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

Saturday, July 23, 2011

week ending July 23

Fed balance sheet shrinks slightly in latest week-- The Federal Reserve's balance sheet contracted slightly to $2.875 trillion in the week ended July 20 from a record $2.88 trillion in the prior week, the central bank said Thursday. This is the first decline in the balance sheet since mid-January. The balance sheet is stabilizing as the Fed recently completed its plan to purchase $600 billion in Treasurys at the end of June. The central bank had talked about how to shrink its bloated balance sheet, but weak economic data have put those plans on hold perhaps until next year. Chairman Ben Bernanke has raised the possibility of another round of asset purchases if the economy falters. Fed officials eventually want to return to holding only Treasurys and get the balance sheet back to precrisis 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 slightly to $1.634 trillion from $1.630 trillion in the previous week. The Fed's holdings of mortgage-backed securities fell to $904 billion from $908.8 billion in the prior week. Bank reserves fell slightly to $1.64 trillion from $1.68 trillion in the prior week.

Fed Balance Sheet Shrinks In Latest Week - The Fed's asset holdings in the week ended July 20 decreased to $2.875 trillion, from $2.882 trillion a week earlier, it said in a weekly report released Thursday. However, the Fed's holdings of U.S. Treasury securities climbed to $1.634 trillion on Wednesday, from $1.630 trillion. Thursday's report showed total borrowing from the Fed's discount lending window inched up to $12.53 billion on Wednesday from $12.51 billion a week earlier. Borrowing by commercial banks rose to $26 million, from $5 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.454 trillion, from $3.445 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.722 trillion from $2.711 trillion in the previous week. Holdings of agency securities dropped to $732.57 billion, from the prior week's $734.07 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 14, 2011

Fed's Sack Says End of Bond Buying Unlikely to Cause Interest Rate Rise - Brian Sack, the Federal Reserve Bank of New York’s markets group chief, said the end of the central bank’s second round of large-scale asset purchases is unlikely to cause interest rates to rise.  “We do not expect this adjustment to our purchases to produce significant upward pressure on interest rates or a tightening of broader financial conditions,” Sack said in the text of remarks given in New York today. The Federal Open Market Committee voted on June 22 to conclude its $600 billion bond-buying program as scheduled at the end of last month, and to maintain its balance sheet near record levels by reinvesting proceeds from its securities holdings. The FOMC also affirmed its pledge to keep its benchmark interest rate near zero for an “extended period.”  The pace of the Fed’s bond purchases will drop to about $15 billion a month from about $100 billion a month through June, Sack said.

The Fed Audit - Newsroom: U.S. Senator Bernie Sanders - The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else." Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said..

Fed Plans New Term-Deposit Facility Auction - The Federal Reserve says it will hold a term-deposit facility auction next week as part of an effort intended to drain excess reserves from the financial system. The Fed says that on Monday it will offer $5 billion in 28-day term deposits. The offering is designed to familiarize banks with term-deposit operations.The Fed injected money into the financial system as it battled the recession and financial crisis. Banks accumulated excess reserves. Too much money in the system can excite inflation. With term deposits, banks set up interest-bearing deposits at the central bank, similar to certificates of deposits that banks offer to retail customers. The facility gives banks an extra incentive to keep their money at the Fed instead of lending it to companies and households, making credit harder to get. The opening for bids starts at 10 a.m. EDT Monday and closes at 2:00 p.m. that day, the Fed announced.

NY Fed's Brian Sack: The SOMA Portfolio at $2.654 Trillion - From NY Fed VP Brian Sack: The SOMA Portfolio at $2.654 Trillion. Sack discusses previous actions, and then discusses possible future actions: I will not be saying anything about the likelihood of prospective policy actions beyond what has been conveyed in FOMC communications. However, I would like to make a few points about the portfolio under those prospective actions. As noted earlier, the current directive from the FOMC is to reinvest principal payments on the securities we hold in order to maintain the level of domestic assets in the SOMA portfolio. This approach can be interpreted as keeping monetary policy on hold. Indeed, one can generally think of the stance of monetary policy in terms of two tools—the level of the federal funds rate, and the amount and type of assets held on the Federal Reserve's balance sheet. The FOMC has decided to keep both of these tools basically unchanged for now.Given the considerable amount of uncertainty about the course of the economy, market participants have observed that the next policy action by the FOMC could be in either direction. If economic developments lead the FOMC to seek additional policy accommodation, it has several policy options open to it that would involve the SOMA portfolio, as noted by Chairman Bernanke in his testimony last week. One option is to expand the balance sheet further through additional asset purchases, with the just-completed purchase program presenting one possible approach. Another option involves shifting the composition of the SOMA portfolio rather than expanding its size.

Fed’s Lockhart: Central Bank on Hold for at Least 2 or 3 Meetings - The Federal Reserve will maintain its very accommodative monetary policy for “at least the next two or three meetings” and could continue for a “reasonable number of months,” Atlanta Fed President Dennis Lockhart said Monday in an interview on Fox Business Network. Lockhart said the U.S. economy is still growing but “very slowly” and it’s necessary to maintain this accommodative course until an upturn begins, which he sees in the second half of 2011, and much more strongly in the beginning in 2012.

Fed should do more if US economy doesn't improve-Evans  - If the U.S. economy does not show signs of sustainable improvement this quarter, the Federal Reserve should dig into its toolbox to find new ways to help it along, a top Fed official said on Thursday. The Fed has held short-term rates near zero since December 2008 and, in an unprecedented move, bought a total of $2.3 trillion of long-term securities to stimulate an economy struggling to right itself after the worst downturn since the 1930s. But signs the U.S. recovery is flagging - again - suggest the economy needs more gas, and soon, Chicago Federal Reserve Bank President Charles Evans told a small group of reporters in a joint interview. "If it were easy to do, if we had a very effective policy tool like a positive funds rate, if we could cut that by 100 basis points, then I would almost surely be advocating something like that," Evans said. "But in the absence of that, I think we have to think about the other tools."

A Subtle Shift in FOMC Policy - Cleveland Fed - At his second press conference, Chairman Bernanke was asked whether the Fed would ever institute an explicit numerical inflation-targeting policy. In responding, he confessed he has always been a fan of that type of monetary policy. Recent adjustments in some of the Fed’s communications suggest that the Chairman may be gaining a few more Federal Open Market Committee (FOMC) participants on his side. Adopting an inflation target is a topic that has gotten a lot of attention lately, and a review of the Committee’s most recent minutes and the public discourse should help shed some light on why. The minutes of recent FOMC meetings show that at least some FOMC members have been considering the costs and benefits of an explicit inflation target as an official policy goal. As expressed in the minutes, “a few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored.” This statement is not a new development, however, as it has appeared in each of the last three sets of minutes published. Perhaps more important was a change in the Chairman’s interpretation of the Committee’s inflation projections.

Audit: Fed gave $16 trillion in emergency loans - The U.S. Federal Reserve gave out $16.1 trillion in emergency loans to U.S. and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the government's first-ever audit of the central bank. Last year, the gross domestic product of the entire U.S. economy was $14.5 trillion. Of the $16.1 trillion loaned out, $3.08 trillion went to financial institutions in the U.K., Germany, Switzerland, France and Belgium, the Government Accountability Office's (GAO) analysis shows. Additionally, asset swap arrangements were opened with banks in the U.K., Canada, Brazil, Japan, South Korea, Norway, Mexico, Singapore and Switzerland. Twelve of those arrangements are still ongoing, having been extended through August 2012. Out of all borrowers, Citigroup received the most financial assistance from the Fed, at $2.5 trillion. The audit also found that the Fed mostly outsourced its lending operations to the very financial institutions which sparked the crisis to begin with, and that they delegated contracts largely on a no-bid basis. The GAO report recommends new policies that would eliminate such conflicts of interest, and suggests that in the future the Fed should keep better records of their emergency decision-making process.

Questions on Holdings at the Fed - The Federal Reserve Bank of New York again is facing scrutiny over stockholdings held by a senior official during the 2008 financial crisis. Then-New York Fed President Timothy Geithner issued a waiver that allowed William Dudley—executive vice president of the regional Fed bank's markets group—to work on the controversial bailout of American International Group Inc. even though he held shares in the company, according to a congressional audit report released Thursday. The government has been criticized by legislators, investors and others for ensuring that major Wall Street banks including Goldman Sachs Group Inc., which had significant financial exposure to AIG, were repaid in full. The New York Fed, whose role in buying and selling government securities makes it the most powerful of the Federal Reserve's 12 regional banks, played an important role in shaping Washington's response to the crisis.  The waiver allowed Mr. Dudley, a former Goldman economist who became New York Fed president in January 2009, to also work on issues involving General Electric Co., another company that received U.S. assistance, even though he also held shares in that company.

Federal Reserve audit highlights possible conflicts of interest - When the Federal Reserve launched an unprecedented series of interventions1 in the financial system in 2008, it often moved so quickly that the usual practices for preventing conflicts of interest couldn’t keep up, according to a new report. An audit of the Fed’s emergency lending programs by the Government Accountability Office, ordered by the financial reform law passed last year2 and released Thursday, reports generally sound financial management by the central bank as it undertook programs that deployed trillions of dollars to backstop a faltering financial system. But it brings to light difficult issues that arose when the Fed undertook actions that its rules never envisioned. For instance, William C. Dudley, the president of the Federal Reserve Bank of New York who was a senior official there in 2008, owned stock of American International Group3 before the Fed bailed out the giant insurance firm. The GAO report did not mention him by name, but Sen. Bernie Sanders (I-Vt.), who spearheaded the audit, identified Dudley as the unnamed official described in the report.

The Head Of The World's Biggest Hedge Fund Sees "Economic Collapse" Due To Money Printing By Early 2013:  As part of its most recent issue The New Yorker has released a must read interview with Ray Dalio - head of the world's biggest hedge fund, Bridgewater. Dalio's fund, which according to some may now be as large as $80 billion, continues to outperform even in this problematic environment, indicating that unlike various other managers who shall remain nameless, and whose wealth is built up almost exclusively on one trade (and that belonging to someone else in the first place), Dalio, despite rumors that he is preparing to leave his current position and is actively seeking a replacement, is still keenly able to adapt to changing macro conditions. Which is why his warning about future rounds of QE, which he sees as a certainty, should be heeded. Especially since it conforms 100% with the warnings of Zero Hedge - Dalio believes that future inevitable money printing will 'lead to a collapse in currencies and bond markets.' Dalio is even kind enough to give a time frame. 'I think late 2012 or early 2013 is going to be another very difficult period.' He is, to say the least, quite diplomatic.

The Glenn Beck/DeBeers Connection - Paul Krugman - Kash, at the Street Light, has a very good post on the price of gold and its relationship or lack thereof to inflation fears. He points out that the market for gold is surprisingly small, so that it would take only a relatively small number of extra buyers to push the price way up, even when other, more direct measures of expected inflation remain low. And he draws a parallel with diamonds: The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds.Surprisingly, though, Kash doesn’t say explicitly that this parallel is not at all hypothetical. Glenn Beck was financially intertwined with Goldline, and therefore had a financial stake in pushing fears of hyperinflation. And he had many, many viewers. So there was a direct channel through which conservative Americans were being pushed into buying gold. Market prices almost always tell you something useful. But sometimes what they tell you is that there’s a marketing scam in progress.

Which Firms Have Flexible Prices? - NY Fed -Since the 1930s, the conventional wisdom among economists has held that producer prices are more rigid than consumer prices. The roots of this view lie in the 1930s-era “administered price” thesis, which states that large firms set their prices more rigidly than do small firms. In this post, we report that this old “fact” is not true. We instead find that the prices set by large firms are much more flexible than those set by small firms. A key implication of this finding is that policymakers concerned about inflation or deflation should pay particular attention to changes in large firms’ prices. In a New York Fed staff report, we analyze the data used to construct the U.S. producer price index (PPI), finding that large firms exhibit considerably more price flexibility than do small firms—not less—even within narrowly defined industries. Surprisingly, once large firms are weighted correctly in the data, producer prices appear to be at least as flexible as consumer prices.  

Money Supply Jumps, But Economists Don't See Inflation - A surge in money supply measures reflect a mix of technical banking factors and investor unease, and isn't a harbinger of an inflation surge, economists say.  While it wasn't widely remarked upon when it was released last week, some in markets were taken aback by unexpectedly large increases in some of the broadest measures of money stock, as reported by the Fed.   Wrightson ICAP flagged an "explosion" taking place in M2, while Capital Economics said an internally created measure of money supply is growing at the fastest rate in two years.   Is the kindling of an inflation surge finally being lit? Or is something else afoot? Economists suggest the latter is most likely the case.  Fed officials and others have noted for all the unprecedented action they've taken, money supply measurements have grown at modest levels that have not deviated much from historical norms. Beyond that, there's a sense traditional relationships between the central bank and money are now different.  Fed president John Williams spoke of the "breakdown of the standard money multiplier" over the tenure of crisis.

Profiles in Un-courage - Krugman - Matt Yglesias notes the odd failure of reasonably sensible Republican macroeconomists to confront their party’s descent into hard-money madness. He analyzes it as follows: But these guys and other longtime GOP economic hands have largely been doing the usual Beltway wonk dance of speaking up for Republican positions when they agree with them, and staying quiet when they don’t. You don’t even need to see this as a particularly cynical way of behaving. In Washington, it’s ultimately a question of all power to the politicians. A wonk who insists on picking fights with prominent party leaders just finds himself marginalized. Next thing you know and you’re Bruce Bartlett. It’s arguably more useful to just keep your head down and make sure that if your team takes over they have some sensible people to turn to. That’s a fairly charitable interpretation; but to some extent it’s worse than that. Early in the crisis, both Greg Mankiw and Ken Rogoff actually came out in favor of a period of relatively high inflation. That’s what their models (and mine) suggested we should be doing. But they faced a firestorm of angry responses from the right — and went silent.

The Federal Reserve: Our Policy Is To Steal From You - We know two things: 1) the official policy of the Federal Reserve is to engineer and maintain inflation and 2) inflation is theft. As I have recounted here many times, in nominal terms, it looks like average wages (earned income) in the U.S. have been rising smartly for decades. But measured in purchasing power, i.e. adjusted for inflation, earned income has declined for most workers, especially in the past three years.  Measured in purchasing power, i.e. the number of gallons of gasoline or loaves of bread an average worker could buy with one hour of labor, American workers have experienced a steady decline in the value of their labor for the past 40 years.  Whenever a pundit scoffs at the idea that the dollar might lose 95% of its value, readers remind me it already has lost 95% of its value in the past century.  The dollar has lost most of its value just in the past 45 years; according to the BLS inflation calculator (which very likely understates real inflation), it takes $7 2011 dollars to buy what $1 bought in 1966, at the top of the post-war Bull market.  Can we buy 7 times more goods and services now? Or can we actually only buy 6 times more goods? If so, then our earnings have actually declined by 15%. Put another way: 15% of our earnings have been effectively stolen via inflation.

Fed Bankers Say Economic Data Weaker Than Expected - Amid economic data that were weaker than expected, most Federal Reserve bank directors voted to hold the discount rate steady, according to meeting minutes. The Fed on Tuesday released the minutes of its discount-rate meetings from May 9 through June 20. The discount rate is charged to banks on short-term emergency loans. Ten of the Fed's 12 district banks voted to keep the discount rate unchanged at 0.75%, according to the minutes. Directors from the Kansas City and Dallas Fed called for an increase in the rate to 1%. The Fed has kept interest rates low for a long time to stimulate the economy. While higher prices for energy and other commodities had recently pushed up inflation, bankers generally expected inflation to fall back, the minutes showed. Many bank directors said recent price increases had restrained consumer spending, which is a key driver of economic growth.

The Inadequacy of the Balance Sheet Recession View - Thanks to this David Leonhardt article, the balance sheet recession view is once again getting much discussion.  This view holds that households acquired excessive amount of debt during the housing boom, the value of their assets plummeted during the crash, and now their balance sheet are in need of great repair.  Consequently, the U.S. economy is undergoing a great deleveraging cycle that is slowly restoring household balance sheets.  Some take this view to also mean that only time can heal the wounds of a balance sheet recession.   I don't like this view for two reasons.  First, it is at best an incomplete story.  For every household debtor deleveraging there is a creditor getting more payments.  Yes, household debtors have cut back on spending, but so have creditors.  The creditors could in principle provide an increase in spending to offset the decrease in  debtors' spending.  They aren't and thus the economic recovery is stalled.  The second problem I have with the balance sheet view of recessions is that it leads people to think there is nothing monetary policy can do.  If it were widely understood that the fundamental problem was excess money demand, then there would be more faith in using monetary policy. 

Is Weak Aggregate Demand Really the Main Problem? - Or is it the regime uncertainty that many observers attribute to the Obama administration? The answer from several recent surveys say it is weak aggregate demand.  First, a Wall Street Journal survey shows most economists see the lackluster recovery as a the result of weak aggregate demand rather than uncertainty over government policy:    The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey...In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren't hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing. This conclusion is supported by the findings in the most recent NFIB's survey of small businesses.  This survey has consistently shown, and shows for June, that the number one problem facing small business is not regulation or taxes--though they do matter according to the survey--but weak sales. 

Weak Growth Is Not Only in Rear-View Mirror - The lethargy isn’t over. The U.S. economy’s weak growth rate was supposed to end with the first half. After all, temporary drags, particularly high energy costs and disruptions related to the Japanese disaster, were key headwinds last quarter. Recent reports, however, suggest the third-quarter economy is just limping along. While not a “soft spot,” the expected growth rate is so meager it is unlikely to lower the jobless rate by much. Two major economic shops lowered their outlooks last week. First, economists at J.P. Morgan reduced their expectations for third-quarter real gross domestic product. They now expect real GDP growth of 2.5% this quarter, down from a prior view of 3.0%. Then on Friday, the crystal-ball gazers at Goldman Sachs brought down their forecast, also to 2.5%, from 3.25% previously. At 2.5%, growth would still be higher than the 2% or so generally estimated for the first half. A big reason is the expected rebound in vehicle production. The Japanese supply chain is functioning again, and U.S. automakers are boosting this quarter’s production plans. Even so, 2.5% isn’t great.

No growth, no jobs - The recession was an ugly one, at least relative to postwar American recessions. Real output grew just 1.9% in 2007, was flat in 2008, and fell 2.6% in 2009. That performance was more than enough to create a large pool of unemployed workers. The American economy is estimated to have a trend growth rate between 2% and 3%. To reabsorb idled workers while also accommodating normal labour force growth, the economy needs to grow above that trend rate. In 2010 it barely managed this, growing at 2.9% for the year as a whole. In the first quarter of 2011, growth slowed to just 1.9%—below trend. We have yet to get official numbers on the second quarter, but it's a good bet that the expansion performed below trend once again. Goldman Sachs estimates the annual growth rate in the second quarter at just 1.5%. Macroeconomic Advisers puts it at 1.4%.  At best, closure of America's output gap seems to have stalled. And unsurprisingly, the labour market has failed to add enough jobs over the past couple of months to keep up with normal labour force growth. Meanwhile, early forecasts for third quarter output growth are being revised down.

Deconstructing the Recovery: The Capital Surge - David Altig has some awesome charts comparing this recovery to the last two recessions. Let me talk through two of them. Here is the first. It shows a couple of things. One GDP growth has been slightly less robust in the 2009 – present period. But lets just look at the composition. The largest blue bar in each area is PCE – that’s consumer spending. Notice how much smaller it is than the other two recoveries. That’s not a big a shock. We knew that the consumer was hurting. I’ve posted tons of charts showing the “check mark” in retail sales. However, really take a look at the green bar. That’s investment in the sense that most people think about it: Equipment and Software. A lot of investment is actually buildings, but that’s not what the average commentator is talking about when he or she mentions investment.  They mean computers, software, diesel locomotives, die presses, etc. The type of stuff that makes other stuff. Not the type of stuff that houses other stuff. You can also see – since it is so pertinent to the current political debate – that government was a huge part of the post dot-com recovery, and a tiny part of the 1991 recovery, but has played no part of this recovery.

Is This More Than a Bump In the Road? - Data has not been kind in recent weeks, sending second quarter forecasts tumbling below 2%. But that is not all; third quarter forecasts are heading lower as well. Ryan Avent questions this rush to judgment: Meanwhile, early forecasts for third quarter output growth are being revised down. That seems premature to me; the third quarter has only just begun and it still seems likely that low petrol prices and a recovering Japan, among other things, may buoy American output. This is a good question – do we have enough data to appreciably alter estimates of the third quarter? As Avent notes, the quarter is only two weeks old, and at least a few temporary factors are already in reversal. Once these factors clear, hesitancy to hire new employees should dissipate.  Alternatively, will the slowdown in the first half of the year trigger a cascade of weakness that will drag down the latter half as well? If so, it is appropriate to lower third quarter estimates.

Goldman says recession risk rising - A recession is "clearly a possibility," the bank that until recently was America's biggest booster said in cutting its economic growth forecasts yet again. Goldman Sachs, which just seven months ago was the loudest voice for a stronger than expected U.S. recovery, now expects U.S. output to creep ahead at a snaillike 1.5% clip in the second quarter and a less than vigorous 2% in the third. Friday's call stands as quite a comedown for economist Jan Hatzius, who in May forecast a 2% expansion in the second quarter and a 3.25% gain in the third quarter – numbers that themselves represented a retreat from the firm's bullish start-of-the-year forecast. A forecast downgrade alone doesn't spell economic downturn, of course, but there is ample reason to suspect a deeper malaise is at work: Consumer confidence fell "off a cliff" last month, Bank of America economist Joshua Dennerlein wrote in a note to clients Friday, dropping almost 20% in the most recent reading. That puts the consumer sentiment index at a level last seen in 2009, when Citi (C) was assumed to be bankrupt and the stock market fetched half its current price.

Don't expect economy to brighten this summer, reports say -- The economy's spring slump appears to be extending into the summer, according to a slew of mixed data released Thursday. Layoffs are rising. Manufacturing activity in the Northeast expanded only slightly in July after contracting in June. Economic growth is projected to pick up this fall but not enough to give businesses confidence to hire and speed the recovery. The economy could lapse even further if Congress and the Obama administration fail to reach agreement on raising the nation's borrowing limit in the coming week. For the moment, traders on Wall Street don't seem worried. Stocks soared Thursday on news that European governments were moving toward agreement on an aid package for Greece. Economists are less optimistic. They are forecasting a third straight month of feeble hiring in July, based on the latest round of data. Expectations are the economy added somewhere in the range of 50,000 to 100,000 net new jobs this month.

A response to New Deal Democrat - "New Deal Democrat" at the Bonddad blog took the time to examine my latest recession indicator and question some of the methodologies and outcomes. NDD actually contacted me a while ago and expressed some of his opinions over these issues so the fact that he has blogged about it is not only welcome but also allows me a chance to respond. NDD specifically has an issue with using real 10 year bond rates as a recessionary indicator. The reason is that the relationship between negative real 10 year bond rates and an eventual recession appears to break down in before 1953. Now the reason why I did not use any pre-1953 data in my study is because the 10 year bond rate series (GS10)  available at the St Louis Fed only starts in 1953, while seasonally adjusted inflation (CPIAUCSL) starts in 1947. NDD, however, has pointed out that a discontinued government bond data series called LTGOVTBD has data going back to 1925, and that because both GS10 and LTGOVTBD follow each other closely from 1953 to 2006 (when the series was discontinued) it is therefore a good proxy. Add to the fact that non-seasonally adjusted inflation figures (CPIAUCNS) begin in 1913 and you have the beginnings of a pre 1953 data series that could confirm or deny my assertion that negative real 10 year bond rates will always lead to recession.

Debt Ceiling: Delay Equals Growth Recession – MacroAdvisors - The probability that Congress and the Administration fail to raise the debt ceiling before the Treasury runs out of cash has risen substantially. Our initial estimates are that if such action is delayed one month while a modest deficit-reduction plan is negotiated, Treasury debt will be downgraded, interest rates will rise modestly, and the economy will enter a brief growth recession. In particular:

  • Relative to the baseline, GDP growth would be slowed by 0.6 percentage point during the second half of 2011, but boosted by 0.2 percentage point during 2012.The unemployment rate would rise to 9.6% by the end of the year compared to 9.2% in the baseline, and still exceed 8% by the end of next year.
  • During the third quarter, long-dated Treasury yields would rise by 20 basis points relative to the baseline and by 10 basis points thereafter.
  • Private credit spreads for long-dated yields would widen by 20 basis points in the third quarter, but then quickly return to the baseline value. Stock prices would temporarily decline roughly 5%.

The Lesser Depression, by Paul Krugman - These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets. We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse. The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable, the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions).

A Long US Holiday For The Bond Vigilantes - Bond vigilantes are driving yields higher for certain European countries, but there’s little sign of stress in the U.S. Treasury market. The dollar is hardly perfect, but it's still the world's reserve currency and it claims a number of benefits over the euro. Even so, the low yields on Treasuries is surprising to some considering the surge of predictions that the fiscal and monetary stimulus in recent years would eventually drive yields skyward. In 2009, for instance, The Wall Street Journal argued that the vigilantes “appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.” Two years on, the benchmark 10-year Treasury yield is roughly 2.9% as of yesterday, or about 50 basis points lower than when the Journal expressed its concerns about the blowback from vigilantes on May 29, 2009.

China boosts holdings of US Treasury securities - China, the biggest buyer of U.S. Treasury debt, increased its holdings in May for the second straight month, after five months of declines. Total foreign holdings of Treasury securities also rose, as Japan and the United Kingdom, the second and third-largest overseas owners of Treasurys, boosted their stockpiles. China's U.S. debt holdings increased $7.3 billion to $1.16 trillion, the Treasury Department said Monday. Total foreign holdings rose 0.6 percent to $4.51 trillion. The report shows that foreign investors didn't lose their appetite for U.S. government debt in May, even though the U.S. reached its $14.3 trillion borrowing limit that month. With European governments mired in that continent's debt crisis, U.S. Treasury securities are benefiting from being seen as a less-risky alternative. "U.S. Treasuries are still looked upon as being the safest assets in the world," Jay Bryson, an economist at Wells Fargo Securities, wrote in note to clients. "Investors do not seem to be the least bit worried about a U.S. default as yields continue to move lower."

China’s Treasury Holdings Make U.S. Woes Its Own — However grim Washington’s debt and deficit negotiations may seem to Americans, the impasse is nearly as disturbing for China. As the United States’ biggest foreign creditor — holding an estimated $1.5 trillion in American government debt — China has been a vocal critic of what it considers Washington’s politicized profligacy. “We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said at a news conference late last week. Beijing might prefer to respond by starting to dump some of its American debt. But in this financial version of the cold war, analysts say, both sides fear mutually assured destruction. One reason the United States would want to avoid defaulting on its debt is that such a move could alienate China, which is a steady purchaser of Treasury bonds1. Beijing, meanwhile, already has too much invested in American debt to do much more but continue to buy, hold and grumble.

China urges U.S. to boost confidence in debt, dollar (Reuters) - China pressed the United States to take "responsible" measures to boost market confidence in the dollar and U.S. government debt on Wednesday, underscoring investor worries that Washington could default on its debt. The urging from China's currency regulator came as U.S. leaders tried to hammer out an 11th-hour deal to raise a $14.3 trillion debt ceiling for the United States before it runs out of money to cover all its bills on August 2. "We hope the U.S. government will take responsible policies and measures to boost global financial market confidence and respect and protect the interests of investors," the State Administration of Foreign Exchange said. The remarks, published on its website, were carried as a response to queries on whether Beijing will cut its investment in U.S. Treasuries following through from rating agencies saying they may cut the United States' credit rating.

'China faces a dilemma' in US Treasuries - China has "little choice" but to continue buying US Treasury bonds in the short term despite the potential risk of Washington defaulting on its obligations to foreign bondholders, analysts said on Tuesday. China, the largest foreign holder of US Treasuries, increased its holdings by $7.3 billion to $1.16 trillion for the second straight month in May, according to the US Treasury Department. The total foreign holdings of Treasury securities rose 0.6 percent to $4.5 trillion in May, the same month the US reached its $14.3 trillion debt ceiling the US government can legally borrow to finance its operations.

Joke Is on China as U.S.’s AAA Becomes Laughable - Suddenly that $3 trillion of currency reserves looks like a bad idea. Make that very bad for China, as investors display an obvious preference for yen over dollars. That the IOUs of a debt-ridden, aging, politically adrift nation smarting from a huge earthquake and nuclear crisis seem safer than U.S. Treasuries says it all. Many investors still see China’s monster currency stash as a strength. They reason that China is fortified against financial Armageddon. In reality, China is trapped and struggling to find exits that don’t exist. Sell dollars for Greek debt? Right. Swap into Italian commercial paper? Perhaps not. Find enough spare Swiss francs to diversify into? Good luck. There’s always Japan. Two immediate problems come to mind. One, 10-year bonds yield a piddling 1.06 percent, about a third of the return on comparable U.S. bonds. Two, with about 95 percent of Japan’s debt outstanding tucked under tatami mats at home, China couldn’t get its hands on enough to make the exercise worthwhile

Anything's possible if U.S. debt downgraded to AA (Reuters) - For those who think a deeply indebted United States has begun its long, slow fade as the world's dominant financial power, the loss of the country's gold-plated AAA credit rating would seem poetic justice. That's because characteristics blamed for volatile markets in countries like Italy -- high debt levels, slow economic growth, and government gridlock -- fairly describe the United States now. The debt ceiling has been the chief source of market angst lately, but that's a short-term problem. The greater concern is: What happens if the United States, the risk-free benchmark from which all other assets in the global financial market are priced, loses its coveted triple-A rating? Nobody knows for sure.  "If the impossible occurs, everything else becomes possible. It would have psychological repercussions that could be serious, and that certainly sets the stage for things to deteriorate."

Asia braces for direct hit from the West's debt woes (Reuters) - For Asia, the deepening debt troubles in the West are like a giant asteroid on a collision course -- too big to dodge or ignore, and difficult to pinpoint precisely where the worst damage will be done. With roughly $3 trillion of reserves held in the form of U.S. Treasury debt -- more than $2 trillion in China and Japan alone -- Asia would be directly exposed to a U.S. debt downgrade or default. The sheer size leaves Asia with nowhere to hide. "Where could these investors go to put that amount of cash to work? Answer: Nowhere," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. Government officials interviewed by Reuters said there was little they could do but watch, wait and hope for the best as Washington struggles to find a politically palatable agreement to avoid an Aug. 2 default and satisfy ratings agencies looking for proof of longer-term debt sustainability. Indeed, some officials sounded more worried about risks emanating from Europe, where debt fears have spread beyond Greece, Ireland and Portugal to a much larger economy: Italy.

Current account dilemma - Creditors nations are worried.  Their obligors seem determined to take steps, they claim, to undermine or erode the value of their obligations – at the expense, of course, of the creditors. Over the past two years we have become pretty used to the spectacle of Chinese government officials warning the US about its responsibility to maintain the value of the huge amount of US treasury bonds the PBoC has accumulated.  More recently we have been hearing complaints in Germany about the possibility that defaults in peripheral Europe will lead to losses among the many German banks that hold Greek, Portuguese, Irish, Spanish and other European government obligations. In both cases (and many others) there seems to be an aggrieved sense on the part of creditors that after providing so much helpful funding to undisciplined debtors, the creditors are going to be left with losses.  There is, they claim, something terribly unfair about the whole thing.To me this whole argument is pretty surreal.  Not only have the creditors totally mixed up the causality of the process, and confused discretionary foreign lending with domestic employment policies, but an erosion in the value of the liabilities owed to them is an almost certain consequence of their own continuing domestic policies.  It is largely policies in the creditor countries, in other words, that will determine whether or not the value of those obligations must erode in real terms.

The Debt Limit and National Security - One curious thing about the debt limit debate is the virtual silence of the foreign policy establishment. It’s curious because the potential for a default on our debt owing to Republican intransigence in Congress is a very big foreign policy issue indeed. Perspectives from expert contributors. This becomes obvious when one realizes that foreigners own close to half of all Treasury debt held by the public, and a lot of it is owned by countries –- China, in particular –- that are America’s most aggressive competitors on a wide variety of political, economic and military issues. As Treasury data show, at the end of April, foreigners owned more than 46 percent of all Treasury securities held by the public. China is our largest creditor, with a fourth of all foreign-held debt and 12 percent of the total. Not surprisingly, Chinese officials have long expressed concern about the quality of Treasury debt, for both economic and political reasons.

What Kind of Country Reneges on Its Contracts? - When the U.S. government sells a Treasury security, it is making a promise to pay back the money, with interest, according to a set schedule. Businesses and individuals make promises like this all the time. They're effectively (and often explicitly) contracts. When you renege on one, you'd better have good reason. Simply choosing not to honor a contract because you don't feel like it earns you a lawsuit and a deserved reputation as a deadbeat. Those who fail to meet their obligations because of some event out of their control (the legal term for such eventualities appears to be "frustration" or "impossibility") are often let off. Those who simply run out of money have the remedy of bankruptcy court. Renege on your obligations with no good reason, though, and you are granted no such mercy. You shouldn't be. The sanctity of contracts is at the heart of the success of the capitalist enterprise over the past two centuries. Mess with it at your peril.

Then Why Are Treasuries Up? - The Times: Markets Stumble on Deficit and Debt Worries Stocks in the United States and Europe fell more than 1 percent on Monday in the wake of the publication late Friday of the results of stress tests on European banks, and as investors remained wary about the debt-ceiling talks in Washington. The Journal: Stocks Slump on Debt Fears:Stocks fell as the combination of anxieties about debt in the block of euro-using nations and a lack of progress in U.S. debt-ceiling negotiations sparked a selloff. If people are worried about the debt ceiling, then why are short-term and intermediate-term Treasuries flat or slightly up? Presumably the mechanism by which a debt ceiling breakdown would affect stocks would have to go through Treasuries somehow.

Debt and Delusion, by Robert J. Shiller -  Economists like to talk about thresholds that, if crossed, spell trouble. ... Consider, for example, the debt-to-GDP ratio, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. A paper written last year by Carmen Reinhart and Kenneth Rogoff ... found that when government debt exceeds 90% of GDP, countries suffer slower growth... But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily. They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category. There is also the issue of reverse causality. Debt-to-GDP ratios tend to increase for countries that are in economic trouble. If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance. ... The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

Surprise, U.S. Debt is Falling - The U.S., when you look at our overall debt, is in a much better position that the wranglings in Washington suggest. What's more, it appears that the U.S. is the only country with a so-called developed economy that's overall debt picture has actually improved since the financial crisis. Here's why: The research arm of the consulting firm McKinsey recently took a look at the data on debt levels in a number of countries with so-called developed economies. What they found would probably surprise most Tea Partiers. The U.S.'s overall debt - which is government debt plus individual household debt plus corporate debt and bank debt - when compared to our GDP, which is how most economists look at these things, is actually much lower than many other developed nations. Overall, the U.S. and its citizens owe a little over $41 trillion. That, of course, is a lot of money. But when compared to the U.S. GDP, it's not a shockingly bad number. In fact, it's pretty good, when compared to other nations. The U.S.'s debt is equal to 275% of our GDP. That percentage for the United Kingdom is over 450%. Japan's overall debt-to-GDP is about the same as the U.K. Spain comes in at nearly 350%, and France's debt is above 300%. Our debt level is about the same as Germany, which everyone think is pulling off economic miracles these days. But more importantly than that, the U.S. appears to be the only developed country where the overall debt level is falling. , " The U.S. doesn't have a debt problem, but we are doing a good job of creating one with the debt ceiling debate."

Friday Animation: Obama vs GOP on Debt Ceiling - Linda Beale - What does the GOP want?  Let's consider the list.

  • 1. No tax increases, even for the wealthiest Americans who are getting more than ever but paying less in taxes.  This is a class warfare position. The people who are being protected are the carried interest elite who get their compensation as mostly capital gains...the wealthy families who own most of the financial assets of the country; the wealthy families whose estate taxes have been reduced to a dribble by the Bush tax cuts and the new temporary estate tax 'compromise' enacted under the same type of economic terrorism
  • 2. Substantial spending reductions--even in programs that actually bring money into the Treasury by holding tax cheats and securities cheats accountable.
  • 3. Spending cuts that are set without regard to programming needs but in terms of an arbitrary figure as a percentage of GDP.
  • 4.  A continuation of the misinformation and propaganda campaign that has misled the American public about debt, deficits, monetary systems, spending and taxes.  You'll note that the rhetoric advanced by the right often compares the US government to a family.  It suggests that borrowing to make ends meet is irresponsible, and therefore the only solution is to quit 'cold turkey'--to have the US cut spending drastically, no matter the consequences. That is a false analogy and a false cure.

White House, lawmakers eye compromise debt deal - With just two weeks to avert a catastrophic debt default, top US senators forged ahead Monday with a bipartisan compromise effort as the White House's Republican foes set up symbolic votes on an austerity plan. As a new poll showcased deep US public disgust with politicians' handling of the standoff, US Treasury Secretary Timothy Geithner sought to reassure skittish markets that polarized Washington would rally behind an 11th hour deal. "Despite what you hear -- and this is a complicated place, Washington -- people are moving closer together," he told CNBC television, emphasizing that a default would devastate the fragile US economy and have grim global effects. Geithner said a default "would bring the world economy, again, because of the critical role we play in the global economy, to the edge of recession again. And again, it's not an option we can consider." Geithner praised a plan being forged in private by Democratic Senate Majority Leader Harry Reid and Republican Senate Minority Leader Mitch McConnell that would give President Barack Obama broad powers to raise the debt ceiling.

Both Sides Confident on Debt Talks Despite Impasse - Top Republican lawmakers and the Obama administration’s budget director predicted Sunday that an agreement would be reached before the federal government defaults on its debt in early August, but both sides continued to squabble over the details of competing proposals, offering little evidence that a deal was at hand.   “All of the leaders of Congress and the president have acknowledged that we must raise the debt limit2. And the question is how.” Republicans made clear that they intended to vote this week on their “cap, cut and balance” plan, which would cut the deficit, cap federal spending as a share of the economy and amend the Constitution to require a balanced budget. The changes would be made along with a provision that would lift the debt limit.  The proposal is expected to pass the House, but its fate is much less certain in the Senate, as Mr. Obama and Democratic lawmakers have made clear that they oppose the measure. That has not discouraged Republicans, who see the “cap, cut and balance” proposal as a popular rallying point.

Ending the debt ceiling stand-off - Let's begin by reviewing what would happen when the Treasury runs out of accounting gimmicks yet Congress refuses to authorize further debt issue. Aside from deciding simply to ignore the debt ceiling, what options would the President have? One would be to defer payment of coupons and/or principal on outstanding Treasury securities. Of course the holder of these securities could still try to sell them on the secondary market. Flooding the market with sell orders would of necessity generate a spike in interest rates. Depending on how confident people were that the situation would be quickly resolved, in a worst case scenario, selling and asset shifting could turn into an outright financial panic. Effects on financial payment logistics could be pretty scary, and it could easily be worse than what we saw in the fall of 2008. Don't want to go there. Or, the President could withhold payments to various individuals entitled to those payments by law, such as government employees and contractors, or social security and welfare beneficiaries. Perhaps these people could be issued federal IOU's that banks would accept, though the logistics of doing so seem insurmountable. It's quite plausible to expect that the spending by those affected parties would come crashing down at a time when the economy seems precariously near stall speed. Don't want to go there, either.

Divide and Conquer - Soon after Mitch McConnell joined the debt limit talks, his suspicions grew. An agreement with President Obama on raising the limit by $2.4 trillion​—​and tied to serious spending cuts​—​looked impossible. The more he heard from Obama and his aides in the private sessions at the White House, the more he felt that no good could come from the talks. They would lead to a bad deal, harm to Republicans, or both. McConnell, the Senate minority leader, did not participate in the earlier negotiations, seven weeks of them, guided by Vice President Biden. Senate Republican whip Jon Kyl had taken part in those talks, which were friendlier and far more productive than the meetings run by Obama. Biden, despite his reputation as Washington’s premier windbag, had restrained himself. The president hasn’t. He’s talked incessantly and for so long that others often gave up trying to get a word in. Obama dominated one session so completely that only one of the four Republicans spoke and then only in short spurts. What appalled McConnell was Obama’s insistence that even relatively small spending cuts be accompanied by tax increases. These were “little stuff,” one Republican says, and not particularly controversial. That wasn’t the only rollback from the Biden talks. Obama’s aides had reduced the size of the cuts.

Wonkbook: A three-part deal on the debt ceiling? - We seem to be coming closer to a deal on the debt ceiling. It begins with the McConnell plan, in which the debt ceiling is raised three times between now and November, and each time, Republicans are able to offer a resolution of disapproval. Then it adds in $1.5 trillion in spending cuts harvested from the Biden talks. Then it creates a committee of 12 lawmakers charged with sending a deficit-reduction plan to Congress by the end of the year. Whatever they decide on would be protected from the filibuster and immune to amendments. For Republicans, this plan is something close to the best of all possible worlds (sorry, but I do not consider a world in which "Cut, Cap, and Balance" passes to be a possible one): It's all spending cuts and no revenues. It's a little plan that denies the Obama administration the political and substantive benefits of a big plan. It's a multi-part plan -- which is more important than people realize -- that forces Democrats to take three hard votes between now and the election, and almost ensures that deficit reduction will be an issue in 2013 and beyond.  As for the Democrats? Well, it's a deal. No particular part of it is so objectionably that Harry Reid couldn't pass it if he tried. And it raises the debt ceiling. That's not a particularly rousing argument, but perhaps it will be enough.

Coburn of Oklahoma to Offer $9 Trillion Budget-Cut Plan to Spur Debt Talks -  Republican Senator Tom Coburn said he will unveil a plan tomorrow that would cut $9 trillion from the federal budget over the next 10 years in an effort to curb spending and avoid a default on U.S. debt. While he said he doesn’t expect his plan to pass Congress, it would offer a wide range of spending cuts and revenue increases that could be used as the basis for bipartisan negotiations on a budget compromise. “We have $9 trillion worth of savings that are achievable over the next ten years,” Coburn said on CBS’s “Face the Nation” program. “Pick half of them. Half of them solve our problems.” With Washington deadlocked on a strategy to cut spending and raise the nation’s borrowing limit before an Aug. 2 deadline, the Oklahoma Republican said he will offer a 10-year plan that cuts defense by $1 trillion, makes changes to Social Security and Medicare, and raises $1 trillion through changes in the tax code, among other things.

Debt Ceiling Update - From this AM’s WaPo: “A bipartisan effort in the Senate to allow President Obama to raise the federal debt ceiling in exchange for about $1.5 trillion in spending cuts over 10 years gained momentum Sunday, as leaders agreed they would have to act in the next two weeks to avert a potential default by the U.S. government.” This means House R’s would have to give up their dollar-for-dollar demand re spending cuts for debt ceiling headroom, as President Obama insists that the increase in the ceiling gets us past the election.  So we’re talking about $1.5 trillion in cuts with no revenues as part of the deal, for a $2.5 trillion increase in the ceiling. I was calling this “dirty McConnell” last week as opposed to the original McConnell idea which did not call for binding cuts.  I still don’t like it—I think it’s critical for the deal to balance the spending cuts with at least some revenues.  When cuts do all the lifting, we risk undermining programs that protect the vulnerable, educate our kids, retrain our adults, invest in research and infrastructure, and provide much needed health and retirement security for retirees.

Wall Street will not let Republicans pull the debt ceiling trigger - The tension is building in the budget talks as the calendar closes in on the August 2 drop-dead date. According to Treasury Secretary Geithner, this is the date where the government would no longer have the money to pay its bills and a default on the debt would be looming. As many have noted, including me, a default on the debt would be an absolute disaster for the financial system. We would see the same sort of freeze-up of lending as we did after the collapse of Lehman in September of 2008, although this time would almost certainly be much worse. This is why we knew all along that the Republicans in Congress were not serious about their threats over allowing the government to default. While these people might be happy to ... take hard-earned wages and benefits away from working people, and to shove retirees out onto the street, the Republican congressional leadership is not about to cross Wall Street. After all, who pays for the campaigns?

"Wall Street" Has No Sway Over the Tea Party Freshmen - Dean Baker has a column in the Guardian arguing that: It was only necessary for President Obama to call their bluff. The bottom line is that the debt ceiling is a gun pointed first and foremost at Wall Street’s head. And, there is no way on earth that Wall Street is going to let the Republicans pull the trigger. This is silly. “Wall Street,” by which Baker means the major banks, has very little sway over the 87 Tea Party freshmen. It’s the GOP freshmen who are currently the key constituency in the debt ceiling negotiations, and if anything, most of them would take pride in rejecting impassioned pleas from JPMorgan and Goldman Sachs. The idea that the major banks can just snap their fingers and get the Tea Party freshmen to drop their debt ceiling demands is beyond ridiculous. The Tea Party freshmen are thoroughly crazy, and there’s no telling what they’ll do. But if you think they’re all tools of Wall Street, then you simply haven’t been paying attention.

GOP Leadership Can't Take Default Off The Table - Treasury Secretary Tim Geithner was widely quoted today saying that the Republican congressional leadership had "taken default off the table" in its negotiations with the White House on increasing the debt ceiling. Take a look at this story from Reuters that earlier today was published on, for example. There's a basic problem, however: The GOP congressional leadership doesn't necessarily speak for the rank and file and so can't guarantee that anything it agrees to on the debt ceiling will be approved in their respective houses.  Indeed, the lack of control that House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), and Senate Minority Leader Mitch McConnell (R-KY) have over their respective caucuses is one of the big differences between the situation that exists now and the one that took place in 1995-96 when Speaker Newt Gingrich (R-GA) could cut  deal with the Clinton White House and be relatively sure that the GOP members would support it. 

Debt ceiling breakdown could shatter the Republicans - The emergence of the Tea Party in 2009 posed two questions. Would the movement capture the Republican party and, if it did, would this strengthen the resistance to Barack Obama’s liberal project or cripple it? The debt-ceiling fight in Washington settles the first issue: the Tea Party insurgency has indeed captured the Republican party in Congress. The other question will be answered within days, and it could go either way. Many Tea Party activists see the showdown with the Obama administration as their finest hour. But if it goes wrong it could destroy their movement and gravely wound the Grand Old Party.  As a point of principle it has no leaders, only would-be favourites such as Eric Cantor, the Republican number two in the House of Representatives, and Michele Bachmann, the representative from Minnesota who is running for the GOP nomination (and doing pretty well). It has no real policies, only an unfocused rage against big government. It assisted in the rout of House Democrats in 2010, yet seems incapable of tactical calculation. It nominated weak Senate candidates (they were anti-establishment, all that mattered) and casually threw away its chance of winning control of both chambers.

US vs Moody’s, S&P and Fitch - The rating agencies are the whipping boys of the market.  Like princes who had a whipping boy to take the hit for their transgressions, so the rating agencies take the hit that should go to the regulators, which delegated their  credit-risk responsibility to the rating agencies.  That works out well for all, in one sense: the rating agencies make money, and the regulators escape blame.  What could be better? But now we face another situation with the rating agencies, where they will finally downgrade the US Government from AAA.  Long overdue, particularly when one looks at the entitlement promises. So what happens if the US gets downgraded? Not much.  As I have said before, the ratings don’t mean much, except to regulators.  Yields shouldn’t move much, and if there is a sovereign ceiling at Aa2/AA, that will be the benchmark for all US yields, and corporate/municipal/securitized yields won’t shift much, because the economic reality hasn’t changed much.

5 Disastrous Consequences Of A Debt Ceiling Meltdown - According to the conventional wisdom, the stakes around a default* are so great that after a brief game of brinksmanship, lawmakers will eventually come to their senses and raise the debt ceiling as the deadline nears. But this is an exceptional moment in our political history. At this point, neither Senate Minority Leader Mitch McConnell, R-Kentucky, nor Speaker John Boehner, R-Ohio, can truly claim to speak for their caucuses. Many within the Tea Party caucus refuse to vote for a debt ceiling increase under any circumstance, and Boehner needs a good number of Dems to pass it. Obama wants a big, grand bargain – possibly to include cuts to Medicare and Social Security – while the Democratic rank-and-file wants to run on protecting those programs next fall. So, improbable as a protracted period of default might be, with all these political divides deepening it's no longer out of the question. Most Americans are unsure what a default actually means, and with good reason – it's virtually (but not entirely1) unprecedented. So what might happen if the worst-case scenario should come to pass? We run down some possibilities below.

Obama faces off with GOP over debt ceiling - animation

The Real Significance Of The Debt Ceiling Debate - It is mid-July, and the debt ceiling hysteria is peaking. What is the significance of this debate? What is its real meaning for ordinary Americans? These questions can be answered at two different levels, from inside the consensual reality box and from outside that box (and see here). Although I don't agree with Dmitry Orlov's dystopian visions of the near future, he framed the answer from outside the box in this quote— Although people often bemoan political apathy as if it were a grave social ill, it seems to me that this is just as it should be. Why should essentially powerless people want to engage in a humiliating farce designed to demonstrate the legitimacy of those who wield the power? Orlov has hit the nail on the head. The debt ceiling debate is a humiliating farce designed to demonstrate the legitimacy of those in power. Bill Hicks (a pseudonym, not the dead comedian) described how The Farce typically works in his post America’s Plutocrats are No Different than the Leaders Who Ran the Soviet Union into the Ground.

How the Budget War Was Framed - In the debate over the budget deficit and debt ceiling, the American people have been framed in both senses of the term. They have been given a misleading picture of the possibilities, and they have taken the blame for unrealistic attitudes. Nominally, the budget debate focuses on spending cuts versus tax increases, with Republicans in one corner and Democrats in the other. What I see is a three-way tussle among the rich, the not very rich and the not rich at all over who should pay the costs of balancing the budget. Consider a largely invisible proposal for balancing the budget, the People’s Budget, released in April by the Congressional Progressive Caucus, which includes 83 members of Congress. Its proposed budget savings include major cuts to military spending based on immediate withdrawal from Iraq and Afghanistan. Its proposed revenue sources include new tax brackets for the rich (from 45 percent on income over a million dollars a year to 49 percent on income over a billion a year), restoring the estate tax and eliminating the Bush tax cuts.

US debt crisis: Obama warns of 'tax rise for all' if deal cannot be done - Barack Obama has warned that the US is "running out of time" to raise the limit on US government borrowing and that failure to do so will lead in effect to a tax increase for all Americans, because a downgrade of the country's credit rating would cause an interest rate rise. The president's warning was reinforced by a threat from the ratings agency Standard & Poor's to strip the US of its AAA standing if no long-term political deal is reached to tackle government spending and debt. As Obama and Republican leaders in Congress continued to wrangle over the terms for approving an increase in the US's $14.3 trillion (£8.9tn) debt ceiling by the 2 August deadline – with Republicans rejecting Obama's demand that tax increases for the wealthy accompany sharp budget cuts – the president warned ordinary Americans of the seriousness of the situation. "This is not some abstract issue. Congress has run up the credit card and we now have an obligation to pay our bills. If we do not it could have a whole set of adverse consequences. We could end up with a situation, for example, where interest rates rise for everybody all throughout the country, effectively a tax increase on everybody," he said.

Nearing the Cliff - Will Congress get it together in time? Yes, Mark Zandi tells Bloomberg—because the alternative is so dark.

The Federal Deficit Mess - On August 2, even if the ceiling on federal debt is not raised the government will not yet be in default in a technical sense. It will not be able to borrow, but it has enough money coming in each month from collection of federal taxes to service its debts. Without borrowing, however, it will not have enough money to pay noncontractual obligations in full, such as government salaries, and entitlements such as social security, Medicare, and Medicaid, and a host of subsidies. No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit.

Some Thoughts on the Unthinkable - Strictly speaking, the Treasury could continue to make payments on all obligations authorized by Congress, simply by sending out checks as they come due. Commercial banks would undoubtedly accept these from depositors, confident in the knowledge that the Fed would create the reserves necessary to credit their accounts. If the Fed were concerned about the resulting expansion of the monetary base, it could neutralize this by selling bonds on the open market. The result would be an increase in the debt held by the public, with no change in the monetary base, which is exactly what would transpire if the deficit were financed by the issue of new bonds.. I'm quite certain that in the current political climate this would be treated by Congress as a usurpation of its power, resulting in a constitutional crisis and possible impeachment. The only alternative is for the Treasury to meet some of the obligations authorized by Congress while failing to meet others. For this to happen, someone in the executive branch would have to decide which prior appropriations made by Congress to respect, and which to ignore. Interest and principal on the debt would probably receive the highest priority, given constitutional imperatives. But everything beyond that, it seems, would be fair game. By respecting one law -- the debt ceiling -- the Treasury would be forced to disregard others. Payments to contractors, congressional and agency staff, state and local governments, social security recipients and health care providers would all need to be prioritized. This is a bizarre and highly undemocratic manner of repealing legislation.

Debt Ceiling: What Really Changes on August 3? - It is not the case that the borrowing authority of the United States is newly exhausted on August 3--the borrowing authority was exhausted on May 16. What happens on August 3 is that the CSRDF and GSIF fund balances hit zero--that the Secretary of the Treasury will have to do something more than breach his fiduciary duty to the investors of the CSRDF and GSIF while relying on 5USC§8438 as authority for this breach. Thus it seems to me that on August 3 the Treasury Secretary must decide whether to:

  • Breach his constitutional duty to repay bondholders (and be subject to suit).
  • Breach his constitutional duty to pay government contractors duly appropriated and authorized funds (and be subject to suit).
  • Disinvest some other government trust fund than the CSRDF and the GSIF of which the Secretary of the Treasury is also Managing Trustee (and to do so without the safe harbor of 5USC§1848, but Roberts would have to work very, very hard indeed and break a great deal of precedent in order to give anybody standing to file suit).
  • Mint a large platinum or palladium coin and use it to buy back some Treasury debt.
  • Persuade some other actor (the IMF? The government of China?) to make a big wire transfer to the Treasury's cash account in return not for a U.S. Treasury bond but for a handwritten IOU of or simply the handshake of the Treasury Secretary.

If Geithner Doesn't Have A Debt Ceiling Plan B, He Needs To Be Fired Immediately - This morning on CNBC, Tim Geithner stuck with his line that there's no debt ceiling plan b. The only solution is to pass the debt ceiling hike, and that's that. Even when asked why he couldn't prioritize coupon payments, in light of the fact that the government takes in more than enough revenue to cover them, he insisted that the only choice is for the debt ceiling to pass. We can see why Geithner is taking this hardline. He just wants this debate to end. Now. Any hint that there's give means more time for political fighting. But let's just put it this way: He better be lying, because there's a non-trivial chance that the debt ceiling does not get lifted by August 2, and if The Treasury has not figured out a way to avoid a default on Treasuries, when the government clearly takes in enough money to do so, it would be a scandalous planning failure.

Defaulting to Big Government – Simon Johnson – Leading United States congressmen are determined to provoke a showdown with the Obama administration over the federal government’s debt ceiling. These representatives – with whom I've interacted at three congressional hearings recently – are convinced that the US federal government is too big relative to the economy, and that drastic measures are needed to bring it under control. Depending on your assessment of “Tea Party” strength on Capitol Hill, at least a partial debt default does not seem as implausible as it did in the past – and recent warnings from ratings agencies reflect this heightened risk. But the consequences of any default would, ironically, actually increase the size of government relative to the US economy – the very outcome that Republican intransigents claim to be trying to avoid. The reason is simple: a government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called “risk-free” rates on government bonds. Removing this pillar of the system – or creating a high degree of risk around US Treasuries – would disrupt many private contracts and all kinds of transactions.

McConnell plan makes choices public - The overarching desire in Washington these days is for a “grand bargain” to address the debt ceiling and deficit. With this grand bargain, both Republicans and Democrats would end their bickering and find a way to agree on a series of proposals to slash inconceivable sums from the federal budget. But the concerns of voters must have a role in the national debate. Now, thanks to Senate Minority Leader Mitch McConnell’s intriguing proposal, endorsed by House Minority Leader Nancy Pelosi (D-Calif.), Grover Norquist and Senate Majority Leader Harry Reid (D-Nev.), they might get one. McConnell (R-Ky.) has proposed granting President Barack Obama the right to raise the debt ceiling three times by 2012 — on condition that he map out a plan to cut spending by the amount of the debt ceiling hike. Congress might refuse to allow the debt ceiling hike, but the president would veto such a refusal, and it is very unlikely that veto could be overridden.

US backup debt plan doesn't support rating - Moody's - (Reuters) - A U.S. government backup debt plan to raise the country's debt ceiling and avoid imminent default could still lead to a downgrade of U.S. ratings in the next year or so, Moody's said on Tuesday. Senator Mitch McConnell's "Plan B," increasingly seen as a "Plan A" in Washington, would avoid any immediate downgrade of the coveted U.S. triple-A rating, Moody's analyst Steven Hess told Reuters in an interview. "But the numbers that are being discussed in terms of any possible deficit reduction coming out of this plan don't seem to be very large," Hess said. "Therefore this plan might result in a negative outlook on the rating."

Debt Compromise Pressure Intensifies in U.S. - The Obama administration signaled it may accept a short-term increase in the U.S. debt limit if it is combined with a major agreement to cut the deficit. “The president has been clear that he will not support a short-term extension of the debt ceiling” without an agreement to cut the deficit, White House spokesman Jay Carney told reporters today. President Barack Obama plans to meet with top congressional Democrats today as the Aug. 2 deadline for raising the $14.3 trillion debt limit nears. While the deadline is “real and fast,” the press secretary said, “there is still time to do something significant if all parties are willing to compromise.”

The Dangerous Hi-Jinks of the GOP's Juveniles - Robert Reich - I’ve spent enough of my life in Washington to take its theatrics with as much seriousness as a Seinfeld episode. A large portion of what passes for policy debate isn’t at all — it’s play-acting for various constituencies. The actors know they’re acting, as do their protagonists on the other side who are busily putting on their own plays for their own audiences. Typically, though, back stage is different. When the costumes and grease paint come off, compromises are made, deals put together, legislation hammered out. Then at show time the players announce the results – spinning them to make it seem they’ve kept to their parts.At least that’s the standard playbook. But this time there’s no back stage. The kids in the GOP have trashed it. The GOP’s experienced actors – House Speaker John Boehner and Senate Minority Leader Mitch McDonnell – have been upstaged by juveniles like Eric Cantor and Michele Bachmann, who don’t know the difference between playacting and governing. They’re in league with tea party fanatics who hate government so much they’re willing to destroy the full faith and credit of the United States. Washington has gone from theater to reality TV – a game of hi-jinks chicken that could end in a crash.

