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

Saturday, March 19, 2011

week ending Mar 19

Fed balance sheet hits record size again‎ - - The size of the Federal Reserve's balance sheet reached another record in the latest week, spurred by its $600 billion bond program aimed to support economic growth, Fed data released on Thursday showed.The balance sheet expanded to $2.567 trillion in the week ended March 16 from $2.561 trillion the previous week. The central bank's holding of U.S. government securities grew to $1.280 trillion on Wednesday from last week's $1.266 trillion total. Meanwhile, the Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) declined to $944.10 billion from $948.93 billion in the latest week. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system totaled $139.99 billion, lower than $143.25 billion a week earlier.Meanwhile, the Fed's overnight direct loans to credit-worthy banks via its discount window averaged $7 million a day in the week ended Wednesday, compared with an average daily rate of $8 million last week.

Federal Reserve Balance Sheet Rises to $2.587 Trillion‎ - The U.S. Federal Reserve's balance sheet expanded slightly last week as the central bank continued efforts to spur economic growth through asset purchases. The Fed's asset holdings in the week ended March 16 climbed to $2.587 trillion, from $2.581 trillion a week earlier, it said in a weekly report released Thursday. It was the sixth consecutive week in which assets were above $2.5 trillion. The Fed's holdings of U.S. Treasury securities rose to $1.280 trillion on Wednesday from $1.266 trillion the previous week. Meanwhile, Thursday's report showed total borrowing from the Fed's discount window fell to $19.95 billion Wednesday, from $20.18 billion a week earlier. Borrowing by commercial banks slipped to $4 million Wednesday from $12 million a week earlier.Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts grew to $3.410 trillion, from $3.398 trillion in the previous week.U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.648 trillion from $2.638 trillion in the previous week.

Fed Assets Rise to Record $2.59 Trillion on Treasury Purchases - The Federal Reserve’s total assets rose by $5.98 billion to $2.59 trillion, the seventh consecutive record-setting week, as the central bank bought Treasury securities as part of the second round of its quantitative easing strategy. Treasuries held by the Fed rose by $14.3 billion to $1.28 trillion as of yesterday. The Fed’s holdings of mortgage-backed securities fell by $4.83 billion to $944.1 billion and federal agency debt fell by $3.26 billion to $140 billion, according to a weekly release by the central bank today. The central bank has purchased $439.6 billion in Treasuries since Nov. 12 under plans to purchase $600 billion of government debt through June and reinvest proceeds from maturing mortgage debt.. M2 money supply rose by $9.7 billion in the week ended March 7, the Fed said. That left M2 growing at an annual rate of 4.1 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. M1 fell by $30.9 billion, and over the past 52 weeks M1 rose 9.6 percent, according to the central bank.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 17, 2011 

A Look Inside the Fed’s Balance Sheet - Assets on the Fed’s balance sheet expanded to around $2.566 trillion in the latest week from $2.403 trillion at the end of 2010. Nearly all the additions this year have come from new Treasury purchases — some $164 billion in the past three months. The Fed announced earlier last year that it will purchase an additional $600 billion of Treasurys through June in addition to previously announced purchases with money reinvested from its MBS portfolio.Though the overall size of the balance sheet is continuing to increase, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds nearly $1 trillion in MBS, but now owns more Treasurys — over $1.28 trillion. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed. Click and drag your mouse to zoom in on the chart. Clicking the check mark on categories can add or remove elements from the balance sheet.  See a full-size version. Click on chart in large version to sort by asset class.

Fed Sees Economy on ‘Firmer Footing’; Affirms Bond Purchases - Federal Reserve policy makers said U.S. growth is becoming more durable and higher energy prices will have a temporary effect on inflation as they affirmed plans to buy $600 billion of Treasuries through June.  “The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said today in a statement after a one-day meeting in Washington. The inflation effects of increased commodity costs will be “transitory,” and officials “will pay close attention to the evolution of inflation and inflation expectations,” the Fed said.  U.S. stocks pared losses on the upgraded outlook from Fed Chairman Ben S. Bernanke and his colleagues, who dropped language that the recovery is “disappointingly slow” and that “tight credit” is holding back consumer spending. Central bankers went out of their way to acknowledge a rise in commodity prices while dismissing any inflation danger.  “This statement takes QE3 off the table, as they are taking off the downside risk in deflation and saying the economy is on track,”

FOMC Statement: No Change, "Economic recovery is on a firmer footing" -

• The target range for the federal funds rate remains at 0 to 1/4 percent
• The policy of reinvestment of principal payments remains
• no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011.
• the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains

Fed Statement Following March Meeting - The following is the full text of the Fed’s statement following the March meeting:

The Fed doesn't mention Japan - THE Federal Open Market Committee has concluded its March meeting and there aren't any big surprises in the statement. Here's a key bit:Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Fed remains focused on core inflation, which is still below levels consistent with price stability and full employment. As a result, the committee unanimously opted to continue planned asset purchases and maintain the current interest rate language.

Parsing the Fed: How the Statement Changed - The Fed’s statement following the March meeting noted no change in policy, but the central bank upgraded its assessment of the economy and expanded its discussion of inflation pressures. (Read the full March statement.)

If QE2 is through, does Fed deflate balance sheet?‎ - If it's QE2 and through, will the Federal Reserve soon start letting the air out of its balance sheet balloon as well? The Fed's improved view of the U.S. recovery and heightened vigilance on inflation suggest it will wrap up its monetary easing once it completes its $600 billion bond buying program -- dubbed QE2 because it is the second round of quantitative easing -- at mid-year. The next important decision for the U.S. central bank is whether to hold the size of its $2.5 trillion balance sheet steady by reinvesting securities as they mature or are paid off, or do nothing, allowing the balance sheet to shrink of its own accord. That decision -- effectively whether to adopt a neutral policy stance or begin the process of tightening, even if only passively, right away -- will offer a critical signal to markets of how quickly policymakers will shift to a more active effort to remove support for the economy. Most observers expect the Fed to pull back on its easing first by draining reserves from the financial system through reverse repurchase agreements or short-term deposit arrangements, and then by raising benchmark interest rates.

Who will buy Treasuries? - IN THIS week's column, Buttonwood writes about the potential difficulty of ending the Fed's QE2 programme of asset purchases: Bill Gross is the most famous and experienced bond-fund manager in the world. So when he says PIMCO’s Total Return, the $237 billion fund which he manages, is avoiding Treasury bonds, investors should take notice. Mr Gross is particularly worried about the effect of quantitative easing (QE) by the Federal Reserve, the second round of which is due to expire in June. He has described this process, whereby the Fed creates money to buy both mortgage-backed securities and Treasury bonds, as a form of pyramid or Ponzi scheme. PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases, with foreigners buying the other 30%. “Who will buy Treasuries when the Fed doesn’t?” asks Mr Gross, adding that the danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation. And today, the Big Picture posts the chart below and asks whether this is indeed why Mr Gross got out of Treasuries:

Fed Watch: Policy Still on Autopilot, For Now - The Federal Reserve did as expected, leaving policy unchanged. But policymakers tweaked the statement ever to slightly to suggest that indicators are at a minimum not moving away from the objectives of the dual mandate – a critical first step on the road toward normalizing monetary policy. First, apparently there was some surprise that the Federal Reserve failed to mention the unfolding crisis in Japan. From the Wall Street Journal: it’s nevertheless puzzling central bankers omitted the biggest risk of all: Japan. I suspect they did not mention Japan because little information is known about the economic risk or they don’t perceive it to be the primary risk in the US outlook. Indeed, we have been down this road before with Hurricane Katrina - even very large disasters in advanced economies appear to have limited overall economic impact, although the regional impacts could be quite severe. I. I tend to be less concerned about the economic impact (particularly over the longer term; market economies have proven to be remarkably resilient) and instead am much, much more concerned about the very devastating and long-lasting human impact of this tragedy. I recommend the guest post at Econbrowser on this topic. To be sure, policymakers will be watching this and other situations closely, but I suspect they would turn to this kind of research as a guide and conclude for now that the global economic impact will be largely transitory.

The Metric You Should Be Watching But Aren't - I recently made the case that money demand remains elevated and continues to be a drag on the economy.  The  flow of funds data for 2010:Q4 supports this conclusion.  This data shows that the share of nonfinancial private sector assets in liquid form remains relatively high.  Households and firms continue to hold significantly more liquid assets than they did prior to the recession.  The good news is that it the share of liquid assets  dropped slightly in Q4. Presumably, the share of liquid assets continued to decline in early 2011 though recent global events may change that.  Using the Flow of Funds data, the figure below shows for the combined balance sheets of households, non-profits, corporations, and non-corporate businesses the percent of total asset that are highly liquid ones (i.e. cash, checking accounts, saving and time deposits, and money market funds) as of 2010:Q4.  The figure also shows M3 velocity.

The Fed, Unions, Wage Stagnation and Risk-Shifted Jobs - Matt Yglesias writes about progressives needing to engage the Federal Reserve in the latest issue of Democracy Journal. I agree with the article completely; now is the time for new thinking about this topic. Here’s a question I’ve been trying to find research on lately – how much is the post-Volcker era of monetary policy responsible for stagnating wages and high-end inequality? I’m pretty familiar with the stories and arguments surrounding these two topics, and the Federal Reserve never shows up. It’s almost like taking an American phone charger overseas; there’s no place for monetary policy to “plug-in” the current research and arguments, from technology to superstars to policy to everything else, on wages/inequality.  Which is weird, since when you read transcripts of their FOMC meetings, released years after the time when they were recorded, the board members are obsessed with wages.   We have a sense of the Greenspan Put for the financial sector, but what’s the Greenspan option-metaphor for workers? A friend just sent me this paper, Not Yet Dead at the Fed: Unions, Worker Bargaining, and Economy-Wide Wage Determination (2005) by business economists Daniel J.B. Mitchell and Christopher L. Erickson. They go through and read twenty years of the FOMC transcripts.

Don’t Look for Fed to Flag Japan Worries Directly - Economists believe the Federal Reserve will acknowledge the economic impact of the Japan disaster indirectly, if it does so at all, at Tuesday’s monetary-policy meeting. Fed watchers reckon that if the central bank wishes to note the fast-moving events in Japan in the wake of a devastating earthquake and tsunami, it will do so under the flag of “geopolitical” uncertainties. Using that phrase will allow central bankers to pay heed to Japan’s situation, as well as the unrest unsettling the Middle East, without committing the Fed to any policy action. The Fed is unlikely to go any further in the document announcing the outcome of the Federal Open Market Committee meeting because it doesn’t know how these twin currents will play out. Both could be big negatives for the U.S., but it is hard to say right now. Hence the Fed’s likely limited commentary, which should arrive in a policy statement likely to reaffirm the Fed’s commitment to providing support to the economy.

Is the Treasury undermining QE? - QUANTITATIVE easing suffers its fair share of controversy, but not over this aspect: whether you like it or not, it’s the central bank’s job and no one else’s. I’ve just read a paper that suggests otherwise: done right, the Treasury could achieve the same thing through debt-management policy. Better yet, the Treasury and Fed working together should be able to multiply the impact of QE. The new paper by Eric Swanson of the San Francisco Fed re-evaluates an early attempt at QE. In the early 1960s, the Treasury and Federal Reserve embarked on Operation Twist, under which the Fed would buy up long-term bonds in an effort to nudge down their yields. To finance those purchases, it, and Treasury, would sell short-term Treasury bills. Operation Twist has long been considered a failure. Research in particular by Franco Modigliani and Richard Sutch found very little impact on long-term yields. This helped reinforce the orthodox academic view that efforts to influence security prices by altering their supply were doomed to failure. By this argument, bond yields were determined by investors’ expectations of inflation, growth, fiscal and monetary policy. You could withdraw every dollar of Treasury debt from circulation if necessary and the yield on the last remaining dollar wouldn’t change. This was one reason why so much scepticism greeted the Federal Reserve’s latest round of QE.

Fed Up - Bored by the proceedings at the Republican National Convention in St. Paul one day in 2008, I decided to try to gather some color down the road in Minneapolis, where Ron Paul and fellow dissident conservatives and libertarians were holding a counter-convention at the Target Center. At one point a speaker thundered that Barack Obama and John McCain “both have a lot to learn about Austrian business-cycle theory.” The crowd went delirious with cheers, and soon chants of “end the Fed” echoed throughout the arena. It was funny at the time. A bunch of cranks talking about their crank monetary theories and espousing a crank prescription. Today, Paul is the chairman of the House Subcommittee on Monetary Policy

Ron Paul’s Next Committee Hearing on Inflation and Commodity Prices is 100% Gold Bug - PBR cans at the bar across the street from where I live just went from $2 to $2.50. So now would be a great time for a government panel to gather experts to discuss the relevant issues surrounding commodity inflation;  what is important and not important in understanding how inflation is calculated, the ways it can bias, the relevant experiences of unorthodox monetary policies in other countries, how China and other emerging markets’ demand for commodities are effecting prices, whether we need a higher inflation target, the disinflationary impact of the foreclosure crisis, etc. etc. etc. Now I wonder who is in charge of the committee that would hold a hearing on this?   Oh I know.  Ron Paul. So tomorrow, Ron Paul is chairing “The Relationship of Monetary Policy and Rising Prices.” That page now has links to the testimony of the three witnesses and oh. my. god. This is not me cherry-picking, these are the main arguments of the panelists. All of them are gold bugs.

Why Politics, Ideology and the Fed Don’t Mix - As anyone who follows the Central Bank knows, President Obama’s nomination of Nobel Prize winning economist Peter Diamond to fill an open seat on the Federal Reserve Board of Governors is being held up by Senator Richard Shelby of Alabama, the top ranking Republican on the Senate Banking Committee. Shelby argues that Diamond is unqualified because he has little experience “conducting monetary policy, supervising our financial system, and responding to financial crises.” Thus, Shelby says, “Mr. Diamond’s background clearly demonstrates that he is not the right person for this particular job.” Shelby continues, “Dr. Diamond is an old-fashioned, big government Keynesian. Many of us believe that this is not the economic philosophy the Fed should be embracing at this point in our economic history.” The objection is not just about qualifications, then; it’s based on ideology as well.

Hacker group Anonymous declares war on ‘global banking cartel’ - The faceless, decentralised on-line community known as “Anonymous” posted a video on YouTube on Monday declaring war against the international banking system in a movement it is calling “Operation Empire State Rebellion”.  In the video, Anonymous explains how this movement would involve a “relentless campaign of nonviolent, peaceful civil disobedience” until its demands are met. These demands begin with the resignation of Federal Reserve Chairman, Ben Bernanke, but ultimately it seeks to “break up the global banking cartel centered at the Federal Reserve, International Monetary Fund, Bank of International Settlements and World Bank”.

Hacker Group Anonymous Brings Peaceful Revolution To America: Will Engage In Civil Disobedience Until Bernanke Steps Down - The world's most (in)famous hacker group - Anonymous - known for effectively shutting down their hacking nemesis security firm (with clients such as Morgan Stanley and, unfortunately for them, Bank of America)- HBGary, advocating the cause of Wikileaks, and the threat made by one of its members that evidence of fraud by Bank of America will be released on Monday, has just launched communication #1 in its Operation "Empire State Rebellion." The goal - engage in "a relentless campaign of non-violent, peaceful, civil disobedience" until Ben Bernanke steps down and the "Primary Dealers within the Federal Reserve banking system be broken up and held accountable for rigging markets and destroying the global economy effective immediately."

Three Flawed Fed Exit Options‎ - Austrian economists know that the Fed's creation of new money can distort markets by pushing interest rates below their natural market level. This is a subtle point that most commentators ignore. Instead, the thing that has more and more people worrying at night is the potential for runaway price inflation. Specifically, there are currently about $1.2 trillion in "excess reserves" in the banking system. Loosely speaking, the banks have this much money on deposit with the Fed, above and beyond their reserve requirements (needed to "back up" their existing customer checking account balances and the like), and they are free to lend it out to their own customers. Because of the fractional-reserve banking system, the $1.2 trillion in excess reserves could ultimately translate into almost $11 trillion in new money created by the banks, as they pyramid new loans on top of the base money Bernanke has injected. The M1 measure of the money stock is currently $1.9 trillion, meaning that even if the Fed stopped inflating tomorrow, the banking system would have the potential to increase the money stock by a factor of six. Even if the demand for dollars remained constant in such an environment (which it wouldn't), that could mean oil prices above $600 a barrel.

Currency Wars: RIP Shadow Banking System, Long Live QEx! - We have unwittingly become trapped in the snarled net of years of bad Public Policy. Like corporations that look no further than this quarter's results, our politicos never stop campaigning to start the tough task of ruling responsibly. A winning election simply represents 'rewards' and 'spoils' to all before quickly resuming the next campaign.   Image has become reality!  As a result the never ending political pandering has led to false expectations, undeliverable entitlements and false optimism in the electorate that rejects the immediate and obvious realities.   The result of a degenerated political leadership process is we are on the brink of a massive and sudden reduction in the US standard of living.

Our Outrageous Bubble Economy - Last week's Federal Reserve’s Z1 Flow of Funds data deserves our attention. Tim Iacono took a close look at the Balance Sheet of Households and Nonprofit Organizations. Due in no small part to record money printing by the central bank, the value of households’ assets rose by $2.1 trillion in the fourth quarter of last year year while debt increased by a paltry $26 billion... Historians will no doubt look back on this data – collected and reported right there at the Fed – and wonder how it could be that monetary policy in the late-20th and early-21st century was aimed squarely at inflating one asset bubble after another – inflating a new one after the previous one burst. The Bernank is dead set on getting us back to the elevated levels of 2007. Once he gets us there, he will call it a recovery. But what will he have achieved? For the vast majority of working Americans, life will continue to feel like it did in 2009 during the post-meltdown lows. Look at this table from G. William Domhoff's Wealth, Income, and Power

The Fed Beats Marie Antoinette With “Let Them Eat iPad2s” - - Yves Smith - The infamous “let them eat cake” was actually “qu’ils mangent de la brioche” which is “let them eat brioche”. The only French queen who might have said that was Marie Therese, about 100 years before the French Revolution. In addition, Marie Antoinette was concerned with the welfare of the poor, so such a clueless remark seems even more unlikely to have come from her.  However, there is no excuse for this telling example of how out of touch Fed officials are, specifically, New York Dudley of the New York Fed. From Reuters:Dudley faced persistent questions from the audience on food inflation. The president of the Federal Reserve Bank of New York said people forget that even as the price of food is rising, other prices are falling. He mentioned the price of the iPad 2, prompting guffaws from the audience. Now before you forgive this as standard economist thinking….the Wall Street Journal’s Economics blog makes clear Dudley was speaking to people in Queens:

Will Higher Energy Prices Pass Through to Consumers? - Are there any signs that higher energy prices are translating into rising core inflation? We may get an answer this week. Core inflation, which excludes food and energy prices, is the price measure watched by the Federal Reserve. (Though, Chairman Ben Bernanke has shifted the central bank’s communications strategy to de-emphasize the focus on core.) So far, the Fed considers core inflation to be very mild. But with gasoline prices up nearly 50 cents so far this year and global food prices soaring, these costs are sure to be a main topic when policy makers sit down at their March 15 Federal Open Market Committee meeting. Indeed, consumers, who are paying more for food and gasoline, see rising inflation as more of a problem than Fed officials do. The early March survey done by Thomson Reuters/University of Michigan showed consumers think top-line inflation will rise to 4.6% within the next year, the highest reading since August 2008.

Mauldin: Inflation and Hyperinflation - I have had a lot of questions about my thoughts on inflation and hyperinflation of late, especially in the new “Ask Mauldin” section on Unfortunately, the answer is not short and simple. The good news is that my new book has an entire chapter on inflation and hyperinflation, and today, as I fly to La Jolla (more below), I give you that chapter as this week’s letter. The letter will print a little long, as there are a lot of charts. Please note, my co-author and I have different views on the subject for different countries. In some, we consider high (or worse) inflation a serious prospect. In others the opposite is true. There is no one size fits all. And of course our best estimates today are based solely on the facts as we know them – if the facts change, so will our opinions. When we wrote this chapter late last year, it was not obvious that the Fed would purchase 100% of the US debt. We currently assume that will stop. If it does not, then the lessons of this chapter are more important than we would like them to be. Inflation and hyperinflation are choices made by humans. That means there is an element of uncertainty, when logic would dictate there should not be.

Exporting Inflation: Oil versus Equities - In semi-annual testimony before both houses of Congress, Fed Chairman Ben Bernanke expressed concern about “significant increases in some highly visible prices, including those of gasoline and other commodities,” but then quickly downplayed their significance for monetary policy. The price increases, in Bernanke’s telling, reflected rising demand for raw materials and have been reflected in all major currencies, not just the dollar. Moreover, the phrase “highly visible” suggests Bernanke’s concern is less with the commodity price inflation itself as it is with the public’s overreaction to it. At the same time that Bernanke argued that Fed policy has nothing to do with price increases in food and commodities, he was very eager to take credit for increases in the prices of stocks, corporate bonds, and other assets: When the globally traded commodity is oil, the price run up is a result of supply and demand and political unrest. When the globally traded commodity is a common stock, the price increase is the handiwork of the Fed. Price increases that reduce Americans’ terms of trade by increasing the number of hours of work required to fill the gas tank are global phenomena with no linkage to the Fed. Conversely, price increases that work through similar channels but instead boost Americans’ net worth through increases in the value of their mutual fund holdings are most definitely attributable to the Fed. As argued in a recent Barron’s article, this line of argument is both intellectually incoherent and unseemly.

Memo to market: High oil prices are DE-flationary - As the European Central Bank (ECB) prepares to raise interest rates to prevent inflation, the bank cites rising commodity prices, particularly oil prices, as a sign of that inflation. What the bank and other market participants don't seem to understand is that high commodity prices and, in particular, high oil prices are deflationary. The logic is so simple it's hard to understand why smart people with advanced degrees can't see it. Commodities, particularly oil, pull money away from other sectors of the economy. When people are forced to choose between paying for heat and gasoline or paying the mortgage, they pay for heat and gasoline. Cars don't budge without gasoline (unless you can afford an electric one) and most people need their cars to get to work. The heat can be turned off rather quickly by the utility company in comparison to the glacial pace of a mortgage foreclosure that can take many months and sometimes more than a year.

Wholesale prices up 1.6% on steep rise in food - Higher energy costs and the steepest rise in food prices in nearly four decades drove wholesale prices up last month by the most in nearly two years. Excluding those categories, inflation was tame.The Producer Price Index rose a seasonally adjusted 1.6 percent in February, the Labor Department said Wednesday. That's double the 0.8 percent rise from the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January's 0.5 percent rise.Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.Energy prices rose 3.3 percent last month, led by a 3.7 percent increase in gasoline costs. David Resler, an economist at Nomura Securities, said the jump in prices is likely temporary, echoing remarks made by the Federal Reserve on Tuesday. Much of the increase in food prices was due to winter freezes in Florida, Texas and other agricultural areas. Turmoil in the Middle East is a major reason that motorists are facing higher gas prices. "Both food and gasoline prices are going to stop rising so rapidly,"

U.S. Producer Prices Rise More than Forecast, Led by Food, Oil - Wholesale costs in the U.S. rose more than forecast in February, led by food prices at a more than three-decade high and a surge in energy.  The producer-price index climbed 1.6 percent from the prior month, the most since June 2009, Labor Department figures showed today in Washington. The median projection in a Bloomberg News survey was for a 0.7 percent gain. The so-called core measure, which excludes volatile food and energy costs increased 0.2 percent, matching forecasts.  The cost of raw materials has risen further as expanding economies in Asia and Latin America lift demand, and crude oil has been pushed up by turmoil in the Middle East. Even so, firms have limited scope to raise prices to shield profits, allowing the Federal Reserve yesterday to maintain monetary easing to spur growth while citing “subdued” underlying inflation.

U.S. producer prices surge in February - February producer prices rose a much stronger than expected 1.6% in the month following a 0.8% rise in January. Expectations had been for a sizeable increase although by a more moderate 0.7%. The strong monthly increase resulted in the year-over-year rate jumping to 5.6% from 3.6% in January. On a core basis, prices rose an expected 0.2% although this was sufficient enough to move the annual rate up to 1.8% from 1.6% in January and a recent quarterly low of 0.9% at the end of 2009.Expectations had been for upward pressure to emanate from the energy component on indications of rising gasoline prices. This expectation was evident in today’s report with the gasoline component rising 3.7%. There was also a sizeable 14.6% jump in heating oil that also contributed to overall energy prices rising 3.3% in the month. The main upward surprise in the report, however, was a 3.9% surge in food prices. The Bureau of Labor Statistics, which compiles the data, indicated that about 70% of the rise in this component was attributable to unusually cold weather in the South and West thereby boosting vegetable prices (e.g., lettuce up 155%, tomatoes up 169% and green peppers up 185%). A return to more normal weather should result in these increases reversing in subsequent months.

Producer Prices Highest Since 1974 -February 2011 marked the largest one-month increase in 37 years for wholesale food prices, climbing by 3.9 percent.That’s according to an analysis of the latest Producer Price Index Report by the Food Institute, which indicates that wholesale prices have not experienced an increase this great in many years. This number was only exceeded in November 1974 when spiraling oil prices resulted in sharp food price increases amounting to 4.2 percent. “Food retailers in the U.S. have been very adept at holding price increases at a minimum for the past 18 months but the February surge will make that task more difficult in future months,” said Brain Todd, Food Institute president and CEO.This latest increase in the Producer Price Index for finished consumer foods is driven by a 49 percent jump in fresh vegetable prices due to freezes and other crop issues in many farming areas. Price increases of 4 percent or more during the month for beef and pork also added to the surge in the overall index.

Rising wholesale prices ring inflation alarm bells - The cost of producing goods is rising, and consumers could soon pay the price.  The Producer Price Index rose 1.6% in February alone, the Labor Department reported Wednesday, the biggest jump in nearly two years. The rise was far worse than the 0.6% increase that economists surveyed by were expecting. Overall, prices rose 5.6% from a year ago. The biggest drivers were a 3.9% jump in wholesale food prices and 3.3% rise in energy prices. But core inflation, which strips out volatile food and energy prices, was up only 1.8% compared to a year ago following a 0.2% rise in the month -- in line with forecasts. The sharp rise in oil prices is a major concern for economists. In a recent survey by CNNMoney, economists identified the oil spike as the biggest headwind facing the nation's economic recovery.  "The big difference today relative to the 2008 commodity rise is that underlying demand is significantly more robust. This means that price gains are more likely to stick,"

WSJ: Wholesale Prices Jump - U.S. wholesale prices surged last month on the back of higher energy and food prices, but underlying producer prices increased only moderately. Separately, home construction in the U.S. took the steepest monthly plunge in nearly 27 years in February and new building permits set a record low, an indication that the battered sector is a key source of weakness for the economy.The index of producer prices, which measures how much manufacturers and wholesalers pay for goods and materials, rose a seasonally adjusted 1.6% in February, the Labor Department said Wednesday. That's the biggest increase since June 2009.

GDP forecasts cut after housing data -- First-quarter growth estimates were cut after data released earlier Wednesday showing a 22.5% slump in housing starts during February. Analysts at RBS cut their GDP view to 2.6% from 2.8%. "Admittedly, residential investment is now such a small share of GDP (just 2.5%) that even big changes in assumed growth rates for that sector don't have a large an impact on the headline growth rate. In any case, coming into today we were looking for residential investment to be up modestly in Q1, but now expect it to be closer to flat," they said. Also, Macroeconomic Advisers cut its Q1 GDP view by 0.1 point to 2.6%

Core Measures show increase in Inflation - Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.1 percent before seasonal adjustment... The index for all items less food and energy rose 0.2 percent in February, the same increase as in January, with most of its major components posting increases.  The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  the median Consumer Price Index rose 0.2% (2.4% annualized rate) in February. The 16% trimmed-mean Consumer Price Index increased 0.3% (3.8% annualized rate) during the month. Over the last 12 months, core CPI has increased 1.1%, median CPI has increased 1.0%, and trimmed-mean CPI increased 2.1%.  This graph shows these three measure of inflation on a year-over-year basis.  These measures all show that year-over-year inflation is still low, but increasing lately.  Also, all three increased in February at a higher annualized rate: core CPI increased at an annualized rate of 2.4%, median CPI 2.4% annualized, and trimmed-mean CPI increased 3.8% annualized. This is the second consecutive month with the annualized rate for these three key measures at or above the Fed's inflation target.

Re-Inflating America - Good news via Calculated Risk. Inflation measures are rising.  Remember its not that we want to juice the economy, so long as inflation doesn’t rise. Its not even that we want to juice the economy, in spite of a rise in inflation. Bear minimum we want to juice the economy so that inflation will rise back to two percent. The textbook level targeting approach would say to keep on juicing until you undid all of the extra low inflation we have had since 09. I would of course say that you should keep juicing until you get to at least 4%. Perhaps a little overshoot to take down unemployment. But, the long term real inflation rate should be 4%.  That gives us four percentage points of room to avoid a liquidity trap.

Inflation Slowly Showing Signs of Life - Inflation, once believed dead, is showing a pulse. While price increases are unlikely to become rampant, consumers are lifting their inflation expectations, and more businesses are marking up their selling prices to recoup input costs. Signs of life for inflation come at a time when the Federal Reserve has to weigh the potential impacts from the Japan tragedy and Middle East unrest. To be sure, Thursday’s data on the consumer price index showed inflation remains well within the Fed’s preferred target of about 2%. Total prices, pushed up by higher food and energy, increased 2.1% over the year ended in February, while core inflation — which ignores food and fuel — was up a milder 1.1%.Even so, higher commodity costs are starting to influence the outlook.For instance, inflation expectations for the next year, as measured by Thomson Reuters/University of Michigan, started to perk up when gasoline headed toward $3 per gallon and above. Consumers now think the inflation rate could reach above 4% a year from now.

Great Inflation Debate: CPI Headline Is High, Core Remains Tame - The Great Inflation Debate got a little kick this morning, but it won’t do much to budge folks from their respective camps. The Labor Department reported that consumer prices rose 0.5% in February, rising from gains of 0.4% in the previous two months. Annualized, the CPI is now at 2.1%, up from 1.1% in November. That is fodder for the inflation worrywarts. But the inflation complacents will warm to the so-called core CPI, which chucks out the volatile food and energy components. It rose a scanter 0.2%, putting the core at a relatively soothing 1.1% annualized rate. The Fed watches the core most closely, and it will see little to fret about since that measure remains well below the 2% level it sees as generally just fine. The readings were mostly in line, with the core coming in a touch higher than expectations. Earlier this week, the Federal Open Market Committee maintained its super-easy monetary policy and said inflation issues remained subdued. It won’t be scared by these figures, though the carping about the swift rise in the headline number will probably be a bit loud today.

BofA Merrill Lynch Fund Manager Survey Reveals Growth and Profitability Fears After Oil Price Spike - Following the recent oil price spike, investors fear for corporate profitability and global growth, according to the BofA Merrill Lynch Survey of Fund Managers for March. A net 24 percent of asset allocators now expect corporate operating margins to fall over the next 12 months. This represents the sharpest month-on-month decline since the survey began asking this question in 2004. As recently as January, a net 10 percent was expecting margins to expand. A net 32 percent of fund managers still look for corporates to increase profits in the next year, but this is down significantly from a net 51 percent a month ago. A net 31 percent now views consensus earnings estimates as too high, moreover. This decline in confidence is reflected in the survey participants' macroeconomic outlook. A net 31 percent of fund managers still believe the global economy will strengthen in the next year, but this is down from a net 51 percent last month. In the U.S. the fall was even sharper, from a net 52 percent to a net 21 percent, while respondents in Asia outside Japan turned negative. A net 25 percent sees the region's economy weakening over the period. While fears of recession remain remote, the threat of stagflation has risen, according to the survey findings. In the space of two months, the proportion of fund managers anticipating below-trend growth and above-trend inflation has doubled to 38 percent. Among four possible outlooks, this is now the most common among respondents.

Supply Disruptions Pose Threat of Stagflation - A scramble for supplies prompted by Japan's crisis may add to the specter of stagflation stalking the U.S. economy. Already, high oil prices and geopolitical uncertainty have taken some of the buzz out of 2011 growth prospects. The first quarter in particular looks like it will end on a much weaker note than initially thought. Morgan Stanley's tracking estimate of annualized real gross-domestic-product growth has dropped from 4.5% to 2.9% over the past six weeks. A similar one from tracking firm Macroeconomic Advisers has slipped to 2.5%.  That isn't much above stall speed. But even that level of growth would mean cost pressures are likely to persist, to the chagrin of businesses and households. Stagflation is persistent inflation combined with stagnant consumer demand and relatively high unemployment.

Stagflation, 70s icon, dusts off disco shoes (Reuters) - Nostalgia buffs of the 1970s should invest in vintage economic textbooks because stagflation may be the next retro-trend to make a comeback in the United States. Soaring oil prices have raised concerns the economy could see a repeat of problems that marred the disco era, when inflation soared, the economy slowed and unemployment was high. Indeed, some bond investors are showing signs of alarm. U.S. government bonds that offer protection from price growth now reflect the highest inflation expectations in around two and a half years. "I hate to mention the word stagflation, but that seems to be what fears are out there at the moment," said Martin Hegarty, of BlackRock, the world's largest asset manager. Hegarty sees inflation concerns as contained for now, though the rise in oil is threatening momentum in the economic recovery at the same time as a number of other economic headwinds are threatening the rosy outlook.

Stagflation will have more bark than bite -  Indeed, two numbers caught the attention of the media in January – inflation and growth. The former was high and the latter was low. Speculation soon started as to whether the UK was returning to days of old and a period of stagflation. I think that assumption is highly premature. The current cycle will have plenty of issues, but stagflation is unlikely to be one of them. To understand why, we should separate the two elements of the equation, stagnation and inflation, and analyse them separately. Consumer price inflation was reported at an annual rate in December of 3.7%, well above the Bank of England target of 2%. Price increases were fairly broad, but not even. Oil and oil-related goods and services were especially strong. Overall inflation has been exacerbated recently by a fall in sterling, the general rise in commodity costs and the new year rise in VAT. The numbers are not comfortable, but they are a very long way from the double-digit inflation recorded in the 1970s. It is possible that some of these influences – particularly rising commodity costs – might persist for some time. It is also fair to suggest that some of the favourable deflationary dynamics of recent years – notably the emergence of China as a source of low cost goods – are coming to an end.

As Good As It Gets - Have you had enough yet? Everyday we wake up to a world which seems to be falling apart. A few days ago Calculated Risk posted Crisis Fatigue? Make A List. CR's list included-

  • Risks from the earthquake in Japan
  • Higher oil prices and a possible supply shock
  • The U.S. Housing Crisis
  • The European financial crisis
  • State and local government cutbacks
  • Possible Federal government cutbacks (even shutdown)
  • Inflation (a two sided coin)
With the exception of the earthquake, each of these crises is either 1) a consequence of the Great Recession, the collapse of the Housing Bubble and the financial meltdown or 2) a consequence of the policies adapted by the Federal Reserve to counter those events or 3) a consequence of the failure of Federal policy to reform our society's rules and jump-start the economy.

Rock Me on the Water - Most interesting to me this morning are the financial implications of all these things and let's start with Japan. Monumental doesn't seem to describe the unholy mess there, just the sheer awfulness of all that mud, twisted steel, radioactive trash, and decomposing human bodies scattered amongst and within it. The cost of it seems beyond calculation, but the first questions might be how does a deeply-in-debt Japan raise some cash to begin digging out and (possibly) rebuilding  (and I add that qualification because I don't know that a lot of this lost stuff will be rebuilt at all). But it will be cleaned up and sorted out. The obvious answer to the funding question is that Japan sells foreign bonds, namely US and European.  That will not be a good thing for Euro-America. Japan was the quiet benefactor last time the European sick countries had to roll over their debt payments, and nobody wanted to buy their paper. Japan went in and hosed up their debt, allowing them to enjoy one last Christmas of seeming political normality. Now it's rollover time again in the Euro-Zone and not only will kindly Uncle Japan not be present for the bond sales, they will be selling off the stuff they already hold, and it is hard to see how the European banks digest that ugly bolus of reality,     Similarly, in the US. Japan has accumulated about 800-billion in US debt paper. They have more-than-generously propped up our operations here for years by buying the stuff. Now they would seem to have little choice but to liquidate a bunch of it and cancel their seats at the upcoming auctions of new paper issues. That leaves Ben Bernanke alone in his office with a shit sandwich for lunch. What to do now, Ben? Who on this planet is going to buy more debt of a people who spend their lives in zombie-like thrall to the Kardashian sisters? No, Ben's going to have to eat the sandwich himself, a least until the end of QE-2. Or watch interest go way way up to the point where the risks are acceptable to outside parties - but that would only destroy the US Economy and American government at all levels, since we can't meet our obligations even at ZIRP levels - and, anyway, who would step forward now to buy this crap under any circumstances? (Echo answers....)

Congressman John Campbell's Moment Of Epiphany - Realizes US Is One Big Ponzi Scheme - Zero Hedge first observed the duration mismatch in US Treasury holdings back in November 2009, when we highlighted the concerning amount of debt that the government has to roll every year courtesy of about 30-40% in outstanding paper that is of very short duration (under 2 years or so). We have also been pretty adamant that by now the US economic system is nothing but a ponzi scheme pure and simple. Today, we observe how this epiphany manifests itself when it occurs to a congressman, in this case John Campbell (California).  From John Campbell's website:The punchline: "I understand that the Fed and the Treasury are trying to keep interest rates low and improve the economy and the deficit. But, when coupled with the huge deficits, these moves look a bit like a Ponzi scheme that will soon unravel." Amen brother.

Monthly GDP declined 0.8% in January - Macroadvisers - Monthly GDP declined 0.8% in January, partially reversing a 1.4% increase in December. Monthly GDP has been on a choppy, but rising trend over the last several months. The January reading reflected declines in inventory investment, net exports, and domestic final sales. The latter was largely accounted for by a decline in construction spending. The level of monthly GDP in January was 0.2% below the fourth-quarter average at an annual rate. Our latest tracking forecast of 2.7% growth of GDP in the first quarter assumes average monthly increases of 0.6% per month in February and March. (charts)

The Future of Macroeconomic Policy: Nine Tentative Conclusions - IMFdirect - Olivier Blanchard - The global economic crisis taught us to question our most cherished beliefs about the way we conduct macroeconomic policy. Earlier I had put forward some ideas to help guide conversations as we reexamine these beliefs. I was heartened by the wide online debate and the excellent discussions at a conference on post-crisis macroeconomic policy here in Washington last week. At the end of the conference, I organized my concluding thoughts around nine points. Let me go through them and see whether you agree or not.

  • 1.  We’ve entered a brave new world in the wake of the crisis; a very different world in terms of policy making and we just have to accept it.
  • 2.  In the age-old discussion of the relative roles of markets and the state, the pendulum has swung—at least a bit—toward the state.
  • 3.  The crisis made it clear that there are many distortions relevant for macroeconomics, many more than we thought earlier.

Mankiw and Weinzierl: An Exploration of Optimal Stabilization Policy - I haven't had a chance to ready beyond the introduction and conclusion of this paper by Greg Mankiw and Matthew Weinzierl, "An Exploration of Optimal Stabilization Policy," but a couple of quick reactions. First, in the paper, in order for there to be a case for fiscal policy at all, the economy must be at the zero bound and the monetary authority must be "unable to commit itself to expansionary future policy." This point about commitment has been made in other papers (I believe Eggertsson, for example, notes this), and I think the credibility of future promises to create inflation is a problem. If so, if the Fed cannot credibly commit to future inflationary policy, then this paper provides a basis for, not against, fiscal policy when the economy is stuck at the zero bound. Second, they note in the paper that tax policy can do a better job of replicating the flexible price equilibrium in terms of the allocation of resources, and hence tax policy should be used instead of government spending. However, since I think that there is a strong case that we are short on infrastructure, and that public goods problems prevent the private sector from providing optimal quantities of these goods on its own, I don't see the distributional issues as an important objection to government spending at present.

Government spending should be last resort in a crisis - Government spending to offset a fall-off in demand should be used as a last resort in an economic crisis, in conjunction with cutting taxes and only after all other options are exhausted, a new paper by two Harvard University economists released Thursday said. Gregory Mankiw, a former chairman of President George W. Bush‘s Council of Economic Advisors, and Matthew Weinzierl implicitly argue against the sequence of tools used by the U.S. to handle the recent crisis, proposing instead a different hierarchy of policies. The first level, they said, is conventional monetary policy, when the central bank cuts short-term interest rates. The second is a cut in long-term interest rates, and possibly an increase in long-term monetary-policy targets, such as a higher level of gross domestic product. Rather than cuts in taxes and an increase in government spending to prop up demand, the third level should be fiscal policy aimed at encouraging investment. “In essence, optimal fiscal policy tries to do what monetary policy would if it could,” they said.

Barry Eichengreen on the End of Dollar Dominance (video)

The dollar, the RMB and the euro? - Pettis. Barry Eichengreen had a very interesting piece in last week’s Wall Street Journal.  In it he argues that we are approaching the end of the period in which the US dollar is the world’s dominant reserve currency, and suggests what that might mean for the world.  Eichengreen argues that one of the main reasons for the current dominance of the dollar was simply the lack of plausible alternatives.  This is changing, he suggests, because of the rise of the euro and the RMB.  I wish Eichengreen were right, but I don’t think he is. The RMB is unlikely to become a serious reserve currency in the foreseeable future. There are a number of reasons for this. First and most obviously, there are few realistic mechanisms by which the world can acquire RMB. Either China needs to run a large current account deficits, or it needs totally open domestic financial markets in which foreigners can easily acquire domestic RMB-denominated bonds to the tune of several percentage points of China’s GDP annually. I discussed why in a blog entry five months ago. We are unlikely to see either for many, many decades.

G7 in rare intervention to weaken yen -The Group of Seven industrialised nations have agreed to co-ordinated currency intervention for the first time in a decade to help Japan recover from its devastating earthquake, tsunami and nuclear crisis. Authorities in Japan, the eurozone, the UK, Canada and the US agreed on Friday to help weaken the yen in a rolling intervention that began at 9am in Tokyo, which immediately pushed the yen down from above Y79 against the US dollar to below Y81.It is the first time the G7 has agreed to intervene as a group since it propped up the euro in 2000 and shows the extent of international sympathy for Japan. Japan’s currency, trading near Y83 the day before the earthquake and tsunami hit on March 11, had climbed to Y76.25 by Thursday as traders anticipated huge demand from Japanese investors and financial institutions as they sell foreign assets and bring funds home for reconstruction.A strong yen would add to the pain of rebuilding by hampering Japanese exports. The currency retreated from a record high against the dollar late on Thursday as speculation mounted that the ministry of finance would intervene.

NY Fed Confirms Intervention In Currency Markets - The New York Federal Reserve Bank confirmed that it intervened in currency markets on Friday for the first time in more than a decade. The disclosure came a day after the Group of Seven major industrialized nations pledged in a statement to join in a coordinated effort to weaken the Japanese yen. The yen has surged in the last week to post-war record levels following the Japanese earthquake and tsunami. A spokesman at the New York Fed, which operates as the agent of the U.S. Treasury in currency operations, confirmed that it had intervened. The last time the U.S. government intervened in currency markets was the fall of 2000 when it sold dollars and bought euros to bolster the fledgling European currency. The spokesman refused to provide any details on the amounts of the intervention or what currencies were involved.

Fed Has Limited Yen War Chest for Market Intervention - The Federal Reserve's contribution to a global effort to weaken the yen is limited by the central bank's war chest of Japanese currency and currency-like assets. The Fed's modest holdings are indicative of the dollar's position as the world's key reserve currency. That's meant the U.S. central bank hasn't faced a need to accumulate much in the way of any foreign currency, at least relative to the other holdings on its balance sheet. It also reflects U.S. policymakers' long-standing hands-off relationship with foreign exchange markets. While reports from traders about the size of the Fed's participation in Friday's interventions were as uneven as one would expect in the absence of official confirmation - it seems they sold around $600 million - the overarching fact is the Fed doesn't have much yen to sell. The aim of weakening the yen is to prevent the currency's appreciating value from hurting Japan's recovery prospects as it tries to rebound from last week's earthquake and resulting disaster. According to fourth quarter 2010 data from the Fed, the most recent available, the central bank held a total of $11.922 billion in yen denominated assets. That consists of $3.882 billion in cash and $8.039 billion in securities, the type of which the Fed doesn't describe.

IMF on Expanding Special Drawing Rights' Int'l Role - In March of 2009, People's Bank of China Governor famously made his "Reform the International Monetary System" speech. Until now, we still do not have a clear reason why he made this speech. A Chinese colleague suggested it was to appease Chinese politicians who had grown tired of the export lobby's continuing predominance in policy circles.  In any event, Zhou reiterated the Chinese view that the United States' exorbitant privilege of issuing the world's standard reserve currency allowed it to abuse the aforementioned system. The United States, in effect, gave in to the temptation to flood the world economy with uncontrolled dollar emissions. His suggestions were many, including broadening the world's reserve currencies to reflect the shifting global balance of economic power. Among other things, expanding the role of the IMF's special drawing rights (SDRs)--a form of currency serving as money only within Bretton Woods institutions--to encompass trade and reserve accumulation functions was mooted by Zhou. A recent IMF paper that assesses whether expanding the role of SDRs would improve the stability of the international system. My quick read? Yes, it may, but there are significant political hurdles along the way that need to be surmounted. What follows is the overview of the paper; the rest is well-worth reading especially for IPE junkies, global imbalance addicts, and other sorts with obsessive-compulsive tendencies.

Data Show Increased Fed Role in Financing Federal Debt - Some interesting information on the federal government’s balance sheet can be gleaned from the fourth-quarter flow-of-funds report, which was released by the Federal Reserve Board on the 10th of this month. The total amount of all federal liabilities, as reported by the Fed last week, is shown as the sum of the red and blue areas in the figure above. The blue portion of the graph represents liabilities owned by the Federal Reserve System, while the red portion shows the rest of the federal government’s liabilities. The blue portion is best netted out of the total debt when one is calculating a figure to be used for policy purposes, as it essentially represents a sum of money that one part of the federal government owes to another. (The Fed describes itself in its educational literature as “independent within the government,” though it is shown in flow-of-funds reports as a separate entity with a separate balance sheet from that of the federal government.)As noted in the figure above, total federal liabilities, according to the new data, rose in the fourth quarter of 2010 to 75.0 percent of seasonally adjusted U.S. GDP from 72.6 percent the previous quarter. Of this 2.4 percentage-point increase, 1.6 percentage points were accounted for by an increase in Fed holdings of federal government liabilities, while all other entities increased their combined holdings of these liabilities by only about nine-tenths of a percentage point. Hence, the net federal debt actually stood at approximately 65.5 percent of GDP as of the end of last quarter.

Japan May Sell US Treasuries After Earthquake, Brown Brothers' Thin Says - Japan may sell some of its foreign holdings, including U.S. debt, to finance increased spending after the country’s strongest earthquake left millions without electricity or water, according to Brown Brothers Harriman & Co.  “The scope for, again, massive fiscal spending, seems to be there,” Win Thin, the firm’s head of emerging-markets strategy at Brown Brothers in New York, said in a Bloomberg radio interview on “Bloomberg Surveillance” with Ken Prewitt. “If they have to raise these funds domestically, they may have to sell some of their holdings elsewhere.”  The Bank of Japan poured a record 15 trillion yen ($183 billion) today into the financial system of the world’s third- largest economy and doubled the size of its asset-purchase program. The earthquake and a tsunami may have killed 10,000 people in Miyagi prefecture, local police said. BOJ Governor Masaaki Shirakawa, speaking at a news conference in Tokyo, pledged more cash as needed.

U.S. Government: Ever More Reliant on Foreign Investors  Despite the Fed recently surpassing China as the largest owner of U.S. government debt, the U.S. remains heavily reliant on foreigners to fund the government’s ongoing fiscal largess. Geithner’s Treasury Department has firmly focused new issues at the mid to longer end of the yield curve (since Geithner assumed office, the average length of marketable Treasury debt held publicly has increased by nearly one year). Despite the Treasury taking advantage of the ultra-low interest rate and funding environment, there are substantial refinancing issues over the near term; moreover, many of these maturing issues are foreign owned. Should sovereign fiscal concerns spread to the U.S., in concert with the evermore attractive interest rates offered internationally, refinancing the U.S. debt could become increasingly difficult if foreign investors turn their backs.

To Whom Does the U.S. Government Really Owe Money? - Back in January, we featured a post where we looked at who are the largest holders of the U.S. national debt. Since that time, the U.S. Treasury has revised their data, specifically to identify who the real foreign owners of the U.S. national debt are. Here are how things really stood at the end of the U.S. government's 2010 fiscal year on September 30, 2010: The main differences from the chart we previously featured are that China's holdings are much greater, while the United Kingdom's holdings are much smaller, which is a result of a number of Chinese institutions using banks in the United Kingdom as intermediaries for purchasing and holding U.S. government-issued debt. As a result, China's real U.S. debt holdings now account for 9.5% of the entire U.S. national debt outstanding (nearly 1 out of every 10 dollars the U.S. government has borrowed), instead of the 7.5% that was previously recorded.

The Elephant in the Room - In looking at the foreign ownership of the U.S. national debt, we realized that we could determine whether a nation is growing or fading in relative economic power by whether or not its share of the U.S. national debt is growing or falling with respect to other nations over time. As you might imagine, a nation whose relative economic power is on the rise will see its share of the U.S. national debt it might own rise over time, which will most often be a result of it being able to run a trade surplus with the United States for a sustained period of time. Here, the nation running a sustained trade surplus would buy U.S. government-issued debt as a way to help balance the books for its international trade with the United States. The longer that goes on, the larger the share it gains of the U.S. national debt. We found that that China and Brazil were the two nations whose relative economic power were on the rise during most of the first decade of the twenty-first century.  But in that analysis, we left out the nation whose relative economic power declined the most substantially by that measure - the United States!

Japan’s Lesson to U.S.: Get Your Fiscal House in Order - After running large budget deficits for years, Japanese government debt, at more than 200% of gross domestic product, is among the highest in the world. Standard & Poor’s in January lowered its credit rating on government debt to double-A-minus, though it said Monday it didn’t foresee another downgrade in the wake of the crisis. No doubt, the government will launch a rebuilding program, but it might find its wiggle room is constrained. If investors are reluctant to take on more government debt, for instance, it could find its borrowing costs rise. To offset more spending, it might raise taxes. Navigating the political gridlock that accompanies larger deficits is another challenge, and a big one in Japan which has cycled through six prime ministers in six years.U.S. government debt isn’t as large as a percentage of GDP; it is 95% and even lower if you don’t count the government debt obligations that it sells to itself through the Social Security trust fund. But the U.S. is more vulnerable in a different way: Japan’s debt is funded almost entirely by domestic investors and institutions. The U.S. depends heavily on foreign investors. That makes the U.S. much more vulnerable to swings in sentiment from abroad and among financial institutions that it can’t control.

Tricky creditors holding out money, waiting to yank it away - From early February, the yield on the 10-year Treasury is down about 12%, and it's down 4% since Friday. In the wake of the financial crisis, low yields have been used by defenders of fiscal stimulus to support the argument that America does not face a near-term borrowing crisis and should spend more. Tyler Cowen, seeing the change in yields, turned up the sarcasm in a tweet: U.S. Treasury yields I guess it's OK for our government to spend more money! At his blog, he later added: Quick quiz: does this mean our federal government should:a) spend more money, because there are even fewer bond market vigilantes than before, or b) spend less money, because there is a general signal that everyone should pull back on excess commitments and risky projects, governments included.One can't be sure of Mr Cowen's meaning from the above, but my reading is that he's suggesting it's obvious the decline in yields should not be interpreted as permission to (or justification to) spend more. If I'm wrong, I hope he'll correct me. It seems reasonable, and yet I find myself thinking that Brad DeLong has a point here: If people thought that government debt was risky, its price would be falling as well. The fact that people are willing to pay more for government debt indicates that it is increasingly valuable--and so we should make more of it.

Geithner says Congress must raise debt limit (Reuters) - Treasury Secretary Timothy Geithner said on Wednesday that there was no alternative except for Congress to raise the debt ceiling so that the government can keep borrowing. "Congress has to do it. There's no alternative," he said in response to questions at a House of Representatives appropriations subcommittee. He repeated a warning that it would be have "catastrophic" consequences for the economy if the debt ceiling was not raised and the country defaulted on its debt obligations.

Yes, We're In A Liquidity Trap - Krugman -- Some comments on various blog posts ask what evidence we have that liquidity trap economics is any different from normal economics. Um, the answer is staring us in the face: the failure of interest rates to rise despite very large budget deficits: If you had told most people, back in 2007, that the federal government would soon be running budget deficits in the vicinity of 10 percent of GDP, most of them would have predicted soaring interest rates. In fact, quite a few people did predict just that — and in some cases lost a lot of money for their investors. But it hasn’t happened. Short rates have stayed near zero; long rates have fluctuated with changing views about the prospects for recovery, but stayed consistently below historical norms. That’s exactly what those of us who understood liquidity-trap economics predicted, right from the beginning. I don’t know what more evidence you could ask for. After all, interest rates are what the liquidity trap is all about.

