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

Saturday, June 25, 2011

week ending Jun 25

Fed balance sheet hits another record size - (Reuters) - The Federal Reserve's balance sheet expanded to a 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 swelled to $2.841 trillion in the week ended June 22 from $2.811 trillion the prior week. The central bank's holding of U.S. government securities grew to $1.602 trillion on Wednesday from last week's $1.576 trillion total. The central bank has said it will complete QE2 at the end of June, but will continue to reinvest proceeds from agency bonds and mortgage-backed securities as they mature. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) eased to $914.33 billion from $914.51 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank were steady at $118.37 billion. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $20 million a day in the week ended Wednesday, compared with an average daily rate of $24 million last week.

Fed balance sheet grows to record $2.86 trillion - The Federal Reserve's balance sheet expanded to a record $2.86 trillion in the week ended June 22 from $2.83 trillion in the prior week, the central bank said Thursday. The Fed balance sheet continues to set weekly records as the central bank completes its plan to purchase $600 billion in Treasurys by the end of June. The Fed is buying bonds to try to ease financial conditions and lower long-term interest rates under its plan, dubbed quantitative easing or QE2. The Fed had talked about how to shrink its bloated balance sheet but weak economic data has put those plans on hold perhaps until next year. Fed officials eventually want to return to holding only Treasurys and get the balance sheet back to pre-crisis levels, a process that could take five years. The Fed's assets and liabilities were only $870 billion in December 2007. The report shows that the Fed's holdings of Treasurys rose to $1.60 trillion from $1.58 trillion in the previous week. The Fed's holdings of mortgage-backed securities slipped to $914.3 billion from $914.5 billion last week. Bank reserves rose slightly to $1.59 trillion from $1.57 trillion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 23, 2011

A Look Inside the Fed’s Balance Sheet - Interactive for 6/15 - See a full-size version. Click on chart in large version to sort by asset class. Ahead of the Federal Reserve‘s policy-setting meeting tomorrow and the coming end this month of QE2, it’s worth taking a look at the latest figures from the Fed’s balance sheet.Assets on the Fed’s balance sheet sit at around $2.811 trillion as of last Wednesday. That’s up from less than $1 trillion prior to the recession. During the recession the Fed expanded its balance sheet through several programs aimed at keeping markets functioning. As markets stabilized the Fed shifted out of emergency programs and into purchases of U.S. Treasurys, mortgage-backed securities and agency debt securities to drive down interest rates and encourage more borrowing and growth in two separate rounds of what is known as quantitative easing.

Bernanke May Prolong Record Stimulus - Federal Reserve Chairman Ben S. Bernanke will probably delay the central bank’s exit from record stimulus, economists said in a survey, giving the flagging economy a boost without resorting to additional asset purchases. Seventy-nine percent of 58 economists expect Bernanke to sustain the Fed balance sheet at current levels until October or later, compared with 52 percent who held that view before the Fed’s last policy meeting in April, according to a Bloomberg News survey conducted last week. Ninety percent of those surveyed predict the Fed will wait until the fourth quarter before dropping its pledge to hold interest rates low for an “extended period.” Bernanke and his fellow policy makers have given no indication they’ll tighten policy anytime soon. With manufacturing slowing and unemployment increasing during May to 9.1 percent, the Fed chief said this month growth is “frustratingly slow,” and Richmond Fed President Jeffrey Lacker said the economy could be “stuck below trend for some time.”

Fed Statement Following June Meeting - The following is the full text of the statement following the Feds June meeting:

The Fed's Monetary Policy Meeting: Policy Stays on Hold - As expected, there was no change in Fed policy. QE2 will end on schedule on June 30, the Fed won’t begin reversing QE1 and QE2 yet, i.e. it won’t reduce the size of its balance sheet, it gave no hint at all of willingness to move on to QE3, and interest rates will remain low for an “extended period.”There were, however, some changes to note in the press release relative the previous meeting. In particular, the statement notes that “recent labor market indicators have been weaker than anticipated,” but the Fed attributes this to temporary factors (as I’ve noted, I think that it is a mistake). Thus, although the Fed has downgraded its forecast, it is looking through the current weakness to — cross your fingers — better times just around the corner. Thus, the Fed sees no need for further easing at this time.In addition, the Fed says that “Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate.” Thus, while the Fed is also viewing recent price movements as temporary (I agree with this assessment), they clearly have their eye on inflation. This also works against any inclination toward further easing.

Economic signs change; Fed policies do not - The economic environment may be changing, but the Fed’s policies probably won’t. While Fed officials are concerned about the ominous signs in the economy, they still expect growth to pick up in the second half of the year. And with their controversial effort to pump $600 billion into the economy expiring in mere days, they see little wisdom in expanding the program anew. The central bank is sure to acknowledge the recent slowing in the pace of growth, but the question is how strongly they hold to the view, articulated by Bernanke in a speech earlier this month, that they view many of the causes of weak 2011 growth so far to be temporary. Fed officials are likely to downgrade their forecast for 2011 growth in gross domestic product for the second straight meeting. As of April, they expected the economy would grow in the 3.1 to 3.3 percent range for the full year, and that range will now probably dip into the high 2 percent range.

NY Fed Releases Details of Reinvestment Program - In the wake of the Federal Reserve's decision to keep alive a program that reinvests the proceeds of securities held on the central bank's books into Treasury debt, the Federal Reserve Bank of New York has offered details about how that will happen.  In a statement Wednesday, the New York Fed said it would aim to keep the central bank's balance sheet steady at $2.654 trillion. To accomplish that, it will buy in seven Treasury maturity ranges each month. "Purchases will be allocated across maturities according to a distribution that is nearly identical to that executed under the Treasury purchase program" that will end this month, the New York Fed said. "The only change to the distribution is that the two maturity sectors beyond 10 years from the earlier purchase program will be combined into a single maturity sector of 10 to 30 years in order to achieve greater operational simplicity." The New York Fed said it would devote 5% of its planned buying to Treasurys of 1.5- to 2.5-year maturities, while 20% each will go to 2.5- to 4-year maturities and 4- to 5.5-year maturities, respectively. Some 23% will be aimed at 5.5- to 7-year maturities and to 7- to 10-year maturities, respectively, while 6% will go to the 10- to 30-year range. The central bank also said 3% will go to Treasury inflation indexed bonds known to most as TIPS.

Profiles in Fed Cowardice - Krugman - Not really a surprise, but still shocking. The Fed predicts disastrously high unemployment as far as the eye can see (pdf): And in response to this dire prospect, it declares its work done. Notice that the Fed does not buy into the notion that there has been a large rise in the structural rate of unemployment, that 9 percent is the new normal. That stuff off to the right, labeled “longer run”, is in effect the Fed’s estimate of how low unemployment could and should go without causing inflation problems. So the Fed agrees that something should be done to greatly increase demand. But it washes its hands of the problem, even though Bernanke and his colleagues are well aware that nobody else will act.I’m aware that there are doubts about how much the Fed could accomplish; I share those doubts. But that’s no reason not to try.

Fed Watch: FOMC Reaction -The two-day FOMC meeting ended largely as expected, with the Fed reaffirming the current policy stance. If you were looking for signs that QE3 is on the horizon, you were sorely disappointed. If anything, the FOMC statement shifted in a slightly hawkish direction, setting the stage for the next policy move to be a tightening. The Fed is trying to make it as straightforward as possible – in the absence of clear and convincing evidence that deflation is again a threat, they have nothing else to offer.The statement itself made clear the Fed interprets much of the current data flow as reflecting temporary factors, either the impact of higher commodity prices or the disaster in Japan. In response to a request for the forecast he brought to the meeting, Bernanke admitted that he was on the low side of expectations: [The] “slowdown is at least partly temporary….can’t explain the entire slowdown…Growth at least in the near term might be a little bit less than we anticipate.” Still, despite the slowdown, the Fed removed the “employ its policy tools as necessary to support the economic recovery” language, presumably because they have no intention of providing any additional support. As Mark Thoma notes, Bernanke made clear that the shift away from deflation concerns effectively ends the possibility of another dose of quantitative easing. So what happened to the Bernanke of a decade ago, when he chastised the Bank of Japan for inaction?

QE 2 Proves No Silver Bullet - Federal Reserve officials have been warning for months that the controversial $600 billion bond-buying program they initiated last year wouldn't be a panacea for an ailing U.S. economy. That's one forecast they seem to have gotten right.  They hoped it would prevent very low inflation from giving way to a Japan-style bout of deflation—a fall in the overall consumer price level that drags the economy down with it. They also sought to stir the economy by holding down long-term interest rates, boosting prices for stocks, corporate bonds and other financial assets. More job growth, they argued, would follow.  They succeeded in putting deflation worries to rest. But economic growth is slower now than it was when the program was enacted, the job market has sputtered after a spurt, and the financial-market impact has been a mix of good and bad. Stock prices are higher and corporate-bond yields lower, which helped growth. But prices for oil, grains, and other commodities have surged, pinching consumers.  Though Fed officials didn't state it as a goal, another outcome of the program was likely the continued slide in the dollar, which is both a blessing and a curse for the economy. In all, the economy looks to have grown at a 2% annual rate in the first half of the year, the slowest six-month stretch of the recovery.

Fed’s 3-Year Rescue Plan Falling Short of Promise - The Federal Reserve1 hoped that its three-year-old economic rescue campaign would reach a climax at the end of June. It hoped that consumers and businesses by now would be spending more and more, and the central bank could start doing less and less.  That peak now looks like a long plateau. The Fed still is expected to announce Wednesday that it will halt the expansion of its aid programs at the end of June, as scheduled, when it completes the purchase of $600 billion in Treasury securities2. But growth is sputtering, and economists now expect that the Fed will leave its $2 trillion of bandages, props and crutches untouched until next year.   Economic forecasters, many of whom also thought 2011 would be a more prosperous year, say that they underestimated the impact of the Japanese earthquake on the production of cars and other goods. They also point to a lack of confidence, an elusive concept that basically defines the willingness of consumers and businesses to spend more money than is justified by current circumstances.

Economy's 'training wheels' to come off - The Federal Reserve's latest round of stimulus ends on June 30, but economists think it's no big deal. The policy, known as the second round of quantitative easing, or QE2 for short, is likely to have little effect on financial markets or the pace of the recovery, they say. "I don't think the end of QE2 will have any significant immediate impact on interest rates, stock prices, jobs or the broader economy," said Mark Zandi, chief economist with Moody's Analytics.  The Fed is expected to maintain the status quo. Interest rates should remain at their currently low levels, and few expect Fed chairman Ben Bernanke to call for another round of stimulus, or so-called QE3.

What can the Fed do? - The Federal Reserve has released its latest statement on the state of the US economy.Its Chairman Ben Bernanke has now spoken to the press as well. The overall assessment was rather downbeat. (video below)If you compare the Fed statement to its previous one, you will understand the Fed has downgraded the economy’s outlook. And indeed its economic projections shade lower. The Economist’s Greg Ip asked Mr. Bernanke, why the Fed had lowered its medium-term outlook if the impediments to continued growth were temporary as the Fed had indicated in its statement. Here is what Mr. Bernanke said in response: Part of the slowdown is temporary, and part of it may be longer-lasting. We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace than we had anticipated in April. We don’t have a precise read on why this slower pace of growth is persisting. [S]ome of the headwinds that have been concerning us, like … weakness in the financial sector, problems in the housing sector, balance sheets and deleveraging issues…may be stronger or more persistent than we thought. And I think it’s an appropriate balance to attribute a slowdown partly to the identifiable temporary factors, but to acknowledge a possibility that some of the slowdown is due to factors which are longer-lived and which will be still operative by next year.

Koo and Gross on what Bernanke will do next - Richard Koo, chief economist at Nomura Research Institute and analyst-in-chief of “balance sheet recessions“, writes in his latest note that the Fed’s lack of options today is reminiscent of the BoJ’s predicament a decade ago.Koo argues that although its consumers are deleveraging and its house values are declining, it’ll take the US longer than generally assumed to return to trend growth. Especially since, if Japan’s balance sheet recession is any guide, the adjustment in asset values may overshoot on the downside.So what’s a Fed Chairman to do? Well, according to Koo, apparently Bernanke has to do something, even though he knew all along that quantitative easing doesn’t do much in these situations.I suspect the Fed chairman, who must do something despite his awareness of the limitations of quantitative easing, is in asimilar predicament. While this is just speculation on my part, I think he may be considering leaving the $600bn in liquidity in the market as long as possible while, on a microeconomic level, seeking a way to better target the funds supplied by the Fed.

PIMCO'S Gross says Fed to unveil QE3 at Jackson Hole (Reuters) - Bill Gross on Wednesday said the Federal Reserve will likely hint at a third round of bond purchases, better known as 'quantitative easing,' at its next Jackson Hole meeting in August. Jackson Hole is an annual global central banking conference, led by the Fed, which takes place at Jackson Hole, Wyoming. It was at this event last year that Fed chairman Ben Bernanke said the U.S. policymakers were prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation -- a prolonged drop in prices of wages, goods and assets like homes and stocks. Gross, the co-chief investment officer of PIMCO, the world's top bond manager, on Wednesday said on Twitter: 'Next Jackson Hole in August will likely hint at QE3 / interest rate caps.'

The U.S. Federal Reserve Plan For QE3 – And Why It's a Done Deal - When U.S. central bank policymakers conclude their two-day meeting today, there's really only one question investors want an answer to: What's the U.S. Federal Reserve plan for QE3? Let me answer that for you: QE3 is a done deal - although Fed Chairman Ben Bernanke & Co. might well give it another name... Here's what I see: Instead of printing more money, the Fed is likely to start reinvesting the proceeds of maturing debt. Ultimately, that won't reduce our government's bloated, toxic balance sheet. But it will change the makeup of that balance sheet - and not for the better. I believe the Fed will also attempt a freeze of some sorts that effectively removes pressure from the U.S. Treasury markets that would otherwise crater it. At the same time, I can easily envision continued demand for U.S. Treasuries from abroad that will confound such well-known Treasury bears as Pacific Investment Management Co. LLC (PIMCO) star Bill Gross, who has been wrong on Treasuries before.

What are the differences between QE1, QE2 and QE3? - Because the Federal Reserve has become a political target, it is in no hurry to have monetary policy displace fiscal policy in underpinning the economy, but it may be forced to do so given its dual mandate and the likelihood of fiscal contraction. Last week, when discussing what QE3 could look like I indicated that were the Federal Reserve to start expanding its balance sheet, QE3 will see interest rate caps after a pause and period of reflection. Let me address the differences between the various QEs here to illustrate why interest rate caps are being contemplated.

Lost in transmission – Mees - The past decade has been characterised by record-low interest rates, which has given rise to a whole new batch of economic literature on global imbalances, or the so-called saving glut. What has attracted much less attention is the fact that – while US Treasury yields have dropped to an all time low – the yield on equity capital has actually risen.  With the US economy still faltering, some are suggesting it may be time for a third round of quantitative easing. This column explores the transmission mechanism of monetary policy and how it has broken down in recent years. It argues that, in this climate, the Fed would be wise to avoid another bond-buying programme.

How the Fed Could Set Off a New Recession – Thoma - The recent data is not the only reason I’ve changed my mind about the possibility of a double dip. When the recession started, I was certain we wouldn’t repeat the mistakes of the past. One mistake in particular looms large right now, the deficit reduction and interest rate increases that sent the economy into a tailspin in 1937-38. Many people do not realize that there were two recessions within the Great Depression. The first, which came in 1929, is well known. This recession lasted until 1933, and then the economy began slowly recovering, much like today. As the recovery continued, people began to worry about the budget deficit and the possibility of inflation – again much like today. In response, fiscal authorities began reducing the deficit and monetary authorities raised interest rates, and the result was a second recession in 1937-38. This mistake prolonged the economy’s troubles considerably, and in part was why this became the “Great” Depression.

Monetary Policy Efficacy During a "Balance Sheet" Recession - Over at Credit Writedowns, Edward Harrison discusses Richard Koo's work on balance sheet recessions.  Koo believes that monetary policy is ineffective in such settings. I disagree and have made the case before against Koo's views on balance sheet recession.  Here is the comment (with some slight edits) I left for Harrison: QE2's limited success was not because monetary policy is impotent in such situations, but because they failed to properly shape and anchor nominal expectations. Ryan Avent summarized this problem well: QE2 changed the direction of monetary policy, but didn't set the destination.  I supported QE2 and hoped the best for it.  I also acknowledged, however, from the start that in the absence of a well defined level target it was bound to be limited and politically polarizing.  I believe Bernanke knows all this--as is suggested by his work on Japan--but he is faced by political constraints and has burned up most of his political capital on QE1 and QE2. 

Woodford on Monetary and Fiscal Policy - Krugman - Mike argued that monetary expansion once you’re at the ZLB mainly works, if it does, through affecting expectations. If people don’t perceive the expansion as representing a change in policy that will persist even after the economy has recovered, even big changes in the monetary base have hardly any effect. Mike had a chart of Japan 2000-2008 that I’ve crudely reproduced: Note both that Japan reversed much of the initial expansion in the monetary base, confirming the expectations of those who might have regarded that expansion as temporary – and Japan did this even though deflation continued! Note also that nominal GDP never moved at all despite the huge amount of money “printed”. So why is a fiscal response any better? Mike argued:

1. A fiscal response to a severe slump doesn’t require committing yourself to changes once the storm has passed; it “only requires unusual action while the situation remains grave.”
   2. Fiscal policy is “not wholly dependent on expectations changing for its effect (more robust to alternative models of expectations)”

Is there excess demand for base money? - For Scott Sumner this is basically a religious belief, he defines "tight money" as any situation where NGDP growth falls short of 5%, which means his view is basically vacuous.  If you believe that everything that ever happens does so because it's god's will then what explanation can there ever be for anything other than "it's god's will"? Nick Rowe also believes that an "excess demand" for money is the only thing that can possibly cause a recession, so again, if there's a recession it must be due to an excess demand for money.  In the comment section of this post Andy Harless also makes the claim that "The problem is a lack of base money relative to demand."  If we agree to discount the faith based arguments then we are led to apply some basic economics to the question in the title of this post.  What's the evidence?

TIPS Liquidity, Breakeven Inflation, and Inflation Expectations - FRBSF -Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities-a difference known as breakeven inflation-is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely followed Survey of Professional Forecasters inflation forecast.

Debating core inflation - In the last few weeks the press and several blogs have been engaged in a debate on the classic question of whether central banks should rely on headline inflation or core inflation (defined as headline inflation excluding energy and food) to obtain a signal for medium-term inflationary pressures. The debate, this time, was started by a Financial Times article by Lorenzo Bini Smaghi, board member of the ECB. Paul Krugman replied fiercely in The New York Times and put forward a defence for core inflation (Krugman 2011). Policy issues apart, in this column we would like to assess the two points of view.

Inflation: What’s the Worry? - With oil and gasoline prices tumbling, it seems an odd time for economists to be putting out notes about the growing risk of inflation, but two did just that today. Barclays Capital and UBS have separate notes out today noting the recent rise in core inflation pressures, driven mainly by higher rent prices. They suggest this recent increase in the core will push the Fed to act sooner than the market expects to tighten policy. Here’s Barclays, led by Dean Maki: Shelter costs, the only significant source of disinflation in the core CPI, continue to rise, pushing core inflation higher. Recent firming in the core CPI likely raises the bar for further action from the Fed. By “further action,” he means QE3. Meanwhile, here’s UBS, led by Maury Harris, going a step further: We believe the Fed is currently more focused on the inflation half of its dual mandate. This view, coupled with our expectations of a rebound in second-half growth following the “soft patch”, continues to suggest the Fed will move earlier than the consensus expects—we look for the first increase in the Fed funds target rate in January 2012.

Shelby to Urge Fed to Establish Explicit Inflation Target - The top Republican on the Senate Banking Committee said Thursday he would urge the Federal Reserve to pursue an explicit inflation target, in the face of renewed interest in the idea. Sen. Richard Shelby (R., Ala.) said in an interview that he would urge Fed Chairman Ben Bernanke, a proponent of a formal inflation target, to pursue the matter when the central banker next testifies before his committee in July. Shelby said a formal target would improve transparency and hold the Fed accountable. "If people knew what they were doing there would be in a sense some accounting of what they're doing," he said. "Whereas if they have a target but nobody knows what it is, they can slip and slide." There's been much discussion lately of an explicit target, especially from Fed officials. Atlanta Fed president Dennis Lockhart embraced the idea in a speech last month, as have other regional Fed bank presidents.  Bernanke said a formal target would help the Fed fulfill its dual mandate of stable prices and maximum employment but that he would need support from lawmakers and others to proceed.

Greece may threaten global finances: Bernanke — The Greek sovereign debt crisis could threaten the stability of the global financial system if a solution is not found, US Federal Reserve chief Ben Bernanke warned Wednesday. Bernanke said the central bank was following the situation closely, in response to a question at a news conference in Washington. "If there were a failure to resolve that situation, it would pose threats to the European financial systems, the global financial system and to European political unity," he said. "I think the Europeans appreciate the incredible importance of resolving the Greek situation," he said. "We've been in close communication with our colleagues in Europe." The Fed's policy-setting body, the Federal Open Market Committee, had discussed the Greek problem in the two-day meeting that ended Wednesday, Bernanke said. "It's one of several potential financial risks that we're facing now."

Economic Outlook - FRBSFBart Hobijn , senior research advisor at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook.

Fed dims outlook for jobs and growth for 2011 - Federal Reserve officials are more pessimistic about prospects for economic growth and employment than they were two months ago. In an updated forecast, the Fed estimated Wednesday that the economy will grow between 2.7 percent and 2.9 percent this year. That's down from its April estimate of between 3.1 percent and 3.3 percent. The downgraded revision is an acknowledgment that the economy has slowed, in part because consumers have been squeezed by higher gasoline prices. Growth at the rate the Fed is projecting won't be enough to significantly lower unemployment, now at 9.1 percent. The Fed estimates that unemployment will still be around 8.6 percent to 8.9 percent by the end of the year. Growth would need to pick up in the second half of this year to meet even the reduced estimates of the private economists and the Federal Reserve. The economy grew at an anemic 1.8 percent annual rate in the first three months of the year. Many economists believe the economy is expanding only slightly more in the current quarter.

The Fed's forecasts: Serial disappointment - THE Fed attracted attention this week for downgrading its forecast not just for this year, but for 2012, as well. More striking is how often it does this. As my nearby chart shows, the Federal Open Market Committee has repeatedly ratcheted down its forecasts of out-year growth. The latest downward revision is particularly large, and in keeping with the pattern: when the current year disappoints, they take a bit out of the next, as well. (The chart shows all their forecasts since early 2010 except two, for the sake of simplicity.) This is not because the Fed thinks the economy’s potential has diminished: long-run growth forecasts remain the same and they’ve raised their view of the long-run unemployment rate just a smidgen. I asked Ben Bernanke, the chairman, at his press conference, why, if the restraints on the economy are temporary, the FOMC lowered its medium-term outlook. He replied: Part of the slowdown is temporary, and part of it may be longer-lasting. We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace than we had anticipated in April. We don't have a precise read on why this slower pace of growth is persisting.

Fed Forecasts? PUH-Leeze! -  Beyond the institutional habit of being excessively optimistic, the Fed’s economic forecasts have been working off the wrong data set, stubbornly refusing to recognize that this is a credit driven crisis, and not your run of the mill business cycle contraction. They have either been unwilling or unable to recognize this. I am not sure which I find more galling: The lack of acumen or missing sense of humility for the failures. Trader’s lack the luxury of being that wrong over and over again. The best career advice for any trader with the Fed’s forecasting track record would be to learn the phrase “Would you like fries with that, sir?” This is the savage tragedy of giving a group of economists this much influence and authority. I disagree with Ron Paul — its not that we should End the Fed, it is that we should replace much of its ruling economists with mathematicians and engineers. Applied Physics (and its empirical-based scientific method) should drive monetary policy, and not the squishy, cognitively challenged economists who suffer from the human foibles of believing they have a clue about the future.

As Economy Slowly Recovers, Fed Says It Has Done Enough - The nation’s central bank said Wednesday that it would complete the planned purchase of $600 billion in Treasury securities2 next week as scheduled, and then suspend its three-year-old economic rescue campaign, leaving in place the aid it already is providing but doing nothing more, for now, to bolster growth.  The Fed also reduced its expectations for growth in 2011, projecting that the economy will expand at a rate of 2.7 to 2.9 percent this year, down from its April projection of a growth rate of 3.1 to 3.3 percent.  The Fed predicted that 2012 would be a little better, with growth between 3.3 percent and 3.7 percent. That is also well below its April forecast range of 3.5 percent to 4.2 percent, suggesting that the issues restraining growth, including the housing collapse and government spending cuts, will probably persist.

Fed on Hold Amid Slow Recovery - Federal Reserve officials see the U.S. economy settling into a disappointingly weak recovery this year and next, and say they have done all they are prepared to do to spur growth for now.  The bleak picture contrasts with the booming global economy, which is complicating the decision making of the Fed, but lifting the fortunes of U.S. companies abroad.  The central bank's policy makers substantially downgraded their projections for U.S. economic growth and unemployment, which they released Wednesday after a two-day meeting. "We don't have a precise read on why this slower pace of growth is persisting," Federal Reserve chairman Ben Brenanke said.

Can You Fake....a Capitalism? - "We don't have a precise read on why this slower pace of growth is persisting" - Ben Bernanke.  Fed Chairman Ben Bernanke is confused.  Interest rates are low, liquidity is flowing freely and equity prices are up between 15-20% year-on-year.  Why then, Bernanke wonders, isn't the US economy growing as a capitalist economy should grow under such conditions? Perhaps the US is just faking a Capitalism. Most definitions of Capitalism include reference to private ownership of the means of production which exist on a "for profit" basis- i.e. survival of the fittest. While worthy of discussion in their own right I'll only note in passing that ownership of the means of production is far from private in its early 20th Century sense and that existing on a "for profit" basis likely implies not existing (as opposed to being bailed out) if losses are excessive, hoping to draw your, and perhaps Mr. Bernanke's, attention to the graph below.

Why Does Bernanke Lie To Us? Why Can't He Just Admit What The Problem Is?: Yesterday, in his press conference, Fed Chairman Ben Bernanke said he really doesn't know what the economy's problem is. Specifically, he said: “We don’t have a precise read on why this slower pace of growth is persisting.” That statement is pretty much a lie. It's not completely a lie, because no one ever has a 'precise read' on why the economy is doing anything. But it's a statement that ignores an elephant in the room, one that every open-eyed economist and market observer on the planet appears to be aware of except for Ben Bernanke. What's that elephant in the room? The work of professors Ken Rogoff and Carmen Reinhart, Richard Koo, Paul Krugman, Niall Ferguson, and many other economists, which shows that--after debt-fueled financial crises like the one we just had--economies take a long time to recover. After such debt-binges, we often go through what are known as 'balance sheet recessions.' In these recessions, recoveries are slow because the economy needs to 'de-leverage'--meaning that it needs to work off the debt that built up in the decades leading up to the crisis. As the chart below illustrates, in the early 80s, Americans began to borrow more and more relative to their incomes--and they didn't stop borrowing until 2007.

America flirts with a fate like Japan’s - The stalling of the US recovery raises big, scary questions. After a recession, this economy usually gets people back to work quickly. Not this time. Progress is so slow, the issue is not so much when America will return to full employment but what “full employment” will mean by the time it does. The administration thinks the pace of recovery will pick up soon. Last week President Barack Obama called the pause a “bump in the road”. Others think the slowdown will persist and might get worse, fears that cannot be dismissed. One alarming possibility is that the traits the US has relied on to drive growth in the past – labour market flexibility, rapid productivity growth – might have become toxic. If the US is unlucky, traits seen as distinctive strengths are now weaknesses, and a “lost decade” of stagnation, like Japan’s in the 1990s, might lie ahead. Two things might work differently this time. First, since the recession was unusually deep and the recovery unusually slow, the US is experiencing unheard-of long-term unemployment rates. The housing slump and its associated plague of negative equity aggravate this by making it harder for the unemployed to move to find work. Long-term joblessness erodes skills and employability. Structural unemployment is surely inching closer to European levels. America has not been here before.'

Our Lost Decade Relationship - Krugman - Clive Crook argues that we’re flirting with the possibility of a lost decade. I disagree — the flirting took place three years ago. The lost decade question now isn’t whether our flirtation with a lost decade will turn into something serious; it’s whether the torrid affair we’re now having with the potential for a lost decade can somehow be broken up. Step back from the short-term news flow, and look at my favorite indicator these days, the employment-population ratio: What you see isn’t a recovering economy that may be stumbling; you see an economy that has stopped its free fall, but hasn’t really been recovering at all.I’d say that the burden of proof right now is on those who claim that we aren’t on track for a lost decade.

The Busts Keep Getting Bigger: Why? - Krugman & Wells - Suppose we describe the following situation: major US financial institutions have badly overreached. They created and sold new financial instruments without understanding the risk. They poured money into dubious loans in pursuit of short-term profits, dismissing clear warnings that the borrowers might not be able to repay those loans. When things went bad, they turned to the government for help, relying on emergency aid and federal guarantees—thereby putting large amounts of taxpayer money at risk—in order to get by. And then, once the crisis was past, they went right back to denouncing big government, and resumed the very practices that created the crisis. What year are we talking about? We could, of course, be talking about 2008–2009, when Citigroup, Bank of America, and other institutions teetered on the brink of collapse, and were saved only by huge infusions of taxpayer cash. But we could also be talking about 1991, when the consequences of vast, loan-financed overbuilding of commercial real estate in the 1980s came home to roost, helping to cause the collapse of the junk-bond market and putting many banks—Citibank, in particular—at risk.Or we could be talking about 1982–1983, when reckless lending to Latin America ended in a severe debt crisis that put major banks such as, well, Citibank at risk, and only huge official lending to Mexico, Brazil, and other debtors held an even deeper crisis at bay. Or we could be talking about the near crisis caused by the bankruptcy of Penn Central in 1970, which put its lead banker, First National City—later renamed Citibank—on the edge; only emergency lending from the Federal Reserve averted disaster.

A Balance Sheet Recession - John Taylor - The U.S. is facing a long period of slow growth and high unemployment unless it can get its fiscal house in order, said noted economist John Taylor in an interview with The Wall Street Journal. The odds of the U.S. falling back into recession in the next 18 months are “low,” but recent stimulus and monetary policy measures such as the Federal Reserve’s bond-buying program, known as quantitative easing, are not helping.The latest round of quantitative easing ends next week and hasn’t done much to help growth, said Taylor, a monetary policy expert best known for creating the “Taylor rule” to govern changes in interest rates. He added that a third round of bond purchases would be a mistake.Fed Chairman Ben Bernanke said earlier this week that the bar would have to be extremely high to launch another program to buy U.S. Treasury debt. There had been speculation heading into Bernanke’s press conference Wednesday that the Fed could consider more bond purchases later in the year if economic growth continues to slow.

The Future Is Not What It Used To Be - Krugman - Greg Ip points out the the Fed keeps expecting a vigorous recovery just around the corner, and it keeps not happening: It’s kind of awesome. It was obvious very early on that this was likely to be a prolonged slump, requiring sustained policies to sustain demand if many years of high unemployment were to be avoided. Yet policy shops, including both the Fed and the White House, kept making optimistic projections. It’s hard to avoid the sense that this was and is wishful thinking, that people just didn’t want to face the responsibility of dealing with this big a problem. So they didn’t, and the slump goes on. Oh, and a side issue: why does John Taylor both say that this is a balance sheet recession — which is exactly what I’ve been saying — and oppose doing anything at all to help us deal with it?

Chicago Fed: Economic growth remained below average in May - No surprise (this is a composite index) ... from the Chicago Fed: Index shows economic growth remained below average in May The index’s three-month moving average, CFNAI-MA3, declined to –0.19 in May from –0.15 in April, remaining negative for a second consecutive month and reaching its lowest level since November 2010. May’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Q1 real GDP growth revised up to 1.9%, Durable-goods orders up 1.9% - From the BEA: Gross Domestic Product: First Quarter 2011 (Third Estimate). This small upward revision, compared to the 2nd estimate, was because of a slight increase in Net exports, and a larger contribution from the change in private inventories - partially offset by a larger decrease in state and local government spending.  From the Census Bureau: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders May 2011 New orders for manufactured durable goods in May increased $3.6 billion or 1.9 percent to $195.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 2.7 percent April decrease. Excluding transportation, new orders increased 0.6 percent. Excluding defense, new orders increased 1.9 percent. This was above the consensus of a 1.6 percent increase.

The New New Normal: Are We in a "Growth Recession"? - Remember the days when one catch phrase could sum up our entire economy? In the 1970s, it was “stagflation,” the idea that inflation could be high even when economic growth was low.  In the early 90s, the "jobless recovery,” a term coined during Bill Clinton's presidential campaign, referred to the lingering recession that eventually ousted George H.W. Bush from the White House. As for today's economic malaise, the jury is still out on what pithy moniker will rule the day. For a while following the financial crisis, the phrase the “new normal,” claimed by bond fund manager PIMCO's Mohamed El-Erian, seemed like the strongest contender. It referred to the idea that this economic turnaround would be slower and less impressive than those of recessions past. On the investing side, this meant painfully adjusting to a long period of lower-priced stocks and bonds. On the economic side, the “new normal” was about a shift in power from rich countries like the U.S. and Britain, which have long been the more trusted and stable, to emerging markets like China and India, which the world used to consider more volatile and unreliable.

That Stalling Feeling - Roubini - The year began with rising food, oil, and commodity prices, giving rise to the specter of high inflation. Then massive turmoil erupted in the Middle East, further ratcheting up oil prices. Then came Japan’s terrible earthquake, which severely damaged both its economy and global supply chains. And then Greece, Ireland, and Portugal lost access to credit markets, requiring bailout packages from the International Monetary Fund and the European Union.But that was not the end of it. Although Greece was bailed out a year ago, Plan A has now clearly failed. Greece will require another official bailout – or a bail-in of private creditors, an option that is fueling heated disagreement among European policymakers. Lately, concerns about America’s unsustainable fiscal deficits have, likewise, resulted in ugly political infighting, almost leading to a government shutdown. A similar battle is now brewing about America’s “debt ceiling,” which, if unresolved, introduces the risk of a “technical” default on US public debt. Optimists argue that the global economy has merely hit a “soft patch.”  But there are good reasons to believe that we are experiencing a more persistent slump.

Will housing save America's economy? - BACK in February of 2009, Paul Krugman was worrying about an insufficient policy response to the recession and he pondered the question: if America is to muddle through with too little stimulus, then how will growth return? [R]ecovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. As CR pointed out, at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won’t happen. Even if the desired number of vehicles doesn’t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are obsolete,,,He mentions automobiles, but there is another, somewhat surprising possibility—that housing will lead the way to a durable recovery. This may seem strange to suggest. An epic housing collapse following a massive housing boom helped to trigger the downturn. Residential investment has been a drag on growth for five consecutive years. And yet some writers, like Karl Smith and Calculated Risk, are hinting that a housing recovery may be on the way. Matt Yglesias hints at one reason why with this chart:

The Slow Economic Recovery -At the height of the financial crisis, the media frequently had discussions of the “failure of capitalism”, and the need to radically rein in the private sector through extensive regulations and other government activities. The politically liberal Congress elected in 2008 along with President Barack Obama reflected these views. In addition to taking various steps to try to fight the recession, leading members of the new Congress, and President Obama as well, considered they had a mandate to reengineer the American economy through more radical government interventions In addition to repeated attacks on American business, especially banks (some of the attacks on banks were well deserved), Congress passed an expensive stimulus package that did not stimulate much. The health care bill Congress passed seems likely to increase the cost to small and large businesses of providing health insurance for employees. Congressional leaders proposed high taxes on carbon emissions, large increases in taxes on higher income individuals, corporate profits, and capital gains as part of vocal attacks on “billionaires”. It is no surprise that this rhetoric and the proposed and actual policies discouraged business investment and slowed down the recovery.

Slowdown Is ‘Temporary’ If Jobs, D.C. Cooperate - Not to worry, says the Federal Reserve. The current slowdown is temporary and we will be back on track soon. There are a few reasons to believe that. But an acceleration also depends on job growth reviving and politicians avoiding a government shutdown. In Wednesday’s policy statement, the Fed said the economy’s slower pace partly reflects “factors that are likely to be temporary,” including higher food and energy prices and supply-chain disruptions associated with the tragic events in Japan. Once those drags have passed, the Fed “expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline.”  Private economists expect the same step up. Economists at IHS Global Insights, for example, think that real gross domestic product is growing at a 2% rate this half, and will rev up to 3.5% in the second half of 2011. Autos will drive the second-half revival.

The Fed’s Wishful (And Wrong) Thinking on Unemployment - No one seems to have noticed that the Fed’s latest unemployment projections just don’t make sense.  While most economists are concerned about a jobless recovery, the Fed is forecasting lots of jobs, but little recovery. Yes, today’s projections suggest only tepid output growth in the next few years. And given this, it’s hard to see how we will make much of a dent in the unemployment rate.  Yet the Fed believes otherwise, cheerfully (wishfully?) forecasting declining unemployment. The blue dots in the graph below show how economic growth has historically translated into changes in unemployment. The dashed line shows Okun’s law, which fits the data pretty well. This rule-of-thumb tells us two things:

  • 1.       You need economic growth in excess of around 3% to lower the unemployment rate.
  • 2.       If GDP grows a percentage point faster—which counts as a very optimistic forecast at the moment—then unemployment will fall by half a percentage point, from say, 9% to 8.5%.

Bernanke Is Either Not Very Bright or Not Very Honest. He Admits He Doesn’t Know Why We Have a Weak Economy … But He’s the One Who Weakened It - In “Bernanke Admits He’s Clueless On Economy’s Soft Patch”, Forbes blogger Agustino Fontevecchia notes: Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.” Specifically, Bernanke said today: We don’t have a precise read on why this slower pace of growth is persisting.  Well, it is obvious to anyone who has been paying attention what’s causing the slow down, and if Mr. Bernanke doesn’t know, he should be fired. As I’ve repeatedly explained since 2008, all independent economists and financial experts know why the economy is weak … and everything the Fed has been doing has been weakening it.

Why the economic recovery is lagging—The U.S. economy is stagnant; the proposition that we had a mere “recession” which “ended” two years ago, is, like the terminology of sovereign default (“debt restructuring”), just an exercise in euphemism. Real (that is, inflation-adjusted) GDP per capita has declined by almost 3 percent since 2007. (This is on the assumption that the first-quarter 2011 increase in GDP at an annual rate of 1.8 percent, not adjusted for inflation or population growth, will be the full-year real per capita increase—in fact, if unadjusted GDP grows by less than 3 percent for the year as a whole, the real per capita GDP will decline.) . National economies are so complex, and so different from each other and over time (making cross-sectional and time-series analyses of business cycles inconclusive), that it is rare that a phase in the cycle can be explained satisfactorily, especially if an estimate of magnitude rather than just of direction is desired. For what it's worth, I think the major impediment to economic growth at present is uncertainty on the part of the key economic actors, namely businessmen and consumers. Businessmen are hesitant to hire and invest and consumers to spend, in both cases because of uncertainty about their economic prospects.

If the slowdown is temporary, when will the news flow change? - Fed Chairman Ben Bernanke argued that the recent slowdown was mostly due to temporary factors. From the FOMC statement: "The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan." I also think we will see some pickup in the 2nd half of 2011, although I think the recovery will remain sluggish and choppy. Clearly we will see some ugly reports over the next few weeks. The regional manufacturing surveys will probably all show contraction in June, and that means the ISM manufacturing survey will be pretty bad, and maybe below 50 - indicating contraction nationally (to be released Friday, July 1st). The May Personal Income and Outlays (Monday, June 27th) will be weak (May was a tough month), and there is little indication that the June employment report will be strong (Friday July 8th).

State and local government s should be listed as a primary risk to the US outlook - Rebecca Wilder - I don't see why the aggregate state funding gap is not numero uno on the 'risks' to the US recovery (I usually hear oil, Europe, China, etc., in my line of work). According to the Center on Budget and Policy Priorities, the State budget gap is not expected to clear at least through 2013. From the CBPP report "States Continue to Feel Recession's Impact":  Three years into states' most severe fiscal crisis since the Great Depression, their finances are showing the clearest signs of recovery to date. States in recent months have seen stronger-than-expected revenue growth. This is encouraging news, but very large state fiscal problems remain. The recession brought about the largest collapse in state revenues on record, and states are just beginning to recover from that collapse. As of the first quarter of 2011, revenues remained roughly 9 percent below pre-recession levels. Consequently, even though the revenue outlook is better than it was, states still are addressing very large budget shortfalls.

Consumption and compensation: explicit and implicit wealth effects in finance - Rebecca Wilder - The outlook for the US economy is of utmost importance to that for the world, given that the US will hold an average 22.1% of World GDP through 2016 (measured in $US), according to the IMF April 2011 World Economic Outlook. And the outlook for the US consumer is of utmost importance to that of the US economy, given that personal consumption expenditures hold a large 71% share of 2010 US GDP. Therefore, holding the US consumer share constant, US consumption is expected to be 15% of the global economy on average through 2016. How wealth usually matters for US consumption: one of the drivers of consumption patterns 'now' is the wealth effect, usually defined as the shift in consumption due to changes in tangible (home values) and intangible (paper assets, like stocks and bonds) net assets. The chart above illustrates the 'wealth effect' on consumption as the ratio of net worth to disposable income (blue dotted line) as it's correlated to the consumption share (outlays really, see table 1 for the breakdown) of disposable income (green line). The consumption (outlay) share is is 100 less the saving rate. A large part of the Fed's quantitative easing program (QE) was targeted at stimulating the positive wealth effects on consumption via higher risk asset prices. I would argue that this has been largely successful to date. The two year moving average of the consumption share (green solid line) fell precipitously following the financial crisis, only to generally stabilize since Q1 2009; this is largely coincident with the outset of QE1.

This is what a balance-sheet recession looks like, and it's not pretty - (6 graphs) I had never heard the expression "balance-sheet recession" before this recent episode, and it's time I got around a comparison of the household balance sheets of the US and Canada. Of all my "Canada is not the US" posts, this is the one that makes me most grateful. The quarterly data goes back to 1990, and it's good to put the last few years in context. I've scaled all the series by price (the consumption spending deflator) and population. Here is the net worth series: There's been talk of a Japan-like 'lost decade' in the US; that seems optimistic. US real per capita net worth is back to what it was back in 1999.The US problem is on the assets side: Few will be surprised to learn that the collapse of US house prices had an important effect on US asset holdings:Although the fall in US housing assets was more dramatic, other assets lost value as well: The US data go back to 1952, so I was able to check the last time the real, per capita value of US housing equity was at its current level. Even after looking at all of these graphs, the answer astonished me: 1978. Nineteen seventy-freaking-eight.

The Euro: Safer Than The U.S. Dollar? - The dollar risk hiding in plain sight are U.S. money market funds. Just like all investors, money market funds have been scrambling for yields. With yields on three month Treasuries at a rock bottom annualized 0.02% as of this writing, money market funds have had to look for riskier investments to make ends meet. So what are these riskier investments? We encourage everyone reading this analysis to download the latest published report of the money market funds they are invested in. As we fear the issue is a systemic one, we won’t name any specific funds. Still, to illustrate the issue, two money market funds we recently analyzed had the following characteristics: the first was a large institutional money market fund with US$74 billion in assets. 4.6% of the fund is held in commercial paper issued by BNP Paribas. BNP Paribas is a French bank with €5 billion ($7.2 billion) in Greek bond holdings. In total, that fund had over 50% exposure to foreign banks, many of them European. The second was a retail money market fund with $1.4 billion in assets offered by a major brokerage firm. Approximately two thirds of its assets were invested in U.S. dollar denominated commercial paper and other short-term debt instruments issued by European banks.

Risk of U.S. credit rating downgrade increased-S&P (Reuters) - The risk of a downgrade to the credit rating of the United States has increased due to a lack of political consensus on how to employ the country's balance sheet flexibility, Standard and Poors' said on Tuesday. "Theoretically, there's a lot of flexibility on the fiscal and the monetary side: you have a central bank that can expand its balance sheet, and that's a real boon," Moritz Kraemer, head of sovereign credit ratings for Europe at Standard & Poor's, said on Tuesday. "But the problem is this flexibility needs to be employed and for that you need political consensus. That's not very visible right now. "The downside risks in the medium term have increased and we did assign a negative outlook that signifies there's a one in three chance the rating might go down in the next few years,"

Fitch sees risk of Greece, US debt defaults(Reuters) - Fitch Ratings said on Tuesday that it would regard a voluntary rollover of Greece's sovereign bond maturities as a default and would cut the credit rating appropriately, keeping pressure on Athens ahead of a confidence vote in parliament. The definitive comments weighed on the euro and underscored how much is at stake for Greece, which is struggling to implement a deeply unpopular fiscal austerity plan necessary to win the next tranche of emergency aid from the European Union and International Monetary Fund. Fractious euro zone finance ministers are trying to patch together a second aid package for Greece, with more official loans and, for the first time, some sort of contribution by private investors who hold Greek government bonds. Fitch's Colquhoun also reiterated that the rating agency would place the U.S. sovereign rating on watch negative if Congress did not raise the federal government's borrowing ceiling by August 2, and said if the U.S. government misses an August 15 coupon payment, then Fitch would place the rating on restricted default.

U.S. Default Would Change Fundamentals of Rating, Moody's Says -- The U.S. would risk not winning back its top Aaa credit rating soon if a failure by Congress to raise the nation's debt limit causes even a short-term default, according to Moody's Investors Service's senior credit officer. "Up until now, our assumption was that the risk is virtually zero of them ever missing an interest payment," Moody's Steven Hess said during an interview. "If they actually miss a debt payment, then it's a fundamental change."  Republicans are using talks to increase the $14.3 trillion debt-ceiling to press for cuts in spending. Negotiators seeking a bipartisan plan to reduce federal deficits said they oppose pairing it with only a short-term boost in the U.S. debt limit that the Treasury Department estimates will be breached at the start of August. Moody's warned on June 2 that it will put the credit rating under review for a downgrade unless there's progress on increasing the debt limit by mid-July.

The Obstinacy of Error, Interest Rates Edition - Krugman - Brad DeLong reposts something he wrote two years ago about interest rates; it was, I think, at least in part a followup to my slightly earlier post on liquidity preference and loanable funds. Brad and I both believe that the story of interest rates in this crisis is both remarkable and under-appreciated. In early 2009 we were faced with the prospect of (a) huge borrowing by the United States and other advanced-nation governments, because the recession had savaged revenues and increased the costs of safety-net program (b) a protracted period of high unemployment, with monetary policy likely to be up against the zero lower bound for years to come. Many private investors – plus economists and economic commentators who never understood Keynes – looked at (a) and confidently predicted soaring interest rates. Economists who did get Keynes looked at (b) and said that rates would stay low unless government borrowing was large enough to return the economy to something like full employment, which was unlikely. And here we are, two-plus years later, and the interest rate on 10-year U.S. Treasuries is only 2.94 percent.

Treasury Note Yields Stay Below 3% for a Sixth Day Before Fed's Decision - Bernanke and his fellow policy makers have given no indication they’ll tighten policy anytime soon. With manufacturing slowing and unemployment increasing during May to 9.1 percent, the Fed chief said this month growth is “frustratingly slow.” The unemployment rate in the U.S. unexpectedly climbed to 9.1 percent in May and payrolls grew at the slowest pace in eight months, according to Labor Department figures on June 4. “If we see the same jobs numbers next month, market expectations for QE3 will increase,” said Tsutomu Komiya at Daiwa Asset Management Co. Yields will probably fall below 2.88 percent, 2011’s low set last week, he said.

America's Debt Ceiling: The Mother Of All Tail Risks - Unlike most countries America requires two legal steps to run a deficit: one to pass budget bills, the other to borrow the money. Congress sets a ceiling on how much the country may borrow. In the past it has always raised the ceiling before the Treasury ran out of cash, doing so on 16 occasions since 1993 alone. But it often attaches conditions, and this year Republicans who control the House of Representatives are insisting on particularly onerous terms. With the debt and the deficit at their highest in 60 years, they want to see at least $2 trillion in spending cuts over ten years and no tax increases.  If a deal cannot be reached before August 2nd the Treasury says it will be forced to default. It has not specified on what: it could choose to stop paying pensioners and soldiers before it stopped paying interest on its debt. But outright default cannot be entirely ruled out. What happens if the world’s most trustworthy borrower reneges on its debt?  The possibility has not gone unnoticed. Trading in credit-default swaps (CDSs) on Treasury securities has picked up and the price of protection against default, as measured by the CDS spread, has risen (see chart). One-year protection is now almost as expensive as five-year protection. This is more often seen in distressed markets where investors are pricing in an imminent default than with otherwise healthy borrowers with long-term problems.

Guest Contribution: What Happens if U.S. Defaults? - WSJ _ Although we still do not view government default as a likely outcome, several factors are encouraging brinkmanship. The 2011 budget deal reduced outlays by a paltry $352 million despite announced cuts of $38 billion. This gap between expectations and reality has likely hardened the stance of voters and politicians who are focused on fiscal issues. In a recent Gallup poll, 47% of Americans were against increasing the debt ceiling, a figure that probably bolsters the anti-debt hike posture for many politicians who argue against an increase. According to a recent Pew Research Center poll, about the same percentage (48%) believes increasing the debt ceiling would result in “higher spending/bigger debt”. In contrast, just over a third of Americans worry about the impact a default would have on the U.S. economy. These figures may be the result of the mistaken notion that the U.S. can continue to make interest payments in a timely manner, avoiding a default indefinitely, and keeping intact its full faith and credit. The erroneous view requires investors to willingly roll over their holdings of Treasury debt, which seems unlikely under those conditions. Additionally, it ignores the fact that some Treasury investors may actually need their money back at some point. Finally, it does not account for the sharp interest rate increase that may result.

A Lesson on the Federal Reserve Board and the Deficit - Let's take this great moment of national deficit hysteria to teach people a bit about the Federal Reserve Board and the deficit. The Wall Street types get very upset when the rest of the country thinks that they should have any influence over Fed policy. But the Fed is part of the government, which means the public through its elected representatives can tell Ben Bernanke and the Fed what to do. One thing that the public could tell Ben Bernanke to do is to hold on to $3 trillion in government bonds and/or mortgage backed securities over the next decade, instead of selling these assets back to the public. This matters hugely for future deficits. If it hold $3 trillion in bonds that earn an average interest rate of 5 percent a year (the Congressional Budget Office's projected interest rate for the longer term), this translates into $150 billion a year refunded to the Treasury.  It is not easy to find spending cuts or tax increases that total $1.5 trillion, but the Fed could accomplish this task just by holding on to the assets it has purchased as part of its quantitative easing programs. To put this number in perspective, this $1.5 trillion in savings would close roughly half of the projected shortfall in Medicare over the program's 75-year planning horizon.

US budget talks hit tense stage - Budget talks between the White House and both parties in Congress enter an intense phase this week, with all sides expecting them to go beyond the initial early July deadline set for resolution.  Global financial markets are nervously watching the talks, which are being chaired by Joe Biden, the vice-president, to lift the US borrowing limit of $14,300bn before the ceiling is reached on August 2.The Treasury department has warned that in the absence of a deal to lift the debt ceiling, the US could default on its debt, damaging irreparably the creditworthiness of the world’s reserve currency and potentially plunging a sputtering economic recovery into a new recession. The White House does not want the negotiations to continue until the last minute before the August deadline, because it fears such brinkmanship could have a similarly damaging impact on confidence even without a default.However, none of the parties expects an agreement by July 2, the initial deadline. Mr Biden said at the end of last week’s talks that the “really tough stuff” had to be confronted by all parties to the negotiations as they hunt for trade-offs between deep spending cuts demanded by the Republicans and the Democrats’ efforts to stagger reductions with new revenue measures.

Short debt limit hike possible: McConnell (Reuters) - Congress and the White House could raise the debt limit for a few months while they seek a comprehensive, long-term budget deal, Senate Republican leader Mitch McConnell said on Sunday. The Obama administration has warned it will run out of money to pay the nation's bills if Congress does not raise the $14.3 trillion debt limit by August 2 -- a prospect that could push the country back into recession and upend global financial markets. Congressional Republicans, particularly in the House of Representatives, have balked at raising the debt ceiling unless it is accompanied by significant spending cuts. McConnell said on Sunday the ceiling could be raised enough to last a few months so that negotiations can continue on a larger deal that would include changes to so-called entitlement programs like Medicare. "The president and the vice president, everybody knows you have to tackle entitlement reform," McConnell said on CBS's "Face the Nation." "If we can't do that, then we'll probably end up with a very short-term proposal over, you know, a few months. And we'll be back having the same discussion again in the fall," McConnell said.

White House Leaves Door Open to Short-Term Debt Limit Vote - The White House is leaving open the possibility of a short-term debt ceiling vote this summer if lawmakers and administration officials cannot reach a deal for deep spending cuts by the Aug. 2 deadline. Responding to comments from Senate Minority Leader Mitch McConnell, who on Sunday floated the idea that Congress might only raise the debt ceiling for “a few months” and revisit the issue in the fall, White House press secretary Jay Carney didn’t rule it out. “I am not going to, today, make a judgment about different ideas that are being floated about when and how and for how much and how long the debt ceiling should be raised because our focus right now is on the things that we are doing at the staff level today and beginning tomorrow with the vice president leading the next meeting of negotiators,” On Sunday, Mr. McConnell said if the White House and Congress can’t reach a deficit reduction deficit reduction deal that includes entitlement reforms, then GOP lawmakers may approve “a very short term” increase in the debt ceiling and revisit the issue in the fall. “You cannot ignore entitlement reform,” 

Raising the Roof... on the National Debt - For the past month, House Republicans and the White House have been in a bitter standoff over the national debt ceiling, the legal limit to borrowing that the U.S. government imposes on itself. The law establishing the ceiling has been in effect since 1917, but the ceiling has been raised many times over the past century. The current limit is set at $14.3 trillion.  Failing to increase the debt ceiling could lead to the U.S. being unable to fund military salaries, pay for programs like Medicare, or make interest payments to creditors. But increasing the debt ceiling won’t be easy either.In the worst-case-scenario, an agreement to raise the debt ceiling would not be reached, and the U.S. government would risk defaulting on interest payments to lenders. The United States government has consistently served as a safe haven for lenders looking to store funds; historically it has never missed a payment. As a result of this reliability, the U.S. economy has been able to enjoy relatively low interest rates. If the U.S. were to consider defaulting on its loans, investing in the U.S. government would become riskier. To attract borrowers and accommodate for the increased risk of not being paid back, real interest rates would have to rise.

Don't Believe What You're Hearing About Budget Talks - Last week was the point in this year’s budget negotiations when everyone’s worst fears about what would happen seemed to be on the verge of being realized. The combination of increasingly happy talk about the summit being led by Vice President Joseph Biden and President Barack Obama’s golf outing with Speaker John Boehner (R-Ohio) seemed to have every blogger, pundit and interest group convinced that what they least wanted either was on the verge of happening or had already been agreed to. If you listened closely, the rumors indicated that everything — from significant tax changes to substantial Social Security cuts — not only was on the table but was coming together in a package that would soon be ready for political prime time and would fly through the legislative process.  This is a routine part of the federal budget debate and the fiscal equivalent of one of the five stages of grief.

Clock is ticking: U.S. politicians clash over budget - The White House and congressional leaders are accelerating negotiations over the biggest debt-reduction package in at least two decades amid mounting concern the effort is running out of time. Over the next six weeks, negotiators must strike a bipartisan compromise to slice more than $US2 trillion ($1.9 billion) from the federal budget by 2021, reduce the complex plan to writing and persuade a bitterly divided Congress to support it. But time is running out. "I keep talking to other colleagues who have confidence that someone else is working things out,'' said Senator Chris Coons, a freshman Democrat member of the budget committee. ''But I keep looking around thinking, 'If we're not doing it, then who is?'''

GOP doubts over long-term deficit deal grow — Doubt appears to be growing among congressional Republicans about getting a long-term deficit-reduction deal by early August in exchange for hiking the U.S. debt limit, as high-level talks restarted Tuesday. Two Republican lawmakers said at a Wall Street Journal conference on Tuesday that there isn’t enough time to thoroughly deal with a host of issues, including taxes and entitlement reform, before Aug. 2 — the day the Treasury says the United States will default if the debt limit isn’t raised.  “You’re not going to be able to have every detail completed in time for Aug. 2,” said Rep. Dave Camp, the Michigan Republican who chairs the tax-writing House Ways and Means Committee. “That’s why there’s some talk of maybe a short-term extension” in the debt ceiling.  Camp said that a temporary extension is “not a good idea” because it doesn’t provide enough certainty. But he added: “Because this is going to take some time to do, you may see that.”