Cost-Cutters, Except When the Spending Is Back Home — Freshman House Republicans who rode a wave of voter discontent into office last year vowed to stop out-of-control spending, but that has not stopped several of them from quietly trying to funnel millions of federal dollars into projects back home.  They have pushed for dozens of projects in their districts, including military programs opposed by the president, replenishing beach sand lost to erosion, a $700 million bridge in Minnesota and a harbor dredging project in Charleston, S.C. Some of their projects were once earmarks, political shorthand for pet projects penciled into spending bills, which Republicans banned when they took over the House. An examination of spending bills, news releases and communications with federal agencies obtained under the Freedom of Information Act shows that nearly two dozen freshmen have sought money for projects that could ultimately cost billions of dollars, while calling for less spending and banning pork projects.

GOP’s Plan for Debt Reform: Win in 2012 - As the chances for a big deal on debt and deficits evaporate in the heat of deadline negotiations, fiscal hawks are growing increasingly frustrated. Sen. Tom Coburn1, R-Okla., is releasing his “Back in Black” plan for massive debt reduction and four of his former compadres from the Gang of Six are rolling out their less-ambitious deficit plan. House Republicans, meanwhile, are pushing through the conservative-backed proposal for deep cuts now, spending caps later and a balanced budget amendment farther down the road. None of these big-ticket items seem to be going anywhere before a projected government shutdown begins sometime in the next few weeks, so why bring them up now? Part of it is the hope for a miraculous ending to this months-long debate in which a very liberal president and very conservative members of Congress decide to ditch their dogmas in the name of bipartisan compromise. It’s never happened before, but hey, there’s a first time for everything, right?

Debt ceiling debate turns 'scary' -Washington’s frayed nerves showed through Monday amid tough talk on the right, a White House1 veto threat, canceled weekend passes and the top Senate Democrat likening default to a “very, very scary” outcome even for those “who believe government should be small enough to drown in a bathtub.” “What will it take,” asked an agitated Majority Leader Harry Reid2 (D-Nev.), “for my Republican colleagues to wake up to the fact that they’re playing a game of political chicken with the entire global economy?”  House Speaker John Boehner confirmed a POLITICO report4 that he had met again privately with President Barack Obama at the White House on Sunday to try to get debt talks back on track. But ignoring Obama’s veto warning, Boehner will press ahead Tuesday with House votes on a revised debt ceiling bill that shows no sign of compromise on the spending and tax policy differences behind the crisis.

Biggest unforced error in history still on schedule - TODAY is July 19th. Two weeks from today, it will be August 2nd. On that day, or very soon thereafter, the Treasury will run out of room to use extraordinary measures to keep meeting its obligations without issuing any new debt. To avoid a default at that point, which most economists agree would be catastrophic, the Treasury will then need to slash spending immediately and precipitously—by about 44%. The process won't be tidy; depending on what bills are coming due on a particular day, the shortfall will affect payments to state governments, public employees (including soldiers), payouts to entitlement beneficiaries, and so on. Absent an agreement to raise the debt ceiling, spending would be slashed by $134 billion over the month of August. That would represent a sudden fiscal consolidation of over 10% of GDP—enough, in all likelihood, to tip the economy into recession. And at some point, if no agreement were reached, default would become inevitable. The potential outcomes here all seem terrible, and so most people have assumed that a deal to raise the debt limit would eventually be forthcoming. But here we are, two weeks from the deadline, and Congress appears to be some way from reaching an agreement.

Debt Ceiling: Could A Deal Cost the Economy a Million Jobs? - There has been a lot written about what would happen if the government doesn't end up raising the debt limit. My colleague Alex Altman perhaps puts it best in this Swampland post, when he says: On one side, the Obama Administration, Capitol Hill Democrats, Wall Street whizzes and budget experts have been wearing out their thesauruses looking up new words for “catastrophe” as they try to explain to the public that failing to raise the $14.3 trillion federal debt limit by Aug. 2 would result in a radically different country on Aug. 3. And over at Moneyland, Josh Sanburn has dug a little deeper to explain what a debt default would feel like for the average American. The effects on the stock market might be temporary - a drop followed by a rebound when a deal is struck. Mortgage rates, though, would be likely to rise and stay there even after an eventual deal, which, all things being equal, is likely to keep housing prices depressed. Douglas Elmendorf, who is the director of the non-partisan Congressional Budget Office, ran the numbers on what a deal that either cuts spending or raises taxes in order to reduce the deficit by $2 trillion would mean to the economy. Elmendorf estimates that the deal would likely slow the economy by as much as 0.6% in each of the next three years. Again, there is no science to translating GDP growth into jobs. But 0.1% of GDP growth usually translates into the economy adding around 5,000 jobs, and visa versa. So that means a debt ceiling deal of the size Elmendorf is talking about could cost the economy as much as just over a million jobs during the next three years.

The Two Most Exquisite Ironies Of The Debt Ceiling Fight - On the one hand, much of Wall Street is insisting that the whole fight is political theater and that Congress and the White house will work something out. On the other hand, congressional Republicans are insisting that Wall Street won't react negatively if a deal doesn't get done. In other words, financial markets aren't yet reacting because they think a deal is in the offing and the GOP isn't cutting a deal because it doesn't think Wall Street cares.. On the one hand, congressional Republicans are using the debt ceiling as a weapon to force the White House to accede to their wishes on spending cuts. On the other hand, the GOP in the House and Senate insists that not raising the debt ceiling will have no impact. So...We say that not raising the debt ceiling won't have an impact that we have to worry about but you had better be worried because it's going to hurt come August 3.

US Senate group offers $3.75 trillion deficit cuts (Reuters) - A bipartisan group of U.S. senators on Tuesday revived an ambitious budget plan that could provide new ideas for breaking the impasse in Congress over raising the nation's credit limit by Aug. 2. President Barack Obama threw his support behind the proposal by the "Gang of Six" senators, saying it was broadly consistent with his approach on reducing debt and deficits. Obama urged Senate Majority Leader Harry Reid, a fellow Democrat, and Senate Republican leader Mitch McConnell to start "talking turkey" about it. Senate Budget Committee Chairman Kent Conrad, one of the six Democratic and Republican senators who have been working since December on a deficit-reduction plan, said the proposed $3.75 trillion in savings over 10 years contains $1.2 trillion in new revenues.  The group briefed about half of the 100-member Senate and "the response was very favorable," Conrad told reporters.

Weighing the Gang of Six Proposal - A bipartisan group of senators dubbed the “Gang of Six” has been meeting for months to hash out a budget deal that can actually pass the Senate. Their long awaited plan has just been released, and analysis is coming in. Dan Mitchell, senior fellow at The Cato Institute, weighed in on “The Good, the Bad, and the Ugly in Their Budget Plan.” Since the plan is only an outline, and not fleshed out as legislative language or in a form scored by CBO, the analysis is equally brief.On the positive side, the plan’s good news is mostly in the area of tax reform. It lowers the top rate for individuals and corporations. This move is “something that is long overdue since the average corporate tax rate in Europe is now down to 23 percent.” The Alternative Minimum Tax is eliminated, which will help eliminate the end of the year scramble to adjust it annually. The Gang’s plan “targets some inefficient and distorting tax preference such as the health care exclusion.” On the health care side, ObamaCare’s budget busting CLASS Act would be repealed. The “bad and ugly” elements flagged by Mitchell are mostly omissions

Will the Return of the Gang of Six End the Debt Ceiling Showdown?- As Congress flails around looking for a way out of the debt ceiling trap it has fallen into, interest has turned to a “Gang of Six” deficit reduction plan that emerged in the Senate on Tuesday. The plan, which is a version of the Bowles-Simpson deficit reduction plan, was received favorably in the Senate. Interest in the plan intensified when President Obama said he approved of the proposal as a basis for moving forward. The proposal involves $500 billion in immediate deficit reduction, and it requires future cuts to Social Security, Medicare, and other programs. When these changes are coupled with changes in the tax code, the proposal is advertised as reducing the deficit by nearly $3.7 trillion over the next ten years (the CBO has not yet scored the plan).  Let’s put that in perspective. While “immediate” isn’t actually defined, suppose it’s over four years, i.e. through 2015 (which isn’t all that immediate). Recall that the ARRA was $767 billion, but 37.5 percent of that was tax cuts, so the spending component was around $479 billion. Thus, the cut of $500 billion in the Gang of Six proposal is larger than the spending component of the stimulus package.

Government: The Gang of Six provides a debt-ceiling escape hatch… The Gang of Six -- a bipartisan group of senators who've been trying to craft a deficit-reduction plan for months -- may be the deus ex machina that magically resolves the debt-ceiling impasse. Or not, depending how willing lawmakers on both parties are to stick a fork in their favorite campaign issues. The group estimated that its plan would reduce projected deficits by $3.6 trillion to $4.65 trillion over the coming decade, depending on the assumptions used. That's far more than $1.5 trillion to $2.5 trillion being sought by Senate leaders and House Republicans, respectively, which may lend it some credibility among deficit hawks. Sen. Richard J. Durbin (D-Ill.), a Gang of Six member, told the Hill that the proposal won't be ready to be voted on by Aug. 2, the drop-dead date set by the Treasury Department for raising the debt ceiling. But early expressions of support from other senators and President Obama suggest that key elements of the proposal could be used to make a debt-ceiling bill more palatable to recalcitrant lawmakers. That's because it makes important concessions to the main concerns on both sides of the aisle, enabling Republicans and Democrats to claim some kind of victory -- despite the numerous provisions that would be toxic to one party or the other if they were voted on separately.

"Gang Of Six" Deficit Reduction Proposal Short On Specifics - The Gang of Six deficit reduction plan introduced today promises $3.7 trillion in cuts over 10 years. Only $500 billion of those cuts, however, would be made immediately as part of a bill to raise the debt limit. The rest are guidelines for congressional committees to take up later this year, with no guarantee they will remain in their current form, or provide the level of deficit reduction advertised. 'There is not a final agreement on the gang of six plan – rather an agreement on a framework for what could become a plan,' Max Gleischman, a spokesman for Senator Dick Durbin (D-IL), told Business Insider. Tax reform 'will not be part of a deal to get us through the August 2nd deadline,' he added. The executive summary released by the group lists only six areas for immediate deficit reduction, including a switch to the chained-CPI beginning in 2012 (for more details see below), and the repeal of the CLASS Act — an insurance program providing long term coverage for families in the event a relative becomes disabled. The rest of the five page document establishes 'a fast track process for the committees in Congress to specify further savings.'"

Obama Embraces Senators’ Deficit-Cutting Plan - President Barack Obama embraced a $3.7 trillion debt-cutting plan by a bipartisan group of senators that would combine tax increases and spending cuts, saying it could offer a way out of the congressional deadlock over raising the U.S. borrowing limit. “We now are seeing the potential for a bipartisan consensus,” . He called the proposal by the so-called Gang of Six “broadly consistent” with what he has sought and “a very significant step” in so far fruitless negotiations between Republicans and Democrats over boosting the nation’s $14.3 trillion borrowing authority before a threatened default on Aug 2. At the Capitol, the bipartisan group led by Republican Senator Saxby Chambliss of Georgia and Senator Mark Warner of Virginia pitched its plan for an immediate $500 billion in spending cuts followed by a longer-term effort to force bigger reductions and $1 trillion in tax increases. The plan calls for lowering tax rates and limiting the growth of entitlement programs such as Medicare and Social Security.

The Gang Of Six Deal Is Now The Gang Of 50 Or More Deal - This morning, a bipartisan group of 50 or more senators endorsed a revived version of the "Gang of Six" plan.  The Atlanta Constitution's Jamie Dupree seems to be the first to put the details on the web here.  President Obama endorsed the plan in principle in a press room appearance at 1:35 p.m. today.  The transcript will be posted here.  This stole the thunder from the House's vote later today for "Cut, Cap, and Balance," H.R.2560.  When the Senate votes down H.R.2560 later this week, the key question will be whether 120 House Republicans will support the "Gang of Six" plan.  I've already had one top House GOP staff director express doubt, but we shall see.  If Senator McConnell's (R-KY) proposal is added, giving the President the authority to raise the debt limit in increments of $700 billion, $900 billion, and $900 billion, subject to a disapproval resolution from Congress, we will have a way out of the implacable positions on the debt limit.

The Gang of Six plan - Ezra Klein links to a founding document.  David Wessel summarizes some of it.  It’s complicated and a lot of it will be re-legislated.  We still have an OK path forward.  It seemed to me that gdp+1 for Medicare does lot of the medium-term work.  The entire tax discussion was unclear and I feared that some revenue losses were perhaps not acknowledged.  At this point the real questions are about public perceptions, not the principles of public finance as they might be debated by Musgrave and Buchanan.  The estimated level of social capital in the U.S. political system will very shortly be revalued, one way or the other.

Gang Of Six Details - The "Gang of Six" returned to life today in the U.S. Senate, unveiling a plan for $3.7 trillion in budget savings over 10 years, breathing new life into the drive to reach a bipartisan deal on the budget, which could then pave the way for an increase in the nation's debt ceiling. Here is a rundown of some of the details that have been agreed to by the Gang of Six. This bipartisan, comprehensive, and balanced plan consistent with the recommendations of the Bowles-Simpson fiscal commission that will:

  • * Slash our nation’s deficits by $3.7 trillion/$3.6 trillion over ten years under CBO’s March 2011 baseline, or $4.65 trillion/$4.5 trillion under the original fiscal commission baseline (which used the President’s 2011 budget request as the starting point for discretionary spending).
  • * Stabilize our publicly-held debt by 2014.
  • * Reduce our publicly-held debt to roughly 70% of our economy by 2021.
  • * Impose unprecedented budget enforcement.

The Gang of Six's plan: Better than we're likely to do otherwise…Let's start with what's in the Gang of Six's plan (pdf) — or at least what we know is in it.The first piece is $500 billion in immediate cuts and new revenue. That mainly comes through a cap on discretionary spending and slowly moving the government's measure of inflation to chained-CPI, which ends up reducing Social Security benefits and raising taxes. It also repeals the CLASS Act, which doesn't save any money in the short-term but potentially saves a fair amount in the long term, lays down some new budgetary rules and sells off some federal property.  But that's $500 billion out of a planned $3.7 trillion. So it's really what comes next that's interesting. Entitlements come next. The proposal directs the Senate Finance Committee to find $300 billion in health savings to permanently fix the way Medicare pays doctors, and then to pull out another $200 billion in health savings — or perhaps it's $85 billion, the document is slightly confusing — on top of that. It also directs the committee to "maintain the essential health services the poor and the elderly rely on." I take that to mean structural changes such as the Ryan Plan are off the table, but things like raising the Medicare eligibility age or increasing cost sharing are fair game. Various other committees ranging from Armed Services to Energy then have to find another $250 billion or so. We're talking a lot of money here, so the cuts will have to go deep.

What 'Gang of Six' plan would do -- It's hardly a done deal. And there's absolutely no guarantee the no-taxes-ever conservatives in the House will go for it. But a debt-reduction framework put forward on Tuesday1 by the bipartisan Gang of Six in the Senate injected new hope that the ongoing stalemate in the debt ceiling negotiations might be broken. Before reviewing the specifics of the plan, President Obama gave it an early nod of approval. "The framework is broadly consistent with what we've been working on here in the White House and with the presentations that I've made to the leadership when they've come over here," he told reporters. The Gang of Six plan got a positive reception from a bipartisan group of more than 40 senators earlier on Tuesday. "This is the moment because everybody sees the process drifting towards a kick-the-can down the road response, which is embarrassing,"

Optimism returns to fiscal talks - When it comes to the fiscal debate in Congress, the worst-case scenario is clear: no agreement at all, and a default. The best-case scenario is also clear: a bipartisan agreement on a credible long-term fiscal plan which allows a large measure of certainty and predictability going forwards. Something along those lines looks more likely today, and markets are rising as a result. In the middle is the McConnell muddle-through approach — something which avoids immediate disaster but doesn’t address any long-term issues at all. That’s fine — Congress has never been particularly good at addressing long-term issues. But the world is changing, and both Moody’s and S&P have said that the US could lose its triple-A credit rating if it doesn’t make a credible attempt to get a grip on the national debt. Will Congress make a serious effort at achieving the best-case outcome? I think it will. But there’s risk associated with doing so: the more time and effort you put into a substantive deal, the more difficult it becomes to cobble together a McConnell-style Plan B in the event that it falls apart at the last minute. Congress showed, during the first TARP vote in 2008, that measures which need to get passed can still fail. My fear here is that if the ambitious plan becomes the main focus of attention, no one will really have a clue how easy or difficult it might be to pivot to Plan B should it fail.

Obama Renews Push for a Bipartisan Deal on Debt -  President Obama on Tuesday renewed his push for an ambitious deficit-reduction deal, hailing a bipartisan package put forward hours earlier by a group of six senators as a sign of progress and summoning Congressional leaders for a new round of negotiations.  Saying time is running out to get a deal before the government hits its debt ceiling1 on Aug. 2, Mr. Obama said a proposal worked on for months and put on the table by the so-called Gang of Six — the group of senators who offered a plan for roughly $4 trillion in deficit reduction over the next decade — suggested there was still hope for a bipartisan deal.  The group’s plan, modeled on the recommendations last year of a fiscal commission set up by Mr. Obama, includes new revenues as well as substantial spending cuts.  The president spoke as the House prepared to vote on a Republican plan that would cut spending next year, cap it for the long term and call for a Constitutional amendment requiring a balanced budget.  Mr. Obama said the bipartisan Senate group’s proposal “is broadly consistent with the approach that I have urged.”

Obama backs new senate debt plan - President Barack Obama, in a last-ditch bid for a bipartisan "grand bargain" on the budget, threw his weight Tuesday behind a $3.7 trillion deficit-reduction plan unveiled by six Republican and Democratic senators. The plan, which would span a decade, has scant chance of passing intact as the solution to the current debate over raising the government's borrowing limit. Some Republicans were wary of the plan's changes in tax rules. Democrats said it would be near impossible to draft legislative language and pass it quickly. Still, some elements from the so-called Gang of Six senators could be incorporated into a final deal to shrink the deficit and raise the government's $14.29 trillion debt cap by Aug. 2. That's when the Treasury Department says the government will run out of cash to pay all its bills without an increase in borrowing authority.  Even House Majority Leader Eric Cantor (R.,Va.), one of the party's most combative conservatives, didn't dismiss the plan out of hand. "While there are still portions that are unclear and need more detail, this bipartisan plan does seem to include some constructive ideas to deal with our debt."

Presenting The Complete Generic Fluff That Is The "Gang of Six Plan To Reduce Our Nation's Deficit  - Well it's not a 3 page term sheet. It is a 5 page talking point bulletin full of ridiculous fluff with nothing substantial.Here is the only immediately actionable prerogative which comes from, you guessed it, Chained CPI and Social Security:Enacting a $500 billion down payment that would secure immediate deficit savings, while establishing a fast track process for the committees in Congress to specify further savings:

  • Impose statutory discretionary spending caps through 2015.
  • Implement numerous budget process reforms.
  • Shift to the chained-CPI (a more accurate measure of inflation) government-wide starting in 2012, along with the following specifications for Social Security: (1) exempt SSI from the shift for five years, and then phase in the shift over the next five years; and (2) provide a minimum benefit equal to 125% of the poverty line for five years. (According to CBO, the shift to chained-CPI would result in the annual adjustment growing, on average, about 0.25 percentage points per year slower than the current CPI.)
  • Repeal the CLASS Act.
  • Enact concrete policy changes that lock-in additional savings, including freezing Congressional pay and selling unused federal property.
  • Require GAO and the Department of Labor to report to Congress on establishing a more effective unemployment insurance trigger.

Oops: Boehner Says Gang Of Six Proposal "Appears To Fall Short - No, the soap opera is not done just yet. According to The Hill the office of John Boehner has said that the Gang of Six proposed $3.7 trillion fluff "settlement" appears to fall short of goals set by House Republicans. "This plan shares many similarities with the framework the Speaker discussed with the president, but also appears to fall short in some important areas. The House is voting today on our 'cut, cap, and balance' plan, and we hope the Senate will take it up soon. That remains our focus,” a Boehner spokesman said. As expected the kicker is the impact on Social Security which will see drastic changes if Chained CPI is implemented in conjunction with cost of living adjustments: "They also are wary of the plan's complicated mechanism for dealing with Social Security. The plan states that Social Security reform only be taken up once the rest of deficit-reduction plan is completed. If Social Security reform is not passed by a 60-vote margin, the earlier vote on the rest of the deficit-reduction package is nullified." The actual impact on COLA was not mentioned by Boehner's office. We expect the AARP will require clarification on the speaker's stance on that issue shortly.

Disagreeing WIth Pete: Gang Of Six Plan Changes Alost Nothing - In his post yesterday, Pete thought that the gang of six plan was far more significant than I do.   In fact, I don't think the plan changes the overall situation at all unless House Republicans are suddenly willing to agree to the $1 trillion increase in taxes that they so far have been completely unwilling to do.  The fact that the White House embraced the proposal so quickly may also make it hard...or even impossible...for the House GOP to get on board quickly. In other words, even if the gang of six plan does pass the Senate, its prospects in the House are extremely limited.  As a result, the odds of a debt ceiling increase being in place by August 2 haven't changed very much in the past 24 hours no matter what the headlines say. And I'm not at all confident that the gang of six plan can pass the Senate either.  From those I've talked with, Pete's assertion that the gang of six plan is supported by 50 senators does not seem to be as true today as it might have seemed yesterday. Equally as important, the gang of six plan needs 60 rather than 50 votes to be considered because of the virtual certainty that Jim DeMint (R-SC) and Ran Paul (R-KY) will filibuster.

Gang of Six and the Housing Market - There aren't a lot of details about the Gang of Six debt proposal, but apparently it includes cutting or eliminating the home mortgage interest deduction. There's a good case to be for eliminating the home mortgage interest deduction. But regardless of whether the deduction should go, I question the timing. Cutting or eliminating the deduction isn't going to help stabilize the housing market. I worry about major legislative changes via budget deals that haven't had a chance to benefit from a public airing. We require notice and comment periods for regulatory rule-makings. It seems ill-advised to undertake more significant reforms without the benefit of public input. Yes, there's a default clock running, but there's a much simpler and less risky way to avoid that--increase the debt ceiling enough to enable a public debate on the long-term solution.

The Senate Gang of Six’s Budget Plan Aims at Taxes - The Senate’s bipartisan on again/off again Gang of Six has proposed an ambitious tax and spending package that closely follows the plan offered six months ago by the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson. Their plan is not so much a budget as a framework. In some cases it is quite explicit. In others, it is annoyingly vague. Looking at its five page summary feels something like reviewing house blueprints that sometimes specify the size of the nails and other times show little more than a blank space over the garage. So, for example, it calls for three individual tax brackets—not two, not four, but three. And it proposes to reduce tax preferences by $1 trillion over 10 years. It vows to trim such hot-button tax breaks as subsidies for health insurance, charitable giving, homeownership, and retirement. How? Well, that is to be determined later. All we know is that these tax breaks should be reformed but not eliminated. It is also built upon an impenetrable tangle of process rules, multiple baselines, deadlines, and unenforceable instructions to future Congresses. Still, it is a framework for deficit reduction that has bipartisan support—in the Senate at least.  And that is more than anyone else has been able to accomplish.

Your daily debt-ceiling update - YESTERDAY, reporters briefly got excited about the return of the "Gang of Six", a bipartisan group of Senators, who seem to be proposing a grand-bargain-like plan worth $3.7 trillion over the next decade. It manages the neat trick of raising revenue through the reform of the tax code, in a way that can be interpreted as both raising and lowering tax revenues. President Obama endorsed the plan yesterday, and a few economics reporters pointed to a dip in long-term government bond yields as evidence that markets believed the plan would happen. Colour me sceptical. Ezra Klein says a plan of that ambition probably can't be completed in the brief window left before the government runs out of money. House Republicans are distinctly cool to the plan, and Mr Obama's endorsement is unlikely to encourage their support. Yields dropped yesterday...all the way back to their July 12th level, and they're up again today. This looks, like so much of the recent negotiations over the debt ceiling, like a convenient way to fill a newspaper page and little else.

New debt plan gains support in Senate; House passes balanced-budget measure - President Obama and lawmakers in both parties latched on to a new strategy for reducing the federal debt Tuesday, saying an emerging plan to save $3.7 trillion over the next decade could help break a political impasse over the debt limit 1and avert a U.S. default2.The proposal, crafted by a bipartisan group of senators known as the “Gang of Six,” 3calls for $500 billion in immediate savings and requires lawmakers in the coming months to cut agency spending, overhaul Social Security and Medicare, and rewrite the tax code to generate more than $1 trillion in fresh revenue. In the works since January, the plan became public Tuesday, just as it was becoming apparent that the leading option for raising the federal debt limit faces bleak prospects in the House. With the Treasury4 expected to start running out of cash 5in two weeks, House Republicans are openly hostile to a Senate-led plan that would authorize additional borrowing but kick the hardest decisions — such as whether to raise taxes or cut entitlement programs — to a special legislative panel.

Does ‘Gang of Six’ Plan Raise or Cut Taxes? - There’s a critical question that could determine the future of Washington’s latest deficit-reduction plan: Does it raise taxes? Unfortunately, the answer is both yes and no. In Congress, the key question about the price tag attached to any deficit-reduction package is: Compared to what? Once upon a time, everyone used the same baseline—the yardstick for comparison—which was typically current law extended into the future indefinitely. Today, largely because the tax code is stuffed with temporary provisions that no one really regards as temporary, you can make your package look big, or your opponents’ look small, by picking a more convenient yardstick. Proliferating baselines allow people who agree to a specific proposal to describe it differently, which is why, in the crazy world of Washington budgeting, the same proposal can be said by some to be a tax increase and by others to be a tax cut. The Gang of Six, a bipartisan group of senators, threw its deficit-reduction package into the arena Tuesday and it is variously described as increasing tax revenues by $1 trillion over 10 years and also decreasing them by $1.5 trillion over 10 years. Huh?

Does the Gang of Six Cut Taxes or Raise Them? -- Over the next ten years, would the proposal:
  •      a. Cut taxes by $1.5 trillion
  •      b. Increase taxes by $1.2 trillion
  •      c. Increase taxes by $2.0 trillion

If you answered (d. All of the above.), you have a fine future as a budget watcher (or you peeked at the answer from the last time we played this game). The answer depends on the yard stick you use to measure changes in tax revenues. Unfortunately, people now use at least three different yard sticks. The first, known as the current law baseline, assumes that Congress doesn’t change the tax laws on the books today. That means every temporary tax cut expires in the next two years. The second, known as the current policy baseline, assumes those three temporary tax cuts all get permanently extended. The third, known variously as the Fiscal Commission’s plausible baseline or the alternative fiscal scenario of 2010, assumes that those three temporary tax cuts all get extended with one big exception: the tax cuts that benefit “high-income” taxpayers expire.

Understanding the Gang of Six plan - Press coverage of the Gang’s plan has been substantively weak. Most of it covers only the Gang’s top line substantive message and the political back-and-forth surrounding it. I’m going to try to supplement that by putting some meat on the bone.Friendly warning: this is somewhat of a monster post. It is both longer and more detailed than I would like it to be, but I’m aiming it primarily at policy insiders who I think want that additional detail and analysis. Lay readers may find a few parts of it to be tough sledding. The mainstream press is giving you not enough detail. Here I’m erring on the other side. I will, in my follow-up post, provide a shorter and far more judgmental summary of what’s going on in this plan. To their credit, the Gang of Six (G6) released three documents that provide significant descriptive detail and numbers. I will therefore begin by giving you what the Washington insiders already have: the Gang of Six’s documents, so you can see for yourself.

  1. Gang of Six summary;
  2. Gang of Six slides; and
  3. Gang of Six charts.

Deficit Compromise Opens the Door for Huge Cutbacks in Mortgage Deduction - The “Gang of Six” compromise on the federal deficit that has been endorsed by President Obama mandates the most significant reductions in the mortgage interest deduction in the 98 years it has been in effect. A memo outlining the broad strokes of the plan obtained by Real Estate Economy Watch authorizes the congressional finance committees to “Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families” in order to achieve $1 trillion additional revenues.” Though exactly how the proposed budget reform package will affect the mortgage interest deduction won’t be known until the “Gang of Six” proposal is turned into legislation, significant changes for the MID are in store if it passes, and maybe not even then. This afternoon Senate Majority Leader Harry Reid reported ge got a call from Congressional Budget Office Director Doug Elmendorf, who said the plan would take at least two weeks to score for cost and savings, putting the completion of that work just beyond the Aug. 2 deadline. Reid called the plan “wonderful” and said he does not want to diminish enthusiasm over it, but said alternatives still must be considered.

The Gang of Six Framework: A Step Backward for Social Security Reform - This week, the Senate’s “Gang of Six” unveiled a deficit reduction framework that has been publicly described as generally building off of the Simpson-Bowles fiscal commission recommendations, and as specifically pursuant to Social Security reform, among other objectives. A careful examination of the framework, however, reveals that it is a step back from bipartisan Social Security reform rather than a step toward it. This piece explains specific elements of the Gang of Six’s Social Security framework. I want to be clear from the outset that I strongly support the conceptual objectives of the Gang of Six to promote deficit reduction, general bipartisan cooperation, and to build off of the specific Simpson-Bowles recommendations. My repeated support for and defenses of the Simpson-Bowles Social Security proposals are on the public record. The goal of this piece is to explain the substantive implications of the Gang of Six document, leading to the conclusion that it moves away from meaningful Social Security reform.

Gang of Six Plan Gives Tax Breaks for Wealthy, Social Security Cuts for Ordinary Workers - The budget plan produced by the Senate’s “Gang of Six” offers the promise of huge tax breaks for some of the wealthiest people in the country, while lowering Social Security benefits for retirees and the disabled.  Despite claiming that they will "reform" Social Security on a "separate track, isolated from deficit reduction," the plan includes cuts to Social Security that would be felt in less than six months, as the plan calls for a new inflation formula that will reduce benefits by 0.3 percentage points a year compared with currently scheduled benefits. The plan also calls for a process that is likely to reduce benefits further for future retirees. The proposed cuts to Social Security are cumulative. This means that after ten years, a beneficiary in her 70s will see a cut of close to 3 percent. After 20 years, the cuts for beneficiaries in their 80s will be close to 6 percent, while the reduction in annual benefits will be close to 9 percent by the time beneficiaries are in their 90s. For a beneficiary in her 90s living on a Social Security income of $15,000, this means a loss of more $1,200 a year in benefits.

Disaster Warning: 'Gang of Six' Deal Sacrifices Social Security, Medicare, Medicaid to GOP Madness - The latest idea to emerge in negotiations over a deficit-reduction package came from a group of senators that calls itself the Gang of Six. The proposal would be a disaster, Sen. Bernie Sanders warned. 'The plan would result in devastating cuts to Social Security, Medicare, Medicaid and many other programs that are of vital importance to working families in this country. Meanwhile, tax rates would be lowered for the wealthiest people and the largest, most profitable corporations.' 'This is an approach that should be rejected by the American people. At a time when the rich are becoming richer and corporate profits are soaring, at least half of any deficit-reduction package must come from upper income people and profitable corporations. We must also take a hard look at military spending, which has tripled since 1997.' Summary of the 'Gang of Six Plan':

Gang of Pain: Who Suffers Under the Bipartisan Deficit Reduction Scheme - President Obama endorsed the Senate's Gang of Six deficit reduction plan Tuesday, saying that the proposal “is broadly consistent with the approach that I’ve urged” and “makes sure that nobody is disproportionately hurt from us making progress on the debt and deficits.” However, an examination of the plan’s specifics reveals that corporations and wealthy Americans won’t feel much pain at all—in many cases, just the opposite. The plan slashes taxes and could bring the top personal income rate down as low as 23 percent—meaning CEOs like Jamie Dimon and Lloyd Blankfein could see their after-tax income increase by as much as $3 million, according to Dean Baker, co-director of the Center for Economic and Policy Research. The corporate tax rate would be reduced from 35 percent to between 23 and 29 percent under the proposal. (Supposedly enough loopholes would be closed to keep total revenue from corporate taxes the same. Even in that scenario, corporations won’t pay an extra penny). Military spending also remains virtually untouched.

Gang of Six Plan Would Raise Taxes on Low-Income Workers - The chained Consumer Price Index (CPI), a provision included in the Gang of Six's deficit reduction package, raises taxes on low- and moderate-income workers, according to a recent report by the Joint Committee on Taxation. This belies the claim that the harm done to the middle class by the chained CPI's benefit cuts would be partly off-set by the revenues it would generate. The chained CPI, a change in the inflation formula that would result in cuts to Social Security, VA benefits, Supplemental Security Income (SSI), and other benefits, as well as increases in revenue, has been on the table in deficit talks for months. The measure has specifically been seen as a possible point of bipartisan compromise, because it both cuts spending and raises revenues. .  While commenting on Yglesias' opposition to inflation-indexed tax brackets is above my pay-grade, it is pertinent to note that a recent report by Congress's Joint Committee on Taxation shows that the chained CPI would greatly increase the tax burden of low- and moderate-income workers, while barely affecting millionaires.

Why Does the Gang of Six Want to Repeal the CLASS Act? - The bipartisan deficit reduction plan proposed by the so-called “Gang of Six” senators includes very few specifics. Oddly, one would repeal the Community Living Assistance Services and Supports (CLASS) Act. CLASS, a national, voluntary long-term care insurance program, was included as part of the 2010 health reform. Despite its obscurity, it is the only provision of that sprawling law the Gang would kill. The Gang’s budget plan, which President Obama called a “very significant step,” also proposed large but unspecified cuts in Medicaid as well as other unidentified reductions in non-Medicaid social service programs—some of which also benefit the frail elderly and younger people with disabilities. This combination of cuts and repeal of CLASS threatens to put millions of families in financial and physical jeopardy. Today, more than 40 percent of all long-term care is funded by Medicaid, the joint federal/state health program that is itself under tremendous financial stress. Only about 7 million Americans own long-term care insurance, which is both costly and often unavailable to those with pre-existing medical conditions.

The Only Debt Ceiling Plan "That Is Going To Ever Pass": Senators Tom Coburn (R-OK) and Kent Conrad (D-ND) defended the debt limit and deficit reduction proposal that they introduced yesterday from Democratic and Republican criticism, arguing it has the best shot to pass Congress. The two are members of the so-called 'Gang of Six,' which drafted the bipartisan proposal, and called for shared sacrifice to get a deal done before the August 2nd debt limit deadline. 'It is probably the only plan that is going to ever pass--or some combination of it,' Coburn told Bloomberg Television. '$3.7 trillion is a lot of money, but it is not enough yet--but it will buy us the time to get us down the road a little further to make additional changes that are going to have to be made.' Coburn called on the House of Representatives to seriously consider the proposal, saying 'each side has to give up something they did not want to give up.'

Your daily debt-ceiling update - JUST 12 days until the deadline, and there is little sign of progress on the debt-ceiling front. Ezra Klein writes: One common explanation for where we are in the talks is that we're waiting for the last minute. No deal struck before the last minute will be credible as the best deal Republicans could possibly get, because in this negotiation, time is leverage, and if the clock isn't one minute from midnight, that means there's leverage Republicans chose not to use. Until we hit that point, there's just not enough incentive for the House GOP to say "yes" to anything, not enough pressure to force them to say "yes" to anything, and there's an argument, popular among some conservatives, that it would in fact be a mistake to say "yes" to anything. But what no one quite knows is what the House GOP will accept when the clock is one minute from midnight, or, in more pessimistic tellings, the Dow is 1,000 points below whatever it was at the day before. We're hearing talk that the "Big Deal" is being revived, but the bigger the deal, the tougher it is to pass quickly. There's still no sign of that elusive holy grail: a plan that's acceptable in both the House and the Senate.

18 Months Of Debt Talks Have Gotten Us Nowhere - In late 2009, President Obama and Congress first toyed with the idea of creating a powerful commission to slash the long-term deficit and restore fiscal sanity to the nation. The Senate lost its nerve and killed the proposal, but Obama came back with an executive order, creating a less influential panel to chart out a path.  What happened next tells a story of a dysfunctional federal government, unbridgeable political partisanship and missed opportunity. Over the ensuing year and a half, much energy, money and manpower was  expended to address what virtually everyone in Washington agrees is an essential task: reining in the $1.5 trillion annual deficit and finally getting a handle on runaway spending, including health care and other entitlement programs that threaten to consume most of the federal budget in the coming decade.

The Weirdness of 10-Year Deficit Reduction - The Gang of Six plan proposes to reduce the cumulative deficit by $3.6-3.7 trillion over ten years relative to the CBO’s March 2011 baseline. Everyone’s excited about it. Four trillion dollars! Hooray! The weird thing is that if you are claiming deficit reductions against the CBO’s baseline, I think intellectual honesty requires you to point out that, according to the CBO’s baseline, there is no deficit problem. The projected 2021 deficit is $729 billion, but net interest spending is $807 billion (Table 1-5). That means that the primary budget is running a surplus of $78 billion, the entire deficit is due to interest payments on the debt, and the debt has stabilized around 75 percent of GDP. This is not a great situation, but it’s no emergency, either.

S&P: At Least 50% Chance US Rating Downgraded Within 3 Months - Standard & Poor's said there is at least a 50% chance the U.S. government's pristine credit rating could be cut within the next three months as the debt ceiling deadline looms. The rating agency said it is looking at three possible outcomes over the debate to raise the debt ceiling and enact a long-term deficit reduction plan. The scenarios include an increase to the debt ceiling tied with a long-term debt-reduction solution; an increase to the debt ceiling with no long-term solution; and a failure to raise the debt ceiling before the Aug. 2 deadline. S&P said in a new research note Thursday that it still believes the U.S. will avoid a default. S&P first put the U.S. rating on review for a possible downgrade last week as debate of the debt ceiling intensified. The worst-case scenario, a default because the debt ceiling isn't raised, could "wrack global financial markets and likely shove the U.S. economy back into recession." Because of that possibility, S&P sees the potential for the Federal Reserve to launch another round of bond buying, known as quantitative easing.

Fitch repeats warning of U.S. debt outlook change -- Fitch Ratings reiterated a threat to put the U.S. sovereign rating on rating watch negative if the U.S. government doesn't increase the debt ceiling prior to Aug. 2, though Fitch still predicts it will do so and make "full and timely" payments on all its obligations. "Agreement on a credible fiscal consolidation strategy will secure the U.S. 'AAA' status; failure to do so will inevitably weaken the sovereign credit profile and may result in a sovereign rating downgrade," the credit agency said. Standard & Poor's so far has gone the furthest of the rating agencies, warning of a downgrade even if the debt ceiling is increased and spending cuts outlined.

Exclusive: Fed planning for potential default - The Federal Reserve is actively preparing for the possibility that the United States could default as a deadline for raising the government's $14.3 trillion borrowing limit looms, a top Fed policymaker said on Wednesday. Philadelphia Federal Reserve Bank President Charles Plosser said the Fed has for the past few months been working closely with Treasury, ironing out what to do if the world's biggest economy runs out of cash on August 2. "We are in contingency planning mode," Plosser told Reuters in an interview at the regional central bank's headquarters in Philadelphia. "We are all engaged ... It's a very active process."  The Treasury has repeatedly said default was unthinkable and that there was no alternative to raising the debt ceiling. Plosser's remarks marked the most extensive public comments yet on preparations for a default from a U.S. official.

GOLDMAN: The Debt Ceiling Fight Is Already Hurting The Economy - While it's certainly possible that the drop in confidence reflects other factors--or simply unmeasured deterioration in the economy--the extent, timing, and composition suggests that the uncertainty surrounding the debt ceiling is probably a contributing factor. Given that the economy appears to have posted real GDP growth of only 1.5%-2% in the first half of the year, hovering near its "stall speed", any self-inflicted wounds are particularly unwelcome. Still, a drop in confidence is only important if it affects real economic variables such as hiring or spending. We suspect the drop has put a small crimp in June spending and will continue to do so in July, via the following channels: Directly, via heightened uncertainty and lower expected income. Even after accounting for factors such as disposable income, net worth, and financial conditions, information on consumer confidence helps explain spending behavior in the short term. In particular, responses to questions about expectations of the economy seem to be more highly correlated with spending than assessments of current economic conditions.

Debt negotiations: How Congress is already dragging down the economy - In 12 days, the Treasury Department will "exhaust its borrowing authority," which means it will not be able to spend more than it takes in. The government will lose the ability to pay about half of its bills—sorry, troops, doctors, and/or seniors!—and the monthly GDP could drop by 10 percent. Yet Congress continues to dither on lifting the debt ceiling, though both sides agree that they have to. As this characteristically droll Economist headline puts it: "Biggest unforced error in history still on schedule." To be fair, Congress doesn't have to do much (literally and figuratively) to make economic conditions worse. If, upon hearing the news from Washington, consumers feel more pessimistic and decide to save rather than spend, that hurts the recovery. If bond investors decide to hang on to cash rather than buying corporate debt until this all blows over, that hurts the recovery. If contractors hold off on hiring workers until they are certain they are going to get their check from Washington, it hurts the recovery. And there is evidence that all of those things are starting to happen.

A fate worse than debt ceiling - Starting a war is one thing but ending it is an entirely different matter, as Republicans in Congress are discovering in the fight over raising the US debt ceiling.Republicans marched into battle with the Obama administration over the debt limit confident of exploiting their political strength and public concern over the size of the US budget deficit. But after firing off most of their ammunition with little to show for it, the GOP is finding that US public opinion remains unimpressed, and has shifted towards the White House the longer the campaign has gone on. Most Americans, it seems, want a debt deal to be done that includes increases in government revenues – or taxes, if you prefer – as well as cuts. Overall, opinion is hardening in favour of a deal of some sort. According to at least one poll, a majority wants a debt ceiling deal even if they don't like it themselves:

Compromise - The debt limit contretemps in Washington during these sweltering summer days threatens to end in financial disaster if Congress and the president can’t agree on legislation raising the cap on federal government borrowing. As everyone recognizes, there will be no solution unless competing factions that demand sharply different policies can compromise. The problem lies in the two different meanings my dictionary offers for the noun “compromise:” 1. A settlement of differences in which each side makes concessions.  2. A concession to something detrimental or pejorative: a compromise of morality. Both sides in the debt limit debate seem obsessed with the second definition. Accepting policies that violate major principles—higher taxes for Republicans, entitlement cuts for Democrats—would constitute concessions to things they view as “detrimental or pejorative.” That’s a hard step for either group to take.  But strict adherence to that view takes us down a road no one wants to travel. Warnings from rating agencies and business leaders demonstrate real concern from people who ought to know.

Boehner and Obama Close to Deal, Leaders Are Told, NYT: The Obama administration has informed Democratic Congressional leaders that President Obama and Speaker John A. Boehner were starting to close in on a major budget deal that would enact substantial spending cuts and seek future revenues through a tax overhaul. Officials knowledgeable about the conversations between the administration and Congressional leaders said the details of the potential package remained unknown but they presumed it would include cuts and adjustments in most federal programs, including Medicare. However, officials on all sides of the tense negotiations warned that no firm deal was in hand yet. The agreement was likely to rile Democrats, who could view it as more tilted toward Republican priorities than a bipartisan plan issued by the so-called Gang of Six senators this week; its prospects with conservative House Republicans were uncertain as well.

Boehner says there's no debt agreement with Obama (MarketWatch) -- House Speaker John Boehner said Friday there's no agreement between himself and President Barack Obama about raising the debt ceiling and cutting spending. Boehner spoke as the Senate was poised to reject a House passed-bill that would raise the debt ceiling. Obama continued to press for a "big and meaningful" deal amid reports he and Boehner were nearing an agreement to cut $3 trillion in spending. Boehner suggested negotiations would continue, saying: "It's going to be a hot weekend in Washington, DC."

Boehner: 'No deal' on exiting debt limit stalemate - Speaker John Boehner declared Friday that the House has "done its job" toward resolving the impasse over raising the government's debt limit and said it was time for the Senate to act. "There is no deal. There is no agreement in private" with Democrats, Boehner told reporters at the Capitol as the Senate was voting on a bill pushed through the House by majority Republicans which is called "cap, cut and balance" in pursuit of an accommodation on raising the government's debt limit. The legislation was killed in the Democratic-dominated Senate on a procedural vote by a 51-46 margin. . A testy Boehner said at one point that "at the end of the day, we have a spending problem," blaming that on Democrats and then abruptly declaring an end to his news conference. Boehner's appearance came after days of partisan wrangling and the Senate vote on GOP-backed legislation tying an increase in borrowing authority to a substantial program of spending cuts, including restraints on Social Security and Medicare.

House GOP Whip McCarthy expects no debt surprises, deals over the weekend - The No. 3 Republican in the House said Thursday night that he didn’t expect any surprises in the deficit debate over the weekend. “I do not see something springing this weekend,” Republican Whip Kevin McCarthy (Calif.) told conservative radio host Hugh Hewitt. McCarthy pooh-poohed reports that the White House and Republican leadership are closing fast on a deal on the budget deficit and raising the debt ceiling. “There is no deal,” McCarthy said, using the same phrase used by the White House and House Speaker John Boehner (R-Ohio) following reports they were nearing a deal on Thursday. McCarthy said Republicans would not rush to push a bill through in order to meet the Treasury Department’s Aug. 2 deadline. According to McCarthy, House Republicans will seek to follow their own “three-day rule” in order to allow members of Congress to debate the plan.

Republican Kevin McCarthy Says No Debt Deal Likely Today, Or Over Weekend: Treasury Now Projected To Have -$15.5BN Cash Balance On August 15 $31BN Coupon Date Well, it looks like there will be no debt ceiling hike enacted prior to August 2 at which point the money really does run out. From The Hill: 'The No. 3 Republican in the House said Thursday night that he didn’t expect any surprises in the deficit debate over the weekend. “I do not see something springing this weekend,” Republican Whip Kevin McCarthy (Calif.) told conservative radio host Hugh Hewitt. McCarthy pooh-poohed reports that the White House and Republican leadership are closing fast on a deal on the budget deficit and raising the debt ceiling. “There is no deal,”Now the reason why this is bad is because as Stone McCarthy calculates, "we expect Treasury to have less cash in early August than we thought previously." And here is where it gets very tricky since the money generating machinery won't be in place on time: "we now show Treasury with a negative cash balance of $15.5 billion on August 15, which implies that Treasury wouldn't have the resources to pay $30.6 billion in interest on that day."

Democrats in ‘volcanic’ mood - Barbara Mikulski, Democratic senator from Maryland, best captured the turn of events in the critical US debt talks. After emerging from a lunch meeting on Thursday with members of her party and Jack Lew, the White House budget director, Ms Mikulski said her colleagues were feeling “volcanic” about the prospect of a $3,000bn deal to cut deficits and raise the debt ceiling that did not include any higher taxes, adding that it was “like Mount Vesuvius” in the room. Harry Reid, the US Senate majority leader, added: “This can’t be all cuts, there has to be a balance.”Facing a possible revolt from within Democratic ranks, White House officials immediately dismissed the notion that the president would strike any agreement with Republicans to implement significant spending cuts – including reform of treasured government programmes such as Medicare and Social Security – without garnering any new revenue in return. They also invited Democratic leaders back to the White House for a second straight day of talks in an effort to shore up their support in the negotiations. Democrats are still expected to back whatever deal President Barack Obama strikes with congressional Republicans, but Thursday’s discontent highlighted the delicate balancing act facing White House officials as they go back-and-forth between the parties in search of a compromise.

Go Gang of Seventy - It’s good to get a grip and some perspective at times like these. That’s why I appreciated Congressman Raúl Grijalva, co-chair of the Congressional Progressive Caucus (CPC), reminding us that a “Gang of Seventy” Democrats in the House has already vowed to oppose any deal which cuts benefits in Social Security, Medicare or Medicaid. “Our Gang of Seventy-plus has the Gang of Six completely outnumbered,” says Grijalva. “And with Republicans not voting for any package, period, because of their opposition to a functional economy, House Democrats hold the key to whatever plan can pass Congress.” Grijalva and his allies point to the CPC People’s Budget as an alternative more in sync with what people want and the economy needs—a budget that calls for shared sacrifice. For example, 66 percent of Americans favor raising income tax rates on those making more than $250,000 and 67 percent support raising the wage cap for Social Security taxes. Both of these measures are included in the CPC budget. It’s a budget that also offers sensible cuts to military spending run amok, new tax brackets for millionaires and billionaires, and an investment of $1.45 trillion in job creation, education, clean energy, broadband infrastructure, housing, and R&D.

Wonkbook: New anger about a mostly old deal - What set off yesterday's debt-deal panic among congressional Democrats wasn't so much information about a new deal as a better understanding of the old deal. What Boehner and Obama appear to be discussing is the $4 trillion deal they were discussing a few weeks ago. In that deal, $1.5 trillion in immediate cuts would be followed by processes for making a further $1.5 trillion in deeper cuts -- many of them to entitlement programs -- and reforming the tax code to raise a trillion more dollars than it does now. The plan would also include some sort of enforcement mechanism that would make sure the future spending cuts and tax increases manifested. Congressional Democrats spent much of yesterday complaining that this plan doesn't really have revenues while the White House spent much of yesterday swearing that it did. On this, congressional Democrats are mostly right. The revenue in this plan is approximately equal to the revenue from letting the Bush tax cuts on the rich expire -- which is something Democrats could do with zero Republican votes in 2012, when the Bush tax cuts are set to expire automatically. In other words, Democrats are demanding, as part of this deal, that Republicans agree to let them do...something they could do even if Republicans refused to agree to it.

Man-made disaster Debt-fight debacle - Earlier this year, conservative Republicans in and out of the House of Representatives thought they could strong-arm the president and the Democrats into mammoth spending cuts -- only to find that when you have control of only one chamber of Congress, your arm isn't that strong.  Democrats, meanwhile, believed they could use the crisis to repeat the dynamic of 1990, when they got GOP President George H.W. Bush to agree to tax hikes -- a move that fractured the right and led to divisions that helped doom Bush to a single term.  But in deciding on a confrontational approach rather than responsibly pressing for a series of short-term fixes in the absence of a consensus, President Obama and his team issued so many warnings about a looming apocalypse on Aug. 3 that they've succeeded in hastening a looming crisis of confidence in the creditworthiness of the United States.

Obama Aligns With Boehner in Seeking U.S. Debt Pact Amid Internal Strife - House Speaker John Boehner said he and the White House are “not close to an agreement” on raising the U.S. debt ceiling following a meeting with House Republicans in which Boehner’s mood was described as gloomy.  “The speaker was the most sort of melancholy I’ve seen him,” said Ohio Representative Steve LaTourette, a long-time Boehner ally. “He wanted to, I think, report to the conference that substantial progress was being made, we’re moving in the right direction, and he couldn’t give that report.”  President Barack Obama and Boehner face strife within their ranks and dwindling time to avert a U.S. default as they press for a broad agreement to boost the nation’s $14.3 trillion debt limit. The two leaders have discussed cutting spending by trillions of dollars and overhauling the tax code.

What Is Obama Getting? - Nothing, as far as I can tell. The media are reporting the potential Obama-Boehner deal as $3 trillion in spending cuts and $1 trillion in unspecified future revenue increases. But as far as I can tell (details are vague), the baseline for that $1 trillion tax increase is a world in which all of the Bush/Obama tax cuts are extended.* President Obama can personally guarantee that none of those tax cuts will be extended, simply by promising to veto any bill that extends them. That would increase tax revenues by $3-4 trillion over ten years, not $1 trillion. That is enormous bargaining leverage against a Republican Party that only cares about one thing: tax cuts. So as far as I can tell, Obama is handing the Republicans $3 trillion in spending cuts, and also handing them $3 trillion in tax cuts. There are only two possible interpretations that I can think of. One: Obama thinks this is the best deal he can get — but if that’s the case, then you have to ask why his starting point wasn’t letting all of the tax cuts expire. Two: Obama thinks this is a good outcome.

Save the Gambling Bankers (video) President Obama and Republican House Speaker John Boehner are allegedly close to a $3 trillion deficit-reduction package as part of a deal to raise the federal debt ceiling before an Aug. 2 deadline. But the deal is coming under fire from both congressional Democrats and Republicans. Part of it calls for lowering personal and corporate income tax rates, while eliminating or reducing an array of popular tax breaks, such as the deduction for home mortgage interest. Some Democratic lawmakers expressed outrage on Thursday because the Obama-Boehner agreement appears to violate their pledge not to cut Social Security and Medicare benefits, as well as Obama’s promise not to make deep cuts in programs for the poor without extracting some tax concessions from the rich.  We’re joined by economist Michael Hudson, president of the Institute for the Study of Long-Term Economic Trends, a Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and author of “Super Imperialism: The Economic Strategy of American Empire.” [includes rush transcript]

Senate rejects House GOP budget-cutting plan, cancels weekend sessions— President Barack Obama and House Speaker John Boehner searched on Friday for an elusive debt-limit compromise as the Senate rejected a House plan containing deep spending cuts and for the moment put aside a last-ditch fallback option.  The 51-46 party-line Senate vote, and a decision by Senate Majority Leader Harry Reid, D-Nev., to cancel weekend Senate sessions, left unresolved the urgent issue of how to lift the nation’s borrowing powers to avoid a first-ever U.S. default on Aug. 3.  The moves also cleared the way for private negotiations between the president, Boehner and other key players. But neither the president nor the speaker was openly optimistic that they would succeed.  Boehner, R-Ohio, told reporters that, despite reports that Obama and he were closing in on a $3 trillion deficit-reduction deal, “There was no agreement, publicly, privately, never an agreement, and frankly not close to an agreement. So I suggest it’s going to be a hot weekend here in Washington, D.C.”

Boehner quits debt talks with Obama - White House talks to avert a disastrous early August debt default teetered on the edge of collapse late Friday as Republican House Speaker John Boehner abruptly quit the negotiations. US President Barack Obama condemned Boehner's decision and angrily called top lawmakers to the White House for emergency negotiations at 11:00 am (1500 GMT) Saturday, warning "we have run out of time" with an August 2 deadline looming."I expect them to have an answer in terms of how they intend to get this thing done over the course of the next week. The American people expect action," the president said at a hastily called public appearance. Obama said Boehner, House Minority Leader Nancy Pelosi, Democratic Senate Majority Leader Harry Reid, and Republican Senate Minority Leader Mitch McConnell must "have some answers" to reassure skittish global markets.

Letter from Speaker Boehner Regarding Next Steps on Debt Limit Discussions - House Speaker John Boehner (R-OH) released the following letter tonight regarding the president’s request for an increase in the national debt limit. Dear Colleague, Our economy is not creating enough jobs, and the policies coming out of Washington are a big reason why. Because of Washington, we have a tax code that is stifling job creation. Because of Washington, we have a debt crisis that is sowing uncertainty and sapping the confidence of small businesses. Because of Washington, our children are financing a government spending binge that is jeopardizing their future. Since the moment I became Speaker, I’ve urged President Obama to lock arms with me and seize this moment to do something significant to address these challenges. I’ve urged him to partner with congressional Republicans to do something dramatic to change the fiscal trajectory of our country. . .something that will boost confidence in our economy, renew a measure of faith in our institutions of government, and help small businesses get back to creating jobs. The House this week passed such a plan. . .the Cut, Cap & Balance Act, which passed the House with bipartisan support."

Transcript of Obama’s News Conference - Here is the White House transcript of President Barack Obama’s news conference on the debt ceiling and deficit reduction.

"Shorter Obama Press Conference" There's a reason the breakdown in budget talks happened after markets were closed -- it shows there is considerable fear about how markets might have reacted (though perhaps that's wishful thinking?). It also indicates that a "fear of what might happen" motivated agreement of some sort is still likely. Is it good news or bad news that fear might motivate an agreement?: Shorter Obama Press Conference, by Michael Froomkin: I tried repeatedly to surrender to the House GOP, but they wouldn’t take even my most abject surrender. I have summoned them back to the White House tomorrow morning in another attempt to force them to accept it. If worst comes to worst, and they will not accept my surrender, I am prepared to accept theirs, but I really don’t like it, and will use the opportunity to campaign against Democratic values in the next election. I'm hoping that they throw up their arms at some point, point fingers at each other as they lift the debt ceiling out of fear of what might happen if they don't, and take this fight up another day. That would at least give us a chance to try to bring some sense to Obama on entitlements and taxes, though it's looking more and more like that's a lost cause. He seems determined to show he's a Very Serious Person -- to show how tough he is -- by placing key Democratic programs on the sacrificial altar.

Obama-Boehner talks collapse; each side blames the other - Debt-reduction negotiations between President Obama and House Speaker John A. Boehner collapsed Friday, derailing an effort to reach a landmark agreement to cut spending, overhaul the tax code and avert a government default. In subsequent statements, both sides blamed the other for an impasse that threatens to plunge the nation into a fiscal crisis if the government fails to meet a looming deadline to raise the federal debt ceiling. “It’s hard to understand why Speaker Boehner would walk away from this kind of deal,” Obama said, but Boehner (R-Ohio) countered that it was the president who walked away from an agreement on revenue increases, demanding “more money at the last minute — and the only way to get that extra money was to raise taxes.” Saying that “we have now run out of time,” Obama summoned Boehner, House Minority Leader Nancy Pelosi (D-Calif.), Senate Majority Leader Harry M. Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) to the White House at 11 a.m. Saturday.

New GOP hostage demand: Kill Obamacare - I had a dream last night -- well, a nightmare, actually -- in which the debt ceiling ruckus insidiously morphed into a replay of the battle over healthcare reform. And then I woke up, and read the New York Times and realized it wasn't a dream. Like a plague of zombies, the GOP assault on Obamacare was back, eager to eat my brain. Details are in short supply as to the actual nature of the deal under negotiation between President Obama and Boehner. But there appears to be some consensus that Obama is willing to agree to a big package of cuts now, in exchange for a tax "reform" package to be named later. The White House wants a trigger that would raise taxes on the wealthy; Mr. Boehner wants the potential penalty for inaction to include repeal of the Obama health care law's mandate that all individuals purchase health insurance after 2014. The Bush tax cuts are set to expire in 2012. So if Republicans don't hold to the bargain, something that is legally mandated to happen anyway in 2012 would automatically take place. In other words, there is already a trigger that would raise taxes on the wealthy. It's called the law, as currently written.

