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

Saturday, September 17, 2011

week ending Sept 17

US Fed balance sheet expands in latest week - 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 -- a broad gauge of its lending to the financial system -- was $2.847 trillion in the week ended Sept. 14, compared with $2.841 trillion in the week ended Sept. 7. For balance sheet graphic: Meanwhile, the Fed's holdings of Treasuries totaled $1.659 trillion, up from $1.656 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) totaled $884.9 billion, unchanged from 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 $19 million a day in the week ended Wednesday, up from $2 million a day in the previous week.

Fed Total Discount Window Borrowings $11.63 Billion - The size of the U.S. Federal Reserve's balance sheet continued to rise last week, ahead of a key meeting next week where officials will discuss whether to change the composition of the central bank's portfolio in an effort to boost a weak economy. The Fed's asset holdings in the week ended Sept. 14 stood at $2.867 trillion, up slightly from the $2.862 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 $1.659 trillion Wednesday, from $1.656 trillion the week before. Thursday's report showed total borrowing from the Fed's discount lending window was $11.63 billion, down slightly from the $11.66 billion a week earlier. Borrowing by commercial banks rose to $68 million last week, when concerns over Europe's debt crisis increased. That was up from $13 million the previous week. Five major central banks, including the European Central Bank and the Fed, moved in concert Thursday to pump dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis. The Fed report showed that U.S. government securities held in custody on behalf of foreign official accounts moved down to $3.463 trillion, compared to $ 3.474 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts edged down to $2.730 trillion from $2.742 trillion the previous week. Holdings of agency securities edged up to $733.42 billion from $732.18 billion the prior week.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances  

The Fed Bails Out Eurobanks Yet Again - Yves Smith - Watching re-enactments of scenes from the global financial crisis is a very peculiar experience indeed. The opening by the Fed of currency swap lines to allow the ECB and other central banks to extend dollar funding to Eurobanks was seen as an extreme measure the first time around, a sign of how close to the abyss the financial system had come. This time, allegedly because the powers that be acted before things got quite so dire, bank stocks rallied impressively. Similarly, the media treated this move as just another episode in the ongoing Perils of Pauline drama running on the other side of the Atlantic. The Eurodrama has gone so many chapters that it’s easy to get rescue fatigue. And a bailout handled tidily among central bankers makes for less gripping reporting that the national and interpersonal theatrics involved in the typical Eurozone cliffhanger. Similarly, the Eurobanks were under real stress by being frozen out of dollar funding, largely because US money market funds were not longer willing to do repos with them or buy their commercial paper. And US banks were also encouraged to cut back on their exposures to them. So the central banks have stepped into this breach.  But this is just a liquidity fix, and here, that means largely a palliative. The Eurobanks will suffer serious hits when the sovereign debt crisis losses come home to roost; this alone will render many major banks undercapitalized. The ECB has, as the Fed did, allowed banks to pledge dreckly collateral in return for shiny new funds. But the big difference between the ECB and the Fed is the ECB apparently sees itself as constrained by its $5 billion in equity (even though it could simply print, give the proceeds to national governments, and have them give that back to the ECB as an equity contribution) and is loath to bloat its balance sheet too much. The self imposed balance sheet growth limits of the ECB plus the refuse of EU leaders to consider other mechanisms such as Eurobonds means it’s hard to see how the wheels are not going to come off the European financial system in the not too distant future.

Why didn’t the Fed release a statement on the dollar liquidity bailout? - Overnight, a group of us were exchanging e-mails on the recent coordinated central bank action to provide European banks the funding being denied them by the markets. I had a few comments of note I wanted to address, but here’s why I am writing this post:“See NYT report which says clearly that the Fed did nothing to cooperate since the swap was already in place and would make no statement.” When I read that I realised it was true. Look at the post yesterday from the BoE, “Additional US dollar liquidity-providing operations over year-end”. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed. In fact, I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed). I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?

Fed Watch: A Modest Monetary Proposal -- I have been reading and rereading Raghuram Rajan’s piece questioning the effectiveness of proposals to raise inflation targets. I tend to be pretty sympathetic to such proposals; traditional monetary policy obviously hit it limit long ago, and active commitments to higher inflation to depress real rates seems to be a logical next step. That said, Rajan has a number of good points questioning both the implementation and efficacy of higher inflation targets. Can the Federal Reserve credibly commit to higher inflation? Can they credibly commit to regain control over inflation at some later time? Most striking, I think, was Rajan’s reflection, that a small inflation increase really will not do much good at all: 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. A mechanism to rapidly accelerate the process of household rebalancing would be extremely helpful. It is not clear that an inflation target of 3 percent is such a mechanism. Something more dramatic is required. Would that something more dramatic be QE3?

Fisher says Fed can do little now to spur economy -(Reuters) - There is little the Federal Reserve can do at this point to help a U.S. economic recovery battered by problems at home and abroad, a top Fed official said on Monday, adding that he believes it is it incumbent on politicians to attack fiscal problems. Richard Fisher, president of the Dallas Federal Reserve Bank, did not outright reject further monetary easing, but he emphasized he remains skeptical that such action would be fruitful. His comments echoed his own dissent to the U.S. central bank's decision last month to commit to ultra-low interest rates until at least 2013, a stance driven not by fears of reigniting inflation, but because he did not believe the move would do any good. "If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,"  "But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary."

Evans doctrine gains traction at Fed - Once seen as an extreme, even imprudent notion in the corridors of respectable central banking, the idea that a little bit of inflation is needed to let some of the air out of a decades-long debt bubble is gaining ground in establishment economics. Even the U.S. Federal Reserve, a central bank that prides itself in offering a high degree of steady predictability on inflation, is now actively pondering taking more drastic steps, such as linking the path of interest rates to the direction of unemployment or inflation. One particularly striking passage in minutes to the Fed’s August meeting signaled such an approach was much closer to becoming policy than investors and economists had believed:In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting.

Fed Set To Give Economy Therapy, Not Shock Treatment (Reuters) - The Federal Reserve, facing rising global financial strains and recession fears, is poised to increase downward pressure on longer-term interest rates next week in a bid to accelerate a sputtering U.S. recovery. With one eye on escalating debt turmoil in Europe and another on a stubbornly high 9.1 percent U.S. unemployment rate, the Fed, whose policy panel meets next Tuesday and Wednesday, looks set to begin shifting the composition of its balance sheet to weight it more heavily with longer-term securities. Having taken short-term interest rates to near zero and bloated its balance sheet with bond purchases that topped $2 trillion, analysts say the U.S. central bank is looking for smaller-bore ways to increase its support, such as shifting its holdings away from shorter-term debt. "That sends a signal the Fed is still active in supporting growth,"

Fed, in time, to use three easing tools - The Federal Reserve will eventually try all three principal easing tools now on the table unless there is a dramatic improvement in the economic outlook, a former top central bank official told MarketWatch in an interview.  The minutes of the Aug. 9 meeting show the Fed was mulling three policy steps beyond ultralow interest rates and the $2.6 trillion in bonds it currently holds: swapping shorter-maturity government securities for longer-dated ones to twist the yield curve, buying more bonds, and reducing the interest rate paid to private lenders for the reserves they park at the central bank. At the moment, press commentary about the Fed’s next step is often framed like a horse race, with smart money betting that the Fed is going to conduct a strategy nicknamed Operation Twist. Alan Blinder, the former vice chairman of the Fed and now a Princeton University professor, suggested that all three easing tools will end up in the winner’s circle.  “If the economy doesn’t perk up and continues to look anything like it looks now, I think they will do one, two and three,” Blinder said in an interview with MarketWatch.

Treasury to accommodate Fed on ‘Twist’ - The US Treasury would effectively accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, according to people familiar with the matter.  The Treasury would play a crucial role if the Fed decided to launch “Operation Twist”, where the central bank would buy more longer-term Treasury securities to drive down long-term interest rates by reducing the amount of such debt available to other investors. But its effectiveness would depend on how the Treasury reacted. If it pushed the other way, and took advantage of the Fed’s buying to sell more long-dated debt, then it could minimise the effect on interest rates.  However, the Treasury would be unlikely to respond to falling long-term interest rates with a sudden shift in the pattern of debt issuance, even though one of the Treasury’s strategic goals is to increase the average term of the US national debt.Treasury declined to comment on the implications of any Fed action on Treasury debt management policy.

The Fear Factor - The debate over fiscal expansion versus consolidation continues to divide the developed world. In response to the global recession of 2008, the United Kingdom embarked on an austerity program while the United States enacted an $800 billion fiscal stimulus. Despite a softening economy, British Prime Minister David Cameron is promising to stay the austerity course. Obama, too, is sticking to his guns with his recent proposal for an additional $450 billion of government expenditure and tax cuts to help boost employment.Unemployment in the US has remained above 9% for 22 of the last 24 months. While some are supporting additional stimulus, others are calling for UK-style austerity.  A better approach to reducing unemployment would be a new and expanded round of quantitative easing. I am heartened by calls for this in the UK, and that the talk is now turning to the purchase of risky assets, such as corporate bonds or bundles of loans to the private sector, as opposed to long-term government securities. This is a step in the right direction that I have been advocating for the past three years.

Something Useful Which the Fed Could Do - Buy Greek bonds.  I am very suspicious of proposals that the Fed do more to save the economy which do not specify what. They seem to be based on the idea that expanding Fed liabilities would be useful no matter what assets the Fed buys. I am convinced that Fed purchases are useful if and only if the Fed purchases assets which private investors fear. I think the QEII experiment supports this view. Investors fear Greek government bonds. The Fed certainly has the legal authority to buy foreign treasury securities. It can save Greece any day it pleases. This would be good for the USA, because it reduces the risk of another world financial crisis. There is no chance that the Fed will do this. I don't know why ?

The World's Safest Bank - Where do you put your money when you fear the worst? Why, in the world's safest bank, of course: the Federal Reserve System.* That's what the rest of the world has been doing in recent months, in massive quantities. And it makes perfect sense. After all, it's hard to think of any asset that is more safe and more liquid than dollar deposits kept in a bank account with the Fed, i.e. "reserves". And right now, banks -- especially European banks -- are clearly desperate for additional safe, liquid dollar assets. So that's why this time around, unlike during the banking crisis of late 2008, when the deposits of US banks with the Fed increased dramatically, it's now primarily non-US banks that have been pouring the most money into their accounts with the Fed. The following graph and table tell the story.

Barney Frank Takes on Fed District Presidents - U.S. Rep. Barney Frank (D., Mass.) Monday renewed his attack against the Federal Reserve‘s district presidents, saying their presence has become a “significant constraint” on the nation’s economic policy-making. In a position paper updating a bill he introduced in May to take away regional Fed officials’ power to shape monetary policy, Frank accused them of worrying too much about inflation — in economic jargon, of being inflation “hawks” — and too little about high unemployment. Though the bill is unlikely to make it into law due to Republican opposition, Frank’s move shines a spotlight on the effectiveness of Fed policy amid a widening rift at the central bank.

Barney Frank Working On Legislation To Overhaul The Fed… Representative Barney Frank, the ranking member of the House Financial Services Committee, is working on legislation that would transform the Federal Reserve's decision-making process. According to Bloomberg and The Hill, Frank plans to submit a bill that would remove the votes of the five regional Federal Reserve presidents from the 12-member Federal Open Markets Committee (FOMC), which sets interest rates, and replace them with five appointees that would be nominated by the president and confirmed by the Senate. Frank is concerned that the process is undemocratic because the regional Fed presidents are not elected or appointed by elected representatives, and he believes that regional Fed presidents are overly likely to focus on guarding against inflation at the expense of more adequately tackling the country's unemployment crisis. Traditionally, seven governors of the Federal Reserve are appointed to the FOMC in such a way, while the president of the Federal Reserve Bank of New York has a permanent seat on the committee, and four of the 11 presidents of the other regional banks have one-year rotating terms on the committee.

Supervising the supervisors - A new Brookings Institution report from the self-appointed Committee on International Economic Policy and Reform suggests that, given a spotty recent record, supervisors and policymakers at the world’s top central banks need to be watched themselves. The group of 16 high-profile economists and financial experts, which includes former Brazilian central bank chief Arminio Fraga, Berkeley professor Barry Eichengreen, Harvard’s Kenneth Rogoff and Mohamed El-Erian from Pimco, proposes a new international watchdog that might ensure actions taken by individual countries are coordinated and smoothed out:We call for the creation of an International Monetary Policy Committee composed of representatives of major central banks that will report regularly to world leaders on the aggregate consequences of individual central bank policies. The proposal comes as the Federal Reserve, faced with a weakening U.S. economy, ponders another round of unconventional monetary stimulus. The Brookings report suggested the Fed’s go-it-alone approach can be self-defeating:

The Problem With Quasi-Monetarism - Krugman - Henry Kaspar has a good piece laying out his differences with what he calls “quasi-monetarists”, economists who view the current slump as essentially a problem of too much demand for money, and therefore subject to a monetary solution. I basically agree with his diagnosis of where we are, but I thought I might add a bit more to the interpretation. So: an overall shortfall of demand, in which people just don’t want to buy enough goods to maintain full employment, can only happen in a monetary economy; it’s correct to say that what’s happening in such a situation is that people are trying to hoard money instead (which is the moral of the story of the baby-sitting coop). And this problem can ordinarily be solved by simply providing more money. But we’re not in an ordinary situation here, we’re in a liquidity trap in which short-term interest rates have been driven to zero, yet the economy still languishes. What that means is that when people are hoarding money, they’re no longer doing so because of its moneyness — the liquidity it provides, which makes money different from other assets. They’ve already got all the liquidity they want, since liquidity is free — you don’t have to sacrifice interest earnings to get more, so people are saturated. So at the margin, they’re holding money simply as a store of value.

Is Bernanke the Most Inflationary Fed Chair?  - Republican presidential candidates want his head. Inflation hawks on the Federal Reserve board think his policies go too far, and advocates for the unemployed think they stop too short. Fed chair Ben Bernanke seems to be ticking off economy-watchers at every turn. But while some of Bernanke's policies have certainly been unconventional, are the critics right about them being 'inflationary'? Take Newt Gingrich. He has called Bernanke "the most inflationary, dangerous and power-centered" Fed chairman in history and said he would sack Bernanke pronto. Texas Governor Rick Perry called Bernanke's "money printing"  "treasonous." And GOP presidential candidate Mitt Romney thinks Bernanke has "over-inflated the amount of currency he's created." These attacks get at several issues, none well explained. One is the idea that we are experiencing higher inflation than under any other Fed chairman in history. According to this chart by Jodi Beggs, that allegation appears to be false.The other issue is whether Bernanke, by increasing the money supply, is creating dangerous conditions that would stoke inflation down the road. Fortunately, Beggs also clears that up. Compared to other Fed chairs throughout history, Bernanke doesn't fare so badly on increasing the money supply either (M1 and M2 are different measure of money supply):

U.S. Inflation :: Current Median CPI :: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.6% annualized rate) in August. The 16% trimmed-mean Consumer Price Index increased 0.3% (4.0% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.4% (4.6% annualized rate) in August. The CPI less food and energy increased 0.2% (3.0% annualized rate) on a seasonally adjusted basis. Over the last 12 months, the median CPI rose 2.0%, the trimmed-mean CPI rose 2.4%, the CPI rose 3.8%, and the CPI less food and energy rose 2.0%

Inflation expectations have not been rising - BUTTONWOOD notes that the University of Michigan's survey of consumers indicates rising inflation expectations, a departure from the Cleveland Fed's measure of inflation expectations I presented yesterday. A number of economic writers have been pointing to the Michigan figures for months as an indicator that high inflation looms.  One shouldn't dismiss such data points, but it is worth placing them in the appropriate context. Market-based measures of inflation expectations, like Treasury breakevens, clearly show a sharp decline in inflation expectations over the next few months. Just the fact that the yield on the 30-year Treasury sits at 3.31% should tell us something important about the outlook for inflation. It's worth noting that survey-based estimates of inflation have consistently overstated future inflation in recent years. A recent research letter from the San Francisco Fed discussed the divergence, noting: The recent jump in the Thomson Reuters/University of Michigan measure of household inflation expectations appears to be related to increases in the prices of energy and food, similar to the jump observed in 2008. The size of this response to noncore inflation cannot be justified in terms of the historical relationships in the data.

How likely is deflation? - The Federal Reserve Bank of Atlanta’s (FRBA) calculates the probability of deflation to have been 17.1% at the end of August, up from just 6.4% on April 24th. The estimate is based on the price of similar-maturity Treasury Inflation-Protected Securities (TIPS)—government bonds with a principal amount that is adjusted upward with changes in the Consumer Price Index (CPI). The difference in yields between ordinary Treasury bonds and TIPS, the so-called breakeven inflation rate, provides an indication of the market’s inflation expectations. In this case, the FRBA is looking at the 5-year period beginning in early 2011. Just how likely is deflation? Odds of roughly 1:5 look pretty high at first glance and the FRBA’s methodology has its shortcomings. History provides an alternative benchmark in the base rate: the frequency with which the phenomenon has popped up on a historical basis. What is proportion of months that have been followed by a deflationary 5-year period? Using the inflation series compiled by Robert Shiller of Yale and stretching back to 1871, I calculate a base rate of 22%, which is pretty consistent with the TIPS-derived estimate. But is our sample period the right one?

HUSSMAN: The Market Is Totally Ignoring Greece And The Recession Because Everyone Assumes The Fed Will Save The Day - In John Hussman's view, equity markets still aren't really appreciating the 100% certainty of Greek default because bailouts have been so fully ingrained in the investor mentality. Undoubtedly, one of the main factors prompting a benign response to what is now virtually certain recession and virtually certain Greek default is the hope that the Fed will launch some new monetary intervention. While Wall Street appears to view the present weakness as a replay of 2010, it is strikingly clear that the evidence tells a different story, with a broad ensemble of data implying near-certainty of oncoming recession (see An Imminent Downturn ). While we have to allow for the possibility of a knee-jerk speculative response in the event of further Fed intervention, it is also much clearer now than it was in 2010 that quantitative easing does not work, and that even its marginal effects have reached the point of diminishing returns. To a large extent, the only basis for further Fed action here is superstition in the absence of either fact or theory. 

Why There Is No ‘V’ Rebound This Time - Dallas Fed - The NBER chronology seeks to identify turning points in general economic activity rather than a transition in a particular economic measure. The selection of the turning points is based on the behavior of key indicators (such as employment, sales, production and income), with the weighting of each indicator reflecting the judgment of the committee that determines the dates.   An alternative method of characterizing the business cycle is to examine the behavior of a single comprehensive measure of economic activity—such as GDP—and, furthermore, to define the cycle as movements in this indicator relative to some measure of its long-term trend. This is the approach favored by contemporary business-cycle theorists.  Chart 1 shows the behavior of real (inflation-adjusted) GDP relative to its long-run trend from 1947 to second quarter 2011.[4] When output is below trend, the deviations are negative. Note that these episodes tend to match up closely (albeit not perfectly) with NBER’s recession episodes (shown as shaded bars).

Economic Reports Indicate U.S. Economy Heading Down - Default notices on U.S. home mortgages rose 33% in July. Retail sales and food services rose only 0.0% -- adjusted for inflation they were negative. The CPI inflation measure for August came in at 0.4%, almost as high as it was in July. Weekly jobless claims rose again this week, coming in at 428,000. All are pointing to an economy in trouble.   The U.S. economy will continue to have difficulties until all the excesses are ringed out of house prices. Government policy has instead been geared toward stabilizing the market with temporary fixes. The Federal Reserve instituted a number of programs to funnel money into the mortgage markets to protect the banks that had too much exposure to real estate loans and the Obama administration has created programs like HAMP (Home Affordable Mortgage Program) to lower the foreclosure rate. Banks themselves have avoided or delayed foreclosures as long as possible because they don't want the properties on their books. All the government's efforts have certainly slowed down the rate of foreclosures and that may ultimately be all that they accomplish. A 33% increase of foreclosure notices in July indicates a new wave of foreclosures is likely next year.  Meanwhile, U.S. retail sales are declining if you take inflation into account.

That Uncertain Feeling - In a Wall Streeet Journal op-ed Friday about the recession, Becker started off Labor Day weekend weighing in on unemployment and the stalled recovery.  His explanation:  in a word, uncertainty.  These laws [financial regulation, consumer protection] and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires. It’s the standard right-wing, anti-government line, and Becker has impeccable conservative credentials, so I shouldn’t be surprised.  Still there’s something curious about it.  He pushes uncertainty to the front of the line-up and says not a word about the usual economic suspects – sales, costs, customers, demand.  It’s all about the psychology of those in small business, their perceptions and feelings of uncertainty,  Not only are these vague and hard to measure, but as far as I know, we do not have any real data about them.  Becker provides no references. 

Business Investment as a Key to Recovery - Advocates of traditional fiscal stimulus often view low levels of investment as a symptom, rather than a cause, of the weak recovery. Businesses are reluctant to invest, they argue, because they lack customers eager to spend. If the government can goose demand by handing out dollars to households short on cash, or by buying goods and services directly, businesses will respond by expanding their own spending as well.  WHAT can policy makers do to stoke animal spirits and encourage businesses to invest?  One obvious step would be a cut in the taxation of income from corporate capital. According to a 2008 study by the Organization for Economic Cooperation and Development, “Corporate taxes are found to be most harmful for growth.” Tax reform that reduced the burden on capital income and shifted it toward consumption would improve prospects for long-run growth and, in so doing, encourage greater investment today.  Yet it would be overly optimistic to think that any single public policy, by itself, could lead to the kind of robust investment spending seen in previous recoveries.

How to Really Save the Economy - THE United States is in the third year of a grand experiment by the Obama administration to revive the economy through enormous borrowing and spending by the government, with the Federal Reserve playing a supporting role by keeping interest rates at record lows.  How is the experiment going? By the looks of it, not well.  The poor results should not surprise us given the macroeconomic policies the government has pursued. I agree that the recession warranted fiscal deficits in 2008-10, but the vast increase of public debt since 2007 and the uncertainty about the country’s long-run fiscal path mean that we no longer have the luxury of combating the weak economy with more deficits.  Today’s priority has to be austerity, not stimulus, and it will not work to announce a new $450 billion jobs plan while promising vaguely to pay for it with fiscal restraint over the next 10 years, as Mr. Obama did in his address to Congress on Thursday. Given the low level of government credibility, fiscal discipline has to start now to be taken seriously. But we have to do even more: I propose a consumption tax, an idea that offends many conservatives, and elimination of the corporate income tax, a proposal that outrages many liberals.

Corporate Taxes and Investment - Yesterday in the New York Times Greg Mankiw -- a professor of economics at Harvard, an advisor to the governor of Massachusetts, in the campaign for the Republican presidential nomination and a former Chairman of the Council of Economic Advisers under president Bush -- had a column in which he argued that a cut in the corporate tax rate would induce greater investment. This is a key premise of Republican campaigns that has driven Republican policy since the early 1980s. The article is here. We should look at the record and see how well such cuts to corporate taxes actually has worked. First, average corporate profits versus tax business pays. Contrary to the statutory rate of 39% widely quoted, the effective rate corporations actually pay is now about 22%. That is down from about 50% in 1950 and a local peak of some 44% in the early 1980s. The right likes to compare the statutory rate to other advanced countries statutory rate and claim that the US has about the highest corporate tax among advanced countries. But according to a recent study by the US Treasury the US effective rate is in about the middle of the pack of effective rates for advanced countries.

Today’s Priority Cannot Be Austerity - Re economics professor Robert Barro’s oped in the NYT this AM: yuk, double yuk…yuk squared and yuk factorial. Essentially, what we have here is a visit to the NYT from the deeply misguided editorial pages of the Wall St. Journal, where Barro is a frequent contributor. The assertions are all wrong and the politics are too.  Start with the assertions. “Today’s priority has to be austerity, not stimulus…”  I keep hearing this argument that somehow immediate cutting, slashing, and burning will generate growth and jobs, by how?  Usually, it’s “confidence” and “certainty.” Obviously, such psychological states of mind matter a lot in an economy, but at a time like this, they simply can’t matter as much as customers.  And at 16% underemployment, with very low borrowing rates, high savings rates, and excess factory capacity, people and investors simply won’t engage in much economic activity.

Tinkering at the margins - Harvard profs Greg Mankiw and Robert Barro, two giants of the macro world, have twin editorials in the NYT suggesting what we should do to improve the economy. Mankiw favors free trade agreements and steps to improve international wage competitiveness..For example, passing the free trade agreement with South Korea, which has languished in Congress more than four years after first being negotiated, would be a step in the right direction. So would reining in the National Labor Relations Board...while Barro suggests switching from corporate and estate tax to a VAT:One benefit from a VAT is that it is more efficient than an income tax — and in particular the current American income tax system...  Abolishing the corporate income tax is similarly controversial. Any tax on capital income distorts decisions on saving and investment. Now, I broadly agree with all the policies described above. But do prof.'s Mankiw & Barro really believe that these will get us our of our slump? Where have we seen an example of a country that got itself out of recession by tweaking its tax and labor policies?

How to generate investment - THIS would seem to be the week when economists argue that a shortfall in investment is the main problem with the American economy. In the New York Times, both Robert Barro and Greg Mankiw wrote this weekend that glum businesses should be America's main concern. Mr Barro suggests that the Obama administration's focus on temporary measures—temporary tax cuts, delayed increases in tax rates, and delayed imposition of various regulations—has left businesses lacking the confidence and certainty they need to invest. What would he do? bIf we could get past the political fallout, we could get more revenue and improve economic efficiency by abolishing the corporate income tax and relying instead on a VAT. Like Mr Barro, Mr Mankiw calls for a cut in the corporate tax rate. He also suggests that passing free trade agreements and reining in labour unions would boost "animal spirits" and set loose investment. A few thoughts: first off, real business investment isn't clearly performing much worse than other variables in the economy, including output. Second, it's always a good time to do things that are generally worth doing. Mr Mankiw doesn't mention infrastructure and Mr Barro speaks about infrastructure spending with outright derision, despite the fact that is as likely to dampen business sentiment as is nervousness about the fate of a trade agreement with South Korea.

Word to the Wise: FPI (Investment) includes Residential Construction - So I see a lot of people looking at low investment in the US and saying this is the problem. And, I don’t disagree! But then they assume that investment is a reflection of business, in particular corporations, willingness to expand capital. This is wrong. The majority of investment is in structures and the majority of structures are residential. So when we say “investment” the biggest component of that is housing. Lets look at some graphs, because that makes anything more fun. So this is FPI or fixed private investment. Non-fixed investment is inventories. They are counted as investments basically to make GDP add up to the right number, that’s all. So FPI is investment in things that are supposed to yield long term benefits. That’s ugly. No wonder our economy sucks. Alright but lets takeout residential investment. That looks better already. Still kind of down in the dumps though. Lets take out construction all together. The BEA calls that Investment in Equipment and Software as opposed to Structures. Well, that’s much better. Indeed its performed better than GDP since the end of the recession.

What’s the Story Behind Business Investment, Ctd -  In this first post I want to compare the two “biggest” categories which are information processing and transportation. I put biggest in scare quotes because one of these categories has actually fallen to third place recently. It should be obvious which. So the blue line is investment in Information Processing and Communication equipment. The yellow line is investment in Transportation equipment.  Now these are indices marked so that 2005 is 100, for both. In actual dollar terms IT is significantly larger than transportation. However, you can see that investment in transportation equipment simply cratered, falling by an astounding 70+% in 2008. Disentangling investment in various transportation components will take some work and I’ll save that for a later post.

Jobs Act: Greater than Expected Impact - Last week President Obama unveiled his much-heralded jobs plan, the American Jobs Act of 2011 (AJA 2011). It was bigger than expected, with a price tag of $447 billion. More than half the total ($245 billion) is in the form of temporary tax relief, with most of the balance in infrastructure spending. We estimate that if enacted promptly and assuming no monetary offset, the plan will:

  • •Boost GDP growth roughly 11⁄4 percentage points in 2012 by pulling growth forward, mostly from 2013.
    •Raise payroll employment 1.3 million by the end 2012, 0.8 million by the end of 2013, and progressively smaller amounts thereafter.
    •These estimates do not reflect jobs that might be created in response to tax incentives for hiring included in the plan. While an argument can be made for such effects, we believe them to be modest (more below).
    •Our simulation does not include the effects of an initiative, under consideration by the Administration, to direct federal housing agencies to facilitate mortgage refinancing. We will publish a piece on this shortly.
    •The President will recommend offsetting the cost of AJA 2011 over the coming decade. The “pay-fors” imply fiscal drag not included in the simulation, but this will be modest and most likely occur after 2013 when the economy is stronger and the Federal Reserve is better positioned to accommodate it.
    •Our published forecast already assumes a one-year extension of the current employee payroll tax holiday. Hence, if the President’s plan was enacted in its entirety, we would revise up our forecast for GDP growth in 2012 by about a percentage point, not the full amount shown in this analysis.

ROUBINI: If We Don't Have Massive New Stimulus We're Going To Have Another Great Depression There's violent unrest in the world, banks are collapsing, and the economy's once again teetering on the brink—which means that Prof. Nouriel Roubini is right back in his element. And he's going to it with gusto! Nouriel's sticking with his "60% chance" of a new recession. But he's amping up the rhetoric accompanying this assessment. His latest warning, as recorded by Bloomberg, is that unless world governments release massive new fiscal stimulus, we're headed for another Great Depression. Here are some quotes: “I thought a few months ago that the perfect storm would be 2013, but now, the economic weakness in the U.S., eurozone and U.K. is front-loaded." “So we're going to double-dip earlier. The climax of it could be 2013 or it could be already earlier." “You need to restore economic growth, not five years from now. You need to restore it today." “In the short term, we need to do massive stimulus; otherwise, there's going to be another Great Depression...Things are getting worse, and the big difference between now and a few years ago is that this time around, we're running out of policy bullets.” Bottom line? Austerity doesn't work. Time to spend, spend, spend.

What do low government bond yields signify? -- Brad DeLong and Tyler Cowen point to an interesting exchange in the Financial Times. Martin Wolf argues that in the U.S., U.K., and Germany, the household, business, and foreign sectors want to spend much less than they earn, pushing interest rates to exceptionally low levels, and signaling that the public sector in these countries needs to borrow more and spend more to pick up the slack. Stephen King maintains instead that Treasury yields are low for the same reason that gold prices are high-- naked fear: "Investors are trying to find pockets of safety in a world where the financial system appears to be slowly crumbling." King notes that in September 2005, the interest rate on 10-year government bonds from countries like Greece and Italy was only 3.3%, but denies that the willingness of creditors to lend at those low historical rates should have been interpreted by the governments at the time as encouragement for even bigger deficits. Fear seems to be one of those things that can quickly change focus.

China to 'liquidate' US Treasuries, not dollars - The debt markets have been warned. A key rate setter-for China's central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible. "The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum. "We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way." "Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said. To my knowledge, this is the first time that a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets – chiefly AAA euro debt from Germany, France and the hard core. We don't know how much US debt is held by SAFE (State Administration of Foreign Exchange), the bank's FX arm. The figure is thought to be over $2.2 trillion. The Chinese are clearly vexed with Washington, viewing the Fed's QE as a stealth default on US debt.

lONG TREASURY BOND YIELDS - The current low level of long term interest rates is creating all types of debate about what it is suppose to signify and what investors are discounting. Maybe they are not signaling anything and it is just a return to normal for interest rates. For example, from 1924 to 1965 long Treasuries were below 4% almost continuously. Over the long sweep of history very low rates were more the norm than the high rates of recent decades. Maybe the recent history was the exception and we are now just returning to a more normal level of rates.

The Death of the Confidence Fairy - Krugman -In the first half of last year a strange delusion swept much of the policy elite on both sides of the Atlantic — the belief that cutting spending in the face of high unemployment would actually create jobs. I went after this stuff early and hard (I suspect that the confidence fairy will be one of my lasting contributions to economic discourse); still, it’s good to have a steadily mounting weight of evidence about just how wrong that view was. The latest entry is a comprehensive review of past episodes of austerity by economists at the IMF, from which the figure above is taken. Yes, contractionary policy is contractionary. And as the authors point out, it’s probably even more contractionary than usual under current conditions: The reduction in incomes from fiscal consolidations is even larger if central banks do not or cannot blunt some of the pain through a monetary policy stimulus. The fall in interest rates associated with monetary stimulus supports investment and consumption, and the concomitant depreciation of the currency boosts net exports. Unfortunately, these pain relievers are not easy to come by in today’s environment. In many economies, central banks can provide only a limited monetary stimulus because policy interest rates are already near zero .

Budget Deficit in U.S. Grew to $134.2 Billion in August on Calendar Effect - The U.S. government’s budget deficit widened in August, primarily reflecting a calendar- related jump in spending compared with the same month last year. The gap climbed to $134.2 billion last month, exceeding the August 2010 shortfall of $90.5 billion, according to the Treasury Department’s monthly budget statement issued in Washington. For the fiscal year to date, the deficit increased to $1.23 trillion, less than at the same point in 2010. Improved income-tax collections and efforts to cut spending signal the deficit will stop climbing, according to government and Wall Street analysts. The drive to limit debt prompted President Obama to send a $447 billion job-growth package to Congress this week that he stressed would be paid for with offsetting reductions in outlays and increases in tax revenue over the next decade. “The red ink has maxed out for this recession,”. Just the same, “austerity is in, and stimulus is out,”

1.2 Trillion Budget Cuts Still Leaves Debt At Record Proportion Of GDP -  Douglas Elmendorf, the head of the nonpartisan Congressional Budget Office, told the Joint Select Committee on Deficit Reduction that if federal government spending was reduced by $1.2 trillion by fiscal 2021, U.S debt as a proportion of GDP would drop from 67% at the end of the current fiscal year to 61% by 2021. The lower proportion would still be the highest mark in any year from 1953 through fiscal 2009, Elmendorf said. According to the lengthy prepared testimony released by the CBO, the budget deficit is expected to stand at 8.5% of U.S. GDP in fiscal 2011, the third highest shortfall in more than six decades, trailing only the previous two years.  "Moreover, an aging population and rising health-care costs will exert significant and increasing pressure on the budget in the years beyond 2021," Elmendorf told the panel. He said that in considering when aggressive efforts to tackle deficits should begin, there is "no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential."

U.S. Political Process Is Weaker Than AAA Nation’s, S&P Says - Standard & Poor’s, the rating company that stripped the U.S. of its top credit grade last month, said the nation’s political process contrasts “unfavorably and increasingly” with top-rated countries. Lawmakers in AAA rated Canada, France, Germany and the U.K. acted more quickly than the U.S. to cut their deficits following the financial crisis in 2008, S&P said today in a report. John Chambers, a managing director of S&P, said today at a conference that there is a one-in-three chance of another U.S. debt downgrade, though a change may not occur until late 2012 or 2013. “We view U.S. political performance in recent years as evidence of a weaker ability to implement reforms,” S&P said in the report. “The debate over fiscal policy appears to us the most intractable of current political debates.”

S&P’s Chambers Sees One-in-Three Chance of Another U.S. Credit Downgrade - John B. Chambers, a managing director of Standard & Poor’s, said today that there is a one- in-three chance of another U.S. debt downgrade, though a change may not occur until late 2012 or 2013. “If there were another downgrade, it would probably be because something has happened with the budget control act, that it has somehow been watered down” or “the fiscal committee doesn’t deliver the goods,” Chambers said. “Hopefully things turn around” and fiscal restraint “would enable us to see the ratings stabilize.” Instead of falling in value after S&P said the U.S. was less creditworthy, Treasuries rallied and the government’s borrowing costs fell to record lows. While stocks fell, wiping $2.5 trillion from the market value of global equities on the first trading day after the downgrade, the gain in benchmark 10- year government notes sent yields down almost a quarter percentage point, to 2.32 percent. Yields have continued to fall, reaching 2.08 percent today.

Who Will the Super-Committee Fight For? - While President Obama’s highly anticipated jobs speech seems to be all political junkies are paying attention to today, attention must also be paid to the first meeting of the infamous super-committee. Today these twelve men and women begin the business of finding $1.2 trillion to $1.5 trillion in new revenues and spending cuts over the next decade. What this committee comes up with might go a long way towards determining the kinds of resources that will be available (or not) for any lasting economic recovery. Before embarking on a GOP “cuts only” approach that too many Democrats seem willing to buy into, the super-committee members—six from the House and six from the Senate, evenly divided between the parties—should look homeward to their own districts and states and see how their constituents are doing. That’s why Half in Ten—a national campaign to reduce poverty by 50 percent over the next ten years—along with the Center for American Progress Action Fund, have put together a comprehensive fact sheet for each of the twelve members, describing the conditions in their districts and states—from the jobs picture, to the impact of tax policy, to poverty and education.

Stop Thinking About Super Committee As A Super Hero - Maybe it’s because its formal name — the Joint Select Committee on Deficit Reduction — seems so milquetoast and bureaucratic in comparison. But the far more commonly used super committee certainly gives the impression that the 12 House and Senate Members chosen for this assignment will be able to do their work faster than a fiscal locomotive, change the course of mighty budget politics and bend the health care cost curve in their bare hands. And that was before the committee met for the first time. As the super committee was just getting organized last week, many of the participants and observers in the federal budget debate were already asking it to take on new powers and responsibilities that have continually proved to be far beyond those of ordinary men and women... Even though the assignment given to the committee of reducing the deficit by $1.2 trillion to $1.5 trillion by this Thanksgiving was already a deed many thought only a superhero could do, some are now demanding that it do even more.

CBO: Spend money now! - As Congressional Budget Office director, Doug Elmendorf doesn’t advocate for specific policy proposals. Rather, his office tells Congress how much the policies that they decide on will cost. But during his testimony in front of the “supercommittee” this morning, Elmendorf came awfully close to pushing Congress to support stimulus spending as part of its deficit reduction charge. “Credible policy changes that would substantially reduce deficits late in the coming decade and over the long term, without immediate cuts in spending or increases in taxes, would support the economic expansion in the next few years and strengthen the economy over the longer term,” Elmendorf said at the hearing. “There is no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high ... and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.” This could be a difficult policy for the supercommittee to follow through on. The 12-member panel’s charge is to find $1.2 trillion in cuts; making space for increased government spending is a challenge in that context.  But Elmendorf made the case that it’s the best approach. “If policymakers wanted to achieve both a short-term economic boost and medium-term and long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade,” he said.

Doug Elmendorf: More Fiscal Expansion Now » Doug Elmendorf: Testifying in Front of the "Supercommittee": Credible policy changes that would substantially reduce deficits late in the coming decade and over the long term, without immediate cuts in spending or increases in taxes, would support the economic expansion in the next few years and strengthen the economy over the longer term,” Elmendorf said at the hearing. “There is no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high ... and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential….If policymakers wanted to achieve both a short-term economic boost and medium-term and long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade…

What the Great Budget Debate Is Really About - Want to know what the Great Budget Debate of 2011 is really about? Ask Congressional Budget Office director Doug Elmendorf (who was a Tax Policy Center associate before joining CBO). In testimony to Congress’s  fiscal super committee on Tuesday, Doug put the whole thing into a few simple sentences: “I think really the fundamental question…is…where you want the country to go, what role do you …want the government to play in the economy and society?” [I]f you want a role that has benefit programs for older Americans like the ones we’ve had in the past, and that operate…the rest of the government like …in the past,then more tax revenue is needed than under current tax rates. On the other hand, if one wants those tax rates, then one has to make very significant changes in spending programs for older Americans” and the rest of government. Doug is exactly right about these core choices. And that’s why it is so difficult for Congress and President Obama to reach any serious agreement on fiscal policy. At bottom, this argument is not about reducing the deficit by $1.2 trillion or $1.5 trillion to hit some artificial budget target. It is about reconciling fundamentally competing visions of the role of government.

Contracting Out Costs the Government Lots Extra, POGO Study: Contractors Costing Government Twice as Much as In-House Workforce. This looks like an important study. The results are sadly not incredible: if you look not at the wages employees receive in the contracted-out businesses, but rather the prices their employers charge the government for their services, contracting-out looks (sometimes very) expensive compared to using government workers. The U.S. government’s increasing reliance on contractors to do work traditionally done by federal employees is fueled by the belief that private industry can deliver services at a lower cost than in-house staff. But a first-of-its-kind study released today by the Project On Government Oversight (POGO) busts that myth by showing that using contractors to perform services actually increases costs to taxpayers. POGO’s new report is the first to compare the rate that contractors bill the federal government to the salaries and benefits of comparable federal employees. The study found that while federal government salaries are higher than private sector salaries, contractor billing rates average 83 percent more than what it would cost to do the work in-house. The study comes with some caveats, but at first glance it looks like a serious attempt to measure things that — oddly — are not routinely measured by the government that pays for all this stuff.

Report: Government spends billions more hiring contractors over public workers - As Washington's use of private contractors grows, the government is paying those contractors billions more than it would pay their government workers to do the same job, according to a new study released Tuesday.. In an attempt to verify frequently made claims that the government can save money by outsourcing its work, the nonprofit Project On Government Oversight (POGO) compared the total annual compensation for federal (and private sector) employees with federal contractor billing rates. The group found that in 33 of the 35 occupational categories it reviewed, federal government employees were less expensive than contractors. On average, the federal government pays contractors 1.83 times more than it pays federal employees and two times more than what comparable workers in the private sector are paid. For instance, the government on average pays contractors $299,374 for accounting services, while it pays federal employees $124,851 for accounting services. By comparison, workers in the private sector (not under contract by the government) make on average $83,132. The government on average pays contractors $198,411 for information technology management, while they pay federal workers $124,663.

Study: Privatizing government doesn’t actually save money… The theory that the federal government should outsource its operations to private firms usually rests on a simple premise: It saves money. But a new study from the Project on Government Oversight suggests that this theory is quite wrong. In many cases, privatizing government turns out to be far more costly. For its study, POGO decided to do something different than the usual method of comparing public- and private-sector salaries. Instead, the group scrutinized the actual contracts that were awarded to companies for specific tasks and compared them with what it cost the government to do the same job in-house. They looked at 550 contracts — all deemed “fair and reasonable”— for 35 different jobs across government agencies, from auditors and engineers to food inspectors and groundskeepers. As it turned out, the private contractors cost more in 33 of those 35 jobs. On average, the service contracts paid private employees 83 percent more than the government would pay a federal employee doing the same job (and that’s even taking into account health care benefits, pensions, and so on). There’s a long debate about whether workers in the private sector actually make less than their federal counterparts, but it turns out this is all beside the point. The POGO analysis found that private contractors working with the government make, on average, twice as much as a comparable private-sector worker.

Bigger Economic Role for Washington - Just weeks ago, economists and financial analysts were dismissing Washington as largely irrelevant to the economy’s course in coming months, if only because it chose to be. They are not dismissing it anymore.  The possibility of major parts of President Obama1’s $447 billion jobs bill becoming law, and of further steps next week by the Federal Reserve2, have forecasters saying that the decisions Washington makes in the weeks ahead could have a substantial effect on economic growth and unemployment. At a minimum, the stimulus could be insurance against the headwinds blowing from Europe’s debt crisis3 and the impact of the recent government spending cuts in this country.  The jobs package of tax cuts and spending initiatives could add 100,000 to 150,000 jobs a month over the next year, according to estimates from several of the country’s best-known forecasting firms; the potential Fed actions could add 15,000 more jobs a month over two years. It remains uncertain, of course, what Congress or the Fed will do and, if they do act, whether their actions will have the intended effects.

Defence cuts could boost US unemployment -  The Pentagon is warning Congress that potential sweeping cuts to the defence budget would put millions more out of work and add a percentage point to the country's unemployment rate, officials said Thursday.The Pentagon described a dire scenario if a congressional "supercommittee" fails to agree by November 23 to trim $1.2 trillion from government deficits, which would trigger deep automatic cuts across the federal government. "We believe that would result in job cuts that would add one percent to the unemployment rate," said press secretary George Little, citing Defence Department estimates. "So we're not talking about just military jobs. We're also talking about jobs in the private sector that support the innovation and creativity and capabilities that we need to keep America strong," . Panetta has shared the gloomy estimates with members of Congress, said a senior Pentagon official, speaking on condition of anonymity.

Greenspan Urges Trimming Entitlements in Testimony at Panel - Economic growth is likely to be slow for years, increasing pressure on Congress to cut entitlement spending, Alan Greenspan said in remarks before a Senate panel. “There is no credible scenario of addressing our current fiscal problems without inflicting economic pain,” he told a Senate Finance subcommittee today. The former Federal Reserve Board chairman said his preferred option for addressing the U.S. budget deficit is a plan put forth by House Budget Committee Chairman Paul Ryan, a Wisconsin Republican. Greenspan told the Senate panel that because Ryan’s plan lacks votes for passage, Greenspan prefers a proposal from the Simpson-Bowles deficit-cutting commission, which addresses the deficit by ending tax breaks as well as through spending cuts. “I do not know if whether a U.S. budget crisis is immediately on the horizon or is years off,” Greenspan said. “What I do know is that if we presume that we have a year or two before starting serious long-term restraint, and we turn out to be wrong in that optimism, the impact on financial markets could be devastating.” 

Supercommittee May Get Push From Senators to Increase Savings - Congress’s deficit-cutting supercommittee may receive a push to increase its $1.5 trillion savings target from a bipartisan group of about 25 senators. The informal group, about evenly split between Democrats and Republicans, met yesterday to discuss principles they might propose, said Senator Chris Coons, a Delaware Democrat, and two other senators. Another meeting is planned tomorrow. “I’m optimistic about our progress,” Coons said in an interview. The senators aim to provide political support for supercommittee members in both parties who face difficult decisions on whether to support entitlement program cuts and tax increases. Congress created the 12-member bipartisan supercommittee last month in legislation resolving a standoff over raising the federal debt limit. The panel was instructed to create a 10-year plan to cut at least $1.5 trillion by Nov. 23. The law requires automatic, across-the-board spending cuts if Congress doesn’t pass a plan. During the supercommittee’s first hearing yesterday, the director of the Congressional Budget Office said the U.S. can’t stabilize its long-term debt without major cuts to entitlement programs, revenue increases far higher than historical averages or a much smaller federal government.

RICHARD KOO: Even Talking About Long-Term Deficit Reduction Is Indecent And Irresponsible: RICHARD KOO: Even Talking About Long-Term Deficit Reduction Is Indecent And Irresponsible Joe Weisenthal Sep. 13, 2011, 1:04 PM 1,920 20 A A A x Email ArticleFrom To Email Sent!You have successfully emailed the post. inShare6In his latest note, Nomura economist Richard Koo gives decent marks to Obama's jobs plan, but says it's ultimately kind of small, and that when the Tea Party is done hacking it up, it will only be left with fairly ineffective tax cuts. Given that Koo is such an advocate of fiscal stimulus during a balance sheet recession, this is hardly surprising. More interesting is where he takes issue with the faction of the pro-stimulus camp, who still ultimately argue that over the long-term we need deficit reduction. Says Koo: Arguing need for longer-term fiscal consolidation is irresponsible The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible. If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.

Obama's "Jobs Act" Proposal: Why Less Is More of the Same - What we got from Obama was a 2009 "Stimulus Light" proposal, with all the problems of the prior 2009 stimulus package in the form of inadequate magnitude of spending, wrong composition and targets and bad timing. First, on the matter of the magnitude of spending in the proposal, some think it was bold. But put it in context; $447 billion just won't achieve the job creation it claims. It's once again too little for an economy the size of the US, for an economy in as deep an economic hole as it is and in an economy facing growing downward momentum at home in the context of a global economy also rapidly slipping. The 38 percent tax cut mix in 2009 amounted to about $300 billion in total tax reduction. That $300 billion followed a $90 billion tax cut less than nine months before in spring 2008. Another $50 billion in tax cuts was further added later in 2009-2010 in various bills and administrative actions. That's a total of $440 billion in tax cuts. There's more. Add to that $440 billion another $270 billion in Bush tax cut extensions in late 2010 for 2011, plus another $100 billion in this year's payroll tax cut. Now, add the Job Act's tax-heavy $270 additional billion. Now, we're well over $1 trillion in tax cuts in just the past two years. And what's been the result in jobs? Still 25 million unemployed today as in June 2009.

A Second Stimulus Package? Becker - The recovery from the Great Recession has been slow and unsteady. Two years after unemployment peaked at 10.1%, it still remains over 9%, in contrast to the under 5% in 2007. GDP has grown very slowly during the past year, and is now more than 10% below its potential level. President Obama is rightly concerned about the large number of Americans who are unemployed, especially the longer term unemployed-those who have been without jobs for over six months. How successful will his proposed American Jobs Act be in getting the economy moving forward at a much faster clip? Boiled down to its essentials, the proposed Jobs Act is a second stimulus package since most of the spending is supposed to take place soon (before the end of 2012), while it will be financed over the next ten years in ways that are unclear.  At an estimated approximately $450 billion, this package is much smaller than the first stimulus package in 2009 that cost about $800 billion. The proposed structure is better than the first one since it relies more on tax cuts and direct subsidies to households: about 2/3 of the proposed spending comes from a temporary cut in (payroll) taxes and increases in benefits to the long term unemployed.

Obama flicks jobs switch - Responding to US President Obama’s announcement of his proposed American Jobs Act, Republican Presidential candidate Mitt Romney tartly observed that it was ‘960 days late’ (referring to Obama’s time in office so far). This was rather unfair – Obama introduced a major fiscal stimulus immediately after taking office, and followed up with a temporary payroll tax cut and extension of unemployment insurance benefits at the end of 2010. His new jobs plan is, in large measure an extension of these earlier initiatives.Nevertheless, like all effective political rhetoric, Romney’s jibe had an element of truth. Having passed the stimulus bill, Obama’s political team made the judgement that there were no votes in talking about jobs. Instead, they decided to bet that the economy would recover in time for Obama’s re-election campaign, and to focus instead on health care reform. This seemed like a bad call at the time, and with the benefit of hindsight it looks positively catastrophic.

Barro, Galbraith Debate U.S. Economic Policy - Robert Barro, an economics professor at Harvard University, and James Galbraith, a professor at the University of Texas in Austin, talk about the U.S. economy, the effectiveness of fiscal austerity versus stimulus and ways to spur growth. They speak with on Bloomberg Television's "Street Smart."