Democrats call for new spending in debt deal (Reuters) - Democratic leaders called on Wednesday for additional spending to boost the sluggish U.S. economy, setting up a fresh hurdle for bipartisan efforts in Washington to head off a government debt default this summer. Democrats' demand for new stimulus spending is at odds with the work of negotiators, led by Vice President Joe Biden, who are trying to find trillions of dollars in savings as part of a deal that would allow Congress to sign off on new government borrowing before the U.S. runs out of money to pay its bills. Those talks, which resumed on Wednesday, have largely focused on spending cuts over the next 10 years. Senate Democrats want the deal to include more money for highway construction, a payroll tax cut and clean-energy subsidies to bring down the 9.1 percent unemployment rate. "Get the recovery right before you get in this deficit-cutting mode,"  Dick Durbin told reporters. "Get people back to work. Let's start moving in that direction."Republicans, who favor deep spending cuts, said that idea was not likely to go far in the Biden-led talks.

Biden-led U.S. debt talks reach impasse over taxes (Reuters) - Efforts led by Vice President Joe Biden to reach a deal that would allow the United States to avoid a debt default reached an impasse on Thursday as Republican Representative Eric Cantor said he was pulling out of the discussions. Cantor said participants in the talks had identified trillions of dollars in potential spending cuts but were deadlocked over tax increases that Democrats want. "Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue," Cantor said in a statement. An aide to Senator Jon Kyl, the other Republican participant, declined to say whether he would take part in the next meeting, scheduled for 2 p.m. EDT Negotiators had hoped to reach a budget deal by next week that would give lawmakers the political cover to raise the $14.3 trillion debt ceiling.

New Stimulus Spending? Even Less Likely - Prospects dimmed for enacting new stimulus spending in the deficit-reduction talks, further highlighting the divide between Republicans and Democrats as the bipartisan budget talks headed by Vice President Joe Biden falter. At a press conference on Wednesday, Senate Democratic leaders insisted that they want the Biden deficit talks to include short-term jobs measures such as employer tax cuts or infrastructure spending. Majority Leader Harry Reid of Nevada added that he’s calling for stimulus ideas from his committee chairs to be delivered by Aug. 1 – a day before the Aug. 2 deadline Treasury has set for increasing the debt ceiling. That timetable suggests it could be difficult for Democrats to pull together a stimulus plan in time for the debt-ceiling vote, which is expected to include agreement on a long list of spending cuts. The list of options for a potential stimulus package also seems to be growing, another sign of possible disarray.

Playing with Fire with the Debt Limit - America sometimes takes its exceptionalism too far. Case in point: We are the only major economy that talks openly of default. Government debt has ballooned throughout the developed world in the aftermath of the Great Recession. France and Britain are as deep in debt as the United States, for example, and Japan is much further in the hole. But their leaders never mention the possibility of default. Why would they? If you have the ability to pay your bills, there’s no reason to scare your creditors. But that’s exactly what we do in America. Treasury Secretary Timothy Geithner has been warning about the risks of default since January. If we don’t increase the debt limit by early August, he tells us, default becomes a real possibility. And that could pose grievous risks to our already weak economy. Many Republicans play down that risk. Echoing famed investor Stanley Druckenmiller, some argue that a temporary default would be acceptable if it’s part of a larger political strategy that brings future deficits under control. But that is a dangerous game.

Budget Talks Near Collapse as G.O.P. Leader Quits - Budget talks aimed at clearing the way for a federal debt limit1 increase teetered near collapse Thursday as Representative Eric Cantor2, the House majority leader, abandoned the negotiations and top Republicans said they would not give in to a Democratic push for new revenues as part of a compromise. The decision by Mr. Cantor, one of two Republicans participating in the talks being led by Vice President Joseph R. Biden Jr., jolted the discussions in what was considered to be a crucial week of bargaining as the Aug. 2 deadline for an increase in federal borrowing authority neared. While the Virginia lawmaker had previously expressed optimism that the sessions could produce a deal, he announced he would not be attending Thursday’s meeting because Democrats continued to press for part of the more than $2 trillion in savings to come from revenues such as phasing out income tax deductions.

Republicans Bolt Biden Group Budget Talks - Yesterday morning, House Majority Leader Eric Cantor (R-VA) bolted the Biden Group deficit talks in frustration over repeated insistence by Democrats that some revenue raisers be included in the deal to raise the debt limit.  There were conflicting accounts over whether Cantor's move was made on his own, but it did appear to catch Senator Jon Kyl (R-AZ) by surprise.  A few hours later Kyl announced he would boycott the talks as well.  Speaker John Boehner (R-OH) rushed to the White House Wednesday night for a hastily arranged meeting with President Obama, presumably to reassure him that a deal would eventually be reached.  In my opinion, Cantor may have acted alone to solidify his leadership position with House Tea Party Republicans and to pressure President Obama into direct participation in the talks.  If this had happened during the last week of July, I'd be concerned, but, with five weeks until August 2, it may actually facilitate a deal.  Last night, Vice President Biden issued a statement saying he was ready to resume the talks whenever the Republicans were.

OH NO: The US Debt Ceiling Negotiations Just Blew Up - House Majority Leader Eric Cantor just pulled out of the debt ceiling talks over tax issues, according to Cantor says there is an "impasse" over taxes holding up negotiations that only President Obama and House Speaker Boehner can resolve. Currently, Vice President Joe Biden is running these negotiations. From the Wall Street Journal: "We've reached the point where the dynamic needs to change,'' Mr. Cantor said. "It is up to the president to come in and talk to the speaker. We've reached the end of this phase. Now is the time for these talks to go into abeyance." Thus far, both sides have agreed to $2 trillion in spending cuts over the next 10 years. But the issue of taxes is holding the whole thing up, according to Cantor. On one side, the Democrats are calling for some tax increases to be included in the legislation. But Republicans are refusing to include any tax hikes in the deal.

Their Temper Tantrum - NYT Editorial - Congressional Republicans, who played a major role in piling up the government’s unsustainable debt in the first place, have thrown a tantrum and walked out of the debt limit talks1. This bit of grandstanding has brought the nation closer to the financial crisis that Republicans have been threatening for weeks. But, at least now, their real goals are in sharp focus.  The two Republicans in the talks, Representative Eric Cantor, the House majority leader, and Senator Jon Kyl, the minority whip, had no intention of actually negotiating. Negotiations require listening to those on the other side and giving them something they want in exchange for some of your goals.  It has been obvious all along that cutting government services alone is not a solution to either the budget deficit or the mounting national debt. The Democrats, at least, acknowledged that reality at the bargaining table by saying that along with the cuts the Republicans cherish, there would have to be increases in revenue — an end to unnecessary tax loopholes for corporations or the rich.

Why Eric Cantor won’t make the budget deal - Eric Cantor is pulling out of the debt-ceiling talks. But he’s not saying they should end. In fact, he’s saying they’ve been very successful thus far.  But having agreed on spending, now the two parties need to agree on taxes. And Cantor doesn’t want to be the one to make that agreement. It’s time, he told the Wall Street Journal, for “the president to come in and talk to the speaker.” But nor is it an accident that Cantor is fleeing the room now that the spending cuts have been chosen and the taxes have to be agreed to. For all the reasons that Boehner needs Cantor’s fingerprints on the deal, Cantor can’t put them there. Cantor has the credibility with the Tea Party that Boehner lacks. But that’s why Cantor won’t cut the deal. The Tea Party-types support him because he’s the guy who won’t cut the deal. He can’t sign off on tax increases without losing his power base. But if he’s able to throw it back to Boehner, and Boehner cuts the deal, that’s all good for Cantor: Boehner becomes weaker and he becomes stronger. Which is why Boehner will also have trouble making this deal. It’ll mean he made the concessions that Cantor, the true conservative, didn’t. That’s not how he holds onto the gavel in this Republican Party.

Cantor Bolting Budget Talks Puts Bullseye On Boehner's Forehead - As I posted yesterday, all of the happy talk that has been coming from the budget talks should have been taken with a healthy dose of skepticism instead of the optimism that has been reported. But it's also not surprising because Cantor doesn't represent a wing of the House Republicans that was ever going to vote for a deal on the debt ceiling.  That's why, while done in an overly dramatic way, his departure from the talks isn't that meaningful.  The question is whether Boehner has now been further forced into a corner and, as he did immediately after the Cantor story broke, has to appear to be holier than thou with the tea party. The real balance of power on this vote is with the non tea party wing of the GOP and that's a group with which Boehner has better credibility than Cantor.  From my perspective, the only way Boehner can get them to go along is to wait until the last minute so it looks like he has driven the best possible deal and then hope that market jitters allow him and his colleagues to say that he has no choice.  He's only going to get about 100 GOP votes to pass a bill.  That means that he can't go too far right and expect the 118 Dem votes he'll also need.

US House to consider balanced-budget amendment - The U.S. House of Representatives will vote on a bill that would amend the Constitution to require Congress to balance the budget each year, Republican Leader Eric Cantor said on Thursday. The measure has little chance of becoming law, but it could give Republicans added leverage as they struggle with Democrats over a budget-cutting deal that would allow the country to continue borrowing money and avert a default on its debt. Cantor walked away from the talks earlier in the day, saying negotiators were at an impasse over tax increases sought by Democrats. The Treasury Department has warned that it could run out of money to pay the country's bills if Congress does not increase the $14.3 trillion debt ceiling by Aug. 2. That could push the country back into recession and rattle markets across the globe. Some conservative Republicans say they won't back a debt-ceiling increase unless Congress first approves the constitutional amendment. Cantor said he would schedule the vote for the week of July 25, shortly before the Aug. 2 deadline.

Geithner: ‘Six Episodes of Failure’ Before Deficit Deal - Treasury Secretary Timothy Geithner on Friday urged Americans to be patient during the deficit-reduction talks that are consuming Washington, predicting that the political fight will be messy but will ultimately lead to a bipartisan deal. “You are going to see a lot of political theater around this the next couple of weeks, and there will be six episodes of failure before people do the right thing,” Mr. Geithner did acknowledge, though, that the risk talks could break down appeared to have risen. He said there were forces within both political parties that are more interested in fighting over the deficit than reaching a deal. “There’s a big risk of miscalculation now because there’s a lot of people on both sides of the political spectrum now that would rather have a fight than actually do something,” he said.  Mr. Geithner has said that if the ceiling isn’t raised by Aug. 2, the country could begin defaulting on its obligations. “There’s a little danger in this, because it’s a very unpopular vote,” he said.

How To (Temporarily) Survive a Debtpocalypse - Intra-caucus dynamics on the GOP side seem to be dooming the debt limit talks. Eric Cantor’s preference is for John Boehner to sign a deal he can grumble about, so that when the GOP loses seats in 2012 he can challenge Boehner for the leadership. Boehner, meanwhile, doesn’t want to sign a deal that Cantor won’t sign. Consequently, we can’t get a deal.  This, then, returns us to the subject of tactical modalities available if the country runs up to the debt ceiling. The key issue at this point becomes the fact that hitting the debt ceiling doesn’t force an automatic default or a government shutdown. Revenue continues to come in to the federal government. There’s simply a gap between how much comes in and how much the government is supposed to spend. The first step to sound policy in this case is to make sure we keep paying interest on the debt. Thus default and immediate catastrophe is avoided. Second, what you want to do is minimize the impact on government activities. That means that in the first instance you want to try to stiff people to whom the government owes money but who will probably keep working even if you don’t pay them.

The Debt Ceiling: Why Obama Should Just Ignore It - With a Republican-controlled House demanding large cuts in present and future spending in exchange for an increase in the debt ceiling, the possibility that the federal government will have trouble financing and issuing new debt is becoming more frighteningly likely each day. Treasury Secretary Tim Geithner, CBO chief Doug Elmendorf, and Federal Reserve Chairman Ben Bernanke have all encouraged Congress in strong terms to resolve the debt ceiling stand-off before the creditworthiness of the United States is jeopardized. But barring a timely resolution to the standoff, could President Obama simply ignore the debt ceiling and keep making good on the country’s obligations? As the deadline grows nearer, the question has been popping up on law blogs and other forums, and according to a number of legal experts with whom I spoke, the answer, surprisingly, appears to be yes—and it is conservative justices who have played the biggest role in making it possible.  Jonathan Zasloff, a professor at the UCLA School of Law who has discussed this idea on a blog that he writes with several other academics, told me that while an order from the president for the Treasury Department to continue issuing new debt sounded extreme, it was unclear who could prove sufficient injury from the decision that would qualify the person to sue the administration in court.

Forty groups unite to block debt ceiling hike - More than 40 conservative groups and 20 members of Congress will announce later Wednesday that they have signed a pledge to block a vote on raising the debt ceiling unless it is coupled with plans to cut, cap and balance federal spending, according to a statement provided to POLITICO. Ten Republican senators - including Jim DeMint, Marco Rubio and Orrin Hatch - along with 10 members of the House - Ron Paul and Jason Chaffetz, among them - have agreed to the "Cut, Cap, Balance" pledge, as have major conservative groups, such as the Americans for Prosperity, Club for Growth, Freedom Works, the National Taxpayers Union, the American Family Association and Tea Party Express. Those who sign the pledge commit to opposing any effort to raise the debt ceiling that does not come with substantial spending cuts beginning in fiscal 2012, enforceable spending caps and congressional passage of an amendment to the U.S. Constitution that would require a balanced budget, spending limits and a super-majority for raising taxes.

Americans See Debt Threat, Reject Tax ‘Scare’ - Americans say that the $14.3 trillion U.S. debt threatens the economy and that entitlement programs may go broke even as they dismiss as “scare tactics” the arguments offered by Republicans and Democrats who are debating a solution.  Their sentiments in a Bloomberg National Poll suggest that the public is open to the recommendations of the majority of President Barack Obama’s debt commission. Members of the group, which included current and former members of Congress and White House officials, called for revenue increases and spending cuts that would have shaved deficits by $3.8 trillion over the next decade.  More than 60 percent of those surveyed say that interest on the debt may lead to a recession and that the rising costs of Medicare and Social Security represent real dangers, according to the poll conducted June 17-20.  At the same time, the poll found that most Americans aren’t swayed by the arguments Republicans and Democrats make to advance their competing remedies for debt reduction and strengthening the financial stability of entitlement programs, viewing them as empty rhetoric.

Another Great Morning in the Nation’s Capital - I woke up to the headlines in today’s Washington Post – House Majority Leader Eric Cantor and Senate Minority Whip Jon Kyl were walking out of the budget negotiations. The Democrats, they said, were insisting that revenue increases be part of any agreement. No revenue increases were acceptable – period. As I drove into a nearby suburb to catch the subway, I noticed all the traffic lights were out. Today we have another power failure, affecting who knows how many homes and businesses.The drivers adjusted, treating the nonfunctioning traffic signals as four way stop signs, and I soon arrived at the Metro. Today, the trains on the line I take were running on schedule. But at my downtown station, one of the deepest in the system, none of the escalators were working. We trudged quietly and uncomplainingly up the steps in the heat and humidity.  But we are told we don’t need to spend more on these or other public services or public and private infrastructure. In fact, if they are in the public sector, we should cut them. And no one should have to pay higher taxes – especially those with the highest incomes who may rely less on public services or the social safety net. The worst thing we can do is to enact “job-killing” tax increases.

How Do Fannie and Freddie Fit Into the Debt-Ceiling Picture? -A lot is written these days about the debt ceiling fight. Lots of articles also continue to bemoan the bailout of mortgage financiers Fannie Mae and Freddie Mac. Yet these two pet topics of economic and business commentators tend not to intersect. But they could in a few months. Every quarter, Fannie and Freddie go to the Treasury with their latest need for a cash infusion. Their next scheduled request will be in August -- the same month when the Treasury's "extraordinary measures" are set to dry up. Will Fannie and Freddie make the situation even more difficult for the Treasury if the debt ceiling isn't raised by that time?

Fed Frets Over US Fiscal Recklessness - Federal Reserve Chairman Ben S. Bernanke is stepping up his call for the government to rein in the federal deficit -- just not now. The central bank chief and his lieutenants are expressing concern that Congress’s failure to close what Dallas Fed President Richard Fisher called the nation’s “fiscal sinkhole” puts the economy at risk. At the same time, they say that acting too quickly may choke off a recovery hobbled by an unemployment rate above 9 percent. Concern that government spending cuts will inhibit economic growth may prompt the Fed to maintain record stimulus well beyond the completion of its $600 billion bond purchase program this month, said Dean Maki of Barclays Capital. Should the economy weaken further, there’s little more the Fed can do to spur growth and create jobs with interest rates near zero and the balance sheet at a record $2.83 trillion. “The Fed is not inclined to do more easing in the form of asset purchases, and it would create something of a dilemma for them if there’s such a dramatic near-term fiscal tightening put in place that it prevented the Fed from achieving its mandate” for full employment, said Maki, chief U.S. economist at Barclays in New York.

Bernanke to Congress: Don't cut too much, too fast - The Federal Reserve’s outlook on the U.S. economy is gloomier than it was two months ago, the central bank’s chairman said Wednesday afternoon, reiterating plans to keep interest rates near zero and urging Congress not to cut federal spending by too much too fast.  At his second-ever press conference, Bernanke repeated the findings of the Federal Open Market Committee, which said in a statement earlier in the day that while “the economic recovery is continuing at a moderate pace,” it is happening “somewhat more slowly” than had been expected. Bernanke also urged congressional negotiators to hold off on making deep spending cuts in the short term. The effect of federal spending cuts “depends on the timing,” Bernanke said. “I have advocated that the negotiations about the budget focus on the longer term, say 10 years, which is the budget window, or even longer” if considering entitlement reform.  “In light of the weakness of the recovery, it would be best not to have sudden and sharp fiscal consolidation in the near term,” he said. “I don’t think that sharp, immediate cuts in the deficit would create more jobs.”

Overly Swift Spending Cuts Scarier Than Temporary Default, Economist Argues - Bank reserves swelling and commodity prices surging — that’s the situation that the U.S. economy is now confronting. But it also was the case back in 1937. And that’s what worries Ethan Harris, North American economist at Bank of America Merrill Lynch. He fears, now like then, that tightening of monetary and fiscal policy could cause a recession, so much so that he thinks a temporary default on U.S. Treasury obligations may be preferable to overly swift spending cuts. His view stands at odds with the rest of Wall Street, which has frequently communicated to congressional Republicans as well as the White House their desire to see the $14.3 trillion debt ceiling increased. They fear a temporary default could disrupt the $4 trillion Treasury financing market, could spark a run on money-market funds and increase mortgage rates.

Could The US Have An “Expansionary Fiscal Contraction”? -  Simon Johnson. The US has a large budget deficit and a debt-to-GDP ratio that, in most projections, continues to rise over time.  Some House and Senate Republicans are arguing strongly that this situation calls for large and immediate cuts to government spending, for example as part of any agreement to increase the federal government’s debt ceiling.   The Joint Economic Committee of Congress held a hearing on Tuesday to discuss whether such spending cuts would be “contractionary” or “expansionary” for the economy in the short-run.  My assessment, after participating as a witness at the hearing, is that large immediate spending cuts would tend to slow the economy (a webcast of the hearing is here). My full written testimony to Tuesday’s hearing of the Joint Economic Committee of Congress is available here. The general presumption is that fiscal contraction – cutting spending and/or raising taxes – will immediately slow the economy relative to the growth path it would have had otherwise.

PIMCO Founder To Deficit-Obsessed Congress: Get Back To Reality - One of the most influential investors in the world of finance has a message for lawmakers -- particularly conservative lawmakers -- on Capitol Hill: rejoin the real world. In a prospectus for clients, Bill Gross, a co-founder of investment management giant PIMCO, says members' of Congress incessant focus on deficit -- and in particular, the manner in which they obsess about deficits -- is foolhardy, and a recipe for disaster. What the country needs, Gross said, is real stimulus now, and a measured return toward fiscal balance in the years ahead. 'Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea,' Gross writes. 'While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare. Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.

Top bond trader Bill Gross calls for more stimulus - Bill Gross, the head of PIMCO, the world’s largest bond investor, on Tuesday lambasted politicians who claim deficit reduction will lead to job growth and called for new stimulus spending. Gross is often cited by House Budget Committee Chairman Paul Ryan (R-Wis.) as having said the U.S. had only a few years to rein in the deficit to avoid a debt crisis. Gross sparked a lot of attention by dumping his holdings of U.S. Treasuries this spring. “Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem,” Gross wrote in PIMCO’s July Investment Outlook.  “Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed,” he said.  Gross spoke favorably of New Deal-style infrastructure programs and called for a National Infrastructure Bank.

Bill Gross SLAMS Fiscal Conservatism, And The Politicians Who Think It Will Help Job Growth: PIMCO bond god Bill Gross has warned repeatedly in the past that the US is facing major fiscal problems. So you might be surprised by his stance on spending cuts: Both parties, in fact, are moving to anti-Keynesian policy orientations, which deny additional stimulus and make rather awkward and unsubstantiated claims that if you balance the budget, “they will come.” It is envisioned that corporations or investors will somehow overnight be attracted to the revived competitiveness of the U.S. labor market: Politicians feel that fiscal conservatism equates to job growth. It’s difficult to believe, however, that an American-based corporation, with profits as its primary focus, can somehow be wooed back to American soil with a feeble and historically unjustified assurance that Social Security will be now secure or that medical care inflation will disinflate. Admittedly, those are long-term requirements for a stable and healthy economy, but fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth. Fed Chairman Bernanke has said as much, suggesting the urgency of a congressional medium-term plan to reduce the deficit but that immediate cuts are self-defeating if they were to undercut the still-fragile economy."

Bill Gross: Bond Vigilante, Minsky Convert - In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem. -School Daze, School Daze, Good Old Golden Rule Days, Bill Gross, Jul 2011

And Policymakers Are Proposing to Withdraw Stimulus? - GDP growth is slackening: The output gap remains large, and will still be -3.6% in 2012Q4, according to the mean WSJ June survey. Finally, on the spending side, government expenditures on goods and services are a negative component of overall GDP growth, in an accounting sense. This figure reminds us that the Federal stimulus was largely offsetting contraction from the state and local governments. This point was highlighted in Aizenman and Pasricha's analysis of spending (on both goods and transfers). So, I think I understand where PIMCO’s Bill Gross is coming from (The Hill): Bill Gross, the head of PIMCO, the world’s largest bond investor, on Tuesday lambasted politicians who claim deficit reduction will lead to job growth and called for new stimulus spending.

When has stimulus ever been politically feasible? - Brad DeLong says that he and everyone he knows were taken aback by our government's inability to prevent the financial crisis from turning into a protracted recession... I have to say that I am not surprised by this at all...and I think that even without the benefit of hindsight, I would not have been surprised (and indeed, I always believed that the government's response would be inadequate). Why? Because we've never really implemented effective countercyclical policy in the past! Can you name a systemic financial crisis in our history that was not followed by a protracted economic slump? Now take the Fed's inability/refusal to stabilize nominal GDP growth after the crisis. At the zero lower bound, Fed action pretty much means QE. And when have we (or any country) ever implemented large-scale QE in the absence of out-and-out deflation? Finally, let's consider the political feasibility of stimulus. Has the United States ever purposefully enacted a large countercyclical fiscal stimulus in the past? There's the New Deal, but as DeLong himself has mentioned, it was actually pretty small beer.

The Real vs. Imagined Deficit - Republicans say they won’t raise taxes. Democrats are reluctant to cut Social Security1, Medicare2 and Medicaid3. So discretionary spending — the roughly 35 percent of government that includes other social programs and the military — will have to be a big part of any deal in coming weeks to raise the debt ceiling4.  According to the government’s official forecasts5, discretionary spending is already slated to shrink significantly. Military spending will fall by 25 percent, as a share of the economy, over the next decade. Domestic programs will shrink even more, and by 2021 they will account for their smallest share of the economy since the 1950s.  And the scale of the cuts could do real damage. They could jeopardize food safety6, highway quality and F.B.I. investigations. They could hurt the poor at a time when unemployment remains near a three-decade high. They could undermine education and scientific research, the best hopes for future prosperity.  The goal of deficit reduction can’t simply be arithmetic. It has to be philosophical, as well.  What’s the least amount of spending needed to ensure a decent life for even the most vulnerable citizens? Who is in the best position to pay that money?

The GOP Myth of 'Job-Killing' Spending - I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that government spending destroys jobs. No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.  Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?

U.S. debt may lead to crisis, report warns - The rapidly growing national debt could soon spark a European-style crisis unless Congress moves forcefully, the Congressional Budget Office warned Wednesday in a study that underscored the stakes for Vice President Joe Biden and negotiators working on a sweeping plan to reduce red ink. Republicans seized on the report to renew their push to reduce costs in federal benefit programs such as Medicare. The report said the national debt, now $14.3 trillion, is on pace to equal the annual size of the economy within a decade. It warned of a possible "sudden fiscal crisis" if it is left unchecked, with investors losing faith in the U.S. government's ability to manage its fiscal affairs. The study reverberated throughout the Capitol as Biden and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

CBO’s 2011 Long-Term Budget Outlook - CBO Director's Blog - Recently, the federal government has been recording budget deficits that are the largest as a share of the economy since 1945. Consequently, the amount of federal debt held by the public has surged. By the end of this year, CBO projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II. As the economy continues to recover and the policies adopted to counteract the recession phase out, budget deficits will probably decline markedly in the next few years. But with the aging of the population and growing health care costs, the budget outlook, for both the coming decade and beyond, is daunting. This morning CBO released the latest in its series of reports on the long-term budget outlook. The report examines the pressures on the federal budget by presenting our  projections of federal spending and revenues—under two different scenarios discussed below—over the next 25 years. Tomorrow, I will testify on the key findings of the report before the House Budget Committee.

CBO Updates its Report on the Looming Debt Crisis - Every couple years, the Congressional Budget Office publishes a very scary document, The Long-Term Budget Outlook.  As in previous reports, the conclusion is that a continuation of current policies would lead to an unsustainable increase in the national debt. Here’s how you read the report.  CBO simulates two scenarios.  One is called “extended baseline,” in which all of the Bush tax cuts expire on schedule after 2012, the AMT engulfs the middle class in a web of higher taxes and mind-numbing complexity, and payments to providers under Medicare are slashed.  While all of these things are technically scheduled to occur under current law, none is likely.  Congress recently extended the Bush tax cuts, the AMT “patch” (which protects most middle class people from the dread tax), and the Medicare “doc fix,” and is likely to do so again.  The “alternative fiscal scenario” assumes that federal tax revenues return to their historical levels (18.4% of GDP) and health care spending continues to grow at roughly its historical rate (2 percentage points faster than GDP).  The alternative scenario should really be labeled “current policy,” and it’s pretty bleak, as shown in the chart above (from the cover of the CBO report).  Within 10 years, debt will exceed 100% of GDP.  By 2037, it would be more than double the size of the economy.

CHART OF THE DAY: CBO: If Politicians Made No Changes, The Debt Problem Would Go Away: "Today the Congressional Budget Office released its latest forecast for the government debt, and not surprisingly it's pretty grim. You know the drill by now. But it doesn't have to be. This chart shows two lines: The Extended Baseline Scenario and the Alternative Fiscal Scenario. In the baseline scenario, politicians literally sit on their hands. They let the Bush tax cuts expire, they keep indexing the Alternative Minimum Tax higher, and they don't raise Medicare payments to doctors. All of that will happen automatically if politicians do nothing. Unfortunately from a debt perspective, it's the alternative scenario that's more likely. The Bush tax cuts probably won't be killed, and Medicare payments will be raised to satisfy doctors. Still, the key is: if there were no legislative changes whatsoever, this would be our debt future. Back in April, Ezra Klein posted a version of this chart and said it was the chart that all debt discussions should start with."

Federal Budget Math: We Can’t Repeat the Past - CBO Director's Blog - I was pleased to talk last Thursday at the Federal Reserve Bank of New York. I began my presentation by showing that, under current tax and spending policies, federal debt held by the public would be roughly equal to our annual economic output by the end of the decade—a level that has been exceeded in the United States during only a few years in the 1940s. By “current policies,” I mean policies that are in effect now, even though they might be scheduled, by law, to expire or change in the next few years. Those policies include the tax cuts originally enacted in 2001 and 2003, the indexing of the parameters of the alternative minimum tax, and maintaining Medicare’s payment rates for physicians’ services. Thus, under current policies, the federal budget is quickly heading into territory that is unfamiliar to us and to most other developed countries as well. As policymakers and citizens think about this challenge, many wonder whether it is possible to return to a configuration of federal spending and revenues that, in earlier years, led to a stable trajectory of federal debt.

CBO Testified on the Long-Term Budget Outlook - CBO Director's Blog - This morning I testified before the House Budget Committee on our long-term budget outlook that was released yesterday. In that testimony, I highlighted many of the points that were included in my blog post from yesterday. In this blog, I will discuss, in more detail, the main factors that account for the projected increases in outlays for Social Security, Medicare, and Medicaid: aging of the population and rising health care costs. CBO’s long-term projections highlight a key element underlying the fiscal challenges facing the United States. Those projections indicate that, if the government’s programs and activities are maintained in their current form, spending for everything other than interest will rise to between 23 percent and 25 percent of GDP in 2035, compared with an average of 18.6 percent of GDP experienced over the past 40 years. Thus, providing the services and benefits that people are accustomed to will consume a greater share of the economy in the future than it did in the past.

Long-term budget outlook 'daunting', CBO says— Budget deficits will probably drop in the next few years, but long-term prospects are “daunting” as spending on entitlements and health care spikes, the federal agency charged with keeping tabs on Congress said Wednesday. The Congressional Budget Office said that under one scenario that adheres closely to current law, the total federal debt will grow from about 69% of GDP this year to 84% by 2035. That scenario assumes that the Bush-era tax cuts and other policies expire. Read long-term budget outlook from CBO. 2 Under a second scenario that assumes changes in current law, the debt held by the public would reach 190% by 2035. Among other things that scenario assumes that the Medicare program’s payment rates for doctors will remain at current levels. Current law has them declining by about a third.

CBO Cuts through the Noise: Spending Growth is Unsustainable - The federal budget is complex, and the partisan chatter surrounding it tends to muddy the water further.  That's why it's important to get it straight from the horse's mouth.  The Congressional Budget Office (CBO), our nation's primary arbiter of budget issues, just released their long term budget forecast.  Behold: Under current law, an aging population and rapidly rising health care costs will sharply increase federal spending for health care programs and Social Security. If revenues remained at their historical average share of gross domestic product (GDP), such spending growth would cause federal debt to grow to unsustainable levels. If policymakers are to put the federal government on a sustainable budgetary path, they will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.

CBO: Debt could grow to double GDP - Applying a little shock treatment to White House deficit talks, the Congressional Budget Office released new projections Wednesday showing that the U.S. debt could be nearly twice the nation’s GDP in 25 years absent real changes in spending and tax policy.  Instead of confining itself to CBO’s often rigid long-term baseline rules, the report creates an “alternative fiscal scenario” which the authors argue is more politically realistic in that it doesn’t assume that Congress will let all the Bush-era tax cuts expire or that Medicare physician payments will be allowed to drop precipitously over the coming years. Upper middle-income families would still be protected from the Alternative Minimum Tax under the same scenario, and revenues held to 18.4% of GDP, close to what’s become a Republican goal. Under these assumptions, as mapped out by CBO, debt held by the public would exceed 100% of GDP by 2021 and exceed its historical peak of 109% two years later. By 2035, it would be approaching 190% of GDP and equally important interest on that debt would be equal to 9% of GDP –more than five times current levels.

Unchanged Debt Explosion - CBO’s Long-Term Budget Outlook released this week is essentially the same as last year’s: without a change in policy the debt will explode to over 900 percent of GDP. One difference is that CBO decided not to print out the debt ratio in their spread sheet “Data Underlying Scenarios and Figures” as in the past two year once the ratio went beyond 200 percent. So in the following graph I computed the ratio from the revenues and spending projections. This is why it is so important to adopt reforms like the ones proposed this week by Congressman Kevin Brady, which would hold down federal spending as a share of GDP and stop the debt explosion. By using potential GDP rather than actual GDP his proposal would eliminate the pro-cyclical spending implied by many other spending cap proposals (which use actual GDP) where federal spending would rise rapidly during booms and fall rapidly during recessions

Republicans Say “Screw You, CBO (Baseline)” - Graph above is Figure 1-2 from CBO’s long-term budget outlook, showing debt held by the public as percent of GDP under two scenarios. The Congressional Budget Office released its long-term budget outlook this week.  There wasn’t really any new news in it, but it did serve as a reminder that the fiscal policy choices available to us can make a huge difference–from the wildly unsustainable path implied by CBO’s “alternative fiscal scenario” to the much-closer-to-sustainable (at least over the next 25 years) “extended-baseline scenario.” Most of the difference between these two paths is explained by what happens to the Bush/Obama tax cuts.  Under the CBO’s baseline conventions, revenue levels are based on current tax law as written, expiration dates and all.  That means the baseline assumes that the entirety of the Bush/Obama tax cuts–those to the rich as well as those to the rest of us (98 percent of us or so) that make up the big group now known as “middle class”–go away as (now) scheduled at the end of 2012.  Under the “alternative fiscal scenario” (considered a “policy extended” scenario), expiring tax cuts are assumed to be permanently extended.

Pentagon Crosses $1 Trillion Threshold in War on Terror Spending -- The Pentagon says it has spent at least $1 trillion prosecuting the wars in Iraq and Afghanistan and defending the U.S. homeland, according to newly released Defense Department figures through April 30. Spending growth on Afghanistan operations helped push the Pentagon over the $1 trillion mark, increasing to $6.2 billion per month in April from $4.3 billion in the first two months of fiscal 2011 that began Oct. 1. Afghanistan spending in fiscal 2009, as Barack Obama became president, averaged $3.9 billion per month. Still, the $1 trillion does not include about $95 billion in funds appropriated but still to put on contract or paid to personnel to cover operational costs over the rest of the fiscal year as well as procurement of replacement weapons systems and construction that take years to spend, said Amy Belasco, a Congressional Research Service budget expert. It also does not include about $100 billion the Pentagon excludes as not 'war-related,' such as intelligence, Belasco said. Nor does it include long-term costs for Veterans Administration care, disability costs for wounded Iraq and Afghanistan veterans, or all reconstruction funding for the war- damaged countries.

Gender Values: The Costs of War - Americans ignored Eisenhower's warning and allowed the military-industrial complex to grow unchecked. As a consequence, valuable resources flow to destructive ends, and U.S. citizens, especially women, lose out. Spending on the military counts for a huge share -- 58 percent -- of U.S. discretionary federal spending. If military funding were redirected to meet critically important social needs, the nation as a whole would reap enormous benefits. For example, the Congressional dollars allocated to Afghanistan in 2011 could have funded the enormously popular, widely recognized, and vitally important Head Start program. The 2011 appropriation for Afghanistan would pay for the next 15 years of Head Start! Instead, we face a national crisis in early child education -- there are 2,528,896 children of low-income families eligible for Head Start, but only enough federal funds to provide 904,153 places. There are, in other words, more kids eligible for Head Start but left out, than there are in Head Start. The Head Start deficit is 1,624,743 seats per year. Neither these 1.62 million kids nor their parents are receiving the education and comprehensive care that Head Start provides.

Slow Domestic Economy Puts Focus on Cost of Two WarsPresident Obama1 will talk about troop numbers in Afghanistan when he makes a prime-time speech from the White House on Wednesday night. But behind his words will be an acute awareness of what $1.3 trillion in spending on two wars in the past decade has meant at home: a ballooning budget deficit and a soaring national debt2 at a time when the economy is still struggling to get back on its feet.  As Mr. Obama begins trying to untangle the country from its military and civilian promises in Afghanistan, his critics and allies alike are drawing a direct line between what is not being spent to bolster the sagging economy in America to what is being spent in Afghanistan — $120 billion this year alone.  On Monday, the United States Conference of Mayors made that connection explicitly, saying that American taxes should be paying for bridges in Baltimore and Kansas City, not in Baghdad and Kandahar.

Missing Iraq money may be as much as $18 billion - In 2004, the Bush administration flew twenty billion dollars of shrink-wrapped cash into Iraq on pallets. Now the bulk of that money has disappeared. The funds flown into the war zone were made up of surplus from the UN's oil-for-food program, as well as money from sales of Iraqi oil and seized Iraqi assets. Recent estimates had the amount of missing money at about $6.6 billion, but according to Al Jazeera, Iraqi Parliament Speaker Osama al-Nujaifi says the figure is closer to three times that amount. Officials were supposed to distribute the money to Iraqi government ministries and U.S. contractors tasked with the reconstruction of Iraq, but it now appears that the bulk of the cash was stolen in what may be one of the largest heists in history. The Iraqi government argues that U.S. forces were supposed to safeguard the cash under a 2004 agreement, making Washington responsible for the money's disappearance. Pentagon officials claim that given time to track down the records they can account for all of the money, but the U.S. has already audited the money three times and no trace of what happened to it can be found.

NY Fed Won’t Say How Much Money Went to Iraq - The New York Fed is refusing to tell investigators how many billions of dollars it shipped to Iraq during the early days of the US invasion there, the special inspector general for Iraq reconstruction told CNBC Tuesday.  The Fed's lack of disclosure is making it difficult for the inspector general to follow the paper trail of billions of dollars that went missing in the chaotic rush to finance the Iraq occupation, and to determine how much of that money was stolen.  The New York Fed will not reveal details, the inspector general said, because the money initially came from an account at the Fed that was held on behalf of the people of Iraq and financed by cash from the Oil-for-Food program. Without authorization from the account holder, the Iraqi government itself, the inspector general's office was told it can't receive information about the account.  The problem is that critics of the Iraqi government believe highly placed officials there are among the people who may have made off with the money in the first place.  And some think that will make it highly unlikely the Iraqis will sign off on revealing the total dollar amount.

Hip, Hip — if Not Hooray — for a Standstill Nation - Early in June, President Obama and House Republicans met at the White House1 to bridge differences. Republicans complained that Mr. Obama was demagoguing their Medicare plan. The president said he knew a little about demagoguery as the “job-killing, death-panel, probably-wasn’t-born-here president.” Seventy-five minutes later, they parted no closer to agreement. If anything has defined the second half of Mr. Obama’s term, it has been the politics of paralysis. On jobs and debt, health care and education, Washington seems stalled. In coming weeks, the president and Republicans presumably will cut a deal to slash spending while raising the debt limit, though even then it may not be a long-term solution to the nation’s crushing problems. And then Democrats will go back to attacking Republicans, and Republicans will go back to attacking the president. Is this any way to run a country? As it happens, yes. Ideal it is not.  For all the hand-wringing about how the system is broken, this is the system as it was designed and is now adapted for the digital age.

“Standstill Nation” as the New Abnormal? - On Sunday, the New York Times closed out its “Week in Review” section after a run of 76 years. With Republicans and most Democrats back singing the praises of deregulation, smaller government, and tax cuts less than three years after that old song brought the world to its knees, we should probably have expected a grateful “Invisible Hand” would drop by to wave goodbye. And so it happened. Times correspondent Peter Baker celebrated the famous Hand’s magical ability to resolve not economic complexity, but political stalemate. “Mad at Beltway gridlock and can’t take it anymore?” asked the headline. To which Baker answered: “Paralysis (alas) is one way things are supposed to work.” He went on to explain that “for all the handwringing about how the system is broken, this is the system as it was designed and is now adapted for the digital age.” Thus Baker’s argument continued, leavened only by a few careful hedges noting that reality has not as yet conformed to this Panglossian script and that unemployed Americans might assess the government’s paralysis a little differently. At the very end, Baker cautiously put forward a suggestion that the Hand might, like so many other aging Americans, benefit from a prosthesis: legislation that would remorselessly chop government programs unless Congress acted to stop it.

Mankiw's Misleading Defense Of Paul Ryan - Former Bush economic advisor Greg Mankiw, writing in the New York Times, picks up the GOP talking point that Paul Ryan's plan to radically alter Medicare is really a pretty familiar bipartisan idea being blown out of propotion: Representative Paul D. Ryan, Republican of Wisconsin, has attracted much attention with his plan to reform Medicare. He proposes replacing the current fee-for-service program, in which the government picks up the bill for medical expenses, with a “premium-support” system in which seniors use federal dollars to choose among competing private insurance plans. Democratic critics of the plan suggest that enacting it would be akin to pushing Grandma over a cliff. But they rarely point out that the premium-support model is in some ways similar to the system set up under President Obama’s health care law. If choosing among competing private plans on a government-regulated exchange is a good idea for someone at age 50, why is it so horrific for someone who is 70?

Cat Food Commission No Dog’s Breakfast for Liberals - Liberals rejoiced when President Barack Obama dismissed his fiscal commission with a perfunctory pat on the back. They had taken to calling it “the cat food commission” in honor of its proposed cuts to Social Security and Medicare. They wanted Obama to go public, give his trademark speeches, make the pro-government case that they hoped would break the anti-government wave.  Conservatives, meanwhile, were outraged. Republican Representative Paul Ryan blasted the president for having ignored the commission’s recommendations -- never mind that Ryan had served on the commission himself and voted against its final recommendations.  Both sides misjudged the playing field. In retrospect, it’s clear that the report produced by the commission, chaired by former Senator Alan Simpson and Democrat Erskine Bowles, was a much better deal than liberals are now likely to get. And the president’s rejection of the Simpson-Bowles report won’t, in the end, prove so vexing to conservatives after all. To understand how far -- and how fast -- the goal posts have moved, consider the budget the president proposed in April.

Social Security And Medicare Cuts: Washington’s War On The Young - Anti-government hawks like Alan Simpson and Pete Peterson also made a deft (if deeply cynical) move by framing these programs as a war between baby boomers vs. Gen X-ers, since some of their cuts would hurt boomers too. But young people will take the worst of these cuts, since their impact increases over time.  That's no accident. Politicians know that seniors would rise up against any politician who crosses them. And seniors vote. They're also aware that baby boomers are a large and powerful voting bloc, not to be trifled with.  Young people, on the other hand, traditionally find it hard to imagine their own old age. On top of that, they've been barraged with propaganda designed to discourage them from believing these benefits will be there when they retire. That makes it easy for politicians to target them when designing their budget cuts, especially since its easier to hide their long-term impact from those they would hurt the most.

At least Weiner was a distraction - Most days last week, a prominent Democrat would get on TV or issue a statement calling for New York Rep. Anthony Weiner to step aside. Weiner was, they all said, too much of a distraction and was hurting the Democratic Party. But it’s worth asking: how was Weiner a distraction? What is the Democratic agenda he was pulling voters away from? The simple fact is: There’s no governing agenda being debated. So Weiner wasn’t a distraction — more like an in-flight soft-core movie in between election jockeying by a bored political class. For confirmation, let’s look at the economist Rebecca Blank, a candidate to replace Austan Goolsbee as the White House’s chief economic adviser. Blank is a “pragmatic progressive” economist, which apparently means someone who feels bad about the damage caused by the problems they aren’t trying to fix.

Phony Deficit Hawks - Krugman - So, just to summarize: Republicans are deeply, deeply concerned about the budget deficit; they believe that our nation’s future is at stake.  But they’re willing to sacrifice that future, not to mention risk the good faith and credit of the federal government, rather than accept so much as a single penny of tax increases as part of a deal. Given all that, it seems almost redundant to mention that federal tax receipts as a percentage of GDP are near a historic low: So what’s it all about? The answer, of course, is that the GOP never cared about the deficit — not a bit. It has always been nothing but a club with which to beat down opposition to an ideological goal, namely the dissolution of the welfare state. They’re not interested, at all, in a genuine deficit-reduction deal if it does not serve that goal.

Who Gets Hit? - Earlier today I pointed out that revenue in the budget deal is not inconsistent with recent Republican talking points if the revenues come from cuts to tax expenditures.   A question was raised: wouldn’t it be more regressive—meaning hit middle and lower income people harder—to raise revenues through cutting tax expenditures than through higher marginal rates? Probably, but it depends on whose rates you raise versus which expenditures you cut. The Tax Policy Center runs scads of useful tables on this sort of thing and below is a figure on the incidence of home mortgage interest deduction, which clocks in around a cool $90 billion (that’s an annual cost, btw). About 9% of the benefits go to middle-income homeowners, but 67% goes to the top fifth and (not shown) 43% to the top 10%.  So, cuts here would be pretty progressive

Reagan and Revenues - Krugman - The wholesale voodization of the GOP is a sight to behold; apparently the nonsense about the Reagan tax cuts having led to a vast rise in revenue is now something one must claim to believe. Anyway, a quick note about Federal revenue history. The way I like to look at it is to compare business cycle peaks. We know that recessions reduce revenue and recoveries raise it. So it’s much more informative to look at peaks (not troughs: all happy economies are more or less alike, each unhappy economy is unhappy in its own way). Oh, and since 1979-82 was really one double-dip recession, I just use 1979 and ignore the 80-81 “recovery”.  So here’s the rate of growth of real per capita federal revenues between successive business cycle peaks: There was no Reagan revenue miracle; growth slowed. There was a Clinton miracle. And there was a Bush II reverse miracle.

Preaching to the Choir - Paul Krugman says there was no Reagan revenue-growth miracle. Actually, I tend to agree with Paul on this one.  I am also skeptical that across-the-board tax cuts increase tax revenue (although, unlike Paul, I think that tax cuts do generate significant dynamic effects and therefore are not as costly as static estimates suggest). What strikes me about Paul's blog post, however, is how completely unconvincing it is.  He uses a chart that starts the Reagan era in 1979, arguing we need to correct for the business cycle.  But would or should this persuade anyone? The null hypothesis being tested is that Reagan policies had a significant effect on revenue growth.    Maybe Paul's chart might appeal to someone who already agrees with him, but I thought economists turned to data to try to persuade those who are truly undecided.It is hard to see how this presentation of the data would move someone who is yet to make up his mind.

Are Taxes High or Low? A Further Look - A couple of weeks ago, I discussed the low level of federal taxes as a share of the gross domestic product in the United States, both historically and in comparison with other developed economies. I noted that total federal revenue — income, corporate and payroll taxes combined –– has been below 15 percent of gross domestic product for three years in a row, its lowest level since 1950 and well below the postwar average of about 18.5 percent of G.D.P. Judging by their comments, a great many readers were incredulous. For years, Republicans have told them over and over again that taxes in the United States are exceptionally high and the primary obstacle to growth, and that a huge tax cut would do more to raise growth than any other policy. A common criticism of my earlier point about federal taxes as a share of G.D.P. is that I ignored marginal tax rates and the payroll tax, which is the largest tax that most people pay. Of course, I did not ignore the payroll tax; it is part of total federal revenues. But the point about marginal rates is worth exploring further, since economists agree that this is often the most important tax rate for economic decision-making.

No, Gov. Pawlenty, Tax Cuts Don't Pay for Themselves - Republicans claim to be deeply concerned about the budget deficit and the national debt, yet repeatedly demand additional large tax cuts. For example, former Minnesota Gov. Tim Pawlenty rationalizes by asserting that his tax cut will not actually lose any revenue. As Pawlenty told Slate reporter Dave Weigel on June 13: “When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.” In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65 percent. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24 percent. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15 percent. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.

Do Tax Cuts Pay for Themselves? Sorry, No. - Here’s a really nice video interview of Bruce Bartlett on the issue. Don’t let the fact that it’s MSNBC lead you to automatically dismiss the story as hyper-partisan hogwash. It actually quotes a lot of Republican experts. The basic point is that certain tax cuts can do a decent job stimulating demand for goods and services in a recessionary economy, and certain tax cuts (usually other kinds) can do a decent job encouraging the supply of productive resources (labor supply and saving) in a full(er)-employment economy. But neither type of tax cut is likely to generate so much demand or so much supply that they pay for themselves (a la Laffer), even over the longer run. And once you get long enough into the longer run, chances are any credit you are giving to the tax cut itself is misplaced.

Close Encounters of the Tax Myth Kind - Remy Welling, the auditor who blew the whistle on backdated stock options to me and Tax Notes's Warren Rojas seven years ago was fired and barely escaped prosecution for revealing taxpayer secrets. When Welling ran into one of her old bosses at a bookstore, he asked how she was doing and then told her in no uncertain terms that she was a fool for going public about the backdated stock options. As Welling put it, he "started saying how stupid I was to have objected to the backdating. He said everybody knew that was how large cases were worked at the IRS -- that audit decisions were political decisions that were made at the top and that everyone went along. He said that was just how big business and government operate all the time." And then, Welling said, her old boss told her, in the context of the Madoff Ponzi scheme that went undetected despite warnings, that "financial statements given to the SEC are filled with lies."Other IRS managers I have spoken to over the years about Welling and other whistleblowers have made similar, although far less blunt, assessments. ... That the IRS was made aware of backdating and did nothing remains scandalous.

Foreign Investment in U.S. Jumped 49% in 2010 From 2009 - Despite a world struggling through an economic crisis, direct foreign investment in the U.S. jumped $75 billion in 2010, the White House said Monday. “The United States remains the No. 1 destination for foreign investment in the entire world,” Direct foreign investment in the U.S. jumped 49% to $228 billion from $153 billion in 2009. Goolsbee said these investments support 5.7 million workers in the U.S. President Obama, in a statement, hailed the important role of foreign investments in the U.S.  He said the U.S. has the “world’s most productive workforce,” a culture of innovation, remarkable colleges, and a business environment marked by transparency and the rule of law.Boosting foreign investment is something the administration is considering to help accelerate the U.S. economy. To do that, Goolsbee said the administration wants to make permanent a tax credit for companies’ research and development costs, as well as overhaul the corporate tax code.

A Tax Break for the “Job Creators” That Will Not Increase Jobs - David Kocieniewski should get high marks for excellent reporting. He starts by noting a supply-side proposal and its rhetoric: Some of the nation’s largest corporations have amassed vast profits outside the country and are pressing for a tax break to bring the money home … Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit. Corporations promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington. “For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” If you are thinking we tried this a few years ago, David reminds us that we did: in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage. Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock

U.S. Companies Press for Repatriation Holiday - Some of the nation’s largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama administration for a tax break to bring the money home.  Apple has $12 billion waiting offshore, Google has $17 billion and Microsoft, $29 billion.  Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.  Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.

Tax Repatriation: You Can’t Turn This into A Good Idea - My experience in policy making has led me to try to strictly obey a couple of basic precepts.  First, keep it simple.  Unintended consequences abound, and the more tweaks you have to build in to get the policy to do what you really want it to do, the more likely something will go wrong. Second, it’s better not to pass a bad policy than to try to make it a good one.   These caveats come to mind in thinking about the tax repatriation holiday that’s getting some buzz these days.  This is where you let multinational corporations who’ve been “deferring” taxes they owe to the Treasury—holding them overseas—get a time-limited break to bring them back (to “repatriate” them) at a much reduced rate (5%!!).  See here and here. The core of the critique is that while the corporations who take advantage of this tax break claim that they’ll invest the tax windfall and create more jobs, the evidence shows otherwise (we tried this before, back in 2004).    The evidence shows that firms mostly used the repatriated earnings not to invest in U.S. jobs or growth but for purposes that Congress sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders.

Two Bad Tax Ideas for Creating Jobs - In Washington, bad ideas never go away. Now two old tax breaks have resurfaced with the ostensible goal of creating jobs, despite plenty of evidence that neither actually works. One would create a payroll tax break (aimed at employers instead of workers this time). The other would grant a temporary tax holiday to multinational corporations that bring foreign earnings back to the U.S. Not only is there little evidence that either of these tax breaks would create jobs but they also fly in the face of all the recent rhetoric about the need to eliminate such preferences from the tax code. Politicians give a speech on Tuesday decrying special interest tax breaks. They give another on Wednesday promoting these subsidies as job creators.

The worst tax cut in Washington -There are two tax-cut ideas floating around Washington right now. Both go to businesses. Both are being sold as further stimulus. But only one is even worth considering. The other would do nothing for jobs, would vastly increase deficits now and into the future and would permanently lower the tax rate on overseas income from 35 percent to 5 percent, even though it’s being billed as “temporary.” It’s a bad idea — very bad, in fact — but there’s so much money behind it that it just might pass.  The bad business tax cut is a holiday for the profit that corporations are storing overseas. Why are corporations storing that profit overseas? Well, because they’re hoping the government will give them another big tax cut for bringing it home.  Yes, another. We did this in 2004 under President George W. Bush. It was called “the American Job Creation Act.” Did it create jobs? No. The National Bureau of Economic Research concluded that the holiday “did not increase domestic investment, employment or research and development.” Instead, over 90 percent of the $312 billion that corporations brought home went to increased dividends and stock buybacks.

Hoenig: Restrict bank activities to core services - Below are extracts of a paper formulated by Thomas Hoenig, the President of the Federal Reserve Bank of Kansas City, to better regulate the US Financial sector. His overarching aim is to isolate core banking activities that are protected by a government guarantee from riskier investment banking and trading activities. The main regulatory suggestions:

  • Impose Volcker Rule. Banking organizations would not be allowed to do any proprietary trading.
  • Allow money market funds to break the buck. “Money market mutual and other investment funds that are allowed to maintain a fixed net asset value of $1 should be required to have floating net asset values.” 
  • Rescind mortgage assets bankruptcy exemption. “Bankruptcy law for repurchase agreement collateral should be rolled back to the pre-2005 rules, which would eliminate mortgage-related assets from being exempt from the automatic stay in bankruptcy when the borrower defaults on its repurchase obligation.”
  • Regulate off-balance sheet transactions as on-balance sheet. “Off-balance-sheet holdings and exposures should be supervised and regulated as if they were on-balance-sheet.”

Banking’s Moment of Truth - Capital matters. Let me put that another way. The current fight over additional capital requirements for the banking industry, eye-glazing though it is, also happens to be the most important reform moment since the financial crisis broke out three years ago. If investment banks like Merrill Lynch had had adequate capital requirements, they would not have been able to pile on so much disastrous debt. If A.I.G. had been required to put up enough capital against its credit default swaps, it’s quite likely that the government would not have had to take over the company. Adequate capital hides a plethora of sins. And because, by definition, it forces banks to use less debt, it can also prevent sins from being committed in the first place. “There is no credible way to get rid of bailouts except with capital,” says Anat Admati2, a finance professor at Stanford Business School and a leading voice for higher capital requirements. “The only cure is capital,” says Daniel Alpert, a founding managing partner of Westwood Capital. A few days ago, The Wall Street Journal wrote an editorial3 applauding the recent suggestion by Daniel Tarullo4, a Federal Reserve governor, that the biggest banks hold as much as 14 percent of assets in capital. I couldn’t agree more.

Banks are safe, say banks - EUROPEAN banks are busy submitting data for the second year of Europe’s much maligned stress tests. Attention has so far focused on the flaws left over from the 2010 tests. The “stressed” scenarios banks are measured against are not all that stressful (a Greek default, for example, is still considered impossible). But a more fundamental problem is being ignored: the methodology relies on self-reporting by banks. In 2010 Europe’s stress testers had no power to challenge data submitted by banks. Only national regulators had this privilege. Yet national regulators had a clear interest in state-owned or state-recapitalised banks passing the stress tests. Most did. Many questioned how well bank data was scrutinised. This year has seen some improvement. Data submitted by banks in May were subject to “peer review” by a committee of experts from the European Banking Authority (EBA), a pan-European college of regulators, which is administering the tests. The committee concluded that some banks had been over-optimistic in their self-assessment. In some cases different banks had estimated very different probabilities of default and losses on similar underlying assets. Results were meant to be out this month, but all banks have now been asked to do their sums again and resubmit by the end of July.

John Walsh, a Regulator Critical of Over-Regulation - There aren’t many regulators saying things that big banks want to hear these days, but they’ll like this: Acting Comptroller of the Currency John Walsh on Tuesday warned international regulators that they may be trying to rein in the financial industry too much. “We are in danger of trying to squeeze too much risk and complexity out of banking as we institute reforms to addresses problems and abuses stemming from the last crisis,” That’s a far different tune from what’s coming from other players in the financial overhaul, who’ve emphasized that banks should get back to the boring business of banking and complexity should be limited. In contrast, Mr. Walsh argued in his speech that imposing high capital requirements, tight liquidity rules and restrictions on what activities banks can engage in threaten to hurt economic growth. He urged particular caution on the issue of imposing additional capital requirements on the largest banks — or a “surcharge” on systemically important firms, and his comments come as international regulators are pushing in coming weeks to reach agreement on just how much extra capital the biggest banks must hold.