Naked Blackmail - Krugman - It turns out that in the final stages of the debt negotiations, Republicans suddenly added a new demand — a trigger that would end up eliminating the individual mandate in health care reform. This is telling, in a couple of ways. First, the health care mandate has nothing to do with debt and deficits. So this is naked blackmail: the GOP is trying to use the threat of financial catastrophe to impose its policy vision, even in areas that have nothing to do with the issue at hand, a vision that it lacks the votes to enact through normal legislation. Second, this is a demand Obama can’t accept, unless he plans on changing his party registration. Health reform doesn’t work without a mandate (remember the primary? Maybe better not to). And if health reform is undermined, Obama will have achieved nothing. So by adding this demand, Republicans were in effect saying no deal — unless, I guess, they believed that Obama is a total pushover.

It’s so gratifying to leave you wallowing in the mess you’ve made - Not good news: Negotiations over a broad deficit reduction plan collapsed in acrimony on Friday after House Speaker John A. Boehner suddenly broke off talks with President Barack Obama, raising the risk of an economy-shaking default. Anyone who has played Sim City 2000 will remember the importance of maintaining a tight budget. But if your city in the game gets to a point where you're running out of money you have a number of serious choices to make in order to balance the budget. One option you have is to cut funding to roads. When you do so, this guy (your roads and transport secretary) pops up and yells at you: What happens then? As time goes by your roads begin to crack up and become unusable. This is turn reduces economic activity and your own tax revenue even further. It's a short term solution but ends up costing you far more in the longer term. It's a sure fire way to lose to game.

Conceder In Chief - Krugman - Amanda Marcotte is right: of course the big problem is the craziness of the GOP. That said, I am among those in a state of suppressed rage and panic over the president’s negotiating strategy. I’d like to believe that it’s all 11-dimensional political chess; but at this point — after the midterm debacle, after the big concession on taxes without even getting a raise in the debt limit — what evidence do we have that Obama knows what he’s doing? It’s very hard to avoid the impression that three things are going on:

  • 1. Obama really just isn’t that into Democratic priorities. He really doesn’t much care about preserving Medicare for all seniors, keeping Social Security intact, and so on.
  • 2. What he is into is his vision of himself as a figure who can transcend the partisan divide. He imagines that he can be the one who brings about a big transformation that settles disputes for decades to come
  • 3. As a result, he can’t or won’t see what’s obvious to everyone else: that any Grand Bargain will last precisely as long as Democrats control the Senate and the White House, and will be torn up in favor of privatization and big tax cuts for the wealthy as soon as the GOP has the chance.

So What Might Happen if We Get to August 3 With No Deficit Deal? - Yves Smith - The fast and furious reports on the state of play with the US debt ceiling theatrics is getting more and more amusing. If we didn’t have a stake in the outcome, this would make for great theater. The Telegraph blares “Obama and Republicans ‘close to deal‘.” That’s actually not inaccurate. but the problem appears to be Obama is now trading with his real allies, the Republicans, who want entitlement cuts as much as the President does, and also realize they have more to lose than he does if there is no deal.  A useful article in the Economist describes how Wall Street, which had heretofore assumed that there was no way the US would (effectively) voluntarily skip some interest payment, is now scrambling to figure out how to position themselves should such an event come to pass. Many observers had assumed that the repo market, on which dealers depend to fund themselves and collateralize derivatives positions, would go into chaos (the belief was that counterparties would demand bigger haircuts). But the Economist argues that does not appear to be the case: In other words, this event is focusing enough minds that a lot of parties are looking at ways to get waivers or other variances to allow them to continue to hold Treasuries even in the event of a downgrade or delayed payment. But a report from Reuters on the Fed’s contingency planning makes them sound markedly less creative than their private sector counterparts (but it is important to note that Charles Plosser of the Philadelphia Fed, the key source for his story, has been a critic of the Fed’s fancy footwork in the crisis. In fact, the New York Fed is the key actor, and it has been notably, um accommodating in the past). In addition, the New York Times reported yesterday that some hedge funds are moving into cash to buy up Treasuries in case other investors dump them. I’ve even heard of retail investors planning the same move. That does not mean the volume of buyers will be enough to offset forced sales, but it does say that fundamentally oriented investors would see this event as an opportunity, not a cause for panic.

40% Less Government Will Be Fun! - So suppose the debt-ceiling deadline passes. Nothing to worry about, right? There's still enough money for Social Security, Medicare, interest payments, military payrolls, and veterans benefits, isn't there? That's more or less true, but unfortunately, that's all there's money for. Megan McArdle runs down a small sample of the things that will have to be zeroed out:

  • You just cut the IRS and all the accountants at Treasury, which means that the actual revenue you have to spend is $0.
  • The nation's nuclear arsenal is no longer being watched or maintained
  • The doors of federal prisons have been thrown open, because none of the guards will work without being paid, and the vendors will not deliver food, medical supplies, electricity, etc.
  • The border control stations are entirely unmanned, so anyone who can buy a plane ticket, or stroll across the Mexican border, is entering the country. All the illegal immigrants currently in detention are released, since we don't have the money to put them on a plane, and we cannot actually simply leave them in a cell without electricity, sanitation, or food to see what happens.
  • All of our troops stationed abroad quickly run out of electricity or fuel. Many of them are sitting in a desert with billions worth of equipment, and no way to get themselves or their equipment back to the US.
  • Our embassies are no longer operating, which will make things difficult for foreign travellers
  • No federal emergency assistance, or help fighting things like wildfires or floods. Sorry, tornado people! Sorry, wildfire victims! Try to live in the northeast next time!
  • Housing projects shut down, and Section 8 vouchers are not paid. Families hit the streets.
  • The money your local school district was expecting at the October 1 commencement of the 2012 fiscal year does not materialize, making it unclear who's going to be teaching your kids without a special property tax assessment.
  • The market for guaranteed student loans plunges into chaos. Hope your kid wasn't going to college this year!
  • The mortgage market evaporates. Hope you didn't need to buy or sell a house!
  • The FDIC and the PBGC suddenly don't have a government backstop for their funds, which has all sorts of interesting implications for your bank account.
  • The TSA shuts down. Yay! But don't worry about terrorist attacks, you TSA-lovers, because air traffic control shut down too. Hope you don't have a vacation planned in August, much less any work travel.
  • Unemployment money is no longer going to the states, which means that pretty soon, it won't be going to the unemployed people.

Only Certainty in Impact of U.S. Default Is More Uncertainty - Yes, the sun will rise if the U.S. debt ceiling isn’t lifted. But the ensuing day will bring chaos to financial markets and the economy. Even as they expect a resolution, economists are sorting out the fallout from a failure to raise the debt ceiling and the subsequent downgrade to the Treasury’s credit rating. The problem is — with no past to point to — ideas of the consequences are mostly “guesstimates.” “There is little precedent to turn to for an indication of how markets and the economy might react to a downgrade,”  Clearly, a sustained federal shutdown would cut gross domestic product growth. If Washington could only spend current revenues, it would subtract about $100 billion in economic output just in August, say most economists. What’s unclear is the negative multiplier impact on the private economy. It depends on what bills aren’t paid: no Medicare payments will hit hospitals, shutting down federal parks will hurt consumer spending and jobs. The bigger drag will be uncertainty. “Worries over the intractable politics of deficit reduction and raising the federal debt ceiling have cast a pall over the economy,”

Treasury Ramps Up Contingency Planning as Debt Limit Nears - As they’ve been all along, administration officials were mum about what the contingency plans might be. Instead, Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Federal Reserve Bank of New York President William Dudley issued a one-sentence joint statement that will likely be scrutinized around the globe: “While we remain confident that Congress will raise the debt ceiling soon, officials from the Treasury, Federal Reserve Board and the New York Fed met today to discuss the implications for the U.S. economy if Congress fails to act.” Presumably, Treasury officials hope the meeting ends up being for naught. That’s because they want the debt ceiling raised as soon as possible to avoid a default on the government’s debt, which would mean that won’t have to activate any of the plans they might have drummed up to contain any financial market chaos. Treasury officials believe the government could begin defaulting on its debts after Aug. 2 if the debt ceiling isn’t raised.

Geithner Said to Meet Bernanke, Dudley to Discuss Consuquences of Default - Treasury Secretary Timothy F. Geithner was scheduled to meet this morning with Federal Reserve Chairman Ben S. Bernanke to discuss the implications of a failure of Congress to raise the debt limit in a timely manner, according to an administration official. William C. Dudley, president of the Federal Reserve Bank of New York, was also scheduled to take part in the meeting. The administration official wasn’t authorized to discuss the meeting and declined to be identified. President Barack Obama and House Speaker John Boehner, seeking to avert a U.S. default, are pursuing a broad agreement to boost the debt limit while cutting spending by trillions of dollars and overhauling the tax code.  The Treasury Department yesterday announced the meeting of three top officials, without disclosing the topic of their talks. Dudley, as head of the New York Fed, oversees Wall Street and leads the regional branch through which the central bank executes monetary policy. Dudley is also vice chairman of the policy-setting Federal Open Market Committee and is the only regional chief with a permanent vote.

What the Federal Debt Limit Has to do with States (and Not) Moody’s warns that a federal credit downgrade would immediately lower ratings for 7,000 state and local issuances and possibly affect even some gold plated AAA states.   At the same time, backers of a federal balanced budget amendment point to states as an example where such rules have worked.What’s going on?  Will a federal default doom state and local governments?   Are states the new model of fiscal probity? First, it’s important to remember that although state tax receipts are picking up, states and localities are still climbing out of a revenue hole created by the Great Recession.  Meanwhile, federal stimulus funds have largely run out along with easy fixes like selling off assets, raiding special funds, and deferring obligations.  Against this backdrop, any federal action that cuts off revenue or increases costs is not helpful.  Next, state and local governments are already feeling the brunt of “extraordinary measures” undertaken when the federal government hit its debt limit in May.  Back then, the U.S. government stopped issuing State and Local Government Securities.

Get Ready for TARP 2.0 - Yves Smith  - Washington DC appears to be readying itself for a repeat of the TARP, namely, the passage of unpopular legislation to appease the Market Gods (and transfer even more income from ordinary Americans to the Masters of the Universe). But unlike the TARP, which was a classic example of well-placed interests finding opportunity in the midst of upheaval, this reprise is a far more calculated affair. The latest episode of brinksmanship is the breakdown in talks between Obama and John Boehner Friday afternoon. Boehner claims Obama retraded the deal, asking for more tax increases; Obama, in an unusually incoherent press conference, says he bent over backwards and the Republicans just won’t be satisfied. Obama demanded talks resume on Saturday.  The presumed deadline for reaching the outline of a deal is Monday, given the need to finalize language. But that assumes that the shortfall hits August 2. Barclays and Normura reports claim that internal Treasury forecasts indicate the crunch probably does not start until the 9th or 10th. Let’s review how we got here. Obama made it clear before he took office that he intended to go after Social Security and Medicare. As we discussed, shortly after he took office, Obama was privately reassuring conservatives that he’d curtail entitlements once the economy was on a better footing. Clearly, he’s been willing to settle for “better” being tantamount to “not in imminent danger of falling off a cliff.” And if you had any doubts, Obama made his intentions abundantly clear (to use that Nixonianism) by creating a Deficit Reduction Commission and staffing it with enemies of Social Security, former Clinton chief of staff Erskine Bowles and Senator Alan Simpson.

Pity the Policymakers - Mohamed A. El-Erian - I don’t know about you, but whenever I am in an airplane experiencing turbulence, I draw comfort from the belief that the pilots sitting behind the cockpit’s closed door know what to do. I would feel very differently if, through an open door, I observed pilots who were frustrated at the poor responsiveness of the plane’s controls, arguing about their next step, and getting no help whatsoever from the operator’s manuals.  So it is unsettling that policymakers in many Western economies today resemble the second group of pilots. This perception reflects not only the contradictory pronouncements and behavior of policymakers, but also the extent to which economic outcomes have consistently fallen short of their expectations. This perception is evident in Europe, the United States, and Japan, where indicators of economic sentiment are deteriorating again, already-weak recoveries are stalling, and over-stretched balance sheets are becoming even more precarious. Understandably, companies and households are becoming even more cautious – inevitably making a difficult job for policymakers that much harder.

Debt-Ceiling Silence: What Does Wall Street Know? - Another week, another step closer to financial Armageddon. President Obama spent the weekend trying to impress upon a skeptical public the wild notion that a default on U.S. debt could ruin their summer.  Senators from both sides of the aisle took to the Sunday talk shows, only to paint themselves deeper into their respective corners. And Michele Bachmann expanded her franchise of fractured science, venturing into economics to assure her public that an American government rendered unable to pay its bills is no big deal.  And Wall Street is…okay with this?  True, financial services CEOs such as Citigroup’s Vikram Pandit and BlackRock’s Laurence Fink were among the 470 corporate Pooh-Bahs who signed a Business Roundtable letter last week urging Washington to avoid default. And many Wall Street trade groups have issued antiseptic statements that say, in effect: “We respectfully urge our elected officials not to visit financial calamity on the world.” But really, folks, that’s not just no bite -- it’s no bark. Compare Wall Street’s oddly passive stance on the debt ceiling with the treasure it has expended fighting regulatory reform.

What is the purpose of raising the debt ceiling when they plan to cut the budget deficit anyway? - The public budget deficit is a function of private sector deleveraging and cannot be cut without further undermining the economy. If they plan to undermine the economy anyway by cutting the budget deficit, why bother raising the debt ceiling? Without further budget deficits, public debt should stop growing anyway. Is it to allow further trade deficits?

The Debt Ceiling is a Housekeeping Procedure - I’ve been privately seething for months now as I’ve watched the House Republicans use the debt ceiling as a negotiating chip in their ideological agenda. It should be a no-brainer to raise it since it’s merely a housekeeping procedure. They obviously care nothing for the consequences of a default, and the fact that they are willing to risk this country’s spotless credit rating shows me that they are functionally insane. Whether they are actually insane is of no importance; they are behaving as if they are: As the stalemate over debt talks dragged on Wednesday, Congress and the White House may have passed the point of no return in avoiding a U.S. government debt downgrade. If Uncle Sam loses his coveted AAA rating, the cost of borrowing goes up, the economy slows further and jobs get even tougher to find. The immediate impact of such a downgrade would be a jump in interest rates. Just as a consumer with a lower credit score has to pay higher interest rates on their credit card, a downgrade of the Treasury’s debt rating would raise the cost of borrowing.

Let’s Eliminate the Debt Limit - America’s leaders need to get to yes on a budget deal – one that marries substantial deficit cuts with a much-needed increase in the debt limit. But that’s not enough. Rather than merely increasing the debt limit, we should eliminate it. I realize that sounds strange. With all the Sturm und Drang in the budget talks, you might think that the debt limit is essential to controlling Washington’s profligate ways. It’s not. Washington has other tools for managing its finances. The annual budget process includes a series of steps by which Congress decides how much to spend and to collect in taxes. Those decisions determine the size of America’s deficits and debt. That simple fact often gets lost in the debate, so let me say it again: When Congress decides how much to spend and how much to tax, it is also deciding how much to borrow. Unfortunately, the debt limit allows lawmakers to pretend that they can separate the two

Is the debt ceiling necessary? We asked all nine living former treasury secretaries. - In the nine weeks since the United States hit its debt ceiling, there has been no shortage of debate about whether and how to lift the cap, what mix of taxes or cuts to demand or accept, and how the financial markets would react if and when the Treasury Department actually stopped sending out checks. The best guess to that last question is that it would shave 10 percent off of monthly GDP, shock the world markets, and tip the country back into recession. Less prominent, however, has been the debate about the one question underlying this whole crisis: Should we have a debt ceiling at all? . Bright minds from both sides of the ideological spectrum, including Bruce Bartlett (who gave me the idea for this article) and Alan Greenspan, have come to the same conclusion. And on Monday, the ratings agency Moody's declared the ceiling more trouble than it is worth as well.  But what do the people who have dealt most directly with the debt ceiling think?  Right now, the count is 3-to-1 for eliminating the debt ceiling, with one Republican appointee saying it should be eliminated, one saying it should be kept, and two Democratic appointees for its elimination.

Understanding Cut, Cap, and Balance - Sometime this week the House of Representatives will consider Rep. Jason Chaffetz’ H.R. 2560, the “Cut, Cap & Balance Act.” We are entering the arcane world of budget process, so this could be tough sledding. I will do my best to distill the essential elements and simplify it. The key to understanding this bill is that it focuses on government spending, rather than on taxes or deficits. The bill would achieve significant deficit reduction through cutting and limiting spending, and all of its mechanisms use spending rather than deficit targets.  Surprise, surprise: the bill consists of three parts.

  1. Cut – The bill provides specific numbers to limit both discretionary and mandatory spending for FY12. These numbers would drive further Congressional action this year or else force a Presidential sequester. The intent of this section is to force Congress and the President to cut spending immediately.
  2. Cap – The bill would establish a new enforceable limit on total federal spending as a share of the economy. The new caps are designed to phase federal spending down to just below 20% of GDP by FY17 and then hold it there through the end of a 10-year budget window in FY21. Put more simply, this is a new enforceable aggregate spending cap.
  3. Balance – The bill would increase the debt limit by $2.4 trillion after the House and Senate have passed a Balanced Budget Amendment (of a certain type).

The Phony Balanced Budget Amendment Debate - Next week, House Republicans plan to debate a balanced budget amendment to the Constitution. Although polls show overwhelming public support, it is doubtful that many Americans realize that the measure to be debated is not, in fact, a workable blueprint to enforce a balanced budget. In fact, it’s just more political theater designed to delight the Tea Party. Historically, those supporting a balanced budget amendment to the Constitution were only interested in balance per se. That is, requiring that revenues and expenditures be as close to equal as possible. The view was that if the states – almost all of which are required to balance their budgets annually – could do it then so could the federal government.  Thus a big problem for proponents of a balanced budget amendment has always been how to enforce it. Lacking de facto enforcement from the rating agencies, there would have to be some mechanism whereby the courts could intervene to block spending or force tax increases for a balanced budget requirement to be operational and not just an expression of sentiment.

Balanced Budget Lunacy - The House will be voting tomorrow on a proposed balanced budget amendment to the Constitution that would include a Proposition 13-like supermajority requirement for any tax increases.  It's unlikely to go anywhere, but it's worth discussing, if only because this budget lunacy is becoming half-way respectable. On its face, what could possibly be objectionable about a balanced budget?  The words "balanced budget" have a very nice ring to them--who could possibly object to fiscal responsibility after all? We certainly don't want an imbalanced budget, do we?  Actually, there are very good reasons why we should want some budgeting flexibility.  And there are several problems with a federal balanced budget requirement. 

Balanced Budget Amendment Is A Fraud - It’s hard to believe that the House is planning to debate yet another proposed balanced budget amendment to the Constitution, an idea that was so discredited so long ago that it is typically discussed by constitutional scholars, economists and budget experts in tones and words that at best indicate ridicule, scorn and contempt. What makes consideration of another balanced budget amendment even worse than the ones from previous years is that, from any reasonable point of view, the proposed amendment itself is much worse than all those that have come before it. Start with the most basic element of all: H.J. Res. 1, the proposed balanced budget amendment to the Constitution approved by the House Judiciary Committee on June 23, doesn’t actually require that the federal budget be balanced. Instead, it’s a spending and tax limitation that could — and in my estimation likely would — lead to the federal budget not ever being balanced. The name of the proposed amendment so incorrectly describes what it would do that it must be considered to be intentionally misleading.

Balancing the Budget by Magic - Brian Beutler reports on the Republican “cuts, cap, and balance” fiscal proposal:Tuesday, the House of Representatives will vote on, and likely pass, a conservative Republican plan called "Cut, Cap, and Balance." The package will include some immediate, as-yet unspecified spending cuts, a statutory cap to keep spending below 18 percent of GDP, and a promised separate vote on a Constitutional amendment that requires Congress to maintain a balanced budget, but essentially forbids any future tax increases. Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?

Progress scarce as debt limit impasse continues - The Senate has taken up tea party-backed House legislation tying an increase in the government's borrowing authority to a series of conservative demands including a constitutional balanced budget amendment.Majority Leader Harry Reid, D-Nev., called up the measure to placate Republicans demanding a vote. But he said it "doesn't have one chance in a million of passing the Senate." Democrats argue that the so-called "cut, cap and balance" measure would impose untenable spending restraints and set spending levels, as a percentage of the overall economy, on par with the mid-1960s — before the advent of Medicare and automatic Social Security cost-of-living adjustments. The development Thursday reflected the reality that there's more talk than progress as official Washington wrangles daily over finding a way out of a debt dilemma that has the government sliding inexorably toward a first-ever default on its financial obligations.

A Balanced Budget Requirement is a Very Bad Idea - I've argued on many occasions that one of the big lessons we need to learn from this recession is that state-level balanced budget requirements are highly destabilizing. When a recession hits, spending goes up for social services and taxes fall as income, sales, property values, and other sources of revenue for state and local governments decline. The result is a big hole in state and local government budgets, and that forces either increases in taxes or cuts in spending. And though some state and local governments were an exception to this, far and away the choice is to cut spending. We can see this in the state and local government employment statistics: That's not what we want to have happening when we are trying to recover from a recession. It would be much better if states had rainy day funds to rely upon, and if the rainy day funds fall short, the federal government could backfill the budget holes to prevent the destabilizing downsizing.

Amend Constitution to balance budgets? No, experts say — When Washington's gotten snarled in budget impasses over the past 30 years, one perennial favorite remedy is to amend the Constitution to require the federal budget to be balanced. Republicans in Congress have dusted it off again, and it's front and center in today's debate over deficits and debt. But experts left, right and center warn that however appealing the idea may sound, it's highly impractical in reality. And it would make economic crises such as the one in 2008 much worse by tying the government's hands when intervention is needed most. Five Nobel Prize-winning economists joined forces Tuesday to send a letter to congressional leaders warning against adopting a balanced-budget amendment. "A balanced-budget amendment would mandate perverse actions in the face of recessions. In economic downturns, tax revenues fall and some outlays, such as unemployment benefits, rise. These so-called built-in stabilizers increase the deficit but limit declines of after-tax income and purchasing power,"

Do Americans Really Want (Even More Than) 100% of Deficit Reduction to Come from the Spending Side? - NPR’s Frank James reports on two recent polls that cast doubt on the popularity of the Republicans’ position: A new CBS News poll suggests that while none of the Washington political players gets the approval of a majority of voters for how policymakers are handling the debt-ceiling debate, congressional Republicans fare the worst. The CBS News survey lined up with a recent Gallup Poll that suggested that more voters support Obama’s position that deficit reduction be achieved through a combination of tax revenue boosts and spending cuts instead of just spending cuts alone, which is the current Republican position in the debt-discussions. The Center on Budget and Policy Priorities’ Bob Greenstein here explains the implications of the Republican “Cut, Cap, and Balance” proposal that the House will take up on Tuesday.   He makes this key point about the degree to which spending would have to be constrained under the proposal

Whose Responsibility Is it that the Public Doesn’t Understand Public Finance? - Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.

Understanding the Federal “Debt Crisis” - Once upon a time in America, back a century ago, our nation's rich paid virtually nothing in taxes to the federal government. And that same federal government did virtually nothing to better the lives of average Americans.But those average Americans would do battle, over the next half century, to rein in the rich and the corporations that made them ever richer. And that struggle would prove remarkably successful. By the 1950s, America's rich and the corporations they ran were paying significant chunks of their annual incomes in taxes — and the federal projects and programs these taxes helped finance were actually improving average American lives. America's wealthy, predictably, counterattacked — and, by the 1980s, they were scoring successes of their own. Today, the rich and their corporations no longer bear anything close to their rightful share of the nation's tax burden. The federal government, given this revenue shortfall, is having a harder and harder time funding initiatives that help average working families. The result: a "debt crisis."

U.S. House Stops Voting for Week With No Action to Keep FAA Operating - The U.S. Federal Aviation Administration will halt some operations at midnight after the House of Representatives and Senate adjourned today without agreeing on legislation to extend the agency’s authority. The disagreement means the FAA has to furlough as many as 4,000 workers tomorrow and stop collecting about $200 million a week in airplane-ticket and other taxes until it is resolved, U.S. Transportation Secretary Ray LaHood said yesterday. Air- traffic controllers, considered essential employees, would remain on the job. The agency has been without long-term funding legislation since 2007 and has operated on a series of short-term extensions, the most recent of which expires at midnight. “States and airports won’t be able to work on their construction projects, and too many people will have to go without a paycheck,” LaHood said in an e-mailed statement today. The House and Senate will reconvene July 25.

“Pick Your Poison: Do Politicians Regulate When They Canʼt Spend?” - We investigate whether laws restricting fiscal policies across U.S. states lead politicians to regulate more instead. We first show that partisan policy outcomes do exist across U.S. states, with Republicans cutting taxes and spending and Democrats raising them. We then demonstrate that these partisan policy outcomes are moderated in states with no-carry restrictions on public deficits. Lastly, we test whether unified Republican or Democratic state governments regulate more when constrained by no-carry restrictions. We find no-carry laws restrict partisan fiscal outcomes but tend to lead to more-partisan regulatory outcomes. The presentation slides are here.

Post-ABC poll: GOP too dug in on debt talks; public fears default consequences - Majorities of Americans see both President Obama and congressional Republicans as not willing enough to compromise in their budget negotiations, but the public views the GOP leaders as particularly intransigent, according to a new Washington Post-ABC News poll. There is also growing dissatisfaction among Republicans with the hard-line stance of their congressional representatives: Fifty-eight percent say their leaders are not doing enough to strike a deal, up from 42 percent in March. While Republicans in Congress have remained united in their opposition to any tax increases, the poll finds GOP majorities favoring some of the specific changes advocated by the president, including higher income tax rates for the wealthiest Americans. There is also broad dissatisfaction with Obama’s unwillingness to reach across the aisle: Nearly six in 10 of those polled say the president has not been open enough to compromise. Among independents, 79 percent say Republicans aren’t willing enough to make a deal, while 62 percent say the same of Obama.

Across Nation, Budget Talks Stir Pessimism - On Friday morning, President Obama1 insisted that he completely understood how the American people — a phrase he mentioned more than two dozen times — felt about the slow pace of negotiations over the debt ceiling2.  “For the general public — I’ve said this before, but I just want to reiterate — this is not some abstract issue,” the president said in a news conference at the White House, adding that he knew that the American people “expect more.”  “They expect,” he said, “that we actually try to solve this problem.”  But, as Yoda once said, there is a profound difference between try and do. And a quick, informal selection of voices from across the country over the weekend found both pessimism and cynicism about the state of negotiations in Washington, resignation about the partisan jousting and more confusion than conniption about what exactly will happen if the president and his Republican opponents cannot make a deal to raise the debt ceiling by Aug. 2. And neither side, they say, looks good.

If We Can’t Laugh About It……then all we’d have to do is cry! For your amusement (just try to smile!), here’s a collection of “budget and deficit cartoons” put together by U.S. News and World Report. I found it via a link on this blog post by Leslie Marshall discussing what the new CBS News poll tells us–and why we should be a bit depressed about it and need cartoons like this to cheer us up: To read the polls is not only confusing, but it shows how confused we the people are. Some polls show Americans want to cut spending, but they don’t want to raise taxes. Other polls show a majority of Americans want the Bush tax credits to end for the wealthy. And after Rep. Paul Ryan put forth his machete to Medicare, he was booed at town hall meetings, and a Democrat won a congressional seat in a district which had been a Republican stronghold for decades. It sickens me when I hear the GOP talk about leaving something for our children and future generations when their proposals cut more education and Medicare and Social Security, making those programs a memory for our children. And without them, our children will be financially strapped, taking care of sick and elderly parents and grandparents.

Public on Budget: Tax the Rich, Cut Military Spending - When a representative sample of the American public was presented the federal budget, they proposed changes far different from those the Obama administration or the Republican-led House have proposed. The biggest difference in spending is that the public favored deep cuts in defense spending, while the administration and the House propose modest increases. However, the public also favored more spending on job training, education, and pollution control than did either the administration or the House. On average the public made a net reduction of $146 billion — far more than either the administration or the House called for. … On average respondents increased revenues by $292 billion. The largest portion was from income taxes: majorities increased taxes on incomes over $100,000 by 5 percent or more and increased them by 10 percent or more for incomes over $500,000. Majorities also increased corporate taxes and other excise taxes.

Sane Conservatives and the Debt Ceiling - Sane conservative economists recognize that not raising the debt ceiling on August 2nd would be a disaster.  Sane conservatives understand that the ratings agencies will lower our credit rating if we won’t raise the ceiling, and that we have almost $500 billion in maturing treasuries that we need to roll over in August alone which, as UBS argues, is a problem:“The mistaken view that interest payments to US Treasury-holders could easily be prioritized, avoiding default indefinitely. This view requires that investors willingly roll over their holdings of Treasury debt and does not take into account the sharp increase in interest rates that may result.”As Lawrence White explains, and S&P agrees, prioritizing payments is a default: ”…if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations….I believe that the financial markets would not be copacetic [if bondholders were repaid but other creditors weren’t]….They would realize that the government was stiffing one set of claimants who are creditors, and the markets would worry that they might be next.”Our lenders understand better than those arguing that we can simply cut government spending 30-40% overnight, and lenders understand that voters won’t tolerate having foreign banks get paid while they suffer.

Wall St. Makes Fallback Plans in Event of U.S. Default - Lawmakers in Washington are racing to reach a deal to save the country from defaulting on its debt, but on Wall Street, financial players are devising doomsday plans in case the clock runs out. These companies are taking steps to reduce the risk of holding Treasury bonds1 or angling for ways to make profits from any possible upheaval. And even if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country’s market credibility. On Wall Street, Treasuries function like a currency, and investors often use these bonds, which are supposed to be virtually fail-proof, as security deposits in their trading in the markets. Now, banks are sifting through their holdings and their customers’ holdings to determine if these security deposits will retain their value. In addition, mutual funds2 — which own billions of dollars in Treasuries — are working on presentations to persuade their boards that they can hold the bonds even if the government debt is downgraded. And hedge funds are stockpiling cash so they can buy up United States debt if other investors flee.

Blaming it on the Economists - The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek(or Ayn Rand) knows the score, you would find this dubious on its face. The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.

Get Them From The Greeks - Krugman - I’ve complained a lot about the Hellenization of our economic discourse — the insistence, in the teeth of evidence, that America is just like Greece in budget terms. Now comes Lindsey Graham to promote the fallacy. So let’s talk, again, about why it’s nonsense. Here are net debt levels as a percentage of GDP; source here. Just to forestall the objections, these reflect all levels of government, not just federal: So the US has much less debt than Greece. Also worth noting is the pattern over time. Greece ran up debt relative to GDP at a fairly good clip even during good times, while the United States — despite the Bush administration’s best efforts — did not. So America does not have a comparable record of sustained fiscal irresponsibility; we’ve only developed large deficits in response to the crisis, which happens to be exactly when we should be running large deficits. And that’s not even to get into the issue of us having our own currency.

Barack Obama: The Democrats’ Richard Nixon? - - There is no question that Barack Obama is one of our most enigmatic presidents. Despite having published two volumes of memoirs before being elected president, we really don’t know that much about what makes him tick. The ongoing debate over the deficit and the debt limit is clarifying what I think he is: a Democratic Richard Nixon.  Here are a few examples of Obama's effective conservatism:

  • His stimulus bill was half the size that his advisers thought necessary;
  • He continued Bush’s war and national security policies without change and even retained Bush’s defense secretary;
  • He put forward a health plan almost identical to those that had been supported by Republicans such as Mitt Romney in the recent past, pointedly rejecting the single-payer option favored by liberals;
  • He caved to conservative demands that the Bush tax cuts be extended without getting any quid pro quo whatsoever;
  • And in the past few weeks he has supported deficit reductions that go far beyond those offered by Republicans.

Obama / Nixon - Krugman - Bruce Bartlett says what you’re not supposed to say: Obama has governed as a moderate conservative, somewhat to the right of Richard Nixon. The frothing-at-the-mouth comments are an extra bonus. And it is, of course, true; although Obama defenders would say that he had no option. Still, the point is that if you ask what Mitt Romney would probably be doing if he were in the White House and not trying desperately to convince his party that he shares its madness, it would look a lot like what Obama is doing. There are, however, two crucial points to understand. First, Obama gets no credit for his moderation, and never will. No matter how far right he moves, Republicans will move further right; and nothing he can do will keep them from denouncing him as a radical socialist. Second, moderate conservatism isn’t working as a policy matter. As I’ve tried to tell everyone from the beginning of the Lesser Depression, a deeply depressed economy in which monetary policy is up against the zero lower bound turns the normal rules of policy upside down. We’re in a world in which conventional prudence is folly, in which playing it safe is extremely risky. And we have, alas, a conventionally prudent, play-it-safe president — the kind of president who might have done fine in the 1990s, but not now.

The Challenge of Attaining a Sustainable Federal Budget - CBO Director's Blog - As the nation addresses the budgetary challenges facing the federal government, one of the central questions to resolve is how big a government we want to have. During the past 40 years, government spending has ranged from as low as 18.2 percent of gross domestic product (GDP) in 2000 and 2001 to as high as 25.0 percent in 2009, averaging about 21 percent. Revenues, however, have averaged only 18 percent of GDP. One possible approach to addressing the longstanding mismatch between government spending and revenues—a mismatch that would grow substantially if current tax and spending policies are extended—would be to shrink spending so that it equals revenues at their historical 18-percent share of GDP. What would it take to accomplish that? The following chart shows federal spending and its key components as shares of GDP: on average during the past 40 years; in 2007 before the recession began; and in 2021 under CBO’s current-law baseline projections. In the chart, the “major health programs” are Medicare, Medicaid, the Children’s Health Insurance Program, and insurance subsidies to be provided through exchanges in coming years; “all other spending” includes Food Stamps, unemployment compensation, other income security programs, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and many other programs.

More About the Challenge of Attaining a Sustainable Federal Budget - CBO Director's Blog - Earlier this week, I wrote a blog posting about the challenges facing policymakers as they work to put the federal budget on a sustainable path. The central conclusion in the earlier posting, illustrated by the following chart, was the following: Given the aging of the population and the rising cost of health care, attaining a sustainable budget for the federal government will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:

  • Raise federal revenues significantly above their average share of GDP;
  • Make major changes to the sorts of benefits we provide for older Americans;
  • Substantially reduce the role of the rest of the federal government—that is, defense (the largest single piece), Food Stamps, unemployment compensation, other income-security programs, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—in our economy and society.

Bob Bixby: The U.S. Is So Close to Falling Into “Deadbeat” Status - Here’s a Bloomberg interview of my boss, Bob Bixby. Bob explains that policymakers have made so little progress in terms of fiscal responsibility that even the motions they’re making to appear fiscally responsible–such as proposing a balanced budget amendment–are quite the opposite, because they only serve to distract policymakers from actually making the necessary (and tougher) policy choices. He also emphasizes that the unsustainable debt is a far greater threat to the economy than the revenue increases or spending cuts it would take to actually get to sustainability, labeling suggestions to the contrary as “silly.” It’s a great interview that well represents the Concord Coalition’s perspective on the debt limit issue.

Americans oppose increasing the debt ceiling. Here's why - This comes from Gallup:Gallup finds that Americans, by a 42% to 22% margin, are more likely to want their representative in Congress to vote against rather than for an increase in the federal debt ceiling, with 35% saying they have no opinion.The July 7-10 poll asked respondents who either favored or opposed raising the debt ceiling to use their own words to explain their position. These responses were placed into categories and the results discussed in a previous Gallup analysis. On pages 2 and 3 are the exact verbatim responses used by these more than 700 Americans in response to this open-ended question. Here is a sampling of the responses:

Why Taxpayers Are So Angry and So Wrong About Spending - Republicans, emboldened by public support for spending cuts, have taken the country to the brink of default as they fight to dial back government programs and vehemently oppose any tax increases to attack the deficit. But is the fight over the debt ceiling really an ideological battle between the two parties over the size and role of government? Or is a lot of the public support for GOP positions driven by myopia about entitlement spending and misplaced public anger?  The fact is, most people believe they pay far more to the government than they receive in return. To a surprising degree, Americans underestimate their actual consumption of government services and tax breaks. For example, 43% of people receiving unemployment insurance deny they receive government benefits, and 40% of those on Medicare answer the same way: They do not use government programs.  For the most part, people believe their taxes go to support other people. This wrongheaded perception helps explain the strong support for spending cuts.

WSJ/NBC Poll: Americans Take Debt Ceiling Seriously - A clear majority of the American public now believes a failure by Congress to raise the nation’s statutory debt ceiling would be a real and serious problem, dismissing arguments by some Republicans that the coming debt ceiling deadline is no big deal, a new Wall Street Journal/NBC News poll shows. For months, a majority of Americans have opposed raising the debt ceiling, giving license to politicians to take a hard line on budget negotiations in Washington. But as the debate has heated up, voter attention has focused on the specifics, the poll suggests. Now 55% say that failing to raise the debt ceiling would be a real and serious problem while only 18% do not believe that. A quarter of the public still say they don’t know enough about the issue to make a decision. Republicans who continue to maintain that the government can avoid defaulting on its debts even with no increase to the borrowing limit might be listening to their core tea-party supporters. Of voters who identify themselves as tea-party supporters, one-third say failing to lift the ceiling would present no significant problems. But even in this group, a plurality, 47%, say it would be a serious issue. That number mirrors the overall percentage of all Republicans who worry about the consequences of doing nothing.

U.S. Government Receipts as Percent of GDP - Several readers have asked me for source data on U.S. government receipts and outlays. I've also been asked if receipts are really near a record low since WWII as a percent of GDP. First, here is the budget data from the Congressional Budget Office (CBO). Under "Supplemental Material", the CBO provides historical budget data in both PDF and excel formats. The White House also provides historical data on budget receipts and outlays. This is from the CBO for 2010 and earlier. The data shows that total receipts are near a record low as a percent of GDP since WWII. The record low was in 1950, and it will be close this year (in fiscal 2011). But that masks some significant change in the mix of receipts. The following graph shows receipts by source as a percent of GDP since WWII. Both income (blue) and corporate taxes (red) are near record lows. Combined income and corporate taxes could rise almost 50% (as a percent of GDP) and receipts would still only be at the median for the 50 years from 1946 through 1996. Notice the sharp decline in off-budget social insurance in 2011 (Social Security insurance). That is mostly the reduction in the payroll taxes for this year. Also hidden in the "other" category has been the sharp reduction in the estate tax.

Deficits and Money - A recent post of Paul Krugman brings to my attention a few paragraphs near the end of Jamie Galbraith’s testimony to the Deficit Commission which call out for a money view explication.  To my mind, Krugman’s toy model does not really engage the issue, and Galbraith responds to that toy model rather than providing the needed explication.   Both men are really more interested in deficits than in money, but not me, so here goes. The title of Section 9 of Galbraith’s testimony gives the gist:  “In Reality, the US Government Spends First & Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector.”  Krugman, perhaps sniffing MMT heresy, translates:  “deficits are never a problem, as long as a country can issue its own currency.”  But that’s not what Galbraith is saying, at least not in my reading.Galbraith begins with the government making a payment by writing a check, for concreteness let us say a Social Security check.  The immediate effect is to expand both sides of the balance sheet of the banking system by the same amount, additional reserves on the asset side and additional deposits on the liability side.  On the Fed’s balance sheet, this same operation shows up as a debit from the Treasury account and a credit to the bank’s account. (video)

The Size-of-Government Fallacy - You hear all the time that the government must get smaller. John Boehner said it the day after the elections: “We’re going to continue and renew our efforts for a smaller, less costly and more accountable government.” Barack Obama agreed in part earlier this week: “We have agreed to a series of spending cuts that will make the government leaner, meaner, more effective, more efficient, and give taxpayers a greater bang for their buck.” And a large majority of Americans agree in the abstract (while simultaneously opposing any significant spending cuts). Conservatives like to point to high levels of federal spending—23.8 percent of GDP last year—as evidence that government is too big. But the idea that there is one thing called “government”—and that you can measure it by looking at total spending—makes no sense. Worse yet, it can lead to fundamentally misguided policy decisions.

Government: Bigger than a breadbox, smaller than a planet - The Economist - JAMES KWAK says something that can hardly be repeated enough: [T]he idea that there is one thing called "government"—and that you can measure it by looking at total spending—makes no sense. First of all, the number of dollars collected and spent by the government doesn't tell you how big the government is in any meaningful sense. Most government policies can be accomplished at least three different ways: spending, tax credits, and regulation. For example, let's say we want to help low-income people afford rental housing. We can pay for housing vouchers; we can provide tax credits to developers to build affordable housing; or we can have a regulation saying that some percentage of new units must be affordably priced. The first increases the amount of cash flowing in and out of the government; the second decreases it; and the third leaves it the same. Yet all increase government's impact on society. Here's a thought experiment I've found useful in the past. Imagine a government that does just two things. First, it automatically deducts 100% from everyone's wages. Second, it sends everyone a check for the same amount. That's one big government! And it has no effect whatsoever on your life.

Reaganomics and the GOP's Economic Terrorism - Linda Beale - This debt-ceiling crisis is one of the GOP's making and relates directly to the failed  policies of militarization, deregulation, privatization, and tax cuts espoused by Ronald Reagan and his satraps.  Even the Washington Post (a right-of-center mainstream paper with a reduced staff and a tendency to describe economics and policy in the 'received wisdom' of Washington circles, which means that it tends to reflect corporatist and elitist perspectives more than it reflects ordinary Americans' thinking) recognized the way the Reaganomics tax-cut train has gained speed as it moved out of the station (spurred, of course, by the Koch and Walton money and the power of a dozen propaganda tanks spewing out the dogma on a daily basis):  This singular focus has been several decades in the making. The Reagan Revolution was spurred by “supply side” animus, but Reagan himself presided over several tax increases. He escaped GOP opprobrium, but when George H.W. Bush signed a deficit deal with higher taxes, he was cast as a traitor. George W. Bush passed two big tax cuts, which nonpartisan budget experts now say were a major factor in today’s deficits.  Five Questions on the Debt Ceiling, Wash. Post, July 16, 2011. Even some of the GOP leaders are now realizing that starting a game of chicken over something as critical to the US economy as the debt was probably pretty stupid. But the tea partiers are still adamant that the US should just stop spending and all will be fine. 

Debt and Forgetfulness- Krugman - I keep seeing comments along the lines of “Keynesianism doesn’t work, because liberals keep running deficits even when times are good, and never pay debt down.” Guys, how about looking at recent history (pdf)? Between 1993 and 2001, federal debt held by the public fell from 49.2 percent of GDP to 32.5 percent of GDP. What stopped the paydown of debt wasn’t liberal big spending; it was demands from conservatives that the surplus be used to cut taxes. George Bush said that a surplus means that the government is collecting too much money; Alan Greenspan warned that we were paying off our debt too fast. Oh, and I was very much against those tax cuts, arguing that we should pay down the debt to prepare for future needs. As a reward, I now get accused of inconsistency, for saying that deficits were bad under Bush but good now. Anyway, get your history straight before making claims about who’s fiscally responsible.

"They’re Going to Cut Back the Bone and They’re Going to Keep the Fat, Basically. They’re Going to Try to Panic the Population into Acquiescing in a Democratic Party Sellout by Cutting Back Payments to the People...While Making Sure that They Pay the Pentagon, They Pay the Foreign Aid, They Pay Wall Street"  - I pointed out last year that Ronald Reagan's budget director said that the tax cuts for the wealthy were "the biggest fiscal mistake in history". I noted yesterday:  Plugging the major holes in our economy is more important than either cutting spending or raising taxes. And stopping bailouts and giveaways for the top .1% of the richest elite (which weaken rather than strengthen the economy, as shown here, here and here) and slashing spending on unnecessary imperial wars (which reduce rather than increase our national security, as demonstrated here and here) is what the budget really needs. As I wrote last year:Why aren't our government "leaders" talking about slashing the military-industrial complex, which is ruining our economy with unnecessary imperial adventuresAnd why aren't any of our leaders talking about stopping the permanent bailouts for the financial giants who got us into this mess? And see this.And why aren't they taking away the power to create credit from the private banking giants and give it back to the states? If we did these things, we wouldn't have to raise taxes or cut core services to the American people.

The Crumbling Case for Cutting Spending to Stimulate the Economy - Empirical support for the view that sharp, immediate cuts in government spending would be good for the U.S. economy was never strong, and it’s getting weaker. The Economist is on the case, highlighting two new studies showing that austerity and growth don’t mix in the short term. The first new study is from the International Monetary Fund.  In its 2010 World Economic Outlook, the IMF put the kibosh on the idea that deficit reduction would boost economic growth in the short run.  IMF researchers have now presented a revised and extended version of that analysis reaching the same conclusion. The second new study, by Roberto Perotti, backs up those of us who have been arguing for some time that these international examples have little in common with current U.S. budget and economic conditions. Perotti conducted detailed case studies of the four largest multi-year deficit-reduction efforts that researchers have commonly regarded as spending-based.  He found that they were actually much smaller, and much less tilted toward spending cuts, than previous studies had assumed.

Penny-Wise Policy - Krugman - Mark Thoma sends me to Jonathan Schwarz making the case that Obama knew perfectly well that the stimulus should have been bigger. I’m not sure that lets his advisers completely off the hook; there’s a big difference between saying, well, the macroeconomic case says this should be bigger, but smaller is OK, and saying — as they should have, and maybe some did — that a weak stimulus runs a large risk of setting us on a path toward a lost decade. Never mind. What really struck me was this quote from Obama that Schwarz found: Well, we are still in consultation with members of Congress about the final size of the package. We expect that it will be on the high end of our estimates, but [it] will not be as high as some economists have recommended because of the constraints and concerns we have about the existing deficit. Aside from the fact that Obama was being cautious about the deficit when he really, really shouldn’t have been, think about how this has actually played out....And yes, it’s quite possible that even aside from the political-economy angle, the weak stimulus directly made our long-run debt position worse.

Marshall Auerback: There is No Progressive Case for Deficit Cutting – The Myth of the “Virtuous” Clinton Surpluses At his press conference on Friday, the President made the following argumentIf you are a progressive, you should be concerned about debt and deficit just as much as if you’re a conservative. And the reason is because if the only thing we’re talking about over the next year, two years, five years is debt and deficits, then it’s very hard to start talking about how do we make investments in community colleges so that our kids are trained. How do we actually rebuild $2 trillion worth of crumbling infrastructure.  So, now the question is, what should we be doing to win the future, and make ourselves more competitive, and create more jobs, and what aspects of what government’s doing are a waste, and we should eliminate.” And that’s the kind of debate that I’d like to have." You want a debate on this, Mr. President? Consider it done. In a nutshell, your proposed cuts will NOT set the stage for a “progressive agenda” going forward. The austerity measures contemplated by your Administration will suck income and wealth out of the private sector. This will cause private spending to fall, leading to yet more downsizing and unemployment. Tax revenues will decline further as corporate profitability sags, social welfare expenditures will rise as the automatic stabilizers kick in. And before you know it, we’ll be bumping up against that troublesome debt ceiling again, experiencing the same kind of political grandstanding that is characterizing today’s conflict, sort of like a nightmare version of “Groundhog Day”. The government will, in effect, be chasing its own tail. You will not “put the nation’s fiscal house in order”, Mr. President, but tear down its foundations even further.

Congress Bickers as Bond Markets Brace for Total Panic - Pay attention folks,” as the investor Gifford Combs e-mailed me on Friday. “This is not a drill.” Here are the facts: The yield on Greek sovereign debt is now at record highs for the euro era. Last week’s state-managed bond auction in Italy almost failed. And, while few seem to have noticed, the overnight repurchase market -- for short-term, secured, corporate debt obligations -- nearly seized up amid what Combs described as “an almost panicky scramble” for less- risky paper. Indeed, investors’ manic desire for safety last week reached levels not seen since the most acute days of the financial crisis in September and October 2008. Ironically, though, given the pathetic display in Washington and the country’s ongoing fiscal troubles, people turned in droves to the perceived security of the U.S. Treasury market, even though it has never looked shakier.At the same time, it's an open secret on Wall Street that the Federal Reserve Bank of New York has become increasingly concerned about the state of U.S. money-market funds. With as little fanfare as possible -- understandably, so as not to cause a panic -- the New York Fed has been urging domestic money- market funds to reduce their exposure to European banks, where the funds have turned to increase yields not available in the U.S. because of rock-bottom interest rates. The Fed is said to be terribly worried that -- because of provisions in the Dodd-Frank law -- it will no longer be able to rescue a money-market fund if it "breaks the buck," as the Fed did famously the day after Lehman Brothers Holdings Inc. filed for bankruptcy.

Why did Congress waste six months? - The House Republican strategy to link a normally routine increase in the nation’s debt limit with a crusade to slash spending has already had a high cost, threatening the nation’s credit rating and making the United States look dysfunctional and incompetent to the rest of the world. What’s even worse is that this entirely artificial, politician-created crisis has kept government from doing what taxpayers expect it to do: Solve the problems citizens care about. The most obvious problem is unemployment. The best way, short term, to drive the deficit down is to spur growth and get Americans back to work. Has anyone noticed that Americans with jobs can provide for their families, put money into the economy — and, oh yes, pay taxes that increase revenue and thus cut the deficit?  There is no mystery about the steps government could take. Ramping up public works spending is a twofer: It creates jobs upfront and provides the nation’s businesses and workers the ways and means to boost their own productivity down the road.

More American Exceptionalism - Let’s adopt the unpresuming assumptions that:

  • 1. A prosperous, modern economy needs a certain amount of government (taxing, spending) to become and remain prosperous. And that government has to be paid for via taxes and other government revenues. Simple enough.
  • 2. Either too much or too little government in a country results in a poor economy, forcing the country to alter its taxing and spending policies.

So you won’t see any countries outside the workable range, because they’ll be forced back into it. Now look at this: The first thing to notice: U.S. government revenues (local/state/federal combined) have been flat (with some short- and long-term wiggles) for 45 years. The notion of rampant increases is a myth. Next: Note that the higher-taxing countries, in aggregate, have been seen long-term growth that’s basically equivalent to ours.

The “Pledge” Versus the “Position” - Exciting buzz about Grover Norquist’s admission that letting the Bush tax cuts expire would not technically violate the “No New Taxes” pledge (which surprised me)–followed by his quick walk-back on it (which didn’t surprise me).  I think Time magazine’s Michael Scherer has it right with his interpretation: Grover’s admission that such a course would not violate the pledge is a big deal, and he is all over the place today trying to walk it back. But if you read his clarifications closely, he is not denying what he told the Washington Post. He is simply adding another fact: While such a course would not violate the pledge, he says, it would violate the position of Americans of Tax Reform. Here is Norquist today on MSNBC:“There are certain things you can do technically and not violate the pledge, but that the general public would clearly understand as a tax increase. So I can be clear: Americans for Tax Reform would oppose any effort to weaken, reduce, or not continue the 2001, 2003 Bush tax cuts.” So there is a huge difference between what the “No New Taxes” pledge literally says (that they can’t raise taxes with new legislation) versus the more aggressive version that’s what Grover and the other Republicans probably wish the pledge said.

Bonuses for Billionaires - I finally came to understand how much sense the Tea Party caucus1 makes.  Why would we impose “job-crushing taxes2” on wealthy Americans just to pay for luxuries like federal prisons? Why end the “carried interest” tax loophole for financiers3, just to pay for unemployment benefits — especially when those same selfless tycoons are buying yachts and thus creating jobs for all the rest of us?  Hmmm. The truth is that House Republicans don’t actually go far enough. They should follow the logic of their more visionary members with steps like these:   Republicans won’t extend unemployment benefits, even in the worst downturn in 70 years4, because that makes people lazy about finding jobs. They’re right: We should be creating incentives for Americans to rise up the food chain by sending hefty checks to every new billionaire. This could be paid for with a tax surcharge on regular working folks. It’s the least we can do.  Likewise, the government should take sterner measures against the persistent jobless. Don’t just let their unemployment benefits expire. Take their homes!

How does Michael Boskin do math - He writes in the Wall Street Journal this morning: The lower marginal tax rates in the 1980s led to the best quarter-century of economic performance in American history. This didn't seem right to me, so I went to the National Income and Products Account web site. For GDP growth after 1947 (the beginning of the quarterly NIPA data), the best 25 year period was between the first quarter of 1949 and the last quarter of 1973, when the economy grew by a multiple of 2.68.  This is well before Reagan took office. The period of 25-year spells after Reagan took office is small, but the best period is the fourth quarter of 1982 until the third quarter of 2007, when the economy grew by a multiple of 2.26. GDP growth likely overstates the benefit of the post Reagan era, because the benefits of the growth have been unevenly distributed. If we look at median household income, it is really hard to figure out how to find a "best in history" 25 year period after Reagan.

Tom Coburn: Tax Subsidies Are Socialism - Give Sen. Tom Coburn(R-OK) credit. In a city where obfuscation and misdirection are the coin of the realm, the conservative Republican lets you know exactly where he stands. While most of his party remains mired in its  “job-killing tax increase” rhetoric, Coburn has no misgivings about eliminating tax subsidies and using the money to reduce the deficit.  His new budget plan, “Back in the Black” would scale back these deductions and credits by $1 trillion over a decade. And in doing so, Coburn didn’t mince words: “Tax expenditures are not tax cuts. Tax expenditures are socialism and corporate welfare. Tax expenditure are increases on anyone who does not receive the benefit or can’t hire a lobbyist…to manipulate the code to their favor.”    Unlike most pols of both parties, who blast tax expenditures in general but refuse to name names, Coburn has a list. In fact, he has 60 pages of details on the tax subsidies he’d deep-six. He targets two of the most controversial: the tax exclusion for employer-sponsored health insurance and the mortgage interest deduction. And he takes aim at a wide range of tax breaks for economic development and energy production.

Huckabee Presses for National Sales Tax - Never mind the dramatics over raising the debt ceiling. One group is keeping its eye on what it regards as a bigger prize: getting rid of the IRS. Supporters of the so-called Fair Tax —  a national retail sales tax that, in theory, could replace the income tax – are gearing up for a major push on Capitol Hill next week, including intensive lobbying. The highlight of the week will be a Ways and Means Committee hearing on the Fair Tax, as well as other consumption-tax variations, such as the European-style value-added tax. The hearing is part of a series on tax reform that the tax-writing committee is holding. Former Arkansas Gov. Mike Huckabee – who’s expecting to be one of the witnesses at Tuesday’s hearing – so far claims more than 25,000 signatures on a petition he hopes to deliver to lawmakers. “Help us reach 100,000 signatures by July 25th at midnight, he says on his website. “Why? So I can say when I testify about the FairTax before Congress, that over 100,000 Americans are standing with me today.” He adds: “Folks, it is time we put the IRS out of business.”

Mark Ames Calls for Restoration of Policies of President Eisenhower -  In a segment on the Dylan Ratigan show (hat tip Joe Costello), the normally fire-breathing Mark Ames set forth a policy program that plans to use Grover Norquist tactics to bring back Eisenhower era policies.

The US Tax Burden Falls Disproportionately On Individuals and Small Business - Although the nominal US corporate tax rate of 35% seems high, and especially so given all the corporate funded propaganda promoting more tax cuts and givebacks, in fact the realized corporate rates are relatively low both in terms of historical experience and other countries. This is because of the many loopholes, subsidies, and accounting gimmicks available to its corporate citizens from the corporate friendly government. One could make the case that the tax burden is falling disproportionately on smaller businesses and individuals that do not have the infrastructure and latitude to take advantage of the loopholes available to the bigger business lobby companies. State and local taxes appear to be regressive. The top echelons of corporations and private individuals seem to be doing rather well for themselves.

People Still Support Higher Taxes to Reduce the Deficit by a 2-to-1 Margin - I posted an earlier version of this table a week ago, but there have been several new polls confirming the conclusion, so I have brought it up to date. (results of 14 different polls)

The Problem with Targeted Tax Incentives - Business taxation is an important and contentious topic in state fiscal policy. Tax competition is a fact of life in state fiscal policy. But there is good competition and bad competition. The bad form of tax competition involves targeted tax incentives. The economic literature is not kid to targeted tax incentives. At best their economic effect is minimal. At worst is zero or negative. In any case, the benefits secured are not worth the cost. Targeted tax breaks are expensive and inefficient. They increase compliance costs for businesses and enforcement costs for the government. They can result in similar firms having vastly different effective tax rates that are hard to justify. Larger firms have a level of political and economic influence that is not enjoyed by smaller firms, and are more likely to secure special treatment. Similarly, firms are often able to secure special tax breaks for relocating to the state, while loyal firms are stuck with the bill.

The Distribution of the U.S. Mortgage Interest Tax Deduction by Income - If the federal government tries to increase the amount of its tax collections by eliminating or limiting the mortgage interest tax deduction, who's most at risk of seeing their taxes go up?  To find out, we tapped the U.S. Congress' Joint Committee on Taxation's report on tax expenditures for 2010-2014, which provides the breakdown of how much of the mortage interest tax deduction is claimed by taxpayer income level for the 2009 tax year.  We then used that data to construct the distribution of the mortgage interest tax deduction by taxpayer household income below:  As you can see in the chart above, the greatest amount of "losses" to the federal government, at least, from the perspective of a hypothetical government overlord, is represented by taxpayer households who have incomes in the range between $50,000 and $150,000.  Meanwhile, President Obama has proposed limiting or eliminating the tax deduction for mortgage interest for individuals with incomes over $200,000 or households with incomes over $250,000.

There Will Be Taxes, Ctd - A quick reminder, because this will take some persistence, that means testing is a marginal tax increase. Adjusting to a new chained CPI measure will also in many cases be marginal a tax increase – both through the tax code and the spending code. However, in this iteration of my infinite part series I am going to pivot off of something Yglesias said that echoes a long standing position of mine: There is no present-day economic problem that can be laid at the feet of high current levels of federal spending. So let’s not sweat the 2020s. Maybe we’ll invent some super-useful but expensive technology that merits giant spending. Who knows? Most likely, voters will continue to demand certain kinds of public services and that will cost money. One such service is health care. Systematic reform of the exceptionally high cost structure of American health care would, fairly reliably, lead to a lower level of future spending. Just saying “cross my heart / hope to die / stick a needle in my eye / public sector health care spending will be lower” doesn’t achieve much of anything. Future problem necessarily exist in the future. And, because of adding up constraints, solutions to future problems often exist only in the future as well.