Supercommittee Open to Finding Extra Savings to Pay for Parts of Jobs Plan - Lawmakers on the debt supercommittee say they are open to finding more long-term savings that could be put toward immediate measures to spur job growth, though such a move would complicate an already difficult task with a tight deadline. President Barack Obama last week proposed a $447 billion jobs plan, but Republicans have rejected measures Obama said would pay for it. Still, there is broad support for some of the president’s proposals, such as a measure to extend a payroll tax cut, if there is also a way to pay for it “A whole bunch of us… are fixated on a larger deal here to begin with. And I think we have some flexibility in there specifically with respect of which components of the president’s proposal may or may not attract support,” Sen. John Kerry (D., Mass.) told reporters Tuesday. Sen. Rob Portman (R., Ohio) also said the committee could go beyond its mandate. “I suppose you could see some of it being allocated to pro-growth policies, but Congress would need some consensus on what those are,” Portman said.

Obama proposes tax hikes on wealthy to pay for $447B jobs bill -  The White House said Monday that President Obama wants to pay for his $447 billion jobs bill by raising taxes on the wealthy and businesses. The chief provision announced by Lew would be to limit itemized deductions for individuals who make more than $200,000 a year and families that make more than $250,000, something the Obama administration has previously pushed to do through its budget proposals. Lew told reporters at the White House press briefing that this would raise about $400 billion.The administration would tax the income investment fund managers make, known as "carried interest," as regular income instead of as capital gains, which has a low 15 percent tax rate. This is another longstanding administration goal that has been resisted by Wall Street as well as some Democrats. The administration estimates the capital gains change would provide $18 billion in revenue. The administration also wants to eliminate tax breaks for the oil-and-gas sector, which would raise $40 billion, the administration said. Another $3 billion would come from changing the way corporate jets depreciate. With a few other revenue increases, Lew indicated the total measures proposed by the administration would bring in $467 billion, $20 billion more than the cost of the bill.

Obama would hike taxes to pay for his jobs bill - In a sharp challenge to the GOP, President Barack Obama proposed paying for his costly new jobs plan Monday with tax hikes that Republicans have already emphatically rejected. The reception to his new proposal was no more welcoming, setting the stage for a likely new fight with Congress. Flanked at the White House by workers he said the legislation would help, Obama declared, "This is the bill that Congress needs to pass. No games. No politics. No delays." He sent it to Capitol Hill saying, "The only thing that's stopping it is politics." The president's proposal drew criticism from House Speaker John Boehner, who'd previously responded in cautious but somewhat receptive tones to the $447 billion jobs plan made up of tax cuts and new spending that Obama first proposed in an address to Congress last Thursday. "It would be fair to say this tax increase on job creators is the kind of proposal both parties have opposed in the past. We remain eager to work together on ways to support job growth, but this proposal doesn't appear to have been offered in that bipartisan spirit,"

Obama proposes higher taxes for wealthy to fund jobs bill… President Obama announced plans Monday to fund his $447 billion jobs bill1 largely by raising taxes on wealthier families, provoking immediate opposition from congressional Republicans. The sequence of event suggests that despite the recent pledges of greater bipartisanship, many of the fiscal and economic stumbling blocks that have left Washington gridlocked in recent months remain firmly in place. At a Rose Garden ceremony to promote the bill before he formally sent it to Congress, the president urged the public to pressure lawmakers to quickly approve the package. “This is the bill that Congress needs to pass,” Obama said. “No games. No politics. No delays.” There was little delay in the GOP response, even if it was relatively measured. “We remain eager to work together on ways to support job growth, but this proposal doesn’t appear to have been offered in that bipartisan spirit,”

White House Would Cut Deductions to Pay for Its Jobs Plan - The White House said on Monday that it would cover most of the cost of his payroll tax cut and other job initiatives by limiting the deductions that can be claimed on the tax returns of wealthier taxpayers.President Obama, repeating what is clearly going to be the mantra for his stump speeches this fall, called on lawmakers Monday to “pass this bill” — his $447 billion jobs package.At the White House, his budget director described how the administration would propose to pay for the plan, as the president has promised to do. Jack Lew, the director of the White House Office of Management and Budget, said the bulk of the plan –- $400 billion over 10 years — would be raised by limiting the itemized deductions, such as those for charitable contributions and other expenditures, that may be taken by individuals making more than $200,000 a year and families making over $250,000 a year. The rest would come from provisions affecting oil and gas companies, hedge funds, and the owners of corporate jets. Mr. Lew said that the Congressional panel charged with finding at least $1.2 trillion in savings this fall as part of the agreement to raise the debt ceiling will have the option of accepting the payment proposals submitted by Mr. Obama, or proposing new ones of their own.

The President's Odd Deficit-Reduction Plan - Robert Reich - On Monday the President will offer ways to pay for his $467 billion American Jobs Act mostly by increasing taxes on the wealthy. I’m all in favor, but it’s an odd strategy. If any Republican was prepared to vote for the jobs bill, this will send him or her scurrying. So if the President was never really serious about getting Republican votes in the first place — if his jobs bill and the tax increase on the wealthy were always going to be part of his 2012 election year pitch — why didn’t he make his jobs bill big enough to do the job?Here’s another odd thing. The deficit-reduction plan the President will present Monday to Congress’s special supercommittee on the debt (now struggling to come up with $1.5 trillion in deficit reduction) will also propose some $2 to $3 trillion in additional deficit reduction over the next ten years — including changes in Medicare.  According to the President’s plan, those tax increases and spending cuts would go into effect in 2013.   But there’s a strong likelihood the American economy will still be anemic in 2013, if not on life support. When unemployment is still in the stratosphere, it would be insane to start cutting the deficit by $3 trillion to $4 trillion. That would push unemployment into outer space.

Obama Would Sign Parts Of Jobs Bill, Push For Rest - The Obama White House is revising its initial unwillingness to negotiate on the president's job creation plan, saying now that if individual components of the bill came to the president's desk -- as opposed to the bill in its entirety -- he would sign them into law. The new approach opens up the administration to charges that it no longer views the American Jobs Act as a take-it-or-leave-it bill. But in a briefing with reporters Tuesday, senior administration officials insisted President Obama wasn't backing off his position that he wants the entire bill passed through Congress.  If lawmakers sent Obama legislation that would, say, send money to the states to rehire teachers, he would sign it and push for Congress to pass the remainder of his suggested reforms. As one of those senior administration officials put it, it would be politically suicidal to veto a bill that creates 1 million jobs just because it doesn't create 2 million jobs.  The less-than-absolutist stance contrasts with remarks made in television appearances earlier Tuesday morning by Obama adviser David Axelrod, who insisted that the president wasn't interested in negotiations "to break up the package."

Snatching Defeat out of the Jaws of Victory - President Obama’s jobs speech last Thursday evening heartened Democrats and progressives, but yesterday’s meeting of the “super-committee” reminds us how much Obama has already given away and the traps he has set for himself (and the recovery) going forward. While he tries to coax the economy into producing more jobs with one hand, Obama has set in motion an inexorable process that will lead to more economic contraction. The process will also deprive the Democrats of clarity in defending their most popular crown jewels—Medicare and Social Security—against unpopular Republican assault. Ironically, while Republican front-runner Rick Perry was getting hammered by other GOP leaders for playing fast and loose with Social Security—creating an opening for Democrats with seniors—President Obama is on the verge of proposing an increase in the Medicare eligibility age from 65 to 67.

Tax Plan for Jobs Bill Has Familiar Ring - To pay for his $447 billion jobs bill, President Obama1 is once again proposing an assortment of tax increases on wealthy individuals and corporations.  But the White House also says its plan should be viewed as a rough framework, because its top priority is to get the jobs bill enacted.  The bulk of the additional tax revenue under Mr. Obama’s proposal would come from the wealthiest 1.5 percent of taxpayers — individuals with adjusted gross income over $200,000, families with more than $250,000 — who would face new limits on their itemized deductions for such things as charitable contributions and state and local taxes. The initiative is similar to one made by the president during the debt ceiling2 negotiations two months ago and rebuffed by Congressional Republicans.  In its new incarnation, however, the measure would raise an additional $80 billion in taxes over 10 years by restricting “above the line” deductions, which allow taxpayers to exclude items like foreign earnings and earnings from municipal bonds3 from their taxable income. The proposal would also require wealthy taxpayers to count some employer health benefits as income.

GOP Balks at Taxes to Finance Jobs Plan - The prospects for President Barack Obama's $447 billion jobs plan grew dimmer Monday as he unveiled the fine print of how it would be paid for—primarily through tax increases that Republicans said would destroy jobs, not create them. Mr. Obama proposed limiting itemized deductions for families with taxable income of $250,000 or more a year, ending tax breaks for oil companies and corporate jet owners, and cutting out a tax break for investment-fund managers. The White House says the tax changes would take effect in 2013 and estimates they would raise $467 billion in additional revenue over 10 years. Republicans in Congress, who had been striking a more conciliatory tone about backing at least parts of the proposal the president unveiled last Thursday, disputed the White House contention that the plan would cause no additional job losses for the struggling economy. "It would be fair to say this tax increase on job creators is the kind of proposal both parties have opposed in the past,''  "We remain eager to work together on ways to support job growth, but this proposal doesn't appear to have been offered in that bipartisan spirit.''

Obama to propose Medicare and Medicaid cuts - Barack Obama is expected to lay out a plan next week that would cut several hundred billion dollars from Medicare and Medicaid, the large government healthcare schemes for the elderly and the poor, as part of a pitch to cut future deficits by more than $1,500bn.  Senior White House officials said the US president would base a detailed blueprint for fiscal reform, which is to be delivered on Monday, on an earlier speech he delivered in April on deficit reduction. The announcement could create tensions within the Democratic party, which has traditionally staunchly defended Medicare. Mr Obama’s fiscal proposal will be released just one week after the president unveiled a separate plan to raise more than $450bn to pay for a jobs bill that senior officials said would be the president’s singular focus in coming weeks.  The American Jobs Act, a mix of tax cuts for workers, infrastructure projects and aid for states, has won a lukewarm reception among Republicans on Capitol Hill, even though Mr Obama’s plan to pay for the legislation – by cutting tax deductions on mortgage interest and charitable donations for households making more than $250,000 and raising tax on some corporations – has been panned by senior Republican leaders. “We see permanent tax increases put into effect in order to pay for temporary spending. I just don’t think that’s going to help our economy the way it could,” Mr Boehner said.

Obama Looks for Big Health Cuts, Worrying Democrats - As Congress opens a politically charged exploration of ways to pare the deficit, President Obama is expected to seek hundreds of billions of dollars in savings in Medicare1 and Medicaid2, delighting Republicans and dismaying many Democrats who fear that his proposals will become a starting point for bigger cuts in the popular health programs. The president made clear his intentions in his speech to a joint session of Congress3 last week when, setting forth a plan to create jobs and revive the economy, he said he disagreed with members of his party “who don’t think we should make any changes at all to Medicare and Medicaid.” Few Democrats fit that description. But many say that if, as expected, Mr. Obama next week proposes $300 billion to $500 billion of savings over 10 years in entitlement programs, he will provide political cover for a new bipartisan Congressional committee to cut just as much or more. And, they say, such proposals from the White House will hamstring Democrats who had been hoping to employ Medicare as a potent issue against Republicans in 2012.

Remember, when they say ‘austerity,’ substitute ‘priorities’ - When you’re reading Top Secret America: The Rise of the New American Security State – just published, or a book length expansion which you can read for free, on explosion of stuff that is classified “Top Secret” the thing to remember is that we are tearing apart what’s left of the social safety net to pay for stuff like this: When roadside bombs (called IEDs, for improvised explosive devices) became the greatest cause of casualties in Iraq, the army set up an IED task force to investigate ways to stop these crude weapons.  Finally the Pentagon established a Washington-based joint organization — the Joint Improvised Explosive Device Defeat Organization, or JIEDDO, to undertake a military-wide effort to counter this deadly, low-tech terrorist weapon. Working from undisclosed office buildings in Crystal City, Reston, and Charlottesville, Virginia, JIEDDO has grown to about four hundred military, civilian, and contractor personnel. In fiscal year 2010, to deal with the surge of U.S. troops into Afghanistan, the JIEDDO budget increased from an initial $1.88 billion to $2.98 billion, and then to $3.465 billion. JIEDDO had so much money that it hired 1,200 contractors, according to the Government Accountability Office. It even has its own air force.

White House debt-reduction plan coming together - In his speech to Congress last week, President Obama briefly touched on the issue of debt reduction, urging the so-called super-committee to be even more ambitious in its goals in order to cover “the full cost of the American Jobs Act.” He added, “[A] week from Monday [Sept. 19], I’ll be releasing a more ambitious deficit plan — a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run.” One could hear an audible “uh oh” from much of the left, which was left to wonder what such a plan might entail. The concerns about how far Obama might go — and just how much he’d give up — were more than reasonable. As part of an effort to strike a “Grand Bargain” with House Speaker John Boehner (R-Ohio) in July, the president was prepared to go way too far with concessions on entitlements. Fortunately for all of us, too much wasn’t good enough for House Republicans, and the offer was rejected. But now that the president is prepared to present his own “ambitious” deficit-reduction plan, how nervous should the left be? As it turns out, there’s actually some cause for optimism.

US Working-Age Poverty Hits a Record High: What it Means for the Budget Debate - Adding to the gloom from recent labor market data, the Census Bureau reported today that the poverty rate among working-age Americans hit a record high in 2010. Last year some 13.7 percent of the U.S. population aged 18-64 years fell below the poverty threshold of $22,314 for a family of four. That was up from 12.9 percent in 2009, also a record. The Bureau has reported working-age poverty figures since 1966, at which time the rate was 10.5 percent. As the following chart shows, the poverty rate for children also rose, although it has not yet reached its all-time peak. The poverty rate even ticked up slightly, to 9.0 percent from 8.9 percent, among the elderly population. However, poverty among senior citizens, who were the poorest segment of the population in the 1960s, departed only slightly from its long downward trend. None of this bodes well for the ongoing budget debate. Almost everyone now admits that it will be impossible to close the budget gap without doing something about social security and Medicare entitlements.

Boehner plan cuts 2012 spending - In a surprising bit of hardball, House Republicans confirmed that they had been actively considering a plan to tamper with the August budget agreement by cutting even more from 2012 spending in order to put pressure on Senate Democrats to come to terms faster on domestic bills for the coming fiscal year. Instead of the agreed-upon appropriations target of $1.043 trillion, a stopgap continuing resolution or CR this week would be calibrated at a lower $1.035 trillion level. The idea – promoted by Speaker John Boehner — was to effectively withhold about $8 billion for the first two months of the fiscal year, with the money becoming available only as Senate Democrats come to terms with the House on the dozen annual spending bills that cover government operations. Not to be outdone, Senate Majority Leader Harry Reid countered with his own free-standing $6.9 billion disaster aid package separate from the CR.

Two Parties, No Solutions to Jobs - Jeffrey Sachs - With President Obama's speech on Monday and Speaker Boehner's speech yesterday, we can put the Democratic and Republican Party economic plans side by side. What is stunning is that neither side offers a serious diagnosis or a solution. The truth this time is not in the middle, a compromise of the two views. The truth, alas, requires a new view, and probably a new party. The President's plan is another example of short-run gimmickry. The President wants to cut taxes in 2012 and raise them afterwards. The idea is to give a quick jolt to the economy, on the theory that the economy mainly requires a temporary stimulus to get it back on track. This is the same stimulus approach that has been tried since 2009. We have a learned the obvious: a series of short-term gimmicks does not add up to a long-term strategy. The Republicans want a long-term strategy, but one that would take us in the wrong direction. The Republican mantra, repeated relentlessly since 1980, is that tax cuts and deregulation are the solution to growth and employment. The problem with the Republican position is simple: it's wrong.

Should Obama and Boehner Meet on This Bridge? - President Barack Obama will head to a bridge near the district of House Speaker John Boehner in southern Ohio next week to pitch his jobs package; this time focusing on crumbling infrastructure.  On Thursday, he’ll travel to the Brent Spence Bridge, which Press Secretary Jay Carney described as “functionally obsolete” because it is in such need of repair. “If Congress passes the American Jobs Act, we can put more Americans back to work while getting repairs like this one done,” he said. The president’s plan includes $140 billion for infrastructure work. Mr. Carney would not concede that the choice of bridge was at all influenced by the House speaker, who lives nearby. He said the bridge was picked because it is a day-trip away from Washington and because it is in need of repair. A spokeswoman for Mr. Boehner, Brittany Bramell, said the speaker welcomed the visit. “Speaker Boehner has long supported repairing the Brent Spence Bridge and is pleased the president is bringing additional attention to the need for it to be improved and eventually replaced,”

Obama backs off Social Security cuts in deficit plan (Reuters) - President Barack Obama, yielding to pressure from his political base, has backed off a proposal to reform Social Security retirement benefits in a high-stakes deficits deal Congress needs to reach this year. The Democratic president upset many core supporters in July when he considered changing how the popular pension funds are linked to inflation during acrimonious negotiations with Republicans over raising the U.S. debt ceiling. Obama saw the change as a way to ensure the federal program remains viable for future generations, but liberals felt he was giving up too much ground to Republicans. White House spokesman Amy Brundage said Obama's suggestions on how Congress can get to a $1.2 trillion deficit-reduction target, to be unveiled on Monday, "will not include any changes to Social Security." A senior administration official said his proposals to 12-member congressional panel tasked with finding the savings by November 23, were still being finalized. But they are expected to total as much as $3 trillion over 10 years and include tweaks to Medicare and Medicaid, the government's healthcare programs for the elderly and for the poor, and tax changes to close more loopholes for wealthy Americans and companies.

Obama Won't Include Social Security Reform - Jilted by Republican leadership during the deficit-reduction talks that accompanied the debt ceiling debate, the Obama administration is now pulling back an offer to put Social Security reform on the negotiating table. The president will not include changes to that program in the series of deficit reduction measures that he will offer to the congressional super committee next Monday, administration officials confirm. During  Obama is putting off support for that idea of changing the inflation formula of Social Security to chained consumer price index (CPI). “The president’s recommendation for deficit reduction will not include any changes to Social Security because, as the president has consistently said, he does not believe that Social Security is a driver of our near and medium term deficits," said White House spokeswoman Amy Brundage. "He believes that both parties need to work together on a parallel track to strengthen Social Security for future generations rather than taking a piecemeal approach as part of a deficit reduction plan.” "There will be no Social Security in the recommendations,"

Shutdown Chances Increase Over Disaster Relief, Program Cut Disputes -Two separate but related Republican efforts are increasing the odds that the government will shut down at the end of September, despite repeated assurances from both GOP and Democratic leaders that neither party has an appetite for another round of brinksmanship. In a Thursday letter, over 50 House Republicans, led by Rep. Jeff Flake (R-AZ), pushed Speaker John Boehner (R-OH) to make steep cuts to discretionary spending in the next fiscal year, reneging on the agreement the parties struck to resolve the debt limit standoff. That legislation set a cap on discretionary spending at $1.043 trillion and both Boehner and House Majority Leader Eric Cantor (R-VA) are committed to funding the government at that level for the coming year.  There's just one problem.  The House's funding legislation (known as a 'continuing resolution') provides what Democrats and even some Republicans say is insufficient money for disaster relief.  In the Senate today, Democrats and Republicans passed nearly $7 billion in emergency supplemental funds for FEMA with no offsets. House Republicans could ignore that bill and try to jam Democrats with their spending bill: it's our way on emergency FEMA funds, or there's a full government shutdown. That's where House Minority Leader Nancy Pelosi (D-CA) comes in.

Obama’s Cap on Tax Deductions: Not What It Seems - It turns out that President Obama’s plan to limit the benefit of itemized deductions is much more than that. Not only would it reduce tax savings for mortgages, charitable gifts, high medical costs, and the like, it would also curb tax breaks for owners of municipal bonds, workers who buy health insurance, and those who earn money overseas.  The $400 billion plan is the centerpiece of Obama’s $467 billion package of tax increases aimed at paying for the stimulus package he announced on Sept. 8. It would limit to 28 percent the value of many tax preferences for those whose adjusted gross income is more than $200,000 ($250,000 for couples). Today, these tax breaks are worth 35 cents on the dollar for someone in the top tax bracket. Under Obama’s plan they would be worth just 28 cents.   The plan is often described as a cap on itemized deductions but in fact aims at a number of other politically popular tax breaks as well, including several exclusions that reduce the amount of income subject to tax.         An across-the-board cap on the benefit of deductions and the like is often seen as rough justice—a way to tackle the Revenue Code’s trillion dollars in tax expenditures without  fighting over each one.

American Jobs Act is about 154 Pages Too Long - Closing loop-holes, aka tax expenditures, has bipartisan appeal.  This is because it is difficult to deny the common sense notion that tax expenditures add unnecessary complexity and compliance costs to the tax code, while benefitting a select few at the expense of the many. On Monday, the President attempted to appeal to such common sense by recommending his jobs plan be covered in part by closing certain loop-holes, in certain ways, for certain groups of people only.  Sound complicated?  Well, it is.  155 pages of legislative language and 41 pages of section-by-section analysis indicate that the American Jobs Act would close the industry specific loopholes for exactly two industries: oil and gas, and corporate jets.  . In the personal income tax code, it would "limit the value of all itemized deductions and certain other tax expenditures for high-income taxpayers by limiting the tax value of otherwise allowable deductions and exclusions to 28 percent," where high-income is more than $200,000 for singles or $250,000 for married couples. If the purpose is to clean up the tax code, simplify it, and make it more neutral and fair across groups, the American Jobs Act is an abysmal failure.  As far as I can tell, the only jobs created by the American Jobs Act are all the budget wonks, politicians, lawyers, accountants, and economists who have labored to put this thing together and/or labored to understand it.  Meanwhile, 14 million Americans remain out of work.

Expect 'Yes' on Tax Cuts, 'No' Elsewhere The real takeaway from President Barack Obama's jobs agenda? Workers probably can count on continuing to pay lower Social Security taxes. Employers may not have to pay as much, either. The long-term unemployed probably will keep drawing jobless benefits. Congress can be expected to ratify new trade agreements with South Korea, Colombia and Panama. But don't expect Congress to funnel tens of billions of dollars into rebuilding schools and blighted neighborhoods, or helping local governments pay teachers and firefighters, or setting up an "infrastructure bank" to leverage federal loans for roads, water systems and other public works projects. "Enough of the stimulus," House Majority Leader Eric Cantor, R-Va., said Friday on CNBC. "We can't afford to keep spending money we don't have." Last December, Congress passed a one-year cut in Social Security taxes, reducing the rate for workers from 6.2 percent to 4.2 percent for 2011. Employers still pay the 6.2 percent rate, which is applied to wages up to $106,800.

How to Raise Revenue Without Violating the Tax Pledge - The biggest barrier to reducing the budget deficit is the Republican insistence that taxes not be increased by so much as a penny. As we saw in the Republican candidates’ debate on Aug. 11, when asked if they would support a plan with $10 of spending cuts for $1 of tax increase, every candidate declined to support that plan. But with federal revenues at a 60-year low, every serious budget analyst knows that revenues must be increased to stabilize the nation’s finances, not just in dollar terms, but as a share of gross domestic product. However, no Republican politician dares to acknowledge this, for fear of excommunication and likely defeat by some Tea Party patriot in the next primary. There are, however, ways of cutting spending by raising revenue. While this sounds like magic, it is done all the time. The first thing one needs to know is that not all federal revenues count as revenues. Some are classified as “offsetting receipts” or “offsetting collections.” Such revenues are classified as negative spending rather than as revenues. The classification has no effect on the deficit but does make both federal spending and revenues about $600 billion lower than they actually are.

What Is “Pro-Growth” Tax Reform? - I testified before the House Budget Committee this morning, for a hearing entitled “The Case for Pro-Growth Tax Reform.”  My full written testimony is available at the committee’s website and also at the Concord Coalition site, here.  (Later you should be able to see the video on the committee website.) As I explained at the opening of my testimony:The “case” for pro-growth tax reform is easy and non-controversial—as achieving a stronger economy makes pursuing any other social goals easier (deficit reduction, higher and fairer standards of living, greater investment in higher quality public goods and services, etc). The disagreement is over what makes a given tax reform “pro-growth.” Growing the economy through tax policy isn’t as simple as “cutting taxes” to reduce overall tax burdens.  Tax cuts all have benefits, but the first thing one learns in an economics class is in a world of scarce resources, we maximize well being by weighing costs against benefits, and at the margin starting from where we are right now.  Tax cuts that might benefit particular households and businesses don’t necessarily pass society’s cost-benefit test, even based on a narrower and naïve goal of maximizing GDP

How Payroll Tax Cuts Can Create Jobs - The president proposes cutting the employer portion of the payroll tax by 3.1 percentage points (bringing the combined total down to about 12 percent) for employers with less than $5 million in payroll. Unfortunately, this last condition is business-distorting. Nevertheless, the 3.1-percentage-point part of the president’s proposal could raise employment by at least a million, albeit the duration of job creation is related to how long the tax cut lasts. I expect that every percentage-point reduction in employers’ costs raises employment by about a percentage point and real gross domestic product by about 0.7 percentage point. That means employment could be roughly three million greater during the period of the tax cut than it would otherwise. The tax cut is proposed to last a year, and some of the estimated three million incremental job-years — a job that lasts a year, or 12 jobs that last a month — could be spread over time. So we might see only two million in the first year of the cut, with another one million after the cut expires. But still that’s a lot of jobs.

Why the Tax Code is a Mess, Graphically - I just came across this bar chart, which illustrates graphically why the tax code is such a mess.  The Joint Committee on Taxation (JCT) is the official scorekeeper for all tax legislation passed by the Congress.  The chart shows the number of requests for estimates and other analysis that they’ve received from Congressional offices since 1986. Most of the requests are for estimates, which are necessary if a member wants to get a piece of tax legislation seriously considered.  The chart doesn’t say how many are for new credits, deductions, or other tax breaks (although a quick perusal of the Congressional record suggests that proposals for tax breaks far outnumber proposals for new taxes or tax increases). .. But the growth in the number of requests is astonishing–1,373 percent between 1986 and 2009.  And the 6,983 requests in 2009 was not even the record.  The all-time peak was 2007 with 7,786 requests.  What’s remarkable about the growth is that 1986 was the year that the Tax Reform Act of 1986 passed.  The JCT was really busy that year.  There were 474 requests.  But since then, the trend has been almost exponentially upward.

Tax rates and revenue since the 1970s (St Louis Fed) pdf

Amnesty Program Yields Millions More in Back Taxes - More than 12,000 American taxpayers have voluntarily revealed their secret offshore bank1 accounts to the Internal Revenue Service as part of the government’s latest tax amnesty program, agency officials said on Thursday. The move will allow the United States Treasury to collect at least half a billion dollars in unpaid taxes.  The voluntary disclosure program, which was in effect from February until last week, is part of an initiative to deter tax evasion via offshore bank accounts. Since the I.R.S. began its previous amnesty program in 2009, more than 30,000 taxpayers have reported their secret overseas accounts, and the federal government has collected $2.7 billion in taxes and penalties.  The United States began its most recent offensive against offshore tax evasion in 2009, when the Justice Department reached a settlement with the Swiss bank UBS that required it to pay $780 million and reveal details about 4,500 clandestine accounts that were believed to hold undeclared assets of United States residents. Although the Swiss government has yet to authorize the release of information about those accounts, Douglas H. Shulman, the I.R.S. commissioner, said that the agency would continue to pressure tax evaders to come forward or face prosecution.

Sharply Progressive Taxation Virtuous Circle - One important benefit of sharply progressive taxation that I haven't really heard is that it makes the rich a lot less capable of controlling, corrupting, and perverting government with massive legal bribes, I mean donations (as well, the middle class has a lot more money to donate to compete with the rich). With a sharp increase in the progressivity of taxes (all taxes including state and local), the rich become less capable of controlling and corrupting government, making it a lot less efficient. Thus, the increase in progressivity makes government more efficient, increasing confidence in government along with its performance, creating a virtuous circle of government confidence and performance. At the same time, the rich have a lot less money to fund the right wing propaganda machine, thus it becomes a lot less able to grossly distort people's image of government's efficiency, usefulness, and importance, so again more confidence in government. And this leads to greater public investment and insurance, which greatly increases long run growth and total societal utility, with the gains widespread instead of only at the top.

Rep. Louie Gohmert proposes bill to eliminate corporate taxes - Republican Congressman Louie Gohmert of Texas introduced legislation to the House of Representatives on Wednesday that would drop the corporate tax rate to all the way down to zero. The two-paged bill, called the American Jobs Act of 2011 -- the same name President Barack Obama gave to his jobs package -- would amend the Internal Revenue Code of 1986 to repeal the corporate income tax. "It is a very simple bill, which will eliminate the corporate tax which serves as a tariff that our American companies pay on goods they produce here in America." Gohmert claimed that dropping the current corporate tax rate of 35 percent down to zero would prevent manufacturing jobs from being shipped overseas, promote capital investment and attract businesses to America.

The Crisis of Fiscal Imagination - Greedy banks, bad economic ideas, incompetent politicians: there is no shortage of culprits for the economic crisis in which rich countries are engulfed. But there is also something more fundamental at play, a flaw that lies deeper than the responsibility of individual decision-makers. Democracies are notoriously bad at producing credible bargains that require political commitments over the medium term. In both the United States and Europe, the costs of this constraint on policy has amplified the crisis – and obscured the way out. Consider the US, where politicians are debating how to prevent a double-dip recession, reactivate the economy, and bring down an unemployment rate that seems stuck above 9%. While there is no quick fix to these problems, the fiscal-policy imperative is clear. The US economy needs a second round of fiscal stimulus in the short term to make up for low private demand, together with a credible long-term fiscal-consolidation program. As sensible as this two-pronged approach – spend now, cut later – may be, it is made virtually impossible by the absence of any mechanism whereby President Barack Obama can credibly commit himself or future administrations to fiscal tightening.

Clawbacks Without Claws - Under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission1 was encouraged to hit executives where it hurts — in the wallet — if they certified financial results that turned out to be, in a word, bogus.  SarbOx was supposed to keep managers honest. They would have to hand back incentive pay like bonuses, even if they didn’t fudge the accounts themselves.  That, anyway, was the idea. The record suggests a bark decidedly worse than its bite. The S.E.C. brought its first case under Section 304 of SarbOx in 2007. Since then, it has filed cases demanding that only 31 executives at only 20 companies return some pay.  In 2007 and 2008, most of the cases involved shenanigans with stock options and produced some big recoveries. In the wake of the financial crisis, the dollars recouped have amounted to an asterisk. Since the beginning of 2009, the S.E.C. has pursued 18 executives at 10 companies. So far, it has recovered a total of $12.2 million from nine former executives at five. The other cases are pending.

Jamie Dimon Lashes Out, Calls Global Bank Capital Rules "Anti-American" - JPMorgan's chief executive Jamie Dimon called new international bank capital rules "anti-American" and said the U.S. should consider leaving the Basel group of global regulators, the Financial Times reported. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” Dimon told the FT. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.” His statements came after the G7 economists and bankers restated their commitment to "implement fully" the Basel III regulations this weekend. This is not the first time Dimon has criticized bank regulations. Back in June at the American Bankers Association conference in Atlanta, George, Dimon confronted Federal Reserve chairman Ben Bernanke with pointed questions about Basel III and Dodd-Drank during the Q&A session. "We know there are 300 rules coming," he told Bernanke. "Has anyone looked cumulative effect of all these regulations, and could they be reason it's taking so long for credit and jobs to come back?"

Dimon Says US Banks Should Dictate to Regulators - Yves Smith - Now that Steve Jobs has retired from Apple, Jamie Dimon seems determined to assume his role as the CEO with the most effective reality distortion sphere. You can infer that from the magnitude of the whoppers he is telling and the size of the audience he is trying to bamboozle.  But while Jobs’ Svengali tendencies have gotten more than occasional mention, they weren’t a major failing. Jobs not only saved Apple, but he spearheaded the development of important new product categories. By contrast, Dimon has long been a bully, a smart and capable bully, but a bully nevertheless (I have reports going back to his first year at Harvard Business School, and it takes some doing to be memorably obnoxious by dint of the competition in that category).  Now on the surface, Dimon’s latest brazen remark isn’t quite as gross as my headline suggests. He is merely saying that US banks should not be subject to the new incoming international bank rules, known as Basel III. That might seem to be a narrower statement, but as we show, when you parse his logic, it amounts to banking uber alles.  Here is the relevant section of an interview published today in the Financial Times: New international bank capital rules are “anti-American” and the US should consider pulling out of the Basel group of global regulators, Jamie Dimon, chief executive of JPMorgan Chase, has said

Final Volcker Rule Remains Months Away - U.S. financial regulators are likely to miss an October deadline for the Volcker rule, a hotly contested part of last year's financial-overhaul law that limits financial firms from trading with their own money.According to the Dodd-Frank law, regulators have until Oct. 18 to "adopt rules to carry out" the provision. But regulators haven't agreed yet on even a draft proposal of the rule, which is named for former Federal Reserve Chairman Paul Volcker, who first proposed the trading curbs. A proposed rule might be released as soon as this week, according to people familiar with the situation. After that initial step, the draft version of the Volcker rule will go out for public comment, most likely for 60 days. Regulators can make changes based on comments before issuing a final rule. That means the rule likely won't take effect for months

The Problem With Living Wills for Financial Firms -The Federal Deposit Insurance Corporation took an important step this week toward getting big financial institutions, foreign and domestic, to submit resolution plans — also known as living wills or funeral plans — as required by the Dodd-Frank Act. If the new, so-called orderly liquidation authority is going to work, it is going to depend on F.D.I.C.’s ability to understand and plan for financial distress in advance. And thus the living wills are key. Whether living wills will be as useful as hoped is another matter. The basic idea is simple: big financial companies have to submit plans that explain how they would structure a future bankruptcy case or orderly liquidation authority proceeding if they were failing. The plans have to be written for two scenarios: one in which a financial institution alone fails, and one in which it fails as part of a broader crisis. In addition, financial institutions would have to disclosure their exposure to other significant financial companies. The wrinkles start to develop when you see that the rules provide that the plans have to be made with an assumption of no governmental funding. That makes sense given how Congress has restricted the Federal Reserve’s §343 powers as lender of last resort, but it is not very appealing, especially for the systemic crisis scenario.

Elizabeth Warren vs. the banks - But the fact remains: the White House chose to stand between Wall Street and the pitchforks. Rather than joining with the public against the bankers who had caused the crisis, they were joining with the Bush administration and the bankers to chart a cooperative path back to record profits for the financial industry. Insofar as Americans saw the financial crisis as an “us vs. them” moment, the White House fell into the “them” category as often as they fell into the “us” category. And that can’t have helped their political fortunes. During this period, Elizabeth Warren was a lonely voice for consumers, and against the administration’s treatment of the banks, during this period. As one of the watchdogs for the TARP funds, Warren regularly and publicly clashed with Tim Geithner over the deal the administration was giving to the banks. “You’re telling me that these financial instruments that are bought by very sophisticated parties are going to be treated effectively like deposits in checking accounts and savings accounts.” Warren snapped at one hearing. “They ended up effectively with 100-cent-on-the-dollar government guarantees for which they had never paid.” The look on Geithner’s face tells you all you need to know about the relations between the two at the time.

Citigroup To Start Charging Per-Month Fees On Low-Balance Accounts - Citigroup Inc said it will start charging a monthly fee of $10 on checking and savings accounts with combined balances of less than $1,500, joining a growing list of banks seeking to recoup revenue lost under new financial industry regulations.The fee will be waived if a customer completes one direct deposit and one online bill payment per month through an account, or maintains a balance of at least $1,500 in checking and savings accounts, Citigroup said on FridayThe change takes effect in December. Under Citi's current fee structure, customers are not required to maintain minimum account balances but must complete five transactions a month through an account to avoid a monthly fee of $8. Citigroup said it will not charge for debit card use or online bill payment. Stephen Troutner, head of banking products for Citi's U.S. consumer bank, said free debit card use could woo customers from other banks that are weighing whether to charge for debit card use, such as JPMorgan Chase & Co and Wells Fargo & Co

Tackling Reams of Bank Data Can Take Diligence, and Trust - If you really want to give your brain a workout to stave off the ravages of mental decline, I recommend trying to read bank financial statements. In my last column, I wrote about how many bad residential mortgage loans the big banks had on their balance sheets, using numbers from a site called, which does the punishing work of wading through regulatory filings known as call reports and aggregating the data. Take Wells Fargo. About $41.3 billion, or 19.5 percent, of its $212 billion worth of residential first-mortgage customers were either late in paying or had been classified as “nonperforming,” according to the site. This was in line with calculations by the Office of the Comptroller of the Currency, which estimates that about a fifth of residential loans on bank balance sheets nationwide are delinquent or in the process of being written off. Turn to Wells Fargo’s filings with the Securities and Exchange Commission for a full picture, according to Wells. It’s a happier, alternate universe in which $15.6 billion, or 7 percent of $223 billion, of first-mortgage loans are tagged late or “nonaccrual,” a charmingly opaque euphemism for bust.

Lehman Brothers: three years of denial - Very little has changed about either the realities on the ground or the intellectual debate on economic issues in the last three years. The "too-big-to-fail" banks are bigger than ever as a result of crisis induced mergers. Financial industry profits now exceed their pre-crisis share of corporate profits, and executive pay and bonuses are again at their bubble peaks. None of the executives who pushed and packaged fraudulent mortgages has gone to jail. Even those who have faced civil actions, like Countrywide's Angelo Mozilo, have almost certainly still come out ahead after making large payments to settle suits. And all the top policy people who guided us to this economic disaster are still doing just fine. When former Fed Chairman Alan Greenspan isn't collecting his seven-figure salary from Pimco, the country's largest bond fund, he is sharing his wisdom with the world on the Sunday morning talk shows.More importantly, little of their perceived wisdom has been questioned. Central banks around the world are still targeting 2% inflation as their main, if not only, policy goal. They are acting as though nothing in the world has happened that might cause us to question this policy.

Matt Stoller: Happy Lehman Brothers Bankruptcy Day - Lehman’s bankruptcy happened three years ago today. It should be quite clear at this point that another Lehman is going to happen again. Policymakers didn’t deal with the crisis of 2008-2009; they turned it into a much longer crisis with far greater lasting damage. There are two intertwined issues with any major financial panic. One issue is liquidity — can an asset be sold or traded without significant movement in the price? Can an institution exchange its assets for assets of similar value? In a bank run, the answer is no. People are too afraid to accept that their bank deposit is worth what is in the account because they don’t trust the bank that tells them what they have in the account. The second issue is solvency — is there enough value to pay off all creditor claims? Are assets greater than liabilities, even in a liquid market? The basic point to understand about the financial crisis is that it isn’t in fact over. The liquidity crisis of 2008-2009 was temporarily abated, but the solvency problem hasn’t been dealt with. The global financial architecture is essentially dominated by too many obligations, a.k.a. debt, that cannot be paid. This can only be addressed by a mass writedown of debts. Usually creditors don’t like being told they can’t have the money they think they have and force is required. Debtor deals are often preceded by civil wars, world wars, or depressions. But not always — sometimes a debtor cartel can force writedowns. So that’s the solvency issue.

Latest Lame Obama Excuse: “Geithner Blew Me Off” - Yves Smith -  This does not pass the smell test. An Associated Press report on a to-be-released book by Ron Suskind tells us that Obama said that Geithner ignored his request to look into the feasibility of breaking up Citigroup: AThe book states Geithner and the Treasury Department ignored a March 2009 order to consider dissolving banking giant Citigroup while continuing stress tests on banks, which were laden with toxic mortgage assets. The directive from the president was one of the most important decisions during the first few months of his presidency.

William Black: Why Nobody Went to Jail During the Credit Crisis - Jim welcomes Professor of Economics and Law William Black to Financial Sense Newshour. He explains to Jim why no one has gone to jail four years after the beginning of the historic Credit Crisis. Professor Black believes that the level of corruption and fraud is so pervasive that very few of the guilty will ever be brought to justice.

Credit Crisis the Result of Greatest Financial Crime in World History - Where are all the convictions? The S&L Crisis was the last major case of domestic fraud resulting not only in major U.S. bank failures but also thousands of convictions across the financial industry. However, today's crisis is vastly bigger, with many more players involved, and yet, not one person has been convicted or gone to jail. In the following transcript, William Black gives a behind the scenes look at events leading up to our current situation, who in the government needs to go, and other key details that will probably suprise you. Jim Puplava:  Joining me on the program is Professor William Black. He is both a Lawyer and an Associate Professor of Economics and Law at the University of Missouri, Kansas City. He was a Director of the Institute for Fraud Prevention from 2005 to 2007. He taught at the LBJ School of Public Affairs at the University of Texas. He was also a Litigation Director for the Federal Home Loan Bank Board. He is also author of the book “The Best Way to Rob a Bank Is to Own One.”

The Fed and the SEC Disappoint Yet Again - This week we got two more examples of a government that can’t remember how to function. Fed Chair Ben Bernanke can’t understand why consumers aren’t spending. Enforcement Chief Robert Khuzami of the SEC can’t figure out how to hold people accountable for securities fraud. Bernanke gave a speech in Minnesota on the state of the economy. It was substantially the same as the one he gave in Jackson Hole last month, but in Minnesota, Bernanke added a long paragraph chiding consumers: Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects. He sees some problems, but he can’t understand why people who don’t have those problems aren’t spending more. We know why: it’s because all of us but the rich are scared that things won’t get better. We know that Obama and Congress intend to cut Social Security and Medicare to avoid taxing the rich fairly. We know we need to get out of debt and build up whatever savings we can. We know our kids are facing a miserable future, and we need to accumulate money so we can help them all their lives.

Sanity Check: “Revolt Over Risks of Elite Class of Bankers” - Yves Smith - The Financial Times’ John Gapper makes some remarks in his latest comment at the Financial Times, “Revolt Over Risks of Elite Class of Bankers,” that I found surprising: The common thread of this week’s events is that national depositors and taxpayers are revolting against the idea that they should bear the risks of international finance and permit an elite class of global bankers such as Mr Adoboli – or the feckless citizens of other countries – to take the rewards. As they draw back, global financial regulation is creaking at the seams. I have trouble with the idea that there ever was “global financial regulation”. Basel II was never implemented in the US.Even the initial Basel accord was implemented by national regulators and my understanding was that it was tweaked somewhat in various nations. There has been more communication and cooperation between national banking regulators post crisis, but that is not tantamount to international regulation. Gapper may be seeing something I am missing, but from my US vantage, nothing has changed from what I wrote in ECONNED (published March 2010):The firms that had been silently drained of capital and tied together in shadowy counterparty links teetered, fell, and looked certain to perish. There was one last capital reserve to tap, U.S. taxpayers, to revive the financial system and make the innovators whole. Widespread anger turned into sullen resignation as the public realized its opposition to the looting was futile.

Companies Still Hoarding Cash - US companies continue to accumulate profits instead of spending them. The latest flow of funds data from the Fed show holdings of cash and other liquid assets at nonfinancial companies rose to $2.047 trillion in the second quarter, up 4.5% from the first quarter. That was the highest level since the series began in 1945. Meanwhile, households’ total net worth edged down 0.3% to $58.464 trillion last quarter, thanks to falling home and equity prices.

Nurses Hold Actions Across Country Demanding Wall Street Transaction Tax - Yves Smith -- I find it intriguing that the fact that nurses have stages protests against Wall Street has gotten pretty much no coverage in the mainstream media. I checked nurses + protest on Google News, and the only note take of their September 1 protest was a story in the Boston Herald and MarketWatch (but the latter merely published their press releases). Nurses have the potential to become an effective and visible source of pressure, since they are disciplined, organized, and have a good public image and are a large group. But they need more turnout and more media interest in order to reverse the perception that nothing can be done about the banksters. This report on The Real News Network provides a good overview of their position:

UBS Blames $2 Billion Loss on Rogue Trader -UBS said on Thursday that a rogue trader in its investment bank had lost $2 billion, delivering a fresh blow to the beleaguered Swiss bank. The police in London have arrested a European equities trader, Kweku Adoboli, in connection with the case, according to a person with direct knowledge of the situation who was not authorized to speak publicly. The incident raises questions about the bank’s management and risk policies at time when it is trying to rebuild its operations and bolster its flagging client base. The case could also bolster the efforts of regulators who have been pushing in some countries to separate trading from private banking and other less risky businesses. The revelation about the rogue trader comes as the bank tries to regain its financial footing. Last month, UBS announced it would shed 3,500 jobs, following poor second-quarter results. In an internal memo, the bank said the unauthorized trading could drag down earnings in the third quarter to a loss, adding that “no client positions” were involved in the “unauthorized trading.”

Another Huge Embarrassment For UBS In The Rogue Trader Scandal - Letting a trader lose $2 billion through unauthorized, risky trades is always going to be a black eye for a bank, as it necessarily raises alarm bells about controls and risk management. But it gets even worse for UBS. BBC's Robert Peston reports that the bank never discovered the losses. It had to be told about them from the alleged rogue trader Kweku Adoboli. The course of events was that on Wednesday Mr Adoboli disclosed to UBS that he had engaged in unauthorised trades, in his role as part of UBS's so-called Delta One trading team, which deals in exchange traded funds (or tradable investment funds whose proliferation has concerned regulators). UBS then examined his trading positions and rapidly informed the Financial Services Authority and the police. Mr Adoboli was arrested by the police at 3.30am yesterday. All this furthering the notion that UBS is easily among the worst banks in the world. John Gapper rightfully asks whether we're talking about a rogue trader scandal or a rogue bank given its history of huge losses in both the US mortgage market and even its entanglement with Long-Term Capital Management.

Rogue traders and stated-income borrowers - The financial scandal du jour is a $2 billion dollar loss at UBS blamed on a “rogue trader”. You’d think the whole “rogue trader” problem would have been solved by giant, sophisticated investment banks. After all, it was way back in 1995 that Nick Leeson brought down a 233 year-old global institution. Since then we’ve had John Rusnak at my hometown bank, Jérôme Kerviel at Société Générale, and others. Kid Dynamite, a former trader himself, notes that “losing $2B without anyone knowing about it is much harder than you think“. To generate a $2 billion dollar loss in a short period, a trading position has to be gargantuan. Some dude on a trading desk can’t just put on that kind of trade. He’d have to get buy-in from superiors and risk managers, which probably means making up justifications or falsifying hedged positions. Derivatives trades require collateral posting, and securities trades settle in cash. You’d think the bean counters would take note when large sums come and go through the accounts. Perhaps these “rogue traders” are supergeniuses who reroute the accounting ledgers through the lavatory plumbing at the exact critical moment. Otherwise you’d think that detecting unauthorized positions of $10B-ish would be the sort of thing that masters of the universe would be capable of doing.

The 2 Billion UBS Incident: 'Rogue Trader' My Ass - Matt Taibbi - The news that a "rogue trader" has soaked the Swiss banking giant UBS for $2 billion has rocked the international financial community and threatened to drive a stake through any chance Europe had of averting economic disaster. There is much hand-wringing in the financial press today as the UBS incident has reminded the whole world that all of the banks were almost certainly lying their asses off over the last three years, when they all pledged to pull back from risky prop trading. Here’s how the WSJ put it: The Swiss banking giant has been struggling to rebuild trust after running up vast losses in the original financial crisis. Under Chief Executive Oswald Grubel, the bank claimed to have put in place new risk management practices, pulled back from proprietary trading and focused on a low-risk client-driven model. All the troubled banks, remember, made similar promises in the wake of the financial crisis. In fact, some of them used the exact same language. Some will recall Goldman’s executive summary from earlier this year.

UBS Faces Questions on Oversight After a Trader Lost $2 Billion - Until this week, Kweku M. Adoboli was riding high, a young trader for a big bank, with a stylish apartment in a fashionable London neighborhood and a steady girlfriend. On Wednesday, the world of Mr. Adoboli began to come tumbling down around him. After being questioned by compliance officers about some of his trades, he became evasive, later sending a “confessional” e-mail to bank officials, saying that he did not have the information they wanted. Mr. Adoboli, 31, has now been charged with one count of fraud and two counts of false accounting in connection with a $2 billion trading loss at his former employer, the Swiss banking giant UBS. One of the false accounting charges against Mr. Adoboli dates to October 2008 — at the height of the financial crisis and less than two years after he became a trader for UBS. The charge that Mr. Adoboli’s rogue trading had been going on for years raises embarrassing questions about the bank’s controls and oversight. After writing down more than $50 billion on bad subprime mortgage investments, the chief executive of UBS, Oswald J. Grübel, had pledged to improve the bank’s risk management when he took over in 2009.

UBS ‘Rogue’ Trading Lasted 3 Years - An alleged trading scheme at UBS AG went undetected for three years before it was finally discovered, triggering a $2 billion loss, U.K. authorities indicated Friday as they charged a 31-year-old trader at the Swiss bank with fraud.  Flanked by a newly hired lawyer from a top London firm, Kweku Adoboli briefly gaped at reporters at his court hearing and said little beyond providing his birth date and address. Mr. Adoboli, who didn't enter a plea, dabbed his eyes with a tissue during a roughly 30-minute hearing at the City of London Magistrates' Court in London's financial district. The charges came as an early picture began to emerge of lapses inside one of the world's largest banks that allegedly allowed a young trader on a small stock desk to cause huge losses over three years, a much longer period than initially suspected. The alleged scheme dated to 2008, according to people familiar with the situation and court filings.  Alarm bells at the bank went off on Wednesday, when risk-management officials discovered unauthorized trades allegedly made by Mr. Adoboli on a desk that specialized in a hybrid of mutual funds.

Shrinking corporate officer pay - As a group, corporate officers — executives with broad authority to act on the company’s behalf, not just follow orders from the CEO or some other boss — are making less, not more, my analysis of newly available tax data shows. This is in sharp contrast with the thoroughly documented excesses at the very top revealed through analysis of disclosures to shareholders. The new tax data includes CEOs, but the few score of wildly overpaid ones at the biggest companies become statistically insignificant within the universe of nearly a million corporate officers covered in the new tax data. Many CEOs get paid far beyond what economic theory says is necessary to motivate them. Worse, a fair number enjoyed soaring pay while shareholders saw their wealth dwindle, as with John Snow when he ran the CSX Corp railroad company. When Snow left to become Treasury secretary his pay had grown 69 percent, while the price of CSX shares fell as much as 64 percent, just one of many disconnects between CEO pay and performance. But among the nearly one million corporate officers in the United States, this new data, never available before, show that the overall story is one of shrinking pay.