OCC Gives Banks Another Blow Job -  Yves Smith - The acting head of the Office of the Comptroller of the Currency, John Walsh, has unwittingly revealed himself to be running a heretofore stealth operation: The Ministry of Truth According to Banks. In the past, his remarks have had just the right combination of occasional intersection with the truth plus lots of nebulous phrasemaking for him to be able to sound dimly plausible as a regulator, provided you were on reader craazyman’s preferred cocktail of Xanax and Jack Daniels.  Walsh has finally stooped to offering up straight up unadulterated bullshit, as opposed to the perfumed and heavily packaged variety that he typically serves up. I don’t know whether that is because he was having an off day or whether he is so confident that the banks have won that he no longer feels he needs to go through the mental gymnastics of making his arguments, such that they are, sound plausible.  As we noted last week, central bankers have suddenly started getting religion about asking financial firms, particularly the large, connected, TBTF variety, to hold more capital. This is a surprising turn of events, given that the direction of virtually everything that has happened since the crisis is to decide to enact not very strong and overly complicated regulations, and then water them down further in the “working out all the gory details” phase.  So what does Walsh have to say about this salutary turn of events? Per the Financial Times, which unduly dignifies this tripe with the headline, “Warning on bank rules reform“:

Wanted: Better Bank Regulators - Regulatory capture: It's the wonky name for when an industry co-opts the watchdogs that are supposed to be regulating it. And there's no clearer example of that than the banking industry and the Office of the Comptroller of the Currency (OCC), which oversees about 1,400 US banks. For instance, it was the OCC in 2003 that squashed Georgia's efforts to outlaw the most toxic home loans on the market—think negative amortizing loans, NINJA (no income, no job, no assets) loans, you name it. How prescient. On Tuesday, the OCC was at it again. Its chief, John Walsh, went before the Senate to testify against new bank capital requirements, calling for a "fundamental rethink" of rules that would force banks to keep more capital on their books to absorb losses and weather crises. "My view," Walsh said, "is that we are in danger of trying to squeeze too much risk and complexity out of banking as we institute reforms to address problems and abuses stemming from the last crisis." Translation: These rules will pinch bank profits.

Biggest Banks May Get Boost From Basel Bid to Curb Them - The biggest banks may face the stiffest additional capital requirements under plans being considered by global regulators, a premium that may give them a financing advantage over their smaller competitors. The Basel Committee on Banking Supervision meets in the Swiss city today to discuss how much extra capital the world’s largest and most systemically important banks will be forced to hold to avert another financial crisis. About 25 banks may have to hold more than the 7 percent core Tier 1 capital required by the Basel rules, according to Morgan Stanley analysts. While the plans may force lenders such as Deutsche Bank AG (DBK) and Bank of America Corp. (BAC) to hold more capital, they may conversely make it cheaper for them to borrow as the lenders will have an implicit state guarantee as being too big to fail, analysts and lawyers said. HSBC Holdings Plc (HSBA) Chairman Douglas Flint said in March he “absolutely” wanted Europe’s biggest lender to be classified as systemically important as it would make the bank more attractive to investors and clients. “Everybody is worried they will be left behind by not being on the list,”

Bair Delivers a Warning in Her Swan Song as FDIC Chairman - Ms. Bair said the U.S. is suffering from a case of “short-termism,” in which some in business and government want to sacrifice long-term stability for short-term gains. She warned against yielding to efforts to undo some of the Dodd Frank financial law, including higher capital requirements for banks.“Once again, people are going ask ‘Why now?’ Why are we making such onerous demands on private-sector financial institutions?’” Ms. Bair said in her speech. “And it will need to be explained that the alternative is to risk another financial crisis that could someday throw millions of people out of work and wreck our public finances.” Ms. Bair’s speech comes as global policymakers meet this weekend in Basel, Switzerland to discuss how much additional capital large financial firms should have to hold to withstand potential losses. The U.S., which is required by Dodd-Frank to impose higher capital requirements on financial firms whose failure poses risks to the financial system, is pushing for levels between 2 percentage points and 2.5 percentage points above international standards agreed to in Basel last year.

House Financial Services Committee Continues Efforts to Chip Away at Dodd-Frank -The House Financial Services Committee voted Wednesday to approve several measures that would scale back provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As lawmakers prepare for the bill’s July 21, 2011 implementation date, House Republicans passed several measures narrowing the scope of the bill, including a measure that would exempt companies that manage up to $50 million in securities from having to register with the Securities and Exchange Commission; a bill exempting most private equity fund advisers from having to register with the SEC; a bill repealing the provision in Dodd-Frank requiring publically-traded companies to disclose their employees’ median compensation separately from their CEO pay packages; and a bill creating a legal framework for the use of covered bonds. House Financial Services Committee Chairman Spencer Bachus (R-AL) said that all of the bills were designed to create jobs.

Geithner: Big Banks Spend ‘Huge Amount to Erode’ Dodd-Frank Law - Treasury Secretary Timothy Geithner said Wednesday that Wall Street and large banks are spending “a huge amount of money to erode, weaken, walk back” the Dodd-Frank financial overhaul law that was enacted last year. He called on Congress not to weaken or delay the new rules.  His comments came in response to questions at a House Small Business Committee hearing. Bank and business groups have opposed many new parts of the law, including the appointment of a new consumer-protection regulator and regulations tied to the exotic financial instruments called derivatives. Mr. Geithner acknowledged that there was “some risk that examiners are going to overdo it a bit” in how they scrutinize banks, and he said the heads of the Federal Reserve Board and the Office of the Comptroller of the Currency would

The Blind Men and the Elephant - Beware, O Dearly Beloved, those endlessly multiplying pundits who propose single-method solutions to the problem of financial reform. "The" answer is not minimum equity capital requirements, liquidity controls, return on equity caps, compensation reform, leverage or size limits, portfolio risk monitoring, or even slipping saltpeter into the lattes of testosterone-addled traders so they act more like risk-averse women. The answer—pace the sexual lobotomization of traders which many in society may wish for other reasons—is likely to be a combination of all of those reforms (and more), implemented in a dynamic and flexible regulatory structure which can respond and adapt to changing conditions. For the fundamental truth which most commentators continue to overlook is that the global financial system is much more like our illustrative friend Panic Pete than an elephant. When you squeeze Mr. Pete in one spot, the squishy gel inside his rubbery body causes his other parts to bulge out. Squeeze him in those newly bulging areas, and he will return to his original form or bulge unexpectedly in new directions. Why? Because the gel inside of him is incompressible. Squeezing the flexible outer skin does not cause the toy to shrink. It just forces it into a new configuration. Likewise, the fundamental quantity in the global financial system which we are concerned with, and which we properly wish to control, is risk. But, given any specific level of return, risk is incompressible.

Lawyers and Accountants Once Put Integrity First - NEARLY a year after President Obama signed into law a huge overhaul of financial regulations, little on Wall Street seems to have changed. Regulators appear to be dragging their feet on finalizing the tough new rules that the law, known as Dodd-Frank, authorized them to write. It will take decades to fully untangle the causes of the 2008 financial crisis, but as our economy fitfully heals, it would be prudent to ask whether lawyers and accountants offer the same protection against corporate misconduct that they once did.  Three or four decades ago, investors and regulators could rely on these professionals to provide a check on corporate risk-taking. But over time, attorneys and auditors came to see their practices not as independent firms that strengthen the integrity of capitalism, but as businesses measured chiefly by the earnings of their partners.

The World Held Hostage by Credit Default Swaps. Dick Alford on the FOMC: Watch what they say - The Office of the Comptroller of the Currency and other regulators recently issued a request for comments on " Proposed Guidance on Stress Testing for Banking Organizations with More than $10 Billion in Total Consolidated Assets." IRA is going to be responding to the OCC request, both with comments and by fielding a public data stress testing solution for all US banks.  As we told our friends on CNBC's Fast Money last week, the apparent bailout for the EU banks led by BNP, Societe General and the German landesbanks is shared equally by their US derivatives counterparts. Remember, as of the end of Q1 2011, it would take just a move of less than 10bp in the aggregate value of the OTC derivatives book of JPMorgan Chase to wipe out the firm's capital.  So the more accurate description is that all of the major players in the world of credit default swaps were bailed out on Friday, proof again that this financial ghetto known as OTC derivatives is adding to the systemic risk problem -- and holds the entire world hostage.  The net increase in financial exposures due to the existence of the CDS market in sovereign credit risk has not made the real economy safer, but instead multiplies the dollar amount of the basis risk in all markets, real or imagined. You cannot get rid of systemic risk and "too big to fail" until you limit credit derivative products to holders of actual debt. Instead we have hedge funds and banks gambling on the end of the world.

The Regulator Down the Hall - As part of a push to prevent another financial crisis, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency are increasing the number of examiners who go to work every day at the companies they regulate. Much like reporters assigned to a military unit during war, these regulatory "embeds" get unprecedented access to financial firms such as Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley. They file through the same security turnstiles, eat lunch at the company cafeteria and press top executives for answers to questions about mortgage-documentation procedures and exposure to European debt and municipal bonds. About 150 such regulators are scattered across banks and securities firms overseen by the New York Fed. That total will double by this fall, according to a person familiar with the situation. As a result, groups of 15 to 20 regulators per company will swell to as many as 35 people.

Republican Lynch Mob Looking Awfully Hard to Find Rope With Which to Hang Elizabeth Warren -  Yves Smith - This situation has become an intriguing bit of political theater. The Republican have increasing become one-trick ponies. Their strategy has been to take an extreme position, scream like bloody murder, act like they have no intention of negotiating, and watch the Dems capitulate. But particularly with Obama, capitulation is tantamount to throwing Br’er Rabbit in the briar patch: it’s exactly where the Democrats like to go, but they need political cover for selling out their badly abused “base”. The hyperventilating and bullying strategy backfired spectacularly last month in subcommittee hearings with Warren chaired by Patrick McHenry. But the Republicans have convinced themselves that if they double down, they’ll come out winners. I don’t know how much of this is reptile brain reflex on overdrive, in that they are capable only of fight or flight and even flight is no longer an option.  So as a warm-up for July, the Republicans have also been trying Warren in the press, but so far that isn’t getting much traction. The right wing organization Judicial Watch released the results of a Freedom of Information Act request last Thursday which requested, among other things, for “any and all” communications that Warren had with state attorneys general. The results were so underwhelming that the media (even the eager to pound on Warren Wall Street Journal) ignored them; the only uptake was late, on Monday, by the ever reliable mortgage industry mouthpiece Housing Wire.

Nothing Can Stop Obama From Adjourning Congress, Making Recess Appointments - According to Public Citizen, there’s nothing stopping the President from circumventing the Congress for recess appointments of key positions, including Elizabeth Warren for the Consumer Financial Protection Bureau. And they have the Constitutional passages to prove it.In a blog post for the organization and a letter to the President, David Arkush writes that, contrary to received wisdom, the House cannot block adjournment of the Senate if the President uses a Constitutional measure to force that adjournment. Now, some of this is academic, because the House has said that they would not move to block their consent of a Senate adjournment under Article I, Section 5, clause 4 of the Constitution But Arkush points out that the President has powers in this area as well: In Article II, section 3, clause 3, the President is given the ability to adjourn Congress. So he could do so, or threaten to do so, and then make his recess appointments.

Republicans do not have the power to block an Elizabeth Warren recess appointment -If you’re following the story of whether President Obama will nominate Elizabeth Warren to head the Consumer Financial Protection Bureau (CFPB), you’ve probably heard that the Republicans found a way to block even a recess appointment. It turns out that’s mistaken. Here’s the rule: Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting. That’s Article I, section 5, clause 4 of the U.S. Constitution. You have to hand it to the House Republicans. They read the Constitution. But they may not have read the whole thing. A little bit later—in the very same Constitution—is this passage on presidential powers: [The President] shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient; he may, on extraordinary Occasions, convene both Houses, or either of them, and in Case of Disagreement between them, with Respect to the Time of Adjournment, he may adjourn them to such Time as he shall think proper

The Elephants in the Room: The GOP’s War on Consumer Protection - Saturday, June 25th, represents a seminal day for Bank of America credit card holders. It is Penalty Rate Increase Day. From that day forward, the penalty rate for card holders who pay their bill as little as one day late could rise to 29.99% on all future purchases. This is in addition to a late fee of up to $25 for the first time and $35 if there is a second slip within six months. Talk about a day late and a whole lot of dollars short…….. After the tumultuous past few years of the Great Recession when banks and credit card companies slashed and burned millions of cardholders by closing accounts, lowering credit limits, raising interest rates and fees to unconscionable levels, virtually without warning, this may feel like same s#%t, different day, but not this time. The good news, if it can be considered good news, is that Bank of America’s announcement, while not welcome, was made pursuant to new, more transparent procedures mandated by the Credit Card Accountability Responsibility and Disclosure (CARD) Act. Now there is a 45-day notice period; the increase doesn’t impact existing balances; and cardholders have the right to opt out of the relationship with some five years to pay off existing balances.

Two Supreme Court Rulings Give Big Companies “Get Out of Liability Free” Cards - Yves Smith - If you had any doubts that the US has become a corpocracy, two fresh rulings by the Supreme Court should seal any doubt. They are stunningly bad, in that they reduce or gut the reach of well-settled law over large companies, to the degree that it will take very little in the way of effort for companies to organize their affairs so as to escape liability for their actions in areas that affect large numbers of citizens. The through line in both rulings is the creative and selective use of the notion of corporate “personhood”. That personhood has been the basis for the extension of a whole raft of rights to corporations, including, perversely, the Constitutional right of free speech. Yet the same notion which has been used to confer privileges that companies lack in other countries is at the same time being construed so as to vitiate accountability, when ordinary people find it mighty hard to escape the consequences of their actions. I’m certain the Founding Fathers, who were wary of concentrated power, would be spinning in their graves at the logic and effect of recent decisions on this front.  The first stunner is a ruling today in favor of WalMart on an employment discrimination class action lawsuit. It effectively weakens anti-discrimination laws as far as big companies are concerned. Per the New York Times the court essentially said that if lawyers brought a nationwide class action against an employer, they would have to offer strong evidence of a nationwide practice or policy that hurt the class..

Federal Regulators Just Sued JPMorgan And RBS For Lying To Investors: Federal Regulators just sued JPMorgan and RBS for lying to credit unions in offering documents for mortgage-backed securities. The offering documents that RBS and JPMorgan gave to investors, specifically credit unions, contained "untrue statements of material fact," or "omitted to state material facts" in violation of state and federal securities laws, says a new lawsuit filed against the firms by the National Credit Union Administration. The NCUA seeks $565 million from RBS and $278 from JPMorgan. The lawsuits are available for download here. We're going through them right now and let you know what they're all about soon. At first glance, the lawsuit seems to take issue with one of the underlying aspects of the mortgage crisis, that ratings agencies used "credit enhancement" to give shoddy mortgages high ratings. The NCUA was not aware of the credit enhancement. Here's one key sentence from the lawsuit against JPMorgan: If the Credit Unions had known about the Originators’ pervasive disregard of underwriting standards— contrary to the representations in the Offering Documents—the Credit Unions would not have purchased the certificates.

Feds Sue Bankers Over Fall in Bonds - Federal regulators accused J.P. Morgan Chase & Co. and Royal Bank of Scotland Group PLC of duping five large credit unions into buying more than $3 billion in mortgage bonds that were "destined to perform poorly," and that quickly sank the credit unions. The two civil lawsuits filed Monday in U.S. District Court in Kansas City, Kan., by the National Credit Union Administration are the most aggressive move yet by U.S. regulators to recover losses from Wall Street firms for alleged wrongdoing before and during the financial crisis. Many of the nation's 7,000 credit unions, which play a critical role in community lending, have been damaged by the mortgage crisis. More than 40 have failed since the start of 2009, and the survivors are being forced to absorb some of the costs of the failures, forcing some to charge higher interest rates on loans and to pay less on customer deposits. The collapse of the five large institutions, called wholesale credit unions, "resulted in the worst crisis faced by the credit-union industry in its history,"

Bill Black: Dawn of the Gargoyles – Romney Proves He’s Learned Nothing from the Crisis - Mitt Romney chose to unveil the economic plank of his campaign for the Republican nomination with a speech in Aurora, Colorado decrying banking regulation. He could not have picked a more symbolic location to make this argument, for Aurora is the home and name of one of the massive financial frauds that caused the Great Recession. Lehman Brothers’ collapse made the crisis acute and Lehman’s subsidiary, Aurora, doomed Lehman Brothers. Lehman acquired Aurora to be its liar’s loan specialist. The senior officers that Lehman put in charge of Aurora, which was inherently in the business of buying and selling fraudulent loans, set its ethical plane at subterranean levels. Aurora sealed Lehman’s fate by serving as a “vector” that spread an epidemic of mortgage fraud throughout the financial system and caused catastrophic losses far greater than Lehman’s entire purported capital. Aurora epitomizes what happens when we demonize the regulators and create regulatory “black holes.” Romney literally demonized banking regulators as “gargoyles” and claimed that banking regulations and regulators were the cause of the economy’s weak recovery. On April 20, 2010, I testified before the Committee on Financial Services of the United States House of Representatives regarding Lehman’s failure. My House testimony explained why Aurora was the key to understanding Lehman’s failure and the causes of the financial crisis.

JP Morgan Pays $153.6 Million to Settle SEC Charges on Toxic Magnetar CDO - Yves Smith - The SEC announced that JP Morgan has agreed to pay $153.6 million to settle charges related to a $1.1 billion heavily synthetic CDO called Squared which JP Morgan placed in early 2007 and was managed by GSC Partners, a now defunct CDO manager. The SEC has a cute but not all that helpful visual on the site, save it reflects the role of Magnetar as the moving force behind the deal. Per the SEC’s complaint against JP Morgan, Magnetar provided $8.9 million in equity and shorted $600 million notional, or more than half the face amount of the CDO (this is consistent with our analysis, which had suggested that Magnetar, unlike Paulson, did not take down the full short side of its deals, since it like staying cash flow positive on its investments. The size of its short position was limited by the cash to be thrown off by the equity tranche). And needless to say, this was a CDO squared, meaning a CDO made heavily of junior tranches of other CDOs, so it was a colossally bad deal.  The complaints (one against JP Morgan and the other against GSC employee Edward Steffelin) make clear that the SEC had gotten its hands on some pretty damning e-mails..

Magnetar Deal Prompts SEC Settlement With JPMorgan Chase…As we reported last year, Magnetar often pushed for riskier assets [2] to be included in deals and placed bets against many of the same investments, known as collateralized debt obligations, or CDOs. Our piece first detailed the JPMorgan deal, called Squared. (The story was part of a collaboration with our friends at Chicago Public Radio's This American Life [3], and NPR's Planet Money [4]. And so was this special CDO show tune [5]. You can read our full Pulitzer prize winning series on Wall St. [6] via our site or on your Kindle [7]. ) The SEC’s complaint [8] [PDF] underscores those findings. According to the complaint, JPMorgan allowed Magnetar to play "a significant role in the portfolio selection process" for Squared without disclosing Magnetar's role to investors. In the settlement, JPMorgan didn't admit to any wrongdoing. A court must still approve the deal. 

Ezra Klein Should Stick to Being Wrong About Health Care - Yves Smith - A recent post by Ezra Klein, “What ‘Inside Job’ got wrong,” manages the impressive feat of being spectacularly off base, rhetorically dishonest, and embarrassingly revealing of the lack of a moral compass all at once.  Since being off base is a major part of Klein’s brand, I suppose one should not be surprised; those who’ve had the good fortune to have limited contact with his output can read Jon Walker’s “Ezra Klein: Insurance Exchanges Don’t Work and Must be Expanded Dramatically,” or Physicians for a National Health Care Program’s “Does Ezra Klein really think ‘managed care didn’t kill anyone’?” for two of many examples.  I’m going to shred this piece in some detail, first, because it will be entertaining, and second, I hope that it will encourage readers to take a cold, bloodyminded look at the excuses made for malfeasance in our elites.

Fraud at senior management level is highlighted in KPMG report - When it comes to "white collar" crime, finance directors, chief executives and other senior management are far more likely to be involved in fraud – such as the mis-statement of financial results, theft and expense abuse – than junior staff. The economic downturn has also made it a lot easier to commit fraud, according to research by KPMG, which warned that scams go undetected for longer. The consultancy's global analysis of fraud trends suggests that the typical fraudster is male, aged 36 to 45, holds a senior job in finance, has worked for his company for more than a decade and acts in collusion with a partner. What should send alarm bells ringing across companies is a jump in the number of cases involving the exploitation of weak internal controls – up to 74% in 2011 from 49% in 2007. The recession and continued difficult economic climate may be partially to blame, according to the report. Tighter budgets are forcing some companies to cut costs in risk management and control, giving fraudsters more opportunities to falsify accounts or siphon off funds. But personal greed remains the prime motivation for fraud, followed by pressure to reach tough profit and budget targets.

How insider trading becomes endemic - This week’s New Yorker has George Packer’s massive, 11,000-word article on Raj Rajaratnam, his prosecutor Preet Bharara, and financial prosecutions. Highly recommended. But there was one line in particular which jumped out at me: If there are examples of people whom Rajaratnam unsuccessfully tried to corrupt, they have not surfaced in the voluminous public record on Galleon. I asked Packer what he meant by this. Is it simply a narrow statement about “the voluminous public record on Galleon”? Is it possible that Rajaratnam never met someone he couldn’t corrupt?  Packer replied:From my work on this story, I’m certain there are people Raj tried to corrupt and couldn’t. And perhaps it’s not surprising that their names didn’t show up in the record, since we’re talking about a criminal investigation. It’s just striking that so many names of the corruptible do show up, how casually they show up, how easy it was for Raj to turn most of them. Also striking that not a single counter-instance happens to stumble into the record, with all the documents I’ve seen and wiretaps I’ve heard.

Bhidé Cites “Rampant, Extensive Criminality” As Proof That Bank Reform Had Gone Down the Wrong Path - Yves Smith - I’ve known Amar Bhidé, who is now a professor at Tufts, for thirty years; we both worked on the Citibank account at McKinsey. He’s long had a reputation for being incredibly smart and iconoclastic.  Amar enjoys annoying people by saying completely commonsensical things that are not acceptable and watching chaos ensue. I suspect readers will enjoy this interview. Bhidé pretty much calls JP Morgan a criminal enterprise, although in context, he is merely citing that bank as typical of the industry. He also very clearly says CEOs are not in control of these enterprises and that the engage in activities that “can’t be managed, can’t be examined.” That of course begs the question of why these corporate chieftans are so well paid. We argued in ECONNED that the major capital market firms were engaged in looting and that top management was at best hostage to the producers (the business unit managers) and at worst, in cahoots.

Eurozone woes are US woes - A different perspective on the risks the world faces from the financial woes of Greece, Ireland and Portugal is provided by a new class of statistics published today by the Bank for International Settlements (BIS), the central bankers' central bank. What it shows is that US banks are collectively second or third most exposed to the woes of Greece, Portugal and Ireland, through what the BIS calls their "potential exposure" to these countries. This new visibility for the big bets US banks have made on the eurozone's most overstretched economies could prove controversial in Washington - coming so soon after these banks were bailed out by US taxpayers. The stats show that there is some considerable alignment of eurozone and US interests in preventing a Greek default.  The scale of how much money American banks have at risk in the eurozone comes from a new BIS table of the actual and potential exposure of banks to most economies via cross-border loans and financial transactions. It's the detail on potential exposures that is illuminating.

European Bank Debt Dominates U.S. Money-Market Funds, Fitch Ratings Says - The top U.S. prime money-market funds have about half their assets in securities issued by European banks, according to a report by Fitch Ratings.  The 10 largest funds eligible to purchase securities from corporations concentrated 31 percent of their holdings as of May 31 in debt, deposits and repurchase agreements with banks in France, Germany and the U.K., up from 30 percent three months earlier, the London-based ratings firm said. Deutsche Bank AG (DBK), based in Frankfurt, was the biggest issuer, accounting for 4.5 percent of the funds’ assets.  The Bank of International Settlements estimated European lenders held $136.3 billion in loans to Greece at the end of 2010 and almost $2 trillion to Portugal, Ireland, Spain and Italy.  Money-market fund holdings of European debt have risen from 38 percent of assets since the second half of 2006 to about 50 percent at the end of May, driven by the banks’ demand for dollar-based holdings and narrowing investment opportunities for the funds, Fitch said.

Greek Implications: Watch U.S. Money Markets and CDS Issuers - The U.S. would likely feel immediate financial repercussions from the Greek default in two ways. First, as explained previously, data from the Bank for International Settlements (BIS) suggest that U.S. banks may have large residual exposure to Greece through credit derivatives. Secondly, the U.S. money market mutual fund (MMMF) industry basically provides the dollar funding for European banks today. Both exposures could be significant and pose an enormous risk to the continued functioning of the U.S. financial system.According to BIS, European banks hold about $8 trillion in dollar-denominated assets. To avoid currency risk, they have to either finance these holdings through dollar liabilities or through currency swap arrangements. The cheapest way to finance these positions is through issuing commercial paper to U.S.-based money market funds. MMMFs are eager to provide this low cost funding because the interest rates European banks pay are actually higher than the rates paid by U.S.-based commercial paper issuers. While this seems like a match made in heaven as both sides get better deals than available from other market participants, the effect is to import European financial fragility to the U.S.

Greece and You - The euro-zone bailout of Greece is, in good part, a bailout of European banks. In France and Germany alone, banks hold some $90 billion worth of public and private Greek debt. The European Central Bank also holds Greek government debt, and the fear is that if Greece defaults, cascading losses could threaten all of Europe.  Are American banks also vulnerable? No one is sure. They are not big lenders to Greece, but they are big players in the derivatives markets. If Greece defaulted, a European bank holding a credit-default swap on Greek debt from an American bank would be entitled to a payout from that bank. Credit-default swaps are the kind of derivatives that were behind the blowup of the American International Group and the near meltdown that followed in the global financial system. From the available evidence, it doesn’t appear that a Greek default would have the same destructive power, but no one is eager to test the proposition.

If Only Greece Were AIG - Here comes Financial Crisis 2.0. Like its predecessor, it was caused by the banks.The first crisis was the result of banks inventing toxic financial products and then promoting bets on different kinds of securities with borrowed money. When the speculative bubble popped, tens of trillions of dollars in financial and housing assets vanished. At that point, governments and central banks stepped in and rescued the banks. The only thing that suffered was the rest of the economy.  On all policy fronts, banks called the shots. The supposed cure for the large public deficits caused by the financial crisis and resulting recession was belt tightening—for everyone but the banks. Yet voters were oddly passive because the issues seemed technical, elected leaders sided with bankers, and citizens were not quite sure whom to blame.  Now, the worm is turning. Austerity itself is creating a second crisis, and this time it has some political bite.  The epicenter of the new crisis is Greece, which epitomizes the folly of banker rule.

When Only “Crazies” See the Bank Giveaway for What It Was - It seems bizarre that the most reasonable understanding of why the 2008 bank crisis did not require a vast public subsidy for Wall Street occurred at Monday’s Republican presidential debate on June 13, by none other than Congressional Tea Party leader Michele Bachmann – who had boasted in a Wall Street Journal interview two days earlier, on Saturday, that she: “voted against the Troubled Asset Relief Program (TARP) ‘both times.’… She complains that no one bothered to ask about the constitutionality of these extraordinary interventions into the financial markets. ‘During a recent hearing I asked Secretary [Timothy] Geithner three times where the constitution authorized the Treasury's actions [just [giving] the Treasury a $700 billion blank check], and his response was, “Well, Congress passed the law.” …With TARP, the government blew through the Constitutional stop sign and decided ‘Whatever it takes, that's what we're going to do.’” Clarifying her position regarding her willingness to see the banks fail, Bachmann explained: “I would have. People think when you have a, quote, ‘bank failure,’ that that is the end of the bank. And it isn't necessarily. Often times, the phoenix rises out of the ashes.”

Small Banks Turn To U.S. Fund To Repay TARP Aid - Hundreds of small banks that received US aid after the financial crisis appear to have found a creative way to repay the funds: obtain money from a different government program. Most of the 627 banks that still hold money from the controversial Troubled Asset Relief Program, or TARP, have filed applications to roll the obligations into the government’s new Small Business Lending Fund, according to Treasury officials and the banks. TARP was widely tarred as a bailout for greedy banks, but the $30 billion small business lending program does not carry the same baggage. The new program would let many TARP recipients sharply reduce dividend payments to the government, while no longer facing strict restrictions on executive compensation.

Treasury Shouldn’t Help Speculators of GSE Stocks - In the wake of the financial crisis, the government-sponsored enterprises Fannie Mae and Freddie Mac are obviously in bad shape. Congress is currently discussing plans to dramatically scale-down or even eliminate the organizations, so why are investors still interested in holding their stock? The Wall Street Journal interviewed investors who are counting on a policy change by the Treasury to make the stock more valuable. The preferred shares have climbed more than 50% to 11 cents on the dollar from about seven cents in recent weeks. Some attribute the gains to a bet among investors that the Treasury may be willing to cut the dividend payments the companies are making on $163 billion in capital the government injected into the funds. They reason that a cut might help boost the companies' profits—and the value of the preferred shares.

April commercial real estate prices dip: Moody's - Moody's Investors Service said U.S. commercial real estate prices fell by 3.7% in April, as distressed prices masked the price recovery seen in larger, higher-quality assets. The commercial real-estate sector, like its residential counterpart, continues to struggle with slumping demand. April marks the fifth consecutive decline in the Moodys/Real Estate Analytics LLC commercial property price index, though the price recovery that began a year ago among so-called "trophy properties" in the largest markets continued unabated. "In April, we continued to see a case of where the strong are getting stronger and the weak are getting weaker," said Tad Philipp, Moody's Director of CRE Research. "Major asset/major market prices have recovered more than half of their post-peak losses, while prices for distressed transactions have continued to bounce around the bottom." Distressed sales have comprised at least 20% of the repeat-sales transaction volume for 17 consecutive months

U.S. Commercial Property Prices Decline on Distressed Sales, Moody’s Says -  U.S. commercial property prices fell in April as sales of distressed assets made up a large share of transactions, according to Moody’s Investors Service. The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000, the company said in a report today. The index, which measures broad national price trends, has fallen for five straight months as sales of distressed properties undermined real estate values. Investor demand is strongest for well-leased buildings in major markets such as New York and Washington, which are viewed as less risky in a sluggish economy. “In a case of the strong getting stronger and the weak getting weaker, major asset/major market prices have recovered more than half of their post-peak losses, while prices for distressed transactions continue to bounce around the bottom,” Moody’s said"

Moody's: Commercial Real Estate Prices declined 3.7% in April, Prices at new Post-Bubble Low - Moody's reported that the Moody’s/REAL All Property Type Aggregate Index declined 3.7% in April. 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. The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000 .. 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).

Home equity loan losses pile up for Bank of America - Of all the mortgage woes at Bank of America, one of the less-publicized ones could turn into one of the most expensive: home-equity loans. From the beginning of 2008 through the first quarter of this year, the Charlotte bank has racked up $18.5billion in home-equity loan losses, according to an analyst report last week. That was about 40 percent of the bank's $46billion in housing-related losses so far, and more than any other category. By the end of 2013, the bank could post an additional $27billion in losses on housing-related issues for a total of about $73billion, according to the report. Of that, $24.8billion could come from home-equity loans, just shy of the $25.8billion that could come from investor requests to buy back soured home loans, a more high-profile issue.

How the mortgage industry lies with statistics - Yesterday something calling itself the Coalition for Sensible Housing policy put out a dense 13-page white paper entitled “Proposed Qualified Residential Mortgage Definition Harms Creditworthy Borrowers While Frustrating Housing Recovery”. It’s all part of the lobbying campaign surrounding Dodd-Frank, and the eminently sensible idea that if a bank wants to securitize a bunch of mortgages, it has to keep at least 5% of those mortgages for itself. Somehow, in the course of putting Dodd-Frank together, an exception was carved out to that rule, called the Qualified Residential Mortgage, or QRM. For the small group of the most copper-bottomed mortgages, banks could sell off the whole lot, without having to retain 5%. This gave the mortgage lobby an opening, and they’re attacking it aggressively.  The main part of the QRM qualification that they’re upset about is the requirement for a significant downpayment, and so a central part of the lobby’s argument is that if you’re underwriting loans properly, increasing the downpayment doesn’t have much of an impact on delinquency rates. There’s other bits to the argument, too, such as the idea that non-QRM mortgages are going to be much more expensive, but for this post I’m just going to concentrate on the downpayment question.

When Uncle Sam forecloses - You probably won’t be surprised to hear that Wells Fargo is sparring with the government on the subject of foreclosures. But you might be surprised to see who’s on which side: Wells Fargo & Co. decided to exit reverse mortgages after federal officials insisted it foreclose on elderly customers who were behind on property tax and insurance payments...Reverse mortgage market participants generally agreed that the industry is enduring hard times… One problem is that lenders are not allowed to set aside payments for property taxes and other such recurring costs, leading to trouble if the borrower cannot pay them. Contributing to the issue is a prohibition on underwriting loans based on borrowers’ credit rather than the equity they have in their home. A third problem arises in the course of disposing of the property. If the borrower dies and the equity in the home does not cover the mortgage, the FHA is responsible for making up the difference. But it is often the lender’s duty to dispose of the house, a process that sometimes forces it to eat some of the costs. An FHA requirement that the lender not sell the house for less than 95% of its appraised value can make that process difficult

Suit Goes After Fannie And Freddie - Oakland County is hoping to recover more than $1.5 million in real estate transfer taxes that mortgage giants Fannie Mae and Freddie Mac haven't paid over the years. In a lawsuit filed Monday in U.S. District Court, the county said the companies didn't pay the tax -- which is less than 1% of a property's sale price -- because they claim to be government entities, a notion the county disputes. "We look at it as the cost of doing business when you record a deed," said Keith Lerminiaux, deputy corporation counsel for Oakland County. The case has been referred to U.S. District Court Judge Victoria Roberts. If successful, the county's lawsuit could be replicated by counties across the state and nation, costing Fannie Mae and Freddie Mac millions in unpaid taxes.

Two Michigan Counties Sue Fannie and Freddie for Nonpayment of Mortgage Transfer Fees -  Yves Smith - I’ll be brief because this article from the Michigan Messenger (hat tip furzy mouse) stands on its own. Readers may recall that some registers of deeds (the county officials responsible for recording mortgage transfers) are less than happy at the way MERS has deprived their governments of income by skipping recording fees for some mortgage transfers (that was the point, after all) and making a mess of title records.  Two counties in MIchigan, Oakland and Ingham, have decided to do something about it. To my knowledge, this is the first litigation of this type: Oakland County Treasurer Andy Meisner is suing mortgage giants Freddie Mac and Fannie Mae in the nation’s first federal lawsuit seeking to recoup tax payments never paid on properties that were transferred several times during the height of and during the foreclosure crisis that has gripped the nation over the last few years,“I do think it’s fraudulent and I do think there is strong evidence to suggest there has been fraud. I do think it is a fraudulent conspiracy,” Meisner said. “We are identfying the people involved and we are systematically working to hold them accountable.”

Sunny Sheu: Murdered for Investigating NY Foreclosure Judge Joseph Golia? - Yves Smith - The details are thin but they sure don’t smell right. The short form is that Sunny Sheu had his house stolen from him by fictive buyers who used forged documents. Judge Golia of Queens engaged in what appears to be highly questionable behavior in failing to reverse the sale. Sheu started investigating the judge, was told by policeman who specifically referred to information he had provided about Golia, and that if he didn’t drop it, he’d wind up dead. Sheu disregarded their warning and did wind up dead. The authorities are also refusing to honor requests for information regarding Sheu’s death made under New York’s Freedom of Information Act. This story has been publicized by Foreclosure Fraud and The Daily Bail and I hope it gets more traction.  First, the background, as reported in Black Star News:

Allonge Fabrication 101 – Part I - transcripts, visuals

Florida Governor Floats Huge Gimmie for Banks: Taking Foreclosures Out of the Court System -  - Yves Smith - Florida continues to show a rather disconcerting willingness to throw its citizens’ rights under the bus to help the banks. The state created special foreclosure courts to clear up a substantial backlog, which might not have been such a bad idea if they had been properly implemented. However, they were staffed with retired judges, many of whom seemed to put speed over due process. There have been numerous reports of judges refusing to hear motions or evidence presented by borrowers, to the point where the ACLU contested the procedures used as violations of due process.To some degree, this has become moot since these kangaroo courts are expected to be shuttered (they required an extension of funding to continue). Moreover, new foreclosure filings have slowed in Florida as a result of the robo-signing scandal. The revelation of widespread abuses by banks has led some judges to dismiss cases with dubious documentation; judges are also complaining that banks are seldom coming to hearings on foreclosure cases. Never fear, with government bought and paid for in America, someone was certain to try a fix. The Florida governor has, in effect, suggested that if banks can’t meet the existing requirements for foreclosure, then the solution obviously is to lower them

Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury - A Cuyahoga County grand jury on Wednesday indicted nine employees of California-based Argent Mortgage Inc. for their suspected roles in approving fraudulent home loans.  Argent, which was one of the biggest originators of home loans in Cuyahoga County from 2003 to 2005, was sold to Citibank in 2008.  This case, investigated by the Cuyahoga County Mortgage Fraud Task Force, presents a primer about how the lending practices of Argent and other subprime mortgage companies were largely responsible for the foreclosure crisis that devastated Cleveland and its inner-ring suburbs. Worldwide, the meltdown of the subprime mortgage market starting in 2007 resulted in the deepest economic downturn since the Great Depression. The indictment alleges that Argent employees helped coach mortgage brokers about how to falsify loan documents so that they misstated the source or existence of down payments as well as borrower's income and assets. Employees at an Argent loan processing center in Illinois ultimately approved the loans knowing that the company's own lending rules had not been satisfied.

Netroots Panel Demands Action From Obama On Foreclosures -- Neither Congress nor the Obama administration have shown much initiative to fix the nation's deepening foreclosure problem of late, but the issue remains a dominant subject of activist attention and a major source of middle class anxiety. That's the takeaway from a packed Friday panel on bank regulation and foreclosures at the annual Netroots Nation conference, an annual meeting of internet-savvy progressives. "It is a continuation of the insane Wall Street behavior of the 2000s," said financial blogger Mike Konczal, comparing the recent practice of pushing through foreclosures with shoddy documentation to the frenzy to push out subprime mortgages at the height of the housing bubble. There were one million foreclosures in 2010. That pace has slowed somewhat in 2011, as banks are challenged in court, often on the validity of the paperwork deployed to evict borrowers.

$1 Billion in Homeowner Aid Offered - Homeowners facing foreclosure can now tap into a $1 billion program of emergency loans to help tide them over a temporary financial crisis, the Department of Housing and Urban Development (HUD) has announced. Beginning today, homeowners in 27 states can file preliminary applications for the Emergency Homeowner's Loan Program (EHLP). Eligible homeowners can obtain interest-free loans of up to $50,000 to help cover mortgage expenses for up to two years. The program is available to homeowners who have seen their incomes fall and who could lose their homes to foreclosure due to circumstances beyond their control, including involuntary unemployment, underemployment, economic conditions or an illness. The program is a counterpart to the $7.6 billion Hardest Hit Fund and is available only to homeowners in states not covered by that program. The Hardest Hit Fund provides foreclosure avoidance assistance to homeowners in states that have been most seriously affected by the declining housing market and economic downturn.

Backlog of Cases Gives a Reprieve on Foreclosures - Millions of homeowners in distress are getting some unexpected breathing room — lots of it in some places.  In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.  Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.  In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books. "If you were in foreclosure four years ago, you were biting your nails,"“Now you’re probably not losing any sleep.”

Another Layer of the Mortgage Mess: “Zombie Notes” -  Yves Smith - One of the claims we’ve heard throughout the mortgage crisis is that all the systems and records are fine, that the banks have just made a few “mistakes” and when they find out about them, they correct them promptly and cheerfully. If you believe that, I have a bridge I’d like to sell you. Not only is evidence of widespread, and very likely systematic abuses piling up in courtrooms all over the US, but even at this late date, new types of misconduct are coming to light. Lisa Epstein and April Charney pointed out the latest version, that of “zombie notes”. It’s another version of the “who has the note” (the borrower IOU) problem. In this case, thousands of borrowers in Florida (and potentially other states) who were being foreclosed upon were contacted by Fannie Mae and offered the opportunity to have the debt cancelled if they gave a deed in lieu of foreclosure. That’s a fancy way of saying if they gave up their rights to the house and vacated, Fannie would drop the foreclosure action. The advantage to the borrower is that he puts the matter behind him (if the house is sold for less than the mortgage balance, for instance, he can’t be sued for a deficiency judgment) and suffers less damage to his credit record.  But it appears Fannie did not live up to its side of the bargain, and even a representative of the American Bankers Association distanced itself from the agency’s action, saying it is “not a practice we’ve ever heard of.”

AIA: Architecture Billings Index indicates declining demand in May - Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From the WSJ: Momentum Gone in Design Services...This graph shows the Architecture Billings Index since 1996. The index decreased in May to 47.2 from 47.6 in April. Anything below 50 indicates a decrease in billings.  Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this suggests another dip in CRE investment towards the end of this year - and into 2012.

The Next Crisis in Residential Mortgages – New Data Emerges - Back in the fall of last year, we commented to many that the so-called “foreclosure-gate,” or “document-gate” was going to prove to be a double edged sword for the large banks. On the one hand, lying to judges and facing the possible voiding of mortgage collateral documents and the ability to foreclose is decidedly bad for business. On the other hand, we pointed out that there would likely be sighs of relief at the notion that the recognition of losses connected with the bubble of pending home repossessions, that was then coming towards the end of the foreclosure snake, could again be delayed. Over the past week, two intrepid investigative business reporters, at The Financial Times and The New York Times, respectively, have published stories that shed new light on this issue, in a manner that furthers our concerns about the banking sector. In our view, the magnitude of pending foreclosures, together with housing prices that continued to decline through March, could potentially result in losses to banks that materially exceed existing provisions for such losses. Moreover, if the backlog of foreclosures were to move through repossession and liquidation, the impact on the housing market would unquestionably be to accelerate the pace of falling prices (at least in many regions of the country).

Mortgage Mess Cripples Spring Sales Season - Homebuyer traffic, a major indication of future home sales, tumbled in May, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. The closely-watched survey’s traffic index for first-time homebuyers fell from 51.7 in April to 45.3 in May, while the traffic index for current homeowners fell from 56.1 to 44.8. Meanwhile, the traffic index for investors fell from 55.3 to 54.6. Any index value less than 50 indicates a decrease in traffic from the previous month. For the previous three months, the first-time homebuyer and current homeowner indexes had been well above 50. Because traffic typically leads to closed transactions, these significant declines could indicate a downward shift in the housing market in the coming months. The HousingPulse Survey’s Distressed Property Index, a key measure of the health of the U.S. housing market, fell slightly to 46.7 percent in April, although sales of distressed properties continued to account for nearly half of the market.

FHA sells record number of REO in May, Freddie Mac Serious Delinquency Rate declines - A couple of updates ...  FHA Sells record number of REO (Real Estate Owned) in May.  In Q1, Fannie and Freddie were foreclosing at record levels - and selling REO even faster - so their REO inventory actually declined. However, the FHA was apparently having REO inventory problems and the FHA's REO inventory increased in Q1.  It now appears the FHA REO problem has been solved. The FHA sold a record number of REO in April, and even more in May. According to data from HUD the FHA acquired 6,727 REO in May and sold a record 12,671 properties. The FHA REO inventory has declined from 69,9581 at the end of Q1 2011, to 60,587 at the end of May 2011. It appears REO at the F's will decline again in Q2. REO for March was revised up slightly.  Freddie Mac reported that the Single-Family serious delinquency rate decreased to 3.53% in May from 3.57% in April. This is down from 4.06% in May 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. The normal serious delinquency rate is under 1%, so this is still very high, but at least it is declining.

May existing home sales fall to 6-month low - Sales of existing single-family homes and condos fell 3.8% in May to a seasonally adjusted annual rate of 4.81 million, the National Association of Realtors reported Tuesday. This is the lowest level since November. The decline was in line with forecasts. Economists surveyed by MarketWatch expected sales to fall to 4.80 million units in May, based on a sharp 12% drop in pending home sales in April. Existing home sales fell a revised 1.8% in April to 5.0 million units, down from the initial estimate of a 0.8% fall to 5.05 million units. The median price of homes sold was down 4.6% in May from last year at $166,500. Inventories of existing homes for sale fell 1.0% to 3.72 million units in May, representing a 9.3 months' supply, up from 9.0 months in April.

May Existing Home Sales: 4.81 million SAAR, 9.3 months of supply - The NAR reports: Existing-Home Sales Decline in May. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in May 2011 (4.81 million SAAR) were 3.8% lower than last month, and were 15.3% lower than in May 2010.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.72 million in May from 3.76 million in April.  The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, so it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.  Inventory decreased 4.4% year-over-year in May from May 2010. This is the fourth consecutive month with a YoY decrease in inventory. Inventory should increase over the next couple of months months (the normal seasonal pattern), and the YoY change is something to watch closely this year.

Existing-Home Sales in U.S. Fell in May to Six-Month Low, May Be at Bottom - Sales of existing U.S. homes decreased in May to the lowest level in six months, a sign that the housing market is lagging other parts of the economy. Purchases of existing homes fell 3.8 percent to a 4.81 million annual pace last month, in line with the 4.8 million median estimate in a Bloomberg News survey of economists, data from the National Association of Realtors showed today in Washington. Preliminary figures showing a jump in contract signings suggest May will prove to be the weakest sales month of the year, according to the group’s chief economist. An unemployment rate hovering around 9 percent and tight credit standards mean it may take years to absorb the 1.8 million distressed properties on the market that are weighing down home values. Persistent weakness in the housing market is one reason why Federal Reserve policy makers are likely to maintain record stimulus when they meet this week. “There is no real let-up in the weakness,”

CHART OF THE DAY: This Chart Guarantees Lots More Housing Pain Ahead: "The housing economy is going to be garbage for a long time. Why? Per today's new home sales number, months of housing inventory on the market continues to shoot upward. All this needs to be burned off eventually before the market hits equilibrium, and right now things are going in the wrong direction. The red line on this chart -- via Calculated Risk -- tells the grim story.

Existing Home Sales: Comments and NSA Graph - There was no mention of the "benchmark revision" that was supposed to be announced this summer. This revision is expected to show significant fewer homes sold over the last few years (perhaps 10% to 15% fewer homes in 2010), and also fewer homes for sale.  The NAR continues to complain about lending standards. NAR economist Lawrence Yun said: “There’s been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction – this overreaction is clearly holding back the recovery.” Actually standards are fairly reasonable for qualified buyers. Of course many qualified buyers bought last year - using the ill-considered homebuyer tax credit - and that pulled demand forward. The housing market is still paying the price for that policy mistake. The following graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2011.  Sales NSA are well below the tax credit boosted level of sales in May 2010, but slightly above the level of May sales in 2009. The level of sales is still elevated due to investor buying. The NAR noted:  All-cash transactions stood at 30 percent in May, down from 31 percent in April; they were 25 percent in May 2010; investors account for the bulk of cash purchases.

CoreLogic: Existing Home Shadow Inventory Continues to Decline - From CoreLogic: CoreLogic® Reports Shadow Inventory Continues to Decline: CoreLogic ... reported today that the current residential shadow inventory as of April 2011 declined to 1.7 million units, representing a five months’ supply. This is down from 1.9 million units, also a five months’ supply, from a year ago. The decline was due to fewer new delinquencies and the high level of distressed sales, which helped reduce the number of outstanding distressed loans. This graph from CoreLogic shows the breakdown of "shadow inventory" by category. For this report, CoreLogic estimates the number of 90+ day delinquencies, foreclosures and REOs not currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as shadow inventory. This report provides a couple of key numbers: 1) there are 1.7 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale, and 2) there are about 2 million current negative equity loans that are more than 50 percent or $150,000 “upside down”.

CoreLogic: US Home "Shadow Inventory" Dips on Year -   The number of U.S. homes likely to hit the market soon fell compared to last year due to fewer new delinquencies and a high level of distressed sales, a real estate research firm said Wednesday.  CoreLogic reported that the so-called shadow inventory of homes in the three months to the end of April declined to 1.7 million homes. That's equivalent to a five months' supply and is down from 1.9 million in the same time frame the year before.  It is also down from the peak level of 2 million homes seen in the three months up to January 2010, CoreLogic said.  Since its collapse, the housing market has remained a drag on the economy and economists say a recovery in the sector can only take place once the overhang of distressed properties is sold off.  CoreLogic estimates the supply of homes yet to come up for sale by calculating the number of properties that are not currently listed on multiple listing services and are delinquent by 90 days or more, in foreclosure and owned by lenders.

New Home Sales in May at 319 Thousand SAAR - The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 319 thousand. This was down from a revised 326 thousand in April (revised from 323 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new one-family houses in May 2011 were at a seasonally adjusted annual rate of 319,000 ... This is 2.1 percent (±10.7%)* below the revised April rate of 326,000, but is 13.5 percent (±13.6%)* above the May 2010 estimate of 281,000.  And a long term graph for New Home Months of Supply. Months of supply decreased to 6.2 in May from 6.3 months in April.. Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale fell to 64,000 units in May. The combined total of completed and under construction is at the lowest level since this series started.  The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In May 2011 (red column), 30 thousand new homes were sold (NSA). The record low for May was 26 thousand in 2010 (following the expiration of the homebuyer tax credit) and now 2011. The high was 120 thousand in 2005.

Miami Condos: Foreign Cash Buyers - Here is an article from Bloomberg: Brazilians Buy Miami Condos at Bargain Prices. Surging real estate prices in Brazil and the currency’s 45 percent gain against the U.S. dollar since 2008 are sending Brazilians to South Florida in search of bargain vacation homes and property investments. That’s helping bolster Miami’s condo market ... As many as half of the downtown Miami condos that have been sold to foreigners for more than $500,000 since January were purchased by Brazilians.This doesn't help in most overbuilt areas. But it does help a little in some areas - like Miami - and they are paying all cash.

The Chinese Government Is Buying Up Economic Assets And Huge Tracts Of Land All Over The United States - The Chinese government is using sovereign wealth funds and Chinese state-owned enterprises to buy up economic assets and huge tracts of land all over the United States.  Many of our politicians hail all of this "foreign investment" as something that is "good for America", while many others see something much more sinister going on here.  In any event, this is a trend that is rapidly accelerating and that is causing great concern among patriotic Americans. In my recent article entitled "China Wants To Construct A 50 Square Mile Self-Sustaining City South Of Boise, Idaho", I examined a potential deal that Sinomach (a company controlled by the Chinese government) wants to do with the government of Idaho.  But first it is important to note that this is a phenomenon that is happening all across the United States. For example, a Chinese investment group is buying up a very large chunk of real estate in Toledo, Ohio.  The following is a brief excerpt from an article in the Toledo Blade on May 26th, 2011.... Dashing Pacific Group Ltd., which has already purchased the nearby Docks restaurant complex for $2.15 million, put its $3.8 million offer to buy the southern 69 acres at the Marina District in East Toledo back on the table

Abandoned projects leave lasting reminder of economic crash - It wasn’t long ago that hotels, high-rise condominiums and massive retail and office complexes sprang up in Southern Nevada seemingly faster than one could drive from one end of the valley to the other. Take that same drive today, though, and you’ll likely see vestiges of the Great Recession: partially built structures with exposed foundations or steel beams — or building wraps to hide the evidence — that represent dreams put on hold. Many mothballed projects face an uncertain future, signs their owners either don’t have the money to complete construction or don’t think the economy has recovered sufficiently to make them viable. Some have also been mired in litigation. Here are prime examples: (photo gallery)

House Prices May Not See Recovery Until 2014 - U.S. home prices won’t rise consistently until 2014 amid continuing structural problems in the housing market, an economist arguesIn Capital Economics latest look at the housing market, economist Paul Dales says that the current double dip in the market won’t reverse course quickly. He argues that the low level of demand isn’t something that a general economic recovery can easily fix. Rising down-payment requirements for homes are keeping first-time buyers on the sidelines, while widespread negative equity is making it difficult for repeat buyers to move up to more expensive houses. “These constraints on demand are structural rather than cyclical, meaning that even faster employment and income growth over the next few years is unlikely to lead to anything more than modest rises in home sales. In any case, in recent months the economic outlook has deteriorated,” Dales writes.

No way out? - Stuart Gabriel called housing the "tail that wags the dog" of the US economy.  He was likely referring to this paper or, perhaps, this paper.  In any event, the evidence from past business cycles powerfully supports residential construction as a leading indicator. Here is the St. Louis Fed's depiction of housing starts going back to 1959: In an average year, the US economy starts around 1.5 million houses.  It has started fewer than 600,000 per year since 2008, and is currently squiggling along at a bottom unprecedented in the St. Louis Fed series. I find it hard to see how the economy can recover strongly without housing making a comeback.  Yet we still have too many houses--builders cannot compete with the inventory currently available. While they try to differentiate new houses from stuff in the foreclosure stock, it is tough to make a sale when price differences are very large.  The problem is that stimulating housing is a bad idea too, because we really don't need many more houses in the economy right now.  We are left with a quandary.  For the economy to be restored to health, housing construction needs to return to normal--but there is no reason for it to return to normal.  The alternative--waiting--doesn't seem very appealing either.

Generation Rent: How Our American Dream Is Different from Our Parents' - One of the most depressing news stories I've read in the last few years is one asserting that the Millennial generation will be the first to be worse off than their parents. This factors in salaries, health costs, and social security, but also our prospects (or lack thereof) of ever Owning A Home, that classic American declaration of independence. Recent numbers are sketching out a harsh reality: that our hopes of owning property may be unrealistic, and that we will become a generation of renters in the next few decades. Here are a few ways Generation Rent differs from their parents:

  • Renter cities aren't just coastal anymore.
  • Despite our lack of purchasing power, our need to invest is greater than ever.
  • If we do own, parents are footing the bill a lot more often. 

The Death of Demand: The Post-Consumer Debt Economy - Keynesians are constantly demanding more debt be taken on to spark "demand" for more stuff. What if debt-fueled demand is dead, expired of natural causes? If so, then the Keynesians are pushing on a string. The truth is the U.S. has long been a post-consumer economy. Everybody already had a TV, phone, car, etc. 40 years ago, which is coincidentally when wages began their 40-year stagnation and the nation's public and private debts began exploding higher as the forces of financialization took over. In other words, the only way to get people to buy more crap was to give them vast quantities of debt. Now that debts exceed 350% of the nation's GDP, we've reached the end of the financialization process: we can't afford any more debt unless the interest rate is near-zero. Hey, isn't that the Federal Reserve's policy now, forever and ever, near-zero interest rates? No wonder. If the nation had to pay a historically average rate of interest on its debts, the economy would quickly implode like a supernova star.

Demos on Credit Reporting and Employment; Surveillance, Inequalities and the Labor Market  - I just learned recently that the FTC has given a thumbs up to the Social Intelligence Corp. archiving seven years worth of people’s Facebook posts, posts that can then be used as part of their background checking service for job applicants. With that in mind, I’d just like to tell whatever computer algorithms are currently crawling over and compiling my profile to sell to potential future employers that all my status updates about fake calling in sick to work, family health concerns, having too much fun at a party or disgruntlement with bosses were all j/k lol. I read that at the same time I just read the latest Demos report by Amy Traub and Shawn Fremsted, Discrediting America, The Urgent Need To Reform The Nation’s Credit Reporting Industry. A fantastic report on something I’ve been wanting to think through and start to conceptualize a reform agenda: the credit reporting scores play a huge role in society but they have huge oversight gaps and major, systemic errors that bias against consumers.

U.S. Economic Confidence Plunges in Early June - A sharp deterioration in the jobs outlook and six straight weeks of Wall Street declines sent Americans' confidence in the U.S. economy plunging to an average of -35 during the week ending June 12 -- a decline of nine percentage points from two weeks ago, and six points worse than it was in the same week a year ago. Economic confidence is now approaching a 2011 weekly low. Economic confidence reached its peak so far this year at -18 in February and then generally declined through the week ending April 24, when it reached -39 as gas prices surged and economic activity slowed. Economic confidence improved to -25 during the week after Osama bin Laden's death and coincident with the "rally effect" in President Obama's approval rating. However, Americans have become more pessimistic about the economy in early June, with confidence reverting to late April levels.