Corporate Tax Holiday in Debt Ceiling Deal: Where's the Uproar? - Matt Taibbi - Have been meaning to write about this, but I’m increasingly amazed at the overall lack of an uproar about the possibility of the government approving another corporate tax repatriation holiday. I’ve been in and out of DC a few times in recent weeks and one thing I keep hearing is that there is a growing, and real, possibility that a second “one-time tax holiday” will be approved for corporations as part of whatever sordid deal emerges from the debt-ceiling negotiations. I passed it off as a bad joke when I first saw news of this a few weeks ago, when it was reported that Wall Street whipping boy Chuck Schumer was seriously considering the idea. Then I read later on that other Senators were jumping on the bandwagon, including North Carolina’s Kay Hagan For those who don’t know about it, tax repatriation is one of the all-time long cons and also one of the most supremely evil achievements of the Washington lobbying community, which has perhaps told more shameless lies about this one topic than about any other in modern history – which is saying a lot, considering the many absurd things that are said and done by lobbyists in our nation’s capital.

Could Tax Reform Make the Financial System Safer? - Simon Johnson - In the deafening cacophony of voices in Washington on the debt ceiling, it is easy to miss a potentially more significant development. There is growing bipartisan interest in tax reform, including changing the corporate tax system to make it more sensible and a bulwark against financial sector instability. The House Ways and Means Committee and the Senate Finance Committee held a joint hearing last week — the first time these two committees had met in this fashion to discuss taxation in more than 70 years, their chairmen said. The theme of the hearing, “Tax Reform and the Tax Treatment of Debt and Equity,” might sound dry, but in fact it was well designed to carve out some space for agreement across the political spectrum. The basic question at the hearing was: Did the tax code contribute to the severity of the financial crisis in 2008-9? I testified at the hearing and argued that banks and other financial institutions should be the priority, because their overborrowing was central to past crises and is likely to be a salient issue in the future. It is also ironic — perhaps even bizarre — that while we try to constrain how much banks borrow through regulation, we give them strong incentives to borrow more through the tax code.

Credit Suisse Investigation for Assisting Tax Evasion - On Friday, it was announced that the US is investigating Credit Suisse for assisting US residents in evading taxes with secret bank accounts.  According to reports, the bank turned up in the information gleaned by the government through its voluntary disclosure program.  Taxpayers who came forward and sought the generous terms of the program were required to provide detailed information on their banking contacts.  It was expected that such information would lead to many more accounts and potential prosecutions of other banks similar to the UBS prosecution that garned so much attention. Treasury officials have said that Credit Suisse assisted in tax evasion since 1953, helping two generations of US taxpayers hide their assets offshore.

Tissue paper over a mountain range - Basel Capital Accords did promote global competition, and so the concentration of global banking into a very few global banks by punishing smaller banks with higher capital requirements. And to that extent, the plan worked to favour Wall Street and the City. The plan also worked in favour of the Italians, who could issue copious government debt to capitalise their banks at the zero risk weighting and flog that debt to American, British and German banks who carried it at zero risk too.  But as the American, British and German banks were relieved of the onerous responsibility for due diligence, they took sillier and sillier risks.  And all the time the bias of Basel made them more and more powerful. Basel II cemented big banks' control of both regulators and markets. They could use ratings to justify investments in structured products that seemed to have no economic rationale for either investors or intermediaries, but were magically profitable for everyone in theory.  It is all starting to unravel now. Despite a commitment to Basel III - to be implemented far in the future - I doubt Basel II will last much longer. This week saw Portugese and Irish government bonds downrated to junk. Even the mighty US Treasury is on creditwatch for downrating given the rising risk of default.

Dodd-Frank Anniversary: Has Anything Changed? - Thursday marks the one-year anniversary of the Dodd-Frank financial overhaul.  Now is a good time to ask: Is the financial system any safer? Not likely. And here are a few reasons why: First off, just because the law made its first pass through Congress doesn't mean it's here to stay. There are two dozen bills in Congress aiming to do away with parts of Dodd-Frank. And many of the rules mandated by the law haven't even been written. The Wall Street Journal has a piece out today chronicling the troubles facing the Securities and Exchange Commission and Commodity Futures Trading Commission as they attempt to write new rules. The SEC has missed more than 75% of its Dodd-Frank rulemaking deadlines, while the CFTC has missed 88%. Of the 400 rules mandated by Dodd-Frank, only 49 have been finalized. The hairy details of the Volcker rule (which aims to end the practice of banks taking risky bets for their own profit) and derivatives regulation, for instance, have yet to be fleshed out. Why? Funding and staff shortages are part of the problem. Not only are they keep regulators from writing new rules; They're preventing them from staying on top of responsibilities they already had.

Dodd-Frank Still Under Fire a Year Later - In the year since the passage of a sweeping overhaul of the nation’s financial regulatory system after the financial crisis, the stock market is up, banking profits have grown and institutions that invest on behalf of average Americans are praising the tougher stance in Washington.  Timothy F. Geithner, the Treasury secretary, expressed the general good feeling among Obama administration officials on Monday, saying that the financial system was “on more solid ground” than at any time since before the crisis in 2008.  But there remain signs that the tightened regulatory measures could still be undone, creating uncertainty about whether the actions that have helped to stabilize Wall Street will be in place when the next crisis hits.  Two dozen bills in Congress seek to dismantle parts of the Dodd-Frank Act, which President Obama signed a year ago Thursday. Business groups have argued that too many new regulations could snuff out the start of an economic recovery. 

Bernanke Calls For Continued Push To Strengthen Financial System…Federal Reserve Chairman Ben Bernanke will urge senators Thursday to push forward on efforts to strengthen and overhaul the financial system to ensure that the events of the global crisis aren't repeated. On the one-year anniversary of the Dodd-Frank Act, Bernanke defended the regulatory overhaul while acknowledging the "costs and uncertainties" brought on by any sweeping reform effort. "As we work together to implement financial reform, we must not lose sight of the reason that we began this process: ensuring that events like those of 2008 and 2009 are not repeated," Bernanke said in prepared remarks to the Senate Banking Committee. "Our long-term economic health requires that we do everything possible to achieve that goal." His comments come as Republicans increasingly try to dismantle portions of the legislation, taking particular aim at the new Consumer Financial Protection Bureau. The White House threatened Wednesday to veto a bill that would replace the head of the bureau with a board.

Dodd-Frank Act - Ben Bernanke - July 21, 2011  Testimony Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

The Shameful Murder of Dodd Frank - One full year after the financial reform bill spearheaded through Congress by Christopher Dodd and Barney Frank was signed into law, Wall Street looks and acts much the way it did before. That’s because the Street has effectively neutered the law, which is the best argument I know for applying the nation’s antitrust laws to the biggest banks and limiting their size. Treasury Secretary Tim Geithner says the financial system is “on more solid ground” than prior to the 2008 crisis, but I don’t know what ground he’s looking at. Much of Dodd-Frank is still on the drawing boards, courtesy of the Street. The law as written included loopholes big enough to drive bankers’ Lamborghini’s through — which they’re now doing.What kind of derivatives must be traded on open exchanges? What are the capital requirements for financial companies that insure borrowers against default, such as AIG? How should credit rating agencies be funded? What about the much-vaunted Volcker Rule requiring that banks trade their own money if they’re going to gamble in the stock market – how should their own money be defined? What “stress tests” must the big banks pass to maintain their privileged status with the Fed? The short answer: whatever it takes to maintain the Street’s profits and perquisites

Being "Completely Ignorant of Everything" is a Very Bad Idea - The Republicans are trying to dismantle the information gathering ability of the Treasury's new Office of Financial Research, an agency charged with providing "data and economic analysis to federal regulators": Dodd-Frank-Created Stats Office Comes Under Fire, WSJ: For the most part, Treasury’s new Office of Financial Research has gone unnoticed... But the new office and the man in charge of setting it up – former chief U.S. economist for Morgan Stanley, Richard Berner – felt some heat this afternoon. The subject of an oversight hearing Thursday, the investigating subcommittee’s chairman, Rep. Randy Neugebauer (R., Tex.) criticized the office’s data-collecting mission as “Orwellian”..., and painted an image of powerful bureaucracy with no limits on how much it can spend or what information it can demand from the industry, a characterization echoed by many of his Republican colleagues. Mr. Berner sought to temper the Frankenstein-like descriptions of the OFR. He said the office’s goal is to “fill in information gaps, not duplicate” data collection that’s already going on among financial regulators. ...

Dodd-Frank: Regulation as necessary evil. - A year after the financial reform legislation was signed into law, Republicans are inveighing against it, introducing bills to abolish or weaken it, and trying to starve the regulators that are supposed to implement it. Wall Street is pouring money into lobbying against it. Liberals worry that Dodd-Frank is already dead, and while that might be overstating the facts, the argument that too much regulation might stifle the weak recovery is gaining ground.  Right now, the only thing you can be sure of about Dodd-Frank is that it will have unintended consequences. But the status quo was not an option. The subprime crisis laid bare some ugly truths about the banks and showed that some of our fundamental assumptions about the way the world worked were wrong.  One reason we had a crisis in the first place was because modern bankers were willing to sell any product, no matter how shoddy, to anyone who would buy it. Whether it was Countrywide selling terribly flawed mortgages to people who could never pay the money back, or Goldman Sachs creating money-losing securities to sell to clients in order to decrease its own risk, almost every financial institution performed some variation of the same bait and switch.

Dodd-Frank Improves Regulation, But Shadow Bank Runs are Still a Potential Problem - Ineffective regulation of the financial sector was a key factor in the financial meltdown, and the Dodd-Frank financial reform bill is an attempt to close the regulatory holes exposed by the financial crisis. The Dodd-Frank legislation made important changes in how the financial sector is regulated. It established the Consumer Financial Protection Agency to protect consumers, and it forced derivatives onto organized exchanges so that investors can monitor risk more effectively. In addition, the legislation gave regulators the ability to step in and close large banks in an orderly fashion. This authority was missing when the crisis hit, and that left regulators the choice of either bailing the banks out, a politically unpopular option, or doing nothing. Now regulators have the additional option of temporarily taking control of the banks, throwing out management, and putting the losses on investors rather than taxpayers. The legislation also required audits of many Fed activities that were previously secret, it reinserted barriers between commercial and investment banking through the Volcker rule, it established new ways to monitor systemic risk, and it imposed a variety of other restrictions such as limits on leverage, capital requirements, and executive pay restrictions.

Matt Stoller: Dodd-Frank Made No Structural Changes to Banking System - I was a staffer on the Dodd-Frank legislative package, and the whole process seemed odd from the very beginning. There was no attempt initially to ask the question, “what happened and what should we do about it?” There was no examination of the purpose of a banking system, and how to rebuild a system that aligns the public with the financial industry. There was no attempt to build legitimacy through a public education campaign about what Congress and the administration was doing, and why. Instead, legislators and very serious men in suits started throwing around terms like “systemic risk regulator” and “resolution authority”, and then used the idea of a Consumer Financial Protection Bureau as a palliative for liberals. But overall, the Dodd-Frank bill was significant for its lack of significance. In retrospect, this was by design. Congress created a panel — the Financial Crisis Inquiry Commission — to examine the cause of the financial crisis. But this panel had a mandate to deliver its recommendations after the passage of Dodd-Frank. In other words, Congress and the administration did not design Dodd-Frank to prevent another financial crisis. So what was the purpose of the bill? I suspect this can only be answered by looking at the overall policy thrust of the government since the beginning of the financial crisis.

Dodd-Frank Backers Clash With Currency Chief Walsh - John Walsh voiced the frustrations of many bankers when he warned in a speech last month that federal regulators were not paying attention to the cumulative impact of new rules and restrictions, jeopardizing the ability of banks to support economic growth. “I might have titled these remarks, ‘Beware of the Pendulum,’ ” he said. “To put it plainly, my view is that we are in danger of trying to squeeze too much risk and complexity out of banking.”  What made the speech unusual was that Mr. Walsh is a federal regulator. In fact, he is responsible for overseeing most of the nation’s large banks. And as the text of his remarks ricocheted across the electronic landscape of official Washington, it drew a furious reaction from advocates of increased regulation, who called on the White House to replace him.  The uproar brought into public view the increasingly contentious relationship between the authors and supporters of the Dodd-Frank Act, the law passed last year to overhaul financial regulation1, and Mr. Walsh, the acting comptroller of the currency, a crucial player in the work of translating the law into practice.

Is Geithner Warning Dodd-Frank May Fall to Debt Ceiling Deal?- The most interesting part of Treasury Secretary Tim Geithner’s op-ed in the Wall Street Journal today is not what the Treasury Secretary wrote—but that he wrote it at all.  Its appearance in today’s has some in Washington wondering whether the Obama administration may be preparing to sacrifice parts of the Dodd-Frank financial reform law in order to strike a deal on the debt ceiling.  When top administration officials pen op-ed articles in the New York Times or the Wall Street Journal, it is usually the result of a calculated decision to go public. More often than not, the person writing the op-ed is on the losing side of an internal administration debate.  There are signs that something similar is going on with Geithner’s op-ed. His closing line, for instance, doesn’t directly threaten a presidential veto of Republican attempts to change Dodd-Frank—which he would do if he was certain the president was on his side.

In the land of risk myopia, the one-eyed King is blind - This post develops my response to a post that used this phrase in answer to a question on LinkedIn’s Financial Services Regulation group; “How do you govern risk if you have no visibility into your risk? How do you identify risk? If you cannot identify risk, you are unable to mitigate it.” It gives me an opportunity to build on a point The Epicurean Dealmaker raised in his 2007 blog”Nobody Expects the Spanish Inquisition”, a four year old but timeless commentary on the use/abuse of credit derivatives and risk transfer. “Risk is incompressible: it cannot be eliminated, only transferred (for a price).“ TED makes clear  he is referring to risks associated with derivative insrtuments. Risk transfer between financial institutions frequently focuses on transferring irreducible risk associated with a third-party entity that neither the seller or buyer can directly influence through their actions. So financial institutions lobby to indirectly influence outcomes. Currently, we are seeing this influence being exerted across the Eurozone where the Olympian “Game of Finance” is approaching it’s final stages. Cost of entry to watch this game is high, everyone can be assured of a ticket allocation as the ticketmasters have our tax details and the cost for adults is lower than it is for chidren.

Stabilizing the Tri-Party Repo Market by Eliminating the “Unwind” -  NY Fed - A repurchase agreement is a sale of securities coupled with an agreement to repurchase the securities at a specified price at a later date. In the United States, a tri-party repo is a form of repurchase agreement in which a third party, the clearing bank, intermediates between the cash investor and the collateral provider. A detailed description of the tri-party repo market can be found in the working paper “The Tri-Party Repo Market before the 2010 Reforms.”    Under current practices, the tri-party repo clearing banks “unwind” all repos each morning—that is, investors receive their cash back and dealers receive their collateral back. Later in the day, investors choose whether to reinvest their cash with the dealers by renewing their repos. Under the proposed new rules, the clearing bank would not unwind repos every morning. Instead, new and maturing repos would be settled simultaneously, in the afternoon. “Term” (multiple-day) repos and “rolling” repos (those renewed every day unless canceled by one of the parties) would no longer be unwound.

Winners and Losers - I loved this story. Some poor bastard over at Chevron accidentally released the company’s crude/distillate trading results for the year. An effort was made by the company to squash the information. Dow-Jones said, "the hell with that" and went public with the info. Not surprisingly, Chevron is doing just fine in its oil trading business. They show year to date gains of a very tidy 360 million. I find it amusing that they are making such a bundle. The President said a month or so ago that he was going after the speculators who he thinks are driving up the cost of energy. Look no further Mr. President. It’s the oil companies that are driving up prices and making a bundle in the process, not some ‘locals” who trade crude futures in Chicago. Speaking of making a bundle in oil trading it’s worth taking another look at the SPR oil sales that Obama ordered to “reduce the price at the pump”. This chart looks at LLS (Louisiana Light Sweet) for the past month. Note that as of Friday’s close of $116.49 we are now above the level for pricing before the SPR sales (June 22). Therefore one would have to conclude that nothing of lasting value was accomplished by the effort to manipulate markets.

Fast Traders, in Spotlight, Battle Rules - For years they have operated in the shadows, often far from Wall Street, trading stocks at warp speed and reaping billions while criticism rose that they were damaging markets and hurting ordinary investors.  Now high-frequency trading1 firms, normally secretive, are stepping into the light to buff their image with regulators, the public and other investors.  After quietly growing to account for about 60 percent of the seven billion shares that change hands daily on United States stock markets, the firms are trying to stave off the regulators who are proposing to curb their activities.  To make their case, the firms have formed their first industry trade group, hired former Securities and Exchange Commission staff members and spent nearly $2 million in the last few years on Washington lobbying and contributions to lawmakers. Some even want to be called “automated trading professionals” rather than high-frequency traders.

Tim Geithner Opposes Nominating Elizabeth Warren To Lead New Consumer Agency - Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views. The financial reform bill passed by the Senate on Thursday mandates the creation of a new federal entity charged with protecting consumers from predatory lenders. But if Geithner has his way, the most prominent advocate for creating the agency may not be picked to lead it. Warren, a professor at Harvard Law School whose 2007 journal article advocating the creation of such an agency inspired policymakers to enact it into law, has rocketed to prominence since the onset of the financial crisis as one of the leading reform advocates fighting on behalf of American taxpayers.

Obama Passes Over Warren, Names Deputy to Run Consumer Agency - President Obama nominated Richard Cordray, a former Ohio attorney general and state lawmaker, to run the nascent Consumer Financial Protection Bureau on Sunday. The announcement comes just four days before the CFPB, set up in 2010′s sweeping overhaul of the financial sector, is set to open its doors, and marks the beginning of the end of financial regulatory reform’s foremost political drama. Cordray’s resume is well suited to the task at the CFPB, an agency responsible for policing consumer products like mortgages and credit cards. As Ohio’s top law enforcement official, he led the charge in a class action lawsuit on behalf of public pension funds against Bank of America over losses incurred after the acquisition of Merrill Lynch. After years in Ohio politics — and a few failed attempts to reach Washington by way of Congress — Cordray, 52, landed a job as assistant director for enforcement at the CFPB after losing re-election last November. “Richard Cordray has spent his career advocating for middle class families,” Obama said,” and looking out for ordinary people in our financial system.” Of couse, Obama will get more scrutiny for whom he didn’t pick, than for whom he did.

Former Ohio Attorney General Picked to Lead Consumer Agency… President Obama1 said Sunday that he would nominate Richard Cordray, the former attorney general of Ohio, to lead the new Consumer Financial Protection Bureau2, passing over Elizabeth Warren3, the Harvard Law professor who was the driving force behind the bureau’s creation. Mr. Cordray came to national attention for his aggressive investigations of mortgage foreclosure practices during his one term as attorney general. He had already joined the watchdog agency, which starts formal operations on July 21, as the head of its enforcement division.  “Richard Cordray has spent his career advocating for middle-class families, from his tenure as Ohio’s attorney general, to his most recent role as heading up the enforcement division at the C.F.P.B. and looking out for ordinary people in our financial system,” Mr. Obama said in a written statement. He will formally announce the nomination Monday.

CFPB Sadness - Krugman - As expected: President Obama said Sunday that he would nominate Richard Cordray, the former attorney general of Ohio, to lead the new Consumer Financial Protection Bureau, passing over Elizabeth Warren, the Harvard law professor who was the driving force behind the agency’s creation. Was this a decision that “reflects political realities”, as the report says? Well, the report itself refutes that claim:While Ms. Warren received the brunt of the scrutiny, Wall Street executives also bristled at the selection of Mr. Cordray to lead the bureau’s enforcement team. Seen as a zealous prosecutor of financial crime, Mr. Cordray is a similarly contentious figure among bankers and lobbyists. Republicans made it clear on Sunday that they were no more likely to confirm Mr. Cordray than Ms. Warren.  What’s going to happen, then, is no director for the CFPB in any case. But meanwhile Obama has passed up a chance to symbolically align himself with the public and against the banksters.

Too Good, Too Smart, Too Able for Wall Street Approval - Ralph Nader -To dump Elizabeth Warren, the most qualified, most motivated and most articulate candidate for the directorship of the Consumer Financial Regulatory Bureau is an act of political cowardliness by President Obama and a boon to anti-consumer Republicans and their corporate paymasters in Wall Street. Elizabeth Warren apparently is just too good, too smart, and too able to arouse the just concerns of millions of American families about the need to put the law-and-order wood to the corporate criminals, defrauders and reckless speculators with the savings and pensions of millions of Americans. President Obama should realize that his back-of-the-hand attitude to his liberal and progressive supporters – who sent him to the White House – can have consequences. He believes they have no where to go. But they do. They can stay home in 2012, as so many did in 2010 to the detriment of the Democrats and many Congressional races.

Ralph Nader: Obama is a “Political Coward” for Not Picking Elizabeth Warren to Head Consumer Bureau - After months of fierce opposition from Wall Street, corporate lobbyists and Republican lawmakers, the Consumer Financial Protection Bureau officially launches this week in Washington, D.C. A product of last year’s overhaul of financial regulation, the bureau was established to protect consumers from deceptive practices. Republicans have sought to weaken its reach with a number of restrictive measures, including granting other regulatory bodies veto power over the bureau’s decisions. This week, Republicans scored another victory with President Obama’s announcement of his choice to head the bureau. Obama has tapped former Ohio Attorney General Richard Cordray instead of Elizabeth Warren, the Harvard professor who first proposed the bureau and has overseen its establishment for the past year. "[Cordray] is no Elizabeth Warren. He doesn’t have her communication skills,” says Nader. “She is a rare find. And by throwing her overboard, Obama has signaled to hundreds of good, smart people all over the country, who would like to turn our government around and make it stand for the people, that they may be too good for the president, they may be too good for the rogue Republicans.” [includes rush transcript]

Senate Republicans say no CFPB director until power is checked - A group of 44 Republican senators sent a letter to President Obama Thursday vowing not to confirm any nominee for director of the Consumer Financial Protection Bureau until structural changes are made. The White House released a statement Thursday defending the bureau. Republicans in both the House of Representatives and Senate want to restrict the bureau and establish more checks and balances before it gets underway. According to the letter, lead by Sen. Mitch McConnell (R-Ky.) and Sen. Richard Shelby (R-Ala.), the eventual director will have "vast rulemaking, supervisory, investigative and enforcement powers and the authority to regulate any person or business that offers or sells a 'financial product or service.'" "Accordingly, we will not support the consideration of any nominee, regardless of party affiliation, to be the CFPB director until the structure of the Consumer Financial Protection Bureau is reformed," the letter reads.

Elizabeth Warren: We will not let Republicans ‘rip arms and legs off’ of consumer agency - Consumer advocate and Harvard law professor Elizabeth Warren addressed Monday how she felt about being passed up as director of the Consumer Financial Protection Bureau on MSNBC’s Rachel Maddow Show. “I want to be real clear. The reason I can not run this agency is because of [Republicans],” Warren continued. “They have made it perfectly clear that they are not going to let this agency go forward if I am there. Fine, I can step away from this. What I care about is this agency.” Warren described Cordray as a “good man.”  “I think it’s time to take the fight straight to the Republicans,” she added. “We need a director in place, that is the law, and we are not, not, not going to let the minority come in and dictate the terms of this agency – rip its arms and legs off before it is able to help a single family."

Obama Defends Consumer Agency — and His Nominee to Head It - President Barack Obama on Wednesday defended the new U.S. consumer watchdog agency, saying it is “completely transparent and completely accountable.” In an interview with WBNS-10TV in Ohio, Mr. Obama also praised his nominee to head the new Consumer Financial Protection Bureau, Richard Cordray, a former state attorney general in Ohio. (The video of the interview is here, and the transcript is here.) The consumer bureau has come under intense fire in recent months from Republicans who are concerned that its powers are too broad. Some have threatened to block Mr. Cordray’s nomination unless Mr. Obama agrees to change the way the bureau functions. Mr. Obama dismissed such talk. “We’re not going to let it be watered down,”

Matt Stoller: Elizabeth Warren Versus Barack Obama on Leadership - Last week, I caught some of the grilling of Elizabeth Warren by GOP Congressmen during the House Oversight Reform Hearing. At one point, a Republican Congressmen asked Warren if she was “running a campaign” to convince people of the validity of the Consumer Financial Protection Bureau she is in the midst of setting up. He was trying to peg her as overtly political, using government resources to travel the country and do advocacy. Suddenly, she got the nature of the question, and turned to him and said, pointedly, “I always try to convince people that I’m right.” There was some laughter in the room, but she wasn’t kidding. Warren believes that consumer protection is necessary for a just society, and spends a great deal of time trying to persuade the public of the necessity and legitimacy of government. Imagine that – a public servant who thinks that communicating with and persuading the public of the merits of their ideas. Contrast this with Barack Obama, a person who never fails to wrap his true agenda in gauzy opaque process jargon  He won’t announce Social Security or Medicare cuts, he wants it to be part of a Grand Bargain for whom no one has to take responsibility. He demands an end to earmarks, or something, but we need an infrastructure bank or something. As a result, the Democratic Party is enmeshed right now in a guessing game about the true goals of their leader, paralyzed and unable to govern.

Elizabeth Warren: A Big Week for the New Consumer Agency = Today, the President will announce his intent to nominate Richard Cordray to serve as the first Director of the Consumer Financial Protection Bureau. On Thursday, the CFPB makes its transition from a start-up to a real, live agency with the authority to write rules and to supervise the activities of America's largest banks.  Rich will be a strong leader for this agency. He has a proven track record of fighting for families during his time as head of the CFPB enforcement division, as Attorney General of Ohio, and throughout his career. He was one of the first senior executives I recruited for the agency, and his hard work and deep commitment make it clear he can make many important contributions in leading it. Rich is smart, he is tough, and he will make a stellar Director. I am very pleased for him and very pleased for the CFPB.  The DNA of the new consumer agency is well established. Our mission is clear: No one should be tricked in any financial transaction. Prices and risks should be clear. People should be able to make apples-to-apples comparisons. Fine print should be mowed down, not used to hide nasty surprises. And, everyone -- even trillion dollar banks -- should follow the law.

McConnell: GOP will still block consumer agency nomination - President Barack Obama has decided to nominate Richard Cordray to head the Consumer Financial Protection Bureau (CFPB) instead of Elizabeth Warren, but Senate Minority Leader Mitch McConnell (R-KY) doesn’t care. He says Republicans still plan to block the nomination. “I would remind [President Obama] that Senate Republicans still aren’t in interested approving anyone to the position until the president agrees to make this massive government bureaucracy more accountable and transparent to the American people,” McConnell announced on the Senate floor Monday. He continued: “Back on May 5 of this year, 44 Republican Senators signed a letter to the president stating — quote — ‘We will not support the consideration of any nominee, regardless of party affiliation, to be the CFPB director until the Consumer Financial Protection Bureau is reformed.’” “We have no doubt that without proper oversight, the CFPB will only multiply the kind of countless, burdensome regulations that are holding our economy back right now and that it will have countless unintended consequences for individuals and small businesses that constrict credit, stifle growth, and destroy jobs."

Understanding Why Republicans Will Block Richard Cordray for the CFPB - Elizabeth Warren is out, and former Ohio Attorney’s General and current Consumer Financial Protection Bureau Director of Enforcement Richard Cordray is in, for the nominee to head the Consumer Financial Protection Bureau (CFPB). Cordray was very serious about the problems in the foreclosure fraud crisis while in Ohio, going as far as to sue GMAC when the robosigning scandal broke out last October.  Here is coverage of that lawsuit from Yves Smith and David Dayen from the time period. Beyond GMAC, Cordray sent letters to Bank of America, JPMorgan Chase, Citi and Wells Fargo to question their use of robosigning.  I hope that he is likely to support other AGs like Eric Schneiderman that are currently investigating these problems further up the securitization chain. Here’s an interview Cordray did with Annie Lowrey from last October.  Cordray:

Elizabeth Warren Makes It Personal - Elizabeth Warren is ready to name and shame. After 10 long months spent crafting a brand-new federal agency in her image and likeness, years before that willing the institution into statutory existence, only to be passed over on Sunday in favor of Richard Cordray just as the new Consumer Financial Protection Bureau is moving out of beta, Warren, on a press call late yesterday afternoon, was eager to share her clarity on who's to blame for the especially precarious position the new federal-friend-to-the-American-consumer now finds itself in. Those enemies of Warren, of the CFPB? Republicans, first and foremost, namely Senate Banking ranking member Richard Shelby (R-AL) and the forty three other Republican senators who signed a letter to Obama in May raising heck over the "unfettered authority" the CFPB had supposedly been granted by the Dodd-Frank Act, passed in the wake of the mortgage meltdown. But Warren's also annoyed with the press for buying the GOP's story that it's simply a more efficient consumer advocate they're eager for, when really what Republicans want is for the CFPB to die an early death.

We Speak on BNN Re the Latest Euro Rescue, Launch of Consumer Financial Protection Bureau - Yves Smith -- We had a wide ranging conversation today on Business News Network. Enjoy!

House votes to overhaul consumer agency - The new Consumer Financial Protection Bureau officially opened for business Thursday during rancorous political debate over the structure of the agency and who should lead it. The House approved a bill Thursday that would strengthen the veto power of the Financial Stability Oversight Council over the bureau’s decisions. It would also install a five-member commission rather than a single director to head the agency and delay transfer of powers to the new agency. The bill passed 241 to 173, largely supported by Republicans who have voiced concerns about the scope of the watchdog bureau.

Why Liberals are Lame, Part 3: Why a Warren Run for Senate is a Terrible Idea - Yves Smith - It’s bad enough that what passes for the left has been kneecapped by the Obama Administration. The ambiguous campaign promise “Change you can believe in” has turned out to be a Nixon-goes-to-China series of moves to the right that would have been well nigh impossible for a Republican to execute without incurring significant costs. Remarkably, Obama has increased both the number and scope of wars, used deficit scaremongering to cut Medicare and Social Security, and passed a health care “reform” bill that made overly expensive American health care even more uneconomical by enriching Big Pharma and health care insurers. And this is only a starter list in his campaign against average Americans. Those visible moves have been accompanied by a largely stealth operation to neuter what were once called progressive organizations (“progressive” has been rendered meaningless by being adopted by pretty much everyone to the left of Attila the Hun). Groups truly committed to a left-leaning anti-corporate platform quickly learned the cost of crossing Team Obama: in their so-called veal pen, the Administration would get big company backers to yank their funding.  What little remains of the left seems to be rallying around Elizabeth Warren, which given the dearth of prominent figures who are serious about standing up for middle class Americans, as opposed to pandering to them and then selling them out, isn’t a bad impulse per se. But they are deploying their energies in quixotic missions or worse, falling completely in line with the Administration’s plans, which has been to subject Warren to a high end version of the veal pen treatment, to box her in and render her incapable of independent operation. And in case you wonder what I am talking about, I mean the plan, concocted by the Democratic party hackocracy, for her to run for the Senate seat now occupied by Scott Brown.

Banks Pay Back TARP Funds by. . . .Borrowing from Treasury - Generally, banks that repaid CPP funds did so with cash raised from earnings, or by raising new outside capital. In finance and banking you always have to read the fine print. And if you go back to the report, you’ll notice that the fine print accompanying the entries for each of the above exits makes reference either to Footnote 49 and Footnote 50. Footnote 49 reads: “Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009 using proceeds received in connection with the institution’s participation in the Small Business Lending Fund.” Footnote 50 reads: “Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009 — part of the repayment amount obtained from proceeds received in connection with the institution’s participation in the Small Business Lending Fund.” All of which is to say that these banks repaid cash owed to a program run by the Treasury Department by. . . .borrowing from another program run by the Treasury Department.

Banks Pay Back TARP Funds by. . .Borrowing From Treasury… Most of the big banks have repaid the government funds they received under the Capital Purchase Program (CPP), the pillar of TARP under which Treasury bought preferred shares in the nation's banks. Enough so that, combined with dividends and sales of warrants, Treasury has declared that taxpayers have earned a profit on the CPP. Thus far, $245 billion has gone out, and $255 billion in repayments, interest and warrants has come back, yielding a profit to taxpayers of $10 billion. And there's several billion more where that came from. Many of the small banks that took relatively small chunks of capital have been slower to exit. Last week, however, there was a mini stampede. The transactions are reported here. Eight banks paid back their funds on July 14.

No Class Warfare Here! - Whenever liberals note that the rich are getting richer while everyone else is either treading water or sinking, or that profits are up while wages are down, or, worse yet, that profits are up because wages are down, those liberals are invariably accused by conservatives of fomenting class warfare.  Well, goodness knows, we at the Prospect would never stoop so low. We would, however, refer our readers to the July 11 “Eye on the Market” report by J.P. Morgan Chase Chief Investment Officer Michael Cembalest, which demonstrates conclusively that, well, profits are up because wages are down. The subject of the July 11 report is corporate profits, in particular, the pre-tax profit margins of the S&P 500, the 500 largest publicly-traded companies based in the U.S. Those profit margins, you’ll be glad to know, are close to record highs, nearing 13 percent of company revenues - their highest levels since the mid-1960s. And since medical costs are far higher today than they were back then, how, you may wonder, have those companies climbed back to the profit margins of those earlier, lest costly, more innocent times?

Only Poor People Should Be Allowed To Fail - I don't usually post twice in one day, but there is a story which requires our immediate attention (hat tip, Mish). This post's title is riff on Arthur Fullerton's Only poor people can be allowed to fail. His story is short and sweet. I believe it speaks for itself. Reading Lawrence Summers in the Financial Times yesterday I came across this statement as his third principle [for] dealing with the Euro crisis: ...there must be a clear commitment that, whatever else happens, no big financial institution in any country will be allowed to fail. The most serious financial breakdowns – in Indonesia in 1997, Russia in 1998, and the US in 2008 – came when authorities allowed doubt over the basic functioning of the financial system. This responsibility should rest with the ECB, with the requisite political support. And so we have a clear unambiguous statement of the principle of socialism for the rich and powerful, and capitalism, red in tooth and claw, for the poor. Notice that too big to fail has now gone global. I felt the need to publish this immediately because Fullerton notes that coverage has been lacking.

Unofficial Problem Bank list declines to 993 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for July 22, 2011.Changes and comments from surferdude808:  This week there were four removals and two additions to the Unofficial Problem Bank List. These changes result in the list having 993 institutions with $415.7 billion in assets, down from 995 institutions with assets of $$416.2 last week. Failure remains the most likely way to exit the list.

Wall Street’s Euthanasia of Industry - Now, over the weekend, yesterday in the New York Times, there was an interview with the head of the FDIC, Sheila Bair, whose five-year term just expired last week. Now that it’s expired she can begin to tell the stories. And she told the story of how one meeting with Obama after another he’d make promises to her, promises that he would try to prevent the mortgage crime that was occurring, to prevent the fraudulent subprime mortgages, to make a bank regulation to prevent criminal activities. She said in every case she’d go to his big speeches and an hour before the speech she’d be given a copy of it and he took out everything that he’d promised her and it was all rewritten by the big bank contributors. The important thing is that now Ms. Bair is saying look, people said that there would’ve been a meltdown I you didn’t give all this 13 trillion to Citibank, to AIG and to Goldman Sacks but the fact is that we at the FDIC wound down Washington Mutual. Our business is winding down bad banks. Citibank could have gone under and all the other banks and the depositors wouldn’t have lost. They would’ve all been insured because there were plenty of bank assets. There weren’t enough assets in Citibank and AIG to pay the gamblers and the big players, the wealthiest one percent. And she said in every case they were told the wealthiest one percent can’t afford to lose a penny.

Corporate Americas chokehold on wages - If you’re wondering why American consumers are still flat on their backs, rendering the economy similarly supine, the answer is both fundamental and simple: It’s not just that so many of them are unemployed. The ones who are employed are also underpaid.Don’t take my word for it — take that of Michael Cembalest, the chief investment officer of J.P. Morgan Chase. He asserted in the July 11 edition of “Eye on the Market1,” the bank’s regular report to its private banking clients, that “US labor compensation is now at a 50-year low relative to both company sales and US GDP.”The primary subject of Cembalest’s report isn’t wages. It’s profits — specifically, the fact that profit margins (the share of a company’s revenue that goes to profits) of the Standard & Poor’s 500 companies are at their highest levels since the mid-1960s, despite the burdens of health-care costs, environmental compliance and other regulations that are presumably weighing down these large companies.

`Use It or Lose It’ Should Be the Management Rule on Corporate Cash: View - U.S. companies are holding about $2 trillion in cash, and the amount keeps growing, especially as many corporations report strong first-half profits on top of robust 2010 earnings. This leads to a few questions: Shouldn’t managers put their cash to work, or pay it in dividends? And if they don’t, shouldn’t shareholders be getting impatient?  Total dividends paid in the first quarter of 2011 fell from a year earlier. The average dividend yield on Standard & Poor’s 500 Index companies is about 1.9 percent. That’s half the level of the 1980s and a fifth less than in the 1990s. During the late 1990s, dividends plunged as investors began accepting a trade-off: low payouts in exchange for rising share prices. Companies also had ample uses for their cash, such as investing in technology to gear up for the world of online commerce.

Can US Hold Corporations Accountable Anymore? - In the UK the News-Of-The-World/News Corp/Murdoch scandal seems to be reawakening democracy. A big, powerful corporation has been found to be engaged in criminal activity, manipulating news, paying off police and politicians, and generally getting its way. The people, press and politicians are rising up, holding the company and its executives legally accountable and are taking back control of their system. Could this happen in the US?

The Blame for Fannie and Freddie - Dean Baker - It is entertaining to see all the folks who missed the housing bubble try to apportion blame after the fact. Tyler Cowan is the latest entrant, pronouncing Fannie and Freddie at least partially responsible. While his indictment is impressive, the real question should be, “what is the charge?” Of course Fannie and Freddie are at least partially responsible, they purchased hundreds of billions of dollars of loans that were used to buy properties at what they should have recognized as bubble-inflated prices. If they had refused to buy such loans, it almost certainly would have brought the irrational exuberance of the housing bubble to a quick halt.  However, giving the primary blame to Fannie and Freddie and the government policy of promoting homeownership ignores the fact that the worst subprime loans were sold to Merrill Lynch, Citigroup and other private investment banks. These banks do not have any pretense of having a mission of promoting homeownership; they are there to make money, they were booking huge profits on the loans that they repackaged into mortgage backed securities and more complex financial instruments.

Bank of America Has Record Loss on Bad Home Loans - Bank of America Corp. (BAC) posted the biggest quarterly loss in the lender’s history after Chief Executive Officer Brian T. Moynihan booked more costs tied to defective mortgages and revenue continued to slide. The second-quarter loss of $8.83 billion, or 90 cents a share, compared with profit of $3.12 billion, or 27 cents, a year earlier, the lender said today in a statement. Ed Najarian, head of bank research at International Strategy & Investment Group, called revenue “fundamentally” weak and Paul Miller at FBR Capital Markets said doubts about earnings power may prompt analysts to lower their ratings. Moynihan, 51, is working to move Bank of America past the fallout from lax home lending by reaching settlements with mortgage bond investors and insurers and setting aside funds for future claims. The bank, the largest U.S. lender by assets, said it’s able to get funds at attractive rates and Moynihan rejected suggestions from analysts during a conference call that the company may need to raise capital

BofA Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms - Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds. Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan’s ability to raise dividends and repurchase shares. Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America’s stock declined 26 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion.

Is Bank of America At Risk of a Death Spiral? - Yves Smith - Bloomberg’s Jonathan Weil took a look at Bank of America’s stock price, which is trading at less than half of the Charlotte bank’s book value, and discussed whether the bank is at risk of a serious crisis. If a levered financial firm’s stock trades at a severe discount from book value, it is not attractive to raise equity via selling shares. Yet the steep discount is a sign that the market doubts the strength of the concern’s equity base. If those worries persist, and the company is not able to shore up its balance sheet via earnings (ie, either its profits are impaired or they are offset by writeoffs), first long term and eventually short-term lenders will start to demand higher interest rates. Once that happens, it is easy for confidence to vanish and a death spiral to start.  Weil enumerates the reasons for doubt. First, the bank has been overly optimistic. It refused to write down $4.4 billion of goodwill from Countrywide until late last year, and maintained it would only suffer $4.4 billion [yes, the same number] in mortgage-related losses, then wrote off $19.2 billion more last quarter. Second, the bank appears to be in denial:The crucial question today is whether Bank of America needs fresh capital to strengthen its balance sheet. Moynihan emphatically says it doesn’t, pointing to regulatory-capital measures that would have us believe it’s doing fine. The market is screaming otherwise, judging by the mammoth discount to book value. Weil correctly depicts BofA as a systemic risk. And this confirms a point made by critics of so-called financial reforms, including yours truly, that the banks were not dealt harshly enough in the crisis. Both Citi and BofA were at risk of failure in early 2009. . The authorities have grossly underestimated the severity of the housing crisis and are still refusing to confront some of its key elements, such as the broken servicing model and chain of title problems.

Obama administration not planning another big housing program - The Obama administration has no plans to introduce another large-scale program for relieving the troubled housing market, despite the president’s recent admission that his past efforts have not solved the problem, according to a senior administration official. “There is no money and, to some degree, we have run out of ideas. I have seen them all,” said Mark Zandi, chief economist of Moody’s Analytics. “I don’t think there is something grand that could make a big difference.” The biggest opportunity for wide-ranging change may be a settlement being negotiated between a coalition of state attorneys general and large banks related to flawed foreclosure practices, industry officials and consumer advocates say.

Fed to Wells: $7000 for Wrongful Foreclosure - Yesterday the Fed announced a settlement with Wells Fargo of claims that its subprime unit had 1) deliberately steered prime borrowers into higher-cost subprime mortgage refinancings and 2) falsified income documents to put subprime borrowers into unaffordable loans.  The settlement provides for an $85 million fine, plus an elaborate claims-based compensation procedure for victims, who may number 10,000 or more.  Notably, families who lost their home in foreclosure as a consequence of Wells Fargo's illegal steering are to receive $7,000 for the loss of their home.  That should cover some moving costs and a month's rent or so.   As far as I could tell the agreement does not provide for consumers to release claims in exchange for these paltry sums, but advocates would be well advised to review settlement notices with affected consumers carefully. The Fed announcement touts this wrist-slap settlement as the largest consumer protection enforcement fine in its history.   Ample evidence that consumer protection against financial institutions needs to be transferred to a real enforcement agency at the earliest

Should You Get Only $7000 if Wells Stole Your House? -- Yves Smith - If you are a too big to fail bank like Wells Fargo, the wages of crime look awfully good. RIp off as many as 10,000 people to the point where they lose their homes and your good friend the Fed will let you off the hook for somewhere between $1000 and $20,000 per house. And as we’ll discuss in due course, this deal isn’t just bad for the abused homeowners, it’s also bad for investors and sets a terrible precedent, which means its impact extends well beyond the perhaps 10,000 immediate casualties.  Oh, and how much does the Fed think you should be paid if you were foreclosed upon thanks to Wells? Per the settlement document: if, primarily as a result of the additional payment obligation on the loan resulting from the altered or falsified documents, on or before the date of this Order, the borrower’s home was foreclosed on or the borrower sold the home in a short sale, Administrator A shall provide an additional amount up to $7,000 in appropriate remedial compensation to reimburse the borrower for any expenses attributable to the foreclosure or short sale; In other words, as Adam Levitin noted, all the loss of your home is worth according to the Fed is your moving costs and maybe a month or two of rent.  The settlement consisted of an $85 million fine plus the additional compensation to abused borrowers who were put into unduly costly loans. Levitin also described the claim process as “elaborate.” Given that it has yet to be designed, I wonder if Wells will make it sufficiently onerous so as to discourage wronged borrowers from seeking restitution.

Officials Warn That Foreclosure Probes May Prove Inadequate - Since flawed foreclosure practices by the nation’s biggest banks became last fall’s biggest scandal, federal bank regulators and the attorneys general of all 50 states launched simultaneous investigations [1]. But there are an increasing number of warnings that neither of those efforts have addressed the full scope of the problem.  Most notably, Elizabeth Warren, a senior Obama administration advisor, warned [2] about the ongoing probes in Congressional testimony last week: “I think there’s a real question about whether there’s been an adequate investigation.” After news about fraudulent and missing mortgage documentation raised questions last fall about the legitimacy of foreclosure actions, all 50 states launched a joint investigation. A group of federal bank regulators  launched a separate investigation. As we'd noted [3], some observers had low expectations for the federal investigation all along,  especially given the involvement of the historically bank-friendly [4] Office of the Comptroller of the Currency.

As Government Nears Accord With Banks, Questions Swirl Over Scope Of Investigation: -- State and federal prosecutors are pressing to complete a proposed settlement with the nation's five largest home loan companies over alleged mortgage abuses, even though they've only initiated a limited investigation that hasn't examined the full extent of the alleged wrongdoing, according to interviews with more than two dozen officials and others familiar with the state and federal probes. The deal with the mortgage companies would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices going forward, these sources told The Huffington Post. Negotiators met in Washington last week to hash out the settlement. For federal and some state officials, expedience now appears to be trumping other considerations in settlement talks with major mortgage servicers. Despite failing to marshal a strong case proving misconduct during the foreclosure crisis, the government is seeking to craft a settlement quickly, in the hopes that this will inject greater certainty into the financial system, stabilize home prices and add vigor to a flagging economy."

States negotiating immunity for banks over foreclosures (Reuters) - State attorneys general are negotiating to give major banks wide immunity over irregularities in handling foreclosures, even as evidence has emerged that banks are continuing to file questionable documents. A coalition of all 50 states' attorneys general has been negotiating settlements with five of the biggest U.S. banks that would include payment of up to $25 billion in penalties and commitments to follow new rules. In exchange, the banks would get immunity from civil lawsuits by the states, as well as similar guarantees by the Justice Department and Department of Housing and Urban Development, which have participated in the talks. State and federal officials declined to say if any form of immunity from criminal prosecution also is under discussion. The banks involved in the talks are Bank of America, Wells Fargo, CitiGroup, JPMorgan Chase and Ally Financial. Reuters reported Monday that major banks and other loan servicers have continued to file questionable documents in foreclosure cases. These include false mortgage assignments, and promissory notes with suspect or missing "endorsements," which prove ownership. The Reuters report also showed continued "robo-signing," in which lenders' employees or outside contractors churn out reams of documents without fully understanding their content. The report turned up several cases involving individuals who were publicly identified as robo-signers months ago.

Elizabeth Warren: Government Hasn't Sufficiently Probed Foreclosure Abuses (VIDEO): "-- A top Obama administration official on Thursday questioned the scope of the state and federal investigations into alleged mortgage abuses and 'illegal' foreclosures perpetrated by the nation's largest mortgage companies, marking the first time a senior White House official publicly broke ranks with the administration over the issue and raising fresh questions about the wisdom of the government's rush to settle with the firms. Elizabeth Warren, a senior adviser to President Barack Obama and Treasury Secretary Timothy Geithner, told a congressional panel that government agencies may not have sufficiently investigated claims that borrowers' homes were illegally seized by banks such as JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial. 'I think there's a real question about whether there's been adequate investigation,' said Warren, the temporary custodian of the Bureau of Consumer Financial Protection, a new federal agency charged with protecting borrowers from abusive lenders. Her statement came in response to questions from Rep. Trey Gowdy (R-S.C.), a former federal prosecutor who asked Warren why her agency needed to oversee such abuses when the U.S. Department of Justice is already probing such matters."

Mystery Mortgage Economics - Krugman - As most of our attention is focused on the debt-ceiling crisis, another issue is coming to a head: whether prosecutors will rush to let banks off the hook for mortgage abuses in return for a modest settlement, without having done anything like a complete investigation. I’ll leave the legal issues to others; what puzzles me is the economic argument being made for a rush to settlement: Indeed, halting the long slide in home prices has emerged as the government’s primary goal in its settlement talks with lenders. Following the robo-signing scandal last autumn, many major servicers halted home seizures. But in the months since then, more homeowners have fallen into distress amid high unemployment and a weak economy, adding to the inventories of potential foreclosures to come. Help me out here: why would accelerating the foreclosure process halt the slide in home prices? I mean, let’s think supply and demand here. When you evict a family from a home, you’re adding that home to the supply of homes for sale.  So this looks to me like an increase in housing supply not matched by an equal increase in demand. Shouldn’t this push prices down, not up?

Letting Bankers Walk, by Paul Krugman - Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers. Why the kid-gloves treatment? Money and influence no doubt play their part; Wall Street is a huge source of campaign donations, and agencies that are supposed to regulate banks often end up serving them instead. But officials have also argued at each point of the process that letting banks off the hook serves the interests of the economy as a whole.  It doesn’t. The failure to seek real mortgage relief early in the Obama administration is one reason we still have 9 percent unemployment. And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense.  Last fall, we learned that many mortgage lenders were engaging in illegal foreclosures. Most conspicuously, “robo-signers” were attesting that banks had the required documentation to seize homes without checking to see whether they actually had the right to do so — and in many cases they didn’t.

Federal Home Loan Banks Challenge BofA Settlement, Say They May Be Owed a Lot More - Yves Smith - This is getting interesting. I had heard that a lot of investors were unhappy with the proposed Bank of America settlement of liability for selling investors a garbage barge when they’d been promised something a tad better. But being unhappy is one thing, actually taking concrete steps to oppose the $8.5 billion deal (which heinously also included a broad release for chain of title liability) is quite another. While a group of investors who had pursued their own objections were quick to file a petition objecting to the settlement, they are small fry and their protest in isolation would probably be rejected by the judge. The equation changed today with several Federal Home Loan Banks effectively saying they had been kept out of the loop and have reason to think the settlement is inadequate. While this falls short of a an effort to block the deal, the FHLBs have demanded more information. What they uncover may confirm their argument, that the settlement amount really should be much higher, with their estimate in the range of $22 to $27.5 billion, if not higher.  At a minimum, this move throws a spanner in the works and puts some heavyweight names who can’t be easily dismissed on the other side of the table from BofA and the conflict-ridden trustee, Bank of New York. In addition, New York attorney general Eric Schneiderman has taken a keen interest and may well raise objections to the deal.

Special report: Banks continue robo-signing -America's leading mortgage lenders vowed in March to end the dubious foreclosure practices that caused a bruising scandal last year. But a Reuters investigation finds that many are still taking the same shortcuts they promised to shun, from sketchy paperwork to the use of "robo-signers." Reuters has found that some of the biggest U.S. banks and other "loan servicers" continue to file questionable foreclosure documents with courts and county clerks. They are using tactics that late last year triggered an outcry, multiple investigations and temporary moratoriums on foreclosures. In recent months, servicers have filed thousands of documents that appear to have been fabricated or improperly altered, or have sworn to false facts.

AP Exclusive: Mortgage 'robo-signing' goes on - Mortgage industry employees are still signing documents they haven't read and using fake signatures more than eight months after big banks and mortgage companies promised to stop the illegal practices that led to a nationwide halt of home foreclosures. County officials in at least three states say they have received thousands of mortgage documents with questionable signatures since last fall, suggesting that the practices, known collectively as "robo-signing," remain widespread in the industry. The documents have come from several companies that process mortgage paperwork, and have been filed on behalf of several major banks. One name, "Linda Green," was signed almost two dozen different ways. Lenders say they are working with regulators to fix the problem but cannot explain why it has persisted.

Quelle Surprise! The Banks Lied and Robosigning Lives! - Yves Smith - We’ve heard numerous bank executives swear piously before Congressional hearings that those “paperwork problems” that led major servicers to halt or slow foreclosures on a widespread basis last year were “mistakes”. That was already a really big lies, since “mistake” means the practice was not deliberate and was presumably isolated, when in fact robosigning was a widespread, institutionalized practice. 14 major servicers then swore in consent orders earlier this year that they’d stop doing all that bad stuff. But with compliance weak (the banks get to hire the overseers!), they appear to have decided they don’t need to change their ways all that much. Indeed, the record of consent orders is underwhelming; for instance, both Nevada and Arizona are suing Countrywide for violations of past agreements.  Two stories were published yesterday, one a long form Reuters investigation (hat tip April Charney), the other a shorter report by AP. So…the banks have perjured themselves, made commitment to regulators that they are brazenly violating. The Reuters investigation determined that at least 5 of the 14 servicers that signed consent decrees in April are not complying with their requirements: OneWest, Bank of America, HSBC, Bank USA, Wells Fargo and GMAC Mortgage. Note that three of them (Bank of America, Wells, and GMAC, now Ally) are among the five biggest servicers, so the impact is greater than the number of derelicts suggests. And the AP report found that servicers were continuing to generate documents signed by well-known robosigners, including the notorious Lisa Greene. This seems to be asking to be caught out.

Mortgage 'robo-signing' goes on - Mortgage industry employees are still signing documents they haven't read and using fake signatures more than eight months after big banks and mortgage companies promised to stop the illegal practices that led to a nationwide halt of home foreclosures. County officials in at least three states say they have received thousands of mortgage documents with questionable signatures since last fall, suggesting that the practices, known collectively as "robo-signing," remain widespread in the industry. The documents have come from several companies that process mortgage paperwork, and have been filed on behalf of several major banks. One name, "Linda Green," was signed almost two dozen different ways.  Lenders say they are working with regulators to fix the problem but cannot explain why it has persisted. Critics say the new findings point to a systemic problem with the paperwork involved in home mortgages and titles. And they say it shows that banks and mortgage processors haven't acted aggressively enough to put an end to widespread document fraud in the mortgage industry. "Robo-signing is not even close to over,"  "It's still an epidemic."

Known Florida robo-signing names turn up on mortgage documents elsewhere -  Florida names connected to last fall's mortgage 'robo-signing'' scandal are turning up on documents again. County officials in at least three states say they have received thousands of mortgage documents with questionable signatures in the past eight months. Lenders say they are working with regulators to fix the problem but cannot explain why the practice, which led to a nationwide halt of home foreclosures, has continued. 'Robo-signing is not even close to over,' says Curtis Hertel, the recorder of deeds in Ingham County, Mich. 'It's still an epidemic.' In Guilford County, N.C., the office that records deeds says it received 456 documents with suspect signatures from Oct. 1, 2010, through June 30. The documents, mortgage assignments and certificates of satisfaction, transfer loans from one bank to another or certify a loan has been paid off. Suspect signatures on the paperwork include 290 signed by Bryan Bly and 155 by Crystal Moore. Last fall, Bly and Moore worked for Nationwide Title Clearing, a Pinellas County company, when video depositions they gave in a foreclosure case popped up on YouTube and AOL. In one deposition, Moore was asked if she ever read any of the documents she signed. She replied, 'No.'' Asked how much time she spent with each document, she said, 'a few seconds.'' When Bly was asked in the deposition what a mortgage assignment is, he replied: 'I'm really not sure.'

Moody's: Commercial Real Estate Prices increased in May - From Bloomberg: U.S. Commercial Property Prices Increased 6.3% in May, Moody’s Says: The Moody’s/REAL Commercial Property Price Index rose 6.3 percent from April ... It’s down 11 percent from a year earlier and 46 percent below the peak of October 2007...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. . The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are down 11% from a year ago and down about 46% from the peak in 2007. Prices fell sharply over the previous six months, and this increase only erases part of that decline.

Moody's Sees Risk of Strategic Default Rising in Low-Risk Areas - Negative equity remains one of the biggest challenges for the housing market. For some borrowers it can become their rationale to stop making mortgage payments and intentionally default on the loan. The risk of such strategic default is rising among loans that have “always performed,” according to the credit analysts at Moody’s Analytics. They say as home prices have fallen over the past year, the loan-to-value ratios (LTVs) of so-called always-performing loans – or those that have remained current – have begun to approach, and in many cases surpass, average LTVs for loans that have defaulted. This dynamic, Moody’s says, raises the likelihood of a renewed increase in strategic defaults. The agency found that these always-performing loans tend to be concentrated in markets that have held their values above the national average, namely the robust housing markets in the Los Angeles, New York/New Jersey, Washington D.C., and Chicago metropolitan statistical areas (MSAs). Since mid-2010, Moody’s study shows that the average home price for current loans originated since 2005 has been falling, precipitating rising LTVs that are now approaching the LTVs of loans that have defaulted since 2009.

White House to tackle housing reform after debt ceiling fight  - Once the tumultuous debt ceiling negotiations settle, Washington officials said the Obama administration will begin a revitalized effort to address lingering concerns in housing finance reform. When debt ceiling talks resolve remains a question.  New developments late Friday indicate Rep. John Boehner (R-Ohio) walked away from talks with Obama to find common ground on a long-term deal. But if Washington ever strikes a debt ceiling deal, the still struggling housing market awaits. Already, plans are being drawn. A spokesperson for Rep. Barney Frank (D-Mass.) told HousingWire Friday the Obama administration has begun work on a proposal to extend the conforming loan limits, which are set to expire in October. In February, the administration put out a white paper, providing Congress three options for winding down mortgage giants Fannie Mae and Freddie Mac.

Government Considers Ways to Rent Foreclosed Homes - The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter. While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels. Trimming the glut of unsold foreclosed homes on the market is "worth looking at," said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

Mortgage Delinquency Rate Climbs, Foreclosure Numbers Head Higher: "Lender Processing Services (LPS) says data it’s collected through the end of June show an abrupt increase in the industry’s mortgage delinquency rate and a smaller uptick in the national foreclosure inventory. The company reports the home loan delinquency rate – defined as loans 30 or more days past due, but not yet in foreclosure – rose to 8.15 percent last month. That’s up 2.4 percent from a rate of 7.96 percent at May month-end. Compared to this time last year, however, delinquencies are down 14.7 percent. The U.S. foreclosure inventory was up on both a monthly and annual basis. LPS assesses foreclosure inventory as the share of mortgages that have been referred to a foreclosure attorney but haven’t reached the final stage of foreclosure sale. The foreclosure rate stood at 4.12 percent at the end of June, up 0.2 percent from May and 12.8 percent from June 2010. Altogether, LPS says there are some 6,452,000 mortgages going unpaid in the United States. Of these, 2,167,000 are in the process of foreclosure. The remaining 4,285,000 are past due by one or more payments but have not been referred to a foreclosure attorney, with 1,906,000 of the loans in this bucket overdue by 90 days or more."