Liquidity Traps, Once Again - Krugman - Arnold Kling complains that I talk too much about the liquidity trap, but still doesn’t get the point. The economy is in a liquidity trap when even a zero nominal interest rate isn’t enough to restore full employment. That’s it. There are, however, some consequences of that situation. One of them is that increased borrowing by the government — or by anyone else — does not push up interest rates. And that’s the sense in which the low level of interest rates now, lower than rates before the big deficits began, is evidence that the theory of the liquidity trap applies. Really, this isn’t hard; you can read the words, or, if you’re a trained economist, work through the formal models. It’s only confusing if you really, really don’t want to understand.

Should the US balance its budget? - Deficit hysteria is alive and well in the United States as calls grow to slash spending and return the budget to a “sustainable” position. Today I am going to ask what may seem like a very obvious question: should the US quickly balance its budget or even return it to surplus?Of course it should, many would say. The US is living beyond its means and like a household that is spending more than it takes in, if they don’t tighten their belt soon, they are going to go broke. Or so the argument goes. But is it really so simple?  I have written before on this blog about the idea of sectoral balances (as has my fellow blogger Delusional Economics). As you may recall, this is a basic accounting identity which states that in any economy over a fixed period of time, the following must hold true: Private Sector Balance + Government Sector Balance – Current Account Balance = 0

Polls and the Federal Budget Debate: Two Roads Diverging Wildly - As anyone who spends any time trying to figure it out will tell you, the federal budget is exceedingly complex and difficult. Combine that with the increasingly emotional debate that surrounds federal deficits, the national debt, taxes and spending, and it’s not hard to understand how and why budget discussions almost always seem to involve misstatements, hyperbole and a word I use with increasing frequency these days when characterizing the budget debate — demagoguery. I raise this because current polls continue to show that there’s a substantial disconnect between what’s being said about what people want on the budget and actual public opinion. Indeed, the latest polling on budget-related issues shows that the purported lessons of the 2010 midterm elections are much closer to wishful thinking than an accurate assessment of existing public sentiment.

A Credible First Step Toward a New Budget Strategy? - Last week the Senate voted down the House proposal (HR1) to slow the growth of spending in the current fiscal year 2011. Now alternative plans are being laid to slow the growth of spending in 2011 by roughly the same amount as HR1, possibly through a series of shorter continuing resolutions prorated at $2 billion per week. Simultaneously the House is developing a budget resolution for 2012 with the aim of reducing spending growth and the deficit in later years. Hence, the 2011 budget actions should be viewed as a first step of a longer term budget strategy. This first step is crucial. It establishes the credibility of the whole strategy.

Compromise on the Budget? Not SBC Ranking Republican Jeff Sessions - Senator Jeff Sessions (R-AL) is the ranking Republican on the Senate Budget Committee and, therefore, one of the people most responsible for developing a budget resolution. So when Sessions says that he doesn't see much room for compromise, as he did last week on the Bloomberg Television show "Political Capital with Al Hunt," you have to sit up and take notice. Here's the whole interview:    In one sense Sessions' Don't-compromise-till-you-see-the-whites-of-their-eyes position isn't a shock at all.  He is, after all, a conservative from one of the most conservative states in the country.  But it is a shock in the sense of what it tells you about the state of the budget debate in Washington.  I started my budget career as an intern with the Senate Budget Committee when Henry Bellmon (R-OK), as the ranking Republican, thought he had a responsibility to make the budget process work and working with the chairman -- Ed Muskie (D-ME) to get a budget resolution adopted was one of his jobs.  That clearly isn't the case now.

Paul Ryan’s Dilemma - Today the Concord Coalition released this issue brief on the challenges confronting House Budget Committee chairman Paul Ryan.  The bind that Republicans are now in is that, despite having complained about the fiscally-irresponsible Democrats’ health reform bill which they claimed was a “jobs killing” and “deficit increasing” one, now few if any of them–now that they’re in charge–seem willing to come up with their own specific proposals to actually cut Medicare spending.  (Another “bind” they’re in relates to the No New Taxes pledge–also inconsistent with deficit reduction despite what Grover Norquist likes to rant about.) The Republicans’ bind over health reform reminds me of the bind that the Obama Administration and congressional Democrats got themselves into over the “fiscally-irresponsible” Bush tax cuts that they argued were responsible for the huge deterioration in the budget outlook. Once those Democrats were put in charge, we quickly realized that even they weren’t actually willing to let go of those fiscally-irresponsible (then-)Bush(-now-Obama) tax cuts.So what kind of budget would Ryan need to write that would honor his stated commitment to deficit reduction? 

Conservative zealotry vs. economic reality -One thing about the current generation of conservatives: Getting mugged by reality hasn't changed the way they look at the world. We've just come through a calamitous financial collapse - caused by reckless Wall Street gambling and toothless watchdogs - that triggered a Great Recession and doubled the U.S. national debt. The collapse is the greatest cause of large deficits, but conservatives act as if the deficits caused the collapse.  A recent stop in London revealed that this isn't just a Tea Party phenomenon. There, the new Tory-dominated coalition led by David Cameron looks and sounds like a sprightlier offshoot of House Speaker John Boehner's troops. Cameron has set out on a forced march for fiscal retrenchment, imposing deep and immediate spending cuts (and tax increases) to bring deficits down in Britain. This plan is sold with a jaunty recital of conservative gospel: The economy has begun to recover, and action on deficit reduction will boost the confidence of business and consumers. The resulting revival, it is argued, will generate more than enough private-sector jobs to make up for those lost in the public sector.

Proposed GOP budget cuts target tsunami warning centers - GOP budget plan that passed through the House last month aimed to cut funding for a tsunami warning center that issued a slew of warnings around Japan's devastating earthquake.  The budget, which proposed about $60 billion in budget cuts, would slash funding for the National Weather Service and the National Oceanic and Atmospheric Administration (NOAA). That would potentially cripple the effectiveness of the Pacific Tsunami Warning Center in Hawaii, which issued a series of warnings over the past several days regarding the situation in Japan, where an 8.9 magnitude earthquake triggered a massive tsunami along the nation's east coast. (The PTWC is a part of the National Weather Service, which falls under the umbrella of NOAA - the organization responsible for providing tsunami warnings in the U.S.)

Impatient fiscal conservatives - Several conservative House and Senate Members, dissatisfied both with the spending cuts enacted so far and with repeated short-term appropriations negotiations, are threatening to oppose another Continuing Resolution.  I think that’s a mistake.Conservatives are expressing two concerns – spending cuts are not being enacted quickly enough, and short-term CRs lack funding limitations (e.g., No federal funds may be appropriated for [National Public Radio, implementing ObamaCare or new EPA regulations, Planned Parenthood].) I support cutting spending even more deeply than the original House-passed bill.  I support and place a high priority on stopping implementation of ObamaCare and the new EPA regulatory authorities.  Yet I think this move is a short-sighted and even counterproductive tactical blunder.

House Passes Another Stopgap Budget Bill - The House of Representatives gave grudging approval on Tuesday to finance the federal government for three more weeks. Dozens of Republicans broke with their leadership to oppose the stopgap legislation.  Lawmakers on both sides of the aisle called for the bill passed on Tuesday, which would cut $6 billion in spending while keeping the government operating through April 8, to be the last temporary budget expedient. They said it was time for Congress and the White House to reach agreement on federal spending that would cover the remainder of the fiscal year, through Sept. 30.  “Let’s pass this, move ahead and get this thing done,” said Representative Ander Crenshaw, Republican of Florida.  The House Republican leadership supported the short-term bill because it would allow some time for additional budget talks with Democrats. But more than 50 rank-and-file conservatives opposed it because it did not cut spending more deeply, and some of them said they were ready to force a showdown and that Democrats were stalling.

House approves stop-gap measure funding gov’t for three weeks… – By a margin of 271-158, the House voted Tuesday to pass yet another stop-gap resolution that cuts $6 billion in spending and funds the government for an additional three weeks. The bill now moves to the Senate. Funding expires Friday as the House and Senate failed to agree on a longer-term budget measure, making this sixth continuing resolution -- which was negotiated by the two parties -- necessary to avert a government shutdown. Though both parties emphasize the need to avoid a shutdown, patience is running thin as lawmakers say the appetite to fund the government in two or three-week increments is rapidly vanishing. Negotiations on a broader budget measure are continuing this week, Democratic and Republican leadership aides tell Raw Story.

Checkmate: No Good Moves For Boehner In Spending Fight - The House of Representatives passed emergency legislation Tuesday to keep the government funded through mid-April and avoid a shutdown reminiscent of the one Newt Gingrich triggered back in 1995. House GOP leadership has insisted for months now that they don't want a shutdown, period. But Tuesday's outcome was nonetheless a mixed one for Boehner. It illustrated a reality he'd hoped to escape -- that a large chunk of his caucus won't vote with him if he compromises. Indeed, the 54 Republicans who voted against the stop-gap legislation put him in an unenviable box: Either he kowtows to his right flank, and pushes initiatives that can't pass in the Senate; or he abandons them, as Sen. Chuck Schumer (D-NY) has suggested, and passes consensus legislation. The latter option, however, would require significant concessions to win Democratic votes, and further delegitimize himself with the Tea Party base.

Who's Being Serious Here?, by Kevin Drum: Paul Ryan has taken to asking if President Obama is "an Erskine Bowles Democrat or a Nancy Pelosi Democrat?" Well, if this is the best that Bowles can do, I guess it makes Obama's choice a lot easier:....Mr. Bowles had harsh words for fellow Democrats. He dismissed the idea that raising taxes alone might help erase the deficit, saying "raising taxes doesn't do a dern thing" to address health care costs that are projected to be a big driver of future fiscal problems.If there's anything that could be called a wonkish consensus on the left, it's this: we should eliminate the Bush tax cuts in a couple of years when the economy has recovered, and we need to rein in the long-term growth of healthcare costs. It's true that taxes don't address healthcare costs, but it's just sophistry on Bowles' part to put it like that. Taxes do address the medium-term deficit, and that's important. Quite separately, PPACA makes a start on holding down healthcare costs and thus addressing the long-term deficit, and I hardly know anyone on the left who doesn't agree that more needs to be done.

A job-loss statistic produced out of thin air - The House of Representatives, on a bipartisan vote Tuesday, passed another stopgap spending bill that would keep the government running at least until April 8. The bill, known as a continuing resolution, also would cut 2011 budget authority by $6 billion, in what the Republicans call a down payment on their push to trim $61 billion from the fiscal 2011 budget.  The three-week bill is expected to clear the Senate as early as today, but Rep. Becerra, vice chair of the Democratic conference, lashed out at the GOP plan at a news conference Tuesday, saying it would result in 75,000 jobs being lost. (He also voted against the bill.)  Where did that figure come from, and is it true? The original source of the number is economist Mark Zandi of Moody’s Analytics, who last month crunched the numbers and concluded that a $61 billion cut in federal spending would mean 672,000 fewer jobs would be created by the end of 2012, as the country emerges from the recession. He rounded up to 700,000 in a blog post and said, in an interview yesterday, “I was surprised by the attention it got.”

House votes to defund NPR - After a contentious debate and over procedural objections from Democrats, the House on Thursday voted to prevent federal funds from going to National Public Radio. The proposal, sponsored by Rep. Doug Lamborn (R-Colo.), passed the House on a 228-to-192 vote, with one Republican voting present. All but seven Republicans voted for the measure, and all Democrats present voted against it. The measure is unlikely to be taken up by the Democratic-controlled Senate. The White House on Thursday issued a statement “strongly opposing” the bill but stopping short of a veto threat. The bill would ban any federal money from going to NPR, including funding through competitive grants from federal agencies and the Corporation for Public Broadcasting. NPR receives about $5 million annually in such funds. The bill would also prohibit NPR’s roughly 600 member stations from using federal funds to purchase programming from NPR and to pay station dues.

Bloomberg: Congress Approves Bill Funding Government Until April 8 - Congress gave final approval to a stopgap measure funding the U.S. government until April 8 while lawmakers debate spending levels for the rest of this year.  The Senate voted 87-13 to send the plan to President Barack Obama for his signature. It cleared the House two days ago over opposition from 54 members of the Republican majority.  Lawmakers working on the longer-term budget today reported little progress toward agreement on how much to cut, which programs to shrink, and what to do with more than 50 policy actions -- such as ending funds for Planned Parenthood -- that House Republicans seek to include in the plan.  Congressional leaders are determined to complete a budget plan for the fiscal year ending Sept. 30 in the next three weeks to avoid a government shutdown, said Representative Steny Hoyer, the second-ranking House Democrat.

Senate passes short-term spending measure that includes some easy cuts - The U.S. Senate has approved a stopgap measure that will fund the government for three more weeks, while cutting $6 billion from the federal budget. The measure, which has already passed the House1, was approved by a vote of 87 to 13. It is now expected to be signed by President Obama. This is the sixth “continuing resolution” passed by Congress this fiscal year, as Republicans and Democrats have agreed to short-term budgets designed to keep the government’s doors open.  The measured passed Thursday would avert a shutdown until April 8 — but it would not eliminate the threat. Republicans in the House, led by a crowd of tea party-influenced freshmen, have called for $61 billion in spending cuts for this fiscal year. The Democratic-led Senate has shown no sign it will go that far. The Senators voting “no” included nine Republicans, many of them conservatives who have objected to the idea of funding the government through repeated stopgaps.

Obama Signs Spending Bill as Senators Seek Talks on Deficit - The clock is ticking until April 8, the day of reckoning for Democrats and Republicans to broker budget deal. President Barack Obama signed the latest stopgap measure on Friday, giving negotiators three more weeks to work out a deal that will fund the government through September.The two sides are roughly $50 billion apart, and the new class of freshmen Republicans in the House may not give Speaker John Boehner (R., Ohio) a lot of wiggle room to sign off on a compromise. Fifty-four Republicans voted against the three-week bill, some because they were frustrated with another incremental measure and others because it didn't deny funding to Planned Parenthood or programs created by the new health-care law. Mr. Obama signed the bill on a day that 64 senators - 32 Republicans and 32 Democrats - sent him a vaguely worded letter asking the president "to engage in a broader discussion about a comprehensive deficit reduction package." They mentioned cuts in discretionary spending, entitlement changes and tax reform; however, they did not get any more specific, like citing specific entitlement programs - Social Security, Medicare - that needed to be reformed or changes that need to be made in the tax code.

CBO Budget Baseline Will Compete With Other Baselines. - Visitors to House and Senate Budget Committee mark-ups are often surprised by how debates over baselines consume more time than debates over policy.  That's because agreeing to a baseline forces certain policy decisions.  If you assume tax cuts will be extended in the baseline, it doesn't cost anything to extend them.  If you assume the President's spending proposals in the baseline, you can show large spending cuts when you remove them, even if they had little chance of enactment anyway.  That's the game being played now.  This morning, the Congressional Budget Office will release its baseline as required by the Budget Act in its annual Analysis of the President's Budget.  CBO is constrained to take into account "present law," except that any expiring trust fund taxes are assumed to continue.  That means that last December's tax cuts will be assumed to expire at the end of 2012, even though most, if not all, of them will be extended at a 10-year cost of $3.2 tr.  President Obama wants to allow the tax cuts for those with incomes over $250,000 to expire, even though he agreed to extend them for two years last December.  Assumptions about what expires and what doesn't are crucial.  For decades, Congress has passed large tax cuts that are assumed to expire so their long-run cost can be hidden, even though everyone knows they will be continued.  That's why getting a realistic U.S. budget baseline requires adding back the cost of extending expiring tax cuts, funding the wars in Iraq and Afghanistan, and the cost of other hidden spending. 

CBO's Preliminary Analysis of the President's Budget for FY 2012 - CBO Director's Blog - Today CBO released a preliminary analysis of the proposals contained in the President's budget for fiscal year 2012 and their estimated effects on federal revenues, outlays, and budget deficits. This analysis does not include an assessment of the macroeconomic effects of the President's proposals, which will be addressed in a more comprehensive report that CBO will release in April. The Key Points:

  • Under the President's proposals, the federal budget deficit would total $1.2 trillion in 2012 and smaller amounts in later years, averaging 4.8 percent of gross domestic product (GDP) over the 2012-2021 period.
  • Deficits would total $9.5 trillion between 2012 and 2021 under the President's budget, $2.7 trillion more than the amounts projected in CBO's March baseline. Debt held by the public would rise from 69 percent of GDP in 2011 to 87 percent of GDP in 2021.
  • The President's policy proposals, on net, mostly affect the revenue side of the budget: Relative to CBO's baseline, revenues would be lower in every year of the coming decade-for a total reduction of about 6 percent over the 2012-2021 period. Most of the revenue changes would result from extending tax policies that are currently in effect or were in effect in the recent past.
  • Outlays (other than net spending for interest costs) would be slightly lower under the President's budget than in CBO's baseline over the next 10 years.

CBO: Administration's Proposed Tax Cuts Basically "Pay for Themselves" Under Administration's Assumptions - The Congressional Budget Office's (preliminary) Analysis of the President's Budget just came out.  Will have more to say after a more careful read this weekend, but a few things immediately jump out from the main tables in the report:

  1. Deficits under the President's budget proposals as estimated by CBO are more than $2.2 trillion higher than estimated by the Administration. 
  2. CBO estimates the total cost of the President's proposals to be $2.733 trillion over ten years.  The great bulk of this (85%) is the cost of proposed tax cuts, at $2.331 trillion-without including any additional interest costs associated with these tax cuts.
  3. In fact, if you decompose the cost of the spending proposals into mandatory, discretionary, and net interest effects, you find that the contribution of tax cuts is more than 100 percent of the total cost.
  4. It is only coincidental that the difference between CBO's estimate of deficits under the President's proposals and the Administration's (OMB's) own estimate ($2.2 trillion) is almost identical to CBO's estimate of the cost of the tax cut proposals ($2.3 trillion).  But it effectively means that through the Administration's rosier assumptions (which I hope to investigate further), they are implicitly suggesting-or at least not contradicting-the notion that tax cuts pay for themselves

Obama's invisible budget showdown - On Tuesday, the House of Representatives approved a stopgap set of budget cuts that would keep the government operating beyond an imminent deadline. Senate Democrats signaled that they could live with the cuts, paving the way for the president to sign the spending bill into law later this week. As for Obama, he once again baffled his supporters and provided his opponents with plenty of ammunition for attack by saying nothing remotely newsworthy about the ongoing budget negotiations. Didn't all this happen already, a mere two weeks ago? Sure, there are some minor new developments. This week's spending bill will keep the government going for three weeks, instead of two, and the budget cuts add up to $6 million, instead of $4 million. But the substance of the cuts is remarkably similar to the first batch: Nearly everything had already been requested by the White House, or consisted of funds that ended up not being spent in previous budgets, or were earmarks that both parties supposedly now oppose. I'm beginning to think that these people aren't quite clear on what the words "budget showdown" actually mean. Some questions jump to mind. What exactly was the point of this rerun? Who is winning this fight? And is a potential government shutdown more or less likely as a result of Tuesday's events?

White House Divided Over Social Security - Jon Chait - Why is President Obama absent from the budget negotiations? Because, reports Alexander Bolton, his administration is still decided what to do: Obama is being pulled in opposite directions by those whose priorities are fiscal and those whose No. 1 concern is electoral. Treasury Secretary Timothy Geithner, National Economic Council Director Gene Sperling and Sperling’s deputy, Jason Furman — leading figures in the president’s economic team — are pressing Obama to cut Social Security benefits if necessary, say sources familiar with their positions. But Obama’s political team, led by David Axelrod, David Plouffe and Jim Messina, are urging the president to understand that backing benefit cuts could prove disastrous to his 2012 reelection hopes, sources say.  There's a benefit in bashing Republicans for going after Social Security. But that assumes they do go after Social Security, which, despite all their rhetoric, is far from certain. I'd argue that, politically speaking, obtaining a bipartisan deal on the deficit is likely to be popular.

Social Security Suicide - Krugman - Via Jonathan Chait, The Hill reports that Obama administration economic officials are pressing for Social Security benefit cuts. I hope this is wrong, although I have no reason to believe otherwise. As some of us have tried to point out again and again, cutting Social Security would(a) make only a minor contribution to reducing our long-run fiscal problems (b) offer no useful template for dealing with the real problem, health care costs Let’s assume that we’re not talking about expropriating the money people have paid in, that we’re only talking about restoring actuarial balance. Well, on the conservative estimates of the Social Security trustees, we’re talking about 0.6 percent of GDP over the next 75 years. That’s not enough to make a major difference –certainly not enough to make any difference whatsoever to market confidence in US solvency. All you would do is undermine a key part of the US social safety net — and, of course, offer Republicans a big fat target. So what on earth is going on here?

It’s still an empty lockbox - Last week, President Obama’s budget chief, Jack Lew, took to his White House blog1 to repeat his claim2 that the Social Security trust fund is solvent through 2037. And to chide me for suggesting otherwise. I had argued in my last column3 that the trust fund is empty, indeed fictional. If Lew’s claim were just wrong, that would be one thing. But it provides the intellectual justification for precisely the kind of debt denial and entitlement complacency that his boss is now engaged in. Therefore, once more unto the breach. Lew acknowledges that the Social Security surpluses of the last decades were siphoned off to the Treasury Department and spent. He also agrees that Treasury then deposited corresponding IOUs — called “special issue” bonds — in the Social Security trust fund. These have real value, claims Lew. After all, “these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are.” Really? If these trust fund bonds represent anything real, why is it that in calculating national indebtedness they are not even included? We measure national solvency by debt/GDP ratio. As calculated by everyone from the OMB4 to the CIA5, from the Simpson-Bowles6 to the Domenici-Rivlin7 commissions, the debt/GDP ratio counts only publicly held debt.

Wonkbook: How to lift the debt ceiling and save Social Security in one easy step - About half of the Senate’s Republicans have signed a letter opposing any effort to lift the debt ceiling that doesn’t include entitlement cuts. In response, a group of Senate Democrats are trying to pass a measure forcing any cuts to Social Security to pass a two-thirds vote in the Senate. Bitter partisan warfare over the debt ceiling is not exactly an appealing prospect. But perhaps it can be avoided. According to a Washington Post-ABC poll that’ll be released later today (you can download the data here), there’s actually a possible fix that would avoid cutting Social Security, fulfill Republican desires to balance the program’s finances and is even popular with the public.  According to the survey, more than 80 percent of Americans believe the system is in crisis. But when it came to solutions, most cuts were opposed by a majority of Americans.   The only fix that garnered majority support was lifting the payroll-tax cap so that all income, rather than just the first $107,000, got taxed. That’s a reform, I’m confident to say, that the Senate’s liberals would have less trouble swallowing, and according to the Congressional Budget Office, it would wipe out virtually all of Social Security’s shortfall.

Obama Budget Chief: Cutting Spending Doesn’t Equal Cutting Deficit - White House budget director Jacob Lew trotted out a mantra of sorts Wednesday: “There is an agreement that we should be reducing spending. There also needs to be an agreement that we need to reduce deficits… because one can reduce spending and do nothing about the deficit. I think that we have to do both.” Which is another way of saying: The president wants to be sure tax revenues are on the table before he starts bargaining about restraining spending on popular retirement and health benefit programs. But Lew, meeting Wednesday with reporters at a breakfast hosted by Bloomberg News, was reluctant to put it so bluntly A few Senate Republicans — including Mike Crapo of Idaho and Tom Coburn of Oklahoma — agree with that. But House Republicans, so far, are resisting any talk of raising revenues, even if it’s accomplished by eliminating deductions, credits and loopholes rather than raising tax rates, as the Simpson-Bowles fiscal commission recommended.

What if we’re not broke? - “We’re broke.” You can practically break a search engine if you start looking around the Internet for those words. They’re used repeatedly with reference to our local, state and federal governments, almost always to make a case for slashing programs — and, lately, to go after public-employee unions. The phrase is designed to create a sense of crisis that justifies rapid and radical actions before citizens have a chance to debate the consequences. Just one problem: We’re not broke. Yes, nearly all levels of government face fiscal problems because of the economic downturn. But there is no crisis. There are many different paths open to fixing public budgets. And we will come up with wiser and more sustainable solutions if we approach fiscal problems calmly, realizing that we’re still a very rich country and that the wealthiest among us are doing exceptionally well. Consider two of the most prominent we’re-brokers, House Speaker John Boehner and Wisconsin Gov. Scott Walker.

Is The United States Broke? -  I've said more than once that the United States is broke. As with all other issues, the question of whether we are broke has now become political. Upon opening the opinion pages of the Pittsburgh Post-Gazette yesterday, I was greeted by two columns on the subject of our bankruptcy. Dan Simpson, a former U.S. ambassador who is now an associate editor with the newspaper gave his view that The U.S. Can't Fix Libya. The other column was a reprint of Washington Post writer E.J. Dionne's What If We're Not Broke?  Simpson's view echoes Niall Ferguson's assessment and my own. But now we are going to enter the political world, a world of complexity, obfuscation and confusion. I am going to ignore Dionne's opinion piece because it is actually based on David J. Lynch's Bond Market Shows Why Boehner Saying We’re Broke Is Only Figure of Speech, published by Bloomberg. At this juncture, I am going to ask the almost impossible from you, the reader: ignore Boehner's hidden political agenda, which mostly involves impoverishing you and bulldozing money toward the rich. After all, that is what the wealthy pay him to do. But ignore all that. Just consider Steel's assertion that if a family is spending more money than it's taking in year after year, that family is broke.

The Schumer maneuver - Last week Senator Charles Schumer (D-NY) made news by proposing a “reset” of FY11 appropriations negotiations.  He suggested substituting savings from Medicare and Medicaid and tax increases for the cuts being negotiated in discretionary spending. Senator Schumer is focusing on the aggregate amount of budgetary savings proposed by Republicans.  He points out that any given amount of deficit reduction is easier to achieve if you start discussions with a larger share of the total budget pie. Ongoing CR negotiations are about how and how much to cut from the projected $663 B of nondefense discretionary spending this year.  This encompasses much of what we think of as the federal government, including everything from the FBI, federal prisons, Homeland Security, health research, most education spending, the FDA, most foreign aid, financial regulators, national parks and the Environmental Protection Agency, the Labor Department, a lot of veterans’ spending, and a lot of our transportation infrastructure spending. In comparison, Medicare is $492 B this year after netting out premiums paid by beneficiaries.  Federal Medicaid spending is $274 B this year.  These two programs alone cost federal taxpayers $766 B this year

As the Global Economy Trembles, Our Nation's Capital Fiddles - Robert Reich - Why isn’t Washington responding? The world’s third largest economy suffers a giant earthquake, tsunami, and radiation dangers. A civil war in Libya and tumult in the Middle East cause crude-oil prices to climb. Poor harvests around the world make food prices soar. All this means higher prices. American consumers, still reeling from job losses and wage cuts, will be hit hard. (Wholesale food prices surged almost 4 percent in February, the largest upward spike in more than a quarter century.) Even before these global shocks the U.S. recovery was fragile. Consumer confidence is at a five-month low. Housing prices continue to drop. More than 14 million Americans remain jobless, and the ratio of employed to our total population is at an almost unprecedented low. So you might think our elected representatives would want to avoid a repeat of what happened the second half of 2010 when the fragile recovery began tanking. They’d certainly want to prevent a double-dip recession.   Think again. Amazingly, the big debate in Washington is about how whether to cut $10 billion or $61 billion from the federal budget between now and September 30.

Roots of Macroeconomic Ignorance - Paul Krugman - Brad DeLong discusses the remarkable profusion of wrong-headed macroeconomic ideas, and blames Milton Friedman — not because Friedman himself was that wrong-headed, but because he led many economists down a path that eventually left them ignorant of basic principles.I have some quibbles: Brad, I think, telescopes the process. Today’s freshwater economists don’t believe in Friedman-type monetarism; they’re two intellectual generations of intellectual retrogression beyond that. The first post-Friedman generation bought into the Lucas-type argument that no anticipated shock to demand can have any real effect; when that model failed, the next cohort turned to real business cycle theory, in which recessions are basically like bad weather that both reduces a farmer’s productivity and induces him to stay indoors. But Brad is right about the larger point — that having spent the past 30+ years carefully forgetting all about demand-side shocks, many economists found themselves “trying to think complicated issues through on the fly from scratch” — and saying some very foolish things, things that economists were supposed to have gotten past 70 years ago, in the process.

Nick Rowe: Where Will the Demand Come From? - It gets asked in every recession. Recovery requires an increase in demand. "But where will the demand come from?"... Macroeconomics is ultimately about closed systems.... Demand cannot come from outside the system. There is no outside. Demand comes (mostly) from itself. That's the answer that makes no sense whatsoever to most people. It's the logic of the Old Keynesian multiplier. The Hawtrey-Kahn-Keynes-Clower multiplier contains an important truth that is missing from nearly all modern macroeconomics.The short side of the market determines quantity traded. Quantity sold is whichever is less: quantity demanded; or quantity supplied. If there is excess supply of goods in aggregate, then realised sales of goods, and income from those realised sales, is demand-determined. And if people are unable to realise their plans to sell as many goods as they wish (if they face Clowerian quantity constraints) then their demand for goods will depend on their realised sales, which is demand-determined. Demand creates income. And income creates demand. So demand creates demand. That's the fundamental insight of the Old Keynesian multiplier that was lost in the New Keynesian Euler equation.

In Which I Try Not to Go Shrill - I am just going to express this honestly for posterity’s sake. I don’t mean that my comments are morally defensible. I believe they are not. Megan McArdle says And the bad signals aren’t just to the federal debt market–the flight to quality is ultimately going to push things like mortgage rates down too.  Would the people urging the government to take on as much debt as possible also urge our homeowners to once again leverage themselves as far as the banks will allow? I am sure the emotion I am having right now leads many people on Wall Street to do not so nice things. Its just that the expression here not only misunderstands the fundamental nature of reality but does so, so self-righteously. Like I said, I am not proud of any of this but I had to share so that at least people now that people who feel these feeling are out there. Ok, so yes you should leverage your house to the maximum the bank will allow. You should always leverage to the maxim your counterparty will allow. If you don’t get this then you don’t get the concept of “Other People’s Money” which is fundamentally superior to your own money, because it belongs to someone else. If you lose it , they are screwed. They could try to screw you in return but it is always harder to re-screw than to screw.

Stimulating Happiness _ Krugman - One overwhelming result of happiness research is that having a job matters a lot, much more than you might have expected just from the income involved. Well, duh, you may say — and it’s true that anyone who has ever spent time unemployed, or knows anyone who has been unemployed, knows that the blow to self-esteem is far greater than the mere financial loss. Think about the fact that real income per capita right now is considerably higher than it was at the peak of the Clinton-era boom: So are Americans happier? Of course not — in 1999 or 2000 everyone could easily find a job, right now everyone — even the highly educated — faces the prospect of very long-term unemployment if anything goes wrong. So what does this say about policy? It says that job creation is urgent, even if it isn’t very productive in terms of GDP. A WPA-type program when you’re in a severe slump is more productive than most people imagine, but even if it isn’t very productive, it can do a lot to help the nation’s overall welfare, simply by putting people to work. And if the debt run up to pay for the program means higher taxes later, so?

The Pentagon’s Biggest Boondoggles - As our government teeters on the brink of a shutdown, and Congress and the president haggle over spending cuts, the Pentagon budget should be scoured for places where significant reductions may be made. Not the handful of trims alluded to by Defense Secretary Robert Gates — $78 billion over the next five years, with these savings simply used to shore up spending on other acquisitions — but major cuts to systems that don’t work very well or that are not really going to be needed for decades to come. Unworkable or unnecessary systems tend to have something in common: their costs are often uncontrollable. A 2009 Government Accountability Office study of 96 major defense acquisition programs found that almost two-thirds of them suffered major cost overruns — 40 percent above contract prices, over all — with average delays of nearly two years. Those overruns totaled close to $300 billion, about the amount of President Bill Clinton’s last full defense budget request a decade ago. Listed below is just a sampling of what systems could be ended without endangering America; indeed, abandoning some of them might actually enhance national security.

The F-35: A Weapon That Costs More Than Australia - The Lockheed Martin F-35 Lightning II is an impressive aircraft: a fifth generation multirole fighter plane with stealth technology. It's also a symbol of everything that's wrong with defense spending in America. In a rational world, U.S. military expenditure would focus on the likely threats that the United States faces today and in the future. And at a time of mounting national debt, the Tea Party would be knocking down the Pentagon's door to cut waste.  But the only tea party in sight is the one overseen by the Mad Hatter, as we head down the rabbit hole into the military industrial wonderland.

Small Government Supporters Aren’t Racists, They Are Fictional - James Lindgren goes through great pains to show that small government supporters aren’t racist. There is one problem. Small government supporters don’t actually exist. Oh, there are a handful. A few intellectuals who are opposed to government expansion because they think it is in opposition to liberty or that it creates fundamental incentive problems. There are a few who distrust democracy generally. Then there is a somewhat larger swath of traditionalists who reason that small government is what the Founders wanted and is therefore by definition good. The vast majority of people, however, view government as the Authority. Of those people, some of them are mad at the state of world and thus blame the Authority. This fuels some anti-government sentiment, but not small government views.

The GOP’s penny-wise, pound-foolish spending cuts - Let’s say that for every dollar you gave me, I gave you a crisp $10 bill in return. Good deal, right? Almost too good. But before you start to ask questions, I’ll remind you that this is my thought experiment. Perhaps I just love dollar bills. Or perhaps I just love you. At any rate, there are no strings attached, and you can take advantage of it more than once. Now let’s say that you’re in debt and you need to get your finances in order. Do you start handing me more dollar bills? Or fewer? If you’ve got any sense, you’ll give me more. Converting dollar bills into $10 bills is an excellent way to pay off your credit card. Except, it seems, if you’re a House Republican. On March 1, House Republicans voted to cut $600 million from the budget of the Internal Revenue Service for the remainder of 2011, and they want even deeper cuts in 2012.  Well, as the Associated Press reported, “every dollar the Internal Revenue Service spends for audits, liens and seizing property from tax cheats brings in more than $10, a rate of return so good the Obama administration wants to boost the agency’s budget.” It’s an easy way to reduce the deficit:  You just have to make people pay what they owe.

Getting the right tax policy: Aiding recovery and boosting growth - The question of how to design tax policy that both speeds recovery from the current economic crisis and contributes to long-run growth is weighing heavily on the minds of policymakers the world over. Tax reductions to increase demand in the short run may conflict with tax reforms aimed at increasing output and promoting long-term growth. This is important as short-term tax concessions can be hard to reverse, implying that policies to alleviate the crisis could compromise long-run growth.  Have governments been cutting the right taxes? And are they choosing the best taxes to increase now that they need to balance the books? Using data from 21 OECD countries, this column argues that the best taxes to cut early on are income taxes for low earners, while the best taxes to increase – later on – are property taxes and consumption taxes.

Tax Expenditures a Good Target for Deficit-Reduction Efforts - Testifying before the Senate Budget Committee on tax reform and deficit reduction, Center Executive Director Robert Greenstein stated recently that reforming tax expenditures — i.e., spending that is delivered through the tax code rather than through public programs — can reduce deficits, promote economic efficiency, and make the tax code more progressive at the same time.   Here are some excerpts:. . . The costs of tax expenditures are large.  In 2010, individual tax expenditures totaled nearly $1 trillion, and total tax expenditures — both individual and corporate — amounted to $1.05 trillion.  This greatly exceeded the cost of Medicare and Medicaid combined ($719 billion), Social Security ($701 billion), and non-security discretionary programs, which stood at $589 billion, a little over half of the cost of tax expenditures.  [See graph.] . . .[T]ax expenditures are not only costly, but often also economically inefficient.  Although some tax expenditures are intended to adjust the amount of taxable income so as to better measure economic income or to reflect differences in ability to pay taxes, most tax expenditures are designed for another purpose — to subsidize certain desired activities — and often do so in inefficient ways that can detract from economic growth.

Tax Haven USA attracts over $3 trillion in foreign dirty money - I have found a number for the amount of dirty money that is attracted into the United States on account of the secrecy facilities it provides: US$3 trillion. Yes, three trillion dollars. Which goes quite some way to explaining why the United States came top of the Tax Justice Network’s Financial Secrecy Index. The number comes from a letter to Tim Geithner, US Treasury Secretary, sent by every single member of the Florida Delegation to the House of Representatives. They are whinnying about new proposed IRS regulations for the United States to be more transparent about what foreigners earn there. Currently, almost all foreigners can bank in the U.S. in complete secrecy, and evade taxes they owe their own governments. These excellent proposals would see the U.S.  co-operating with other countries to help them tax their own citizens properly.The key section of the letter says: “Because of the privacy laws of the United States, nonresident aliens are estimated to have deposited over $3 trillion in U.S. financial institutions . . (the United States has) refrained from taxing the interest earned by them or requiring their reporting).”

Information Reporting on foreign depositors in US banks--Florida's GOP delegation shamefully supports tax evasion facilitation  Many wealthy Americans have taken advantage of banking secrecy in other countries, particularly Switzerland, to hide their assets and income from the United States, thus avoiding paying their fair share of taxes on their riches.  That practice became somewhat harder when reports on American accountholders became available to the government and the media were filled with stories of Swiss bankers for UBS carrying diamonds in tubes of toothpaste for their wealthy US clients, in order to help them evade US income tax laws.  What is perhaps even more interesting is the fact that the US is a tax haven for the wealthy of other countries.  The US is a tax haven in part because of the withholding exemption for "portfolio" interest--allowing foreigners to earn income by making deposits in our banks without taxation.  We have also not required banks to provide information reporting on that income--so that those foreigners can receive income in the US and avoid paying appropriate taxes on it back in their home countries.  This will change under a proposed regulation issued by the Treasury department in a move to make the US more forthcoming in tax information exchanges with other countries in hopes of reciprocity.  See  IRB 2011-8 regarding the new information reporting requirement under Section 6049 (REG-146097-09) (requiring information reporting for bank deposit interest payable to nonresident alien individuals). 

Tax Holiday for $1 Trillion May Lure Back Profits Without Growth - Google Ireland is not a branch office of the U.S.-based search giant Google Inc. (GOOG) It’s a separate corporation, and American tax collectors can’t touch a dime that Google Ireland earns from its core business until it sends profits back home to the mother ship in Mountain View, California. The term of art for bringing the money back is repatriation -- the same as for a soldier captured abroad. U.S. multinationals have more than $1 trillion in profits stashed in overseas subsidiaries. Some of the companies with the most money squirreled away say they’re prepared to bring a big chunk of it home. All they want in return is a temporary tax break that wouldn’t cost the U.S. Treasury anything, since it’s money that would otherwise be kept abroad and not taxed at all. The tax break would actually raise billions of dollars from applying the reduced tax rate to the money that’s been repatriated. What’s not to like? John T. Chambers, the chief executive officer of Cisco Systems Inc. (CSCO), told securities analysts in February that “you’re now seeing political leaders at all levels understand” the case for a tax holiday on repatriated foreign profits. “I think this one has well over a 60 percent probability of being resolved in a positive way,” he said.

Shifting Burdens – U.S. Taxes By Income Level Over The Years… The tax man cometh, and to illustrate the inequities of his cleft-hoofed embrace, we’ve charted the shift in U.S. income taxes from rich to poor over the past century:  That’s a line for every year from 1913 onward, sized and colored by the tax burden: the amount of tax due relative to the long-term average at each income level. Above-average burdens appear thick and red and below-average thin and blue. We adjusted everything for inflation to ensure an apples-to-apples comparison, with the caveat that the effects of Social Security, Medicare, and other taxes are not included. The underlying data comes from The Tax Foundation, IRS, and Bureau of Labor Statistics, and is the same information we used in last year’s bracket graph, updated for 2011. Our graph shows a series of tax regimes. Overall, taxes stayed low until 1940, spiked during World War II, remained high through the Korean conflict, and eased slightly in the mid ’60s. From there, they held steady, until President Carter emancipated poverty-level wagemakers with his tax-free under-$8000 bracket, creating the blue wedge in our graph. Three years later, Reagan entered office and began turning the tables, finishing in 1988 with his retrograde 28% upper rate. The rich were now on tax vacation, at the expense of the poor and middle class.

Audit rates for the rich increasing--about time - The IRS recently released its 2010 Data Book, which describes the agency's activities for the 2010 FY ending September 30, 2010.  One important part of the data revealed is a much-needed focus on the compliance of wealthy taxpayers.  IRS Commission Doug Shulman admitted in late 2009 that the agency needed to shift its focus to pay more attention to high-net-worth individuals--at least in part to reassure ordinary Americans that the rich weren't able to avoid compliance (i.e., the idea that they might be able to avoid paying taxes simply because they had lots of money and could seek out tax shelters unavailable to the rest of us).  The IRS created a group within the agency focused on "global high wealth" individuals--those with $10 million or more.  Plans for the group required increased audits as a way to call attention to the problems and for the agency to teach itself more about the ways that these high-wealth individuals maintain their wealth and receive their income.  The Data Book shows that the IRS audited 18.4% of those high-income taxpayers in FY 2010, up considerably from the rate of 10.6% the prior fiscal year. The release describing the databooks highlights the following information--including the fact that tax revenues are down compared to prior years.

Jan Schakowsky Introduces Bill To Raise Taxes For Wealthiest Americans -- Rep. Jan Schakowsky (D-Ill.) announced new legislation on Wednesday that would create new tax brackets for earners who make significantly more than the baseline for the current top income bracket.  Currently, the top marginal tax rate of 35 percent applies to income starting at $373,650, and the tax code fails to distinguish between earners making a few hundred thousand dollars a year and those making a few hundred million dollars a year. "LeBron James and LeBron James’s dentist: same difference," “In the United States today, the richest 1 percent owns 34 percent of our nation’s wealth -- that’s more than the entire bottom 90 percent, who own just 29 percent of the country’s wealth,” she said during her prepared remarks at a press conference. “And the top one-hundredth of 1 percent now makes an average of $27 million per household per year. The average income for the bottom 90 percent of Americans? $31,244." Schakowsky's bill would create new tax brackets for earners making between $1 million and $1 billion annually, with tax rates starting at 45 percent with the millionth dollar and increasing on a sliding scale. The legislation would also tax capital gains and dividend income as ordinary income for those earning over $1 million in a given year. A full list of the new brackets appears below:

U.S. millionaires say $7 million not enough to be rich   - A million dollars ain't what it used to be. More than four out of ten American millionaires say they do not feel rich. Indeed many would need to have at least $7.5 million in order to feel they were truly rich, according to a Fidelity Investments survey. Some 42 percent of the more than 1,000 millionaires surveyed by Fidelity said they did not feel wealthy. Respondents had at least $1 million in investable assets, excluding any real estate or retirement accounts. "Every person in the survey is wealthy," said Sanjiv Mirchandani, president of National Financial, a unit of Fidelity. "But they are still worried about outliving their assets."The average age of respondents was 56 years old with a mean of $3.5 million of investable assets. The threshold for "rich" rose with age. "They compare themselves to their peer group ... and they are also thinking about the long period they will have in retirement and want more assets" to fund their lifestyle, said Michael Durbin, president of Fidelity Institutional Wealth Services.

Enough - A friend passed on this article in The Motley Fool by Morgan Housel. It begins this way:“Enough.“That’s the title of Vanguard founder John Bogle’s fantastic book about measuring what counts in life. “The title, as Bogle explains, comes from a conversation between Kurt Vonnegut and novelist Joseph Heller, who are enjoying a party hosted by a billionaire hedge fund manager. Vonnegut points out that their wealthy host had made more money in one day than Heller ever made from his novelCatch-22. Heller responds: ‘Yes, but I have something he will never have: enough.’”The rest of the article discusses the cases of Rajat Gupta and Bernie Madoff, the former accused (but not criminally) and the latter convicted of illegal activity done after they had already been enormously successful, professionally and financially. Housel asks, why do people push on — legally or illegally — when they have more of everything than anyone could possibly need?

D.C. insiders can reap fortunes from federal programs for small businesses -For years as a lawyer in Washington, Paralee White had helped small and disadvantaged firms break into the federal contracting market.  Then she decided to help herself.  She started a business and was soon making more than $500,000 a year through a contracting program intended to help poor Alaska natives, even though she isn't an Alaska native.  White also helped her family. She hired her sister and brother, paying them as much as $280,000 a year. She helped her sister's boyfriend set up his own firm in partnership with Alaska natives. He made more than $500,000 a year.  White's story offers a look at how Washington insiders can make fortunes from government programs intended to benefit small, disadvantaged and minority entrepreneurs. It also illustrates how government officials who are supposed to keep tabs on these programs often fail to do so.

Wall Street Won! Nothing to Prevent Another Crisis, Says Former FDIC Chairman Bill Isaac - Crisis may create opportunity, but Congress completely flubbed its opportunity to enact meaningful financial reform in the aftermath of the worst crisis since the Great Depression, says the former chairman of the FDIC, Bill Isaac. The Dodd-Frank reform bill--the one major piece of legislation to emerge since the financial crisis--is mostly meaningless, says Isaac, who is also the chairman of regional bank Fifth Third.  Dodd-Frank does nothing to address the root causes of the financial crisis, Isaac says, and it won't prevent the next one. Specifically, Dodd-Frank will just create more bureaucracy and red tape. Meanwhile, our biggest banks are still "Too Big To Fail." Our commercial banks are still allowed to take way too much risk. Our regulators are still balkanized and political. And we still haven't addressed Fannie Mae and Freddie Mac. In other words, it's fair to say that Wall Street won the financial crisis.  And it's no mystery who lost.

Risks, Radiation and Regulation - Early warnings about potential nuclear dangers in Japan and about Wall Street’s propensity for risk-taking without liability were both dismissed as paranoid anticipation of low-probability events. With both disasters, regulatory failures set the stage, and taxpayers will end up paying most of the social costs.  Effective risk management is central to economic efficiency. Yet major players in both crises have insisted that they should not be held accountable for risks they underestimated. Goldman Sachs’s chief executive, Lloyd C. Blankfein, likened the financial crisis to a once-every-hundred-years storm or an earthquake. But no natural disaster played a role there, just vast mismanagement (too bad we can’t measure that on the Richter scale). Many economists, including my fellow Economix blogger Simon Johnson, argue that deregulation weakened the very foundations of our financial system..

History's lesson is that investment and retail banking must be separate - Just over a week ago, the Bank of England Governor, Mervyn King, was interviewed by The Daily Telegraph on the banking sector. Anything King says on banks is important – given that the institution he runs will, later this year, take charge of UK bank regulation once the Financial Services Authority, after less than a decade and a half in existence, is disbanded. What was interesting about King's interview, though, wasn't so much what he said, but the reaction it provoked. After months of shadow boxing, the crucial battle over the future of the UK banking industry is now finally on.  King argued that unscrupulous bankers are keen "to make money out of gullible or unsuspecting customers". To anyone who has a British bank account, and has been hit with extortionate charges for minor transgressions while waiting days for an incoming cheque to clear, this is a statement of the obvious. But senior bankers were still seriously miffed by this comment.

Curbing the credit cycle - Credit lies at the heart of crises. Credit booms sow the seeds of subsequent credit crunches. This is a key lesson of past financial crashes, manias and panics (See e.g. Minsky 1986, Kindleberger 1978, and Reinhart and Rogoff 2009). It was a lesson painfully re-taught to policymakers during the most recent financial crisis. This column argues that these have their source in cross-bank externalities. To internalise these cross-sectional spillovers, policy should operate “across the system”. It adds that this is the essence of macro-prudential policy, which, for the first time is about to be undertaken internationally.

Why the Fed needs to get its act together on payments - I’ve known Josh Reich, BankSimple’s CEO, for a while now, but it’s only today that I managed to sit down and have a serious conversation with CFO Shamir Karkal. He’s a very interesting guy — go check out his latest blog entry on the rise of Credits and you’ll see what I mean. Our discussion today was largely about payments, an area where BankSimple stands out starkly from the mass of banks and credit unions by being in favor of lower debit interchange fees. The debit interchange debate is at full volume right now, as banks try to lobby Congress to weaken the part of the Dodd-Frank law which essentially forces the Fed to bring interchange fees down to a very low level. And both sides — banks vs merchants — are putting a lot of money and effort into noisily pushing their side of the story. The big picture here starts with the fact that there are very good public-policy reasons for central banks to assiduously regulate payments mechanisms and ensure that they clear at par. Paper checks are very expensive to process, for instance, but if I write you a check, the amount of money that I spend and the amount of money that you receive are identical.

As Energy Speculation Hits An All-Time High, CFTC Tries To Fend Off Budget Cuts - The price of oil closed yesterday at $101.19 per barrel, and analysts have been predicting that rising gas prices may stunt America’s slow economic recovery and cause the loss of as many as 600,000 jobs. Unrest in the Middle East is just one of many factors behind the recent rapid rise in oil prices.But as ThinkProgress’ George Zornick pointed out last week, “one question remains unanswered — to what extent are commodity traders influencing these high gas prices?” Many experts point to speculative trading, not simple supply and demand, as one of the causes of the 2008 spike in oil prices. And today, the Commodity Futures Trading Commission — which is responsible for policing energy markets — said that energy speculation is at an all-time high:Hedge funds and other speculators have increased their positions in energy markets by 64 percent since June 2008 to the highest level on record, according to data released by U.S. Commodity Futures Trading Commissioner Bart Chilton. Speculative positions accounted for more than one million energy futures equivalent contracts as of January, according to the data.

Banking's Scourge on Charm Offensive - Elizabeth Warren has earned a reputation as the scourge of the financial industry. Banks used "tricks and traps" to carry out a "massive looting from middle-class families," the Harvard professor and consumer advocate has said. She slammed Wall Street chiefs after the financial crisis as the "people who drove the car over the cliff" and then "demanded a bailout." Now, Ms. Warren is setting up the federal government's new Consumer Financial Protection Bureau, a longtime dream of hers that the 2010 financial overhaul established. And her tone has changed.  She wants to "make sure that there is a robust, diversified financial-services industry," Ms. Warren told Texas community bankers in January. Earlier, meeting with American Express Co. Chief Executive Kenneth Chenault, she said she wanted to learn about the industry, asked him what he thought the bureau's priorities ought to be, and said she understood that financial firms need to be able to compete, according to people familiar with their talk.

Who’s Afraid Of Elizabeth Warren? – Simon Johnson - The next big political battle in Washington – after the budget debate is declared “over” – will likely feature the Consumer Financial Protection Bureau, in particular the fight to determine whether Elizabeth Warren can become as the agency’s first official head. But will this fight feature a classic left vs. right set-piece confirmation showdown in the Senate?  Or it will it be resolved with cloaks and daggers closer to the White House – with Treasury Secretary Tim Geithner managing to prevent Professor Warren’s nomination?There is much to commend the left vs. right scenario.  The Republicans, after all, want to argue that regulation is excessive in general and regulation of financial products is somewhere between unnecessary and dangerous for economic growth in particular.  This theme came up during the Dodd-Frank legislative debate on financial reform last year but it was largely lost in the larger conversation. Now Spencer Bachus, Republican chair of the House Financial Services Committee, has Elizabeth Warren firmly in his sights – with the mortgage settlement negotiations as the flashpoint.

Consumer Financial Protection Bureau: Some "rogue"! - On March 16 the House Financial Institutions and Consumer Credit Subcommittee held an oversight hearing about the Consumer Financial Protection Bureau. Committee Chair Shelley Moore Capito, R.-W.Va., called it "one of the most important hearings this subcommittee will hold this Congress." Its urgency was underscored by a Wall Street Journal editorial that appeared that same morning calling the CFPB "a bureaucratic rogue." Members of Congress complained that the CFPB was unaccountable to the congressional appropriations process; too heavily influenced by politics; indifferent to the "safety and soundness" (i.e., solvency) of financial institutions; and an all-around bureaucratic nuisance. Sitting in the press section, I began to feel guilty that I'd never before written about this regulatory monster. Then I remembered: The CFPB hasn't done anything yet.

Just how powerful is Elizabeth Warren? - It seems everybody is afraid of Elizabeth Warren1, the Harvard law professor charged by President Obama with setting up the new Consumer Financial Protection Bureau2.  The Wall Street Journal editorial page called her “President Warren”3 and a “czar” in command of an “empire.” Richard Shelby of Alabama, the top Republican on the Senate banking committee, thinks she’s orchestrating a “regulatory shakedown”4 of mortgage companies. And Spencer Bachus, chairman of the House Financial Services Committee, told Warren on Wednesday that she is “probably directing the most powerful agency that’s ever been created in Washington.” That will come as news to the Pentagon. But in the tradition of Chief Justice John Roberts, who described himself to lawmakers as a lowly “umpire,” Warren declared herself to be a mere sheriff’s deputy.  “If there had been a cop on the beat with the authority to hold mortgage services accountable a half-dozen years ago,” she announced, “the problems in mortgage servicing would have been exposed . . . long before they became a national scandal.”

Elizabeth Warren Defends New Consumer Financial Agency - Elizabeth Warren, the Obama administration adviser setting up the controversial Consumer Financial Protection Bureau, strongly defended the new agency Wednesday against sharp Republican criticism that it is an unaccountable and dangerous new bureaucracy.Appearing before a congressional committee for the first time since being appointed to launch the agency last fall, Warren didn't back down as she faced the Republican majority on a House Financial Services subcommittee."If we had had this agency six years ago, eight years ago, we would not be in the mess we are today," she said. Many of the Republicans on the committee opposed creation of the agency and now want to limit its budget and authority. They have opposed Warren's appointment to launch the Consumer Financial Protection Bureau and criticized her recent role in negotiations between federal and state officials with mortgage servicers to resolve an investigation into botched foreclosure paperwork because she hasn't been nominated or confirmed by the Senate to head the new agency.