Banks Easing Lending Standards, but Not for Consumers -Here’s a glimmer of good news for the economy. An annual survey by a key bank regulator showed some signs that the nation’s banks are easing underwriting standards after three years of broad tightening of lending terms. Conducted by the Office of the Comptroller of the Currency, the survey covered 54 national banks, including the 14 largest banks overseen by the agency, and covered loans representing about 94% of all loans in the national banking system. Underwriting standards easing particularly in commercial products, and most of the highest share of easing was done by large banks, the survey showed.But don’t get too excited. Tightening continued in areas that most impact the average American consumer thanks to continued economic uncertainty. Loan portfolios that experienced the most tightening in standards over the last year include credit card, home equity, commercial and residential construction and residential real estate loans. “The health of the economy” was a key factor in tightening, according to OCC examiners.

Change in China Hits US Purse - For more than a decade starting in the early 1990s, U.S. inflation declined as low-wage workers in China and other developing nations joined the global economy and produced a tide of cheap goods that washed onto U.S. shores. The trend made American consumers feel better off and, by restraining the upward crawl of consumer prices, helped enable the Federal Reserve to fuel the U.S. economy with low interest rates. That epoch appears to be over. Prices of imported goods are climbing, becoming a source of inflationary pressure. A wide variety of common products made abroad, from shoes to auto parts to jewelry, are landing on U.S. docks with higher price tags. U.S. import prices, excluding oil, rose 8% over the past two years, a historic shift from their downward drift for two decades. The increase is bigger still when including oil, which is up on global demand and Mideast turmoil

Faster Inflation Causes ‘Trade Down’ Boost for McDonald’s, Wal-Mart -  McDonald’s Corp. (MCD) and Wal-Mart Stores Inc. (WMT) are getting a boost from value-minded consumers as rising commodity costs constrain discretionary income and confidence in the economy wanes. Energy and food costs have risen 19 percent and 4 percent since December, according to the Labor Department. That caused real disposable income, or the money left over after taxes and adjusted for inflation, to remain unchanged. The confluence of higher prices and unemployment at 9.1 percent has become especially acute for households making less than $75,000 a year, according to David Schick, an analyst at Stifel Nicolaus & Co. in Baltimore. “More-persistent inflation is affecting consumer confidence,” Schick said. “This may cause low-to-middle income consumers to trade down when shopping at retailers.” The shift is similar to 2008, when commodity prices also soared

DOT: Vehicle Miles Driven decreased -2.4% in April compared to April 2010 - This data is for April and gasoline prices were at the highest level of the year at end of April and in early May - so the YoY decline might be less in June. The Department of Transportation (DOT) reported that vehicle miles driven in April were down 2.4% compared to April 2010: Travel on all roads and streets changed by -2.4% (-6.1 billion vehicle miles) for April 2011 as compared with April 2010. Travel for the month is estimated to be 250.5 billion vehicle miles.Cumulative Travel for 2011 changed by -0.8% (-7.1 billion vehicle miles). The Cumulative estimate for the year is 939.2 billion vehicle miles of travel. 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. So far the current decline is not as a severe as in 2008. With the decline in oil and gasoline prices, the YoY decline in miles driven will probably not be as large in June.

IRS Raises Mileage Rate to 55.5 Cents - Reversing a previous hint that they oppose mid-year increases due to logistical challenges and other complications, the Internal Revenue Service (IRS) announced today that the optional standard mileage rate will rise to 55.5 cents per mile, an increase of 4.5 cents, effective July 1, 2011. From the press release: Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.[...] "This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."

Cars as a Harbinger of an Upturn - For those who believe that the economic recovery has merely hit some bumps, and that growth will accelerate during the second half of the year, the automobile industry may offer the most persuasive evidence. Sales of cars and light trucks plunged after the Japanese earthquake from an annual rate of 13.1 million vehicles in April to an annual rate of 11.8 million vehicles in May. That’s slightly better than last year, but 2009 and 2010 were the first years since 1982 in which Americans bought fewer than 12 million vehicles. The decline, it seems clear, was driven by a lack of supply. The flow of vehicles from Japan came to a standstill. The 150-acre Toyota parking lot in Long Beach, Calif., where imported cars usually sit in long white rows, is as empty as the blacktop around a football stadium in springtime. American factories also were disrupted. Most Toyotas sold in America are built in America, but many of the parts come from Japan. Companies based in the United States like Ford and General Motors also rely on Japanese parts. North American factories made 4 percent fewer cars and light trucks in May than in the same month last year.

Durable Goods Orders Rise 1.9% In May - Score another point in favor of the soft patch theory vs. expecting a new recession around the next corner. New orders for durable goods rose by a seasonally 1.9% in May, reversing the previous month’s sharp 2.7% loss. If we strip out some of the volatile sectors of the report, there’s still a pop in last month’s tally. For example, ignoring transportation equipment leaves durable goods orders up by 0.6%; excluding defense translates into a 1.9% gain for the rest of new orders for durable goods.  There was also a tidy 1.6% gain for business investment, based on the proxy of non-defense capital goods ex-aircraft orders. All in all, a decent report, and just in the nick of time, given the current worries about the economy. It’s only one indicator, of course, but as a closely watched leading indicator it’s encouraging that the latest number is higher vs. the previous month. More importantly, the trend for new orders continues to look solid.

Orders for U.S. Durable Goods Beat Forecast in May - Orders for durable goods climbed more than forecast in May, signaling manufacturing may be one of the first areas of the U.S. economy to rebound from a first-half slowdown in growth.  Bookings for equipment meant to last at least three years rose 1.9 percent after a 2.7 percent April drop that was smaller than previously reported, data from Commerce Department showed today in Washington. Revised figures from the agency also confirmed gains in gross domestic product cooled last quarter.  Record exports, the need for companies to update equipment and the easing of parts shortages stemming from the disaster in Japan will probably boost manufacturing in the second half of the year. The figures support the view of Federal Reserve officials, who this week said the slackening in the expansion may be due to temporary restraints.  “Some of the slowdown does appear to have been because of temporary factors that will either fade or reverse, including the supply chain effects from Japan and the big jump in oil and gasoline prices at the start of the year,”

Data points to underlying factory strength (Reuters) - New orders for U.S. manufactured goods and a gauge of business spending plans rose in May, easing fears of a sharp slowdown in factory activity. Durable goods orders increased 1.9 percent after dropping 2.7 percent in April, the Commerce Department said on Friday, with a proxy of business spending also rebounding strongly. An improvement across the board in May and revisions to April's figures that showed smaller declines than previously reported, pointed to underlying strength in a sector that has powered the economic recovery. Economists had expected durable goods orders, a leading indicator of manufacturing health, to rise 1.5 percent in May. Durable goods are items ranging from toasters to aircraft that are meant to last three years or more.

Bad News for Wall Street, Good News for Main Street - Despite resurgent profits among the titans of finance, Wall Street is slimming down. As the New York Times' Dealbook reports today, heavyweights like Goldman Sachs and Bank of America are shaving operating costs and planning to lay off employees. Morgan Stanley, the Times says, could jettison at least 300 brokers and cut $1 billion in expenses not related to pay. For the well-heeled denizens of big finance, that's bad news. For the rest of America, it could be cause for celebration. Here's why. Over the past two decades, we've witnessed the "financialization" of America, in which Wall Street and the banking sector have gobbled up an ever-greater share of American wealth. As economist Henry Kaufman has noted, the ten largest financial institutions controlled 10 percent of financial assets in the US in 1990; by 2008, their control had grown to a whopping 60 percent. And when Princeton economics professor Hyun Song Shin studied the flow of cash in the American economy, he found that, between 1954 and 1980, nearly all sectors grew tenfold. That trend continued from 1980 to 2008, but with one major exception: the securities industry grew 100-fold, largely thanks to the deregulatory frenzy presided over by Reagan, Clinton, and Bush I and II.

President Clinton, The Economy Started Losing Manufacturing Jobs While You Were in Office  - If you ever wondered why manufacturing employment has not done well over the last 15 years, President Clinton gave us part of the answer in a column giving advice on job creation.  His 13th item on job creation is "Enforce Trade Laws," where he tells readers: "We lost manufacturing jobs in every one of the eight years after I left office. One of the reasons is that enforcement of our trade laws dropped sharply.  Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending. Since they are now our bankers, it’s hard to be tough on their unfair trading practices. This happened because we abandoned the path of balanced budgets 10 years ago, choosing instead large tax cuts especially for higher-income people like me, along with two wars and the senior citizens’ drug benefit." Okay, we have some real serious confusion here from the former president. First, it is true that the economy lost manufacturing jobs in the eight years after President Clinton left office, but the job loss began in his last three years in office. Here are the numbers:

Bill Clinton’s Legacy of Denial - Does Bill Clinton still not grasp that the current economic crisis is in large measure his legacy? Obviously that’s the case, or he wouldn’t have had the temerity to write a 14-point memo for Newsweek on how to fix the economy that never once refers to the home mortgage collapse and other manifestations of Wall Street greed that he enabled as president.   Endorsing the Republican agenda of financial industry deregulation, reversing New Deal safeguards, President Clinton pursued policies that in the long run created more damage to the American economy than any other president since Herbert Hoover, whose tenure is linked to the Great Depression. Now, in his Newsweek piece, Clinton has the effrontery to once again revive his 1992 campaign mantra, “It’s the economy, stupid,” as the article’s title without any sense of irony, let alone accountability.  His list of safe nostrums—painting tar-surface roofs white and seeking more efficient solar and battery production is vintage Clinton hype. But that hardly speaks to a crisis in which, as was reported Tuesday, the housing meltdown continues unabated as the toxic mortgages sold and packaged by the leading banks and investment houses clog the real estate market, destroying consumer confidence and hobbling job creation.

From the Richmond Fed, on structural unemployment - These results are related to what I sometimes call Zero Marginal Product workers:…a significant part of the increase in long-term unemployment is indeed due to the inflow into unemployment of workers with relatively low job finding rates. We conclude by arguing that given the increased contribution to overall unemployment of unemployed workers with inherently low job finding rates, monetary policymakers may want to exercise caution in the use of policy to respond to the level of unemployment.  The entire study — full of useful information — is here, and for the pointer I thank Alex in Jerusalem (we await a report). Via Scott Sumner, while this is not my favorite structural explanation, I read of this from Siemans: Siemens had been forced to use more than 30 recruiters and hire staff from other companies to find the workers it needed for its expansion plans, even amid an unemployment rate of 9.1 percent …a recent survey from Manpower, the employment agency, found that 52 percent of leading US companies reported difficulties in recruiting essential staff, up from 14 percent in 2010.

Bernanke’s Scary View of Employment - Ben Bernanke, chairman of the Federal Reserve, said a truly frightening thing at his just completed press conference, even if he wasn’t breaking new ground.He said the U.S. economy is “still years away” from what is considered a level of full employment, meaning an unemployment rate somewhere in the range of 5%. It stands now at 9.1%. It would be one thing if the Fed chairman made that statement in the midst of a recession, or early in the recovery. But we’re now two years from the end of the downturn in the U.S. and we are still that far away. Others have said similar things, but the chairman’s stature made you feel the weight of it. Imagine hearing that comment sitting on your couch at home because you have no job. You’ve already seen the statistics that show how significant a portion of the unemployed have been unemployed for an unusually long time.

The Unemployment Crisis Is Looking More Structural Every Day - The political debate in America has become almost overwhelmed by the merits or faults of Obamacare and the long run challenges of Americas entitlement system.  As big of an issue as these are in the political realm, another, at least as large, issue looms in the economic policy realm. That is, whether our currently elevated unemployment rate is the result of cyclical or structural forces. To say unemployment is cyclical is to say that it is a part of the cycle of booms and busts that economists have been studying for hundreds of years. Witness the structural changes in home building, state governments and manufacturing. Something is afoot. To say that unemployment is structural is to say that there is something deeper afoot. The economy is changing in fundamental ways and the workers of yesterday may simply be unable to compete in the world of today. They don't have the right skills, the right training, perhaps even the right temperament for a globalized workforce.

Charts of the day: The rise in structural unemployment - Is this jobless recovery a peculiarly American phenomenon? This chart, from a new paper seeking to unentangle cyclical from structural unemployment, would suggest that it possibly is: I find these numbers quite shocking: after all, it’s hardly as though countries like the UK and Portugal have emerged from the recession unscathed. But the US increase in unemployment over the course of the recession was more than double the increase anywhere else. That said, the US has historically has a much lower rate of structural unemployment than most of these other countries: the level of unemployment which is baked in to economic reality, before cyclical factors move it temporarily up and down. And what I fear is that the Great Recession has moved the US towards European levels of structural employment, without any kind of Euro-style social safety net.

How Much Cyclical vs. Structural Unemployment? - This is a question that has raged in the blogosphere for some time now.  And here is an answer from Prakash Loungani et al. (2011): We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors-real GDP changes (Okun‘s Law), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession. This is a little less than Scott Sumner's 70-30 split, but is still far more weighted toward cyclical factors than Arnold Kling's Recalculation theory suggests.  Tyler Cowen will also appreciate the light this study sheds on his questions regarding the relative importance of aggregate demand and aggregate supply shocks.

Weekly Jobless Claims Remain Elevated - Not good, not good. Initial jobless claims popped higher by 9,000 to a seasonally adjusted 429,000, the Labor Department reports. previous week’s claims were also revised up by 6,000 to 420,000. The surge in new claims in April has subsided, but the message seems to be that it's subsided to a relatively elevated level vs. the trend that had been unfolding in this year’s first quarter. The stakes are high. Hanging in the balance is deciding if the May’s sharp slowdown in job creation was a one-time event or the start of materially weaker employment numbers in the months ahead. Today’s update on new filings for unemployment benefits suggests that the June employment report (scheduled for release on July 8) may deliver another round of disappointment. In that case, it's likely there'll be a major reassessment of the entire macro outlook. Meantime, there's still hope. It’s one thing to see job creation virtually evaporate in one month, as it did in May. But it could be statistical noise. On the other hand, two months of weakness in what is arguably the single-most important economic report would be much harder to dismiss.

Study: Unemployment Rate Unlikely to Fall Below 8% - A new study by a group of International Monetary Fund economists and an economist from the San Francisco Federal Reserve suggests that the unemployment rate is not coming down anytime soon, at least not to where it was before the recession. The study, which is called New Evidence on Cyclical and Structural Sources of Unemployment, has to do with something called structural unemployment, that's the amount of people out of work not just because the economy is weak, but because they lack the skills to fill a job opening. A number of people have argued that most of the problems with unemployment purely have to do with the recession. People aren't spending so companies aren't hiring. When the recession ends, the unemployment rate will shoot back up. Last year, Nobel Prize winning economist and New York Times columnist Paul Krugman wrote: all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Those like Krugman who have been on the cyclical side of the argument have been pushing for more stimulus. But two years past the end of the recession and the unemployment rate remains stubbornly high. The IMF paper suggests that the unemployment problem is worse than people think.

Why the Jobs Situation Is Worse Than It Looks - The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment. The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America’s greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million.

CEPR: New Report Suggests Work Sharing as Best Means of Preventing Layoffs and Lowering the Unemployment Rate - With the unemployment rate at a painfully high 9.1 percent, the majority of Americans list jobs as their number one economic concern. A new report from the Center from Economic and Policy Research (CEPR) suggests that in the current economic climate work sharing may be the most effective way to avoid many layoffs and quickly return the economy to full employment with little additional spending. “The labor market in the United States is still suffering the effects of the last recession,” said Dean Baker, co-director of CEPR and author of the report. “With the economy operating well below its full capacity, work sharing could be a significant factor in preventing layoffs and lowering the unemployment rate.” The report, “Work Sharing: the Quick Route Back to Full Employment,” describes a system of work sharing that would give employers an incentive to keep workers on their payrolls with shorter hours as an alternative to laying them off. This would be attached to the current unemployment insurance system with short-time compensation as an alternative to unemployment compensation.

Interactive Map: Employment History Since 2001 by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc) When it comes to jobs, this is the weakest recovery ever except for health-care. In the first of a two-part series, please consider the following interactive map, using Tableau Software, with data courtesy of Economic Modeling. This interactive map may take a bit to load. Please give it time on a slow connection. In a followup post I will look at job gains and losses since 2008, by job classification.

Overworked America: 12 Charts that Will Make Your Blood Boil Why "efficiency" and "productivity" really mean more profits for corporations and less sanity for you. In the past 20 years, the US economy has grown nearly 60 percent. This huge increase in productivity is partly due to automation, the internet, and other improvements in efficiency. But it's also the result of Americans working harder—often without a big boost to their bottom lines. Oh, and meanwhile, corporate profits are up 20 percent. (Also read our essay on the great speedup and harrowing first-person tales of overwork.)

With executive pay, rich pull away from rest of America - The evolution of executive grandeur — from very comfortable to jet-setting — reflects one of the primary reasons that the gap between those with the highest incomes and everyone else is widening. For years, statistics have depicted growing income disparity in the United States, and it has reached levels not seen since the Great Depression. In 2008, the last year for which data are available, for example, the top 0.1 percent of earners took in more than 10 percent of the personal income in the United States, including capital gains, and the top 1 percent took in more than 20 percent. But economists had little idea who these people were. How many were Wall street financiers? Sports stars? Entrepreneurs? Now a mounting body of economic research indicates that the rise in pay for company executives is a critical feature in the widening income gap. The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

Relative poverty rates can mislead - Many researchers and policy makers favor a “relative” measure of poverty. A relative poverty measure is essentially a measure of inequality within the bottom half of the income distribution. As long as this is made clear, such a measure can serve a purpose. But it’s fairly common for commentators to refer to a relative poverty rate as though it’s an indicator of absolute well-being. A journalist or opinion writer or researcher may say something like “We’ve failed to make things better for the poor; the poverty rate is the same now as a decade ago.” When hearing this, some (many?) of us will assume it reflects stagnant incomes for households at the bottom. But low-end incomes may actually have increased; that can happen without yielding any reduction in the relative poverty rate if incomes in the middle rise too. Consider the experiences of six rich nations from the late 1970s to the mid-2000s. The following charts show trends in relative poverty and in absolute inflation-adjusted household income at the tenth percentile (a good proxy for “the poor”) in three of the six: the United States, Canada, and Germany.

The Post Discovers Inequality - The Post had a major front page article on the growth in inequality in the United States over the last three decades. While it is good to see the Post taking note of this enormously important development, the piece does manage to misrepresent some key points. First, there has been new research that sheds additional light on the identity of the top earners, but we have long had a pretty good idea of who the big earners were. So telling us that many of the big earners are CEOs at major companies is not exactly news.Neither is it news that many of the top earners are Wall Street types. There are news articles every year on the bonuses paid out at Goldman, Citigroup and the rest. We already knew that the financial sector accounted for a hugely disproportionate chunk of the top earners.The other major flaw in this piece is its seeming willingness to accept the explanation that higher pay is explained by the growth of companies. First, this does not appear to have been the case in the 50s and 60s when the economy and many companies grew very rapidly, with no comparable explosion in pay at the top.

The systematic financial pillaging of the middle class - Millionaires don’t feel rich unless they have $7.5 million while 45 million Americans live on food stamps. Another 50 percent cannot come up with $2,000 in the next 30 days, For over 30 years the debilitating shrinkage of the middle class has been papered over with access and use of debt.  Debt in every form; mortgage debt, credit card debt, auto loans, and student loans.  Yet debt is not wealth.  Americans are facing a financially nightmare where 1 out of 3 has no savings.  This should come as a little surprise since the per capita income in the country is $25,000.  Many workers are simply getting enough out of their stagnant paychecks to pay the monthly bills.  Of course much of the real wealth has been systematically looted through bailouts and crony capitalism.  There was a time when the government and even Wall Street benefitted by a growing U.S. middle class.  Now all you hear from banking executives is how much cheaper it is to outsource American jobs at the same time their pay keeps soaring.  Why don’t we outsource their job?  The problem of course is a deep capture of our political system and a perfect fusing of Wall Street and the government.  The middle class is slowly floating away as inflation created by the Fed bailouts of the too big to fail banks causes more and more financial pain.

World's wealthiest people now richer than before the credit crunch - We are not all in this together. The globe's richest have now recouped the losses they suffered after the 2008 banking crisis. They are richer than ever, and there are more of them – nearly 11 million – than before the recession struck. In the world of the well-heeled, the rich are referred to as "high net worth individuals" (HNWIs) and defined as people who have more than $1m (£620,000) of free cash.According to the annual world wealth report by Merrill Lynch and Capgemini, the wealth of HNWIs around the world reached $42.7tn (£26.5tn) in 2010, rising nearly 10% in a year and surpassing the peak of $40.7tn reached in 2007, even as austerity budgets were implemented by many governments in the developed world.The report also measures a category of "ultra-high net worth individuals" – those with at least $30m rattling around, looking for a home. The number of individuals in this super-rich bracket climbed 10% to a total of 103,000, and the total value of their investments jumped by 11.5% to $15tn, demonstrating that even among the rich, the richest get richer quicker. Altogether they represent less than 1% of the world's HNWIs – but they speak for 36% of HNWI's total wealth.Click here to see a pdf of this graphic

Forbes: World’s Rich Richer Than Ever; Wealth Growth Beats GDP Avgs - The rich get richer.  In fact, despite economic crisis, recessions and slowdowns, the incomes of the planet’s high net worth individuals rose more last year in percentage terms than the world’s GDP. This week, consulting firm Capgemini and private wealth manager Merrill Lynch Wealth Management published their annual review of where the rich are.  The 40 page World Wealth Report 2011 shows that the wealth of the world’s millionaires grew 9.7% in 2010, while world gross domestic output rose 5.01%, according to the International Monetary Fund. The world’s rich have a high net worth of $42.7 trillion, roughly three times the size of the US economy. The population of high net worth individuals grew 8.3% to 10.9 million, with Asia-Pacific leading in terms of overall numbers of individuals entering the ranks of millionaire. The region saw a 9.7% increase in high net worth individuals wealth over the last year, with a total of 3.3 million people swelling the ranks. The population of rich people living in Asia-Pacific, led by China with over 535,000 millionaires, according to Capgemini, surpassed that of Europe in 2009. The gap widened in 2010 and is expected to widen further this year.

Paychecks as Big as Tajikistan - WHEN does big become excessive? Answers to that question come fast and furious in a recent, immensely detailed report2 in The Analyst’s Accounting Observer3, a publication of R. G. Associates, an independent research firm in Baltimore. Jack Ciesielski, the firm’s president, and his colleague Melissa Herboldsheimer have examined proxy statements and financial filings for the companies in the Standard & Poor’s 500-stock index. In a report titled “S.& P. 500 Executive Pay: Bigger Than ...Whatever You Think It Is,” they compare senior executives’ pay with other corporate costs and measures.  Let’s begin with the view from 30,000 feet. Total executive pay increased by 13.9 percent in 2010 among the 483 companies where data was available for the analysis. The total pay for those companies’ 2,591 named executives, before taxes, was $14.3 billion.  That’s some pile of pay, right? But Mr. Ciesielski puts it into perspective by noting that the total is almost equal to the gross domestic product of Tajikistan, which has a population of more than 7 million. Warming to his subject, Mr. Ciesielski also determined that 158 companies paid more in cash compensation to their top guys and gals last year than they paid in audit fees to their accounting firms. Thirty-two companies paid their top executives more in 2010 than they paid in cash income taxes.

Why the rich want to get richer - In 1981, the economist Sherwin Rosen wrote a paper titled "The Economics of Superstars." What Rosen correctly saw was that the globalizing world would vastly enhance the incomes of the few who could move from playing on a national stage to playing on an international stage. The economics of superstars is real, and it's certainly been an accelerant for CEO pay. But it doesn't explain the phenomenon that Peter Whoriskey nicely gets at in this article --something I will call the the economics of starters.  Whoriskey's article suggests that the social norms are breaking down. His article contrasts Kenneth Douglas, a CEO in the 1970s who repeatedly refused raises because they'd be bad for employee morale, to his successor, who makes 10 times as much, belongs to four separate golf clubs and jets around on a private plane. But perhaps we don't have to choose between social norms and economic forces. After all, society often adopts new norms in response to new economic realities. And I suspect that's what's happened here, too.

Some Stats on Income Inequality - The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. Income inequality has been on the rise for decades in several nations, including the United Kingdom, China and India, but it has been most pronounced in the United States, economists say. In 1975, for example, the top 0.1 percent of earners garnered about 2.5 percent of the nation’s income, including capital gains, according to data collected by University of California economist Emmanuel Saez. By 2008, that share had quadrupled and stood at 10.4 percent. The phenomenon is even more pronounced at even higher levels of income. The share of the income commanded by the top 0.01 percent rose from 0.85 percent to 5.03 percent over that period. For the 15,000 families in that group, average income now stands at $27 million.

An Unfair Burden - NYT Editorial. For all of the economic hardship of the last several years, there was reason to hope that the nation could avoid a crushing increase in the number of Americans living in poverty. That hope is fading fast.  In 2008, amid a deepening recession, a Census Bureau measure showed that the number of poor Americans rose by 1.7 million to nearly 47.5 million. In 2009, thanks in large part to the Obama stimulus, the rise in poverty was halted — a significant accomplishment at a time of worsening unemployment. When data for 2010 are released in the fall, poverty is expected to have stayed in check because the stimulus, including aid to states and bolstered unemployment benefits, was still in effect last year.  This year and next are a different story. The stimulus is waning and Republicans are targeting poverty-fighting programs for deep cuts. Obama officials have said that low-income programs will not be automatically cut to fit a preconceived target from the debt-limit talks, but there is no guarantee they will stick to that position.  Exempting low-income programs has been a major feature of deficit deals going back to 1985. Both sides should publicly commit to that now, and take steps to strengthen the safety net. The alternative is unconscionable harm:

In the Crosshairs - The National Labor Relations Board (NLRB) was a barely-noticed federal agency until recently. Now, it’s mentioned in Republican presidential debates and is the object of heated political attacks. Why? The NLRB is in the political crosshairs of many on the right because it enforces workers’ rights, and has for more than 75 years. These rights have been under assault in state legislatures, by governors, and now the right has turned its sights on the NLRB. Governors have authority over state employees, so their efforts to repeal collective-bargaining rights have necessarily focused on teachers, police officers, fire fighters and other state employees. In Wisconsin, Gov. Scott Walker forced through the legislature a bill that will make it much harder for public employees to unionize. In New Jersey, Gov. Chris Christie has sharply criticized teachers who exercise their right to have a say in the educational process. In Michigan, Gov. Rick Snyder gave unelected financial “managers” uncontested power to cancel public employee union contracts. Now the attack is expanding to the private sector--and the NLRB.

Number of unemployed teens reaches record high; future bleak - Teens looking for jobs this summer face one of the toughest job markets in 60 years as they compete for low-paying positions against overqualified and out-of-work adults. And the lack of work doesn't just mean no pocket change for dinner and a movie - it could have lasting impacts on teens and their communities, experts say. From delivering pizzas to flipping burgers, job-hungry adults are bringing years of work experience to entry-level positions historically filled by teens. "Because of the recession, many of the older workers are having to step down in position," said William Even, a labor economist at Miami University in Ohio. The picture is even worse for California teens. The state ranks third in the country in unemployed teen job-seekers, with 34.1 percent. That's more than double what it was in 2000 - and well above the national average of 24.2 percent.

America, land of the free to go hungry - As unfortunate as our current age of austerity is claimed to be, legislators at both the federal and state levels seem to relish the opportunity it has provided them to dismantle the last vestiges of the social safety net. If the economic crisis taught us anything, after all, it is that there is too much government regulation on Wall Street, and too many government safeguards for those most in need, right? With the latest set of proposals, "belt tightening" will have a very literal meaning for millions of Americans as Republicans in Congress have now proposed cutting and radically restructuring the Supplemental Nutrition Assistance Programme (Snap) – the programme more commonly known as food stamps – despite record numbers of people presently on the rolls. Without question, these cuts and changes would prove devastating for many of those to whom food stamps represent a last line of defence against hunger.

‘Scrap Yards Are the New Pawn Shops’ - Take one helping of an economy wrecked by rampant greed, reckless speculation, and failed policies, and combine that with financial and other markets distorted by the same toxic brew, and what do you get? Developments like these:

  • "Antioch Copper Wire Thieves Reach New High – Or Low" (KCBS) – Just days after Pacific Gas and Electric lamented the ongoing and widespread theft of copper wire from its Antioch power poles, the utility is now revealing that a particularly brazen thief – or thieves – stole an entire transformer from a power pole. This is in addition to the knocking down of an estimated 300 power poles, stripping them of their lucrative copper wiring.
  • "Thieves Steal 4-Thousand Dollars in Storm Drain Covers" (WINK)-Thousands of dollars of your taxpayer dollars gone down the drain. That's after thieves stole at least 10 storm drain covers from various Lee County locations. Metal drains, grates, and covers the Florida Department of Transportation says at one time, they've all been stolen from swales and retention ponds in Lee County.
  • "Train Derails After Thieves Steal Tracks" (Gawker)— A train derailed in Taunton, Massachusetts yesterday after thieves apparently used a blowtorch to steal two 8-foot, 900-lb chunks of solid steel track. Luckily, the train was moving slowly when the conductor hit the brakes, so no one was injured. Apparently scrap yards are the new pawn shops; metal theft the more desperate version of cat burglary. The thieves made off with one of tracks, and abandoned the second one in a field.
  • (more)

The right’s new fetish? Send the unemployed, welfare recipients, parolees into the fields - Talking up Texas, with its low-wage jobs boom… touting a survey that Americans will work for as little as a quarter … gutting unions and now this: the right wants to see more Americans laboring in the fields.  Not Americans like them, of course. The “undesirable” kind: those who happen to be unemployed, receiving some form of welfare, or who have committed crimes. Americans love their cheap produce, and somebody’s got to pick it. So the country needs a readily available, large supply of cheap labor. Where to get it? Take this story, clipped by Politico today: Georgia, which passed an Arizona-style immigration bill in April that is due to take effect next month, has seen thousands of undocumented immigrants flee the state. A state survey released last week found 11,080 vacant positions on state farms that needed to be filled to avoid losing crops.At the same time as the survey’s release, Deal, a first-term Republican, announced a program to link the state’s 100,000 probationers with farmers looking to fill positions, the vast majority of which pay less than $15 per hour.

Source of Missing Jobs in America Found: Forced Laborers - With unemployment at a near historic high in the United States, could you imagine any American company bringing in foreign workers to work for them below the minimum wage and with no benefits? Most people would say no. But can you imagine those same Americans forcing foreign workers to stay here, with no pay, and constant abuse? That is actually happening in this country today. Forced labor is a real phenomenon in the United States agriculture business. Without awareness and investigation into where our supplies come from and who businesses are hiring, the American people become unwitting complicit supporters of labor trafficking

Many Cities Face a Long Wait for Jobs to Return - According to a report to be released Monday, nearly 50 metropolitan regions — or more than one out of seven — are unlikely to bring back all the jobs lost in the recession1 until after 2020. Among those areas are Cleveland and Dayton, Ohio; Detroit; Reno, Nev.; and Atlantic City, according to the report commissioned by the United States Conference of Mayors.  Detroit, which lost 323,400 jobs during the recession, and Reno, which lost 36,000 jobs, are not expected to regain all of those positions until after 2021. With job creation having slowed to a crawl and the housing market depressed by foreclosures and falling prices, the economy is struggling to put 13.9 million unemployed Americans back to work. According to the mayors’ report, which was compiled by IHS Global Insight, the nation’s 363 metropolitan statistical areas tracked by the Labor Department will generate enough jobs to get back to only the prerecession peak of employment in the first half of 2014, a dreary forecast that poses an increasing political challenge to the Obama administration. The areas lost 7.3 million total jobs during the recession from a peak of 118.3 million in the first quarter of 2008.

In Many Cities, Jobs Recovery Could be a Decade Away - Remember when we used to talk about a V-shaped recovery. Yeah not so much. A new economic report commissioned by the U.S. Conference of Mayors, which is meeting this week, predicts that at least 50 metro areas, or about one-in-seven cities, in this country won't see a return to pre-recession employment levels until 2020. Among the cities that could be the biggest laggards are a number of ones in Ohio - Cleveland, Dayton, Toledo - Reno and Atlantic City. Those cities may not see a full jobs recovery until 2021 or beyond. A number of cities in Michigan, including Detroit, face a tough road back as well.  The mayors' analysis predicts that of the 363 metro areas in the report 75 will still have double-digit rates of unemployment by the end of the this year. Overall, IHS put the unemployment rate at 8.6% at the end of 2011, and says that gauge won't go below 8% until sometime in 2013. Unsurprisingly, given the group, the report also makes the case that cities are the most powerful engines of jobs growth in the country.

State workers picket, protest in face of thousands of layoffs - Public employees held rallies across the state Monday to protest Gov. Andrew Cuomo's plans to move forward with 9,800 layoffs starting next month. The governor has said the layoffs will begin July 15 unless unions agree to $450 million in concessions. Many union contracts expired April 1, but the sides have yet to agree on new ones. Layoff notices are expected to start going out Friday. Union leaders had harsh words for Cuomo, a Democrat in his first year in office. The governor has made "outrageous" demands and his negotiating team hasn't met with the Public Employees Federation in a month, said Kenneth Brynien, the union president, during a rally held outside the Capitol. "This is about the lack of respect," he said as hundreds of protesters blew whistles and rattled noisemakers. "The governor does not respect the state workforce. The governor does not respect teachers. The governor does not respect the work that we all do, and he does not respect the citizens that we all serve."

Monday Map: State Revenue Volatility = Today's Monday Map shows volatility in state revenues over the past decade. The volatility score is expressed as a percentage of the top state, which is Alaska.

Matt Stoller: Who Wants Keep the War on Drugs Going AND Put You in Debtor’s Prison? -- More than a third of all states allow debtors “who can’t or won’t pay their debts” to be jailed.  In 2010, according to the Wall Street Journal, judges have issued 5,000 such warrants.  What is behind the increased pressure to incarcerate people with debts?  Is it a desire to force debt payment?  Or is it part of a new structure where incarceration is becoming increasingly the default tool to address any and all social problems?Consider a different example that has nothing to do with debts.  Earlier this year, a Pennsylvania judge was convicted of racketeering, of taking bribes from parties of interest in his cases.  It was a fairly routine case of bribery, with one significant exception.  The party making the payoffs was a builder and operator of youth prisons, and the judge was rewarding him by sending lots of kids to his prisons. Welcome to the for-profit prison industry.  It’s an industry that wants people in jail, because jail is their product.  And they have shareholder expectations to meet.

Cato: Privatization Deals Are “Fraught with Peril” - Cato’s Roger Pilon, who according to his bio held “five senior posts in the Reagan administration,” responded to my piece on infrastructure with an interesting sentiment: agreement. Stoller does go on to criticize much of the “privatization” that’s taken place since – starting with Fannie Mae and Freddie Mac. He’s right there: These “private-public partnerships” are fraught with peril, not least by giving privatization a bad name, something he doesn’t consider. I’m pleased that Pilon shares my skepticism towards privatization deals. Since Fannie worked pretty well when it was a fully public agency, I’m not inclined to care as he does about the PR value of privatization, but I will take agreement on the substance where I can get it. In fact, I’ll return the favor, and showcase another area of agreement between us. The idea of “public goods” is not meaningless, but the definition has to be strict, as economists know, and the means for privatizing ersatz “public goods” have to be clean. Given the vast public sector before us, we’ve got years of privatization ahead. Let’s hope it’s done right.

How to prevent misguided privatizations - The problem with talking about federal infrastructure expenditures as “investments” is that someone like Dick Durbin is likely to take the term literally. He’s now introduced legislation which says that any time a state or city wants to privatize a transportation asset, it has to repay the federal government first. So if the government sunk a few hundred million dollars into a highway project, for instance, and then the state decided it wanted to sell off the right to collect tolls on that highway, then the toll operator or the state would first have to repay all the money that the feds spent. Durbin explained to HuffPo’s Dave Jamieson what he was worried about: As states and cities across the country face grim budgets, more and more are looking to stem their shortfalls by leasing existing assets, such as roads, lotteries or government buildings. The City of Harrisburg, Pa., may soon lease its parking meters to a private investors, as Chicago has already done for a 75-year period starting in 2008. Durbin remarked that he’s already watched the cost of parking soar in Chicago since that city’s deal was inked.

State Lawmakers Racing to Close Budget Gaps Across U.S. as Deadlines Loom - Lawmakers from Boston to Sacramento are racing to cobble together spending plans in at least nine U.S. states with just a week left before the fiscal year begins. Minnesota is bracing for a government shutdown that may idle more than 36,000 workers because Governor Mark Dayton, a Democrat, remains at odds with the Republican-led Legislature over closing a $5 billion deficit. California lawmakers have forfeited their pay after missing a June 15 deadline. New Jersey Democrats and Governor Chris Christie, a Republican, appear headed to an 11th-hour showdown over alternative spending plans. The last-minute tussles cap a struggle by states to close gaps estimated to have totaled $103 billion this year, according to the Center on Budget and Policy Priorities. It’s the fourth- straight year states have grappled with fiscal fallout from the longest recession since the Great Depression, this time without extra federal aid they’ve received since 2009.

States look to Internet taxes to close budget gaps -- State governments across the country are laying off teachers, closing public libraries and parks, and reducing health care services, but there is one place they could get $23 billion a year if they could only agree how to do it: Internet retailers such as That's enough to pay for the salaries of more than 46,000 teachers, according to the U.S. Bureau of Labor Statistics. In California, the amount of uncollected taxes from Amazon sales alone is roughly the same amount cut from child welfare services in the current state budget.But collecting those taxes from major online retailers is difficult. Internet retailers are required to collect sales tax only when they sell to customers living in a state where they have a physical presence, such as a store or office. When consumers order from out-of-state retailers, they are required under state law to pay the tax. But it's difficult to enforce and rarely happens. That means under the current system the seller is absolved of responsibility, buyers save 3 percent to 9 percent because they rarely volunteer to pay the sales tax, and the state loses revenue

If state shuts, all could pay for idled Minnesota workers - A Minnesota state government shutdown could have a lasting effect on the finances of businesses that contract with the state. That’s because the layoffs they make now could add up to higher unemployment insurance taxes in the future. Even employers that do not lay off workers will pay extra because a shutdown lasting more than a couple of weeks would extend the amount of time it takes the state to dig out of a more than $400 million hole in its unemployment insurance fund. Every private employer in Minnesota pays a surcharge in unemployment insurance payroll taxes as long as there is a deficit in the fund. A typical business with 40 workers, for example, pays anywhere from $125 to $2,225 extra per year, depending on the company’s recent layoff history.

Brown Vetoes California Budget Without Tax Extension - California Governor Jerry Brown vetoed a budget lacking the tax extensions he sought less than 24 hours after it was passed by the Democrat-controlled Legislature, continuing a stalemate over a $10 billion deficit. Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks and accounting tricks, said the budget sent to him yesterday used legally suspect techniques to paper over the shortfall. “The budget I have received is not a balanced solution,” Brown said today in a statement. “It continues big deficits for years to come and adds billions of dollars of new debt. It also contains legally questionable maneuvers, costly borrowing and unrealistic savings. Finally, it is not financeable and therefore will not allow us to meet our obligations.”The veto means California, the biggest issuer of municipal debt in the U.S., faces the start of its fiscal year July 1 without a budget that would let the state borrow from Wall Street to pay bills. Democrats, who don’t command enough votes to override Brown’s veto, said it’s now up to Brown to find a compromise with Republicans who oppose his tax plan.

Brown Pledges to Seek Republican Tax Votes After Vetoing California Budget - California Governor Jerry Brown, who failed to win Republican support of tax extensions in six months of negotiations, said he’d “move heaven and earth” in another attempt after vetoing a budget lacking the provision. Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks, didn’t say how he’d get the Republican backing needed to pass his plan. His budget veto was the first in state history. “I’m going to do everything I can, I’ll move heaven and earth, to get those votes,” Brown told reporters yesterday in Los Angeles. Brown wants lawmakers to bridge the deficit by extending tax and fee increases that are set to expire June 30, to avert deeper spending cuts to schools and public safety. The governor needs to persuade at least two Republicans in each legislative chamber to back his plan before it can pass. Without a budget by July 1, Controller John Chiang can’t pay lawmakers or the more than 1,000 legislative workers and gubernatorial appointees. They would get any money owed once the spending plan is signed

No Pay for California Legislators Due to Late Budget, Controller Rules - As we noted last week, a rarity happened in that the Legislature passed a budget on-time but saw it vetoed by Governor Jerry Brown (D). If the Governor had signed it, it would have been just the fifth budget in 19 years to have been passed prior to the beginning of the fiscal year on July 1. Instead, Brown rejected the budget as being too gimmick-ridden, and California will likely see the start of another fiscal year without a budget. California voters are familiar with their elected officials' inability to get a budget enacted on time. In 2010, they approved Proposition 25, which:

  • Lowered the requirements to pass a budget from a two-thirds vote to a simple majority, so long as as no tax increases are involved (in which case, two-thirds is still required); and
  • If a budget is not passed by June 15, state legislators forfeit their pay until it is passed.

California Lawmakers Lose Pay Over Budget, Controller Says -- California lawmakers must forfeit their pay for failing to send a balanced budget to Governor Jerry Brown, the controller said. The $89.8 billion spending plan that the Democrat-run Legislature passed last week was short $1.85 billion of revenue needed to balance, primarily in terms of school funding, Controller John Chiang said today in a statement. “Careful review of the recently passed budget found components that were miscalculated, miscounted or unfinished,” Chiang said. “The numbers simply did not add up, and the Legislature will forfeit their pay until a balanced budget is sent to the governor.” Brown, a 73-year-old Democrat, and lawmakers are at an impasse over how to bridge a $10 billion deficit. Without a budget, the biggest issuer of municipal debt in the U.S. is unable to borrow on Wall Street to pay bills when the fiscal year starts July 1.

S&P says California credit rating at "crossroad" (Reuters) - California's credit rating is at a "crossroad," Standard & Poor's Ratings Services said on Tuesday, noting concerns about the state's cash and budget politics as the new fiscal year approaches.The rating agency is particularly concerned about how the state's testy budget politics could impede its ability to issue short-term debt.S&P said in a report that it sees California's 'A-/Negative' rating at a "crossroad ... In our view, the budget process is significant in California's credit profile because if a budget is not adopted in time for the state to issue its revenue anticipation notes (RANs) before its cash runs low, the state's basic operating liquidity can become inadequate."S&P added that "beyond near-term financial liquidity, we believe budget politics in California already impede the state's long-term credit quality as well."Democrats who control California's legislature last Wednesday approved a budget to close a deficit of about $10 billion on their own. The next day Governor Jerry Brown, a Democrat, vetoed it, criticizing its "legally questionable maneuvers, costly borrowing and unrealistic savings."

$11 billion in state service cuts apply July 1 - Millions of Californians will see smaller aid checks, fewer services and higher costs as painful budget cuts ripple across every corner of the state in the coming weeks. The steep reductions were approved by Gov. Jerry Brown and lawmakers in March as part of their bid to get a head start on taming a $25.4 billion deficit in time for the start of the fiscal year July 1.Three months later, those actions have been overshadowed by the latest impasse over how to close the remaining gap of nearly $10 billion. But many of the cuts approved earlier are just beginning to take effect now. Donna Pomerantz says she can give you at least a thousand reasons why the Legislature should resist scaling back even more. That's how many sight-impaired members she represents as president of the California Council of the Blind.

San Francisco Superior Court preparing for ‘unprecedented’ layoffs and court closures - The California legislature’s latest budget, though vetoed Thursday by Gov. Jerry Brown, is forcing San Francisco Superior Court officials to prepare to lay off 41 percent of court staff and close 25 courtrooms, the court announced. Presiding Judge Katherine Feinstein said in a statement that while Brown’s veto was “good news,” the uncertainty about the budget “requires us to continue planning for unprecedented layoffs and courtroom closures.” The proposal to cut $150 million from the state’s judicial branch, in addition to a $200 million cut approved last year, increases the San Francisco Superior Court’s deficit from $8.03 million to $13.75 million, according to Feinstein. With the state budget in “limbo,” the court is planning to issues layoff notices by mid-July, effective in mid-August. The current budget would require the dismissal of 200 of its 484 employees, and the closure of 25 courtrooms, including civil, criminal, probate, juvenile and family law departments, according to the court.

California's Budget Crisis: Kabuki Without End - WHAT a lot of history California has been making this month. For the first time since 1933, the (Democrat-controlled) state legislature has the power to enact a budget with a simple majority, thanks to a ballot measure voters approved last year. So it passed a budget on June 15th, meeting the constitutional deadline—also for the first time in years. But the next day Governor Jerry Brown, himself a Democrat, vetoed that budget—apparently the first such veto in California’s history. The budget was not balanced, he said, and contained “legally questionable manoeuvres”.  His fellow Democrats scolded him. Mr Brown scolded them back, and the Republicans to boot. The Republicans were already scolding everybody, and saw no need to stop. Joining this free for all, the state’s independently elected state controller, John Chiang, decided to stop paying legislators. The new budget rules require withholding salaries from legislators for every day that a budget is late, he said. But our budget was not late, the legislators objected. Your budget had gimmicks and was not even balanced, Mr Chiang told them. He will get sued for his pains, it goes without saying.

U.S. mayors find few recovery signs as cutbacks pose new risks - Little Rock, Ark., has stopped replacing aging police cars. Mesa, Ariz., is losing $5 million a year from thousands of vacant homes that aren’t paying utility bills. Providence closed schools, fired teachers and may cut almost a fifth of its police force. “Even with all that, we’re still looking at a huge tax increase,” said Providence Mayor Angel Taveras, who proposed a $15 million boost in property levies. “Mayors are having to make difficult decisions. They are making them in Boston, New York, Newark, Detroit, all across the country.” U.S. mayors gathered in Baltimore for their annual meeting this weekend say they are being squeezed by rising costs, tax collections below their peak and cuts from states and the federal government that threaten their nascent financial stability. While state governments are showing signs of emerging from the fiscal crisis caused by the recession, cities are still waiting for recovery, the mayors say.

Government layoffs slow US cities' recoveries-report (Reuters) - The layoffs of thousands of government workers may threaten the already slow-motion economic recovery in many U.S. metropolitan areas, according to a report released on Wednesday by the Brookings Institution. "Job growth, though occurring in more metropolitan areas than in the past, was sluggish," the think tank said. "Those that suffered the most, as well as those with the weakest economic recoveries, typically lost government jobs." Since the recession began in 2007, 19 out of the 20 metropolitan areas with the strongest economies gained government jobs, according to the report which focused on the first quarter of the year. Conversely, 13 of the lowest performing 20 areas lost government jobs. Looking at the 100 metropolitan areas combined, Brookings said total employment rebounded by 0.8 percent after hitting its low point in the recession. But local government employment fell 1.2 percent and state employment dropped 0.2 percent, "reflecting the impact of reduced local and state revenues."

High technology, not low taxes, may drive states' economic growth - High-tech training may trump tax breaks for creating more jobs and improving a state's economy, according to a team of economists.  "We found that lower state taxes were not statistically associated with a state's economic performance," said Stephan Goetz, professor of agricultural economics and regional economics, Penn State. "The tax climate was not linked to either growth or income distribution."  Goetz, who serves as director of the Northeast Regional Center for Rural Development, said states that favor low taxes do not necessarily spend funds efficiently. They may skimp on funding needed public services like road maintenance and education. Those costs are often transferred to businesses directly or become obstacles for businesses seeking to attract qualified workers to the state.  "It's essentially a case of you get what you pay for," Goetz said. "You can't attract businesses if you can't provide needed public services."

Report claims Cook governments’ debt at $108 billion - A report from Cook County Treasurer Maria Pappas claims taxpayers countywide are on the hook for more than $108 billion in debt accrued by various government agencies, including more than $25 billion in unfunded public pension liabilities.The report shows that only a quarter of the county’s more than 500 taxing bodies are funding pension plans at 80 percent or more, an amount considered “healthy” by federal standards. “It’s like if I were surgeon general, I’d say that 75 percent of our governments are morbidly obese,” Pappas said. “I don’t think there’s any one cure for the debt problem, just like I don’t think there’s one cure for obesity."

Every Chicago household's share of local govt. debt: $63525 - Calling local government debt “staggering,” Cook County Treasurer Maria Pappas announced Tuesday that the $108 billion debt tab across various governing bodies in the county translates to $63,525 per Chicago household and nearly $33,000 per suburban household. The data, collected thanks to a beefed up county ordinance on debt disclosure, includes a first-time detailed look at pension liabilities for Cook County municipalities and taxing districts reported, which total more than $50 billion. The unfunded pension liabilities add up to $25 billion — nearly a quarter of the overall debt countywide. “We knew that debt and unfunded pension obligations were serious problems at the state and federal level and assumed that a similar pattern would follow at the local level. But, quite frankly, I was stunned by the depth of the crisis for local governments,” Pappas said in a statement on the Treasurer’s website.

Illinois Legislators Hint that Tax Increases Are Driving Away Jobs - In January, Illinois legislators approved raising their individual income tax rate from 3% to 5%, and raised the corporate income tax rate from 7.3% to 9.5%, retroactive to January 1. (Some state officials mislead reporters by stating that their corporate tax went from 4.8% to 7.0%, by not including a separate 2.5% tax on corporate income.) While the proposal was under debate, we noted that the increase would result in Illinois having one of the highest corporate income taxes in the industrialized world, and would hurt their score in our annual State Business Tax Climate Index. While the Progressive States Network as recently as yesterday applauded Illinois's "responsible approach," everyone else seems to be having second thoughts after experiencing the effects of the tax increases. Yesterday, House Speaker Michael Madigan (D) and Senate President John Cullerton (D) announced a legislative review of the state's business tax structure:

Illinois Stiffs Vendors From Mortuary to IBM as $4 Billion Debt Piles Up - In Illinois, you’re never too big or too small to get stiffed by the state, which is $4 billion behind in its bills. International Business Machines Inc. is owed $1.1 million. Office Depot Inc. (ODP) is waiting for a $660,955 check. And the 17th Street Bar & Grill in Sparta is due $340.52. They are among at least 8,000 vendors including businesses, charities and government agencies waiting months for the state to pay up. At least 114 companies are due more than $1 million, according to documents from Illinois Comptroller Judy Baar Topinka. While states periodically fall behind in paying Medicaid providers or, in the case of California, rely on bank loans and IOUs, the Illinois backlog has been growing for three years. It’s forcing some vendors to fire workers, cut services and, if they can, obtain loans and lines of credit to keep their businesses going while the state takes months to pay.

Police layoffs in high-crime cities cost far more than they save - Tight budgets are forcing cities to make cuts that may do more harm than good.  A cost-benefit analysis published today by the Economic Policy Institute shows there is more to cost-cutting than meets the eye.  Cuts to the police force of five high-crime cities in New Jersey actually cost 12.9 times more than the budgetary savings of eliminating the officers, when the cost of rising crime is factored into the equation.  False Savings, by Rutgers University professor Dr. Jeffrey Keefe, measures the cost of crime and compares it to the budget savings of police layoffs and finds that in these five high-crime cities (Camden, Irvington, Trenton, Newark, and Paterson), cutting police officers is more costly than keeping them. “While police layoffs are an understandable action for a city with limited fiscal options, from a social and economic perspective, the layoffs are irrational,” said Keefe.

City Government demands all keys to properties belonging to Cedar Falls residents YouTube - Ordinance #2740 (An unfunded city-wide mandate) was passed with a resounding 6 to 1 vote, and it allows for the citizens of Cedar Falls to forcefully give the government keys to their comercial properties through universal 'lock boxes'. The intent of the program is to provide increased safety and protection to personal, private property which include businesses, apartments and some rental houses-- which by the way-- comes at the expense of furthering wayward erosion of fundamental constitutional rights.  **UPDATE** The plights and concerns of the citizens have fallen on deaf ears as the City of Cedar Falls has voted to pass the final ruling on mandatory lock boxes, again, with a 6-1 decision. Read more at:

Harrisburg Hoping God Can Help Balance the Books - If all the brightest minds in Harrisburg’s government can’t solve the city’s financial problems, maybe God can. That seems to be the thinking in Pennsylvania’s capital city, where Mayor Linda Thompson and a host of other religious leaders are about to embark on a three-day fast and prayer campaign to cure the city’s daunting money woes. “The City of Harrisburg is facing a direct, immediate and grave financial crisis,” the DCED wrote in a massive 422-page analysis of the government’s perilous condition. “The financial crisis is so severe that the City teeters uncomfortably on the verge of bankruptcy that could be triggered at any moment by parties outside its control.”

State Lawmakers Accelerate To Take Over Harrisburg -- State lawmakers are moving faster than expected on legislation to take control of spending in the city of Harrisburg. A bill would appoint a state and county board to oversee the day-to-day fiscal operations of a city more than $300 million in debt. Sen. Jeff Piccola, R-15th District, said City Council and Mayor Linda Thompson would still control the city if it's taken over by the state. On Wednesday, a bill to appoint a state and county board to oversee the operation of the city passed the Senate. Lawmakers said the state doesn’t want to take over the city’s government, but don’t see bankruptcy as a viable option either.

Large-scale early education linked to higher living standards and crime prevention 25 years later: "High-quality early education has a strong, positive impact well into adulthood, according to research led by Arthur Reynolds, co-director of the Human Capital Research Collaborative and professor of child development, and Judy Temple, a professor in the Humphrey School of Public Affairs at the University of Minnesota. The study is the longest follow-up ever of an established large-scale early childhood program. In the study published June 9 in the journal Science, Reynolds and Temple (with co-authors Suh-Ruu Ou, Irma Arteaga, and Barry White) report on more than 1,400 individuals whose well-being has been tracked for as much as 25 years. Those who had participated in an early childhood program beginning at age 3 showed higher levels of educational attainment, socioeconomic status, job skills, and health insurance coverage as well as lower rates of substance abuse, felony arrest, and incarceration than those who received the usual early childhood services.

Will Business Buy In to Early-Childhood Education? - Economists disagree about a lot of things, but many agree that public investments in early childhood education pay off. The social benefits far exceed the social costs. A recently released study of 1,000 poor children who benefited from Chicago’s Child-Parent Center Education Program (which includes intensive preschool, parent training and support for students through third grade), suggests that every dollar spent on the program yielded nearly $11 to society, including increased tax revenue and reduced spending on child welfare, special education and grade retention. Many other detailed cost-benefit analyses, ably summarized in Timothy Bartik’s new book, “Investing in Kids,” document a high social rate of return, with the potential to encourage local economic development as well as improve productive skills. Enthusiasm crosses the political spectrum. James Heckman of the University of Chicago, a Nobel laureate who is hardly a big advocate of government spending, is famously insistent on the benefits of early childhood education. Ben Bernanke, the chairman of the Federal Reserve Board, is another strong supporter.

The State of the States in Developmental Disabilities: It’s Not Good, Especially in Red States - Last Tuesday I hit the “send” button on a big grant concerned with intellectual and developmental disability (I/DD) policy issues. Last Wednesday, the bible of the field, State of the States in Developmental Disabilities, appeared in my mailbox. Such is life. State of the States is a periodic compendium of state policies, service patterns, and spending across the country. (It’s a telling commentary on the separation between disability policy and health policy wonkdom that few among the latter group even know that State of the States exists.) The 2011 edition extends previously-available data from 2006 to 2009. As such, it provides a sobering window into the human impact of the current recession. I/DD services serve a highly-valued, highly-vulnerable population. Yet these services are also quite costly, particularly to states and localities having difficulty carrying the load. States’ different approaches to preserving or to cutting these services in hard fiscal times thus provides a real signal of states’ larger values and vision of government.

Number of the Week: U.S. Teachers’ Hours Among World’s Longest - 1,097:

Average number of hours U.S. teachers spend per year on instruction. Students across the U.S. are enjoying or getting ready for summer vacation, but teachers may be looking forward to the break even more. American teachers are the most productive among major developed countries, according to Organization for Economic Cooperation and Development data from 2008 — the most recent available. Among 27 member nations tracked by the OECD, U.S. primary-school educators spent 1,097 hours a year teaching despite only spending 36 weeks a year in the classroom — among the lowest among the countries tracked. That was more than 100 hours more than New Zealand, in second place at 985 hours, despite students in that country going to school for 39 weeks. The OECD average is 786 hours. And that’s just the time teachers spend on instruction.

Stop Blaming Teachers for Poor Student Performance - The politics around blaming teachers is simple. If you're not going to go after the legitimate targets for educational 'failures,' then look for scapegoats. This approach is clearly bipartisan, as President Obama, the Democrat, chants a similar mantra to the likes of Republican Gov. Scott Walker of Wisconsin — that all should share the sacrifices. In education, shifting the responsibility almost entirely onto the professional teaching class is their way of sharing sacrifices. Our national focus on education is to turn it into a business with no input from its workers. Teachers are laborers, and students are the commodities. But consider this: The state with the highest state test scores, Massachusetts, is the most unionized state for teachers. Conversely, South Carolina, the most anti-union state in the country, shows the worst performance among its students but nary a peep from the 'reformers.' Yet it is somehow the unions' fault that students aren't performing well? Who is manufacturing failed 'products?'