Why The Drop In Foreclosures Is Not Good News - It sounds like good news: Foreclosure filings declined by 29 percent in the first half of 2011, according to a midyear report by RealtyTrac. But U.S. homeowners just can’t catch a break. The decline isn’t due to a recovering real-estate market, but rather to the fact that shoddy foreclosure practices last fall have led to long processing delays. As many as 1 million forecloses that should have taken place in 2011 will be pushed back to 2012, or perhaps even later, according to the experts at RealtyTrac. “This casts an ominous shadow over the housing market, where recovery is unlikely to happen until …  the inventory of distressed properties can be whittled down to a manageable number,” said James Saccacio, chief executive officer of RealtyTrac. Some 1.17 million homes or one in 111 had at least one foreclosure filing in the first half of this year. Foreclosure filings during the second quarter decreased 32 percent from the second quarter of 2010. In June, fillings dropped 29 percent from 2010, marking the ninth straight month where foreclosure activity decreased on a year-over-year basis.

New Resource: NCLC's Bankruptcy Mortgage Project - The National Consumer Law Center has launched a useful new resource for the bankruptcy community called the Bankruptcy Mortgage Project.  See here.  Those likely to find it handy include judges, consumers, trustees, mortgage servicers, attorneys, and academics.  The website, created with a grant from the National Conference of Bankruptcy Judges’ Endowment for Education, collects all sorts of documents related to mortgage issues in consumer bankruptcy cases.  It thus provides easy, free access to various local rules, forms, general orders, and court opinions. The site collects documents in five categories:  loss mitigation and mediation, cure plan requirements, stay relief requirements, lien stripping, and Chapter 13 plans. Anyone can access documents for free.  But a caution:  consumers who peruse the site should quickly get a sense of why they need a lawyer, and a consumer bankruptcy specialist in particular, if they want to have a decent chance at trying to save a home in bankruptcy.  It’s complicated!

Mortgage Rates and Refinance Activity - Freddie Mac reported this week: 30-Year Fixed-Rate Mortgage Ticks Up To 4.52 PercentFreddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), which shows mortgage rates changing little over the previous week following mixed economic and housing data. The 30-year fixed average 4.52 percent and the 15-year fixed averaged 3.66 percent. To put this into perspective, here is a long term graph of 30 year mortgage rate in the Freddie Mac survey:  Mortgage rates are currently near the low for the last 40 years (mortgage rates close to this range in the '50s). The monthly low was 4.23% in October 2010. The second graphs shows refinance activity and mortgage rates:  This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  With 30 year mortgage rates still about 0.3 percentage points above the lows of last October, mortgage refinance activity has only picked up a little recently.

Existing Home Sales in June: 4.77 million SAAR, 9.5 months of supply - The NAR reports: June Existing-Home Sales Slip on Contract Cancellations:Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 0.8 percent to a seasonally adjusted annual rate of 4.77 million in June from 4.81 million in May, and remain 8.8 percent below the 5.23 million unit level in June 2010, which was the scheduled closing deadline for the home buyer tax credit. ... This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. . The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.77 million in June from 3.65 million in May. 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 3.1% year-over-year in June from June 2010. This is the fifth consecutive month with a YoY decrease in inventory.

June Existing-Home Sales Slip on Contract Cancellations, but Prices Stabilize: "Existing-home sales eased in June as contract cancellations spiked unexpectedly, although prices were up slightly, according to the National Association of Realtors®. Sales gains in the Midwest and South were offset by declines in the Northeast and West. Single-family home sales were stable while the condo sector weakened. Total existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 0.8 percent to a seasonally adjusted annual rate of 4.77 million in June from 4.81 million in May, and remain 8.8 percent below the 5.23 million unit level in June 2010, which was the scheduled closing deadline for the home buyer tax credit. “Home sales had been trending up without a tax stimulus, but a variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” he said. “The underlying reason for elevated cancellations is unclear, but with problems including tight credit and low appraisals, 16 percent of NAR members report a sales contract was cancelled in June, up from 4 percent in May, which stands out in contrast with the pattern over the past year.”"

Home Sales Fall 0.8%; 3rd Drop in 3 Months - Fewer people bought previously owned homes in June, a private group said Wednesday, putting this year on pace to be the worst for sales since the housing bust.  The National Association of Realtors said home sales fell 0.8 percent last month to a seasonally adjusted annual rate of 4.77 million homes. That is far below the six million homes a year rate that economists say represents a healthy housing market. June’s decrease was the third consecutive monthly decline in home sales. Through the first six months of 2011, the number of sales is behind last year’s 4.91 million homes sold — the weakest sales in 13 years. Sales have fallen in four of the last five years. The association said a record number of people who signed contracts canceled their deals last month. And first-time buyers are becoming a smaller share of the market. Sales of single-family homes held steady in June, while sales of condominiums declined 7 percent.

Existing-home sales fall 0.8% to seven-month low - Sales of existing homes slipped in June to a seven-month low, with a trade group attributing the weak economy and a spike in cancellations for the surprise downturn. The National Association of Realtors on Wednesday reported sales of single-family existing homes fell 0.8% to a seasonally adjusted annual rate of 4.77 million from 4.81 million in May. Economists polled by MarketWatch had anticipated a 4.9 million rate of sales. The data caught economists by surprise in part because pending homes sales had gained 8.2% in May. Lawrence Yun, the chief economist of the NAR, said "a very weak economy [led] to weak sales," and cancellations jumped to 16% from just 4% in May. The NAR also downgraded its 2011 sales projection to 5 million from a range of 5.1 million to 5.2 million. The median existing home price was $184,300, an increase of 0.8% from June 2010.

Existing Home Sales: Comments and NSA Graph - The NAR reported that inventory increased in June from May (the normal seasonal pattern), and that inventory is off 3.1% from June 2010. Other data sources suggest that the NAR is overstating inventory (inventory will be part of the coming revisions). Inventory is probably down more year-over-year (YoY) than the NAR reported.  The NAR provided an update on the timing of the "benchmark revisions". The release will be in the fall, and the revisions will be down (no surprise):  The red columns are for 2011. Sales NSA are below the tax credit boosted level of sales in June 2010 and June 2009, but slightly above the level of June sales in 2008. Last year sales collapsed in July (orange column - after the expiration of the tax credit), so expect a report of a large YoY increase in sales announced next month.  The level of sales is still elevated due to investor buying. The NAR noted: All-cash transactions accounted for 29 percent of sales in June; they were 30 percent in May and 24 percent in June 2010; investors account for the bulk of cash purchases. First-time buyers purchased 31 percent of homes in June, down from 36 percent in May; they were 43 percent in June 2010 when the tax credit was in place. Investors accounted for 19 percent of purchase activity in June, unchanged from May; they were 13 percent in June 2010.

HousingTracker: Homes For Sale inventory down 10.9% Year-over-year in mid-July - Last month, Tom Lawler posted on how the NAR estimates existing home inventory. The NAR does NOT aggregate data from the local boards. Sometime this summer, I expect the NAR to revise down their estimates of inventory and sales for the last few years..  While we wait for the NAR, I think the HousingTracker data that Tom mentioned might be a better estimate of changes in inventory (and always more timely). Ben at is tracking the aggregate monthly inventory for 54 metro areas. This graph shows the NAR estimate of existing home inventory through May (left axis) and the HousingTracker data for the 54 metro areas through mid-July. The HousingTracker data shows a steeper decline. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the mid-July listings - for the 54 metro areas - declined 10.9% from last year.

Goldman Sachs Lowers estimate of Excess Vacant Housing Supply - The current number of excess vacant housing units is a key piece of data for the housing market. Unfortunately available data is inconsistent.  Economist Tom Lawler has been arguing that many analysts are overestimating the vacant supply by using the HVS - and Lawler has been using the 2010 Census data to make his case. See: The “Excess Supply of Housing” War and Census 2010 Demographic Profile: Highlights, Excess Housing Supply Estimate, and Comparison to HVS Today Goldman Sachs lowered their estimate of the excess supply.  While the decennial census data are from the largest sample, we do not believe it is appropriate to ignore the other sources. ... With the 2010 Census results in hand, we would now say that excess vacancies in the housing market are 1.5 to 3.5 million units—a wide range, reflecting discrepancies in the available data. [A]t the current rate of housing production and with household growth of one million per year, it would take 5.1 years to clear 3.5 million units of excess inventory, but only 2.2 years to clear 1.5 million units of excess inventory.

Are There Too Many Homes in America, Ctd - Goldman Sachs isn’t quite sure: While the decennial census data are from the largest sample, we do not believe it is appropriate to ignore the other sources. …  With the 2010 Census results in hand, we would now say that excess vacancies in the housing market are 1.5 to 3.5 million units—a wide range, reflecting discrepancies in the available data.  Clearly though, the census results suggest the risks to our previous estimate of 3.5 million units are to the downside If there are 2 million shadow households and 1.5 million excess housing units then we are as of right now, 500K units in the hole – should the market immediately clear today. Even at the high end estimate of 3.5 million we are looking at an excess of only 1.5 million units and only roughly 200K new unit scheduled to come on line in the next 12 months. If housing starts remained depressed throughout 2012 then natural household formation will push us into shortage. I do, however, think the high end estimate is too high and that when shadow households are factored in we are already looking at a shortage.

Homeowners in Denial About Value of Properties - Homeowners, especially those who bought their houses after the real-estate bubble burst, are still having trouble accepting just how much the values of their properties may have fallen, says a new report from the real-estate site Zillow. Current sellers who bought their homes in 2007 or later, an analysis of the site’s home listings shows, are overpricing their properties by an average of 14 percent. Sellers who bought their houses before the bubble, and those who bought during the big run-up in home values, also are overpricing their homes, but not by as much. Those who bought before 2002 are pricing their homes roughly 12 percent over market value, while those who bought from 2002-06 price them about 9 percent over market value. In the analysis, Zillow compared the asking price of one million homes for sale to the homes’ previous purchase price, then factored in the change in the Zillow Home Value Index for the respective ZIP code, to determine an estimate of that home’s current market value.

Home Values: Delusional Buyers, Bank Squeezers and Zillow - Via Barry Ritholtz, a link to a post at Time Moneyland post which led to a post at the Zillow blog: We found sellers who bought after the housing bubble burst, in 2007 or later, price their homes 14 percent above market value. Those who bought before the housing run-up, prior to 2002, overprice by nearly 12 percent. Somewhat surprisingly, sellers who bought during the run-up, from 2002-2006, seems to be the most realistic, pricing their homes 9 percent over market value. The Moneyland post goes on: We suspect that homeowners who bought around the market peak are painfully aware of having bought at the height of the market and have no real hope of getting back what they paid upon re-sale. Homeowners who bought after the market peak, on the other hand, may be patting themselves on the back a bit too much for having bought after prices began to correct — not realizing just how much prices have continued to fall even after their purchase. I think what Zillow is missing is that by late 2009 and early 2010, in some markets, home sales in many markets had dried up.

Other House Price Indexes - In addition to Case-Shiller and CoreLogic, I follow the following house price indexes: : RadarLogic (based on a house price per square foot method), FNC Residential Price Index (a hedonic price index), Clear Capital, Altos Research and Zillow. CoreLogic already reported that the CoreLogic HPI increased 0.8% in May.  FNC reported:  Based on the latest data on non-distressed home sales (existing and new homes), FNC’s Residential Price Index™ (RPI) indicates that single-family home prices were up again in May at a seasonally unadjusted rate of 0.8%.You can see the FNC composite indexes, and prices for 30 cities here. The FHFA (GSEs only): FHFA House Price Index Rises 0.4 Percent in May; Second Consecutive Monthly Increase.  The previously reported 0.8 percent increase in April was revised to a 0.2 percent increase. For the 12 months ending in May, U.S. prices fell 6.3 percent.  From RadarLogic Weak Fundamentals Undermine Seasonal Strength in Home Prices:  While the RPX Composite increased somewhat during April and gained 1.2 percent month-over-month in May, these gains have barely offset declines in January.

MBA: Mortgage Refinance Activity "Surges", Purchase activity flat - The MBA reports: Refinance Applications Surge in Latest MBA Weekly Survey: The Refinance Index increased 23.1 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier.   "Refinance applications have surged in response and the refinance index is at its second highest level of the year. One factor that may be contributing to this increase is that borrowers potentially impacted by impending decreases in the conforming loan limit may be opting to lock in fixed-rate financing now." The following graph shows the MBA Purchase Index and four week moving average since 1990. Click on graph for larger image in graph gallery. The recent decline in mortgage rates hasn't boosted purchase applications; the four week average of the purchase index is still mostly moving sideways at about 1997 levels. Of course this doesn't include the large number of cash buyers ... but this suggests purchase activity remains fairly weak.

Mortgage applications see biggest increase in 4 months - (Reuters) - Applications for home mortgages surged last week, racking up the biggest increase in four months on a flood of refinancing demand as interest rates remained low, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, spiked up 15.5 percent in the week ended July 15. It was the largest increase since early March."Ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe has brought mortgage rates back to their lowest levels of the year," Michael Fratantoni, MBA's vice president of research and economics, said in a statement. "Refinance applications have surged in response." The MBA's seasonally adjusted index of refinancing applications soared 23.1 percent, but the gauge of loan requests for home purchases dipped 0.1 percent. The refinance share of mortgage activity rose to 70.1 percent of total applications from 65.6 percent the week before.

Homeownership Rate May Decline Further - In recent years, the nation’s homeownership rate has dropped closer to historical averages, after hitting an all-time high of 69.2 percent in 2004. The rate may fall even further, according to a paper by the Mortgage Bankers Association’s Research Institute for Housing America (RIHA). The first-quarter U.S. homeownership rate was 66.4 percent. In a paper titled “Homeownership Boom and Bust 2000 to 2009: Where Will the Homeownership Rate Go from Here?” the RIHA suggests homeownership could fall by one or two percentage points due to factors such as tightened credit. From the late 1960s to the mid-1990s, homeownership rates remained stable between 64 and 65 percent. In the middle of the last decade, homeownership increased across all demographics, with the highest increase in the under-30 population. RIHA attributes the increase to lax credit restrictions and a shift in attitudes toward accepting more risk in homeownership investment. The tightening of credit after the start of the financial crash in 2007 then led to a decrease back to levels reported in 2000.

Housing Starts increase in June - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in June were at a seasonally adjusted annual rate of 629,000. This is 14.6 percent (±10 9%) above the revised May estimate of 549,000 and is 16.7 percent (±11.8%) above the June 2010 rate of 539,000...  Single-family starts increased 9.4% to 453 thousand in June. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit. This was above expectations of 575 thousand starts in June. Multi-family starts are increasing in 2011 - although from a very low level. This is one of the bright spots for construction and the economy this year.

Housing starts hit 6-month high, permits up (Reuters) - Groundbreaking for homes scaled a six-month high in June, partly reflecting growing demand for rental apartments, a government report showed on Tuesday. The Commerce Department said housing starts increased 14.6 percent to a seasonally adjusted annual rate of 629,000 units, the highest level since January, as ground breaking for multi-family units soared 30.4 percent. Confronted with plummeting home values, Americans are shunning homeownership, pushing up demand for rentals and helping construction to stabilize. The report also showed an unexpected increase in building permits and a sturdy gain in the construction of single-family homes. It offered a glimmer of hope for the distressed housing sector, which is struggling under the weight of a glut of for-sale properties and plummeting prices. "There is a recovery unfolding, it's just glacially slow and requires incredible scrutiny to discern it," . "New homes are more scarce than they have ever been." Economists had expected housing starts to rise to a 575,000-unit rate last month. Compared to June last year, residential construction was up 16.7 percent.

Mutli-family Starts and Completions - Although the number of multi-family starts can vary significantly from month to month, apartment owners have been seeing falling vacancy rates, and some have started to plan for 2012 and 2013 and have been breaking ground this year. So I've been forecasting a pickup in multi-family starts. However, since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - there will be a record low, or near record low, number of multi-family completions this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling average. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010. The rolling 12 month total for starts (blue line) is now above the rolling 12 month for completions (red line), and they are heading in opposite directions. Starts are picking up and completions are declining.

On Track for Record Low Housing Completions in 2011 - As I mentioned earlier, the U.S. is on pace for a record low number of multifamily completions in 2011. That is just part of the story ... the U.S. is on pace for a record low number of total completions, and the fewest net housing units added to the housing stock, since the Census started tracking completions. Here are some excerpts from Tom Lawler today:  The Commerce Department reported that US manufactured housing shipments ran at a seasonally adjusted annual rate of 48,000 in May, up slightly from April’s 46,000, but still an incredibly low pace by historical standards. Total housing production in 2011 should fall south of 600,000 units, compared to the 2.092 million housing units that came on line in 2006. Sadly, there are no good, timely data on the likely number of housing units that will be lost to various factors (demolition, conversions, disaster, etc.). I put the following table together for the last few years. For 2011 I used the first half pace (manufactured housing through May). As I noted earlier, multi-family housing completions will fall even further and will probably be close to 100 thousand units this year. Also note that Lawler thinks scrappage is closer to 250,000 per year. So this means there will be a record low number of housing units added to the housing stock this year and that the overhang of excess inventory should decline significantly in 2011.

Residential Remodeling Index at new high in May - The BuildFax Residential Remodeling Index was at 124.3 in May, up from 109.7 in April. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax3The Residential BuildFax Remodeling Index rose 22% year-over-year--and for the nineteenth straight month--in May to 124.3, the highest number in the index to date. Residential All regions were up month-over-month, with the Northeast up 9.8 points (12%), the South up 7.3 points (7%), the Midwest up 16.3 points (18%), and the West up 8.7 points (7%).  This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom. Note: permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

Sign of Housing Bottom? Deja Vu All Over Again - We’ve been here before. Home builders report a spike in activity and hopes build that housing is in recovery. The latest signs of improvement came from a 14.6% jump in June housing starts, a 2.5% gain in building permits and a 2-point rise in the July housing market index. At best, the latest numbers on housing starts suggest housing is bottoming out–finally. At worst, the June increase in starts is a rebound from harsh weather in the spring. Residential construction has been the number one drag on gross domestic product, having subtracted from growth in almost every quarter since 2006. The continued drag over the past two years is in stark contrast with past recoveries, when housing was a leader to growth. What could the June starts jump signal?

Has Housing Bottomed? Here's How To Tell - Has housing bottomed? Here is the sure-fire way to tell: Stories titled "Has housing bottomed? Here's how to tell" have vanished for lack of interest. The absence of stories about the bottom in housing will mark the final nadir, because the real bottom can only be reached when everyone has abandoned housing as a pathway to easy money. Only when the public and investor class alike have completely lost interest in real estate as a "sure-fire" investment can the real trough be reached. This destruction of long-held habits and beliefs takes a long time. The closest analogy might be the stock market in the last secular Bear market. Stocks topped out in 1966, though the economy lumbered on until 1969 before faltering. Stocks then meandered for 13 years of stagflation, losing 66% of their inflation adjusted value in 1966 by 1982. I call this loss of faith "when belief in the system fades:" note how household participation in stocks topped out in 1969, three years after the peak in the market. Participants clung to their belief in stocks for about four years after 1969, at which point participation cratered as they finally abandoned their faith in a "permanent Bull market."

U.S. Moves Toward Home ‘Rentership Society,’ Morgan Stanley Says - The U.S. homeownership rate has fallen below 60 percent when delinquent borrowers are excluded, a sign of the country’s move toward a “rentership society,” Morgan Stanley said in a report today.  The national rate, which stood at 66.4 percent at March 31, would be 59.7 percent without an estimated 7.5 million delinquent homeowners who may be forced into renting, according to Morgan Stanley analysts led by Oliver Chang. The lowest U.S. homeownership rate on record was 62.9 percent in 1965, the first year the Census Bureau began reporting the data.  The homeownership rate reached an all-time high of 69.2 percent in 2004 as relaxed lending standards fueled home sales and President George W. Bush promoted an “ownership society.” Mortgage delinquencies, foreclosures and tighter credit for housing loans are reducing property buying, Chang said.  “Taken together they are forcibly moving the country away from being an ownership society,”

NAHB Builder Confidence index increases in July, Still Depressed - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased to 15 in July from 13 in June. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Gains Two Points in July "Two out of three of the HMI's component indexes rebounded in July from declines in the previous month. The component gauging current sales conditions rose two points to 15, returning to its May level, while the component gauging sales expectations in the next six months rose seven points to 22, which is where it stood in April. The component gauging traffic of prospective buyers held even with the previous month, at 12.." This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the July release for the HMI and the May data for starts (June housing starts will be released tomorrow). Both confidence and housing starts have been moving sideways at a very depressed level for several years.

Household Formations Drop Dramatically. It’s The Jobs, Stupid. - A lot of people have written about and documented the extended slump in housing and the negative economic effects this creates.  Not many have written about the relationship between household formation and housing:  Household formation drives the housing business. From an article in Seeking Alpha, written by Matt Stichnoth: Household formation hasn’t been this low in more than 60 years, the Philadelphia Inquirer reports: U.S. household formations are at their lowest since 1947, data from the Census Bureau show. And that’s helping to keep the supply of unsold homes at near-record levels nationwide, even though relatively few houses are being added to the inventory. Between March 2009 and March 2010, the number of households rose just 357,000, according to the census data. In the previous 12 months, the number increased only 398,000, the third-smallest increase on record since World War II. Between 2002 and 2007, before the economy started on its downward trajectory, household formations averaged 1.3 million a year, U.S. census data show.

The Middle Class Massacre - The real statistic to know when considering the depth of our recession is $7.38 trillion.  That’s the amount of household wealth lost because of the housing bubble collapse.  And the majority of those who lost this wealth are smack square in the so-called ‘middle class.’  The wealthy lost money too, but the majority of their wealth is not tied up in their home, it’s in securities, and securities markets have rebounded smartly since their initial collapse.  So don’t worry about these folks, they’ve pretty much already recovered. From Marketwatch, an article by Rex Nutting lays out the facts. A lot of people say they are deeply puzzled by the slow recovery in the U.S. economy. They look at the 9+% unemployment rate and the mediocre growth in national output, and they scratch their heads and wonder: Where is the boom that inevitably follows a deep bust, such as we experienced in 2008 and 2009? But there is no mystery. What other result would you expect from the financial ruin of the once-great American middle class?

Are Unsellable Homes Holding Back Job Growth? - Many economists have argued that the continually deteriorating housing market may be holding workers back from relocating to areas where jobs are more plentiful. If you can’t sell your home in Detroit, where the unemployment rate is 11.6 percent, you’re not able to move to Fargo, where the rate is a mere 3.5 percent. That creates a geographic mismatch in the labor market, and keeps job growth lower than it might otherwise be if workers were more mobile.  A new study from researchers at the Federal Reserve Bank of Chicago calls this assumption into question. The researchers looked at Census data on state-to-state migration patterns through the summer of 2010, paying special attention to migration of renters versus homeowners. Homeowners always have lower migration rates than renters, but if “house lock” was unusually problematic in recent years, you would expect that the two migration rates would move in opposite directions. The researchers found, however, that homeowner migration rates moved roughly in tandem with renter migration rates during the recession and early recovery:

Too broke to grow - TO FOLLOW-UP on the previous post, let me address the mystery of just why growth through America's recovery has been so slow. The argument that seems to be winning the day this week is that deleveraging to blame. Before the recession, the argument goes, firms and households accumulated unsustainably large mountains of debt. In the wake of the recession, households are struggling to rebuild their balance sheets. Because they are labouring to pay down debts, consumption is and will remain depressed, and that must inevitably constrain growth. Deleveraging is a problem. And as The Economist wrote two weeks ago, the process of deleveraging has only just begun, though America has made greater progress in addressing debts than other countries. Can we really pin the blame for the disappointing recovery on indebted households, however, as is argued by David Leonhardt? We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.

We’re Spent - THERE is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs. But the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.  The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem. The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.

Looking Inside the Consumer Bust - A few commenters responded to my Sunday column by asking whether consumer spending had really declined all that much. A blog post by Jared Bernstein discusses this issue. The crux of the argument is this chart, showing that consumer spending does not make up a smaller share of gross domestic product than a few years ago: There are three reasons, though, why it’s a mistake to read this chart as saying there has not been a consumer bust. First, consumer spending has retained its G.D.P. share because G.D.P. has done so poorly. It is only marginally higher than it was in late 2007, more than three years ago. Which is to say that consumer spending is only marginally higher than it was three years. As Mr. Bernstein explains, “the fall in consumer spending is proportionate to the decline in G.D.P.” In the more than 60 years that the government has been keeping records, consumer spending has never had a weaker three-year period than in this downturn.

Households Are Still Deleveraging. Or Not., by Tim Duy: Calculated Risk reviews a David Leonhardt New York Times article and notes:  In addition, household debt as a percent of income, remains very high and household deleveraging is ongoing. That is why so many companies identify their number one problem as "lack of customers"… The picture looks like this: How much deleveraging is left remains a mystery. Just to the pre-2000 trend, or even farther? Or is the process pretty much over? Steve Matthews at Bloomberg recently wrote a story full of anecdotes and quotes from those who believe we are very far along on the deleveraging story. Some examples: …“The financial situation of the household sector has improved far faster and far more than everyone thought it would two years ago,” said James Paulsen, chief investment strategist for Wells Capital. “People are still locked into the view that consumers are facing record burdens, and they are not. There has been a change that is sustainable and durable.”……“The household deleveraging process is much further along than is appreciated,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “This is evident in the rapid improvement in credit quality. ‘Zombie consumers’ is a mischaracterization of the state of the American consumer.”…

A Consumer Bust? Or a Wage Bust? - Robert Reich, the professor, blogger and former labor secretary, sent the following e-mail in response to my Sunday column on the great consumer bust: I enjoyed your piece in Sunday’s Times — but I don’t think the underlying problem is so much that American consumers have for years spent beyond their means as it is the means of typical consumers haven’t kept up with what the growing economy could have (and should have) been able to provide them. The great divergence between productivity and median wages started in the late 1970s, as you know, and has become far more dramatic in recent years. If we move toward a more investment and production economy without enlarging the portion of national income going to the vast middle class, we’ll be left with an even greater imbalance –- and there’s no way net exports will correct it.

A Structural Down-Shift in Spending? - The always-worth-reading David Leonhardt posited that consumer spending was undergoing a large, negative, structural shift.  I said, hmmm, not so sure—you don’t see it in consumption as a share of GDP, though you do see sharply diminished housing investment. David Leonhardt responds to my response by saying that as far as he’s concerned, spending by consumers is consumer spending, whether it’s on a house or a tank of gas.  So he combines the two graphs from my original post into one.  If you do that, you definitely get a sharp decline in this hybrid consumption+investment measure as a share of GDP. I agree that buying a house is a big expenditure and my original point was that if you’re looking for structural change—a lasting change in shares of the economy—that’s where you’ll find it: residential investment has been and will be depressed for awhile.So David L and I agree.  But I lose my GDP account nerd privileges if I combine consumption and investment that way.  And there is some substance to this distinction.  To economists, stuff you buy that lasts a long time, like a house, is an investment.  Stuff that doesn’t, like a slice of pizza, isn’t.

Consumer Spending: The Chicken or the Egg - Yet more on the consumer bust, this time from David Backus (via Andrew Gelman): The suggestion … is that the economy is growing slowly because consumers aren’t spending money. But how do we know it’s not the reverse: that consumers are spending less because the economy isn’t doing well. As a teacher, I can tell you that it’s almost impossible to get students to understand that the first statement isn’t obviously true. What I’d call the demand-side story (more spending leads to more output) is everywhere, including this piece, from the usually reliable David Leonhardt. We can’t know, for sure. But here’s an important clue: If a weak economy inexorably led to weak consumer spending, which in turn led to an even weaker economy, we would never escape recessions. We’d enter an inescapable spiral. You often hear warnings of such a cycle in the latter stages of a typical economic slump. Unemployment is high and even rising. Income growth trails inflation. Bankers and corporate executives are uncertain about when the recovery will begin.

What’s Wrong with This Economy, Part 2  - David Leonhardt has an interesting piece in today’s NYT pointing out the much-larger-than-usual decline in consumer spending in this relative to past downturns. In an economy that’s 70% consumption, that’s an important reason why we’re stuck in neutral.  But David L intimates that this decline in consumption is structural not cyclical (“The old consumer economy is gone, and it’s not coming back.”) I’m not so sure.  Seems to me that for the structural call to be true you’d want to see at least the beginning of a change in the consumption share of GDP, and that hasn’t happened. The figure shows, in fact, that consumption as a share of GDP, was 71.1% most recently, tied for the highest share on record, with data going back to the 1930s.  Doesn’t mean the NYT is wrong, but it’s probably too soon to assert a structural shift.  It must be that the fall in consumer spending is proportionate to the decline in GDP.

Is consumer spending the problem? - Atlanta Fed's macroblog - In answer to the question posed in the title to this post, The New York Times's David Leonhardt says absolutely:"There is no shortage of explanations for the economy's maddening inability to leave behind the Great Recession and start adding large numbers of jobs… "But the real culprit—or at least the main one—has been hiding in plain sight. We are living through a tremendous bust. It isn't simply a housing bust. It's a fizzling of the great consumer bubble that was decades in the making… "If you're looking for one overarching explanation for the still-terrible job market, it is this great consumer bust." Tempting story, but is the explanation for "the still-terrible job market" that simple? First, some perspective on the pace of the current recovery. Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery. The following chart traces the path of real gross domestic product (GDP) from the trough of the last three recessions:

Rising Family Income: More Work, Not Raises - Traditional families today earn more than they did three decades ago — but primarily because they’re working more hours, a recent paper from the Hamilton Project at the Brookings Institution finds. Median wages for two-parent families have grown 23 percent since 1975, after adjusting for inflation. The collective number of hours worked by both parents over the course of a year, however, has risen 26 percent. That means their wages haven’t even grown as much as their working hours would imply they should. The additional hours worked by the median two-parent family — 3,500 hours in 2009, compared to 2,800 hours in 1975 — mostly reflect the fact that more women have joined the work force since the 1970s. Men’s annual working hours have stayed relatively constant; women’s, on the other hand, have more than doubled. These figures may actually overstate the economic improvements in Americans’ lives over the last three decades, too, since they refer to a family structure that is much less common today. The share of men between age 30 to 50 who are married with children was 70 percent in 1975, and only 47 percent today.

U.S. Consumers Relying on Credit for Basic Necessities - Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.The dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor. “Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.”

Back-to-School Shoppers Face Higher Clothing Prices - We may be in the thick of summer, but some parents are already starting to shop for back-to-school clothes and supplies. But this year, many shoppers will be facing higher prices. The cost of cotton began rising last summer, at the same time retailers were placing their back-to-school merchandise orders. That cost is now hitting store shelves, just in time for the back-to-school shopping season. And anything made with cotton is going up. "With world prices being what they are, prices with inflation, demand on product in other emerging markets affect the price of cotton,"

Consumers get more worried - Reuters reported yesterday that the preliminary July reading for the Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.8, the lowest level in more than two years. In fact, that's about as low as this measure ever got in the recessions of 1981-82 or 1990-91, and is well below values for the recession of 2001. Here's an update of a graph I last looked at in January, plotting consumer sentiment over the last 10 years along with real gasoline prices, with the latter shown on a negative scale to make the negative relation between gasoline prices and consumer sentiment more apparent. Consumer sentiment had been holding up reasonably well despite the high gasoline prices of 2011. That is, it was until yesterday's report.

Securitization and Small Business - FRBSF Economic Letter - Small businesses have relied considerably on securitized markets for credit. The recent financial crisis led to a virtual cessation of securitization of some of the loans used by small businesses, such as commercial real estate mortgages, vehicle, and credit card loans. In addition, values of commercial and residential real estate, which small businesses often use as collateral for loans, dropped dramatically. As a consequence, small businesses may have experienced tighter credit conditions than larger businesses, which rely relatively less on those categories of loans and collateral.

Dearth of Demand Seen Behind Weak Hiring - The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey. "There is no demand," . "Businesses aren't confident enough, and the longer this goes on the harder it is to convince them that they should be." In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren't hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing. Some executives echoed the survey's central finding. "We're hiring a little here and there—but it's not what it should be,". "And it's because of the lack of demand."

Wall Street Journal proves Keynes was right -A seven-word Wall Street Journal headline says it all: "Dearth of Demand Seen Behind Weak Hiring." The first paragraph:The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey. It's not every day that one sees liberal econoblogger Keynesian orthodoxy stated so bluntly in the Wall Street Journal, so we should cherish it when it happens. But what could be more obvious, even in the absence of rigorous training in economics? In the absence of demand, businesses will refrain from ramping up production and adding staff -- no matter what employers think about the future regulatory climate. To prime this pump, to rev up this engine, to get the "delicate machine" working properly, the first focus for economic policymakers should be figuring out ways to boost demand.But in the absence of any positive action, is it too much to hope that our government doesn't purposefully attempt to subtract demand from the economy?

The dangers of being wrong on Keynes - If you ask economists what went wrong during the Great Depression, you’ll often hear: “We hadn’t read Keynes yet.” That’s John Maynard Keynes, author of the “The General Theory of Employment, Interest and Money.” After the crash, his description of economic crises — and how to get out of them — became so widely accepted that, in the 1960s, President Richard Nixon said, “We’re all Keynesians now.” Well, we’re not all Keynesians now. When you hear “Keynesian” today, it’s usually with “Obamacare” and “socialists.” And it’s not a compliment. “The president’s team were fervent believers in the theories of a British economist called John Maynard Keynes,” wrote Majority Leader Eric Cantor (R-Va.) in his election-year manifesto, “Young Guns.”  Perhaps the president’s team should have better explained their theories to Cantor. In his book, Cantor goes on to describe Keynesianism as the theory “that government can be counted on to spend more wisely than the people.” He’s wrong — and wrong in a way that’s making it harder to recover from this crisis, and could make it harder to respond to the next one.

Industrial Production - Industrial production was reported to have increased 0.2% in June as compared to - 0.1% declines in April and May. The entire gain was in mining and utilities as manufacturing output was unchanged. The chart shows industrial production this cycle compared to other cycles. The old forecasting rule of thumb was that it took about a year from the bottom till industrial production surpassed its prior peak. You can see that on average this was a good rule in both mild and severe recessions. But this cycle some 19 months pass the bottom output is at 111.1 versus 120 at the peak. Despite all the talk of the rebound in manufacturing is clearly weak compared to historic norms and the thesis that manufacturing is returning to its old glory days is at best unproven. I also calculate an estimate of monthly manufacturing productivity and according to that calculation productivity collapsed at an annual rate of -3.0% in the second quarter. The sharp drop in manfacturing productivity supports the idea that the drop in output caught firms by surprise and was due largely to supply chain disruptions after the Japanese disaster.

Manpower CEO: Businesses ‘Living on the Edge’ - The U.S. economy is experiencing “summer doldrums” as employers maintain extreme caution in their hiring, says Manpower Inc. Chief Executive Jeffrey Joerres. With weak demand at home and risks mounting abroad, U.S. firms are using the business practices they installed over the past decade to control their expenses and match hiring closely to demand. “There is no reason to take a risk in today’s world,” Joerres said. “I don’t know of one client that doesn’t feel like they’re living on the edge.” Firms today have learned to adjust quickly to a soft patch in the economy, he said. Many were “hitting the pause button” this spring when several shocks — renewed troubles in Europe, Japan’s supply-chain problems — hit the world economy. Today, employers can halt world-wide hiring in “literally 48 hours,” Joerres said. “Before, that glide path used to take 60 days before you could come in and stop it.”

Social Media History Becomes a New Job Hurdle -  Companies have long used criminal background checks, credit reports1 and even searches on Google and LinkedIn to probe the previous lives of prospective employees. Now, some companies are requiring job candidates to also pass a social media background check. A year-old start-up, Social Intelligence2, scrapes the Internet for everything prospective employees may have said or done online in the past seven years. Then it assembles a dossier with examples of professional honors and charitable work, along with negative information that meets specific criteria: online evidence of racist remarks; references to drugs; sexually explicit photos, text messages or videos; flagrant displays of weapons or bombs and clearly identifiable violent activity.

Weekly Initial Unemployment Claims increase to 418,000 - The DOL reportsIn the week ending July 16, the advance figure for seasonally adjusted initial claims was 418,000, an increase of 10,000 from the previous week's revised figure of 408,000. The 4-week moving average was 421,250, a decrease of 2,750 from the previous week's revised average of 424,000. This is the 15th straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January.  The following graph shows the 4-week moving average of weekly claims since January 2000 (longer term graph in graph gallery).  The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased slightly this week to 421,250. This increase was about at expectations. With all the recent layoff announcements (Borders, Cisco, etc), there is some concern that weekly claims will rise over the next couple of months. From the WSJ:  Companies are laying off employees at a level not seen in nearly a year, hobbling the job market and intensifying fears about the pace of the economic recovery.

Jobless Claims Rise 10k: Biggest Jump In 8 Weeks - The message in today’s update on initial jobless claims is that the labor market recovery has stalled. The crowd has more or less suspected as much these last several months, but today’s numbers drive home the point. It’s clear from looking at the trend that we’re stuck in an elevated range. It could be worse, of course. New weekly claims could be rising. Instead, they’re treading water, albeit at levels that leave little room for comfort in thinking positively about what happens next for job creation and therefore the economy. True, overall growth still has the upper hand and there's a number of reasons to expect more of the same. But the economy's flying closer to stall speed. New filings for unemployment benefits rose by 10,000 to a seasonally adjusted 418,000 for the week through July 16. That’s the biggest weekly jump since late May. More troubling: jobless claims have remained north of the 400k mark for 15 consecutive weeks. "We're just stuck in this trend between 410,000 and 430,000."

Layoffs climb amid a raft of worries - The Labor Department said Thursday that applications5 for unemployment benefits rose by 10,000 to a seasonally adjusted 418,000. The four-week average, a less volatile measure, dipped to 421,250. It was the third straight week that applications have risen. And in a sign that hiring is sluggish, applications have also topped 400,000 for 15 straight weeks. They had fallen in February to 375,000, a level that signals healthy job growth, and stayed below 400,000 for two months. But applications then surged to an eight-month high of 478,000 in April and have declined slowly since then.  Consumers have pulled back on spending this year, besieged by high unemployment, stagnant wages, and high gas prices. "Jobless claims are a leading economic indicator. These numbers don't support the case for having 3.5 to 4 percent growth in the second half of the year that some people had talked about. The economy is moving forward at a modest pace but we don't seem to be picking up momentum,"

Layoffs Deepen Gloom - Companies are laying off employees at a level not seen in nearly a year, hobbling the job market and intensifying fears about the pace of the economic recovery.  Cisco Systems Inc., Lockheed Martin Corp. and troubled bookstore chain Borders Group Inc. are among those that have recently announced hefty cuts, while recent government numbers underscore how companies have shifted toward cutting jobs.  The increase in layoffs is a key reason why the U.S. recorded an average of only 21,500 new jobs over the past two months, far below the level needed to bring down unemployment, which now stands at 9.2%.

The current labor market expansion: third poorest performer 24 months after the recession's end since 1948 – Rebecca Wilder - It's now two years after the end of the Great Recession, and the unemployment rate has ticked downward just 9 pps (percentage points) since its 10.1% peak. Pundits call this an expansion since GDP has fully retraced its recession losses; but the unemployment rate tells a very different story. The chart illustrates the unemployment rate after 24 months since each recession's end spanning 1948 to June 2011. The business cycle dates are set by the National Bureau of Economic Research. The rates are indexed to the month of the recession's end for comparison, and the raw data are referenced in the table at the end of this post. Spanning the business cycles since 1948, the average decline in the unemployment rate is 20 pps from its peak to 24 months after the recession's end. In the '07-'09 'expansion', the unemployment rate has fallen by less than half the average, -9 pps since the first month of recovery, July 2009.

Jump Start Possibilities - Krugman - Suppose that Obama announces that we face a clear and present danger from Ruritania, and that to meet that threat we need immediate investment in roads and rail (to move troops, of course). The economy surges on the emergency spending — and newly employed men and women at last get to move out of their relatives’ basements. Home construction surges. Then Obama apologizes, says that his advisers have learned that there is no such country as Ruritania, and cancels the program. But we still have the new roads and rail links; plus, the surge in housing demand is now self-sustaining, and the economy remains strong. Of course, we could do all this without the Ruritanian threat; but we won’t.

Finding work (with a little help from friends) -SOCIAL connections help when looking for a job. In America, the slow recovery means firms are less likely to advertise vacancies, and more likely to rely on word of mouth. In Italy, jobseekers with friends in jobs are likely to find employment faster than jobseekers whose friends are unemployed. The American research comes from Steven Davis, Jason Faberman and John Haltiwanger, who have designed an index for the “recruitment intensity” of hiring companies. Aggressive recruiters advertise positions, interview extensively and make immediate offers. Other firms rely on word of mouth and are less likely to make offers to suitable candidates. In the wake of the recession, the index fell to its lowest in a decade:

A Lost Decade in Jobs - I’m putting together an “economic update” presentation for next week and am including a figure I and just about everyone else I have seen do these things includes. However, it reminded me of how little I see it out on the blogosphere. It’s total employment in the United States over the last 20 years: Currently we have fewer people working in America than just before the dot-com bust. Taken all together this has just been a brutal decade on the jobs front. The 90s were of course unusually good but even in historical perspective the current period is striking. Levels over the last 70 years.

Sad State of Employment - Employees Covered by Unemployment Insurance Still Below 2001 Recession Low; How the BLS Determines Employment Revisited - Mish - Here are some interesting charts from reader Tim Wallace regarding "covered employees", those employees that have unemployment insurance. Note that the number of covered employees is still below the 2004 trough and that it took 16 quarters in the wake of the 2001 recession to get back above the pre-recession highs. It has now been 11 quarters since the 2008 high. However, we are still not back to the previous recession dip. The number of covered employees soared during the housing and commercial real estate bubbles and at the end of the dot-com bubble. What will be the next big driver for employment? I cannot come up with any nor do I think there will be any in the midst of a Schumpeterian Depression phase of the Long Wave trough.That is one of the reasons I proclaimed three years ago "expect structurally high unemployment for a decade". The others reasons are global wage arbitrage, tax policy, and massive consumer debt.

Welcome to the Recovery - Krugman - Companies step up layoffs. In Washington-speak, coming from both the White House and the Fed, we’re always on the road to recovery, with a few setbacks on the way. But the reality is that we’ve been basically flat on the employment front since late 2009, with nothing suggesting a sustained break back toward better performance: Maybe someone should talk about doing something? Nah. Oh, by the way, why are companies stepping up layoffs? It’s because of fear of the Islamic socialist Kenyan president weak demand.

Got Jobs? - Casey Mulligan's claim that the unemployment problem is largely due to lack of motivation among younger workers ("the degree to which people would like to have a job"), and that this disproves Keynesian economics, prompts a shrill response from Arin Dube: Searching for jobs: good thing Casey Mulligan doesn’t need to, by Arin Dube: Tearing down Casey Mulligan’s “discoveries” of evidence against Keynesianism is probably ill-advised: these are not serious arguments, and rebutting them may dull one’s acumen.  Nevertheless, once again I will sacrifice some brain cells and bite the bullet—consider it the provision of a minor public good. OK, so in his most recent post, Mulligan claims that the differential trends in employment among older and younger workers over the Great Recession shows that Keynesian arguments are wrong.  He says: Many elderly people, for example, saw the market values of their homes and retirement assets plummet in 2008 and feel they can no longer afford to be retired. Naturally, many of them react by looking for work. The blue and green lines in the chart show that the elderly have been much more successful than the general population at obtaining and retaining jobs.

Is There Hope for the Unemployed? - Recent reports of the bleak jobs outlook for the United States brought to mind an eye-opening report for the Council on Foreign Relations by Michael Spence, a Nobel laureate, and Sandile Hlatshwayo. I highly recommend that report, at the very least its summary, “Globalization and Unemployment,” It clearly explains our current dilemma in the labor market. The authors break down our economy into those sectors whose output is traded across international borders (the tradable sectors) and is thus subject to competition from foreign producers, and those sectors whose output is not traded across international borders (the nontradable sectors).In the tradable category are manufactured goods, farm products, raw materials and financial, consulting, educational, computing and other technical services. Prominent in the nontradable sector are government, health care, retailing, construction, restaurants and, for the most part, legal services.The authors then explore the question of how employment and value added per employee developed in both sectors from 1990 to 2008. The chart below, based on Figure 5 of the report, answers the first of these questions.

Number of the Week: Low Odds Long-Term Unemployed Will Find Work - One in Ten: Odds that a person who has been out of work for more than 27 weeks will find a job this month. In contrast, according to Federal Reserve number-crunching of Bureau of Labor Statistics data, a person who has been out of work less than four weeks has about a three-in-ten chance of finding work and one who has been out of work between five and 14 weeks has a two-in-ten chance.Even in good times, the likelihood of finding a new job falls the longer one is out of work. These are not good times. Job-finding rates for all unemployed workers, though inching up from recession lows, remain low by historical standards. At last count, there were 6.3 million Americans who had been out of work for 27 weeks or more, and say they’re still looking for work, a pool of people equal to twice the population of the city of Chicago.

Why Hasn't Employment of the Elderly Fallen? -The red line in the chart below displays an index of the per capita employment for the general population. For example, a value of 93 for 2010 means that the fraction of people employed in 2010 was 7 percent less than it was in 2007, before the recession began. The red line shows what we all know by now: many fewer people have jobs now than did a few years ago. The other two series in the chart are for specific age groups: ages 65-69 and ages 70-74. Both groups have a somewhat greater fraction working now than in 2007 (the increase is even more for ages 75+, but that group is small, so it is omitted from the chart). Recent studies have looked at the labor-market experiences of the elderly during the first half of the recession. The authors emphasize that, while the recession by itself might reduce elderly employment, the elderly have become increasingly willing to work.. Many elderly people, for example, saw the market values of their homes and retirement assets plummet in 2008 and feel they can no longer afford to be retired. Naturally, many of them react by looking for work.

How Much Are Geezers Displacing Teens from the U.S. Workforce? - The Big Picture's Invictus points us to an interesting study, via e-mail:  You may want to have a look at this BLS research: Shortly after the minimum wage was raised last year, the right-wing chorus rose up and began to assert that the rise in teen unemployment was directly attributable to the more generous pay scale. To my eye, and based on numbers I’d crunched, I thought demographics were much more at play (note: that’s “much more,” not “exclusively”), and said so here last September: There is evidence – real, actual evidence! – that it’s the 55+ age cohort staying in – or re-entering – the job market that is much more at play than the minimum wage…Where there had been less than 2.5 workers 55+ per teen worker in the year 2000, that number has now jumped to a record 5.5…As a percent of the workforce, the 55+ age cohort has now reached a new record of 19.4%, clear evidence that older workers are squeezing younger workers from the workforce.

Five Reasons Why We Should Embrace Migrants - Migrants have been the engine of human progress throughout history. The movement of people has sparked innovation, spread ideas, relieved poverty and laid the foundations for all major civilizations and the global economy. Globalization has increased the tendency for people to seek their fortunes outside their country of birth and the 21st century will give more people the means and reasons to move. We should embrace this future because of the benefits it promises for sending countries, receiving countries and for migrants themselves. The movement of people has fuelled the development of modern economies. Migrants promote innovation, connect markets, fill labor gaps, reduce poverty and enrich social diversity.

Business groups challenge rules on unions - Employer groups turned out in force Monday to challenge rules proposed by the National Labor Relations Board that would streamline the process for holding union elections and make it easier for workers to organize. The rules would eliminate many of the opportunities for delaying elections that unions say give employers more time to threaten workers against organizing. Unions say the existing rules are tilted in favor of employers, helping to explain why union membership in the private sector has plummeted1 from 36 percent in the early 1950s to 7 percent today. Employer representatives told the labor board that streamlining the election process would deprive employers, especially small businesses not versed in labor law, of the chance to consult with lawyers and communicate with their workers prior to a vote.

State Unemployment Rates "little changed" in June - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in June. Twenty-eight states and the District of Columbia registered unemployment rate increases, 8 states recorded rate decreases, and 14 states had no rate change, the U.S. Bureau of Labor Statistics reported today. The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue (only Louisiana in May), the state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate.  Nevada saw the most improvement year-over-year in June, but still has the highest state unemployment rate. Two states and D.C. are still at the recession maximum (no improvement): Arkansas and Montana. The fact that 36 states and the District of Columbia have seen little or no improvement over the last year is a reminder that the unemployment crisis is ongoing.

Jobless Rates Rise in Most U.S. States - The unemployment rate increased in 28 states in June, reflecting the nationwide increase to 9.2% from 9.1% over the month, the Labor Department said. Some 14 states saw their unemployment rate hold steady while eight logged decreases. The U.S. economy added a paltry 18,000 jobs in June, as measured by a separate national survey, and an average of just 21,500 over the past two months – a disappointing result that has raised big questions about the sustainability of the nation’s economic recovery. The regional unemployment data show that the states that were hardest hit by the recession continue to have the toughest road in recovery. For instance, California, Florida and Nevada — all three of which were hit hard by the housing bust — all had unemployment rates well over 10%. Nevada, at 12.4%, continues to have the nation’s highest unemployment rate, as the near-halt in homebuilding activity and steep drop in construction jobs continues to weigh heavily on the state’s economy.See the full interactive graphic.

Long-Term Unemployment, by State - More than one in three jobless Americans were out of work for at least a year in a handful of U.S. states that appear to be disproportionately caught up in the nation’s long-term unemployment problem.  Lasting spells of unemployment have been problematic in the wake of the most recent downturn and in seven states the situation was particularly dire. In New Jersey, Georgia, Michigan, South Carolina, North Carolina, Illinois and Florida more than a third of unemployed residents had been out of work for at least a year in 2010, according to Labor Department data that is expected to be released later this month. Nearly all of those states had unemployment rates higher than the national average of 9.6% in 2010, but New Jersey is a bit of an outlier. Its unemployment rate averaged 9.4% for the year but it had the largest share of residents out of work for at least a year: 37.1%. The state had the second highest incomes in the country last year and offered higher unemployment benefits than the national average. Click for full interactive graphic.

">A Tale Of Two Countries: The Growing Divide Between Silicon Valley And Unemployed America - For people who spend most of their days within a few blocks of tech start-up epicenters such as South Park in San Francisco, University Avenue in Palo Alto or the Flatiron district in New York, last week’s jobs report must have created some cognitive dissonance. After all, we’re in a boom/bubble right? It’s really hard to hire good people isn’t it? But take a moment to step outside the world of high technology and a dramatically different picture emerges of what’s going on in America. The number of unemployed now eclipses 14 million nationwide. Underemployment is scary too with U-6, the government’s official measure of under-utilization,rising to 16.2% in June from 15.8% in May. But the worst number of them all might be mean duration of employment which has spiked to 40 weeks. Which bring us to an important question: Should Silicon Valley (and other tech clusters throughout the country) care? After all, as long as people in Nebraska or the Central Valley of California have enough money to buy virtual tractors to tend their crops in Farmville, should the tech community be worried about whether those same people are getting paid to do work in the real world? Is what’s best for Silicon Valley also good for America?

Hunger Stalks California’s Rural Communities - Driving south out of Silicon Valley, the big electronics plants gradually disappear, along with the sprawling developments that house their workers. In their place spreads San Benito County's fields of lettuce and tomatoes and orchards of apricots and walnuts. Something else changes too. As communities get more rural and farm workers make up more of the population, people get poorer. In 2009, the average yearly income in Santa Clara County - home of Silicon Valley - was $94,715. Silicon Valley has its own not-so-hidden poverty, but the urban standard of living, especially in the country's premier high-tech industrial center, is much higher than San Benito County. Here, the average wage in 2009 was a third of Silicon Valley - $37,623. In April last year, when the recession boosted state unemployment to 12 percent, Santa Clara's rate was 10.3 percent. San Benito County's unemployment rate was exactly double - 20.6 percent.

Our economy is hungry for food stamps - With House Republicans voting to decimate the USDA's various food programs by cutting over $2 billion, along comes The Economist with an excellent reminder of the effectiveness and scope of America's main anti-hunger program: food stamps. The piece stands as a bracing antidote to a favorite recent contrarian subject -- "young hipsters" taking advantage of a program for the poor. As The Economist observes: It is also hard to argue that food-stamp recipients are undeserving. About half of them are children, and another 8% are elderly. Only 14% of food-stamp households have incomes above the poverty line; 41% have incomes of half that level or less, and 18% have no income at all. The average participating family has only $101 in savings or valuables. Less than a tenth of recipients also receive cash payments from the Temporary Assistance for Needy Families programme (TANF), the reformed version of welfare; roughly a third get at least some income from wages.

SNAP Faces $20 Billion Cut - The August 2nd deadline is looming as our nation's lawmakers work to figure out a debt ceiling agreement. One of the government programs facing a big hit is the Supplemental Nutrition Assistance Program (SNAP). It serves thousands of people all over the country, helping with food costs. Now, it could take a cut of over $20 billion to deal with the deficit. "They're scary numbers to me," says Jocelyn Lantrip, Marketing and Communication Manager at Food Bank of Northern Nevada. "We looked at our numbers, we fed over 70,000 children." That's just in northern Nevada last year. Food Bank officials say that number is just too high to be cutting back on the SNAP program. They say families really don't get much support as it is. The most money each family can receive is $5 per day, per person. The majority of families don't even see that much, as most only receive $3 per day. "If you cut that money, it's either going to be less people served, or less benefits to each person," says Lantrip

Chance favors the concentration of wealth - The study, "Entrepreneurs, chance, and the deterministic concentration of wealth," is published in the July 20 issue of the journal PLoS ONE. The researchers simulated the performance of a large number of investors who started out with equal amounts of capital and who realized returns annually over a number of years. But wealth did not remain equal, because each year an entrepreneur's return was a random draw taken from a pool of possible return rates. Thus, a high return did not guarantee continuing high returns, nor did early low returns mean continuing bad luck. Even though all investors had an equal chance of success, the simulations consistently resulted in dramatic concentration of wealth over time. The reason: With compounding capital returns, some individuals will have a string of high returns and, given enough time, will accumulate an overwhelming share of the wealth.  This appears to be a fundamental feature of economies where wealth is primarily generated from returns on investment

For the few, by the few, in the name of the many - "A crash introduction to Elite Theory" - Whatever the narrative behind the term democracy – the reality is that in a democracy it is the elite political class who holds the power to make decisions. Elite political theory holds that any society is divided between the elites (the few) and the masses (the many). The elites – who make up the leaders of society – are generally different from the masses, having control over wealth, education, access and so on. There is an elite class who graduates into the various leadership positions of power – in the UK think of the Eton/ Oxbridge/ Bullingdon club graduates which dominate the political class whether politician, journalist or other. The role of the masses is to be ruled, not to rule, with elections having symbolic value rather than being any meaningful competition. In reality, the elections are simply a tool to decide who will run the system, and nothing to do with changing it. Elitism doesn’t prevent other non-elites from entering the elite set – a few from the masses can be permitted to work their way up, serving the double purpose of assimilating the best talent from the generality of people while at the same time providing an outlet to undermine any potential for revolutionary leadership emerging. But to be accepted as one of the elite – you have to give up any alternative views to that of the elite class. You can become one of the people at the top – as long as you agree to the rules of the game and to help maintain the playing field. A good example of this would be the current White House incumbent Barack Obama, superficially appearing as an outsider but one who has internalised what are the fundamental interests of the United States according to the elites, helping to explain that though he was carried in on a slogan of change he has disappointed even his most ardent supporters.

No Matter How Debt Debate Ends, Governors See More Cuts for States - The rancorous debate in Washington over whether to raise the federal debt ceiling1 is alarming many of the nation’s governors from both parties, who fear that whatever the outcome, much-needed money will almost certainly be drained from their states.  If the federal debt limit is not raised, several governors said as they gathered here on Friday for the semiannual meeting of the National Governors Association, the ensuing default will harm the economy, make it difficult for states to borrow money and delay some of the vital federal payments that states count on for everything from Medicaid2 to unemployment benefits.  But even if the debt ceiling is raised, as many governors expect it ultimately will be, states could still pay a high price. Both Democrats and Republicans in Washington want to pair any increase in the debt limit with deep new spending cuts — cuts that many governors fear will hurt their states as they are still recovering slowly from the Great Recession. 

States’ Money Woes Show No Favorites - Arizona began cutting more than 100,000 people from its Medicaid1 rolls this month. Illinois, even after raising taxes, began the month with $3.8 billion worth of unpaid bills left over from last year. Connecticut sent layoff warnings last week to state troopers. The governors who gathered here over the weekend for the summer meeting of the National Governors Association2 have all been scathed by the unpopular things they have had to do to keep their budgets in balance. For the veterans, it was just the latest in a series of tough years. For the rookies — 29 new governors took office this year — it was their first taste of state budget battle. “It’s funny, here I am, I’m six months into it and I don’t think of myself as a new governor anymore,” said Gov. Dannel P. Malloy of Connecticut, a Democrat who took office this year and closed a gaping deficit with a blend of tax increases, service cuts and union concessions. Since the unions have failed to ratify the agreement he made with their leaders, he now faces the prospect of having to lay off more than 5,000 state workers. “It’s been that kind of six months,” he said.

Monday Map: State and Local Sales Tax Rates, 2011 - Today's map shows the state-local combined sales tax rate in each state. Since city, county, and municipal rates vary, the rates are weighted by population to compute an average local tax rate.

Moody's mulls downgrade on five states - Moody's Investors Service placed its ratings on five Aaa-rated states on watch for downgrade, saying if the U.S. government's ratings were to be lowered, those states would face probable cuts as well.  The ratings agency's action on Maryland, New Mexico, South Carolina, Tennessee and Virginia affect a combined $24 billion of general obligation and related debt. It follows Moody's announcement last week it would consider a downgrade on the U.S. government's bond rating, citing the "rising possibility that the statutory debt limit will not be raised on a timely basis," which would lead to a default on U.S. Treasury debt obligations.  Moody's on Tuesday said it would review each of the five states on a case-by-case basis and plans to act on the ratings within seven to 10 days following a sovereign action.

