week ending Sept 24

Fed Balance Sheet Shrinks In Latest Week - The U.S. Federal Reserve's balance sheet shrank a bit last week, just as central bank policymakers said they would boost the share of long-term Treasurys in another bid to spur the economy. The Fed's asset holdings in the week ended Sept. 21 stood at $2.861 trillion, down from the $2.867 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 $1.663 trillion Wednesday, from $1.659 trillion the week before. However, its holdings of mortgage-backed securities and federal agency debt securities decreased. Thursday's report showed total borrowing from the Fed's discount lending window was $11.45 billion, down from the $11.63 billion a week earlier. Borrowing by commercial banks fell to $8 million from $68 million. The Fed report showed that U.S. government securities held in custody on behalf of foreign official accounts moved down to $3.456 trillion, compared to $ 3.463 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts slipped to $2.722 trillion from $2.730 trillion the previous week. Holdings of agency securities rose to $734.29 billion from $733.42 billion the prior week.

US Fed balance sheet shrinks in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week as the central bank reduced its holdings of mortgage-backed and agency debt securities, Fed data released on Thursday showed. The Fed's balance sheet was $2.841 trillion on Sept. 21, compared with $2.847 trillion on Sept. 14. For balance sheet graphic: link.reuters.com/buf92k The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) dipped to $879.2 billion on Wednesday from $884.9 billion a week previous. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $108.3 billion, down from $109.8 billion in the previous week. Meanwhile, the Fed's holdings of Treasuries totaled $1.663 trillion, up from $1.659 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $23 million a day in the week ended Wednesday, up from $19 million a day in the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - September 22, 2011

Fed Watch: Rearranging the Deck Chairs - Here we are, again staring down the barrel of an FOMC meeting while deeply entrenched in a subpar equilibrium, with output well below the pre-recession trend and unemployment stuck in the high single digits. What will the Fed bring to the table this time around? Considering the magnitude of the economic challenge, expectations are low: A modification of the FOMC statement to reflect an increasingly pessimistic outlook couple with some version of “Operation Twist,” an effort to reduce longer-term interest rates by extending the duration of the Fed’s portfolio of Treasury securities. There is an outside change the Fed lowers interest on reserves, but I view that as unlikely at this juncture. Even more unlikely is another round of quantitative easing. I don’t think there is much appetite at the Fed for additional asset purchases given the inflation numbers and the stability of longer-term inflation expectations relative to the events that prompted last fall’s QE2. Will additional Fed action accomplish much if anything? I admit to being increasingly skeptical that the Fed is doing much more than pushing on a string. Interest rates on are less than 1 percent out to five year, which pretty much means whatever the Fed is doing at that horizon is just shifting around the composition of risk free assets. I think they need to be throwing around some big numbers when it comes to Operation Twist.

Fed Runs Risk of Doing Less Than Expected - — Investors have concluded that the Federal Reserve¹ will announce new measures to promote economic growth after a meeting of its policy-making committee ends Wednesday. Long-term interest rates have moved as if the Fed had already spoken.  The central bank is often described as facing the choice of whether to do more to improve the economy. But the anticipatory behavior of investors means the Fed really faces a slightly different choice, one it has confronted often in recent years: whether to risk doing less than expected.  The overriding argument for action is the persistent weakness of the American economy, which has left more than 25 million Americans unable to find full-time work.  The Federal Reserve chairman, Ben S. Bernanke, who has made a series of unusual efforts to revive growth, has not discouraged speculation that he is ready to try again. “I think the Fed has no choice but to act,”  “If the Fed were not to do anything having built market expectations to a pretty decent level, I think the markets would react quite negatively to that.”

FOMC Decides to Implement Operation Twist - Here's the FOMC statement. The big news is the attempt to lower long-term interest rates by shifting $400 billion of the Fed's portfolio from short-term to long-term assets (i.e. what has been described as a "twist"): On the run, so very quick reaction:

• 1. This shifts the duration of the balance sheet, but it does not change its size. I would have preferred balance sheet expansion, i.e. QE3, as that would have a much better chance of helping the economy. But the inflation hawks on the committee will not tolerate further expansion in the balance sheet due to worries about inflation.
• 2. It's not big enough.
• 3. Even if it causes rates to fall, will consumers and businesses respond?
• That is, this might help some, but not enough to solve our employment crisis -- not by any means. Thus, this does not alleviate the need for Congress to implement serious job creation programs as soon as possible.

Fed Statement Following September Meeting - The following is the full text of the Federal Reserve’s statement following the September meeting:

The Twist - Today the Fed announced that it would embark on 'Operation Twist', as the business press has dubbed it. To be a bit more precise, here's the actual text from the FOMC press release: the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. What does this mean? Basically, it's an effort by the Fed to bring down long term interest rates. Typically the Fed moves interest rates by changing the intercept of the yield curve, i.e. by shifting the entire curve up or down. But one of the many odd things about being at the zero lower bound on interest rates, as we have been in the US for a couple of years now, is that the Fed no longer has the ability to shift the yield curve down. So the 'Twist' is an effort to bring down long term interest rates despite this handicap. As shown in the picture below (which is meant to be schematic, not exactly accurate), by selling short-term bonds and buying long-term bonds, the idea is to change the slope of the yield curve instead of its intercept.