Elizabeth Warren Defends Consumer Agency - Elizabeth Warren, the Obama administration official given the task of setting up the first federal consumer financial watchdog agency, on Wednesday battled Congressional Republicans who say the new agency is wielding too much power in Washington and on Wall Street. In testimony before a House Financial Services subcommittee, Ms. Warren also defended the Consumer Financial Protection Bureau against complaints that it lacks transparency.The bureau is the nation’s “most constrained and accountable” financial regulator, Ms. Warren said in her first public statements to Congress since President Obama hired her to establish the bureau.The Dodd-Frank financial regulatory law created the bureau — and gave it authority over a wide swath of financial businesses, including payday lenders, mortgage companies and big banks. The bureau is focused on enhancing mortgage disclosure, raising concerns among Republicans that revised mortgage forms will burden some lenders.

An Advocate Who Scares Republicans - The piñata sat alone at the witness table, facing the members of the House subcommittee on financial institutions and consumer credit.  The Wednesday morning hearing was titled “Oversight of the Consumer Financial Protection Bureau1.” The only witness was the piñata, otherwise known as Elizabeth Warren2, the Harvard3 law professor hired last year by President Obama4 to get the new bureau — the only new agency created by the Dodd-Frank financial reform law — up and running. She may or may not be nominated by the president to serve as its first director when it goes live in July, but in the here and now she’s clearly running the joint.  And thus the real purpose of the hearing: to allow the Republicans who now run the House to box Ms. Warren about the ears. The big banks loathe Ms. Warren, who has made a career out of pointing out all the ways they gouge financial consumers — and whose primary goal is to make such gouging more difficult. So, naturally, the Republicans loathe her too. That she might someday run this bureau terrifies the banks. So, naturally, it terrifies the Republicans. The banks and their Congressional allies have another, more recent gripe. Rather than waiting until July to start helping financial consumers, Ms. Warren has been trying to help them now. Can you believe the nerve of that woman?

Heroes As Villains: The Case of Elizabeth Warren - Krugman - Joe Nocera has a good piece about the demonization of Elizabeth Warren; it’s something remarkable to watch. In a sane world, Warren — who warned about consumer debt before it was fashionable, and in particular warned about the abusive lending practices that played a significant role in the buildup of that debt — would be an icon of reform. But to listen to the GOP, she’s a power-mad usurper of individual rights, a threat to the solvency of our financial system.As Nocera points out, this attack needs to be seen in the context of the GOP attempt to undermine any and all financial reform. And the GOP has it in especially for anyone who got it right: since they’re trying to sell a narrative in which the financial crisis was somehow generated by too much government intervention, not too little, and the bankers were just helpless victims, they especially need to demonize the people who called the actual route to ruin as it was happening.And it’s not just the Republicans: Warren has clearly faced a lot of hostility from within the administration, too. And as I see it, this also comes precisely because she was right: that gives her the kind of credibility that, in turn, makes her something of an independent force — which some people don’t like at all.

Ex-Goldman Banker Behind WSJ ‘Smear Campaign’ Against Elizabeth Warren-- A Wall Street Journal editorial writer who has been closely involved with the paper's recent attacks on Elizabeth Warren is a former Goldman Sachs banker. The same editorial writer, Mary Kissel, is readying another piece critical of Warren and the new consumer agency, according to a source familiar with the coming article.Like most major newspapers, the Journal does not disclose the authors of its editorials. Kissel recently appeared on the John Batchelor radio show as a representative of the Journal's editorial board do discuss Warren, and repeated the main arguments used in the editorials. The editorials paint both Warren and the new Consumer Financial Protection Bureau as an immensely powerful, unaccountable organization. The nascent agency is assuming the consumer protection duties currently exercised by regulators at the Federal Reserve and the Office of the Comptroller of the Currency. Kissel is listed on the Journal's website as a member of the editorial staff and her bio includes her time at Goldman Sachs and notes that she worked for the company in both New York and London.

Associate in Insider Case Sought to Quit Goldman - Rajat K. Gupta, the former Goldman Sachs director accused by the government of passing insider information about the Wall Street firm, had tried to resign from the Goldman board in the middle of the 2008 financial crisis, only weeks before he is said to have provided the tips to the hedge fund manager Raj Rajaratnam.According to a new audiotape recording released by federal prosecutors late Friday, Mr. Gupta sought to leave the Goldman board to take a job as a senior adviser at Kohlberg Kravis Roberts, the private equity firm led by Henry R. Kravis, a friend of Mr. Gupta’s.The recording also suggests that Mr. Gupta may have been having personal troubles at the time he is accused of passing the tips. The tape offers an unusual window into Mr. Gupta’s world during the time that the government says he tipped off Mr. Rajaratnam.

Banks served Libor subpoenas - Regulators probing alleged manipulation of a key interbank lending rate have focused their demands for information and interviews on five global banks, according to people familiar with the investigation. UBS, Bank of America, Citigroup and Barclays have received subpoenas from US regulators probing the setting of the London interbank offered rate, or Libor, for US dollars between 2006 and 2008. Several witnesses have been interviewed by UK and US regulators and criminal investigators. They are examining whether rates were manipulated immediately before and during the financial crisis. At the time, some commentators complained that Libor rates did not reflect the real market.The investigation’s scope has narrowed in recent months. Last autumn, all 16 members of the committee that helped the British Bankers’ Association set the dollar Libor rate during 2006-08 received informal requests for information. Libor, which measures the rate banks charge each other, is used as a reference for about $350,000bn in financial products, making it one of the world’s most closely watched indices.

FDIC sues WaMu execs, seeks to freeze their assets - For those of you who share my horrid fascination with the mortgage meltdown, this document will make interesting reading. It’s a lawsuit, filed Wednesday March 16 in U.S. District Court in Seattle. It’s a whopper in size and scope: 63 pages, detailing how three Washington Mutual executives ignored repeated warnings from inside their own company, over a period of years, to pursue short-term profits via a wide array of risky subprime home loans. The plaintiff: the Federal Deposit Insurance Commission, which was left holding the bag after WaMu collapsed amid billions in loan losses. The suit seeks to hold the three executives, CEO Kerry Killinger, Chief Operating Officer Stephen Rotella and Home Loans President David Schneider pesonally liable for their actions. All three stand accused of gross negligence as the bank piled up huge losses.

Mirabile Dictu! FDIC Suing Former WaMu CEO, Two Execs, for $900 Million - Yves Smith - The FDIC is suing three former WaMu executives for their role in the bank’s failure. The directors of the board, according to the Wall Street Journal, already settled for $125 million. More details: The Federal Deposit Insurance Corp. sued three former executives of the failed Washington Mutual Bank, along with two of their wives, in a lawsuit filed on Wednesday. The FDIC is seeking $900 million in damages for alleged gross negligence and other failures by the former executives in the run up to WaMu’s collapse in September 2008…The former WaMu executives charged by the FDIC are Kerry Killinger, the former chief executive officer, and his wife, Linda; Stephen Rotella, a former president and chief operating officer, and his wife Esther; and David Schneider, the former president of home loans for WaMu, who now works for WaMu’s new owner, J.P. Morgan Chase & Co

FDIC Seeks Comment on Seeking Pay Clawbacks in Resolutions… -- The Federal Deposit Insurance Corp. is seeking comment on a measure that would subject executives and directors to clawbacks of as much as two years’ pay if they are found “substantially responsible” for the failure of a systemically important financial company. FDIC board members voted 5-0 to propose the rule, part of the agency’s expanded liquidation authority under the Dodd-Frank Act, at a meeting in Washington today. In the same vote, board members laid out a framework for priority payment of creditors and procedures for filing claims in liquidations of large, complex firms, for which the FDIC would serve as receiver. “Today’s action is another significant step toward leveling the competitive playing field and enforcing market discipline on all financial institutions, no matter their size,” FDIC Chairman Sheila Bair said in a statement. “Under Dodd-Frank, the shareholders and creditors will bear the cost of any failure, not taxpayers.”

Final TARP Report: Provided Critical Support but Distorted Markets - The Congressional Oversight Panel released its final report on the Troubled Asset Relief Program. From the panel: The Congressional Oversight Panel’s 30th and final oversight report describes the financial crisis, summarizes and updates the Panel’s prior oversight reports, and evaluates federal financial stabilization initiatives. Federal Reserve Chairman Ben Bernanke has said that, when the TARP was created in late 2008, the nation was on course for “a cataclysm that could have rivaled or surpassed the Great Depression.” It is now clear that, although America has endured a wrenching recession, it has not experienced a second Great Depression. The TARP does not deserve full credit for this outcome, but it provided critical support to markets at a moment of profound uncertainty. Even so, the program leaves behind a troublesome legacy: continuing distortions in the market, public anger toward policymakers, and a lack of full transparency and accountability. By statute, the Panel will terminate on April 3, 2011. Read the full report.

Evaluating TARP - Today’s TARP hearing at Senate Banking follows a slew of recent reports. The Congressional Oversight Panel (COP) issued its final report yesterday. Economists Simon Johnson, Allan Meltzer, Joe Stiglitz, and Luigi Zinglales submitted testimony to COP two weeks ago. The Special Inspector General for TARP (SIGTARP) issued a comprehensive review in January. Three members of COP published an oped in today’s Wall Street Journal. A common theme is the high cost of the TARP. I‘m not talking about whether the government lost or made money, which is not a good measure of effectiveness, but rather the costs to the economy (stability, growth, employment, etc). Since November 2008 I have been writing about the costs of the chaotic rollout of the TARP which in my view worsened the crisis and exacerbated the panic. (Here is my written testimony for today’s hearing.) In his recent book former FDIC chairman Bill Isaac concluded that “any objective analysis would conclude that the TARP legislation did nothing to stabilize the financial system that could not have been done without it. Moreover, the negative aspects of the TARP legislation far outweighed any possible benefit.” In his recent testimony Joe Stiglitz said that “TARP has not only been a dismal failure…but the way the program was managed has, I believe, contributed to the economy’s problems.”

Bailout Still $123 Billion in the Red - The administration has been on a PR offensive1 [1] in recent months to tell the good news about the TARP. As the Treasury Department official in charge of the TARP is saying at a congressional hearing this morning2 [2], the bailout won't cost anywhere near the full $700 billion Congress authorized. In fact, many of its investments have turned a profit, and some of its most infamous bailouts -- such as the rescue of AIG -- won't end up being the tax dollar black holes3 [3] they once seemed sure to be.But the true picture isn't so rosy.At ProPublica, we've provided a comprehensive bailout database4 [4] since TARP's launch. It shows not only how much money has gone to each recipient5 [4], but how much each has paid in interest and dividend payments. With all this data, we're able to clearly show how deep in the hole the program remains6 [5]. And the answer as of today is $123 billion.

Buffett Tells Country, TARP Gave Over $1 Billion to Goldman Sachs, by Dean Baker: At a time when all the tough guys in Washington are making plans to cut Social Security and Medicare benefits for high-living seniors and to cut Head Start for low-income kids, it was generous of Warren Buffett to point out that we taxpayers gave over $1 billion to Goldman Sachs through TARP. Buffett probably didn't intend to point out this fact to the country, but it is an unavoidable implication of his $2 billion profit on his loans to Goldman.  Buffett made his $5 billion loan to Goldman about a week before the Treasury lent $10 billion to Goldman through the TARP program. Buffet got 10 percent interest on his loans, while the Treasury got 5 percent on its loans. In addition, Buffett got a much more generous commitment of stock warrants, which is the basis of the $2 billion in profits that he is now set to pocket. The Treasury boasted of getting a $1.1 billion profit on its loans to Goldman, but as Mr. Buffet showed, this was far below the market rate of interest on loans to Goldman at the time. The difference between the return received by Buffett and the return received by the Treasury was in effect a gift from taxpayers to the top executives at Goldman and their shareholders

Do We Need Big Banks? - Thoma - As I've noted in the past, there is little evidence that we need mega-size banks, but they do come with costs, so why allow them?:There is no convincing evidence that banks need to be as large as allowed under the Dodd legislation for the financial system to function efficiently. However, limits on bank size may not protect the financial system from a meltdown. If small banks are exposed to common risks or sufficiently interconnected, then many small banks could fail simultaneously and mimic the failure of a large bank, something that has happened in the past.Reducing size is no guarantee of safety. But limiting bank size does limit the political power of financial institutions. Imposing regulations such as strict limits on leverage is much more difficult when banks are politically powerful, and that alone is sufficient reason to enact strict limits on bank size. Do we need banks to be as large as they are?: Do we need big banks?, Vox EU: In recent years, many banks have reached enormous size both in absolute terms and relative to their national economies. By 2008:

  • 12 banks worldwide had liabilities exceeding $1 trillion, and
  • 30 banks had a ratio of liabilities to national GDP higher than 0.5.

Do We Need Big Banks? - - Yves Smith - Yves here. I normally let VoxEU articles stand on their own, but this topic, of whether the bank PR that bigger banks are essential stands up to scrutiny, is near and dear to my heart. Note that the authors point to a 1990s study that finds that a $25 billion in assets bank was the optimal size. There were a fair number of studies done then of bank size versus efficiency. I’m a bit surprised that this is the one that is most often cited, since it also came up with the biggest size threshold at which a negative cost curve kicked in (meaning the bank became more costly to run). One study found that the slightly negative cost curve started at $100 million in assets (!); more typical was somewhere between $1 and $5 billion. And remember, these studies were done in the days when banks returned checks, and check processing was believed to have strong scale economies.  This article does make an important contribution in parsing out the impact of absolute versus relative size. And it mentions that bank executives have incentives to make banks bigger (an issue we have discussed) as opposed to safer. However, a big frustration is that this piece treats all large banks as being of a muchness. There is a considerable difference between being a large and largely traditional bank, versus being one with large capital market operations (like Citibank, Goldman, Deutsche, SocGen, UBS, Barclays). The dealer banks are systemically risk due to the counterparty exposures and opaqueness.

CreditWriteDowns: Geithner: We Need Big Banks To Be Even Bigger - “I don’t have any enthusiasm for ... trying to shrink the relative importance of the financial system in our economy" -Timothy F. Geithner According to the man running U.S. economic policy, American banks need to be even bigger in order to take advantage of the 'financial deepening' that is anticipated in emerging markets. So, no, Geithner says, don't shrink the big banks. Make them even bigger. The problem with this view is that it ignores recent history and all available economic research on bank size. Take the latest study from VoxEU economists for example:In recent years, many banks have reached enormous size both in absolute terms and relative to their national economies. By 2008: 12 banks worldwide had liabilities exceeding $1 trillion, and 30 banks had a ratio of liabilities to national GDP higher than 0.5

Federal Reserve completes Analysis of 19 Largest Banks, Allows some Dividends =From the Federal Reserve: The Federal Reserve on Friday announced it has completed the Comprehensive Capital Analysis and Review (CCAR), its cross-institution study of the capital plans of the 19 largest U.S. bank holding companies.  As a result of the CCAR, some firms are expected to increase or restart dividend payments, buy back shares, or repay government capital. The Federal Reserve on Friday will discuss the reviews and its decisions with firms that requested a capital action. All 19 firms will receive more detailed assessments of their capital planning processes next month. The Fed is not releasing details of these stress tests, and they will notify the 19 banks if they can start paying dividends (expect announcement pretty soon).Update: Dividend announcements from JPMorgan, Wells Fargo, BB&T, BNY Mellon, US Bancorp. SunTrust announces a buyback.

Two Cakes - Eric Dash of DealBook reports on the latest stress tests conducted by the Federal Reserve, which apparently went swimmingly, at least for some of the healthier banks. I have no independent basis on which to assess the accuracy of those test results, so I won’t.What I did notice is that JPMorgan Chase and Wells Fargo are using the green light from the Fed to start buying back stock: $15 billion for JPMorgan, 200 million shares (about $6 billion) for Wells. Does something seem wrong with this picture to you? Me, too.Last summer, the argument from the big banks was that higher capital requirements were bad because they would reduce the amount of bank lending. The argument is pretty simple: Say you have a 5 percent capital requirement, $5 in capital, and $100 in assets, so you’re barely adequately capitalized. Then say your regulator increases your capital requirement to 10 percent. Now you either need to raise $5 more in capital or, since that could be difficult, you have to shrink your assets to $50 — which means you’re lending half as much money as before. The rules are much more complex than that, but that’s the basic concept. And, so the story goes, less lending means less economic growth means fewer jobs.

Anonymous Bank of America e-mails: Where's the fraud and corruption? - For months, Anonymous, an online hacker group, has bragged that it holds a treasure trove of e-mail messages that would shame and embarrass Bank of America. At midnight on Sunday, it let them fly. The venue, appropriately enough, was, and the Twitter tag "#blackmonday." The leaker is an aggrieved seven-year veteran of a former Bank of America subsidiary, Balboa Insurance. The e-mails show "corruption and fraud," Anonymous says, with Bank of America employees deleting documentation information, apparently to help the bank foreclose. Forgive me if I suppress a yawn. First, there are many very well-documented stories about mortgage fraud and illegal foreclosures already out there. Second, and more relevant, the information revealed by Anonymous doesn't really prove anything.  Of course, nobody has independently verified the documents, and Bank of America has denied the allegations, telling Reuters that the e-mails come from a disgruntled former employee and show clerical errors, not fraud. The bank also says the e-mails do not pertain to foreclosure. "We are confident that his extravagant assertions are untrue," a spokesperson said.

A Reason to Stop Banking with Wells Fargo - - Yves Smith - Even though deciding which TBTF is the worst is like a having an ugly contest between Cinderella’s sisters, Wells Fargo may deserve pride of place. Yes, the Vampire Squid sorta owns the government. JP Morgan has too many people believing it didn’t need a bailout during the crisis. Ahem, what about a $76 trillion derivatives clearing operation don’t you understand? If AIG or Morgan Stanley had failed post Lehman, JPM would have been next. And it is the most aggressive bank I have come across in the “gotcha” fees and bait and switch as far as retail customers are concerned. But Wells is sanctimonious and too often has taken the position that it is less badly behaved than other banks, which grates on me. It has played fast and loose with its balance sheet reporting, and has lied to Congressional staffers, claiming it hadn’t engaged in robo signing when there were depositions in the public domain to the contrary.  Hopefully, not many NC readers are having to think seriously about filing for bankruptcy. But the practice described in this post at the San Diego Bankruptcy Attorneys Blog reads as bad faith dealings (and if someone from Wells reading this might dare to disagree, we can have a conversation about the past and ongoing certifications, which are included in SEC filings, that your bank has made as trustee in numerous mortgage backed securities offerings):

Why Don’t All Major Unions Own Banks? - Seeing that large banks are the most powerful political entity in America and one of the only institutions members of Congress will practically trip over each other in their rush to save from their own mistakes, I’m left wondering why all the major labor unions don’t get in on the action by starting their own banks.With control of big financial reserves and large numbers of members, the larger unions already have basically all the most important things they need to start successful banks. Amalgamated Bank, one of the few union banks from the 1920s to survive the great depression, shows that a union-owned bank can be run successfully and not behave like a bastard to their customers. In addition, the new union-owned banks can provide favorable loans to businesses that are unionized, new union-owned businesses, and loans to members trying to start small companies organized as worker-owned cooperatives.

Unofficial Problem Bank list increases to 982 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Mar 18, 2011. Changes and comments from surferdude808:  The Unofficial Problem Bank List surged to its highest ever institution count and asset level this week. Contributing factors were the release of actions through mid-February 2011 by the OCC and a deeper dive into the databases of the regulatory agencies. The scrubbing of databases found 12 institutions not previously identified. In all, there were 21 additions and three removals this week, which leaves the Unofficial Problem Bank List at 982 institutions with assets of $430.4 billion, up from 964 institutions with assets of $420.7 billion last week. The previous asset high was $422.4 billion at September 24, 2010.

Executive Bonuses Bounce Back -  For many U.S. chief executives, bonuses bounced back last year at a speedy clip. CEO bonuses at 50 major corporations jumped a median of 30.5%, the biggest gain in at least three years, according to a study of the first batch of corporate CEO pay disclosures by consulting firm Hay Group for The Wall Street Journal. Top executives collect a lot of different types of pay, including salaries, long-term equity awards and bonuses tied to corporate performance. Bonuses in general are rebounding as some hard-hit industries like autos recover and corporate profits climb.  Under the new financial-overhaul law that took effect this year, every business whose stock-market value exceeds $75 million must let investors voice their views on rewards for the top brass at annual meetings.

CEO Pay Up, Average Worker Not so Much - Executives in the corner office now make 62 times more than the average worker, and that's just in bonuses alone. A study done for the Wall Street Journal, found that incentive pay for the chief executive officers of 50 major corporations  jumped 30% in 2010. That's on top of their base pay. And it also doesn't include a whole bunch of other things, like generous retirement packages, gold-plated healthcare plans and use of the corporate jets. Remember how the financial crisis was supposed to wipe away the bonus culture of pay for short-term performance in corporate America. Yes. Well, not so much.As a group the 50 CEOs got year-end payouts of $126 million. That was up from $83 million. Some of lucky (they would say deserving) recipients included Walt Disney's CEO Robert Iger, who received a $13.5 million bonus. That was an increase of 45.5% from a year ago. GM CEO Jeffrey Immelt, the nation's new jobs czar, got a $4 million bonus, after not receiving a special - check for two years in a row. And if you are wonder where all that money you spend on Grande Caffe Mochas go, wonder no longer. Starbucks CEO Howard Schultz took home a $3.5 million bonus last year. It was the biggest bonus the Schultz has ever, repeat ever, received. And I thought we were still in tough economic times.

Three eminent domain cases show corporatism in action - So the dialling for dollars campaign is under way in U.S. municipalities. I'm talking about the use of eminent domain laws to dispossess property owners of property in order to make way for luxury facilities. This is an ongoing process I expect to get worse as cash-strapped municipalities figure out how to close budget gaps. There are three recent cases that I want to highlight. But first, here's some history. I first wrote about eminent domain and luxury building in 2009 regarding an eminent domain case in the New York City metropolitan area. In the first case in November 2009, I profiled how New York was to use eminent domain to build a basketball stadium". A month later I gave a reminder about eminent domain and government power regarding eminent domain efforts by the Florida Department of Environmental Protection. Both of these cases were made vastly easier by the landmark Kelo v. City of New London case in which the Supreme Court sanctioned the seizure of privately-held property to build luxury facilities and decrease urban blight.

Charting The Trend | Real Estate and Commercial & Industrial Loans - Last week’s Federal Reserve update on loans at commercial banks in the U.S. reports the fourth straight monthly rise in C&I loans in February. The relative size of the increases continues to slip, however, increasing by $2.3 billion, well down from January’s $5.3 billion advance. Meantime, real estate loans continue to retreat in absolute terms. Last month’s decline accelerated, posting the biggest monthly drop in a year in seasonally adjusted dollar terms. Reviewing the numbers in context with a longer span of history suggests that C&I loans are stabilizing. Real estate loans, by contrast, continue to weaken. Measured on a rolling 12-month percentage basis, the rebound in the C&I trend looks more pronounced. There’s also a hint that real estate loans may finally be stabilizing as well when tracked by their annual percentage change.

SEC moves toward charging Fannie Mae, Freddie Mac executives - The Securities and Exchange Commission1 is moving toward charging former and current Fannie Mae and Freddie Mac executives with violations related to the financial crisis, setting up a clash with the housing regulator that oversees the companies, according to sources familiar with the matter. The SEC, responsible for enforcing securities laws, is alleging that at least four senior executives failed to provide necessary information to investors about the companies’ mortgage holdings as the U.S. housing market collapsed. But the agency that most closely regulates Fannie and Freddie, the Federal Housing Finance Agency2, disagrees with that assessment, according to sources familiar with the matter. FHFA officials think Fannie and Freddie’s financial disclosures, which agency staff members had reviewed before the documents were released to the public, were sufficient, the sources said. One source added that FHFA has sent a letter to the SEC opposing the filing of charges.

FHA Commissioner David Stevens Cannot Serve Two Masters: Fire Him Immediately - The Washington Post reports that David H. Stevens will be taking over as head of the Mortgage Bankers Association. Stevens currently serves as Assistant Secretary for Housing in the Department of Housing and Urban Development, and as the Commissioner of the Federal Housing Administration. He has a conflict of interest so deep that he should be fired at once. Here is how HUD describes his duties:Commissioner Stevens has direct responsibility for oversight and administration of the FHA insurance portfolio, which includes multifamily housing, insured health care facilities and well over 20 percent of mortgages in the domestic single family market. Stevens also has responsibility for other programs within HUD, such the regulatory areas of the Real Estate Settlement Procedures Act (RESPA) and the Secure and Fair Enforcement Mortgage Licensing (SAFE) Act.

Geithner Backs Covered Bond Bill For Mortgages (Reuters) -Treasury Secretary Timothy Geithner on Tuesday backed efforts by U.S. lawmakers to create a new market for financing mortgages that would help wean the $10.6 trillion U.S. mortgage market from government support. Geithner said he backed efforts to create a market for covered bonds, which are securities issued by banks and backed by pools of loans. The loans underlying covered bonds remain on the issuer's balance sheet. That is different from the current U.S. mortgage system, where lenders sell many of the loans they make to Fannie Mae and Freddie Mac, which then repackage them as securities for investors. In a covered bond system, banks can borrow against the value of the underlying mortgages to obtain fresh capital to extend further loans. The bond investors have the right to those underlying assets in the case of a bank default. The Federal Deposit Insurance Corporation has warned a covered bond system could put its bank deposit insurance fund at increased risk for losses because the investors would have seniority over the agency in the event of default.

“Anonymous” Whistleblower Charges BofA With Large Scale Force Placed Insurance Scheme With Cooperation of Servicers - Yves Smith - Ooh, this is ugly.The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated. If they got kickbacks, um, commissions, they are culpable and thus liable.

Another Inside Job, by Paul Krugman - Count me among those who were glad to see the documentary “Inside Job” win an Oscar. The film reminded us that the financial crisis of 2008 ... didn’t just happen — it was made possible by bad behavior on the part of bankers, regulators and, yes, economists.What the film didn’t point out, however, is that the crisis has spawned a whole new set of abuses, many of them illegal as well as immoral. And leading political figures are, at long last, showing some outrage. Unfortunately, this outrage is directed, not at banking abuses, but at those trying to hold banks accountable for these abuses.  The immediate flashpoint is a proposed settlement between state attorneys general and the mortgage servicing industry. That settlement is a “shakedown,” says Senator Richard Shelby of Alabama. The money banks would be required to allot to mortgage modification would be “extorted,” declares The Wall Street Journal. And the bankers themselves warn that any action against them would place economic recovery at risk.  All of which goes to confirm that the rich are different from you and me: when they break the law, it’s the prosecutors who find themselves on trial.

Elizabeth Warren defends consumer agency's role in mortgage settlement talks - Federal consumer bureau head Elizabeth Warren 1made no apologies Wednesday for the new agency’s involvement in ongoing settlement negotiations with some of the nation’s largest mortgage servicers, whose widespread flawed foreclosure practices drew national attention last fall. “If there had been a cop on the beat with the authority to hold mortgage servicers accountable a half dozen years ago, if there had been a consumer agency in place, the problems in mortgage servicing would have been exposed early and fixed while they were still small, long before they became a national scandal,” Warren said in testimony before a House Financial Services subcommittee. She is the Obama administration’s point person for setting up the new Consumer Financial Protection Bureau. If anything, Warren said, the uproar over shoddy foreclosure practices illustrated the need for an agency dedicated solely to protecting ordinary borrowers from abuses by lenders.

Obama Administration Pushing For Banks To Modify Millions Of Mortgages To Settle Foreclosure Claims - The Obama administration is seeking to force the nation's five largest mortgage firms to reduce monthly payments for as many as three million distressed homeowners in as little as six months as part of an agreement to settle accusations of improper foreclosures and violations of consumer protection laws, six people familiar with the matter said. Described as a "shock and awe" approach, the deal would accomplish the four goals set out by state and federal policy makers and regulators as part of their multi-agency investigations into abusive mortgage practices by the nation's largest financial firms: punish banks for violations of state law and federal regulations; provide much-needed assistance to distressed borrowers; stabilize a deteriorating housing market; and dissuade firms from abusing homeowners in the future. The modified mortgages could cost the five financial behemoths -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial -- as much as $30 billion, according to sources. Combined, the five firms handle three out of every five home loans, according to newsletter and data provider Inside Mortgage Finance.

Obama Pressing for a “Shock and Awe” Mortgage Mod Program, 3 Million in 6 Months -- Yves Smith  - Given how well “shock and awe” worked in the Iraq war, I’d see the Administration’s use of that expression in the context of the mortgage mess as a Freudian slip. I must confess to being surprised at the report by Shahien Nasiripour of Huffington Post, namely that the Administration is pushing for an even more aggressive-looking mortgage modification program than has been rumored. The reason I’m surprised is that this effort, even though it appears misguided on several fronts and falls far short of what is needed, represents an upping of the demands being made against banks. That is contrary to both the Obama Administration’s past behavior of making great sounding promises and walk them so far back as to wind up in a different country, and of inconveniencing the banks terribly much. The scorecard thus far appeared to be that the state attorneys general were the only group moving forward against the foreclosure fraud, but the bold promises of criminal prosecutions were quickly recanted. Instead, a 27 page outline of their settlement demands was leaked. As we discussed, it was a disappointment. Virtually all of it merely insisted that banks obey existing law. It has only two new requirements. One was ending dual track (if a bank is entering into a modification discussion or program with a borrower, it cannot keep moving forward in parallel with a foreclosure). The other was “single point of contact,” meaning having one person at the bank serve as case manager and be the interface with the borrower. We deemed that to be operationally unworkable even if the banks had their records and systems working well.

State attorneys general tackle mortgage servicing - State attorneys general, who soon will enter settlement talks with the nation’s largest mortgage servicers after revelations of flawed foreclosure paperwork and other shoddy practices1, will accept nothing less than wholesale changes to the way those companies treat troubled homeowners, the group’s leader said Wednesday. “We're trying to shift the servicing industry from [being] a dysfunctional one to a functional one,” Iowa Attorney General Tom Miller2, who’s heading up the 50-state coalition, said in an interview. “If we can get something that changes the direction of servicing, then that’s what we’ll do. If we don’t, then we’re not going to settle.” Miller said he thinks it’s “more likely than not” that the attorneys general and officials from nearly a dozen federal agencies will reach an agreement with banks. “It’s really in everybody’s interest to settle this,” he said. But he acknowledged that, “Things could blow up and get off track; that’s always possible.”, as evidenced by several attorneys general who have voiced opposition to a 27-page “term sheet”3 submitted to banks earlier this month.

Gretchen Morgenson Confirms Lack of Attorney General Investigations into Foreclosure Fraud - Yves Smith - This is the key snippet from Gretchen Morgenson’s New York Times column today, which inveighs against Iowa attorney general Tom Miller’s unseemly and peculiar haste to get a deal with miscreant banks inked: Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered. And the official denial amounts to a confirmation: Mr. Miller declined to be interviewed about the proposal. But  “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.” Really? All you have is complaints to various AG offices, which I sincerely doubt have been investigated in a systematic manner. If they had been, we would have seen more wideranging action in more states by now. But all they have is accounts from irate homeowners, along with court cases and horror stories reported in the media. That’s self-reported sample, regularly dismissed by the banks as anecdotal and not consequential. Without an investigation, all we have is “he said, she said.” Despite robo-signing having revealed widespread abuse of court procedures, the AGs seem remarkably unwilling to get to the bottom of things. Since the banks are the ones who have a seat at a table in these negotiations, it’s almost a certainty that their version of the story will get more serious consideration.

In Proposed Mortgage Fraud Settlement, a Gift to Big Banks… Lurking in a proposed mortgage fraud settlement with the state attorneys general is a clause that could be worth billions for the big banks.  Yes, I mean the settlement that might extract the supposedly large sum of $20 billion1 from the banks to settle foreclosure fraud. The one denounced as a "shakedown"2 by Sen. Richard Shelby of Alabama.  Despite such rhetoric, the settlement might let the banks avoid tens of billions of write-downs, thanks to a clause with a biblical flavor: the last shall be first.  The proposed agreement -- which is preliminary and subject to intense negotiations being led by Tom Miller, the attorney general of Iowa -- would allow banks to treat second mortgages, like home equity lines of credit, just like the first mortgages. Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down "at least proportionately to the first."  Suddenly, the banks would be given license to subvert the rules of payment hierarchy, as Gretchen Morgenson pointed out3 in The New York Times on Sunday. Yes, the clause says the other alternative is to wipe out the second's value entirely, but given a choice, the banks would be extremely unlikely to do that.

Five on Why Second Liens are Important to the Mortgage Settlement - Jesse Eisinger writes In Proposed Mortgage Fraud Settlement, a Gift to Big Banks, arguing that “when the principal on the first mortgage is reduced, the second lien is typically wiped out. The first lien holder has the first right to any money recovered, and the second lien holder has to wait its turn.” Since the rule in the leaked mortgage settlement says that seconds should be written down “at least proportionately to the first” this is a gift to the banks. Eisinger quotes Arthur Wilmarth, a law professor at George Washington University, sayin “seems astonishingly generous to the second-lien holders…And who are those? Of course, they are the big mortgage servicers” and goes on to note: “But this suggests that the banks, with the authorities’ tacit approval, think contracts are for thee and not for me. The price to get the banks to do the right thing contractually with mortgage modifications and foreclosure is to allow them to not do the right thing elsewhere.”

SqueezePlay : March 17, 2011 : 'Shock & Awe' U.S. Mortgage Solution - interview video - The Obama administration is pushing for a "shock and awe" approach to modifying delinquent U.S. mortgages. Will this cure what ails the U.S. housing sector? Or will the scheme even make it through a combative U.S. Congress? BNN finds out from Yves Smith, Editor of Naked Capitalism.

On the Clouded Title Mess and the Difficulties of Cleaning It Up - Yves Smith - Abigail Field’s latest piece at Daily Finance is a great one-stop summary of the most thorny problem underlying the securitization mess: how can we clean up title given how badly it has been screwed up? As we and many others have noted, integrity of property ownership is an essential foundation of development; this is straight Hernando de Soto gospel. And as our Richard Smith has pointed out, the various fixes to get around this mess run roughshod over well established court procedures that date back to the 1677 Statute of Frauds. Why was it necessary to implement those rules? Because without them, wealthy people could use the court system to steal property. Sound familiar? One thing that it is important to stress: that the abuses to established real estate transfer and recording processes were not inherent to the securitization model. I’m not a fan of securitization but the sad reality is that no one is prepared to go back to the more costly in terms of equity required, model of on-balance sheet banking (it would result in a shrinkage of credit that every respectable economist would recommend against and hence will never happen). But no one (except the FDIC, which keeps being ignored) is thinking seriously enough about what it would take to make securitization safer.

Class, Social and Traditional Media, and the Mortgage Mess - Yves Smith - I’m going to tell one on myself, and since I suspect my reflexes are atypical, I suggest you watch this video by a realtor, Leigh Brown, before reading the balance of the post: First, I regarded her story as entirely credible. Second, it’s not at all surprising to learn that her video got Bank of America’s attention when going through normal channels didn’t. The Charlotte Observer picked up on her story at about the same time the video and her tweets started getting traction (the bank has “social media monitors” on staff). And the Observer’s account adds some ugly details: The sale closed on Jan. 27, and the first-time homebuyers, Kacie and Christopher Justice, began moving in. Six days later, on Feb. 2, they noticed unfamiliar men outside their home taking photos. They wore black shirts with images of handguns on the front and the word “Agent” emblazoned on the back, Kacie Justice said. Their truck was black with tinted windows. “It was just scary,” Justice said. The men said they were there to perform work on a foreclosed home — on orders from Bank of America. Now admittedly, the homeowners were lucky enough to intercept the “agents” who are tricked out to look as intimidating as possible (I wonder if they prefer guys with tattoos, scars, and/or teeth missing).Now why did I debate with myself a bit before posting this story?

Administration Foreclosure Relief Programs Plagued By Broken Servicers - Yesterday, the House voted to terminate the FHA Refinance Program by a vote of 256-171. This is one of a number of upcoming votes in the House to eliminate foreclosure mitigation programs. Only one Republican, Joe Heck of Nevada, whose district features one of the worst foreclosure crises in the nation, voted to retain the program. 18 Democrats went along with termination. Another measure on the floor today would cancel out the Emergency Homeowners’ Relief Program, which is a HUD measure.The White House has promised a veto, so this and other House bills are a bit like spitting into the wind. But the problem with defending these Administration foreclosure programs is their inability to do the job

Homeowners say banks rebuffing attempts to modify mortgages - A lot of people bought homes with a "blending mortgage," he said. They took out first and second mortgages to avoid a big down payment and monthly mortgage insurance premiums.With housing depreciation, it's safe to say that virtually 100 percent of those second mortgages have no equity value, Harris said. Many first mortgages are also "underwater," -- that is, homeowners owe more on the mortgages than the homes are worth. So homeowners simply throw in the towel and walk away when the bank refuses to work with them. They think bad times from the mortgage mess are behind them, not knowing that lenders can file deficiency judgments to reclaim losses on the loan. The first mortgage lender has six months to file. "Most of the banks are so completely overwhelmed with foreclosures that I have not heard of one case of this happening, so the risk is not too great," Harris said. "However, the lender holding the second mortgage has six years to come after the homeowner. So these poor homeowners will walk away from their homes and destroy their credit in the process."

MERS Prevails in New York Supreme Court - The Supreme Court of the State of New York ruled in favor of Mortgage Electronic Registration Systems last week, validating the company's ability to foreclose on a mortgage and assign it. Judge Lucindo Suarez found in the case Bank of New York v. Sachar the Bank of New York Mellon has standing to foreclose based on a MERS assignment and the delivery of the note. Suarez said in his ruling the bank showed enough documentation to do so. "Plaintiff has shown that the assignment of the mortgage was not made retroactively," Suarez wrote. "Although the assignment refers only to an assignment of the mortgage, physical delivery of the note is sufficient to transfer the obligation, and plaintiff has established that the note was delivered to it prior to the commencement of this action." Adam Levitin, associate professor of law at Georgetown University, said the case could still go to the Court of Appeals, the top court in the state. "This ruling muddies the waters, but doesn’t really change things," Levitin said.

Demise of foreclosure firm could cost courts - The demise of Florida’s “foreclosure king” and the free-fall in foreclosure filings could turn the state’s court system into a pauper. The Law Offices of David J. Stern P.A. announced it will cease foreclosure operations this month, leaving as many as 100,000 Florida foreclosure cases in limbo. Court officials and attorneys say the ensuing delays will further strain a legal system that is running low on operating money because of declining revenue from filing fees.“I’m not sure how it’s all going to shake out,” said Christopher Forrest, a foreclosure defense attorney in Sarasota. “I’m anticipating it’s going to be a big mess.”  Stern’s Plantation-based law firm was among the most prolific foreclosure filers in Florida, accounting for nearly a third of the state’s 350,000-case backlog. That earned Stern a fortune -- he reportedly has an $18 million yacht docked at his $16 million Fort Lauderdale mansion -- and the “foreclosure king” nickname and led critics to derisively call his law practice a “foreclosure mill.”

NAHB Builder Confidence increases slightly in March, Still depressed - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased slightly to 17 in March. This was at expectations of an increase to 17. Confidence remains very low ... any number under 50 indicates that more builders view sales conditions as poor than good. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the January data for starts (February housing starts will be released tomorrow). Both confidence and housing starts have been moving sideways at a very depressed level for over two years. Press release from the NAHB: Builder Confidence Edges Up One Point in March

Level of U.S. home construction drops sharply - Builders broke ground on fewer homes in February than a month earlier, and the trend is not likely to improve anytime soon, according to federal data released Wednesday. Construction of single-family and multi-family homes fell to a seasonally adjusted annual rate of 479,000 in February, the lowest level since April 2009, the Commerce Department reported. That’s down 22.5 percent from January, the largest monthly plunge since 1984. Meanwhile, fewer builders pulled permits in February, suggesting that construction is unlikely to pick up soon. Building permits were at a seasonally adjusted annual rate of 517,000, the lowest level since the government began tracking the numbers in 1960.The results suggest that builders lack the incentive to break ground given the stiff competition they face from the excess supply of existing homes 1— particularly the deeply discounted foreclosures that are flooding the national housing market.

Housing Starts decrease sharply in February - Total housing starts were at 479 thousand (SAAR) in February, down 22.5% from the revised January rate of 618 thousand, and barely up from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  Single-family starts decreased 11.8% to 375 thousand in February - the lowest level since early 2009.  The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit. Here is the Census Bureau report on housing Permits, Starts and Completions.

U.S. housing starts approach record low - New construction of U.S. housing units plunged in February, erasing a sharp gain in January and coming close to an all-time-low level.  Starts fell 22.5% to a seasonally adjusted annual rate of 479,000, the Commerce Department said. This is just 0.4% above the record low of 477,000 units set in April 2009.  The decline in starts in February was the largest since March 1984.  January starts were revised higher to a 618,000 pace from the 596,000 previously reported. The 18.4% jump in January was due to an 87.4% surge in apartment starts, which analysts attributed to special factors.  As a result, economists were expecting a decline in February — but nothing close to the actual drop. Analysts polled by MarketWatch had forecasted starts to fall to a 570,000 rate

New Housing Starts Drop Sharply As Building Permits Fall To Record Low - Housing starts fell sharply in February, dropping the most in a single month since 1984, the U.S. Census Bureau reports. The 23% retreat left starts at an annualized rate of 479,000 in February, or just above the previous low for this cycle—477,000 in April 2009. It’s unclear if starts are headed for new lows, but the possibility surely went up a notch or two in light of today’s numbers. The drop in starts is all the more dramatic considering January’s 18% surge—the best monthly gain in nearly two years. But in the wake of today’s update, it looks like the January revival was a one-off number. More ominiously, the new report suggests that apparent stability in housing starts may be eroding. The key question: Is the housing market poised for a new leg down?

Quelle Surprise! New Home Construction Plunges - - Yves Smith - How could anyone have expected new home building to be anything more than anemic with housing prices expected to fall nationwide in 2011? Did some forecasters miss the fact that there are a lot of foreclosures in the pipeline given the current level of serious delinquencies as well as a lot of shadow (homeowners who would like to sell but are not putting their homes on the market due to depressed prices in their market?) From Bloomberg: Housing starts in the U.S. plunged to the lowest level in almost a year in February and wholesale prices rose more than forecast, hurdles for a recovery that the Federal Reserve said yesterday is on a “firmer footing.” Home construction dropped 23 percent to a 479,000 annual rate, while building permits slumped last month to a record low, Commerce Department figures showed today in Washington….

Housing Starts Plummet To Second Lowest Ever At 479K, Finished Consumer Food PPI Jumps By Highest Since 1974 - Stagflation, bitchez. PPI in February doubled to 1.6% on expectations of 0.7%, compared to 0.8% previously, and 5.6% Y/Y! This is the largest increase in finished goods prices since a 1.9-percent advance in June 2009. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 2.0 percent, and the crude goods index climbed 3.4 percent. On an unadjusted basis, prices for finished goods advanced 5.6 percent for the 12 months ended February 2011, the largest 12-month increase since a 5.9-percent rise in March 2010.' And the stunner: 'The index for finished consumer foods surged 3.9 percent in February, the largest increase since a 4.2-percent climb in November 1974. About seventy percent of the February rise can be traced to higher prices for fresh and dry vegetables, which jumped 48.7 percent. Advances in the indexes for meats and dairy products also were major factors in the increase in the finished consumer foods index.' And while inflation is everywhere, or at least for items people need, the housing market is now official dead. February housing starts came at 479K on expectations of 566K, a massive 22.5% collapse from revised January data, and the second lowest ever, better only to April 2009's 477K. Overall: complete stagflationary disaster, and one which means the Fed will use any excuse for QE3, inflation be damned.

Multi-Family Housing Starts and Completions - Although the number of multi-family housing starts was down in February to 96,000 at a seasonally adjusted annual rate (SAAR) (see Housing Starts decrease sharply in February), the number of multi-family starts can vary significantly month to month. In general multi-family housing starts are trending up. Apartment owners are seeing falling vacancy rates, and some have started to plan for 2012 and will be breaking ground this year. We can see this in reports from architects and from comments at the NMHC apartment conference:  The following graph shows the lag between multi-family starts and completions. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.  Notice that the blue line (Starts) is now trending up, and the red line (completions) is still falling. Since it takes about 13 months on average to complete a multi-family building, the low level of starts in 2010 means a low level of completions in 2011.

Residential Remodeling Index shows strong increase year-over-year - The BuildFax Residential Remodeling Index was at 99.0 in January. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax: The Residential BuildFax Remodeling Index rose 22% year-over-year—and for the fifteenth straight month—in January to 99.0, the highest January number in the history of the index, which starts in 2004. Although down month-to-month (off 5% from December) this is the highest level for a January since BuildFax started tracking permit data.  Note: permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity.Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.The remodeling index is up 22% from January 2010.Although new home construction is still moving sideways, it appears that two other components of residential investment are increasing in 2011: multi-family construction and home improvement (based on this index).

Housing Muted Role In The Economic Recovery - The February update on housing starts arrives later today, but a repeat performance of January's near-15% rise isn't in the cards. The consensus forecast calls for a 3.5% decline for last month, according to The housing market, in other words, is still treading water after a severe correction. Housing starts may be stabilizing after falling more than 50% from the glory days before the Great Recession, but a rebound of any magnitude is widely discounted as improbable for the foreseeable future. The question is how that pinches the economic recovery? Historically, "the housing component of GDP (more formally known as residential investment) tends to be a solid contributor to GDP growth during a recovery," according to a recent report from the St. Louis Fed. "Although residential investment is a small component of GDP in levels, it can contribute substantially to the GDP growth rate for short periods of time."

Shrinking Labor Pool Means Shrinking Demand For Housing - Here is an interesting set of charts on labor pool statistics and housing courtesy of my friend Tim Wallace. First consider a chart of various civilian population numbers. Points to Consider:

  • The civilian population is steadily rising. However, none of that increase in recent years is looking to buy a home.
  • Those not in the labor force are not looking
  • Those unemployed are not looking
  • Those afraid of losing their job are not looking
  • Those in a house and underwater are not looking
  • Those just out of school and deep in school debt are not looking
  • Those facing retirement may be looking to sell or downsize
  • Mortgage standards are much tighter for those who are looking

Nevada's Boom Ends In Empty Houses - Nevada's building boom over the last decade has ended in a record number of empty homes. Newly released Census data shows 167,564 empty houses in the state last year, more than double the number in 2000. In all, the number of vacant homes represents about one out of every seven houses across Nevada. The data suggests the housing crash forced many Nevadans from their homes. More than 16 percent of Nevadans relocated to other residences within the state in 2008 alone, the highest mobility rate in the nation. The state also had the highest foreclosure rate in the country in January, and delinquent mortgages are on the rise. The jobless rate is 14.2 percent, and the state's estimated budget gap starts at $1.5 billion.

Homes Sit Empty Across East Bay - In the West Oakland neighborhoods that lie just south of Interstate 580, about one in four homes is vacant. On a block of Adeline Street, the entrance to a foreclosed apartment building is cluttered by a pile of unread newspapers and an abandoned Christmas tree with dried, yellow pine needles. A sign says the building is up for auction. Like officials in East Contra Costa and elsewhere, Oakland Councilwoman Desley Brooks says that the empty houses are dragging down values and limiting property tax revenue at a time when the city can least afford it."There is also some comfort in living in a neighborhood where there are people on either side of you," Brooks said, recalling the case of an elderly woman who called her office scared that the abandoned homes around her had attracted crime.

Nearly 20% of Florida homes are vacant  - On Thursday, the Census Bureau revealed that 18% -- or 1.6 million -- of the Sunshine State's homes are sitting vacant. That's a rise of more than 63% over the past 10 years. Having this amount of oversupply on the market will keep home prices depressed and slow any recovery. During the housing boom, Florida was among the hottest real estate markets in the nation. Homes were snapped up by the state's growing population as well as hordes of investors confident that prices would continue to soar. "You'd drive through downtown Miami and see 30 or 40 cranes sticking up in the air," said Michael Larson, a housing market analyst for Weiss Research. The bust brought an end to that. Development ground to a halt. Retirees stopped relocating. And prices started falling and vacancies rising. "Housing went from being the preeminent investment of choice to toxic waste,"

Cheapest Houses in America/Detroit, Starting at $1 -

   1. The 8 Cheapest Houses in America: "Today's dilemma: A sandwich or a house. They both cost $7." (Note: 5 of the 8 cheapest houses are in Michigan.)
     2. Here are 32 homes in Detroit for $500 or less, including the one above for $1

Philly Fed Index Has Best Reading Since 1984 - Factory operators doing business in the Philadelphia Fed’s district saw already-strong growth heat up further in March to the best pace in nearly three decades, as inflation pressures remained persistent. The Federal Reserve Bank of Philadelphia reported Thursday that its index of general business activity for manufacturers moved up to 43.4, the best reading since January 1984, from 35.9 the month before. Economists had been expecting a modest slowing in the rate of expansion, and had predicted the index would come in at a still very respectable 30.0. Readings over zero indicate expansion and describe the breadth of the change, not its magnitude.Regional factory surveys, such as the Philadelphia Fed’s, have been turning in strong performances over recent months that have been largely confirmed in national manufacturing reports. Earlier this week, the New York Fed reported an expansion of growth in its barometer of factory output. The manufacturing sector has consistently been a bright spot over the course of the recovery, leading the rest of the economy out of recession.

Philly Fed Survey highest since January 1984 - From the Philly Fed: March 2011 Business Outlook Survey The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 35.9 in February to 43.4 this month. This is the highest reading since January 1984. The demand for manufactured goods is showing continued strength: The new orders index increased 17 points this month, the sixth consecutive monthly increase. That is mostly good news. This was well above the consensus of 35.9.The concern remains the pickup in both prices paid and received: Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through March. The ISM and total Fed surveys are through February. This early reading suggests the ISM index will be in the 60s again this month. Another very strong report.

Industrial Production, Capacity Utilization decline in February - From the Fed: Industrial production and Capacity Utilization Industrial production declined 0.1 percent in February after having risen 0.3 percent in January; output in January was previously estimated to have edged down 0.1 percent. Manufacturing output increased 0.4 percent in February, and the gain in January was revised up to 0.9 percent. Outside of manufacturing, the output of mines rose 0.8 percent in February, which more than reversed its decline in January. However, the output of utilities fell 4.5 percent--the drop reflected unseasonably warm weather in February, which reduced the demand for heating after two months of unseasonably cold temperatures. This graph shows Capacity Utilization. This series is up 8.1 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 76.3% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007. The second graph shows industrial production since 1967. Industrial production decreased in February to 95.5, however January was revised up from 95.1 to 95.6. The decline was due to warmer weather in February (less production at utilities) and the upward revision to the January data.

GM Shuts Pickup Factory Due to Japanese Earthquake - Plants that rely on Japanese parts are now running out of them. That includes General Motors, which announced a shutdown of its Shreveport, Louisiana assembly plant, where parts made in Japan are critical to the assembly of Chevrolet Colorado and GMC Canyon pickup trucks. It's sadly ironic that pickup trucks— quintessential American vehicles and big profitmakers for GM—can't be assembled because critical parts are supplied Japan.  Yet sourcing parts in Japan or Asia is not unusual for GM, since it builds vehicles all over the world. More significantly, the parts shortage in Louisiana underlines one of the weaknesses of JIT manufacturing— it's exposure to supply chain risk.  Supply managers in Shreveport are not unmindful of what a natural disaster can do to supply chains; they live in a hurricane zone. Still it's not likely that anyone in GM would have modeled what would happen if a monster earthquake and tidal wave hit critical suppliers half a continent and one ocean removed.

Some Manufacturing Sectors Putting More Capacity to Use - There’s still plenty of slack in the U.S. economy. But not everywhere. The Federal Reserve reported that manufacturing capacity utilization — the share of factories’ productive capacity that’s getting put to use — rose to 74.3% in February, up from 74.1%. That’s way up from the 65.4% registered in early 2009, but still below the average of 77.6% in the decade before the recession hit. The still-low level of capacity utilization, in combination with high unemployment, leaves factories have a lot of leeway to increase production as demand rises. That should act as drag on prices. In some areas, however, capacity has tightened significantly. Capacity utilization at textile mills, at 79.1%, is 4.5 percentage points above the pre-recession average. Apparel makers, at 84.6% capacity, are up 10.7 percentage points versus the pre-recession average. In those two industries, the jump in capacity utilization is, of course, largely due to the shuttering of U.S. productive capacity in recent years.

February LA Port Traffic: Exports weak year-over-year - The first graph shows the rolling 12 month average of loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for February. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, this graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is up 17% and outbound up 9%. The 2nd graph is the monthly data (with strong seasonal pattern).  For the month of February, loaded inbound traffic was up 7% compared to February 2010, and loaded outbound traffic was up less than 1% compared to February 2010 - and down compared to January 2011. This suggests the trade deficit with China (and other Asians countries) probably increased in February.

Housing Starts Dive; Food Boosts Wholesale Prices - Builders broke ground last month on the fewest homes in nearly two years, a reflection of declines in home prices and diminished demand. Housing starts plunged 22.5 percent. Building permits, an indicator of future construction, fell 8.1 percent to the lowest level on records dating back to 1960. A separate report showed that wholesale prices jumped a seasonally adjusted 1.6 percent, amid the steepest rise in food prices in 36 years. The Commerce Department said Wednesday that home construction plunged to a seasonally adjusted 479,000 homes in February, down 22.5 percent from the previous month. It was lowest level since April 2009, and the second-lowest on records dating back more than a half-century.The decline followed a surge in highly volatile apartment construction in January, which pushed the overall construction rate up to more than 600,000 units the fastest rate in 20 months. Still, the building pace has been far below the 1.2 million units a year that economists consider healthy.

