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

Saturday, April 23, 2011

week ending Apr 23

Fed's balance sheet grows to record in latest week - The U.S. Federal Reserve's balance sheet grew to another record size in the latest week, as the central bank bought more bonds in an effort to support the economy, Fed data released on Thursday showed. The balance sheet expanded to $2.670 trillion on April 20 from $2.649 trillion on April 13. The Fed's holding of U.S. government securities grew to $1.402 trillion on Wednesday from last week's $1.375 trillion. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) fell to $933.22 billion in the latest week from $937.16 billion the prior week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system fell to $128.46 billion from $130.89 billion the prior week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $5 million a day in the week ended Wednesday, down from an average daily rate of $21 million last week.

US Fed Balance Sheet Expands To $2.690 Trillion‎ -- The U.S. Federal Reserve's balance sheet grew last week as the central bank continued efforts to spur economic growth through asset purchases. The Fed's asset holdings in the week ended April 20 climbed to $2.690 trillion, from $2.670 trillion a week earlier, it said in a weekly report released Thursday.The Fed's holdings of U.S. Treasury securities rose to $1.402 trillion on Wednesday, from $1.375 trillion the previous week.Thursday's report also showed total borrowing from the Fed's discount window slipped to $17.62 billion Wednesday, from $17.86 billion a week earlier.Borrowing by commercial banks increased to $6 million Wednesday, from $2 million a week earlier.Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts climbed to $3.423 trillion from $3.409 trillion.U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.663 trillion from $2.650 trillion.Holdings of agency securities rose to $760.29 billion from the previous week's $758.93 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--April 21, 2011

Fed to signal end of monetary easing - An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June. When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn “quantitative easing” programme – or “QE2” – that is due to finish by the end of the second quarter. Fed officials, however, know that announcing more asset purchases at the last minute would disrupt markets. Silence on a follow-up “QE3” at next week’s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop.

Is the Fed finished? - THE Financial Times has a story by Robin Harding above the fold this morning, headlined, "Fed to signal end of monetary easing". Sounds like big news! What's it all about? I understand what Mr Harding is saying here. Based on recent statements from key people on the FOMC it seems clear that the Fed's intention is to complete QE2 and then stop. So long as inflation expectations are rising, I would be very surprised to see additional Fed action. (I don't necessarily agree that rising inflation expectations should stay the Fed's hand; I simply think that they will.) And yet, it's too strong to say that the Fed is signaling an end to its easing cycle. It would be more accurate to call the impending end of QE2 a pause. The end of the initial round of asset purchases did not represent the conclusion of the easing process; when global developments undermined expectations in America, the Fed responded. I am sure that the FOMC is keeping a close eye on falling projections for first quarter output and on the potential threats to a self-sustaining recovery represented by Europe, commodity prices, and the global swing toward policy tightening.

Should the Fed's Expansionary Policies Be Ended? - No, but they should be more systematic. The problem with the QEs all along is that they have been rather ad-hoc and unpredictable.  This has made them less effective and politically polarizing.  Imagine how different the Fed's monetary stimulus would have been had they adopted an explicit target, preferably a nominal GDP level target.  Such an approach would have given them the freedom to do really aggressive 'catch-up' monetary easing until nominal GDP returned to the targeted trend while at the same time ensuring long-term predictability.  It also would be viewed (correctly) as constraining the Fed's power.   Instead we are stuck with the problematic QE programs that have been at best mildly effective and as result, are an easy target for critics. Thus, it is no surprise to learn from Robin Harding of the FT that the Fed is about to signal the end of monetary easing: One reason the Fed is contemplating this is because the QE programs have not delivered a robust recovery  and have become a political minefield.  This does not mean monetary policy could not do more if done right. 

End of QE2: Interest on Reserves vs. Balance Sheet Management‎ - The end of QE2 poses a broader question: what will constitute the implementation of US monetary policy after June? The Fed faces two major challenges:

  • 1. Dealing with the size of its balance sheet: The main goal is to soak up excess liquidity (defined as the amount of liquidity beyond which the actual level of Fed Funds falls below the desired level). To reduce mass liquidity, the Fed could act on both sides of the balance sheet. However, the Fed is not allowed to absorb excess reserves by issuing short term notes, as emerging market central banks frequently do (which effectively sterilizes their FX reserves). On the asset side of its balance sheet, the Fed faces a duration concentration on long-term maturities. The average duration holdings of the Fed is 5-7 years, so there is clearly a time issue. If the Fed needs to reduce its balance sheet before any tentative tightening, there is a definitive risk linked to the associated increase in the relative supply of US notes.
  • 2. Adopting the separation principle:  The idea according to which the central bank steers the supply of liquidity to fix the repo rate is wrong. The separation principle suggests that liquidity can be increased or reduced whatever the level of the repo rate. Reserves requirements are independent of the level of interest rates. As a result, as long as the central banks provide the amount of reserves required by the banking system it can set and signal its desired level of interest rates independently.

Charles Plosser and the 50% Contraction in the Fed's Balance Sheet - Dr. John Hussman is no stranger to Outside the Box readers. And his recent posting has my mind reeling. In essence he is saying that if the Fed wants to stop the QE and allow rates to rise, they must either reverse the QE or bring on inflation. And he does it with numbers and his usual strong reasoning. I really did read this 3-4 times, thinking through the implications. “There are a few possible outcomes as we move forward. One is that the economy weakens, and the Fed decides to leave interest rates unchanged, or even to initiate an additional round of quantitative easing. In this event, it's quite possible that we still would not observe much inflation, provided that interest rates are held down far enough. Unfortunately, the larger the monetary base, the lower the interest rate required for a non-inflationary outcome. T-bills are already at less than 4 basis points. In the event of even another $200 billion in quantitative easing, the liquidity preference curve suggests that Treasury bill yields would have to be held at literally a single basis point in order to avoid inflationary pressures.”

Stocks, Flows, and Pimco (Wonkish) - Krugman - I’ve been getting questions about what happens when the Fed wraps up QE2 — related especially to Bill Gross’s public view that interest rates will shoot up. This is related to the question of the extent to which QE2 has kept interest rates low. So a quick exposition of my theoretical position, which also happens to be more or less standard economics. So: I basically think of asset prices in a Tobin-type stock equilibrium framework (pdf). People make portfolio choices, allocating their wealth among bonds, stocks, etc.. Asset prices – including the famous “q” – rise and fall to match these portfolio choices to the actual asset supplies. On this view asset purchases matter because over time they change the stocks of assets available : by buying long term federal debt, the Fed takes some of that debt off the market, and hence drives up the price of what’s left, reducing interest rates. The flow – the rate of purchases – matters only to the extent that it affects expected returns. On this view, the fact that the Fed is currently buying some large fraction of debt issuance is irrelevant; interest rates are determined by the willingness at the margin of private investors to hold the existing stock of debt, regardless. This view could be wrong, or at least incomplete. Investor inertia – a tendency to leave funds where they are – could give flows an independent role. But how much of a role? If you believe that it is obvious that rates will spike as soon as QE2 ends, you have to ask why investors aren’t moving out of US debt now in anticipation; you don’t have to believe in efficient markets to believe that totally obvious gains or losses will be anticipated.

A note on the recent Fed accounting change - This was a response to Detroit Dan in comments here, but since the comment is about an Yves Smith post that I have to linked to here and here, I'm posting my reply here for those who may also be wondering about the recent Fed accounting change. The Yves Smith post is a discussion of how the Fed plans to handle any interest rate/market loss it could incur if it decides to sell the hoard of Treasuries it bought via QE2. Basically, if the selling results in a net loss to the Fed, it will just consider the current loss to be deductible from the amount of profit it sends to the Treasury the next time it has a profitable year. So during the year that it incurs the loss, it actually receives a "credit" from Treasury.A comparable scenario in private business is if you have a business that incurs a loss this year, you just say "it's okay,I will in the meantime just consider the loss as a shareholder loan from me payable to me the next time the business is able to". This can go on indefinitely if you are like the Treasury, which can just debit-credit the losses until the Fed finally is able to pay again. But you, as a currency user, will have to fund the loss with actual money, while the Treasury, a currency issuer, doesn't.

Bernanke Market Signals No Shift With Obama Deficit Cutting -- The Federal Reserve can be counted on to keep its balance sheet big and interest rates low if President Barack Obama and Republican lawmakers agree on a multi-year deal to slash the $1.4 trillion budget deficit. That’s the message from the Treasury bond market, where yields on 10-year securities sank to their lowest level in almost a month this week on speculation that government budget cuts will slow the economy and encourage the Fed to hold off from raising borrowing costs, said Mohamed El-Erian.“The more fiscal austerity you get, the more likely that the Fed will stay on hold for longer,” El-Erian said in an April 19 interview on Bloomberg Radio’s “Surveillance” A 10-to-15 year agreement to stabilize and then reduce the ratio of federal debt to gross domestic product would trim U.S. economic growth by a quarter to a half percentage point a year, according to a scenario run by Englewood, Colorado-based consultants IHS. The Fed probably would try to mitigate that impact by tightening credit more slowly than it otherwise might

Bernanke May Sustain Stimulus to Avoid ‘Cold Turkey’ End to Aid - Federal Reserve Chairman Ben S. Bernanke may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June. The Fed chief’s top two lieutenants said this month the economy and inflation are too weak to warrant the start of a monetary-policy reversal. Investors and economists including David Kelly at JPMorgan Funds see that as a signal the Fed will keep its balance sheet at current levels by replacing about $17 billion a month in maturing mortgage debt with Treasuries.  Ending the reinvestment policy and the $600 billion program at the same time would be like quitting stimulus “cold turkey,” said Kelly, who is based in New York and helps oversee $400 billion as chief market strategist at JPMorgan. “It does make sense to reinvest for a while,” he said. “Then they could watch how bond yields react to that.”

Bernanke to Open Up as Fed Embarks on Era of Glasnost -… Next Wednesday, Federal Reserve Chairman Ben Bernanke will do something no Fed chief has done before: Stand before a room full of journalists after officials conclude a policy meeting and answer questions about the central bank's decisions. Washington churns out press conferences the way Kansas cranks out wheat. But this briefing will carry more import than most: Mr. Bernanke has been on a campaign since taking the helm of the Fed in 2006 to make it more transparent and consensus-driven. The financial crisis severely shook public confidence in the Fed, the economy has recovered unevenly since then, and Mr. Bernanke faces disagreement on his own policy-making committee. Inflation is climbing, in large part due to surging food and energy prices. Unemployment remains high and economic growth disappointed in the first quarter. Mr. Bernanke seems intent on leaving the central bank's ultralow-interest-rate policy in place for now, but he faces vocal opposition in his ranks.

Who Cares About the Fed? - Federal Reserve policy affects short-term interest rates, bank regulation and eventually inflation.  The Federal Reserve, especially its New York branch, is actively engaged in buying and selling Treasury securities, and it lends money to banks on an overnight basis. As a result, it is widely thought that the Federal Reserve is an important determinant of the rate of interest paid on short-term Treasury securities. By reducing the supply of Treasury securities and overnight loans, so-called “tight” monetary policy raises short-term interest rates. High short-term interest rates are said to discourage borrowing, and thereby curtail private sector investment projects. The idea is that private sector projects are undertaken only when their expected return exceeds the cost of borrowing. In theory, high short-term interest rates result in relatively few capital projects, with high expected returns, and low short-term rates result in more capital projects, including those with lower expected returns. But the effect of high short-term interest rates on Main Street’s economy has been exaggerated. Although it is commonly assumed that today’s rock-bottom rates should help strengthen a business recovery, it appears that business conditions actually have little to do with short-term money markets.

Impeccable Timing - Amidst all the U.S. budget talk last week, the IMF decided to weigh in by noting the U.S. lacked a "credible strategy" to handle its public debt.  Now Standard & Poor's has decided to pile it on by downgrading U.S. public debt from stable to negative.  From the FT: “We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns..." Between this and the rumors of a possible Greek debt restructuring, global markets are roiling.  If this turns ugly, then Fed should be ready to accommodate the spike in global demand for dollar-denominated money.

Fed May Have to 'Carry the Day' Amid Deficit Debate, Toms Says - The Federal Reserve may be slower to increase interest rates as U.S. government debates budget cuts to reduce the deficit, said Matt Toms, the head of U.S. public fixed-income investments at ING Investment Management. Standard & Poor’s put the U.S. government on notice that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. Toms helps manage more than $500 billion at Atlanta-based ING. He spoke today in a telephone interview. “The government is going to need to be more diligent. That means some reduction in fiscal stimulus that’s been put through the system and monetary policy will have to carry the day.” “All else equal, growth expectations get tempered somewhat because of this.”

Fed’s Bullard: Monetary Policy Ultimately Aimed at Headline Inflation - In a speech offering an optimistic outlook for the economy, a Federal Reserve official said monetary policy is ultimately devoted to controlling headline inflation levels, and no other measure of price pressures. “Headline inflation is the ultimate objective of monetary policy with respect to prices” and “the only reason to look at core [inflation] is as an indicator for headline,” Federal Reserve Bank of St. Louis President James Bullard said Monday. (See his presentation.) He was referring to an increasingly contentious debate that cuts straight to the heart of monetary policy making. For a long time, central bankers have tended to set monetary policy, at least over the short term, in reaction to the changes in core price pressures, which are stripped of food and energy prices. That’s because most Fed officials have believed core measurements provided them a less volatile way of gauging inflation.

James Bullard: “Headline Inflation the Proper Target” - In his Kentucky Day with the Commissioner (?) presentation today, James Bullard makes the case for targeting headline inflation. This is likely consistent with the recent hawkish turn he has taken, but is it correct? Is it true that we should expect core inflation to be a predictor of headline inflation, as he suggests? First things first, though. Bullard proclaims victory for the quasi-monetarists: This experience [rising asset prices in multiple markets, including stocks, bonds, commodities, as well as declining real interest rates and a depreciated dollar] shows that monetary policy can be eased aggressively even when the policy rate is near zero. But then Bullard takes a turn toward hawkish land, with five points regarding core vs. headline inflation:

  • Headline inflation refers to overall price indexes.
  • Core inflation refers to the same indexes, but without the food and energy components.
  • Core inflation is often smoother than headline inflation.
  • Core eliminates 20% or so of the prices in the index.
  • The “core” concept has little theoretical backing. It is very arbitrary.

Glenn Rudebusch on Headline Inflation - Here is a data point given by Glenn Rudebusch (h/t Mark Thoma), vice president of the San Francisco Fed, in the recent FedView: A simple rule of thumb that summarizes the Fed’s policy response over the past two decades recommends lowering the federal funds rate by 1.4 percentage points if inflation falls by 1 percentage point and by 1.8 percentage points if the unemployment rate rises by 1 percentage point. Either headline inflation or core inflation can be used with this rule to construct policy recommendations. Relative to a core inflation formulation, a policy rule using headline inflation would have called for a higher fed funds rate in 2005-2006 before the recession and in 2008 in the midst of a deepening recession. Currently, both formulations call for substantial monetary accommodation. The Fed, in it’s October meeting (after Lehman had failed on Sept. 16th) lowered their target fed funds rate only 50 basis points to 1.50. That week (Dec. 6th-10th), the DJIA fell 18%, but it wasn’t until Oct. 29th that the Fed met hastily in an emergency meeting to cut rates…50 basis points, to 1.00. What metric could they have been watching that would suggest (in a historical sense) that inflation was the problem, and not deflation? It could only have been headline inflation!

Wage-price spirals have two spiraling components - INFLATION expectations in America are rising, it's true. The increase, so far, has been benign—the numbers indicate that expectations are rising back to a normal level, and at a slow pace. But could more, and more dangerous, increases be on the way? Probably not, says the New York Fed. And here's one big reason why: For inflation expectations to begin spiraling upwards, price increases must be sustainable. And for price increases to be sustainable, they must be matched by wage increases; otherwise real purchasing power falls, consumption pulls back, and the economy weakens until prices adjust downward. Given the state of the American labour market, there is very little upward wage pressure, and therefore very little risk of a wage-price inflation spiral. A 2010 IMF working paper on persistent, large output gaps covered this territory:

Extra Credit? - Krugman - One thing I see here and there — on blogs, in comments, etc. — is the claim that inflation is defined not by the rise in prices but by the expansion of money and credit, with prices just as a symptom. Actually, no. Words mean what they are taken to mean, and if everyone uses the word “inflation” to refer to the CPI, then that’s what it’s about.  First of all, what is money? It’s not just pieces of green paper bearing pictures of dead presidents — that’s much too narrow a definition. Milton Friedman liked M2, which includes a wide range of bank deposits. In the modern world, there’s a strong case for adding in other forms of short-term funds placement, like repo. And measures like this have not shown rapid growth — in fact, they plunged in the financial crisis, and even now are growing at below historical rates. What about credit? Here’s the rate of growth of nonfinancial credit liabilities in the United States — that’s business, consumers, and government combined: We’re well below historical growth rates.

Mauldin: The Cure for High Prices - Today we once again think about the inflation/deflation debate, turn our eyes to Europe and the very interesting election happening there this Sunday, and speculate a little about what could derail the US economy. The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat. Last week I wrote about what I think is the potential for inflation in the US to rise to uncomfortable levels, in the 4-5% range. I got questions from readers asking if that meant I no longer thought deflation was an issue. The quick answer is no. Deflation, or at least low inflation, should be the normal trend. Prices should go down as we become more productive. But there is never a one-way street. Prices fluctuate. We got the Consumer Price Index numbers today, and we will use them as a "teaching" moment to think about the whole drift, the yin and yang, if you will, of inflation.

What Is Driving the Recent Rise in Consumer Inflation Expectations? - NY Fed: The Thomson Reuters/University of Michigan Survey of Consumers (the “Michigan Survey” hereafter) is the main source of information regarding consumers’ expectations of future inflation in the United States. The most recent release of the Michigan Survey on March 25 drew considerable attention because it showed a large spike in year-ahead expectations for inflation: as shown in the chart below, the median rose from 3.4 to 4.6 percent and the other quartiles of responses showed similar increases. ... In this post, we draw upon the findings of an ongoing New York Fed research project to shed some light on the possible sources of the recent increase and to gauge its significance. While our research spans both short- and medium-term inflation expectations, this blog post discusses movements in short-term measures only...

Oil Prices Are Skyrocketing. For Everything Else, Inflation's Still Low. - The latest U.S. inflation numbers are out this morning. Scroll down the list, and a few numbers leap out. The price of gas at the pump rose by over 19 percent in the past year, and by 5 percent between January and February. Other energy prices — for things like fuel oil — were also up sharply, driven by the global jump in oil prices. Otherwise, though, inflation is still pretty low. Overall, the price of everything consumers buy rose by just over 2 percent in the past year. That's lower than the long-term average for the U.S. (but higher than the ultra-low inflation rates we've been seeing in the past few years). The price of food also rose by about 2 percent in the past year — despite the fact that the global price of staples such as wheat, corn and sugar skyrocketed. As we've noted before, that's largely because the price of basic food staples accounts for a tiny percentage of food prices in the U.S. We're mostly paying for labor and marketing and everything else.

 A Golden Tipping Point: University of Texas Takes Delivery Of $1 Billion In Physical Gold - Tipping points are funny: for years, decades, even centuries, the conditions for an event to occur may be ripe yet nothing happens. Then, in an instant, a shift occurs, whether its is due a change in conventional wisdom, due to an exogenous event or due to something completely inexplicable. That event, colloquially called a black swan in recent years, changes the prevalent perception of reality in a moment. This past week, we were seeing the effect of a tipping point in process, with gold prices rising to new all time highs day after day, and the price of silver literally moving in a parabolic fashion. What was missing was the cause. We now know what it is: per Bloomberg: 'The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board.' And so, the game theory of a nearly 100 year old system of monetary exchange has seen its first defector, but most certainly not last. With an entity as large as the University of Texas calling the bluff of the Comex, the Chairman, and fiat in general in roughly that order, virtually every other asset manager is now sure to follow, considering there is not nearly enough physical gold to satisfy all paper gold in existence by a factor of about 100x. The proverbial Nash equilibrium has just been broken.

Default or Inflation? - Over the last year or so there has been an increasing amount of discussion about government debt, default, and monetary policy. What I have in mind in talking about the importance of a country having its own currency is the sovereignty over monetary policy. Suppose that government debt and nominal income are both increasing, but the ratio between the two is not. Now suppose that one does not have sovereignty over monetary policy and that policy becomes tight without any change in fiscal policy. As a result, nominal income declines. To the extent that tax revenue is raised through income taxes, this implies a corresponding reduction in revenue and a larger budget deficit than initially planned. The larger budget deficit means a larger increase in the stock of government debt. The larger government debt coupled with lower nominal income causes the ratio between the two to get larger. Since this is a crude measure of the country’s capacity to pay back the debt, this change is potentially significant.

Putin: U.S. Monetary Policy Is ‘Hooliganism’ - Russian Prime Minister Vladimir Putin slammed expansionary U.S. monetary policy, calling it “hooliganism”, in remarks that followed more veiled criticism from China after Standard & Poor’s Corp. cut the outlook on its U.S. debt rating this week. “We see that everything is not so good for our friends in the States,” Putin told lawmakers Wednesday. “Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone — in other words, the whole world — with government bonds. There is no way we will act this way anytime soon. We don’t have the luxury of such hooliganism,” he said. Even as Putin blamed the U.S. for printing money — something for which Russia was criticized during periods of hyperinflation in the 1990s — other Russian officials said there is no alternative to the U.S. dollar and declined to discuss cutting the country’s dollar holdings. Russia has the world’s third-largest international reserves after China and Japan, with the biggest part in U.S. government debt. However, Russia appears to have cut its direct Treasury holdings significantly in recent months, according to data from the U.S. Treasury.

Vladimir Putin Thinks We're Hooligans - Krugman - Here: “Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone — in other words, the whole world — with government bonds. There is no way we will act this way anytime soon. We don’t have the luxury of such hooliganism,” he said. The funny thing is that Russia, like other emerging markets, is suffering from inflation precisely because it doesn’t want to let the United States reduce its trade deficit. Capital wants to flow to the EMs, with the counterpart of that flow being a move on their part into trade deficit while America reduces its trade deficit. But the necessary counterpart of that move is a real appreciation on the part of the EMs — a rise in the relative price of their goods and services. They could let their currencies rise; if they won’t, the real appreciation will take place via inflation, which is what is happening.

Hooliganism? Hardly. - Vladimir Putin is critical of monetary policymakers in the US: Putin: U.S. Monetary Policy Is ‘Hooliganism’, WSJ: Russian Prime Minister Vladimir Putin slammed expansionary U.S. monetary policy, calling it “hooliganism”, in remarks that followed more veiled criticism from China after Standard & Poor’s Corp. cut the outlook on its U.S. debt rating this week. … The real issue is that, as noted in the article linked above, “Russia has the world’s third-largest international reserves after China and Japan.” Policymakers in Russia are worried about inflation in the US eroding the value of these reserve holdings. But why does Russia have so many reserves to begin with? It comes from a trade surplus, one that — like the surplus in China — can be alleviated by allowing its currency to appreciate on foreign exchange markets (that would also help with inflation in both countries). The US cannot reduce its trade deficit unless other countries are willing to reduce their surpluses. That is, unless it is willing to undergo deflation — another way to allow foreign currencies to appreciate against the dollar. But policymakers in the US are not going to allow that to happen since it could lead to a deflationary spiral.

A Soft Patch Or Something Worse? (Reuters) - The U.S. economy appears to be running dangerously close to stall speed, and the rest of the world may not have enough oomph to compensate. At the start of 2011, growth looked solid. The U.S. unemployment rate was finally dropping, consumers were in a spending mood, and economists were busily upgrading first-quarter growth projections to the range of 4 percent. Those forecasts are falling fast. Many economists now think the U.S. economy grew at a sluggish 1.5 percent to 2 percent pace over the first three months of the year, and one forecaster even raised the possibility of a negative reading. Whether this is a short-lived blip or a more worrisome dip depends largely on which way oil prices move, and how consumers and businesses around the world respond. Goldman Sachs economist Andrew Tilton said downside risk was "unfortunately a phrase we have been using a lot lately."

Jan Hatzius Friday Night Bomb: "We Are Downgrading Our Real GDP Growth Estimate To 1¾% From 2½%" - Nobody could have seen this coming: "With most of the news on first-quarter growth now in, the GDP “bean count” looks even softer than it did a couple of weeks ago. The most recent disappointments have come on the export side—with trade now set to subtract significantly from growth in the quarter—and from inventories. Consequently, we are downgrading our real GDP growth estimate to 1¾% (annualized), from 2½% previously (and from 3½% not too long ago)." Some other things nobody will be able to predict: Hatzius dropping full year GDP from 4% to 2.25%; Goldman's downgrade of precious metals, Kostin's 2011 S&P 500 price target reduction by 20%, and Goldman getting its New York Fed branch to commence monetizing $1.5 trillion in debt some time in October.

How Risky is the Global Economy? - Mohamed A. El-Erian -  Many are opting for the first, more reassuring view of the world. This global view is based on multispeed growth dynamics, with the healing and healthy segments of the global economy gradually pulling up the laggards. It is composed of highly profitable multinational companies, now investing and hiring workers; advanced economies’ rescued banks paying off their emergency bailout loans; the growing middle and upper classes in emerging economies buying more goods and services; a healthier private sector paying more taxes, thereby alleviating pressure on government budgets; and Germany, Europe’s economic power, reaping the fruit of years of economic restructuring. Much, though not all, of the recent data support this global view. Indeed, the world has embarked on a path of gradual economic recovery, albeit uneven and far less vibrant than history would have suggested. If this path is maintained, the recovery will build momentum and broaden in both scope and impact.

Our "Let's Pretend" Economy - Children love to play "let's pretend." Let's pretend the economy is "recovering."Why does this "recovery" remind me of an addict who's conning his caseworker? (Yes, I'm really in recovery--those aren't tracks, they're insect bites....) Let's play pretend that jobs are really really coming back, so please ignore this chart, or turn it upside down: Also ignore that Big U.S. Firms Are Shifting Hiring Abroad. Let's pretend that households, corporations and government are reducing their debt. To do that, we have to ignore that the debt-junkie (i.e. the U.S.A.) hasn't kicked the monkey off its back, it just keeps feeding it more debt. David Stockman dismantled all that propaganda about corporations sitting on trillions in cash--they're sitting on even bigger piles of debt: Federal Reserve’s path of destruction. He also takes out the claim that "consumers are deleveraging." Consumer debt has barely budged. Never mind, let's pretend we're deleveraging. So please ignore this chart:

Monetary Madness - The Dollar Starts To Look Good! - Good golly what a mess the World is!  You know it's bad when the US begins to look responsible compared to other World governments but even Alan Greenspan is now calling for an end to the Bush Tax cuts before they cost us another $3.6Tn over the next decade (and that's assuming no inflation and steady earnings) and we have Paul Ryan and the President calling for Trillions more in deficit reduction so I guess we SOUND serious about cutting our deficit and WE SHOULD BE because the IMF this week said the U.S. budget deficit was on course to hit 10.8 percent of nation's economic output this year, tying with Ireland for the highest deficit-to-GDP ratio among advanced economies.   With QE2 winding down in 2 months and no QE3 on the horizon, we can finally turn around and look at the policies of other nations, as the tidal wave of new dollars pulls back and exposes their own, smaller, montetary schemes.  The rest of the World is crying Uncle Sam as most Central Banks are mandated to fight inflation and that has been an impossible dream while the US runs the money spigots.  Even worse, relatively lower US lending rates sets up a new global carry trade, threatening to make the US the new Japan as Dollars are sold (devalued) Globally and high-yield currencies are bought, making the Dollar relatively weaker and crippling trade for other nations as well as devaluing their Dollar-denominated assets (including debt notes!).  It was bad enough when Japan did it and the Yen is less than 10% of all Global currency - the Dollar is 62%

Fleeing the Dollar Flood -- Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That's a dangerous game, given the need for investment to drive economic development. But it's also increasingly typical of the world's reaction to America's mismanagement of the dollar and its eroding financial leadership. The dollar is the world's reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.  The Fed's relentlessly easy monetary policy combined with Congress's reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on.

It’s Official: China Will Be Dumping US Dollars - In case you missed it, earlier this week China announced that its foreign currency reserves are excessive and that they need to return to “reasonable” levels. In politician speak, this is a clear, “we are sick of the US Dollar and will be taking steps to lower our holdings.” Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt). This comes on the heels of China deciding (along with Russia) to trade in their own currencies, NOT the US Dollar. Not to mention the numerous warnings Chinese politicians have been issuing to the US over the last 24 months. In simple terms, China is done playing nice and is now actively moving out of US Dollar denominated assets. This is the beginning of the US Dollar’s end as world reserve currency.  The dimwits in Washington don’t understand this because their advisors are all Wall Street stooges who don’t think debt or deficits matter. After all, why would they? Their entire business model is now based on endless cheap debt from the US Fed. So it’s only logically (in their minds) that the US as a sovereign state engage in the same strategies.

China's Yuan Nearly "Freely Usable": Central Bank's Yi (Reuters) - China's yuan is close to being a freely usable currency, one of two key tests for it to be included in the International Monetary Fund's currency basket, the deputy governor of China's central bank said on Sunday. The most widely used emerging market currencies should be considered for the basket, Yi Gang, deputy governor of the People's Bank of China told reporters. He was speaking on the sidelines of a twice-yearly meeting of the International Monetary Fund where expanding the IMF's so-called Special Drawing Rights was discussed. "The most obvious candidates are the BRICS," Yi said, referring to Brazil, Russia, India, China and South Africa. He added that the Chinese yuan is "very close to being freely usable." The SDR now comprises the dollar, euro, yen and sterling and is a synthetic quasi-currency that is mainly used as an accounting tool for the IMF's internal operations. Some experts believe the SDR could increasingly play a role akin to that of a global reserve currency.

Axel Merk: Why Is Anyone Still Waiting to Sell the Dollar? - "The Fed can buy billions, even a trillion or so, but if and when the market is moving against the policymakers then there is no stopping. The Fed cannot stem that tide. There is only so much that they can manage and so it is something that they have to watch very carefully. At the same time, they are not terribly concerned. If the bond market is falling, you do not know whether it is because of more economic growth or because of more inflation, and you really only know after the fact. So for now people think “We have economic growth kicking in”, until the next economic numbers are not as great as expected and so it is a bit like a boiling frog syndrome. You print in all this money, you think everything is great and you have some warning signs but you think “Things are moving along” and by the time that you really see the damage you have created, it is quite late to undo this damage and it is going to be very, very expensive and painful." So remarks Axel Merk, currency specialist and founder of the Merk Mutual Funds, who is perplexed by those waiting for additional warning signs to sell the dollar. In his view, we have all the evidence we need. He and Chris discuss the inner workings of the Fed and the course it is determinedly charting - and the looming dangers ahead for the US dollar. (runtime 40m:55s):

Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise - The mounting debt burden of the world’s most developed nations, set for a post-World War II record this year, is unsustainable and risks a future fiscal crisis, the International Monetary Fund’s John Lipsky said. The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the war, Lipsky, the IMF’s first deputy managing director, said in a speech at a forum in Beijing today. “The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks,” said Lipsky. “The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion.” Lipsky’s view clashes with Nobel laureate Joseph Stiglitz, who told the same forum yesterday that further fiscal stimulus is needed to aid growth, and that European nations focused on austerity have a “fairly pessimistic” outlook. At stake is sustaining the developed world’s rebound without a deepening in the debt crisis that’s engulfed nations from Greece to Ireland.

The Breakdown Draws Near - Things are certainly speeding up, and it is my conclusion that we are not more than a year away from the next major financial and economic disruption. Alas, predictions are tricky, especially about the future (credit: Yogi Berra), but here's why I am convinced that the next big break is drawing near. In order for the financial system to operate, it needs continual debt expansion and servicing. Both are important. If either is missing, then catastrophe can strike at any time. And by 'catastrophe' I mean big institutions and countries transiting from a state of insolvency into outright bankruptcy. In a recent article, I noted that the IMF had added up the financing needs of the advanced economies and come to the startling conclusion that the combination of maturing and new debt issuances came to more than a quarter of their combined economies over the next year. A quarter! I also noted that this was just the sovereign debt, and that state, personal, and corporate debt were additive to the overall amount of financing needed this next year. Adding another dab of color to the picture, the IMF has now added bank refinancing to the tableau, and it's an unhealthy shade of red: Banks face $3.6 trillion "wall" of maturing debt: IMF

U.S. CORP and the impending IMF merger - Been lots of talk around lately regarding the collapse of the US Dollar and what that would mean for the United States of America and the world. There has also been a lot of talk about the Federal Reserve Bank of the United States of America and how unhappy the people of the US are getting with this largely unknown organization. These two forces are converging together in what could be a very serious and detrimental way as it relates to the average US citizen. This article will rely heavily on flawed analogies to help the lay person understand the inner workings of both the IMF and the Federal Reserve Bank. This is not to be taken as an academic piece and I would ask that it not be judged as such. This is meant to help those people that have recently woken up to the reality that their country has been hi-jacked and those that are desperate to get up to speed as quickly as possible. So let’s jump right into the thick of it shall we?

What America's debt problem means for the global economy - U.S. leaders have believed in the concept of American exceptionalism, that America was a special country with a special mission. It is a notion that continues to this day. And when it comes to the threat its deteriorating national finances present to the world economy, America is truly exceptional. That danger was finally made clear by Standard & Poor's on Monday, which changed the outlook on its U.S. sovereign rating to negative – in other words, it's threatening to downgrade the U.S. from its traditional triple-A status. The implications of that move are incredibly far-reaching. No, it doesn't mean the U.S. in on the verge of a debt crisis. But it does mean the world can't act that the elephant isn't in the room. We've seen a debt crisis grip hold of Europe, and worries mount about the financial state of Japan. Those debt problems are scary enough. But when it comes to terrifying debt-crisis scenarios, the U.S. stands in a universe all on its own.

The Uses of Brinksmanship - Zandi - It is easy to be gloomy about our nation's fiscal problems. The federal government narrowly averted a shutdown over the 2011 budget and it looks as if lawmakers plan to play chicken over the fast-approaching national debt ceiling. These same lawmakers must soon reach agreement on long-term government spending and tax policy, or the nation will suffer fiscal and economic ruin. Lifting the debt ceiling by July 4 is absolutely vital; otherwise the Treasury will be unable to borrow and be forced to slash spending. As it happens, the gap between federal revenue and expenses reaches its deepest point of the year in mid-July, nearly $6 billion per day. The Treasury will pay its bills until nothing is left, then simply stop.No government function will be spared. Never mind keeping national parks open or funding Planned Parenthood; in question will be payment for our soldiers, Social Security and Medicare checks, food stamps, and unemployment insurance. There is even debate about whether the government will miss interest and principal payments on its debt. Such a default would send global financial markets into turmoil, drive interest rates skyward, and cause stock and house prices to crash.

World Finance Chiefs Chastise U.S. On Budget Gap (Reuters) - World finance leaders on Saturday chastised the United States for not doing enough to shrink its massive overspending and warned that budget strains in rich nations threaten the global recovery. Finance ministers in Washington for semi-annual talks took sharper aim than in previous years at the United States' $14 trillion debt. While most of the criticism came from emerging market economies, some advanced nations joined the chorus. Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy. "Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector," de Jager told the International Monetary Fund's steering committee. The IMF this week said the U.S. budget deficit was on course to hit 10.8 percent of nation's economic output this year, tying with Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.

U.S. Hasn’t Crashed Through Debt Ceiling Yet, but Getting Closer - Wait a second, did the U.S. government crash through the debt ceiling last week? Not exactly, but it sure might look like it to casual observers. Total public debt outstanding on Friday hit $14,305,336,580,992.11, easily above the $14.294 trillion debt ceiling set by Congress. So where was the economic meltdown? Why didn’t stock markets plummet? The impact of the record-high debt level wasn’t felt because the debt ceiling only applies to a subset of total U.S. debt. So U.S. debt “subject” to the debt ceiling was only $14,218,621,000,000 on Friday. Why the difference? Debt subject to the ceiling set by Congress doesn’t include the “unamortized discount,” which is essentially the discount adjustment on Treasury bills and zero-coupon bonds. The unamortized discount totaled $40.964 billion on Friday. It also doesn’t include debt at the Federal Financing Bank, which had a balance of $10.239 billion on Friday.

Tim Geithner: It Would Be Catastrophic If People Start To Doubt Whether The U.S. Can Pay Its Obligations: Tim Geithner gave reassurance on 'Meet the Press' today that the debt ceiling will be raised. As the deadline to raise the debt limit approaches, Republicans are trying to get Democrats to first agree to more spending cuts. There's been some question about whether or not waiting until the last minute for political gain is flirting with disaster, but Geithner says, don't worry - at a certain point, it's not a political game anymore. Everyone in political leadership understands that 'you can't play around with this,' he says. The debt limit will be raised because 'if you allow people to start to doubt whether the U.S. can pay its obligations - that would be catastrophic,' says Geithner. 'And the leadership understands that.' Here's a snippet of the conversation from Meet the Press:

Geithner: House Republicans Already Assured President They Would Raise the Debt Limit - Speaking on ABC’s This Week, Treasury Secretary Timothy Geithner dropped the dime on Congressional Republicans, announcing that they assured President Obama that they would vote to raise the debt limit later this year. When asked if he was sure, Geithner responded, “absolutely,” adding that Congressional leaders made clear they understood the importance of the matter when meeting with President Barack Obama at the White House last Wednesday. “I sat there with them, and they said, we recognize we have to do this. And we’re not going to play around with it,” Geithner said of last week’s White House meeting. “We know that the risk would be catastrophic.” This brings up a couple of points. First, it means that any of the rhetoric on the debt limit is useless to track. I have no reason not to believe that Republican leaders made this assurance to the President. John Boehner or Paul Ryan or some random tea partier can object all they want, but the fact is that they’ll eventually pass an increase. If nothing else, Wall Street will demand it. So I’ll be tuning all those objections out.

Want More Background on the Debt Ceiling? - Take a look at this report from the GAO about what the federal government can do if the federal debt ceiling is reached. It's especially good at describing the actions the Treasury has at its disposal.

If you thought the financial crisis was bad, wait till the debt ceiling caves in - Timothy Geithner does not want the market to smell his fear. “I want to make one thing perfectly clear,” he said Sunday. “Congress will raise the debt ceiling.” But if there was truly so little doubt, Geithner wouldn’t have been peppered with questions about it on the Sunday shows. Raising the debt ceiling may be economically necessary, but it’s politically lethal. Only 16 percent of Americans want the debt ceiling raised, according to an NBC/Wall Street Journal poll. Sen. Marco Rubio said he wouldn’t vote for an increase unless it included “a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare and Medicaid” — everything on the conservative agenda, basically. And this is where things get dangerous.

As debt ceiling vote nears, the pressure’s on House Republican freshmen - Financial industry executives, business leaders and Treasury Department officials are visiting the freshmen in their offices, briefing them in small groups and even cornering them at dinner parties. It’s all part of a behind-the-scenes campaign to school congressional newcomers in the economic stakes of Washington’s next big fiscal fight: over the debt ceiling. The freshman class that gave Republicans the House majority will be a critical voting bloc in the looming clash over whether to raise the amount of money the government can borrow to keep it from defaulting on its loans. “It is the big vote for all of us,” said Rep. James Lankford (R-Okla.). “I don’t think there’s been a week that I’ve been here where we’ve not had some kind of conversation with somebody dealing with debt ceiling issues.”Like many in his class, Lankford had no prior experience in government. He was an evangelical youth-camp director before running for Congress last year as a fiscal conservative.

Debt Ceiling Increase is Likely To Fail at Least Once Before it's Finally Adopted -- This new Marist poll, which includes responses from just before and just after President Obama's speech at George Washington University last Thursday, shows again that many of the most fundamental positions of the leaders of the tea party and GOP on the budget are at odds with a vast a majority of not just the country as a whole but with their own party as well when it comes to cutting Medicare and Medicaid. However, the most informative response in the poll was about raising the federal debt ceiling.  Almost 7 out of every 10 voters (69 percent) said the debt ceiling should not be raised.  But with the exception of raising taxes on those earning more than $250,000 a year, those who responded didn't support any of the things that would actually make it unnecessary to increase the amount the government borrows. There are some important implications for the debate on increasing the federal debt ceiling that's just ahead.

Ceil Us In? - NRO Symposium - National Review Online (7 contributors)

The scariest thing I’ve ever heard on television - Ezra Klein - The segment was on the debt ceiling, and “Last Word” host Lawrence O’Donnell played a clip of Rep. Michele Bachmann giving her plan. In short, her plan is that we don’t raise the debt ceiling, but we use the revenue still coming in to pay off creditors first and whatever we think most important second. That way, we “don’t violate our credit rating” and “prioritize our spending.” Makes perfect sense. At least, it makes perfect sense unless you, like me, had spent the previous few days talking to economists, investors and economic policymakers about what could happen if we start playing games with the debt ceiling. Their answers were across-the-board apocalyptic. If the U.S. government is so incapable of solving its political problems that it can’t come to an agreement on the debt ceiling, they said, that’s basically the end of the United States as the world’s reserve currency. We won’t be considered safe enough to serve as the investment of last resort. We would lose the most important advantage our economy has in the global financial system — and we’d probably lose it forever. Skyrocketing interest rates would slow our economy and, in real terms, make it even harder to pay back our debt, which would in turn send interest rates going even higher. It’s an economic death spiral we associate with third-world countries, not with the United States.

Here's JPMorgan's Chilling Report On "The Domino Effect Of A US Treasury Technical Default" - A new report from JPMorgan explodes the myth that a technical default by the US Treasury -- a couple of missed coupon payments -- would be no big deal. To recap, a growing number of analysts like Chris Whalen and BofA's Jeffrey Rosenberg have been out saying that a technical default would be no big deal. The JPM report from analyst Terry Belton, which is getting the attention of players in the money market industry is titled The Domino Effect of a US Treasury Technical Default and it concludes that "any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy." The biggest threat if the US defaults? A Lehman-like run on money market friends. You'll recall that post-Lehman, the breaking-of-the-buck of the money market reserve fund caused a gigantic ron on money markets that required a bailout. The collapse in balances looked like this:

Here's What Happens When The US Treasury Hits "The Desperation Stage" - Suddenly, everyone is wargaming various scenarios for what happens if the debt ceiling isn't raised, and the Treasury legally can't borrow anymore money.  Earlier, JPMorgan came out with a big report on the ramifications of a technical default by the US (it would be very bad). Next up is Citi with a big report on the debt ceiling and the sovereign rating. Analyst Brett Rose first walks through what's known about the fiscal fight, and then some of the standard accounting tricks the Treasury could use to avoid hitting the debt ceiling if it's not raised in May (almost nobody thinks it will be). He then addresses what happens in "The Desperation Stage" Yet, what if the Treasury still needed more time? The next stage would likely use current assets on the Treasury’s balance sheet to finance the government’s expenses (Figure 10). The Treasury could accelerate its sale of agency MBS or do large-scale repos and raise an additional $130 billion.

U.S. debt ceiling: What's the worst-case scenario if the United States comes even close to default? - You're a principal at a small, New York-based financial firm. The sudden cacophony means the worst has happened. In mid-May, the United States hit the debt ceiling: Because Congress failed to increase the debt limit, the Treasury Department could no longer issue new bonds to finance the United States' deficit spending and to pay the interest on its existing debt. For a few weeks, Treasury and the White House were able to move money from one pocket to another to keep the country running smoothly. But the congressional bickering never abated, with Republicans insisting on the passage of huge, immediate spending cuts and a balanced budget amendment, and Democrats refusing to consider either—and certainly not to tie them to the debate over the $14.3 trillion ceiling.   Weeks into the impasse, some Social Security payments stopped going out, causing American citizens to scream bloody murder. They barely noticed when, just before midnight on July 5, Treasury said it would start missing scheduled coupon payments on some bonds. Wall Street didn't miss the announcement, though—hence your 3 a.m. wakeup call. The United States, to the shock and horror of investors around the world, sat on the brink of default. The world's safest investment became the world's most uncertain, tipping the markets into chaos.

Handicapping the Debt Limit Debate - Sometime this spring, Congress will vote to increase the debt ceiling. That vote won’t come easy. Newly ascendant House Republicans will threaten to withhold needed votes unless significant spending cuts or budget process reforms are attached to the measure. Democrats will denounce Republicans for threatening the government’s ability to pay its bills. But strike a deal they will. With monthly deficits running around $100 billion, the United States can’t cut spending or increase tax revenues enough to avoid further borrowing this year. It is equally inconceivable (I hope) that our elected leaders will decide to withhold payments from Social Security beneficiaries, our military, and our creditors. So the debt ceiling will go up. And that means that at least 50 senators and more than 200 House members will cast a politically toxic yea vote. Which lucky members will they be? That’s impossible to handicap today. In the meantime, though, we can look at past votes. They tell a clear story: debt limit votes are about politics, not principle:

Raising the Roof: Principle or Politics? - Think the vote to raise the debt limit is about principle? Think again. Our new infographic shows stand-alone votes in Congress to raise the debt ceiling over the past decade. In 2003, 2004 and 2006, Republicans controlled everything—the White House, the House of Representatives and the Senate. When the debt limit came up for a vote in the Senate, guess what happened. The vote to raise the debt ceiling came almost totally from Republicans. Same thing was true when the debt ceiling came up for a vote in the House in 2002 and 2004. In June 2002, a year after Sen. Jim Jeffords of Vermont became an Independent, the Senate was narrowly controlled by Democrats but the House was still Republican.) In 2009 and 2010, Democrats controlled everything. So what happened? Votes to raise the debt ceiling came almost entirely from Democrats. When power was divided in 2002 and 2007, the Senate votes to raise the debt ceiling were bipartisan. If there is a principle involved, it seems to be this: whose problem is it?

'Illegal' Treasuries: Could They Happen and Who Would Buy Them? - Would you buy a bond guaranteed by the full faith and credit of the United States if its existence also breached U.S. law? This seemingly crazy concept might sound ridiculous, but bizarre times may call for bizarre measures. As a result, this week, Citi analyst Brett Rose (via Business Insider) suggested that the Treasury could resort to an unlikely worst-case scenario: it could just issue more Treasury securities in violation of the law.  This might sound far-fetched, because, well, it is. But John Carney at CNBC's NetNet explains that it wouldn't be totally out of character for the Treasury to disregard the law:  For example, Geithner's Treasury Department ignored the law that explicitly forbid the government from putting conditions on banks that wanted to repay TARP. He forced the banks to show they could issue non-guaranteed debt before he permitted them to repay their TARP funds. This was completely illegal--but he got away with it. The only retaliation that banks could have taken would have been to sue the U.S. government. As you can imagine, that would not have made for the most flattering headlines at the time.

US deficit deal could head off debt-limit fight  - As Washington gears up for a fight over the debt ceiling, lawmakers are considering an approach that would allow them to say they are adopting fiscal discipline over the long term even as they vote for increased borrowing. The approach, outlined in several proposals circulating on Capitol Hill, would set specific savings targets and require automatic spending cuts and possibly tax increases if the goals are not met. Contentious fights over taxing wealthy Americans and overhauling health programs for the poor and elderly would be left to a later date. This path would give lawmakers political cover as they vote to allow the government to borrow above its current $14.3 trillion limit, a move strongly opposed by the Tea Party movement and other fiscal conservatives who want to see government spending slashed. Lawmakers and Washington pundits say it could head off a looming showdown over raising the debt limit that could stretch out for weeks after the limit is reached in mid-May.

Abolish The Debt Ceiling! - That's my solution to the impending crisis over raising the legal US debt ceiling that threatens to shut down the US government, throwing us into many difficulties, and possibly crashing global financial markets if the US Treasury defaults on debt, thereby possibly throwing us back into a deep global recession. It is fear of political paralysis over raising the debt ceiling that lies behind the S&P's announcement yesterday of a downgrade to "negative" of prospects for US debt ratings, even though that remains AAA, which has in turn triggered Republicans like Eric Cantor to double down on demanding stronger budget cuts (really do in Planned Paranthood???) as the price for allowing another round of raising the debt ceiling. The top is that the US is the only country in the world that I could find after considerable searching that even has one.