Grais fights to keep $8.5 billion BofA case in fed. court - On Wednesday night, Grais & Ellsworth filed a 29-page brief laying out its arguments for why Bank of America's proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors belongs in federal court, not in New York state court, where Bank of New York Mellon, as Countrywide MBS trustee, filed it. I'll talk about Grais's assertions in a moment, but first, I want to explain why the jurisdictional question is so crucial to the ultimate fate of BofA's proposed deal. Two transcripts tell that tale. BNY Mellon filed the case as an Article 77 proceeding in New York state supreme court, taking advantage of a state law that permits trustees to seek a judge's endorsement of their decisions. Using Article 77 was a deliberate tactic by BNY Mellon, BofA, and the 22 institutional investors who support the settlement. The lawyers who put together the deal considered and rejected other possible vehicles for court approval, but decided that Article 77 was the fastest, cleanest way to resolve claims involving 530 separate trusts. The provision, which is usually invoked in garden-variety trust cases, gives broad discretion to trustees, who are generally assumed to be acting in the best interests of trust beneficiaries.

BofA plans 30,000 job cuts; investors underwhelmed - Bank of America Corp said it will cut 30,000 jobs and slash annual expenses by $5 billion, but investors were unimpressed with the plan and the lack of details on how it will be accomplished. The staff reductions amount to more than 10 percent of the bank's workforce, and come as chief executive Brian Moynihan struggles to fix a bank whose share price has dropped nearly 50 percent this year.Media reports last week said the bank could cut as many as 40,000 jobs. Many investors had hoped for a more dramatic turnaround plan on Monday, when Moynihan spoke at a financial conference and the bank released its cutback plans. "It was pretty underwhelming," "They need to address the bigger issues the bank faces,"

Bank of America to cut 30,000 jobs over 3 years. But let’s talk about stock prices - In a Reuters article about plans for $5 billion in cost-cutting at Bank of America over the next three years, this is what we hear about BoA workers:  But we get paragraphs and paragraphs about stock prices. Forbes and the Wall Street Journal offer similar proportions, though reporting 30,000 planned job cuts rather than 40,000. NPR leads with the job cuts but doesn't have much to say about them. Dealbook offers some insight into the lack of detail about 30,000 jobs and the emphasis on stock prices: Bank of America just isn't talking about it. When the bank's CEO described cost-cutting measures, he didn't even mention job cuts; that came later, in a statement that offered no specifics. Because to the big banks, jobs just aren't important. And financial reporters overwhelmingly go along with that. Bank of America, by the way, paid no corporate income taxes in 2010 and "actually reported a tax benefit of almost a billion dollars." In the same year, top executives earned tens of millions of dollars. That's how we're told to understand our economy these days: the rich get millions, corporations have no responsibility to pay their fair share, and the loss of tens of thousands of jobs is a side note to lengthy discussion of stock prices.

New York Times Runs PR for Bank of America’s Headcount-Cutting Profiteers - 09/14/2011 - Yves Smith - It might behoove a publication that styles itself as the newspaper of record to do some basic fact checking rather than take dictation from parties with an obvious axe to grind and publish it as news. I’m going to give the disgraceful New York Times story, “Outsiders’ Ideas Help Bank of America Cut Jobs and Costs” a long form treatment, not only because it may help readers recognize PR masquerading as news, but also because the bits of this story that the Times didn’t bother to probe help illuminate how the retail banking industry became predatory and how some of the mechanisms to transfer wealth to people at the very top are well hidden from the great unwashed public. Thus, this post is a companion piece to our piece today on the rise in poverty and continuing destruction of the middle class in the US. The New York Times piece is hagiography about the cost cutting process at Bank of America, in which the Charlotte bank will shed 30,000 jobs, more than 10% of its workforce. It starts with the misrepresentation of calling the belt-tightening a “turnaround plan.” That implies that the business of the bank is in trouble and the headcount reduction measures can save the day. This is utter bunk. Bank of America was already a very cost and efficiency driven bank, to a fault.  Banking expert Chris Whalen has called the cost cutting effort “criminal”. He points out the obvious: there is nothing wrong with the bank’s operating businesses. The threat to BofA’s survival comes from litigation on its mortgage backed securities business, and the bank would do better to preserve the fundamental value of its business by declaring bankruptcy.

BofA Said to Keep Bankruptcy as Option for Countrywide Unit - Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy. The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said. The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.

Some Banks Hang On to Bailout Billions - While it has been nearly three years since Washington bailed out the banks, the financial industry is still clinging to $19 billion in taxpayer money. Nearly 500 banks, ranging from beleaguered regional powerhouses to obscure community banks, owe roughly 8 percent of the $245 billion doled out at the peak of the financial crisis, according to Treasury Department data released this week. Regions Financial, a large lender based in Alabama, owes $3.5 billion, the most of any bank.Even as bailout money has slowly returned to the government’s coffers throughout the year, many banks still refuse to part with their lifelines. Some institutions, well-positioned to reimburse taxpayers through fresh stock offerings, are choosing instead to wait for brighter days when their stock prices are not so depressed. Other stragglers desperately need the money. Nearly one-third of the remaining debtors have missed their recent dividend payments to the government.

Big Bank Chart Source: How Banks Got Too Big to Fail, MoJo

Unofficial Problem Bank list declines to 984 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Sept 16, 2011. Changes and comments from surferdude808:  The OCC did not release its actions through mid-August as we anticipated they would last week. Perhaps there are operational issues or changes in release protocol after the merger with the OTS. Without the OCC release and the FDIC sitting on its hands this week as far as closures, there were only minor changes to the Unofficial Problem Bank List this week. In all, there were two removals, which leaves the list with 984 institutions and assets of $402.4 billion. A year ago, there were 854 institutions with assets of $416.0 billion.

Delinquency rate for CMBS highest in 14 years - Commercial and multifamily delinquency rates fell in four of the five major investor groups in the second quarter, while the delinquency rate for loans in commercial mortgage-backed securities rose to the highest level in 14 years. The Mortgage Bankers Association said 90-plus day delinquencies for loans held by banks and thrifts insured by the Federal Deposit Insurance Corp. decreased to 3.93% in the second quarter. The 60-plus day delinquency rate of loans in the portfolios of life insurance companies slid to 0.12% from 0.14%. The rate of delinquent multifamily loans held or insured by Fannie Mae declined in the second quarter to 0.46% from 0.64% a quarter before, while the same delinquent rate slid to 0.31% from 0.35% for Freddie Mac multifamily loans. Meanwhile, the 30-day delinquency rate for loans in CMBS climbed to 9.43% in the second quarter from 9.18% the prior quarter. "Commercial/multifamily mortgage delinquency rates for four of five major investor groups – banks, life insurance companies, Fannie Mae and Freddie Mac – declined in the second quarter," And the delinquency rates "remain below levels seen in the last major real estate downturn during the early 1990's, some by large margins."

The Government Giveth and It Taketh Away: The Significance of the Game Changing FHFA Lawsuits - Friday, September 2, the Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac, sued almost all of the world’s largest banks in 17 separate lawsuits, covering mortgage backed securities with original principal balances of roughly $200 billion.   The following is my take on the most interesting aspects of these voluminous complaints (all available here) from a mortgage litigation perspective. The first thing that jumps out to me is the tenacity and aggressiveness with which FHFA presents its cases.  In my last post (Number 1 development), I noted that FHFA had just sued UBS over $4.5 billion in MBS.  While I noted that this signaled a shift in Washington’s “too-big-to-fail” attitude towards banks, my biggest question was whether the agency would show the same tenacity in going after major U.S. banks.  Well, it’s safe to say the agency has shown the same tenacity and then some. FHFA has refrained from sugar coating the banks’ alleged conduct as mere inadvertence, negligence, or recklessness, as many plaintiffs have done thus far.  Instead, it has come right out and accused certain banks of out-and-out fraud.  Besides showing that FHFA means business, these claims demonstrate that the agency has carefully reviewed the evidence before it and only wielded the sword of fraud against those banks that it felt actually were aware of their misrepresentations.

BofA, JPMorgan Fail to Make Fannie Mae Grade for Loan Servicing - Bank of America Corp. (BAC), the largest U.S. mortgage servicer, failed to make a list of companies doing a satisfactory job of assisting homeowners struggling to pay their mortgage, according to Fannie Mae. Of the 11 biggest servicers of Fannie Mae mortgages, Wells Fargo & Co. (WFC), Citigroup Inc. (C), Ally Financial Inc. and EverBank Financial Corp. are on track to receive satisfactory or better grades under a newly created customer service and foreclosure- prevention ratings system, the mortgage-finance company said in a statement. JPMorgan Chase & Co. (JPM), SunTrust Banks Inc. (STI), PHH Corp. (PHH), PNC Financial Services Group Inc. (PNC), OneWest Bank FSB and MetLife Inc. (MET) were the other companies that didn’t make the list. Loan servicers interact with borrowers, collect mortgage payments and oversee foreclosures. “Servicers who achieve the highest ratings are leading the way in providing assistance to homeowners who are having difficulty making their mortgage payments,”

Housing Finance: Role of the Government Guarantee - I'm testifying before the Senate Banking Committee on Tuesday about the role of the government guarantee in housing finance (a/k/a wtf do we do with Fannie and Freddie). My testimony is here. I expect it will manage to piss off people left, right, and center, but that's the nature of this GSE reform debate.  I'm not thrilled with the prospect of a government guarantee, but I just don't think that there's sufficient the market demand for credit risk on U.S. mortgages for a non-guaranteed system to function. Do we really think that $6 trillion dollars of interest risk investors are suddenly going to decide they want credit risk as well? Realistically, if it gets hairy enough, the government will bail out the system, Dodd-Frank, Tea Party, and all that jazz aside. We'll keep chanting no more bailouts until we do the next bailout. (Remember the War to End All Wars?) That means that it's better to have an explicit guarantee and price for it. 

One Obstacle to Obama’s New Plan to Help Homeowners: A Gov’t Regulator - If you weren't listening closely to President Obama's speech, you might have missed his new plan to help millions of homeowners.  Here it is, in its entirety: “We're going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. ... That's a step that can put more than $2,000 a year in a family's pocket, and give a lift to an economy still burdened by the drop in housing prices.” Why so brief and vague? Perhaps because there are obstacles making it doubtful such a plan will ever get off the ground, let alone make a major impact. To understand why, you have to look at why the administration's big refinancing plan, started two years ago, has helped only a small fraction of the homeowners it was designed to help. This is the plan Obama is proposing to fix, but it depends on getting a green light from a key regulator, which may not happen.

Experts back expanding Obama mortgage refi effort  - At issue is the White House’s Home Affordable Refinance Program, or HARP, which has seeks to provide refinancing options to millions of underwater borrowers who have no equity in their homes as long as their mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants. “Jump-starting HARP requires that Fannie and Freddie not charge add-on rates, even for refinancing borrowers who have lost a lot of equity in their homes or have relatively low credit scores,” said Mark Zandi, the chief economist of Moody’s Analytics. As it stands now, the HARP program only allows borrowers to refinance at current low interest rates into a mortgage that is at most 25% more than their home’s current value. David Stevens, president of the Mortgage Bankers Association, acknowledged that allowing borrowers who are even more underwater, that is they owe even more than that cap, to participate would enable more qualified borrowers to refinance. Zandi made additional suggestions, including proposing that Fannie and Freddie could forgo borrower income verification and detailed home appraisals to keep costs down.

Minnesota AG Swanson Backs Schneiderman: No Settlement With the Banks Without Investigation - Minnesota Attorney General Lori Swanson has released a letter that opposes giving a broad release to banks on foreclosure fraud in exchange for a quick settlement. In the letter, Swanson writes that “the banks should not be released from liability for conduct that has not been investigated and is not appropriately remedied in any settlement.” Specifically, she refers to “liability for securities claims or conduct arising out of the securitization of mortgages or liability arising out of the use of the Mortgage Electronic Registry System (“MERS”), where those claims have not been investigated or fairly addressed through the settlement.” She adds that bank officers should not be released from criminal liability in a civil settlement. Swanson lines up with New York Attorney General Eric Schneiderman, then, in saying that she would not sign off on any broad settlement without an actual investigation. But she actually goes a bit further. Swanson writes that due process rights of individuals cannot be impeded or compromised by any settlement. A settlement among AGs could never preclude private action by individuals, but because AG lawsuits would invariably aid efforts by individuals to sue over irregularities in the securitization or foreclosure process, in a way this would nullify any settlement.

MBA: Mortgage Purchase Application Index increases, Record Low Mortgage Rates - The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey: The seasonally adjusted Purchase Index increased 7.0 percent from one week earlier. ... The Refinance Index increased 6.0 percent from the previous week, stopping a run of three consecutive weekly decreases.The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.17 percent from 4.23 percent, with points decreasing to 0.97 from 1.04 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate also decreased from last week. The 30-year fixed contract rate is the lowest in the history of the survey, with the previous low being 4.21 percent in the week ending October 8, 2010.The following graph shows the MBA Purchase Index and four week moving average since 1990.

Mortgage Rates Fall to New Record Lows; In Real Terms You Can Borrow Now for Free at 0% or Less - Freddie Mac reported today that the average rate on 30-year fixed mortgages fell to 4.09% this week, down from 4.12% last week, and the lowest rate since the early 1950s (see top chart above, news report here).  The 15-year fixed rate fell to 3.30% this week from 3.33% last week, setting a new all-time record low (see bottom chart above). To purchase a median priced existing home at $174,000 (most recent data available is for July) with a 20% down payment, the monthly payments at 4.09% would be $671.80.  In 2008, when the median priced home averaged $198,100 and the 30-year mortgage rate averaged 6.04%, the monthly payments (with 20% down) would be $954.25, or 42% higher than the current monthly payment of $671.80.  With rates so low, and home prices stable or falling, there's probably never been a better time to buy or refinance a home.  With annual inflation of 3.8% through August, getting a 4.09% 30-year fixed rate mortgage is basically "free money" at close to a 0% real rate (assuming inflation remains at 3.8%). 

Huge Surge in Bank of America Foreclosures - Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months.  The notice of default is usually sent when a borrower is 90 days or more overdue in payments, but that timeline has been extended significantly during this housing crisis, due to the so-called "robo-signing" processing scandal and the sheer volume of troubled loans.  Mortgage and housing analyst and strategist Mark Hanson alerted me to unusually high legal default filing activity, and his research points to Bank of America as the primary driver.  I contacted a Bank of America  spokesman, who responded: "It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories.  It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month." RealtyTrac is also confirming a surge in overall notices of default in its August numbers

U.S. Foreclosure Activity Increases 7 Percent in August, Defaults Surge 33 Percent - RealtyTrac® today released its U.S. Foreclosure Market Report™ for August 2011, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 228,098 U.S. properties in August, a 7 percent increase from the previous month, but still down nearly 33 percent from August 2010.  Default notices (NOD, LIS) were filed for the first time on a total of 78,880 U.S. properties in August, a nine-month high and a 33 percent increase from July — the biggest month-over-month increase since August 2007.  Default notices increased more than 40 percent on a month-over-month basis in several states, including New Jersey (42 percent), Indiana (46 percent) and California (55 percent), but were still down from a year ago in all of those states. “The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems,” . “It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process.”

August Surge in Mortgage Default Warnings. - The number of U.S. homes that received an initial default notice -- the first step in the foreclosure process -- jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. said Thursday. The increase represents a nine-month high and the biggest monthly gain in four years. The spike signals banks are starting to take swifter action against homeowners, nearly a year after processing issues led to a sharp slowdown in foreclosures. Foreclosure activity began to slow last fall after problems surfaced with the way many lenders were handling foreclosure paperwork, namely shoddy mortgage paperwork comprising several shortcuts known collectively as robo-signing. Many of the nation's largest banks reacted by temporarily ceasing all foreclosures, re-filing previously filed foreclosure cases and revisiting pending cases to prevent errors. In all, 78,880 properties received a default notice in August. Despite the sharp increase from July, last month's total was still down 18 percent versus August last year and 44 percent below the peak set in April 2009, RealtyTrac said.

Mortgage-Default Filings Jump 33% in U.S. as Bank Foreclosure Logjam Eases - Default notices sent to delinquent U.S. homeowners surged 33 percent in August from the previous month, a sign that lenders are speeding up the foreclosure process after almost a year of delays, RealtyTrac Inc. said. First-time default notices were filed on 78,880 properties, the most in nine months, the Irvine, California-based data seller said today in a report. Total foreclosure filings, which also include auction and home-seizure notices, increased 7 percent from a four-year low in July to 228,098. One in 570 homes received a notice during August. On a year-over-year basis, foreclosure filings dropped for an 11th straight month after claims of “robo-signing,” or pushing through documents that weren’t verified, spurred an investigation by state attorneys general in October. The jump in default notices from July -- the biggest monthly gain in four years -- shows that banks’ paperwork delays are easing even as industry talks to settle the probe continue, RealtyTrac said.

Calif. Notices Of Default Increase By 55 Percent - California saw a big jump last month in the number of homeowners who got a default notice – which is usually the precursor to a foreclosure. Daren Blomquist with research firm RealtyTrac said notices of default increased by 55 percent between July and August. “That’s the biggest month-over-month increase we’ve seen going all the way back to January 2009,” said Blomquist. “The banks have been taking longer to push delinquent properties into foreclosure. But this is a clear signal that some of those delayed foreclosures are being pushed through.” Blomquist said the delay followed allegations that some banks rushed through the foreclosure process without proper verification. The 55 percent increase helped keep California’s foreclosure rate second highest among all states in August. One in every 226 California housing units had a foreclosure filing last month. .

CoreLogic: 10.9 Million U.S. Properties with Negative Equity in Q2 - CoreLogic released the Q2 2011 negative equity report today...showing that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011, down very slightly from 22.7 percent in the first quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide. The new report also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, above-market interest on their mortgages.Here are a couple of graphs from the report: This graph shows the distribution of negative equity. The more negative equity, the more at risk the homeowner is to losing their home. Close to 10% of homeowners with mortgages have more than 25% negative equity. This is trending down slowly - the decline is apparently mostly due to homes lost in foreclosure. The second graph from CoreLogic shows the cumulative distribution of mortgage rates for borrowers with positive and negative equity. The third graph shows the break down of negative equity by state.

More Than One-Fifth of Mortgages Underwater: Report - Nearly 10.9 million, or 22.5 percent, of all residential mortgages had negative equity at the end of the second quarter of the year, according to a report released Tuesday by the analytics firm CoreLogic. The figure is actually a slight improvement from the 22.7 percent of all mortgages with negative equity in the first quarter of 2011. An additional 2.4 million borrowers had less than 5 percent equity in the second quarter, according to the report, which also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, above-market interest on their mortgages. The states that had the most inflated property values before the housing bubble burst, and Michigan, which continues to suffer from the fall off of the automotive and manufacturing industries, had the highest negative equity percentages. Nevada held the top position in terms of negative equity with 60 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (45 percent), Michigan (36 percent), and California (30 percent).

Home Prices Are Down, but Rentals Are Rising - The housing market is gasping for air, and home prices are down to 2003 levels, according to the S&P/Case-Shiller Home Price Indices. But that does not mean all housing is cheap. Rents are actually rising, according to the latest inflation data from the Labor Department. Last year, rents were essentially flat, but they have been rising steadily since the end of 2010. In August, rents paid for primary residences were up 0.4 percent compared with July, and 2 percent above a year earlier. The reason is simply a matter of increasing demand for rental properties. In a better economy, the people who are now renting might be looking to buy a house. Many people do not have the financial capacity to get a mortgage. Interest rates are at historic lows, but lenders are making prospective borrowers go through ever more hoops to qualify for loans. People who are insecure about their jobs do not want to commit to mortgages, and those who are scraping by on unemployment insurance or savings certainly cannot buy a house.

Huntsman is right on immigration - Jon Huntsman made the important and underappreciated argument that immigration could help lift housing markets:“Why is it that Vancouver is the fastest growing real estate market in the world today? They allow immigrants in legally and it lifts all boats. We need to focus as much on legal immigration.” Suzy Khimm at the Washington Post attempts to throw some cold water on Huntsman’s argument, but I think she gets it wrong. Or more accurately, economist Paul Dales, whom she quotes, gets it wrong. He argues that immigration wouldn’t be significant enough to sop up the excess demand in housing and thus wouldn’t make much of a difference: …More immigrants overall could have a “marginally positive” effect on the U.S. market by buying vacant homes, but “any impact would be almost unnoticeable” on a national scale . Dales estimates that the overhang is at least one million, and potentially as high as three to four million homes. So even a sudden influx of immigrant homebuyers wouldn’t be enough to make a dent in the market, realistically speaking There are a couple big missing pieces here. First off, what level of immigration is Dales talking about? If an extra 100,000 a year more isn’t enough, then we can let in an extra 3 million. From his own numbers, this would likely sop up the excess supply, so surely a sudden influx of a large enough amount would make a significant dent in the market.

Q2 Flow of Funds: Household Real Estate assets off $6.6 trillion from peak - The Federal Reserve released the Q2 2011 Flow of Funds report today: Flow of Funds. The Fed estimated that the value of household real estate fell $65 billion to $16.18 trillion in Q2 2011, from $16.25 trillion in Q1 2011. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011. This chart is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.  In Q2 2011, household percent equity (of household real estate) was at 38.6% - about the same as in Q1.  Note: about 30.3% of owner occupied households have no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 38.6% equity - and 10.9 million households have negative equity. The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Consumers Are Depressed Beyond Reason - I usually pay no attention to the remarks of the Fed Chairman, but I was struck by this story in the New York Times called Fed Chief Describes Consumers as Too Bleak (hat tip, Tim Iacono). Mr. Bernanke, speaking at a luncheon in Minneapolis, offered the standard explanations... Then he said something new: Consumers are depressed beyond reason or expectation. 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. Economic models based on historic patterns of unemployment, wages, debt and housing prices suggest that people should be spending more money. Depressed beyond reason or expectation? Good Lord! There is lots of subtext to explore here. Those "economic models based on historic patterns" are Keynesian models which discount the importance of debt and the distribution of income, as I described in Dude! Where's My Recovery?, which was based on the insights of Australian economist Steve Keen.

Economic Roadkill - If you really want to know what’s going on with the economy,  you should take a look at the Fed’s Consumer Credit Report that was released on Thursday. Yes, it’s a real snoozer, but it does reveal the truth behind all the “recovery” hype. So, let’s cut to the chase: When unemployment is high and wages are stagnant, the only way the economy can grow is through credit expansion. That’s why economists pay so much attention to the credit report, because it lets them see if we’re making progress or not. Right now, we’re not making any headway at all. Of course, the cheerleading media see things differently. Here’s a clip from an article in Bloomberg that puts a positive spin on a truly dismal report: “Credit increased $12 billion after a revised $11.3 billion rise in June, the Federal Reserve said today . The rise in non-revolving loans was the most since November 2001.” Hooray!  The US consumer is off the canvas and borrowing again. Let the celebration begin! Not so fast. The uptick in credit spending is entirely attributable to subprime auto loans and government-backed student loans, both of which are a mere extension of the same Ponzi-finance scam that put the global economy into cardiac arrest. Every other area of credit expansion is on-the-ropes.

Households Doubling Up - In coping with economic challenges over the past few years, many of us have combined households with other family members or individuals. These “doubled-up” households are defined as those that include at least one “additional” adult – in other words, a person 18 or older who is not enrolled in school and is not the householder, spouse or cohabiting partner of the householder. The Census Bureau reported today that the number and share of doubled-up households and adults sharing households across the country increased over the course of the recession… In spring 2007, there were 19.7 million doubled-up households, amounting to 17.0 percent of all households. Four years later, in spring 2011, the number of such households had climbed to 21.8 million, or 18.3 percent. All in all, 61.7 million adults, or 27.7 percent, were doubled-up in 2007, rising to 69.2 million, or 30.0 percent, in 2011. Young adults were especially hard-hit, with 5.9 million people ages 25 to 34 living in their parents’ household in 2011, up from 4.7 million before the recession. That left 14.2 percent of young adults living in their parents’ households in March 2011, up more than two percentage points over the period. These young adults who lived with their parents had an official poverty rate of only 8.4 percent, since the income of their entire family is compared with the poverty threshold. If their poverty status were determined by their own income, 45.3 percent would have had income falling below the poverty threshold for a single person under age 65.

Massive default is best way to fix the economy - You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy? There’s a way to do it. Fast. And relatively simple. But you’re not going to like it. You’re not going to like it at all. Default. A national Chapter 11 bankruptcy. The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy. I told you that you wouldn’t like it. I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back. But you know what? The time to stop that was five or 10 years ago, when the money was being lent. It’s gone. And mass Chapter 11 is, by far, the least obnoxious solution to our problems. That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.   It’s the debt, stupid.

Port of Long Beach July container traffic slows - Cargo volume through California's Port of Long Beach slowed 6.5% in August from July, an ominous economic signal during a month when U.S. retailers traditionally build inventories in advance of the holidays. "An August downturn really has to do with retailers ... having to think about what kind of a holiday season they're going to have," port spokesman Lee Peterson said. "The importers especially are taking a little bit more of a cautious approach to bringing in goods at this point." The figures from August for the nearby Port of Los Angeles weren't yet available. Together, the two big West Coast ports account for about 40% of U.S. inbound containerized cargo traffic, consisting mostly of consumer products and other finished goods from Asia.

LA Port Traffic in August: Imports decline - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for August. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is down 0.9% from July, and outbound traffic is up 0.9%. Inbound traffic is "rolling over" and this suggests that retailers are cautious for the coming holiday season. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of August, loaded inbound traffic was down 9% compared to August 2010, and loaded outbound traffic was up 12% compared to August 2010.  Imports have been soft - this is the 3rd month in a row with a year-over-year decline in imports. This suggests a smaller trade deficit with Asian countries in August.

Import Prices in U.S. Fall a Second Time in Three Months on Food, Oil Drop - Prices of goods imported into the U.S. fell in August for the second time in three months as the cost of oil and food dropped while autos stabilized. The 0.4 percent decline in the import-price index followed a 0.3 percent increase in July, Labor Department figures showed today in Washington. Economists projected a 0.8 percent decrease, according to the median of 52 estimates in a Bloomberg News survey. Prices excluding fuel rose 0.2 percent. Slower growth in Europe and emerging economies like China, together with less U.S. demand, may restrain the cost of goods from abroad. Federal Reserve Chairman Ben S. Bernanke last week said “transitory” influences that had pushed up some prices will wane, and that the central bank had tools to spur growth if necessary. Compared with a year earlier, import prices rose 13 percent, today’s report showed, down from a revised 13.8 percent increase in the 12 months ended in July that was smaller than previously estimated.

Vital Signs: Oil Prices Down, but Gas Stubborn - Oil prices have come down a lot. Gas prices — not so much. Crude closed at $88.19 a barrel in New York trading Monday, 22.3% below the high it hit this spring and down 3.1% from late December. But the price of regular gasoline, at an average of $3.66 a gallon Monday, is down only 7.7% since its spring high and is still 20% higher than the end of December.

U.S. motorists may spend a record $491 billion for gasoline this year - Fuel prices have been high this year because of expensive oil and increased exports of gasoline and diesel to other countries. Gasoline prices may decline for a few weeks after the switch to winter blends, which are less costly to produce than summer blends. But gas price woes won't go away, experts said. "The 30 days between now and mid-October will be the most hospitable days in the country for dropping prices," said Tom Kloza, chief oil analyst for the Oil Price Information Service. "But then the drumbeats will start about fears of a second Arab Spring [of political unrest]. Demand outside of Europe and the U.S. continues to rise. By spring, Americans will be wrestling with $4 gasoline in a lot of markets." Both the U.S. and California averages were well short of the all-time highs set in 2008 of $4.114 and $4.588, respectively. But overall, drivers have shelled out more for fuel this year than in 2008 because prices rose faster this time and have stayed high longer.

Ceridian-UCLA: Diesel Fuel index declined in August - This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Remains in Idle – Down 1.4 Percent in August The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation fell 1.4 percent in August on a seasonally and workday adjusted basis, following a 0.2 percent decline in July.  “The August number supports the pattern of sluggish economic growth coming out of a recession, which is something that we’ve seen in the past. What we’re experiencing is the ‘new normal,’ where the U.S. economy will continue to stumble forward until a new growth engine is identified. This graph shows the index since January 2000.The weakness in the PCI over the last several months called for a zero percent change in the July Industrial Production – the initial release of 0.9% was stronger, although subject to revisions. Due to the continued weakness evident in the PCI, the forecast for August Industrial Production is a 0.26 percent decline when released on September 15.

Diesel could signal economy's course - Voters may be angry about high gasoline prices, but the path of the economy could well rest on what happens next with diesel fuel. Both are closely connected. Gas engines carry consumers to shopping malls, chain restaurants and big box stores. Sales of gasoline have dropped in volume 2.1 percent so far this year, he said, indicating that people’s shopping bags have gotten lighter — not much of a surprise, given consumers reluctance to spend these days. Then, Felmy pointed out that diesel sales are up this year a walloping 10.9 percent. The problem is that gas and diesel should start moving along the same lines, which means that diesel usage could soon reverse course — a sign that the economy might be running on fumes. “This raises some questions because you can’t continue to produce stuff if people aren’t buying,” . Trucking has outperformed the rest of the economy this year, with volumes up 5 percent. American manufacturing — another sector that has been doing better than the rest of the economy — contributed to the increased traffic, since U.S.-made goods usually generate more business for trucking than imports. Ferrying a Chinese-made pair of jeans to Walmart might involve one to three “truck movements,” he said. With a durable good produced by a U.S. factory, there might be seven to eight truck movements

Wholesale prices flat, as inflation pressures ease -- Companies paid the same amount for wholesale goods last month as a drop in energy prices offset higher food costs. Excluding the volatile food and energy categories, core wholesale prices edged up 0.1 percent, the smallest increase in three months. The figures indicate that inflation pressures are easing. The Producer Price Index, which measures price changes before they reach the consumer, was unchanged in August, the Labor Department said Wednesday, after a 0.2 percent rise in July. In the past 12 months, the index has increased 6.5 percent, mostly due to higher gas and food costs. That's the smallest 12-month rise since March, though much bigger than the annual changes late last year. Core prices rose 2.5 percent in the past 12 months, the same pace as July. "It does seem as though wholesale prices have plateaued," They are likely to remain at roughly the same level or inch down in future months, he said.

Consumer Price Index Summary - The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.8 percent before seasonal adjustment. The seasonally adjusted increase in the all items index was broad- based, with continuing increases in the indexes for gasoline, food, shelter, and apparel. The gasoline index rose for the 12th time in the last 14 months and led to a 1.2 percent increase in the energy index, while the food index rose 0.5 percent, its largest increase since March. The index for all items less food and energy increased 0.2 percent in August, the same increase as the previous month. Shelter and apparel were the biggest contributors, though the indexes for most of its major components posted increases, including used cars and trucks, medical care, household furnishings and operations, recreation, tobacco, and personal care. The new vehicles index, unchanged for the second month in a row, was an exception. The 12-month change in the all items index edged up to 3.8 percent after holding at 3.6 percent for three months, while the 12-month change for all items less food and energy reached 2.0 percent for the first time since November 2008. The energy index has risen 18.4 percent over the last year, while the food index has increased 4.6 percent.

Key Measures of Inflation increase in August - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis ... The gasoline index rose for the 12th time in the last 14 months and led to a 1.2 percent increase in the energy index, while the food index rose 0.5 percent, its largest increase since March. ... The index for all items less food and energy increased 0.2 percent in August, the same increase as the previous month.  The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.6% annualized rate) in August. The 16% trimmed-mean Consumer Price Index increased 0.3% (4.0% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  On a year-over-year basis, these measures of inflation are increasing, and are near the Fed's target.  On a monthly basis, the median Consumer Price Index increased 3.6% at an annualized rate, the 16% trimmed-mean Consumer Price Index increased 4.0% annualized in July, and core CPI increased 3.0% annualized.

Inflation Slowed in August, Reflecting a Weak Economy - The rate of inflation in the United States slowed slightly in August, when a rise in food prices1 was tempered by easing prices for gasoline and automobiles, according to government statistics released Thursday.  The Labor Department said the Consumer Price Index rose 0.4 percent last month2, a slight deceleration compared with the 0.5 percent rise in July. The index, although it reflects just one month of data, is a closely watched indicator that guides analysts in assessing the economy. Other reports released Thursday showed weakness in the jobs market and an uncertain outlook for manufacturing. The inflation figures for August reflected the volatility in prices for items such as food and energy. Prices for gasoline moderated, with a 1.9 percent rise in August after a 4.7 percent jump in July. Food prices rose 0.5 percent compared with 0.4 percent in July.

Preliminary September Consumer Sentiment increases slightly to 57.8 - The preliminary September Reuters / University of Michigan consumer sentiment index increased slightly to 57.8 from 55.7 in July. In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. In August, sentiment was probably negatively impacted by the debt ceiling debate.  It usually takes 2 to 4 months to bounce back from an event driven decline in sentiment (if the August decline was event driven) - and any bounce back from the debt ceiling debate would be to an already weak reading.

Consumer View Improves, but Demand Concerns Persist - The panic consumers felt about the August economy has subsided when it comes to looking at the early September economy. The Thomson-Reuters/University of Michigan consumer sentiment index edged up to 57.8 in early September after the index plunged in August to a final reading of 55.7 from 63.7 in July. All of the gain reflected a better assessment of the current economy. That’s in contrast to the early-September readings from the factory sector. Reports from the Federal Reserve Banks of New York and Philadelphia show manufacturing activity in their respective regions was still contracting this month just as it did in August. Since consumers control the bulk of U.S. demand and stronger demand is what’s needed in this recovery, the better reading on consumer sentiment may be something the economy needs. Yet even within the sentiment report, there is cause to worry about the strength of future demand. The gain in sentiment was concentrated in households making less than $75,000 a year, while sentiment among upper-income households fell to its lowest level since March 2009, according to economists at Credit Suisse.

Retail Sales in U.S. Unexpectedly Stagnate -- Retail sales in the U.S. unexpectedly stagnated in August as a lack of employment and limited income growth restrained demand, highlighting the risk the economy will stall. The unchanged reading followed a 0.3 percent gain for July that was smaller than previously estimated, Commerce Department figures showed today in Washington. Prices paid by producers were also unchanged in August, according to the Labor Department, while so-called core costs that exclude food and fuel rose less than forecast. Retailers like Best Buy Co. and Target Corp. (TGT) are saying a struggling job market that has battered consumer confidence is hurting sales. The dim outlook for household spending, which accounts for about 70 percent of the economy, will make it harder for the two-year old recovery to gain speed, giving the Federal Reserve reason to take additional steps to spur growth. “Consumers are being more cautious given all the economic headwinds,”

Retail Sales flat in August - On a monthly basis, retail sales were flat from July to August (seasonally adjusted, after revisions), and sales were up 7.2% from August 2010. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $389.5 billion, virtually unchanged (±0.5%)* from the previous month and 7.2 percent (±0.7%) above August 2010. Retail sales excluding autos increased 0.1% in August. Sales for and June and July were revised down.  This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 17.1% from the bottom, and now 2.9% above the pre-recession peak.  The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.7% on a YoY basis (7.2% for all retail sales).

Another Zero For August Economic Activity -- Retail sales last month were essentially unchanged, offering another sign that the economy has slowed. The flat performance mirrors the stagnation in jobs creation for August. Zero and zero add up to a discouraging outlook for the economy. Nonetheless, let’s be fair and recognize that the annual trend in retail sales still looks robust.  For the 12 months through August, retail sales climbed 7.2%. That’s in the range of the annual pace over the last year or so, and since a 7% rise over 12 months is historically a strong number there’s a case for thinking that there’s no capitulation in these numbers, at least not yet. Nonetheless, it’s hard to overlook the slowdown in August. The flat performance is the worst monthly reading since May’s modest decline in retail sales.

Empire State Manufacturing Index Drops Unexpectedly – The New York Federal Reserve’s index of manufacturing conditions unexpectedly deteriorated in September, remaining in negative territory for the fourth consecutive month, official data showed on Thursday. In a report, the Federal Reserve Bank of New York said that its general business conditions index fell by 1.1 points to minus 8.8 in September from minus 7.7 in August. Analysts had expected the index to improve to minus 4.0 in September. On the index, a reading above 0.0 indicates improving conditions, below indicates worsening conditions. The new orders index held steady at -8.0, while the shipments index dropped sixteen points to -12.9.After dropping significantly over the summer, the indexes for both prices paid and prices received climbed several points, suggesting that the pace of price increases picked up. Employment indexes were below zero, indicating that employment levels and hours worked fell over the month.

Philly Fed index negative for third time in four — Manufacturing activity in the Philadelphia region contracted in September for the third time in four months, though the drop wasn’t as bad as the tumble last month that rattled markets, according to data released Thursday.  The Philadelphia Fed said its index of current activity was -17.5 in September, an improvement from the -30.7 reading in August.  Economists polled by MarketWatch had anticipated a -13.4 reading for September, though the miss wasn’t as stark as the August reading that shocked the market and economists alike. The August reading came after a wrenching debate in Congress over the debt ceiling and the ensuing downgrade of the U.S. credit rating that may have proved to be more a hit to confidence than underlying activity.  Nonetheless, the data in the Philly report — as well as a separately released gauge from the New York region — weren’t comforting. Read related story on Empire State. A separate gauge measuring new orders showed a similar path, rising to -11.3 from -26.8 in August.  The shipments gauge got worse in September, sliding to -22.8 from -13.9. Employment swung back into positive territory but not a high level at 5.8.

Industrial Production increased 0.2% in August, Capacity Utilization increases slightly - From the Fed: Industrial production and Capacity Utilization: Industrial production increased 0.2 percent in August after having advanced 0.9 percent in July.  Capacity utilization for total industry edged up to 77.4 percent, a rate 1.9 percentage points above its level from a year earlier but 3.0 percentage points below its long-run (1972--2010) average. This graph shows Capacity Utilization. This series is up 10.1 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.4% is still 3.0 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in Decebmer 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production increased in August to 94.0 (although earlier months were revised down). After the fairly rapid increase last year, increases in industrial production and capacity utilization have slowed recently.

Industrial Production Vs. Credit Spreads - Yesterday’s update on industrial production looks surprisingly good at a time when the only news from the economic front seems to be bad news. True, industrial production’s rise of 0.2% last month was relatively modest, but the 3.4% annual percentage increase for this series suggests that the economy will chug along. History implies that if there’s a recession approaching we’ll see the annual change in industrial production drop rapidly, and soon. For now, however, it’s holding up quite nicely. But how much confidence do we have that it'll remain so? Looking forward is tricky, of course, but researchers offer a number of guides for developing some reasonable guesses. For instance, credit spreads have a decent record of dropping some clues about the future path of industrial production.

Economy Clips Factories - The earnings outlook for American manufacturers, whose rebound propelled the U.S. recovery last year, is deteriorating as the global economy sputters. Big industrial companies generally haven't begun chopping their own forecasts, but analysts are starting to do it for them. The average Wall Street forecast for 2012 earnings growth by 35 industrial companies included in the Standard & Poor's 500-stock index stood at about 16% Wednesday, down from 19% as of June 30, according to FactSet Research Systems. The U.S. economy "is clearly not recovering anymore," Mr. Linebarger said. "We're just not sure how deep or long [the slowdown] is going to be." Cummins already has seen a decline in orders for standby power-generation units used at such facilities as factories, office buildings and hospitals, he said. While the U.S. struggles with a stubbornly weak housing market, Europe's financial troubles are threatening to choke off growth there. At the same time, China and India have slowed their economies deliberately to fight inflation.

Number of the Week: Lots of Manufacturing Equipment Sitting Idle - 4.9%: Decline in U.S. manufacturing capacity since December 2007. Some say to spur the economy we need to get back to making things. First, we probably need to replace the equipment that was dismantled, or just fell apart, during the recession. Manufacturing capacity — how much the nation’s factories can put out at full tilt — is way down since the recession began. The only other time on record the U.S. cut manufacturing capacity was after the 2001 recession, when it edged down 0.6%. Some areas with the steepest capacity losses, like furniture making and textile production, may never return to their old levels. Others, like machinery and motor vehicle production, might stand a better chance. But while manufacturing capacity has fallen sharply, demand for goods made in the U.S. has fallen even more. As a result, the share of capacity that factories are actually using is 75%, still well below the 79.2% at the recession’s start. Companies will want to see more of their capacity put to use before they turn to rebuilding America’s manufacturing base.

Is Manufacturing Falling Off the Radar? - Three shifts of workers produce machines that bale hay, dig trenches, reduce tree branches to wood chips, grind stumps into sawdust, and drill tunnels to run electric wires and pipes underground. Most were the creations of Gary Vermeer, a farmer, tinkerer and inventor who died two years ago, at the age of 91.  The company he founded bears his name, but for all its American roots, the Vermeer Corporation put its newest factory — and the wealth that goes with it — not here but in the capital of China. And Mr. Vermeer’s daughter, the chief executive, presides over a manufacturing operation that relies increasingly on government support.  As President Obama urges Congress to enact a package of tax cuts and new government spending intended to revive growth and create jobs, one crucial corner of the American economy — manufacturing — has largely fallen off Washington’s radar screen.  Vermeer earns nearly one-third of its annual revenue from exports — counting on the United States government for trade agreements, favorable currency arrangements and even white-knuckle diplomacy to make exports happen. In China, that wasn’t enough: “If we wanted to stay in the Chinese market, we needed to be there. That was the reality.”

The Decline of Manufacturing in America: The Role of Government Neglect -- Yves Smith - As I mentioned in a Labor Day post, I grew up in an America where manufacturing was still the backbone of the economy. I may be more aware of that than most in my age group by virtue of spending much of my childhood in small towns where the local paper mill was the biggest employer. Similarly, when I went to business school, many of my classmates had worked for major manufacturing firms, and the ones who had been in finance (for the most part, two year credit officer programs at major banks) weren’t seen as having better backgrounds than their classmates. While as other economies developed, the US share of global production was bound to decline, I’m disturbed by the assumption that labor costs are the sole determinant of success. My contacts is that it is an article of faith in Washington is that the US can be competitive only in finance (and presumably in commodities businesses like agriculture). This story line is terribly convenient, since it gives diseased, greedy, and incompetent American managers and policymakers a free pass. The reason that the attitudes of policymakers matter is that, contrary to popular belief, we do not live in a mythical world of “free trade” but one of managed trade. Other advanced economies have either a formal or informal trade/economic strategy and seem to do better with it than we do?

NFIB: Small Business Optimism Index declines in August - From the National Federation of Independent Business (NFIB): Small Business Confidence Takes Huge Hit: Optimism Index Now in Decline for Six Months Running Confidence in the economy among small-business owners tumbled in August, as NFIB’s monthly Small-Business Optimism Index dropped a whopping 1.8 points, settling at a disturbingly low 88.1. The Index has now been in decline for a full six months. Unlike previous months, August’s decline comes in the immediate aftermath of the debt ceiling debate ... Sales remain the largest problem for small firms—a full quarter identifying “poor sales” as their top business problem. The first graph shows the small business optimism index since 1986. The index decreased to 88.1 in August from 89.9 in July. Optimism has declined for six consecutive months now. The second graph shows the net hiring plans for the next three months.  Hiring plans were still low in August, but positive and improving.

US Small-Business Index Falls to 13-Month Low on Outlook‎ (Bloomberg) -- Confidence among U.S. small businesses dropped to a 13-month low in August as fewer companies projected better economic conditions and improving sales, a private survey found. The National Federation of Independent Business’s optimism index decreased to 88.1, the weakest reading since July 2010 and the sixth-consecutive decline, from 89.9 in July. The number of small-business owners saying they expected the economy will improve six months from now fell to the lowest level since 1980.  “With such a dim outlook, owners are not going to do a lot of hiring or expanding.” Small-business owners have grown less confident that conditions will improve as stagnant job growth weighs on consumer sentiment.  Six of the index’s 10 components decreased. The gauge of expectations for better business conditions six months from now led the decline, falling 11 points to a net minus 26 percent in August. The drop brought business assessment of the economy to the lowest level since the second quarter of 1980, when the measure fell to minus 37, according to Dunkelberg.

Small Business Hangs ‘Demand Wanted’ Sign - “Nobody knows the trouble I’ve seen.” That’s the song small-business owners around the U.S. are singing. But it isn’t regulation, tax policy or credit constraints causing the woes. It’s the lack of customers. The widely watched survey of small businesses done by the National Federation of Independent Business shows optimism in August was the lowest since July 2010 when the recovery last hit a soft patch. The drop to 88.1 was the sixth consecutive decline — a record string of declines in the index. The NFIB bleak view isn’t one dark cloud in a blue sky. Half of respondents to an August survey done by Newtek Business Services are pessimistic about the outlook, and 69% don’t plan on hiring over the next 6-12 months. Small business-owners are worried because sales are falling and there’s no pickup in sight. The NFIB index covering sales expectations for the next three months is at its lowest since the recession. Falling sales expectations are bad news for the jobs outlook because companies are not going to add workers if they do not think demand will increase as well.

U.S. Spending Billions on Rural Jobs, but Impact Is Uncertain— The Obama administration is investing billions of dollars to promote economic development in rural areas by bringing broadband service and small-business financing to regions with chronic poverty and high unemployment.  But critics say the administration has little to show for its efforts, which highlight the difficulties of creating jobs in remote areas. They say the money has gone to areas where it is not needed, to promote broadband where it already exists and for industrial parks designed to attract business and jobs that may never materialize.  The Agriculture Department said it had provided more than $6.2 billion to help nearly 10,000 small and emerging rural businesses expand, creating or saving more than 250,000 jobs since 2009.  “Rural areas are important to our economic future,” said Agriculture Secretary Tom Vilsack, who heads the White House Rural Council, established in June to aid job creation by increasing the flow of capital to rural areas. “It is important that people understand that a large portion of America gets its water, food, fuel from these areas.”

Infrastructure in the Real World - One critique you’re beginning to hear about the infrastructure ideas in the President’s jobs proposal is that the Recovery Act’s infrastructure programs were some kind of bust, of never got started, or whatever.Demonstrably untrue.  There’s no question that they did not get up-and-running as quickly as other parts of the program, but here’s a graph of the cumulative spendout on public investment (which includes infrastructure along with other investments like clean energy and health IT).  And below that, a more specific look at work underway by day 200 on 192 airports and over 2,200 highway projects across the country. I’m sure you’ll hear claims to the contrary in coming days as we debate the infrastructure initiatives in the American Jobs Act, but the fact is that these projects were solidly in the economy by last summer.  The problem is we needed more of them this summer, and we’ll need more next summer as well.

"Infrastructure has another meaning, too." -Arlene Goldbard points out the not-so-obvious to those whose "misplaced concreteness" makes them see only roads and bridges where public support of culture -- books, plays, paintings, sculpture, dance performance, concerts and cultural workshops -- would employ far more people, more creatively with less capital intensity. Cultural infrastructure, social infrastructure: these describe the institutions, customs, ways of communicating, expressions of caring, celebrations, ceremonies, and public spaces that enable people to feel seen and to know they are welcome in their own communities. Cultural infrastructure is the aggregate of innumerable public and private actions, of many threads weaving the social fabric we share. When it becomes badly frayed—when foreclosures, homelessness, long-term joblessness are epidemic, when countless families are forced to relocate to find work, when bleeding-edge gentrification become commonplace, when scapegoating rises and ordinary Americans are unable or unwilling to cross lines of color or class—when the social fabric is as shredded as it has become after decades of me-first corporate-driven politics, mending it is clearly a public sector responsibility. Who else’s should it be?

The Infrastructure Privatization Bank - The first time many heard about the United States creating a infrastructure bank was in President Obama’s Thursday speech, but the idea has actually been floating around Congress for a number of years. The horrific 2007 bridge collapse in Minneapolis is often used as the poster child to promote a national infrastructure bank.  I think there is some misunderstanding though about the purpose of the proposed infrastructure bank. On the surface it appears to be an alternative source of funding for common transportation, water and energy projects.  But its real purpose seems to be a means of spurring a large infrastructure privatization movement in the United States. Senate Resolution 652, sponsored by Senator Kerry of Massachusetts, would create the American Infrastructure Financing Authority. The AIFA would require that funded projects generate revenues to repay the loan to the infrastructure bank. For the Minneapolis bridge project to be funded it would have needed to be a toll bridge rather than a free bridge (or have a government entity repay the loan). It’s a PayGo Infrastructure Bank.

Is the Georgia Works Program a Failure, How Could We Tell and Would We Even Care?  - In his jobs proposal, President Obama called for a modification of unemployment insurance based on Georgia Works, a proposal the administration refers to as the “most innovative reform to the unemployment insurance program in 40 years.” Georgia Works is a program wherein workers on unemployment insurance: have the opportunity to train with a potential employer for a maximum of 24 hours per week for up to eight weeks. The Georgia Department of Labor (GDOL) provides a stipend and workers compensation coverage to participating job seekers. Employers pay nothing to these trainees. GW$ provides employers the opportunity to train and appraise candidates at no cost. There is no obligation to hire any given trainee…Congressional conservatives such as Eric Cantor like the program, so there’s a good chance it might pass. I actually missed the debate about this from a few weeks ago — Zaid Jilani at Think Progress has a summary of some pros and cons from the time.

Job creation policies: Minnesota’s MEED program vs. Georgia Works - I’ve been asked in recent days by several journalists about Georgia Works, because there are rumors that there is some interest by the White House in this program as a model for helping the long-term unemployed. The question is: are programs such as Georgia Works a good way to create better job opportunities for the unemployed? In particular, I have praised the MEED program, which Minnesota used in the 1980s, which also subsidizes employers to help the unemployed. Under MEED, employers received up to a $10 per hour wage subsidy (adjusted to today’s price level) to hire targeted disadvantaged workers for six months for a full-time job slot. The targeted workers under MEED were any unemployed worker who was NOT receiving unemployment benefits.  The subsidized jobs had to be newly created jobs, and the employers had to pay the usual wage they paid for that type of job.  Employers had to make a good faith effort to retain the subsidized worker for one year after the six-month subsidy period. In theory, if employers did not make such a good faith effort, they could be required to repay the MEED subsidy they received.  I believe we would be better off with programs such as MEED, which cost a lot more because they provide much bigger subsidies to employers, but also expect employers to do a lot more, in particular they expect employers to create jobs, which is what we should be targeting at present.