Wholesale prices up 1.6 pct. on steep rise in food --- Wholesale prices jumped last month by the most in nearly two years due to higher energy costs and the steepest rise in food prices in 36 years. Excluding those volatile categories, inflation was tame. The Labor Department said Wednesday that the Producer Price Index rose a seasonally adjusted 1.6 percent in February -- double the 0.8 percent rise in the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January's 0.5 percent rise. Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose. Energy prices rose 3.3 percent last month, led by a 3.7 percent increase in gasoline costs.

U.S. Producer Prices Jump Amid Higher Food And Energy Prices - With food and energy prices showing substantial increases in the month of February, the Labor Department released a report on Wednesday showing that total producer prices increased by much more than expected for the month.  The Labor Department said its producer price index jumped by 1.6 percent in February following a 0.8 percent increase in January. Economists had been expecting producer prices to increase by a much more modest 0.7 percent.  The bigger than expected increase in producer prices marked the fastest pace of growth since a 1.9 percent increase in June of 2009. A sharp rise in food prices contributed to the bigger than expected increase, with food prices surging up by 3.9 percent in February after edging up by 0.3 percent in January. The increase marked the fastest pace of growth since a 4.2 percent jump in November of 1974. The jump in food prices was largely due to higher prices for fresh and dry vegetables, which surged up by 48.7 percent. Prices for meats and dairy products also showed notable increases.

Consumer Prices Accelerate In February On Higher Energy Costs - U.S. consumer price inflation ticked higher last month, the Bureau of Labor Statistics reports. Headline inflation rose by a seasonally adjusted 0.5% in February, up from 0.4% the month before. Core inflation, however, remained modest, advancing 0.2% last month, unchanged from January’s rate. Rising energy prices were the main culprit, posting a 3.4% increase in February, up sharply from January’s 2.1% rate. “Food indexes also continued to rise in February,” the Labor Department notes, “with sharp increases in the indexes for fresh vegetables and meats contributing to a 0.8 percent increase in the food at home index, the largest since July 2008.”The price increases are lifting the annual pace of CPI inflation, as the chart below shows. Headline consumer price inflation rose 2.2% over the past year through February, the highest since April 2010. Core inflation, which tends to cast a bigger influence on the Fed’s monetary policy, inched higher too. Core CPI is now higher by 1.1% over the past year. Based on recent history, however, that’s still quite low and at the lower end of the Fed’s reported target range of 1% to 2%.

Consumers see bad news - The Reuters-Michigan survey of consumer sentiment registered a decline from 77.5 in February to a preliminary reading of 68.2 in March. That's the biggest monthly decline since the financial crisis in October 2008, and wipes out the nice gains of the last four months to put us back where we were in October 2010. I noted a few weeks ago that the lost consumer purchasing power from the oil price increases seen so far could subtract 1/2 percent from GDP. Consumer sentiment is not the most important economic indicator, but it does seem to be one factor in why spending sometimes responds by more than the simple calculation behind that 1/2 percent figure would suggest. The connection between gasoline prices and consumer sentiment is pretty well established. A recent study by Paul Edelstein and Lutz Kilian (published version here, working paper here) estimated the following relationship over 1970-2006 of how consumer sentiment declines after an increase in energy prices.

The Double-edged Sword of Credit Cards for Women and Minorities - This week’s credit check: People of color are more likely to pay credit card interest rates of 20%. Women make up two-thirds of those seeking help for their debt loads. The ability to stay away from credit cards is a privilege, as is being offered banking products, including checking accounts. Indeed, minorities and women have historically been shut out of the products others take for granted. And this problem was one of the excuses used by the industry to deregulate and “democratize” credit. But as access to credit and banking expanded, so did predatory practices. As the CFPB tries to rein them in, it risks shutting people out all over again. As “Up to Our Eyeballs” recalls, before deregulation women, African Americans, and Latinos were all but excluded from credit by the good old boys at the helm of the country’s financial institutions. Women were given credit only with their husband’s signature and in his name, no matter what their own personal finances were. Divorced and single women were often unable to buy a house or a car, let alone open up a credit card account.

Number of the Week: Household Debt May Be Accelerating Again - $822 billion:

the amount defaults have lopped off U.S. household debt since mid-2008. U.S. consumers deserve some credit for getting their debts under control. But they still have a way to go. One of the puzzles of the recovery has been how U.S. households have managed to shed some $658 billion in mortgage, credit-card and other consumer debt over the past two and a half years: Are they really paying it down, or are they just giving up and defaulting? The latest data from the Federal Reserve suggest defaults have played a big enough role that “paying down” would be a misnomer. By our own estimate, based on the Fed data, banks’ and investors’ charge-offs — the result of defaults — lopped $822 billion off households’ debt load from mid-2008 to the end of 2010. In other words, net of defaults, consumers actually borrowed an added $163 billion. That calculation alone, though, doesn’t provide a full picture of consumers’ change in behavior. They may be adding debt, but they’re doing so at a much slower pace than during the housing and credit boom. Net of defaults, household debt grew at an average annualized rate of only about 0.5% from mid-2008 to the end of 2010. That compares to about 10.5% in the preceding decade, a difference of 10 percentage points.

Debtors' Prison Gets a 2011 Update - Some lawmakers, judges and regulators are trying to rein in the U.S. debt-collection industry's use of arrest warrants to recoup money owed by borrowers who are behind on credit-card payments, auto loans and other bills. More than a third of all U.S. states allow borrowers who can't or won't pay to be jailed. Judges have signed off on more than 5,000 such warrants since the start of 2010 in nine counties with a total population of 13.6 million people, according to a tally by The Wall Street Journal of filings in those counties. Nationwide figures aren't known because many courts don't keep track of warrants by alleged offense. In interviews, 20 judges across the nation said the number of borrowers threatened with arrest in their courtrooms has surged since the financial crisis began. The backlash is a reaction to sloppy, incomplete or even false documentation that can result in borrowers having no idea before being locked up that they were sued to collect an outstanding debt. The debt-collection industry says such errors are extremely rare, adding that warrants usually are sought only after all other efforts to persuade borrowers to pay have failed.

It’s Coming: The $5 ATM Fee - Big banks have been fighting new federal rules that seek to limit consumer fees on debit cards and overdraft charges. But in the meantime, the banks have a plan B. Deal Journal colleague Robin Sidel weighed in with an eye-opening story this morning about several banks changing their ATM policies to rake in more fees. J.P. Morgan’s retail bank, Chase, is even testing fees of $5 in Illinois and $4 in Texas for people who use a Chase ATM and aren’t a bank customer.The fees already are big business. As Robin wrote, ATMs generated $7.1 billion in fees last year, according to consulting firm Oliver Wyman. Of that, banks collected roughly $3 billion from charging their customers for using another institution’s ATM.Expect more banks to raise ATM rates in coming months. Dodd-Frank is limiting some charges that banks can slap onto consumer accounts, and they’re making up for it in other ways.

Mistrust and the Great Recession - Four years ago, 75% of Americans said that they had confidence in financial institutions or banks. Following the financial crisis, that number has fallen dramatically, to 45%. This well-earned public mistrust may be yet one more factor retarding the recovery of the financial sector, and possibly the broader economy. Survey data also show that trust in government is also currently at an historic low. The effects of this can be seen every day in our political dialogue. And I fear that this demagoguery has made it more difficult for policymakers to respond aggressively to our current economic malaise. Betsey Stevenson and I document this decline in trust in our new working paper titled “Trust in Public Institutions Over the Business Cycle.” You can either read the paper here, or Justin Lahart’s splendid write-up in today’s Wall Street Journal, here. The key fact we document is that those countries hardest hit by the Great Recession also experienced the largest declines in trust. First, here are the data for trust in financial institutions:

U.S. 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.But any solace from the improving debt numbers has been tempered by worries over rising commodity prices, Chinese trade and the threat to Middle East oil supplies.

My Personal Metaphor for the Middle Class -Today, I am visiting my parents' home and went for a walk that included a stroll down the commercial strip on the busy street near their house. Along this commercial strip in a solid middle-class neighborhood in Peoria, Illinois, is a small red brick building that thirty years ago I remember housing an insurance agency. What is there today? A payday lender. My stroll turned into my own personal metaphor for the change in the middle class over the past generation. In place of an institution that cushioned against risk, the neighborhood now has an institution that creates it.The local bowling alley is shuttered as well -- everyone now just can  "bowl alone."The payday lender that inspired this post does not even really stand out. In that one-quarter mile stretch of that commercial strip, there are are now five payday or auto title lenders.

Jobs and Structure in the Global Economy - The US economy did not have a conspicuous unemployment problem until the crisis of 2008 because the non-tradable sector absorbed the bulk of the expanding labor force. That pace of employment growth now appears unsustainable. Government and health care alone accounted for almost 40% of the net increment in employment in the entire economy from 1990 to 2008. Fiscal weakness, a resetting of real-estate values, and lower consumption all point to the potential for long-term structural unemployment. One response is to assert that market outcomes always make everyone better off in the long run. But that is not supported by theory or experience. A second response is to acknowledge the distributional implications, but to accept them as the price of efficiency and openness. According to this view, the alternative – not having an efficient market system operating in a relatively open global economy – would be far worse.

Latest in (Lack of) Structural Unemployment, Housing Lock Edition: MacroBlog, CEPR. - I like to keep up with the latest in the structural unemployment arguments.   Melinda Pitts, research economist and associate policy adviser at the Atlanta Fed, recently summarized and provided links for a bunch of the recent work in Gaining perspective on the employment picture: It’s good to have all the cutting-edge arguments against this line of argument in one place.  Two quick points before we move along: They only mention partial equilibrium effects of unemployment insurance extensions. It is likely that job creation more or less nets out, raising the unemployment rate but also raising the employment rate. They also note: “Furthermore, a recent National Bureau of Economic Research study showed that job creation is more correlated to young businesses than the broad class of small businesses. Start-ups and young businesses are often financed in ways other than direct business loans.”  I’m not sure how this fits in, but it is correct that there are fewer new businesses opening, but it should also be noted that new businesses are more likely to fail during this recession (and the previous one). Analysis here:

Gallup Poll Pegs Unemployment Rate at 10.2%, Underemployment at 19.9%, Same as Last Year - I am very skeptical of BLS unemployment rates inching lower. Not only do the BLS reports discount millions of marginally attached and discouraged workers but BLS seasonal adjustments seem more than a bit unusual. Gallup polls paint a far different picture. Please consider Gallup Finds U.S. Unemployment at 10.2% in Mid-March. The only valid way to compare not seasonally-adjusted numbers is to compare the numbers to the same month a year ago. I added the red circles on the above charts to show just that. Note that year-over-year comparisons of the unemployment rate, the underemployment rate, and the part-time for economic reasons rate, all show no significant change compared to a year ago. Meanwhile the BLS would have you believe the unemployment rate fell from 9.7% to 8.9% over the course of the last year.

Hidden workforce challenges recovery - Overshadowing the nation’s economic recovery is not only the number of Americans who have lost their jobs, but also those who have stopped looking for new ones. These workers are not counted in the Labor Department’s monthly unemployment rate, yet they say they are willing to work. Since the recession began, their numbers have grown by 30 percent, to more than 6.4 million, amounting to a hidden labor force that could stymie the turnaround. Adding these workers to February’s jobless rate pushes it up to 10.5 percent, well above the more commonly cited 8.9 percent rate.An even broader measure of unemployment, which includes people forced to work part time, stands at nearly 16 percent. Economists say the longer these workers stay out of the job market, the harder it will be for them to find employment, creating a vicious circle that can spiral for months or longer. Meanwhile, their delayed entry into the job market means smaller paychecks in the future. And if these ranks remain high, economists worry that it will signal a much deeper and more troubling problem for the country: Workers’ skills don’t match the jobs available. “It can be a self-reinforcing problem, where it just gets worse over time,”

The Mysteries of Labor Composition - David Leonhardt had a blogpost last week that left some of us here at CEPR stumped. It had two graphs, one on top of the other, showing patterns in wages since the start of the recession. The top graph showed wage gains by educational attainment. This showed that college grads had an increase of about 1.5 percent in their real weekly earnings, while everyone else saw modest declines. The second graph showed real wage growth by income cutoffs. Those at the 90th percentile saw real wage gains of 8.0 percent, but everyone else also saw modest wage gains as well. At first glance, these seemed inconsistent and we thought that Leonhardt had made a mistake. After checking his data, we saw that he was exactly right. The explanation was a change in the composition of the employed workforce. There was a sharp drop in employment among workers without high school degrees and those with just a high school degree between 2007 and 2010. On the other hand, the number of people employed who had advanced degrees actually increased slightly.

No JOLTS to Complacency, by Paul Krugman - David Romer has a complaint about the recent IMF conference on new thinking in macroeconomics: I had one major source of unhappiness with last week’s conference: the participants were largely silent about the dismal outlook in the advanced economies for the next several years. The current outlook for unemployment in the United States, Europe, and Japan is probably worse than it was in late 2008. Then, mainstream forecasts for 2009–2011 showed unemployment rising sharply—but generally to levels below what we are experiencing today—and then returning toward normal at a moderate pace. Despite this deterioration, the dire sense of urgency in late 2008 has not increased. Indeed, it has largely disappeared. I find this complacency in the face of vast, preventable suffering and waste hard to understand.Part of the answer, I suspect, is lack of nerve in the face of the ferocity of the austerians: anyone who suggests that we actually need to focus on unemployment instead of slashing spending now now now can expect to face harsh attacks, which leads all too many to shy away from the current policy debate in favor of longer-run concerns.But there’s also this, from the JOLTS (job offerings and labor turnover) data:

The Forgotten Millions, by Paul Krugman - More than three years after we entered the worst economic slump since the 1930s, a strange and disturbing thing has happened to our political discourse: Washington has lost interest in the unemployed.  Jobs do get mentioned now and then. But no jobs bills have been introduced in Congress, no job-creation plans have been advanced by the White House and all the policy focus seems to be on spending cuts.  So one-sixth of America’s workers — all those who can’t find any job or are stuck with part-time work when they want a full-time job — have, in effect, been abandoned.  It might not be so bad if the jobless could expect to find new employment fairly soon. But unemployment has become a trap, one that’s very difficult to escape. There are almost five times as many unemployed workers as there are job openings; the average unemployed worker has been jobless for 37 weeks, a post-World War II record.  In short, we’re well on the way to creating a permanent underclass of the jobless. Why doesn’t Washington care?

Complacency? What Complacency? - As was reported by Brad DeLong, Paul Krugman and Mark Thoma, David H. Romer, the co-host of the IMF "Conference on Macro and Growth Policies in the Wake of the Crisis" had "one major source of unhappiness" with the conference:Today, not only is unemployment higher than most 2008 forecasts of its peak levels, but the expected pace of recovery is weaker. Despite this deterioration, the dire sense of urgency in late 2008 has not increased. Indeed, it has largely disappeared. I find this complacency in the fact of vast, preventable suffering and waste hard to understand. The Sandwichman is shocked! Shocked to find that complacency is going on in here! According to the Statistics Canada definition, the Sandwichman was unemployed from February 1994 to September 2006. This is not to say he was completely idle. Long stretches of proposal writing and network pestering were interrupted sporadically by intense bouts of well-paid contracting as a policy research consultant. Fed up with yet another seemingly interminable contract drought, S. got a job as a grocery store clerk in 2006.

Whoops: Gingrich praises NAFTA for shipping out American jobs - Former House Speaker Newt Gingrich found himself in a bit of a log-jam with his inner-conservative Monday night. Appearing on a conservative talk radio program, Gingrich praised the Clinton-era North American Free Trade Agreement (NAFTA), taking the decidedly internationalist view that it was positive because it created jobs in Mexico. Whether the economy or even the job market overall benefited from the agreement has been the subject of intense debate ever since, but most economists agree that the trade agreement has resulted in the loss of many low-skill jobs to Mexico. But Gingrich's position on the arrangement, which succeeded in dramatically expanding the value of trade between the US, Canada and Mexico, isn't common among Republicans, today or in the lead-up to the agreement's passage. Then, he was instrumental to the Clinton administration in helping bring Republicans around to supporting the plan. Gingrich was also a supporter of the World Trade Organization and has been consistent in advocating for the globalization of markets.

Lacking Parts, G.M. Will Close Plant - General Motors1 said Thursday that it would temporarily shut a truck plant in Louisiana because it could not get enough Japanese-made parts, the first in what analysts say could be widespread disruptions at auto plants in North America because of the earthquake, tsunami and nuclear crisis half a world away.  Production at Ford Motor5 has not been affected, but officials are still assessing the situation, Mark Fields, the president of Ford6’s Americas division, said Thursday. “It’s literally an hour-by-hour, day-by-day type of thing that’s going to unfold,” he told reporters at an event to commemorate the start of production of the new Ford Focus compact car near Detroit. “We have to first understand what is the situation there, and then we’ll determine the appropriate actions that we need to take.” So far, all auto plants in North America have stayed open despite the troubles in Japan, although Toyota and Subaru have canceled overtime shifts to slow production and avoid depleting part inventories.  In Japan, most plants remain closed. Mitsubishi began bringing plants back up Wednesday, and two Nissan plants in Kyushu restarted operations on Thursday, but Nissan was uncertain whether it could keep them running for more than a few days.

No German Jobs Miracle, but There May Be a Lesson for U.S. - Germany’s jobs market fared much better than the U.S. in the recent recession mainly because hiring in Europe’s largest economy had been so much weaker during the boom years preceding the economic crisis, a paper released Thursday shows. The study presented at a Brookings Institution conference found that Europe’s widespread use of reducing the number of work hours during tough times instead of laying people off also helped, suggesting America could benefit from the practice. In the recent downturn, Germany’s economy actually contracted by more than the U.S. Yet German employment barely fell, by 0.5%, while employment in the U.S. suffered its biggest decline in decades, plunging 5.6%. The performance gap is still showing, even though the two economies have been growing at a similar pace since the U.S. recession ended in June 2009: unemployment stood at 7.9% in Germany last month, a full percentage point below the U.S. rate.

Stimulating Happiness _ Krugman - One overwhelming result of happiness research is that having a job matters a lot, much more than you might have expected just from the income involved. Well, duh, you may say — and it’s true that anyone who has ever spent time unemployed, or knows anyone who has been unemployed, knows that the blow to self-esteem is far greater than the mere financial loss. Think about the fact that real income per capita right now is considerably higher than it was at the peak of the Clinton-era boom: So are Americans happier? Of course not — in 1999 or 2000 everyone could easily find a job, right now everyone — even the highly educated — faces the prospect of very long-term unemployment if anything goes wrong. So what does this say about policy? It says that job creation is urgent, even if it isn’t very productive in terms of GDP. A WPA-type program when you’re in a severe slump is more productive than most people imagine, but even if it isn’t very productive, it can do a lot to help the nation’s overall welfare, simply by putting people to work. And if the debt run up to pay for the program means higher taxes later, so?

Is Happiness Overrated? - The relentless pursuit of happiness may be doing us more harm than good.Some researchers say happiness as people usually think of it—the experience of pleasure or positive feelings—is far less important to physical health than the type of well-being that comes from engaging in meaningful activity. Researchers refer to this latter state as "eudaimonic well-being." Happiness research, a field known as "positive psychology," is exploding. Some of the newest evidence suggests that people who focus on living with a sense of purpose as they age are more likely to remain cognitively intact, have better mental health and even live longer than people who focus on achieving feelings of happiness.

The sad but true story of wages in America - Recent debates about whether public- or private-sector workers earn more have obscured a larger truth: all workers have suffered from decades of stagnating wages despite large gains in productivity. The current public discussion illogically pits state and local government employees against private workers, when both groups have failed to sufficiently benefit from the economic fruits of their labors. This paper examines trends in the compensation of public (state and local government) and private-sector employees relative to the growth of productivity over the past two decades. Read Issue Brief

Growing Productivity, Stagnating Compensation - Yesterday Ezra Klein had a chart (from a paper by Larry Mishel and Heidi Shierholz at the EPI showing that both private sector and public sector wages have been stagnating for the past several years, and have certainly not kept up with productivity growth. I think it’s useful to look at the relationship between productivity and compensation over a longer time horizon. The following chart shows labor productivity and real hourly compensation since 1950. (Data from the BLS.) Two things strike me particularly about this graph. The first is how closely the two series track each other between 1950 and 1980. During those 30 years labor productivity in the nonfarm business sector of the US economy rose by 92%; real hourly compensation paid to workers rose by a nearly identical 87%.  The second striking feature of this picture is, of course, how much the two series have diverged since the early 1980s. Output per hour of work in 2010 was 87% higher than in 1980, while real hourly compensation was only 38% higher.

The vanishing middle - MENZIE CHINN attended a conference on employment prospects for lower wage workers, and he writes up some of the interesting findings. He also drops in a chart from research by David Autor: To the extent that one thinks a middle class is associated with middle-skill employment opportunities, this chart suggests that pressures on the middle class exist across the rich world and are likely to do technological change. In particular, Mr Autor has emphasised the difference between routine and non-routine tasks. Many middle-skill positions—like factor line worker or back office clerk—are of the routine sort that can easily be either offshored or replaced by robot or computer programme. At either end of the skill spectrum, however, are a range of non-routine tasks—like design (at the high-skill end) or janitorial (low-skill) work. Employment opportunities for these positions have risen.

Financial Armageddon: Not Hard to See - In recent years, American workers have received an ever-decreasing share of what our economy produces. Is it any wonder that many Americans aren't feeling so happy about the so-called recovery (assuming, of course, it's more than just smoke and mirrors)?

What Caused Inequality To Grow? - It is a commonplace that since the 1970s, inequality in America has been growing rapidly--far more rapidly than our peers abroad.  Naturally, this has invited a lot of attempts to explain that growth, usually in terms of America's tax policy, its culture, or some sort of capture of our national institutions by the rich, allowing them to rig everything in their favor. But Scott Winship offers an intriguing alternative possibility--is our outsized growth rate an artifact of mid-eighties changes to our tax code? Wow, that's a four percentage point increase in two years--three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000. It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase).  And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year.

What workers gave, and what they got - Over the last 30 years there has been very modest wage growth for the typical worker. This is not because the economy was weak and employers were strapped for cash or profits. The economy enjoyed soaring productivity between 1980 and 2009. The Figure compares median wage growth over that period to average gross domestic product growth per worker, a measure of what each individual worker, on average, contributed to the overall economy. This is equivalent to the growth of income per worker as well. While average income per worker grew 59.0%, median wages grew by just 11.2%. Over this same period the amount of wealth (household assets less liabilities) per worker grew by 63.7%. This modest wage growth was not the result of a broken economy: rather, modest wage growth is the result of the way the economy has been designed to work.  Essentially, economic policy of the last three decades has not supported good jobs. The focus instead has been on policies that claimed to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards such as the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions. These policies have served to undercut the bargaining power of most workers, widen wage inequality, and deplete access to good jobs. In the last 10 years, even workers with a college degree have failed to see any real wage growth.

The "Hood Robin" Economy - In 1973, if you put the 1 percent of the country that had made the most money in a room and got them to empty out their pockets, you’d see 8 percent of all the money paid out in wages over the last year falling to the floor. If you’d repeated that exercise in 2008, you’d find 18 percent of the economy’s income on the ground. You’d better have a pretty big room.But that’s what makes the rich different from you and me: their riches. The problem is that since 1973 median wages have been stagnating. Inequality isn’t just rising because the rich are getting richer. It’s rising because the rest of us, by and large, aren’t. If median household incomes had risen between 1974 and 2008 by as much as they rose between 1949 and 1973, the median family would be making well over $100,000 a year by now. In such a world, we might wonder about inequality, but we’d have less reason to worry about it. But the rest are not getting richer. The question is whether the two phenomena are connected: Has the economy gone Hood Robin, with median wages stagnating because the folks at the tippy-top are channeling more and more of the economy’s gains into their own bank accounts? Or have the rich and famous moved into their own economy, and whatever is going on with median incomes is a different problem that will require different solutions?

Is Inflation Driving More People to Food Stamps? - On Thursday, the Bureau of Labor Statistics reported its numbers that track inflation. Back out the cost of food and energy, which most economist do, and inflation looks rather tame. But if you just look at the price of food, inflation looks like a growing problem. The price of food rose 0.6% in February, and that was on top of a 0.5% increase in January. Again, these are low numbers, but the rate of growth in prices is what could be alarming. Food prices rose just 0.1% in August 2010. So prices have really picked up in just six months. And rising food prices comes at a time when the number of people already getting food stamps has risen dramatically. From October 2007, which was just before the financial crisis, to December 2010, which is the most recently available statistics, the number of people on food stamps rose 62% to 44.1 million. That equals 13.1% of the population, up from 9% a little over three years ago. Despite the need, a number of Republicans have targeted food stamps as a problem that needs to be cut to reduce the deficit.

Most Don’t Turn to Government in Tough Times - In some circles, there’s a belief the government safety net creates more problems than it solves because it makes it too easy to be out of work. But against that view, researchers at the Federal Reserve Bank of  San Francisco argue that as important as the government safety net is, most Americans rely on themselves and their social network to get through tough economic times.“Work-limiting disabilities, job losses, and divorces generally have damaging economic effects,” said new research published Monday. “For the most part, individuals and families respond to these shocks privately.” “On average, most post-shock family income comes from the earnings of family members,” the researchers wrote. “If a life-cycle shock causes the principal earner to lose income, other family members take up all or most of the slack by increasing their own earnings.”

The Key to Rebuilding Workers' Power: Unrig the Rules - The battle in Wisconsin over the rights of public-sector workers holds the potential to reawaken workers across the country to demand their fair share of the economic pie. This could be an important turning point. However, if workers are to make real progress, they must move to alter the rules of the game. These rules have been deliberately rigged against them over the last three decades. The most obvious of these rules are those governing the rights to unionize, such as those that Gov. Scott Walker directly attacked in Wisconsin. However, this is just part of the story. Unionization has become almost impossible in the private sector, since companies routinely fire workers engaged in an organizing drive. It is illegal to fire workers for trying to organize, but the penalties are trivial, even if a fired worker presses a case before the National Labor Relations Board long enough to win. Companies will gladly pay a few dollars to the organizers they fire in order to avoid having a union. But this is just the beginning. Over the last three decades, the government has signed trade agreements like NAFTA, the major purpose of which is to put US manufacturing workers in direct competition with low-paid workers in countries like Mexico and China. According to economics and common sense, workers in the United States will lose jobs or see their pay cut when they have to compete with workers in other countries earning one-tenth as much.

New Edition of Facts & Figures: How Does Your State Compare? - We have released the 2011 version of Facts & Figures: How Does Your State Compare?, a popular pocket-sized booklet comparing the 50 states on 32 different measures of taxation and spending, including individual and corporate income tax rates, business tax climates, excise taxes, tax burdens and state spending. Copies are available for $3 each on If you'd like a large number of copies to share with your colleagues and friends, contact us about bulk discounts. You can also download the PDF or Excel file free of charge here.   Every year we send Facts & Figures free of charge to all state legislators, and many of them request extra copies and tell us how useful the booklet is. We believe it's vital for the people who make the laws to understand the level and impact of taxation. From our founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society.

In Ohio, Public Work Is a Road to the Middle Class -Decades of industrial decline have eroded private-sector jobs here, leaving a thin crust of low-paying service work that makes public-sector jobs look great in comparison. Now, as Ohio’s legislature moves toward final approval of a bill that would chip away at public-sector unions, those workers say they see it as the opening bell in a race to the bottom. At stake, they say, is what little they have that makes them middle class.  “These jobs let you put good food on the table and send your kids on school trips,” said Monty Blanton, a retired electrician and union worker. “The gap between low and middle is collapsing.”  Gallipolis is a faded town on the Ohio River, one whose fortunes fell with the decline in industries like steel in bigger cities along the river. That erased a swath of middle-income jobs in the area, said Bob Walton, who, as a commissioner for the Southern Ohio Port Authority, an economic development agency, has tracked the economic history of the area for decades.  “It’s a real big change,” Mr. Walton said. “It has changed the complexion of our community.”

NC lawmakers OK study of $2.6B jobless fund debt - North Carolina lawmakers rushed Wednesday to approve hiring outside consultants to tell them how to fix the fund that pays unemployment claims, which has borrowed nearly $2.6 billion from the federal government. The measure to pay for a study about how to fix the problem zipped through a legislative committee and votes by the House and Senate on Wednesday to head to Gov. Beverly Perdue's desk. Opponents said legislators didn't need to pay up to $250,000 for an analysis that would likely tell them business owners should expect to pay more. Businesses pay into the unemployment insurance system expecting that their contributions will cover the jobless benefits for qualified former workers. But after a series of rate cuts in the 1990s that drove the tax rate for some businesses to zero, the fund has run deficits in five of the last eight years.

Perry, House leaders agree to use $3.2 billion from Rainy Day Fund to close 2011 deficit - Gov. Rick Perry and House leaders agreed Tuesday to use $3.2 billion from the state's reserve fund to close a deficit in the current budget, according to a statement from Perry's office. The announcement clears the way for an end to a stalemate between the Republican governor and House conservatives on the one hand, and Rep. Jim Pitts, the House's chief budget writer. "We have worked closely with state leaders and lawmakers to balance the current budget, which includes using a one-time amount from the Economic Stabilization Fund to help our budget deal with the impact of the national recession," Perry said. "I remain steadfastly committed to protecting the remaining balance of the Rainy Day Fund, and will not sign a 2012-2013 state budget that uses the Rainy Day Fund."

Texas Legislature Looks to Soda Tax to Fill Budget Gap - With a $27 billion budget shortfall, Texas is looking to raise taxes soda, diet soda, and energy drinks as a means to raise $2 billion a year and curtail the obesity rate. The first issue with this proposal is the fact that there is still a $25 billion budget gap left to tackle. Second, targeting particular goods such as soda or energy drinks complicates the tax code. Third, why is one sugary product worth being taxed at a higher rate than another?  Peremptorily imposing an ambiguous tax on a select group of consumers is the worst way to close a budget gap. In light of sound policy and a little bit of common sense Texas needs to seriously reassess their budget and focus on cutting the least-valued government spending or raising a broad-based tax such as the sales tax.

California’s Brown struggles to strike a budget deal on taxes, spending cuts - California Gov. Jerry Brown1 looked tired and sounded frustrated. Leaving an impromptu meeting with his finance director on Tuesday afternoon in the Capitol, he paused briefly to assess budget negotiations that have reached a critical stage. “We’re still climbing the hill, and I can’t see over the horizon,” he said, typically terse and oblique.  The negotiations involve the governor and five Republican state senators. He needs the votes of two of the five (plus two Republicans in the state Assembly) to win passage of a plan to eliminate a budget shortfall of more than $26 billion. The package includes about $12 billion in spending cuts and $12 billion from the extension of several taxes due to expire. Brown has pledged to put any revenue proposals to a vote of the people. But to get it even that far, he needs Republican support in the legislature.

Washington's Budget Shortfall Grows To $5.1 Billion – Washington's budget shortfall has now grown to $5.1 billion over the next two years. That's the estimate from the Governor's office after Thursday's state revenue forecast.Washington's chief economist is Arun Raha . He predicts the state will collect nearly $800 million less than previously forecast for a variety of reasons. Arun Raha: "First we had the volatility in oil prices, because of the political unrest in the Middle East. Now we have the tragedy in Japan the world's third largest economy and one of the state's leading trade partners." Even though the gap between revenues and projected spending is getting worse, Washington tax collections are rebounding. In fact, the state expects to take in $4 billion more over the next two years compared to the current budget cycle. Governor Chris Gregoire urged lawmakers to balance the budget with cuts and no "one-time fixes."

‘FitzWalkerstan’: The Republican Brothers And The Wisconsin Showdown - Before last year, it had been more than 70 years since a political party in Wisconsin took over both the State Senate and the State Assembly in the same election. That rare event produced an even rarer one: siblings at the helm of both chambers. "I'm ready for it," Wisconsin State Sen. Scott Fitzgerald (R) told The New York Times in November, shortly after he and his younger brother, State Rep. Jeff Fitzgerald (R), were chosen to be State Senate Majority Leader and State Assembly Speaker, respectively. "If we don't ruffle feathers this time, I think people are going to say we're not doing what we said we would do." By that measure, Fitzgerald can rest easy. Gov. Scott Walker (R) has pushed through his controversial measure to strip most state employees of their collective bargaining rights, and feathers have been ruffled. Thousands have protested. Democratic State Senators left the state. Madison was compared to Cairo, and Capitol security to palace guards. And the Fitzgeralds have been at the center of all of it.

Dispatches (IX): 49,000-85,000 100,000 Rally In Madison - From USA Today:By 3 p.m., tens of thousands of people crowded the Capitol Square. There is a big discrepancy in the crowd estimates compiled by Capitol Police and the Madison Police Department. Capitol Police estimated about 49,500 at 2 p.m. while Madison police said the crowd was about 85,000. Latest Reuters estimate at up to 100,000. I thought this episode, recounted in The Milwaukee Sentinel Journal was emblematic:Walker signed the bill privately in the morning and held a separate, ceremonial bill-signing in front of reporters later in the day. He was joined by his cabinet and four Republican lawmakers. This article indicates that the bill passed had passed muster, in terms of having no fiscal provisions. I am no lawyer, so I will merely observe that there are many provisions with implications for the budget in the bill, as noted here by the Legislative Fiscal Bureau. In a TIME article, intriguingly titled "Wisconsin's Governor Wins But Is He Still Dead Man Walker?", constitutional challenges are assessed more circumspectly:

Promises, Promises: Obama Rebuffs Invites to Stand with Workers - Union leaders urged Vice President Joe Biden during a White House meeting last month to go to Wisconsin and rally the faithful in their fight against Gov. Scott Walker's move to curtail collective bargaining rights for most public employees.Request rebuffed, they asked for Labor Secretary Hilda Solis. So far, however, the White House has stayed away from any trips to Madison, the state capital, or other states in the throes of union battles. The Obama administration is treading carefully on the contentious political issue that has led to a national debate over the power that public sector unions wield in negotiating wages and benefits. Some labor leaders have complained openly that President Barack Obama is ignoring a campaign pledge he made to stand with unions; others say his public comments have been powerful enough. The stakes are high as Obama looks toward a grueling re-election campaign. Republicans have begun airing television ads linking Obama to 'union bosses' standing in the way of budget cuts in Wisconsin, Ohio and other states.

Walker's Big Bank Donors Take a Hit - The blowback from Wisconsin governor Scott Walker’s union-busting crusade has only just begun—and it may soon hit the governor where it really hurts: in the deep pockets of his biggest donors. Workers have begun organizing a “Move Your Money Campaign” against M&I Bank, whose employees are among his chief financial backers.  M&I Bank is the largest bank in Wisconsin, and was the recipient of $1.7 billion in TARP bailout money from the federal government. The bundled contributions from M&I executives were Walker’s second largest source of campaign funds. According to records provided by the Sunlight Foundation1, executives at M&I Bank gave $46,308 to Walker’s campaign. And now, a group of local unions in Wisconsin have threatened to pull their money from M&I Bank unless it denounces Scott Walker’s attack on workers’ rights. “Walker and his henchmen in the GOP have chosen to ignore the people of Wisconsin, but we all know now that they will listen to their big money donors,” says factory worker David Goodspeed, union member of Sheet Metal Workers Local Union 565."This is an opportunity for donors like M&I to be good corporate citizens and do what’s right for the citizens who bailed them out.”

Madison Rally Bigger Than Biggest Tea Party Rally - Police estimated up to 100,000 people turned out in Madison, WI yesterday to protest Gov. Scott Walker's (R) assault on unions, making it bigger than any protests the city has witnessed, even those during the Vietnam War. The Madison rally is part of a much larger Main Street Movement of average Americans demanding fairness in labor laws, social spending, and taxation that has emerged in Ohio, New Jersey, Florida, Michigan, and elsewhere. But yesterday's rally in Madison is noteworthy because at 85,000-100,000, it was bigger than the biggest tea party protest, the September 12, 2009 rally in Washington, D.C., which turned out only an estimated 60,000-70,000. A photo of the Madison rally yesterday:

Greetings From Fitzwalkerstan: Wisconsin GOP Denies Legislative Democrats Voting Rights - Not content to deny state, county and municipal employees and teachers a voice in the workplace -- with legislation that takes away collective bargaining rights -- Wisconsin Republicans have now moved to deny Democratic legislators the right to vote on legislation as it is being considered by state Senate committees. For the better part of a month, 14 Democratic state senators denied Republicans the quorum they sought to pass Wisconsin Governor Scott Walker's anti-labor legislation -- and, in so doing, provided the time for the development of a mass movement that last Saturday drew more than 100,000 union supporters to the Capitol. The Democratic senators have returned and the legislation has passed.But Republican poll numbers have collapsed. And they are furious. How furious? Walker and his legislative consigliere, state Senator Majority Leader Scott Fitzgerald, have now moved to deny the dissenting Democrats the right to participate in the legislative process.

Power Concedes Nothing Without a Demand - The liberal class is discovering what happens when you tolerate the intolerant. Let hate speech pollute the airways. Let corporations buy up your courts and state and federal legislative bodies. Let the Christian religion be manipulated by charlatans to demonize Muslims, gays and intellectuals, discredit science and become a source of personal enrichment. Let unions wither under corporate assault. Let social services and public education be stripped of funding. Let Wall Street loot the national treasury with impunity. Let sleazy con artists use lies and deception to carry out unethical sting operations on tottering liberal institutions, and you roll out the welcome mat for fascism. The liberal class has busied itself with the toothless pursuits of inclusiveness, multiculturalism, identity politics and tolerance—a word Martin Luther King never used—and forgotten about justice. It naively sought to placate ideological and corporate forces bent on the destruction of the democratic state. The liberal class, like the misguided democrats in the former Yugoslavia or the hapless aristocrats in the Weimar Republic, invited the wolf into the henhouse.

Dennis Kucinich Remarks in Wisconsin (Video)

Wisconsin judge temporarily blocks implementation of law curtailing public worker union rights -  A Wisconsin judge issued a temporary restraining order Friday blocking the state’s new and contentious collective bargaining law from taking effect, a measure that drew tens of thousands of protesters to the state Capitol and sent some Democrats fleeing to Illinois in an attempt to block a vote on it. The judge’s order is a major setback for new Republican Gov. Scott Walker and puts the future of the law in question. Dane County Judge Maryann Sumi issued the order, which was requested by that county’s District Attorney Ismael Ozanne, a Democrat. Ozanne filed a lawsuit contending that a legislative committee that broke a stalemate that had kept the law in limbo for weeks met without the 24-hour notice required by Wisconsin’s open meetings law. The Republican-controlled Legislature passed the measure and Walker signed it last week.

The Toll Road to Serfdom - If you want to experience a real disconnect, find out how highway privation actually works and then read the glowing raves by infrastructure privatization boosters. They claim that privatization transfers risk to the private contractor, while providing high quality infrastructure that a cash-strapped public cannot otherwise afford. They say that the public will have easy drives with new roads and new lanes, all assisted by the installation of the latest tolling and messaging technology. But when you look into the history and details of infrastructure privatization, reality differs. Take the story that praises the 1995 California State Route 91 private toll lanes built in the median of a public road. Those private lanes have a troubled history that is still relevant to today's privatized infrastructure. The SR 91 deal forbade the state from doing repairs and maintenance on the public lanes in order to herd drivers to the private toll lanes. As the public lanes were left to deteriorate, potholes led to car damage and dangerous road and, eventually, public anger that toppled politicians. Commonly found "noncompete" terms forbid building or improving "competing" road or mass transit systems. They may also require what is called "traffic calming" but which means by narrowing lanes or making other changes to make alternative routes unpleasant or less useful.

Infrastructure privatization: Can banks be trusted? - Almost lost in the deluge of news out of Wisconsin was a paragraph tucked into Gov. Scott Walker's original "budget repair bill" giving the state government the right to sell state-owned power-generation facilities—which supply heating, cooling, and electricity to Wisconsin's government buildings—essentially without any oversight, checks, or balances. As the bill put it, any such sale would, by definition, be "considered to be in the public interest." The blogosphere erupted in a storm of speculation—and New York Times columnist Paul Krugman joined in—that the sale of the plants was intended as a gift to Koch Industries, the mammoth private company run by the Koch brothers, the billionaire Tea Party Medicis who provided conservative support for Walker's agenda. Actually, the privatization of state and, especially, local government assets is a very real, very national issue, albeit one in which the left's favorite villains in Wisconsin—the Koch brothers—don't figure as prominently as the left's other favorite villain—the banks. The deep budgetary woes of states and cities around the country have made the quick (but one-time) infusion of cash resulting from an asset sale a handy temporary solution. The big banks advise cities about whether privatization is a wise choice. They also control the ability of states and cities to access the market for their financing needs. But the banks' investment funds may also stand to make money off privatizations.

Michigan's GOP Governor Slashes Corporate Tax Rate by 86 Percent, Hikes Taxes for Working Poor - As we’ve been documenting, several conservative governors have proposed placing the brunt of deficit reduction onto the backs of their state’s public employees, students, and middle-class taxpayers, while simultaneously trying to enact corporate tax cuts and giveaways. Govs. Rick Scott (R-FL), Tom Corbett (R-PA), and Jan Brewer (R-AZ) have all gone down this road.Following suit, Gov. Rick Snyder (R-MI) has proposed ending his state’s Earned Income Tax Credit, cutting a $600 per child tax credit, and reducing credits for seniors, while also cutting funding for school districts by eight to ten percent. At the same time, as the Michigan League for Human Services found, the state’s business taxes would be reduced by nearly $2 billion, or 86 percent, under Snyder’s plan:Business taxes would be cut by 86 percent from an estimated $2.1 billion in FY 2011 to $292.7 million in FY 2013, the first full year of the proposed tax changes…Taxes on individuals from the state income tax would rise by $1.7 billion or nearly 31 percent, from an estimated $5.75 billion in FY 2011 to $7.5 billion in FY 2013, the first full year of the tax changes.

Governor says Mich. must focus on 'we,' not 'me' - Michigan citizens need to think about what's best for everyone rather than just themselves if the state is to reinvent itself, Gov. Rick Snyder told the Michigan Association of Broadcasters on Wednesday. The Republican governor defended his nearly $2 billion in business tax cuts and the income tax changes he wants to make to offset that, including a tax on pensions that has drawn criticism. The new governor has been criticized for proposing deep cuts to public education, universities and local governments while slashing business taxes, asking people to pay more income taxes and requiring public workers to make concessions. He wants to eliminate the Earned Income Tax Credit that helps the working poor keep more of their earnings -- a move church groups and advocates for the poor oppose. The Michigan League for Human Services this week cited a new analysis by the Institute on Taxation and Economic Policy that found households earning $17,000 or less would pay 1.1 percent more of their income in new taxes, while those making $355,000 or more would pay 1/10th of 1 percent more under Snyder's proposals. A recent league analysis also found that Snyder's plan will cut business taxes by 86 percent while increasing individual income taxes 31 percent.

State allows Flint to borrow $8 million to cover deficits - The state today approved Flint's request to borrow money to cover its deficits, allowing the city to issue $8 million in municipal bonds. The State Administrative Board granted the request this morning, according to a news release from Flint Mayor Dayne Walling's office. Walling is expected to discuss details of the bond at a 1 p.m. news conference. The Flint City Council must now approve the issuance of the bond, which will "help the city address its projected cash flow deficits for the remainder of this budget year and next," according to the release. The city had initially asked the state for permission to issue $20 million in bonds to cover its past $17 million deficit and a portion of this year's projected deficit. The state board declined to act on that request last month. Members of the board said they were concerned about the city's long-term financial outlook and its structural deficit.

Kasich's budget slashes aid to local governments - Local governments would see a cut growing to 50 percent and state colleges and universities would be limited to 3.5-percent tuition increases under Gov. John Kasich's new two-year budget. The former would cost counties, municipalities and townships $167.1 million the first year including an estimated $5 million for Columbus and $388.2 million starting in the second year, when the full 50 percent reduction would take effect.For example, Circleville, which received $687,000 from the state's local government allocation last year, budgeted for $638,000 this year, or about 13 percent of its overall total. The real number under the state budget would total $515,000, with a drop to $343,000 the following year. "We're cut to the bone now. I don't know what we are going to do," said Mayor Chuck Taylor. "Its going to be devastating to us, to be honest." Like most cities, Circleville spends most of its funds on public safety.

Ohio Governor Kasich tries to sell his budget cuts to a skeptical public - Gov. John Kasich unveiled an austere budget this week that includes painful cuts to close Ohio’s $8 billion shortfall. But in announcing his proposals, Kasich himself was anything but austere. He didn’t grimly warn voters that it is time to sit up and take their medicine. Instead, in a marathon stage show that was part Steve Jobs and part Anthony Robbins, the Republican governor enthusiastically tried to convince Ohioans that the cuts are a good thing — and that they will be better off with less. “We have balanced this budget with no smoke and mirrors, and we have done it in a way that will put Ohio on a path to growth,” he said. “People said: ‘How could you do it? It’s not doable!’ No more kicking that can down the road. Can’t do that anymore in Ohio.” Despite his best efforts to win over his audience, however, his performance was met with only sporadic applause from the crowd of nearly 900. Kasich received tough questions from Republicans and downright skepticism from Democrats as well as teachers and other public workers who say his proposals would gut schools and government services.

Banning Income Taxes in Tennessee - While states such as Illinois are gaining national attention for fiscal woes and raising taxes, Tennessee is getting coverage for another reason: creating a resolution to constitutionally ban income taxes. Tennessee effectively has no income tax, only imposing income taxes on interest from bonds and dividends from stocks. Though taxing wage income has become more or less standard elsewhere, Republican legislators in Tennessee are pushing to amend Tennessee's constitution to ensure that a wage income tax does not make its way to the state any time soon. Senator Brian Kelsey (R), the bill's sponsor, and other supporters hope that the bill will help make Tennessee a more attractive state to do business and bring more businesses to Tennessee due to the added assurance of continuing the "no income tax" policy approach.

States, cities face more rating cuts: Moody's  - States, cities, towns and other issuers of municipal debt likely will suffer more credit downgrades than upgrades in 2011, with the overall outlook negative for the third straight year, Moody's Investors Service said on Thursday. Reasons for the gloomy prediction include the still-fragile economic recovery the end of the federal stimulus plan and growing "anti-tax" movements spurring politicians to back budget cuts and layoffs, even though they could depress growth. Still, Moody's identified some positive trends, including rising sales and income tax collections, improving unemployment rates and still-manageable borrowing levels. Although the rising costs of retirement benefits weigh on credit ratings, this is a longer-term issue, Moody's said. The debt burden of states "is relatively affordable," as it amounts to only 6.1 percent of state gross domestic product versus 103.8 percent for the largest industrialized nations, Moody's said.

LA Looks for Revenue in 'Crevices of Your Couch' as Gap Looms -- Proposals to close Los Angeles’s $54 million deficit this year and $1.86 billion of budget gaps through 2015 will be made public today at City Hall. A report by City Administrative Officer Miguel Santana to Mayor Antonio Villaraigosa and the City Council also will suggest ways the second-most-populous U.S. city can eliminate municipal services or hire contractors for them to help curb future budget imbalances. The current fiscal year ends in June.  “It’s basically the equivalent of going between the crevices of your couch and trying to find any kind of revenue you can,” Santana said at a luncheon meeting yesterday.  The city of about 3.8 million has reduced costs by cutting 4,000 jobs, renegotiating labor contracts and creating a tier of lower pension benefits for newly hired police officers and firefighters, Santana said. Los Angeles has 34,300 employees.

Miami-Dade Voters Overwhelmingly Choose to Remove Mayor… - Mayor Carlos Alvarez was ousted Tuesday by voters angry over a property tax rate increase and salary raise for county employees in a county struggling to recover from the recession. With 100 percent of precinct votes counted, 88 percent voted to oust the mayor, making Miami-Dade the most populous area, with more than 2.5 million people, ever to recall a local official. Just 12 percent of the 204,500 who cast ballots were in favor of allowing Alvarez to finish his second term, which ends in 2012. Alvarez said he was confident the county's professional staff will work hard to ensure a smooth transition to a new administration.

America: The World's Madwoman in the Attic - When Louis Brandeis called state legislatures “laboratories of democracy,” he couldn’t have imagined the curious formulas the Tea Party chemists would be mixing in 2011, including: a bill just passed by the Utah legislature requiring the state to recognize gold and silver as legal tender; a Montana bill declaring global warming “beneficial to the welfare and business climate of Montana”; a plan in Georgia to abolish driver’s licenses because licensing violates the “inalienable right” to drive; legislation in South Dakota that would require every adult to buy a gun; and the Kentucky legislature’s effort to create a “sanctuary state” for coal, safe from environmental laws.  Less well known is what’s going on in Montana. Legislators there have introduced several bills that would nullify federal law, including health-care reform, the Endangered Species Act, gun laws and food-safety laws. Under one legislative proposal, FBI agents couldn’t operate in the state without the permission of county sheriffs. Legislators are also looking into a proposed resolution calling on Congress to end membership in the United Nations. A “birther” bill, similar to proposals in various other states, would require presidential candidates — they’re talking about you, Obama — to furnish proof of citizenship that is satisfactory to state authorities.

Union: 19000 educators get pink slips in Calif.—California school districts have issued at least 19,000 layoff notices to teachers and other school employees amid heightened uncertainty over the state budget, the teachers union said Tuesday.  The California Teachers Association announced its estimate of preliminary notices on the day school districts must let employees know they could lose their jobs. It comes as Gov. Jerry Brown and state lawmakers negotiate over how to close the state's nearly $27 billion budget shortfall.  Many districts have not reported how many pink slips they have issued as they prepare for worst-case budget scenarios, said CTA President David Sanchez. He expects the number to surpass 20,000 when the union has a more complete count by week's end.

California Schools Hold Rallies To Protest Layoffs -- The state budget crisis has been hard on teachers. The latest numbers are out and according to the California Teachers Association 19,000 pink slips have gone out. Tuesday is the deadline for school districts to notify teachers.  Districts have warned that unless more money gets directed to schools hundreds of thousands of teachers statewide will lose their jobs. Some districts have warned that budget cuts will not only cost jobs, but will also mean an end to art, music and other programs. A sample of some preliminary layoff numbers just in the South Bay shows in the San Jose Unified School District, 154 teachers will get pink slips today.

Schools Running Out Of Money - More than 100 school districts throughout New York state do not have enough reserves to offset Gov. Andrew Cuomo's proposed $1.5 billion (7.3 percent) cut to the state's education budget, a study released Thursday by state Comptroller Thomas P. DiNapoli indicates.According to DiNapoli, most districts do have the reserves to cover their share of the of proposed cuts - though only for one year."Most districts have big enough reserves to cover the proposed cuts for one year," DiNapoli said. "But after that, the reserves would be gone and without other actions, the expenses would still need to be addressed. And more than 100 districts across the state don't have enough reserves for even one year." Included in that list of 100 school districts are two in Chautauqua County: Brocton and Cassadaga Valley.

Doubts on Mayor's Forecast of 4600 Teacher Layoffs - Mayor Michael R. Bloomberg has been warning that 4,600 city teachers will receive pink slips this spring, as he pushes for legislation in Albany that would eliminate rules requiring that layoffs be based solely on seniority.  That number of layoffs will be necessary, the Bloomberg administration says, because budget cuts will eliminate about 6,100 teaching positions, and only 1,500 teachers will be lost due to attrition, the natural churn of teachers resigning, retiring, being fired or otherwise leaving their jobs.  But over the past two years, the city’s teaching force has shrunk by 2,000 to 2,500 each year through attrition, according to Department of Education statistics, suggesting that the city would need to lay off 500 to 1,000 fewer teachers than it has said.

Facing $80M In Budget Cuts, CPS Hears Public's Input - About 200 people packed a Cincinnati School Board meeting Monday night, many of them to talk about the district's finances. Cincinnati Public Schools is trying to figure out how it will balance its budget in the face of an expected loss in revenue next year of nearly $80 million, or 17 percent. The district, like schools across the state, is bracing for deep cuts to education funding when Gov. John Kasich releases his biennium budget today. It's also facing losses in federal funding and rising expenses. The district made no decisions Monday night. The forum was intended to get the public's opinion on what they think the core mission of the district should be and what programs are important to the community.

How do charter schools impact outcomes other than test scores? -A common, although misleading, refrain heard from education reform critics is that charter schools on average do no better on standardized tests than public schools. Less commonly discussed is the impact on other, non-test outcomes. A paper looks at how attending a charter schools affects the probability of graduating high school and attending college for a sample of students from Chicago and Florida. An important question in the literature is the extent to which selection bias is a problem. Do charter school students have different outcomes than public school students because the charters educate them somehow better or worse, or is it because people who decide to go to charter schools are systematically different than those who don’t? They find that in both Florida and Chicago, attending a charter high school increased graduation and college attendance rates. In Chicago, students were 7% more likely to graduate from high school if they attended a charter, in Florida it was 12% to 15%.