Fed Watch: FOMC Reaction – The Extended Version - Earlier I posted my quick reaction to the FOMC statement. Now it is time for some extended comments. First off, the Fed sees increasing risks of disappointing news in the months ahead. The August sentence: Moreover, downside risks to the economic outlook have increased. was changed to:Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The downside risks are now “significant,” and we can thank the Europeans for that. I already commented on the twist operation – I tend to think it is too little to have much impact, largely just changing the composition of already safe assets. What I didn’t have a chance to digest earlier was this: To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. That the debt overhang in mortgage markets is weighing on the recovery is not much of a secret. . By keeping assets in the mortgage markets, the Fed is hoping to encourage even lower rates and, by extension, a greater pace of refinancing. Worth a try, to be sure. I don’t know that this addresses the critical impediments to refinancing – underwater mortgages and tighter underwriting conditions.

Twist and Yawn - The Fed decided today it would lower the average maturity of publicly-held treasuries by selling $400 billion of shorter-term treasuries and buying the same amount of longer-term treasuries.  In addition, the Fed also reconfirmed its commitment to maintain the size of its mortgage holdings and anticipated its targeted interest rate would remain low through mid-2013.  The burning question now is how big of an impact will the Fed's new treasury maturity transformation or "operation twist" program have on the economy?  Not much in my view.  It should add some monetary stimulus, but like the original operation twist its effects will probably be modest and do little to spark a robust recovery.   So how would it add monetary stimulus?  The standard story is that it would transfer duration and other risks from the private sector's balance sheet to the public sector and thus add to the private sector's ability to take on more risk.  Other riskier asset would be bought by the private sector including corporate bonds and stocks.  This would create wealth and positive balance sheet effects that would spur spending.  In turn, this would increase demand for credit and banks would start lending more.

The Fed Statement - I am somewhat disappointed both by the mildness of the statement and the once again triple dissent. Kocherlakota singled that this was going to end. It doesn’t look good for Fed creditability. It also signals that the Fed can be politicized. Neither are good. I am also not sure what to make of adding that line –including low rates of resource utilization and a subdued outlook for inflation over the medium run – to the Funds policy statement. My gut tells me that it was intended as a harmless clarification by a Chairman obsessed with transparency.  However, as a traditional Fed watcher I would read that statement as tightening Fed policy, as it makes the promise seem more conditional.

The not-so-fearless Fed? - The narrative around the Fed’s announcement on Wednesday is that it went ahead with a $400bn ‘twist’, towards the larger end of what was expected — despite some pretty heavy pressure from the Republicans a couple of days earlier. But was the launch of Operation Twist such a fearless easing measure, after all? Not just in the sense that selling short-dated bonds will raise yields and, in turn, the dollar. Which of course, it has. There’s no expansion of the balance sheet, after all. Scott Sumner points out that a flat yield curve is typically seen as a result of tight monetary policy. He quotes Sharon Kozicki at the Kansas City Fed: The yield spread reflects the stance of monetary policy. According to this view, a low yield spread reflects relatively tight monetary policy and a high yield spread reflects relatively loose monetary. As Sumner adds, the dollar rose along with short-term Treasury yields on the news. Stock markets are also reflecting a big risk-off sentiment.  Of course, it’s debatable how much of this is due to the Twist launch itself, and how much to the mention of “significant downside risks to the economic outlook”, and how much just to the general despair that this type/scale of action will be adequate in the face of a looming slowdown and contractionary fiscal policy.

The Fed Twists in the Breeze - Yves Smith - Mr. Market so far is not at all impressed with the announcement today that the Fed will be changing the composition of its portfolio by selling $400 billion of near-dated Treasuries and buying the same amount of longer maturity Treasuries. Since the Fed will maintain the same Fed funds target rate, the Fed’s intent is to keep short term rates low and also reduce longer term rates.  The fallacy with the Fed approach, as our Marshall Auerback has pointed out repeatedly, is that targeting a quantity means the central bank has no idea what result it will achieve. An analysis by Jim Hamilton showed that $400 billion of QE in the past would have moved rates by all of 17 basis points, which is bupkis (and that’s assuming you think lowering of longer term rates further is a worthy goal when long term rates are already at historic low levels).  And of course, to the extent the Fed is successful in flatting the yield curve, even modestly, this reduces the profitability of the basic operation of banking, which is maturity transformation (borrowing short and lending long).

Meh - And I Mean That - Krugman - OK, the Fed moved. It was a bit stronger than expected — and BB and company stood up to the GOP. But seriously, they’re trying to use a water pistol to stop a charging rhino. Conventional monetary policy operates by changing the supply of monetary base, which is a unique, uniquely liquid asset. Increase the supply of green pieces of paper with pictures of dead presidents, and you start a hot-potato process in which people try to get out of that asset into higher-yielding but less liquid assets, interest rates fall all along the curve, and big real things can happen. Right now, however, people are holding monetary base at the margin simply for its role as a store of value, so conventional monetary policy doesn’t do anything.  To a first approximation, long-term interest rates are determined by expected future short-term rates, and if that were the whole story, the Fed would be accomplishing nothing at all. Now, to a second approximation, risk plays a role; and what the Fed is trying to do is play on the margin created by the difference between the first and second approximations. But we’re talking about very big markets here. Total nonfinancial debt in the US is around $36 trillion, and the Fed is talking about shifting $400 billion of that total from short-term to long-term assets. How much effect can that have?