Alabama county wants $1.3 billion debt reduction: report - Alabama's Jefferson County wants creditors to wipe $1.3 billion from its bond debt as part of a settlement plan, a local newspaper said in a report that a senior county official said on Monday was broadly accurate. Settlement talks this month with creditors, including JPMorgan Chase, are part of a bid to resolve a county financial crisis over a $3.2 billion sewer debt and avert what would be the largest municipal bankruptcy in U.S. history. The Birmingham News reported on Sunday that the county also wanted creditors to accept single-digit annual rate increases for sewer system customers and to create a relief fund for struggling ratepayers. One of the county's five commissioners said on Monday the story was broadly accurate.

Minnesota bars denied permit renewal as state shutdown continues (Reuters) - Minnesota bars, liquor stores and restaurants running low on alcohol because their state buyer's permits have expired cannot renew them before the government shutdown ends, a judge ruled on Monday. Minnesota's broad government shutdown entered its 18th day on Monday with the governor and legislative leaders trying to hammer out the details of a two-year budget to follow a broad framework agreement they announced last Thursday. No date has been set for a special session needed to end the shutdown, but Democratic Governor Mark Dayton, House Speaker Kurt Zellers and Senate Majority Leader Amy Koch said Sunday in a joint statement that "considerable progress" had been made on the spending bills. The debate in Minnesota has mirrored those in the nation's capital over the debt ceiling. The shutdown has forced closure of state parks, historic sites, rest stops, two horse-racing tracks and the suspension of about 100 road construction projects -- but the threat of beer taps running dry has generated broad attention.

New York state, public employees union agree to freeze wages for 3 years - The state of New York and the second-largest public employee union agreed over the weekend to a labor contract that would freeze salaries for three years. The deal also hikes worker health care contributions, but would avert the layoff of 700 employees initially scheduled for next week. New York Governor Andrew Cuomo reached the agreement with the Public Employees Federation, which is made up of white-collar employees. The largest public union in the state, the Civil Service Employees Association, is scheduled to hold a vote on their labor contract next week. Offices of the CSEA sent contract negotiators across New York to convince health care, maintenance and clerical workers to agree to the nine days yearly of forced leaves without pay, benefit cuts and three-year pay freeze, than to layoff thousands of workers.

SF To Shutter Courtrooms; Lay Off 200 Workers - The San Francisco Superior Court announced Monday that it's laying off more than 40 percent of its staff and shuttering 25 courtrooms because of budget cuts. Presiding Judge Katherine Feinstein said the actions were necessary to close a $13.75 million budget deficit caused by state budget cuts. She said the cuts mean it will take many more hours to pay a traffic ticket in person, up to 18 months to finalize a divorce and five years for a lawsuit to go to trial. 'The civil justice system in San Francisco is collapsing,' Feinstein said. Some 200 of the court's 480 workers will be let go by Sept. 30, including 11 of 12 commissioners who preside over a variety of cases. And she said it could get worse if optimistic revenue projections don't materialize by January."

Budget cuts put severe strain on California court system - Californians will soon face longer lines in courthouses, delays in finalizing divorces, prolonged custody battles and extended waits for lawsuits to go to trial as a result of deep budget cuts approved by state lawmakers. Judicial Branch leaders will meet Friday to vote on how to allocate the courts' shrinking budget, which will be slashed $350 million from a total of $3.5 billion. The cut, aimed at helping close the state's budget deficit, means the courts have suffered more than a 30 percent reduction in state general funds over the past three years. San Francisco Superior Court is expected to be one of the hardest hit in the state. Part of the reason for the crisis there is that the court chose to use unpaid furloughs and money from its reserve, rather than layoffs, to make budget cuts in the past. Now, it is struggling to keep its doors open.  San Francisco court officials have predicted a five-year wait for lawsuits to get to trial. A divorce, which used to be finalized in five months, may now take 18 months, courts officials said. The court has sent layoff notices to 40 percent of its employees.

Pennsylvania road fund plan could cost truckers $500 more per vehicle  — Gov. Tom Corbett's transportation funding commission on Monday endorsed a mixture of revenue sources to generate about $2.5 billion in additional annual spending for Pennsylvania's roads, bridges and mass transit. It was projected to cost trucking companies more than $500 per year for each tractor-trailer. However, that $500 figure is calculated by adjusting for inflation, which would mean a 35 percent increase of the current registration fee, according to Jim Runk, president and CEO of the Pennsylvania Motor Truck Association. Runk, a member of the commission, said the funding plan still must go through the legislative process and may not make it into final legislation.Vehicle and driver fee changes they endorsed would bring in nearly $600 million, with the annual cost for the average Pennsylvania driver not expected to be more than $132.

Causes of Inequality - Last week I posted on how measures of U.S. income inequality have evolved over time. There, I ducked the question of why this has happened. In "The Undereducated American," a report that came out last month from the Georgetown University Center on Education and the Workforce, Anthony P. Carnevale and Stephen Rose offer a nice synopsis of the answer economists give most often. They write: "The relative wages of college-educated workers have been rising much faster than the wages of people with a high school diploma. The laws of supply and demand are the best single indicator of whether the United States is producing enough, too few, or too many college graduates. If the relative earnings of college-educated workers rise faster than the earnings of their counterparts, it means the demand is growing faster than supply. The data, therefore, are unequivocal—Americans are undereducated.

Hurting Poor Students - Extremists in Congress have long wanted to gut the spending restrictions in Title I, a federal law dating back to the 1960s that underwrites extra help for disadvantaged schoolchildren. A bill, approved by a House committee last week, would do just that, damaging one of most important civil rights programs in the country.   Title I was created during the Johnson administration in response to the failure of the states to offer access to equal education for all students as required by Brown v. Board of Education. The education law is based on a strict formula that drives federal aid to high-poverty districts, where large numbers of disadvantaged children often pose educational challenges. It is supposed to provide an added layer of federal money to high-poverty schools that already have budget allocations similar to those of other schools in the same district.  The State and Local Funding Flexibility Act would let school districts spend money earmarked for impoverished children on almost any educational purpose they chose. This would inevitably lead to money going from politically powerless poor schools to those without the same needs.

Our Broken Escalator - THE United States supports schools in Afghanistan because we know that education is one of the cheapest and most effective ways to build a country.  Alas, we’ve forgotten that lesson at home. All across America, school budgets are being cut, teachers laid off and education programs dismantled.  My beloved old high school in Yamhill, Ore. — a plain brick building that was my rocket ship — is emblematic of that trend. For the next school year, freshman and junior varsity sports teams are at risk, and all students will have to pay $125 to participate on a team. The school newspaper, which once doubled as a biweekly newspaper for the entire town, has been terminated.  Business classes are gone. A music teacher has been eliminated. Class size is growing, with more than 40 students in freshman Spanish. “It’s like a long, slow bleed, watching things disappear,” says the school district’s business manager, Michelle Morrison.  The school still has good teachers, but is that sustainable with a starting salary of $33,676?

Atlanta Schools Created Culture Of Cheating, Fear, Intimidation-- Teachers spent nights huddled in a back room, erasing wrong answers on students' test sheets and filling in the correct bubbles. At another school, struggling students were seated next to higher-performing classmates so they could copy answers. Those and other confessions are contained in a new state report that reveals how far some Atlanta public schools went to raise test scores in the nation's largest-ever cheating scandal. Investigators concluded that nearly half the city's schools allowed the cheating to go unchecked for as long as a decade, beginning in 2001. Administrators – pressured to maintain high scores under the federal No Child Left Behind law – punished or fired those who reported anything amiss and created a culture of "fear, intimidation and retaliation," according to the report released earlier this month, two years after officials noticed a suspicious spike in some scores. The report names 178 teachers and principals, and 82 of those confessed. Tens of thousands of children at the 44 schools, most in the city's poorest neighborhoods, were allowed to advance to higher grades, even though they didn't know basic concepts. One teacher told investigators the district was "run like the mob."

School Discipline Study Raises Fresh Questions - Raising new questions about the effectiveness of school discipline, a report scheduled for release on Tuesday found that 31 percent of Texas students were suspended off campus or expelled at least once during their years in middle and high school — at an average of almost four times apiece.  When also considering less serious infractions punished by in-school suspensions, the rate climbed to nearly 60 percent, according to the study by the Council of State Governments, with one in seven students facing such disciplinary measures at least 11 times.  The study linked these disciplinary actions to lower rates of graduation and higher rates of later criminal activity and found that minority students were more likely than whites to face the more severe punishments.  “In the last 20 to 25 years, there have been dramatic increases in the number of suspensions and expulsions,”  “This quantifies how you’re in the minority if you have not been removed from the classroom at least once. This is not just being sent to the principal’s office, and it’s not after-school detention or weekend detention or extra homework. This is in the student’s record.”

UC Riverside to Cut Positions to Help Close $46 Million Gap - A $46 million budget shortfall will require "dozens" of job cuts at UC Riverside, campus officials said today. In a letter to faculty and students, UCR Chancellor Timothy White said major spending reductions would be necessary for the university to close its 2011-12 fiscal year gap, precipitated by the roughly $1 billion cut to the UC system in the state budget signed 2 1/2 weeks ago by Gov. Jerry Brown. "Despite our best efforts and enormous lobbying activity, these cuts are significant and will inflict real pain on individuals and programs," White wrote. "We must work together as we redouble our efforts to find non-general fund resources to support our activities, and to find additional efficiencies." The contraction in spending comes at the same time student tuition hikes take effect. Last week, the UC Board of Regents approved a 9.6 percent boost in student fees, which followed an 8 percent increase ratified by the regents last summer. The total 17.6 percent spike in tuition will be absorbed by students beginning this fall.

College presidents' paychecks raise brows - There's probably not a very good time to announce that a college president is going to be making $100,000 more than his predecessor. The California State University System probably picked one of the worst. Literally moments after the system's Board of Trustees announced that it was going to increase next fall's tuition by 12 percent, an additional $294 a semester, the board turned around and approved a salary of $400,000 for the new president of San Diego State, Elliot Hirshman -- $350,000 in state funds and $50,000 from the campus's foundation -- a bump of more than $100,000 from what his predecessor made last year. "There's never a good time to raise presidents' pay," . "But when there are immediate needs, whether taboo or not, we have to fill them." The question of whether it's appropriate for higher education administrators to be making very large salaries (often in the hundreds of thousands of dollars) is highly contentious, with vocal advocates on each side of the issue. Those for high pay say such salaries are necessary to attract top talent to run complex institutions.

The $64 Million Dollar Question on Private Student Loans - When the new Consumer Financial Protection Bureau starts its work on private student loans in earnest, it will have to confront a question that has vexed policymakers and student aid experts in recent years: Why do so many students take on this debt without exhausting their eligibility for federal loans first? According to the most recent data available from the Department of Education, the majority of undergraduates who borrowed private loans in the academic year 2007-08 did so even though they hadn’t taken out all of the federal loan debt for which they were qualified. Nearly one quarter of these private loan borrowers did not take out any federal loans at all. This is a major public policy problem because private loans are far more risky than federal loans and almost always much more expensive. Unlike federal loans, which carry a fixed rate, private loans generally have uncapped interest rates that vary month to month based on market conditions. While federal loans offer the same terms to all borrowers, private loan providers tend to charge higher rates to those with the greatest need.

Boomers bank on less inheritance - As recently as five years ago, economists marveled that baby boomers stood to inherit anywhere between $41 trillion to $136 trillion as their parents passed on. The legacies from members of the Greatest Generation to their boomer offspring promised to become history's greatest intergenerational transfer of wealth.  But increasing life spans and health care costs — plus two recessions in the past decade — are prompting economists to lower the estimates. Now, they say, when it comes time for the reading of the wills, boomers are likely to get a total of $8.4 trillion  To be sure, the amount of money left in Mom and Dad's estate will be significant — a median of $64,000, according to a December report from the Center for Retirement Research at Boston College and MetLife insurance.  That's a tidy sum, but it's hardly the life-changing pile of cash that will send boomers on a big shopping spree for yachts.

A young person’s guide to Social Security - Many young people don’t think Social Security will be there for them when they retire. Coupled with the doubt about Social Security’s longevity is a general apathy toward learning its basic functions and how it operates. Young people are uninformed and therefore misinformed. They do not understand how Social Security works, who it affects, and how it fits into their future plans. The Economic Policy Institute seeks to address the skepticism and lack of interest and understanding with this comprehensive guide to Social Security—written by young authors for young people. Download the PDF  This textbook does not have a bibliography. All citations can be found in the PDF document as URLs inlaid in the text that link to the article or webpage from which the number, fact, or figure was derived. All program statistics and historical data are from the Social Security Administration Office of the Chief Actuary and the Office of the Chief Actuary’s "2010 Trustees Report." The most-used source is Appendix A of the report, Table VI.A4.— Operations of the Combined OASI and DI Trust Funds.

Social Security for Beginners - In Monday’s Atlantic column, the part that upset the most people was (not surprisingly) the following paragraph on Social Security: “The dollars are in programs like Social Security ($740 billion), which, per dollar, has a relatively small impact on the economy. Social Security doesn’t say what businesses can or can’t do, and it doesn’t say what people can do with their money: it mainly moves money from people’s working years to their retirement years, which means that in part it’s doing something that they would have done anyway.” One commenter, for example, said that Social Security does tell you what you have to do with your money: you have to buy an annuity. Another said that if he could opt out of Social Security right now, he would, since he thinks it is a losing proposition for him. I don’t think that any of the criticisms really addressed the main point I was trying to make: that Social Security has a smaller per-dollar economic impact than a regulatory agency like the CFPB. They are fairly typical of criticisms of Social Security, however, so I want to address them in a little more detail.

News from EPI: Soc Sec provides majority of income for most over 65 - The average annual Social Security retirement benefit in 2009 was $13,406.40, slightly above the $10,289 federal poverty line for individuals age 65 and older, but less than the minimum wage.   Today’s Snapshot illustrates that while modest in size, Social Security benefits comprise a substantial share of household income for most elderly recipients. According to 2008 data, for the poorest 40 percent of 65-and-older households, Social Security payouts constitute more than four-fifths of total income.

When the Wait for Social Security Checks Is Worth It - SOCIAL SECURITY1 may be the most beloved of all the government’s programs, partly because it requires so little thinking. You pay taxes while you work, then you and your spouse collect until you die.  This description oversimplifies things, of course. Social Security, as it’s currently constituted, is refreshingly straightforward but you do have to make one important choice, and many people could make their lives after retirement2 better if they chose differently.  As I discussed in a previous column3, most economists and financial advisers4 say that in retirement, Americans would do well to increase the proportion of their wealth that pays a guaranteed income for life, much as Social Security does. The technical word for the financial instrument that accomplishes this feat is an annuity.  Traditional pensions are a form of annuity, and people who have them usually seem to love them. What’s odd is that people with retirement plans like 401(k)’s5 generally do not buy annuities6, even though annuities would simplify and stabilize their financial lives. Economists call this state of affairs the annuity puzzle.

The Only Social Security Reform Worth Considering - Robert Reich - The very idea that Social Security might be on the chopping block in order to pay the ransom Republicans are demanding reveals both the cravenness of their demands and the callowness of the opposition to those demands. In a former life I was a trustee of the Social Security trust fund. So let me set the record straight. Social Security isn’t responsible for the federal deficit. Just the opposite. Until last year Social Security took in more payroll taxes than it paid out in benefits. It lent the surpluses to the rest of the government. Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years. But why should there even be a problem 26 years from now? Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.) Greenspan’s commission must have failed to predict something. What? Inequality

Is There Something Worse than Despicable? - I'm running out of words to describe the low-lifes in Washington who continue to outdo themselves when it comes to devising ways to separate us from our money. The latest comes from the Social Security Administration, in conjunction with the Treasury Department.  My neighbor just got her social security check in the mail and asked me to help her figure out the flyer that came with it. The flyer reads, "Be prepared to stop receiving a paper check. All federal benefits will be paid electronically.... Sign up for electronic payments NOW!"  My neighbor is quite old, in her 80s probably. She has a computer and gets email, but that's it -- no online banking, shopping, etc. She has memory problems, and it's hard for her to cope with anything more complicated than logging onto AOL. Plus, she doesn't really trust the internet with her money. So we went to the website on the flyer, to see if there was a way to opt out. There is not. Everyone receiving federal benefits (including Social Security and Supplemental Security Income (SSI) payments, Veterans Affairs (VA), Railroad Retirement Board, Office of Personnel Management and Department of Labor (Black Lung), is going to go direct deposit. This new payment method will affect millions of people, including the 18 million Baby Boomers retiring in the next five years.

The Race To The Bottom: Half Of US Social Program Recipients Believe They “Have Not Used A Government Social Program” - It's really hard not to get discouraged when you realize that all the anti-intellectual elitist talk has led us to this exact circumstance"Reconstituting the Submerged State: The Challenges of Social Policy Reform in the Obama Era," a paper by Cornell's Clinton Rossiter Professor of American Institutions Suzanne Mettler features this remarkable chart showing that about half of American social program beneficiaries believe that they "have not used a government social program."  That's right...all those bonehead tea baggers going to rallies with signs that say "Keep the guvmint out of my Medicare" really *are* actually that ignorant. The Mettler paper (.pdf) is equal parts fascinating and depressing. It confirms for me that the entire national dialog is being controlled by people who really understand very little and revel in their lack of comprehension.

One in Four Americans Provide Unpaid Care to an Adult - So as if saving for your own retirement wasn’t enough of a challenge, get ready to stash away for your relatives. That’s the takeaway from a new report making the rounds from AARP. According to AARP, in 2009 one in four Americans cared for an adult family member, partner or friend who had a disability or chronic condition. All told, the tab for their unpaid caregiving contributions came in that year at $450 billion, a 21% increase over the $375 billion AARP estimated in 2007. As Baby Boomers continue to age, many of whom relied on rosy assumptions about their retirement savings, this doesn’t bode well going forward. Life expectancies continue to go up, as do health care costs. Retirement account savings rates continue to be anemic. Plus, your cognitive ability when it comes to money may decline as you age. In sum, people aren’t ready.

Oregon cuts Medicaid physician pay by average of 11.5% - Oregon lawmakers and Gov. John Kitzhaber, MD, approved a fiscal 2012 budget in late June that on average reduces physician Medicaid pay by 11.5% effective Aug. 1. The size of the cut varies by physician specialty. The state's Medicaid agency will not reduce fees for primary care services, including ob-gyn care, said Oregon Medical Assn. spokeswoman Betsy Boyd-Flynn. The Oregon Health Authority is attempting to bring all physician pay as close as possible to 72% of Medicare rates. This calculation means anesthesiologists, for instance, are facing a 39% Medicaid pay cut that Boyd-Flynn said is "really, really difficult to sustain." Dr. Kitzhaber had supported Medicaid pay cuts of up to 19%, but the steeper reductions were not necessary because the Legislature agreed to increase a hospital tax in an effort to secure more federal matching dollars. The medical association was still seeking more details on the cuts at this article's deadline.

Florida spurns $50 million for child-abuse prevention - Florida lawmakers have rejected more than $50 million in federal child-abuse prevention money. The grants were tied to the Obama administration’s healthcare reform package, which many lawmakers oppose on philosophical grounds.The money, offered through the federal Affordable Health Care Act passed last year, would have paid, among other things, for a visiting nurse program run by Healthy Families Florida, one of the most successful child-abuse prevention efforts in the nation. Healthy Families’ budget was cut in last year’s spending plan by close to $10 million. And because the federal Race to the Top educational-reform effort is tied to the child-abuse prevention program that Healthy Families administers, the state may also lose a four-year block grant worth an additional $100 million in federal dollars, records show.

The most important chart in health policy - Like it or not, the ACA will be judged, at least in part, by the degree to which it contributes toward reducing the rate of growth in health care spending. There are reasons to be optimistic that the law will help to “bend the cost curve”: as Henry Aaron put it, the ACA contains “virtually every idea for cost control that any analyst has come up with.” There are reasons for pessimism too: the success of the law depends on the body that has the power to destroy it, Congress. If Congress is unified, or reasonably so, in preserving and strengthening the cost control mechanisms in the law, the chance they will work increases considerably. If, however, Congress, or even a significant minority of its members, wants to delay, weaken, or repeal components of the law, success in cost control is far less likely. It’s no insignificant point that the law may be declared a failure by the very individuals who fought to undermine it. Would that really be a failure of the law? If, by action of politicians or the market, the health care spending curve is not bent, one might argue that this reflects our collective desire, our revealed preference.

The Price is…ummm….errrr…. Wrong (Part 2)  Food poisoning is NOT fun. Food poisoning that results from bad fish can be unspeakably horrible. Leaving out the most gruesome bits, I found myself the next scorcher-of-a-July morning with a fever rallying like the price of Silver after a bubble-vision interview with Jim Rogers, or the Bunker-Hunt's declaration that they were in possession of most of the Comex warehouse receipts. I experienced a cycle of chills and sweats such that when my then GF who was worried by my moans and climbing fever, took me to a private clinic nearby (the only one open on a Sunday morning), I left the house wrapped in blanket despite the triple-digit [fahrenheit] temperature. Not exaggerating, I was unable to sit upright in the chair in the waiting room such were the shivers and vertiginous undulations. As my friend dispensed formalities with the clerk-nurse, so I laid myself on the floor of the empty waiting room. "How would you like to pay?" queried the bespectacled overweight nurse-cum-bouncer in the most deadpan of tones. "Errrr, can't we do this after?" my friend said, "I mean, look at him (pointing to me on the floor) he's, like, pretty bad". Receptionist replied (expressionless again) as if she was uttering the most normal thing in the world: "No, you cannot see the doctor until you have paid." "I'll write her a check", I managed between groans, having followed the conversation between the near- hallucinations (the kind that makes one maniacal about Ayn Rand as described in Tobias Wolff's"Old School"), the chills and the somersaulting of the waiting room. Nurse-Bouncer return-volleyed: "I am sorry, we don't take personal checks".

An unprecedented 1 in 66 Americans is a diagnosed psychotic - Outselling even common drugs to treat high blood pressure and acid reflux, antipsychotic medications are the single top-selling prescription drug in the United States. Once reserved for hard-core, One Flew Over The Cuckoo's Nest type of mental illnesses to treat hallucinations, delusions or major thought disorders; today, the drugs are handed out to unruly kids and absent minded elderly. A recent story in Al Jazeera by James Ridgeway of Mother Jones illuminates the efforts by major pharmaceutical companies to get doctors prescribing medicines like Zyprexa, Seroquel, and Abilify to patients for whom the drugs were never intended. Focusing on psychiatrists because they rely on subjective diagnoses, the drug reps have been so successful that they've changed the criteria for mental illness and disability payments. Ridgeway quotes former New England Journal of Medicine editor Marcia Angell. '[T]he tally of those who are so disabled by mental disorders that they qualify for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) increased nearly two and a half times between 1987 and 2007 - from one in 184 Americans to one in seventy-six. For children, the rise is even more startling - a thirty-five-fold increase in the same two decades. Mental illness is now the leading cause of disability in children.'

Mass Psychosis in the US: How Big Pharma Hooked Americans on Drugs - Has America become a nation of psychotics? You would certainly think so, based on the explosion in the use of antipsychotic medications. In 2008, with over $14 billion in sales, antipsychotics became the single top-selling therapeutic class of prescription drugs in the United States, surpassing drugs used to treat high cholesterol and acid reflux. Once upon a time, antipsychotics were reserved for a relatively small number of patients with hard-core psychiatric diagnoses - primarily schizophrenia and bipolar disorder - to treat such symptoms as delusions, hallucinations, or formal thought disorder. Today, it seems, everyone is taking antipsychotics. Parents are told that their unruly kids are in fact bipolar, and in need of anti-psychotics, while old people with dementia are dosed, in large numbers, with drugs once reserved largely for schizophrenics. Americans with symptoms ranging from chronic depression to anxiety to insomnia are now being prescribed anti-psychotics at rates that seem to indicate a national mass psychosis.

Small amounts of antibiotics generate big problem - Antibiotic resistance is a growing medical problem that threatens the effectiveness of health care the world over. It has until now been thought that resistant bacteria were primarily selected in people and animals undergoing high-dosage antibiotic treatment for infection. The just-published findings indicate, however, that the very low concentrations of antibiotics found in such external environments as sewage systems, lakes and rivers also play a role in selecting for resistance.  “About half of the antibiotic dose used in treating a person or animal leaves the body in unchanged, active form via the urine,”  Antibiotics released are spread via sewage systems to water and soil. Stable antibiotics can remain active in the environment for a very long time, causing enrichment of resistant bacteria, which in turn can infect people and animals via, for example, food.  It is plausible that more than 100,000 tonnes of antibiotics annually enter the environment in this way worldwide, though the figure is subject to uncertainty.

Cancer patients' urine suspected in Wissahickon iodine-131 levels - Three weeks after an earthquake and tsunami severely damaged Japan's Fukushima nuclear power plant, Lisa Daniels opened an e-mail with test results of river water samples from Southeastern Pennsylvania.  Nationwide, officials were testing rain, rivers, milk, and other substances to learn if radioactivity from the stricken plant was present. None of the other river samples in the batch showed iodine-131. But this one did. Since then, officials have found more iodine-131 in the Wissahickon, and at several sewage treatment plants along the creek. They've also realized that worrisome levels of iodine-131 had been detected long before the Fukushima accident in several Philadelphia drinking water samples taken as part of an obscure monitoring program run by the U.S. Environmental Protection Agency.  The source they now suspect was a surprise. Iodine-131 is used to treat thyroid cancer, and they suspect it's coming from patients excreting excess radioactivity in their urine, which then winds up in rivers, and ultimately in Philadelphia's drinking water intakes.

Are Chemicals Making Us Fat? - The global obesity/diabetes epidemic is receiving wide-spread attention like the June 26 article in The Washington Post by David Brown. One-fourth of our national health care bill of $2.3 trillion is linked to the treatment of diabetes and its complications. Average American life expectancy is now dropping because of this disease complex. Even children are being recommended for gastric bypass. A growing body of evidence in animals and humans suggests that many man-made chemicals contaminating our environment mimic some of the body's own hormones like testosterone and estrogen. Researchers have called these chemicals endocrine disruptors because they wreak havoc with endocrine organs like the thyroid, pancreas, testes and ovaries that depend on hormones to develop and function properly. But a new, more relevant term for these chemicals has emerged. They are now also called obesogens.Exposure to tiny amounts of obesogens during embryonic development has startling effects on animals, resulting in obesity, infertility, feminization of male species, ambiguous sexual characteristics and high death rates.

New rules urged on hybrid animal-human experiments (Reuters) - Scientific experiments that insert human genes or cells into animals need new rules to ensure they are ethically acceptable and do not lead to the creation of "monsters," a group of leading British researchers said on Friday. While humanizing animals in the name of medical research offers valuable insights into the way human bodies work and diseases develop, clear regulations are needed to make sure humanization of animals is carefully controlled. Extreme scenarios, such as putting brain cells into primates to create talking apes, may remain science fiction, but researchers around the world are constantly pushing boundaries. Chinese scientists have already introduced human stem cells into goat fetuses and U.S. researchers have studied the idea of creating a mouse with human brain cells -- though they have not actually done so. Such controversial research needs special oversight, according to a report from Britain's Academy of Medical Sciences on the use of animals containing human material.

Coming in 2012: Genetically modified front lawns and the mass spraying of neighborhoods and playgrounds with RoundUp - Thanks to a recent admission by the USDA that it does not have the regulatory framework to even regulate GMOs, the world of biotech is set to unleash a tidal wave of genetically modified seeds upon the United States. This is the upshot of Scotts Miracle-Gro challenging the USDA over its GMO grass seeds, to which the USDA threw in the towel and essentially announced it can't technically regulate many GMOs at all.Welcome to the new world order of GMO self regulation, where the companies that produce the GMO seeds now get to regulate their own behavior! ( Miracle-Gro is now moving full speed ahead on its GMO yard grass product, which could theoretically be introduced into the marketplace as early as 2012. This is a home consumer yard grass seed which, of course, resists glyphosate (RoundUp), and its introduction into the marketplace would almost certainly result in millions of homeowners across America planting these seeds in their yard and then spraying RoundUp across their entire lawn as a "treatment" for eliminating weeds.

Don’t eat your broccoli: Junk food industry determined to target kids - Last week, as health advocates around the nation raced against a deadline to submit comments to the federal government on food marketing to children, the food industry was busy doing what it does best: launching a massive PR campaign to undermine anything the feds might dare do to protect children from corporate predatory marketing.

Largest four grocery retailers accounted for 37 percent of U.S. grocery sales in 2009 - U.S. sales by the 20 largest food retailers totaled $404.2 billion in 2009, amounting to 64.2 percent of U.S. grocery store sales, an increase from 39.2 percent in 1992. Although shares held by the largest 4, 8, and 20 supermarket and supercenter retailers decreased slightly from 2008 to 2009, the longer term trend shows an increasing concentration of sales among the Nation’s largest grocery retailers. Contributing factors to these increases over the past decade include mergers and acquisitions among food retailers and the rapid growth of Wal-Mart supercenters.

Farm Report: More Corn Going Into Cars Than Cows - A few years back, in order to provide support to the newborn ethanol industry, and advance the agenda of renewable energy, Congress enacted subsidies to ethanol producers. And it’s worked very well, at least in subsidy terms, said the Financial Times last month: A US government report calculated last year that taxpayers give $1.78 in subsidies to reduce gasoline use by one gallon through the use of biofuels, but even this underestimates the true cost. Since 2000, US ethanol output has risen 10-fold and corn has gone from less than $2 a bushel to nearly $8. A third of the US corn crop now goes to ethanol, which makes up a 10th of US retail petrol sales. Last week the USDA released one of its usual crop reports, which shows that now more corn is going into ethanol than into cows and chickens. Here’s a chart, showing the rapid rise of ethanol use, and a slow slide in feed use (click to enlarge):

China Leads the way in U.S. Agricultural Exports to BRIC Nations - With the increase in feed consumption, U.S. crop exports to BRIC countries have grown, especially to China. China has emerged as the leading BRIC destination for U.S. bulk commodities and crops. The value of U.S. bulk commodity exports to China has soared over recent years. The annual value of these exports averaged less than $2 billion from 1990 to 2002, rose to about $4 billion in 2005, and reached $12.3 billion in 2010.  China accounted for more than 95 percent of all U.S. bulk commodity and crop exports to BRIC countries over the past five years. United States soybean exports have led bulk commodity trade with China, surging nine-fold during the past decade to almost $10 billion in 2010. The value of U.S. feed grain exports to China rose to almost $900 million in 2010, well above the annual average of $50 million at the beginning of the decade.

It's Time To Kick Farmers Off The Federal Dole - The U.S. government has no money.  Uncle Sam is borrowing 40% of this year’s $3.8 trillion in outlays.  Total federal obligations and unfunded liabilities run roughly ten times the formal national debt of $14 trillion. Washington must cut spending. But despite their rhetoric politicians do not spend much time worrying about those in poverty.  The two biggest domestic programs provide middle class welfare:  Social Security and Medicare.  The Pentagon mostly provides welfare for populous and prosperous allies throughout Asia and Europe. The rest of the federal budget is filled with outrageous special interest pay-offs.  Consider the agricultural dole.. The system doesn’t help consumers. Reducing supplies and imposing price floors obviously are bad deals for the hungry. Paying off farmers might lower some prices, but steals back through taxes any benefits received by consumers. Agricultural subsidies are designed by farmers for farmers.

Farm Felons Pick Off California Crops - While thievery has long been a fact of life in the country, such crimes are on the rise and fighting them has become harder in many parts of California as many grants for rural law enforcement have withered on the vine. While other states have their own agricultural intrigue — cattle rustlers in Texas, tomato takers in Florida — few areas can claim a wider variety of farm felons than California, where ambushes on everything from almonds to beehives have been reported in recent years. Then there is the hardware: diesel fuel, tools and truck batteries regularly disappear in the Central Valley, the state’s agricultural powerhouse, where high unemployment, foreclosures and methamphetamine abuse have made criminals more desperate, officials say.  “All of our ag crimes are up,” said Sergeant Reed, who oversees a unit of two full-time detectives — down from three a year ago — all patrolling a county about eight times the size of Rhode Island. A wet winter and warm summer, after all, have meant healthy crops, he said, and a healthy market means happy thieves.

When life gives you lemons, make fish sticks? - What do you do with a bony, ugly, jumpy, fat, fugitive fish that's taken over the Mississippi and Illinois rivers and threatens the ecology of the Great Lakes? Grind them into fish sticks and feed them to the poor. That's the latest strategy from the Illinois Department of Natural Resources in its tussle with the Asian carp. The department plans to process tons of the fish and donate it to food banks, including the St. Louis Area Food Bank. "We'll filet them and pull the bones out and turn them into fish sticks, or the equivalent of canned tuna," said Tom Main, acting deputy director at the DNR. "The fish actually taste pretty good."  via Just an early Monday second-best policy solution.

Our Love Affair With Fish Is Unsustainable - Imagine what people would say if a band of hunters strung a mile of net between two immense all-terrain vehicles and dragged it at speed across the plains of Africa. This fantastical assemblage, like something from a Mad Max movie, would scoop up everything in its way: predators, such as lions and cheetahs, lumbering endangered herbivores, such as rhinos and elephants, herds of impala and wildebeest, family groups of warthog and wild dog. Pregnant females would be swept up and carried along, with only the smallest juveniles able to wriggle through the mesh. This efficient but highly unselective way of killing animals is known as trawling. It is practised the world over every day, from the Barents Sea in the Arctic to the shores of Antarctica, and from the tropical waters of the Indian Ocean and the central Pacific to the temperate waters off Cape Cod. Fishing with nets has been going on for at least 10,000 years – since a time when hunters pursued other humans for food and killed woolly mammoths by driving them off cliffs. Yet because what fishermen do is obscured by distance and the veil of water that covers the Earth, and because fish are cold-blooded rather than cuddly, most people still view what happens at sea differently from what happens on land.

The Toilet Challenge - In our textbook, Modern Principles, Tyler and I write:In the United States, diarrhea is a pain, an annoyance, and of course an embarrassment. In much of the developing world, diarrhea is a killer, especially of children. Every year 1.8 million children die from diarrhea. To prevent the deaths of these children we do not need any scientific breakthroughs, nor do we need new drugs or fancy medical devices. What these children need most is one thing: economic growth. Economic growth brings piped water and flush toilets, which together cut infant mortality from diarrhea by 70 percent or more. Bill Gates and the Gates Foundation think that some scientific breakthroughs are needed and they are putting millions into the Toilet Challenge a new project to build a better toilet.

House Republicans Massively Chop Funding for Wildlife, Clean Water and Air -The Republican-led House Appropriations Committee has approved a restrictive spending bill for Fiscal Year 2012 that allows uranium mining on public lands adjacent to the Grand Canyon, prohibits funding for the U.S. EPA to set greenhouse gas standards, and exempts oil and utility companies from the Clean Air Act. The EPA's budget would be cut by $1.5 billion and the Interior Department would take a $715 million hit under the bill passed by the House Appropriations Committee on Tuesday.In total, the bill includes $27.5 billion in spending - a reduction of $2.1 billion below last year's level and $3.8 billion below President Barack Obama's budget request for the Department of the Interior, the Environmental Protection Agency, the Forest Service, and other independent and related agencies.

Willem Buiter thinks water will be bigger than oil  - Buiter says water is the next big thing: I expect to see in the near future a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that will exceed the capacity of those for oil and gas today. I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG. I see new canal systems dug for water transportation, similar in ambition and scale to those currently in progress in China, linking the Yangtze River in the South to the Yellow River in the arid north.I also hope and expect that these new canal ventures will be designed and implemented with a greater awareness of the environmental and social impact of such mega-projects. India will have to engage in investment on a scale comparable to that seen today in China to produce clean water in the best locations and transport it to where the household, industrial and agricultural users are.

Reading the world In a loaf of bread - What can a humble loaf of bread tell us about the world? The answer is: far more than you might imagine. For one thing, that loaf can be “read” as if it were a core sample extracted from the heart of a grim global economy. Looked at another way, it reveals some of the crucial fault lines of world politics, including the origins of the Arab spring that has now become a summer of discontent. Consider this: between June 2010 and June 2011, world grain prices almost doubled. In many places on this planet, that proved an unmitigated catastrophe. In those same months, several governments fell, rioting broke out in cities from Bishkek, Kyrgyzstan, to Nairobi, Kenya, and most disturbingly three new wars began in Libya, Yemen, and Syria. Even on Egypt’s Sinai Peninsula, Bedouin tribes are now in revolt against the country’s interim government and manning their own armed roadblocks. And in each of these situations, the initial trouble was traceable, at least in part, to the price of that loaf of bread

Searing heat: northwestern Ontario goes up in flames - Dozens of wildfires raged across much of northwestern Ontario on the weekend as hot, dry weather swept the province, leaving forests tinder-dry. The provincial Ministry of Natural Resources says there are 92 active fires burning in the remote northwestern region. More than 30 new blazes are expected in the coming days. Water bombers, attack helicopters, aircraft and ground crews are battling the flames. There are more than 2,000 fire fighters on the ground; they will be helped by another 500 or so arriving from British Columbia early this week. Many northwestern communities are faced with heavy smoke drifting in, and they are consulting federal and provincial authorities about possible evacuations if advancing flames pose a threat.

Worst heatwave in years grips Midwest, moving east (Reuters) - An oppressive and potentially deadly summertime mix of sizzling temperatures and high humidity baked a large swath of the country again on Sunday, pushing afternoon heat indexes in dozens of cities to dangerous levels. Forecasters warned the heatwave would persist through much of the coming week and cautioned residents in more than three dozen states to take extra precautions. The National Weather Service posted excessive heat warnings for much of the country's midsection, including Illinois, Wisconsin, Minnesota, Iowa, Missouri, Kansas, Nebraska, Oklahoma, as well as South and North Dakota, where forecasters predicted heat indexes could hit 115 degrees. "This will likely be the most significant heat wave the region has experienced in at least the last five years," the weather service said.

Heat taking toll on U.S. poultry flocks -  A heat wave that has pushed temperatures well over 100 degrees has killed tens of thousands of turkeys and chickens in Kansas and North Carolina and left farmers across the lower part of the country struggling to cool off their flocks.In North Carolina, about 50,000 chickens died at a farm after the power went off for less than an hour. In Kansas, one couple lost 4,300 turkeys that took 26 hours to bury. “It felt like a war zone. It felt like hell,” turkey grower Holly Capron said. The heat wave that started over the weekend has been spreading east. Four of the nation's top turkey-producing states — Arkansas, Missouri, North Carolina and Virginia — were under a heat advisory Tuesday. Arkansas and North Carolina are also leading chicken producers. Temperatures in Kansas on Sunday reached 110 degrees, with a heat index of 118. It was 106 in the buildings near Columbus where Capron and her husband raise 22,000 turkeys for Butterball LLC.  They lost 140 birds on Saturday, but nothing prepared them for Sunday, when 4,300 died.

Drought woes grow as ranchers' cattle die from too much water  - The unrelenting Texas drought has produced a cruelly ironic twist: cattle dying from too much water. Agriculture officials in parched Texas said Wednesday there are no hard numbers on how many head of cattle have died but reports of deaths from too much water or too little are showing up across the nation’s leading cattle production state. “They over drink because they’re thirsty,” said Dr. Robert Sprowls of the Texas Veterinary Medical Diagnostic Laboratory in Amarillo. “Once they fill up on water it happens pretty quickly.”Producers are losing cattle after moving them from withered pastures where water tanks have dried up. Once in new pastures, cattle that take in too much water too quickly die within minutes and their carcasses are found near the stock tanks from which they were drinking. Texas is coming off its driest nine-month period ever and its hottest June on record. More than 90 percent of the state is in the two most severe drought stages. The cattle deaths are occurring earlier, in part because of lack of forage growth in pastures.

The Sizzle Factor for a Restless Climate - ENJOYING the heat wave? The answer is probably no if you live in Abilene, Tex., where temperatures have been at or above 100 degrees for 40 days this summer. It’s been a little cooler in Savannah, Ga., where the mercury hit 90 or more for 56 days in a row. Texas, New Mexico and Oklahoma are coping with their driest nine-month stretch since 1895. Yes, it has been a very hot summer after one of the most extreme-weather springs on record. It’s time to face the fact that the weather isn’t what it used to be.  Every 10 years, the National Oceanic and Atmospheric Administration recalculates what it calls climate “normals,” 30-year averages of temperature and precipitation for about 7,500 locations across the United States. The latest numbers, released earlier this month, show that the climate of the last 10 years was about 1.5 degrees warmer than the climate of the 1970s, and the warmest since the first decade of the last century. Temperatures were, on average, 0.5 degrees warmer from 1981 to 2010 than they were from 1971 to 2000, and the average annual temperatures for all of the lower 48 states have gone up.

Midwest heat wave generates a heat index of 131° in Iowa - A unusually intense, long-lasting, and widespread heat wave with high humidities continues to plague the Central U.S. The heat index--how hot the air feels when factoring in both the temperature and the humidity--exceeded 100°F in twelve states on Monday and thirteen on Sunday, with the dangerous heat extending from Texas northwards to North Dakota, Minnesota, and Wisconsin. At least thirteen deaths are being blamed on the heat in the Midwest. The heat index hit a remarkable 131°F at Knoxville, Iowa on Monday, and a heat index in excess of 120° was recorded at numerous locations in Iowa, Minnesota, and Illinois. The extreme heat will shift slowly eastwards this week, peaking in Chicago on Wednesday, Detroit and Pittsburgh on Thursday, and New York City and the mid-Atlantic states on Friday. Temperatures near 100°F are expected in Detroit on Thursday and New York City on Friday. Detroit has hit 100°F 18 different years in its 137-year record, and New York City 22 years out of the past 140 years, so this heat wave is expected to be about a 1 in 7 year event. While that makes it a notable heat wave, the most remarkable feature of this July 2011 U.S. heat wave is the humidity that has accompanied the heat. A heat index over 130°F, such as was observed yesterday in Iowa, is very rare in the U.S., and extremely dangerous.

It’s Not the Heat, It’s the Stupidity: Limbaugh Calls Heat Index a Liberal Government Conspiracy - Wikipedia:  “The heat index … combines air temperature and relative humidity in an attempt to determine the human-perceived equivalent temperature — how hot it feels….  The heat index was developed in 1978 … and was adopted by the National Weather Service a year later.” Rush Limbaugh:  They’re playing games with us on this heat wave, again. Even Drudge, drudge getting sucked in here.  Gonna be a 116 in Washington. No, it’s not.  It’s going to be a 100, maybe 99.  The heat index, manufactured by the government, they tell you what it feels like when you add the humidity in there.  116 -  When’s the last time the heat index was reported as an actual temperature?  It hasn’t been.  But it looks like they’re trying to get away with doing that now. Yes, the black helicopters are after Limbaugh and the whole country now.  Well, actually if there were UN helicopters, I’m sure they’d be white, since the black ones would just get too damn hot in this weather!

Get Used to New Weather Extremes - We're seeing records fall in all directions this year—wettest, driest, warmest, coldest, snowiest, stormiest, fieriest—across the globe. In the US alone, in the month of July alone, 1,079 total heat records have been broken or tied. That's 559 broken, 520 far. The map below, generated today at NOAA's US Records page, shows how records have fallen nationwide, including in Alaska and Hawaii. In fact, every state except Delaware has broken heat records so far this month. In Iowa yesterday, the heat index exceeded 130°F/54.4°C—an extremely rare occurrence in this part of the world. According to Jeff Masters, writing at his Wunderblog, the only place where a 130°F heat index is common is along the shores of the Red Sea in the Middle East.

500 Days of Summer: We’re Having a Heat Wave, a Tropical — and Subtropical — Heat Wave - Washington Post reports that “Many states hit hardest by this week’s searing heat wave have drastically cut or entirely eliminated programs that help poor people pay their electric bills, forcing thousands to go without air conditioning when they need it most. Oklahoma ran out of money in just three days.”  Hard to believe we’re the richest country in the world. The U.S. is, in some sense, being slammed by two different heatwaves –  a tropical heatwave with staggering humidity that is driving up the heat index to deadly levels and a ‘subtropical heatwave’ with staggering aridity that turns a drought into a Dust Bowl. Of the tropical heat wave, meteorologist Dr. Jeff Masters writes: Wunderground’s climate change blogger Dr. Ricky Rood in his latest post, [explains that] with hundreds of thousands of acres of farmland still inundated by flood waters, and soils saturated over much of the Upper Midwest, there has been plenty of water available to evaporate into the air and cause remarkably high humdities. This makes for a very dangerous situation, as the human body is not able to cool itself as efficiently when the humidity is high.

Peter H. Gleick: It's Hotter Than It Used to Be; It's Not as Hot as It's Going to Be - Holy crap it's hot. People, animals, and crops are dying. But not only is it hot, it's hotter than it used to be. And it's our fault. Welcome to the future of climate change. Let's keep this simple: we know the Earth is warming up -- the data are unambiguous.* We know that humans are largely responsible -- the scientific community has been clear. And we know that the massive efforts to deny these two facts have confused policy makers, the public, and the media and have seriously delayed taking any sort of effective policy action to slow climate changes. What this delay means, however, is rarely discussed, but in the most straightforward terms:  It's going to get even hotter. A lot hotter. Global warming is causing or worsening some of the extreme weather we're seeing. This influence of climate change on some extremes, including especially heat waves and heavy precipitation and some kinds of storm and flood events must no longer be waved away, swept under the rug, or otherwise ignored. It must become part of our daily discussion and debate. Until then, our politicians, in their air-conditioned chambers, under pressure from lobbyists and others who fear the policies that must inevitably be put in place to reduce our atmospheric pollution, will continue to look the other way.

It's hot out there - A "HEAT dome" is descending on Washington. It's hovering over much of America, actually, sending temperatures into triple digits (or the upper 30s, if you prefer). This is just the latest in what has been a remarkable series of extraordinary weather events. America's south is experiencing a record drought. So, too, is the horn of Africa, where a famine may impact millions of people. In late June, an airport in Oman recorded the highest ever low temperature; on the evening of the 27th, the mercury failed to drop below 107 degrees Fahrenheit. Droughts, floods, deadly storms: the news is full of them. While it's not easy to attribute any individual event to climate change, it is clear that a hotter planet translates into a higher frequency of extreme weather events. When we emit carbon into the atmosphere, we impose a tiny negative cost on society as a whole in the form of more rapid global warm and a greater intensity of the accompanying social ills. Views of the magnitude of this cost differ. Many studies peg it at somewhere between $5 and $150 per tonne of carbon. Other studies indicate that it could be far higher—perhaps more than $1,000 per tonne. But the cost is positive, and a crucial first step to dealing with climate change, therefore, is to charge people for the carbon they emit.

As heat index soars, so does record-setting power demand -- The sweltering heat wave that has much of the United States in a stranglehold is stressing the nation's power grids to the max, according to energy officials. Thursday, the Midwest Independent Transmission System Operator (MISO) -- the organization that manages the flow of bulk power in 12 states across the Midwest -- declared an emergency alert due to high temperatures stretching generators to a much higher-than-forecast load. The agency reported demand surged to its highest point ever in history Wednesday, peaking at 103,975 megawatts and surpassing the last record set on July 31, 2006. Previously in May, the agency said it expected peak demand for the summer to reach 93,842 megawatts, a projected 1.3% increase over 2010. As the heat wave continues to bear down on more than 150 million Americans in the Midwest and mid-Atlantic regions, more and more people are cranking on air conditioners and turning up demand for electricity.

US Power Grid - In the context of modern survival, electricity (the lack thereof) is near the top of the list of risks to our way of life, as it feeds systems that the majority of the population rely upon for their very survival. If you really stop and think about the essence of what would or could cause real and life-threatening disaster, the loss of electricity or power grid failure is near or at the top of the list. It wouldn’t take much more than just a few days without electricity in major populous regions to bring on chaos and desperation.Given the current heat wave that is occurring across much of the US at this time (yes, it is summer time), and the main-stream-media is reporting on the records and power consumption, it may be interesting to view some of the facts regarding the US power grid, where the power comes from, and what the power sources are that keep the systems of modern life running.

Republican governors: Prayer will solve our problems -- Trend alert! In the face of devastating natural disasters, Republican governors around the country are increasingly asking constituents to join in prayer to God to solve their states' intractable problems. The latest example is Oklahoma Gov. Mary Fallin, who, in response to a brutal heat wave that has contributed to over one hundred wildfires, asked Oklahomans to collectively pray for rain on Sunday. From the official press release: "I encourage Oklahomans of all faiths to join me this Sunday in offering their prayers for rain," Fallin said. "For the safety of our firefighters and our communities and the well-being of our crops and livestock, this state needs the current drought to come to an end. The power of prayer is a wonderful thing, and I would ask every Oklahoman to look to a greater power this weekend and ask for rain."

How Land Grabs for Biofuels Undermine Food Security - Land grabbing, a practice in which governments buy or lease land outside their borders, is a growing threat to food security. In 2009, total land grabs around the world equaled the size of France, with much of that activity happening in developing countries. Some of the land grabbers are surprising.  While the culprits are typically nations and/or investors, even  American universities like Harvard and Vanderbilt have been channeling endowment dollars through hedge funds to make huge land grabs in Africa. Kofi Annan, former secretary general of the United Nations and current chairman of the Alliance for a Green Revolution in Africa, has been drawing attention to the tri-fold problem of climate change, food security, and land grabs, calling for an end to predatory land grabs.  In a recent lecture Annan criticized the practice: “It is neither just nor sustainable for farmland to be taken away from communities in this way nor for food to be exported when there is hunger on the doorstep. Local people will not stand for this abuse – and neither should we.”

Tens of thousands feared dead in south Somalia famine - Tens of thousands of Somalis are feared dead in the world's worst famine in a generation, the UN said Wednesday, a crisis so severe that the United States is loosening rules meant to prevent emergency funds from falling into the hands of al-Qaida-linked militants.  Exhausted, rail-thin women are stumbling into refugee camps in Kenya and Ethiopia with dead babies and bleeding feet, having left weaker family members behind along the way. “Somalia is facing its worst food security crisis in the last 20 years,” said Mark Bowden, the UN’s top official in charge of humanitarian aid in Somalia. “This desperate situation requires urgent action to save lives ... it's likely that conditions will deteriorate further in six months.” The crisis is the worst since 1991-92, when hundreds of thousands of Somalis starved to death, Mr. Bowden said. That famine prompted intervention by an international peacekeeping force, but it eventually pulled out after two American Black Hawk helicopters were shot down in 1993.

EPA sued over Los Angeles smog -- Environmental groups are suing the U.S. Environmental Protection Agency, saying it has failed to force officials to crack down on smog in the Los Angeles Basin.The suit by environmental and public health groups says the EPA missed a May deadline to determine whether ozone levels in the area are hazardous to public health, a determination that could lead to tougher limits on pollution, the Los Angeles Times reported Tuesday. Congress established a standard for ozone pollution, a principal contributor to smog, under the federal Clean Air Act and the EPA was to certify no later than May whether air districts had met the standard. The EPA's "silence" on the LA region suggests the agency "knows we haven't met the standard and it is choosing to not make the determination," Angela Johnson-Meszaros, an environmental attorney involved in the suit, said.

IEA CO2 Emissions Update 2010 - Bad News - The International Energy Agency (IEA) has released unpublished estimates of 2010 global carbon dioxide (CO2) emissions, and the news is not good.  Between 2003 and 2008, emissions had been rising at a rate faster than the IPCC worst case scenario.  However, the global recession slowed the emissions growth considerably, and in fact they actually declined slightly from 29.4 billion tons (gigatons, or Gt) CO2 in 2008, to 29 Gt in 2009. However, despite the slow global economic recovery, 2010 saw the largest single year increase in global human CO2 emissions from energy (fossil fuels), growing a whopping 1.6 Gt from 2009, to 30.6 Gt (the previous record annual increase was 1.2 Gt from 2003 to 2004).  As illustrated in Figure 1, in 2009 we had dropped into the middle of the IPCC Special Report on Emissions Scenarios (SRES) scenarios, but the 2010 increase has pushed us back up toward the worst case scenarios once again.

Climate change ‘threatens peace’ - Climate change poses a major threat to future peace and security, a senior UN official has warned. Achim Steiner from the UN Environment Programme said climate change would also "exponentially" increase the scale of natural disasters. His comments followed a UN declaration of famine in parts of Somalia. Meanwhile, Russia rejected a Security Council statement backed by Western nations which asserted the link, but later agreed to a weaker text. The Russian envoy Alexander Pankin said he was sceptical about the implications of putting climate change on the security council's agenda. Security Council members finally agreed to a text which spoke of the "possible security implications" of climate change.

NSIDC: Early Sea Ice Melt Onset, Soaring North Pole Temperatures, Presage Rapid 2011 Summer Decline - As the country swelters, ice and snow melt in the North.   The National Snow and Ice Data Center has just issued an update on this year’s version of the Arctic death spiral, concluding: Arctic sea ice extent declined at a rapid pace through the first half of July, and is now tracking below the year 2007, which saw the record minimum September extent. The rapid decline in the past few weeks is related to persistent above-average temperatures and an early start to melt. In fact, “air temperatures over the North Pole were 6 to 8 degrees Celsius (11 to 14 degrees Fahrenheit) higher than normal.” The NSIDC also published a helpful backgrounder, “Heading towards the summer minimum ice extent, on NSIDC’s new Icelights: Your burning questions about ice and climate.” It quote NSIDC researcher Walt Meier explaining that while  individual years may  fluctuate, “the overall long-term trend will continue downward.” 

Massive ice island drifts toward Canada - A Manhattan-sized chunk of ice that broke off a glacier in Greenland nearly a year ago is drifting toward the coast of Newfoundland, Canada — providing a stunning sight to scientists and curiosity-seekers but also posing a potential threat to ships. The ice island is 20 square miles — roughly 6.2 miles long and 3.1 miles wide.  . It was formed when a 97-square-mile chunk of ice broke off Greenland's Petermann Glacier on Aug. 5, 2010, possibly due to warming of the Atlantic Ocean. The ice island, the largest single chunk remaining from the massive parent chunk, has been winding its way through Arctic waters ever since.  In the past few days, it has been moving south at a rate of 5 to 6 miles per hour. On Thursday, it was about 11.5 miles off the Labrador coast, drifting toward Newfoundland, said Lionel Hache, senior ice forecaster with Canadian Ice Service in Ottawa. The Ice Service, a department of Environment Canada, has been tracking the movement of the ice island.

Rising oceans - too late to turn the tide? - If sea levels rose to where they were during the Last Interglacial Period, large parts of the Gulf of Mexico would be under water (red areas), including half of Florida and several Caribbean islands. (Photo illustration) Melting ice sheets contributed much more to rising sea levels than thermal expansion of warming ocean waters during the Last Interglacial Period, a UA-led team of researchers has found. The results further suggest that ocean levels continue to rise long after warming of the atmosphere has leveled off.  Thermal expansion of seawater contributed only slightly to rising sea levels compared to melting ice sheets during the Last Interglacial Period, a University of Arizona-led team of researchers has found. The study combined paleoclimate records with computer simulations of atmosphere-ocean interactions and the team's co-authored paper is accepted for publication in Geophysical Research Letters.

House panel votes to bar foreign climate change funding— A panel of the US Congress on Thursday moved to bar foreign assistance related to climate change, defying President Barack Obama's calls to contribute as part of an international accord. On a party line vote, the Republican-led House Foreign Affairs Committee voted to ban funding in next year's budget for Obama's initiative to support poor nations in adapting to climate change or pursuing clean energy. But the measure's future is uncertain as other committees also have jurisdiction over climate funding including in the Senate, where Obama's Democratic Party is in control. Representative Connie Mack, a Republican from Florida, said he proposed the funding cut as "we have to prioritize US tax dollars." Jean Schmidt, a Republican from Ohio, questioned if human activity was causing climate change.

Obama threatens to veto Interior-EPA spending bill - President Barack Obama on Thursday afternoon threatened to veto the House Interior-EPA appropriations bill. In a five-page Statement of Administration Policy1, the White House blasted various policy riders as well as the overall funding level for the EPA, which it says would leave the agency “unable to implement its core mission of protecting human health and the environment.” The laundry list of policy riders the White House opposes includes language preventing the EPA from regulating greenhouse gas emissions from stationary sources, blocking Interior from stopping uranium mining claims near the Grand Canyon and stopping new regulations on mountaintop removal mining. The administration also criticizes numerous spending cuts to programs as wide-ranging as forest fire suppression, wetlands and wildlife grants and the National Endowment for the Arts.

Ideal carbon capture solution years off: study - A dream climate change cure to turn planet-warming greenhouse gases into useful products from jet fuel to plastics will take years to develop from the lab and pilot projects, a report found on Thursday. Pilot projects already use carbon dioxide (CO2) to feed plants, for example to boost tomatoes in glasshouses, while laboratories have tested the manufacture of concrete, plastics and oils, but costs are high and projects depend on concentrated streams of CO2. Scaling up depends on applying the technology to fossil fuel power plants, trapping the greenhouse gas from a diluted mixture of other flue gases. Converting the trapped CO2 into useful products and minerals would avoid the cost of burying it underground in empty oil wells, as planned under another untested process called carbon capture and storage (CCS).

David Suzuki: Natural gas is not a solution for climate change - Can a fossil fuel help us avoid the harmful effects of other fossil fuels? It’s a question that’s come up lately as natural gas is eyed as a cleaner alternative to oil and coal. Burning coal and oil causes pollution and emits greenhouse gases that drive climate change. Exploring and drilling for oil and mining coal also come with numerous environmental impacts—especially as easily accessible oil runs out and we have to rely on deep-water drilling and oil sands. Natural gas burns cleaner than oil and coal, and it emits less carbon dioxide for the amount of energy it produces. This has led industry and governments to argue for an increase in natural gas production. It’s not that simple, though, especially when we consider the impacts of unconventional natural gas, along with extraction methods such as hydraulic fracturing, or “fracking”. A report by the David Suzuki Foundation and Pembina Institute, “Is natural gas a climate change solution for Canada?” examines the key issues around natural gas and reaches surprising conclusions."

Destroying our only home -Primatologist Jane Goodall believes that what sets the human race apart is its explosive intellect - but are the myriad environmental and social problems we experience an indication that we have lost wisdom?

