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

Saturday, October 1, 2011

week ending Oct 1

Fed's Balance Sheet Shrinks In Latest Week -- The U.S. Federal Reserve's balance sheet shrunk marginally in the latest week, after the central bank announced it would soon boost its share of long-term Treasurys and prevent its mortgage bond holdings from shrinking in another bid to spur the economy. The Fed's asset holdings in the week ended Sept. 28 stood at $2.854 trillion, edging down from the $2.861 trillion reported a week earlier, the central bank said in a weekly report Thursday. Holdings of U.S. Treasury securities moved up a little to $1.665 trillion Wednesday, from $1.663 trillion the week before. Its holdings of mortgage-backed securities and federal agency debt securities decreased slightly. Thursday's report showed total borrowing from the Fed's discount lending window was $11.46 billion, up a tad from the $11.45 billion a week earlier. Borrowing by commercial banks rose to $40 million from $8 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts moved down to $3.422 trillion, compared to $ 3.456 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts slipped to $2.697 trillion from $2.722 trillion the previous week. Holdings of agency securities fell to $725.39 billion from $734.29 billion the prior week.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances September 29, 2011 

Twisting in the Wind - Bernanke did everything he could last week, short of a QE3 expansion of the Fed’s balance sheet, but apparently the market was expecting more.   A creature of habit, the market was fixated on the balance sheet that has done the global heavy lifting since Lehman, rather than on the balance sheets that are poised to do the heavy lifting now, namely the other central banks that jointly announced unlimited dollar lending last week, especially the ECB. Bernanke is going to sell $400 billion of Treasury bills (< 3 years maturity) and buy an equal amount of Treasury bonds (6-30 years maturity), in effect an interest rate swap.  And he is also going to reinvest the principal payments on current holdings of Mortgage Backed Securities into additional MBS instead of Treasuries, thus maintaining rather than shrinking the Fed’s credit swap position.   Big money, but no big deal in the larger scheme of things.  It is not Treasury bonds but rather peripheral Europe bonds (and the banks that hold those bonds) that need the help.

Operation Twist Has a Twist - According to Alan Blinder, writing in the Wall Street Journal, the Fed’s latest operation includes a detail (“the sleeper in the package”) that is aimed at boosting the housing market: For more than a year now, the Fed has been allowing its portfolio of agency debt (e.g., Fannie Mae and Freddie Mac) and mortgage-backed securities (MBS) to shrink naturally as mortgages are paid off and securities mature. To maintain the size of its balance sheet, the Fed has been reinvesting the proceeds in Treasurys. But starting “now” (the Fed’s word), and continuing indefinitely, those proceeds will be reinvested in agency bonds and MBS instead. The objective here is exactly what it was for the first round of quantitative easing, QE1: to reduce spreads between MBS and Treasurys (which had widened a bit), and thereby to help the ailing housing market.

Fed's Twist May Prompt Bigger Turn - "Operation Twist" might be more powerful than many investors expect. As the Federal Reserve Bank of New York prepares to release on Friday new details about the central bank's rate-lowering program, some bond-market strategists have done their own back-of-the-envelope assessment already. Their conclusion: Operation Twist could in some ways do as much—or more—for the bond market than its predecessor, known as QE2. The program also could prove to be a boost for stocks. Operation Twist was initially maligned by some market participants because it mainly involves the Fed shuffling its bond holdings, rather than pouring new money into the system.  Even though Operation Twist hasn't begun being implemented, it already is having an impact on long-term interest rates. It also is affecting what bond investors are buying and selling, pushing many to buy somewhat more risky bonds like mortgage securities and corporate bonds. That's the outcome the Fed has suggested it wants to achieve.

NY Fed Details How Twist Will Work - The Federal Reserve‘s effort to lengthen the average maturity of its balance sheet will see the central bank sell around $44 billion of short-term securities to buy a like amount of longer-dated Treasurys over October. The Federal Reserve Bank of New York said it will buy Treasurys in 13 operations over the coming month, starting on Oct. 3. The last for the month will be on Oct. 27. The purchases will range in size between $1 billion and $5 billion, according to the New York Fed. The sale of short-dated Treasurys starts on Oct. 6 and ends on Oct. 28. Sale sizes will range between $8 billion and $9 billion.

New York Fed reveals Twist schedule - The Federal Reserve Bank of New York detailed its schedule of Treasury debt sales and purchases in October designed to push down long-term interest rates under the central bank’s new policy, dubbed Operation Twist. During October, the markets desk of the New York Fed said it will buy and sell about $44bn of Treasuries, with the first purchase of debt starting on Monday. The size of the 12 regular Treasury purchases will vary between $2.25bn to $2.75bn and $4.25bn to $5bn. The additional purchase of Treasury inflation bonds will involve a size of $1bn to $1.5bn. The Fed will sell shorter-dated Treasuries in six auctions over October with the first taking place next Thursday. Under the policy announced earlier this month, the Fed will buy $400bn of long-dated Treasuries, financed by the sale of an equal amount of bonds with three years or less to run over the next nine months. The policy is designed to “twist” the relationship between short and long-dated yields and boost the housing market and US economy through lower borrowing costs.

Tentative Outright Treasury Operation Schedule - NY Fed

Fed Treasury purchases: How big is big? - Atlanta Fed’s macroblog - In his July 13 testimony to Congress, Federal Reserve Chairman Ben Bernanke discussed the large-scale asset purchase program to buy $600 billion of longer-term Treasury securities that started in November 2010 and was completed in June 2011. The chairman noted: "The Federal Reserve's acquisition of longer-term Treasury securities boosted the prices of such securities and caused longer-term Treasury yields to be lower than they would have been otherwise. In addition, by removing substantial quantities of longer-term Treasury securities from the market, the Fed's purchases induced private investors to acquire other assets that serve as substitutes for Treasury securities in the financial marketplace, such as corporate bonds and mortgage-backed securities. The net result of these actions is lower borrowing costs and easier financial conditions throughout the economy." In a similar way, the maturity extension program—dubbed "Operation Twist" by some—announced by the Federal Open Market Committee last week is designed to further remove longer-term Treasury securities from the market, a move that, other things being equal, should put downward pressure on longer-term rates. Jim Hamilton at Econbrowser has taken a stab at estimating the effects and concludes that it is likely to be modest. Atlanta Fed President Dennis Lockhart shared a similar sentiment, described in more detail later in this posting, in a speech earlier this week.

Fed Watch: The Bernanke of 2003 - Ryan Avent reminds us of a depressing point: ...Ben Bernanke seems to have forgotten everything he once knew about the crises in the 1930s and in Japan in the 1990s. America is sinking back toward recession while the global economy nears a cliff, and the Fed—by its own acknowledgment—has plenty of heavy ammunition sitting untouched on the shelf. I recently had reason to re-read then Federal Reserve Governor Ben Bernanke's 2003 speech on Japanese monetary policy, and realized again that he eliminated virtually every objection to doing more. Concerned about a temporary inflation increase beyond the target rate? Not an problem, according to Bernanke: Fearing the possible capital loss on the Fed's balance sheet should interest rates need to rise quickly? Bernanke offers a solution: Is the debt an impediment to additional fiscal policy? We can fix that, too:

Fed’s Raskin says more easing may be needed — Just days after the Federal Reserve dusted off a bond-purchase shift program from the 1960s, a central bank official who voted for that policy says more action may be needed. Further actions might be warranted even though the Fed’s unusual steps, such as bond buying and last week’s announced maturity shift plan, have made a “somewhat more muted” than expected transmission to economic growth and employment, said Fed Governor Sarah Bloom Raskin at a University of Maryland event on Monday. “Even if the usual effectiveness of monetary policy is being attenuated by the factors that I have mentioned, that conclusion should not be taken as implying that additional monetary accommodation would be unhelpful. Indeed, the opposite conclusion might well be the case — namely, that additional policy accommodation is warranted under present circumstances,” said Raskin, one of seven FOMC members who voted for last week’s decision. An excess supply of housing and impaired access to credit may be a drag, she said.

Bullard Says Fed Could Ease Further If U.S. Economy Weakens - St. Louis Federal Reserve President James Bullard said the Fed is prepared to ease policy should the U.S. economy weaken, while keeping an eye on inflation risks.  “The Fed has potent tools at its disposal and is not now, or ever, out of ammunition,” Bullard said today in a speech in San Diego. “Should further weakness develop, monetary policy will need to respond appropriately,” he said, adding that “sluggish growth” leaves the economy vulnerable to “shocks.” Bullard told reporters after the speech that he supports Operation Twist, though he believes it won’t do much to aid the economy.

Fed Watch: Opinions and Rumors - Federal Reserve President Richard Fisher today attempted to defend his ongoing policy dissent. He gives plenty of material to work with, beginning with his version of research ahead of an FOMC meeting: I survey a select group of 30 or so private business and banking operators, imparting no information about monetary policy but listening carefully to their perspectives on developments in the economy as seen at the ground level... there was speculation in the financial markets and in the press that an Operation Twist was being contemplated. I received an earful of opinions on these rumors. A big red flag right away. He claims to listen to survey contacts on the state of the economy, but does he tell us what they said about the economy? No, of course not. Instead, he emphasizes that he heard a lot of opinions about rumors.  He  He believes policy should be made on the basis of random speculation.  He continues: Embarking on an Operation Twist would be signaling the economy is in worse shape than they thought. The economy is in worst shape than the FOMC believed just months ago. Is it Fisher’s contention that the Fed’s best policy is to attempt to hide this fact? Apparently so – good luck establishing a credible monetary policy when the stated intent is to lie about the actual state of the economy.

Plosser: Recent Stimulus Will Hurt the Fed's Credibility - Federal Reserve Bank of Philadelphia President Charles Plosser voted against Operation Twist -- the recent attempt for the Fed to help the economy -- because: “The actions taken in August and September tend to undermine the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not,” ... “We should not take certain actions simply because we can.” “If we act as if the Fed has the ability to solve all our economic problems, the credibility of the institution is undermined,” Plosser said. “The loss of that credibility and confidence could be costly to the economy because it will make it much harder for the Fed to implement effective monetary policy in the future,” he said. He certainly isn't acting like "the Fed has the ability to solve all our economic problems," (and two other Fed officials dissented along with him). In addition, the Fed officials who voted for this action have been careful to say this won't, in fact, solve all of our problems. They've said it can help modestly, and given the state of the economy even modest help is vary valuable, but they have not implied this will suddenly and magically fix our problems. So I really don't see how this action undermines credibility.

Fed’s Hoenig Says Operation Twist Risks New ‘Complexities’ - Federal Reserve Bank of Kansas City President Thomas Hoenig said the Fed’s plan to push down long- term interest rates may produce accidental outcomes and policy makers risk creating “imbalances” in the economy. “I have real concerns about trying to fine-tune and micro- manage the economy when monetary policy is a blunt tool,” he said today in an interview with Bloomberg Radio. Efforts to “redefine yield curves” may “introduce new complexities and risk new unintended consequences,” he said. Hoenig steps down as the central bank’s longest-serving policy maker this week, after serving as a regional chief since 1991. The Federal Open Market Committee is debating how to jump- start the U.S. economic recovery, with three members casting dissents at each of the past two meetings and posing the most opposition in almost 19 years. “We risk further imbalances,” said Hoenig, 65, who doesn’t vote on the FOMC this year. “We ought to be very, very humble in our expectations of what we can do with this instrument we call monetary policy.”

The Case For Monetary Cranks - Kansas City President Thomas Hoenig is the Uriah Heep of central banking. "We ought to be very, very humble in our expectations of what we can do with this instrument we call monetary policy," says Hoenig, who retires this week after racking up eight straight dissents last year as a voting member of the FOMC. But would tighter monetary policy imposed six months or a year earlier be paying macro dividends now? Let's be generous and say that it's debatable. Still, the prescription endures.  In an interview with NPR, Hoenig complains that "in a world of instant gratification, we have had two decades in this country of consuming more than we produce by a considerable margin." As part of the solution, he recommends spending cuts and tax hikes, NPR reports. Now? In this economy? So much for humility. The punishment, it seems, must fit the crime, Hoenig suggests. Monetary policy as punitive social policy? But austerity now isn't helping Europe, and it's not clear that it would help the U.S. economy at this point, as history suggests.

Japan’s rate dilemma casts shadow over Fed - Slightly more than a decade ago, I spent many hours at the Bank of Japan talking with officials about the paradoxes of ultra low rates. At the time, BoJ officials faced intense pressure from politicians and markets to boost growth; so they were duly implementing quantitative easing or their zero interest rate policy.  However, the more they experimented with Zirp, the more sceptical they seemed about whether it really worked. The essential problem, they moaned, was that Japan’s financial system was so broken that it had become bifurcated: some companies desperately needed cash, but could not borrow because the banks were too risk-averse to assume credit risk, with or without Zirp.  However, healthy companies that did not need loans were finding it laughably easy to raise money. The result was a classic liquidity trap.  These days, the shadow of Japan is hanging over America’s Federal Reserve (and not just because when Ben Bernanke was an academic, he used to write extensively on Zirp, and question whether Hayami was trying hard enough). Last week, the Fed announced the latest variant in its home-spun version of Zirp: the so-called ‘Twist’ operation, a move that sees it purchasing long-term bonds and mortgage securities, in place of short-term term debt and government bonds.

QE3 'Treason': Tales of Print & Hang Bernanke  - Call me shallow--I don't mind--but I was rather amused by Texas Governor and Republican presidential candidate Rick Perry's idea of charging Federal Reserve Chairman Ben Bernanke with treason should he further realize his well-known money-printing advocacy. To many dollar holders, it probably isn't an issue whether this contemptible character who's debased the currency and hence their wealth should be executed. Rather, the real question is if he should be hanged, gassed, electrocuted or shot (nevermind that it's unclear who he's committed treason for). The reason I mention this (pseudo-)morbid stuff is because, hyperbolic rhetoric aside, it seems such dialogue has nonetheless had an impact on US central banking. As the arch-neoliberal state in the not-so-distant past, the US was long among the most vocal advocates of the concept of central bank independence.  Suffice to say, central bank independence has long been part of the neoliberal fashion. Despite being a target for disdain among left-leaning academics (read: most UK political scientists) over accountability concerns, this matter is largely settled among the more insular community of orthodox economists. With the world's largest economy, academia, and IFIs (alike the World Bank and IMF) all peddling central bank independence, it has become expected--especially in OECD countries.

Fisher Says Central Bank Is Under Attack From Paul, Frank -- Federal Reserve Bank of Dallas President Richard Fisher said the central bank's independence is under attack from both ends of the political spectrum in Congress, and he singled out two of the critics by name. "We are being attacked from the right and from the left, and I don't see much difference between a certain congressman from Texas named Ron Paul and a certain congressman from Massachusetts named Barney Frank," Fisher said in response to audience questions after a speech in Dallas. Paul is a Republican and Frank is a Democrat. Fisher's remarks are uncommon among central bank officials, who tend to defer to Congress and its members. The Dallas Fed chief is the only member of the Federal Open Market Committee to have run for Congress, losing as a Democrat to Republican Senator Kay Bailey Hutchison twice, in 1993 and 1994. His comments are "true as a factual matter,"  "But a person in the position of president of a Federal Reserve bank should be careful about what he says and how he says it because the Fed actually reports to Congress and Congress can do anything it wants to the Fed."

Ben Bernanke Deserves a Break - Try putting yourself in Ben Bernanke's shoes, which by now must be feeling about two sizes too tight. The Federal Reserve chairman walked into last week's meeting of the Federal Open Market Committee (FOMC) knowing that:

  • • The U.S. economy is extremely weak—certainly not growing fast enough to make a dent in the unemployment rate. And serious dangers lurk in Europe.
  • • With the president and congressional Republicans at loggerheads as usual, it is unlikely that the economy will get much help from fiscal policy.
  • • Financial markets were fully expecting some version of "Operation Twist," under which the Fed buys longer-term Treasury securities and sells shorter-term ones.
  • • Market participants wanted the Fed to do even more than "twist," which they viewed (correctly) as a relatively weak weapon.
  • • The Fed's bag of tricks, while certainly not empty, didn't have any show-stoppers left in it.
  • • Any proposal to ease monetary policy further would likely provoke dissenting votes from other Federal Reserve bank presidents
  • • Four Republican leaders in Congress—Mitch McConnell, Jon Kyl, John Boehner and Eric Cantor—had just sent Mr. Bernanke an unfriendly and amazingly ill-timed letter, expressing "reservations" about any "additional monetary stimulus proposals" and urging the Fed to "resist further extraordinary intervention in the U.S. economy."

Ben Bernanke and the Washington Consensus - Earlier today, Ben Bernanke gave a speech in Cleveland, Ohio on what we can learn from developing economies about economic growth. The speech revolves around three principles, macroeconomic stability, increased reliance on market forces, and strong political and economic institutions that “are important for sustainable growth.” These principles are derived from the Washington Consensus, which, as Bernanke notes, is “a list of 10 broad policies to promote economic development … judged as commanding … substantial support between both economists and policymakers.” The Washington Consensus is, at its heart, a call to let free market forces lead development. Thus, it emphasizes minimal government, and minimal interference with internal and external trade. However, one of the lessons of the recent crisis is that market forces alone may not be enough to stabilize the financial system, i.e. the financial system may not be self-regulating. The conclusion of the speech seems to recognize this:

Bernanke: U.S. Unemployment a ‘National Crisis’ - Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing a crisis with a jobless rate at or above 9 percent since April 2009, and that fiscal discipline would help spur the economic recovery.  “This unemployment situation we have, the jobs situation, is really a national crisis,” Bernanke said in response to questions after a speech yesterday in Cleveland. “We’ve had close to 10 percent unemployment now for a number of years and, of the people who are unemployed, about 45 percent have been unemployed for six months or more. This is unheard of.”  The chairman is contending with the most opposition on the Federal Open Market Committee in almost 19 years, with three policy makers opposing the central bank’s decision last week to push down longer-term interest rates. Fed regional bank presidents Thomas Hoenig of Kansas City and Richard Fisher of Dallas spoke out against the plan this week, while Eric Rosengren of Boston backed it and Dennis Lockhart of Atlanta said the move will probably have a “modest” effect.

Why Did Republicans Turn Against The Fed? - Given their traditional views about the role of the Federal Reserve in stabilizing the economy, one might have expected Republicans to cheer the latest action proposed by the central bank last Wednesday. After all, here was an alternative to President Obama’s reviled stimulus spending. Instead, however, the ceaseless Republican broadsides against the Fed have made it difficult for some of the right-of-center economists with whom I spoke not to question Republicans’ motives. As Ken Rogoff, a professor of public policy and economics at Harvard and the former chief economist of the IMF, told me, “If the shoe were on the other foot and a Republican were in the White House, we might see different rhetoric.” Similarly, Scott Sumner, a professor of economics at Bentley University and author of the influential blog The Money Illusion, pointed out that “people on the right were pushing for monetary stimulus in the 1980s when inflation was much higher than it is now”—and a Republican was, coincidentally, in the White House.

The Law of Unintended Consequences Part 2 - The Downside of Quantitative Easing and the "Twist"  -  This period of generationally low interest rates has made it almost impossible for most retirees to live off the returns from their interest-bearing savings, particularly if these investments took the form of bank issued CDs or GICs which generally mature in five years or less. Right now, 5 year CD/GIC rates in the United States range from 1.5 percent to just over 2.0 percent annually. Short-term rates are even worse as shown in this graph of 6 month CD rates for the past 10 years: When you're getting a fraction of a percent on your investments, one wonders if money wouldn't be just as well off stuck between the mattress and box spring where it is out of the reach of the unstable banking industry. In the low interest environment, investing strictly becomes capital preservation, less the impact of inflation. Interestingly enough, if you look at all yields, they are extremely low right across the maturity curve with 30 year yields falling south of 3.4 percent, very close to an all time low as shown on this graph: With an estimated $9.9 trillion in interest-sensitive assets held by United States households at the end of the second quarter of 2010, plus the investments made by life insurance companies and private pension plans, low Treasury yields are impacting the income levels from up to an estimated $18.8 trillion in assets.

Will the Federal Reserve Policy Create A Lost Decade for America?  - With the Federal Reserve pondering how they can unscrew themselves from the corner that their experiments have screwed them quite firmly into (i.e Operation Twist), I thought it was time to look at a paper by James Bullard, President and CEO of the Federal Reserve Bank of St. Louis.  This paper, entitled "Seven Faces of "The Peril" (a rather ominous sounding title, don't you think?) was released in late July 2010 and looks at the deflationary issues facing Japan's economy and how the actions taken by the Federal Reserve’s Federal Open Market Committee (FOMC) could help avoid this economic nightmare (for central bankers) with their program of quantitative easing. Mr. Bullard opens with the rather frightening "...most worrisomely, current monetary policies in the U.S. (and possibly Europe as well) appear to be poised to head straight toward the problematic outcome described in the paper.".  The paper he refers to was written by three academic economists in 2001 and is entitled "The Perils of Taylor Rules".  For those of you who aren't aware of Taylor-type economic policy, Taylor Rules are basically a guideline for interest rate manipulation where changes in interest rates are used to both stabilize the economy in the short-term and maintain long-term growth. 

David Stockman: Blame The Fed! - David Stockman, former US Representative and Director of the Office of Management and Budget under Reagan, does not mince words. He sees the monetary systems of the world coming apart. How did we get here? He identifies the root cause as the intentional over-leveraging of world economies by central planners in a misguided effort to enjoy growth without consequence. I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved -- or morphed -- a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the "T-bill standard" or the "federal debt standard." And the other central banks of the emerging mercantilist Asian economies -- Japan, Korea, and now, especially, the People’s Printing Press of China -- have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But because all the bonds on the margin were being absorbed by the central banks, we got away for twenty or twenty five years with deficits without tears.”

What Is Wrong With this Statement? - Following a speech on Wednesday, Fed Chairman Ben Bernanke had this to say in a Q&A:"If inflation itself falls too low or inflation expectations fall too low, that would be something we'd have to respond to because we don't want deflation[.]" At first glance this statement seems reasonable, but upon further reflection there is something troubling about it.  It is the monetary policy equivalent of locking the barn door after the horse is already out.  Bernanke is saying here the Fed will respond after inflation falls too low.  Why not lock the barn door up front by explicitly targeting inflation expectations so that the public's expectations about future spending and price growth are anchored and not likely fall in the first place?   If this were the way monetary policy were conducted the Fed would be a little more concerned right now about the now 6-month downward trend in inflation expectations.   If there is one lesson the Fed should have learned from this crisis is that it needs to take a more forward-looking approach to monetary policy. 

European banks and US dollars - I sometimes get asked why European banks are in apparent need of US dollars, and why the Fed lending money to the European Central Bank (ECB). We have all heard about the apparent troubles European banks are having. They have (we believe) invested in the sovereign debt of fiscally strapped nations like Portugal and Greece; see here. Fine, you say. This might explain why they need short-term Euro financing, which the ECB can in principle supply. What the heck do they need USD for? Well, evidently, European banks do not invest just in Europe. They also lend to companies operating in the US. Where do they get the USD to do this? A big source of  funding apparently comes from U.S. money market mutual funds (MMMFs), which lend funds to branches of these foreign banks residing on US soil.  Now, when things start to look scary in the financial market, credit begins to tighten. And it looks like the American MMMF industry is running scared from Europe. MMMFs are shortening the maturity structure of their lending to European banks (and raising rates). This makes European banks more susceptible to a "rollover freeze"--an event where short-term financing collapses altogether.

Euro Crisis Makes Fed Lender of Only Resort - The Federal Reserve, chastised by Congress for lending money to foreign institutions such as the Central Bank of Libya, is once again the lender of last resort for banks around the world it knows little about. Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data. The failure of regulators worldwide to address European banks’ fragile dependence on short-term funding is “putting the Fed in a really awkward position,”. The swaps with Europe “are an extremely advantageous political football” for critics of the Fed, she said. The extended funding comes as the U.S. central bank is already under fire for its unprecedented monetary stimulus.

Nobel Winner Diamond: I ‘Really Wanted to Go’ to the Fed; Austerity Measures ‘Perverse’ - Longtime Massachusetts Institute of Technology professor Peter Diamond (now retired) may have won the 2010 Nobel prize in economics for his work on the labor market, but his bid to serve on the Federal Reserve Board of Governors went nowhere in Congress. To wit: Republican Senator Richard Shelby of Alabama, his most prominent critic, said in mid-2010 that “I do not believe he’s ready to be a member of the Federal Reserve Board. I do not believe that the current environment of uncertainty would benefit from monetary policy decisions made by board members who are learning on the job.” Prof. Diamond finally withdrew his nomination in June, in a newspaper op-ed, no less. On Monday, he sat down for a Big Interview with the WSJ’s Kelly Evans; below are excerpts from his comments.

"Top 10 Most Extreme Monetary Policy Moves of 2011" -Here's a listing of the top ten most extreme monetary policy moves in the year to date of 2011 (as judged by Central Bank News).  To be sure, there's still another quarter of the year to go, and with heightened concerns about global growth and the ongoing European debt crisis the list could yet be expanded.  But for now, let's look over some of the most extreme moves in the year so far in monetary policy:

The Wages of Bad Macroeconomics -  Krugman - What you missed if you believed that the bond vigilantes were coming any day now, that rates would soar as soon as QE2 ended, and all that: Betting on Bernanke yields 28% return on treasuries. Betting on Ben S. Bernanke has been the most profitable trade for government bond investors in 16 years, defying lawmakers in the U.S. and abroad who said the Federal Reserve chairman’s policies would lead to runaway inflation and the dollar’s debasement. Treasuries due in 10 or more years have returned 28 percent in 2011, exceeding the 24.4 percent gain in all of 2008 during worst financial crisis since the Great Depression, according to Bank of America Merrill Lynch indexes. Not since 1995, when the securities soared 30.7 percent, have investors done so well owning longer-dated U.S. government debt. Tell me why business people pay attention to the WSJ editorial page?

A Quick Note On Inflation - Paul Krugman - People like Greg Mankiw are relaxed about the inflation situation; I’m worried that it will get too low. But there are always people popping up in various places arguing either that (a) the official numbers vastly understate true inflation or (b) recent inflation has been pretty high, and we should be worried about it going still higher. On the first claim, as many people have pointed out, if you really believe that we have 10 percent inflation, none of our other economic numbers make sense: real GDP must be plunging, which is inconsistent with everything else we see. Even aside from those considerations, however, we now have inflation estimates that are completely independent of the official numbers, such as the Billion Price Index. What’s that index saying? Just about the same as official inflation: Now, what about that 3.8 percent rise in the CPI over the past year? Well, if you look at the detail, you see that it’s very largely about commodity prices — oil mostly, but also to some extent food, and even the bulge in apparel prices is probably mainly about cotton.And all that is history — it’s the bulge of late 2010 and early 2011 working its way through the pipeline.

US inflation expectations lowest for a year - Market expectations for US inflation have dropped to their lowest level in a year and are now below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy. The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday. For now, the slide in market expectations for inflation has not approached the lows of summer 2010, when investors feared the economy was in danger of tipping into deflation. The drop in long-term inflation expectations came after the Fed announced Operation Twist last week, a policy aimed at driving down long-term interest rates. Since then, gold, a classic inflation hedge, has tumbled and oil prices have fallen sharply.

Fed's Bullard worried by price expectations drop: report (Reuters) - St. Louis Federal Reserve Bank President James Bullard said he is troubled by a drop in inflation expectations but does not see deflation as likely and still sees a high bar to further quantitative easing, the Wall Street Journal reported on Thursday. "That is making me a little bit worried," Bullard told the Wall Street Journal, referring to recent declines in market-based measures of inflation expectations. Bullard said that if economic activity continued to weaken or if the economy were to be hit by another shock, then inflation expectations could decline substantially below the Fed's objectives, raising the risk of deflation. Fed Chairman Ben Bernanke said on Wednesday the central bank would have to ease policy further if inflation or inflation expectation fell too low. "That would be something we have to respond to because we do not want deflation," he said.

Shilling Sees Evidence of Deflation in 5 of 7 Key Areas; Bernanke Begs Congress for Fiscal Stimulus, Admits Fed is Out of Bullets - Shilling Sees Evidence of Deflation in Financial Assets, Tangible Assets, Median Income, Commodities, Currencies. Shilling says "Forces of deleveraging and deflation are greater than the Fed can handle." I certainly agree and have been saying the same thing (correctly I might add) for several years. All the Fed has ever managed to do is slow the deflationary outcome and that is in spite of $trillions in both monetary stimulus from the Fed and fiscal stimulus from Congress. Once again, if you mistakenly think inflation and deflation are about consumer prices instead of vastly more important credit, you will come to a different conclusion.

Too Much Of A Good Thing? - The gold bugs should be happy, but they're not. Yet inflation expectations are falling, and it's no short-term trend. The Cleveland Fed reports that expecting less on the inflation front has been intact for three decades. Matthew Yglesias suggests ours is an "era of ever-falling inflation expectations." Is this a random event? Yglesias has his doubts: Certainly it’s striking that during the past thirty years of FOMC statements and speeches by chairmen and Fed governors, not a single sentence starts with the clause “as part of our thirty year drive for ever-lower inflation expectations…” even though it’s hard to believe that inflation expectations have been steadily falling for thirty years by accident. Is there some actual reason to be doing this? I feel like if there were, the people doing it wouldn’t be so hesitant to admit that it’s what they’re doing.

An Examination of U.S. Dollar Declines - NY fed - Although the dollar strengthened somewhat recently, its level relative to the currencies of the United States’ main trading partners is nonetheless 11 percent lower than it was at the start of 2009. This represents one of the more pronounced periods of dollar weakness over the past two decades and consequently has garnered considerable attention from market participants and policymakers alike. In this post, we examine the role of market uncertainty and currency risk premia in the pace and size of episodes of dollar weakness since 1991. We find that the most recent bout of U.S. dollar declines largely can be attributed to the recovery in global economic activity from the most recent recession. 

The long bond does the limbo -Yields on long-term US bonds have been falling like a rock since August. On the demand side, there’s no great mystery to this. Stock markets have done poorly, which tends to support Treasuries as a “flight to safety” asset. Other “safe havens” have looked wobbly. European debt in general has been tarnished by the sovereign financial crisis. The Swiss Central Bank just made violently clear its discomfort with flight-to-safety investment flows. Gold and silver’s prices have seemed “bubblicious” for some time, and have duly lived up and down to that characterization by crashing. Only the US Treasury remains willing and able to bear the “exorbitant burden”, in Michael Pettis’ coinage, of providing sanctuary to refugee capital. The latest collapse in long-term yields followed the announcement by the Federal Reserve of an “Operation Twist” intervention, under which it will sell short-term US debt and purchase long-term debt. At first blush, it is obvious why this might drive down long-term bond yields. Holding all else constant, if the Fed enters the long bond market as a large-scale buyer, it seems natural that it would bid up prices and push down yields on long-term bonds. But this account is unsatisfying. First, “operation twist” had been widely anticipated by market participants, so why the sudden earthquake? More importantly, “holding all else constant” is a ridiculous assumption when thinking about “operation twist”.

Yield of Dreams - Krugman - FTAlphaville points us to Lance Roberts pointing out that the upward-sloping yield curve does not say what people think it says. He’s right, but it’s simpler than he makes it. I’ve written about this repeatedly. The argument, once again: The reason for the historical relationship between the slope of the yield curve and the economy’s performance is that the long-term rate is, in effect, a prediction of future short-term rates. If investors expect the economy to contract, they also expect the Fed to cut rates, which tends to make the yield curve negatively sloped. If they expect the economy to expand, they expect the Fed to raise rates, making the yield curve positively sloped. But here’s the thing: the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate, because under current conditions it’s like an option price: short rates might move up, but they can’t go down. Is it really possible that market players haven’t figured this out after three years?

U.S. on "knife edge" of contraction: Fed economist (Reuters) - The U.S. economy is on a "knife edge" between growth and contraction, and if it were a dashboard, it would be flashing "watch out, danger ahead on all gauges," Dallas Federal Reserve Bank's top economist said on Tuesday. "The economy is moving along at stall speed," Dallas Fed research director Harvey Rosenblum told a forum sponsored by the greater San Antonio Chamber of Commerce. "Unless we start moving a little bit faster, we are at a tipping point where things may not go the right way." The U.S. jobs engine has lost momentum and could be set for further "backtracking," Meanwhile, he said, there is also a "credible" risk of rising inflation. "We are in the midst of the Second Great Contraction,"  "This patient is still not ready to get out of the hospital, there are still tubes connected to the patient, and the patient is still not responding well to all the medicine." The grim assessment of the economic outlook came a week after a majority of the Fed's policy-setting panel backed further monetary policy easing to help support a faltering U.S. recovery. Dallas Fed President Richard Fisher, Rosenblum's boss, was one of three policymakers to dissent. Fisher gave a vigorous defense of his decision at his bank headquarters on Tuesday, saying he believed the move could do more harm than good.

Roubini and Soros Say The U.S. Already in A Double Dip Recession and Warn of Uprising - Dr. Doom Roubini has grown even more pessimistic since he put a 60% probability of a U.S. double dip in 2012 just about three weeks ago.  Business Day reported that speaking at a press conference in Johannesburg on Sep. 20, Roubini now says, "The US is already in a recession although it will not admit it." and that the rest of the world would not be insulated from the effects of another global meltdown. (Clip at our site) Regarding Greece and Euro Zone, Roubini thinks Greece would do best to default on its debt and leave the euro zone, and that Europe needs to step up austerity measures: . Eerily, George Soros also said almost exactly the same in a CNBC interview (Clip at our site).  Soros believes the U.S. is already in a double dip recession, and that "a number of smaller euro zone nations could default and leave the single currency area."   But there's a reason Roubini earned his "Dr. Doom" reputation as he made an even more ominous prediction that there would be protests as well in the world’s largest economy. "There is growing inequality all over the world. We have already seen middle-class unrest in Israel. Germans have smashed fat cats' cars.....As we go into another recession, there will be unrest in the US."

Bleeding the Patient, Modern Economics and the Symbolic Economy - Back in the bad old days, the premier physicians of the age accepted and practiced the idea that the cure for illness was to bleed very ill patients, effectively weakening them. Countless patients who might have recovered if simply left "untreated" died as a result of the misguided "science of healing" of the era.  Only with the advent of a true understanding of the nature of infection, the immune system and disease did the "folk" pseudo-science of bleeding pass from accepted medical practice.  We are mired in a similar era of pseudo-science being accepted as actual science, i.e. as reflecting the underlying causal mechanisms of life and the universe, and that pseudo-science is called economics.  As I have noted here many times, we are experiencing not just a standard-issue financial crisis but the failure of the entire pseudo-science edifice of modern conventional economics.

This economic collapse is a 'crisis of bigness' - Living through a collapse is a curious experience. Perhaps the most curious part is that nobody wants to admit it's a collapse. The results of half a century of debt-fuelled "growth" are becoming impossible to convincingly deny, but even as economies and certainties crumble, our appointed leaders bravely hold the line. No one wants to be the first to say the dam is cracked beyond repair. To listen to a political leader at this moment in history is like sitting through a sermon by a priest who has lost his faith but is desperately trying not to admit it, even to himself. Watch Nick Clegg, David Cameron or Ed Miliband mouthing tough-guy platitudes to the party faithful. Listen to Angela Merkel, Nicolas Sarkozy or George Papandreou pretending that all will be well in the eurozone. Study the expressions on the faces of Barack Obama or Ben Bernanke talking about "growth" as if it were a heathen god to be appeased by tipping another cauldron's worth of fictional money into the mouth of a volcano. In times like these, people look elsewhere for answers.   When things fall apart, the appetite for new ways of seeing is palpable, and there are always plenty of people willing to feed it by coming forward with their pet big ideas. But here's a thought: what if big ideas are part of the problem? What if, in fact, the problem is bigness itself?

US GDP Data: Growth for Q2 2011 Revised Upward, But Still Weak -  U.S. GDP growth for the second quarter of 2011 was revised upward to a 1.3 percent annual rate from the 1.0 percent second estimate reported last month. The upward revision, which returned GDP growth to the same rate as the advance estimate released in July, was a relief to some observers, even though it was still very weak . About 2.5 percent growth is generally considered necessary to keep unemployment from rising, when growth of the labor force is taken into account.  Investment remained a relative bright spot in the GDP data, accounting for .79 percentage points of the 1.3 percent growth in the quarter. Business fixed investment was relatively strong while housing investment remained weak. Consumption grew by about 0.49 percentage points, with personal expenditures on healthcare services leading the way. The government sector contracted. Federal defense expenditures rose, but they were more than offset by decreases in federal nondefense spending and in state and local government purchases. Net exports performed better than previously estimated. Exports were revised upward and imports downward compared with the August report.

U.S. Data Better, but Let’s Get Real - The financial markets took Thursday’s U.S. data as a sign of economic strength. But let’s get real. The reports only suggest that the summer’s recession fears were overdone. Besides, unless payrolls start falling again, the biggest problem for the U.S. outlook may now lie beyond its borders. The dark clouds hanging over the euro zone could easily spin off a tornado in the U.S.The most shockingly good report was the 37,000 plunge in jobless claims to 391,000 in the September 24 week, much more than the 3,000 drop expected. The Labor Department, however, was quick to say seasonal factors and other technical problems skewed the numbers. And continuing claims — those collecting for more than one week, remain far above 3.7 million — a sign that the unemployed are having a tough time finding new work. Second-quarter growth was also a bit better than expected, with gross domestic product growth revised to a 1.3% annual rate. Investors liked that the pace was better than the 1.0% reported a month ago, but seemed to forget the revision just put GDP growth back to its advance reading of 1.3% reported in July.

U.S. data point away from another recession - The economy grew slightly more than previously estimated in the last quarter and weekly jobless claims fell to their lowest number in five months, signs that the nation may not be heading into another recession. The economy grew at an annual rate of 1.3% from April through June, an anemic but marginally better pace than the most recent estimate of 1%, federal officials said Thursday. The revised data on total economic output, also known as gross domestic product, narrowly beat expectations. Also Thursday, the Labor Department reported that weekly claims for unemployment insurance dropped 37,000 last week to 391,000, the lowest figure since early April. Economists said claims below 400,000 were a positive sign for job growth. The unemployment rate was 9.1% in August after the economy failed to add any new jobs. Even so, a private report Thursday indicated that only about a third of the nation's chief executives expected to hire employees any time soon. The two government reports indicate that fears of another recession are unwarranted right now.

The Fundamentals of the US Economy - This month the manufacturing survey’s improved. In particular the gut wrenching Philly Fed number from last month (-30) improved to severe indigestion (-17) this month.  This marks four consecutive months of weakening or weak manufacturing surveys. This is deeply disconcerting as movements in the goods producing industries remain the primary source of macroeconomic fluctuation, even in our de-industrializing economy. Retail Sales have also yet to recover from the Summer Slowdown. However, at the same time many of my really core numbers look more promising. Used car prices are rising. Rents are rising. Hotel Occupancy is rising.  Inventories are light and getting lighter and will trend lighter based on the latest data.  Business lending is picking up. I still the the domestic economy looks ready to move. The biggest threat is to imports.

US economy may still have a (faint) pulse - The U.S. economy still has a heartbeat, although you have to listen really closely to hear it. Amid signs that a global economic slowdown could bring on another recession, the Commerce Department Wednesday reported that companies boosted orders in August for equipment such as computers, machinery and other goods that keep their factories humming. "It shows that we're not falling off a cliff, which helps,"  Overall, new orders for durable goods dipped 0.1 percent in August, largely because demand for new cars was weak. But while consumers are holding back on spending, businesses continue to buy new equipment. Business investment in computers, software, telecommunications and other equipment has been of the few sources of growth for the U.S. economy since the recession officially ended in mid-2009. That's helped pick up the slack from weak demand from consumers, who have been struggling with a stubbornly weak job market, stalled wages and rising gasoline and food prices. The ongoing recession in the housing market has also cut deeply into sales of furniture and appliances.

Goldman On Durable Goods: Encouraging, But Doubt Recent Growth Rates Will Be Sustained - Today's core durable goods number is being desperately spun as yet another inflection point for the economy. Alas, nobody buys it any more. Enter Goldman Sachs, which says that while encouraging, is quite dubious if the "recent growth rates will be sustained." Growth of what? Stainless steel scaffolding for lies and rumors that reach to the sky? If so, then yes absolutely. Otherwise, with China rumored to be gearing up to downgrade the CNY (and finally push Schumer over the cliff), we wish the optimists the traditional dose of good luck with their daily hopium. BOTTOM LINE: Total durable goods orders about unchanged, but core orders and shipments up significantly. While an encouraging sign, we are not sure recent growth rates will be sustained.

Double-dip ahead? - THE will-it-or-won't-it double-dip debate has once again broken out. Nouriel Roubini says the American economy is destined for a return to recession. David Leonhardt, on the other hand, notes better-than-expected durable goods orders and a subsequent rise in 3rd quarter GDP forecasts and suggests that the odds of a double-dip recession may be falling. I think it's very difficult to judge anyone's predictions about the outlook for the American economy without hearing their assumptions about three key things: 1) what the Fed will do in coming months, 2) how Congress will alter fiscal policy in coming months, and 3) what will happen in the euro zone in coming months.

Laying the groundwork for the "big one" - TYLER COWEN reproduces two quotes on macroeconomic stabilisation and crisis. First, from Macroresilience: As Minsky has documented, the history of macroeconomic interventions post-WW2 has been the history of prevention of even the smallest snap-backs that are inherent to the process of creative destruction. The result is our current financial system which is as taut as it can be, in a state of fragility where any snap-back will be catastrophic. And next from Nassim Nicholas Taleb and Mark Blyth: Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. The argument is akin to ideas about forest management—when governments suppress the natural fires that periodically clear away forest underbrush, they create a build-up of flammable material sufficient to power a massive conflagration. I certainly think an equivalent truth applies to financial markets

CITI: Policymakers Are Too Timid To Prevent The 'Nightmare Scenario' - The developed world is heading into recession and every major policymaking body is making the wrong moves. Here's what various agencies could do to prevent this "nightmare scenario," according to Citi:

  • The ECB could step up its purchases of Italian and Spanish debt, even drawing a line in the sand — "We will not let yields rise above 5.5%"
  • The Fed could to ignore that "frankly frightening letter from the Republicans" and take action to prop up asset price expectations
  • Politicians could "adopt a plan to restructure Greece, Ireland and Portugal but to effectively ring-fence Italy and Spain through a gigantically expanded EFSF-style liquidity cusion"
  • The U.S. supercommittee could "exceed its mandate, coming up with a long-term proposal for a return to budget surplus coupled with near-term stimulus"

None of these outcomes are likely, however, until markets get lower.

What kind of Western recession? - Regular readers will recall that I began forecasting a Western recession some months ago. That judgement is now becoming mainstream. Last night, Willem Buiter called an imminent European recession. From Alphaville: Even with a leveraged EFSF, additional fiscal tightening and tighter financial conditions are likely to be sizeable drags for Euro Area growth. Taking this into account, we revise down our Euro Area 2012 GDP growth forecast from +0.6% to -0.2%, now expecting a mild recession to start in 4Q 2011. And a couple of night’s ago, the always excellent Gerard Minack also made the recession call for both Europe and the United States. The entire video from Lateline Business is worth your time: You will have noticed that both of these recession predictions are based upon the same premiss, that Western governments will retrench spending causing their economies to slump into recession. As Minack says,  and I’ve argued for some time, a US recession is likley to come from the 1.5% or so of fiscal spending cuts that are being haggled over by the US Joint Select Committee on Deficit Reduction or “Super Committee”. With GDP already weak, such cuts are ipso facto a recession. Buiter has essentially used a similar calculus in his call for Europe.

Goldman Sachs Sees 40% Risk of ‘Great Stagnation’ - Investors and consumers across the world are worried that the global economy is heading back into recession, but analysts at Goldman Sachs are warning the risk of a "great stagnation" is bigger than you might think. Having analyzed 150 years of macroeconomic data, Goldman has found 20 examples of stagnation similar to those experienced by Japan in the 1990’s, most of which occurred during the last 60 years in developed economies. “During these episodes, GDP per capita growth hovers below 1 percent and is less volatile than usual. They are also characterized by low inflation, rising and sticky unemployment, stagnant home prices, and lower stock returns,” Jose Ursua, an economist at Goldman Sachs, said in a research note on Thursday. He predicts a 40 percent chance of stagnation in the world's developed markets. “Stagnations are more likely than you would like. Because these events are correlated with financial crises, the conditional probability of stagnation in the current environment is higher than normal," he said

The Economy is On the Ropes and Going Down - by cmartenson - The macro trends of worsening public and private debt loads, a looming and unaddressed Peak Oil threat, exponentially increasing global population, resource depletion, and an all-too-human tendency to use the money printing machine to deal with tough economic problems all remain pointed firmly towards an uncomfortable conclusion: There's a future of less in store for most people. Our best hope is for a negotiated decline to lower levels of economic activity that allow us to gracefully adjust our expectations to a new and lower level consumption that offers an even more enjoyable and purpose-filled existence. Our worst fear is that a stubborn insistence on business-as-usual by our leadership leads to a future shaped by disaster rather than design. The fundamental issue is this: You can't solve a problem rooted in too much debt with more debt. It just doesn't pencil out.

ECRI Recession Call: ‘You Haven’t Seen Anything Yet’ - The U.S. is headed back into recession. That’s the word from the widely respected Economic Cycle Research Institute, which uses economic indicators to put together leading indexes. On its Web site, ECRI said the U.S. economy is “indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.” The forecasting firm relies on dozens of specialized leading indexes to support the warning “If you think this is a bad economy, you haven’t seen anything yet.” Consumers, however, aren’t so ready to throw in the towel. They expect some small ray of sunshine to peek through the gathering dark clouds. Within Friday’s Thomson Reuters/University of Michigan consumer-sentiment survey, the index covering six-month expectations rose to 49.4 at the end of September from a preliminary reading of 47.0, while the current-sentiment index edged up only slightly. The question is whether the slightly better outlook is based on positive trends consumers are experiencing now — or just wishful thinking. The Michigan survey suggests households may be viewing economic weakness as the new norm.

ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call? - Mish - A number of people have asked me to comment on the ECRI's recession calls. Link if video does not play: Economist Says U.S. Recession Is `Inescapable' Select Quotes from the Video

  • "We are looking at forward looking indicators, over a dozen leading indicators on different aspects of the US economy, and it's wildfire"
  • "Anyone who is looking for a job has a right to call this a depression"
  • "It's going to get worse"
  • "Spain never left recession, I don't care what the GDP numbers say. Italy's on the verge, and the [European] core is not looking so good."
  • "Dr. Copper is a short-term leading indicator. This thing has room to run. Global industrial growth is not turning up anytime soon"
  • "Government bond yields can go even lower. Look at Japan"
  • "Future inflation gauge for Europe is heading down"

I have to give Achuthan credit. I think that was a superb interview. However, I still do not appreciate the half-truths and hype in today's ECRI report U.S. Economy Tipping into Recession

Americans Have No Cause to Feel Smug About Euro Zone Crisis - Americans looking balefully across the Atlantic at the euro zone’s debt crisis have no cause to feel smug, according to data from Capital Economics experts Wednesday. At the firm’s annual conference in New York, Paul Ashworth, chief North American economist, pointed out that by some measures, the U.S. is in far worse shape than the currency bloc’s beleaguered peripheral nations. By two key metrics — government deficit as a percentage of gross domestic product and government receipts as a percentage of outlays, the U.S. is in worse shape than Greece, Spain, Portugal and Italy, Mr. Ashworth said. Equally worrying, for the U.S., he pointed out, are the Congressional Budget Office’s long-term projections for government spending, particularly on health care. (He also noted that the U.S.’s burden of older people as a percentage of the working population isn’t as acute as that in Germany or China.) However, while the U.S. faces significant fiscal challenges, it also enjoys unique advantages, he said, namely the dollar and the expansive Treasury market.

Defeatism -  Krugman - Martin Wolf is getting frantic, as well he should. The austerians have brought us to the brink of a vast disaster. A recession in Europe looks more likely than not; and the question for the United States is not whether a lost decade is possible, but whether there is any plausible way to avoid one. Wolf directs us to a recent speech by Adam Posen (pdf), which opens with a passage that very much mirrors my own thoughts: Both the UK and the global economy are facing a familiar foe at present: policy defeatism. Throughout modern economic history,  every major financial crisis-driven downturn has been followed by premature abandonment—if not reversal—of the macroeconomic stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further policy stimulus. Every time those voices were wrong on each and every count. Those voices are being heard again today, much too loudly. It is the duty of economic policymakers including central bankers to rebut these false claims head on. It is even more important that we do the right thing for the economy rather than be slowed, confused, or intimidated by such false claims.

A few thoughts on economic nationalism - Here’s the depression macro thesis I have developed prominently featuring a kernel of nationalism:

  • Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
  • Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases.
  • As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  • Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.

Economists Shut Out Of Debt-Ceiling Debate - A Media Matters analysis of evening cable news programs reveals that just 4.1 percent of guests who discussed the debt-ceiling debate were actual economists. This lack of credible economic experts helped create a media environment in which political and media figures could spread misinformation. On August 2, President Obama signed the Budget Control Act, a controversial compromise bill that raised the nation's debt ceiling in order to avoid default while also cutting government spending by hundreds of billions of dollars over the next decade. Many economists criticized the deal, saying that budget cuts would only weaken the economy and further drive up unemployment. But their voices were largely absent from CNN's, Fox News', and MSNBC's coverage of the debt-ceiling negotiations. Of the 1,258 guest appearances during segments that discussed the issue in the month leading up to the debt deal, only 52 -- or 4.1 percent -- were made by economists.

A Free Lunch for America - The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year. Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure – even unproductively, on projects for which the social rate of return is a measly 25% per year. Suppose that – as seems to be the case – the simple Keynesian government-expenditure multiplier on this spending is only two. In that case, the $500 billion of extra federal infrastructure spending over the next two years would produce $1 trillion of extra output of goods and services, generate approximately seven million person-years of extra employment, and push down the unemployment rate by two percentage points in each of those years. And, with tighter labor-force attachment on the part of those who have jobs, the unemployment rate thereafter would likely be about 0.1 percentage points lower in the indefinite future. So, what are the likely costs of an extra $500 billion in infrastructure spending over the next two years? For starters, the $500 billion of extra government spending would likely be offset by $300 billion of increased tax collections from higher economic activity. So the net result would be a $200 billion increase in the national debt. American taxpayers would then have to pay $2 billion a year in real interest on that extra national debt over the next 30 years, and then pay off or roll over the entire $200 billion. The $40 billion a year of higher economic activity would, however, generate roughly $10 billion a year in additional tax revenue. Using some of it to pay the real interest on the debt and saving the rest would mean that when the bill comes due, the tax-financed reserves generated by the healthier economy would be more than enough to pay off the additional national debt.

Has Anyone Seen Those Vigilantes? - The bond vigilantes are MIA, observes Ronald McKinnon, a professor at Stanford. This is unusual, he advises. "In past decades, tense political disputes over actual or projected fiscal deficits induced sharp increases in interest rates—particularly on long-term bonds." But as anyone who watches the Treasury market these days knows, rates have been falling, and for longer than many veteran market pundits and traders expected. To put it simply, these are extraordinary times... still. On that point, at least, there's no debate. "Even with great financial disorder in the stock and commodity markets since late July 2011, today's 10-year Treasury bond rate has plunged below 2%," McKinnon notes. "The bond market vigilantes have disappeared."  The disappearing act has consequences, he continues: Without the vigilantes in 2011, the federal government faces no immediate market discipline for balancing its runaway fiscal deficits.   McKinnon argues that "the vigilantes have been crowded out by central banks the world over." This isn't normal, he complains.  When interest rates dipped in the past,firms would rush to avail themselves of cheap credit before it disappeared. However, if interest rates are expected to stay low indefinitely, this short-term expansionary effect is weakened.

Peter Diamond on Unemployment and Debt - U.S. policymakers face two major problems — unemployment and debt — but solving them involves two different time frames, says Peter Diamond, 2010 Nobel winner for economics and the former nominee for Federal Reserve governor who pulled his nomination amid political squabbling. Diamond also called for more fiscal stimulus to help the economy. “Unemployment is an immediate problem that calls for an immediate response,” said Diamond during an interview Monday with Dow Jones Newswires and The Wall Street Journal. In his view, high unemployment — the U.S. had a jobless rate of 9.1% in August — is the result of two problems: structural shifts in the labor force and the loss of aggregate demand because of the recession and weak recovery. Policymakers are best suited to boost aggregate demand. Diamond said he was glad to see the Federal Reserve initiated “Operation Twist” as a way to help the economy but was uncertain how effective the move would be. “My sense is it helps but not enough,” he said.

Some Context for Thinking About Deficit Reduction: Social Security and Major Health Care Programs - CBO Director's Blog - As policymakers consider the composition of policy changes to be used to reduce future budget deficits, it is useful to consider both historical experience and projections for the future for significant components of the budget. Today, I’ll discuss Social Security and the government’s major health care programs. Spending on Social Security and the major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and insurance subsidies to be provided through exchanges in coming years—will be 12.2 percent of GDP in 2021, according to CBO’s projections based on current law. Such spending equals 10.4 percent of GDP in 2011 and represented an average of 7.2 percent of GDP during the past 40 years. The marked increases in such spending experienced during the past 40 years and projected for the next 10 years reflect the aging of the population, rising costs for health care, and changes in federal programs.  Spending for Social Security, which totaled 3.3 percent of GDP in 1971, will equal 4.8 percent in 2011 and is projected to continue growing over the next 10 years, reaching 5.4 percent in 2021 (see the figure below). Medicare spending (excluding offsetting receipts) is projected to grow even faster, relative to the overall economy, from 0.7 percent of GDP in 1971 to 3.7 percent in 2011 and 4.1 percent in 2021.

Some Context for Thinking About Deficit Reduction: Implications for Future Budget Policy - CBO Director's Blog - In blog postings this week, I’ve reviewed the historical experience and CBO’s projections for three broad components of the federal budget: revenues; Social Security and the major health care programs; and all other spending excluding interest payments. Today I’ll discuss some of the implications of that experience and those projections for future budget policy. Combining the various components of spending, total federal spending excluding net interest will represent 19.9 percent of GDP in 2021, according to CBO’s projections under current law, a bit above the 40-year average of 18.6 percent. And the composition of that spending will be noticeably different from what the nation has experienced in recent decades: Spending for Social Security and the major health care programs will be much higher, and spending for all other federal programs and activities, except for net interest payments, will be much lower (see the figure below). Alternatively, if the laws governing Social Security and the major health care programs were unchanged, and all other programs were operated in line with their average relationship to the size of the economy during the past 40 years, total federal spending would be projected to be much higher in 2021—nearly 24 percent of GDP. That amount exceeds the 40-year average for revenues as a share of GDP by nearly 6 percentage points—even before interest payments on the debt have been included.

The Trillion Dollar War of Choice, and the Constraints on Macro Policy - Or at least $805.6 billion as of the end of September, not including debt service and additional reset costs; around $940 billion including interest payments. As the US economy faces the prospects of stagnant growth or recession, it is of interest to see why the scope for fiscal policy is so circumscribed -- that is why is the debt level so high given that in the last year of the Clinton Administration, we were paying down debt? Figure 1 depicts part of the answer (other parts, here). To understand the magnitude of the cumulative nominal costs as of September 2011, it is useful to normalize by nominal GDP. As of 2011Q2, GDP was $15 trillion SAAR. Hence, cumulative expenditures (not including the resulting incremental interest rate payments) was equivalent to 5.4% of one year’s economic output. Including the interest burden, the (publicly held) debt to GDP ratio would be 6.3 percentage points lower than what it currently is (65.0%).

Defense Leaders Make The Case Against Budget Cuts - The congressional supercommittee has two months to come up with a way to slash more than a trillion dollars from the federal deficit or risk deeper cuts that would be triggered automatically. Everything is on the table in the debate — including defense spending. The Pentagon is on a mission to prevent the defense budget from taking the brunt of the cuts, and the threat of losing funding has both the military branches and the defense industry fighting back. "It's safe to say that every single line of the budget is under scrutiny," Secretary of the Air Force Michael Donley said at the Air Force Association's annual conference this week. Discussion at the conference this year centered on how to survive the pending budget cuts. The Pentagon has already been ordered to cut at least $450 billion from its budget over the next 10 years, and that number could grow to more than a trillion dollars depending on what Congress does.

Why Don't the Deficit Hawks Want to Tax Wall Street? - Dean Baker - The intensity with which the country's leading deficit hawks continue to ignore financial speculation taxes (FST) is getting ever more entertaining. While deficit hawks like Wall Street investment banker Peter Peterson, Morgan Stanley Director Erskine Bowles and The Washington Post never tire of preaching the virtues of shared sacrifice, somehow sacrifice for Wall Street never features as a part of this story. The refusal of this group to consider FST is becoming more striking because most of the world appears to be moving in this direction. Last spring, the European Parliament voted by an almost four to one margin in support of FST. The European Commission, the executive body of the European Union (EU), is now making plans to implement a modest tax beginning in 2014. Even with the low tax rates being considered by the commission (e.g. 0.05 percent in each side of a stock trade), it is estimated that an EU-wide tax could bring in as much as $60 billion a year. Two of the leading proponents of a FST in Europe are German Chancellor Angela Merkel and French President Nicholas Sarkozy, both of whom are leaders of the conservative parties in their countries. Still, even liberal deficit hawks here do not want to talk about FST.

Super Committee Members Raked In $41M From Wall Street - Members of the deficit-reduction super committee have received a combined total of $41 million from the financial and real estate sectors during their time in Congress, according to a new report from Public Campaign and National People's Action.  The report also found that at least 27 current or former aides for members of the super committee have traveled through the revolving door between K Street and Capitol Hill and have lobbied on behalf of financial firms. "Wall Street bought the deregulation that led to our economic collapse and the American public has paid the price," . "The super committee should not give Wall Street and big banks another free ride because of their campaign cash." The government reform groups are pushing several tax reforms that Wall Street strong opposes, such as closing hedge-fund loophole and instituting a financial-speculation tax, both of which could generate more than a trillion dollars and offset costs for several components of Obama's jobs bill, including rebuilding the nation's infrastructure, extending unemployment benefits and providing tax incentives for hiring veterans.

Supercommittee operating in secret - As 12 lawmakers tackle the historic task of slashing at least $1.2 trillion from the nation’s deficit, they have spent lots of time behind closed doors, speaking almost nothing of their proceedings while leaving behind little more than a trail of sandwich wrappers and unanswered questions. It’s a remarkable show of secrecy after an election year that ushered in nearly 90 new Republicans who rejected the idea that sweeping legislation would be authored outside the public view. Tuesday was the second straight closed-door day for the supercommittee. The panel met for roughly 6½ hours in the Capitol, and when its members left, they wouldn’t answer basic, innocuous questions about the policies they were discussing nor specify when the next meeting would take place.

Dynamic Deja Vu on Tax Policy - The “dynamic scoring” debate is back again. Last week the House Ways and Means Committee—chaired by Dave Camp (R-MI), who also happens to be a member of the debt-limit deal’s “super committee”—held a hearing on the subject, calling on the Joint Committee on Taxation’s chief of staff, economist Tom Barthold, to explain why that committee still estimates the revenue effects of tax legislation using “static” methods. The Washington Post’s Lori Montgomery reported on this “old battle,” wondering out loud whether the super committee will resort to dynamic scoring as a “magic elixir that greases the skids to a more far-reaching compromise.” Well, unfortunately for certain policymakers, dynamic scoring is not so magical. “Dynamic scoring” refers to revenue estimates that would be adjusted to account for expected effects of tax policies on the aggregate size of the economy. As Barthold explained, conventional revenue-estimating methods account for how changes in tax policy might cause households and businesses to substitute lightly taxed activities for more heavily taxed ones. But the assumption is that the total level of economic activity stays constant.

A Plan on Jobs Deserves a Hearing, by Christina Romer - People are concerned about the deficit, and this concern is holding back the recovery. Fiscal austerity, not more stimulus, is the answer. This argument makes me crazy. There’s simply no evidence that concern about the current deficit is a significant factor limiting consumer spending or business investment. And government borrowing rates are at record lows, suggesting that financial markets are not worried about the deficit, either. Moreover, as I discussed in a previous column, the best evidence shows that fiscal austerity depresses growth and raises unemployment in the near term. That’s the experience of countries like Greece, Portugal and Britain. Cut the current deficit and you will raise unemployment, not lower it. With 14 million Americans unemployed and no prospect of rapid recovery on the horizon, we really have no choice: we must take additional measures to create jobs. Just as important, policy makers should be discussing how to make meaningful progress on the long-run deficit at the same time. We need a credible plan that phases in aggressive deficit reduction as the economy recovers.

Bloomberg: Obama Jobs Plan May Prevent 2012 Recession - President Barack Obama’s $447 billion jobs plan would help avoid a return to recession by maintaining growth and pushing down the unemployment rate next year, according to economists surveyed by Bloomberg News.  The legislation, submitted to Congress this month, would increase gross domestic product by 0.6 percent next year and add or keep 275,000 workers on payrolls, the median estimates in the survey of 34 economists showed. The program would also lower the jobless rate by 0.2 percentage point in 2012, economists said.  Economists in the survey are less optimistic than Treasury Secretary Timothy F. Geithner, who has cited estimates for a 1.5 percent boost to gross domestic product. Even so, the program may bolster Obama’s re-election prospects by lowering a jobless rate that has stayed near 9 percent or more since April 2009.

How to Put More Jobs in the American Jobs Act - President Obama’s recently proposed American Jobs Act would put people to work building and repairing the nation’s roads, bridges, and schools. This is all laudable, if fairly inadequate ($50 billion for transportation infrastructure and half that for school infrastructure) given both the extent of our dilapidated infrastructure and the size of the employment hole. But a job creation idea you won’t find in the AJA would produce double the employment boost of those physical infrastructure projects. If we invest in putting people to work delivering social care services—shoring up our crumbling social infrastructure by adding jobs in professions like direct care—we can begin to crawl our way back to full employment, while providing vitally needed services and doing more to help those who are least able to weather the current non-recovery recovery.  The idea of retrofitting and rebuilding schools has been championed (by Jared Bernstein and others) as an alternative to traditional transportation infrastructure projects because of the differences in labor intensity: transportation projects employ fewer people per dollar spent. For the same reason, investment in community-based social care services, like home health care for the elderly and disabled, gives you an even more impressive employment bang for the buck.

Up a Creek with a Paddle - It’s one thing to be up the creek without a paddle.  It’s quite another to be stuck up the creek with a paddle that you can’t use. The latter describes where we are in terms of economic policy.  The Federal Reserve is trying to do their part with more easing of interest rates, but absent more action on the fiscal side, like the measures in the President’s jobs plan, I don’t expect anyone much to take advantage of lower rates.  What’s missing is demand, customers, orders, projects that inspire investors to come in off the sidelines.  In other words, I think that at a time like this, sequencing matters when it comes to monetary and fiscal stimulus, and fiscal needs to go first…without more demand, I fear we’re unlikely to see the incentive of lower rates gain more traction. So what’s blocking the fiscal push, as in the jobs plan? A friend of mine (hat-tip JB) reminded me of this interesting albeit disheartening analysis by James Surowiecki. His answer to the above question is, of course, Republicans, but that begs another question: why is it politically costless for R’s to go to the do-nothing, or worse (austerity!), place on jobs?

Thinking through the White House’s Plan to (Further Cut) Payroll Taxes - A major part of President Obama’s announced jobs plan came in the form of cuts to payroll taxes. The employee share of payroll taxes is cut in half, while the employers’ share is also cut in half until they reach a total payroll of $5 million. Lowering the employer’s rate lowers the marginal cost of hiring additional workers, which some argue might induce more hiring. Lowering the worker’s share results in an unexpected windfall for employees, but may not fundamentally alter hiring and firing decisions. The CBO has suggested that employer-side tax cuts may be more effective than employee-side ones. The tax cut on the employer side is fairly complicated. Firms will receive tax credits if they raise wages – a bizarre strategy that may lead to some firms opting to pay existing workers more for additional hours rather than hire more workers. Also, the cuts are narrowly targeted towards small businesses.  Fast growing companies would be notable losers, as the benefits to hiring phase out as they grow. This is like imposing a high effective marginal tax rate on growth, similar to the high effective marginal tax rates created by phase-outs for tax preference items like the earned income tax credit,

GOP Young Guns Blast Regulations at Facebook Event - Republicans’ push to cut federal spending and regulations is part of their effort to create “a future that holds a space for a lot more Facebooks,” House Majority Leader Eric Cantor of Virginia said Monday in an interview held at the company’s Palo Alto, Calif., headquarters. For instance, regulations from the Environmental Protection Agency can hinder the ability of small businesses to stay afloat, Cantor said in the hour-long appearance with House Majority Whip Kevin McCarthy of California and Rep. Paul Ryan of Wisconsin (Check out their Facebook pages here, here and here.) “It’s not to say we don’t want a clean Earth, because we do, but we need prosperity in order to afford the technology to make a cleaner Earth,” Mr. Cantor said. Clad in shirtsleeves, the three lawmakers, who co-authored a book together called “Young Guns: A New Generation Of Conservative Leaders,” talked up the virtues of social media and entrepreneurs on Monday, just a few hours after President Barack Obama wrapped up a LinkedIn town hall meeting nearby in Mountain View, Calif.

Regulatory uncertainty not to blame - Republican politicians and business groups keep telling us that business investment and hiring is being held back by uncertainty over future regulations and taxation. For instance, Maine Senator Susan Collins in introducing her bill to put a moratorium on all new regulations: Her view has been repeated by others – like House Majority Leader Eric Cantor  and the Chamber of Commerce. This story is also being told by some of the dissenters on the Federal Reserve Board’s Federal Open Market Committee, as Mike Konczal recently reported. In a recently released paper, I present evidence that if you examine what employers are actually doing in terms of hiring and investment, this story about regulatory (or tax) uncertainty driving current job trends does not hold up. Private sector job growth has been weak in each of the last three recoveries and the current recovery’s private job growth matches up with the early 1990s recovery and is far better than that of the 2001 recovery. Investment in equipment and software has been stronger in this recovery than in the prior two recoveries. Last, weekly work hours are still substantially below those prior to the recession: uncertainty about future regulations cannot explain why employers do not increase work hours of currently employed workers to meet current demand for goods and services.

Phony Fear Factor, by Paul Krugman - After spending a year and a half talking about deficits, deficits, deficits when we should have been talking about jobs, job, jobs we’re finally back to discussing the right issue.  Listen to just about any speech by a Republican presidential hopeful, and you’ll hear assertions that the Obama administration is responsible for weak job growth. How so? The answer, repeated again and again, is that businesses are afraid to expand and create jobs because they fear costly regulations and higher taxes. Nor are politicians the only people saying this. Conservative economists repeat the claim in op-ed articles, and Federal Reserve officials repeat it to justify their opposition to even modest efforts to aid the economy. The first thing you need to know, then, is that there’s no evidence supporting this claim and a lot of evidence showing that it’s false ... as a new paper by Lawrence Mishel of the Economic Policy Institute documents at length. So Republican assertions about what ails the economy are pure fantasy, at odds with all the evidence. Should we be surprised?

Austerity is a problem, but so is fear - Paul Krugman this morning argues that fear of fear is phony.  He is almost certainly correct that fear is not the number one problem at the moment--if I had to pick a number one issue, it would be austerity measures at the state and local levels of government.  Tracy Gordon of Brookings has a nice picture: Cuts in state and local government jobs (police officers, school teachers, firefighters, DMV workers) are putting a drag on employment growth.  Moreover, this picture understates the problem, because total compensation to many state and local workers has been cut. But I do think fear is part of the problem, at least in one sector of the economy.  It seems to me that there are business opportunities in lending that are going unanswered.  The pendulum for underwriting has swung so far to caution that according to the Flow of Funds Accounts, net lending declined in the second quart of 2011.  More specifically, net bank lending dropped by $181 billion on an annualized basis in the first quarter and by $129 billion in the second quarter.  Net lending is the difference between volume of new loans and volume of repayment of old loans. I do find it plausible that one of the sources of the tight lending environment is a fear of regulators.

Fiscal policy failure or failure to try fiscal policy? - THAT Barack Obama's attempt at massive fiscal stimulus failed is an article of faith among some of the president's critics, not least because America's unemployment rate ended up rising well above forecasts produced by administration advisers in the months before Mr Obama's inauguration. This analysis misses the important point that the Obama adminstration pushed for a smaller (and in their view more politically viable) bill than economic conditions at the time seemed to call for, and economic conditions at the time dramatically understated the severity of the recession. It also ignores the fact that for much of the stimulus' life, it primarily served to counteract the effect of deep cuts to state and local government spending. Paul Krugman directs us to a Goldman Sachs report on the path of fiscal policy, which includes this chart:

Stimulus Tales -  Krugman - Dean Baker is upset with David Brooks — not for the first time. Let me just put in a word here. The story of Keynesian economists and the Obama stimulus, as anyone who’s been reading me knows, runs as follows: When information about the planned stimulus began emerging, those of us who took our macro seriously warned, often and strenuously, that it was far short of what was needed — that given what we already knew about the likely depth of the slump, the plan would fill only a fraction of the hole. Worse yet, I in particular argued, the plan would probably be seen as a failure, making another round impossible. But never mind. What we keep hearing instead is a narrative that runs like this: “Keynesians said that the stimulus would solve the problems, then when it didn’t, instead of admitting they were wrong, they came back and said it wasn’t big enough. Heh heh heh.” That’s their story, and they’re sticking to it, never mind the facts. And what the facts say is that Keynesian policy didn’t fail, because it wasn’t tried.

How macroeconomic statistics failed the US - There’s one big reason why the current economic weakness in the US has come as such a shock. It’s not the only reason, but it’s an important one, and it hasn’t gotten nearly the attention it deserves: the state of macroeconomic data-gathering in the US is pretty weak. In particular, the data coming out of the Bureau of Economic Analysis at the beginning of 2009 was way off. Here’s Cardiff Garcia, introducing an interview with Fed economist Jeremy Nalewaik: The initial GDP estimate for the fourth quarter of 2008 showed that the economy contracted by 3.8 per cent. It was released on January 30, 2009 — about three weeks before Obama’s first stimulus bill passed. That number was continually adjust down in later revisions, and in July of this year the BEA revised it all the way down to a contraction of 8.9 per cent. The BEA is happy to try to explain what happened here — but whatever the explanation, the original 3.8% figure was a massive and extremely expensive fail. It was bad enough to be able to get a $700 billion stimulus plan through Congress, but if Congress and the Obama Administration had known the gruesome truth — that the economy was contracting at a rate of well over $1 trillion per year — then more could and would have been done, both at the time and over subsequent months and years.

Economists Defending the Use of Models -  Yves Smith - I found this video by the Institute for New Economic Thinking, in which a number of prominent economists discussing the use of models, more than a bit frustrating, with Jamie Galbraith’s comments at the very end a notable exception.  Mainstream economics fetishizes the use of models. Even if your insight could be stated clearly and concisely in a narrative, it is not economics unless a model is involved. For instance, two of our colleagues have gone through Mankiw’s introductory economics textbook and have ascertained that every use of a graph is not only unnecessary, but in most cases serves to impede rather than add to the presentation of the concept under discussion.  The preoccupation with models suggests that the economics discipline has unduly limited its problem-solving abilities by giving high priority to “models”. Recall how central bankers rejected William White and Claudio Borio’s well documented warning that an international housing bubble was underway. The basis for the bankers’ dismissal? White and Borio had no theoretical underpinning for their view.

Not More of the Same Model Simulations! - Simulations of Mark Zandi’s economic model, which are reported in the press to show that a new temporary stimulus package will create 1.9 million jobs, are being touted as evidence that it will work. This is the same type of model simulation that predicted the very similar 2009 stimulus package would create millions of jobs, and the same type of simulation that claimed that that package worked. Andrew Ferguson reviews the predictions in a recent article in Commentary. But simulations of such models do not provide such evidence, as I have explained on this blog before, for example here and here. They are wrong because they assume “multipliers” for temporary one-time payments or tax changes far in excess of the basic “permanent income” or “life cycle” models (which we teach in Economics 1). They are wrong because they assume that state and local government infrastructure and other purchases respond to federal stimulus grants in a mechanical way, unlike what we have seen practice, as I explained in this article with John Cogan. And they are wrong because they do not take account of the negative growth effects of expected future permanent increases in tax rates. I have debated Mark Zandi on these topics many times before, for example on the NewsHour and in congressional testimony.

Why Obama is right to back Buffett - Barack Obama last week put forward a package of tax increases to pay for a proposed $447bn jobs programme. The most controversial proposal is that no one making more than $1m a year should pay a smaller share of his income in taxes than a middle class family pays. This is popularly called the Buffett Rule, after the billionaire Warren Buffett, who has long complained that he pays a lower tax rate than his secretary, and famously came out in public recently asking to pay more. Republicans were quick to denounce the proposal as “class warfare”, and to argue that low taxes on the wealthy are essential to boost the economy in these difficult times. This echoes the debate in Britain where 20 prominent economists from the left and right sparked a nationwide debate after writing to the Financial Times suggesting that the top 50 per cent rate of tax, introduced in the 2010 tax year, should be lowered to encourage investment and hiring.  But polls show wide public support. A Gallup poll found that two-thirds of Americans favour raising taxes on those making more than $250,000 a year. While I spent many years working for Republican administrations, one of whose core principles was low taxes, I believe Mr Obama is on solid ground asking the rich to pay more.

Buffett has replaced Soros as Republicans’ billionaire boogeyman - Exit: George Soros. Enter: Warren Buffett, stage left. Buffett, the investment mogul and Berkshire Hathaway CEO, is slowly drifting into the role Soros played during the first decade of this century: billionaire boogeyman to the right, and go-to example cited by the left to show that one can support Democrats’ economic policies and still be pro-business. A frequent spot holder on Forbes’s list of the world’s wealthiest individuals, Buffett endorsed President Obama in 2008, but has not historically been an overly political figure – until now. In August, he penned an op-ed in the New York Times asking policymakers to raise taxes on millionaires and billionaires like himself. He has claimed he pays a lower tax rate than his secretary, thanks to a tax structure that favors those whose income comes from investments. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” Buffett wrote. “It’s time for our government to get serious about shared sacrifice.” With Obama struggling to persuade Republicans to accept a tax hike on the wealthy to pay for the deficit reductions that the GOP has demanded, Buffett has become a veritable stump speech line for Obama; he calls the tax hike the “Buffett Rule,” and mentions the billionaire now with the frequency that Republicans mention Reagan.

Shutdown Closer as Senate Blocks Spending Bill - An impasse between the House and Senate over a bill to keep the government open after Sept. 30 and provide aid to natural disaster victims deepened Friday as the Senate easily shot down a House measure passed just hours before. House members, considering their work done, headed home to their districts for a week’s recess, trailing uncertainty behind them since no resolution to the standoff appeared imminent. The Senate set a procedural vote for Monday evening in an effort to advance an alternative, but it was unclear whether it could draw sufficient support or whether Republican leaders would call members of the House back to consider it even if did pass the Senate. The dispute meant that less than six months after the fiscal throwdown that left the government at the precipice of a shutdown last spring, Congress has brought the nation there again. While the government has until next Friday before it runs out of money, the $175 million in an emergency aid fund for disaster victims is set to run dry as early as Tuesday.

Congress Is Forced to Stay as a Shutdown Looms - Congress was scheduled to be off this week, but lawmakers must stay in Washington because they made no progress over the weekend in settling a dispute over spending that threatens a possible government shutdown. Despite promises to work together following a public backlash against the bickering that consumed much of the summer, Republicans and Democrats face the reality that disaster aid could run out Tuesday and the government could partially shut down beginning this weekend unless they strike a deal quickly. The Democratic-led Senate is scheduled to vote Monday afternoon on a short-term spending bill that would fund the government through Nov. 18, including $3.65 billion in disaster-relief funding. House Republicans approved a similar bill last week, but they funded some of the disaster spending by cutting spending for energy programs valued highly by Democrats. The two sides are fighting bitterly over whether to include the funding offsets. The Federal Emergency Management Agency is now spending $30 million to $40 million a day providing aid to victims of Hurricane Irene, a recent earthquake and other disasters earlier in the year. Its relief fund could be broke by Tuesday.

The New Standoff: Clean-Car Jobs Vs. Disaster Relief - The once-rare possibility of a federal government shutdown has reared its head again, this time over House Republicans' desire to offset spending for disaster relief with money for other unrelated projects. A clean-car loan program has become a key battleground. The House spending bill would take $1.5 billion from the program for disaster relief. Democrats say that would be a huge mistake. The Advanced Technology Vehicles Manufacturing (ATVM) program was created by Congress and President Bush in 2007. The program lends companies money to retool their plants to manufacture clean car technologies. It received bipartisan support, and according to the Department of Energy, it has saved or created 39,000 jobs — most of them at Ford. The company's state-of-the-art Michigan Assembly Plant reopened in May with help from the loan program. It used to produce SUVs; now it's set up to assemble the Ford Focus.

Bernie Sanders: Offsetting disaster relief with spending cuts is ‘absolute hypocrisy’ - Independent Senator Bernie Sanders of Vermont told a press conference on Monday that he would continue to oppose a Republican plan to offset disaster relief with spending cuts. He noted that Republicans had not asked to offset tax breaks for billionaires or wars overseas with spending cuts. “But suddenly when you need a relatively small amount of money to rebuild communities in the state of Vermont and other states, suddenly we hear a whole lot about offsets,” Sanders said. “I think that is politics of the worst kind. I think that is absolute hypocrisy.” Watch video, uploaded to YouTube on September 26, 2011, below:

The Funding Standoff and the GOP's Refusal to Learn From Hurricane Katrina - Sometime next week, the Federal Emergency Management Agency will officially run out of money if Congress doesn’t act. Unprecedented demands and gamesmanship by Republicans in the House of Representatives are threatening a funding bill for the agency, along with disaster relief for Americans affected by the recent hurricanes. Watching the spectacle unfold, it’s impossible not to marvel at short Republican memories—it wasn’t that long ago that playing politics with FEMA proved disastrous for the GOP. By many accounts, the federal government’s failure to respond to Hurricane Katrina’s devastation of New Orleans was a turning point in George W. Bush’s presidency. His administration was shown to be incapable of even basic functions of government—helping desperate citizens in desperate need following a natural disaster. After they left the White House, several Bush aides acknowledged that this was the moment that the Bush presidency was irredeemably lost:

Disaster Aid Disaster Averted, barely - Once again, Republicans intent on obstructing the normal operation of the federal government unless they can extract cuts to programs they don't like (in the name of deficit reduction) applied the combination of House recalcitrance and Senate anti-majoritarian filibuster to threaten a government shutdown and siderail needed funding for emergency assistance to ordinary Americans until they could get at least some of their objectives.   A compromise that will get money to FEMA and keep the government funded for a spell has been reached.

Senate votes to avert US funding shutdown - Congressional leaders were seeking to extricate themselves from a tense stand-off over disaster relief funding in a bid to avert a government shutdown at the end of this week.  Late on Monday, top Democrats and Republicans in the Senate reached a deal to keep federal operations running until November 18. It was approved by an overwhelming 79 to 12 votes. The measure was designed to be approved in the upper chamber and then put pressure on the House of Representatives to pass similar legislation, one congressional aide said.  In a fight that had again exposed the dysfunctionality of US politics, Congress has been squabbling over some $3bn for assistance to states ravaged by last month’s Hurricane Irene and other recent natural disasters – less than a 1,000th of projected US government outlays of $3,597bn in the current fiscal year.  The deal reached in the Senate offers $2.65bn in funding for disaster relief, but no offsetting spending cuts, as Republicans in the House had been demanding, the aide said.

Senate Votes to Avoid Government Shutdown, End Dispute Over Aid‎ - The U.S. Senate reached a bipartisan deal on stopgap spending designed to avoid a government shutdown and defuse a fight over aid to victims of hurricanes, tornadoes and other natural disasters. Senators approved legislation yesterday, 79-12, to finance the government through Nov. 18, a measure including $2.65 billion for federal disaster assistance. With the expectation that the House would consent, senators also passed on a voice vote a measure to tide the government over through Oct. 4 so that the House, in recess this week, can consider the longer funding measure. The 2011 fiscal year ends on Sept. 30, and the House can approve the short-term bill by unanimous consent without bringing members back to Washington. “We expect speedy passage of this agreement by the House so that the flow of disaster aid is not interrupted,” New York Senator Charles Schumer, the chamber’s third-ranking Democrat, told reporters after the votes. “It is hard to see how the House Republicans could reject this proposal given the overwhelming” support it got in the Senate.

Senate Reaches Deal to Avert Government Shutdown -The Senate reached a bipartisan spending agreement on Monday to avert a government shutdown, sidestepping a bitter impasse over disaster financing after federal authorities said they could most likely squeak through the rest of this week with the $114 million they had on hand. After blocking one Democratic proposal, the Senate voted, 79 to 12, to approve a straightforward seven-week extension of financing for government agencies that were due to run out of money on Friday, simultaneously replenishing accounts at the Federal Emergency Management Agency that this summer’s string of natural disasters had nearly exhausted.  “It shows us the way out,” said Senator Harry Reid, the Democratic majority leader, who said the plan should be satisfactory to both Democrats and Republicans. “It means we no longer have to fight.”  The discovery by FEMA that it had money for the week was the key to the breakthrough since it eliminated one of the main points of contention: whether to offset a quick infusion of funds to the agency with cuts elsewhere as House Republicans had insisted.

Government shutdown averted; auto funds survive - The U.S. Senate reached a deal Monday to avert a government shutdown and, at the same time, avoid a $1.5 billion cut in a program intended to help the auto industry retool for fuel-efficient vehicles.  House Republicans wanted to shave money from the Advanced Technology Vehicles Manufacturing Loan Program to help offset an increase in disaster relief, as part of a bill to keep the government running through Nov. 18.  But in a vote that ended weeks of political brinkmanship, lawmakers finessed the dispute.  The Democratic-controlled Senate approved the measure on a bipartisan vote of 79-12, sending it to the Republican-controlled House for a final sign-off.  The breakthrough came hours after the Federal Emergency Management Agency indicated it had enough money for disaster relief efforts through Friday. That disclosure allowed lawmakers to jettison a $1 billion replenishment for FEMA that had been included in the funding measure.  FEMA spokeswoman Rachel Racusen paved the way for the gridlock to be cracked by announcing the agency had $114 million left in its disaster relief fund — enough to last until Thursday or Friday, the final business day of the current budget year.

Flood Victims Getting Fed Up With Congress - Standing in the living room of their house, now full of mud, slime and debris, Helen and Peter Kelly cannot believe that Congress is bickering over disaster aid to people like them. The roaring waters of the Susquehanna River burst into their home more than two weeks ago. “Water — you work with it every day, and then it destroys your whole life,” Mrs. Kelly said.  Her husband, still looking shell-shocked, said: “We lost everything. Stove, washer, dryer, TV. Hot water heater, clothes, dishes, refrigerator. Everything, just gone.”  The Kellys also lost confidence in government and politicians.  “I wish they would understand that people like us are really in need of assistance,” Mr. Kelly said, A few miles away in Falls Township, Pa., houses were upended, lifted off their foundations and carried a few hundred feet downstream. Huge piles of rubbish, furniture, mattresses, carpets and clothing line the streets.

Losing Faith in Government - Washington’s dysfunctional political climate not only makes it harder for Congress to pass sound economic policy. It also means that whatever policies Congress manages to pass may be ineffective anyway, since Americans have lost so much confidence in their government’s ability to help. Americans’ confidence in their government is at historic lows, according to Gallup’s annual governance survey. The poll of 1,017 adults, conducted in early September, found that 81 percent of Americans are dissatisfied with the way the country is being governed, the highest share since the question was first asked in 1972. Additionally, 69 percent of Americans say they have little or no confidence in the legislative branch of government, also a record high, and nearly three times the share of people who said this in 1972.

Five reasons the next budget fight could be worse - Think this budget fight is bad? Just wait a few weeks. Even if Congress manages to resolve its differences over the current budget extension, the continuing resolution funds the government only until Nov. 18. And the next round of budget negotiations will feature much larger stakes, much more consequential differences, and many more opportunities and excuses for mischief. Here are five potential flash points:
1) The entire 2012 budget will be under negotiation, not just emergency funds: The rapid escalation of the current shutdown fight is over a small sliver of emergency disaster aid money. That has obscured the broad bipartisan consensus over the vast majority of government spending — at least until Nov. 18.  Party leaders say they’ll continue to abide by the overall $1.043 trillion funding limit under the debt-ceiling deal, which requires $21 billion in spending cuts for 2012.
2) Congress hasn’t decided whether it will pass the next budget piecemeal or all at once:
3) Both parties have already drawn battle lines on funding priorities:
4) There could be big fights over policy riders: This is what tripped up the budget negotiations the last time around. Back in April, Republicans pushed to restrict funding for Planned Parenthood and abortion in the District of Columbia through “riders” that placed conditions on the money. Congress could deadlock over riders again, but it’s not just abortion that could be at issue.
5) The supercommittee is due to provide its deficit-reduction proposal at the same time: Finally, the 2012 budget negotiations could also be complicated by what the supercommittee produces. The deadline for the deficit-reduction package — which would take effect in 2013 — is November 23, which could overlap with the 2012 budget as well if negotiations carry on past November 18.

The Moral Question, by Robert Reich: We dodged another shut-down bullet, but only until November 18. That’s when the next temporary bill to keep the government going runs out. House Republicans want more budget cuts as their price for another stopgap spending bill. Among other items, Republicans are demanding major cuts in a nutrition program for low-income women and children. The appropriation bill the House passed June 16 would deny benefits to more than 700,000 eligible low-income women and young children next year. What kind of country are we living in?  Medicaid is also under assault. Congressional Republicans want to reduce the federal contribution to Medicaid by $771 billion over next decade and shift more costs to states and low-income Americans. It gets worse. Most federal programs to help children and lower-income families are in the so-called “non-defense discretionary” category of the federal budget. The congressional super-committee charged with coming up with $1.5 trillion of cuts will almost certainly take a big whack at this category because it’s the easiest to cut. Unlike entitlements, these programs depend on yearly appropriations. It gets even worse. Drastic cuts are already underway at the state and local levels.  So far this year, 23 states have reduced education spending.  Local family services are being cut or terminated. Tens of thousands of social workers have been laid off. Cities and counties are reducing or eliminating their contributions to Head Start...

Everyone Wants Austerity Until They See What Austerity Is Really Like: Interesting chart from the Economist. Note the Brits are much less supportive of spending cuts as they are actually experiencing the pain of an austerity program. In other countries austerity is more of a concept than a reality. The Economist also points out, The biggest change in sentiment can be seen in the euro area. In 2009 only 8% of Italians thought their government was spending too much compared to 49% who now want it cut. In Portugal and Spain nearly one-third of those asked two years ago thought that too little was being spent, an opinion now held by only a fraction of that. Let’s see how this chart looks in a year or two when austerity programs in many of these countries start to bite. It is also important to internalize this data into your macro view of the sources of potential global demand. Politics matter.

Delegating Economic Policy to the Technocrats, and Away from Democracy - In a column in The New Republic, Peter Orzsag, President Obama’s former budget director, argues for making the country’s policy-setting less dysfunctional by making it “less democratic.” One means for reducing politicized gridlock, he says, is to delegate more authority to “depoliticized commissions” of experts. This is similar to the rationale behind establishing the Federal Reserve as an independent body: The Fed, at least theoretically, is shielded from short-term political interests. It can instead make decisions based what is good for the long-term interest of the economy, as determined by immutable economic laws and objective academic research. (In reality, of course, there have been many attempts to put political pressure on the Fed over the years, and within the central bank there is still broad disagreement about what’s best for the long-term interest of the economy.) Mr. Orszag also notes some other expert commissions, such as the military-base closing commissions, and the Independent Payment Advisory Board (IPAB), created by last year’s Patient Protection and Affordable Care Act to make changes to the Medicare payment system.

The Problem with Purportedly Apolitical Policy Wonks: Their Faulty Logic - Peter Orszag opines from the politically sheltered comfort of his gig at Citigroup that we have too much democracy. I’ll say more about specific claims he makes below, but first, let me point out a fundamental problem with his argument. He suggests we need to establish institutions insulated from our so-called polarization to tackle the important issues facing this country. That argument is all premised on the assumption that policy wonks sheltered from politics, as he now is, make the right decisions. But not only is his own logic faulty in several ways–for example, he never proves that polarization (and not, say, money in politics or crappy political journalism or a number of other potential causes) is the problem. More importantly, he never once explains why the Fed–that archetypal independent policy institution–hasn’t been more effective at counteracting our economic problems. If the Fed doesn’t work–and it arguably has not and at the very least has ignored the full employment half of its dual mandate–then there’s no reason to think Orszag’s proposed solution of taking policy out of the political arena would work.

I'd Rather Be an Unlucky Ducky - I’m not saying that Republicans are anarchists, only that when it comes to taxes they talk as if they are. Their default position is that there is no level of taxation below which it would be unwise to go, no tax cut too large not to be taken seriously and no justification for a government any larger than one that could be drowned in a bathtub, as the Republican activist Grover Norquist once put it. The Wall Street Journal editorial page routinely refers to those who pay no taxes as “lucky duckies,” as if zero taxation is the ideal state of nature. Oddly, one never hears Republicans praise those countries where people are lucky duckies — those where taxation is a small fraction of what it is here. Let’s take a look at some of the places.

  • Equatorial Guinea: According to the Republican-leaning Heritage Foundation, those who live in this small country in sub-Saharan Africa are lucky duckies indeed. Because of recently discovered oil deposits, the citizens of Equatorial Guinea pay less than 1 percent of the gross domestic product in taxes. However, Equatorial Guinea doesn’t seem to be a very pleasant place to live. The people are poor and have little freedom.
  • Myanmar: The people who live in this small country in Southeast Asia are also lucky duckies, if not quite as lucky as those in Equatorial Guinea. According to Heritage, taxes in Myanmar are 3 percent of G.D.P.. Heritage says “longstanding structural problems include poor public finance management and undeveloped legal and regulatory frameworks.” Apparently, the government doesn’t protect property rights very well, the infrastructure is poor, and there is a lot of corruption. But at least the people get to keep almost all their earnings.
  • Libya: Why the people revolted in this North African fiscal paradise is a mystery. According to Heritage, government revenues are just 3.4 percent of G.D.P.

Time to Rally for Sane Tax Policy! - I wish I had even a fraction of the talent that Jon Stewart and Stephen Colbert–the “sanity ralliers”–have in explaining tax and budget policy in engaging ways. The Jon Stewart segment above is my latest favorite, but here’s a great one by Colbert on the “Buffett Rule.” In my Tax Notes column this week on “Evolved Tax Policy,” I argue that as our economy grows and changes shape over time, so should our tax policy. Why should we use our experience in the past to guide our policymaking more than our hopes and expectations for the future? How do I wish tax policy would better “evolve?”  Here are some forms of tax policy evolution we could use right now:

    1. recognizing that expanding the economy via tax policy isn’t as simple as cutting taxes and that tax cuts involve costs as well as benefits;

  • 2. allowing smart tax policymaking to at least occasionally trump clever tax policy politics;
  • 3. acknowledging that Wagner’s Law — which holds that the public sector is a luxury good — may apply, suggesting that the optimal size of government and hence the optimal level of revenue/GDP grow over time with the economy; and
  • 4. realizing or recognizing that because part of that growing role of the public sector may be the redistributive role, especially if wealth income inequality increase with aggregate income growth, the progressivity of the tax system may need to increase over time to partially compensate.

    Why Is The US Government Still Collecting Taxes, Ctd - I am not really sure how meetings with the President go. When I see pictures of the Oval Office I wonder how anything gets done.  Anyway, since I assume the only graphics available are those that are printed out and handed to everyone, here is something they might want to pass around the prayer circle. This is the estimated real cost of financing the US government over ten years. Its quickly approaching zero. And, so I ask – Why is the US government still collecting taxes?  I mean seriously. What is it that you hope to accomplish by collecting taxes. One, might say to finance government expenditures, however, they can be financed for free in the bond market.

    Is Ryan's Worry about taxing job creators worthy of focus? - Linda Beale - Paul Ryan--Republican from Wisconsin, radical right in perspectives, and chair of the House Budget Committee--is marching in lockstep with the radical right minority that is holding the majority of the US hostage in pursuit of its dream of decimating the federal government's human capital and safety net programs.  In a September 18 appearance on Fox News (hat tip to OmbWatch, below), Ryan made that clear in objecting to Obama's jobs proposal by claiming that any tax increase that would hit the wealthiest small businesspeople would be a sure-fire way to undo job creation. "when you are raising these top tax rates, you're raising taxes on these job creators where more than half of Americans get their jobs from in this country." OMB Watch's Craig Jennings  has some very good graphs and a sharp analysis of the lack of facts behind Ryan's pretextual 'I care about jobs'  What Happens When We Tax the "Job Creators", In essence, OMBWatch points out that:

    • 1) very few small business owners make enough to be in the top two income brackets (only about 2 percent).
    • 2) For those who are in that rarified group making more than $300,000 in take-home profits, a tax increase of about $5000 more a year wouldn't be enought to change their minds on hiring decisions.