Pay Teachers More - From the debates in Wisconsin and elsewhere about public sector unions, you might get the impression that we’re going bust because teachers are overpaid.  That’s a pernicious fallacy. A basic educational challenge is not that teachers are raking it in, but that they are underpaid. If we want to compete with other countries, and chip away at poverty across America, then we need to pay teachers more so as to attract better people into the profession. Until a few decades ago, employment discrimination perversely strengthened our teaching force. Brilliant  These days, brilliant women become surgeons and investment bankers — and 47 percent of America’s kindergarten through 12th-grade teachers come from the bottom one-third of their college classes (as measured by SAT scores). The figure is from a study by McKinsey & Company, “Closing the Talent Gap.”1Changes in relative pay have reinforced the problem. In 1970, in New York City, a newly minted teacher at a public school earned about $2,000 less in salary than a starting lawyer at a prominent law firm. These days the lawyer takes home, including bonus, $115,000 more than the teacher, the McKinsey study found.

Louisiana Governor's Budget Assumes College Tuition Hike - Gov. Bobby Jindal's budget would be costly to Louisiana's college students. Tucked in the pages of the $24.9 billion spending plan are provisions for spending more than $98 million that Jindal hopes the state's colleges will get through tuition hikes. Separate legislation would need to be passed to enact the cost increases, and higher education leaders are supporting the bills. The tuition and fee increases would come on top of $60 million in increased costs for students already set to take effect this fall for the 2011-12 school year. Those increases are as large as 10 percent at some schools, and they will grow for at least four additional years, under legislation passed last year.The Jindal administration says another round of price hikes for students would ensure the colleges and universities have the resources they need. It also mollifies complaints from college chiefs and business leaders who have criticized several previous rounds of budget cuts approved over the last two years by Jindal for the schools.

Are "charter universities" the future of state-funded higher ed? - With states mired in their fourth straight year of budget shortfalls, many university presidents around the county seem willing to make deals like the one in Ohio. In states such as Oregon, Louisiana and Wisconsin, flagship universities are inching away from their traditional patrons in the statehouse, accepting lower levels of state funding in exchange for freedom from state regulations.  The result may be a new relationship between states and their public universities. For state leaders, that relationship may wind up being less of a budget drain — but politicians will have less leverage to tell universities what to do and how to do it. For universities, less state funding and oversight is likely to come with higher tuition and more reliance on private-sector funding. At the same time, it will raise questions about the core mission of state universities whose original purpose was to offer an affordable education.

What Is a College Degree Really Worth?— The March 6 issue of the New York Times contains an interesting article by the economist Paul Krugman entitled “Degrees and Dollars,” available online at In it Krugman challenges the conventional view that we need to invest more in education because “everyone knows that the jobs of the future will require ever higher levels of skill.” Krugman argues that since about 1990 “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.” He expects the trend to continue, noting a recent newspaper article about the growing use of software to do legal research, potentially replacing hordes of lawyers and paralegals engaged in document review in big cases. He argues that computers are good at doing both cognitive and manual work that can be performed effectively by following rules, whereas work involving a high degree of discretion or imagination, ranging from writing poetry to inventing a new social network to running a corporation, along with some manual labor (he instances truck drivers and janitors, but could add waiters and retail sales personnel), cannot be. He argues that demand will grow for jobs in the categories in which work cannot be automated, and will decline for jobs in the categories that can be.

How We Teach Our Graduates Not to Teach - A new report came out recently on what the US can learn from the countries that most successfully educate their children. The most important recommendation? “Make a concerted effort to raise the status of the teaching profession.” While the U.S. is only second to Luxembourg in OECD countries’ spending on education, our money is misdirected, going to areas other than teacher salaries like bus transportation and sports facilities. And as the NYTimes notes, the results are clear: On average, American teenagers came in 15th in reading and 19th in science. American students placed 27th in math. Only 2 percent of American students scored at the highest proficiency level, compared with 8 percent in Korea and 5 percent in Finland. This recommendation comes at a time when the teaching profession is experiencing a brutal attack, as Republican governors (see: Scott Walker; also: Chris Christie) demonize them and their unions as vampires sucking state coffers dry and lazy ne’er-do-wells who have luxurious pensions and vacation time.

Are Too Many Young People Going to College? If the value of higher education in the modern information-oriented economy has been overrated, the sizable growth in the number of educated persons should have lowered the earnings premiums for college graduates, and raised the unemployment rates of these graduates. In fact, these earnings premiums have generally risen, not fallen, and often the growth has been large. Moreover, unemployment rates of the college-educated have remained much below those of high school graduates and high school dropouts.In the United States, for example, the average earning of persons with four year of college increased from about 35% above the average earnings of high school graduates in 1980 to about 55% higher in 2009, despite a growth during this period in the fraction of the American labor force with a college education. The earnings premiums for persons with a post-graduate education have increased even faster over this 30 year-period. Moreover, the unemployment rates of lower educated persons have remained much higher than the unemployment rates of persons with higher education.

Cost soars for California state retiree benefits - The unfunded cost of providing future health and dental benefits to retired California state employees has grown by $8.1 billion in one year, to $59.9 billion, the state's controller said Monday.  Controller John Chiang warned that the state should act quickly to reduce its long-term liability. The new actuarial projection comes as lawmakers in California and across the nation debate the cost of government pensions and benefits.  "It is critical that we begin making down payments on this tab and adopt strategies to reduce health care costs," Chiang said in a statement.  Paying more money into the fund now would be cheaper in the long run because the investments would have time to grow along with the obligation, he said. State retirees are guaranteed health and dental coverage for life under a plan administered by the California Public Employees' Retirement System, the nation's largest public pension fund.

Wave of pension costs to hit OC cities - Costa Mesa's decision to lay off 203 workers1 earlier this month may be just the first drop in a gathering financial storm that will pound city governments across the state. A prestigious, bipartisan commission put it simply in a report that stunned Sacramento last month: "Pension costs will crush government."The Little Hoover Commission found that more public workers are collecting bigger pensions2 for longer than ever before, and that those costs will force "counties and cities to severely reduce services and lay off employees to meet pension obligations.""The math is inexorable," the government oversight commission wrote. While the state is feeling the pain of pension costs, which make up 5 percent of the budget, it's at the local level – where the costs are typically twice that percentage or more - that spiraling costs could have the most dramatic effect.

Study on pensions 'shocking' Are you a fan of horror movies? Save the price of a ticket and read "An Assessment of San Francisco's Unfunded Pension and Retiree Health Care Liabilities" instead. (Trust us, the mind-numbingly boring title belies the fright within.)San Francisco now owes $4.476 billion in pensions to its employees but only has the money to pay roughly three-quarters of that cost. Every family in the city would have to pay $35,000 apiece to make up the difference.  Even if the pension fund grows by an optimistic 7.75 percent every year, there's only a one-third chance the city will be able to pay the promised pension benefits.The city also owes $4.364 billion in health care benefits and has hardly saved anything for it. That figure will grow to $9.5 billion by 2028.

The Burden of Pensions on States - The pension replacement rate, or percentage of a worker’s preretirement income that his pension replaces, varies widely from state to state. And it seems to bear little correlation to the percentage of state workers who are covered by a collective bargaining agreement. Other states will also probably find that Wisconsin’s idea of simply dividing pension contributions between labor and management is an illusory solution to their long-term financial woes. That’s because several studies have shown that promises to workers are far more costly than routinely calculated by Wisconsin and most states.  And the problem seems unlikely to be solved by putting curbs on the collective bargaining power of state workers. Despite the arguments of some Republican governors and popular perception, the places with the most unionized work forces are not necessarily the ones with the most generous pensions, according to a new study.

Illinois Pension Crisis Eludes Easy Solutions - Lawmakers in Illinois say they may try to fix the state's ailing pension system by asking current workers to pay more into the plan, though the approach faces substantial legal and political obstacles.The lawmakers are also entertaining the politically difficult idea of applying broader pension changes made this year for newly hired employees to current workers. Those include raising the retirement age and scaling back on annual cost-of-living raises.Whatever approach is embraced, it remains unclear whether such strategies would fix the Illinois system, which is 45% funded. That makes it the most under-funded state plan in the U.S., according to Moody's Investor's Service. The proposals come as Illinois focuses on home-grown solutions to its pension difficulties after Gov. Pat Quinn created a stir when he said in his budget proposal last month that the state may need a "federal guarantee" of its pension funds—a reference his office now says was a mistake.

Calpers Committee Holds Assumed Return Rate at 7.75% - A committee at Calpers on Tuesday decided to maintain the pension fund giant's annual assumed rate of return on investments, despite an actuary's recommendation to switch to a lower rate. The committee of the California Public Employees' Retirement System decided to recommend maintaining the rate at 7.75%, instead of adopting the recommendation by Calpers's chief actuary to lower the rate to 7.5%. The committee's recommendation still has to be approved by the fund's board. The board is scheduled to meet Wednesday. A Calpers spokeswoman said a main factor behind the vote was a push by local governments to maintain the status quo. A decrease, the spokeswoman said, could have bumped up the amount of money public employers pay toward government workers' pensions.

Wisconsin pension plan among most secure - The protests in Wisconsin over public workers’ pay, benefits and collective bargaining rights have underscored a dilemma facing many states: the cost of public pensions and how cash-strapped governments should pay for them. But the turmoil overshadows a salient point: Wisconsin may have a budget deficit, but its pension system does not. Studies show that Wisconsin’s state pension program is one of the most solid in the country and has enough funds to cover the promises made not only to current retirees but to those in the future.  Wisconsin was hailed as a “national leader” in managing its long-term liabilities for both pensions and retiree health care in “The Trillion Dollar Gap,” a Pew Center on the States report last year. (Pew Center on the States is Stateline's parent organization.)

U.S. Life Expectancy Hits All-Time High - One of the primary reasons some are calling for dramatic changes to major entitlement-programs Medicare and Social Security is because the Baby Boomer generation is getting older and people are living longer. A new report1 released Wednesday by the Centers for Disease Control and Prevention provides fresh data on life expectancy. The report finds that life expectancy at birth rose to 78.2 year in 2009, an all-time high, based on preliminary data that includes death certificates from all 50 states, Washington DC, and the U.S. territories. That’s up from 78.0 years in 2008. For men, life expectancy rose two-tenths of a year to 75.7 years in 2009. For women, life expectancy ticked up one-tenth to 80.6 years. To put this in perspective, life expectancy in 1930 (a few years before the Social Security system was established), was 58 for men and 62 for women, according to the Social Security Administration.

Most workers have saved just $25,000 for retirement - Most Americans have less than $25,000 saved up for retirement. And surprise!: Retirement confidence is at record lows. More than a quarter, or 27%, of workers say they are "not at all confident" about retirement, according to an annual survey from the Employee Benefit Research Institute. That's up from 22% last year, which was the lowest level recorded in the two decades the survey has been conducted.Meanwhile, only 13% of workers are "very confident" about having enough money to retire, which is unchanged from 2009. While this sounds dismal, EBRI says it's about time people started waking up to reality. And this drop in confidence may simply be a sign that people are finally realizing how much they must save, instead of being overly confident as they have been in previous years. For example, confidence among the worst savers slipped sharply this year. The number of workers with savings of less than $25,000 and who reported being "not at all" confident about their retirement savings surged to 43% this year, from only 19% in 2007

A Social Security Crisis? - In bewailing the "entitlements crisis," many have made much of the fact that the percentage of GDP expended on Social Security, Medicare, and Medicaid is growing at a fairly ferocious pace. In 2007, those three programs totaled 8.4% of the GDP. By 2050, the CBO estimates they could be 18.6% of GDP. By 2080, they could be nearing 25% of GDP. However, grouping those three programs together hides a significant fact: the driving force behind the inflation of those "entitlement" programs is the increase in medical spending. Social Security spending is far more sustainable than the current Medicare and Medicaid regimes. Currently, Social Security spending is about 4.8% of the GDP. This spending is estimated to rise to about 6.1% of the GDP by 2035 and will linger around 6% for the next fifty years after that. This is about a 27% increase in Social Security spending as a percentage of GDP. That's not a small number, but it is a manageable one, especially when one considers that that period will witness the retirement of the Baby Boomers. If it gets its economic house in order, the US could conceivably afford to spend 6% of its GDP on Social Security for a very long time.

Why we don't need to repay Social Security principal - You may have to bear with me here. Because very few people have seriously examined what a solvent Social Security system would actually look like. One of those that has is (thankfully) Steve Goss, the Chief Actuary of Social Security, who last year wrote what may be the single most important article on Social Security that I have ever read. It was included in the 75th Anniversary edition of the Social Security Bulletin under the title The Future Financial Status of the Social Security Program The whole thing is important but I want to focus on and then unpack the following passage, because the implications are simply transformational.

Poll finds growing public worry about Social Security - More than eight in 10 Americans now see the country’s Social Security system as headed for a crisis, and most think a major overhaul is in order, according to a new Washington Post-ABC News poll1. Overall, 81 percent of those polled see Social Security as veering severely off-course, up 10 percentage points from 2005, when former president George W. Bush2 led a push to privatize the government-run program. And since that time, public support for specific changes has risen, but remains tepid.  The new poll comes as another survey shows Americans’ slumping confidence in their ability to achieve a comfortable retirement. In the poll by the Employee Benefit Research Insitute3, a record high 27 percent of workers said they’re “not at all confident” they’ll have enough money when they retire. Most still expect Social Security to be a source of income in their retirement.  But similar to a poll six years ago, in the new Post-ABC survey, only one of six possible ways to avoid a potential shortfall in Social Security – removing the cap on income subject to its dedicated tax – tops the 50-percent-mark, and barely so.

The meaning of “socialism” in American politics - So, call me a philistine, but I really think that the Tea Party types have gotten a bum rap over their whole “Keep Government Out Of My Medicare” slogan. Yes, Medicare is a government benefit. One’s Medicare card represents a claim on the government that can be redeemed for goods and services, usually delivered by private sector providers. You know what else is a claim on government that can be surrendered for goods and services from private sector providers? Money. Yet there is no part of the political spectrum that considers it incoherent to say “Keep Government Out Of My Pocketbook”, even though the only relevant thing your pocketbook contains is government scrip. If the money analogy seems to forced, consider a retirement account chock-full of government bonds. The account contains nothing more or less than government promises to pay, but that doesn’t render it incoherent to object to the government’s altering the terms of the bundle of promises, whether by restructuring the debt or more aggressive taxation.

The Injustice of Social Justice - Every once in a while, something comes along that perfectly encapsulates the idea of so-called "social justice" in action. For all the wonderful critiques that have been written about this wretched concept by its many detractors,[1] none quite match the elegant simplicity of a recent work by some of its advocates. I am referring here to a recent video made for the World Day of Social Justice[2] in which students and teachers complete this sentence:Everyone has the right to _____. The video is a colorful montage of possible completions to this sentence, set to some pleasant easy-listening music. It shows students and teachers completing the above sentence, showing their answers written on their hands, arms, and feet. The people in the video give answers consisting of all manner of desirable things, from knowledge, justice, love, compassion, and truth to healthcare, education, food, clean water, nutrition, shoes, dancing, rock-and-roll, and even lollipops and ice cream.

A Deal to be Done on Medicare and Health Reform - Could Congress replace the current Medicare system with a voucher program, as former Clinton budget director Alice Rivlin and House Budget Committee chairman Paul Ryan (R-WI) among others have suggested? It could if Republicans allow the 2010 health law to take effect and Democrats can bring themselves to stop defending a deeply flawed Medicare program.  In such a voucher system (sometimes called premium support), traditional Medicare would disappear. Instead, government would give seniors a subsidy they could use to buy private insurance. But such a plan could never succeed without a robust individual insurance market. Get past all the nasty partisan rhetoric and it is pretty clear: The 2010 law—the Affordable Care Act—creates exactly the foundation for that market.  

Will public health insurance displace private insurance? - Last December, selected “a government takeover of healthcare” as the Lie of the Year for 2010.  Their reasoning was that, despite the claims of numerous candidates and pundits, the ACA will mostly build on the existing employer-based insurance system.I agree with PolitiFact about the rhetoric, but several months ago I started to wonder how each provision of ACA would affect the balance between public and private insurance in the long run.  In particular, the “Cadillac” tax, a 40% excise tax levied on high-premium health plans, seems likely to erode the favorable tax treatment of employer-based insurance over time.  This is because the premium threshold where the tax begins to bite is indexed to inflation, but health insurance premiums have historically grown substantially faster.  If employer-based coverage becomes less attractive, how many more people will choose public coverage? Answers to these questions can be found in my new working paper (also available here), co-authored with Austin and Lisa Iezzoni. 

Is Your Drugstore Selling Your Private Information to Big Pharma? - For years, the big drugstore chains have stoutly denied selling prescription information—patient names, contact information, doctors' names, and prescription details—to pharmaceutical companies for marketing use. Now, that charade has come to an end with two class action  suits, accusing CVS and Walgreen of doing just that. In a civil suit in Philadelphia County Court, as Courthouse News reports, the city’s teachers union charged that consumers got unsolicited sales pitches after CVS allegedly sold customers’ private information to Eli Lilly and Co., Merck, AstraZeneca, Bayer, and other drug manufacturers. The union’s claim states: "Specifically, in exchange for the receipt of funds, direct promotional letters were sent to physicians of consumers by  defendant CVS Caremark in order to promote and tout specific prescription drugs of pharmaceutical manufacturers who contracted   with defendant CVS Caremark" for use of prescription information, according to the complaint.     

The Roots of the Vaccine Panic - Do vaccines cause autism or other neuro-developmental disorders? Scientists know that vaccines don't, but the idea lingers everywhere -- on talk shows and blogs and in conversations between parents and their child's pediatrician. It lingers because many people in this country and elsewhere think that vaccines just might not be good for us. In two books that tell the story of the panic over vaccines, Paul Offit, chief of infectious diseases at the Children's Hospital of Philadelphia, and Seth Mnookin, a contributing editor at Vanity Fair, argue that bad people pursuing careers or fame or ratings or God knows what became purveyors of falsehoods that duped otherwise decent people into thinking vaccines could harm their children. That duplicity has led parents to make bad decisions -- not to vaccinate their children or to vaccinate them on a non-recommended schedule -- which turn out to be potentially deadly not just for their own children but for others.

Return of the Salmonella Republicans - How else to explain their posture on funding for the Food and Drug Administration? As part of their campaign to reduce federal spending, House Republicans want to reduce FDA food safety funding by $241 million for the duration of this fiscal year. As my friend and former colleague Suzy Khimm recently reported for Mother Jones, that would mean, among other things, furloughing inspectors and reducing examinations of imported food. And that could be just the beginning of cutbacks at FDA. For next year’s budget, the Republicans have said they want to reduce discretionary spending to 2008 levels. According to calculations by David Plunkett, who is a staff attorney at the Center for Science in the Public Interest, such a cut at FDA would likely force the agency to lay off 600 inspectors, actually reducing the force to slightly less than what it was in 2008.What makes this particularly troubling is that 2008 spending levels were clearly inadequate--even in 2008. Remember the salmonella-infected tomatoes of 2008? How about the tainted peanut butter of 2007? Or the bad spinach of 2006?

The Quicksilver Mess - Several weeks after the two boys found the mercury, doctors in Texarkana, a town of 22,600 that straddles the Texas-Arkansas border, began to see symptoms of poisoning. The boy who smoked the mercury-dipped cigarette began coughing up blood. Five more victims were hospitalized with symptoms that included vomiting and difficulty breathing. On Thursday one of the boys who found the mercury was readmitted to the hospital suffering from seizures. Further tests were ordered on 42 other townspeople.By last week Texarkana was crawling with men in moonsuits, rubber gloves and respirators as two dozen federal, state and local agencies tried to contain what had become a full-blown toxic emergency. Authorities identified 170 people--some in a town 15 miles away--who were exposed to the mercury as it moved from school lockers to kids' bedrooms and local businesses. Eight homes were contaminated so badly that they had to be evacuated and emptied of most of their furnishings. A classroom was splashed with mercury, as were a restaurant and a convenience store.

Haiti cholera epidemic to hit 800,000: study – Up to 800,000 Haitians will contract cholera this year, double the estimates of UN agencies, a report published by The Lancet on Wednesday claimed. A US team led by Jason Andrews from Harvard School of Public Health also found that a recent dip in reported cases was likely a temporary phase of the epidemic and not related to the intervention efforts. "Although worldwide estimates of the epidemic at present are based on the assumption that the epidemic will attack four percent of the population, this assumption is essentially a guess," the report said.Previous estimates were "based on no data" and ignored "the dynamics of cholera epidemics, such as where people acquire the infection, how they gain immunity, and the role of human interventions such as water allocation or vaccination," it added.The findings, published in the medical journal's online edition, suggested that a combination of access to clean water, oral vaccination and increased antibiotic use could save thousands of lives.

The hangover from the over-fishing party - Many fisheries scientists were sure there was no way humans could make a dent in the seemingly endless abundance of fish in the ocean as late as the middle of the 20th century. But our fishing industries were already well on their way to proving them wrong. It now seems that the problems facing our fisheries are as plentiful as cod once were on the Grand Banks off Newfoundland and throughout the Gulf of Maine. We now live in a world where overfishing is far too prevalent. To stem this tide, regulators impose tighter and tighter restrictions on fishermen,* in the face of fundamental disagreements among harvesters, regulators, and conservationists about how many is too many. Fisheries scientist John Shepherd is often quoted saying, “Counting fish is like counting trees, except they are invisible and they keep moving.” Eric Schwaab, the current administrator of the National Marine Fisheries Service, or NMFS, likes to tack on this critical addendum: “and they eat each other.” Given these ecological realities one can understand why fisheries science—which creates the stock assessments that in turn lead to catch limits—is often controversial.

Conservatives Against Markets - My colleague Michael Conathan writes about the problem of declining fish stocks: I’m not very knowledgeable about this subject, but one idea that comes to mind pretty obviously is some kind of property rights in the fish. Tradable permits that would create incentives to conserve. Right now, you own a fish if you’ve caught it, but nobody owns it if it’s in the ocean, so the incentives all pont toward overfishing. But according to Conathan, House Republicans are against this idea: Something must be done. But what? Some groups, including NMFS, have begun touting a cap-and-trade style management system known as “catch shares” as a cure for the industry’s ills. Such a framework, though, often comes with more questions than answers. And in fact the House of Representatives passed an amendment to its recent spending bill for fiscal year 2011, filed by Rep. Walter Jones (R-NC), that would prevent any federal funding from being used to develop new catch share programs. The mainstream view on the American right is, I guess, that it’s

Incredible swarms of fish form off coast of Acapulco - Some experts believe the phenomenon is directly related to the Japanese tsunami. The shores of Acapulco’s beaches were this weekend teeming with masses of fish packed so tightly they looked like an oil slick from above. Thousands of sardines, anchovies, stripped bass and mackerel surged along the coast of the Mexican resort in an event believed to be linked to the devastating Japanese tsunami. Delighted fishermen rushed out in wooden motor boats, abandoning their rods and nets and simply scooping the fish up with buckets. The fishermen attributed the strange phenomenon to the unusual currents unleashed by tsunami that followed the earthquake in Japan.

Spilled Milk Regulations a Myth, E.P.A. Says - To Representative Morgan Griffith, a freshman Republican from Virginia, nothing illustrates the Environmental Protection Agency’s overreach more clearly than a new rule applying the same regulations that govern spilled oil to milk spilled on dairy farms.“It appears spilt milk is just as threatening as an oil spill,” Mr. Griffith wrote in a recent newsletter to his constituents. Such rules would force dairy farmers to build containment facilities in case of a spill and develop emergency plans, he continued, “jacking up the cost of milk and butter.”In the midst of a heated debate over the E.P.A.’s authority to regulate heat-trapping emissions like carbon dioxide, the charge makes for great political theater. But according to the agency, it is pure fiction. In testimony before Congress on Thursday, Ms. Jackson declared that the new rule cited by Republicans would, in fact, exempt dairy containers from the regulations that govern oil facilities — rules that have been on the books for nearly 40 years.

King of California - David Zetland at Aguanomics offers this review of a topic that gets little national attention - the use of water between watershed areas, water rights, and how we value water to date at least in this area of the country. Use of water and policy on water use tends to be regionally and locally based, making a one size fits all answer to the problems of water use less than useful.  In this book, Mark Arax and Rick Wartzman illustrate the fascinating details behind a family that combined hard work, farming wisdom and political maneuvering to turn "lake-bottom land" into a farming empire, with help from government workers who may have ignored the Public interest and badly-written and ill-enforced government laws. The book traces the story of the Boswell family, which left Georgia's cotton lands for California. The Boswell began marketing cotton in Los Angeles and then moved into production, turning land, abundant water, and very sharp management into one of the largest farming operations in the US and world.

Higher Food Prices Likely Here to Stay - Higher food prices are likely here to stay and the rising cost is likely to affect core inflation for poorer nations, International Monetary Fund staffers said in a report Thursday.“The world may need to get used to higher food prices,” IMF research department staff Thomas Helbling and Shaun Roache wrote in a new IMF article1. “Policymakers — particularly in emerging and developing economies — will likely have to continue confronting the challenges posed by food prices that are both higher and more volatile,” they said.The IMF article said structural changes in the global economy mean a rising demand for food — and accompanying price increases — are here to stay.One of the most important explanations on food prices is that consumers in emerging and developing economies are becoming richer and changing their diet as a result. “Consumers in these economies are eating more high-protein foods such as meat, dairy products, edible oils, fruits and vegetables, and seafood,” the report said.

Betting the Farm: Former FDIC Chair Isaac Fears Another 'Ag' Bubble Brewing -The housing bubble may have burst but another American real estate boom rolls on: Since 2000, U.S. farmland values have risen by 58% after inflation, according to the FDIC. And since 2003, they've risen by over 10% annually. Surging agriculture prices, a weak dollar, fear of financial assets and rising global demand for food have all contributed to this boom. The question now is whether it's becoming a bubble. "It's very reminiscent of period we had in 1970s," when farmland prices surged 350% in less than a decade, says Bill Isaac, former FDIC chairman and current chair of Fifth Third Bancorp. "I'm hoping we don't let it get that far."  At an FDIC symposium in Washington this week, Isaac discussed the "worrisome trends and similarities between the 1970s and today," including: loose fiscal and monetary policies, massive deficits creating inflation, and a weak dollar spurring demand for agricultural exports.

10 Genetically Modified Foods -  Genetically modified organisms have been at the center of a lot of stormy debates for the past few decades. On the one hand, advocates say the genetic modification is one of the best ways to fight world hunger. As the human population is expected to reach seven billion this decade, malnutrition is a growing global problem. However, transgenic crops and livestock are not the new Green Revolution. Industrialized farming has resulted in decreased biodiversity, increased use of pesticides, climate change, and polluted water supplies. The introduction of genetically modified (GM) crops will hardly alleviate these problems, and are more likely, according to some activists, to exacerbate them. In addition, GM crops are owned and patented by those who created them, like agri-tech giant Monsanto (once voted the most evil corporation in the world), who enforce their patents through legal action against any farmer they suspect of ‘biopiracy’.

Saudi Arabia orders radiation tests on all Japan imports - Saudi Arabia said on Wednesday that all goods imported from Japan would be subject to radiation testing.The Ministry of Commerce and Industry has told all laboratories operating in the border ports to carry out the tests on all consumer goods arriving from Japan, state news agency SPA reported.In its latest notification to the Council of Saudi Chambers of Commerce and Industry, the Ministry emphasised "the necessity of conducting tests" to ensure they were free "from any radioactive contamination".The move comes as Japan continues to battle to avert a major nuclear disaster following the impact of last week's earthquake and tsunami.

Italy restricts the import of Japanese products, introduces checks for radiation - Italy will restrict imports of Japanese fish, eggs, seaweed, soy sauce and green tea. All goods will be subjected to radiation checks, Italian Minister of Health Ferruccio Fazio said, cited by news agency ANSA.  The Minister noted that the measures would affect major imports from Japan. For several weeks will be carried out checks on products selected at random.  There will be no restrictions on Japanese products imported before the earthquake on March 11.

Shanghai to scan Japanese food, cargo for radiation - Shanghai authorities have ordered detailed checks of imports from Japan for radioactivity, including on food, people and cargo, Chinese state media reported on Wednesday. The Shanghai Entry-Exit Inspection and Quarantine Bureau placed the announcement on its website earlier on Wednesday but later removed it. However, the online edition of the official People's Daily reported a detailed list of goods for which Shanghai quarantine officials would be checking for radiation, following concerns about an escalating nuclear crisis in Japan after last week's earthquake damaged a number of reactors. [ID:nL3E7EF450] Items to be checked for radiation include produce, seafood, grains and drinking water, as well as cargo containers, post, vehicles and personnel, the People's Daily website said.If any problems are detected, the bureau would carry out timely quarantine measures, it added.

India monitoring food import from Japan for radioactive contamination - India's Food Safety and Standards Authority (FSSAI) has ordered authorities to monitor food being imported from Japan for radioactive contamination, Director Sumita Mukherjee said.  Several nuclear power plants in Japan are currently in a state of emergency after an enormous 9.0-magnitude earthquake struck off its northeastern coast on Friday, unleashing a wall of water. But low levels of radiation have been released from a nuclear power plant, worrying people about a danger to health. "I am directed [..] that following the recent earthquake in Japan and concerns of possible radiation leakage from affected nuclear plants, there is a need to increase the surveillance of food imports from Japan to ensure that they are safe for consumption," Mukherjee wrote in a signed notice. Mukherjee said that, in a precautionary measure, food imports from Japan will need to have test samples taken to ensure they are not contaminated with radiation. These tests apply in particular to fresh products such as seafood, fruits, vegetables and meat.

America on radiation alert: Japan faces world's worst nuclear accident since Chernobyl as experts warn fallout may reach U.S.- Fears that America could be hit by the nuclear fallout from the Japan earthquake have dramatically increased as workers prepared to abandon a reactor crippled by the earthquake and tsunami last night in the face of what is set to become the world's second worst nuclear disaster - topped only by Chernobyl.  Damage at the number two reactor at the crippled Fukushima Dai-ichi nuclear power complex is worse than thought, the Japanese government admitted tonight, sparking fears for human health both in Japan and the U.S. The Nuclear Regulatory Commission has admitted it is 'quite possible' the fallout could reach America.

Japan crisis causes run on anti-radiation pills in U.S. - The Japanese nuclear power plant crisis is triggering jitters about radioactive fallout hitting the United States, even though experts say that is highly unlikely.Fearful residents have flooded health officials in western states such as California, Washington, and Oregon with anxious questions, and some authorities have begun issuing updates about air monitoring for radiation. “We opened a hotline and have fielded hundreds of calls from the worried public,” said Michael Sicilio of the California Department of Public Health. The two U.S. companies that make potassium iodide1, which can reduce the risk of thyroid cancer from exposure to iodine-131, are being overwhelmed by demands for the medication from individuals, pharmacies, hospitals, day-care centers and others. “People are terrified,” said Alan Morris, president of Anbex Inc.2, of Williamsburg, Va. “We’re getting calls from people who are crying and saying things like, ‘Please. Can’t you help me? Can’t you send me anything?’ ”

DON’T Take Potassium Iodide Unless You Are Exposed to Radiation - Because of the fear that the radiation from the Japanese nuclear meltdowns will hit the Western United states (see this and this), potassium iodide has sold out in most health food and supplement stores in many California, Oregon and Washington locations.People know that it's good to take potassium iodide to protect against radiation, to help protect against thyroid cancer (potassium iodide does not protect any other organs). But taking potassium iodide when there is no radiation can actually damage the thyroid gland ... at least in some individuals. A doctor told me that potassium iodide is given to people with hyperthyroid disease in order to partially kill the thyroid - i.e. to lower thyroid function. Ideally, buy potassium iodide now, and monitor radiation levels by looking at real-time monitoring networks such as this and this. Don't take iodide unless and until elevated radiation levels hit your area. Whatever you do, don't take more than the recommended dosage.

What Effect will the recent Tsunami, Earthquake, and Nuclear Disaster have upon Japan's Agriculture? - There may be Ag related infrastructure that needs to be replaced which might include energy, transport, rail, roads, storage facilities, feed mills, and possibly ports. What is the condition of Japan's grain storage facilities? The ports of Kobe, Tokyo, and Osaka should be largely undamaged by this event. The affected region represents 6-7% of Japan's total economy. Japan's sovereign debt burden is making some question the feasibility of rebuilding all that is necessary following this disaster. Rice, in Japan, would normally be planted in April or May. It would seem doubtful that this event will be significant for their 2011 rice growing season assuming the farmers have no obstacles to working their small fields. Japan's agricultural production in metric tons in 2004 included: rice 11 mmt, sugar beets 4.7 mmt; potatoes 2.9 mmt; cabbage 2.3 mmt; mandarin oranges 1.4 mmt; onions 1.1 mmt; sweet potatoes 1 mmt; apples .9 mmt; cucumbers .7 mmt, and other crops included melons, tomatoes, wheat, soybeans, tea, and tobacco. Japan is the largest buyer of U.S. corn and the third largest buyer of U.S. soybeans.

Farming profile: Japan. Why the devastation matters - While the country boasts 1.8m farms rated "commercial", as of 2008, this classification includes all enterprises farming on more than three-quarter of a hectare, or with sales of more than 500,000 yen. The average farm size is 1.9 hectares, or less than five acres. In part, this is down to the topography of the country, which is both mountainous and heavily populated, leaving relatively little for farming.Indeed, of the 37.8m hectares that the country covers, just 4.7m hectares, or 12%, is farmed. (Farmland is also spread over a distance which, in latitude, matches the east coast of the US, and covers a broad mixture of climates, from the near-Siberian to the near-tropical.) However, the dearth of consolidation is also down to a generous regime of subsidies, and trade barriers for much of what is produced, equivalent some 48% of total production as of 2008,State help reduces the incentive for farms to consolidate to reap economies of scale.

The skeptical environmentalist on biofuels - The United States spends about $6 billion a year on federal support for ethanol production through tax credits, tariffs, and other programs. Thanks to this financial assistance, one-sixth of the world's corn supply is burned in American cars. That is enough corn to feed 350 million people for an entire year. Government support of rapid growth in biofuel production has contributed to disarray in food production. Indeed, as a result of official policy in the United States and Europe, including aggressive production targets, biofuel consumed more than 6.5 percent of global grain output and 8 percent of the world's vegetable oil in 2010, up from 2 percent of grain supplies and virtually no vegetable oil in 2004. This year, after a particularly bad growing season, we see the results. Global food prices are the highest they have been since the United Nations started tracking them in 1990, pushed up largely by increases in the cost of corn. Despite the strides made recently against malnutrition, millions more people will be undernourished than would have been the case in the absence of official support for biofuels.

NOAA: Monster crop-destroying Russian heat wave to be once-in-a-decade event by 2060s (or sooner) - Exclusive: NCAR's Trenberth challenges the attribution analysis, "Many statements are not justified and are actually irresponsible." - Apologies for leading with a complicated chart, but the NOAA release and study on the Russian heat wave last week buried the lede.  All the news was about whether or not global warming caused the monster heat wave, but, as NCAR’s Kevin Trenberth explained to me about the paper, “Many statements  are not justified and are actually irresponsible.” First, the real news.  The Russian heat wave was, according to NOAA, roughly 5°C ( 9°F) above average for July.  The figure above shows that, using an ensemble of climate models, July temperatures will match that by the 2060s once a decade — twice a decade by century’s end.  Remember, this 9F heat wave was enough to end Russian grain exports for a year. Note that a 4C (7F) warmer-than-average July would occur once a decade by 2040. Moreover, the authors based their simulations on the A1B emission scenario. In 2100, A1B hits about 700 ppm with average global temperatures “only” about 3°C (5 F) warmer than today. In fact, on our current emissions path, a 3C temperature rise will likely happen much sooner (see M.I.T. doubles its 2095 warming projection to 10°F — with 866 ppm and Arctic warming of 20°F).  Thus, the monster heat wave might well be once-a-decade much sooner.

Climate Change and Agriculture: Predicting Food Yield Changes by Degree of Temperature Increase - From a new report issued by the National Research Council predicting effects of climate change according to the number of degrees of temperature rise, I have excerpted the parts of the report which relate to agriculture. Note that normally I try to avoid making predictions or featuring predictive scenarios on this blog as many issues are too complex to do it with certainty and I include climate change in that category. It seems that more can be gained by carefully monitoring what IS happening to detect trends, and so far, we are continuing to turn out near record-level crops here in the U.S. and elsewhere. Nevertheless, this subject is so important to agriculture, that I feel it is my duty to present what the experts are predicting.That said, I see the following key points from the report not making sense, which serves to illustrate my point to avoid making predictions so as not to discredit a subject.

NOAA data for February shows cold European winter, warming world - The US government research centre the National Atmospheric and Atmospheric Association provide a monthly assessment of surface temperatures around the world. It’s a useful resource – although pretty detailed, it gives a picture both of what temperatures are doing around the world, and how they’re changing over time. The overall conclusion for the month was: The combined global land and ocean average surface temperature for February 2011 was 0.40°C (0.72°F) above the 20th century average of 12.1°C (53.9°F). This ties for the 17th warmest such value on record. As part of the report, NOAA have graphed February temperatures over the past 130 years. The weight of where above-average years are falling is pretty obvious

Analysis: “The content of carbon dioxide in the atmosphere is accelerating super-exponentially.” - Overall, the evidence presented here does not augur well for the future. Recent climate science suggests human civilization is on the precipice.  It turns out that a purely mathematical analysis, “Evidence for super-exponentially accelerating atmospheric carbon dioxide growth,” comes to the same conclusion. The paper itself is mostly for math and statistics junkies.  It is essentially agnostic on climate science.  But the conclusions are as stark as any in the climate literature:

  • The human population is still growing at an exponential rate and there is no sign in the data that the growth rate is decreasing. Many argue that economic developments and education of women will lead to a decreased growth rate and an eventual stabilization of human population. This is not yet observed in the population dynamics, when integrated worldwide.
  • Notwithstanding a lot of discussions, international meetings, prevalence in the media, atmospheric CO2 content growth continues unabated with a clear faster-than-exponential behavior. On the face of this evidence using data until 2009, stabilizing atmospheric carbon dioxide emissions at levels reached in 1990 for instance seems very ambitious, if not utterly unrealistic.

Every Single GOPer On House Energy Cmte Won’t Say Climate Change Is Real - Thirty-one Republicans on the House Energy And Commerce Committee -- the entire Republican contingent on the panel -- declined on Tuesday to vote in support of the very idea that climate change exists.  Democrats on the panel had suggested three amendments that said climate change is a real thing, is caused by humans and has potentially dire consequences for the future. The amendments came on a Republican bill to block the EPA from offering regulations to mitigate the results of global climate shifts. The global scientific community is in near unanimous agreement that climate change is real, and that humans contribute to it.  None of the 31 Republicans on the committee would vote yes on any of the amendments (Rep. Marsha Blackburn [R-TN] declined to vote on one.) The committee's 21 Democrats voted yes on all three. Though the result may seem shocking to supporters of climate legislation, activists say this is pretty much what they expect from the GOP these days.

Rep. Peter DeFazio says “people will die” from GOP cuts to NOAA, disaster response programs - House GOP still says accurate weather forecasting and hurricane tracking are luxuries America can’t afford - Last month, Climate Progress reported on House Republicans’ shortsighted attempt to obliterate funding for new environmental monitoring satellites—the sole source of some data for weather and climate forecasters.On Tuesday, in its latest three-week extension of government spending, the GOP, apparently not content with the depth of its evisceration, upped the ante by voting to cut an additional $115 million from NOAA’s Acquisition account.   The tragic events in Japan serve as the most recent reminder that betting against Mother Nature is a losing proposition, yet House Republicans seem intent on insisting they can protect Americans without adequate information. They know the hurricanes, tornadoes, and floods are coming. Apparently we simply can’t afford to know when.

More on Climate Change in America - I wrote before that part of the problem for climate hawks is that even expected damages from climate change are not that large. Not zero by any means but not as high as they would like. In particular a number of folks seemed to be upset with CBO testimony on the matter. Brad Johnson writes The failure of the economics profession to come to grip with the clear science of climate change is a scandal that far outstrips its cheerleading of the housing bubble and other financial disasters. As previously discussed in the Wonk Room, conventional economics not only fails to accurately assess the threat of global warming, but also totally misrepresents the economic impact of taking action. There are a couple of points to be made. First, they are doing analysis as it pertains to the United States, not as it pertains to the rest of the world. There are some big differences here because the US has an advanced, Northern Hemisphere economy. The situation is different for some parts of the world, most notably Bangladesh and the analysis is considerably more difficult.

Climate change and the world’s poorest - Even though much has been written about climate change, and about poverty, as distinct and complex problems, the link between them has received little attention. This is odd for two reasons:

  • The majority of the poor live in rural areas where agriculture is the predominant form of economic activity, and agriculture – particularly in the tropics – is one of the sectors most vulnerable to climate change (see World Bank 2010).
  • At the same time, these regions offer some of the greatest potential to contribute to mitigation – particularly for forest carbon sequestration, but also for agricultural practices.

Those who rely on agriculture for their livelihoods are among the most vulnerable to climate change – they also happen to be among the world’s poorest. This column argues that policymakers have a duty to help them adapt. It adds that the near-term poverty effects of climate-mitigation policies could even be more significant than climate change itself.

Climate-Related Disasters May Provide Opportunities For Rural Poor, Study Suggests… A new study in Honduras suggests that climate-related weather disasters may sometimes actually provide opportunities for the rural poor to improve their lives.Researchers found that that the poorest inhabitants of a small village in northeastern Honduras increased their land wealth and their share of earnings relative to more wealthy residents after Hurricane Mitch devastated their village in October 1998...In order to compare how residents fared after the hurricane, the researchers separated the population into thirds, based on the amount of land they owed.  They found that the land-poorest third of the residents – half of which were headed by single women – lost 59 percent of their land to the hurricane, compared to just 36 percent land loss suffered by the land-richest third of the residents.But while the poorest were hit hardest by the hurricane, they actually showed a remarkable rebound in the years following

Mapping Human Vulnerability to Climate Change -First global map suggests climate change will have greatest impact on the populations least responsible for causing the problem. Researchers already study how various species of plants and animals migrate in response to climate change. Now, Jason Samson, a PhD candidate in McGill University’s Department of Natural Resource Sciences, has taken the innovative step of using the same analytic tools to measure the impact of climate change on human populations. Samson and fellow researchers combined climate change data with censuses covering close to 97 per-cent of the world’s population in order to forecast potential changes in local populations for 2050.

Not Getting It on Climate Change - Based on my comments I take it that I am still not making myself clear on Climate Change in America. A few more direct points:

  • (1) Its not that rebuilding America would be a good thing because it produces jobs. Or that spending money or seawalls or air conditioning contributes to GDP. Its that these are bad, but they are not that bad. They are a cost but not a great cost.
  • (2) Cranking up really big damages almost always comes from loss of life. What reason do we have to suspect that lots of lives will be lost in the United States from Climate Change?
  • (3) There is a big difference between whether Climate Change will be bad for the United States and whether it will be bad for the rest of the world. Again big damages come from loss of life.

Unrest stalls Middle East effort to cut CO2 - Political unrest in the Gulf has complicated the task of lowering fuel subsidies to help cut carbon in a region with the world’s highest per capita emissions. Gulf countries, where summer temperatures reach 50 degrees Celsius (122 F), want to adopt renewables like solar power to free up oil for export at high prices as well as cut emissions, which are six times higher than the world average.But they have been dragging their feet by providing $30 billion a year in subsidies for oil and gas use, selling gasoline and electricity domestically at often a fraction of international rates.G20 nations have pressured the region to end subsidies, which hamper fuel efficiency, push more oil into domestic power generation, and make renewable projects uncompetitive.

EPA to Release Long-Awaited Rules on Toxic Power Plant Emissions This Week - An ongoing fight in Congress to limit EPA’s role in regulating greenhouse gases is obscuring the importance of these long-overdue rules to public healthThis week the Environmental Protection Agency is expected to release new standards for coal- and oil-fired power plants that will limit the emissions of 84 different “air toxics,” including mercury, benzene, hydrogen chloride and radioactive material.According to EPA, American coal plants produce 386,000 tons of hazardous air pollutants per year. The toxins they release — hazardous chemicals that can lead to disease, brain damage and premature death — affect every part of the human body. Arsenic, chromium and nickel cause cancer; lead damages the nervous system; acid gases irritate the nose and throat; dioxins affect the reproductive endocrine and immune systems; and volatile organic compounds weaken lungs and eyes.

GOP budget targets agency that warned of tsunami - A spending plan being pushed by Republicans would slash funding for the agency that warned Hawaii and the West Coast about the devastating tsunami in Japan. The plan, approved by the GOP-controlled House last month, would trigger an estimated $126 million in cuts for the National Weather Service, the agency that houses the Pacific Tsunami Warning Center in Hawaii. The center issued widespread warnings minutes after Friday's earthquake and issued guidance and updates throughout the day. A union representing workers at the tsunami center said the proposed cuts — part of $454 million in cuts for the National Oceanic and Atmospheric Administration — could result in furloughs and rolling closures of weather service offices. If so, that could affect the center's ability to issue warnings similar to those issued Friday, said Barry Hirshorn, Pacific region chairman of the National Weather Service Employees Organization. "People could die. It could be serious,"A spokeswoman for the House Appropriations Committee, which is leading the budget-cutting effort, said deep cuts were needed to restore the country's fiscal health. The GOP plan would cut spending for NOAA operations by nearly 10 percent below the budget enacted last year.

In Its Crusade Against EPA Climate Rules, Has the GOP Gone Too Far? Lately, the amount of time House Republicans have dedicated to crying over spilled milk would make even the casual observer suspicious. Fortunately, EPA Administrator Lisa Jackson is savvy enough to detect that particular brand of crocodile tears unique to Capitol Hill. However, she still might have to consider changing her title to chief EPA mythbuster if representatives keep using congressional hearings as a forum to boo-hoo to her about cooked-up regulations they know are fallacies yet continue to insist her agency is preparing to promulgate. Though she sometimes cracks a knowing smile from the witness chair, Jackson is always her gracious, measured and down-to-earth self when she patiently explains to one committee or another that the Environmental Protection Agency does not now — and will not in the future — regulate cow flatulence, farm dust or milk spilled on dairy farms.

Senate Democrats work to defend EPA - Senate Democrats are scrambling to combat a GOP-led offensive against the Obama administration’s climate regulations ahead of a possible Wednesday floor showdown. In a surprising move, Senate Majority Leader Harry Reid signaled Tuesday he would allow a floor vote on a Republican amendment to nullify the EPA’s authority to regulate greenhouse gases. Minority Leader Mitch McConnell offered the amendment — authored by Sen. Jim Inhofe (R-Okla.) — to the small-business bill pending on the floor. The language mirrors the anti-EPA bill the House Energy and Commerce Committee passed during a daylong markup Tuesday. Now, Reid and other top Senate Democrats who oppose the amendment are looking for ways to kill it. And they may have a tougher time than they expected, given the momentum after the Energy and Commerce vote and anti-EPA sentiment among moderate Senate Democrats.

Japan quake shifts Antarctic glacier -- The major earthquake that hit Japan on Friday caused a massive ice stream in Antarctica to momentarily speed up. As the surface seismic waves generated by the quake travelled around the world, they appear to have given the Whillans ice stream in West Antarctica a nudge, causing it to slide by about half a metre. The movement was picked up by Jake Walter of the University of California, Santa Cruz, and his colleagues, who monitor the glacier remotely from California. They say the event is an "interesting insight", but are not suggesting it will destabilise the ice stream in any way. The Whillans ice stream drains ice from the West Antarctic Ice Sheet into the Ross Ice Shelf. Since 2007, Walter and colleagues have been using GPS field stations on the ice sheet to monitor its movements. They have shown that the ice stream speeds up twice a day in slip events which last about 30 minutes.

Fire and Ice: Melting Glaciers Trigger Earthquakes, Tsunamis and Volcanos - Climatologists have been raising alarms about global warming for years, and now geologists are getting into the act, warning that melting glaciers will lead to an increasing number of earthquakes, tsunamis and volcanic eruptions in unexpected places.  People in northern climates who have been looking south and shaking their heads sadly over the plight of people living in the path of Atlantic hurricanes and Pacific tsunamis had better get ready for a few seismic events of their own, according to a growing number of prominent geologists.  Ice is extremely heavy—weighing about one ton per cubic meter—and glaciers are massive sheets of ice. When they are intact, glaciers exert enormous pressure on the portion of the Earth’s surface they cover. When glaciers begin to melt—as they are doing now at an increasingly rapid rate due to global warming—that pressure is reduced and eventually released.  Geologists say releasing that pressure on the Earth’s surface will cause all sorts of geologic reactions, such as earthquakes, tsunamis (caused by undersea earthquakes) and volcanic eruptions.  Wu offered the analogy of pressing a thumb against a soccer ball. When the thumb is removed and the pressure released, the ball resumes its original shape. When the “ball” is a planet, the rebound happens slowly, but just as surely.

The Scariest Earthquake Is Yet to Come - Even more worrisome than geography and topography, though, is geological history. For this event cannot be viewed in isolation. There was a horrifically destructive Pacific earthquake in New Zealand on Feb. 22, and an even more violent magnitude-8.8 event in Chile almost exactly a year before. All three phenomena involved more or less the same family of circum-Pacific fault lines and plate boundaries—and though there is still no hard scientific evidence to explain why, there is little doubt now that earthquakes do tend to occur in clusters: a significant event on one side of a major tectonic plate is often—not invariably, but often enough to be noticeable—followed some weeks or months later by another on the plate’s far side. It is as though the earth becomes like a great brass bell, which when struck by an enormous hammer blow on one side sets to vibrating and ringing from all over. Now there have been catastrophic events at three corners of the Pacific Plate—one in the northwest, on Friday; one in the southwest, last month; one in the southeast, last year. That leaves just one corner unaffected—the northeast. And the fault line in the northeast of the Pacific Plate is the San Andreas Fault, underpinning the city of San Francisco.

Pacific Northwest Faces Nearly Identical Risks To Japanese Quake - .—It’s being called one of the largest recorded earthquakes in world history. Also, according to Robert Yeats, “This is our wake up call.” Japan today is struggling with the aftermath of a massive 8.9 earthquake on a subduction zone, a short distance offshore, which unleashed a devastating tsunami that killed hundreds and has turned large parts of cities into rubble.Click here to find out more! Yeats, a professor emeritus of geology at Oregon State University, said that if people didn’t already get the message from recent disasters in Sumatra and Chile, they should pay attention now. “This is an earthquake of the same type, with about the same magnitude and proximity that we face here in the Pacific Northwest from the Cascadia Subduction Zone,” Yeats said. “What you are seeing in Japan today is what you will also see in our future. Except they are better prepared than we are.”

Nuclear Waste: From Bombs to $800 Handbags - UNTIL the Japanese catastrophe of last weekend, the biggest nuclear mess in the Western world could be found at the Hanford nuclear facility in Washington state, where America’s government once made most of the plutonium for its nuclear weapons. More than two decades after the clean-up began, officials have yet to deal with any of the nasty stuff.  At the Hanford site, which sprawls across a sagebrush plain in the south-east of the state, none of the 53m gallons (200m litres) of highly toxic waste stored in 177 ageing and leaky underground tanks has been mopped up, even though the last reactor was shut down in 1987. That must wait until 2019, when a unique waste-treatment plant—described as the largest and most expensive nuclear clean-up project ever undertaken—will begin transforming radioactive leftovers that could poison the nearby Columbia river into still-radioactive glass logs more suitable for long-term storage. If all goes well, gunk-to-glass processing (“vitrification”) will continue until at least 2047 and cost about $74 billion, more than the annual budget of America’s Department of Education.

Richard Heinberg: Earth's Limits: Why Growth Won't Return - Climate Change, Pollution, Accidents, Environmental Decline, and Natural Disasters - Accidents and natural disasters have long histories; therefore it may seem peculiar at first to think that these could now suddenly become significant factors in choking off economic growth. However, two things have changed. First, growth in human population and proliferation of urban infrastructure are leading to ever more serious impacts from natural and human-caused disasters. Consider, for example, the magnitude 8.7 to 9.2 earthquake that took place on January 26 of the year 1700 in the Cascadia region of the American northwest. This was one of the most powerful seismic events in recent centuries, but the number of human fatalities, though unrecorded, was probably quite low. If a similar quake were to strike today in the same region—encompassing the cities of Vancouver, Canada; Seattle, Washington; and Portland, Oregon—the cost of damage to homes and commercial buildings, highways, and other infrastructure could reach into the hundreds of billions of dollars, and the human toll might be horrific..

Battle-proof Wind Farms Survive Japan’s Trial by Fire - Despite assertions by its detractors that wind energy would not survive an earthquake or tsunami the Japanese wind industry is still functioning and helping to keep the lights on during the Fuksuhima crisis. Colleagues and I have been directly corresponding with Yoshinori Ueda leader of the International Committee of the Japan Wind Power Association & Japan Wind Energy Association, and according to Ueda there has been no wind facility damage reported by any association members, from either the earthquake or the tsunami. Even the Kamisu semi-offshore wind farm, located about 300km from the epicenter of the quake, survived. Its anti-earthquake “battle proof design” came through with flying colors. Mr. Ueda confirms that most Japanese wind turbines are fully operational. Indeed, he says that electric companies have asked wind farm owners to step up operations as much as possible in order to make up for shortages in the eastern part of the country:

EPA proposes ‘first ever’ emissions standards for power plants - The Environmental Protection Agency released a plan Wednesday that would reduce emissions1 of mercury and other toxins from coal-burning power plants, drawing praise from health officials and condemnation from some industry representatives and lawmakers.EPA Administrator Lisa P. Jackson said the “first ever” national standard for harmful power plant emissions “was 20 years in the making” and was required by the 1990 Clean Air Act2. The plan would force plants to purchase scrubbers and other equipment to prevent 91 percent of mercury from coal from being released into the air.“Today we’re taking an important step forward to protect the health of millions of Americans,” Jackson said in an address at the agency’s headquarters. She repeated the EPA’s position that controlling pollution prevents thousands of premature deaths as well as childhood asthma.According to a report3 by the Congressional Research Service, coal-fired power plants are among the nation’s greatest sources of stationary pollution. In 2005, they accounted for 70 percent of emissions of sulfur dioxide, nearly half of the mercury and 20 percent of the nitrogen oxide.