You Can't Kill a Planet and Live on It, Too - With an entire planet being slaughtered before our eyes, it's terrifying to watch the very culture responsible for this - the culture of industrial civilization, fueled by a finite source of fossil fuels, primarily a dwindling supply of oil - thrust forward wantonly to fuel its insatiable appetite for 'growth.' Deluded by myths of progress and suffering from the psychosis of technomania complicated by addiction to depleting oil reserves, industrial society leaves a crescendo of atrocities in its wake. A very partial list would include the Bhopal chemical disaster, numerous oil spills, the illegal depleted uranium-spewing occupations of Iraq, Afghanistan, mountaintop removal, the nuclear meltdown of Fukushima, the permanent removal of 95 percent of the large fish from the oceans (not to mention full-on systemic collapse of those oceans), indigenous communities replacement by oil wells, the mining of coltan for cell phones and Playstations along the Democratic Republic of the Congo/Rwanda border - resulting in tribal warfare and the near-extinction of the Eastern Lowland gorilla. As though 200 species going extinct each day were not enough, climate change, a direct result of burning fossil fuels, has proved not only to be as unpredictable as it is real, but as destructive as it is unpredictable. The erratic and lethal characteristics of a changing planet and its shifting atmosphere are becoming the norm of the 21st century, their impact accelerating at an alarming pace, bringing this planet closer, sooner than later, to a point of uninhabitable ghastliness. And yet, collective apathy, ignorance and self-imposed denial in the face of all this sadistic exploitation and violence marches this culture closer to self-annihilation.

The Answer, My Friend - Krugman - Yves Smith links to an interesting article about wind power; apparently it’s possible to get a lot more power from a given acreage of wind farm if you design the turbines in a way that minimizes aerodynamic interference. OK, not my field of expertise, to say the least. But there’s a broader point this story brings to mind. Opponents of a strong policy to curb greenhouse gases tend to be fervent believers in the magic of market economies. Yet somehow their faith goes away when it comes to environmental issues. If you seriously believe in markets, you should believe that given the right incentives — namely, putting a price on emissions, through either a tax or a tradable permit scheme — the economy will find lots of ways to emit less. You should definitely not believe, as anti-environmentalists claim, that the result would be economic disaster.

Less energy is better--really - I now make it a staple of my public talks on energy to ask who in the audience has been to Europe. Usually many hands rise. I then explain that Americans seem to love to get on a jet plane, cross the Atlantic, and spend time in a theme park called Europe where good meals abound; interesting and usually friendly people reside; and beautiful, historic cities and breathtaking countryside are everywhere. What they may not know is that by American standards Europeans live in an energy-starved society where the per capita energy consumption is only half that of the United States.There are many things that make European energy frugality possible: the density of European cities; the wide availability of good public transportation; the willingness of people to walk or bicycle to their destinations; small cars; and parsimonious use of central heating to name just a few. Perhaps the key to understanding Europeans when it comes to energy use is the very high price of energy in Europe, due primarily to stratospheric energy taxes. For example, in the United Kingdom the effective tax rate on motor fuel for automobiles as of December 2010 was 175 percent. When something costs a lot, people tend to figure out how to use less of it or to use it not at all.

Nuclear delusions - Desperately seeking answers for a low carbon energy regime, some observers propose a “nuclear renaissance” to replace hydrocarbons. Nuclear companies, nations, and advocates offer nuclear as a possible “low-carbon” energy path. However, the evidence in hand shows that nuclear energy is not the solution to humanity’s energy needs that many hope for. The industry claims that nuclear energy is “carbon free” because while a nuclear plant operates, it does not directly burn hydrocarbons. However, from a life-cycle analysis, nuclear energy is a carbon hog. Plant construction – cement, steel, and complex electronics – is carbon intensive. The nuclear fuel cycle – mining, milling, enriching, fabrication, transport, and processing nuclear waste – is carbon intensive. Halogenated compounds used in uranium refining have a greater impact on global heating than carbon dioxide. Finally, when a nuclear plant’s 40-to-60 year life is over, decommissioning adds more carbon costs and leaves a radioactive, lifeless blotch on the landscape. Many studies confirm that nuclear electricity is not low-carbon; here are three:

New EU nuclear waste law allows export abroad The EU have just adopted the ‘radioactive waste and spent fuel management directive’ meaning that radioactive waste will be buried in secure bunkers in the future. Is this a ‘major achievement for nuclear safety in the EU’, as EU energy commissioner Guenther Oettinger puts it, or will it just make the embodied costs outweigh the net energy generation?Europe still has 143 reactors that come part and parcel with 50,000 cubic metres of radioactive waste each year (according to nuclear industry body Foratom), currently stored in bunkers and warehouses, taking years to cool. EU Member states will now have to draw up plans before 2015 for 'deep geological repositories' – caverns buried between 100 and 700 meters underground, built in clay or granite rock. But this is in no way an instant solution. "At present, such deep geological repositories do not exist anywhere in the world nor is a repository in construction outside of the EU," Oettinger's team stated. "It takes currently a minimum of 40 years to develop and build one." The plan to build these nuclear caverns requires that the safety standards drawn up by the International Atomic Energy Agency become legally binding.

Meltdown: What Really Happened At Fukushima? - The authors have spoken to several workers at the plant who recite the same story: Serious damage to piping and at least one of the reactors before the tsunami hit. All have requested anonymity because they are still working at the plant or are connected with TEPCO. One worker, a maintenance engineer in his late twenties who was at the Fukushima complex on March 11, recalls hissing and leaking pipes.  “I personally saw pipes that came apart and I assume that there were many more that had been broken throughout the plant. There’s no doubt that the earthquake did a lot of damage inside the plant," he said. "There were definitely leaking pipes, but we don’t know which pipes – that has to be investigated. I also saw that part of the wall of the turbine building for Unit 1 had come away. That crack might have affected the reactor.” A second worker, a technician in his late 30s, who was also on site at the time of the earthquake, narrated what happened. “It felt like the earthquake hit in two waves, the first impact was so intense you could see the building shaking, the pipes buckling, and within minutes, I saw pipes bursting. Some fell off the wall. Others snapped. I was pretty sure that some of the oxygen tanks stored on site had exploded but I didn’t see for myself.

Tepco Rushes to Cover Fukushima as Typhoon Nears - Tokyo Electric Power Co. is rushing to install a cover over a building at its crippled Fukushima Dai-Ichi nuclear plant to shield it from wind and rain as Typhoon Ma-on approaches Japan’s coast from the south.  Work on the cover for the turbine building of the No. 3 reactor started at about 8:30 a.m. today, Junichi Matsumoto, a general manager at the utility known as Tepco, said at briefing in Tokyo. The transfer of tainted water for storage in a barge docked next to the plant was halted.  The eye of Ma-on, which is categorized as “extremely strong,” was about 420 kilometers (260 miles) southeast of the city of Kagoshima at 4 p.m. today, or 1,200 kilometers from the Fukushima plant, according to the website of the Japan Meteorological Agency.   A forecast track from the U.S. Navy Joint Typhoon Warning Center indicates the storm may pass over the Fukushima plant by July 21.

Japan scrambles to protect damaged reactor from typhoon - Workers in Japan scrambled Monday to build a protective covering over a damaged nuclear reactor ahead of an approaching powerful typhoon, an energy company spokesman said. Typhoon Ma-on -- currently a "Large" and "Very Strong" storm, according to the Japan Meteorological Agency -- should strike Japan well south of the damaged no. 3 reactor at the crippled Fukushima Daiichi nuclear power plant. But the Tokyo Power Company, which is responsible for the plant wracked by the March 11 tsunami that struck northeast Japan, is constructing a "roof-like structure to prevent rain from entering holes on the turbine building," said spokesman Satoshi Watanabe. The energy company says it aims to complete construction late Monday. Workers enter reactor No. 1 in Japan Typhoon Ma-on is predicted to make landfall Tuesday, according to the country's meteorological agency.

TEPCO Acts As Typhoon Heads For Fukushima - Tokyo Electric Power Co (TEPCO) is rushing to install a cover over a building at its crippled Fukushima Dai-ichi nuclear plant to shield it from wind and rain as Typhoon Ma-on approaches Japan. Work on the cover for the turbine building of the No 3 reactor started yesterday, said TEPCO general manager Junichi Matsumoto. The transfer of tainted water for storage in a barge docked next to the plant was halted, spokesman Satoshi Watanabe said. The eye of Ma-on, categorised as "extremely strong," was about 1,200km from the Fukushima plant, according to the website of the Japan Meteorological Agency, which issued warnings for floods and high waves along the southern coast from Okinawa to Tokyo. The storm was heading north and may cross Kyushu early today. The United States Navy Joint Typhoon Warning Center said the storm may pass over the Fukushima plant by Thursday.

Must see Arne Gundersen video: Fukushima reactors to have tents over them to hold back radioactive steam - Pay close attention at minute 1 when the animation shows the radiation traveling across the Pacific. While many radioactive cattle have been discovered large distances from Fukushima, what is more important is where their feed is coming from. "It's not only about the radioactive cattle in Fukushima Prefecture; its also about the radioactive straw the cattle eat that was grown elsewhere." Straw found 45 miles from Fukushima is highly contaminated with radioactive cesium, which is an indication that radiation has contaminated large portions of Northern Japan. More than half a million disintegrations per second in a kilogram of straw are comparable to Chernobyl levels. This proves that the American Nuclear Regulatory Commission was correct when it told Americans to evacuate beyond 50 miles and that the Japanese should have done the same.

Japan Bans Cattle Shipments as Contamination Spreads - Beef cattle shipments from areas near Japan’s stricken Fukushima nuclear plant were banned as consumers and lawmakers accused the government of negligence after more cows were found contaminated with radiation.  Authorities discovered 637 cattle that had been fed hay tainted with radioactive cesium and sent to market from farms in prefectures including Fukushima, Masahiro Seki, an official at the Ministry of Agriculture, Forestry and Fisheries’ livestock and feed division, said in an interview yesterday.  Four months after an earthquake and tsunami crippled the Fukushima Dai-Ichi power station causing the worst nuclear disaster since Chernobyl, Chief Cabinet Secretary Yukio Edano said yesterday the government halted all shipments of cattle from the area. Aeon Co., Japan’s biggest supermarket chain, said July 16 it had sold beef from cattle tainted by radiation at 14 of its stores in Tokyo and four other prefectures. “This government completely lacks risk-management ability,” Tsutomu Takebe, a former agriculture minister and opposition Liberal Democratic Party lawmaker, told parliament yesterday. “It’s already four months, and what have you done?”

The industrial revolution as an energy revolution - The most fundamental defining feature of the industrial revolution was that it made possible exponential economic growth – growth at a speed that implied the doubling of output every half-century or less. This in turn radically transformed living standards. Each generation came to have a confident expectation that they would be substantially better off than their parents or grandparents. Yet, remarkably, the best informed and most perspicacious of contemporaries were not merely unconscious of the implications of the changes which were taking place about them but firmly dismissed the possibility of such a transformation. The classical economists Adam Smith, Thomas Malthus, and David Ricardo advanced an excellent reason for dismissing the possibility of prolonged growth.  Before the industrial revolution, economists considered output to be fundamentally constrained by the limited supply of land. This column explores how the industrial revolution managed to break free from these shackles. It describes the important innovations that made the industrial revolution an energy revolution.

China Asks ConocoPhillips To Halt Oilfield Output - China's State Oceanic Administration (SOA) has ordered ConocoPhillips (COP.N) to halt production at two offshore oilfield platforms due to slow progress in cleaning up oil leaks. The leaks from platforms B and C of the Penglai 19-3 oilfield in the northern Bohai Bay, which started on June 4 and June 17, respectively, polluted 840 square kilometres of water, the administration said last week. "Most of the measures taken by ConocoPhillips so far are temporary and remedial. They can not completely eliminate risks of oil spills and the possibility of another oil spill is at all times posing huge threat to the ecological environment of the Bohai Bay," the administration said on its website ( Oil continued to spill from the two platforms and there was still oil slick floating on the sea, SOA added. ConocoPhillips is the operator of Penglai 19-3, China's largest offshore oilfield, which has five production platforms with total daily production of roughly 160,000 barrels.

Oil Spill Six Times Size Of Singapore - A huge oil spill off the Chinese coast has now contaminated an area around six times the size of Singapore, state media reported yesterday, as the government said it may seek compensation for the leak. The spill from the oil field, which the United States’ ConocoPhillips operates with China’s state-run oil giant CNOOC, has polluted a total area of almost 4,250 square kilometres (1,650 square miles), government figures showed. The figures, which were announced on the State Oceanic Administration website earlier this week but only reported yesterday, were almost five times the size of the 840-square-kilometre area previously reported. The administration says that area remains worst affected by the spill, but that another 3,400 square kilometres have also been contaminated to a lesser degree by the oil. The spill was kept secret by the authorities for several weeks before being made public this month, sparking suspicions of an official cover-up, and the disaster has triggered a furious public response in China

ConocoPhillips Halts Oil Operations In Bohai Bay, China - ConocoPhillips has been ordered by the Chinese government to halt oil rig operations in Bohai Bay. China said Wednesday it had ordered ConocoPhillips to immediately stop operations at several rigs in an area off the nation’s eastern coast polluted by a huge slick. The 336-square-mile slick emanating from the oil field in Bohai Bay — which ConocoPhillips operates with China’s state-run oil giant CNOOC – has sparked outrage amid allegations of a cover-up. On Wednesday, the State Oceanic Administration (SOA) said operations would not be allowed to resume before the source of the spill was fully plugged and “risks eliminated,” as fears over the long-term impact on the environment grow. “There has been oil seeping continuously into the sea for days from platforms B and C in the Penglai 19-3 oil field and there is still a slick in the surrounding marine areas,” the SOA said in a statement.

Administration Says Minor Oil Seepages Persist In Bohai Area - Oil leaks at China's largest offshore oilfield in Bohai Bay, operated by US energy giant ConocoPhillips Co, may be continuing as the company has failed to take effective remedial measures, according to the State Oceanic Administration (SOA), the country's ocean watchdog.  While an on-site investigation of the Penglai 19-3 oilfield found no oil slicks near the company's B and C platforms on Friday, agencies under the SOA found minor seepages were still occurring 20-30 times a minute, leaking about 1-liter of oil in 24 hours at Platform C, where an open-flame was burning on the platform.  Operating staff at ConocoPhillips claimed the flame was caused by the burning of natural gas to generate electricity for the platform and Lu Aimin, manager of Platform B, told the Xinhua News Agency the seepages at Platform C were caused by an effort to clean up oil on the seabed. 

How Do You Hide an Oil Spill? Ask China- On Friday, China’s State Oceanic Administration reported that an oil spill in June from two wells in Bohai Bay has polluted 4,250 square kilometers—1,650 square miles—of sea, an area six times the size of Singapore.  Moreover, another 3,400 square kilometers had been contaminated to a lesser degree, according to the agency. According to the South China Morning Post, ConocoPhillips immediately reported the first spill to the State Oceanic Administration on June 4, the day it occurred. Its partner in the Penglai field, China National Offshore Oil Corporation, said nothing to the public until July 1, despite the fact that large numbers of dead fish were washing up on nearby shores. When SOA got around to saying something on July 5, it fibbed. “There is no visible floating oil on the sea and the leak is now under control,” said a spokesman—although one official conceded that oil was still visible. Unfortunately, Beijing gets no credit for coming clean. The July announcements, after all, were prompted by whistle-blowing reports on Sina Weibo, a Twitter-like service in China, of the leakages.

Green Skeptics Sally Forth To Oil Spill - A fishing boat packed with non-governmental volunteers will set off Sunday for the Penglai 19-3 oil field in Bohai Bay to inspect the spill amid suspicions that facts are being concealed. They want to assess the true level of contamination and inform the public, Feng Yongfeng, a senior researcher with the Beijing-based NGO Greenbeagle, one of the activity's initiators, told the Global Times on Friday. "In addition to the delay revealing oil spills to the public, the changing answers from authorities and the developers about the oil spills have disappointed us," Feng said. Following mounting online speculation over the size and scope of the alleged oil spills at the Penglai 19-3 oil field, the State Oceanic Administration on July 5 confirmed two oil leaks on June 4 and June 17, fouling an area of more than 840 square kilometers.

Oil from giant spill reaches Chinese coast: Xinhua - Oil from a huge spill off the Chinese coast has been found washed up on the shore in two separate areas, state media reported on Wednesday. A 300-metre "belt" of oil was found on a bathing beach in the port of Jingtang in the northern province of Hebei, the official Xinhua news agency reported. Oil particles measuring between one and three centimetres (0.5 to 1.2 inches) across were also found on a four-kilometre stretch of beach in the northeastern province of Liaoning, Xinhua said.It has been confirmed that the particles came from the Penglai 19-3 oil field in Bohai Bay, Xinhua said, citing Lin Fangzhong, a State Oceanic Administration official. The spill from the oilfield, which the US firm ConocoPhillips operates with China's state-run oil giant CNOOC, has polluted a total area of almost 4,250 square kilometres (1,650 square miles), according to government figures released last week.

Media Allowed to Film Bohai Bay Oil Leaks in Shandong Province -video

Oil companies under fire in China for offshore oil spill - The oil spill in China's Bohai Bay has unleashed a storm of criticism, not only at the operators of the offshore field, but also at the authorities for the way they have handled the ongoing disaster.  The State Oceanic Administration stands accused of keeping quiet about the spill in the Yellow Sea for weeks until the truth started to emerge - and then only gradually. It was only once criticism of officialdom was heard that the authorities went on the offensive, last week ordering a halt to production on the two platforms affected in the Penglai 19-3 field, China's largest offshore field.  ConocoPhillips China (COPC), the Chinese subsidiary of the US oil concern based in Houston, and its Chinese partner, the state-owned China National Offshore Corporation (CNOOC) have both come under attack.  The companies insist that the leaks have now been closed. But Chinese observers are drawing unfavourable comparisons with BP and the Deepwater Horizon spill in the Gulf of Mexico last year.

An Oil Spill Runs Through It: Montana Suffers Another Pipeline Rupture - The AP dropped more bad news on a state already reeling from Exxon’s Yellowstone spill: A newly discovered oil spill in northwestern Montana went unreported for a month before a neighboring landowner complained to the Blackfeet Indian Tribe, federal regulators said Monday.FX Drilling Co. never reported the spill, estimated to be between 420 and 840 gallons, to the tribe or to the Environmental Protection Agency, EPA spokesman Joe Vranka said. A fossil fuel company lying to the public about a spill — who could believe it? This should be another the nail in the coffin for TransCanada’s proposed tar sands pipeline into the U.S. — see As America’s “Last Best River” Suffers Through Exxon Spill, Experts Warn of Risks from Keystone XL Pipeline.

Alberta pipeline shut down after 1,300 barrels of crude oil leaked into swamp and creek - Pembina Pipeline Corporation said Wednesday that it is investigating an oil spill northwest of Edmonton, Alberta. The company said it shut down the pipeline after approximately 1,300 barrels of crude oil leaked into muskeg and an unnamed creek in Swan Hills, Alberta. Pembina said no oil has entered any named waterways or sources of drinking water following the spill that occurred Tuesday. Pembina CEO Bob Michaleski said the pipeline has been shut down, the spill has been contained and clean-up crews have been sent to the area. An Alberta Health Services official said the spill hadn’t caused any immediate concerns or complaints from people who live in the region. The shut-down order came after company monitors noticed a volume imbalance in the line on Tuesday. Workers later confirmed the spill. Pembina said it is making arrangements to truck oil that is normally sent through the pipeline.

Koch, Exxon Mobil Among Corporations Helping Write State Laws Across U.S - Koch Industries Inc. and Exxon Mobil Corp. (XOM) are among companies that would benefit from almost identical energy legislation introduced in state capitals from Oregon to New Mexico to New Hampshire -- and that’s by design.  The energy companies helped write the legislation at a meeting organized by a group they finance, the American Legislative Exchange Council, a Washington-based policy institute known as ALEC.  The corporations, both ALEC members, took a seat at the legislative drafting table beside elected officials and policy analysts by paying a fee between $3,000 and $10,000, according to documents obtained by Bloomberg News.  The opportunity for corporations to become co-authors of state laws legally through ALEC covers a wide range of issues from energy to taxes to agriculture. The price for participation is an ALEC membership fee of as much as $25,000 -- and the few extra thousands to join one of the group’s legislative-writing task forces. Once the “model legislation” is complete, it’s up to ALEC’s legislator members to shepherd it into law.  “This is just another hidden way for corporations to buy their way into the legislative process,”

"Anonymous" Hackers Attack Monsanto, Tar Sands Oil Companies - The notorious activist hacking group 'Anonymous' has launched two new campaigns championing a pair of green causes -- helping U.S. farmers earn the right to label their food as 'GMO-free' and working to obstruct the expansion of the devastating tar sands oil project in Alberta, Canada. Monsanto, the giant biotech firm, has confirmed it was the victim of a large-scale hacking attack. And the oil companies are next, Anonymous says. Anonymous Versus Monsanto MSNBC reports that the 'Hacking group Anonymous has posted information on 2,500 Monsanto employees and associates.' In addition, the hacking collective bombarded the company's international websites and succeeded in shutting them down for nearly three days. What stoked the ire of the infamous online activists? Here's CNET: 'the Anonymous online activist collective ... said today that it had attacked Web servers of Monsanto and released data on employees to protest the company's lawsuits against organic dairy farmers for stating on labels that their products don't contain growth hormones.' Anonymous posted a statement shortly after, detailing their assault:

"Senators unveil bill to funnel oil-spill penalty money to Gulf" - A bipartisan group of senators floated legislation Thursday that would funnel billions of dollars in fines from last year’s oil spill to Gulf Coast states. The legislation mandates that 80 percent of Clean Water Act penalties eventually imposed on BP or other companies deemed responsible for the spill go to five Gulf states. Under current law, penalty money goes to the federal Treasury. ... In total, 35 percent of the penalty money is evenly split among the five Gulf coast states under the legislation. .BP and the other companies deemed responsible for the spill face billions of dollars in penalties. If BP is deemed negligent under the Clean Water Act by the courts, the company will have to pay $1,000 for every barrel of oil spilled into the Gulf. If the courts find that BP was grossly negligent, the company will have to pay $4,200 per barrel. Last year's spill spewed about 4.9 million barrels of oil into the Gulf, meaning BP could have to fork over between $5.4 billion and $21.1 billion.

Where did the Gulf’s spilt oil and gas go? - The puzzle over what happened to the oil and gas released during the Deepwater Horizon oil spill in the Gulf of Mexico last year has been partially solved. Oil is composed of many thousands of different chemicals but the plume that stretched through the Gulf contained relatively few. Now chemists have worked out what happened to the rest. Christopher Reddy, an environmental chemist at the Woods Hole Oceanographic Institution in Massachusetts, and colleagues, used a remotely operated submarine to collect samples directly from the leaking well in June 2010 and compared these with samples taken from elsewhere in the oil plume. The team found that water-soluble compounds dissolved in neutrally buoyant seawater about 400 metres above the wellhead. These included benzene, toluene, ethylbenzene and xylene – a toxic suite collectively referred to as BTEX. And in this layer they stayed. By contrast, the compounds that reached the surface were mainly insoluble.

America’s Domestic Oil Production Peak Presaged the Rise of Legalized Gambling - As a lifelong history buff and someone who became Peak Oil Aware several years ago, I find it interesting to reexamine the past 40 years of American history since America’s domestic oil production peaked in 1970 through that lens. Some aspects of that momentous event are clearly obvious—for instance we have since become totally dependent upon oil imports to keep our economy running. Other changes in our society are much subtler—such as the fact that the average working person’s wages when adjusted for inflation have been virtually stagnant since the Nixon administration. Not coincidentally, I would argue, gambling has in recent years shaken off its Mafia-dominated roots and has ridden a wave of legalization to spread far and wide across the landscape. In 1970, there was only one place in America where you could go a wager your paycheck without the risk of being arrested, and that place was Las Vegas.

The Peak Oil Crisis: Reality On Hold - As much of America bakes in some of the highest temperatures ever recorded and while Washington argues interminably over taxes, budget cuts and debt caps, one is struck by the unreality of it all. When the House of Representatives votes to preserve the incandescent light bulb for a while as a symbol of personal freedom, it is as if we have entered a wonderland where black is white, up is down and as a nation we have lost touch with reality. Our media, the cornerstone of our democracy, clearly has failed to communicate something of great import to us. Perhaps it is the information overload of the electronic age. There is so much news that the big picture is lost in mountains of trivia - there are only so many minutes in day. Another possibility is that there is so much bad news out there, that nobody really wants to hear or think about it. At last count there were at least a dozen mega dangers looming on the horizon all of which have the potential to change the nature of global civilization in profound ways. Yet the body politic seems to take little or no notice and concerns itself largely with issues that will soon be swept away by change. These dangers range from the depletion of our fossil fuel and mineral resources, to shrinking food and water supplies, to rising oceans, to political upheavals.

International Oil Efficiency vs Gas Prices - The above graph shows per capita oil consumption versus the retail price of gasoline in 22 developed countries.  The 2010 oil consumption data come from BP, the population figures from Wikipedia, and the 2010/2011 gasoline prices from GTZ. This is a rough exercise - ideally I would have liked to compare vehicle fleet efficiency to retail gas prices, but haven't found suitable cross-country statistics yet.  Nonetheless, there is a clear inverse relationship, in which each additional $/gallon in gas prices is associated with using 1.5 barrels/person less each year.  This is, of course, a very long-term relationship - differences between different country's oil consumption is caused by factors like the density of the built environment - differences that have been building for over a century - as well as by the nature of the vehicle fleet which changes over a decade or two. Currently, no developed country runs on less than about 9 barrels/person/year, with the leaders being Portugal, Italy, the UK, and France.

Report: High oil prices unlikely to budge -- Everything including the imminent start of the hurricane season in Mexico suggests the oil price will stay up in the foreseeable future despite efforts by consumer nations' groups and OPEC to ease upward pressure on crude market movements. More oil was released on world markets in June and July than in the recent past as part of recent market maneuvers at the International Energy Agency, which represents consumer industrial countries, and at the Organization of Petroleum Exporting Countries. Traders' calculations that excess oil would push prices down didn't meet the expected with market results, however. The reason, the London Center for Global Energy Studies said in its Monthly Oil Report, was that the release of crude oil stocks by the IEA created its own dynamic as markets noticed the lower reserves and robust consumer demand in Asia kept the prices buoyant.

IEA could take further action on oil -- The International Energy Agency isn't ruling out another release of strategic oil reserves in an effort to keep market volatility under control, Paris said. The IEA last month called on its members to release oil from strategic reserves to provide more liquidity in a market tightened by a shuttered crude oil sector in war-torn Libya. The IEA move followed a decision by the Organization of the Petroleum Exporting Countries to keep official production quotas set in 2008 in place. Economists had warned higher energy prices could erase an economic recovery in 2011. IEA officials had said their June action wasn't specifically about price, however. Nevertheless, with crude oil prices on the New York Mercantile Exchange moving closer to $100 per barrel for August delivery, French Industry Minister Eric Besson said another IEA release was something to consider.

Venezuela Officially Has More Oil Than Saudi Arabia - Venezuela's proven oil reserves have exploded past Saudi Arabia in the annual statistical bulletin from OPEC. Venezuela's reserves reached 296.5 billion barrels, up 40.4% year-on-year and higher than Saudi Arabia's 264.5 billion barrels. This number accepts controversial claims regarding the accessibility and quality of oil in the Orinoco Belt. The boost in reserves to Venezuela along with Iraq and Iran are seen as supporting efforts to keep oil prices high, according to Dow Jones. Here's a look at the new paradigm:

Saudi oil exports set to dive in long-term - Saudi Arabia’s crude oil exports are expected to sharply decline in the long term as its output is projected to rise slightly and domestic demand is growing fast, a key investment firm in the Gulf Kingdom said on Wednesday. The sharp fall in oil exports constitutes a major challenge to the world’s dominant oil power given its heavy reliance on crude exports in the absence of other major sources of income, the Riyadh-based Jadwa Investment said. In a study sent to Emirates 24/7, Jadwa said Saudi Arabia’s oil exports had already plunged from around 7.5 million barrels per day in 2005 to 5.8 million bpd in 2010 and could be as low as 6.3 million bpd in 2015 despite a rise of nearly one million bpd in output. An expected high growth in domestic consumption could further depress exports to around six million bpd in 2020 and only 4.9 million bpd in 2003, it said. Three important trends come together to pose a significant challenge to Saudi Arabia’s continued dependence on oil revenues. We have addressed two: the Kingdom is likely to experience only a very gradual increase in production of crude oil, and the government’s spending will continue to rise at a rapid pace and rely primarily on oil revenues,” the study said.

India Reveals World’s Biggest Uranium Discovery - A new mine in south India could contain the largest reserves of uranium in the world, a government official said in remarks reported Tuesday, signalling a major boost for the energy-hungry nation. The Tumalapalli mine in Andhra Pradesh state could provide up to 150,000 tonnes of uranium, Srikumar Banerjee, secretary of the Department of Atomic Energy, told reporters after a four-year survey of the site was completed.“It’s confirmed that the mine has 49,000 tonnes of ore, and there are indications that the total quantity could be three times that amount,” Banerjee was quoted as saying in The Times of India.

Peak Copper - Copper surprised everyone with its rapid ascent from the recession, propelled by China’s stockpiling program to hit record-high prices. Prices were buoyed by underlying changes to the supply chain, with analysts closely watching eroding stockpiles of copper in warehouses, and predicting that sooner, rather than later, we will run out of copper. We all have heard the hysteria surrounding peak oil, however, supporters of peak copper claim that there would be more dire consequences to peak copper compared to peak oil. “Advances in oil field technology since the 1980s have greatly extended the ultimate date for peak oil,” according to Yu-Dee Chang, Chief Trader at ACE Investment Strategies. Green technology has also provided new means to extract energy, more affordably, from renewable resources. Now for copper, the frightening fact is, with today’s current technology, there are no viable substitutes.

China, Iraq pledge further reciprocal cooperation as PM visits (Xinhua) -- China and Iraq on Monday vowed to conduct further reciprocal cooperation in oil exploration, electricity and other fields, and signed two cooperation deals. The pledge was made during talks between Premier Wen Jiabao and visiting Iraqi Prime Minister Nuri Al-Maliki, who's also the first prime minister to visit China in the over 50 years of history of diplomatic relations. "The Chinese government will encourage companies to establish a long-term and stable relationship on oil and natural gas supply and demand with the Iraqi side and expand cooperation in oil exploration, refinery and equipment trade," Wen said. He said China will continue to provide assistance for Iraq's economic reconstruction, seriously implement debt relief agreements, actively participate in Iraq's infrastructure construction, and help its personnel training.

Mounting Trash Emergency Encircles Beijing - China's capital has grown so huge that it now has seven peripheral roads. It is also becoming encircled by garbage. This is both a poignant metaphor and serious dilemma. Wang Jiuliang, a photographer, was the first to expose the city's little-known Seventh Ring Zone garbage dumps in his documentary video and photos entitled Besieged by Garbage. Wang illustrates the scope of the problem by marking the 400 sites in yellow on a Google map, forming a dense ring, effectively encircling Beijing. The image is shocking, of a city besieged.  Wang has visited all 400 refuse heaps. "When you walk around these landfills, you can hear the sound of money flowing everywhere. Behind each dumping site lies interests," he says, his voice charged with emotion.

In China, Mortgage Slaves Curse U.S. Debt - The list of trending topics on China’s leading, twitter-like microblog, Sina Weibo, is typically dominated by entertainment news, celebrity gossip and the daily grind. So it was unusual when, on July 7, 2011, news of China’s central bank's quarter-point interest hike went to the top of that list. No, Chinese microbloggers weren’t rushing to discuss the macroeconomic consequences of the bank’s move. Rather, they were venting about how their mortgages, almost all of which are tied to that benchmark interest rate, had suddenly become less affordable. A Sina Weibo user, QingMu2010, shortly thereafter railed: Brother Salary, when will you learn from your elder brother, Interest Rate? Brother Salary and Brother Interest Rate are on Chinese urban dwellers' minds these days, especially in light of the rising prices of pretty much everything. This includes, of course, housing. “One who doesn't have a house can’t afford one, and one who has bought a house can’t pay the mortgage!” Tweeted Dragon In Society on Sina. “It’s not easy to become a mortgage slave and one who has become a mortgage slave can't afford the pain.”“I have decided that from now on, when Americans smile at me, I will shout at them: ‘Smiling for what! Hurry up and pay back our money!!!’”

China Cities Value Land at Winnetka Prices With Bonds Seen Toxic - Workers toil by night lights with hoes, carving out the signs for Olympic rings in front of an unfinished 30,000-seat stadium, bulb-shaped gymnasium and swimming complex in a little-known Chinese city.  Loudi, home to 4 million people in Chairman Mao Zedong’s home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year.  In Loudi, people take home $2,323 annually and there are no Olympics here on any calendar. A 3,300-mile (5,310-kilometer) tour of three cities in China, coupled with reviews of dozens of Chinese-language bond prospectuses that offer an unusually transparent view into local government debt, shows just how widespread such borrowing has become. In China, as in the U.S. before the collapse of the subprime mortgage market in 2007, local debt is backed by collateral that is overvalued, may be hard to sell and, in some cases, doesn’t exist.

Rail transport should be treated as “The Commons” - As a child in Northern Sydney in the mid 1980s, I lived near a railway line. On the way to school each morning I would see the regular-as-clockwork XPT pass by, New South Wales' newest high speed train. I remember feeling a sense of pride that we had built and operated such a great piece of machinery.Since then neoliberal economics has made rail transport difficult to maintain or expand or promote. The idea of "user pays" and government departments (such as Countrylink) being corporatised and made to run profits was turned into policy. Of course there's nothing wrong with such policy if it can indeed create more efficient services - but in the case of rail it has not. As a result, rail has been seen as an increasingly obsolete and expensive infrastructure. Yet there are two important factors we must keep in mind when looking at rail transport.  Firstly, the long distance delivery of bulk grain and bulk ore needs rail. Secondly, studies have shown that the total cost of rail-based public transport is less than the cost of running a car. I blogged about this in 2006 and subsequently argued for free rail-based public transport paid for by taxes.

China’s Manufacturing May Contract for First Time in a Year, PMI Signals - China’s manufacturing may contract for the first time in a year as output and new orders drop, preliminary data for a purchasing managers’ index indicated. The gauge fell to 48.9 for July from a final reading of 50.1 for June, HSBC Holdings Plc and Markit Economics said in a statement today. The final July reading is due Aug. 1. Today’s data adds to evidence that growth in the world’s second-largest economy is slowing on Premier Wen Jiabao’s campaign to tame consumer and property prices. The International Monetary Fund said in a report released late yesterday in Washington that risks for the economy include the threat of faster-than-expected inflation, a real-estate bubble, and bad loans from stimulus spending. “The data are another sign that the monetary tightening measures that commenced last October are biting,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV. “If there is a concern that growth is slowing too much, past practice is that there will be a pause in the tightening.”

HSBC's China flash PMI points to contraction - HSBC's China "flash" Purchasing Managers' Index fell to a 28-month low of 48.9 in July, down from 50.1 in June, marking the first time the guage has indicated a contraction since July 2010. The preliminary version of the PMI output index also showed further deterioration, dropping to 47.2 in July from 49.8 in June. HSBC economists said the PMI data seemed to indicate an industrial-production rebound seen in last month's data was temporary. "We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through," said HSBC economist Hongbin Qu. HSBC's final version of the PMI is due out at the beginning of next month.

China should tighten further, IMF says - The International Monetary Fund on Wednesday said China should continue to withdraw stimulus in part to combat risks of higher-than-expected inflation. In its annual review of China’s economy, the IMF directors “saw room for further tightening of monetary conditions” and suggested “greater reliance on interest rates and nominal exchange rate appreciation.” In addition to possible inflation risks from food supply shocks, the IMF staff said China also faced the risk of a possible property bubble and a decline in credit quality in the lending undertaken to protect the economy from the financial crisis. The IMF board repeated its recommendation that China should allow its currency, the yuan, to strengthen further. China’s representative at the IMF, Jinxiong He, had the rare opportunity to rebut the report. He disagreed sharply with the suggestion that the yuan was below fundamentals, saying the staff analysis is based on a flawed benchmark.

IMF Harps on PRC Yuan Undervaluation (Again) - Here we go again: with China being the country with the world's largest external surplus, its role in the resolution of global economic imbalances is always going to loom large. Given the past and continuing Western dominance of international financial institutions alike the IMF-witness the Christine Lagarde appointment to replace Dominique Strauss-Kahn--it is no real surprise that China's economic practices have been in its crosshairs. Namely, the IMF has done next to everything but declare the yuan undervalued. This together with many other attempts to use the IMF for clubbing China over currency valuation and sovereign wealth fund governance. However, IMF hypocrisy aside, the obvious thing is that the institution has limited leverage on China. Having witnessed how troubled countries were treated in the aftermath of the Asian financial crisis, China famously embarked on an unprecedented export / reserve-building complex that has taken its holdings to well over a previously unimaginable $3 trillion. With so much cash accumulated, it's actually worked the other way around with the IMF asking the IMF to contribute to its firefighting efforts in Europe and elsewhere.

Global slowdown signs strengthen, debt crisis weighs (Reuters) - Growth ground to a halt in the euro zone's private sector this month while China's factory sector contracted for the first time in a year, surveys showed on Thursday, deepening evidence of a sharp slowdown in the global economy. The surveys were published just before European leaders meet for a crisis summit to hash out a second bailout of Greece and allay fears a debt default by Athens will poison access to the bond market for bigger states. In the latest sign economic growth is dwindling, Markit's Eurozone Purchasing Managers' Indexes showed growth in the 17-nation bloc's factory sector came to a standstill in July while its dominant service sector grew at its slowest rate in 22 months. "The large fall in the flash euro zone PMI in July provides further signs that the debt crisis may be starting to take a heavy toll on the economic recovery in the region,"

The great divergence, the other way around - As rich economies' prospects dim under their crushing debt burdens and political paralyses, the world's hope for economic dynamism rests with developing nations. These countries had an exceptionally good decade before the global financial crisis struck. And most among them have recovered quickly.  Check out this picture, which I find quite interesting: For the first time ever, developing countries as a group grew have been growing faster than industrial countries. Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.  And it isn't just China, India, and a few countries that have been doing well. For a change, Africa and Latin America actually experienced some convergence with rich countries over the last decade.  Many analysts have projected these trends forward and predict rapid global growth, largely off the back of emerging and developing nations. In the words of a Citigroup report, "this time will be different."

IMF casts doubt on renminbi rise - A substantial appreciation of the Chinese renminbi would have little effect on trade and growth in the rest of the world even if accompanied by other economic liberalisation, according to the International Monetary Fund. In its annual report on the Chinese economy, the IMF said a 20 per cent trade-weighted appreciation in the renminbi – a level similar to that demanded by many American lawmakers – would increase growth in the US economy by between 0.05 and 0.07 percentage points. The fund said that even with a package of other reforms including liberalisation of the financial sector and encouragement of household consumption and imports, the shift in the currency would increase US growth by less than 0.15 percentage points and improve the US current account deficit by between 0.02 and 0.25 percentage points. The US trend economic growth rate is estimated to be somewhere between 2 and 3 per cent. Before consumption and imports were weakened by the global financial crisis, the country was running a current account deficit of around 6 per cent of gross domestic product. The impacts of Chinese reforms would be only marginally higher for the eurozone, the IMF said. The fund reiterated its support for a more flexible renminbi, but said that it needed to be part of a package of reforms to increase Chinese growth and contribute, however modestly, to rebalancing the global economy.

Is China facing an American future? - At first glance, that may sound like a crazy question. The two giants of the global economy appear to be heading in opposite directions. China is the world's up-and-coming superpower, propelled forward by stratospheric growth, advancing industry, a goal-oriented political system and a supposedly superior form of economic management, “state capitalism.” On the other side of the Pacific, the U.S. looks like a bumbling behemoth, its competitiveness on the wane, its political system paralyzed and its future direction uncertain. What could these two economies possibly have in common? More than you think. Very rapidly, China is beginning to encounter the same economic pressures as the U.S. Some are simply the natural outgrowth of China's supercharged development. Others are being brought about by policy errors – similar, in fact, to those made by the West before the 2008 financial crisis. All of these new pressures are serious and, if not handled properly, could alter the course of China's economic progress.

“Trade Imbalances Lead to Debt Imbalances” or Why Mercantilist Nations Shouldn’t Beef About Their “Profligate” Customers -- Yves Smith - Michael Pettis, a respected economist and commentator on China, provides an important contribution on the global imbalances theme. Many observers have pointed fingers at debtor nations like Greece, Portugal, Spain, and the US and argue that they need to start consuming less. While narrowly there is some merit to that argument, Pettis points out that the trade deficit countries (the debtors) are not the ones in the driver’s seat and it it the trade surplus countries that must take the lead in making adjustments. The problem is that trade surplus countries gain substantial advantage from adopting mercantilist policies (the most important is high levels of employment) and under our international trade system, they bear few costs. This defect was why Keynes proposed his Bancor system, which would penalize both trade surplus and trade deficit countries.  I’m excerpting Pettis at some length, since he constructs his arguments in a step-by-step manner:

The Too-Quiet American - It is now apparent that the United States is the main culprit in preventing the ten-year-old multilateral trade negotiations known as the Doha Round from being closed this year. The US has even spurned World Trade Organization Director General Pascal Lamy’s desperate attempt to get member states to support a wholly emasculated agreement – described by critics as Doha Lite and Decaffeinated – which is mainly confined to some concessions to the least-developed countries.  America’s rejectionist stance comes from the top of the US government, starting with President Barack Obama’s lack of leadership. From the outset of his presidency, Obama’s defense of a liberal trade regime has been inadequate. He has said repeatedly that exports are good for the US: they create jobs. But US exports are other nations’ imports, so Obama’s argument amounts to telling others to lose their jobs. He needs to remind Americans that imports are also good: he can surely ask his audience to think of jobs in the UPS cargo planes, freight trains, and trucks that carry imports into the American interior.

A global minimum wage system - The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalisation’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing US or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages. The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.

Italy Versus Japan - Paul Krugman - A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%. I ask this because in a number of ways the two countries look similar. Both have high debt levels, although Japan’s is higher. Both have awful demography. In other respects, the numbers if anything favor Italy, which has a much smaller current deficit as a percentage of GDP. So what’s going on? I normally argue that members of the euro zone that have excessive costs — which certainly includes Italy — face a straightjacket in the sense that they will be forced to go through a period of grinding deflation to restore competitiveness. But while Japan has its own currency, it’s suffering from its own deflation all the same. What is true is that the Bank of Japan is keeping rates at zero, while the European Central Bank seems determined to raise rates. Is that enough to explain the difference? Or is it something about the absence of a proper lender-of-last-resort function?

Italy Versus Japan, External Deficit Versus External Surplus - Paul Krugman asks  why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%. The short answer has to be that Italy is a deficit country, and Japan is a surplus country. To wit: Invoke the macro identity: the current account equals the sum of private and public net saving. Japan is a net saving country; the savings of its households and firms exceeds the borrowing of its government. As long as Japanese savers and financial institutions are willing to stockpile Japanese bonds, interest rates will remain low. This willingness results not only from general financial sentiment, but also institutional linkages between public and private institutions, which are commingled at a deep level. Italy in recent years has increasingly become a deficit country.  . It depends on external creditors whose evaluation of its financial soundness includes the fact that it depends on external creditors. In short, capital is not yet borderless. It is easier to borrow domestically than from abroad.

Why Japanese government bond yields are so low - Paul Krugman poses a puzzle: A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%. I ask this because in a number of ways the two countries look similar. Both have high debt levels, although Japan’s is higher. Both have awful demography. In other respects, the numbers if anything favor Italy, which has a much smaller current deficit as a percentage of GDP. I don't really know anything about Italy, but I do know a bit about Japan, and today I asked several Japanese economists why Japanese government bond yields are so low when Japanese government debt is so high. Their answers were pretty much in agreement. It comes down to three things: 1) financial repression, 2) home bias, and 3) dysfunctional equity markets.

It's wrong to compare Italy to Japan - Rebecca Wilder - Reader Dilip pointed me to Paul Krugman's article over the weekend, Italy Versus Japan. In it, Krugman (via commenters) asks why Italian debt is trading at 5.7% on the 10yr, while that in Japan is trading at 1.1% (as of July 19, 2011). The answer's pretty simple: just 7% of Japan's public debt is held outside its borders. Furthermore, near all of it is denominated in yen, a fiat currency that is funded by the Japanese government itself. On the other hand, Italy has quite a large share of external public debt, 43% of total public sector debt, and the sovereign has conceded monetary policy to the currency union. Simply put: Italy's constrained, Japan is not - and interest rates reflect this. The point is that while the government debt is high, the private sector balance is elevated, so that accounting requires the government to run large deficits and accumulate debt. This is true of both economies; but Japan's private sector surplus is multiple factors of that in Italy. The Japanese private sector financial balance (the current account as a % of GDP less public sector net lending as a % of GDP) is seriously elevated, 11.7% of GDP in 2010 (mostly the business sector). Given that Japan runs current account surpluses, the level of deficit spending is somewhat less, 8.1% of GDP in 2010.

Al Jazeera interview on Rating Agencies - I’ve done numerous interviews on Al Jazeera‘s news and business programs over the last 5 years; this is the first one I’ve been sent a clip of–and I’ll try to keep getting them now that the ProfSteveKeen YouTube Channel is up and running. The topic was the role of the Credit Rating Agencies and their role in the crisis. Though the interviews are short new pieces and don’t leave time to get into topics in any great detail, the fact that Al Jazeera covers topics like this in some critical detail puts it several steps ahead of the media pack, especially in the US and Australia.

Behind the downgrades and the doubt: A crisis of growth - If, within the space of the coming month, the Eurozone sees the first developed country default since World War II, and combined with that the US loses its AAA credit score, something's up. But what? In the first place, we are experiencing the tail-end shocks of the global financial crisis. The bad debt in the system has not been written off, but the liabilities assumed instead by states - through bank bailouts, fiscal stimulus, and a huge regulatory forbearance that has left many institutions, from corner shops to central banks, adopting the "extend and pretend" strategy. That is, extend repayment and pretend the losses do not exist. The result of letting states, rather than banks, take the pain is that states are starting to go bust. Greece is effectively bust, Ireland and Portugal cannot borrow and we will see today whether the European Central Bank (ECB) has to step in to provide short term support to the Italian bond market. On top of that, all parts of the state and supra state machinery that were too weak are collapsing under the strain. Bi-partisan politics in America could not survive the large-scale entry of the state into the economy: the two parts of political America despise each other and would rather destroy their country's credit rating separately than stand together in its defence.

Euro-Region Manufacturing Growth Weakens - European services and manufacturing growth weakened more than economists forecast to the slowest pace in almost two years, adding to signs the euro-region recovery is losing momentum as the debt crisis persists. A composite index based on a survey of euro-area purchasing managers in both industries fell to 50.8 in July from 53.3 in June, London-based Markit Economics said today. That’s the lowest since August 2009. Economists forecast a drop to 52.6, the median of 17 estimates in a Bloomberg News survey showed. A reading above 50 indicates growth.  “We expect the euro-region recovery to lose momentum over the coming months,” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt. “The German boom is mainly export driven and the global economy is also cooling. The second half will be significantly weaker overall.”

Time is Running Out for Europe - Europe is close to losing a generation of youth in Spain, Ireland, Portugal and Italy, with between 20 and 45 per cent youth unemployment. To avoid losing this generation, European politicians and the ECB need to come up with a radically new game plan. First, we need to stop pretending we can dance around the word “default” Let me help: if your income is less than your expenses and you can’t borrow money, you are done, finito, insolvent and in default. That is another lesson from Greece; the longer you avoid facing the truth, the more you solve debt with debt, the deeper the hole you are digging as your new beginning necessitates a larger and large initial trauma. Politicians tend to underestimate their voters ability to deal with a crisis. If the population at large knows it’s coming, they can and will deal with it. Many of today’s generation of politicians forget that their grandparents lived through two wars, the depression and several stock market crashes only to create the most robust growth era in modern history. Yes, there will be some contagion and some short-term high volatility if Greece goes the default rout, but as they say in the world of sports: no pain, no gain

Italy and Spain in firing line as euro's fate hangs in the balance - Eurozone leaders are braced for another battering from financial markets this week, amid growing fears that the spiralling sovereign debt crisis is threatening the future of the single currency. "It's likely to be a very confused and volatile week, with mixed messages from markets and policymakers," After Italy was forced to bring forward austerity plans last week to placate anxious bond investors, European council president Herman Van Rompuy called leaders to an emergency summit this Thursday. The results of "stress tests" by the new European Banking Authority revealed on Friday that eight banks were vulnerable, and must raise €2.5bn (£2.2bn) to cushion themselves against potential losses. The EBA did not calculate the impact of a default by Greece or other vulnerable eurozone countries, but it released detailed data about banks' holdings that will allow analysts to make their own assessment. "Everybody's sitting up crunching numbers," said one market insider.

Italy MPs struggle to hold back eurozone debt crisis - Under persistent attack by speculators on international bond and security markets, Italian politicians are scurrying to improve their image at home and abroad, and their country's financial credibility. Embattled Economics Minister Giulio Tremonti dashed back to Rome on Tuesday - abandoning an EU finance ministers' meeting in Brussels - to confer with the government and opposition leaders about his proposed 40bn euro (£35bn; $56bn) austerity package, which was unveiled to howls of protest by industrialists and workers alike two weeks ago. Italian President Giorgio Napolitano made an umpteenth appeal to squabbling politicians to ignore their partisan differences in the interests of national solidarity at this critical moment. Prime Minister Silvio Berlusconi has remained unusually silent during four days of sinking Italian bank shares, but he too made a dramatic appeal for national unity. Abandoning his usually optimistic tone, Mr Berlusconi declared that Italy is "in the front lines of an economic battle" and must "accelerate the process of austerity within a very short time frame". But he defended the solvency of Italy's banks, describing them as "solid, and sheltered from the blows that foreign banking institutions have suffered"

It Isn't Just Sovereigns Stressing Europe's Banks  During Europe's 15-month financial crisis, investor and analyst fears have centered largely on banks' holdings of sovereign debt issued by governments in financially shaky countries such as Greece, Ireland and Portugal. If those countries were to default, it could saddle banks and other holders of their bonds with big losses. But Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt, and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow. As of Dec. 31, its four largest banks—BNP Paribas SA, Crédit Agricole SA, BPCE Group and Société Générale SA—were holding a total of nearly €300 billion ($425 billion) in loans and other debt issued to institutions and individuals in Portugal, Ireland, Italy, Greece and Spain, the countries that are among Europe's most troubled. That's largely a result of some of the French banks having big retail- and commercial-banking operations in Greece, Italy and Spain.

Once Greece Goes - The economic crisis in Greece is the most important thing to have happened in Europe since the Balkan wars. That isn’t because Greece is economically central to the European order: at barely 3 per cent of Eurozone GDP, the Greek economy could vanish without trace and scarcely be missed by anyone else. The dangers posed by the imminent Greek default are all to do with how it happens. I speak of the Greek default as a sure thing because it is: the markets are pricing Greek government debt as if it has already defaulted. This in itself is a huge deal, because the euro was built on the assumption that no country in it would ever default, and as a result there is no precedent and, more important still, no mechanism for what is about to happen. The prospective default could come in any one of several different flavours. From everybody’s perspective, the best of them would be what is known as a ‘voluntary rollover’. In that scenario, the institutions that are owed money by the Greek government will swallow heavily and, when their loan is due to be repaid, will permit their borrowings to be rolled over into another long loan.

Looking at Greece in the Argentinean mirror -Many argue that Greece should drop the euro like Argentina dropped the dollar in 2002. In this column, Domingo Cavallo – who was Argentina's finance minister during the heart of its crisis – argues that exiting the euro would be wrong. Argentina’s growth recovery after it de-pegged the peso was due to exogenous developments in global commodity prices – not to the peso devaluation. He also suggests steps for an orderly restructuring of Greek debt.

Economists Nearly Unanimous on Need for Greek Restructuring - All but one of 49 economists surveyed by the Wall Street Journal last week said Greece will be forced to restructure its debt. Fifty-three economists, who are mostly U.S.-based, take part in the survey, but not everyone answers every question. Forty-eight of the 49 respondents to the question on Greece think a restructuring is inevitable. “Restructuring, default, or forgiveness by lenders,” said Allen Sinai of Decision Economics. “There’s too much debt for Greece to pay down.” Last week, concerns grew that the debt crisis could spread, as Italy faced bond market jitters. Just two of 44 participants said that the crisis in the euro zone will be contained in Greece. Thirteen see it moving to Ireland and Portugal, while 19 say it won’t be contained until it has reached Italy and/or Spain. The remainder — 10 economists — expect it to move even deeper into the euro zone. “My fear is that if we can’t stop the recent Italian scare, all bets are off,” said Diane Swonk of Mesirow Financial. “My hope is that Europe comes together on this.”

Trichet says ECB would reject Greek bonds as collateral - - The European Central Bank's chief said it could not accept defaulted bonds as collateral and that governments would have to intervene and correct things were Greece government debt to be rated as a default. ECB President Jean-Claude Trichet criticized euro zone governments for their crisis management in the bloc's sovereign debt crisis, saying they needed more discipline. "If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral," . "The governments would then have to step in themselves to put things right ... the governments would have to take care the Eurosystem is presented with collateral that it could accept." "There is an absolute need to improve 'verbal discipline'. The governments need to speak with one voice on such complex and sensitive issues as the crisis," Trichet said.

Trichet says governments alone will have to clean up the mess of a Greek default - He does not seem to be bluffing, as some analysts had hoped. At the beginning of the most important week in the history of the eurozone, Jean Claude Trichet told Financial Times Deutschland that the ECB would not support Greece in case of a selective default, or default. “In the event of a decision by the governments leading to a selective default or a default, which, again, we are warning against loudly and clearly, the governments would have to take care that the Eurosystem is presented collateral that it could accept”, Trichet said. The ECB president made it clear that it would be up to the governments to cope with the consequences should they decide on a partial debt buy back or any other solution in Greece that would trigger a selective default or a default. “The governments have been warned, in no uncertain terms and using all possible means. I have said so publicly. I have explained in detail to the Heads of State and Government and to the finance ministers, on several occasions, that, if a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral.  The governments would then have to step in themselves to put things right. That would then be their duty”, he said.

Bundesbank chief slams eurobonds - The head of Germany's Bundesbank central bank attacked Sunday proposals to issue eurobonds guaranteed by eurozone states as a way of helping Greece, saying it would lead to a "transfer union." "Nothing would destroy more quickly and in a more lasting fashion incentives for a solid budget policy that joint guarantees for sovereign debt," Jens Weidmann told the Bild am Sonntag weekly in an interview. "But this is exactly what some politicians and economists are proposing in the form of eurobonds as a solution to Greece's problems," he said. "The result would be European taxpayers, and first and foremost German ones, vouching for Greece's entire national debt. It would be a step towards a transfer union, something which Germany has correctly opposed thus far." He also said that restructuring Greece's mammoth debts would also fail to solve the stricken eurozone country's problems

Pressure rises for Greek debt buy-back, swap (Reuters) - German Chancellor Angela Merkel called on Sunday for private investors to make a major contribution to bailing out Greece, as pressure rose for radical action to cut the country's debt burden. Officials proposed a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a buy-back or a swap in which private owners of Greek government bonds -- banks, insurers and other investors -- would accept cuts in the face value of their holdings. European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued. "This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily,"

ECB and Merkel clash over Greece - The head of the European Central Bank placed a major obstacle on the path to a new agreement on a Greek financial bail-out, saying the bank could not accept defaulted bonds as collateral, potentially cutting off fundng from the Greek banking system. Jean-Claude Trichet, in an interview with Financial Times Deutschland published on Monday, said other eurozone governments would have to come up with ways to keep Greek banks in business if they continued pushing for a bail-out plan that would lead to bond defaults. “If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral,” he told the newspaper in an interview to be published in its Monday edition.  “The governments would then have to step in themselves to put things right ... the governments would have to take care the euro system is presented with collateral that it could accept.”  Mr Trichet’s statement, just days ahead of an emergency summit on the eurozone financial crisis in Brussels on Thursday, puts him in direct conflict with Angela Merkel, German chancellor, who has insisted bondholders bear some of the burden of a new €115bn Greek bail-out.  Rating agencies have said all of the plans under consideration would lead at least to a selective default.

Monday, Bloody Monday... For European Bonds - Absolute bloodbath in Europe:

  • Italian 10-Year Bonds Extend Drop; Yield Climbs to 6 Percent
  • Spain 10-Year Bond Yield Surges to Euro-Era Record 6.31 Percent
  • Yield on 10-yr Treasuries slumped 2bps to 2.88% on haven bid as European peripheral spreads hit euro-era record high after digesting bank stress test results over the weekend.
  • Mkt skeptical over outcome of Thursday’s special summit of top EU officials as Merkel indicates unlikely to attend unless deal is on, BNP note says
  • 2/10 spread shrunk 3bps to 252bps, narrowest since December
  • "We expect to see a floor in the 2/10 slope in the 250bps zone, with the possibility of a return to 265-270bps,” note from BBVA says
  • Fed futures pricing 15% chance of Fed rate at 0.5% by April 2012 vs 14% a week ago, 22% a month ago
  • 10-yr Treasury futures due September hit new high of 125.01 to imply 3.07% vs 3.09% on Friday

Italian, Spanish Bond Yields Soar to Records Amid Crisis Concern -- Italian and Spanish 10-year bond yields surged to euro-era records while German bunds rallied as contagion from the sovereign-debt crisis spread, piling pressure on Europe’s leaders to find measures to contain the turmoil. Yields on two-year Greek, Irish and Portuguese debt also reached the highest since the introduction of the 17-nation shared currency, while benchmark bund yields sank to within 12 basis points of an eight-month low. European Central Bank President Jean-Claude Trichet reiterated his opposition to Greek debt restructuring as euro-area leaders prepared to meet in Brussels on July 21. Stocks fell on concern European banks may need to raise as much as 80 billion euros ($113 billion) of capital following stress tests on the lenders last week. “It does not seem as if we are going to see an immediate solution to the debt crisis, so investors prefer to stay on the cautious side, and this is being reflected in German bunds,”

Core Europe Infected By Crisis as France CDS Surge to Record -The cost of insuring European sovereign debt rose to records on concern the region’s crisis is spreading to its core. Credit-default swaps on France surged 9 basis points to a record 123 and Germany climbed 4 to 64, the highest since March 2009, according to CMA prices at 4:30 p.m. in London. Greece, Ireland, Italy, Portugal and Spain also rose to records, helping push the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up 7.5 basis points to an all-time high of 305.5. Contagion to France and Germany “reflects the reality that the euro zone is in complete crisis,”. “If we get anywhere close to looking at France, it’s game over.” European leaders are holding a special summit this week as they seek to contain the debt crisis, after stress tests published July 15 failed to reassure investors the region’s banks could withstand a sovereign default. European Central Bank President Jean-Claude Trichet reiterated the ECB won’t accept bonds from a defaulting nation as collateral, putting it at odds with politicians pushing for private investors to share the burden of rescuing Greece.