Detroit Schools budget to cut $230M in expenses - Expenses in the financially struggling Detroit Public Schools would be cut by about $230 million and 853 non-teaching jobs axed under a $1.2 billion budget proposed by the district's state-appointed emergency financial manager. A draft of the budget was released Thursday. It also calls for $200 million to be lopped off the district's $327 million budget deficit through the sale of long-term bonds. Another $48 million in purchased and contracted service cuts also are planned. The district has about 4,400 teachers, and financial manager Roy Roberts has said most of their jobs will be spared. But across-the-board job cuts will include school administrators, clerical and professional staff, counselors, teacher aides and central office supervisors.

Layoff notices for 10K school employees - All 10,000 Detroit Public Schools employees are getting layoff notices as the financially troubled district faces continued budget problems. District spokesman Steve Wasko tells the Detroit Free Press for a story published Friday that the move will allow "maximum flexibility for staffing." Roy Roberts, the district's state-appointed emergency financial manager, is working to trim a $327 million budget deficit.The layoffs are effective July 29, the last day of summer school, and were expected. In April, the district said 5,500 teachers would get layoff notices. It isn't known how many will be recalled. The 2011-12 school year starts Sept. 6.

States Battling Over Education Budgets at Fiscal Year's End - After months of public feuding and failed negotiations, lawmakers and governors in several states remain deadlocked over how to close daunting budget shortfalls and pay for education and other services, with some Democrats calling for tax hikes and Republicans countering with demands for deep cuts to state government. The ideological standoffs, which mirror the partisan split at the federal level, have left school districts in some states with only a vague sense of how much money will be available to them next year. In at least one state, Minnesota, the budget standstill has created the possibility of a state government shutdown, with uncertain consequences for schools. With the fiscal year coming to a close on June 30 in the majority of states, about 15 have yet to approve budgets for the coming year or the biennium

341 layoffs ahead for St. Paul schools - The St. Paul school board sliced $24.6 million from its 2011-2012 budget Tuesday by laying off 341 employees and shuttering several departments. The layoffs include 167 employees hired or kept on during the past two years with $60 million in federal stimulus money that runs out this year. "We're laying off some exceptionally good staff," said board member Anne Carroll. "This is horrible and I'm sorry. I'm sorry we don't have the budget we need to support our families. This has been exceptionally messy this year because of the Legislature's barrier to finalize their own budget. This could get worse. It's not done yet." The district's deficit could change depending on what Gov. Mark Dayton and legislative leaders decide about the state's budget in the coming weeks.

Bridgeport Public Schools are on the Brink of Extreme and Grim Budget Cuts - Four hundred and thirty-four positions, one in five across the district, will be eliminated if the board of education adopts the budget. Among the losses would be 18 administrators, 150 teachers, more than 100 paraprofessionals (like librarians and teacher aides) and another 100 or so other employees (such as IT workers and crossing guards). Class sizes would be upped to 29 students, the highest allowed in the district's contract with the teachers union, the Bridgeport Education Association. Other programs, like sports and music would be effected. “I can't see them running a school district with the proposed cuts,” says BEA President Gary Peluchette. In the last two budget cycles, Bridgeport Public Schools received $16 million in federal stimulus dollars, money that was cut off this year. Meanwhile, expenses continue to go up, says Ramos. For example, last year, the district spent $37 million on healthcare benefits. This year, that cost jumped to $44 million.

Gov. Snyder agrees to $470 per student cut - Gov. Rick Snyder signed his first-ever budget into law yesterday. Today, Mid-Michigan school districts are worried about what it will take to balance their books after suffering tough cuts. Both Saginaw and Bay City schools need to cut millions more from their budgets after the governor agreed to a state aid cut of $470 a student. In Saginaw, the district faces a $10.6 million budget hole. Around $3.6 million of that was caused by the state's cuts to per pupil funding. In Bay City, administrators are trying to fill in a roughly $9 million budget deficit. The superintendent says about half of that is the result of less state aid in this year's budget. "Balance for them means that we've got some work to do yet,"

Green Bay teachers upset by change calling for more work hours, less planning time - More than 100 Green Bay teachers dressed in red packed the School Board meeting room on Monday to say they feel betrayed by a recent school district directive that would require them to work longer hours and lose planning time. The Green Bay School District recently sent a memo to teachers indicating they would be required to work an extra half-hour a day and would lose planning time to make room for staff and other meetings.This brought teachers — many emotional — to the School Board, saying they feel betrayed that they weren't first consulted about the changes. Many said morale among Green Bay teachers is low and expressed worry these changes could be the tip of the iceberg.

FAST! - I recently suggested a national infrastructure program to repair, insulate, and green the nation’s public schools.  As described here, this is a “dialable” concept that could go from meeting the maintenance backlog to more ambitious retrofits and technology upgrades. Now I’ve even got a name for it, Fix America’s Schools Today, or FAST.  I think it’s a smart way to get a lot of people who really need jobs back to work, fix a critical part of our institutional infrastructure, save energy costs, provide kids with a better, healthier learning environment, and do so in way that everyone can see and feel good about each morning when they drop their kids at school. If you’re not yet convinced, check out this article from one of my favorite economic journals, People, which did a pretty compelling feature on the problem.  

California district can't afford to use new $105M school - In a sign of just how deep economic and budget problems have grown in the nation's largest state, a gleaming new high school built at a cost of $105 million will sit unused for at least a year because education officials say they don't have money to operate it. Hillcrest High School in Riverside was planned to relieve crowding at a nearby school and was financed with bonds approved by voters in 2007. But Wendell Tucker, superintendent of the Alvord Unified School District, says big cuts in state funding, the main source of money for local schools, have left the inland Southern California district without the means to hire administrators, teachers and other staff needed to open the campus when the school year starts this fall.

Developing mathmatical thinking - a generational problem? -We were sent a link to a blog post by Katie Steckles for the Math/Maths Podcast a couple of weeks ago. I'm preparing for the recording of episode 52 in a few hours and I thought I would share my thoughts on the topic here. The blog post quotes another, 'The Mathematics Generation Gap'. This starts with "Profs do not know how their students were taught mathematics, what their students know, what their students don't know - and have no idea how to help their students bridge those gaps." However, the main thrust of the article is on what is called "The arithmetic gap": "profs over a certain age (and some immigrant profs) were drilled in mental math;... students under a certain age haven't been. Some implications of the arithmetic gap are familiar: profs who can't understand why students insist on using calculators; students who can't understand why their profs are so unreasonable. ..." The article goes on to talk about analogue clocks and even Google Maps as forming a difference in understanding and approach between students and their professors.

Scholarship cut for 1,400 of Florida's top students - The cost of college just went up by an unexpected $1,500 for some of Florida's top students.  Recipients of the highly competitive, merit-based Robert C. Byrd Honors Scholarship have received letters from the state this month saying the federal government is no longer funding the awards.  About 1,400 students in Florida and 28,000 nationwide received the $1,500-per-year renewable scholarship during the 2009-10 year, the most recent figure available.  "I just found out a week-and-a-half ago. I don't know how I'm going to make up the difference," "They told us so late in the year, and most of the deadlines for other scholarships have already passed."  The scholarship, named for the late U.S. senator, was cut because it duplicates other programs that provide college assistance to students, according to a budget analysis from the Education Department. Other grant, work-study and loan assistance programs are available to students, the analysis said.

Republican profs give out less egalitarian grades. So what? -A number of bloggers (for example Mark Perry, Catherine Rampell, Greg Mankiw)  have picked up Bar and Zussman's recent paper on Partisan Grading. (Downloadable here, forthcoming here) Bar and Zussman take data on student grades, student SAT scores, and professor political affiliation, and find that:...student grades are linked to the political orientation of professors: relative to their Democratic colleagues, Republican professors are associated with a less egalitarian distribution of grades and with lower gradesThere are some problems with the study - it is based on just one university, only 44 percent of professors at that university could be identified on local voter registration lists, and of those, just 27 were Republicans, so two or three curmudgeonly professors teaching large undergraduate classes could skew the results. But if control over grading is taken out of the hands of professors, it will be put into the hands of someone else. And that someone else will also have political leanings.

Dubious Research: The More Debt Students Have, The Higher Their Self Esteem - Yves Smith - We’ve already instituted the Frederic Mishkin Iceland Prize for Intellectual Integrity for special-interest-group- favoring PR masquerading as research. That suggests we need a separate category for the more mundane, bread-and-butter shilldom that is dressed up to look like serious academic work. Let’s call it the Lobsters Really Want to be Your Dinner Prize. Joe Costello pointed out to us the study that is the first recipient of this award, which he found via Yahoo News and was published in Social Science Research in May. I confess to not having read the underlying article (I’m not paying $31 to support this sort of nonsense) but the abstract is sufficiently detailed to give a sense of how barmy the framing is: Research suggests that young people have divergent perspectives on debt: some focus on credit as a necessary investment in status attainment, while others worry that readily available credit invites improvidence that can erode the self-concept as debt encumbers achievement and future consumption and increases a sense of powerlessness. We find that both education and credit-card debt increase mastery and self-esteem, supporting the hypothesis that young people experience debt as an investment in the future, and contradicting the expectation that debt used to finance current spending will lower mastery and self-esteem. Our expectation that debt effects are accentuated for those of lower- and middle-class origins but blunted for those of upper-class origins is supported.

FGCU tuition increase approved by trustees - As trustees at Florida Gulf Coast University on Tuesday approved a pay raise and bonus totaling roughly $77,000 for their president, they also voted to approve a tuition increase that will compel full-time students to pay an additional 15 percent next year. Trustees voted 8-3 to increase tuition an additional 7 percent. That’s on top of the 8 percent increase required in a budget signed by Gov. Rick Scott in May. That means students who paid $4,981.20 in tuition and fees for 30 hours of classes in the past year can expect to pay $5,532.60 for the same course load starting in the fall. FGCU is among 11 state universities either considering or already requesting a full 15 percent tuition hike ahead of a state Board of Governors meeting later this week. While the Legislature required 8 percent increases at all universities, each university has the ability to seek an additional 7 percent increase.

Florida Teachers Sue State In Pension Dispute -- Florida teachers have filed a lawsuit seeking to stop the state from requiring them to contribute 3% of their pay towards their pensions. The lawsuit, filed Monday by the Florida Education Association in Circuit Court in Tallahassee, argues that the new mandate is unconstitutional because Florida law says employees do not have to contribute toward the state retirement system. The plaintiffs in the lawsuit also include sheriff's deputies, a nurse, social workers and other public employees. They are all members of various unions. The group is seeking class action status. The teachers' union, which calls the contribution a pay cut, is also protesting the reduction of cost-of-living benefits. The Florida Police Benevolent Association joined the lawsuit.

Attorney general cites 'serious' concerns about San Jose pension proposal - San Jose Mayor Chuck Reed's proposal to declare a fiscal state of emergency and seek a ballot measure to trim employee pensions raises "serious" legal concerns, the office of California Attorney General Kamala Harris says.The attorney general's assessment was in a preliminary response to a joint letter last month questioning Reed's proposal by state Assemblymen. Reed, however, said the attorney general seemed to misinterpret the proposal. He said the city isn't attempting to use the Emergency Services Act or unilaterally alter contracts with employees, with whom the city is negotiating on the matter. Reed has said the move is needed to curb runaway pension costs, which have jumped from $63 million in 2000 to $255 million this year. They are expected to hit $400 million or more in five years.  The city has had to lay off employees, including police officers, to cover that bill, with the number of employees dropping from a high of 7,500 about a decade ago to about 5,300 today.

Tax hikes needed for U.S. pension funding -study (Reuters) - U.S. state and local governments will need to raise taxes by $1,398 per household every year for the next 30 years if they are to fully fund their pension systems, a study released on Wednesday said. The findings clash strongly with a June report by the National Conference on Public Employee Retirement Systems as well as a March report by the Pew Center on the States. The study, co-authored by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester, both of whom are finance professors, argues that states will have to cut services or raise taxes to make up funding gaps if promises made to municipal employees are to be honored. "To achieve fully funded pension systems within 30 years, contributions would have to rise today to the levels we calculate, and then continue to grow along with the economy," said Rauh. The disagreement partly stems from the varying assumptions about investment returns and the rate of economic growth.

Study: $1400 Tax Hike Needed to Fund US Pensions - U.S. state and local governments will need to raise taxes by $1,398 per household every year for the next 30 years if they are to fully fund their pension systems, a study released on Wednesday said.  The study, co-authored by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester, both of whom are finance professors, argues that states will have to cut services or raise taxes to make up funding gaps if promises made to municipal employees are to be honored.  Pension funding in U.S. cities and states has deteriorated in the wake of the 2007-2009 economic recession as investment earnings dropped, and some states, such as New Jersey and Illinois, skipped or reduced required payments.  The issue has sparked heated debates, from the streets of Wisconsin's capital, Madison, where thousands demonstrated over public employees' rights to bargain, to New Jersey, where lawmakers are expected to give final approval this week to a plan that will scale back benefits for public sector workers. 

N.J. Slashes Public-Worker Benefits - New Jersey's public workers will have to pay more for health-care benefits and will receive smaller pensions under a bill that won final approval in the state Legislature, with the support of nearly a third of Democratic lawmakers. Gov. Chris Christie, who is expected to sign the bill Monday, said the second round of cuts under his watch will bring sufficient change to the issue that has roiled private-sector workers who saw their jobs eliminated and salaries and benefits slashed during the recession. "We've accomplished on pensions and benefits what we needed to and wanted to accomplish," Mr. Christie said

U.S. Postal Service to Stop Paying Into Pension Fund - The U.S. Postal Service, facing insolvency unless it gets approval to delay a $5.5 billion payment for worker health benefits, will suspend contributions to an employee retirement account to save $800 million this year. The Postal Service will stop paying employer contributions to the defined-benefit Federal Employees Retirement System, which covers about 85 percent of career postal workers, it said today in an e-mailed statement. The $115 million payment, made every other week, will stop on June 24, the statement said. Suspending payments to the retirement account will help “conserve cash and preserve liquidity,” the statement said. The agency estimates it has overpaid the retirement account by $6.9 billion and has asked Congress to pass legislation to return that money."

Postal Workers Alarmed About Their Retirement: 'Sheer Chaos' Over Account Cut, Worker Says - A U.S. Postal Service decision to suspend employer contributions to a postal worker retirement account is causing alarm among its employees.  "It was sheer chaos on the work floor when everybody found out about it this morning," said Clarice Torrence, who has worked for the Postal Service for 32 years. "How long is this going to go on? Are they going to play catch-up?"  The Postal Service announced Wednesday it will suspend the $115 million payment it made every other week to the Office of Personnel Management's retirement system beginning June 24. Cutting the payments to the defined benefits of the Federal Employees Retirement System (FERS) is expected to save the Postal Service approximately $800 million this fiscal year.  The FERS account had about a $6.9 billion surplus, according to the Postal Service.  Torrence, a 60-year-old postal worker in New York City, said though her employer has said current or retired employees will not be affected, she is concerned. While her children have grown and left the nest, most of her co-workers still need to support their families and children in college.

AARP Takes Brave Stance on Social Security - On Friday, AARP issued a press release that contained the following statement from CEO Barry Rand: “Let me be clear — AARP is as committed as we’ve ever been to fighting to protect Social Security for today’s seniors and strengthening it for future generations.  Contrary to the misleading characterization in a recent media story, AARP has not changed its position on Social Security.” AARP’s press release was sent in response to a story published in The Wall Street Journal earlier in the day, stating that AARP was dropping its opposition to cutting Social Security benefits. The Wall Street Journal story started a media frenzy. Politicians and commentators hailed AARP’s change in position as breaking the logjam to meaningful change. Meanwhile, senior activists slammed AARP. Max Richtman, acting CEO of the National Committee to preserve Social Security and Medicare, said,  “AARP is losing the confidence of seniors around the country, and not just seniors but people of every age group. I hope the ship that he wants to steer isn’t the Titanic filled with seniors.” So what’s going on? Does AARP support changes to Social Security or not? You can glean more by reading the organization’s press release

Is Social Security an investment Ponzi scheme? - There's just one thing that's worse than having a large chunk of money taken out of your paycheck: Taking a chance you won't get it back. Workers who see Social Security deductions taken from their paychecks every pay period can't help but wonder if they'll ever see the money again. That's especially true with younger workers, whose contributions are being used to pay benefits to the swelling ranks of Baby Boomers, who are reaching retirement age or who are already retired. Making things even more troubling is the amount investors need to save in order to retire is only increasing, even as incomes are flat, or even down. With average lifespans extending and wages stagnant and unemployment rates high, saving for retirement is a bigger challenge than ever. The Social Security system is under intense pressure as its method of taking current workers' contributions to pay for current retirees is under strain. And it's that method, which often draws criticism for resembling a Ponzi scheme.

Fixing Social Security Isn’t Hard - Social Security has two obvious problems. While the system is not “broke,” as some insist, it will have only enough money to provide future retirees with about three-quarters of their promised benefits.  At the same time, it is poorly designed for the needs of a country where life expectancy and the nature of work and family have changed dramatically since Social Security was created in 1935. As a result, those who most need social insurance—single women, low-wage workers, the disabled, and the very old—get much less than they need. On the other hand, those who need benefits least get the most. If Washington policymakers could hold the twin goals of solvency and modernization in their heads at the same time, they could take a few relatively modest steps needed to reform Social Security—and enhance a key pillar of the social safety net for the most vulnerable elderly. The trick will be to get past the dissonant squabbling that passes for debate these days. Conservatives need to recognize that Social Security will remain a defined benefit program for the foreseeable future.  Liberals must overcome their fear that any change at all is the death knell for social insurance.

Raise, Don’t Save, Social Security - I cringe when Democrats talk of “saving” Social Security. We should not “save” it but raise it. Right now Social Security pays out 39 percent of the average worker’s preretirement earnings. While jaws may drop inside the Beltway, we could raise that to 50 percent. We’d still be near the bottom of the league of the world’s richest countries — but at least it would be a basement with some food and air. We have elderly people living on less than $10,000 a year. Is that what Democrats want to “save”? “But we can’t afford it!” Oh, come on: We have a federal tax rate equal to nearly 15 percent of our G.D.P. — far below the take in most wealthy countries. Let’s wake up: the biggest crisis we face is that most of us have nothing meaningful saved for retirement. A recent Harris poll found that 34 percent of Americans have nothing saved for retirement — not even a hundred bucks. In this lost decade, that percentage is sure to go up. At retirement the lucky few with a 401(k) typically have $98,000. As an annuity that’s about $600 a month — not exactly an upper-middle-class lifestyle. It’s too late for Congress to come up with some new savings plan — a new I.R.A. that grows hair, or something. There’s no time. We have to improve the one public pension program in place.

Redefining Social Security -SOCIAL SECURITY in America has always suffered from an identity crisis. On the one hand it is a forced saving and insurance programme. It was not originally intended to cover nearly all Americans, but it does now. Americans pay 12.4% of their income (up to $106,800) and receive an annuity when they retire based on 35 years’ worth of income. Most people cannot opt out of it, you get some benefit in retirement no matter how rich you are. So Social Security provides everyone some income floor in retirement. The benefit you receive is some percentage of your pre-retirement income—this is called the replacement rate. But the higher your income was, the lower your replacement rate is. There is some economic justification for both of these features. People might not value future consumption as much as they should. They don’t save enough when they are young and don't realise their mistake until it's too late. Or they know the state will not let them starve in retirement, so the forced saving element eliminates free-riders. The progressivity of the programme also makes sense. Many poor people live paycheck to paycheck just to get by, so they have no money left over to save for the future. They also need a higher replacement rate in retirement (because their income is so low to begin with) so some redistribution is probably desirable.

Millions of middle-class people could get Medicaid - President Barack Obama's health care law would let several million middle-class people get nearly free insurance meant for the poor, a twist government number crunchers say they discovered only after the complex bill was signed. The change would affect early retirees: A married couple could have an annual income of about $64,000 and still get Medicaid, said officials who make long-range cost estimates for the Health and Human Services department. After initially downplaying any concern, the Obama administration said late Tuesday it would look for a fix. Up to 3 million more people could qualify for Medicaid in 2014 as a result of the anomaly. That's because, in a major change from today, most of their Social Security benefits would no longer be counted as income for determining eligibility.

Minn. shutdown pain likely greatest at hospitals - Of all the state services that Gov. Mark Dayton has argued must be halted if the state government shuts down on July 1, the most serious potential impact stands to be the interruption of Medicaid payments to hospitals, nursing homes and other care providers that serve seniors, the disabled and other vulnerable people.  Tom Lindh, administrator of Good Shepherd Nursing Home in Rushford, said at any given time, 60 to 65 percent of about 75 residents are on Medicaid. "If it went a month or longer, it would get downright impossible. Our mission is to take care of people, not make money. But you still have to have money to pay your workers." The Dayton administration argued in court this week that the state's health care, welfare and child support services should continue in a government shutdown. But while payments to individual recipients would continue under that scenario, payments to health care providers did not make the administration's cut. The shutdown looms amid the continued failure by Dayton and Republican state lawmakers to agree on levels of spending and taxation in the state's upcoming two-year budget cycle.

Doctors, Hospitals, Poor To Feel Illinois Budget Pain - Illinois is on the verge of approving a Medicaid budget that could mean doctors and hospitals wait months to be paid and poor people have a harder time finding care while state government falls deeper into a financial hole. The budget passed by lawmakers last month promises doctors and hospitals the same pay they get now. The same number of poor Illinoisans will be entitled to virtually the same services. But the amount of money set aside for Medicaid falls about $1.2 billion short of covering all those costs. The state almost certainly will handle the gap between continuing costs and reduced money by letting more medical bills go unpaid. Checks that now go out within 30 days could sit around for 120 days before the state can afford to pay them, Gov. Pat Quinn’s office warns. In effect, the state isn’t cutting spending. It’s pushing off $1.1 billion in payments until the next budget year, to join the roughly $6 billion in overdue bills that have piled up already. The payment delays would mean financial pain for anyone who treats the poor, experts said. More doctors and dentists might choose not to see patients who depend on Medicaid. Hospitals and nursing homes would face pressure to cut staff or delay improvements. “It’s going to get ugly … I just envision this to be the worst year yet,”

Illinois racing to erase $1.8B in Medicaid bills in June - Illinois is on track to pay nearly $2 billion in Medicaid bills by the end of June. Lawmakers on Wednesday approved a plan to delay a $365 million payment into Illinois' rainy day fund, and instead use that money to pay some of the billions of dollars Illinois owes to Medicaid providers. Comptroller Judy Baar Topinka said the state is racing to maximize a federal Medicaid match that expires at the end of the month. Illinois is getting 57 cents on the dollar for qualifying Medicaid bills that it pays this month. Starting in July, that rate falls back to the normal 50 cents on the dollar. Maximizing the $365 million, Topinka said, should allow her to pay $1.85 billion in Medicaid bills by June 30. She estimates Illinois could receive an extra $90 million to $100 million from the federal government.

America, The Fraudulent Society - It is not controversial to say that Medicare & Medicaid spending is bankrupting the United States. Given that we're already broke, and with Baby Boomers retiring in droves, future bills we can't pay will only make a bad situation worse. An interesting graph published recently by the Economist caught my eye (Estimated waste in American health-care spending) America has a talent for wasting money on health care. It has devised many ingenious ways to do this. A patient may see many skilled specialists, none of whom coordinate with one another. Payment systems are unfathomably complex and highly variable. Doctors order duplicative or unnecessary tests. The country excels at treating sick people and does a horrible job keeping them from getting sick in the first place. All these problems, however, are due to a simple, structural failing: the more services a hospital provides, the more it is paid. You can easily see that unnecessary care leads the field by a wide margin, with fraud and abuse coming in a distant second. Still, I am perplexed why unnecessary care is not a form of fraud and abuse.

Not Wrong, Again -  Krugman - I’ve written recently about what should be a well-known fact: Medicare spending has risen less than premiums on private health insurance. This shouldn’t be a controversial proposition; it comes straight from the Center for Medicare and Medicaid Services health expenditure data. You can argue about why it’s happening and whether it’s sustainable, but the fact shouldn’t be up for dispute. But the usual suspects know, just know, that it can’t be true. Austin Frakt takes on one hatchet job, which relies on the also true fact that health spending outside Medicare and Medicaid has risen more slowly than Medicare spending. As Frakt points out, this number has been held down by the rising number of Americans without insurance. So the private sector has achieved “cost control” by just not providing coverage.

Wonkbook: Is Obama secretly the greatest Republican ever? - Michele Bachmann, speaking at the Republican Leadership Conference, accused the president of being insufficiently committed to socialism -- or at least to single-payer health care. “The president’s plan for senior citizens is Obamacare,” Bachmann said. “I think very likely – and I’m speculating – I think very likely what the president intends is that Medicare will go broke, and ultimately that answer will be Obamacare for senior citizens.”Even more puzzling, Bachmann had already cast a vote for the House GOP budget, which Speaker John Boehner said "transforms Medicare into a plan that's very similar to the President's own healthcare bill." That's not quite true, as the key feature of the GOP's budget isn’t the Medicare exchanges, which do mirror a core feature of the Affordable Care Act, but the vouchers that grow much more slowly than the cost of health care. Nevertheless, by Boehner's logic, Bachmann is accusing Obama of abandoning single-payer health care in favor of the Medicare reforms that Republicans support. Wouldn't this make Obama essentially the greatest Republican ever?

McKinsey Pulls Back the Curtain - Krugman - McKinsey has now released some (not all) of the details from its mystery study. True to form, the company now claims that a study touted as evidence that companies “will” drop coverage was “not predictive.” Uh-huh. So what do we learn? It was basically a poll — which is a really bad way to assess how firms will make decisions about whether or not to maintain health coverage. Such a decision is, after all, a big issue, one that won’t be taken without careful study of the numbers and consequences. A relatively casual answer to a poll probably isn’t a very good predictor of that decision. It’s pretty clear that McKinsey was trying to drum up/scout out business, and someone had the bright idea of weighing in on policy debate on the Republican side. Bad idea, and nobody should be quoting this study for that purpose.

Janitors and Executives Have the Same Pay Packages - Krugman - Of course, they don’t. But much of the argument over health care amounts to insisting that they do. Aaron Carroll catches Steve Pearlstein saying that Obamacare and Ryancare are the same thing:Democrats have been equally hysterical in attacking Ryancare as a throw-Grandma-under-the-bus scheme to balance the budget, even as they proudly defend the health reform law for everyone else.  As Carroll said, this is wrong in part because Ryancare would dismantle the much better system — Medicare — that seniors already have, while Obamacare would provide insurance to those who would not have it otherwise. But beyond that, the subsidies in the health care law are supposed to make care affordable; the vouchers in Ryancare are not, and in fact would be grossly inadequate.

Some Health-Care Consensus, if Only Accidental - WE are entering the season of polarization. With various Republicans vying to replace Barack Obama1, the president eager to keep his job, and both the House and the Senate up for grabs, candidates from both sides of the aisle will spend the next year and a half stressing their differences.  But beneath this veneer of partisanship lie a few fundamental agreements. Consider health care, which will be at the center of the political debate. Here are four aspects of the issue in which Republicans and Democrats have stumbled into consensus.

Map of the Day: Falling Life Expectancies - In lots of place in the United States, women are living shorter lives than they used to: In 737 U.S. counties out of more than 3,000, life expectancies for women declined between 1997 and 2007. For life expectancy to decline in a developed nation is rare. Setbacks on this scale have not been seen in the U.S. since the Spanish influenza epidemic of 1918, according to demographers. "There are just lots of places where things are getting worse," said Dr. Christopher Murray, director of the Institute for Health Metrics and Evaluation at the University of Washington, which conducted the research. "We're not keeping up." ....A key finding of the data is that "inequality appears to be growing in the U.S.," said Eileen Crimmins, a gerontologist at USC who also co-chaired the 2011 National Academies panel on life expectancies. "We are different than other countries." The map is below.

E. coli have rights too - Americans are fed up with the nanny state telling them how much salmonella they can get with their arsenic burger.  That’s what a shocking new Rasmussen Reports poll says. By a two-to-one margin, Americans say reducing the federal deficit is more important than inspecting the food supply. Read about Rasmussen’s poll.   Why is the result shocking? Because 57% of the people are more fearful of the imaginary dangers of our public debt than they are of the very real dangers of food poisoning.  The Centers for Disease Control estimates that about 48 million Americans come down with some sort of food-borne illness each year, with 128,000 requiring hospitalization and 3,000 requiring an undertaker. Any estimates of how many people get sick or die each year from our federal deficit? See the CDC’s estimates here. The question posed by my friend Scott Rasmussen is a dumb one anyway: “What is more important -- increasing safety inspections for food sold in the United States or reducing the federal budget deficit?” Can’t we have both? That’s like saying, which is more important: your lungs, or your heart?

Unusual Traits Blended in Germany E. Coli Strain - The E. coli bacteria that killed dozens of people in Germany1 over the past month have a highly unusual combination of two traits and that may be what made the outbreak among the deadliest in recent history, scientists there are reporting.  One trait was a toxin, called Shiga, that causes severe illness, including bloody diarrhea2 and, in some patients, kidney failure3. The other is the ability of this strain to gather on the surface of an intestinal wall in a dense pattern that looks like a stack of bricks, possibly enhancing the bacteria’s ability to pump the toxin into the body. Other Shiga-producing bacteria adhere to the lining of the gut much less avidly, in diffuse clumps, not bricklike walls, Dr. Tarr said. And other strains of E. coli that do attach tightly to the gut do not make Shiga toxins. The combination of the two traits in one E. coli strain may be what makes this one so lethal.

State Mulls Amends for Sterilizations - A perennial legislative proposal to pay as many as 3,000 sterilized people $20,000 each got a boost this spring after Republicans took over North Carolina's House and Senate following the November elections.  Compensation for victims has long been championed by state Democrats, but the idea gained momentum with the recent endorsement of some high-ranking Republicans who said sterilization was an infringement on individual rights. "Most of the time, we're thinking from the neck up, but this one started with me in the stomach, the intuition of it all," North Carolina is among more than 30 states that once sanctioned eugenics; the vast majority of the victims were sterilized either forcibly or with inadequate consent.  The eugenics movement, which gained popularity in the early part of the 20th century, called for sterilizing some Americans who were deemed socially or intellectually unfit. But North Carolina was the rare state that accelerated its program after World War II, amid a backlash against the eugenics practices of Nazi Germany.  The program continued through 1974, far later than other states, and North Carolina now estimates that 7,600 people were sterilized under the auspices of its eugenics board.

Unreasonable complaints about local food - From Arnold Kling at EconLog: Ed Glaeser writes about another one of my pet peeves, locavorism. I always tell locavores that they should go further and only buy clothes made from local materials. Only use computers made from local materials. In fact, they should only consume goods that we can make ourselves using materials we can find on their own property. My response:  It's easy to deliver an off-the-cuff dismissal of local food. But, did you even read Glaeser's article? Like many of the commenters here, he likes local gardens for their educational value. And surely Kling doesn't mind people choosing local food according to their own preferences.  You might object to government policies that strictly favor local food, but basically there really aren't many policies like that in the real world. Most government policies favor the conventional food system. And you might object to an over-sold argument that we should eat ONLY local food, but if that's your complaint, you should quote a particular opponent, because I think most writers on this topic are more reasonable.

F.D.A. Confronts Challenge of Monitoring Imports — The Food and Drug Administration commissioner, Dr. Margaret Hamburg, has repeatedly expressed alarm about the waves of imported food and drugs overwhelming her organization’s ability to monitor them, but through the first two years of her leadership she had not provided a strategy to deal comprehensively with this problem — until now.  On Monday, the F.D.A. released a rare special report titled “Pathway to Global Product Safety and Quality” that is likely to win plaudits not so much for the four “building blocks” it outlines for dealing with imports but for the frank way it acknowledges the problem.  “This report in large part is meant to frame the issue so that all of our colleagues inside the F.D.A. and external to the F.D.A. really understand how much the world has changed and the necessity of how much we do business in the F.D.A. has to be dramatically transformed,”

Yes, There Are Pesticides On Organic Lettuce  Last week, the Environmental Working Group released its 2011 Shopper's Guide, which lists the produce with the highest pesticide residues, or its "Dirty Dozen." Of the fruits sampled, 98 percent of apples came back with pesticide residue, followed by celery, strawberries, and peaches. The list isn't intended to scare you away from fruits and vegetables, but to help you decide when it might be best to go organic. While you'll find fewer pesticides on certified organic produce, organic doesn't always guarantee "pesticide-free." As Maureen Langlois explained recently on NPR’s Shots blog, the U.S. Department of Agriculture found that one-fifth of organic lettuces actually tested positive for spinosad, a naturally occurring soil bacterium that's manufactured by Dow Chemical and is one of about 40 synthetic chemicals permitted under the USDA's National Organic Standards.

No Pesticide Permit? No Problem! - In 1996, the Talent Irrigation District in Oregon set out to kill off aquatic weeds in irrigation canals by spraying herbicides in the water. But in addition to a lot of dead weeds, it got a lot of dead fish—92,000 steelhead salmon. Since then, legal battles have raged over how the government should regulate pesticides used on or near waterways. On Tuesday, pesticide users marked a possibly major victory in that battle, as a bill that would allow them to bypass the Clean Water Act and spray pesticides over waterways passed through the Senate Agriculture, Nutrition and Forestry Committee. Currently, once a pesticide has been deemed safe by the EPA, there's nothing to compel users of the pesticide to follow guidelines in the Clean Water Act for minimizing how much pesticide makes it into streams, lakes, or other water bodies.

House bill would cut food assistance programs, protect farm subsidies - According to the Associated Press summary, the appropriations bill passed by the Republican-led House of Representatives would cut WIC and international food aid, while protecting most farm subsidies. The AP report said the bill:

  • Directs the Agriculture Department to rewrite rules it issued in January meant to make school meals healthier. Republicans say the new rules, the first major overhaul of school lunches in 15 years, are too costly.
  • Forces USDA to report to Congress every time officials travel to promote the department’s “Know Your Farmer, Know Your Food” program, which supports locally grown food, and discourages the department from giving research grants to support local food systems. Large agribusiness has been critical of the department’s focus on these smaller food producers [note: see earlier post for context].
  • Prevents USDA from moving forward with new rules that would make it easier for smaller farmers and ranchers to sue large livestock companies on antitrust grounds. The proposed rules are meant to address the growing concentration of corporate power in agriculture.
  • Delays for more than a year new rules for reporting trades in derivatives, the complex financial instruments blamed for helping precipitate the 2008 financial crisis. A Republican amendment adopted Thursday would require the Commodity Futures Trading Commission, which funded in the bill, to first have other rules in place to facilitate its collection of derivatives market data.
  • Prevents the FDA from approving genetically modified salmon for human consumption, a decision set for later this year.
  • Questions the scope of Obama administration initiatives to put calories on menus and limit the marketing of unhealthy foods to children.

                Georgia's Harsh Immigration Law Costs Millions in Unharvested Crops - Jay Bookman provides some unsurprising news about Georgia's illegal immigration crackdown: there are unintended, negative consequences. After enacting House Bill 87, a law designed to drive illegal immigrants out of Georgia, state officials appear shocked to discover that HB 87 is, well, driving a lot of illegal immigrants out of Georgia... Thanks to the resulting labor shortage, Georgia farmers have been forced to leave millions of dollars' worth of blueberries, onions, melons and other crops unharvested and rotting in the fields. It has also put state officials into something of a panic at the damage they've done to Georgia's largest industry... The results of that investigation have now been released. According to survey of 230 Georgia farmers conducted by Agriculture Commissioner Gary Black, farmers expect to need more than 11,000 workers at some point over the rest of the season, a number that probably underestimates the real need, since not every farmer in the state responded to the survey.

                Georgia’s New Immigration Law Leading To Crops Rotting In Farmers’ Fields -During the last legislative session, Georgia adopted a harsh new immigration law modeled on the law passed last year by Arizona. Now, it seems they’re getting a little lesson in the law of unintended consequences: Thanks to the resulting labor shortage, Georgia farmers have been forced to leave millions of dollars’ worth of blueberries, onions, melons and other crops unharvested and rotting in the fields. It has also put state officials into something of a panic at the damage they’ve done to Georgia’s largest industry.Adam Ozimek, who’s guest blogging for Megan McArdle this week, explains the rather elementary economics behind what’s happening: If you’re not going to let illegal immigrants do the jobs they are currently being hired to do, then farmers will have to raise wages to replace them. Since farmers are taking a risk in hiring immigrant workers, you can bet they were getting a significant deal on wage costs relative to “market wages”. I put market wages here in quotations, because it’s quite possible that the wages required to get workers to do the job are so high that it’s no longer profitable for farmers to plant the crops in the first place.

                Ga.’s farm-labor crisis going exactly as planned -  Deal proposes that farmers try to hire the 2,000 unemployed criminal probationers estimated to live in southwest Georgia. According to the survey, more than 6,300 of the unclaimed jobs pay an hourly wage of $7.25 to $8.99, or an average of roughly $8 an hour. Over a 40-hour work week in the South Georgia sun, that’s $320 a week, before taxes, although most workers probably put in considerably longer hours. Another 3,200 jobs pay $9 to $11 an hour. And while our agriculture commissioner has been quoted as saying Georgia farms provide “$12, $13, $14, $16, $18-an-hour jobs,” the survey reported just 169 openings out of more than 11,000 that pay $16 or more.In addition, few of the jobs include benefits — only 7.7 percent offer health insurance, and barely a third are even covered by workers compensation. And the truth is that even if all 2,000 probationers in the region agreed to work at those rates and stuck it out — a highly unlikely event, to put it mildly — it wouldn’t fix the problem.

                Experts worried about large decline in U.K. honeybees over the winter, possibly caused by neonicotinoids - Honeybee populations declined by 13.6% over the winter, according to a survey of beekeepers across England. Losses were most severe in the north-east, where the survey recorded a loss rate of 17.1%. Experts worry that the declines will affect plant productivity. There are also concerns that the declines, along with drought conditions in some areas, will mean less English honey this year. Martin Smith, president of the British Beekeepers Association, which carried out the survey, said: "If this was measured against similar losses in livestock it would be seen as disastrous and there would be great concern on the knock-on impact of food prices."Beekeepers are puzzled by the decline because the cold winter and early spring should have favoured bees. They stay "clustered" tightly in their hives when it is cold and dry, saving energy for spring foraging when the temperature rises about 12C.

                Lawyer at forum warns of Delta water grab - Standing before dozens of slides charting water quality, export statistics and salinity levels in the California Delta, attorney Dante Nomellini warned Thursday of efforts to divert water from Northern California and send it south. "The Delta is the frontlines of a larger fight," said the water attorney, who spoke as part of the Leadership Forum at Hutchins Street Square. Without the Delta, which provides water for more than half of the agricultural production in San Joaquin County, the region's finances would suffer, he said. Furthermore, any potential deals for the future of California's water do not limit the power of the government, and any deal made should protect the water rights from arbitrary actions, he said. Nomellini also pointed to incidents in the 1970s, '90s and early 2000s, when California governors declared a state of emergency and suspended the water rights of agencies and individuals. The situation could happen again in a severe enough drought, resulting in water being shipped south, he said."There is no evidence the government will help Northern California when the time comes," he said.

                Corn Gains as Flooding Threatens China Harvest Amid Strengthening Demand - Corn advanced for a third day on signs last week’s slump to the lowest price in three months lured buyers and on concerns rains may flood recently planted crops in central China, the world’s second-largest consumer of the grain. Corn inspected for export at ports in the U.S., the world’s largest shipper, climbed 21 percent to 43 million bushels in the week ended June 16, the U.S. Department of Agriculture said. Severe flooding will persist in the Yangtze River valley, threatening corn, soybeans, and winter-wheat planted areas, Telvent DTN Inc. said in a June 20 forecast. “Some people are buying on dips,” Tetsu Emori, a commodity fund manager at Astmax Co. Ltd., said by phone from Tokyo. “There could be much more buyers coming into the market on China,” he said, referring to concerns that flooding could push the Asian nation to boost imports.

                Corn Stocks Plunging to 1974 Low as China Adds Brazil-Sized Crop to Demand - Even a fifth consecutive year of record global corn harvests will fail to meet demand for food, fuel and livestock feed, reducing world stockpiles to the lowest in two generations. Consumption will rise 3 percent in the next marketing year, a 16th consecutive annual gain that saw demand jump 66 percent, according to U.S. Department of Agriculture estimates. Inventory will drop to 47 days of use, the fewest since 1974, the data show. Waterlogged fields in the U.S., the largest exporter, will curb yields, Goldman Sachs Group Inc. says. Corn may jump 36 percent to a record $9 a bushel if conditions worsen, Morgan Stanley says. Corn purchases are accelerating as droughts and floods limit output gains in everything from soybeans to wheat, driving the Standard & Poor’s Agriculture Index of eight commodities 60 percent higher in 12 months. China, the world’s second-biggest consumer after the U.S., will use 47 percent more than a decade ago, adding an amount greater than the entire crop of Brazil, the third-largest producer.

                The Great Corn Con - FEELING the need for an example of government policy run amok? Look no further than the box of cornflakes on your kitchen shelf. In its myriad corn-related interventions, Washington has managed simultaneously to help drive up food prices and add tens of billions of dollars to the deficit, while arguably increasing energy use and harming the environment.  Even in a crowd of rising food and commodity costs, corn stands out, its price having doubled in less than a year to a record $7.87 per bushel in early June. Booming global demand has overtaken stagnant supply.  But rather than ameliorate the problem, the government has exacerbated it, reducing food supply to a hungry world. Thanks to Washington, 4 of every 10 ears of corn grown in America — the source of 40 percent of the world’s production — are shunted into ethanol, a gasoline substitute that imperceptibly nicks our energy problem. Larded onto that are $11 billion a year of government subsidies to the corn complex.   It’s America’s largest crop, dwarfing wheat and soybeans. A small portion of production goes for human consumption; about 40 percent feeds cows, pigs, turkeys and chickens. Diverting 40 percent to ethanol has disagreeable consequences for food. In just a year, the price of bacon has soared by 24 percent.

                Millions affected by China flooding - More than five million people are believed to have been affected by severe floods in eastern China, amid predictions of further heavy rains in the coming days. The Chinese government has raised its disaster alert to the highest level as the flooding has caused more than $700m worth of damage."Severe floods triggered by heavy rains will continue to threaten parts of southern China," Chen Lei, minister of water resources, said on Monday. "There is an increasing possibility that downpours, with enhanced frequency and intensity, will continue to lash regions in the south," he said in a speech posted on his ministry's website. Heavy rains hit Zhejiang province over the weekend and the level of a river that passes through Lanxi city has risen sharply, Zhao Fayuan, deputy director of the flood control headquarters, said. The level of Lanjiang river has now hit 34 metres, the highest since 1966, state-run Xinhua News Agency reported. Torrential rains have left huge areas of Hubei and Zhejiang provinces under water, with more than one million acres (432,200 hectares) of farmland inundated, the Xinhua said.

                France’s Sarkozy Urges Action Against the ‘Plague’ of Food Price Surges - World food prices that rose 37 percent in a year, driving 44 million more people into poverty, are a “plague” that need action from world leaders now, French President Nicolas Sarkozy said.  Group of 20 farm ministers are in Paris for the second day of a summit. France, which holds the G-20 presidency, wants a central database on crops, limits on export bans, international market regulation, emergency stockpiles and a plan to raise global output. The proposals to limit export curbs and start a database will be “especially sensitive,” French Agriculture Minister Bruno Le Maire said last week.  Wheat as much as doubled in the past year as Russia and Ukraine curbed exports after drought decimated crops, adding to record global food prices the World Bank says put 44 million more people into poverty since June. Nations will spend $1.29 trillion on food imports this year, the most ever and 21 percent more than in 2010, the United Nations estimates.

                Century of Hunger Is Warning From France as Farm Ministers From G-20 Meet - French President Nicolas Sarkozy said the world must take action to avoid another food crisis, as agriculture ministers meet in Paris. A lack of transparency in global agricultural markets is adding to price swings and threatens future food production, Sarkozy said in a speech to Group of 20 farm ministers. World leaders risk making this “the century of hunger” unless they can agree on new rules on food supply, French Agriculture Minister Bruno Le Maire said before the meeting. France, which holds the G-20 presidency, wants a central database on crops, limits on export bans, international market regulation, emergency stockpiles and a plan to raise global output. “We have to act, and act together,” Sarkozy said. “The world is watching you.” Wheat as much as doubled in the past year as Russia and Ukraine curbed exports after drought decimated crops, adding to record global food prices the World Bank says drove 44 million more people into poverty since June. Nations will spend $1.29 trillion on food imports this year, the most ever and 21 percent more than in 2010, the United Nations estimates."

                World Bank debuts tool to fight food price swings — Poor farmers in the developing world will now be able to use Wall Street-style financial wizardry to protect against food price volatility, under a new program announced by the World Bank on Tuesday. The Washington-based development lender said it was launching a new risk management product to provide an initial $4 billion in protection from volatile food prices to farmers and consumers in developing countries. "With this new tool, we can help farmers, food producers, and consumers protect themselves against price swings, strengthen their credit position, and increase their access to finance," World Bank chief Robert Zoellick said. "This tool shows what sensible financial engineering can do: make lives better for the poor," Zoellick said in a statement. The new financial product -- which will help buyers hedge against price spikes in wheat, sugar, cocoa, milk, cattle, corn, soybeans, and rice -- was developed jointly by the World Bank and Wall Street bank JPMorgan Chase.

                The Scoop On Rising Food Costs - Ice cream may be a deliciously simple combination of milk, butter, and sugar, but the true cost of an ice cream cone is no simple business calculation. Toscanini’s price tag is part of complex and increasingly interconnected world economy, one that links a dairy farm in the tiny Western Massachusetts town of Colrain to the sprawling neighborhoods of Beijing. A cyclone in Australia wiped out sugar beet crops. Uprisings in the Middle East have threatened to disrupt oil supplies. Growing demand for milk by Asia’s rising middle class affects the over-the-counter price of an ice cream cone at Toscanini’s.The story of this scoop of ice cream, as it moves from raw materials to finished prod \uct, captures the myriad forces that are pushing food prices higher and putting pressure on beleaguered US consumers and a tentative economic recovery. Like other commodities, milk, sugar, and gasoline prices have soared because of rising demand, catastrophic weather, and political unrest.

                The Relationship Between Hunger And Petroleum Consumption -In part 9 of my previous series, I estimated that of the 25 barrels of petroleum consumed per person per year (b/py) in the USA, at most 1.7 b/py was needed to support the present food production system. In part 10, based on the analysis of population growth and per capita petroleum consumption trends for some selected countries and regions, I down-graded my estimate of the per capita petroleum needed to sustain the food production system, and therefore prevent starvation and population decline, from 1.7 b/py to between 1.2 and 0.2 b/py. For the purposes of predicting future population trends, I took 1.1 b/py as my best-estimate of the minimum per capita consumption level needed to sustain our current petroleum-driven food production system.One of the problems I have had when trying to relate population growth/decline to rates of petroleum consumption is that at some point, a country or region gets food-aid from other countries or regions to prevent what would otherwise be famine and death. This is the way, I think, that some countries, like Ethiopia, can continue to have very low levels of petroleum consumption (e.g., <0.2 b/py) but still have population growth at 3% per year.

                India to Get Deficient Rains for Second Time in 3 Years, Spurring Prices - Monsoon rain in India will be below normal for the second time in three years, the weather office said, potentially lowering farm output and accelerating inflation which is the highest among Asia’s major economies. Rainfall will be 95 percent of the 50-year average in the June-September season, Science and Technology Minister Pawan Kumar Bansal told reporters in New Delhi today. That compares with 98 percent predicted by the India Meteorological Department in April. The bureau defines normal precipitation as 96 percent to 104 percent of the long-term average. Prime Minister Manmohan Singh is betting on adequate rainfall to harvest record quantities of food grain and lentils for a second year and cool inflation, which has led the central bank to raise rates for a 10th time in 15 months. Agriculture makes up almost 14 percent of the economy and a reduced harvest can lower rural incomes, hurting sales of tractors and cars.

                Winds to challenge crews battling AZ, NM wildfires -- Extremely high winds are expected to challenge firefighters trying to protect homes threatened by a pair of fires in southern and eastern Arizona on Sunday.  The small New Mexico town of Luna is in the path of the massive Wallow Fire burning in eastern Arizona's Apache-Sitgreaves National Forest. Fire breached a containment line along Highway 180 on Saturday and about 200 residents were ordered to evacuate and remained out of their homes Sunday.  The evacuation order came on the same day that some other residents displaced by the fire that began May 29 were allowed to return home.   The blaze has consumed nearly 800 square miles, a little more than 511,000 acres, and more than 3,500 firefighters were trying to stop its advance. The blaze is larger than a 2002 fire that burned 732 square miles and destroyed 491 buildings that had been the largest in state history. Despite its size, the latest fire has destroyed just 32 homes and four rental cabins. Containment rose to 44 percent Sunday.

                Wildfires rage in East Texas - An army of firefighters battled a 15,000-acre wildfire Sunday in Trinity and Polk counties, one of the largest wildfires in East Texas history and just one of dozens burning across the state. The blaze, called the "Bearing fire," has been burning since Friday afternoon in the Davy Crockett National Forest, about 100 miles north of Houston, said Rae Brooks, spokeswoman at the National Forest Service. It's called the "Bearing fire" because it started after a person hauling a trailer pulled off the road with a hot wheel bearing, which ignited dry grass nearby, officials said. "It's one of the largest wildfires in East Texas, ever," Brooks said. No injuries were reported, but the fire destroyed several structures and forced evacuations in some communities. It was only about 40 percent contained Sunday. Statewide, dozens of wildfires destroyed at least 37 homes and forced hundreds of people to evacuate. A few small fires were contained in Harris County over the weekend.

                Wildfires burn 1.4 million acres across 12 states -- As a legion of firefighters battle the stubborn Wallow Fire in east central Arizona and west central New Mexico, colleagues in 10 other U.S. states also have their hands full with dozens more wildfires. The Wallow fire is just one of 53 large uncontained wildfires burning in the United States, from Alaska to Florida, according to the National Interagency Coordination Center. All told, the fires have burned 2,166 square miles or 1.4 million acres -- nearly the size of Delaware.About 10,400 firefighters are involved in efforts to contain the fires, with more than 7,000 of them in Arizona and New Mexico, where fires have burned 853,518 acres, according to the center.The largest of the fires continues to be the Wallow Fire, which has burned 527,774 acres so far, the fire's incident command team announced Tuesday, and is about 58% contained.

                More than 10,000 firefighters battle wildfires in 12 states - -- More Arizona and New Mexico residents Wednesday returned to their homes, in some cases to find them intact, in other cases to sift through debris left by a massive wildfire. The Wallow fire in east central Arizona is one of 58 large wildfires burning in the United States, from Alaska to Florida, according to the National Interagency Coordination Center. All told, the fires have burned 2,166 square miles or 1.4 million acres -- nearly the size of Delaware. The number of wildfires so far this year is below the 10-year average for the United States, according to the U.S. Forest Service. But the number of acres burned is three times that 10-year average, according to the agency.

                Levees face unprecedented test - For the era in which it was built, the levee system protecting much of Omaha is first class. The levees that protect Council Bluffs and Eppley Airfield are a notch down. That system has less clay standing between the swollen Missouri River, thousands of homeowners and a regional transportation hub, but it is far better than some of the dirt-only levees that protect rural areas. The question of whether the metropolitan levees will hold hangs over Omaha and Council Bluffs like a foreboding storm. Only time will answer, but — without a doubt — the levees will be put to a historic and an unprecedented test in this summer of floods. . Both systems are federally designed and survived the 1952 storms, when the Missouri rose higher than it is expected to rise this summer. But the levees are old. And it's questionable whether they were built to handle three or more months of high water. “Engineers 60 to 70 years ago did not anticipate the long-duration floods we're experiencing today ... (but) there is every reason to believe they will hold,”

                Nebraska Governor Requests Disaster Declaration - Above-average snowmelt in Montana has combined with rainfalls ten times greater than average this spring and like a game of Dominoes, one by one, the dams and levees along the Missouri river are spilling their waters into farmlands, city streets, and homes in a large portion of Nebraska and numerous other states. According to Mike Wight, Public Information Officer for (NEMA), the situation continues to worsen each day. "It's still raining in Montana," Wight said. "Two weeks ago they had two more feet of snow in the Montana mountains. Depending on which state you are in, and where you are in that state, the waters in the Missouri and Platte Rivers are anywhere from 5 to 8 feet above flood level and they could be rising."Wight explained that he does not have an exact number of the acres of farmland that have been flooded, "but I would estimate at least 90,000 acres will be affected in Nebraska by the time this is done," he said. It is estimated that as much as 425,000 acres will be affected in Nebraska and Iowa combined. "It is difficult to predict the end result because there is such a large portion of the country involved in this flood," Wight said. "The flood waters are moving through Montana, North and South Dakota, Nebraska, Iowa--basically, anything near the Platte and Missouri Rivers is flooding.

                A soggy summer awaits along the Missouri River‎— It isn't so much the amount of water churning its way down the Missouri River that has people along the nation's longest waterway on edge. It's how long all that water will stick around. The annual "spring rise" on the Missouri will last deep into this soggy summer, as a torrent of early season rains and winter snowpack flows through wide-open gates of South Dakota's Gavins Point Dam upriver and toward the confluence with the Mississippi River. The Missouri might start to crest soon, but it won't start to fall until August or later.That constant pressure on the network of levees that protect farmland, roads, small towns and big cities from a river running well outside its banks is what worries folks downriver most as the high water heads south toward Kansas City and east toward St. Louis. "The length of the flood will test levees like they've never been tested before," Missouri Gov. Jay Nixon said. "You're going to see levees which in essence may be tall enough, but not strong enough."

                Minot, N.D., Braces for Flooding From Souris River - The first time rising waters forced a quarter of the residents here to abandon their homes several weeks ago, many of them simply hauled their possessions up to their second floors to keep them dry. But as the river that divides downtown began rising to record levels this week, those same homeowners confronted a sobering realization: the second floor might not be high enough.  In this summer of unrelenting flooding across the Midwest, with record flows along giants like the Mississippi and the Missouri Rivers, one of the most striking scenes of unfolding destruction is occurring here on the banks of the diminutive Souris River — known as “The Mouse,” after its French name. This city is bracing for a powerful surge of water predicted to break records by as much as five feet. As sirens blared, more than 11,000 residents evacuated their homes on Wednesday for the second time in a month, this time with the grim assurance from local leaders that the river would overtop levees in a matter of hours and swamp a huge section of the city for weeks. And, right on schedule, the fast-moving water started pouring over defenses that had kept the city dry for more than six decades.

                Flood waters overwhelm North Dakota's levees Flood waters from North Dakota's Souris River are pouring over the levees protecting Minot, North Dakota today, and flood heights are expected to rise to the highest levels in recorded history tonight. The Lake Darling flood control reservoir located about 15 miles upstream from Minot is full to overflowing, and record releases of water are occurring to prevent the lake's dam from over-topping. By this weekend, the Army Corps of Engineers will open the dam's flood gates to a maximum flow rate of 20,000 cubic feet per second, which is roughly double the flow rate that the levees in Minot can handle. Water began flowing over the levees yesterday, forcing the mandatory evacuation of 12,000 residents. By Sunday, water levels on the Souris River are expected to peak at four feet above the previous all-time flood height, set in 1881. Torrential rainfall in Canada on Sunday and Monday, combined with very heavy rainfall and snow melt over North Dakota over the past month, are responsible for the record flood. The Souris River Basin near the Rafferty Dam in Saskatchewan received four to seven inches of rain Sunday into Monday. Flood heights along the Souris River near the Canadian border upstream from Minot are already two feet above the previous all-time highest mark, and that pulse of water is now arriving in Minot. The unprecedented flood is expected to keep much of Minot underwater for at least two weeks.