Operation Twist--Conditional Support - By having the Fed sell off its holdings of short term government bonds, the Fed will relieve that underlying excess demand for those securities and lessen any shift of that excess demand to an excess demand for money. It should help relieve the monetary disequilibrium. Of course, if the Fed reduced the quantity of base money, as would be the usual consequence of an open market sale, then any decrease in money demand would be offset by a decrease in the quantity of money. However, by purchasing long term bonds, the Fed sterilizes the impact of the sale of short term bonds on the quantity of base money. The other way to look at the issue is that with nominal interest rates on T-bills (nearly) at zero, they are perfect substitutes for money. By selling T-bills and purchasing long term government bonds so that base money does not decrease, the total quantity of money, T-bills held by households and firms and base money, increases. This will tend to relieve the excess demand for money.

It's What They Didn't Say - I’m on record that the Fed’s goal should be much higher long term interest rates (achieved through monetary stimulus.) The econ textbooks rarely even discussed the original operation twist (from the 1960s), except occasionally to note that it probably had no effect. There’s a reason it was tried and then abandoned. So I thought it worse than nothing—something that diverted the Fed’s attention, and made effective moves less likely... This looks more and more like the Hoover Administration. Initially his initiatives were greeted with big stock rallies. But by mid-1932 the stock market reacted to his speeches with big declines. Not because we were “out of ammunition;” the minute FDR got in things turned around. Well that’s not quite right, the stock market did nothing until the April 1933 dollar devaluation, when it began rocketing upward. Symbolism isn’t enough, you need level targeting. Ben Bernanke understood this when he recommended the Japanese show “Rooseveltian resolve.” What happened to that Bernanke?

Fed’s Operation Twist Isn’t Much to Shout About - The Federal Reserve has announced its latest effort to jolt the economy back to life. In the widely anticipated move, dubbed Operation Twist, it is pledging, over the next nine months, to sell some $400 billion in short-term government bonds it owns and use the proceeds to buy government bonds that mature in 6-30 years.  There are some reasons why we shouldn't have great expectations for this move. First, the Federal Reserve moves with all the surprise and guile of a lumbering elephant. It talks about moving, says what direction it might go in and at what speed, and provides a specific date on which it will act.  The interest rate on the 10-year bond has fallen from 3.2 percent on July 1 to about 1.9 percent today. The mere anticipation of the Fed's move has caused the market to do much of the Fed's work. Second, given how low long-term interest rates already are -- they've fallen by 40 percent in the past three months -- this action is like pushing on a string, or adding another drop of water to a full pitcher. In August, according to Freddie Mac, the average commitment rate on 30-year mortgages it backed was 4.27 percent.

The Fed Disappointed... The Great Collapse is Here - I’ve been warning for weeks now that the Fed would disappoint with its September meeting. And boy did it. As I forecast, the Fed didn’t announce QE 3. In fact, it didn’t announce any new policy of note. Instead it is simply reshuffling its holdings to focus more on the long end of the bond markets.  On top of this, the Fed announced it will only be moving roughly $400 billion of its portfolio around. This is the smallest major intervention the Fed has announced since it began implementing QE in 2009 (QE 1 was $1.25 trillion while QE 2 was $600 billion). Indeed, this move is on par with the Fed’s implementation of QE lite which to date has been about $300 billion give or take in scope. Even more striking, while announcing this disappointing move, the Fed downgraded its view of the economy stating, “there are significant downside risks to the economic outlook.” Previously, any admission of economic deterioration from the Fed resulted in the US Dollar selling off sharply as traders expected additional easing/ printing. This time around, the market senses that the Fed has disappointed and that the Fed’s move is largely symbolic more than anything else.

The Fed seemingly disappoints everyone - YESTERDAY, the Fed closed a two-day meeting with a statement that seems to have disappointed everyone. Its action represents a nominal step toward greater easing, which surely irks hard-money types and their Republican spokesmen. But it is less action than many were looking for. Markets are not at all pleased with the news. After the FOMC's statement, the S&P 500 dropped over 2%. Exchanged around the world are flashing red today, commodity prices are tumbling, and the dollar is soaring as traders flee risk. Why is this happening? The point of the primary Fed action announced yesterday—the decision to sell $400 billion in short-term securities and buy long-term securities, in order to flatten the yield curve—was to increase the private-sector's risk appetite. Why are we observing a move in the opposite direction? I think we're seeing a couple of things going on. First, markets seem to have been straightforwardly disappointed by the Fed's action. Everyone thought that "Operation Twist" purchases would be a part of the mix, but the size of the purchases was perhaps a bit smaller than was expected. Meanwhile, there was some hope that the Fed would take an additional step toward signalling its policy goals, as Charlie Evans recently advocated.

Operation Twist: Doing Nothing While Looking Busy - I once read that Carl Icahn took over a particular company, brought his team in to assess the inner workings of the firm, and found an entire floor of workers who looked busy, but whose purpose in the firm couldn’t be identified. As a result, they fired everyone on the floor. Nothing changed. Now this story could be a complete fabrication, but I don’t care whether its true. I bring it up because Operation Twist 2.0 is the embodiment of that floor of workers. There is an illusion that something is being done, but in reality, things would be no different if the policy didn’t exist.