Benefits and costs of EPA's mercury rule - Lisa P. Jackson, the agency’s administrator, estimated the total annual cost of compliance at about $10 billion, in line with some industry estimates (although some are much higher), and the health and environmental benefits at more than $100 billion a year. She said that households could expect to see their electric bills rise by $3 to $4 a month when the regulation was fully in force after 2015. She said that installing and maintaining smokestack scrubbers and other control technology would create 31,000 short-term construction jobs and 9,000 permanent utility sector jobs.  A few comments:

  1. Suppose the costs are underestimated, as industry argues, and the benefits are overestimated because the health effects of lowering mercury don't materialize. Doubling costs and using the lower bound of the benefits (RIA here) still generates net benefits of $30+ billion. And note that the health benefits from lowering mercury is only about 10% of the benefit estimate. The majority of benefits comes from reductions SO2 and other "PM2.5 precursors" leading to reductions in mortality.
  2. Costs could be lowered if the Bush Administration's cap-and-trade proposal was followed but, as I learned back then, mercury isn't so good for a cap-and-trade program because the worst power plants would buy the permits creating hot spots. In other words, there would be lots of birth defects near the oldest power plants.
  3. The green job creation is part of the cost of the regulations, not the benefits.

Japan nuclear woes cast shadow over U.S. energy policy (Reuters) - Anxiety over Japan's quake-crippled nuclear reactors has triggered calls from lawmakers and activists for review of U.S. energy policy and for brakes on expansion of domestic nuclear power. President Barack Obama has urged expansion of nuclear power to help meet the country's energy demands, lower its dependence on imported fossil fuels and reduce its climate-warming greenhouse gas emissions. But as engineers in Japan tried on Sunday to avert a meltdown at three nuclear reactors following Friday's massive earthquake, some U.S. policy makers were reevaluating their take on nuclear energy even as the industry itself offered assurances about the safety of new and existing plants. "I don't want to stop the building of nuclear power plants,""But I think we've got to kind of quietly put, quickly put, the brakes on until we can absorb what has happened in Japan as a result of the earthquake and the tsunami and then see what more, if anything, we can demand of the new power plants that are coming on line," Lieberman added.

U.S. Nuclear Industry Faces New Uncertainty - The fragile bipartisan consensus that nuclear power offers a big piece of the answer to America’s energy and global warming1 challenges may have dissolved in the crippled cores of Japan2’s nuclear reactors.  Until this weekend, President Obama3, mainstream environmental groups and large numbers of Republicans and Democrats in Congress have agreed that nuclear power offers a steady energy source and part of the solution to climate change, even as they disagreed on virtually every other aspect of energy policy. Mr. Obama is seeking tens of billions of dollars in government insurance for new nuclear construction, and the nuclear industry in the United States, all but paralyzed for decades after the Three Mile Island accident in 1979, was poised for a comeback. Now, that is all on hold as the world watches the unfolding crisis in Japan’s nuclear reactors and the widespread terror it has spawned.

Will Japan Disaster Halt a US Nuclear Renaissance? - The unfolding emergency in Japan comes at a time when nuclear power, for the first time in a generation, was enjoying widespread political support in the United States. While no new plants have been built here in three decades, the industry has revived interest by marketing itself as a clean energy source. Republicans have long supported nuclear power, but the lower-carbon argument has won over many Democrats, including President Obama, who in his January State of the Union address called for the inclusion of nuclear in a new "clean energy standard." The administration has been aiming to triple federal loan guarantees for new plants—its last two budgets called for an additional $36 billion, raising the total to $54.5 billion. Congress, too, has also shown interest: The climate and energy bill introduced in the Senate last May called for loan guarantees sufficient to fund 12 new reactors.

World Nuclear Renaissance Wobbles as Quake Hits Japan Reactors - Global expansion of nuclear power may draw more scrutiny after officials in China and India and U.S. lawmakers called for the review of atomic energy plans as Japan struggles with reactors crippled by a quake and tsunami.  Tokyo Electric Power Co.’s Fukushima Dai-Ichi No. 3 reactor experienced a hydrogen explosion at 11:01 a.m. local time today. Residents living within 20 kilometers were ordered indoors, Kyodo reported. An explosion March 12 at the No. 1 reactor, 220 kilometers (135 miles) north of Tokyo, injured four workers.  The 8.9-magnitude temblor and subsequent tsunami that struck northeast Japan on March 11 cut power to the reactors’ cooling systems. Tokyo Electric engineers have been working to prevent the meltdown of the two units by flooding each with a mixture of water and boric acid to stymie a catastrophic release of radiation.  “This is obviously a significant setback for the so-called nuclear renaissance,” said Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission. “The image of a nuclear power plant blowing up before your eyes on a television screen is a first.”

Crisis Underscores Fears About Safety of Nuclear Energy - The official announcement that two reactors at an earthquake-damaged nuclear plant could be suffering meltdowns underscores the Japanese nuclear industry’s troubled history, and years of grass-roots objections from a people uniquely sensitive to the ravages of nuclear destruction.  The unfolding crisis at the two reactors, both at the Fukushima Daiichi Nuclear Power Station, feeds into a resurgence of doubts about nuclear energy’s safety — even as it has gained credence as a source of clean energy in a time of mounting concerns about the environmental and public health tolls of fossil fuels.  Critics of nuclear energy have long questioned the viability of nuclear power in earthquake-prone regions like Japan. Reactors have been designed with such concerns in mind, but preliminary assessments of the Fukushima Daiichi accidents suggested that too little attention was paid to the threat of tsunami. It appeared that the reactors withstood the powerful earthquake, but the ocean waves damaged generators and backup systems, harming the ability to cool the reactors.

What The Media Doesn't Get About Meltdowns - The big question is the degree to which Japan's current nuclear power emergency resembles the more contained 1979 U.S. Three Mile Island accident, or the worst in history, the 1986 Chernobyl catastrophe in the Ukraine. "I covered Chernobyl and I covered Three Mile Island," NBC's chief science and health correspondent Robert Bazell said today. "So far it's not anything like Chernobyl. Let's keep our fingers crossed that it will continue to stay that way."   He emphasized that "it is a race against time" to prevent a serious breach of the containment structures housing the nuclear fuel cores in at least two reactors at Japan's Fukushima Daiichi nuclear power station, as well as potential dangers at several other plants in the region. Indeed it is also a race to find reliable, real-time public information about the rapidly changing Japan nuclear power emergency, amidst a sea of confusing, conflicting and often limited information emanating from sources across the world.

What Now For Nuclear Power? - Commentators consider the pros and cons of nuclear power and question the facts following explosions at the nuclear plant in Fukushima in Japan.Al Jazeera's Inside Story says the consequences of the explosions are still unclear:"There are conflicting accounts of the radiation levels being measured in the vicinity of the Fukushima Daiichi plant - where sea water is being injected into at least two of the reactors in an attempt to prevent the nuclear fuel from melting as the temperature continues to rise. Nick Butler predicts in the Financial Times that not all nuclear power plans will stop:"[F]acts disappear into the cloud of fear that nuclear accidents produce. In the US and Europe, the building of new stations will be delayed and older ones will be closed sooner rather than later. In the developed world, the main business opportunity will be in decommissioning as the old stations come to the end of their lives.  Unless the current problems at Fukushima spiral out of control and undermine all confidence in nuclear power as a source of electricity generation, building plans in China and India are likely to remain in place.

Nuclear Power: When The Answer Becomes The Problem - Japan certainly has stricter building regulations than many countries but unfortunately that doesn¹t mean they are strictly enforced. Some years back many buildings constructed according to these rules were found to be substandard because avaricious construction companies had cut corners. Nevertheless, there has been widespread complacency that things are OK. For example, last month several Japanese said to Rick that what happened in Christchurch “would not happen in Japan”. They may have been ready and well-drilled for a huge quake but people were not prepared for the tsunami that followed this one. Hubris may apply to those who run nuclear power plants. They (and their supporters in the media) claim that because they are better designed and more rigorously constructed none of the 55 working reactors could suffer an accident like Three Mile Island or Chernobyl. It’s a phrase we have heard many times in the past week or so that, even if it's true, seems like an echo of an over-confidence which has now become intrinsic to their business.

Japan Earthquake: Nuclear Power Under Fire - Almost 40 years ago, in the heyday of the expansion of nuclear power, one of its pioneers warned the world that it had made "a Faustian bargain" with the atom. People like himself, he said in 1972, were providing a "magical energy source" that was "almost non-polluting when properly handled". But it came at a price: "a vigilance ... to which we are quite unaccustomed".  Dr Alvin Weinberg, then director of the Oak Ridge National Laboratory, was a driving force behind the world's most widely built reactors, including the two that have been teetering on the edge of disaster in Japan. Today at Fukushima – as at Chernobyl, 25 years ago last month, and at Three Mile Island seven years earlier – the world is being forced to weigh up that bargain. Is the supply of a well-developed, low-carbon source of energy worth the price of the cataclysm that can follow a human lapse in vigilance or an act of God? Does the role it could play in helping avert the almost certain slow catastrophe of climate change justify the risk of a calamitous accident?

Do We Really Need Nuclear Power? Just how necessary is nuclear power? Lately, politicians around the globe have been asking themselves that question as they watch a small handful Japanese technicians race to prevent three reactors from spewing out radiation at the quake-ravaged Fukushima Daiichi plant. In recent years, a consensus had taken hold that the world needed many, many more nuclear plants to meet its low-carbon energy needs and avoid drastic global warming...the Bipartisan Policy Center recently summed up the conventional wisdom for The New York Times: “It’s not possible to achieve a climate solution based on existing technology without a significant reliance on nuclear power.”A number of liberals would agree with this statement. Yes, the argument goes, nuclear power carries some risks, but those aren’t nearly as great as the risks of burning coal, cooking the planet, and sending all sorts of deadly pollutants into the air. Air pollution kills two million people per year and much of that is due to fossil-fuel combustion. The right answer is to learn from Japan's mistakes and improve nuclear safety. (It’s also worth noting that the next generation of reactors are supposed to be even safer.) No energy source is risk-free, and nuclear is one of our best bets. Right?

Why I'm Not Worried About Japan's Nuclear Reactors - I am writing this text (Mar 12) to give you some peace of mind regarding some of the troubles in Japan, that is the safety of Japan’s nuclear reactors. Up front, the situation is serious, but under control. And this text is long! But you will know more about nuclear power plants after reading it than all journalists on this planet put together.There was and will *not* be any significant release of radioactivity. By “significant” I mean a level of radiation of more than what you would receive on – say – a long distance flight, or drinking a glass of beer that comes from certain areas with high levels of natural background radiation. I have been reading every news release on the incident since the earthquake. There has not been one single (!) report that was accurate and free of errors (and part of that problem is also a weakness in the Japanese crisis communication). By “not free of errors” I do not refer to tendentious anti-nuclear journalism – that is quite normal these days. By “not free of errors” I mean blatant errors regarding physics and natural law, as well as gross misinterpretation of facts, due to an obvious lack of fundamental and basic understanding of the way nuclear reactors are build and operated. I have read a 3 page report on CNN where every single paragraph contained an error.

How a Reactor Shuts Down and What Happens in a Meltdown - The operating reactors at Fukushima Daiichi power station automatically shut down during the earthquake. But after subsequent cooling failures, two of them went into partial meltdown.

Tokyo Electric to Build US Nuclear Plants: The no-BS info on Japan’s disastrous nuclear operators - I don't know the law in Japan, so I can't tell you if Tokyo Electric Power Co (TEPCO) can plead insanity to the homicides about to happen. But what will Obama plead?  The Administration, just months ago, asked Congress to provide a $4 billion loan guarantee for two new nuclear reactors to be built and operated on the Gulf Coast of Texas — by Tokyo Electric Power and local partners.  As if the Gulf hasn't suffered enough.Here are the facts about Tokyo Electric and the industry you haven't heard on CNN: The failure of emergency systems at Japan's nuclear plants comes as no surprise to those of us who have worked in the field. Nuclear plants the world over must be certified for what is called "SQ" or "Seismic Qualification."  That is, the owners swear that all components are designed for the maximum conceivable shaking event, be it from an earthquake or an exploding Christmas card from Al Qaeda. The most inexpensive way to meet your SQ is to lie.  The industry does it all the time. The government team I worked with caught them once, in 1988, at the Shoreham plant in New York.  Correcting the SQ problem at Shoreham would have cost a cool billion, so engineers were told to change the tests from 'failed' to 'passed.' The company that put in the false safety report?  Stone & Webster, now the nuclear unit of Shaw Construction which will work with Tokyo Electric to build the Texas plant, Lord help us. There's more.

Crisis casts doubt on nuke industry P.R. campaign - I've been closely tracking the spin-laden response of the nuclear power industry to the crisis in Japan over the past couple of days. But it's also worth taking a moment to look back at what the messaging of the industry has been in recent years and why the current situation is so damaging from a public-relations perspective. There have been two major prongs in the (up-till-now successful) argument for a renewal of nuclear power in the United States, where a new reactor has not been built in the past 30 years: first, that nuclear power plants do not release carbon emissions that cause climate change; and second, that nuclear power generation is completely safe. It's the latter concept that is currently taking a battering, with authorities in Japan -- where 200,000 people have already been evacuated, three explosions have occurred, and dozens of workers have been exposed to radiation -- laboring to prevent full meltdowns at multiple reactors.The dual message of the industry is neatly encapsulated in the name of a prominent pro-nuclear group, the Clean and Safe Energy Coalition (CASEnergy Coalition for short).

Safety on the Cheap - Robert Reich - Can we please agree that in the real world corporations exist for one purpose, and one purpose only — to make as much money as possible, which means cutting costs as much as possible? The New York Times reports that G.E. marketed the Mark 1 boiling water reactors, used in TEPCO’s Fukushima Daiichi plant, as cheaper to build than other reactors because they used a comparatively smaller and less expensive containment structure.Yet American safety officials have long thought the smaller design more vulnerable to explosion and rupture in emergencies than competing designs. (By the way, the same design is used in 23 American nuclear reactors at 16 plants.) In the mid-1980s, Harold Denton, then an official with the Nuclear Regulatory Commission, said Mark 1 reactors had a 90 percent probability of bursting should the fuel rods overheat and melt in an accident.  “Mark 1 failure within the first few hours following core melt would appear rather likely.” Sound familiar? BP knew Halliburton lacked experience testing cement to prevent blowouts and hadn’t performed adequately before on a similar job.  Nor did Massey Energy spend the money needed to ensure its mines were safe. And so on.

Lesson from Japan: We Don’t Need Nuclear Power to Solve the Climate Crisis - On March 14th, the NYTimes stated that “This page has endorsed nuclear power as one tool to head off global warming. We suspect that, when all the evidence is in from Japan, it will remain a valuable tool.” I want to argue that, to the contrary, the lesson to be learned from the catastrophe in Japan is that nuclear power is not even part of a sustainable solution to global warming. The whole idea behind preventing global warming is to protect the Earth’s ecosystems, collectively known as the biosphere. You can’t save the biosphere if it’s irradiated. The same problem rears its ugly head with most biofuels, certainly with corn ethanol; it won’t matter if the climate isn’t changing if the planet has been turned into one big desert because the soils and fresh water have been destroyed. Speaking of water, the reactors that are melting down were supposed to be of a superior design, “light water” reactors, the “light” making it sound easier on the environment. But it turned out that unless you use (and abuse) prodigious amounts of circulating water, the whole system implodes. When the effects of global warming kick in and sea levels rise and erratic rainfall leads to unforeseen downpours or extended droughts, more sequences of rare events will lead to more nuclear power disasters. Why is it worth potentially losing a region of a country, or even a whole country, just to generate electricity? What happens if a cloud of radiation heads for Tokyo, or moves into Korea? Why do we even have to worry about this?

Germany to shut down seven reactors - Germany will shut down its seven oldest nuclear power reactors and may not restart them, German Chancellor Angela Merkel said Tuesday. The plants will be closed for at least three months under a moratorium imposed in response to the Japanese nuclear crisis, she said. "Power plants that went into operation before the end of 1980 will be shut down for the period of the moratorium," Merkel said. The moratorium shelves a decision to extend the lifetime of Germany's 17 reactors by an average of 12 years. Nuclear power supplies nearly one-fifth of Germany's electricity and it's an integral part of the European energy mix.

The World's Largest Nuclear Producers - The explosions and meltdown fears at Fukushima Daiichi nuclear-power plant that followed Friday’s earthquake have increased concerns in Japan about the safety of nuclear power. The country is not well placed to move away from it though, with only America and France producing more electricity from nuclear sources. Germany, which yesterday suspended a deal to delay closing its ageing nuclear plants, is the world’s sixth-largest producer. In percentage terms the story is rather different. Nuclear power in Japan accounts for just 29% of total domestic power production, putting Japan 15th on the list of the most nuclear-reliant countries. It ranks far below France, where nuclear power makes up three-quarters of electricity production.

Emerging Economies Move Ahead With Nuclear Plans - Despite Japan’s crisis, India and China and some other energy-ravenous countries say they plan to keep using their nuclear power plants and building new ones. The Japanese disaster has led some energy officials in the United States and in industrialized European nations to think twice about nuclear expansion. And if a huge release of radiation worsens the crisis, even big developing nations might reconsider their ambitious plans. But for now, while acknowledging the need for safety, they say their unmet energy needs give them little choice but to continue investing in nuclear power. “Ours is a very power-hungry country,“ Srikumar Banerjee, the chairman of India’s Atomic Energy Commission, said during a news conference Monday in Mumbai. Nearly 40 percent of India’s 1.2 billion people do not have regular access to electricity, Mr. Banerjee said. “It is essential for us to have further electricity generation.“  And in China, which has the world’s most ambitious nuclear expansion plans, a vice minister of environment, Zhang Lijun, said on Saturday that Japan’s difficulties would not deter his nation’s nuclear rollout.

China suspends nuclear building plans - China has suspended approval for new nuclear power stations following the accident at Japan's Fukushima Daiichi plant.It will also carry out checks at existing reactors and those under construction. China is currently building 27 new reactors - about 40% of the total number being built around the world.The news comes as China grows increasingly worried about the nuclear accident in Japan.'Top priority' The decision to temporarily halt approval for nuclear plants came at a meeting of China's State Council, or Cabinet, chaired by Premier Wen Jiabao. "We will temporarily suspend approval for nuclear power projects, including those that have already begun preliminary work, before nuclear safety regulations are approved," read a statement from the State Council.

DOE Loan Chief: We Remain Committed to Nuclear - The sentiment echoes DOE Secretary Steven Chu’s cautious but steadfast comments supporting nuclear before the House Energy & Commerce committee. The DOE Loan Program has issued a conditional commitment for a $8.33 billion loan guarantee to Georgia Power to build the first nuclear power plant in the U.S. in three decades. Silver noted briefly in his talk that the nuclear technologies used by Georgia Power will be different from the GE Mark I, which are the type of reactors that are under going a partial meltdown in Japan right now, in the wake of the massive earthquake and tsunami. Silver said the Loan Program expects to move forward with the Georgia Power nuclear plant, as well as additional nuclear projects. The Georgia Power project is still a conditional commitment, and the loan guarantees take months to finalize.

Is Nuclear Power Worth the Risk? - - Yves Smith - One of the interesting features during the Fukushima reactor crisis were the fistfights that broke out in comments between the defenders of nuclear power and the opponents. The boosters argued that the worst case scenario problems were overblown, both in terms of estimation of the odds of occurrence and the likely consequences. The critics contended that nuclear power was not economical ex massive subsidies, that there was no “safe” method of waste disposal, and that nuclear plants were always subject to corners-cutting, both in design and operation, so the ongoing hazards were greater than they appeared.  Here is the key section from the Bulletin of Atomic Scientists, “The Lessons of Fukushima“, by anthropologist Hugh Gusterson :And presumably there are other complicated technological scenarios that we have not foreseen, earthquake faults that are undetected or underestimated, and terrorists hatching plans for mayhem as yet unknown. Not to mention regulators who place too much trust in those they regulate.Thus it is hard to resist the conclusion reached by sociologist Charles Perrow in his book Normal Accidents: Living with High-Risk Technologies: Nuclear reactors are such inherently complex, tightly coupled systems that, in rare, emergency situations, cascading interactions will unfold very rapidly in such a way that human operators will be unable to predict and master them. To this anthropologist, then, the lesson of Fukushima is not that we now know what we need to know to design the perfectly safe reactor, but that the perfectly safe reactor is always just around the corner.

Japan warned over nuclear plants, WikiLeaks cables show 15 Mar 2011 Japan was warned more than two years ago by the international nuclear watchdog that its nuclear power plants were not capable of withstanding powerful earthquakes, leaked diplomatic cables reveal. An official from the International Atomic Energy Agency (IAEA) said in December 2008 that safety rules were out of date and strong earthquakes would pose a "serious problem" for nuclear power stations. The Japanese government pledged to upgrade safety at all of its nuclear plants, but will now face inevitable questions over whether it did enough. While it responded to the warnings by building an emergency response centre at the Fukushima plant, it was only designed to withstand magnitude 7.0 tremors. Friday's devastating earthquake was a magnitude 9.0 shock. The news is likely to put further pressure on Japan's Prime Minister, Naoto Kan, who has been criticised for "dithering" over the country's response to the ongoing crisis at the Fukushima nuclear power plant. .

Reactor Design in Japan Has Long Been Questioned -The warnings were stark and issued repeatedly as far back as 1972: If the cooling systems ever failed at a Mark 1 nuclear reactor, the primary containment vessel surrounding the reactor would probably burst as the fuel rods inside overheated. Dangerous radiation would spew into the environment. Now, with one Mark 1 containment vessel damaged at the embattled Fukushima Daiichi nuclear plant and other vessels there under severe strain, the weaknesses of the design — developed in the 1960s by General Electric — could be contributing to the unfolding catastrophe. When the ability to cool a reactor is compromised, the containment vessel is the last line of defense. Typically made of steel and concrete, it is designed to prevent — for a time — melting fuel rods from spewing radiation into the environment if cooling efforts completely fail. But the type of containment vessel and pressure suppression system used in the failing reactors at Japan’s Fukushima Daiichi plant — and in 23 American reactors at 16 plants — is physically less robust, and it has long been thought to be more susceptible to failure in an emergency than competing designs.

Bid to ‘Protect Assets’ Slowed Reactor Fight - Crucial efforts to tame Japan's crippled nuclear plant were delayed by concerns over damaging valuable power assets and by initial passivity on the part of the government, people familiar with the situation said, offering new insight into the management of the crisis. Meanwhile, a regulator who was inspecting the Fukushima Daiichi nuclear-power complex when the quake hit offered The Wall Street Journal one of the first eyewitness accounts of the havoc at the site, describing how the temblor took down all communications in the area, greatly complicating the response.The plant's operator—Tokyo Electric Power Co., or Tepco—considered using seawater from the nearby coast to cool one of its six reactors at least as early as last Saturday morning, the day after the quake struck. But it didn't do so until that evening, after the prime minister ordered it following an explosion at the facility. Tepco didn't begin using seawater at other reactors until Sunday.

Remaining Staff at Fukushima Plant Told to Leave (Temporarily?); Intrade Predicts IAEA Will Upgrade Accident Level (Updated) - 03/16/2011 - Yves Smith  -Given the dearth of real information coming from Tokyo Power, it’s hard to reach informed conclusions about whether the powers that be are making progress in getting the damaged reactors in the Fukushima power complex under control. Japanese are just not big on Western-style disaster presentations: “Here is what happened,” (with a few schematics) “here is what we’ve done and this is what we are going to do next” with backup plans sketched out if the first line of attack fails.  So the collective nervousness is based on the legitimate concern that Something Really Awful still could happen, and the incomplete and often inconsistent tidbits don’t provide much reassurance. Washington Post (which has been doing a very good job on this beat) reports that the 50 workers trying to get the facility under control have been ordered to leave. It isn’t clear what is happening with reactor 4. A fire started there yesterday, and the concern was that it was in the spent rods pool, which is a real weak point in the design (this cooling pool evidently has its own container, separate from the reactor, and it isn’t clear whether it is intact). Some reports say the fire has been put out; others say it has been subdued but is still burning: With it unclear whether the latest explosion damaged the container to reactor 4, BBC reports that the normally stoic Japanese are getting rattled and those that have options are starting to leave Tokyo.

Understanding The Deteriorating Situation In Fukushima - Below is a great video explaining what is going on and what the risks are. AP reports that there is no water in spent fuel pool of Japan plant.

Inviting a nuclear emergency - The most urgent focus of Japan’s worsening nuclear crisis1 is the threat from radioactive fuel that has already been used in the Fukushima Daiichi reactors and awaits disposal. In the United States, the nuclear industry has amassed about 70,000 tons of such potentially deadly waste material — and we have nowhere to put it. U.S. officials’ increasingly dire assessment of the situation in Japan stems largely from the fact that spent fuel rods — which were stored in pools of water to keep them cool — have apparently become uncovered. The material is “cool” only in the relative sense: Once exposed to air, the fuel rods rapidly heat up and release large amounts of radiation. This is just one of several calamitous system failures at the Fukushima plant, but it is the most immediately perilous. For days, Japanese officials denied that there was any problem with the spent-fuel pools, which are located in the same structures that house the reactors. On Thursday, however, authorities acknowledged the seriousness of the situation and began doing everything they could to address it.

Nuclear crisis: Workers temporarily evacuated as radiation surges - With smoke rising and workers being temporarily evacuated, the latest news from the striken Fukushima Daiichi nuclear plant presents a confusing and alarming picture. According to Kyodo News, Japan's chief cabinet secretary, Yukio Edano, told reporters on Wednesday morning local time: "There is a possibility that the No. 3 reactor's containment vessel is damaged."If so, that means that containment vessels for two reactors at the site may now be compromised. Concern also surrounds spent fuel rods at the site's No. 4 reactor, which has experienced a second fire, Kyodo News reports.Edano's comments followed TV pictures showing white smoke rising above the No. 3 reactor, as radiation levels at the plant's entrance briefly reached 10 millisieverts per hour at 10:40 am local time - considered hazardous to human health.

EU energy chief: Japan situation out of control - Catastrophic events could unfold in the next few hours at Japan’s damaged nuclear plant, the European Union’s top energy official said Wednesday, roiling financial markets and sending U.S. stocks to a deeper dive.  “The site is effectively out of control,” Energy Commissioner Guenther Oettinger told a European Parliament committee, according to news reports. “In coming hours there could be further catastrophic events which could pose a threat to the lives of people on the island.” A spokeswoman for the commissioner said Oettinger “expressed his fear that the situation in Japan could worsen soon.”  The commissioner was briefing the parliament committee on his proposal for voluntary stress tests for nuclear power plants, she said.  The European Commission relies on the International Atomic Energy Agency and reports from media outlets and the European Union delegation in Japan for information, the spokeswoman added.

Options are few to prevent Japan nuclear catastrophe - As a crack is discovered in a Fukushima spent fuel pool, officials confront two crucial tasks: preventing a runaway chain reaction into the nuclear fuel and maintaining a massive flow of seawater through the damaged pools and reactor vessels. But to deal with the grim reality at hand, utility workers and some of the top U.S. experts on nuclear reactors are working around the clock, attempting to calculate how to avoid further damage to the reactors and how to get sufficient cooling water through the plant with improvised water cannons, fire hoses and helicopters. "If those water cannons are getting water to the cooling pools, they should keep that up," said Elmer Lewis, an expert on nuclear power plant safety at Northwestern University in Evanston, Ill. "Until that fuel cools down, they have a real mess on their hands."Edward Morse, a professor of nuclear engineering at UC Berkeley, added that it would take huge amounts of water to compensate for the cracks in a containment pool that were uncovered by U.S. surveillance aircraft on Friday."The best thing to do is use as much of the Pacific Ocean as possible," he said.

Scientist says contaminated regions in Japan could pose long-term risks - A Seattle scientist that studied radiation impacts after the nuclear bombs drops, and at Chernobyl, says the radiation exposure risk in contaminated areas of Japan could last a long time.  "It was just sickening to watch the pictures, the earthquake, the tsunami, and then the explosions at these plants," says Fred Hutchinson researcher Dr. Scott Davis, who lived in Japan for two years.  While in Japan, Davis studied the long-term effects of the World War Two nuclear bomb drops.  His studies have also taken him to Chernobyl, about 80 times since the meltdown at the Russian nuclear plant.  As he looks at Japan, now, "The evacuations indicate to me, that this is really serious. Hundreds of thousands of people being moved,"

Economic Damages Are Not Just Damages to the Economy - Since Matt has been going down this road repeatedly I have got to step in here. He says I try, personally, not to get too invested in this kind of controversy because I think it sort of misses the point. Expenditures on cleanup of radiation count as GDP. So by the same token, if Manhattan becomes uninhabitable and we need to build new buildings for everyone to live in, that will be GDP. The economic point would be that GDP measures flow of goods and service while ecological devastation impacts our stock of said things. This is just a false interpretation of the leading economic models or how economists think about climate change. For example, in Nordhaus’ DICE model, the majority of damages come from “Catastrophic Damages” that is the loss of stocks, such as infrastructure and life.  For example, statistical loss of life is estimated in the United States at around $7 million per person. We say statistical loss because its based on risk. While most people would be reluctant to exchange their life for cash, many people would risk their lives for cash. Yet, if enough people risk their lives eventually one of them will actually be killed.

Japan Nuclear Disaster Caps Decades of Faked Reports, Accidents - The unfolding disaster at the Fukushima nuclear plant follows decades of falsified safety reports, fatal accidents and underestimated earthquake risk in Japan’s atomic power industry.  The destruction caused by last week’s 9.0 earthquake and tsunami comes less than four years after a 6.8 quake shut the world’s biggest atomic plant, also run by Tokyo Electric Power Co. In 2002 and 2007, revelations the utility had faked repair records forced the resignation of the company’s chairman and president, and a three-week shutdown of all 17 of its reactors.  With almost no oil or gas reserves of its own, nuclear power has been a national priority for Japan since the end of World War II, a conflict the country fought partly to secure oil supplies. Japan has 54 operating nuclear reactors -- more than any other country except the U.S. and France -- to power its industries, pitting economic demands against safety concerns in the world’s most earthquake-prone country.  Nuclear engineers and academics who have worked in Japan’s atomic power industry spoke in interviews of a history of accidents, faked reports and inaction by a succession of Liberal Democratic Party governments that ran Japan for nearly all of the postwar period.

Top Lies from TEPCO. Sound like BP? - Like British Petroleum, the Tokyo Electric Power Company has a history of playing fast and loose with the truth and endangering lives. So let’s drop the “What, Me Worry?” routine about nuclear energy. When cover-ups and preparing falsified records are part of the corporate culture, we’re not just getting hysterical, as some blindly pro-nuclear power folks would have it.We’re getting real.The horrible disaster we saw in the Gulf showed us plenty about what happens when industry and regulatory entities get too cozy and companies like BP are left to self-report on safety and are then actually trusted — by people as high up as the president of the United States — when they do. People die. Our natural world is polluted. Admittedly there are no means of producing energy that are entirely without risk. Birds do get caught in windmills. But when something goes wrong at a nuclear facility, ENTIRE CITIES CAN BE WIPED OUT. So while nuclear hawks blithely tell us that smart companies and their engineers will take care of making nuclear energy safe and sound, let’s remind them of the actual record.

TEPCO Director Weeps After Disclosing Truth About Fukushima Disaster - The Daily Mail has released a dramatic picture showing the emotional exhaustion of TEPCO managing director Akio Komori who is openly weeping as he leaves a conference to brief journalists on the true situation at Fukushima, following his acknowledgment that the radiation spewing from the over-heating reactors and fuel rods was enough to kill some citizens. "A senior Japanese minister also admitted that the country was overwhelmed by the scale of the tsunami and nuclear crisis. He said officials should have admitted earlier how serious the radiation leaks were. Chief Cabinet Secretary Yukio Edano said: 'The unprecedented scale of the earthquake and tsunami that struck Japan, frankly speaking, were among many things that happened that had not been anticipated under our disaster management contingency plans." This is precisely as Zero Hedge had expected would happen all along, following our recurring allegations of a massive cover up by the Japanese government. And furthermore as we predicted a week ago when we said that continued government lies and subversions would make the situation untenable once the population loses faith in the government, this is precisely what has happened.

Danger of Spent Fuel Outweighs Reactor Threat - Years of procrastination in deciding on long-term disposal of highly radioactive fuel rods from nuclear reactors is now coming back to haunt Japanese authorities as they try to control fires and explosions at the stricken Fukushima Daiichi Nuclear Power Station. Some countries have tried to limit the number of spent fuel rods that accumulate at nuclear power plants — Germany stores them in costly casks, for example, while Chinese nuclear reactors send them to a desert storage compound in western China’s Gansu province. But Japan, like the United States, has kept ever larger numbers of spent fuel rods in temporary storage pools at the power plants, where they can be guarded with the same security provided for the power plant. Figures provided by Tokyo Electric Power on Thursday show that most of the dangerous uranium at the power plant is actually in the spent fuel rods, not the reactor cores themselves. The electric utility said that a total of 11,195 spent fuel rod assemblies were stored at the site.That is in addition to 400 to 600 fuel rod assemblies that had been in active service in each of the three troubled reactors. In other words, the vast majority of the fuel assemblies at the troubled reactors are in the storage pools, not the reactors.

NRC Chair: "No Water In The Spent Fuel Pool" at Unit 4 - The chair of the U.S. Nuclear Regulatory Commission warned this afternoon that all of the water is gone from the spent fuel pool at reactor four of the Fukushima Daiichi nuclear plant, causing “extremely high” radiation levels. “We believe that secondary containment has been destroyed and there is no water in the spent fuel pool and we believe that radiation levels are extremely high which could possibly impact the ability to take corrective measures,” NRC Chair Gregory Jaczko told the House Energy and Commerce Committee.He suspected a hydrogen explosion occurred in the unit, due to the uncovering of the fuel in the pool. Asked for clarification, Jaczko explained “we believe at this point that unit four may have lost a significant inventory, if not lost all of its water.”The pools are designed to cool spent fuel rods. Without water, the exposed fuel rods risk overheating, which could lead to a melt down or explosion.

Radiation Plume to Reach Southern California Late Friday - A United Nations forecast of the possible movement of the radioactive plume coming from crippled Japanese reactors shows it churning across the Pacific, and touching the Aleutian Islands on Thursday before hitting Southern California late Friday. Health and nuclear experts emphasize that radiation in the plume will be diluted as it travels and, at worst, would have extremely minor health consequences in the United States, even if hints of it are ultimately detectable. In a similar way, radiation from the Chernobyl disaster in 1986 spread around the globe and reached the West Coast of the United States in 10 days, its levels measurable but minuscule. The projection, by the Comprehensive Test Ban Treaty Organization, an arm of the United Nations in Vienna, gives no information about actual radiation levels but only shows how a radioactive plume would probably move and disperse.

Radiation Travel Models - Wondering where that radiation's heading? Jeff Masters at WunderBlog has used NOAA's HYSPLIT model to forecast possible travel routes for Japan's radioactive particles based on weather systems and the jet stream. You can see his forecast tracks here. Beginning Saturday, he suggests, as the winds over Japan shift to southwesterly, radioactive emissions will begin being lifted high in the atmosphere: Since there is less friction aloft, and the high speed winds of jet stream increase as the air moves higher in the atmosphere, this radiation will undergo long-range transport. Latest trajectory runs... show that radioactivity emitted today [Thursday] and Friday could wind up over Alaska and eastern Siberia after five days, and radioactive particles emitted on Saturday could make it to Hawaii and California by late next week. As to how much radioactivity will be travelling across the Pacific, that's a lot more difficult to ascertain, since Japan hasn't released either measurements or estimates of the totals—numbers crucial to forecasting any potential health effects.

Feds deploy more radiation monitors in western US - Federal environmental regulators say they are adding more radiation monitors in the western United States and Pacific territories as concerns rise over exposure from damaged nuclear plants in Japan.The Environmental Protection Agency already monitors radiation throughout the area as part of its RadNet system, which measures levels in air, drinking water, milk and rain. The additional monitors are in response to the ongoing nuclear crisis in Japan, where emergency workers are attempting to cool overheated reactors damaged by last week's magnitude-9.0 earthquake and tsunami.

Is There Any Cure For Our Outsized Fear Of Nuclear Catastrophe?… It’s hardly a mystery why the ongoing nuclear crisis in Japan is so horrifying—and so riveting. A country already savaged by a 9.0-magnitude earthquake and 24-foot-high tsunamis is now facing the prospect of meltdowns at multiple reactors, with a handful of technicians risking their lives to avert further radiation leaks. But the crisis is attention-grabbing for another reason, too: The fear of nuclear disaster has long claimed a special hold on our collective psyche. Pro-nuclear advocates love to grumble that people are disproportionately, even irrationally, afraid of nuclear power. There’s certainly something to that complaint. According to a 1992 study by James Flynn, a researcher at Decision Research, the public in the United States and Canada seems to dread nuclear accidents more than any other type of disaster—even though the industry has amassed a commendable safety record. In Japan, it took an earthquake of apocalyptic force to cause serious problems at the Fukushima reactor. And, while the risk of calamity will never be zero, nuke fans note that other energy-related tragedies don’t get the same frenzied media coverage, whether it’s a deadly explosion at a natural-gas plant or the 13,200 Americans killed by coal pollution each year.

Why American Officials Have Been Criticizing the Japanese Nuclear Containment Efforts - Yves Smith - Some bloggers as well as readers in comments have been very surprised at and unhappy with the spectacle of American officials taking issue with the Japanese response to the crisis at the Fukushima reactor. For instance, the US recommended evacuation for a 50 mile radius from the facility, as opposed to the 20 kilometers, or 12 miles, established by the Japanese.The disparity in reporting appears to continue today. Bloomberg’s latest story on the nuclear disaster, which looks to rely on Japanese sources, take a “the worst is over” posture, noting that Tokyo Power hopes (stress on the hope part) to have a new power line out to the plant operational by early PM Tokyo time, which should enable some services, most important some of the water pumps, to be restored. By contrast, the New York Times, which appears to reflect the reading of American experts, is still pretty gloomy. The article cheerily titled “Radiation Spread Seen; Frantic Repairs Go On“ perversely starts by conceding that so far, the Japanese are right and the hazardous area appears to be just shy of their cordon.  Our Richard Smith, who has among his many talents knowing a bit about reactors (he wrote code for some systems for them) has been gobsmacked by the lack of remotely adequate information coming from the Fukushima site. Having worked with the Japanese (I was the first gaijin hired into the Japanese hierarchy at Sumitomo Bank when it was a leading player), let me hazard some informed guesses:

Radioactive Waste Piling Up at Savannah River Site: The 310 square mile Savannah River Site is located close to several major cities, including Augusta and Savannah, Georgia; as well as Columbia, Greenville, and Charleston, South Carolina. The site is owned by the Department of Energy's Savannah River Operations Office and managed by Westinghouse Savannah River Company. The facility was built in the early 1950s to produce plutonium and tritium for the U.S. nuclear arsenal. More than a third of U.S. weapons plutonium and almost all of its tritium was produced there. The federal government has stored the high level radioactive waste produced at the plant on site in 51 massive underground tanks with the aim of retrieving it and moving it elsewhere for safe storage. Although the liquid wastes can be drawn out and removed, the Energy Department's method for removing the most radioactive sludge out of the tanks has proven unsafe and alternatives are being explored.

Swedish firm applies to bury nuclear waste amid protests – A Swedish nuclear industry group applied to authorities Wednesday for permission to bury nuclear waste for the period it is unsafe, but Greenpeace protesters warned of the risks of leakage.If the plan is approved, Sweden could become the first country in the world to bury spent nuclear for the whole time it is considered dangerous, which is around 100,000 years.The Swedish Nuclear Fuel and Waste Management (SKB) applied to build an end-repository in Forsmark, in the centre of the country, and a mid-term storage capsule in Oskarshamn in the south, company spokesman Carl Sommerholt said.The application handed to the Swedish Radiation Safety Authority would see the waste from the country's 10 nuclear reactors buried 500 metres (1,640 feet) underground. "After 30 years of research, we feel we have a solution that, if built the way we suggest, will provide a secure end-storage system," Sommerholt told AFP.

Report: Non-nuclear clean energy to double by 2020 - As concerns mount over nuclear power safety in the aftermath of Japan’s massive earthquake, a new report says other energy sources not derived from fossil fuels are expanding and will likely double market share within a decade. Global revenue for solar photovoltaics (PV), wind power and biofuels jumped 35% last year, compared with 2009, growing from $139.1 billion to $188.1 billion, according to the 10th annual report Monday by Clean Edge Inc., a U.S.-based research and advisory firm. Most of this growth was due to a doubling in solar PV installations and steady growth in the biofuels sector. For the first time in a decade, however, the wind market showed a slight decline.The global market for solar PV skyrocketed from $2.5 billion in 2000 to $71.2 billion in 2010 and that for wind power surged from $4.5 billion in 2000 to more than $60.5 billion today, the report says.

U.S. will do new studies on Keystone XL tar sands pipeline - The U.S. State Department is going to require additional environmental studies before granting a permit for the 1,660-mile Keystone XL pipeline, proposed to carry oil from the tar sands of northern Canada through the U.S. heartland and on to south Texas. In an announcement Tuesday, department officials said they would open a new round of public comments on a Supplemental Environmental Impact Statement, to be released in mid-April, with a decision on whether to grant a permit for the controversial pipeline now expected by the end of the year. Pipeline opponents have long called for new environmental reviews, looking especially at the ability of a standard oil pipeline to safely carry the diluted bitumen found in the tar sands of northern Alberta. A study last month by three of the nation’s biggest environmental organizations and the Pipeline Safety Trust warned of a higher risk of corrosion-related spills linked to higher levels of abrasives, temperature and acidity in tar sands oil — claims that TransCanada, the pipeline builder, has rebutted. Download Keystone XL Fact Sheet TransCanada

What The Frack: Ohio Gov. John Kasich wants to open up state parks for oil and gas drilling - At the behest of then-Vice President Dick Cheney, an exemption was inserted into a 2005 energy bill — dubbed the “Haliburton loophole” — which stripped the EPA of its power to regulate a natural gas drilling technique called hydraulic fracturing. This method, called fracking, entails drilling a L-shaped well deep into shale and pumping millions of gallons of water laced with industrial chemicals — chemicals which the energy companies are not legally bound to disclose. The poisonous fluid fractures the shale and releases natural gas deposits for collection.Due to the documented water contamination issues surrounding hydraulic fracturing, both New York and New Jersey have imposed bans on fracking in their states. But the public health risk doesn’t seem to bother Ohio Gov. John Kasich (R) and state Republicans. The Ohio House introduced a bill early this month that would create a panel to open any state-owned land for oil and gas exploration to the highest bidder. This week, in an unreleased portion of Kasich’s proposed budget, the Ohio Department of Natural Resources would be given authority to lease 200,000 acres of state park land for oil and gas exploration.

 US Energy Consumption by Source (2009 pie graph)

OPEC: Global Oil Production Increased in February - The OPEC Monthly Oil Market Report came out on Friday.  This is one of three publicly available estimates of global liquid fuel production, and in this case it's the earliest to give figures for February.  As you can see in the graph above, the recent trend of pronounced increases in global oil production seems to have continued, notwithstanding the turmoil in the Middle East. I will update my other graphs in a few days when the IEA data also comes out.

IEA Confirms New Highs of Fuel Production - The IEA Oil Market Report came out today, and confirmed what OPEC said on Friday: global liquid fuel production reached a new high in February, notwithstanding the turmoil in the Middle East.  The graph above shows the three main public sources of "all liquids" fuel production, along with the spot prices on the right hand axis (though be aware that this is WTI spot prices, which have been anomalous lately). Just focussing on the last few years, the picture looks like this, showing the way in which current production has now comfortably surpassed the previous peak in 2008. It's worth noting that "all liquids", which is the best documented global oil production series, includes minority components like biofuels, syncrude from tar-sands, and natural gas liquids (with molecular weights all the way down to propane).  More conservative definitions of oil like crude-plus-condensate (C&C) have not yet passed the 2008 peak (but the data are several months behind the all liquids data, and I think it's likely the C&C signal will also reach new highs once the data is available).

Saudi oil production increased in February - The OPEC report of Friday gave us a first glimpse of Saudi production stats for February.  According to the data, production increased by about 300kbd from January.  But December and January data were also revised up, so the data (see above) now show a pretty noticeable increase of about 0.5mbd over the last few months.  The IEA will release their version of this in a couple of weeks, so we will get confirmation then.  And obviously, March will make clear both the degree of loss of Libyan production, and the extent of any Saudi response.

The Saudi King Just Unveiled A Big List Of Bribes So That His Citizens Don't Revolt - Saudi King Abdullah just gave a very brief speech to the country, as he hopes to avoid the winds of revolt. Sultan AL Qassemi has a list of some of the bribes he's offering his people: A two month bonus to all state employees. A two month bonus to all higher-ed students. More benefits to the unemployed. A higher minimum wage. 500,00 new housing units will be built. A new anti-corruption organization is being established. More housing loans will be made avaialble. In addition to the bribes, the king is also reiterating the illegality of critizicing mufits. 'All media must respect the islamic clerics.' Hilariously, there will also bea bigger budget for the 'Committee for the Propagation of Virtue and the Prevention of Vice.'

Future shocks in store - The ongoing power struggle in Libya is estimated to have reduced crude oil supply from the beleaguered nation to a third of its 1.6 million tonnes capacity. This has sent prices of Brent crude oil up by 15 per cent in the space of three weeks to three-year-high levels.  Higher oil prices have a variety of ramifications ranging from higher inflation in import-dependent India and China to derailing consumer confidence across Europe and the US.  Through his NBER working paper 16790 titled ‘Historic Oil Shocks' (, author Mr James Hamilton has sifted through 150 years of oil supply and price data and how they relate to recessions in the business cycles. The author's basic assertion that oil shocks, or violent spikes in the price of oil, are among the major contributing causes to the slowdown in the business cycle, is backed up by empirical evidence dating back to the 1970s.  The author's major observation is that ‘‘insofar as events such as the Suez Crisis and first Persian Gulf War were not caused by US business cycle dynamics, a correlation between these events and subsequent economic downturns should be viewed as causal''.

Japanese Earthquake: What will it mean for US Gas Prices? - For the past month or so, economists have grown increasingly worried that rising oil prices, in part driven by unrest in the Middle East, could halt the US economy's recovery. Some economists were predicting that a rise in gas prices could lower employment in the US by as many as 600,000 jobs. In fact, oil was quickly becoming one of the biggest economic fears. A recent poll of economists by the Wall Street Journal found that a number of the forecasters had upped their odds that the US could dip back into recession. The biggest reason given: Rising gas prices. The Japanese earthquake has taken the chance that we will be paying $5.00 a gallon gas by summer down from a good to nearly zero. That's not to say that the US will avoid an economic impact from the Japan quake. Investors all of a sudden do seem spooked about Japan. US stocks opened down 300 points on Tuesday. But the hit we take won't be from oil. Here's how the wacky, unfortunate calculus of an American economy hooked on oil works out: Senseless human-inflicted tragedy in the Middle East equals higher gas prices and economic trouble. Natural disaster in Asia that ended well over 10,000 lives, well that could put the US recovery right back on track.

Sarah Palin: Obama To Blame For High Gas Prices - Former Alaska Governor Sarah Palin blasted President Obama in a Facebook post on Tuesday, accusing his administration of intentionally pushing energy policies designed to drive up the price of gas."His war on domestic oil and gas exploration and production has caused us pain at the pump, endangered our already sluggish economic recovery, and threatened our national security," Palin wrote, before laying out three arguments that she used as proof that Obama was working to turn the thumbscrews at the gas pump. Palin alleged that Obama's signature of a deepwater oil drilling moratorium in the wake of the catastrophic rig explosion last year was just one sign that the president was intent pursuing policies detrimental to American consumers. The ban has since been lifted, and Obama has appeared more than happy to tout his administration's supposed openness to new oil exploration. Palin then went on to point to Obama's recently failed attempt to cut tax incentives for oil companies and seeming hesitance to green-light Arctic drilling operations as additional evidence of Obama's purported effort to cause pain at the pump. According to Palin, the residual effects on the price Americans pay for gas was no "accident."

Dems Blast Oil Speculators… Democrats are turning to their own dual argument — one that links oil-futures markets to fuel costs and attacks the GOP for proposing to cut the regulation of “speculators.” Pinning an increase in gas prices on oil speculation is not a new maneuver for Democrats, who made similar calls for stricter regulation by the Commodity Futures Trading Commission (CFTC) when gasoline hit $4 per gallon in the summer of 2008. But the Democratic return to blaming pump prices partly on Wall Street comes as Republicans press to cut CFTC’s budget by one-third, giving Democrats a fresh pushback against the GOP message that reining in EPA would help drive gas costs down. “There is no question” that speculation is playing a role in the rise in gas prices, Rep. Barney Frank (D-Mass.), who empowered CFTC to crack down on oil futures traders in last year’s financial reform law, said in an interview. The $56 million cut to CFTC included in the House GOP’s continuing resolution (CR), which passed Feb. 19, means the commission would “lose the ability to restrict that speculation,” added Frank, the top Democrat on the House Financial Services Committee.

On Energy, GOP Doesn't Know What the Problem Is: "Capitalizing on instability in the Middle East, last week House Speaker John Boehner and Senate Minority Leader Mitch McConnell blamed high gas prices -- which have shot up in response to fears of prolonged disruptions in the supply of crude oil -- on President Barack Obama's supposed reluctance to 'drill, baby, drill.' 'Americans looking at the price of gas at the pump these days are justifiably upset,' McConnell said. 'What they may not realize is that some in the administration are actively working to prevent us from increasing our own oil production here at home.' Aside from the factual inaccuracies -- domestic oil production rose to its highest level since 2003 last year -- at the heart of Republicans' long-standing approach to energy and transportation issues is a basic logical flaw: Republicans assume we can resolve shortages -- and continue to rely on automobiles to the degree that we do -- by increasing supply."

The GOP’s Oil Drilling Pipe Dream - Here we go again. Every time gasoline prices spike, no matter the reason, Republican leaders and talk radio’s libertarian elite reach for the American Petroleum Institute’s (API) latest talking points and crank up the “drill, baby, drill” rhetoric. The current uptick in the price at the pump is not actually due to a supply crunch. It is due to market speculation that current turmoil in the Middle East will spread and lead to supply problems.The notion that the U.S., which sits atop less than 3 percent of the world’s proven oil reserves, can drill enough oil to drive down prices if the flow is interrupted from a region with 64 percent of the world’s reserves is a pipedream. Over the past week a steady stream of Republicans, including Senate GOP leader Mitch McConnell (KY), House Speaker John Boehner, and House Energy and Commerce Committee Chair Fred Upton (MI), have taken to the airwaves to complain that the Administration’s cautious approach to domestic oil drilling has caused this problem. They are calling on the Administration to tap our nation’s “vast” oil reserves. Vast?

Expect Calls for More Drilling, Until Somebody Tells the Truth About Gas Prices - Within the green transportation community there's little argument over whether the longterm interests of the United States and world would be better served by having slightly-to-significantly more expensive gas. Hybrid and electric car owners aren't the only ones who understand this though. Secretary Chu seems to as well, and President Obama himself is almost certainly at least aware of the arguments supporting such a policy (even if it's one he wouldn't touch with a 10-foot poll.)  But in continuing to coddle the public by attributing “high” gasoline prices to temporary factors like political unrest in North Africa, the President is setting himself up to be hit again and again by the “drill baby, drill” crowd.

Iraqi Oil Production Reaches Post-Invasion High - With Arab populations revolting against their dictators, nuclear power plants blowing up and spewing radioactivity, and now western militaries about to start bombing Libya any moment.  I hardly know which way to turn. However, it's important not to lose track of the slower burning but equally important stories that affect the evolution of our global civilization.  One of these is Iraqi oil production.  Iraq is a country with enormous oil reserves that were rather under-exploited by regional standards due to the constant stream of wars and revolutions that have plagued the country for decades.  The graph above shows the last decade and a bit of oil production -you can see the declining production in the early aughties (due to UN sanctions on Saddam Hussein's regime), followed by the precipitous decline when the US invaded the country in 2003.  After that, production rebounded to a low level, improved a bit with the increasing stability in the country associated with the Petraeus surge, but then plateaued at or below 2.5mbd.

The Japanese Crisis and World Energy Prices -- Oil prices have fallen in the last few days, apparently because investors expect Japan’s damaged factories to consume less energy in the immediate aftermath of the earthquake. But in a new report on the economic consequences of the disaster, HSBC’s economics team suggests that the crisis may ultimately have the reverse effect on oil prices: [S]ome of the loss of output – notably from the stricken nuclear reactors – is permanent. Once a reactor is flooded with seawater, it is effectively decommissioned. A quarter of Japan’s electricity is provided by nuclear power, suggesting that any major loss will have to be replaced by alternative, imported, sources of energy. Demand for oil and gas may, therefore, rise. And if demand rises, so would price. If unrest in the Middle East persists, oil prices will be pushed higher from restrictions on the supply side, too.