    Millionaire Myths, Indeed - The Washington Post’s “Five Myths About Millionaires” piece yesterday by John Steele Gordon did more to perpetuate myths than dispel them.  Below are corrections to each of his five points:

    1. Gordon confuses total wealth and annual income to claim that millionaires aren’t really rich, arguing that “Today, $1 million in the bank generates only about $50,000 per year in interest.”  Anyone paying attention to today’s tax debate understands that President Obama’s proposed “Buffett Rule” would apply to people with annual incomes above $1 million, not total assets above that amount. 
    2. Gordon may be correct to say that some millionaires don’t feel rich. But in any event, people who don’t feel rich despite making over $1 million a year should consider this: the average Bush tax cut for their income category this year is $136,000, or nearly three times what the average American family makes in an entire year.
    3. In stating that millionaires as a whole don’t pay lower taxes than middle-class Americans, Gordon is attacking a straw man.  As we’ve explained, a significant group of people with incomes over $1 million pay a smaller share of their incomes in federal income and payroll taxes than large swaths of the middle class.  
    4. Millionaires don’t all share the same political beliefs, Gordon argues.  That’s certainly true. But, it’s not relevant. 
    5. Finally, Gordon argues that a millionaire’s tax would seriously limit investment.  But as my colleague Chad Stone has noted (and the graph shows),“job creation and economic growth were significantly stronger in the recovery following the Clinton tax increase [on upper-income Americans] than they were following the 2001 Bush tax cut. 

    Some Historical Tax Stats -The IRS's Statistics of Income Division is a gold mine of data for serious tax wonks. One lesser-known product the IRS puts out every year is the public use microdata file - for a (not so) small fee, you get a sample of hundreds of thousands of tax returns that you can slice and dice any way you want. I recently looked through some IRS microdata file from the year 1960, and stumbled across the following interesting facts:

    • In 1960, the top 1% of households earned 9% of all income, and paid 13% of all taxes. (In 2008, the top 1% earned 20% of all income, and paid 38% of all taxes.)
    • The top marginal tax rate in 1960 was 91%, which applied to income over $200,000 (for single filers) or $400,000 (for married filers) - thresholds which correspond to approximately $1.5 million and $3 million, respectively, in today's dollars. Approximately 0.00235% of households had income taxed at the top rate.
    • A taxpayer at the very bottom of the top 1% (in other words, one who is right on the boundary between the 98th and 99th percentiles) had a nominal income of $24,435, or about $190,000 in today's dollars.

    Understanding Class Warfare Hysteria -- The recent outbreak of hysterics over “class warfare” occasioned by President Obama’s deficit reduction plan from a week ago was a highly revealing event. The super-rich have enjoyed overwhelming prosperity and a rapidly accelerating share of the national income over the last three decades. They also enjoy a position of privilege within the cultural and political elite, which paradoxically rallies around them and has come to see them as a vulnerable minority threatened by populist currents, however faint those may be. And they are faint, indeed. To understand the hysterical character of the “class warfare” charge, consider the basic lay of the land. Here is a chart showing the share of national income earned by various income groups alongside their share of the tax burden: Obama’s proposed tax hike would, by limiting deductions, increase the average tax rate paid by households earning between half a million and one million dollars by 2.7 percentage points. Households earning over a million dollars would see their tax rate increase by 5.5 percentage points. How do you take this state of affairs and portray it as a kind of quasi-Bolshevism?

    Class Warfare My Ass - Watching these recent GOP debates has cracked me up for any number of reasons, but nothing can top watching those millionaires square off in an attempt to prove who among them is the most "folksy," the most in tune with the working stiff. Mitt Romney, whose personal fortune roars deep into nine figures on the left of the decimal, actually claimed he was a middle class guy during a recent campaign appearance. Ah, yes, the irony again...just think, if people banking nine figures of personal wealth were actually considered middle class, all of our problems would be solved, right? Or something. Which brings us to the subject of "class warfare." The term has been a favorite broadside of the right-bent rich-people-first set going on forty years now, and in times past has always reaped them rich rhetorical benefits. We're a classless society here in America, don'tcha know, so accusations of "class warfare" have all too often sent lily-livered liberal-leaning politicians scuttling for the exits, for the apology, for the eventual retreat.  Oh no, it isn't class warfare, this is only fair...which earned, invariably, a reply of "CLASS WARFARE SOCIALISM WHAAARGARBLE"...which, in turn, earned another hasty retreat instead of a proper and just reply. Which is, should have always been, and should now be: kiss my ass, you leech, you bloodsucker, you greedy whore, you war profiteering glutton, you disgrace, you betrayer of America.

    A voice of reason amid the madness - Aljazeera -"I hear all this, 'well, this is class warfare, this is whatever'. No. There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear:  You moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did." - Elizabeth Warren

    Marriner Eccles on the Need to Save the Rich from Themselves -- Yves Smith - A remarkable document has been placed today on the “London Banker” blogsite, the testimony of Marriner Eccles to the Senate Finance Committee in early 1933.  “London Banker” highlighted this particular passage from Eccles’ testimony: It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment. Where are people such as Marriner Eccles today?

    Taxes do matter – Matt Yglesias has a few posts on the effect of taxes on married women’s labor supply. He makes some valid points here, taxes are not everything. But they are important. As far as I understand the American tax law (…?), married couples in the US have the option to file jointly and be taxed as a unit, with a marriage penalty (because, well, living together is cheaper than alone). This in turn means that the tax rates for the secondary earner in a couple are much higher (in a progressive tax system) and often, deductions are transferable to the primary earner if the secondary earner does not earn market income. Combine that with the need for more prepared food, a nanny, some other paid help, and the implicit tax rate for the secondary earner can easily go to 70%, and even higher in Europe. My preferred tax policy regarding married couples is not only strict individual taxation, but on top of that to lower the tax rate for the woman and the woman only by 5% points for every child she raises, and by 10% for the third child if they have one girl and one boy. .

    Google Joins Apple in Push for Tax Holiday -As a coalition led by Apple Inc. (AAPL), Google Inc. (GOOG), and Cisco Systems Inc. (CSCO) presses for a tax holiday on more than $1 trillion in offshore profits, it is turning to a well-positioned lobbyist: Jeffrey Forbes, once chief of staff to Max Baucus, chairman of the tax-writing Senate Finance Committee.  Data compiled by Bloomberg News show that Forbes is part of an army of more than 160 lobbyists, including at least 60 who once worked for a sitting member of the House or Senate, pushing for the repatriation holiday. Their job is to persuade Congress to establish a tax break estimated to cost the U.S. government $78.7 billion over the next decade.  Independent studies have found that the last time this tax break was tried, in 2004, the bargain rate for bringing home offshore profits did little to spur hiring or domestic investment. Most of the money was used to buy back stock.

    Taxes and Energy Policy - As you know, our tax system is desperately in need of reform. It’s needlessly complex, economically harmful, and often unfair. Because of a plethora of temporary tax cuts, it’s also increasingly unpredictable. Last week I had the opportunity to testify before two Ways and Means subcommittees–Select Revenue Measures and Oversight–about the way our tax system is used as a tool of energy policy. Here are my opening remarks. You can find my full testimony here.

    Ratings Agencies, the financial crisis, and tax - Linda Beale - In the booming securitization business that was a central factor in the 2007-8 financial crisis and the Great Recession that is its aftermath, rating agency determinations on mortgage-backed securities and collateralized debt obligations--especially on the ones that were resecuritizations of prior securitization tranches like "re-REMICs" and "CDOs-squared" had a great deal to do with the ability of sponsors to cram low-quality debt into securitization vehicles and sell it off to buyers unaware of the significant risk they were taking on. Rating agency determinations play a huge role, as well, in the tax treatment of financial instruments.  IN the past, tax practitioners considered that rating agencies had done "deep" due diligence and were well aware of the quality of the collateral backing a debt issuance, the reasonably expected future cash flows of the entity issuing the debt, and the equity structure underlying and supporting the debt.  Accordingly, if you asked a tax practitioner in one of the firms doing a good bit of capital market work what they generally looked at to determine whether a financial instrument labeled debt was indeed to be treated as "debt in substance" for tax purposes, that practitioner would likely point to the credit rating as one of the primary factors..

    Is the SEC Finally Taking Serious Aim at the Ratings Agencies? -- Yves Smith - If the grumblings in the comments section are any guide, quite a few citizens are perplexed and frustrated that the ratings agencies have suffered virtually no pain despite being one of the major points of failure that helped precipitate the global financial crisis. If there were no such thing as ratings agencies (i.e., investors had to make their own judgments) or the ratings agencies had managed not to be so recklessly incompetent, it’s pretty unlikely that highly leveraged financial institutions would have loaded up on manufactured AAA CDOs for bonus gaming purposes.  But the assumption has been that the ratings agencies are bullet proof. Their role is enshrined in numerous regulations and products that make ratings part of an investment decision. And they get a free pass on mistakes, no matter how egregious. So why, pray tell, has the SEC sent a Wells notice to Standard and Poors, which is a heads up that the regulator may file civil charges, which could result in penalties and disgorgement of fees, on a 2007 Magnetar CDO called Delphinius? The history is that suing ratings agencies over their opinions has not been a terribly successful exercise. And the SEC tends to be conservative in the cases it files; it likes to have a high certainty of a win, whether that means a courtroom victory or a reasonably fast settlement.

    S.E.C. Faults Credit Raters, but Doesn’t Name Them - An examination of credit-rating agencies by the Securities and Exchange Commission1 staff found repeated instances of the companies failing to follow their own procedures or adequately manage conflicts of interest, according to an S.E.C. staff report issued Friday.  The examinations were mandated in the Dodd-Frank regulatory law passed last year after numerous investigations into the causes of the financial crisis. Several of those inquiries found that the rating agencies issued inaccurate reports, failed to report or manage conflicts of interest and put generating revenue ahead of rigorous financial analysis.  For the investing public, however, the S.E.C.’s report is likely to be of limited value because the commission declined to name the credit-rating agencies at which it found deficiencies. Instead, it refers to its findings as occurring either at one or more of the three large agencies — Moody’s Investors Service, Standard & Poor’s and Fitch — or at one or more of the seven smaller credit-rating firms.

    New Capital Rules Likely for Banks - International regulators are set to rebuff heavy lobbying by banks and stick with a plan to require some of the world's largest financial institutions to hold extra capital, according to people familiar with the matter. The watchdogs that make up the Basel Committee on Banking Supervision are gathering Tuesday in the Swiss city to consider comments on a planned rule requiring big banks to maintain thicker capital cushions than other institutions. The proposal, first put out in July, aims to curb risk-taking and ensure that these banks are able to absorb sudden losses without damaging the broader financial system or requiring taxpayer bailouts. The July agreement would require 28 big banks to hold between 1% and 2.5% of extra capital as a percentage of their "risk-weighted assets." The surcharge comes on top of a base 7% capital requirement for all banks agreed to by international regulators last year.

    Anti-American Bankers - Jamie Dimon claims that the new rules on bank capital “anti-American” because they somehow discriminate against American banks and American bankers.  This framing of the issues is misleading at best. The term “bank capital” is often poorly explained in the debate on this issue.  It is just a synonym for equity – meaning the amount of a bank’s activities that are financed with shareholder equity, rather than debt.  The advantage of equity is that it is “loss absorbing,” meaning that it takes losses and must be wiped out in full before any losses fall on creditors. More capital means that a bank is safer, both from the perspective of shareholders and for creditors.  Bankruptcy has become less likely. But the real need for capital requirements arises from the social costs that a banking crisis can impose.  Switzerland has moved to 20 percent capital requirements because they have two large banks which, if they fail, would cause major damage to the economy.  The British are discussing moving in the same direction – the recent Vickers Commission report regards the Basel capital rules as insufficient for safeguarding public interests.

    Dimon in attack on Canada’s bank chief - Jamie Dimon of JPMorgan Chase launched a tirade at Mark Carney, Bank of Canada governor, in a closed-door meeting in front of more than two dozen bankers and finance officials, underscoring mounting tensions between bankers and officials over financial regulation. The atmosphere was so bad after the meeting that Lloyd Blankfein, chief executive of Goldman Sachs and head of the Financial Services Forum bankers’ group which arranged the session, emailed the central banker to try to smooth relations, people familiar with the matter said. On Sunday, 48 hours after the contretemps, Mr Carney delivered a speech to global bankers at the Institute of International Finance, warning them “it is hard to see how backsliding [on implementing new capital rules] would help” the global economy. “If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon,” he said. Mr Dimon told Mr Carney that many of the rules discriminated against US banks and he was going to continue to use the phrase “anti-American”, first used in a Financial Times interview this month, because it seemed to resonate with people who might be able to modify the reforms

    Jamie Dimon Now Trying to Beat Up on Heads of Central Banks -  Yves Smith  - We’ve mentioned in older posts that Dimon’s history as a bully goes back at least to business school. Former section mates report that even by Harvard Business School standards, Dimon was a standout in the aggression category. Readers may also recall that Dimon’s latest effort to get out of having international capital standards imposed on JP Morgan was to call them “anti-American”. It appears that, for a big bank, “American” = “not having to obey any rules”. We did point out that since foreign markets are, well, foreign, it wasn’t exactly reasonable to expect everyone abroad to roll over and do things US style, particularly since one of our major exports was the US way of doing capital markets, plus a boatload of toxic securities, which in combination produced a global financial crisis.  But Dimon apparently got so much reinforcement in the US on his “anti-American” line that he has tried taking it on the road. His first browbeating object was Mark Carney, the governor of the Bank of Canada. Dimon appears to have been going on the “my dick economy is bigger than yours” basis of argumentation, no doubt assuming that because Canada is a smaller economy that is attached at the hip to the US, of course he would be able to get his way. I was amused at Dimon’s abuse merely stiffening Carney’s resolve. From the Financial Times:

    Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb? - The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

    Speculators Get a Break in New Rule - A LOAF of whole wheat. A gallon of gasoline. A pair of Levi’s. Americans are paying more for many basic items this year, making tough economic times even tougher.  But these hardships for consumers provide another reason to check in on Dodd-Frank, that package of financial reforms that Congress passed in 2010. Here’s why:  Congress told federal regulators to write rules that would ensure that Dodd-Frank does what it’s supposed to do, which includes protecting consumers. But the Commodity Futures Trading Commission1 has proposed rules that critics say might actually encourage speculation in the commodities markets, rather than reduce it.  “Despite a clear directive from Congress to rein in excessive speculation, regulators still are listening too much to Wall Street and not acting quickly enough to protect American consumers,” Senator Nelson said last week.

    SEC Proposes Changes In Market Halts - Federal regulators are considering changing the rules for when a dramatic shift in the stock market's value triggers exchanges to cut off trading. The Securities and Exchange Commission put proposed changes in so-called circuit breakers out for public comment Tuesday. Those are measures that automatically halt trading if the market falls by certain percentages. The SEC wants smaller market declines to trigger halts, but it also wants to shorten the stoppages. They now stop trading if the Dow Jones industrial average tumbles 10 percent, 20 percent or 30 percent. The new triggers would be drops of 7 percent, 13 percent or 20 percent in the Standard & Poor's 500-stock index. The halts would be shortened to 15 minutes from the current 30 minutes, hour or two hours. ...The SEC also has proposed establishing so-called "limit up-limit down" rules for individual stocks that would bar any trades outside specified price boundaries. Those restrictions limit how much a stock's price can rise or fall in a given day.

    Man Down As Hedge Fund Redemptions Arrive: 25% Of Hedge Funds Industry To Follow Into That Good Night - It was just yesterday that we, as it happens prophetically, said that "we fear the hedge fund space, which at last check was approaching $2 trillion in AUM, will collapse by 25% after the new year when the full carnage of the redemption requests is made public...we certainly had no idea just how pervasive the decimation within the hedge funds ranks was until we saw the mid-September results. We really, really hope the collusive short squeeze-cum-month end rally works out for the hedge fund community, because it really will be "or else." Well, as of today it is nearing "or else" for the world's largest hedge fund Man Group, which is down, yup, 25% today on, you guessed it, redemptions. There is, however, good news for all hedge fund managers reading us today: you will know whether or not you are in business next year, by this friday. As Dow Jones reports, "Friday marks a deadline for investors in many hedge funds with monthly and quarterly liquidity to say they want their capital back."

    Trader on BBC Sounds Alarm About Market Crash - Yves Smith - This segment on BBC may not go viral, but it seems to be getting traction, based on the e-mails (hat tip readers Paul S and Marcus) and alerts in the comments section.  This is not an entertaining Rick Santelli-style rant, it’s a cool assessment of how the Euromarket crisis is likely to end, which he thinks is very badly. The flummoxed reaction of the BBC host suggests that the trader, Alessio Rastani, was a booking mistake.  But consider his second message: that Goldman and people rule the world and like him don’t care about what happens to the real economy. A depression is just a great investment opportunity if you see it coming and position yourself accordingly. Rastani is the bland, reasonable face of predatory capitalism.

    BBC Speechless As Trader Tells Truth: "The Collapse Is Coming...And Goldman Rules The World" - In an interview on BBC News this morning that left the hosts gob-smacked (google it... it is the BBC after all), Alessio Rastani outlines in a mere three-and-a-half-minutes what we all know and most ignore. While the whole interview is worth watching, the money shot for us was "This economic crisis is like a cancer, if you just wait and wait hoping it is going to go away, just like a cancer it is going to grow and it will be too late!". While he dreams of recessions, sees Goldman ruling the world, and urges people to prepare, it is hard to disagree with much (or actually anything) of what he says and obviously interventions and machinations means we will have days like this (in Silver for instance), there is only one endgame here and we hope there is less hopeful euphoria (and more preparedness) as we pull back the curtain further and further. While we do not know who this trader is, one thing we can be 100% certain of is that he will never appear on CNBC.

    Twitterifying Catastrophe - As stock markets continue to fall and the eurocrisis rolls on an independent trader called Alessio Rastani appears on BBC live and gives a candid account of how he, as a trader, views the crisis.  He sees it, he says, as an opportunity to make an awful lot of money. He tells viewers that they too should seek out safe havens – such as US Treasury bills and dollar holdings – to weather the continuing storm. Not long after the Twitterati are out in droves. Some are shocked at the amoralism of it all. Some have their heads buried so deep in the sand that they try to convince themselves that Rastani is just a prankster. Which group is worse? One has to wonder. The former are fools, blind to the world in which we live and the considerable economic problems that haute finance has caused us in the past two decades. But the latter are arguably more loathsome; they’ve turned a very important statement on where we are today into another bit of fun to fill their time on Twitter.

    Sorry, But This Trader’s Banking Confession Was No Prank - This week, an insignificant market trader and self-proclaimed financial self-help guru, Alessio Rastani, rocketed to stardom after speaking frankly on the BBC about the collapsing market and his plans to make money from it. We Yes Men heard about it right away, because soon after the broadcast, people started emailing from all over the world to congratulate us on another prank well done. They couldn't imagine that a real trader could possibly speak so candidly about the market, so they assumed Rastani was one of our posturings. He wasn't. Rastani is small potatoes, but he's a real trader. And he said nothing that would suggest otherwise; he simply described what he does, more honestly than a true insider would, but quite accurately. "Every night I dream of another recession," Rastani said, and explained that it's possible to make huge money from a big crisis even when millions of others lose their life savings, and worse.

    All you need to know about what's real and what's not - It’s time to make one thing clear once and for all: the financial institutions at the heart of our economic system are finished, broke, bankrupt. Since 2008, they have been kept alive only by gigantic infusions of our, the public's, money. We have been, and still are, told this is only temporary, and that the money will help restore them to health and then be repaid, but temporary has been 3 years and change now and there’s no restored health anywhere in sight.  The opposite is true: Obama launches another -even more desperate- half-trillion dollar jobs plan, and Europe is devising another multi-trillion dollar plan aimed solely at keeping banks from going belly-up, because these banks have lost anywhere between 50% and 90% of their market capitalization in the past few years, despite the multi-trillion capital infusions(!), and are still loaded to the hilt with investments, in sovereign bonds, in each other, in derivatives, that are so toxic they could blow them up at any moment.  If this were not true, if there were any possibility left that the banks at the heart of the system could indeed be saved and restored back to health with public funds, their assets would all long have been marked to market, and market confidence would thus be fully restored. The fact that mark-to-market is still religiously shunned 3 years after Lehman should tell you all you need to know about what's real and what's not.

    Three Concrete Demands to Hold Wall Street Accountable - The demands of the several hundred protesters camped out on Wall Street have been criticized as ad hoc and poorly articulated. The protesters emphasize that their demands are "a process" intended to allow people to "talk to each other in various physical gatherings and virtual people's assemblies ... [and] zero in on what our one demand will be, a demand that awakens the imagination." Since they're looking for suggestions, here are three policy changes that should be on their list of demands.

    • 1. Cancel the debts. The crisis we face is fundamentally about a giant pool of bad mortgage debt. We need to work through these debts for recovery to really take off. The only question is who will absorb them—the creditors who made the loans or the people on the other side. In this case, there is no way to share these losses, and the government has stood behind the owners of many of these debts as being "Too Big to Fail." By making banks write down bad loans and work out failed mortgages we’ll have an system where the fraud that originated on Wall Street isn't borne entirely on the real economy.
    • 2. Investigate Wall Street. In the buildup to the crisis, bad loans that could never be paid back were passed out to unsuspecting homeowners. These loans were then passed along a chain until they got to investors who thought the loans were made with the utmost diligence. When the entire house of cards collapsed, homeowners were left with bad loans, investors looked to cover their investments, and a mind-boggling 5 million people were foreclosed on. Loans were made so fast that proper records weren’t kept, which means it’s difficult to hold creditors and debtors accountable.
    • 3. Create a Financial Transaction Tax. It is hard to think of something with such a boring name as a particularly radical solution, but an FTT would be an important first step toward remaking our economy so it is not so dependent on the financial sector.

    Outsize Severance, Even for Failed Executives - The golden goodbye has not gone away.  Just last week, Léo Apotheker was shown the door after a tumultuous 11-month run atop Hewlett-Packard. His reward? $13.2 million in cash and stock severance, in addition to a sign-on package worth about $10 million, according to a corporate filing on Thursday.  At the end of August, Robert P. Kelly was handed severance worth $17.2 million in cash and stock when he was ousted as chief executive of Bank of New York Mellon after clashing with board members and senior managers. A few days later, Carol A. Bartz took home nearly $10 million from Yahoo after being fired from the troubled search giant.  A hallmark of the gilded era of just a few short years ago, the eye-popping severance package continues to thrive in spite of the measures put in place in the wake of the financial crisis to crack down on excessive pay.

    Call by Fed for Money-Fund Curbs - A key Federal Reserve official called for stricter regulation of the money-market mutual-fund industry, saying its vulnerabilities remain a threat to financial stability. "Given the systemic importance of the [money market mutual fund] industry, it is critical that one way or another we make the industry less susceptible to credit shocks and liquidity runs," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech prepared for delivery Thursday at a conference in Stockholm, Sweden. The $2.5 trillion money-market industry is a vital cog in the machine that provides short-term financing for the U.S. economy—and European banks.

    Annals of management consultancy advice, overdraft-fee edition - It’s one of the oldest tricks in the retail-banking book: if you order your customers’ transactions from biggest to smallest, rather than in the order they’re received, then you’ll maximize your overdraft income. Every banker in the country knows this — to get the most overdraft fees, you have to push your customers into the overdraft zone as quickly as possible, by prioritizing their largest payments. This truism is so blindingly obvious that it’s known even to management consultants like CAST, who were giving advice to Union Bank of California. In an insight typical of their kind, CAST told Union Bank that its fee income would rise if it ordered transactions from biggest to smallest. But CAST didn’t stop there. To become a really successful management consultant, you need chutzpah: Bank documents turned over to plaintiff attorneys during discovery indicate Union Bank agreed that CAST would receive 20% of any extra overdraft charges generated under its high-to-low system.

    Investor Fear Over Morgan Stanley Sharpens - It is Morgan Stanley1’s turn on the hot seat.  As confidence in the soundness of some of the world’s biggest banks has fallen in recent weeks, investors have been selling off their shares of one financial institution after another.    Now, the fears about Morgan Stanley are becoming especially acute. Investors are worried about the bank’s exposure to the European debt crisis2, its ability to weather a turbulent trading environment and its reliance on short-term borrowing to finance its operations.  Now Morgan Stanley, which never regained the prestige and power it had in the years before the 2008 crisis, is quickly becoming a focal point for investors who fear that it may not be able to weather another financial storm  In another closely watched indicator of investor sentiment, the cost of buying protection against a default of Morgan Stanley bonds has soared. It now eclipses the cost of similar insurance on major French banks. Only a few weeks ago, the French banks came under heavy fire amid concerns that they were struggling to finance their operations.

    Morgan Stanley Seen as Risky as Italian Banks - Morgan Stanley (MS), which owns the world’s largest retail brokerage, is being priced in the credit- default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.  The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, surged to 488 basis points as of 4:20 p.m. in New York, or $488,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA had CDS trading at 422 basis points, and UniCredit SpA  at 426, the data show. A basis point is one-hundredth of a percent.  “The CDS spreads are making investors and creditors nervous” about Morgan Stanley, said Brad Hintz, who rates the company’s stock “outperform,”  Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month.

    Could the European Debt Crisis Cause a U.S. bank to Fail? - Depending on how you look at it, U.S. banks could lose as much as $1 trillion dollars if the current money troubles in Europe were to lead to a full blown financial crisis. Or they could close to nothing. It depends on who you believe. Understanding why there is a difference of opinion is at the heart of knowing whether U.S. banks are really in trouble. For right now, the point may be moot. In the past few days the news out of Europe has been looking a little better. But for a while there, and perhaps again, investors seemed really worried about the affect a European crisis could have on U.S. banks. Shares of the biggest banks have been falling for the past month or so on worries of European troubles, though to be fair the weak U.S. economy, legal woes and downgrade of U.S. government debt hasn't helped the banks either. Some argued that a crisis in Europe could significantly hammer U.S. banks and lead us back into our own financial crisis. Is this possible? Or was the sell off just another sign of lingering PTSD from the 2008 financial crisis? It's not really clear. But what is clear is that the European crisis and how it is affecting U.S. banks is another sign of why Dodd-Frank regulations don't go far enough to protect us from future financial crises.

    Unofficial Problem Bank list at 986 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Sept 23, 2011. Changes and comments from surferdude808:  Finally, the OCC released some information on its recent enforcement action activity. Interestingly, the information only included actions against national banks as the OCC has yet to release any activity with thrifts since the merger with the OTS this summer. This week, there were five removals and seven additions and the changes leave the Unofficial Problem Bank List with 986 institutions and assets of $400.4 billion. Comparatively, there were 872 institutions with assets of $422.4 billion on the list a year ago.

    Bank Failures per Week in 2011 - I haven't updated this graph for some time ... There have been 395 bank failures in this cycle (starting in 2007): FDIC Bank Failures by Year 2007-3 2008-25 2009-140 2010-157 2011-73  This graph shows the cumulative bank failures by week in 2008, 2009, 2010 and 2011. The FDIC has slowed down recently, and it appears the FDIC will close around 100 banks this year. There are still quite a few problem banks, so there are probably quite a few banks failures to come.

    US Treasury issues last round of small business loans (Reuters) - The U.S. Treasury Department on Wednesday announced a seventh and final wave of disbursements to community banks under a small business lending fund that drew criticism for being slow to kick into action. Treasury said 141 community banks -- generally smaller banks -- were getting $1.6 billion of funds. In total, that means some $4 billion was distributed to 332 banks under the program the Obama administration set up last year. Called the Small Business Lending Fund or SBLF, the program was approved by Congress last December partly because small businesses said they were having difficulty in getting access to credit in the wake of the 2007-2009 financial crisis. It was designed as a potential $30 billion program to provide capital to smaller banks with under $10 billion in capital. Banks pay interest for the money ranging from 1 percent to 5 percent, and the more they increase their lending with the funds, the lower the rate they pay. But the program drew criticism from lawmakers, who called Treasury Secretary Timothy Geithner before Congress at mid-year to question why no funds had yet been disbursed, and from banks, who complained about excessive paperwork needed for qualification.

    Quelle Surprise! SIGTARP Report Finds Citi, Bank of America Allowed to Leave TARP Prematurely -  Yves Smith - We said at the time it was inexcusable for the Treasury to allow banks to repay the TARP as early as they did (US banks are still below the capital levels many experts consider to be desirable; Andrew Haldane of the Bank of England has made a well-substantiated case that higher capital levels cannot remedy the problem, since the social costs of a major bank blow up are so great, and you therefore need very tough restrictions on their activities). And why were the bank so eager slip the TARP leash? To escape some pretty minor restrictions on executive compensation. This had NOTHING to do with the health of the enterprise and everything to do with executive greed. And not surprisingly, Treasury indulged it. Due to the late (for me) hour, I’m relying on the report by Shahien Nasiripour of the Financial Times, who seems to be releasing the story before the actual SIGTARP report is out. My big reservation is why the line was drawn at Citi and Bank of America. Yes, they were clearly the weakest banks, but I don’t buy the implicit endorsement of the ability of all the rest of the TARP recipients to weather another financial crisis with no government support.  SIGTARP is upset that the Treasury went through the stress tests, which among other things, determined how much capital the banks would need to raise, then ignored its own findings. The SIGTARP discusses that Treasury effectively made up on the fly how much more capital the banks would need to scrounge up, with the required number being lower than the stress test number.

    Bank of America to Charge $5/Month for Any Debit Card Use; Financial Reform Blamed - Yves Smith - Banks don’t like it when their imperial right to loot customers runs into interference, do they?   The Los Angeles Times reports that Bank of America intends to start charing customers $5 per month for any debit card use starting next year. The exceptions will be certain customers that the bank regards as sufficiently profitable otherwise so as not to be worth annoying, such as those with a $200,000+ mortgage or an account at Merrill Lynch with balances over $20,000. Narrowly, of course, the argument is accurate. The Charlotte bank is trying to preserve margins by circumventing the intent of new legislation, which was intended to stop what amounted to bank price gouging for debit cards (you can drive a truck between the cost of providing the service and what banks charged). That’s why it’s such a shame our bank regulatory apparatus has been co-opted by the industry. A competent regulator would beat back a brazen effort like this to game new rules. The intent of the legislation was in fact that banks make less money on the debit card service; the BofA strategy to deal with it is tantamount to a stick in the eye. In fact, it may turn out that Bank of America makes more money with its new fee scheme than its old one.  If you assume an average merchant charge of 22.5 cents, the bank does better if customers on average make fewer than 22 debit card charges per month.

    Big Bank Cuts Costs Via Layoffs And Smaller Cups, While Increasing Bonus Pool -  Wall Street is planning to lay off thousands of workers in a supposedly underperforming quarter, and Goldman Sachs is no exception, saying that it plans to cut $1.2 billion in costs by laying off 1,000 people, roughly 3 percent of its workforce. The mega-bank is also going after small savings by downsizing its drinking cups. Even plants aren’t safe from the bank’s tightened budget. The London office removed potted plants, reportedly causing “disquiet” among employees and led “to a stand-off between the plant pickers and staff.” Morgan Stanley has also cut back on office foliage, while Bank of America skipped an annual field day. However, the real measure of whether Wall Street is serious about cutting costs will be if bonuses go down during lean times. And so far, the chances do not look good. The New York Times’ Dealbook reports that banks, including Goldman, have set aside $65.69 billion for bonuses at the end year, an 8 percent increase over last year:

    SEC probes banks over mortgage loans - The Securities and Exchange Commission is investigating Royal Bank of Scotland, Credit Suisse and other financial institutions for their handling of problem mortgage loans, according to public disclosures and people familiar with the matter.The SEC is examining whether banks misled shareholders about the number of loans they might be forced to buy back because of early defaults – known as loan repurchase requests – and set aside sufficient reserves to fund those purchases or handle related litigation, people familiar with the matter said.  RBS disclosed the probe in a regulatory filing last month, saying it relates to “document deficiencies and remedial measures taken with respect to such deficiencies. The investigation also seeks information related to early payment defaults and loan repurchase requests.” RBS said it was co-operating with the investigation and “has not experienced a significant volume of repurchase demands . . . and has not ceased any of its US foreclosure activities”. Credit Suisse was subpoenaed by the SEC in relation to allegations made in a private lawsuit, according to court filings. MBIA sued Credit Suisse, alleging the bank fraudulently sold securities backed by loans that did not meet underwriting standards. Credit Suisse has denied any wrongdoing.

    BofA and JPMorgan sued over securities - Bank of America and JPMorgan Chase were sued for selling $4bn of mortgage-backed securities to German lenders that later turned sour. Sealink Funding, an entity set up by Landesbank Sachsen, a German bank, claimed in suits filed in New York that the US banks sold residential mortgage-backed securities that they knew were backed by bad mortgages. “Defendants not only concealed from Sealink the truth about the poor quality of the securitised loans, defendants also knowingly provided false information to the credit rating agencies in order to secure a triple A blessing for its RMBS,” the complaint against JPMorgan read. The BofA complaint used similar language. JPMorgan declined to comment.  BofA said: “This appears to be another sophisticated investor looking for someone to blame for investment losses suffered due to a downturn in the economy. We will vigorously defend this lawsuit.”

    Bank of America Deathwatch: $50 Billion Securities Fraud Suit Over Merrill Acquisition - Yves Smith - If mortgage litigation and losses on second mortgages aren’t enough to put Bank of America in a terminally impaired state, the $50 billion private lawsuit filed earlier today represents another major blow. In short form: when Bank of American bought Merrill, the suit claims failed to disclose $15.31 billion loss around the time of the acquisition. It further alleges that this loss was deliberately hidden to assure the deal would be approved by shareholders. The suit charges that senior executives, including the former CFO, Joseph Price, didn’t tell the general counsel, Timothy J. Mayopoulos, about the full extent of the losses. Mayopoulos had been told the losses were roughly $5 billion. He had initially wanted them to be presented, but later decided against it (one has to assume due to pressure from CEO Ken Lewis and others) because it was within the range of recent Merrill quarterly losses. He was told two days before the shareholder vote the losses would be $7 billion, but that was still in a range that investors would arguably expect. They were actually $11 billion the day of the vote. Four days later, at a board meeting, Mayopoulos found out about the larger loss figures and tried to meet with Price. Mayopoulos was fired the next day. Note that that the SEC sued the Charlotte bank over the very same issue. Judge Jed Rakoff rejected the initial $33 million settlement as inadequate, and reluctantly approved the sweetened $150 million deal, noting it didn’t impose enough costs on the executives involved.

    Freddie Mac Low-Balled BofA MBS Settlement - The Federal Housing Finance Agency (FHFA) has often functioned with a single-minded purpose:  it wants to limit taxpayer losses on risky housing loans purchased by Fannie Mae and Freddie Mac from banks and other mortgage lenders. That’s it. Sometimes that works to the benefit of taxpayers and homeowners, as when they pressure banks to repurchase mortgage-backed securities from Fannie/Freddie where the banks made bad representations and warranties. This reveals the essential fraud in the system and could go a long way to reforming it.  But when FHFA refuses to promote principal modifications or refinancing on underwater homes, it acts against the interests of the homeowner (and the taxpayers, since principal modifications would help heal the housing market).  It’s short-term thinking. FHFA’s single-minded focus can also go awry even when FHFA appears to be playing a good role. For instance, earlier this year, Freddie Mac inked a $1.35 billion settlement with Bank of America over mortgage backed securities. But the FHFA’s inspector general found in a report that Freddie Mac used a faulty analysis in accepting a deal that lowballed potential losses the agency could incur if the loans it purchased from banks turned out to perform worse than expected.

    Freddie Mac Loan Deal Defective, Report Says - Freddie Mac used a flawed analysis when it accepted $1.35 billion from Bank of America to settle claims that the bank misled it about loans purchased during the mortgage boom, according to an oversight report scheduled for release on Tuesday.  The faulty methodology significantly increased the probable losses in Freddie Mac’s portfolio of loans, according to the report, prepared by the inspector general of the Federal Housing Finance Agency, which oversees the company. Freddie Mac and Fannie Mae were taken over by the government in 2008 so additional losses would be shouldered by taxpayers.  The report also noted that the settlement with Bank of America in December was completed over the objections of a senior examiner at the agency. Freddie Mac officials did not want to jeopardize the company’s relationship with Bank of America, from which it continues to buy loans, the report concluded.

    Freddie Protecting Banks, Not Taxpayers, And Never Mind Homeowners -- For many months, people concerned about the anemic American economy have focused on the housing market, and the reality that many of the nation's homeowners remain underwater, owing banks more than their homes are worth. Eyes have turned to Fannie Mae and Freddie Mac, the two government-controlled mortgage behemoths that collectively back about half of the nation's $11 trillion worth of outstanding home loans: If they would forgive a significant slice of this debt for homeowners facing difficulty, that would give borrowers a greater stake in their properties, diminishing the foreclosure crisis. The move would put more money in people's pockets via lowered mortgage payments -- money that borrowers would in turn spend, generating jobs for other people. But the government body that now supervises Fannie and Freddie, the Federal Housing Finance Agency, has refused to go along, asserting that this kind of help for homeowners would be unfair to taxpayers, who ultimately own the mortgages. Better to hold firm and extract what they can from distressed borrowers, returning something to the taxpayers who ponied up north of $140 billion to rescue Fannie and Freddie three years ago.

    Nevada AG Masto Gets Up to $57,000 Per Homeowner in Morgan Stanley Settlement - Nevada Attorney General Catherine Cortez Masto just reached a settlement with investment bank Morgan Stanley for up to $40 million, over deceptive practices in mortgage lending and securitization. This may seem like a small number, but Morgan Stanley was not a big player in Nevada, and the case itself involves just a small slice of mortgages:The New York-based company, with assets of some $831 billion, was investigated by Cortez Masto’s office for its role in buying and selling to investors some 3,000 subprime mortgages in Nevada. In a settlement filed in Clark County District Court, called an “Assurance of Discontinuance,” Cortez Masto said the company’s Morgan Stanley Capital Holdings unit committed to improve practices to securitize Nevada mortgages, to refund and adjust interest rates for certain Nevada borrowers and to pay $7.2 million to prevent foreclosures and mortgage fraud in Nevada.

    Treasury: Mortgage loan fraud suspicious activity reports increased in Q2, Most occurred during bubble - From Treasury: Second Quarter Mortgage Loan Fraud Suspicious Activity Persists The Financial Crimes Enforcement Network (FinCEN) today reported in its Second Quarter 2011 Analysis of mortgage loan fraud suspicious activity reports (MLF SARs) that financial institutions filed 29,558 MLF SARs in the second quarter of 2011 up from 15,727 MLF SARs reported in the same quarter of 2010. A large majority of the MLF SARs examined in the second quarter involved mortgages closed during the height of the real estate bubble. The upward spike in second quarter MLF SAR numbers is directly attributable to mortgage repurchase demands and special filings generated by several institutions. The most common mortgage loan fraud suspicious activity was the misrepresentation of income, occupancy, debts, or assets (about 30%). Some of the more current frauds are related to debt elimination and short sale fraud (unfortunately attempted short sale fraud is very common). FinCEN has some Mortgage Fraud SAR Datasets breaking down the data by state, MSA and county. California was #1 in Q2 (Nevada or Florida have usually been #1). San Jose-Sunnyvale-Santa Clara, CA was the #1 MSA.

    Government to Pull Back Some Housing-Market Support: What Will Happen? - Beginning on Saturday, the maximum limit for loans that can be backed by government-related entities will decline modestly in many of the nation’s most expensive housing markets. Over the next few weeks it’s worth watching what happens to sales of homes priced between the new and old limits. The Developments blog offers a primer for those that are just tuning in. Here’s an excerpt:  Loans that aren’t eligible for government backing tend to carry higher rates and, more importantly, tend to require down payments of at least 20%. Because the FHA allows borrowers to make minimum down payments of just 3.5%, the jump from an FHA-backed loan to a jumbo loan could be one that some borrowers can’t make. If you live somewhere where all the homes are below $300,000, these changes won’t matter. But for people who live in places where homes are pricier, tougher lending standards and higher borrowing costs could reduce the potential pool of buyers. That, in turn, could put pressure on prices. Take San Diego County, where one in 12 loans over the past year fell in between the new and the old loan limit, assuming a 10% down payment. Many of those sales might have happened anyway, but in some of them, buyers might not have been able to qualify or wouldn’t have had a 20% down payment.

    Analysis of Obama’s Proposed Fannie/Freddie “Streamline Refi” Program - As with any new government program, we must look beyond the obvious to determine what the real objectives and outcomes of a program are. With this program, we don’t have to look far, because some objectives are readily admitted.

    • The report estimates that mortgage payments will fall by about $70 – $80 billion.. What this really means is that it is being undertaken as a “new stimulus” for the economy, under the disguise of mortgage refinancing.
    • Attempt to stabilize home values by refinancing to lower rates to keep people in homes. Finance underwater loans to avoid default. This will fail.
    • Make the GSE’s more profitable through increased fees. GSE’s receive upfront cash flow from $54b – $72b. Allow the GSE’s to control more of the housing market.
    • Bondholders to pay bulk of the costs of the program. Nearly all gains to homeowners come at the expense of the bondholders. (Total bondholder costs not given.)

    Mortgage modifications are still messed up, 4 years later…— Jose Palomo was surprised when the knock on the door came in August, informing him that his California home had been foreclosed and he'd need to vacate promptly. After all, he'd recently started payments on an in-house mortgage modification with CitiMortage Inc.  Palomo's plight illustrates why housing remains such a drag against U.S. economic recovery. He's fighting to keep a 738-square-foot home that today is worth less than $85,000. He was given a mortgage modification where he'll owe about twice that amount — illustrating how such modifications often fail to solve the problem they're designed to fix. Simply put, mortgage modifications aren't cleaning up the housing-finance mess.  And to top it off, even as he began making payments on his still too-high mortgage, Palomo still faced losing his home — underscoring lenders' relentless pursuit of foreclosure proceedings four years after the housing-market bust. Today there are at least 4.2 million homeowners who, like Palomo, are late on their mortgage payments or somewhere in the delinquency and foreclosure process.

    One in Five Modified Loans Default Again, U.S. Comptroller Says -- One in five homeowners whose mortgages were modified under a program aimed at reducing foreclosures defaulted again within a year after their payments were cut, the U.S. Comptroller of the Currency reported today. Twenty percent of modified loans were at least 90 days delinquent within a year in the second quarter, according to the Comptroller's "Mortgage Metrics Report." Delinquencies for loans 30 to 59 days late increased 0.4 percentage points to 3 percent from the previous quarter, "Foreclosures may continue to increase in future quarters as a large number of foreclosures work through the process and alternatives to foreclosure are exhausted," the Comptroller, a division of the U.S. Treasury Department, said in a statement. Mortgage delinquencies have increased amid slow economic growth and a U.S. unemployment rate that's been 9 percent or higher since April. Default notices sent to delinquent homeowners surged 33 percent in August from the previous month, RealtyTrac Inc. said on Sept. 15.

    Mortgage Relief Scams Proliferate After Recession - From the looks of the mortgage relief companies Christopher Mallett has marketed in recent years, offering lower payments and new loan terms to troubled homeowners, one might easily get the impression that he has the backing of the federal government or is running non-profit help groups. Mallett is the driving force behind and He also founded The Department of Consumer Services Protection, U.S. Debt Care, the U.S. Mortgage Relief Council and several other operations with similarly authoritative if not auspicious-sounding names. But people who turned to them for help didn’t receive services, according to court documents filed by the Federal Trade Commission in U.S. District Court this month. Their names were instead sold to companies that almost universally scam distressed homeowners, federal regulators say.

    Hard Truths Block Solutions to Foreclosure Crisis – But, I have the answers that will fix it. -We need to begin this journey by making sure we have a common understanding of why we are, where we are today, so I’m going to start out by stating what I see as being the absolute facts of our collective situation related to the foreclosure crisis, being individually at risk of foreclosure, or representing a homeowner at risk of foreclosure. After that, I’ll put it all together so you can clearly see the thinking behind what I propose to be the path to a real solution to the foreclosure crisis.  Here’s what’s really going on:

    • 1. Homeowners at risk of foreclosure wanted their loans modified as they had been told could be done by the Making Home Affordable program.
    • 2. It didn’t go well for millions of homeowners, and not just because they lost their homes after being told their modification was “in progress,” but because overall, their servicers treated them with nothing short of utter contempt, with an appalling lack of professionalism, and with total disregard at a level usually reserved for insects found indoors. 
    • 3. Homeowners first became frustrated, then angry, then desperate… and then, represented by legal counsel.   And they found that there were in fact big problems with how foreclosures were being conducted.
    • 4. The idea that the banks were foreclosing illegally and/or improperly, and that they could potentially not even own the loans in question, spread like wild fire.  Maybe the bank couldn’t take their homes after all.  And the homeowners headed to court for on-the-job training to become lawyers, ready to do battle with the likes of Bank of America. 

    Left vs. White House over mortgage deal - This time, the problem is a subprime mortgage settlement that his administration is pressuring state attorneys general to sign off on — a deal that could stop many state investigations and prosecutions about mortgage lending practices. That settlement, a collaboration between the Justice Department3 and the 50 state attorneys general much like the one that produced the landmark 1998 agreement with tobacco companies, would mean a lump-sum payment from the banks in exchange for a release from liability. But with negotiators in Washington this week trying to finalize a deal, it’s become the latest flashpoint of left-wing disenchantment with Obama. “The least charitable view ties it directly to campaign donations,” said Adam Green, co-founder of the Progressive Change Campaign Committee, which this week began mobilizing its 700,000 supporters against the broader deal. “The most charitable view, it’s a bunch of Wall Street hacks in the position of economic advisers who truly believe that giving billions to banks will trickle down to the middle class. The most charitable view is that they’re just wrong.”

    California breaks from 50-state probe into mortgage lenders - California Atty. Gen. Kamala Harris will no longer take part in a national foreclosure probe of some of the nation's biggest banks, which are accused of pervasive misconduct in dealing with troubled homeowners. Harris removed herself from talks by a coalition of state attorneys general and federal agencies investigating abusive foreclosure practices because the nation's five largest mortgage servicers were not offering California homeowners relief commensurate to what people in the state had suffered, Harris told the Times on Friday. The big banks were also demanding to be granted overly broad immunity from legal claims that could potentially derail further investigations into Wall Street's role in the mortgage meltdown, Harris said. “It has been a process of negotiating and sitting at a table in good faith but ultimately I have decided that we have to go our own course and take an independent path and that decision is because we need to bring relief to Californians that is equal to the pain California experienced and what is being negotiated now is insufficient,"

    Game Over: California Attorney General Breaks From “50 State” Mortgage Settlement - 09/30/2011 - Yves Smith  - We’ve been saying for months that the 50 state attorney general settlement was not going to happen. Despite the vigorous efforts by people on the side of the Federal regulators involved in the negotiations and Tom Miller’s (the AG leading the negotiations’) office to make it seem as if the deal was moving forward, the content of the reports showed otherwise. There was a huge gap between the positions of the banks and even the bank friendly position of the state AGs at the table and the banking regulators.  There was not going to be a settlement that was anything other than an abject sellout with a 11 figure payoff to mask that fact. And there were too many attorneys general who were already troubled by the terms of the deal that Miller had put forward for that to happen. Now that Kamala Harris, the California state attorney general, has officially abandoned the talks, they don’t mean much, at least from the state side. The departure of such a big state, in population, foreclosure exposure, and Electoral college terms, along with other states (New York, Delaware, Nevada, Massachusetts, Kentucky, Minnesota, likely Arizona) means any settlement has limited practical meaning from the state side and even less credibility. It also considerably raises the odds of other states bolting. And needless to say, this is a major repudiation of the Obama Adminstration “let’s sweep foreclosure fraud under the rug” strategy.

    Deloitte sued for $7.6B over mortgage fraud - A pair of lawsuits filed Monday claim that Deloitte & Touche LLP, one of the nation's largest accounting firms, should pay $7.6 billion in damages for failing through years of audits to detect massive fraud at a now-defunct Florida mortgage company. "They certainly did not do their job," said attorney Steven Thomas, who represents those suing Deloitte. "This is one of those cases where the red flags are staring you in the face, and you've got to do a lot, and they did not." The lawsuits were filed in Miami-Dade Circuit Court on behalf of the bankruptcy trustee for the fraudulent mortgage firm, Taylor Bean & Whitaker, and by Ocala Funding LLC, a company that purchased hundreds of millions of dollars' worth of mortgages from Taylor Bean. The bankruptcy trustee is attempting to recover money for Taylor Bean creditors.

    Politico Shows Maximum Ignorance in Foreclosure Fraud Settlement Story - I love when reporters are put on stories with a clearly self-imposed frame – in this case, Obama versus “The Left” – and then show themselves to have no knowledge of the details of the situation. Edward-Isaac Dovere commits this sin in the second sentence of his Politico story about the foreclosure fraud settlement, using a term that betrays his ignorance. This time, the problem is a subprime mortgage settlement that his administration is pressuring state attorneys general to sign off on — a deal that could stop many state investigations and prosecutions about mortgage lending practices. Exactly what is a “subprime mortgage settlement”? Is the claim that every mortgage the banks sliced and diced and improperly securitized and then tried to cover up with falsified or backdated documents a “subprime” one? Is the idea that there were two mortgage markets, a perfectly legal prime market and a perfectly legal subprime one? Of course not. Dovere knows some buzzword called “subprime” and applies it to the 50 state AG investigation, which isn’t about subprime mortgages per se but over garden variety fraud upon state courts.

    The Closer  - When a lender forecloses on a property, one of the first things he does is send somebody out to see if there is a house still standing and whether there’s anybody living there. That’s my job. Sometimes the houses are crack dens or meth labs, sometimes the sites of cock- or dog-fighting operations, sometimes the backyard is filled with pot. And sometimes the house is a waterfront mansion in a gated golf community worth well over seven figures. Variety is the rule.  Some people have been expecting me. Some claim they never knew they were foreclosed on or tell me that they have worked something out with their lender. Some won’t tell me a thing. If nobody is home, I have to determine where they are — at work, on vacation, in the Army, in jail, in a nursing home, dead or moved away. It isn’t easy.  Many lenders are willing to negotiate with the occupants instead of taking them to court. In exchange for surrendering a property in reasonably clean condition with the furnace still hooked up, the kitchen not stripped and the basement not intentionally flooded, the lender will cut the occupants a check.

    House Is Gone but Debt Lives On - Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.  In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71. It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.  Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today's battered housing market mean that lenders are doing so more and more.  "Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt," . "Before, it didn't make sense [for banks] to expend the resources to go after borrowers; now it doesn't make sense not to."  Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.

    Protestors Disrupting Foreclosure Auctions in California - On Monday afternoon at 12:00 p.m., a group of protesters organized under the umbrella of the “Make Banks Pay California” campaign picketed a foreclosure sale at the Alameda County Courthouse. When I arrived around noon, I saw a group of roughly 10 to 15 people protesting. Some had yellow shirts marked “ACCE” picketing on the courthouse steps. Many of them had signs, like “Stop Foreclosures/End Bankster Fraud” and pictures of various Wall Street Executives tagged as “Wall Street Robber Banker.” One woman held up a sign that said “Chase and LPS Crime Scene." Over the next 2 weeks, the Make Banks Pay California group plans to have a variety of actions in the San Francisco Bay Area and Los Angeles to “make Wall Street banks pay for destroying jobs and neighborhoods with their greedy, irresponsible and predatory business practices.” There were already a few auctioneers standing there with clipboards in hand, ready to start their auctions. The protestors started to chant, with at least one person blowing a whistle. Some of the chants were “they got bailed out, we get tossed out” and “vultures.” I spoke with a well dressed gentleman who said he was there with his client to place a bid. When asked for his thoughts, he said he thought it was a “joke” and that people should “go home” and “pay their bills.”

    Fannie Mae and Freddie Mac Serious Delinquency Rates decline in August - Fannie Mae reported that the Single-Family Serious Delinquency rate declined to 4.03% in August. This is down from 4.08% in July, and down from 4.75% in August of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined to 3.49% in August from 3.51% in July. This is down from 3.83% in August 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent.  The serious delinquency rate has been falling as Fannie and Freddie work through the backlog of delinquent loans. The normal serious delinquency rate is under 1%, and at this pace of decline, the delinquency rate will be back to "normal" in four or five years.

    New Home Sales decline slightly in August - The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 295 thousand. This was down from a revised 302 thousand in July (revised up from 298 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. The second graph shows New Home Months of Supply. Months of supply increased slightly to 6.6 in August. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal).Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 60,000 units in August. The combined total of completed and under construction is at the lowest level since this series started.   The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In August 2011 (red column), 26 thousand new homes were sold (NSA). The record low for August was 23 thousand in 2010 (following the expiration of the homebuyer tax credit). The high for August was 110 thousand in 2005.

    New-home sales dipped 2.3 pct. in August to a six-month low, median prices plunge 9 pct. (AP) -- Sales of new homes fell to a six-month low in August. The fourth straight monthly decline during the peak buying season suggests the housing market is years away from a recovery. The Commerce Department said Monday that new-home sales fell 2.3 percent to a seasonally adjusted annual rate of 295,000. That's less than half the roughly 700,000 that economists say must be sold to sustain a healthy housing market. New-homes sales are on pace for the worst year since the government began keeping records a half century ago. High unemployment, larger required down payments and tougher lending standards are preventing many people from buying homes.  The median sales price of a new home fell nearly 9 percent to $209,100 -- the lowest price since last October. That suggests builders are slashing their prices in order to compete with comparably lower-priced previously occupied homes.

    New home sales stuck at the bottom in August  - The August read on new home sales showed properties selling at a seasonally adjusted rate of 295,000, down 2.3% from a revised July rate of 302,000 and just 6.1% above August 2010, according to the Commerce Department. "With job growth at a standstill, the stock market swinging wildly, Congress wrangling over the debt ceiling and the euro zone’s problems sending consumer confidence down, sales of new homes are slipping from an already weak pace," Celia Chen, director of housing economics at Moody’s Analytics, wrote in a note Monday morning. "New-home sales fell below the 300,000 mark in August and are nearing the cyclical (and 48-year) low of 278,000 that sales hit in August 2010." Patrick Newport, U.S. economist with IHS Global Insight, said that the trend for new home sales has been flat for the last 16 months. "This year is shaping up to be the worst year on record for new home sales," Newport wrote

    Fed's Rosengren: Housing and Economic Recovery - From Boston Fed President Eric Rosengren: Housing and Economic Recovery. A few excepts and couple of graphs that highlight two topics we've discussed for years: [E]even though residential investment is a small share of GDP (today only 2.2 percent), it is quite interest-sensitive – it can decline quite dramatically as interest rates rise, and expand quickly when interest rates are relatively low.  In the current situation, however, U.S. mortgage rates are quite low but residential investment has not been the engine of growth that it normally is in economic recoveries. As shown in Figure 4, exports have been a source of strength in the first two years of the U.S. recovery, and business fixed investment has grown at approximately the same rate in this recovery as in the previous three. Yet the household sector has been particularly weak. Consumption, which accounts for approximately 70 percent of U.S. GDP, has grown only about half as much in the first two years of the recovery as it did in the previous three recoveries. And the shortfall for residential investment is even more striking. In the previous three recoveries, residential investment grew over 30 percent on average in the first years of the recovery – but has actually decreased in the first two years of this recovery. ...

    Mortgage Rates Fall Again to New Record Lows - According to data released today by Freddie Mac, 30-year fixed mortgage rates fell this week to another new historic low of 4.01% (see chart above), and 15-year rates fell to a new record low of 3.28%.  Based on the most recent one-year increase in the CPI of 3.8% through August, 15-year mortgage rates are below the current annual inflation rate and 30-year rates are just barely above current inflation.   

    Freddie Mac: Record Low Mortgage Rates - Probably deserves a mention ... from Freddie Mac: Fixed-Rate Mortgages Lowest on Record. Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), coming on the heels of the Federal Reserve's recent announcements. The conventional 30-year fixed averaged an all-time record low at 4.01 percent; likewise the 15-year fixed averaged an all-time record low at 3.28 percent for the week. ... "Fixed mortgage rates fell to all-time record lows this week following the Federal Reserve's announcement of its Maturity Extension Program and additional purchases of mortgage-backed securities. Interest rates for ARMs, however, were nearly unchanged as the Federal Reserve plans to sell $400 billion in short-term Treasury securities, which serve as benchmarks for many ARMs."

    Existing Home Inventory continues to decline year-over-year in September - In June, Tom Lawler posted on how the NAR estimates existing home inventory. The NAR does NOT aggregate data from the local boards (see Tom's post for how the NAR estimates inventory).  In a few months the NAR will revise down their estimates fpr inventory and sales of existing homes for the last few years. Also the NAR methodology for estimating sales and inventory will be changed.  I think the HousingTracker / DeptofNumbers data that Tom mentioned provides a timely estimate of changes in inventory. Ben at is tracking the aggregate monthly inventory for 54 metro areas. This graph shows the NAR estimate of existing home inventory through August (left axis) and the HousingTracker data for the 54 metro areas through September. The HousingTracker data shows a steeper decline in inventory over the last few years (as mentioned above, the NAR will probably revise down their inventory estimates this fall). The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the September listings - for the 54 metro areas - declined 16.7% from last year. Listed inventory for September is probably down to the lowest level since September 2005.

    CoreLogic: Existing Home Shadow Inventory Declines to 1.6 million units - From CoreLogic: CoreLogic® Reports Shadow Inventory Continues to Decline: CoreLogic ... reported today that the current residential shadow inventory as of July 2011 declined slightly to 1.6 million units, representing a supply of 5 months. This is down from 1.9 million units, a supply of 6 months, from a year ago, and follows a decline from April 2011 when shadow inventory stood at 1.7 million units. The moderate decline in shadow inventory is being driven by a pace of new delinquencies that is slower than the disposition pace of distressed assets. CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of distressed properties not currently listed on multiple listing services (MLSs) that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lendersThis graph from CoreLogic shows the breakdown of "shadow inventory" by category. For this report, CoreLogic estimates the number of 90+ day delinquencies, foreclosures and REOs not currently listed for sale.

    Case Shiller: Home Prices increased Seasonally in July - S&P/Case-Shiller released the monthly Home Price Indices for July (actually a 3 month average of May, June and July). This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities). Note: Case-Shiller reports NSA, I use the SA data. From S&P: Home Prices Continue to Show Seasonal Strength According to the S&P/Case-Shiller Home Price Indices. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 32% from the peak, and down slightly in July (SA). The Composite 10 is 1.4% above the June 2009 post-bubble bottom (Seasonally adjusted). The Composite 20 index is off 31.8% from the peak, and up slightly in July (SA). The Composite 20 is slightly above the March 2011 post-bubble bottom seasonally adjusted. The second graph shows the Year over year change in both indices. The Composite 10 SA is down 3.8% compared to July 2010. The Composite 20 SA is down 4.2% compared to July 2010. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices. Prices increased (SA) in 8 of the 20 Case-Shiller cities in July seasonally adjusted.  Most of this prices increase was seasonal.

    A Look at Case-Shiller by Metro Area - S&P/Case-Shiller home-price data showed sideways movement in July, as prices were boosted from a month earlier thanks to seasonal factors but remained below year-ago levels. The composite 20-city home price index, a key gauge of U.S. home prices, posted a 0.9% increase from June but fell 4.1% from a year earlier. On a seasonally-adjusted basis, which aims to account for stronger housing demand in the spring and summer season, the 20-city index was flat in July from the previous month. Eighteen of the 20 cities posted annual declines in June, only Detroit and Washington posted year-to-year gains. Las Vegas and Phoenix were the only cities to post monthly declines. But on a seasonally adjusted basis just eight cities — Boston, Chicago, Dallas, Detroit, Miami, Minneapolis, New York, and Washington, D.C. — posted monthly increases. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

    Housing likely to be flat for years: Shiller (Reuters Video)

    Shiller: House Prices Probably Won’t Hit Bottom For Years - The July numbers for the most widely followed measure of house prices, the S&P/Case-Shiller Index, were released this morning. The numbers weren't terrible--on a seasonally adjusted basis, July was basically the same as June--but one of the creators of the index, Professor Robert Shiller of Yale University, isn't taking much solace in them. The economy has deteriorated significantly since July, Professor Shiller observes, and he suspects that the housing market has followed suit. And, from a broader perspective, house prices are still down more than 4% year over year. In February, Professor Shiller startled those looking for an imminent "bottom" in house prices by suggesting that house prices could still fall 10% to 25%. He's standing by that assessment. House prices won't necessarily plunge from here in nominal terms, but in real terms--after adjusting for inflation--they could still drop significantly, Professor Shiller says. And the bottom might not arrive for years.

    Real House Prices and House Price-to-Rent - An update: Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income. The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2011), and the monthly Case-Shiller Composite 20 SA (through July) and CoreLogic House Price Indexes (through July) in nominal terms (as reported). In nominal terms, the Case-Shiller National index is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to June 2003 levels, and the CoreLogic index is back to July 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). In real terms, the National index is back to Q3 1999 levels, the Composite 20 index is back to August 2000, and the CoreLogic index back to July 2000. In real terms, all appreciation in the last decade is gone. In October 2004, Fed economists presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. Here is a similar graph using the Case-Shiller Composite 20 and CoreLogic House Price Index. This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Composite 20 index is back to September 2000 levels, and the CoreLogic index is back to July 2000.

    Update on Gasoline Prices - From Reuters: U.S. gasoline prices slide; more to come-survey The average price for a gallon of gasoline in the United States tumbled 12.23 cents in the past two weeks and appeared poised to drop even more as crude oil prices weaken, the nationwide Lundberg survey showed on Sunday. The national average price was $3.5446 on Sept. 23, down from $3.67 two weeks ago ... Gasoline prices jumped from about $3.10 per gallon in early February to over $3.50 per gallon in early March as Brent crude oil prices increased from about $100 per barrel to over $120 per barrel. (WTI increased from around $85 per barrel to over $110 per barrel early this year). Since oil prices have declined back to the early February levels (Bloomberg: WTI is at $80 per barrel and Brent is at $104), gasoline prices will probably decline too. Note: This graph show oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices. Quick charts: 1 Month | 3 Month | 6 Month | 9 Month | 1 Year | 18 month | 2 Years | 3 Years | 4 Years | 5 Years | 6 Years

    ATA Trucking Index decreased slightly in August - From ATA: ATA Truck Tonnage Index Edged 0.2% Lower in August The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index declined 0.2% in August after falling a revised 0.8% in July 2011. July’s decrease was less than the 1.3% ATA reported on August 23, 2011. The latest drop put the SA index at 114.4 (2000=100) in August, down from the July level of 114.6. ...Compared with August 2010, SA tonnage was up a solid 5.2%. In July, the tonnage index was 4.5% above a year earlier.  Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

    Durable Goods Orders Hold Their Ground In August - New orders for durables goods, considered a leading indicator for the business cycle, slipped 0.1% last month on a seasonally adjusted basis. The slight decline follows a strong 4.1% jump in July. Given all the recent worries about rising recession risk, it’s a wonder that new orders didn’t fall further. The fact that this critical measure of economic activity managed to hold on to virtually all of July’s gains implies that the economy may continue to struggle but it will avoid a recession. That relatively optimistic view is strengthened after learning of the 1.1% rise last month in business investment (a proxy for capital spending, as measured by nondefense capital goods orders excluding aircraft).  You can’t tell much from looking at monthly data, given all the short-term noise. A better measure is comparing rolling 12-month percentage changes. By that standard, news orders for durable goods and capital spending continue to rise at strong rates, as you can see from the chart below.

    U.S. durable goods orders slip 0.1%  - Companies ordered more machinery, computers and communication equipment in August, a positive sign for the slumping U.S. economy. An increase in demand for those kind of longer-lasting factory goods suggests businesses are sticking with their investment plans, despite slow growth and weak consumer spending. Overall orders for durable goods slipped 0.1 percent last month. The modest decline was largely due to an 8.5-per-cent drop in orders for autos and auto parts. In July, demand for those goods surged 10.2 per cent — the biggest increase in eight years. Economists looked past the headline figure and focused more closely on a 1.1-per-cent increase in a key category that measures business investment plans. Those are core capital goods that are neither used for defense nor transportation. Another bright sign: shipments of those goods rose 2.8 per cent, the fourth consecutive gain in this category. The government looks closely at shipment data when calculating economic growth.

    Kansas City Manufacturing Survey: Manufacturing activity expands "modestly" in September - This is the last of the regional Fed surveys for September. The regional surveys provide a hint about the ISM manufacturing index - and the regional surveys were weak in September, but not as weak as in August. From the Kansas City Fed: Growth in Manufacturing Activity Edged Higher Growth in Tenth District manufacturing activity edged higher in September. Expectations moderated slightly, but producers on net still anticipated increased activity over the next six months. Price indexes moved up modestly, with slightly more producers planning to raise selling prices.The month-over-month composite index was 6 in September, up from 3 in August and 3 in July ... The employment index increased for the second straight month, but the new orders for exports index fell slightly after rising last month. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index: The New York and Philly Fed surveys are averaged together (dashed green, through September), and five Fed surveys are averaged (blue, through September) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through August (right axis).

    Vital Signs: Consumers Remain Depressed - Consumers’ spirits remained in the doldrums this month. The Conference Board’s Consumer Confidence Index registered 45.4 in September, up only fractionally from August’s 45.2 and near its lowest levels since early 2009. Consumer expectations of how the economy will perform over the next half-year improved, but that was mostly offset by a decline in their assessment of current conditions.

    In Time of Scrimping, Fun Stuff Is Still Selling - Consumers at all income levels have been splurging on indulgences while paring many humdrum household expenses, according to industry data for the last year. Many retailers also report that while fripperies like purses and perfumes are best sellers, they cannot get shoppers interested in basics like diapers, socks and vacuum bags.  “Consumer psychologists say that in this uncertain economy — coming after one of the worst recessions in generations — it is just too hard being good all the time.  “People have a limited supply of energy to put toward controlling their urges,” .. Many of the products selling briskly are not high-priced, but they could be on a party supply list: premixed cocktails and coolers, cheesecake, cosmetics and wine. Meanwhile, sales of staples like batteries, bleach and fertilizer have declined sharply.

    What Are We Spending Our Money On? - Consumers, pinched by falling incomes, trimmed their spending last year even as prices for everyday goods climbed, according to a new report from the Labor DepartmentClick image for an interactive graphic. Consumer groups, defined as families, single persons living alone or sharing a household with others but who are financially independent, and two or more persons living together who share expenses, saw their average income before taxes drop 0.6% from a year earlier to $62,481. Average spending dropped 2% to $48,109 last year. Even as income and spending fell, consumer prices increased 1.6% in 2010. The only areas to see growth in spending were health care, which has increased on a year-to-year basis for well over a decade, and transportation, which was affected by a 18% jump in the price of gasoline last year from 2009. The rise in health-care spending was driven by increased payouts for insurance. Housing continues to be the biggest expense for most people, accounting for more than a third of average spending, though the amount spent decline in 2010 from a year earlier.

    Spending Less on Entertainment and Charity - Americans ratcheted down their spending on entertainment and philanthropic donations in 2010, according to a new report from the Bureau of Labor Statistics. Every year the bureau collects data on how Americans spend their money. Here’s a look at the budget of the average household: According to these survey data, the average pretax income per consumer unit (which is, more or less, a household) fell 0.6 percent in 2010, to $62,481 from $62,857. But households disproportionately tightened their spending, which fell 2 percent in 2010, to $48,109 from $49,067. Spending had fallen 2.8 percent the previous year. In fact, in these nominal dollars, the 2010 level of average annual consumer expenditures was lower than that for 2006. Just about every major spending category fell last year, with two exceptions: health care (up 1 percent) and transportation (up 0.2 percent).

    Personal Income decreased 0.1% in August, Spending increased 0.2% - The BEA released the Personal Income and Outlays report for August:  Personal income decreased $7.3 billion, or 0.1 percent ... in August ... Personal consumption expenditures (PCE) increased $22.7 billion, or 0.2 percent.  The following graph shows real Personal Consumption Expenditures (PCE) through August (2005 dollars). PCE increased 0.2 in August, and real PCE decreased slightly as the price index for PCE increased 0.2 percent in August. The personal saving rate was at 4.5% in August. Personal saving -- DPI less personal outlays -- was $519.3 billion in August, compared with $550.5 billion in July. Personal saving as a percentage of disposable personal income was 4.5 percent in August, compared with 4.7 percent in July. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the August Personal Income report. Using the two month method to estimate Q3 PCE gives a 1.1% annualized rate (another weak quarter), however it appears PCE increased in September (auto sales are up) and June was especially weak in Q2 - so real PCE growth will probably be in the 1.5% range in Q3 (still weak).

    Real Disposable Personal Income Drops Second Consecutive Month; Drop is Highly Deflationary -Inquiring minds are digging into the just released Personal Income and Outlays Report for August 2011. Personal income decreased $7.3 billion, or 0.1 percent, and disposable personal income (DPI) decreased $5.0 billion, or less than 0.1 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.7 billion, or 0.2 percent. In July, personal income increased $17.1 billion, or 0.1 percent, DPI increased $14.4 billion, or 0.1 percent, and PCE increased $76.6 billion, or 0.7 percent, based on revised estimates. Real disposable income decreased 0.3 percent in August, compared with a decrease of 0.2 percent in July. Real PCE decreased less than 0.1 percent, in contrast to an increase of 0.4 percent. Real DPI -- DPI adjusted to remove price changes -- decreased 0.3 percent in August, compared with a decrease of 0.2 percent in July. Real PCE -- PCE adjusted to remove price changes -- decreased less than 0.1 percent in August, in contrast to an increase of 0.4 percent in July.  PCE price index -- The price index for PCE increased 0.2 percent in August,compared with an increase of 0.4 percent in July. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent. Some charts will help put these numbers onto perspective.

    After the Tape: The Bigger Impact of Smaller Paychecks - Sluggish U.S. income growth isn’t necessarily new. It just stings more these days. On Friday, the Commerce Department released its potpourri of personal income, spending, saving and inflation figures for August. It was quite the pungent mix: after-tax income declined for the first time since October 2009, and real incomes were even weaker thanks to a small rise in the price level. Little wonder, then, that spending rose just 0.2% for the month after a downwardly revised 0.7% gain in July. Households, after all, are far more reliant on paychecks (and government benefits) now than during the credit-fueled boom. Consumer credit as a percentage of personal spending, for example, rose from 18.4% in the early 1990s to a peak of 26.3% in December 2008. It has since dropped sharply, notes Omair Sharif of RBS Securities. But with the level still at 22.8% as of July, “we’re probably not even halfway through” the household debt-shedding process, he says.

    September Consumer Sentiment increases to 59.4, Chicago PMI fairly strong - First on the Chicago PMI Chicago Business Barometer™ Rebounded: The overall index increased to 60.4 from 56.5 in August. This was above consensus expectations of 55.4. Note: any number above 50 shows expansion. The employment index increased to 60.6 from 52.1. "EMPLOYMENT expanded to highest level in 4 months". The new orders index increased to 65.3 from 56.9. "NEW ORDERS erased net declines accumulated since April"  The final September Reuters / University of Michigan consumer sentiment index increased to 59.4 from 55.7 in August. In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. In August, sentiment was probably negatively impacted by the debt ceiling debate..This was still very weak, but above the consensus forecast of 57.8.

    Michael Hudson: Debt Deflation in America - (Edited Interview by Bonnie Faulkner first aired on Pacifica, September 14) “Without consumption, markets are going to shrink. Companies won’t invest, stores will close, “for rent” signs will spread on the main streets and local tax revenues will fall. Companies will lay off their employees and the economy will shrink more. Why aren’t economists talking about these effects of debt deflation, which are becoming the distinguishing phenomenon of our time? They advocate giving more money to the banks, hoping that somehow everything will be okay, as if the banks would lend out the money to fund new production and employment. Mainstream economics and political leaders in both parties are failing to ask why the banks are using these giveaways to speculate abroad, pay their managers bonuses and high salaries or to pay dividends rather than to lend to small businesses or do other things to actually get the economy moving again. This phenomenon cannot be explained without seeing that debt service is siphoning off revenue into the financial sector, which is not recycling it back into the production-and-consumption economy.”

    Why Small Businesses Aren’t Innovative - A year ago, President Barack Obama approved the Small Business Jobs Act, which cut taxes and expanded loan programs for tens of thousands of small companies. Signing the bill into law, he gave a speech that could have come out of the mouth of any Washington politician: lauding the country's "entrepreneurs," the "basement inventor[s]" designing revolutionary new products and creating most of the country's new jobs. The stereotype of the small-businessperson as a start-up innovator is pervasive. But it's not true, according to a new study. Scupper the image of Mark Zuckerberg handcrafting a new service to revolutionize how we socialize and adding thousands of jobs to the economy. Replace it with the image of a gas-station owner, servicing a crowded market, happy to be able to make his kid's soccer games without a boss breathing down his neck, and more wary of innovation than eager for it.  In a new paper, "What Do Small Businesses Do?," Erik Hurst and Benjamin Wild Pugsley of the University of Chicago says innovative whizzes and small-business owners are very different breeds. For politicians and policymakers eager to bolster job creation and foster American competitiveness, Hurst and Pugsley's analysis could have important ramifications.

    Is It Virtually Impossible To Land A Job As "Jobs Hard To Get" Responses Hit 28 Year High - While the fact that the September Conference Board consumer confidence number missed in September, coming in at 45.4, below expectations of 45, and a tiny increase from the revised August 45.2, the shocker was in the responses to "jobs hard to get" category which printed at 50, up from 48.5 in August, and is now the highest number since 1983! Yet despite that it can not get a job to save its life, the public appears to have reverted to Hopium consumption, with the 6 month outlook jumping to 54 from 52.4, even as the current conditions index declines from 34.3 to 32.5, and the lowest since January. And a big red sign for the auto segment, is that Americans expecting to buy a car within 6 months has dropped to just 11.4% from 13% last month. And this even with GM offering subprime loans to deadbeats left and right.

    Recent Layoffs in a Fragile Labor Market - SF Fed Economic Lettter - Rising layoff rates during the spring of 2011 highlight renewed labor market weakness. Although job cuts among state and local governments have accelerated over the past few years, most of the recent increase occurred among private-sector employers. Following modest improvement in early summer, subsequent labor market performance has been uneven, indicating that labor market conditions remain fragile.

    Weekly Initial Unemployment Claims decline sharply to 391,000 - The DOL reports:In the week ending September 24, the advance figure for seasonally adjusted initial claims was 391,000, a decrease of 37,000 from the previous week's revised figure of 428,000. The 4-week moving average was 417,000, a decrease of 5,250 from the previous week's revised average of 422,250.  The following graph shows the 4-week moving average of weekly claims since January 2000 (there is a 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 declined this week to 417,000. This is the lowest level for weekly claims since early April, although the 4-week average is still elevated.

    Jobless Claims Drop Sharply. Can We Believe It This Time? - New jobless claims dropped last week by a hefty 37,000 to a seasonally adjusted 391,000. That’s the biggest weekly tumble since May, pushing new filings for jobless benefits under the 400,000 mark for only the second time in 25 weeks. It looks good, and it surprised a lot of economists. But let's refrain just yet from declaring this as the start of something big. Indeed, new claims dipped under 400,000 several times in the early months of this year, but it didn’t mean much, at least not by the only standard that matters at this point: job growth. The growth in private nonfarm payrolls has weakened considerably since the spring, with August’s report indicating virtually no change. Does today’s surprisingly strong dip in claims foretell of better days ahead for the labor market? Perhaps, but you’ll excuse me if I remain a wee bit skeptical until further notice. The dip under 400,000 earlier this year looked like the real deal for a time, and it was based on more than one data point. But stuff happened and so the revival turned out to be an imposter. Perhaps the second time’s the charm, but it’ll take much more than one (so far) brief flirtation under 400k.

    Initial Claims Beats By Multiple Standard Deviations As BLS Revisions Jump Again - We grow weary of reporting the consistent statistical anomaly that is the prior revision UP in the initial jobless claims. Headlines will read of the impressive job 'improving' situation as initial claims fell 37k on the week (a two standard deviation improvement which seems extremely unlikely given the macro/micro backdrop). Once again proving their ineptitude, the claims print was massively better than even the most optimistic economist estimate - an incredible six standard deviations better than consensus. This is the lowest initial claims print since April 1st (ironic really) and only the second time below 400k in the last 25 weeks - though for a moment we must have some hope that this is a trend as ES pops 10pts. Via Bloomberg (we couldn't resist) from TD Securities' Eric Green: "If its too good to believe, it probably is, and the BLS says as much"

    Employment: Comment on preliminary annual benchmark revision - This morning the BLS released the preliminary annual benchmark revision of +192,000 payroll jobs. The final revision will be published next February when the January 2012 employment report is released February 3, 2012. The annual revision is benchmarked to state tax records. From the BLS:  Establishment survey benchmarking is done on an annual basis to a population derived primarily from the administrative file of employees covered by unemployment insurance (UI). The time required to complete the revision process—from the full collection of the UI population data to publication of the revised industry estimates—is about 10 months. The benchmark therefore determines the final employment levels ..This graph shows the impact of the preliminary benchmark revision on job losses in percentage terms from the start of the employment recession. The red line on the graph is the current estimate, and the dotted line shows the impact of estimated coming benchmark revision. This puts the current payroll employment about 6.7 million jobs below the pre-recession peak in December 2007. Still very ugly.

    It’s Man vs. Machine and Man Is Losing - In the man-versus-machine competition, machine is winning. And it’s not just Watson beating humans on “Jeopardy.” Since the recession ended, businesses had increased their real spending on equipment and software by a strong 26%, while they have added almost nothing to their payrolls. In August, new orders and shipments of “capex goods” — defined as nondefense capital goods excluding aircraft — increased by 1.1% and 2.8%, respectively. In the same month, private payrolls (adjusted for the Verizon strike) edged up a mere 62,000. For all the talk of uncertainty, the increase in orders is a sign that companies are optimistic about the future. After all, no executive would expand production facilities if he or she thought customer demand was about to stagnate. In addition, the gain in shipments — up by nearly a 19% annual rate so far this quarter — suggests at least a modest gain in gross domestic product. After the shipment numbers were released, economists at J.P. Morgan raised their estimate for third-quarter real GDP growth to 1.5% from a previous 1.0%.

    Will robots steal your job? - If you're taking a break from work to read this article, I've got one question for you: Are you crazy? I know you think no one will notice, and I know that everyone else does it. Perhaps your boss even approves of your Web surfing; maybe she's one of those new-age managers who believes the studies showing that short breaks improve workers' focus. But those studies shouldn't make you feel good about yourself. The fact that you need regular breaks only highlights how flawed you are as a worker. I don't mean to offend. It's just that I've seen your competition. Let me tell you: You are in peril. At this moment, there's someone training for your job. He may not be as smart as you are—in fact, he could be quite stupid—but what he lacks in intelligence he makes up for in drive, reliability, consistency, and price. He's willing to work for longer hours, and he's capable of doing better work, at a much lower wage. He doesn't ask for health or retirement benefits, he doesn't take sick days, and he doesn't goof off when he's on the clock.

    Job Losses Across the Developed World - Across the developed world, the biggest job losses in the 2008-9 downturn were in mining, manufacturing and utilities, according to new data from the Organization for Economic Cooperation and Development. Here’s a chart showing job losses and gains by sector for a selection of developed countries. Bars above the horizontal axis show industries that added jobs, and bars below the axis show industries that lost jobs. The red bars refer to jobs lost in mining, manufacturing and utilities:  Across the entire O.E.C.D., job losses in this sector equaled 35.3 percent of total employment changes in 2008 and 2009. The biggest gains, by contrast, were in community, personal and social services (the light blue bars). This is probably no surprise to people who have been following job trends in the United States, where the health industry has been going gangbusters in both good and bad economies. But actually growth across the broader sector has been smaller in the United States than elsewhere in the developed world.

    Analysis: Stagnant U.S. jobs market bodes ill for world economy  (Reuters) - Record-high long-term unemployment is testing politicians and central bankers to the utmost as the impact of a shortfall in demand is amplified by an aging population, a mismatch of skills and inadequate efforts to get people back to work. That's a summary not of Europe, typically associated with rigid hiring and firing laws and excessive non-wage costs, but of the United States, long renowned for a labor market as dynamic as its entrepreneurs. America's jobs machine is now spluttering badly, an ominous development for businesses worldwide hoping for a revival in the world's largest economy to relieve the gloom cast by the euro zone debt crisis. Figures due on October 7 are likely to show the unemployment rate stuck at 9.1 percent in October despite near-zero interest rates. Alarmingly, an unprecedented 30 percent of the jobless have been out of work for a year -- a stagnant pool of workers whose job prospects can only decline as their skills rust. "There is clearly a risk for the United States of repeating the experience in European countries of cyclical unemployment turning into structural unemployment,"

    Even if Congress passes entire Obama jobs plan, economists say high jobless rate will linger - Even if Congress heeds President Barack Obama’s demands to “pass this bill right away” and enacts his jobs and tax plan in its entirety, the unemployment rate probably still would hover in nosebleed territory for at least three more years. Why? Because the 1.9 million new jobs the White House says the bill would produce in 2012 falls short of what it’s needed to put the economy back on track to return to pre-recession jobless levels of under 6 percent, from today’s rate of 9.1 percent. That’s how deep the jobs hole is. The persistent weakness of the U.S. economy has left 14 million people unemployed and more than 25 million unable to find full-time work. Economists of all stripes pretty much agree that it will be a long, hard road no matter what Congress does. Right now, the Republicans who run the House and the Democrats who lead the Senate aren’t finding much common ground. Obama estimates his American Jobs Act would lower unemployment by just a single percentage point by next year, to just over 8 percent, heading into the 2012 presidential election.

    America faces a jobs depression - Robert Reich - Since the start of the Great Recession at the end of 2007, the potential labor force of the United States – that is, working-age people who want jobs – has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000. In other words, we're in a deep hole – and the hole is deepening. In August, the United States created no jobs at all. Zero. America's ongoing jobs depression – which is what it deserves to be called – is the worst economic calamity to hit this nation since the Great Depression. It's also terrible news for President Obama, whose chances for re-election now depend almost entirely on the Republican party putting up someone so vacuous and extremist that the nation rallies to Obama regardless. The problem is on the demand side. Consumers (whose spending is 70% of the economy) can't boost the American economy on their own.  Businesses, for their part, won't hire without more sales. So we're in a vicious cycle. The question is what to do about it. When consumers and businesses can't boost the economy on their own, the responsibility must fall to the purchaser of last resort. As John Maynard Keynes informed us 75 years ago, that purchaser is the government

    Obama: U.S. Has Become a ‘Little Soft’ - President Barack Obama on Thursday said the U.S. has lost some of its competitive edge and gotten a “little soft.” Mr. Obama said his administration has been tough on the country’s trading partners and tried to strengthen U.S. manufacturing. “This is a great great country that had gotten a little soft and we didn’t have that same competitive edge that we needed over the last couple of decades,” Mr. Obama said in response to a question about the country’s economic future. “We need to get back on track.” Mr. Obama has faced heavy criticism for his handling of the economy, and the high unemployment rate –9.1%– is threatening his re-election bid. Despite his concern, Mr. Obama said he wouldn’t trade positions with any country on Earth. “We still have the best universities, the best scientists, best workers in the world; the most dynamic economic system in the world,” he said. “We just need to bring all those things together.”

    Allowing High Unemployment Is a Choice Our Government Is Making - The government has a lot of power to take actions that would increase the number of Americans with jobs. By not taking these actions, our political leaders are making the choice to allow unemployment to remain high. If there aren’t enough jobs, the government can simply create new government jobs. As long as the government can easily borrow money or raise more money, the United States can directly pay people to do jobs that need doing. The government can hire millions of new teachers, police officers, firefighters, road maintenance workers, crossing guards, people to repair schools or retrofit dwellings for energy efficiency or even ditch diggers. To bring down unemployment, the government can even go beyond just creating new jobs. It is a well established legal principle that not only can the government offer to hire people who are unemployed, but the government can actually force unemployed individuals to have a job. We are currently fighting multiples wars, and during a previous war, the federal government conscripted people into the military.  The example shows the extreme power the federal government has to radically reduce unemployment.

    Tell The Story Right: The Jobs Plan We Need, Part 1 -  After seeing the economy bleed jobs for so long, it was hard to watch without ambivalence as President Obama finally rose on Thursday to call for a transfusion of public funds for job creation. I felt some measure of relief: at last, our national leaders are paying attention to the suffering caused by economic policies that have polarized wealth, exported jobs, and made people afraid to spend money. But after all this time, my doubts remain strong: Is it too late to save the body politic? Is the remedy commensurate with the problem? Or is it merely the 2012 campaign gearing up, a gesture toward recovery rather than a cure?  Despite right-wing opposition, the action we need to demand is much bigger, deeper, and more transformative than Mr. Obama’s proposal. It is a hard challenge to go on wanting all that is right and necessary when many voices are telling you to settle for whatever they say you can get. But right now, it is the only worthy challenge. The essential—and often overlooked—point about job creation is that all jobs drive prosperity to the extent that every person who has money to spend on rent, groceries, goods, services, and life’s pleasures initializes a flow that ripples through the economy.

    Tell The Story Right: The Jobs Plan We Need, Part 2 - Public policy should be driven by a few essential questions: Who are we? What do we stand for? How do we want to be remembered; what is our legacy to the future? These foundational questions underpin this second essay on the jobs plan we need. Before you dismiss this out of hand as absurdly idealistic, impractical, and altogether unreal, I ask you to consider where that response may originate. Take a breath and check in with yourself. That dismissive voice in my head is linked to a powerful visual image, one implanted in childhood: I see adult faces, wearing expressions of amused scorn, condescending to correct my childish views. “My dear girl,” one of the voices says, dripping with sarcasm, “you have no idea what life is really about.” A valid purpose is not discredited because it will take a great deal of time and effort to attain. A valid purpose is a guiding star to steer by, a way to check our alignment with worthy moral and ethical principles, a goal to spur us on. Even if it takes a million steps to arrive, setting out to fulfill it puts us on the right path, bringing us closer each day. A valid purpose is a journey worth undertaking.

    Chinese Currency Bill: A No-Cost, Bipartisan, Long-Term Jobs Measure - Yesterday, we learned that Harry Reid moved up a vote on a bill targeting China’s alleged currency manipulation ahead of the American Jobs Act. Improving the balance of trade with China, which forcing a revaluation of the yuan would accomplish as a kind of monetary stimulus, would have a greater economic and jobs impact than the short-term stimulus efforts that have been proposed, and based on past experience, it would have a more likely chance of passing Congress. Yet the Obama Administration has eschewed this more aggressive approach toward China’s currency manipulation. They now say they are “reviewing” the bill, and that they share its goals. Let’s review the bill together! The legislation is an amalgam of two different efforts. A bill co-sponsored by Sherrod Brown (D-OH) and Olympia Snowe (R-ME) would give unions and industries greater ability to file claims against illegal Chinese trade practices on a case-by-case basis, and would allow the Commerce Department to factor in currency manipulation into any tariffs the US puts up as a result. This would increase duties against Chinese products, which are being effectively subsidized by currency manipulation.

    Cracking down on job-candidate credit checks - Last week, the California legislature sent the governor a bill that would ban most employers from running credit checks on job applicants. If the governor signs the bill into law (which this web site tells us he’s likely to), California will become the biggest get yet for those pushing for such laws around the nation. Is this just what a country full of unemployed people with wrecked credit needs? Or is it, as HR managers have been hollering, a way of hindering them from finding good, upstanding workers? The back story is as follows. A decade ago, about a third of employers ran credit checks on job applicants; today, some 60% do. HR types (and, of course, the Big Three credit bureaus) argue that credit checks help firms find reliable employees who are unlikely to steal from company coffers. Civil liberties types argue that pre-employment credit checks have a disparate impact on groups that tend to have lower credit scores, like minorities. Losing a job is one of the fastest ways to wreck your credit. Now, it seems, that same bad credit may hinder you from regaining a steady paycheck and mending your finances. Quite the vicious cycle. So who should win the debate? Should firms be banned from using credit checks in the hiring process?

    Obama Proposes Protecting Unemployed Against Hiring Bias - Mr. Obama’s jobs bill would prohibit employers from discriminating against job applicants because they are unemployed.  Under the proposal, it would be “an unlawful employment practice” if a business with 15 or more employees refused to hire a person “because of the individual’s status as unemployed.”  Unsuccessful job applicants could sue and recover damages for violations, just like when an employer discriminates on the basis of a person’s race, color, religion, sex or national origin. Mr. Obama’s proposal would also prohibit employment agencies and Web sites from carrying advertisements for job openings that exclude people who are unemployed. The Equal Employment Opportunity Commission has received reports of such advertisements but does not have data to show how common they are.

    How Does Inequality Affect Economic Growth? - Historically, many economists believed that a healthy degree of economic inequality was good for economic growth. Branko Milanovic explains in "More or Less": "The view that income inequality harms growth—or that improved equality can help sustain growth—has become more widely held in recent years. ... Historically, the reverse position—that inequality is good for growth—held sway among economists. The main reason for this shift is the increasing importance of human capital in development. When physical capital mattered most, savings and investments were key. Then it was important to have a large contingent of rich people who could save a greater proportion of their income than the poor and invest it in physical capital. But now that human capital is scarcer than machines, widespread education has become the secret to growth. . Moreover, widespread education not only demands relatively even income distribution but, in a virtuous circle, reproduces it as it reduces income gaps between skilled and unskilled labor. So economists today are more critical of inequality than they were in the past."

    Should there be a maximum wage? - We need a maximum wage to complement the minimum wage. That is, we need maximum pay ratios within companies and across sectors to put an end to chief executives getting paid more than 250 times what cleaning staff earn. Why? The top three reasons are:

    1. Greater equality: rising wage disparities are one of the key drivers of inequality. By putting a plug on both ends of the pay scale we help ensure decent living standards for all and avoid the negative consequences (eg higher crime, poorer public health) of living in a highly unequal society.
    2. The need to tame executive pay: extremely high levels of pay among executives have encouraged risk-taking behaviour (leading to the banking crisis) and have been found to hinder, not aid, the overall productivity of a company.
    3. Tackle over-consumption and debt: as social beings we constantly rate ourselves relative to others. Keeping up with the Joneses in an era of high inequality has led people to take on higher levels of debt and to over-consume at a level they and the planet cannot sustain.

    "Wages and Recovery" - Laurence Kotlikoff misrepresents the views of Paul Krugman and Jamie Galbraith in Five Prescriptions to Heal Economy’s Ills, by Laurence Kotlikoff, Bloomberg: Some prices and wages are set too high, thereby damping demand for output and for the workers needed to produce it. This is the standard sticky wage and price explanation for our economic malaise offered by Keynesian economists such as Paul Krugman and James Galbraith. I think there are fewer markets suffering from this problem than Krugman and Galbraith do, but there are enough such markets to make the case for government intervention. In comments, Jamie Galbraith corrects the record: ...I have never written, argued or believed that unemployment can be cured by cutting wages. Nor does that position have anything to do with Keynes, who wrote The General Theory to debunk this view. Keynes favored stable money wages, writing: "it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money wages..." It seems likely that Professor Kotlikoff has never read Keynes either. Here's Paul Krugman's dismissal of this idea: Wages and recovery.

    This Time May Not Be That Different: Labor Markets, the Great Recession and the (Not So Great) Recovery - Cleveland Fed -  The economy has been in recovery for almost two years. Still, the labor market is in bad shape. More than 14 million people are officially unemployed, and many others remain underemployed or have left the labor force. Not surprisingly, net job creation has also been relatively anemic, and we have gained back less than 20 percent of the jobs that were lost during the recession. The situation has analysts asking if this “jobless recovery” means that there is now something fundamentally different about the labor market. In this Commentary, we show that the labor market’s performance has largely been consistent with the path of output during the recession and the subsequent recovery. The jobless nature of the current recovery stems from weak GDP growth. There is little evidence of a fundamental change in the labor market.

    The Productivity Slowdown Reaffirmed - NY Fed - Many economic and financial variables experience episodes in which their behavior seems to change quite dramatically. These episodes can result from events such as wars, changes in government policies, or structural change in the economy. Productivity is a series that has shown occasional changes in its trend growth rate. During the post-war period, productivity growth slowed around 1973. Around 1997, however, it increased to a level similar to that observed during the 1948-73 period. Economists generally agree that productivity is the primary ingredient for sustainable growth in GDP and wages. The August productivity data release provided some clarification regarding trend—or long-run—GDP growth, but the news was not good: Following a resurgence of strong productivity growth in the late 1990s and early 2000s after nearly a quarter-century of slow growth beginning in 1973, the latest reading from a trend tracking model now indicates that slow productivity growth returned in 2004. In this post, we describe our “regime-switching” productivity model and share the model’s insights into the historical profile of high- and low-growth regimes as well as the outlook for productivity.

    Unrecoveries and the New Normal - Krugman - Larry Mishel has a very good piece systematically debunking the zombie claim that fears of regulation are holding back job creation. There is, literally, not a shred of evidence for this claim — not in the numbers, not in what businesses say. Yet it has been eagerly adopted not just by Republican politicians but by Chicago economists, Federal Reserve presidents, and more. I think the willingness of so many people to completely abandon any intellectual principles here, so that they can play for Team Republican — or maybe we should call that Team Oligarch — is part of what has me down these days. But there’s another point Larry raises here that is worth emphasizing. A lot of the argumentation for the regulatory thing comes from the belief that the failure to recover strongly from the 2007-2009 recession is unprecedented. You often hear assertions to the effect that in the past the economy has always rebounded strongly after a recession, so there must be something special at work here — and that something special must be the socialist in the White House. Yet the reality is that weak recoveries have actually been the norm for the last two decades: both the 1990-1991 recession and the 2001 recession were followed by prolonged “jobless recoveries”.

    Employers Hit By Unemployment Tax Hikes -- Companies have yet another reason not to boost hiring: rising unemployment taxes. Employers around the nation are getting socked with higher state unemployment tax bills as states are forced to shell out more than $1 billion in interest payments this month. More than 30 states have had to borrow billions from a federal fund to cover unemployment benefits for their jobless residents in recent years. And this is only the first of two tax spikes employers are contending with, on both the state and federal level. Come January, companies in 24 states could have to shell out between $21 and $63 more per employee in federal unemployment taxes. These hikes are the latest in a series of unemployment tax increases as states look to replenish their unemployment trust funds devastated by the Great Recession. Last year, employers paid 27.8% more in state jobless taxes,

    Slump Alters Jobless Map in U.S., With South Hit Hard - When the unemployment rate rose in most states last month, it underscored the extent to which the deep recession1, the anemic recovery and the lingering crisis of joblessness are beginning to reshape the nation’s economic map.  The once-booming South, which entered the recession with the lowest unemployment rate in the nation, is now struggling with some of the highest rates, recent data2 from the Bureau of Labor Statistics show.  Several Southern states — including South Carolina, whose 11.1 percent unemployment rate is the fourth highest in the nation — have higher unemployment rates than they did a year ago. Unemployment in the South is now higher than it is in the Northeast and the Midwest, which include Rust Belt states that were struggling even before the recession.  For decades, the nation’s economic landscape consisted of a prospering Sun Belt and a struggling Rust Belt. Since the recession hit, though, that is no longer the case. Now, with the concentration of the highest unemployment rates in the South and the West, some economists and researchers wonder if it is an anomaly of the uneven recovery or a harbinger of things to come.

    States Losing the Most Jobs to China - list of 10 and details

    The Aggregate Distribution of U.S. Household Income in 2010 - So, if you were a modern day illegal withdrawals specialist, seeking to go "where the money is" with respect to the incomes of those who earned it in 2010, where would you go?  To find out, we estimated the number of households within each $1,000 increment of total money income from $0 to $10,000,000 in the United States, using U.S. Census data. We then calculated the aggregate amount of income within each $1,000 income increment by multiplying our estimated number of households by the value of the midpoint of the income increment.  Our first chart shows what we found:  To make those values easier to read, we switched the horizontal axis to be in a logarithmic scale. Our second chart shows the results:  Here, we clearly see that most of the aggregate income earned by U.S. households in 2010 is to be found between the median household income figure of $49,455 and the mean household income figure of $67,530, which would put you in the neighborhood where Americans households collectively earn well over 50 billion dollars per year.

    CNNMoney: (interactive map) Middle class income falls ... but not everywhere -- For the typical American household, income fell during the recession. But middle class residents in some states were more fortunate than others. Nationwide, median household income fell to $50,046 in 2010, down 1.4% from 2007, according to Census statistics released last week. But while the Great Recession wreaked havoc across the nation, wide disparity among the states shows that not all the pain was shared equally. Some Americans were still able to get ahead despite soaring unemployment and the housing collapse.  In 21 states and the District of Columbia, households in the middle of the pay scale saw their incomes rise despite the recession, according to a CNNMoney analysis of the data. These lucky folks benefited largely from the growth of the federal government, higher energy and agriculture prices, and the rebound on Wall Street.

    The “success” of workfare when jobs are scarce - This year marks the 15th anniversary of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), the Bill-Clinton- and Newt-Gingrich-led overhaul of cash assistance to poor families with children.* One of the major changes of that law was adding work requirements so that most cash assistance applicants (generally single mothers) couldn’t receive help without heading into the world of market-based work.** When the bill passed, and unemployment was below 5%, there was some concern about what would happen when the economy slowed and jobs weren’t as easy to come by. We are now finding out. As this graph from the Center for Budget and Policy Priorities shows, as unemployment has sky-rocketed, and other social safety net program like SNAP (a.k.a. food stamps) have seen a surge in participation, Temporary Assistance for Needy Families (TANF) has barely budged.

    US Becomes a Center of Poverty-wage Manufacturing - Earlier this month, the World Socialist Web Site reported that production workers are now being hired at $12 an hour at Volkswagen's Chattanooga, Tennessee plant, and that BMW has opened a new assembly line in Spartanburg, South Carolina that employs mostly contract workers earning $15 per hour. These wages, among the lowest for autoworkers anywhere in the developed world, are the result of the unrelenting assault on living standards of American workers over the last three decades. This has reached new heights since the outbreak of the financial crisis in 2008. With the full backing of the Obama administration, US and foreign-based corporations are exploiting levels of mass unemployment and poverty not seen since the Great Depression in order to transform the US into a cheap labor platform in direct competition with Mexico, China and other low-wage countries. Tennessee, like nearly half of all US states, has an unemployment rate hovering around 10 percent, and its real jobless rate is probably double. When Volkswagen began taking applications for 1,700 jobs in Chattanooga, it received over 65,000 responses in the first three weeks. On the basis of cutting labor costs by at least a third at its US factory, Volkswagen is able to sell cars for $7,000 less than comparable models made in Germany.

    Amazon Workers Rediscover the Grapes of Wrath - Want to learn about the plight of unemployed workers during the Great Depression? Head to and order John Steinbeck’s Depression-era epic, “The Grapes of Wrath.” Want to learn about the plight of workers during our own Lesser Depression? Head over to Amazon’s warehouse in Lehigh, Pennsylvania, and watch them prepare your book for shipping.  What the book will give you is perhaps the most penetrating lecture on labor markets in the American canon. It comes as the Joad family has just completed a long, awful trip from the desiccated fields of Oklahoma to the rumored paradise of California. Their journey was propelled by an orange handbill that Pa Joad kept folded in his pocket: “Pea Pickers Wanted in California. Good Wages All Season. 800 Pickers Wanted.” It seemed to be a ticket to a better life.  When the family arrives in California, there’s no work. Just tents and hungry, hopeless people. A young man leaving the Hooverville they’ve just joined laughs ruefully at them: “They say they’s three hunderd thousan’ us folks here, an’ I bet ever dam’ fam’ly seen them han’bills.”  “If they don’ need folks,” asks Tom Joad, “what’d they go to the trouble puttin’ them things out for?”  “Look,” the young man says, “s’pose you got a job an’ work, an’ there’s just one fella wants the job. You got to pay im what he asts. But s’pose they’s a hunderd men. S’pose they’s a hunderd men wants that job. S’pose them men got kids, an’ them kids is hungry. S’pose a lousy dime’ll buy a box of mush for them kids. S’pose a nickel will buy at leas’ somepin for them kids. An’ you got a hunderd men. Jus’ offer ‘em a nickel -- why they’ll kill each other fightin’ for that nickel.”

    Foreigners filling temporary jobs at North Carolina farms - While more than one in 10 North Carolinians are without work, thousands of farm jobs that pay more than the minimum wage are being filled by immigrants, most of them from Mexico, through a legal, temporary work program. This year alone, North Carolina farmers were granted permission to hire 8,547 temporary foreign agricultural workers, by far the most of any state. This represents more than 10 percent of the state's agricultural workforce, according to the Employment Security Commission of North Carolina. The jobs, which pay $9.30 to $9.59 an hour, must first be advertised to Americans before foreign workers with H-2A visas — the name of the temporary agriculture work permits — can be hired to fill them. This has sparked a debate as to why these jobs are being filled by temporary immigrant workers and not U.S. citizens during a period of severe unemployment.  Farmers and industry advocates say Americans simply don't want these jobs because of the laborious and seasonal nature of the work.

    11 Ways America is Keeping Poor People Poor -  An ancient piece of common wisdom says the poor get poorer and the rich get richer (in fact it’s as ancient as the Bible).  We’ve all experienced this in small ways in our daily lives in the form of bank fees if our account falls below a certain minimum amount, or in the higher interest rates we pay on a loan given the fact that we don’t have a yacht to put up as collateral.  But lately it seems like this proverb has shifted to “the poor get poorer and holy crap don’t tax the rich — who else is going to generously provide menial minimum-wage jobs to the poor?!” In case it doesn’t go without saying, being poor is really super awful in ways most people fail to think about.  Well, “most people” might be stretching it, since statistically speaking, the percentage of Americans living in poverty is at its highest point in more than a decade, not to mention that the poverty line is $22,350 for a family of four.  Try supporting just yourself on that and see how not poor you feel. So for the sake of re-affirming the obvious, let’s dive into the actual reasons why the poor stay poor in America.

    Most Food Stamp Recipients Have No Earned Income - Some 70% of households that relied on food stamps last year had no earned income, a new report shows.  Click here for an interactive map. More than 40 million individuals and nearly 19 million households tapped the food stamp program in 2010, according to the U.S. Department of Agriculture. While the recession technically ended in 2009, a sluggish economic recovery left millions out of work or underemployed and leaning on the government for assistance last year. The Agriculture Department’s annual snapshot on the characteristics of food stamp households, released Friday, shows that seven in 10 households receiving food stamps had no earned income last year, though many got other forms of government benefits. Nearly 21% of households on food stamps also received Supplemental Security Income, assistance for the aged and blind. Some 21.4% received Social Security benefits. Just 8% of households also received Temporary Assistance for Needy Families, the cash welfare program.But some 20% of households had no cash income of any kind last year, up from 15% in 2007, the year the recession began, and up from 7% in 1990.

    Closing of Angel Food Ministries impacts Triangle food banks - Hurricane Irene, the deadly April tornadoes and the closing of a multi-million dollar national nonprofit have placed added strain on food banks in the Triangle, according to the Inter-Faith Food Shuttle, a Raleigh-based charity that stocks the pantries of disaster victims and other needy families. "Together we're not doing enough. If one of us disappears, it cripples everyone else,"  The Food Shuttle, like many Triangle nonprofits, is also seeing an increased demand for food assistance and a reduction in the number of donations coming in. "Our reserves have dwindled to nothing," Staton Bullard said. "We're so far down that we're at a critical shortage." Angel Food Ministries provided discount groceries to Triangle families for more than 17 years. Last week, it closed its doors, citing the economic downturn. Based out of Georgia, Angel Food Ministries once served more than 500,000 families in 45 states, including many in North Carolina.

    Upstate Food Pantry In Danger Of Shutting Down - One of the Upstate's largest food pantries is in danger of shutting down, if they don't receive some help soon. Tom Williams, executive director of God's Pantry in Greenville County, says they only have about a week's worth of food left. "This is the worst I've ever seen it," says Williams. The pantry serves Greenville, Spartanburg and Laurens County. So far this year, they've fed about 100,000 need people around the area, according to Williams. But donations are running only at 69% of what they typically bring in. Williams says he has boxes in his warehouse, but they're empty right now. He blames the problem on the poor economy, and the shortage of donations from churches, one of the pantry's main sources of help. "Churches are really struggling right now," he says.

    Local food pantries are in crisis - Video - Workers at one South Valley food bank say they haven't seen their shelves this empty in more than twenty years. This pantry in Visalia is running low on canned food items and it's not alone. Food pantries throughout Tulare County have been facing a shortage. Not only have food banks seen an increase in demand because of the sluggish economy... but food manufacturers have cut back on their donations due to increasing food costs.  "Food prices have been very high, so that not only hurts people on a tight budget, it also means that less food comes here. So we've just in the last few months, we've seen a 45% cut in USDA commodities."  Experts say the food shortage crisis will only get worse... with the demand increasing even more during the holidays.

    Local pantries hungry for donations - "I can't afford to spend much money. I'm on Social Security and can't work no more," By some estimates, thousands of county residents find themselves in a similar position. They rely on more than 100 churches and nonprofit groups across the county that help feed the needy. But as schools prepare to launch one of the county's biggest food drives in October, some pantries already are having to cut back on how much they hand out because donations are down. "We have a dire need for food. The number of people we're seeing has now doubled," Since 2007, the number of households in the county receiving food stamps has more than doubled - from 6,300 to more than 15,600, county Social Services Director Marcia Kennai said. Last school year, more than 19,000 students qualified for free and reduced-price meals, county officials said. Many more families with problems putting food on the table don't even qualify for assistance. 

    One in Five New York City Residents Living in Poverty - Poverty grew nationwide last year, but the increase was even greater in New York City, the Census Bureau1 will report on Thursday, suggesting that New York was being particularly hard hit by the aftermath of the recession. From 2009 to 2010, 75,000 city residents were pushed into poverty, increasing the poor population to more than 1.6 million and raising the percentage of New Yorkers living below the official federal poverty line to 20.1 percent, the highest level since 2000. The 1.4-percentage-point annual increase in the poverty rate appeared to be the largest jump in nearly two decades.  Many New Yorkers were spared the worst of the recession, but the median household income has since shriveled to levels last seen in 1980, adjusted for inflation. Household income declined among almost all groups — by 5 percent over all since the beginning of the recession in 2007, to $48,743 in 2010.  Manhattan continued to have the biggest income gap of any county in the country, with the top fifth of earners (with an average income of $371,754) making nearly 38 times as much as the bottom fifth ($9,845).  Poverty among children under 18 rose 2.9 percentage points to 30 percent. Single mothers, blacks and adults lacking a high school diploma fared worst. Among Hispanic single mothers in the Bronx, the poverty rate was nearly 58 percent

    Reading, Pa., Knew It Was Poor. Now It Knows Just How Poor. - Ashley Kelleher supports her family on the $900 a month she earns as a waitress at an International House of Pancakes. Louri Williams packs cakes and pies all night for $8 an hour, takes morning classes, and picks up her children in the afternoon. Teresa Santiago takes complaints from building supply customers for $10 an hour, not enough to cover her $1,900 in monthly bills.  These are common stories in Reading, a struggling city of 88,000 that has earned the unwelcome distinction of having the largest share of its residents living in poverty, barely edging out Flint, Mich., according to new Census Bureau data. The count includes only cities with populations of 65,000 or more, and has a margin of error that makes it difficult to declare a winner — or, perhaps more to the point, a loser.  Reading began the last decade at No. 32. But it broke into the top 10 in 2007, joining other places known for their high rates of poverty like Flint, Camden, N.J., and Brownsville, Tex., according to an analysis of the data for The New York Times by Andrew A. Beveridge, a demographer at Queens College.

    Peoria Got a Raise - In the first quarter of this year, the average weekly wage in the United States increased by 5.2 percent, to $935, compared to the same period last year. But in Peoria County, Ill., workers received an average raise of 18.9 percent, to $944. That’s according to a report released Thursday by the Bureau of Labor Statistics on employment and pay for the 322 largest counties. The county with the biggest cut in average weekly wages was Williamson County, Tex., where wages fell 3.8 percent, to $953. In raw dollar figures, New York County (Manhattan) once again had the highest average weekly wage, at $2,634, and the biggest raise, at $222 (9.2 percent). The county with the biggest increase in employment was also in the Midwest: Elkhart County, Ind., which gained 6.2 percent more jobs over the year, compared to the national average of 1.2 percent job growth. Elkhart County was primarily buoyed by manufacturing, which added 5,125 jobs over the year (12.4 percent).

    Illinois budget deficit to hit $8 billion despite tax increase - Despite a major income tax increase, the state of Illinois is expected to end the budget year more than $8 billion in the red, according to a report set to be released Monday by a nonpartisan tax watchdog group. The Civic Federation analysis found that while lawmakers cut spending for state agencies this year, the reductions were offset by higher pension costs and the growing cost of paying back years of increased borrowing to keep Illinois afloat. In all, the state will be $8.3 billion short on June 30 if nothing is done, according to the report. The majority of that money, roughly $5.5 billion, will come in the form of unpaid bills from companies that provide everything from meals for the elderly to toilet paper for prisoners. Another $1.2 billion is composed of Medicaid payments the state will push off until the next budget year, while the remaining $1.6 billion is owed to companies for tax returns and health insurance bills for state workers.

    California And Bust - The smart money says the U.S. economy will splinter, with some states thriving, some states not, and all eyes are on California as the nightmare scenario. After a hair-raising visit with former governor Arnold Schwarzenegger, who explains why the Golden State has cratered, Michael Lewis goes where the buck literally stops—the local level, where the likes of San Jose mayor Chuck Reed and Vallejo fire chief Paige Meyer are trying to avert even worse catastrophes and rethink what it means to be a society.

    Watchdog budget options: Tolls on LSD, city income tax, privatized garbage - Chicago’s City Hall watchdog agency is putting forth more than $2.8 billion in spending cuts and revenue hikes – from imposing a city income tax to charging tolls on Lake Shore Drive to privatizing trash collection – in order to ease a massive budget deficit. In his latest menu of “budget options,” Inspector General Joe Ferguson’s office lays out 63 ideas to mitigate a projected $635 million city budget deficit for 2012. The options hit both sides of Chicago’s balance sheet, and range from often-discussed policy proposals to pie-in-the-sky political non-starters. The single largest-netting option is imposing a city income tax, which the report estimates could bring in $500 million a year to the city’s coffers. Another $450 million could come from broadening the city sales tax to include more services, while raising water and sewer rates could net $380 million a year, according to the report. As for spending cuts, the report estimates Chicago could save $190 million by cutting nearly 1,400 management jobs in city government, including more than 700 firefighters and more than 300 police officers. Privatizing the garbage collection for all city households – something Mayor Rahm Emanuel has suggested on a smaller scale – could save another $165 million.

    New York's roads, bridges need expansive, expensive work - New York state faces an extraordinary infrastructure problem as it seeks to repair roads and bridges built decades ago. he state's crumbling infrastructure isn't going to get better any time soon, and it's going to be expensive to repair. The state Comptroller's Office estimates that New York needs a remarkable $250 billion to maintain its transportation, sewer and water systems over the next 20 years — but about $80 billion of that total is unfunded. The troubled picture comes as Washington and Albany are grappling with budget woes that have limited funding for roads and bridges. New York in 2009 lowered its capital spending on transportation repairs, but federal stimulus money picked up some of the slack. Yet the stimulus money is soon to run out. "The central theme is that we have immense infrastructure needs and very limited resources to tend to those needs, and that presents some significant challenges,"

    New York struggles to bridge $80 billion chasm for infrastructure needs - The state faces an extraordinary problem as it seeks to pay for repairs needed on more than one of every three bridges across New York and other crumbling infrastructure: an $80 billion funding shortfall. The troubled picture comes as Washington and Albany grapple with budget woes that have limited funding for roads and bridges. New York in 2009 lowered its capital spending on transportation repairs, but federal stimulus money picked up some of the slack. Yet the stimulus money is soon to run out. "The central theme is that we have immense infrastructure needs and very limited resources to tend to those needs, and that presents some significant challenges," said Tom Nitido, deputy state comptroller. An analysis of the 17,365 bridges in the state by Gannett's Albany Bureau found that 36 percent have a condition rating less than 5 — the threshold that requires repair. Bridges in New York were built on average in 1965, records show, and 46 years later, many are showing their wear. Bridges have an average life of about 50 years, industry experts said.

    EPA: N.J. needs $8B fix to antiquated sewer systems = "Most people wouldn’t have any idea what this is," said Sheehan, the head of a nonprofit group that watches over the river, "but come out here enough and you’ll figure it out. You’ll smell it." At more than 200 spots like this in New Jersey, outdated sewer systems pour more than 23 billion gallons of raw sewage into the water each year, according to the U.S. Environmental Protection Agency. And residents — including those who boat, kayak and fish these waterways — are usually never told when the sewage is flowing, officials say.   Even small rainfalls can cause a dirty cocktail of bacteria to spew from 224 nondescript pipes that are mostly in northern New Jersey, EPA says, posing a serious health risk to anyone who touches the water.  Frustrated by the state’s lack of progress, the federal agency is pressuring the Christie administration to fix the long-standing problem, which EPA estimates could cost more than $8 billion.

    Monday Map: Growth of Property Taxes by State - Today's Monday Map looks at the growth of property taxes between 2009 and 2010. The basic metric we use to judge property tax levels is the median real estate tax divided by the median home value. This figure more than doubled in Louisiana, rising over 140% (though it should be said that Louisiana still ranked lowest overall in 2009, and only jumped to 3rd lowest for 2010.) North Dakota and Indiana are the only two states that saw a decrease.

    U.S. Cities Grapple With Sliding Taxes as Costs Rise, Aid Falls -- For U.S. cities, the effects of the real-estate collapse and the recession it helped spark in 2007 are showing few signs of ending. More than half, 57 percent, of municipal officials said finances were worse in fiscal 2011 than in 2010, the National League of Cities said today, citing a survey of municipal officials. Inflation-adjusted revenue is headed for a fifth- straight annual drop, while worker health-care and pension costs rose for more than 80 percent. Half said state aid has declined. The good news was that the number of city officials saying their communities are worse off was lower compared with the 87 percent who said that last year. The number who indicated things had improved rose to 43 percent from 13 percent. “We’re in a situation where they don’t see it getting worse, but it’s not getting any better,”

    Strapped states crave bigger online tax bite (Reuters) - With holiday shopping season near and billions of dollars in sales tax at stake, financially strapped state and local governments are pushing to collect more tax on online purchases, but real progress will require action in Washington where political gridlock prevails. Recent efforts by California made headlines nationwide when, one of the world's largest online retailers, agreed to begin collecting taxes on sales in that state as early as next September. The state, which faced a $25 billion budget deficit at the beginning of the year, is estimated to be losing $1.7 billion annually in uncollected online sales taxes. Sales over the web are the fastest growing area of retailing and states are anxious to up their share. Deloitte LLP projects that this holiday season, retail sales overall will grow up 3 percent, but 14 percent online. Goldman Sachs has estimated that online shopping will jump from less than 10 percent of retail sales to over 17 percent by 2020.

    Nine American Cities Going Broke - Of the 7,800 bonds in the U.S. secured by state or local governments, only 25 are currently speculative-grade, or junk-bonds, rated by Moody’s Ba1 or lower. Only municipalities received such low ratings, and the reasons vary. Moody’s report, “A Look at Speculative-Grade Local Governments in the Wake of the Recession,” details the economic issues that have lead each into junk-bond territory. 24/7 Wall St. has analyzed the nine worst cities, whose credit rating is Ba2 and lower. Each of these municipalities faces a unique situation, Moody’s explains, and the list is not indicative of a greater trend. Most municipalities, Moody’s writes in the report “face deeper and longer-standing problems than investment-grade issuers.” Analysis by 24/7 Wall St., however, reveals a number of commonalities between the lowest-rated areas. For instance, a number of the municipalities on the list are facing shrinking tax bases possibly exacerbated by the recession and high unemployment. Some cities, such as Detroit and Pontiac, have had their economies devastated by the recession. Their populations have decreased dramatically and struggling major tax-paying corporations have contributed much.

    U.S. Crime And GDP: Falling Together - IT MAY be of little comfort to their residents, but there was at least some good news for the American states hardest hit by recession, in the regional crime data recently released by the US Department of Justice. Nationwide, crime rates have been falling for two decades, a trend that continued through the recession. The latest figures reveal the surprising depth of the decline in property crime between 2007 and 2010. In the states which suffered the biggest drops in per-person income, such as Nevada, the rate of property crime has also come down most. If such crime is a rational act, one might expect it to increase as residents get poorer and more desperate for cash. But the recession also hit the incomes of the victims of crime, perhaps reducing the opportunities for criminals to steal from them. This second effect seems to have been greater during the recession, and in fact the correlation is strongest during its worst period, 2008-09. Other plausible explanations can't be ruled out; perhaps criminals, or at least those most likely to commit crime, are migrating to growing states. Others may be reducing police budgets less, or locking up more criminals, for reasons unrelated to economic performance. Whatever the cause, the general downward trend in crime is some small relief in tough economic times.

    Detroit prison to close, 2,000 face layoffs to fill state budget gap -- The Mound Road prison in Detroit will close, about 2,000 prison employees face layoffs and tens of thousands more state employees will get four unpaid days off in 2012, under budget-balancing plans announced Wednesday by the administration of Gov. Rick Snyder. The prison closing, furloughs and a handful of other measures are aimed at saving state taxpayers about $145 million in the 2011-12 state fiscal year, which begins Saturday. They were announced after talks with state employee unions failed to produce contract concessions to close the gap. Among the most controversial moves -- and the one most likely to lead to major state employee layoffs -- is a plan to turn over all prison health care and prison mental health services to a private contractor. Union representatives and Democrats in the Legislature denounced the moves as counterproductive and wrongheaded, predicting the savings won't materialize. Closing the Mound prison is a betrayal of assurances the governor made earlier to keep it open, they also said. Prison officials said Wednesday that the prison is expensive to run and unneeded as prisoner populations decline.

    21,000 Detroiters losing welfare benefits - Roughly 1 in 10 children in parts of Detroit and Flint will lose welfare benefits Saturday, when cash benefits for families who've been on welfare 48 months or longer are cut off. Although nearly 41,000 people statewide will lose payments averaging $515 a month, the brunt of the impact will be felt in two of the poorest cities in the state, with Detroit accounting for more than half of those losing benefits, according to ZIP code records obtained by The Detroit News through a Freedom of Information request. The results show high concentrations in neighborhoods deeply afflicted with blight, crime and poverty. In Detroit's 48205 ZIP code, a roughly five-square-mile section of the northeastern part of the city, nearly 2,000 adults and 1,500 children will be cut off. "I think it's tragic," said state Sen. Bert Johnson, D-Highland Park, whose district includes the 48205 ZIP code. "You can't have high violence and crime and poverty and expect that Detroit's going to be able to compete in its comeback."

    8 Ways US Cities Are Slashing Spending And Cutting Services: Municipalities expect major spending cuts amid revenue shortfalls. According to the National League of Cities, revenues will decline another 2.3% this year on lowered state aid and a smaller tax base. The NLC surveyed 272 cities across the US to see how each city planned to cut back. We ranked the 8 most popular actions. (slide show)

    Oil refineries seek huge tax refunds -— Some of the nation's largest oil refineries are seeking huge tax refunds that could force school districts and local governments across Texas to give back tens of millions of dollars they were counting on to pay teachers and provide other services. The refineries want the tax breaks in exchange for buying pollution-controlling equipment. But the cost to public schools would be dear, coming only months after lawmakers slashed education spending by more than $4 billion. If a three-member commission appointed by Gov. Rick Perry grants the refunds, nearly half the money would be taken from schools. Classrooms in cities with refineries would be hurt most. "We were already cut at the knees as it is, but more cuts? It's appalling," said Patricia Gonzales, president of the parent-teacher organization, which was created this past summer after budget cuts left the school without basic supplies such as pencils and paper towels. The Texas Commission on Environmental Quality is evaluating 16 refund requests that could add up to more than $135 million, What's more, if the commission grants the requests, at least 12 other refineries that have not sought a refund also could qualify.

    Law drives school lunch price hike - The price of school lunches increased this year for students at many area districts with prices expected to continue to rise in the future as school officials across the country grapple with the requirements of a new federal child nutrition law. The child nutrition bill, signed into law by President Obama in December, initially made headlines for requiring school districts to reduce fat and increase the selection of fresh fruits, vegetables and whole-grain options in order to make school lunches healthier. The precise nutrition requirements haven’t yet been established, so school districts don’t yet know exactly how many servings of fresh produce and whole grains they’ll have to include in each lunch — or how much more it will cost to do so. But some families are feeling the price-pinch already. Under a little-noticed provision of the child nutrition law, many districts must begin bringing their prices in line with what it costs to prepare the meals, eventually charging an average of $2.46 per lunch. That provision contributed to several price increases this fall, with more on the way, local school district food service directors said.

    As California State Tuition Rises, Financial Aid Offices Struggle to Adjust - Faced with drastic cutbacks in state financing, U.C. tuition increased 18 percent this school year, and the university’s Board of Regents is expected to vote on a plan to raise tuition 8 percent to 16 percent a year through 2015-16. With the cost of rent, food and books also soaring, more students like Mr. Seman are scrambling to be able to afford their education.  The financial aid department is hustling to meet the increased demand, and some officials and students worry that the situation could undercut the university’s reputation as one of the nation’s foremost low-cost public education systems.  For the first time this year, the University of California1 will receive more of its money from student tuition than from the state — a shift that will inevitably put more pressure on students from middle- and low-income backgrounds. In a letter to parents and students about the recent tuition increase, Mark Yudof, the University of California president, struck an apologetic note, acknowledging the “economic uncertainties and hardship” facing many families.

    Seton Hall will lower tuition rate by $21K to match Rutgers for some incoming freshmen - Getting good grades and high SAT scores could save some Seton Hall University freshmen more than $21,000 a year in tuition costs under an unusual new program that could pit the Catholic school against Rutgers University for some of the state’s top students. Starting next fall, Seton Hall will match Rutgers’ tuition — which is currently $10,104 a year for most in-state undergraduates — if freshmen score at least 1,200 on the combined reading and math sections of their SAT tests and graduate in the top 10 percent of their high school class. Other students on the South Orange campus will continue to pay Seton Hall’s regular annual tuition rate, which is currently $31,440 before room, board and other fees are added.

    Bad Decade for Male College Grads - For years I’ve been tracking the decline in the real earnings of college-educated workers. Now, with the latest income statistics, we can see just what the decade of the 2000s has wrought.In terms of real earnings, male college graduates were absolutely pounded, taking a 9.7% decline in real pay from 2000-2010 (that’s bachelor’s only). Meanwhile female college grads saw no decline at all in real earnings. (we’re looking here at the real mean earnings of full-time workers 25 years and over). For every educational category, the same pattern holds: Males doing worse than females in terms of change in real earnings. This is not directly related to the sharper job loss for men, since this data covers only full-time workers. However, it does provide corroborating evidence that the labor market seems to have moved against male-dominated industries and occupations, affecting the college educated as well as workers with only high school diplomas.

    Big Change in Graduate School Loans Flew Under the Radar - When Congress recently compromised on balancing the budget, it chose to “save” Pell grants for undergraduates by throwing Stafford Loan for graduate students under the bus. It is unclear why this particular horse trade was necessary, and I am not even saying it was the wrong thing to do, but I do think people who might care (law students, law professors) should at least know about the change.  According to a recent article out of the Unviversity of Illinois, federal Stafford loans for graduate and professional students will no longer include an interest subsidy, which in the past kept interest from accumulating while students were in school. Students can still defer paying interest until after they graduate, but it will accumulate in the meantime. This will be true of all loans taken out in the Fall of 2012 until the law changes. This change is estimated to save the federal government $18 billion over the next 10 years. It could also cost individual students several thousand dollars, depending on how long their graduate studies last. Graduate students are currently allowed to borrow up to $8,500 annually through a subsidized Stafford loan, and another $12,000 in unsubsidized loans. After that they can get Graduate Plus loans — which carry a 7.9 percent interest rate vs. 6.8 percent for Stafford loans — up to the cost of their attendance. Medical students can borrow more in Stafford loans — up to $40,000.

    U.S. Still Dominates in Research Universities - The chart, based on new data from the Organization for Economic Cooperation and Development, shows the distribution of the top 50 universities for a range of disciplines. Rankings are based on citations of work coming from each university’s department. The darker blue bars at the bottom of the chart refer to American universities. And as you can see, at least at the post-secondary level, we still have some top-notch schools. In fact, for every discipline shown except for the social sciences, a majority of major research institutions are in the United States. Even in the social sciences a plurality of the top departments are based in the United States. Across all disciplines shown, 80 percent of the top research departments are in the United States. The next-highest share is in Britain (light blue bars), which is host to 10 percent of the world’s top research departments. American tertiary education dominance may not last forever, though. The share of residents who hold doctorates is lower in the United States than in many other countries, as shown in the chart below. Indeed — partly because the rest of the American education system is so weak — many of the students attending American doctorate programs are visiting from abroad.

    Bernanke’s Twist turns the screws on already battered pension funds  - When U.S. Federal Reserve chief Ben Bernanke pulled his latest confidence-restoring tonic out of his medicine bag last week, he could not have been expecting such a strongly adverse reaction from the markets, which practically choked on the stuff. Investors simply concluded that if the Fed is desperate enough to try bringing down already ridiculously low long-term interest rates – in what one wag dubbed “Operation Twist in the Wind” – the beleaguered U.S. housing market and the broader economy must be in as bad shape as the bearish prognosticators have been telling us. And if that’s the best the U.S. central bank can do, it must really be out of ammunition. Among those feeling the market letdown most acutely are big pension funds, which have yet to recover from the last global financial crisis and are one of the little noticed victims of the extended rock-bottom interest-rate policies of major central banks. “Pension funds are getting badly hurt again,”

    Calpers Investment Chief Says 7.75% Return May Be Tough to Meet for Years -  The California Public Employees’ Retirement System, with half its money in equities, will be hard-pressed to return 7.75 percent this year as the weak U.S. recovery and deepening debt crisis in Europe weigh on global stocks, its investment chief said. Calpers, the largest U.S. public pension fund, assumes it will earn an average of 7.75 percent annually to meet its obligations. It spreads losses and gains over 15 years to blunt the impact that annual swings may have on the amount of money the fund charges taxpayers to finance retirement benefits for government workers. “That’s going to be tough this year and maybe for the next few years,” Calpers Chief Investment Officer Joe Dear said in a Bloomberg Television interview yesterday. “This low-return environment is structurally driven, and there’s not a lot of policy to move it.” The fund earned 20.7 percent in the 12 months ended June 30, its best result in 14 years, led by gains in stocks and private equity. Since then, Calpers’s value has dropped by $20 billion to $218.6 billion as of Sept. 26, as global stocks declined 18 percent.

    Federal retirement plans almost as costly as Social Security - Retirement programs for former federal workers — civilian and military — are growing so fast they now face a multitrillion-dollar shortfall nearly as big as Social Security's, a USA TODAY analysis shows.The federal government hasn't set aside money or created a revenue source similar to Social Security's payroll tax to help pay for the benefits, so the retirement costs must be paid every year through taxes and borrowing. The government paid a record $268 billion in pension and health benefits last year to 10 million former civil servants, military personnel and their dependents, about $100 billion more than was paid a decade earlier after adjusting for inflation. And $7 billion more was deposited into tax-deferred accounts of current workers. In addition, the federal government last year made more than a half-trillion dollars in future commitments, valued in 2010 dollars that will cost far more to pay in coming decades.

    Black Is White - I wasn’t sure what the Social Security wage base was (it’s $106,800, by the way), so I Googled “payroll tax cap.” The number one hit is a post at a blog modestly called The American Thinker.  Anyway, the thrust of the argument is that we shouldn’t eliminate the cap on wages subject to the payroll tax because “America simply can’t afford it.” Such plans for expanding an already-huge entitlement are beyond irresponsible, they’re frightful.  Klein and Weller aren’t serious men.  When reading their ideas for Social Security expansion in this time of trillion-dollar federal deficits, one realizes that progressives are unconcerned about America’s fiscal crisis. You read that correctly. The argument is that increasing the wage base, which would bring in more revenues and reduce the deficit, is a bad thing—because of our fiscal crisis. This claim is based on the idea that uncapping the wage base would also mean that benefits would have to be uncapped. That does seem like the sensible way to do it. But the way the benefit formula is written, when you increase the wage base, revenues go up much more than benefits.

    Should Social Security Be Progressive? - My earlier rant on the Social Security wage base made me think of a more important question (actually, I was already thinking of it, hence the need to Google the earnings cap): Should Social Security be more progressive than it already is? The most common ways liberals want to make it more progressive are (a) eliminating the cap on taxable earnings altogether and (b) reducing benefits for high earners. For part of my brain the automatic answer is “yes,” but I think there is a reasonable argument for leaving things roughly the way they are. First, there’s a straight-up political argument. Social Security is popular because people feel like they earn their benefits. If people thought it was a covert redistribution program, then the high earners would definitely be against it, and most of the middle class probably would be too because of the American allergy to welfare. In fact, there are certainly people who think it is “pure welfare”, like the author of the post I criticized last time around. But it isn’t:

    Why Immigration Won't Fix Social Security - Periodically in some debate over social security and entitlements, someone will suggest that we simply throw open the immigration doors and let young, fresh immigrants come in and rebuild the bottom of the Ponzi scheme pyramid.  I used to think this was a good idea, but (while I remain in favor of more open immigration), I'm not sure it will work, for the reasons outlined below:

    • 1.  The places that send us immigrants aren't having so many kids.  In Mexico, for example, the population of children age 4 and under was 434,000 less in 2010 than it was in 1996. The result? The demographic momentum that fueled huge flows of Mexican migration to the United States has waned, and will wane much more in the future. Already, the net flow of illegal Mexican immigration northward has slowed to a trickle.
    • 2. The workers who most want to come aren't the same as the workers who are already here. Social Security does not just depend on the existing pool of workers; it depends on their output.  You cannot keep the pyramid going by replacing each retiring public accountant with 1.5 cleaning ladies and carpenters. 
    • 3.  America's capital is cultural as much as financial and physical.  We cannot bring in so many immigrants that we swamp the institutional structures:
    • 4.  An aging America is one that is going to be politically resistant to change.  Immigrants change things.  Therefore, politically this solution is going to be very tricky.

    Stop Obsessing Over Entitlement Reform -- In the 1970s, Jeff Madrick read Milton Friedman's Capitalism and Freedom. It enraged him. "[Friedman] argued that markets can solve most problems, and all we need is individual responsibility," says Madrick. "It's clear in studying economics that markets do not solve all or even most social problems." But Madrick, the editor of Challenge magazine and a former economics columnist for the New York Times, parlayed his furor into action: He's now the author of several books and numerous articles that argue in part that we can't rely on market forces to take care of the sick and the elderly. That's why on Oct. 4, he'll dispute the proposition "Grandma's benefits imperil Junior's future" at the live Slate/Intelligence Squared U.S. debate. "I still have one parent alive," he explains. "I know how necessary [social benefits] are, and what a great American achievement they have been." I caught up with Madrick earlier this week for a conversation about why we should worry about Medicare but not Social Security, and the real causes of the deficit crisis. Excerpts from the interview are below.

    Safety Nets and Their Cost -  The United States Coast Guard’s search-and-rescue division is considering some of the same trade-offs that are found in better-known safety-net programs related to unemployment and health care. Among other duties, the Coast Guard rescues people in, on and near United States waters. In addition to having highly trained life-saving personnel, the Coast Guard has ships, helicopters, planes and some of the world’s most modern life-saving equipment. Taxpayer financed, the Coast Guard every day offers its services free of charge to the people it rescues. In that regard, the search-and-rescue part of the Coast Guard is a kind of safety net –- taxpayers pay so that people can have help on the rare occasions when they need it. Safety-net programs have what economists call “moral hazard” as an unfortunate byproduct: recognizing that the government is standing by to help, some people do too little to take care of themselves.

    Health Care Reform Likely Heading to Supreme Court Before 2012 Election - The constitutionality of the Affordable Care Act seems headed for an earlier review by the Supreme Court than some expected.   A decision by the Administration to bypass an intermediate appeal from an adverse decision by a three-judge panel of the 11th Circuit Court means it’s now possible the Supreme Court could rule on the constitutionality of the Affordable Care Act’s individual mandate by June 2012, right in the middle of the election season. With multiple lower courts having reached conflicting decisions about the constitutionality of the new law, this issue was guaranteed to end up before the Supreme Court, but how soon was not clear. The Obama administration had the option of asking the full 11th Circuit Court of Appeals to re-hear is panel’s adverse decision. That intermediate step would probably have delayed the case from going before the Supreme Court until after the 2012 election. Yesterday evening the Justice Department said it will not ask for this re-hearing. This means the law will probably be appealed sooner to the highest court in the land.

    Supreme Court Is Asked to Rule on Health Care — The Obama administration asked the Supreme Court1 on Wednesday to hear a case concerning the 2010 health care overhaul2 law. The development came unexpectedly fast and makes it all but certain that the court will soon agree to hear one or more cases involving challenges to the law, with arguments by the spring and a decision by June, in time to land in the middle of the 2012 presidential campaign.  The Justice Department said the justices should hear its appeal of a decision3 by a three-judge panel of the United States Court of Appeals for the 11th Circuit, in Atlanta, that struck down the centerpiece of the law by a 2-to-1 vote.  “The department has consistently and successfully defended this law in several courts of appeals, and only the 11th Circuit Court of Appeals has ruled it unconstitutional,” . “We believe the question is appropriate for review by the Supreme Court.  “Throughout history, there have been similar challenges to other landmark legislation, such as the Social Security4 Act, the Civil Rights Act and the Voting Rights Act5, and all of those challenges failed,” the statement continued.  “We believe the challenges to the Affordable Care Act — like the one in the 11th Circuit — will also ultimately fail and that the Supreme Court will uphold the law.”

    US health insurance costs up 9% in year: study - The average cost for employer-provided family health care insurance has hit $15,073 a year, a burden that has more and more companies dropping coverage for employees, according to the Kaiser Family Foundation's annual study of health insurance costs. Just one to two percentage points of the nine percent increase can be blamed on the Obama administration's sweeping 2010 health care reform act, which increased insurance coverage for preventive medical services and allowed families to keep grown children under 26 on their health plans, according to Kaiser. In fact, the study pointed out, over 10 years the cost of health insurance provided by an employer has risen 113 percent, compared to national wages just 34 percent higher on average, and inflation of 27 percent. The employer contribution to insurance costs is more than double that of employees, but worker contributions are increasing faster, and rose 131 percent in the 10 years to 2011, the study showed.

    Health Reform and Skyrocketing Insurance Premiums - Family health insurance premiums surged 9% in 2011 according to new data from the Kaiser Family Foundation. That’s the fastest health insurance inflation since 2005: Insurance premiums (in red) thus outpaced both general inflation (gray) and worker earnings growth (blue) by a wide margin.That scary spike raises an obvious question: Is health insurance more expensive because of the health reform enacted last year? Kaiser crunched the numbers and says yes, but only modestly: The two provisions in the Affordable Care Act likely to have the greatest effect on the premiums for employer-sponsored health coverage in 2011 are allowing children up to age 26 to remain on their parents’ plans and requiring plans that are not grandfathered to provide preventive services with no patient cost-sharing. Our analysis, based in part on estimates provided by federal agencies when regulations implementing these provisions were issued, suggests that these provisions are responsible for 1-2 percentage points of the 9% increase in family premiums in 2011.

    Good News, Bad News About Employer-sponsored Insurance - Another major report on health care is out, bringing with it a mix of good and bad news. The good news is about the Affordable Care Act: The law has helped young adults, not only by giving hundreds of thousands of them access to health insurance but, in many cases, by giving the ones who already had insurance better coverage than before. The law has also bolstered basic benefits for some older working-age Americans. The bad news is about the health care system overall. Premiums for employer-sponsored insurance, which had been rising at a more modest pace, spiked again last year. Overall, the increase dwarfed the rise in wages and general inflation. “The average family policy now costs more than $15,000 per year, more than the cost of a Chevy Aveo or a Ford Fiesta,” according to Drew Altman, president of the Kaiser Family Foundation, which co-sponsored the survey. Also, more people now face high deductibles, of at least $1,000. 

    High-Deductible Health Plans Are Growing Rapidly - Here’s another important fact from the Kaiser Family Foundation’s recent survey of the employer health insurance market. As shown in the chart above, health insurance plans with high deductibles and a saving option (HDHP/SO) have been gaining market share rapidly. Only 1-in-25 enrollees were in such plans in 2006; today that figure is more than 1-in-6. The increased popularity of these plans–which involve Health Savings Accounts (HSAs, created by the 2003 tax law) or Health Reimbursement Arrangements (HRAs)–has come at the expense of health maintenance organizations (HMOs, down from 21% in 2005 to 17% in 2011), preferred provider organizations (PPOs, down from 61% to 55%), and point-of-service plans (POS, an unfortunate acronym, down from 15% to 10%). When paired with HDHPs, HSAs and HRAs are often called consumer-driven health plans because they give the patient / consumer more direct responsibility for health spending. In return for lower premiums, beneficiaries face higher cost-sharing. To help cover those out-of-pocket costs, beneficiaries make contributions to tax-advantaged saving accounts.

    “Skin in the Game” Fails As a Health Care Cost Control Idea - Health insurance premiums for a typical employer-provided family policy grew by an incredible 9 percent this year according to a new Kaiser Family Foundation study. Not only have premiums increased for employers, but the employee cost sharing has gone up as well. Compared to only a few years ago, there has been a big increase in high deductible plans, co-pays and co-insurance. In 2006, 10 percent of workers with employer insurance had a deductible as high as $1,000 for single coverage; now 31 percent face such deductibles. The first chart from the study shows how health insurance premium increases have far outpaced worker earnings. The second shows how more and more workers confront high deductibles.   From KFF: Charts like these should put to death the zombie myth that the way to control America’s incredible health care cost growth is to just give individuals more “skin in the game.” The idea that making Americans pay more out of pocket for their health care will reduce overall health care spending is false, and pursing it will be a complete failure.

    The Money Flow From Households to Health Care Providers - My last post, “The Role of Prices in Health Care,” contained a chart connecting health spending with health income. One reader commented: The graph misses a very major, and growing, component of the U.S. health care system. In between “the rest of society” and the “owners of health care resources” there is not only the “health care system” but also the United States government. This is sapping a not insignificant portion of the resources that could and should otherwise be devoted to the provision of actual health care services. I am not sure just what to make of this. Is the argument that government is a sinkhole that absorbs “a not insignificant portion of the resources” that could otherwise be devoted to health care proper? Are there not other intermediaries, such as private insurers? Or is the argument that government as a public provider of health insurance to millions of Americans siphons off financial resources and returns no benefits to society, while private insurers do? Consider the chart below. It illustrates that the flow of money through health care in the United States is complicated, with many detours on the way from households, which ultimately pay for all of the nation’s health care, to providers. Along the way are a number of pumping stations, employers among them.

    Health-Benefit Costs Rise Most Since 2005, Surpass $15,000 (Bloomberg) -- The cost for businesses to buy health coverage for workers rose the most this year since 2005 and may reach $32,175 for a family in 2021, according to a survey of private and public employers. The average cost of a family policy climbed 9 percent in 2011 to $15,073, according to a poll of 2,088 private companies and state and local government agencies by the Henry J. Kaiser Family Foundation in Menlo Park, California, and the Chicago- based American Hospital Association's Health Research and Educational Trust. The groups' findings, based on data collected through May, show that health insurance is consuming a bigger share of employer costs, preempting pay raises and making companies pass on more medical costs to their workers, benefit consultants said. The premiums reported are in effect for the full year. "Rising health-care costs have crowded out other elements of the compensation package," "That's the price we are paying, beyond the fact that health-care cost in and of itself continues to be more expensive."

    Cost of Family Health Coverage Doubled in Past Decade - While health-care reform continues to be debated in the nation's courtrooms and halls of power, Americans continue to shell out more for insurance.  A new study out today by the Kaiser Family Foundation, a nonprofit research group that tracks employer-sponsored health insurance, shows that the average annual premium for family coverage through an employer topped $15,000 in 2011, an increase of 9 percent over last year. Many businesses continue to cite the high cost of coverage in decisions not to hire new employees, dragging down an already-sputtering economy. According to the study, the cost of family coverage has doubled since 2001, when premiums averaged $7,061. The Kaiser survey included big and small companies using employer-sponsored coverage representing 60 percent of all insured Americans of working age. Some smaller businesses said they expected their premiums to moderate because they would be employing younger, healthier employees, making it less likely that the companies would incur high medical claims.

    Andy Grove on Reforming the FDA - In an important editorial in Science, Andy Grove, former Chief Executive Officer of Intel Corporation, advocates restricting the FDA to safety-only trials. Instead of FDA required efficacy trials patients would be tracked using a very large, open database. The biomedical industry spends over $50 billion per year on research and development and produces some 20 new drugs….A breakthrough in regulation is needed to create a system that does more with fewer patients. While safety-focused Phase I trials would continue under their [FDA] jurisdiction, establishing efficacy would no longer be under their purview. Once safety is proven, patients could access the medicine in question through qualified physicians. Patients’ responses to a drug would be stored in a database, along with their medical histories. Patient identity would be protected by biometric identifiers, and the database would be open to qualified medical researchers as a “commons.” These comparisons would provide insights into the factors that determine real-life efficacy: how individuals or subgroups respond to the drug.

    Milk, meat prices to continue to rise - Prices for milk and meat will continue to go higher, following increased worldwide demand since 2009, a national farmers' group said today. "Global demand for meat and dairy products remains strong and continues to influence retail prices here in the U.S.," said American Farm Bureau Federation economist John Anderson. "Many nations around the world rely on America to provide the food they need to improve their standard of living, particularly through the addition of protein to the diet. Strengthened demand for meats began in 2009, continued through 2010 and remains important as we look ahead to the close of 2011." That announcement came from  theIndiana Farm Bureau as their group's latest "market basket" quarterly survey was released. Sixteen food items checked by 23 shoppers in the Indiana survey during July, August and September tallied an average of $50.33, up $1.39 from April, May and June.

    Food Prices Still Elevated - It's been a few months since I checked the UN Food and Agriculture Organization's Food Price Index.  The above shows the latest data (through August).  As you can see, food prices, after rising very sharply in 2010, have stabilized near their recent peak level.  Presumably this has been aided in part by the slowdown in the global economy since the spring - though the leveling out began before then. It's important to note that this FAO index only goes back to 1990 but food prices have been much higher before then.

    2011 Corn and Soybean Yields - 2011 seems to have been a slightly crazy year weather-wise.  For example, Climate Progress notes that there have already been more FEMA declared disasters in 2011 than in any prior year, with three months still to go.  Between tornadoes and floods in the midwest, droughts in Texas, and hurricanes and tropical storms on the East Coast, the weather has been in the news a lot.  I was curious to know whether this showed up in a big way in crop yield data (since effects on crop yields are presumably the primary way that climate change might seriously threaten civilization). Of the three big field crops, the 2011 yield data are available from NASS for corn and soybeans, but not yet for wheat.  The raw yield data are above.  You can see that 2011 is a bit of a jog down but doesn't look like a marked departure from trend.  My assumption is that generally the trend is dominated by improvements in agricultural technology, while the year-to-year noise is mainly due to weather.

    ‘Superweed’ explosion threatens Monsanto heartlands - Today, 100,000 acres in Georgia are severely infested with pigweed and 29 counties have now confirmed resistance to glyphosate, according to weed specialist Stanley Culpepper from the University of Georgia. “Farmers are taking this threat very seriously. It took us two years to make them understand how serious it was. But once they understood, they started taking a very aggressive approach to the weed,”  “Just to illustrate how aggressive we are, last year we hand-weeded 45% of our severely infested fields,” said Culpepper, adding that the fight involved “spending a lot of money.” In 2007, 10,000 acres of land were abandoned in Macon country, the epicentre of the superweed explosion, North Carolina State University’s Alan York told local media.  Had Monsanto wanted to design a deadlier weed, they probably could not have done better. Resistant pigweed is the most feared superweed, alongside horseweed, ragweed and waterhemp. “Palmer pigweed is the one pest you don’t want, it is so dominating,” says Culpepper. Pigweed can produce 10,000 seeds at a time, is drought-resistant, and has very diverse genetics. It can grow to three metres high and easily smother young cotton plants.

    The Plight of the Honeybee - Dan Rather did an excellent report on the honeybee crisis, also known as colony collapse disorder (CCD).  For several years, honeybee colonies have been dying off in alarming numbers but no one has been able to conclusively determine the cause.  Turns out that scientists within the EPA have been voicing concerns over a class of insecticides called  neonicotinoids since they came up for registration 15 years ago.  But, instead of asking for independent third party studies of the insecticides, EPA administrators accepted the studies done by the chemical companies themselves.  This, as was noted in the report, is like asking the foxes to design the chicken coop.  Obviously, this is just one example, among many, of how politics and economics trump science in the determination of the safety of pesticides, of which there are over 20,000 currently registered with the EPA.  My favorite quote from the report, which I think perfectly encapsulates the problem of letting short term economic gain drive policy, comes from retired EPA scientist Bill Caniglio: "(The EPA) judged the risk to be not as important as the benefits, and in that balance, risk-benefit balance, it's obvious that they are not considering the collapse of the entire food chain.  They are dealing with the benefits from a short term perspective." The entire food chain!!! Ah, capitalism...gotta love it.

    Groundwater greed driving sea level rises - SLOWLY and almost imperceptibly the seas are rising, swollen by melting ice and the expansion of seawater as it warms. But there's another source of water adding to the rise: humanity's habit of pumping water from underground aquifers to the surface. Most of this water ends up in the sea.  Not many scientists even consider the effects of groundwater on sea level, says Leonard Konikow of the United States Geological Survey in Reston, Virginia. Estimates were published as far back as 1994 (Nature, DOI: 10.1038/367054a0), but without good evidence to back them up, he says. The last report of the Intergovernmental Panel on Climate Change said that changes to groundwater reserves "cannot be estimated with much confidence".  Konikow measured how much water had ended up in the oceans by looking at changes in groundwater levels in 46 well-studied aquifers, which he then extrapolated to the rest of the world. He estimates that about 4500 cubic kilometres of water was extracted from aquifers between 1900 and 2008.  That amounts to 1.26 centimetres of the overall rise in sea levels of 17 cm in the same period (Geophysical Research Letters, DOI: 10.1029/2011gl048604).

    E-Waste Hell - Ever wondered where your old TVs and computers go after you send them off for recycling or to charity?  Dateline’s Giovana Vitola has found a mountain of old electronic equipment dumped in what were once picturesque wetlands in Ghana in West Africa. The e-waste is poisoning everything around it, including the scavenging children burning the wires to try and get at the valuable metal inside. Meanwhile, acrid smoke drifts across the Agbogbloshie area of the capital Accra, and even the city’s main food market. Stamped across the equipment, the names of companies and government bodies in countries like Australia, Britain and the United States, with many hard drives still intact and containing potentially confidential information. Exporting hazardous waste to developing countries is strictly regulated, so how is some of it ending up in Ghana illegally? Do the companies disposing of it even know what’s happening?

    The Phony Solyndra Scandal - If Brian Harrison and W. G. Stover, the two Solyndra executives who took the Fifth Amendment1 at a Congressional hearing on Friday, ever spend a day in jail, I’ll stand on my head in Times Square.  It’s not going to happen, for one simple reason: neither they, nor anyone else connected with Solyndra, have done anything remotely criminal. The company’s recent bankruptcy — which the Republicans are now rabidly “investigating” because Solyndra had the misfortune to receive a $535 million federally guaranteed loan2 from the Obama administration — was largely brought on by a stunning collapse3 in the price of solar panels over the past year or so.  The company’s innovative solar panels, high-priced to begin with, became increasingly uncompetitive in the marketplace. Solyndra didn’t have enough big commercial customers to create the necessary economies of scale. And although Harrison and Stover remained optimistic up to the bitter end — insisting six weeks before the late-August bankruptcy filing that the company was going to be fine4 — they ultimately failed to raise additional capital that would have allowed Solyndra to stay in business.  The Republicans are trying to make that optimism appear sinister, but if we’ve learned anything from the financial crisis, it is that wishful thinking in the face of a collapsing market is not a crime.

    Why the U.S. Should Not Abandon Its Clean Energy Lending Programs - With the bankruptcy of the California solar-gear manufacturer Solyndra, the Department of Energy (DOE)’s loan program has been excoriated for wasting tax payer money under suspicious circumstances.  To be sure, there are problems here, but ... these attacks fundamentally misunderstands the nature of an imperfect but invaluable clean energy finance program. Such misunderstanding is unfortunate; it undercuts support for exactly the kind of prudent, targeted approach the United States should be using to scale up important new industries by deploying the nation’s sophisticated financial markets in ways that minimize taxpayer risk and maximize economic impact. The reality is the DOE’s loan guarantee program will likely result in minimal costs and large gains for taxpayers—just like many other federal lending efforts. The bottom line: The loan programs have been solid initiatives that have created jobs in a recession, generated $4 to $8 of private lending for every $1 of public investment, begun to scale up important clean energy technologies, and begun the work of financing the long-term restructuring of the U.S. economy.

    What’s Good for the Goose is Good for the Gander - Robert Stavins - “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.” … That’s the crux of the doctrine. At about the same time that Leonhardt’s article appeared in the New York Times Magazine, Elizabeth Kolbert’s profile of green jobs activist Van Jones, “Greening the Ghetto: Can a Remedy Serve for Both Global Warming and Poverty,” was published in The New Yorker.  Kolbert included the following passage: When I presented Jones’s arguments to Robert Stavins, a professor of business and government at Harvard who studies the economics of environmental regulation, he offered the following analogy: “Let’s say I want to have a dinner party. It’s important that I cook dinner, and I’d also like to take a shower before the guests arrive. You might think, Well, it would be really efficient for me to cook dinner in the shower. But it turns out that if I try that I’m not going to get very clean and it’s not going to be a very good dinner. And that is an illustration of the fact that it is not always best to try to address two challenges with what in the policy world we call a single policy instrument.”

    Ocean Heat Content And The Importance Of The Deep Ocean (see graphic) Most of the heat from global warming is going into the oceans. Covering some 70% of the Earth's surface and having a heat capacity a thousand times more than the atmosphere, it's easy to understand why the oceans are the main heat sink. Multiple studies measuring from the ocean surface down to 700 metres show very little warming, or even cooling, over multiple years in the last decade. This is surprising given that some studies estimate that the imbalance at the-top-of-the-atmosphere (TOA), the difference between energy entering and leaving Earth's atmosphere over that time, has actually grown. So we might have expected the 700 metre sea surface layer to show increased warming. However the average depth of the ocean is around 4300 metres, and in a recent SkS post, we saw that when measurements were extended down to 1500 metres, the oceans were found to still be warming, indicating that heat is somehow finding a way down to the deep ocean. SkS has recently looked at Asian aerosols as a contributor to the 'slowdown' in warming, but a recent climate modeling study, Palmer (2011), suggests another possible cause - that heat is able to be buried into deeper ocean layers, something the observations seem to support.

    Arctic Shelves Have Lost Half Their Size in Six Years - Canada’s Arctic ice shelves, formations that date back thousands of years, have been almost halved in size over the last six years, Canadian researchers said on Tuesday.  Researchers at Carleton University in Ottawa, who regularly analyze satellite images from the region, also found that a major portion of the ice shelves split in half this summer and other pieces covering an area roughly one and a half times that of Manhattan have broken off since the end of July.  Consistently higher temperatures in Canada’s Arctic, the researchers said, were the main cause of the dramatic decline.  “It’s fascinating to bear witness to this as a scientist but it also saddens me as a general citizen of the planet to see this happen,” said Derek Mueller, a professor at the university’s school of geography and environmental studies. “We’ve seen this on timescale of six years yet these ice shelves are thought to have been in place for thousands of years.” […] “This is an area of the world where temperatures are rising very rapidly and the ice shelves are responding,” Professor Mueller said.

    Slowing jet stream shows risk from warming Arctic (Reuters) - A new, unpublished finding that the polar "jet stream" is slowing down provides compelling evidence of a link between rapidly melting Arctic sea ice and colder winters across the northern hemisphere and other extreme weather. The possibility of far flung impacts from a rapidly warming Arctic underlines the danger of unpredictable, economically disruptive knock-on effects of rising greenhouse gas emissions. The polar jet stream is created by difference in temperature between the cold high latitudes and warmer regions to the south; the steeper the temperature difference the faster the flow. Arctic sea ice is melting three decades faster than predicted by models used in a U.N. climate panel report four years ago. Ice floes about 2-3 metres thick floating in the open ocean around the North Pole now have a collective area in late summer about three-fifths of levels in the 1970s. Without an insulating layer of ice the sea warms the Arctic air through autumn and winter, adding a large extra source of heat to the atmosphere and eroding the temperature difference with lower latitudes, and it seems slowing the jet stream. The high altitude winds across North America have slowed by 20 percent or more in the past quarter century, according to Jennifer Francis at the U.S.-based Rutgers University.

    Warming climate triggers sweeping change for Interior Alaska Natives - Warmer winters, thinner ice, stranger weather — climate change has begun to undermine subsistence life along the Yukon River, according to a new federal study that collected and analyzed observations by Native residents in two southwestern Alaska villages. “They expressed concerns ranging from safety, such as unpredictable weather patterns and dangerous ice conditions, to changes in plants and animals as well as decreased availability of firewood,” say the researchers in this story about their work that was posted by the U.S. Geological Survey. The study, published this month in the journal of Human Organization, found that hunters and elders in the Yup’ik communities of St. Mary’s and Pitka’s Point noticed a litany of dramatic climate shifts over the course of their lives, forcing changes in how they gather food and wood while making it more difficult to read the sky correctly before heading out into the tundra.

    The trouble with apocalypse - The trouble with apocalypse is that most people have already seen it at the movie theater, watched it on television, read it in a book, or heard all about it from the pulpit. So inundated with the language of crisis are we that we have become immune to it. From the perspective of the historian our age has been chock full of “great transformations.” And, it is, after all, the historian’s business to write about great change even if he or she has to invent some. The great energy crisis of the 1970s passes and is followed by an era of cheap energy lasting more than 20 years. The great run-up in energy prices in recent years is followed by a collapse in prices, and then another run-up (and perhaps another collapse?). The “worst economic downturn since the Great Depression” is followed by a ceaselessly heralded recovery. The much feared Y2K computer bug was either fixed or of little consequence on January 1, 2000. A modern plague has been in the wings for years, first as SARS and then as avian flu. Now that the H1N1 virus is here, it doesn’t seem like the civilization-destroying event it was advertised to be. Once the worst is over or the predicted crisis fails to materialize, the fear that most people felt fades from memory.

    Markets Can Be Very, Very Wrong - Krugman - Muller, Mendelsohn, and Nordhaus have a new paper in the American Economic Review that should be a major factor in how we discuss economic ideology. It won’t, of course, but let me lay out the case anyway. What MMN do is estimate the cost imposed on society by air pollution, and allocate it across industries. The costs being calculated, by the way, don’t include the long-run threat of climate change; they’re focused on measurable impacts of pollution on health and productivity, with the most important effects involving how pollutants — especially small particulates — affect human health, and use standard valuations on mortality and morbidity to turn these into dollars. Even with this restricted vision of costs, they find that the costs of air pollution are big, and heavily concentrated in a few industries. In fact, there are a number of industries that inflict more damage in the form of air pollution than the value-added by these industries at market prices. It does not necessarily say that we should end the use of coal-generated electricity. What it says, instead, is that consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation. If consumers did have to pay the full cost, they would use much less electricity from coal — maybe none, but that would depend on the alternatives.

    Appalachia faces steep coal decline  - Business owners, politicians and miners in the hilly coalfields of Central Appalachia blame the industry decline on tougher regulation from the Obama administration. They aren't as ready to talk about something a change in administrations cannot fix. The region's thick, easy-to-reach seams of coal are running out, forcing many operators to shift to cheaper and more destructive mining methods that draw heavier environmental regulation. Coal here is getting harder and costlier to dig — and the region, which includes southern West Virginia, Virginia and Tennessee, is headed for a huge collapse in coal production. The U.S. Department of Energy projects that in a little more than three years, the amount of coal mined here will be just half of what it was in 2008. That's a significant loss of a signature Appalachian industry, and the jobs that come with it. "The seams of coal that are left in this area are harder and harder to mine, and they're thinner and thinner and thinner," The thinner seams make it less cost-effective for a coal operator to send an army of miners underground, so surface mining with blasting and earth movers has often been the answer.

    China To Invest 2 Trillion Yuan In Green Economy: Report (Xinhua) -- China will invest two trillion yuan (313 billion U.S. dollars) to promote low-carbon economy in the five years to 2015, the China Daily reported on Sunday, citing a senior official from the country's top economic planner. The investment will help reduce energy consumption per unit of gross domestic product in China by 16 percent at the end of 2015 compared with the level of 2010, the newspaper said, quoting Xie Zhenhua, vice chairman of the National Development and Reform Commission. During the five years to 2010, energy consumption per unit of GDP dropped by 19.1 percent, according to the report. Xie said China will develop circular economy projects, establish 100 demonstration bases for resource comprehensive utilization and launch low-carbon pilot programs in five provinces and eight cities during the next five years. 

    Fukushima Surprise: Radioactive Rice “Far Exceeding” Safe Levels Found in Japan - Pretty big news from Japan, via Reuters. Japan found the first case of rice with radioactive materials far exceeding a government-set level for a preliminary test of pre-harvested crop, requiring thorough inspection of the rice to be harvested from the region, the farm ministry said late on Friday. The ministry said radioactive caesium of 500 becquerels per kg was found in a sample of the pre-harvested rice in Nihonmatsu city, in Fukushima Prefecture, 56 km (35 miles) west of the Fukushima Daiichi nuclear plant which was crippled by the March 11 earthquake and tsunami, triggering the world’s worst nuclear disaster in 25 years.  The ministry said the Fukushima Prefecture will expand the inspection spots nearly ten-fold to around 300 areas. Needless to say, rice is central to both the Japanese culture and diet. And it’s one more threat to a world food supply on the edge (see “Global Food Prices Stuck Near Record High Levels“). Here’s more on the radioactive rice:

    Fukushima Desolation Worst Since Nagasaki as Residents Flee -  Beyond the police roadblocks that mark the no-go zone around Japan’s wrecked Fukushima nuclear plant, six-foot tall weeds invade rice paddies and vines gone wild strangle road signs along empty streets.  Takako Harada, 80, returned to an evacuated area of Iitate village to retrieve her car. Beside her house is an empty cattle pen, the 100 cows slaughtered on government order after radiation from the March 11 atomic disaster saturated the area, forcing 160,000 people to move away and leaving some places uninhabitable for two decades or more.  “Older folks want to return, but the young worry about radiation,” said Harada, whose family ran the farm for 40 years. What’s emerging in Japan six months since the nuclear meltdown at the Tokyo Electric Power Co. plant is a radioactive zone bigger than that left by the 1945 atomic bombings at Hiroshima and Nagasaki. While nature reclaims the 20 kilometer (12 mile) no-go zone, Fukushima’s $3.2 billion-a-year farm industry is being devastated and tourists that hiked the prefecture’s mountains and surfed off its beaches have all but vanished.

    Japan Finds Plutonium Far From Reactor —Trace amounts of plutonium were found as far as 28 miles from the damaged Fukushima Daiichi nuclear-power plant, the first time that the dangerous element released from the accident was found outside of the immediate area of the plant. The science ministry report issued Friday comes just as the government lifted one of its evacuation advisories, underscoring the difficulty of restoring normalcy and assuring the safety of residents around the crippled plant. The government also reported a rare detection of strontium, another highly dangerous element, far from the crippled reactor, in one spot as far away as 50 miles. Most of the radioactive material discovered to date in the communities surrounding Fukushima Daiichi has been cesium or iodine.. Still, the latest discovery is a potentially disturbing turn, as it shows that people relatively far from the plant could be exposed to more dangerous elements than had been previously disclosed.

    No Will, No Way: Nuclear Problems Persist, But US Fails to Seize Fukushima Moment - As September drew to a close, residents of southwest Michigan found themselves taking in a little extra tritium, thanks to their daily habit of breathing (h/t emptywheel). The tritium was courtesy of the 40-year-old Palisades Nuclear Generating Station in Covert Township, which suffered its third “event” (as they are politely called) in less than two months, and was forced to vent an indeterminate amount of radioactive steam. The reactor at Palisades was forced to scram after an accident caused an electrical arc in a transformer in the DC system that powers “indications and controls“–also known as monitoring devices, meters and safety valves. (Transformer arcs seem to be “in” this season–it was a transformer arc that caused the Calvert Cliffs plant in Maryland to scram during Hurricane Irene.)  And even after fission is mitigated, a reactor core generates heat that requires a fully functional cooling system. Which is kind of an interesting point when considering that Palisades had just been restarted after completing repairs to a breach in the cooling system that was reported to be leaking more than 10 gallons per minute. Prior to that, a “special inspection” was ordered August 9 after a pipe coupling in the plant’s cooling system failed.

    In North Dakota, Flames of Wasted Natural Gas Light the Prairie - Across western North Dakota, hundreds of fires rise above fields of wheat and sunflowers and bales of hay. At night, they illuminate the prairie skies like giant fireflies. They are not wildfires caused by lightning strikes or other acts of nature, but the deliberate burning of natural gas2 by oil3 companies rushing to extract oil from the Bakken shale field and take advantage of the high price of crude. The gas bubbles up alongside the far more valuable oil, and with less economic incentive to capture it, the drillers treat the gas as waste and simply burn it. Every day, more than 100 million cubic feet of natural gas is flared this way — enough energy to heat half a million homes for a day. The flared gas also spews at least two million tons of carbon dioxide into the atmosphere every year, as much as 384,000 cars or a medium-size coal4-fired power plant would emit, alarming some environmentalists.

    Natural Gas Flaring, Carbon Taxes, and the Risk of Alien Invasion - To an alien orbiting Earth in a flying saucer, natural gas flares would be one of the most visible signs of human life on earth. Notice I said "human life," not "intelligent life." Flaring is the practice of burning off the natural gas that is produced in association with oil rather than piping it to market, using it at the wellhead, or reinjecting into the ground. Flaring was once common, but in more recent times, it has largely been limited to places like Russia and Nigeria. Now, though, it is becoming a big source of controversy in the United States. According to a recent New York Times article, some 30 percent of natural gas produced from rapidly expanding North Dakota oil fields will be flared this year—more than enough to heat every home in North Dakota through the state's harsh winters. For many producers flaring looks like a free lunch, despite its significant opportunity costs. Most obviously, it contributes to climate change by adding carbon dioxide to the atmosphere, an estimated 2 million tons per year from North Dakota alone. If enough gas is flared in one place, local ambient air quality can also be affected, a growing concern even in that sparsely populated state.  The trouble is, North Dakota producers don’t necessarily pay these costs. 

    Oil and gas group resists EPA proposed rules on fracking - Environmentalists and advocates for drilling companies faced off Thursday at a public hearing in Arlington on the Environmental Protection Agency's proposed rules to limit pollution at oil and gas wells. The agency is proposing standards to curb hydraulic fracturing, or fracking, by requiring operators to capture and sell natural gas that now escapes into the air. The EPA hearing Thursday was held in a region with a vast area of urban drilling atop the natural gas-rich Barnett Shale. The EPA proposal would apply new pollution control standards to about 25,000 gas wells that are fracked each year. While industry representatives touted the jobs and prosperity that drilling brings, critics argued it's not worth the environmental risk of toxic spills, scattered drill site explosions, tainted drinking water and polluted air. Industry representatives said the proposed rules are extremely complicated and compliance would present a financial hardship, especially to smaller operations.

    A Pipeline Divides Along Old Lines - Jobs Versus the Environment -  The final days of rancorous public debate over a $7 billion oil pipeline that would snake from Canada through the midsection of the United States have taken on an unexpected urgency this week, as the economic and environmental stakes of the massive project snap into focus at a time of festering anxiety about the nation’s future.The round of public hearings by the State Department — stretching along the proposed pipeline route from eastern Montana, through Nebraska and Oklahoma to the Texas Gulf Coast — is ostensibly meant to focus on a single question: Is the pipe in the national interest? Addressing that question, though — especially in the sprawling sweep of six huge states through which the pipeline or its pump stations would run like a spine — takes in a universe of conflicting, interlocking issues, from short-term economics to global climate, from the discontent of a rural belt losing population to issues of national energy security, joblessness, corporate power and prices at the corner pump.  The State Department concluded last month that the project, Keystone XL, would cause minimal environmental impact if it was operated according to regulations, and the operator, TransCanada, has said the nearly 2,000-mile line would create 20,000 jobs in the United States.

    Tea Party conservative blocks pipeline safety bill - Tea Party conservative Sen. Rand Paul is blocking pipeline safety legislation intended to fix some of the problems that led to the rupture of a natural gas pipeline in San Bruno last year that destroyed a neighborhood and killed eight people. Paul, a first-term Kentucky Republican whose father, Rep. Ron Paul, R-Tex. is running for president, is using his prerogative as a senator to stymie action because he is opposed in principle to adding regulations and expanding the federal government. "Sen. Paul doesn't think new regulations and the creation of dozens of bureaucratic positions should be swept through without sufficient debate and vote," said his spokeswoman, Moira Bagley.  Paul has used his Senate privileges to put a hold on the Pipeline Transportation Safety Improvement Act of 2011, which blocks further action on the bill despite nearly unanimous bipartisan support in Congress for toughening federal regulations.

    The Dumb Get Dumber - OK, folks. I'll just put the story out there today. It's your turn to pick it apart... Today's story comes from NPR Weekend Edition's New Boom Reshapes Oil World, Rocks North Dakota (September 25, 2011). Here's the audio. For background information, follow the few links I've provided to older posts. You will not a get a true feel for this story unless you listen to the full audio (11:15). At the 1:39 mark (narration by Guy Raz, audio) — Our cover story today: The new American oil boom. In 2008, we imported almost 2/3rds of our oil. This year, less than half of it came from abroad. And what happened? Well, scientists figured out how to extract oil from rocks and sand, and it means that within a decade, the U.S. will be close to producing as much oil as Saudi Arabia. And within five years? America could pass Russia as the world's largest energy supplier. [upbeat background music gets a little louder, a little happier...] Now, the change in Williston, North Dakota is so dramatic in just the last three or four years because of something called the Bakken rock formation, and it's estimated that trapped in that rock is anywhere from 11 to 20 billion barrels of oil, enough oil to power the United States for four years...

    BP asks permission to start new Gulf drilling - BP is asking regulators to approve a blueprint for new deep-water drilling in the Gulf of Mexico for the first time since its Macondo well blew out last year, triggering the nation’s worst oil spill. In a filing with the U.S. government made public this week, the British oil company seeks to expand on previously approved drilling plans at its Kaskida prospect, about 220 miles off the Louisiana coast. Federal regulators broadly signed off on BP’s plans to drill up to five wells at the site in 2008. In the new filing, BP is asking permission to drill two more wells at Kaskida and change the location of two others. If the exploration plan were approved, BP still would have to get the government’s approval to drill individual wells at the site, with each vetted separately.BP said its plan embraces “enhanced performance standards” that go beyond federal requirements, including backup emergency equipment and engineer-witnessed testing of cement used in wells.

    Canada’s Far North divided over Arctic offshore drilling - Some talk of an economic boom, while others talk of a potential oil spill. Northerners in Canada are divided on the issue of offshore drilling. Inuvialuit leader Nellie Cournoyea, CEO of the Inuvialuit Regional Corporation with headquarters in Inuvik in Canada’s Northwest Territories, says it’s a difficult balance. “People are very strong in their belief and their will to protect the environment and the wildlife. At the same time, economic opportunities are also important for people in this region.” The National Energy Board’s review — called a round table — was held in Inuvik September 12 to 16. More than 200 representatives of aboriginal, territorial and federal government gathered from across Canada as well as members of the public who were also encouraged to speak during the five day event.

    Ice on fire: The next fossil fuel - If countries and companies are exploring the potential of methane clathrates only now, that's not for lack of scientific interest over the years. Research over the past two decades has shown that the energy trapped in ice within the permafrost and under the sea rivals that in all oil, coal and conventional gas fields, and could power the world for centuries to come. Oil and gas companies have been slow to catch on, however, believing methane clathrates to be unreliable and uneconomical. Feasibility studies and the diminishing supplies of conventional natural gas are changing that, making commercially viable production realistic within a decade, says Ray Boswell, who heads the clathrates programme at the US Department of Energy.  "Just a few years ago no one was thinking about clathrates as an energy source," Boswell says. "Now there is a great deal of interest in them." It is not just the US. Canada, China and Norway are entering the race too. The governments of Japan and South Korea have given the green light for full-scale production. The first intentional commercial exploitation may come as early as 2015.

    America's Gasoline Excise Tax: A Mighty Temptation - With oil prices being volatile on the downside in recent weeks, the mainstream media coverage of high United States gasoline prices has faded noticeably.  As my regular readers well know, as a geoscientist, I am a firm believer in the concept of peak oil (or at the very least peak cheap oil) and it is my belief that consumers in Canada and the United States will eventually be forced to deal with gasoline prices that are far higher than what we are seeing today, excluding the impact of increases in excise taxes. As we are all aware, a portion of what we pay at the pump is in the form of an excise tax that is collected by the refiner and remitted to more than one level of government.  Excise taxes are basically sales taxes levied on specific goods as either a percentage of the value of the good or as a set dollar value per unit of the good as in the case of gasoline taxes (i.e. cents per gallon).  In the case of the United States, for the most part, these gasoline excise taxes are used to fund the construction and maintenance of our highways.  In this way, the excise tax does create jobs as the nation's highway transportation infrastructure is improved.  The current federal gasoline tax legislation in the United States is due to expire on September 30th, 2011 and it will be interesting to see how Washington deals with its renewal.

    Shell shuts most of Singapore refinery as fire rages (Reuters) - Royal Dutch Shell Plc finally put out a blaze at its massive Singapore refinery after firefighters struggled to contain it for a day and a half, forcing the firm to start shutting its biggest plant worldwide. The closure of the 500,000 barrel per day refinery, which makes up more than a third of Singapore's capacity, drove up benchmark fuel prices in the city-state, hub for Asian fuel trade. Officials said earlier on Thursday that they were shutting down all refining units and may shut the attached chemical complex. The company said in a statement later that the fire, which had started at 0515 GMT on Wednesday, was extinguished, but that there were still traces of fuel vapor. It said it was prepared to shut down all units if necessary for safety, but gave no further details on operations. "We are focused on safety, and are going through the progressive shutdown of the refinery," Shutting down the entire refinery will take two days, van Koten said. Shell Singapore's chairman, Lee Tzu Yang, said that the company has not declared force majeure on product shipments.

    Explosions rock Shell’s Singapore refinery - Royal Dutch Shell Plc will shut its biggest refinery over the next two days on an island off Singapore as firefighters battle a blaze for a second day, the worst fire at the site in 23 years. “We are progressively shutting down the refinery over the next two days,” as a precautionary measure, not because of damage, Martijn van Koten, Shell’s vice-president for eastern manufacturing operations, said at an evening press briefing. Loading wharfs away from the fire are still in operation though Shell has turned tankers away from berths near to the blaze for safety reasons, he said. He declined to give further details on which units were already shut after Shell yesterday said a hydrocracker was idled. There were no fatalities. The fire at Pulau Bukom, 5.5 kilometers (3.4 miles) offshore the city, is still contained after the fire swelled at noon local time today, Shell said in an earlier e-mailed statement. Singapore is Asia’s largest oil-trading and storage center, with local product supply dominated by Shell’s Pulau Bukom, which can process 500,000 barrels a day, and refineries operated by Exxon Mobil Corp.

    The End Of Motoring - Young people today would rather have the latest smartphone than a flashy car. And the number of them who can drive is plummeting. Is Britain's love-affair with the car really over? In Britain, the percentage of 17- to 20-year-olds with driving licences fell from 48% in the early 1990s to 35% last year. The number of miles travelled by all forms of domestic transport, per capita per year, has flatlined for years. Meanwhile, road traffic figures for cars and taxis, having risen more or less every year since 1949, have continued to fall since 2007. Motoring groups put it down to oil prices and the economy. Others offer a more fundamental explanation: the golden age of motoring is over.  "Car manufacturers are worried that younger people in particular don't aspire to own cars like we used to in the 70s, 80s, or even the 90s. Designers commonly say that teenagers today aspire to own the latest smartphone more than a car. Even car enthusiasts realise we've reached a tipping point."

    Some OPEC members may let oil below $90 – Some Gulf oil producers are unlikely to reduce supplies to try to stem a decline in oil prices unless crude falls below $90 a barrel for a sustained period. Others did not specify an ideal price range but said they would maintain high output and could tolerate a further decline in prices. Brent crude, trading around $107 Wednesday, has fallen some $15 since the start of August as the economic outlook darkened and following the release of strategic consumer reserves and extra supplies from Gulf OPEC producers in June. The prospect of Libyan oil returning to the market after a first post-war cargo shipped on Tuesday is also beginning to weigh on prices. Libya is hoping to restore full output in 12-15 months. “The price has come down but it is still above $100,” said an official from one Gulf OPEC member. “$90 is still high,” the official said.

    A brief economic explanation of peak oil - For a number of years there has been an arid debate between economists and geologists about Peak Oil. The geologists maintain that Peak Oil (maximal production) is a geological imperative imposed because reserves are finite even if their exact magnitude is not, and cannot be, known. In contrast many economists maintain prices will resolve any sustained supply shortfalls by providing incentives to develop more expensive sources or substitutes. The more sanguine economists do concede that the adaptation may be slow, uncomfortable and economically disruptive. The reality, I believe, is that both groups have part of the answer but that Peak Oil is, in fact, a complex but largely an economically driven phenomenon that is caused because the point is reached when: The cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time. While hard to definitively prove, there is considerable circumstantial evidence that there is an oil price economies cannot afford without severe negative impacts.

    Global Resource Crunch - I want to make this as simple as possible. The world is in for a serious resource crunch. That stark reality may be lost on you as we trudge through the other problems that have come to dominate day-to-day American life. It's also a hard concept to grasp when dealing with so much data and propaganda. Today, let's throw all the reserve data out the window. We're not going to talk about shale salvation. We're not going to look at our supposed hundred-year supply of coal. Instead, let's look at just one country: China — and how its growing appetite will affect natural resources in the very near future. For this exercise, you only need to know one thing: By 2035, income per person in China will reach the current U.S. level. If they spend that money like we do, here's how the resource picture will look in about twenty years' time.

    Vital Signs: China, India Consumer More Energy - China and India are consuming a growing share of the world’s energy. This year the two nations will consume an estimated 131 quadrillion British thermal units worth of energy, accounting for 25% of global energy consumption. That is up from 13% in 2000. By 2035, the Energy Information Administration forecasts China and India will account for a third of global energy consumption.

    Rare Earths Fall as Toyota Develops Alternatives - Rare-earth prices are set to extend their decline from records this year as buyers including Toyota Motor Corp. (7203) and General Electric Co. (GE) scale back using the materials in their cars and windmills.  Prices for cerium and lanthanum, the most abundant rare- earth elements, will drop by 50 percent in 12 months, Christopher Ecclestone, an analyst at Hallgarten & Co. in New York, has forecast. Neodymium and praseodymium, metals used in permanent rare-earth magnets, may fall as much as 15 percent, he said.  Makers of electric cars, wind turbines and oil-refining catalysts have sought to reduce use of the metals after China, which supplies more than 90 percent of the market, said in July 2010 that it would cut exports and clamp down on the industry. That boosted prices, encouraging mining companies to develop new prospects and buyers to find alternatives.  “If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,”  “The principal customer for rare-earth metals is a global automotive industry using rare-earth permanent magnets. That industry will engineer this stuff out.”

    China’s Squeeze on Property Market Nearing ‘Tipping Point’ (Bloomberg) -- The squeeze on China’s property market may be reaching a “tipping point” that drives growth lower just when exports are under threat from a global slowdown and investor confidence is plunging, said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc. Land transactions in 133 cities tracked by Soufun Holdings Ltd., the country’s biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities last month compared with July, according to government data. Property construction is a mainstay of investment that last year drove more than a half of economic growth while land sales contributed 40 percent of revenues earned by local authorities that have amassed 10.7 trillion yuan ($1.67 trillion) of debt. A funding squeeze on developers risks a “domino effect” as companies needing cash cut prices, forcing others to follow, Credit Suisse Group AG said yesterday. “We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,”

    China, Driver of World Economy, May Be Slowing - the American economy appears to teeter on the edge of another recession, Europe struggles with a financial crisis and emerging markets like Brazil and India show new weaknesses, China may appear to be in better shape than most countries, economists say. But “better” is relative.  On the surface, economists at the International Monetary Fund and most banks are still estimating China’s growth rate to be over 9 percent this year. China continues to run very large trade surpluses. New construction starts have soared with a government campaign to provide more affordable housing.  And yet, the country’s huge manufacturing sector is starting to slow and orders are weakening, especially for exports. The real estate bubble is starting to spring leaks, even as inflation remains stubbornly high for consumers — despite a series of interest rate increases and ever-tighter limits on bank lending.  Because China’s mighty growth engine has been one of the few drivers of the global economy since the financial crisis of 2008, signs of deceleration could add to worries about the global outlook.

    Cash Crunch in China Picks Up Momentum; Chinese Economy "Teetering On the Edge" - Todd Martin, an Asia equity strategist at Societe General SA, talks about the outlook for China's economy and credit market. Martin also discusses global stocks and commodities. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia."

    China’s Landing – Soft not Hard - China’s economy is slowing. This is no surprise for an export-led economy dependent on faltering global demand. But China’s looming slowdown is likely to be both manageable and welcome. Fears of a hard landing are overblown.To be sure, the economic data have softened. Purchasing managers’ indices are now threatening the “50” threshold, which has long been associated with the break-even point between expansion and contraction. Similar downtrends are evident in a broad array of leading indicators, ranging from consumer expectations, money supply, and the stock market, to steel production, industrial product sales, and newly started construction.. While there is a kernel of truth to each of these China-specific concerns, they do not by themselves imply a hard landing. Nonperforming loans will undoubtedly increase in response to the banking sector’s exposure to some $1.7 trillion of local-government debt, much of which was incurred during the stimulus of 2008-2009. But the feared deterioration in loan quality is exaggerated.

    What are the side costs of trade with China? - There is a new study from David Autor, Gordon Hanson, and David Dorn: The study rated every U.S. county for their manufacturers’ exposure to competition from China, and found that regions most exposed to China tended not only to lose more manufacturing jobs, but also to see overall employment decline. Areas with higher exposure also had larger increases in workers receiving unemployment insurance, food stamps and disability payments. The authors calculate that the cost to the economy from the increased government payments amounts to one- to two-thirds of the gains from trade with China. In other words, a big portion of the ways trade with China has helped the U.S.—such as by providing inexpensive Chinese goods to consumers—has been wiped out. And that estimate doesn’t include any economic losses experienced by people who lost their jobs.

    America’s Free-Trade Abdication - The indifference and apathy that one finds in Washington from both the Congress and President Barack Obama on the Doha Round of world trade talks, and the alarm and concern expressed by statesmen elsewhere over the languishing negotiations, mark the end of the post-1945 era of American leadership on multilateral free trade. Evidence of anxiety outside the US has been clear to everyone for almost a year. German Chancellor Angela Merkel and British Prime Minister David Cameron were concerned enough to join with Turkey’s President Abdullah Gül and Indonesia’s President Susilo Bambang Yudhoyono in appointing Peter Sutherland and me as Co-Chairs of a High-Level Trade Experts Group in November 2010. We held a prestigious Panel at Davos with these leaders in January 2011, where, on the occasion of our Interim Report, we gave full-throated support to concluding Doha. But there was no response from the US government.

    The Internal Cost of China’s Currency Policy - It is currently costing the Chinese central bank about $240 billion per year to hold down the value of the Chinese currency relative to other currencies.  This cost is growing rapidly.  The cost would decrease significantly if China allowed its currency to float and began reducing its foreign reserves, although there would likely be a one-time capital loss at the time the currency begins to float. To put this cost in perspective, $240 billion is considerably larger than China’s trade surplus of $183 billion last year.  It is about 4 percent of China’s GDP in 2010.  Moreover, this cost does not include the implicit tax on the banking system associated with China’s reserve holdings, which is passed on to Chinese households in the form of depressed rates of interest on savings deposits. As of June 30, 2011, China’s foreign exchange reserves were $3.2 trillion, having grown rapidly from $2.9 trillion on December 31, 2010.  There are two components of the cost of these reserves:  First, the interest rate earned on these reserves is below the rate of interest paid to finance them.  Second, the value of the reserves in terms of Chinese yuan is declining and is expected to continue to decline.

    An exorbitant burden - IN AMERICA, the Democratic leadership in Congress is once again pushing forward a measure to "get tough" with China over its currency policy. The measure makes for great politics but dubious economics. Don't get me wrong, China continues to intervene in markets to hold down the value of the yuan. That doesn't imply that America will reap big benefits from pressuring China, for a few reasons. First, there could be negative side effects, including a political or trade row with China or a sharp weakening in the Chinese economy. Second, there has been quite a lot of real appreciation in China already; while movement in the exchange rate has been slower than some would prefer, wage growth has been scorching, rapidly eroding China's cost advantages in a number of tradable sectors. And finally, China does not compete with America in the production of many tradable goods, and additional appreciation might simply shift China's position within supply chains. The composition of America's trade deficit is likely to change, but it's not clear that there would be a big shift in its size. In my view, the benefits of a confrontation are unlikely to outweigh the costs.

    $18,000 EACH: Ontario’s debt burden threatens serious trouble ahead - Every man, woman and child in Ontario now owes more than $18,000 to the province’s creditors. And unless something changes, experts say, the province could be headed for serious trouble because of debt. You’d never know it by listening to the election campaign. The politicians have said little or nothing about the debt. On the contrary, all parties have made a raft of new spending promises to win votes. “This is such a bizarre election,” says Compas pollster Conrad Winn. He says the campaign has been an extreme version of most election campaigns, which, as Kim Campbell once notoriously said, are no time to discuss serious policy issues. Make no mistake: Ontario’s mounting debt is a serious policy issue. When Dalton McGuinty’s Liberals came to power eight years ago, net provincial debt was just under $139 billion. It now tops $240 billion and is projected to reach nearly $285 billion in two years.

    World’s Biggest Rate Cut Forecast as Global Slump Deepens: Brazil Credit-  Traders are betting Brazilian central bank President Alexandre Tombini will cut interest rates by the most in two years to shield the economy from a European banking crisis that is hurting global growth. The yield on rate futures due November fell 64 basis points in the past month to 11.59 percent yesterday, indicating investors expect policy makers to reduce the benchmark Selic rate by 75 basis points at their meeting on Oct. 19 after a surprise cut of 50 basis points last month. The central bank lowered the rate 100 basis points, or 1 percentage point, in June 2009. The Bank of Israel unexpectedly trimmed its key rate yesterday for the first time in 2 1/2 years. Brazil became the second country in the Group of 20 after Turkey lowered rates last month as policy makers signaled they were more concerned about the global slowdown than quickening inflation in Latin America’s biggest economy. The prospect of more cuts prompted economists in a central bank survey last week to forecast inflation will breach the 6.5 percent upper limit of the government’s target for the first time since 2003.

    The Bots of FX - But still high frequency traders are vilified. Recently I called them the Velociraptors of finance roaming the financial jungle devouring all in their wake.. My view on HFT hasn’t really changed though, I still think they need to be regulated but in a manner that doesn’t ban them from markets but seeks to regulate their size and influence in the markets. Some markets are just too small for these guys when they are in, but particulalry if for some reason, they are suddenly out. But not FX it seems. The BIS released a report this week on the impact of HFT in FX markets. The BIS says that the study group was chaired by Guy Debelle from the RBA so we know there will have been a lassiez faire hand on the tiller but still this is an important study. In the Exec Summary the report says, Having come to prominence in equity markets, high-frequency trading (HFT) has increased its presence in the foreign exchange (FX) market in recent years. This development is one aspect of a broader trend facilitated by the wider use of electronic trading in foreign exchange, not only in the broker-dealer market, but also at the customer level. HFT in FX operates on high volume but small order sizes, low margins, low latency (with trade execution times measured in milliseconds) and short risk holding periods (typically well under five seconds). As such, it occurs mainly in the most liquid currencies. While, to date, HFT has been most prevalent among the major currency pairs, it has the potential to spread to other relatively actively traded currencies, including some emerging market currencies.

    India’s Food Inflation Accelerates, Maintaining Pressure on Interest Rates - India’s food inflation accelerated for the first time in four weeks, maintaining pressure on the central bank to raise borrowing costs to tame price gains. An index measuring wholesale prices of agricultural products gained 9.13 percent in the week ended Sept. 17 from a year earlier, the commerce ministry said in a statement in New Delhi today. It rose 8.84 percent the previous week. The rate of inflation in the world’s second-most populous nation remains above the level the central bank deems acceptable and has been “fairly stubborn,” Governor Duvvuri Subbarao said this week as he weighs the risks to expansion posed by a faltering global recovery against price pressures. The Reserve Bank of India extended its record series of rate increases on Sept. 16 to curb the fastest inflation among the so-called BRICS economies. “Inflation is still at elevated levels and that remains a concern for the central bank,” She expects the Reserve Bank to boost its repurchase rate by a quarter of a percentage point to 8.5 percent in October.

    India to Borrow 32% More Than Planned in Second Half; Bonds Drop -- India’s federal government increased its debt-sale target for the second half of the financial year by about 32 percent, citing a drop in state-run small savings plans. Ten-year bonds slumped. The finance ministry plans to raise 2.2 trillion rupees ($45 billion) selling bonds in the six months ending March 31, higher than the budgeted 1.67 trillion rupees, R. Gopalan, secretary, Department of Economic Affairs, told reporters in New Delhi today. The government raised 2.5 trillion rupees in the first six months of the year. “This has come as a negative surprise,” . “Considering the heightened fiscal conditions globally, there was a sense that the government would maintain their numbers.” The yield on the benchmark 7.8 percent note due April 2021 jumped 10 basis points to 8.44 percent after the announcement, according to the central bank’s trading system. The rupee fell 0.5 percent to 48.97 a dollar at the 5 p.m. close of trading.

    Turmoil in Western Economies Has NRIs Heading Back Home - Faced with declining salaries and job cuts abroad, an increasing number of NRI professionals are moving back to India in search of greener pastures, a move that will give homegrown companies the chance to target this attractive resource pool. According to a study by, a recruitment tendering platform, hiring of non-resident Indians (NRIs) will account for 19 per cent of total recruitment activity during October-December this year, compared to 11 per cent in the year-ago period, representing a growth of 8 per cent. Hiring of NRIs accounted for 21 per cent of total recruitment activity during April-June, 2011. "The high economic growth in India, with many good opportunities, has fuelled the NRI thought process to head back. In addition to that, many Indian companies are shutting their offices in the West,"  However, "It is not only the major crisis in the West, but also a combination of economic, social and other factors that has driven this,"

    Why we work too much - A 2010 report from UK think tank New Economics Foundation generated plenty of publicity by suggesting that a 21 hour standard work week would significantly improve wellbeing by giving people more time for family, friends, neighbours, and leisure activities. Interestingly, economist John Maynard Keynes envisaged in a 1930 essay on the Economic Possibilities for our Grandchildren the following situation: Thus for the first time since his creation, man will be faced with his real, his permanent problem - how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. The productivity gains imagined by Keynes as the source of this freedom from work did eventuate. Everywhere we look we can see far greater output per hour of labour, from agricultural production all the way through the production processes in our complex 21st century economy. However, recent research suggests that leisure time has been relatively constant since 1900, and time spent on home production activities (cooking, cleaning etc) has actually slightly increased. Additionally, while time spent at work over a lifetime has decreased since 1900, most of this is the result of more time spent studying.

    Japan FY 2012 Budget Requests to Hit Record Over 98 T. Yen (Jiji Press)--Japan's general account budget requests for fiscal 2012 are estimated to total over 98 trillion yen, the largest request size ever, it was learned Thursday.   The estimated request amount compares with the actual spending scale of 92,411.6 billion yen for the initial budget for fiscal 2011 ending next March and with 96,746.5 billion yen in requests for the current fiscal year.  The fiscal 2012 budget requests are to balloon because government ministries and agencies are allowed to seek unlimited budget allocations for projects to reconstruct areas devastated by the March 11 earthquake and tsunami, government sources said.

    Japan to Expand Yen-Intervention War Chest - Japan's finance minister sent out a fresh warning against the yen's persistent strength on Friday, with a plan to expand the nation's currency-market intervention war chest to record levels and a vow to take "decisive measures" to limit the yen's rise. But the foreign-exchange markets showed little reaction to the comments, with the dollar staying just above its post-war record low of ¥75.94 in Asian trading as investors doubted that Tokyo would engage in imminent yen-selling intervention. "We will reinforce our monitoring of the currency market and stay vigilant over speculative activity," Finance Minister Jun Azumi said

    Can China save us again? - The 2008 Global Financial Crisis (GFC) brought about an extraordinary fiscal and monetary response from the world’s governments. Nowhere was this response as grand as in China, which rolled out an enormous stimulus package worth some four trillion yuan ($US570 billion), mostly in the form of fixed asset investment, including the construction of roads, railways, and buildings. To say that China’s stimulus package was a ‘success‘ is an understatement. As the Western economies entered recession in 2009, the contraction of Chinese exports – which lopped around 3% off China’s GDP – was more than offset by an increase in fixed asset investment, which peaked at a whopping 90% of GDP in 2009 (see the below chart).

    China Rebuffs Hopes It Might Help Bail Out Europe - —China to Europe: Don't expect a bailout from us.That was the message delivered by a number of Chinese officials during meetings at the International Monetary Fund, where China was widely seen as an answer to the euro zone's problems, either as a purchaser of European debt or as a country that could further goose its economic growth rate. "We can't just go save someone," said Gao Xiqing, president of China Investment Corp., China's huge sovereign wealth fund. "We're not saviors. We have to save ourselves," he said at a weekend panel discussion. If Europe decided to issue euro-zone bonds—debt guaranteed by all euro-zone members—CIC would consider becoming a purchaser, he said afterwards. "If it has a risk profile that fits into our allocation, we'll buy some," Mr. Gao said. "But don't expect us to buy more than our risk appetite would take."  That appeared to rule out CIC buying debt from Italy, Greece and other troubled euro-zone nations that are having the toughest time finding buyers.  Chinese central banker Zhou Xiaochuan was just as adamant that China shouldn't be expected to boost its growth rate in an unsustainable fashion to help out the global economy.

    Indebted Countries Come in Three Flavors - The IMF’s latest Fiscal Monitor includes a colorful chart of who owns the debt of six countries with well-known debt concerns: The debt owned by foreign investors and foreign central banks are in red and yellow; the other colors represent debt owned domestically. Based on IMF’s accounting, the six countries come in three flavors:

    • The “PIG” countries. Portugal, Ireland, and Greece owe most of their debt to foreigners.That’s a key reason their shaky finances are of international concern.
    • Japan. It owes almost all of its debt to itself (i.e., its citizens and institutions). That’s a key reason the international community isn’t freaking out about its debt levels.
      The U.S. and U.K. The two “Uniteds” owe most of their debt to themselves (including their central banks, in orange), but also owe a substantial amount to foreigners. The yellow pie slice for foreign official holdings is, of course, notably large for the United States.

    U.S. Pushes Europe to Act With Force on Debt Crisis -  Obama administration, increasingly alarmed by the spillover effects of Europe’s financial crisis, has begun an intensive lobbying campaign to persuade Chancellor Angela Merkel1 of Germany and other leaders to act decisively to stem any contagion from the Greece debt crisis2.  In phone calls and meetings over the last week, President Obama3 urged Mrs. Merkel and President Nicolas Sarkozy4 of France to take coordinated measures to prevent Greece’s debt woes from spreading to its neighbors. The American pressure will be on display again Friday and this weekend at a gathering of the world’s finance ministers in Washington.  Yet administration officials played down the likelihood of concerted action emerging from these meetings of the International Monetary Fund and the World Bank. At best, they said, the ministers might lay the groundwork for a bolder response in November, when leaders of the Group of 20 industrialized nations meet in Cannes, France.

    Which pump to pull to rescue the recovery? - Scary. The International Monetary Fund, determined not to get caught out as it was when the crisis hit three years ago, has been daily sounding the alarm. The global economy, it says, is in “a dangerous new phase”, while Christine Lagarde, its managing director, warns that the path to continued recovery is narrower than three years ago. The IMF thinks chances of a new recession are as high as 38% in the US, 18% in France and 17% in Britain. Purchasing managers’ surveys point to a eurozone on the brink of recession. Resolving its crisis in a climate of growth was hard. Doing so in recession is much harder, notwithstanding George Osborne’s warning that its leaders have six weeks to save the euro. The economic solution, in the form of “shock and awe” from the European Central Bank and an enlarged European Financial Stability Facility, recapitalisation of Europe’s banks and medium-term restructuring of the eurozone (including an eventual Greek exit), is not hard to envisage. The politics of it, however, are horrendously difficult. The eurozone, it goes without saying, is the biggest threat facing the world.

    IMF’s Resources May Not Be Enough If Global Economy Worsens, Lagarde Says - The International Monetary Fund’s $384 billion lending chest may not be enough to meet all loan requests if the global economy worsens, Managing Director Christine Lagarde said.  “The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-case scenarios,” Lagarde said in an “action plan” distributed to the IMF steering committee today. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”  Tripling IMF resources was part of the Group of 20 leaders’ response to the global recession in 2009. As the European debt crisis threatens to spread and further damp the global recovery, the IMF was asked by its steering committee today to review whether its resources are sufficient.  “The IMF has a limited financial ability to staunch an escalation of the crisis that envelops major European economies like Spain and Italy,”

    Christine Lagarde: IMF may need billions in extra funding - Telegraph: The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states. In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: "The fund's credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders." The suggestion came after European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion. The plan to increase the EFSF firepower is the crucial part of a three-pronged strategy being designed by German and French authorities to stop the eurozone's debt crisis spiralling out of control. It also includes a large-scale recapitalisation of European banks and a plan for an "orderly" Greek default. Although Britain is not involved in the large-scale eurozone bail-out projects, it is liable for 4.5pc of IMF funding.

    Pimco Forecasts Europe Recession Next Year - Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting that advanced economies will stall over the next year as Europe slides into a recession, underscoring mounting investor concern about the global economic outlook. There will be little-to-no economic growth in industrial nations in the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El- Erian. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next. Such gloomy sentiment dominated weekend talks of policy makers, investors and bankers in Washington, where the IMF and World Bank held their annual meetings. The Dow Jones Industrial Average suffered its biggest loss since 2008 last week as the Federal Reserve said risks to the U.S. economy had increased and Europe’s debt crisis went unresolved. “For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero,” El-Erian said

    European Industrial Production - Above are the latest numbers on Eurozone industrial new orders, including the latest data point - July - which just came out today.  As you can see July has a drop which could be the beginning of a new downtrend, but which is also not so big that it might not be just noise.  Indeed the report notes:In July 2011 compared with June 2011, the euro area (EA17) industrial new orders index fell by 2.1%. In June the index dropped by 1.2%. In the EU27 new orders decreased by 0.8% in July 2011, after a fall of 0.8% also in June. Excluding ships, railway, and aerospace equipment, for which changes tend to be more volatile, industrial new orders rose by 1.4% in the euro area and by 0.9% in the EU27. Either way, this index is still not back to it's pre-recession high.  It will be very interesting to find out what this series did in August.

    Eurozone PMI - Here's the key graph from the Markit PMI press release.  This is from their survey of Purchase Managers in September so provides a more real time indicator than official indicators.  That's certainly not an encouraging reading at all.

    Globalization’s Government - Jeff Sachs - We live in an era in which the most important forces affecting every economy are global, not local.  Economic globalization has, of course, produced some large benefits for the world. Yet globalization has also created major problems that need to be addressed. First, it has increased the scope for tax evasion, owing to a rapid proliferation of tax havens around the world. Multinational companies have many more opportunities than before to dodge their fair and efficient share of taxation. Moreover, globalization has created losers as well as winners. In high-income countries, notably the US, Europe, and Japan, the biggest losers are workers who lack the education to compete effectively with low-paid workers in developing countries.. Such workers have lost jobs by the millions. Those who have kept their jobs have seen their wages stagnate or decline. Globalization has also fueled contagion. The 2008 financial crisis started on Wall Street, but quickly spread to the entire world, pointing to the need for global cooperation on banking and finance. What globalization requires, therefore, are smart government policies.

    Europe Seeks to Ratchet Up Effort on Debt -  Under increasing pressure from global investors and world leaders, European government officials indicated Saturday that they were working to intensify their response to the continent’s growing debt problems. It was an acknowledgment, after weeks of public stonewalling, that a plan announced in July had failed to calm financial markets.  Fears that Greece could default on its mounting debts, and that other European countries might follow, have repeatedly sent global markets plunging in recent weeks. Investors are also increasingly concerned that uncertainty itself is disrupting economic activity around the world and slowing growth.  Olli Rehn, the European Union’s monetary affairs commissioner, said Saturday that there was “increasing political will” among European leaders for a new effort to soothe investors. He said they were discussing a plan to multiply the financial impact of an existing bailout fund designed to make up to 440 billion euros ($600 billion) in loans to troubled nations and banks, so that it could instead insure a few trillion euros in loans.

    'Massive jobs shortfall' predicted for global economy - The world's major economies are heading for a "massive jobs shortfall" by the end of next year if governments do not change their tack on policy, the International Labour Organisation (ILO) said in a study published on Monday. In the report, prepared with the OECD for G20 labour ministers meeting in Paris on Monday, the ILO said the group of developing and developed nations had seen 20m jobs disappear since the financial crisis in 2008. At current rates it would be impossible to recover them in the near term and there was a risk of the number doubling by the end of next year, it said. "We must act now to reverse the slowdown in employment growth and make up for the jobs lost," ILO director general Juan Somavia said in a statement. "Employment creation has to become a top macroeconomic priority."

    Multi-trillion plan to save the eurozone being prepared -  European officials are working on a grand plan to restore confidence in the single currency area that would involve a massive bank recapitalisation, giving the bail-out fund several trillion euros of firepower, and a possible Greek default. German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiralling out of control. Their aim is to build a “firebreak” around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered “too big to bail”. Sources said the plan would have to be released as a whole, as the elements would not work in isolation. According to sources, progress has been made at the G20 meeting in Washington, where global leaders piled pressure on the eurozone to fix its problems before plunging the world back into recession.

    Europe Readying Yet Another “This Really Will Do the Trick” Bailout Package -  Yves Smith - Well, we are clearly in crisis mode. We are back to weekends being a period when you need to watch the news in a serious way. And in another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all. The problem is that was the premise of several of the last grand schemes, such as the EFSF and the ESM. The market calming effect relatively short lived because analysts quickly pencilled out the programs were inadequate in size and failed to address the problems of lack of a fiscal mechanism at the EU level and the need to address the elephant in the room, bank solvency. The program in the works claims address the underlying issue of bank solvency, but even the sketchy leak of this weekend reveals it falls falls short, both in concept and in size.  The new rescue program seeks to create a sovereign debt crisis firebreak at Greece, Portugal, and Ireland, when contagion has already put Spain, Ireland, and Belgium in the crosshairs. The high concept is leverage on leverage plus monetization: the EFSF, which is basically a CDO, would then provide the equity to a new fund, and the ECD would provide “protected ‘debt’” I’m not at all certain what the latter is supposed to mean; reader input is welcome. But this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt. Nevertheless, this mechanism will allegedly allow for sovereign bailout program of €2 trillion.

    Europe: Why the One-Size-Fits-All Solution Won’t Work - Rebecca Wilder - I’d like to remind the Troika – the ECB/EU/IMF – that their one-size-fits-all (OSFA) solution won’t work for every economy in the euro area. OSFA: forced fiscal consolidation for each euro area country that falls into the throes of a liquidity crisis, thereby finding themselves in need of funding at “reasonable” rates. First it was Greece – then it was Ireland – then it was Portugal – and then it was Italy and Spain. But don’t forget France – they recently instituted new fiscal cutbacks to accommodate a lower growth trajectory. The rationale for the OSFA approach is pretty simple. Ireland, Portugal, Greece, Spain, Italy, and France (among the headline candidates) are  forced (either explicitly by the Troika – Ireland, Portugal, Greece, the ECB – Italy and Spain, or the bond markets – France along with the others) to drive down domestic demand via fiscal consolidation to the point where prices (wages) fall, thereby shifting relative prices to drive increased competitiveness and net export income.  The Table below lists the leverage by sector: Private sector ( household + non-financial corporation) and Public sector (General government) as the total debt outstanding and normalized by the country’s level of GDP (see ECB data here).  The thing to notice here is, that broadly speaking the 2010 leverage build was not in the government  sector (fiscal consolidation) but generally in the private sector.

    Debt Levels Alone Don’t Tell the Whole Story - AS the world’s central bankers and finance ministers gather in Washington this weekend for the annual meetings of the International Monetary Fund and World Bank, government debt is at the top of the agenda. Some governments can no longer borrow money and others can do so only at relatively high interest rates. Reducing budget deficits has become a prime goal for nearly all countries.  But looking only at government debt totals can provide a misleading picture of a country’s fiscal situation, as can be seen from the accompanying tables showing both government and private sector debt as a percentage of gross domestic product for eight members of the euro zone. The eight include the largest countries and those that have run into severe problems.  In 2007, before the credit crisis hit, an analysis of government debt would have shown that Ireland was by far the most fiscally conservative of the countries. Its net government debt stood at just 11 percent of G.D.P.  By contrast, Germany appeared to be in the middle of the pack and Italy was among the most indebted of the group.  “In Ireland, as in Spain, the government paid down debt while private sector grew,” said Rebecca Wilder, an economist and money manager whose blog at the Roubini Global Economics Web site1 highlighted the figures this week.

    Linking sovereign risk to corporate credit spreads in Europe - Rebecca Wilder - Financial firms in Europe and the US are hitting crisis mode, as illustrated by relative borrowing costs, spreads, to comparable government bonds (see financial spreads chart to left and click to enlarge). World policy leaders anxiously await – and some promise to deliver – a solution to the euro area sovereign debt crisis at the IMF annual meetings. Tim Geithner urges policy makers in Europe to end the “threat of cascading default, bank runs and catastrophic risk”. We really are in crisis mode. However, in order for Europe to end the threat of bank runs and catostrophic risk, they must address the cause of the banking crisis itself. Wherein lies the risk to the European banking system? Is it liquidity? Is it solvency? What does the ‘market’ think? In this post (and in a subsequent post as well), I’ll highlight the following point: at this time, there is no liquidity crisis, per se, in the European banking system – there could be in coming months/quarters if deposits fall more sharply. The underlying risk to the banks is their sovereign exposure, as illustrated by the sector-level breakdown of European corporate credit spreads. The coordination of the European national governments is failing, inherently disintegrating any implicit guarantees in the banking system. Therefore, the risk premium is rising.

    Banking Systems Most Exposed to PIIGS Nations – 3,2 trillion USD - At the center of concerns are the "PIIGS" nations - Portugal, Italy, Ireland Greece and Spain - heavily indebted countries in danger of default that could trigger an economic domino effect around the globe. In an April 2010 report, the Swiss-based Bank for International Settlements (BIS), a clearinghouse for world’s central banks - reviews central bank data and reveals the countries that are the most exposed to European turmoil, specifically in their banking systems. The numbers presented here take into account foreign claims - investments in the form of loans and bonds that have arisen from PIIGS nations – that are held by international banks headquartered outside the individual countries. If a government defaults on debt, it could carry catastrophic consequences for the country's economy, with the potential to seriously devalue - or potentially wipe out - these assets. For the context of this report, has compared the exposure of countries to the size of their respective financial systems for a percentage of total direct exposure. The exposure numbers only include data from international banks, and does not account for insurance companies or other financial firms.

    Banks May Need $202 Billion Euro-TARP Program, Says JPMorgan (Bloomberg) -- Euro zone banks need at least 150 billion euros ($202 billion) of capital provided through a Europe-wide Troubled Asset Relief Program akin to the U.S. plan, according to a report by JPMorgan Cazenove. France could lead with a capital injection of about 15 billion euros to 20 billion euros for its banks, according to a note led by JPMorgan analyst Kian Abouhossein. Societe Generale SA would be one of the “key beneficiaries” if France led the European TARP program, they said. The minimum required to reopen European bank funding market is 112 billion euros, according to the note. “We assume a Euro TARP rather than specific support only for the most distressed institutions, as we believe a general solution is required to restore general confidence and reopen the funding markets for all institutions,”

    Gloomier and gloomier - TWO significant messages emerged from the weekend's IMF meetings that are both striking in their own right and which, when set against each other, are deeply disconcerting. On the one hand, journalists seem to be unable to describe the meetings without noting the high level of fear and anxiety among the participants. (The Financial Times' Wolfgang Münchau closes his column today by saying, "I have never seen Europe's policymakers as scared as I saw them in Washington last week.") Along those lines, leaders came away from the meetings promising bold action by early November. The message seems to be that officials have been scared into a recognition of the severity of the world's problems and are now prepared to act. Yet the day's headlines carry another message: the euro zone is riven by conflict and unable to agree on the most basic of rescue measures. Euro-zone governments are still struggling to put in place an agreement reached in July. Some officials insist that Greece's creditors must take much larger haircuts than those assumed in that deal, while Greek leaders continue to argue that they will not default. Observers are biting their nails over looming parliamentary votes on the plan to increase the EFSF, even as it becomes clear that a rise to €440 billion isn't sufficient.

    Investors Ask if Anything Can Save Greece From Default - After months of wrangling, Greece’s frustrated lenders are on the verge of disbursing funds to keep the near-bankrupt nation solvent. But as investors and increasingly frantic policy makers confront mounting fears of a run on European banks, the need to bail out Italy and a second global recession1, the €8 billion tranche Greece expects to receive from its creditors could well be too little, too late. Under intense pressure from the United States, euro zone leaders spent the weekend in Washington working to craft a rescue plan to bolster sickly banks and buy the bonds of weak countries like Italy. But past efforts to bring an end to the debt crisis in Europe — including a second, €109 billion rescue plan for Greece forged by Europe and the International Monetary Fund in July — have failed to stand up. Investors remain skeptical that another plan will be any different. With Greek government debt trading on the open market below 40 cents on the dollar, it is quickly approaching what debt experts call the recovery rate — the price investors would get for their bonds if the country officially defaulted.  In effect, that means investors have given up.

    Can Europe Be Spared Cascading Collapse? - The failure of the European authorities to arrest the speculative run on Greek bonds and the sense of inevitable wider collapse reminds me of the diplomatic failures that led to World War I. In the summer of 1914, myopic bluffing by Europe's key leaders produced a catastrophe that nobody wanted.  Each pursued only narrow self-interest. The impending economic collapse of Europe is looking like one of those avoidable calamities in slow motion.Here are the elements of the Greek crisis, its wider ripple effects, the diplomatic paralysis, and the solution that seems beyond the grasp of European politics. Greece, a small nation of just over 11 million people, has a government debt that it cannot service without external aid. Speculators expecting a default have been making bets that Greece will fail to pay, raising its interest costs and thus increasing the likelihood of the default they are betting on.  When a house is on fire and threatens the whole neighborhood, it's not smart to dither about whether there was adequate fire-prevention while the place burns down. You put the fire out.

    The Geithner Plan to Save Europe is Not Enough - The latest initiative to save the Eurozone is the "Geithner Plan." It would have the Eurozone leverage up the EU's €440 billion bailout fund to €1 trillion by making it act as an insurance fund for investors buying up debt of the troubled Eurozone countries.  Though big, this plan would only address the current debt problems.  It would not solve the large real exchange rate misalignment--30% according to Ambrose Evans-Pritchard--between the core countries and the the troubled periphery. The ECB, on the other hand, could address fix this problem. Here is how.  If the ECB were to sufficiently ease monetary policy, it would cause inflation to rise more in those parts of the Eurozone where there is less excess capacity and nominal spending is more robust.  Currently, that would be the core countries, particularly Germany.  Consequently, the price level would increase more in Germany than in the troubled countries on the Eurozone periphery.  Goods and services from the periphery then would be relatively cheaper.  Therefore, even though the fixed exchange rate among them would not change, there would be a relative change in their price levels.  This would provide the much needed real depreciation for the Eurozone periphery as they move forward in their attempts to salvage their economies. 

    Can European Politicians Beat the Clock and Stave Off a Crisis? - Yves Smith - The Eurocrats finally seem to have realized time is running out. The abrupt market downdraft of last week appears to have focused their minds on the need for a much larger scale rescue mechanism of some form, with numbers like trillions attached, and that will move the Eurozone further towards fiscal integration, another badly needed outcome. Yours truly, along with a lot of the English language press, seems to have misread the resignation of Jurgen Stark from the ECB as a Bundesbankian repudiation of sorts. Instead, it’s a sign that Germany realizes its interests lie in preserving the Eurozone. Per Marshall Auerback: Most of the ‘blame the Mediterranean profligates rhetoric we’ve been hearing has been diversionary, to draw local attention away from the fact that Germany’s hardcore Bundesbankers are losing this battle. .  The pan-Europeanists are the ones who will support a coordinated response to financial issues, not coincidentally because this will be the only way to retain existing benefit levels once some sovereigns and the banks exposed to them go soft. Remarks from Angela Merkel over the weekend confirm that the Germans understand full well that they can’t afford a Greek exit: Merkel rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed.

    Will The IMF Save The World? - Simon Johnson - The finance ministers and central bank governors of the world gathered this weekend in Washington for the annual meeting of countries that are shareholders in the International Monetary Fund.  As financial turmoil continues unabated around the world and with the IMF’s newly lowered growth forecasts to concentrate the mind, perhaps this is a good time for the Fund – or someone – to save the world. There are three problems with this way of thinking.  The world does not really need saving, at least in a short-term macroeconomic sense.  If the problems do escalate, the IMF does not have enough money to make a difference.  And the big dangers are primarily European — the European Union and key eurozone members have to work out some difficult political issues and their delays are hurting the global economy.  But, as this weekend’s discussions illustrate, there is very little that anyone can do to push them in the right direction.

    Noyer Sees ‘Absolutely No Reason’ to Use 2008 Backstop for French Banks - Bank of France Governor Christian Noyer said he sees “absolutely no reason” to activate a support system for the nation’s banks that was set up during the financial crisis in 2008.  “A backstop facility created in 2008 still exists,” Noyer said in an interview with Bloomberg Television yesterday in Washington. “I see absolutely no reason it should be used.”  BNP Paribas SA and Societe Generale (GLE) SA, France’s biggest banks by market value, rose in Paris yesterday on speculation the French government will take steps to bolster their capital. Both banks, along with Credit Agricole SA (ACA), have shed more than half their value in the past three months as Europe’s sovereign debt crisis intensified.

    German Banking Group Warns of further Greek Charges - Germany's private banks need to prepare for further fallout from the euro zone's sovereign debt crisis, the head of Germany's BdB banking association said on Sunday. "I don't think that banks will get around further charges regarding Greece," BdB President Andreas Schmitz told Reuters in an interview in Washington, adding that the effects of the Greek crisis were manageable if it could be contained. Earlier this month, Free Democratic Party leader (FDP) Philipp Roesler, Germany's economy minister, said an "orderly bankruptcy" of Greece should not be a taboo, in remarks that were criticized by Chancellor Angela Merkel and German Finance Minister Wolfgang Schaeuble. Schmitz said that this kind of dissent only added to investors' concerns and that it was crucial that the German parliament approves the granting of new powers to the existing euro zone rescue mechanism, the European Financial Stability Facility (EFSF) in a key vote on September 29.

    Bank lobby rejects reopening of Greek rescue deal - The international bank lobbying group that has been taking a leading role in negotiations on giving debt-ridden Greece easier terms for its bonds on Sunday rejected calls to impose larger losses on private investors. Forcing private creditors to write down their Greek bond holdings by more than the 21 percent tentatively agreed to in a July deal would quickly cause a "domino effect" that would see the crisis spread to other parts of Europe, warned Josef Ackermann, the outgoing chairman of the Institute of International Finance. Such a move would ultimately cost taxpayers much more than just bailing out Greece and erode confidence in the euro, warned Ackermann, who is also the CEO of Germany's Deutsche Bank, a major lender to Greece.

    ‘Barrier’ Around Greece Needed: Merkel - German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states ... “We have to be in a position to react,” Merkel said. “We have to be able to put up a barrier.” Even so, “I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks.”  Merkel rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” ... “Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” ... Merkel suggested that Greece may be able to get the next tranche of bailout aid, after a team of officials from the IMF, the ECB and the European Commission assess the Greek government’s progress ... Merkel is due to host Greek Prime Minister George Papandreou for talks in Berlin on Sept. 27, two days before German lawmakers vote on the enhanced rescue fund...

    Greece vows to stay in the euro, never go bankrupt - Greek Finance Minister Evangelos Venizelos sought to reassure nervous markets and EU partners on Saturday by pledging his debt-ridden country would do whatever it takes to avoid default and stay in the euro zone. During an IMF meeting in Washington that was dominated by fears that Greek debt woes could trigger a wider European crisis, threatening banks and hurting the world economy, Venizelos dismissed any talk of bankruptcy. "Greece will always be in the euro and Greece will never go bankrupt because this would be destructive for the euro zone and for many other countries beyond the euro zone," he said in a statement after meeting his German, French and Italian and Belgian counterparts. "Greece is determined to honor all its obligations. No Greek paper will ever go uncovered," Venizelos told reporters.

    Catastrophic Stability - Krugman - I look a fair bit at bond market “breakevens” — the difference in interest rates between regular bonds and inflation-protected bonds of the same maturity, which give a measure of inflation expectations. It’s not a perfect measure, but breakevens do give a quick read on the issue, and can be helpful in thinking about where we are. So, let’s look at German breakevens: The market seems to expect price stability for Germany — an inflation rate of 1 percent or so over the next 5 years. And that has a clear message: it’s signaling catastrophe for the euro. Why? I tried to lay this out a while ago.A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent. But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.

    German inflation is higher, Paul – Kantoos - Paul Krugman has a post on German inflation expectations. Almost everything he writes is true, but there is one problem: I don’t think it’s the German inflation outlook he is looking at. German inflation-indexed government bonds use the overall Eurozone HICP index as a benchmark, not the German index. So the breakeven rate at Bloomberg, which is currently at a depressing 1.35 % for the next 10 years, is the breakeven inflation rate for the Eurozone, not Germany.In terms of Eurozone dynamics, Paul is absolutely right: we need to see some inflation such that wage and price adjustments in the periphery are easier to accomplish, that is, without outright deflation. A below-2% inflation target is completely inadequate for the Eurozone. If we take the target of the ECB as given, the major problem is the sheer size of the German economy within Europe. If the ECB does not tolerate more than a weighted average of 2% inflation, the recent rise in German nominal wages of 4.2% may not help much if it induces the ECB to tighten policy. What is really tragic is how obvious this is, and how little European economists seem to care.

    Hiccup! (HICP) - Krugman - Kantoos informs me that German index bonds are indexed to the eurozone Harmonized Index of Consumer Prices, not the specifically German index, which means that things are not quite as bad as I suggested in this post; as he says, however, they are still plenty bad. This is probably a good time to point out something that should be widely understood: inflation and deflation are not symmetrical. Four percent inflation does very little harm; four percent deflation is a disaster. Why? Three reasons:

    • 1. The zero lower bound: you can always raise interest rates, but you can’t cut them below zero, so deflation means significantly positive real rates even in the depths of a slump, making monetary stabilization much harder if not impossible.
    • 2. Nominal wage rigidity: it’s hard to get wage cuts — always has been, and always will be. So deflation messes up labor markets.
    • 3. Debt: deflation is always contractionary, because it redistributes wealth to creditors and away from debtors, who are almost by definition more likely to be spending-constrained.

    Greek debt talks fail to find solution - The International Monetary Fund annual meetings wrapped up in Washington on Sunday with widespread concern over the eurozone sovereign debt crisis but no immediate consensus on the solution. Participants said they were waiting for the ratification of the action plan agreed on July 21 by the eurozone, particularly by the German Bundestag this week, before starting serious negotiations on increasing the rescue fund's firepower or asking for a bigger writedown in private sector holdings of Greek debt. Meanwhile, Greece continued to insist it would not default, despite widespread private pessimism among attendees at the meetings. Josef Ackermann, chief executive of Deutsche Bank, on Sunday criticised suggestions among some G20 officials about revisiting a planned rescheduling of private bondholdings -- a central part of a planned second eurozone-IMF rescue package for Greece agreed in principle on July 21.

    Greece faces austerity strike as markets brace for debt default - As the prospect of a disastrous debt default hung over Greece, the government faced strikes and protests Monday against new austerity measures needed to appease the country's rescue creditors. Athens metro, tram and suburban rail workers held a 24-hour strike, while buses and trolleys were to stop operating for several hours. Airline passengers also faced delays as traffic controllers implemented work-to-rule action, refusing to work overtime. A 48-hour strike by all transport workers is expected later this week. Greek police held their own protest, with the Special Guards unit hanging a giant black banner from the top of Lycabettus Hill in the capital reading "Pay day, day of mourning." Faced with mounting anger from the country's international creditors, the government recently announced a raft of new austerity measures to secure the next euro8 billion ($10.7 billion) instalment of bailout loans from the euro110 billion rescue package it has been dependent on since last year. Without the funds, Greece only has enough funds to see it through mid-October, when it faces the prospect of a messy default.

    Greece needs decade to get competitive: German finance minister - (Reuters) - German Finance Minister Wolfgang Schaeuble said in a magazine interview published on Saturday that Greece would not be able to return to capital markets next year and would need a decade to make its economy competitive. Schaeuble told business weekly WirtschaftsWoche that it was "clear that Greece will not be able to return to capital markets in 2012, as we thought in 2010." "Greece will need a decade rather than a year to get fully competitive," added the minister from Chancellor Angela Merkel's center-right government. With anxiety about a possible Greek sovereign debt default rising in Europe, the chief economist of German insurer Allianz said a major haircut for Greek government bondholders would only increase the risk of contagion in the euro zone. "I don't believe the time is right for a debt haircut like this,"

    Europe’s Banking Crisis Is No Longer a Liquidity Crisis, nor Is It a European Version of ‘Subprime’ – It’s a Sovereign Coordination Crisis  - Rebecca Wilder - I often hear that Europe is trying to avoid its ‘Lehman event’, or that the PIIGS euro area bonds are the European equivalent of  subprime bonds. Rather, the European banking crisis is centered on a failure of public coordination that’s made explicit and implicit holdings of sovereign assets a risk to even the healthiest of banks. Cross border bank exposure to the Periphery economies is widely known in Europe, as clearly listed through the BIS banking statistics (see Table 9b). Therefore, the first-order losses from any country taking, say a 50% writedown on Greek debt, is known and preparations can be made. In contrast, policy makers during the US subprime crisis had no idea what they were dealing with, even the securities themselves were little known by Fed officials. Furthermore, European banks raised capital (at least the big ones have) and acquired USD cash buffers to finance their dollar-denominated operations (chart below) – not enough, clearly, but they’ve done it. . In Europe, you’ve got 17 economies that (at this time) must conjure up a plan to buffer their respective banking systems in the face of a Greek default, a Portuguese default, a failed ratification of the EFSF, etc.  And here’s the problem: European banks face a very different risk than did US banks: sovereign risk via failed fiscal coordination.

    Waiting on European Bailout Solutions, When European Policies Prevent Them - The weekend ended without any dramatic announcement about a multi-trillion euro bailout for the banking sector. But the elements of the bailout are being prepped. European officials are working on bolstering their bailout fund, known as the European Financial Stability Fund (EFSF). After a weekend of being told by the United States, China and other countries that they must get more aggressive in their crisis response, European officials focused on ways to beef up their existing 440 billion-euro rescue fund.“We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet,” the official said. More anti-austerity protests raged in Greece, meanwhile, though the perspective of the people that have to suffer the consequences of protecting the banks doesn’t seem germane to European policymakers. Why Greece is bothering to knuckle under to such demands for another tranche of bailout money, when everyone believes they will go into default, doesn’t make a lot of sense to me.

    Euro Zone Death Trip, by Paul Krugman - Is it possible to be both terrified and bored? That’s how I feel about the negotiations now under way over how to respond to Europe’s economic crisis, and I suspect other observers share the sentiment.  On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world. On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.

    Geithner Tells Europe to ‘Get On With It’ After Global Chiding Over Crisis - U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up their response to their region’s debt crisis after a chiding from counterparts around the world. “They heard from everybody around the world” in Washington meetings last week, Geithner said on ABC’s “World News With Diane Sawyer” program. Europe’s crisis is “starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea. And they heard the same message from us they heard from everybody else, which is it’s time to move.” Geithner’s remarks maintain pressure on Europe ahead of finance minister and central bank gatherings next week and a decision on whether to disburse a loan Greece may need to avoid default. Speculation that rescue efforts will be strengthened spurred a rally in stocks even after Dutch and Finnish officials said they won’t boost commitments to a euro-area bailout fund. Europe has “some time, but not very much time,” Geithner said in the interview late yesterday. “If you listen carefully to what they said this weekend, not just to us in private, but what they said publicly, they’re foreshadowing now the escalation that’s going to come. And we’d like them to get on with it.”

    EU looking at trillions in shock-and-awe plan to end crisis - A plan involving a multi-trillion euro leveraging of the eurozone's rescue fund via the European Central Bank is under consideration as the EU comes under global pressure to act quickly to prevent the bloc's crisis kicking off a global recession. .A source close to the discussions confirmed that the plan is "real" but the full scale of the sums involved remain undecided. At a crunch meeting of the International Monetary Fund meeting in Washington where little else was on the table for discussion, according to reports out of the US capital, officials suggested that European Financial Stability Fund (EFSF) could be leveraged via the ECB to achieve the estimated €2 trillion needed were Italy and Spain to require financing. EU economy chief Olli Rehn said on Saturday: "We need to build a bridge and I think this bridge will be developed on the basis of the current reform of the EFSF and as one part of that next stage we are contemplating the possibility of leveraging the EFSF resources to have more firepower and thus have a stronger financial firewall to support our member states doing the right thing."

    IMF to increase resources to more than $1 trillion: report -  The International Monetary Fund may be hoping to increase its financial resources from $940 billion to at least $1.3 trillion, according to a newspaper report out Monday.German daily the Frankfurter Allgemeine Zeitung said two "models" were currently being examined to up the IMF's resources, without stating its source. It follows comments on its lending capacity by managing director Christine Lagarde in an action plan released Saturday. "Our lending capacity of almost $400 billion looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders," Lagarde said. "It will be useful to discuss, soon, the needs and contingency options," she added.

    Here's The Euro-TARP Bazooka Europe And The IMF Are Discussing Right Now...  Europe is crawling closer to finally doing something about its bankrupt fringe countries and the impending collapse of its banking system.  Namely, it's finally talking about solutions. The solution being talked about today by the International Monetary Fund, says the BBC, is as follows:

    • Increase the EFSF (european bailout fund) to 2 trillion euros, more than quadrupling it. The EFSF would lend to countries that are having trouble borrowing money in the private markets.
    • Write Greece's debt down by 50%
    • Strengthen bank capital in some undefined way.

    European governments reportedly want to have this plan in place in 5-6 weeks. Would this work? Well, most analysts think Greece's debts will have to be written down by 80% or more. But 50% is a reasonable start. And 2 trillion euros is a lot of euros, so that would help kick the can down the road a ways.

    Deal…what deal? - The situation in Europe has now officially become a farce. While the Equity markets rocketed up between 4-5% last night because of a rumour that Greece, and therefore Europe, would be saved by a new plan to leverage up the EFSF, a large number of people who would actually have to approve the deal were denying such a deal even existed. German Finance Minister Wolfgang Schaeuble told the cabinet on Tuesday: .. there were no plans to increase the volume of the European Financial Stability Facility (EFSF) rescue fund or Germany’s maximum contribution Finland and Dutch PM’s in a joint statement: … rejected international calls for an expansion of Europe’s bailout facility however, stressing that profligate euro nations in the periphery should enforce budget discipline according to existing treaty obligations. Spanish Economy Minister Elena Salgado: “It is not on the table, nor has it been discussed,”The EIB that was supposed to be running the whole thing: .. the European Investment Bank just said that it has not been approached to take part in any bailout program involving the European Financial Stability Facility.

    The IMF, (Hypocritical) Dispensers of Bad Advice - I've regularly been receiving (print!) newsletters from the Bretton Woods Project whose most famous campaign was "Fifty Years is Enough" concerning the aforementioned IMF and World Bank outlasting their usefulness.  I needn't go over my longstanding objections concerning the misappropriation of emergency funds meant for balance of payments crises going towards bailouts of troubled European peripheral states not primarily suffering from such problems. Moreover, think of how various regions of the world are coming up with their own bailout funds expressly designed to make IMF borrowing superfluous to a certain extent: Europe has its European Financial Stability Facility (EFSF). Asia has its Chiang Mai Initiative Multilateralization (CMIM). Meanwhile, Latin American countries have mooted a Banco del Sur. For this post, though, let's focus on one of the most annoying things the IMF does which is peddle rather poor, hypocritical advice. Alike with questions of succession tilted towards Europeans and what it means for emergency lending, the IMF being headquartered in DC also has deleterious consequences. For, it has continually been the case that the IMF has prescribed austerity...except for "special cases" (like its host country).

    Is and ought for the Eurozone - The fundamental problem is that it's very hard to get 17 governments to agree on how the European Central Bank should act in its role as lender of last resort. Which sovereigns get helped, and how much? Which countries' banks get helped, and how much? If a bust bank gets nationalised, which sovereign takes it over? Can you nationalise a bust sovereign? You can't really give economic policy advice in that sort of context. The best you can do is act like a mediator trying to keep a disfunctional 17 person marriage from breaking up. Why even bother? Even if you could find a magic cure for this crisis, you don't solve the problem. The problem is the marriage itself. The best advice you could give would be to propose some way of breaking up which minimised the costs to all 17. The Eurozone doesn't work. It's going to break up anyway, I think. The only question is when, and whether it's a negotiated break up or a break up from force majeure when sovereigns default, and banks go bust, and countries will have no alternative but to issue their own currency if they want to pay their government workers and pensions and re-open their banks.

    Split opens over Greek bail-out terms - A split has opened in the eurozone over the terms of Greece’s second €109bn bail-out with as many as seven of the bloc’s 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials. The divisions have emerged amid mounting concerns that Athens’ funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July. While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt.  Senior European said there was significant division over the move to re-open the bondholders’ deal, which could trigger a bigger and earlier restructuring of Greek debt. Even within Germany, officials are split over whether to press for a bigger “haircut” for private sector creditors.  “In Germany, there are the hardliners and there are the moderates,” said one senior European official. “This is the hardliners’ stance.”

    Top German central banker slams debt crisis steps  - Germany's top central banker warns that efforts to halt the debt crisis in Europe could give countries incentives to run up deficits in the future. The statements by Bundesbank president Jens Weidmann underline his differences with German Chancellor Angela Merkel and his fellow board members of the European Central Bank. Weekend meetings of global financial leaders in Washington raised hopes of a change in strategy, with officials indicating that would focus on further boosting the firepower of the euro440 billion ($595 billion) rescue fund -- perhaps by allowing it to tap loans from the European Central Bank or otherwise leveraging its lending capacity. Hopes for such a move boosted European stock markets on Monday, with German and French bank shares rising strongly. However, ahead of a parliamentary vote Thursday on changes to the fund that eurozone leaders already agreed to in July, Berlin was keen to underline its attachment to its often-criticized step-by-step approach. When asked in Washington whether he supported the idea of leveraging the rescue fund, German Finance Minister Wolfgang Schaeuble said: "Of course we will use the EFSF in the most efficient way possible."

    German turmoil over EU bail-outs as top judge calls for referendum - Germany's top judge has issued a blunt warning that no further fiscal powers may be surrendered to Europe without a new constitution and a popular referendum, vastly complicating plans to boost the EU's rescue machinery to €2 trillion (£1.7 trillion). Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent. "The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution)," he said. "There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people,"  The extraordinary interview comes just days before the Bundestag votes on a bill to revamp the EU's €440bn bail-out fund (EFSF), enabling it to purchase EMU bonds pre-emptively and recapitalise banks.

    German Leader Reaffirms Backing for Greece - — Promising that Athens would live up to its commitments, the Greek prime minister urged Europe to pull together to take the steps needed to head off a potentially disastrous escalation in the sovereign debt crisis.  In a speech to the same group of German business leaders, Chancellor Angela Merkel2 said Germany would provide all the help it could to stabilize Greece.  “We must stop blaming each other for our different weaknesses and unite together with our different strengths,” Prime Minister George Papandreou3 of Greece said in his speech. “The euro zone must now take bold steps towards fiscal integration to stabilize the monetary union. Let’s not allow those who are betting against the euro4 to succeed.”  The speeches — and a meeting between the two leaders set for Tuesday evening — come just two days before German lawmakers are to vote on a bill that would bolster the main European bailout fund, known as the European Financial Stability Facility. Although it is sure to pass — with opposition support if required — some members of Mrs. Merkel’s governing coalition are threatening to oppose it amid popular anger about bailing out Athens. That would be another blow to her credibility at home.

    Frau Merkel, it really is a euro crisis - Angela Merkel told German industry today that we are not facing "a euro crisis, but a debt crisis." She is wrong. Total levels of private and sovereign debt in the eurozone are lower than in the UK, the US, and far lower than in Japan. Greece’s debt levels are around 250pc of GDP, at the lower end of the developed world. Spain’s sovereign debt is admirably modest at around 65pc. Italy’s household debt level is the envy of the rich world. It has a primary budget surplus. Italy has many problems, but the budget deficit is not one of them. So why is there such a destructive and long-festering crisis in the eurozone? Why have three countries required an EU-IMF bail-out? Why is the ECB having to shore the debt markets of five countries — soon to be six — with direct bond purchases, including Spain and Italy? Not because of debt, except in the most superficial sense. The reason this crisis keeps grinding ever deeper is because the euro itself is a machine for perpetual destruction. The currency is fundamentally warped and misaligned.

    German, French economists urge 50 pct Greek debt write-down (Reuters) - German and French government advisers urged in an article on Tuesday that Greece be allowed to write off around 50 percent of its debt and called for more support for banks with large holdings of Greek bonds. Decisions made to resolve Greece's debt crisis at the July 21 European summit were not sufficient, a group including Germany's "wisemen" panel of economic advisers, an advisor to the French government, an economist on the ECB Shadow Council and the editor of "IMF Economic Review" wrote in the Financial Times Deutschland. "Creditors should renounce around a half of the nominal value of their Greek bonds," the article said. "Then it would be possible for Greece to bring its debt levels down to a sustainable level through its own efforts." The July 21 agreements provided for a 21 percent haircut on Greek debt through a bond swap deal that would see banks give Athens longer to pay off its debt. Many financial market players are convinced, however, that a larger-scale default is all but inevitable.