Post-FOMC: What Does the Fed Think It Is Up To? - The primary policy change is:  The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.While some people want to interpret this as different from QE2, which was a swap of $600 billion in reserves for long-maturity Treasury bonds over a period of about 8 months, a swap of short-maturity Treasury bonds for long-maturity Treasury bonds amounts to essentially the same thing under current conditions. The only differences are that the purchase is 2/3 of QE2, and takes place over a longer period of time. While this asset swap was widely anticipated, the other policy change was not:  To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.Since mid-2010, Fed policy had been to reinvest these principal payments in long Treasury bonds. My contention is that both of these interventions are irrelevant, and will have no effect on current or future prices and real activity.

My quick response on the Fed - I’ve been making my way to Toulouse and haven’t followed all of the details.  Scott Sumner has many good posts on the topic, and I would put it thus: the Fed probably decided to do the best it could within political constraints and a framework of more or less stable prices.  Which won’t do much good at all.  Keep in mind:

• 1. The median voter hates price inflation.  Don’t blame Bernanke.
• 2. Today price inflation will accelerate real wage erosion, or at least is perceived so, who wants to take credit for that?
• 3. Core CPI is already going up at a rate of two percent and 3.8 percent for the broader bundle, at least for the time being.  Voters don’t know or care what is embedded in the TIPS spread, etc.
• 4. Some of the “inflationists” ignored supply-side factors and bottlenecks and didn’t see this price pressure coming.  That has thrown their entire analysis into doubt, unjustly probably but nonetheless. 

Twisting When We Should Be Shifting - Without directly addressing the slides that Tyler linked to, I want to make a quick comment about the Fed's new Operation Twist.  The idea is to twist long and short rates by buying more long-term securities and paying for them with sales of shorter-term ones.  The hoped-for reduction in long term rates would benefit mortgage holders and others on the consumer side, but also spur investment. I made two points about this:

• 1.  The Fed is like one of those movie characters who empties all the bullets in his gun to no avail against an advancing bad guy, leading him to grab anything he can find nearby to use as a weapon:  throw a vase or a bowling ball or a chair, or whatever's to hand to try to fend off the bad guy.  Your normal weaponry does not work. That's where it seems to me the Fed is right now.
• 2.  More important, if we look at the loanable funds market, we might get a handle on the situation.  If this program is designed to increase investment by driving down rates, it's not going to work if that demand for loanable funds curve is highly inelastic.  Borrowers are just not going respond to the lower interest rate if they have major concerns about the future.  The problem, I would argue, is that we shouldn't be trying to twist the yield curve, but shifting the loanable funds demand curve.

Fed Watch: Working on the Wrong Margins - Brad DeLongs offers some tepid support of yesterday's FOMC outcome. At the moment ten-year Treasury bonds are selling at a present-value discount of 14%, and thirty-year Treasury bonds are selling at a present-value discount of 45%. Guess that half of these discounts are expectations of interest rate changes and half are rewards for risk bearing. Then if the Fed buys half 10-year and half 30-year bonds it takes risk currently valued at $60 billion off of the private sector's balance sheet. A ten-year corporate investment project of about $150 billion carries $60 billion worth of risk with it, so if this works and if the risk-bearing capacity freed-up by this version of quantitative easing is then deployed elsewhere, we will have an extra $150 billion of business investment over the year or so it takes to roll out this program and for it to have its effect. Still, the outcome is too little: I am skeptical that taking on longer-term US debt really draws off much if any risk-bearing capacity off the public's balance sheet, thereby freeing up capacity for additional business investment. I am even more skeptical that even if such risk were reduced, firms would take advantage. There is plenty of cash already on corporate balance sheets, but little incentive to put it to work in an economic environment characterized by slow and uncertain patterns of growth.

“Operation Twist” Gets Underway - We do not believe that “Operation Twist” will be the silver bullet that is needed to solve all the economy’s problems. We do not mean to criticize the Fed for its actions today. The Fed long ago ran out of conventional “ammunition.” . If the Fed could cut its main policy rate even further, it clearly would. However, the lower bound of zero percent is preventing the Fed from undertaking further conventional stimulus. The Fed is in uncharted territory at present, and it is doing all it can to help the struggling economy get back on its feet via unconventional policy actions. Could the Fed do more? Arguably, the FOMC could authorize another round of quantitative easing (QE). However, the efficacy of further QE is unknown, and the policy is seen as controversial, certainly outside of the Fed and arguably within the Fed as well. As they did at the last policy meeting, at which the FOMC said that it would keep the fed funds rate at “exceptionally low levels…at least through mid-2013,” three FOMC members voted against today’s decision because “they did not support additional policy accommodation at this time.” QE3 could eventually occur. However, we think that the bar for further QE is relatively high. Only if inflation recedes significantly over the next few months and/or the economy appears to be rolling back into recession do we think that a critical mass of Fed policymakers will support another round of QE.

A few thoughts about the Fed - AS THE headline promises, here are a few quick thoughts about monetary policy.

• 1) I mentioned yesterday that given the intensity of the political uproar over monetary policy of late, the Fed would likely be even more reluctant than normal to take action in the months leading up to the 2012 election. That means the Fed is quickly running out of opportunities to make big, near-term course corrections to policy. And that means that this, via Tim Duy, is disconcerting:Nathan Sheets, who retired as director of the Federal Reserve‘s international affairs group this summer, said  "I wouldn’t expect at its November meeting the Fed is going to roll out some additional package,” . The Fed isn't leaving itself much time to act.
• 2) The Fed isn't the only institution that can conduct "monetary policy". The Treasury can, too. James Hamilton notes that during QE2 the Treasury ramped up its issuance of long-term Treasuries, essentially cancelling out the impact of the Fed's purchases of same. Mr Hamilton goes on to note that during the original "Operation Twist", the Fed and the Treasury were cooperating.
• 3) Monetary policy works through a number of mechanisms. As the Fed has responded to the crisis, it has become clear that Ben Bernanke places a big emphasis on the impact of the Fed's market operations on interest rates and, through them, on the economy.

GOLDMAN: Wake Up, This Was Full-On QE3 That We Just Got -Very important point from Goldman's Dominic Wilson on yesterday's "Twist" announcement. Essentially he argues that the part of the operation where the Fed is going to sell $400 billion of short-dated bonds is irrelevant. Only the buying part really effects anything:  Despite the discussion of whether QE3 will follow, for all intents and purposes, QE3 has already begun with yesterday’s shift. While the Fed has been careful to frame the latest shift as a “twist” that leaves its balance sheet neutral, as we have described before the policy is economically more or less equivalent to outright asset purchases. This is because the decision to sell short-dated securities in exchange for bank reserves – the additional transaction relative to the prior purchase program – is largely irrelevant given that the two are very close substitutes when interest rates at the front end of the treasury curve are close to zero (the US 3-year yield is only about 35bp). So yesterday’s policy announcement is not materially different in economic terms from an announcement to buy $400bn of longer-dated USTs through “printing money”. And in fact, given the tilt towards longer durations, the size of purchases is not meaningfully different from QE2.

Bernanke chooses deflation - So, down we go. The last impediment to lower … well … everything (except the $US) has been removed. There’s no QE3. Markets didn’t muck around. Everything risk and $US sensitive took an instant pounding and the $US jumped. The equity market got smashed into the close and is signaling more to come. What we got from the FOMC was Operation Twist, as advertised. The FT showed some deference in reporting the outcome: The US Federal Reserve launched “Operation Twist” on Wednesday in a bold attempt to drive down long-term interest rates and reinvigorate the faltering economy. The central bank said that it would buy $400bn of Treasuries with remaining maturities of six to 30 years and finance that by selling an equal amount of Treasuries with three years or less to run. The Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage agencies such as Fannie Mae and with a strong focus on buying 30-year Treasuries. “ The FT is wrong, this is not big, nor a rabbit out of the hat. As I’ve argued before, at the zero bound, where the only price signal is the signal of policy-maker intentions to deflate or inflate the system, you can’t feed a market rich desserts with thick topping then offer them a dry donut and still expect the system to inflate.

Effects of operation twist - The Federal Reserve announced on Wednesday ([1], [2]) that it will sell some of its shorter-term assets in order to buy more longer-term assets. Here I assess some of the possible consequences of this move. The maneuver is being referred to by some as "operation twist", an expression that was originally used to describe a plan implemented by the Kennedy administration and the Federal Reserve in 1961, and given its moniker after a dance popular at the time. The idea then was that the Treasury would replace some of its longer-term debt with shorter-term obligations, and the Federal Reserve would simultaneously sell some of its shorter-term securities and buy longer-term Treasuries. The Fed announced on Wednesday that it is going to try something similar, intending over the course of the next 9 months to sell about $400B worth of its Treasuries that have maturity between 3 months and 3 years in order to buy securities with maturities of 6 years or longer. According to the latest H41 statement, the Fed currently only has $129B in Treasuries between 3 months and 1 year, meaning that much of what they plan to sell has to be in the 1-3 year range. The details of the plan released by the Federal Reserve Bank of New York indicate that about 2/3 of the securities purchased will be in the 6 year to 10 year range, and most of the rest will be over 20 years.

Operation Twist and the Limits of Monetary Policy in a Credit Economy - If the problem with reduced real rates was simply that they were likely to be ineffective, there could still be a case for pursuing monetary policy initiatives aimed at reducing real rates. One could argue that even a small positive effect is better than not trying anything. But this unfortunately is not the case. There is ample reason to believe that reduced real rates across the curve have perverse and counterproductive effects, especially when real rates are pushed to negative levels:

• Prolonged periods of negative real rates may trigger increased savings and reduced consumption in an attempt to reach fixed real savings goals in the future, a tendency that may be exacerbated in an ageing population saving for retirement in an era where defined-benefit pensions have disappeared.
• One of the arguments for how a program such as Operation Twist can provide economic stimulus is summarised here by Brad DeLong: “such policies work, to the extent that they work, by taking duration and other forms of risk onto the government’s balance sheet, leaving the private sector with extra risk-bearing capacity that it can then use to extend loans to risky private borrowers.” But duration is not a risk to a pension fund or life insurer, it is a hedge – one that it cannot shift out of in any meaningful manner without taking on other risks (equity,credit) in the process.
• The ability of incumbent firms to hold their powder dry and hold cash as a defence against disruptively innovative threats is in fact enhanced by policies like ‘Operation Twist’ that flatten the yield curve. Firms find it worthwhile to issue bonds and hold cash due to the low negative carry of doing so when the yield curve is flat, a phenomenon that is responsible for the paradox of high corporate cash balances combined with simultaneous debt issuance.

Fed Watch: Already Thinking About November -The ink is barely dry on the Fed's policy shift this week, but the debate is already shifting to the next move. Jon Hilsenrath at the Wall Street Journal offers this assessment: Bernanke has made clear his mindset about post-bubble economics: Keep experimenting as long as the economy is stumbling and inflation is muted. I think Hilsenrath is correct - as long as the economy continues to stumble along, the Fed will continue to tinker with policy. The likely policy paths: Other options have been discussed. Among them, officials are deep in talks about whether the Fed should shift communications strategy to be clearer about what it would take to get them to raise rates. More clarity might quell any lingering fears in financial markets that the bank might prematurely tighten monetary policy. The Fed also could buy more securities, lower a 0.25% rate it pays banks on their cash deposits at the central bank or consider other unconventional measures. I would like some more clarity on the "other" measures, but that aside, the usual suspects. I tend to think it will be a challenge to shift the communications strategy given the willingness of Fed policymakers to publicly challenge the stance of monetary policy.  In any event, should we be looking for more at the November meeting? One former Fed staffer says no:

When So-Called Hawks Are Really Doves – Taylor - The Fed's dual mandate of “maximum employment” and “stable prices” is in the news again. At the recent presidential debate, the major Republican candidates made the case for repealing the dual mandate, while the President of the Federal Reserve Bank of Chicago, Charles Evans, made the case for doubling down on it.  It's an important issue to understand and discuss. In my Bloomberg News article yesterday, I argued that history indicates that removing the dual mandate will actually help lower unemployment by reducing discretionary interventions and encouraging more predictable rule-like policy.  In this regard the frequently used terms monetary "hawk" and "dove" are quite misleading. A hawk is usually defined as someone who would like the Fed to focus on long run price stability.  But according to the evidence I discuss in my article, such a focus would better characterize a dove in that unemployment would be lower not higher.

G.O.P. Urges No Further Fed Stimulus - Even though the financial markets have been counting on the Federal Reserve¹ to take action, Republican Congressional leadership sent a letter to the Federal Reserve chairman on Tuesday evening urging it not to engage in further stimulus.  The letter was sent in the midst of a two-day meeting in which Fed officials are widely expected to undertake policies to lower long-term interest rates. That move would be intended to loosen up credit in hopes of promoting growth. The meeting ends Wednesday, and the Fed is expected to release a statement Wednesday at 2:15 p.m.  “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” said the letter, signed by four of the top Republicans in Congress: Mitch McConnell of Kentucky, the Senate Republican leader; Jon Kyl of Arizona, the Senate Republican whip; House Speaker John Boehner of Ohio and House Majority Leader Eric Cantor of Virginia.

Full Text: Republicans’ Letter to Bernanke Questioning More Fed Action - Dear Chairman Bernanke, It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people. It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

The Republican’s Latest Ploy to Keep the Economy Lousy through Election Day, by Robert Reich -  Whatever shred of doubt you may have harbored about the determination of congressional Republicans to keep the economy in the dumps through Election Day should now be gone. Today, in advance of a key meeting of the Federal Reserve Board’s Open Market Committee to decide what to do about the continuing awful economy and high unemployment, top Republicans wrote a letter to Fed Chief Ben Bernanke. They stated in no uncertain terms the Fed should take no further action to lower long-term interest rates and juice the economy. To say it’s unusual for a political party to try to influence the Fed is an understatement. When I was Secretary of Labor in the Clinton Administration, it was considered a serious breach of etiquette — not to say potentially economically disastrous — even to comment publicly about the Fed. Everyone understood how important it is to shield the nation’s central bank from politics. If global investors suspect the Fed is responding to political pressure of any kind, investors will lose trust in the nation’s monetary policies. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. The inevitable result: Lenders charge more for lending us money.

GOP To Fed: Let Economy Fail - The headline above is not what GOP congressional leaders actually said today to Federal Reserve Board Chairman Ben Bernanke, but they might just as well have used that precise language in the letter CNBC reports they sent to the Fed.  According to CNBC, the letter instructed the Fed "to refrain from further 'intervention' in the economy. In other words, now that the GOP has made it all but impossible for fiscal policy to be used to improve they economy, they want to make sure that the only other tool the government has at its disposal -- monetary policy -- isn't used either.  Why take on the Fed?  The Republicans have some direct control over fiscal policy because they can either refuse to consider a proposal in the House where they are in the majority or can filibuster legislation in the Senate where they are in the minority.  Because the Fed is an independent agency, the GOP can only do what they did today in the letter by threatening to bring down the wrath of god if it dares take any action to get the economy moving.

Maybe the GOP Leadership Has Known All Along - That additional monetary stimulus would help the economy.  That is the only sense I can make of the letter from Republican leaders in Congress sent to Federal Reserve Chairman Ben Bernanke asking him to refrain from further monetary stimulus.  They may realize that a truly bold monetary stimulus program like FDR's original quantitative easing program of 1933-1936 can turn a depressed economy around and affect political outcomes.  If so, this understanding would also explain Governor Rick Perry's comments about Bernanke committing treason if he printed more money before the election.  It would be truly tragic if in fact these politicians were making this tradeoff between political gain and economic gain.  There is, though, a silver lining to these developments. Marcus Nunes notes that the congressional letter actually opens the door for the Fed to do something bold if they can justify it:

Keep monetary policy independent - Yesterday the top four Republican Congressional leaders sent a letter to Fed Chairman Bernanke about monetary policy.  I think that was a big mistake. The letter weighed in on the Fed’s debate about monetary policy, and was sent by Speaker Boehner, Leader Cantor, Leader McConnell, and Whip Kyl.  The key text is: Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people. I’m not commenting today on the economic or substantive policy view the Leaders express, but instead on the process point.  The U.S. has several long-standing economic policy advantages over many other countries.  One of those advantages is a fairly apolitical monetary policy process. I think monetary policy is worse when it is influenced by political pressure from Congress or the White House.

Treason? - So the Fed has gone ahead and done Operation Twist even though the Republican congressional leaders took the unprecedented step of politicizing the Fed and trying to dictate policy. If you believed the Republican leaders, you would say this is reckless monetary policy aimed specifically at supporting President Obama, a Democrat. Is Bernanke ‘almost treasonous’ then, as Rick Perry has said he is? Here’s my take. Bernanke is a Republican. Let’s get that out of the way. Ben Bernanke is a Republican holdover into the Obama administration first appointed by George W. Bush, much like former FDIC chair Sheila Bair and former Defense Secretary Robert Gates. Look it up. These three are exemplary public servants in that they have tried to serve their country as best they could regardless of the party in power. You might not agree with their policies, but acting like any one of the three is favoring a Democratic President for partisan reasons is preposterous. I would say it is even reckless – just like calling Bernanke ‘almost treasonous’ is. But what about the new Fed policy, Operation Twist? Isn’t it so reckless as to be ‘almost treasonous’. The short answer is no; Operation Twist is a big yawn.

Tea Party wolf tries to blow the Fed down - There is one charitable interpretation of the assault on the Federal Reserve delivered by the Republican leadership in Congress this week, on the eve of the central bank’s latest effort to reinvigorate the US economy. The Fed’s mission, enshrined in its founding legislation in 1913, does more than make the body independent of day to day politics. It also makes it a convenient whipping boy for politicians when they need someone to blame for the economy. A cynic might thus suggest that the letter from the Republican leaders in the house and senate urging the Fed to reject more stimulus measures was just making use of this institutional pressure valve. The letter landed in Ben Bernanke’s in-tray in the middle of the Fed’s two-day meeting to fine-tune the central bank’s new strategy to drive down long-term interest rates. The Fed Chairman dutifully ignored it and proceeded with the central bank’s plan.  But this exchange was no charade in which the steady Fed and populist politicians played out the roles expected of them. Within the Republican party there is a much larger game afoot on economic policy that extends far beyond the Fed. The Tea Party dominated Republicans of the early 21st century are planning a long march through the institutions of their own, this time remaking the core of the economic safety net which has been under construction in the US since the 30s.

Boehner Blames Fed for ‘Enabling’ Political Gridlock House Speaker John Boehner (R., Ohio) said he continues to have concerns about the Federal Reserve taking steps to kick-start the economy, saying the central bank was acting because officials there don’t believe the political system is doing its job.Earlier in the week, top Republican leaders sent a letter to Federal Reserve Board Chairman Ben Bernanke urging him not take further quantitative easing measures, saying there was little evidence that earlier efforts had helped to improve the economy. On Thursday, Boehner said he still has those concerns. But he also made a different argument: that the Fed is acting because of a belief that Congress and the White House aren’t working. “It appears to us they are taking actions because they don’t believe the political system can do what needs to be done,” the speaker said at a weekly press conference. “Frankly, I think that’s enabling the political process, rather than forcing the political process to do what it should do, and that’s to deal with our deficit and our debt which is imperiling jobs.”

Fed Bashers: Take A Lesson from Milton Friedman - On Tuesday, the Federal Reserve announced new measures to stimulate the economy. The stock market was not impressed and has fallen subsequently. Analysts point mainly to continuing debt problems in Europe and a growing belief that the U.S. economy may weaken further. I believe that another factor is concern that improving prospects for a Republican victory next year is strengthening the hand of so-called inflation hawks at the Fed, meaning that there will be less monetary stimulus than markets had anticipated. This fact was made clear on Tuesday, when the entire Republican congressional leadership sent a letter to Bernanke warning him against taking additional stimulative actions.  They specifically warned that the dollar would fall on foreign exchange markets and promote borrowing by overleveraged consumers. From the 1960s through his death in 2006, the dominant intellectual figure in Republican economic policy was University of Chicago economist Milton Friedman. He thought that the gold standard was nuts and that the Fed’s greatest failure was that it didn’t provide enough money to the economy during the Great Depression.