Japan May Need 200,000 Extra Barrels of Oil Daily, IEA Says - Oil demand in Japan may climb by about 200,000 barrels a day if the country makes up the shortfall in nuclear power with crude-fired generation, the International Energy Agency said.  Japan shut 11 atomic reactors totaling about 9.7 gigawatts of capacity after being struck on March 11 by its largest recorded earthquake. The country has enough spare oil-fired plants to make up the loss, using only 30 percent of the crude generation units in 2009, the IEA said in its monthly Oil Market Report today.  Increasing the country’s natural gas-fired generation may also replace the lost nuclear plants, the agency said. Japan’s gas plants are currently running at only 55 percent of capacity. “If the shortfall were met entirely by oil, consumption would increase by roughly 200,000 barrels a day on an annual basis,” the report said. “The generation of an extra 60 terawatt-hours using only gas would require plants to operate at near 70 percent of capacity, implying an additional 12 billion cubic meters of liquefied natural gas a year.”

IEA Warns High Oil Prices Could Hit Growth - The International Energy Agency warned Tuesday of a "marked slowdown" in the global economy unless oil prices fall from current high levels as post-recession demand picks up. "If prices remain at current levels or rise further, by September 2011, if not before, the global economy may feature a marked slowdown," the IEA said in its monthly oil report. This effect would be exacerbated by expected fiscal tightening if inflationary pressures become entrenched, said the IEA which advises the industrialised world.While admitting that estimating the impact is "notoriously difficult," the IEA suggested that a 10 percent increase in the price of oil could cut global growth by between 0.2 and 0.7 percentage points after one year, and possibly by twice as much in the second year.

Why Bahrain Could Shake World Markets - The conflict in Bahrain may seem small compared to Libya – the country produces only 40,000 barrels of crude oil a day, a tiny fraction of world supply, and it economy is miniscule. But the religious nature of the unrest in the country has some potentially major implications for the world economy. “If the current Sunni regime is deposed, Iran's ability to provoke conflict will be enhanced,” notes Said Hirsh, Middle East economist for London based Capital Economics. For some time, Iran, which is largely Shiite, has been increasing its influence in the region (it is, for example, one of the major funders of Lebanon's Hezbollah). Allies include the Shiite government in Baghdad, as well as Syria. There are other areas where Iran could increase its influence, like Yemen, which is home to Shiite rebels. That could cause conflict on the border of Saudi Arabia, which contains 25 percent of the world's known oil reserves. If that happens, you can bet that oil prices, dampened recently by the Japanese nuclear disaster and the knock on decrease in global energy consumption, will shoot back up, and global stock markets could become volatile.

Bahrain's central location and geopolitical importance to the US and KSA - The tsunami in Japan has not only swept away many cities and town in Japan, it has also swept away the main-stream media's coverage of continuing civil unrest in some of the MENA countries. What perfect cover for the Kingdoms of Bahrain and Saudi Arabia, and UAE, to take strong action against the protesters in Bahrain: Troops from Saudi Arabia and police officers from the United Arab Emirates crossed into Bahrain on Monday under the aegis of the Gulf Cooperation Council to help quell unrest there, a move Bahraini opposition groups denounced in a statement as an “occupation.”  Bahrain, a small island with a population of about 1 million people (about half being an ex-pat labor force; Background Note: Bahrain), has a number of features that make it an important geopolitical pawn..

The Peak Oil Crisis: Protests, Tsunamis & Deficits- Events seem to be moving faster and faster these is coming to the point that one's world outlook has to be modified every few months as the old ways of looking at things are changed by events. So it is with oil -- supply, demand and, of course, price. At the beginning of the year the future of oil was thought to be mostly about China and how fast its economy and demand for oil would grow during 2011. In last two months, however, the world situation has changed markedly and we now have a multiplicity of factors vying to influence the global oil markets in ways as yet unknown. There are a few givens, however, that we can use as guideposts. First is that world oil production has already or is very close to reaching peak production. From here, it may creep up by a couple of million barrels a day, but then the inexorable laws of depletion will begin to take hold and global oil production will steadily melt away until it is no longer useful as a major source of energy. Although world population will undoubtedly peak and begin declining sometime in the next century or two this is unlikely to happen in the next decade or two.

Peak Oil Confronts Peak Idiocracy: What to Do?  - Political restrictions on international oil drilling by OPEC, Russia, and other national oil companies and dictatorships is driving international companies to drill in more extreme environments. Extreme offshore drilling is likely to increase for this reason, and because that is where most of the new giant oil fields are likely to be found. Such a movement into an extreme environment is becoming more difficult as the world confronts "peak manpower" -- which is the inevitable mirror image of "peak Idiocracy."  Due to differential birthrates and other global demographic change, the global average population IQ is dropping from near 90, ever closer to 85, then toward 80. In order to competently operate a high-tech infrastructure, a population needs to have an average IQ of 90 or above -- due to the nature of the IQ distribution, and the demands of high-tech jobs on a human brain. Energy operations -- particularly in extreme environments -- require competency and a minimal intelligence in order to avoid disaster. Many of the richest seafloor oil fields lie offshore of countries with some of the lowest average IQs, globally. Shipping in outside workers is the obvious answer, but there is a limit to the number of competent workers who are in the training pipeline, again due to global demographics.

The Economic Consequences of the Arab Revolt -  Roubini - Political turmoil in the Middle East has powerful economic and financial implications, particularly as it increases the risk of stagflation, a lethal combination of slowing growth and sharply rising inflation. Indeed, should stagflation emerge, there is a serious risk of a double-dip recession for a global economy that has barely emerged from its worst crisis in decades. Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the last five global recessions. The Yom Kippur War in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974-1975. The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980-1981. And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession. Oil prices also played a role in the recent finance-driven global recession. By the summer of 2008, just before the collapse of Lehman Brothers, oil prices had doubled over the previous 12 months, reaching a peak of $148 a barrel – and delivering the coup de grâce to an already frail and struggling global economy buffeted by financial shocks.

Libya says may give oil deals to China, India (Reuters) - Libya is considering offering direct oil block contracts to China, India and other nations it considers friends in its month-long conflict with rebels, Libya's top oil official said on Saturday.National Oil Corporation Chairman Shukri Ghanem said Libya's crude production had fallen to less than 400,000 barrels per day from about 1.6 million before the crisis and warned that oil exports might halt altogether if output is not restored. "Because of the situation, we will be looking at giving direct block contracts to countries ready to come and work in the country because we want to increase production," he said. He mentioned India, China and Brazil as examples of potential partners. He also urged Western oil companies to return their staff to Libya to help restore production, adding that all existing contracts would be honoured

How To Live In A World With Declining Oil Production - We don’t know precisely how oil supply will work out, but if it declines quickly, we need to think about how we can deal with such an outcome. A quick decline could come if some combination of events starts oil production on a downward spiral.For example, Middle Eastern revolutions could take a significant amount of production off-line. As a result, oil prices could spike, leading to recession and debt defaults in many countries. The resulting financial crisis could make it difficult to maintain the current level of international trade, and could lead to a sharp reduction in oil supply within a few years because repair parts and international expertise needed for extraction drops off greatly. This might be described as an application of Liebig’s Law of the Minimum. Oil is present, but various above-ground issues interfere with its production. Declining energy return on energy invested (EROI) will tend to make the situation worse, because it will tend to keep oil prices high and raise the need for investment capital. There is a possibility that lack of capital and failing international trade will also cause interference with the production of electricity, natural gas, coal, and uranium. Most of what we have been told are renewables (solar PV, large wind, electric cars) likely will cease to be manufactured in such a situation, since their production depends on the availability of fossil fuels.

World Energy Crunch As Nuclear And Oil Both Go Wrong - The existential crisis for the world's nuclear industry could hardly have come at a worse moment. The epicentre of the world's oil supply is disturbingly close to its own systemic crisis as the Gulf erupts in conflict.  Libya's civil war has cut global crude supply by 1.1m barrels per day (bpd), eroding Opec's spare capacity to a wafer-thin margin of 2m bpd, if Goldman Sachs is correct.  Now events in the Gulf have turned dangerous after Saudi Arabia sent troops into Bahrain to help the Sunni monarchy crush largely Shi'ite dissent, risking a showdown with Iran.  Russia's finance minister Alexei Kudrin warned on Wednesday that the confluence of events in Japan and the Mid-East could push oil to $200 a barrel in a "short-lived" spike, which would snuff out global recovery.  While there has been no loss of oil output in the Gulf so far, the violent crackdown in Manama on Wednesday left four people dead and risks inflaming the volatile geopolitics of the region

Radioactive Releases in Japan Could Last Months - As the scale of Japan’s nuclear crisis begins to come to light, experts in Japan and the United States say the country is now facing a cascade of accumulating problems that suggest that radioactive releases of steam from the crippled plants could go on for weeks or even months. The emergency flooding of two stricken reactors with seawater and the resulting steam releases are a desperate step intended to avoid a much bigger problem: a full meltdown of the nuclear cores in two reactors at the Fukushima Daiichi Nuclear Power Station.But on Monday, Japanese officials reported an explosion at the No. 3 reactor at Fukushima Daiichi, which appeared to be similar to a blast on Saturday at the No. 1 reactor.  NHK reported that the blast occurred when a combination of hydrogen and oxygen ignited.  Japanese reactor operators now have little choice but to periodically release radioactive steam as part of an emergency cooling process for the fuel of the stricken reactors that may continue for a year or more even after fission has stopped. That suggests that the tens of thousands of people who have been evacuated may not be able to return to their homes for a considerable period, and that shifts in the wind could blow radioactive materials toward Japanese cities rather than out to sea

Japan radioactivity could enter food chain, children at risk…Radioactive materials spewed into the air by Japan's earthquake-crippled nuclear plant may contaminate food and water resources, with children and unborn babies most at risk of possibly developing cancer. Experts said any exposure to radioactive materials has the potential to cause various kinds of cancers, with higher levels of radiation seen as more dangerous. But they said they needed more accurate measurements for the level of radioactivity in Japan, and the region, to give a proper risk assessment. "The explosions could expose the population to longer-term radiation, which can raise the risk of cancer. These are thyroid cancer, bone cancer and leukemia. Children and fetuses are especially vulnerable,"  "For some individuals even a small amount of radiation can raise the risk of cancer. The higher the radiation, the higher the risk of cancer," Radioactive material is carried by minute moisture droplets in the air. It can then be directly inhaled into the lungs, get washed down by rain into the sea and onto soil, and eventually contaminate crops, marine life and drinking water. Cow milk was also especially vulnerable, experts said, if cows graze on grass exposed to radiation.

MOX fuel rods used in Japanese Nuclear Reactor present multiple dangers - The mixed oxide fuel rods used in the compromised number three reactor at the Fukushima Daiichi complex contain enough plutonium to threaten public health with the possibility of inhalation of airborne plutonium particles. The compromised fuel rods supplied to the Tokyo Electric Company by the French firm AREVA. Plutonium is at its most dangerous when it is inhaled and gets into the lungs. The effect on the human body is to vastly increase the chance of developing fatal cancers.Masashi Goto, a reactor researcher and designer for Toshiba, told the Foreign Correspondents Club in Toyko the mixed oxide (MOX) fuel used in unit 3 of the Fukushima Daiichi nuclear facility uses plutonium, which is “much more toxic than the fuel used in the other reactors.” Goto said that the MOX also has a lower melting point than the other reactor fuels. The Fukushima facility began using MOX fuel in September 2010, becoming the third plant in Japan to do so, according to MOX supplier AREVA.

How Black Is the Japanese Nuclear Swan? The following is a guest post from friend of TOD Nicole Foss who blogs at The Automatic Earth as Stoneleigh. The subject of Nicole's master thesis at Warwick University was nuclear safety. Subsequently at Oxford Institute for Energy Studies, her research field was power systems, with a specific focus on nuclear safety in Eastern Europe.  The Japanese earthquake is a tragedy of epic proportions in so many ways. The situation continues to evolve, and the full scope of the disaster will not be understood for a long time. One critical aspect is the effect on Japan's nuclear industry, which provides over 30% of the country's electricity from 54 reactors. Some of the largest nuclear plants in the world (Fukushima Dai-ichi and Fukushima Dai-ni, 4696 MW and 4400 MW, respectively) are located close to the epicentre, and on the coast, directly in the path of the resulting tsunami:

Supply Disruptions of Power and Water Threaten Japan’s Economy - As the humanitarian and nuclear crises in Japan escalated after the devastating earthquake and tsunami, the impact on the country’s economy appeared to be spreading as well... “The big question is whether this will seriously affect Japan’s ability to produce goods for any extended period of time,” said Edward Yardeni, The Bank of Japan, in an effort to preempt a further deterioration in the economy, eased monetary policy on Monday by expanding an asset buying program. ‘‘The damage of the earthquake has been geographically widespread, and thus, for the time being, production is likely to decline and there is also concern that the sentiment of firms and households might deteriorate,’’ the central bank said in a statement.

Moody’s Sees Risk of Japan Reaching Fiscal ‘Tipping Point’ Sooner on Quake - Japan may “at some point” reach a fiscal “tipping point” if the market loses confidence in the soundness of government finances and demands a risk premium on government bonds, said Tom Byrne, a senior vice president at Moody’s Investors Service.  “The earthquake may have shifted such a potential tipping point a bit forward, unless Japan’s political parties are galvanized by the crisis to also address the country’s long-term fiscal challenges,” he said in an e-mailed note today.  Japan’s economy will recover and a fiscal crisis is not “imminent,” Byrne said.

Analysis: Japan quake risks severe near-term economic damage - A triple blow of earthquake, tsunami and one of Japan's worst nuclear accidents is set to damage the world's third largest economy, possibly more deeply and for longer than initially expected. Power outages and possible tax rises are likely to hurt companies and households and could outweigh the mild economic aftershock from the 1995 Kobe earthquake, given that oil prices and the yen are stronger and Japan's debt pile is much bigger. Rolling blackouts will start Monday, affecting businesses and households as the country grapples with its worst crisis since World War Two. More than 1 million people are without water or power and towns have been wiped off the map. Already saddled with debt that is double the size of its $5 trillion economy and threatened by credit downgrades, the government is discussing a temporary tax rise to fund relief work.

Certainties of Modern Life Upended in Japan - In a nation where you can set your watch by a train’s arrival and a conductor apologizes for even a one-minute delay, rolling blackouts have forced commuters to leave early so they will not be stranded when the trains stop running. Some stores have been stripped bare of essentials like rice and milk, leading the prime minister to publicly call for calm. All the while, aftershocks small and large rattle windows and fray nerves.  While workers struggle to avert nuclear meltdowns at stricken power plants 170 miles to the north, residents of Tokyo are wondering whether to trust the government’s assurances that they are out of harm’s way.  The string of disasters has revived the notion — dormant since Tokyo rose from the firebombed devastation of World War II — that this city is living on borrowed time. Many people are staying inside to avoid radiation that the wind might blow in their direction. Others are weighing whether to leave.

Measuring the economic aftershocks - In the short term, all agree that the disaster will hit Japan's output, conceivably tipping it formally into another recession. GDP shrank in the last three months of 2010. It is possible that output will now shrink in the first quarter of this year as well. Everyone can also agree that the Bank of Japan will do all it can to prevent the Japanese currency rising in response to the crisis. Bonds fell after the Kobe earthquake in 1995, but the yen rose to a record high as the economy moved into deflation. The BoJ doesn't want that to happen this time. We have already seen Japan's central bank inject an extra 15 trillion yen (£114bn;$183bn) into the economy this morning. It also offered to buy an additional 3 trillion yen of government bonds. This has helped to reverse the rally in the currency you saw in the early hours after the quake.  Finally, everyone agrees that the government will fund the vast majority of the reconstruction effort, almost certainly through some form of emergency stimulus programme, and that this is likely to boost GDP over the course of the next year or so.

Bank of Japan injects $98-billion more into system - Japan's central bank pumped billions more into the financial system Tuesday to quell fears that the country's banks could be overwhelmed by the impact of the massive earthquake and tsunami. Stocks slumped for a second day as a nuclear crisis escalated. Two cash injections totalling ¥8-trillion ($98-billion) came a day after the Bank of Japan fed a record ¥15-trillion into money markets and eased monetary policy to support the economy in the aftermath of Friday's 9.0 magnitude quake that has killed thousands. The injections have helped stabilize currency markets. But stock markets dived for a second day as investors unloaded assets amid escalating worries of a nuclear crisis. The benchmark Nikkei 225 stock average slid as much as 14 per cent after Prime Minister Naoto Kan warned residents near a damaged nuclear power plant in tsunami-ravaged northeastern Japan to stay inside or risk getting radiation sickness. It closed Tuesday down 10.6 per cent at 8,605.15.

Update: Make That 15 Trillion; BOJ Raises Liquidity Injection To JPY12 Trillion ($146 Billion -- Update: make that JPY15 trillion:The BOJ offered a combined 15 trillion yen ($183 billion) into the banking system on Monday in its first same-day market operation since the Greek debt crisis in May last year, to soothe market jitters in the wake of a devastating earthquake and tsunami that struck northeast Japan on Friday. The central bank's policy board will likely discuss whether the sharp fall in Tokyo stock prices and the potential damage from the quake to corporate profits warrant an immediate policy response, the sources said.  We have since learned that the extra 3 trillion will be use to buy government bonds. Hello QE, my old friend.

Japan Adds $183 Billion to Economy, Doubles Asset Purchases - The Bank of Japan poured a record amount of cash into the financial system and doubled the size of its asset-purchase plan to shield the economy from the effects of the nation’s strongest earthquake on record.  The central bank pumped 15 trillion yen ($183 billion) into money markets today to assure financial stability amid a plunge in stocks and surge in credit risk. Governor Masaaki Shirakawa and his board enlarged a program buying assets from government bonds to exchange-traded funds by 5 trillion yen, about one- tenth the size of the Federal Reserve’s quantitative easing. Policy makers said they were concerned corporate and household sentiment will worsen, with production set to decline in the aftermath of the temblor and an ensuing tsunami. The March 11 catastrophe killed an estimated number of more than 10,000 people, shut down factories, prompted rolling power cuts and sparked the risk of a meltdown at a nuclear power plant.  “The disaster will push down gross domestic product in the short run, and the BOJ wants to mitigate the deflationary impact through liquidity injections,”

Bank of Japan injects $245 bln into markets- Japan's central bank injected 20 trillion yen ($245 billion) into the money markets Tuesday in an effort to help calm financial markets, according to reports. The move was designed to ensure that banks have enough liquidity to meet a surge in demand from companies and households seeking to raise funds. The same-day funds injection came as Japan's unfolding nuclear crisis deepened on Tuesday, with an explosion at reactor No. 2 and as the danger spread to reactor No. 4 at the stricken Fukushima nuclear plant. Elevated radiation levels were reported in Tokyo as southerly winds carried the radioactive plume from Japan's eastern coast towards urban areas.

Japan central bank's cash injections hit nearly $700 billion amid disaster aftermath - Japan's central bank continued to flood money markets with cash on Wednesday, bringing its total emergency funding to nearly $700 billion as it tries to soothe fears about the economic impact of the catastrophic earthquake, tsunami and unfolding nuclear crisis. The latest offer of Bank of Japan funding came as stock markets bounced back from a steep sell-off that sent the benchmark Nikkei down 20 percent over two days to an almost two-year low. The index finished up 5.7 percent at 9,093.72. The Bank of Japan conducted emergency operations for the the third day in a row, bringing its total liquidity injection to 55.6 trillion yen ($688.3 billion) since Monday. By flooding the banking system with money, it hopes banks will continue lending and meet the likely surge in demand for post-disaster funds.

Earthquake to cost 3% of Japanese GDP: Barclays  -- Damage from Friday's earthquake and tsunami in Japan are likely to tally 15 trillion yen ($184.2 billion), or about 3% of the country's gross domestic product, according to an estimate by Barclays Capital. The bank's Tokyo-based economists said regions affected by the quake account for 6% to 7% of the Japanese economy, making the current disaster similar in scope to the 1995 Great Hanshin-Awaji earthquake centered in Kobe. Friday's temblor affected a region with an industrial infrastructure "surprisingly similar" to Hyogo prefecture, the area most affected in the 1995 disaster. Manufacturing makes up about a quarter of both regions, while services account for about one-fifth, and wholesale and retail about one-tenth, Barclays said

Rebuilding after the terrible tragedy in Japan - The awful human tragedy that is northern Japan following the earthquake and tsunami is also an opportunity to question the assumptions built into many American news reports about our own country. Reporters who ask the right questions and dig will find that the assumptions permeating what Washington politicians say range from faulty economics to utter nonsense. Here are some questions to ask and some facts and basic economic concepts to help journalists get to real answers, not canned talking point responses:
1. How will Japan finance rebuilding? By borrowing the money.
2. Why would interest rates fall as debt grows? Why aren't interest rates rising?
3. Who will loan money to the Japanese government, given its debt?
4. How will Japan pay for this debt? First, rebuilding northern Japan will produce an economic boom. Japan's ten-year notes currently pay 1.27% interest, down from an average rate of 1.39% over the last decade, according to Bloomberg Business News.

How Will Japan Finance Its Reconstruction? - Japan's Nikkei index has dropped almost 10% since the earthquake hit, but this is not what most analysts are really worried about.  Instead, they're looking at Japan's debt, and wondering how the government is going to finance a reconstruction that will require mind-boggling sums, as the BBC points out:  "The sum that Japan needs to borrow this year is the kind of number that boggles the brain: if you add together both the maturing debt that needs to be repaid and new borrowing to finance the deficit, Japan needs to borrow around a third of its $5.5 trillion GDP, excluding very short term debt, or more than half its GDP including short term debt."  That borrowing is going to come atop an already colossal debt burden--Japan's debt-to-GDP ratio is currently well over 200%.  This can't go on forever . . . is this when it stops? In the short term, no, for two reasons.  As Nomura points out in the BBC link, the Bank of Japan is . . . er . . . [insert some metaphor for supergoosing the money-supply that does not involve floods.]  In the short term the BOJ's actions may actually increase the price of Japanese bonds--and according to Nomura, the ratings agencies are probably going to cut Japan some "humanitarian" slack.

How will Japan pay for reconstruction? - MANY people have linked to Robert Peston's nice piece on the potential obstacle to Japanese recovery posed by its high debt level. Japanese sovereign debt is in a league all its own. Its gross-debt-to-GDP ratio may reach 228% this year—more than twice the ratio in America. There is some concern that reduced expectations for growth associated with the immediate disaster may combine with expectations for increased spending associated with the reconstruction effort may shift debt worries in a definitive fashion. Maybe, it's suggested, markets will finally tire of holding Japanese debt and (another) crisis will strike. Two factors lean against this argument. One is that Japanese households are voracious savers and hold much of Japan's outstanding debt. This structural feature of the Japanese economy makes a sudden flight from Japanese debt unlikely. OF course, someone has to keep buying the newly issued debt, of which there is plenty. Japan's savers might be willing, but amid crisis it's not clear that they'll be as able. The Bank of Japan, on the other hand, may be. In addition to a massive release of liquidity to maintain financial market stability, the Bank has promised to double its asset-purchase plan, which will help absorb some of the additional debt. I suspect it is this action that led Japanese bond yields to fall in the immediate wake of the disaster. The question is: to what extent is the Bank of Japan willing to run with this activity? If bond yields were to rise, would the Bank of Japan take additional action?

Will Japan's quake be the costliest ever? - As rescue teams and government officials sort through the rubble caused by Friday's earthquake and tsunami, we're getting a clearer picture of the damage done by the catastrophe – and it doesn't look good. Perhaps Japanese Prime Minister summed up the situation best when he said the quake presented the worst crisis for Japan since World War II. Thankfully, even as the death toll mounts, this quake won't be the costliest in terms of human life. However, it could well be the costliest in terms of money.AIR Worldwide estimates that insured property losses from the quake could reach as much as $35 billion. That's a very preliminary projection, of course, but if it is anywhere near the final figure, Friday's quake in Japan would easily be the costliest on record, potentially dwarfing the losses incurred from the 1994 California earthquake, and making it the second-most expensive natural disaster ever, after Hurricane Katrina. Another modeling firm, Eqecat, estimates total losses to homes, factories, infrastructure and other property caused by the quake and tsunami could exceed $100 billion.

Japan disaster more expensive than Katrina -- The earthquake and tsunami that slammed Japan on Friday will likely wind up topping Hurricane Katrina as the most expensive disaster in history, according to a leading firm that estimates such losses. Jayanta Guin, senior vice president of research and modeling for AIR Worldwide, said that it still too early to come up with even a preliminary estimate for the total losses, but that it is clear that it will "be far greater than we experienced in Katrina."That 2005 hurricane, which devastated New Orleans and the U.S. Gulf Coast, had estimated losses of $125 billion, according to the Insurance Information Institute.  Nearly 3,400 were confirmed dead as of Tuesday1 morning in Japan, with nearly 7,000 more still missing and nearly a half-million in shelters due to both damage to their homes and the risks of meltdowns at nuclear reactors damaged by the disaster.

Japan's Losses: Who Pays? - It was only natural that shortly after the disaster in Japan, peoples' thoughts turned to global insurance markets.  Insurers and reinsurers took a beating after events like Hurricane Andrew, 9/11, and Katrina, so why not this? But it turned out to be more complicated than that.  Japan's government is extraordinarily protective of their domestic markets, including the market for insurance.  While there are some foreign insurers operating there, the exposure was not nearly as large as you might have thought. That left the question:  who pays?  According to the New York Times, the answer is that while the global reinsurance industry will bear some substantial losses, in many cases, the losses will be borne by the government--or by people and companies whose insurance does not cover the damage that was done.  The nuclear industry was required to buy insurance through a special industry insurer with liability limits that now seem laughably small--about $2 billion.  And many of the damages simply aren't insured at all:

The Wave from Japan - Unless Japan's nuclear power mishap worsens severely, there's little reason to fear an economic spillover in the U.S., Mark Zandi tells CNBC."...The U.S. and global economies will not be materially impacted by the Japanese disaster, assuming of course that the nuclear crisis abates without any significant spillage of radioactive material. The principal linkages between Japan and the U.S. global economies are trade, financial markets, and commodity markets. The U.S. trade balance with Japan will not be significantly impacted. U.S. exports to Japan will suffer somewhat, but mitigating the impact is that the U.S. exports things the Japanese will need more of including agricultural and food products and pharmaceuticals. Moreover, U.S. imports from Japan will also weaken as Japanese producers will shift some production of vehicles, semiconductors and computers to the U.S. where Japanese companies have excess capacity. Interest rates will not be materially impacted as the Bank of Japan is upping its quantitative easing and the Federal Reserve is now much more likely to complete QE2..."

Satyajit Das: The Economic Calculus of Japan’s Tragedy - The only known is that the earthquake, tsunami and its aftermath have destroyed significant infrastructure and inflicted heavy loss of life. The death toll likely to reach several thousand and the destruction of 60,000 homes and other buildings testifies to the scale of the disaster. Initial estimates suggest that the three most affected prefectures account for a combined 6-8% of Japanese Gross Domestic Product (”GDP”). This is roughly half that of the earlier Kobe earthquake, making it economically less significant. The affected region has manufacturing plants (cars, chemical, electronic and beer), energy infrastructure (as everybody now knows!) as well as agricultural, forestry, and fishery industries.Losses are currently estimated at between US$100-200 billion. Kobe resulted in approximately Yen 10 trillion of damage (around US$102 billion), equating to around 2.5% of Japan’s GDP at the time. These are only the direct costs. When the full economic, social and human impact is factored in, the real damage will be much larger. The disaster has disrupted economic activity. A number of industries have been forced to suspend production temporarily. The major issues are the supply of electricity, water, transport, telecommunications and other essential services.

More on Japan - I wanted to add a few quick additional comments to Ilan Noy's reflections on the possible economic implications of the tragedy in Japan. In assessing the economic consequences, it's useful to draw a distinction between narrow-swath and wide-swath disasters. In a narrow-swath event like 9/11, the destruction was horrific but was narrowly focused, leaving intact the response infrastructure and allowing immediate access to the impacted areas. In a wide-swath event like Katrina, the nature of the disruption made it very difficult logistically for any emergency or relief operations to function, and returning to some sort of normalcy was a very difficult process. In the current situation, Japan's damaged infrastructure includes electricity generation and transportation. Fear of radiation could hamper not just immediate relief efforts, but could profoundly influence all kinds of spending patterns, which I could easily see exerting big effects on demand in addition to the obvious considerations on the supply side. To paraphrase Franklin Roosevelt, the fear itself could cause more economic damage than the physical events themselves, and the physical damage was of course itself quite awesome and frightening.

Meltdown Macroeconomics - Krugman - Life and business go on; so I guess we have to talk about the economic impact of the Fukushima nightmare. One set of impacts involves disruption of supply chains: Japanese chips and other components are an important part of world manufacturing — you really need to think of China, Korea, Japan and so on as being part of an East Asian manufacturing complex –and it’s not clear yet just how much damage will be done.  But what I’m hearing a lot is worries about financial impacts. Japan will clearly have to spend hundreds of billions (dollars, not yen) on damage control and recovery, even as revenue falls thanks to the direct economic impact. So Japan will become less of a capital exporter, maybe even a capital importer, for a while. And this, so the story goes, will lead to soaring interest rates. But so far, um, not. Japan 10-year: And US 10-year:   What’s going on? The story about rising interest rates would be right in normal times. But we’re not in normal times: we’re — still — in a liquidity trap, with short-term rates up against the zero lower bound.

Economists Examine The Disaster In Japan - The death toll in the Japan disaster has now risen above 2000, but the final tally will very likely amount to 10,000 people or more. The threat of a dangerous radioactive cloud at Fukushima Dai-ichi remains in play. Tens of thousands of people are homeless. The 8.9 earthquake has caused the worst humanitarian crisis in Japan since World War II, when the United States dropped not one but two ... uh ... never mind.  For the Western press, the initial shock of the diaster has now worn off, and now it's time to talk about the important stuff. And what is the really important stuff? Japan's economy, dummy! And how it affects our economy. Here's from the New York Times' Disruptions of Power and Water Threaten Japan’s Economy— “The big question is whether this will seriously affect Japan’s ability to produce goods for any extended period of time,” said Edward Yardeni, an independent economist and investment strategist. Yes, siree! That's the big question, for sure. As opposed to finding, identifying and burying the dead, or providing a lifeline to the homeless. But never mind all that.  The Times can alway count on the soulless zombie Mark Zandi to give us the big picture.

Japanese Electricity Usage - Ed Yardeni -The fact is that Japan’s economy, the third largest in the world, is in big trouble. The country’s Federation of Power Companies provides monthly data on electric power consumed by large users. It rebounded 25.7% from a cyclical low of 19.4 billion Kwh during March 2009 to 24.3 billion Kwh during January 2011. That was still 5.3% below the record high during February 2008. By some accounts, Japan’s electricity output may now be down by at least 25%. That would put usage by large users back at a recession reading of around 18.0 billion Kwh.

Japan May Face ‘Irreversible’ Damage to Its Power Capacity, Citigroup Says - Japan may face “irreversible” damage to power-supply capacity from the March 11 earthquake, limiting business activity, Citigroup Inc. said. “Particularly worrying is the serious blow to the power supply in eastern Japan,” Kiichi Murashima, chief economist at Citigroup Global Markets Japan in Tokyo, said in an e-mailed note dated yesterday. “It is difficult to tell how long this will remain a drag on corporate activity.”  Power supply may be reduced by 54 percent under a worst- case scenario to companies reliant on Tokyo Electric Power Co., Murashima said. That calculation is based on the company suspending operations at all nuclear plants and thermal power plants being unable to resume operating, the note said.

Massive blackout possible for Tokyo -- A massive blackout could envelop the Tokyo area because of increased power demands due to cold temperatures, the Japanese government warned Thursday.  The possibility of the blackout was raised even as Tokyo Electric Power Co. called for rolling blackouts for a fourth consecutive day Thursday in parts of the Kanto region to counter power shortages in the aftermath of last week's 9-magnitude earthquake, Kyodo News reported.  Economy, Trade and Industry Minister Banri Kaieda said a massive blackout could occur despite power-rationing.  Some areas in the Kanto region Thursday could expect scheduled blackouts twice, Kyodo reported.

Alphaville: The situation in Tokyo, a view from the ground - The US embassy website said it all about the situation in Japan on Thursday: The U.S. Embassy in Tokyo informs U.S. citizens in Japan who wish to depart that the Department of State is making arrangements to provide transportation to safehaven locations in Asia. The US move is the most chilling sign yet of how grave the situation is at Japan’s crippled Fukushima nuclear power plant. It is also an acknowledgement that available transport simply can’t keep up with the growing stampede out of Tokyo. Those of us remaining in Tokyo — and among expats, there aren’t many — started the day seeing images on Japanese television of helicopters hovering above the stricken plant, trying to drop water on overheating reactors to cool melting fuel rods.That set the tone for another disturbing day. The yen strengthened to a post-war record high against the dollar, for reasons earlier explained by FT Alphaville but which still makes it all look very odd. Power cuts may begin kicking-in in Tokyo soon, though these will probably be in such a way as to create utter confusion, leaving businesses from restaurants and bars to banks and brokers, mystified by when electricity would be cut and for how long. That combined with food shortages, transport disruptions, the closure of many businesses, cancellation of all key events, from concerts and conferences to big business meetings  and even the annual Tokyo Fashion Week — and a general sense of rising panic.

How a Legacy From the 1800s Is Making Tokyo Dark Today - A strange legacy of the Japanese power system’s infancy in the late 1800s is complicating efforts to keep Tokyo supplied with electricity.The problem, as explained by IDG News Service’s Martyn Williams, is that half of the country uses power whose current alternates at 60 Hz, while the other half gets its power at 50 Hz.The discrepancy has to do with the founding of electric power in the country. Tokyo Electric Light Co. used German generators, which operated at 50 Hz, while in the west part of Japan, Osaka Electric Lamp Co. used generators from General Electric, an American company, operating at the same 60 Hz standard that is used in the United States to this day. While it’s possible to connect the two grids, the frequency-changing stations required can only handle up to 1 gigawatt. When the quake hit, it shut down 11 reactors including three that were in operation at the Fukushima Daiichi plant that is now at the center of Japan’s nuclear problems. With the 11 reactors offline, 9.7 GW was gone from eastern Japan’s electricity production capacity.And that’s the root of Tokyo’s current electricity problems: Utility companies in west Japan are unable to make up for all of the lost power.

The end of Japan as an industrial power? - I don't mean to be apocalyptic here,  in the face of the terrible tragedy hitting the Japanese people.  But I think the current crisis is going to accelerate the aging of Japanese society, especially if the nuclear disaster gets worse.  And  I'm wondering whether we are seeing the beginning of the end of Japan as an industrial power.  Think about this from the perspective of an executive running a major Japanese manufacturer.  In the short-term, when you are facing all the problems at home,  you may find it appealing, wherever possible, to 'temporarily' switch over much of your production to either China or the U.S., your two major markets.  This can be justified, patriotically, as the need to keep up profits to help fund the reconstruction of Japan. But you may not want to move that  production  back again. In the medium-term,  as you consider how much to invest in rebuilding your factories and infrastructure in Japan,  you will face a demographic problem-the coming collapse of the working-age population. Take a look at this chart:

Japan Risks Credit Crunch As Yen Thunders - Japan is in imminent danger of a credit-crunch with global implications unless the authorities stabilise Tokyo's stockmarket and take overwhelming action to stop the yen exploding to record levels. Akito Fukanaga from RBS warned of a "financial shock" as banks and insurers comes under strain, and investors focus on the nexus of structured products linked to the yen.  "Preventive measures on the financial front are urgently needed. Sentiment has declined severely and there are concerns over capital erosion at financial institutions. Lower stock prices and yen appreciation are on the verge of triggering a credit crunch," he said. The yen's violent move late Wednesday to a record ¥76 against the dollar - smashing historic lines of resistance - has gone far beyond levels that automatically set off secondary effects through derivative contracts.

Yen surges to all-time high in chaotic trade (Reuters) - The yen soared to a record high against the dollar on Thursday in chaotic trading as a break of the previous peak triggered a host of stop-loss and option-related selling, which in turn caused a cascade of algorithmic sales. While the escalating nuclear crisis and subsequent rush for safety was the initial spur for the move, this latest lunge higher in the yen was more about positioning. All sorts of exotic option and structured products were being stopped-out, while many Japanese margin traders were forced to bail from leveraged trades funded in yen. Dealers said the market was increasingly disorderly with liquidity evaporating and bids pulled, leaving huge gaps in the charts. Many were actively hoping the Japanese authorities would intervene to provide some liquidity and restore order. "It's mayhem out there," said one trader at a Australian bank in Sydney. "The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in."

FX markets deal Japan another blow -  If FX moves were measured on the Richter scale, this one would be a monster — the yen managed to strengthen by 4% against the dollar and almost 6% against the Australian dollar in a matter of minutes. This move is overwhelmingly due to technicals, rather than fundamentals: you don’t get jumps like this because people have donated a few million bucks in aid which is now being converted to yen. And on the face of it the move doesn’t make a lot of sense: countries’ currencies are just as likely to fall in the wake of a natural disaster as they are to rise. But what we’re seeing here is a function of ultra-leveraged hedge funds unwinding their carry trades. If you borrowed yen and invested in higher-yielding currencies like the Australian dollar or the South African rand, you made lots of money so long as the rate of appreciation of the yen was lower than the interest rate you were getting in the target currency. But when the yen starts to appreciate dramatically, you get margin calls, which force you to buy a lot of yen in an illiquid market, which in turn drives the yen up even further, which in turn not only increases the size of your margin call but also triggers a large number of stop-loss orders and other triggers embedded in exotic FX options. The result can be massive, as we’ve just seen.

The Yen and the Earthquake - Dramatic events in currency markets this week. First, the value of the dollar vs the yen fell substantially on Monday through Wednesday. Then on Thursday the plunge in the dollar/yen exchange rate deepened, finally to be followed by the announcement yesterday evening of a highly unusual coordinated action by the world's major central banks to prop up the dollar against the yen. What's going on here? Why have traders been so eager to buy yen in the wake of the disaster in Japan? After all, wouldn't common sense suggest that the disaster will weaken the Japanese economy, and by extension weaken the yen? But clearly common sense is missing something in this situation. It's always difficult to forecast exchange rate movements, largely because there are so many different forces that have often countervailing effects on currencies, and it's rarely possible to tell which force is going to prevail. But to help understand the complexity of the issue, here is a list of a few forces (note that this is certainly not an exhaustive list) that will be acting on the yen as a result of the disaster:

"Wow. That's all I have to say, just wow." Maybe someone can help me understand the following: “Speculators are becoming increasingly confident about pushing the [dollar/yen] currency pair around,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “Everyone is curious to find out why they chose not to defend the 80 level. Wow. That’s all I have to say, just wow.” The yen gained to 77.48 per dollar at 5:42 p.m. in New York after passing its post-World War II high of 79.75 reached in April 1995, from 80.72 yesterday. For those who don’t follow the yen closely, 77 is an insanely high level.  Japan’s currency is showing amazing strength, and the BOJ is nowhere to be seen.  Tight money in an economy that shows no signs of overheating—unless you count nuclear power plants.    I don’t get it, but then I’ve never understood anything the BOJ did or did not do.  It pains me to write this post, as I am a big fan of Japanese culture.  Although I have never been there, I love the country.  But the truth is that Japan is not particularly good at handling disasters (as we found out after Kobe), and of course has a very spotty record on nuclear safety.  On the other hand there may be a tendency for people to get overly emotional about nuclear issues, so I really don’t know whether markets are over- or under-reacting.

G-7 countries announce joint currency intervention - Finance officials from the Group of Seven major industrialized countries have agreed on coordinated currency intervention to support Japan's economy following a devastating earthquake.  It will mark the first time the G-7 countries have jointly intervened in currency markets since the fall of 2000.  In a joint statement issued following emergency discussions, the G-7 officials said that the United States, Britain, Canada and the European Central Bank will join with Japan in a "concerted intervention" in currency markets Friday.

Yen falls after G7 deal, further downside seen  - Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market, the first joint action in over a decade. The dollar jumped nearly 3 percent on the day to as high as 81.48 yen, extending a rebound from a record low of 76.25 yen plumbed on Thursday. The selloff in the previous session came after a break of the 1995 record low of 79.75 triggered a cascade of automatic sell orders in thin trade. The yen has climbed steadily since last week's earthquake, as Japanese and international investors closed long positions in higher-yielding, riskier assets such as the Australian dollar, funded by cheap borrowing in the Japanese currency. Expectations that Japanese insurers and companies will bring money home to pay for claims and reconstruction also contributed to the yen's strength. Some analysts doubted any intervention would be effective, given past experiences by the Bank of Japan and the Swiss National Bank.

Frantic phonecalls ahead of G7 yen move bring back chilling memories - For veterans of the credit crunch, including the Bank of England's chief economist Charlie Bean, the late night emergency phone call must have brought back chilling memories of the days in late 2008 when they were racing to prevent the collapse of the entire global financial system.On the surface, the aims of Thursday night's co-ordinated currency intervention were much more modest – to cap the wrenching rise in the Japanese yen triggered by last week's earthquake, and the unfolding crisis at the Fukushima nuclear plant. But the world's economic policymakers had much deeper anxieties than the direct impact on Japan's export-driven economy of an unwanted currency appreciation. If we learned anything from the credit crunch, it is that a confidence-crushing event in one part of the world can rapidly be transmitted worldwide – and amplified – by movements in volatile financial markets.As Bank of England governor Mervyn King pointed out in a recent speech, many of the imbalances that were the catalyst for the financial crisis – massive trade deficits, eye-watering sovereign debts, out-of-kilter currencies – have been left unresolved.

Coordinated Forex Intervention "Works" - From Reuters: A coordinated move by central banks of rich nations to stabilize the yen's value appeared to be having a decisive effect on Friday, after a sharp rise in the yen after Japan's devastating earthquake and nuclear crisis raised fears about the global economy. The action by the Group of Seven, in which they poured billions of dollars into markets, was the first joint intervention in currency markets since the G7 came to the aid of the newly launched euro in 2000.  The U.S. dollar surged two full yen to as much as 81.98 yen in response, up from a record low of 76.25 hit on Thursday. Traders estimated the Bank of Japan alone bought more than $25 billion, paying with yen to effectively weaken the currency's value by boosting the supply. ...The impact on the USD/JPY exchange rate is shown in Figure 1 (down is an appreciation of the Yen against the dollar).

Quake Response Puts Yen on the Line - In order to maintain Japan's position as a net-exporter of manufactured goods and net-buyer of US debt, the yen needs to stay down. So, the G-7 group of the world's leading economies has intervened in the foreign exchange market by selling yen holdings, thereby pushing the currency down. In the short-term, their efforts appear to have been "successful," with the yen dropping sharply today. Theoretically, this action is being taken to preserve export earnings, but this is only a secondary effect. Primarily, in making this move, the G7 is saying that the key to rebuilding Japan's earthquake-ravaged economy is to raise the price of everything it needs to buy.   After all, absolute purchasing power is far more important than nominal export earnings. When the yen gains in strength, Japan earns more dollars from its exports, which could now be used to purchase the raw materials necessary to rebuild its infrastructure. However, by weakening the yen, Japan earns fewer dollars for its exports, increasing the economic burden of reconstruction. Conventional wisdom is that a weakening currency is a boon for economic growth and exports; however, history does not support this view.

It's lonely at the top: now it's up to the Bank of Japan to hold the yen down - Rebecca Wilder - Wow, FX space is totally rattled this week: the yen hit 76.25 against the dollar at the end of the day on March 16 and has since rebounded to current levels 80.90 (1:50pm in NY on 3/18). What happened over this time span? Mass speculation on yen appreciation due to earthquake-related repatriation, followed by technical levels being hit that drove the yen up against the dollar, and a collapse of the dollar against the yen (spike downward in the chart below). And then yesterday the G7 central banks (the Bank of Japan, Bank of England, European Central Bank, the Federal Reserve, and the Bank of Canada) agreed to coordinate a weak-yen effort. Today the yen is off 2.7% against the dollar. Note: In the chart above, a decline in the USD/YEN is an appreciation of the Japanese yen and a depreciation of the US dollar. The chart above illustrates the daily fluctuation of USD/Yen since the Tōhoku earthquake on March 11. The coordinated depreciation of the yen against its major trading partners is 'concerted', and such an effort has not occurred since September 2000 when the G7 bid up the euro. The yen effort is very different, as I'll explain below. Furthermore, ongoing weakness in the yen against the rest of the G7 currencies depends on further actions by the Bank of Japan into next week and beyond.

Cash Demand Soars; Banks Brace For Withdrawals - Demand for cash is growing rapidly after the March 11 earthquake as people, mainly in eastern Japan, fret over aftershocks, nuclear accidents and possible blackouts. The number of bank notes in circulation has surged by an estimated 1.8 trillion yen since the start of the week. Cash demand tends to increase at this time of the year anyway, ahead of the three-day vernal equinox holiday. This year demand has spiked, climbing more than sevenfold compared with the same period last year. "Cash withdrawals have ballooned, as banks and other financial institutions have stored more cash than usual to prepare for such cash withdrawals," said an official at Tokyo Tanshi Co. According to documents released by the Bank of Japan, an extra 1.76 trillion yen of bank notes will have been issued by the end of this week.

Why no looting in Japan? - Amidst the heartbreaking devastation in Japan, many have noticed (especially this blog from the Telegraph) how much social solidarity — and little stealing — there has been. The Telegraph blogger Ed West notes vending machine owners giving out free drinks, in contrast to large-scale looting after Katrina.Economists have been saying for a while that trust is a good candidate to be a major determinant of development. Think how much contract enforcement is critical to make trade and finance possible. Think how much easier contract enforcement is when nobody tries to cheat. This is supported by empirical studies correlating per capita income with a measure of trust, like that shown below, which is computed as …oh forget that, the current example is much more compelling.Responding to tragedy, the Japanese have resources because they are rich, and it was their social solidarity that helped get them there.

Japan can meet the earthquake test - If any civilisation is inured to such tragedies it is Japan’s. Its people will cope. This seems certain. A bigger question is whether something more positive might emerge from the tragedy. Japan’s bickering politicians are on trial. Can they sustain the mood of national unity? If so will they use it to take Japan out of the doldrums of the past two decades? What, then, are the economic consequences of a calamity on this scale? Most directly, it destroys wealth and disrupts the economy. Noteworthy, in this case, is the impact of the calamity on attitudes towards – and the future of – the global nuclear industry. Losses must also be shared between those directly affected and insurers, both private and public. Then will come a surge of reconstruction, which reallocates spending and, at a time of economic slack, is likely to raise it, too. The impact on spending will, in turn, affect the country’s monetary and fiscal positions and external balance.  All this is clear, qualitatively. It is far harder to make reasonable quantitative estimates, not least because the nuclear crisis is ongoing. In its thorough way, Goldman Sachs has produced an estimate of the total cost of damage to buildings, production facilities and so forth of some Y16,000bn ($198bn). That would be 1.6 times the destruction from the 1995 Hanshin earthquake, which devastated Kobe.

What Does the Earthquake Mean to Japan’s Fiscal Future? - There is no doubt that this terrible earthquake is worse than the Kobe tragedy of 1995. Kobe was a 7.4 on the Richter scale, but the quake that hit Sendai was 8.9 — many hundreds of times more powerful. And then there was the tsunami. The devastation is so great that no one knows how catastrophic it is likely to be in the end. But the worst of it lies ahead. People are slowly beginning to imagine how the country will cope going forward, but it didn’t take the blink of an eye for the fiscal deficit hawks to descend in force. They suggest that Japan can ill-afford another big round of government expenditures, given what they call its looming “national insolvency.” How must it feel to people in shock to hear the news bulletins telling them that their government is broke and unable to help the population? Particularly when it isn’t true.

Japan Catastrophe Sends Shock Waves - As the situation at the Fukushima nuclear plant continues to deteriorate, increasing panic has gripped Japan and the world. By early Thursday, last-ditch attempts to prevent a full-blown disaster appeared desperate, and fears about the status of spent fuel at the plant added to speculation that the authorities were withholding vital information about the scope of the catastrophe.  The signs of distress to the plant struck by a magnitude 9 earthquake last Friday are everywhere; foreigners are leaving the island nation en masse. In North America, which is down wind from Japan, frantic buying led to a shortage of potassium iodide and Geiger counters. A number of countries, including Germany and China, halted operations at older reactors and/or construction plans for new nuclear power plants, pending an exhaustive review, and it now appears that a major debate on the future of nuclear energy will follow.  The wider geostrategic consequences of the crisis are only beginning to emerge, and speculation ranges from a new economic recession to repercussions in the Persian Gulf and global energy markets.

Roubini Earthquake Gloom Meets ‘Shock Doctrine’ - Economist Nouriel Roubini has a point when he says the earthquake came at the “worst time” as Japan struggles to reduce its massive debt. Let’s go the other way for a moment, and explore three potential silver linings from this quake.  One, it’s a wake-up call. Japan dithered for years as deflation deepened, wages stagnated and public debt exceeded gross domestic product. The days before Friday’s quake saw Japanese politics at its worst. Foreign Minister Seiji Maehara, a 48-year-old who had been tipped to be the next prime minister, was browbeaten into resigning over a clerical error. His campaign received 250,000 yen ($3,053) since 2005 from a South Korean woman residing in Japan. By Friday morning, before the quake, the opposition was digging up similarly petty dirt on Prime Minister Naoto Kan.  Such complacency and distraction is no longer an option. Japan’s leaders must now roll up their sleeves to rebuild after the strongest earthquake on record. And they must do so without the luxury of massive borrowing. As Roubini, co-founder of Roubini Global Economics LLC in New York, says, a “shock like this” complicates reining in the world’s biggest public debt.

Will Japan's quake rock the world economy? - I think the main impact of Japan's crisis will show itself in supply chains. Japan is tightly integrated into global manufacturing networks and is an important supplier of tons of stuff the world needs, from steel to semiconductors. So any disruption of supply of components and materials in Japan will ripple through those supply chains, potentially causing shortages or interruptions that would hamper factory operations around the world. It's hard to tell at this point how severe the overall impact might be, but based on what's going on in Japan's industrial sector these days, problems seem inevitable. Factories are shut across the country, and with power shortages and transport a mess, industrial production is unlikely to get back to normal for weeks. The situation is probably most serious in electronics, since Japan produces 40% of the world's electronics components, including materials and parts for chips and LCD TVs, as well as advanced batteries. This supply chain problem may be short-term, as companies find new sources of components, and there is enough spare capacity in Japan and elsewhere to replace production lost to quake damage. But that doesn't mean the disruption won't be costly.

Japan’s Meltdown and the Global Economy’s - Four years ago, there were fears of a financial meltdown — a term borrowed from the nuclear power industry. Now there are fears of a real meltdown.  Comparing the two events may risk seeming insensitive to the rising human toll in northern Japan, but there are similarities in causation. In each case, overconfidence born of experience led to increased risks once a disaster unfolded. In the years preceding each meltdown, the very act of reducing apparent risks may have increased actual risks. In the world of finance, there was a general acceptance of the idea that banks and their regulators had developed sophisticated risk models to prevent a disaster. As lending grew more reckless, there was confidence that no real risks were being taken. In Japan, the risks of earthquake and tsunami were well known, and believed to have been dealt with. An earthquake could damage a nuclear plant and its vital cooling process if power to the reactor were cut off. So backup generators were built and batteries installed to provide power even if the generator did not immediately kick in. A tsunami could cause flooding. So huge sea walls were built to prevent floods. All the precautions had worked in previous earthquakes, and that history was reassuring.

Japan Disaster May Have Global Economic Impact - Japan's economy — like much of the world — was already facing serious challenges before the earthquake struck. You have to remember that Japan is a country that has been either in or on the verge of recession for over 20 years. And the major reason for that is that there's simply not enough domestic spending. In that sense, anything which causes government to - or companies to spend more actually helps the economy. And the precedent for this is the 1995 Kobe earthquake. A great deal of damage was done to the economy, and over the next couple of years, companies and the government had to spend massive amounts of money rebuilding infrastructure and factories. So if we use that, apply that analogy to today's situation, in the short term, of course, because there's been so much disruption, growth will decelerate. But over the medium term, say, the next two or three years, my guess is that there'll be a massive increase in spending on plants and equipment and highways and ports. So Japan's economy is likely to grow significantly faster as a result of this crisis over the medium term.

Japan's Pain & Suffering Will Have Global Consequences - Dated economic news in the period ahead is likely to be of limited value for assessing the trend. "It is too soon to develop good estimates of the likely economic and financial effects of last Friday’s massive earthquake and subsequent devastating tsunami, particularly with the situation in the damaged nuclear plants still unresolved," advises Bill Witherell, chief economist at Cumberland Advisors, in a note to clients today. The next-best thing, he suggests, is looking for perspective by reviewing the aftermath of the Kobe earthquake that hit Japan in January 1995. Reports that the Bank of Japan is prepared to inject huge amounts of fresh liquidity into the country’s economy may help too. But for the moment, at least, Witherell and other economists warn that there’s still too much uncertainty to be confident about what happens next, either for Japan or the global economy. Indeed, Japan was hit by two catastrophes over the week: a tsunami and the ongoing nuclear power crisis that’s leaking small amounts of radiation into the atmosphere. It's hard to overemphasize that there's a continuing health risk of unknown magnitude for Japan, and perhaps other countries as well.