                NPR: Slow River Rise Becoming Roar In Flooding ND City - Watching the Souris River creep over roads and into neighborhoods has amounted to slow torture for residents of Minot, N.D., where the river broke a record set in 1881 Friday, when it reached 9-1/2 feet above the flood stage. The Souris is expected to rise another 6 feet this weekend. The new mark was set one day after the U.S. Army Corps of Engineers accelerated water releases from the upstream Lake Darling dam. Officials said the move could raise the river up to 3 feet higher than earlier projections — or a whopping 6-1/2 feet above the record set more than a century ago — in a community where water already reaches several homes' first floors. In just four days, the predicted release of water from the dam more than doubled, from 11,000 cubic feet per second to 29,000. National Weather Service hydrologist Steve Buan laid the blame on 4 to 6 inches of rain that fell last week in largely rural — and saturated — areas to the north. "The short answer is, yes, it was from rain," Buan said.

                2010 - 2011: Earth's most extreme weather since 1816? - Every year extraordinary weather events rock the Earth. Records that have stood centuries are broken. Great floods, droughts, and storms affect millions of people, and truly exceptional weather events unprecedented in human history may occur. But the wild roller-coaster ride of incredible weather events during 2010, in my mind, makes that year the planet's most extraordinary year for extreme weather since reliable global upper-air data began in the late 1940s. Never in my 30 years as a meteorologist have I witnessed a year like 2010--the astonishing number of weather disasters and unprecedented wild swings in Earth's atmospheric circulation were like nothing I've seen. The pace of incredible extreme weather events in the U.S. over the past few months have kept me so busy that I've been unable to write-up a retrospective look at the weather events of 2010. But I've finally managed to finish, so fasten your seat belts for a tour through the top twenty most remarkable weather events of 2010. At the end, I'll reflect on what the wild weather events of 2010 and 2011 imply for our future.

                Masters: Driven by Global Warming, “It Is Quite Possible That 2010 Was The Most Extreme Weather Year Globally Since 1816" - The pace of extreme weather events has remained remarkably high during 2011, giving rise to the question–is the “Global Weirding” of 2010 and 2011 the new normal? Has human-caused climate change destabilized the climate, bringing these extreme, unprecedented weather events? Any one of the extreme weather events of 2010 or 2011 could have occurred naturally sometime during the past 1,000 years. But it is highly improbable that the remarkable extreme weather events of 2010 and 2011 could have all happened in such a short period of time without some powerful climate-altering force at work. The best science we have right now maintains that human-caused emissions of heat-trapping gases like CO2 are the most likely cause of such a climate-altering force. Human-caused climate change has fundamentally altered the atmosphere by adding more heat and moisture. Observations confirm that global atmospheric water vapor has increased by about 4% since 1970, which is what theory says should have happened given the observed 0.5°C (0.9°F) warming of the planet’s oceans during the same period. Shifts of this magnitude are capable of significantly affecting the path and strength of the jet stream, behavior of the planet’s monsoons, and paths of rain and snow-bearing weather systems. For example, the average position of the jet stream retreated poleward 270 miles (435 km) during a 22-year period ending in 2001, in line with predictions from climate models.

                Relax Farmers: Climate Change is Good for You (Not) - In 1989, I worked for a farm magazine that claimed global climate change, if real, would actually be good for agriculture since rising carbon dioxide levels would act as some sort of mega plant growth promoter. During the past seven days, I’ve seen firsthand what happens when extreme weather—which many scientists say is an offshoot of climate change—hammers Midwestern agriculture. Guess what: drowning crops have a hard time breathing in CO2. Last Friday, I was in southwest Iowa, where the Missouri is making lowland corn and soybean fields a soupy mess while threatening the popcorn capital of the world. Today, I spent some time in northwest Minnesota, where yet another ridiculously wet spring is making a mockery of even the latest in tile drainage technology. This kind of extreme weather—more precipitation coming in more intense bursts—is not a once every 10- or even 5-year situation. As we’ve reported in this blog before, this is the new norm. Farmers and other agriculturalists are being forced to take notice.

                World’s oceans in ‘shocking’ decline - The oceans are in a worse state than previously suspected, according to an expert panel of scientists. In a new report, they warn that ocean life is "at high risk of entering a phase of extinction of marine species unprecedented in human history". They conclude that issues such as over-fishing, pollution and climate change are acting together in ways that have not previously been recognised. The impacts, they say, are already affecting humanity. The panel was convened by the International Programme on the State of the Ocean (IPSO), and brought together experts from different disciplines, including coral reef ecologists, toxicologists, and fisheries scientists. Its report will be formally released later this week. "The findings are shocking," said Alex Rogers, IPSO's scientific director and professor of conservation biology at Oxford University.

                Oceans in distress foreshadow mass extinction - Pollution and global warming are pushing the world's oceans to the brink of a mass extinction of marine life unseen for tens of millions of years, a consortium of scientists warned Monday. Dying coral reefs, biodiversity ravaged by invasive species, expanding open-water 'dead zones,' toxic algae blooms, the massive depletion of big fish stocks -- all are accelerating, they said in a report compiled during an April meeting in Oxford of 27 of the world's top ocean experts. Sponsored by the International Programme on the State of the Ocean (IPSO), the review of recent science found that ocean health has declined further and faster than dire forecasts only a few years ago. These symptoms, moreover, could be the harbinger of wider disruptions in the interlocking web of biological and chemical interactions that scientists now call the Earth system.

                Ocean life on the brink of mass extinctions: study (Reuters) - Life in the oceans is at imminent risk of the worst spate of extinctions in millions of years due to threats such as climate change and over-fishing, a study showed on Tuesday. Time was running short to counter hazards such as a collapse of coral reefs or a spread of low-oxygen "dead zones," according to the study led by the International Programme on the State of the Ocean (IPSO). "We now face losing marine species and entire marine ecosystems, such as coral reefs, within a single generation," according to the study by 27 experts to be presented to the United Nations. "Unless action is taken now, the consequences of our activities are at a high risk of causing, through the combined effects of climate change, over-exploitation, pollution and habitat loss, the next globally significant extinction event in the ocean," it said. Scientists list five mass extinctions over 600 million years -- most recently when the dinosaurs vanished 65 million years ago, apparently after an asteroid struck.

                Multiple Ocean Stresses Threaten “Globally Significant” Marine Extinction - An international panel of marine experts warns in a report released today that the world’s ocean is at high risk of entering a phase of extinction of marine species unprecedented in human history. The preliminary report arises from the first ever interdisciplinary international workshop to consider the cumulative impact of all stressors affecting the ocean. Considering the latest research across all areas of marine science, the workshop examined the combined effects of pollution, acidification, ocean warming, over-­‐ fishing and hypoxia (deoxygenation).

                YouTube - Jeremy Jackson: How we wrecked the ocean

                Study reveals long-term rise in sea level— Sea level has been rising significantly over the past century of global warming, according to a study that offers the most detailed look yet at the changes in ocean levels during the last 2,100 years. The researchers found that since the late 19th century — as the world became industrialized — sea level has risen more than 2 millimeters per year, on average. That’s a bit less than one-tenth of an inch, but it adds up over time. It will lead to land loss, more flooding, and saltwater invading bodies of fresh water, said lead researcher Benjamin Horton, whose team examined sediment from North Carolina’s Outer Banks. He directs the Sea Level Research Laboratory at the University of Pennsylvania. The predicted effects he cites aren’t new and are predicted by many climate scientists. But independent scientists say the research verifies increasing sea level rise compared with previous centuries.

                Modern-day sea level rise skyrocketing - Sea levels began rising precipitously in the late 19th century and have since tripled the rate of climb seen at any time in at least two millennia, a detailed analysis of North Carolina marsh sediments shows. “This clearly shows the recent trend is not part of a natural cycle,” Andrew Kemp of the University of Pennsylvania and his colleagues spent five years plumbing salt marsh sediments that had remained largely undisturbed for millennia. Kemp, now at Yale, and his team drilled cores at two sites, unearthing the microscopic remains of single-celled shelled organisms known as foraminifera. Foraminifera vary in their salt tolerance. So as sea level changed over millennia, so did the mix of species living at any given site, explains University of Pennsylvania coauthor Benjamin Horton. Knowing the modern-day distribution of foraminifera at various water depths along the modern-day coast, the researchers could infer past sea levels at the two core sites from the abundance of different species in successive sediment layers. Radioisotope dating showed that the sediments recorded 2,100 years of sea level history, the researchers report online June 20 in the Proceedings of the National Academy of Sciences.

                Climatic Change, Volume 107, Nos. 1-2 (June 2011): Florida, sea level rise - 11 pdf reports

                Climate Change: Public Skeptical, Scientists Sure -The American public is less likely to believe in global warming than it was just five years ago. Yet, paradoxically, scientists are more confident than ever that climate change is real and caused largely by human activities. Something a bit strange is happening with public opinion and climate change.Anthony Leiserowitz, who directs the Yale University Project on Climate Change Communication, delved into this in a recent poll. He not only asked citizens what they thought of climate change, he also asked them to estimate how climate scientists feel about global warming."Only 13 percent of Americans got the correct answer, which is that in fact about 97 percent of American scientists say that climate change is happening, and about a third of Americans just simply say they don't know," he said. Most Americans are unaware that the National Academy of Sciences, known for its cautious and even-handed reviews of the state of science, is firmly on board with climate change. It has been for years.

                The Greenhouse Effect is Real and It’s “irrefutable” that rapid increases in CO2 will cause “rapid future warming” - What would we do without Australian scientists?  We have physicist John Cook, who runs the must-read blog Skeptical Science, where the figure above comes from (see Eight great figures summarizing the evidence for a “human fingerprint” on recent climate change). Then the Australian scientific community decided that they were mad as hell and not going to take it anymore — in an open letter reposted here last week (see Australian Scientific Community: “Climate Change is Real, We Are Causing It,” Media has Botched the Coverage).  Now some of those scientists are contributing to a multipart series at “The Conversation” website. The second in the series, “The greenhouse effect is real: here’s why,” is reprinted below.

                Climate Change: It's bad and getting worse - The rate of ice loss in two of Greenland's largest glaciers has increased so much in the last 10 years that the amount of melted water would be enough to completely fill Lake Erie, one of the five Great Lakes in North America. West Texas is currently undergoing its worst drought since the Dust Bowl of the 1930s, leaving wheat and cotton crops in the state in an extremely dire situation due to lack of soil moisture, as wildfires continue to burn. Central China recently experienced its worst drought in more than 50 years. Regional authorities have declared more than 1,300 lakes "dead", meaning they are out of use for both irrigation and drinking water supply. Floods have struck Eastern and Southern China, killing at least 52 and forcing the evacuation of hundreds of thousands, followed by severe flooding that again hit Eastern China, displacing or otherwise affecting five million people. Meanwhile in Europe, crops in the northwest are suffering the driest weather in decades. Scientific research confirms that, so far, humankind has raised the Earth's temperature, and the aforementioned events are a sign of what is to come.

                New U.N. climate talks proposal would eliminate need for consensus - A new proposal on the table at U.N. climate talks in Bonn, Germany, would allow decisions to be adopted by a three-fourths majority vote instead of the consensus currently required by the United Nations.The proposal, co-sponsored by Mexico and Papua New Guinea, could break an almost constant deadlock created by the veto powers granted to all 193 nations. It would allow for decisions to be made via an “overwhelming majority” vote of 75 percent only as a last resort after attempts to build consensus had failed. Many delegates believe the proposal will ultimately fail, since it would require consensus approval in order to go into effect. It is not the first time that a proposal to eliminate the consensus requirement has been brought up in U.N. climate talks, but the backing of Mexico gives this iteration of the plan more weight.

                Bonn Climate Talks News Wrap Up: No Agreement in Sight - The two-week long United Nations Framework Convention on Climate Change intercession meeting ended on Friday in Bonn, Germany.  The talks revealed major issues that are hindering the progression of outcomes achieved in Cancun.  The Parties are not in agreement about the future of the Kyoto Protocol, how to operationalize the agreements reached in Cancun, and international climate finance. Parties will attempt to resolve these issues in the lead up to the next major UN climate conference in Durban, South Africa in November. Here is a news roundup of what happened in Bonn.

                Climate of Denial - Al Gore - Admittedly, the contest over global warming is a challenge for the referee because it's a tag-team match, a real free-for-all. In one corner of the ring are Science and Reason. In the other corner: Poisonous Polluters and Right-wing Ideologues. The referee — in this analogy, the news media — seems confused about whether he is in the news business or the entertainment business. Is he responsible for ensuring a fair match? Or is he part of the show, selling tickets and building the audience? The referee certainly seems distracted: by Donald Trump, Charlie Sheen, the latest reality show — the list of serial obsessions is too long to enumerate here. But whatever the cause, the referee appears not to notice that the Polluters and Ideologues are trampling all over the "rules" of democratic discourse. They are financing pseudoscientists whose job is to manufacture doubt about what is true and what is false; buying elected officials wholesale with bribes that the politicians themselves have made "legal" and can now be made in secret; spending hundreds of millions of dollars each year on misleading advertisements in the mass media; hiring four anti-climate lobbyists for every member of the U.S. Senate and House of Representatives.

                Earth in the Balance, Humankind on the Edge - Complacency is baked into our species. We can’t resist thinking that recent experience defines the future. Give us a run of good luck, and we are apt to turn that into an implicit expectation that our luck will continue -- even that we are entitled to it. This kind of thinking was instrumental in the run-up to the financial crash of 2008. Too many private and public institutions assumed that an extraordinary run in prosperity, particularly in the real estate market, was just normal. It didn’t occur to them that things could go so wrong. . Risk wasn’t systematically measured; it was ignored. It’s easy to write this off to greed or foolishness on the part of Wall Street. But the truth is, our entire civilization rests on a foundation just as shaky. We assume that the very Earth is static and will always be as it is now, or as we remember it. Yet geophysics tells us that is emphatically not the case. Bad things happen. In the past couple of years alone, we have witnessed a litany of horrific natural disasters.

                Systemic Collapse - Only willfully ignorant individuals are failing to perceive the ongoing systemic collapse of western civilization. Economic recession? Check, since 2000. Economic depression? Check, since 2008. Rampant “natural” disasters? Check, with increasing frequency. Climate chaos? Indeed, only a politician could miss it.  Not to put too fine a point on it, but this is what systemic collapse looks like. We’re awash in tell-tale interactions between climate change, “natural” disasters, and the industrial economy. Fire and flood are both on the rise. We used to be able to exert a modicum of control over both phenomena, back when climate chaos wasn’t exploding and the industrial economy wasn’t imploding.

                Deus ex Machina: Will economic collapse save us from climate catastrophe? - "I don't think the American public has gripped in its gut what could happen. …We're looking at a scenario where there's no more agriculture in California." – Steven Chu, US Secretary of Energy, "[W]ith 6% per year decrease of fossil fuel CO2 emissions [beginning in 2012]…[g]lobal temperature relative to the 1880-1920 mean would barely exceed 1°C and would remain above 1°C for only about 3 decades. – James Hansen, "A reduction in [oil] supply of only a few percentages could create difficulties throughout the entire system. Further reductions could lead to a complete failure of critical systems." – Rick Munroe, Summary: A new paper by NASA's James Hansen suggests that immediate and drastic declines (ca. 6% annual) in industrial CO2 emissions are required to avoid catastrophic climatic destabilization. As no realistic political solution exists for such immediate CO2 reduction, prospects for a livable future have now become dependent on a single back-breaking option: rapid global economic collapse. And in `Deus ex machina' style, we may get it just in time…

                Cuba: Seas to rise more than 30 inches by 2100 - Cuban scientists calculate that median sea levels around the Caribbean nation will rise more than 30 inches by the end of the century due to global climate change, official media said Friday. Models predict the sea will rise 10.6 inches (27 centimeters) by 2050, and 33.5 inches (85 centimeters) by 2100, Abel Centella, scientific director of the country's Meteorological Institute, was quoted by Communist Party daily Granma as saying. There were no details of what preparations the island is undertaking, but Granma said scientists are closely monitoring sea levels. Government scientist Marcelino Hernandez warned of the need to protect environments that can mitigate the effects of sea encroachment. "Right now it is urgent to preserve mangroves, coral reefs, sea grass and sand beaches,"  "Each of these ecosystems is a natural barrier to defend the coasts from the impact of climate change. If they deteriorate, the consequences will be worse." International scientific studies have projected sea levels will rise between 30 and 75 inches (190 centimeters) by the end of the century, fed by melting glaciers and ice caps.

                Fastest sea-level rise in 2,000 years linked to increasing global temperatures: "The rate of sea level rise along the U.S. Atlantic coast is greater now than at any time in the past 2,000 years -- and has shown a consistent link between changes in global mean surface temperature and sea level. The findings are published in the journal Proceedings of the National Academy of Sciences (PNAS). The research, funded by the National Science Foundation (NSF), was conducted by Andrew Kemp, Yale University; Benjamin Horton, University of Pennsylvania; Jeffrey Donnelly, Woods Hole Oceanographic Institution; Michael Mann, Pennsylvania State University; Martin Vermeer, Aalto University School of Engineering, Finland; and Stefan Rahmstorf, Potsdam Institute for Climate Impact Research, Germany. "Having a detailed picture of rates of sea level change over the past two millennia provides an important context for understanding current and potential future changes,"

                Arctic Melt Raises Sea Levels and Reinforces Global Warming - If you want to see global warming’s signature, look to the Arctic. Up north, the air is warming and the ice is melting. As all of that reflective ice goes away, the Arctic Ocean is soaking up more sunlight, further enhancing warming. Melting Arctic ice is also contributing significantly to sea level rise. For two decades, scientists have predicted these things would happen as the Earth warms, and now we see that the Arctic is changing much as expected. A new assessment report released by the Arctic Monitoring and Assessment Program lays out the facts about many of the changes. AMAP is a working group of the Arctic Council, an intergovernmental organization consisting of eight Arctic nations. The report provides 15 key findings, and many of them are based on NASA satellite observations or science we’ve talked about on the Earth Observatory. Here’s a summary of the key findings:

                NOAA: U.S. unprepared for changes in Arctic ice - The National Oceanic and Atmospheric Administration is being inundated with requests for weather and ice forecasts as well as navigation information about the Arctic, but isn't able to provide all of the information that the Coast Guard, industries and native Alaskans need, NOAA chief Jane Lubchenco said on Monday.  The NOAA chief, the commandant of the Coast Guard and the chief of naval operations spoke at a symposium about challenges ahead for the U.S. as summer Arctic sea ice declines, opening the Arctic to oil and gas extraction, fisheries, tourism and shipping. Lubchenco, a marine ecologist, said her agency doesn't have nearly the same capacity for Arctic weather forecasting, oceanography and navigational charting that it has in other regions.  "It's a matter of insufficient observing, insufficient information to do the modeling and forecasting. So there's a huge disconnect between what is expected we will be able to deliver and what we are actually able to provide," she said.Lubchenco said NOAA needs more funding for this work, despite current pressure to cut the federal budget.

                High court shields AEP from state suits over emissions - The U.S. Supreme Court handed American Electric Power a victory yesterday when it ruled that states cannot go to federal court to force power companies to reduce the emission of greenhouse gases believed to cause global warming. In an 8-0 ruling, the justices concluded that the U.S. Environmental Protection Agency has the primary authority to regulate emission of greenhouse gases. By doing so, the justices tossed out a lawsuit brought by eight states against AEP, three other private power companies and the Tennessee Valley Authority. The decision means that AEP will not have to spend millions of dollars defending itself from state challenges in federal courts. The states had wanted a federal judge to force the power companies to slash their emissions of greenhouse gases. But at the same time, the decision provides the EPA with a boost for its desire to issue new regulations to restrict emissions from coal-fired utility plants operated by AEP and other companies.

                Solar storms, EMP and the future of the grid - In late August 1859 the most severe solar storm ever witnessed began and lasted through the first few days of September. It produced vivid auroras in the night sky as far south as Cuba. During the storm telegraph operators felt as if some alien force had overtaken their equipment. Even disconnecting power to the wires failed to quiet their telegraphs. In some places the paper strip used to record the dots and dashes of Morse code caught fire because of the electrical surges coursing through the telegraph lines. Today, the world we live in might be thought of as one big telegraph system composed of computer chips, telephone lines, fiber optics, cellphone towers, satellites, undersea cables and an electrical grid that supplies energy to the terrestrial parts of that system. An event as severe as the 1859 solar storm--called the Carrington Event after the respected British astronomer Richard Carrington who detected it as it developed--could cripple vast areas of the world, shutting down entire national grids not just for days, but possibly for months or years.

                University of Minnesota engineering researchers discover source for generating ‘green’ electricity - University of Minnesota engineering researchers in the College of Science and Engineering have recently discovered a new alloy material that converts heat directly into electricity. This revolutionary energy conversion method is in the early stages of development, but it could have wide-sweeping impact on creating environmentally friendly electricity from waste heat sources. Researchers say the material could potentially be used to capture waste heat from a car's exhaust that would heat the material and produce electricity for charging the battery in a hybrid car. Other possible future uses include capturing rejected heat from industrial and power plants or temperature differences in the ocean to create electricity. The research team is looking into possible commercialization of the technology.

                Great Lakes may beat Atlantic to offshore wind - States along the Atlantic Coast are racing to be first in the country to put wind turbines offshore. But a group in Ohio says the first offshore wind farm in America isn’t likely to be in the Atlantic, but in the fresh waters of Lake Erie about seven miles off the Cleveland coast. Promoters of clean wind say, in the next decade, hundreds of turbines in Lake Erie could produce 1,000 megawatts of power — enough for 200,000 homes. The plan is to start next year with a five-turbine pilot project within sight of downtown Cleveland. Its $100 million cost would be raised from investors and loans. Chris Wissemann, the project's developer, says that with turbine supplier General Electric, engineering giant Bechtel, and Texas-based Cavallo Energy on board, his company, Freshwater Wind, will likely win the nation's offshore wind race.

                Ohio taking in flood of Pennsylvania's toxic brine for disposal… Millions of barrels of salty, toxic wastewater from natural-gas wells in Pennsylvania are coming into Ohio despite efforts to keep it at bay. In June 2010, Ohio quadrupled the fees that out-of-state haulers must pay to dump brine into 170 disposal wells. Ohio officials thought that raising the fees from 5 cents to 20 cents per barrel would help keep the brine in Pennsylvania, where drilling has exploded since the discovery of huge gas deposits deep in Marcellus shale. Ohio wants to keep its injection wells open for Ohio brine, which also might explode in volume if the state's own shale begins to give up natural gas. But then, Pennsylvania officials told 27 sewage-treatment plants to stop dumping brine into streams. The state's geology doesn't support brine-injection wells.  Ohio's does. From January through March, nearly half the brine that went into disposal wells in Ohio came from Pennsylvania and other states.

                Forum: Just how safe is ‘fracking’ of natural gas? - Yale Environment 360 asked industry officials, scientists, and conservationists to answer the following two-part question: “Can hydraulic fracturing of gas and oil reserves in shale formations be done on a large scale without significant negative impacts on water supplies, air quality, and local communities? As fracking continues to expand rapidly, do you believe more stringent federal and state regulations are needed and, if so, what should they be?” Among the wide range of views, one theme emerged: Shale gas fracking in the U.S., which to date has been less strictly regulated than other sectors of the oil and gas industry, is almost certainly headed for a period of tougher federal and state environmental controls.

                Fracking and Water: E.P.A. Zeroes In on 7 Sites - The Environmental Protection Agency has chosen seven natural gas drilling sites where it will conduct case studies to evaluate the impact of hydraulic fracturing on local drinking water. Hydraulic fracturing, or fracking, involves freeing of natural gas trapped in shale rock by injecting copious amounts of water at very high pressure.  Communities fear that this form of drilling may cause serious environmental damage, particularly if the chemicals enter the drinking water supply. Yet companies, arguing that natural gas is a cleaner energy source than coal, are eager to tap these bountiful underground reserves. Last year Congress mandated that the Environmental Protection Agency study whether the drilling is damaging the environment and to what extent. After a public review process in which 40 places were considered, the agency chose the case study sites by considering the proximity of drinking water supplies to the fracking activity and by striving for geographic diversity. The E.P.A. says the results will be peer-reviewed and made public, and that the data will be contribute to computer modeling and other efforts to evaluate the drilling’s impact.

                Frack sand mining doesn't just suck, it blows - When they say fracking goes miles deep and miles wide, they aren’t kidding. Where do you think the fracking sand comes from? Recently I learned that EOG, aka Enron Oil and Gas, is planning to start a frack sand mining and processing plant in Cooke County near the beautiful Saint Jo. The planned 1,400-acre facility will handle all stages of production and transportation. Although EOG has only applied for and has not yet been granted the permit by TCEQ, they have already done a lot of construction and water well drilling at the proposed site. You can see aerial photographs acquired through the efforts of local citizens at the Save The Trinity Aquifer blog spot.   Frack sand mining sucks!This facility will use 3,700 gallons of water per minute, 24 hours per day, 7 days per week, year round and we do not know the longevity of the mine other than the “permanent” box was checked on the permit application. To put that water use into perspective: according to the US Geological Survey, the average person uses 80 to 100 gallons of water per day. So EOG will use more water in one minute than you use in a month. They will use 1,944,720,000 gallons of water a year, which is enough water for 53,280 people for a year.

                Texas forces firms to open up on 'fracking' - As the spiritual home of big oil, Texas may fairly be seen to be to environmentalism what its official food, chilli con carne, is to vegetarianism.  But that hasn't stopped the state becoming the first corner of America to require energy firms to disclose information about the chemicals they are pumping into the ground in order to release natural gas during the hugely controversial process of "hydraulic fracking". The Lone Star state's Governor, Rick Perry, quietly signed a law last week which forces gas companies to publish a list of the 600 or so substances they add to a mixture of water and sand during the process. This mixture then gets fired deep underground at high pressure to release deposits of gas locked up in formations of shale and other rocks. For years, the industry in the US has refused to declare what toxic chemicals it uses during fracking, saying that to do so would amount to revealing trade secrets. But that policy has bred public mistrust, with the industry accused of contaminating local water supplies and creating other environmental hazards.

                Poland: Fracking Heaven - POLAND may have western Europe’s largest reserves of shale gas. A dozen global gas-exploration companies have promised to drill as many as 120 test wells over the next few years to find out. The prize could be trillions of cubic metres of gas. It is “a huge and expensive gamble”, says Tomasz Maj, the head of Polish operations for Talisman Energy, one of the exploration firms. The rewards could be vast. Shale gas could free the country from its dependence on coal, a dirtier fuel, which currently accounts for 95% of Polish power generation. It could also mean that Poland no longer has to rely on Russia, the neighbourhood bully, for most of its natural gas.  But the extraction of shale gas is controversial. It requires fracking: blasting fissures in subterranean rock and pumping in water and sand, and occasionally nasty chemicals, to force out the gas. France won’t do it. There is local resistance in the Netherlands. Yet other countries’ qualms may make fracking more attractive for Poland. If others won’t frack, they will probably buy Polish gas. 

                Rains continue in and around Omaha, Nebraska, coming within 18 inches of forcing the shutdown of the Cooper Nuclear Plant - The Missouri River rose to within 18 inches of forcing the shutdown of a nuclear power plant in southeast Nebraska, but stopped and ebbed slightly. The river has to hit 902 feet above sea level at Brownville before officials will shut down the Cooper Nuclear Plant. Nebraska Public Power District spokesman Mark Becker says the river rose to 900.56 feet on Sunday, then dropped to 900.4 feet later in the day and remained at that level Monday morning. Becker says the plant is operating at full capacity.  The forecast for rain in eastern Nebraska is worrisome for officials who are already concerned about flooding along the swollen Missouri River. . Weather Service forecaster Van DeWald says the first round of storms in the afternoon shouldn’t significantly worsen flooding along the Missouri River because the storm will move across the region. DeWald says the places most likely to have flooding problems Monday are the places that received heavy rain Sunday, such as Fremont.

                Cooper Nuclear Station On Lowest Warning Level - As the Missouri River rises, the Nebraska Public Power District declared a Notification of Unusual Event Sunday for the Cooper Nuclear Station located three miles southeast of Brownville, Nebraska along the riverfront. NPPD says there is no threat to plant employees or the general public. The Omaha Public Power District made the same declaration nearly two weeks ago when the Missouri River continued to rise near the Fort Calhoun Nuclear Station.The Missouri River surged to a new record at Brownville Sunday afternoon. The National Weather Service said the river measured at 44.75 feet surpassing a record of 44.3 feet set in 1993. Flood stage is 33 feet. The U.S. Army Corps of Engineers said the river level at Brownville surged two feet from Saturday morning to Sunday morning. NPPD plans dictate that when the Missouri River’s water level reaches 42.5 feet or greater than 899 feet above sea level, the notification of an unusual event is declared. If the river’s level increases to 900 feet above sea level, plant personnel will barricade internal doorways as another layer of protection for facility equipment.

                Project Flood Nuclear Warnings: 10000 evacuees prep, 60 buses on standby...‎ Across river from the state of Nebraska's Fort Calhoun Nuclear plant, possibly leaking radiation now, Red Cross is preparing for 10,000 evacuees as a Warning Level 1 has been issued in Project Flood 2011 where the Mighty Missouri River continues swelling, and water is bubbling from the ground near the levee. Tornado sirens are planned to get people out of harms way while over sixty buses standby to haul people if evacuation is mandated. The Warning includes, "LEVEE MAY BE IMPACTED. MAKE PREPARATIONS TO LEAVE." Families are packing in Council Bluffs, Omaha, Nebraska after water is forcing sand into their homes according to Action3News. Although the Omaha based news station made no mention of the nearby nuclear power plant facing catastrophe, Omaha Public Power District (OPPD) that owns the nuclear facility has. On its website, OPPD warned people to not be in the floodwaters due to possible radiation leaking from the nearby nuclear power plant. Earlier on Saturday, the Russian Federal Atomic Energy Agency (FAAE) released information provided to them by the International Atomic Energy Agency (IAEA) stating that the Obama administration ordered a “total and complete” news blackout relating to any information regarding a near catastrophic meltdown of Fort Calhoun Nuclear Power Plant.

                Corps brass arriving at behest of Congress as Missouri River threatens -Missouri's congressional delegation fired off a letter recently saying many of their constituents believe that flooding along the Missouri River might have been prevented with better planning by the Army Corps of Engineers.  Record-breaking rains and heavy snow in the basin's western reaches have filled upstream impoundments to near capacity, forcing the corps to evacuate the waters with dam releases more than double any in history. The record volumes of water that are working their way to the confluence with the Mississippi are scheduled to last into August. Corps officials acknowledged over the weekend that they are failing to keep up despite the releases. Continuing snowmelt and rain is complicating matters and corps officials said on Friday that they are moving more water from two upstream reservoirs into the Fort Randall impoundment in South Dakota, where space had been kept open. More heavy rains are forecast in coming days, prompting Army engineers to warn on Saturday that if weather continues to deteriorate, they will lose their ability to make adjustments between dams and may need to increase releases from Fort Randall and Gavins Point dams.

                Missouri River floods endanger nuclear power plants - time for climate adaption - Large parts of the US midwest are experiencing heavy rainfall and flooding, not unlike what Queenslanders saw in December and January this year when Brisbane was inundated. A major problem with urban infrastructure on flood plains is the risk of innundation during flood events, flood events likely to become more frequent with climate change. In Nebraska two nuclear power Stations are threatened by floodwaters. The Fort Calhoun Nuclear Power Plant in the midwest state of Nebraska was protected by sandbag levies and is now surrounded by flood waters. The reactor has been in cold shutdown mode since April 9 while being refueled. A "notification of unusual event" was issued due to the floods in early June. An alert was issued on June 7 after a fire in a switchgear room which was quickly extinguished. Cooling for the spent fuel pool was out of action about 90 minutes before a backup pump was activated. Assurances have been issued by Omaha Public Power District (non-profit electricity utility)that the nuclear reactor is safe and no radiation has been released. The Fort Calhoun Nuclear Power Plant is the designated spent fuel storage facility for the entire state of Nebraska. Calhoun stores its spent fuel in ground-level pools.

                Sand shortage as waters rise near the Cooper Nuclear Plant at Brownville, Nebraska - The supply of sand used to fill hundreds of thousands of bags needed to fight off the swollen Missouri River is running low after weeks of relentless flooding. It's a problem that could get worse as the river is expected to remain high through August, making it unsafe to gather sand from the easiest place to get it: the river itself. The sand shortage comes as the bloated river rose to within 18 inches of forcing the shutdown of Cooper Nuclear Plant at Brownville, Neb. It stopped and ebbed slightly Monday, a reprieve caused by levee breaches in northwest Missouri. Flooding is a concern all along the river because of the massive amounts of water that the Army Corps of Engineers has released from six dams. Any significant rain could worsen the flooding especially if it falls in Nebraska, Iowa or Missouri, which are downstream of the dams. During the next few days, the river is expected to rise as much as 5 to 7 feet above flood stage in much of Nebraska and Iowa, and as much as 10 feet over flood stage in parts of Missouri. It could stay above flood stage into August.

                ‘Event’ (number 46970) at Cooper Nuclear Plant, Brownville, Nebraska, June 20, 2011: Oil released into Missouri River after levees over topped  - Notification is being made to the Nebraska Department of Environmental Quality regarding the release of oil to the Missouri River from the Cooper Live Fire Training Facility. Currently, levees separating the Training Facility and the Missouri River are being over topped due to flooding of the Missouri River. This condition has resulted in flooding of the burn pits in the fire training facility, with the subsequent release of the residue which includes unburned fuel oil. Any release of this water containing oil to the Missouri River is uncontrolled at this time. Then [sic] is no radiological contamination in this area.

                Flooding Shuts Down Nebraska Nuke, It “May Be Late Fall” Before Restart - The Fort Calhoun nuclear power station in Nebraska remains shut down due to Missouri River flooding, but the plant itself has not flooded and is expected to remain safe, the federal government said Friday. The rising river “has certainly affected the site, but the plant itself, the actual reactor is still dry,” said Scott Burnell, Nuclear Regulatory Commission spokesman. The 478-megawatt plant north of Omaha shut April 9 to refuel, and has remained shut because of the flooding, said Omaha Public Power District spokesman Jeff Hanson. “When the river reaches 1,004 feet above mean sea level, we shut down,” said Hanson. “We don’t have any idea when we’ll be able to start again.” As this AP News Video makes clear, though, it “may be late fall” before it can restart:

                NRC tracking flooding at two Nebraska nuclear power plants (Reuters) - The U.S. Nuclear Regulatory Commission (NRC) said Wednesday it was closely monitoring conditions along the Missouri River, where floodwaters were rising at Nebraska Public Power District's Cooper Nuclear Station and Omaha Public Power District's Fort Calhoun nuclear power plant in Nebraska. "Cooper is operating at full power. Fort Calhoun shut down for a refueling outage on April 7 and operators have decided not to restart the plant until flood waters recede," the release said. The NRC said that both plants had made extensive preparations to protect the sites against rising floodwaters. Flooding could complicate the restart of the Fort Calhoun plant as the U.S. Army Corps of Engineers expects record water release from the federal dams along the Missouri River to continue until mid-August, keeping river levels high.

                Fort Calhoun has 2 feet of flood water in several areas of plant - The U.S. Nuclear Regulatory Commission is closely watching conditions along the Missouri River where floodwaters are rising at Cooper Nuclear Station and the Fort Calhoun nuclear power plant in Nebraska The Fort Calhoun plant was shut down on April 7 for a refueling outage, and operators decided not to restart it until flooding had subsided. The Cooper plant was shut down for an "unusual event" on June 19. "Both plants have activated their flood response plans and taken appropriate steps to protect vital structures, systems and components from rising floodwaters and maintain their plants in a safe condition," NRC Region IV Administrator Elmo Collins said in a statement today.  Although the Fort Calhoun plant is surrounded by an 8 foot tall and 16 foot wide protective berm, two feet of water have already made its way to several areas of the Fort Calhoun plant, but authorities say there is no immediate danger at either plant.

                US orders news blackout over crippled Nebraska Nuclear Plant: report - A shocking report prepared by Russia’s Federal Atomic Energy Agency (FAAE) on information provided to them by the International Atomic Energy Agency (IAEA) states that the Obama regime has ordered a “total and complete” news blackout relating to any information regarding the near catastrophic meltdown of the Fort Calhoun Nuclear Power Plant located in Nebraska.According to this report, the Fort Calhoun Nuclear Plant suffered a “catastrophic loss of cooling” to one of its idle spent fuel rod pools on 7 June after this plant was deluged with water caused by the historic flooding of the Missouri River which resulted in a fire causing the Federal Aviation Agency (FAA) to issue a “no-fly ban” over the area. Fort Calhoun Nuclear Plant is owned by Omaha Public Power District (OPPD) who on their website denies their plant is at a “Level 4” emergency by stating: “This terminology is not accurate, and is not how emergencies at nuclear power plants are classified.” Russian atomic scientists in this FAAE report, however, say that this OPPD statement is an “outright falsehood” as all nuclear plants in the world operate under the guidelines of the International Nuclear and Radiological Event Scale (INES) which clearly states the “events” occurring at the Fort Calhoun Nuclear Power Plant do, indeed, put it in the “Level 4” emergency category of an “accident with local consequences” thus making this one of the worst nuclear accidents in US history.

                Alert : Cooper Nuclear plant Workers Given SATELLITE Phones and Stock Pile Food and Water

                A Nuclear Plant’s Flood Defenses Trigger a Yearlong Regulatory Confrontation -Pictures of the Fort Calhoun nuclear power plant north of Omaha, Neb., show it encircled by the swollen waters of the Missouri River, which reached a height of nearly 1,007 feet above sea level at the plant yesterday.  The plant's defenses include new steel gates and other hard barriers protecting an auxiliary building with vital reactor controls, and a water-filled berm 8 feet tall that encircles other parts of the plant. Both systems are designed to hold back floodwaters reaching 1,014 feet above sea level. Additional concrete barriers and permanent berms, more sandbags and another power line into the plant have been added. The plant was shut down in April for refueling and will remain so until the flood threat is passed.  "Today the plant is well positioned to ride out the current extreme Missouri River flooding while keeping the public safe," But a year ago, those new defenses were not in place, and the plant's hard barriers could have failed against a 1,010-foot flood, the Nuclear Regulatory Commission contends in a yearlong inspection and enforcement action against the plant's operator, the Omaha Public Power District (OPPD).

                Fort Calhoun Nuclear Power Station -- Is It Worse Than We Think? [8-month-old NRC letter: At 1,010 ft water would enter Ft. Calhoun’s auxiliary building, shorting power and submerging pumps; Could then have a station blackout with core damage within 15-18 hours — water now at 1,007 ft.] - The NRC responded in its October 2010 letter that once flooding reached 1,004 feet, water would have entered the plant and the ability of emergency workers to move around the site would “significantly degrade.” [...] At 1,010 feet, water would begin to enter the auxiliary building, “shorting power and submerging pumps. The plant could then experience a station blackout with core damage estimated within 15 to 18 hours,” under a worst-case scenario, the NRC said. [...] “They also ordered us to revise our policies and procedures and make whatever changes were necessary to bring the design basis up to 1,014. We did so, and we believe we are now in compliance with the NRC and are awaiting a final inspection.”

                Radioactive tritium leaks found at 48 US nuke sites - BRACEVILLE, Ill. — Radioactive tritium has leaked from three-quarters of U.S. commercial nuclear power sites, often into groundwater from corroded, buried piping, an Associated Press investigation shows.  The number and severity of the leaks has been escalating, even as federal regulators extend the licenses of more and more reactors across the nation. Tritium, which is a radioactive form of hydrogen, has leaked from at least 48 of 65 sites, according to U.S. Nuclear Regulatory Commission records reviewed as part of the AP's yearlong examination of safety issues at aging nuclear power plants.  Leaks from at least 37 of those facilities contained concentrations exceeding the federal drinking water standard — sometimes at hundreds of times the limit.

                Gov’t: No quick fix for leaky nuclear reactors - U.S. nuclear power plant operators haven't figured out how to quickly detect leaks of radioactive water from aging pipes that snake underneath the sites — and the leaks, often undetected for years, are not going to stop, according to a new report by congressional investigators. The report by the Government Accountability Office was released by two congressmen Tuesday in response to an Associated Press investigation that shows three-quarters of America's 65 nuclear plant sites have leaked radioactive tritium, sometimes into groundwater. Separately, two senators asked the GAO, the auditing and watchdog arm of Congress, to investigate the findings of the ongoing AP series Aging Nukes, which concludes that the U.S. Nuclear Regulatory Commission and the nuclear power industry have worked closely to keep old reactors operating within safety standards by weakening them, or not enforcing the rules.

                AP IMPACT: US nuke regulators weaken safety rules -– Federal regulators have been working closely with the nuclear power industry to keep the nation's aging reactors operating within safety standards by repeatedly weakening those standards, or simply failing to enforce them, an investigation by The Associated Press has found. Time after time, officials at the U.S. Nuclear Regulatory Commission have decided that original regulations were too strict, arguing that safety margins could be eased without peril, according to records and interviews. Examples abound. When valves leaked, more leakage was allowed — up to 20 times the original limit. When rampant cracking caused radioactive leaks from steam generator tubing, an easier test of the tubes was devised, so plants could meet standards.Failed cables. Busted seals. Broken nozzles, clogged screens, cracked concrete, dented containers, corroded metals and rusty underground pipes — all of these and thousands of other problems linked to aging were uncovered in the AP's yearlong investigation. And all of them could escalate dangers in the event of an accident.

                U.S. nuke regulators repeatedly weakened safety rules - The Associated Press has a blockbuster study of the Nuclear Regulatory Commission (NRC): Federal regulators have been working closely with the nuclear power industry to keep the nation's aging reactors operating within safety standards by repeatedly weakening those standards, or simply failing to enforce them, an investigation by The Associated Press has found. Time after time, officials at the U.S. Nuclear Regulatory Commission have decided that original regulations were too strict, arguing that safety margins could be eased without peril, according to records and interviews. The result? Rising fears that these accommodations by the NRC are significantly undermining safety -- and inching the reactors closer to an accident that could harm the public and jeopardize the future of nuclear power in the United States. I've been arguing for a long time that there was no nuclear renaissance, that the industry had failed to get its act in order, and had priced itself out of the market. Then back in October, Exelon CEO John Rowe explained that low gas prices and no carbon price push back nuclear renaissance a "decade, maybe two." In short, nuclear power has gone from "too cheap to meter" to "too costly to matter."

                Global Nuclear Update - While a tornado partially knocked out at the Browns Ferry reactors in Alabama in April, power began to be restored within a month without incident.  The flood waters in the Missouri continue to pose a danger to the Fort Calhoun nuclear plant in Nebraska. As you may know, an electrical fire at the spent fuel pools at Fort Calhoun temporarily knocked out power for cooling, and the operator flooded the containment building.  So far, I have seen no evidence of any release of radiation, although there are a number of worrying factors in the form of a “perfect storm” which could – in a worst-case scenario – lead to an accident.  The State of Vermont has denied relicensing to the Vermont Yankee Nuclear power plant.But Senator Sanders says that 100% captured Nuclear Regulatory Commission has pressured the Department of Justice to sue the state to allow relicensing, and to side with the nuclear operator instead of the state. The Anshas Nuclear Reactor outside of Cairo has leaked small amounts of radioactive water. See this, this and this. (etc...long report)

                Tepco Says Failure at Water Decontamination Won’t Delay Nuclear Shutdown  - Tokyo Electric Power Co. played down concern a solution to its nuclear crisis may be delayed, one day after finding more radiation than expected must be removed from millions of gallons of water before other work can proceed.  Decontamination efforts at the Fukushima Dai-ichi plant were halted June 18 after a filter expected to remove the radioactive element cesium for several weeks exceeded capacity in just five hours. Oil and sludge in the water contained more radiation than expected.   Work on a self-contained cooling system has been suspended while the company solves this problem, Matsumoto said, adding that the setback won’t delay achievement of a stable cooling status by mid-July.  “Decontamination is the key to solving the problems at the plant,” . “They put together equipment from different manufacturers, which may have made the system as a whole vulnerable.”

                Japan Strains to Fix a Reactor Damaged Before Quake — Three hundred miles southwest of Fukushima, at a nuclear reactor perched on the slopes of this rustic peninsula, engineers are engaged in another precarious struggle.  The Monju prototype fast-breeder reactor — a long-troubled national project — has been in a precarious state of shutdown since a 3.3-ton device crashed into the reactor’s inner vessel, cutting off access to the plutonium and uranium fuel rods at its core.  Engineers have tried repeatedly since the accident last August to recover the device, which appears to have gotten stuck. They will make another attempt as early as next week.  But critics warn that the recovery process is fraught with dangers because the plant uses large quantities of liquid sodium, a highly flammable substance, to cool the nuclear fuel. The Monju reactor, which forms the cornerstone of a national project by resource-poor Japan1 to reuse and eventually produce nuclear fuel, shows the tensions between the scale of Japan’s nuclear ambitions and the risks.

                Radiation spike halts work at Japan nuclear plant - A rise in radiation halted the clean-up of radioactive water at Japan's Fukushimi nuclear power station on Saturday hours after it got under way, a fresh setback to efforts to restore control over the quake-stricken plant. The power plant has been leaking radiation into the atmosphere ever since the March 11 quake and tsunami and both China and South Korea have expressed concern over the possibility of further leaks into the sea. Tokyo Electric Power Company, the operator of the Fukushima Daiichi plant, said it expected to resume the clean-up within a week. A statement issued by the utility, known as Tepco, said the suspension was prompted by a faster than expected rise in radiation in a part of the system intended to absorb caesium. "At the moment, we haven't specified the reason,"

                Data drone makes emergency landing on Fukushima reactor building - A small, 18-pound (8.2-kilogram) drone aircraft gathering data from heavily-damaged areas of the Fukushima nuclear power plant lost control Friday and landed on the roof of the No. 2 reactor building, according to the plant's operator, Tokyo Electric Power 1Co. (TEPCO).The vehicle, known as a T-Hawk, is about 19.7 inches (50 centimeters) in diameter and looks like a small jet pack. It is used primarily by the military for reconnaissance work in dangerous areas. It has been used at Fukushima since mid-April to assist in damage assessment. The company said that there did not appear to be any damage from the impact of the vehicle, with no fire or smoke observed following the accident. It was not known if the vehicle was damaged. TEPCO spokesman Junichi Matsumoto said that due to its small size and weight, the drone was "unlikely to crash through the rooftop and damage the reactor."

                Japan finds hot spots in areas that seemed safe -  As officials bolster efforts to map the nuclear fallout with daily and sometimes hourly readings, they have found that radioactive particles concentrate in random hot spots — curling with the wind, collecting along mountainsides and raising fresh problems for residents who thought they were a safe distance from danger.Japan’s evacuation map now resembles not a circle but a paw print, with a growing number of finger-like projections. On Thursday, Chief Cabinet Secretary Yukio Edano recommended the evacuation of several emerging hot spots beyond the government-ordered 12.5-mile evacuation zone around the Fukushima Daiichi plant. These hot spots — some as far as 35 miles from the facility — could receive more than 20,000 microsieverts of radiation in a year, surpassing the internationally recognized limit for adult exposure, Edano said. Instead of basing its evacuation recommendations on simple geography, the government is now opting for a hyper-detailed evaluation that underscores the randomness of radioactive patterns. On Saturday, the government said new hot spot areas would be analyzed on a house-by-house basis, a tacit acknowledgment that the formula for projecting long-term exposure relies too much on estimation and should not be the sole factor in determining whether residents stay or leave.

                Japan Expands The Fukushima Evacuation Zone Even Further -- After 98 Days Of Radiation Exposure: "After three months of meltdown, Japan is finally recommending evacuations from towns as far as 25 miles from Fukushima Nuclear Plant, according to Japan Times. Chief Cabinet Secretary Yukio Edano recommended evacuations from places like Date and Minamisoma, where levels of radiation exceeded the equivalent of 20 millisieverts per year. Evacautions are not mandatory. While America and other foreign governments evacuated people within 37 miles of the plant in March, Japan has been extremely slow to evacuate. Until April 11, Japan maintained a non-mandatory evacuation zone extending only 15 miles from the plant. Until today, Japan has mandated evacuations within 15 miles and recommended evacuations within 19 miles. Meanwhile containment at the nuclear plant has shown little progress.

                Fukushima Nuclear Plant Remains 'Ticking Time Bomb' After Japan Disaster: Michio Kaku, Theoretical Physicist - Though global fears about radiation emissions from the heavily damaged Fukushima Daiichi nuclear power facility have calmed in the weeks since Japan's devastating March 11 earthquake and tsunami, famed physicist Michio Kaku insists the situation remains a "ticking time bomb."  A professor of theoretical physics at the City University of New York and the City College of New York, Kaku discussed some recent revelations about the disaster's impact, and noted that Japanese officials still don't yet have control at the site. "In the last two weeks, everything we knew about that accident has been turned upside down," Kaku says. "Now we know it was 100 percent core melt in all three we know it was comparable to the radiation at Chernobyl."  Among Kaku's other distressing notes: Fukushima workers are exposed to a year's dose of radiation within minutes of entering the site, and cleanup will take between 50 to 100 years. "It's like hanging by your fingernails," he says. "It's stable, but you're hanging by your fingernails."  Watch Kaku's interview with CNN here:

                Nuclear terrorism can cause another Fukushima: expert - “Both al Qaeda and Chechen terrorist groups have repeatedly considered sabotaging nuclear reactors — and Fukushima provided a compelling example of the scale of terror such an attack might cause,” Matthew Bunn of Harvard University said. Some countries had “extraordinarily weak security measures in place,” he said in an Internet blog posted this week, without naming them. “The nuclear industry in many countries is much less prepared to cope with security incidents than with accidents,” wrote Bunn, an associate professor at Harvard Kennedy School who specializes in nuclear issues. Steps to protect against both sabotage of nuclear facilities and theft of nuclear weapons or the materials to make them were “particularly urgent.”

                Japan's energy crisis: A matter of trust | The Economist - THE Kansai region of western Japan has an economy as big as the Netherlands, is home to two electronics giants, Panasonic and Sharp, and has in its biggest city, Osaka, a fun-loving rival to Tokyo. When Japan was hit by the March 11th natural and nuclear disasters, Kansai thought it would do its bit for Japan by revving its economic engines. To its chagrin, however, it has found itself in a similar pickle to Tokyo.Kansai drew no nuclear power from the stricken Fukushima Dai-ichi nuclear-power plant. But its regional monopoly, Kansai Electric Power (KEPCO), has asked clients to cut energy consumption by 15% at peak times between July and September. Citizens risk a sweat-soaked summer without air-conditioning. Tokyoites are bracing for something similar. Unlike theirs, however, Kansai’s leaders are in open revolt.  The issue is trust, which has been wearing thin in Japan ever since the nuclear accident. The Union of Kansai Governments, a group headed by the seven prefectural governors, believes that energy savings of 5-10% are enough.

                Dozens of countries queue up to go nuclear - IN THE wake of the nuclear meltdown at the Fukushima Daiichi power plant in Japan in March, several countries have announced plans to reject nuclear power. Japan will not build any more reactors. Germany plans to phase out its nuclear power plants, Switzerland will not replace its reactors, and last week Italy voted against starting a nuclear programme. The International Atomic Energy Agency is running an emergency conference this week to identify the key lessons from Fukushima (see "Agency report praises Fukushima staff, slams TEPCO"). So does this mean a decade-long revival of interest in nuclear power is grinding to a halt? IAEA figures suggest not. They list 65 reactors under construction, and those figures are just the tip of the iceberg because they do not include reactors that are contracted to be built, or those being planned. Neither do they acknowledge the significance of the United Arab Emirates being on course to become the first country to go nuclear since China in 1985: the UAE has signed a deal with a consortium led by the Korea Electric Power Corporation to build four reactors. Saudi Arabia is following suit, having announced earlier this month that it will build 16 reactors by 2030. Turkey plans to build two new plants.

                International Energy Agency fears higher emissions if nuclear power is cut - The International Energy Agency has warned that the world faces higher energy costs, more carbon emissions and greater supply uncertainty if it turns its back on nuclear power. Nobuo Tanaka, executive director of the IEA, signalled that the organisation was likely to cut its estimates of atomic power when it finalises its latest World Energy Outlook this year. The IEA previously believed nuclear would generate 14% of all electricity by 2035 but this figure is under revision in the light of Germany and Japan abandoning the sector following the Fukushima crisis. This week, in a referendum, Italy also voted overwhelmingly – and against the advice of Silvio Berlusconi's government – to reject any return to nuclear power. 'If nuclear is not 14%, but say 10%, then it means more gas and more coal as well as more renewables,' 'It will cost much more, be less sustainable and there will be less security. These are the consequences of lower nuclear.' The IEA says Germany faces a big challenge to achieve its goal of replacing a significant part of its nuclear power generation with wind and solar. The Berlin government says it wants 35% of its power to come from renewables by 2022, with a huge rise in offshore wind from the North Sea and more solar from the south."

                Lawmakers set to allow speedier Arctic drilling - The House is set to streamline regulations around Arctic drilling this week that would speed the development of oil and gas reserves off the Alaskan coast over the objections of environmentalists. At issue is a series of leases held by Royal Dutch Shell, Conoco Phillips, Norway's Statoil and a handful of other companies in the Chuckchi and Beaufort Seas, which lie west and north of Alaska. The leases are outside Alaska's Arctic National Wildlife Refuge. The areas have been open for drilling4 for years and the companies have paid billions of dollars to the federal government for the right to explore for oil and gas on them. But gaining the final permits for drilling has been challenging as environmentalists have made it more difficult for drillers to secure the permits using procedural and legal tactics. Supporters of the drilling argue that a significant amount of oil and jobs are at stake.

                Oil sands pipeline bill poised to advance - The House Energy and Commerce Committee is slated to vote on a bill aimed at accelerating federal approval of a controversial pipeline that would expand U.S. imports from Canada’s oil sands projects.The oil industry-backed bill – which House GOP leadership hopes to bring before the full chamber this summer – would require an Obama administration decision on the proposed Keystone XL pipeline by Nov. 1.Republicans and some Democrats call the pipeline a major step toward creating jobs and boosting supplies from a friendly neighbor. But opponents say the pipeline carries major environmental risks, citing potential leaks and the ecological impact of greenhouse gases emitted form Alberta’s oil sands project. Check out our posts here, here, here and here for more on the battle over the Keystone XL project.

                To the Last Drop - Aljazeera - (video) The small town of Fort Chipewyan in northern Alberta is facing the consequences of being the first to witness the impact of the Tar Sands project, which may be the tipping point for oil development in Canada. The local community has experienced a spike in cancer cases and dire studies have revealed the true consequences of "dirty oil". Gripped in a Faustian pact with the American energy consumer, the Canadian government is doing everything it can to protect the dirtiest oil project ever known. In the following account, filmmakers Niobe Thompson and Tom Radford describe witnessing a David and Goliath struggle.

                Middle East’s Push Toward Renewable Energy Spurred by Rising Oil Prices - There’s a revolution sweeping the Middle East that has nothing to do with street uprisings or Twitter protests. It’s a clean energy upheaval with international implications that could transform the Arab world from North Africa to the Persian Gulf. Solar plants are cropping up in Jordan and Morocco. Wind farms are being built in Egypt and Tunisia. Eight Arab nations and the Palestinian territories have a renewable energy target, and at least five more are taking serious steps to promote the domestic use of clean energy. Some of the most surprising movement is happening in oil-rich countries like Saudi Arabia and Qatar. Perhaps taking a page from Masdar, the famous carbon-zero city in the United Arab Emirates, these countries are spending their petrodollars on a budding number of their own alternative energy projects. Climate change, by all accounts, is not the primary driver for this. While rising global temperatures threaten to reduce the availability of scarce water and to raise food prices in the Middle East, analysts say that prospect is overshadowed by present realities of their main export: oil. Rising oil prices and growing energy demands mean depleting reserves. Thus, there is a new need to diversify.

                Oil Prices - Above is the latest data the EIA has for the spot prices of WTI and Brent grades of light oil (which are essentially the prices of light oil in the middle of the US, and in Europe, respectively). I've plotted from the beginning of 2007, showing the later stages of the 2005-2008 price spike, which then broke during the great recession, before bottoming out at the beginning of 2009.  Recovery in prices was gradual, but there was a recent spike probably mainly caused by events in the Middle East, and particularly the ongoing loss of Libyan oil starting in late February of this year.  Since April, prices have been retrenching a bit as the global economy has slowed, suggesting demand will be lower. It's extremely difficult to predict oil prices, since both supply and demand are the sum of many hard to predict factors, and the price depends on small difference between the two, which then get multiplied by an enormous factor because oil demand is so inelastic. Still, I have my guess.  While I think the current retrenchment may continue fitfully for a little while, at some point later in the year I expect the underlying pressures of rapidly growing emerging market demand and constrained supply to start pushing prices higher again.

                True Cost of Gasoline? Try $15 a Gallon - The Center for Investigative Reporting put together this great video on the hidden costs of gasoline.  It’s worth thinking about the next time you’re filling up at the pump.