This time is different, hopefully - EUROPEAN markets opened the week badly. Equities were down again; some indexes are approaching official bear-market territory. Yields on peripheral debt continue to rise; for a brief spell, the yields on both Spanish and Italian 10-year debt topped 6%, bringing both worrisomely close to the threshold of an insolvency death spiral. Against this backdrop, European leaders are preparing to meet this Thursday for an emergency summit. But the Financial Times reports: Ms Merkel has warned that she will only attend an emergency summit on the eurozone financial crisis in Brussels on Thursday if there is going to be an agreement on a new rescue plan for Greece. Guarantee her the results, or she won't come. Meanwhile, the European Central Bank is reiterating its position that it will not accept Greek debt that is considered to be in default as collateral for loans. The threat leaves euro-zone governments in a tricky position. If they do not push to restructure Greek debt, then taxpayers will face higher costs to bail out the Greek government. If they do restructure Greek debt and the ECB makes good on its threat, then a run on the Greek banking system is likely unless euro-zone taxpayers provide direct financial support to the banks.

The True Elephant In The Room Appears: Trillions In Commercial And Industrial Loans To Europe's Insolvent Countries - With the market's attention over the past year exclusively focused on bank holdings of insolvent European sovereign debt, which as is now well known had been declining for months, many if not all forgot that banks also have credit exposure via far simpler conduits: retail and commercial debt. And as an analysis of the full disclosure in the EBA's second stress test exposes, banks are on the hook for literally trillions in various plain-vanilla commercial and retail loans to individuals and businesses. WSJ's David Enrich summarizes it best: "Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow." Oops.

Plan D stands for default . . . and the death of the euro - The biggest single danger in the eurozone crisis now is that events are moving too fast for Europe’s complacent political leadership. Last week, the crisis reached Italy. And the European Union looked the other way. It was a huge mistake to postpone an emergency EU summit until Thursday this week. The European Council should by now have doubled or trebled the size of the European financial stability facility, the rescue umbrella. It should have made the facility more flexible, allowing it to buy bonds in the secondary markets. The council should have forced a closure of the debate on how to handle private investors, who bought Greek sovereign bonds.  Instead, the council allowed its finance ministers to get stuck in tedious technical details, unable to take a decision. Angela Merkel said there was no need for a summit right now. The German chancellor did what she has been doing throughout the crisis: hiding behind procedure. And since last Friday’s stress tests for banks was another cynical exercise in obfuscation, the council will need to take the first steps to sort out the banking mess at eurozone level. It will not. The crisis is moving too fast. Within a few weeks, the necessity moved from plan A to plan B to plan C. Plan A was austerity. Plan B acknowledges the need for debt relief, through some combination of a fiscal transfer and a contribution by bondholders. Plan C would widen the EFSF umbrella, to make it big enough to shelter Spain and Italy.

The Eurozone’s Last Stand - Nouriel Roubini - By 2012, Greek public debt will be above 160% of GDP and rising. Alternatives to a debt restructuring are fast disappearing. A full-blown official bailout of Greece’s public sector (by the International Monetary Fund, the European Central Bank, and the European Financial Stability Facility) would be the mother of all moral-hazard plays: extremely expensive and politically near-impossible, owing to resistance from core eurozone voters – starting with the Germans. Meanwhile, the current French proposal of a voluntary rollover by banks is flopping, as it would impose prohibitively high interest rates on the Greeks. Likewise, debt buybacks would be a massive waste of official resources, as the residual value of the debt increases as it is bought, benefiting creditors far more than the sovereign debtor.  But how can debt relief be achieved for the sovereign without imposing massive losses on Greek banks and foreign banks holding Greek bonds? The answer is to emulate the response to sovereign-debt crises in Uruguay, Pakistan, Ukraine, and many other emerging-market economies, where orderly exchange of old debt for new debt had three features: an identical face value (so-called “par” bonds); a long maturity (20-30 years); and interest set well below the currently unsustainable market rates – and close to or below the original coupon.

Europe Update: Next Key Meeting on Thursday - The next emergency EU summit is scheduled for this coming Thursday.  Wolfgang Münchau is very concerned, from the Financial Times: Plan D stands for default and death of euro The biggest single danger in the eurozone crisis now is that events are moving too fast ... It was a huge mistake to postpone an emergency EU summit until Thursday this week. This is a key meeting. If there is no agreement on how to proceed, the markets could really panic. Also many people were disappointed with the stress tests released Friday. From the WSJ: Euro Stress Tests Tell Only Half the Story Here is what the official stress tests results didn't tell you: 27 European banks would need to raise a combined €82 billion ($155 billion) in new capital ... That is well above the €2.5 billion shortfall, spread across eight banks, announced Friday. The €82 billion doesn't tell the full story. Naturally bond yields are rising.The Greek 2 year yield is up to a record 36%. The Portuguese 2 year yield is up to a record 20.4%. The Irish 2 year yield is up to a record 23.2%. A key European analyst (I can't name) put out a note last night that ended with "Run like hell."

Trichet: Governments must prevent Greek default (Reuters) - Euro zone governments have to come up with a plan to prevent Greece from defaulting, as that could not be a desirable solution to the debt crisis, European Central Bank President Jean-Claude Trichet was quoted as saying on Tuesday. Trichet also said that a failure of the United States to solve the impasse around raising its debt ceiling would "create a problem of great magnitude for the entire world," but said he was confident the United States would deal with the issue. Trichet spoke bluntly about the need to prevent a Greek debt default. "On behalf of the Governing Council of the ECB, I said that a credit event, selective default or default should be avoided," Trichet said Those who advocated sovereign default as a desirable way out of the crisis had not thought the matter through, he said. "Who would consider the default of any sovereign issuer -- in the context of a European and global crisis of public finances in the advanced economies -- a 'good solution'?" Trichet said.

Greece 2-Year Debt Hits 35.98%, Ireland Hits 23.31%, Italy 10-Year Debt Tops 6%, New Highs In Spain; Sovereign Debt Charts

Confusion reigns as Europe limps toward Greece summit - Confusion over competing policy proposals reigned among officials and bankers on Monday as Europe struggled to put together a second bailout of Greece and prevent the region's debt crisis from spreading. French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year. But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings.

The support given to EU banks is killing the recovery - Bailing out private-sector banks, and slashing public spending to pay for it, will aggravate the financial crisis, not diminish it. The European Banking Association's stress tests have been designed to provide reassurance to the financial markets that the European banks are sound. They are unlikely to be successful.This is the EBA's second attempt to provide reassurance. Last year's exercise gave the all-clear to Europe's banks. All the Irish banks collapsed just months later, with the credibility of the EBA's tests among the collateral damage.The latest tests are barely more onerous. It is true that, at least, this time the banks' holdings of government debt are included, having previously been regarded as 100% safe. But the possibility of an actual default by one more European government was not part of the latest stress test, even though this is now widely held to be inevitable. As a result, these stress tests are wholly inadequate for identifying the true level of European banking fragility.

EU Struggles to Convince on Greek Deal European leaders are struggling to convince investors that they will agree on a second Greek bailout at a summit this week as record bond yields boosted financing costs at sales of Spanish and Greek debt. European Union government chiefs plan to meet for the second time in a month on July 21, aiming to break a deadlock over a new Greek rescue that has spooked investors. Spanish and Italian bond yields surged yesterday, piling pressure on officials to end the turmoil. Spain and Greece sold 6.08 billion euros ($8.6 billion) of bills today.“As another D-day looms on Thursday, we have few soothing words,” . “Greece appears beyond repair, Italy is on the brink and the chances are that the euro might be no more very soon.”

A brilliant idea for an agreement on Thursday: Let’s kick that can again - There was still no deal last night – and the expectation is that the eurozone summit set for Thursday will agree some fudged formula of a Greece package. After a horrible day on financial markets, which saw yields on Italian and Spanish 10-year bonds reach new records, the discussions in the EFC seem to converge towards options that will avoid a selective default. These options might include a bank levy. Reuters has a good comment from Paul de Grauwe, who said that the politicians had delayed a decision on Greece for so long that they ended up running out of options. "We've had solutions in the past, but we haven't grasped them," he said. "Now it's too late for some of those solutions  to work any more; the opportunity has been lost." (For example, they cannot simply let the EFSF buy bonds on secondary markets, or backstop national deposit insurance schemes, because Germany wanted a highly constrained mechanism that can only advance credit).  Reuters quotes a source as saying that a bank levy could raise €10bn a year, or €30bn over the three-year period in question – which is the sum earmarked for private-sector contribution. The source also said that any bond swap to be agreed by the summit is likely to be small – paving the way for a bigger restructuring of Greek debt in a few months.

Kohl: Merkel "is destroying my Europe" - According to Der Spiegel, Helmut Kohl, the father of a unified Germany and the German politician most responsible for the single currency, is very unhappy with his protégé Angela Merkel. I found this article to be consistent with what I have heard for months about the Kohl-Waigel generation’s feelings about Merkel’s leadership during the sovereign debt crisis. When reviewing the key players in the sovereign debt crisis, I said the following about Germany: German Government: Led by Angela Merkel, first German Chancellor from former East; because of public opposition to bailouts, reluctant supporter of bailouts; Looking for bail-in of private investor losses; Finance Minister Schaeuble only minister with institutional memory of pre-Euro German political imperatives; More unilateralist and markedly less ‘pro-European’ than previous German governments. -Stuffing bondholders in Greece and Ireland.  Kohl has vehemently denied the Spiegel account as the disclaimer at the end of the article attests. Nevertheless, it is likely true in substance if not form. My translation of the full article is below.

Merkel losing her party’s old guard - Last time it was Altkanzler Helmut Kohl telling us that present German Chancellor Angela Merkel was “destroying my Europe”. Now the former Defense Minister under Kohl Volker Rühe is ripping into the Chancellor as well. Handelsblatt writes: Former Defense Minister Volker Rühe (CDU) has harshly criticised Chancellor Angela Merkel. "The long-term perspective is missing from government policy; it lacks strategic thinking," the former Deputy National Chairman and Secretary General of the CDU said to the "Flensburger Tageblatt". Merkel is pursuing a mere "moment-to-moment" policy. For Rühe, her management of the current European debt crisis is "wanting".  "Germany is not fulfilling its leadership role," Rühe said to the newspaper. "We must ensure that the German reputation of reliability and predictability is not damaged." He also accused the Chancellor and her cabinet of foreign policy shortcomings, serious mistakes and a lack of communication. Rühe was defense minister from 1992 to 1998. If the sovereign debt crisis spirals out of control, it is not clear who will govern. At a minimum, Germany’s reputation as a foundational support for the European project will be in tatters. Likely, the governing coalition of CDU, CSU and FDP will be get the blame for this.

European Interest Rates  - FT Alphaville quotes a Royal Bank of Scotland assessment that Italy and Spain are crossing the threshold of no return in their interest rates: Spain has entered the danger zone for yield levels. The chart [above] shows the yield moves in the constant maturity 10y paper for the GIIPS countries. These markets traded a range between 6 per cent and 7 per cent but ultimately this proved to be a pause before the move to higher yields then accelerated. There is no consistent yield trigger level inside this range but market talk of point-of-no-return around the 6 ½% is not without foundation either. I was somewhat skeptical of that outcome a month ago, but the latest data certainly give cause for concern.  If the bond markets do lose confidence in the ability of Italy and Spain to service their debt, that can quickly become a self-fulfilling prophecy.  In turn, it's hard to see how that doesn't lead to a full-fledged existential crisis for the euro

Two months of negotiations: And the outcome is a tax - It looks like Jean-Claude Trichet and the financial markets have scared the European negotiators, who will tonight narrow down their list of options into a single proposal for European leaders to rubberstamp at their meeting tomorrow. Among the options under consideration, the favourite now seems to be a bank levy, imposed in such a way that it would raise the desired €30bn over three years.  Another new facility likely to be introduced tomorrow is an EFSF equivalent of a flexible credit line.  The motivation behind the choice of a bank tax, coupled with a fall in interest rates and a rise in maturities of the present Greek loan package, is the attempt to avoid a selective default rating, which is the consequence of all the other options currently under discussion, including the French proposal for a debt rollover, and a proposal by the Institute for International Finance. As Italian and Spanish yields rose to new eurozone-records this week, officials are now resigned to accept the least risky options.  But a bank tax, or bank levy, is not going to be easy to implement. For a start, as the FT reminds us in its main story this morning, this cannot be implemented eurozone-wide. This has to be done country-per-country.  

Why does stuff take so long to happen? - Nick Rowe - For example, the Eurozone crisis. A couple of decades back, I noticed that things often seemed to happen the way economists thought they would happen, but that they always seemed to take about ten times longer to happen than you would have thought they would. We go from one equilibrium to another equilibrium in a few seconds on the chalkboard. It seems to take forever in the real world. I just read the latest Europe Update on Calculated Risk. And again this morning on Eurointelligence. I then re-read all my old posts on the Eurozone. (Just type "Eurozone" into the search box on the right, and you will get a whole slew of them, going back over 2 years.) Two years, or even one year ago, what I was writing about the Eurozone was an extreme view. Now it's fairly mainstream. There is little in those old posts I would want to change. I have nothing new to add.  Things have been slowly getting worse over the last two years. I could feel vindicated. Events have been proving me right (so far). And I have no idea why it has taken so very long for everything to happen. And it still hasn't happened yet.

Austria Central Bank Head Signals ECB May Bend on Greece - European Central Bank council member Ewald Nowotny suggested the bank may compromise and allow a temporary Greek default as officials scramble to fix a sovereign debt crisis that’s spreading to Italy and Spain before a leaders’ summit in two days. As Spanish financing costs surged at a 4.45 billion euro ($6.31 billion) treasury bill auction today, policy makers are trying to ease a split that’s pushed interest rates on Spanish and Italian 10-year debt above 6 percent for the first time since the euro debuted 12 years ago. The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country. Nowotny, who heads Austria’s central bank, issued a statement today concerning the “interpretation” of his earlier comments in an interview with CNBC. He is in “complete agreement” with ECB President Jean-Claude Trichet that the aim is to “avoid any situation that would make it impossible for the ECB to continue to accept Greek sovereign bonds as collateral,” 

Approaching stall speed - EUROPEAN markets enjoyed a respite from trouble today; equities rose, along with the euro, and yields on Spanish and Italian debt fell back. There's no enduring good news here, however. Rather, traders are probably taking profits while they await the outcome of this Thursday's emergency summit. And beneath the main indexes, trouble continues to build. In a new debt auction, yields on Spanish 12-month and 18-month bonds rose sharply from the last debt sale; the yield on the latter rose to 3.912%, up from 3.26% a month ago. Spain will return to markets again on Thursday, when it will auction off €2.75 billion in long-term debt. Right now, the market yield on long-term debt is over 6%. If that's what Spain gets from markets in its new auction, the sustainability of its government finances will face new doubts. The Spanish government is on the brink; at lower interest rate levels its debts are manageable, but at higher rates it might well prove insolvent. This is why confidence is key. But there seems to be little urgency within the euro-zone's leadership regarding the need to get ahead of contagion.

Larry Summers on How to Save the Rich: "No Big Financial Institution in Any Country Should be Allowed to Fail - Larry Summers has a mistitled as well as horrendously flawed op-ed in the Financial Timed on How to save the eurozone. A more appropriate title would be "How to save the rich". Please consider a few galling snips.  US policymakers were applauded for about 12 hours for their willingness to let Lehman go bankrupt. The adverse consequences of the shattering effect that had on confidence are still being felt now. The European Central Bank is right in its concern that punishing creditors for the sake of teaching lessons or building political support is reckless in a system that depends on confidence. No one wants to punish creditors simply for the "sake of teaching lessons" but rather to prevent moral hazards that accompany bailouts. The simple fact of the matter is that in a capitalistic system, money will be misappropriated unless failure is allowed. Bernanke called it his biggest failure. I think the collapse of Lehman is about the only thing Bernanke did right. Banks acted recklessly because they thought they would be bailed out, and they were.

Of eurobondage - FOR a nice look at some of the euro-zone solutions being mooted see this piece in the current edition of The Economist. It includes a bit on the proposal for an issuance of eurobonds: Reinforcing Europe’s banking system—the third task for its harassed policymakers—will be the job of national regulators following the results of the stress tests. But even if individual banks are recapitalised, the danger remains that a dodgy sovereign can drag down its banks. One answer to that could be some form of European fiscal backstop through the issue of “Eurobonds” underwritten by the currency area’s taxpayers. The EFSF falls short of this because its backing from the euro-area states is not “joint and several”; each country is responsible for its share of the guarantees that lie behind the EFSF’s issuance, but not for the whole amount.

Marshall Auerback: The European Monetary Union is the Titanic - In the past, I have called the euro zone a “roach motel”. But as usual, I’ve been outdone in the metaphor design department by the Italians: Guilio Tremonti, the Italian Finance Minister, last week compared Germany and its small-minded Chancellor Angela Merkel to a first-class passenger on the Titanic. The underlying message is the same: You can be sailing in coach or you can be in the 1st class compartment. But when the ship hits the iceberg, everybody goes down together — Germans, Italians, Greeks, Irish and French alike. All euro zone members have an institutional wide problem of not being able to fund deficits, given that the countries of the euro zone have all acceded to impose gold standard conditions on themselves by forfeiting their fiscal freedom. To repeat: this is not a problem confined to the periphery. The sovereign risk problem applies to the central core countries, such as Germany and France, as it does to the Mediterranean “profligates”. Once a run on the currency starts and moves into the banking sector, then none of the governments will be able to do anything other than to oversee financial and economic collapse while the fiddlers in Brussels and Frankfurt try to spin some line about “special circumstances” or something without admitting the whole system they imposed on the area is the cause of this crisis.

Satyajit Das: Europe’s Debt Crisis Refuses to Die - Recent frantic efforts that secured release of Euro 12 billion to Greece avoided immediate default but have not solved the fundamental problems. Greece is unlikely to meet targets for tax revenues, spending cuts and sales of public assets. A recent International Monetary Fund (“IMF”) report on Greece suggests that the loans to Greece would not meet normal IMF lending criteria, in the absence of European Union (“EU”) support and pressure. Christine Lagarde, the new head of the IMF, recently was equivocal about ongoing further support, reflecting the real risk that it now faces in relation to its exposure to Greece. Efforts to secure a new package of Euro 115 billion have stalled. German insistence on token participation by private banks and investors has proved divisive. A French plan, Gallic in complexity, appeared and disappeared. Slanging matches between Greek Prime Minister and the EU, the EU president and the German Chancellor and the European Central Bank (“ECB”) President and the Chancellor have taken the place of substantive progress. In the meantime, contagion has become a reality. Financial markets recognised belatedly that the authorities are not in control of the situation and there are no real solutions to the problems.

Standing on the precipice – and ready to jump - I am not worried that the eurozone’s leaders will walk away from Thursday’s summit without a deal. Wednesday night’s reported, but not yet revealed, agreement between Angela Merkel and Nicolas Sarkozy firmly points in that direction. I would not be amazed if they were to spring a couple of positive surprises. What I am worried about is that everybody will get obsessed with some obscure technicalities of a deal – that ultimately falls short of solving the problem. The eurozone would not survive such a failure. To arrive at such a stark conclusion, one has to understand the nature of the threat the eurozone is facing. The problem is not Greece, or some other small country on its periphery. The existential danger is the rise in market interest rates of Italy and Spain, two large countries in the eurozone’s core. To state the goal of today’s meeting in simple terms would be to say: the survival of the eurozone depends on whether its leaders will be able to take decisions that would allow Italy and Spain to remain inside the eurozone on a sustainable basis. Greece is now just a side-show. To ensure that the eurozone survives the next few weeks, they will need to take two important decisions on Thursday. The first, and most important, would be an increase in size and flexibility of the European financial stability facility, the rescue umbrella. At present, the overall size of the EFSF, including the share of the International Monetary Fund, is €750bn. With a second Greek credit about to be agreed and second programmes for Ireland and Portugal very likely, the ceiling will not be big enough to bring in Spain, let alone Italy. To do that that, the ceiling would have to be doubled, or trebled.

Only Germany can save EMU as contagion turns systemic - Europe's leaders have finally run out of time. If they fail to agree on some form of debt pooling and shared fiscal destiny at Thursday's emergency summit, they risk a full-fledged run on South Europe's bond markets and a disorderly collapse of monetary union. "We are heading towards fiscal union or break-up," said David Bloom, currency chief at HSBC. "Talk is no longer enough as the fire threatens to leap over the firebreak into Spain and Italy. "What the market is worried about is Germany's long-term committment to the euro project. If we see unreserved and absolute backing from the political establishment of Germany, that will be a soothing balm." Chancellor Angela Merkel seemed in little hurry on Tuesday to convey such a message. There will be no "spectacular step" at the Justus Lipsius building on Thursday; just a "controlled process of gradual steps and measures", she said with unflappable calm. Given the simmering wrath from top to bottom of German society, it may be impossible for her to do much more.

Greece debt: Merkel dampens expectations of deal - German Chancellor Angela Merkel has played down the chances of Thursday's emergency eurozone summit resolving Greece's debt crisis. She told a news conference that there would not be anything as "spectacular" as a restructuring of Greek debt. The meeting will attempt to agree a second bail-out of Greece in a hope of calming financial markets and stop contagion spreading. She said: "Thursday will help in this, but further steps will be needed." At the weekend Mrs Merkel indicated that she may not attend the meeting unless there was a likelihood of a concrete deal on a second Greek rescue. Germany has been at odds with the European Central Bank (ECB) over its insistence that private investors in Greek bonds share the pain of another rescue deal.

Barroso Says Summit Failure on Greece Would Cause Global Damage - European Commission President Jose Barroso comments on tomorrow’s meeting of euro-area leaders to work out a second aid package for Greece. “Nobody should be under any illusion; the situation is very serious. It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.  “The situation requires full engagement by everyone at the summit and I believe we’ll have it.” “The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system.”  “Most of the decisions to be taken tomorrow belong to the competence of the member states. They have reserved the instruments to themselves and they have said they will do what it takes to ensure the stability of the euro area. Well, now is the time to make good on that promise.

Pressure Mounts on Greece Meeting - French Finance Minister François Baroin said euro-zone leaders are expected to deliver a "strong message" at the summit, while Foreign Minister Alain Juppe said on French television he was "convinced" leaders will find an agreement. "There are difficult technical aspects and slowness in the decision process, but on the objective there is a large consensus," said Mr. Juppe. The French optimism contrasts with comments Tuesday from Ms. Merkel, who said there won't be "one spectacular step" at the Brussels summit, and that it would rather be the first of a "step-by-step measures ... with the final goal of finally getting to the roots of (the) problem." "Today we have a historic choice," said Mr. Juppe. "Either we go backwards, and we let what we've built collapse. That would be an absolute catastrophe for every country. Or we go further.

Sarkozy calls Merkel “criminal”, and then reaches a deal with her - The stage setting of this European Council is so typical with its last-minute secrete deals, except that a lot more is at stake. After seven hours of negotiations in Berlin, Angela Merkel and Nicolas Sarkozy arrived at an agreement, but they managed to keep it secret until this morning, presumably to prevent the news media and analysts from taking it apart before it is fully worked out by the eurozone working group later today. The meeting was called after a phone call between Merkel and Sarkozy on Tuesday night yielded no results.  The latest proposal, endorsed by France and a majority of member states, included a tax on banks of €10bn a year, over five years, with the funds earmarked for bond repurchases by the EFSF (or some other institutions, but not the Greek government). Alternatively, as the FT reports this morning, Berlin wants investors to swap their short-dated bonds for 30-year bonds. The FT reports that the plan could reduce Greek’s total debt by €90bn (to arrive at such a number on the basis of a new tax, whose details has yet to be worked out, is a case of irresponsible optimism. It seems to us that the main purpose of the French bank tax proposals, as they circulated before the Merkel/Sarkozy meeting,  is to get the French banks off the hook, not to help Greece.)  Germany also balked at proposals to make the EFSF more flexible, through the equivalent of a flexible credit line, and the ability to use funds for crisis prevention.

Update on the Eurozone Crisis - Back on the Eurozone crisis front we find find some great lines from Michael Darda and Marshal Auerback on the latest developments.  Here is Darda from his latest newsletter: Although there seems to be some optimism in European equity markets that Thursday’s finance ministers’ powwow will bring a “shock and awe”  announcement, we would not wait to exhale. As we’ve argued before, eurozone nominal GDP is about 10% below trend. This has caused tax revenues to collapse and debt burdens to mushroom. Since the ECB has tightened liquidity and raised rates instead of lowering  them and adding liquidity,  we simply  see  no path to  a  recovery in nominal GDP (and solvency) for the European periphery, whose costs and prices are out of whack with the rest  of the eurozone. Rearranging the deckchairs with  alphabet soup bailout schemes and fiscal austerity measures has failed for 14 months and will continue to fail unless accompanied by  a much more  supportive monetary policy by the ECB, in our view...Sterilized interventions -- when a central bank buys an asset but sells another asset so that the money supply remains unchanged -- is like attempting procreation with contraception. It’s set up to fail.

Merkel, Sarkozy to Outline Position on Greek Debt - German Chancellor Angela Merkel and French President Nicolas Sarkozy will outline a joint position to solve Greece’s debt crisis when they arrive in Brussels for a summit convened to stamp out contagion in European bond markets. The pact was agreed on after a seven-hour meeting in Merkel’s Chancellery in Berlin that ended after midnight, according to a statement distributed to reporters. Merkel and Sarkozy “listened” to the views of European Central Bank President Jean-Claude Trichet, who was also present, though the statement didn’t say if they settled differences on whether Greece should be allowed to default.  European Union officials will follow a two-pronged approach today, focusing on the need to agree on a second bailout for Greece and measures that stop the debt crisis engulfing Italy and Spain. Greek options include funding a rescue using a bank tax, allowing investors to roll over Greek debt, cutting the interest rates on outstanding bailout loans and managing a bond default.

New Greek Bailout Can't Rule Out Default: Juncker - Jean-Claude Juncker, chairman of the group of euro-zone finance ministers, said that a selective default on Greek debt cannot be ruled out under a new bailout plan for the country, Dow Jones reported Thursday. "One can never exclude such a possibility," Juncker was quoted as saying by Dow Jones. Juncker said that the euro zone governments are trying to avoid such a default. Euro zone leaders will meet later on Thursday to decide on the new package for Greece, which it is hoped will stop contagion from the troubled peripheral economy spreading to the rest of the euro zone. French President Nicolas Sarkozy and German Chancellor Angela Merkel reached a common position on a second bailout of Greece Wednesday night after seven hours of talks. Juncker also confirmed reports that a bank tax is unlikely to be part of the new aid package.

EU May Consider Greek Guarantee to Offset ECB Default Angst - Euro-region governments may guarantee Greek bonds to make it easier for the European Central Bank to accept a default of the indebted nation after months of opposition to such a move, said two officials familiar with the talks. Policy makers would aim to keep any period of default as short as possible, said an EU government official, who spoke on condition of anonymity because deliberations before today’s Brussels summit were confidential. The bonds could be backed up by top-rated securities sold by the European Financial Stability Facility, a national central bank official said. No decisions have been taken and an ECB spokesman declined to comment. The proposal signals that leaders may find a way for the ECB to accept a default and sign up to a new package for Greece, which is a key step in stopping Europe’s debt crisis spreading to Italy and Spain. ECB President Jean-Claude Trichet, who is at the summit, has said until now that the ECB can’t accept defaulted Greek bonds as collateral in market operations, a step which would cut off funds to Greek banks.

Toward a Greek default - AS EUROPEAN leaders gather in Brussels to settle on a new plan to address Greece's debts and—they hope—the broader issue of market confidence in the euro zone, details of a potential deal are emerging. It appears that German Chancellor Angela Merkel and French President Nicolas Sarkozy met last night with European Central Bank head Jean-Claude Trichet in an attempt to iron out their differences. A framework for an agreement was reportedly reached and will be presented at today's summit. No specifics are available, but a few key issues appear to have been settled. First, it looks as though a haircut for Greek creditors is now likely.  Next, it looks like the European Financial Stability Facility (EFSF), the €440 billion bail-out fund, will be given greater flexibility to operate. It may have the authority to lend to countries that have not yet received official bail-outs and to recapitalise banks. The EFSF might also be used to fund a large-scale buy back of Greek debt. It does not appear, however, that an increase in the EFSF's size is on the table. The idea of a bank tax, which had previously been suggested as a means to help finance a Greek rescue, now seems dead.

Eurozone set for Greek deal, temporary default - European leaders were poised to sign off on a second bailout for Greece on Thursday, even at the cost of making the country the first euro state to partially default on its debt. With the new rescue program, leaders want to "address the problems really at the root," by lightening the country's debt burden and restoring its economic competitiveness, German Chancellor Angela Merkel said as she arrived at an emergency summit in Brussels. That will include getting private creditors to contribute to new aid, a move that would put Greece in so-called "selective default," a partial renege on its debt deals. Dutch finance minister Jan Kees de Jager said objections "to avoid a selective default ... have been swept from the table." Speaking to lawmakers in The Hague, de Jager said the plan for Greece would "do something for the debt duration and also lower the debt burden."

Merkel Drive to Save Euro May See Joint Bond Surrender as Crisis Spreads - German Chancellor Angela Merkel may need to abandon her opposition to issuing common bonds in order to stop a debt crisis that is threatening to splinter the euro region. Merkel, who calls the single currency a “work of peace” and part of Europe’s “uniting idea,” is the key holdout on so- called euro bonds. “Once they look into the abyss of a major speculative attack on Italy,” Merkel will have to embrace euro bonds, Peter Bofinger, a member of the chancellor’s Council of Economic Advisers, said in a telephone interview. “That would be the turning point. There needs to be a joint guarantee for all outstanding debt.” France sees little room for a common bond without more integration of Europe’s fiscal and budgetary regimes, a French official said. German Deputy Foreign Minister Werner Hoyer said it will require a closer “political union.”

EU Leaders Offer $229 Billion in New Greek Aid - After eight hours of talks in Brussels, leaders announced 159 billion euro ($229 billion) in new aid for Greece late yesterday and cajoled bondholders into footing part of the bill. They also empowered their 440-billion euro rescue fund to buy debt across stressed euro nations after a market rout last week sparked concern the crisis was spreading. The fund can also aid troubled banks and offer credit-lines to repel speculators. The euro strengthened as officials drew concessions from Germany, the European Central Bank and investors for a twin- track strategy to support Greece and ensure its woes don’t spread. The summit is the latest in a running-battle to resolve the crisis amid calls this week for tougher action from U.S. President Barack Obama and the International Monetary Fund. The Greek financing package will consist of 109 billion euros from the euro region and the IMF. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks that will also cut Greece’s debt load, the leaders’ communiqué said.

Greece to default as EU agrees €159 billion bailout - Greece is set to lead the eurozone's first-ever default as European leaders agreed that the private holders of Greek debt will take a hit of €106bn (£93.5bn) over eight years. Breaking weeks of deadlock, the heads of the 17 eurozone governments conceded that a "controlled" failure was the only way to prevent the collapse of the single currency and a global financial rout.
• Private lenders to contribute €37bn to second Greek bail-out
• Deal paves way for European monetary Fund and economic integration
• Debt interest rates cut for Greece, Ireland and Portugal• Equity and debt markets rise on back of historic deal
• 'We now have a programme and a package of decisions which create a sustainable path for Greece’ - Greek prime minister George Papandreou

Eurozone leaders draw up radical plan to safeguard euro - European leaders are poised to take a quantum leap to safeguard the future of the euro and rescue Greece from insolvency by turning the eurozone's 15-month-old bailout fund into a much more ambitious instrument resembling an embryonic European monetary fund. The deal being hatched at an emergency summit of eurozone leaders also looked certain to entail haircuts – losses – for Athens' private investors, increasing the likelihood that Greece will become the first eurozone country deemed to be in some form of default on its sovereign debt. A 15-point draft agreement being negotiated provided for a vast expansion in the role and powers of the €440bn bailout fund established in May last year.  Under the radical plan, the fund would be able to intervene on the secondary markets to buy up the bonds of struggling debtor countries, to take pre-emptive or "precautionary" action to nip a debt crisis in the bud by, for example, agreeing lines of credit, to supply loans to struggling eurozone countries which would then use the money to shore up and recapitalise their banks. Such aid would apply, unlike at present, to countries not already in bailout programmes.

Here's What "Selective Default" Actually Means - This morning, reports emerged from Europe that "selective default" was on the table for Greece.  A sovereign nation enters "selective default" when it elects to delay repayment of some of its financial obligations while fully honoring others. The idea is that eventually everyone gets paid somehow. It's just in a manner different than how it's set up now. The debt plan currently on the table would require investors to bear some of the burden of a Greek default, although other European nations would step in to guarantee the delayed repayments. The term has been met with fear and confusion from all sides. "The word selective default scares without reason," said Greek Finance Minister Evangelos Venizelos on Tuesday. "It is not a real event, it is not default. It is an evaluation by the three familiar rating agencies." He also promised that a selective default would not activate credit default swaps for holders of European debt, because the country would not fully renege on its obligations. In a draft of a current bailout proposal, EU leaders said that they delay in repayments would only be likely to last for a few days.

The draft Eurozone plan - It is here (and further detail here), via Paul Krugman, who rightly slams it.  Matt offers comment, so does Wolfgang, many more details and updates here.  If you had told me it was an Onion-like satire of all the previous plans, and not an actual serious plan at all, I would have believed you.  Here is one of the stranger, funnier, sadder, and more Straussian paragraphs: 6. All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of States or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole. In other words: “We know you are worried about Italy and Spain so we promise you that they are fine.”  There is a good deal of ah, optimism about the real side of these economies:9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest…

Better than expected – but reduction in net present value of Greek debt is only 21% - Markets are always jubilant after a European summit because they focus on the headlines, not the substance. The overnight market reaction was quite extreme. Italian 10-year spreads were down to 2.5bp, and Spanish spreads down to 2.896% this morning. This tells us that the summit managed to move the eurozone away from the edge of a cliff back towards a situation where the crisis was 10 days ago.  Here is the statement by eurozone leaders. As ever, it is best to read the original document.  The three most important decisions taken by the summit were a net present value reduction in Greek debt/GDP by about 21%, a private sector participation that will trigger a temporary selective default rating, and more flexibility for the EFSF and the ESM.  Here is a summary of the most pertinent points:

The new Greek bailout plan, digested - By now I’ve read many more other commentariesMy basic opinion hasn’t changed much, but here’s another way to frame it.  The EU pledges that Greek creditors will take a hit but that this will never ever happen again, not with Spain or Italy in particular.  That’s not a credible promise, if only because of the magnitudes involved, and so over time it shouldn’t influence the borrowing rates of those countries very much.  It’s worth a small amount to have the promise made at all, but the comparable promises made about Greece were just broken so who is being fooled here? Behind the scenes, Merkel probably committed to a more direct German financial support of the bailout fund, although that pledge is not yet ready for public consumption.  That’s arguably the biggest event of the day.  If that’s not the case, it’s not clear where the fund gets its extra oomph from.  It’s also not clear how many other parliaments will have to approve comparable financial commitments or backstops and that is potentially a stumbling block for the whole plan.

Greece defaults - The latest Greek bailout is done — the official statement is here — and it involves Greece going into “selective default,” which is, yes, a kind of default. This is a bail-in as well as a bail-out: while Greece is getting the €109 billion it needs to cover its fiscal deficit, both the official sector and the private sector are going to take losses on their loans to the country. As such, it sets at least two hugely important precedents. Firstly, eurozone countries will be allowed to default on their debt. Secondly, a whole new financing architecture is being built for Greece; French president Nicolas Sarkozy called it “the beginnings of a European Monetary Fund.” The nature of massive precedent-setting international financing deals is that they never happen only once. There’s lots of talk today that this deal is for Greece and for Greece only, but some of the more explicit language to that effect was excised from the final statement. On thing is for sure: these tools will be used again, in future. They will be used again in Greece, since this deal is not enough on its own to bring Greece into solvency; and they will be used in other countries on Europe’s periphery too, with Portugal and/or Ireland probably coming next.

Greek Default and more - This is a day to remember - Greece will now default - so this is probably worth one more post (I haven't seen a rating agency downgrade them yet).  The history of the European bailouts is deny first, then act later. So naturally the following denial of additional defaults just raises the question of "when" for many observers:  And here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of July 20th). The spreads have declined sharply since the Euro Zone announcement. From the Atlanta Fed:  In recent days, Italy has become the next euro-area member to come under financial market pressure. Along with Greece, Portugal, Spain, and Ireland, Italian bond spreads (over German bonds) have continued to widen. . Since the June FOMC meeting, the 10-year Italian-to-German bond spread has widened by nearly 108 bps through July 19. The spreads for Ireland and Portugal have soared higher by 276 bps and 262 bps, respectively, over the same period. Greek bond spreads remain extremely elevated, 140 bps higher since the June FOMC meeting, at 16.3 percent over German bonds. Spain’s spread also rose 80 bps.  Note: I added arrows pointing to the various bailouts starting with the first bailout for Greece, followed by Ireland, Portugal and then Greece again.

Eurozone leaders hail leap towards economic union - The tetchy negotiations dragged on for hours, with an irascible Finland at one point demanding that Greece offer the Parthenon, the Acropolis and its islands as collateral for the second €159bn rescue package.  France and its allies abandoned their long struggle to prevent a Greek default, opening the way for the first sovereign insolvency in Western Europe since the Second World War. Objections from the European Central Bank were swept aside. Germany has obtained its fig leaf concession: burden-sharing for bankers. As a quid pro quo, Germany has dropped its vehement opposition to debt sharing and crossed the line in the sand towards fiscal federalism. It has agreed to turn the eurozone's €440bn bail-out fund (EFSF) into what amounts to a European Monetary Fund, and arguably into an EU Treasury in embryo. The EFSF will be allowed to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments including in non programme countries", code for Italy and Spain. The full weight of the German-led creditor bloc will stand behind south Europe's banking system.

Economist Q. & A. on Europe's Debt Accord - European leaders reached an accord Thursday to reduce Greece’s debt burden and prevent a collapse of confidence that has threatened to engulf some of the region’s largest economies. Economix has asked three prominent economists to offer their views on the accord and the effects it may have, intended or otherwise, in Europe and the United States. They are:

Greek Bailout Leaves Larger Issues Unresolved - I’m still trying to fully understand what’s happening in the latest European debt plan, but at first glance it seems to be almost entirely besides the point—a plan to address insolvency in Greece at a time when as Megan McArdle says “[t]he spreads on Spanish, Italian, Irish, and Portuguese bonds are not widening because investors think that Greece needs a debt swap, or because the solons of Brussels haven’t made enough announcements about the virtues of budget-cutting.” Right, the spreads on PII[G]S’ bonds are going up because of concerns about those specific countries. An uncontrolled Greek default would make the situation worse, but merely avoiding such a scenario doesn’t address the issues there.  I think it’s worth just plowing straight forward and looking at Italy, the largest and allegedly least-troubled of the PIIGS. This from JP Morgan is very instructive:

Contortionist Compromises - It's often hard to define with precision when the beginning of an end is reached. In many instances, and certainly in the case of the Euro and its zone, it's really inconsequential. The only thing that truly counts is that after yesterday's contortionist €159 billion Greek bail-out 2.0, there is no way back to a healthy currency, or an economically viable region to use it in, for that matter. But the markets are up, you say! Yes, of course they are, because they were just handed access, in the form of a "reformed" European Financial Stability Facility (EFSF) to potentially trillions of euros worth of European taxpayers' money. And even though they're well aware that it's all just temporary, for today - and maybe tomorrow- their profits are guaranteed. So of course they're up. For now.  The message that emanates from the hastily broken vows and neglected solemn pledges by the major players in Europe does nothing to restore confidence in either Greece, Ireland or Portugal. In fact, it does the exact opposite. If there had been any chance at all that Greece could have paid off its debts, the terms of the present deal would not be what they are. What it all spells, going forward, is increasing volatility. Which suits the most savvy players just fine, thank you.

The People Behind the Numbers: Greece Threatened with Widespread, Long-Term Poverty - SPIEGEL- This time, the fight for survival last exactly 29 minutes. At precisely 3 p.m., Father Andreas, a 37-year-old Greek Orthodox priest, opens the doors of the food bank in downtown Athens. At this hour, the line of hungry people stretches all the way across the large square outside and into the street. Needy people of all ages are waiting patiently -- pensioners, unemployed people, mothers with children, immigrants, asylum seekers. "We can't let these people starve," the priest says. "They are already suffering so much. They should at least not go without food." It is a charitable deed. But in just under half an hour, all of the kitchen's 1,200 servings have been taken, causing several dozen people to leave with empty hands and growling stomachs. They can only hope to be among the lucky ones next time. Greece is tightening its belt -- and the number of people living in poverty is surging as a result. Thousands line up in front of food banks and resort to rifling through rubbish bins. The country's financial crisis is rapidly turning into a social one -- while wealthy tax evaders manage to get off scot-free.

Monetary union, always unworkable, has set in train a European disaster - At last, a real crisis. The Franco-German salvage operation for the eurozone was inevitable for the simple reason that Armageddon never happens. Nicolas Sarkozy and Angela Merkel patched together yet another 'temporary' bail-out for the Greeks, and will do so for the Portuguese and Irish if need be. German taxpayers will pay the Greeks' bills and aid Europe's banks as they continue to profit from 20% interest on their sovereign loans. Power always wins, so long as it can get someone else to pay. A more intriguing crisis erupts in Britain. The chancellor, George Osborne, showed impressive cynicism in abandoning his opposition to a 'two-speed' Europe and demanding that the eurozone move swiftly to fiscal union – with Britain firmly outside. Only such a union, he said, would discipline the debtor nations and thus avoid bank anarchy that would spill over into the British economy. Britain would have no part in any rescue, but it relied on the eurozone to continue on its path to ever closer union. Cynical Osborne may be, but he is right in his historical analysis. The latest Greek bailout is the moment when continental Europe finds itself forced to transmogrify from a loose federation into a brittle unitary state. If European politics starts to implode and return to xenophobia, manned borders, ethnic cleansings and trade boycotts, that start is now. This is a true turning point."

">Some useful steps but not much of a strategy - It looks like there will be deal on a eurozone package for Greece. The full details are still missing, but it appears that the eurozone is forcing Greece into a selective default. As part of such a package, short-term Greek debt will be more or less forcibly converted into long-term debt. The wretched bank tax is mercifully off the table. And the European financial stability facility will most likely be allowed to purchase Greek debt at a discount. Let us not mince words here. This would be a default, the first by a western industrialised country in a generation. I am not quite sure how it is possible for the European Central Bank to agree to this, or to all of this. But I will surely be intrigued to hear how Jean-Claude Trichet will manage to be consistent with what he said a few days ago. There are also reports that the eurozone leaders may accept a more flexible EFSF beyond those bond purchases.So would this be a good deal? Those who are in the thick of it are running the danger that they got so obsessed with the formidable technical complexities that they lose sight of the bigger picture…the survival of the eurozone depends on whether its leaders will be able to take decisions that would allow Italy and Spain, and everybody else as well, to remain inside the eurozone on a sustainable basis. Greece is now just a side-show….the ceiling will not be big enough to bring in Spain, let alone Italy. To do that that the ceiling would have to be doubled, or trebled. Without this increase, it is inconceivable that the eurozone can get through this crisis intact.. As it stands, the eurozone has a mechanism that can deal with Greece, Ireland and Portugal, but no other country.

EU agreement on Greece – no solution at all - I actually think the best European news was the drama that was being played out on the heights of Galibier Serre-Chevalier in Southern France yesterday. I thought the theatre and backdrops were stupendous. But while that is getting some coverage the news is being dominated by the “done deal” – the “solution” to the Euro debt crisis. When I read the – Statement by the Heads of State or Government of the euro area and EU institutions – I considered it a statement of a group of failed states who have lost perspective on what governments should be doing. Even the UK Guardian editorial (July 21, 2011) pronounced that the deal represented – Baby steps in the right direction. I read the Statement by the Heads of State or Government of the euro area and EU institutions somewhat differently. The 16-point statement suggests that the leaders still don’t fully get it at all.

The latest Eurozone response: one step closer to the crisis point - Rebecca Wilder - I’ve generally not commented on the politics of the sovereign debt crisis in Europe. Regular readers are well aware of my skeptical outlook on the growth prospects for countries forced into fiscal austerity amid piles of private-sector leverage, a slowing global recovery, and a central bank with a tightening bias. However, Tyler Cowen points us to various reactions - I’ll break my silence here and likewise comment on the latest Eurozone policy response. The latest response to the Euro area banking, economic, and now fiscal crisis was heavy on promises and light on details and substance. Specifically, it outlines 16 different measures on 4 pages of text. The optimists – you know, the ‘glass half full types’ – see the ‘increased flexibility’ of the EFSF fund, or point 8. of the announcement, as a boon to the single-currency union. I see it as one step closer to the point where Eurozone policy makers will ultimately decide whether they're willing to institute a policy to keep the 17-country 'zone' together or let it fail. Point 8. gives the European Financial Stability Fund (EFSF) the ability to do the following with ‘appropriate conditionality’: act on the basis of a precautionary programme; finance recapitalization of the banks for countries not in the EFSF programme; and purchase bonds on the secondary market (what the ECB was doing under its Security Markets Programme). This is all fine and dandy; but these measures will do nothing to stem the contagion

Euro Statement Translated -Yesterday the long awaited Euro rescue plan was announced. As ever, it is couched in euro-speak so TMM offer up their translation of the document -

The CDS market and Greece’s default - ISDA has made the right decision: the Greek bond default does not and should not count as a “credit event” for the purposes of whether Greek credit default swaps will get triggered. This is the right decision for two reasons. Firstly, the swap is voluntary. If you don’t want to suffer a haircut, or see your six-month maturity suddenly become a 30-year maturity, then all you have to do is nothing. If the CDS paid out, that would be tantamount to giving free money to anybody who wanted it: just buy short-dated Greek debt and also credit protection on that debt. The bonds will pay out in full, and the CDS would pay out as well. Secondly, this should be a large nail in the coffin of the CDS market generally. Credit default swaps were designed primarily for banks: it took many years before they became widely-traded speculative instruments in their own right. The idea behind them was that banks could keep loans on their balance sheets while at the same time hedging the risk that they would default. That was easier and cheaper than selling the loans outright, and also helped banks maintain good relations with their borrowers.

Latest European Bond Spreads - The wonderful graphic above comes from Calculated Risk. The point I wanted to add is this: every bailout announcement has caused some kind of drop in the spreads, only to see them resume their growth afterwards.  Yesterday's plan has caused a smaller drop in the spreads than any previous bailout.  That suggests to me that spreads will resume growing again shortly, and that the speed of the crisis will begin to accelerate.  The plan announced yesterday lacks all credibility as a general response to the problems (see, for example, Megan McArdle's critique). I am shifting my view on this situation.  It now seems to me that it's really about the political leadership of the Eurozone and the fact that Europe lacks the institutional capability to understand what it is up against, and respond decisively and effectively.  It's going to get much worse, until the Eurozone falls apart altogether, or Europeans finally get desperate enough to do something that's really going to work.

Greece: Fitch warns of ‘selective default’ - Here it is - no surprise. From Bloomberg: Fitch Ratings Says Greece Faces ’Restricted Default’ After New Debt Pact. Yields have fallen sharply this morning ... The Greek 2 year yield is down to 25.7% (was above 39%). The Portuguese 2 year yield is down to 14.9% (was above 20%) The Irish 2 year yield is down to 14.7% (was above 23%). The Italian 2 year yield is down to 3.6%. And the Spanish 2 year yield is down to 3.7%. Here are the links for bond yields for several countries (source: Bloomberg):

European Banks Could Face $23 Bln Writedown on Greece, FT Says - European banks would need to write down as much as 16 billion euros ($23 billion) on holdings of Greek debt should they have to take a 20 percent haircut on the bonds, the Financial Times reported, citing its own analysis of the 90 banks recently subjected to stress tests. Auditors have warned banks to make provisions for losses on Greek bonds in their second-quarter results, the FT said, arguing lenders should absorb losses now because almost any proposals for dealing with Greek restructuring would lessen the value of their bondholdings.

The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP - A funny thing happened in Euro spreads today. While the bonds of all PIIGS countries surged higher in price (and plunged in yield) upon the announcement of the second Big Bang bailout, the reaction in core Eurozone credit was hardly as exuberant, and in fact spreads of the two core European countries pushed wider by the end of the day, and over the last week. Why? After all the elimination of peripheral risk should have been seen as favorable for everyone involved, most certainly for those who had been seen as supporting the ever more rickety house of European cards. Well, no. Basically what happened today was a two part deal: the i) funding of future debt for countries that are currently locked out of the market (all the PIIGS and possibly core countries soon) or in other words the 'liquidity mechanism' which is being satisfied by the EFSF 'TARP-like' expansion, and ii) the roll-over mechanism for existing holders of debt which 'allows' them to 'voluntarily' transfer existing obligations into a 'fresh start' Greece which can then emerge promptly from the Selective Default state that is coming from Moody's and S&P any second, and supposedly allow the country to access markets as a non-bankrupt country."

The CDO At The Heart Of The Eurozone Just Became Europe's Plunge Protection Team - There is only one section of the proposed European Bailout draft statement that is relevant to traders: Section 7, bullet 3 which says: 'To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional circumstances and a unanimous decision of the EFSF Member States.' Everything else is noise. Europe just legalized its own Plunge Protection Team and off balance sheet Quantitative Easing program with one signature. Good luck trading in this, or any, market which even the politicians now admit is nothing more than a central banking policy tool."

1937! 1937! 1937! - Krugman - The Telegraph has a leaked draft of the eurozone rescue plan for Greece. The financial engineering is Rube Goldbergish and unconvincing. But here’s what leaped out at me: 9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. OK, so we’re going to demand harsh austerity in the debt-crisis countries; and meanwhile, we’re also going to have austerity in the non-debt-crisis countries. Plus, the ECB is raising rates. So demand will be depressed in both crisis and non-crisis economies; this will lead to a vigorous recovery through … what? The Serious People are determined to destroy all the advanced economies in the name of prudence.

Euroblather - Krugman - OK, via Calculated Risk, the text of the STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA AND EU INSTITUTIONS (pdf) is out. That’s quite a mouthful, by the way; like the generic bridges and doors on euro notes, it’s an indicator of just how far they are from having a real workable union. Anyway, the let’s do-1937 paragraph is still there, and it’s even worse on close reading: All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Public deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. So everyone will cut; but also, everyone will “improve competitiveness”. So as the Spaniards reduce their labor costs relative to Germany, the Germans will also reduce their labor costs relative to Spain. Progress all around!

The euro crisis will give Germany the empire it’s always dreamed of - It is conceivable that yesterday’s negotiations may indeed save the eurozone – but it is worth pausing to consider the consequences of European fiscal union. First, it will mean the economic destruction of most of the southern European countries. Indeed, this process is already far advanced. Thanks to their membership of the eurozone, peripheral countries such as Greece and Portugal – and to an increasing extent Spain and Italy – are undergoing a process of forcible deindustrialisation. Their economic sovereignty has been obliterated; they face a future as vassal states, their role reduced to the one enjoyed by the European colonies of the 19th and early 20th centuries. They will provide cheap labour, raw materials, agricultural produce and a ready market for the manufactured goods and services provided by the far more productive and efficient northern Europeans. Their political leaders will, like the hapless George Papandreou of Greece, lose all political legitimacy, becoming local representatives of distant powers who are forced to implement economic programmes from elsewhere in return for massive financial subventions. While these nations relapse into pre-modern economic systems, Germany is busy turning into one of the most dynamic and productive economies in the world. Despite the grumbling, for the Germans, the bail-outs are worth every penny, because they guarantee a cheap outlet for their manufactured goods. Yesterday’s witching hour of the European Union means that Germany has come very close to realising Bismarck’s dream of an economic empire stretching from central Europe to the Eastern Mediterranean.

A Report from Greece - Yves Smith - Via e-mail, a reading of public sentiment in Greece from reader Scott S, who is a TV/movie industry professional and did the trailer for ECONNED. I have gotten similar. albeit more brief accounts from other readers. One reader with contacts in Greece did stress that the protests, at least as of the end of June, were overwhelmingly peaceful and added:There is clear videotaped evidence showing certain apparently violent individuals doing things like happily entering police stations, and receiving clubs while hanging out with the police.The Greek and international media have been successfully portraying the protests as the violence of hoodlums. Now to the latest sighting via Scott S: I’m in Greece right now staying with friends and I wanted to send you a brief report.The mood is tense and people are very unhappy with what’s happening to their country. From what i can tell, only the extreme heat is preventing people from turning out in large numbers to protest the extremely unpopular sell-off of Greek assets to save the banks. Strikes are being planned and one Greek-Canadian businessman friend left the country in a hurry yesterday for fear of being trapped here. Look for the situation to intensify in September.  The authorities here are nervous, to say the least.

Selling oneself short - INVESTMENT bankers do not often advocate bigger government, but UBS’ Stephane Deo has an interesting paper arguing that wholesale privatisation is not the answer to European sovereign-debt problems. The potential revenues are significant—between them euro-zone governments own financial assets worth €2.35 trillion (or 26% of euro zone GDP), while UBS estimates non-financial assets such as property are worth double that. But Mr Deo suggests three alternatives to privatisation.  First, the likes of Greece may be able to return to the bond market earlier if they pledge revenue from state-owned assets as security against new bonds. Second, leasing state-owned property rather than selling it would provide consistent deficit-reducing revenue year after year, rather than a one-off debt reduction. Finally, rather than privatising state-owned enterprises, why not impose market discipline, while retaining ownership of the subsequent profits? We too have argued that privatisation, in Greece in particular, should proceed more cautiously than currently planned. Proper regulation should be developed before state-owned utilities such as railways and electricity providers are sold off, to ensure sufficient competition to restrain price rises.

Portugal's Prime Minister Pedro Passos Coelho discovers 'colossal' budget hole - Portugal's new leader Pedro Passos Coelho has told the nation to brace for further austerity measures after his government discovered a "colossal" €2bn (£1.7bn) hole in the public accounts left by the outgoing Socialists.Yields on two-year Portuguese debt rose to a fresh record of 20.3pc on Monday, reflecting fears by investors that the country would struggle to pull itself out of downward spiral without some form of debt restructuring. Mr Passos Coelho also appeared to caution the European authorities that his government will not tolerate heavy-handed interference in the country. "We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and let Europe govern Portugal," he told a party gathering.

Scary chart of the day: Ireland's bank run - Rebecca Wilder - I knew that the Irish deposit base was shrinking - I just didn't realize the severity of the situation. In sum, €21.4 bn in household and non-financial business deposits have been drawn down since their respective peaks. Irish businesses in aggregate have been in a silent bank run since 2007, households since 2010. So how big is €21.4 bn? Roughly 14% of Irish GDP.

France is next -  I have been wondering for quite a while when France will finally join the PIIGS camp, given that it to is a highly indebted nation with insipid GDP. I have posted a number of articles over the past months about the fact that Europe will eventually have to face up to a sovereign debt crisis because nothing is being done to address the fundamental issues within Europe. Something I note the ECB’s policy maker made quite clear over the weekend. The European emergency fund purchasing bonds in the secondary market is just another step towards an actual monetary union. Something the ECB’s Lorenzo Bini Smaghi is obviously pushing for.  It needs to be remembered that these are countries that have suffered substantial property market shocks and there will be substantial unrealised losses across all of these balance sheets. A quick glance at European bank exposure to the PIIGS should ring alarm bells across the board:

Sigma X Trading Suggests European Contagion May Be Shifting From Italy To The UK - Over 3 weeks ago,, before Italian treasury spreads blew out by several hundred basis points, and before Italian bank stock trading halts became a daily occurrence, we suggested that the European contagion was shifting to Italy based on Goldman dark pool Sigma X trading. To wit: 'Today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly.' That someone sure was right, and it is precisely this trifecta of stocks that at last check was halted on the Borsa. Well, based on today's action at Sigma X, the next, and probably biggest domino may be about to fall: the UK itself, because coming in at position #2, just behind UniCredit, we see Lloyds Banking. And if Lloyds goes, the ones that will follow are Barclays and RBS. At that point, the financial crisis goes global."

European debt crisis threatens interest rates, says Bank of England - George Osborne urged European leaders to 'get a grip' when they meet today in a bid to resolve the debt crisis and save the euro The Chancellor of the Exchequer said that if action was not taken, it could result in an economic collapse as serious as the 2008 recession.And, although Britain does not use the single currency, failure to deal with the financial calamity could engulf the whole continent. Homebuyers and firms are facing higher lending costs thanks to the spiralling debt crisis across Europe.In a dramatic warning, the Bank of England also said the risks posed by turmoil in the eurozone pose a substantial threat to the UK.The Bank said the funding costs faced by UK banks were being pushed up because of the risks of economic collapse on the Continent.These were ‘likely to affect the price and affordability of credit to many households and businesses adversely’."

Can sovereign defaults tank the global economy? - The main way a sovereign default could hurt global growth is through its impact on the financial sector. Banks holding the defaulter's bonds swallow losses and, in severe cases, might need to recapitalize to fill in the holes left in their balance sheets. That means they become conservative and make fewer loans. Then there's the direct impact on growth from the country that defaults. Invariably, defaults lead to massive contractions in output, as governments get cut off from global financial markets and are forced to implement budget reforms and austerity programs. After Argentina defaulted in 2001, its economy tanked by nearly 11%. Then there is the contagion effect. Investors burned by one country become nervous and flee anything else that could get them into further trouble, potentially causing a series of sovereign defaults that then send shock after shock through the global economy. The IMF painted just such a scenario when warning about risks to the global recovery in June.

No comments: