week ending Sept 10

U.S. Fed balance sheet expands in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week as the central bank reinvested the proceeds of its maturing agency mortgage-backed securities by buying more Treasuries, Fed data released on Thursday showed. The Fed's balance sheet was $.2.841 trillion in the week ended Sept. 7, compared with $2.838 trillion in the week ended Aug. 31. For balance sheet graphic: link.reuters.com/buf92k The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $884.9 billion, unchanged from the previous week. Meanwhile, the Fed's holdings of Treasuries totaled $1.656 trillion, up from $1.652 trillion the previous week.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $109.8 billion, unchanged from the previous week.The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $2 million a day in the week ended Wednesday, up from a $7 million average daily rate in previous week.

Fed Balance Sheet Increases In Latest Week - The Fed's asset holdings in the week ended Sept. 7 stood at $2.862 trillion, slightly more the $2.857 trillion reported a week earlier, the Fed said in a weekly report Thursday. The central bank's holdings of U.S. Treasury securities edged up to $1.656 trillion Wednesday, from $1.652 trillion the week before. Thursday's report showed total borrowing from the Fed's discount lending window was $11.66 billion, down slightly from $11.71 billion a week earlier. Borrowing by commercial banks stood at $13 million, down from $17 million the previous week. U.S. government securities held in custody on behalf of foreign official accounts moved down to $3.474 trillion from $3.485 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts edged lower to $2.742 trillion from $2.752 trillion the previous week. Holdings of agency securities edged down to $732.18 billion from the prior week's $732.61 billion. Further data on the Fed's balance sheet, including a breakdown of district-by- district discount window borrowing, can be found at http://federalreserve.gov/ releases/h41/current/h41.pdf.

FRB: H.4.1 Release - Factors Affecting Reserve Balances

Fed's Evans on the Fed's Dual Mandate - From Chicago Fed President Charles Evans: The Fed's Dual Mandate Responsibilities and Challenges Facing U.S. Monetary Policy "Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market. In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment."

Fed’s Williams: Stalling Out, High Unemployment Is Economy’s Main Threat - A too slow pace of recovery suggests there is room for the Federal Reserve to help promote stronger growth, a Federal Reserve official said Wednesday. “The real threat” facing the nation “is an economy that is at risk of stalling and the prospect of many years of very high unemployment, with potentially long-run negative consequences for our economy,” Federal Reserve Bank of San Francisco President John Williams said. Against this environment, “there are a number of potential steps the Fed could take to ease financial conditions further and move us closer to our mandated goals of maximum employment and price stability,” he said.

Fed’s Rosengren Willing to Consider Action - The economy is growing so much more slowly than expected earlier this year that the already high unemployment rate might start rising again, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview with The Wall Street Journal. Rosengren said he believed the economy would grow at around a 2% annual rate in the second half of the year, much slower than the rate of more than 3% he expected earlier this year. In addition to shocks that have hit the economy, business and household confidence has been shaken by worries about fiscal policy in the U.S. and Europe, he said. “We might see some drifting up on the unemployment rate,” he said. Unemployment in August was 9.1%.

Fed’s Evans Calls for Stimulus to Cut Unemployment to 7.5% - Federal Reserve Bank of Chicago President Charles Evans said the central bank should move “aggressively” to reduce unemployment, even at the cost of temporarily pushing inflation higher. The Fed’s current commitment to record-low interest rates should be made contingent on pushing the unemployment rate to around 7 percent or 7.5 percent, as long as inflation stays below 3 percent in the medium term, the 53-year-old regional bank chief said today in a speech in London. “Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation,” he said. “Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2 percent.” The speech places the Chicago Fed president among the “few” members of the Federal Open Market Committee who, according to minutes of the FOMC’s gathering in August, favor a “more substantial move” beyond the central bank’s pledge to hold rates low for about two years.

Fed’s Plosser: Monetary Policy Can’t Help Jobs Market Much Right Now - Monetary policy has little ability to help the U.S. jobs market in current economic circumstances, a top Federal Reserve official said Thursday. “I am really doubtful that monetary policy is a tool that is going to help us very much” to help spur demand and improve hiring in an economy where many households and companies are still looking to cut borrowing levels, rather than to increase them, Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview with Dow Jones Newswires and The Wall Street Journal.

Fed has bullets, but not clear if needed: Bullard (Reuters) - The U.S. economy weakened over the summer, but it is an open question whether it needs the boost that further monetary policy accommodation could supply, a top Fed official said on Friday. "I'm not one to say that we are out of bullets, but on the other hand we've already got a very accommodative monetary policy," St. Louis Federal Reserve Bank President James Bullard told Canada's Business News Network on Friday. "So the question is do we have it calibrated right just now, or has the economy slowed just a little bit and should we do a little more or not? And I think that's the main question for the committee at the September meeting."

Fed Policy Makers Lay Groundwork for Further Action to Foster U.S. Rebound - Federal Reserve policy makers are laying the groundwork for further action at this month’s meeting, warning that U.S. economic growth could stall, producing lasting stagnation in the job market. Federal Reserve Bank of Chicago President Charles Evans said yesterday the Fed should consider adding “very significant amounts of policy accommodation” and attacked the notion it should abide by a 2 percent ceiling on inflation. San Francisco Fed chief John Williams cited “a number of steps” that could be taken to support growth, without offering specifics. The Fed may decide at its Sept. 20-21 meeting to replace some of the short-term Treasury securities in its $1.65 trillion portfolio with long-term debt in a bid to lower rates on everything from mortgages to car loans, according to economists at Wells Fargo & Co., Barclays Capital Inc. and Goldman Sachs Group Inc. Some analysts dub the maneuver “Operation Twist” because it would bend long-term yields lower

Fed Prepares to Act - Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.  Worries about inflation at the Fed have receded in recent weeks and economic data have worsened, putting officials on the lookout for ways to spur economic growth and improve financial conditions.  Chairman Ben Bernanke speaks Thursday in Minneapolis, and is likely to reiterate that the central bank is studying all its options, before officials meet Sept. 20 and 21. Other Fed officials, meanwhile, are expressing support for additional action. One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities.  A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank....A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.

Goldman’s Hatzius sees Operation Twist QE3 due to weak jobs number - The jobs numbers in the US were weak. There was no change in non-farm payrolls. Unemployment was unchanged from July at 9.1%. Underemployment was 16.2%. Total revisions to previous months’ data were –58,000, meaning the number today was equivalent to -58K print. The numbers sparked a selloff in stocks and crude oil, but caused the Swiss Franc and Treasuries to rally. These are very weak numbers. Eddy Elfenbein gives us the longer-term perspective: over the last seven years, the labour force has grow by 6.03 million and there are only 54,000 new jobs. Moreover, the unemployment rate would be 11.4% if the labour force was as big as it was when President Obama took office. With this in mind, take a look at what Jan Hatzius has to say to Bloomberg News. He sees QE3 coming in the form of operation twist. This is an asset swap of short-paper for long-dated paper first attempted in 1961 to get long rates to fall even more. I see this as toxic for banks and savers. However, Hatzius says it could happen by September already.

Fed Spectrum: Where FOMC Members Stand on Stimulus - The Federal Reserve is divided over whether the central bank should take further action, but there are more than just two simple camps. At their most recent meeting, Fed officials made a commitment, conditional on the economy’s performance, to keep interest rates near zero through mid-2013. At their meeting on Sept. 20 and 21, the central bank’s policy makers will consider next possible steps to help the economy, which could include rejiggering the Fed’s portfolio of bonds; pushing down a 0.25% interest rate it pays banks; restarting a bond-buying program, known as quantitative easing; or doing nothing at all. Participating in Fed policy meetings are all seven members of the its Washington board (which currently has two vacancies) and all 12 presidents of the regional Fed banks. The board members and the New York Fed president always vote on policy decisions and four bank presidents vote on a rotating basis. See how the members tend to line up here.

Fed Watch: Ben Speaks - Federal Reserve Chairman Ben Bernanke took the stage today, providing few hints about the path of monetary policy in the months ahead. Market participants were hoping for more specific details on what the Fed has up its sleeve at the next meeting, but got more of the same. In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability. More interesting was his extended comments on inflation...A couple of points. First, he takes the inflation boogeyman off the table for the time being. Not only are temporary factors easing, but long-term expectations remain stable and wage gains are subdued. Focus more, however, on the inflation expectations story – clearly Bernanke is not phased by the deterioration in the five and ten year-forward breakevens. The ten year in particular still hovers well above the levels that triggered QE2.

Setting Their Hair on Fire, by Paul Krugman -   Before I get to the Obama plan, let me talk about the other important economic speech of the week given by Charles Evans, the president of the Federal Reserve of Chicago. Mr. Evans said, forthrightly, what some of us have been hoping to hear from Fed officials for years now. As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed’s target of around 2 percent, unemployment remains extremely high. So how should the Fed be reacting? Mr. Evans: “Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.” But the Fed’s hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation.

El-Erian: U.S. Faces Challenges Fed Can’t Solve - Pacific Investment Management Co.’s Mohamed El-Erian said the U.S. faces “serious” economic challenges, including lagging housing and labor markets, that will prove resistant to Federal Reserve stimulus efforts. “You simply can’t overcome these impediments,” said El- Erian, chief executive and co-chief investment officer at Newport Beach, California-based Pimco, manager of the world’s biggest bond fund. “These are structural issues and require structural solutions.” Responses to financial crises in the U.S. and other countries “have been too cyclical and too dependent on central banks,” he said today at a symposium on Asian banking and finance held at the Federal Reserve Bank of San Francisco. El- Erian’s remarks followed a speech today by Fed Chairman Ben S. Bernanke, who said policy makers stand ready to take action as needed to boost the recovery. “We’re rather surprised at how cyclical the responses have been,” whether in the U.S. or Europe, El-Erian told bankers, regulators and economists gathered at the conference. The world is undergoing a “historical” realignment akin to “tectonic plates shifting,” which is focused on balance sheets, growth dynamics among different countries, and policies or politics, he said.

The Impact of GDP Revisions on Taylor Rule Estimations - Cleveland Fed - Along with July’s advanced estimate for second-quarter GDP, the annual revisions for previous GDP estimates were released. Revisions showed a dramatically lower path for GDP than had been previously estimated. In fact, after revisions, real GDP is now believed to still be below pre-recession levels. We look at how these revisions could impact policy using what is known as the Taylor rule. The Taylor rule is one of the most common tools used to evaluate Fed policy because it suggests what the federal funds rate should be and compares it to actual rates to get some insight into monetary policy decision making. Results are shown in the chart below. They indicate that policy has been constrained by the zero lower bound since the end of 2008. Before the GDP revisions and without the zero lower bound restriction, the Taylor rule suggests that the federal funds rate should have been approximately 2 percentage points lower than it was, that is, around −2 percent. After the revisions, the large increase in the output gap suggests that the rate should be 3 percentage points lower than it is currently. That is, the revisions themselves would cause nearly a 1 percentage point drop in the rule’s estimate for the interest rate.

Communication, Credibility and Implementation Some Thoughts on Current, Past and Future Monetary Policy - Narayana Kocherlakota - President Federal Reserve Bank of Minneapolis (video & speech transcript)

The Fed Gets Schooled Again on Central Banking: the Swiss National Bank Edition - I have continually stressed the need for the Fed to (1) publicly and forcefully announce a level target and to (2) back up such an announcement with a commitment to buy up as many assets as needed so that the target is hit.  Well, the Swiss National Bank has amazingly just done that in a way that would make Lars E. O. Svensson proud.  Below is the press release: With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. . If the economic outlook and deflationary risks so require, the SNB will take further measures. Any question as to the SNB's resolve here?  Didn't think so.  Swiss monetary officials are concerned about weakening economic activity and deflation and therefore have made a forceful, unambiguous commitment to expand the central bank's balance sheet until these problems are gone.  Moreover, in the last sentence they note more will be done if necessary.

Following the Swiss lead - On Tuesday, the Swiss National Bank (SNB) adopted a bold policy of pledging to sell Swiss Francs in an unlimited amount to ensure that the exchange rate viz-a-viz the euro is at least 1.2 Swiss Francs per euro. The exchange rate promptly jumped over 8 percent to a bit more than 1.2 Swiss Francs per euro. The SNB can clearly weaken its currency in this way, so long as its commitment is unwavering. The Fed could decide to do something similar at the next FOMC meeting, except with Treasury securities rather than the exchange rate. Concretely, the Fed could commit to buying any Treasury security with a maturity date in or before 2016 at a yield of (say) 25 basis points. The commitment would remain until the securities matured. This would reinforce and extend the existing commitment to keeping short rates low and would be a failsafe version of quantitative easing. It would be different from QE1 and QE2 in pegging a price, not a quantity. This strategy would be very likely to lower rates on other assets that are close substitutes. Fiscal policy would be a better tool, but of course that is not in the Fed’s domain. At this point, directly targeting longer-term interest rates is the most promising course for boosting demand available to the Fed (except perhaps for raising the short-run inflation target).

Jedi monetary policy - WRITING at Econbrowser, Jonathan Wright says: On Tuesday, the Swiss National Bank (SNB) adopted a bold policy of pledging to sell Swiss Francs in an unlimited amount to ensure that the exchange rate viz-a-viz the euro is at least 1.2 Swiss Francs per euro. The exchange rate promptly jumped over 8 percent to a bit more than 1.2 Swiss Francs per euro. The SNB may not actually have to intervene heavily. It’s a nice case study in the power of credible commitment and rational expectations. Quite right. When you can make a credible commitment to a policy goal, you don't have to work as hard to hit it; markets will do the work for you. Mr Wright suggests that the Fed could pull a similar trick for a different variable, like long-term interest rates. (The Fed could target an exchange rate, which would almost certainly make for potent stimulus. But it would generate an international uproar and would likely lead to a wave of protectionist retaliation.) If the Fed were to declare its intention to buy bonds until rates hit a specific level, markets would help push the rate toward that level, leaving the Fed with less to do than if it were to keep its policy goal unclear and try to hit the target through brute force.

The Fed's Twisted Plan - While world markets sell off,  the Federal Reserve is busy with its own problems as it attempts to deal with stubbornly high and persistent unemployment. Expectations for additional quantitative easing (QE) are running very high, but there is the possibility that the Fed may undertake a different kind of QE program, designed to provide stimulus without actually putting more money into the system. One widely discussed possibility would be to replay the famous 1961 “Operation Twist” action, where the Fed used open market operations to shorten the maturity of public debt in the open market. (History of Federal Open Market Committee actions) By buying longer-term bonds, the Fed will cause price of those bonds to go up, and this will drive the longer-term yields down.  Selling shorter-term bonds (to fund the purchase of the longer-term bonds) will put pressure on the price of the shorter term bonds, while driving short term yields up.

QE3 Looking Increasingly Less Likely - The last two texts released by the Fed shed light into which way Bernanke may be leaning: Bernanke’s Jackson Hole speech, as well as the Fed minutes from the August 9^th meeting. When considering the August 9^th minutes, context from the prevailing situation is very useful to keep in mind. The US debt rating had just been downgraded by S&P, causing a 7% selloff in the major equity indices the day before. Markets were falling apart, and the fall of 2008 seemed to be back in full swing. August’s Fed meeting happened to be scheduled for the day after the huge stock market rout, and investors had high hopes that Bernanke would come to the rescue, pumping another enormous amount of liquidity into the system or a similarly drastic action. From the backdrop of this dire situation in risk markets, policy makers had to come up with a response. From the August Fed minutes, we can see that a range of policy responses was discussed, from a renewed round of quantitative easing, a “twist” operation, setting explicit inflation and/or employment targets to doing nothing at all. While the minutes are somewhat ambiguous, it appears that two FOMC members favored the nuclear response of more quantitative easing and renewed monetary expansion immediately.

How to Make Central Banks More Accountable For Passive Tightening - Yesterday we learned that despite the ongoing spate of bad economic news in both the Eurozone and the United States, monetary authorities in both places have decided to do nothing new for now.  In the Eurozone, ECB president Jean acknowledged the Eurozone economy faces "particularly high uncertainty and intensified downside risks" yet chose, along with the rest of the ECB authorities, not to further loosen monetary policy.  Across the Atlantic, Fed Chairman Ben Benarnke gave a speech where he too acknowledged the economy was surprisingly weak. He then noted that the "Federal Reserve has a range of tools that could be used to provide additional monetary stimulus" that he and other Fed offiicials "will continue to consider... at our meeting in September..."  In short, both central banks have decided to sit on the sidelines for now despite the ability and need to do more. There is a term for this. Its called a passive tightening of monetary policy. It occurs whenever a central bank passively allows total current dollar or nominal spending to fall, either through an endogenous drop in the money supply or through an unchecked decrease in velocity.  This failure to act when aggregate demand is falling has the same impact of the stance on monetary policy as does an overt tightening of monetary policy.

G7 communique: "Central Banks stand ready to provide liquidity as required" - From the Telegraph: G7 communique: in full - Agreed terms of reference by G7 Finance Ministers and Central Bank Governors  We met at a time of new challenges to global economic recovery, with significant challenges to growth, fiscal deficits and sovereign debt, stemming from past accumulated imbalances. This is reflected in heightened tensions in financial markets. There are now clear signs of a slowdown in global growth. We are committed to a strong and coordinated international response to these challenges.  We are taking strong actions to maintain financial stability, restore confidence and support growth....Monetary policies will maintain price stability and continue to support economic recovery. Central Banks stand ready to provide liquidity to banks as required. We will take all necessary actions to ensure the resilience of banking systems and financial markets. In this context we reaffirm our commitment to implement fully Basel III.

Should the Fed target unemployment? - BEN BERNANKE'S speech today in Minnesota cut and pasted the key sentence out of his Jackson Hole remarks: “the Federal Reserve has a range of tools…[and is] prepared to employ these tools as appropriate.” What does this mean? I’ll trust Neil Irwin and Jon Hilsenrath: they say the Fed will ease in September.If they’re right then maybe the rest of this blog post is moot. Nonetheless, it’s worth revisiting a meaty and intriguing speech that Charlie Evans, president of the Chicago Fed, delivered yesterday. Mr Evans has emerged as a vocal dove and counterpoint to the Fed’s hawkish contingent. Mr Evans provides a theoretical argument why more vigorous monetary ease aimed explicitly at lowering unemployment is justifiable right now. There’s a lot about this speech that I love, in particular this observation: I do not think that a temporary period of inflation above 2% is something to regard with horror. I do not see our 2% goal as a cap on inflation. Rather, it is a goal for the average rate of inflation over some period of time.. If a 2% goal was meant to be a cap on inflation, then policy would result in inflation averaging below 2% over time.

Will More Fed Easing Lead to Currency Wars? - Get ready for monetary easing 3.0. That was the takeaway from Fed chair Ben Bernanke's speech in Minneapolis today. Bernanke didn't indicate what form easing might take. But any of the options on offer are bound to tick off countries like Brazil and Switzerland, which are struggling to hold down the values of their currencies against the backdrop of easy Fed policy. The question is whether those aggravations will lead to so-called "currency wars" and drag down the global economy. The threat of currency wars (that is, when countries around the world start competing to make their currency cheaper than everyone else's as a way to boost trade) has been lingering for a while. But yesterday's announcement by the Swiss National Bank that it was "prepared to buy foreign currency in unlimited quantities" to steady its currency value added fuel to the fire. Why? Because when big central banks like the Fed make moves that reduce the dollar's value abroad, other safe haven currencies offering higher returns, like the Japanese yen and the Swiss franc, experience an surge in demand. When the central banks of those countries step in lower their currencies' values (which protects their export industries), other countries competing on trade tend to follow suit.

Bernanke: Inflation not "ingrained in the economy" - From Fed Chairman Ben Bernanke: The U.S. Economic Outlook. Excerpts on inflation: ...However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. Meanwhile, the step-up in automobile production should reduce pressure on car prices. Importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. Longer-term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households' longer-term expectations from the Thompson Reuters/University of Michigan survey, the 10-year inflation projections of professional forecasters, and the five-year-forward measure of inflation compensation derived from yields of inflation-protected Treasury securities. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures.

Is the Fed Too Obsessed with Inflation? A Proposal for a New FOMC Regime When the Chairman discusses the FOMC's medium-term inflation objective, we suspect that many in the market interpret him as saying that the inflation goal is also a near-term objective. This interpretation undermines the FOMC's ability to ease under current circumstances. A key issue is providing clarity on how tolerant the FOMC is, or should be, about short-run departures of core inflation from 2%. We propose a new policy regime, called monitoring-range inflation targeting (MRIT, pronounced "merit") that provides such clarity.

• Under MRIT, the FOMC announces an explicit medium-term headline inflation target-e.g., 2%-together with a short-term monitoring range for expected core inflation-e.g., 1.5% to 2.5% on a 12-month change basis.
• Under MRIT, if the labor market did not improve significantly, the FOMC would keep the funds rate "exceptionally low" as long as near-term core inflation was projected to stay within the monitoring range, provided, of course, longer-term inflation expectations remained consistent with the medium-term inflation target.
• We don't know whether the FOMC is or will be considering MRIT. We strongly believe that it should! Indeed, we believe it so strongly that we anticipate something akin to MRIT being announced, perhaps early next year

‘Helicopter Ben’ risks destroying credit creation - Bill Gross - Borrowing short-term at a near risk-free rate and lending at a longer and riskier yield has been the basis of modern-day finance.  Borrowers wanted lengthy loans to match the practical lives of their plant and equipment, but lenders were disposed towards shorter maturities because of the resultant financial volatility. Over a secular timeframe, a grand compromise was struck somewhere between seven and eight years in terms of nations’ typical average maturity, but lenders demanded an additional feature – a positive yield curve with a substantially lower policy rate that would allow “rolldown” and incremental yield – especially if levered. Thousands of billions of dollars of credit were extended on this basis, some of it as short as a one-week or one-month maturity extension, but all of it – almost everywhere, nearly all of the time – on the basis of a positive yield curve encompassing potential rolldown and incremental returns. However, in recent weeks, at least in the United States and perhaps soon elsewhere in the Fed dominated global monetary system, the rules have changed. Pilot Bernanke has changed planes from a fixed wing to a rotor-based helicopter by “conditionally” freezing policy rates for at least the next two years. As such the front end of the curve has for all intents and purposes become inert and worst of all flat as opposed to steeply positive. Two-year yields are the same as overnight fund rates allowing for no incremental gain – a return that leveraged banks and lending institutions have based their income and expense budgets on. A bank can no longer borrow short and lend two years longer at a profit.

How Can the Fed Avoid Hyper-Inflation? - So, I have seen more than a few people worry about money coming off of the Fed’s balance sheet and creating hyperinflation in the United States. More often that not this is phrased as “Well right now banks are hording cash but as soon as they stop the Fed is going to be in trouble” I want to respond to that but its difficult to find the exact framing. On the one hand the issue of an exist strategy and effectively transitioning to a new monetary model is not trivial and should be taken lightly. Fed official are rightfully wringing their hands over the execution of such maneuvers. On the other hand its not the kind blatant monkey business that I think some people are envisioned. It is overwhelmingly likely that the Fed is going to be successful at making this work. So briefly lets think about why someone might suspect hyper-inflation or at least a very high level of inflation is coming and why the Fed will overwhelmingly likely to prevent.

Randy Wray: Helicopter Ben – How Modern Money Theory Responds to Hyperinflation Hyperventilators - In the first part of this series on hyperinflation I addressed the critic’s view that if Modern Monetary Theory were adopted, this would inevitably lead to hyperinflation. I argued that this is obviously false—MMT describes how any sovereign government that issues its own currency spends. They’ve all done it for the past “4000 years at least” as Keynes put it. All modern sovereign governments spend by “keystrokes”—making electronic entries onto balance sheets—what most critics somewhat misleadingly call “printing money”. There is no other way to spend a sovereign currency into existence. Only the sovereign government can create it.  In the second part, I argued that hyperinflation is a rare occurrence. Obviously, if “keystrokes” inevitably lead to hyperinflation, then hyperinflation ought to be a common feature of just about all economies for the past 4000 years. Instead, we find that experience with hyperinflation is quite limited, and seems to result from very specific circumstances such as unwillingness or inability to impose and collect taxes, with civil war, or with huge external debts denominated in a foreign currency. In this final part of the series I will address the belief that the US (and other countries with large budget deficits in their own floating rate currency) faces hyperinflation. Many fear that “Helicopter Ben” (Chairman Bernanke) has pumped so much “money” into the economy that high inflation, if not hyperinflation, will be the inevitable result. This is one of the reasons for the run into gold—supposedly an inflation hedge.

Bernanke's Waterloo; Midst of Deflationary Collapse or Brink of Inflationary Disaster? 12 Specific Recommendations - We also need to remember that THE primary goal of the Fed and politicians has been to thwart the generational credit cycle deleveraging process to the best of their abilities while it is occurring, all in the interests of being reelected. So as you look at the bottom clip of the chart above, remember that this is the growth in domestic economic activity in the current cycle that has occurred while the Government has borrowed $5 trillion and used the proceeds for increased transfer payments, cash for clunkers, help for those with mortgage problems, deals for appliances, etc. And yet still we’ve experienced incredibly subdued domestic economic activity. Just what would this have looked like in the absence of historic Government balance sheet leveraging? Although it appears obvious conceptually, we're not so sure the markets yet fully appreciate the fact that in true generational deleveraging cycles, monetary policy is powerless to influence credit expansion. Again, our near myopic focus on credit is driven by the fact that credit is the cornerstone of modern economic development and balance, and certainly not just in the US. The character, availability and price of credit regulate the ongoing tone of aggregate demand, so monitoring credit is simply crucial. If credit cannot expand, then neither can aggregate demand. A simple yet key truism, especially in our current circumstances. As you can see below, we've seen literally unprecedented monetary expansion so far in the current cycle, yet private sector credit creation (as is exemplified by the bank loans and leases outstanding) remains wildly subdued at best. The whole pushing on a string thesis? Exactly.

The scapegoating of Ben Bernanke - Among Republican presidential hopefuls, bashing Ben has become a sport of choice. That’s Ben Bernanke, chairman of the Federal Reserve Board. First, Texas Gov. Rick Perry said it would be “almost treasonous” for Bernanke to embrace the so-called Quantitative Easing 3 (QE3). Then former House speaker Newt Gingrich said at Wednesday’s GOP debate that he’d fire Bernanke, calling him the most “dangerous and power-centered chairman” in Fed history. This rhetoric is beyond over-the-top. Its distortions are so grotesque and its judgments so poor that they should suggest disqualification for the White House. All presidents want to create economic confidence. Indeed, improving confidence is crucial to boosting today’s lackluster recovery. The easiest way to destroy confidence is for the White House and Fed to get into a public brawl. By law, the Fed is “independent.” The Fed chairman, for example, is not a member of the president’s Cabinet. The reason is to insulate the Fed from short-term political pressures. It is to allow the Fed to take actions that, though perhaps initially unpopular, are judged necessary for the economy’s long-term health and stability.

Treasuries, TIPS, and Gold (Wonkish) - Paul Krugman -I am, of course, a big deflationista, and as I see it record low interest rates strongly vindicate my position. As I like to point out, if you’d believed the inflationistas at the Wall Street Journal and elsewhere, you would have lost a lot of money. But what about gold? As some readers and correspondents love to point out, you would have made a lot of money if you’d bought gold early in this mess. So doesn’t that vindicate the inflationistas, to some extent? My usual response has been that I have no idea what drives the price of gold, to say that it’s a market driven by hoarding in Asia, Glenn Beck followers, whatever. But maybe I’ve been too flip here. Why not think about what actually should be driving gold prices? And I mean think about it, rather than going for slogans about inflation, debased currencies, and all that. Well, I’ve been thinking about it — and the answer surprised me: soaring gold prices may be quite consistent with a deflationista story about the economy.

Are Other Commodities Like Gold? (Quick and Wonkish) - Paul Krugman - A number of commenters on my gold post have asked whether the same logic doesn’t apply to all commodities, oil in particular. And the answer is, no, not quite. The simple Hotelling model applies to a commodity where the stock has already been extracted, so the choice is between storing it for the future or selling it now — and it also, in the simple example, depends on there being negligible storage costs. Neither of these propositions looks remotely right for oil; in the case of oil the choice is whether to extract it now or leave it in the ground and extract it later. If you work through this story, the thing that rises at the real rate of interest is not the price but the difference between the price and marginal extraction costs, which may be much smaller. Also, if other things — such as new oil discoveries and improving drilling technology — are keeping the real price from rising much, there won’t be any Hotelling-type hoarding at all. This has been true of oil for most of the industry’s history, although it may be ending now. So there aren’t a lot of things like gold here; maybe some other precious metals, but I’m not sure any fit the bill.

Golden Spikes - Krugman - As some readers may have guessed, I’m having some fun thinking about gold price economics — nothing like a good intellectual puzzle to keep you occupied while the world collapses. Anyway, some people have asked about previous gold price fluctuations, and in particular whether my low-interest-rate story can fit with the last time gold soared. So, here’s the history since the gold peg ended (deflating by the CPI): Now, the end of the 70s was a time of high interest rates, whereas the current environment is one of low rates. But that’s a comparison of nominal rates; what about real rates, which are what the model says should matter? Bear in mind that what we want are expected real rates looking forward, not ex-post rates based on past inflation and bond yields. And unfortunately, there weren’t any inflation-protected securities three decades ago, so we can’t get a direct read on market real interest rates. But there are other indicators of inflation expectations. Here’s one easy comparison (yes, it’s one-year inflation expectations versus 10-year bond yields; so sue me):

On 4% Inflation - So I know there are an increasing number of folks coming on board with Rogoff idea that what we need is a burst of inflation. I think the – very true – idea that this will help repair household balance sheets is behind this. However, looking at the following chart is anyone yet persuaded that 2% inflation is just a bad idea; and that 4% gives us fundamentally more breathing room. Perhaps we can countenance a 0% overnight rate, but doesn’t make you at least a little queasy to see the 10 year bond – what we used call THE long bond, at 2% On top of that we are seeing, what are essentially hot money flows INTO the United States.  Via Kash: Recall from yesterday’s post that MFIs in Europe have drained their bank accounts at European banks by about €700 billion over the past year and half, which at current exchange rates is approximately $1 trillion. It seems that much of that money has recently found its way into the bank accounts that European MFIs keep in US banks. And conversely, it seems likely that the large inflow of cash deposits held at US banks this year is largely from European banks.

Is Inflation the Answer? -Recently, a number of commentators have proposed a sharp, contained bout of inflation as a way to reduce debt and reenergize growth in the United States and the rest of the industrial world. Are they right?  As Carmen Reinhart and Kenneth Rogoff argue, recoveries from crises that result from over-leveraged balance sheets are slow and typically resistant to traditional macroeconomic stimulus. Over-levered households cannot spend, over-levered banks cannot lend, and over-levered governments cannot stimulate. So, the prescription goes, why not generate higher inflation for a while?  It is an attractive solution at first glance, but a closer look suggests cause for serious concern. Start with the question of whether central banks that have spent decades establishing and maintaining anti-inflation credibility can generate faster price growth in an environment of low interest rates. Japan tried – and failed: banks were too willing to hold the reserves that the central bank released as it bought back bonds. Moreover, the central bank needs rapid, sizeable inflation to bring down real debt values quickly – a slow increase in inflation (especially if well signaled by the central bank) would have limited effect, because maturing debt would demand not only higher nominal rates, but also an inflation-risk premium to roll over claims.

The ECB data do not support the view that European banks are moving cash assets out of Europe and into the U.S.: it the Fed's QE2, that's all – Rebecca Wilder - Kash Mansori published complimentary articles that received quite a bit of attention in the blogosphere. Using data published by the ECB and the Fed, Kash Mansori argued (here and then here) the following: monetary financial institutions (MFIs) in Europe have been moving their deposits out of European banks. Where is that money going? It looks like much of it is being placed with US banks instead. The following chart shows the total deposits at domestically chartered commercial banks in the US. ...Clearly, something is going on -- the recent rise in deposits with US banks has been dramatic, with an above-trend increase in deposits of approximately $500 billion over the past 6 months. I have a pretty simple problem with this analysis - the two posts span two different time periods, 1.5 years and 6 months. In this post, Kash argues that deposits of monetary financial institutions (MFIs) with other MFIs declined by € 461 billion spanning the period January 2010 to July 2011 (using freely available ECB data), implying that they must be moving their cash somewhere else: with an above-trend increase in deposits of approximately $500 billion over the past 6 months.

Fact-Checking the GOP Debate, Inflation Edition... Economic subjects were a hot topic at last night's GOP debate, and several candidates specifically chimed in regarding Federal Reserve Chair Ben Bernanke and inflation. Some examples:

• Newt Gingrich: "I would fire him tomorrow. I think he's been the most inflationary, dangerous, and power-centered chairman of the Fed in history." Gingrich even went so far as to blame Bernanke for the current price of gasoline.
• Mitt Romney: "I think Ben Bernanke has overinflated the amount of currency that he's created." He then goes on to say that he would take a different approach than Ben Bernanke has taken, which makes sense if for no other reason than Mitt is running for President, not Fed chair.

Something about these comments didn't seem quite right, so, armed with only a list of Federal Reserve Chairmen and an inflation calculator, I got to work. Here's what I found regarding Federal Reserve Chairmen and inflation:

Fed's Williams: Downside Risks and Temporary Factors -Today San Francisco Fed President John Williams outlined some of the downside risks and temporary factors for the economic outlook: The Outlook for the U.S. Economy and Role for Monetary Policy. Here are some excerpts: The recent slowdown was due in part to temporary factors. The weather was unusually bad in many parts of the country this past winter, the Japanese earthquake disrupted global supply chains, and, perhaps most importantly for U.S. economic growth, oil and other commodity prices surged. Higher prices at the pump staggered Americans and took a sizable bite out of consumer spending at a particularly sensitive moment for the economy.[W]e are vulnerable to negative shocks that could put the recovery at risk. . A full-blown financial meltdown in Europe would hit U.S. exports, which have been one of the economy’s few bright spots. Perhaps more importantly, it could slam U.S. financial markets and deal a further blow to already fragile confidence. Right now, though, the real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment, with potentially long-run negative consequences for our economy.

Fed's Beige Book: "Economic activity continued to expand at a modest pace" - Fed's Beige Book: Reports from the twelve Federal Reserve Districts indicated that economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity. The St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported either modest or slight expansion. Atlanta said activity continued to expand at a very subdued pace, while Cleveland reported slow growth and New York indicated growth remained sluggish. Economic activity expanded more slowly in the Chicago District and slowed in the Richmond District. Business activity in the Boston and Philadelphia Districts was characterized as mixed, with Philadelphia adding that activity was somewhat weaker overall. Several Districts also indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks. Consumer spending increased slightly in most Districts since the last survey, but non-auto retail sales were flat or down in several Districts.

Fed’s Beige Book: District-by-District Summaries - The Federal Reserve, in its latest beige book report, said Wednesday that the U.S. economy continued to expand between the second half of July and the end of August, but some districts noted mixed or weakening activity.  The following is a district-by-district summary of economic conditions in the 12 Fed districts (See an interactive graphic):

Fed Watch: Questions and Answers - Does the economy need more stimulus? YES! The US economy is two years into an economic expansion, and yet the unemployment rate remains above 9 percent. National output growth averaged just 0.7 percent in the first two quarters of the year. Job growth was zero in August, albeit with some downward pressure from the Verizon strike. Output is $1 trillion below CBO potential – and the gap is expanding. The 30-year inflation indexed Treasury bond just traded at 90 basis points. None of which should be happening two years into an expansion. Yet here we are. Will the private sector provide the needed stimulus? Federal Reserve President Dennis Lockhart summarizes the situation:It is necessary that the process of deleveraging plays itself out, which may take several more years.  It is obvious that as consumers reduce spending they divert more of their incomes to paying off debt. This shift in consumer behavior increases the amount of capital available for financing investment. But higher rates of business investment are not likely to fully offset weakness in consumer spending for some time, as businesses continue to grapple with uncertainties about the future. Will the government provide the needed stimulus? On the fiscal side, the answer is no, or at least not yet. As Paul Krugman points out, fiscal policy is already contractionary, while the recently passed budget deal promises only more austerity.

Federal Reserve Reverse Repurchase Agreements: A Harbinger of Economic Catastrophe?  - In recent weeks, we've all watched as the sovereign debt issues facing the Eurozone and the United States seem to be spiralling out of control. While the issue is not page one news most days, the situation is still very dynamic and, in combination with what appears to be Part II of the Great Recession, the world's fiscal situation could get rather dicey to put it mildly. In this posting, I'll take a look at a rather arcane (at least to most of us) measure that may signal what lies ahead for all of us. In perusing the web, I happened on this fascinating graph from the St. Louis Federal Reserve Bank as sourced on their FRED pages (Federal Reserve Economic Data): The RRA in the title of the graph WLRRAA stands for Reverse Repurchase Agreements.In the specific case of the Federal Reserve, the central bank uses reverse repurchase agreements to temporarily add or subtract reserve balances in the open market (the amount of money in the system) and to temporarily offset swings in bank reserve levels.

On the Verge of a Double Dip Recession - If history is a guide, the odds that the American economy is falling into a double-dip recession have risen sharply in recent weeks and may even have reached 50 percent.  Economies have a strong self-reinforcing nature. When people are optimistic, they spend, which begets hiring and then more spending. When people are anxious, they pull back, which leads to a cycle of hiring freezes and further anxiety that often lasts for months.  The United States appears to have entered some version of the vicious cycle. Most ominously, job growth has slowed to a pace that typically signals the start of a recession.  Over the last 50 years, every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one. From early 2010 through this spring, by contrast, employment was growing fast enough to make the economy look as if it were in a recovery, albeit a modest one.  “The chances that we are in something that is going to feel like a recession are close to 100 percent,”

CNN Poll: 8 in 10 think we're in a recession - Economic fears are not diminishing. More than eight in 10 Americans think the economy is in another recession, according to a new CNN/ORC poll. One-third of those surveyed think it’s serious. While the country isn’t technically in a recession because the economy hasn’t experienced two straight quarters of negative growth, the poll’s results highlight the importance of President Barack Obama’s jobs speech next Thursday night. Full results (pdf) Americans have “a bad case of economic jitters,” according to CNN Polling Director Keating Holland. About two-thirds think the president should focus more on creating jobs right now, even if it means less deficit reduction. Don’t expect Republicans to stop demanding more budget cuts though. Almost half of GOPers surveyed say deficit reduction is just as important as creating more jobs, including those who identify themselves as tea party supporters. Democrats strongly disagree. Eighty-three percent want the president to focus more on job growth, and two-thirds of independents say the same.

Double Dip or Not? The Data and Policy Implications - We know that in the aftermath of combined housing busts, financial crises, and recessions, recoveries are typically modest if not halting, even if the recession is deep. [0] This characterization appears to have held true, with the question now whether we will enter into a new recession, or merely plug along with growth that technically constitutes a recovery, but is not sufficient to close the output gap with appreciable speed. The NBER lists the indicators that are of interest in terms of business cycle dating, as of the latest trough. (The months pertain to the trough dates that mark the last expansion.)

• Macroeconomic Advisers' monthly GDP (June)
• The Stock-Watson index of monthly GDP (June)
• Their index of monthly GDI (July)
• An average of their two indexes of monthly GDP and GDI (June)
• Real manufacturing and trade sales (June)
• Index of Industrial Production (June)
• Real personal income less transfers (October)
• Aggregate hours of work in the total economy (October)
• Payroll survey employment (December)
• Household survey employment (December)

In the following two figures, I depict the series in bullet points 5-10.

Just Face It, We've Been In A Recession This Whole Time: I keep repeating that the debate over a double dip is meaningless. Why? Because we’ve been in one long balance sheet recession this entire time. The point is, with this much slack in the economy, it’s unlikely that any economic downturn from here will be substantial. Does that mean I think the U.S. economy can’t contract from here? No, but I would be very surprised if we were to experience another blow similar to the 2008 recession where real GDP fell 5%. To put this argument in some perspective, analysts at ING tend to agree. They see the economy as muddling through, but not collapsing. They cite 5 reasons for this perspective:

• “Cyclical sensitive sectors, namely the housing sector and the auto sector, are already weak and are unlikely to contract much more.
• Households’ balance sheets have improved since the global financial crisis. Lower rates over a considerable period of time benefit net borrowers. Most US households will benefit from low borrowing rates.
• The trade deficit is likely to narrow due to slower import growth, decline in energy and commodity prices and a weak trade weighted dollar.
• Decline in commodity prices will check headline inflation and could lift households’ purchasing power.
• Investors’ fears are based on their most recent experience. The unpleasant memories of the global financial crisis are biasing investors’ sentiments. ”

A proposed solution: Co-ordinated international fiscal and currency policy  - Synopsis: A new international agreement between China, Japan the US and the Eurozone should be made to boost economic growth: The US Dollar should be actively depreciated against the value of the Japanese Yen and the Chinese Yuan; Japan and China should enact substantial stimulus programs while the US dollar drops in value. This should boost internal demand in Japan and China which would result in a higher amount of goods and services exported from the US. The Eurozone should also enact a stimulus program while depreciating the Euro slightly. This would ensure both an increase in overall economic growth in all nations while solving the current account imbalances which helped create the economic crisis in the first place.

Jim Follain has a proposal for empirical macro - He writes: First, let’s do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying macroeconomics built around national totals, such as national income, GDP and the aggregate unemployment rate. Instead, we are wise to take a more geographically granular view of our economy that measures regional, state and local economic activity and adapts policies specific to these areas. Focusing upon the national aggregate or the national average masks the extraordinary variation among markets in this country and, indeed, can even make it harder to identify seriously stressful events until it’s too late. This is difficult to do, but c’est la vie.

The Fatal Distraction, by Paul Krugman - Friday brought two numbers that should have everyone in Washington saying, “My God, what have we done?” One of these numbers was zero — the number of jobs created in August. The other was two — the interest rate on 10-year U.S. bonds, almost as low as this rate has ever gone. Taken together, these numbers almost scream that the inside-the-Beltway crowd has been worrying about the wrong things, and inflicting grievous harm as a result. Ever since the acute phase of the financial crisis ended, policy discussion in Washington has been dominated not by unemployment, but by the alleged dangers posed by budget deficits. Pundits and media organizations insisted that the biggest risk facing America was the threat that investors would pull the plug on U.S. debt. .  I don’t mean to dismiss concerns about the long-run U.S. budget picture. If you look at fiscal prospects over, say, the next 20 years, they are indeed deeply worrying, largely because of rising health-care costs. But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all. And by obsessing over a nonexistent threat, Washington has been making the real problem — mass unemployment, which is eating away at the foundations of our nation — much worse.

How Did The U.S. Debt Get So Bad? (BBC slide show)

The world’s debt trap - “There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support.” — Bloomberg, quoting Nouriel Roubini This forecast from a sometimes-prescient and widely quoted economist brings to mind a question that many people now find irrelevant. Which should we policymakers choose, option A or option B? How about doing whatever is necessary to balance the government’s budget? Increasingly, policymakers believe that is their only option. In some countries, these policymakers may be right. For them, options A through Z are to raise taxes or cut spending. This is what happens when (1) tax revenues are weak, (2) money is needed to make payments on government debt, and (3) the country in question does not or cannot print its own currency and cannot make reserves for its own banks. Here in the United States, point (3) above does not apply. Hence, the federal government can issue any amount of securities, with the Fed purchasing them if necessary, as long as Congress is willing to keep increasing the debt limit.

Reich: Government Has To Spend More To Get Out Of Debt - Video - "At this point, there's a huge shortfall between consumer spending, businesses are not going to hire, on the one hand, and also on the economy's potential at full employment or near full employment on the other hand. Government is the spender of last resort. The only way to restart not only jobs, Simon, but also economic growth, which is terribly important for every purpose including deficit reduction. the only way we're going to get the deficits and long-term debt under control is if we get back growth. The only way to get back growth is for government to be this spender of last resort," Former Secretary of Labor Robert Reich told CNBC.

We must listen to what bond markets are telling us - What is to be done? To find an answer, listen to the markets. They are saying: borrow and spend, please. Yet those who profess faith in the magic of the markets are most determined to ignore the cry. The fiscal skies are falling, they insist. HSBC forecasts that the economies of high-income countries will now grow by 1.3 per cent this year and 1.6 per cent in 2012. Bond markets are at least as pessimistic: US 10-year Treasuries yielded 1.98 per cent on Monday, their lowest for 60 years; German Bunds yielded 1.85 per cent; even the UK could borrow at 2.5 per cent. These yields are falling fast towards Japanese levels. Incredibly yields on index-linked bonds were close to zero in the US, 0.12 per cent in Germany and 0.27 per cent in the UK. Are the markets mad? Yes, insist the wise folk: the biggest risk is not slump, as markets fear, but default. Yet if markets get the prices of such governments’ bonds so wrong, why should one ever take them seriously? The massive fiscal deficits of today, particularly in countries where huge financial crises occurred, are not the result of deliberate Keynesian stimulus: even in the US, the ill-targeted and inadequate stimulus amounted to less than 6 per cent of gross domestic product or, at most, a fifth of the actual deficits over three years. The latter were largely the result of the crisis: governments let fiscal deficits rise, as the private sector savagely retrenched.

The worst possible idea at the worst possible time - Unemployment is at 9.1%; the jobs report released Friday was awful; economic growth is anemic, and Americans are desperate for policymakers to take this crisis seriously. Yesterday, just 24 hours after we learned the economy didn’t generate any jobs at all in August, the Republican Party delivered a weekly address on the message the GOP wants the public to hear. Republicans want President Barack Obama to demand a balanced budget amendment in his upcoming jobs speech to Congress. “This would ensure spending cuts made today don’t easily disappear tomorrow,” Oh my. If anyone was looking for a reminder as to why dealing with congressional Republicans on economic policy is practically impossible, the party’s weekly address certainly offered one. Keep in mind, a month ago, the House GOP leadership told its members that “the best thing they could do during the August recess” was to sell their constituents on the idea of a balanced budget amendment to the Constitution. This is just madness... That congressional Republicans managed to create a BBA this year that was even worse than the previous version is a testament to their creativity, but it also reflects a degree of economic illiteracy that should disqualify them from any adult conversation on public policy.

Does No Jobs Mean No Deficit Reduction? - Nope. Simplest reason why not: the deficit reduction we’re talking about is over the next ten years. The extra or at least more effective stimulus we’re talking about better come sooner. Many of the same policies that contribute to the adverse longer-term fiscal outlook provide very little offsetting benefit to the near term. Getting our longer-term act together would give global investors, right now, more confidence in the security of Treasury bonds and help keep the cost of borrowing–for stimulus right now–low. So it seems the so-called “super committee” has no reason to shy away from its task of (another $1.5 trillion over ten years in) deficit reduction. There’s lots of opportunity for them to become “superheroes” in conquering both the near-term and the longer-term challenges facing our economy. And President Obama could encourage them by offering his own leadership on this issue–and let’s hope we hear some of that on Thursday. As “super” as they might be or might become, they can’t do it without his help.

The Federal Budget Deficit: $1.23 Trillion Through the First 11 Months of 2011 - CBO Director's Blog - The federal budget deficit totaled $1.23 trillion through the first 11 months of fiscal year 2011, CBO estimates in its latest Monthly Budget Review—$28 billion less than the deficit incurred in the same period last year. Revenues were about 7.6 percent higher through August than they were at the same point last year, and outlays were 3.7 percent higher. In its most recent budget projections, published in August in The Budget and Economic Outlook: An Update, CBO estimated that the deficit for fiscal year 2011 (which will end on September 30, 2011) will total $1.28 trillion, about $10 billion less than last year’s shortfall. Over the first 11 months of the fiscal year, revenues totaled $2.1 trillion, CBO estimates—$146 billion more than  receipts during the same period last year. That growth reflects a significant increase in receipts from individual income taxes, which was partially offset by a net reduction in other receipts. Specifically:

Senate Vote Hikes US Borrowing Limit By $500 Billion - The U.S. Senate defeated an attempt by Republicans to slow down a $500 billion increase in the federal government's borrowing limit in a vote that means the borrowing limit is immediately hiked to $15.19 trillion. That amount is enough to support federal government borrowing through late January or early February at current borrowing rates. In a 52-45 vote, the Senate blocked an attempt to begin debate on a resolution of disapproval against the $500 billion increase in the borrowing limit. Had a majority of lawmakers voted to proceed with the resolution, it would likely have been approved by the Senate in a subsequent vote next week. The GOP controlled House would then have been expected to also approve it.

If Only REINing in the Deficit Were As Easy As RAIN - Just had to “tweet” that!  Mainly wanted to combine a complaint about the rain and a link to my Tax Notes column (reprinted on the Concord Coalition site, here) that argues that the first easy thing the debt limit deal’s “super committee” could do is commit to strict pay-as-you-go rules on the Bush tax cuts–and on other expiring tax cuts and on spending as well, by the way, but the biggest difference this would make in on tax policy. Committing to pay-go rules on the Bush tax cuts wouldn’t be so hard in terms of making tax policy.  I explain in my column that there are three main ways we could get there–each with their economic and political pros and cons:

1. Do Nothing. Allow all expiring tax cuts to expire as specified under current law. That would mean reverting to Clinton-era marginal tax rates. (Hmmm, what was so bad about those tax rates for our economy?)
2. Do It Big. Extend some or all of the marginal tax rates under the Bush tax cuts, but fully offset the costs of extending the low rates by broadening the tax base and reducing some tax expenditures. This is the fundamental tax reform approach.
3. Do It to the Rich. Extend some or all of the Bush tax cuts — particularly those that affect middle-income taxpayers (lower tax rates, child tax credit, marriage penalty relief) — and fully offset the costs by imposing an extra tax on the very rich, such as a surtax on households with incomes in excess of $1 million.

August Budget Agreement Is Already Out Of Date - When we last left the federal budget debate in early August, the Budget Control Act — the agreement to raise the federal debt ceiling and reduce the deficit — had been enacted into law and Wall Street and the rest of the country were supposedly breathing a deep sigh of relief because, at least as far as spending and taxing was concerned, life was good. Except that it wasn’t and isn’t.  Think about what’s happened in the slightly more than four weeks since the agreement was signed. An earthquake occurred on the East Coast that damaged a number of federal and other facilities that will need to be fixed. The costs might not be large, but they weren’t anticipated.  Hurricane Irene did major damage and had a huge effect on people’s lives from North Carolina to Maine. The full extent of the damage is not yet known. We do know, however, that, like the earthquake, this storm wasn’t anticipated when the budget deal was put together. Federal Reserve Board Chairman Ben Bernanke made it clear that the economic recovery was not proceeding as expected and that Congress and the White House would have to use the budget to deal with it.

Members of debt panel have ties to lobbyists - Like many federal contractors, General Electric has a lot riding on the work of a new congressional “supercommittee,” which will help decide whether to impose massive cuts in defense and health-care spending. But the Connecticut-based conglomerate also has a potential advantage: A number of its lobbyists used to work for members of the committee, and will be able to lobby their former employers to limit the impact of any reductions in the weeks ahead.GE is hardly alone: Nearly 100 registered lobbyists used to work for members of the supercommittee, now representing defense companies, health-care conglomerates, Wall Street banks and others with a vested interest in the panel’s outcome, according to a Washington Post analysis of disclosure data. Three Democrats and three Republicans on the panel also employ former industry lobbyists on their staffs.  The preponderance of lobbyists adds to the political controversy surrounding the supercommittee, which will begin its work in earnest this week as Congress returns to Washington. The panel has already come under fire from watchdog groups for planning its activities in secret and allowing members to continue fundraising while they negotiate a budget deal.

Let's Hope It Is Just This Simple - Kevin Drum has joined the chorus, with "My Jobs Plan: A Trillion Dollars for Infrastructure:" All of us have our fantasies about what we'd like President Obama to say in his big speech next week about jobs. Here's mine: ask Congress to appropriate a trillion dollars to be spent on infrastructure upgrades over the next five years. That's it. That's the jobs plan. A trillion dollars to make us into a first-world country again. And as part of the enabling legislation, ask for emergency powers to temporarily streamline the regulatory red tape, interagency approval processes, environmental-impact statements, and labor rules that might otherwise keep the money from being put to work speedily. Make the case aggressively and you never know. Free money is free money, and even Republican voters like the idea of clean water, safe bridges, pipelines that don't blow up, electrical grids that work, and dams and schools that aren't crumbling.I couldn't have said it better myself.  Just much, much earlier.

How to put America back to work - Around the country there is growing pessimism. The rhetoric will be fine. But is there anything that anyone can really do — given the country’s looming debt and deficit?The pessimism is understandable. Monetary policy, one of the main instruments for managing the macro-economy, has proved ineffective — and will likely continue to be. It’s a delusion to think it can get us out of the mess it helped create. We need to admit it to ourselves. Meanwhile, the large deficits and national debt apparently preclude the use of fiscal policy. Or so it is claimed. And there is no consensus on which fiscal policy might work. The answer from economics is: There is plenty we can do to create jobs and promote growth. There are policies that can do this and, over the intermediate to long term, lower the ratio of debt to gross domestic product. There are even things that, if less effective in creating jobs, could also protect the deficit in the short run. But whether politics allows us to do what we can — and should — do is another matter.

New Urgency in the Battle for Stimulus - Having battled for months over deficit reduction, President Obama¹ and Congress on Friday each confronted new urgency to shift their focus to job creation after the most anemic employment report in many months.  For Mr. Obama, who last month promised a pivot to job creation, the Labor Department’s report raises the stakes as he prepares for a prime-time national address on Thursday before a joint session of Congress. In the speech, he will outline a new round of economic stimulus measures.  In Congress, the reactions from some Republicans suggested small cracks in their party’s wall of opposition to such measures, whether tax cuts or spending.  Within the White House, the report gave ammunition to Obama advisers who have pressed internally for bolder action on tax cuts and spending measures as Mr. Obama makes the final changes to a speech that could be as important to his re-election prospects as any to date. No president since Franklin Roosevelt has been re-elected with unemployment so high.

A Point That’s Going to be Important in a Few Days - I’m not trying to do a “prebuttal” here—that’s an ugly Washington move where you present a counter-argument to a speech or idea that hasn’t been delivered yet.  But we’re already hearing the R’s attack the President’s forthcoming jobs plan as reckless spending that will just increase the deficit, blow up the debt, yada, yada…So I wanted that make an essential yet poorly understood point about spending on jobs programs of the type we expect to hear Thursday night: Temporary spending does NOT increase either the long-term deficit or the growth of the national debt. The measures the President will introduce are temporary programs needed to ensure there’s enough economic activity to support the growth and jobs we badly need.  In normal times, private sector firms carry out much more of this function, but there’s still way too much slack out there, and federal fiscal policy is the main game in town.

Obama’s Deficit Plan to Include Medicare Eligibility Age Increase - I’ve been trying to remind people throughout the run-up to the Obama jobs proposal that it would also presage a deficit proposal, to “pay for” whatever spending is in the jobs proposal. We now have a topline number for the jobs plan: $300 billion, half from tax cuts and 2/3 from the extension of current law (Maybe this is why nobody thinks it will work). So will there be $300 billion in cuts in some fashion to “pay for” the spending over time? No, it’ll be much higher than that. The Catfood Commission II already has a minimum requirement of $1.5 trillion in deficit reduction (this is on top of the $900 billion enacted through a cap on discretionary spending in the 2012-2021 budget years). But Obama wants to exceed that number, and he’s reportedly ready to commit the grand bargain to paper, the one he negotiated with John Boehner before it blew up over taxes. So we’re going to have a Democratic President write down a desire to raise the Medicare eligibility age, among other things

Let’s Just Raid Social Security - Out of one side of its mouth, our political system talks about reforming Social Security to preserve it for a few more years, and out of the other side of its mouth, it proposes to expedite its demise. There are rumblings everywhere about a one-year extension of the "temporary" payroll-tax cut. Effective for all of 2011, it reduces the employee portion of the Social Security tax from 6.2% to 4.2%, thus giving us a little extra spending money. And collectively, it's more than a little: $100 billion for the year. The idea is that we'd spend this extra money, which would nudge up GDP and create jobs somehow somewhere. Yep, GDP and consumer spending are up a bit, despite dropping real wages and sagging consumer confidence. Yes, the inexplicable American consumer. However, the mind-boggling U.S. trade deficit, particularly in consumer goods, sees to it that much of this extra money is going overseas.  But here is one thing the payroll-tax cut did do very effectively: It raided Social Security by $100 billion. And now, they're proposing to raid it again. But to be fair, let's include an employer portion. Combined, it would amount to $200 billion for next year. And why not make it permanent? Because letting it expire would be decried, much like today, as a huge jobs-destroying "tax hike," while the $2.6 trillion Social Security Trust Fund just sits there, fat and plump with all this "money."

A Bipartisan Move to Tackle Benefits Programs — In a significant shift driven by bipartisan concern about the looming long-term debt, Republicans and Democrats are no longer fighting over whether to tackle the popular entitlement programs — Medicare¹, Medicaid² and Social Security³ — but over how to do it.  In the presidential race, Gov. Rick Perry⁴ of Texas, the Republican front-runner of the moment, took the debate over entitlements to a level never before seen from a major candidate, calling for the end of all three programs as currently structured. In his debate with Republican rivals Wednesday, he amplified his claims that Social Security is a Ponzi scheme⁵ and a “monstrous lie” to younger Americans counting on the money for retirement.   At the same time, Republicans and Democrats on Capitol Hill expressed a willingness to wring savings from the long-untouchable programs during the first meeting of the special committee that is charged with recommending $1.5 trillion in deficit reductions over the decade. Then President Obama⁶, in his address to a joint session of Congress on spurring job creation, reiterated his call for a plan reducing long-term debt with both changes in entitlement programs and taxes from the wealthy.

Excerpts of Obama’s Speech on Jobs - The White House released excerpts of President Barack Obama’s speech Thursday to a joint session of Congress on his jobs plan, called the American Jobs Act. The televised address is scheduled to begin at 7 p.m. EDT.Here are the excerpts:

Obama's Jobs Speech: Bolder Than Expected - The main question I had prior to the President’s jobs speech was how bold the proposal would be, and how committed the administration was to enacting the legislation. It was bolder than I expected, and the speech promised more commitment to this issue than we have seen in the past. The American Jobs Act is a $450 billion package containing a mix of spending and tax cut proposals. The proposed legislation contains most of the expected elements: Infrastructure spending featuring school modernization and transportation, tax incentives to hire the long-term unemployed, payroll tax cuts for small businesses, tax credits to hire veterans, temporary work programs, and help to refinance mortgages. The speech was delivered with a passion and commitment we haven’t seen from the president for some time, and it was effective at placing the responsibility for action on Congress. And pointing out that all of the programs in the Jobs Act have been supported by Republicans in the past didn’t hurt his arguments. However, there are some concerns.  Instead of jobs, the speech talked about the deficit, red tape regulation, the need to accept painful cuts in social programs, and so on — all favorite GOP issues. If that’s an indication that the commitment toward job creation will be similarly derailed by these issues in the future, then that’s worrisome.

Text of Obama’s Remarks on His Jobs Plan - Here is the White House text of President Barack Obama‘s remarks before Congress as prepared for delivery. The White House also released a fact sheet on the proposed legislation

Obama Jobs Speech Tough On Rhetoric, Light On Substance - After a summer in which the economy seemed to slow down further week by week, President Obama told Congress last night that it needed to pass his $447 Billion jobs plan right away or he’d take his case to the American people: “You should pass this jobs plan right away,” the president declared over and over in his 32-minute speech that eschewed Mr. Obama’s trademark oratory in favor of a plainspoken appeal for action — and a few sarcastic political jabs. Ezra Klein summaries the plan, the details of which will not be fully released until a week from Monday, at which time it will be combined with a deficit reduction plan that, the President says, will pay for the entire cost of the bill:

Obama's jobs speech: A call to action - AS JOB growth has ground to a halt and stock markets have swooned, the outlook for both the American economy and Barack Obama’s presidency has dimmed. The jobs package he unveiled in a much anticipated speech before Congress on September 8th was a calculated attempt to resuscitate both. His “American Jobs Act” consists of a hefty $447 billion worth (roughly 3% of GDP) of new and renewed tax cuts and spending that, he hopes, will prevent a fiscal vice from pushing the economy into recession early next year. Mr Obama proposed not only extending a 2% payroll-tax cut scheduled to expire in December, but increasing it to 3.1%—half the employee’s normal contribution to Social Security. He also called for an equivalent 3.1% cut in the employer’s payroll tax for the first $5m of payroll, and elimination of the entire 6.2% tax on the wages of new hires or on pay raises for current employees. At $240 billion, those provisions account for more than half the plan’s price tag. He also wants to keep extended unemployment insurance benefits for one more year while offering states flexibility to use the plan to encourage the unemployed to return to work.

The American Jobs Act - Here is the fact sheet for The American Jobs Act. Some of the major proposals (total is around $450 billion):
1) Payroll tax cuts (approx $240 billion):
• Cutting payroll taxes in half for 160 million workers next year: The President’s plan will expand the payroll tax cut passed last year to cut workers payroll taxes in half in 2012 ...
• Cutting the payroll tax in half for 98 percent of businesses: The President’s plan will cut in half the taxes paid by businesses on their first $5 million in payroll ...
2) Schools and teachers / aid to states (approx $60 billion):
• Preventing up to 280,000 teacher layoffs, while keeping cops and firefighters on the job.
• Modernizing at least 35,000 public schools across the country,supporting new science labs, Internet-ready classrooms and renovations at schools across the country, in rural and urban areas.
3) Other infrastructure ($75 billion)
4) Extend unemployment insurance benefits ($49 billion).
5) Helping More Americans Refinance Mortgages (there are no details yet). "The President has instructed his economic team to work with Fannie Mae and Freddie Mac, their regulator the FHFA, major lenders and industry leaders to remove the barriers that exist in the current refinancing program (HARP) to help more borrowers benefit from today’s historically low interest rates."

Obama's Job Plan: Mostly More of the Same - Here are the details, as outlined by the White House; I've added in the amounts on the major categories as best I can figure them:

Tax cuts: $250 billion

• Payroll tax rebate on first $5 million in payroll, which the president says will reach 98% of American companies, plus complete rebate for new hires or raises
• Extending payroll tax cut
• Extending 100% expensing of business investment
• (A bunch of regulatory streamlining that is likely to have little effect and is bizarrely classed as a tax cut)
• Tax credits for hiring unemployed veterans, particularly those with service-connected disabilities
• $4,000 per worker for hiring workers who have been unemployed for more than six months

Infrastructure: about $100 billion

• $50 billion for new infrastructure projects
• $10 billion for an infrastructure bank
• $15 billion to rehab vacant and foreclosed homes/businesses
• Some undisclosed sum for getting high speed wireless to "98% of American"
• $25 million to rehab schools

Direct assistance: About $100 billion (?)

• Continuing the extension of unemployment benefits
• Various retraining/wage support ideas that are supposed to help the structurally displaced to transition into new careers.
• $35 billion for preserving/hiring teachers, cops and firefighters

What’s in the president’s jobs plan, and what comes next - The proposal itself is called “The American Jobs Act” and amounts to about $450 billion worth of ideas that have, at other times, commanded a bipartisan consensus.

• - It completely eliminates the payroll tax for workers, which amount to a $175 billion tax break, and cuts it in half for businesses until they reach the $5 million mark on their payrolls, at a cost of $65 billion. The idea there is to target the tax cut to struggling small businesses, rather than the cash-rich large businesses. It also extends the credit allowing businesses to expense 100 percent of their investments through 2012, which the White House predicts will cost $5 billion.
• - It offers $35 billion in aid to states and cities to prevent teacher layoffs, and earmarks $25 billion for investments in school infrastructure.
• - It sets aside $50 billion for investments in transportation infrastructure, $15 billion for investments in vacant or foreclosed properties, and $10 billion for an infrastructure bank. It also makes mention of a program to “deploy high-speed wireless services to at least 98 percent of Americans,” but it doesn’t offer many details on that program.
• - It provides $49 billion to extend expanded unemployment insurance benefits. $8 billion for a new tax credit to encourage businesses to hire the long-term unemployed, and $5 billion for a new program aimed at supporting part-time and summer jobs for youth and job training for the unemployed.
• - It also encourages the Federal Housing Finance Authority to make it easier for underwater homeowners to refinance their mortgages.

Experts Say The Economy Needs A Boost That Is Big, Fast, And Smart. The American Jobs Act Fits That Criteria. - A few weeks ago, when President Obama announced his intention to propose a major jobs bill, I asked a group of respected economists what, in an ideal world, such a bill would contain. They agreed on three basic criteria: Size, speed, and smarts. In other words, it would be big, it would be quick, and it would be self-sustaining in the long run. The American Jobs Act may not be perfect. And, lord knows, it may not pass Congress in any recognizable form. But it appears to meet those three key criteria, or at least come reasonably close. Size: The numbers I got from economists varied, but the rough consensus was that an investment in the neighborhood of $400 to $500 billion (including renewal of the existing payroll tax cut and unemployment insurance extension) would reduce unemployment by roughly a percentage point over the next year, relative to what it might otherwise be. If the current projections are right -- always a big if -- that'd still leave unemployment at close to 8 percent, which would be too high. But it'd be a whole lot better than 9 percent, which is where it's stuck now.

Obama's Jobs Act Plan -Linda Beale - Obama's jobs speech Thursday night on his proposed American Jobs Act bill was a step in the right direction, though far from perfect.  He did make clear that the wellbeing of the middle class is essential to economic progress, and that means we need jobs that provide economic security.  He offered a number of proposals that neither right nor left should object to--payroll tax relief, jobs credits for hring long-term unemployed, needed infrastructure spending, needed spending on school renovations--while for the first time in quite a while enunciating the progressive message that we are all in this together, that America has shined best when government works to accomplish that which we cannot do as individuals.  See this brief analysis by Elizabeth Jacobs, a fellow at the Brookings Institution. Not surprisingly, the GOP reaction was negative.  Even though these are mostly programs that they have supported in the past, various Republican commenters to BNA "said short-term tax incentives have not worked in the past to stimulate the economy and will not work in the future because businesses need tax certainty and permanence."

Jobs, Jobs, Jobs - There has been a lot of praise about Obama’s jobs speech that he delivered last night, both in style and in substance. I thought the style was just fine, and has set Obama up in a position where he can clearly smack Republicans in the general election should they resort to obstructing the American Jobs Act. The plan broadly consists of three classes of measures, the first is cutting the payroll tax on both the employer and employee side. Along with my co-blogger Karl, I am in favor of this proposal as a measure to remove supply side barriers to new hiring.  The second measure is tax incentives for hiring specific classes of people. In this case, there is an incentive for hiring veterans, the long-term unemployed, and for giving raises to current employees. I am roundly not in favor of this type of policy, especially the incentive to artificially prop up wages. The third part of the plan is direct spending on infrastructure — namely schools and transportation. Sure, great, do it! Real rates are at zero or below all the way out to 10 years…that means (as has been pointed out ad nauseam) it’s cheaper to borrow than to tax now, and defer taxation to the future, when there will presumably be robust growth.

The jobs plan - I’m not a fan of the kind of political rhetoric that Barack Obama employed for much of his speech last night. “Pass this jobs bill” is not exactly “tear down this wall.” But, as Paul Krugman says, there’s a lot to like in the nitty-gritty of the proposals, even if most of it was hard to discern in the speech itself. This, in particular, comes close to something I’ve been advocating for a while: The President’s plan will completely eliminate payroll taxes for firms that increase their payroll by adding new workers or increasing the wages of their current worker (the benefit is capped at the first $50 million in payroll increases). There are two things I’m less than ecstatic about here. First is the $50 million cap; second is the elimination of payroll taxes just for handing out pay rises, rather than for actually hiring people.  But the idea of this bill, I think, is to attack the jobs crisis on multiple fronts, rather than placing a lot of faith in any one tax cut or similar. There’s the tax credit for hiring unemployed veterans, which is a great idea, along with another tax credit for hiring anybody who’s been unemployed for more than six months.

Obama’s Jobs Plan: Great Theater, Uncertain Policy - When you get right down to it, the jobs plan President Obama proposed before a joint session of Congress last night was built on three elements:  A large payroll tax cut, lots of new spending on public infrastructure, and a promise that its $447 billion cost would be paid for with yet-to-be disclosed tax hikes and spending cuts. As political theater, the speech was terrific. It was a powerful defense of government—words his base has been longing to hear since the 2010 election. It challenged Republicans to “stop the political circus” and work with him to boost the economy—a poll-tested argument that appears to have strong support among many Americans. And the often dispassionate president sounded as if he really cared. As substance, his plan, called the American Jobs Act, combines the bold with small-bore, Bill Clinton-like subsidies for carefully selected interests. Mixing short-term stimulus with long-term deficit reduction is perfectly sensible. But did Obama get the right mix?

Plan’s Focus on Social Security Taxes Reflects Its Modest Ambitions - The centerpiece of President Obama¹’s job-creation plan, a proposal to further reduce Social Security² taxes, is emblematic of a package of modest measures that some economists describe as helpful but not sufficient to lift the economy from its malaise.  In his speech on Thursday night, Mr. Obama asked Congress to cut the amount that workers must contribute toward Social Security benefits, extending an existing measure, and to reduce, for the first time, the matching payments that employers are required to make.  The cuts, which would deprive the government of about $240 billion in revenues next year, are the largest items in the president’s $447 billion job-creation plan, which includes payments to unemployed workers, incentives for companies that hire workers and increased federal spending on infrastructure. All of the measures will require the support of Congressional Republicans.  Cutting taxes is a time-honored strategy for stimulating growth. The formula is simple: Workers will spend more money when their paychecks grow, and companies will respond to that increased demand by hiring more workers, creating a cycle that increases the pace of growth.

Obama outlines right-wing program in “jobs” speech - The bulk of the “American Job Act’s” funding would go to pay for tax breaks and another extension of unemployment benefits, neither of which will produce any appreciable reduction in the number of unemployed. At the center of the proposal is the conception that only the private sector can create jobs, and that the government can prod it along with the offer of tax incentives. The reality, however, is that corporate America is sitting on a cash hoard amounting to trillions of dollars, fed by record profits and government bailouts, and has shown no inclination to utilize these vast resources to provide jobs for the unemployed. A reduction in payroll taxes or tax incentives for hiring veterans or the long-term unemployed will not change this class policy. Moreover, by cutting these taxes, the Obama administration is starving core social programs—Social Security, Medicare and Medicaid—for funds, helping to create a justification for inflicting even more savage budget cuts.

Obama package a palliative, not a cure - President Barack Obama has proposed a larger than expected $447bn package of tax cuts and spending increases, structured for maximum impact over the next year and focused on policies such as infrastructure investment that in the past have enjoyed a measure of support across party lines.  Many of the steps he has outlined – extending the payroll tax cut and unemployment insurance coverage, for example – will only prevent existing legislation from lapsing. Tax credits to stimulate hiring have been tried in the past, and economists are divided over their effectiveness. Aid to state and local governments, an important ingredient of the 2009 stimulus, did temporarily stave off large cuts in public sector employment but had little long-term effect on the private economy.  Behind this approach lies a political calculation. While Mr Obama paid a price for the extended debt ceiling standoff, so did congressional Republicans, whose public approval is significantly lower than even the president’s depressed standing.  By proposing steps that seem non-threatening and relatively affordable, Obama hopes to force his adversaries to acquiesce, at least to the measures they have supported in the past. If they don’t, he will be positioned to argue that Republicans are putting party above country, working to defeat him for re-election even at the cost of further slowing the economy and possibly tipping it into a second recession.

A decade of slack labor markets (Brookings) Last night, President Obama gave a televised address to Congress in which he offered an array of proposals intended to boost employment. Federal Reserve Board Chair Ben Bernanke also gave a speech on the economy earlier in the day. Understandably, both men focused on the aftermath of the recent recession and financial crisis, but in so doing, both Bernanke’s description of our current employment problems and the president’s prescription for getting out of them neglected a longer-term issue that goes back to the last recession, in 2001. We have had a slack labor market for a decade. Job opening and unemployment data released in recent weeks paint a stark picture of just how tough it is out there for those looking for work. There are somewhere between three and five out-of-work job-seeking Americans competing for each job opening. As shown in the chart below, competition for jobs among the unemployed remains greater than any time before the financial crisis, stretching back to the Great Depression.

Employers Say Jobs Plan Won’t Lead to Hiring Spur - The dismal state of the economy is the main reason many companies are reluctant to hire workers, and few executives are saying that President Obama’s jobs plan — while welcome — will change their minds any time soon.  That sentiment was echoed across numerous industries by executives in companies big and small on Friday, underscoring the challenge for the Obama administration as it tries to encourage hiring and perk up the moribund economy.  As President Obama faced an uphill battle in Congress to win support even for portions of the plan, many employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved.    “You still need to have the business need to hire,”  While a $4,000 credit could offset the cost of the company’s lowest-cost health insurance plan, he said, it would not spur him to hire someone. “Business demand is what drives hiring,” he said.  Indeed, the industries that are hiring workers now — like technology and energy — are those where business is strong, in contrast to the overall economy.

Technology Reversal Job Creation Measures - I was thinking about the President's job creation measures this morning.  The composition and scale of the proposals sounds broadly similar to the ARRA stimulus bill of a couple of years back and it seems like the effect might be similar - mitigate the worst of the downturn while being insufficient to create much actual job growth.  However, clearly the bill runs the risk of being perceived to make the deficit worse (and very likely actually would make the deficit worse). I also take to heart some of the critique in Do Stimulus Dollars Hire the Unemployed? that in a highly technological automated society it's not completely straightforward for stimulus dollars to flow to the people that need it (ie lower skilled and out of work individuals). Another thing the government could do in principle to create jobs fairly quickly is ban certain labor saving technologies, thus forcing businesses to hire people to do the work instead. This has several advantages: it wouldn't cost the government anything and the results would be more controllable in terms of where the jobs went.

That Tireless Cruncher of Numbers… …Mark Zandi must have been up late feeding the American Jobs Act into his macromodel, because after too little rest, I wake up to find his analysis of the jobs plan in my inbox. Here’s his projected impact of GDP and jobs:

• “–President Obama’s jobs proposal would help stabilize confidence and keep the U.S. from sliding back into recession.
• –The plan would add 2 percentage points to GDP growth next year, add 1.9 million jobs, and cut the unemployment rate by a percentage point.”

Here’s the punchline in a graph.  As I’ve stressed, if we, and by “we” at this point, I mean Congress, we should expect unemployment to be where it is a year from now if not worse.  If we enact the AJA, it will be something like a point lower than that. I’m afraid it’s really that simple.  The Recovery Act along with monetary stimulus helped move the economy from sharp reverse to slow growth.  But the depth of the downturn meant that as the Recovery Act and assorted Fed actions fade, slow growth downshifted to neutral. It is not that these measures have not worked.  It is that they stopped to soon.  The AJA keeps them going and that’s extremely important right now.

American Jobs Act: A Significant Boost - Macroadvisers - We estimate that the American Jobs Act (AJA), if enacted, would give a significant boost to GDP and employment over the near-term.

• The various tax cuts aimed at raising workers’ after-tax income and encouraging hiring and investing, combined with the spending increases aimed at maintaining state & local employment and funding infrastructure modernization, would:
  • Boost the level of GDP by 1.3% by the end of 2012, and by 0.2% by the end of 2013.
  • Raise nonfarm establishment employment by 1.3 million by the end of 2012 and 0.8 million by the end of 2013, relative to the baseline.
• The program works directly to raise employment through tax incentives and support to state & local governments for increasing hiring; it works indirectly through the positive boost to aggregate demand (and hence hiring) stimulated by the direct spending and the increase in household income resulting from lower employee payroll taxes and increased employment.

Because the package is some $100-$150 billion larger than the proposal widely reported in the press and that we wrote about two weeks ago, these effects are expected to be significantly larger than previously expected. This simulation did not incorporate potential incentive effects on employment from the payroll tax credit for new hires. Because these initiatives are planned to expire by the end of 2012 — except for the infrastructure spending, which has a longer tail — the GDP and employment effects are expected to be temporary.

Would a Slow Economic Recovery Be That Bad? - The good news about President Obama's $447 billion jobs plan? A lot of analysts think it would boost growth. The bad news? The bump would likely be temporary. But before we go on ranting about the perils of an ineffectual Washington and the doom facing this economy, let's just consider how catastrophic an only temporary boost would be. Because no matter what does or doesn't pass in Congress, both parties will continue chiding each other about who's more to blame for what feels like a total flop. (As Reuters' Ryan McCarthy tweeted today: "Who's excited for months of listening to fake reasons to oppose a relatively modest bipartisan jobs plan?") And yet, when we consider this recovery in context, things aren't as dire as vote-chasing politicians would have us believe. No question, our economy is in a bad state. We may not technically be in a recession anymore, (though fears of a double-dip are rising), but that term boils down to semantics. Weak growth doesn't seem to be doing much to help the jobless, who, on the heels of a report of zero jobs growth in August, are feeling evermore skeptical about their lot in life.

Dean Baker Statement on the American Jobs Act and Work Sharing - "It is encouraging to hear that President Obama included work sharing as part of his jobs agenda. This is a job creation measure that both has been shown to be successful and has the potential to break through partisan gridlock. "The basic logic of work sharing is simple. Currently the government effectively pays for workers to be unemployed with unemployment insurance. Rather than just paying workers who have lost their job, work sharing allows workers to be partially compensated for shorter work hours. Instead of one worker getting half pay after losing her job, under work sharing five workers may get 10 percent of their pay cut after their hours are cut by 20 percent. "This situation is likely to be better for both employees and employers. It allows workers to maintain their jobs and continue to upgrade their skills. It avoids a situation where workers may end up as long-term unemployed and find it difficult to get re-employed. "This is also likely to be better from the standpoint of employers since it keeps trained workers on the job. When demand picks up, they don’t need to find and train new workers, they simply must increase hours for their existing work force."

A Real Jobs Program - Obama's economic policy from the start has been based on one overarching idea: that a package of temporary tax cuts and spending increases will reliably boost employment and help the economy to return to self-sustaining growth, at which point the stimulus can be ended without sending the economy back into recession. This central idea, repeated in this week's job speech, has failed till now. Alas, it will fail again if Obama's new "American jobs program" is adopted. Many economists agree with Obama's logic but the underlying economic theory is much weaker than supporters realize. It fails on two counts. First, the US economy needs more than a temporary stimulus to return to self-sustaining growth and full employment. Our growth and employment problems are structural, and need a structural response. Second, the stimulus might not actually stimulate very much at all even in the short term.  Obama's economic strategy assumes that the US economy has a strong natural tendency in the medium term (say three to five years) to bounce back from the 2008 recession with renewed growth. The interpretation is that demand has temporarily declined but that private demand will quickly recover, especially if jolted by a temporary stimulus. Yet the problem in the US is deeper. The collapse of housing is actually a symptom rather than the fundamental source of US economic weakness.

Job Plan Hinges on Cut to Social Security Tax - The centerpiece of President Obama¹’s job-creation plan, a proposal to further reduce Social Security² taxes, is emblematic of a package of modest measures that some economists describe as helpful but not sufficient to lift the economy from its malaise.  In his speech on Thursday night, Mr. Obama asked Congress to cut the amount that workers must contribute toward Social Security benefits, extending an existing measure, and to reduce, for the first time, the matching payments that employers are required to make.  The cuts, which would deprive the government of about $240 billion in revenues next year, are the largest items in the president’s $447 billion job-creation plan, which includes payments to unemployed workers, incentives for companies that hire workers and increased federal spending on infrastructure. All of the measures will require the support of Congressional Republicans.  Cutting taxes is a time-honored strategy for stimulating growth. The formula is simple: Workers will spend more money when their paychecks grow, and companies will respond to that increased demand by hiring more workers, creating a cycle that increases the pace of growth.

Obama Jobs Plan Tax Cuts Threaten Social Security - Yves Smith - This interview at Real News Network focuses on the element of the Obama “jobs” plan most likely to see the light of day, namely, the payroll tax cut and the “reform,” meaning gradual erosion, of Medicare and Social Security.

Shorter Obama Jobs Speech - “Attention GOP: I’m going to start counting and you better pass my bill of GOP-endorsed tax cuts and popular spending before I get to 10; meanwhile, here’s a preemptive concession on Medicare. And as part of my commitment to transparency, and to ensure that my plan isn’t really all that stimulative to the economy, we’ll ask the Congressional Super-Committee to meet in secret to decide even more cuts to pay for it.”

Obama is Coming to Cut Medicare - I don’t want to be entirely cynical about President Obama’s jobs speech yesterday. Some of the ideas in his proposal, like the money to fix up old schools, are great. He is finally putting his rhetorical focus on the issue the American people actually wanted him to be talking all along. If the package Obama outlined last night was actually a compromise that Obama got the Republican Congressional leadership to agree to, I might even consider this fairly poorly designed plan a decent deal. The problem, though, is that this jobs package isn’t going to pass Congress, so this speech wasn’t about policy, it was about messaging. From that perspective, the speech was very scary to me as a progressive, because in the middle of what should have been a speech about getting Americans back to work, Obama very publicly endorsed putting Medicare and Medicaid on the deficit-reduction chopping block. Most important, Obama signaled he supports reducing Medicare spending that “some in his party” won’t like. From Obama’s Speech: In addition to the trillion dollars of spending cuts I’ve already signed into law, it’s a balanced plan that would reduce the deficit by making additional spending cuts, by making modest adjustments to health care programs like Medicare and Medicaid,

Political Forces Lining up to Raise Medicare Retirement Age - The threat to Medicare is very real and pressing. Over the past several months more and more political forces in Washington have being slowly lining up behind a campaign to raise the Medicare eligibility age. This most recent effort really got started when Sen. Joe Lieberman (I-CT) and Tom Coburn (R-OK) put forward a bill to raise the Medicare retirement age in late May. It got a major push in July when Obama privately offered it up as part of a “grand bargain” on the debt ceiling with Speaker John Boehner.  It probably got another push in Obama’s jobs speech last night when the president suggested he still wants to change Medicare in a way “some in his party” won’t like. The campaign also got a behind-the-scenes boost this week. First, the Democratic members of the House Ways and Means committee included raising the Medicare retirement age in a memo to the Super Committee outlining possible deficit reduction options. But more importantly, the powerful American Hospital Association came out in favor of it.

Macro Solutions, Practical And Otherwise - President Obama outlined a new plan to create jobs last night in his speech before a joint session of Congress, although the old debate about what's keeping the economy from recovering in a meaningful way rolls on. But if the perspective appears fuzzy on cause and consequence, Paul Kasriel, chief economist at Northern Trust, insists that your perspective isn't properly focused. As a solution, he dispatches a crisp review of what went wrong and what, in theory, could go right, assuming a certain institution headed by one Ben Bernanke acts decisively. Kasriel begins by noting what isn't a problem. For example, some pundits charge that the recovery is being held back by the weight of uncertainty on businesses, which are said to be responding by refraining from investment and spending. But the numbers suggest otherwise, as Kasriel points out in this chart, which shows a strong rise in real business expenditures recently. "If there has been so much uncertainty," he asks, "why have businesses been so willing to purchase capital equipment and software?"

Our Sadly Diminished Expectations - Official unemployment has been stuck around 9 percent for 16 months, and recent signs indicate our economic growth has stalled. And for over two years now, the American people  have called jobs/economy the top problem in this country. In this environment, many people on the left are happy that a Democratic president asked Congress to do something about it. Pleased simply because Obama actually thought spending some time talking about a plan that could partially address the issue; even though the plan is probably too small, it’s unlikely to be enacted by Congress, and it would be paid for with cuts to Medicare. Don’t get me wrong, compared to where we were before, I think it’s a real improvement that Obama is now at least saying he wants actions that would improve things, but the fact that the speech made many liberal pundits happy is a damning statement about how incredibly diminished our expectations have become.

An Outside the Box Stimulus Package: Stop Collecting Federal Taxes For Awhile. Period. - Karl Smith wonders why the U.S. Government is even bothering to collect taxes right now, since interest rates are negative, which makes borrowing cheaper than cash right now. Now do you believe that the real US economy will grow faster than 1.1 percent per year over the next 30 years? We should hope so, because if it doesn’t then lots of our forecasts are going to be waaay off. Well that means that if we suspend taxation, borrow to fund the government and then keep rolling in the interest payments into the debt, our total obligation as a fraction of the economy will keep falling every year over the 30 year horizon. Suppose real growth is 3 percent per year. Then this years obligation as a fraction of GDP falls by 1.9 percent per year, every year for 30 years. This means that in 30 years this obligation as a fraction of GDP will be only 56% as large. Even if we then pay it all off in one lump payment we will only have to increase taxes by 56%. That increases deadweight loss by 146%. However, we saved 100% of deadweight loss in the current period. So our net increase in deadweight loss is only 46%.

Deregulation As A Jobs Program…Really? - Though it tops recent lists of Republicans’ jobs proposals, I find it very hard to take seriously the idea that deregulation would move the jobs needle at all.  Here’s why. To put it economic terms, the dereg crowd vastly overestimates both the magnitude of regulations and the elasticity to which that magnitude is applied. To estimate a jobs impact of a policy change, you need to know the magnitude of the change (X) and an “elasticity” (e) to map that change onto job gains or losses.  If research shows that a 1% tax on soda (that’s X) will reduce soda consumption by 0.5% (that’s e) then it’s fair to guess that a 10% tax will reduce soda sales by 5%. The R’s making this argument in the regulatory context exaggerate both X and e.

It's *Not* Regulatory and Tax Uncertainty - I was in the Bloomberg TV studios debating a guy from Heritage. He went on for several minutes about the damage being done by high taxes, excess regulation, business "uncertainty" about future tax hikes and regulatory burdens.  I asked Bloomberg's host whether he was aware that corporate profits relative to national income had just hit a 60-year peak?  He had heard rumors to that effect.  Was he aware that taxes on corporate earnings were at a 60-year low?  The Heritage guy had heard that might be the case. Then why was uncertainty about taxes and the future burden of the Affordable Care Act holding back business investment and hiring right now?  If managers thought taxes or regulatory costs might go up in the future, wouldn't it make sense to take advantage of today's low taxes and lower burdens to invest and hire today?  According to the "uncertainty" argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018.  Shouldn't they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?

Of red tape and recessions - HOW much of our economic malaise can be blamed on regulatory uncertainty? Conservatives argue that a wave of Obama administration regulations and the threat of more to come are the primary hindrance to business confidence and hiring. Liberals say that the weak economy is far more important and that any regulations being enacted more than pay for themselves in economic terms. I’ve been struggling with this question for months and have found the debate frustrating: the terminology is wrong and the subject poorly framed, the evidence fragmentary and unhelpful, and generalisations are rampant. So what follows are a few thoughts that I think clarify the debate, though without necessarily resolving it. First, it is not “uncertainty” per se that bothers business. Whether uncertainty is unwelcome depends entirely on what’s at stake. What would you prefer: 100% probability of dying next year, or 50%? Most of us would choose the latter. Similarly, business would prefer zero probability of a burdensome new rule, but if that’s not possible, would certainly take 50% probability over 100%.

Burtless: It's *not* regulatory and tax uncertainty - Gary Burtless, an economist at the Brookings Institution, seems pretty sure that the relatively depressed levels of U.S. business investment and employment have nothing to do with the alleged uncertainty over future tax and regulatory regimes. Mark Thoma reports the story here. The main thrust of the argument is contained in the following paragraph: According to the "uncertainty" argument, businesses are fearful they might face high taxes and extra health cost in 2016 and 2018. Shouldn't they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?  Burtless raises some good questions here, but I don't think they are the nail-in-the-coffin he makes them out to be. Why not more investment now, if taxes might go up in 2016 or 2018? First of all, I'm not sure that those are the only dates businesses have to consider (governments can raise taxes anytime). Second, many large capital projects take a lot more than just a few years to complete. Think about the act of committing a large amount of capital (belonging to you, your friends, your creditors, your shareholders) destined to payoff (if at all) sometime in the distant future. Once committed, this capital is almost completely irreversible and--significantly--it is easily appropriated, since capital cannot run away once it is built).

Regulation: Of red tape and recessions - Gary Burtless - MY ARGUMENT that data are inconsistent with a regulation-based explanation of economic weakness may be off base, but only part of the argument is that businesses appear to face historically low tax rates and moderate regulations right now. An important issue is that if businesses fear that future tax rates will rise above the historically low levels they now face, it would make sense for many of them to bring forward any planned spending that might be subject to higher taxes or heavier regulation if it were undertaken in the future. These are not permanently avoidable costs for a firm that plans to stay in business. They are costs that will probably be borne sooner or later. If future taxes or regulation might be more burdensome, shouldn’t the firm move the spending to a period when it will be more lightly taxed or regulated? One of the reasons corporate tax collections are currently low is that much investment undertaken in the past couple of years has been the target of generous, but temporary, tax preferences. Firms could expense a great deal of their 2009–2011 capital investment. That generous tax treatment will not (or may not) be available if the companies delay the spending until 2013 or 2015.

Obama and Regulatory Uncertainty - One of the current Republican talking point is that a major reason that firms are not hiring is regulatory uncertainty. Of course there is little or no evidence to support this argument and virtually every poll of business and especially small business shows that fear of regulation is a very minor factor in current business decisions. The dominant factor in poll after poll is inadequate demand. ON 11 June 2004 Milton Friedman published an interesting article in the Wall Street Journal Editorial Page called "Freedom's Friend" [reprint available here], where he proposed that the number of pages in the Federal Register could be used as a measure of government's interference in people lives and a measure of freedom. I've looked at this measure before, back in 2008. Given this new Republican talking point it seems a good time to revisit it, so I've updated the data to include the first two years of the Obama administration. The chart compares the average number of pages published in the Federal Register each year. This measure allows you to compare the number of pages in four-year and eight-year administrations, as well as the number in the first two years of the Obama administration. If you tried to chart the total number of pages published over an administration, you could not make this type of comparison very well.

Does fiscal policy matter? Is there a better way to reduce unemployment? - Can government spending help the economy recover from a recession by boosting job creation and lowering unemployment? Or is it a waste of money? This column addresses this question and others using a unique framework. It explains why fiscal policy was effective at ending the Great Depression but it argues that a big fiscal expansion may not be the best solution this time round.

The Peasants Are Revolting - Krugman - I see that Atrios has spotted another piece claiming that we’re having all this trouble because those pesky voters won’t support what the wise men know is good for them. I’ve written about this before, with comparable disgust. But the fact is that both the origins of this crisis and its perpetuation overwhelmingly reflect the errors of the very people now lamenting the annoyances of democracy that keep them from imposing their preferred policies. As Atrios says, the euro was very much a top-down, elite-imposed project; and it’s the ECB and the German finance ministry, not the unwashed masses, that have pushed for the austerity-for-all agenda that is pushing the euro system to the edge as we speak. Meanwhile, in the United States it was the Very Serious People — the WaPo editorial page, the Bowleses and Simpsons and those who extolled them, who declared that our top priority must be deficit reduction now now now, and have left us slashing spending to fend off imaginary bond vigilantes at a time of mass unemployment and record low interest rates. Meanwhile, voters may be confused and not all that well informed, but if anything they are making more sense on job creation than anyone in a real position of influence.

On the Inadequacy of the Stimulus - Krugman - I don’t think I’ve ever put up a simple explanation of why the stimulus was so clearly inadequate to the task. By the way, my point here is not what Obama shoulda-coulda done; I just want to look at the straight economics. So here’s the thing: the financial crisis, and in particular the popping of the housing bubble, had two big effects on spending. One was that housing investment plunged from well-above-normal to well-below-normal levels. The other was that consumers suddenly increased their savings. Here’s a picture, with the red line showing residential construction as a percentage of GDP and the blue line showing the personal savings rate: Put these together and you have a negative shock on the order of 6 percent of GDP. Against this you had a stimulus bill of $800 billion — except $100 billion of that was AMT extension that was going to happen anyway, another $200 billion was other tax cuts of dubious effectiveness, so you were left with $500 billion of spending, spread over more than 2 years — maybe 1.5 percent of GDP or less. It just wasn’t big enough to do the job

Of Princeton pair of Krueger and Krugman, it matters which is going to Washington - Obama’s recent selection of Krueger to head his Council of Economic Advisers is evidence in the eyes of many that the president, who campaigned as a cham­pion for sweeping change, has also adopted an approach of “less so.” And as an unemployment-scarred country prepares to watch Obama deliver his jobs plan to a joint session of Congress on Thursday, the macro-Krugman vs. micro-Krueger divide that once may have seemed like a low-stakes, ivory-tower debate now is anything but. “I’m not sure that appointing Alan Krueger is meant to be terribly symbolic, though it is,” said Alan Blinder, a colleague in Princeton’s economics department and a former member of President Bill Clinton’s Council of Economic Advisers. The message sent by the Krueger pick, Blinder said, is that “realistically the time for a huge macroeconomic program, a stimulus program, is gone now, but the urgency of doing something about employment is not gone. And what Alan represents is trying to think about programs, some small, some very small, some modest-sized, that can do something about that.”

Hot Porridge and More Fiscal Stimulus - Economist:  “The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective.  It is just that folks tried a first punch that was too light and that generally we didn’t get big measures until well into the recession.” Congressman:  “That is precisely my point.  That is why I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.” The identities of these tiresome Keynesians?  Kevin Hassett of the American Enterprise Institute and Congressman Paul Ryan of Wisconsin—in 2001.  From a purely predictive standpoint, it makes one wonder:  assuming that control of Congress doesn’t change much, are the odds of additional fiscal stimulus higher if there is a Democratic or a Republican President in 2013?

Why did the GOP turn against stimulus? Ask a psychologist. - In 2001, Grover Norquist called a national sales-tax holiday “exactly the kind of immediate stimulus our shell-shocked economy needs now.” Norquist went on to quote George W. Bush’s chief economist, Glenn Hubbard, saying we needed stimulus “sooner rather than later.” Sen. Olympia Snowe (R-Maine) introduced a bill to that effect. Around the same time, Rep. Paul Ryan (R-Wis.) held a hearing in which he invited Kevin Hassett, a conservative economist based at the American Enterprise Institute, to make the case for a fiscal stimulus. “The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective,” Hassett testified. “It is just that folks tried a first punch that was too light and that generally we didn’t get big measures until well into the recession.” Ryan was delighted by his answer. “ I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.” So not only was it non-controversial that deficit-financed stimulus spending was an effective and desirable way to fight economic downturns, but it was taken as obvious by Paul Ryan — Paul Ryan! — that the big danger was that you did too little.

The price of 9/11 - Joe Stiglitz, Aljazeera - The September 11, 2001, attacks by al-Qaeda were meant to harm the United States, and they did, but in ways that Osama bin Laden probably never imagined. President George W Bush’s response to the attacks compromised the United States’ basic principles, undermined its economy, and weakened its security. The war of choice quickly became very expensive - orders of magnitude beyond the $60bn claimed at the beginning - as colossal incompetence met dishonest misrepresentation. Indeed, when Linda Bilmes and I calculated the United States' war costs three years ago, the conservative tally was $3-5tn. Since then, the costs have mounted further. With almost 50 per cent of returning troops eligible to receive some level of disability payment, and more than 600,000 treated so far in veterans’ medical facilities, we now estimate that future disability payments and health-care costs will total $600-900bn. But the social costs, reflected in veteran suicides (which have topped 18 per day in recent years) and family breakups, are incalculable.

The Worst Mistake America Made After 9/11 - How focusing too much on the war on terror undermined our economy and global power. In the wake of al-Qaida's attack on New York and Washington, an organizing principle suddenly presented itself. Like the Cold War, the new "war on terror," as it instantly became known, clearly defined America's friends, enemies, and priorities. Like the Cold War, the war on terror appealed both to American idealism and to American realism. We were fighting genuine bad guys, but the destruction of al-Qaida also lay clearly within the sphere of our national interests. The speed with which we all adopted this new paradigm was impressive, if somewhat alarming. At the time, I marveled at the neatness and cleanliness of this New New World Order and observed "how like an academic article everything suddenly appears to be."  The events of 9/11 reverberated through many spheres of American life but nowhere more profoundly than in American policy toward the outside world. During the subsequent decade, we created a vast new security bureaucracy, encompassing some 1,200 government organizations, 1,900 companies, and 854,000 people with security clearances, according to a Washington Post investigation carried out last year. We launched two wars, in Afghanistan and Iraq. We organized counterterrorism operations in far-flung places such as the Philippines and Yemen, changed the culture of our military and reoriented our foreign policy. We sharpened our focus on al-Qaida and its imitators. And we spent, according to one estimate, $3 trillion.

An End to Empire - Ideology makes people stupid. Employing ideology as the basis for policy is a recipe for disaster. Surviving in a complex, uncertain environment requires flexibility, pragmatism, and perhaps above all self-awareness. That’s true if you’re in the business of making cars or selling donuts. It’s truer still for those whose business is statecraft. When the Cold War ended 20 years ago, Americans chose to view the outcome through the lens of ideology. We congratulated ourselves on winning an unqualified victory, to which we attributed transcendent significance. The outcome had ostensibly rendered a great historical judgment, testifying to the manifest superiority of democratic capitalism—that is, to the American way of doing things. The universal embrace of liberal values, democratic politics, and market economics seemed sure to follow, sealing our triumph and extending the American Century for centuries to come.  In Washington, such expectations qualified as advanced thinking, finding expression in the expansive claims that became a hallmark of the 1990s. Bill Clinton was wagging his finger at China. Beijing needed to align itself with the “right side of history,” the president counseled, which meant that the Chinese should take their cues from America.

President Obama's Jobs Speech References Numerous Tax Proposals - President Obama addressed a joint session of Congress this evening, proposing a $447 billion jobs package titled the American Jobs Act. The plan includes a number of tax changes. Below are the President's references to taxes in his speech:

Doubling Down on the Payroll Tax Holiday is a Bad Bet - The center piece of the President's jobs proposal is to extend and expand the payroll tax holiday for another year.  This would cut the rate employees pay in half, from 6.2 percent to 3.1 percent, and also cut in half, to 3.1 percent, the rate employers pay on the first $5 million of their payroll.  Additionally, businesses that increase their payroll in 2012 would be exempt from paying any payroll taxes on the increase in payroll, with a cap of $50 million.  According to the White House, the total cost to the Treasury is estimated to be $240 billion, with $175 billion going to employees and $65 billion going to employers.    Why won't this work?  For much the same reasons the first version has not worked.  It is temporary, and unlikely to substantially change economic plans, particularly the hiring plans of businesses which are multi-year gambles.  So, for the most part, it won't directly address the unemployment problem.  It will put money in the pockets of those already employed, and this is certainly a relief.  The hope is that much of this money will be spent on consumption and thus contribute to short term GDP growth.  Confidence fairies abound.

The Payroll Tax Cut Did Not Cost Security Revenue - The NYT wrongly told readers that the payroll tax cut cost Social Security, "resulted in $67.2 billion of lost revenue for Social Security in 2011." This is not true. The tax cut was fully offset by money from general revenue so that the trust fund was unaffected by the tax cut.

Doubling Down on the Payroll Tax Holiday Still Won't Create Jobs - No policies under consideration today offer a greater assurance of failure than the proposal to extend the existing payroll tax holiday—or to double down by extending that holiday to the so-called employer’s share of the tax. Payroll tax relief is intended to stimulate the economy in two ways, neither of which works. Cash in people’s pockets. First, payroll tax relief reflects the faulty Keynesian stimulus philosophy of putting money in people’s pockets that they would then spend, thereby increasing demand in the economy and ultimately increasing output and employment. The fundamental assumption of this theory is that since the economy is underperforming, total demand must be too low. The theory prescribes tax cuts targeted at those who are most likely to spend and additional government spending that can be spent quickly. These policies then increase the budget deficit but are also intended to increase total demand in the economy, driving it back toward full employment. It works perfectly in some mathematical models. Unfortunately, reality is a bit more complicated, and on closer examination, the details void the whole theory.

The Trouble With Tax Cuts - Job growth stalled in August, manufacturing activity isn’t faring much better, the demand for liquidity and safety is on the march again, and the trend for U.S. exports may face new headwinds if economic growth in emerging markets suffers, as some analysts predict. What's a politician to do these days? Lean on the tried-and-true policy response, of course.  The latest round of gloom is raising the profile of tax cuts once more as a potential solution. But is this policy tool up to the job this time? President Obama seems to think so. He’s ready to roll out a new round of tax cut proposals in his scheduled speech to Congress this Thursday. The president "is focusing on cuts targeted at middle-income Americans to spur consumer spending, which accounts for 70 percent of the economy," Bloomberg reports. The question is whether fresh tax cuts will bring any relief, and by relief we're talking jobs. Andrew Ross Sorkin recommends that we curb our enthusiasm:  …temporary tax cuts rarely result in new jobs and always result in less tax revenue.

Mortgage interest deduction focus of debt debate - Ending tax breaks for oil, corporate jets and hedge fund managers is nearly every Democrat's favorite way to reduce the federal debt. But one of the biggest tax breaks of all is heavily skewed to wealthy residents of San Francisco, San Jose and California's other upscale coastal cities. It's the mortgage interest deduction, and its benefits are heavily concentrated in a handful of pricey cities, none of which votes Republican. As the new super committee of Congress sets about finding another $1.5 trillion in deficit reduction by Thanksgiving, tax breaks of all kinds, including the interest deduction, are getting new scrutiny. Beloved by the public and the real estate industry, the deduction will cost the government more than $1 trillion over the next decade. But few homeowners, even those claiming the deduction, know how skewed it is by region and by income.  Just three metro areas - greater New York, Los Angeles and San Francisco - receive more than 75 percent of the subsidy, according to a 2004 study by economists  Mortgaged homeowners in the San Francisco and San Jose region receive $4.6 billion a year from a tax break for what are known as McMansions.

The Fallacy Behind Tax Holidays - — Wall Street and corporate America are working behind the scenes in Washington to push for a series of temporary tax breaks, which they insist will help create jobs. Of course, businesses want an overhaul of the corporate tax code that would reduce rates for the long term. But for now they are seeking a series of tax holidays, including a payroll tax break for employers, not just employees, and a tax break to let companies repatriate about $1 trillion that is sitting overseas. In turn, they say, they will spend it on new recruits, perhaps as many as 2.9 million of them, according to a letter the United States Chamber of Commerce sent to the president on Monday. . There is only one small problem with this strategy: temporary tax cuts rarely result in new jobs and always result in less tax revenue. Most temporary tax holidays “reward people for what they are going to do anyway,” he said, adding that “the bang for the buck is very low — you’re subsidizing companies that were already going to hire.”

Overseas Tax Break Won’t Fire Up U.S. Job Machine - If the past is prologue, then a new Homeland Investment Act won’t help the U.S. economy much. President Obama may suggest a foreign-profits tax holiday in his jobs bill Thursday. Companies could repatriate foreign-made profits with little or no tax payment as long as they used the money for U.S. investment and job creation. The idea is that the tax proposal would get Republicans to go along with other job-creating ideas. But would an overseas tax break boost U.S. output or create jobs? Three arguments say the answer is No. First, the HIA of 2004 didn’t work as planned. According to research done by three academic economists, the act didn’t lead to an increase in investment, employment or R&D in the U.S. Instead, the research found, “a $1 increase in repatriation was associated with a $0.60-$0.92 increase in payouts to shareholders,” even though such outlays wasn’t permitted in the bill. Companies substituted the foreign profits for domestic funds earmarked for expansion and used the domestic funds for the dividends and stock buybacks.

A One-Sentence Explanation Of Why Tax Cuts Won't Spur Hiring - From Citi's Tobias Levkovitch this morning, a simple line on the silliness of thinking tax cuts will incentivize hiring: "Whatever temporary or even longer- lasting tax incentives offered, it is terribly difficult to convince employers to add workers they don’t need." We touched on this this weekend in this post. So mostly, Levkovitch is pretty pessimistic that Obama and Congress could possibly agree on anything that's demand-inducing.

Tax Havens in Reverse - Reuters provides a synopsis of a report by the OECD on tax-avoidance strategies by multinational corporations:  Due to the recent financial and economic crisis, global corporate losses have increased significantly. Numbers at stake are vast, with loss carry-forwards as high as 25% of GDP in some countries. Though most of these claims are justified, some corporations find loop-holes and use ‘aggressive tax planning’ to avoid taxes in ways that are not within the spirit of the law. This aggressive tax planning is a source of increasing concern for many countries and they have developed various strategies to deal with it. Working cooperatively, countries can deter, detect and respond to aggressive tax planning while at the same time ensuring certainty and predictability for compliant taxpayers.  David Cay Johnson presents his interpretation of the data: The latest evidence of this tax after-the-factism comes from an eye-popping global tax avoidance study by the Organization for Economic Co-operation and Development.What makes the study by tax authorities in 17 major countries so astonishing is not just the size of the losses, but when they were booked.

Rich look set to escape higher tax burden - Most people would say that a good tax is one paid by those richer than themselves, so calls by members of the global wealthy elite to pay more tax have come as a bolt from the blue.  However, early signs are that the “tax me more” campaign by some of the prominent rich, such as Maurice Lévy, chairman and chief executive of the French advertising group Publicis, is unlikely to gain traction.  Last week, Italian parliamentarians rejected raising top income tax rates and the introduction of a wealth tax. Spain also steered away from a wealth tax. In the US, Republicans have taken a dogged stance against higher taxes. In the UK, one of three countries to have raised its top income tax rate since the crisis, alongside Spain and Greece, George Osborne, chancellor, insists the level is temporary and has established a review to examine its pros and cons. The expectation in political circles is that this review will provide justification to scrap the tax before the next election.  According to Jeffrey Owens, head of taxation policy at the Organisation for Economic Co-operation and Development, although governments across advanced economies have sought to raise more revenue by taxes, countries have not reached a tipping point of squeezing the rich for more money.

Swiss Bankers Fighting Back on behalf of offshore banking secrecy - The US has threatened to sue more Swiss banks unless they hand over information on tax-dodging US taxpayers.  See Thomasson, U.S. Threatens to Sue Swiss Banks, Huffington Post (Sept. 4, 2011).  The article reports a letter from  U.S. deputy attorney general Cole demanding that Credit Suisse hand over information by today and that nine other banks follow suit.  One reason for the smaller banks--many of the US taxpayers that failed to disclose their accounts after the tax evasion charade at UBS became public simply moved their accounts from UBS to smaller Swiss banks.Switzerland had already offered to turn over certain information that would  be made available under the new treaty negotiated around the time of the UBS brouhaha, even though the treaty is still pending before the U.S. Senate. This isn't making Swiss bankers happy.  The Swiss Bankers Association is mounting a campaign to persuade the Swiss Government not to enter into further agreements with the US requiring banks to reveal more US taxpayers' hidden Swiss bank accounts. 

Supercommittee Pits Lobbying Firms’ Clients Against One Another - The bipartisan congressional supercommittee charged with finding $1.5 trillion in budget savings is leaving Washington lobbying firms in a quandary, seeing their clients pitted against one another in a competition for government cash.  Major defense contractors such as Boeing Co. (BA) and Lockheed Martin Corp. (LMT) have a dozen or more lobbying firms working for them, many of whom also represent the health-care industry, another likely target of budget cuts. While firms often deal with conflicts of interest, the supercommittee represents an unusual challenge.  “This actually is going to be much more like a zero sum game,” . “If someone wins, someone loses.”  Trying to protect clients by stalling action -- a classic lobbying tactic -- isn’t an option for most because the committee’s failure to meet a Nov. 23 deadline would trigger $1.2 trillion in across-the-board spending cuts in both defense and non-defense spending beginning in 2013.

You Get What You Pay For - Standard & Poor’s downgrade of United States government debt last month has been much debated, but not enough attention has been devoted to the fact, reported last week by Bloomberg News, that it continues to rate securities based on subprime mortgages as AAA. In short, S.&P. is suggesting that these mortgages are more creditworthy than the United States government – a striking proposition.  Just focus on all the things that can go wrong with subprime mortgages – housing prices can fall, people can lose jobs, the economy may fall into recession and so on. Now weigh those risks against the possibility that the United States government will default. As we learned this summer, that is not a zero-probability event – but it would take either an act of Congress, in the sense of passing legislation, or a determination by members of Congress that they could not act. Now S.&P. might be right, of course. Or its assessment might be influenced by the fact that it is paid by the issuer of those mortgage-backed securities – which presumably wants a higher rating. The rating agency’s employees may want to do an accurate assessment; management can reasonably expect to make higher profits if its ratings please the paying customers.

S&P Met With Bond Firms Prior to Downgrade - Standard & Poor's Corp. officials held private meetings with large bond investors weeks before the firm's historic U.S. debt downgrade, leaving some believing the chance of a credit-rating cut was higher than they previously thought. Though S&P had put the U.S. on "credit watch" in mid-July, some investors were skeptical that S&P would actually strip the U.S. of its triple-A rating, maintained since 1941. S&P said in a news release on July 14 that "there is at least a one-in-two likelihood that we could lower" the U.S. ratings within 90 days. In the following weeks, S&P officials visited large bond firms including Allianz SE's Pacific Investment Management Co., Los Angeles-based TCW Group Inc., Legg Mason Inc.'s Western Asset Management and New York asset-management giant BlackRock Inc., according to people who either attended the meetings or were briefed on them afterward. Some of these investors say they came away with a stronger sense the nation's debt rating would be cut.

Banks face 'day of reckoning', says McKinsey - Bank reforms coming into effect over the next decade will destroy the profit-drivers of the world’s largest banks and more than halve industry returns, according to McKinsey. In a report titled ‘Day of reckoning’, McKinsey paints a bleak picture for banks, estimating that their average pre-regulation return on equity of 20pc will be cut to just seven percent by new capital requirements that will force them to maintain larger buffers against potential losses. Highly-profitable but risky businesses such as proprietary trading, which involves banks trading using their own money, could see their returns fall by more than 80pc. Even traditional operations such as stock broking where banks acts as the intermediaries between the buyers and sellers of shares are expected to see their returns post the new regulation fall by 40pc, according to McKinsey.
The Basel III rules, which come into full force in 2019, will require banks to maintain a Tier 1 capital ratio of at least 6pc as well as a 2.5pc counter-cyclical capital buffer, more than doubling the amount of capital financial institutions will be required to hold.

Bank capital and zero Fed rates - I'm not sure if the Fed should do anything anymore to move rates, even if to make it go up. Right now, I'm thinking just keep rates at zero, but neither should it pay interest on reserves. This way, private sector banks don't make lending decisions based on fed rates, but on real market considerations. This is hardly a set position for me yet. I'm not sure if there's a downside to this approach, but I think Warren Mosler is proposing something on this line, and I think it considers a lot of the unseen pitfalls and distortions that interest rate setting does to the financial market. The Fed just could lend at zero to a bank that needs reserves for payment purposes. It could also lend at zero to a bank that wants to lend, but it will now need to insist on a high capital equity ratio, higher than what it is now (Capital ratio pertains to bank capital. This is owner's equity that will bear the first risk of loss if the bank ends up with a soured loan, before depositors start losing their money. Basel recommends a loan ratio of no more than 15 times capital. Bigger than that, the depositors' money starts getting more at risk).

Libor inquiry looks at criminal angle - The US investigation into alleged manipulation of interbank lending rates is focusing on possible violations of a commodities law that has previously been used to send financial executives to prison. According to people familiar with the probe into the setting of London and Tokyo interbank offered rates, US authorities are modelling their investigation on an earlier prosecution of three energy companies for violations of the Commodity Exchange Act, which resulted in criminal settlements and prison terms of up to 14 years. Under the act, it is illegal to transmit a false report that would affect the price of a commodity. The interbank lending probe, led by the US Commodity Futures Trading Commission and the Department of Justice, is examining possible collusion between traders and bank treasury departments in 2007 and 2008. It has also drawn in investigators from the UK, Japan and the European Union. In its seven-year investigation into US energy trading companies, the DoJ filed criminal charges against nearly two dozen traders from numerous oil companies. Prosecutors alleged that they submitted false trade data to Platts and other publishers – whose indices are used to price and settle physical and financial derivative natural gas transactions – to benefit their positions.

Richard Cordray Goes To Capitol Hill, But Addresses Deaf Republican Ears - In what was surely one of the stranger Senate confirmation hearings in recent history, President Obama’s nominee to head the Consumer Financial Protection bureau, Richard Cordray, testified Tuesday before the Committee on Banking, Housing, and Urban Affairs. Unlike most nomination hearings, which focus on the merits of the nominee, the committee could not agree on whether the position itself should exist. Forty-four Senate Republicans sent a letter to President Obama in May that demanded a five-person board with appointees from both parties run the CFPB, instead of a single director. Tuesday, only two of the committee’s Republicans showed up to the hearing—Sen. Richard Shelby, the ranking member, and Sen. Bob Corker. Shelby declined to even question Cordray, and blasted the hearing in his opening statement as “premature,” and said “we do not believe that the committee should consider any nominee to be the director of the CFPB until reforms are adopted to make the Bureau accountable to the American people.”

Payday Loans Are Dead! Long Live Payday Loans! -  Yves Smith - In yet another example of finance double-speak, major financial players have moved into that netherworld of the functional equivalent of loansharking known as payday lending. While in theory short-term loans can be a boon to cash-strapped individuals, in practice, the usurious interest of payday loans result in many borrowers falling into a debt treadmill. The Pentagon was so concerned about the way that payday lending could wreak havoc with the lives of combat personnel that it restricted the rates that could be charged to military personnel to 36%. The industry howled that rules would drive payday lenders out of the business of serving the armed forces (they had previously been targeting bases). I suspect that result was a feature, not a bug. The latest sighting, via the Associated Press is that bigger, more reputable-looking banks are offering payday loans, but predictably calling them something else, in much the way that the term “escort service” is meant to imply something more refined than “prostitution”.  Wells Fargo, for example, offers its loans for direct deposit customers. As The Associated Press has reported, it says customers can only borrow up to half their direct deposit amount or $500, whichever is less. Its fees are cheaper too, at $7.50 for every $100 borrowed. That still amounts to a 261 percent annualized interest rate over the typical pay cycle. The amount of the advance and the fee are automatically deducted from the next direct deposit.

More Proof of DoJ Lack of Interest in Enforcing the Law: The Case of the Kickback-Demanding Banks -- Yves Smith - In this world of rampant banking miscreance, it may seem hard to get worked up about $6 billion in impermissible kickbacks. But this is a case of a clear-cut legal violation, with the particulars sent to the Department of Justice by the HUD Inspector General’s office on a silver platter. And one of the alleged big bad actors was the ever-sanctimonious Wells Fargo. American Banker has a detailed write-up of a kickback scheme between major banks who were mortgage originators, in particular Wells, Citigroup, Countrywide, and SunTrust and mortgage insurers. The mortgage insurance was to insure the riskier portion of a highly geared mortgage. The borrower would pay a higher rate to compensate for the lack of a large (or much of any) down payment. The kickback was dressed up as reinsurance, meaning the mortgage insurer was laying off some of the risk to the originator and paying a fee to do so. But what instead happened was that fees were paid but the deals were structured so that no risk was shifted over to the banks. The violations were uncovered by HUD’s Inspector General office. IGs are tasked to prevent and uncover fraud, waste, and abuse. Its budget is separate from the rest of HUD. It has substantial law enforcement powers and can subpoena documents but not witnesses. Not surprisingly, this isn’t the first time that significant HUD IG finding has been ignored. The IG’s office found substantial evidence that the biggest servicers had defrauded taxpayers (with Wells again a particularly bad actor) But since that report contradicted the “see no evil” Foreclosure Task Force findings, nothing has been done.

BNY Mellon’s interest-rate problem - Why is BNY Mellon’s ex-chief, Bob Kelly, getting $33.8 million in severance and benefits in the wake of resigning his position? As Theo Francis explains, it’s because, in the words of the official 8-K, “Mr. Kelly will receive the benefits to which he is contractually entitled on a termination other than for cause”. If this was actually a resignation, Kelly would have got much less. But in reality — and this will come as a surprise to absolutely no one — he had no choice in the matter: he was fired by the board. BNY Mellon makes its money by managing $26.3 trillion in assets under custody. That’s a bigger number, I think, than is humanly possible to comprehend, but here’s a start: it’s about $4,000 per human being on the planet, or $85,000 per American, or $235,000 per US household, or five times the market capitalization of the S&P 500. It’s a truly insane amount of money. These aren’t BNY’s assets, of course — they all belong to someone else. But BNY looks after them, and reliably looking after that quantity of assets is an incredibly important and stressful and difficult and expensive thing to do.

The Great Bank Robbery - For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits. That $5 trillion dollars is not money invested in building roads, schools and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting.

Quelle Surprise! Partitioning Bank Retail and Wholesale Operations Won’t Cost Much -  Yves Smith - One of the most annoying aspects of Life After the Crisis is the utter refusal of banks to take responsibility for the costs they have imposed on the rest of us. This is directly related to their efforts to fight any and all interference with their God-given right to loot. In the UK, for instance, the Bank of England and the FSA both recommended to the Independent Banking Commission that banks be forced to break up along retail-small business v. pretty much everything else lines was successfully beaten back. The ICB in its preliminary report did come out in favor of ring-fencing, which primarily serves to limit the way banks can use their cheap deposits to fund the riskier wholesale side of the house.  Banks have predictably screamed that any such change would wreck the economy. Since advanced economies grew faster when banking was more heavily regulated, simple-minded comparisons seem to disprove the banks’ stance, putting the burden of proof on them (well, in fairness, they employ enough think tank types that they can usually gin up something that bears a passing resemblance to an analysis to bolster their argument). The Financial Times reports that a newly released study casts doubt on the banks’ claims

Settlement Said to Be Near for Fannie and Freddie - Regulators are nearing a settlement with Fannie Mae and Freddie Mac over whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans, bringing to a close a three-year investigation. The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case. But a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust. And the action, however limited, may help refurbish the S.E.C.’s reputation as an aggressive regulator, particularly as the country struggles with the aftereffects of the financial crisis that the housing bubble fueled.

Bank of America to close 600 branches - Brian Moynihan is continuing his streamlining of the nation's largest bank with a major reorganization, according to a published report. Following a significant trimming of senior executive ranks as part of his "Project New BAC" program to streamline operations and drastically cut expenses, Bank of America (BAC_) CEO Brian Moynihan has plans to split the company's banking operations into consumer and commercial units, which will include up to 600 branch closings, according to Charlotte, N.C.-based WCNC News Channel 36. The article cites unnamed sources. Bank of America has 5,900 existing "banking centers," according to a Securities and Exchange Commission filing. Moynihan said in a statement on Tuesday that "de-layering and simplifying at the scale in which we operate requires difficult decisions," and that "only by streamlining and focusing our resources behind our customers will we truly deliver on the promise of what we have built."

BofA discussing about 40,000 job cuts: report - Bank of America Corp officials have discussed slashing roughly 40,000 jobs during the first wave of a restructuring, the Wall Street Journal said, citing people familiar with the plans. The number of job cuts are not final and could change. The restructuring aims to reduce the bank's workforce of 280,000 over a period of years, the Journal said. The Journal said BofA executives met Thursday at Charlotte, North Carolina, where the bank is headquartered, and will gather again Friday to make final decisions on the reductions, putting the finishing touches on five months of work. Investors are pressing BofA to improve its performance after it lost money in four of the last six quarters and its stock has fallen by half this year. The Journal said the proposed job cuts may exceed BofA's last big cutback in 2008 when it called for 30,000 to 35,000 job cuts over three years. That move was triggered by an economic slowdown and the planned takeover of securities firm Merrill Lynch & Co.

BofA to Be ‘Smaller, More Focused’: Moynihan - Bank of America Corp. (BAC), the lender struggling to contain losses from soured mortgages, will cut employees and assets to make the biggest U.S. lender easier to manage, said Chief Executive Officer Brian T. Moynihan.  About four dozen of the bank’s top executives were scheduled to meet today to review initiatives in Moynihan’s cost-cutting plan, known as Project New BAC. Job cuts may total about 10 percent of the firm’s 288,000 employees in the next two to three years, said a person with direct knowledge of the discussions.  “It’s time to simplify the organization, streamline the organization and make sure our business processes are relevant when you have a smaller, more focused company,” Moynihan said in a Sept. 6 interview. “We just don’t need to be the biggest.”  Moynihan, 51, has already announced the first major shakeup from his project -- a reorganization of six businesses into two that cater to consumers and corporate or institutional clients. The new lineup promoted Thomas K. Montag and David Darnell to co-chief operating officers and left Sallie Krawcheck and Joseph Price without jobs

Nevada Wallops Bank of America With Sweeping Suit - The state of Nevada dramatically expanded its lawsuit against Bank of America today, turning the narrow case it filed late last year into a broadside that targets virtually all aspects of the bank’s mortgage operations. Bank of America has previously denied wrongdoing.  The sweeping new suit could have repercussions far beyond Nevada’s borders. It further jeopardizes a possible nationwide settlement with the five largest U.S. banks over their foreclosure practices, especially given concerns voiced by other attorneys general, New York’s foremost among them.  Nevada’s attorney general charges that Bank of America and the now-defunct mortgage giant Countrywide acquired by the bank in 2008, deceived borrowers and investors at almost every stage of the process. According to the suit, borrowers were duped into unaffordable loans and then victimized again through a misleading mortgage modification program that homeowners tried to use to avoid foreclosure. Finally, the suit alleges, the bank filed fraudulent documents to move forward with the foreclosures.

Probe Into Goldman Widens - Prosecutors in New York are pressing ahead with their inquiry into the way Goldman Sachs Group Inc. marketed certain mortgage-linked instruments before the financial crisis, issuing subpoenas to Morgan Stanley and other investors in the deals, people familiar with the matter said. Some of the subpoenas were received in recent weeks, the people said. The Manhattan district attorney's office began its probe into Goldman following the release in April of a U.S. Senate subcommittee report into the causes of the crisis. Goldman was featured prominently in that report. The district attorney's office previously had subpoenaed Goldman, requesting several months ago a series of documents and communications about the deals, which were put together in the mid- to late-2000s, one person familiar with the matter said at the time.The prosecutor's requests to investors, including some hedge funds, concerned how Goldman sold the deals, a person familiar with the matter said.

Janet Tavakoli: Fraud As A Banking Business Model -  There were many factors that contributed to our recent financial bubble.  While fraud wasn't the only issue, it was and is a significant contributor to the credit bubble. Restraining fraud is a necessary but not sufficient condition for a sound financial system. Congressional investigations in recent years have put ample evidence of fraud in the public domain.  To illustrate just one type of malicious mischief, Senator Carl Levin (D. Mich.), Chairman of a senate investigative panel, issued a memo stating that Goldman "magnified the impact of toxic mortgages." The Wall Street Journal reviewed data showing that a $38 million subprime-mortgage bond created in June 2006 was referenced in more than 30 debt pool causing around$280 million in losses to investors by 2008. In other words, Goldman kept repackaging, reselling or protecting (buying credit default protection on) losers. It took the wrong kind of nerve for Goldman's CEO to say he was doing "God's work." On Friday, September 2, 2011, The U.S. Federal Housing Finance Agency (FHFA), the regulator for taxpayer-subsidized mortgage lending guarantors Fannie Mae and Freddie Mac, filed lawsuits against 17 of the world's largest banks over suspect mortgage loans which helped exacerbate the U.S. housing crisis. Both Fannie Mae and Freddie Mac were placed in conservatorship in September 2008 after they nearly collapsed. The FHFA claims banks misrepresented the value of the mortgage loans and mortgage securities they underwrote, arranged, and sold.

FHFA lawsuit against banks over mortgage-backed securities documents Wall Street’s informational advantage - The FHFA lawsuit on behalf of Fannie Mae and Freddie Mac memorializes the informational advantage that Wall Street had regarding mortgage-backed securities and how Wall Street used this advantage to the detriment of other market participants. Regular readers know that Wall Street invested in and purchased sub-prime mortgage originators and servicers to gain an informational advantage over other market participants.  Their investments and acquisitions put Wall Street's traders in the position of having tomorrow's news today while all other market participants had tomorrow's news several days or weeks later. Your humble blogger has talked about this informational advantage since before the credit crisis.  My focus has always been on the need to eliminate this informational advantage to restore confidence in and attract investors back to the private RMBS market. It is the FHFA lawsuit that has shown how the informational advantage could be used for fraud.  Courtney Comstock wrote a long post discussing the FHFA lawsuit, Goldman Sachs and Dan Sparks...

Suing Banks Is Next Best to Letting Them Fail - Last week, the conservator for Fannie Mae and Freddie Mac filed lawsuits against 17 financial institutions to recover losses on faulty mortgage bonds sold to the two government- backed housing financiers. One of the defendants was Ally Financial Inc., the lender formerly known as GMAC that once was the finance arm of General Motors Co.  If the Federal Housing Finance Agency recovers damages from Ally for Freddie Mac, it will be a win for taxpayers. Yet it also will be a loss. That’s because Ally is still majority-owned by the U.S. Treasury.  It’s a ridiculous situation, for sure. Then again the FHFA is doing what it’s supposed to do: preserve and conserve the assets of Fannie and Freddie. It’s not the agency’s fault that Congress passed the Troubled Asset Relief Program and gave the Treasury Department new powers to keep Ally and its ilk alive.  Congress could have let those companies die, as they deserved to. It didn’t, though. So now the inevitable claims are working their way through the courts. The government’s roles as both a referee and a player in the financial markets remain as conflated as ever.

Analysis: Mortgage cases target people, not just banks (Reuters) - By suing 131 individuals in its effort to recover losses on $200 billion of mortgage debt that went sour, the federal agency overseeing mortgage giants Fannie Mae and Freddie Mac is doing one thing that the government has largely left alone. It is trying to hold actual people, not just companies, responsible for their roles in the global financial crisis. The 18 lawsuits by the Federal Housing Finance Agency, including 17 filed last week and one in July, signal a change from prior federal efforts to punish banks and bankers for their roles in the financial crisis. That difference may stem in part from the FHFA's belief that it has enough evidence to pursue civil claims against banking executives.Its lawsuits draw on information generated by 64 subpoenas issued last year for details on pools of mortgage securities that Fannie Mae and Freddie Mac bought. Most of the higher-profile financial crisis cases brought by the Department of Justice, such as its civil fraud against Deutsche Bank AG, or the Securities and Exchange Commission have named few or no individual defendants. So far, no top executives at major banks have been criminally charged.

FHFA Lawsuits: Price Tag Could Reach as High as $60 Billion - It’s been very hard to determine how much the FHFA is seeking in their lawsuit against leading banks in the mortgage bond scandal. We knew the total value of the mortgage backed securities in the suit – around $250 billion – but not precisely the amounts FHFA would ask for. Public radio’s Marketplace takes a look, and comes up with an eye-popping figure. They dug up a research note by the form Keefe Bruyette & Woods. KBW’s “very preliminary analysis” suggests that the FHFA lawsuits – if they’re successful – could cost banks about $60 billion [...] that’s not all. If the FHFA makes a winning case, those bad loans could end up changing hands again, with all the sales considered void.  KBW notes, “If FHFA is successful in showing that securities laws were violated then the loss would not be restricted to defective loans. The sale could be rescinded and the securitizer would receive the loans back. In this case, the loss to the originator would be the difference between cost and market value for all loans in the securitization, not just the defective ones. In our analysis, we assume losses on all defective and delinquent loans.”

Dick Bove On The Bank Lawsuits: 'The Price Tag Is Unlimited' - On Bloomberg TV, Dick Bove weighed in on the FHFA lawsuits against all the big banks. Here's his transcript: ------- On the possible price tag attached to this lawsuit:"The price tag is unlimited. Basically, we can look at Fannie Mae and Freddie Mac and say they've lost $33 billion, supposedly, as a result of buying these bad mortgages, and therefore, those losses should be put back to the banking system. But in essence, if we establish the precedent that anyone can sue a bank if they get a mortgage that doesn't work out, and there were $5 trillion of mortgages that were securitized through this Fannie-Freddie system over the past number of years. I have no idea how many people would sue, nor how much the courts are willing to give back to these companies and take away from the banks. It's a very, very negative development."On the size of the losses attached to securities sold to Fannie-Freddie:"It could presumably jump to $53 billion. I don't think it will, but conceivably it could. Then you've got the $20 billion from the state attorney general settlement, if it occurs, the $10 billion that AIG wants, then you've got the $900 million that is being asked from U.S. Bancorp. And then you have J.P. Morgan saying it has 10,000 lawsuits against it seeking redress on mortgages.

Banks May Fight Banks as Mortgage Investors Try for Class Status - Banks including JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) may pay more to resolve claims over their alleged roles in the collapse of a $2.3 trillion mortgage- backed securities market if sophisticated investors are allowed to sue as a group along with less savvy ones.  Class-action status allows investors to pool financial and legal resources, giving them greater leverage to win larger settlements or verdicts. The banks, however, have a court ruling on their side that may help fend off such blockbuster cases. It says class status is barred because some investors are too sophisticated -- in fact, because some of them are other banks, including JPMorgan. “It is possible to be both an alleged perpetrator and victim at the same time,” said Jacob S. Frenkel, a former U.S. Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland. “It’s unprecedented that you have the most sophisticated institutions as victims, to be in a position where their losses are so great that they have sued.”

FHFA lawsuits shows that disputed Fannie and Freddie mortgage deals had robo-signers - Long before the banks started evicting delinquent homeowners, Wall Street, it appears, used robo-signers to ink mortgage deals that would eventually cost investors tens of billions of dollars and in part led to the financial crisis.According to lawsuits filed last week by the U.S.'s Federal Housing Financing Agency, one individual was used by three different banks to sign off on 36 different mortgage bond deals in 2006 alone. Many of the deals contained as many as 4,000 home loans. Yet, according to the lawsuits, the individual Evelyn Echevarria signed documents attesting to the fact that all the loans - well over 100,000 in 2006 alone - met the underwriting guidelines set out in each of the deals' offering statements for potential investors. In fact, according to the FHFA lawsuits, many of the loans in the deals were of much lower quality than the offering documents suggested. "Signing these documents should have been a meaningful function,"  "But it is hard to see that one person could have fulfilled their legal obligation to vet all of these prospectuses if they were doing so many deals at the same time."

Banks Have Hissy Fit, Cancel Meeting With Attorneys General Due to FHFA Mortgage Litigation - Yves Smith - Yours truly has said for months that the negotiations among major banks, state attorneys general, and Federal regulators to reach a settlement of various types of mortgage liability were not going to result in a meaningful deal. Further confirmation of our views came today, via Time’s Swampland. The five biggest banks cancelled a session today with the state attorneys general. This move was apparently to object to the FHFA lawsuits filed against 17 banks which Dave Dayen penciled out at $60 billion in potential liability. This hissy fit seems wildly misguided, since the FHFA has not been a party to the foreclosure settlement talks. It isn’t even a part of the Executive Branch, so it’s a little hard to charge that the Obama Administration is acting in bad faith (which seems to be the subtext). Per Reuters: “Each agency has its own statutory authority, and its own particular evidence,” “The FHFA is not part of the executive branch,” Swire added. “It does not report to the president. If the FHFA finds the right evidence, it decides on its own to move forward.” The idea that a financial services regulator might operate autonomously is clearly not unknown to the major banks. Their captured minder, the OCC, went rogue early in the year to undermine the Consumer Financial Protection Bureau participation in the settlement talks.

Banks Blow Off, Doom Foreclosure Fraud Settlement With AGs -- Obviously a refinancing initiative using an existing program, which may net $20 billion but not do much to arrest the foreclosure crisis, is more of a punt than anything as far as housing is concerned in the American Jobs Act. That’s Mike Konczal’s take as well. But the bigger news on the housing/foreclosure front was the final nail in the coffin of this increasingly farcical 50-state AG settlement. The banks are miffed about the FHFA’s lawsuit against them over representations and warrants on mortgage backed securities, particularly because the suit holds over 130 individuals responsible for the crimes, which is just not done. So these banks blew off the latest scheduled meeting with the AGs in a fit of pique. The five biggest mortgage servicers have cancelled a planned negotiating session with representatives of the 50 State Attorneys General in apparent protest over a federal regulator filing suit against them, a source familiar with the matter tells TIME

Iowa Attorney General Tom Miller’s Yawning Credibility Gap - - Yves Smith - Since corruption is becoming as rich, complex, and important a topic as precipitation apparently is in Wales, the time has arrived for devising more nuanced ways to describe its many manifestations. And it’s always preferable to take advantage of established terminology.  So to encourage the revival of the Johnson Administration coinage, “credibility gap,” we’ll discuss a prime example: Iowa attorney general Tom Miller’s conduct in his role as head of the 50 state attorney general mortgage “settlement”. His latest claims, contained in a letter defending his ouster of New York attorney general Eric Schneiderman from the executive committee of the 50 state AG efforts, is more than a tad disingenuous, but that simply makes them par for the course for Miller. I have no idea how truthful Miller is on a routine basis. But he has told so many whoppers as well as carefully crafted exercises in truthiness that I now assume that whatever he says about the mortgage settlement talks is the opposite of what is actually happening. Maybe not the polar opposite, but at least 120 degrees away from reality.  Let’s do a quick recap:

Matt Stoller: The Corrupt Establishment Begins Smearing Eric Schneiderman - Last month we had New York Fed Board Member Kathryn Wylde whining and meddling about Eric Schneiderman’s investigation into big banks. That seriously backfired. HUD Secretary Shaun Donovan put pressure on him as well, and that didn’t go over so well. And after Tom Miller petulantly stopped allowing Schneiderman on his AG conference calls, there was a mini-media storm over the rancid character of the DOJ and bankster-owned Miller. None of the insider signals worked, so now it’s on to stage two of neutralize Schneiderman. It’s time for…. the smear campaign! Two editorial boards are coming out and using innuendo to paint Schneiderman as a self-promoter looking to make a name for himself by unfairly tarnishing banks. It’s pretty standard – throw up rumors that have a narrative basis in the American psyche, and chip away at public faith. Here’s the Washington Post’s editorial. The majority of the other attorneys general, led by Tom Miller of Iowa, have kicked Mr. Schneiderman out of the negotiations, accusing him of making excessive demands.  Notice the lie (repeated below in the other editorial) – that the majority of Attorneys General threw Schneiderman off the 50 state task force. No, it was Tom Miller’s decision, period. Or at least, that’s what some newspaper called The Washington Post reported last week.

Translating the WaPo’s Bank-Talking-Point Editorial - Yesterday the Washington Post ran a grotesquely bank-skewed editorial chastising New York Attorney General Eric Schneiderman for his refusal to play ball with the hush money “50 state AG” settlement on the table. Matt Stoller pointed out that the Washington Post owns Kaplan schools, a for profit network of schools, and Schneiderman’s investigating for-profit schools, a fact that the WaPo didn’t disclose. But the Kaplan connection is important in another way too, as it probably explains why the WaPo had so much empathy for the banks in the editorial, and displayed so little understanding of the banks’ victims. For profit schools of the Kaplan type result in extremely unsustainable student debt because of very high tuition, low quality of education and particularly nasty practices. All schools like Kaplan care about is the access to the student loans; the loans are Kaplan’s (and the WaPo’s) profit center. The schools don’t care if the loans are repaid. Sounds a lot like the banks’ position vis a vis mortgages made during the securitization-fueled housing bubble. But with student loans, the situation’s worse. The students default, but they can never escape the debt because they can’t discharge it in bankruptcy except in extreme circumstances. Thus students are punished for decades for the naïve and wrong decision to rely on the marketing of Kaplan and similar schools. The human misery inflicted to get that stream of money isn’t justified.

US banks offered deal over lawsuits - Big US banks in talks with state prosecutors to settle claims of improper mortgage practices have been offered a deal that is proposed to limit part of their legal liability in return for a multibillion dollar payment. The talks aim to settle allegations that banks including Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial seized the homes of delinquent borrowers and broke state laws by employing so-called “robosigners”, workers who signed off on foreclosure documents en masse without reviewing the paperwork. State prosecutors have proposed effectively releasing the companies from legal liability for allegedly wrongful securitisation practices, according to five people with direct knowledge of the discussions. Some state officials have expressed concern that they have offered the banks far too broad a release from liability. Others say the broad language was perhaps inadvertently crafted and will be tightened as negotiations continue. Participants on both sides stressed the talks remain fluid.

50 State Attorney General Effort to Sell Out to Banks Makes Even More Egregious Offer - Yves Smith - The so-called 50 state attorney general mortgage settlement negotiations (a bit of a misnomer, since at least 4 attorneys general appear to be out, and various Federal banking regulators are alos party to the deal) are looking more and more like a desperate effort to reach any kind of a deal so as to save the officialdom’s face. The only good news is the banks are so insistent on total victory that despite the efforts to pretend the talks are making progress, the odds of a deal being consummated still look remote. It is nevertheless frustrating to continue to see the media depict the flailing about by the attorneys general headed by Tom Miller as progress. I’ve been involved in negotiations for much of my career, and I’ve never seen so much incompetence on open display. The Financial Times headline, “US banks offered deal over lawsuit” is substantively misleading. You can’t credibly put forward a proposal unless your side has signed off on it. Yet he has just made an offer that his own side may not support. And this isn’t the first time Miller has pulled this trick. Per the Financial Times:According to five people with direct knowledge of the discussions, state prosecutors have proposed settlement language in the “robosigning” case that also might release the companies from legal liability for wrongful securitisation practices. Some state officials have expressed concern that they have offered the banks far too broad a release from liability.

9th Circuit Court Ruling Legitimizes MERS - A ruling from the 9th Circuit Court - Cervantes vs. Countrywide gives legitimacy to MERS and deals a major blow to many of the arguments that attorneys representing homeowners try to make. The 9th Circuit takes appeals from Arizona, California, Hawaii, Montana, Nevada, Idaho, Oregon, and Washington.  Patrick Pulatie at LFI Analytics shared his opinions on the case via email and I wish to pass them along....Cervantes vs. Countrywide is an Arizona case appealed to the 9th Circuit after the Arizona District Court Ruled against the homeowners without leave to amend the complaint. The primary argument of Cervantes were the MERS operation was fraudulent and unlawful, and that use of MERS split the Deed and Note. Other issues were addressed, but the most important parts are in regards to MERS. Here are the key points and court rulings ... Homeowners Claim: The homeowners claimed that MERS was a “sham beneficiary” and use of MERS was unlawful and misrepresentative. Ruling: The Court found that the MERS operation had been disclosed in detail to the borrowers through the Deed of Trust. Therefore, there was no misrepresentation. This is especially important in that it destroys arguments for fraud on the part of MERS

My Job is to Watch Dreams Die - I work at a real estate office. We primarily sell houses that were foreclosed on by lenders. We aren't involved in the actual foreclosures or evictions - anonymous lawyers in the cloud somewhere is tasked with the paperwork - we are the boots on the ground that interacts with the actual walls, roofs and occasional bomb threat. When the lender forecloses - or is thinking of foreclosing - on a property one of the first things that happens is they send somebody out to see if there is actually a house there and if there is anybody living there who needs to be evicted. Lawyers are expensive so they send a real estate agent or a property preservation company out to check. There is the occasional discovery of fraud where there was never a house on the parcel to begin with, but such instances are rare. If the house is occupied my job is to make contact and determine who they are: there are laws that establish what happens to a borrower as opposed to a tenant and the servicemember relief act adds an additional set of questions that must be answered. Some of the people have an idea of why I am there. 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 and some threaten me to never return in the name of the police, their lawyer, or the occasional "or else/if I were you". During one initial visit the sight of 50-60 motorcycles parked on the lawn suggested that we try again the next day. At a couple the police had cordoned off the area and at one they were in the process of dredging the lake searching for the body of a depressed former homeowner.

Florida Appellate Decision May Be a Major Obstacle to Foreclosure - Yves Smith - A ruling issued today, Glarum v. LaSalle Bank, by the court of appeals for Florida’s fourth district, may have thrown a really big wrench in the foreclosure machinery state-wide. I say “may” because this ruling has such big implications that the bank has good reason to appeal to try to get the decision reversed or narrowed. The ruling itself is remarkably straightforward and damning. The trial court had issued a summary judgment for foreclosure. The appeals court reversed it because the evidence submitted by LaSalle Bank to establish the amount due and owing was inadequate under Florida’s rules of civil procedure. Glarum v LaSalle Bank National Association.  How did the bank try to prove what the borrowers owed? A La Salle staffer, Ralph Orsini looked at the computer records and provided a deposition. That doesn’t cut it. From the ruling:  Orsini did not know who, how, or when the data entries were made into Home Loan Services’s computer system. He could not state if the records were made in the regular course of business. He relied on data supplied by Litton Loan Servicing, with whose procedures he was even less familiar. Orsini could state that the data in the affidavit was accurate only insofar as it replicated the numbers derived from the company’s computer system. Despite Orsini’s intimate knowledge of how his company’s computer system works, he had no knowledge of how that data was produced, and he was not competent to authenticate that data. Accordingly, Orsini’s statements could not be admitted under section 90.803(6)(a), and the affidavit of indebtedness constituted inadmissible hearsay.

Florida Appeals Court Rules Banks Must Follow Rules - Yesterday the District Court of Appeal for the 4th District in Florida issued a wholly unremarkable ruling in Glarum v. LaSalle that nonetheless could massively complicate banks’ efforts to foreclose in Florida. When foreclosing, the court said, a bank has to use evidence, not hearsay. In this case, the hearsay was LaSalle’s claim about how much the homeowner owed it–the bank’s “affidavit of indebtedness.”What is hearsay? Split the word in two and it’s obvious: the witness hears something, and then says it to the court. Hearsay’s prohibited for a basic reason: you can’t trust it to be true, as anyone who has played “telephone” knows. The hearsay rule has a 500+ year pedigree, so it’s not possible that any lawyer or judge in Florida thought it was okay to use hearsay to win a case. The hearsay rule does have exceptions, allowing in information as evidence when external evidence of the information’s reliability. ” The exception the bank perfunctorily claimed allowed its affidavit of indebtedness to be treated as evidence was the “business records” exception. But even a cursory comparison of the affidavit and the exemption shows the affidavit doesn’t fit; the bank’s claim is pure hearsay.

Profiles in competence: Jesse Jones & Leo Crowley - An important paper, “Streamlined Refinancings for up to 30 Million Borrowers,” which makes the case for refinancing all loans – trillions of dollars in face amount — now covered by the housing GSEs, Fannie Mae and Freddie Mac. This proposal breaks-down the evil cartel of banks and GSEs currently blocking more than 30 million American families from refinancing their homes and thus stalling economic recovery. But this proposal, while admirable, has a cost. Income now flowing to investors and banks who own GSE paper will instead be retained by consumers to the tune of $70 billion annually. If other proposals to compel refinancing of non-GSE mortgages are adopted, the reduction in income to investors, banks and the GSEs themselves as a result of mass prepayments is over $100 billion per year. The banking system made $28 billion in Q2 2011, thus the dilemma. I use the term “dilemma” deliberately. The GSEs and large banks are still hiding losses on their books and subsidizing these losses by preventing consumers from refinancing their mortgages. It remains only to recognize these losses, restructure solvent institutions and get on with the business of recovery and growth by refinancing eligible home owners.

CBO: An Evaluation of Large-Scale Mortgage Refinancing Programs - Some economists have proposed a large scale mortgage refinancing program for homeowners with loans owned or guaranteed by Fannie, Freddie or the FHA, and who are current on their mortgages but who can't refinance - usually because of Loan-to-values (LTV) much greater than 100%. Some economists have suggested this program could be used by 30 million borrowers and deliver $70 billion in annual savings - at essentially no cost.  The CBO has analyzed a proposal for a large scale refinancing program: An Evaluation of Large-Scale Mortgage Refinancing Programs (ht mort-fin). Some key findings: Relative to the status quo, the specific program analyzed here is estimated to cause an additional 2.9 million mortgages to be refinanced, resulting in 111,000 fewer defaults on those loans and estimated savings for the GSEs and FHA of $3.9 billion on their credit guarantee exposure, measured on a fair-value basis. We also discuss the impact of this program on various stakeholders, including homeowners, non-federal mortgage investors, mortgage lenders, mortgage service providers, private mortgage insurers, and subordinated mortgage holders. For example, non-federal investors would experience an estimated fair-value loss of $13 to $15 billion; most of that wealth would be transferred to borrowers.

Calculating the Ooomph From Big Government Refi Effort - How much economic oomph would be produced by a big federal government push to refinance mortgages for borrowers who can’t refinance because their incomes are too low or because their mortgages are bigger than the shrunken value of their homes or because the fees are prohibitive? Some oomph, but not enough to solve all the woes of the housing market, according to a Congressional Budget Office working paper by staff economists. (CBO emphasizes this isn’t an official estimate.) The bottom line: The “estimated gains and losses are small relative to the size of the housing market, the mortgage market and the economy” and, thus, the effects would be small as well, the trio says. A large-scale refi program would benefit millions of borrowers, to be sure, but “would not address many of the problems facing the U.S. housing market,” including borrowers who are already in default or whose mortgages are so big relative to the value of the homes that refinancing isn’t the answer.

How to make mortgage relief work - One of the problems with mortgage modifications, the way the big banks do them, is that they tend not to work very well. Borrowers who were underwater stay underwater; often their total amount outstanding goes up rather than down. The amount of time and effort expended by both borrower and lender is enormous, much of it duplicated due to bad document management by the banks, and policies requiring borrowers to get at least two modifications — one for a “trial period” and then a second, permanent one. Redefault rates are very high. In that context, it’s easy to see why banks would shy away from expanding such programs even further: they’re clearly broken, after all, and even if they help borrowers (which isn’t clear), they certainly don’t seem to be helping the banks. Which is why it’s encouraging to have seen a couple of pieces in recent days showing that well-designed programs for delinquent borrowers really can work, and work well.

MBA: Mortgage Purchase Application Index near 15 Year Low - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey. The Refinance Index decreased 6.3 percent from the previous week. The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier."Heading into the Labor Day weekend, the 30-year rate was at its second lowest level in the history of our survey (the low point was reached last October), and the 15-year rate marked a new low in our survey," The following graph shows the MBA Purchase Index and four week moving average since 1990. The four week average of the purchase index is now at the lowest levels since August 1995. This doesn't include the large number of cash buyers ... but purchase application activity was especially weak over the previous month, and this suggests weak home sales in September and October. Also - with the 10 year treasury yield below 2% this week - mortgage rates will probably be at record lows in the survey next week.

Mortgage Rates fall to Record Low - From Freddie Mac: Mortgage Rates Attain New All-Time Record Lows Again - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing mortgage rates, fixed and adjustable, hitting all-time record lows amid market and employment concerns and economic uncertainty. foot-dragging governments should adopt austerity, insisting that early and substantial fiscal tightening (“front-loading”) was vital to restore confidence.  Here is a long term graph of 30 year mortgage rate in the Freddie Mac survey: The Freddie Mac survey started in 1971. Mortgage rates are currently at a record low for the last 40 years (mortgage rates were close to this range in the '50s). The second graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  Refinance activity declined a little last week, but activity was up significantly in August compared to July.  With 30 year mortgage rates now at record lows, mortgage refinance activity will probably pick up some more in September - but so far activity is lower than in '09 - and much lower than in 2003.

Mortgage Rates at Record Lows: 30-Year at 4.12%, 15-Year at 3.33%; Home Resales Worst in 14 Years - U.S. 30-year mortgage rates are at record lows but it does not matter. Too few want to buy and many cannot refinance because they are underwater.  Fixed mortgage rates fell this week to the lowest levels in six decades.  The average rate for the 30-year fixed mortgage fell to 4.12 percent, down from 4.22 percent, Freddie Mac said Thursday. It's the lowest level on records dating back to 1971. Freddie Mac said the last time rates were cheaper was 1951, when most long-term home loans lasted just 20 or 25 years. The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to 3.33 percent from 3.39 percent. That's the lowest on records dating to 1991 and likely the lowest ever, according to economists. Over the past year, the average rate on the 30-year fixed mortgage has been below 5 percent for all but two weeks. That compares with five years ago, when the average 30-year fixed rate was near 6.5 percent. Yet sales of new homes are on pace to finish the year as the lowest on records dating back a half-century. The pace of re-sales is shaping up to be the worst in 14 years.

Existing Home Inventory continues to decline year-over-year - From Jon Lansner at the O.C. Register: Sellers rush to pull homes off O.C. market As more homeowners throw in the towel with the realization that the best time of the year to sell has now passed, the inventory continues to steadily drop. It is normal for inventory to decline as the summer ends, so this decline is mostly seasonal. However, not mentioned in the article, is that this is an 8.2% decline from the same period in 2010. I've been using the HousingTracker / DeptofNumbers data that Tom Lawler mentioned back in June to track inventory. Ben at deptofnumbers.com is tracking the aggregate monthly inventory for 54 metro areas. This graph shows the NAR estimate of existing home inventory through July (left axis) and the HousingTracker data for the 54 metro areas through early September. The HousingTracker data shows a steeper decline in inventory over the last few years (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 early September listings - for the 54 metro areas - declined 16.5% from last September. Of course there is a large percentage of distressed inventory, and various categories of "shadow inventory" too. But this is a significant year-over-year decline and pretty soon we will be talking about inventory being at the lowest level since 2005 (inventory increased sharply near the end of 2005 signaling the end of the housing bubble).

Cities have trouble selling fixed-up foreclosures - They've got the homes. They just need buyers. Local communities have been using millions of federal dollars to fix up and resell foreclosed homes in an effort to battle blight and to protect surrounding property values, but those neighborhood revivals are being hampered by rehabbed homes that cities can't unload. The homes were supposed to be bargains for the low- and moderate-income families eligible for the programs, but officials now realize a number of the homes they bought didn't match the needs of would-be buyers. And cities need to sell those homes so they can take the money and put it back into the pot to buy and fix up more foreclosures and keep the neighborhood turnarounds going.

Helping Unemployed Borrowers Meet Their Mortgage - NYFed - With unemployment very high, income loss is now the primary reason for mortgage default. Unemployed homeowners face tough choices. Those with equity in their house may attempt to sell it quickly. Alternatively, to keep their house while seeking a new job, they might deplete their savings, apply for a loan modification, or use other credit. Those with negative equity—who owe more on the mortgage than the property’s current value—have fewer choices, because selling the house won’t pay off the mortgage. All too often the home enters foreclosure and becomes costly for the family and the community. In this post, we examine how states may be able to offer special bridge loans to help jobless homeowners pay their mortgages and help protect neighborhoods and housing markets. Such initiatives could complement existing programs by helping many distressed homeowners before they miss any payments.

Finance and Macroeconomics: The Role of Household Leverage - The increase in household leverage prior to the most recent recession was stunning by any historical comparison. From 2001 to 2007, household debt doubled, from $7 trillion to $14 trillion. The household debt-to-income ratio increased by more during these six years than it had in the prior 45 years. In fact, the household debt-to-income ratio in 2007 was higher than at any point since 1929. Our research agenda explores the causes and consequences of this tremendous rise in household debt. Why did U.S. households borrow so much and in such a short span of time? What factors triggered the slowdown and collapse of the real economy? Did household leverage amplify macroeconomic shocks and make a quick recovery less likely? How do politics constrain policy responses to an economic crisis? While the focus of our research is on the recent U.S. economic downturn, we believe the implications of our work are wider. For example, both the Great Depression and Japan's Great Recession were preceded by sharp increases in leverage.¹ We believe that understanding the impact of household debt on the economy is crucial to developing a better understanding of the linkages between finance and macroeconomics.

The Other Debt Crisis - American households are carrying around $11.4 trillion of debt. This amounts to around 90 percent of GDP. This is twice the amount of household debt held during the last major recession in 1982. On a macro level, this is bad because people with a lot of debt don't spend money. Demand for goods and services is what keeps the economy going (and people employed), but households need economic conditions to improve so that they can deleverage, and the economy needs households to deleverage so that they can spend. It's a stalemate that predicts long-term sluggishness. CBO, for instance, projects that unemployment will remain above 8 percent until 2014. Since most of the debt being carried by families is in their home ($9.21 trillion of it), one way to reduce the value of the debt would be to allow homeowners to refinance their mortgages to the low rates that are now available. This could increase the capacity of  homeowners to spend by around $85 billion a year. As an alternative, the government could compensate for low aggregate demand through an infusion of resources, or stimulus, to prop up demand until it becomes self sustaining, also know as the "fake it 'till you make it" model. Some would argue that at times of historically low interest rates, government borrowing in exchange for a functioning economy would be the bargain of the century.

‘Heavy Lifting’ Still to Come for Consumers - Have U.S. consumers fully shed their debts? Not yet, according to grim new research out this morning from BlackRock Inc. The firm rebuffs the notion that the consumer may be coming back and suggests that when one looks into recent behavior, consumer spending — which makes up roughly 70% of demand in the U.S. economy — may have a painfully long way to go. “The heavy lifting still lies ahead,” the firm writes. The authors note that there has been an increase in nonrevolving consumer credit, perhaps reflecting some signs of life in auto sales and more student loan debt as the unemployed head to school. “On the other hand,” BlackRock researchers write, “The last two months have witnessed increases in revolving consumer credit, so while thus far in the recovery period it would appear that the consumer is hesitant to make meaningful purchases with credit cards, the trends here remain in flux and will need to be watched closely in the months ahead.” But even if revolving credit has picked up lately, BlackRock’s authors worry about the household debt-to-assets ratio.  “The debt-to assets measure fails to account for changes in household asset liquidity,”

Household Debt or Structural Change? - While employment has recovered to an extent in low debt counties; it has badly lagged in high household debt counties. For Konczal and many other researchers, this is evidence that the presence of high levels of debt (particularly mortgage debt) remains a causal factor preventing the recovery. Evidence of this sort is used as arguments for radical measures to reduce household debt — including mass refinancing or mortgage modifications (for e21’s views on these plans, click here). Because these treatments frequently involve large taxpayer losses, it’s worth thinking through what the demonstration means. While it’s true that household debt and employment are correlated; it’s not clear that lowering household debt would automatically raise employment. Erik Hurst presents an alternate explanation: that areas of high investment in real estate are experiencing high unemployment due to difficulties in re-allocating resources to other uses. He presents evidence suggesting that states which had a high share of employees in construction or finance saw greater increases in unemployment during the recession:

Fed Chief Describes Consumers as Too Bleak -  Ben S. Bernanke, the Federal Reserve chairman, offered a new twist on a familiar subject Thursday, revisiting the question of why growth continues to fall short of hopes and expectations.  Mr. Bernanke, speaking at a luncheon in Minneapolis, offered the standard explanations, including the absence of home construction and the deep and lingering pain inflicted by financial crises. He warned again that reductions in government spending amount to reductions in short-term growth. Then he said something new: Consumers are depressed beyond reason or expectation.  Oh, sure, there are reasons to be depressed, and the Fed chairman rattled them off: “The persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high.”  However, Mr. Bernanke continued, “Even taking into account the many financial pressures that they face, households seem exceptionally cautious.” Consumers, in other words, are behaving as if the economy is even worse than it actually is.

Bernanke puzzled by weak consumer spending  Federal Reserve Chairman Ben Bernanke says he is surprised by how cautious consumers have been in the two years since the recession officially ended. But the Fed chief offered no hints of any steps the Fed would take to boost the weak economy. Bernanke says a number of factors are keeping consumers from spending more, including high unemployment, a temporary spike in energy prices, falling home prices and high debt burdens. Bernanke said the Fed will consider range of policy options at its next meeting later this month without offering any clues to what it might do. His comments were familiar to ones he gave last month in Jackson Hole, Wyo.

Bernanke “Let Them Buy Cake” Reveals Pathological Blindness - Yves Smith - There’s a genre of jokes about the ivory tower propensities of economists, and the monetary economists at the Fed are reputed to be the worst of the bunch. But even allowing for those proclivities, the remarks by Bernanke yesterday about consumer behavior showed a remarkable lack of engagement with the real world. He and his colleagues clearly do not know, or bother to know, members of the dying breed known as the middle class. Today, Bernanke said in a speech that consumers ought to be spending more. The fact that they aren’t means it must be due to mood, or as he put it, that they had become “exceptionally cautious.” Since economists believe that consumers are rational, this outburst of illogical behavior is unexpected and the Fed can’t be blamed for it. The New York Times dutifully did stenography and played up the confidence meme: Economic models based on historic patterns of unemployment, wages, debt and housing prices suggest that people should be spending more money…. one possibility is that Americans collectively are suffering from what amounts to an economic version of post-traumatic stress disorder….Let’s look at what the Fed chairman said. Because Fed chairmen make an art form of speaking in as anodyne a manner as possible, what is disturbing about his discussion may not jump put at you:

Jobs Will Follow a Strengthening of the Middle Class - Robert Reich -THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal.  When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?  The economy won’t really bounce back until America’s surge toward inequality is reversed. Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke’s Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.

ISM Non-Manufacturing Index indicates expansion in August -The August ISM Non-manufacturing index was at 53.5%, up from 52.7% in July. The employment index decreased in August to 51.6%, down from 52.5% in July. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: August 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in August for the 21st consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business.This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.This was above the consensus forecast of 50.5% and indicates slightly faster expansion in August than in July.

A Bit Of Good News For The Services Sector - The U.S. services sector grew at a moderately faster pace in August, but the crowd’s not paying attention. The better-than-expected rise in the ISM’s non-manufacturing index is taking a back seat to Friday’s news of flat job growth and renewed fears of mounting economic challenges in Europe and the Continent's ongoing push for fiscal and monetary austerity. Focusing on the negative isn’t surprising, but today’s ISM report keeps hope alive, if only slightly, that the problems in the U.S. will bring a mixed bag of macro results rather than an outright recession. The news from the Institute for Supply Management is no silver bullet, but it’s hardly irrelevant. Why? It could have been worse. The fact that the numbers were ok is enouraging because the services sector is where the action is for the U.S. economy. Something on the order of four of every five workers draw paychecks from companies in the services economy. The manufacturing sector may generate all the buzz in economic analysis, but in terms of dollars and jobs the real story resides elsewhere.

AAR: Rail Traffic mixed in August - The Association of American Railroads (AAR) reports carload traffic in Auguest 2011 decreased 0.3 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 0.4 percent compared with August 2010. On a seasonally adjusted basis, carloads in August 2011 were flat compared to July 2011; intermodal in August 2011 was up 0.3% from July 2011.Railroads originated 1,482,570 carloads in August 2011, down from 1,486,378 in August 2010. ... As the chart [below] shows, for the past five months rail carload traffic has been joined at the hip with the same month in 2010. This graph shows U.S. average weekly rail carloads (NSA).  Rail carload traffic collapsed in November 2008, and now, over 2 years into the recovery, carload traffic is only about half way back. "Excluding coal, U.S. rail carloads in August 2011 were up 1.0% over August 2010. Excluding coal and grain, U.S. rail carloads in August 2011 were up 3.7% over August 2010". The second graph is for intermodal traffic (using intermodal or shipping containers):

Trade Deficit decreased sharply in July - The Department of Commerce reports:  [T]otal July exports of $178.0 billion and imports of $222.8 billion resulted in a goods and services deficit of $44.8 billion, down from $51.6 billion in June, revised. July exports were $6.2 billion more than June exports of $171.8 billion. July imports were $0.5 billion less than June imports of $223.4 billion. The trade deficit was well below the consensus forecast of $51 billion. The first graph shows the monthly U.S. exports and imports in dollars through July 2011. Click on graph for larger image. Exports increased and imports decreased in July (seasonally adjusted). Exports are well above the pre-recession peak and up 15% compared to July 2010; imports are up about 13% compared to July 2010. The second graph shows the U.S. trade deficit, with and without petroleum, through July. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. . The decline in the trade deficit was due to an increase in exports. Also the trade deficit for the first six months of the year was revised down - especially in Q2.

Consumer Goods from China Are Getting More Expensive – NY Fed  - In order to identify trends in import prices of consumer goods from China, we construct our own price index, because official statistical agencies only provide aggregate price indexes. Each month, the Bureau of Labor Statistics (BLS) publishes an aggregate U.S. import price index that averages price movements across all source countries. The aggregate index in turn is divided into separate indexes by type of goods imported, referred to as end-use categories, which include industrial supplies, consumer goods, capital goods, and autos. In addition, the BLS computes a separate price index for some source countries, including China. These country-specific indexes, however, are not broken out by end-use categories.  We find that, in a sharp reversal of earlier trends, U.S. import prices for consumer goods shipped from China have been rising rapidly in recent quarters—by 7 percent between 2010:Q2 and 2011:Q1. In this post, we track U.S. import price movements in Chinese goods in different product categories by creating an import index that uses highly disaggregated data. We also consider the likely causes of the recent rise in prices for consumer goods. If these price hikes persist, they could have important consequences for U.S. businesses and consumers because China is the largest single supplier of U.S. imports, accounting for more than 20 percent of non-oil imports.

The Decline of Manufacturing in America: A Case Study -- Yves Smith - One frequent and frustrating line that often crops up in the comments section of this blog is that American labor has no hope, it should just accept Chinese wages, since price is all that matters. That line of thinking is wrongheaded on multiple levels. It assumes direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost (and increased coordination costs of much more expensive managers are a significant offset to any cost savings achieved by using cheaper factory workers in faraway locations). It also assumes cost is the only way to compete, when that is naive on an input as well as a product level. How do these “labor cost is destiny” advocates explain the continued success of export powerhouse Germany? Finally, the offshoring,/outsourcing vogue ignores the riskiness and lower flexibility of extended supply chains. This argument is sorely misguided because it serves to exculpate diseased, greedy, and incompetent American managers and executives.  Indeed, the rise of Germany and Japan was then seen as a due to sclerotic American management not being able to keep up with their innovations in product design and factory management.  But if you were to ask most people, they’d now blame the fall of American manufacturing on our workers, which serves to shift focus from the top of the food chain at a time when they’ve managed to greatly widen the gap between their pay and that of the folks reporting to them.

Depressing Economic Statistic Of The Day -- Tyler Cowen digs this rather depressing number out of a post by John Mauldin: The US has roughly the same number of jobs today as it had in 2000, but the population is well over 30,000,000 larger. To get to a civilian employment-to-population ratio equal to that in 2000, we would have to gain some 18 MILLION jobs. There’s much more in Mauldin’s piece, which is worth reading as long as you don’t want to depress yourself too much.

The Greater Recession: The Real Reason Americans Feel So Squeezed - Before the Great Recession, there was a greater recession for the American worker. And it's been much worse than most of us thought. Here's what we thought we knew. In the last three decades, gross domestic product doubled but the typical worker's real wages barely increased. For those with only a high school degree, salaries fell slightly. Some economists called this period of lazy wage growth the "Great Stagnation." It turns out that "stagnation" was too optimistic. In fact, real wages for middle class men have declined by 28 percent since 1969, according to a report from the Hamilton Project. For men without a high school degree, they've fallen by a whopping 66 percent. "Stagnation is too weak a word," said Michael Greenstone, author of the report. "This is decline."  Americans have a complicated relationship with productivity. We obsess about our personal efficiency, but we don’t think much about efficiency across broad swaths of the economy. Productivity is the not-so-secret sauce in our GDP. We’re the second-largest manufacturer in the world even though manufacturing jobs have shrunk to less than 10 percent of our economy. We’re the world’s third-largest agricultural nation even though only 2 percent of us farm. The reason we can do so much work with so little is that the U.S. economy is incredibly, and increasingly, efficient at making some things cheaply.

A Slightly Better Than Zero Jobs Report - The big news headline from the latest employment situation report from Washington D.C. was that there were zero net jobs generated in the month of August 2011 in the U.S. nonfarm payroll.  But, paradoxically, if we look at the household survey portion of the jobs report, we find that August 2011 actually showed the biggest month-over-month gain that it has since April 2010.  Overall, 331,000 additional Americans were counted as being employed in August 2011 than had been in July 2011, bringing the total number of employed up to 139,627,000.  The gains extended across all three major age groupings that we regularly track: teens (Age 16-19) saw gains of 68,000, young adults (Age 20-24) saw their numbers in the U.S. workforce rise by 35,000, while the remaining American adults (Age 25+) increased their ranks in the U.S. workforce by 228,000.  We have to go back to April 2010 to find a month where the total number of employed Americans rose by more than August's 331,000 from the previous month.

Businesses post most job openings in 3 years -  Companies in July advertised the most jobs in three years, and layoffs declined - a bit of hope for a weak economy. Still, many employers are in no rush to fill openings. The Labor Department said Wednesday that employers increased their postings to 3.23 million from 3.17 million in June. That is the largest number of openings since August 2008. Typically, it takes anywhere from one to three months to fill an opening. More openings don't guarantee more jobs. The government said last week that employers failed to add any net jobs in August, the worst month for hiring since September 2010. The unemployment rate stayed for the second straight month at 9.1 percent. There's heavy competition for each job. Nearly 14 million people were out of work in July. So roughly 4.3 unemployed workers were competing for each opening. That's a slight improvement from June, when the ratio was 4.45. In a healthy economy, the ratio is closed to 2 to 1.

BLS: Job Openings "little changed" in July - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in July was 3.2 million, little changed from June. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in July was 1.1 million openings higher than in July 2009 (the most recent trough). The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. In general job openings (yellow) has been trending up - and job openings increased slightly again in July - and are up about 13% year-over-year compared to July 2010.  Overall turnover is increasing too, but remains low. Quits increased slightly in July, and have been trending up - and quits are now up about 9% year-over-year.

Afraid to Quit Work, Even If You Hate the Job - With so much uncertainty about the economy, Americans appear reluctant to quit their jobs, a new Labor Department report shows. Each month the Labor Department releases a number called the “quits rate,” which is the total number of voluntary separations by employees, as a percent of all employment. When the economy is good, the rate tends to be higher, since workers know they have opportunities elsewhere if they don’t like their current jobs.As you might imagine, the quits rate fell drastically during the recession and even during the early part of the recovery. In December 2007, the month the downturn officially started, the quits rate was 2 percent. By January 2010, it had fallen to about half that, at 1.1 percent. The rate has risen slightly since then. As of July, it was 1.5 percent, where it’s been for several months. But that is still well below healthy levels. In case there’s any doubt, the quits rate hasn’t stagnated because employed Americans are happier at their jobs. A recent Gallup survey suggested that, if anything, workers are more dissatisfied with many aspects of their jobs now than they were in August 2008.

Update: Labor Force Participation Rate by Age - Here is a look at some the long term trends (updated graphs through August 2011). The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out this year - the rate increased slightly in August to 74.7%. The participation rate for men has decreased from the high 90s a few decades ago, to 88.7% in August 2011. (up slightly from July). There will probably be some "bounce back" for both men and women (some of the recent decline is probably cyclical), but the long term trend for men is down. The next graph shows that participation rates for several key age groups. There are a few key long term trends:

• The participation rate for the '16 to 19' age group has been falling for some time (red). This was at 34.5% in August.
• The participation rate for the 'over 55' age group has been rising since the mid '90s (purple), although this has stalled out a little recently (perhaps cyclical). This was at 40.2% in August.
• The participation rate for the '20 to 24' age group fell recently too. This appears to have stabilized - although it was down to 70.5% in August, from 71.5% in August 2010.

The third graph shows the participation rate for several over 55 age groups. The red line is the '55 and over' total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA). The participation rate is generally trending up for all older age groups.

Number of the Week: Elevated Unemployment Rate - 8.4%:

Where Okun’s law suggests the unemployment rate should be. Even when you consider the shoddy state of the economy, companies’ have shown a remarkable reluctance to hire, according to a rule of thumb first framed by economist Arthur Okun in the early 1960s. Analyzing data between World War II and 1960, Mr. Okun found that for every percentage point that unemployment fell annually, economic growth increased by three percentage points. His argument (which has some salience today) was that if the government took steps to increase employment, the economy would benefit.The relationship between employment and the economy has changed in the past 50 years, and most economists — including Federal Reserve Chairman Ben Bernanke — frame Okun’s law this way: For every 2% gross domestic product falls below its long-term trend annually (about 2.5% according to current estimates) the unemployment rate increases by one percentage point.

The Chronic Pain Of Jobless Claims - The risk of a new recession is higher, but it’s not obvious that it’s at the tipping point. A number of traditional indicators that have an encouraging history of dispensing early warning signs are still in the growth column, if only slightly. But there’s also a set of deteriorating numbers that counteract the positives, as today’s update on new jobless claims reminds. No wonder that some analysts say there's a 50/50 chance of a downturn. The latest data point is hardly a reason to think otherwise. New filings for unemployment benefits inched higher last week by 2,000 to a seasonally adjusted 414,000. At the very least, we’re stuck in an elevated range, which offers little hope that the labor market will pull out of its slump in the near future. Even worse, there are signs that the trend may be set to rise. The four-week moving average of claims, which is quite volatile on a weekly basis, increased to nearly 415,000 last week, the highest since mid-July.

The Rich Are Raking It in, So Where Are the Jobs? -Once upon a time, Americans celebrated the labor movement on Labor Day. But that was a long while ago, B.R. (Before Reagan). Most Americans have long since ceased viewing life through the prism of the working class. Americans are consumers first and foremost. We like to buy things. Unions, with their insistence on livable wages, pension plans, and health insurance, are an impediment to that desire. They drive up prices. I don't think that there's been a time in my life that unions have had a worse public image. Public unions have been particularly under siege. They've been forced to give ground on benefits, wages, seniority rights, and pension guarantees.  It's a grim joke, then, to speak of Labor Day as a celebration of labor. Fourth of July Lite is more like it. The Great Recession has sliced through American workers like a scythe, cutting them off at the knees. Unemployment is chronic and entrenched, having hovered around 9 percent for more than two years. Foreclosures continue apace and workers who do find jobs are getting them at significantly lower wages than their previous jobs paid. Many are losing their health insurance, and the public schools they send their kids to are being starved for funds by destitute cities and states. Old people, poor people, and young people all have to share the burden of debt reduction. No government function is so sacrosanct as to be spared the knife. Except…

Another cut at the postrecession job picture, Atlanta Fed's macroblog: There is not much to be said about the August employment report released last Friday—or not much good, anyway. The ongoing updates at Calculated Risk provide a chronicle of the questions and challenges that have characterized the postrecession period. An exhaustive set of graphs are spread across several posts, here, here, and here. The last post in the series focused on construction employment specifically and includes this observation, which is based on the addition of 26,000 construction jobs in 2011 through August: "After five consecutive years of job losses for residential construction (and four years for total construction), there will not be a strong increase in residential construction until the excess supply of housing is absorbed." Given the likely pace of turnaround in the housing market, that sounds like a problem. It is not much surprise that employment in the construction sector is, and likely will continue to be, significantly weaker than it was before the recession. Can the same be said of most other sectors? The following chart shows pre- and postrecession, cross-sector average monthly changes in payroll employment, broadly defined according to U.S. Bureau of Labor Statistics' classifications.

Structural, Austrian and PSST Stories - David Altig has a nice chart comparing labor force growth in various industries. Lets give it a look and see what it is telling us. So on the Y axis we have post-recession employment growth. On the X-axis we have employment growth over the mid-nils, the previous episode of expansion. The size of the bubbles represents the number of folks employed in each industry. The bubbles themselves are labeled so you can see which industries we are looking at. The 45-degree line represents points were growth (or decline) in the previous expansion and growth (or decline) since the recession would be equal. Bubbles below the line are industries which are growing slower (or declining faster) now than before. Bubbles which are above the line are industries which are growing faster (or declining slower) now than they were before.

Channeling FDR: The Moral Case Against Unemployment - My last weekend in D.C. provided a final chance to enjoy my favorite haunts. And so I found myself walking amongst the memorialized giants of U.S. history. On I walked, through the FDR Memorial, where I stumbled across the chiseled message below. Sure, I had seen it before. But I had forgotten how beautiful it is. A reminder, if you like, of why we care:  No country, however rich, can afford the waste of its human resources.  Demoralization caused by vast unemployment is our greatest extravagance.  Morally, it is the greatest menace to our social order. I’m sure FDR would acknowledge the usual economic case against unemployment—billions of dollars of lost output and rising fiscal pressure. But I find FDR so persuasive because he advocates an explicitly moral argument, reminding us of the corrosive and demoralizing effects of unemployment.This speech continues beyond the parts that were memorialized, and it is just as important: I stand or fall by my refusal to accept as a necessary condition of our future a permanent army of unemployed. On the contrary, we must make it a national principle that we will not tolerate a large army of unemployed and that we will arrange our national economy to end our present unemployment as soon as we can and then to take wise measures against its return.

What Should Obama Do? - Brad DeLong:...What in most important is not just what Obama proposes on Thursday (because nothing will get done by congress), but rather what he does in the weeks and months afterwards to actually tune the economy so that it creates more jobs. I think Obama should:

1. Apply a full-court press to the Federal Reserve to get it to target nominal GDP to close the spending gap, for it is fear of risk that nobody will spend to buy what you make and confidence that your purchasing power is safe in cash that is holding back businesses from spending money to hire people.
2. Apply a full-court press to the Federal Reserve to get it to engage in more quantitative easing--into taking more risk onto its own balance sheet.
3. Quantitative easing does not have to be done by the Fed: the Treasury can use residual TARP authority to take tail risk onto its own books as well, and should be doing so as much as possible.
4. Expansion does not require that the federal government spend: using Treasury (and Fed!) money to grease the financing of infrastructure and other investments by states would pay enormous dividends.
5. For the Treasury Secretary to announce that a weak dollar is in America's interest right now would not only boost exports, but it would immediately lead to a shift in monetary policy in Europe toward a much more expansionary profile--which would be good for the world.

One Path to Better Jobs - The idea of it may chill a homeowner’s heart, but the wealth supported by urban density is what gives urban homes their great value in the first place.  And when it comes to economic growth and the creation of jobs, the denser the city the better.  How great are the benefits of density? Economists studying cities routinely find that after controlling for other variables, workers in denser places earn higher wages and are more productive. Some studies suggest that doubling density raises productivity by around 6 percent while others peg the impact at up to 28 percent. Some economists have concluded that more than half the variation in output per worker across the United States can be explained by density alone; density explains more of the productivity gap across states than education levels or industry concentrations or tax policies.  Put two workers with similar skill levels in cities of different densities and the one in the denser place will be more productive, according to two decades’ worth of research from economists.

Romney's Jobs Plan - Robert Reich - Mitt Romney unveiled his economic plan today. It is unremarkable, to say the least. He wants to lower corporate taxes and reduce regulations. This, he asserts will create jobs. Remember, corporations are now showing record profits. They’re sitting on $2 trillion of cash. Why it is Romney believes they need more money and lower costs in order to create jobs is one of the wonders of the universe. Romney does nothing for average working people. He’d eliminate capital gains taxes for anyone earning under $200,000 — but these are not average working people. But Romney is not out of his mind. What he offers has been standard Republican fare for decades. In other words, Romney is way too reasonable for the current GOP. 

How many jobs did the governor create? - LAST night, contenders for the Republican nomination for the American presidency gathered to debate. Among the topics covered, the economy received particular attention, and the leading contenders went out of their way to tout their job-creation records. This made for a few moments of cognitive dissonance, as candidates who would normally be first to cast doubt on the ability of government to do anything useful proudly boasted of the means through which they, as state governors, grew the economy. I'm sure it didn't strike most listeners as dissonant, however; we're used to viewing the economy through a prism of executive agency. It's Obama's economy now, we're led to think, and it's up to him to get things moving. As Ed Glaeser writes in today's Boston Globe this is largely false, both at the presidential and state levels. The main force driving state economic outcomes at any given time is the performance of the national economy, and the performance of the national economy is only very loosely connected to action taken by the president. The president could move heaven and earth and it wouldn't much matter for the macroeconomy if the Fed decided to keep policy too tight. And the most capable state governor isn't going to prevent a sharp rise in unemployment when the national economy shrinks by 4%.

On Tinkerbell Policy - There is a strain of thought in American politics which suggests most of our problems could be solved by a good dose of self-esteem. If we only believed in democracy harder. If we believed in capitalism and the possibility of the American worker. If we believed in our children and their teachers.  If we believe in all of these things then they would get better. America would win wars, create jobs and raise the brightest minds of our future. We just need more self-esteem.  There are plenty of writers who can offer a take-down of tinkerbellism and I encourage them to do so. However, as is my wont, I want to be a little more Meta about this. There is an aphorism in business that pessimists are more accurate but optimists get more things done. A favorite professor of mind used to say that we can mock the MBA cheerleading squads all we want but they are the ones driving new Mercedes while we are the ones fixing our own cars.

Going Big - Randall Wray and Stephanie Kelton demonstrate what it would look like to “go big”: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements. The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Private-Sector Employment in Jobless Recoveries - I still think Obama is toast—a result of his own making, since he’s really the apotheosis of a government-hating Republican who never tries to do anything because he’s afraid it would succeed.  He’s basically Jon Huntsman, economic policy and all, with a slightly better social policy—or at least a willingness not to try to compete globally in the 21st century using employment policies that were outdated in the 19th. (Short version: you might be able, in general, to exclude 55% of your potential workforce—women and gay men—if you have the population of an India or a China. You can’t do it when you have 1/3 or less of their population; you need a market that is open to everyone, which means you need social policies to match.) But there are way in which he is a Bad Republican (traditional definition—think Gerald Ford’s Presidency), and those, as much as anything else,are what has destroyed his re-election chances.  Not to mention U.S. employment data. I’d like to think I’m wrong, but let’s look at the data, comparing the last three recessions: the ones with so-called “jobless recoveries.”  In the grand tradition of Mitt Romney, let’s look at job growth over the following 24 months.*  First, the Private Sector:

The Importance of Time Off - Derek Thompson’s article on the importance of vacation cites a number of studies showing that taking short breaks can improve either quality of work or output or both. Even modest amounts of lolcats or cute animals can increase productivity. And anyone who knows anything about software development knows that if you demand more output from people in the same amount of time, you’re going to get lower quality—which means more work in the long run, when you factor in bug fixes and the increased effort required on customer sites. The idea that more time spent “at work” translates linearly into greater value for the employer is just silly, for reasons I go into more in my earlier post.There’s a bigger issue here, too. If working forty hours per week is better than working forty-eight, why is working forty better than working thirty-two? One of the more obvious solutions to the unemployment problem is job-sharing or, more radically, a four-day work week. Various European companies have implemented shorter work weeks (and paid people less), with no productivity losses (I believe—I’m basing this on what people I trust have told me). (There’s the problem of fixed benefit costs, but there must be solutions to that.) I realize that this does nothing for economic growth and GDP. But it would modestly reduce the problem of unemployment-induced poverty, reduce welfare and disability claims on state and federal governments, and allow people to maintain their job skills, which is important for the economy in the long run. And, who knows, maybe it would actually make people more productive.

The Cost of Labor -- The standard model of Economic Development is Romer’s (1989, JPE 1990) adaptation* of Solow’s (1956, 1957) Model.  Basically, Y = AK^α(HL)^(1-α) where the H stands for “human capital,” which multiplies the ability of labor. (Think high-skills labor—construction work, plumbing, teaching—where the worker continually “learns by doing” [op cit., Arrow, 1962]. The additional “human capital” multiples the effect of the labor. One central question is how much of α is attributable to capital and how much is attributable to labor.  Standard Macroeconomics and Economic Development courses teach varying values for α, ranging from around 25% to about 1/3 (33.3%): that is, the mixture is between 3 and 4 parts of Labor to every one part of Capital. How does the compensation go?  Well, not quite that way: The banded area is the estimate of actual allocations of capital and labor. The bars show the compensation to labor (and, therefore, the area above that to 100% are the portion of GDP that is being allocated to capital). Economic theory tells us that if something is receiving excessive rents—as capital is clearly doing in the United States—there is suboptimal growth occurring across the economy.

PRODUCTIVITY AND THE STOCK MARKET - I may have missed it, but the revisions to second quarter productivity did not seem to have been covered very well. But nonfarm productivity growth is slowing sharply. It was actually negative in the first and second quarter ---0.6% and -0.7% in the first and second quarters, respectively -- and the year over year change is now only 0.7% Moreover, productivity lagged two quarters is a great leading-concurrent indicator of real GDP growth. Productivity growth now implies that the second half will be weak. This is in sharp contrast to the still consensus expectations of a stronger second half. With weak productivity growth, unit labor costs is moving up sharply. Moreover, the increase is due almost exclusively to the weak productivity, not rising compensation. Unit labor cost is now rising more faster than the nonfarm deflator. The spread between unit labor cost growth and price growth is a primary determinate of profits growth and it is saying that profits expectations are still too high. The recent stock market volatility -- it's interesting that stock market is only volatile when it is declining, not rising -- appears to stem largely from investors revising their earnings expectation down. Moreover, the productivity data implies that this downward revision is not over.

Looking at Education for Clues on Structural Unemployment - It’s no secret that the recession was hardest on the least-educated Americans. And it’s no surprise that cities with less-educated populations also were disproportionately affected. But a new study from the Brookings Institution looks at the issue from a new angle that might shed light on a debate in economic circles: Whether the U.S. unemployment problem is primarily due to weak demand (the lousy economy) or to fundamental issues that will persist even when the economy improves. The study, by Brookings researchers Jonathan Rothwell and Alan Berube, looks at what they call the “education gap”: the difference between the level of education that employers are looking for, on average, and the level of education that potential workers actually have. Rothwell and Berube used Census and Bureau of Labor Statistics data to calculate the education gap in 366 U.S. metropolitan areas. Perhaps unsurprisingly, cities with wider education gaps tended to have higher levels of unemployment. Madison, Wisc., had the lowest education gap in recent years, and enjoys an unemployment rate of 5.3%, far below the 8.8% unemployment rate in the average metropolitan area.

Labor Day: Few Labor Stories - With the unemployment rate at 9.1% and almost 14 million Americans unemployed, with the alternate measure of unemployment (U-6) at 16.2%, with 6 million workers unemployed for more than 6 months, and with 6.9 million fewer payroll jobs than at the beginning of the 2007 recession, one might think every major publication would lead with a labor story on Labor Day. One would be wrong. A quick glance shows zero labor stories on the front page on the NY Times - or on the Business page. Zero. Zip. Zilch. Nada. LA Times? Same story - no stories. The WSJ? One story, sort of. Infrastructure Likely Part Of Obama Jobs Push. President Barack Obama signaled Monday he'll propose a major infrastructure program and an extension of a payroll tax break in the jobs speech he planned to deliver Thursday before a joint session of Congress. The WaPo? A few opinion pieces. CNBC? You guessed it. Zip.

Private-Sector Employment in Jobless Recoveries - I still think Obama is toast—a result of his own making, since he’s really the apotheosis of a government-hating Republican who never tries to do anything because he’s afraid it would succeed.  He’s basically Jon Huntsman, economic policy and all, with a slightly better social policy—or at least a willingness not to try to compete globally in the 21st century using employment policies that were outdated in the 19th. (Short version: you might be able, in general, to exclude 55% of your potential workforce—women and gay men—if you have the population of an India or a China. You can’t do it when you have 1/3 or less of their population; you need a market that is open to everyone, which means you need social policies to match.) But there are way in which he is a Bad Republican (traditional definition—think Gerald Ford’s Presidency), and those, as much as anything else,are what has destroyed his re-election chances.  Not to mention U.S. employment data. I’d like to think I’m wrong, but let’s look at the data, comparing the last three recessions: the ones with so-called “jobless recoveries.”  In the grand tradition of Mitt Romney, let’s look at job growth over the following 24 months.*  First, the Private Sector:

Public Job Creation - President Obama has signaled a new commitment to combating unemployment, with a major speech planned for later this week. The big question is whether his battle plan will go beyond indirect means of encouraging long-run employment growth (such as tax incentives) to include public job-creation programs that could significantly lower unemployment over the next year. His Republican critics take a “been there, done that, didn’t work” approach to economic stimulus. But President Obama’s stimulus plan, the 2009 American Recovery and Reinvestment Act, relied primarily on tax cuts and increases in aid to the states, shying away from direct federal job-creation efforts that were considered politically risky. (Jared Bernstein, chief economic adviser to Vice President Joseph R. Biden Jr. at the time, provides a clear account of the administration’s rationale). The stimulus helped the economy toward recovery. Increased aid to the states temporarily buffered the impact of state and local budget cuts. But over all, the Obama administration has been characterized by public job elimination rather than creation. The latest estimates of government employment (preliminary estimates for July 2011) show a significant decline since 2008, to about 22 million from about 22.5 million.

The Shrinking Public Sector - Matt Yglesias makes an important observation about the dismal recent labor market statistics: Looks like we had 17,000 thousand new private sector jobs in August, which were 100 percent offset by 17,000 lost jobs in the public sector. The striking zero result should galvanize minds, but it’s worth noting that this has been the trend all year. The public sector has been steadily shrinking. According to the conservative theory of the economy, when the public sector shrinks that should super-charge the private sector. What’s happened in the real world has been that public sector shrinkage has simply been paired with anemic private sector growth. Our graph shows total government employment since January 2007 as well as employment by state and local governments over the same period. Total government employment has actually been declining since the month Barack Obama became President. While Federal employment has risen very slightly on net during this period (it too has been falling of late), employment by state and local governments has declined by 650,000 over this same period. 

Postal Service Is Nearing Default as Losses Mount - The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances. . “If Congress doesn’t act, we will default.”  The post office’s problems stem from one hard reality: it is getting squeezed on both revenue and costs.  As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.  At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.

GAO report backs up Postal Service’s dire warning- The future of the U.S. Postal Service, which traces its roots to the earliest days of the republic, is of insolvency, says a report from the nonpartisan Government Accountability Office.  The Postal Service is facing a net loss of $5.7 billion for just the first nine months of its current fiscal year.  “USPS does not now have — nor does it expect to have — sufficient revenue to cover its costs without legislative changes,” the GAO report says.  GAO has identified key issues needing consideration. These include:

• • USPS proposal to sponsor its own health benefit plan. USPS expects to save costs by increasing employee contribution rates, fully utilizing Medicare benefits, and administering its plan more efficiently. “
• • USPS proposal to seek reimbursement of its $6.9 billion Federal Employees Retirement System surplus. Reimbursing the entire surplus all at once is a risk as the current FERS surplus is an estimate that could change as economic or demographic assumptions change, the GAO says.
• • USPS proposal on workforce optimization USPS expects to reduce costs by closing about 300 mail processing plants and 12,000 retail facilities; reducing service; and eliminating layoff protections in collective bargaining agreements so that it can reduce its total workforce by about 125,000 career employees by 2015.

Whither the Post Office? - The New York Times this weekend had a lengthy article about the woes of the Post Office, which are about to go critical thanks to a combination of recession and the internet: [ ]  Congress has given the Post Office two incompatible mandates.  It is to make money like a business . . . but it is not to have any of the freedom that businesses have to, say, close branch offices, cut its delivery area, or change delivery schedules.  This is, to put it mildly, lunatic. It was kindasorta somewhat sustainable for a while, because Congress sweetened the deal with a very valuable monopoly over the delivery of first class mail--a fact over which conservatives used to complain bitterly.  But now that monopoly is an albatross.  The only people who really need the service are the people who it is incredibly expensive to serve: those in remote areas that are far from stores, and only spottily serviced by UPS, Fedex, and broadband.  So average cost is rising fast, while rates can't.

White House to Propose Plan to Help Postal Service - The Obama administration said on Tuesday that it would seek to save the deficit-plagued Postal Service from an embarrassing default by proposing to give it an extra three months to make a $5.5 billion payment due on Sept. 30 to finance retirees’ future health coverage.  Speaking at a Senate hearing, John Berry, director of the federal Office of Personnel Management, also said the administration would soon put forward a plan to stabilize the postal service, which faces a deficit of nearly $10 billion this fiscal year and had warned that it could run out of money entirely this winter¹.  “We must act quickly to prevent a Postal Service collapse,” said Senator Joseph Lieberman, who is chairman of the Senate Homeland Security and Governmental Affairs Committee, which held the Tuesday hearing on the Postal Service’s financial crisis. Postmaster General Patrick R. Donahoe testified that even with a three-month reprieve on the $5.5 billion payment, the post office was likely to run out of cash and face a shutdown next July or August unless Congress passed legislation that provided a long-term solution for the ailing agency.

How to solve the Post Office’s problems - I like the fact that the NYT splashed Steven Greenhouse’s article on the Post Office’s woes all over its front page yesterday. There’s not much new here, but it’s a huge and important story and the public is far too ignorant of it. “The causes of the crisis are well known,” writes Greenhouse, “and immensely difficult to overcome.” This is true. And the big one — the secular shift from snail mail to email — is not something that Congress can do anything about. But just look at how Congress is tying the Post Office’s hands behind its back here — and not just by forcing it to pay $5.5 billion per year into a retiree healthcare fund.

• The law also prevents the post office from raising postage fees faster than inflation…
• In some countries, post offices double as banks or sell insurance or cellphones. In the United States, the postal service is barred from entering many areas…

It seems to me that a significant part of the problem here lies with Congress and that a massive bout of deregulation could be just the solution that the Post Office is looking for. Congress is micromanaging the Post Office, telling it how much it can raise postage rates, telling it that it can’t offer financial services (despite its huge business in money orders), telling it that it can’t get into all manner of other businesses either and telling it that it has to deliver mail on Saturdays.

What The Media Won’t — Or Can’t — Tell You About The Jobs Crisis - Everyone knows the unemployment rate is painfully high and not falling. Friday's monthly jobs report from the Department of Labor put a cruel point on this fact: In August, job gains in the private sector were entirely offset by job losses in the public sector, netting precisely zero new payrolls for the month. Zero is a striking number in this context, but it's also a bit misleading. For instance, private sector job creation appeared artificially lower than it should have because 45,000 Verizon workers were on strike when the survey was taken. What happened in August has been happening for months, as policy makers allow federal spending to fall and, thus, for government jobs to disappear, placing a significant drag on overall growth. Experts disagree to some extent over the precise measures lawmakers should take to stanch this bleeding -- but overwhelmingly they agree it can be stanched. Their recommendations give the lie to the idea -- pushed by conservatives and adopted by some Democrats -- that government is growing out of control and deficits need to be addressed urgently. And yet nearly all major news outlets ignore, or bury this fact -- indeed, most reports of this month's jobs figures place no emphasis on the contraction of the public sector, and the implications thereof.

Stop bashing government workers - Two thousand and eleven has been one of the toughest years for public workers that I can remember. Every month until this past one, the private sector has added jobs, and every month the public sector has lost them. The last decade has been marked by both peril and possibility, and in all of it there has been no shortage of American heroes. Many, if not the vast majority, worked for the government — as firefighters and police, as teachers and rescue workers. In the aftermath of Sept. 11, 2001, men and women proudly wore hats and shirts labeled “FDNY” and “NYPD.” When we wept for our nation, it was the bravery of the first responders that reminded us of our national character.  In the 10 years since, those and other public workers haven’t been any less heroic or any less essential. But they have been significantly less appreciated, even demonized. “There are a lot of government employees that need to go find a real job,” Rep. Paul Broun (Ga.), a Tea Party favorite, snorted in June. For too many on the right, a government worker isn’t a worker at all.

Obama Labor Day Speech Praises Union Concessions - Yves Smith - Philip Pilkington pointed to this Real News Network video as a companion piece to our post on how executives in the coated paper industry have strip-mined their own companies. If you had any doubts as to who Obama sees as his real constituency, this should settle it.

30 Years Ago Today: The Day the Middle Class Died - From time to time, someone under 30 will ask me, "When did this all begin, America's downward slide?" They say they've heard of a time when working people could raise a family and send the kids to college on just one parent's income (and that college in states like California and New York was almost free). That anyone who wanted a decent paying job could get one. That people only worked five days a week, eight hours a day, got the whole weekend off and had a paid vacation every summer. That many jobs were union jobs, from baggers at the grocery store to the guy painting your house, and this meant that no matter how "lowly" your job was you had guarantees of a pension, occasional raises, health insurance and someone to stick up for you if you were unfairly treated. Young people have heard of this mythical time -- but it was no myth, it was real. And when they ask, "When did this all end?", I say, "It ended on this day: August 5th, 1981." Beginning on this date, 30 years ago, Big Business and the Right Wing decided to "go for it" -- to see if they could actually destroy the middle class so that they could become richer themselves. And they've succeeded. On August 5, 1981, President Ronald Reagan fired every member of the air traffic controllers union (PATCO) who'd defied his order to return to work and declared their union illegal.  It sent a shock wave through workers across the country. If he would do this to the people who were with him, what would he do to us?

Unions continue to take a beating in post-recession climate - The Great Recession and ensuing job crisis continue to take a toll on union membership, according to UCLA's annual report on organized labor. From July 1, 2010, to June 30, 2011, unionization rates remained essentially flat in Los Angeles but fell close to a percentage point in California and tumbled to historic lows nationwide, researchers from the university's Institute for Research on Labor and Employment (IRLE) found. "The trend is bad for unions, it's bad for workers and, because it's a reflection of a jobless recovery, it's bad for the country," said Chris Tilly, director of the IRLE and a professor of urban planning at UCLA's Luskin School of Public Affairs. "The State of the Unions in 2011: A Profile of Union Membership in Los Angeles, California and the Nation," publishes on Labor Day, Sept. 5. The report is based on an analysis of the U.S. Current Population Survey, conducted by the U.S. Bureau of Labor Statistics and the U.S. Census Bureau.

Weak Unions, Weak Economy: Why the Decline of Organized Labor Makes it Harder to Revive Growth -"If we had more freight to haul, we'd be doing more hiring," trucking executive Barbara Windsor explained to President Obama earlier this year. From the small businesses suffering weak sales and a shortfall of customers to the large companies now stockpiling tens of billions in cash the fundamental problem with our economy is the same: a lack of consumer demand means substantial investment and hiring in the U.S. are often irrational from a business perspective. But a closer look at the long-term trends underlying consumer spending power suggests another, less recognized culprit lurking in the weeds: union busting. To understand how a decades-long legacy of union busting is making our recovery harder, consider the role that organized labor has traditionally played in ensuring that working people – who make up most consumers -- receive a larger share of the economy’s gains and thus have money to spend consuming. Unions bargain collectively for better wages and benefits for their members. But unions also raise compensation for workers they don’t represent: a recent study finds that by scaring non-union employers into raising wages to avoid unionization, promoting norms of fair pay, and lobbying for public policies that raise wages, unions substantially boost compensation for non-union employees in addition to their own members.

ILWU Protest Closes Ports of Seattle, Tacoma - The International Longshore and Warehouse Union effectively shut down the ports of Seattle and Tacoma on Thursday as workers joined fellow union members at the Port of Longview to protest the hiring of non-ILWU labor at a new grain terminal Port of Seattle spokesman Peter McGraw said the ILWU workers did not show up for work Thursday morning. IWLU spokesman Craig Merrilees confirmed that longshoremen from Seattle and Tacoma went to Longview to express solidarity with ILWU workers there. The Associated Press reported that longshoremen in Longview overpowered security guards at the terminal, damaged rail cars and dumped grain on the ground. International Longshoremen's Association spokesman Jim McNamara said the East Coat union supports its West Coast brethren's actions.  The ILWU in Longview has been protesting for months the hiring of a non-ILWU contractor to staff the newly-built EGT grain export terminal.. The port authority and the union charge that the ILWU contractually has the right to represent dock workers at the port.

Union Dispute, Turning Violent, Spreads and Idles Ports - The busy ports of Seattle and Tacoma, Wash., were shut down on Thursday as an increasingly violent dispute between unionized port workers and the owner of a grain export terminal in Longview, Wash., spilled over to the other facilities.  About 500 longshoremen stormed the new $200 million terminal in Longview before sunrise Thursday, carrying baseball bats, smashing windows, damaging rail cars and dumping tons of grain from the cars, police and company officials said.  Later in the day, more than 1,000 other longshoremen shut down the ports of Seattle and Tacoma by not coming to work.  Officials with the International Longshore and Warehouse Union, while claiming they had not authorized the actions in Seattle and Tacoma, said the ports would reopen on Friday.  Members of the union are livid that the Longview terminal’s owner, EGT, is seeking to export grain without reaching an agreement with the union. Instead, EGT hired a contractor that uses workers from another union

Unemployed face tough competition: underemployed - The job market is even worse than the 9.1 percent unemployment rate suggests. America's 14 million unemployed aren't competing just with each other. They must also contend with 8.8 million other people not counted as unemployed — part-timers who want full-time work. When consumer demand picks up, companies will likely boost the hours of their part-timers before they add jobs, economists say. It means they have room to expand without hiring. And the unemployed will face another source of competition once the economy improves: Roughly 2.6 million people who aren't counted as unemployed because they've stopped looking for work. Once they start looking again, they'll be classified as unemployed. And the unemployment rate could rise. Intensified competition for jobs means unemployment could exceed its historic norm of 5 percent to 6 percent for several more years. The nonpartisan Congressional Budget Office expects the rate to exceed 8 percent until 2014. The White House predicts it will average 9 percent next year, when President Barack Obama runs for re-election.

Who Lost Work During the Great Recession? - Young people have seen their work hours drop the most during this recession, while the elderly are actually working more than they did before. Using data from the Census Bureau’s Household Survey via the National Bureau of Economic Research, I calculated the average hours worked by age for 2007 (people not working during the week of the survey count as zero hours worked) and then again for 2010. The chart below displays each age group’s percentage change from 2007 to 2010. For example, the chart shows that the average 16-year-old in 2010 worked 40 percent fewer hours than the average 16-year-old did in 2007. We all know that hours worked in 2010 were considerably fewer than they were before the recession began, which the chart shows: most of the age groups have a negative percentage change. But the chart also shows that labor losses lessen with age and are positive for a number of age groups. In percentage terms, work hours fell the most for teenagers, reflecting the high teenage unemployment rate. After the teenagers, work hours fell the most for the age groups 20 to 29. Work-hours losses for groups in their 30s and 40s ranged 5 to 11 percent. Work hours also fell for age groups 50 to 59, but typically less in percentage terms than for the age groups aged less than 50. As I noted a few weeks ago, average work hours actually increased for the oldest age groups.

Dismal summer for teen jobs may scar young Americans (Reuters) - Teenagers hung out on street corners and on the steps of boarded-up buildings in impoverished downtown Newburgh one blisteringly hot August day this year. With the economy still in the doldrums and government summer work programs losing funding, there was little for them to do in this town about 60 miles north of New York City. They were not alone: It was the worst summer on record for U.S. teenagers seeking work, delaying millions of young Americans' entry into the labor force and creating a generation that history suggests may be scarred by the experience. Only a quarter of the 16.7 million Americans between the ages of 16 and 19 had jobs this summer, the fewest since at least World War II and compared with 45 percent in 2000.The numbers are especially bad for black male teens from families who earn less than $40,000 a year: only 12 percent had summer work in June and July, according to Northeastern University's Center for Labor Market Studies.

Putting Part-Time America Into Historical Perspective - Looking back from January 1956 through the data for August 2011, we find that there is a pretty strong correlation between rapid rises in the percentage of individual Americans working part time for economic reasons and the official recession periods as determined by the National Bureau of Economic Research.  Looking at the period following the most recent recession, which ran from December 2007 through June 2009, we find that there has never been such a prolonged period in which part-time employment made up such a large share of the employed portion of the U.S. workforce following the official end of a recession. As such, that continuing high percentage of Americans working part time is a pretty good indication that by this measure, the recession that officially began on December 2007 has never really ended, despite all of President Obama's various attempts at creating jobs and all of the taxpayer money spent with the President's approval to try to stimulate the U.S. economy.

The Greater Recession: America Suffers from a Crisis of Productivity - Poverty is overrated. That was the unmistakable conclusion of a report from the Heritage Foundation released this July.  Most of the 30 million Americans in families making under $21,000 "are not poor in any ordinary sense of the term," the conservative think tank claimed, because they have widespread access to air conditioning, television, and a car. "They are well housed, have an adequate and reasonably steady supply of food, and have met their other basic needs, including medical care," the authors wrote. Critics savaged the survey by pointing out that many families in poverty rent apartments where fridges and air conditioning units come automatically. But the study made an important point: The ubiquity and affordability of consumer technology is an astounding testimony to productivity in the electronics sector.  In fact, eating and clothing ourselves is getting easier all the time. Before the Great Depression, about 35% of family expenditures went to food and threads. Today, we spend only 10% of our income on food and 3% of our income on clothes. Again, this is an achievement of manufacturing and farming efficiency. But there's a dark side behind the advance of productivity: Cheaper goods need cheaper workers.

The Jobs Fairy Doesn’t Live Here Anymore - Grim news, yesterday, to start the Labor Day weekend.  For the first time in sixty-six years, the economy produced no net new jobs.  The unemployment rate remained stalled at 9.1 % – the broader unemployment rate rose to 16.2 % – with Black unemployment at 16.7 % (the highest since 1984) and the jobless rate for Hispanics at 11.3 %. http://www.bls.gov/news.release/empsit.nr0.htm Federal, state and local governments cut back on public sector jobs for the tenth straight month in their relentless drive to balance budgets and reduce deficits.  And, according the the San Francisco Chronicle,  even self-employed Americans lost ground.  After an increase from 15.7 million at the end of 2007 to 16.3 million at the end of 2008, those numbers dropped to 14.7 million by July of this year.   At jobs fairs, lines of jobseekers wind on for blocks. As if it needed saying, the American worker continues in a world of hurt and nothing the Fed, the Gov or the economists do seems to help.  It’s small comfort to him or her to note that the entire global economy seems to be dancing on the head of a pin right now, as manufacturing slows down, again, worldwide. 

Unemployment Benefits’ Effect on Jobless Rate - A new report estimates that the U.S. unemployment rate is 0.6 percentage point higher due to the extension of jobless benefits. The biggest rap on extended unemployment benefits is that they discourage people from going out and finding work. Their skills erode, the government is saddled with higher costs, and the unemployment rate is pushed higher. On the other side of the ledger, they help shore up the economy — the unemployed have money to spend that they otherwise wouldn’t — and it provides a safety-net at a time when the job market is very weak. Predictably, there’s lots of partisan bickering about whether the tradeoff is worth it. Extended benefits may also be distorting job figures in another way. Because they are required to look for work in order to qualify for unemployment, many people are probably counting themselves as in the labor force who would otherwise have dropped out. Federal Reserve economists have looked into this issue, and the rate-setting Federal Open Market Committee talked about it during a meeting last year. In a new analysis, Macroeconomic Advisers estimates that the Labor Department’s tally of the labor force — the sum of people working and unemployed and looking for work — has been boosted by roughly one million as a result of extended benefits.

Deadline looms for millions of unemployed Floridians - Taking their name from the 99-week limit on state and federal unemployment benefits, 99ers made up about 14 percent of the 14.4 million people who were jobless at the end of July, the most recent month for which figures are available, according to the federal Bureau of Labor Statistics. The recession may have officially ended last year, but for Turner and millions of others the dark economic cloud has yet to lift. They rely on unemployment checks, food stamps, Medicaid and other government programs -- programs that are being cut or retooled by state and national leaders. This summer's debt-ceiling deal between Obama and congressional Republicans failed to extend unemployment benefits beyond the end of this year. Come January, millions more people in Florida and beyond could see their benefits dry up, a change that will take billions of dollars out of local economies.

Many feel repercussions of long-term unemployment -  In early July, Baerlin exhausted all 99 weeks of his unemployment benefits. He has been saving every penny he can, canceling doctor appointments and using as little water, lighting, air-conditioning and gasoline as possible. If the 51-year-old doesn't find a job soon, he could lose his house.Welcome to the world of the long-term unemployed, who face a 20 percent drop in earnings over the next two decades, loss of retirement savings, isolation, increased risk for depression and even reduced life expectancy. In Michigan, where unemployment benefits currently last an unprecedented 99 weeks, half a million residents are expected to exhaust these benefits between June 2011 and June 2012, according to the state's Unemployment Insurance Agency. That's on top of the nearly 174,000 who ran out of these benefits from 2008 through the end of May. "This is like nothing we've seen since the Great Depression - by far," said Heidi Shierholz, a labor economist at the Economic Policy Institute, a Washington, D.C., think tank focused on issues important to low- and middle-income workers. She noted that in the early '80s, the long-term jobless made up 26 percent of all unemployed workers. Today, they account for more than 40 percent.

Low income and wellbeing - We seem to work on the basis of a couple of basic assumptions about income, lifestyle, and community in this country that need to be questioned. One group of these clusters around the idea that a high quality of life requires high and rising income. High income is needed for high consumption, and high consumption produces happiness and life satisfaction. Neighborhoods of families with high income are better able to sustain community and civic values. And symmetrically, we assume that it is more or less inevitable that poor communities have low levels of community values and low levels of the experience of life satisfaction. All these assumptions need to be questioned. But here I want to focus on the other end of this set of assumptions: the idea that non-affluent people and communities are necessarily less happy, less satisfied, and less integrated around a set of civic and spiritual values. So here is the central point: people can build lives within the context of low income that are deeply satisfying and rewarding. And communities of low-income people can be highly successful in achieving a substantial degree of civic and spiritual interconnection and mutual support. It doesn't require "affluence" to have a deeply satisfying human life and a thriving community.

The Poor: Still Here, Still Poor - What ever happened to poor people? Even on the left, Cornel West and Tavis Smiley’s Poverty Tour was an exception. Mostly, the talk is of the “middle class”—its stagnant wages, foreclosed houses, maxed-out credit cards and adult kids still living in their childhood bedrooms. The New York Times’s Bob Herbert, the last columnist who covered poverty consistently and with passion, is gone. Among progressive organizations, Rebuild the Dream, a new group co-founded with much fanfare by Van Jones and MoveOn, is typical. It bills its mission as “rebuilding the middle class”—i.e., the “people willing to work hard and play by the rules.” (What are those rules? I always wonder. And do middle-class people really work all that hard compared with a home health aide or a waitress, who cannot get ahead no matter how hard she works and how many rules she plays by?) The ten steps in its “Contract” contain many worthy suggestions—invest in America’s infrastructure, return to fairer tax rates, secure Social Security by lifting the cap on Social Security taxes. There’s nothing wrong with any of this as far as it goes—middle-class people have indeed suffered in the current recession. But let’s not forget that the unemployment rate for white college grads is 4 percent, and every single one of them has been written up in Salon. It’s who’s missing that troubles me: poor people.

Working-age adults make up record share of US poor - Working-age America is the new face of poverty. Counting adults 18-64 who were laid off in the recent recession as well as single twenty-somethings still looking for jobs, the new working-age poor represent nearly 3 out of 5 poor people -- a switch from the early 1970s when children made up the main impoverished group. While much of the shift in poverty is due to demographic changes -- Americans are having fewer children than before -- the now-weakened economy and limited government safety net for workers are heightening the effect. Currently, the ranks of the working-age poor are at the highest level since the 1960s when the war on poverty was launched. When new census figures for 2010 are released next week, analysts expect a continued increase in the overall poverty rate due to persistently high unemployment last year. If that holds true, it will mark the fourth year in a row of increases in the U.S. poverty rate, which now stands at 14.3 percent, or 43.6 million people.

More restaurants are targeting customers who use food stamps - The number of businesses approved to accept food stamps grew by a third from 2005 to 2010, U.S. Department of Agriculture¹ records show, as vendors from convenience and dollar discount stores to gas stations and pharmacies increasingly joined the growing entitlement program.  Now, restaurants, which typically have not participated in the program, are lobbying for a piece of the action. Federal rules generally prohibit food stamp benefits, which are distributed under the USDA⁸'s Supplemental Nutrition Assistance Program (SNAP), from being exchanged for prepared foods. Yet a provision dating to the 1970s allows states to allow restaurants to serve disabled, elderly and homeless people, USDA spokeswoman Jean Daniel⁹ said. Between 2005 and 2010, the number of businesses certified in the SNAP program went from about 156,000 to nearly 209,000, according to USDA data. There is big money at stake. USDA records show food stamp benefits swelled from $28.5 billion to $64.7billion in that period.

Nation’s Jails Struggle With Mentally Ill Prisoners- Three hundred and fifty thousand: That's a conservative estimate for the number of offenders with mental illness confined in America's prisons and jails. More Americans receive mental health treatment in prisons and jails than in hospitals or treatment centers. In fact, the three largest inpatient psychiatric facilities in the country are jails: Los Angeles County Jail, Rikers Island Jail in New York City and Cook County Jail in Illinois. "We have a criminal justice system which has a very clear purpose: You get arrested. We want justice. We try you, and justice hopefully prevails. It was never built to handle people that were very, very ill, at least with mental illness,"  When the government began closing state-run hospitals in the 1980s, people with mental illness had nowhere to turn; many ended up in jail. Judge Leifman saw the problem first-hand decades ago in the courtroom. When individuals suffering from mental illness came before him accused of petty crimes, he didn't have many options.

US states to pay unemployment bills, taxes could rise - U.S. states will start sending more than $1 billion to the federal government in coming weeks for loans used to pay unemployment benefits and some may have to raise business tax bills to cover the charges. The 2009 economic stimulus plan made it easier for states to borrow from the federal government to pay benefits for unemployed workers, easing the strain on their budgets as revenue cratered and high numbers of residents filed for assistance during the recession. In February, President Barack Obama asked Congress to extend the help and delay any impending tax hikes, but Republican resistance and general criticism of the $830 billion stimulus plan muted the possibility of a continuation.

The Incentive to Supply Bad Ideas - The CBPP notices what may be a new trend: Yet another state has proposed raising taxes on low-income residents to pay for new corporate tax breaks. Leading lawmakers in Missouri want to eliminate a property tax credit for low- and moderate-income seniors and people with disabilities in order to help finance new tax credits for businesses. Sadly, swaps like this are increasingly common; both Michigan and Wisconsin have cut low-income programs this year to pay for business tax breaks. The Missouri proposal, which the legislature will consider in a special session that begins today, would make renters ineligible for the state’s property tax “circuitbreaker” credit. Landlords generally pass along a large share of their property taxes to tenants in the form of higher rents; the circuitbreaker credit helps offset those higher rents for more than 100,000 low-income and disabled Missouri residents. ... Some 29 states offer property tax circuitbreakers or similar programs. Killing this tax credit would raise taxes on some of Missouri’s most vulnerable residents by up to $750 a year.

Monday Map: Wages as a Percentage of AGI By County - This week's map comes a day late because of the long Labor Day weekend. We've taken IRS county-level data and used it to show wages and salaries (Form 1040 Line #7) as a percentage of adjusted gross income (Form 1040 Line #37) for each county:

Tough Times in the Second City -THIS Labor Day should be an uncomfortable day for our political leaders, and for comfortable readers of this newspaper, too. Working people are enduring hard times, maybe the hardest in decades. Meanwhile, our national political debate seems utterly out of touch with the economic pain now being endured by millions of precariously employed, under-employed and jobless people across America.  Consider greater Chicago. Forty-five percent of mortgaged single-family homes are underwater, meaning people owe more on their mortgages than their homes are worth. Foreclosure epicenters like the Austin and West Englewood communities are checkerboarded with abandoned and decaying properties, many stripped bare by vandals for scrap. Joblessness among African-Americans exceeds 20 percent — almost 50 percent among black youths.  Numbers don’t fully capture the impact of the downturn. Some of the toughest challenges arise in small suburban localities like Hazel Crest, a short bicycle ride from my house. A destination for Chicagoans hoping to move up the economic ladder, the village of Hazel Crest has been hard hit by unemployment, white flight and the housing crisis.

KJ Flunks the TSE Exam - Did he — Kevin Johnson, ex-NBA star and current mayor of Sacramento — really flunk the test?  Unfortunately, I think he did. USAToday.com records his answers to a series of questions regarding the plans for financing Sacramento’s new arena.  First: We’re going to release a report that shows a menu of options on the public financing side. We looked at 30 different things. We’re narrowing it down to 10 or nine or eight. We’ve done our due diligence with experts looking at it. We’re programming with the Maloofs, the NBA, all the interested parties. Uh, KJ, I thought “the rules” stated that taxpayers come first.  But your answer puts the owners and the NBA befire other “interested parties.” 

Gov. Pat Quinn plans to issue layoff notices to thousands of state workers this week - Gov. Pat Quinn plans to issue layoff notices to thousands of state workers this week as he deals with a budget shortfall he pegs in the hundreds of millions of dollars, a state government source with knowledge of the situation told the Tribune. The governor also intends to announce the closing of several state facilities, including a prison, juvenile detention center and homes for the mentally ill and developmentally disabled, sources confirmed. Without action, Quinn's budget office says, several agencies would run out of money by the spring.Quinn is responding to the Democratic-controlled Legislature's decision at the end of May to dictate this year's budget with little input from his office. The Democratic governor maintains that lawmakers didn't provide enough money to keep the state operating for a full year. Quinn, who asked for $2.2 billion more, already has made partial vetoes to the budget and blocked raises for thousands of state workers, a decision that's being challenged in court by the state's largest government employee union. The union also is expected to fight the pink slips, citing a no-layoff agreement it struck with Quinn last year 

Decrease in federal stimulus money blamed for Iowa closures, layoffs — While Iowa Democrats point to the irony of the state’s job-finding agency issuing pink slips to its own workers, Iowa Workforce Development Director Teresa Wahlert says the move isn’t surprising. “Ironically, when these one-time (federal) funds to stimulate the economy were injected into Iowa’s economy, workforce development hired about 100 people, knowing that those funds were (only for) 12 to 18 months,”  Iowa Workforce Development, or IWD, last week closed 31 part-time field offices intended to help unemployed Iowans find jobs, and Thursday laid off 47 people who worked in those offices. Another five offices will close Oct. 31, leaving another 30 people without jobs. “I think even in the minds of whatever the plan was a couple of years ago, there was an acknowledgment that the funds were short,” . “It was, ‘We’ll deal with that problem when we get there.’ So I don’t think it’s ironic at all, that this is the situation we have.”

Inmate Visits Now Carry Added Cost in Arizona - For the Arizona Department of Corrections, crime has finally started to pay.  New legislation allows the department to impose a $25 fee on adults who wish to visit inmates at any of the 15 prison complexes that house state prisoners. The one-time “background check fee” for visitors, believed to be the first of its kind in the nation, has angered prisoner advocacy groups and family members of inmates, who in many cases already shoulder the expense of traveling long distances to the remote areas where many prisons are located.  David C. Fathi, director of the National Prison Project of the American Civil Liberties Union, called the fee “mind-boggling” and said that while it was ostensibly intended to help the state — the money will be used to repair and maintain the prisons — it could ultimately have a negative effect on public safety.  “We know that one of the best things you can do if you want people to go straight and lead a law-abiding life when they get out of prison is to continue family contact while they’re in prison,” he said. “Talk about penny-wise and pound-foolish.”

Budget woes may worsen for LAUSD schools - While youngsters may be nervous about pop quizzes and making new friends, administrators and educators are anxious out the outlook for the nation's second-largest district.  Superintendent John Deasy was intently watching the stock market and monthly jobs reports this summer - and neither has improved his prognosis for the new school year.  "I am very, very concerned about our budget next year," Deasy said. "There is no room in our budget for any cuts."  When the state budget was approved by the Legislature in July, it seemed to bring good news for schools because it promised no further cuts to education. That financial plan, however, relied on $4 billion in increased state revenues that so far have failed to materialize.

How Florida Schools Are Coping With Budget Cuts - Seminole County could turn classroom thermostats all the way up and athletes may have to pay to wear their school’s uniform. The wife of a Polk County Tea Party congressman led a failed effort to raise money for college counselors whose positions were eliminated. Many students can no longer walk to catch the bus after districts merged stops. School districts have been forced to make painful budget choices as state property values decline and the economy continues to sputter. More than $2.1 billion has been cut from state education spending since 2008, according to the state education department. This year districts are facing an eight percent cut, or $542 per student. Every district has coped differently. Schools have maintained services with the help of one-time federal aid the past two years, and many districts used that time to prepare for the money running out this September.

How many unemployed teachers are there? -- This bit from Bruce Yandle challenges the conventional wisdom: As to hiring teachers, total employment in local government education is already up by one million workers since August 2010. Teacher employment in state government nationwide is up 300,000 workers. The unemployment rate in education and health services at 6.3% is one of the nation’s lowest unemployment rates. While the president implied that teachers were being cut from payrolls at a heavy pace, the data say otherwise. The president’s efforts are seen as misguided if the goal is to ease some of the pain in high unemployment sectors. Here is another source: As Figure 1 shows, state government education employment is up by 2.1 percent since the start of the recession while all other state government employment is down 1.9 percent — a substantially larger decline than in other parts of the state-local sector. State government non-education employment began falling less than a year into the recession, and fell below its pre-recession level about a year and a half after the start of the recession

Realtors should love school spending - In the most recent Wisconsin gubernatorial election, Realtors and homebuilders were the leading campaign contributors to Scott Walker. As governor, Walker has shown hostility toward public education in general and school teachers in particular.  If one were to analyze what ails Wisconsin, public education would not rise to the top of the list, because Wisconsin has among the highest high school graduation rates in the country (or conversely. among the lowest drop-out rates), along with strong SAT and ACT scores.  Milwaukee public schools are another matter, but somehow I do not think the school children of Milwaukee are among the top of Governor Walker's concerns. Beyond all this, however, it puzzles me as to why real estate people would support someone hostile to public education.  There is a very long literature that shows that spending on schools produces higher property values, particularly in the suburbs that are the places where Realtors and homebuilders make most of their money.  Lisa Barrow and Cecilia Rouse:

Our Children and Grandchildren...Austerity: [via] Obama's plan will help to stop this, but will the GOP sign on? Or will they continue to save our children and grandchildren from a burdensome debt by undermining their educational prospects?

In Classroom of Future, Stagnant Scores - In this technology-centric classroom, students are bent over laptops, some blogging or building Facebook pages from the perspective of Shakespeare’s characters. One student compiles a song list from the Internet, picking a tune by the rapper Kanye West to express the emotions of Shakespeare’s lovelorn Silvius.  The class, and the Kyrene School District as a whole, offer what some see as a utopian vision of education’s future. Classrooms are decked out with laptops, big interactive screens and software that drills students on every basic subject. Under a ballot initiative approved in 2005, the district has invested roughly $33 million in such technologies.  The digital push here aims to go far beyond gadgets to transform the very nature of the classroom, turning the teacher into a guide instead of a lecturer, wandering among students who learn at their own pace on Internet-connected devices.  Hope and enthusiasm are soaring here. But not test scores.  Since 2005, scores in reading and math have stagnated in Kyrene, even as statewide scores have risen.

Angst for the educated - MILLIONS of school-leavers in the rich world are about to bid a tearful goodbye to their parents and start a new life at university. Their elders have always told them that education is the best way to equip themselves to thrive in a globalised world. Blue-collar workers will see their jobs offshored and automated, the familiar argument goes. School dropouts will have to cope with a life of cash-strapped insecurity. But the graduate elite will have the world at its feet. There is some evidence to support this view. A recent study from Georgetown University’s Centre on Education and the Workforce argues that “obtaining a post-secondary credential is almost always worth it.” Educational qualifications are tightly correlated with earnings: an American with a professional degree can expect to pocket $3.6m over a lifetime; one with merely a high-school diploma can expect only $1.3m. The gap between more- and less-educated earners may be widening. A study in 2002 found that someone with a bachelor’s degree could expect to earn 75% more over a lifetime than someone with only a high-school diploma. Today the premium is even higher.

A Jobs Program in Need of Reform - The Federal Work-Study Program, created in 1964, provides more than $1 billion in wage subsidies to institutions and reaches more than 750,000 college students each year. For students who are financially eligible, the program covers up to 75 percent of wages for 10 to 15 weekly hours of on-campus employment or, in some cases, for community service work off campus. The college covers the rest. The federal government spends only about half as much on the Work Opportunity Tax Credit, which subsidizes 25 to 40 percent of wages when employers hire workers in one of nine target groups. The longevity of the work-study program program reflects its popularity, and, to some extent, romanticized public conceptions of the student “working his way through college” (see, for example, this 1907 article from The New York Times Magazine). Surveys suggest that students like the program. And it’s obvious why work-study is beloved by institutions: it provides a highly discounted labor pool. But popularity aside, the equity and efficiency of the program are questionable at best.

College students living in the lap of luxury - Nearly every detail at West 27th Place is upmarket, from the fountains, landscaping and custom outdoor light fixtures to the granite countertops and big-screen HD television sets in every unit. There are also televisions in the well-appointed gym, along with a professional-grade Sundazzler — a walk-in tanning booth that resembles a science-fiction movie prop. Making margaritas? The kitchens include ice makers. Revelry can spill over to the billiard room, swimming pool and a hot tub that is supposed to hold five people.  Those who remember college housing as spartan dormitories or crowded cracker-box apartments may be seized with envy — or the urge to give denizens of West 27th Place a sermon on how spoiled they are. Get over it. Students today expect more from their college experience, including all the comforts of Mom and Dad's sumptuous home, according to developers who are rushing to fill the growing demand for deluxe digs. At UC Riverside, the year-old Camino del Sol complex on campus boasts a 24-hour fitness center, billiards, a hot tub, barbecues and a resort-style pool with a sun deck and cabanas. University Gateway, which opened last year just outside USC, is "almost like a youth-oriented luxury hotel," developer Dan Rosenfeld said. "It's a national trend," he said. "There is competition among schools, and USC has to provide a competitively attractive student environment."

Md., Va. retiree systems seen as unsustainable - The pension systems in Maryland and Virginia remain a huge liability for already beleaguered state budgets, and the peril is growing as state officials bank on extremely optimistic investment returns during uncertain economic times to pay off soaring retirement costs. Both states face roughly $17 billion in unfunded pension liabilities and Maryland has wracked up a tab nearly that high in health care commitments for retirees. To make those payments, both states would need to experience at least a half-decade of double-digit investment returns to draw pension funding in line with expectations -- a prospect that analysts dismiss as unrealistic. "We as a state are not sufficiently prepared for the most likely scenarios," said Anirban Basu, president of Sage Policy Group in Baltimore. "Investments have to return better than we expect them to for the Maryland pension system to proceed smoothly." Basu said he was concerned that Maryland, "already one of the most heavily taxed states," would turn to "tax-weary residents" to account for any future losses.

Savers get burned by Fed’s zero interest rate policy - Rock-bottom interest rates shored up banks, turned around the stock market and steadied the economy. They also put 82-year-old Wayne Wagner behind a lawn mower. Wagner, a retired engineer, mows and sprays for weeds at an Independence fourplex he rents out to make ends meet. He bought the property two years ago when the interest rates on his savings dropped so low he couldn’t get by. “I should be fishing more,” Wagner said. Savers of all stripes have had to make other plans since the Federal Reserve embarked on its zero interest rate policy more than two years ago. They have little tolerance for the gyrations of the stock market, choosing instead to save through federally insured bank accounts and government-backed bonds. And that has meant less and less income as rates tumbled. Then, at its early August meeting, the Fed vowed to keep rates this low at least through mid-2013. Two more years of scant income for those who’ve lost work and had to turn to their savings unexpectedly. Two more years of pressure to take on more risk for little reward that can be passed on to the newest generation. Two more years to worry whether gasoline or food prices will finally outstrip fixed incomes in retirement.

Many baby boomers don't plan to leave their children an inheritance - Upending the conventional notion of parents carefully tending their financial estates to be passed down at the reading of their wills, many baby boomers say they instead plan to spend the money on themselves while they're alive. In a survey of millionaire boomers by investment firm U.S. Trust, only 49% said it was important to leave money to their children when they die. The low rate was a big surprise for a company that for decades has advised wealthy people how to leave money to their heirs. Whether to leave an inheritance is a decision increasingly faced by many of the nation's 77 million baby boomers, and it's becoming all the more complicated by the troubled economy. Boomers are caught between the desire to enjoy their long-awaited golden years and the pressure of various financial concerns, such as fear of outliving their savings and the need to help parents, children or siblings who have their own money struggles. Many boomers, who range in age from roughly 47 to 65, simply believe that after years of hard work they can spend their money as they choose, experts say.

Rick Perry’s Social Security Myth - Texas Governor Rick Perry is being rightly criticized for his loony claims about Social Security in last night’s GOP presidential debate. But what troubles me the most is this whopper: “It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you’re paying into a program that’s going to be there. Anybody that’s for the status quo with Social Security today is involved with a monstrous lie to our kids, and it’s not right.” What’s not right is the tired myth that Social Security won’t be there for people 25 or 30 years old. And by perpetuating this alligators- in-the-sewer fable, Perry not only wrecks his own credibility but makes it harder for Congress to fix the program.  Here is the real story of Social Security in one sentence: It is underfunded and badly needs to be modernized but even if Washington does nothing, young people will receive three-quarters of their promised benefits. And last I looked, three-quarters of promised benefits falls somewhat short of a “monstrous lie.” Here is a link to the trustees report from 2007. This year’s isn’t much different.  

What Would Happen if Social Security Disappeared? - Bad things, at least in the near term. As Jackie Calmes of the New York Times points out, the difference between Social Security and a Ponzi scheme is that people who have paid into Social Security will eventually collect their money. If the program ended tomorrow, they wouldn't, and Social Security really would become a Ponzi-like system. The results would be the same as when any massive economic fraud collapses—a calamity. Poverty among retirees would surge. The program represents 41 percent of the income for elderly Americans, and almost all of the personal income for a significant proportion of single retirees. Current workers and employers would see an immediate benefit, in the form of a 6.2 percent increase in income, because the tax that funds Social Security would disappear. But the economy as a whole would suffer for several years. The young are more likely to save and invest. That's good for the economy, but its salutary effects take longer to materialize than the immediate demand that the elderly create, since they spend their money as fast as it comes in.

Driving the point home on health care costs - Over the last couple of years, there’s been plenty of talk — far too much, really — about the nation’s long-term fiscal challenges, and it’s true that it’s a problem that we should deal with responsibly in time. But the talk is often overly broad — what we have is a fiscal challenge related to long-term health care costs specifically, not just long-term debt in general. As Jared Bernstein put it the other day, “As long as health care costs (and, as the population ages, demand for services) continue to spiral up, it’s going to create huge problems.” To drive the point home, take a look at this image the Bipartisan Policy Center published yesterday.  It may be a little tough to see but there are four lines, showing long-term spending, as a percentage of GDP, on health care, Social Security, discretionary spending, and other mandatory spending. That blue line that shows the sharp increase? That’s health care.

Fourth Circuit Denies ObamaCare Challenges - The fourth circuit has ruled against the plaintiff two suits that sought to overturn our new health care law, one brought by the state of Virginia, and the other by Liberty University and two private plaintiffs who argued that the mandate was an unconstitutional infringement on their right not to buy health insurance.  But supporters shouldn't get too excited: the rulings were narrow findings that the plaintiffs lack standing to sue, not exciting broad assertions that the individual mandate is 100% constitutional.  The suits are more interesting for why they were dismissed.  In the Virginia case, the court says that they can't sue because it's an individual mandate; it's not enough that it contravenes Virginia law: Thus, if we were to adopt Virginia's standing theory, eachstate could become a roving constitutional watchdog of sorts; noissue, no matter how generalized or quintessentially political,would fall beyond a state's power to litigate in federal court. The Liberty University case is more interesting still.  These plaintiffs can clearly articulate a direct harm to them, as individuals, from the individual mandate.  So why can't they sue? Because, says the court, the mandate is a tax.  And you cannot pre-litigate taxes; you have to pay them first, and then sue, thanks to the Anti-Injunction Act. 

Sometime the WSJ makes it too easy - It’s Texas and Health Care. Let’s wade right in: The attempt to dismiss the Texas jobs record seems to have abated, at least for now, but the episode shouldn’t pass without mentioning the other great liberal theme: More than a quarter of the Lone Star State’s people lack health insurance, and supposedly this is proof that Governor Rick Perry hates the poor, as well as vindicating President Obama’s health-care plan. Um, no. Please go back and read any of the pieces I’ve written about Texas and health care. At no time, do I claim – nor do I believe – that Gov. Perry hates the poor. I believe the the policies of his administration have done a terrible job of covering the uninsured and improving the health care system, but that’s not the same thing.  On top of Democratic criticism, we wouldn’t be surprised if Mitt Romney uses the issue to attack Mr. Perry as the former Massachusetts Governor fights for the GOP Presidential nod. The contrasts are instructive, but the factoid that 26.3% of Texans under age 65 are uninsured—compared to the national rate of 17.2%—could use a little scrutiny. “Factoid“? That implies it’s false. Is that the stance of the WSJ? Which is it, WSJ? Are you calling the census a liar?

Your Money or Your Life--Health Care In the US - Linda Beale - Thoughtful people should be asking why the U.S.'s health care costs are so exorbitantly high compared to every other developed nation.  Our health care costs are higher and more people in the US have indecent health care.  That means something is pretty badly wrong with our system of health care provision.  Many on the left have argued that what is wrong is that we need to treat health care as a public utility and regulate the pay of doctors (they are currently paid too much) and the role of private insurers (they currently play much too central a role in deciding who gets what care, and they add their profit-taking onto the problems of the health care system) and the role of for-profit and not-for-profit hospitals (the one charges too much, and the other operates with a public subsidy without providing much of a public benefit to compensate).

What A Toothache Says About National Healthcare - Last week, this story about a man dying of a tooth infection spread across liberal blogs who used it as evidence of the failure of the US health care system.  Conservative bloggers quickly pointed out that this made no sense: emergency room doctors had given the man a prescription for painkillers and antibiotics, and he had chosen to fill the prescription for painkillers.  Though you can't really tell from the story, he may have thought that the painkillers had been enough--as I understand it, once a tooth infection has killed the root, the pain may stop.  Then the infection spread to his brain, and he died.  Matt Yglesias argues that while he may have made bad choices, you shouldn't have to choose. And while I personally know enough to know that the antibiotics will make the pain stop almost as quickly as the painkillers, having had a terrible dental infection myself, I'm not exactly surprised that he chose the thing that made the pain stop.

Dollars for Docs - Drug companies have long kept secret details of the payments they make to doctors and other health professionals for promoting their drugs. But 12 companies have begun publicizing the information, some because of legal settlements. ProPublica pulled their disclosures into a database so patients can search for their doctor. Accepting payments isn’t necessarily wrong, but it can raise ethical issues. Read more about the data »  An update of ProPublica’s Dollars for Docs database includes more than $760 million in payments from 12 pharmaceutical companies to physicians and other health-care providers for consulting, speaking, research and expenses.   Click on a state name to see the disclosed payments made to healthcare practitioners there. Notes: Allergan is not included in the state or national totals because it reports payments in ranges. Also, Valeant did not report payments in the fourth quarter of 2010

Scrambling for cancer drugs - Ellen McCarthy was scheduled to receive her monthly dose of an ovarian cancer drug at Massachusetts General Hospital last month when she got distressing news: The hospital had run out.. The 60-year-old retiree drove to Mount Kisco, N.Y., received the intravenous treatment, then headed back - a 10-hour round trip. Drug shortages have been on the rise in recent years, affecting everything from antibiotics to anesthesia drugs, for reasons that range from manufacturing problems to companies discontinuing a medication. But shortages are particularly harrowing with cancer drugs, when time is of the essence and substitutes aren’t always available. More than a dozen cancer drugs are now in short supply, according to the US Food and Drug Administration, creating a situation that doctors at local hospitals say is unprecedented, and worsening. A drug used to treat testicular cancer is scarce; earlier this year, a leukemia drug was affected. And some of the drugs used to treat pediatric cancers, many of which are curable, are in short supply. “To not have these drugs available is unconscionable; we literally cannot treat cancers we know are not just treatable but curable,’’

Anthem Requests 12.9 Percent Increase; No Public Hearing Is Required - The last time the state denied its request to increase insurance rates nearly 20 percent, but this year Anthem Blue Cross and Blue Shield, is asking for a much lower increase of 12.9 percent. The state’s largest insurer submitted its 12.9 percent request to hike premiums for more than half, or about 25,000, of its individual health insurance customers on Aug. 31. In its filing with the Insurance Department it said it needs to increase premiums because of increasing claims, state and federal mandates, and increased utilization of services. “Anthem does not want the cost of health care coverage to continue to increase,“ the company said in a statement. “Unfortunately the use of various high cost services including hospital care, new technologies, other expensive diagnostic services, and prescription drugs are increasing – and we owe it to our members to cover those costs and ensure access to a broad network of providers.” Since the rate request doesn’t exceed 15 percent it doesn’t trigger an automatic public hearing and it’s unclear if one will be scheduled.

The Diaper Rash Economic Indicator - American parents spend $1,500 per baby on diapering each year, changing a diaper 6.3 times in a day, according to Procter & Gamble. In a recession, unfortunately, diapering is one of the first costs that households cut. Diaper rationing is showing up in rising sales of diaper rash cream -- even in a period when the baby population decreased. Ad Age has more: The number of babies ages 2 and under in the U.S. fell about 3% to 8.1 million last year, based on data from the U.S. Centers for Disease Control, which tracks the number of live births. Yet SymphonyIRI data show unit sales of disposable diapers fell 9% in the 52 weeks ended Aug. 7, three times as fast as the population of infants. At the same time, unit sales of baby ointments and creams rose 2.8%, despite fewer babies. Diaper rash doesn't rise to the level of concern that the CDC tracks cases, so sales of diaper-rash cream are one of the better barometers for tracking its frequency. And the trend of diaper-ointment sales rising even as diaper sales decline has been going on since 2009, according to SymphonyIRI data from Deutsche Bank. The disconnect between fewer diapers and more rash cream has intensified in the past year

U.S. measures to reduce teenage smoking deemed WTO violation - U.S. measures to reduce teenage smoking violate World Trade Organization (WTO) rules, according to a panel ruling released late last week. Indonesia successfully argued that the U.S. Family Smoking Prevention and Tobacco Control Act (FSPTCA) of 2009 violated WTO rules. The ruling opens the door to more teenage tobacco addiction, while further imperiling the legitimacy of a WTO that rules against environmental, health and other national policies 90 percent of the time. The FSPTCA took a series of unprecedented and bold measures to combat teenage smoking, including the banning of many forms of flavored cigarettes. There is substantial evidence that tobacco companies produce and market these cigarettes as "starter" or "trainer" cigarettes in order to hook teenagers into a lifetime of nicotine addiction.

Exclusive: Smoked out: tobacco giant’s war on science - Philip Morris International is seeking to force a British university to reveal full details of its research involving confidential interviews with thousands of children aged between 11 and 16 about their attitudes towards smoking and cigarette packaging. The demands from the tobacco company, made using the UK's Freedom of Information law, have coincided with an internet hate campaign targeted at university researchers involved in smoking studies.  One of the academics has received anonymous abusive phone calls at her home at night. She believes they are prompted by an organised campaign by the tobacco industry to discredit her work, although there is no evidence that the cigarette companies are directly responsible. Philip Morris says it has a "legitimate interest" in the information, but researchers at Stirling University say that handing over highly sensitive data would be a gross breach of confidence that could jeopardise future studies. 

Tick-borne parasite infecting blood supply: CDC (Reuters) - A tick-borne infection known as Babesiosis, which can cause severe disease and even death, is becoming a growing threat to the U.S. blood supply, government researchers said on Monday. There are currently no diagnostic tests approved by the U.S. Food and Drug Administration that can detect the infection before people donate blood. A 31-year study by the Centers for Disease Control and Prevention now suggests the parasitic infection may be increasing. Babesia infections are marked by anemia, fever, chills and fatigue, but they can also cause organ failure and death. The still rare disease is known to occur in seven U.S. states in the Northeast and Upper Midwest in the spring and summer.But a study led by Dr. Barbara Herwaldt of the CDC, published in the Annals of Internal Medicine, found cases had occurred year-round and in states where Babesia parasites are not found -- including as far away as Texas and Florida.

Roasted crickets and toasted ants – coming to you courtesy of EU research millions - Telegraph: Fancy some scorpion soup? How about a mixed locust salad with bee crème brûlée for dessert? It may not sound like the most appetising of prospects but the European Union thinks all these could soon be on the menu. Experts in Brussels believe insects and other creepy crawlies could be a vital source of nutrition which will not only solve food shortages but also help save the environment. They have launched a three million euro (£2.65 million) project to promote the eating of insects while also asking national watchdogs like the UK's Food Standards Agency to investigate the issue. Proponents of entomophagy – insect eating – argue that bugs are a low-cholesterol, low-fat protein food source.

Monsanto Denies Superinsect Science - As the summer growing season draws to a close, 2011 is emerging as the year of the superinsect—the year pests officially developed resistance to Monsanto's genetically engineered (ostensibly) bug-killing corn. While the revelation has given rise to alarming headlines, neither Monsanto nor the EPA, which regulates pesticides and pesticide-infused crops, can credibly claim surprise. Scientists have been warning that the EPA's rules for planting the crop were too lax to prevent resistance since before the agency approved the crop in 2003. And in 2008, research funded by Monsanto itself showed that resistance was an obvious danger. And now those unheeded warnings are proving prescient. In late July, as I reported recently, scientists in Iowa documented the existence of corn rootworms (a ravenous pest that attacks the roots of corn plants) that can happily devour corn plants that were genetically tweaked specifically to kill them. Monsanto's corn, engineered to express a toxic gene from a bacterial insecticide called Bt, now accounts for 65 percent of the corn planted in the US.

GM Feed Toxic, New Meta-Analysis Confirms - A meta-analysis on 19 studies confirms kidney and liver toxicity in rats and mice fed on GM soybean and maize, representing more than 80 percent of all commercially available GM food; it also exposes gross inadequacies of current risk assessment. A team of independent scientists led by Gilles-Eric Séralini at Caen University in France carried out a meta-analysis combining the results of 19 previous studies [1], and their report concluded: “From the regulatory tests performed today, it is unacceptable to submit 500 million Europeans and several billions of consumers worldwide to the new pesticide GM-derived foods or feed, this being done without more controls (if any) than the only 3-month-long toxicological tests and using only one mammalian species, especially since there is growing evidence of concern.”

EU Court rules on GMO contamination; opens door to biotech liability - On Sept. 6, the European Union’s top court paved the way for farmers and beekeepers to recoup losses when their crops or honey become genetically contaminated from neighboring GM fields. The European Court of Justice ruled that all food products containing GMOs – whether intentional or not – must undergo an approval process. This marks a much stricter view than that being pushed by European Union Commissioner for health and consumer affairs, John Dalli,  who wants no regulation of foods genetically contaminated “by accident,” a ludicrous idea given that coexistence ensures genetic contamination. At the center of the dispute is Bavarian beekeeper Karl Heinz Bablok who joined with several others in suing the state when its research plots of Monsanto’s GM corn, MON 810, contaminated his honey. Discussing today’s ruling, attorneys for the beekeepers noted that they may now have “a claim for damages against a farmer if MON 810 pollen from his cultivation gets into their honey.”

World Food Prices to Remain Elevated After Drop in August on Cooking Oils - World food prices probably will stay at historically high levels this year on a lack of stockpiles after falling in August on lower costs for cooking oils and dairy products, the United Nations said. An index of 55 food commodities fell to 231.1 in August from 231.9 in July, the UN’s Rome-based Food and Agriculture Organization said in a report on its website today. The gauge has slipped 2.8 percent from a record 237.7 in February, while remaining higher than at any time in previous years. “You’ll have these high prices continuing,” Abdolreza Abbassian, a senior economist at the FAO, said by phone. “Certainly for the countries that import food, the kind of food inflation they’ve experienced so far is not really going to diminish with our food index dropping 1 or 2 points.” The cost of living is rising across the world. U.S. consumer prices advanced 0.5 percent in July as food and energy costs rose. In Uganda, where protests erupted in April over rising living expenses, July inflation was almost 19 percent, the fastest pace in 18 years on surging food prices. 

India’s Food Inflation Stays Above 9% for a Fifth Straight Week -- India’s food inflation rate stayed above 9 percent for a fifth straight week, maintaining pressure on the central bank to raise interest rates. An index measuring wholesale prices of farm products including rice and wheat rose 9.55 percent in the week ended Aug. 27 from a year earlier, the commerce ministry said in an e- mailed statement in New Delhi today. It gained 10.05 percent the previous week. Reserve Bank of India Governor Duvvuri Subbarao has to weigh the risks to economic growth posed by Europe’s sovereign- debt crisis and a faltering recovery in the U.S. when he announces the next rate decision on Sept. 16. Higher food costs have contributed in keeping India’s benchmark wholesale-price inflation at more than 9 percent since the start of December. “The RBI will raise rates next week and then pause to assess the impact of its rate increases so far,” said N.R. Bhanumurthy, a New Delhi-based economist at the National Institute of Public Finance and Policy.

India may double corn yields in next decade - India, Asia's second-largest corn grower, could double its corn yields over the next decade, according to reports. India's corn acreage currently ranks fifth highest in the world at more than 8 million hectares, though the country's yields are among the lowest, ranging from 1 to 4.5 metric tons per hectare. But according to the Associated Chamber of Commerce and Industry of India, the country could consume 30 million metric tons of corn by 2020, more than 50% claimed by the poultry industry. "There is tremendous room for improvement and given the focus on the crop, yields could go up 6 to 8 (metric tons per hectare) in the next 10 years,"  About half of India's corn area uses traditional cultivation methods, which produce only about 1 metric ton per hectare. The remaining area, which uses high-yield seeds, yields about 4.5 metric tons per hectare from winter-sown crop and between 2.5 and 3 metric tons per hectare from summer-sown crop, said Grewal. "So one-fourth of the corn area in India is supplying one-half of the total production...[that] shows you that Indian small farmers are adopting technologies very quickly.

The mechanization of India’s farms -Rohtash Mal, president of India’s Tractor Manufacturers Association, said the huge growth in sales is happening at every horsepower size – big farms are mechanizing, but, in a feature unique to the Indian market, the smallest ones are too. Meanwhile, Mr. Mal noted, retail finance has penetrated even the most rural parts of India over the Past three years, making mechanization a possibility for even owners of the smallest plots. The bulk of India’s farming is going to continue to be done on very small farms, he noted, as the politically and socially complex process of reforming land acquisition will take decades. And the owners of those farms are unlikely ever to buy their own implements, even if cheaper domestically-made ones enter the market. Currently, a combine sells for between $25,000 and $45,000 here.

Extremes of the Weather: Summer 2011 in the U.S.  Are we all thinking it but afraid to ask? What if? What if the extreme weather events of this year continue and accelerate in frequency as each new year unfolds? A growing number of climate scientists have predicted that changes will happen more rapidly than earlier models suggested. Weather determines agricultural production. Period. As of now, expectations are that our corn yields, which allowed for no room for error, will be down due to weather. It is expected that soybean yields will be reduced due to weather. Cotton yields will be reduced due to weather. Wheat projections for 2012 look ominous because fall planting prospects are dim in winter wheat drought regions. Livestock numbers have been culled due to weather. According to the Financial Times, the Texas drought has cost its agriculture sector $5.2 billion. Or, perhaps it was just "our turn" after the last couple of seasons brought more disasters to other global regions.

La Nina returns, bringing more severe weather: US - Experts at the National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center upgraded last month's La Nina Watch to a La Nina Advisory, the agency said in a statement. The back-to-back emergence of the trend -- which causes cooler than average temperatures in the Pacific Ocean -- is not unheard of and happens about half the time, NOAA said. "La Nina, which contributed to extreme weather around the globe during the first half of 2011, has re-emerged in the tropical Pacific Ocean and is forecast to gradually strengthen and continue into winter," it said. The June 2010 to May 2011 La Nina "contributed to record winter snowfall, spring flooding and drought across the United States, as well as other extreme weather events throughout the world, such as heavy rain in Australia and an extremely dry equatorial eastern Africa."

The God Clause and the Reinsurance Industry - Consumers don’t tend to know what reinsurance is because it never touches them directly. Reinsurers make their living thinking about the things that almost never happen and are devastating when they do. But even reinsurers can be surprised. And the insurers who make up their market put them on the hook for everything, for all the risks that stretch the limits of imagination. This is what the industry casually refers to as the “God clause”: Reinsurers are ultimately responsible for every new thing that God can come up with. As losses grew this decade, year by year, reinsurers have been working to figure out what they can do to make the God clause smaller, to reduce their exposure. They have billions of dollars at stake. They are very good at thinking about the world to come. Lloyd’s, the London-based company that invented the modern profession of insurance, publishes a yearly list of what it calls “Realistic Disaster Scenarios.” The list imagines such events as two consecutive Atlantic seaboard windstorms or an earthquake at the New Madrid fault in the Mississippi Valley, either of which could strain or break an insurer’s balance sheet. By 2001, Lloyd’s had already envisioned two airliners colliding over a city, launching claims on hull insurance for the planes, property insurance and workman’s comp on the ground, and life insurance everywhere. But even Lloyd’s lacked the imagination to anticipate September 11. “People find it hard to believe in a risk unless they can see it in their mind,” . “When you try and describe a risk like this—some terrorists are going to teach themselves how to fly a plane, they will fly into property, the buildings will be weakened—by the time you get to your third point, peoples’ eyes are glazing over.”

Texas cut fire department funding by 75 percent this year…Under Gov. Rick Perry (R) this year, Texas slashed state funding for the volunteer fire departments that protect most of the state from wildfires like the ones that have recently destroyed more than 700 homes. Volunteer departments that were already facing financial strain were slated to have their funding cut from $30 million to $7 million, according to KVUE. The majority of Texas is protected by volunteer fire departments. There are 879 volunteer fire departments in Texas and only 114 paid fire departments. Another 187 departments are a combination of volunteer and paid.  For that reason, aid from the Federal Emergency Management Agency (FEMA) could be more important than ever to the state where wildfires have recently been raging. At a press conference Monday, Perry promised to seek federal disaster relief and said that FEMA would be in the state by Wednesday

As wildfires rage, Texas Forest Service grapples with funding cuts -  As the Texas Forest Service battles what may be the state's most destructive wildfire outbreak ever, state lawmakers are facing criticism that they have has taken a penny-wise-pound-foolish approach to funding the agency. Texas is one of the few states that rely primarily on volunteer fire departments to protect rural areas from wildfires. About 330 firefighters with the forest service traditionally serve as a second tier of defense when such fires get larger than the local department can handle. The Legislature cut the agency's funding this year to $83 million from $117 million, according to Robby DeWitt, the forest service's associate finance director. Chris Barron, executive director of the State Firemen's and Fire Marshals' Association of Texas, said: "It's very frustrating that they don't have the proper tools and resources to fight these fires. If fire departments had enough funding, if the forest service had enough funding, we wouldn't be in this predicament over each and every year." The issue is drawing more attention in part because of the sheer scope of the Central Texas wildfire, which has destroyed more than 1,500 homes and killed at least two people. There's also a new political component as critics charge that the budget cuts are proof that the fiscal restraint Gov. Rick Perry is touting on the presidential campaign trail comes at a price.

Somalia famine 'may kill 750,000' - As many as 750,000 people could die as Somalia's drought worsens in the coming months, the UN has warned, declaring a famine in a new area. The UN says tens of thousands of people have died after what is said to be East Africa's worst drought for 60 years. Bay becomes the sixth area to be officially declared a famine zone - mostly in parts of southern Somalia controlled by the Islamist al-Shabab. Some 12 million people across the region need food aid, the UN says. The situation in the Bay region was worse than anything previously recorded, said senior UN's technical adviser Grainne Moloney "The rate of malnutrition [among children] in Bay region is 58%. This is a record rate of acute malnutrition," she told journalists in the Kenyan capital, Nairobi.

Eritrea’s secret famine crisis – ‘They are being left to starve’ - There is reportedly growing evidence that Eritrea, like other countries in the horn of Africa, is suffering famine despite government's claims that the population has the food it needs. Over 12 million people are said to be affected by drought and famine-the worst in the region in 60 years. Eritrea claims it is not one of the affected countries in the region.  Eritrea, with no free press and no opposition, has made it difficult for its claims of food sufficiency to be verified.  Testimonies however suggest the east African country is hiding a glaring case of a drought and famine-hit nation.  The BBC reports that malnourished Eritreans, with tales of failed crops and homes without food, are crossing the heavily militarized border at the rate of 900 a month, according to journalists in the region. ''This year I farmed, but there was lack of rain. I don't know what's going to happen, only God know,'' ''There is no food and no grain in the home,''

Elephants and livestock battle for water in East Africa - As the Horn of Africa suffers its worst drought for 60 years, there are reports of growing conflict between people and wildlife over the region's limited resources. Conservationists say that in Kenya livestock herders and their animals are encroaching on water sources in protected areas, which is having a potentially devastating impact on the wildlife there -- particularly elephants. With the region getting hotter and dryer the battle for water is going to become even more of a problem in the future,

Biofuel vs. Food - In “Can the World Still Feed Itself?” WSJ’s Brian Carney touches on a subject that I’ve been calling attention to for years: the Western fetish for turning cheap, efficient food into expensive, inefficient fuel. “Politicians,” Mr. Brabeck-Letmathe says, “do not understand that between the food market and the energy market, there is a close link.” That link is the calorie. The energy stored in a bushel of corn can fuel a car or feed a person. And increasingly, thanks to ethanol mandates and subsidies in the U.S. and biofuel incentives in Europe, crops formerly grown for food or livestock feed are being grown for fuel. The U.S. Department of Agriculture’s most recent estimate predicts that this year, for the first time, American farmers will harvest more corn for ethanol than for feed. In Europe some 50% of the rapeseed crop is going into biofuel production, according to Mr. Brabeck-Letmathe, while “world-wide about 18% of sugar is being used for biofuel today.”

Year-to-date Ethanol Exports in 2011 are Already More than the Combined Total of 2009 and 2010 Exports - From Renewable Fuels Association: "Unprecedented U.S. ethanol exports continue to be driven by the fact that corn ethanol is currently the lowest-cost motor fuel source in the world."

• Top destinations: Canada, Brazil, and European Union.
• Through July 2011, we've exported roughly 7.5% of our total ethanol output.
• Year-to-date DDGS exports total 4.43 million metric tons, meaning the U.S. is on pace to export roughly 7.6 million metric tons in 2011.

Also, today, RFA has sponsored a Politico Ad lobbying Obama on job creation coming from the ethanol program.

Commodities Look Set to Rocket Higher - I've been asked to comment on the work of a few noted deflationists who are calling for a top in commodity prices here. Their argument is pretty clear cut: Because inflation is a function of available money plus credit (their definition), and because credit has fallen, deflation is what comes next. When looking about for things to deflate in price, commodities are an obvious candidate for attention because they have risen so much over the past decade. In this view, three things have to be true:

1. Demand for commodities has to fall below supply. After all, as long as demand exceeds supply, prices will typically rise.
2. Money, including credit that would normally be used to buy commodities, has to shrink. That's the definition of deflation that we're analyzing here.
3. People's preference for money has to be greater than their preference for 'things,' with commodities being very obvious 'things.' That is, faith in money has to be there or people will prefer to store their wealth elsewhere.

There are several reasons why I think there are serious holes in each of these conditions. Enough to warrant a healthy degree of caution in one's certainty about what 'must' happen next to commodity prices.

Need Rain? Try Lasers - On the banks of the Rhone River in 2009 and 2010, Swiss researchers fired ultrashort pulses of a powerful mobile laser into the sky 28 different times. The laser shots created nanometer-sized particles in the air. These particles then allowed water molecules to bind together, forming droplets and avoiding re-evaporation.  The researchers reported their results in the online journal Nature Communications. The droplets were too small to fall as rain, perhaps because the laser just wasn't strong enough or did not hit enough material in the sky. But the scientists note that their  technique might also be used to prevent rain, by creating more of the smaller water droplets that stay airborne. And the laser system apparently works in temperatures ranging from 2 degrees Celsius up to 36 degrees C, though the laser bursts become less effective as it gets warmer. Of course, this finding is preliminary. But, given crippling drought in Texas and catastrophic rains in Vermont, controlling the weather--especially rain--remains an attractive prospect for a  laser light show.

A Debate Arises on Job Creation and Environment -Do environmental regulations kill jobs? Republicans and business groups say yes, arguing that environmental protection is simply too expensive for a battered economy. They were quick to claim victory Friday after the  Obama administration abandoned stricter ozone pollution standards. Many economists agree that regulation comes with undeniable costs that can affect workers. Factories may close because of the high cost of cleanup, or owners may relocate to countries with weaker regulations. But many experts say that the effects should be assessed through a nuanced tally of costs and benefits that takes into account both economic and societal factors. Some argue that the costs can be offset as companies develop cheaper ways to clean up pollutants, and others say that regulation is often blamed for job losses that occur for different reasons, like a stagnant economy. As companies develop new technologies to cope with regulatory requirements, some new jobs are created. What’s more, some economists say, previous regulations, like the various amendments to the Clean Air Act, have resulted in far lower costs and job losses than industrial executives initially feared.

Environmental Regulation and Jobs - The short answer is that it’s the wrong question.  Now for the longer answer. The main tradeoff with regulation is output, not employment.  If you increase the cost of making something, you need more people to make the same amount, or you need people to make something else instead, something you wouldn’t have wanted to make without the regulation.  That’s why economists who study regulations measure their impacts on productivity and output, not jobs.  But the topic is jobs, so let’s consider it. There are three potential sources of unemployment in an economy, the level of aggregate demand, the trade balance and structural mismatch.  Let’s look at each.

Obama to Breathers: Sorry, Wait Until 2013 - On Friday, in a move that shocked enviros and public-health advocates, President Obama asked the Environmental Protection Agency to withdraw its proposal to tighten a key air-quality standard. The request, Obama said, is part of the administration's efforts to reduce "regulatory burdens and regulatory uncertainty." The EPA has been at work on new rules on ozone pollution, better known as smog, since September 2009. The agency rolled out new, tougher draft standards in January 2010, only to have the release of the final rules repeatedly delayed. In a statement, Obama said he has asked the agency to wait until 2013—you know, after the next election—to improve the standard. According to the American Lung Association, the weaker standard means that as many as 186 million Americans are currently breathing in unhealthy levels of smog. The EPA's own figures are even more shocking. If the Obama administration set the lower standard of 60 parts per billion, it would prevent 4,000 to 12,000 premature deaths a year by 2020. Even the higher standard of 70 parts per billion would save between 1,500 and 4,300 lives per year. Improved air quality would bring down the number of deaths and hospitalizations every year due to asthma, bronchitis, and other heart and lung conditions.

Al Gore: Obama is Listening to Big Polluters Instead of Science - On his blog, former Vice President Al Gore harshly criticized President Obama’s recent decision to shelve the EPA’s new ozone regulations. From Al Gore: On Friday afternoon President Obama ordered the EPA to abandon its pursuit of new curbs on emissions that worsens disease-causing smog in US cities. Earlier this year, the EPA’s administrator, Lisa Jackson, wrote that the levels of pollution now permitted — put in place by the Bush-Cheney administration– are “not legally defensible.” Those very same rules have now been embraced by the Obama White House. Instead of relying on science, President Obama appears to have bowed to pressure from polluters who did not want to bear the cost of implementing new restrictions on their harmful pollution—even though economists have shown that the US economy would benefit from the job creating investments associated with implementing the new technology. The result of the White House’s action will be increased medical bills for seniors with lung disease, more children developing asthma, and the continued degradation of our air quality.

Fox host on EPA: ‘Stick a fork in it. It’s done’ - In the aftermath of President Obama overruling the EPA’s anti-smog regulations, Fox Business Channel host John Stossel thinks the federal agency’s services aren’t required anymore. “Thank goodness for the EPA,” Stossel said. “The air and water are cleaner than they use to be. But they passed those rules. It’s diminishing returns. They have done a wonderful job, stop already. Stick a fork in it, it’s done.”  Watch: Video from Fox News, which appeared on September 2, 2011

Rick Perry: The EPA ‘Won’t Know What Hit ‘Em’ - Speaking at a campaign stop in his home state yesterday, Texas Governor and Republican Presidential Candidate Rick Perry announced his intentions to make the Environmental Protection Agency unapologetically pro-pollution. His remarks were reported by the Houston Chronicle:“I’ll tell you one thing: The EPA officials we have an opportunity to put in place, they’re going to be pro-business, and there’s not going to be any apologies to anybody about it,” he said. “Those agencies won’t know what hit ‘em.” It’s not hard to see why Perry would want environmental regulations to be crafted by polluters, considering that he’s taken $11 million from the oil and gas industry since 1998. Meanwhile, Perry has stepped up his attacks on climate science by falsely claiming that researchers manipulated data for money.

Obama speech pushes back against GOP green rule rollbacks - President Obama’s big jobs speech Thursday takes an apparent shot at GOP efforts to scale back environmental regulations. It touts the administration's own regulatory review efforts, noting "We should have no more regulation than the health, safety, and security of the American people require." But Obama added: But what we can’t do — what I won’t do — is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on for decades. I reject the idea that we need to ask people to choose between their jobs and their safety. I reject the argument that says for the economy to grow, we have to roll back protections that ban hidden fees by credit card companies, or rules that keep our kids from being exposed to mercury, or laws that prevent the health insurance industry from shortchanging patients. I reject the idea that we have to strip away collective bargaining rights to compete in a global economy. We shouldn’t be in a race to the bottom, where we try to offer the cheapest labor and the worst pollution standards. Obama himself scuttled planned EPA smog regulations last week, but the White House is vowing to defend a suite of other air-pollution rules, such as air toxics standards for power plants.

Deep-sea fish in deep trouble - A team of leading marine scientists from around the world is recommending an end to most commercial fishing in the deep sea, the Earth's largest ecosystem. Instead, they recommend fishing in more productive waters nearer to consumers.  In a comprehensive analysis published online this week in the journal Marine Policy, marine ecologists, fisheries biologists, economists, mathematicians and international policy experts show that, with rare exceptions, deep-sea fisheries are unsustainable. The "Sustainability of deep-sea fisheries" study, funded mainly by the Lenfest Ocean Program, comes just before the UN decides whether to continue allowing deep-sea fishing in international waters, which the UN calls "high seas."  Life is mostly sparse in the oceans' cold depths, far from the sunlight that fuels photosynthesis. Food is scarce and life processes happen at a slower pace than near the sea surface. Some deep-sea fishes live more than a century; some deep-sea corals can live more than 4,000 years. When bottom trawlers rip life from the depths, animals adapted to life in deep-sea time can't repopulate on human time scales.

Homo laeviculus — "Clueless Man" - Australian science writer Julian Cribb believes a strong case can be made for renaming the human species, which Linnaeus dubbed Homo sapiens (Latin, meaning "wise man") in the 18th century. I heartily concur. Cribb laid out his compelling arguments in The case for re-naming the human race.  It is time the human race had a new name.  The old one, Homo sapiens – wise or thinking man – has been around since 1758 and is no longer a fitting description for the creature we have become: When the Swedish father of taxonomy Carl Linnaeus first bestowed it, humanity no doubt seemed wise when compared with what scientists of the day knew about both humans and other animals. We have since learned our behavior is not as wise as we like to imagine – while some animals are quite intelligent. In short it is a name which is both inaccurate and which promotes a dangerous self-delusion.  In a letter to the scientific journal Nature (476, p282, 18 August 2011) I have proposed there should be a worldwide discussion about the formal reclassification of humanity, involving both scientists and the public. The new name should reflect more truthfully the attributes and characteristics of the modern 21st century human – which are markedly different from those of 18th century ‘man’.

CO2 is Just a Trace Gas  - One of the talking points favored by deniers like Joe Bastardi is “CO2 is just a trace gas.”  It makes up less than less than four 100ths of 1% of the atmosphere — what harm could it really do? Skeptical Science has the short and long response of “What the science says” (along with the video above).  Here’s the short answer. Saying that CO₂ is “only a trace gas” is like saying that arsenic is “only” a trace water contaminant.  Small amounts of very active substances can cause large effects.

Arctic Death Spiral Continues: Sea Ice Volume Hits Record Low for Second Straight Year -The Polar Science Center at the University of Washington has updated its calculations of Arctic sea ice volume.  As usual, Neven has the best graphs of the PSC’s data at his Arctic Sea Ice Blog, a must-read for cryosphere-junkies. The PSC recently improved their PIOMAS model, which combines the best observational data with their own analysis.  They are publishing their findings in the Journal of Geophysical Research, “Uncertainty in Modeled Arctic Sea Ice Volume”:… the 2010 September ice volume anomaly did in fact exceed the previous 2007 minimum by a large enough margin to establish a statistically significant new record. And now that 2010 record is broken — and the melt season isn’t over yet. Indeed, it is going to be a close race to see if we break the record for sea-ice extent, a two-dimensional metric that the media and others focus on because that data is reported every day by many different sources.  If you’re interested in that trend, the National Snow and Ice Data Center released its latest analysis yesterday, “Arctic sea ice near record lows” [see figure below].

Global warming no hoax to insurance companies - If anyone is going to feel a rise in global temperature — and the destructive weather it causes around the planet — it’s the people who have to pay for the damage.  And here’s what insurance companies are reporting to state insurance commissioners: “Genworth recognizes that climate change poses significant potential risks to the environment, the global economy and to human health and well being. We also recognize that human activity contributes to global warming.” — Genworth Life Insurance Co. of New York  “AIG was the first U.S.-based insurance company to adopt a public statement on the environment and climate change, recognizing the scientific consensus that climate change is a reality and is in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth’s atmosphere.” — Chartis, a subsidiary of American International Group Inc. AIG +0.09%  “The earth’s climate appears to be changing in ways inconsistent with the historical record upon which catastrophe models draw data.” — ACE USA. “Climate change could cause reduced loss predictability.” — RiverSource Life Insurance Co. of New York

Is planet-cooling balloon full of hot air? - It sounds audacious or sci-fi: a tethered balloon the size of Wembley stadium suspended 12 miles above Earth, linked to the ground by a giant garden hose, pumping hundreds of tons of minute chemical particles a day into the thin stratospheric air to reflect sunlight and cool the planet.  But a team of British academics will next month formally announce the first step towards creating an artificial volcano by going ahead with the world's first major "geoengineering" field test in the next few months. The ultimate aim is to mimic the cooling effect that volcanoes have when they inject particles into the stratosphere that bounce some of the sun's energy back into space, preventing it from warming the Earth and mitigating the effects of human-made climate change. Before the full-sized system can be deployed, the research team will test a scaled-down version of the balloon-and-hose design. Backed by a $2.6 million government grant and the Royal Society, the team will send a balloon to a height of 0.6 miles over an undisclosed location. It will pump nothing more than water into the air, but it will allow climate scientists and engineers to gauge the engineering feasibility of the plan. Ultimately, they aim to test the impact of sulphates and other aerosol particles if they are sprayed directly into the stratosphere.

Going Green but Getting Nowhere - You refuse the plastic bag at the register, believing this one gesture somehow makes a difference, and then carry your takeout meal back to your car for a carbon-emitting trip home. Say you’re willing to make real sacrifices. Sell your car. Forsake your air-conditioner in the summer, turn down the heat in the winter. Try to become no-impact man. You would, in fact, have no impact on the planet. Americans would continue to emit an average of 20 tons of carbon dioxide a year; Europeans, about 10 tons. What about going bigger? If all Catholics decreased their emissions to zero overnight, the planet would surely notice, but pollution would still be rising. Of course, a billion people, whether they’re Catholic or adherents of any other religion or creed, will do no such thing. Two weeks of silence in a Buddhist yoga retreat in the Himalayas with your BlackBerry checked at the door? Sure. An entire life voluntarily lived off the grid? No thanks. So why bother recycling or riding your bike to the store? Because we all want to do something, anything. Call it “action bias.” But, sadly, individual action does not work. It distracts us from the need for collective action, and it doesn’t add up to enough. Self-interest, not self-sacrifice, is what induces noticeable change.

China Benefits As U.S. Solar Industry Withers - The bankruptcies of three American solar power¹ companies in the last month, including Solyndra of California on Wednesday, have left China’s industry with a dominant sales position — almost three-fifths of the world’s production capacity — and rapidly declining costs.  Some American, Japanese and European solar companies still have a technological edge over Chinese rivals, but seldom a cost advantage, according to industry analysts.  Loans at very low rates from state-owned banks in Beijing, cheap or free land from local and provincial governments across China, huge economies of scale and other cost advantages have transformed China from a minor player in the solar power industry just a few years ago into the main producer of an increasingly competitive source of electricity.  “The top-tier Chinese firms are kind of the benchmark now,”  Pricing of solar equipment is determined by the Chinese industry, he said, “and everyone else prices at a premium or discount to them.”

Getting A Grip On The Grid - One of the crucial factors that limits the capacity of the electricity grid is the temperature of the lines; as their metal is heated by the current flowing through them, the lines get longer, and they sag, and can contact trees or other objects. That development helped set off the great Northeast blackout of August 2003. But the utility companies have never had a precise idea of what the temperatures are, or where their lines are in relation to obstructions below. They use a complicated formula for calculating the temperature that involves the angle of the sun, the wind speed and direction in relation to the lines, and the air temperature. Now, though, utilities are testing a new technology that could reduce the guesswork.

Natural Gas Bombshell: Switching From Coal to Gas Increases Warming for Decades, Has Minimal Benefit Even in 2100 - A stunning new study by the National Center for Atmospheric Research (NCAR) concludes: In summary, our results show that the substitution of gas for coal as an energy source results in increased rather than decreased global warming for many decadesCoal, natural gas, and climate: Shifting from coal to natural gas would have limited impacts on climate, new research indicates. If methane leaks from natural gas operations could be kept to 2.5% or less, the increase in global temperatures would be reduced by about 0.1 degree Celsius by 2100.  Note this is a figure of temperature change relative to baseline warming of roughly 3°C (5.4°F) in 2100.  Click to Enlarge. The fact that natural gas is a bridge fuel to nowhere was first shown by the International Energy Agency in its big June report on gas — see IEA’s “Golden Age of Gas Scenario” Leads to More Than 6°F Warming and Out-of-Control Climate Change.  That study — which had both coal and oil consumption peaking in 2020 — made abundantly clear that if we want to avoid catastrophic warming, we need to start getting off of all fossil fuels.

Jevons paradox: When doing more with less isn’t enough - Jevons paradox is named after William Jevons, who observed in the 19th century that an increase in the efficiency of using coal to produce energy tended to increase consumption, rather than reduce it. Why? Because, Jevons argued, the cheaper price of coal-produced energy encouraged people to find innovative new ways to consume energy. Jevons paradox, as currently stated by Owen and others, is really an extreme statement about an effect economists commonly observe called "rebound": some of the gains from energy efficiency are lost because people's consumption rises in response to lower prices. For instance, when the federal government requires more fuel-efficient cars, aggregate demand by cars for gas is less. So prices tend to decline, and (to a limited effect) that lower price motivates a few people to drive a little more than they might have, perhaps taking advantage of the lower prices to take an extra weekend trip to the beach.

Iran plugs first nuclear power plant into grid (Reuters) - Iran's first nuclear power plant has finally begun to provide electricity to the national grid, official media reported on Sunday, a long-delayed milestone in the nuclear ambitions of a country the West fears is covertly try to develop atomic bombs. "The Atomic Energy Agency announced that atomic electricity from Bushehr power plant joined the national grid with a power of around 60 megawatts on Saturday at 2329 (1859 GMT)," the official news agency IRNA reported. The start-up will come as a relief to Tehran after many years of delays and false starts at the plant it hopes will show the world it has joined the nuclear club despite sanctions imposed in an attempt to curb its disputed nuclear progress. The $1-billion, 1,000-megawatt Bushehr plant will be formally inaugurated on September 12, by which time it will be operating at 40 percent capacity, Hamid-Khadem Qaemi, spokesman for the Atomic Energy Organization of Iran (AEOI), told the state-controlled Arabic language TV station al-Alam.  The plant on the Gulf coast is the first of what Iran says will become a network of nuclear facilities that will reduce its reliance on its abundant fossil fuels and is a showpiece of what it says is a purely peaceful atomic programme.

Sea radiation from Fukushima seen triple Tepco estimate (Reuters) - Radioactive material released into the sea in the Fukushima nuclear power plant crisis is more than triple the amount estimated by plant operator Tokyo Electric Power Co, Japanese researchers say. Japan's biggest utility estimated around 4,720 trillion becquerels of cesium-137 and iodine-131 was released into the Pacific Ocean between March 21 and April 30, but researchers at the Japan Atomic Energy Agency (JAEA) put the amount 15,000 trillion becquerels, or terabecquerels. Government regulations ban shipment of foodstuff containing over 500 becquerels of radioactive material per kg. Takuya Kobayashi, a researcher at the agency, said on Friday the difference in figures was probably because his team measured airborne radioactive material that fell into the ocean in addition to material from contaminated water that leaked from the plant.

Before Release, a Hydraulic Fracturing Study for the State Draws Skepticism- New York State environmental officials commissioned a study of impacts of natural gas¹ hydraulic fracturing from a consulting firm that counts oil² and gas companies among its clients and that could gain business from increased drilling in the state.  The $223,000 study of the effects of “hydrofracking” on the economy and the quality of life was conducted by Ecology and Environment Inc.³, a global environmental and engineering services company based in Lancaster, N.Y.  The study has yet to be released, but some community, environmental and government watchdog groups say the company’s ties to the drilling industry undermine its credibility — no matter what the report concludes.  “I’m not saying they’re bad,” said Adrienne Esposito, executive director of Citizens Campaign for the Environment⁴, which does not want this kind of drilling to start until the state strengthens regulations of the industry. “I’m saying let’s not be confused. This is not an objective analysis done in the public interest. They went to someone with whom they have a work relationship and that also does work for energy interests.”

Report Outlines Rewards and Risks of Upstate Natural Gas Drilling - Natural gas drilling using a controversial technique known as hydraulic fracturing could create up to 37,000 jobs and generate from $31 million to $185 million a year in added state income taxes for New York at the peak level of well development, according to analyses in a report commissioned by the New York State Department of Environmental Conservation¹ that was released on Wednesday.  But communities in south-central and southwestern New York, on or near the Marcellus Shale, where most new drilling is expected, would pay a price for the local economic bonanza.  Included among the negative impacts the report² outlines are large-scale industrial activity, heavy truck traffic, more spending on police and fire protection and higher housing prices due to the expected influx of workers.  The report was contracted to Ecology and Environment³, a New York environmental engineering consulting firm that counts among its clients both the state government and private oil⁴ and gas companies. The report now becomes part of the broader draft document by which New York environmental regulators identify risks and propose rules to allow hydraulic fracturing with horizontal drilling, for the first time in the state.

Study Sharpens Picture of How Much Oil and Gas Flowed in Deepwater Horizon Spill — In a detailed assessment of the Deepwater Horizon oil spill, researchers led by a team from the Woods Hole Oceanographic Institution (WHOI) have determined that the blown-out Macondo well spewed oil at a rate of about 57,000 barrels a day, totaling nearly 5 million barrels of oil released from the well between April 20 and July 15, 2010, when the leak was capped. In addition, the well released some 100 million standard cubic feet per day of natural gas. The results -- published in the Sept. 5, 2011 online issue of the Proceedings of the National Academy of Sciences (PNAS) -- are in line with the federal government's official estimates, but just as importantly validate the innovative measuring techniques the team employed. The accuracy of the measurements was crucial because, "Ultimately, the impact of the oil on the environment depends primarily on the total volume of oil released," according to a report by the Flow Rate Technical Group (FRTG), a collection of research teams charged with using different means to generate an accurate estimate of the amount of oil released into the Gulf.

Is oil leaking in the Gulf from the BP spill site? - Reports of oil surfacing near the site of the Deepwater Horizon explosion are raising questions about its source and whether it is related to last year’s oil spill in the Gulf of Mexico – one of the worst environmental disasters in US history. A patch of oil was documented last week about a quarter-mile northeast of the Macondo wellhead leased by BP. On Wednesday, reporters from the Mobile, Ala., Press-Register published photographs and video of their discovery on the news organization’s website, which was in response to surveillance flights conducted the week before by two environmental groups – the Gulf Restoration Network and On Wings of Care.  The reporting expedition collected oil samples that later underwent chemical analysis at a Louisiana State University lab headed by Edward Overton, an oil chemist who was tapped by federal investigators to study the oil in the early weeks of the spill. Mr. Overton confirmed that the oil was south Louisiana crude, but because of the low concentration of samples, testing could not determine that it was MC252 – the specific oil that can be traced to the Macondo well.

Unlocked by melting ice-caps, the great polar oil rush has begun - It's the melting of the Arctic ice, as the climate warms, that makes it possible — and you can understand why they're all piling in. In July 2008, the US Geological Survey released the first ever publicly available estimate of the oil locked in the earth north of the Arctic Circle.  Scramble for hydrocarbons above the Arctic Circle: click here to download graphic (900k)  It was 90 billion barrels, representing an estimated 13 per cent of the world's undiscovered oil resources. If you're an oil company, or an oil-hungry economy, that's more than enough to make your mouth water.  But wait. Less than a year later, the geologists involved in the programme, known as Cara, the Circum-Arctic Resource Appraisal, had radically revised their estimate – upwards. Now – in June 2009 – they said the Arctic might in fact hold as much as 160 billion barrels, which would amount to more than 35 years of US oil imports, or five years of total global oil consumption, and be worth, at current prices, more than 18 trillion dollars. Forget mouthwatering. Think drooling.

Oil exploration under Arctic ice could cause ‘uncontrollable’ natural disaster - Any serious oil spill in the ice of the Arctic, the "new frontier" for oil exploration, is likely to be an uncontrollable environmental disaster despoiling vast areas of the world's most untouched ecosystem, one of the world's leading polar scientists has told The Independent. Oil from an undersea leak will not only be very hard to deal with in Arctic conditions, it will interact with the surface sea ice and become absorbed in it, and will be transported by it for as much as 1,000 miles across the ocean. The interaction, discovered in large-scale experiments 30 years ago, means that the Arctic oil rush, which was given a huge boost last week with a $3.2 billion (£1.9bn) investment from Exxon Mobil, is likely to be the riskiest form of oil exploration ever undertaken, said Professor Wadhams, who is a former director of Cambridge's Scott Polar Research Institute. "If there is serious oil spill under ice in the Arctic it will be very hard, if not impossible to stop it becoming an environmental catastrophe," he said. "It will be very much harder to deal with than a major spill in open water."

End of Alaskan Oil? - If new drilling in Alaska is not approved soon the Alaska pipeline will have to shutdown and the remaining oil in the National Petroleum Reserve will be lost. I have written about this several times but new information just appeared in a new article on ASPOUSA.ORG. First some background. The Trans-Alaska Pipeline System (TAPS) was built between 1974-1977 to deliver oil from the North Slope to the closest ice free port of Valdez in southern Alaska. The pipeline is just over 800 miles long and it has delivered more than 16 billion barrels of oil since it was completed. At any given time there are nine million barrels of oil in the pipeline and it takes an average of 14 days for a barrel of oil to flow from start to finish. The peak flow rate was 2.145 mbpd in January 1988.  The average flow in July was 459,376 bpd. That compares to the average over the past year of 572,835 bpd. As I have reported before the problem facing the pipeline system is the declining flows. Below a certain flow rate the pipeline will become inoperable due to a number of factors. Those factors include ice buildup, wax buildup and clogging of valves and systems. 

Tech Talk - NPRA and ANWR, will they help TAPS? - When I wrote about the Alaskan Pipeline last week, I noted that the pipeline was currently flowing at a volume of 495 kbd after the Alyeska folk who run the system had just issued a report indicating that there would be problems once the flow fell below 600 kbd. Checking the flow rate for August (posted on Sept 1), the flow rate has risen back to 539 kbd, with average flow for the year-to-date running at 568 kbd. (The EIA reported final average for 2010 was 589 kbd)  The problems that come with low flow (including reduced revenues) are recognized within the state and Alaskan Governor Parnell has urged that enough new wells be brought on line to allow flow to be raised back up to 1 million barrels a day (mbd) within ten years. With the ongoing decline of current reservoirs, one has, therefore, to look at the reservoirs that lie north of the Brooks Range, in what is known as the North Slope (though it is rather flat) and see what can be brought on line.

Benching a benchmark - If you’re expecting gasoline prices to soon reflect the 11% decline seen in New York-traded oil since the start of the summer-driving season, don’t hold your breath — because Brent crude prices have a bigger sway. This coming Labor Day weekend marks the last hurrah for summer driving. Gasoline demand is running lower than a year ago, and Libya’s conflicts are likely to eventually give way to a return to more normal oil-production levels. But the average regular price of $3.629 per gallon of gas is up 36% from Sept. 1, 2010 and down just 4% since Memorial Day this year on May 30, according to AAA data compiled by the Oil Price Information Service. Why? West Texas Intermediate is not an accurate benchmark for oil, analysts said. Cushing, Okla. — the delivery location for the Nymex crude contract — is “landlocked, and supply has been building up,” said Brian Milne, Telvent DTN’s refined fuels editor. “The market now believes that Cushing doesn’t fully reflect the proper price of oil, with some calling it a broken benchmark,” he added. “Brent is now considered the price marker” for crude.

Brent Prices - Graph above is the daily Brent price (from the EIA) from Jan 2009 to August 31st, with today's number added from new stories.  Since the Libya-inspired peak in April we seem to have been in a volatile-but-generally-down trend associated with weak global macroeconomic news and particularly uncertainty about the Eurozone. The question now is whether the global economy will firm up a little bit in the second half or continue to worsen.  A significant part of that will be down to government policy, and in particular whether the recent trend to fiscal austerity and monetary dithering will change in the face of weak economic growth. Still, oil over a $100 a barrel is hardly cheap by historical standards and suggests the limits of how much economic growth the global economy can sustain at the present without triggering resource price shocks - not too much.

Where's Our Oil Price Collapse? - Make no mistake about it, without plentiful, cheap, and easy to access oil, the United States of America would descend into chaos and collapse. The fantasies painted by “green” energy dreamers only serve to divert the attention of the non critical thinking masses from the fact our sprawling suburban hyper technological society would come to a grinding halt in a matter of days without the 18 to 19 million barrels per day needed to run this ridiculous reality show. Delusional Americans think the steaks, hot dogs and pomegranates in their grocery stores magically appear on the shelves, the thirty electronic gadgets that rule their lives are created out of thin air by elves and the gasoline they pump into their mammoth SUVs is their God given right. The situation was already critical in 2005 when the Hirsch Report concluded: “The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking

Major Countries Burn Up Crude Reserves: Whether Big Oil Is In Trouble - It is something that peak oil advocates have been warning us for a long time; our world using up our last reserves of oil. While the day that the last drip of crude is burned up is a long ways out, some parts of the world may be heading for a major pinch in production. As our world population continues to expand, with the total predicted to hit nine billion by 2050, our addiction to crude only increases, as we use oil for a wide number of things in our daily lives. Besides its most dominant use as a fuel for automobiles and the like, oil is also used in a number of other processes like the production of plastics and variety of other industrial outputs. Of course, as countries begin to eat through their proven reserves, alternative energy will get a closer look from a number of nations across the globe. For the time being, adopting mass use of clean energy would be a very costly process, as it is much cheaper to use fossil fuels as opposed to something like solar or wind energy. But as crude begins to dry up, some nations may be forced to incorporate some of these alternate fuel options in the near future, though many will likely turn to LNG and other fossil fuel derivatives first.

The Next Catastrophic Crunch Will Be Oil: Set to hit the USA just like In 2008-  Everyone was waiting with baited breath for the news about QE-3. But perhaps the number to watch was Q-3 nominal GDP, coming soon!! The important message Ben Bernanke had in Jackson Hole was that the Federal Reserve cannot, on its own, create economic growth in America (or jobs), simply by making it more or less attractive for banks to lend; and thus for Americans and foreigners to borrow. Or by printing money to buy over-priced toxic assets so the ATMs still work, or to help the Treasury improve the structure of their debt, by buying long bonds real cheap from Bill Gross…Hey Bill, that was a patriotic thing to do!  Meanwhile in Belgium there was a conference to discuss whether or not the gyrations in the price of oil over the past few years were due to (a) speculation or (b) something else.

Perestroika - There's a difference, of course, between what this country thinks it needs and what it's going to get.  The world has a way of dragging you, kicking and screaming, to where it wants to take you.  We think we need more American oil so we can "end our dependence on foreign oil." Despite the PR bullshit you see on CNBC, the oil is not really there in a form that will flow sufficiently to support our completely insane mode of living in cars.  I get letters from crazy people every week who tell me that shale oil from the Bakken Formation in Dakota will keep this racket going. Forget about it. Marcellus shale gas? Similar story. These are phantom energy reserves. And we don't have enough capital to throw at it. The world wants to take us to the place where you don't have to use a car eleven times a day, a different arrangement of things on the landscape than what we're currently stuck with in most of the United States. The American people are not disposed to taking this idea seriously, but we'll get to that place eventually. The first kickings and screamings are exactly what's coming out of the Tea Party.  These are people who don't want to change the sacrosanct American Way of Life, but they don't want to have to pay for it either, so the contradiction produces a sound and fury.

Has Peak Oil Come To The Non-OPEC World? Maybe - The world’s biggest oil companies put in a pretty pathetic performance in the second quarter of 2011. Not in terms of earnings — those were great, with Exxon¹ posting $10.7 billion and Royal Dutch Shell doing $8 billion. Just what you’d expect with Brent crude at a lofty $120 a barrel. Where the results were disappointing was in the barrels.  Of the 16 big U.S. and European oil companies studied by Deutsche Bank analyst Paul Sankey, 14 of them saw their production of petroleum decline in the quarter. Collectively, the drop amounted to 12% of total liquids volumes, or 1.2 million bpd. Their average output for the quarter totalled, 14.67 million bpd. Even excluding the effect of Libya’s issues, the decline was 8%. Only Exxon and Shell managed 1% volume gains in liquids. The situation didn’t get much better when Sankey looked at other big non-OPEC producers. Brazil’s supposed growth engine Petrobras was down a touch, as were Russia’s Lukoil and TNK-BP and China’s Sinopec. Rosneft (2.2 million bpd) and PetroChina (2.4 million bpd) did eke out gains of 2% and 4%.

As EU bans Syrian oil, China, India likely to fill void - Oil-hungry China and India could undermine efforts by the European Union to punish Syria for its deadly response to activists trying to overthrow the government. The EU on Friday banned oil imports from Syria, shutting down the vast majority of that country’s export market. The taps won’t be turned off, however, until the middle of November. Even if this market closes, Syria will have other options that could leave the repressive government relatively unscathed. China, as well as India, could absorb the roughly 150,000 barrels of oil a day that Syria currently directs toward the EU. Oil exports make up about 25 per cent of Syria’s revenue, and at today’s oil prices, the shipments are worth about $4-billion a year. “Financially, it won’t have a big impact [on Syria],” he said of the sanctions. “They can sell the oil elsewhere.”

Idling oil tankers expose fleet imbalance - Anyone looking out over the Bay of Algeciras by the Rock of Gibraltar over the next few months can expect to see plenty of ships. The bay is a popular spot to moor oil tankers – Algeciras’s busy oil refinery is nearby and the bay’s strategic location makes it an excellent place for temporarily idle ships. The ships are underemployed thanks to growth in the world tanker fleet that far outstrips the 1.3 per cent world oil consumption growth projected for this year and the 1.8 per cent projected for 2012. Figures from Fearnleys, an Oslo-based shipbroker, put this year’s growth in the world fleet of very large crude carriers – the largest commonly used kind – at 14 per cent this year if none are scrapped. The figure for 2012 should be 9 per cent. The question is how many of the world’s tanker owners can withstand the prolonged slump in earnings that the glaring imbalance is producing.“Earnings are pretty close to zero, while break-even rates are close to $30,000 a day,” he says. One industry adviser suggests more than one large operator faces financial collapse – either filing for bankruptcy protection or a painful restructuring – if the downturn were to last as long as the 12 to 18 months that many expect.

Big oil tanker groups vulnerable, warn bosses - At least one leading oil tanker operator is likely to follow collapsed smaller operators into insolvency, senior figures in the industry believe, as the sector is swamped by oversupply.  The executives were speaking amid a slump that has sent the rates paid to charter ships way below vessel operating expenses. The average short-term spot market rate to charter a very large crude carrier – the largest widely-used class – from the Gulf to Far East on Friday stood at just $1,795 per day, compared with the $29,800 that Frontline, the biggest listed tanker operator by fleet capacity, recently said such vessels needed to break even. Nasdaq-listed Omega Navigation, Netherlands-based Marco Polo Seatrade and several other small operators have already been forced into bankruptcy protection. Cyprus-based Ocean Tankers, which made a €19.6m net loss for the first half on €9.77m income, has had several of its ships arrested – held under court orders by creditors – during port calls this year. Now executives predict that far larger names are likely to follow. Moody’s last week downgraded one operator facing acute challenges – New York-listed General Maritime – to Caa3, only just above default. “We could see bigger players than [the ones that have already collapsed] disappearing,” he said.

China halts rare earth production at three mines -  Li Guoqing, the director of the mining management bureau of Ganzhou, said on Monday that three of eight major rare earth producing counties would stop production by year-end, China's official English-language newspaper said.  It is unknown when production will resume, Li said, according to the China Daily. Ganzhou produces almost 40 percent of China's ionic rare earths, the newspaper said, minerals used to manufacture high-tech products such as electric batteries, wind turbines and electronics. China, which produces about 97 percent of the world's supplies of the 17 minerals, has cited resource depletion and environmental degradation concerns as reasons for a nationwide crackdown on its rare earths sector. It has capped production at 93,800 tonnes and exports at 30,184 tonnes, saying it cannot sustain the sort of output levels demanded by foreign customers. Demand for rare earths is expected to double in the next five years, but Chinese output growth is likely to be much slower, and major importing countries have toyed with the idea of taking legal action.

The wages of China bashing - YESTERDAY, Mitt Romney, Republican candidate for the presidential nomination, released his plan to invigorate the American economy. It's mostly a collection of Republican orthodoxy, with one notable exception: Mr Romney declared his intention to get tough with China and push for a revaluation of the yuan against the dollar. The Obama has been reluctant to apply heavy pressure on China toward this end, despite populist criticism of the yuan's valuation from the left and the right. In that sense, the policy seems like a useful political weapon. As a means to boost the economy, however, its potency has significantly deteriorated. Kevin Drum wisely points to our Bic Mac index in showing that the yuan may no longer be heavily undervalued.

Top of Chinese wealthy’s wish list? To leave China -- Chinese millionaire Su builds skyscrapers in Beijing and is one of the people powering China's economy on its path to becoming the world's biggest. He sits at the top of a country -- economy booming, influence spreading, military swelling -- widely expected to dominate the 21st century. Yet the property developer shares something surprising with many newly rich in China: he's looking forward to the day he can leave. Su's reasons: He wants to protect his assets, he has to watch what he says in China and wants a second child, something against the law for many Chinese. The millionaire spoke to The Associated Press on condition that only his surname was used because of fears of government reprisals that could damage his business. China's richest are increasingly investing abroad to get a foreign passport, to make international business and travel easier but also to give them a way out of China. The United States is the most popular destination for Chinese emigrants, with rich Chinese praising its education and healthcare systems. Last year, nearly 68,000 Chinese-born people became legal permanent residents of the U.S., seven percent of the total and second only to those born in Mexico. Canada and Australia are also popular. It is a bothersome trend for China's communist leaders who've pinned the legitimacy of one-party rule on delivering rapid economic growth and a rising standard of living. They've succeeded in lifting tens of millions of ordinary Chinese out of poverty while also creating a new class of super rich. Yet affluence alone seems a poor bargain to those with the means to live elsewhere.

China’s migrant workers expect more - Li Feifei, a 19-year-old migrant factory worker from China’s Hubei province, dreams of becoming a clothes designer. At night in Shenzhen, China’s biggest migrant city, crowds of young women walk with arms linked, shopping at boutiques. It is not hard to see why Ms Li would like to leave Fuji Xerox, despite its reputation as one of the city’s most humanely run plants, for that world. It would be a great leap forward. Ms Li is a symbol of China’s own jobs crisis. There is plenty of work for migrants in its fast-growing economy, but their ambitions and frustrations are rising even faster than their rewards. China’s problem is less immediate than that of the US, but is equally intractable. To assuage the growing discontent of its 145m migrants, it must not only restructure its economy and reform its local residency system but also loosen the grip of the Communist party on financial resources. Despite the 12th five-year plan’s talk of creating a more harmonious society, it has ducked the challenge. A generation ago, it encouraged rural workers to migrate temporarily to coastal factories, confident that they would work for a few years, save money and return home to build a house in the village. Ms Li’s generation of migrants no longer need to pull families out of poverty. They do not want to go home docilely, having done their job, but to seize a new life in the city.

Personal income to double in five years: analyst - Personal revenue in China is likely to double in the five years to 2015 due to increasing social welfare and rising wages, says the chief economist at Bank of China International, Cao Yuanzheng. China is stepping into a new stage of development, and domestic consumption should be the main driving force, the financial news website Caijing.com quoted Cao as saying. The increase in consumption is relatively slow, mainly because of low personal income, he said.

The China Debate Continues - One of the biggest questions in the international economy is whether China can continue its astonishing 30-year record of growing 10% a year. Arvind Subramanian, an economist at the Peterson Institute for International Economics, argues in a new book, “Eclipse: Living in the Shadow of China’s Dominance,” that China is bound to become the world’s number one economy even if it’s growth rate slows substantially. That’s because China is still likely to grow faster than the U.S. for years to come and its population is four times the U.S. A China with GDP-per-capita of just 26% that of the U.S. would be number one — although it would still be a poor country. That would be the first time since the industrial revolution that a poor country was also the world’s biggest economy. At the U.S. Federal Reserve’s Jackson Hole conference, Harvard economist Dani Rodrik, a development specialist, was far more skeptical about the inevitability of convergence. While the manufacturing sectors in some poor countries can catch up to those of wealthy ones, Mr. Rodrik argues, that doesn’t necessarily translate into an economy wide catch-up. Why? As manufacturing sectors get more productive, they need to employ fewer people to do the same amount of work, so the gains don’t necessarily spread to the whole nation.

China Isn’t Losing Its Manufacturing Competitiveness After All - It’s a raging debate in economics circles: Is China’s commanding position as the world’s low-wage factory floor eroding in the face of rising labor costs and a strengthening currency? Just a few days ago UBS economist Jonathan Anderson wrote that China is at a turning point in its dominance of labor intensive industries such as apparel and toys. He says China’s share of exports in items made by armies of low-wage workers has peaked and that places such as Vietnam, Bangladesh, Indonesia and Mexico are picking up pieces of those markets. Now comes the counterpoint. RBS’s top China economist Li Cui writes in a research note published Wednesday that “evidence of China losing out is still absent.” Her view is that China has been remarkably adaptive to rising labor costs and a strengthening currency. “One would have expected that labor intensive industries should have been hurt the most given their thin margins and relatively weak pricing power in the global market. However during this period China’s exports of light manufacturing products has risen to about one-third of the world markets (from 22% in 2005), dominating other regional competitors,” she writes.

World Bank, China May Cooperate to Transfer Manufacturing Jobs to Africa -  The World Bank is in “very early stage” talks on cooperating with China to promote the transfer of low-value manufacturing jobs from the nation to Africa, said Robert Zoellick, head of the Washington-based lender. An expected end to the expansion of China’s labor force and the government’s push for domestic companies to move up the value chain could help shift jobs that would boost employment in sub-Saharan Africa and North Africa, Zoellick said at a briefing in Beijing today at the end of a five-day visit. China’s three-decade-old, one-child policy may accelerate declines in the workforce, forcing companies to upgrade to higher-value products. The pool of 15 to 24-year-olds, a mainstay for factories making cheap clothes, toys and electronics, will fall by almost 62 million people in the 15 years through 2025, according to United Nations projections. There are about 85 million low-value manufacturing jobs in China compared with about 8 million to 10 million in sub-Saharan and North Africa, Zoellick said. Transferring 5 million of those 85 million jobs would boost employment opportunities in the African regions by 50 percent, he said.

China reiterates vows to diversify fx reserves - China is exploring ways to diversify its $3.2 trillion foreign exchange reserves and plans to make it easier for local firms to use yuan to invest abroad, the country's commerce minister said on Thursday. Speaking at a trade fair in China's southeastern city of Xiamen, Chen Deming said the country's exports may grow at a slower clip in coming months, as listless demand in other major economies weighs on global demand. "We will study (how) to widen the effective investment of our foreign exchange reserves and increase the channels of cross-border flows of the renminbi to support domestic firms in making overseas investment," Chen said. His remarks reiterate Beijing's repeated vows to cut China's dependence on the dollar by investing more of its reserves in other currencies. Analysts estimate that about two-thirds of China's reserves, the world's largest, are invested in dollars.

China's yuan to become reserve currency -Nigeria c.bank chief (Reuters) - It is inevitable that the yuan would grow into a global reserve currency one day, Nigeria Central Bank Governor Lamido Sanusi said on Tuesday. Sanusi, who is in Beijing, made the remarks a day after he said that Nigeria's central bank plans to diversify its $33 billion in foreign exchange reserves away from the dollar by switching a tenth of the stockpile into yuan . Sanusi said Standard & Poor's downgrade of its U.S debt rating last month made it more urgent for Nigeria to diverisfy its reserves, which are mainly invested in the dollar .

Yuan Will Be Fully Convertible by 2015, Chinese Officials Tell EU Chamber - Chinese officials told European Union business executives that the yuan will achieve “full convertibility” by 2015, EU Chamber of Commerce in China President Davide Cucino said. “We were told by those officials by 2015,” Cucino told reporters in Beijing yesterday, declining to identify the government departments involved. People’s Bank of China Governor Zhou Xiaochuan said that while there is no timetable for convertibility, the offshore yuan market is “developing faster than what we had imagined.” China has accelerated the use of the yuan in international trade and investment to curb its reliance on the dollar. A fully convertible currency is one of the criteria the U.S. and Europe are demanding from china as a condition for allowing it to be part of the International Monetary Fund’s currency basket. A 2015 target would be a year faster than the schedule expected by 57 percent of 1,263 global investors in a Bloomberg survey published in May. “Making the yuan fully convertible will lead to foreign inflows into China and a stronger yuan,”

The imminent yuan float meme - The kind of attention the Chinese yuan gets is fascinating.  At the height of the debt ceiling nonsense and the subsequent days, the yuan surged to a record high against the $US, and made some of the largest moves on record.  Countless reports told stories that it signaled Beijing’s ambitions for internationalisation, or the use of the exchange rate as a monetary policy tool, or Beijing’s increasing dislike of the $US. Whatever.  Of course, in the subsequent days and weeks, the yuan has not been doing much against the $US, and the stories have faded. Let’s get this straight: first off, if something is allegedly “undervalued” and has been rising from the “lows”, that thing is bound to make record high after record high. Second, we all know that Chinese policy makers make things happen at a pace that they think is appropriate, so you never know where we’ll end up.  The latest Bloomberg report which suggests that Yuan will be convertible by 2015 is yet another example of the sort of thing that has to be taken with caution.  First of all, there are still 4 years in between.  Second, nobody knows what policy makers will be thinking about even tomorrow, let alone 2015 (and we will have new Chinese leaders as well).

China Central Bank: No Timetable for Full Yuan Convertibility - China has no timetable for the full convertibility of its currency though it plans to make the yuan convertible on the capital account eventually, the country's central bank chief said on Thursday.  "China has published a plan (that includes convertibility for the yuan on the capital account). Up to now, the plan does not define a clear timetable for full convertibility," People's Bank of China Governor Zhou Xiaochuan said. He was commenting on media reports that quoting the president of the European Union Chamber of Commerce in China as saying he had been told by Chinese officials that Beijing would make the yuan fully convertible" by 2015. Zhou also said China saw no "special urgency" in having the yuan including in the basket used to calculate the value of the International Monetary Fund's Special Drawing Rights (SDR), though it welcomed discussion of the idea as a way to improve the global currency system. Asked by reporters how global economic imbalances should be addressed, Zhou said it needed a "concerted effort by all the major economies in the world."

Japan machinery orders slump, signal weak investment - Japan's core machinery orders tumbled in July at twice the pace economists' had expected in a sign that companies are delaying investment due to worries about a strong yen, slackening global growth and slow progress in reconstruction from the March earthquake. The current account surplus fell more in the year to July than the median estimate as exports weakened, highlighting concerns that a strong yen and a stuttering global economy could hamper Japan's recovery from the post-quake slump. The disappointing data could place some pressure on the government and the Bank of Japan, which highlighted risks to growth after leaving monetary policy on hold on Wednesday, to ensure that the yen doesn't strengthen further.The yen has been attracting safe-haven demand from investors unsettled by Europe's sovereign debt crisis and signs of U.S. economic slowdown even as Japan struggles with its own debt burden and its new government faces a long battle to gain consensus over how to fund reconstruction from the March 11 earthquake and tsunami. Japan is on guard against further yen appreciation after intervening in currency markets last month when its currency approached a record high versus the dollar.

Japan machinery orders slump, cast doubt on recovery -  Japan's core machinery orders tumbled twice as much as expected in July in a sign that companies are delaying investment due to worries about the strong yen, faltering global growth and slow progress in rebuilding from the March earthquake and tsunami. The data is the latest in a series of disappointing figures, including July exports and output, which has cast doubt over the strength of Japan's expected recovery from its post-quake slump.The report could put pressure on the government and the Bank of Japan to act to ensure that the yen does not strengthen further by intervening in the market and further easing monetary policy

Japan to keep rate near zero till prices stabilize - The Bank of Japan on Wednesday refrained from additional easing steps, saying the yen’s rise did not pose an immediate downside risk to the economy, but it pledged to keep its 0%-0.1% policy rate unchanged “until it judges that price stability is in sight.” Following a two-day meeting, the Japanese central bank said its policy board voted unanimously to keep the rate unchanged and maintained its view that the economy “is expected to return to a moderate recovery path from” September onward. Speculation about additional easing steps had circulated after the Swiss National Bank, in an extraordinary move on Tuesday, set a floor for the Swiss franc against the euro in an effort to curb further appreciation of its currency. It said that quake-related supply disruptions had mostly been resolved and that production and exports had nearly recovered to levels prior to the natural disasters in March.

Down is the New Up - When the World’s 3rd largest economy is manipulating it’s currency on a daily basis, of course the Global markets are going to be thrown into chaos.  Every day the BOJ tries to debase their currency they must buy other currencies or foreign stocks or gold or silver or oil – ANYTHING BUT YEN to make the Yen less valuable as compared to another relative basis.   Even so, it’s not working and Japan’s new finance minister said this morning that he will try to forge a consensus among the Group of Seven leading industrialized countries that "excessive yen rises" won’t benefit the world economy when finance officials meet in France later this week.  "I am hoping to see us develop a common view that excessive yen rises, as shown by facts and processes in the past, do not necessarily have a positive impact on the global economy," Mr. Azumi told reporters, referring to Friday’s planned meeting of G-7 finance ministers and central bank chiefs in Marseille, France.  "At this exchange rate, it is becoming impossible for crucial parts of Japan’s export industry to make profits," he said.

OECD Slashes Growth Forecasts, Says Rate Cuts May Be Needed -- The Organization for Economic Cooperation and Development slashed its growth forecasts for the U.S. and Japan and said central banks around the world should be ready to ease monetary policy if economies weaken further. The U.S. will grow 1.1 percent in the third quarter and 0.4 percent in the fourth, instead of the 2.9 percent and 3 percent predicted in May, the OECD said today in its interim economic assessment. Japan will expand 4.1 percent in the third quarter before stalling in the fourth, and the three biggest euro economies will grow 1.4 percent and then shrink 0.4 percent. The predictions highlight the global slowdown the day that President Barack Obama will set out plans to revive growth in the world's largest economy and the European Central Bank and the Bank of England conduct monthly policy meetings. Group of Seven finance ministers will also discuss ways to revive growth when they gather tomorrow in Marseille, France. "Policy rates in most OECD economies should be kept on hold,"

Asian Central Banks Hold Interest Rates Amid Threat of Slowdown in Exports - Four central banks in Asia held off from raising borrowing costs today even as the region contends with elevated inflation rates, forced into inaction by the threat of a slump in exports as the global outlook dims. The Bank of Korea held its benchmark interest rate at 3.25 percent, and the central banks of Indonesia and the Philippines kept their rates at 6.75 percent and 4.5 percent, they said in statements. Malaysia left its overnight policy rate at 3 percent. Economic data in the region today showed an unexpected drop in Australian payrolls and the biggest slide in machinery orders in Japan in 10 months, adding to evidence of the toll from receding confidence among consumers from Europe to the U.S. Asian stocks were little changed as investors looked to remarks by President Barack Obama and the central bank chiefs of the U.S. and euro region for signs of additional stimulus measures. “Asia’s starting to feel the chill from Europe and the U.S. as export demand slows,”

‘No Doubt’ About Pressures in Australia Economy - Australia's economy, particularly industries such as manufacturing and retailing, is under pressure as households restrict spending and the high currency curbs returns from exports, Treasurer Wayne Swan said. “There’s no doubt there are pressures in our economy,” Swan said today in his weekly economic note. “Many industries like manufacturing and retailing are doing it tough as they battle with cautious household spending and a high Australian dollar.”  Swan is waiting for second-quarter gross domestic product figures on Sept. 7 to show the economy resumed its expansion after a 1.2 percent contraction in the first three months of the year as flooded coal mines, railways and farmland hurt exports. GDP probably grew 1 percent, according to the median forecast in a Bloomberg News survey of 23 economists.  “It’s taken longer than expected to get coal production back up and running, but we have seen a recovery in exports in recent months,”

Africa: Trade Based Money Laundering – A Shady Side of Globalisation - Contemporary international trade involves the movement of huge volumes of exports and imports, supported by high-value financial transactions, generally attracting significant levels and forms of taxation. The volumes and value involved also create opportunities for tax evasion by one or more of the trading parties. There has been a growing body of literature, particularly in the last five years, showing the multiple methods used to evade trade-based tax. It has become conventional to divide these methods into two broad categories, depending on whether the transactions involve related or unrelated parties. As between related parties in commercial transactions, the most common method used to evade trade-based tax is the intra-group abuse of transfer pricing. It typically takes the form of one of the related companies in a multi-national enterprise (MNE) 'selling' commodities to the other at a lower price than it would have done to an unrelated party, or even at a loss.

Tax Havens in Reverse - Reuters provides a synopsis of a report by the OECD on tax-avoidance strategies by multinational corporations:  Due to the recent financial and economic crisis, global corporate losses have increased significantly. Numbers at stake are vast, with loss carry-forwards as high as 25% of GDP in some countries. Though most of these claims are justified, some corporations find loop-holes and use ‘aggressive tax planning’ to avoid taxes in ways that are not within the spirit of the law. This aggressive tax planning is a source of increasing concern for many countries and they have developed various strategies to deal with it. Working cooperatively, countries can deter, detect and respond to aggressive tax planning while at the same time ensuring certainty and predictability for compliant taxpayers.  David Cay Johnson presents his interpretation of the data: The latest evidence of this tax after-the-factism comes from an eye-popping global tax avoidance study by the Organization for Economic Co-operation and Development.What makes the study by tax authorities in 17 major countries so astonishing is not just the size of the losses, but when they were booked.

IMF: global economy faces a 'threatening downward spiral' - The International Monetary Fund has called on the US and Europe to abandon fiscal austerity and switch to stimulus measures, warning that the global economy faces a "threatening downward spiral".  Christine Lagarde, the IMF's managing-director, said the outlook had darkened suddenly over the summer.  "There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken," she said. "The spectrum of policies available is narrower because a lot of ammunition was used in 2009. But if governments, institutions and central banks work together, we'll avoid recession," she told Der Spiegel.  The comments come at the start of a dramatic week for the eurozone as Italy prepares to roll over record sums of debt and Germany's constitutional court issues its long-awaited verdict on the legality of the EU's bail-out machinery.

Brazil Inflation Accelerated to Fastest Since 2005 Ahead of Shock Rate Cut - Brazil’s inflation accelerated for the 12th straight month in August to its fastest annual rate since 2005, reinforcing economist views that the central bank may have cut borrowing costs prematurely. Consumer prices, as measured by the IPCA index, rose 0.37 percent in August from the previous month, the national statistics agency said today. That was in line with analyst expectations for a 0.36 percent increase, according to the median estimate of 40 analysts surveyed by Bloomberg. Prices rose 7.23 percent from a year ago, the highest since June 2005. “Inflation is worrying, mostly in the long run with elevated service prices growth,” Mauricio Rosal, chief economist at Raymond James in Sao Paulo, said in a telephone interview. “It will be harder for the central bank to bring inflation down to its target because it’s at such a high rate.”

Currency Wars, Trade and the Consuming Crisis of Capitalism - To really make sense of the past 40 years, and the current crisis of advanced global Capitalism, we must turn to everyone's favorite misunderstood economic framework, Marxism. I recently addressed several aspects of Marx's view of the inevitability of advanced Capitalism's crises in Marx, Labor's Dwindling Share of the Economy and the Crisis of Advanced Capitalism.  Here's the thing about conventional economics: it cannot make sense of our current interlocking crises because it lacks the tools and perspective to do so. Conventional economics has failed on a grand scale. Not only has its policies failed, its account of what's really going on fails to explain the underlying dynamics because it is fundamentally self-referential, parochial, mechanistic, blind to broader forces of history and soaked in the quasi-religious hubris that reductionist equations and quant models can not only explicate reality, they can predict human behavior. The catastrophic failure of its policies result not from poor policy choices but from a tragically inadequate intellectual foundation. Hubris, indeed.

US Competitiveness Ranking Continues to Fall in Global Competitiveness Report 2011-2012 - World Economic Forum - Switzerland tops the overall rankings in The Global Competitiveness Report 2011-2012. Singapore overtakes Sweden for second position. Northern and Western European countries dominate the top 10 with Sweden (3rd), Finland (4th), Germany (6th), the Netherlands (7th), Denmark (8th) and the United Kingdom (10th). Japan remains the second-ranked Asian economy at 9th place, despite falling three places since last year. The United States continues its decline for the third year in a row, falling one more place to fifth position. In addition to the macroeconomic vulnerabilities that continue to build, some aspects of the United States’ institutional environment continue to raise concern among business leaders, particularly related to low public trust in politicians and concerns about government inefficiency. On a more positive note, banks and financial institutions are rebounding for the first time since the financial crisis and are assessed as somewhat sounder and more efficient.

US vs Eurozone Growth - The graph above shows both US and Eurozone GDP growth - including the second estimate of Q2 Eurozone growth that just came out.  Both are real GDP growth, seasonally adjusted, quarter-on-quarter but expressed at annual rates. Clearly both are coupled to the same set of global influences in the last few years.  However in so far as there are differences: the Eurozone lagged going into the great recession (because US subprime households and lenders was where the global economic fabric of unrealistic expectations ripped first).  Then the US recovered more strongly in late 2009 and early 2010 and has had a more obvious slowdown since, while the eurozone recovery has been choppier all along and hasn't obviously been getting weaker - except that the 2011 Q2 number was bad in both economies.  However, other series such as retail trade are less noisy and do suggest a slowing - or even contracting - Eurozone economy.

A world without borders makes economic sense - What is the biggest single drag on the beleaguered global economy? Opponents of globalisation might point to the current crisis, which shrank the world economy by about 5%. Proponents of globalisation might point to the remaining barriers to international flows of goods and capital, which also serve to shrink the world economy by approximately 5%. That sounds like a lot. But the truly big fish are swimming elsewhere. The world impoverishes itself much more through blocking international migration than any other single class of international policy. A modest relaxation of barriers to human mobility between countries would bring more global economic prosperity than the total elimination of all remaining policy barriers to goods trade - every tariff, every quota - plus the elimination of every last restriction on the free movement of capital. I document that remarkable fact in a new research paper. Large numbers of people wish to move permanently to another country – more than 40% of adults in the poorest quarter of nations. But most of them are either ineligible for any form of legal movement or face waiting lists of a decade or more. Those giant walls are a human creation, but cause more than just human harm: they hobble the global economy, costing the world roughly half its potential economic product.

OECD warns on growth - The OECD is very downbeat in its latest interim assessment, warning that growth has stalled and that advanced economies will not grow much in the second half of the year. "Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, according to new analysis from the OECD," it says. "Growth remains strong in most emerging economies, albeit at a more moderate pace." For Britain, the OECD sees growth, conventionally measured, of just 0.1% in both Q3 and Q4, while Germany and the big three eurozone economies (Germany, France and Italy) will see GDP contracting in Q4. These, it should be remembered, are momentum forecasts, with a wide margin of error.

Economy: World Entering 'Dangerous New Phase' Says Lagarde -  Christine Lagarde, the managing director of the International Monetary Fund, warned that the global economy is entering a "dangerous new phase" on Friday, ahead of the G7 summit in Marseilles, France.  She warned that both advanced and emerging economies faced key economic challenges, and that governments must "act now" to stop further contagion.  "Policymakers should stand ready, as needed, to take more action to support the recovery, including through unconventional measures," Lagarde said.  "The world is collectively suffering from a crisis of confidence, in the face of a deteriorating economic outlook and rising concerns about the health of sovereigns and banks."  Her speech at Chatham House in London came after a turbulent week for the markets, with the focus on sovereign debt issues in the euro zone and job creation in the US.  She welcomed President Obama's new $450 billion jobs package, announced Thursday, but added "it remains critical for the United States to clarify its medium term plan."

Citing Global Weakness, Central Banks Hold Interest Rates Steady— The president of the European Central Bank¹, Jean-Claude Trichet, warned Thursday that the risk of slower growth in Europe had intensified amid a climate of “enormous” economic uncertainty, and signaled that the bank was unlikely to raise rates again soon.  The E.C.B. joined the Bank of England² and several Asian central banks in leaving benchmark interest rates unchanged Thursday, as they wait to see if the global economy deteriorates.  Nearly stagnant growth in the euro zone has raised questions whether the E.C.B. acted prematurely when it raised rates twice earlier this year, to 1.5 percent from 1 percent.  While warning that the euro zone economy was “subject to particularly high uncertainty and intensified downside risks,” Mr. Trichet defended the E.C.B.’s earlier policy moves as necessary to hold down prices.  “We think what we did was appropriate,” he said at a news conference, which also included a rare outburst against his critics. Asked about complaints about E.C.B. policy in the German Parliament, Mr. Trichet said, with obvious irritation, “We do our job, it’s not an easy job.”

US money market blow for eurozone - US money market funds say they cut their exposure to eurozone banks for a second consecutive month in August, reducing the availability of credit as the stress in the region’s banking system increasingly affects stronger countries such as France.  Some money market funds, historically essential providers of short-term financing to European banks, have begun to avoid French institutions entirely, while other money market fund managers say they are “de-emphasising” the country’s banks.  One head described the process as the “ongoing diversification out of core Europe into the Nordic, Canadian and Japanese banks”, adding that money market lending to banks in the peripheral countries, and to Spain and Italy, had in effect ceased.  “Exposures have fallen dramatically, even from a month ago,”. Money market funds were not renewing all their short-term loans to the banks as they mature, or were lending only for very short periods, he said.  Meanwhile, the head of one large fund said he had cut his exposure European banks to about 30 per cent of assets, half the level of two years ago. Loans to French banks are now less than a 10th of his fund’s investments, from 16 per cent two months ago.

More on Transatlantic Cash Flows - Last week I noted the recent buildup of cash assets by foreign banks in the US. I suggested that, when paired with ECB data showing that European monetary financial institutions (MFIs) have been drawing down their deposits in Europe, this provides circumstantial evidence that European institutions are reducing their exposure to Europe in part by moving cash to the US. (Note that most of that cash is being deposited with the Fed in the form of reserves.) But as noted by some commenters, it's worth considering a couple of other possible explanations. For example, Kate Mackenzie at Alphaville draws our attention to commentary by Lars Pedersen at Alliance Bernstein. In June Pedersen noted the substantial buildup of cash assets by foreign banks in the US, and suggested that "building up dollar balances at the Federal Reserve might be viewed as insurance by these foreign banks." But he also noted that there may be something else going on (pdf): There may be other motivations beyond safety. Deposits at the Fed are unusually attractive for foreign banks because of the regulatory landscape. Borrowing money via deposits that don’t exact an FDIC surcharge, and depositing them at the Federal Reserve, earning 25 basis points, is much more attractive to a foreign bank with a US branch than it is to a US bank.

Pension funds in new crisis as deficit hole grows (Reuters) - Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees. At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis. But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds. With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions. For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both. This year has been a nightmare for many in the industry -- which controls $35 trillion (22 trillion pounds), or a third of global financial assets -- and funding deficits are posting double-digit rises. "We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out,"

Swiss National Bank sets minimum exchange rate - This is a strongly worded statement from the SNB: Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures. The FT Alphaville has several posts about this move, including The clairvoyant Jim O’Neill and SNB euroquake, the analyst reaction – part one and SNB euroquake, the analyst reaction – part two.

Swiss draw line in the sand to weaken franc - Using some of the strongest language from a central bank in the modern era, the SNB said it would no longer tolerate an exchange rate below 1.20 francs to the euro and would defend the target by buying other currencies in unlimited quantities. The move immediately knocked about 8 percent off the value of the franc, which had soared by a third since the collapse of Lehman Brothers in 2008 as investors used it as a safe haven from the euro zone's debt crisis and stock market turmoil. The move was seen as a new shot in the currency wars, with Japan expected to try to weaken the yen if the Swiss action diverts more safe-haven inflows into the currency. Gold, which hit a record higher earlier on Tuesday, is also seen gaining. "That was the single largest foreign exchange move I have ever seen," said World First chief economist Jeremy Cook. "This dwarfs moves seen post Lehman Brothers, 7/7, and other major geopolitical events in the past decade."

Charts of the day, Swiss franc edition - As a general rule, it’s the risk-on trades which have a tendency to blow up in your face. If you borrow in a low-yielding safe currency and invest in a higher-yielding risky currency, you make money every day, but can lose it all — and then some — with one violent currency move, when the risky currency suddenly weakens. Today, however, it’s the other way around. With one announcement, the Swiss National Bank sent the Swiss franc — a classic safe currency, which rallies in times of uncertainty — plunging. To give you an idea of just how insanely huge today’s currency move was, here it is in the context of the past 12 years or so: What this chart shows is that even during the recent crises, the Swiss franc basically never rises or falls more than 2% in one day. Today, it moved more than 8% — that’s a 20 standard deviation move.

Franc Plunges Most Ever Versus Euro as Central Bank Draws Line (Bloomberg) -- The franc tumbled, dropping the most ever against the euro, after the Swiss central bank imposed a ceiling on the currency's exchange rate and said it will defend the target with the "utmost determination." The franc depreciated at least 7.8 percent against all 16 of the most-active currencies monitored by Bloomberg, with the biggest decline versus the Norwegian krone. The yen retreated against the dollar as Japan's Finance Minister Jun Azumi said he will call for Group of Seven officials that "excessive yen rises" are bad for the global economy. The euro fell below its 200-day moving average against the dollar. "The Swiss National Bank indicated to the market that they are more than willing to print as much money as necessary to defend this peg and defend it with resolve," . "The market is starting to play the Norwegian krone as a safe haven."

Swiss FAQs - In proper analogy format, today's news that the Swiss National Bank (SNB) is going to buy "unlimited quantities" of foreign currency in order to keep the Swiss Franc (CHF) from appreciating beyond 1.20 CHF/euro can be expressed as follows: Just as China has for years steadily purchased US dollars in order to keep its currency from appreciating, Switzerland has now promised to buy euros in order to keep the CHF from appreciating. To help understand what that means, here are some FAQs:
1. Why did the SNB decide to do this?  The SNB had to act because the strong CHF had basically been strangling the Swiss economy by making Switzerland a horrendously expensive place to manufacture or buy things.
2. Is the SNB's new exchange rate policy credible?  Yes, it is absolutely credible. There's no technical or economic limit to the ability of the SNB to sell CHF and buy euro to keep the exchange rate above 1.20, simply because the SNB can create as many CHF as it wants. So the exchange rate will only go below 1.20 if and when the SNB decides to allow that to happen.
3. What will this do to the Swiss money supply?  Chances are high that Switzerland's money supply will explode. There's probably no getting around this one; the only way the SNB can keep its exchange rate at the desired level is to offer unlimited CHF at an exchange rate of 1.20 CHF/euro to anyone who wants to use Switzerland as a safe haven for their money. Given that lots of people are seeking safe havens for their money right now, it's likely that there will be a lot of takers, which means that the SNB will have to create lots and lots of new CHF.

It is time for outsiders to save the single currency - The eurozone is caught in a vicious circle. Sovereign credit is deteriorating, reducing confidence in banking systems, which in turn increases the likelihood that governments will have to assume additional bank liabilities. This further impairs sovereign credit, which further undermines confidence in the banks.  Europe’s leaders have shown themselves incapable of breaking this vicious cycle, raising the danger of the European crisis becoming a global crisis. It is now past due time for the International Monetary Fund and Group of 20 to intervene. They must immediately demand consistent accounting treatment and regulatory oversight of European banks’ sovereign exposures. The International Accounting Standards Board has taken a first step, raising questions about whether eurozone banks are provisioning adequately for losses on government bonds. The problem it points to, inadequate reserves, is precisely what stops policymakers providing meaningful debt relief for the crisis countries. .

The road to Europe: the return of the State - The European Monetary Union has been conceived and realized under the banner of neoliberalism and of the neoclassical economic paradigm: markets are efficient; they, through their price mechanism, are the best allocator of resources. They are the best regulators of economic activities, not the State. This ideology is antithetic to social cohesion both within and between countries. We could have built a different type of European Union, within a different ideological, economic and political context: one in which the markets could have played a role but under the power of the State to regulate them for the benefit of all; one in which social cohesion within and between European States could have played a large role. In such an ideological context, economic, political and social integration would necessarily have gone hand-in-hand and the issue of timing of economic versus political integration would not have arisen. But this would have required adherence to different economic paradigms and a different political starting point.

Germans oppose bailout boost, critical of Merkel - Center-right Chancellor Merkel is trying to face down a threatened revolt in her own bloc in parliament over a September 29 vote to ratify more money and powers for the euro rescue fund.  She was also publicly criticized by her ex-mentor Kohl, Germany's longest-serving post-war chancellor and architect of German reunification, over policy on Europe, the United States and Libya, saying Berlin had "no view or idea" about where it was going.  An opinion poll by Infratest dimap for public broadcaster ARD suggested 68 percent of Germans agree with Kohl's comments published in a magazine last week, while 66 percent think the Merkel government has "lost its grip" on the euro crisis.  Two thirds said they were opposed to giving more funds for the European Financial Stability Facility (EFSF) and over half were against introducing common euro-zone bonds -- a proposal the German government has energetically rejected so far.

Self-Important Approach Worries Berlin’s Allies - Germany's neighbors and allies are growing increasingly concerned about Berlin's foreign policy direction. Some even fear that efforts to export its fiscal ideas could mean the prosperous country has lost sight of the European idea. Or worse yet, that it wants to dominate the currency union. The euro has failed, though more politically than economically, according to an article in the September edition of US magazine Vanity Fair. "Conceived as a tool for integrating Germany into Europe, and preventing Germans from dominating others, it has become the opposite," . "For better or for worse, the Germans now own Europe." The fact that a reunited Germany has weathered the Western world's financial crisis with ease, at least so far, has made its neighbors and friends uneasy. In the political salons of Washington and Paris, from Brussels to Madrid, and inside political broadsheets and think tanks, people are asking whether the new Germany is altering its foreign policy. Is Berlin turning away from the European Union, or is it the opposite, that it wants to use the currency to gain control of the entire continent -- something it couldn't do with weapons?

Why austerity is only cure for the eurozone - Wolfgang Schäuble - In recent weeks, debt markets have undergone wild gyrations, leading some analysts and commentators to question the progress achieved in taming the sovereign debt crisis in the eurozone. Instead of focusing minds, however, these developments have prompted a cacophony of prescriptions about what western governments should do next. There have been calls on regulators to rein in speculators, on the central banks to loosen monetary policy further, on the US and Germany to use their supposed “fiscal space” to encourage demand and on European Union leaders to take an immediate leap into a fiscal union and joint liability. Now more than ever is a time for clear messages and clear priorities.Whatever role the markets may have played in catalysing the sovereign debt crisis in the eurozone, it is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare. Piling on more debt now will stunt rather than stimulate growth in the long run. Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now. The recipe is as simple as it is hard to implement in practice: western democracies and other countries faced with high levels of debt and deficits need to cut expenditures, increase revenues and remove the structural hindrances in their economies, however politically painful. 

The Beatings Must Continue - Krugman - Oh, my — at first I missed this op-ed by Wolfgang Schaeuble. If you had any doubts about where key figures in Europe are going, this should clear them up:Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.…There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion, but even if it were, there is a trade-off between short-term pain and long-term gain. An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption. So, austerity now now now — none of this waiting until recovery is well underway. And never mind concerns about deepening the slump – the confidence fairy will come to our rescue, and anyway, pain is good for the soul.

1937 - Krugman - Between Friday’s US job report and today’s economic news from the rest of the world, it’s hard to avoid the sense that things are going bust all over. Austerity is really biting, and the global economy is sputtering.Plus, Europe! Spreads are widening out drastically, again — and where is the ECB? Still unwilling to concede that its move toward monetary tightening was exactly the wrong thing. And Munchau is right: if all of Europe is going to be engaged in fiscal austerity, with the ECB adding to the downdraft instead of fighting it, there’s no way the peripheral countries can make it.What gets me, always, is that there is nothing mysterious about this crisis; nothing is happening that someone who read Paul Samuelson’s original, 1948 edition of his textbook would find puzzling. But much of the economics profession has turned its back on what it used to know, and policy makers have chosen to go with fantasies about expansionary contraction rather than macroeconomics 101. Awesome.

Europe: Service Sector Slows, Stocks Fall, Bond Yields move higher - From the Telegraph: "Eurozone service sector [slowed] and the Purchasing Managers Index figures show services activity slowed to its lowest rate since September 2009. The eurozone PMI figure slipped to 51.5 in August, down from 51.6 in July." "The [U.K.] guage of services activity, which makes up the biggest part of the British economy and includes shops and restaurants, fell to 51.1 in August from 55.4 in July" From the WSJ: U.S. Lawsuit Pressures Bank Shares The suit by the Federal Housing Finance Agency in New York and Connecticut courts alleged that units of 17 banks including Royal Bank of Scotland Group PLC, Barclays PLC, HSBC Holdings PLC, Deutsche Bank AG, Credit Suisse AG and Société Générale SA, misrepresented the risks of $196 billion in home mortgage-loan securities sold to the agencies in a four-year period, making it the largest legal action by a federal regulator. The Greek 2 year yield is at 49.99%! Here is a graph of the 10 year spread (Italy to Germany) from Bloomberg. And for Spain to Germany. The Italian spread is at 365, most of the way back up to the high of 389 on Aug 4th, and the Spanish spread is at 330, still down from 398 on Aug 4th.

Euro Falls on Greece Worries - The euro extended its falls Monday in Asia amid renewed concerns over the Greek debt crisis following news that a slump in support for German Chancellor Angela Merkel's ruling party in local elections has added to "risk-off" selling pressure in the wake of dismal U.S. jobs data Friday.  Rival parties gained fresh support in the elections Sunday, piling further pressure on Merkel at a time when she already faces criticism at home over her handling of the euro-zone debt crisis and Germany's slowing economy.  The election result is seen as euro-negative since the loss of regional influence comes as Merkel's party prepares for a much-anticipated vote in the German parliament at the end of the month on changes to the euro-zone's temporary bailout mechanism. The news follows Friday's suspension of talks between the Greek government and representatives of the International Monetary Fund, European Central Bank and European Commission over new bailout funds. The talks were suspended amid disagreements over how to fill a government-deficit gap that once again appears to be veering off track.

The worst of the euro crisis is yet to come - The most disturbing aspect about the eurozone right now is that every crisis resolution strategy depends on a moderately strong economic recovery. The Greek programme was already in trouble when it was agreed six weeks ago. All the official forecasts were wrong. The country is in a depression, and its debt dynamic is “out of control”, according to its new fiscal council. In Italy, the central bank expressed concern that the country’s austerity programme would have recessionary effects.  The European bank recapitalisation strategy – if you want to call it that – is also collapsing under the weight of the economic downturn. Last week saw a heated dispute between the International Monetary Fund and the eurozone governments over how much banks need to be recapitalised. The final figure for recapitalisation could be far higher than even the IMF’s estimates if the economy plunges back to recession..  The downturn began this summer, and appears to have gained momentum. Bank lending to the private sector has fallen for two months. Broad money supply is well below the reference rate. A widely followed purchasing managers’ survey points towards a decline in manufacturing activity in August. For all we know, the eurozone may already be in a recession right now.  The first, second and third priorities of European economic policy should be to stop and reverse the downturn. If they fail to achieve that, the eurozone’s crisis will end in catastrophe because every single resolution programme will be in danger of failing.

Ready for the fall - AS BUTTONWOOD notes, much of Europe is back from holiday today, and they all appear to be in rotten moods. European markets are tumbling today, and European banks are heading for trouble:While the authorities bicker, the borrowing costs of banks are rising as US money market funds retreat from the region. The costs of insuring against European corporate defaults has risen 7% today. That will make the banks even less keen to lend; the annual growth rate of private sector lending was just 2.4% on the latest data. Kash provides a nice overview of the flow of money from European banks to their American counterparts. Sovereigns are feeling the pressure, too. Early in the summer, a new bail-out proposal for Greece slowed the rise in yields on the debt of the smaller peripheral countries. Later, European Central Bank intervention in debt markets brought down yields on the big peripheral economies—Italy and Spain. Now, everyone's yields are rising once again. The yield on the Italian 10-year bond is back above 5.5%. What's going on? FT alphaville's Joseph Cotterill muses that the ECB may be punishing Italy for moving too slowly on implementation of its austerity plans.

Unsecured bond sales to test Europe’s banks - Europe’s banks are bracing for a fresh test this month: whether they can successfully sell unsecured bonds.  The region’s banks have sold less debt in total so far this quarter than in any comparable period going back to 1996 – when their financing needs were a fraction of their current levels.  Although US companies and banks have continued to tap the market through the summer, Europe’s traditional August lull turned into an absolute freeze as fears over banks’ liquidity caused broad market turmoil and drove borrowing costs sharply higher.  Banks’ ability to sell bonds has wider economic consequences since higher costs or a prolonged freeze will restrict their ability to lend, potentially worsening the economic slowdown.  “European banks have unquestionably been squeezed in funding markets in recent months, and it would be surprising not to see this start to show up in lending surveys before long,” said Joseph Faith, credit strategist at Citigroup.

Euro bonds are not enough: eurozone countries need a government banker - The eurozone‘s public finance crisis continues to fester, reflecting both political and intellectual failure.  The flaw is the inability of eurozone governments to harness the central bank’s power to assist government finances. This systemic weakness explains why US and UK government bonds are weathering the storm, whereas Spain confronts default rumours despite having roughly similar debt and deficit profiles. The euro solved the problem of exchange rate speculation by creating a single currency, but in doing so made countries vulnerable to bond market speculation. That is because support buying of member country bonds by the European Central Bank is prohibited under the “no bail-out” provision. This prohibition is appropriate as buying one country’s bonds would subsidise it relative to others. However, it means country governments lack access to central bank help to ward off speculative bond market attacks, to finance budget deficits and to conduct quantitative easing programmes of the sort carried out by the Federal Reserve and Bank of England. One proposal to address the crisis is the idea of a “blue bond”. Countries would have the right to issue blue bonds up to 60 per cent of their gross domestic product that would be guaranteed collectively by euro member countries. This would significantly lower interest rates charged to troubled countries, helping them to attain solvency. In effect, financially strong countries would de facto lend their creditworthiness to weak countries.

SPIEGEL Interview with IMF Chief Christine Lagarde: 'There Has Been a Clear Crisis of Confidence' - SPIEGEL ONLINE - In a SPIEGEL interview, Christine Lagarde, the new managing director of the International Monetary Fund, discusses her fears of a new global recession and calls on industrialized nations to work together to combat the threat of a downturn.

Europe 'Likely to Go Into Recession': Strategist  -Europe is on the verge of recession and the US is already in a growth recession – an expression used by economists to show that growth is so slow that more jobs are lost than added, a strategist told CNBC Monday. "All the indicators that mattered showed a contraction, yes some of them might have contracted more slowly but they contracted. Europe is going to go into recession overall and the US is in a growth recession at least with the risk still on the downside," Nick Parsons, head of strategy at National Australia Bank, told CNBC. "Six (the US, Japan, Germany, France, UK and Italy) out of seven of the biggest economies on the planet will show 0 percent growth for this third quarter and with Europe likely to go into recession we need to have a much longer-term horizon, otherwise we'd be well advised to step aside for the moment," Parsons added. Global gross domestic product is around $62 trillion, with the six economies making up $31 trillion of this total. The latest ISM Manufacturing report for the US for August, which detailed falling production, orders and exports but rising inventories, is a great lead indicator that a recession is imminent, he said.

Lost Decades Everywhere: The Grim Reality of Europe - Stocks are closed in the US today, but they are falling precipitously in Europe, as the continent continues to struggle. European leaders still cling to the fallacy that they are in the midst of a debt crisis, when a bank crisis is more to the point. An austerity crisis, too. But the elites still demand more beatings. The head of the European Central Bank, Jean-Claude Trichet, warned Italy that they must soldier on with austerity measures, after their Parliament failed to pass legislation to that effect. The ECB basically threatened to slow down or stop its purchases of Italian debt if the austerity programs aren’t put into place, which would raise borrowing costs for Italy to unsustainable levels. But this is akin to the ECB putting a gun to its own head. European banks would suffer if Italy faced a Greek-style collapse, and they cannot afford any kind of losses at this point.

Fears rise again over Europe debt crisis - German benchmark borrowing costs fell below 2 per cent to all-time lows while Italy’s shot up as worries about the eurozone debt crisis and the fragility of banks once more intensified. European lenders bore the brunt of a broad-based sell-off across equity markets while the cost of insuring bank and government debt hit record highs as investors fled from risky assets to safer ones. German 10-year Bund yields fell 16 basis points to 1.85 per cent, their lowest ever. The move below 2 per cent tracked that of US Treasuries, which closed below that level for the first time since 1950 on Friday and were not traded on Monday due to a public holiday. Angela Merkel, the German chancellor, told parliamentary colleagues that the situation in Greece and Italy was “extremely fragile”, Reuters quoted a party official as saying.  Investors’ intense concerns about the likelihood of a Greek default were underlined by Greek 1-year bond yields rising to a record 82.1 per cent.

European Bankers Urge Leaders to Move Quickly on Debt Crisis -  With stock and bond markets on a roller-coaster ride reminiscent of the 2008 financial crisis, Jean-Claude Trichet¹ and Mario Draghi², the current and incoming chiefs of the European Central Bank³, had a pointed message for European leaders Monday: Get your act together.  Europe’s top central bankers couched their admonishment in diplomatic terms during speeches in Paris focusing on the world three years after the collapse of Lehman Brothers. But the warning was clear: politicians are still not moving quickly enough to ensure that the euro zone’s debt crisis⁴ does not become seriously worse.  Europe needs to “make a quantum step up in economic and political integration,” Mr. Draghi said as the bond yields of Greece, Italy and other countries with weak finances jumped Monday amid investor fears that such efforts might be unraveling. 

Europeans Talk of Sharp Change in Fiscal Affairs - As leaders in Europe try to contain a deepening financial crisis, they are also increasingly talking about making fundamental changes to the way their 17-nation economic union works. The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro¹ zone into something resembling a United States of Europe. Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.

Former German leader calls for "United States of Europe" (Reuters) - Former German chancellor Gerhard Schroeder on Sunday called for the creation of a "United States of Europe," saying the bloc needed a common government to avoid future economic crises.Schroeder, a Social Democrat who ran the country from 1998 to 2005, said in an interview with Der Spiegel that European Union leaders were wrong to expect the euro to drive the bloc on its own. "The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal, economic and social policy," Schroeder said. He added: "We will have to give up national sovereignty." "From the European Commission, we should make a government which would be supervised by the European Parliament. And that means the United States of Europe." Schroeder, who nurtured a close relationship with France during his leadership, welcomed an initiative launched by German Chancellor Angela Merkel and French President Nicolas Sarkozy to move toward a fiscal union in 2012. Their proposal, which would mean giving up sovereignty over budgetary policies with the aim to shore up the 17-nation currency union, has received a lukewarm response from other euro zone countries.

Deutsche Bank CEO says "It's Obvious Many Banks Will Not Survive if Forced to Value Sovereign Debt at Market Prices - Josef Ackermann, CEO of Deutsche Bank admitted the obvious today with statements recognizing that many organizations will fail at mark-to-market pricing. To show you the Fantasyland world these bankers live in, Ackermann also believes European banks are now much better capitalized and less dependent on short-term financing. Courtesy of Google Translate please consider Many banks will not survive if forced to value sovereign debt at market prices  "It is obvious that many organizations will not survive in the event of having to reassess their portfolios of sovereign debt at market prices," Ackerman said in his speech at a banking conference held in Frankfurt. These comments came after the controversy arose Christine Lagarde, managing director of IMF, which has called for an urgent recapitalization of European banking. According to the institution, the shortage could reach 200,000 million euros, resulting from exposure to sovereign debt.

Angela Merkel slumps to defeat in home state elections -Exit polls for the vote in Mecklenburg-Vorpommern gave Mrs Merkel's Christian Democrats just 24 per cent of the vote, down from the 28 per cent they garnered in the last vote in 2006. Adding to her woe was the performance of the Free Democrats, her coalition allies, who could be wiped out of the regional assembly, with just 3.6 per cent of the vote.  If the results stand, the Christian Democrats face the unpleasant possibility of being ousted from their current state coalition with the Social Democrats. Exit polls gave the left-wing party 37.7 per cent, and it could decide to strike an alliance with the Left Party or the Greens instead of maintaining the coalition.  To lose on her home turf will come as an acute embarrassment to Mrs Merkel.  She made nine visits to the state of 1.4 million people in the lead up to the election, and the defeat will raise question marks over her credibility and leadership.

German endgame for EMU draws ever nearer. Finance minister Wolfgang Schäuble could hardly have chosen a more toxic term than "Bevollmächtigung" or general enabling power when he requested blanket authority from the Bundestag for EU rescues, as if Weimar were so soon forgotten. He was roundly rebuffed.  You can feel the storm brewing in Germany. Within days of each other, President Christian Wulff accused the European Central Bank of going "far beyond" its mandate and subverting Article 123 of the Lisbon Treaty by shoring up insolvent states, and Bundesbank chief Jens Weidmann said bail-out policies had "completely gutted" the EU law.  Both believe the EU Project has taken a dangerous turn. Fiscal powers are slipping away to a supra-national body beyond sovereign control. "This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies," said Mr Wulff.  We will find out to what extent Germany’s constitutional court shares these fears when it rules this Wednesday on the legality of the EU rescue machinery, and delivers its verdict of life or death for monetary union.

Bring Out Your Dead - UBS Quantifies Costs Of Euro Break Up, Warns Of Collapse Of Banking System And Civil War - UBS conveniently sets up the straw man as follows: "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." So far so good. Yet where it gets scary is when UBS quantifies the actual opportunity cost to one or more countries leaving the Euro. Notably Germany. "Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. " It also would mean the end of UBS, but we digress. Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction: "The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war." 

Former Dutch FinMin: 1930s recession if euro zone fails Reuters: (Reuters) - Former Dutch Finance Minister Gerrit Zalm said on Sunday Europe would fall into a recession worse than the one seen in the 1930s if the euro zone fell apart. Asked on Dutch current affairs TV programme Buitenhof what would would happen if the euro zone broke up, Zalm said: "We will have a recession which makes the 1930s look like nothing." "The whole of Europe will crumble. You will get Switzerland effects. Switzerland has gotten a very strong currency and are being pushed out competitively because of the strong franc," said Zalm, who was Dutch finance minister until 2007. "For the Netherlands it would mean that if the European economy plunges, we would follow. Three quarters of our export goes to Europe," said Zalm, who earned a reputation as a fiscal hawk in Europe as one of the proponents of budget rules.

Game Over? Senior IMF Official - "I Expect A Hard Greek Default This Year" While the US was panicking over a double zero jobs report, things in Europe just fell off a cliff. As both the WSJ and Reuters report, it seems that the second Greek bailout, following repeated and consistent disappointments by Greece which has resolutely refused to comply with the terms of its fiscal austerity program, has just collapsed.And with the US closed on Monday: long a counterbalance to European risk pessimism, this week (especially with the news fro the latest FHFA onslaught against global banks) may just be the one that "it" all comes to a head. But back to Europe, and more specifically Greece, which it now appears is doomed. "I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim."

A shotgun wedding for the United States of the Euro? - "Ummm, you know that Free Trade Agreement we signed with the US and Mexico, a while back? And you know we said NAFTA was just a free trade agreement -- nothing more? Ummm, well, it turns out we were wrong. Because of NAFTA, if Canada, Mexico, and the US don't now join together into one big United States of North America, the result will be the total economic collapse of all three countries. So, we are just going to have to join our three countries together and make the best of it. Sorry about that. But we can't turn back the clock. And there really is no alternative now. OK?" Any sort of Canadian nationalist would go ballistic if I were to say those words. Especially if they knew I was right. Like all analogies, it doesn't work exactly. But that's the best I can come up with. Just replace "North America" with "Eurozone"; and "free trade agreement" with "common currency". If that is how the United States of the Euro gets created, I think it would be the most hated country on earth. Hated by its own people.

Latest European Indicators - Italian and Spanish bond yields have been creeping up in the last couple of weeks but seem to have taken a very sharp turn for the worse today - particularly Italian bonds.  The Italian graph is above and the Spanish one below. This is a very worrying development and hopefully the European authorities will respond rapidly. Also of particular interest is this pair of posts by Kash Mansori looking at the flow of bank deposits from Europe to the US:Putting it all together yields a compelling story: European banks are shifting their cash assets out of European banks and putting much of them into US banks. (An interesting question is what European MFIs have done with the remaining money they've withdrawn from the European banking system... but that's a story for another day.) This has happened at a significant rate, with a net transatlantic flow from European to US banks that probably totals close to half a trillion dollars in just six months.  If you're wondering exactly who has been the first to lose confidence in the European banking system, look no further. It seems that at the forefront is the European banking system itself.

German austerity drive risks Euro-slump - German finance minister Wolfgang Schäuble has vowed to halt rescue payments to Greece unless the country complies totally with the EU-IMF demands, brushing aside warnings that a Greek collapse would set off a disastrous chain reaction and a global banking crisis.  “The next tranche can be paid only when the conditions have been met. There is no room for manouvre here,” he told the Bundestag. Yields on 10-year Greek debt spiked to a fresh record of 19.8pc on fears of a disorderly default. The tough words reflect sentiment in Berlin that Greece should be left to its fate or even be ejected from the monetary union, even though the chief reason Greece has failed to meet its deficit target is the crushing effect of recession. The economy will have shrunk by 12pc by the end of this year, playing havoc with debt dynamics.  Mr Schäuble rebuffed calls from the International Monetary Fund for a softening of Europe’s austerity drive. “Piling on more debt now will stunt rather than stimulate growth in the long run. Highly indebted Western democracies need to cut expenditures, increase revenues and remove structural hindrances in their economies, however politically painful,” he wrote.

Insiders and outsiders - IF THE European Central Banker were printing money like newspapers print columns proposing solutions to the euro-zone crisis, Europe might finally face some of that dangerous inflation Jean-Claude Trichet keeps warning us about. There is no shortage of ideas for ways out of this mess. Some solutions are elegant, some rely on brute force, but solutions do exist. What a booming business in euro-solutions hasn't managed to accomplish is an implementation strategy; however clever the policy proposals, euro-zone governments have been reluctant to act at all, to say nothing of boldly, unless pushed to the brink by markets. It's possible that the cycle of brinksmanship will move the euro zone step-by-step toward a sustainable union, and that the bickering and dithering is primarily about negotiation over the allocation of the costs of this process. I'm not sure that's right, however. Europe's leaders know what they'll have to do to stabilise the situation. The key question now is: what is the set of euro-zone countries consistent with the political will to save the currency area? Europeans in Europe's core will share a currency with "outsider" countries, but they won't fight to save them. So who are the outsiders? Who has to go to convince core voters that the cost of saving the euro zone is worth bearing?

Euro Zone Leaders Get Warning From Central Bankers - With stock and bond markets on a roller-coaster ride reminiscent of the 2008 financial crisis, Jean-Claude Trichet and Mario Draghi, the current and incoming chiefs of the European Central Bank, had a pointed message for European leaders Monday: Get your act together. Europe’s top central bankers couched their admonishment in diplomatic terms during speeches in Paris focusing on the world three years after the collapse of Lehman Brothers. But the warning was clear: politicians are still not moving quickly enough to ensure that the euro zone’s debt crisis does not become seriously worse. Europe needs to “make a quantum step up in economic and political integration,” Mr. Draghi said as the bond yields of Greece, Italy and other countries with weak finances jumped Monday amid investor fears that such efforts might be unraveling. Mr. Draghi’s call goes to the heart of what politicians now acknowledge is a root cause of Europe’s crisis, but that few seem ready to change: the lack of a federal fiscal union that would make the euro zone look more like the United States. The idea is something that Germany and others are wary of because it could undermine their national authority.

In Euro Zone, Banking Fear Feeds on Itself - As Europe struggles to contain its government debt crisis, the greatest fear is that one of the Continent’s major banks may fail, setting off a financial panic like the one sparked by Lehman’s bankruptcy in September 2008.  European policy makers, determined to avoid such a catastrophe, are prepared to use hundreds of billions of euros of bailout money to prevent any major bank from failing.  But questions continue to mount about the ability of Europe’s banks to ride out the crisis, as some are having a harder time securing loans needed for daily operations.  American financial institutions, seeking to inoculate themselves from the growing risks, are increasingly wary of making new short-term loans in some cases and are pulling back from doing business with their European counterparts — moves that could exacerbate the funding problems of European banks.  Similar withdrawals, on a much larger scale, forced Lehman into bankruptcy, as banks, hedge funds and others took steps to shield their own interests even though it helped set in motion the broader market crisis.

European Inflation - The above graph shows the last 12 or months or so of Eurozone inflation.  The blue curve is "headline" inflation - ie including all of a basket of goods and services bought by the average consumer.  The red curve excluded energy, food, alcohol, and tobacco - something equivalent to what gets called "core" inflation in the US.  You can see that the rise in energy prices this spring caused a substantial rise in headline inflation and this was starting to bleed through into core inflation - which had otherwise been very low.  Now that oil prices have been moderating again, this appears to be subsiding again. If we look at the last month's data for the core inflation broken down by country, it looks like this:The PIIGS countries mostly have very low inflation as one might expect (with the partial exception of Portugal).  These countries have very weak economies and Greece and Ireland in particular are flirting with deflation.  The countries with the highest inflation are the UK and Iceland (neither in the Eurozone). Even the big central European economies of Germany and France have quite low rates of core inflation at the moment.

Irresponsible Alarmist Data Analysis at the NYT - The New York Times has the graphic above as the quantitative support for an article about European Banking with this lede: Remember the collapse of Lehman Brothers? Europeans certainly do. Notice the leftmost panel of the graphic above with the Libor-OIS spread increasing sharply in the last two and a bit months: I was suspicious of the choice to look at only such a short period of data so I went to Bloomberg and looked at the last three years' worth: That rise in the last couple of months doesn't look so big now does it?  Not only is it miniscule compared to 2008 but it hasn't even reached the levels of July 2010. So it seems the New York Times intentionally cherry picked a very short section of the data to create an alarming impression and support a comparison to the events of 2008 with the Lehmann bankruptcy.  On the strength of the evidence so far, there is no comparison.

super rich escape wealth tax -Hours after the Finance Minister unveiled a series of plans to tax wealthy Portuguese in order to consolidate the country’s burgeoning budget deficit, the Prime Minister revealed in Madrid his Government believed taxing large fortunes would be counter-productive and would scare investors away. While admitting that Portugal has one of the biggest divisions between rich and poor, Pedro Passos Coelho on Thursday rejected the idea of a tax on the nation’s richest.  In an interview published in Spanish newspaper El País, which the Prime Minister gave during an official visit this week to Madrid, he conceded that taxing the biggest investors in the Portuguese economy could lead to a mass exodus of capital.  “We know that if we were to adopt more aggressive fiscal measures, we would lose investors to other countries”,

Italian President warns on "alarming" debt signals - Italian President Giorgio Napolitano urged swift action to strengthen planned austerity measures on Monday, saying a severe market selloff was a clear warning that markets had lost confidence in Italy. "No one can underestimate the alarming signal from today's surge in the differential between the prices of Italian public debt instruments and those of Germany," Napolitano said in a statement. "It is a sign of the persistent difficulty in regaining trust as is urgently and indispensably required," he said, adding that he urged all parties not to block measures needed to restore credibility.

Italy to impose wealth tax, raise VAT - The Italian government today announced a cabinet meeting to authorise a confidence vote on an austerity package to speed its adoption amid the euro zone member's burgeoning debt crisis.  Italy announced the €45.5 billion austerity package last month, but its credibility among investors had been undermined by several changes the government made in the following week.  After Prime Minister Silvio Berlusconi met with coalition leaders today they announced the package will again include a wealth tax, raise the VAT sales tax and make pension reforms.  The government also said it would also adopt balanced budget rule on Thursday as part of efforts by the beleaguered euro zone member to regain the confidence of markets.  A wealth tax of 3% on revenues above €500,000 was put back into the package today, after a tax of 5% had been cut last week under pressure by Berlusconi.  The VAT sales tax will go up one point to 21%, according to statement issued after the ruling coalition meeting. The retirement age for women in the private sector, now at 60, is to rise to 65 years as it is for men beginning in 2014, instead of 2016 as had been planned previously.

Italian Workers Strike Against Austerity Measures - Thousands of workers took to the streets in Italy on Tuesday in a general strike to protest a package of ever-changing austerity measures required by the European Central Bank and now up for debate in the Italian Senate. The eight-hour strike shut down transport and businesses nationwide. It was called by the C.G.I.L. union, which represents 2 million public and private sector workers, in opposition to a 45.5 billion-euro austerity package of tax hikes and spending cuts proposed by the Italian government last month to reduce Italy’s budget deficit by 2013. The Northern League, the most powerful party in Mr. Berlusconi’s coalition, had been vehemently opposed to raising the retirement age for women, since in Italy public day care is scarce and grandmothers routinely serve as child care providers. Addressing a crowd of an estimated 70,000 people in Rome on Tuesday, Susanna Camusso, the leader of C.G.I.L., called the change to the labor law “unjust” and threatened more strike actions if it weren’t removed.

Berlusconi Cabinet Will Call for Confidence Vote on Revised Austerity Plan -Italian Prime Minister Silvio Berlusconi called a Cabinet meeting today to authorize a confidence vote in Parliament on an amended 45.5 billion-euro ($64.5 billion) austerity plan that prompted a general strike. The meeting in Rome will pave the way for a vote on the measures, which will include raising the value-added tax rate by one percentage point to 21 percent, a 3 percent levy on incomes of more than 500,000 euros a year as well as an increase in the retirement age of women in the private sector starting in 2014, Berlusconi’s office said in an e-mailed statement. The eight-hour walkout by CGIL, Italy’s biggest union, disrupted travel and manufacturing as protests in Rome and other cities attracted as many as a million people, according to the union. Fifteen percent of workers at Fiat SpA (F) took part in the strike, the nation’s biggest manufacturer said by e-mail. Fifty-eight percent of employees stayed off the job, the union said in a statement on its website, citing a survey. About 50 percent of trains, most of them regional, were halted, according to CGIL. Rome’s two metro lines and local commuter trains were shut down, ATAC, the company that runs them, said in a statement on its website.

Italy austerity plan faces Senate confidence vote - Italian Prime Minister Silvio Berlusconi faces a confidence vote in the Senate on Wednesday following the latest changes to a widely criticised austerity package aimed at staving off financial crisis... Italy, the euro zone's third largest economy, has been at the centre of the debt crisis since the start of July when markets began to doubt its commitment to cutting its 1.9 trillion debt mountain. Only intervention by the European Central Bank to buy Italian bonds has kept its borrowing costs from soaring out of control and destabilising the entire euro zone. But the ECB has warned that its support could not be taken for granted. Berlusconi's centre-right coalition has been deeply split over whether to raise taxes or hit pensions with Economy Minister Giulio Tremonti, once seen as the guarantor of financial stability, appearing increasingly isolated.

Finland May Quit Second Greek Rescue If Collateral Denied, Katainen Says - Finnish Prime Minister Jyrki Katainen said his country may not contribute to a second Greek bailout package if demands for collateral in exchange for new loans aren’t met. Such an outcome “remains a possibility,” Katainen told reporters after delivering a speech in Helsinki today. “It depends on the collateral issue.” Finland is at the center of a collateral dispute that threatens to stall Greece’s second rescue package and exacerbate Europe’s debt crisis. Katainen had earlier this month pledged to find a model that satisfies the AAA rated nation’s insistence on extra assurances its bailout funds be repaid without putting other euro members or creditors at a disadvantage.

Slovak leader: EU bailout fund 'road to hell' - An influential member of Slovakia's ruling coalition is confident he can muster enough support to block a plan to boost the powers of the eurozone's bailout fund. Richard Sulik, leader of the Freedom and Solidarity Party and parliamentary speaker, told the AP such measures are pointless and "a road to hell." All eurozone nations must give their consent before the "European Financial Stability Facility" can be given new powers, such as buying the bonds of governments struggling with their debt loads. Sulik says Slovak lawmakers will vote on the matter some time this fall once all other eurozone nations have delivered their verdict.

The impeccable Mr Trichet - Stung by a question reporting the criticism levelled by German politicians at the “European bad bank”—thanks to its rising pile of dodgy government bonds, which since August includes Italian and Spanish debt—Mr Trichet lauded the ECB’s record in almost 13 years in keeping inflation lower (averaging around 1.5% a year) than in any previous such period in Germany’s post-war history. The bank had remained true to its mission of securing price stability and had delivered it “impeccably, impeccably”. The bargain-breakers were governments (including Germany and France early on) that had failed to keep a grip on public finances.  These are difficult days at the ECB, as its usual task of setting interest rates to meet its inflation target of below but close to 2% is overshadowed not just by criticism about its unorthodox bond-buying programme, but by fears that the euro area may not survive a further 13 years in its present shape. At times, today’s conference seemed to be more about fiscal than monetary policy—and especially Italian fiscal policy. Mr Trichet delivered one bromide after another about how

Germany’s Top Court Rejects Constitutional Challenges to Euro Rescue -Germany’s top court cleared the way for Chancellor Angela Merkel’s coalition to participate in the current euro-area rescue plans, while saying it must seek some additional parliamentary approval for payouts under the funds. The Federal Constitutional Court in Karlsruhe threw out three suits targeting Germany’s share of the 110 billion-euros ($155 billion) in loans for Greece from euro-region governments and the International Monetary Fund as well as a separate 750 billion-euro rescue fund approved last year in an effort to prevent Greece’s debt crisis from spreading. The ruling will aid Merkel’s efforts to gain support for participation in a new round of European Financial Stability Facility programs. She pledged last week to consult lawmakers after her Cabinet agreed on a reworked plan that would raise Germany’s share of EFSF loan guarantees to 211 billion euros from a current 123 billion euros. The court said its ruling today shouldn’t be seen as “blanket” authorization of future rescue packages and the government must seek approval from the parliament’s budget committee for the individual guarantees it assumes in each bailout under the current EFSF.

German court gives MPs bigger say in euro bailouts (Reuters) - Germany's highest court said parliament must have a bigger say in euro zone rescue packages, a landmark ruling that may make it more difficult for Europe to respond swiftly in delivering aid to crisis-hit member states. As expected, the German Constitutional Court rejected a series of lawsuits filed by eurosceptics aimed at blocking the participation of Europe's biggest economy in bailout packages for Greece and other euro zone countries.  But its ruling on Wednesday said the government must seek the approval of parliament's budget committee before granting aid and spelled out that the ruling should not be misinterpreted as a "blank cheque" for future rescue packages. "The constitutional complaint has been rejected," said the president of the court, Andreas Vosskuhle, in a ruling closely watched by policymakers and investors because of its impact on the decision-making process in the 17-nation currency bloc.

EU parliamentarians fear debt crisis damage to Europe - The next act in the Greek debt tragedy, regarding the declining eurozone and its nascent rescue, is upon us: It now seems that Greece may not be able to fulfill the requisite conditions to qualify for further financial aid from Europe. This has stirred much ire within the German government. Some, few lawmakers are calling for Greece to be ejected from the single currency zone. Furthermore, Chancellor Angela Merkel could struggle to achieve a majority in parliament to push through further loans to Greece and other eurozone countries struggling to stay afloat under piles of debt. A straw poll carried out in the Bundestag this week showed as much.  Greece will have to explain how it intends to gets its financial house in order, before the official vote takes place in Germany's parliament at the end of the month. The figures on Athens' books appear to be even worse than previously thought.

Greek Bailout, Merkel's Majority In Doubt - Greece's government vowed Tuesday to increase the pace of structural reforms following fresh criticism from its European partners that it needed to accelerate austerity plans and sales of state assets. In a news conference, Finance Minister Evangelos Venizelos pledged to press ahead with a raft of measures to shrink the public sector, speed up privatizations and liberalize the economy. Among the measures, Venizelos said that the government would revamp the wage structure for public-sector workers in a move that is widely seen as leading to further cuts in civil-service wages. He also said that the government would progress with creating a labor reserve for surplus public workers that would be a step toward reducing the overall public-sector work force. Beginning Wednesday, Venizelos said the government would also transfer selected state assets into a Greek state privatization fund as a first step toward jumpstarting Greece's moribund EUR50 billion ($70 billion) privatization drive.

Costs of Euro Zone Breakup Underestimated - A breakup of the euro zone would have grim, long-lasting social and political consequences that extend far beyond its economic costs — an ugly risk that is widely underestimated, according to UBS AG. The Swiss bank warned that the economic cost of a breakup should in many ways be the least of investors’ concerns. “The economic costs of breaking up the euro are high, and extremely damaging. The political costs of breaking up the euro, even in part, are too great to quantify in bald cash terms,” Stephane Deo, an economist at UBS, said in a note to clients Tuesday. Following a breakup, euro countries would barely have a whisper on the world stage, Deo said. What is more, past instances of monetary union breakups tend to spark either an authoritarian response from the government or create social disorder and civil war.

When fractured politics kills economic solutions - It’s all too easy, looking at Europe from across the pond, to divide the entire continent into two halves: a profligate south, spending beyond its means, piggybacking on the rich north, which doesn’t want to bail them out. But of course it’s a lot more complicated than that. For starters, there’s the fight between the ECB, which wants a fiscal solution to the crisis, and pretty much everybody else, who wants the ECB to grow up, stop worrying about nonexistent inflation, and help save the euro zone by printing euros. There’s the question of whether and how much shareholders in banks should help pay for the bailout; a separate question about banks’ bondholders; and yet another question about sovereign bondholders. Within the northern countries, Finland has staked out a particularly extreme stance, saying that it won’t lend any money to anyone unless it’s collateralized. And then there’s the Bundesbank, which is particularly keen on imposing a painful regimen of austerity and structural reforms on countries which desperately need growth. Or, to put it another way: European economic union has failed because European political union doesn’t exist. There’s no political body empowered to make decisions on behalf of the whole, and nor is there an executive able to issue debt on behalf of the whole. Hence the EFSF — a special purpose vehicle partially guaranteed by 16 different states including both Malta and Cyprus, incorporated under Luxembourgish law, and funded by the German Finanzagentur, in a structure which makes CDOs look downright simple.

Europe Out of Time; Differences Impossible to Untangle; Merkel's Mind is Fried; Eurozone Breakup Inevitable; "Let the Euro Die" - One of the many interesting aspects of the Eurozone crisis is how many key political and central bank leaders fail see (or at least admit) that Europe is out of time. Even more peculiar are statements by ECB president Jean-Claude Trichet who finally does realize time is of the essence, yet Trichet "solution" is a set of measures that must be passed by all 17 nations when those nations cannot agree on EFSF funding, on Eurobonds, on collateral for Greece, or even on whether a fiscal union or transfer union must take place. In some instances the differences boil down to big country vs. small country concerns. In other instances it is Southern "club-med" states vs. Northern states. Some countries refuse to give up sovereignty, while others welcome giving up sovereignty. It does not help matters when German chancellor Angela Merkel seems to change her mind on something every other week.

Greek Yields, Default Swaps Rise to Records on Bailout Concern - Greece’s two- and 10-year yields rose to records on speculation the nation’s deepening recession may make a second international bailout agreement redundant even before it’s implemented. German two- and 10-year yields dropped to all-time lows as equities fell. The yield difference, or spread, between Greek 10-year bonds and German bunds widened to the most since at least 1998, and the cost of insuring against default on Greek sovereign debt surged to a record. Italian two-year yields rose to the highest level in a month as workers held a general strike. Spanish 10-year bonds rose for the time in eight days as the European Central Bank bought the nation’s debt. “The consensus seems to be that the second bailout package for Greece might be obsolete before it has been put into law, which is obviously detrimental for sentiment,” “ Greece’s 10-year yield climbed 50 basis points to 19.81 percent at 4:51 p.m. in London. The 6.25 percent security due June 2020, fell 1.155, or 11.55 euros per 1,000-euro ($1,400) face amount, to 45.47. Two-year note yields added 283 basis points, or 2.83 percentage points, to 53.20 percent.

Greek 1-Year Bond Yield Hits 88.48%; No Comments from Trichet, ECB, or EU -

Greek one-year bonds march relentlessly towards a yield of 100%. During this massive spike, there has been no comment from outgoing ECB president Jean-Claude Trichet, incoming ECB president Mario Drahgi, or for that matter anyone in the ECB or EU regarding Greek bond yields and the implications of this move. Here is some advice for Trichet and Drahgi: If you ignore a default, it will not go away.

Greece euro exit can't be ruled out - German CSU head (Reuters) - The leader of Germany's Christian Social Union, one of three parties in Chancellor Angela Merkel's centre-right ruling coalition, was quoted on Wednesday as saying he could not rule out Greece leaving the euro zone.Horst Seehofer, CSU chairman and Bavaria state premier, told Bild newspaper that he was nevertheless confident Greece could succeed with its fiscal reform efforts. Asked by Bild if he could exclude Greece exiting the euro zone, Seehofer said: "I do not think that can be ruled out but I'm counting on the success of the path that has been taken with aid and consolidation efforts." Seehofer also told Germany's top-selling daily: "However, there can be no assistance if the indebted countries do not make their own contribution." The comments from Seehofer stood in contrast to those from Merkel, the leader of the Christian Democrats (CDU). Merkel said on Monday she did not think any country would be leaving the euro zone and any such move could drag down other countries.

Greece to sack 150,000 public sector workers - Until very recently Greece was seen as a successful, catching-up European Union country, albeit with some worrying socio-economic blemishes. It is fast on its way to becoming what used to be called a Third World country. It is certainly being treated as such by the ‘troika’ of institutions (EU, ECB, IMF) offering it financial support subject to strict conditionality. They have now threatened to withhold further support unless deep cuts are made in public spending. Yesterday the Greek finance minister announced that 150,000 public sector jobs, 20% of the total, would be cut. He said that Greece needed to implement cuts immediately not because it’s imposed from abroad but because it has to happen now, as quickly as possible, for the sake of our children. The only question is which of the two parts of this sentence is the more fatuous. The fact is that EU institutions and international lenders are forcing a European Union country to implement the same self-defeating pro-cyclical austerity policies and so-called ‘structural reforms’ that have caused such damage in numerous less developed countries in past decades. Greece’s output and employment continue to contract, not least in the face of past austerity measures, now deemed insufficient. How dismissing 20% of the public sector work force – technically they are to be transferred to to a reserve on 60% pay, but this is obviously a functional equivalent of unemployment – can be in the interests of Greek children, or for that matter the country’s adults and senior citizens, is hard to see.

WSJ: Greece's Recession Deepens - The Greek 2 year yield is at 55%! From the WSJ: Greece's Recession Deepens Greece's economy sank deeper into recession in the second quarter than previously forecast, with gross domestic product contracting by 7.3% on the year. ... Plunging domestic consumption was mostly responsible for the steep contraction rate ... With consumers bracing for the implementation of further austerity measures, promised in exchange for a fresh bailout to Greece ... Perhaps the headline should read "Greece's Depression Deepens".  And there is more austerity to come, from the WSJ: Greek Officials Scramble to Find More Cuts Greece's Socialist government is scrambling to cut public spending after receiving stark ultimatums from euro-zone governments that further rescue money will be withheld if Athens doesn't deliver on promises to reduce its budget deficit. The government now is looking at unprecedented public-sector layoffs and cuts in civil-service perks ...The beatings will continue until morale improves.

Prospect of empty coffers looms large. The government is facing the possibility of not being able to pay wages and salaries in October if its international creditors do not approve the pending 8-billion-euro sixth installment immediately. The country’s foreign lenders have made disbursement conditional on the government’s adoption of new measures that will target the collection of at least 1.7 billion euros. Without the sixth tranche, the public purse will be 1.5 billion euros short on October 17. The prospect of a freeze in payments appeared even more serious on Thursday, after Greek commercial banks failed to cover the sum of 300 million euros of supplementary, noncompetitive bids for Tuesday’s auction of T-bills, providing only 155 million. The shortfall is interpreted as a clear message by banks to the government that they are unwilling to fund future issues of T-bills. The gravity of the situation is indicated by the fact that the government has frozen all disbursements apart from salaries and pensions.

Ongoing Greek debt problems spark talk of euro exit - Anger at Greece's failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals, with senior politicians now talking openly about the possibility of Athens exiting the euro zone. Horst Seehofer, the head of the Bavarian Christian Social Union (CSU), was the first prominent figure in Germany to suggest publicly that Greece might eventually be forced to leave the 17-nation single currency bloc in an interview in the Bild newspaper on Wednesday. But he was expressing what many lawmakers and ministers in the German capital have been whispering behind closed doors for weeks, according to well-informed sources. German Finance Minister Wolfgang Schaeuble has ramped up his rhetoric since "troika" inspectors from the European Union, International Monetary Fund and European Central Bank suspended talks on payment of a new aid tranche to Greece last week due to backsliding on its deficit targets.

Europe’s lethal uncertainty - As markets plunge again today, ostensibly on existential worries about the eurozone, you might want a plain-English explanation of what the root of the problem is. And John Lanchester is a great place to turn for such things: On 16 August, Nicolas Sarkozy and Angela Merkel had an emergency meeting to decide what to do about the Eurozone crisis. After it, they gave a press conference at which they spoke in platitudes about the need for Europe to improve its ‘economic governance’, avoiding all specifics. They precisely and explicitly ruled out the only two things which would have helped: the creation of ‘eurobonds’, i.e. debts backed by the full economic weight of all the countries inside the eurozone; and the extension of the €440 billion European Financial Stability Facility. It’s easy to see why they did this, and their reasons are entirely to do with the domestic unpopularity of giving more aid to the indebted and severely struggling ‘Club Med’ countries of Southern Europe. Unfortunately, Merkel and Sarkozy’s inaction is a recipe for certain disaster. Everybody and his cat knows that the eurobond is the only way out of the crisis for the eurozone in the medium term; as for the necessary size of the short-term bailout facility, Gordon Brown’s guesstimate was €2 trillion. That ‘could have convinced the markets that Europe meant business’. Instead, nothing.

ECB Says Banks Deposited 166.8 Billion Euros Overnight - The European Central Bank said financial institutions lodged 166.8 billion euros ($235 billion) with it overnight, the most in more than a year. Bank deposits were at the highest since Aug. 9, 2010, and up from 151.1 billion euros on Sept. 2. Lenders borrowed 8 million euros from the ECB at the marginal rate of 2.25 percent. The ECB currently lends banks unlimited liquidity in its refinancing operations at the benchmark rate of 1.5 percent. Banks are hoarding excess cash as the euro region’s worsening sovereign-debt crisis makes them wary of lending to other institutions. Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday that market conditions remind him of late 2008 when New York-based Lehman Brothers Holdings Inc. collapsed, sparking a global financial crisis. “On one hand this is a sign that there are some tensions in the interbank market,” “On the other hand we can’t draw too many conclusions because we are heading towards the end of the reserve maintenance period and there is also a lot of excess liquidity, so it would be normal to deposit it at the ECB.”

New poll shows far right could squeeze out Sarkozy  - Marine Le Pen, leader of the anti-immigration National Front (FN), is projected to win enough votes to knock out President Nicolas Sarkozy from the second round of next year’s all important 2012 presidential election, the French daily Le Parisien's revealed on Thursday. The poll confirmed a previous Le Parisien survey conducted in early March that gave Le Pen a considerable head start over Sarkozy, and even a small edge on IMF boss Strauss-Kahn. The March survey said Le Pen would gather 24% of French votes, beating Strauss-Kahn’s 23% and Sarkozy’s 20%. In Thursday’s survey Strauss-Kahn climbed to 30% and Le Pen dipped down to 21%. Either way, the figures makes Le Pen a credible candidate in the 2012 race.

Italy to Miss Budget Goal, Risks Default, Capital Economics Says - Italy will fail to balance its budget in 2013, and a shrinking economy and low potential growth will hamper efforts to cut Europe's second-biggest debt, increasing risk of default, Capital Economics Ltd said. "If our gloomier economic forecasts prove accurate, the budget deficit may remain at around the 3 percent of GDP mark over the next two or three years," Ben May, European economist at London-based Capital Economics, wrote today in a note to investors. "There remains a strong chance that Italy may eventually have little choice but to default." Prime Minister Silvio Berlusconi's 54 billion-euro ($76 billion) austerity plan was approved by the Senate last night as Italy seeks to persuade investors and the European Central Bank it will eliminate the deficit in 2013. The government hasn't revised its April 11 growth forecasts that projected a GDP increase of 1.1 percent this year and 1.3 percent next. "Italy may be on the brink of falling back into recession; we now expect the economy to contract in 2012 and 2013," May wrote. "Even if Italy can eliminate its budget deficit by 2013 as planned, it will still need to dramatically reduce its debt- to-GDP ratio to regain the markets' confidence."

German 10-Year Yields Fall to Record Low After ECB; Italian Bonds Decline - German 10-year bund yields fell to a record low after European Central Bank President Jean-Claude Trichet said “downside risks” to the economy have intensified and inflation concerns had eased. Italian bonds declined after the nation’s Senate approved a revised 54 billion-euro ($75.6 billion) austerity plan as the government seeks to convince investors it’s serious about cutting its deficit. French bonds gained as the ECB cut its euro-area economic growth forecasts for this year and next. The euro-region’s economy faces “particularly high uncertainty,” Trichet said at a press conference in Frankfurt after the ECB kept its benchmark interest rate at 1.5 percent. Ten-year bund yields fell to a record 1.823 percent as Trichet spoke. Two-year notes dropped three basis points to 0.46 percent. They declined to an all-time low 0.417 percent Sept. 6.

Default and Dissent Threaten Greece - Sixteen months after a landmark bailout and seven weeks after a fresh deal to pull it back from the brink of collapse, Greece remains in danger of descending into a messy, destabilizing default.  Greece is being buffeted on several fronts. It is in danger of missing budget-cutting targets that its euro-zone rescuers insist are the price of continued aid. Participation by banks in a crucial debt-restructuring plan may be less than planned. And euro-zone countries are mired in a debate over whether Greece must provide collateral to secure its bailout money.   There is little room for anything to go wrong. Without more aid, Greece will run out of cash within weeks, senior Greek government officials say.  Meanwhile, popular dissent in Greece is seething. Mass protests are expected to greet Prime Minister George Papandreou in Thessaloniki, Greece's second city, where he is slated to give a speech Saturday at the international trade fair, defending the harsh fiscal cuts his government has pledged.

Greek PM to give key speech amid hostility - The Greek prime minister will face a hostile audience on Saturday when he makes a key economic policy speech in the northern city of Thessaloniki after several days of turmoil on financial markets, and a controversial decision to sack thousands of public sector workers. As recession bites deep in his crisis-hit country, George Papandreou is under mounting pressure. His Panhellenic Socialist Movement’s rating is slipping in opinion polls, some German politicians have called for Greece to exit the eurozone, and his finance minister was on Friday forced to dismiss market speculation that the country might default over the weekend.  Evangelos Venizelos called the rumours “a game in bad taste; an organised piece of speculation against the euro and the eurozone countries”. He insisted Greece would fully implement its economic reform programme agreed with the European Union and International Monetary Fund, “without taking into consideration any element of political cost”.

Germany Said to Ready Plan to Help Banks If Greece Defaults - Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said. The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress. Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,”

Revisiting the PIIGS Led to Slaughter Perspective – Implications of a Greek Default - Last year we provided an analysis based on the financial balances approach that suggested a number of problems could arise with the eurozone’s pursuit of what are called “expansionary fiscal consolidations”.  Simply put, higher taxes and lower government spending drain cash flow from households and firms, and that increases the financial fragility of economies. For a number of reasons, there appears to be a glaring blind spot with regard to private debt as investors and policy makers remain focused on reducing public debt growth. There is little or no recognition of how changes in fiscal policy may influence the sustainable paths available for the private sector to manage its financial obligations. We currently have in hand an extreme case of this interaction of public and private financial conditions. Investor and policy maker attention is now focused squarely on the prospect of an imminent Greek public debt default. But the issue of a Greek government debt default immediately raises the issue of Greek bank solvency (since much of the Greek public debt is held on their books), and hence provokes the question of how the necessary bank recapitalization could proceed. I doubt the EFSF or ECB (or Qatari investors, for that matter, who must feel like Prince Alwaleed with his Citi holdings) will be in the mood for subsidizing a Greek bank recapitalization if Greece has defaulted on its public debt.

Eurozone: “illogical” to exclude bankruptcy countries, says the Estonian Minister of Finance -The economy minister of Estonia, member of the euro area since January, said it was “illogical” to exclude the possibility of bankruptcy, in an interview published Friday. “I still do not understand how a failure to pay (heavily indebted countries) can be avoided,” said Juhan Parts in German daily Financial Times Deutschland. “In a market economy, this should be an option. It is illogical to want to avoid this issue,” he added.His comments came as doubts about the ability of Greece to implement promised reforms, and on which the financial assistance of its partners are increasingly keen among Europeans.Estonia, which had to implement stringent economic reforms in the past, has the lowest debt level in the EU, 6, 6% of gross domestic product (GDP) in 2010. M. Parts rejected the idea of ​​an economic government of the euro area, put forward by French President Nicolas Sarkozy and German Chancellor Angela Merkel. “What is it is supposed to be?” He asks. “With the Stability and Growth Pact, there is already a clear agreement. And we do not know how we can force the Italians to apply [comply],”.

IMF chief urges bold action in G7 crisis talks - Finance ministers from the world's richest economies gathered Friday to work out how to head off gathering storm clouds, as the new IMF chief urged bold action on the sovereign debt crisis. After US President Barack Obama unveiled a $447 billion jobs plan to energise the world's largest economy, finance chiefs and central bank governors of all of the Group of Seven (G7) group of industrialised nations gathered in the French coastal city of Marseille for two days of talks. A report issued on the eve of the meeting said that a new recession in some rich countries cannot be ruled out and the eurozone crisis could deepen. The Organisation for Economic Cooperation and Development (OECD) also revised sharply down its growth forecasts for the rest of the year for G7 nations and expected at least one quarter of contraction in Germany and Italy. The European Central Bank also cut its growth forecasts for the eurozone for this year and next.

Something Stinks in Euroland - The more I look at the economic data the worse the situation seems, especially when it comes to the banking system. It’s bad news for anyone hoping Europe can avoid a repeat of the U.S.-led financial disaster that kicked-off in earnest in 2008. Just remember this: Problems don’t usually stay in the banking system. Rather they move like greased-lightning into the real economy, where the rest of us live and work. Late last month, I warned that the TED-spread had surged to multiyear highs, indicating an elevated level of stress in the banking system. In response to this post I received a torrent of criticism. When I get a reaction like that it usually means I am on to something good. Sometimes the truth just hurts. Some people vigorously pointed out that things are better than they were in 2008. Maybe so, but why wait until for a monumental financial disaster to tell you why your savings disappeared? The bad news: Things are worse now than they were last month. Not only is the TED-spread still elevated, around 33 today, up from 16 in late July, but other indicators are flashing red too.

Stark quits ECB - This is good news for inflationists. I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job – or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark – like the Mark writes Die Welt. In my opinion, the main difference between the ECB and the Fed is that the ECB has people like Stark. Unfortunately, there are only a few. He is opposed to cheap money policies. A while ago, he openly warned of rolling bubbles caused by too low interest rates in the media. Thus, he suggested a timely turn-around in interest rate policy. Recently he voted against further bond purchases of the ECB. More on this recent event can be found here. Coming shortly after Axel Weber resigned due to his disagreement with Trichet’s policies, Europe’s anti-inflation block is now shattered. Something terrible must be going on at the ECB. I wonder where the ECB is heading?

A Setback for the Euro Zone— Discord over the handling of Europe’s debt crisis¹ spilled into full view on Friday when an influential member of the European Central Bank²’s executive board unexpectedly resigned. The news intensified fears over the euro³ currency union’s ability to cooperatively resolve its problems. Stock markets swooned in Europe and the euro fell against the dollar⁴ after the bank announced the resignation of Jürgen Stark, a German who is the central bank’s de facto chief economist and also a member of its policy-setting governing council, and the sell-off continued in the United States, with the major indexes all falling more than 2 percent.  Although the central bank said that Mr. Stark was leaving for personal reasons, the impression was that Mr. Stark’s departure was connected to his well-known opposition to the bank’s buying of government bonds to ease pressure on countries like Greece, Italy and Spain.  Mr. Stark’s resignation, nearly three years before his term was up, is widely viewed as another fissure in the edifice of European unity, which has suffered as wealthier countries like Germany have been asked to underwrite poor performers like Greece.

Starkness Falls -  Krugman - Did the euro just enter its death throes? OK, I know that sounds over the top, and I hope it is. But recent developments are really, really bad. The best guide to recent events is actually a paper written this spring, by Paul De Grauwe (pdf). The key point, which I’ve finally taken fully on board, is that in addition to the huge problems of adjustment created by a rigid exchange rate in the aftermath of a bubble, the fact that European nations no longer have their own currencies leaves them vulnerable to self-fulfilling debt crises – in effect bank runs on governments rather than banks (although those too). To head off this risk, somebody – the EFSF, the ECB, whatever – has to be ready to act as lender of last resort; Eurobonds would have served much the same purpose.By resigning from the ECB, Juergen Stark has conveyed, deliberately or not, the message that there will be no such lender of last resort, that there isn’t enough political cohesion in the eurozone to stand behind countries under market attack. And this translates directly into soaring spreads for Spain and Italy; the self-fulfilling crisis is on.You little know, my friends, with how little wisdom the world is governed.

Economic, Debt Worries Mount in Euro Zone  The unexpected departure of European Central Bank chief economist Jürgen Stark intensified investors' worries about the euro-zone financial crisis Friday and unleashed a broad pullback from risk in European financial markets, sinking the euro to its lowest level in more than six months.  The cost of insuring European government debt against default rose to record highs as peripheral sovereign bond markets were hit by a fresh selloff, prompting the European Central Bank to step in again to support the market by buying Italian and Spanish government bonds. The cost of insuring European banks against default were also trading around record highs.

The euro zone is coming apart at the seams now - You can read it on Reuters:The top German official at the European Central Bank is to quit early in disagreement with the bank’s policy of buying euro zone government bonds to combat the currency bloc’s debt crisis. Clearly, Stark sees the monetisation path the ECB is on as not at all compatible with the ECB’s mandate. Separately, the noises coming out of the German governing coalition show exasperation with the progress in Greece. Edward Hugh writes that “a Greek euro exit is no longer the unthinkable taboo topic”. This is especially true after the beating Angela Merkel’s party took in elections in her home state of Mecklenburg-Vorpommern this past weekend.Fiscal consolidation is not expansionary. Moreover, it increases deficits due to the increase in spending on fiscal stabilisers and the decrease in tax receipts – that is unless the cuts are extremely large. There is zero chance that Greece will make its targets. I don’t expect Portugal, Italy, Ireland or Spain to meet their targets either, especially given the incipient double dip we are witnessing.

A stark warning - IT IS getting to be a habit. Earlier this year Axel Weber, then the head of the German Bundesbank and shoo-in candidate to take the top job at the European Central Bank (ECB) when Jean-Claude Trichet steps down at the end of October, caused consternation when he abruptly revealed that he did not want the job. Now Jürgen Stark, the ECB’s chief economist and a member of its six-strong powerful executive board, is to leave the bank early for “personal reasons”. The announcement rattled already nervous markets—the euro fell to its lowest against the dollar since February and there were heavy losses in European stockmarkets—because whatever his personal reasons may be, Mr Stark was known to be unhappy about the ECB’s decision to resume its bond purchasing programme in early August, since when it has bought some €55 billion of Italian and Spanish sovereign debt. He is not alone. Jens Weidmann, who replaced Mr Weber as president of the Bundesbank, also opposed the step, taken at an emergency weekend meeting of the bank’s governing council.

Key Resignation Another Blow to Eurozone Stability Atlantic Council: The markets took another hard hit today following the abrupt resignation of Jürgen Stark, Germany’s member of the European Central Bank’s board. The euro hit six month lows against the dollar, bank stocks tumbled five percent, the Dow was down 3 percent, and the FTSE All-World index fell 3.07 percent amid near certainty that Greece would default on its debt and send another shockwave throughout the Eurozone. Phillip Inman and Helena Smith, reporting for Guardian, say Stark, "a German hardliner and former member of the Bundesbank board, has lobbied for the ECB to impose stricter austerity measures on Greece and Portugal and to reject using its funds to purchase Italian and Spanish bonds until Rome and Madrid have made further efforts to reduce their debts and institute reforms" and that "Stark has been a consistent critic of the ECB's programme of purchasing government bonds of debt-ridden European nations in the markets. He has said eurobonds, which many economists believe are the only way to save the euro, would create false incentives for indebted countries. The cost of borrowing for the German government has increased as investors price in the risk of it absorbing the debts of all eurozone members through the creation of eurobonds."

Markets tumble after ECB’s Jurgen Stark resigns - World stock markets tumbled after the shock resignation of Jurgen Stark, a key member of the European Central Bank (ECB), provided an unwelcome backdrop to the crucial G7 meeting in Marseilles. Mr Stark, the top German official at the ECB, was leaving due to "personal reasons".  Sources said his departure reflected a deep rift at the heart of the ECB, with Mr Stark opposed to the bank's policy of buying eurozone bonds to support highly indebted countries like Italy and Spain. Mr Stark was considered to be a hawk at the bank, favouring looser monetary policy including higher interest rates.  The news came amid clear divisions in the G7 ahead of the two-day meeting, which began on Friday. Chancellor George Osborne was adamant that he would not waver from his austerity plan. "Britain will stick to the deficit plan we've set out," he said.  However, Christine Lagarde, the head of the International Monetary Fund, said that policymakers in advanced economies should use all available tools to boost growth as the world economy entered a "dangerous new phase".  Speaking at Chatham House, she said that while Britain's £110bn deficit reduction plan was "appropriate", policymakers should be "nimble."

When Fear Dominates - Europe has a couple of major problems right now. As we all know, there's the seemingly never-ending concern that Greece (and possibly other countries) may be insolvent and have to default on its government debt. But an equally serious problem, I think, is the widespread perception that there is no convincing leadership in Europe. European leaders just can't seem to agree on the big decisions that would have to be taken to firmly resolve the crisis one way or another, and so the policy responses have been seen to be nothing more than a series of delaying tactics. When you then get news about members of the ECB leadership resigning (note that Stark was the second to do so in the past several months), the policy disarray looks even worse.  Stark was the most prominent German in the ECB’s leadership, and probably also one of the most hawkish of them. The Germans, and Stark in particular, were quite unhappy with the ECB’s decision to start buying the government bonds from Italy and Spain.  Since the ECB leadership will now lose one of the fiercest opponents of assistance to the weaker euro countries, maybe this means that the ECB will actually be able to do more to help them. On the other hand, it's equally possible to think that this means that this will mean that support for ECB policies in Germany has been pushed to the limit, and that this will mean the end of additional support for the eurozone periphery.

Europe on the Verge of a Political Breakdown -  Eichengreen - Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union. If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. But Europe doesn’t have months, much less years, to resolve its crisis. At this point, it has only days to avert the worst. It is critical that leaders distinguish what must be done now from what can be left for later.

Few options left to save the euro zone - How should I begin this post? Let me start out with my former default position: I have always seen a sovereign default and restructuring within the euro zone as more likely than a break-up of the euro zone. I would say I considered the dissolution of the euro zone as an outlier. See my thoughts from "Anticipating Eurozone Collapse" in March. Increasingly, this possibility is being raised. Granted, the chances are increasing but it still cannot be the baseline case.-Three options for the euro zone: monetisation, default, or break-up This is no longer my view. Breakup is my default case now. Let me tell you why. In June, I wrote that the chances of a euro zone breakup are now increasing, giving background for the current political turmoil surrounding Greece. My conclusion was “the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core”. A few days later, Nouriel Roubini wrote a very good note explaining then why the Eurozone could break up over a five-year horizon. We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible:

What To Look Out For In Greece This Weekend - Greece has occupied the center of attention today, as fears of default mount. This apprehension will continue over the weekend. It would, however, be surprising to see anything like this happen before Greece meets with IMF/EU/ECB officials to discuss $11 billion in bailout funds next week. Of prime importance this weekend is a speech PM George Papandreou will deliver in Thessaloniki Saturday, amid mounting hostility within his own party. While the government publicly reaffirmed Greece's will to go ahead with the bailout today, his remarks may provide insight into a handful of different issues. Here are the four big questions we'll be looking to answer:

• - How serious is the ECB/EU/IMF troika about actually revoking the next tranche of aid funding ($11 billion) it promised to provide?
• - How long can Greece last without a bailout?
• - How fragile is Papandreou's position?
• - How close is the Greek government to giving up and throwing in the towel?

Gloomy August - when the surveys matched the weather - Once the role of Markit, which produces the monthly purchasing managers' surveys, appeared to be to expose some odd looking official figures. Markit's surveys signalled a UK upturn long before the Office for National Statistics did. Now the purchasing managers' surveys are pointing to weak growth - it suggests its manaufacturing, construction and service surveys point to stagnation in the third quarter - at a time when the trajectory of the official figures (together with level effects) suggests faster growth in Q3 than Q2.We will see what happens - the third quarter has time to run. In the meantime, some detail from today's service sector purchasing managers' survey, which showed a sharp index fall from 55.4 to 51.1, the sharpest drop for 10 years.

Osborne Says U.K. Deficit Cuts Pave Way for BoE - Chancellor of the Exchequer George Osborne said his five-year program to eliminate Britain’s budget deficit has provided space for the Bank of England to practise “monetary activism” to keep borrowing costs down. The plan for the biggest cuts in public spending since World War II is “flexible enough” to withstand economic shocks even as growth struggles to gather momentum, Osborne said in a speech last night to Lloyd’s of London, the world’s oldest insurance market. He suggested government growth forecasts will be lowered. The U.K. has “a plan for fiscal responsibility” that was introduced “so that monetary activism can allow interest rates to stay lower for longer,” Osborne said. Goldman Sachs Group Inc. and Citigroup Inc. said two days ago the Bank of England may restart its quantitative easing program by buying bonds as early as this week as the economic recovery weakens and bank-funding costs increase. Governor Mervyn King needs permission from Osborne to do so.

UK Disposable Income falls to the lowest since 1921 - The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.  Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.  The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year's fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.   It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January's increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices. At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cut-backs.