                IEA releases oil reserves to prop up economy (Reuters) - Industrialized oil consumer nations on Thursday announced the release of 60 million barrels of oil from strategic government stockpiles in a bid to push down crude prices and underpin the global economy. The 28-member International Energy Agency said it would release 2 million barrels a day (bpd), mostly of crude, over an initial 30 days to fill the gap in supplies left by the disruption to Libya's output. The United States will provide half the volumes from its huge 727-million barrel crude reserve, about 1.5 days of U.S. consumption, with Europe supplying 30 pct in crude and refined products and the rest from Pacific OECD nations. The announcement comes after the Organization of the Petroleum Exporting Countries failed to raise production at a meeting on June 8 and despite assurances from OPEC's biggest producer Saudi Arabia that it would lift supplies unilaterally.

                U.S., IEA to Release Oil from Reserves - The U.S. and 27 other countries agreed Thursday to release 60 million barrels of oil from strategic reserves, temporarily driving down oil prices to a four-month low in a controversial effort to prop up the world's fragile economy.  The International Energy Agency said its members will release 60 million barrels of crude from emergency stocks, half from the U.S. strategic reserve, to offset production lost to the unrest in Libya, only the third time in its history that the IEA has intervened in this way. The White House said the decision to tap oil reserves—only the third time strategic crude stocks have been tapped in a coordinated global effort—is meant to help replace some of the 140 million barrels of oil production lost as a result of the three-month conflict in Libya, and to boost supplies during the peak summer driving season.

                Oil tumbles as U.S., IEA release oil stocks  - Oil fell sharply on Thursday, with North Sea Brent down more than $6 per barrel, after the International Energy Agency said 60 million barrels of oil would be released from strategic stockpiles to help the global economy. The announcement comes after OPEC failed to raise production at a meeting on June 8 and despite assurances from OPEC's biggest producer Saudi Arabia that it would lift supplies unilaterally. "Greater tightness in the oil market threatens to undermine the fragile global economic recovery," the IEA said. The IEA said it would release 2 million barrels per day (bpd) over 30 days onto the world market to fill the gap in supplies left by the disruption to Libya's output. Libya was exporting about 1.2 million bpd. Analysts and traders said they had not expected the move: "I'm really surprised. Everyone's been saying they've got enough stocks. This should keep WTI (U.S. crude) under the $100 (per barrel), but really we want Brent there, and this should help," said Robert Montefusco, broker at Sucden Financial.

                Global Oil Reserves Tapped in Effort to Cut Cost at Pump - The United States will lead an international effort to release 60 million barrels of petroleum reserves to world markets, replacing some of the oil1 production lost because of the conflict in Libya, the International Energy Agency announced in Paris on Thursday.  The action2 is aimed at stabilizing global oil3 supplies and reducing energy prices for businesses and consumers, and by early afternoon, futures contracts for West Texas intermediate crude oil were down $4.05 to $91.36 a barrel.  Of the total amount of oil to be released, about half would come from reserves in the United States, with the rest to be provided by other nations among the international agency’s 28 member states.  Negotiations for the coordinated response have been going on in secret for weeks, according to a person involved in the talks. Similar unified action was taken in 1991 at the outbreak of the first Persian Gulf War.  “We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” said Energy Secretary Steven Chu in a statement4. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”

                Oil Tumbles to Four-Month Low After IEA Says It Will Tap Reserve  - Oil tumbled in New York, erasing its gains for the year, after the International Energy Agency said its members would release crude from strategic reserves.  Oil fell 4.6 percent as the agency announced the release of 2 million barrels a day for 30 days beginning next week to help make up for a Libyan supply disruption. Commodities and equities dropped after U.S. jobless claims rose and the Federal Reserve cut its economic growth outlook yesterday. “The big driver is the IEA number,” . “There’s been a constant string of negative news about the economy and a lack of direction from Washington, which makes for a very volatile market.” Oil for August delivery dropped $4.39 to $91.02 a barrel on the New York Mercantile Exchange, the lowest settlement since Feb. 18. Prices have slipped 0.4 percent this year.  Brent crude for August delivery fell $6.95, or 6.1 percent, to $107.26 a barrel on the London-based ICE Futures Europe exchange, the lowest price since Feb. 22. Prices have risen 13 percent this year

                Oil Dives To 4 Month Low As Emergency Stocks Unleashed (Reuters) - Oil tumbled 6 percent on Thursday to a four-month low after the world's top consumers released emergency oil reserves for the third time ever, a surprise intervention to aid the struggling global economy. The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month and sending prices spiraling, with U.S. crude prices erasing all of the year's gains. The move shocked traders who had been expecting the IEA to give top exporter Saudi Arabia more time to make up for the supply shortfall following OPEC's failed meeting on June 8, when other members blocked Gulf efforts to hike output. "It comes after the Saudis said they would increase output so it suggests they think this might not be enough,"

                Asia moves to tap oil reserves (Reuters) - Asian nations moved to release emergency oil stockpiles on Friday as part of a rare global coordinated action by consumer countries to prevent high energy prices from stunting a stuttering economic recovery. The move, led by Washington and criticized by the oil industry as an unnecessary distortion of markets, suggests a fundamental shift on the part of industrialized nations toward intervention in commodity markets as an economic policy tool. Brent oil prices tumbled to a four-month closing low on Thursday and after rallying early on Friday, turned and fell again. Some doubts emerged that the unexpected decision by the International Energy Agency to release 60 million barrels over the next month would have a long-term impact. Japanese Economics Minister Kaoru Yosano said the IEA move was a warning to speculative buyers but India's Oil Minister S. Jaipal Reddy doubted the action would have an impact. "Even if there is a slight increase in production (supply), those gains will not be made available to us because of unbridled speculation in the financial markets of the world," he said. "We don't know whether this (weaker oil prices) is a stable trend."

                U.S. ready to release more oil from reserves - The United States said Thursday it would release more oil from its reserves if necessary, after leading a global drawdown of 60 million barrels due to supply disruptions in the Middle East. "The US stands ready to do more as is necessary to address this issue," a senior US official told reporters on condition of anonymity, adding that Washington would review the supply situation after one month. International Energy Agency countries said earlier Thursday that they would draw down 60 million barrels from strategic oil stocks to make up for the loss of Libyan output. The drawdown, only the third in the history of the IEA, was intended to complement "expected increases in output" by the major oil producing countries, the IEA said in a statement.

                Business group slams Obama over oil release -Washington's most powerful business lobby panned the Obama administration's decision to tap the nation's strategic oil reserve Thursday, calling the move "ill-advised." "Our reserve is intended to address true emergencies, not politically inconvenient high prices," Karen Harbert, CEO of the U.S. Chamber of Commerce Energy Institute, said in a statement. The U.S. Department of Energy said it would release 30 million barrels of oil1 from the Strategic Petroleum Reserve to alleviate Libyan supply disruptions. Other nations will contribute an additional 30 million barrels. The U.S. Chamber of Commerce is the voice of big business in Washington's hallways of power, and the group hasn't always been on friendly terms with the administration.  Energy policy has been a particularly sticky point. The Chamber favors an increase in domestic energy production, including off-shore drilling, and has asked the Obama administration to expedite drilling permits and leases.

                ‘Head-Scratcher’ Petroleum Release to Swell U.S. Crude Glut - Oil producers tumbled the most in more than a year after the U.S. government announced plans to pour as much as 1 million barrels of stockpiled crude a day into an already-glutted market. The U.S. and 27 other nations pledged today to tap government-controlled oil inventories after to civil war in Libya disrupted shipments and Saudi Arabia failed to persuade fellow members of the Organization of Petroleum Exporting Countries to plug the gap with increased output. Crude futures plunged more than $5 a barrel in New York trading. The supply addition comes at a time when refiners in the world’s biggest economy have more crude on hand and are importing less as demand for fuels such as gasoline and diesel is slipping, according to Energy Department figures. The National Petrochemical and Refiner’s Association criticized the decision to tap the strategic reserve as a political move that “makes no sense” and “will do nothing to benefit consumers.”“This is kind of a head-scratcher because we’re just not in a situation in the U.S. where we physically need more barrels to meet demand,”“This looks more like a perception move by the U.S. government and the Europeans to alleviate high crude prices.”

                A Release From The "Strategic" Petroleum Reserve - Not even W ever stooped this low. I believe we have just witnessed the first use of the Strategic Petroleum Reserve (SPR) as a way to stimulate the economy. The SPR exists for use in emergencies. The Wall Street Journal alerted me to the move yesterday afternoon The International Energy Agency (IEA) said it will release 60 million barrels of oil from emergency stocks in the next 30 days to alleviate supply problems caused by the shutdown of Libyan crude exports due to the civil war.The IEA, which represents major energy-consuming nations, said the tight supply situation was becoming a threat to a fragile global economic recovery. "I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy," IEA chief Nobuo Tanaka said.So which is it, Dr. Tanaka? Is the supply situation tight? Or is the market well-supplied? Clearly, this is a stimulus, not an emergency. The IEA will release 30 million barrels from OECD stocks, and the United States will release 30 million barrels from the SPR.

                More than political interest behind IEA move - Does the International Energy Agency know something that the market ignores? The release of the strategic petroleum reserve is prompting questions in the market. True, Libya oil production is out-of-action; refineries are demanding more oil as we move into the second half of the year, and high oil prices are affecting economic growth. All of that is plainly evident to the market. Yet, it appears that there is something more. For the critics, that something more is political interest. The White House – and European governments – were concerned about losing votes due to high petrol prices. Other argue that the release is a response to the collapse of the meeting of the OPEC cartel earlier this month. I think factor is relevant as background, but also that there is more to it than that. The more to it is not a secret that the IEA is keeping close to its chest and the market ignores. I just think that the agency is putting more emphasis on some evident problems it sees lying ahead: the first one is the outage in Libya, the second is the health of demand. On Libya, the release indicates that the country’s oil production is not going to recover any time soon. The health of demand is another key factor. While some on the market expect that economic weakness would cut demand growth, I believe that the IEA is telling the market the opposite: demand growth remains strong.

                The Dark Side of the OECD Oil Inventory Release - IEA in Paris announced this morning a release of 60 million barrels from OECD inventories. The implications of this extraordinary action are not positive. Let’s first take a look at the most recent global production data, which shows the large downward move of supply coming into March 2011, from the loss of Libyan oil. IEA is pointing to this loss of supply as the prima causa for its decision.  While some asset markets, perhaps global stock markets, may take comfort from the lower price of oil over the next 90 days, the intermediate term realities, implied by this action, are rather worrisome. I will list a few here: * We know that Saudi Arabia did not rescue the oil market this Spring, as was originally anticipated. Both the Financial Times and covered this issue originally in February. By April, it was clear that Saudi did not make up the Libyan loss. Thus, the IEA inventory release implies that whatever extra supply Saudi Arabia can offer, it is either too sour and heavy to bring down the price of global diesel, or Saudi can only pump extra oil for short periods of time. In my view, both of these factors are in play.

                Government Controlled Oil Stocks - Here is the recent history of government controlled oil stocks in the OECD (ie the developed countries).  The data comes from the EIA: You can see that in total there's about 1500 million barrels held by western governments in strategic reserves.  The US holds about half, Europe about a quarter, and the rest of the OECD the other quarter (Japan, Korea, Canada, Australia, etc).  This next chart shows how long the total would last before running dry, as a function of the steady release rate:The black lines indicate the level of yesterday's announcement, which called for a release of two million barrels/day, a rate that could be sustained for a little over two years.  Initially, the call is to do this for thirty days, however:

                The Secret Genius Move Behind Today's Big Oil Release: Completely predictably, everyone is peeing all over the IEA/White House's big news about releasing money from the Strategic Petroleum Reserve. It's true that it's a drop in the bucket, and it's also true that there's no oil emergency (just somewhat high prices), and so on its surface, this move comes off as more politics than sound energy policy. But that misses the point. This is a gun fired right at OPEC. Remember, it was just two weeks ago that an OPEC meeting ended in disaster, when the various countries openly split on production levels. Since then, things have even gotten more hairy within the cartel. Not surprisingly, Iran is already having a tantrum, saying this kind of interference in the market is totally unwarranted. Oil consuming countries have to love this. The IEA is pushing OPEC's buttons right now, taking advantage of the political climate to further roil the various parties. Brilliant.

                Peak Oil - the clear and present danger - Global oil production (crude oil plus condensate) has been on a plateau / in decline for 7 years resulting in high energy prices that are feeding inflation, eroding family budgets and crippling the World economy. It is time for the international political community to awaken to the risks posed by Peak Oil. A British Government report published last week under a Freedom of Information Act (FOIA) request makes clear that civil servants working at the UK department of Energy and Climate Change (DECC) seem very aware of the risks posed by peak oil, and yet the British Government seems happy to continue to ignore warnings. Last week The UK Guardian "newspaper" carried a story about an internal UK government report on peak oil that the government failed to make public and was eventually released under a Freedom of Information Act (FOIA) request made by French student Lionel Badal. The report, in form of a data and text rich Power Point presentation landed in my inbox and I was quite amazed by the content. Slide 16 in particular caught my attention:

                India Said to Plan Raising Fuel Cost to Cut $5.3 Billion Subsidy - India may raise fuel prices when a ministers’ panel meets today, seeking to trim fuel subsidies that threatens to exceed the government’s forecast of $5.3 billion this year, an oil ministry official said. The Ministry of Petroleum and Natural Gas has recommended higher diesel prices, and lower taxes on crude oil and fuels, the oil ministry official said yesterday, declining to be identified before a public announcement. The panel led by Finance Minister Pranab Mukherjee will meet at 1 p.m. in New Delhi, a finance ministry official said yesterday. An increase in fuel costs may spur inflation in Asia’s second-largest energy consumer, where diesel and cooking-fuel prices are capped to protect livelihoods of three-quarters of the population the World Bank says survives on less than $2 a day. Prime Minister Manmohan Singh’s government is raising prices to keep its pledge of narrowing the budget deficit.

                Russia threatens to cut off Belarus electricity — Russia's power utility warned Tuesday it would cut off all electricity to cash-strapped Belarus if it remains in arrears after receiving the first tranche of a $3 billion bailout loan. A potential interruption of Russian supplies should not hit resource-starved Belarus too severely because it only receives a tenth of its electricity from its energy-rich neighbour. But it adds another psychological blow to a nation of 10 million that this year has already seen its currency devalued by more than a third and inflation reach a staggering 32.6 percent amid its worst crisis since the Soviet era. The cutoff threat stems from a $54 million electricity payments debt that resulted in a partial disruption in supplies earlier this month.

                Russia May Face Debt Crisis Like Greece - Russia may face a debt crisis similar to the one gripping Greece by 2030 unless the government reduces spending, said Sergei Ulatov, the resident World Bank economist in Moscow. “By 2030 the debt level would be unsustainable like in Greece” if nothing changes, Ulatov said in an interview during the Russia and CIS Capital Markets Forum organized by Euromoney in London today. “Right now, we are mostly helped by oil prices and not by a very prudent macroeconomic policy.” Finance Minister Alexei Kudrin this week urged the government to cap annual spending increases at 4 percent to stabilize public finances and avoid state “paternalism” in running the economy. The budget deficit may narrow to less than 0.5 percent of gross domestic product this year if oil prices average $115 a barrel, according to Kudrin.

                The commodity bubble - In its recent Bulletin, the RBA has a new piece of research that questions the role of financialisation in commodity prices. The research has some spectacular charts and ultimately concludes that new financial instruments “short-run price dynamics for some commodities, the level and volatility of commodity prices appear to be primarily determined by fundamental factors.” I both agree and disagree with this conclusion. The paper begins by outlining the evidence for fundamental drivers of commodity prices: One of the most significant has been the shift in the composition of global growth over this period, as emerging market economies – particularly China – have come to prominence as the engines of world growth. Since these emerging market economies are generally at a relatively commodity-intensive stage of development, there has been a corresponding shift in global demand towards commodities as these countries industrialise and expand their infrastructure (Graph  2). Food prices have also been affected by economic development, with the composition and volume of food intake changing as per capita income in these economies rises, generally resulting  in a shift away from grains towards higher protein  foods such as livestock and dairy, which have high  resource footprints.

                About Those 65 Million Vacant Homes In China...Last year a survey by the State Grid Corporation of China found that 65 million residences were empty. This number was circulated as evidence of a housing bubble -- along with satellite pictures of Chinese ghost cities.  A new survey, however, says that number is bogus. CLSA talked to 200 developers in 54 cities across China. There are only 16.6 million vacant homes in China, according to this new survey.16.6 million vacant homes isn't all that scary in a population of 1.3 billion. CLSA also points out a difference from the U.S. housing bubble: the lack of leverage in residential mortgage financing. There aren't millions of poor people buying homes they can't afford. Rather there are millions of rich people buying houses as a store of value. Commodity housing represents the greatest portion of vacant homes -- 7.8 million. Old public housing represents another large portion -- 7.5. million -- which may be destroyed rather than sold.

                High-Speed Rail Poised to Alter China - Even as China prepares to open bullet train service from Beijing to Shanghai by July 1, this nation’s steadily expanding high-speed rail network is being pilloried on a scale rare among Chinese citizens and news media. Complaints include the system’s high costs and pricey fares, the quality of construction and the allegation of self-dealing by a rail minister who was fired earlier this year on corruption grounds. But often overlooked, amid all the controversy, are the very real economic benefits that the world’s most advanced fast rail system is bringing to China — and the competitive challenges it poses for the United States and Europe. Just as building the interstate highway system a half-century ago made modern, national commerce more feasible in the United States, China’s ambitious rail rollout is helping integrate the economy of this sprawling, populous nation — though on a much faster construction timetable and at significantly higher travel speeds than anything envisioned by the Eisenhower administration.

                Chinese Finance Comes of Age - The Chinese financial system’s evolution in recent years has been extraordinary. Back in 2002, all of China’s major banks were awash in non-performing loans (NPLs), which in some cases amounted to more than 10% of the total balance sheet. None of the major banks met even the Basel 1 standards for capital adequacy. Few financiers in London or New York could have named any bank other than Bank of China, which was often wrongly thought to be the central bank. Less than a decade later, much has changed. The old NPL problem was resolved, primarily by establishing asset-management companies to take over doubtful assets, and injecting new capital into the commercial banks. Now, reported NPLs amount to little more than 1% of assets. Foreign partners have been brought in to transfer skills, and minority shareholdings have been floated. Current valuations put four Chinese banks in the global top ten by market capitalization. They are now expanding overseas, fortified by their strong capital backing.

                Chinese 1- And 2-Week SHIBOR Rates Surge Over 9%, Highest Since 2007 - And while the developed world wonders whether or not Greece will default (it will), the real news continues to come from the new "White Knight" and IMF replacement, China, which according to the China Securities Journal is about to see an unprecedented surge in inflation, making life for the schizophrenic PBoC (on one hand handing out liquidity, on the other reeling it back in with rate hikes), untenable. Market News reports: "The Chinese central bank will need to raise interest rates in the near future if it is to tackle inflation pressure, despite the potential hit to economic growth, the official China Securities Journal said in an unsigned, front-page editorial Thursday. The newspaper said the central bank will move in the near future because the monetary conditions that are driving inflation are still in place, while negative rates are driving money out of the banking system, and putting those funds outside of the scope of reserve requirement adjustments. "

                Yuan Schizophrenia - Tuesday's Wall Street Journal illustrated the conflicted nature of American views regarding real yuan appreciation. The front page article by Hilsenrath, Burkitt and Holmes argued "Change in China Hits U.S. Purse". On the back page of the C section was a countering article, "No appreciation for the rising yuan", by Orlik, that noted the moderate impact on prices of imported goods from China. The front page article stressed the fact that as the yuan appreciates, and Chinese labor costs rise, then the price of imported goods that constitute a large part of the bundle of goods purchased by lower income households also rise, thus pushing up the overall cost of living. That epoch [of cheap imported goods from China] appears to be over. Prices of imported goods are climbing becoming a source of inflationary pressure. A wide areity of common products made abroad… From the back-page article: A rising yuan has actually done little to force of the price of China’s exports. Data collected by the U.S. Bureau of Labor Statistics show the price of U.S. imports from China in May up just 2.8% year on year. Can both articles be right (or both wrong) at the same time?

                Japan disaster recovery confronts funding dilemma - More than three months after the earthquake and tsunami ravaged Japan’s Tohoku region, reconstruction moves ahead at an uneven pace, and so does the debate about how the government will fund it. As frustration grows in Tohoku, political infighting about how the central government will pay the reconstruction bill has slowed the recovery process. The extent of the damage in some coastal cities has also affected the ability of local governments to distribute public funds and charitable donations to the people who need them most. While politicians in Tokyo clashed, survivors in the disaster zone waited for help rebuilding their lives and livelihoods. Even before the March 11 natural disasters did billions of dollars’ worth of damage, left over 23,000 people dead or missing and triggered a nuclear crisis at the Fukushima Daiichi nuclear plant, Japan’s national balance sheet wasn’t pretty. Its public debt was about twice the size of its $5 trillion economy, and ratings agencies were already warning that the country faced sovereign downgrades if it didn’t put its fiscal house in order.

                Japan Posts Second Biggest Trade Deficit In History - For those who may not have noticed it, the headline says "deficit" and pertains to Japan: once upon a time a booming export economy. The reason: the ongoing collapse in export trade, after May exports dropped by 10.3% from a year ago, and just better than April severe economic contraction of 12.4%. Consensus was for an 8.4% decline. The net result was a monthly deficit of 853.7 billion yen, or $10.7 billion, the second biggest inverse surplus ever. And just like in Europe, where things are going to go from insolvent to perfectly solvent any minute now... just not yet... so in Japan the economic renaissance which will cause the economy to surge (unclear how: no new monetary stimulus, and the recently announced fiscal stimulus of Y500 billion in new loans will do precisely nothing to boost anything except for some corrupt bureaucrats Swiss bank accounts) is coming any minute.... just not yet. Bloomberg says: "Shortages of power and parts have disrupted production and slowed overseas sales, prompting Japanese companies including Honda Motor Co. to forecast weaker earnings. Higher unemployment in the U.S. and weakening demand in Asia indicate Japan won’t be able to rely on global demand to pull itself out of a slump caused by the quake."

                Why Free Trade Matters - The link between trade openness and economic prosperity is strong and suggestive. For example, Arvind Panagariya of Columbia University divided developing countries into two groups: “miracle” countries that had annual per capita GDP growth rates of 3% or higher, and “debacle” countries that had negative or zero growth rates. Panagariya found commensurate corresponding growth rates of trade for both groups in the period 1961-1999. Of course, it could be argued that GDP growth causes trade growth, rather than vice versa – that is, until one examines the countries in depth. More compelling is the dramatic upturn in GDP growth rates in India and China after they turned strongly towards dismantling trade barriers in the late 1980’s and early 1990’s. In both countries, the decision to reverse protectionist policies was not the only reform undertaken, but it was an important component.

                Germany to Make Immigration Easier to Attract More Specialized Workers - Germany will facilitate immigration for members of some professions as a first step to counter an increasing lack of specialized workers, Chancellor Angela Merkel said Wednesday.The government will scrap a rule that demands giving priority to German employees during job selection processes for electric and machinery sector engineers and physicians, Merkel said in a statement before a meeting with employers and unions.“More steps will follow to make a targeted immigration possible,” Merkel said. “We invite specialized workers, especially from other European countries.” Amid falling unemployment and due to an aging population, Germany is facing an increasing lack of specialized workers, which in southern regions has already become severe.

                How Germany Achieved Stable and Affordable Housing -- Yves Smith: I’ve long been interested in the German approach to housing, since it has two noteworthy features: very high rates of rentals and reasonable costs. This post from MacroBusiness  provides a short but very instructive overview. I’m intrigued to see this article highlight an issue that I have stressed as a New York City resident, where tenants have much stronger rights than almost anywhere in the US: that strong tenant protections actually help landlords. The result is that people rent not because they can’t afford to own (which means they are financially less stable) but because they prefer not to (for instance, they prefer the flexibility, or decided to put their money in a second home or in investments). And tenants who have property rights (as in the landlord cannot deny them a lease renewal if they are current on their rent) not only take better care of their unit, but I’ve seen them actually make meaningful investments in them (this happens a lot in my building).

                Put A Fork In It: Saab Stops Paying Employees - The end appears near for Saab. Like bankrupt royalty trying to keep up appearances and hoping to marry new money, the once-proud Swedish marquee kept saying a return to production was just around the corner as its owner, Spyker, danced with Chinese and Russian suitors. But we rounded the corner today, and it's not pretty: The company said today it has no money to pay its 3,700 employees, reports the Associated Press. Not meeting payroll means production, essentially shut down since April 6, can't restart any time soon restart because what supplier would deliver parts now without cash up front? The company insists the latest news does not mean it will file for bankruptcy. Spokesman Eric Geers told the AP: "We're saying that we don't have funding to pay out salaries, but we're working day and night to find a solution. We're assuming we'll find a solution."

                Spain's ghost airports: monuments of reckless building that buried a nation in debt - Draw closer and there's something eerie about Ciudad Real's Central Airport. There's hardly a plane in sight. Nobody's around. Cars can only be heard faintly in the distance. This is one of Spain's "ghost airports" _ huge projects often funded by taxpayer money that helped drive Spain's economic boom and now symbolize the wasteful spending that contributed to its spectacular bust. Envisioned three years ago as a satellite airport for congested Madrid, Central boasts one of Europe's longest runways, yet there's hardly a skid-mark from the handful of weekly flights it now handles. Its vast and airy terminal, designed to handle 2.5 million passengers a year, echoes every sound. Spain's downturn has played its role in Central's woes, but critics say it was never a viable airport from the beginning _ a pork-barrel project too far from the capital to serve any real purpose.

                Overbuilding in Spain Leaves Many White Elephants - Last March, local officials inaugurated a brand new airport in Castellón, a small city on Spain’s Mediterranean coast. They are still waiting for the first scheduled flight. Castellón Airport, built at a cost of 150 million euros ($213 million), is not the only white elephant that now dots Spain’s infrastructure landscape. Spain’s first privately held airport — in Ciudad Real in central Spain — was forced to enter bankruptcy proceedings a year ago because of a similar lack of traffic.  Across the country, nearly empty toll roads are struggling to turn a profit. Other projects are surviving only with continued public financing, which has been cast into doubt by Europe’s sovereign debt crisis.  Over the last two decades, Spain built transportation networks at a rate that few other European countries approached.  Having opened its first high-speed train2 connection between Madrid and Seville in 1992, Spain overtook France last December as the country operating Europe’s biggest high-speed rail network, covering just over 2,000 kilometers, or 1,200 miles. 

                Cross-border banking in Europe -The global crisis has provided compelling evidence of the need to understand the role of banks in international finance. This column introduces a new CEPR report analysing key aspects of cross-border banking taking a European focus. The report argues that policy reforms in micro- and macro-prudential regulation and macroeconomic policies are urgently needed for Europe to improve its efficiency and reduce its risk.

                Kicking the Eurocan - Paul Krugman - The reaction of European leaders and institutions to the Greek crisis is a sight to behold. Essentially, it boils down to the fact that default would be very inconvenient, both as a practical matter and in terms of prestige. Therefore default must not be considered a possibility, even though it has long been obvious that non-default is not an option. So will they kick the can down the road once again? I don’t know. What I do know is that the costs of this strategy of delay are themselves badly misunderstood. I keep seeing statements along the lines that delaying a full resolution of the Greek situation is costing hundreds of billions of euros, because estimates of the size of the needed financial rescue fund keep going up. But such calculations totally miss the point. The European Stabilization Fund isn’t a transfer program; it’s a credit line designed to provide liquidity to get past a temporary cash squeeze. Since that’s not the actual problem, the size of the fund is a measure of European delusion, not a bailout cost.

                Iceland's Higher Growth and Lower Unemployment: A Model for Greece -  The performance of Iceland after default is not going to calm citizens in Greece, Spain, Portugal, Ireland or Great Britain. The IMF released a Country Report for Iceland on June 6, 2011 titled, Iceland: Fifth Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria and Rephasing of Access — Staff Report; Informational Annex; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iceland. I guess they didn't want to mislead anyone about the content of the report. The content was fascinating because it had projections of how Iceland is growing compared to advanced countries. The situation is they're doing somewhat better than average. The chart below shows that in 2011, Iceland is projected to have a growth rate of 2.3% compared to 2.2% for advanced economies. As the year is half over and the IMF raised the estimated growth for Iceland, it's probably pretty good.

                Eurogroup makes payment of fifth loan tranche contingent on Greek parliament’s approval of the austerity package - This is a politically smart move. Reuters reports that at their meeting in Luxembourg yesterday, European finance ministers will make the payment of the next loan tranche, due mid-July, contingent on the outcome of the confidence vote this Tuesday, and the Greek parliament’s approval of the austerity programme. That vote is due June 30. The political idea behind this decision is to present the Greek parliament with a straight choice between imminent and total default, or a continuation of the programme. Once the vote is in, according to Didier Reynders, the Eurogroup will approve the next loan tranche.  (Note: this refers to the payment of the fifth loan tranche of the existing programme, not the next programme, which is being negotiated separately.)  The official statement by finance ministers, however, did not contain any new details. Reuters reports that, according to its information, the plan will be €120bn in total size, with €60bn in official loans, €30bn from the private sector, and €30bn from privatisation. But all these leaks reflect only some countries’ position. Jean-Claude Juncker said last night that it was impossible to pin down the private sector’s contribution if the participation is voluntary. Wolfgang Schäuble repeated his old line that private sector involvement should be “voluntary but substantial” (meaning involuntary).

                New bailout may buy only months for Greece (Reuters) - Europe's plan for a new bailout of Greece may buy the country only several more months' breathing space before it again has to confront the prospect of default or a radical restructuring of its debt. A pledge by Euro zone finance ministers on Monday to pay a 12 billion euro ($17.2 billion) tranche of emergency loans in July -- provided the Greek parliament first passes new austerity steps -- is expected to keep Greece afloat into September. But the ministers' plan for a second bailout takes the same approach as the first rescue, launched in May 2010: it does not include direct steps to cut Greece's debt pile and merely tries to stave off default until Athens can reform its budget and the Greek economy starts growing its way out of trouble.

                Greek Bailout Leaves French Unruffled While Germany Seethes - Greece’s bailout, which has provoked popular anger in Germany, leaves neighboring France cold. Europe’s two largest economies, which were on opposite sides of a deadlock on enrolling investors in a second Greek rescue without triggering a default, said today in Berlin that they’ve found common ground. German Chancellor Angela Merkel’s room for maneuver has been limited by opposition at home. French President Nicolas Sarkozy has faced no such pressure. “France is a Latin country that feels closer to the Greeks; they also feel it could happen to them,” . “In Germany, it’s the classic tale of the ant and the grasshopper, with the ant furious about having to pay for the grasshopper’s profligacy.” In the face of turmoil in currency and credit markets, Merkel signaled willingness to compromise on German demands that bondholders shoulder a ‘substantial” share of a Greek rescue, saying she’ll work with the European Central Bank to resolve the crisis. France, like the ECB, had sought a “voluntary” rollover of Greek debt by investors, warning that a compulsory move might constitute the euro area’s first sovereign default.

                Germany 'dismisses Greek debt compromise plan' - A German compromise plan to resolve a dispute with the European Central Bank over the Greek rescue that was reported by Der Spiegel magazine is no longer on the table, a government source said Sunday. Der Spiegel had reported ahead of its Monday issue that the German finance ministry called for a beefed-up version of Europe's temporary bailout mechanism lending to Greek banks to insure they have adequate collateral with the ECB. It would boost the effective lending capacity of the Emergency Financial Stability Facility (EFSF) to 440 billion euros ($629 billion) and see member states double the amount of guarantees they provide the fund. Germany's share of guarantees would climb to 246 billion euros from 123 billion euros, according to the report. But a German official, who spoke on condition of anonymity, said that while "several options" were being debated to involve private creditors in an Athens rescue, the reported proposal was "no longer on the agenda".

                Europe May Withhold Half of Greek Payment - European governments weighed withholding half of Greece’s next 12 billion-euro ($17.2 billion) aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the euro area into crisis. Euro-area finance ministers may authorize only a 6 billion- euro loan to tide Greece through bond redemptions in July, while further aid hinges on Greek budget cuts, Belgian Finance Minister Didier Reynders said. “We will in any case try to release the necessary funds for the short term,” Reynders told reporters before a meeting of euro-area finance ministers in Luxembourg tonight. Tonight’s euro-area finance ministers’ meeting coincided with the start of a three-day Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a “critical crossroads.” Papandreou has 155 seats in the 300-seat parliament.Germany, which as Europe’s largest economy is the biggest guarantor of aid packages to Greece, Ireland and Portugal, insists on an “ambitious” economic overhaul in Athens, Finance Minister Wolfgang Schaeuble said.

                Europe May Withhold Half of Greek Payment to Pressure Athens - European governments weighed withholding half of Greece’s next 12 billion-euro ($17.2 billion) aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the euro area into crisis. Euro-area finance ministers may authorize only a 6 billion- euro loan to tide Greece through bond redemptions in July, while further aid hinges on Greek budget cuts, Belgian Finance Minister Didier Reynders said. “We will in any case try to release the necessary funds for the short term,” Reynders told reporters before a meeting of euro-area finance ministers in Luxembourg that began late yesterday. Europe’s financial brinksmanship ran in parallel with Greek Prime Minister George Papandreou’s effort to save his government from collapse and win parliamentary backing for spending cuts, tax increases and state-asset sales needed to keep bailout funds flowing. Spanish Economy Minister Elena Salgado said the focus is still on paying out the full 12 billion euros, telling reporters after four hours of talks: “You can’t divide it.”

                Eurozone Brinksmanship: Ministers Walk Back Greek Rollover Commitment, Demand Austerity Measures First - Yves Smith - One of the interesting features of the seemingly unending Eurozone crisis is that the half life of rescue measures is decreasing.  The elephant in the room, which we will put aside to focus on the current state of play, is that everyone knows the Greek debts must be restructured. To have Greece pay out punitive rates on past debt will simply grind the economy into a deeper hole, worsening its debt to GDP ratio and eroding its physical and human infrastructure. All the delay of the inevitable does is allow for more extend and pretend while Western financial firms strip the economy for fun and profit. And this is terribly inefficient looting; their profits from this pilferage will be small relative to the pain inflicted on the Greek populace.  Late last week, various commentators made a bit too much of the clearing of one obstacle to the extension of yet another short lifeline to Greece, namely, that Angel Merkel had relaxed one of conditions that stood in the way of a planned €12 billion credit extension. She had wanted private creditors to share in the pain, and agreed that a rollover of currently maturing debt would do. Before she had insisted on a full bond exchange, which would have resulted in a much more significant hit to investors. This concession did not go over well in Germany.

                Ramping Up Pressure on Athens: Euro Group Postpones Decision on Greek Aid - The euro-zone finance ministers have decided not to approve the next tranche of aid to Athens until the Greek parliament passes new austerity measures. The move increases pressure on the Greek government, but it is unlikely to reassure the financial markets. It's a reliable rule of thumb with European Union summits that the bigger the problem, the longer the meeting. In this case, the discussion lasted seven hours. It was not until early Monday morning that the finance ministers of the euro-zone countries emerged one by one from the conference center in Luxembourg City's deadly quiet Kirchberg plateau, home to various EU institutions. But the result they announced came as a surprise: The decision about whether to grant Greece new loans has been postponed.  In a statement, the euro group said that the Greek parliament would first have to approve the latest round of austerity measures and a €50 billion privatization program before the next tranche was disbursed.

                Deal on Lifeline to Avert Greek Bankruptcy Is Postponed - Europe’s finance ministers unexpectedly put off approval early Monday of the next installment of aid to debt-laden Greece, delaying the decision until July and demanding that the Greek Parliament first approve spending cuts and financial reforms that include a large-scale privatization program. After nearly seven hours of talks in Luxembourg, ministers announced a holding action that reflected their struggle over how to avert a potentially disastrous default by Greece. Athens needs the next payout of 12 billion euros from its existing 110 billion euro bailout package by mid-July in order to remain solvent. The decision adds to pressure on the Greek government and its prime minister, George Papandreou, who on Sunday began urging Parliament to support his reform plans in a confidence vote scheduled for Tuesday night.

                Europe delays decision on emergency loans to Greece - Euro zone finance ministers postponed a final decision on extending 12 billion euros ($17 billion) in emergency loans to Greece, saying Athens would first have to introduce harsh austerity measures. The ministers said they expected the money, the next tranche in a 110 billion euro bailout of Greece by the European Union and the International Monetary Fund, to be paid by mid-July. Greece has said it needs the loans by then to avoid defaulting on its debt. But keeping up their pressure on Athens, where public opposition to austerity has been growing, the ministers insisted that disbursement would depend on the Greek parliament first passing laws on fiscal reforms and selling off state assets. "To move to the payment of the next tranche, we need to be sure that the Greek parliament will approve the confidence vote and support the programme, so the decision will be taken at the start of the month of July,"

                Finance Ministers Struggle With Long-Term Fix, but Get Closer on Short-Term Cash - European finance ministers meeting Sunday in Luxembourg moved toward approving a fresh quarterly installment of Greece's €110 billion ($157 billion) bailout loan, but they remained divided over the details of a far harder task—extending Greece a giant new package that would support it for years to come. Meanwhile, finance ministers and central bankers from the Group of Seven industrialized countries held a conference call late Sunday to discuss the crisis, according to people familiar with the matter. Natalie Wyeth, a spokeswoman for the U.S. Treasury Department, confirmed a G-7 conference call was held but declined to provide any details. A senior euro-zone official said the U.S. urged a fast resolution of the Greek issue. Europe thought it had put Greece's troubles to rest last spring with a mammoth bailout that rewrote the contract among the euro's member countries. Now, Greece needs more help, and there's fatigue all around.

                China and the Saving of Europe - Simon Johnson - The Greek government owes more than it can afford to pay, now or in the near future, at market interest rates.  There are two options: reduce the payments through some form of restructuring, or move the debt into the hands of people who are willing to charge below market rates for the foreseeable future. In this decision, the International Monetary Fund has relatively little say – this is really a political decision to be made by the European Union, with discrete backing from the US and China. While the EU leadership is surely tired of Greek politicians at this point, they also fear greatly the implications for other eurozone countries if Greece says it can’t pay or won’t pay.  The realization that spreads on Spanish government debt will rise sharply concentrates the mind wonderfully.  Fortunately for the undeserving European policy elite, the IMF has plenty of money it can lend at low rates and the Europeans have plenty of votes at the IMF.  And funding is available from China and other emerging market countries with large stockpiles of foreign exchange reserves. China has every interest in making sure that the euro survives and prospers as a major reserve currency – to make sure that, over a longer period of time, the US dollar will decline as the primary place in which to hold public and primary rainy day funds.

                Greek Default Spells 'Havoc' for Banks a Year After Bailout - A year after European officials bailed out Greece, investors say the region’s banks haven’t raised sufficient capital or cut loans enough to withstand the contagion that may follow a default. While European lenders reduced their risk tied to Greece by 30 percent to $136.3 billion last year by not renewing loans, writing down the value of debt and shifting it off their books, they still have almost $2 trillion linked to Portugal, Ireland, Spain and Italy, figures from the Bank for International Settlements show, leaving them vulnerable if the crisis spreads. “The Greek debt situation certainly has the potential to create havoc with the European banking system,” said Neil Phillips, a fund manager at BlueBay Asset Management Plc in London, which oversees about $45 billion. “A Greek default and the ramifications of that would be too ghastly for Europe and the European banking system to contemplate right now.”

                EURO GOVT-Greek, Italian CDS rise as periphery hit (Reuters) - The cost of insuring Greek and Italian debt against default rose on Monday after ministers delayed granting emergency loans to Greece and rating agency Moody's warned Italy's credit rating could be cut. A meeting of Eurogroup finance ministers on Sunday had been expected to agree to provide Greece the funding it needs to avoid a near-term default, but ministers postponed a final decision pending confirmation that Athens could muster political approval for tough new austerity measures.  Moody's placed Italy's credit rating on review for downgrade late on Friday, citing concerns over an increased cost of borrowing stemming from the Greek crisis, as well as structural impediments to growth. Five-year credit default swaps (CDS) on Greek government debt rose 128 basis points to 2,025 bps, according to data monitor Markit. Equivalent Italian CDS hit 182 bps, up 11 bps on the day

                Italy: lurking in the credit risk shadows - Rebecca Wilder - Markets and global economists are focused on Greece, where all the while there are growing non-Greek credit events lurking in the shadows. Specifically, recent news flow out of Italy ensures that the volatility in Europe will follow any near-term Greek resolution. On Friday, Moody's placed Italy's Aa2 local and foreign currency bonds on negative outlook, citing a possible downgrade within 90 days. The drivers for the review are the following: (1) challenges to potential growth, (2) implementation risks surrounding fiscal consolidation efforts; and (3) risks posed by funding conditions for European sovereigns with high levels of debt. Moody's states that the above are the 'main drivers' (no link); but how I've interpreted recent shifts in credit outlooks is that (2) above, via rising political risk, is the last straw. If the economic cyclical indicators become somewhat challenged, this would surely require further austerity measures in the case of European sovereigns; and if further austerity measures become less certain in expectation on rising political risk, then the country goes on 'review'.

                Italian Voters Turn Out Against Water Privatization - Italians voted earlier this week to overturn laws established by Premier Silvio Berlusconi’s government. Voters blocked efforts by the Italian government to privatize water, reestablish the nuclear energy program and grant Berlusconi immunity from prosecution. If you’ve perused some of the articles in places like The Washington Post, The New York Times or Bloomberg, you may have noticed that most of the attention was paid to Berlusconi and his political survival. But, to many of us, the most critical element of this story is that the people of Italy do not want their water privatized. The Italian government had initially pushed for private sector assistance to repair an aging water system, and they passed a law that would privatize water by the end of the year. But, Italians already had a poor taste of what water privatization would be like after some communities had to deal with mismanaged water resources at the hands of a few multinational corporations. Boosted by support from the Roman Catholic clergy and others who demand that water be treated as a human right, the people of Italy have called for their water to be managed by a public entity.

                Could the EFSF engineer a Greek restructuring? - We’re now close enough to a Greek default that the likes of Daniel Gros are coming up with schemes for how to avoid such a thing: The European rescue fund — European Financial Stability Facility, or E.F.S.F. — should offer holders of Greek paper an exchange into E.F.S.F. paper at the current market price. Banks could be “induced” by regulators to accept the offer. The E.F.S.F. could then be the only remaining creditor of Greece and propose a bargain to the country: “We write down the nominal value of our claims (say, 280 billion euros) to the amount we paid (say, 150 billion euros) and extend all maturities (at unchanged interest rates) by five years provided you (Greece) agree to additional adjustment efforts (and asset sales).” The losses that would be taken by Greece’s private-sector creditors — €130 billion or so — would be small enough to avoid large-scale bank insolvencies, at least outside Greece itself. (What would happen to Greek banks is far from clear.) But it’s not at all clear how this regulatory “inducement” could work.

                Greece faces power outages due to austerity strike - Greece faced power outages on Monday as employees at the main power utility began 48-hour rolling strikes to protest the company's privatization, part of austerity plans needed to avoid a national debt default. The sell-off of state assets in the power company is a major step in a euro50 billion ($71 billion) privatization drive that must be completed by 2015. It is part of highly unpopular austerity plans, including more tax hikes and spending cuts, that must be passed by Parliament by the end of the month if Greece is to get the next euro12 billion installment of its euro110 billion bailout next month.Without the funds, Greece will be unable to pay its debts as of the middle of July, triggering a default that would rock financial markets in Europe and abroad. The power company, known by its acronym DEH, said nine small and large thermoelectric units were already offline as of Monday morning due to the strike, and appealed to consumers to limit their use of electricity, particularly during the midday heat, when air conditioning use is at its peak. It said it was preparing hour-long power cuts in several areas if that became necessary.

                Athens protests: Syntagma Square on frontline of European austerity protests - Athenians used to stop off at Syntagma Square for the shopping, the shiny rows of upmarket boutiques. Now they arrive in their tens of thousands to protest. Swarming out of the metro station, they emerge into a village of tents, pamphleteers and a booming public address system. Since 25 May, when demonstrators first converged here, this has become an open-air concert – only one where bands have been supplanted by speakers and music swapped for an angry politics. On this square just below the Greek parliament and ringed by flashy hotels, thousands sit through speech after speech. Old-time socialists, American economists just passing through, members of the crowd: they each get three minutes with the mic, and most of them use the time alternatively to slag off the politicians and to egg on their fellow protesters.  The closer you get to the Vouli, the parliament, the more raucous it becomes. Jammed up against the railings, a crowd is clapping and chanting: 'Thieves! Thieves!'

                Tens of Thousands March Against Euro Pact in Spain - Tens of thousands of Spaniards abandoned their customary quiet day with families and friends on Sunday to march against the so-called "Euro Pact" and the handling of the economic crisis, reports Reuters. In Madrid, marches began at six locations around the city, one at 6 am from Leganes, 13 kilometres from the centre, before convening at the Neptune plaza in front of the Prado art museum, a stone's throw from parliament. At 1200 GMT (1 p.m. British time), police put estimates in Madrid at between 35,000 and 45,000 protestors, with no reports of violence, according to national radio. "I'm here because this is a con," said Juanjo Montiel, 26, one of four blind protestors in Madrid, who works in Information Technology for around 1,000 euros a month. "I'm lucky enough to have a job, but many don't and have no chance. And on top of that, the politicians want to make more cuts. This is not our fault, it's the system." Sunday's protests have largely concentrated on the "Euro Pact," agreed by euro zone politicians to stimulate competitiveness across the bloc, which in Spain has prompted reforms to give companies greater power to hire and fire.

                Cool reception for Greek debt plan - One game of chicken is over in the eurozone but another is just beginning. The first ended with Germany backing down over its demands on how private creditors should be involved in a new Greek bail-out, handing a victory of sorts to the European Central Bank and France. But the latter duo’s preference for a so-called voluntary rollover of Greek debt means a new game of chicken will take place between bondholders and authorities.  A rollover would see investors encouraged not to cash out when their bonds mature but to buy new, longer maturing bonds.  Investors and strategists say that the outcome of this game is less likely to go the way of the European authorities.  They expect that only the banks – which are estimated to own about a quarter of Greek sovereign debt – will agree to a rollover. “I can’t see why anybody would want to roll over a Greek bond if they had a choice,”

                A Slightly Sweeter Deal Offered to Greece - Seeking to sweeten the medicine for Greek politicians who must decide next week whether to embrace a strict austerity plan, the president of the European Commission, José Manuel Barroso, on Tuesday proposed early payment of around €1 billion in E.U. funds earmarked for Athens.  At a summit meeting of European leaders Thursday and Friday, Mr. Barroso will propose special treatment for Greece to make it easier for the debt-laden country to use the funds, the equivalent of $1.4 billion, to encourage badly needed economic growth.  “Greece has the potential to access a significant amount of E.U. money,” Mr. Barroso said in Brussels, adding that the funds should be concentrated where they can create jobs. The idea was to “front-load and accelerate them, so that Greece gets the benefit now.”  The suggestion came as Fitch Ratings1 said Tuesday that it would consider even a voluntary rollover of Greece’s sovereign debt as a default that would lead it to cut the country’s credit rating, while a top U.S. official criticized Europe for failing to speak with one voice on the Greek debt crisis.

                Why another Greek bailout is a stupid idea - First, the bailouts are not actually making it any more likely that Greece will be able to pay its debts back. Perhaps just the opposite. The bailouts are trying to solve Greece's debt problem with debt. The talk is that a proposed second EU bailout could total as much as 120 billion euros. Taken together with last year's 110 billion-euro rescue, the combined bailouts could add up to a remarkable 100% of GDP. With mandated budget cuts, tax hikes and other austerity measures eating into the country's growth potential, the combination of a stagnant economy and unresolved high debt levels is not going to convince any investor to trust his or her money with the government in Athens. That's especially because no one can trust Athens to follow through on its reform pledges. Even if the austerity package passes parliament on Tuesday, is it politically possible to implement it? Will politicians eventually cave to anger on the streets? Can the government even survive in the face of such opposition? There is no way investors can be convinced that the government in Athens will hold up its side of the bargain, and thus no way to convince private investors to have faith in further EU bailouts. In fact, continued EU aid may actually be undercutting Greek reform efforts rather than energizing them.

                Greece: Private-sector voluntary aid may be impossible - Following last week's agreement between Angela Merkel and Nicolas Sarkozy that any private-sector contribution to Greece's rescue would be voluntary, not a compulsory roll-over of credit or formal write-down of the 340bn euros owed by the Greek government, there has been understandable interest in what on earth the eurozone has in mind. These uncertainties came to a head late on Sunday night, in a conference call between the leaders of the G7 developed economies - whose main point was to brief the US and the Canadians about attempts to stabilise and quarantine the Greek financial problem. Because US banks have the second biggest exposure of any country's banks to the Greek economy,Tim Geithner, the US Treasury secretary, was particularly interested in learning what France and Germany mean by "voluntary" contributions. The response he received, according to a well-placed source, was profoundly unenlightening, I am told. "It is all incredibly vague and formless" said a source. "Goodness only knows how they will get a serious and credible proposal together by the deadline they've set themselves of July".

                Greek debt restructuring likely a default  - Standard & Poor's reaffirmed a voluntary debt restructuring for Greece as currently foreseen by euro zone governments would likely be deemed a default, its head of European sovereign ratings told a German newspaper. "Past experiences show that restructuring the debt of a country, whose creditworthiness is rated at CCC like Greece is currently, tend not to be voluntary and investors must sustain losses,"  Euro zone officials have told Reuters a second bailout plan for Greece is expected to fund Athens into late 2014 and feature up to 30 billion euros in aid from a voluntary private sector participation on the basis of the so-called "Vienna Initiative." S&P's Kraeemer said whether extending a bond's maturity voluntarily or not is of lesser importance. "What's decisive is how does it compare to what was promised to creditors when they first invested their money," he said.

                More Eurozone Burning While the ECB Fiddles - It is bad enough to passively allow monetary policy to tighten in an economic crisis, but to actively do so is unconscionable. Yet, as Michael T. Darda reports, that is exactly what the ECB's seems to be doing at this time (my bold): Our main concern is that it’s not just Greece. Ireland and Portugal are in very similar predicaments, while Spain’s economy, with twice the debt load of Greece, remains in deep trouble with 20% unemployment and tightening debt markets. Italy, with three times the debt load of Spain, also remains on shaky ground. If the periphery is going to survive, there has to be some path to growth/recovery. As yet, there is none. Austerity programs have dented growth and shrunk the tax base. Data for the last week show that the ECB, inexplicably, is contracting high-powered liquidity at more than a 10% year-to-year rate. Broad money across the zone is weak. Peripheral debt spreads are in the stratosphere. And funding costs are inching ever higher. To us, this is a setup for the weakness of the periphery to spread into the core, rather than for the strength of the core to lift the troubled periphery.

                Europe's damaging dithering continues CHARLEMAGNE summarises the latest developments from Europe: After seven gruelling hours in Luxembourg, which included a video conference with colleagues from G7 countries, the finance ministers of the 17 countries of the euro zone decided to delay until July the disbursement of €12 billion ($17 billion) in loans from the European Union and the IMF. By then, they said, two issues would have become clearer. Firstly, the finance ministers say they want to know how far Greece’s private creditors are willing to help “voluntarily” by rolling over Greek debt when current bonds mature. This has become vital for German domestic opinion to sweeten the bitterness of having to support a second bail-out for Greece. Secondly, the euro zone wants to know whether the reshuffled government of George Papandreou, the embattled Greek prime minister, will secure a vote of confidence in the Greek parliament, which is expected to come on Tuesday. Greek MPs are also due to approve, by the end of June, the next round of austerity measures and structural reforms—including a wholesale privatisation of state companies and lands... [I]n the end the ministers decided they could not issue a blank cheque.

                New Hurdle Is Placed for Loan to Greece - Pressure rose on Greece1 on Monday after a surprise decision by euro zone finance ministers to delay a loan payment until the troubled Greek government secures a confidence vote from Parliament.  The Socialist prime minister, George Papandreou2, requested the confidence vote last week after a cabinet shuffle aimed at shoring up internal support as he works to push through measures demanded by foreign lenders before they release the next aid package. The confidence vote is scheduled for Tuesday evening and is to be followed by a vote on the new measures in Parliament next Tuesday.  Those measures — which include tax increases, wage cuts and the privatization of about $70 billion in state assets — have met howling popular resistance. Power company workers started rolling blackouts on Monday and unions called a 48-hour general strike for next week after protests last week, some of them violent. In Brussels on Monday, Mr. Papandreou said3 that Greece would do whatever it took to pass the austerity measures, and he asked for patience from the country’s European partners.

                Still on track - George Papandreou won his vote of confidence early on Wednesday with the support of all his 155 PASOK deputies against 143 no votes and 2 abstentions, Kathimerini reports. The procedure was without major incident, except when deputy PM Theodoros Pangalos provoked the opposition party and caused them to leave the room stating that democracy in Greece has not started in 1974 but in 1981, when PASOK was first in government.  Papandreou’s cabinet is to approve the austerity package today, Wednesday, to get parliament’s approval by June 28 and then push through laws needed to implement it within the following two weeks, according to Reuters. An important legal hurdle has also been cleared yesterday. Greece’s supreme administrative court ruled that Greece’s agreement with its creditors to implement reforms in exchange for emergency funding was constitutional. The court rejected appeals by the biggest legal association and trade unions.

                IMF introduces a glitch into the EU timetable -The IMF yesterday threw down the gauntlet at EU finance ministers, warning them that they need firm commitment on a second Greek launch package before agreeing to disburse the fifth tranche of the Greek loan under the current programme, the FT reports. Ministers had hoped that the two issues had been separated – that it was only necessary for the Greek parliament to approve the latest austerity programme as a precondition for the payment of the €12bn tranche. IMF officials yesterday told the eurogroup meeting that they needed further commitment on the agreement on a second loan for Greece.  Süddeutsche Zeitung reports. that John Lipsky had to intervene to cut short the ministers’ never ending debate about private sector involvement and to help draft the final communiqué during the seven hour long Eurogroup meeting at Luxemburg in the night from Sunday to Monday, Oh, and as an aside, Reuters reports that the ministers also agreed that the ESM would have pari passu creditor status in respect of loans when it comes to loans to Greece, Ireland and Portugal.

                Greece Says Central Budget Deficit Widens on Tax Revenue - Greece's central-government budget deficit widened in the first five months of the year as the country's recession hit tax revenue. The shortfall, which excludes outlays by state-owned institutions and companies, increased to 10.3 billion euros ($14.7 billion) from 9.1 billion euros a year earlier, final data released today by the Athens-based Finance Ministry showed. Greece has failed to reduce its budget deficit, which in 2009 was the biggest in the history of the euro region, as much as required under the terms of a 110 billion-euro bailout from the European Union and International Monetary Fund last year.

                Thousands of angry Europeans protest against austerity - Thousands of angry European trade unionists swamped Luxembourg's city centre Tuesday, shouting "No to Austerity!" and demanding EU governments fund jobs rather than service deficits. Police said 7,500 people from across Europe poured off two trains and 130 buses in the demonstration while the organisers, the European Trade Union Confederation (ETUC), estimated the rally at 15,000 to 20,000 people. Held as the European Union prepares for a summit Thursday and Friday to be dominated by the continent's sovereign debt crisis and events in Greece, the march was called to prod EU leaders to focus on jobs rather than deficits. The 27-nation bloc's "main problem is not deficits but unemployment", said the ETUC's president, Spaniard Ignacio Toxo, whose group represents 83 union confederations from 36 European countries.

                Greek opposition leader: austerity will not work -- Greece's opposition leader insists the austerity program designed to pull the country out of its debt crisis "will not work" and must be renegotiated. Conservative party leader Antonis Samaras spoke Tuesday night during a debate ahead of a crucial parliamentary confidence vote for the Socialist government. Prime Minister George Papandreou called the vote to face down an internal party rebelion and help him push through additional austerity essential to prevent Greece from default. Samaras has come under intense pressure from Europe to lend support to the austerity. But he said he "will not give consensus to a mistake" and that "the austerity program simply will not work."