Japan's Lean Mfg Becomes the World's Problem - It's not always that you feel sorry for Japanese automotive behemoth Toyota, but I'm sure we should all wish it well at the moment. For several years now, the Japanese have been the world's "lean manufacturing" innovators as exemplified by the likes of the Toyota Production System. During conventional times--therein lies the rub, but more on that later--they have sought to minimize muda or waste, which comes in seven forms: (1) overproduction, (2) overprocessing, (3) unnecessary transportation, (4) excess inventory, (5) excess motion of workers and equipment, (6) product defects, and (7) downtime. Certainly, we can all do without excess pollution, busywork, and material use. These are goals we can applaud. However, these are obviously not conventional times in Japan as many supply disruptions occur: lack of electricity, water, transportation, and what else have you. Add in the human element of fear given what has occurred on top of the possibility of harmful radiation spreading. Given the highly interconnected production chains in Factory Asia (to use cheaper labour where available, inter alia), it may thus be detrimental that Japanese manufacturing has become too lean. Given that several Japanese wares are at the top of the production value-added pyramid, a lot of processing and other less knowledge-intensive activities elsewhere will have to wait while our Japanese friends get back to speed at doing what they do best. In the meantime, however, disruptions are noticeable. Be prepared for shortages of all sorts of manufactured goods in the near future, then.

Global supply chain threatened by Japanese disaster - One aspect of globalisation is that manufacturers source their supplies from around the world. This will depend on the comparative advantage those countries have developed in producing various types of components. Japan produces about 30% of the global output of ‘flash memory’ used in electronic cameras and smartphones, and about 15% of the DRAM memory used in PCs. If something happens to disrupt that supply chain, as is clearly the case after the horrific events in Japan, there will be global effects.  The Asian Development Bank reported last year that making the i-phone, for example, involves nine companies, which are located in . . . the Republic of Korea, Japan, Taipei, China, Germany, and the US. At present, most manufacturers in Japan have shut down production in order to carry out structural and energy checks of their facilities, with the result that the components and parts that they make are not available for use elsewhere in the world. It is easy to see, therefore, how their customers around the world may be impacted by the loss of supply of a vital component, which will in turn hold up their production of the end-product.

Broken links - Not many people in the American electronics industry had ever heard of the Japanese town of Niihama before the summer of 1993. That changed overnight when a small specialty chemical factory there was knocked out by a fire. Obscure though it may have been, this factory accounted for 65 percent of the world's supply of epoxy cresol novolac, a resin essential in making most semiconductors. As shockwaves shot through the world electronics industry, prices of some kinds of semiconductors doubled in days.  The episode illustrates in microcosm a problem that may confront many key global manufacturing industries on a much larger scale in the wake of the Japanese earthquake: shortages of highly rarefied but critical materials, components, and capital goods. Even as the death toll mounts and rescue teams race to dig out survivors, the world's supply chain chiefs are bracing for major disruptions in the availability of many so-called "producers' goods," in which Japanese companies have built up dominant or even monopoly positions. Just how gravely will these shortages impact the world economy?

World May Struggle to Make Up for Lost Japanese Exports - As companies in Japan struggle to cope with damaged plants, supply-chain disruptions and rolling blackouts, it will be up to companies around the world fill any gap left by a decline in Japanese exports. That might not be easy. Japan’s crisis came at delicate time. During the global economic downturn, companies around the world slashed inventories and many have been reluctant to build them back up. Even before the earthquake struck, supplies of many metals and electronic components that Japan is a key exporter of were running tight, notes Paul Martyn, a consultant with supply management consultancy BravoSolution. Now, amid the uncertainty surrounding Japan, companies are moving to ensure they be able to get supplies. “People aren’t waiting,” Mr. Martyn said. “They’re out their actively seeking new supplies.” Japan exported $57 billion in metals last year, including high grade steel and alloys that had already been facing production constraints.

Crisis Adds New Risk to Global Recovery - Mounting worries about Japan's ability to contain and recover quickly from a nuclear disaster jolted the world's financial markets and economy Tuesday, underscoring a sharp shift in recent weeks in the risks facing the global recovery. Last week's earthquake in Japan has disrupted global electronics supply chains, sparking concerns about higher component costs and shortages. WSJ's Yun-Hee Kim and Kirk Yang, head of Asia technology hardware research at Barclays Capital discuss. International companies from BMW1 AG to Boeing2 Co. girded for possible disruptions to supply chains, as the world's third-largest economy faced worry about radioactive contamination and was imposing rolling power outages to cope with the crippling blow the quake has dealt to its electricity grid.

How A Tokyo Earthquake Could Devastate Wall Street And The World Economy (scribd) (The title of an article written by Michael Lewis in 1989.) "When the Japanese emerge from the rubble, the world will change forever: they'll want their money back!"

Does Anyone Seriously Believe the Global Recovery Is Still Intact? - Today's exercise: design a semi-plausible scenario guaranteed to halt a global recovery that is entirely dependent on massive money printing, credit creation, Central Bank intervention and Central State spending.

  • 1. Natural disaster dusrupts production in a key global exporter: check.
  • 2. An event which nudges a major economy into financial crisis: check. (If you don't think Japan's economy and finances will be pushed over a threshold by the quake, please be patient.)
  • 3. Ignite a chain reaction of mass movements in a key oil exporting region: check.
  • 4. Supply-demand imbalances in critical materials and grains: check.
  • 5. Central banks and sovereign states addicted to vast quantities of printing-money and credit creation stimulus which trigger rampant inflation in essentials: check.
  • 6. Massaged statistics, channel-stuffing, misrepresentation of risk and unlimited propaganda by a failed Status Quo: check.

G-7 to Hold Urgent Talks on Japan Quake, Global Markets - The yen strengthened to a post- World War II high as Group of Seven officials prepare to meet to discuss the threat to the world’s third-largest economy from last week’s earthquake and a worsening nuclear crisis.  The yen rose as officials hold back for now from intervening in currency markets to stem its advance, climbing 4.5 percent in 26 minutes as markets closed in New York and re- opened in Asia. The G-7 teleconference will begin at 7 a.m. Tokyo time and will encompass currencies, Finance Minister Yoshihiko Noda told reporters in Tokyo today. The yen’s climb today is driven by speculation and the government is monitoring its moves, Economy Minister Kaoru Yosano said.  The announcement of discussions prompted Japanese stocks to pare losses and the yen to weaken on the prospect of coordinated global action to prevent the disaster from crippling the economy. The yen earlier strengthened to 76.36 to the dollar and bond risk soared as workers raced to avert a meltdown at the Fukushima Dai-Ichi nuclear plant north of Tokyo.

Japan Quake Hits China Supply Lines - The effects of Japan's earthquake are already hitting China's manufacturing sector.  Japan's proximity to the mainland, and technological edge in production of key components, has made it a major beneficiary of China's rise. In 2010, Japan exported $176.7 billion of goods to China. That makes it China's largest source of imports and the only one of the world's major economies with which the mainland runs a trade deficit.  Top of China's import shopping list: electronics components and auto parts. China is the world's largest producer of computers and mobile phones, but production of the components that go into them remains beyond the ken of the mainland's manufacturers. Japan is responsible for 35% of global supply of NAND flash chips, which go into iPhones and iPads, although the producers are distant from the epicenter. Even so, spot prices for flash chips are up sharply this week, according to DRAMeXchange, Asia's biggest spot market for chips. The main losers will likely be smaller producers that have less market clout.

Democrats call for China rare-earth sanctions - Two Democratic senators said Tuesday they plan to ask the Obama administration to oppose U.S. and international Chinese mining projects until "China plays fair" with rare-earth element exports. Sens. Charles Schumer and Debbie Stabenow said in a statement that they plan to release a letter urging Treasury Secretary Timothy Geithner to block Chinese mining projects in the U.S. and abroad until China agrees to their demand that China participates fairly in the global trade of rare earth elements, which they charge China is hording.

How Should China Solve Its Energy Problems? - China's economic model propels its energy consumption, concentrated among heavy industry and manufacturing to fuel an export juggernaut. In other words, China's energy problems are a direct outgrowth of being an industrializing "producer," which is the opposite of the U.S., a consumer-led energy guzzler. Viewed this way, it becomes obvious that the energy pattern in each country reflects a major symptom of the central economic imbalance of production and consumption between China and the U.S. It is no surprise then that Beijing persistently argues that China's energy consumption per capita is just one-tenth that of the U.S. So to the extent that China exits its current hyper-industrialization phase and restructures its economy, the process should naturally lead to improvement in what seems to be unbridled energy consumption.

Caixin Online: China’s cities see slump in residential housing - Sales of residential housing in Beijing and Shanghai dropped sharply in the past two months due to both the central and local government’s latest measures to cool the property market. Beijing municipal government announced policies to restrict home purchase by requiring five years of tax and social security payments for non-Beijing residents in the city.  According to the municipal statistics bureau on March 15, residential housing sales in Beijing for the January-to-February period declined 21.1% from the same period last year to 1.32 million square meters. At the same time, residential housing transactions in Shanghai fell 31.3% year-on-year to 1.9 million square meters.  During the first two months, total housing sales including both residential housing and commercial housing projects in Beijing and Shanghai dropped 18.9% and 26.7% from last year, respectively.  In the past two months, newly launched housing projects in Beijing totaled 2 million square meters, a 34.8% decrease from the same period last year. But residential housing construction increased 14.4% year-on-year to 1.8 million square meters.

China closes 130,000 Internet cafes as it seeks more control - China shut down more than 130,000 illegal Internet cafes in the country over a six year period, as part of crackdown to control the market, according to a new Chinese government report. Internet cafes in China are highly regulated by the government, which can issue and revoke their licenses. Authorities have made it illegal for Internet cafes to serve minors under the age of 18, stating that the Web's content could endanger their well-being. Last April, the Ministry of Culture issued new rules declaring that Internet cafes would be closed down if they were found admitting minors.  The Ministry of Culture said it will make the report public in a month's time. But in statements made to China's official Xinhua News Agency, the ministry said it is continuing to promote Internet cafe chains, while enforcing rules to stop the establishment of independently run Internet cafes. The ministry also plans on instituting harsher penalties for Internet cafes found admitting minors.

Chinese Premier Rejects Faster Currency Rise - China's premier on Monday ruled out allowing a faster rise in the value of its tightly controlled currency to fight surging inflation, citing the danger of possible job losses and the impact on Chinese businesses. At a news conference, Premier Wen Jiabao repeated Chinese complaints that the U.S. Federal Reserve's efforts to spur American growth are partly to blame for global inflation, though he avoided mentioning the Fed by name. Wen said Beijing is taking steps to rein in surging inflation that pushed up consumer prices by 4.9 percent in February. But he said the yuan's rise against the U.S. dollar would be kept gradual. Analysts say a stronger yuan would cool Chinese inflation by making imported oil and other goods cheaper in Chinese currency terms. Beijing has restrained the yuan's rise since the 2008 global crisis to help Chinese exporters that employ millions of workers compete abroad.

China noses ahead as top goods producer - China has become the world’s top manufacturing country by output, returning the country to the position it occupied in the early 19th century and ending the US’s 110-year run as the largest goods producer.The change is revealed in a study released on Monday by IHS Global Insight, a US-based economics consultancy, which estimates that China last year accounted for 19.8 per cent of world manufacturing output, fractionally ahead of the US with 19.4 per cent. China’s reversion to the top position marked the “closing of a 500-year cycle in economic history”, said Robert Allen of Nuffield College, Oxford, a leading economic historian.Deborah Wince-Smith, chief executive of the Council on Competitiveness, a Washington-based business group, said the US “should be worried” by China taking over a position that the country had occupied since about 1895. “This shows the need for the US to compete in the future not on the basis of commodity manufacturing but on innovation and new kinds of services that are driven by production industries,” she said.

China Ends America's Century Old Manufacturing Dominance - Ending a 110-year run for America as the world's dominant producer, China has overtaken the United States as the world's largest manufacturer. According to economics research firm IHS Global Insight, China manufactured 19.9% of the world's goods in 2010, while the U.S. accounted for 19.4%.  This marks the first time since 1850 that China has held the crown as the world's largest manufacturer, the latest sign of the nation's economic resurgence.  The U.S. “should be worried” by the news, Deborah Wince-Smith, chief executive of the Council on Competitiveness, tells The Financial Times. “This shows the need for the U.S. to compete in the future not on the basis of commodity manufacturing but on innovation and new kinds of services that are driven by production industries." True as that might be, it doesn't mean the world's most populated country is destined to hold the crown for as long as the U.S..There is, however, plenty of reason the U.S. should use this as a wake-up call.  America must recognize China is no longer just producing low-end cheap products, it's now home to many high-tech components that live in Apple devices and other consumer electronics. Thanks to better technology, education and infrastructure the Chinese will continue to move up the production food chain, including highly sophisticated weaponry.

Adios Panama Canal: PRC's Colombia Railway Plan - It's been a longstanding ambition of many a would-be-conquistador that may finally come true. For, here's an interesting bit of realpolitik that you may have missed of the early Chinese bird catching the Latin American worm. Among Latin American countries, Colombia is regarded as having among the best ties with the United States in recent times. Aside from the Bush-Uribe conservative rapport of years gone by, the two countries also have an FTA-in-waiting. Yet, we also know that there's a new sheriff in the world economy spreading its largesse far and wide while attempting to win friends and influence people--the PRC. As Washington's megadeficits plunge the US into an infinite abyss, the loaded Chinese are using their coffers runneth over to this end. As it turns out, even the Colombians are hedging their bets. After all, it doesn't take a genius to figure out that it's probably better to catch a rising star than to be dragged down by one that's fading fast.

WTO ruling: 'free trade' and 'state capitalism' needs broader discussion-

In terms of international law, one can trace the legitimacy of our policies at least as far back as the founding of the General Agreement on Tariffs and Trade, the WTO’s predecessor, in 1947. In terms of economics, their justifying logic is very simple.  In the case of dumping, free trade is not justified if one side sells below cost in order to wipe out the other and thus eventually grab the market (or most of it) for itself. Even if the attempt fails, the damage done to our industries will be real, and by then it will be too late. Enter state capitalism. The flashpoint of the current dispute centers on the vexed question of what price constitutes dumping in a non-free-market economy. In a free-market economy like our own, dumping is considered to occur when a product is sold abroad for either less than its production cost, or less than what it is sold for domestically. Unfortunately, in an economy like China’s, which is so tightly controlled by the government that many prices are essentially whatever the government says they are, this logic doesn’t work. The WTO has ruled that our techniques are not legit. Bottom line? We're supposed to overlook the vast panoply of subsidies—ranging from free land to cheap loans and a million different tax credits—because state capitalism makes them tricky to calculate.

Are the numbers wrong? - EZRA KLEIN links to a new study of sorts by economist Michael Mandel which suggests that America's datakeepers are getting something seriously wrong. According to Mr Mandel, American data do not take into account the discount implicit in cheap imports or the import content of American exports. The figures may therefore be overstating American productivity gains and understating the trouble in American industry. It sounds bad.At the heart of the complaint lies a paradox. On the one hand: Domestic and international statistical agencies put forth a vast array of economic data each month—but virtually none of the data directly support the propositions that the United States is falling behind other countries in competitiveness or being significantly hurt by trade. In other words, the official economic statistics do not confirm the starting negative premise for either the competitiveness worriers or the trade skeptics. And on the other...well, people seem to worry about competitiveness and are sceptical of the benefits of trade. Faced with the need to square these two pieces of information, Mr Mandel suggests that the data are wrong. Honestly, I'm not sure why

Is growth incomplete without social progress? South Asia’s development paradox - The Indian economy, along with others in South Asia, is among the fastest growing in the world. But what about social progress? This column reviews World Bank data suggesting that while income growth is helping to reduce poverty, the number of poor people is actually rising and there remains huge room for improvement in education, health, and women’s economic participation.

India's Inflation Unexpectedly Quickens to 8.31%, Adding to Rate Pressure - India’s inflation unexpectedly accelerated in February, increasing pressure on the central bank to raise interest rates this week for the eighth time in a year.  The wholesale-price index rose 8.31 percent from a year earlier after an 8.23 percent jump in January, the commerce ministry said in a statement in New Delhi today. The median forecast of 20 economists in a Bloomberg News survey was for a 7.8 percent increase. The Reserve Bank of India may increase its repurchase rate by a quarter-point on March 17, according to all 19 economists in a Bloomberg News survey, after weighing the impact of oil prices and the earthquake in Japan. India’s benchmark price gauge is almost double the central bank’s “tolerance” level. “By no measure is the inflation rate heading back to a comfortable level any time too soon,”

Population explosion, main cause of socio-economic problems : Firdous - Federal Minister for Information and Broadcasting Dr Firdous Ashiq Awan said on Saturday that population explosion and lack of long-term planning were the major causes of all socio-economic challenges being faced by the country.Addressing a seminar on ‘Energy Crisis and Role of Media’ at Hameed Nizami Press Institute of Pakistan, she said, “Unfortunately no attention was given towards checking fast growing population during the last 63 years which led to multiplication of problems and squeezing of resources.” The Information Minister said population was growing rapidly while resources remained limited due to which “We are facing difficulties in providing best health, education,infrastructure ,communication, electricity and other facilities to people.” She said it was due to population explosion that today Pakistan lagged behind various other countries of the region and added “they have improved their economies by focusing their attention to this issue.”

Dani Rodrik's "The Globalization Paradox" - It is dogma among economists and right-thinking members of the political and business elite that globalization is good and more of it is even better. That is why they invariably view anyone who dissents from this orthodoxy as either ignorant of the logic of comparative advantage or selfishly protectionist. But what if it turns out that globalization is more of a boon to the members of the global elite than it is to the average Jose? What if most of the benefits of the free flow of goods and capital across borders have already been realized, and any gains from additional globalization will be outweighed by the additional costs in terms of unemployment, reduced wages, lost pensions and depopulated communities? What if global markets, to be widely beneficial, require the kind of global governance structure that does not yet exist and that most people would oppose? What if it turns out that the countries that have benefited most from free-market globalization are not those that have embraced it wholeheartedly, but those that have adopted parts of it selectively?

A licence to text money: New insights on mobile money in Kenya - Over the last dozen years, mobile telephony has spread through the developing world faster than any other technology in history. As cell phone ownership and network coverage have expanded, access to this means of communication has deepened, and the kinds of messages sent have changed, both in terms of the technology (from analog to digital, from voice to text), and in terms of content, from personal greetings, to healthcare reminders (see Aker and Mbiti 2010 for a survey). In the last four years, cell phones have been used to send what might be the world’s most important message: Money. The success of the mobile money programme in Kenya – where money is exchanged via mobile phone – has been phenomenal. In four years, a country with only 850 bank branches has seen the number of outlets providing the service grow from 4,000 to 25,000. People have access to formal finance as never before. This column studies 3,000 households between 2008 and 2010, tracking this social and economic transformation.

Small Changes, Big Results For The World's Poor - According to a standard economic model, a fourteen-year-old girl in Kenya will go to school if doing so will enable her to earn more than she spent on her education. A family will buy dilute-chlorine solution, measure out capfuls to treat their water, and wait for the chlorine to disinfect their water if the health benefits exceed the cost of the chlorine. Since a school uniform that lasts a year or two costs only six dollars, and a month’s supply of chlorine runs about $0.30, these costs should be fairly minor factors. Influenced in part by these arguments, many governments in the developing world and nongovernmental organizations (NGOs) concerned with development have maintained small charges for education and preventative health care. However, in recent decades economists have increasingly come to recognize what most of us have long known: human beings don’t always make the best decisions.

Greek, Spanish, Italian Bonds Rally on Expanded Bailout Plan - Greek, Spanish and Portuguese bonds rallied after European Union leaders agreed on a retooled bailout plan for the region’s most indebted nations, curbing concern that they will be unable to repay their debts. Yields on 10-year Greek debt sank the most in more than two months following the agreement to widen the scope of rescue efforts aimed at resolving the EU’s debt crisis. German bunds were lower after a report showed European industrial production increased in January for a fourth consecutive month. “The peripherals as a whole are performing pretty well, which makes sense given that the rescue package agreement came earlier than expected,” said Owen Roberts, a London-based fixed-income analyst at Morgan Stanley. “The market likes the fact that policy makers are making progress, which is why we’re seeing this positive rally in peripheral bonds. It doesn’t solve the debt crisis though, so this could only be positive in the short term.” Yields on 10-year Greek debt fell as much as 61 basis points, the biggest drop since Jan. 11, and were 38 basis points lower at 12.43 percent as of 4:30 p.m. in London.

EU Puts Periphery Countries on the Rack - Yves Smith - For those of you unfamiliar with medieval implements of torture, the rack was not only terribly painful, but like most old school methods of torture, often crippled those who survived. It was also employed in particularly gory executions, such as drawing and quartering. The Eurozone seems to be using similar medieval methods on its debt-laden periphery countries with far less clear understanding that serious damage to the subject is a likely outcome. However, we have the unusual spectacle of a smidge of disagreement between two regular critics of the Eurozone “kick the can down the road and call it a strategy” approach to its interwoven sovereign debt/banking crisis. The trigger event was an announcement over the weekend of yet another adjustment in the funding mechanisms for countries at risk of default: an enlargement in the size of the rescue facility, a 1% reduction in punitive interest rates, some loosening of restrictions on the uses of the €440 billion facility (limited purchase of periphery country debt permitted). But numerous conditions were imposed on the subject countries. Ireland refused to accept the new terms because it would have had to give up its low corporate tax rate.  One of the two skeptics, Wolfgang Munchau of the Financial Times, simply sounds resigned to an eventual train wreck. His reading is straightforward: there are only two mechanisms for resolving a debt crisis, namely a bailout or a default (or a combination). I actually disagree a tad, since the options are really “provide new funds” which might not be nuts if debt were written down enough, a voluntary restructuring, or a default. But his bottom line is right: the Europeans are engaged in what we call “extend and pretend” and for countries like Greece, the only possible endgame is default:

Is The ECB Actually Targeting the Monetary Base? - Look at the figure below.  It shows the monetary base for the Eurozone and the data comes directly from the ECB.  The monetary base follows a striking trend that begins in 2002 and continues to the present.  Even the financial and Eurozone crises create only temporary deviations from this trend.   This trend is so straight it creates the appearance that the ECB is actually targeting the monetary base rather than following its two pillar strategy.   This upward trend not only creates the appearance of a monetary base target, but it also turns out to be very important to the trend growth of nominal GDP in the Eurozone.  To see this, note that the monetary base, B, times the money multiplier, m, equals the money supply, M (i.e. Bm = M).  In turn, the money supply times velocity, V, equals nominal spending or nominal GDP, PY (i.e. MV=PY). Putting this all together, we get the following identity: BmV = PY. Now let's unpack the first two components of this identity, Bm, that make up the money supply.  Using the M3 money supply to solve for the money multiplier, (i.e. m = M/B), the following figure shows what has been the main determinant of growth in the money supply: 

The Printing Press and the Euromess - On March 15, Federal Reserve Bank officials will convene to decide on which way to direct - or redirect - their resources. Accusations that the Fed is running the printing press on overtime (as Republican budget maven Rep. Paul Ryan of Wisconsin put it) have been steadily on the rise. Monetary policies shorthanded as "printing money" and a European-style disaster will be portrayed as simply opposite shores of a small pond and ever more equations will be made between US financial troubles and those of Ireland and Southern Europe. As the run-up to the congressional debate on the debt ceiling proceeds (it has migrated from January to possibly July), the same accusations will crescendo.Observers who complain about current monetary policy and at the same time worry that we're about to become the next Ireland, Greece, Italy or Spain fail to point out one key difference: our public debt is a promise to pay interest and principal in specific dollar amounts. The Fed can print those dollars as necessary, unlike troubled eurozone governments, which don't have the freedom to churn out euros.

Portugal announces fresh cuts and reforms to reduce deficit - …Portugal has announced a fresh round of spending cuts and public sector reforms in an attempt to reduce its deficit and avoid being forced into taking a bailout. The new austerity measures include slashing spending on health services and social welfare payments, and delaying infrastructure projects. Portugal will also impose a new levy on those with larger pensions, and cut the compensation payments to workers who are laid off.The finance ministry said the cutbacks will trim Portugal's 2011 deficit by another 0.8% of GDP. It is targeting a deficit of 4.8% of GDP this year, down from around 7% in 2010.The measures were announced as eurozone leaders gathered in Brussels to discuss the ongoing debt crisis in the region, with Portugal under heavy pressure to request an international aid package

A deal, finally, but will it end the crisis? - Overshadowed by tragedy elsewhere, the European Council  reached a surprise political agreement on the outstanding issues of eurozone governance reform in the early hour of Saturday morning. A comprehensive package will be concluded at the March 24/25 European Council . Finance ministers will meet today to work out some of the details agreed. As ever it is best read the original document of the European Council’s resolution. We provide a brief summary of the main points (with our own numbering).

  1. The Pact for the Euro agreed. The goals are: to increase competitiveness, to foster employment, to improve sustainability of public finances, and to reinforce financial stability. Council will monitor wage developments, and member states will try to translate the stability and growth pact into a domestic fiscal rule under national legislation. Member states also promise to put into place additional legislation for banking resolution. Concrete objectives to be agreed, and progress monitored annually by heads of state or government. European Parliament will be fully involved. Single market respected.
  2. Greece to increase privatisation programme to €50bn, in return for a longer payback period of 7.5 years, and a cut in interest rates.
  3. There is no deal on Ireland yet. France and Germany demand concessions on the corporate tax base, but Enda Kenny, Irish PM refused. Ireland is now to present its own proposals at the next summit.
  4. On ESM: finance capacity of €500bnl EFSF €440bn effective; any disbursement decisions based on unanimity, and only with a view to safeguard financial stability of eurozone as a whole (ultima ratio clause); financial assistance will be subject to strict conditionality; assistance comes in the form of loan, and, exceptionally, in the form of primary market debt purchases;
  5. Member states commit to recapitalise/restructure weak banks.
  6. Agreement to finalise the six outstanding legislative points on economic governance.
  7. Consider a financial transactions tax.

The World's Banks Face $2.5 Trillion In Exposures To Europe's Fringe - The world's banks have exposures of $2.5 trillion to Portugal, Ireland, Greece, and Spain, according to the latest report from the Bank for International Settlements (via Ambrose Evans-Pritchard). Those exposures include everything, from derivatives, to other credit products, to more typical investments. The country with the biggest exposures in Europe: Germany, with $569 billion in exposure. That exposure will likely continue to play into how Germany's government deals with the situation in the region, and will likely weigh on the government's willingness to let any euro member default.

Germany, France Said to Fight Basel Bank-Leverage Disclosures - Germany and France are fighting global rules that would force lenders such as Deutsche Bank AG (DBK) and BNP Paribas SA to reveal their reliance on debt, according to an internal note prepared by the European Commission. The euro region’s two biggest economies are “fiercely against” proposals drawn up by the Basel Committee on Banking Supervision for lenders to reveal as soon as 2015 whether they would meet a cap on borrowing, known as a leverage ratio, that may only become binding three years later. Austria and Greece are also opposed, according to the document obtained by Bloomberg News. The “total transparency” may put pressure on lenders to meet the leverage rules three years early, the countries argue, according to the commission document. The nations may accept publication of methods regulators use to measure “leverage risk” that don’t identify specific banks, the document says.

Irish Banks Need More Than 10 Billion Euros, Noonan Says - Irish lenders will need more than the 10 billion euros ($14 billion) initially earmarked to recapitalize them, Ireland’s Finance Minister Michael Noonan said today, citing estimates of the country’s central bank. “The commitment was 10 billion euros,” Noonan told reporters in Brussels before a meeting with European Central Bank President Jean-Claude Trichet, referring to Ireland’s bailout agreement. He said Irish central bank authorities, including Governor Patrick Honohan, think it’ll exceed that, though they’re “not prepared to estimate yet by how much.”  Ireland’s new government won’t put 10 billion euros into the country’s lenders, four of which have been taken over by the state since 2008, until the results of capital and liquidity tests are available at the end of this month.  Ireland is able to draw on a further 25 billion euros under its November bailout agreement with the European Union and the International Monetary Fund, depending on how the stress tests turn out

Will Ireland Threaten to Default? -- Yves Smith - We were surprised that Ireland capitulated so quickly to pressure from its Eurozone confreres and accepted a punitive bailout of its government, when it was in fact its banks that were a mess. As we noted in November: Note that the Irish government is still holding out for a banking-system-only bailout, even if the funds are channeled through the government. Since I am not aware of any IMF bailout being done on this format, it’s likely to be a sticking point if the Irish refuse to back down (recall that the government itself is under no immediate funding pressure; they have six months before they need to go to market, which is an eternity in crisis-land). Fast forward, the Irish agree to a deal, the ruling party suffers substantial losses precisely for accepting the terms demanded by the eurozone and the IMF, and the new incumbents are much less willing to play nicely with counterparties who are engaging in what amounts to “every man out for himself” behavior, no matter what spin is put on their demands. From Gideon Rachman of the Financial Times:In the last few days, there has been a sudden recognition, at least on the part of some Irish commentators, that Ireland has the upper hand. A default would be a disaster for European banks, and anyone who has been paying attention knows that the refusal to restructure periphery country debt is a way to avoid bailing out not very popular German and French banks.

Pact for the euro: Tough talk, soft conditions? - This weekend, EU leaders agreed to the outlines of a new mechanism to deal with Eurozone debt problems after the current mechanism expires in 2013. The mechanism is a continuation in the leaders’ preference for “tough talk and soft conditions”. This column argues that the package is merely the next step down the slippery slope of EU taxpayers sharing the burden with Greek taxpayers.

E.U.'s Latest Rescue Package Seen Falling Short-Again - Another missed opportunity for Europe?  Over the past year, the European Union and the International Monetary fund have pledged €640 billion in bailout funds to distressed economies on the Continent’s periphery. Yet the interest rates on benchmark bonds in Greece, Ireland and Portugal remain at or near their historic highs.  Pressed yet again by a skeptical market to take action, Europe’s leaders cobbled together a new structure over the weekend that will allow its rescue fund, the European Financial Stability Facility, to disburse its entire €440 billion, or $615 billion, allotment if needed, and to buy bonds at government auctions. They also eased the conditions on Greece’s rescue loans by reducing interest rates and extending repayment terms.  But as has often been the case with grand European rescue plans, there appears to be a catch: While the European rescue facility can now buy bonds at government auctions, it will not be able to purchase paper in the secondary market. That will heap more pressure on an ever-reluctant European Central Bank to remain in its job as peripheral Europe’s buyer of last resort.

Trichet attacks yesterday’s agreement on stability pact - Jean-Claude Trichet is upping his war against the European Council when he decried yesterday’s Ecofin agreement as poor and insufficient. While Olli Rehn welcomed the “historic reform”, Trichet once again criticised their lack of ambition. He called them an insufficient lesson from the crisis, according to El Pais. The Hungarian presidency also acknowledged that yesterday’s compromise implied a less stringent stability pact than the one proposed by the European Commission. The article notes that sanctions will only be applied after preventative measures have been tried first, and failed. Ecofin agreed yesterday that on transgression against the pact the Commission can initially propose the payment of an interest bearing deposit of 0.2% of GDP – that can later be turned into a fine of no more than 0.5%. The procedure is that Ecofin needs to vote with QMV to implement the procedure, while later stages in the procedure are automatic, but can be stopped by a QMV in the opposite direction. That would reduce, but not eliminate, the probability of a repeat of the 2003 situation when Germany and France conspired to overturn a Commission decision to start a deficit procedure. The Ecofin also agreed to toughen the debt criterion. Italy has originally rejected the proposal, but a compromise was found according to which the procedure needs to take account of the degree of domestic funding, which is high in Italy. Countries will now have to take concrete steps to meet the 60% debt limit. In Italy’s case that would require a debt reduction of 3% per year (which is simply not going to happen).

A plan that will damage Europe - You would think that the transformation of the European Union into a transfer union, the extension of the rescue facility for the continent’s fragile currency by a few hundred billion dollars, and new policy dictates to struggling economies like Greece would be of some interest to the wider public. Indeed, in normal times, every single measure passed at Friday’s meeting would have triggered big debates. However, reports from Japan dominated the front pages of European newspapers and magazines over the weekend – and sadly will continue to do so for days to come. To be clear, there is no conspiracy to bury bad news in the shadow of a natural disaster. On the other hand, European leaders certainly seized the opportunity to quickly pass a range of measures that otherwise would have had to be negotiated at an EU summit scheduled in two weeks. The agreements reached last Friday were substantial. Greece will be forced to privatise assets worth €50 billion in return for lower interest rates on its emergency loans. It is not clear whether this sum is realistic and achievable, given the fragile state of the Greek economy.

Brussels Eyes a Halt to SWIFT Data Agreement - Only with great reservations did the European Parliament agree last year to the SWIFT agreement with the United States. The agreement allows the transfer of data pertaining to European bank customers to US investigators in accordance with strict guidelines. But many provisions of those guidelines have been widely ignored.US pledges to provide transparency on bank data monitoring are not being fulfilled. Transparency was supposed to be a major element in the controversial US-European data agreement SWIFT. But an effort by one European parliamentarian to determine if US officials had accessed his personal account information failed. Now, Brussels is considering a suspension of the deal.

On the tasks of the European Stability Mechanism  - In the run up to next week’s meeting of the European Council, confusion remains on how to tackle the Eurozone debt crisis and ensure stability in the currency area. This column argues that it is high time for the European Council to stop ducking the issues and provide a credible framework to tackle the sovereign debt crisis on its doorstep.

Moody's cuts Portugal's debt rating - Portugal’s ability to avoid a fiscal bailout remained under question Wednesday after Moody’s Investors Service cut the nation’s long-term debt rating by two notches to A3 from A1.  Portuguese Finance Minister Fernando Teixeira dos Santos said a downgrade was “premature” ahead of a summit of European Union leaders next week and a new round of proposed austerity measures, according to Dow Jones Newswires.  The minority government’s opposition, however, has threatened not to support the added austerity measures.  Economists said the downgrade wasn’t a surprise as it puts Moody’s rating in line with Standard & Poor’s take on Portugal. Both agencies have negative outlooks on the rating.

Portugal Downgraded, More Cuts Likely - Moody’s cut Portugal by two notches to A3 and kept a negative outlook despite the recently announced fiscal tightening and despite the tentative plan to expand the EFSF. This downgrade really shouldn’t come as any surprise. As we wrote just last week, “Moody’s A1 and Fitch’s A+ ratings for Portugal need to be adjusted downward as our model rates it at A-/A3/A-, while S&P’s A- looks correct.” The only thing we’d add is that it looks like Portugal will deteriorate further in the next quarterly update of our model (out later this month) to the BBB+/Baa1/BBB+ area, and so the negative outlook is justified and further cuts appear likely. Portugal clearly will remain in the market spotlight as its 10-year yield remained above 7% for the 28th straight day on Tuesday. Furthermore, Portugal’s 5-year yield stayed above 7% for the 19th straight day and the 2-year stands at around 6.3%. This continues the pattern that we saw with Greece and Ireland. In both those cases, the 10-year yield was the first to break above 7%, with the 5-year and then the 2-year yields breaking above that level eventually. It is noteworthy is that the rescue packages for those two countries have done nothing to substantially lower their borrowing costs, with 10-year yields still substantially above 7% for both. With contagion showing no signs of abating, we think Portugal is doomed to the same fate.

Pride or prejudice - Prime Minister José Sócrates has this week said he has a responsibility to ten million Portuguese to not apply for an international financial rescue plan, in what is now the clearest indication yet that Portugal will not seek a bail-out on their own initiative. His comments came in the week when Portuguese bonds were sold off at rates deemed “unsustainable” even within Government circles, amid mounting calls from abroad for the country to open its books to international scrutiny and manipulation.Portugal this past Wednesday raised one billion euros from the sale of Treasury bonds. The bad news is that it came at a yield 50% higher than the last sale of the very same September 2013 bond six months ago. The 5.99% return investors can expect from purchasing these government bonds is also the highest rate Portugal has had to accept since joining the Euro Zone.

The clock is ticking for Socrates - Portugal is moving closer to a bailout as the country faces rising interest rates and a political stand-off that could lead to the fall of the minority government. In yesterday’s auction the Portuguese government sold all €1bn in T-bills on offer, with demand outstripping supply by 2.2 times. The yield was 4.33%, below record levels seen in December at 5.28%, but significantly higher than 4.06% two weeks ago. Long term yield spreads over German bund moved above the critical level 4.5pp. A Reuters poll of 45 economists found a 60% chance that Portugal will need a bailout like Greece and Ireland with the expectation that it will happen by June.  Under intense pressure after Moody’s downgrade the political interplay is getting ugly and increasingly desperate: Portugal's government now blamed the higher rates on the opposition's refusal to back its latest austerity plans, warning a political standoff could force it to seek a bailout, according to Reuters. "Failure to approve the new measures in the budget plan would push the country to external help," finance minister Fernando Teixeira dos Santos told parliament's budget committee. Jornal de Negocios reports that Socialists and Social Democrats traded insults in parliament. Socrates has warned earlier this week that his government will not be able to continue if his growth pact, including the new austerity measures, does not pass in next week’s vote.

Deplorable Portugal 12 Month Auction Validates Belgium Decision To Pull Sovereign Issuance Due To "Market Conditions" - Earlier today Portugal had a deplorable bond auction of €1 billion in 12 month Bills, which saw the interest rate paid jump to nearly 4.5% even as general demand indicated by Bid to Cover plunge from 3.1 to 2.2. And even so, the bulk of the purchasing was from Asia, read China, as the last thing Japan needs now is to rescue a insolvent Portugal, according to a finance minister disclosure. From Reuters: 'The 12-month T-bill yield rose to 4.331 percent from 4.057 percent in an auction on March 2, in line with analyst expectations of around 4.3 percent and with the secondary market. It also stayed below record levels seen in December.' Alas, while Portugal purchased a few days of funding, it merely confirmed that it is now effectively bankrupt as paying 4.3% for 12 months worth of debt indicates the Rubicon has long been passed. Look for Portugal to be bailed out any minute. And in attempting to avoid the same fate, Belgium decided to 'postpone' its own bond issuance of 6 year benchmark notes on concern investors will puke all over the paper.

BBC News - Portugal hit by debt downgrade from ratings agency - Moody's has downgraded Portugal's sovereign debt rating, citing the country's need to cut debt and its poor growth prospects. The ratings agency cut Portugal by two notches from A1 to A3 and kept the rating on a negative outlook, suggesting more downgrades may follow. Meanwhile, Portugal's main opposition party has announced it will oppose the government's austerity plans. The prime minister has warned the country could face a bail-out. 'The consequence of a political crisis would worsen the risks for our economy and lead to intervention,' he said. Portugal is burdened with high levels of debt and is struggling to avoid an international bail-out, similar to those of Greece and the Republic of Ireland.

Muddling through is no option - No political organisation in the world is as skilled as the European Union when it comes to muddling though. Don’t knock it. For 27 member states to agree, the art of compromise is critical. Muddling through has served the EU well over the years. The agreement reached by EU leaders in the early hours of Saturday was a politically smart muddle. Angela Merkel got exactly what she needed: a deal that limits Germany’s financial liability. The others could live with it. Some important technical details have yet to be worked out, but the deal is essentially done. Unfortunately, you cannot muddle through a debt crisis. There are, in essence, two ways to resolve a debt crisis: through a bail-out or through default. Or through some clever combination of the two if you know what you are doing. If you muddle through, you end up with the default option, literally.

Bond Sale Failing in Russia as Poland Raises 50% of Target Shows Retreat -- Russia and Poland raised less than 50 percent of their targets at government bond auctions today as Japan’s deepening nuclear crisis, escalating violence in Bahrain and Portugal’s credit-rating downgrade unsettled investors. Russia sold 10.2 billion rubles ($356 million) of bonds known as OFZs that mature in 2016 after seeking to raise as much as 30 billion rubles, the Finance Ministry said today. Poland issued a combined 1.03 billion zloty ($354 million) of 2021 floating-rate notes and 2023 inflation-linked bonds after saying it was prepared to offer as much as 2.5 billion zloty of debt.  The auctions came as Japan tried to prevent a meltdown at the crippled Fukushima Dai-Ichi nuclear power plant, clashes with anti-government protestors in Bahrain escalated and Portuguese borrowing costs rose following a rating cut by Moody’s Investors Service. Yields on the ruble-denominated OFZ due in 2016 fell 2 basis points to 7.61 percent while the zloty note due in October 2020 rose 1 basis point to 6.274 percent.

Europe debt risk hits $2.5 trillion - THE total exposure of foreign banks to the struggling quartet of Greece, Ireland, Portugal and Spain tops $US2.5 trillion once all forms of risk are included, according to the latest data from the Bank for International Settlements. On an ''ultimate risk'' basis that includes the potential loss on derivatives and credit guarantees of different kinds, the figure rises to $US2.51 trillion as of last September, well above the headline figure of $US1.76 trillion in cross-border loans. The sheer scale highlights the systemic dangers if the European Union fails to stabilise the debt crisis. Euro-zone leaders agreed to boost the lending power of the European Union bailout fund on Friday, but Germany vetoed proposals for a debt buyback scheme or an activist policy of bond purchases. The BIS, the central bank of central banks, said in its quarterly report that Germany had $US569 billion of exposure to the quartet, France $US380  billion and Britain $US431 billion.A chunk of British exposure is on behalf of Middle East and Asian clients banking through London. Italy has just $US81 billion at risk and seems uniquely insulated from the crisis.

The Flaws of the Central Counter Party Idea - The CCP is designed to reduce systemic risk but in reality, the CCP may become a node of concentration. The clearing arrangement centralises contracts in a single entity – the CCP. This increases risk concentrations within financial markets. The CCP is the ultimate case of “too big to fail”.  International agreement on clearing and the CCP may prove elusive. Regulators in major jurisdictions support the concept of clearing. However, there are significant differences between the positions of individual countries. For example, international regulators are yet to agree on the definition of a standardised contract or the market participants required to transact through the CCP. It is also not clear who will regulate and oversee the system, especially where it transcends national boundaries. Attempts to regulate derivatives trading are complicated by existing entrenched interests and complex benefits and costs. The five largest U.S. derivative dealers generate annual revenues of around $60-70 billion from trading derivatives and cash securities. Global revenues are probably two to three times that number.  A framework for clearing OTC derivative will emerge, if only because finance ministers, central bankers and regulators have invested too much political capital in the proposals.

Should the ECB raise interest rates? - THIS week, we asked guests at Economics by invitation whether the European Central Bank should raise interest rates. Not long ago, ECB President Jean-Claude Trichet was strongly signaling that at least one rate increase would be forthcoming soon. Is he still feeling so confident? Richard Baldwin suggests he should not be:There are three big uncertainties.

    • (1) EU leaders’ attempt last weekend to fix up their screw-up on the euro-zone rescue seems to have screwed up their May 2010 fix-up. We’ll see what markets say, and we’ll see whether the ECB is willing to continue offering a free put on Greek, Irish and Portuguese bonds, but the analyses of Daniel Gros and Stefano Micossi convince me that the euro-zone crisis could still blow up this spring.
    • (2) The US’s inability to agree to the necessary fiscal discipline—or even a plan for getting some—creates the worrying prospect of the dollar/global imbalances crisis that all the pundits worried about before Lehman Brothers.
    • (3) Japan’s catastrophe—and the massive interconnectness of Japan’s manufacturing sector with all of East Asia—creates enormous uncertainties about Asia’s demand for US and EU exports, and Asia’s exports to the US and the EU. Now is not the time to follow rigid interest-rate rules.

Enforcing the unenforceable (EU and fiscal policy) European Union countries are coming up with new proposals to provide a stricter framework for fiscal policy. EU members have lived for more than a decade under the rules of the Maastricht Treaty and the Stability and Growth pact that set numerical limits on government deficits (3%) and debt (60%). While numerical rules are attractive (they are simple and transparent) the experience of EU countries has shown that, by themselves, they are not very good at providing fiscal policy discipline.  There are many reasons why these rules have not worked as well as expected: they do not provide enough discipline when it is most needed (during economic booms), the enforcement mechanism is decided by the offenders (ministers of finance), etc. In addition, even if the rules are supposed to be objective and transparent, they have always been subject to different interpretations. In particular, the limit on government debt (60%) has been consistently violated by many countries - today most countries are above this limit. The current proposal by the European Commission (you can read it here) attempts to make the 60% limit more operational and enforceable.

Irish Perspective on Bank/Sovereign Default -- Yves Smith - This program on RTEOne from the Ides of March gives a window on how the prospect of default looks from Irish perspective (hat tip Richard Smith). Note that it is the chairman of Goldman Sachs International who argues against debt repudiation. We’ve argued that it’s rational for the Irish to threaten default and if the debt is not restructured, to act on its promise. The EU has more to lose, since one country rebelling against austerity demands will embolden others, and also brings the real underlying problem, that of Eurobank undercapitalization, to the fore.  You can view the program here. The relevant segment starts at the ten minute mark. The debate at the end of the show is quite illuminating. The one issue that is not stated clearly enough on this program is that investors are delighted to lend to companies and countries post default/restructuring because they have a much better balance sheet. The “credibility” issue is a canard. Ireland is not a credible borrower now because the debt burden is obviously unsustainable. The impediment is not the Ireland won’t be able to borrow post default, but how ugly and protracted a default/restructuring process might be.

Guess which policy your central bank will pursue -Dean Baker - An IMF conference exposes a clear choice: who pays for this crisis – workers by unemployment or banks through inflation?  In spite of the increased openness of the discussion at the IMF, it is not clear that its policies have undergone a similar adjustment. In particular, it openly touts the route of "internal devaluation" for countries that have fixed the value of their currency to other currencies or don't have their own currency.This is an incredibly painful process. The idea is that a country that has high unit labour costs relative to its trading partners will get its costs in line by lowering wages. The way they lower their wages is to force workers to take pay cuts under the pressure of high rates of unemployment. Latvia is currently the poster child for internal devaluation. Its unemployment rate was still 16.9% in the final quarter of 2010, falling from 18% the quarter before. The IMF path would have other countries with serious competitiveness problems such as Ireland, Greece, Spain and Portugal go the same path.  The alternative would be to promote a somewhat higher rate of inflation in the surplus countries – most importantly, Germany. Higher inflation in the surplus countries would allow the deficit countries to regain competitiveness simply by having their wages rise less rapidly than the inflation rate in the surplus countries. This could be accomplished without the double-digit unemployment rates that the latter countries are not enduring.

And now for the nitty-gritty technical details - FT Deutschland quotes Jean-Claude Juncker as saying that the financing of the EFSF will be achieved entirely through an increase in the guarantees of the AAA-rated countries, rather than through direct capital injections from non-AAA rated countries. This has been demanded by Finland, but rejected by Italy and others. The article also mentions that the EFSF will discuss with rating agencies whether borrowers should post collateral for an EFSF loan – and what impact that would have on the structure. And Ireland will need to draw down its €85bn facility with the EFSF/EFSM/IMF faster than foreseen (not by us though), as it needs more money for bank recapitalisation. The exact amount will be determined by the European Commission and the ECB by the end of March.  After chairing the eurozone meeting, Jean Claude Juncker said that he is “not happy” about the role played by credit-rating companies in Europe’s sovereign-debt crisis, particularly in the case of Spain, Bloomberg reports. Juncker said it is “surprising” that Moody’s didn’t wait to see the Bank of Spain’s assessment of lenders’ capital shortfall, which was due on the same day, before downgrading the nation’s credit rating. According to proposals by the EU Commission last November, credit-ratings agencies may be forced to give governments three days’ notice of any change to their rating, compared to current 12 hours. 

Bundestag sets limits to Merkel’s room for manouvre - Dow Jones Newswire carries the story that the German parliament yesterday passed a motion calling on the government to reject bond purchases of the various rescue mechanisms of the EU. The motion has no direct significance, and will not change for Angela Merkel to renege on her agreement to accept bond purchases in primary markets, but to attach so many conditions that this will, in practice, never be used. But the vote shows the constrains under which the German government operates at the moment, and that any “whatever it takes” promise is highly conditional on fixed parameters set by German constitutional law, and political opinion. The story quote a CSU member of the Bundestag as saying that the vote supported Merkel’s position, but also put limits on it.  In an opinion on the ESM, the ECB, meanwhile, came out in broad support, but wants the ESM to be established firmly as an official institution under European law, not as a Luxembourg-based company like the EFSF. The ECB gave its qualified backing to the ESM, but warned about moral hazard, which would require strong safeguards such as an IMF involvement in the debt sustainability analysis, programme negotiation and monitoring.

Total German Triumph As EU Minnows Subjugated - The Iron Chancellor of Germany could not have been clearer. “Whoever wants credit must fulfill our conditions“.  These conditions are capitulation by three vulnerable states on core policies, and partial loss of sovereignty for the rest of the eurozone.  For Greece, the terms are a fire-sale of €50bn (£43.2bn) of national assets within four years, a tenfold increase from the original €5bn that premier George Papandreou thought he signed up to a year ago.  When the IMF first mooted this sum last month he told the inspectors not to "meddle in the internal matters of the country.“  State holdings in Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank, to name a few, will not fetch more €15bn. What next?  In return, Chancellor Angela Merkel has agreed to cut the penal interest rate on the EU share of Greece’s €110bn loan package by 100 basis points (still penal), and stretch the maturity to 7.5 years.

Straightjackets and “We Rule” Shirts - John B. Taylor - David Wessel writes about the "straitjacket" of a one-size-fits-all monetary policy in his Wall Street Journal column this week. He shows why a single interest rate set by the European Central Bank is not necessarily appropriate for all the countries in the Euro zone: it can push some countries off the Taylor rule which can lead to financial excesses and other problems. In the period leading up to the financial crisis, the Euro interest rate was way too low for Ireland, Greece, and Spain. So it’s not surprising they ran into financial difficulties. Germany in contrast was right on the rule. The chart below (a favorite of mine produced in March 2008 by the OECD) illustrates the same point: the larger was the deviation from the Taylor rule, the larger was the housing boom. The chart also illustrates that the single rate would not have been such a problem if it were closer to the Taylor rule during that period: all the other countries were to the right of Germany.

EU Debt Crisis Won’t End Without Debt Restructuring, Buiter Says - Europe’s debt crisis won’t be resolved until a number of country’s restructure their debt and clean up their banks’ balance sheets, Citigroup Inc. Chief Economist Willem Buiter. “It won’t go away until Europe restructures a couple of sovereigns and deals with its dummy banks,” Buiter said today in an interview on Bloomberg Television’s “The Pulse” in London, adding that probably meant debt restructuring for Greece and Ireland, though not Spain. “All that’s been done so far is to kick the problem down the road.” European Union leaders agreed at the weekend to increase the effective lending capacity of its bailout fund to 440 billion euros ($617 billion), a move Buiter said hasn’t solved the underlying problems that led to the crisis. Euro-area finance ministers meet in Brussels March 21 and EU leaders gather there again three days later to hammer out the details of their plan.

Europe’s Austerity: a Grimm’s Fairy Tale - In ways big and small, Europeans from Greece to Portugal, from Britain to Bavaria are registering their growing anger with the relentless assault inflicted by government-imposed austerity programs.  Wages, working conditions and pensions that unions successfully fought for over the past half century are threatened by the collapse of banking systems caught up in a decade-long orgy of speculation that the average European neither took part in, nor profited from. Even the so-called "well off" workers of Bavaria, Germany's industrial juggernaut, have seen their wages, adjusted for inflation, fall 4.5 percent over the past 10 years. The narrative emanating from EU headquarters in Brussels is that high wages, early retirement, generous benefits, and a "lack of competition" has led to the current crisis that has several countries on the verge of bankruptcy, including Ireland, Greece, Portugal and Spain. Now, claim the "virtuous countries"—Germany, the Netherlands, and Finland—it is time for these spendthrift wastrels to pay the piper or, as German Chancellor Andrea Merkel says, "do their homework."  It is an interesting story, a sort of Grimm's fairly tale for the 21st century, but it bears about as much resemblance to the cause of the crisis as Cinderella's fairy godmother does to the International Monetary Fund (IMF).

Running faster but falling behind - RAISING pension ages often incites protest. France was rocked by unrest last autumn over the government’s decision to increase the standard pension age from 60 to 62. Despite this, pension ages are going up (or are planned to rise) in around half of the 34 countries that belong to the OECD, according to the latest edition of "Pensions at a Glance", from the intergovernmental think-tank based in Paris.This comes after a long period in the second half of the twentieth century when pension ages were falling. That decline bottomed out in the mid-1990s but the upward trend is now becoming more salient. Over the next 30 years, the average pension age for men will rise by 1.5 years, to 64.4 in 2040. For women, it will increase by more—2.3 years—to 64.1, as their retirement ages are equalised with men’s. That’s depressing for all those who yearn to hang up their boots, but sounds encouraging for finance-ministry scrooges. But it isn’t enough, thanks to even faster rises in longevity. The OECD estimates that life expectancy at the new pensionable age in 2040 will be 19.6 years for men, up from 18.5 in 2010. For women it will be 23.9 in 2040, up from 23.3 today.

The Happynomics of Life - The Brits don’t go in much for happiness. Stiff upper lip is more the thing, and a good laugh if warranted. Trying to be happy just seems like piffle to a practical people. Undeterred, Prime Minister David Cameron has decided to create a national happiness index providing quarterly measures of how folks feel. His foray into “happynomics” has prompted a deluge of criticism — “woolly-headed distraction” was a mild commentary — at a time when Brits face a year of cuts in everything from public-sector jobs to child benefits. The consensus seems to be that Cameron is going touchy-feely because in reality he’s wielding an ax.

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