A Plan for Zero Unemployment-- From economist Steve Allen:There were 14m unemployed workers in August.  The $447b stimulus package could be used to generate a check of almost $32,000 to each and every one of them.  As a condition of receiving that check, they would be asked to work at some organization, for profit or nonprofit, for one year.  These jobs would last just as long as the stimulus package and some of them would no doubt turn into real jobs.  Isn't this a plan everyone could support?

Job-creation plan largely ignores housing woes - President Obama's new jobs-creation plan all but ignores what many economists see as the single biggest problem in the stalling economy: the continuing depression in the housing market. Home sales, prices and construction have been bad and have been getting worse for so long that Washington and many Americans have grown numb to the problem. But dig below the surface and housing turns out to be a root cause of many of the other problems that are getting more attention — including the high level of unemployment that Obama focused on in his speech Thursday to Congress. "That's probably the biggest missing ingredient here," economist Mark Zandi said after reviewing Obama's proposed $447-billion package of tax cuts and infrastructure spending. More than four years after the sector's initial collapse, housing has become the economy's silent killer. With about one-fourth of all houses in the United States in foreclosure or still underwater — their mortgagesexceeding their market price — millions of Americans face such severe financial problems that they cannot begin to resume their normal roles as consumers, move to new jobs or finance their small businesses.

Jobless claims post surprise increase last week - New claims for jobless aid unexpectedly rose last week and factory activity along much of the Eastern seaboard contracted early this month, backing the view the Federal Reserve would move soon to boost growth. However, industrial production edged higher in August and consumer prices rose more than expected, factors that could give U.S. central bankers some pause over putting in place aggressive new measures to help the economy. Still smarting from the 2007-2009 recession, the U.S. economy barely grew in the first half of this year and a bruising spending battle in Congress spooked consumers into shutting their wallets last month. With growth limping along, the economy also looks very vulnerable to an escalation in Europe's debt crisis. "Business activity has slowed and confidence has fallen ... but we haven't slipped into a recession yet," "The Fed can still do some additional easing."

Economists Who Are Always ‘Surprised’ Should Re-Think Their Models and Assumptions - Today’s report of Initial Unemployment Claims from last week is out and once again, the economists are “surprised” at the figures reported (via Reuters):The number of Americans filing new claims for state unemployment aid rose unexpectedly to 428,000 in the week ended September 10 from a revised 417,000 in the prior week, the Labor Department said.. Wall Street analysts expected a modest dip in new claims. Once again, that is an upwards revision from the previously reported figure. I’m feeling a tad too lazy to go back through all my blog posts to find the last week when there wasn’t an upwards revision from the previous week’s report but I know that it has been months since there has been anything but upward revisions. At best there might have been a week when the numbers reported were not revised at all a couple of months ago but that’s it. Realistically, I have to admit that the continual ‘surprise’ by the economists is just a continuation of the overall cluelessness shown by the financial elites.

How Much More Of This Can The Economy Take? - Initial jobless claims are moving higher again. It’s not terribly surprising after another summer of economic discontent. In recent weeks there was some hope that new filings for unemployment benefits (a key leading indicator) was stuck in neutral, albeit at elevated levels. Now even that thin reed seems to be giving way as the numbers edge higher. Maybe it's noise; maybe we're in another one of those extended head fakes that have plagued these numbers several times in the recent past. Maybe, maybe, maybe. What we do know is that new claims rose 11,000 last week to a seasonally adjusted 428,000, the Labor Department reports--the highest since late-June. It takes an enormous amount of confidence to dismiss this increase once you also consider that the four-week moving average for this series has been rising steadily for the past month. The implication: This is not a drill.

Unemployment Benefits Extensions Have Small Impact on Jobless Rate - Generous unemployment benefits have had little effect on the unemployment rate, according to a new study that may help ease concerns that benefits give sidelined Americans a disincentive to hunt for jobs. Unemployment insurance, which is available for up to 99 weeks in some states, nudged the jobless rate up 0.2 to 0.6 of a percentage point higher than it would have been otherwise, according to a new paper by Jesse Rothstein, a University of California, Berkeley economist and released at the Brookings Institution this week. “Any negative effects of the recent unemployment insurance extensions on job search are clearly quite small, too small to outweigh the benefits of transfers to people who have been out of work for over a year in conditions where job-finding prospects are bleak,” according to the report. Economists generally agree that extended jobless benefits increase the unemployment rate. But they disagree on how big the effect is and how damaging that is to the economy.

Real Average Hourly Earnings - In August real average hourly earnings fell fell -0.6% as nominal wages fell -0.1% and the CPI rose a stronger than expected 0.4%. On a year-over-year basis real average hourly and weekly earnings are down -2.4%. With real wages falling so steeply no wonder the retail sales report was weaker than expected. I continue to stick with my position that with wage growth so weak the economy can not sustain accelerating inflation. Higher inflation will lead to a weaker economy, not an inflationary spiral.

Taps for the Unemployed - At the height of the Great Recession of 2008, one third of the capital equipment of the American economy lay idle.  Of the women and men idled along with that equipment, only 37% got a government unemployment check and that check, on average, represented only 35% of their weekly wages.  Meanwhile, there are now two million ”99ers” -- those who have maxed out their supplemental unemployment benefits because they have been out of work for more than 99 weeks. Think of them as a full division in “the reserve army of labor.”  That “army,” in turn, accounts for 17% of the American labor force, if one includes part-time workers who need and want full-time work and the millions of unemployed Americans who have grown so discouraged that they’ve given up looking for jobs and so aren’t counted in the official unemployment figures.  As is its historic duty, that force of idle workers is once again driving down wages, lengthening working hours, eroding on-the-job conditions, and adding an element of raw fear to the lives of anyone still lucky enough to have a job.

A jobless future? - Stanley Aronowitz and William DiFazio wrote a pretty gloomy book in 1994 with the striking title, The Jobless Future. Here is a Harvard Educational Review discussion of the book (link). What is most discomforting in reading the book today is the degree to which the factors they identify seem to be today's headlines. What does jobless mean here? In a word, it means that the US and other OECD countries will never recover the number and quality of jobs they need in order to regain the middle class affluence they had in the 1950s and 1960s. The future will involve work -- but not enough jobs to ensure a low unemployment rate. Here is their assessment in 1994: For there is no doubt that we have yet to feel the long-term effects on American living standards that will result from the elimination of well-paid professional, technical, and production jobs. At the same time, nearly everyone admits that many of these jobs are gone forever. (xi) The central structural factors they identified in 1994 are still key parts of our economic environment today: technology innovation replacing labor, rising productivity producing persistently flat labor demand, shifts in the structure of the economy towards finance and service sectors, and internationalization of production.

Are jobs obsolete? - The U.S. Postal Service appears to be the latest casualty in digital technology's slow but steady replacement of working humans. Unless an external source of funding comes in, the post office will have to scale back its operations drastically, or simply shut down altogether. That's 600,000 people who would be out of work, and another 480,000 pensioners facing an adjustment in terms. We can blame a right wing attempting to undermine labor, or a left wing trying to preserve unions in the face of government and corporate cutbacks. But the real culprit -- at least in this case -- is e-mail. People are sending 22% fewer pieces of mail than they did four years ago, opting for electronic bill payment and other net-enabled means of communication over envelopes and stamps. New technologies are wreaking havoc on employment figures -- from EZpasses ousting toll collectors to Google-controlled self-driving automobiles rendering taxicab drivers obsolete. Every new computer program is basically doing some task that a person used to do. But the computer usually does it faster, more accurately, for less money, and without any health insurance costs.

Video: Does America Really Need More Jobs? - All the fixation on creating jobs in America is outdated and misguided, argues media theorist and author Douglas Rushkoff. He explains to WSJ’s Dennis Berman his theory on new models that could actually increase productivity and make Americans more satisfied.

Jobs are evolving, not becoming obsolete - DOES America really need more jobs? You’d think the answer would be an unambiguous yes. "Media theorist" Douglas Rushkoff questions whether the economy actually requires more jobs, however. He reckons we’ve reached a point where, because of technology, we simply don’t need as many people to produce the same amount of output. New technologies are wreaking havoc on employment figures -- from EZpasses ousting toll collectors to Google-controlled self-driving automobiles rendering taxicab drivers obsolete. Every new computer program is basically doing some task that a person used to do. But the computer usually does it faster, more accurately, for less money, and without any health insurance costs. And so the president goes on television telling us that the big issue of our time is jobs, jobs, jobs -- as if the reason to build high-speed rails and fix bridges is to put people back to work. But it seems to me there's something backwards in that logic. I find myself wondering if we may be accepting a premise that deserves to be questioned. But this argument is wrong.  Throughout the industrial era someone has always claimed that technology makes human workers obsolete.   Technology eventually makes workers better off by increasing the value of their work.

Recent college graduates face long-lasting economic damage - They say a picture is worth a thousand words, and this graph certainly is. (Including, though it's not what I'm focusing on here, quite a few words about gender inequality.)  Heidi Shierholz writes: After gains in the 1980s and particularly in the 1990s, hourly wages for young college-educated men in 2000 were $22.75, but that dropped by almost a full dollar to $21.77 by 2010.  For young college-educated women, hourly wages fell from $19.38 to $18.43 over the same period.  Now, with unemployment expected to remain above 8% well into 2014, it will likely be many years before young college graduates — or any workers — see substantial wage growth. A recent New York Times article adds some more information about what new college graduates face: The numbers are not encouraging. About 14 percent of those who graduated from college between 2006 and 2010 are looking for full-time jobs, either because they are unemployed or have only part-time jobs, according to a survey of 571 recent college graduates released in May by the Heldrich Center at Rutgers.

Labor Day at the New York Times: Targeting the Post Office -  On Labor Day The New York Times ran a front page article that, through the lens of the United States Postal Service, simultaneously addressed two of our most burning issues: the condition of workers and our underfinanced government.  The Post Office has a deficit, and on its front page the paper of record listed the main reasons why: labor costs are 80% of total cost in the post office but only 53% and 32% at UPS and Fed Ex; health benefits are more generous at the post office than those offered to most other federal employees; and the USPS union contracts contain no layoff clauses.  First class postal mail is delivered by foot, while UPS parcels are delivered by trucks and Fed Ex letters are often delivered by trucks (and airplanes) that travel great distances to deliver, in some cases, a single item.   The only meaningful comparison is of the actual wages themselves. According to the Federal Daily, a UPS delivery driver earns 15% more in wages and 59% more in benefits than a postal service letter carrier. Obviously it is not the low wages or low benefits that the USPS pays that explain why its labor component is so much higher than it is at UPS.  The pay of Fed Ex delivery drivers is lower than even that of postal service letter carriers, but that only means that Fed Ex workers are even more grossly underpaid and an article about these workers and the anti-unionization activities that Fed Ex engages in against them would have been both more interesting and more fitting for Labor Day.

Who are the world's biggest employers? -- ONE of the biggest headaches for policymakers in many rich countries has been how to create jobs during a period of fiscal austerity and anaemic growth. The private sector has been slow to generate jobs, and government spending cuts usually end up cutting jobs. And governments employ a lot of people: in our chart of the ten biggest global employers, below, seven are government-run. America's defence department had 3.2m people on its payroll last year, equivalent to 1% of the country's population. China, the world's most populous nation and a big military spender, employs 2.3m people in its armed forces. And the number of people working for the National Health Service in England is equivalent to over 2.5% of the country's population. The three private companies are Walmart, McDonald's and Taiwan's Hon Hai Precision Industry Company, a subsidiary of which is Foxconn, a secretive electronics manufacturer.

The late American jobs machine - Here are some revealing indicators. During the growth phase of the business cycle, from 2002 to 2007, the number of people employed increased less rapidly than in previous upturns. The employment-to-population ratio gained no ground over the 2002-07 upturn. It was 63% when the economy emerged from recession at the beginning of 2002 and 63% just before it plunged back into recession at the end of 2007. Rising employment is particularly important for those at the low end of the labor market. Here too the 2000s upturn was a disappointment. In working-age households in the bottom quartile of the income distribution, average employment hours failed to rise at all. What caused this collapse of the American jobs machine? I think the most convincing explanation is a shift in management’s incentives and in its leverage relative to employees. According to Robert Gordon, this has its origins in the 1980s and 1990s but emerged in full force in the early 2000s: Business firms began to increase their emphasis on maximizing shareholder value, in part because of a shift in executive compensation toward stock options.

What could America be good at? - A vision of what American economic growth over the next decade could look like might also help us address our immediate economic problems. Columbia University Professor Jeffrey Sachs worries that the United States today may also be paying too little attention to those long-run challenges: Obama's economic strategy assumes that the U.S. 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.  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.  If U.S. growth were to resume with the current account in balance, what would it look like? Although many people share Sach's focus on manufacturing, I would call attention to this conclusion from a 1990 study by Stanford Professor Gavin Wright: Surprisingly, the most distinctive characteristic of U.S. manufacturing exports was intensity in nonreproducible natural resources; furthermore, this relative intensity was increasing between 1880 and 1920. The study then asks whether resource abundance reflected geological endowment or greater exploitation of geological potential. It was mainly the latter.

Billions in Unemployment Benefits Paid in Error - Nearly $19 billion in state unemployment benefits were paid in error during the three years that ended in June, new Labor Department data show. The amount represents more than 10% of the $180 billion in jobless benefits paid nationwide during the period. (See a sortable chart of each states’ overpayments) The tally covers state programs, which offer benefits for up to 26 weeks, from July 2008 to June 2011. Layers of federal programs that help provide benefits for up to 99 weeks weren’t included. The figures were released Wednesday as the Obama administration promotes its bid to reduce waste at federal agencies. The federal government foots the bill for administering the programs, and states are supposed to pay for the benefits. Many states exhausted their unemployment insurance trust funds during the long recession and slow recovery, prompting them to borrow from the federal government to replenish their funds.  Click image for a full-size interactive map

How Many Unemployed Have Exhausted All Benefits? -- Reader "Mike" is wondering how many unemployed have exhausted all benefits. This is a hard one to answer because I cannot find any government numbers in my searches. I can however tell you these facts:

  1. In January of 2009 there were 133,886,830 people in the state unemployment pool footnotes in the weekly unemployment report. Today there are 125,807,339, a loss of 8,079,491 unemployment insurance covered positions.
  2. The federal EUC2008 extended program at that same time covered 2,147,837 people. Today the various federal extended programs cover 7,169,176, a net increase of 5,021,339 covered people at the federal level.
  3. Since we know there were 8,079,491 people who have totally dropped off the state level roles and there is a net increase at the federal level of 5,021,339 people, we can safely assume that 3,058,152 people have exhausted all benefits - they are no longer covered on either sets of roles.
However, it is more complicated than that.

Recession Job Losers Take Bigger Hit to Future Earnings - Workers who lose jobs in a recession suffer nearly twice the hit to future earnings compared to those who are displaced in more prosperous times, a new study shows. Employees who held their jobs for three or more years and were let go in a mass layoff saw the value of their future earnings decline by 11% in an average year compared to those who kept their jobs, according to a paper released Thursday at Brookings Institution. Similar workers who were let go in a mass layoff during a recession saw the value of their future earnings drop nearly twice as much, 19%. The paper notes that “workers who have experienced job displacements events since 2008 are likely to experience unusually severe and persistent earnings losses.” The researchers tracked workers over time using Social Security records, covering 31% to 36% of all workers covered between 1980 and 2003. They focused on workers 50 years old and younger. When firms with 50 or more employees experienced a lasting drop in employment of at least 30% in two years, it was counted as a mass layoff.

U.S. Jobs Crisis Is Depression-Style Calamity for Young Americans - The Great Recession is technically over but with more than 22 million Americans un- and underemployed, six million who have been out of work for more than six months, the situation is still dire. It's especially bad for America's young workers, who are facing a "depression-era crisis," according to Tamara Draut, vice president of policy and program for Demos and author of Strapped: Why America's 20- and 30-Somethings Can't Get Ahead."It's become harder for anyone of this generation to either work or educate their way into the middle class," Draut tells The Daily Ticker's Aaron Task in the accompanying clip. The result has been higher than average unemployment in this group. In 2010, the unemployment rate among 17-24 year olds was 17.3%. The reality is even worse for minorities. Latinos of that age suffered 20.1% jobless rate; for African-Americans it was 28.8%. "We've lost the ability to have a blue collar middle class," Draut says. Without a college diploma it's nearly impossible to find work that affords a middle class life. "Today, young men with only a high school degree are earning 25% less than their parents." In 1980, a man without only a high school degree earned about $39,000 per year. In 2010, the average salary had fallen to $30,000.

Getting Sick Doesn't Pay - If the nation’s 14 million unemployed workers return to jobs, they will find some sobering changes in the workplace: They’ll earn less, pay more for health insurance and receive fewer benefits, some as basic as paid sick leave. Decades of progress in the fight for better employee benefits have been wiped out, putting millions of families at risk of not being able to buy food or of losing their home over something only too common in families: getting sick. For as many as 40 million people who work without paid sick leave, taking time off when they or their children are sick is a gut-wrenching decision. So, as President Obama turns his attention toward creating jobs, family advocates say employee benefits, including paid sick days, must be part of the equation. Even Seattle’s Starbucks Coffee Co., once famous for its generous employee benefits including health insurance for part-time employees, no longer offers paid sick days to its hourly coffee shop workers.

IMF: Austerity boosts unemployment, lowers paychecks -  These past few years, the Republican line on job creation has been simple: Cut government spending, tame the deficit, and unemployment will fall. “To put it simply,” House Majority Leader Eric Cantor (R- Va.) said last spring, “less government spending means more private-sector jobs.” But that’s not exactly a rigorous study. So here’s a rigorous study.  In a new paper for the International Monetary Fund, economists look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.” More specifically, an austerity program that curbs the deficit by 1 percent of GDP reduces real incomes by about 0.6 percent and raises unemployment by almost 0.5 percentage points. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place ... if multiple countries are all carrying out austerity at the same time, the overall pain is likely to be greater.

Income, Poverty and Health Insurance Coverage in the United States: 2010 - The U.S. Census Bureau announced today that in 2010, median household income declined, the poverty rate increased and the percentage without health insurance coverage was not statistically different from the previous year. Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median. The nation's official poverty rate in 2010 was 15.1 percent, up from 14.3 percent in 2009 ─ the third consecutive annual increase in the poverty rate. There were 46.2 million people in poverty in 2010, up from 43.6 million in 2009 ─ the fourth consecutive annual increase and the largest number in the 52 years for which poverty estimates have been published. The number of people without health insurance coverage rose from 49.0 million in 2009 to 49.9 million in 2010, while the percentage without coverage −16.3 percent - was not statistically different from the rate in 2009. Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999. The percentages are not statistically different from each another.

The Distribution of Income for 2010: Individuals - According to data just released by the U.S. Census this morning, in 2010, the median income earned by an individual American was $26,197, or rather, 50% of Americans earned more than that amount and 50% earned less than that amount. The average (or mean) income was $38,337. We've presented the cumulative distribution of the total money income earned by individuals in the United States in the chart below: So what percentile does your income place you on that chart?  Well, wonder no more! Our latest tool will tell you exactly where you rank among all Americans, or rather, the 211,492,000 Americans over the age of 15 who earned money in 2010, based upon the U.S. Census' data for 2010, for which we modeled the distribution using ZunZun's invaluable 2D Function Finder.  Just enter your annual income into the tool below, and we'll give you a good idea of where you rank among all income earning individuals in the United States, at least for 2010!

The Distribution of Income for 2010: Households - In 2010, the median household income in the United States was $49,445, which was down from the $49,777 that had been recorded in 2009.  Meanwhile, average household income in the U.S. was $67,530 for 2010, which was likewise down from 2009's figure of $67,976.  Both figures for 2010, along with the rest of the cumulative distribution of household income in the United States for 2010, are presented in the following chart, which shows the U.S. household income distribution in terms of percentiles:  As we did with the individual distribution of income for 2010, we've built a tool you can use to see where you might fall in percentile terms among all U.S. households where your household income is concerned.  Accounting for 2010's average 1.6% rate of inflation, which would boost household median income in 2009 up to $50,599 in 2010 U.S. dollars, real median household income fell by 2.3%, from $50,599 to $49,445.

More Americans Are Doubling-Up - More people are living with family amid high unemployment rates and a slow economy, but while the phenomenon is keeping the poverty rate lower, it has wider negative economic consequences. In a presentation as part of its wider report on income, poverty and health insurance, the Census Bureau noted a big jump in the number of individuals and families doubling up. Census says 69.2 million, or 30%, were doubled-up in 2011, up from 61.7 million adults, or 27.7%, in 2007. “Doubled-up” households include at least one person 18 or older who isn’t enrolled in school and isn’t the householder, spouse or cohabiting partner of the householder. Much of the increase comes from young people, ages 25-34, living with their parents. Some 5.9 million, or 14.2% of 25-to-34 year olds, lived with their parents in 2011, up from 4.7 million before the recession. “These young adults who lived with their parents had an official poverty rate of only 8.4%, since the income of their entire family is compared with the poverty threshold,”  “If their poverty status were determined by their own income, 45.3% would have had income falling below the poverty threshold for a single person under age 65.”

The Lost Decade for the Middle Class - The poverty and income results for 2010 came out this morning and they’re a) about what you’d expect, and b) pretty bad.  Here’s some Q&A on what they show and what I think they mean, both in short-term (cyclical) and longer-term (structural) contexts. Let me underscore this point: compared to its peak in 1999, median household income is down down $3,800 (2010 dollars), more than 7%.  The decline is even more dramatic for non-elderly households, those headed by someone less than 65 years old.  That value peaked in 2000, and rose only 1 year since then.  It’s down $6,300, or 10% since then, including last year’s decline of 2.6% ($1,500), the largest on record going back to 1987 (see chart). Economists talk about the lost decade in Japan, a period where the macroeconomy stumbled along for years.  Well, with these 2010 data, we can confirm the lost decade for the American middle class.  Though the economy grew most of these years in GDP terms, and productivity growth was notably robust, the middle class fell behind.

U.S. poverty rate reaches 15.1 percent - About 46.2 million Americans lived in poverty last year, marking an increase of 2.6 million over 2009 and the fourth consecutive annual increase in poverty. The total number of people living below the poverty line — which in 2010 was set at an income of $22,314 for a family of four — is now at the highest level in the 52 years the statistic has been collected. The continued rise in poverty was just the latest manifestation of a troubled economy that has left 14 million Americans out of work and caused unemployment to hover above 9 percent for 25 of the past 27 months. As poverty has spiked, median household income declined by 2.3 percent to $49,445 between 2009 and 2010. The typical household now earns less than it did in 1997, when inflation is factored in, a troubling sign of economic stagnation. The decline in income has been most pronounced among those who earn the least. Overall, median household income has declined by 7.1 percent since peaking in 1999. The bottom 10 percent of earners have seen their income decline by 12.1 percent, while the top 10 percent have experienced a decline of 1.5 percent in that time period, the Census Bureau reported.

Soaring Poverty Casts Spotlight on ‘Lost Decade’ - Another 2.6 million people slipped into poverty in the United States last year, the Census Bureau reported Tuesday, and the number of Americans living below the official poverty line, 46.2 million people, was the highest number in the 52 years the bureau has been publishing figures on it. And in new signs of distress among the middle class, median household incomes fell last year to levels last seen in 1997. Economists pointed to a telling statistic: It was the first time since the Great Depression that median household income, adjusted for inflation, had not risen over such a long period, said Lawrence Katz, an economics professor at Harvard. “This is truly a lost decade,” Mr. Katz said. “We think of America as a place where every generation is doing better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.” The bureau’s findings were worse than many economists expected, and brought into sharp relief the toll the past decade — including the painful declines of the financial crisis and recession3 —had taken on Americans at the middle and lower parts of the income ladder. It is also fresh evidence that the disappointing economic recovery has done nothing for the country’s poorest citizens.

Poverty Rate Highest Since 1993; Median Income Reveals Lost Decade and a Half - Yves Smith - Both official data and numerous news stories confirm how badly average citizens have fared in the wake of the global financial crisis. Food stamp use has fallen only a tad from record high levels. WalMart has reinstituted layaway. The average home with a mortgage has no equity in it.  Further confirmation comes via the Census Bureau release that showed the US poverty rate has risen a full percent in the last year to 15.1%, a level not seen since 1993, the end of a short but nasty downturn. And 1/4 of American children are living in poverty. Fewer young adults are able to start households. 14.2% of Americans between the ages of 22 and 34 are living with their parents, up from 11.8% before the downturn. As the Financial Times noted: “To have hit 15.1 per cent is truly extraordinary,” “We are entering territory which looks like the period before we even started fighting a ‘War on Poverty’ in the 1960s. It’s quite stunning. This is a terrible statement about the depths of the Great Recession but, even more, about the recovery, which has clearly left the poorest out completely.” Median income plunged 2.3% in 2010, is are down a full 7% from their high in 1999. Inflation adjusted median income is at the 1996 level. That makes it the first decade since the Great Depression in which inflation-adjusted median income has failed to increase. IN addition, Americans without health insurance reached 49.9 million, an increase of 1 million in the last year.  But focusing on the median as the American middle class is being hollowed out may be the wrong focus. Tech Ticker discusses how marketing giant Procter & Gamble has decided there is no future in the middle class (video)

As America’s Middle Class Shrinks, P&G Adopts “Hourglass” Strategy (Video)This week brought a different kind of evidence that brings home (literally and figuratively) the trend of America becoming a two-class society. Among other companies, Procter & Gamble is adopting an "hourglass" marketing strategy, with products aimed at high- and low-end consumers, but not much in the middle. In a marked shift from P&G's historic focus on middle-class households, "the world's largest maker of consumer products is now betting that the squeeze on middle America will be long lasting," The WSJ reports. This is no small matter or a minor change by a second-tier firm: P&G has at least one product in 98% of U.S. households, The WSJ reports. U.S. sales totaled about $30.5 billion in its latest fiscal year, about 37% of its total, while accounting for 60% of the firm's $11.8 billion profits. The company is engaging in what The WSJ calls a "fundamental change" in how it markets products in the U.S. "We're going to do this both by tiering up in terms of value as well as tiering down our portfolio down,"  As noted above, P&G isn't the only company coming to the same conclusion: Heinz is following a similar strategy to P&G while Saks is focusing its attention more on high-end consumer vs. 'aspirational' shoppers.

Are Companies Betting Against the Middle Class? - You know the economy is in a bind when consumers stop spending. But consumer retrenchment can ultimately be a good thing if it allows indebted households to rebuild their wealth. Unfortunately, that's not how things are playing out for this country's middle class. The personal savings rate has jumped from near-zero in years past to more than 5% in recent months. And yet, the share of middle class wealth is shrinking, while middle class incomes are falling. If consumer marketing is any judge, the middle class crunch is here to stay. Big consumer companies like Proctor & Gamble, which used to gear their products around a growing middle class, have shifted to selling high and selling low while cutting out the middle, the Wall Street Journal reports, because, in their words, "that's where the growth is."

America Is A Plutonomy - I've often spoken of the enormous income and wealth inequality here in the United States. It follows that our "consumer" society has become more and more dependent on spending by the rich and well-off because they've got most of the money. I was surprised to learn there is a term for societies like ours. America is a Plutonomy, as described in the Wall Street Journal's U.S. Economy Is Increasingly Tied to the Rich. Who cares how the rich spend their money? Well, perhaps everyone should these days. Consumer spending accounts for roughly two-thirds of U.S. gross domestic product, or the value of all goods and services produced in the nation. And spending by the rich now accounts for the largest share of consumer outlays in at least 20 years. According to new research from Moody’s Analytics, the top 5% of Americans by income account for 37% of all consumer outlays. Outlays include consumer spending, interest payments on installment debt and transfer payments. By contrast, the bottom 80% by income account for 39.5% of all consumer outlays.

Today: Living paycheck to paycheck, or worse - A new survey confirms what many Americans already know from personal experience: Too many of us are living paycheck to paycheck. The survey of more than 2,500 employed adults found that one-fourth said all their money was spoken for each month, leaving nothing for extras after bills and other expenses were paid for. About one-third were in even worse shape, reporting that they don’t have enough money to make ends meet and end each month in the red. The survey was conducted between Aug. 31 and Sept. 7 by Markco Media for the website CouponCodes4U. Retailers have noticed it too. Speaking at an investor conference in May, a Wal-Mart executive said the mega-retailer has seen that some of their customers are particularly cash-strapped just before payday, which it blamed in part on the weak economy. "We still see the paycheck cycle being very pronounced where the customer doesn't have a lot of money at the end of the month. They are going to smaller pack sizes; opening price point becomes more important,"

New Study Reveals Majority Of Americans Want —A study of more than 1,200 subjects by the Consumer Research Institute at Loyola University has found that a significant majority of U.S. citizens want. "Regardless of their age, gender, class, education, or religion, Americans are remarkably alike in their capacity to want," Dr. Stanley Murcheson told reporters Tuesday, noting that 33 percent of survey respondents indicated they not only want, but want really bad. "And among those who want, a growing number also demand, feel entitled to, and actually expect." The study concluded that while more Americans than ever desperately need, fewer than 6 percent of them will ever get.

Income, Poverty and Health Insurance Report: Fast Facts -

  • –Median household income in 2010 was $49,445, down 2.3% from 2009 and down 6.4% from prerecession level.
  • –Median household income in 2010 was $49,445. That’s 7.1% lower (adjusted for inflation) than it was in 1999
  • –Median earnings for full time male worker in 2010 was $47,715. Adjusted for inflation, it was $48,245 in 1978.
  • –Median earnings for men who worked full-time year round was $47,715 in 2010, down 0.4%. For women it was $36,931, up 1.5%.
  • –Best off 5% of households (adjusted for household size) got 21% of income in 2010.
  • – Official poverty rate in 2010 was 15.1%, up from 14.3% in 2009, third consecutive annual increase
  • –In 2010, 49.90 million Americans (16.3%) without health insurance vs. 48.99 million (16.1%) in 2009.
  • –The fraction of foreign-born without health insurance in 2010 was more than double native-born population.

Poverty rate hits 15.1 percent, highest since 1993 — The US poverty rate rose in 2010 to 15.1 percent, the highest since 1993, according to census data showing a record number of Americans classified as poor and highlighting a struggling economy after the end of the Great Recession. The Census Bureau report released Tuesday showed a sharp increase in the poverty rate from 14.3 percent in 2009, and a fourth consecutive rise in the number of people below the poverty line, to 46.2 million. The number of people living in poverty was the highest since data collection began in 1959, although the rate was 7.3 percentage points lower than in 1959. The US definition of poverty is an annual income of $22,314 for a family of four, and $11,139 for a single person in 2010. The survey showed struggles for the rest of Americans, with median annual household income falling 2.3 percent to $49,445. The Census Bureau also said the number of people without health insurance coverage rose to 49.9 million in 2010 from 49.0 million in 2009, while the percentage without coverage -- 16.3 percent -- was not statistically different from the rate in 2009.

Census: U.S. poverty rate hit 52-year high in 2010 - Continued high unemployment drove the number of Americans living in poverty to a record high in 2010 and dragged down median household income for the third straight year since the Great Recession first darkened the nation's economy in 2007. More than a year after the economic recovery officially began in June 2009, 46.2 million people had annual earnings below the poverty line last year, up from 43.6 million the previous year, according to new U.S. Census Bureau figures released Tuesday. That's the largest number in the 52 years for which poverty estimates have been published The 2010 U.S. poverty rate of 15.1 percent was the highest since 1993, and it was up nearly a full percentage point from 2009. Poverty rates increased for all racial groups except Asians. Government analysts say the problem is rooted in the 86.7 million working-age adults who were unemployed for at least a week last year, compared with 83.3 million in 2009.

Census: US poverty rate swells to nearly 1 in 6 -- The ranks of the nation's poor have swelled to a record 46.2 million -- nearly 1 in 6 Americans -- as the prolonged pain of the recession leaves millions still struggling and out of work. And the number without health insurance has reached 49.9 million, the most in over two decades. The figures are in a Census Bureau report, released Tuesday, that offers a somber snapshot of the economic well-being of U.S. households for last year when joblessness hovered above 9 percent for a second year. The rate is still 9.1 percent at the start of an election year that's sure to focus on the economy and President Barack Obama's stewardship of it. The overall poverty rate climbed to 15.1 percent, from 14.3 percent the previous year, and the rate from 2007-2010 rose faster than for any similar period since the early 1980s when a crippling energy crisis amid government cutbacks contributed to inflation, spiraling interest rates and unemployment. For last year, the official poverty level was an annual income of $22,314 for a family of four. Measured by total numbers, the 46 million now living in poverty are the most on record dating back to when the census began to track in 1959. The 15.1 percent tied the level of 1993 and was the highest since 1983.

Census Report Shows Poverty Rate Hits 15.1%; Record 46.2 Million in Poverty; Real Median Household Income Sinks Below Level First Reached in 1989 -- Please consider Income, Poverty, and Health Insurance Coverage in the United States: 2010. Report released today.

  • Real median household income was $49,445 in 2010, a 2.3 percent decline from 2009
  • Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred in 1999.
  • Both family and nonfamily households had declines in real median income between 2009 and 2010. The income of family households declined by 1.2 percent to $61,544; the income of nonfamily households declined by 3.9 percent to $29,730.
  • Real median household income was $49,445 in 2010, a 2.3 percent decline from 2009. Since 2007, median household income has declined 6.4 percent (from $52,823) and is 7.1 percent below the median household income peak ($53,252) that occurred in 1999

Poor Are Still Getting Poorer, but Downturn’s Punch Varies, Census Data Show - The discouraging numbers spilling from the Census Bureau’s poverty report1 this week were a disquieting reminder that a weak economy continues to spread broad and deep pain.  And so it does. But not evenly.  The Midwest is battered, but the Northeast escaped with a lighter knock. The incomes of young adults have plunged — but those of older Americans have actually risen. On the whole, immigrants have weathered the storm a bit better than people born here. In rural areas, poverty remained unchanged last year, while in suburbs it reached the highest level since 1967, when the Census Bureau first tracked it.  Yet one old problem has not changed: the poor have rapidly gotten poorer.  The report, an annual gauge of prosperity and pain, is sure to be cited in coming months as lawmakers make difficult decisions about how to balance the competing goals of cutting deficits and preserving safety nets.

Nearly one in six in poverty in the U.S.; children hit hard, Census says - Nearly one in six Americans was living in poverty last year, the Census Bureau reported Tuesday, a development that is ensnaring growing numbers of children and offering vivid proof of the recession’s devastating impact. The report portrays a nation where many people are slipping backward in the wake of a downturn that left 14 million people out of work and pushed unemployment rates to levels not seen in decades.As poverty surged last year to its highest level since 1993, median household income declined, leaving the typical American household earning less in inflation-adjusted dollars than it did in 1997. Ominously, several analysts said, unemployment is projected to remain unusually high for the foreseeable future, meaning that the nation is probably in for an extended period of rising poverty and declining income. “Not only have we experienced severe deterioration in recent years, but knowing how weak the outlook is makes this report even more ugly,” said Heidi Shierholz, a labor economist at the Economic Policy Institute. “We are staring high unemployment in the face for years to come.” Last year, 46.2 million Americans lived below the poverty line — $22,314 a year for a family of four — marking the fourth year in a row that poverty has increased.

More Young Adults Are Poor, Live With Their Parents -It’s not your imagination: It really is more crowded at mom and dad’s place. The Census Bureau made headlines yesterday with news that the nation’s official poverty rate hit 15.1%, the highest since 1993. Tough times have also translated into a rise in adult children moving back into (or never leaving) their parent’s homes. In the spring of 2011, 5.9 million young adults aged 25 to 34 lived with their parents, up from 4.7 million before the recession. And these adult kids still at mom and dad’s make very little money: Over 45% have incomes that’d put them below the poverty threshold.  The U.S. Census Bureau puts these adult children living with their parents in the category of “doubled-up households”—when at least one extra adult resides in the home who is not in school and/or is outside the typical family unit. As of last spring, doubled-up households represented 18.3% of American residences (21.8 million total), up from 17% four years ago, when there were 19.7 doubled-up households. In addition to adult kids sticking around longer, in recent years there has also been a rise in multi-generational homes where extended families of kids, grandparents, aunts, uncles, and/or cousins live under the same roof. A 2010 survey had it that 16.1% of Americans lived in multi-generational households, compared to 12.1% of the population in 1980.

How Rich Are Poor People? - More than 46 million Americans are now living below the poverty threshold, according to numbers released by the Census Bureau on Tuesday. That's the highest number since the Bureau started keeping track of the statistic in 1959. Are poor people better off now than they were 52 years ago?Much better, in absolute material terms. Robert Rector of the Heritage Foundation recently published an analysis of the lifestyle of people below the poverty line in 21st-century America. He found that many poor people have amenities that were available only to the wealthy (if they existed at all) in 1959. The typical household at the poverty line includes air conditioning, two color televisions with a cable or satellite feed, a DVD player, and a microwave. Poor children usually have a video game system. More than 38 percent of poor people have a personal computer.

Running out of excuses - The latest data on US incomes make for grim reading, both as regards the bottom of the income distribution where the number in (absolute) poverty is at an all-time high (the proportion of the population was the highest since 1993), and in the middle, where median household incomes have fallen back to the 1997 level. For some groups, such as male wage earners without college education, real incomes haven’t risen since around 1970 Having discussed this issue before I’m familiar with most of the standard arguments[1] used to show that things really aren’t that bad.  But over the last decade or two, these excuses have run out.

  • Average US household size has been increasing since 2005 and is now back to the 1990 level
  • Changes following the Boskin Commission report of 1996 have mostly accounted for product quality improvements and substitution effects
  • The EITC was last changed in 2001, and the effects were modest. It seems likely to be cut as part of the current move to austerity
  • Access to health insurance has generally declined. Obama’s reforms will change this if they survive to 2014, but that’s far from being a certainty
To sum up, whereas the apparent stagnation in household incomes, poverty rates and so on since the 1970s is somewhat misleading (even corrected, the picture is still pretty bad), the official statistics probably understate the decline in median household income and the increase in poverty over the last decade.

Record poverty last year as household income dips - A record number of people were in poverty last year as households saw their income decrease, according to data from the Census Bureau Tuesday, demonstrating the weakness of the economy even after the official end of the recession. The 46.2 million people in poverty in 2010 was the most for the 52 years that estimates have been published, and the number of people in poverty rose for the fourth consecutive year as the poverty rate climbed to 15.1% — the highest since 1993 — up from 14.3% in 2009. Meanwhile, real median household income in 2010 was $49,445, down 2.3% from the prior year and below pre-recession levels. “I would frame this report as giving us a look at whether the so-called recovery that started in June 2009 has had any widespread benefits for American families,” said Larry Katz, a labor economist at Harvard University. Economists say the recession officially ended in 2009, but employment remained weak in 2010, with a national employment gain of only about 940,000 jobs — less than half the growth in the civilian population.

Poverty In America: A Special Report - America is getting poorer.  The U.S. government has just released a bunch of new statistics about poverty in America, and once again this year the news is not good.  According to a special report from the U.S. Census Bureau, 46.2 million Americans are now living in poverty.  The number of those living in poverty in America has grown by 2.6 million in just the last 12 months, and that is the largest increase that we have ever seen since the U.S. government began calculating poverty figures back in 1959.  Back in the year 2000, 11.3% of all Americans were living in poverty.  Today, 15.1% of all Americans are living in poverty.  The last time the poverty level was this high was back in 1993. However, it is important to keep in mind that the government definition of poverty rises based on the rate of inflation.  If inflation was still calculated the way that it was 30 or 40 years ago, the poverty line would be much, much higher and millions more Americans would be considered to be living in poverty. So why is poverty in America exploding?  Who is getting hurt the most?  How is America being changed by this?  What is the future going to look like if we remain on the current path? Let's take a closer look at poverty in America....

Family Income, Size, and Work Hours - Regarding my post about the lost decade in middle-class incomes, a number have commenters have raised questions about changes in family size and work effort.  A quick response: Size-adjusting doesn’t change much at all: the trends are the same…the decade of the 2000s remains a bust.  Census provides a useful figure that adjusts for size by dividing family income by the poverty line for that sized family (e.g., the income of a family of four is divided by the poverty line for a family of four, about $22,000).   They provide the data by income fifth–I’ve plotted the middle-fifth, the average income of families between the 40th and 60th percentile. The figure, as you see, tracks that of the median household income here.

Income Slides to 1996 Levels - The income of the typical American family—long the envy of much of the world—has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation.  The income of a household considered to be at the statistical middle fell 2.3% to an inflation-adjusted $49,445 in 2010, which is 7.1% below its 1999 peak, the Census Bureau said. The Census Bureau's annual snapshot of living standards offered a new set of statistics to show how devastating the recession was and how disappointing the recovery has been. For a huge swath of American families, the gains of the boom of the 2000s have been wiped out.  Earnings of the typical man who works full-time year round fell, and are lower—adjusted for inflation—than in 1978. Earnings for women, meanwhile, are a relative bright spot: Median incomes have been rising in recent years and rose again last year, though women still make 77 cents for every dollar earned by comparably employed men.  The fraction of Americans living in poverty clicked up to 15.1% of the population, and 22% of children are now living below the poverty line, the biggest percentage since 1993.

Median Male Worker Makes Less Now Than 43 Years Ago - While the fact that a record number of Americans are living in poverty should not surprise anyone at this point, what should surprise many is that according to Table P-5 of the Census report of (Lack of) Income, the median male is now worse on a gross, inflation adjusted basis, than he was in... 1968! While back then, the median income of male workers was $32,844, it has since risen declined to $32,137 as of 2010. And there is your lesson in inflation 101 (which we assume is driven by the CPI, which likely means that the actual inflation adjusted income decline is far worse than what is even reported). The only winner: women, whose median inflation adjusted income over the same period has increased by 188%. That said, it is still at 65% of what the median male makes. So injustice all around. And now, it is time to be patriotic again and buy a Pontiac Aztek.

Poverty rate rises in America - Amid a still struggling economy, more people in America fell below the poverty line last year, according to new census data released Tuesday. The nation's poverty rate rose to 15.1% in 2010, its highest level since 1993. In 2009, 14.3% of people in America were living in poverty. "The results are not surprising given the economy," said Paul Osterman, author of "Good Jobs America," and a labor economist at MIT. "You would expect with so many people unemployed, the poverty rate would go up. It's just another sign of what a difficult time this is for so many people." About 46.2 million people are now considered in poverty, 2.6 million more than last year. The government defines the poverty line as income of $22,314 a year for a family of four and $11,139 for an individual. The Office of Management and Budget updates the poverty line each year to account for inflation.For middle-class families, income fell in 2010. The median household income was $49,445, down slightly from $49,777 the year before. Median income has changed very little over the last 30 years. Adjusted for inflation, the middle-income family only earned 11% more in 2010 than they did in 1980, while the richest 5% in America saw their incomes surge 42%.

The Slump Before The Slump - Krugman - I should weigh in on the Census report, many of whose key findings are summarized in this CBPP post. Crucially, of course, the report documents the vast human damage being inflicted by a weak economy. It also documents the ways in which safety-net programs have at least mitigated that damage — notably, uninsurance among children has actually fallen thanks to SCHIP and Medicaid, unemployment insurance has literally kept millions above the poverty line, and the early features of the Affordable Care Act have helped hundreds of thousands of young adults retain insurance. We’ll have a fuller read on this, with the effects of food stamps and other in-kind benefits, next month. But what struck me is the extent to which the suffering didn’t begin with the slump — many measures of pain were rising right through the “Bush boom”, and have merely continued that rise. Exhibit 1 is “deep poverty”, people living below 50 percent of the poverty line: Things were getting worse for lots of Americans even before the slump. Now they’re getting worse faster.

Record Severe Poverty II - The Census Bureau has released estimates of poverty in 2010. Coverage focused on the headline poverty rate which is horrible enough. Much worse, 6.7% of people in the USA suffered severe poverty, that is lived in households with income less than half the poverty line. This is the highest severe poverty rate on record (the series only goes back to 1975 -- I don't know why).  Look at Table Five. I blame welfare reform. Yes the severe recession and slow recovery is a major factor, but the 2010 ratio of the severe poverty rate and the poverty rate is 0.444 which is also the highest on record. That ratio is a crude way of looking at the effect of welfare reform.  Like the poverty rate, the severe poverty rate goes up in recessions, goes up when inequality increases and goes down when per capita income grows. However, the pattern is very different with a long term trend of increasing severe poverty and no correspond trend of the headline poverty rate.  During the period of high inflation, the real value of welfare benefits declined. This explains at least part of the increase in severe poverty. In 1983 the poverty rate peaked at 15.2% and the severe poverty rate peaked at 5.9%. Compared to 1983 a smaller fraction of people are in poverty but a larger fraction of people are in severe poverty. I think that welfare reform is the only plausible explanation.

Is the poverty rate even higher than we think? - Our poverty rate -- which is now at record highs -- was originally developed to show how many people lacked enough money for food and basic sustenance. But critics on both right and left contend that the official rate uses an outdated measure of poverty, painting a distorted economic portrait that affects everything from financial aid to Medicaid benefits. In response, the government has developed alternative ways to quantify the poor. And one approach that the Census Bureau has embraced under Obama seems likely to show that the U.S. poverty is even higher than the official rate. It will release these new figures in late October, and the guidelines they’re relying on suggest that we’re actually underestimating how poor Americans are.  In 1995, the NAS was commissioned by Congress to find a more accurate way to define poverty than the original measure developed in the 1960s and used ever since. Back then, the Johnson administration decided that a family of three or more was considered below the poverty threshold if they spent more than a third of their income on food.

The end of mass media? - If only cord cutting were the technological phenomenon that many in pay TV make it out to be. But a recent analysis by Bernstein Research reveals it to be more of a poverty problem. And, as such, it threatens to undermine a media ecosystem that, for technological reasons, should be blossoming. Moffett's insight flows from an examination of after-tax household income and discretionary spending not on the basis of averages but, rather, on quintiles. In 2009, for instance, after-tax household incomes averaged $62,000. But the mean for each quintile was, in ascending order, $9,956, $27,275, $45,199, $71,241 and $149,951. The big take-away from this de-averaging exercise, as the analyst calls it, is that the top quintile now has 15 times the after-tax income as the lowest quintile. Forty years ago, this ratio was less than 8 to 1. And while that's dispiriting in itself, it gets worse on deducting each quintile's nondiscretionary expenses. "After the necessities of food, shelter, transportation and healthcare each month, the bottom 40% of U.S. households have already exhausted all of their disposable income," Moffett says. "There is nothing left for clothing ... for debt services ... for cable ... or for phone."

Secure Communities Task Force Members Resign Rather than Endorse the Program - Before the Administration enacted their deportation review, I wrote about the series of protests at Secure Communities task force hearings, where Latino activists denounced the program that has resulted in mass deportations of undocumented immigrants despite assurances that only violent criminals would be swept up. The activists called on the task force members to resign, and to recommend that the Secure Communities program be terminated. The task force released its findings yesterday, and they were sharply critical. A task force advising an Obama administration deportation program has sharply criticized immigration officials for creating confusion about its purposes and has found that the program had an “unintended negative impact” on public safety in local communities. In a report on the program, known as Secure Communities, the task force said that the program had eroded public trust by leading to the detention of many immigrants who had not committed serious crimes, after officials said its aim was to remove “the worst of the worst” immigrant criminals from the United States.

Living Wage Calculator - (by county) In many American communities, families working in low-wage jobs make insufficient income to live locally given the local cost of living. Recently, in a number of high-cost communities, community organizers and citizens have successfully argued that the prevailing wage offered by the public sector and key businesses should reflect a wage rate required to meet minimum standards of living. Therefore we have developed a living wage calculator to estimate the cost of living in your community or region. The calculator lists typical expenses, the living wage and typical wages for the selected location.

Obama Fails To Address Homeless Crisis While at Kitchen - On Saturday, September 10, President Obama and his daughters paid a visit to DC Central Kitchen located in the basement of the Federal City Shelter which is right on the edge of Capitol Hill. The kitchen feeds 5,000 of the many impoverished, socio-economically disadvantaged people in our nation's capital every day. And it was a grand event indeed. While many were excited about the fact that our commander-in-chief would take time out of his busy schedule to visit those who are overlooked all too often in our society, others were a bit more analytical of the situation and less apt to praise him.The HEARTH Act is designed to decrease homelessness nationwide by comprehensively addressing its various causes. After its passage, it was handed off to HUD (the U.S. Dept. of Housing and Urban Development) to be implemented. HUD has been dragging its feet and the HEARTH Act has yet to do anyone any good. While HUD is struggling to implement a law that was passed 2 and a half years ago, Congress promises to make their struggle a lot more difficult by cutting their funding for Fiscal Year 2012 by $5.7 Billion. The final word on the funding could come as late as mid-November. It has been estimated that such a cut would force HUD to destroy 600,000 of its housing choice vouchers, displacing 1.5 to 2 million people nationwide. DC has over 11,000 housing choice vouchers and might lose 5,000 of them, displacing some 12,000 people and adding to the city's present homeless population which is just shy of 7,000.

Income Inequality — America Is Like Mexico And The Philippines - Our accelerating downfall is truly a shame, and should be shameful to those running this country. The media will tell you how Obama's jobs proposal is faring, will report about Obama on the stump in North Carolina to promote it. Krugman likes the proposal. Republicans don't like it. On and on this nonsense goes. This new jobs bill is like putting a band-aid on a broken leg. Actually, it's worse than that, because the patient is dying. And it won't even pass!The latest sign of our decline came from the Wall Street Journal's As Middle Class Shrinks, P&G Aims High and Low. It seems that Proctor and Gamble (P&G) has a strategy to tailor their products for the Haves and the Have Nots in so far as there doesn't seem to be any Middle anymore. This is being called an "hourglass" strategy. You can learn about it in the Daily Ticker video (below).  Let start with this background text from the Journal.To monitor the evolving American consumer market, P&G executives study the Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person.

Inequality and its corrosive effects on democracy - Linda Beale - Obama has proposed a jobs plan --including payroll tax relief for workers--that would be paid for, among other things, by treating carried interest as the ordinary income compensation that it clearly is. In these times when so many Americans are suffering and a very very few are continuing to haul in much more of the economic income than any work they do merits, you'd think that the right-wing in Congress would finally realize that their allegiance to the wealthy sacrifices the vast majority of ordinary Americans and may indeed result in the construction of an oligarchy and the destruction of our democracy.  But today's papers are full of the Republican commitment to their ideological 'no tax increase' pledge.  See, e.g.,  Obama Offers Jobs Bill, and GOP Balks, New York Times There is something deeply wrong with our political system if our representatives in Congress are so wedded to maintaining the advantages that operate in favor of the "over-class" of the extraordinarily rich --those fund managers make tens of millions or even hundreds of millions of dollars in 'carried interest' annually--that they cannot see fit to cause them to be taxed fairly on what they earn for services. This undue heeding of the wishes of the uber-rich accompanies a scary decline for ordinary Americans.  See, e.g., this post on Zero Hedge, Median Male Worker Makes Less Now Than 43 Years Ago; Mark Thoma, Poverty Report shows 'doubling up' is on the rise, et al

‘People Are Close to Revolt’: Views From Afar - Three days ago -- just before the Republican debate in California and then the President's speech on jobs, jobs, jobs -- I quoted Congressional staffers on the increasing, cynical destruction of the legislative process, and a librarian from the Midwest who said that because of economic insecurity "people are close to revolt." Several messages in response to those items, with emphasis added.  First, from an American in Europe:>>I've been living in Germany for a few years now, and every year the idea of ever returning to the US grows more and more distasteful. The (metaphorical) air in the US grows ever more caustic, the desperation more palpable, the citizenry increasingly turns on itself.  I'm young, highly educated, and can live anywhere - I found Berlin to be an easy place to adjust to, and while Germany certainly has its serious problems, it is nevertheless free of America's caustic, suffocating atmosphere. Last month, some friends from the US came to visit me. To a man, they all said the same thing, that I was right to have left the country, and that they're very seriously thinking of doing the same. I don't think it was idle chatter. As the US feels more and more like a failing state, I think this phenomenon - an exodus of the most educated and employable - will rise and become difficult to ignore.<<

Why a Working-Class Revolt Might Not Be Unthinkable - It was encouraging to see President Obama pivot from deficit reduction to job creation in his widely anticipated speech last week. The president proposed a combination of spending and tax reduction policies, and he surprised many people with the boldness of his proposals and his passion and commitment to the issue. Unfortunately, Obama’s plan is unlikely to be much help to struggling labor markets. Fourteen million people are unemployed, long-term unemployment remains near record highs, the ratio of job seekers to job openings is 4.3 to 1, and the employment to population ratio has dropped precipitously. While concerns over the deficit are valid for the long run, they shouldn’t prevent us from doing more to help the jobless. (The debt dilemma is predominantly a health-care-cost issue, and whether or not we help the jobless doesn’t much change its magnitude.) The real problem is the political atmosphere. Republicans may go along with doing just enough to look cooperative rather than obstructionist -- but no more than that. And the job-creation policies that emerge from Congress are unlikely to make a dent in chronic unemployment. In fact what emerges won’t be anywhere near the $445 billion program the president has called for, which itself is short of the dramatic intervention needed to really make a difference.

Bankruptcy among college grads grows - Bankruptcy has struck more educated Americans during the past five years, as financial distress spread to more of the population with college degrees, according to study results released Tuesday. "The Great Recession has had a dramatic impact on the bankruptcy filings of American consumers across the economic spectrum -- including college-educated, high-income earners," said Leslie Linfield, executive director and founder of the Institute for Financial Literacy, which conducted the study. While those who didn't graduate from college make up 70 percent of debtors, the study found that the rate of college graduates filing for bankruptcy increased by 20 percent. "While less educated, low-income individuals continue to represent the typical bankruptcy filer, this report underscores a sophisticated evolution of the profile of the American debtor that now extends to disparate age, income and ethnic groups," Linfield said. The study involved more than 50,000 respondents and ran from 2006 to 2010, tracking the financial status of debtors since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act.

America’s Poorest States - The U.S. Census Bureau released two pieces of widely followed data yesterday — one on poverty and the other on median income for 2010. The most interesting findings in this release were the state-by-state figures, especially when compared to national averages. A closer look at the statistics shows that a relatively small number of states suffer such widespread levels of low income and poverty that they skew the national numbers downward. The poverty rate is 21% in Mississippi. The state also has the lowest median income at $36,850. Mississippi is among the states with the worst education systems, highest obesity levels, highest unemployment, and lowest rates of health insurance coverage. The state is an economic black hole, and it shows in the way people suffer there. And, as is true with black holes, it is nearly impossible for the residents of Mississippi to escape their difficult financial situations. There is a dearth of federal programs that target specific states and cities based on local economic need. 24/7 Wall St. reviewed census data from all 50 states on median income, poverty rates, unemployment, and lack of health insurance. We then identified the ten states that have the lowest median income. These are the poorest states in America.

State Unemployment Rates "little changed" in August - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed in August. Twenty-six states and the District of Columbia reported unemployment rate increases, 12 states recorded rate decreases, and 12 states had no rate change, the U.S. Bureau of Labor Statistics reported today. The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate.  Three states and D.C. are at new 2007 recession highs: Arkansas (8.3%), D.C. (11.1%), Texas (8.5%) and Montana (7.8%).  The fact that 45 states and the District of Columbia have seen little or no improvement over the last year is a reminder that the unemployment crisis is ongoing.

Unemployment Rates Up in Most States - The majority of states recorded increases in their unemployment rates in August with the job market stuck in neutral. Earlier this month, the Labor Department reported that the U.S. economy added no net jobs in August while the national unemployment rate remained at 9.1% for the second month in a row. States hit hardest by the housing crisis recorded the highest jobless rates in the country, with Nevada leading the nation at 13.4% in August and California next at 12.1%. Michigan, which was struggling with high unemployment even before the recession hit, saw its rate move higher in August to 11.2% amid job cuts in manufacturing and retail. Washington, D.C.’s rate of 11.1% was impacted by sharp reductions in government jobs. North Dakota’s 3.5% remains the lowest unemployment rate in the nation, thanks to a small population and booming industries tied to natural resources. Nebraska and South Dakota also each had rates below 5%. See the full interactive graphic.

Monday Map: State Corporate Income Tax Apportionment Formulas - Today's Monday Map shows state corporate income tax apportionment formulas. These formulas are used by states to determine what percentage of a corporation's profits are taxed. Generally, three categories are used: property, payroll, and sales. Courts have ruled that, in order for a corporation to be subject to a state's income tax, it must have a physical presence, or "nexus," in that state - sales on their own are not enough to create nexus. A corporation that has nexus in only one state while still selling to consumers in other states often ends up with "nowhere" income - income not taxed by any state - particularly if its home state has a sales-heavy apportionment formula. Many states have adopted what are known as "throwback" rules, which deem sales to states where the firm has no nexus as sales within the state for the purposes of apportionment, thus eliminating the problem of "nowhere" income.

Revenue forecast: WA state facing $1.3B shortfall - Washington faces a $1.3 billion budget shortfall after a revenue forecast issued Thursday determined that the economy was not showing the signs of recovery that officials had initially expected. Lawmakers said they were discussing new ways to address the shortfall, just a few months after finalizing a plan that would reduce projected spending by $4.6 billion. Gov. Chris Gregoire was considering the possibility of asking the Legislature to come back soon to start balancing the budget, ahead of the scheduled January return of the lawmakers. The Economic and Revenue Forecast Council, which lawmakers look to for guidance on how much to spend, had projected three months ago that the state would have money remaining at the end of the budget cycle, thanks to anticipated growth in the economy. But the latest forecast was $1.4 billion lower, leaving lawmakers with a $1.3 billion hole even if they spend all the money set aside in a rainy day fund. "I truly wish I could assure you that this nightmare is about to end, but I see no end in sight,"

Illinois Says Hospitals No Longer ‘Poorhouses’ Shielded From Tax - More than a dozen hospitals in Illinois face the prospect of paying millions of dollars in property taxes or, in some cases, shutting down as a result of a state ruling denying exemptions for three nonprofit healthcare providers.  The uncertainty has prompted at least one hospital to postpone a $23 million construction bond sale while several others that built facilities say they won’t be able to pay the bill if they lose the break.  “We’ll go out of business without it,” said Tracy Bauer, chief executive officer of Midwest Medical Center in Galena, a 25-bed hospital that is on the hook for a $2.3 million property tax bill if its nonprofit exemption is revoked.  The challenge to such exemptions comes as Illinois confronts two financial stresses -- the state’s $8 billion in unpaid bills and hospitals struggling with cuts in Medicare and Medicaid payments.  While other states have battled for decades in court over the obligation to treat the poor in exchange for tax breaks, Illinois intensified the fight on Aug. 16 when its Revenue Department denied exemptions for facilities in Chicago, Naperville and Decatur, saying they provided too little charity care.

Alabama County’s Debt Deal Averts Bankruptcy - The governing board of Alabama’s most populous county voted Friday to accept an agreement on how to restructure more than $3 billion of debt, avoiding what could have been the biggest municipal bankruptcy filing in American history.  The terms of the agreement call for Jefferson County, which includes the city of Birmingham, to shed about $1 billion of the debt, the majority of which is held by JPMorgan Chase. The agreement also offers the county several tools to lower the interest rate on roughly $2 billion of new, 40-year debt that will be issued to replace the current warrants. “It’s been an agonizing process; it’s been going on for three and a half years,” said one Jefferson County commissioner, Joe Knight, explaining why he voted for the agreement. “Today we’re going to take a step. It’s time for a resolution of this lingering debacle.”

Working harder and hardly hiring - This week, BEA put up new figures on metropolitan GDP, for 2010. Here's a look at the change in GDP for that year and the change in the unemployment rate for the 50 biggest metropolitan economies (many thanks to our research and graphics departments for their help with these): A couple of things stand out here. One is that way too many of these economies experienced growth under 3% in 2010. Another, however, is the general negative relationship; across these cities faster growth seemed generally to translate into a bigger drop in the unemployment rate, as we'd expect. To a large extent, then, America's employment shortfall looks like a growth shortfall.

Hundreds Of County Workers Possibly Facing Layoffs On Long Island - As many as 1,400 workers on Long Island could soon lose their jobs in Suffolk and Nassau counties. Executives in both Long Island counties are proposing budgets that would slash hundreds of jobs, 709 in Suffolk and another 710 jobs in Nassau1. Both spending plans call for union concessions2 for workers to pay for part of their medical premiums. “I think it’s ridiculous,” said a county employee who didn’t want to be identified. “Where are all those tax payer dollars that we’re spending? It shouldn’t happen.” It’s another hit on the middle class, says that worker adding “how much more can we take?” Nassau County faces a $310 million budget gap. County Executive Ed Mangano says the cuts are needed3 to balance the budget and will save $10 million annually.

Trenton bracing for deep police layoffs - Officials say 105 officers, or nearly one-third of Trenton's 350-member police force, received pink slips. The layoffs included every officer with less than seven years on the force. Mayor Tony Mack says the layoffs will save the financially strapped city about $4 million this year. Police officials say 18 of them are expected to be brought back next month with the help of a federal grant. Newark, Jersey City, Camden and Atlantic City have slashed their police forces over the past year because of budget cuts. The cuts have not all proven to be permanent. Many officers have returned to duty.

Issa: Keeping teachers on payroll unnecessary - Rep. Darrell Issa (R-CA) appeared on Morning Joe Monday, and suggested that saving teachers’ jobs was little more than a second wave of unnecessary stimulus. The California congressman appeared on the MSNBC show primarily to focus on his plan to revamp the U.S. Postal Service, a move many liberal critics have criticized. But when he was asked about his thoughts on President Obama’s jobs plan, Issa went on the attack, specifically turning his attention towards teachers. “There are tougher issues,” he said. “Whether or not the federal government borrows money from overseas sources to keep teachers in XYZ state on the payroll seems to be ‘stimulus II.’ It seems to be something that the state’s have to decide what the right number of teachers are, and fund that, and not have us borrow money from overseas.”

From the comments, on local employment of teachers - The scaling in the chart makes a big difference. Here’s the data behind the chart, which can by found by following a link on the site that Tyler links to: For the local government column only and April figures. (May would be better but the series runs out at April 2011.) April 2011 was at 8.3 million, about 160K less than the peak two Aprils earlier. That’s about 1.5% difference. That is from RZO, the link and context is here.  In the same comment thread, Frank Howland notes that: K-12 enrollments fell by 0.85% from 2007 to 2009 That’s not exactly the same years and the data go only to 2009 but could it be a general trend across 2009-2011?  Given that context, there is still some decline in per capita local teacher employment.  Note this is a sector where there is a growing realization that quite a few of the workers should, for non-cyclical reasons, be fired anyway.

Are We Laying Off Teachers -- Tyler Cowen implies no:This BLS graph (look under “And which industries show declining employment over the summer?”) shows a strong seasonal trend which may confound some month-specific citations, but still the number seems to be back to where it had been in earlier years (admittedly the scaling and visuals are not what I would wish for) and more importantly it is hard to spot much effect of the recession at all: The BLS graph looks strange to me but this is total state and local education employment over the last 10 years, Seasonally Adjusted. Now state employment is actually up because of Community Colleges mainly, I think. But its not up much. Maybe 40K since the recession ended. The real action is local where we have lost just under 300K since the recession ended.

The "Shock Doctrine" Comes to Your Neighborhood Classroom  -"Let's hope the fiscal crisis doesn't get better too soon. It'll slow down reform." -- Tom Watkins, a consultant, summarizes the corporate education reform movement's current strategy to the Sunday New York TimesThe Shock Doctrine, as articulated by journalist Naomi Klein, describes the process by which corporate interests use catastrophes as instruments to maximize their profit. Sometimes the events they use are natural (earthquakes), sometimes they are human-created (the 9/11 attacks) and sometimes they are a bit of both (hurricanes made stronger by human-intensified global climate change). Regardless of the particular cataclysm, though, the Shock Doctrine suggests that in the aftermath of a calamity, there is always corporate method in the smoldering madness - a method based in Disaster Capitalism. Though Klein's book provides much evidence of the Shock Doctrine, the Disaster Capitalists rarely come out and acknowledge their strategy. That's why Watkins' outburst of candor, buried in this front-page New York Times article yesterday, is so important: It shows that the recession and its corresponding shock to school budgets is being  used by corporations to maximize revenues, all under the gauzy banner of "reform."

U.S. Postsecondary Edge Shrinking Among G-20 Countries - The United States still leads the world in having a college-educated workforce, but it is the only country among the G-20 members whose incoming workers are less educated than those retiring, according to a study released this morning by the Organization for Economic Cooperation and Development. In 2009, Americans accounted for more than one in every four of the 225 million people with postsecondary degrees in G-20 countries, according to the OECD's Education at a Glance 2011 report. Yet the numbers show a deep generational divide among degree-holders: Americans make up more than a third of all postsecondary degree holders, ages 55 to 64, but only a fifth of those ages 25 to 34.  "It's not that the United States is doing worse; its that other countries are starting to do what the United States has been doing for a very long time," said Andreas Schleicher, the head of the indicators and analysis division at the OECD's Directorate for Education, in a briefing on the report Monday morning. "There's been a quite dramatic expansion of the pool of qualified people."

UC Regents say system faces $2.5 billion deficit over next four years -- Looking down the barrel of a budget deficit projected to reach $2.5 billion over the next four years, the University of California Board of Regents deliberated Thursday a proposal to develop a multi-year funding plan with the state. Although the proposal outlined $1 billion in solutions that would be achieved through exploration of funding streams and the institution of academic efficiencies, the university is bracing for a $1.5 billion remainder that could potentially fall on the backs of students. The university is looking for renewed assurance from the state that it will provide long-term funding to ensure that the university remains competitive and is able to plan for long-term investments, such as expanding academic programs, enrolling students, and hiring and tenuring faculty. "The swings in state support, now deeper and of longer durations, have made it impossible to react to changing events while maintaining a longer term vision," Under the worst-case scenario, the proposal anticipates that undergraduate in-state tuition could reach as much as $22,000 in four years. Undergraduate students now pay $12,192 per year.

Under plan, UC tuition could rise by 16% a year The University of California would raise student tuition by at least 8 percent - or as much as 16 percent - every year through 2016 under a plan that UC leaders will propose to the regents Thursday in San Francisco. Basic tuition could top $22,000 in just four years, not including other mandatory fees, books, room and board, if the regents adopt the idea at their November meeting as part of a multiyear budget plan. Undergraduate tuition is currently $12,192. UC officials say the hikes will help cover $2.5 billion in additional funds the university needs to pay its bills and grow enrollment over the next four years. "A bold new approach is necessary to save the university from an irreversible decline into mediocrity," . They said the plan will bring predictability to the wild ride of UC tuition hikes, which have occurred sometimes twice a year and are often accompanied by angry student protests.

America Has Abandoned Its Young People - When a society forsakes its young people, offering them basically nothing to help them start their adult lives, that society no longer has any reason to exist. What is the purpose of a society if not to maintain continuity between current and future generations? Who would have children if they knew in advance that their kids would lead lives far worse than theirs had been? That is the situation we face in the United States today. America's Middle Class is shrinking. The problem is not merely that people are dropping out it. It's also the case that most young Americans will never get there. For those who get a college degree, there is often only a mountain of debt and a poor-paying job to look forward to. College tuitions are now inflating at a rate which boggles the mind. CNN Money recently published Stop the tuition madness (hat tip Bill Hicks). ... colleges are bidding up tuition prices faster than a hedge fund manager at an art auction. Over the past 10 years the cost of private college has jumped more than 60%, nearly three times as much as incomes over the same period, and will now set you back $42,000 a year on average.

Another Disaster in the Making -  In "Consumer Credit in U.S. Rose $12 Billion in July, Fed Says," the San Francisco Chronicle details the latest report on what Americans are doing with other people's money: Consumer borrowing in the U.S. rose by the most in more than three years in July, led by a gain in non-revolving credit that includes student loans. In fact, if you compare education-related borrowing to total borrowing, it throws up (no pun intended) a dizzying divergence. While consumer credit overall has drifted lower since the financial crisis unfolded (as it should), the amount of school loans outstanding has rocketed higher. I wonder: does it really make sense for young people to be taking on extraordinary debt loads to finance an effort that no longer offers good value for money at a time when the longer-term outlook remains decidedly shaky -- at best? Sounds like another disaster in the making to me.

Student loan default rates jump - The number of borrowers defaulting on federal student loans has jumped sharply, the latest indication that rising college tuition costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt. The national two-year cohort default rate rose to 8.8 percent last year, from 7 percent in fiscal 2008, according to figures released Monday by the Department of Education. Driving the overall increase was an especially sharp increase among students who borrow from the government to attend for-profit colleges.  Of the approximately 1 million student borrowers at for-profit schools whose first payments came due in the year starting Oct. 1, 2008; at the peak of the financial crisis; 15 percent were already at least 270 days behind in their payments two years later. That was an increase from 11.6 percent among those whose first payments came due the previous year.  At public institutions, the default rate increased from 6 percent to 7.2 percent and from 4 percent to 4.6 percent among students at private not-for-profit colleges.

Student Loan Default Rates Rise Sharply in Past Year - The share of federal student loan1 defaults rose sharply last year, especially at for-profit colleges2 and universities, where 15 percent of borrowers defaulted in the first two years of repayment, up from 11.6 percent the previous year. According to Department of Education data3 released Monday, 8.8 percent of borrowers over all defaulted in the fiscal year that ended last Sept. 30, the latest figures available, up from 7 percent the previous year. At public institutions, the rate was 7.2 percent, up from 6 percent, and at not-for-profit private institutions, it was 4.6 percent, up from 4 percent. “Borrowers are struggling in this economy,” said James Kvaal, deputy under secretary of education. “We see a strong relationship between student default rates and unemployment rates.” Although the new overall rates are the highest since the 1997, when they were also 8.8 percent, default rates peaked in 1990 at more than 20 percent. The new rates represent a snapshot in time, covering the 3.6 million borrowers whose first loan payments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. More than 320,000 of those borrowers defaulted during that period.

The $1 trillion student loan market begins to implodeDepartment of Education shows two-year default rates at for-profit colleges up to 15 percent. Student loan debt increasing at a rate of $170,000 per minute.  We seem to have entered an era of perpetual and unshakeable financial bubbles and the next ripe bubble to burst is in the student loan market.  Student loan debt has become the fastest growing debt sector throughout the economic recession.  Growth at for-profit colleges has been incredible and tactics used at these institutions reflects patterns seen with the subprime mortgage operators.  They target low income markets and exploit government backed loans and pump them through local area lenders.  It is a bubble of mammoth proportions and it is no surprise that data released by the Department of Education only a few days ago reflects a default pattern reminiscent of the subprime crisis.  Default rates on student loans at for-profit institutions are absolutely abysmal.  There is no question now that the student loan bubble is now the next market to pop.  What will be the consequences of the $1 trillion student loan market contracting?

Comparing the Default Numbers on Subprime Mortgages and For-Profit College Loans - News from the Department of Education:The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools. Kevin Carey explains that the number is even worse than it looks.  A 15% default rate for for-profit schools in the first two years!  Let’s put that in perspective. Let’s take a graph from the Federal Reserve Bank of Chicago’s September 2010 report Default Rates on Prime and Subprime Mortgages: Differences & Similarities.  This graph is the default rate per month from origination, showing the default rate X months out from when the loan started.  You can see it get worse as the years go on, showing increasing trouble and fraud in the private-label securitization pipeline:

401(k) break at risk as policymakers mull retirement shift (Reuters) - U.S. retirement programs could look different if a grand deficit-cutting bargain is struck in upcoming negotiations. On Thursday, the powerful Senate Finance Committee will explore "Tax Reform Options: Promoting Retirement Security." Despite the sleepy title, the hearing will be one of the first outward signs of something that's been actively discussed privately all over this city in recent weeks and months: How to tweak retirement to make 401(k) plans more efficient, keep Social Security afloat and save some money for the federal Treasury. Among the ideas being floated are a replacement of the 401(k) deduction with a tax credit that would offer bigger benefits to lower earners, changes in the withdrawal choices that workers face when they retire and a shift in the way Social Security benefits are calculated. That is on top of the increase in the retirement age that has been mentioned several times in recent months. A variety of economic pressures and demographic trends have come together to put these new ideas on the table. There's also some disillusionment within the Obama Administration and among people with close ties to the administration with the way the 401(k) system is operating.

Is Social Security a Ponzi Scheme? - Matt Yglesias says anyone who thinks social security is a Ponzi scheme is nuts. So let’s take a look at some of these nuts. First up is Nobel prize winner Paul Samuelson who wrote: Social Security is a Ponzi Scheme that Works. The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)! How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired. …A growing nation is the greatest Ponzi game ever contrived.

Ponzi Schemes for Beginners - On the theory that the best defense is a good offense, Rick Perry has been insisting to anyone who will listen that Social Security is a Ponzi scheme. Probably hundreds of people have already explained why it isn’t, but I think it’s important to be clear about why Rick Perry thinks it is—or, rather, why his political advisers think he can get away with it. A Ponzi scheme, classically, is one where you promise high returns to investors but you have no way of actually generating those returns; instead, you plan to pay off old investors by getting new money from new investors. Social Security is obviously not a Ponzi scheme for at least two basic reasons. First, there’s no fraud involved: all of Social Security’s finances are right out in the open for anyone who cares to look, in the annual report of the trustees of the Social Security trust funds. Second, a Ponzi scheme by construction cannot go on forever; no matter how long you can keep it going, at some point you will run out of potential new investors and the whole thing will collapse. I’m sure there are other obvious differences, but that’s enough for now.

The Payroll Tax Holiday: Talk about a Ponzi Scheme! - Is President Obama trying to kill Social Security without explicitly saying so? He put Social Security "on the table" for consideration by his Deficit Commission -- even though Social Security has not contributed to creating or sustaining the deficit/debt in the first place. He kept Social Security on the table when he made a deal to delegate deficit reduction authority over entitlements to an undemocratic Super Committee. Now, in a speech reportedly about jobs, he proposed to extend and increase the ill-considered FICA tax cut he embraced last December -- a tax cut that directly undermines the financial integrity of Social Security. According to the White House Fact Sheet on "The American Jobs Act" the FICA tax holiday for workers will be increased to a 50% reduction, lowering it to 3.1%. Under the 2010 tax deal, the payroll tax for workers was reduced from 6.2% to 4.2%. In addition to expanding the tax cut for workers, the President proposes to extend the FICA tax holiday to employers by cutting in half the employer's share of the payroll tax through the first $5 million in payroll.

The Ponzi Thing - Krugman - Well, I gather that a lot of right-wingers are quoting selectively from a piece I wrote 15 years ago in the Boston Review, in which I said that Social Security had a “Ponzi game aspect.” As always, you should read what I actually wrote. Here’s the passage: Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). Notice what I didn’t say. I didn’t say that the system was a fraud; I didn’t say that it would collapse. I said that in the past it had benefited from the fact that each generation paying in to the system was bigger than the generation that preceded it, and that this luxury would be ending in the years ahead.

Social Security v. the Galveston Plan: the Privatization Debate Redux - PolitiFact is providing some important reporting on a claim being made by some of the GOP Presidential hopefuls:"The city of Galveston, they opted out of the Social Security system way back in the '70s," Cain said. "And now, they retire with a whole lot more money. Why? For a real simple reason -- they have an account with their money on it. What I'm simply saying is we've got to restructure the program using a personal retirement account option in order to eventually make it solvent." . Theresa M. Wilson a few years ago did a comparative analysis of the two systems and noted that the Galveston strategy of investing retirement funds is conservative much like that strategy of the Social Security Trust Fund. In fact, the Galveston real return on its investments was only 4.62 percent over the 1981 to 1997 period as compared to a 4.88 percent return for Social Security funds over the same period.

The real truth about Social Security - SOCIAL SECURITY manages to be one of the most popular and misunderstood government programmes. It serves two purposes: to provide an income floor which keeps people out of poverty in retirement (a form of insurance), and to replace income from previous work (a forced saving scheme). There may be more efficient ways to achieve these goals, but generally, Social Security does a decent job at both. But there is a stunning amount of ignorance when it comes to its financing. On the right, people like Rick Perry call it a Ponzi scheme based on lies. The left prefers to believe there's nothing wrong with the programme and figures when revenues and the trust fund can no longer cover benefit payments some simple accounting trick will save the day. Both views are wrong and dangerous. Discontinuing the programme and moving to something fully funded would be so expensive as to not be worth the cost. Social Security’s financing problems can be fixed, ideally with some combination of tax increases and progressive benefit cuts. It is a fairly easy fix and the sooner it is done the cheaper it will be. Punting it to the future makes it even more expensive to future generations, and is in my opinion irresponsible, to put it nicely.

Early Look: 2012 Social Security Cost-Of-Living Adjustment on track for 3.5% increase - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.3 percent over the last 12 months to an index level of 223.326 (1982-84=100)." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation (much of the following is a repeat from a previous post updated with current data):The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted.

You can't escape demographics. Quit whining and deal with it. As you get older, your productivity will, eventually, decline. If you live long enough, you will reach a point when you can no longer provide for yourself. You cannot bake bread when you are young, bury it in the ground, and then dig it up and consume it when you are old. In your golden years, you must rely on someone younger and fitter to bake bread for you. In every society, the old have some claim on the resources of the young. Only the nature of the claim varies. The oldest form of claim is kinship: children bake bread for their aged parents. Over time, other methods of caring for the elderly have evolved: Charity: religious or volunteer organizations can give the elderly bread. Government: the state can tax the young, and use tax revenues to provide bread for the elderly. Accumulate assets that last: people can buy gold when young and bury it in the ground. When they're old, people dig up the gold and exchange it for bread. Capitalism: people can invest in bakeries, and receive bread in their old age in exchange for their capital investment. Each one of these strategies is vulnerable to demographics. Imagine what happens, under each scenario, when there is a large increase in the number of old - by which I mean people who are unable to bake their own bread - relative to the number of young.

Census report: More Americans relying on Medicare, Medicaid (VIDEO) -  More people relied on state and federal health insurance programs as employer-based plans became more expensive and as US unemployment levels remained high, according to the US Census Bureau's annual report on income, poverty, and health insurance coverage. About 1.5 million fewer Americans had health insurance plans covered by their employers in 2010 than in 2009 – while 1.8 million more joined government insurance plans. The number of people covered by Medicaid, the government program for the poor, increased 1.5 percent to 48.6 million. Those covered by Medicare, the government program for the elderly, rose 2.1 percent to 44.3 million. RECOMMENDED: Health care law's future - four scenarios Already, Republican presidential candidates are attacking President Obama's new health-care law for growing the size of the federal government. So what do these numbers say about his health-care reform? Some say the report demonstrates a weakness in the Obama health-care law – and is a clear admonition for voters. Watch video showing the latest Census figures here: 

Increase in Uninsured Rate - “Gallup: Uninsured Have Increased Under Obama and Since Obamacare Was Enacted,” blares the headline at CNSnews and a number of other conservative sites that picked up the story. The implication is that Obama and the Affordable Care Act have failed, though the article is careful to point out that the mandate does not come into effect until 2014. Indeed, the article makes no claims to explaining why this happened. As two Gallup surveys show, 14.8% of adults were uninsured in 2008, 16.2% in 2009, 16.4% in 2010, and 16.8% in the first half of 2011. In fact, the results in June had to have been dreadful, because Gallup's January-May polling only gave a 2011 figure of 16.6%, and June results pushed the figure to 16.8%. Similar, but less quickly reported, numbers come from the Census Bureau. As reported by the Kaiser Family Foundation in September 2010, the uninsured rate for all Americans was 15.4% in 2008 and 16.7% in 2009.  What were the causes of this increase? Using the Gallup data since it is more recent, fully 70% of the increase (1.4 of 2.0 points) came from 2008 to 2009, when the full-year unemployment rate rose from 5.8% to 9.3%, as mentioned in the Kaiser article. Yet unemployment peaked at 10.1% in October 2009 and is down to 9.1% in August 2011, so it isn't simply unemployment since the uninsured rate has continued to rise.

The Role of Prices in Health Care Spending - The term “health care” evokes different images in people’s minds. To patients who find a miraculous cure, health care may be almost sacred. For physicians, nurses and other health care professionals it is a compassionate human activity. To hard-nosed economists, health care represents just another exchange of favors embedded in a wider market economy that consists of exchanging favors. The chart below illustrates this exchange. Some members of society surrender real resources — their time, amplified by their skill or the health care products they produce — to the process of patient care, which is meant to improve the patients’ quality of life. In return, society issues these providers of real health care resources generalized claims (money) on all the things included in gross domestic product.Thus, the health care sector of any country always has the dual goals of enhancing the quality of life of patients as well as enhancing the quality of life of the providers of health care, and, charity care aside, patients are at once objects of compassion and biological structures yielding cash.

If You Want To Cut Health Care Costs, You Probably Shouldn’t Adopt The Health Industry’s Favorite Idea - Sarah Kliff did some reporting on how the health care industrial complex views the idea of raising the eligibility age for Medicare, and to make a long story short they think this is a great idea: “Key health care players tentatively lean toward raising Medicare eligibility age, especially when it’s compared to other entitlement cuts that the deficit-reduction supercommittee could make.”  The reasons are somewhat complicated, but also profoundly simple. The health care industry charges one price to Medicare, a different higher price to insurance companies, and a third much-higher price to individuals. The smaller your purchasing pool, the higher the price that industry can charge. Consequently, shifting marginal people out of Medicare is lucrative for the health care industry. By the exact same token, if you’re interested in reducing health care costs, what you want to do is listen to executives of health care companies and then go do the reverse. Rather than raising the Medicare eligibility age, we ought to be lowering it. That would require new tax revenue, but the amount of new taxes it would cost would be lower than the reduction in private health care spending.

Health care consolidation: the good, the bad and the ugly - The Washington Post: When the House Ways and Means Health Subcommittee held a hearing Friday morning, there was a weird moment of bipartisan agreement on health policy: increasing consolidation in the health industry is bad for patients. The three-hour hearing probed the health industry consolidation that has increased for the past two decades or so. As a way to increase market clout, hospitals have been buying up physician practices, insurance plans have been merging and health systems are growing larger. Both the Health Subcommittee’s chair, Republican Rep. Wally Herger, and ranking member, Democratic Rep. Pete Stark, repeatedly warned of the negative impact of health consolidation, with larger market clout leading to increased prices and less choice for patients. “It is refreshing to see our majority raise concerns about competition in the marketplace and how it may result in outcomes that are bad for consumers and for Medicare,”

Health Care Thoughts: Please do everything you can.... .... to keep mom/dad alive. Physicians and nurses often dread these conversations. Any of us who have been on the family side of this know how agonizing it can be. And I know even mentioning this can cause a firestorm. However, there are some unsettling issues raised by these conversations, issues that are a sort of third rail of health care (and no there are no proposed death panels). First, does this attitude increase suffering? Many of the elderly have 4 - 10 major diagnosis (COPD, CHF, PAD, diabetes, a-fib, etc. etc.) and very little quality of life. Especially problematic is the ping-pong that often occurs between the hospital and the nursing home (families often see a transfer to the hospital as a magic bullet, physicians often give in). Second, Medicare is paying for a great deal of hospital care that may have very little value. No one wants the government making these decisions, but at some point the care is futile and often painful. Some patients and families deal with these issues well, others do not.

Free to Die, by Paul Krugman - Back in 1980, just as America was making its political turn to the right, Milton Friedman lent his voice to the change with the famous TV series “Free to Choose.” In episode after episode, the genial economist identified laissez-faire economics with personal choice and empowerment, an upbeat vision that would be echoed and amplified by Ronald Reagan. But that was then. Today, “free to choose” has become “free to die.” I’m referring to what happened during Monday’s G.O.P. presidential debate. CNN’s Wolf Blitzer asked Representative Ron Paul what we should do if a 30-year-old man who chose not to purchase health insurance suddenly found himself in need of six months of intensive care. Mr. Paul replied, “That’s what freedom is all about — taking your own risks.” Mr. Blitzer pressed him again, asking whether “society should just let him die.” And the crowd erupted with cheers and shouts of “Yeah!”  The incident highlighted something that I don’t think most political commentators have fully absorbed: at this point, American politics is fundamentally about different moral visions.

Study Proves Gulf War Syndrome is Nerve Gas-Induced Brain Damage: The condition known as Gulf War syndrome is said to affect 25 percent of Gulf War veterans, and is characterized by memory loss, lack of concentration, fatigue, neuropathic pain and depression. The Defense Department has argued for years that it is not, in fact, a treatable physiological condition, but rather a "form of combat stress." But scientists have just proven the opposite: It's conclusively the result of brain damage due to exposure to sarin nerve gas. The UT Southwestern study, published in the journal Radiology, employed cutting-edge MRI technology to measure blood flow in the brains of veterans with GWS. From the Dallas Observer: [Dr. Robert Haley, chief epidemiologist at UT Southwestern] used a neurotransmitter called acetylcholine, which acts to slow the heart rate and blood flow to the brain, making you groggy. For those with receptors damaged by nerve gas, they don't become groggy at all. In fact, sometimes it has the opposite effect. The MRIs showed a marked decrease of blood flow in brains of GWS patients.

Contraceptive pill ‘interferes with women’s memory’ - Women who take the contraceptive pill are interfering with the way they remember information, research suggests. Experts say women who take oral birth control tend to remember different aspects of an incident from those with natural menstrual cycles.  By changing a woman’s hormone balance, the Pill alters the way she remembers information, the study suggests.  Those taking the drug are less likely to remember details of an event, but instead retain its overall emotional impact.  The Pill works by reducing oestrogen and progesterone to prevent pregnancy. These 'left brain' chemicals have been linked with women’s ability to remember events logically, according to Larry Cahill, a neurobiologist who worked on the study.  It raises questions over how the Pill, used by an estimated 3.5million British women, may affect their performance at work.

Dangerous, Drug-Resistant Tuberculosis Spreading at Alarming Rate in Europe - WHO - The World Health Organisation warned Wednesday that dangerous and drug-resistant forms of tuberculosis are spreading at an alarming rate in Europe, and could claim many lives unless health authorities act quickly. WHO's regional director for Europe, Zsuzsanna Jakab, warned that failure to tackle TB now would have grave consequences in the future. "TB is an old disease that never went away, and now it is evolving with a vengeance," said Jakab, who noted the currently spreading TB is resistant to many drugs. Reuters reports WHO is launching a new regional plan to find, diagnose and treat cases of the airborne infectious disease more effectively. TB is currently a worldwide pandemic that kills around 1.7 million people a year. The infection is caused by the bacterium Mycobacterium tuberculosis and destroys patients' lung tissue. When patients cough, they spread the bacteria through the air, putting others at great risk. Reuters reports cases of multidrug-resistant (MDR-TB) and extensively drug-resistant TB (XDR-TB) -- where the infections are resistant to first-line and then second-line antibiotic treatments -- are spreading fast, with about 440,000 new patients every year around the world.

Killing Jobs and Making Us Sick - “In January, Mr. Obama signed a food safety law that provides broad new authority to the Food and Drug Administration,” wrote Robert Pear in Friday’s Times, in an article1 about the Congressional appropriations mess. But House Republicans, he added, had voted “to cut the agency’s budget.”  Well, yes, in a nutshell, that is the sad story of the food safety law — the first major change in how the government regulates food safety in over 70 years. But the way the Republicans have dealt with its funding represents more than appropriations problems. It also represents the way they’ve allowed their unyielding antitax, antispend ideology to get in the way of common sense — and the common good.  For years, the food industry and consumer groups have been aligned on the need to modernize the nation’s food safety inspection system. “Food-borne illnesses” — an outbreak of salmonella or e. coli, for instance — are a problem not just for consumers but for industry as well. Recalls are expensive. Sales shrink, even for companies not involved in the recall. Lawsuits ensue. Employees lose their jobs. It can take years to recover from a food scare.

USDA tackles 6 additional strains of E. coli - Since the 1990s, it has been illegal to sell raw ground beef contaminated with one particular strain of bacteria, called E. coli O157:H7.  Almost any other type of pathogen is allowed for sale in raw beef, unless it actually causes an outbreak of illness.  The food industry has long argued that banning more pathogens would represent overreaching government regulation, because many pathogens (such as salmonella and other varieties of E. coli) are found on a significant percentage of beef sold, it would be expensive to get rid of all the pathogens, and the beef will be sufficiently safe if consumers handle it and cook it well. Today, the New York Times reports that USDA for the first time will ban six more strains of E. coli.  Raw beef with these pathogens would be considered adulterated, and unfit for sale.   “This is one of the biggest steps forward in the protection of the beef supply in some time,”  “We’re doing this to prevent illness and to save lives.” 

Attack of the Superweed - Justin Cariker grabs a 7-foot-tall Palmer pigweed at his farm, bending the wrist-thick stem to reveal how it has overwhelmed the cotton plant beneath it. This is no ordinary weed: Over time it has developed resistance to Monsanto’s (MON) best-selling herbicide, Roundup. Hundreds of such “superweeds” are rising defiantly across this corner of the Mississippi Delta. “We’re not winning the battle,” Cariker, owner of Maud Farms in Dundee, Miss., says as he looks at weeds that tower over his infested cotton field like spindly green scarecrows.  Cariker’s superweeds represent a growing problem for Monsanto, whose $11 billion of annual sales are anchored in crops genetically engineered to tolerate Roundup, the world’s best-selling weedkiller. The use of Roundup Ready seeds has transformed farming in the 15 years since their debut, allowing growers to easily dispatch hundreds of types of weeds with a single herbicide while leaving crops unscathed. It turns out the widespread use of Roundup has led to the evolution of far-tougher-to-eradicate strains of weeds.

DuPont’s Herbicide Goes Rogue - In the corporate world's tortured language, workers are no longer fired. They just experience an "employment adjustment." But the most twisted euphemism I've heard in a long time comes from DuPont: "We are investigating the reports of these unfavorable tree symptoms," the pesticide maker recently stated. How unfavorable? Finito, flat-lined, the tree is dead. Not just one tree, but hundreds of thousands all across the country are suffering the final "symptom." The culprit turns out to be Imprelis, a DuPont weed-killer widely applied to lawns, golf courses, and — ironically — cemeteries. Rather than just poisoning dandelions and other weeds, the herbicide also seems to be causing spruces, pines, willows, poplars, and other unintended victims to croak. At first, DuPont tried to dodge responsibility, claiming that landscape workers might be applying the herbicide improperly. The corporation even urged customers to be patient and leave the tree corpses on their lawns to see if they'd come back to life in a few years. However, faith-based landscaping was a hard sell. Disgruntled homeowners began filing lawsuits. Then DuPont had its own "aha!" moment when trees on the grounds of the DuPont Country Club also developed the "unfavorable symptoms" of Imprelis poisoning.

Smaller corn surplus could push food prices higher --- Food prices could rise next year because an unseasonably hot summer likely damaged much of this year's corn crop. The U.S. Department of Agriculture estimated Monday that a surplus of 672 million bushels of corn will be left over at the end of next summer. The estimated surplus is down from last month's forecast and well below levels that are considered healthy. This spring, farmers planted the second-largest crop since World War II. But high temperatures stunted the plants. "We just didn't have a good growing year," . "It was too hot, too warm, too dry at the wrong time." The price of corn was relatively unchanged at $7.33 a bushel on Monday. While that's down from its peak of $7.99 reached in June, it's still nearly twice the price paid last summer. More expensive corn drives food prices higher because corn is an ingredient in everything from animal feed to cereal to soft drinks. It takes about six months for corn prices to trickle down to products at the grocery store. But many food producers are already being squeezed by the higher prices. Chicken producer Sanderson Farms Inc. reported its third straight quarterly loss late last month, in part, because of increased costs for feed. Smithfield Foods Inc., the world's largest hog producer, said last week that high feed costs would remain a problem this year.

Global Demand Drives Food Prices Higher in Third Quarter - Strong global demand, especially for pork and other protein-rich foods, was a primary driver behind higher retail prices at the supermarket during the third quarter of 2011, according to the latest American Farm Bureau Federation Marketbasket Survey. Click on the image for a high resolution PDF version of the graphic. The informal survey shows the total cost of 16 food items that can be used to prepare one or more meals was $53.12, up $1.95 or about 4 percent compared to the second quarter of 2011. Of the 16 items surveyed, 13 increased, two decreased and one remained the same in average price compared to the prior quarter. “Global demand for meat and dairy products remains strong and continues to influence retail prices here in the U.S.,” said AFBF Economist John Anderson. “Many nations around the world rely on America to provide the food they need to improve their standard of living, particularly through the addition of protein to the diet. Strengthened demand for meats began in 2009, continued through 2010 and remains important as we look ahead to the close of 2011.”

Food Inflation Rate Exceeds 9% for Sixth Week, Adding to Pressure on Rates - India’s food inflation rate exceeded 9 percent for a sixth straight week, maintaining pressure on the central bank to raise interest rates tomorrow. An index measuring wholesale prices of farm products including rice and wheat rose 9.47 percent in the week ended Sept. 3 from a year earlier, the commerce ministry said in New Delhi today. It gained 9.55 percent the previous week. The Reserve Bank of India will probably raise rates by a quarter of a percentage point at tomorrow’s policy meeting, according to 12 of 13 economists in a Bloomberg News survey. Governor Duvvuri Subbarao has to weigh the risks to expansion posed by a faltering global recovery against price pressures, which may be stoked by a weaker rupee. “There are concerns on the global economic front, but inflation still remains the primary concern for the RBI,”

How Do We Feed the World Without Destroying it? TED Talk on Agriculture. - Professor Jonathan Foley is the Director of the Institute on the Environment at the University of the Minnesota who focuses on the behavior of complex global environmental systems and their interactions with human societies. In particular, Foley's research group uses state-of-the-art computer models and satellite measurements to analyze changes in land use, ecosystems, climate and freshwater resources across regional and global scales. Foley says that agriculture is dominating our planet; that it is affecting water quality and leading to loss of biodiversity; that it rivals climate change in importance. Forty percent of the earth's land surface is now devoted to agriculture; 70% of water; and 30% of greenhouse gases going into the atmosphere due to human activity are due to agriculture. He asks, "How are we going to double global agriculture? Remaining lands are in sensitive areas of biodiversity. We need to freeze the footprint of agriculture and increase production through right methods. Since we have to eat, how we can minimize the negative impacts of growing food?

The mighty Missouri River: the flooding and the damage done - Shortly before Memorial Day, a summer of unprecedented flooding from Montana to Missouri along the Missouri River started washing away interstate highway lanes and swamping rail lines as it routed thousands of people from their homes. Flooding continues this Labor Day weekend and is expected not to end for several more weeks. As the water recedes, the extent of damage from three months of flooding is showing up. In cities such as Pierre, South Dakota's capital, the receding floodwaters have left behind sinkholes in roads and parks and begun to reveal widespread damage to storm sewer systems, public softball fields and a city golf course. "We are just now, as the river is going back, really seeing what the damage is," Pierre Mayor Laurie Gill said. Along the riverbanks, the U.S. Army Corps of Engineers estimates the cost of repairing its levees and patching up its dams from Montana to Nebraska could top $1 billion. Behind breached levees and across the floodplains, the estimated cost of fixing damaged roads, rail lines, bridges and other infrastructure is swelling in time and dollars. States in the Midwest are competing for attention, and for federal dollars, with other disasters that have struck since the flooding, including Hurricane Irene on the East Coast at the end of August.

In the world's breadbasket, climate change feeds some worry -  It can't happen here, can it? The United States, the breadbasket and supplier of last resort for a hungry world, has been such an amazing food producer in the last half-century that most Americans take for granted annual bounteous harvests of grain, meat, dairy, fruits, vegetables and other crops. When horrific images of drought or famine in Africa, Asia or other regions land in American media, America is usually first in line with food aid shipments, air drops, and other rescue efforts from its seemingly endless stores. The U.S. alone accounts for half of all world corn exports, 40 percent of soybean exports and 30 percent of wheat exports. But climate change fears are sounding some warning bells. Some scientists and agronomists are becoming increasingly concerned about the real effects they see now on growing conditions in the Midwest, the vast black-soiled region long the core region of the U.S. agricultural miracle. They also say that not only skeptical farmers but also government authorities are trying to quietly adapt, from equipment to planting to research. "We don't have a long-term reserve. We have a global food supply of about 2 or 3 weeks,"

Is the U.S. Reaching Peak Water? - Adequate, high-quality freshwater is fundamental for health, growing food, natural ecosystems, and a productive U.S. economy including the production of energy and all vital goods and services. But as populations and economies grow, new constraints on water resources are appearing, raising questions about ultimate limits to water availability. In some parts of the world, including the U.S., the demand for water is outstripping the supply, causing political disputes and economic uncertainty, and raising the specter of “peak water.” Questions about resource availability and limits are not new. The specter of “peak oil”—a peaking and then decline in oil production—has long been predicted and debated, and peak U.S. oil production occurred forty years ago. But the concept of “peak water” and its implications for the U.S. economy are less well explored and understood. To be clear, “peak water” doesn’t mean the U.S. or the world is running out of water. Overall, there is plenty of water on the planet and it is (mostly) a renewable resource. But there are serious physical, environmental, and economical constraints on water availability that make regional water problems increasingly urgent.

Saudi Arabia's water needs eating into oil wealth - (Reuters) - Long before it understood the value of oil, the desert kingdom of Saudi Arabia knew the worth of water. But the leading oil exporter's water challenges are growing as energy-intensive desalination erodes oil revenues while peak water looms more ominously than peak oil -- the theory that supplies are at or near their limit, with nowhere to go but down. Water use in the desert kingdom is already almost double the per capita global average and increasing at an ever faster rate with the rapid expansion of Saudi Arabia's population and industrial development. Riyadh in 2008 abandoned what was in retrospect clearly a flawed plan to achieve self-sufficiency in wheat and aims to be 100 percent reliant on imports by 2016. "The decision to import is to preserve water," said Saudi Deputy Minister of Agriculture for Research and Development Abdullah al-Obaid. "It's not a matter of cost. The government buys wheat at prices higher than in the local market."

Famine hits Somalia in world less likely to intervene - Effort in 1990s to forcefully deliver humanitarian aid didn't succeed  -  Is the world about to watch 750,000 Somalis starve to death? The United Nations’ warnings could not be clearer. A drought-induced famine is steadily creeping across Somalia and tens of thousands of people have already died. The Islamist militant group the Shabab is blocking most aid agencies from accessing the areas it controls, and in the next few months three-quarters of a million people could run out of food, United Nations officials say.  Soon, the rains will start pounding down, but before any crops will grow, disease will bloom. Malaria, cholera, typhoid and measles will sweep through immune-suppressed populations, aid agencies say, killing countless malnourished people. In a way, this is all déjà vu. In the early 1990s, Somalia was hit by famine, precipitated by drought and similarly callous thugs blocking food aid and producing similarly appalling images of skeletal children dying in the sand. In fact, the famine back then was in the same area of Somalia, the lower third, home to powerless minority clans that often bear the brunt of this country’s chronic troubles.

Poll shows growing belief that global warming is occurring -  A new poll shows that a large majority of Americans believe global warming is occurring, but reveals a sharp partisan divide over its causes. The Ipsos poll released Friday finds that 83 percent of Americans believe the planet is warming, up from 75 percent in 2010. Seventy-two percent of Republicans believe it’s happening, compared to 92 percent of Democrats, according to the poll conducted for Stanford University and Reuters. ... But from there a major partisan split emerges about whether humans are to blame. The summary states: 37% of Democrats believe global warming is the result primarily of human action, while only 14% of Republicans believe this. Conversely, 43% of Republicans believe global warming is the result of natural causes, up from 35% in 2010. Self-identified Tea Party members display still more certainty (49%) that global warming is caused by natural events.

Is It Weird Enough Yet? - Thanks Mr. Perry and Mrs. Bachmann, but we really are all stocked up on crazy right now. I mean, here is the Texas governor rejecting the science of climate change while his own state is on fire — after the worst droughts on record have propelled wildfires to devour an area the size of Connecticut. As a statement by the Texas Forest Service said last week: “No one on the face of this earth has ever fought fires in these extreme conditions.”  Remember the first rule of global warming. The way it unfolds is really “global weirding.” The weather gets weird: the hots get hotter; the wets wetter; and the dries get drier. This is not a hoax. This is high school physics, as Katharine Hayhoe, a climatologist in Texas, explained on Joe Romm’s invaluable blog: “As our atmosphere becomes warmer, it can hold more water vapor. Atmospheric circulation patterns shift, bringing more rain to some places and less to others. For example, when a storm comes, in many cases there is more water available in the atmosphere and rainfall is heavier. When a drought comes, often temperatures are already higher than they would have been 50 years ago, and so the effects of the drought are magnified by higher evaporation rates.”

Senate Republicans block FEMA disaster relief funds - A package of disaster relief funding worth $7 billion was blocked from coming up for a vote by Senate Republicans on Monday, drawing sharp condemnation from Senate Majority Leader Harry Reid (D-NV) who lambasted the conservative party for abandoning Americans in need.  "Last night, Democrats tried to move forward on a measure that would have granted the Federal Emergency Management Agency additional funding to help communities devastated by natural disasters," Sen. Reid said in an advisory.  "This ought to be the least political issue going – whether to reach out a helping hand to our friends and neighbors in their time of need," he continued. "They have lost friends and loved ones. Their homes, businesses and livelihoods have been destroyed by acts of god. Their communities are under water or reduced to rubble. "It’s in our power to help them. But last night Republicans overwhelmingly voted to prevent us from coming to their aid. They prevented us from getting disaster aid to American families and businesses that need it now."

Why Rolling Back Environmental Protection is the Wrong Fix for Jobs - Just when it seemed nothing could do it, persistently high U.S. unemployment has produced bipartisan agreement in Washington—agreement to roll back environmental protection in an attempt to save jobs and create new ones. The White House, shrugging off off environmentalist opposition, has endorsed the Keystone XL pipeline to carry petroleum from Canadian oil sands and has quashed a major EPA initiative that would have strengthened ozone regulations. Republicans have applauded and issued their own list of proposals, including rollbacks of regulations for coal ash, farm dust, greenhouse gasses, and cement plants, among others. None of this is good news, either for the environment or the economy. Rolling back environmental regulations is the wrong way to fix the jobs problem.  Jobs are created when businesses hire workers, combine their labor with capital and natural resources, and use them to produce goods or services. If the products that come out are worth more than the inputs that are used up, the process adds value to the economy. Businesses make profits, workers get jobs, and consumers get goods or services that enhance their standard of living.

Memo to Right-Wing Anti-EPA Job-Killers: Sick and Dead People Aren’t Very Productive - A recent EPA study estimated that just one law — the Clean Air Act — prevented 230,000 deaths, 3.2 million lost school days, and 13 million lost work days a year in 2010. The benefits of this act, including savings in medical expenses and increased worker productivity, are 30 times greater than its cost of implementation, and the benefits of regulation, more generally, also have been shown to exceed costs [PDF]. The right-wing noise machine has mastered the art of repeating a few key nonsensical messages over and over again until some people actually believe them. And so in the Orwellian world of the right-wing, the word “rich” is out and “job creators” is in.  There simply are no more rich people in the Tea Party fantasyland.  Of course, no jobs are being created, and the rich are simply sitting on their billions, accumulating a staggeringly disproportionate amount of the wealth to shame the Gilded Age — the richest “400 people have more wealth than half of the more than 100 million U.S. households,”  So one would have to be a sheep to keep calling them job creators.

The Green Jobs Numbers - Now, more than ever, prospects for “green jobs” are being treated as a red flag in partisan debate. Media Matters, a nonprofit watchdog group, has documented a Fox News report proclaiming that the costs of green jobs exceed the benefits. A recent New York Times article, pointing to lackluster programs in California, concluded that “public efforts to stimulate creation of green jobs have largely failed.” A column by David Brooks in The New York Times was pointedly titled “Where the Jobs Aren’t.” In reaching for bipartisan support in his jobs speech on Thursday, President Obama avoided the word “green” altogether, though his proposed increase in infrastructure spending could involve investments in improved energy efficiency. But green jobs still hold considerable promise. While it’s not hard to find examples of programs that haven’t lived up to expectations, considerable evidence demonstrates the actual and potential employment impact of efforts to improve environmental sustainability.

Not seeing the forest for the trees? - Nancy Folbre promotes the notion of green jobs at Economix and then gets down to business:The biggest gains from investments in new renewable-energy technologies are not easily captured in private transactions, because they produce environmental services that are largely unpriced. But consumers who don’t pay also get the benefits, creating a strong temptation to free ride. Companies can’t market to the consumers likely to benefit most, because they haven’t yet been born. Conventional fossil fuels are cost-effective now only because the environmental costs are dumped into a global commons that imposes costs on other people and future generations.Public policies could remedy this problem, by imposing a tax on carbon emissions so that their market price better approximates their social cost.   The excerpt realizes that the focus should be on enacting environmental policies that provide incentives to clean up air and water. Some people argue that green jobs are a side benefit of environmental policy (i.e., "win-win"). I mostly disagree. In the energy sector, environmental policy should create clean energy jobs and reduce dirty energy jobs. In the consumer product sector, environmental policy should create jobs for people figuring out the best ways to produce goods and services while reducing pollution.

Environmental Regulation and Jobs, Again - Over at Econbrowser, James Hamilton argues that environmental regulation may be a job-killer after all.  There are two themes: the first is that US trade is weighted toward natural resources, and regulation is raising costs and reducing capacity in these tradables, and the second is that, in recessionary times, jobs lost due to regulations are not regained elsewhere.  I think he overstates his points, but he clarifies important issues that tend to get muddied in economic debates. Lets take the second first.  I had argued that regulations tend to lower the measured productivity of workers in regulated industries, leading to some combination of more employment to restore output and expenditure-switching, as consumers shift to different products.  Hamilton’s examples—California agriculture, Texas oil and lignite, Alabama cement kilns—do not dissuade me.  We will continue to eat, power and pave, and if we do a bit less of some of this (especially the powering and paving), we can shift to more benign activities.

Business as Usual Is Destroying America - The national efforts to stem the tide of pollution in the 1960s and 1970s made a difference: Americans had the Environmental Protection Agency (EPA) and cleaner air and water. In 1972, EPA dared to ban DDT, the silver bullet of the farmers against all insects. This decision united farmers, the chemical industry and all polluters to reassert their authority. Business as usual was back on the driver's seat. The Republican administration of Ronald Reagan declared war on nature and started the subversion of EPA to a polluters' protection agency. This was a bipartisan effort to rein in the environmentalists who wanted real protection from the trillions of pounds of hazardous chemicals used or dumped all over the country. Of all the presidents in the last 50 years, George W. Bush was the most formidable enemy of environmental protection. This was a president who invented terrorism as a mantra for perpetual war. With this single-minded commitment to war for theology and petroleum, Bush cared less about environmental protection. Bush only remembered the legacy of Ronald Reagan. He used the Reagan models to cut down on the little the EPA was still doing to keep the air breathable.

MSNBC: World environment programs may lose US aid - Operators fear Congress to target money for foreign aid and international conservation.    What do flood prevention in Nepal, wildlife preservation in Namibia and reef fishing in Indonesia have to do with the U.S. budget?  Global conservation programs like these have all gotten help from the U.S. government, and they are probably prime targets of the budget-cutting congressional "super committee," since they sit at the crossroads of two things Americans don't like spending much money on: foreign aid and the environment. As the 12 members of the Joint Select Committee on Deficit Reduction work to whittle the budget by at least $1.2 trillion over 10 years — if they fail to do so by Nov. 23, automatic spending cuts kick in — they may take aim at funds that pay for international conservation efforts. That's of deep concern to the nongovernmental organizations that run these programs and see them as relative bargains that can prevent vastly more expensive relief operations or security threats caused by thinning natural resources in unstable parts of the world.

Deep-sea fish in deep trouble: Scientists find nearly all deep-sea fisheries unsustainable: — A team of leading marine scientists from around the world is recommending an end to most commercial fishing in the deep sea, Earth's largest ecosystem. Instead, they recommend fishing in more productive waters nearer to consumers. In a comprehensive analysis published online 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. Powerful fishing technologies are overwhelming them.

The Great Oyster Crash and Why Ocean Acidification Is “A Ticking Time Bomb” for Both Marine Life and Humanity - Americans consume approximately 700 million farmed oysters per year.  Despite our love for these briny bivalves, shellfish and the coastal communities that depend on them face serious threats. In a recent piece, Eric Scigliano examines “The Great Oyster Crash” of 2007, in which oyster seed (larvae) off the coast of Oregon and Washington began dying by the millions, seemingly without cause.  After taking aggressive measures to eliminate bacteria in the tanks, and failing to halt their losses, the owners began to suspect the problem was a more fundamental change in the makeup of the oceans.  With the help of local scientists, they found that their losses were directly linked to a far more ominous phenomenon: ocean acidification. As Scigliano explains, “the oceans are the world’s great carbon sink, holding about 50 times as much of the element as the air.”  As carbon emissions from burning fossil fuels and other industrial processes rise, so too does the level of acidity in the oceans.  Once it reaches a certain threshold, ocean acidification becomes lethal to many species, including clams and oysters, which become unable to build the shells or skeletons they need to survive.

Coral reefs ‘will be gone by end of the century’ - Coral reefs are on course to become the first ecosystem that human activity will eliminate entirely from the Earth, a leading United Nations scientist claims. He says this event will occur before the end of the present century, which means that there are children already born who will live to see a world without coral. The claim is made in a book published tomorrow, which says coral reef ecosystems are very likely to disappear this century in what would be “a new first for mankind – the ‘extinction’ of an entire ecosystem”. Its author, Professor Peter Sale, studied the Great Barrier Reef for 20 years at the University of Sydney. He currently leads a team at the United Nations University Institute for Water, Environment and Health. The predicted decline is mainly down to climate change and ocean acidification, though local activities such as overfishing, pollution and coastal development have also harmed the reefs

AFP: Arctic ice cover hits historic low: scientists: The area covered by Arctic sea ice reached its lowest point this week since the start of satellite observations in 1972, German researchers announced on Saturday. "On September 8, the extent of the Arctic sea ice was 4.240 million square kilometres (1.637 million square miles). This is a new historic minimum," said Georg Heygster, head of the Physical Analysis of Remote Sensing Images unit at the University of Bremen's Institute of Environmental Physics. Arctic ice cover plays a critical role in regulating Earth's climate by reflecting sunlight and keeping the polar region cool. Retreating summer sea ice -- 50 percent smaller in area than four decades ago -- is described by scientists as both a measure and a driver of global warming, with negative impacts on a local and planetary scale. It is also further evidence of a strong human imprint on climate patterns in recent decades, the researchers said.

Extent of Arctic summer sea ice at record low level - New data indicates the continuation of a long-term decline in summer ice underway since at least 1979. Researchers say roughly half the decline can be attributed to global warming. On Thursday, the extent of summer sea ice in the Arctic Ocean3 fell to its lowest level for any Sept. 8 since satellites first began to monitor conditions there in 1979, according to researchers at the University of Bremen4's Institute of Environmental Physics5.  Coming so close to the end of the melt season, the observation holds out the prospect that 2011 could replace 2007 as the toughest year for sea-ice survival at the top of the world. The dip comes on the heels of a record low for the month of July, and August levels that flirted with the 2007 record but did not quite cross the line, according to the National Snow and Ice Data Center6 in Boulder, Colo7. The data testify to a long-term decline in summer ice underway since at least 1979. Several factors have contributed to the decline.

‘Artificial volcano’ test to mitigate global warming -  A disused airfield in Norfolk will become the focus of a controversial scientific experiment to see whether it is feasible to engineer the climate by cooling the planet with a simulated volcanic eruption. Scientists and engineers plan to test the "geoengineering" idea at Sculthorpe Airfield near Fakenham next month by launching a helium-filled balloon tethered to a strengthened hosepipe which will spray tap water into the air at a height of 1km. The project is one of the first geoengineering field trials in the world and could result in the deployment of a fleet of up to 20 giant balloons, each the size of Wembley Stadium, injecting millions of tonnes of sulphate particles at a height of 20km into the stratosphere to reflect sunlight back into space. The researchers behind the trial say the project is designed to test the movements of the tethering system in the wind, and will not attempt to reflect sunlight or alter the climate in any way.

Switching from coal to natural gas would do little for global climate, study indicates: — Although the burning of natural gas emits far less carbon dioxide than coal, a new study concludes that a greater reliance on natural gas would fail to significantly slow down climate change. The study by Tom Wigley, who is a senior research associate at the National Center for Atmospheric Research (NCAR), underscores the complex and sometimes conflicting ways in which fossil fuel burning affects Earth's climate. While coal use causes warming through emission of heat-trapping carbon dioxide, it also releases comparatively large amounts of sulfates and other particles that, although detrimental to the environment, cool the planet by blocking incoming sunlight. The situation is further complicated by uncertainty over the amount of methane that leaks from natural gas operations. Methane is an especially potent greenhouse gas. Wigley's computer simulations indicate that a worldwide, partial shift from coal to natural gas would slightly accelerate climate change through at least 2050, even if no methane leaked from natural gas operations, and through as late as 2140 if there were substantial leaks. After that, the greater reliance on natural gas would begin to slow down the increase in global average temperature, but only by a few tenths of a degree

Climate Change: Shift to Natural Gas Set to Fail  - The climate change debate has taken a new turn as a new study found that despite previous claims, greater reliance on natural gas would not help slow down climate change. Although the burning of natural gas emits far less carbon dioxide than coal, it seems that news of its climate change mitigation benefits may have been exaggerated, as study led by Tom Wigley, a senior research associate at the National Center for Atmospheric Research (NCAR), indicates.When used, coal produces emission of heat-trapping carbon dioxide, it also generates comparatively large amounts of sulfates and other particles, which despite being detrimental to the environment also cool the planet by blocking incoming sunlight ,producing an "harm reduction" side effect. However there is also uncertainty over the amount of methane, a powerful greenhouse gas with many times the global warming potential (GWP) of carbon dioxide, leaking from natural gas operations. The burning of natural gas doesn't generate the same level of particulate shielding effect.

EPA Postpones Power Plant Emissions Rules - The Environmental Protection Agency has decided to delay new rules that would limit emissions of climate-warming gases from power plants. It's the second time this month the EPA has either withdrawn or postponed new pollution rules that industry didn't like.

Notorious Grid Bottleneck Spawns Western Blackout - The blackout that squelched power flows to nearly 5 million residents of Arizona, California and northern Mexico last night and shut down California’s San Onofre nuclear power plant may be the latest sign of strain in an outdated U.S. power grid. The incident began during maintenance at a substation in Yuma, Arizona that lies at the center of a sclerotic section of the grid between Phoenix and Tucson—one long recognized as critically congested and thus at heightened risk of failure. Utility officials have not yet identified an explanation for how the substation work took down such a large grid area, since transmission systems are supposed to have sufficient redundancy to survive the loss of any given line or generator. However, such incidents are not without precedent. In 2008 an engineer with Florida Power & Light blacked out 4.5 million customers in south Florida during work on a substation switch in Miami.

Insight: Power reliability will cost Americans more -(Reuters) - Major blackouts like the one that affected 5 million people in the U.S. Southwest and Mexico last week are rare, but occur more often in the United States than in some other developed nations because U.S. electric companies keep excess power capacity, and consumer costs, to a minimum. U.S. utilities could shore up reliability, but experts are divided over whether customers would be willing to spend the billions needed to harden the grid to significantly reduce outage risks. "The fact that the power went out for about 12 hours (in San Diego) does not justify doubling electric rates for the whole rest of the year," said  Although most outages are relatively small, blackouts and brownouts, including those due to hurricanes and other storms, do cost Americans an estimated $150 billion a year in spoiled food, lost productivity and other costs, according to data from the Galvin Electricity Initiative. "The U.S. does not have the excess generation some other nations have. We don't have two of everything and we shouldn't - you would not want to pay for it,"

Feds: Nuke plant among two worst - Federal regulators have downgraded the flood-idled nuclear power plant 20 miles north of Omaha, ranking it as one of the two poorest performing reactors in the United States. The U.S. Nuclear Regulatory Commission, in a letter to the Omaha Public Power District released Tuesday, faulted Fort Calhoun Nuclear Station for the performance of its safety systems — those needed to prevent potential problems from becoming potentially catastrophic. The U.S. has 104 licensed nuclear reactors, and Fort Calhoun is now in a category with one other plant that in laymen's terms could be considered a letter grade of “D.” No plants have an “F,” which requires a plant be shut down. Fort Calhoun already was under heightened supervision as the Fukushima disaster unfolded in Japan because it was one of three reactors at the time being closely monitored by American regulators.

NRC rejects quick restart at Virginia nuclear plant, (Reuters) - Nuclear regulators shot down an ambitious five-week timeline proposed to restart Dominion's (D.N) two North Anna reactors in Virginia during a public meeting on Thursday to discuss the Aug. 23 earthquake that knocked the station offline. The 1,806-megawatt station has remained shut since it automatically tripped last month after the unusually strong 5.8 magnitude earthquake struck roughly 12 miles (19 km) from the plant in Mineral, Virginia. [... D]uring a public meeting on Thursday to discuss the Aug. 23 earthquake [...] Dominion officials said it now appears the reactors shut when the earthquake caused a problem inside the cores at both units rather than from the loss of outside power to the plant as initially reported. “It looks like the rods were going into the core prior to the transformer opening”

How Dead is Yucca Mountain? - The Nuclear Regulatory Commission has voted to kill Yucca Mountain again, sort of. The project has become more complex than nuclear physics. Yucca Mountain, a volcanic structure 100 miles from Las Vegas, was the government’s lead candidate for a nuclear waste repository, but President Obama, making good on a campaign pledge, cut funding for an Energy Department plan to build there, meaning that the country would have to restart the search for a burial spot. The vote on Friday grew out of that policy but did not simplify matters. The complexity starts with a plan that Congress established in the 1980s for creating the waste repository. It was supposed to be built by the Energy Department, but only after the department had obtained a license from the Nuclear Regulatory Commission. When President Obama pulled the plug on Yucca, the Energy Department withdrew its license application for building Yucca, which at the time was being considered by a panel of three administrative law judges of the regulatory commission’s Atomic Safety and Licensing Board.

Radiation expert says outcome of nuke crisis hard to predict, warns of further dangers,  As a radiation metrology and nuclear safety expert at Kyoto University's Research Reactor Institute, Hiroaki Koide has been critical of how the government and Tokyo Electric Power Co. (TEPCO) have handled the nuclear disaster at the Fukushima No. 1 nuclear plant. Below, he shares what he thinks may happen in the coming weeks, months and years. [...] At the No. 1 reactor, there’s a chance that melted fuel has burned through the bottom of the pressure vessel, the containment vessel and the floor of the reactor building, and has sunk into the ground. [...] It’s doubtful that there’s even a need to keep pouring water into the No.1 reactor, where nuclear fuel is suspected to have burned through the pressure vessel. [...] Recovering the melted nuclear fuel is another huge challenge. I can’t even imagine how that could be done. When the Three Mile Island accident took place in 1972, the melted nuclear fuel had stayed within the pressure vessel, making defueling possible. With Fukushima, however, there is a possibility that nuclear fuel has fallen into the ground, in which case it will take 10 or 20 years to recover it. We are now head to head with a situation that mankind has never faced before.

1 Dead, 4 Hurt in Explosion at French Nuclear Site - One person died and another was seriously injured in an explosion today in a site that treats nuclear waste in southern France, the country's nuclear safety body said, adding that no radioactive leaks have been detected. The Nuclear Safety Authority said three other people suffered lesser injuries in the blast at an oven in the Centraco nuclear site. The Centraco site is located next to another nuclear site, Marcoule, located in Languedoc-Roussillon, in southern France, near the Mediterranean Sea. "According to initial information, the explosion happened in an oven used to melt radioactive metallic waste of little and very little radioactivity," the agency said in a statement.

Have frackers pushed their luck too far? - Over the past week, I've heard from serious observers of the U.S. shale gas industry -- from investment analysts, think-tank scholars and others -- that we seem near a tipping point in the heated debate over the companies' drilling methods: If there is another serious accident or two in which shale gas drillers appear to have polluted a water aquifer, look for significant regulatory curtailment of the industry, as one investment analyst put it. If such a backlash occurs, it would be a significant turnaround for an industry that has been widely embraced as a savior, particularly for the possible role it could play in curtailing the emission of heat-trapping gases by allowing for a reduction of coal consumption. In recent years, this new technology has turned the U.S. gas supply from deficit to significant surplus -- accepted forecasts are that the country has a 100-year supply of gas at current consumption levels. Only, fracking has frightened many communities where it is conducted. The main apprehension is that the practice can poison water supplies, such as a Duke University report disclosed last month. 

Pipeline Spills Put Safeguards Under Scrutiny - This summer, an Exxon Mobil pipeline carrying oil1 across Montana burst suddenly, soiling the swollen Yellowstone River with an estimated 42,000 gallons of crude just weeks after a company inspection and federal review had found nothing seriously wrong.  And in the Midwest, a 35-mile stretch of the Kalamazoo River near Marshall, Mich., once teeming with swimmers and boaters, remains closed nearly 14 months after an Enbridge Energy2 pipeline hemorrhaged 843,000 gallons of oil that will cost more than $500 million to clean up.  While investigators have yet to determine the cause of either accident, the spills have drawn attention to oversight of the 167,000-mile system of hazardous liquid pipelines crisscrossing the nation.  The little-known federal agency charged with monitoring the system and enforcing safety measures — the Pipeline and Hazardous Materials Safety Administration3 — is chronically short of inspectors and lacks the resources needed to hire more, leaving too much of the regulatory control in the hands of pipeline operators themselves, according to federal reports, an examination of agency data and interviews with safety experts.

Crews continue Kalamazoo River oil spill cleanup - Crews are continuing cleanup work from last year’s more than 800,000 gallon oil spill that contaminated southern Michigan’s Kalamazoo River. The Battle Creek Enquirer reports that this week crews were seen in heavy concentration on and near Morrow Lake. Enbridge Inc. failed to meet a U.S. Environmental Protection Agency deadline that had been set for Aug. 31 to clean up oil submerged in the Kalamazoo River. Officials have said that the cleanup effort from the July 2010 spill could extend beyond this year. The spill occurred from a portion of an Enbridge pipeline running from Griffith, Ind., to Sarnia, Ontario.

An Oily Tide Washes in With Gulf Storms (pictures) When Tropical Storm Lee pummeled the Gulf coast with wind and rain last week, it left more than local floods and wind damage in its wake. Residents from Florida to Louisiana report the slow-moving gale blew in oily residues, thick tar mats and tar balls, confirming fears that the crude from BP’s historic blowout is far from gone. Charles Taylor of Bay St Louis, MS, said he went out to investigate right after the storm hit to photograph the beach, taking samples of oily crude and tar with a spoon. Taylor said he offered them to the US Coast Guard at a meeting in Biloxi but no one would take them.  Oil also washed up near hard hit Grand Isle on Fourchon beach. According to the Times-Picayune, the storm surge uncovered tar mats just offshore. The land manager of the Wisner Donation Trust, which owns and takes care of the beach area, wondered when BP was going to really clean up the mess.  To see dramatic video of the aftermath of T.S. Lee, check out this site, Black Oil, Red Blood.

Mayor: Tests show link between fresh tar balls on Alabama beaches, BP spill - A coastal mayor says tests show tar balls washed onto Alabama’s beaches by a recent tropical storm are from last year’s BP oil spill in the Gulf of Mexico. Orange Beach Mayor Tony Kennon said Tuesday the connection was found in preliminary tests performed by Auburn University. Kennon says additional tests will be conducted to determine more details. Tropical Storm Lee dumped tar balls on the coast. BP says additional cleanup workers were added at the request of area leaders, and teams also are working longer hours.

OPEC: Global Oil Supply Increased in August - OPEC's graph is above, and shows a continuing increase at a steady pace. We are now pretty much back to the level of January (ie pre-Libya problems). In OPEC country level details: Saudi Arabia sustained and very slightly added to their recent increase, Libya is down to nothing, and nobody else has much in the way in the way of dramatic moves. Kuwait, UAE, and Qatar - Gulf countries that often co-operate closely with Saudi Arabia - have been increasing production gradually but the totals don't add to anything dramatic. I should have graphs tomorrow after the IEA figures are out too. The situation continues to be very hard to read since so much depends on the policy response to events in Europe which is inherently difficult to predict. At the moment Italian bonds seem to be slipping out of control again:

Latest Oil Price Graphs-The chart shows prices for Brent and WTI since the beginning of 2009. Data are from the EIA except for today's which are from news stories. The Brent-WTI spread has really been widening to enormous levels. On the whole, the momentum seems to have been with the oil bears lately. Hard to see how this changes in a big way as long as the economic readings coming out of the US and Europe continue to be so weak. And at least in Europe it seems like it must have to get worse before it can get better.

Global Oil Production up in August - Above is my short term graph showing global liquid fuel production through August.  Both timely sources (OPEC and the IEA) show it pretty much back to the January level. Below shows a long version of the same data along with real WTI spot prices on the right hand scale. As far as commentary goes, I don't have much to add to yesterday's post. If you didn't already see it, you should read the Der Spiegel article on German planning for a Greek exit from the Euro.

OPEC cuts oil production and demand outlook - OPEC cut its forecast Monday for global oil demand and production, citing the slowing economic recovery. In a monthly report, the Organization of Petroleum Exporting Countries said it expected demand growth to drop to 1.1 million barrels per day -- 150,000 barrels per day fewer than its earlier forecasts. OPEC also trimmed back its oil production outlook, saying it still expects output to increase, but by a slightly smaller 500,000 barrels per day in 2011 -- 80,000 barrels below its prior forecast. "The downward adjustment has been due to a weaker-than-expected driving season in the US and the ongoing sluggish economic performance in the OECD," said the report, referring to an organization of 32 member nations that includes the United States., the United Kingdom, Germany and Japan. OPEC said weaker-than-expected demand from China and "ongoing economic uncertainties" were reflective of a global slowdown in industrial activity in most major economies.

World Oil Demand Forecasts Cut by IEA as Global Economic Recovery Falters - The International Energy Agency cut global oil demand forecasts for this year and next as the economic recovery falters.  The Paris-based adviser reduced its estimate for 2012 consumption by 400,000 barrels a day, and for 2011 by 200,000 a day. Worldwide demand will rise by 1.2 percent to 89.3 million barrels a day this year and by 1.6 percent to 90.7 million next year. The full resumption of Libyan exports following the ouster of Muammar Qaddafi will be “long and difficult,” it said.  “Global oil demand continues to expand at only a tepid pace,” the IEA said today in its monthly Oil Market Report. “There are certainly growing concerns about the health of the global economy.”  Brent crude futures have dropped 11 percent from a 2011 peak of $127.02 a barrel reached in April, as Europe’s sovereign debt crisis spreads and global manufacturing slows. Brent fell below $112 today after the release of the report. Worldwide gross domestic product will expand by 4.2 percent next year, less than the 4.4 percent previously expected, the agency said.

Oil defies forecasts of declining demand - A paradox has emerged as oil prices remain high amid declining demand forecasts. Opec and the International Energy Agency cut their forecasts for crude demand again this week, erasing as much as 400,000 barrels per day (bpd) from previous estimates. Yet Brent crude, the European benchmark, seems immune to the predictions, trading comfortably above US$112 yesterday. "Market observers are puzzling over the 'paradox' of weakening economic growth and oil demand indicators on the one hand, and $110/bbl crude on the other," wrote the IEA, an energy watchdog based in Paris, in a report released yesterday. "Prices have stubbornly reclaimed lost ground again within weeks, raising anew questions about the key drivers of prices." The IEA's explanation is that despite the drops in demand, consumption continues to outpace supply. Demand last year was 1.4 million bpd higher than supply, the agency reported, and in the first half of this year it was 500,000 bpd higher. "The focus has now switched more to supply, amid slowing demand growth in [the first half of 2011], with both the Libyan disruption and temporary, but widespread, non-Opec outages leading to a continued market tightening," wrote the IEA.

Cheap Oil, Cheap Money, And Our Culture of Debt and Speculation  - Was the end of abundant cheap domestic oil and the end of the gold-backed dollar not coincidental, but causally related? Oil and finance are inextricably linked, for as long as the US (Fed) prints dollars, and exporters accept them in trade for physical oil, then the US is able to effectively act as if it still has lots of cheap oil, for in a real sense, it does as long as it can trade paper for oil. Interesting, the concept of trading paper for oil. This is something we engineered when Nixon closed the gold window in 1971. Before we'd have had to trade gold for oil, and now? Just paper. A nice trick. But that was simply a coping mechanism that came about because we needed to maintain our supplies of cheap oil and didn't want to give away our gold in return. . Printing money for oil may well be the initial Devil's Pact that started the U.S. down the road to its present addiction to debt, money-printing and "cheap" oil imported from elsewhere and paid for with paper money.

Cassandra's curse: how "The Limits to Growth" was demonized - The Limits to Growth study had everything that was needed to become a major advance in science. It came from a prestigious institution, the MIT; it was sponsored by a group of brilliant and influential intellectuals, the Club of Rome; it used the most modern and advanced computation techniques and, finally, the events that were taking place a few years after publication, the great oil crisis of the 1970s, seemed to confirm the vision of the authors. Yet, the study failed to generate further research and, a couple of decades after the publication, the general opinion about it had completely changed. Far from being considered the scientific revolution of the century, in the 1990s The Limits to Growth had become everyone's laughing stock: little more than the rumination of a group of eccentric (and probably slightly feebleminded) professors who had really thought that the end of the world was near. In short, Chicken Little with a computer.

Introducing 'Decline Watch'  In this regular Passport feature, we will be tracking signs of U.S. economic and political decline -- and the "rise of the rest," especially China.   We don't intend this to be an excercise in schadenfreude -- we're Americans ourselves and don't wish any misfortune on the country -- but there does seem to be an emerging conventional wisdom on American decline in the foreign-policy media that's worth tracking. We'll also hopefully use the column to puncture a few bogus decline trend stories.  Each post, we'll choose a datapoint or article that purports to show a sign of American decline and rate it from 1 to 5.

Limits to Keynesianism - Last week in the FT Martin Wolf sounded a Keynesian battle cry, passionately urging governments to redouble their efforts to use cheap funds to raise future wealth and so improve the fiscal position in the long run: It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs. Mr Wolf is of course incorrect. It is absolutely conceivable that governments will not be able to earn a positive return on borrowing. Indeed, the United States has spent the entire previous decade borrowing money to invest in highway building and war. Mr Wolf also goes on to use the case of Japan, yet another country that spent 20 years investing in negative return public works projects. Or, as others have described it: paving the country over with cement.

Spencer on Petroleum Exports and US trade balances - Some of you may remember that last cycle I sometimes posted charts showing real exports and imports versus trend to show how trade was doing. It is now over two years since imports and exports bottomed so I thought It was time to update those charts for this cycle. But as I started looking at the data I made a very interesting discovery. Real petroleum exports -- both crude and refined product -- are exploding. After being flat for years, petroleum exports have been growing at some 33% to 50% rates since 2006. They have leaped from about $2 B (2005 $) to over $5 B (2005 $). This is a significant development that few people have recognized. To but this in perspective, petroleum exports had been a relative small factor in trade and the economy for years. For example from 1994 to 2005 petroleum exports had fallen from a sum equal to about 10% of petroleum imports to under 5%. But they now amount to almost a third of petroleum imports. Consequently, when you look at US dependence on foreign oil it makes a big difference in the analysis if you just look at the data on gross imports or if you adjust the data to look at net petroleum imports -- imports less exports.  This shows that the US is making much more significant progress in reducing its dependence on foreign oil than is generally recognized.

China's power consumption up 9.1% in August (Xinhua) -- The National Energy Administration (NEA) announced Thursday that the country's electrical power consumption rose 9.1 percent from a year earlier in August. Power use reached 434.3 billion kilowatt-hours (kwh) in August, the NEA said in a statement on its website. The growth rate declined 2.7 percentage points month-on-month, according to the statement. Power consumption is one of the key indicators of China's economic growth. Analysts said the lowered power consumption suggests a slowdown in China's economy. Government data showed earlier this month that the country's industrial value-added output grew 13.5 percent from a year earlier in August, down 0.5 percentage points from that of July. The NEA statement said electricity consumption totaled 3.12 trillion kwh in the first eight months of this year, up 11.9 percent year-on-year. During the period, power consumption by the country's primary industries rose 4.7 percent year-on-year to reach 70.6 billion kwh; power use in secondary industries totaled 2.34 trillion kwh, up 11.8 percent; consumption in tertiary industries climbed 14.6 percent to reach 336.5 billion kwh. Meanwhile, consumption by residents in both urban and rural areas rose 11.4 percent to 373 billion kwh.

China Consolidates Grip on Rare Earths -- In the name of fighting pollution, China has sent the price of compact fluorescent light bulbs soaring in the United States. By closing or nationalizing dozens of the producers of rare earth metals — which are used in energy-efficient bulbs and many other green-energy products — China is temporarily shutting down most of the industry and crimping the global supply of the vital resources.  China produces nearly 95 percent of the world’s rare earth materials, and it is taking the steps to improve pollution controls in a notoriously toxic mining and processing industry. But the moves also have potential international trade implications and have started yet another round of price increases for rare earths, which are vital for green-energy products including giant wind turbines, hybrid gasoline-electric cars and compact fluorescent bulbs.  General Electric, facing complaints in the United States about rising prices for its compact fluorescent bulbs, recently noted in a statement that if the rate of inflation over the last 12 months on the rare earth element europium oxide had been applied to a $2 cup of coffee, that coffee would now cost $24.55.

Darn Them Piggies! Pork Prices & the Inflation Outlook for China - During the past year, views on China’s economy have yo-yoed from concerns about the recovery, to hand-wringing about inflation and overheating, and then back to talk of hard landing. Certainly inflation has been a key feature of the environment this year in China and one should pay close attention to it. Rising inflation is a crucial social concern and takes a heavy toll on household incomes that are already struggling to keep up with economic growth. Overheating? Here at the IMF, the China team’s view—surprising though it may be to some—has been that Chinese inflation should peak in the middle of this year and, by late-2011, move on to a declining trend. No reason, then, to get too excited about inflation. But then we get asked a lot “how does a red hot Chinese economy manage to escape inflation and defy the economic laws of gravity that other economies face?” The first thing to note is that China continues to have chronic excess capacity in a range of highly competitive manufacturing sectors. This leaves companies with little pricing power, diluting the inflationary impetus from strong demand. At the same time, there is still an overall excess supply of labor in China (despite shortages of highly skilled workers) and this helps keep wage growth from getting too far ahead of productivity.  Bottlenecks? Yes. Skills gaps? Certainly. Generalized overheating? No.

Chinese imports at record high as trade surplus narrows - China's imports hit a record monthly high in August, indicating a strong domestic demand despite concerns of a global economic slowdown. Imports surged by 30.2% from a year earlier to $155.6bn (£98bn), government data released over the weekend showed. Exports rose by 24.5% resulting in a trade surplus of $17.8bn, down from $31.5bn in the previous month. The data comes at a time when China has been trying to boost domestic demand in a bid to rebalance its economy. "August's export and import data showed China's economic growth is driven by domestic demand, not external demand and its growth is still very strong," said Li-Gang Liu of ANZ. China's economic expansion in recent years has seen the rise of a more affluent middle class, with higher disposable incomes. That has led to a growth in domestic demand, which has translated into higher import numbers. "Growth of the Chinese middle class is well documented and it is something that will continue to drive growth,"

Consumer Companies Look Beyond China for Sourcing as China’s Low-cost Advantage Diminishes  Southeast Asian sourcing locations like Bangladesh, India, Indonesia and Vietnam maturing as regional integration and preferential trade terms take hold.   With increasing labor costs and an aging workforce, China is losing its foothold as the world’s lowest cost manufacturer of consumer goods. Rising costs are forcing companies to take a closer look at new sourcing locations across Asia, according to a new report from KPMG International.  A number of countries in South and Southeast Asia are set to benefit from this recent shift, the report notes. While hard goods ranging from consumer electronics to furniture are still being sourced from China, apparel and footwear production is widely dispersed and more mobile across the Asia Pacific region (ASPAC). Clusters of specialized production are emerging, such as footwear in Indonesia and Vietnam and hand stitched fabrics and metalware in India. “Sourcing goods in China purely because of ultra-low costs is a thing of the past,”  “With demand still soft in many Western consumer markets, it is also proving difficult for companies to pass on higher costs to consumers. This changing environment is forcing companies to reassess sourcing strategies.”

The End of an Era in China - It looks like most of the $100 bills lying on the sidewalks of China have been picked up already: Consumer Companies Look Beyond China for Sourcing as China’s Low-cost Advantage Diminishes For almost 20 years, manufacturing firms have been able to move production to China, employ low-cost but productive labor there, and earn unusual profits. Those were the proverbial $100 bills lying on the sidewalk, which is simply a poetic (at least to economists, who are not known for their poetry) way of saying that there have been arbitrage opportunities available in China to firms that could move production there. Specifically, the opportunitity for arbitrage was the result of a difference between the cost of labor in China (relatively low) and its productivity (relatively high).  At any rate, as we well know, all arbitrage opportunities are eventually arbitraged away. And that's what's happened in China. The employment of tens (hundreds?) of millions of workers in China's factories over the past two decades has driven up wages -- and, crucially, driven up wages by more than labor productivity has grown. So while it's still possible to find low-cost labor in China, and it's certainly possible to find productive labor there, it's no longer easy to find labor that is low-cost relative to its productivity.

China wants to break the ultimate taboo and buy into Western companies such as Apple, Boeing and Intel - China has punctured the last delusion. There will be no rescue of Italy until Europe agrees to major strategic concessions, and only after EMU's fiscal sinners clean house. Chinese premier Wen Jiabao was soothingly polite in his speech to the World Economic Forum in Dalian, insisting that his country will play its part to "prevent the further spread of the sovereign debt crisis". The language toughened a few notches when asked later how far China's Communist Party is really willing to go. The message was clipped and severe. Beijing will not sign a blank cheque for European states that have failed to carry out deep reform. "Countries must first put their own houses in order," he said. Mr Wen said he had spoken to José Manuel Barroso, the president of the European Commission, laying the conditions for Chinese intervention. "I made clear to him that we are confident Europe will overcome its difficulties and make a full recovery. We have on many occasions expressed our readiness to extend a helping hand, and that we are willing to invest more in European countries." "At the same time, we need bold steps to give redirection to China's strategic objective. We believe they should recognise China's full market economy status,"

China urges U.S. not to resort to protectionism - China's Foreign Ministry urged U.S. lawmakers on Wednesday not to resort to "excuses" for trade protectionism after the U.S. Senate Democratic Leader Harry Reid pushed for legislation aimed at forcing China to loosen controls on its currency. "I want to stress that protecting the stable and healthy development of Sino-U.S. economic and trade relations is in keeping with the interests of both sides," Ministry spokeswoman Jiang Yu told a regular news briefing.Reid's renewed drive for a yuan currency bill reflects the belief of many lawmakers that the United States' huge trade deficit with China, which hit a record $273 billion in 2010, reflects Beijing's currency exchange policies, which keep the yuan from rising in value against the dollar.

Global Trade - The above shows global trade through June 2011.  This is based on the monthly data from the WTO (and see here for more methodological detail). It's pretty normal for trade to be flat in the second quarter after a big rise in the spring, so this data doesn't present any particular cause for concern.  The circles in the graph above show the corresponding time of year in each past year. However, the data only go through June and much of the current cause for concern is the effects of the market turbulence of August and the potential for the sovereign debt situation in Europe to ripen into a full-blown banking crisis.  So we shall have to wait and see what effect on the real economy those may have.

Releasing 70,000 Psychiatric Patients Shows Japan Debt Task (Bloomberg) -- In the hallway of St. Pierre Psychiatric Hospital north of Tokyo, an elderly woman sits on the floor next to a bulging brown duffle bag, her arms wrapped around her knees, mumbling about being taken home. She has packed her things many times since she was admitted for schizophrenia more than 20 years ago, in the belief someone is coming to fetch her, said psychiatrist Manabu Yamazaki, the hospital’s owner. Her hope mirrors that of the government, which wants to empty 70,000 beds to reduce the highest rate of psychiatric hospitalization among developed nations, lowering its 1.8 trillion yen ($23.5 billion) annual mental-health payments. Facing the world’s largest public debt and the fastest aging society, Prime Minister Yoshihiko Noda is trying to curtail growth in the country’s 34.8 trillion yen-a-year health bill. “The only thing the government has in mind is cutting medical costs,” said Yugo Miyata, who runs Yokohama Camellia Hospital on the outskirts of Tokyo. “If hospitals force out 70,000 patients immediately, we must be ready for several thousand of them to be homeless on the street.”

Japan mulls 4th extra budget of 1-2 trillion yen: report (Reuters) - The Japanese government is considering compiling a fourth extra budget for the fiscal year to March of about 1 to 2 trillion yen ($13-26 billion) to fund additional economic steps without issuing new bonds, the Yomiuri newspaper reported on Wednesday. The extra budget, which Prime Minister Yoshihiko Noda's government may start compiling as early as November, could provide funding for economic measures as concerns grow over a global economic slowdown and the euro zone debt crisis, the Yomiuri said without citing sources. The budget, which may also include funding for rebuilding following a recent storm that hit western Japan, will be funded from extra money that was set aside for bond interest payments that turned out to be lower than expected, the Yomiuri said. The government is currently working on a third extra budget, expected to be more than 10 trillion yen in size.  Money from that budget will be used to fund projects to rebuild areas destroyed by a huge earthquake and tsunami in March and also include steps to combat the strong yen, which is clouding the outlook for Japan's export-oriented economy.

Public debt in the Eurozone, Japan, and the US -There is little doubt that public debts have become outsized in many developed countries. Worse, they are expected to keep growing over the next decades as populations age. The financial markets have now set their eyes on this situation, making it difficult or expensive to borrow for a number of Eurozone countries, and the list could grow and expand beyond the Eurozone. Europe’s debt crisis is unfolding while Japanese and US debt problems are on hold. The problem of public debt in advanced economies will be with us for decades. This column introduces a new Geneva Report on the World Economy that addresses the nuts, bolts, and worries surrounding the issue.

There's About To Be A Global Battle For Good Jobs - The coming world war is an all-out global war for good jobs. As of 2008, the war for good jobs has trumped all other leadership activities because it's been the cause and the effect of everything else that countries have experienced. This will become even more real in the future as global competition intensifies. If countries fail at creating jobs, their societies will fall apart. Countries, and more specifically cities, will experience suffering, instability, chaos, and eventually revolution. This is the new world that leaders will confront. If you were to ask me, from all the world polling Gallup has done for more than 75 years, what would fix the world -- what would suddenly create worldwide peace, global wellbeing, and the next extraordinary advancements in human development, I would say the immediate appearance of 1.8 billion jobs -- formal jobs. Nothing would change the current state of humankind more. The leadership problem is that an increasing number of people in the world are miserable, hopeless, suffering, and becoming dangerously unhappy because they don't have an almighty good job -- and in most cases, no hope of getting one.

Quarry Australia has no people - The above quote suggests that Australia's fiscal stimulus, particularly the school halls program, was well targeted to create space for the appropriate housing construction labour puzzle pieces. But for me, the nature of the labour market as an intricate puzzle leads to questions about education and training. How do redundant puzzle pieces reshape to fit the new puzzle spaces? Is on-the-job training going to help people reskill more quickly than the alternative of spending years undertaking costly skills training and education? The appeal from business to increase the skilled migrant intake shows that many industries appear unwilling to train the workforce they require. There appears to be an expectation that appropriately skilled workers can be plucked off the shelf and placed perfectly in their puzzle. Indeed it was not uncommon to hear that a skills shortage would undermine an Australian economic recovery. The great irony here is that in growing areas of the economy, particularly mining and gas, experienced workers can only be found from within the industry. Unless someone is offering the necessary training, businesses in the expanding industry will find themselves outbidding each other for the same pool of workers.

Canada's Household Debt Hits Record High - Canadian appetite for debt showed no sign of lessening with a key indicator hitting a new high, as consumers borrowed to purchase houses and cars at a rate that was more than three times faster than the growth in their disposable incomes. The ratio of credit-market debt to personal disposable income in the household sector grew to 148.7%, Statistics Canada said Tuesday, marking the highest level since the agency began compiling the figures in 1990.

Indian Inflation Quickens to 13-Month High, Adds to Interest-Rate Pressure -- India’s inflation accelerated to the highest level in more than a year, maintaining pressure for further interest-rate increases even as economic growth slows.  The benchmark wholesale-price index rose 9.78 percent in August from a year earlier after a 9.22 percent jump in July, the commerce ministry said in a statement in New Delhi today. The median of 25 estimates in a Bloomberg News survey was for a 9.64 percent gain. The Reserve Bank of India will probably raise rates by a quarter of a percentage point at the Sept. 16 policy meeting, according to 11 of 12 economists in another Bloomberg survey. Governor Duvvuri Subbarao has to weigh the risks to expansion from Europe’s debt crisis and a faltering U.S. recovery against price pressures, which may be stoked by a weaker rupee.

Dark Side of Brazil's Economic Rise - WSJ —Brazil is booming amid a tectonic shift in global investing toward the developing world that has lifted its stock market, strengthened its currency and provided financing for new ports and World Cup soccer stadiums. But while foreign investment is mostly a good thing, there are downsides. The abundance of cash has helped fund riskier bank loans and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world's most overvalued currency, and many local factories aren't competitive in global markets. Daily life has become so expensive that movies, taxis and even a can of Coke cost more in São Paulo than in New York. Rio de Janeiro apartment prices have doubled since 2008, and office space in São Paulo is suddenly more expensive than Manhattan. In many cases, investment banks must pay their Brazilian bankers and analysts more than they would get doing the same job in New York.

Haves and Have Less—Why Inequality Throws Us Off Balance - iMFdirect - We used to think that overall economic growth would pull everyone up. While the rich might be getting richer, everyone would benefit and would see higher living standards. That was the unspoken bargain of the market system. But now research is showing that, in many countries, inequality is on the rise and the gap between the rich and the poor is widening, particularly over the past quarter-century. With taxpayers footing the bill for troubles in the financial industry in advanced economies during the global economic crisis, this discrepancy seems particularly galling to wage-earners who have seen their pay stagnate or worse. Inequality has started to attract more research by economists.The September 2011 issue of Finance & Development (F&D) looks at income inequality around the world and how it matters. According to Branko Milanovic, a lead economist at the World Bank who wrote the cover article, the global economic crisis may have narrowed global inequality somewhat between people around the world because most emerging and developing economies continued to maintain strong growth. Milanovic explains his research in this podcast.

Wen Says World Must Get ‘Houses in Order,’ Not Rely on China -- Chinese Premier Wen Jiabao, facing calls to widen support for indebted European countries, signaled that developed nations should cut deficits and open markets rather than rely on China to bail out the world economy. “Countries must first put their own houses in order,” Wen said today at the World Economic Forum in the Chinese city of Dalian. “Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.” China can best contribute to the global economic recovery by ensuring steady growth at home, Wen said, calling on the European Union and U.S. to allow more Chinese investment in return. Stocks dropped in Asia as the comments damped optimism that China would help stabilize the euro region, after Italy this month followed Spain, Portugal and Greece in seeking investment from the world’s fastest-growing major economy.

World Must Cut Debt Before Relying on China: Wen -Chinese Premier Wen Jiabao, facing calls to widen support for indebted European countries, signaled that developed nations should cut deficits and open markets rather than rely on China to bail out the world economy. “Countries must first put their own houses in order,” Wen said today at the World Economic Forum in the Chinese city of Dalian. “Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.” China can best contribute to the global economic recovery by ensuring steady growth at home, Wen said, calling on the European Union and U.S. to allow more Chinese investment in return. Stocks dropped in Asia as the comments damped optimism that China would help stabilize the euro region, after Italy this month followed Spain, Portugal and Greece in seeking investment from the world’s fastest-growing major economy. “What he is basically saying is China wants to help, they want to invest, but we can’t help you take the proper measures to control the debt crisis, you’ve got to do that on your own,”

China Buys European Bonds to Diversify FX Reserves, Reduce Dollar's Role - Xinhua - China, as the world's biggest foreign buyer of U.S. Treasury bonds, is purchasing European bonds in a bid to diversify its foreign exchange reserves and reduce global dependence on the U.S. dollar, the official Xinhua News Agency said Wednesday. "This will lessen the world's dependence on the U.S. dollar as the sole global reserve currency and begin a shift toward a more multipolar reserve system," the news agency said in a commentary. Chinese officials have said they want a bigger global role for their own currency and a reduced dependence on the dollar.

World economy in danger zone: Zoellick - (Reuters) - World Bank President Robert Zoellick said on Wednesday the world had entered a new economic danger zone and Europe, Japan and the United States all needed to make hard decisions to avoid dragging down the global economy. "Unless Europe, Japan, and the United states can also face up to responsibilities they will drag down not only themselves, but the global economy," Zoellick said in speech at George Washington University. "They have procrastinated for too long on taking the difficult decisions, narrowing what choices are now left to a painful few," he said ahead of meetings of the World Bank and International Monetary Fund next week. His bluntly-worded speech highlighted mounting fears among global policymakers about an escalating sovereign debt crisis in Europe, which has for now overshadowed investor concerns about public finances and reforms in the United States and Japan. Just as those very countries had called on China to be a responsible global stakeholder as a rising economic power, so too must they act responsibly and face up to their economic problems, Zoellick added. Chinese Premier Wen Jiabao weighed in earlier and called on developed countries to take responsibility for fiscal and monetary policies to avoid the European crisis from spreading. 

G7 agree to act together on economy but offer no action - Group of Seven finance ministers agreed on Friday to respond in concert to a slowdown in the global economy but produced no concrete action to calm markets spooked by signs of faltering growth and Europe's debt crisis. "We met at a time of new challenges to ... growth, fiscal deficits and sovereign debt ... There are now clear signs of a slowdown in global growth. We are committed to a strong and coordinated response to these challenges," a communique said after hours of talks between G7 finance ministers and central bankers. "We reaffirmed our shared interest in a strong and stable international financial system and our support for market determined exchange rates," it said. "We will consult closely in regard to actions in exchange markets and would cooperate as appropriate." A German government source said talks dragged on late into the evening because France wanted a joint communiqué but others in the meeting felt there was not enough common ground to merit one. 

IMF's Lagarde: report of $273.2 billion bank hole misleading (Reuters) - IMF chief Christine Lagarde said on Saturday that reports of a draft IMF document showing a $273.2 billlion shortfall in European banks' capital were misleading and the lender was still finalizing its study. "There has been misreporting about the 200 billion euros, this number is tentative," Lagarde told a news conference after G7 and G8 finance talks in the southern French city of Marseille. "This is not a stress test that the IMF conducts nor is it the global capital need for European banking institutions, that it is not, and we are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September."

I.M.F. Chief’s Change of Tune on Bank Capital - Over the weekend, Christine Lagarde, the managing director of the International Monetary Fund, was desperately trying to back-pedal. A report had surfaced citing an internal I.M.F. document estimating that Europe’s banks were woefully short of capital — by a whopping $273.2 billion. “Misreporting,” Ms. Lagarde insisted, before awkwardly describing the number as “tentative.” Then she went even further, saying that the number “is not a stress test that the I.M.F. conducts nor is it the global capital need for European banking institutions.” She added, “We are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September.” While Ms. Lagarde acted as if she was surprised by the number — and tried to play it down — she shouldn’t be. And in truth, she wasn’t.  Ms. Lagarde sounded alarm bells last month about what she called the need for an “urgent recapitalization” of European banks, and was roundly criticized for it. Her refreshingly honest remarks had been so honest — apparently, too honest — that some bankers blamed her for further undermining confidence in European banks.

An Impeccable Disaster, by Paul Krugman- On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. — Europe’s equivalent to Ben Bernanke — lost his sang-froid. In response to a question about whether the E.C.B. is becoming a “bad bank” thanks to its purchases of troubled nations’ debt, Mr. Trichet, his voice rising, insisted that his institution has performed "impeccably, impeccably!" as a guardian of price stability. Indeed it has. And that’s why the euro is now at risk of collapse.  Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.  And all indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively.   Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.  Yet this story applies, if at all, to Greece and nobody else.

Jurgen Stark = Credit Anstalt 2.0 (and Euromarkets Reacting Accordingly) - Yves Smith - It is remotely possible that the EU officialdom will temporarily reverse the train wreck that started last Friday with the resignation of Jurgen Stark from the ECB. That was seen as a sign that Germany has adopted bailout fatigue as official policy. That in turn would mean that Greece will not get any more money lifelines (which as commentators predicted some time ago, means a likely banking crisis, which was the reason for them not to exit the Eurozone). Mr. Market is giving a big vote of no confidence in European leadership, although the FTSE has reversed some of its early-session losses. But the other big development of last week, the ruling of the German constitutional court on the European Financial Stability Fund, was a major, and likely fatal, blow to the Eurozone. As our Ed Harrison and more recently Wolfgang Munchau of the Financial Times explain, the ruling makes it well nigh impossible for the Eurozone to implement measures that would create a fiscal authority (such as eurobonds) or even allow for an permanent backstop device (the European Stability Mechanism, due to go live in 2013. Note that the ruling did not address the ESM specifically, but the logic of the ruling appears to make a challenge to the ESM a slam dunk). The other way out is for the ECB to step into the breach and “print”, but the Germans have been firmly opposed to that, and Stark’s abrupt exit firmly underscored that point.

Europe May Need to Bail Out, Nationalize Some Banks, Westpac’s Jones Says - European officials may have to bail out and nationalize some private banks to avoid another global recession, said Russell Jones, global head of fixed-income strategy at Australia’s second-biggest lender. “The last thing really the global economy needs now is a major banking crisis in the euro zone,” . “The governments are going to have to put their hands in their pockets.” Group of Seven finance chiefs and central bankers vowed in recent days to support banks and buoy slowing economic growth. “We will take all necessary actions to ensure the resilience of banking systems and financial markets,” they said in a statement released during weekend talks in Marseille, France. A European banking collapse is “the sort of shock to the system when things are very fragile, as they are at the moment, that could really push us back into the sort of downturn we experienced in 2008 and 2009,” Jones said, according to a transcript of the interview. Nationalization is possible, “at least temporarily so,” he said

Greece on verge of default as doubt grows over €8bn bailout - Greece's embattled prime minister, George Papandreou, has moved to counter growing fears that Athens is about to default on its debts, saying there was a clear route back to economic health. Speaking amid high security as protesters converged on the northern city of Thessaloniki for its annual international trade fair on Saturday, the socialist leader said: "There are two paths. One is the path of major change that will lead to a productive and creative Greece. "The other path, the supposedly easier one, does not look problems straight in the eye and leads to disaster. We insist on the path of change." Despite strong denials that the country is heading for a default, rumours have grown that the end game is approaching. Wolfgang Schäuble, the German finance minister, has insisted that a sixth, €8bn (£6.8bn) instalment of aid will not be released unless Greece enacts corrective measures to kickstart its economy and improve competitiveness. Experts from Washington and Brussels will fly into Athens this week to assess whether Greece is sticking to its programme of drastic spending cuts and tax rises, amid fears that its creditors could be ready to pull the plug.

Papandreou Pledges to Avoid Default as Bailout Fatigue Builds - Greece's embattled prime minister, George Papandreou, has moved to counter growing fears that Athens is about to default on its debts, saying there was a clear route back to economic health. Speaking amid high security as protesters converged on the northern city of Thessaloniki for its annual international trade fair on Saturday, the socialist leader said: "There are two paths. One is the path of major change that will lead to a productive and creative Greece. "The other path, the supposedly easier one, does not look problems straight in the eye and leads to disaster. We insist on the path of change." Despite strong denials that the country is heading for a default, rumours have grown that the end game is approaching. Wolfgang Schäuble, the German finance minister, has insisted that a sixth, €8bn (£6.8bn) instalment of aid will not be released unless Greece enacts corrective measures to kickstart its economy and improve competitiveness. Experts from Washington and Brussels will fly into Athens this week to assess whether Greece is sticking to its programme of drastic spending cuts and tax rises, amid fears that its creditors could be ready to pull the plug.

Papandreou says to save Greece, stay in euro - Prime Minister George Papandreou said he’ll fight to keep Greece in the euro and avoid a default, as resistance builds to providing more aid to the European Union’s most-indebted nation. The government’s top priority is “to save the country from bankruptcy,” Papandreou said in a speech in the northern Greek city of Thessaloniki today. “We have taken the decision to fight to avoid a catastrophe for our country and its citizens: bankruptcy. We will remain in the euro. And this meant and means difficult decisions.” Greek bond yields this week surged to records amid threats by European officials to withhold the loans the country needs to pay wages, pensions and bond redemptions. Police battled protesters with tear gas in Thessaloniki today as demonstrators marched against austerity measures that have cut incomes and driven unemployment to a record. Police in Athens used tear gas to disperse protesters near the Parliament building.

Greek police, firefighters protest - More than 1,000 police officers and firefighters staged an anti-austerity rally in Greece’s second-largest city yesterday, before major union rallies planned over the weekend against cost-cutting policies that have pushed unemployment to record levels. The demonstrators, angry at pay cuts, attended the rally in uniform in Thessaloniki, chanting “Don’t push us into poverty.’’ “The government has surrendered all sectors of public life to the country’s creditors,’’ Christos Fotopoulos, head of Greece’s National Police officers’ Association, said. “Everything is being demolished by austerity… . All our hopes of recovery have evaporated.’’ The protest was staged before the officers help provide security at major union rallies planned for today, when Prime Minister George Papandreou will deliver an annual keynote speech on the state of the economy.

Merkel urges Germans to be patient with Greece - German Chancellor Angela Merkel called on her compatriots to be patient with Greece in its current struggle to overcome a severe debt crisis. "What hasn't been done in years cannot be done overnight," Merkel told the Sunday edition of Berlin's Tagesspiegel newspaper, pointing to Germany's bid to spruce up infrastructure in former communist East Germany after unification in 1990. "Remember the reunification process," said Merkel who grew up in East Germany. "How much time it took in the early 1990s to rebuild new administrative infrastructures, share know-how and privatise." "We must be patient," she said. Merkel also called on the Greek government of Prime Minister George Papandreou not to waver in his reform drive. "Greece knows that credit is only available if it meets its obligations," she said. German Finance Minister Wolfgang Schaeuble however doubts that Greece can avoid bankruptcy and is preparing for a scenario where the debt-stricken nation becomes insolvent, the Spiegel magazine reported on its website Saturday.

Jürgen Stark's Resignation Is Setback for Merkel - Spiegel - The chief economist of the European Central Bank, Jürgen Stark, resigned on Friday, apparently over his opposition to the ECB's bond-buying program. The loss is embarrassing for Chancellor Angela Merkel, coming just months after the resignation of Axel Weber as Bundesbank president. In its official announcement, the ECB cited "personal reasons" for the step. For a top central banker, however, personal reasons are always professional reasons as well. It was known that Stark had long questioned the policy of the ECB and its president, Jean-Claude Trichet, involving the purchase of large quantities of the government bonds of ailing euro-zone countries.  According to a friend, Stark made his decision to resign in early August, when the majority of the ECB governing council voted for the purchase of Italian and Spanish government bonds. Trichet and his staff were dismayed when Stark announced internally that he intended to resign. They urged him to at least stay on until the ECB council meeting last Thursday. But then Trichet used the press conference following the meeting for a theatrical tirade against the inflexible Germans.

Greek recession worse than expected, finance minister says - Greek Finance Minister Evangelos Venizelos on Saturday dismissed rumours of a Greek default, but admitted that the economy was now set to shrink by more than 5 per cent this year, far more than previously estimated. "The rumours circulating that Greece will default on its debt over the weekend are speculation," Venizelos said in speech in the northern port city of Thessaloniki. At the same time, he conceded that "the recession is exceeding all projections, even the forecasts made by the European Union, the European Central Bank and the International Monetary Fund (IMF)." "The projections in May was that the recession would be at 3.8 per cent and now we are exceeding 5 per cent," he said. Venizelos said the deepening of the recession was due to a huge decline in consumer spending, as well as reduced investment and exports.

"Europe is Again on the Precipice" - On Europe and the Euro: 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. ... Eichengreen: Europe is again on the precipice. ... The euro’s survival and, indeed, that of the European Union hang in the balance. ... European leaders’ continued focus on the long run at the expense of short-term imperatives may indeed be the death knell for their single currency.

Papandreou Pledges to Avoid Default - Prime Minister George Papandreou said he’ll fight to avoid a default and keep Greece in the euro, as resistance builds to extending more aid to the European Union’s most-indebted nation. The government’s top priority is “to save the country from bankruptcy,” Papandreou said in a speech in the northern Greek city of Thessaloniki last night. “We have taken the decision to fight to avoid a catastrophe for our country and its citizens: bankruptcy. We will remain in the euro. And this meant and means difficult decisions.” The speech was greeted with protests and police battled demonstrators with tear gas in Thessaloniki as Greeks marched against the austerity measures that have cut incomes and driven unemployment to a record. Police in Athens also used tear gas to disperse protesters near the Parliament building. A total of 4,500 police officers were deployed in Thessaloniki as 15,000 people protested, including students marching against education reforms and taxi drivers opposed to new licensing rules. Police detained 94 and arrested two. Guests ran the gauntlet of protesters to reach the venue and were pelted with eggs.

Greece vows to avoid default at all cost - George Papandreou has vowed to fully implement reforms demanded by international lenders so that Greece will be able to avoid default and remain a member of the eurozone. The Greek prime minister told officials from his socialist party and business people: ”We’re travelling on an uphill road during an international storm … but our first priority is to save the country from bankruptcy.” Thousands of protesters shouting anti-austerity slogans gathered outside a conference centre in the northern city of Thessaloniki where the premier was making his annual economic policy speech on Saturday Riot police fired tear gas to disperse protesters as a dozen separate groups, including public sector trade unions, university students and supporters of a local football club, staged marches around the city centre. Mr Papandreou said he was committed to carrying out this week’s cabinet decisions: immediate cuts in civil service salaries and the planned dismissal of 20,000 public sector in the next few weeks – a condition for Greece to receive the next €8bn tranche of its current bail-out loan.

Greek Leader Vows To Press Changes - Prime Minister George Papandreou vowed Saturday that the country would meet its budget targets and press ahead with difficult reforms, even as thousands demonstrated against those reforms on the streets of Greece's second largest city.  His remarks came as Greece's embattled government is scrambling to cut public spending and step up its reform drive after receiving stark ultimatums from other euro-zone governments that further rescue money will be withheld if Athens doesn't deliver on promises.  "Even if the recession this year is appreciably bigger than the original forecasts…Greece will meet its fiscal targets doing all it has to do," Mr. Papandreou said

Can Government Lies Calm the Markets? - In spite of the fact most of us realize lies will not help, and most often makes matters worse, governments repeatedly resort to lies, platitudes, and wishful thinking.Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister admitted as such in his statement "When it becomes serious, you have to lie" Things are clearly serious, so everyone should expect lies, and lies we have in spades. MarketWatch reports G-7 seeks to calm market fears on Europe, banks: The finance ministers and central bankers of the Group of Seven richest industrial countries sought late Friday to calm market fears about Europe’s debt crisis. The group trumpeted the EU’s July 21 agreement to ease financial tensions, saying it would make the European Financial Stability Fund more flexible. At the same time, the euro-zone countries reaffirmed their “inflexible determination” to honor their sovereign debts and their commitments to sustainable fiscal policies and structural reforms.

Germany May be Ready to Surrender in Fight to Save Greece - Germany may be getting ready to give up on Greece. After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, Chancellor Angela Merkel is laying the ground for what markets say is almost a sure thing: a Greek default. “It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.” Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets and investors raising bets on a default. Ring-fencing their banks and a hardening of rescue terms risk isolating Germany and unnerving global policy makers already fretting that the region’s political tussles are roiling markets and threatening growth.

Germany pushes Greece to the brink in dangerous brinkmanship - Telegraph: Germany and Holland have threatened to block rescue payments to Greece unless the country complies to the letter with bail-out terms, raising the spectre of default and a chain-reaction through southern Europe. German finance minister Wolfgang Schauble said there will be no more money until Greece "actually does" what it agreed to do. "I understand that there is resistance among the Greek population to austerity measures. But in the end it is up to Greece whether it can fulfil the conditions necessary for membership of the common currency. We offer no discounts," he told Deutschlandfunk. The wording has been taken as a threat to eject Greece from EMU, though is there no legal mechanism for such drastic action. Dutch finance minister Jan Kees de Jager said the Netherlands "will not participate" in further payments to Greece unless it secures the go-ahead from the EU-IMF Troika, which left Athens abruptly last week after talks broke down. The showdown in Greece came as the European Central Bank (ECB) abandoned its push for higher interest rates and slashed growth forecasts for the next two years, warning that the situtation is "extraordinarily demanding" and that "downside risks" have intensified. 

"Orderly Insolvency for Greece Cannot be Ruled Out" says German Economy Minister; Mish says "Neither Can a Disorderly One"; Schaeuble Lie Confirmed - Mainstream media is chock full of humorous reporting today, including this Bloomberg headline Greek ‘Orderly’ Default Can’t Be Ruled Out, Roesler Tells Welt An “orderly insolvency” for Greece must not be ruled out for the sake of stabilizing the euro, Die Welt reported, citing German Economy Minister Philipp Roesler. "To stabilize the euro there must be no taboos,” the newspaper quoted Roesler as saying in an article to be published in tomorrow’s edition. “If need be, that also includes an orderly insolvency of Greece, provided the instruments needed for that are available.”  Put the "orderly default" theory right up there with the humorous idea "Greece Bond Swap Progressing Well" If there is a default, what possible reason is there for it to be orderly?

Failure to tackle lessons from 2008 - The waiting is over. On Monday morning, before the markets opened, 358 pages of finest commission-speak dropped into the in-boxes of Britain’s big banks, putting them out of (some of) their misery of the past 15 months.As you might imagine with such a meaty tome, the final report of the Independent Commission on Banking has plenty to get your teeth into. Aside from some fairly mild recommendations on how the banking market should be made more competitive, Sir John Vickers, the commission’s chairman, focuses his main conclusions on financial stability, advocating a package of measures that “makes banks better able to absorb losses; makes it easier and less costly to sort out banks that still get into trouble; and so curbs incentives for excessive risk-taking”. If those are the aims, the centrepiece proposal on how to get there is the well-trailed concept of the “ringfence”. It is a neat idea. Build a firewall around the banks’ crucial operations – consumer deposits, small business lending, payment mechanisms and the like – and you make extra sure they do not get dragged down by dodgy risk-taking. But it still looks like a blinkered view.

The euro crisis comes to a head -- Spiegel has an excellent, long, and detailed article about the tension at the heart of the euro crisis — the one between Greece and Germany. Europe has thrown $150 billion at Greece to date and has nothing to show for it except for a temporarily averted sovereign default. If that kind of money continues to rain down on Greece, the outcome will be similar — immediate crisis averted, but no real change in terms of the Greek sovereign finances. Austerity, it turns out, is working exactly the way it always does: it’s slowing down the country and making any recovery pretty much impossible. Up until now, the EU’s attitude to Greece was a bit like Tim Geithner’s attitude to the debt ceiling: Greece will implement the reforms it has promised, it will recover economically, we will give them the liquidity they need from the EFSF, there is no alternative. But now, starkly, two alternatives have emerged blinking into the harsh light of the market. Either Greece defaults and remains in the euro; or it defaults and leaves the euro. This is not an orderly London Club bail-in default with a modest 21% haircut and an exit yield of 9%: rather, it’s a proper we-can’t-pay-our-debts default with significant losses for all banks holding Greek debt — including the ECB.

Greece's Jan-Aug deficit widens 22 pct (Reuters) - Greece's central government deficit widened 22 percent year-on-year in the first eight months of 2011 but came in below a revised interim target, the finance ministry said on Monday. Greece is scrambling to meet fiscal targets set by its international lenders under a bailout plan to continue to receive funding and avoid default. On Sunday it announced a plan to slap a new levy on property to shore up revenues. Finance ministry data showed that the January-August budget gap grew to 18.101 billion euros ($24.82 billion) from 14.813 billion in the same period last year. But the budget gap was narrower than a revised, indicative target of 18.974 billion euros for the first eight months of the year, the ministry said. The data refer to the state budget deficit, which excludes local authorities and social security spending. They also do not coincide with the general government shortfall, the benchmark for the EU's assessment of Greece's economic policy programme.

Debt-laden Greece will run out of money next month - Debt-laden Greece has enough money to pay wages and pension until next month, the country’s Finance Minister said today. The comments of Filippos Sachinidis highlight the desperation for the country to qualify for the next round of the EU/IMF bailout. "We have definitely maneuvering space within October," Mr Sachinidis said in an interview on Greek TV. "We are trying to make sure the state can continue to operate without problems," he added. Greece's international lenders have threatened to hold off on the next bailout payment of about €8bn as the country fails to meet fiscal targets.

Greek money running out amid opposition to tax hike  (Reuters) - Greek workers threatened on Monday to sabotage a new property tax decided by the government as a last-ditch effort to please international lenders, ignoring warnings that Athens will run out of cash next month. The move casts doubt on the government's goal to plug a 2 billion euro hole in its 2011 budget and meet the deficit goals its EU/IMF lenders have set to continue bankrolling the cash-strapped country. Euro zone policymakers threatened last week to withhold the sixth bailout tranche, of about 8 billion euros ($11 billion), because of the country's repeated fiscal slippages. European Council Presiden Herman Van Rompuy welcomed the fiscal measures Athens announced over the weekend and said representatives of the European Commission, the International Monetary Fund and the European Central Bank, the so-called troika, would return to resume talks on Monday. Greece needs to get its next 8.0 billion euro loan tranche under the first bailout package to avert default down the line as it will be running on empty after some time in October.

Troika Expected To Approve Greek Loan Tranche This Month - Greece's creditors are expected to give the thumbs-up for the disbursement of the next tranche of its 2010 bailout pact later this month after the Greek government announced new taxes to cover a EUR2 billion revenue shortfall, said two senior International Monetary Fund officials familiar with the matter. The IMF officials, who have direct knowledge of the talks, warned, however, that this was Greece's last chance and that the scheduled December installment would be more difficult to arrange unless budget targets are met. The Greek government and its so-called troika of creditors--the IMF, European Union and European Central Bank--are scheduled to meet again this week to discuss the payout of the next EUR8 billion tranche amid worries in financial markets that Greek austerity steps so far haven't met the troika's conditions. The two IMF officials dismissed speculation of an impending Greek default or exit from the euro-zone. But they said Greece nonetheless remains the biggest problem for the common currency and that it is imperative that Athens follows up on its promises to cut down the public sector and tackle tax evasion

Understanding Trichet and Conpany: A Note - What are Jean-Claude Trichet and company really thinking right now? The most likely scenario is this: they bet on mean-reversion in unemployment, on the magic full-employment equilibrium-restoring properties of the market, on their role as prudent stewards of financial rectitude, and on a take-no-prisoners commitment to price stability in all circumstances as the driving force behind the great moderation. They were wrong.  They now have a choice.  They can admit that they were wrong. Then they will probably have to resign, and then be snubbed worldwide. Nobody likes a loser.  Alternatively, they can double down. Their reputations right now are underwater. What do they have to lose reputationwise by saying more absurd nonsense? And there is a chance that tomorrow the confidence fairy will appear, wave her magic wand, and the V-shaped recovery will start.

Europe, through the looking glass - MANY people have been linking to this Spiegel piece, on how the Germans are preparing for the possibility of a Greek default. It's a remarkable read. Consider: The rest of Europe is losing patience with Athens. And after 18 months of crisis in the country, there is still no improvement in sight. Key economic figures are worsening, and there are growing doubts over whether the Greek government truly understands how serious the situation is. If this is the way most Germans view the situation in Greece, Europe really is doomed. Greece has not shied away from austerity. There is perhaps more to be cut, but the Greek government already faces regular civil discontent over the wrenching budget moves it's adopted over the past year. Meanwhile, the Greek economy shrank 7.3% in the year to the second quarter. Its banks are being bled dry in a slow-motion run on the country's financial system. Trust me, if there's anyone in Europe who understands how serious the situation is, it's the Greeks. The Germans, on the other hand, seem to be in complete denial. German leaders are pushing for more, rather than less, austerity, despite the damage severe cuts are inflicting on the economy.  The Germans are keen on nagging southern Europe to boost its competitiveness, but they don't seem anxious to give up their persistent trade surplus.

Insurance Against Sovereign, Bank Defaults Rises to Record Highs in Europe - The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 17 basis points to 353 at 5:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 14 basis points to 314 and the subordinated index jumped 15 to 550, according to JPMorgan Chase & Co. Chancellor Angela Merkel’s government is debating how to support German banks should Greece fail to meet budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all-time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week. “The situation in Greece is just the initial problem,” . “Our economists expect a hard default is likely by year-end. We are focused on the consequences of that for European banks.”

The Truth? Europe Can't Handle The Truth! - Krugman - I’m a big fan of the FT’s Alphaville blog — although I have to say that their explanation of my views on gold left me feeling a bit confused. But anyway, they have a wonderful take on Jean-Claude Trichet as Jack Nicholson: Trichet: Son, we live in a world that has prices, and those prices have to be guarded by men with bonds. Who’s gonna do it? You? You, Sylvia Wadhwa? I have a greater responsibility than you could possibly fathom. You weep for Lehman Brothers, and you curse Ben Bernanke. You have that luxury. You have the luxury of not knowing what I know. Go read the whole thing.

The solvency solution for Europe: time to do the unthinkable… It is finally game on in Europe. The starter’s pistol fired long ago, yet only now does it seem that the EU and ECB are getting out of the gate. There is no more time to dwell on misdiagnoses, missed opportunities and policy slippage. Extend and pretend is no longer an option. I am not by nature an alarmist. But the cancer is metastasizing at an ever-accelerating rate. Italy, Spain and even France are now genuinely at risk. Failure to stem the tide now could well undermine faith in the modern global capitalist system — a system already stretched by political polarization and income inequality — with potentially massive social implications. In short: It’s go time. Concretely, Europe has to leapfrog the phase of thinking the unthinkable and start doing the unthinkable. It begins with those on the inside admitting that the EU, as currently conceived, failed. It is not a liquidity crisis. It is not a leadership crisis (this is the smarter-than-thou throw-away line of those with a superficial understanding). It is a failure of design.

The European debt crisis in charts - Rebecca Wilder - I present some basic statistics to highlight the problem in Europe. In short, there exists a deleterious positive feedback loop between overly leveraged banks and their sovereigns in key markets.

Exhibit 1: European Banks are overly levered. Spanning 2006 through the latest data point, key European banking systems - France, Germany, and Italy - increased leverage. The chart above illustrates the ratio of bank assets to capital (see the IMF's Financial Soundness Indicators for the data and description of 'capital').
Exhibit 2. While leverage is too high, asset quality is dropping. The banks are increasing exposure to government loans and securities relative to traditional loans.The chart illustrates the nominal stock of loans held on the bank balance sheets of the Monetary Financial Institutions in Europe. The data are from the ECB. Loans to governments and holdings of government securities are increasing more swiftly than traditional lending.
Exhibit 3. The asset quality of that rising stock of loans to the government sector is deteriorating...quickly. Italian and Spanish 10yr bonds are 1.5% and 1.2% higher, respectively, since the beginning of 2010, while German 10-yr yields are 1.5% lower.

Greek Finance Minister Announces Fresh Property Tax as PM Uses Annual Speech as Rallying Call - Finance Minister Evangelos Venizelos heralded fresh austerity measures over the weekend, chiefly a new property tax, a day after Prime Minister George Papandreou insisted that his government would do everything necessary to plug a gaping budget deficit and secure the next installment of emergency funding on which the country’s solvency depends. Noting that the next two months would be “hellish,” Venizelos told a press conference earlier Sunday that the government had no option but to do “everything necessary” to cover a budget shortfall, estimated at 2 billion euros, following a deeper-than-expected recession. The new charge, the latest in a series of tax increases, will range from 50 cents to 10 euros per square meter according to the value of the property and will apply for two years, Venizelos said, noting that the tax would be added to electricity bills to thwart would-be tax evaders. There will be concessions for the disabled, the unemployed and large families.

Greek 1-Year Debt Yield Hits 108%, Still No Comment From Trichet; U.S. and Germany 10-Year Yields at New Record Lows - I have been expecting Greek yields to surpass 100% and here we are, and still with no comment from ECB president Jean-Claude Trichet. Meanwhile U.S. the 10-Year treasury yield hit a new all-time low of 1.89% and the German 10-Year bond yield hit a new all-time low of 1.72% Yield on the 10-year Italian bond rose .06 to 5.47%. So, what's Trichet going to do for his going away party?

Greece unveils more austerity measures - Under intense pressure from international lenders, Greece on Sunday announced a new set of austerity measures to meet deficit reduction targets and stamp out speculation that it would be forced out of the European single-currency zone. The measures, which include a two-year property tax, are intended to make up for revenue shortfalls that come to about $3 billion this year alone. Though designed to target mainly high earners, the new tariff could further anger the crisis-weary middle class and pose political risks for the socialist government, which repeatedly has pledged to protect Greek households from being hurt by further austerity measures. "We know that these measures are unbearable," Finance Minister Evangelos Venizelos said after a heated six-hour Cabinet meeting in the northern city of Thessaloniki. "But once more, we all have to rally together in a national effort." That could prove tricky. Over the weekend, thousands poured onto the streets of Thessaloniki, the country's second-largest city, to protest austerity policies.

Greece's new generation of homeless - After 18 years cooking moussaka and roast lamb in restaurants around Greece, Petros Papadopoulos prepares lunch for 50 in a place he never expected to end up - as a resident of a homeless shelter in Athens. In 2010, he lost his job to Greece's worst recession in decades and joined the ranks of tens of thousands of unemployed. When he could no longer afford his mortgage, he lost his home and was forced to roam the streets. "I felt like I was living in a movie. My life changed 180 degrees. I was lost," Papadopoulos said, wringing his hands as he recalls how he struggled to find a sleeping place in an abandoned building. "The street is unbearable." Officials say the number of homeless in Greece has increased about 20 to 25 per cent in two years, a staggering rise in a country where adult children often live with their parents and pensions traditionally go to supporting young families. It's a statistic that resonates across many European countries laid low by the one-two punch of recession and austerity, as rising unemployment, shortages of affordable housing and social benefit cuts push more people over the edge and affect people who thought they were immune.

IMF Says No Loan For Belarus, Urges More Reforms - The International Monetary Fund urged Belarus to tighten its monetary policy and initiate structural reforms but didn't extend a loan to the cash-strapped country, the IMF said Tuesday in a statement. Belarus turned to the fund for a loan of up to $8 billion in June to steady its economy. The funding came after pre-election spending by President Alexander Lukashenko depleted reserves and left the country with a gaping trade deficit, forcing it to devalue its ruble by 36% in May. The IMF's refusal may drive the authoritarian Lukashenko to make concessions to Russia, which has been eyeing key Belarussian assets such as potash miner Belaruskali, which if merged with Russia's Uralkali would create the biggest maker of the fertilizer in the world.

The Spanish Prisoner - Krugman - One of the good ideas in Paul De Grauwe’s now-essential paper (pdf) was to do a head-to-head comparison of Spain and the UK to illustrate the problems the euro faces. Here’s an update. First, using the most recent IMF data and projections, here’s the fiscal outlook for Spain and the UK: Spain started off with low debt, and despite the severity of its slump is expected to have if anything less increase in debt than the UK. Yet markets are acting as if Spain is highly risky, while treating UK bonds as a safe haven like US or German bonds: To some extent this may reflect the reality that British growth prospects are better because of the depreciated pound, and also the fact that Britain won’t have to deflate the way Spain will thanks to being on the euro. But I believe that De Grauwe is right that the most important factor is that Britain, which can turn to the Bank of England for financing if necessary, doesn’t face the risk of a run by creditors the way Spain does.

Fitch downgrades Spanish regions on fiscal issues - Fitch Ratings Wednesday downgraded five Spanish regions, as worries mount that local governments could derail Spain's efforts to slash one of the euro zone's largest budget deficits. In a short statement, the credit ratings company said it had lowered Andalusia and the Canary Islands to A+ from AA-, Catalonia to A- from A, Murcia to A from AA- and Valencia to A- from A. It has negative outlooks on all five. Fitch cited "sharp fiscal deterioration" as the reason for the downgrades, noting that the Spanish finance ministry recently said first-half revenue for Spanish regions had declined by 3.6% on the year and that they had a combined budget deficit equal to 1.2% of gross domestic product. The finance ministry also said most of the country's 17 regions were not on track to meet their year-end deficit targets.

Teachers to strike in Madrid over staffing cuts - Teachers in Madrid are going on strike next week to protest staffing cuts blamed on austerity measures, even as Europe's debt crisis is threatening to drag Spain into more perilous waters. Teachers union leader Eduardo Sabina said secondary and vocational training teachers at 400 schools will go on strike Sept. 20 and 21. The regional government has ordered that teachers give two extra hours of class per week because temporary hiring is being cut back. The regional government, run by the conservative Popular Party, is hoping to save euro80 million ($110 million) with the staff cuts. Sabina said without the thousands of temporary teachers who are normally hired each year, some teachers in Madrid are being assigned to teach subjects they know nothing about. "I know the case of a science teacher who is being forced to teach a class in the history of music," he said. Teachers from all over the country will march Oct. 22 in Madrid.

Euro SOS - Yves Smith - This is a lively discussion on RT which starts from the contrarian perspective of trying to find a silver lining in the Eurozone crisis. One of the panelists is Michael Hudson, who has been a vocal critic of how austerity programs are being used to strip Greece of sovereignity (on top of the minor complication that these programs are certain to fail). It also discusses the prospects for the survival of the euro and who the winners and losers would be in a breakup.

EU's Juncker says euro zone prepared to boost EFSF - "We will do everything that will be needed in order to defend the euro," Juncker told newsagency Market News International, who added that that included increasing the size of the EFSF. Juncker was also quoted as saying the euro zone would present "a proper solution in the next couple of days" to address Finland's demand for collateral in exchange for further Greek aid.

German Leader Faces Key Choices on Rescuing Euro - As Europe struggles to reverse a plunge in financial confidence, the world waits for Germany’s chancellor, Angela Merkel, to make a fundamental choice. She, more than any other European politician, will have to either summon the leadership to rescue the euro or concede that the political will is not there. Mrs. Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. American officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic.  The project of European integration, which began in the difficult years after World War II, is also on the line. If Greece were forced to abandon the euro, as more and more voices on the German right are demanding, it would be a jarring setback for solidarity on the Continent.

French Minister: Won't Lend To Greece If Efforts Insufficient - French budget minister and government spokeswoman Valerie Pecresse Sunday said France would stop lending to Greece if it does not deliver on its part of the bailout program.  "The plan has two aspects; aid to Greece with the guarantees, but also a Greek recovery plan. They have a privatization program, a spending-cut program, a program for taxing revenues. Greece must make efforts, otherwise we won't lend to them," she said in an interview broadcast Sunday on French television channel M6.  Earlier this month, talks between Greece and a visiting troika of officials from the European Commission, International Monetary Fund and European Central Bank--who were in Athens to assess the country's eligibility for fresh aid---were suspended in a spat over whether Greece would need to take further measures. Greek Prime Minister George Papandreou vowed Saturday that the country would meet its budget targets and press ahead with difficult reforms, even as thousands demonstrated against those reforms on the streets of Greece's second-largest city.

European Banks Valued at Post-Lehman Lows Show Sovereign Risks Are Growing - Investors are valuing European banks at levels not seen since the depths of the credit crunch that followed the collapse of Lehman Brothers Holdings Inc. as concern over a Greek default and debt contagion escalates. A Bloomberg index shows 46 lenders trading at 0.56 times book value, the cheapest since the post-Lehman lows of March 2009, signaling investors estimate their net assets are worth less than the companies claim and are demanding discounts for perceived risks. Valuations reflect the impact of a potential sovereign default for some banks, according to Barclays Capital analysts led by Jeremy Sigee. BNP Paribas (BNP), Societe Generale and Credit Agricole tumbled in Paris trading on a possible ratings cut by Moody’s Investors Service, extending their more than 40 percent slide in the last three months. France’s three largest banks by market value may have their credit ratings cut as early as this week because of their Greek holdings, two people with knowledge of the matter said.

French banks braced for credit-rating downgrade-sources (Reuters) - France's top banks are bracing themselves for a likely credit rating downgrade from Moody's, sources close to the situation said on Saturday, further complicating their efforts to assure investors they are riding out the tensions in funding markets.  Several sources said on Saturday that BNP Paribas , Societe Generale and Credit Agricole were expecting an "imminent" decision from the ratings agency, which first put them under review for possible downgrade on June 15.  Moody's at the time had cited French banks' exposure to Greece's debt-stricken economy as the reason behind the review, which was due to last three months. Outside commentators said the ratings were ripe for a downgrade because of rising borrowing costs in the face of sovereign debt turmoil.  "The decision is imminent," one Paris-based source said. "It will probably be a downgrade but it's not certain yet."  France's lenders -- two of which own local banks in Greece -- have the highest overall bank exposure to Greece, according to the Bank for International Settlements. They have begun to take writedowns on their Greek sovereign debt holdings as part of a new rescue package but some say not aggressively enough.

France’s banks lose their Street cred - It’s looking increasingly as though the proximate cause of the next big global crisis is going to be a liquidity crunch at French banks, rather than a European sovereign default. This is not the kind of stock chart that any leveraged institution likes to see: BNP Paribas started July trading at €55 per share; it’s now at €27, and there’s no bottom in sight. And that’s making lenders very nervous, according to Nicolas Lecaussin. “We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell.” And Andrew Ross Sorkin, today, points out that Christine Lagarde, after being forthright about the need for European bank capitalizations, has recently been, well, less so. Largarde’s right that European banks in general — and French banks in particular — need to be recapitalized. But now is not the time to be saying such things, just because statements along those lines, in today’s febrile environment, can cause banks to collapse even before new capital is lined up.

Italy's borrowing costs rise as demand falls - Italy sold 3.9 billion euros ($5.3 billion) of five-year bonds Tuesday as borrowing costs rose and demand for the debt shrank. Rome's Treasury sold the debt at an average yield of 5.6%, compared to 4.93% on July 14 when it last sold similar bonds, according to a Bloomberg report. The bid-to-cover ratio, which indicates the amount of investor demand for the debt, also fell to 1.28 times the amount on offer, down from 1.93 at the previous auction, the report added.

European Bond Spreads Show ECB Losing the Containment War on Italian Bond Yields - Curve Watchers Anonymous is taking a look at 10-year bond yields and bond spreads in the Eurozone. Interest on 10-Year bonds in Italy are down from the spike high after the ECB stepped in with purchases as shown in the following chart. However, the chart also shows rates have inched back up and have now taken back about half of the ECBs effort.Spreads vs. Germany are another way of looking at things. Here is a table I put together with data from Bloomberg as of Sunday evening.  I asked Chris Puplava at Financial Sense if he could chart that idea over time. Greece is so far removed for other countries and it so distorted the charts we removed it.

Italy Erupting - Protesters Clash With Riot Police Over Austerity Measures (Video)

Italy turns to China for help in debt crisis - Italy’s center-right government is turning to cash-rich China in the hope that Beijing will help rescue it from financial crisis by making “significant” purchases of Italian bonds and investments in strategic companies. According to Italian officials, Lou Jiwei, chairman of China Investment Corp, one of the world’s largest sovereign wealth funds, led a delegation to Rome last week for talks with Giulio Tremonti, finance minister, and Italy’s Cassa Depositi e Prestiti, a state-controlled entity that has established an Italian Strategic Fund open to foreign investors.  Italian officials were in Beijing two weeks ago to meet CIC and China’s State Administration of Foreign Exchange (Safe), which manages the bulk of China’s $3,200bn foreign exchange reserves. Vittorio Grilli, head of treasury, met Chinese investors in Beijing in August. Italian officials said further negotiations were expected to take place soon.The possibility of Chinese investment comes at a critical moment for Italy, as markets demand increasingly high yields to buy Italian public sector debt, projected to reach 120 per cent of GDP this year, a ratio second only to Greece in the eurozone.

China Called On as Lender Amid Italy Crisis - China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence. Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today. Chinese Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of her nation’s main investment destinations, without specifically mentioning Italy. Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors.

China's interest in Italian debt is purely business - Sixty years ago, communism saved China. Thirty years later, capitalism saved China. Could China now save capitalism? . The Financial Times’ report that China Investment Corp, the sovereign wealth fund, planned to buy Italian assets (including government bonds) has sent a few ripples of relief across markets. But the plans should not be read as Beijing’s vote of confidence in il bel paese, or in its ability to service its debts. The motives may well be much simpler: fund managers trying to expand their turf.  In July CIC released its 2010 financial report. Headline returns on its global portfolio were 11.7 per cent -- identical to the figure reported in 2009. That brought its total assets under management to $135-billion, up from its initial $21-billion seeding in 2008. But in order to qualify for another big injection from China’s foreign exchange reserves -- the Ministry of Finance released an additional $58-billion in 2009 -- the fund needs to demonstrate that it is ready, willing and able. Hence the extremely aggressive drawdown of cash holdings, from 32 per cent of assets in 2009 to 4 per cent last year.

IMF releases nearly 4 billion euros of rescue funding to Portugal (Xinhua) -- The International Monetary Fund (IMF) announced Monday it has completed the first review of Portugal's performance under a multi-year economic program, which enables the immediate disbursement of an amount equivalent to 3. 467 billion IMF special drawing right (SDR), or about 3.98 billion euros, to the nation. This allocation has brought total IMF disbursements under the Extended Fund Facility (EFF) to 9.078 billion SDR, or about 10.43 billion euros, the Washington-based lender said in a statement. The EFF, which was approved in May 2011, is part of a global package of financing with the European Union amounting to 78 billion euros over three years in support of Portugal's economic recovery.

Saving Europe with sovereign equity - One way to think about the European financial crisis is that it is a matter of capital structure. Countries like the United States and Great Britain are equity-financed, while countries like Greece, France, and Germany are debt-financed. [1] There is no question that some European countries have very real problems. But there is also no question that no matter how badly a country may be arranged, nations cannot be “liquidated”. A “bankrupt” state must be reorganized. If Greece were a firm, a bankruptcy court would not sell critical assets at fire-sale prices, as Greece’s creditors sometimes idiotically demand. Instead, a bankruptcy court would convert debt claims that are unpayable, or whose payment would impair the long-term value of the enterprise, into equity claims whose value would depend upon restoring the underlying enterprise to health. Greece’s problems are extreme, but by no means unique. European states in general are crippled by overleveraged, fragile capital structures. What Europe requires, in financial terms, is a means of converting some part of member states’ sovereign debt into equity. One solution would be to redenominate the debt of European sovereigns into unredeemable fiat currencies. But that is a particularly extreme solution, and would represent a large setback to the European project. What follows is a more modest proposal to equitize part of European states’ capital structures. The proposal is not original. It is an elaboration of a suggestion by Warren Mosler. It seems politically impossible. But very recently, so did outright default and/or exit of a Eurozone sovereign, yet that political impossibility suddenly looks very likely.

China Must Avoid Lending to ‘Troubled’ Nations, Former PBOC Adviser Says - China shouldn’t buy bonds issued by individual euro-area countries because their leaders and the European Central Bank are in disarray, said Yu Yongding, a former adviser to China’s central bank.  “China has to wait until it can see a clearer road map by euro countries for solving sovereign-debt problems,” Yu, who is based in Beijing, said in e-mailed comments today. The nation is not a lender of last resort for “troubled countries,” he added.  Brazilian Finance Minister Guido Mantega said yesterday that officials from Russia, India, China and South Africa will discuss next week ways to help Europe overcome its debt crisis. Italy is struggling to avoid a collapse in investor confidence and German Chancellor Angela Merkel has warned that an “uncontrolled insolvency of Greece” would roil markets.  Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said Sept. 12, adding that bonds weren’t the focus.

Wary Investors Start to Shun European Banks - It’s not just money market funds that are getting cold feet.  On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said. The two French giants are major international players in the derivatives arena, so a pullback would hurt egos and the bottom line of both companies. Derivatives are investment instruments whose value is tied to another underlying security.  And since last month, according to several bankers who insisted on anonymity, hedge funds and other firms have also withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks. Prime brokers hold assets for hedge funds and other investors, while providing loans for increased leverage on their bets.  While still small, this kind of transfer echoes the larger move hedge funds made as Lehman teetered in 2008, when a tidal wave of withdrawals helped sink the bank.

Sovereign, Bank Bond Risk Reach Records on Greek Debt Concerns (Bloomberg) -- The cost of insuring against default on European sovereign and bank debt rose to records on mounting concern a default by Greece will trigger losses for banks holding the government's bonds. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed seven basis points to 360 basis points, an all-time high based on closing prices. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers rose 11 basis points to 325, while the subordinated index was up 17 basis points at 567, according to JPMorgan Chase & Co. at 11 a.m. in London. German Chancellor Angela Merkel's vow to avoid letting Greece go into "uncontrolled insolvency" because of the risk of contagion for other euro-area countries has failed to reassure investors. BNP Paribas SA stock fell 12 percent in Paris after an unidentified bank official told the Wall Street Journal the French bank can't borrow in dollars because U.S. money-market funds will no longer lend to it. "An endgame to Greece's debt problem looks to be upon us as policy makers are fast running out of options to boost sentiment,"

Moody's cuts French banks as euro crisis deepens - Moody's cut the credit ratings of two French banks on Wednesday because of their exposure to Greece's debt, highlighting growing risks to Europe's financial sector from a deepening euro zone sovereign debt crisis. But the euro and European stocks were lifted by an announcement by the head of the European Commission that it would soon present options for issuing a common euro zone bond, despite huge political hurdles especially in Germany. The ratings agency's one-notch downgrade of Societe Generale and Credit Agricole came hours before the leaders of Greece, France and Germany were to hold a video conference on measures to head off a potential Greek default, which has prompted rising global alarm. China added its voice to U.S. concerns over Europe's apparent inability to stop debt contagion spreading, while Indian and Brazilian officials said major emerging economies were discussing increasing their euro sovereign holdings. Moody's kept BNP Paribas on review for a ratings downgrade saying the bank's profitability and capital base provided an adequate cushion to support its Greek, Portuguese and Irish exposure.

Moody's Downgrades Credit Agricole, SocGen Ratings - Moody's Investors Service said on Wednesday that it downgraded the credit ratings of Societe Generale and Credit Agricole, marking the latest in a series of blows to French banks that have recently punished European stocks. Moody's cut SocGen's debt and deposit ratings by one notch to Aa3 from Aa2.  The outlook on the long-term debt ratings is negative. Moody's anticipated that the impact of its review on the Bank Financial Strength Rating (BFSR) would be limited to a one-notch downgrade.  Moody's said that although SocGen's "capital base currently provides an adequate cushion to support its Greek, Portuguese, and Irish exposures ... it will extend its review for downgrade of the C+ BFSR to consider the implications of the potentially persistent fragility in the bank financing markets, given its continued reliance on wholesale funding." For Credit Agricole, Moody's downgraded its BFSR by one notch to C from C+, and cut its long-term debt and deposit ratings by one notch to Aa2 from Aa1.

BNP Paribas plans $96 billion of asset sales - BNP Paribas, the largest of France's embattled banks, is to sell 70 billion euros ($96 billion) of assets to shore up capital and cut funding needs, and perhaps stay the credit rating cut suffered by its main rivals. BNP said its asset sales would reduce its balance sheet by around 10 percent and as part of the plan would cut its U.S. dollar funding needs by $60 billion by the end of 2012. With concern over French banks' exposure to the euro zone debt crisis growing, Moody's Investors Service cut the credit ratings of rivals Societe Generale and Credit Agricole, but spared BNP, at least for now. Moody's said it would extend its review for a possible downgrade of BNP's long-term debt and deposit ratings. "Surely it can only be a matter of time before BNP Paribas follows in their wake as the bank announces a restructuring plan to increase capital, probably in order to head off a downgrade at the pass,"

Dollar borrowing costs add to strain on European banks - European banks are facing increasing strains on their balance sheets because of the dramatic jump in the cost to borrow dollars, essential for some institutions as they need to repay loans in US currency. The cost for European banks to swap euros into dollars has jumped fivefold since June, hitting the highest levels since December 2008, and raising the risk of insolvency in the region’s financial sector....The main reason for the spike in the cost of swapping euros for dollars is the overwhelming demand for the US currency due to its growing status as a haven in the face of rising worries of an imminent Greek default that could spark a deeper sovereign debt crisis. European banks, which need to borrow dollars to repay loans, face an extra premium of 103 basis points to swap euros into dollars for three-month loans – a dramatic jump since June when they only had to pay an extra 20bp.

ECB Lends Dollars to Two Euro-Area Banks as Markets Tighten (Bloomberg) -- The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets. The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds. The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 99.1 basis points below the euro interbank offered rate, or Euribor, at 12:24 p.m. in Frankfurt, indicating a premium to buy the greenback. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg. U.S. money-market funds “have stopped rolling over dollar loans of European banks,” “I wouldn’t be surprised if demand increased in the next weeks.”

EU warned of credit crunch threat, French banks hit (Reuters) - European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a "systemic" crisis in euro zone sovereign debt spills over to banks, according to documents obtained by Reuters on Wednesday. In a report prepared for ministers meeting in Poland on Friday and Saturday, senior EU officials said the 17-nation currency area faces a "risk of a vicious circle between sovereign debt, bank funding and negative growth." "While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic," the influential Economic and Financial Committee said. "A further reinforcement of bank resources is advisable," ministers were told in language that echoed an International Monetary Fund call for urgent action to recapitalize European banks.

Europe Close to Banking Crisis: El-Erian - Pacific Investment Management Co.’s Mohamed A. El-Erian said organizations such as the International Monetary Fund need to act with European banks at risk of being engulfed in the region’s sovereign-debt crisis.  “We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said. “We are in a synchronized global slowdown. There’s very little confidence in economic policy making both in Europe and the U.S.”  The World Bank and the IMF meet Sept. 23-25 in Washington as European officials work to keep the currency union from unraveling while weighing whether to allow Greece to default. French banks have become a focal point because of their holdings of bonds issued by the euro region’s most-indebted nations, topping the list of Greek creditors with $56.7 billion in overall exposure, according to a June report by the Bank for International Settlements.  “The light should be flashing yellow, if not red, in Washington, D.C., and hopefully the IMF meeting can be the catalyst for getting to a common analysis and setting the stage for the G-20,” El-Erian said

ECB Says Banks' Emergency Borrowing Jumped to Highest in Month -- The European Central Bank said emergency overnight loans to commercial banks jumped to the highest in more than a month at the start of its latest maintenance period. Euro-area banks tapped the ECB's marginal lending facility for 3.4 billion euros ($4.7 billion) at 2.25 percent yesterday, the Frankfurt-based central bank said today. That's the most since Aug. 10. Banks deposited 87 billion euros with the ECB overnight, up from 75.5 billion euros the previous day. Yesterday was the first day of the ECB's maintenance period, during which banks need to hold a certain amount of reserves on average. This results in fluctuations at the beginning and end of the period as some lenders front-load their borrowing.

Greek Second-Quarter Unemployment Rate Rises to Record 16.3% (Bloomberg) -- Greece's unemployment rate rose to a record in the second quarter as the government's austerity measures deepened the recession, raising the pressure on Prime Minister George Papandreou to meet budget targets. The jobless rate rose to 16.3 percent, or 810,821 people, from 15.9 percent in the first quarter and 11.8 percent a year earlier, the Hellenic Statistical Service said in an e-mailed statement today in Athens. That's the highest since the introduction of quarterly data going back to 1998. The growing number of unemployed is raising the political cost of Papandreou's budget cuts as he tries to secure additional European Union and International Monetary Fund aid following a 110 billion-euro ($155 billion) bailout last year. Investor skittishness about Papandreou's ability to push through the cuts to secure the funds and avert default have roiled markets worldwide.

Greeks fume over property tax demanded by EU, IMF - Greeks were fuming on Thursday at a surprise property tax that could leave out Church holdings while the country is being urged to make "costly" sacrifices to secure EU-IMF rescue loans. The finance ministry, under pressure from its international creditors to plug a budget hole of more than 2.0 billion euros ($2.7 billion), on Wednesday further increased the tax which had already caused outrage when announced at the weekend. "This is not the worst of our nightmares as (our members) have long lost their sleep," the homeowners' union Pomida said in a statement. "Even unemployed owners, many of whom owe their homes to banks, get no full reprieve," it said. Instead of a maximum of 10 euros per square metre, the limit was placed at 16 euros and electricity will be cut off for owners who refuse to pay.

Greeks Vow to Rebel Against New 'Monster Tax' The Greek government's new real estate tax, a desperate bid to meet its budget goals and secure fresh foreign aid, will hit the population hard. Greeks have almost their entire wealth invested in property -- and are more worried about the tax than about the prospect of a national insolvency or leaving the euro. For people like Foteinos, the tax entails another financial burden they can ill afford. The former shop owner recently had his monthly pension cut by €200. Now he could face a tax bill of some €1,000 in the coming days. Given that prospect, he doesn't really care that politicians from Chancellor Angela Merkel's coalition have started talking openly about the possibility that Greece will go bankrupt or even have to leave the euro zone. In fact, he wouldn't mind getting the drachma back. "Everyone here has had bad experiences with the euro," he said. That may be a little exaggerated. But for many Greeks, the real estate tax poses a bigger problem than the currency.

Greece Default Risk Jumps to 98% as Euro Crisis Deepens - Greece has a 98 percent chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the euro-region crisis.  “Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” . “Clearly this austerity plan is not working.”  It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA. Greek bonds plunged, sending the 10- year yield to 25 percent for the first time.  German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing his country’s budget gap widened 22 percent in the first eight months of the year.  The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value if the nation fails to meet its obligations.

Europe fears Greece is heading inexorably toward default - The dreaded D-word for those struggling with Europe's economic crisis is no longer just "debt." Try "default." European politicians, who denied for months that bankruptcy was an option as Greece struggled to bring down an enormous budget deficit, are now beginning to acknowledge the possibility. Nervous investors appear to increasingly believe default is just around the corner. They have withdrawn billions of dollars from Europe's stock markets over the last few weeks. Beyond cold-shouldering Greece, investors are punishing European banks that hold huge piles of government debt and pulling back on lending money to traditionally safe countries such as Italy. On Monday, fears that Athens is heading inexorably toward default and deepening doubts over whether Europe's leaders have the political will or skill to keep the debt crisis from spiraling out of control sent the region's stocks tumbling. Banks in France and Germany scrambled to assure investors that they could survive their exposure to sovereign debt, but were hammered all the same. In a separate move, Britain unveiled a radical plan to overhaul its banking system to protect ordinary consumers if the institutions' riskier activities go disastrously wrong, as they did during the global financial meltdown three years ago.

Greece Should ‘Default Big’ to Address Worsening Debt Crisis, Blejer Says - Mario Blejer, who managed Argentina’s central bank in the aftermath of the world’s biggest sovereign default, said Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union. “This debt is unpayable,” Blejer, who was also an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “Greece should default, and default big. A small default is worse than a big default and also worse than no default.”  World Bank and International Monetary Fund officials will meet in Washington Sept. 23-25 as European Union officials work to keep the currency union from unraveling and the Greek crisis worsens. Europe is facing “a full-blown banking crisis” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., in an interview yesterday.  Rescue programs backed by the IMF and European Central Bank are “recession-creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. A Greek default would push Portugal to do the same and would put Ireland “under tremendous pressure to at least symbolically default” on some of its debt, he added.

'Totally Ridiculous' Greece Should Default Big Or Go Home - In what seems like the first honest words from a central banker in months (albeit an ex-central banker), Mario Blejer (who presided over the post-default Argentina in 2001) has some first-rate advice for G-Pap and his fellow Greeks. From an interview in Buenos Aires, Bloomberg notes the following notable quotes: “Greece should default, and default big, you can’t jump over a chasm in two steps.” "Rescue programs backed by the International Monetary Fund and European Central Bank are “recession creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth" “It’s totally ridiculous what is going on,” Blejer, 63, said. “If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.”

Does Greek default mean Greece leaving the eurozone? - I get this question a lot; by the way this guy advocates one and not the other.  “Not necessarily, but probably” is the answer. Let’s say Greece opts for a large default.  The Greek government’s commitment to the Greek banking system could then be seen as either stronger or weaker.  Stronger because they have more money left over, or weaker because they are breaking their commitments.  Note that Greece is still borrowing to meet current budget, so a large unauthorized default probably weakens the commitment to the banks.  They’re still out of money and then some. In my view the commitment of the Greek government to its banking system needs to be seen as much stronger.  If perceptions remain the same or weaken, the silent run on Greek banks will continue or worsen.  Sooner or later, the Greek government, through guaranteed or nationalized banks, will be redeeming “a euro” for “less than a euro,” at which point they have de facto left the eurozone. 

Dutch investigating fall-out of Greek bankruptcy - The Dutch finance ministry regards the bankruptcy of Greece as inevitable, news channel RTL Nieuws reports, citing 'reliable sources'. The cabinet assumes Greece will not be able to meet its financial obligations, the channel says.Finance Minister Jan Kees de Jager has confirmed that the Netherlands is making preparations for a Greek bankruptcy. “We are making preparations for a number of scenarios, both probable and improbable. We are doing this under the utmost secrecy in collaboration with the De Nederlandsche Bank (Dutch central bank) and other countries,” Mr de Jager said. The idea is to let Greece go bankrupt in a controlled fashion to prevent panic breaking out in the financial world. Freedom Party leader Geert Wilders is demanding that the cabinet presents a contingency plan for the fall of Greece as soon as possible. The party, which provides the conservative minority cabinet with parliamentary support, wants to know how a Greek bankruptcy would affect the Netherlands.

Dutch Finance Minister says has not given up on Greece - The Dutch government has not given up on the rescue of Greece and is determined to do everything possible to save the euro zone, the Dutch finance minister told members of parliament on Wednesday.  "To be clear ... this Cabinet has the firm will to do everything possible to save the euro or the euro zone," Finance Minister Jan Kees de Jager told members of parliament.  He strongly denied Dutch media reports that the government expected Greece to default, and reiterated comments he made this week that the Netherlands was examining various different scenarios, which included a possible default.  De Jager was responding to questions from members of a parliamentary finance committee in a debate over proposed changes to the euro zone bailout fund, or EFSF, as agreed in July by European leaders.  That measure is considered crucial for stabilising financial markets, but several members of parliament, even from pro-European parties, expressed reservations about it.

Germany Plans for Possible Greek Default - The tougher talk is much more than show. The rest of Europe is losing patience with Athens. The disappointment runs particularly deep in Berlin, where the government's crisis-management policy has clearly been going around in circles. In the beginning, the chancellor said that the Greeks ought to help themselves out of their own crisis. Then came the first and subsequently the second aid package. The new approach, the government said, was to rescue Greece so that the other debtor nations would be spared. Now the Germans have come full circle, and the prevailing emotion is fear of a never-ending debacle in Athens. "Enough is enough," says one senior government official ... With a mixture of resignation and fatalism, Merkel and Schäuble are facing up to the inevitable and thinking the previously unthinkable: Greece is going bankrupt, and not even its withdrawal from the monetary union can be ruled out anymore. The planning for the day of reckoning is already underway, in departments at the Finance Ministry in Berlin as well as in task forces at the EU in Brussels. German Finance Ministry officials hope that a Greek bankruptcy would be manageable, as long as European politicians keep their cool and the bailout funds are increased as planned.

Time for Germany to make its fateful choice - The extent of the breakdown was not brought home to me by the resignation of Germany’s Jürgen Stark from the board of the European Central Bank, nor by the looming Greek default, nor by new constraints imposed by the German constitutional court. What brought it home to me was a visit to Rome. This is what I heard from an Italian policymaker: “We gave up the old safety valves of inflation and devaluation in return for lower interest rates, but now we do not even have the low interest rates.” Then: “Some people seem to think we have joined a currency board, but Italy is not Latvia.” And, not least: “It would be better to leave than endure 30 years of pain.” These remarks speak of a loss of faith in both the project and the partners. In his latest press conference, Jean-Claude Trichet, outgoing president of the European Central Bank, pointed to the bank’s stellar counter-inflationary record, far better than the Bundesbank’s. But the low inflation masked the emergence of profound imbalances within the zone and the lack of means – or will – to resolve them. As a result, a default by a major government, a break-up of the eurozone or both are now conceivable. The consequent flight to safety, which must include attempts to hedge cross-border exposures in a supposedly integrated currency area, threatens a meltdown. We are witnessing a lethal interplay between fears of sovereign insolvency, emerging sovereign illiquidity and financial stress (see chart). 

Merkel Quells Speculation on Greek Default - German Chancellor Angela Merkel rejected suggestions that Greece could be forced into bankruptcy soon or even leave the euro zone, lifting European banking shares and broader financial markets that have been gripped in recent days by fears of an imminent Greek meltdown. The German leader called German politicians, including her own economics minister, to heel for suggesting in recent days that Greece should be allowed to go bust. Those remarks fanned fears that Germany would accept, and possibly even support, evicting Greece from the euro zone, fueling a market selloff.  "I think we will do Greece the biggest favor by not speculating much, but instead encouraging Greece to implement the commitments it has made," Ms. Merkel told RBB Inforadio.

Greece's Future Is With Euro Zone, Say Merkel and Sarkozy - German Chancellor Angela Merkel and French President Nicolas Sarkozy are convinced that Greece's future is within the euro zone, Mrs. Merkel's spokesman said after the two leaders held a three-way conference call with Greek Prime Minister George Papandreou.  But Mrs. Merkel and Mr. Sarkozy also stressed during the call the need for Greece to put into practice in a strict and effective way the already-agreed measures of its austerity program under a current bailout package, the spokesman, Steffen Seibert, said.  "That is a prerequisite for the payment of future tranches of the program," Mr. Seibert said. "

Germany and France Back Greece on Austerity Effort -  France brushed off concerns about its biggest banks Wednesday, insisting that it had no plans to nationalize1 any of them despite a credit rating downgrade linked to their exposure to the limping Greek economy.  Moody’s Investors Service2 downgraded two of France’s biggest banks Wednesday, Société Générale3 and Crédit Agricole, citing their exposure to the Greek economy and the fragile state of bank financing markets. It kept a third, BNP Paribas, under review.  The French government’s latest attempt at reassurance about the health of their banks came as the leaders of France and Germany prepared to speak with their Greek counterpart amid worries that Athens may default on its heavy debt load.  U.S. Treasury Secretary Timothy Geithner also sought to soothe nerves over a possible Greek default, saying in a CNBC interview that European leaders have the capacity “to hold this thing together.”

Commission prepares plans to introduce euro area bonds - The euro rose the most in a week against the dollar and European stocks surged this afternoon amid optimism the region's debt crisis may still be contained. The single currency was boosted after European Commission president José Manuel Barroso said he is close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany. Speaking this morning, Mr Barroso said the commission is preparing options for the introduction of eurobonds. He called for much closer political integration and said the EU needed a "new federalist moment" to confront the most serious challenge for the union in a generation.Addressing the European Parliament in Strasbourg, Mr Barroso portrayed the current crisis as an existential threat to the European project. "This is a fight for the jobs and prosperity of families in all our member states," he said. "This is a fight for the economic and political future of Europe. This is a fight for what Europe represents in the world. This is a fight for European integration itself."

Merkel says euro bonds are "absolutely wrong" (Reuters) - German Chancellor Angela Merkel bluntly rejected euro zone bonds as a solution to the currency area's sovereign debt crisis, saying on Thursday that "collectivizing debts" would not solve the problem. The European Union's top economic official meanwhile said he expected international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid to Greece, warding off the threat of an imminent default. While that may keep Greece afloat until it gets a second bailout package from the euro zone, the finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

Weidmann urges ECB to quit bond-buy business (Reuters) - The European Central Bank has burdened itself with "considerable risks" and these should be unwound, Bundesbank President Jens Weidmann said on Tuesday, in a thinly veiled attack on the ECB's bond-buy plan. In his first speech since news broke on Friday that another German ECB policymaker, Juergen Stark, is resigning in protest at the bond-buying plan, Weidmann also criticised politicians' response to the debt crisis and said worries about the euro are increasing in Germany and other parts of the euro zone. Weidmann and Stark both opposed the ECB's decision last month to reactivate the bond plan following a 19-week pause. The bank decided to buy the bonds of Italy and Spain after they came closer to succumbing to the debt crisis. "Central banks have taken on some of the load of fiscal policy for the support of individual countries or banks that have fallen into trouble," "Because of this, the Eurosystem books are now burdened with considerable risks," he said, referring to the Eurosystem of central banks, comprising of the ECB and the 17 national central banks in the common currency bloc. "I am of the firm view that these should henceforth be unwound and definitely not increased.  This is not the role of monetary policy(makers)."

Anne Siebert: The damaged ECB legitimacy - Yves here. This post may strike readers as a tad wonky, but the role and governance of central banks has become a subject of debate in the US, and I expect it to move more into the spotlight in the EU as the crisis continues. And as you read the post, the ECB had been trying to avoid scrutiny for good reason. It manages to make the oft-criticized Fed look good.  Anne Siebert is the wife of former central banker, now Citigroup chief economist Willem Buiter, who was a very outspoken and vocal critic of the Fed during the crisis, particularly of its “quasi fiscal role,” meaning the way it subsidized banks in ways that involved taking real balance sheet risk outside Congressional budgetary processes. Buiter argued this might well be a violation of the Constitution.  He and Siebert have written and done advisory work together, often for central banks.  Her experience makes Siebert a commentator who cannot easily be ignored.  The European Central Bank was once known for its obsessive focus on price stability. Since the global economic crisis, however, its role has extended to preventing the insolvency of banks and sovereign countries. This column argues that such a move has badly harmed the institution’s legitimacy – something that will damage both its policy effectiveness and confidence in the governing bodies of the EU as a whole.

German economist: ‘There is no alternative but Greece’s euro zone expulsion’ - Hans-Werner Sinn is making headlines with inflammatory remarks again. This time, German newspaper Die Welt has him on record in a conversation with Die Welt as saying Greece must be expelled from the euro zone. My translation is below.

    • Welt Online: How can such a small country like Greece cause all these eruptions at all?
    • Sinn: Greece is a textbook case. During this financial crisis, the capital markets have raised only one question: Will Germany pay or not? And if Greece is cut loose, it is feared that Germany will not pay in the other countries.Then a lot of rich people will lose a portion of their wealth. This is precisely the point. That’s what this is all about.
    • Welt Online: Should Germany pay?
    • Sinn: it has already paid a lot. We have to end this soon. Investors will have to forgo some of their money. Greece cannot be helped with continual transfers. Rather, Greece must get back on its own feet.

European banks face major reckoning -  European banks are facing a reckoning over hundreds of billions of dollars in loans extended to the continent’s cash-strapped governments with potential losses so large, if countries default, that some financial firms could be put out of business. The tumbling value of government bonds issued by some European governments is already undermining the health of major banks. On Wednesday, Moody’s Investors Service cut the credit rating of two large French banks, due to their holdings of Greek government bonds and to wider concerns about whether investors will continue to trust European banks with their money.On Thursday, the European Central Bank announced that it would provide European banks loans in dollars to help shore up investor confidence. The ECB said it would coordinate with the Federal Reserve, Bank of England, Bank of Japan and the Swiss National Bank to offer three medium-term loans through 2011. If a major bank were to fail, that could send shock waves across the Atlantic, buffeting U.S. financial companies with close ties to their European counterparts or major investments in Europe.

Europe Scrambles to Ease Greek Debt Crisis - Facing market pressure to resolve the Greek debt crisis1 once and for all, President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany will hold a video conference call Wednesday evening with the embattled Greek prime minister, George Papandreou, French officials announced on Tuesday.  The announcement could portend yet another restructuring of Greek debt to stave off a default. A stopgap bailout plan announced on July 21 has yet to be approved by all 17 nations that share the euro2 currency, and in recent weeks a renewed sense of crisis has engulfed the euro region.  In the latest sign of turmoil, Italy — the euro region’s most indebted member, after Greece — was forced to pay record-high interest rates in order to complete an auction of its five-year bonds on Tuesday, despite continuing purchases by the European Central Bank. Spain, which plans a bond sale on Wednesday, could be subjected to similar investor wariness. Plans were clearly being laid Tuesday for a serious conversation with Mr. Papandreou. His government has proved incapable so far of making the kinds of legal changes and budget cuts in the middle of a deep recession3 that Athens has promised its European partners and the International Monetary Fund.

Europe's leaders battle to keep faith with euro as Greek bailout flounders - Europe's struggle to come good on pledges to rescue Greece from bankruptcy and save its single currency has descended into confusion amid political feuding and parliamentary setbacks across the eurozone. Angela Merkel's coalition in Germany faced rows about whether Greece should be allowed to fail; a parliamentary committee in Austria delayed a vote to ratify plans for a stronger bailout fund; and Slovakia's Eurosceptic parliamentary speaker demanded that Greece be allowed to go bust, making clear that he would seek to undermine the plan hatched at a eurozone summit in July in Brussels. Amid the cacophony, José Manuel Barroso, head of the European commission, voiced exasperation at the failure of EU national leaders to keep their promises and talked up the benefits of eurobonds, a pooling of eurozone government debt. The Polish finance minister said the survival of the EU was at stake. "If the euro area breaks up, the European Union will not be able to survive." Poland currently holds the EU presidency and Rostowski faces a tough challenge on Friday when he chairs a meeting of EU finance ministers in Wroclaw which will now be consumed by the crisis.

Austrian Government Fails in Vote to Increase Euro Bailout Fund - This is from the Austrian daily Der Standard: According to parliamentary correspondence, the Finance Committee of the National Council on Wednesday did not not approve the massive increase to 21.6 billion euros in Austrian liabilities for the provisional euro rescue fund (EFSF) sought by the government coalition. A two-thirds majority was required. FPÖ and BZÖ voted against it. Green Party Finance spokesman Werner Kogler said he would not stand behind “a rash majority procurement”. At issue was the planned increase in the euro rescue fund to 780 billion euros from the present 440 billion. Austria’s share was to be 21.6 billion euros. A particular problem is the Principle of unanimity for the EFSF program; this makes the European institutions very cumbersome. Indeed. We are seeing the effect of unanimity now. One country can block anything in Euroland. And effectively, Austria has done that now.

Europe default risk signal flashing red -- Europe default risks are on the rise. Take one look at the market for credit default swaps, and the probability that Greece will default on its $345 billion in debt is near 100%. Portugal, Ireland, Spain and Italy aren't too far behind. Credit default swaps, or CDSs, are essentially insurance contracts that give bondholders a way to get paid back if a country or a company stops making interest payments on its debt. The data are useful in gauging how worried investors are about potential defaults. Some investors buy these swaps as contracts on bonds they've previously purchased. Other investors, like hedge funds, simply buy the insurance but not the bonds. "Credit default swaps are basically a thermometer of the market's perception of someone's creditworthiness," says Peter Boockvar, the equity strategist at Miller Tabak + Co. "We're obviously seeing legitimate concerns from the market that these countries will have difficulty paying back what's owed." For nearly half the countries in the European Union, the price of insuring sovereign debt has increased more than 100% since July 2010.

ECB Says Risks to Economic Outlook Have Shifted to Downside - The European Central Bank said threats to euro-area growth have intensified and inflation risks have eased, signaling policy makers may take further action should Europe’s debt crisis worsen. The 17-member euro-area economy faces “particularly high uncertainty and intensified downside risks,” the Frankfurt- based ECB said in its monthly bulletin today, echoing President Jean-Claude Trichet’s Sept. 8 policy statement. Risks to the inflation outlook are broadly balanced and no longer tilted to the upside, the ECB said. The Frankfurt-based central bank last week left its benchmark rate at 1.5 percent -- after two increases this year - - and revised down its growth forecasts for 2011 and 2012. With confidence in Europe’s financial institutions waning as the sovereign debt crisis spreads, Trichet said on Sept. 12 that the ECB has the “weaponry” to deal with banks’ liquidity needs. “While the monetary policy stance remains accommodative, some financing conditions have tightened,” the ECB reiterated in today’s bulletin. “A very thorough analysis of all incoming data and developments over the period ahead is warranted.”

Are euro zone bonds the new subprime? - So we all by now know the story of how the global economy fell into the 2008 financial crisis. Banks gorged themselves on high-yielding U.S. subprime mortgage securities, which were awarded top credit ratings (perhaps fraudulently). When those investments proved as financially sound as the over-leveraged homeowners behind them, the foundation of the financial system crumbled like cheap Chinese wallboard. From Wall Street, the shockwaves ricocheted around the world. And we ended up in the Great Recession.Now we have to ask if something similar is going on in Europe. But this time around, a very different sort of subprime security is at the heart of the problem – the sovereign bonds of euro zone countries. Just as deteriorating subprime securities ate away at the balance sheets of major American and European banks, the same could happen with euro zone bonds issued by the weak PIIGS. Those bonds are already losing value as yields escalate. In a scary scenario, the euro crisis deepens, the bonds of Greece, Ireland, Italy and the other PIIGS lose more and more value, weakening the European banking sector. Banks in Europe holds billions of dollars of PIIGS bonds, so the impact could be severe. Then the fallout gets spread around the world through globalized banking and financial markets. And it's 2008 all over again

Is Greece the catalyst for another panic? -That was the question that RT’s Lauren Lyster was asking last night. My short answer is not necessarily. The long answer is that policy makers have a lot of ways to continue the ball rolling. They can allow Greece to default and recapitalise the banks first and foremost. This may be costly, but they could just start with the most undercapitalised and continue on down the line as markets see more banks and more sovereigns running into problems. On Spain and Italy, the ECB will do their part – how much is the question and using what kind of quid pro quo.  The bottom line is that financial Armageddon doesn’t happen overnight and Eurozone default is not synonymous with breakup. Angela Merkel, the German Chancellor, is even talking about a future ESM (European Stability Mechanism). So, there are a lot of missteps that get you from here to there. Video below

Will German indecision on the euro drag the whole world down? - As the great engine room of the European economy, Germany has the power to save or break the euro.  Germany could also choose to stop inappropriately imposing its own monetary disciplines on others, and leave the euro itself. In the spirit of altruism, this might indeed be the best thing it could do for its fellow Europeans.  Yet torn between two constituencies – a policy elite that remains wedded to discredited ideas of European solidarity, and the great mass of the German people who do not see why they should be required to subsidise the profligacy of their ill-disciplined fellow travellers – Germany has become paralysed.  Trapped by their history, the country’s leaders seem incapable of facing up to the choices that need to be made to bring the chaos of today’s related sovereign debt and banking crises to any kind of meaningful resolution.  In its indecision, Germany threatens not just the future prosperity of Europe, including its own, but as is clear from the growing alarm of American and Chinese policymakers, that of the world economy as a whole.

International alarm over euro zone crisis grows -(Reuters) - International alarm over Europe's debt crisis reached new heights on Tuesday, with U.S. President Barack Obama pressing the bloc's big countries to show leadership as talk of a Greek default escalated and markets heaped pressure on Italy. German Chancellor Angela Merkel sought to quash talk of an imminent Greek default or exit from the euro zone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy sent markets gyrating up and then down. Confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds. "I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk. 

US, Europe Worry 'Everyone': Saudi Central Bank Governor - Saudi Arabia's Central Bank Governor, Muhammad Al Jasser, said yesterday that "everyone" was concerned over the fragile state of the US economy and Europe's ongoing sovereign debt crisis, according to Reuters reports. His comments did not provide a vote of confidence for the United States, nor for the Euro Zone, as he also said Saudi Arabia would not consider purchasing Euro Zone debt. The Saudi Central Bank Governor was speaking after meeting with the Gulf Cooperation Council (GCC) Central Bank governors of Qatar, Kuwait, and Bahrain. With the U.S. dollar under pressure since Standard & Poor's unprecedented US debt downgrade, speculation has also grown over whether GCC countries might consider revaluing their currencies. Al Jasser said Saudi Arabia had no plans to revalue the riyal at this time, but he did add that the economic conditions in the Gulf are "excellent" for forming a monetary union, according to Reuters, something that’s been under consideration for some time.

What Next for Greece and for Europe? - Peter Boone & Simon Johnson - Uncertainty about potential loan losses in Europe continues to roil markets around the world. For many investors, taxpayers and ordinary people there is no clarity on the exact current situation — let alone a consensus on what could happen next.. What should any friends of Europe — the United States, the Group of 20, the International Monetary Fund, perhaps even China — strongly suggest the Europeans do? A good start would involve being honest on four points. There is nothing pleasant about the truth in such crisis situations, but denial is increasingly dangerous to all involved. Greece is on the front burner. Currently on offer is a debt swap for private-sector lenders that, once it goes through, will effectively guarantee 33 cents for every euro in bonds that they currently hold. That downside protection is attractive to banks — because they will get hard collateral in the restructured deal. (Greece would buy the bonds of safe European countries, like Germany, and hold them where creditors could get at them.) The first brutal truth is that this is a default by Greece, and all attempts to deny this or use another word just muddy the waters.

Does the Euro Have a Future? - George Soros - There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset—collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now—lost some or all of their value. Unfortunately the euro crisis is more intractable. In 2008 the US financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.

Thinking the Unthinkable in Europe - George Soros – To resolve a crisis in which the impossible has become possible, it is necessary to think the unthinkable. So, to resolve Europe’s sovereign-debt crisis, it is now imperative to prepare for the possibility of default and defection from the eurozone by Greece, Portugal, and perhaps Ireland. In such a scenario, measures will have to be taken to prevent a financial meltdown in the eurozone as a whole. If a euro deposited in a Greek bank would be lost through default and defection, a euro deposited in an Italian bank would immediately be worth less than one in a German or Dutch bank, resulting in a run on the deficit countries’ banks. All of this would cost money, but, under the existing arrangements agreed by the eurozone’s national leaders, no more money is to be found. So there is no alternative but to create the missing component: a European treasury with the power to tax and, therefore, to borrow. But this presupposes a radical change of heart, particularly in Germany. The German public still thinks that it has a choice about whether to support the euro. That is a grave mistake. The euro exists, and the global financial system’s assets and liabilities are so intermingled on the basis of the common currency that its collapse would cause a meltdown beyond the capacity of the German authorities – or any other – to contain. The longer it takes for the German public to realize this cold fact, the higher the price that they, and the rest of the world, will have to pay.

Geithner Takes Tougher Tone on Europe - Treasury Secretary Timothy F. Geithner will urge European governments to step up their crisis- fighting efforts amid Obama administration concerns that the region’s woes may hurt the U.S. economy. Geithner will press European Union finance ministers when he meets with them this week, a euro-area official said. The official spoke on condition of anonymity because preparations for the meeting, which takes place in Wroclaw, Poland, on Sept. 16 and 17, are confidential. It will be the first time Geithner has attended a session of Europe’s Economic and Financial Affairs Council, known as Ecofin. “The U.S. has always been discretely preoccupied and discretely present, and now it’s starting to be intensely preoccupied and intensely present,” said Nicolas Veron, a senior fellow at Bruegel, a Brussels-based economics research group. Chinese Premier Wen Jiabao today indicated limits to what his nation will do to counter the European crisis. In a speech at the World Economic Forum in Dalian, China, he said that countries must “put their own houses in order.”

Report: Geithner to Propose using EFSF like TALF - On Friday, the European finance ministers will meet, and Timothy Geithner will make an appearance and probably propose using the EFSF like the TALF - from Reuters: Geithner Is Likely to Suggest Europe Leverage Bailout Fund Treasury Secretary Timothy Geithner is likely to suggest to European finance ministers on Friday that they leverage their bailout fund along the lines of the U.S. TALF program, EU officials said.  Under TALF, the New York Fed would lend out up to $200 billion, taking ABS as collateral with a haircut and the Treasury offered $20 billion credit protection for the Fed.  In this way, a little bit of public money leveraged a much larger central bank contribution and the same idea could work for the European Financial Stability Facility, which has 440 billion euros at its disposal, to offer credit protection to, for example, the ECB to buy euro zone sovereign bonds. This might work, but the sovereign debt collateral haircuts have to be appropriate.  Earlier today, the ECB announced three U.S. dollar liquidity-providing operations in coordination with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank.

Geithner warns EU against infighting over Greece - Speaking at a closed meeting of eurozone finance ministers in Poland, he is reported to have told them that the divisions were "very damaging". Some eurozone ministers seemed unhappy with Mr Geithner's comments. They have also delayed a decision over Greece's next bailout loan. Mr Geithner reportedly said: "What's very damaging is not just seeing the divisiveness in the debate over strategy in Europe but the ongoing conflict between countries and the [European] central bank." He said that "governments and central banks need to take out the catastrophic risk to markets". His presence at the meeting was measure of how concerned the US is about the danger of economic contagion from Europe's government debt and banking crisis. But his comments about ending divisions seemed to open up some new ones. Austria's Finance Minister Maria Fekter said: "I found it peculiar that even though the Americans have significantly worse fundamental [economic] data than the eurozone, that they tell us what we should do."

Geithner Presses EU to Act Decisively, Speak as One - U.S. Treasury Secretary Timothy Geithner urged EU finance ministers on Friday to leverage their bailout fund to better tackle the debt crisis, but there was no agreement on what steps should be taken. In a 30-minute meeting with euro zone ministers, Geithner pressed for the 440 billion euro European Financial Stability Facility to be scaled up to give greater capacity to combat the problems infecting Greece, Portugal, Italy and other states, a senior euro zone official familiar with the discussion said. But ministers were resistant to Washington telling the 17-country euro zone and its finance chiefs what they should do. "He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty," Austria's Finance Minister Maria Fekter told reporters after the meeting. "I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, that they tell us what we should do and when we make a suggestion ... that they say no straight away."

The euro zone shuns Geithner - Tim Geithner has experience flying around the world to address finance ministers and instructing them on how to solve their problems. He was a senior executive at the IMF from 2011 to 2003, after all — a period which coincided with major sovereign crises in South America. So it may or may not be surprising that his latest attempt at such activity, in sunny Wroclaw, fell spectacularly flat. He waltzed into a meeting of euro zone finance ministers (he took a private car, they shared a bus), and informed them that they should follow his lead and leverage the money in the EFSF. In unison, the finance ministers responded by saying “why, Mr Geithner, that’s a simply spectacular idea, we’re shamefaced to admit that we didn’t think of it ourselves. Or, not so much: Mr. Juncker said, pointedly, that the euro group was not discussing “an increase or expansion” of its bailout fund “with a nonmember of the euro area.”  It’s pretty clear, here, that in the wake of the debt-ceiling debacle Geithner has lost a significant amount of international heft. And it’s also clear that the euro zone has absolutely no cohesion, nor any real ability to do anything at all to resolve the current crisis.

European finance ministers ignore US Treasury Secretary Tim Geithner’s warning of ‘catastrophic risk’ over debt crisis -- European leaders ignored a dressing down from US Treasury Secretary Tim Geithner over the "catastrophic risk" of not taking decisive action to tackle the sovereign debt crisis by choosing to delay until October a decision on the Greek bail-out.  Mr Geithner, who had made an unprecedented trip to Poland to speed up resolution plans, was the first American to attend a meeting of European finance ministers.  He said: "Politicians and central banks need to take out the catastrophic risk to markets...they have to definitively remove the threat of…cascading defaults [and avoid] loose talk about dismantling the institutions of the euro."  Later he told reporters: "What is very damaging from the outside is to see not just the divisiveness [in Europe] in the broader debate about strategy, but the ongoing conflict between the governments and the central bank. You need both to work together to do what is essential for the resolution of any crisis." Separately, the Institute for International Finance, which a represents 440 of the world's largest banks, said it had formed a plan whereby the BRIC emerging economies – Brazil, Russia, India and China – could help boost a bond buy-back programme to reduce Greek debt.

Europe's Response To Geithner's Advice: "I'd Like To Hear How The United States Will Reduce Its Deficits ... And Its Debts" - Two years after being laughed out by a bunch of Chinese students, Tim Geithner realized that his hypocrisy may pass muster in the Beltway, but the crowd is tougher across the Atlantic. As Reuters reports, the much anticipated meeting between Geithner and the euro FinMins in Wroclaw, Poland, lasted all of thirty minutes and if nothing else managed to unite the Europeans... in their ridicule and derision of the man that has become a global muppet caricature. The litany of quotes needs no explanation: "I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone that they tell us what we should do and when we make a suggestion ... that they say no straight away," Maria Fekter, [Austria's Finance Minister] told reporters afterwards, recalling a difference of opinion between Geithner and German Finance Minister Wolfgang Schaeuble on how to reinvigorate the euro zone and tax financial deals." And the kicker came from Belgian Finance Minister Didier Reynders, who responded 'tartly' that "We can always discuss with our American colleagues. I'd like to hear how the United States will reduce its deficits ... and its debts."

Advice on Debt? Europe Suggests U.S. Can Keep It - Financial officials from the United States, once called “the committee to save the world” after the Asian crisis in the 1990s, now find themselves uttering apologies for the harm caused to the world by the 2008 financial crisis and coating their advice to European nations with the knowing nod of the battle-hardened. The change in tone was on display here on Friday when Treasury Secretary Timothy F. Geithner1 made an unusual appearance at a meeting of euro zone finance ministries. Mr. Geithner had been invited to offer some advice on fixing Europe’s sovereign debt and banking problems.  European leaders, who have been slow to react to the root causes of the problem, emerged from the meeting dismissive of Mr. Geithner’s ideas and, in some cases, even of the idea that the United States was in a position to give out such pointers.  Such criticism was echoed by other attendees of the meeting, including the finance minister of Belgium, Didier Reynders, who said Mr. Geithner should listen rather than talk. Jean-Claude Juncker, president of the finance minister group, said European officials did not care to have detailed discussions about expanding their bailout fund “with a nonmember of the euro area.”

Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) In his latest Email update, Michael Pettis at China Financial Markets discusses the in more detail the likelihood of a Eurozone breakup. Slow growth is embedding itself solidly into the US economy and the bond mayhem in Europe continues. The external environment for China is getting worse. This will almost certainly make China’s adjustment – when Beijing finally gets serious about it – all the more difficult. With still weak domestic consumption growth, and little chance of this changing any time soon, weaker foreign demand for Chinese exports will cause greater reliance than ever on investment growth to generate GDP growth. Europe’s travails in particular can’t be good for exports. What’s worse, it’s now pretty much official that the euro will fail soon enough. We have this on no less an authority than Angela Merkel. Here is what Thursday’s Financial Times says: Merkel Promises Euro Will Not Fail Angela Merkel, German chancellor, declared on Wednesday that “the euro will not fail” after the country’s powerful constitutional court rejected a series of challenges to the multibillion-euro rescue packages agreed last year for Greece and other debt-strapped members of the eurozone.

Guest Contribution: "Europe's Lehman Moment" - Europe is in the midst of its variant of the great debt crisis that hit the United States in 2008. Fears abound that if things go wrong, the continent will face its own "Lehman moment" -- a recurrence of the sheer panic that hit American and world markets after the collapse of Lehman Brothers in October 2008. How did Europe arrive at this dire strait? What are its options? What is likely to happen? Europe is retracing steps Americans took a couple of years ago. Between 2001 and 2007 the United States went on a consumption spree, and financed it by borrowing trillions of dollars from abroad. Some of the money went to cover a Federal fiscal deficit that developed after the Bush tax cuts of 2001 and 2003; much of it went to fund a boom in the country’s housing market. Eventually the boom became a bubble and the bubble burst; when it did, it brought down the nation’s major financial institutions – and very nearly the rest of the world economy. The United States is now left to pick up the pieces in the aftermath of its own debt crisis.

Math Is Hard, Euro Edition - Krugman - It’s astonishing how many European officials and unofficial wise men insist, with a great air of wisdom, that the euro crisis was caused by failure to enforce the stability pact — that is, limits on deficits and debt. How hard is it to look at the data and discover that Ireland and Spain appeared to be fiscal paragons on the eve of the crisis, with budget surpluses and low debt? Yet another triumph of the Very Serious narrative over easily checked facts.

Next bailout payment for Greece postponed until October - During the informal Eurogroup meeting today in Wroclaw, Poland Jean-Claude Juncker announced that Greece will have to wait for the next, 8 billion euro tranche of the bailout until October. In order to obtain the money the country has to prove that it has delivered on its austerity commitments.  Timothy Geithner, who is also taking part in the meeting urged EU governments to cooperate closely with the ECB and the US in order to combat the debt crisis more effectively. He also suggested leveraging the 440 billion euro EFSF in order to make it a more effective tool in the fight against the financial crisis in Europe.  The Eurogroup made some progress during the first day of talks as far as the improvement of the EFSF conditions is concerned. It has been decided that the interest rate on the loans should be cut in order to avoid the fund being perceived as punishment by countries with problems.

5 Central Banks Move to Supply Cash to Europe -  Worried that Europe’s debt impasse posed a growing threat to the global financial system, the world’s major central banks moved Thursday to assure that European banks would not run short of cash as troubled nations like Greece and Italy sought to stabilize their economies.   The central banks, in a coordinated action intended to restore market confidence, agreed to pump United States dollars into the European banking system in the first such show of force in more than a year. Some banks have found it hard to borrow dollars as American lenders grew nervous about their financial condition.  Thursday’s action, coming almost exactly three years after the collapse of the investment bank Lehman Brothers, lifted global stock markets, sharply increasing the value of shares in banks heavily exposed to debt from Greece and the other struggling members of the euro zone. The euro, which had been falling in recent days, rebounded.  The central bank action came as European finance ministers and other policy makers were gathering in Wroclaw, Poland, for meetings on Friday and Saturday. The United States Treasury secretary, Timothy F. Geithner, who was scheduled to attend, was expected to urge European officials to act more aggressively to contain the sovereign debt crisis, which has already begun to undercut growth in Europe.

Video: Central Banks Move to Pump Dollars into System - European banks are moving to pump dollars into their banking system, as panic starts to seep in over how to prevent a sovereign debt crisis, David Wessel and Charles Forelle report on Markets Hub.

Central Banks Riding to the Rescue - Naturally, the ECB and the Fed have been perfectly aware of the recent signs of stress in Europe's financial markets as dollars have been withdrawn, moved, and otherwise made increasingly unavailable to European financial institutions. Today they decided that they had to take action: ECB to Lend Dollars to Euro-Area BanksThe European Central Bank said it will lend euro-area banks dollars in three separate three-month loans to ensure they have enough of the U.S. currency through the end of the year. The European Central Bank said it will lend dollars to euro-area banks in a series of three-month loans as the region’s debt crisis limits market access to the U.S. currency. The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year. The three-month loans are in addition to the bank’s regular seven-day dollar offerings and will be fixed-rate tenders with full allotment, the ECB said in a statement today. They will be offered on Oct. 12, Nov. 9 and Dec. 7.

Solvency can wait, for now deal with liquidity - CENTRAL banks are once again coming to the financial system’s rescue. In a move coordinated with its counterparts in America, Japan, Switzerland and Britain, the European Central Bank today announced it would make special, three-month dollar loans to euro-zone banks to cover funding needs over the year-end. This has delivered a shot in the arm to European stock markets, and bank stocks in particular. European banks regularly borrow in dollars to make dollar loans and finance dollar-denominated inventory. But concerns about the banks’ solvency should their holdings of peripheral sovereign debt sour have prompted the American money market funds and others who lend to the banks to pull back. European banks have lost access to $700 billion in dollar funding in the last year, according to this excellent analysis in today’s Wall Street Journal. Today’s operation is a bandage, not a cure. The liquidity problems in Europe’s banks are rooted in fears of insolvency. Putting those fears to rest will require aggressive recapitalisation so that the banks can withstand plausible scenarios of European sovereign default.  (Read the extensive coverage in this week’s issue, available online today.)

Central banks pump money into market: Q&A - Stock markets have jumped after the Bank of England joins the Fed, ECB and Bank of Japan to make more dollars available to financial market. Here, we look at how and why they are taking this action.

Central banks to the rescue - THE pledge by the world’s leading central banks to provide unlimited dollar liquidity in three month-loans to battered European lenders cheered up markets on September 15th. European stockmarkets closed up, by more than 3% in France and Germany. French bank shares, which have been in the eye of the storm, recovered sharply (BNP Paribas was up 13% on the day while Société Générale rose by 5%). But the co-ordinated action, while helpful, is a palliative rather than a solution. European banks need the official help because the American money-market funds, on which they rely heavily to finance their dollar lending, have taken fright as the euro area’s sovereign-debt crisis has worsened and morphed into a renewed banking crisis. Through swap lines with America’s Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank will be able to plug the gap in the months ahead (the central banks’ action will start in October with follow-up operations in November and December). In a show of solidarity the Bank of Japan also made a similar pledge. The concerted action may have reassured the markets, but the very fact that it was necessary shows how far the rot has gone.

Financial crisis: central banks do not take this kind of action unless something is up - Three years to the day since Lehman Brothers went under, taking the global economy with it, the Bank of England and its counterparts in America, Europe, Japan and Switzerland went and put on a proper show.  Their promise to lend truckloads of dollars to any bank finding itself a bit short of the greenback may have calmed the febrile markets – for one day at least. But that sort of pre-emptive action can’t help but give you the jitters.  Central banks don’t do that sort of thing unless something is up; and something is most certainly up. In the eurozone, an unfolding Greek tragedy is careering towards its final, brutal act. And, in our joined-up, global economy that spells trouble everywhere, with the odds shortening by the day on a return to recession.  So, are the central banks signalling Credit Crunch Mk 2? Well, yes and no. They could be signalling something worse.  Just like three years ago, the central banks are addressing liquidity problems. This time, how to fill a dollar funding gap in Europe’s banks. Many are struggling to borrow the dollars they need for the international business transactions generally conducted in the US currency. The reason? US funds are so freaked out at the goings-on in the eurozone that they’re refusing to lend to European banks on fears they won’t get their money back.

Stark Says ECB Will Provide Extra Liquidity as Long as Needed (Bloomberg) -- European Central Bank Executive Board member Juergen Stark said the ECB will provide banks with additional liquidity for as long as needed to ensure money markets function. "As long as necessary, we will conduct liquidity management designed to ensure functioning money markets," Stark said in a speech in Vienna today. "Our non-standard measures have helped to stabilize the situation for banks and thereby supported the flow of credit in the euro region." The ECB last month committed to provide banks with unlimited euro liquidity in its refinancing operations through the end of the year. Today it announced it will offer banks three-month dollar loans after the region's debt crisis started to limit market access to the U.S. currency.

Euro Weakens on Concern That Ministers’ Actions Won’t Contain Debt Crisis - The euro fell, halting a two-day gain versus the dollar, after European finance ministers meeting in Poland ruled out efforts to prop up the region’s economy and gave no indication of providing added support for lenders. The 17-nation currency pared its first weekly advance this month versus the greenback as European finance ministers meeting in Wroclaw, Poland ruled out efforts to prop up the faltering economy and raised issues of collateral demanded to take part in another Greek bailout at a meeting today. The Dollar Index rose for the first time in four days after a report showed consumer confidence rose more than forecast this month. Sweden’s krona and Norway’s krone fell as volatility deterred investors. “Nothing encouraging will come out of the finance ministers’ meeting,”. “A lot of the initiatives that we have seen from the European leaders, including the solidarity that they’re trying to show for Greece, don’t really hit at the problem. The market is pretty realistic in pricing in a Greek default.”

Lagarde sees global crisis of confidence - The global economy is facing a crisis of confidence worsened by “policy indecision and political dysfunction,” according to Christine Lagarde, managing director of the International Monetary Fund. Speaking in Washington, where the fund’s annual meetings are due to be held next week, Ms Lagarde said that short-term pressures on the balance sheets of European banks and US households risked creating a “vicious circle” of declining confidence. Ms Lagarde praised last week’s stimulus proposal by President Barack Obama and the recent joint statement of support for Greece by Angela Merkel, German chancellor, and Nicolas Sarkozy, French president. But she added that she was “not backing away” from controversial comments she made last month that European banks needed more capital to support their balance sheets. She reiterated that the US also needed to do more to consolidate its long-term fiscal position, while setting short-term fiscal policy to boost demand. “Weak growth and weak balance sheets – of governments, financial institutions, and households – are feeding negatively on each other,” she said. “This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction.”

Financial paralysis is gripping US and EU leaders, Kenneth Clarke claims -- Kenneth Clarke has accused US and European leaders of "paralysis" amid fears of a deepening global financial crisis. The former chancellor said governments appeared incapable of dealing with the growing prospect of another credit crunch and accused them of playing "short-term politics". "The main thing I take from this crisis is unfortunately the political leadership in the USA and large parts of western Europe have been totally overwhelmed by the dimensions of the crisis, not able to cope," he said. "You have paralysis in Washington, and paralysis in large parts of Europe because they are incapable of agreeing and everybody is fighting short-term politics." Clarke said the British government came out of the crisis quite well when compared with US and European political leaders. "I do not think the British government comes out of it too badly when you make the comparison, " he told BBC2's Newsnight programme. "But our fate partly depends on how these people sort it out."

Independent Commission on Banking — the report (link to 363 pp pdf)

Vickers should mark the dismantling of the credit bubble infrastructure. Eventually - In April, many suspected that the ICB had been a little nobbled. Today’s full report from the Vickers Commission is, on any measure, impressive and provides a framework for true banking radicalism. Perhaps the most surprising thing for me is that the Chancellor has said it will be implemented, though the detail is to be ironed out. On the downside, the seven year timetable means that the actual reform of our banking system will occur more than a decade after the peak of the crash in October 2008. The measure of it is that clearly RBS and to a lesser extent Barclays feel a little singed, will have to restructure, and are likely to face higher funding costs. Martin Taylor, and ICB Commissioner and former Barclays chief was rather robust today: if bankers don’t like this “they should change their business model”. One of the bank chiefs who were briefed at 8am this morning told the BBC that it was a “disaster,” it is not very hard to work out that call might have come through the Edinburgh exchange.

Unemployment up by 80,000 - UK Unemployment is clearly on the up again, with a rise of 80,000 in the May-July period, and an increase in the level to 2.51 million. This was the biggest three-monthly rise since August 2009. The claimant count also rose, though by slightly less than expected, up 20,300 in August to 1.58 million.  More details: "The unemployment rate for the three months to July 2011 was 7.9 per cent of the economically active population, up 0.3 on the quarter. The total number of unemployed people increased by 80,000 over the quarter to reach 2.51 million. This is the largest quarterly increase in unemployment since the three months to August 2009. The number of unemployed men increased by 39,000 on the quarter to reach 1.45 million and the number of unemployed women increased by 41,000 to reach 1.06 million, the highest figure since the three months to April 1988." More details here: The big story is that, for the moment, the private sector is not generating enough jobs to compensate for the growth in the workforce and the loss of public sector jobs, which is gathering steam:

Unemployment rises above 2.5m milestone - Public sector job cuts imposed as part of the government's austerity drive have sent unemployment back through the 2.5m barrier, according to official figures released on Wednesday. The Office for National Statistics said the number of people out of work rose by 80,000 in the three months to July, reaching 2.51m, mainly due to a sharp rise in youth unemployment. Despite ministerial hopes that the private sector will be able to compensate for the squeeze on the public sector, the ONS said the May to July period had seen the sharpest rise in unemployment in two years. The unemployment rate using the internationally agreed yardstick for calculating joblessness rose to 7.9% for May to July, from 7.7% in February to April. Officials said that employment in the public sector had fallen by 111,000 in the second quarter of 2011, the biggest drop since recent records began in 1999. (must be obamacare & dodd-frank)

Rising copper prices hit commuters as thieves steal cables - LONDON commuters yesterday suffered severe delays on the train network following the theft of copper-based signal cables in Guildford, Surrey. The incident, believed to have taken place on Sunday night, disrupted the journeys of hundreds of thousands of rail customers travelling on South West Trains between Hampshire and London Waterloo. There have been three further incidents of signal cable theft in the south east of England in the last week alone, delaying trains at London Bridge and Paddington stations. The British Transport Police has introduced a number of defensive measures to fend off this crime, but have been unable to prevent rising cable theft amid soaring demand for copper worldwide.

Adam Posen: The Case for Doing More (Expansionary Monetary Policy, That Is) » Adam Posen: Gloucestershire: the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus…. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the fiscal consolidations underway, and the simultaneity of similar problems across the Western world. Sustained high inflation is not a threat… the inflation that we have suffered due to temporary factors in the UK is about to peak. If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage….[I ask] you as sensible listeners to see through the distortions and falsehoods that have cropped up again in the aftermath of this crisis as in the past. Some common sense can be just as useful in appraising monetary policy as in evaluating the overall worth and likely success of other services for which the public contracts with technical experts. After such appraisal, I hope that you will agree with my arguments that:

  • More monetary ease will lead to greater restructuring of the economy in the right and necessary direction;
  • More of the same Quantitative Easing [QE] program that the Bank already undertook would be where to start, especially if done on sufficient scale;
  • More cooperation between the Bank and HM Government to promote investment and credit to small and medium business should be the beneficial next step….

Restructuring: The monetary lubricant - I HIGHLY recommend that you read the latest speech from Adam Posen, an economist on the Bank of England's Monetary Policy Committee, called "How to do more". In it, Mr Posen tackles a number of subjects, including the case for additional monetary easing and some means by which the Bank of England could facilitate credit growth to credit-starved sectors. I particularly appreciate his explanation of the importance of adequate demand in facilitating needed structural adjustments in the economy: Every downturn is a combination of cyclical and structural factors. One can and should acknowledge that there is a substantial output gap in the UK and in other post-crisis economies, and still recognize this reality...There is clearly a supply aspect to the UK’s current economic problems. As many have observed, we do need to rebalance the economy from imports to exports, consumption to savings, public to private spending, and from the financial sector to everything else...

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