    Brussels to release financial tax plan despite US objections - The European Commission approved in principle the tax proposal on Tuesday, and the head of the EU executive Jose Manuel Barroso may outline the plan on Wednesday in a "state of the union" address to the European parliament in Strasbourg.  On the commission's drawing-board for more than a year, the idea was given fresh impetus last month when given the nod by Europe's power couple, French President Nicolas Sarkozy and German Chancellor Angela Merkel. "The idea is to force a contribution from the financial sector, which enjoys fiscal privileges thanks to a sales tax exemption, meaning it saves 18 billion euros a year in Europe," an EU source told AFP on condition of anonymity. If adopted -- not before 2014 -- the tax could ring in between 30 billion and 50 billion euros a year -- possibly half for the European Union budget, the remainder for national governments. The rate suggested would be minimal with member states free to hike the tax.

    Greece Passes Property-Tax Law, Clearing a Path for Additional Aid - Greece's parliament approved a new property-tax law in a closely watched vote Tuesday, taking a key step in the country's efforts to secure further aid from its international creditors and avoid default.  The measure was approved with 155 votes in favor and 142 votes against, narrowly surpassing the 151-vote majority required for passage in the Greek body. Three lawmakers abstained. The vote was a crucial test for the Socialist government's ability to enact fresh austerity measures in coming weeks and meet budget goals for 2011 and 2012 in the face of rising internal party resistance. The controversial measures seek to slash pensions and public-sector wages, sparking fears of an open revolt within the ruling party.

    Greek Vote Approves a Despised Property Tax - Chancellor Angela Merkel of Germany welcomed Prime Minister George Papandreou of Greece to a meeting of German business leaders in Berlin on Tuesday.  The Greek Parliament voted late Tuesday in Athens to back a hugely unpopular property tax, one of a series of new austerity measures. The vote could clear the way for a crucial injection of international financing meant to at least temporarily stave off a default on government debt.  The property tax, the first of its type in Greece, would raise 2 billion euros, or $2.7 billion, this year alone, according to government calculations. The question is whether enough Greek people can or will pay the tax to meet those forecasts.

    Greek Parliament Approves New Property Tax Bill - The Greek Parliament on Tuesday approved a controversial tax property bill in a desperate attempt to convince the troika of creditors to release the next tranche of a 110 billion euro bailout package agreed last year. Greece is in dire need of the 8 billion euro ($11 billion) tranche of the 110 billion euro rescue loan, as its cash reserves are likely to be exhausted by mid-October. Although a second bailout package worth 109 billion euros for Greece was worked out in July, it is yet to be ratified by most of euro-zone member states.  The new austerity bill containing the property tax legislation passed the 300-seat Greek parliament with a simple majority after all the 154 deputies from the ruling Socialist PASOK party voted in favor of the measure. Nevertheless, the additional property tax, which the government aims to collect via electricity bills, has evoked widespread criticism as well as opposition in the country, where almost 70% of the population own their own home. Those who fail to pay the new tax risk having their electricity connection cut off.

    Worried Greeks Fear Collapse of Middle Class Welfare State - While banks and European leaders hold abstract talks in foreign capitals about the impact of a potential Greek default on the euro and the world economy, something frighteningly concrete is under way in Greece1: the dismantling of a middle-class welfare state in real time — with nothing to replace it.  Since 2010, the government has raised taxes and slashed pensions and state salaries across the board, in an effort to rein in the bloated public sector that today employs one in five Greeks. Last week, the government announced it would put 30,000 workers on reduced pay as a precursor to possible termination and would cut pensions again for nearly half a million public-sector retirees.  A clerk in her local town hall, Ms. Firigou, like all public-sector workers, took a precipitous pay cut last year — in her case to less than $1,300 a month from $2,000 a month — as the government slashed wages to meet the terms of its foreign lenders. Her husband, who sells used car parts, has seen his commissions drop. Her mother’s pension was cut to about $800 a month from around $920.

    When will the Greeks be made to suffer? - IN A column at Vox, Aaron Tornell and Frank Westermann point out that despite net private capital outflows, Greece has managed to continue running a current-account deficit.This lack of expenditure adjustment contrasts with Mexico in the wake of the Tequila Crisis: From a current-account deficit of 7% of GDP in the year prior to the crisis, Mexico was forced to practically balance its current account during the crisis year (-0.5% in 1995 and -0.7% in 1996). Yes, in 1995 Mexico experienced a sharp real depreciation and a deep recession. By 1996, however, net exports rebounded and economic growth resumed. At the time it was argued that Mexico could have avoided the severe crisis by adjusting in early 1994. Unfortunately, like Greece today, the authorities chose to increase domestic credit to delay a recession. The difference between Mexico and Greece is that while Mexico had to run down its international reserves, Greece has been able to keep them practically unchanged. Instead Greece has used the EU rescue package and the Eurosystem loans to increase domestic credit. Had Greece been like a typical small economy with no access to rescue packages, it would have had to close its massive current-account deficit by now.

    Thinking About Sovereign Bankruptcy - I am just back from presenting a paper at the European Law and Economics Association annual meeting, held this year in Hamburg, Germany. And of course the topic on everyone’s lips at every coffee break, lunch and paper session was the Greece-French-Bank-Generalized-Euro-Zone Panic of 2011. There was general agreement among the conference participants about what needed to be done: Creditors must take a haircut; Greece must accept some austerity; Greece must also be bailed out, because it was unreasonable to expect the Greeks to accept too much more austerity; and some banks will also have to be bailed out. The latter might involve some partial nationalization ( or E.U.-ization?) of the subject banks, along the lines of the United States government stakes in General Motors, American International Group, etc. There was also general agreement that the politicians would never do any of these things – save, perhaps for the more austerity thing – because they are scared. Only when they realized that the public was not fooled, and understood what needed to be done, would the politicians act. We can hope that this last step does not take too long.A depressing state of affairs, but at least the Europeans seem to agree on what the situation calls for. The United States has not yet reached even that degree of consensus. Of course, perhaps we have more time to dally than the Europeans do.

    Europe’s High-Risk Gamble - The Greek government needs to escape from an otherwise impossible situation. It has an unmanageable level of government debt (150% of GDP, rising this year by ten percentage points), a collapsing economy (with GDP down by more than 7% this year, pushing the unemployment rate up to 16%), a chronic balance-of-payments deficit (now at 8% of GDP), and insolvent banks that are rapidly losing deposits.  The only way out is for Greece to default on its sovereign debt. Why, then, are political leaders in France and Germany trying so hard to prevent – or, more accurately, to postpone – the inevitable? There are two reasons. First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks, and sell Greek bonds to the European Central Bank. The second, and more important, reason to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy.

    ECB Lends 140.6 Billion Euros to European Banks for Three Months (Bloomberg) -- The European Central Bank said it will lend banks 140.6 billion euros ($191.7 billion) for three months as tensions in money markets persist. The Frankfurt-based ECB said 214 banks asked for the three- month funds, which will be lent at the average of its benchmark interest rate over the period of the loan. Currently, the benchmark stands at 1.5 percent. The ECB fills all bids against eligible collateral. Banks tomorrow need to repay 132.2 billion euros in maturing three-month loans. Financial institutions are wary of lending to each other after Europe’s sovereign debt crisis fueled concern that some governments may struggle to refinance their debts, prompting investors to shun bonds sold by nations including Greece, Italy and Spain. In a separate tender today, the ECB allotted $500 million to one bidder in a regular seven-day loan. The ECB doesn’t identify the banks it lends to.

    Italy, Spain borrowing rates spike in bond markets - Borrowing rates for Italy and Spain spiked to the highest levels since the global financial crisis on Tuesday amid concern their economies, the third and fourth-biggest in the eurozone, could be sucked into a debt spiral. In its first bond auction since its credit rating was downgraded by Standard & Poor's last week, the Italian Treasury was forced to offer sharply higher rates to attract investors to buy up 14.5 billion euros ($19.6 billion) in debt. The rate on six-month bonds jumped to 3.071 percent compared to 2.14 percent for the last similar operation last month. It was the highest level since September 2008 when the fall of Lehman Brothers sparked a worldwide crisis. Two year zero-coupon bonds went for 4.511 percent compared to 3.408 percent. The difference between the yields on Italian 10-year government bonds and benchmark German bonds fell after the sale however to 370 basis points -- indicating an ease in investor concern -- although the spread remained high. Spain also paid higher borrowing rates to raise 3.225 billion euros in new short-term debt, a sign of persistent tension over its sovereign debt outlook.

    Spain, Italy extend short selling ban on financial stocks - Spain's financial regulator this morning extended restrictions on the trading strategy, which pays off if stocks tumble, as part of an effort to contain volatility. The CNMV, as the market supervisor is also known, said the ban was extended due to "continued market instability". Restrictions will be lifted when market conditions improve. Italy, Belgium and France also instituted similar bans, which went into effect on August 12, as a result of investor fears about the worsening sovereign debt crisis. The CNMV said at the time "extreme market volatility" was affecting financial-services stocks, banning all short positions for 15 days as of August 12. It then extended the ban for one month. Italy's market regulator Consob this morning also extended its ban on the short-selling of financial stocks to November 11. The ban was supposed to expire tomorrow.

    Moral Judgment and Bad Economics from the ECB - Kash - It seems that the ECB's policy prescriptions are being guided more by ideology and moral judgment than by sound economics. A very revealing letter from the ECB to the Italian government from August has just been published in the Italian press. The BBC reports: ECB told Italy to make budget cuts   This is troubling in several ways. First, as the article points out, the timing of things certainly makes it appear as if there was a quid pro quo: the ECB would help only if the Italian government took certain policy steps that the ECB wanted. The ECB has continuously denied that there was any such condition attached to ECB assistance, because otherwise this would look awfully like an instance where a central bank was blackmailing a democratically elected government. Second, the ECB was apparently expressing a purely ideological preference for Italy to reduce its budget deficit through spending cuts. But shouldn't the size of a country's government, and decisions about whether to use tax increases or spending cuts to reduce a deficit, be determined by the country's democratic process?  But third and most distressing to me is how a central element of the policy prescription that the ECB made to Italy was completely wrong. Italy's problem is not annual budget deficits; yes, Italy had chronically large budget deficits during the decades leading up to euro adoption in 1999, but Italy actually ran smaller budget deficits than France, Belgium, or even the Netherlands over the past couple of years (see chart below).

    Merkel majority in euro vote hangs in balance (Reuters) - Germany's Angela Merkel has convinced some rebels in her party to back new powers for the euro zone's rescue fund in a vote on Thursday, but may still have to rely on the opposition to get the measure passed, in what would be a humiliating setback.  The vote in the Bundestag lower house of parliament is the biggest test of Merkel's leadership since she came to power six years ago.  While passage of the bill is not in doubt thanks to support from opposition parties like the Social Democrats (SPD) and Greens, the way her own lawmakers vote will determine whether Merkel retains her authority until the next election in 2013.  "The whole world is watching this vote," the chancellor said at a meeting of her conservative Christian Democrats (CDU) and their Bavarian allies, the Christian Social Union (CSU).  In a trial vote taken by lawmakers in her bloc on Tuesday, 11 voted against bolstering the European Financial Stability Facility (EFSF) and two abstained, according to participants.  But sources gave conflicting signals about how her junior coalition partners, the Free Democrats (FDP), would vote on Thursday, with "no" vote estimates ranging from two to five, and as many as six abstentions seen.

    Criticism: The opposite of stupid | The Economist - WELL, this is helpful: German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank. "I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said. Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world". In fact, the EFSF will be boosted to increase its capacity to purchase sovereign debt, or the task will fall to the European Central Bank, which amounts to much the same thing—or the euro zone will likely come apart, gutting Europe's economy and potentially driving the global economy back into recession. Opting for the latter outcome seems like a "stupid" decision to me, but perhaps the word means something different to Mr Schäuble.

    The dangerous subversion of Germany democracy - Optimism over Europe’s "grand plan" to shore up EMU was widely said to be the cause of yesterday’s torrid rally on global markets, lifting the CAC, DAX, Dow, crude and copper altogether. This is interesting, since Germany’s finance minister Wolfgang Schäuble has given an iron-clad assurance to the Bundestag that no such plan exists and that Germany will not support any attempt to "leverage" the EU’s €440bn bail-out plan to €2 trillion, or any other sum. "I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense."All of this was out in the open and widely reported. Markets appear to be acting on the firm belief that he is lying to lawmakers, that there is indeed a secret plan, that it will be implemented once the inconvenience of the Bundestag’s vote on the EFSF tomorrow is safely out of the way, and that German democracy is being cynically subverted. The markets may or may not right about this. Mr Schäuble has a habit of promising one thing in Brussels and stating another in Berlin. But it is surely an unhealthy state of affairs.

    Merkel says Greek bailout terms may be changed  - German Chancellor Angela Merkel hinted that the second Greek bailout package might have to be renegotiated amid increasing market speculation Wednesday that European leaders want to force private holders of Greek bonds to take bigger losses. Merkel didn't rule out altering the terms to the euro109 billion ($148 billion) package, saying the decision must be based on how Greece's debt inspectors, the so-called troika, judge Athens' recent austerity efforts. "So we must now wait for what the troika finds out and what it tells us: do we have to renegotiate or do we not have to renegotiate?" she said in an interview with Greece's ERT television Tuesday night. Merkel added that she "cannot anticipate the result of the troika." Greece "will not get back on its feet without a serious reduction in debt," said Ottmar Issing, a former chief economist of the European Central Bank, who has served as an adviser to Merkel in the past.Athens needs to see its debt cut "at least 50 percent, probably more," Issing was quoted by Germany's Stern magazine.

    The euro crisis: Major powers plan new bank bailout - With the major powers lurching back into recession, governments on both sides of the Atlantic are planning another huge bailout of the banks. There are significant differences over how such a bailout should be organised, but there is general agreement that hundreds of billions more in public funds must be allocated to cover the banks’ losses from a sovereign debt default by Greece. As occurred following the Wall Street crash three years ago—except on an even bigger scale this time—the wealth of the financial elite whose speculative activities triggered the global crisis will be underwritten through the plundering of state treasuries. This will be carried out even as governments intensify their attacks on the working class in the name of “fiscal consolidation.” To offset the new handouts to the banks, even more brutal austerity measures will be imposed in Greece and other highly indebted European countries that have already been thrown into slump and mass social misery, and social cuts will be expanded in the rest of Europe and the US.

    Euro-Zone Bailout Plan Progresses - The euro zone is on track to expand its bailout fund for indebted countries, which looks set to win approval in Germany's parliament on Thursday following its ratification by Finnish lawmakers Wednesday. But the debate among Europe's crisis managers has already moved on to two thornier issues: a more radical increase in the scope of bailouts, and possible debt restructuring for Greece.  Greece's failure to close its budget shortfall is prompting some European governments, led by Germany, to push for a re-examination of the international bailout program for Athens. Greece's failure to close its budget shortfall is prompting some European governments, led by Germany, to push for a re-examination of the international bailout program for Athens, according to officials involved in the discussions In return, Germany is under pressure to agree to "leverage" the euro-zone bailout fund ...

    Expanded Euro Bailout Fund Clears Hurdle - Europe took another step Wednesday in its slog toward approval of a broader bailout fund for overly indebted countries, as Finland1’s Parliament agreed to contribute its share despite an unresolved dispute over its demand for collateral from Greece2.  The 103-to-66 vote, with 30 legislators absent, still leaves 7 of the 17 members of the euro3 zone yet to ratify a bailout fund that, despite expanded resources and power, is considered much too small to fend off further market attacks on Greece and other wounded countries.  The laborious approval process, which can be held up by objections from any one of the countries in the euro zone, has highlighted deep flaws in alliance’s decision making. Every major initiative must traverse an obstacle course, and each hurdle can jostle financial markets anew.

    French teachers strike over job cuts under Sarkozy - Tens of thousands of French teachers and their supporters took to the streets Tuesday for a national strike and protests over education job cuts under President Nicolas Sarkozy's government. As children nationwide packed into a shrinking number of classes because their teachers were out, Sarkozy insisted that his first responsibility was to private-sector workers and employers facing international competition at a time of economic woe, not state employees. The strikes and protests — and Sarkozy's retort — come as France is gearing up for presidential and legislative elections next year. Labor unions want to ratchet up the pressure on Sarkozy's conservatives, who have cut public-sector jobs as a way to help reduce France's bloated budget deficit. In a first, private school teachers joined the walkout with their public-sector colleagues who are angry about job cuts. Tens of thousands of positions have been cut since 2007 and a further 14,000 are planned to go in 2012.

    French public debt to hit 87% of GDP in 2012: report - France's public debt will rise to roughly 87 percent of gross domestic product next year, according to the draft budget to be presented Wednesday, the daily Les Echos reported citing parliament sources. The draft budget, to be presented to the cabinet of ministers, forecasts that the cost of servicing the public debt will come in at 48.8 billion euros ($66.5 billion) in 2012, down from the last government estimates in July of 50 billion euros, the newspaper said on its website. The report did not provide any information about the size of the public deficit, which France has pledged to squeeze from 5.7 percent of GDP this year to 4.5 percent in 2012 and the EU's target of 3.0 percent in 2013.

    France says it’s cutting budget for 1st time since WWII but experts say more needs to be done - France proudly presented next year’s budget on Wednesday as the first to cut spending since World War II, as it tries to convince nervous investors that it will get its debts under control. But economists balked at the claim and said the cuts in the 2012 budget are not substantial enough to meet deficit targets laid out by the government — or to reduce the country’s debt load. France hasn’t balanced its budget in three decades and for years flouted EU rules that require members to keep their deficits under 3 percent of GDP. Paris was not alone in ignoring the spending rules, and the result has nearly brought the eurozone to its knees: Ireland, Portugal and Greece have all needed bailouts to pay their bills after investors refused to lend to them, and Italy and Spain have seen their borrowing costs skyrocket.

    Portugal Says 2010 Deficit Was 9.8% of GDP, More Than Reported -- Portugal’s budget deficit last year was 9.8 percent of gross domestic product, more than previously announced, after unreported debt of the island region of Madeira was included.  The revision “essentially” reflects debt and spending not reported earlier by Madeira, the Lisbon-based National Statistics Institute said in an e-mailed statement today. The government and the institute previously said the 2010 shortfall was 9.1 percent of GDP.  For the first six months of this year, the deficit was 8.3 percent, down from 10.4 percent in the same period last year, the statistics institute said.  Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($106 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout. The government has already announced a one-time income-tax surcharge to help cover a budget shortfall this year.

    Scorning Voting, Protests Surge Globally - Hundreds of thousands of disillusioned Indians cheer a rural activist on a hunger strike1. Israel2 reels before the largest street demonstrations in its history3. Enraged young people in Spain4 and Greece take over public squares across their countries.  Their complaints range from corruption to lack of affordable housing and joblessness, common grievances the world over. But from South Asia to the heartland of Europe and now even to Wall Street5, these protesters share something else: wariness, even contempt, toward traditional politicians and the democratic political process they preside over.  They are taking to the streets, in part, because they have little faith in the ballot box.  “Our parents are grateful because they’re voting,” . “We’re the first generation to say that voting is worthless.”

    Ireland Triumphs! - Krugman - Or, maybe not. There’s a visible push to claim that recent Irish experience — somewhat better-than-expected growth in the second quarter, rising exports — vindicates austerity policies. Here’s a new piece on export growth, trumpeting a rise in pharma exports. So, some cold water. First of all, eventual recovery after years of Depression-level unemployment is a strange definition of success. But there’s also a specifically Irish twist. Pharma accounts for a large share of Irish exports — but it makes a much smaller contribution to the Irish economy. Partly that’s because pharma uses a lot of imported inputs, so that it has relatively low domestic content. Partly that’s because pharma is very capital-intensive, employing very few people — and the capital is foreign owned, so that the contribution to Gross National Product, which deducts income paid to foreigners, is smaller than the contribution to Gross Domestic Product, which doesn’t. Indeed, Ireland is one of those countries where you really want to track GNP rather than GDP to get a sense of how the country is doing. And here’s how it’s doing:

    Central Banks Pivot on Rates - Central banks around the world are in the middle of a policy U-turn. From emerging markets like Brazil to Denmark and other rich-world economies, policymakers whose primary concern as recently as a month ago was keeping down inflation are contemplating interest rate cuts and other ways to shore up flagging growth. Even the European Central Bank, where top officials are outspoken inflation hawks, could slice borrowing costs as early as Thursday.

    Euro inflation jumps sharply to 3.0% - Inflation soared unexpectedly across the debt-laden eurozone in September, the EU said on Friday, creating a dilemma for ECB chief Jean-Claude Trichet who chairs his final policy meeting next week. After Brussels revealed a big leap to 3.0 percent, from 2.5 percent in August, analysts said the departing European Central Bank president faces a difficult call on whether to reduce interest rates to face weak economic times come Thursday's Frankfurt talks. "The much larger-than-expected jump in eurozone consumer price inflation to a 35-month high of 3.0 percent in September reinforces suspicion that an ECB move as soon as next Thursday is unlikely,". Non-euro inflation is also running high. The Bank of England, expected to launch a new round of stimulus under "quantitative easing," or printing money to bolster a slowing economy, has forecast 5.0 percent across Britain for later this year. London-based Archer believes the ECB, whose inflation target is carved in stone at "below or close" to 2.0 percent, will cut interest rates from 1.50 percent to 1.25 percent before the end of the year.

    Europe Inflation Accelerates to Fastest Since 2008 - European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.  The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.  Faster inflation increases pressure on an economy already hurt by tougher austerity measures and waning investor confidence as governments struggle to contain the fiscal crisis. European economic confidence slumped more than economists forecast this month and German retail sales fell the most in more than four years in August. Commerzbank AG said today that the region “looks set to slip into a recession.”

    European debt inaction scaring the world: Obama - Barack Obama has urged European leaders to confront the deepening sovereign debt crisis, warning their inaction is "scaring the world". The US president's blunt message follows an earlier warning from his treasury secretary Timothy Geithner that a fresh economic shock from Europe could cause cascading defaults and runs on banks. EU leaders appear to be listening and say they are inching towards a multi-trillion-dollar bailout mechanism to firewall Italy and Spain from the debt contagion. Mr Obama was in California raising cash and voter support for next year's re-election campaign.

    Obama's Euro-Crisis Lecture Is 'Pitiful and Sad' - US President Obama has given the Europeans a harsh lecture on the dangers of their ongoing debt crisis. Offended by the unsolicited advice, Europeans have suggested the US get its own house in order first. Obama's remarks were "arrogant" and "absurd," German commentators say on Wednesday. Europeans are well aware of the seriousness of their ongoing debt crisis. But they don't, it seems, like to receive lectures from other countries -- especially the United States, which is struggling to deal with its own mountain of debt. German Finance Minister Wolfgang Schäuble curtly rejected recent American criticism of Europe's approach to solving its debt crisis. "I don't think Europe's problems are America's only problems," said Schäuble, who has become increasingly sharp-tongued as the euro crisis deepens. "It's always easier to give other people advice." Schäuble was referring to strongly worded comments made by US President Barack Obama and US Treasury Secretary Timothy Geithner in recent days.  Obama warned Europeans that their inaction was "scaring the world." The Europeans, he said, "have not fully healed from the crisis back in 2007 and never fully dealt with all the challenges that their banking system faced.

    Financial transaction tax: Feasible and desirable if done right - The announcement on Wednesday that the European Commission will propose an EU-wide, 0.1% tax on bond and equity transactions, and 0.01% on derivative transactions between financial firms, to support European countries in crisis, will generate substantial opposition. Cassandras will shout that it is another crazy idea from Europe that will presage financial Armageddon. This column argues that such taxes are more feasible than most think when they are linked to legal enforceability, and that the burden would be disproportionately borne by high-frequency traders that provide liquidity only when the markets don’t really need it.

    Germany hits out at US as Greece vows action on debt - Europe's snowballing debt crisis had nothing to do with the United States, which would do better to focus on solving the very real problems of its own, said German Finance Minister Wolfgang Schaeuble. His barbed comments were clearly aimed at US President Barack Obama who had warned a day earlier that Europe's failure to tackle crippling Greek debt was "scaring the world". "It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," Schaeuble said in an English-language address to the European School of Management and Technology in Berlin. "Even if Obama is thinking the opposite, I don't think the problems of Europe are the reason for the problems of the US," he said.

    Germans Reconsider Ties to Europe - When German lawmakers vote Thursday on whether to put more money into Europe's bailout fund—a step many investors see as essential to prevent a market panic—several conservative deputies, including Wolfgang Bosbach, a prominent champion of European integration, are expected to vote "no." Mr. Bosbach, a high-ranking conservative in Ms. Merkel's Christian Democratic Union, has recently become an outspoken critic of the bailout strategy. "The first medicine didn't work, and now we are simply doubling the dose," said the lanky Mr. Bosbach of the Greek debt crisis. "My fear is that when the big bang happens, it won't just be us who will have to pay but generations hereafter."The lawmaker rebellion underscores a broader shift among Germans about their nation's role in Europe since the crisis erupted nearly two years ago. While the Thursday vote is expected to pass, and a vast majority of Germans continue to feel a strong, historical commitment to Europe, with a common currency as its anchor, many have grown doubtful of whether it's worth the ever-growing cost of saving the euro. A poll for national German broadcaster ZDF earlier this month shows three-quarters of Germans are against the expanded European rescue fund that's subject to Thursday's vote.

    Merkel Breathes Sigh of Relief - German Parliament Passes Euro Fund Expansion - German parliamentarians on Thursday approved the planned expansion of the European Financial Stability Facility (EFSF) with 523 voting in favor, 85 against and three abstentions.  The bill's passage is a vital step in euro-zone efforts to increase the fund's lending capacity from its current €250 billion ($338 billion) to €440 billion. Germany's share of guarantees for the fund will rise from €120 billion to €211 billion, though several other euro-zone parliaments must still vote on the expansion. The result also means that Merkel can breathe a sigh of relief. There had been concern that renegades within her center-right coalition could mean that Merkel would be forced to rely on opposition votes to pass the legislation. Had that come to pass, her power would have been severely curtailed .

    Germany Approves Bailout Expansion, Leaving Slovakia as Main Hurdle - Removing another significant obstacle in the European debt crisis, the German Parliament voted overwhelmingly on Thursday for the expansion of the bailout fund for heavily indebted European countries. The front now shifts to tiny Slovakia amid questions about an approval process already months long and still not complete. By passing the measure, Germany promised to increase its share of the loan guarantees to 211 billion euros, or about $287 billion, from 123 billion euros, as agreed by national leaders in Brussels back in July. Under the euro zone’s tortuous procedures, however, all 17 European Union4 countries that use the euro must approve the agreement, a process that has revealed ever more fissures, layers of decision-making and political complexity that add up to a worrisome inability to react quickly and decisively to upheaval in fast-moving financial markets. “The markets see that Europe cannot decide anything quickly, and uncertainty is always an inducement to speculation,” The process also leaves the European Union potentially hostage to its smaller members.

    Leveraging the EFSF - I’ll repeat this link for background.  I would feel better about the idea if the context were: “We can always go back to the trough, but leveraging the fund is the easiest way for us to strike quickly and decisively.”  Instead I see too much of: “We can’t get any more from our taxpayers, so we’d better stretch this one as far as we can.”  That’s just inviting the speculators to set up camp against you. Who will fund the leverage?  BRICS?  American investors?  Ultimately other Europeans?  All of those parties already can construct their own leveraged positions in Italian government debt, if they wish.  So presumably the leverage will be a hidden subsidy to the financiers, one way or another, to get them to participate.  Subsidizing the debt buyers, rather than guaranteeing the debt (admittedly that may be impossible and undesirable for Germany), hardly seems like the way to go.  You bear the costs of the bailout without any assurance it will work. This German-language video suggests the German representatives do not know what they just voted for.

    Europe Blinking Red - German parliamentarians reaffirmed their commitment to the Euro-project on Thursday by approving an expansion of the European Financial Stability Facility (EFSF).  The bill will increase the size of the emergency fund (from $340 billion to $600 billion) while allowing greater flexibility in the way in which the funds are distributed. Officials are now free to recapitalize struggling banks as well as purchase bonds from nations that have seen yields spike and government debt soar. According to Der Speigel: “… the law passed on Thursday includes a provision which gives the German parliament a say in future EFSF decisions. In a recent verdict, Germany’s highest court had demanded greater parliamentary involvement in decisions relating to euro-zone bailouts. And now, a special committee will be established in the Bundestag to ensure parliamentary involvement even in hurried EFSF resolutions." The importance of the Bundestag’s “special committee” can’t be overstated. The representatives of the German people will now have a veto-power over policies related to the emergency fund. That means that the fund won’t be “massively leveraged”–to meet the bond purchasing needs of Spain and Italy–unless the new committee agrees. And, agreement would be difficult for anyone seeking reelection in Germany where public opposition to more bailouts is overwhelming. So, while Merkel has won a crucial victory in the short-term, the future of the eurozone is more uncertain than ever.

    German Retail Sales Decline More Than Forecast German retail sales declined the most in more than four years in August as concerns about the economic impact of Europe’s sovereign debt crisis sapped consumers’ willingness to spend. Sales, adjusted for inflation and seasonal swings, slumped 2.9 from July, when they rose 0.3 percent, the Federal Statistics Office in Wiesbaden said today. That’s the biggest drop since May 2007. Economists forecast a 0.5 percent drop, according to the median of 18 estimates in a Bloomberg News survey. Sales rose 2.2 percent in the year. The debt crisis is threatening to tip Europe back into recession, damping confidence even as falling German unemployment boosts household purchasing power in Europe’s largest economy. While a possible Greek default has clouded the outlook, the Bundesbank still predicts a “robust” third quarter and growth of about 3 percent this year.

    Rate of decline in Eurozone retail sales slows in September - Retail sales in the Eurozone fell for the fifth month in a row in September, according to Markit’s latest PMI (Purchasing Managers' Index) surveys. That said, the rate of decline slowed to a marginal pace as sales rose in both France and Germany. The survey data again signalled stubbornly high inflationary pressures in the sector, with purchase price inflation at retailers the strongest in over three years. The Eurozone Retail PMI is a single-figure indicator of changes in the value of sales at retailers. The PMI is adjusted for seasonal factors, and any figure greater than 50.0 signals growth compared with one month earlier. The PMI remained below 50.0 in September, signalling a fifth successive monthly drop in sales revenues. The current sequence of decline is the joint-longest in the past two years. But the index rose during the month, to 49.6 from 48.0, indicating only a marginal decline in sales revenues. The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU’s statistical office Eurostat (on a three-month-on-three-month basis) may ease in the coming months.

    August European Unemployment -  Data are out today from Eurostat and Eurozone unemployment was basically flat at 10%.  I guess that counts as good news under the circumstances - at least it's not getting worse.   It looks stagnant but not recessionary, so far. My read on the European situation at present is as follows:

    • If European governments and institutions don't take adequate action, disaster will ensue and there will be another round of global banking/financial crisis.
    • Adequate actions are potentially open to them if they can come up with a sufficiently beefy centralized mechanism for funding and then gradually writing off the excessive private and public debts in the periphery and then recapitalizing banks as necessary.

    This ‘competitiveness’ thing is a scam - Rebecca Wilder - What is ‘competitiveness’? It’s an important part of the euro area leaders’ negotiated terms in the July 21st Summit announcement by the European Heads of State. The first paragraph, #4, and #11 of the announcement all refer to this issue of ‘competitiveness’: It’s not totally clear what they mean by ‘competitiveness.’ However, I note that they separate the term ‘competitiveness’ from ‘macro-economic imbalances’. See, ‘competitiveness’ is an elusive concept that is often associated with relative price movements, real exchange rates, or openness to international trade. But if we look at a May 2011 speech given by German Finance Minister, Wolfgang Schäuble, what he (and by association, the Germans) thinks of ‘competitiveness becomes more clear: “All Eurozone governments need not only convincingly demonstrate their commitment to fiscal consolidation but also to increasing competitiveness to restore confidence of markets as well as their citizens. the Eurozone has to put additional emphasis on strengthening the competitiveness of all its members. Consumption developments, bubbles in housing markets and the accumulation of external and internal debt in some Member States deepened the impact of the crisis and constrained the capacity to respond. This is why a new procedure for detecting and correcting economic imbalances will be introduced. This procedure will concentrate on curing the root causes of macroeconomic deficits by forcing Member States to ensure a high level of competitiveness.

    Randy Wray: Euro Toast, Anyone? The Meltdown Picks Up Speed -  Greece’s Finance Minister reportedly said that his nation cannot continue to service its debt and hinted that a fifty percent write-down is likely. Greece’s sovereign debt is 350 billion euros—so losses to holders would be 175 billion euros. That would just be the beginning, however. Nouriel Roubini has argued that the crisis will spread from Greece and increase the possibility that both Italy and Spain could be forced out unless European leaders greatly increase the funds available for bail-outs. The Sunday Telegraph has suggested that as much as 1.75 trillion sterling could be required.  The 1.75 trillion figure will almost certainly prove to be wishful thinking if sovereign debt goes bad because that will make the US subprime crisis look like a nursery school dispute. All the major European banks will go down—and so will the $3 trillion US money market mutual funds. It is becoming increasingly clear that authorities are merely trying to buy time to figure out how they can save the core French and German banks against a cascade of likely sovereign defaults. Meanwhile, they keep a stiff upper lip and demand more blood in the form of periphery austerity. They know this will do no good at all–indeed, it will increase the eventual costs of the bail-out while stoking North-South hostility.  If the EMU is eventually saved, however, the rancor will make it very difficult to mend fences.

    In European Crisis, Experts See Little Hope for a Quick Fix - It has happened time and again in recent months as Europe’s debt crisis1 has played out. Stocks stage a remarkably strong comeback on expectations that a solution has been found. Then they quickly resume their decline as hopes dissipate, leaving investors puzzled and frazzled.  What is going on?  The problem, say close watchers of both the subprime financial crisis2 in 2008 and the European government debt crisis3 today, is that many investors think there is a quick and easy fix, if only government officials can come to an agreement and act decisively.  In reality, one might not exist. A best case in Europe is a bailout of troubled governments and their banks that keeps the financial system from experiencing a major shock and sending economies worldwide into recession4.  But a bailout doesn’t mean wiping out the huge debts that have taken years to accumulate — just as bailing out American banks in 2008 didn’t mean wiping out the huge amount of subprime debt that homeowners had borrowed but couldn’t repay.

    Strikes hamper Greek rescue effort - Wildcat strikes in Greece have prevented the country’s bureaucrats from finalising next year’s vital budget figures, potentially holding up this month’s release of sorely needed fiscal aid and capping an ignominious quarter for global markets. Despite a tentative improvement in sentiment over the past week, mounting fears over a potential Greek default and the tepid pace of the global economic recovery led to one of the worst three months on record for financial markets.  Striking civil servants have blocked access to Greece’s statistical agency building in Athens since Tuesday, undermining efforts by Elstat, the statistics agency, to bring Greek figures in line with EU standards after years of fudging . The so-called troika – the European Commission, the European Central Bank and the IMF – are in Athens to inspect the budget figures before deciding whether to release the next €8bn ($10.9bn) tranche of its current bail-out loan. ”We will miss [Friday’s] deadline for sending final debt and deficit figures for 2010 to Eurostat, the Commission and the troika, because I and my team can’t get into the building,” Andreas Georgiou, chairman of the Elstat statistics agency, told the Financial Times. “These detailed figures are urgently needed for the troika to recalibrate the draft budget, if required, before it goes to parliament on Monday.”

    E&Y Says Greek Default Seems Unavoidable; Sees Risk of Recession -- A Greek default is inevitable and there is 35 percent chance of the euro-area economy slipping back into recession, Ernst & Young said. “The euro zone sovereign-debt crisis shows no sign of abating,” E&Y said in an e-mailed report in London today. “A default on Greek government debt now seems unavoidable. The key question is when this default will occur and how it will be managed.” European leaders have struggled to allay investor concerns that a potential debt restructuring in Greece will plunge the region’s economy into a recession. Greek bonds have tumbled and insurance against default has soared as markets put the probability of insolvency at more than 90 percent. Former European Central Bank chief economist Otmar Issing told Germany’s Stern magazine that the country “won’t get back on its feet without a drastic debt restructuring.” “Authorities have been slow in trying to tackle the problems facing Greece, Ireland and Portugal,” E&Y said. “It was hoped that the rescue package for Greece announced in July would bring to an end the long period of indecision and uncertainty.”

    Euro Is Beyond Rescue in Debt Crisis, Szalay-Berzeviczy Says -  The euro is “practically dead” and Europe faces a financial earthquake from a Greek default, according to Attila Szalay-Berzeviczy, global head of securities services at Italy’s biggest lender UniCredit SpA. (UCG) “The euro is beyond rescue,” Szalay-Berzeviczy said in an opinion piece for, a Hungarian news portal, which he signed as former chairman of the Budapest Stock Exchange. “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.” The article described a “worst-case scenario,” he said in a telephone interview from Budapest today. Szalay-Berzeviczy’s “are his own personal view and do not reflect the position of the company,” Claudia Bresgen, a spokeswoman at UniCredit in Munich, Germany, said by e-mail. A Greek default will trigger an immediate “magnitude 10” earthquake across Europe, he predicted. Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty “within minutes,” Szalay-Berzeviczy wrote.

    Everyone's Realizing That Europe Has A Much Bigger Problem Than Debt: It almost seems quaint already to talk about the European "debt crisis" as sharp commenters are moving onto a deeper realization, that the problem in Europe is not about debt, but rather trade, or more specifically trade imbalances. In a post at the NYT Economix blog, Simon Johnson hits the nail on the head here, explaining that when Mexico got bailed out in the mid-90s, its economy was able to rebound via a devaluation of the peso. This led to more competitive exports, which led to a trade surplus. Important parts of the euro zone, like Portugal, Greece and perhaps Italy, badly need a reduction in their real costs of production. If their currencies were independent, this could be achieved by a depreciation of their market value. But this is not an option within the euro zone, and it is within the zone that they need to become more competitive. Unable to move the exchange rate and unwilling to cut wages, the Portuguese government is embarked on an innovative course of “fiscal devaluation,” meaning it will cut payroll taxes, to reduce the cost of labor, while increasing the value added tax, or VAT (a tax on consumption), as a way to maintain fiscal revenues.

    Sovereign default: panic versus fundamentals - There is a growing concern that we are approaching a wave of sovereign defaults in Europe. And if there is default on government debt, it will have an effect on the balance sheets of Euroepan financial institutions and this is the source of the recent concerns about the solvency of some of these institutions. Stress tests are designed to look at "pessimistic" scenarios to see whether financial institutions have enough capital to deal with them.  How pessimistic should we be in these scenarios? The IMF has recently expressed their concerns about the need for capital of some European banks because of the possibility of sovereign defaults not priced into some of the stress tests that European regulators have produced. This is a source of debate between European officials, the ECB and the IMF. How do we measure the probability of default? Should we look at CDS (credit default swaps or should we use interest rates as a measure of default probabilities? Both of these measures capture the "market" view on default probabilities. A completely different approach is too look at the fundamentals of fiscal policy sustainability (yes, it requires more work but it is always a productive exercise to look at the numbers and not just at how others read those numbers!).

    What Would It Take to Save Europe? - Official Washington was gripped last weekend by euphoria, at least briefly, as people attending the annual meetings of the International Monetary Fund began to talk about how much money it would take to stabilize the situation in Europe. At least one éminence grise suggested that 1.5 trillion euros should do the trick; others were more inclined to err on the side of caution, and their estimates ran as high as four trillion euros. This is a lot of money. Germany’s annual gross domestic product is only about 2.5 trillion euros, and the combined G.D.P. of the entire euro zone is about 9.5 trillion euros. The idea is that providing a huge package of financial support would awe the markets into submission –- meaning that people would stop selling their holdings of Italian or Spanish debt, and thus stop pushing up interest rates. But this is the wrong way to think about the problem. The issue is not money in the form of external financial support, whether provided by the I.M.F. or other countries to parts of the European Union. The real questions are whether Italy will get complete and unfettered access to the European Central Bank, and when we will know.

    How to stop a second Great Depression - George Soros - Financial markets are driving the world towards another Great Depression. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now. Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common Treasury for the eurozone. In the meantime, the main banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct banks to maintain credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance themselves within limits at a very low cost. These steps would calm markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.

    Fear and loathing in the eurozone - The annual meetings of the World Bank and International Monetary Fund over the weekend brought together frightened and angry people. The financial crisis that broke upon the world in August 2007 has entered a new and, in crucial respects, more dangerous phase. A positive feedback loop between banks and weak sovereigns is emerging, with a potentially calamitous effect on the eurozone and the global economy: the eurozone is no island. What makes this process particularly frightening is that weaker sovereigns are unable to cope on their own, while the eurozone has nobody in charge. The eurozone may lack the capacity to address the crisis. The underlying danger is laid out in the latest global financial stability report from the IMF. This is surveillance at its best: clear, compelling, courageous. So what is the message? It is contained in two sentences: “Nearly half of the €6,500bn stock of government debt issued by euro area governments is showing signs of heightened credit risk”; and, “As a result, banks that have substantial amounts of more risky and volatile sovereign debt have faced considerable strains in markets.” (See charts.) This is the stage the world has reached, no longer in small peripheral member countries of the eurozone, but in Spain and Italy. The emergence of doubt about the ability of sovereigns to manage their debt undermines the perceived soundness of the banks, both directly, because the latter hold much of the debt of the former, and indirectly, via the dwindling value of the sovereign insurance.

    UBS' Euro Doom And Gloom Team Releases Sequel: "The Eurozone Sovereign Crisis Has Entered A More Dangerous Phase" - From the same fine Swiss folks who three weeks ago (and before it was uncovered that when it comes to playing, or at least scapegoating, dangerously, UBS is second to none) brought you, "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change," comes the sequel: "We believe the Eurozone sovereign crisis has entered a more dangerous phase. Financial and banking stresses are plainly evident as concerns about sovereign default grow. Notwithstanding signs from Washington this past weekend that European and world leaders are willing to consider more decisive policies, concrete steps remain elusive. Yet rising uncertainty threatens an already weakened world economy." The Swiss Bank's conclusions? "First, Europe’s politicians and policy makers must do more to shore up the Eurozone and investor confidence more generally. Among others, that probably includes stronger capital buffers in the banking sector, an expanded EFSF/ESM to finance bank recapitalization and support Eurozone bond markets, and further fiscal austerity in ‘at-risk’ Eurozone countries. But these are big asks of Europe’s ‘political economy’. Hence, the second conclusion: The likelihood is that the crisis will intensify before policy can deliver what is required."

    Causes of the Eurozone Crisis (Part 2): Policy Implications... In the previous post I sketched out the origins of the eurozone crisis, and argued that powerful systemic forces, not irresponsible behavior, pushed the periphery countries toward crisis – and may well have done so no matter what the peripheral eurozone countries had done. The common currency encouraged (in fact, was designed to encourage) large-scale capital flows from the eurozone (EZ) core to periphery.  But note that other aspects of the common currency meant that the odds were stacked even more heavily against the peripheral EZ countries. Euro-adoption not only set the stage for the crisis by encouraging a capital flow bonanza to the EZ periphery; it also made it impossible for the periphery countries to deal with the sudden stop to those capital flows if and when it came. In his excellent recent paper (pdf), Paul De Grauwe has pointed out that the adoption of the euro by Europe’s periphery effectively caused them to be “downgraded to the status of emerging countries”, in the sense that they could no longer issue sovereign debt in their own currency. This made those countries peculiarly vulnerable to changes in investor sentiment. As Paul Krugman recently put it, thanks to the common currency, the periphery countries lacked the tools to manage their balance of payments.

    Estimating the Cost of the Eurozone Crisis - To figure the costs to the periphery countries, I measure the GDP shortfall between those countries and the rest of the EZ during the years 2010-12 using data from Eurostat. (But note that the 2012 GDP growth rate is a forecast, and as such is nothing more than an educated guess on my part.) So for example, over those three years Greece will have had approximately €42 billion less income than it would have had without the crisis, i.e. if it had enjoyed the same economic growth as the EZ core. Dividing this by the Greek population yields a cost of about €3,700 per person, or about 18% of annual income. To estimate the costs to the core EZ countries, I add up the various rescue packages agreed to so far, including the most recent (July 2011) €110 billion plan for Greece. Most of this assistance is in the form of loans; after all, the idea was that these rescue packages were primarily supposed to just see the periphery countries through a liquidity crisis. As such, much of this assistance is due to be repaid. But to be as generous as possible to the EZ core countries in this reckoning, let's assume that such repayments never amount to more than 50% of the package totals.  The following table summarizes these very rough estimates of the burden that the crisis has imposed on the members of the EZ so far.

    Banks must prepare for further shocks, warns BoE’s Financial Policy Committee - The Bank’s new Financial Policy Committee (FPC) has recommended lenders strengthen their finances by “ensuring that discretionary distributions reflected any reduction in profits”. “Discretionary distributions” is Bank shorthand for bonuses and dividends.  Although the FPC – the Bank’s financial stability watchdog – did not mention any numbers, the Bank has suggested in previous Financial Stability Reports that lenders could raise £10bn a year simply by “constraining compensation ratios while limiting dividend payouts”. That £10bn of capital, it claimed, could be used to support roughly £50bn of new lending to households and businesses. Last year, the banks paid £6.7bn in City bonuses – 8pc less than in 2009.  The Bank is acutely aware that lenders are torn between regulatory pressure to boost capital and political pressure to boost the economy by lending more. In the FPC’s inaugural meeting in June, when markets were open and earnings strong, it urged banks to do both. However, in the past couple of months, markets have slammed shut on fears of a second recession – raising the prospect of banks withdrawing credit to strengthen their balance sheets.

    Punked World - Europe is a three-card monte game and Greece is the pea and for the moment I'd guess that the pea is under a walnut shell called France. Or the French banks, to be specific. Their vaults are stuffed with Greek bond paper that is giving the whole neighborhood a headache from a stench like unto rotting carp. Everybody else in the neighborhood has their own cache of deliquescing fish-heads, but they pretend the air is fresh and bracing. In fact, so exhilarating that they are avid to dump $3 trillion into a Euro bailout fund that will solve the problem of that fugitive aroma wafting down the boulevards.  Europe can really only put out stories at this point, and the $3 Tril bailout fund is just another story in a tedious string of them. Where are they going to get the money? From the machinists' union in Dusseldorf? The waiters and chambermaids in Munich? There's that rumored swap line opening from the Federal Reserve to the European Central Bank, but that's nothing more than a cheap loan window, and for a measly half a trillion ($500 billion - the late Senator Ev Dirkson is cackling in his grave). And where do those dollars come from anyway? Who is supposed to pay it back, and how? What kind of collateral is Ben Bernanke going to hold - the contents of the south wing of the Louvre? One hundred million free dinners (wine and tip included) at Taillevent? This game of musical chairs with a hot potato is not fooling anyone, really.

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