The Congressional Budget Office on the uselessness of the debt ceiling - They are not impressed (pdf): By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences. It’s worth being risk averse when it comes to causing unnecessary financial crises which might end with the United States of America in a permanently weaker economic position. The debt ceiling is an unnecessary and dangerous anachronism that mainly exists to let the two parties beat each other over the head. It’s long past time to get rid of it.

If We Have To Have A Debt Limit, Let's Have One Which Reflects Economic Reality - Congress won't abolish the debt limit because (it) can give a spendthrift member of Congress the appearance of being fiscally responsible. So if we're going to have a debt limit anyway, why have a limit that has no basis in economic reality? The current limit covers more than 99% of total federal debt, including publicly held debt and debt held by federal accounts (e.g., the Social Security Trust Funds). The latter is just the authority, but not the means, to pay promised future benefits to ourselves. The fiscal burden of providing those benefits is not felt until the benefits are paid. So trust fund debt has no economic impact. It's just a distraction. As we grapple with the hard work of deficit reduction over the coming years, why not exclude debt held in federal accounts from the debt limit? Given that publicly held debt is just under $9.7 trillion, the existing debt limit of $14.294 trillion could be lowered to $12 trillion, leaving enough room to accommodate the federal government's anticipated borrowing needs beyond the 2012 elections. Congress could avoid a potentially disastrous fight over raising the debt limit, and we would focus on the debt that matters for economic growth: the debt held by the public.

Extortion Politics: Why Won’t American Business Stop the GOP From Threatening to Blow Up The Economy? - Robert Reich - As the government approaches its borrowing limit of $14.3 trillion, Republicans are seeking political advantage over what conditions should be attached to raising that limit.  This is a scandal — or should be. Raising the debt limit shouldn’t be subject to party politics. Economic extortion should be out of bounds.  It’s bad enough government shutdowns have become an accepted part of political negotiation. But failure to increase the amount the Treasury can borrow would have far graver results. Not only would the government be unable to issue Social Security or Medicare checks but the United States couldn’t pay interest on its current debt. We’d go into default. The full faith and credit of the United States would be in jeopardy. Treasury bonds would go into free fall. Interest rates would skyrocket. We, and most of the rest of the world, would fall into financial chaos. The recovery is still fragile. All this would force us and most of the rest of the world into a deeper recession or worse.   No one in their right mind would threaten this. Yet it’s talked about as if it’s just another aspect of Washington politics — a threat that might be carried out in early July when the Treasury runs out of ways to keep paying our debts.

Fiscal Conservatives Dodge $10 Trillion Debt: Simon Johnson… Washington is filled with self- congratulation this week, with Republicans claiming that they have opened serious discussion of the U.S. budget deficit and President Barack Obama’s proponents arguing that his counterblast last Wednesday will win the day.  The reality is that neither side has come to grips with the most basic of our harsh fiscal realities.  Start with the facts as provided by the nonpartisan Congressional Budget Office. Compare the CBO’s budget forecast for January 2008, before the outbreak of serious financial crisis in the fall of that year, with its latest version from January 2011. The relevant line is “debt held by the public at the end of the year,” meaning net federal government debt held by the private sector, which excludes government agency holdings of government debt.  In early 2008, the CBO projected that debt as a percent of gross domestic product would fall from 36.8 percent to 22.6 percent at the end of 2018. In contrast, the latest CBO forecast has debt soaring to 75.3 percent of GDP in 2018.

S&P cuts U.S. rating outlook to negative -— Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable on Monday, lighting a fire under Washington’s deficit-reduction debate and sending stock markets sharply lower.  The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its highest rating, AAA, on the U.S.  Relative to Triple-A-rated peers, the U.S. has very large budget deficits and rising government indebtedness, and the path to addressing those issues is unclear, S&P analysts said. They noted an increasing gap between a lack of action by U.S. fiscal policy makers and steps taken by its AAA-rated peers, even after the Republicans and Obama administration released their 2012 budget proposals.

Standard & Poor’s Lowers U.S. Public Debt Outlook To “Negative” - A new report from one of the world’s top credit rating agencies is sending waves through the stock markets: (CNNMoney) — Standard & Poor’s lowered its outlook for the nation’s long-term debt Monday, even as it reaffirmed the agency’s top-tier rating for the U.S. economy. S&P maintained its ‘AAA/A-1+’ credit rating on U.S. sovereign debt, saying the nation’s “highly diversified” economy and “effective monetary policies” have helped support growth. But the ratings agency lowered its outlook for America’s long-term credit rating to “negative” from “stable,” based on the uncertain political debate around the nation’s fiscal problems.The outlook means that there is one-in-three likelihood that it could lower the long-term rating on the United States within two years, S&P said.

The S & P Goes Bearish On the U.S. - Is this the first domino in the next global financial crisis? It's possible. Today the S & P revised its long-term credit rating outlook for the U.S. from “stable” to “negative.” The immediate result has been a flight from risky assets and anything linked to optimistic views on global growth – gold and Treasuries are up, while oil and dicey currencies are down.The big question is whether or not this is the beginning of a major inflection point in the global economy, one in which rich nations following a pattern that has long been common in emerging economies – after financial crises tend to come sovereign crises. It's happened many times before in countries like Argentina, Thailand, and Indonesia. The question now is whether it will happen in rich nations. In other words, is it possible that the U.S. could actually loose its triple A-rating? My feeling is that yes, it's a real worry. The US has been triple A ever since it was first rated in 1941, but as the FT Lex column points out today, countries that are put on a negative long term outlook have a one in three chance of being downgraded over the next six to 24 months. For more on the history of how banking crises can turn into sovereign crises, check out Ken Rogoff and Carmen Reinhart's prescient book “This Time Is Different,” which looks at eight centuries of history on this score. The upshot – yes, it can happen here.

Yippee, S&P Cuts US Credit Outlook to Negative!!! - Sometimes I'm so glad to be mistaken. I've often thought that the political economy of credit rating agencies went like this: The likes of Standard and Poor's, Moody's, and Fitch's would never downgrade American sovereign debt since the US government held the ultimate ace. That is, it could remove their status as Nationally Recognized Statistical Rating Organizations (NRSROs) if they did not play along. Just as these credit rating agencies happily slapped "AAA" ratings on all sorts of subprime securities which turned out to be utter rubbish, they've been more than willing to grant the US government the highest credit rating of them all. I've always attributed it out of fear of being cast out of the world's biggest capital market by losing their designation as NRSROs. But wonder or wonders, S&P has now downgraded the outlook on American sovereign debt to negative. Which, of course, is the prelude to a full-blown credit downgrade. As you'll read below, there is now a one-in-three chance of this happening in the next two years.

Will S&P downgrade the US? - It’s known as Stein’s Law: if something can’t go on forever, it won’t. And it’s the reason S&P has now revised its outlook on the US sovereign credit rating: Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable. We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns. S&P has three macroeconomic scenarios: baseline, where the US debt-to-GDP ratio reaches 84% in 2013; optimistic, where it’s 80%; and pessimistic, where it’s 90%. “Even in our optimistic scenario,” they write, “we believe the US’s fiscal profile would be less robust than those of other AAA rated sovereigns by 2013.”

China Responds Cautiously to U.S. Debt Move - China called on Washington to adopt "responsible" measures to protect its bond holders, in a cautiously worded response to Standard & Poor's decision to lower its outlook on U.S. government debt that reflects Beijing's awkward position as America's biggest creditor.China has "taken note" of S&P's move, Foreign Ministry spokesman Hong Lei said on the ministry's website late Tuesday. "U.S. government debt is a reflection of the U.S. government's credit, and is an important investment product for institutional investors in the U.S. and internationally," he said. "We hope the U.S. government earnestly adopts responsible policies and measures to protect the interests of investors."

With much at stake, Asia voices confidence in U.S. debt (Reuters) - Some of the United States' biggest creditors moved to shore up confidence in its sovereign debt Tuesday after Standard & Poor's threatened to cut its credit rating on the world's top economy, touching a nerve among big holders of Treasuries. Asian nations have amassed trillions of dollars in U.S. government bonds through recycled export earnings, and have a vital interest in maintaining their value. So it was no surprise that officials were keen to play down the danger. "The United States is tackling fiscal issues in various ways, so I still think U.S. Treasuries are basically an attractive product for us," Japanese Finance Minister Yoshihiko Noda told reporters after a cabinet meeting. Treasury prices did indeed prove resilient Tuesday, though that did not stop stocks markets from skidding across Asia, where investors were already worried that Greece may be on the verge of restructuring its debt.

Goolsbee: S&P Made ‘Political Judgment’ - Austan Goolsbee, the chairman of the White House Council of Economic Advisers, said Standard & Poor’s made a “political judgment” when it dropped its outlook for the U.S. government from “stable” to “negative” because of the budget deficit and rising debt. “The fundamental aspect of their statement was a political probability,” Mr. Goolsbee said in an interview with Bloomberg TV. “I think we’re going to raise the debt ceiling, proceed on this parallel track on deficits, and I don’t think that the S&P’s political judgment is right.” he S&P warned Monday that the U.S. fiscal profile could become “meaningfully weaker” if Congress and the White House can’t reach an agreement to reduce the deficit. "We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” credit analyst Nikola G. Swann wrote.

U.S. Treasury Criticizes S&P Move - Wall Street has been warning Washington for months now that skittish bond markets may not wait until mid-summer for the White House and congressional Republicans to broker a bipartisan deficit-reduction deal. The Standard & Poor’s Ratings Service underscored those warnings Monday by cutting its outlook for U.S. debt to negative, a predecessor to actually downgrading the country’s AAA credit rating. Republicans have been silent so far about the S&P decision, which for now affirmed the AAA rating, and the Treasury Department issued a statement critical of the decision. “We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” said Mary Miller, assistant secretary for financial markets at the Treasury Department. And White House Council of Economic Advisers Chairman Austan Goolsbee said, “I don’t think that the S&P’s political judgment is right.”

S&P -- Paul Krugman - OK, so Standard and Poors has warned that it might downgrade the US one of these days. At first read, what it says doesn’t seem too silly: it lays stress, rightly, on political gridlock. The point should be that the US is perfectly capable both of running large deficits now and getting its fiscal house in order over time; but not if the parties cannot agree on any kind of solution. What we do to spending this year or next is irrelevant.That said, it’s worth remembering that S&P downgraded Japan in 2002 — and here’s what happened: Japanese bonds became known as the “trade of death”, because people kept betting on an interest rate rise, and it kept not happening. So, no big deal.

The implications of a downgraded US - Paul Krugman, looking at Japan, says that today’s S&P news is “no big deal”, based on the fact that Japanese long-term interest rates stayed low even after the country was downgraded in 2002. But of course if the fate of the US over the next 9 years is remotely similar to the fate of Japan over the past 9 years, that’s going to be a very big deal indeed — for the US economy, for its fiscal ratios, and for the entire world. The potential global downside here is large, as Mohamed El-Erian explains: The world looks to America for a range of “global public goods” — including the reserve currency, the deepest and most liquid government debt markets, and the “risk free” standard. With no other country able and willing to step into this role, the result would be global efficiency loses and a higher risk of economic and financial fragmentation. That said, however, there is a silver lining if you look hard enough. A slow move away from the dollar’s reserve-currency status might not be such a bad thing, seeing as how that status has allowed the US twin deficits to grow to previously-unimaginable levels.

Potential US Debt Downgrade -- Felix Salmon has some interesting commentary. Now that the US is on negative outlook, there’s at least a one-in-three chance that the US will lose its triple-A credit rating in the next two years. Or that’s what S&P is saying, anyway. I’m not convinced: the entire S&P business model is based on the idea that creditworthiness is a one-dimensional spectrum which ranges from risk-free, at one end, to defaulted debt, at the other. If US Treasury bonds aren’t risk-free, then nothing is risk-free, and the triple-A bedrock on which the S&P ratings apparatus is built crumbles away. This has been more or less my standard take. A downgrade of the United States doesn’t make any sense. Credit is risky or secure only in relation to other credit and only in certain “states of nature” as economists like to call it. For example, there is a very very small but given its impacts, non-trivial chance that the North American Caldera will erupt within the next 100 years or so. Yet, there 100 year debt is being issued by companies that do business in the vicinity of the Caldera. How does the Caldera affect the yield on that debt?The short answer is that it doesn’t and it can’t. The reason is that the world in which the Caldera goes is a world in which the entire global financial infrastructure collapses.

U.S. credit rating: S&P issues a warning, but not a downgrade. - Standard & Poor's has attached a "negative" outlook to the United States' sterling credit rating. The ratings agency did not actually downgrade America's debt, currently rated at AAA/A-1+. Rather, it said there is a one-in-three or better chance that it will downgrade it if the United States does not get its fiscal house in order, and quick. The news wasn't all bad. S&P did not actually deign to change its rating. Its analysts praised the United States' "flexible and highly diversified" economy and its "effective monetary policies." They also noted a "consistent global preference" for the dollar over other currencies, helping to keep the government's borrowing cheap. But, they noted the obvious: The United States has big annual deficits, $14 trillion in debt, and, to put it gently, a bonkers political system that is making it close to impossible to do the responsible thing in a timely manner. The problem is not financial, S&P argued, at least not right now. The problem is political.

On S&P and Government Creditworthiness - Standard and Poor’s, one of the big bond rating agencies, has announced today that they are giving a “downgrade warning” on U.S. government bonds.  Not a downgrade in credit rating, but just a “warning” that things could be downgraded.Ho hum.  Such theatre.  As if we should believe S&P.  First, a sovereign currency-issuing government with a currency that is non-convertible (no gold standard and no fixed exchange rates) and that borrows in it’s own currency cannot go bankrupt. It cannot default unless it chooses to do so.  Period.  Money can always be created to pay the bonds as they come due.  In fact, money and bonds are pretty much the same thing. Issued by the same people. It’s just that bonds pay an interest rate. The currency notes in your pocket don’t.Besides, S&P has done this before.  Let’s see, in 2002 they not only warned, they actually downgraded Japanese debt.  Let’s see how that worked out.  Surely a down-rated bond issue must have raised Japan’s borrowing costs as lenders (bond buyers) demanded higher rates to compensate for the risk of default, right.  Umm, no.  Japan continues to borrow at extremely low cost. Still payin gless than 1.8%.

News, and "news" - TODAY, S&P adjusted its outlook on American government debt from "stable" to "negative". S&P suggests that America's leaders might struggle to address the country's medium- and long-term fiscal challenges within two years, which development might lead to the loss of the government's AAA rating.This is "news" in the sense that S&P said something and lots and lots of news organisations have opted to write about it. But is it news? No, it isn't. Neither the American fiscal position or its political dysfunction will come as a surprise to anyone who's been paying attention. S&P has not struck out boldly in fretting about American borrowing; that's practically the national pasttime. And so I'm a little sceptical of the ubiquitous headlines asserting that the Dow's morning tumble, of near 2%, is a result of the S&P information. Writers are going a little crazy over something that's not, actually, news. Time's Rana Foroohar, for instance, says, "Is this the first domino in the next global financial crisis? It's possible." I uttered the same thing a moment ago after pouring myself another cup of coffee, and it was equally true.

Republicans Weigh In on S&P Outlook - House Republicans seized on the warning that Standard & Poor’s might downgrade U.S. debt as evidence Congress needs to cut spending in conjunction with any legislation to raise the country’s borrowing limit. House Majority Leader Eric Cantor (R., Va.) called S&P’s move to cut its outlook on the U.S. to negative “a wake-up call,” saying it “makes clear that the debt limit increase proposed by the Obama Administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt.” The announcement Monday that S&P has changed its outlook on U.S. Treasury debt from “stable” to “negative” underscores Republican arguments that Congress and the White House need to agree on a package of spending cuts and entitlement reforms to pare the deficit as part of a deal to raise the country’s debt ceiling.

S&P: US Needs to Get its Act Together on the Debt - So S&P has changed the outlook for US credit from "stable" to "negative".  Some commentators seem to have confused this with a ratings downgrade, which it isn't--the US AAA rating is still very much intact.  Rather, Standard & Poor's are saying that the probability of a downgrade in the future has gone up. I think the WSJ sums it up pretty well: S&P said that even if a short-term deal is reached to contain deficits, any agreement could later be undone by politicians.Administration officials, who were first alerted to the report on Friday, questioned its conclusions but said it validated their efforts to broker a bipartisan deal to address the debt. Fundamentally, what both sides seem to have trouble grasping is that the important thing is not to solve all our problems right now, but to convince markets that we have the will and the fortitude to solve them at some point in the future.  .

El-Erian: A Warning For The U.S., And For The Global Economy - S&P reaffirmed this morning the AAA rating of the US but, importantly, slapped a “negative outlook” on the rating due to concerns on how the country will address its “very large budget deficits and rising government indebtedness.”  In justifying this dramatic move, it noted that “there is a material risk that US policymakers might not reach an agreement in how to address medium- and long-term budgetary challenges by 2013.” This is a timely reminder of the seriousness of America’s fiscal issues, for the country and for the rest of the world. The continued failure to come up with a credible medium-term fiscal reform program would increase borrowing costs for all segments of US society, thereby undermining investment, employment and growth. It would also curtail foreigners’ appetite to add to their already substantial holdings of US assets. And it would weaken the dollar. The US also risks eroding its standing at the core of the global monetary system.

There are “bond market vigilantes”, and then there are “adorable children wearing their underpants outside their trousers” - It was pretty silly when Standard & Poor’s started wagging the finger at the UK and expecting to be taken seriously. Trying to do the same thing with respect to the USA is pretty much the definition of tugging on Superman’s cape.At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.” I can confirm that although it was “at least one” economist that burst out laughing, it was not “at most one”.

Fear-Mongering Over the US Budget Deficit - Absurd news today from S&P's credit rating analysts, who have apparently been drinking liberally from the Deficit Crisis Kool-Aid: US debt is still rated as AAA, which effectively means that S&P's rating analysts believe there is a zero percent chance of the US government not making payments on its debt. However, this new "ratings outlook" indicates that they now believe that there's a reasonable chance that some time within the next two years they will change their mind, and start to believe that there's a chance -- albeit a remote one -- of the US government defaulting on its debts. Ah, but no doubt S&P is worried about what will happen to that debt burden beyond 2012. After all, there are alarming predictions that the currently large budget deficits will continue to be unduly large after 2012, even as the economy recovers. But deficit projections are notoriously slow to catch up with the business cycle. When the economy is doing well and deficits are small, forecasters tend to look in the rearview mirror and make very rosy projections into the future. And when the economy is doing poorly and deficits are large, forecasters also tend to project doom and gloom going forward.

Should You Worry About a U.S. Default? - Standard & Poor’s, the ratings agency, lowered its outlook for the United States to “negative” on Monday, a warning that the country’s top-notch, triple-A credit rating may be lowered. Credit ratings are supposed to give crucial insight into a debtor’s likelihood of default, so a lot of investors and pundits made a big deal about this announcement.Given the lackluster job that S.&P. and other agencies did in rating mortgage-backed securities before the financial crisis, some critics have questioned the relevance of the agency’s latest pronouncement. But the toxic-assets track record aside, there are other reasons to discount this latest S.&P. call.In a recent interview, the financial crisis historian Carmen M. Reinhart said that ratings agencies had historically done a poor job at predicting sovereign debt defaults, currency collapses and other financial crises.That is because, as she wrote in her paper, “Default, Currency Crises, and Sovereign Credit Ratings,” ratings agencies — like so many other professional forecasters — tend to focus on the wrong variables in calculating their ratings. In other words, S.&P.’s announcement may not actually tell us very much.

S&P aims to whip Congress into debt action - A spokesperson for Standard & Poor’s said on Monday that there was a one-in-three likelihood that the rating agency “could lower” its long-term view on US debt within two years. Equities quickly dropped by more than 1.5 per cent but, importantly, the dollar did not weaken and US Treasury interest rates did not rise. The reason for this unusual pattern is simple: the markets think S&P’s move is important not because it signals something new about the economy, but because of its political impact in Washington. So what is going on? A sovereign-debt downgrade is supposed to mean that a government’s finances have become shakier. This means that the likelihood of internal price inflation is also higher, while the future value of the nominal exchange rate is likely to be lower – with the chance that creditors might not get their money back in the form and at the time they had envisioned.  If all this were true, equities could have gone either way: economic chaos diminishes future profits, but stocks are a good hedge against inflation. However the value of the dollar should certainly have fallen, while nominal interest rates should have risen. But that is not what happened.  Instead the dollar rose and nominal rates were unchanged. Given this, there are two things to bear in mind. First, you can go insane over-interpreting short-term market movements. Second, news comes in flavours: new news, old news, no news and political news. And we need to understand why this is news of the latter variety.

Why Listen to S&P on US Debt? - There is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” Which brings me to Standard & Poor’s. They put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt. To which I say “Who Cares?” Its not that I disagree with their assessment — I do not — but I pay it little heed. It was much more important to me as an investor that PIMCO’s Bill Gross was out of Treasuries a month ago (and indeed, is short) than what S&P says. That was all any bond investor needed to know — no ratings agency necessary. If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P.

Is Anyone Listening to the S&P? -- The Room for Debate asks: What does the S.&P. move say about the economy and deficit fears? Or is it, as Obama administration officials contend, largely a political judgment that doesn't go beyond what we know? Some responses:

S&P Negative Watch Smackdown Wrap - Yves Smith - One of the few upsides of the patently silly negative watch announcement for US Treasury bonds was that it elicited colorful and instructive commentary (see our view, along with Mark Thoma’s and Barry Ritholtz’s at the New York Times’ Room for Debate).  And in case you are still worried that China will quit buying our bonds and interest rates will therefore shoot to the moon, Michael Pettis dispatched that issue last week: I don’t think a decline in the amount of capital recycled by China, whether through the PBoC or through other institutions, will likely lead to higher US interest rates at all…. The reason I say this is because if we accept this argument, then it seems to me that we are also saying that one way for the US to reduce interest rates is to allow its current account deficit to explode to significantly higher levels. Why? Remember that foreigners don’t fund fiscal deficits. They fund current account deficits, and they do so automatically. As long as the US runs a current account deficit, in other words, it will receive exactly the same amount of net capital inflows as the size of its current account deficit. So if the US current-account deficit doubles, for example, net foreign inflows will double too.

What, US worry? - OVER the past few days a spirited debate over the status of the American government, and in particular its ability to borrow, has rumbled around Washington. This debate was obviously triggered by S&P's announcement Monday morning that it was cutting its outlook on American government debt to "negative", signaling that there is a one in three chance of a downgrade in America's credit rating by 2013. I found the attention to this statement mystifying. S&P didn't say anything about America's debt situation that wasn't already well known. The market reaction has been about as benign as one could hope for; relative to the Friday close, equities are higher, bond yields are lower, and the dollar is basically flat. Markets shrugged. A lot of pundits found it very difficult to accept that markets shrugged. They seemed to be labouring to explain that the S&P's warning represented the beginning, at long last, of an American debt reckoning.  And so the fact that bond markets steadfastly refuse to hold Congress' feet to the fire is frustrating for those who'd like to see the government budget put on a sustainable path.

After A U.S. Treasury Scolding In 1996, Rates Headed Higher… To summarize yesterday’s news, Standard & Poor’s said it was disappointed in the progress being made to reach a constructive long term federal budget. They didn’t actually downgrade the U.S. Treasury from its coveted and essential AAA rating, but they did put Congress on probation. Bonds were down sharply on the initial news, and stocks were too: I can’t tell exactly but it looks as though the 30-year Treasury was off as much as one percent. Stocks were off about two percent. By the end of the day, however, Treasury yields were pretty much unchanged.We have a precedent of sorts on this sort of warning from late 1995 and early 1996, another time Congress could not get its act together, and the government limped along with temporary increases in the debt ceiling for several months. That time, it was Moody’s that shook its finger, and said it was considering a downgrade on certain issues coming due; when the debt ceiling was raised, however, the Moody’s reversed its move.What was the effect then? There was no debt ceiling for a couple of months, and rates did  rise. This graph plots the 10-year and 30-year Treasury yields from 1995 through 1997.

Understanding the S&P report - Yesterday’s report by Standard & Poor’s on the U.S. government’s credit rating is driving headlines. You can learn a lot more from reading the primary source document than from news coverage of it. Here is what S&P did: On April 18, 2011, Standard & Poor’s Ratings Services affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the United States of America and revised its outlook on the long-term rating to negative from stable. S&P told us why they downgraded their outlook: We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

A Comment on the Deficit -As everyone knows, S&P issued a "negative outlook" on U.S. debt this morning. Although S&P has made plenty of recent rating mistakes, this is a reminder that there is work to do in the U.S. The first step would be to divide up the deficit into several components and calculate the NPV (net present value) of each component. I'd divide the deficit into 1) cyclical portion, 2) General Fund ex-healthcare, 3) healthcare (Medicare and Medicaid), and 4) Social Security Insurance. This is nothing new - I've been pointing this out since I started the blog in 2005! The cyclical deficit is due to the severe recession (and was predictable in 2005). As a result of the recession tax revenues declined, and there was more spending (both stimulus and automatic safety net expenditures). The good news is the cyclical deficit will decline as the economy slowly recovers. The bad news is recoveries following housing/credit bubbles and a financial crisis are usually sluggish and choppy. This is the portion of the deficit that gets the most attention, but from a long run perspective it is the least significant. The General Fund ex-healthcare deficit is the most immediate problem. I've been writing about this for years. Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP. This serious problem has been caused almost exclusively by Bush's policies.

Is S&P’s Deficit Warning On Target? - Simon Johnson - Standard & Poor’s announced on Monday that its credit rating for the United States was affirmed at AAA (the highest level possible) but that it was revising the outlook for this rating to “negative.”  In this context, that was a warning “that we could lower our long-term rating on the U.S. within two years” (see Page 5 of the report). This news temporarily roiled equity markets around the world, although the bond markets largely shrugged it off. While S.&P.’s statement generated considerable attention, the economics behind its thinking is highly questionable. Still, given the quirky nature of American politics, this intervention may or may not end up having a constructive impact on the thinking of both the right and the left.It is commendable that S.&P. now wants to talk about the United States fiscal deficit –- one wonders where it was, for example last year, during the debate about extending the Bush-era tax cuts.

S&P's Judgment on US Debt Is Substandard and Poor - On 18 April, Standard & Poor's (S&P), one of three "credit-rating companies" thatcontrol that sector of the financial industry,revised its outlook on the safety of long-term US debt to "negative" from "stable". There are only two reasonable reactions to this announcement – although the usual business and political leaders are promoting their usual spins. We may dispense quickly with the latter since they are not worth the cyberspace they waste. Conservatives "point with alarm" – a gesture they enjoy – at US debt as if it proved, first, general profligacy in the forms of excessive social programmes and out-of-control entitlements (social security, Medicaid and Medicare), and second, the "obvious" need to cut current budget deficits by cutting federal spending. These geniuses missed whatS&P analyst Nikola Swannwrote or else they found it convenient to speak as if they had no clue about the realities of US debt. As Swann pointed out, from 2003-2008, the US deficit ranged from 2-5% of GDP, but it "ballooned to over 11% in 2009 and had yet to recover".In plain English, fast-rising US debt is a direct consequences of the current global economic crisis and the US government's decision to borrow the money it used to bail out the major banks, brokerage firms, AIG, GM and so on. In plainer English, the conservatives who now dominate both parties areusing S&P's negative outlook as a club to make the masses of people pay– in reduced services and entitlements – for the costs of borrowing to bailout major capitalists in crisis.

Poor Standards -  Krugman - I continue to be amazed by how much attention and credence is being given to the S&P “warning” on US debt. I mean, this was supposedly a warning about the safety of US debt. So if it mattered, we should have seen a jump in interest rates on April 18, the day of the announcement. Um, here’s the 10-year bond rate:   People, this was a non-event.

S&P Warns Treasury About Debt Burden: Fun With Debt Downgrades - I finally got a break from laughing over S&P’s threat of downgrade of U.S. debt. You may remember S&P as the credit rating agency that would rate a security: “structured by cows,” which was said by one of its analysts in reference to S&P’s proclivity for stamping subprime mortgage backed securities with investment grades. First, what does it mean that the U.S. government’s credit rating is impaired? We borrow in dollars. Guess who makes dollars? Imagine if I printed up IOU’s that were payable with my IOU’s. Would S&P think that I might default? This makes no sense. Countries that borrow in a currency they issue will not default unless we get an absurd situation where politicians try to make a point by forcing a default (as in not raising the debt ceiling).. There is a potential issue about inflation and higher future interest rates (and therefore lower bond prices). However, if this is the event that S&P is warning against, then the warning should have been applied to all debt that is denominated in dollars, both public and private.

S&P Negative Watch for US Flagged Financial Sector as Major Risk - Yves Smith - Yes, I know I dissed the S&P report as fundamentally wrongheaded, but as we will discuss shortly, it contained some interesting commentary on the US financial sector that has gotten perilously little notice.But I’d first like to address the way the media and some blogosphere commentators have hopelessly muddied the issues on the downgrade scaremongering. One is the “we depend on foreigners to fund our budget deficit” hogwash. As Michael Pettis pointed out, the idea that the US is funding its federal deficit from foreigners is a widespread misconstruction. The reason we have capital inflows, largely but not entirely foreign purchases of Treasuries, is that we are running a current account deficit. As long as our trade partners want to run surpluses with us, they wind up holding dollars.  Now to the interesting and not widely noticed part of the S&P commentary.Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008,  In line with these views, we now estimate the maximum aggregate, up-front fiscal cost to the U.S. government of resolving potential financial sector asset impairment in a stress scenario at 34% of GDP compared with our estimate of 26% in 2007. In other words, S&P disputes the idea that extend and pretend is working, and sees that financial sector risks are rising. Put it another way: if the rating agencies can no longer support the official cheerleading, how much longer will anyone regard it as credible?

The Credit Rating Hoax - Standard & Poor’s, the self-righteous credit-rating agency, has a damn lot of nerve. It provoked scary headlines by solemnly threatening to “short” America. That is, downgrade the credit-worthiness of US Treasury bonds unless Congress and the president oblige creditors by punishing the citizenry with severe budget cuts. What a load of crap. The headline I would like to see is this: “S&P Execs Face Major Fraud Investigation, Take the Fifth Before Federal Grand Jury.” News coverage on S&P’s credit warning typically failed to mention that Standard & Poor’s itself is in utter disrepute. It was an unindicted co-conspirator in the Wall Street deceitfulness that brought the nation to financial ruin. During the bubble of inflated housing prices, S&P and other rating agencies blessed the fraud-based mortgage securities issued by Wall Street banks with AAA ratings—deceiving gullible investors around the world and assuring bloated profits (and executive bonuses) for the greedy bankers. S&P provided cover for the massive scam that led to the crisis that sank the national economy.

Modern Monetary Baloney, Fundamental Values, and the Unaddressed Requirement for Reform - I agree with David Lindorff in his excellent piece, An Oh Please Moment, that the timing of the SP downgrade of US debt is highly questionable. "Either S&P has been pressured by powerful Republicans and/or Wall Street Bankers to issue this warning, in order to add to national hysteria about the national debt and win more drastic cuts in social programs, or S&P is simply blowing it again." Since the Ratings Agencies quite obviously have been in the pocket of the Wall Street monied interests for some time now, generating ratings on command for pay, there is much less question in my mind about which of the two alternatives are correct. The bankers, having obtained huge sums of personal wealth by buying the government and looting the Treasury, are engaged in an aggressive campaign to make sure they can keep their ill gotten gains, without indictment, and pigs that they are, without any of the pain to be obtained from gaming the US financial system in a massive fraud and causing its collapse. They seek to direct that pain quite squarely and unashamedly on the lower and middle classes, while increasing their wealth by promoting even greater tax benefits and indirect subsidies from the public.  When one does not prosecute crimes, it emboldens the perpetrators to ever greater excesses.

Fearmongering over the US Budget Deficit – Linda Beale - Kash at Angry Bear has expressed the obvious about S&P's announcement a couple of days ago that they were downgrading the outlook on the U.S., because of their concern that Congress wasn't going to act fast enough to deal with the deficit.  Fear-mongering over the U.S. Deficit, Angry Bear, Apr. 18, 2011.  As Kash puts it, the analysts "have apparently been drinking liberally from the Deficit Crisis Kool Aid." Now folks, did you have the same thought I had?  S&P, the notorious soft-baller on subprime mortgages and everything else that smelled bad but was profitable to the corporate client asking for a rating, is "worried" about the U.S. based on what appear to be right-wing think tank/Chicago School "free market takes care of itself" talking points about the debt and deficit?   Come off it, S&P--did you get some big bucks from an unknown client to make that pronouncement, huh?  Maybe those guys like Ryan pushing entitlement-busting as the revenue raiser to pay for the existing and additional tax cuts they want to provide to the big multinationals like GE and their shareholders and managers?

We Speak on BNN About the S&P Negative Watch for US Debt -- Yves Smith -  I had hesitated to post this video, since I wasn’t too happy about it. Just before the segment was about to start, I got a cross feed on the audio, which meant I was listening to another show! I had to open the door to my itty bitty booth and yell to the production guys to fix it (I was already tethered so I couldn’t really go anywhere). This happened twice. The remote video was also on a big delay, so I couldn’t watch it to see my hosts.  I think that got me sufficiently adrenalined up that I got a bit stroopy and also invoking ideas without explaining them enough. Oh well. One reader thought it was OK and chided me for not linking to it. Hope you like it. (didnt seem a bit stroopy to me - rj) You can watch the segment here

Treasuries Advance Before Fed Meets on Bets Growth Will Suffer - Treasuries rose for a second week as investors speculated that efforts to cut the Federal budget deficit may damp economic growth and awaited a policy statement next week from the Federal Reserve.  Ten-year note yields fell to the lowest level in a month even as Standard & Poor’s put the U.S. government on notice that it risks losing its AAA credit rating. Gains were tempered by advances in stocks. The U.S. will sell $99 billion in notes in the coming week, and the Federal Open Market Committee opens its two-day meeting on April 26.  “You are looking at an economy that’s just getting off low levels,”  “The market is looking for guidance from the FOMC. We’re looking for clues as to when the Fed may possibly begin to change course with respect to monetary policy.”

The U.S. could lose its AAA credit rating? Why Treasury bond investors aren't flustered - For all the headlines that Standard & Poor’s generated Monday by warning that it might lower America’s AAA credit rating, the news has failed to panic the target audience: Treasury bond investors. Yields on Treasury securities slipped on Monday from Friday’s levels, and on Tuesday the market ended mostly unchanged. The 10-year T-note yield (charted below), a benchmark for other long-term interest rates, eased to 3.37% from 3.38% on Monday.If the threat of a downgrade from the gold-plated AAA rating had come as a real shock to investors, you would have expected bond prices to plunge and yields to spike. There was a small move up in yields early Monday morning but it didn’t last as buyers quickly came into the market. After rising sharply last fall amid optimism about the economy, Treasury yields have mostly been stuck in a trading range since mid-December. Why didn’t the S&P announcement cause a conniption in the Treasury market? Here are five possible reasons:

Who Are the Other Triple-As? - Standard & Poors Corp. cut its outlook on U.S. debt to negative, raising concerns that the country could eventually lose its triple-A rating, enjoyed by just 20 nations. Below is the full list:

S&P, the Debt Limit, and Political Risk - So it has come to this: The biggest short-term risk of the U.S. defaulting on its sovereign debt is not that big spenders will have their way. Rather, it is that a relative handful of self-styled fiscal conservatives succeed in throwing the country into financial crisis by refusing to raise the nation’s debt limit. It is curious that Standard & Poor’s well-publicized threat to downgrade U.S. debt if a budget deal is not reached by 2012 never quite got around to recognizing this far more urgent problem (more on S&P in a minute). But notwithstanding the rating agency’s silence, the coming game of debt limit chicken will obsess Washington through at least June. I suspect this ridiculous squabble will further delay, and not enhance, any serious deficit debate. Make no mistake: the debt limit battle is about nothing more than naked politics.  Fiscal prudence (as opposed to spending cuts) may be somewhere on their shopping list, but it is surely not at the top. And finally, there is the American public. Firm in their belief that deficits are too high, Americans are equally firm in their insistence that their favorite federal programs remain untouched and that only rich people pay higher taxes. Oh, and they also overwhelmingly oppose increasing the debt limit.

Why It's So Hard To Figure Out How Much Spending Was Cut - One of the biggest budget questions last week was how much spending did the agreement on the continuing resolution actually cut.  The top line number -- $31 billion, $38 billion, whatever billion -- was the first big story because it was one of the ways the media determined who was doing better during the negotiations.  Then the bottom line gave House Speaker John Boehner (R-OH) fits and made him scramble for votes to pass the CR when the Congressional Budget Office reported that spending would only be reduced by millions in 2011 rather than the billions he had proudly announced.  And then the top line was questioned again when CBO reported that the total would be between $20 billion and $25 billion over 10 years instead of the $38 billion total that seemed to seal the deal. The truth is that every one one of these numbers is correct in some way.  It's also correct to say that everyone always seems to be fooled every year when different people involved in the budget debate use the number that best suits their purposes instead of agreeing upfront on how things should and will be measured.

The Budget Debate, Revealed - The air in the capital these days is thick with references to trillion-dollar deficits, debt-to-G.D.P. ratios and mandatory spending. But the budget debate that became fully engaged last week is about far more than accounting and arcane policy disputes. What is under way now is the most fundamental reassessment of the size and role of government — of the balance between personal responsibility and private markets on the one hand and public responsibility and social welfare on the other — at least since Ronald Reagan and perhaps since F.D.R.  The Parties have their own internal tensions to address as the debate goes forward in Congress and on the presidential campaign trail. But in its early stages at least, it is liberals who are on the defensive.  The aging of the baby boom generation and the costs of maintaining Medicare1 and Social Security2 have put the two pillars of the social welfare system on the table for re-examination. The growing weight of the national debt has given urgency to the question of whether the government has become too big and expensive.

The Battle Is About Giving More Money to Rich People, Not About the Size and Role of Government - The New York Times told readers that the battle over Representative Paul Ryan's proposal, which would redistribute tens of trillions of dollars from poor and middle class people to the wealthy is a debate over: 'the size and role of government — of the balance between personal responsibility and private markets on the one hand and public responsibility and social welfare on the other.' This is not true. Paul Ryan, who is ostensibly the proponent of small government in this story, wants the government to be able to arrest people for conducting free market transactions with prescription drugs and medical devices. In Ryan's world, the government will give certain companies patent monopolies that allow them to charge prices that are many thousand percent above the cost of production. Ryan also has shown zero interest in opening trade for doctors and other highly paid medical professionals, which would go far towards reducing costs in the United States. Ryan also wants to deny seniors in the United States the option to buy into more efficient health care systems in other countries. According to the Congressional Budget Office's (CBO) projections, Ryan's plan would increase the cost of providing Medicare equivalent care to seniors by $30 trillion over Medicare's 75-year planning period, an amount that is 6 times the size of the projected Social Security shortfall.

Jim Manzi on the budget - There is a lot to like in Jim Manzi’s take on the long term budget. Read the whole thing. One of my favorite points The rational goal is to push the point of crisis out well beyond the current planning horizon. There is no “long-term solution” that can ever be achieved by any budget deal. In the end, the ballast in the entitlement and budgeting system that prevents it from going haywire in the long run is the good sense of the American electorate. That’s why neither the conservative emphasis on the character of the people, nor the progressive focus on maintaining social consent for the capitalist system, is entirely misplaced. The sentiment Jim expresses in the piece is a bit more alarmist than my own, but his analysis is right on. If I was greatly concerned about the long term deficit I would phrase the issue has he does.

Congress Readies To Favor Wasteful Medicare Spending -To my mind, the biggest farce in the world is the idea of congress passing a law in 2011 that aims at cutting Medicare spending at some point in the far-off future. When congress cuts food stamps, it cuts food stamps right away. When state legislatures cut child care funding, they cut child care funding right away. Yes, people rely on those services. Yes, immediate cuts make people upset. But that’s life. So while we’re all here in Washington talking about promising drastic Medicare cuts for my generation, Congress is also mobilizing to ensure that there will be no actual reduction in wasteful Medicare spending:Mr. Obama wants to expand the power of the 15-member panel, which was created by the new health care law, to rein in Medicare costs.But not only do Republicans and some Democrats oppose increasing the power of the board, they also want to eliminate it altogether. Opponents fear that the panel, known as the Independent Payment Advisory Board, would usurp Congressional spending power over one of the government’s most important and expensive social programs

Unemployment Benefits Add to Deficit - Spending on unemployment benefits and other “automatic stabilizers” that increase during economic downswings have added “significantly” to current federal deficits but their contributions will “steadily fade” over the next few years, according to the nonpartisan Congressional Budget Office.  In a new report Thursday, the CBO said that automatic stabilizers added the equivalent of 2.4% of gross domestic product to the deficit last year. But their share of future budget deficits will decrease as a share of potential GDP, dropping to a projected 2.1% in 2011, 1.7% in 2012 and 1.5% in 2013, CBO said.  As output returns closer to its potential, their contributions to federal deficits will decline even more, CBO added.  Automatic stabilizers include government spending programs that automatically kick in during cyclical declines in the economy, when output declines and unemployment rises. CBO said they include outlays for unemployment insurance claims as well as federal nutrition benefits, such as food stamps.

‘Gang of Six’ in the Senate Seeking a Plan on Debt - Days after President Obama1 called for forming a bipartisan group in Congress to begin negotiating a $4 trillion debt-reduction package, the parties have not even agreed to its membership. Yet six senators — three Democrats, three Republicans — say they are nearing consensus on just such a plan.  Whether the so-called Gang of Six can actually deliver something when Congress returns from a recess in May could determine whether Democrats and Republicans can come together to resolve the nation’s fiscal problems before the 2012 elections.  As Mr. Obama and Republican leaders have warred publicly over the budget, this small group of senators has spent four months in dozens of secretive meetings in offices at the Capitol and over dinner at the suburban Virginia home of Senator Mark Warner2, a Democrat. The group’s oldest members — Senator Richard J. Durbin4, 66, a progressive from Illinois who counts the Senate’s only socialist as a friend and ally, and Senator Saxby Chambliss5, 67, a genial Georgia conservative whose nasty first campaign left lingering bad feelings among Democrats, and who is a confidant of Speaker John A. Boehner6 — illustrate that even with the mounting federal debt intensifying the partisan divide over spending and taxes, the severity of the fiscal threat is forging unlikely alliances.

Sen. Mark Warner: 'Gang Of Six' Looking At Social Security Changes, Not Raising Tax Rates - The bipartisan "gang of six" may recommend changes to Social Security as part of its deficit-reduction plan, even though some Democrats have insisted such a proposal would be a non-starter. "You know, part of this is just math -- 16 workers for every one retiree 50 years ago, three workers for every retiree now," Sen. Mark Warner (D-Va.), a member of the group, told CBS "Face the Nation" host Bob Schieffer on Sunday. Warner credited House Budget Committee Chair Paul Ryan (R-Wis.) for producing a "serious" budget plan but criticized him for not proposing any way to raise revenues while transferring "more responsibility onto our seniors in terms of paying for health care." "What we're doing is we're saying everything has to be on the table," he said. "Entitlement reform, dramatic spending cuts, looking at tax reform." While Ryan's plan primarily talks about lowering tax rates, Warner said the gang of six is also looking at raising revenue by eliminating some of the tax expenditures.

Gang of Six Sees S&P Move as Sign to Act Soon on Budget Plan - “Gang of Six” members reacted to the news Monday that Standard & Poor’s had lowered its outlook for U.S. debt with grim warnings about the country’s financial future. “This is one more warning sign that the financial markets are paying close attention to see if we are serious about addressing our budget deficits and long-term debt,” said Sen. Mark Warner, a Virginia Democrat involved in  the bipartisan talks aimed at reaching a compromise on how to close the budget gap. “If we fail to take this seriously, and if our deficit and debt discussions turn into just another game of political brinkmanship, this could result in the most predictable economic crisis in our history.” The S&P move served as a real-world reminder that bond investors care what Congress does – or doesn’t do. And that bolsters the argument Mr. Warner and others make as they prod colleagues to forfeit a political fight in exchange for a deficit reduction package that maybe one day would balance the budget.“Today’s warning from S&P highlights the dangers of waiting for the perfect political moment to tackle our debt crisis,”

Gang of Six gives old-time politics a try - For months, as a group of senators known as the "Gang of Six" secretively holed up in the Capitol, their unusual bipartisan meetings frequently included some version of the doomsday speech. It's the one given by Sen. Tom Coburn (R-Okla.), portending calamity about the nation's debt crisis, making Democrats in the room squirm. "I say, 'Tom, not the doomsday speech again,'" said Sen. Richard J. Durbin of Illinois, the No. 2 Democrat in the Senate and one of the six, recounting the group's exchanges. Yet Durbin has grown to appreciate the dire warnings. As months have gone by, the widely differing viewpoints of the senators — three Republicans, three Democrats — may have begun to meld. "He has convinced me," Durbin said recently. "This is serious, and if we don't do something, and do it quickly, bad things can happen, in a hurry." Amid the earsplitting and hyper-partisan debate over debt, spending and deficits, the Gang of Six has been toiling quietly, aiming to present lawmakers with a middle course next month

The President’s “matching deficit reduction” claim is off by a trillion dollars (or more) In his weekly radio address the President said:Now, one plan put forward aims to reduce our deficit by $4 trillion over the next ten years. … That’s why I’ve proposed a balanced approach that matches that $4 trillion in deficit reduction.In the radio address the President did not give a timeframe for his $4 trillion in deficit reduction. He did in his budget speech last Wednesday, however: So today, I’m proposing a more balanced approach to achieve $4 trillion in deficit reduction over 12 years. $4 trillion in deficit reduction over 12 years does not “match” $4 trillion in deficit reduction over 10 years. It’s not even close.The twelve year timeframe is a red flag.  Federal budgets are measured over 1, 5, and 10 year timeframes.  Any other length “budget window” is nonstandard and suggests someone is playing games. The President and his team have not yet provided sufficient detail for us to know precisely how his $4 trillion of deficit reduction is distributed over this 12 year window, but we can make some back-of-the-envelope guesses to get a feel for the magnitudes involved.

Comparing Ryan's Medicare Plan to What Congress Gets - In an Op-Ed piece in The Wall Street Journal, Mr. Ryan wrote, “Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of health-care program that members of Congress enjoy.” He repeated that assertion on NBC’s “Meet the Press” on April 10, when he said, “For future generations, what we are proposing is a personalized Medicare, a Medicare system that works exactly like the health care I have as a member of Congress and federal employees have.” Exactly? I beg to differ. There is a huge difference in one important aspect between the Medicare program in the Ryan budget plan and the Federal Employee Health Benefit Plan, or F.E.H.B.P., for federal employees and for members of Congress. Basically, the F.E.H.B.P. is best described as a typical employer-sponsored health insurance plan. The federal government’s – that is, taxpayers’ – annual contribution to the premiums paid to competing private insurers by employees and members of Congress would rise in step with the average premiums charged by the private insurers (see Page 1). These premiums have been rising over time more or less in step with the overall increase in per-capita health spending in this country. By contrast, under the Ryan plan, the federal contribution toward the purchase of private health insurance by future Medicare beneficiaries would be indexed only to the Consumer Price Index (see Page 2 of the C.B.O. analysis).

Janitors and Corporate Executives Have the Same Pay Plan - I mean it: both receive a weekly paycheck. So there’s no difference in what they’re offered! Oh, wait — you mean that the size of the paycheck matters too? What brings this to mind is the now standard claim that Ryancare would be exactly the same as what members of Congress receive. Ryan:  What we are proposing is a personalized Medicare, a Medicare system that works exactly like the health care I have as a member of Congress and federal employees have. As Uwe Reinhart points out, while it’s true that both systems would involve having the government provide a voucher that helps pay for private insurance, it kind of matters how big the voucher is. The federal employees benefit plan rises in value in step with private insurance premiums; Ryan wants Medicare vouchers to grow only at the rate of inflation. A bit of a difference Next up: the Ryan plan, in its majestic equality, forbids members of Congress and Medicare recipients alike to sleep under bridges.

Neediest and sickest pay the price under GOP budget - If there was any doubt that the debate over deficits is not about numbers but philosophies of government — it just exploits the vocabulary of fiscal policy — these two events should lay it to rest. The principal target of Ryan's plan is government healthcare spending — Medicare, Medicaid and the healthcare reform plan. That's a reasonable place to aim any deficit-reduction plan, because that's the area where costs are rising most sharply. But his solutions are the antithesis of reasonable. They involve almost entirely throwing the neediest and sickest Americans out from under the government umbrella to fend for themselves. Medicare as we know it would be eradicated, the cost of Medicaid shifted largely to already hard-pressed state government, and a reform program designed to give tens of millions more Americans the protection of health insurance canceled outright.

Paul Ryan's Reverse Robin Hood Budget - Worst things first. The plan threatens to eviscerate Medicare by privatizing it—with vouchers that, absent some sort of cost-control miracle, would fall further and further behind the rising cost of health insurance. And to make that miracle even less likely, House Republicans want to repeal every cost-containment measure enacted in last year's health-reform legislation. Medicare would not die a sudden death under the Ryan plan—people over 55 are grandfathered. It would, instead, succumb slowly to a debilitating illness as the growing gap between the vouchers and the cost of private health insurance priced more and more seniors out of the market. Then there's Medicaid, which is a lifeline for the poor. House Republicans want to turn it into a block grant, underfund it, and let the 50 states figure it out. Make your own judgment about how well your state would cope. I come from New Jersey. Mr. Ryan comes from Wisconsin.The sums involved are huge. The Congressional Budget Office (CBO) estimates that the House Republican budget would reduce federal health-care spending by more than two-thirds by 2050. (No, that's not a misprint.) Did someone say, "We have to destroy Medicare to save it?"

Budget Fallacies: Why the Ryan Plan Won’t Work - Among the economic fallacies embraced in Congressman Paul Ryan’s budget proposal, two are particularly egregious: that getting rid of Medicare will reduce health care costs and that enacting yet further tax cuts for the rich will spur growth and investment.  Critics on the left are up in arms because Ryan’s proposal to force Medicare recipients to buy private insurance will raise the amount those now under 55 will pay when they are old enough to get Medicare by an average of $6,000 a person. In other words, critics say, we are trying to cut health care costs—and supposedly reform it through more privatization—on the backs of future elderly Medicare recipients. But the Ryan plan won’t reduce health care costs. As Peter Orszag, the former White House budget director, told me recently, the bipartisan Congressional Budget Office calculates that overall health care spending will go up as Medicare recipients are forced to buy private insurance, since private insurance has far higher administrative expenses than Medicare. Health care expenditures, as Orszag nicely puts it, are not being reduced on the backs of seniors, they are being raised on the backs of seniors.  And herein lies a further misunderstanding.

On Not Doing Your Homework - Krugman - Jonathan Chait is annoyed with Jacob Weisberg, who wrote a ludicrously adulatory column about Paul Ryan, then admitted that he was wrong — and in the process once again gave Ryan credit that isn’t due. Chait: The problem, of course, is that Ryan doesn’t own up to this [the requirement that spending be sharply cut to make room for his tax cuts] at all. Continuing the Republican practice of denying any connections between revenues and deficits, he refuses to concede that the spending levels he proposes are in any way constrained by his preference for staying at or below Bush-level tax rates.  Um, how can you lavish praise on a supposed long-term budget proposal without, you know, asking whether its long-run spending projections make sense? Plus, while Weisberg originally poo-poohed my column from last year about Ryan’s flimflam, he apparently didn’t reread the part of the column where I criticized Ryan for making … laughable projections about discretionary spending. Look, this is an important debate. If you can’t be bothered to look at the numbers, you shouldn’t weigh in.

What Can We Learn about the Ryan Medicare Plan from German Experience? - Last week Republicans in the US House of Representatives, following the lead of Representative Paul Ryan, endorsed a far-reaching plan to reform Medicare, the nation's health care system for the elderly. Supporters of the Ryan plan see several benefits. An open letter, posted on the web site of the American Enterprise Institute and signed by a list of prominent physicians and economists, puts it this way: Having more control over their health care spending would encourage consumers and patients to make better health care choices. It would stimulate more innovative and accountable competition by health care providers and give them incentives to better coordinate the care of their patients.  Critics fear that in its zeal to ease the burden on taxpayers, the Ryan plan would make Medicare-equivalent health care unaffordable for many, if not most seniors.The idea of competing private health insurance plans, with premiums split between beneficiaries and the government, is far from new. It has been used for many years in Germany, among other places. What insights regarding the likely effects of the Ryan plan can we get by looking at the German experience? Under the German system, seniors choose insurance coverage from among a list of approved, nongovernmental "sickness funds" (Krankenkassen). As in the United States, those insurers, in turn, pay for health care provided by private physicians and hospitals. Beneficiaries and the government each pay a share of health care premiums. In these respects, the German system is closer to the Ryan plan than to the current version of Medicare.

Medicare Costs More Under Ryan Plan and the Iraq War Costs More Than a Hamburger - The NYT produced its entry in the understatement of the year contest telling readers that: 'A Congressional Budget Office review of the Ryan proposal predicted that retirees would pay more for their health care under it than they would under traditional Medicare.' Yes, this is true. But this is not a question of spending a few extra dollars a month for health care under the Ryan plan. The CBO projections show that under the Ryan plan, seniors would soon be spending more than half of their income to buy a Medicare equivalent plan. This is both due to the cost shifting from the government to individuals, but even more importantly CBO projects that Ryan's plan will lead to much higher health care expenses since it will be less effective in containing costs than the traditional Medicare program. The CBO projections imply that Ryan's plan would add more than $30 trillion to the cost of providing Medicare equivalent policies over the program's 75-year planning period. The additional cost under the Ryan plan is an amount that is approximately equal to $100,000 for every person in the country or 6 times the size of the projected Social Security shortfall. This sum is the pure waste, it does not count the costs shifted from the government to seniors

‘The Shining’ — national debt edition - Remember that great scene in the 1980 film classic, “The Shining,” when the wife comes upon the typewriter of the Jack Nicholson character, who’s supposed to have been working night and day for months on his novel? To her horror, she finds thousands of pages on which Jack has typed, “All work and no play makes Jack a dull boy,” formatted in countless, crazy ways. Suddenly his suspected madness becomes all too frighteningly real.  Well, debt limit mania has driven me to a similar frenzied state. If my wife came across my manuscript it would read, “The House Republican budget adds $6 trillion to the debt in the next decade yet the GOP is balking at raising the debt limit. The House Republican budget adds $6 trillion to the debt in the next decade yet the GOP is balking at raising the debt limit.” I thought about making this week’s column that one sentence printed over and over 30 times. It would have been the opinion page equivalent of a Dada-esque protest against the inanity of the debate — and a cry for every news outlet to focus on this simple, clarifying fact.

Ryan-Republican Plan Requires Debt Ceiling To Be Raised By $6 Trillion - Over at The Washington Post, Matt Miller has a wonderful column that says what needs to be said about the current budget debate as directly and angrily as it can be stated: "“The House Republican budget adds $6 trillion to the debt in the next decade yet the GOP is balking at raising the debt limit." There's more: The supposedly “courageous,” “visionary” Paul Ryan plan — which already contains everything Republicans can think of in terms of these spending cuts — would add more debt than we’ve ever seen over a 10-year period in American history. ***The classic definition of chutzpah was a kid who kills his parents and then asks for the mercy of the court because he’s an orphan. The new definition of chutzpah is Republicans who vote for the Ryan plan that adds trillions in debt and who then say the debt limit goes up only over their dead bodies!

Entitlement Hater Paul Ryan Was A Social Security Baby - When Representative Paul Ryan was 16 years old , tragedy struck his family. His 55 year old father had passed away from a heart attack. Young Paul Ryan found his father’s lifeless body and was burdened by the fact that he had to tell his mother and siblings of this horrible situation. After his father’s passing, young Paul Ryan started collecting social security benefits until the age of 18 years old. He took this benefit and saved it for his college education. Representative Paul Ryan is one example of the millions of people whose lives have depended on our social contract with the American people. Many people do not know that 30% of the social security fund goes directly to widows,orphans and the disabled. It is not solely for the benefit of retirees. Unfortunately this social contract is under a regressive attack by the Republicans, including Paul Ryan.

The NYT Reports on Paul Ryan's Presidential Ambitions and Flat Earthers' Plan for an Astronomy Department -The NYT somehow thinks that it's good journalism not to point out that people who say that the earth is flat are wrong. How else can one explain the fact that it reports on Representative Paul Ryan's presidential ambitions (or lack thereof) and notes in passing that he has different views on how to constrain health care costs and promote growth than President Obama.Representative Ryan's views on both topics have been tested and shown to be wrong. The government run Medicare program is far more effective in constraining costs than the private sector. This is why the Congressional Budget Office (CBO) projects that adopting Representative Ryan's plan would add $30 trillion to the cost of buying Medicare equivalent plans over Medicare's 75-year planning horizon.This is not the sum transferred from the government to beneficiaries. It is the increase in total costs -- waste to the government, income to insurers and health care providers.  It comes to almost $100,000 for every man, woman, and child in the country.

Obama and the House Radicals  - As is his custom, President Obama erred on the side of caution in confronting this country’s grave fiscal crisis. On Wednesday he gave a good speech far too late. What if he hadn’t been so dilatory on a subject he inevitably would have to confront?  Consider this picture: in early 2010, the Tea Party was a mere specter, not yet a full-blown movement, much less an election victor, and it was unimaginable that it would, in effect, seize control of one body of the Congress. Even if Obama had addressed the fiscal crisis at the outset of this year, rather than deliver a wan and cautious State of the Union address, he would have set the predicate for the current budget battle rather than leaving an opening for Paul Ryan’s radical (and somewhat nonsensical) proposal to fill the vacuum. In essence, Ryan’s plan would change Medicare and Medicaid almost beyond recognition and sharply lower tax rates for the wealthiest individuals and for corporations. It relies on strange assumptions, such as 2.8 percent unemployment by 2021, and it appears to come nowhere near his claimed savings of $1.6 trillion. Ordinarily, such a proposal would have been laughed out of town, but now it’s been transformed into respectability.

Medicare as we know it - The President and his allies ominously warn that the Ryan plan would “end Medicare as we know it.” But let’s be honest, how much do you really know about Medicare?  If you’re under age 65 there’s a good chance that you know very little about the program.  You have had no reason to, at least until now.Five years ago I had to help a Cabinet Secretary and a senior White House staffer get up to speed very quickly on the absolute basics of Medicare, just the broadest brush strokes.  They, like you, needed to understand Medicare principally from a top-down budget perspective, rather than as a participant in the system. I created a simple two-page outline for them to study.I have updated the numbers in that document and offer it here, hoping it can provide some basic facts and context to the Medicare component of the current budget debate. This outline won’t make you an expert, but at least you’ll have a starting point.All numbers below are from CBO, except enrollment data are from the Medicare trustees.

A Shot at a Sane Budget - President Obama has been criticized as too slow to engage in major debates and too timid to make difficult decisions.In one important respect, however, Mr. Obama’s deficit speech disproves the caricature, and contains a bold, serious and timely proposal. What I have in mind is his endorsement of a trigger that would automatically kick in to reduce spending and tax expenditures if Congress and the administration fail to bring the debt under control.  Mr. Obama described what he called a “debt fail-safe”: “If, by 2014, our debt is not projected to fall as a share of the economy — if we haven’t hit our targets, if Congress has failed to act — then my plan will require us to come together and make up the additional savings with more spending cuts and more spending reductions in the tax code.”  In essence, Mr. Obama proposed a rule that will enable us to get ahead of the long-run budget problem, and provide predictability and certainty to the federal budget.

Obama's Savvy Deficit Play - Obama’s rhetoric on the debt issue was surprisingly strong. He spoke “powerful words, and spoke them with real feeling,” as veteran ex-speechwriter/bleeding-heart liberal Rick Hertzberg wrote. Obama did not, as many of us feared (and expected), take refuge in the “We must reject both extremes” meme, forgetting, as he so frequently does, that one of those “extremes” is not only not terribly extreme, but also goes by the name of “your base,” sir. No, the speech was not the kick in the teeth, that Pavlov-like, liberals have been trained to anticipate from this president. But this was due in part to the success of the far right in moving the political goals so far into their territory that merely to take what not long ago would have been an Eisenhower-Republican style position is now labeled “liberal class war”; the first step on the road to socialist totalitarianism. Thanks to Paul Ryan, Obama was given a clear target that allowed him to define, for once, his team, rather than play referee. As The New Republic’s Jonathan Cohn writes, to support the Ryan budget, one must also support: (a) denying health insurance to more than 30 million people; (b) raising the Medicare eligibility age and transforming the program into a voucher scheme, thereby leaving millions of seniors struggling to pay their medical bills; (c) terminating the federal government's open-ended commitment to Medicaid, thereby forcing states to cut back on enrollment, benefits, or (more likely) both; (d) enacting yet another huge new tax cut for the extremely wealthy.

Cut Spending by $4 Trillion? - I hope this is a slip up as opposed to a slip of the Freudian variety:... “Both Democrats and Republicans agree that we should reduce the deficit,” Mr. Obama said at a town hall at the Northern Virginia Community College in Annandale. “ In fact, there is general agreement that we need to cut spending by about $4 trillion over the medium term.  And when folks in Washington agree on anything, that’s a good sign.  So the debate isn’t about whether we reduce our deficit.  The debate is about how we reduce our deficit.” The problem is, there actually isn’t an agreement in Washington to cut spending by $4 trillion. ...The other problem is that it isn't just about how, it's also about when. I agree we need to tackle this problem, but not before the economy is standing on sturdy legs. Obama does say "medium term," I just wish his actions were consistent with that qualification. Austerity during the initial part of a recovery is not the answer to our long-run debt problem.

Interactive Map: Paul Ryan vs. Obama Budget Details; Path of Destruction - I have been digging into the details of President Obama's budget plan vs. Paul Ryan's budget plan. What I found was so sickening that I asked my friend Ross Perez at Tableau Software for a display. The interactive map below may take a few seconds. It will be worth your wait. Select from the dropdown box for a list of items you can chart. You can also hover over any of the orange or blue boxes for a popup display comparing the budgetary difference between the Obama and Ryan proposals for that year, for that item. Boxes in blue are years in which Paul Ryan has budgeted more for an item than President Obama. Boxes in Orange are the reverse.

Poll shows Americans oppose entitlement cuts to deal with debt problem, by Jon Cohen and Dan Balz: Despite growing concerns about the country’s long-term fiscal problems and an intensifying debate in Washington about how to deal with them, Americans strongly oppose some of the major remedies under consideration, according to a new Washington Post-ABC News poll. The poll finds that 78 percent oppose cutting spending on Medicare as a way to chip away at the debt. On Medicaid — the government insurance program for the poor — 69 percent disapprove of cuts. There is also broad opposition to cuts in military spending to reduce the debt, but at somewhat lower levels (56 percent).In his speech last week, the president renewed his call to raise tax rates on family income over $250,000... At this point, 72 percent support raising taxes along those lines, with 54 percent strongly backing this approach. ... Only among people with annual incomes greater than $100,000 does less than a majority “strongly support” such tax increases.

The Bipartisan Deficit Reduction Glass Is (Almost) Half Full - We at the Concord Coalition, like many “deficit hawks” who are really more appropriately considered “deficit pandas” (a la Ruth Marcus–I love it!), haven’t given up on fiscal responsibility just yet. Take the recently-reported Washington Post-ABC News poll that’s been characterized (in a Washington Post print headline) as showing “little backing for debt remedies.” Stories about this poll have tended to emphasize the majority who are opposed to each item in a “pick one” menu of tough choices:  78 percent opposed to cutting Medicare, 69 percent opposed to cutting Medicaid, 56 percent opposed to cutting defense spending.  The only “pick one” option that a majority (72 percent) supported:  “raising taxes on incomes over $250,000.”  And even that is not as agreeable as it sounds, considering that households with incomes over $250,000 make up only about 2 percent of the population–i.e., you’d think we could get a little closer to 98 percent support on that one. No one wants to agree to give up something if they think others in society aren’t going to give up something, too.  None of those “pick one” choices conveyed a notion of shared sacrifice or a “balanced” approach.

Choices Must Be Made - Krugman - Arguably the most important thing we can do to limit the growth in health care costs is learning to say no; we cannot afford a system in which Medicare in particular will pay for anything, especially when that’s combined with an industry structure that gives providers a strong financial incentive to engage in excessive care. So naturally, the Independent Payment Advisory Board, which is the first step toward making rational choices, is under attack. Mainly the attack is coming from Republicans, who want to dismantle Medicare, not save it — their proposal is that instead of having Medicare make choices based on expert advice, we should give seniors inadequate vouchers and let insurance company executives make those choices instead. But there are some Democrats in opposition too.  Others, as Jonathan Cohn notes, have suspiciously close ties to industry groups that benefit from the system’s current inefficiency.The thing is, we’re going to make choices eventually, one way or another. Should the choices be made by medical professionals, or should we rely on the kindness of corporations?

Republican Medicare, Republican socialism, massive Republican tax increase -  Rep. Paul Ryan (R-Wis.) is a good and sincere man, but here is why his Medicare policy is radical and extreme. Ryan would destroy and end Medicare. He would replace a government program with taxpayer-subsidized vouchers to pay price-gouging companies. Insurers would of course raise their premiums even higher, and by limiting the size of the voucher subsidies, Ryan is effectively proposing one of the largest middle-class tax increases in history. When Ryan limits the size of his vouchers, and insurers jack up their premiums higher than the amount of the limited vouchers, consumers will pay the difference. The real-life effect of the Republican policy is the same as a perpetual tax increase machine on Medicare recipients, to subsidize a perpetual windfall profits machine for price-gouging companies. The far better solution would be to expand Medicare or enact a public option, which would lower healthcare costs for consumers and reduce the deficit for taxpayers, and enact reforms that end many forms of price-gouging that exist today and would become far worse under the Ryan plan.

Heritage Breaks Internet Silence on Its Ryan Plan Simulations (w/o a single number!) » The Heritage Foundation Center for Data Analysis (CDA) simulation of the Ryan plan, on behalf of the House Committee, has come in for some criticism. Commentary has been provided by Paul Krugman, and perhaps most comprehensively by Macroeconomic Advisers. (My comments are here: [1] [2] [3]). Yesterday, the Heritage Foundation CDA’s director, William Beach, posted a rebuttal to Krugman's critique. While Big Picture posted an excellent rejoinder, I want to deal with one particular aspect of Mr. Beach's open letter. Consider this excerpt. Claim # 2 - We crafted the Ryan plan results with the end in mind: While I can see how you may have forgotten the limited purposes of economic policy modeling (though it’s still shocking that someone of your stature could be so unmindful), it is simply bizarre that you argue that we designed the economic modeling of the Ryan plan to reach specific conclusions. Either you are intentionally lying about our work, or you are totally ignorant of the complex, widely used model we employed for this work and also failed to read the detailed description of what we did that is posted on the House Budget Committee web site along with our results (which you apparently did see).

Wonkbook: 84 percent oppose Ryan’s Medicare plan - You know what’s not popular? Reforming Medicare such that beneficiaries “receive a check or voucher from the government each year for a fixed amount they can use to shop for their own private health insurance policy.” According to a new Washington Post-ABC News poll, 65 percent of Americans oppose the idea -- about the same number who dismissed it in 1995. And if they’re told that the cost of private insurance for seniors is projected to outpace the cost of Medicare insurance for seniors -- which is exactly what CBO projects -- more than 80 percent of Americans oppose the plan.  But it’s not just sweepingly ideological reforms that are unpopular. Cutting Medicare polls poorly even if you leave out the details. Almost 80 percent of Americans oppose Medicare cuts in the abstract, while 70 percent oppose Medicaid cuts. Slightly over half of the country wants the Defense Department left alone. The only deficit-reduction option that is popular? Raising taxes on the rich. That gets the go-ahead from 72 percent of us -- though, as any budget wonk will tell you, it can’t solve anything beyond a small fraction of our fiscal problem.

House of Representatives Votes to End Medicare and Cut Taxes for Wealthy, Corporations - The United States House of Representatives has passed the Paul Ryan (R) budget blueprint that would end Medicare as we know it, convert Medicaid to a block grant program which would sharply curtail health care availability to the poor and nursing home care to seniors, while further cutting dramatically into aid to those in need of food stamp programs and other social safety net assistance. The Resolution would also effectively repeal the Affordable Care Act while reducing the highest tax rates paid by the nation’s wealthiest citizens by 10% and reduce taxes paid by U.S. corporations.

Where We Go From Here - Yglesias on the battle for the America’s fiscal future. I think the right way to think about the current debate is this. We have a fairly settled view in the United States that one important function of the government is taking care of elderly people. We also have a fairly settled view in the United States that one important function of the government is ensuring that people have health insurance. We also have a fairly settled view in the United States that we like being an unusually low tax country. We also also have a fairly settled view in the United States that we want to maintain a uniquely expensive posture of global military hegemony. These are straightforwardly incompatible goals. Large, regionally significant states such as China, India, Brazil, and Nigeria are growing faster than we are putting pressure on military hegemonism. The share of the population composed of elderly people is rising. And the productivity of the health care sector is increasing more slowly than the productivity of the economy as a whole. This leaves us with a lot of adjusting to do. Somewhat . A straight forward way to honor all of these commitments is simply to run ever larger national deficits. Naturally, deficits will decline as the economy improves but the structural deficit will likely be deeper in the near future than in the near past

Game theory and the budget - Matt Yglesias writes:…the right is big government’s best friend…You have a government set to steadily increase spending on autopilot as a result of demographic change and rising health care costs. And you have a Democratic President urging congress to enact spending cuts. But you have conservative politicians refusing to make a serious effort to reach an agreement out of some blend of taxophobia and fear of giving the President a win. The result, again, whether the right realizes it or not, is a gift to the wing of the Democratic Party that disagrees with Obama about the desirability of enacting spending cuts. I tend to agree with this, but it’s always worth trying to solve for the case where one is wrong.

Republicans facing tough questions over Medicare - Anxiety is rising among some Republicans over the party’s embrace of a plan to overhaul Medicare, with GOP lawmakers already starting to face tough questions on the issue at town hall meetings back in their districts. House leaders have scheduled a Tuesday conference call in which members are expected in part to discuss strategies for defending the vote they took this month on a budget that would transform the popular entitlement program as part of a plan to cut trillions in federal spending. The assault has taken some Republicans by surprise, prompting concerns that the party is ceding ground in a policy debate that GOP strategists already viewed as perilous. Some Republicans fear a repeat of 2005, when President George W. Bush tried to turn the political capital of his reelection into a push to privatize Social Security. Republicans abandoned the effort after Democrats vigorously attacked them, accusing the GOP of trying to cut benefits.

Where is My Free Lunch? - Mark Thoma writes, It seems to me that there is far too much discussion of cutting services, and not enough about how to control costs without affecting services (e.g., using the government's purchasing power to reduce the amount the government pays for drugs, reducing the cost of insurance companies fighting over who pays bills, etc.). Costs that can be cut without reducing services need to come first, then, when those efforts are exhausted, we can think about the services themselves. But that doesn't seem to be how we are proceeding. In other words, let's find the free lunch first, before we have to pay for lunch. Here are my remarks:

  • 1. Note the distinction between cost reduction and cost shifting. For example, if government pays less for drugs, that shifts the costs of the drugs to someone else. It does not make drug development or drug delivery more efficient.
  • 2. On the issue of fighting over insurance bills, be careful what you wish for. If you want health care spending to go down, then you probably want the insurance companies to be tough, not soft.
  • 3. Remember that every consumer's cost is some health provider's income. This will make the politics of beating down costs rather difficult. It may be worth trying, but public choice theory predicts that the doctors will generally win these battles.

The budget battlegrounds of 2011 - There are 7-8 budget battlegrounds this year.  The press focuses on only one at a time. You should understand all of them as this year’s components of a multi-year struggle.

Beware the "Middle Ground" of the Budget Debate - Robert Reich - We continue to hear that the Great Budget Debate has two sides: The President and the Democrats want to cut the budget deficit mainly by increasing taxes on the rich and reducing military spending, but not by privatizing Medicare. On the other side are Paul Ryan, Republicans, and the right, who want cut the deficit by privatizing Medicare and slicing programs that benefit poorer Americans, while lowering taxes on the rich.By this logic, the center lies just between.Baloney.According to the most recent Washington Post-ABC poll, 78 percent of Americans oppose cutting spending on Medicare as a way to reduce the debt, and 72 percent support raising taxes on the rich – including 68 percent of Independents and 54 percent of Republicans. In other words, the center of America isn’t near halfway between the two sides. It’s overwhelmingly on the side of the President and the Democrats. I’d wager if Americans also knew two-thirds of Ryan’s budget cuts come from programs serving lower and moderate-income Americans and over 70 percent of the savings fund tax cuts for the rich far more would be against it

No Deal - Krugman - One of the risks Obama ran by proposing a reasonable and actually fairly conservative budget was that the “center” would end up being defined as halfway between that reasonable position and the right-wing radicalism of the Ryan plan. And there were particular fears that the “Group of Six” senators would come out with something along those lines, giving it a lot of political momentum. But it looks as though Republicans aren’t willing to give up anything at all. Via Ezra Klein, Tom Coburn is ruling out any significant tax increases, while Orrin Hatch, not in the group but with effective veto power, says no tax increases nohow. So that’s it. A deal in which the only concession Republicans make is not to cut taxes on the rich even further is just not acceptable.

The Progressive Budget Alternative - Krugman - I’ve been remiss in not calling attention to the budget proposal from the Congressional Progressive Caucus. It’s not going to happen — but then neither is the Ryan plan. And unlike the Ryan plan, it actually makes sense. The CPC plan essentially balances the budget through higher taxes and defense cuts, plus some tougher bargaining by Medicare (and a public option to reduce the costs of the Affordable Care Act). The proposed tax hikes would fall mainly on higher incomes, although not just on the top 2%: super-brackets for very high incomes, elimination of deductions, taxation of capital income as ordinary income, and — the part that would be most controversial — raising the cap on payroll taxes.  None of this is economically outlandish. It’s worth pointing out that if you want to balance the budget in 10 years, you pretty much must do it largely by cutting defense and raising taxes; you can’t make huge cuts in the rest of the budget without inflicting extreme pain on millions of Americans. So the CPC plan is actually much more of a real response to the deficit worriers than all the nonsense we’re hearing from the right. What it doesn’t do is address the long-run health cost issue, which is essential looking beyond the next decade. But as a medium-term proposal, it’s quite sensible.

“The People’s Budget” -It is endorsed by Paul Krugman and also Jeffrey Sachs, so I thought I would give it a look.  It is from the Congressional Progressive Caucus.  One simple question is to ask how the rich are taxed:

  • 1. There are separate rates in the mid- to high forties for millionaires, with strict limits on itemized deductions.
  • 2. “Raise the taxable maximum on the employee side to 90% of earnings and eliminate the taxable maximum on the employer side.”   I find the entire proposal here poorly explicated.  In any case, it’s a big tax increase.
  • 3. Tax capital gains and dividends at the normal income rates.  (I am not sure how loss offsets are to be treated, though it could make a big difference and significantly boost the demand for volatile stocks.)
  • 4. I’m not sure what happens with state-level income tax rates but there’s certainly, in the proposal, no talk of them going down. 
  • 5. Estate taxes would be raised significantly (sock it to Boy Mankiw!), as would corporate income taxes, there would be new financial transactions taxes, there would be a new bank tax, and tax enforcement would be stiffer.
  • 6. There are, by the way, no proposed cuts in benefits.

Taxes, the Dollar and Current Account Surpluses - A couple of points thoughts today I’ve said that the ability of the US to borrow cheaply has primarily financed tax cuts for wealthy Americans. I want to be clear. I do not mean that wealthy Americans should have been taxes so as not to increase the deficit. I mean that if I do my best to imagine a world in which cheap borrowing was impossible that the result I get is not a much smaller welfare state but higher taxes on high income Americans. I want to reiterate that its not clear to me that this has made America poorer. Indeed, using your high credit rating to borrow cheaply and lend dearly is a time honored way of getting rich. It seems to me that America has used this method and that the national as a whole is likely wealthier than it would have been if it had run balanced budgets. This entire complex seems inextricably bound up in the phenomenon Mike Mandel is trying to detail. I think I understand his point to be this: we look at our national statistics and think that we are getting better at turning raw materials into goods and services using traditional engineering expertise. Instead, we are getting better at using our special economic position to engineer favorable terms for goods supplied to US Multi-nationals. While the first represents a knowledge base that is more or less stable, the second depends on our unique position in the world, which is not likely to last.

The Ryan plan cuts taxes for the rich — but why? - Jon Chait is, of course, right that House Budget Committee Chairman Paul Ryan’s budget cuts taxes on the rich. It cuts them when compared with current law, under which the Bush tax cuts expire in 2012. It cuts them against Obama’s budget, under which the Bush tax cuts for income over $250,000 expire in 2012. And it cuts them even if you ignore the Bush tax cuts, as it repeals a variety of progressive taxes included in the Affordable Care Act. That it also closes loopholes and lowers marginal rates has no bearing on the fact that the rich will be paying less than they would under either current law or the president’s proposals. But I also understand why so many conservatives are going to such great lengths to deny that Ryan’s budget cuts taxes on the rich. Raising taxes on the rich is popular. Saying you’re not going to raise taxes on the rich but you’re going to make up that money by sharply cutting Medicaid and Medicare is unpopular. Look what happened to Ryan himself when he tried to tell some of his constituents that the rich were already taxed enough. Skip ahead to 1:25 in the video if all you’re interested in are the boos:

Americans Still Split About Whether Their Taxes Are Too High -- Half of Americans believe the amount they pay in federal income taxes is too high, while 43% consider it about right and 4% too low. The 50% now calling their taxes 'too high' is within the 46% to 53% range found each year since 2003. It is significantly lower than the 65% recorded in 2001, prior to implementation of former President George W. Bush's first round of federal tax cuts. The new findings are from Gallup's annual Economy and Personal Finance poll, conducted April 7-11. The same poll finds 57% of Americans characterizing what they pay in income taxes as 'fair' and 40% as not fair. Notably, more Americans consider their taxes fair than say they pay the right amount in taxes (57% vs. 43%), suggesting more people dislike what they pay than feel it is unjust. While the majority remain positive about the fairness of their own taxes, the margin has narrowed slightly over the past three years.

Turning Tax Expenditures Right Side Up - The federal government spends more than $1 trillion a year on “tax expenditures” — spending delivered through the tax code via credits, deductions, and other targeted tax breaks.  That’s more than it spends on Social Security, or on Medicare and Medicaid combined.  There’s growing bipartisan interest in curtailing tax expenditures as a way to help reduce deficits, and if done right, it could also make the tax code more efficient and equitable, as our new report explains. About 70 percent of what’s spent each year on individual tax expenditures goes for tax breaks whose value is tied to the taxpayer’s income bracket.  As a result, the wealthiest households often receive the largest tax subsidies (since they’re in the highest brackets), while middle-class families receive considerably less — and many of the most vulnerable families are left out entirely. This structure makes little sense.  Much of this “spending” is designed to encourage socially valued activities like owning a home, saving for college or retirement, or contributing to charity.  But high-income families generally would do these things with or without big tax incentives.  By contrast, families of more limited means often can’t afford to do these things without significant financial incentives.

Greenspan Steps Up Call to End Bush-Era Tax Cuts - Former Fed Chairman Alan Greenspan is stepping up his call for Congress to let the Bush-era tax cuts lapse. In an appearance Sunday on ABC’s “Meet the Press,” Mr. Greenspan used his strongest words yet to urge lawmakers to let them expire. The risk of a U.S. debt crisis, he said, is just too big. Mr. Greenspan, who retired from the Federal Reserve in 2006, had endorsed the cuts back in 2001 championed by then-President George W. Bush. “This crisis is so imminent and so difficult that I think we have to allow the so-called Bush tax cuts all to expire. That is a very big number,” he said, referring to how much the U.S. government could save from letting income taxes go back up to levels last seen under former President Bill Clinton. Mr. Greenspan was talking about re-imposing the taxes for all Americans. The Treasury has estimated that a permanent extension of all the Bush tax cuts would cost $3.6 trillion over the next decade. Allowing taxes to increase on those in the top income brackets would take the cost to the government down to $2.9 trillion, according to White House estimates.

Nice to See This--Even If It Is Ten Years Late and $4 Trillion Short - Luca di Leo: Greenspan Steps Up Call to End Bush-Era Tax Cuts - Washington Wire - WSJ: Former Fed Chairman Alan Greenspan is stepping up his call for Congress to let the Bush-era tax cuts lapse. In an appearance Sunday on ABC’s “Meet the Press,” Mr. Greenspan used his strongest words yet to urge lawmakers to let them expire. The risk of a U.S. debt crisis, he said, is just too big. Mr. Greenspan, who retired from the Federal Reserve in 2006, had endorsed the cuts back in 2001 championed by then-President George W. Bush. “This crisis is so imminent and so difficult that I think we have to allow the so-called Bush tax cuts all to expire. That is a very big number,” he said, referring to how much the U.S. government could save from letting income taxes go back up to levels last seen under former President Bill Clinton. Of course, the crisis isn't imminent: it looks to me like it is more than a decade away. But it is not too soon to start trying to avoid it.

An Inconvenient Truth for Teabaggers: America’s Taxes Hit Historic Lows - Who will save us from the socialist dystopia that is Obama’s America? While Republican lawmakers appear unified against tax increases and many Tea Party activists want existing rates rolled back, statistics consistently show that federal taxes are at a historic low. For the past two years, a family of four earning the median income has paid less in federal income taxes than at any time since at least 1955, according to the Tax Policy Center. All federal, state and local taxes combined are a lower percentage of per-capita income than at any time since the 1960s, according to the Tax Foundation. The highest income-tax bracket is its lowest since 1992. At 35 percent, it’s well below the 50 percent mark of much of the 1980s and the 70 percent bracket of the 1970s. Clearly, this calls for another round of tax cuts. Oh, and about that last part. Gallup has a poll today that shows that 59% of the country think millionaires aren’t paying enough taxes. Why do Americans want to punish the producers and reward the lazy?

Saying Goodbye to George Bush's Holiday From History - If we just left the tax code completely alone, a big chunk of our deficit problem would go away. This is not my preferred policy; I support allowing all the Bush tax cuts to expire, but allowing the Alternative Minimum Tax to blindly hit more and more families over the next couple of decades is a pretty blunt instrument for raising money. I think we can do better. Still, it would solve a big piece of both our medium-term and long-term deficit problems. Ross Douthat, however, thinks this would be a catastrophe: Today, for instance, a family of four making the median income — $94,900 — pays 15 percent in federal taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25 percent of that family’s paycheck. The marginal tax rate on labor income would rise from 29 percent to 38 percent. Federal tax revenue, which has averaged 18 percent of G.D.P. since World War II, would hit 23 percent by the 2030s and climb even higher after that. Such unprecedented levels of taxation would throw up hurdles to entrepreneurship, family formation and upward mobility. There's a lot of cherry picking going on here designed to make this look as oppressive as possible.

Just A Little Tax Hike . . . Kevin Drum doesn't think it will be so hard to solve our fiscal problems with tax hikes: I said that federal taxes had averaged 21% of GDP over the past 30 years, and Ross correctly points out that it's federal spending that's averaged 21%. On a macro level this might or might not matter ("to spend is to tax"), but it does matter if we're trying to figure out how voters will react to an increase in the total tax take. However, I continue to believe that the impact would be much less than Ross thinks. The federal tax take was around 20% of GDP during the Clinton era, so here's what we're talking about: letting the Bush tax cuts expire in a couple of years and then raising tax rates by about four or five points of GDP over the next 20 or 30 years. Done reasonably and fairly, I just don't believe that an increase this gradual would be wildly oppressive.This is not true, and it's important to point out why it's not true.  First of all, while it is technically true that the federal tax take was "around 20% of GDP" during the Clinton era, this was only true at the height of the stock market bubble.  Tax revenues exceeded 20% of GDP for exactly one year: 2000.  The average tax take under Clinton was 19%. 

The 23 Percent Solution - As Jonathan Cohn says, American conservatives have a very parochial view of what would constitute crippling levels of taxes. My colleague Ross Douthat cites the possibility of federal taxes rising to 23 percent of GDP (compared with the 19 percent assumed — unrealistically — in the Ryan plan) as something to be deeply worried about. But America is a low-tax country by international standards: You may not approve of a shift that moves America closer to the OECD norm, but that’s not the same thing as saying that it would be inconceivable or disastrous. Now, higher taxes alone can’t resolve our long-run budget issues, because of rising health care costs, which will eventually swamp even a large tax hike if they continue. But cost-control for Medicare plus tax increases that put us closer to the middle of the pack — although still below average, and well below several successful European economies — is a perfectly feasible answer to our long-run deficit concerns.

Yes, 47% of Households Owe No Taxes. Look Closer. - That’s the portion of American households that owe no income tax for 2009. The number is up from 38 percent in 2007, and it has become a popular talking point on cable television and talk radio. With Tax Day coming on Thursday, 47 percent has become shorthand for the notion that the wealthy face a much higher tax burden than they once did while growing numbers of Americans are effectively on the dole.  Neither one of those ideas is true. They rely on a cleverly selective reading of the facts. So does the 47 percent number. Over the last 30 years, rates have fallen more for the wealthy, and especially the very wealthy, than for any other group. At the same time, their incomes have soared, and the incomes of most workers have grown only moderately faster than inflation.   The 47 percent number is not wrong. The stimulus programs of the last two years — the first one signed by President George W. Bush, the second and larger one by President Obama — have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

No, Half Of All Workers Aren't Freeloaders - In the United States, the very rich earn a large share of the income, and are taxed at slightly higher rates than the general population. Here's the picture of shares of income and shares of the total tax burden: Now, conservatives think the main problem in American public policy is that this system takes too much from the rich. So they want to paint it as soaking the high earners and coddling workers at the bottom. Thus you will see the endlessly circulated right-wing talking point that nearly half of all Americans pay no income taxes. Here, for instance, are Veronique de Rugy and Jason Fichtner: The top earning 1% of Americans (or 1.4 million returns) paid 38% of taxes while the Americans at the lower half of the income spectrum (or 70.0 million returns) paid 2.7% of total federal personal income taxes. According to the Tax Policy Center, this tax season, an estimated 45% of tax units will pay no federal income taxes.

Zombie Tax Lies - Krugman - The claim that only rich people pay taxes is a zombie lie — something that keeps coming back no matter how many times it’s killed by evidence.So, let’s try another shot to the head. Yes, high-income people pay the bulk of the federal income tax. But that’s not the only tax! And while the income tax is quite progressive, the payroll tax — the other major federal tax — isn’t; and state and local taxes are strongly regressive. Citizens for Tax Justice (pdf) has the goods: combining all taxes, federal, state, and local, we get this: The overall system is barely progressive at all.  And here’s the thing: the people peddling this stuff about those lucky duckies who don’t pay tax because their incomes are low know all this, because it has been pointed out many times. They are deliberately trying to deceive you.

How Would the House Budget Resolution Affect Tax Progressivity? - The House-passed budget resolution may be the start of a serious conversation about how to address our growing national debt, or it may be an attack on essential government programs, or both. One attribute we can be pretty sure of, however, is that it is very likely to make the tax code much more regressive than it is today. As you wrap up your calculations for Tax Day 2011, keep in mind that under this proposal, taxes will rise for most Americans. When it comes to revenues, the fiscal plan lacks important details. We know only that it would;

  • Cut the top individual and corporate tax rates from 35 percent to 25 percent.
  • Eliminate or reform tax expenditures (details left to the Committee on Ways and Means).
  • Limit total federal revenue collections to no more than 18 or 19 percent of GDP.

REPORT: In 12 Years, Income For Richest 400 Americans Quadruples, Tax Rate Nearly Halved - New data released by the IRS reveals that, over a period of 12 years, tax rates for the richest 400 Americans were effectively cut in half. In 1995, the richest 400 Americans paid, on average, 29.93% of their income in federal taxes. In 2007, the last year for which the IRS has released data, the richest 400 Americans paid just 16.63%.  In 1995, just 12 of the 400 richest Americans paid an effective tax rat of between zero and 15%. By 2007, that number skyrocketed to over 150. The massive reduction is due to both Bush-era tax reductions for the wealthy and the aggressive exploitation of tax dodges and shelters. (For details, check out this report from BusinessWeek.)  As their tax rates plummeted, the total income of the richest 400 Americans skyrocketed. In 1995, the combined income of the richest 400 was just over $6 billion. By 2007, the combined income of the richest 400 was almost $23 billion.

Taxes Plunge for Rich - According to data from the IRS, taxes on the rich have dropped dramatically over the past two decades. To see just how much, check out this segment: Moments after I appeared on set, I received the following (angry) e-mail:It is a shame that in this morning’s broadcast you chose to cherry pick statistics to frame the tax “debate”…if you wanted to frame a debate, you could have added the statistics that 50% of the country pays no federal income tax…So I went back to IRS data from 2007, because that was the end-year of the recent report, that was the basis of the television segment. Here’s what I found: the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government and the bottom 95 percent paid 39.4 percent of the income tax burden.This is the definition of a progressive tax system: the wealthier pay a larger share than everyone else. I think the e-mailer’s point is that the rich bear too much of the burden. But that may not be the case when including payroll taxes, which are mostly paid by those with incomes below $100,000 per year.

Poll: Best way to fight deficits: Raise taxes on the rich - Alarmed by rising national debt and increasingly downbeat about their country's course, Americans are clear about how they want to attack the government's runway budget deficits: raise taxes on the wealthy and keep hands off of Medicare and Medicaid. At the same time, they say that the government should not raise the legal debt ceiling, which the government must do soon to borrow more money, despite warnings that failing to do so would force the government into default, credit markets into turmoil and the economy into a tailspin. Those are among the findings of a national McClatchy-Marist poll taking the country's pulse just as President Barack Obama and Congress launch what could be a multi-year debate on the role of government and how to finance it. On tackling the deficit, voters by a margin of 2-to-1 support raising taxes on incomes above $250,000, with 64 percent in favor and 33 percent opposed. Independents supported higher taxes on the wealthy by 63-34 percent; Democrats by 83-15 percent; and Republicans opposed by 43-54 percent. Support for higher taxes rose by 5 percentage points after Obama called for that as one element of his deficit-reduction strategy last week. Opposition dropped by 6 points. The poll was conducted before and after the speech.

Millionaires don’t flee from ‘millionaire’s taxes’ - When anyone brings up new taxes on the rich, the big objections is that such taxes end up being counterproductive because the rich simply flee to places that don’t tax them. ... A few years ago, New Jersey instituted a tax that raised rates on those making more than $500,000. Predictably enough, some clever academics swooped in to test the prediction that all the rich folks would leave. So how’d it fare? Poorly: The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires. The study dug deeper to figure out whether the millionaires who were moving out did so because of the tax. As a control group, they used New Jersey residents who earned $200,000 to $500,000 — in other words, high-earners who weren’t subject to the tax. They found that the rate of out-migration among millionaires was in line with and rate of out-migration of submillionaires.  The tax rate, they concluded, had no measurable impact. The study went on to conclude that “the policy effect is close to zero,” though if it exists for anyone, it’s for the over-65 crowd who live off their investments.

WSJ Edit Page Disproves Own Point - A recent Wall Street Journal editorial, echoing Paul Ryan, asserts that you can't eliminate the deficit just by taxing the rich because the rich don't have enough money. The editorial winds up proving the opposite point. Follow the bouncing ball: Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record. So the Journal's argument is that reducing the budget deficit by $938 billion a year is not enough deficit reduction? $938 billion is "sand on the beach" compared with a $1.65 trillion deficit? I'm not familiar with the "sand on the beach" metaphor, but unless it means "the clear majority," it's not a good metaphor.

The Rich Aren’t Getting Richer - Are the rich really getting richer? That’s a pretty standard line from the Left, a lament usually cited in the course of calling for higher tax rates. Robert Reich is particularly fond of this mode of attack: A recent post of his was headlined, “For 70 years, the wealthy have grown wealthier.” This is not true. The numbers generally cited in support of this argument do not actually tell us much about what has happened to the incomes of wealthy households over time. That’s because the people who are in the top bracket today are not the people who were in the top bracket last year. There’s a good deal of socioeconomic mobility in the United States — more than you’d think. Our dear, dear friends at the IRS keep track of actual households (boy, do they ever!), and sometimes the Treasury publishes data about what has happened to them. For instance, among those who in 1996 were in the very highest income group isolated for study — the top 0.01 percent — 75 percent were in a lower income group by 2005. The median real income of super-rich households went down, not up. The rich got poorer. Among actual households, income grew proportionally more for those who started off in the low-income groups than those that began in high-income groups.

Rich People Still Don't Realize They're Rich - There’s a movement afoot to mail every taxpayer a “taxpayer receipt,” a breakdown of how the government spends its money. The goal is to educate people about where their taxes go, since Americans are famously unaware about such matters.But as long as we’re talking about educating Americans about fiscal policy, why not start with what they actually pay in taxes, and what they earn, relative to their fellow Americans? I am constantly amazed by how little Americans know about where they stand in the income and taxing distribution. The latest example is evident in a recent Gallup study, which found that 6 percent of Americans in households earning over $250,000 a year think their taxes are “too low.” Of that same group, 26 percent said their taxes were “about right,” and a whopping 67 percent said their taxes were “too high.”

Upper-income people don't realize they're upper-income - Catherine Rampell highlights this stunning Gallup Poll result: 6 percent of Americans in households earning over $250,000 a year think their taxes are "too low." Of that same group, 26 percent said their taxes were "about right," and a whopping 67 percent said their taxes were "too high." And yet when this same group of high earners was asked whether "upper-income people" paid their fair share in taxes, 30 percent said "upper-income people" paid too little, 30 percent said it was a "fair share," and 38 percent said it was too much. 30 percent of these upper-income people say that upper-income people pay too little, but only 6 percent say that they personally pay too little. 38% say that upper-income people pay too much, but 67% say they personally pay too much. Rampell attributes this to people's ignorance about population statistics--these 250K+ families just don't realize that they're "upper income."

Rich are getting richer? Exactly right - Economists use three main tools to study inequality. They measure poverty.They compute the Gini coefficient. And they compare the income or wealth of the rich (or the very rich) to that of the rest of us. On all of these counts the U.S. record since 1970 is grim for all but those at the top. The Census Bureau's 2009 poverty threshold for a family of two adults with two children was $21,756; for a single adult aged less than 65, it was $11,161. The poverty rate, giving the percentage of Americans living below this threshold, varies over time as the economy waxes and wanes.Lately it's been rising. In 2009, 43 million Americans, one of every seven (14.3 percent), lived in poverty. That's up from 25.5 million (12.6 percent) in 1970.The Gini coefficient measures inequality for all of us, not just the poor. It can be zero (if income is distributed equally); it can be 100 (if, impossibly, a single family captures the entire national income), or anything in between. A higher Gini means more inequality. The Census Bureau tells us the U.S. Gini has risen from 39.4 in 1970 to 46.2 in 2000, and to 46.8 in 2009.

How society's elite are made - I’ve spent two decades studying the very poor, and only a few years studying the very rich. One common question that people ask me is, “Do the poor and rich differ that much– except for the fact that one has more money?” I do find similarities, some surprising. For example, neither the very poor nor the ultra-wealthy (whom I’ve only recently observed) define their lives via “work.” One can’t find a job, the other doesn’t need a job. For me, a middle-class person, work is one of the core anchors of my identity. My colleague Shamus Khan has written a fascinating book about the making of our wealthiest citizens. Privilege is his sociological study-cum-reported memoir on going back as a teacher nine years after graduating from St. Paul’s School, perhaps the leading prep school in the country. It is one of the few in-depth looks behind the curtain at the making of the elite. I recommend the book, and here are some thoughts from Shamus as part of my Q&A with him.

How You Can Have a Billion-Dollar Income in America and Pay No Taxes - You will hear that the top 1 percent pay 40 percent of the taxes. It's not true. The federal individual income tax is only about one out of every five dollars of all taxes raised in America. We have federal taxes, state taxes, local taxes, payroll taxes, and I'm ignoring all the things that used to be covered by taxes that are now paid by fees -- three different fees for using the airport, surcharges when you rent a car, etc.While it's true the top 1 percent are paying around 40 percent of the total income tax, in recent years they also have earned as much as 20 percent of the income -- 21 percent in 2008, the last year we have full data. Because their income has gone up vastly faster, the share of income tax paid by people at the top has gone up -- even though their rates have been cut. It's important to recognize what's happened to incomes in America. More than half of the income in the top one percent goes to the top 10th of one percent -- one out of a thousand families in America. For every dollar they made on average in 1980, in the year 2008 they made $4, adjusted for inflation. The top 400 taxpayers now make about a million dollars a day. We have redistributed income, through a variety of means -- suppressed unions; reduced taxes and tax deferrals to people at the top; encouraging owners to withdraw capital from their businesses, destroying jobs. In the bottom half, people are making less now than they did 30 and 50 years ago, when you adjust for inflation.

10 Doomsday trends America can’t survive - We are past the point of no return, thanks to Super Rich— Doomsday Capitalism? Capitalism is killing America? Yes, that’s the message in my tenth book. “Doomsday Capitalism, 10 Self-Destructive Trends.” But you’ll never see it in print. No one, even book publishers want to read this truth: Capitalism is destroying America.  Why? Super-Rich Capitalists get rich off these macro trends. They want happy talk. Back in 2007 Vanguard founder Jack Bogle called my warnings “prescient.” But that didn’t stop the meltdown. Next time financial historians warn of a bigger meltdown; a total collapse has been the destiny of every nation for eight centuries. This time, capitalism is the saboteur.  Yale scholar Immanuel Wallerstein warns that capitalism’s at the end of a 500-year cycle: The “political struggle is over what kind of system will replace capitalism, not whether it should survive.” We cannot stop this cycle.  Yes, Super-Rich Capitalists will fight to the death. But destiny is trapped in our DNA, historians warn, and will not change. America is run by these short-term thinkers. They never learn the lessons of history. They do not want you to know that their capitalism is self-destructive, that capitalism’s cycle is in a suicidal end game, that their “mutant capitalism,” as Bogle calls it, is destroying the very soul of America’s democracy.

Robert Reich's After Shock and Corey Robin's Freedom Arguments - Linda Beale - In earlier posts on ataxingmatter (here and here), I reviewed Robert Reich's 2010 book, After Shock, and wrote about his suggested cures for the problems made most visible in the 2007 crash and the Great Depression that followed. The gist of the book is summed up in the following quote: "[L]eft to its own devices, the market concentrates wealth and income--which is disastrous to an economy as well as to a society."  Corey Robin writes in the Nation about the same problem, Reclaiming the Politics of Freedom. But he notes that harping on the distributional inequality doesn't resonate with voters. We need to "reclaim[] the politics of freedom." And I think he is correct. Because the problem we are facing today, with corporate lobbying and campaign contributions reinforcing the elite class's wining and dining of politicians, is more than the dysfunction of the economy. Yes, there is too much money at the top where there is not enough ability to spend it. Yes, there is too little money at the bottom where there is no way to provide for basic needs. Yes, there is barely enough in the middle, resulting in stagnation in local businesses who don't have enough customers to sell to and can't afford to give credit to those who want to buy. These things are real, they affect us every day, they make us angry every day because we recognize our powerlessness to deal with the highly impersonal Big Business world that has been fostered by the four decades of reaganomics' deregulation, privatization, tax cuts and militarization. But still, the problem goes much deeper than these things.

America’s elites have a duty to the rest of us - The American ruling class is failing us — and itself. At other moments in our history, the informal networks of the wealthy and powerful advocated social decency out of self-interest (reasonably fair societies are more stable) but also from an old-fashioned sense of civic duty. “Noblesse oblige” sounds bad until it doesn’t exist anymore.An enlightened ruling class understands that it can get richer and its riches will be more secure if prosperity is broadly shared, if government is investing in productive projects that lift the whole society and if social mobility allows some circulation of the elites. A ruling class closed to new talent doesn’t remain a ruling class for long.  But a funny thing happened to the American ruling class: It stopped being concerned with the health of society as a whole and became almost entirely obsessed with money.

What Are Taxes For? - Krugman - Brad DeLong and Noah Smith have some fun with a bizarre post by Steve Landsburg — even more bizarrely endorsed by Alex Tabarrok — in which Landsburg asserts that you can’t tax a man if you can’t persuade him to reduce his consumption. There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place. They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue. Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.

Executives Polled on Corporate Tax Reform - In his State of the Union address, President Obama called for a reduction in the U.S.'s high corporate income tax. Treasury Secretary Tim Geithner has had a series of roundtable discussions on the topic, although emphasizing that reform needs to be revenue-neutral and not involve the individual tax side. Members of Congress and the Bowles-Simpson Commission report  have echoed these calls for reform, emphasizing more the importance of dramatically reducing the rate. Yet, no action has happened. A new poll of 1,400 senior business executives conducted by KPMG may provide more information: Nearly half of these executives don't expect corporate tax reform until 2013 at the earliest, after the next election. Most of the executives who think corporate tax reform will be enacted expect only a modest reduction in the tax rate, from the current 35 percent to somewhere between 30 percent and 34 percent.

Bipartisan support builds for slicing corporate tax rate - U.S. corporations have enjoyed a two-year bull run on Wall Street. They are sitting on a record amount of cash and are back to paying bonuses that are the envy of executives around the world. And the icing on the cake for many of them might be just around the corner: a tax cut that has bipartisan support in Congress. As part of their budget plan passed last week, House Republicans want to cut the corporate tax rate to 25% from 35%. The Obama administration and many Democrats also are looking to slice the current rate, but not as much.Supporters of the corporate tax cuts say they're needed to make U.S. companies more competitive with their foreign counterparts, and the administration and House Republicans say they want to offset rate cuts by eliminating unspecified loopholes and tax breaks. Yet despite complaints that they fork over too much money to Washington, U.S. corporations have been paying an increasingly smaller share of federal taxes over the last half-century.

Jim Boyce: Tax Havens or Financial Sinkholes? -Tax havens have got a lot of press lately. In Britain, the UK Uncut movement has mounted demonstrations across the country against tax dodging by large corporations and wealthy individuals – making the connection between profits parked abroad and deficits and budget cuts at home. The term “tax haven” is a euphemism, however, for two reasons.  First, “haven” carries the connotation of a safe refuge from oppression. As Nicholas Shaxson writes in his new book, Treasure Islands: Tax Havens and the Men Who Stole the World, tax havens “offer escape routes from the duties that come with living in and obtaining benefits from society.” They provide refuge not from oppression but from responsibility – the responsibility to contribute to the physical and institutional infrastructure of the economies in which the dodgers themselves make money. Second, “tax” havens are not just about dodging tax. Money flows to these places not only to hide from the taxman, but also to hide from the law. As secrecy jurisdictions, tax havens allow asset holders to hide their identities from authorities in their own countries, and often from authorities in the secrecy jurisdictions themselves. For a modest price, front men, dummy corporations, and multi-layered transactions provide anonymity.

US Uncut Stages Flashmob at Bank of America Over Its Failure to Pay US Income Taxes - Nicholas Kristof of the New York Times in his weekly op ed discussed the use of humor in protests in Serbia and Egypt, as well as in changing attitudes on teen smoking. Funny that he did not mention UK Uncut, which has staged large scale rallies over the fact that many major corporations pay little in the way of tax when they are showing record profits yet ordinary citizens are expected to pay more in taxes and suffer large reductions in social services. Its US sister is starting to get a foothold, as a video of a protest at Bank of America in San Francisco attests.

Fundamental injustice: Charles Hugh Smith's Take - Linda Beale - Yesterday I commented on Robert Reich's book, After Shock, in which he urged us to recognize the fundamental cause of the 2007-2008 Great Recession lay in our imbalanced economy in which income and wealth is becoming more concentrated and consolidated in the hands of wealthy elites, while the vast majority of Americans are stagnating or struggling just to hold even.  Others have noticed the long-term consequences of such substantial income and wealth inequalities.  For example, Charles Hugh Smith writes, on of two, Apr. 20, 2011, about "The Fundamental INjustice that is Poisoning the Nation." There is a fundamental injustice that is poisoning the soul of the nation, and if it is not openly addressed then the nation will face the explosive consequences of institutionalized injustice.  Simply put, it is this: those responsible for the nation's financial crisis and its catastrophic after-effects are not paying for the consequences of their actions--it is the innocent, those who were not responsible, who are paying the price. Whatever you call it, we all know this class of financiers and its minions got away with high financial crimes. The biggest quibble I have with this is that it limits the "crime" to the "financiers and its minions."  In truth, the guilty are the entire upper crust--CEOs, CFOs and other high-priced managers of multinational corporations and the wealthy elite who own most of the stock, municipal bonds and other financial assets--who continue to benefit extraordinarily from the low cost of borrowing, offshoring, de-unionization, privatization, deficit-focus, and "entitlement narrowing" mentality that has been pushed by right-wing think tanks who still proclaim that just getting government out of the way (including by use of the favored three: deregulation, privatization, and tax cuts) so the free market decides winners and losers will create jobs and stimulate growth. 

Casino economics and tax myths – media forgets that people pay sales, property, Social Security, and Medicare taxes. How the financial class robs from the American people legally. - As tax day passes us by, many in the public are realizing that the extremely wealthy especially in the financial industry know something they don’t.  What they are finding is that the financial industry has access to massive government bailouts and in many cases does not pay their fair share of taxes.  Like Atlas holding the world up some are carrying a heavier burden and it doesn’t appear to be the financial sector.  Reports out from the secretive Federal Reserve show for example a $220 million loan to the wives of Wall Street executives merely for speculative purposes.  A win-win gift from our central bank as a thank you for leading the nation into this economic ditch.  Do you have access to cheap and plentiful loans?  There is also this absurd notion that people don’t pay taxes and much of the ire has been on the poor.  When you hear this in the media, they mean federal income tax.  People need to take account of their lives and figure that they pay for Social Security tax, Medicare tax, sales tax, property tax, and automotive registration fees so this idea that average Americans don’t pay tax is a complete misnomer.  In fact, it seems like the extremely wealthy in this country have designed a tax system that has shifted the burden to the majority.  The media narrative revolves around the fact that you should shoulder the brunt of the economic problems caused by the financial industry while bailouts and handouts increase the bottom line at the top.  The income inequality in our nation has never been so high.

 A banking crisis is a terrible thing to waste - Two reports, 853 pages, one question: is this it? Last week, the banking world was gripped by the findings of a probe into the financial crisis by a powerful US Senate committee and the interim report of Britain’s government-appointed Independent Commission on Banking, led by Sir John VickersThe two efforts are important contributions to understanding what caused the turmoil and avoiding a repeat. But they are also the last gasps of the regulatory fervour that followed the crisis – an apt time to assess whether the policy responses were commensurate with the magnitude of the event.Wall Street executives argue that the authorities’ reformist zeal is alive and well. The issue, though, is whether these and other reform efforts are the best regulators could do to remedy the faults laid bare by the worst financial storm in generations. My empirical gauge – looking at how bankers reacted – suggests not.

Wall Street, Banks Press to Shape Dodd-Frank Rules - Wall Street and the financial industry spent more to lobby Washington in the first quarter of this year than a year ago when Congress was writing sweeping financial-overhaul legislation, according to a Wall Street Journal review of lobbying reports released Thursday. The law, known as Dodd-Frank, was adopted nine months ago but banks, credit unions, investment firms and their trade groups now are trying to shape how it is put into practice. The documents show financial-industry lobbyists are spending time with regulators, who are writing hundreds of rules to carry out the law, while pushing Congress to roll-back certain provisions, especially new limits on debit-card fees. The industry is working to influence a long list of Dodd-Frank rules, including sweeping ones for the nearly $583 trillion derivatives market and restrictions on the size and activities of the largest banks. Many are also weighing in on mortgage-finance issues as policy makers address problems with foreclosures and how to revamp mortgage-lending giants Fannie Mae and Freddie Mac, which now are under federal control.

Don’t let banks gamble with taxpayer money - The US is in the process of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the UK, the Vickers Commission has released interim recommendations to “ring-fence” the retail operations of banks from their investment banking activities. The Vickers report is a model of clarity and if the ring fence proposals are implemented, they will have bite. But there is already a push from Lloyds to weaken the proposals of the interim report and that is only the opening salvo. The pressure from financial institutions for lax regulation will be intense. That pressure should be resisted. The proposed reforms of both the Dodd-Frank act and the Vickers report will increase the amount of capital held by financial institutions by reducing leverage. Increased capital requirements will reduce the probability that any given institution will fail but they will not eliminate the moral hazard problem created by implicit government support for large financial institutions. That requires a more radical reform of the kind I have argued for elsewhere.

The FDIC’s Rosy, Theoretical, Misleading Lehman Resolution Counterfactual (or Why TBTF is Still TBTF) - Yves Smith -The FDIC has released a document that purports to show how it could have successfully resolved Lehman Brothers using its new Title II resolution authority granted under Dodd Frank. All I can say is that this is an interesting piece of creative writing. The Lehman counterfactual rests on a series of assumptions, which as I will discuss shortly, look pretty questionable. The most charitable assessment one can make comes from a famous exchange between two technologists. Trygve Reenskaug says: “In theory, practice is simple.” Alexandre Boily asks: “But, is it simple to practice theory?”. But some longstanding Administration cheerleaders have jumped on the bandwagon, arguing that “pundits” have asserted “without evidence or analysis” that the resolution authority can’t work. That’s pretty amusing, given that Shiela Bair herself concedes, per the Financial Times, that the resolution authority will not work on a major international bank with retail and investment banking operations:

Fukushima and Derivatives Meltdowns - We now understand the Fukushima risks and design defects well. Not so for the derivatives risks that jeopardized the global economy. For Fukushima, crews are valiantly trying to stop the radiation leakage. But for derivatives, the analogous efforts are misdirected and won’t save us from the financial fire next time. We are rebuilding derivatives and related financial structures atop the same, still-active faults. Financial players use derivatives to transfer risk: one player assumes the risk of, say, euro fluctuation, but doesn’t want yen risk, while for another, it’s the opposite. So the former promises to deliver euros next June 1, while the latter promises to deliver yen. If one currency declines relative to the other, the loser pays the difference.Repos are financing transactions. Financial firms sell assets, like Treasury bonds or real-estate securities, for cash, and promise to buy those assets back (i.e., to repurchase them or, for short, to do a “repo”), typically the following day. But, with the cash coming from short-term repos making up much of core financial firms’ balance sheets, tremors in financial markets could hit them hard, drying up repo financing for a few, as occurred in 2008. Some, like Bear Stearns, then failed.

78 Trillion Dollar Derivatives Book Compliments of J.P. Morgan Chase - The purpose of this paper is to illuminate the real purpose of the obscene size of derivatives books amongst the world’s largest financial institutions.  Derivatives in strategic markets are controlled by governments through proxy banks and agencies using these instruments.  By sheer volume, the trading in paper “tails” wag the physical “dogs”.  When market volatility negatively impacts these large institutions they are given a pass by regulators and accounting protocols in the interest of national security and preservation of the status quo.  Moreover, this ensures the perpetuation of U.S. Dollar hegemonic power.  The following accounts outline how these instruments are used to project this power.

Derivatives Craziness And The Next Bailout - The world of global finance is still very crazy. I am talking about derivatives. A derivative is a financial instrument whose value depends on something else—a share of stock, an interest rate, a foreign currency, or a barrel of oil, for example. One kind of derivative might be a contract that allows you to buy oil at a given price six months from now. But since we don't yet know how the price of oil will change, the value of that contract can be very hard to estimate. (In contrast, it's relatively easy to add together the value of every share being traded on the stock market.) Derivatives have always had a hallowed place in markets. They are used to hedge risk in the face of volatile commodity prices (wheat, oil). Without this hedging, these markets couldn't function. But in today's Happy World, the vast majority of derivatives are sidebets on interest rates or foreign exchange (FX) rates or anything, really. I am talking about gambling.

IMF raises alarm over exchange traded commodities funds‎ - One of the most successful investment vehicles of the last decade could be sowing the seeds of the next financial crisis, a global financial watchdog warned. Pension funds and retail investors could lose billions of pounds in investment schemes sold widely in the US and Europe with the promise of low costs and higher returns than bank deposit rates. The products have enticed investors into the soaring commodities markets, allowing them to enjoy huge returns from the rising cost of oil, gold and silver in recent years. The Financial Stability Board, which was created in the aftermath of the financial crisis to monitor financial transactions, said the rapid growth of exchange traded funds (ETFs) into a $1,200bn (£735bn) business was unnervingly like the derivatives market in sub-prime mortgages before the credit crunch in 2007. Mario Draghi, the chairman of the FSB, said ETFs had all the hallmarks of a bubble waiting to burst and needed close monitoring by international regulators. "ETFs are reminiscent of what happened in the securitisation market before the crisis,"

ETFs as Source of Systemic Risk? – Yves Smith - Surprisingly little note has been paid to the discussion of ETFs in three reports issued last week by international regulatory heavyweights, namely, the IMF, the BIS, and the G20 Financial Stability Board. Make no mistake: the authorities are worried. The BIS report, for instance, has an unflattering comparison on its first page, noting that now ETFs seem to be serving the same function for institutional investors now as structured credit products did in 2002-2003, with dealers pushing the envelope as far as “innovation” is concerned. The Financial Stability Board was more straightforward, flagging its concerns that ETFs could pose a threat to stability in its report title. The regulators discussed the fact that “ETF” no longer stands for a single product. Most investors probably assume that an ETF is more or less a mutual fund, when in fact Eurobank affiliated groups’ products are typically synthetic (that is, they use derivatives rather than securities. There are even more structural variants, but we’ll stick to these two for the purpose of this post). And too often, the relationship between the ETF and the sponsor is not arm’s length.

Guest post: ETFs – what’s the fuss about? - Last week’s three-pronged attack from the super-regulators of the world’s financial system — the G20 Financial Stability Board (FSB), the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) — has left the exchange-traded fund industry feeling battered, bruised and unloved. But what’s all the fuss about? The regulators’ central argument is that, in adding layers of complexity to what was originally a simple index-tracking product, the ETF industry is in danger not only of offering its investors a poor deal but, more worryingly, of creating broader systemic risks. Last week’s BIS paper on ETFs goes into particular detail on this topic. The recent explosive growth of the ETF market parallels the similar growth rate in structured credit products during another period of low official interest rates (in 2002-03), the BIS points out. We all know how that turned out. Since the BIS was practically alone amongst global regulators in warning of the credit bubble ahead of the 2008 crash, its views carry particular weight.

Spitzer: If The Attorney General Does Not Sue Goldman Sachs, He Should Resign - Some of the notable soundbites from the transcript: "Eliot, do you believe Goldman broke the law and lied? - Yes, I do. And I know people are going to say how can you say that as a lawyer? I have read this report. It confirms our worst fears about double dealing, lying. Goldman Sachs has zero, none, nada credibility in my book"....."Tim Geithner, treasury secretary, apparently reported in today's "New York Times" was calling people saying don't bring cases, it will unsettle the markets, so they let these guys go free. Meanwhile, he signed off on $12.9 billion to Goldman to cover a bad bet they made."....."Goldman Sachs was the number one private campaign contributor to Barack Obama's presidential election campaign. It's one of the single biggest campaign contributors to both parties in Congress"..."Anderson, before I sued, went after Merrill Lynch, which was the first case we filed many years back, I was told by their lawyer -- this is a direct quote -- "Be careful, we have powerful friends"...and the kicker: "Do you think the Justice Department will prosecute? Spitzer: If they don't, shame on them. If they don't, the Attorney General should resign if he can't bring this case."

Goldman Sachs Execs: Going To Jail, After All? - Sen. Carl Levin says the bank misled its clients and Congress and that Goldman executives could still face charges. How likely is that? Goldman Sachs manipulated financial markets, profited from the housing crisis, and misled its clients and Congress, according to a 635-page report released Wednesday by a Senate subcommittee. Sen. Carl Levin (D-Mich.), the chairman of the Senate Permanent Subcommittee on Investigations, says some of the findings of the panel's two-year investigation will be referred to the Justice Department for possible criminal or civil action. He calls the investment bank a "financial snake pit rife with greed, conflicts of interest, and wrongdoing." Naturally, Goldman disagrees with many of the report's conclusions and insists its executives did not lie. But could Goldman executives really be prosecuted?

Eliot Spitzer: Government’s Place in the Market - Web editor David Johnson asked him about his proposals for restoring fairness to Wall Street. David Johnson: Your book reads like a Thomas Paine, Common Sense-style pamphlet—it sets out simple, clear rules about government’s role in the market that everyone should agree upon but that, if accepted, would revolutionize the way many have thought about markets over the past three decades. Was that your intention?Eliot Spitzer: The problem we have faced is a simplistic pseudo-analysis of markets by an ideology of neo-libertarians that so diminished the role of government and rule-makers and enforcers that we lost sight of first principles. How do markets really function? People who listened to Alan Greenspan over the years would have totally misunderstood what is needed to insure integrity in the marketplace. So I wanted to set out a simple rationale for genuine enforcement—one that drew on the cases and lessons I learned in my period in government service.

Gaming Our Own Asses - I have never lived in a time when so many false narratives competed for supremacy of the collective mind-space. Omnipresent as it is, reality seems to elude us, and certainly its supposed interlocutors - figures such as presidents, his highest appointed officials, their voluble, strutting opponents in the other party, the glamorpusses behind the Cable TV news desks, poor dim Bill Keller at The New York Times, and, of course, the necromancers of economics on campuses from Cambridge to Palo Alto.   A more primitive radar would conclude that the planet Earth is angrier than usual this year. Japan is still in a radioactive daze from the seventeen inch shove it suffered and lots of people in Carolina are surely shaking their heads over this weekend's visitation of wrath. Is it possible that climate change and Jesus are one and the same? Let them figure that out in the little cinderblock roadside chapels next Sunday before they all trundle over to the Nascar track     It was heartening at least to see a few signs of life "out there" in the karmic interstices. Senator Carl Levin of Michigan sent a memo to the Attorney General of the US - viz: something has been going on in Wall Street that merits your attention. As in most seemingly crucial turnings lately, echo answered. Can someone please check to see if Eric Holder over in the Department of Justice is leaking sawdust? He must be stuffed something. Styrofoam would just make him look lumpy. Could he be a computer graphic? Or is he just a simple slab of cardboard with a photo glued on.

Banking Groups Stir Consumer Fears on Debit Card Regulations via Twitter   It’s April 21, and another Dodd-Frank deadline has come and gone. Today was the day the Fed’s regulations on debit card transaction fees, also known as interchange fees, were supposed to be finalized. Hasn’t happened. Controversy over the regulations caused the Fed to postpone finalizing the rules [1]. But that win alone wasn’t enough for the banks, which have rallied behind legislation to delay the rules by at least another year. Today, they took to Twitter to continue the push [2], launching a “Save My Debit Card” campaign and asking people to “tell us why you love your debit card today – and why you don’t want that to change [3]!” The strange thing about this campaign is that debit cards aren’t in danger—not from the proposed regulations, at least. Some consumers participating in the #savemydebitcard campaign [4] don’t seem to know that.

Is Debit Fee Regulation Anti-Consumer? - As Adam noted in a post last week, the large banks now have some odd bedfellows in their fight against the regulation of debit swipe fees (this issue often goes by the short-hand "Durbin," for the author of the amendment in Dodd-Frank that requires the Fed to regulate debit fees). Adam suggests that the National Education Association might be motivated by the number of teacher credit unions in America, but how do we explain what a Wall Street Journal article characterizes as "entreaties" from the NAACP and the U.S. Hispanic Chamber of Commerce to delay implementation of the fees and do "further study of the rule to ensure that it doesn't hurt poor and minority consumers." The regulation of interchange is a complex issue, and this post does not represent my complete thoughts on the issue. But I find the argument that fee regulation of debit is anti-consumer to be tough to swallow. First, let me note that the available data suggest that poor and minority consumers are currently penalized under the existing payments regime. Poor and minority consumers are more likely to pay cash, and yet they pay prices for goods and services that reflect the total cost to merchants of customers who pay with credit cards (most expensive), debit cards (middle), and cash (cheapest). This is a classic cross-subsidization problem. While industry contests the extent of the harm from the problem, I am convinced the problem does exist.

Regulatory arbitrage of the day, Citigroup edition - Well done to Tracy Alloway for calling it as it is, in a post headlined “Citi’s Basel-dodging, capital-avoiding, accounting switch”. At issue is a pool of $12.7 billion in assets, which is housed at Citi’s “bad bank”, Citi Holdings. In 2008, Citi decided that these assets were not available for sale, and rather were going to be held to maturity. Presto — the bank no longer had to mark the assets to market, and could hold them on its books at par instead. And the difference between par value and market value went straight to Citi’s precious capital, helping it look stronger. Now, in the wake of a massive bond rally. Citi has decided to switch the assets back. No longer are they held to maturity; instead, they’re available for sale. At a stroke, Citi has to recognize all the gains and losses in the portfolio immediately — that’s $1.7 billion in losses, and $946 million in gains. But the losses can be applied against profits elsewhere in the bank, to reduce the total tax burden. Which is nice, because we wouldn’t want too much money flowing from Citigroup to the taxpayers which bailed it out.

Oops: JP Morgan Liability on Alabama? -- Hmmmm...MONTGOMERY -- A Jefferson County lawsuit may proceed against investment bank JPMorgan Chase & Co. and others over some of the county's ruinous sewer system financing deals, the Alabama Supreme Court ruled today.   In a 13-page decision, the Supreme Court rejected an appeal by JPMorgan, Bill Blount, Al LaPierre and Charles LeCroy and Douglas MacFaddin, two former JPMorgan bankers, to dismiss the suit.  Heh heh heh...... how do you spell "joint and severable liability"?  Could we actually see that happen?  Hope springs eternal. Note carefully folks where the actual justice is coming from - and where it isn't. Where it isn't is Congress and so-called Attorneys General, none of whom are actually doing their jobs in demanding law enforcement take place.On the other hand, we have a few judges that are starting to "get it", and as these cases slowly get to them they are holding - repeatedly - that these events of the last decade were not "accidents", were not "bad bets" that were simply a gamble that didn't pay off and similar nonsense.

Hussman: Banks Are Flashing HUGE Red Flags, And Nobody Seems To Care: "Two months ago, I noted that the surprise resignation of Wells Fargo's Chief Financial Officer had caught the eye of a number of shareholders, who noted my comment several quarters ago that we could observe a wave of fresh risk aversion 'at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further.' My impression is that the underlying state of mortgage debt is no better than it was quarters ago, and indeed may be worse in the sense that there has been no meaningful decline in the backlog of delinquent and unforeclosed homes. While foreclosure filings certainly fell significantly in the first quarter, the decline was driven by record-keeping problems and legal moratoriums. As Realty Trac observed, 'Weak demand, declining home prices and the lack of credit availability are weighing heavily on the market, which is still facing the dual threat of a looming shadow inventory of distressed properties and the probability that foreclosure activity will begin to increase again as lenders and servicers gradually work their way through the backlog of thousands of foreclosures that have been delayed due to improperly processed paperwork.' It's fascinating to hear JP Morgan's Jamie Dimon complaining 'We have homes sitting there for 500 days rotting that we can't do anything about' while at the same time reducing loan loss reserves on those assets. But of course, that's precisely what the FASB has allowed banks to do. Specifically, there is no longer any need to mark to market, and the FASB appears to have dropped any plan to restore it. The standard instead is 'amortized cost' (on which basis you can continuously make the mortgages whole simply by tacking the delinquent payments on to the back of the loan). Little wonder half of all mortgage modifications re-default."

Bill Black: Fiat Justitia Ruat Caelum (Let Justice be Done, Though the Heavens Fall) - Yves Smith -  Yves here. This post by Bill Black is important because it presents and dissects an ugly example of failure of morality and common sense within what passes for the elite in the US. Earlier this week, Matthew Yglesias defended the Administration’s distaste for pursuing fraud investigations against financial players: This line of thinking is a favorite of authoritarians. Democracy, justice, and capitalism are messy affairs. All sort of repressive measures can be justified in the name of stability and safety. And the irony here is that the firms directly responsible for the most disruptive economic event of the last eighty years are to be shielded from the long arm of the law….in the name of stability, the one output they have clearly failed to provide.  You may or may not agree with the Jamie Galbraith view that fraud was a major driver of the crisis, but it was undeniably a contributing factor. And with millions suffering in very tangible ways, through job losses, foreclosures, and losses of savings, the least we can do to is hold those responsible to account, most importantly by punishing misconduct. Every social animal species with enough brainpower to have cheaters also has individuals go to personal cost to punish them.

Throw Out the Money Changers -These are remarks Chris Hedges made in Union Square in New York City last Friday during a protest outside a branch office of the Bank of America. We stand today before the gates of one of our temples of finance. It is a temple where greed and profit are the highest good, where self-worth is determined by the ability to amass wealth and power at the expense of others, where laws are manipulated, rewritten and broken, where the endless treadmill of consumption defines human progress, where fraud and crimes are the tools of business. The two most destructive forces of human nature—greed and envy—drive the financiers, the bankers, the corporate mandarins and the leaders of our two major political parties, all of whom profit from this system. They place themselves at the center of creation. They disdain or ignore the cries of those below them. They take from us our rights, our dignity and thwart our capacity for resistance. They seek to make us prisoners in our own land. They view human beings and the natural world as mere commodities to exploit until exhaustion or collapse. Human suffering, wars, climate change, poverty, it is all the price of business. Nothing is sacred. The Lord of Profit is the Lord of Death.

Sheila Bair for CFPB Director (Really) - The White House is evidently having trouble finding a nominee for director of the Consumer Financial Protection Bureau (CFPB). The list of people who have passed on the job includes former Michigan Gov. Jennifer Granholm, former Sen. Ted Kaufman, Massachusetts AG Martha Coakley, Iowa AG Tom Miller, and Illinois AG Lisa Madigan.Elizabeth Warren, who is currently setting up the CFPB as a “Special Advisor” to the Treasury Secretary, just can’t get the 60 votes required for Senate confirmation. She couldn’t get 60 votes last year, when there were 59 Dems in the Senate... So her chances of getting 60 votes now that there are only 53 Dems in the Senate are somewhere between exceedingly slim and none. Obama could technically recess appoint Warren, and while the chances of that happening have probably gone up, I’d still be very surprised if he did.I think Obama should seriously consider Sheila Bair for the CFPB job. As a preliminary matter, she can definitely get 60 votes in the Senate. I know that Chris Dodd approached her last year about the job, and she said she wasn’t interested, but that was then. She still had a year left at the FDIC when Dodd approached her. Now, with only a couple months left at the FDIC, she might be more receptive. Plus, a personal appeal from the president is pretty hard to turn down.

Sheila Bair as Head of CFPB? - Yves Smith  - Economics of Contempt and I are typically at loggerheads on financial services industry policy matters. But he had an inspired idea today: Obama should seriously consider Sheila Bair for the CFPB job. As a preliminary matter, she can definitely get 60 votes in the Senate. I know that Chris Dodd approached her last year about the job, and she said she wasn’t interested, but that was then. She still had a year left at the FDIC when Dodd approached her. Now, with only a couple months left at the FDIC, she might be more receptive. Another observation by EoC:Bair is also fiercely territorial, which sometimes bleeds into parochial. During the financial crisis, this was supremely unhelpful. But I think this would be one of her greatest strengths as the CFPB director. Given the CFPB’s bizarre legislative structure, in which the Financial Stability Oversight Council (FSOC) can veto the CFPB’s rulemakings, you want a CFPB director who is territorial, and maybe even a bit parochial. The whole purpose of setting up the CFPB was to establish an agency that has a singular focus: protecting consumers.Bair’s not playing ball is more easily read as a rearguard action to try to impose some penalties on miscreant banks (she tried but failed to get Vikram Pandit ousted from Citi and succeed to some degree in getting that bank to downsize) rather than a personality defect in operation. So she has has some success as a bureaucratic infighter with the other, more bank-enabling financial regulators opposed to her. That alone is good reason to want her in this job.

US Treasury to press on with $20bn AIG sale - The US Treasury is pressing ahead with plans to sell $20bn of AIG shares next month even though a sharp fall in the insurer’s stock price will lead to smaller-than-expected profits for taxpayers, according to people familiar with the plans. Shares in AIG have fallen by more than 25 per cent in the past three months to close on Wednesday at $32.35, eroding the paper profit on the Treasury’s 92 per cent stake acquired as a result of the government’s 2008 rescue of the company, from $24bn in January to $6bn today. However, officials and their advisers are planning to begin selling down their stake with a large public offering of about $20bn in May. Bankers are flying to the Middle East in the next few days to pitch the sale to sovereign wealth funds before holding similar talks with US investors.

Taxpayers To Lose At Least $11 Billion On General Motors Bailout - When President Obama pushed his ill-advised plan to bailout two failing auto companies, we were told that the taxpayers were going to make a profit in the end. Well, it turns out that’s not going to happen at all: The U.S. government plans to sell a significant share of its remaining stake in General Motors Co. this summer despite the disappointing performance of the auto maker’s stock, people familiar with the matter said. A sale within the next several months would almost certainly mean U.S. taxpayers will take a loss on their $50 billion rescue of the Detroit auto maker in 2009. To break even, the U.S. Treasury would need to sell its remaining stake—about 500 million shares—at $53 apiece. GM closed off 27 cents a share at $29.97 in 4 p.m. trading Monday on the New York Stock Exchange, hitting a new low since its $33-a-share November initial public offering.

Bank Of America Makes Easy Profits Off Fed While Depositors Get Shortchanged - Households are earning so little from their bank accounts that Bank of America, the largest U.S. lender, has pocketed about twice as much cash this year parking money at the Federal Reserve than it has paid to savings-account holders. The North Carolina-based bank paid U.S. depositors a 0.43 percent interest rate last quarter, according to earnings documents the company released last week. Savings-account holders took home even less, with total interest on their accounts reaching just $32 million for the three-month period ending in March. Meanwhile, Bank of America raked in $63 million simply by stashing cash at the Fed. The nation's central bank only recently began compensating commercial banks for storing their money at the Fed as part of its response to the financial crisis. Thanks to Fed policy and banking industry consolidation, the largest banks are booking easy profits as households and businesses plow record amounts of cash to lenders despite a record-low rate of return.

'Too Big to Fail' Pays Off: Big Bank Salaries Rising Faster than Rivals - The pay bonus for working at a "Too Big to Fail" bank is only getting bigger. Outsized paychecks are often cited as one of the reasons for the financial crisis. So what are the executives at the biggest banks doing? They are upping their pay. In fact, pay at the big banks is not rising just for CEOs and investment bankers but for everyone. According to a new study by bank research website,, the gap between what the largest banks pay and their smaller rivals has risen dramatically since the financial crisis. Last year, the average compensation expense (salary plus benefits) at banks with at least $1 trillion in loans for all employee was 96,355. That compares to pay of $60,755 at banks with less than $100 million in loans. Of course, large banks have always paid more than smaller banks. But, recently, big banks have been upping their pay much faster than their smaller rivals.

CEO pay up 23% in 2010: Labor union - The average pay package of a majority of CEOs at S&P 500 companies was $11.4 million in 2010, an increase of 23% from 2009, according to a top labor union database of compensation packages for executives released Tuesday. “Today’s launch of 2011 Executive PayWatch shows just how out of whack things are despite the collapse of the financial market at the hands of executives less than three years ago,” Richard Trumka, President of the American Federation of Labor and Congress of Industrial Organizations told reporters. “The disparity between CEOs’ and workers’ pay has continued to grow to levels that are simply stunning,” said Trumka. Trumka released the AFL-CIO’s 15th annual pay package report examining compensation of 299 S&P 500 company CEOs. The union said it examined only 299 companies because information is not yet available for 2010 on the rest of the CEOs in the group. He pointed out that in 1980 the chief executive of S&P company CEOs reviewed received, on average, about 42 times the average pay of a worker. By 2000 the gap had widened to 525 times and “even after the economic crisis,” the gap in 2010 is 343 times the average worker, Trumka said.

2010 Average CEO Pay at S&P 500 Companies - Executive Paywatch - According to the Federal Reserve, U.S. corporations held a record $1.93 trillion in cash on their balance sheets in 2010. But they are not investing to expand their companies, grow the real economy or create good middle-class jobs. Corporate CEOs are literally hoarding their company’s cash—except when it comes to their own paychecks.  In 2010, Standard & Poor's 500 Index company CEOs received, on average, $11.4 million in total compensation.[1] Based on 299 companies’ most recent pay data for 2010, their combined total CEO pay of $3.4 billion could support 102,325 median workers’ jobs.[2]

Labor Puts Executive Pay in the Spotlight - The A.F.L.-C.I.O. has long been happy to treat executive compensation as a punching bag, and a Web site it put online Tuesday lands a few new punches. The site, 2011 Executive Paywatch, notes that total compensation for C.E.O.’s averaged $11.4 million in 2010, up 23 percent from the previous year, based on the most recent pay data for 299 major companies. The Web site notes that the C.E.O.’s at those 299 companies received a combined total of $3.4 billion in pay in 2010, enough to support 102,325 jobs paying the median wage.  “Despite the collapse of the financial market at the hands of executives less than three years ago, the disparity between C.E.O. and workers’ pay has continued to grow to levels that are simply stunning.” The Web site notes that chief executives’ compensation is 343 times the median pay — $33,190 — of American workers. It adds that the $11.4 million average for C.E.O.’s is 28 times the pay of President Obama, 213 time the median pay of police officers, 225 times teacher pay, 252 times firefighter pay, and 753 times the pay of the minimum-wage worker.

Unofficial Problem Bank list at 976 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Apr 22, 2011. Changes and comments from surferdude808:  Given the flurry of closings last week and the Easter weekend, it is probably safe to assume the FDIC will be on the sidelines this Friday. During the week, however, there were four removals and two additions, which leave the Unofficial Problem Bank List standing at 976 institutions with assets of $422.2 billion.

Commercial real estate makes up 77% of troubled loans at failed banks - Commercial real estate accounted for 77% of the non-performing loans at the most recently failed banks, according to analytics firm Trepp. Regulators closed six banks on April 15, accounting for a total of $4.8 billion in assets. So far in 2011, there have been 34 closings, but Federal Deposit Insurance Corp. Chairwoman Sheila Bair said bank failures peaked the year before when 156 were shuttered.According to commercial real estate analytics firm Trepp, the six most recent failed banks had a total of $394 million in nonperforming assets as the end of 2010. Of those, 77%, or $300 million in loans were in commercial real estate.Of those, nonperforming construction and land loans totaled $200 million, followed $104 million for commercial mortgages. By contrast nonperforming residential loans totaled $73 million at these banks.

CoStar: Commercial Real Estate prices increased slightly in February - From CoStar: CoStar Pricing Performance Varies Significantly Between Different Regions and Property Types - The Composite Index, which is an equal-weighted analysis repeat sale pricing index incorporating both the Investment Grade and General Grade indices and a reflection of the broad overall market, posted a slight increase in property value for the month of February of 0.6%, reflecting the strong monthly increase in the General Grade repeat sale index. The Composite Index is down 7.5% year over year.  This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. The Investment Grade was down, the other two were up slightly in February. It is important to remember that there are very few CRE transactions (compared to residential), and that there is a high percentage of distressed sales, so prices are very volatile. Also CoStar is seeing significant variations in pricing performance between different regions and property types.

Moody's: Commercial Real Estate Prices declined 3.3% in February - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index declined 3.3% in February. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales and there are a large percentage of distressed sales - and that can impact prices and make the index very volatile. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.  CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are down 4.9% from a year ago and down about 44.7% from the peak in 2007. Prices are just above the post-bubble low last August - and about at the levels of 2002.

IMF Structural Adjustment for US - Write Down Mortgages - I have argued for some time that deleveraging U.S. homeowners, who still carry more than $10 trillion in mortgage debt, is not only a social imperative but essential for the economic recovery.  According to the IMF in its latest semiannual report, failure to deleverage American borrowers is a continuing threat to global economic stability.  The Washington consensus is now fractured, apparently, with the IMF and economists on one side and the banks bleating on the other, with Treasury dithering in ambivalence. Meanwhile, in vaguely related news, S&P, in a bid to restore its credibility after the massive reclassification of AAA mortgage-backed securities to junk, now takes a flyer into the budget debate and announces US Treasury debt's AAA rating is under review.  Really S&P?  Where would you then suggest SWF's park their excess capital instead?  Fannie and Freddie issues, perhaps.

Doug Smith: A Stiletto In The Back Of Sane Housing Markets - The recent federal budget deal eliminated $88 million of HUD funding for non-profit housing counselors. According to this report, these groups use roughly half the funds for foreclosure counseling and half for homebuyer education and qualification. The report says a separate foreclosure counseling effort is also being reduced by $65 million.  Historically, non-profit housing groups focused on low-income folks. But, for many years, people with moderate incomes – nurses, police, teachers and others in what used to pass for the middle class – have also sought help. The core purpose of the non-profits is simple: help people achieve affordable home ownership. This entails educating them on the realities of ownership, helping them shift credit, consumption and savings behavior, advising on how to avoid the worst practices of real estate and mortgage brokers — even at times doing lending. All of which together means, in effect, doing the real work of underwriting that has long since been abandoned by the too big to fail banks who, in their eagerness to increase volumes and squeeze out costs through technology and ‘modeled’ strategies, eliminated the capacity for this careful work.  Most non-profit groups are quite good at what they do. Just under four years ago, I wrote this for Slate:

Homework Regulators Aren’t Doing - “ONE too many times, this court has been witness to the shoddy practices and sloppy accountings of the mortgage service industry. With each revelation, one hopes that the bottom of the barrel has been reached and that the industry will self correct. Sadly, this does not appear to be reality.”  This trenchant take comes courtesy of Elizabeth W. Magner, a bankruptcy court judge in the Eastern District of Louisiana. In an April 7 opinion involving a couple whose bank tried to foreclose on them even though they were current on their mortgage, you can sense Ms. Magner’s frustration with financial institutions that administer home loan payments and records.  Ms. Magner is just one of many judges overseeing cases involving troubled borrowers, of course. But because her judicial duties seem to have made her an expert on mortgage servicing, Ms. Magner’s views could not be more timely and important. This is especially true, given that state attorneys general seem intent on striking a settlement1 with servicers before they have conducted a comprehensive and thorough examination of industry practices.

Fed Aims at Mortgage Fraud, Shoots Housing Market in the Gut - Why are we not surprised that the Fed took aim at mortgage fraud and ended up shooting the housing market in the gut. Here's a simple guide to what's good and bad for housing:  Things which makes it easier and cheaper to borrow money: good. Things which make it harder and more expensive to borrow money: bad.  And that's the fundamental problem with the Federal Reserve's new regulations crimping mortgage broker compensation. Unless we expect mortgage brokers to take vows of poverty, then the system has to allow legitimate brokers to get paid in accordance with the amount of work the loan requires to get funded.  By severely limiting compensation, the Fed has basically wiped out small brokerages and lenders, reducing the availability of mortgages to a handful of--you guessed it--too big to fail banks, who already control the majority of mortgage origination.

Wrongful Foreclosures - NYT Editorial - We were worried recently1 when we saw an advance draft of legal agreements between federal regulators and the nation’s big banks to address and correct foreclosure abuses. The actual deals were as bad as we feared. It turns out that the inquiry that preceded the agreements was limited to reviews of “foreclosure-processing functions” — things like paperwork handling and work-force supervision. The reviews found big processing problems — no surprise there — and the agreements call for more staff and better management.  What was not looked for is far more significant. Because so few files were examined, the regulators’ report says, “the reviews could not provide a reliable estimate of the number of foreclosures that should not have proceeded.” So much for the burning question of the extent of wrongful foreclosures. The reviews also did not look at potential abuses outside the foreclosure process, including unreasonable loan fees and misapplied loan payments. Such faulty charges can precipitate default by making it impossible for borrowers to catch up on late payments.  Nor did the reviews focus on faulty loan-modification processes, like instances in which bank employees wrongly told borrowers they needed to be delinquent to qualify for new loan terms. Delinquency subjects borrowers to late fees, damaged credit and an increased risk of falling hopelessly behind. It also harms mortgage investors who are stuck with the loan losses. But it can be profitable for banks that service loans; they can extract late fees from the borrower or upon the foreclosed home’s sale.

A Slap on the Wrist for Mortgage Fraud - On Wednesday, three federal regulators -- the Federal Reserve, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency -- released an enforcement order against 14 of the nation's largest banks and two third-party service providers for persistent irregularities and outright fraud in the way they process mortgages. These regulators are, respectively, the gang that missed the housing bubble, American International Group's overseer (whose colossal lapses caused it to be disbanded in last year's financial-regulatory law), and an entity most recently headed by a former bank lobbyist. The product of their deliberations, then, is no surprise: a toothless federal consent decree that essentially lets the offending banks off the hook and puts them in charge of their own prosecution. The banks' sentence is confoundingly light: They have to promise not to do any of this criminal activity again, and they get to set their own terms for compliance. As The Nation's Chris Hayes said on MSNBC when the order was leaked last week, "Imagine for a moment all the people accused of robbery in this country who would happily take the same deal."

Another Class Action Suit Filed in Federal Bankruptcy Court Against Lender Processing Services - Yves Smith - The noose is tightening around Lender Processing Services.Last week, various news outlets revealed that Federal banking regulators had issued consent orders against major servicers, MERS, and LPS. Kate Berry of American Banker pointed out that LPS is exposed to making payments to servicers: In addition to the 14 biggest mortgage servicers, two of the biggest vendors to the industry received cease-and-desist orders from regulators Wednesday. One was stronger than the other.Lender Processing Services Inc. and Merscorp Inc.’s Mortgage Electronic Registration System were both cited for “significant compliance failures” and “unsafe and unsound business practices” related to foreclosures. Regulators are requiring both companies to hire independent consultants, take remedial steps to address past failures and hire additional staff.But only LPS, a publicly traded company in Jacksonville, Fla., that provides foreclosure-related services to banks, faces the possibility of having to reimburse servicers and borrowers  A potentially more serious front against the embattled company are legal filings, particularly class action litigation related to allegations of prohibited legal fee sharing in Federal bankruptcy court. Note that bankruptcy court has very strict rules about the disclosure of payments and what laypeople would think of as fee padding.

Best Way to Raise Campaign Money? Investigate Banks - A hilarious report has come out courtesy of the National Institute of Money in State Politics, showing that Iowa Attorney General Tom Miller – who is coordinating the investigation into the banks’ improper mortgage dealings – increased his campaign contributions from the finance sector this year by a factor of 88!  He has raised $261,445 from finance, insurance and real estate contributors since he announced that he was going to be coordinating the investigation into improper foreclosure practices. That is 88 times as much as they gave him not over last year, but over the previous decade.  This is about as perfect an example of how American politics works as you’ll ever see. This foreclosure issue is a monstrous story that is somehow escaping national headlines; essentially, all of the largest banks in the country have been engaged in an ongoing fraud and tax evasion scheme that among other things has resulted in many hundreds of billions in investor losses, and hundreds of thousands of improper foreclosures.  If the banks had to pay what they actually owed – from the registration taxes/fees they avoided by using the electronic registry system MERS to the money taken from investors in toxic mortgage-backed securities to the fees and payments stolen from homeowners via predatory loan practices and illegal foreclosures – they would probably all go out of business. That’s how much money is at stake here: the very future of financial giants like Bank of America and Citi and JP Morgan Chase is hanging to a very significant degree on the decisions of politicians like Miller.

Matt Taibbi Follows the Money in Iowa AG Tom Miller’s Faux Tough Posture in 50 State Mortgage Settlement Negotiations - Yves Smith - We’ve taken aim repeatedly at Tom Miller’s obvious soft touch toward banks in his role as lead negotiator in the 50 state attorney generals negotiation over foreclosure abuses. Some of his questionable actions:Promising to put people in jail, then quickly reversing himselfWorking closely with the bank-friendly Treasury Department when the state and Federal legal issues are very different, rendering the rationale for cooperation suspect  Failing to undertake any meaningful investigations, which would have given the state AGs leverage in settlement talks. Not acting in a manner consistent with a lead negotiator role: negotiating AGAINST the AG group on behalf of the Administration, and springing a preliminary term sheet on them rather than involving them in developing it Putting terms forward piecemeal, and in particular, not disclosing the terms of the release even to fellow AGs. In a deal, you make a complete offer and then see if the other side accepts or counteroffers. We had assumed that the reason for Miller’s bending-over-backwards stance was that he was currying favor with the Administration in the hope of winning the nomination to head the Consumer Financial Protection Bureau. But Matt Taibbi has found what appears to be an even more logical explanation: out of state bank-friendly donors dumped lots of dough into Miller’s fundraising coffers. And I mean LOTS (at least by state AG standards). From Taibbi:

Beyond ForeclosureGate – It Gets Uglier - The ForeclosureGate scandal poses a threat to Wall Street, the big banks, and the political establishment. If the public ever gets a complete picture of the personal, financial, and legal assault on citizens at their most vulnerable, the outrage will be endless. (Image) Foreclosure practices lift the veil on a broader set of interlocking efforts to exploit those hardest hit by the endless economic hard times, citizens who become financially desperate due medical conditions. A 2007 study found that medical expenses or income losses related to medical crises among bankruptcy filers or family members triggered 62% of bankruptcies. There is no underground conspiracy. The facts are in plain sight. ForeclosureGate represents the sum total illegal and unethical lending and collections activities during the real estate bubble. It continues today. Law professor and law school dean Christopher L. Peterson describes the contractual language for the sixty million contracts between borrowers and lenders as fictional since the boilerplate language names a universal surrogate as creditor (Mortgage Electronic Registration System), not the actual creditor. Other aspects of ForeclosureGate harmed homeowners but the contractual problems that the lenders created on their own pose the greatest threats.

J.P. Morgan Chase to pay $27 million to settle lawsuit over military mortgages - J.P. Morgan Chase said Friday it will pay $27 million to settle a class-action lawsuit that accused the bank of overcharging members of the military for their mortgages and prompted a federal investigation, a congressional hearing as well as public outrage. In the suit, Marine Corps Capt. Jonathon Rowles charged that the bank refused to lower the interest rate on his mortgage, as required under a federal law, after he was activated for duty. When Rowles refused to pay the higher rate, the bank called his home up to three times a day and threatened to foreclose, according to the suit, which was filed in July

California bankruptcy court rules against MERS - A California bankruptcy court says Mortgage Electronic Registration Systems cannot help a trustee establish legal standing to foreclose on a securitized mortgage unless the trustee already possesses an actual assignment of interest in the loan. The case — Salazar v. U.S. Bank — comes out of California's Southern District U.S. Bankruptcy Court and is attracting attention from foreclosure attorneys as it seems to contradict another ruling, Gomes v. Countrywide. While the bankruptcy court's decision is only binding in its own jurisdiction and is tied to a very narrow issue filed in bankruptcy court, the opinion does challenge the role MERS plays in the foreclosure process when dealing with securitized loans held by a trustee. California uses a nonjudicial foreclosure process. A MERS spokesman said the company cannot comment on pending litigation since the case is ongoing.

More Shots Across MERS’s Bow - Yves Smith - Admittedly, this act of rebellion against MERS, the electronic mortgage registry by a Pennsylvania county is comparatively minor, but nevertheless illustrates the efforts various local bodies are taking to assert their authority against a system imposed without regard to state and local real estate laws. Montgomery County estimates that it has lost $15 million in recording fees due to MERS, which its Recorder of Deeds, Nancy Becker, says has also made a mess of title records. She is working to get the county to cease doing business with banks that make use of MERS, and has launched an effort to get other counties in the state to follow suit. From the Times Herald: Montgomery County Recorder of Deeds Nancy Becker is urging registers of deeds across state and the country to withdraw public money from any banks affiliated with the Mortgage Electronic Registry System (MERS), which she claims is undermining the practice of accurate land recording.In recent years, mortgages have been assigned and reassigned multiple times, and when a bank or other entity doesn’t properly report these transfers, it makes it very difficult for homeowners to determine who holds their mortgages. “It clouds the chain of title, and it’s prohibiting (officials) from recording revenues they should be recording,” Becker said.

Jury convicts exec in $3B mortgage fraud case - A jury on Tuesday convicted the majority owner of what had been one of the nation's largest mortgage companies on all 14 counts in a $2.9 billion fraud trial that officials have said is one of the most significant prosecutions to arise from the nation's financial crisis. Prosecutors said Lee Farkas led a fraud scheme of staggering proportions for roughly eight years as chairman of Florida-based Taylor Bean & Whitaker. The fraud not only caused the company's 2009 collapse and put its 2,000 employees out of work, but also contributed to the collapse of Alabama-based Colonial Bank, the sixth-largest bank failure in U.S. history.

Florida ‘rocket docket’ court told to respond to ACLU claims - A Florida appellate court issued an order Tuesday, requiring the state's 20th Judicial Circuit to respond within 20 days to claims of ignoring court rules and rushing foreclosure cases through its system. In April, the American Civil Liberties Union filed a petition with  Florida's 2nd District Court of Appeals attempting to block the 20th Judicial Circuit from accelerating foreclosures through its so-called "rocket docket." Beginning in July, the docket was used in all five counties in the southwestern Florida circuit: Lee, Collier, Charlotte, Hendry and Glades. Judges began pushing foreclosures through the system in order to work though a 40,000 case backlog. According to sworn affidavits from foreclosure defense attorneys, court judges allegedly ignored court rules requiring additional paperwork from lenders and denied homeowners a say in court if they were delinquent on their loan.

A Funny Thing Happened on the Way to the AZ House of Representatives… After passing the Senate 28-2… S.B. 1259 Completely Disappeared - When I learned that last February S.B. 1259 passed the Arizona State Senate… a Republican dominated senate, by the way… by an overwhelming 28-2… well… I got kind of excited about the prospects for the bill’s ultimate passage by the Arizona House of Representatives because were it to pass and then be signed by the governor, servicers and lenders would actually have to follow the state’s laws related to chain of title, and therefore would be bringing fraudulent documents into court… at the very least… far less often. And presumably the servicers that haven’t followed the laws and therefore that have broken the chain of title rules, would now have a powerful incentive to modify loans, instead of perpetuating illegal foreclosures. Of course, it came as no surprise that Arizona Bankers Association CEO, Paul Hickman was quick to issue the banking industry’s standard threatening warning, issued whenever anything might change existing rules: “If Arizona passes this, it will be the only state in the union that will require a production of chain of title. States that pass these types of laws will be riskier environments to lend in and more difficult environments to get a loan in.”

Q4 2010: Mortgage Equity Withdrawal strongly negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity, normal principal payments and debt cancellation. For Q4 2010, the Net Equity Extraction was minus $77 billion, or a negative 2.7% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q4. Mortgage debt has declined by $550 billion over the last eleven quarters. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be slightly negative.

Existing-Home Sales Rise in March - Sales of existing-home sales rose in March, continuing an uneven recovery that began after sales bottomed last July, according to the National Association of Realtors®. Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 3.7 percent to a seasonally adjusted annual rate of 5.10 million in March from an upwardly revised 4.92 million in February, but are 6.3 percent below the 5.44 million pace in March 2010. Sales were at elevated levels from March through June of 2010 in response to the home buyer tax credit. Lawrence Yun, NAR chief economist, expects the improving sales pattern to continue. “Existing-home sales have risen in six of the past eight months, so we’re clearly on a recovery path,” he said. “With rising jobs and excellent affordability conditions, we project moderate improvements into 2012, but not every month will show a gain – primarily because some buyers are finding it too difficult to obtain a mortgage. For those fortunate enough to qualify for financing, monthly mortgage payments as a percent of income have been at record lows.”

March Existing Home Sales: 5.10 million SAAR, 8.4 months of supply - The NAR reports: Existing-Home Sales Rise in March Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 3.7 percent to a seasonally adjusted annual rate of 5.10 million in March from an upwardly revised 4.92 million in February, but are 6.3 percent below the 5.44 million pace in March 2010. All-cash sales were at a record market share of 35 percent in March, up from 33 percent in February; they were 27 percent in March 2010. Investors accounted for 22 percent of sales activity in March, up from 19 percent in February; they were 19 percent in March 2010. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in March 2011 (5.10 million SAAR) were 3.7% higher than last month, and were 6.3% lower than March 2010. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.549 million in March from 3.498 million in February. Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall and winter. The last graph shows the 'months of supply' metric. Months of supply decreased to 8.4 months in March, down from 8.5 months in February.

Existing Home Inventory decreases 2.1% Year over Year - Earlier the NAR released the existing home sales data for March; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.  Although inventory increased from February to March (as usual), inventory decreased 2.1% year-over-year in March (from March 2010). This is the second consecutive month with a small YoY decrease in inventory. Inventory should increase over the next few months (the normal seasonal pattern), and the YoY change is something to watch closely this year. Inventory is already very high, and any YoY increase in inventory would put more downward pressure on house prices. The second graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns in January, February and March are for 2011.  Sales NSA are below the tax credit boosted level of sales in March 2010, but above the level of March sales in 2008 and 2009.  The bottom line: March is the beginning of the selling season, and sales activity (so far) is above the 2008 and 2009 levels. Much of this activity is from all cash-sales (both investors and homebuyers).

Distressed Properties Claim 40% of Existing-Home Sales - Distressed homes – typically REOs and short sales – accounted for 40 percent of the existing homes sold in March, the National Association of Realtors (NAR) reported Wednesday.  The trade group notes that these properties generally sell at discounts in the vicinity of 20 percent. Their large market share served to dampen the median existing-home price. For all housing types, it came in at $159,600 last month, down 5.9 percent from March 2010. Overall, sales of previously owned homes rose 3.7 percent last month as the spring buying season began to take hold. NAR described March’s reading as “continuing an uneven recovery,” following the 9.6 drop recorded in February. Lawrence Yun, NAR’s chief economist, expects the improving sales pattern to continue. “Existing-home sales have risen in six of the past eight months, so we’re clearly on a recovery path,” he said. “With rising jobs and excellent affordability conditions, we project moderate improvements into 2012, but not every month will show a gain – primarily because some buyers are finding it too difficult to obtain a mortgage.”

Housing Recovery: Not here yet - There has been a lot more talk recently about whether we are on the cusp of a housing market recovery. I wrote that I believed the housing market would rebound in 2011 back in December. Earlier this month, my colleague Bill Saporito wrote a story about how two developers who had called the crash correctly were now betting on a huge bounce in housing prices. Well, the developers and others will still have to wait. The National Association of Realtors released their numbers on the housing market today. There was a glimmer of good news. Housing sales were slightly higher than analysts expected. And home prices were up from a month ago. But compared to where the housing market was a year ago, both housing sales and housing prices were down significantly. Homes sales were down 7% from a year ago. Prices dropped another 6%. The median price of US homes sold last month was $159,600, down from well over $200,000 at the height of the housing market.

FHFA home prices down 1.6% in February - Home prices declined 1.6% in February from the month before, according to the Federal Housing Finance Agency index. The FHFA monitors the price of homes purchased with Fannie Mae or Freddie Mac mortgages. The agency revised its numbers in January as well. Instead of a 0.3% drop that month, the FHFA said the decrease was a full 1%. Over the last 12 months, home prices fell 5.7% ending in February, and it remains 18.6% below the peak in April 2007. Home prices have fallen to essentially the same level as February 2004. Prices fell the most in the mountain census division, east of California and west of Texas, dropping 3.7% in February. Prices declined 0.6% in the east south central division in February, which covers Kentucky south to Mississippi and Alabama, the smallest drop that month.

Other House Price Indexes - The most followed house price indexes are Case-Shiller and CoreLogic - and also the FHFA index based on repeat sales of homes with loans sold to or guaranteed by Fannie Mae or Freddie Mac. The FHFA reported this morning: U.S. Monthly House Price Index Declined 1.6 Percent from January to February U.S. house prices declined 1.6 percent on a seasonally adjusted basis from January to February, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.3 percent decrease in January was revised to a 1.0 percent decrease. For the 12 months ending in February, U.S. prices fell 5.7 percent. The U.S. index is 18.6 percent below its April 2007 peak and roughly the same as the February 2004 index level.  There are several other house price indexes that I follow: RadarLogic (based on a house price per square foot method, to be released this afternoon for February), FNC Residential Price Index (a hedonic price index), Clear Capital and more. I'm planning on mentioning these other indexes, in addition to Case-Shiller and CoreLogic, and discussing some of the differences. From FNC this morning: February Single-Family Home Prices Decline 0.7 Percent

RadarLogic home prices hit lowest level since 2003 - Home prices nationwide appear to have reached a seasonal trough in February, after falling to the lowest level since March 2003. The RadarLogic RPX Composite index, which tracks home prices in 25 metropolitan areas, fell to $178.12 per square foot, down 4.3% compared to February 2010 and down 36% from the index's all time high in June 2007. RadarLogic said that both supply and demand factors in the housing market are contributing to price depreciation."The foreclosure process remains bogged down after investigations launched late last year prompted temporary halts by some mortgage servicers and created a bottleneck as paperwork was re-filed," the report said. "Housing demand is also constrained." March existing home sales posted 3.7% above February sales, yet 6.3% below sales in March 2010, according to the National Association of Realtors.

Home buyers try to beat "jumbo" loans squeeze - It was only in recent years that the loan limits went so high. Mortgages that are too big to be sold to Fannie and Freddie are termed jumbo loans and are backed privately. Until 2008, all home loans over $418,000 were considered jumbo loans. In that year, a stimulus-focused Congress twice raised the limit on loans the government would back in high cost areas, first to $625,500 permanently, and then to $729,750, temporarily. Since then, Fannie and Freddie have backed an increasing share of that market. In 2010, so-called "jumbo conforming" loans, those over $417,000 and government-backed, made up 6.73 percent of loan originations, according to CoreLogic. That top temporary limit was extended twice, but is expected to expire at the end of September. Private lenders are preparing to step in, according to Guy Cecala of Inside Mortgage Finance, a research firm. In the last quarter of 2010, private lenders originated more loans over $417,000 (the traditional jumbo market) than did government agencies, he said.

FHA Mortgage Squeeze -  Perhaps even more important than the Jumbo Squeeze is the coming "FHA squeeze". Enlarged FHA loan size also expires in October.  For example, in Minneapolis, the current FHA max for single family loans is $365,000. On October 1, that reverts back down to about $275,000. While some buyers of homes in the $290,000 - 380,000 range who could have done FHA loans will be able to switch to conventional conforming loans, some will not.  FHA loans are a lot easier to get: higher debt ratios are allowed, lower credit scores are allowed (without rate upcharges), and the down payment requirement is a mere 3.5%. The reduction in max FHA loan size will take some buyers out of the market.

Americans Shun Cheapest Homes in 40 Years as Ownership Fades - The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.  “The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”  Historically, homes have been a safer investment than equities. During 2008, the worst year of the housing crisis, the median U.S. home price declined 15 percent, compared with a more than 38 percent plunge in the Standard & Poor’s 500 Index.

Housing Starts increase in March - Total housing starts were at 549 thousand (SAAR) in March, up 7.2% from the revised February rate of 512 thousand (revised up from 479 thousand).  Single-family starts increased 7.7% to 422 thousand in March (February was revised up to 392 thousand from 375 thousand). 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.  Privately-owned housing starts in March were at a seasonally adjusted annual rate of 549,000. This is 7.2 percent (±18.0%)* above the revised February estimate of 512,000, but is 13.4 percent (±9.1%) below the March 2010 rate of 634,000.

Housing Starts Post Modest Improvement, Completions Plunge To All Time Low - Following last month's second lowest housing starts number ever of 479,000, March came at 549K, on expectations of 520K. Incidentally last month's number was revised to 512K from 479K. This likely accounts for what many have attributed to a weather related plunge in starts. The biggest swing factor in the March number was in units started at 5 units or more, which came at 117 or about 15% higher than February's 102. On the other side of the starts number was the housing completions, which at 509K was the lowest number ever, even worse than January's 510. Of note is the completions number in one unit structures which came at what is probably a record low 374k. But since nobody cares about the actual final outcome, and merely about the first dig, Housing Permits came at 594K on expectations of 540K. Once again this number was rescued by multi-unit housing, as the structures with 5 units or more came in at 173k compared to 135k previously, and was the highest number in over a year. Anything to fudge the number.

A Rebound In Housing For March, But The Old Challenges Still Apply - Today’s update on housing construction and newly issued building permits for March brings some welcome news after the sharp declines of February. But let’s not kid ourselves: the housing market is still depressed on several fronts and today’s numbers don’t really change much. What they do suggest is that residential real estate has found a bottom. That’s not much, but it’s an improvement over the dire outlook implied by February’s reports. Privately-owned housing starts rose 7.2% last month at a seasonally adjusted annual rate. A respectable gain, but it still pales next to February’s nearly 19% loss. Building permits popped by more than 11% in March, the first gain for 2011. Nonetheless, as our chart below reminds, this all looks like noise in the broader trend: a housing market that’s merely coming to terms with the post-boom era of sharply lower levels of real estate development.

Housing: On pace for Record Low Completions in 2011 - With just three months of data for 2011, it is already pretty clear that there will be a record low number of housing completions this year. Here is a look at the data so far ... 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. However it takes about 13 months on average to complete a multi-family building, and the low level of starts in 2010 means a low level of completions this year. The following graph shows this lag between multi-family starts and completions through March: 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. Based on starts in 2010, I expect mutlifamily completions to be around 100 thousand in 2011 - well below the 146.5 thousand in 2010, and below the previous record low of 127.1 thousand in 1993. We can do a similar analysis for single family housing completions. Through March, about 90 thousand units have been completed (1 to 4 unit structures), and based on housing starts, another 200 thousand or so will be completed over the next 6 months (it takes about 6 months on average to complete single family structures). This graph shows annual completions for 1 to 4 units, 5+ units and manufactured homes (and an estimate for 2011)

Residential Remodeling Index shows strong increase year-over-year in February - The BuildFax Residential Remodeling Index was at 95.1 in February. This is based on the number of properties pulling residential construction permits in a given month. From BuildFaxThe Residential BuildFax Remodeling Index rose 20% year-over-year—and for the sixteenth straight month—in February to 95.1, the highest February number in the index since 2006. Residential remodels in February were down month-over-month 3.9 points (4%) from the January value of 99.0 ...Although down month-to-month (off 4% from January) this is the highest level for a February since 2006 - and above the level of 2005 (during the home equity and remodel boom). 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 20% from February 2010.

NAHB Builder Confidence index declines slightly in April - The National Association of Home Builders (NAHB) reports the housing market index (HMI) declined slightly to 16 in April from 17 in March. This was below expectations for a reading of 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 April release for the HMI and the February data for starts (March housing starts will be released tomorrow). Both confidence and housing starts have been moving sideways at a very depressed level for several years. Press release from the NAHB: Builder Confidence Slips Back a Notch in April “The spring home buying season is getting off to a slow start due to persistent concerns about home values as more foreclosures seem to be hitting the market, increasingly restrictive lending requirements for home buyers and builders, and the slow pace of economic recovery,”

Builders of New Homes Seeing No Sign of Recovery — In this distant Chicago suburb, a builder has finally found a way to persuade people to buy a new house: he throws in a car.   “We needed to do something dramatic,” said Mr. Meier. “The market’s been soft.”  That is one way of putting it. The recession2 hurt a lot of industries, but it knocked the residential construction market to the mat and has kept it there, even as the broader economy has started to fitfully recover.  Sales of new single-family homes in February were down more than 80 percent from the 2005 peak, far exceeding the 28 percent drop in existing home sales. New single-family sales are now lower than at any point since the data was first collected in 1963, when the nation had 120 million fewer residents.  Builders and analysts say a long-term shift in behavior seems to be under way. Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible. That often means buying a home out of foreclosure from a bank.

Home Builders still see no recovery - From the NY Times: Builders of New Homes Seeing No Sign of Recovery..Builders and analysts say a long-term shift in behavior seems to be under way. Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible.  This has led to the "distressing gap" between new and existing home sales! Here is a repeat of the graph showing existing home sales (left axis) and new home sales (right axis). This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales). The gap is due mostly to the flood of distressed sales. This has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.

Where Will the Growth Come From? - One reason that economic growth over the last half-century has not radically transformed the lives of ordinary people is because it doesn’t seem to dramatically lowered the price of stuff ordinary people buy. Below are spending patterns for the Median Household (40 – 50K) from the BLS. I broke out the top level Housing category into its subparts because I want to make a point about it, and the huge fraction of income attached to housing costs more generally would have overstated my case. What you can see is that shelter and transportation are the biggest components of expenditure, followed by food. Food expenditures are roughly half food at home and roughly half food away from home.  Shelter is especially interesting. When I started following the housing market around 2004, I was surprised was what a small fraction of GDP was taken up by fixed residential investment.

MSNBC: Gallon of gas now tops $4 in six states and D.C. — Add New York to the growing list of states where gas prices are topping $4 per gallon.  On Sunday, the Empire State became the sixth state to top $4 for the average price of a gallon of gas, joining Alaska, California, Connecticut, Hawaii and Illinois, according to AAA's Daily Fuel Gauge. The average price of gas also rose to more than $4 per gallon in Washington, D.C., on Saturday. The next states to join the list could be Michigan, which has gas for $3.95 per gallon on average, and Indiana, where the average price is $3.94. Nevada, Washington and Wisconsin are close behind.  The national average for gas has increased for 26 straight days, and is now at $3.83 per gallon. That's up 29 cents from a month ago. Retail surveys suggest motorists are reacting to higher prices now by buying less fuel. Still, the government expects pump prices to keep climbing this summer as vacationers take to the highways.

The Big (Gasoline) Pinch - The sharp rise in gasoline prices over the past year has all but eaten up the payroll tax cut enacted late last year, advises Goldman Sachs via The risk is that the ascent of fuel costs cuts sharply into consumer spending, which has been buoyant lately. “A key reason for concern is the sharp rise in gasoline prices so far in 2011 — nearly 70 cents per gallon — which is siphoning off household income at a run rate equivalent to $100 billion per year," notes Goldman economist Andrew Tilton. With the demand boost from the summer driving season just around the corner, some analysts warn that even higher prices may be coming. The question is how deeply gasoline prices bite into consumer finances? Prices are one signal in searching for an answer, and by that standard Joe Sixpack is spending the most on gasoline these days since the summer of 2008. Average regular gas prices in the U.S. were $3.791 a gallon last week, the Energy Information Administration reports--a rise of more than 90 cents a gallon from a year ago.

DOT: Vehicle Miles Driven increased in February - The Department of Transportation (DOT) reported that vehicle miles driven in February were up 0.9% compared to February 2010:Travel on all roads and streets changed by +0.9% (2.0 billion vehicle miles) for February 2011 as compared with February 2010. Travel for the month is estimated to be 214.8 billion vehicle miles. Cumulative Travel for 2011 changed by +0.6% (2.8 billion vehicle miles). This graph shows the rolling 12 month total vehicle miles driven.  The second graph shows the year-over-year change from the same month in the previous year. The DOT reported vehicle miles driven in February were up 0.9%. No signs of demand destruction yet, however in February U.S. oil prices averaged $90 per barrel, and we might see $100+ oil lead to a decrease in driving in March or April.

Gas spike tab hits $100 billion - In the latest sign inflation is tapping the brakes on the recovery, gas-price increases have practically wiped out Americans' winnings from last year's tax holiday. So says Goldman Sachs. The firm cut its first-quarter U.S. growth projection Friday for the second time this month, warning that the price of gasoline – up to $3.83 a gallon on average at the latest reading – could undermine consumer spending and slow an already laboring economy."A key reason for concern is the sharp rise in gasoline prices so far in 2011 — nearly 70 cents per gallon — which is siphoning off household income at a run rate equivalent to $100 billion per year," writes economist Andrew Tilton. That means Americans who thought they would pocket $110 billion this year in aggregate thanks to the payroll tax holiday are now down to $10 billion – which amounts to about $33 for each man, woman and child. It is not easy to feed a consumer spending rebound on that sort of budget. But it acknoweldges that risks to that forecast are growing, and slashed its first-quarter gross domestic product growth expectation to 1.75%. That's down from 2.5% two weeks ago and 3.5% as recently as last month.

Four Dollar A Gallon Gas Is Coming But It Won't Necessarily Tank The US Economy: "Gas prices will likely rise above $4 a gallon this summer in the U.S., but there's no guarantee it is going to tank the U.S. economy, according to Deutsche Bank's Carl Riccadonna. Riccadonna admits that prices are rising ahead of long-time averages, and that right now, future demand driven price increases that come during the summer confirm we're heading to $4 a gallon. But what really matters is how long we stay there, according to Riccadonna. Earlier this year we estimated that the “tipping point” for gasoline prices was probably somewhere near $4 per gallon based on a range of factors including household income growth as well as analysis of past episodes when energy price spikes impaired economic activity. It is worth clarifying an important point in this regard—prices need to be sustained at the threshold for an extended period (quarterly average), not merely touch it briefly. Of course, it is possible that the threshold is higher than we initially projected; particularly if the pace of hiring (and hence income growth) accelerates more noticeably. Riccadonna says the situation in consumer confidence and retail sales suggest the economy may be able to handle $4 gas. But a quick look at the trend shows we are way out ahead of price growth already for the year.

$4 gas: Consumers might have to adjust -  Gas prices have been spiking for weeks, and $4 gas is quickly becoming a reality across the nation.Six states in mid-April had gas prices above what many economists consider a tipping point for consumers. Prices in California, Alaska and Hawaii have been above $4 a gallon for weeks. They recently were joined by Illinois, Connecticut and New York, with Indiana, Michigan, Nevada, Washington and Wisconsin inching closer.Wyoming had the lowest prices in the nation in mid-April, averaging $3.54.The national average in mid-April stood at $3.84 a gallon. Prices are up 24 percent from the start of the year. Oil has been a big culprit. Based on current oil prices, above $100 per barrel, there is a 33 percent chance that the national average gas price could hit $4 a gallon in July, the Energy Information Administration said in its April short-term energy outlook.

That's pricey: 13 items that cost more, or will - Four-dollar gasoline is just a part of it. As most any shopper knows, prices are climbing for everything from coffee and chocolate to tires and toilet paper.  The Consumer Price Index has climbed 2.7 percent in the past 12 months, according to government statistics released Friday. That's the largest rise since 2009. Price increases will continue in the months ahead as companies pass along the higher costs of raw materials, transportation and other expenses. "When prices at the pump rise and wages don't, already strained budgets show the pain," . This creeping inflation doesn't yet alarm economists, who don't expect high inflation in the near future. That's because many businesses are still wary about boosting prices when workers are getting meager raises, if any, and unemployment remains near 9 percent.

Number of the Week: Americans Buy More Stuff They Dont Need - $1.2 trillion:

How much Americans spend annually on goods and services they don’t absolutely need. This Easter weekend, Americans will spend a lot of money on items such as marshmallow peeps, plush bunnies and fake hay, begging a question: How much does the U.S. economy depend on purchases of goods and services people don’t absolutely need? As it turns out, quite a lot. A non-scientific study of Commerce Department data suggests that in February, U.S. consumers spent an annualized $1.2 trillion on non-essential stuff including pleasure boats, jewelry, booze, gambling and candy. That’s 11.2% of total consumer spending, up from 9.3% a decade earlier and only 4% in 1959, adjusted for inflation. In February, spending on non-essential stuff was up an inflation-adjusted 3.3% from a year earlier, compared to 2.4% for essential stuff such as food, housing and medicine.

High Gas Prices Fuel Used Compact Car Sales - Fuel efficient cars are becoming harder to get and keep on local used car lots. Analysts project gas prices could average $4 a gallon for regular unleaded by week's end in Rochester. As of Monday, drivers are paying an average of $3.92 per gallon of regular unleaded gas in the Rochester area. That's $0.11 per gallon higher than the national average of $3.81. The high prices are changing the dynamic of local used car lots. Used, fuel efficient compact cars are harder to find. "The prices have gone up for wholesalers and retailers," . "I would say we are seeing a shortage," Matthews said. "It's the markets are drying up on them. They're high in demand. Any four-door compact care that gets 30 miles per gallon is becoming very challenging to purchase." Edmunds values compact cars much higher now than it did in September 2010. The value of a 2008 Honda Accord rose 24 percent in the past six months. The 2008 Hyundai Sonata saw a 22 percent increase in value over the same time period.

Near Record High Gas Prices Emptying Pockets -- Many Americans are debating between empty gas tanks and empty pockets as prices at the pump are flirting with record highs.  Some experts predict we could hit $5 per gallon of gas1 by this summer. This is not good news for drivers who already seem to be at the end of their rope.  The national average price for a gallon of gas is $3.83 and Americans are starting to cut back. In California, where the average price is above $4, drivers are running out of gas in record numbers.  AAA said calls for emergency gas services are up 13 percent as drivers try to stretch their gas tank that extra mile.  "We try to calm them down and let them know that we know it's tough times and everybody runs out of gas nowadays," It's not a shortage that's causing the high prices. OPEC said on Monday there is a glut on the market.

Obama On Rising Gas Prices: "No Silver Bullet" - President Obama used his weekly address Saturday to highlight his administration's efforts against rising gas prices -- even though he warned that "there's no silver bullet that can bring down gas prices right away."The president acknowledged what polls this week showed: Americans are feeling down on their luck and down on the country's economic path. He referred to "hard times -- and that's what a lot of people are facing these days." On his to-do list:

  • Increase domestic production of oil.
  • Root out fraud and manipulation in oil markets.
  • End $4 billion in taxpayer subsidies to oil and gas companies.
  • Invest in clean and renewable energy.

$6 Gas? Could Happen if Dollar Keeps Getting Weaker - A dollar plumbing three-year lows is hitting Americans squarely in the gas tank, and one economist thinks it could drive prices as high as $6 a gallon or more by summertime under the right conditions. With the greenback coming under increased pressure from Federal Reserve policies and investor appetite for more risk, there seems little direction but up for commodity prices, in particular energy and metals. Weakness in the US currency feeds upward pressure on commodities, which are priced in dollars and thus come at a discount on the foreign markets. One result has been a surge higher in gasoline prices to nearly $4 a gallon before the summer driving season even starts, a trend that economists say will be aggravated as demand increases and the summer storm season threatens to disrupt oil supplies. "All we have to have is a couple badly placed hurricanes which could constrain some of the refinery output capacity in some key locations,"

30 Mobile Homes Involved In Overnight Copper Theft -According to Dougherty County police, 30 vacant mobile homes at Paradise Village were involved in copper thefts over the weekend. “There were a lot of thefts involving air conditioning coils which of course are copper, some appliances, refrigerators, stoves, either parts taken from them or the whole appliance taken and then various types of damage,” Between the copper thefts and break-ins, Sexton says total damages added up to $21,000. “It's very unusual that we would have this much occur in a small time frame like that,” says Sexton. What is becoming less unusual for the police department is copper theft cases. DCP officials say they have been dealing with copper thefts almost on a daily basis, which they say is due to the fact that the price of copper has increased to $3.50 per pound.

Nation’s Mood at Lowest Level in Two Years, Poll Shows - Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama1’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll.  Amid rising gas prices, stubborn unemployment and a cacophonous debate in Washington over the federal government’s ability to meet its future obligations, the poll presents stark evidence that the slow, if unsteady, gains in public confidence earlier this year that a recovery was under way are now all but gone.  Capturing what appears to be an abrupt change in attitude, the survey shows that the number of Americans who think the economy is getting worse has jumped 13 percentage points in just one month. Though there have been encouraging signs of renewed growth since last fall, many economists are having second thoughts, warning that the pace of expansion might not be fast enough to create significant numbers of new jobs.

Suicide Rates Spike During Recessions - Suicide rates tend to rise in a bad economy and decline in periods of economic expansion, new research shows. From the Great Depression to the double-dip recession of the 1980s, suicide rates have shown a spike in economic downturns, according to a study the Centers for Disease Control and Prevention released last week. And early data suggest that’s likely to be the case in the most recent economic shock as well. In 11 of the 13 recessions that occurred between 1928 and 2007, the rate of suicides ticked up, according to the study. Meanwhile, as the economy improved, the suicide rate usually dropped, falling in 10 of the 13 expansions. The largest jump in the suicide rate took place during the Great Depression, when it soared to an all-time high of 22.1 suicides per 100,000 individuals. That was a 22.8% increase in 1932 from 1928.

Capitalism is failing the middle class - Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations. Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated. The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.

More than a Lost Decade - There are currently 130.738 million payroll jobs in the U.S. (as of March 2011). There were 130.781 million payroll jobs in January 2000. So that is over eleven years with no increase in total payroll jobs. And the median household income in constant dollars was $49,777 in 2009. That is barely above the $49,309 in 1997, and below the $51,100 in 1998. (Census data here in Excel). Just a reminder that many Americans have been struggling for a decade or more. The aughts were a lost decade for most Americans. And I'd like to think every U.S. policymaker wakes up every morning and reminds themselves of the following:There are currently 7.25 million fewer payroll jobs than before the recession started in 2007, with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more. So even as we start to discuss how to fix the structural budget deficit, and also to address the long term fiscal challenges from healthcare costs, we can't forget about all of these Americans.

Phila. manufacturing slows sharply, Fed survey shows - After a stellar March, manufacturing activity in the Philadelphia area slowed sharply this month and the outlook for the next six months dimmed, a regional survey released today showed.  "Nearly all of the survey's broadest indicators remained positive but fell from their readings in the previous month," the Federal Reserve Bank of Philadelphia said in its monthly Business Outlook survey.  Some economists and Fed officials nationally have warned recently of the danger of inflation as the U.S. economy improves, and the Philadelphia Fed's report cautioned that price increases paid by manufacturers in the region for raw materials "continue to be widespread, and a significant percentage of firms reported increases in prices for their own manufactured goods." The survey's main index of manufacturing in the Philadelphia area dropped to 18.5 in April from 43.4 last month. Any index level above zero reflects growth in manufacturing, while numbers below zero signify contraction. April's level was the lowest since November.

BBC News - Toyota extends US production cuts due to parts shortage - Toyota Motors has announced plans to extend its production cuts in North America as it continues to face a shortfall in supply of parts. Toyota said it will cut production at its North American plants by 70% from 26 April to 3 June. Car manufacturers have been facing a shortage of parts due to the damage caused to Japanese component makers by the earthquake and tsunami. Toyota said it may also lower its US sales target for 2011. Last week the company had said that its North American plants would operate on eight-hour shifts for just three days a week. It has now reduced the working hours even further, asking employees to work just four-hour shifts during the ensuing period. However, Toyota spokesman Mike Goss said that about 30,000 employees will remain on the company's payroll during the slowdown.

Heavy Truck Orders Jump 20 Percent - The backlog in Class 8 truck orders reached levels in March not seen since 2006, as net orders jumped almost 20 percent from February, ACT Research said.The vehicle market research firm's final figures for the month of March, released Wednesday, came in slightly below earlier estimates, but only by about 300 units.U.S. truck makers received 28,900 orders last month, pushing the Class 8 heavy-duty truck backlog to 108,000 units by the end of March, ACT Research said.The pace in general economic growth supports strong truck demand, ACT said.

The case against performance-related pay - Finding fair and efficient ways to pay executives is a big problem, in both the private and public sectors. Many companies and, increasingly, governments are devising complex pay packages intended to motivate their leaders to perform. Some think the answer is pay based on annual individual performance. But, especially in the public sector, this is highly questionable. Of course the general level of pay is important – it affects the choice of occupation and of job. Promotion should also be on merit, so that the best people get most responsibility and the pay to go with it. Rigorous forward-looking appraisal is vital too. But that is different from an annual appraisal focused on the past – and whether you performed well enough to deserve a bonus Yet in a review commissioned by the British government, Will Hutton recently advocated a more elaborate system of performance-related pay for senior civil servants. Under Mr Hutton’s system the best would get more, while those below par would lose pay. Yet for teamwork jobs, like those in a government department or a large business, there is little evidence that individually-based incentive pay works. Indeed, there is plenty of evidence against it

Big U.S. Firms Shift Hiring Abroad - U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy. The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That's a big switch from the 1990s, when they added jobs everywhere... [graph] The data ... underscore the vulnerability of the U.S. economy, particularly at a time when unemployment is high and wages aren't rising. Jobs at multinationals tend to pay above-average wages and, for decades, sustained the American middle class. While small, young companies are vital to U.S. economic growth, big multinationals remain a major force. A report by McKinsey Global Institute ... estimates that multinationals account for 23% of the nation's private-sector output and 48% of its exports of goods.

Foreign Firms Aren’t Hiring in U.S. The latest data from the Commerce Department’s Bureau of Economic Analysis on U.S.-based multinational companies focused on their hiring: more workers abroad and fewer in the U.S. during the 2000s.  A few readers asked for data we gathered from corporate 10-K forms for some of the individual companies that reveal how many of their workers are in the U.S. versus abroad. You can find it here in excel format:  In response to queries from readers, here are a few other tidbits from the Commerce Department release with more details to come in November:

  • –For U.S.-based multinationals, 61.5% of their sales, 67.3% of their work forces and 72.5% of their capital spending was in the U.S. in 2009.
  • –Employment in the U.S. by foreign-based multinationals accounted for about 4.7% of all private industry employment in 2009. They, too, cut their work forces in 2009 — by 500,000 to 5.2 million.
  • –In 2009, which was a bad year for the world economy, U.S. multinationals’ capital spending fell across the board.

Why US Multinationals Expand Abroad - Mark Thoma points us to an article by David Wessel, who points out that new data from the BEA indicates that US-based multinational corporations (MNCs) decreased employment in the US while increasing employment outside the US: Big U.S. Firms Shift Hiring Abroad U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy. I would like to sound a note of extreme caution when interpreting such data. It's easy to jump to the conclusion that this data indicates that MNCs are shifting jobs overseas, and that foreign employment growth is coming at the expense of jobs in the US. However, that is probably not what's going on here.  The vast majority of employment and sales by the foreign affiliates of US-based MNCs are serving the local market. When GE, or Microsoft, or Coca-Cola, or American Express expand their operations overseas, it is almost always with the primary goal of satisfying local demand, rather than replacing workers in the US.

McDonald's National Hiring Day: What does it mean for the economy's recovery? - McDonald's has named today, April 19, "national hiring day." As with everything McDonald's, it's all about scale. In one day, the chain hopes to add as many as 50,000 people to its payrolls; worldwide, it employs 1.7 million workers, runs 32,000 restaurants, and serves tens of millions of burgers every day. On the one hand, this is great news: 50,000 jobs! On the other hand, 50,000 McJobs?  Indeed, the McHiringSpree raises the question: Has the recession turned us into a nation of McWorkers? More precisely, what kind of jobs has the recovery ginned up?  The Bureau of Labor Statistics offers a host of month-by-month information on who is working where, for how much and for how long. The data show that a few industries are at or above their level of employment before the recession started. The federal workforce is slightly bigger, once you factor out job losses at the Postal Service and ignore Census hiring. Employment is also up in some niches, like computer systems design. And health care remains the United States' strongest growth industry, with tons of new jobs for workers like home health aides and physicians' office workers.

Immigrants and the wealth of nations - Whether they see immigration as a good thing or a scourge, Americans like to think of their country as an immigrant-friendly place, with borders that are among the most open in the world. But that’s not the case, according to a new comprehensive measure developed by the British Council and the Brussels-based Migration Policy Group. The Migration Integration Policy Index (MIPEX) rates the EU nations’ (plus Norway, Switzerland, Canada, and the U.S.—31 countries in all) efforts to integrate immigrants according to 148 policy indicators, which range from opportunities for education and political participation to levels of protection against discrimination, from prospects for reuniting with family to the likelihood of achieving permanent residence status and citizenship. For those keeping score, Sweden ranked first, Portugal second, and Canada third. The U.S. was ninth! The map below shows the scores for the 31 countries measured by the Index.

State Unemployment Rates little changed in March - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed in March. Thirty four states recorded unemployment rate decreases, seven states registered rate increases, and nine states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today. Nevada continued to register the highest unemployment rate among the states, 13.2 percent in March. The states with the next highest rates were California, 12.0 percent, Florida, 11.1 percent, and Rhode Island, 11.0 percent. The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession.The states are ranked by the highest current unemployment rate. The auto states - led by Michigan - seem to have seen the most improvement (blue area).  Two states are still at the recession maximum (no improvement): Idaho and Louisiana.

Depressed states: Unemployment rate near 20% for some groups -Recent reports of incremental employment gains should not overshadow the continuing depth of the jobs crisis in America—a crisis whose severity for some groups rivals the magnitude of the Great Depression. For example, unemployment among African Americans in Michigan and Hispanics in Rhode Island has exceeded 20% since 2009. In 17 other states, the African American unemployment rate was at least 15% for most or all of 2010, while at least 15% of Hispanics in Nevada, Connecticut, and California were unemployed in 2010. Whites in California, Michigan, Nevada, Oregon, and Rhode Island are also experiencing unemployment rates of 10% or higher. These findings highlight that America’s ongoing jobs crisis is unevenly felt. While all demographic groups are hurting, the pain of joblessness is more common among African Americans and Hispanics than whites. Read Issue Brief 299

NLRB: You Can't Move Away from Your Union - It's not that surprising to see a union complaining about a company that decided to expand operations in a Right-to-Work state, rather than its traditional base of operations, when talks with the union break down.  But as far as I know, it's pretty damn unusual to have the National Labor Relations Board say that this is illegal: So Boeing management settled on South Carolina, which, like the 21 other right-to-work states, has friendlier labor laws than Washington. As Boeing chief Jim McNerney noted on a conference call at the time, the company couldn't have "strikes happening every three to four years." This seems crazy.  Boeing does not seem to have claimed that it was trying to break the union; it said it was moving to seek a more amenable labor force.  As far as I know, that's not against the law, even if unions wish it were.  Companies have been moving south for decades to get a better tax and labor environment.  For the NLRB to declare that companies have no right to move would be tantamount to declaring that they are legally captive to whatever the local unions and governments care to dole out.  And to do so based on a chance remark at a conference call seems particularly insane.  Niklas Blanchard has more.

For union families, a loss of value beyond bank accounts - Judy and Jim Embree, an operating room nurse and paramedic and firefighter, were attending a rally at the state Capitol when they discovered that everything they thought to be good and right about their lives was, to an alarming number of people, completely wrong. The people who showed up that day in support of a plan, since adopted, to cut the power and benefits of public-sector unions said that people like them were the problem. That their “high wages” and “exorbitant pensions” were crippling cities and counties across Ohio. Some, even, said their jobs were unnecessary.  It had never occurred to the Embrees that firefighters and nurses could be unnecessary. They thought of themselves as linchpins of the community — and one of the biggest rewards of their jobs was knowing that the rest of the world thought so, too. 

The Local Government Budget Crisis - While the budget crisis at the state level appears to be easing (tax revenues are up, spending is steady), a problematic reality has been some states getting local governments dependent on state aid and now balancing their budgets by slashing that aid. From the New York Times: Ohio plans to slash aid to Columbus, Cleveland, Cincinnati and other cities and local governments by more than a half-billion dollars over the next two years under the budget proposed last week by its new Republican governor, John R. Kasich. Nebraska passed a law this month eliminating direct state aid to Omaha and other municipalities. The governors ofWisconsin and Michigan have called for sending less money to Milwaukee, Detroit and other local governments. And it is not only Republicans who are cutting aid to cities: Gov. Andrew M. Cuomo of New York, a Democrat, decided not to restore $302 million in aid to New York City that was cut last year, while Gov. Deval Patrick of Massachusetts, another Democrat, has called for cutting local aid to Boston and other cities by some $65 million.

States to Business: Give Our Cash Back - To the list of those dinged by states’ budgetary woes—from Illinois vendors to Wisconsin public employees—add YUSA Corp., an auto-parts supplier in the city of Washington Court House, Ohio. YUSA received a $35,000 development grant from the state of Ohio five years ago, pledging to expand a plant and employ 816 people. It’s only at 445. Recently, Ohio sent the firm a bill, demanding $15,915 back. This was one of nearly a dozen "clawback" orders signed in two months under the state's new Republican governor, John Kasich. There will be more, says his job-creation director, Mark Kvamme: "We need every single dollar we can get our hands on."

Monday Map: State Sales Tax Rates - Today's Monday Map shows state sales tax rates as of January 1st of this year. �This includes only the statewide rate. Many cities and towns impose a local rate on top of the statewide rate, which is not reflected in these numbers.

Louisiana lawmakers target $1.6 billion shortfall - It’s a brutal year to be a Louisiana lawmaker. For starters, they were beaten down by the politics of redistricting over the past few weeks and they’ll face voters later this fall to cap off the current election cycle.  As for the time in between, the Legislature’s regular session convenes in just one week, and the challenges are nothing short of historic.  A record $1.6 billion budget shortfall is looming for the fiscal year that begins July 1.Since it’s an odd-numbered year, lawmakers will be tasked with considering fiscal issues, like taxes and budget cuts.  Lawmakers have to answer to a conservative-leaning electorate in the fall, and Gov. Bobby Jindal is opposed to all forms of taxes.

Sewers, Swaps and Bachus - Once upon a time — back when too many people viewed derivatives as glittering innovations with magical powers to hedge against risk — Jefferson County was ordered by the Environmental Protection Agency2 to upgrade its sewer system. To finance the new sewers, it issued bonds totaling nearly $3.2 billion.  After the sewer system was completed, the county moved all that debt from fixed rates to variable rates3. It did so because some investment bankers at JPMorgan persuaded the county to purchase derivative contracts, in the form of interest rate swaps, that would supposedly allow it to avoid paying higher interest if rates went up. Magic indeed.   Today, the county is broke; according to The Birmingham News, it may run out of cash by July4. It is toying with a bankruptcy filing — which, if it happened, would be the largest municipal bankruptcy in history.

Austerity Chills the Ardor for Muni Debt - For many cities and states, the love affair with debt has cooled, as governments cut back on spending and as borrowing comes under political attack.  In Marquette, a small city on Michigan's Upper Peninsula, officials last month voted to nearly halve the amount of debt the city plans to issue in fiscal 2012 from the year ending June 30.  The wariness to take on more debt extends to the municipal-bond market's largest borrowers, such as California, which this year plans to issue a little more than half of the approximately $10 billion in long-term bonds it sold in 2010. "It has a lot less to do with the market, and more to do with trying to get back on firm fiscal ground," said Tom Dresslar, spokesman for the California Treasurer's Office.  The change in attitude raises the prospect that the drought in municipal-bond issuance—the first quarter was the slowest quarter in 11 years—isn't a temporary blip but a longer-lasting shift in municipal borrowing habits. State and local governments sold $47 billion of debt in the first quarter, down from $104 billion a year earlier, according to Thomson Reuters.

Maryland Cities, Counties See Millions in Speed Camera Revenue - Cities and counties across Maryland are reaping the benefits of revenue from speed cameras, with the money going toward video cameras in police cars, longer police station operating hours and matching funds for federal public safety grants, among other projects.Montgomery County, for example, which was the first county in the state to install speed cameras in select residential streets and school zones in 2007, estimated that it would receive more than $13 million in net revenue from fines for fiscal year 2010. That money would be divided between the fire department, the police department and pedestrian safety projects. The county estimated it would receive about $30 million total, with the balance going to the speed camera vendor.

NJ's 3rd-largest city lays off 125 police officers - Newly unemployed police officers marched outside the Public Safety Complex in Paterson on Monday, protesting the city's decision to layoffs of 125 officers -- or about a quarter of the force in New Jersey's third largest city. The officers and their union representatives wore T-shirts bearing Monday's date -- the effective date of the layoffs -- and carried signs with the message, "Less cops (equals) more crime." They said the layoffs could have been avoided. The layoffs come as the city eliminates 392 municipal positions of a total work force of nearly 2,000 to address a $70 million budget deficit.

Riding Along With The Cops In Murdertown, USA - A sign taped to the entrance of police headquarters says it all: “Closed weekends and holidays.” Every weekday, the doors are locked at dusk.  It’s not that the cops here are scared; it’s just that they’re outmanned, outgunned and flat broke.  Flint is the birthplace of General Motors and the home of the U.A.W.’s first big strike. In case you didn’t know this, the words “Vehicle City” are spelled out on the archway spanning the Flint River.  But the name is a lie. Flint isn’t Vehicle City anymore. The Buick City complex is gone. The spark-plug plant is gone. Fisher Body is gone.  What Flint is now is one of America’s murder capitals. Last year in Flint, population 102,000, there were 66 documented murders. The murder rate here is worse than those in Newark and St. Louis and New Orleans. It’s even worse than Baghdad’s.

ME: BROKEFIX live blog on the Maine Labor Department mural, and guerilla projection - BROKEFIX, the anonymous guerrilla projectionists, will do a live blog at Corrente, April 19 at 9:30PM EST, so please return then! The blog will be fashionably late (at least for the East Coast) so they can get back from Bangor and relex after a legislative hearing on the mural that same day. We'll be interested in that hearing, and also in the DIY tech! Here's the back story: Republican Maine Governor Paul LePage has admitted regret over ordering his Department of Labor to remove a mural depicting the state’s labor history from its lobby. ....Inadvertently, says the Post, the move also made the mural larger than life — literally. Late at night on April 2, a group of three artists calling themselves “BrokeFix” visited Maine’s capitol building in Augusta. Running a projector out of their car, they projected a large image of the mural onto the capitol’s edifice for roughly two hours. [#8] Awesome. Son et lumière not just at Versailles, but in the great state of Maine (and soon, we hope, everywhere!) Here's the video (again):

Oklahoma Senate approves collective bargaining repeal - The Oklahoma Senate voted today to repeal a state law that grants collective bargaining rights to city employees in Oklahoma's largest cities. House Bill 1593 passed 29-19 with entirely Republican support and now heads to Republican Gov. Mary Fallin. The bill would repeal a 2004 law that requires cities with populations of more than 35,000 to grant collective bargaining rights to nonuniformed city workers.The repeal would most directly affect local chapters of the American Federation of State, County and Municipal Employees, which in Oklahoma consist mostly of city road and utility workers. Sen. Cliff Aldridge, R-Midwest City, said the bill is good policy because it lets local officials decide whether to negotiate with labor unions.

UPDATED: And so it begins. Emergency Financial Mgr. fires entire government of Benton Harbor, MI. - As you probably know, Michigan Governor Rick Snyder recently signed legislation passed by the Republican-dominated House and Senate that gives State-appointed Emergency Financial Managers (EFMs) historically broad and sweeping powers. These new powers allow the EFM to cancel or modify contracts (including with unions) and even to fire the municipality's government.  Today, for the first time, an EFM did just that. According to a press release from the Michigan AFL-CIO, Joseph L. Harris, EFM for Benton Harbor, Michigan issued "an order prohibiting all action by all city boards, commissions, authorities and other entities, except as authorized by the emergency manager." Here is the press release in total:

Muni Bankruptcy Threat Makes Michigan Train Financial SWAT Teams -- Michigan is giving hundreds of financial professionals and public employees a crash course in advising troubled municipalities, building an army of emergency managers that may become a model for other U.S. states. As many as 400 accountants, lawyers, school employees and city workers will start classes in Lansing today on topics including “Dealing with the Unionized Workforce,” navigating municipal bankruptcy and negotiating contracts for sewer, water and other utilities. It’s a “rare” example of preparing people in advance for potential fiscal difficulties, said Michael Imber, a principal in Grant Thornton LLP’s corporate advisory and restructuring services group. “Management is usually in denial and waits until it’s too late before they reach out, and here was a state saying, ‘We need help,’” Imber said. He is on the international executive board of the Turnaround Management Association and was among about 50 initial graduates of Michigan’s February course.

Gov. Scott Walker Reportedly Planning Financial Martial Law In Wisconsin - Reports are surfacing that Scott Walker is now preparing his next assault on the democratic political process in the State of Wisconsin. Following the lead of Michigan GOP Governor Rick Snyder, Walker is said to be preparing a plan that would allow him to force local governments to submit to a financial stress test with an eye towards permitting the governor to take over municipalities that fail to meet with Walker’s approval. According to the reports, should a locality’s financial position come up short, the Walker legislation would empower the governor to insert a financial manager of his choosing into local government with the ability to cancel union contracts, push aside duly elected local government officials and school board members and take control of Wisconsin cities and towns whenever he sees fit to do so. Such a law would additionally give Walker unchallenged power to end municipal services of which he disapproves, including safety net assistance to those in need..

After Pledging to Not Raise Taxes, Walker Proposes Hiking Taxes and Fees on the Poor and Students - One of the most important ideological commitments of the modern conservative movement is an opposition to tax increases. It is with this ideology that then-Wisconsin gubernatorial candidate Scott Walker signed Americans For Tax Reforms’ “Taxpayer Protection Pledge,” a vow not to raise taxes on the people of his state. Yet in his newly proposed budget, now-governor Walker appears to have already broken this pledge. While the budget would lower taxes overall — it includes $83.3 million in tax cuts “primarily for businesses and investors” — it would make up for lost revenue by eliminating tax credits and exemptions that primarily benefit the poor and even some in the middle class.  Wisconsin’s Legislative Fiscal Bureau — the state’s equivalent of the Congressional Budget Office — finds that this would amount to a $49.9 million tax increase on people who receive these credits over the next two years:

Clayton Dips Into Teacher Paychecks For Budget Cuts --  Clayton County teachers and physical education programs will take a hit because of budget cuts. Teachers will end up returning some money they were already paid.  Channel 2’s Linda Stouffer was at the heated Monday night meeting where the school board approved five teacher furlough days. Public outcry saved elementary school counseling, music and art programs, but PE programs will be cut in half. Superintendent Edmond Heatley said the board needs to trim about $50 million in the next two years to make up for a shortfall. “Each school would be allocated half a PE teacher, or more succinctly, one PE teacher per two elementary schools,” Heatley said. The decision didn’t go over well with many teachers. “Children need us full time, art and music or PE,” said PE teacher Marc Fordham. Fordham is worried about more than the children he coaches.  “I have kids of my own, twin 7-year-olds. I have to tell them I have to find another job,”

Our Public Schools Are Churning Out Drones for the Corporate State -A nation that destroys its systems of education, degrades its public information, guts its public libraries and turns its airwaves into vehicles for cheap, mindless amusement becomes deaf, dumb and blind. It prizes test scores above critical thinking and literacy. It celebrates rote vocational training and the singular, amoral skill of making money. It churns out stunted human products, lacking the capacity and vocabulary to challenge the assumptions and structures of the corporate state. It funnels them into a caste system of drones and systems managers. It transforms a democratic state into a feudal system of corporate masters and serfs. Teachers, their unions under attack, are becoming as replaceable as minimum-wage employees at Burger King. We spurn real teachers--those with the capacity to inspire children to think, those who help the young discover their gifts and potential--and replace them with instructors who teach to narrow, standardized tests. These instructors obey. They teach children to obey. And that is the point. The No Child Left Behind program, modeled on the "Texas Miracle," is a fraud. It worked no better than our deregulated financial system. But when you shut out debate these dead ideas are self-perpetuating.

Obama to Pre-Schoolers: Sorry I Had to Fire Your Teacher, But Now I Can Buy Almost 1/50th of a Tomahawk Missile - I’m truly amazed that President Obama is willing to make a show of pretending to care about the issue of deficit reduction while literally, at the same time, increasing spending on a war kinetic military action with no clear end in sight in a country that even his Defense Secretary admits isn’t a vital interest for the United States. We found out yesterday that Obama plans on sending $25 million in aid to the Libyan rebels, and we find out today the President has approved the use of American military drones in the conflict. A few million here, a few million there, and pretty soon this mission creeps into us spending some real money. What I want is that, before Obama signed this latest order to waste even more money on his war in Libya, he would first be forced to apologize to room full of pre-schoolers: “Sorry kids that I agreed to cut your Head Start, but I really need to use the money to buy more bombs to drop on Libya. You should at least be happy to know that for the amount we saved by firing your teacher we can buy almost 1/50th of one Tomahawk missile. As you can see the serious person grown-up job budgeting is all about priorities”

Can business be taught? - THERE was a time when higher education was only available to an elite few. These students studied the ideas of great thinkers, literature and history. They entered the labour force with few practical skills, but had strong analytical and communication skills which were highly valued. Now, after a long trend of globalisation, the premium on education has induced ever more people to go to university. According to the Census taken in 1940, 10% of adult Americans had at least some post-secondary education. By 1975 this figure was about 25% and by 2010 it had risen to 55%. Does it still make sense for many of these students, who aren't fit for or interested in engineering or hard sciences, to receive a university education? And if they're going to get one, should they be spending valuable time learning about business? According to professors quoted in a recent New York Times article, the answer is yes. They note that more students than ever are choosing to study “business”. Their motivation is not a quest for divine truth. Rather, the article alleges, they take on the massive expense of higher education with the sole, depraved goal of landing a high-paying job:

Idaho's Public Universities Seek Between 5% to 8.4% In Student Tuition And Fee Increases - Idaho's public universities aim to charge students between 5 percent to 8.4 percent more in tuition and fees next year.The state Board of Education is expected to consider the proposals at a meeting Thursday.Boise State University is seeking the lowest increase at 5 percent, while the University of Idaho has recommended the largest increase at 8.4 percent. Idaho State University and Lewis-Clark State College are each seeking a 7 percent tuition hike.The costs would increase $266 to $454 per year for full-time undergraduate students, under the proposals. Board executive director Mike Rush warned last month that the schools would have to lean further on student tuition and fees. That's because state support for higher education is poised to further decline under a budget for next year.

We’re in a Bubble and It’s Not the Internet. It’s Higher Education. - “A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.” Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated. Making matters worse was a 2005 President George W. Bush decree that student loan debt is the one thing you can’t wriggle away from by declaring personal bankruptcy, says Thiel. “It’s actually worse than a bad mortgage,” he says. “You have to get rid of the future you wanted to pay off all the debt from the fancy school that was supposed to give you that future.”

Idea of the day: National universities - Matt Yglesias has a great post about America's human capital stagnation[T]hroughout our history, America has traditionally been the best educated country in the world. That goes all the way back to New England’s settlement by Bible-obsessed Puritans who through up schools everywhere so kids could learn to read the word of God. It continues through Justin Smith Morrill’s Land Grant Colleges Act, through an emphasis on being an attractive destination for high-skill workers, through to the GI Bill, and public school desegregation in the twenty years after 1955. But we’ve really slowed down. Our fancy colleges are getting more expensive rather than getting bigger or better. The downscale for-profit college sector is dynamic and innovative, but it’s basically a scam where barely anyone graduates. Yglesias is, of course, completely right. In fact, human capital stagnation seems to me a much likelier culprit for a "Great Stagnation" than the dubious hypothesis of a slowdown in technological innovation. People can't spend their whole life in school, so education really is "low-hanging fruit". But that doesn't mean there isn't fruit left to be picked! Check out this graph of U.S. college enrollment rates:

On Public Funding of Colleges and Towards a General Theory of Public Options. - Via Aaron Bady, here is “The Struggle for Public Education in California” (in the South Atlantic Quarterly, Spring 2011).  If we want to wonder why public education is becoming expensive it is in part because we aren’t supporting it as much as we were in the past. I need to file the second paragraph below as a great observation on some of the consequences of “pity-charity liberalism.” California, one of the world’s wealthiest places, has seen one of the world’s most astonishing declines in college achievement. The state’s continuation rate, the proportion of students starting college who complete it, fell from 66 percentto 44 percent in just eight years (1996–2004). California’s rank among states in investment in higher education declined during the same period,from fifth to forty-seventh,according to Tom Mortenson, a higher education policy analyst.The state has cut its investment in higher education by close to 50 percent since 1980, forcing tuition increases like the 60 percent rise at the University of California from 2004 to 2008, which was followed by a 32 percent rise between 2009 and 2011. Meanwhile, half of California’s students (kindergarten through grade twelve) are now eligible for thefederal school lunch program, up from one-third in 1989. As Mortenson notes, these students will have no personal resources to cover the costs ofattending college, which at UC is nearly $30,000 per year.

Texas Teacher Pension Needs 21% Return to Keep 80% Funded Ratio -The Teacher Retirement System of Texas needs an annual return of 21 percent in the year ending Aug. 31 to maintain an 80 percent funded ratio, the level actuaries consider adequate to cover liabilities, said its deputy director. “We’d have to have remarkable investment returns for the rest of the year to reach 80 percent,” The fund’s investment return was 14.7 percent in 2010, the best among large public pension funds, Chief Investment Officer Britt Harris said at an April 7 board meeting. The fund had about $109 billion on April 1, up from $95.7 billion in September. Even with the gains, the pension’s funded ratio -- the portion of promised benefits covered by current assets -- dropped to 81.3 percent as of Feb. 28 from 82.9 percent on Aug. 31, 2010, because of trading losses in 2008 and 2009 included through a process called smoothing, Executive Director Ronnie Jung said April 7.

Public Retiree Numbers Surge as States Reduce Benefits to Shrink Deficits - Teri Essex retired a year earlier than planned when she was offered $56,000 to leave her elementary-school teaching job in Elk Grove, California. Instead of accepting a salary cut, larger classes and less money for supplies from spending reductions made last year by California lawmakers closing a $19 billion budget deficit, Essex, 60, took the money over nine years to retire in 2010 after 21 years of teaching.  “The financial buyout was a no-brainer,” said Essex, whose school was 15 miles (24 kilometers) outside Sacramento. Even though she’ll give up about $300 monthly by quitting early, she said, “Once you start thinking about retiring, it was like, ‘Oh yeah, I want to do this.’”  California, Florida and Texas are seeing more retirements as rising benefit costs, pay cuts and looming furloughs prompt workers to leave. Inducements to quit early also boosted departures in New York as U.S. states tackled budget gaps totaling more than $540 billion since fiscal 2009, according to the Center on Budget and Policy Priorities. In New Jersey, Wisconsin and Ohio, added motivation came from attacks on unions over costs that strained budgets

Middle Ground in the Public Pension Fight? - Pension experts at the Center for State and Local Government Excellence say there’s a middle ground between protecting traditional defined-benefit pensions for public-sector employees and eliminating them in favor of 401(k)-style defined-contribution plans that now dominate the private sector. Instead of covering all workers in the same manner, the lowest-paid public employees would continue to receive pension-style benefits whereas higher-paid workers would take more of the financial risk through 401(k)-style plans similar to those offered in the private sector, according to a new proposal from the Center, a non-partisan, non-profit research organization whose mission is to promote “excellence in local and state governments to attract and retain talented public servants.” The Center for State and Local Government Excellence’s option is to create a “stacked” plan so taxpayers aren’t on the hook for the highest-earning government employees. Earnings below $50,000 would continue to be covered by the defined benefit plan, whereas any income above that level would fall under a defined contribution plan.

Social Insecurity - Chicken Little is everywhere these days, warning us that the Social Security sky is falling. Republicans like to call SS an “entitlement program” that’s contributing to the federal deficit. It isn’t. It’s a self-funded annuity program. You put money in over your working lifetime and you’re guaranteed a monthly payment as long as you live.  We’re now being told that those payments are unsustainable. How can that be? For decades, the Social Security Trust Fund ran huge surpluses. In 1940 there were 42 workers for every retiree. In 1950, there were 16. There was way more money going in than being paid out. Think of the surpluses as cookies. The greedy children in Congress couldn’t stand all those cookies just sitting there in the cookie jar, so they ate the cookies and left IOUs in their place. Now, the cookies are all gone and Congress has to pay back the IOUs. That is the only way that Social Security contributes to the deficit.

Sixteen Men on a Dead Man's Chest...Social Security and the Facts of Life - Sen. Mark Warner (D-Va.) said on Sunday the "Gang of Six" senators is "very close" to a deal on deficit reduction, suggesting the plan would impact Social Security that most Democrats have said is off limits.  Warner said, "Part of this is just math: 16 workers for every one retiree 50 years ago, three workers for every retiree now." What we have learned in ten years of watching the Social Security "debate" is that when someone says "it's just math," he is lying. Unless, of course, a United States Senator simply doesn't know what he is talking about. The "16 workers for every one retiree" is one of those true facts that doesn't mean anything... and is therefore used by liars to mean what they want it to mean. The Senator does not read Angry Bear, but in the hope that one of his friends will try to explain it to him, I offer the following simplified model.

It’s GAME OVER For the US - For the first time since the Great Depression, the US is now officially paying out more in benefits than it takes in via tax receipts. If the US were a company, it’d be spending more in salaries than it makes in sales. Aside from being unprofitable, it’s also got a MASSIVE debt load. And it’s current policy of paying out more than it makes only increases this debt load… which begs the question… who’s going to pay the interest payments on the debt? Now, about those payments… More than half of all Americans (59%) receive a Government payout in one form or another. This is not a sliver of the population… it is endemic to the system. So those who complain endlessly about Government spending need to consider they as well as half of everyone they know, likely gets some kind of assistance in the form of social security, Medicare, food stamps or what have you.  Here’s another zinger: Government payouts account for 79% of household growth since 2007. In other words, the only thing that has kept the US consumer afloat in the last four years is payouts from Uncle Sam.

A small problem (health insurance) - FRB of Minneapolis - Chiefly because of high premiums for small groups, small firms are much less likely to sponsor employee coverage than large firms, according to surveys by the federal Agency for Healthcare Research and Quality (AHRQ; see Chart 1). In North Dakota, 96 percent of companies with 50 or more employees sponsored health coverage in 2009. In contrast, just 38 percent of firms below that threshold offered their workers some sort of health plan. In Montana, it was 28 percent. Consequently, most employees of small businesses in Montana must buy their own insurance in the individual market, or go uncovered.

What Health Insurance Does Cover, and Doesn't-  As required by last year’s health reform legislation, the Labor Department has put together a report on employer-sponsored health insurance coverage that shows what benefits are typically covered by these plans. The results, in one chart: A service is counted as “covered” whether or not 100 percent of the service is paid for by the insurance plan. The report listed a service as “covered” if the health plan documents specifically mentioned coverage of it (as opposed to not mentioning it, or specifically saying that the service was excluded). As you can see, having private insurance doesn’t guarantee that the life-saving service you need — like kidney dialysis, or an organ transplant — will be covered at all by your plan. And even some services that would be considered relatively basic by many patients, like regular gynecological exams, are excluded.  It’s important to keep this in mind in discussions about giving more Americans access to “health insurance.”

Health Insurance Demand and the Uninsured - A common thread on how to bring down the nation’s heath tab is that the bigger stake we have in medical care costs – the more we have to pay for premiums and copays – the less likely we are to undergo expensive and unnecessary treatments. But how much skin people are willing to put in the game depends on how much skin they have. Research on the price elasticity of demand for health insurance – how much demand changes in response to price changes – has focused on people’s decision to enroll in employee-sponsored health insurance. But using that research as a basis for policies aimed at the 50 million Americans who are uninsured is problematic. Among other differences, the uninsured tend to be significantly poorer than the insured, point out Princeton economists. So the economists requested that the Gallup Organization (where Mr. Krueger is a consultant) include questions in an ongoing health survey like:If you could get a health insurance policy for yourself that is as good as the one that members of Congress have, given your current financial situation, would you buy it for $4,000 a year, which works out to $333 per month?

Patients Are Not Consumers - Paul Krugman - I keep encountering discussions of health economics in which patients are referred to as “consumers”, after which the usual mantra of freedom of choice is invoked on behalf of voucherizing Medicare, or whatever.We used to know better than this.Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.That’s why we have medical ethics. That’s why doctors have traditionally both been viewed as something special and been expected to behave according to higher standards than the average professional. The idea that all this can be reduced to money — that doctors are just people selling services to consumers of health care — is, well, sickening.

Patients Aren't Consumers, But They SHOULD Be - Paul Krugman argues in yesterday's NY Times that Patients Are Not Consumers.  Krugman is correct that patients are not consumers, but for a completely different reason that Krugman misses entirely: Almost 90% of health care costs are paid with "other people's money" (insurance companies, government and employers, see chart above, data here), and only about 11% is paid "out of pocket" by patients.  So patients are no longer the "consumers" of health care, and they haven't been for a long time, because the "consumer" paying almost the entire cost of medical care is a third party.  And the trends projected in the chart above indicate that it will get even worse in the future. When we think about soaring health care costs in the United States, isn't one of the main reasons precisely because patients have NOT been treated as consumers spending their own money?  In that case, I think Krugman has it backwards.  If the goal is to control health care costs, that will never happen until patients are treated like consumers

25 Shocking Facts That Prove That The Entire U.S. Health Care Industry Has Become One Giant Money Making Scam - What is the appropriate word to use when you find out that the top executive at the third largest health insurance company in America raked in 68.7 million dollars in 2010?  How is one supposed to respond when one learns that more than two dozen pharmaceutical companies make over a billion dollars in profits each year?  Is it okay to get angry when you discover that over 90 percent of all hospital bills contain "gross overcharges"?  Once upon a time, going into the medical profession was seen as a "noble" thing to do.  But now the health care industry in the United States has become one giant money making scam and it is completely dominated by health insurance companies, pharmaceutical corporations, lawyers and corporate fatcats.  In America today, just one trip to the hospital can cost you tens of thousands of dollars even if you do not stay for a single night.  The sad thing is that the vast majority of the money that you pay out for medical care does not even go to your doctor.  In fact, large numbers of doctors across the United States are going broke.  Rather, it is the "system" that is soaking up almost all of the profits.  We have a health care industry in the United States that is fundamentally broken and it needs to be rebuilt from the ground up.  Obamacare was largely written by representatives from the health insurance industry and the pharmaceutical industry.  Once it was signed into law the stocks of most health insurance companies went way up.

Medical Tourism, separating facts from fiction - One of the greatest myths that I hear on a somewhat regular basis, centers around the belief that the US must have one of the greatest health systems in the world, because everyone comes here for their care. Well, let’s examine that shall we? As with many things, reality is a little different from the mythology.  According to the Deloitte Center for Health Solutions and, there will be roughly 561,000 inbound medical tourists to the United States by 2017….Conversely, 750,000 Americans traveled to foreign countries in 2007, and this grew to between 1.1 and 1.3 million outbound tourists in 2008. Spending on healthcare in foreign countries was estimated to be 20 billion dollars in 2008.  Estimates for growth demonstrate a consistent 35% growth in outbound medical tourism annually. Projections indicate that roughly 1.6-2.5 million Americans will travel abroad in 2012, and spending could reach 100 billion dollars. That’s right, 100 billion US dollars being spent in foreign countries for healthcare such as elective surgeries, complicated dental surgery, plastic surgery, and even coronary bypass surgery.

Someone is Getting Health Spending Under Control - The sustainability of provincial government health spending is a big issue and drug spending in particular has garnered a fair amount of attention.  Whereas in 1975, drug spending only made up about 2 percent of public sector health spending in Canada, today it makes up nearly 10 percent and indeed has been one of the fastest growing health expenditure categories.  The common perception is that government drug spending is on an inexorable upward treadmill driven by technological extension and an aging population.  Yet, the accompanying figure yields some surprises when provincial comparisons are made.  Real per capita provincial government drug expenditures in 1997 dollars from the Canadian Institute for Health Information National Health Expenditure Database are plotted down below for the period 1995 to 2010. 

Ohio County Losing Its Young to Painkillers’ Grip - PORTSMOUTH — This industrial town was once known for its shoes and its steel. But after decades of decline it has made a name for itself for a different reason: it is home to some of the highest rates of prescription drug overdoses in the state, and growing numbers of younger victims.  Their pictures hang in the front window of an empty department store, a makeshift memorial to more than two dozen lives. The youngest was still in high school. Nearly 1 in 10 babies born last year in this Appalachian county tested positive for drugs. In January, police caught several junior high school students, including a seventh grader, with painkillers. Stepping Stone House, a residential rehabilitation clinic for women, takes patients as young as 18.  In Ohio, fatal overdoses more than quadrupled in the last decade, and by 2007 had surpassed car crashes as the leading cause of accidental death, according to the Department of Health. The problem is so severe that Gov. John R. Kasich2 announced $36 million in new spending on it this month, an unusual step in this era of budget austerity.

Pesticide Exposure Leads to Lower IQs in Children - A trio of studies on the effects of organophosphate pesticides on mental development showed one consistent finding: exposure increases the chance of lower IQs and impaired mental development. These bug killers, which can cross the human placenta, work by inhibiting brain-signaling compounds. Although the pesticides’ residential use was phased out in 2000, spraying on farm fields remains legal. The three new studies began in the late 1990s and followed children through age 7. Pesticide exposures stem from farm work in more than 300 low-income Mexican-American families in California, researchers from the University of California, Berkeley and their colleagues report. In two comparably sized New York City populations, exposures likely trace to bug spraying of homes or eating treated produce. Findings from all three studies appear online April 21 in Environmental Health Perspectives. “There was an amazing degree of consistency in the findings across all three studies,” And that’s concerning, he says, because a drop of seven IQ points “is a big deal. In fact, half of seven IQ points would be a big deal, especially when you see this across a population.”

Pesticide exposure in the womb linked to lower IQ in children - Mothers-to-be who eat foods tainted by pesticides could be unwittingly stunting the intelligence of their unborn children, research suggests. The warning follows three separate studies part-funded by the US government and linking exposure to insect ides in the womb to lower IQ on starting school. In the most striking of the studies, every ten-fold increase in the chemicals detected during a woman’s pregnancy corresponded with a 5.5 point drop in her child’s IQ score at the age of seven. ‘That difference could mean, on average, more kids being shifted into the lower end of the spectrum of learning and more kids needing special services in school.’ The professor started by testing samples of urine given by pregnant women for evidence that common pesticides called organophosphates had been in their systems. She then keep track of the women and had their children sit intelligence tests when they reached the age of seven. This flagged up the drop in IQ, as well as lower scores in tests of memory, reasoning and other skills. The link held even when other factors such as socio-economic class and education were taken into account.

Nationwide Study Finds U.S. Meat And Poultry Is Widely Contaminated - Drug-resistant strains of Staphylococcus aureus, a bacteria linked to a wide range of human diseases, are present in meat and poultry from U.S. grocery stores at unexpectedly high rates, according to a nationwide study by the Translational Genomics Research Institute (TGen). Nearly half of the meat and poultry samples — 47 percent — were contaminated with S. aureus, and more than half of those bacteria — 52 percent — were resistant to at least three classes of antibiotics, according to the study published today in the journal Clinical Infectious Diseases. This is the first national assessment of antibiotic resistant S. aureus in the U.S. food supply. And, DNA testing suggests that the food animals themselves were the major source of contamination. Although Staph should be killed with proper cooking, it may still pose a risk to consumers through improper food handling and cross-contamination in the kitchen.

Oil Advancing 23% Hurting Unilever as Stockpiles Decline to 1974 Low -  At a time when consumers are focused on food costs that are within about 3 percent of a record, stockpiles of edible oils needed to make everything from noodles to fish sticks are dropping to a three-decade low. The combined stocks of nine oils will plunge 25 percent to 9.39 million metric tons this year, or about 23 days of demand, the fewest since 1974, the U.S. Department of Agriculture estimates. Palm oil prices will climb as much as 23 percent to 4,000 ringgit ($1,324) a ton by Dec. 31, based on the median in a Bloomberg survey of 11 analysts and traders. As the global population expanded 85 percent in the past four decades, demand for edible oils rose almost ninefold. While that’s raising costs for Unilever, the second-largest consumer goods company, it will also help Sime Darby Bhd., the biggest publicly traded palm-oil producer, report a fourfold gain in earnings this year, analysts’ estimates compiled by Bloomberg show. The forecast price rally, which may quicken should flooding return to plantations, will stoke inflation that caused central banks from Brazil to China to raise interest rates. “The world cannot afford any crop problem this year, anywhere,”

International scientists warn of growing threat of wheat rust epidemics worldwide - Researchers meeting at a scientific conference in Aleppo this week reported that aggressive new strains of wheat rust diseases – called stem rust and stripe rust – have decimated up to 40% of farmers' wheat fields in recent harvests. Areas affected are North Africa, the Middle East, Central Asia and the Caucuses, including Syria, Egypt, Yemen, Turkey, Iran, Uzbekistan, Morocco, Ethiopia, and Kenya. “These epidemics increase the price of food and pose a real threat to rural livelihoods and regional food security,” said Mahmoud Solh, Director General of the International Center for Agricultural Research in the Dry Areas (ICARDA).In most of the countries in Africa, the Middle East, and Central Asia and the Caucuses, where wheat can contribute more than 40% of people's food calories and 20% of the protein, the epidemics cause economic hardship for farmers and their families.

Commodity Price Inflation—Becker’s focus is the impact of food price inflation on the poor, and I have no disagreement with his analysis. I want to discuss commodity price inflation in general, and its political consequences, but I want to begin my discussion with Becker’s point about the effect on food policy of the greater political clout of urban than of rural populations.  The concentration of population in a city, especially in a nation’s capital, makes urban residents a potential threat to political stability. It appears that rapidly rising food prices have been a major factor in the recent and continuing unrest in the Arab countries. As Becker emphasizes, food prices are a big part of the budget of families in poor countries, even of urban residents, with their higher incomes. During the Egyptian crisis Mubarak promised higher subsidies in an (unsuccessful) effort to quell unrest. Other governments in what used to be the Third World will doubtless take the hint, and increase food subsidies particularly for city people, who are far more likely to bring down a regime than rural people; and so the inefficiencies and hardships that Becker points to as consequences of economically unsound food policies are likely to become even greater.

China Crops in Shortest Supply as Vanishing Farms Spur Rising Food Futures - The factories sprawling from Jinan city, 350 kilometers (220 miles) south of Beijing, put Zhao on the front line of a clash between a policy of food self-sufficiency and industrial growth that made China the world’s second-biggest economy. Industrialization is winning, signaling prices for crops like wheat and corn will rise as China is increasingly unable to feed itself and vies for supplies on global markets.  “This year, maybe next, they’ll develop my field,” Zhao, 63, explains as he stands beneath a China Mobile Ltd. cell-phone tower on the edge of the land he’s tended all his life. The local government will buy his land, paying compensation through an annual allowance of 1,800 yuan ($276) per mu, which amounts to about 2,700 yuan for each person in the village.  China’s farmland shrank by 8.33 million hectares (20.6 million acres) in the past 12 years, Premier Wen Jiabao’s top agriculture adviser Chen Xiwen told reporters March 24. Land under cultivation has already fallen almost to the government’s 120 million hectare limit after being consumed by apartments, factories, desertification and a forestation campaign. Drought has also hit the country’s main wheat-growing region.

How to (and not to) Help Poor Families in Developing Countries Cope with Rising Food Prices - Higher prices of foods mainly hurt the poor since poor countries and poorer families within a given country spend a much larger fraction of their incomes on foods than do rich countries, and then richer families within a country. Direct income subsidies are probably the best way to reduce the suffering by poor families due to big increases in food prices that take a sizable share of their total spending. If families below a specified poverty income level received an income supplement, then this level should be indexed to the cost of living by poor families. Especially in poorer nations this means indexing definitions of poverty to the cost of food. An income subsidy approach has the advantage of allowing prices of foods and other goods to be determined by the forces of supply and demand. As a result, it encourages famers to grow more food when food prices rise, and also encourages poor (and other) consumers to reallocate their spending away from foods that rise most in price, and toward other foods and consumer goods.

Ethanol pumping up food prices - Get ready for higher food prices, which appear to be just around the corner for U.S. consumers and potentially a crippling burden for the world's poor. A combination of natural calamities and congressional mandates has come together to drive world food prices to levels that make some governments in developing nations nervous, because higher costs can mean political instability. The toll on American grocery carts thus far is low, but analysts say price increases are coming. The immediate causes of the rise are clear: bad harvests due to drought in Russia, China and Argentina and floods in Australia, among other things. But a longer-term cause may come as a surprise:— 24% of the U.S. corn crop is now mandated to go to ethanol, taking slack out of the world food market and making price shocks more likely, agricultural economists say.

Poultry Industry Unloads on Ethanol and GIPSA Rule at House Ag Hearing - Poultry interests say escalating feed prices are costing the industry billions of dollars and have led to the lowest U.S. per capita meat supply since the 1980s. And they blame it all on federal ethanol policy. Paul Hill, a turkey grower and chairman of West Liberty Foods in Iowa, told a House Ag Subcommittee increased corn prices cost the turkey industry more than a billion dollars in 2007 and 2008. "And the current situation is almost as bad,” Hill said. “We must quit pretending that ethanol isn’t hurting farmers, ranchers and consumers. Ethanol is dividing rural America. The corn farmer in me likes the prices, but the turkey farmer in me sees the real damage." The chicken sector’s annual feed bill has nearly doubled since 2006 to almost 13-billion dollars. "It is time to seriously consider a safety valve to adjust the renewable fuels standards when there is a shortfall in corn supplies such as the current situation.

Southern Restaurateurs Reeling Over Higher Catfish Prices…The American farm-raised catfish is proving an elusive catch for Southern restaurant owners who draw big crowds with heaping platters of fried fish and hush puppies. Rising grain prices and cheaper imports have forced many domestic catfish farmers out of business, creating a shortage of American fish that has pushed prices up. That leaves owners of restaurants grappling with whether to raise prices or risk the ire of their customers with less expensive substitutes, like Asian catfish varieties known as "swai" or "basa."The predicament stems in part from what U.S. farm-raised catfish themselves eat: pellets made of soybeans, corn and wheat. The prices of those ingredients have jumped, causing the price of catfish feed to double over the past four years. Many farmers—caught between rising costs and tight credit that makes it tougher for them to borrow—have been leaving the business. There were 9% fewer American catfish operators on Jan. 1 than there were a year earlier, according to the U.S. Department of Agriculture.

Farmers not to blame for food prices - Farmers and ethanol producers have braced for what they expect could be widespread criticism as corn prices are rising rapidly and other food costs are following. A similar increase five years ago generated a storm of criticism, with many in the food industry blaming the ethanol industry for buying up corn that could be used for food and faulting farmers for capitalizing on the higher prices. Many farmers and ethanol producers worried then that the complaints would force a change in agriculture and energy policies and fewer subsidies for their industries, but prices came down and that didn’t happen. Now, they’re concerned again as corn prices rose even higher last week following an announcement that U.S. farmers are planting the second largest corn crop since 1944, but it won’t be enough to meet growing worldwide demand. Corn has traded at more than $7 a bushel this month, more than double last summer’s $3.50, and many traders say it could pass the record $7.65 set in 2008.

Population growth must stop, says Sir David Attenborough - Sir David Attenborough has warned that population growth must be stopped in order to offer a ‘decent life’ for all.The wildlife broadcaster said people were shying away from accepting that the world’s resources cannot sustain current levels of population growth.‘There cannot be more people on this Earth than can be fed,’ he writes in the New Statesman.‘The sooner we stabilise our numbers, the sooner we stop running up the down escalator – and we have some chance of reaching the top; that is to say, a decent life for all.’ Sir David, 84, said the global population is over six billion and will hit nine billion in 30 years, but ‘there seems to be some bizarre taboo around the subject’.He warned of a ‘perfect storm of population growth, climate change and peak oil production’, leading to ‘insecurity in the supply of food, water and energy’.‘We now realise that the disasters that continue increasingly to afflict the natural world have one element that connects them all – the unprecedented increase in the number of human beings on the planet,' he added."

Hell: “Unprecedented drought” drives “never-before-seen wildfire situation in Texas” - High Water: Aussie inland tsunami labelled 1-in-370 year event - ClimateProgress recently wrote about the record drought hitting Texas, just as the Congressional delegation votes to deny climate change.  It was clear in that post the unprecedented drought was setting the stage for a possible devastating wildfire, which, Buchman reports, is just what happened: Texas is in the midst of one of the worst droughts, in terms of the depth and expanse of drought conditions, since the early 1900s. Dan Byrd, meteorologist with the National Weather Service in Jackson, Miss., said, “This is an unprecedented drought situation [in terms of] how widespread it is and the depth of the drought. We haven’t seen anything like this for the state overall since the early 1900s.Koenig commented, “It’s pretty phenomenal and historic. The entire state is involved in this. When you look at the size of Texas, from the panhandle to the coast, you have about 1,000 miles.” According to the latest analysis by the U.S. Drought Monitor on April 12, 2011, the entire state of Texas was experiencing abnormally dry or drought conditions with most areas in a severe to exceptional drought.

Freak: “Conspicuous Conservation” and the Prius Effect - This month, Toyota sold its one millionth Prius hybrid in the U.S. In 10 years, this strange-looking vehicle with the revolutionary engine has claimed a spot among the best-selling cars. Pretty impressive. But are all those Prius owners thinking mainly about better mileage and a smaller carbon footprint, or is there another incentive at work? More broadly: when people make environmentally sound choices, how much are those choices driven by the consumers’ desire to show off their green bona fides? Two young economists, Steve and Alison Sexton, have been looking into this question. (Not only are the Sextons twins, but their parents are also economists, and Steve is a competitive triathlete.) The result is an interesting draft paper called “Conspicuous Conservation: The Prius Effect and WTP [Willingness to Pay] for Environmental Bona Fides.” When you drive a Prius, the Sextons argue, there’s a “green halo” around you. You make new friends; you get new business opportunities. In an especially “green” place like Boulder, Colo., the effect could be worth as much as $7,000.

GOP Begins New Push to Delay EPA Rules on Toxic Power Plant Emissions - Under pressure from industry, Congressional Republicans are urging the U.S. EPA to further delay long-overdue rules that would limit more than 80 air toxics emitted by coal-burning power plants, barely a month after the agency announced them. At least one lawmaker, Rep. Edward Whitfield of Kentucky — a state which gets more than 90 percent of its power from coal — has said he will soon introduce legislation to postpone implementation of the regulations. The rules in question are EPA’s air toxics standards to control mercury and other poisonous substances from power plants, as well as the Maximum Achievable Control Technology (MACT) standards that govern hazardous emissions from boilers and cement plants. EPA released the nation’s first regulations for toxic power plant emissions on March 16. The boiler rules were announced in February 2011 and the cement standards in August 2010. All of the policies are mandated by the 1990 amendment to the Clean Air Act and originally set to be finalized in 2000.

Gassed Up, Ready to Go - The two House committees most involved in the nation’s energy policy have had a jam-packed agenda over the past three months. They’ve held a total of 30 sessions on gasoline prices, offshore drilling, climate-change rules, energy spending, and oversight of the government’s energy and environment agencies. The House Energy and Commerce Committee has already sent a bill to gut the Environmental Protection Agency’s climate-change rules to the House floor, where it passed 255-172. The Natural Resources Committee has approved three bills to expand offshore drilling that are scheduled to reach the full House next month. The panels are serving as springboards for a political message that GOP leaders believe will be one of the most effective in helping them to gain ground in the 2012 elections: blaming Democrats for high gas prices and overzealous environmental regulations.

States seek greenhouse-gas curbs - A battle over whether states can use nuisance laws to curb greenhouse-gas emissions from power plants will come to the Supreme Court Tuesday in a case that puts a twist on the debate over climate policy. The case pits a coalition of states against five of the nation’s biggest power companies and the Obama administration, which has said it intends to curb greenhouse-gas emissions from big utilities but objects to the way the states want to do it. The arguments come amid a running dispute between the administration and members of Congress who want to block the Environmental Protection Agency’s effort to regulate the carbon dioxide pumped out of power plant smokestacks as a hazardous pollutant under the Clean Air Act. At issue is whether a state can seek a federal court order to force power plants in another state to curb emissions of carbon dioxide and other gases linked to climate change on grounds that those emissions create a public nuisance.

U.S. Supreme Court Signals Rejection of State Climate-Emissions Lawsuits - The U.S. Supreme Court signaled skepticism about a lawsuit by six states seeking to force five companies including American Electric Power Co. to cut their emissions of the gases that contribute to climate change. Hearing arguments today in Washington, justices across the ideological spectrum said the Environmental Protection Agency was better equipped than a federal court to sort through the costs and benefits of reducing carbon emissions. “Congress set up the EPA to promulgate standards for emissions,” Justice Ruth Bader Ginsburg told the lawyer representing the six suing states. “The relief you’re seeking seems to me to set up a district judge, who does not have the resources, the expertise, as a kind of super EPA.” The Obama administration joined the power industry in urging rejection of the suit, along with a related one being pressed by three land trusts.

Fewer Americans, Europeans View Global Warming as a Threat… -- Gallup surveys in 111 countries in 2010 find Americans and Europeans feeling substantially less threatened by climate change than they did a few years ago, while more Latin Americans and sub-Saharan Africans see themselves at risk. The 42% of adults worldwide who see global warming as a threat to themselves and their families in 2010 hasn't budged in the last few years, but increases and declines evident in some regions reflect the divisions on climate change between the developed and developing world. Majorities in developed countries that are key participants in the global climate debate continue to view global warming as a serious threat, but their concern is more subdued than it was in 2007-2008. In the U.S., a slim majority (53%) currently see it as a serious personal threat, down from 63% in previous years. Concern about global warming has also declined across western, southern, and eastern Europe, and in several cases, even more precipitously than in the U.S. In France, for example, the percentage saying global warming is a serious threat fell from 75% in 2007-2008 to 59% in 2010. In the United Kingdom, ground zero for the climate data-fixing scandal known as Climategate in 2009, the percentage dropped from 69% to 57% in the same period.

James Hansen et al: Earth's energy imbalance and implications - Improving observations of ocean temperature confirm that Earth is absorbing more energy from the sun than it is radiating to space as heat, even during the recent solar minimum. This energy imbalance provides fundamental verification of the dominant role of the human-made greenhouse effect in driving global climate change. Observed surface temperature change and ocean heat gain constrain the net climate forcing and ocean mixing rates. We conclude that most climate models mix heat too efficiently into the deep ocean and as a result underestimate the negative forcing by human-made aerosols. Aerosol climate forcing today is inferred to be ‒1.6 ± 0.3 W/m² implying substantial aerosol indirect climate forcing via cloud changes. Continued failure to quantify the specific origins of this large forcing is untenable, as knowledge of changing aerosol effects is needed to understand future climate change. A recent decrease in ocean heat uptake was caused by a delayed rebound effect from Mount Pinatubo aerosols and a deep prolonged solar minimum. Observed sea level rise during the Argo float era can readily be accounted for by thermal expansion of the ocean and ice melt, but the ascendency of ice melt leads us to anticipate a near-term acceleration in the rate of sea level rise.

Rising Arctic Ocean temperatures cause gas hydrate destabilization and ocean acidification  - Vast amounts of methane hydrates are potentially stored in sediments along the continental margins, owing their stability to low temperature – high pressure conditions. Global warming could destabilize these hydrates and cause a release of methane (CH4) into the water column and possibly the atmosphere. Since the Arctic has and will be warmed considerably, Arctic bottom water temperatures and their future evolution projected by a climate model were analyzed. The resulting warming is spatially inhomogeneous, with the strongest impact on shallow regions affected by Atlantic inflow. Within the next 100 years, the warming affects 25% of shallow and mid-depth regions containing methane hydrates. Release of methane from melting hydrates in these areas could enhance ocean acidification and oxygen depletion in the water column. The impact of methane release on global warming, however, would not be significant within the considered time span.

Environmental Activists Angered by Early Work on Lao Dam - Regional environmentalists and scientists are angered by reports a Thai construction company has begun preliminary work at the site of a hydropower dam in northern Laos, before official go head has been given by Mekong River countries.  The Vientiane-based Mekong River Commission is due to make an official announcement this week on the project amid strong resistance from environmentalists.The proposed 1,260 megawatt Xayaburi Dam in Northern Laos is facing new controversy after Thai media reports preliminary dam construction has begun well before official clearance by the Mekong River Commission. The Commission, with representatives from Cambodia, Laos, Thailand and Vietnam, is to make its final report as early as Tuesday on whether the development of the $3.5 billion project should proceed.

China Grids To Connect 90 Mln Kilowatts Of Wind Power By 2015 - China's electrical grids will connect 90 million kilowatts of wind power capacity by 2015, said China's largest power grid company on Friday. The figure will rise to 150 million kilowatts by 2020, said the State Grid Corporation of China (SGCC) in a white paper on wind power development. This is the first white paper issued by a company on wind power development in China. The market for wind power consumption is found primarily in northern China, eastern China and central China, while wind power farm projects are largely located in northern China, northeastern China and northwestern China, making it necessary to boost grid infrastructure construction, according to the white paper.

After 5 Halflives, I-131 Higher than Cs-134/137 Suggests Ongoing Criticalities - It seemed very bad taste for April Fool's jokes, but a few weeks ago there were some very bizarre indications of ongoing criticalities suggested by TEPCO's own reporting of Cl-38 in "stagnant water" of a drywell, plus, a "neutron beam" again implausibly claimed by Kyodo news to be observed at 2-km distance. All those things seemed to defy the laws of physics and were highly suspect, but they led Arnie Gunderson, Arjun Makhijani, and Chris Martenson all to conclude that the evidence pointed to ongoing fission in the Units 1-4 scrammed reactors and their SNF pools in warm shutdown.  During full-power operation, numerous "fission products" are in approximate steady-state equilibrium, meaning roughly equal becquerel of I-131 and Cs-134, with a slow buildup of Cs-137. But they all cease to be created when the reactors are scrammed. Japanese regulators NISA and MEXT seem oblivious of the mysterious fact that I-131 Bq "reactor density" is still often reported double the Cs-134/137 Bq. The TEPCO data suggest that fission is ongoing despite the reactor shutdowns. This is bad news.

Leading Epidemiologist Says that Instead of Trying to Avoid Japanese Radiation, Put Your Energy Into Demanding a Saner Energy Policy - Steven Wing is a PhD epidemiologist, and an associate professor of epidemiology at the University of North Carolina at Chapel Hill. Dr. Wing has spoken out against nuclear power, and has spoken out against the cancer risks from the Three Mile Island accident. So I listened with interest to an interview of Wing by outspoken nuclear critic Arnie Gundersen about the health risks from the Fukushima fallout. Wing said:

  • The generally accepted thinking is that there is no safe dose of radiation with regards to cancer or genetic mutation. There is a linear relationship between radiation dose and the likelihood of getting cancer. As the dose goes down, the risk goes down … but it never disappears
  • When the news media says there is no threat to health, that flies in the face of all of the standard models and all of the studies that have been done over a long period of time regarding radiation cancer
  • When the radiation clouds move around the world, the radiation doses are spread out. But spreading out a given amount of radiation among among more people, it reduces each person’s radiation risks, but it doesn’t reduce the number of cancers which result from that amount of radiation. So having millions and millions of people exposed to a small dose could cause as much cancer as a hundred or a thousand people exposed to the same amount of radiation

Reactor Team Let Pressure Soar -The operator of Japan's stricken nuclear plant let pressure in one reactor climb far beyond the level the facility was designed to withstand, a decision that may have worsened the world's most serious nuclear accident in a quarter century. Japanese nuclear-power companies are so leery of releasing radiation into the atmosphere that their rules call for waiting much longer and obtaining many more sign-offs than U.S. counterparts before venting the potentially dangerous steam that builds up as reactors overheat, a Wall Street Journal inquiry found.

Tepco Must End ‘Whack-a-Mole,’ Protect Reactors From Storms - Tokyo Electric Power Co. must speed up plans to cover reactors at its crippled nuclear plant and drain tainted water to prevent more radiation leaks as Japan’s typhoon season approaches, engineering professors said.  In 2004, eight cyclones passed over or skirted Japan’s Tohoku region, where the Fukushima Dai-Ichi power station is spewing radiation after an earthquake and tsunami on March 11. The earliest was in May that year, according to Japan’s weather agency data. The eyes of two storms passed within 300 kilometers of Tohoku last year, the data show.  Last month’s disaster wrecked the plant’s cooling systems, triggering the worst nuclear crisis since Chernobyl in 1986. The roofs of three buildings were damaged in blasts as water inside reactor cores and spent-fuel ponds boiled away. The utility known as Tepco plans to install temporary covers within nine months, and concrete ceilings over the “medium term.”

Nuclear Overseers Are “Fake” Agencies Funded and Controlled by the Nuclear Power Industry - The Christian Science Monitor noted recently:  Just as the BP oil spill one year ago heaped scrutiny on the United State’s Minerals Management Service, harshly criticized for lax drilling oversight and cozy ties with the oil industry, the nuclear crisis in Japan is shining a light on that nation’s safety practices. [Russian nuclear accident specialist Iouli Andreev, who as director of the Soviet Spetsatom clean-up agency helped in the efforts 25 years ago to clean up Chernobyl ] has also accused the IAEA of being too close with corporations. “This is only a fake organization because every organization which depends on the nuclear industry – and the IAEA depends on the nuclear industry – cannot perform properly.” The U.S. Nuclear Regulatory Commission is no better.

It’s Not Just Alternative Energy Versus Fossil Fuels or Nuclear – Energy Has to Become DECENTRALIZED - Proponents for oil, gas, nuclear and coal claim that we must expand these risky and oftentimes deadly types of energy production, or we will shiver in the dark like cavemen. Proponents of alternative forms of energy say we should switch over to cleaner fuels to avoid a parade of horribles … and point to the Gulf oil spill, the Japanese nuclear crisis and the destruction of aquifers with natural gas fracking as examples. Defenders of fossil fuels and nuclear rebut this by saying that alternative energy isn’t ready for prime time yet. Who’s right? As I’ll show below, the question is not as simple as it may sound.

Toxins found in gas drilling fluids - The drilling fluids used to recover natural gas and oil from deep shale formations contain substances identified as human carcinogens, or listed as hazardous under federal clean air or water rules, according to a report issued late Saturday by senior House Democrats. Democrats on the House Energy and Commerce committee described their report as the first comprehensive national inventory of chemicals used by companies that engage in a process known as hydraulic fracturing. The composition of hydraulic fracturing fluids has become a key point of tension between the oil and gas industry, which has been reluctant to disclose the specific contents of drilling fluids, and those who say such disclosure is necessary to determine whether hydraulic fracturing poses a threat to drinking water.

Millions of Gallons of Hazardous Chemicals Injected Into Wells, Report Says  - Oil and gas companies injected hundreds of millions of gallons of hazardous or carcinogenic chemicals into wells in more than 13 states from 2005 to 2009, according to an investigation by Congressional Democrats.  The chemicals were used by companies during a drilling process known as hydraulic fracturing, or hydrofracking, which involves the high-pressure injection of a mixture of water, sand and chemical additives into rock formations deep underground. The process, which is being used to tap into large reserves of natural gas1 around the country, opens fissures in the rock to stimulate the release of oil2 and gas. Hydrofracking has attracted increased scrutiny from lawmakers and environmentalists in part because of fears that the chemicals used during the process can contaminate underground sources of drinking water.  “Questions about the safety of hydraulic fracturing persist, which are compounded by the secrecy surrounding the chemicals used in hydraulic fracturing fluids,”

Major fracking spill happening now in Pennsylvania - We have the makings of an environmental disaster in northern Pennsylvania at the moment. According to local Pennsylvania television station WNEP, a natural-gas well blew out in the middle of the night while crews were engaged in "fracking" activities: Bradford County's director of public safety said a Chesapeake well went out of control late Tuesday night. That means the well blew near the surface, spilling thousands and thousands of gallons of frack fluid over containment walls, through fields, personal property and farms, even where cattle continue to graze. DEP is taking ground water and stream samples to determine the extent of the spill. Officials said fluids from the well have, in fact, contaminated Towanda Creek which feeds into the Susquehanna River. . A "major operation" is under way to kill the well and stop the flow, which, as of 1:50 p.m. ET, was still uncontrolled.  As with the Gulf, do we really think this sort of thing will never happen again in Pennsylvania? We are, after all, talking about a state where the governor has put industry firmly in charge of regulating itself. For all the big fans of fracking out there, is putting our agricultural lands and water supply at risk really the best path to a low-carbon future?

Emails Expose BP's Attempts To Control Research Into Impact Of Gulf Oil Spill - BP officials tried to take control of a $500m fund pledged by the oil company for independent research into the consequences of the Gulf of Mexico oil disaster, it has emerged. Documents obtained under the Freedom of Information Act show BP officials openly discussing how to influence the work of scientists supported by the fund, which was created by the oil company in May last year. Russell Putt, a BP environmental expert, wrote in an email to colleagues on 24 June 2010: "Can we 'direct' GRI [Gulf of Mexico Research Initiative] funding to a specific study (as we now see the governor's offices trying to do)? What influence do we have over the vessels/equipment driving the studies vs the questions?". The email was obtained by Greenpeace and shared with the Guardian. The documents are expected to reinforce fears voiced by scientists that BP has too much leverage over studies into the impact of last year's oil disaster.

A year later, BP’s oil is still damaging the Gulf Coast - As the one-year anniversary of the BP drilling disaster nears, the American public has largely turned its attention away from the Gulf Coast. But for the people and other living creatures who make the region their home, the oil spill's impacts are still being felt acutely today. In an effort to correct the misperception that the BP disaster is over and the 200 million gallons of oil that spill into the Gulf of Mexico have magically disappeared, staff with the Louisiana-based Gulf Restoration Network last week took reporters on a tour of areas that are still heavily impacted by BP's oil. The tour went from Myrtle Grove, La. to areas including Bay Jimmy, Barataria Bay, Queen Bess Island and Grand Terre Island -- many of the same areas that Facing South visited with GRN last summer.

Voices From the Gulf: "One Year Later, We’re In The Same Situation As Last Year" - One year after the BP Deepwater Horizon oil rig blowout in the Gulf of Mexico, residents of affected coastal communities have reported health ailments such as severe coughing, migraines and irritations that are consistent with common symptoms of chemical exposure. Fishermen and shrimpers have reported record losses in sales and fear the spill will cause long-term damage to marine life and the economy of the region. Many residents report problems with receiving compensation claims from BP. We’re joined by David Pham of Boat People SOS, a national Vietnamese American organization working with fishing communities impacted by the BP oil spill in Alabama. We also speak with Tracie Washington, president of the Louisiana Justice Institute in New Orleans. [includes rush transcript]

Gulf Oil Spill: Fishermen Say They Are Sick from Cleanup; ABC News Investigation- In the aftermath of the Deepwater Horizon oil spill, an army of fishermen, 10,000 strong, joined the cleanup effort. Today, almost a year after the spill, many say they are suffering from debilitating health effects that studies suggest are consistent with prolonged exposure to chemicals in oil. An ABC News investigation found that many workers were told they did not need respirators, advice BP received from the government, and that no government agency tested the air the workers were breathing out at sea until a month after the spill. BP continues to insist that "no one should be concerned about their health being harmed by the oil." In fact, BP says, "The monitoring results showed that the levels generally were similar to background conditions – in other words, concentrations that would have been expected before or in the absence of the spill."

Beyond the Oil Spill, the Tragedy of an Ailing Gulf - The anniversary has passed, the cleanup goes on, and still southern Louisiana sinks steadily into the sea.  Even in the worst days of the BP spill, coastal advocates were looking past the immediate emergency to what the president’s oil spill commission called “the central question from the recovery of the spill — can or should such a major pollution event steer political energy, human resources and funding into solutions for a continuing systemic tragedy?”  That tragedy is the ill and declining health of the Gulf of Mexico, including the enormous dead zone off the mouth of the Mississippi and the alarmingly rapid disappearance of Louisiana’s coastal wetlands, roughly 2,000 square miles smaller than they were 80 years ago. Few here would take issue with the commission’s question, but the answer to it is far from resolved.

"BP to Pay $1 Billion for Gulf Restoration" - BP will provide $1 billion for early oil spill restoration efforts in the Gulf of Mexico in a voluntary agreement with the federal government and five states, company and government officials announced on Thursday. The agreement, the largest of its kind in an oil pollution case, does not absolve BP of legal liability for the explosion and spill that occurred April 20, 2010, or from the costs of any additional economic and environmental damages. The company faces fines and penalties of as much as $21 billion as a result of the disaster, the worst offshore drilling accident in United States history. The company could face additional penalties under a Justice Department criminal and civil investigation. The advance payment, to be divided among the states and the two lead federal agencies overseeing restoration efforts, will be used to rebuild coastal marshes, replenish damaged beaches, conserve ocean habitat and restore barrier islands.

Coast Guard Cites Many Lapses in Sinking of Deepwater Oil Rig - — The Coast Guard reported Friday1 that poor maintenance, inadequate training and a lax safety culture at Transocean contributed to the lethal explosion and sinking of the company’s Deepwater Horizon drilling rig a year ago.  The Coast Guard’s harshly worded 288-page study also declared that the Republic of the Marshall Islands, the mobile offshore drilling2 rig’s flag state, had failed in its regulatory duties. And the study faulted the Coast Guard itself for failing to ensure that large, complex offshore drilling units registered in foreign nations but operating in United States waters were properly maintained, staffed and inspected.  “Although the events leading to the sinking of Deepwater Horizon were set into motion by the failure to prevent a well blowout,” the report states, “the investigation revealed numerous systems deficiencies, and acts and omissions by Transocean and its Deepwater Horizon crew, that had an adverse impact on the ability to prevent or limit the magnitude of the disaster.”

BP chairman: deep-sea drilling must go on - BP never considered abandoning deep-sea drilling after the disastrous oil spill in the Gulf of Mexico last year, the company's chairman told a Swedish newspaper in an interview published Tuesday.Despite the risks of such operations, Carl-Henric Svanberg said halting them "doesn't feel like a logical conclusion" after the Deepwater Horizon blowout because "50,000 holes have been drilled in the Gulf of Mexico and this was the first time things went this wrong."Svanberg told newspaper Svenska Dagbladet that the company now needs to focus hard on safety. "It's like with an airline. If you've had one accident you can't have another one, you need to keep a rock-solid focus on safety. But this is an industry that always will involve risk," he was quoted as saying.

It's like ten thousand spoons when all you need is a knife - They couldn't have waited a day? A single day? Acknowledging the timing was ironic, a trio of Republican state senators this morning held a news conference to announce they had filed a bill to open up the North Carolina coast to energy drilling. Today is the one-year anniversary of the BP oil ...

The option value of not drilling for oil - NYU Law School’s Institute for Policy Integrity has an important paper out today, explaining that the US is using a crazy system to determine whether to allow offshore oil drilling. Under something known as the Revised Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012, the Bureau of Ocean Energy Management, Regulation and Enforcement does a very basic cost-benefit calculation when deciding whether or not to allow drilling in a certain spot: it looks at the costs, and then at the benefits, and then if the benefits outweigh the costs, it gives the go-ahead. What this calculation misses is the significant option value of doing nothing. The oil is, after all, not going anywhere — and if you don’t drill for oil right now, there’s a good chance that the costs of drilling for oil in the future, both economic and environmental, will be lower than the costs of drilling for oil in the present:

BP’s Secret Deepwater Blowout - Only 17 months before BP's Deepwater Horizon rig suffered a deadly blowout in the Gulf of Mexico, another BP deepwater oil platform also blew out. You've heard and seen much about the Gulf disaster that killed 11 BP workers. If you have not heard about the earlier blowout, it's because BP has kept the full story under wraps. Nor did BP inform Congress or US safety regulators, and BP, along with its oil industry partners, have preferred to keep it that way.The earlier blowout occurred in September 2008 on BP's Central Azeri platform in the Caspian Sea. As one memo marked "secret" puts it, "Given the explosive potential, BP was quite fortunate to have been able to evacuate everyone safely and to prevent any gas ignition." The Caspian oil platform was a spark away from exploding, but luck was with the 211 rig workers. It was eerily similar to the Gulf catastrophe as it involved BP's controversial "quick set" drilling cement

Welcome To The Era Of 'Extreme Energy' - One year ago this week, the Gulf of Mexico oil disaster shined an uncomfortable spotlight on the risks of this trend. As wells dried up in tens of feet of ocean, offshore rigs moved into water a mile deep, stretching the limits of technology and safety. But extreme energy is far from isolated in deep waters of the ocean.Across the United States, natural gas "fracking" -- a process where water, sand and chemicals are injected into rock to dislodge previously inaccessible fuel -- has resulted in groundwater so polluted that, in some instances, tap water has been lit on fire. Another process is being developed to extract oil from shale rock under the Rocky Mountains. And in Canada's oil sands, about 620 miles north of Montana, huge amounts of energy are expended to clear boreal forests and dig up land that's about 10% bitumen, a thick form of crude that must be processed multiple times before it turns into gasoline or jet fuel.

Brent-WTI spread - For most of the last decade, there was very little difference between the price of West Texas Intermediate traded in Cushing, Oklahoma and that for North Sea Brent in Europe. But a $10-$15 spread between the two developed at the end of January and has remained ever since. The new gap is essentially a geographic difference between the price paid for oil in the central United States and that paid on the U.S. coasts and anywhere else in the world. For example, Chevron is currently offering $123.25 for a barrel of Louisiana light sweet, $17 more than it is willing to pay for Oklahoma sweet. A year ago the differential was only $3. That gap means that U.S. refiners on the coast are paying a huge premium to buy imported oil, when there are plenty of inland domestic producers who'd love to sell it to them at a significantly lower price. Gail Tverberg noted that the lower price at the Oklahoma hub resulted in part from pressure of new supplies from North Dakota and Canada. But there's still a deep puzzle of where the violation of the Law of One Price is coming from-- why are producers selling the product in Oklahoma when there's such a much better price to be obtained at the Gulf?

Keystone Gulf Coast Expansion Project - If President Obama is looking for ideas that would build American infrastructure, create jobs, and reduce the budget deficit, here's an option to consider. I commented earlier on the current astonishing geographic differential in the price of crude oil. Producers of Williston sweet in North Dakota are only getting $96 a barrel, while refiners on the coast are paying over $120 for similar oil imported from other countries. That disparity in price is a dramatic market signal that we have a desperate need for better transportation infrastructure, ideally a pipeline running all the way from the Williston Basin to the Gulf Coast, to allow refiners to replace expensive imported oil with cheaper domestic. And a company called TransCanada is seeking permission to build exactly what we need. TransCanada has already spent $5 billion on the Keystone Pipeline connecting production from Canadian oil sands to refiners in Oklahoma and Illinois, and wants to spend an additional $7 billion on a proposed Keystone Gulf Coast Expansion, which would expand the capacity and extend the pipeline all the way to the Gulf of Mexico.

Study: Algae Could Replace 17% of U.S. Oil Imports - Every day, the United States spends about $1 billion to import foreign oil, money that we could be investing in American energy and the American economy. President Obama recently announced an ambitious but achievable goal of reducing our oil imports by a third by 2025. To meet this goal, we will need to increase our use of homegrown advanced biofuels. Today, the Department’s Pacific Northwest National Laboratory (PNNL) came out with a new study that shows that 17 percent of the United States’ imported oil for transportation could be replaced with American-grown biofuels from algae. The study’s researchers found that by growing algae in strategic locations, the U.S. could produce 21 billion gallons of algal oil while reducing the amount of water that is needed for production. That amount of algal oil is equal to the 2022 advanced biofuels goal set by the 2007 Energy Independence and Security Act. And by concentrating algae production in the U.S. regions that have the sunniest and most humid climates – the Gulf Coast, the Southeastern Seaboard and the Great Lakes - the process will use much less water.

Looniness on Domestic Oil Production, Will the Post Print Anything? - The Washington Post printed an oped column from Alsaska Senator Lisa Murkowski arguing for increased domestic oil production. The column directly confuses short-term economic weakness with the impact of long-term oil prices. It cites Harvard professor and former AIG director Martin Feldstein as supporting the claim that "that if prices remain high, economic growth will languish." In fact, the quote from Feldstein explicitly refers to economic growth this year. There is nothing that the government can do that will in any significant way affect the amount of oil that the U.S. produces this year. Therefore, Feldstein's statement is irrelevant to the issue at hand. As far as the longer term question, higher oil prices would have a modest impact in slowing growth in most economic forecasting models. However even large increases in domestic production would have little impact on world oil prices (the relevant variable) and therefore have little effect on economic growth. A serious newspaper would not have allowed a columnist to make such misleading assertions.

Oil rises as dollar weakens - Oil rose on Thursday, as the dollar weakened and gas pump prices inched higher. Benchmark West Texas Intermediate crude added 84 cents to settle at $112.29 per barrel on the New York Mercantile Exchange. In London, Brent crude rose 14 cents to settle at $123.99 per barrel. At one point on Thursday the dollar dropped to a 16-month low against the euro. Since oil is priced in dollars, it becomes more attractive to buyers holding foreign currency as the dollar gets weaker. The dollar's been falling as investors remain convinced the Federal Reserve will keep interest rates near zero. Lower rates make the dollar less attractive. Energy traders keep looking for signs that demand for oil and gas will increase as the global economic recovery continues. Analysts at Barclays Capital think they need not look far. "We continue to believe that the top for crude oil prices this year is not yet in," they wrote in a note to investors. "Oil demand indications remain very strong ... Chinese demand is still increasing at a rate faster than 1 million barrels per day."

IMF warns of oil scarcity and a 60% oil price increase within a year « In a benchmark scenario of its latest World Economic Outlook (April 2011) the International Monetary Fund (IMF) analyses what it calls oil scarcity (after “energy security” another code word for peak oil?) and warns of a 60% increase in oil prices within a year and almost 90% within 5 years due to a reduced growth in global oil supplies (assumed to be + 0.8% pa, down from a long term 1.8%) and low oil price elasticities of oil demand between 0.02 (short-term) and 0.08 (long term). Even in the best case scenario in which oil price elasticities increase almost 5 fold (greater substitution away from oil), oil prices are simulated to go up by 60% in 5 years.

When will we see demand destruction for oil? - How high must oil prices go before they start killing the very demand that feeds them?  Everybody from the International Monetary Fund to the International Energy Agency (IEA) is warning of dire economic consequences if today’s triple digit oil prices persist. Curiously though, the IEA, which is warning of a potential global recession due to today’s oil prices, is also predicting an almost a one-and-a-half-million-barrel-a-day increase in world demand this year. And judging by their recent track record, this forecast, like the one it made early last year for 2010, will once again be on the light side.

Oil above $112 on signs of strong US crude demand - Oil prices jumped above $112 a barrel Thursday in Asia to near the highest level since 2008 amid signs U.S. demand remains robust despite rising fuel costs. Benchmark crude for June delivery was up 57 cents at $112.02 a barrel at midafternoon Singapore time in electronic trading on the New York Mercantile Exchange. In London, Brent crude for June delivery was up 71 cents to $124.56 a barrel on the ICE Futures exchange. Benchmark oil surged $3.17 to settle at $111.45 on Wednesday as falling U.S. crude and products supplies suggested a two-month rally hasn't deterred consumer spending. The Energy Information Administration reported that U.S. oil supplies shrank by 2.3 million barrels last week while analysts had expected an increase of 1.6 million barrels. The EIA said inventories of gasoline and distillates also fell.

The Peak Oil Crisis: Killing Off the Recovery - Since the middle of February oil prices have increased by some $22 a barrel. As the U.S. currently consumes just over 19 million barrels of oil a day, that means collectively we are now spending about $420 million a day more filling up our fuel tanks than we were two months ago. Now some of us are wealthy enough to absorb this increased expenditure without a second thought, and some just tuck the added cost away on their credit card statements in hopes there will come a day when they can afford to pay it off. For most however, these higher fuel costs, and of course the higher food and nearly-everything-else bills that go with it, are being covered by foregoing other expenditures that are not an essential part of our lives. Unlike the price spike of three years ago, when oil prices climbed from $70 a barrel in late 2007 to a peak of $147 in July 2008 and then collapsed to less than $60 a barrel by the end of the year, this time prices have been moving steadily higher since March of 2010. Much has happened since the 2008 oil price spike that has left the U.S. and global economies different places than they were three years ago.

Saudi slashes oil output, says market oversupplied  – Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices. Consumers have urged the exporters' group to pump more crude to put a cap on oil, which surged to more than $127 a barrel this month, its highest level in 2 1/2 years amid unrest in North Africa and the Middle East. Oil Ministers from Kuwait and the United Arab Emirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupply and said rocketing crude prices were out of the hands of OPEC, which next meets in June. "The market is overbalanced ... Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.

Analysis: Saudis in tough act to balance sweet-sour crude supply  (Reuters) - Saudi Arabia and other OPEC producers are having to play a difficult balancing act in keeping high oil prices from eroding demand while at the same time protecting the value of their lower-priced, more sulphurous crude. Middle East producers are selling their oil at the deepest discounts since 2005, as heavy sour crude values stay under pressure from a triple shock of China's growing appetite for diesel, Libya's civil war and Japan's March disaster.Additional OPEC supplies are having little effect on prices of lighter and sweeter crude. The loss of high-quality Libyan barrels over the past two months helped propel Brent crude futures to a 32-month high above $127 a barrel last week, trading about $3 below that peak on Thursday. But the Libyan violence has not been as supportive for Mideast Gulf crude prices, which are now key to fund multi-billion-dollar spending sprees that emirs and kings across the Arabian peninsula launched to tighten their grip on power amid wide social unrest.

Saudi Arabia sees output at 10.8 million b/d by 2030 - Saudi Arabia expects its oil production to hold steady at an average 8.7 million b/d to 2015, rising to 10.8 million b/d by 2030 and leaving the kingdom with 1.5 million b/d of spare production capacity, a senior Saudi oil official said in a research paper released Wednesday.Majed Al Moneef, Saudi Arabia's OPEC governor, said in the paper published on the Arab Energy Club website that Saudi output averaged 8.2 million b/d in 2010. Saudi Arabia's oil production in the last two decades averaged 8.3 million b/d, representing 32% of OPEC's total production during a period that saw sharp fluctuations in production from Iraq, Venezuela and Nigeria, he wrote.

Tom Ferguson: Oil-Soaked Politics – Secret U.K. Docs on Iraq - This just in: big oil companies and government ministers had discussions one year before invasion. Revolution in the Middle East, nuclear meltdown in Japan, war in Libya, the U.S. budget crisis, the looming problems of the Eurozone — some days it’s all just too much. But today there’s something no one can afford to ignore: The Independent, one of Britain’s leading newspapers, broke a story that no one, no matter how jaded, can afford to ignore. In a nutshell, the story buries forever all claims that the US, the UK, and other governments did not have oil on their minds as they prepared to invade Iraq. The story reports on a forthcoming book that draws on more than a thousand secret government documents. The excerpts the paper prints detailing meetings between the UK government and British oil companies in the run up to the war are devastating. They demonstrate that all the denials in London and Washington that policymakers were not concerned about oil as they invaded were as false as the famous cover story about weapons of mass destruction.

Iran Central Banker: Lift Sanctions Or Face Spike In Oil Prices The head of Iran's central bank warned that oil prices will rise above $150 a barrel if economic sanctions against the Islamic theocracy are not lifted soon. “Iran can have an effect on world energy and fuel. Fuel prices will go up dramatically,” Mahmoud Bahmani said in a recent interview with The Washington Times at a meeting of the International Monetary Fund in Washington. “If sanctions are not removed, particularly sanctions against banks and other economic sanctions, the price of oil will go above $150 a barrel.”A top Federal Reserve official and other economists predict that such a price could drive gasoline prices skyrocketing and throw the U.S. and Europe into another recession. The last time oil came close to that price was in the global recession that began in 2008, when a barrel of crude hit more than $147 in July of that year.

'US To Recoup Libya Oil From China'Press TV has interviewed Dr. Paul Craig Roberts, former assistant secretary of US Treasury from Panama City, who gives his insight on the revolution in Libya and why US President Barack Obama needs to overthrow Qaddafi when no other US presidents did.

Obama Blames Speculators For Rising Fuel Prices (Reuters) - President Barack Obama on Tuesday blamed speculators for driving gasoline prices higher and straining American consumers, saying there was enough oil in world markets to meet demand. Speaking at a community college in suburban Virginia, Obama said increasing production of U.S. oil and creating a market for fuel-efficient cars would help meet the country's energy challenges. "I know that if you've got a limited budget and you just watch that hard-earned money going away to oil companies that will once again probably make record profits this quarter, it's pretty frustrating," he said. Rising fuel prices are a persistent concern for the White House, which is concerned about their impact on the economy and on voters' wallets as Obama runs for re-election. Average U.S. gasoline prices hit $3.84 a gallon last week, the most expensive since August 2008, as oil prices have soared above $100 a barrel.

Team Obama Targets Oil Traders and Speculators; Scapegoating 101 - Instead of investigating fraud and corruption at banks, and instead of questioning the Fed's policy of US dollar debasement, and instead of pondering the role his administration's budget deficits have on the price of commodities, Team Obama Targets Oil Traders and SpeculatorsPresident Barack Obama said on Thursday the U.S. attorney general was assembling a team to root out any fraud and manipulation in the oil markets that might be contributing to higher U.S. gasoline prices. "The truth is, there's no silver bullet that can bring down gas prices right away," Obama said in prepared remarks for his opening statement at a townhall-style meeting in Nevada. "The Attorney General's putting together a team whose job it will be to root out any cases of fraud or manipulation in the oil markets that might affect gas prices - and that includes the role of traders and speculators. We are going to make sure that no one is taking advantage of the American people for their own short-term gain," Obama said.

One Guess Why Obama Is Suddenly Investigating Wall Street Traders Manipulating Gas Prices - Gas prices are up? People are pissed about paying $5 per gallon? Let's see if we can't blame the speculators on Wall Street, says the President. President Obama announced yesterday that he's putting a team together to study whether or not Wall Street commodities traders (speculators, in his words) are illegally manipulating gas prices. After accusations that President Obama's Washington is in the pocket of Wall Street, and public outcry that gas prices are rising, this investigation seems like an obvious attempt to win public favor. Bloomberg quotes Obama: “The attorney general’s putting together a team whose job it us to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators.' “We are going to make sure that no one is taking advantage of American consumers for their own short-term gain.” Interestingly, this move comes directly after Dan Rather's huge report on the spike in gas prices, Dan Rather Reports: Gas Pains, which aired on HDNet on April 19th. Rather in part blames the spike on speculative commodities trading and on failed congressional efforts to regulate the market.

Did The World’s Largest Futures Exchange Enable $200 Oil? Did the world’s largest futures exchange enable $200 oil?  What happened?

  • On April 18, 2011, the Chicago Mercantile Exchange launched six Euro-denominated oil contracts - one Brent crude oil and five gasoil.1
  • Pricing, margining and treasury for exchange-cleared oil price management can be fully executed in Euros.

On the surface, this appears to be a reasonable product suite offer from the CME.  These contracts are financially-settled and rely on the US dollar oil contracts that trade on ICE, the Intercontinental Exchange.  These contracts should make certain trading functions more streamlined for oil exporters to and oil consumers in the Euro-zone.  For some users, no need to buy US dollars to effect oil trades.   What is known, however, is that the world’s largest futures exchange has made it possible for any entity to enter into Euro-denominated oil trades. If these contracts get traction and grow, there may be a significant effect upon the USD/Euro relationship. USD 200/bbl oil is in the cards and a petrocurrency change may be a reason cited should the oil market achieve that round number.

Latest IMF World GDP Forecasts - Just a quick note that the latest IMF World Economic Outlook is out, and has lots of interesting reading.  In particular, there is a large chapter discussing oil market risks that I hope to write about at a later time when I've digested it a bit better. For now, I just want to put up their forecast for world GDP growth (graph above - slowing slightly to something a little above the recent historical 4% average).  They think the probability of an outright recession in the next two years is miniscule (their 90% envelope only goes down to about 2% growth by the end of 2012).   Myself, I think the risks to the downside due to an oil shock are much higher than this.  But then, last June I thought that the risks of deleveraging to the global economy were higher than the IMF was crediting, and in fact their projections to date were pretty close to reality.  On the third hand, in that piece I also documented that the IMF had completely failed to recognize the impact of the housing/credit crash on the global economy until after it had happened.  They correctly identified it as the largest risk to global growth, but didn't correctly anticipate that it would really happen.

Disquieting Saudi Oil Indicators and the Next Oil Shock - There are a growing number of indicators of concern in Saudi Arabian oil production: 1) According to the Wall St Journal, production sharply declined in March Saudi Oil Minister Ali Al-Naimi said Sunday that oil production from the kingdom was 8.292 million barrels per day in March, down about 800,000 barrels a day from 9.125 million barrels per day in February. Most estimates, including the monthly report of OPEC—which relies on external databases—had seen a rising or stable production at about nine million barrels a day in March. If I treat this like an early JODI report, the overall production graph would look as above.  Obviously, it's strange that Saudi Arabia is cutting production at the same time that the world has lost Libyan output. 2) There was a sudden sharp increase in the count of oil rigs in Saudi Arabia in February and March.  Further increases are expected: Two Saudi officials told Reuters on Tuesday that the extra rig activity would maintain rather than increase the kingdom's oil capacity. "It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said.

Wow, just Wow. - The above is Table 3.1 of the IMF World Economic Outlook, with added orange boxes.  I've tended to be an inelasticity hawk, but these numbers are really eye-popping.  -0.007 for emerging market price inelasticity!   That implies a 10% increase in oil prices produces a negligible 0.07% decrease in consumption.   That's the short term number, but even the 20 year horizon is only -0.035.  Meanwhile, short term global income elasticity is 2/3.  So that 4% economic growth requires  2 1/3% annual increases in oil production to keep prices stable. Can inelasticity really be this bad?  On a global basis, I've assumed -0.05 (eg here), but they are saying -0.02.  More later, I'm sure...

Estimating the End of Global Petroleum Exports - Part 1 Introduction and Method - I and others have made the fairly safe, and perhaps too obvious, prediction that the effects of an end in global petroleum exports will likely happen much more sooner, and, have a much greater impact than peak oil itself.  The economies of all developed countries in the world are highly dependent on the readily available “liquid energy” that petroleum provides. Most developed countries import far more oil than they actually produce domestically. Consequently, all facets of modern life: transportation, agriculture, manufactured good (plastics), pharmaceuticals and other medical products, high technology goods, are heavily dependent upon this continued flow of petroleum imports. I believe that what happens to global petroleum exports will strongly affect the economies of all countries of the world, but especially the economies of the heavy importers, and, your standard of living.  In a previous series, I performed an export land model analysis for the USA which considered the petroleum export trends of the top ten exporting countries to the USA . I estimated this to amount to about 57% of the total world supply of exportable oil (as discussed in part 3 of the series). In the present series, I have expanded my analysis to consider petroleum production and consumption trends for the entire world to quantify the regional global pool of exports and to predict how this will change over time.

Part 5 Predicting regional petroleum consumption in a post-export world  - In part 2 and part 3 of this series, I presented my regional analysis of global production and consumption trends for the Middle East (ME), Former Soviet Union (FS), Africa (AF), South America (SA), Asia-Pacific (AP), Europe (EU) and North America (NA). In part 4, I put the regional analysis together to show that net-exports from the four exporting regions (ME, FS. AF, SA), will end in about 2030-2035. Here in part 5, I apply the same data to predict what petroleum consumption rates will look like for each of these regions as the global net-export pool declines to zero. But first, here’s the “tweet” version of my analysis: Consumption drops worldwide with total collapse in EU & AF, & near collapse in AP.   SA and FS are better off, with NA & ME even better.  

The Arctic Sea—a New Wild West? - The Arctic basin will become less terrible in the coming decades if climate scientists have it right. Indeed, the periodic retreat of polar ice would bring a new middle sea into being at the roof of the world for part of each year, with all the opportunities and dangers an effective change to world geography portends. As a consequence, managing Arctic affairs will pose a strategic challenge of a high order. The US Navy chief oceanographer Rear Adm. David W. Titley puts an upbeat spin on matters. The Arctic Sea, declares Titley, ‘is not the Wild West. It is an ocean and we understand how to govern oceans.’ Really? Like the 19th century American West, the Arctic is a largely vacant domain where law and order are tenuous at best. And if recent years have shown anything, it’s precisely that oceans remain theatres for geopolitical competition, not to mention expanses where anarchy reigns—think piracy off Somalia or weapons proliferation in Northeast Asia—unless navies and coast guards preserve order. In a very real sense the seas are a perpetual Wild West. Governing them is a resource- and manpower-intensive chore that never ends. This will be especially true in empty northern reaches.

Japan, Oil and the Fragility of Globalization - Sometimes it takes an earthquake followed by tsunami accompanied by a nuclear meltdown to catch people's attention.  Improbable events not only make the world go around but expose what is rotten. And I suspect the Great Sendai Earthquake will go down in the annals of human history as just one of a series of unfortunate events that helped to illuminate the world's downward energy spiral.  Or as the Japanese writer Kenzaburo Oe wisely put it: "Japanese history has entered a new phase." Although much media interest has now focused on the proverbial risks of nuclear power (a subject I'll atomize later), the quake really laid bare the fragilities of an oil-fueled economy that has peaked. Japan's familiar energy path The Catholic theologian Ivan Illich once noted that societies that consume large amounts of energy (and especially imported energy) ultimately lose their flexibility and robustness to a web of authoritarian complexity such as the Tokyo Electricity Corporation. It is, afterall, the world's fourth largest utility and a consortium of liars to boot.

Morgan Stanley fund fails to repay debt on Tokyo property - A Morgan Stanley property fund failed to make $3.3 billion in debt payments by a deadline on Friday, handing over the keys to a central Tokyo office building to Blackstone (BX.N) and other investors, the largest repayment failure of its kind in Japan. It marks the latest fallout from a series of highly leveraged investments by Morgan Stanley (MS.N), one of the most aggressive investors in worldwide property markets before the global financial crisis. The $4.2 billion MSREF V real estate fund missed its April 15 deadline to repay 278 billion yen($3.3 billion) worth of debt packaged in commercial mortgage-backed securities on the 32-storey Shinagawa Grand Central Tower, a property which has seen its value plunge, two people involved in the transaction said.

BBC News - Japanese exports fall 2.2% in March due to tsunami - Japanese exports fell more than expected in March, as damage from last month's earthquake and tsunami affected shipments. According to the finance ministry exports declined 2.2% from a year earlier, the first drop in 16 months. Shipments of cars tumbled 28% as the sector continued to be hit by shortfall of parts and slowdown in production. The earthquake and tsunami has damaged factories and disrupted the supply chain. Shipments of semiconductor products and electronics also fell by 6.9%. For Japan's two major export destinations, shipments to the US declined 3.4% from the previous year, while shipments to China rose an annual 3.8%. Analysts say the disruption in the supply chain is making it difficult for Japanese manufacturers to get back on track. 'It is very frustrating for automakers and other manufacturers,'"

Japanese exports fall 2.2 percent in March - The government says Japanese exports in March fell 2.2 percent from a year earlier due to the fallout from last month's massive earthquake and tsunami. The finance ministry said Wednesday that the March figure marked the first year-on-year decline in 16 months. Exports shrank to 5.87 trillion yen ($71 billion), while imports rose 11.9 percent to 5.67 trillion yen last month. The magnitude-9.0 earthquake and ensuing tsunami on March 11 destroyed many factories in northeastern Japan, crippling production and supply chains. The twin disasters have forced manufacturers including Toyota Motor Corp. and Sony Corp. to suspend their output due to parts shortages.

Debt at 200% of GDP Dares S&P Amid Succession - So Naoto Kan is a goner.  That’s the word in traumatized Tokyo. Japan’s prime minister had a once-in-a-lifetime chance to get his mojo back in the five weeks since a record earthquake and tsunami. He failed, and pundits wonder if he will make it to his first anniversary in office in June. Kan would be the fifth to go in five years. Investors harbor a well-honed cynicism about Japanese leaders. They come, stick around for 12 months and they’re gone before markets or foreign governments get to know them. Japan’s revolving-door politics constantly sends new finance and foreign ministers to global summits. So much for relationship-building.  Kan’s predecessor lasted only nine months. Now Kan, who cheered markets with talk of reducing Japan’s massive debt, seems to be on the way out. And the question isn’t who’s next, but does it even matter? Not without sweeping changes to the political system. Barring that, Japan’s economic future is as cloudy as the status of the radiation leaks in Fukushima.

‘Nine months’ to end Japan nuclear crisis - The operator of Japan's crippled Fukushima Daiichi nuclear plant has said it expects to bring the crisis under control by the end of the year.Tokyo Electric Power Co (Tepco) aims to reduce radiation leaks in three months and to cool the reactors within nine months.The utility said it also plans to cover the reactor building, which was hit by a huge quake and tsunami on 11 March. Radiation levels in the sea near reactor 2 rose to 6,500 times the legal limit on Friday, up from 1,100 times a day earlier, Tepco has said, raising fears of fresh radiation leaks. Tsunehisa Katsumata, the chairman of Tepco, Asia's largest utility, told a news conference in Tokyo on Sunday they would need up to nine months to bring the power plant to ''cold shutdown''

IMF's Singh Says Japan Power Loss May Disrupt Emerging Asia - Anoop Singh, director of the International Monetary Fund’s Asia-Pacific Department, said power losses in Japan after the nation’s earthquake and tsunami threaten to disrupt growth in the region’s emerging economies. The IMF forecast for growth of about 8 percent in emerging Asian economies this year would be imperiled by more outages in Japan, where damage to the Fukushima Dai-Ichi nuclear power plant has prompted consideration of energy constraints, he said. “The risks are clearly on the downside,” Singh said at a news conference in Washington today. “There are uncertainties about power outages that could disrupt production in the supply chain.”  Japan may impose legal limits to electric power use as policy makers prepare for shortages that are likely to worsen as the summer approaches, the government of Asia’s largest advanced economy said last week.

Quantifying Impact of Japan Disasters on the Rest of Asia - The twin natural and nuclear catastrophes proved that Japan still matters when it comes to big parts of the global economy, especially automotive and technology supply chains. But in terms of actual economic impact, Japan’s pain isn’t so important, at least to its neighbors in the fast-growing parts of Asia, according to a report from Moody’s Analytics economists Matthew Circosta and Matt Robinson. Even those economies with tight trade links to Japan aren’t likely to be hit terribly hard by the disruptions. And several neighbors could see a boost in demand as Japan rebuilds, the report says. The worst hit: South Korea, Taiwan and Thailand, which are all big traders with Japan and share high-tech and automotive production lines with Japan. They will each see a 0.2 percentage point drop in their annual GDP, according to the Moody’s Analytics forecasts.  Still South Korea is expected to grow 4.4%, Taiwan 4.7% and Thailand 4.8%, so we’re not talking about a major impact.

Supply Chain Disruption Update - Several tech companies have said supply chain issues will impact Q2. As an example, from the Western Digital conference call this week:  [T]here is uncertainty around the ability of our customers and the HDD industry to fully satisfy this demand due to Supply Chain challenges ... we believe that we'll be supply constrained in both June quarter and in the September quarter. We think that in the December quarter, it will be, we'll be able to supply pretty much what the industry, what the customers demand so we think that the comfort level as far as inventory in the pipeline will not be able to be reached again until this quarter next year, the March quarter of next year. This will be an issue most of the year, although most of the impact for the U.S. in Q2 and a little in Q3. I've seen estimates that supply issues will be a drag on U.S. GDP growth of about 0.25 to 0.5 percentage points in Q2 and probably less in Q3.

Toyota: Car production disrupted until end of 2011 - Toyota's global car production, disrupted by parts shortages from Japan's earthquake and tsunami, won't return to normal until November or December — imperiling its spot as the world's top-selling automaker. President Akio Toyoda apologized to customers for the delays due to the March 11 disasters that damaged suppliers in northeastern Japan, affecting automakers around the world. "To all the customers who made the decision to buy a vehicle made by us, I sincerely apologize for the enormous delay in delivery," Toyoda said at a news conference in Tokyo. Toyota Motor Corp. earlier said it has suffered a production loss of 260,000 cars. Earlier this week, it resumed car production at all of its plants in Japan for the first time since the quake, but the factories are running at half capacity due to the parts shortages. Japanese manufacturers are also grappling with power shortages.

Toyota: Output to Return to Normal in November or December  - Toyota Motor said it expects its production to make a full recovery by November or December, around nine months after a massive earthquake and tsunami devastated Japan's northeast and disrupted the supply of key auto parts.  Toyota, the world's largest automaker, said that production would start to normalise in July in Japan and around August at overseas operations, with a complete recovery to come globally by the end of the year.  Toyota and other Japanese automakers have been hit hard by a supply disruption of mostly electronic and resin-based parts made in Japan's northeast, which was battered on March 11 by a magnitude-9.0 earthquake and a tsunami towering more than 10 metres. Toyota has announced plans for production cuts in Japan, North America and China through June 3, and in Europe through the end of May. It has said it would decide on plans beyond that as it gets updates on parts availability.

Korea's Largest Steelmaker POSCO Set to Raise Prices on its Major Products - Korea's largest steel producer, POSCO, is set to raise prices for its major products by 160-thousand won, or around 147 US dollars, per ton starting this Friday.  According to an industry report, hot-rolled steel coils will now be close to 15-hundred dollars per ton, cold-rolled steel at nearly 11-hundred dollars per ton, and thick steel plates at just over a thousand dollars.The steelmaker says it had refrained from raising prices in the past in efforts to prevent a domino effect from taking place in other manufacturing sectors, but that it was inevitable due to the rising cost of raw materials.  The price hike will be POSCO's first increase in the domestic market since June last year.

Moody's downgrades mainland property on gloomy fundamentals - Moody's Investors Service downgraded its outlook on the mainland property sector to "negative" from "stable" on what it says are gloomy fundamentals for developers over the next 12 to 18 months. Under a tough operating environment driven by tightening regulatory measures, rising interest rates, reduced bank lending and increasing supply, mainland developers will inevitably encounter slowing sales, shrinking profit margins and liquidity pressure, according to the rating agency. It also anticipates that the proceeds from contracted sales of residential homes will decline by an average 25 to 30 percent in first and second-tier cities this year.

March Home Transactions in 30 Major Cities Fall 40.5% Y-o-Y - Housing transactions in major Chinese cities monitored by the China Index Research Institute (CIRI) dropped 40.5% year-on-year on average in March, a month when home buying typically enters a seasonal boom period. Transactions rose month-on-month in 70% of the cities monitored, including five cities where transactions were up by more than 100% on a month earlier, reported on Wednesday, citing statistics from the CIRI. Beijing posted a decrease of 48% from a year earlier; cities including Haikou, Chengdu, Tianjin and Hangzhou saw drops in their transaction volumes month-on-month, according to the statistics. Meanwhile, land sales fell 21% quarter-on-quarter to 4,372 plots in 120 cities in the first quarter of 2011; 1,473 plots were for residential projects, the statistics showed. The average price of floor area per square meter in the 120 cities dropped to RMB 1,225, down 15% m-o-m, according to the statistics.

Beijing March New House Prices Plunge 26.7% M/M - Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission. Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009. Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government's crackdown on speculation in the real estate market. Beijing property prices rose 0.4% m/m in February, 0.8% in January and 0.2% in December, according to National Bureau of Statistics data. The central government has launched several rounds of measures since last year designed to cool the housing market, though local government reliance on land sales to plug fiscal holes mean enforcement hasn't been uniform.

More on China's looming(?) growth slowdown - KEVIN DRUM draws attention to an analysis of catch-up growth episodes by Stuart Staniford, which suggests that the Eichengreen-Park-Shin paper on growth slowdowns is too pessimistic about China. Mr Staniford writes: To try to get a better grip on the situation, I did two things. Firstly, to formalize the instinct that the US has been at/near the productivity frontier at most times, I expressed every country's GDP/capita as a fraction of the US value in the same year. Then I started kicking countries out of the sample, unless they met the following criteria: they started out the sample clearly less productive than the US (I took less than 60% as my threshold), and ended up significantly more productive, relative to the US, than they had started out. Ie, we want countries where it's somewhat plausible that there's a story of underdevelopment, period of rapid catchup, followed by slowing growth once the country is a fully developed country with modern capital infrastructure and levels of productivity. And Mr Drum summarises the findings: Long story short, Stuart produced the chart below, which suggests China can keep growing at a fast pace until its per capita income is somewhere in the $25,000 range, which is probably still 15-20 years away. I don't have the chops to adjudicate this, but I thought it was worth highlighting a contrarian opinion anyway.

China Inflation And Wage Protests Spread, Turn Violent - Yesterday we reported news that has so far received almost no media exposure, namely that thousands of striking truck drivers had poured into Shanghai's Waigaoqiao zone, one of the city's busiest container ports, protesting over "rising fuel prices and low wages." Today, via Reuters, we learn that this situation has escalated materially, and progressed into violence: "A two-day strike over rising fuel prices turned violent in Shanghai on Thursday as thousands of truck drivers clashed with police, drivers said, in the latest example of simmering discontent over inflation. About 2,000 truck drivers battled baton-wielding police at an intersection near Waigaoqiao port, Shanghai's biggest, two drivers who were at the protest told Reuters. The drivers, who blocked roads with their trucks, had stopped work on Wednesday demanding the government do something about rising fuel costs, workers said." And while we have violent uprisings over austerity in Europe, now we have violent strikes over inflation in China? The question thus now is just how much longer will China continue to take massively ineffective steps such as RRR and rate hikes, both of which have been a tremendous failure in reining in inflation, instead of picking the nuclear option of revaluing the currency.

Shanghai fuel protests unnerve Beijing - Chinese authorities were locked in negotiations on Friday with striking truckers who have besieged the country’s largest port, in a bid to prevent the unrest from spreading to other cities. Truck drivers at the Shanghai port of Baoshan are demanding relief from rising fuel costs and port fees, in a rare industrial action that will reinforce government fears about the destabilising impact of rising prices. While localised labour and land disputes are common and usually contained, one of the government’s greatest fears is that popular discontent over inflation could spark a wider protest movement. “Every intersection has riot police,” one Baoshan trucker interviewed by phone on Friday afternoon, who declined to be named, said. “I don’t know how long it will last.”  In an alert, a logistics company at the port warned clients that strikers had blocked traffic in a protest over “domestic fuel [costs] and the high handling fees charged by port terminal operators”.

Oil Crisis Just Got Real: Sinopec (Read China) Cuts Off Oil Exports - As if a dollar in freefall was not enough, surging oil is about to hit the turbo boost, decimating what is left of the US (and global) consumer. Xinhua, via Energy Daily, brings this stunner: " Chinese oil giant Sinopec has stopped exporting oil products to maintain domestic supplies amid disruption concerns caused by Middle East unrest and Japan's earthquake, a report said Wednesday. The state-run Xinhua news agency did not say how long the suspension would last but it reported that the firm had said it also would take steps to step up output "to maintain domestic market supplies of refined oil products". Oh but don't worry, those good Saudi folks are seeing a massive drop in demand... for their Kool aid perhaps. "Sinopec would ensure supplies met  the "basic needs" of the southern Chinese special regions of Hong Kong and Macao, but they also should expect an unspecified drop in supply, Xinhua quoted an unnamed company official as saying." Now... does anyone remember the 1970s?

Beer Drinking and What It Says About China's Economy - The average Chinese adult drank about a third of a bottle of beer in 1961, less than the average resident of Iran. By 1991, consumption topped a bottle a year, but still lagged behind 117 other nations, according to the World Health Organization. By 2007, the Chinese were drinking almost a six pack a year. While that’s still considerably less per capita than in beer gardens like the Czech Republic (where the average adult drinks about 24 beers a year) it’s enough to make China by far the world’s largest market for beer. That story can be repeated for any number of consumer goods, of course. But what’s interesting about beer is that the trend is not likely to last. A paper by two economists at the University of Leuven, in beer-loving Belgium, finds that people drink more beer as their incomes rise, until they make about $22,000 a year. Then they start drinking less beer.

Can China dodge the middle-income trap? - THIS week's Economics focus discusses a new working paper by Barry Eichengreen, Donghyun Park, and Kwanho Shin (previously mentioned here at Free exchange) focusing on middle-income growth slowdowns. The authors find that an economy experiencing rapid catch-up growth will often see a decline in per capita growth rates around the time it hits a per capita output level of about $17,000. The authors further note that China is approaching this threshold and may hit it by 2015. For further debate on the question, we turned to the economists at Economics by invitation and asked them whether a slowdown lurks in China's near future. The responses have been very interesting. Michael Pettis writes: I would certainly argue that the consensus medium-term growth predictions for China are wildly optimistic. My own guess is that over the next decade annual growth will average 5% or less, although it will be heavily frontloaded—higher in the first few years and lower later on.

Ranks of the Rich Growing in China -  China’s economic boom has made many Chinese very wealthy indeed. A new study by the consulting firm Bain & Company shows just how many — and how rapidly — the ranks of the rich are swelling in this country of 1.3 billion.  Bain estimates that the number of high-net-worth individuals — mostly first-generation entrepreneurs who have more than 10 million renminbi, or about $1.5 million, in investable assets — will grow to 585,000 this year. That’s twice the number than in 2008. Moreover, the number of individuals who are worth more than 100 million renminbi is rising at its fastest pace.  ‘‘Wealth creation in China is marching on unimpeded,’’ said Johnson Chng, Bain’s chief of financial services in greater China and the author of the study.  The greatest concentration of millionaires and multimillionaires are in Beijing; Shanghai; the provinces of Zhejiang and Jiangsu, which are adjacent to Shanghai; and the southern province of Guangdong. More than 30,000 high-net-worth individuals live in each of these areas.  But central and western areas of China have the speediest growth rates. In provinces like Sichuan, Hunan and Hubei, and the Bohai Bay basin (including Tianjin and Liaoning) the number of rich soared by a rate of 31 to 40 percent a year from 2008 to 2010.

China to alter taxes in attempt to cut wealth gap - China is to lift the exemption threshold for personal income tax payments in an effort to redistribute the spoils of rapid growth and reduce a widening wealth gap. The level at which Chinese citizens must pay income tax will be raised from Rmb2,000 ($305) a month to Rmb3,000, the finance ministry said on WednesdayRaising the threshold to this level will cut the number of taxpayers by about 50m to 350m and reduce government tax revenue by about Rmb99bn.The change, which is likely to come in the second half of the year, is one of several policy initiatives intended to alleviate poverty and reduce growing income disparity. Other policies include a promise to raise average wages by 15 per cent a year and so double average wages by the end of 2015. The government has been increasing statutory minimum wages over the past year and intends to build 35m units of low-income housing over the next five years.The government also has plans to lift its official poverty line from the current income level of $0.50 a day to $0.63

Appreciation for China -- CHINA'S currency has long been undervalued, and this undervaluation has long been a sore spot for China's trading partners. American officials, in particular, have been upset by the impact of a cheap yuan on America's trade balance with China, and by the impact of that imbalance on employment. China allowed its currency to appreciate nearly 20% against the dollar from 2005 to 2008, but it halted the rise in 2008 out of concern for the impact of the global downturn on its export-oriented economy. Last year, as it was clear that China's economy was once more running at full steam (and then some) appreciation resumed. Not fast enough for its critics, it should be noted, but as you can see below, the rise in the yuan has been fairly steady and has so far amounted to an appreciation of about 4.6%. Real exchange rate appreciation has two parts, of course—nominal appreciation, which we see above, and the relative change in inflation. Menzie Chinn discusses the latter point in a post here, and provides a chart of price growth in China:

China Must Cut Forex Reserves – PBOC Chairman - China must reduce its foreign exchange reserves as they are beyond the level the country needs, central bank Governor Zhou Xiaochuan said at a speech at Tsinghua University in Beijing on Monday. China's foreign exchange reserves rose 24.4% year-on-year to $3.044 trillion by the end of March, cementing even further its position as the world’s largest holder of foreign exchange reserves, according to data released by the People's Bank of China on April 14. Its holdings exceeded $2 trillion for the first time in June 2009. The State Council, the nation's cabinet, has highlighted the need to reduce excessive accumulation of foreign exchange reserves and for better management and diversification of the holdings as the rapid increase in reserves has led to excessive liquidity and fuelled inflation pressures.

Yuan Exchange Rate To Be More Flexible: China's Central Bank Governor (Xinhua) -- China will make the yuan's exchange rate more flexible, but in a "step-by-step" manner, China's central bank governor Zhou Xiaochuan said here on Friday. Zhou, governor of the People' s Bank of China (PBOC), made the remarks when discussing issues related to the Group of 20 (G20) countries at the ongoing Boao Forum for Asia. Zhou said that he welcomes the international discussions on the inclusion of the renminbi, or yuan, in the basket of currencies that forms the Special Drawing Rights (SDR), a monetary unit of international reserve assets maintained by the International Monetary Fund. "But we need more time to prepare (for such inclusion)," he said, reiterating the similar stance he made at a meeting on the sidelines of the gathering of financial ministers of the G20 in Nanjing earlier this month. Then, he said that China is in no hurry to let the yuan join the SDR basket of currencies. Zhou expected that issues related to the international monetary system, and the SDR in particular, will not be the focus of discussion at the G20 summit meeting in France later this year.

Zhou Pledges More Tightening in order to combat inflation an rampant property speculation - China increased banks’ reserve requirements to lock up cash and cool inflation, and central bank Governor Zhou Xiaochuan said monetary tightening will continue for “some time.” Reserve ratios will rise a half point from April 21, the People’s Bank of China said on its website yesterday, pushing the requirement to a record 20.5 percent for the biggest lenders. The move came less than two weeks after an interest- rate increase. Zhou sees no “absolute” limit on how high reserve requirements can go, he said April 16. “Our monetary policy will continue to move from moderately loose to prudent,” Zhou said at a briefing in the southern Chinese province of Hainan, where he attended the Boao Forum for Asia. “The trend will continue for some time.” He said that the government will “remove the monetary factors that are related to inflation,” echoing comments made by Premier Wen Jiabao. In China, inflation accelerated to a 5.4 percent annual pace in March, largely driven by food costs, a statistics bureau report showed three days ago.

Chinese recycling and US interest rates (Pettis) I mentioned in last week’s blog entry that during my trips to New York, Washington and Hangzhou in the past two weeks one of the common themes was concern about rising debt levels and weaknesses in the banking sector.  Another theme – one which I want to discuss in this entry – was the possible impact of China’s rebalancing on US and global interest rates.  A lot of people were very concerned that if China does indeed rebalance, US interest rates will soar.  The argument runs like this.  If China raises the consumption share of GDP faster than investment declines, this will result in a reduction in China’s current account surplus.  Clearly if China’s current account surplus drops, the amount of capital it exports must drop in tandem – since a rising share of consumption means a declining share of savings and so a declining excess of savings over investment which must be exported.  But because it is recycling the world’s (and history’s) largest current account surplus, China is one of the world’s largest purchasers of US government bonds.  If China’s current account surplus declines, and so China sharply cuts back on its purchases of US government bonds, this should automatically cause US interest rates to rise.

Inflation in China Poses Big Threat to Global Trade - As the United States and Europe struggle to get their economies rolling again, China is having the opposite problem: figuring out how to keep its revved-up growth engine from generating runaway inflation.  The latest sign that things were moving too fast came on Sunday, when China’s central bank ordered the biggest banks to set aside more cash reserves.  The move essentially reduces the amount of money available for loans, and is an attempt to cool down the economy. It follows the government announcement on Friday that China’s economy was growing at an annual rate of 9.7 percent, by far the strongest performance by any of the world’s biggest economies. Because China is now the world’s second largest economy, after the United States, and because the country has been a leading source of global growth during the last two years, money problems here can reverberate from Wal-Mart1 to Wall Street and the world beyond.

Chinese Inflation and the Impact on the US Economy » The portents from China, on the price front, are ominous. Inflation is rising, as shown in Figure 1: That being said, I think headlines such as "Inflation in China Poses Big Threat to Global Trade" are a little overstated. From the article: Because China is now the world’s second largest economy, after the United States, and because the country has been a leading source of global growth during the last two years, money problems here can reverberate from Wal-Mart to Wall Street and the world beyond.  High inflation endangers China’s status as the low-cost workshop for the world. And if the government’s efforts to fight inflation cause the economy to stumble, that will cloud the outlook for international businesses that have been counting on China for growth. I think it's useful to separate out the effects. First, let's deal with the possibility of Chinese inflation being imported into the U.S. [1] [2]. Definitely import prices from China are rising, as shown in Figure 2.

Fear of a weak China - My column in tomorrow’s issue of The Daily is an extended riff on China and the prospect of a coming growth slowdown, so I’ll keep this post brief: (1) Daniel Blumenthal has a really interesting and substantial post at Shadow Government on why China is getting pricklier: (a) it has a stronger military; (b) weak leadership at the top (as the revolutionary generation has faded, its successors find that they don’t have the legitimacy they need to assert themselves) has created a vacuum that the PLA is well-placed to fill; (c) and xenophobic nationalism is on the rise, fueled by a CCP desperately trying to find new sources of legitimacy (there’s that word again). Blumenthal also notes the potential impact of surplus males.(2) David Barboza has a report in the NYT on rising inflation in China. Barry Eichengreen, Donghyun Park, and Kwanho Shin cite an uptick in inflation as a potential sign that a growth slowdown is on the way in “When Fast Growing Economies Slow Down,” their new working paper. Other factors that make a growth slowdown more likely: an undervalued currency and a rising old-age dependency ratio. Sound like any countries you know? And a spike in inflation could make the Chinese bourgeoisie restless. Wouldn’t want that.

What are fiscal councils, and what do they do? - Vox EU - Fiscal councils are independent bodies set up by governments to evaluate fiscal policy. As problems with debt and deficits have taken hold, they have become increasingly popular. This column looks at what existing councils do and what dangers they face. It argues that, with the right guarantees of their independence in place, independent fiscal councils can make a significant positive contribution to fiscal policy.

Saving the WTO from the Doha Round- The recent bleak news on the Doha Round of trade discussions has thrown its future into doubt once again. This column discusses ways to salvage the talks and the World Trade Organisation itself, arguing that it is time to start thinking about changing the way the organisation does business in order to reflect the changing circumstances of the 21st century.

IMF Warns Response To Credit Boom "Insufficient" (Reuters) - The International Monetary Fund on Monday criticized developing countries for not responding strongly enough to the surge of hot money into their markets, saying the result could be a hard economic landing. After meeting in Washington D.C. on Friday, the IMF said in a note to G20 major economies that huge inflows of speculative capital had sped up economic growth in emerging markets, but also pushed up inflation and the response by developing country governments had "been insufficient to address these rising pressures, portending risks of a hard landing." It said while capital flows to emerging markets have moderated, and in some cases been reversed, they remained high and volatile. The IMF said emerging market economies have tried to slow the flows through a combination of macroeconomic policies as well as capital control measures, but are delaying further macroeconomic responses such as raising interest rates. In Brazil, the IMF said there was scope to continue monetary policy tightening, while in China there should be less reliance on quantitative limits and reserve requirements and more focus on raising interest rates.

Connecting the Dots Between Global Risks - IMFdirect - Finance ministers and central bank governors from around the world, gathering at the Spring Meetings of the IMF and World Bank in Washington last week, identified a slew of continued and emerging risks to the global economy, including higher food and fuel prices, the disaster in Japan, unrest in the Middle East, lingering unemployment in parts of the world, and the risk of overheating in some dynamic emerging markets. With the recovery solidifying but still fragile, ministers put the spotlight on how to strengthen the IMF’s surveillance—its economic assessment and analysis—to help countries take the action needed to address risks and avoid future crises. The new chair of the IMF’s policy-setting body, the International Monetary and Financial Committee, Singapore’s Finance Minister Tharman Shanmugaratnam said that the IMF will need to develop capabilities “to address risks proactively, to anticipate possible scenarios that could turn out to be ugly, and to require that countries, including especially systemically significant countries, take actions early to prevent another major crisis.”

BRICS credit: Local currencies to replace dollar - Brazil, Russia, India, China and South Africa - the BRICS group of fastest growing economies - Thursday signed an agreement to use their own currencies instead of the predominant US dollar in issuing credit or grants to each other. The agreement, the first-of-its-kind, was signed at the 3rd BRICS summit here attended by Indian Prime Minister Manmohan Singh, China's Hu Jintao, Brazil's Dilma Rousseff, Russia's Dmitry Medvedev and South Africa's Jacob Zuma. "Our designated banks have signed a framework agreement on financial cooperation which envisages grant of credit in local currencies and cooperation in capital markets and other financial services,"  But the agreement is confined to credit and not trade. BRICS economies hold 40 percent of the world's currency reserves, the majority of which is still in US dollars.

A new IMF reserve currency - With discontent at the current state of the international monetary system still lingering, is there an alternative to the decades-old discussions about gold, Bretton Woods Systems, and Special Drawing Rights? This column claims there is. It proposes a new IMF reserve currency with the creation of Special Transaction Rights.

Australia Won’t ‘Manipulate’ Currency Now at Record, Rudd Says - Australia won’t “manipulate” its currency, which has reached a record, and countries that do will “pay a price,” Foreign Minister Kevin Rudd said.  Rudd in an interview ruled out intervention in the so- called Aussie, which has gained 15 percent in the past year against the dollar. Spurred by revenue from shipments of coal and iron ore to China, the currency’s surge has hurt Australian tourism, manufacturing and education. “We are not in the business of regulating exchange rates,” Rudd told Bloomberg Television in his Brisbane office yesterday, saying the government could assist industries through tax revision and skills programs. “We don’t intend to drift back to anything which seeks to manipulate our exchange rate and those countries that do I think ultimately pay a price.”

Putin Says Ruble Set to Become Regional Reserve Currency - Prime Minister Vladimir Putin said Russia is succeeding in its effort to turn the ruble into a regional reserve currency as other former Soviet republics adopt it for trade.  “In the post-Soviet space, the ruble is strengthening and becoming a reserve currency,” helping Moscow become an international financial center, Putin told lawmakers in Moscow today.  Ukraine has requested settling purchases of energy products in rubles and Belarus uses the currency for 80 percent to 90 percent of its non-cash transactions with Russia, Putin said.  The world’s biggest energy supplier has been encouraging greater use of local currencies in trade and investment to reduce a reliance on dollars. President Dmitry Medvedev said at the St. Petersburg economic forum last June that he wants to boost the ruble’s place in central bank reserves.

BBC News - Vladimir Putin reveals plan to boost Russia birth rate: "Russian Prime Minister Vladimir Putin has unveiled plans to reverse Russia's declining population. The government will spend 1.5tn roubles ($53bn; £33bn) on raising the birth rate and extending life expectancy. He announced the plan in a key speech to the Duma on the economy ahead of presidential elections in March 2012. The prime minister has hinted he may seek to return to the presidency, but it is unclear whether the incumbent Dmitry Medvedev would make way for him."

ECB Officials Signal More Rate Increases This Year as Economy Strengthens - European Central Bank Governing Council members signaled they will keep tightening monetary policy this year to curb inflation as the economy strengthens.  Investor expectations that the benchmark interest rate will be increased by another 50 basis points in 2011 are “well- founded,” Austria’s Ewald Nowotny told Bloomberg News in Washington on April 16. Luc Coene of Belgium said in an interview yesterday that monetary “conditions are too accommodative.”  The suggestion that the ECB will soon raise its key rate again was echoed by other policy makers at the weekend meeting of the International Monetary Fund, even after President Jean- Claude Trichet said this month’s quarter-point boost to 1.25 percent wasn’t necessarily the start of a series. Higher euro- area borrowing costs at a time when the U.S. Federal Reserve is signaling no imminent move in its near-zero policy rate may support the euro after it fell last week on concern Europe’s sovereign debt crisis isn’t over.

Germany Floats Greek Restructuring as Papandreou Pushes Cuts - German officials are putting Greek debt restructuring on the table over declarations by leaders in Athens and policy makers elsewhere in Europe that Greece will make good on its obligations. German Deputy Foreign Minister Werner Hoyer said yesterday a Greek restructuring “would not be a disaster.” The previous day, Finance Minister Wolfgang Schaeuble was quoted by Die Welt newspaper as saying “further measures may have to be taken” if Greece flunks a June audit.Chancellor Angela Merkel’s deputies are raising what has been a taboo issue for European officials -- a restructuring by a euro member -- to show its unwillingness to contribute to more bailouts. Germany is the largest contributor to European Union rescue funds, which have been tapped by Ireland, Greece and Portugal. “This is part of a gambit in negotiations,”. “If Greece doesn’t get access to markets, the funds will probably run out sometime in 2012. That, I think, is the German message: Don’t count on us to add more money.”

IMF believes Greece should consider debt restructuring -The International Monetary Fund believes Greece's debt is unsustainable and has told European government and central bank officials that Athens should consider restructuring by next year, three people familiar with the situation said Saturday. "The IMF believes the debt situation in Greece is unsustainable," one of those people, who has direct knowledge of the matter, told Dow Jones Newswires. "Senior (IMF) officials have told the parties involved that restructuring should be considered soon," including the European Commission and euro-zone governments.IMF spokesman William Murray denied the IMF was recommending a restructuring of all Greek debt including that held by private holders, but the IMF has said the fund has considered extending the loan repayment schedule for Athens, a form of restructuring.

Greece Bond Yields at Record High following Default Comments - The yield on Greece ten year bonds jumped to 14.4% today and the two year yield is up to 19.6%. From Reuters: Greece asked EU/IMF at Ecofin to restructure debt-paper Greece told the IMF and the European Union earlier this month that it wants to restructure its debt and discussions on the issue are expected to start in June, Greek daily Eleftherotypia said on Monday....The paper said U.S. Treasury Secretary Timothy Geithner is also in favour of stretching out repayments of Greece's debt. "You have to do it, he told Papaconstantinou," the paper said This report has been "dismissed" by Greek, EU and IMF officials, but it is widely expected that Greece will default (aka restructure). Many analysts expect the restructuring to include extending the duration.

Greece Denies Restructuring Plan as Traders Raise Default Bet - Greece said it has no plans for a debt restructuring even as German officials openly discuss the possibility and investors charge a record amount to insure the country’s obligations. “Restructuring is not an issue we’re discussing,” Greek Finance Minister George Papaconstantinou said in an April 16 interview in Washington. “The pain and the cost” of doing so would be greater than repaying lenders, he told reporters the same day. Greece found support from International Monetary Fund Managing Director Dominique Strauss-Kahn and French Finance Minister Christine Lagarde after German Finance Minister Wolfgang Schaeuble was quoted as saying “further measures may have to be taken” if Greece fails a June audit. Traders are betting on a default. The cost of insuring Greek sovereign debt jumped 56 basis points today to a record 1,211 points, according to CMA prices for credit-default swaps. That indicates there’s a 64.5 percent probability of default within five years.

Roubini says Greece to Restructure Debt, Spain May Seek Aid --- Nouriel Roubini said restructuring of Greek state debt is only a matter of time, while Spain may soon follow Ireland and Portugal in seeking financial assistance.  “The issue of Greece is not whether there will be debt restructuring, but when it will be done, and whether it will be an orderly market-oriented debt exchange or disorderly like in Argentina,”  “One can make the same argument for Portugal’s government and Irish banks.” The EU aims to reach an agreement on the aid package for Portugal on May 16, three weeks before the country’s June 5 election, which was prompted by the resignation of Prime Minister Jose Socrates after parliament rejected his deficit- cutting plan. The nation requested emergency aid last week.Spain, the currency bloc’s fourth-largest economy, is trying to restructure its savings banks after a property-market slump left many with surging bad loans. Twelve lenders need to raise as much as 15.2 billion euros to meet new minimum capital standards set by the government. “When Greece failed, they said Portugal is different,” Roubini said. “Now they say Spain is different. I am not sure Spain is different.”

Spain unemployed could reach 5 mln-labour minister - The number of Spaniards out of work could reach a record high of 5 million if the active workforce continues to rise, Labour Minister Valeriano Gomez said in an interview published on Saturday in Expansion. Spanish unemployment is more than double the European Union average at 20.3 percent and has risen by around 2.5 million to 4.7 million since the beginning of the economic crisis in the first quarter of 2008. "Whether or not we rise above the 5 million level really depends on the active workforce," Gomez told Expansion.

Euro Zone Crisis Escalates On Greek Debt Fears (Reuters) - Fresh fears that Greece will have to restructure its mountain of debt, possibly as early as this summer, sent the euro and some euro zone bond prices tumbling on Monday as the bloc's debt crisis escalated. German government sources told Reuters in Berlin that they did not believe Greece, which sealed a 110 billion euro ($158 billion) bailout from the EU and IMF a year ago, would make it through the summer without a restructuring. Market confidence was also hit by a new threat to Portugal's pending bailout from the rise of an anti-euro party in Finnish elections. The anti-euro True Finns party scored big gains in a Sunday vote and vowed to push for changes to a Portuguese rescue by the EU that is expected to total 80 billion euros when it is finalized by a mid-May deadline. After a brief lull in the EU debt crisis at the start of 2011, it has blown up again and some analysts are now openly speculating that Greece and possibly other countries could eventually be forced to exit the bloc.

Hurdles to a Greek debt restructuring - Greek debt restructuring? Greek debt restructuring before 2013? Soft Greek debt restructuring? There are so many variables to the debate — and so many officials talking about it – that it’s difficult keeping up. For the moment, though, focus on the possibility of debt restructuring before the European Stability Mechanism (ESM) is due to take effect in 2013. Deutsche Bank certainly has. And the bank reckons there are quite a few difficulties with such a thing actually happening. (And being a German bank [ahem] they would know all about those, right?)

Extend and Pretend Greek Style - NY Times discusses how a possible restructuring might work: Talk of Greek Debt Restructuring Just Won't Die One option that has attracted some attention, though, is a plan that would ask bond holders to trade in their current paper for debt with lower rates and longer maturities.  Last week, in a Bloomberg article, German Finance Minister Wolfgang Schaeuble was quoted concerning a report due in June on Greek debt sustainability:  “We will have to do something” if the review by the International Monetary Fund and European authorities in June raises doubts about Greece’s “debt sustainability,” Schaeuble was quoted as saying. It seems unlikely that anything will happen until after the report is released in June. The yield on Greece ten year bonds jumped to 14.5% today and the two year yield is now up to 20.3%. The curve is inverted because investors expect to wake up one morning and own longer maturity debt at lower rates. This possibility hits the price of the 2 year bond more than the 10 year.

Greece Denies Restructuring Plan as Traders Raise Default Bet - Greece said it has no plans for a debt restructuring even as German officials openly discuss the possibility and investors charge a record amount to insure the country’s obligations. “Restructuring is not an issue we’re discussing,” Greek Finance Minister George Papaconstantinou said in an April 16 interview in Washington. “The pain and the cost” of doing so would be greater than repaying lenders, he told reporters the same day. Traders are betting on a default. The cost of insuring Greek sovereign debt jumped 56 basis points today to a record 1,211 points, according to CMA prices for credit-default swaps. That indicates there’s a 64.5 percent probability of default within five years.Greece’s aid program was designed on the assumption that the country would repay debt rather than restructure, and “nothing has changed,” Strauss-Kahn said as he hosted the IMF’s semi-annual meetings in the U.S. capital. Lagarde said April 14 at the same talks that “there is no discussion about debt restructuring, none whatsoever.”

Next Phase of Sovereign Debt Crisis; Greek 2-Year Yields Top 20%; Greece Denies Restructuring Plan; Why the Denial? - A Greek newspaper reported that Greece is in talks with the IMF regarding debt restructuring. However, Greek Finance Minister issued this denial "Restructuring is not an issue we’re discussing". Last week, the media went gaga over a no-news announcement from German officials that restructuring was on the table. It should not have caused a stir because anyone watching the market knows perfectly well a restructuring is coming. Denials from Greece cannot stop it. Inquiring minds are likely asking "Why does Greece insist it will not restructure?" The answer is simple: Greek public pension plans are loaded with Greek sovereign debt garbage. A restructuring would shatter the values of those plans and the expected payouts to the pensioners. However, the market does not care what Greek or IMF officials think. Nor does the market care about those pension plans. A yield of 20.34% on the 2-year government bond is proof enough. This is what happens when the market takes matters into its own hands.

Europe, courting trouble - MARKETS were jolted this morning as rumours spread that Greece had gone to the International Monetary Fund and the European Union to request a debt restructuring. The Greek government has denied that this is so, but restructuring increasingly seems to be a matter of when, not if. Yields on 2-year Greek debt are up 7% and 10-year yields are up over 5%. Both are at crisis highs. There is no question of the Greek government's ability to borrow in private markets any time soon. This hardly comes as a surprise; The Economist has been calling for restructuring for some time now. What's somewhat surprising and very troubling is the erosion of the firewall that the euro zone had managed to erect around Greece, Ireland, and Portugal. Ireland and Portugal are in similar straits and will almost certainly need to restructure their debts as well. For a while, however, it seemed that Spain had detached itself from this bunch, and that no longer appears to be the case. Yields on 2-year Spanish debt are also up 7% today, and yields on 10-year debt have risen nearly 3% to a new crisis high. Why does Spain matter so much? Calculations by the Bank of England on losses that would arise from haircuts to Greek, Irish, Portuguese and Spanish debt suggests that a 50% haircut would wipe out 70% of the equity in Greek banks, almost half of it in Portuguese and Spanish banks and about 10% of the equity in German and French banks.

Europe’s long road of tears to fiscal union - There is an emerging consensus among policymakers that the Greek public sector debt is not sustainable. For this realisation to look consistent with the Deauville pledge, the most likely route chosen will be a voluntary restructuring that involves a maturity transformation of Greek bonds. A voluntary restructuring is, of course, an oxymoron. The idea is to get a group of large investors into a room and bang heads. The problem is this will almost certainly not be sufficient. This was also the experience of pre-default Argentina where some investors agreed to a rescheduling, while others stayed outside and took a free ride. In the case of Greece, debt sustainability would require a large restructuring. Standard & Poor’s last week put the necessary size of a “haircut” at between 50 and 70 per cent, given the projected debt level of 160 per cent of gross domestic product. The main significance of a voluntary scheme is not economic, but political. A token voluntary “bail-in” may persuade the EU and the International Monetary Fund to agree another loan to Greece next year. Greece would badly need such a loan because there is no way it will be strong enough to return to the capital market. So this could be the sequence: after the initial loan, a token “bail-in” would be followed by another loan. By that time, the exposure of the private sector will be lower than today. The short-term debt will have been fully repaid

The crisis is back - The financial crisis is back in full force – thanks large to lose talk in Berlin about the inevitability of debt restructuring in Greece. Once Wolfgang Schäuble went public with his views on the inevitability of a restructuring, the markets fed themselves into a frenzy that has now engulfed Spain – the country Herman van Rompuy only a few days ago declared as definitely out of danger. What is now happening is exactly what the ECB has always predicted – that talk of a debt restructuring in Greece would spread like wildfire throughout peripheral Europe. There is now a daily feed of speculative stories, led by the German press, in which some senior officials are quoted as saying that the German government was already working on the details of a restructuring. Die Welt yesterday quoted a Greek minister as saying that a restructuring would happen, it was only a matter of when. And Reuters, for good measure, citing a high ranking German government official as saying: “Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring.” The Greek newspapers are also adding to the rumours. FT Alphaville has dug up, and translated, a report by the Greek newspaper, Elephtherotypia, according to which a senior IMF official had confirmed that the Greek government had asked for a maturity transformation of all Greek debt. This must be the most public debt restructuring in history.  Spanish 10-year spreads reached 2.356% this morning, returning to the neighbourhood of the all time high during the crisis. The Spanish government was forced to raise coupons for an auction of shorter-dated maturities, El Pais reports as part of its coverage of the crisis. Portuguese spreads are now over 6%, close to those of Ireland. Reuters quotes analysts speculating on individual eurozone countries leaving the eurozone, as the process is now very likely to get out of control.

Europe's debt crisis: It's back!!! -- Or should I say, it never really left. Americans got a scary reminder this week of something that the rest of the advanced economies had figured out some time ago -- that mounting sovereign debt is one of the great threats to the future economic stability and prosperity of the world's richest nations. Just ask the Europeans. They've been dealing with (or, more accurately, not dealing with) a sovereign debt crisis for well over a year, with no signs of it abating anytime soon. The contagion that had been raging through Europe ever since Greece spiraled into a debt crisis in early 2010 took an unexpected breather after Portugal's announcement that it, too, was seeking an EU bailout, making it the third member of the euro zone to do so. (Ireland succumbed in November.) But as Leo Cendrowicz and I pointed out in this week's TIME magazine, there was every reason to believe that the pause was merely temporary – most of all because the destabilizing debt problem hadn't been addressed at all.

Finland's Anti-Euro Party Poised to Win Record Support in Weekend Election - Finland’s anti-euro bloc is set to win record support at the weekend’s election, forcing the country’s biggest parties to take a tougher stance on bailouts as they try to woo voters tired of rescuing fiscal failures. Support for political groups opposed to euro-area rescues was 47.3 percent in the latest poll by Helsingin Sanomat, published April 12. The True Finns, whose leader Timo Soini says taxpayers in the Nordic country shouldn’t have helped bail out Greece or Ireland, has seen its support soar to 16.9 percent from 6.9 percent a year ago. Finns will vote on April 17, 11 days after Portugal became the third euro member to seek a bailout and as speculation grows that Greece may be unable to honor its debts. Finance Minister Jyrki Katainen assured voters last week Finland will insist Portugal’s “medicine” is “tougher,” while Prime Minister Mari Kiviniemi on April 13 called for “harsher measures” than those Portugal’s parliament rejected in March. Both politicians want to stop voters backing the True Finns’ leader, who says countries that can’t pay their debts shouldn’t be in the euro.

Will The Finnish Vote Dead End Europe's Bailout Bonanza? - The early Finnish votes are in and it does not look good for Portugal. As Reuters reports, Finland's anti-euro True Finns made huge gains in an election on Sunday, raising the risk of disruption to an EU bailout of Portugal. The right-leaning National Coalition topped the ballot, gaining just over a fifth of all votes. Party leaders will start talks soon on forming a new government. The problem is that as the anti-euro moniker indicates, the True Finns are pretty much hell bent on vetoing the Portugal bailout which means the ongoing annexation of Europe's periphery by Olli Rehn is about to finish (and yes there is a finish-Finnish joke in there somewhere). Per Marketwatch: "Early results Sunday from Finland’s parliamentary elections suggest the anti-EU bailout True Finns party will hold the second-most number of seats and could even be part of a coalition government. Such an outcome may mean the EU’s planned bailout of Portugal is vetoed by Finland, a move that would roil the euro-zone markets. With half the votes counted the True Finns were on 19% support, and on course for 41 seats, tied with the Social Democrats and one seat less than National Coalition Party’s predicted 42-seat haul, the BBC reported. Finland is the only euro-zone country that requires bailouts to be approved by its parliament. Strong gains by the True Finns could derail a planned rescue for Portugal."

True Fins at 19% - what now? - The Finnish election results were a shocker. Helsinki Sanomat declared the leader of the True Finns, Timo Soini, as the true victor of the election, having won a “landslide” 19%, coming a narrow third after the National Coalition and the Social Democrats. The centre party of prime minister Mari Kiviniemi came forth.  There are four other parties that scored under 10%, including the Left Alliance, the Greens, a Swedish Party, and a Christian Democrat party.  The Finnish parliament has 200 members. The two largest parties thus do not automatically have a majority. Both the Social Democrats and the True Finns are expected to be invited to join the government, but it is also possible that smaller parties could be asked to join. Mr Soini insisted that he will be included in the next government, arguing that it will govern from a conservative position. He said the EFSF package will now definitely have to be renegotiated.  This view was contradicted, however, by finance minister Jyrki Katainen, who as leader of the National Coalition is likely to be the next prime minister, and who said the new government would be formed on the basis of a common ground – including on Europe.

Europe's problems in a nutshell - WHEN we talk about the debt crisis in Europe, we tend to focus on the specific details—a relative loss of peripheral European competitiveness, accumulation of debt, rising bond yields and contracting economies. But the bigger story is a simpler one: The euro zone's political institutions did not keep up with its economic institutions. A piece in this morning's Financial Times beautifully captures the dynamic:The True Finns party won 19 per cent of the vote, increasing its number of seats in the 200-strong parliament to 39 from just five at the previous election amid public anger over the succession of taxpayer-funded bail-outs for crisis-hit eurozone countries. The result raised fears that Helsinki could block the Portuguese deal because Finland, unlike other eurozone countries, requires parliamentary approval to take part in bail-outs, which can go forward only with unanimous EU support. How long could America maintain its dominance—or, indeed, its union—if the fact of a secessionist party winning 19% in a Maryland election could prevent the union from undertaking a step critically important to the stability of the American economy?

EU-IMF Face Portuguese Pressures On Debt Rescue - Top EU and IMF officials working on a debt rescue for Portugal worth some 80 billion euros Tuesday met leading unions and politicians who said new austerity measures should not kill off firms or lead to unemployment. The country is eight weeks away from a risk of defaulting on its debt and faces a general election on June 5. The officials from the European Union, the European Central Bank and the International Monetary Fund had talks lasting nearly two-and-a-half hours with leaders of the main opposition Social Democratic Party. Portugal faces an early general election on June 5 because the opposition rejected austerity cutbacks proposed by outgoing Socialist Prime Minister Jose Socrates. The bailout plan is supposed to be agreed by mid-May so that the political parties can take it into the elections.

ECB’s Trichet Defends Rate Increase to Portugal, Greece - European Central Bank President Jean-Claude Trichet has been spending some time at the typewriter, writing a pair of letters to European parliamentarians from Greece and Portugal defending his recent decision to raise interest rates. Many analysts think ECB rate hikes will disproportionately weigh on Southern Europe and Ireland, whose economies are either in or barely out of deep slumps as they enact budget cuts to rein in high levels of government debt. A lot of private-sector debt in Spain, Portugal, Ireland and Greece is tied to short-term interest rates, meaning higher ECB rates ripple through the economy more quickly. The IMF thinks GDP in Greece and Portugal will shrink this year. Ireland will barely grow, the IMF says. Mr. Trichet’s message: he focuses on the euro zone as a whole, and not individual countries. “As regards your first question, on the impact of an interest rate increase on specific countries in the euro area, and on whether the (ECB) has assessed the extra burden for banks and economies of Member States with high debt ratios, let me clarify first that the ECB’s monetary policy is geared towards maintaining price stability in the medium term for the euro area as a whole,”

Greek Bond Yields Rise to Record on Debt Restructuring Concern - Greek bonds tumbled, leading declines by securities from Europe’s most indebted countries, as a German government adviser said the Mediterranean nation will probably have to restructure its debt burden.  The slide drove yields on Greece’s two- and 10-year bonds to euro-era records. Portuguese and Irish bonds also fell after Lars Feld, a member of German Chancellor Angela Merkel’s council of economic advisers, said Greek restructuring is probable. Spanish bonds rose after demand increased at an auction of 10- year debt. German bunds fell for a second day as equities rose, sapping demand for the safest assets. “Talk of Greek restructuring dominates sentiment and is pushing peripherals lower,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “The bond market continues to push spreads wider, suggesting the reality of the restructuring risk.”  Greek two-year yields climbed 129 basis points to 22.02 percent at 4:26 p.m. in London. It reached 22.06 percent, the highest since at least 1998, when Bloomberg began collecting the data.

Rumours on Greek restructuring are spooking the markets - Greek bank stocks fell 4.6% on Wednesday and five-year CDS reach a new record on rumours of a force restructuring debt as early as this weekend, Reuters reports. The Greek finance ministry requested a prosecutor to investigate possible criminal conduct associated with debt restructuring rumours that helped drag Greek stocks down on Wednesday. The Ministry sent the prosecutor an email from traders of a large international investment bank which states an alleged Greek debt restructuring this week-end. "Such rumours are empty of any substance and obviously ridiculous," says the finance ministry.  Comments of Jan Feld, member of Angela Merkel’s council of economic advisers, also rattled the markets, according to Bloomberg. Feld told Deutschlandfunk radio “I fear that Greece can’t get out of this situation without some kind of restructuring”. While “that doesn’t have to mean an actual default,” it could include “the buyback of bonds through a European institution,” he said, without elaborating.  A strong majority of economists polled by Reuters said that Greece will have to restructure its €325bn debt mountain, although most said it would not happen for at least a year.

Rumor Of Greek Default As Early As This Weekend Pushing Yen…The various Yen funding crosses have suddenly seen a bit of a hiccup (but fear not: it only means far greater USD shorting instead) following a rumor that Greece may default as early as this weekend. While we think there is absolutely no possibility of that happening, a far more interesting piece of news comes from Finland, where the recent electoral upstart Soini from the True Finns party has said that the May EcoFin meeting would discuss an "entirely different" solution to the debt crisis, than the previous one. Specifically, he was quoted by Reuters as saying the best solution would be one of bank recapitalization whereby banks, and not taxpayers, bear liability. Is Europe about to pull the plug on taxpayer funded bailout for good? And if so, does the European financial system have enough a buffer to absorb what will certainly be hundreds of billions in capital shortfall. Looks like May is shaping up to be another rescue Europe month... just like last year.

Expecting an early Greek default - Greece is going to restructure its debts — and it’s going to do so before mid-2013. That’s the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months. This is a major development. The markets haven’t believed Greece for a while — but now they don’t believe the European Union, either. Remember that back in November, the EU put out a statement laying out a mechanism for restructuring a member’s debt “in the unexpected event that a country would appear to be insolvent”. It clearly says that “any private sector involvement based on these terms and conditions would not be effective before mid-2013″. But almost nobody believes that Greece can last that long any more. Landon Thomas has the story:

Greece, Portugal Sovereign Credit-Default Swaps Jump to Records - The cost of insuring debt sold by Greece and Portugal rose to records on concern Europe’s sovereign crisis is worsening.  Credit-default swaps on Greece jumped 40 basis points to 1,340 basis points according to CMA, signaling a 68 percent chance of default within five years. Portugal rose 24 basis points to 662.  That helped push the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up by 9.5 basis points to 197.5, the highest since January. The gauge is up from 157.5 basis points April 8, the lowest in five months.  Contracts on Ireland increased 40 basis points to 663, approaching the record closing level of 674 on Jan. 10, while Italy rose 6.5 to 155.5 and Spain climbed 9.5 to 253, CMA prices show. An increase signals deterioration in perceptions of credit quality.

Greece "Velvet Restructuring" Imminent, Blames Upcoming Second Bankruptcy On Citigroup Trader - It appears rumors that Greece is set to restructure its debt are about to come true. According to Greek daily Ta Nea, reported by the Guardian, "the government was mulling "a velvet restructuring" that would include extending outstanding debt and a voluntary agreement with lenders to modify repayment terms." More: "Greece  is considering ways to restructure its debt – such as by extending the life of its loans – two national newspapers claimed on Friday, joining a flurry of recent reports on the prospect that Athens might be forced to default." Not surprising, this comes hot on the heels of continued lies about the stability and viability of the eurozone and the euro, which recently surged to nosebleed levels only to allow it to drop from the highest possible position when the realization that the dominoes are falling finally sets in. But never one to be bound by the confines of reality, Greece is now calling in Interpol to put the blame for its latest and greatest bankruptcy on a Citigroup trader: So, it is a trader fault for pointing out the market's reaction to what is so glaringly obvious even a caveman finance minister from Athens will realize it, and not the fact that one needs to apply a new Excel #Ref! patch in order to express Greek debt to GDP. The lunacy.

Citigroup Denies Wrongdoing Over Greece Debt-Restructuring Rumors -  (RTTNews) - U.S. banking giant Citigroup has denied any wrongdoing over an e-mail allegedly sent by one of its London traders suggesting that Greece may be forced to restructure its national debt as early as Easter. "We are co-operating with the authorities and do not consider there to have been any wrongdoing by Citi or its employees," the bank said in a statement on late Thursday. The Citigroup statement comes a day after Greece announced that it has launched an investigation into the issue and sought Interpol help to question the London trader who allegedly sent the e-mail.  In a statement on Wednesday, the Greek Finance Ministry said that an e-mail from "brokers at an international investment bank referring to a restructuring of Greece's debt during the Easter weekend has been forwarded to the Athens prosecutor's office."

Greece Update - This was amusing. Greece is probing an email discussion of a possible default. The Financial Times has the Citi email sent on Wednesday: Greece probes market talk of debt restructuring “Over the last 20min, there seems to be some increased noise over [Greek] debt restructuring as early as this Easter weekend. Spreads are moving wider now with 2-year spread +100 from +35 mid-day, while [Greek] banks are at -4%, i6% vs +2% in the morning. “The last few days the talks over [Greek] restructuring/rescheduling have intensified, despite the ongoing denials by [Greek] and foreign officials. The yield on Greece ten year bonds increased to 14.9% today and the two year yield is up to 23%. Sounds like a credit event might happen soon. If so, I wonder if it will be haircut or an extension of maturities? Here are the ten year yields for Ireland up to a record 10.5%, Portugal up to a record 9.5%, and Spain at 5.5%.

Greeks 'planning debt restructuring' - Greece is considering ways to restructure its debt – such as by extending the life of its loans – two national newspapers claimed on Friday, joining a flurry of recent reports on the prospect that Athens might be forced to default. Greek and EU officials have steadfastly denied a debt restructuring is planned in the face of mounting evidence that markets are factoring one in. Detectives from Interpol are expected to interview Citigroup trader Paul Moss on Friday about an email he sent on Wednesday about a rumoured restructuring which Greek officials claim sparked a share sell-off in Athens. The country's top-selling newspaper, Ta Nea, said without citing a source that the government was mulling "a velvet restructuring" that would include extending outstanding debt and a voluntary agreement with lenders to modify repayment terms.

Restructuring: By design or by default? - We could be entering end-game territory in the coming months. News from the bond markets about Greece resembles bulletins about Alpine peaks rather than sovereign debt priced within reasonable parameters. Greek three-year bond yields jumped to over 22 percent this week. Such surreal yield levels are pricing in the restructuring option to take place in the second half of 2011 after the Portuguese bailout has been sorted out. Credit default swaps (CDS) are price indicators highlighting the probability of a default. This financial instrument -- not necessarily the most reliable vector but nonetheless indicative of pricing mechanisms -- assumes that the possibility of Greece defaulting in the next five years has increased from 55 percent a month ago to 67 percent in mid-April. Such yield levels are also a reflection of bond markets explicitly challenging the Greek government and its announcement that it will try to return to international capital markets next year for sovereign debt financing. In the view of bond traders and speculators, this intention is either science fiction or fiscal suicide. In both cases it is self-defeating for Greece.

Democracy or Finance? - “Shorting” is a tactic well known among the financial cognoscenti. It means betting against an asset with borrowed money in the expectation of making a profit when its value goes down. A speculator can “short” a government by borrowing its debt at its current price, in the hope of selling it later at a lower price and pocketing the difference. But if a bunch of speculators decide (rightly or wrongly) that a government’s debt is overpriced, they can force down its price, thereby forcing up its yield (the interest rate that the government must pay).If the attack persists, speculators can force a government to default on its debt, unless it can find a way to finance its borrowing more cheaply. The bailout fund created last year by the International Monetary Fund and the European Central Bank to enable Greece and other distressed sovereigns, like Ireland and now Portugal, does exactly that, but on the condition that they implement austerity programs to eliminate their deficits over a short period of time. So what is the role of elected politicians in the face of a speculative attack? Is it simply to accept the market’s will and impose the requisite pain on their people? The financial collapse of 2007-2009 was the result of a massive mispricing of assets by private banks and ratings agencies. So why should we believe that the markets have been correctly pricing the risk of Greek, Irish, or Portuguese debt?

Sweden's finance minister on the Portugal bailout, Europe's recovery, and America's budget mess - I had the change to sit down yesterdau with Sweden's finance minister, Anders Borg, on the sidelines of the IMF Spring Meetings here in Washington. Borg described the meetings as the most 'relaxed' that he's attended since the start of the financial crisis. Then again, with Sweden raising its growth projections last week and predicting a budget surplus and falling unemployment, he can afford to be more relaxed than some of his colleagues. We talked about the reasons for Sweden's surprising recent success (a combination of bad experience, luck, and good policy), why Sweden is reluctant to participate in a bailout of Portugal, and why he thinks U.S. politicians need to get real and raise taxes. Our conversation is below the jump:

Will the Bundestag veto the ESM? - The rebels are coming out. Reuters has a story this morning of a Klaus Peter Willsch, a CDU deputy whom the article describes as a “budget expert” and whom one would normally not need to know, except that he is the first Christian Democrat to announce that he would vote against the ESM. So far 12 FDP MPs have declared that they would vote against the package, but if the ranks of the CDU hold, this would be enough for the coalition to have its own majority. Willsch is quoted by Mitteldeutsche Zeitung as saying that there were about 30 to 40 CDU/CSU deputies in the Bundestag, who think like him. He said even if some were to yield under the pressure, there would still be a critical mass of 20 rebels who would block the measure. Reuters said the measure might still pass with the backing of opposition parties. (But this is not a position Angela Merkel wants to get into, as opposition parties are certain to demand a price for their support, possibly even amendments to the legislation itself.)

Moody's Cuts Irish Bank Ratings - Moody's Investors Service on Monday lowered the long-term bank deposit ratings of Irish government-guaranteed banks by two notches following sovereign ratings downgrade last week. Now all banks are classified as junk. The rating action reflects the reduction in the level of systemic support embedded in the deposit ratings following the downgrade of the sovereign rating, Moody's said in a statement. The long-term bank deposit ratings of Allied Irish Banks (Allied Irish), Bank of Ireland (BoI), EBS Building Society (EBS) and Irish Life & Permanent (IL&P) were lowered by two notches, while that of ICS Building Society (ICS) was cut by one notch.Further, the short-term bank deposit rating at these five institutions has been lowered to Not-Prime, from P-2 for BoI and from P-3 for the other four institutions.

Each Of Ireland's Surviving Banks Downgraded To Junk - IRELAND’S GOVERNMENT BACKED banks are now officially junk following a downgrading of the long-term deposit ratings of the four surviving banks by the ratings agency Moody’s. The decision to downgrade Bank of Ireland (BoI), Allied Irish Banks (AIB), EBS Building Society and Irish Life & Permanent (IL&P) follows the move to cut Ireland’s own ratings status to one level above junk status last week. Moody’s reports that Bank of Ireland, the country’s largest lender, is now rated at Ba1 following the two notch cut which puts AIB, EBS and IL&P on Ba2, one notch below BoI. The ratings agency said the rationale for the decision comes from last week’s downgrading of Ireland’s sovereign rating from Baa1 to Baa3 which is the lowest investment grade rating and just one notch off official junk status. Moody’s said there is a high level of uncertainty about whether the Irish government would extend further support to the banking sector if required, beyond what has already been committed.

Euro vs. Invasion of the Zombie Banks - IS a euro held in an Irish bank in Dublin, or in a Portuguese bank in Lisbon, as sound and secure as a euro in a German bank in Berlin? That apparently simple question holds the key to understanding why the euro1 zone may splinter and bring a new financial crisis.  In Ireland, there has been a “silent bank run2” on financial institutions for much of the last year. In February, for instance, Irish private sector deposits dropped at an annual rate of 9.8 percent. That’s largely because some depositors doubt the commitment of the Irish government to the euro. They fear that they will wake up one morning to frozen bank accounts, followed by the conversion of their euro deposits into a lesser-valued new Irish currency. Pre-emptively, the depositors send their money outside Ireland, where it still represents safe euros or perhaps sterling, accessible by bank transfers and A.T.M. cards.  This flight of capital reflects a centuries-old economic principle known as Gresham’s Law, sometimes expressed casually as “bad money drives out good money.” In this context, if two assets — euros inside and outside Ireland — are not equal in value in the eyes of the marketplace, sooner or later the legally fixed price parity will fall apart.

Britain warns EU it won't contribute to more bailouts - BRITAIN will not be part of any future euro zone bailout fund, British officials have told their European counterparts, despite pressure to back a new safety net for troubled countries from 2013. Britain is expected to be on the hook for about €4.5 billion ($6 billion) of the €80 billion rescue package for Portugal, largely through its 13.6 per cent share of the European Financial Stability Mechanism (EFSM). However, after the Portuguese and Irish bailouts, the €60 billion fund will be almost used up. A larger scheme, backed only by the euro zone nations, expires in 2013, as does the EFSM. Brussels has been pressing Britain to be part of the replacement, the European Stability Mechanism, on the grounds that it is a member of the European Union. France and Germany are particularly keen for Britain to sign up because, as the largest member states, they will bear the lion's share of the burden.

Inflation Expectations Fall in U.K., Bolstering Doves at Bank of England - British public inflation expectations for the year ahead dropped to their lowest level for seven months in April, a survey by Citi and pollsters YouGov showed Wednesday. Although expectations remain higher than the Bank of England’s target for inflation, the report strengthened the hand of those inside the BOE who have been resisting interest rate increases, especially given the government’s fiscal austerity. The median annual inflation expectations in the year ahead fell to 2.9% in April from 3.5% in March and 3.6% in February, the lowest reading since September and third sharpest monthly drop since the survey began in late 2005, Citi said. The median for longer-term inflation expectations — the next five to 10 years — edged down to 3.4% in April from 3.5% in March, the lowest reading since October. Citi economist Michael Saunders said that given the reluctance of several BOE Monetary Policy Committee members to raise interest rates and the likelihood that first quarter gross domestic product data will be soft, the survey results may allow the BOE to keep rates on hold a little longer.

Gross external debt - According to figures from the IMF and the World Bank, gross external debt exceeded 100% of GDP in many rich countries at the end of the final quarter of 2010. In Britain, where the latest figures available are for the three months to June 2010, the gross amount owed to foreigners was four times GDP. The biggest chunk of this—more than three-fifths—consisted of the external debt of British banks. In the case of Greece, the biggest fraction—just under half—was government debt. Portugal, the latest country in the euro area to request a bail-out, has outstanding debts to foreigners that are over twice its national income. Equivalent burdens are smaller in some big emerging countries: Brazil and India had ratios below 20%.

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