                Power cuts hit Greece as protests grow - Greece has been hit by rolling blackouts as employees at the main power company began 48-hour rolling strikes to protest the company's privatisation, part of austerity plans needed to avoid a national debt default. The sell-off of state assets in the power company is a major step in a 50 billion euros ($A68 billion) privatisation drive that must be completed by 2015. It is part of highly unpopular austerity plans, including more tax hikes and spending cuts, that must be passed by parliament by the end of the month if Greece is to get the next 12 billion euros ($A16.3 billion) instalment of its 110 billion euros ($A149.54 billion) bailout next month. Advertisement: Story continues below The troubled Socialist government is also struggling to make up for ongoing budget shortfalls. Without the funds, Greece will be unable to pay its debts as of the middle of July, triggering a default that would rock financial markets in Europe and abroad.

                Greece's Debt Woes Risk Hindering Drug Supplies - Greek hospitals face dwindling supplies of medicines because Greece's debt-laden government has fallen so far behind on payments to foreign pharmaceutical companies that they are withholding delivery of some drugs. Swiss drug giant Roche Holding AG has already stopped delivering medicines to public hospitals that haven't paid their bills. Other drug makers are threatening to do likewise if the situation worsens there. "This is a major issue," Hakan Bjoerklund, the chief executive of Swiss drug maker Nycomed SCA, said at a conference in St. Petersburg, Russia. Last year, the Greek government began paying international suppliers to its hospitals in government bonds.

                Greece's Economic Crisis Upended Middle Class - Greece's embattled prime minister survived a vote of confidence in Parliament early Wednesday. Next week, he faces an even tougher vote for further painful austerity measures to secure a fresh bailout from international lenders. But the government has lost the people's confidence as tens of thousands of Greeks continue daily protests against devastating measures that have led to growing joblessness, homelessness and anxiety. The demonstrators are not the usual leftists and trade unionists with red banners. They're mostly middle-class Greeks waving the white and blue national flag. In Athens' central Syntagma Square, actors perform in the style of an ancient tragedy. Wearing farm-animal masks, the Greek chorus chants the Orwellian phrase: "All animals are equal, but some are more equal than others."  These Greeks are outraged by what they see as the injustice of draconian austerity measures that have driven unemployment to a record high 16 percent, and extended the recession into its third year.

                Alex Andreou: Democracy vs Mythology – The Battle in Syntagma Square - I have never been more desperate to explain and more hopeful for your understanding of any single fact than this: The protests in Greece concern all of you directly. What is going on in Athens at the moment is resistance against an invasion; an invasion as brutal as that against Poland in 1939. The invading army wears suits instead of uniforms and holds laptops instead of guns, but make no mistake – the attack on our sovereignty is as violent and thorough. Private wealth interests are dictating policy to a sovereign nation, which is expressly and directly against its national interest. Ignore it at your peril. Say to yourselves, if you wish, that perhaps it will stop there. That perhaps the bailiffs will not go after the Portugal and Ireland next. And then Spain and the UK. But it is already beginning to happen. This is why you cannot afford to ignore these events.

                Confidence Vote in Greece: Papandreou Allowed to Continue from Frying Pan to Fire - Greek Prime Minister Giorgios Papandreou survived a confidence vote on Tuesday night. But the battle against national bankruptcy will get no easier in the coming weeks. Protests indicate that opposition to his austerity path is growing and he faces a crucial vote next week.When the vote was over, everything veered to the left. The laser pointers which had been criss-crossing the yellow façade of the Greek parliament were now directed at police in riot gear. The officers stood in the approach to the building, where Prime Minister Giorgios Papandreou had just withstood a vote of confidence. Now, he had to be protected from the anger of his people as he departed.

                EU Links Greece Aid to Budget Cuts - Greece will get its next quarterly installment of bailout money only if the country's Parliament passes a contentious package of budget measures, European finance ministers said after a two-day meeting in Luxembourg.  They also made long-planned changes to the euro zone's bailout funds. The ministers deferred any final decision on the installment payment until early July, after the vote in Parliament, and showed modest signs of progress toward a broader agreement for a bigger package of aid to Greece for coming years. They set another meeting for July 3.

                Greece: Cabinet approves Austerity, European Banks pressured to accept losses - From the Telegraph: Greek cabinet approves austerity budget The Greek cabinet has approved a 2012-2015 austerity budget plan as well as laws for its application, a key condition for further EU-IMF help to tame its massive public debt, government sources said. The beatings will continue until morale improves. And from the WSJ: Bailout Needs Banks' HelpIn both Germany and France, finance-ministry officials met with representatives of their respective countries' leading banks and insurers on Wednesday to discuss how banks would shoulder some of the cost of a second bailout of Greece ... The trick will be for the private sector to take losses on Greek bonds, without Greece being declared in default. I'm sure it will be voluntary ...The Greek 2 year yield is down to 27.9%. The ten year yields is down to 16.8%.

                Greece Prepares To Sell Off State Assets To Get Loans - Greece is preparing to sell off billions of dollars worth of state assets including airports, highways and state-owned companies, as well as banks, real estate and gaming licenses, to meet international lenders' demands that it raise funds. European finance ministers said Sunday that they were on track to give Greece a second huge bailout to keep the government afloat, but reiterated that Athens had to take tough measures to get it. Greece has to raise 50 billion euros ($71 billion) through privatization by 2015, Eurogroup members said. It also has to push through tough budget-cutting measures, they said, despite widespread protests in the country that forced a government reshuffle last week.Prime Minister George Papandreou faces a vote of confidence in his new ministers this week as his party clings to a wafer-thin majority in parliament. Acknowledging the anger in the streets, European Commission President Jose Manuel Barroso said the moves would bring "hardships" but were "long overdue."

                Privatisation is no salvation - Large-scale sales of public assets by the Greek government are the latest straw that policymakers are trying to clutch to as the Greek debt saga threatens to drag down the European economy. However, privatisation is a mirage. Privatisation can help when the problem is one of liquidity. If the problem is one of solvency privatisation will only make matters worse, especially if it has to be done at distressed prices (Manasse 2011).  Protests continue in Greece as its leaders debate the latest suggestions for dealing with its crippling debt. One proposal is for Greece to privatise several of its assets. This column argues that privatisation is a mirage. If the problem is one of solvency privatisation will only make matters worse, especially if it has to be done at distressed prices.

                Some Greeks Fear Government Is Selling Nation - They are the crown jewels of Greece1’s socialist state, and they are now likely to go to the highest bidder: the ports of Piraeus and Thessaloniki; prime Mediterranean real estate; the national lottery; Greek Telecom; the postal bank and the national railway system.  And then comes the mandated deeper round of austerity measures, which will slash the wages of police officers, firefighters and other state workers who are protesting in Athens, and raise the taxes of citizens already inflamed by a recession-plagued economy and soaring joblessness.  After winning a pivotal confidence vote on his new cabinet on Tuesday, Prime Minister George Papandreou2 now has an even tougher task: to carry out a radical remedy of forced auctions and fiscal austerity for a sickened economy already in a deep slump.  The European Union3, the European Central Bank4 and the International Monetary Fund5, known as the “troika,” say that is the only way out for a heavily indebted Greece, while some economists say the program resembles medieval bloodletting — a dose of pain highly unlikely to revive the patient.

                Dear Greece, Why Not Just Default? - The Greek government survived its no confidence vote in parliament, and the world is breathing a mini sigh of relief. So where does that leave the Greeks, and what are the next best steps? According to Greek politicians, the name of the game is bailouts, and Greece is desperate for another one. To get that squared away, its parliament first has to pass another round of painful budget cuts, which would free up the next payment of its last EU/IMF bailout, allowing it to make the next round of debt payments due in mid-July. But as the Greek debt crisis 2.0 continues to unfold, there's more and more head scratching (especially by the Greek people) about exactly where this is all going. After a year of drastic budget cuts and bailout money to grease the wheels, Greece is no better off. And by most calculations, there is no way that continuing to tread down the same path will put Athens back in the black.  More bailouts don't increase the likelihood that Greece will be able to eventually pay down its debts, and at this point, private creditors won't touch Greek debt with a ten foot pole. Plus, the drastic austerity measures tied to the bailouts are sure to drive economic growth into the ground, which would eventually result in an even more painful default.

                What makes the IMF think it's right about Greece? - Much of the world remains mired in the worst downturn since the Great Depression; a downturn that the IMF totally failed to predict, as noted by the IMF's own Independent Evaluation Office.  This is the sort of incredible mess-up that most people lose their jobs over and likely never find work again in the same field. Yet, as far as the world knows, not one person at the IMF lost their job. As far as anyone can tell, an economic downturn that ruined the lives of tens of millions of people around the world has had no impact whatsoever on the people who actually have the responsibility for preventing such calamities, at the IMF and in other major governmental and international financial institutions. This makes the IMF's stance behind the continued drive for austerity in much of world especially infuriating. How can Greek workers feel about being told that they will have to work longer for smaller pensions by IMF economists who can retire with six-figure pensions in their early fifties? The vast majority of Greek workers do their jobs. The IMF economists failed at their job.

                Debt Crisis May Overwhelm Euro Zone Says IMF - The debt crisis in the euro zone's periphery is threatening to shatter the region's economic recovery and may cause a global financial disruption if not stopped, the International Monetary Fund warned Monday. "A broadly sound recovery continues, but the sovereign crisis in the periphery threatens to overwhelm this favorable outlook, and much remains to be done to secure a dynamic and resilient monetary union," the IMF said, summarizing a regular report on the policies of the 17-country area. "Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers," it added. The IMF's warning comes after a damaging three-way stand-off between Greece, its partners in the euro zone, and the European Central Bank. The euro zone's finance ministers have agreed in principle to continue supporting Greece, but only under conditions that the Greek body politic is refusing to accept, and neither the European Central Bank nor Greece's political parties can accept.

                Little evidence of convergence across the Euro area 12 after adopting the euro - Rebecca Wilder - Eurostat released measures of annual per-capita GDP expressed in Purchasing Power Standards for the European Union. Purchasing power standards corrects for price differentials in nominal income and is useful for cross-country comparison (Eurostat data).Given the economic dispersion across Europe (a recent article highlighting this using Q1 GDP growth), I wanted to investigate 'convergence' among the Euro area 12 countries. Specifically, are the lower income countries benefiting from the single currency policy more so than the higher income countries and thereby 'catching-up' to the average?The chart below illustrates the per-capita income bases across the Euro area 12 - those countries that adopted the single currency in 1999 plus Greece (they adopted in 2001).The chart illustrates 2001 per-capita GDP measured in PPP euros across the Euro area 12 (now called average income). Luxembourg, Netherlands, and Ireland had the highest average incomes, while Spain, Portugal, and Greece had the lowest. If income disparities among the Euro area (12) countries were to converge over the following decade, then the lower income countries should grow more quickly than the higher income countries, and average income differentials should fall.

                Get It Over With - When Argentina defaulted on its debt a decade ago, the country became a pariah in the eyes of foreign bankers and bondholders and was shut off from international financial markets. Yet its economy recovered quickly and experienced rapid growth thanks to a large boost in external competitiveness provided by a vastly depreciated currency. The lesson is that default can be the better option when the alternative is years of continued austerity.In the case of Greece, this scenario is greatly complicated by the country’s membership in the euro zone. Greece would have to exit the euro zone to be able to engineer a currency depreciation. Since this is something for which euro zone rules do not make any allowance, a unilateral exit will unleash huge uncertainty about the rules of the game. And a Greek default will almost certainly be considered a hostile act by Greece’s European partners – never mind that German and other euro zone banks were equally at fault for having over-lent to the Greek government. Unfortunately, the current strategy seems destined to force Greece to this outcome. It is predicated on protecting German and other European creditors and bondholders while Greek workers, retirees and taxpayer pay the bill. This makes no sense economically, and will not work politically.

                How would a Greek transition out of the euro go? - If Greece announced it was leaving the euro, it might declare a bank holiday.  For some number of days, no one can pull their euros out of the bank (otherwise all euros leave the Greek banking system).  The government would have to put a money stamping technology in place fairly rapidly.  Once the banks are reopened, withdrawn money gets a stamp and it is now a “Greek euro” or “drachma euro,” trading at a lower value of course.  Is there an indelible, irreversible money stamping technology and how long would it take to distribute it  to every Greek bank?  How about ripping off one corner of the bill?  That wouldn’t take long.  Would corrupt bank tellers, handing out notes but refusing to rip them, undercut such a plan?There would be a relative windfall for those who held their wealth in the form of currency rather than bank accounts.  It is impractical to “round up” these cash balances and stamp them.

                Why Germany must exit the euro - Imagine you’re in charge of Europe. The only way you can save the single currency is to eject one country from the eurozone. So, who is it to be?  You might be tempted this weekend to say Greece, for understandable reasons. Not only is it facing almost certain default, it has been a constant thorn in the side of the euro – spending too much, saving too little, and displaying the kind of corporate and statistical honesty you could only hope to match by placing Bernie Madoff in charge of FIFA.  But Greece is not the word. Stricken though it is, lancing that particular boil won’t help. Greece’s issues have always been a manifestation of a far deeper problem with the currency, one that policymakers still seem unable to confront. The eurozone has been pulling itself apart for years; removing Greece will not change that.  However there is another eurozone member that sticks out like a sore thumb. It has run its economy just as, if not even more, recklessly than the Mediterranean brothers, has single-handedly destabilised the euro area for the best part of a decade and is one of the biggest road-blocks to its ultimate recovery. That country is Germany.

                Allied Irish Bank has 'defaulted' says derivatives body - Banks that sold insurance on the debt of Allied Irish Banks will have to pay out to investors in the nationalised lender's debt despite complex legal manoeuvres by the Irish authorities to avoid putting the lender into default. The International Swaps and Derivatives Association (ISDA) yesterday said that a "credit event" had occurred on Allied debt, meaning the bank has effectively defaulted on its debt, a situation the Irish government has gone to extreme lengths to avoid. Credit default swaps (CDS) sold on Allied subordinated bonds and, crucially, its senior debt, have been activated by the decision of the ISDA determinations committee that decides whether a borrower has defaulted. The decision by the committee, which is made up of 10 major banks, follows the announcement earlier this month by the Irish High Court of a "subordinated liabilities order" that changed the terms under which junior debt in Allied was originally sold, forcing holders of the bonds to accept an extension in the maturity of the debt to 2035.

                Stuffing bondholders in Greece and Ireland - Greece and Ireland are in an existential crisis. Over-indebted, the two countries have been forced to slash spending in order to reduce deficits despite the existing shortfall in private sector demand. For Greece this is a real economic death spiral, with the attendant social and political costs. It is a foregone conclusion in global markets that Greece will default on its bonds. The potential for default in Ireland is also high. Clearly, cutting bondholders lose and defaulting is tempting. So, let’s take a brief look at the political issues surrounding a default. I will start by highlighting two articles I read from the Irish Independent today on this issue.

                Austerity Hits Incomes in Greece, Ireland, U.K - Greece and Ireland were the European Union's big losers in terms of income generated in 2010, although the U.K. was also surprisingly badly hit in the aftermath of the financial crisis.  Relative to the European Union average, Germany, the Netherlands, Denmark, Sweden and Finland all saw significant increases in gross domestic product per person, which over the long term should closely correspond to average incomes.  Ireland had been Luxembourg's closest challenger in 2009, placing a distant second with a GDP per capita of 131% of the EU average. In 2010, it slipped to 125%, and is likely to fall further this year. Like Ireland, Greece is in the throes of a fiscal crisis and an austerity program and real wages have fallen sharply. Its per capita income fell to 89% of the EU average at the end of 2010, from 95% at the end of 2009.

                I.M.F. Warns of New Austerity Measures Ahead - The International Monetary Fund1 sent a simple message Monday to the Greek people as they struggle to cope with the austerity measures being imposed on them in exchange for a bailout: Prepare for more of the same. “Consolidation will have to continue,” the I.M.F. said of countries like Greece, Portugal and Ireland that are struggling to close their gaping budget shortfalls. “Continuing fiscal consolidation broadly as planned will support confidence.”  The comments, made in a report after a regular I.M.F. staff mission to the euro zone, come at a sensitive time. Greeks, in particular, are growing increasingly angry about the austerity measures their government has put in place in return for a €110 billion bailout it received a year ago from the fund and European Union2 countries. In its report, the I.M.F. also took a broader look at the euro zone and its troubles. It said that if the monetary union is to function, its 17 member states would have to either move toward political union or implement rules that result in tighter cooperation of national budget policies.

                Each Eurozone Household Will Guarantee €1,450 Of Greek Debt By 2014 - Open Europe has released a paper titled "Abandon Ship: Time to stop bailing out Greece?" which recaps all the salient points well-known to everyone on why continuing to bailout Greece is the worst possible decision available to Europe, yet which will come over and over simply to prevent the European banking oligarchy from encountering an Event of Actual Loss (as defined by Encyclopedia Britannica). "Considering Greece’s poor growth prospects and increasing debt burden, the country is likely to default within the next few years, even if it gets some breathing space through a second bail-out. EU leaders should instead be planning for how such a default could be managed in as orderly a manner possible." Yet the main reason why European taxpayers should be concerned about the happenings in Athens, which are nothing but the latest in a now endless series of taxpayer to banker capital transfers, is that as Open Europe says by 2014, almost two-thirds of Greek debt will be taxpayer-owned!

                Time for common sense on Greece - Albert Einstein is reported to have said that insanity consists of doing the same thing over and over again and expecting different results. By those standards, the deal with Greece that is about to be agreed looks insane. The only justification, as I argued in a column on May 10, is that it is needed to play for time. This is a bad strategy. Something more radical is required. The question about the prospects for Greece is not whether the country will default. That is, in my view, as near to a certainty as any such thing can be. The question is whether a default would be enough to return the economy to reasonable health. I strongly doubt it. The country seems too uncompetitive for that. A default is a necessary, but not a sufficient, condition for a return to economic health. Greek performance under the programme agreed with the International Monetary Fund in May 2010 has been quite impressive. But it has also failed to return the country to solvency. The spread between Greek and German 10-year bonds has gone from 460 basis points (4.6 percentage points) after the programme was announced to 1,460 basis points. Much the same has happened to Ireland and Portugal. More dangerously still, even Spanish spreads have reached 270 basis points (see chart). Greece, Ireland and Portugal have no chance of being able to borrow in the markets at rates they can afford in the foreseeable future.

                Time for Plan B - Spiegel - The euro is becoming an ever greater threat to Europe's common future. The currency union chains together economies that are simply incompatible. Politicians approve one bailout package after the other and, in doing so, have set down a dangerous path that could burden Europeans for generations to come and set the EU back by decades. In the past 14 months, politicians in the euro-zone nations have adopted one bailout package after the next, convening for hectic summit meetings, wrangling over lazy compromises and building up risks of gigantic dimensions. For just as long, they have been avoiding an important conclusion, namely that things cannot continue this way. The old euro no longer exists in its intended form, and the European Monetary Union isn't working. We need a Plan B.

                Calls grow for Greek Marshall Plan - As budget cuts and tax increases push Greece deeper into recession, politicians, economists and business leaders are calling for a new approach - a Marshall Plan that would jolt its economy back to life and give its citizens new hope. Debt-ridden Greece is currently negotiating a second rescue package, on top of the euro110 billion ($158 billion) it was granted a year ago. However, those loans depend on harsh austerity measures and an overhaul of Greece's economy, which are designed to make the country fit in the long-term, but will likely worsen citizens' financial pain in the short-term. At the same time, billions of euros foreseen for Greece are languishing in EU coffers, as the country struggles to come up with its part of the funding. "You can't tighten the thumb screws indefinitely," warned Andreas Rees, an UniCredit economist based in Munich. Yet more austerity might drown the economy, lead to lower tax intakes and ultimately backfire and drive the debt burden yet higher.

                If Greece Defaults, What Happens to Portugal and Ireland—and Spain? - So it looks like Greece is about to go down the toilet.   Last year, Greece got a bailout—so this year (wouldn’t you know it), they want another.  But it’s looking like France, Germany, Holland and the UK are all balking at the reality of having to save the Greek’s hide once again. Boris Johnson, the flamboyant Mayor of London, openly called for Greece to exit the euro in an op-ed in the Telegraph. Several of the participants in the negotiations are asking for Greece to make deeper austerity cuts first, before getting more bailout money——and of course, the Greeks won’t do that: Their population won’t stand for any more austerity measures, as they believe (correctly) that the reason Greece is in the hole it’s in is because rich people shirk their obligation to pay taxes. Also, the Greek people are getting handouts left and right from their government—paid for with deficits and debt. So now that we can, we have to step back, look up, and figure out what’s coming up next on the horizon, once Greece defaults.  The answer is obvious: Portugal, Ireland and Spain are coming up—and coming up fast.

                Greece Debt Crisis Pushes Danish Euro Opposition - Danish opposition to joining the euro rose to a record high as the currency bloc’s debt crisis made voters favor the krone, according to a poll published by Danske Bank A/S. The lead of the ‘no’ bloc widened to 16.5 percentage points to reach 56.7 percent in June, compared with a 9.9 point lead in March, according to the poll released today by Denmark’s biggest bank and conducted by Copenhagen-based Statistics Denmark. The poll puts opposition to the euro at the highest since the currency was introduced in 1999. Danes, who rejected the euro in a 2000 referendum, have grown more skeptical of euro adoption as Greece’s debt plight puts Europe’s single currency through its toughest test since its inception 12 years ago. The region’s monetary union may not survive as taxpayers in Germany balk at the prospect of bailing out governments that failed to comply with Europe’s fiscal rules, the Centre for Economics and Business Research said yesterday.

                Athens Accused of Bid to Amend Austerity Deal - Greece’s new finance minister has attempted to renegotiate parts of the austerity deal struck with international lenders last month, drawing anger from his European counterparts as they battle to find a solution to Athens’ debt crisis. According to officials briefed on the gambit, Evangelos Venizelos proposed changing the 50 billion euros privatization program agreed to by Greek authorities and tried to delay next week’s vote in parliament, insisting it could not be done quickly on procedural grounds. Both the European Union and the International Monetary Fund have made the passage of the new 28 billion euros austerity program the primary condition for releasing a 12 billion euros bail-out payment, which Greece must receive by July 15 to avoid defaulting on its sovereign debt. Mr Venizelos’s proposal caused particular consternation because policymakers are already deeply concerned over whether Greece will fully implement the agreed program, which was negotiated over the course of a month with the IMF, European Commission and European Central Bank.

                Raising $50 Billion From Greece's Real Estate Is Herculean Task - Greece has promised to raise 35 billion euros ($50 billion) from state property by 2015 as part of plans to win more international aid and avoid defaulting on its debt. Like with other bailout conditions, from selling stakes in companies to tax collection, there are complications and delays. A group of nine domestic banks advising the government must study each property individually to ensure that they are not in litigation or lack permits, topographical studies or restrictions governing their use, Karytinos said. Greece is the only country in Europe without a centralized registry of deeds. About 40 percent of registered state properties are disputed and an additional 25 percent have “questionable” legal status, George Papaconstantinou, the Greek finance minister until he was replaced on June 17, told lawmakers earlier this year.

                Pressure stays on Greeks to avoid default (Reuters) - Europe kept up the pressure on Greece to push forward with a painful austerity program on Wednesday after the government jumped a crucial hurdle in averting the euro zone's first debt default. With thousands of demonstrators chanting insults outside, the government of Prime Minister George Papandreou survived a confidence vote early on Wednesday and was due later in the day to approve new belt-tightening measures needed to free up more loans and avoid bankruptcy. There was wide relief at the successful confidence vote but European leaders clearly want to keep the government's feet to the fire in the more difficult next stage -- implementing reforms rejected by many of the population. "There is no alternative. We have a plan, now it's time to act on it, it's time to implement it. There is no alternative. There is no Plan B,"

                Greece Agrees on Austerity Plan With EU, IMF: Report - Greece won the consent of a team of EU-IMF inspectors for its new five-year austerity plan after committing to an additional round of tax rises and spending cuts, both Reuters and Dow Jones reported Thursday. "We have a deal," a source told Reuters. Another source close to the negotiations said that a few remaining technical details would be finalized on Friday. Finance Minister Evangelos Venizelos announced on Thursday Greece's Socialist government would lower the minimum threshold for income tax to 8,000 euros a year, increase the tax on heating oil and impose a one-off solidarity levy on income of between 1 and 5 percent. The apparent agreement comes just days after Greece's parliament backed Prime Minister George Papandreou's new cabinet in a midnight vote of confidence, a crucial hurdle towards approving the austerity package and restarting the flow of bailout funds that are staving off default.

                EU Stops Greek Backtracking - European Union leaders fended off an effort by Greece to water down an austerity and privatization package that is the price for new aid, and EU President Herman Van Rompuy said they were nearing approval on a new rescue program to take Athens until the end of 2014. "Very important decisions have been taken," Greek Prime Minister George Papandreou said in a statement at the end of the first day of a two-day summit. "We have secured the support of our [EU] partners and this is not just a green light, it's a positive sign for the future of Greece."

                Back to the knife edge – Papandreou no longer certain whether package will pass - The EU imposed a last minute hitch that could easily derail the political process in Greece, and force a default of the country within days. The troika forced an agreement on Greece on how to fix a €3.8bn holes in the latest austerity package, by imposing measures that are so tough, and economically questionable like an increases in business tax rates, that the Greek parliament may not pass them. Reuters reports that, following a conversation with George Papandreou, the Slovakian premier Iveta Radicova told the European affairs committee of her parliament that the Greek PM had doubts whether the steps would pass in parliament.  The austerity measures agreed include a drop of the tax-free threshold and an additional annual levy imposed on enterprise , Kathimerini reports. In his first press conference as finance minister on Thursday, Evangelos Venizelos said the tax-free threshold will drop  from €12000 to €8000 euros. Income between €8000 to €10000 will be taxed at a rate of 10%, with the exception of pensioners above the age of 65 and young workers aged below 30. Additionally, businesses will have to pay a tax between €100 and €300 per year. Venizelos also announced a 5% -special-contribution will be applied to lawmakers, elected municipality officials and other high ranking officials of the government, Keep talking Greece reports.

                Destroy Periphery, Save Euro - The ECB, EU, and the IMF are the troika that contributed to the periphery's crises and have responded in such a destructive manner to the crises. O'Callaghan's column urges the European finance ministers to focus on “three simple questions about the [troika's] Irish, Greek and Portuguese” loan programs. My column focuses on the reasoning underlying his third question. “Third, how important is it that the programs succeed? Obviously it is crucial. The success of the programs is key to the survival of the euro and should, therefore, take precedence over any other European agenda.”  O'Callaghan, unintentionally, has disclosed the core irrationality that underlies the euro. It is not “obvious” that “the survival of the euro” is critical, much less a goal of such transcendent importance that it should “take precedence over any other European agenda.” The euro is simply instrumental to some substantive purpose such as economic security, employment, or at least increased efficiency. The economic welfare of the people of the EU should be the EU's transcendent economic goal.

                “Growing Your Way Out of Debt” Is a Fantasy - The Status Quo consensus is that "kicking the can down the road" a.k.a. "extend and pretend" will work because "Greece, Spain, Ireland et al. are going to "grow their way out of debt." That is a fantasy. Here's why.

                • 1. There's a funny little feature of debt called interest. The Status Quo solution for Ireland, Greece, Portugal, Spain et al. is A) increase their debt load with more loans and B) roll over their old debt into new loans, without the old lenders taking any "haircut" on the principal.  Both of these "solutions" add more interest costs. That means more of the national income stream must be diverted to pay the lenders their pound of flesh.
                • 2. A funny little feature of interest is that when people see you're at risk of default, they start charging you more to borrow their money. And it isn't a tiny bit more interest, it's a lot. Think subprime teaser loan at 3% shooting to 8%, or 28% if you're trying to sell new debt on the open market.
                • 3. Governments over-promise future benefits to win elections in the here and now.

                Anglo Irish Cut to CCC by S&P After Noonan's Bond Warning-- Anglo Irish Bank Corp., the recipient of a 29.3 billion-euro ($42 billion) bailout, had its credit rating cut by Standard & Poor's after Finance Minister Michael Noonan said senior bondholders may face losses. "We interpret this as a clear indication of reduced appetite for further government support for the bank and its senior unguaranteed debt holders," the ratings company said in a statement today. S&P downgraded the Dublin-based lender one step to CCC, four levels above default, according to the statement. The rating could be lowered further because Noonan "will likely continue to seek European approval to impose burden-sharing on the bank's bondholders," S&P said.

                IMF says crisis, slow recovery key risks for Spain (Reuters) - Spain faces considerable risks to its recovery and must deepen and conclude reform work to allay market concerns, the International Monetary Fund said on Tuesday.In an annual mission report, the IMF said Spain's wide-ranging policy response last year had helped the economy to rebalance, but the repair of the economy was incomplete and risks were considerable."There can be no let-up in the reform momentum, including further enhancing the credibility of fiscal consolidation, completing financial sector restructuring," the IMF said. Spain has been under intense scrutiny since the beginning of the euro zone debt crisis over concerns the bloc's fourth-largest economy would be forced to follow Greece, Ireland and Portugal in seeking a bailout package.A slew of reforms and austerity measures have helped calm fears, though the premium investors demand to hold Spanish over German debt remains near euro-era highs as concerns persist over Greece.

                Euro Zone: Italy Will Fight Last Stand in Debt Crisis - For more than two years, we have witnessed the economic demise of several European countries. This soon led to the financial community systematically assessing the health of several peripheral southern European countries, tumbling investment grade ratings and spikes in required rates of return on government debt of these sovereigns. As the European Central Bank continues to dole out rescue packages, many are now looking for the next country to suffer a financial attack and wondering if the euro will even survive. Some analysts feel that Spain is the last bastion for the euro’s survival. We do not. We believe that the final battle will be fought on the picturesque shores of Italy, resulting in Rome’s emergence as either hero or villain with respect to the survival of the euro. Most European politicians dearly want the “run” on several of its “club” members to end and its rescues to restore confidence. This is, unfortunately, a dream that is likely to be shattered as the next domino – Spain – suffers the scrutiny of intense solvency analysis. Spain, which has almost twice the amount of government debt outstanding as Greece, has well known infirmities – namely an anaemic economy, an unemployment rate more than 20 percent, a devastating real estate debacle and a consequent banking crisis.

                Trichet Says Risk Signals Are Flashing Red as Debt Crisis Threatens Banks  - European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks. “On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.” Trichet, who chairs the ESRB, made the remarks as European leaders meet in Brussels to discuss how to stave off a Greek default, while preparing a second bailout. The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. (LEHMQ) and resulted in European governments setting aside more than $5 trillion to support banks.

                Greece, Schengen, Nato – the European dream is over - To hear such a bold assertion from one of the two men was striking. But to hear it coming from the other was the sign of a political earthquake. Last month, during a rip-roaring lecture at the Hay Festival, the historian Niall Ferguson observed, almost as an aside, that our generation is "of course" living through the collapse of the European Union. Designed to provoke? Of course. That's Ferguson. It's the sort of remark that you dwell on, all the same. Especially when, just the other day, I heard Sir Stephen Wall say something so similar. Here's what Wall said, at a seminar run by the Policy Network thinktank in London: "We have seen the high point of the European Union. With a bit of luck it will last our lifetime [Wall is 64]. But it's on the way out. After all, very few institutions last forever."Ferguson is a Eurosceptic. His dismissive view of the EU is not a surprise. But Wall's view that the EU is on the way out marks the death of the old faith. For Wall was the most influential British pro-European diplomat of his time: our man in the negotiations of most of the EU treaties of the modern era

                How European Elites Lost a Generation - When Kostas Dekoumes, a 24-year-old Greek, is asked about Europe, he launches into a rant about German Chancellor Angela Merkel. When Oleguer Sagarra, a 25-year-old Spaniard, is asked the same question, he says that Europe represents the only chance to find work. Karl Gill, a 21-year-old Irishman, responds to the question by railing against the banks.The European Union is in bad shape. Not only is the common currency in a shambles and the economies of many member states moribund, but young Europeans no longer see how the EU helps them. Millions of them are taking to the streets to demand a future. By SPIEGEL Staff

                Bad for Business: Euro Crisis Has Decimated Greek Private Sector - The 56-year-old is the founder and chief executive of JEPA, an engineering firm that designs electronics for major projects. The list of projects he has worked on is impressive, ranging from the new Acropolis Museum to London's Heathrow Airport. . "Over the past two years our business has shrunk by 95 percent," The culprit is easy to find. The Greek private sector, which accounted for 97 percent of JEPA's orders three years ago, has collapsed . Back then, the company had business from banks, hotels and restaurants. "The private sector was going well," says Papagrigorakis. But then the Greek state was plunged into financial disaster . And now the government , as so often in the past 30 years, is making a terrible mistake, Papagrigorakis says. "Instead of shrinking the public sector, it is raising taxes."

                EU tightens squeeze on Greece; banks discuss rollover - Greece's new finance minister grappled with EU and IMF officials over gaps in his austerity plans on Thursday, with European leaders insisting on deep spending cuts and more tax hikes if Athens wants to secure funds and avoid potential default.Euro zone governments are meanwhile talking to European banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a possible second rescue for Athens. Greek Finance Minister Evangelos Venizelos met inspectors from the European Commission, European Central Bank and the International Monetary Fund in Athens to try to iron out differences over the current bailout program. "All conditions must be met," Luxembourg Prime Minister Jean-Claude Juncker told reporters as he arrived for a summit of EU leaders at which Greece's crisis will top the agenda

                EU regulator hits banks with Greek bond warning (Reuters) - Europe's top banking watchdog has warned banks to be more realistic about the value of Greek bond holdings, raising the possibility an industry-wide health check will force them to raise more capital. With only weeks to go before the results of the so-called stress tests, the European Banking Authority (EBA) said on Thursday it was closely monitoring the deteriorating situation in Greece and had given banks additional guidance "to address inconsistencies and excessive optimism" on sovereign exposures. The regulator is putting 91 banks under the spotlight to see if they are strong enough to withstand a two-year recession. The results are expected to be revealed on July 13. Greece's deepening crisis has reignited concern that banks are not taking a big enough "haircut", or loss, on their Greek and other peripheral euro-zone government bonds. Until now, any talk of default has been dismissed by politicians and regulators alike, while banks have made assumptions based on historical sovereign debt default probabilities rather than the possibility of countries such as Greece defaulting.

                Athens struggles to win backing for austerity plan (Reuters) - Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default. Despite a refusal by the conservative opposition to back the plan agreed with international lenders and signs of revolt in his own socialist party, Papandreou said he was confident the deeply unpopular package of spending cuts, tax hikes and privatisations would pass. "It is a moment of historic importance. If everybody resists, worse things will come, perhaps even bankruptcy," Papandreou told a news conference at the sidelines of a summit of European Union leaders in Brussels. The meeting saw euro zone governments discuss a new bailout package for Greece, which could include up to 30 billion euros from the private sector to help cut Greece's huge public debt. President Nicolas Sarkozy said French banks had agreed to participate in a voluntary

                Michael Hudson: Whither Greece? Without a National Referendum Iceland-Style, EU Dictates Cannot be Binding - - The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury).  The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect.

                Quelle Surprise! Greece is REALLY REALLY Bad at Collecting Taxes! -- Yves Smith  - Big Bad Bank, via Richard Smith, pointed out a post last fall that didn’t seem to get the traction it deserved (when market sentiment about Greece was peculiarly less pessimistic than now) that Greek tax administration is world class wretched. This matters because even if you operate under the fantasy that austerity works, you still have to be able to cut expenditures and raise taxes. But the logic of “raising taxes” is that if you increase tax rates, you’ll increase tax receipts. If you are already really terrible at collecting taxes, the odds are high that rate increase will not translate fully into higher tax revenues. And even if Greece were to decide to improve its tax apparatus, the machinery is in such wretched shape that it would take years of investment (and changes in laws) to make a dent.  The worst is that when your read this description (which I am excerpting at length, the details are intriguing and damning), although corruption plays a significant role, terrible institutional and systems design is an even bigger culprit.

                EU president unveils new £280m ‘gilded cage’  - While Herman Van Rompuy, the EU president, has described his "Europa building" as a "jewel box", David Cameron has been less enthusiastic dubbing it a "gilded cage".  But perhaps even more unfortunate is the moniker the edifice, which will house Mr Van Rompuy's presidential office and be home to future Brussels summits from 2014, has earned from EU officials.  Built as a state of the art glass and wood wing to an existing Art Deco building, the complex will be focused around a womblike central structure providing a home for summits and meetings of Brussels officials or diplomats.  And it this organic looking "urn" shape has already been nicknamed the "E-Uterus" by Council of the EU officials who will be working in the new building.  "It looks like a womb and, I am sure, many grand visions of Europe will be birthed from there," quipped one official.

                Parliament Torpedoes EU Reform Plan - The European Parliament is refusing to vote formally on a key economic-governance package, having rejected the latest proposal from European Union member states as insufficient. It is now almost certain that the set of six economic reforms, aimed at preventing a repeat of the sovereign-debt crisis, won't be approved by Friday's deadline, when EU heads of government meet in Brussels. When the parliament convenes Thursday, legislators will establish their position on the proposals, but won't take a formal vote that would allow the EU heads to approve the new rules, said a spokesman. The EU countries and Brussels-based legislature have equal say in deciding the details of the economic-governance package. Parliament's stance comes despite a plea by European Economics Commissioner Olli Rehn on Wednesday for the legislature to compromise, or else risk public confidence in EU institutions. "I am worried," Mr. Rehn said.

                When it comes to the bailouts, the hard Left is dead right - I got a faceful of teargas just now. There was a manif outside the European Parliament, with hundreds of angry young Lefties – one can’t properly call them anarchists since most of them depend on the state for their living – yowling and gibbering like stricken apes. The EU’s response to the Greek crisis was a disgrace, they screamed. The workers of Europe were being sacrificed appease to the speculators. And d’you know what? They’re right. When the credit crunch hit in 2008, governments around the world turned to the one set of people who, by definition, couldn’t give them disinterested advice, namely bankers. Predictably enough, the bankers solemnly assured the ministers that, unless they received colossal sums, the entire economy would collapse. I’m sure that if governments contracted out their policy on subsidising bakeries to bakers, they would also be told that handouts were vital. The bakers might even half-believe it themselves. But they would be wrong, just as the bankers were wrong. Proof of just how wrong can be found in Iceland, which was in no position to assume private bank liabilities, and which consequently – despite being far worse hit by the collapse than any EU state – is now in healthier shape than many eurozone countries. Don’t take my word for it: even Paul Krugman, guru to statists and Keynesians everywhere, has noticed.

                Denialism, Here and There - Krugman - What strikes me most, reading the current discussion of economic policy, is the extraordinary extent to which the Serious position depends on sending what actually happened over the past few years down the memory hole. In the United States, we learn that Barney Frank was responsible for the housing bubble and the financial crisis. Who knew that a member of the minority party in the House, at a time when Republicans not only ruled the House with an iron fist but also controlled the White House, had such power? In Europe, the new president of the Bundesbank tells us that The current crisis is no crisis of the euro. It is a sovereign debt crisis of individual, smaller countries in the euro area, which is caused not least by the disregard of the rules.  which you can see clearly in the case of Ireland and Spain below: Um, not. You can only learn from history if you’re prepared to remember it as it actually happened. As it is …

                Merkel admits she does not want to blamed for a collapse of the euro - We always suspected that Merkel’s spectacular U-turn at last week’s bilateral with Nicolas Sarkozy was due to a fear realisation that Germany’s position had no chance of finding majority support. Speaking to the European affairs committee of the Bundestag, she tried to conceal her U-turn saing that "the voluntary participation of private creditors is supported by only very few in Europe. It is the Netherlands, to a certain extent the Finns and it was a major victory getting the French on board." Merkel explicitly rejected harsher measures to bail in private investors. This would "push countries under the EFSF that are currently able to solve their problems on their own..."Then we will have a situation in which other countries, but not Germany, are unable to recapitalise their banks without becoming targets of the markets, and we spark contagion in Europe that I don't want to be responsible for.”  (There is a pattern here. Germany makes extreme requests, and then recants at the last minute. From a eurozone perspective this is fine, but we wonder how long this can go on for? Will the German political system, the ultimate victim of this permanent deceit, not rebel at some point?)

                Euro better off without Greece: Merkel MP in paper (Reuters) - The euro zone would be better off without Greece, a conservative member of Germany's ruling coalition said in an article on Thursday, urging his government to push for an orderly insolvency process for sovereign states. "Greece would be better served with the drachma and the euro better served without Greece," said Georg Nuesslein, parliamentary economic policy spokesman for the CSU, the Bavarian sister party to Chancellor Angela Merkel's Christian Democrats (CDU). Merkel's center-right coalition has a small but vocal minority of MPs that want her to push for tougher terms in a second bailout of Greece, which could likely cost 120 billion euros, but they have still toe the party line when needed. Nuesslein called for an "honest debate" about the economic realities in Greece and criticized a report on its ability to sustain its debt, written by experts from the European Union, European Central Bank and International Monetary Fund, as "not worth the paper it was printed on."

                Guest Post: Why The Eurozone And The Euro Are Both Doomed - Beneath the endless announcements of Greece's 'rescue' lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999. The key imbalance is between export powerhouse Germany, which generates huge trade surpluses, and its trading partners, which run large trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain. Those outside of Europe may be surprised to learn that Germany's exports are roughly equal to those of China ($1.2 trillion), even though Germany's population of 82 million is a mere 6% of China's 1.3 billion. Germany and China are the world's top exporters, while the U.S. trails as a distant third.

                It isn't just the euro. Europe's democracy itself is at stake - Europe has led the world in the practice of democracy. It is therefore worrying that the dangers to democratic governance today, coming through the back door of financial priority, are not receiving the attention they should. Two distinct issues need to be separated. The first concerns the place of democratic priorities, including what Walter Bagehot and John Stuart Mill saw as the need for "governance by discussion". Suppose we accept that the powerful financial bosses have a realistic understanding of what needs to be done. This would strengthen the case for paying attention to their voices in a democratic dialogue. But that is not the same thing as allowing the international financial institutions and rating agencies the unilateral power to command democratically elected governments.  Second, it is quite hard to see that the sacrifices that the financial commanders have been demanding from precarious countries would deliver the ultimate viability of these countries and guarantee the continuation of the euro within an unreformed pattern of financial amalgamation and an unchanged membership of the euro club.

                Economic recovery: Big bills racked up to buttress economic recovery are coming due - The global financial system avoided a potential train wreck as Greece's1 government won a confidence vote in Parliament, the first step toward another European2 bailout of the debt-hobbled nation.Yet even as stock markets rallied worldwide Tuesday, analysts warned of a summer that's likely to be dominated by continuing investor jitters over government debt levels in Europe, the U.S. and Japan.The central issue: Two years into the global economic rebound, big bills that governments and central banks racked up to buttress the recovery are coming due — figuratively if not literally.Until now, a typical political maneuver has been to put off tough spending decisions in favor of more borrowing, a strategy of 'kicking the can down the road,' as Wall Street often calls it.But 'we are coming to the end of the road,' said Mohamed El-Erian, chief executive of money management giant Pimco"

                Greece’s messy muddle-through continues - The one thing you can be sure of, when it comes to the latest episode in the ongoing saga of the Greek bailout, is that it’s a mess. The WSJ is reporting that the bailout is secure, while Reuters is a bit more cautious, just saying that a deal is “closer”. Everybody knows what needs to happen — but a crucial vote in the Greek parliament still hasn’t happened, and the role of private-sector banks going forwards is also extremely vague: European banks and finance officials are discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations about a planned rollover, two senior European banking sources said on Friday.“Only by a completely different composition of the bonds would the rating agencies see the restructuring as voluntary and not declare Greece insolvent,” Your guess is as good as mine when it comes to the meaning of “completely different composition”, but it sounds a bit like some kind of latter-day Brady bond, with principal guarantees or a rolling interest guarantee or some kind of participation from the EU, perhaps provided by the European Financial Stability Facility..

                Greece And Its Leaders Agree On Austerity PlanGreece1 and its foreign lenders reached an agreement on Thursday on a five-year austerity plan that Prime Minister George Papandreou2 must now push through Parliament in order for Greece to stave off default. Last week, the European Union3, European Central Bank4 and International Monetary Fund5, known as the troika, unexpectedly withheld the next installment of $17 billion in emergency aid to Greece over concerns that its blistering program of austerity measures might be falling short of its goals.  That set off a week of market turmoil and political uncertainty in Greece that was calmed on Tuesday after Mr. Papandreou obtained a parliamentary vote of confidence on a new cabinet. Markets recovered from an early swoon on Thursday after reports that Greece and the troika had reached a deal, which includes an additional $5.4 billion in tax increases and spending cuts.  In a news conference in Athens, the new finance minister, Evangelos Venizelos, said that some of the new revenue would come from changes in income tax rules, a $430 annual charge to the thousands of self-employed Greek workers and an increase in the tax on heating oil6.

                Greece Budget Hole Threatens to Swallow Europe - George Papandreou was staring into a 20 billion-euro ($29 billion) hole. It’s common for freshly minted leaders to discover that there’s not enough money to pay for their campaign promises. So when Papandreou’s new Greek government woke up to a looming budget disaster within days of taking office in October 2009, the alarm bells were slow to ring in European capitals. Don’t “overrate” the problem, said German Chancellor Angela Merkel, later to play a pivotal role in the debt saga that continues to rock the 17-nation euro area. “There are deficits in other parts of the world as well.” That initial reaction foreshadowed European leaders’ failure to tame a crisis that is entering its 21st month and has world leaders growing anxious over the prospect of a new financial tsunami as they shake off the effects of the last one. On June 7, President Barack Obama told Merkel it was her job to stop an “uncontrolled spiral of default.” China’s central bank warned on June 14 of a “major risk” incubating in Europe. “This has unravelled badly,”

                IMF: Greek debt could trigger fresh global crisis - The International Monetary Fund warned Monday that Greece's ongoing public debt crisis could result in a new global financial catastrophe if the European Union does not act quickly to stabilize the situation. While the fund did note that the European recovery does seem to be moving on pace, the Greek crisis threatened to spill over and bring the whole eurozone down with it. "While courageous attempts have been made to address the crisis, policymakers are yet again facing uncomfortable dilemmas, raising uncertainty about the final outcome," an IMF statement on the European economy warned. "Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers." Greece has been racked for months by angry, and many times violent, protests against austerity measures, which have cut deeply into public services. Another vote on 28.4 billion euros ($40.65 billion) in budget cuts is set for June 28, and the country's creditors have said it must pass before bridge loans will be provided

                The Financial Collapse Of Greece: The Canary In The Coal Mine For The Global Economy? - The rest of the world needs to sit up and take notice of what is going on in Greece right now.  This is what can happen when you allow government debt to spiral out of control.  Once it becomes clear that you can't pay your debts, a financial collapse can happen very suddenly and you start losing your sovereignty to those that you must turn to for financial help.  So is the financial collapse of Greece the "canary in the coal mine" for the global economy?  EU finance ministers have given the Greek government two weeks from Monday to approve another round of brutal austerity measures.  If the austerity measures are not approved, Greece will not receive the next bailout installment of 12 billion euros.  If that happens, the whole globe better buckle up because it is going to get crazy. July 3rd is the deadline.  Sadly, it has become apparent that the first bailout is not going to be nearly enough for Greece.  A second bailout, which will be the same size or even larger, is already being discussed.  This is going to put the Greek people even more under the heel of the money powers in Europe.

                Goldman Vet Named Euro Central Bank Chief - More good news on the international economic front!.Bloomberg has the details: Bank of Italy Governor Mario Draghi was appointed as the next president of the European Central Bank, avoiding a delay that risked complicating the handling of the sovereign-debt crisis. Draghi’s appointment was approved at a summit of European Union leaders in Brussels today, an EU spokesman said. The former Bank of Italy governor has just the experience needed to become the overlord of Europe’s treasure: A Massachusetts Institute of Technology-trained economist with a stint at Goldman Sachs Group Inc. on his resume, Draghi had already been backed by finance ministers and was the only candidate to take over the Frankfurt-based ECB. For those keeping score, that puts Goldman alums in charge of the ECB, the Bank of Canada (where Mark Carney is the Canadian Greenspan), and the World Bank (where Robert Zoellick is maybe keeping the seat warm for Hillary Clinton), in addition to lesser institutions like the Federal Reserve Bank of New York (where William Dudley is at the helm).

                Italian Banks Plunge, German Yield Spread Widens on Debt Concern - Italy’s markets watchdog said it will investigate trading in bank shares after the country’s biggest lenders posted their largest decline in two years. Part of the slump was due to automatic stop-loss trades, an official for the regulator said by telephone today. The watchdog hasn’t ruled out market manipulation. UniCredit SpA (UCG), Italy’s biggest bank, and Intesa Sanpaolo SpA (ISP), the second-largest, led lenders lower, falling 5.5 percent and 4.3 percent respectively. Both stocks were briefly suspended after breaching limits on intraday swings. Bank stocks tumbled amid concern the European debt crisis may spread just as lenders face scrutiny from regulators over capital levels. Italian 10-year bonds also fell, increasing the additional yield investors demand to hold the securities over benchmark German bunds to the most since the euro was introduced in 1999. European leaders meeting in Brussels today attempted to staunch the crisis, vowing to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week. “Contagion fears keep re-emerging as long as credible, lasting solutions in Greece are pending,”

                Will someone please explain to me why the ECB is hiking in July - Rebecca Wilder - I've gotta say, I have absolutely no idea why the ECB is hiking. If I look at key monetary variables (forget about the real economic data for a minute), they should be on hold.

                • (1) inflation expectations has dropped off precipitously across key countries in Europe, as measured by the 10-yr swap linker.
                • (2) key monetary variables, the annual growth in the money supply (M3) and lending to euro area residents have tapered off at levels not seen since 2003 (chart 2 below).
                • (3) A cursory view of the history of ECB rate targets, US Fed rate targets, and the monetary variables suggests a high correlation between US Federal Reserve policy and Euro area monetary variables. Chart 3 below.
                  (4) The money supply has a high correlation to ECB policy using either the Y/Y or the 3-month annualized growth measures

                Europe’s Naked Banks – Simon Johnson -European leaders are convinced that bank capital is “expensive,” in the sense that raising capital requirements would slow economic growth. But the latest developments in the Greek crisis show that the exact opposite is true – it’s European banks’ lack of capital that threatens to derail European and global growth. In the Basel III negotiations that concluded last year, the French and Germans strongly favored relatively low capital requirements. This was folly: for their big banks today, more capital would reduce the probability of needing further government bailouts. These banks’ potentially troubled assets include, of course, bonds issued by Greece, Ireland, Portugal, and other eurozone countries whose fiscal prospects are now being marked down by financial markets – but that until recently were regarded as “zero risk” by the relevant authorities. If European banks had enough capital, a reduction in the value of Greek and other debt would reduce shareholder equity and disappoint investors, but it would not cause a banking crisis. Unfortunately, European banks do not have enough capital, irrespective of eurozone bailout efforts, because the damage will not be limited to Greece.

                Greece debt crisis: how exposed is your bank? (interactive) How exposed are the world's big banks to the Greece Debt crisis?The crisis is tying up many of Europe's leaders in constant negotiations to agree a bailout deal. Investment bank researchers at UBS have looked at which banks are the most exposed to the crisis.The banks with the highest exposure to Greek's problems are not necessarily those with the most invested - the UBS figures also compare the banks' exposure to Greek debt to their total equity, to illustrate whether they have sufficiently strong reserves to handle a Greek debt default.

                Everyone's problem -  SO IT'S official (or Barclays Capital estimates that it is). Public institutions now hold more than half of Greek sovereign debt. This table comes from Barclays Capital’s updated estimate of exposure to Greek debt, published today. Between the ECB’s bond-buying programme and bail-out loans the European governments, the IMF, the ECB and euro-zone national central banks now hold more than 50% of Greece’s public debt. Barclays Capital points out this should make voluntary rollover of debt more feasible. Since Greek banks have a natural interest in holding up the sovereign, they are likely to participate. That leaves only two banks, one German and one French, with exposures of more than €5 billion ($7.2 billion).

                Treasury plans for Greece to go bust - Jack Straw, the former Labour foreign secretary, said that a “quick” end to the single currency was now better than a “slow death”.  In an emergency debate, senior MPs from all parties demanded that Britain stand aside from a new rescue package for Greece and push for the country to leave the euro.  Mark Hoban, a Treasury minister, admitted that “many scenarios were being considered”. He said it would “not be appropriate” to discuss the detail, but added he would be “guilty of not stepping up to the responsibilities of his office” if plans had not been made to cope with a default.  He said British banks had about £2.47billion in outstanding loans to Greek institutions and individuals. Last night, after leaving a meeting with eurozone ministers in Luxembourg, George Osborne, the Chancellor, insisted that he did not want to see Britain dragged into providing money for a second bail-out.

                UK Greek bill 'may hit £14,640 per family' - Britain could be hit with losses of up to £366bn from the collapse of the Greek economy, it emerged last night. The potential devastation of banks and other City institutions would be equal to 24% of our annual national output, or £14,640 for every family in the UK. Ministers had claimed that British banks have 'only' £2.5bn of exposure to Greek government debt, while the Bank of England says the potential losses would be just £8bn. But experts last night said that UK financial institutions are in far more danger than previously thought, because banks are tied up in complicated derivatives and insurance deals.

                U.K. Facing Larger Deficit Due to Weak Economy, Balls Says -- The U.K. government budget deficit will be higher than forecast by Chancellor of the Exchequer George Osborne as the economy slows, according to Ed Balls, opposition Labour Party Treasury affairs spokesman. "The economy's flat-lined, consumer confidence has fallen very sharply, we've got fewer people paying tax than we should have, we've got more people out of work than we should have, the economy's weaker," Balls told the BBC's "Andrew Marr Show" today. "That is why it's making it hard on the deficit." The Office for Budget Responsibility, Britain's independent fiscal watchdog, said in March the government's fiscal shortfall will be 368 billion pounds ($596 billion) between 2011 and 2016, 46 billion pounds more than Osborne predicted in October, as it lowered its 2011 growth estimate. Prime Minister David Cameron should slow the pace of his budget squeeze and reverse January's increase in value-added tax to spur demand and cut the deficit through faster economic expansion, Balls said.

                UK's Biggest Public Service Union Threatens Strikes - Unison, the U.K.'s largest public service union, will carry out a campaign of strikes "without precedent" to defend against the coalition government's planned pension reforms, the union's general secretary said Tuesday. The threat from Dave Prentis increases pressure on the coalition government of Prime Minister David Cameron after thousands of workers from four other public sector unions said last week they would hold a joint strike June 30 over plans to make public sector employees work longer and with higher contributions for a smaller pension. Unison has yet to ballot its 1.3 million members for industrial action, a legal requirement before it can call a strike, but the speech suggests it may only be a matter of time."To those who say name the day, I say the day won't be enough--this coalition won't move with just one day of action," Prentis said at Unison's annual conference.

                British Unions Threaten The Biggest Wave Of Strikes Since 1926: "The British government is seeking pension reforms, which include increasing the general retirement age in the public sector from 60 to 66, moving from a final salary system to benefits based on career-average earnings and raising contributions by an average 3.2%. Outraged, the head of Britain's largest public sector trade union threatened the biggest wave of industrial action since 1926, according to the Telegraph: Mr Prentis said: “It will be the biggest since the general strike. It won’t be the miners’ strike. We are going to win.” He said: “I strongly believe that one day of industrial action will not change anyone’s mind in government. We want to move towards a settlement. “The purpose of industrial action is not industrial action, it is to get an agreement that is acceptable and long-lasting."

                Bad medicine alert: Austerity in the U.K. - The basic case against pursuing austerity -- i.e. big government spending cuts -- when economic growth is sluggish or in danger of slipping into recession is simple: a dose of harsh medicine risks making the patient even worse off.There are two dangers. The first is that a government which cuts spending too soon sucks demand out an economy that isn't replaced by private market forces. So economic growth slows even faster. The second, related worry, is that a slowing economy results in higher social welfare payments -- more unemployment benefit checks, etc -- which requires the government to borrow more money. Since the point of austerity, theoretically, is to reduce government debt, it should be easy to see why it just isn't optimal policy to strangle the economy if the goal is to make into the black.Some fresh economic data fresh from the United Kingdom, where austerity policies have been in place for several quarters, amply illustrates the point.

                Households poorer by £60 a month, survey shows - Households are about £60 a month worse off than they were a year ago as rising inflation puts the squeeze on household budgets, latest figures show. Family spending power fell by £14 a week in May, according to the Asda income tracker, a record low since the supermarket started publishing the data in January 2007. The figures show that the average family had just £165 a week to spend in May, 8% lower than this time last year due to higher food bills and soaring transport costs. Staple foods have risen in price by 40% over the past 12 months, while the cost of getting around by car and public transport is 8% higher than a year ago. The report indicates that while the UK economy continues to gradually recover, consumers remain under significant financial pressure as wage growth fails to keep pace with the rising cost of living.