Why Liberals Should Join Conservatives’ Fed-Bashing Fun - It’s hard to interpret the letter that Congerssional Republicans sent on Tuesday evening to Ben Bernanke as anything other than an attempt to politically influence the monetary policy set by the Federal Reserve. Democrats have correctly recognized this as a rare breach of the central bank’s independence. But rather than complaining about conservatives’ fervor for monetary issues, liberals should be seeking to emulate them. For most policymakers and commentators on the left, aggressive monetary policy and inflation has long taken a backseat to fiscal and financial sector issues when it comes to discussing how to return our economy to its full potential. That has allowed the conservative movement and the financial sector to dominate the monetary discussion throughout our current recession—and their focus, as we have seen in recent weeks, is a perpetual fear about imminent hyperinflation. But liberals should be addressing monetary policy head-on, and they should do so by challenging conservatives’ definition of the term “credibility” as it applies to our central bank.

The coming failure of Operation Twist –The Federal Reserve has literally run out of ideas.  Operation Twist, a throwback to the 1961 action taken by the Fed named after the Twist Dance fad at the time, is now back in 2011.  This time the Fed plans to purchase $400 billion of bonds with 6 to 30 year maturities while selling bonds with shorter term maturities.  The Federal Reserve continues to deal with a debt crisis with more debt.  The market has quickly spoken shaving off 700 points in two days and many global markets are now solidly back in bear market territory.  The problem with this program is that it assumes that the only problem with the economy is that not enough people are borrowing and spending.  The Fed goes after interest rates like a lion after a zebra.  Interest rates are not a problem.  Rates are at historical lows.  The problem of course is that household income has gone south for well over a decade.  The only true winners with these low rates are the banks who can access cheap money to wildly speculate in the stock market casino.

Suddenly, Over There Is Over Here - THE debt crisis in Europe1 has finally, and officially, washed up on American shores. Last week, the mighty Federal Reserve moved to help European banks that have been having trouble finding people who are willing to lend them money. Some of these banks are growing desperate for dollars. Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper2, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts. Worries over the banks’ exposure to shaky European government debt have unsettled markets over there — shares of big French banks have taken a beating — but it is unclear how much this mess will hurt the economy back here. American stock markets, at least, seem a bit blasé about it all: the Standard & Poor’s 500-stock index rose 5.3 percent last week.

Bottom Line - US taxpayers could be on hook for Europe - The U.S. is coming to Europe's financial rescue. So far, America's role is fairly limited. But if the crisis continues to grow and the U.S. takes on a wider role, U.S. consumers and taxpayers could feel a bigger impact. The biggest exposure could come from America's status as the single largest source of money for the International Monetary Fund. The latest round of American financial assistance came Thursday with a promise by the Federal Reserve to swap as many dollars for euros as European bankers need. In the short run, those transactions won't have much impact because the central banks are simply swapping currencies of equal value. If the move helps avert a wider crisis, it could help spare the global economy from another recession. But over the long term, consumers could feel the impact of central bankers flooding the financial system with cash, according to John Ryding, chief economist at RDQ Economics. "This is a lender of last resort function," he told CNBC. "With the dollar injections that the Fed has done, it's like giving a patient medicine with really bad side effects." Ryding said the bad side effect in the U.S. has been inflation, which has picked up to 3.8 percent year over year.

Rethinking central banking - Vox EU - Central banks have massively broadened their remit in recent crisis-laden years, but the standard analytic framework – ‘flexible inflation targeting’ – has not changed. This column argues that it is time to properly flesh out an alternative framework. Financial stability should be an explicit mandate of central banks, and international coordination among central banks should be boosted by forming a small group of systemically significant central banks that regularly meets and issues reports to the G20 on their financial-stability policies.

Fractional reserve banking - Fractional reserve banking is sometimes portrayed as a sort of scam; a method by which rich bankers  underhandedly sap the wealth of society. This short video here, How Fractional Reserve Banking Increases Inflation and Steals our Wealth, is fairly representative of a view I hear expressed quite often.  I think that this view is somewhat distorted and misleading. The video starts off with an hypothetical depositor who starts off with $1000 and asks what happens when it is deposited. Right away we are off to a poor start. Does he mean starting off with $1000 of cash? Or does he mean $1000 of money (say, in the form of a paycheck)? It makes a difference. When was the last time you made a cash deposit? If you are like me, you cannot remember when. Of course, money gets "deposited" all the time in your account. At work, for example, you might be paid by check or by direct deposit. But this is not what the guy means by "making a deposit"--these "deposits" are simply debit and credit operations in a linked system of accounts (your paycheck is credited to your account, and is debited from your company's account). What the guy means by a "deposit" is a cash deposit. The main source of cash deposits in all likelihood originates from the cash registers of retail businesses.

All money is helicopter money. Against the Law of Reflux. - Nick Rowe - Milton Friedman said (somewhere) that money is like a refrigerator. Both are consumer durables that yield a flow of services to their possessor.But in one important way that is a very bad analogy. Money is a medium of exchange, and refrigerators aren't. The stock of money, and the stock of refrigerators, are determined in very different ways. What determines the stock of refrigerators held by the public? The short answer is: supply and demand. What determines the stock of money held by the public? The short answer is: supply. The suppliers of money, whether those be central banks, commercial banks, or counterfeiters, can force people to hold more money than they wish to hold. The suppliers of refrigerators can't. There is an important sense in which all increases in the stock of money are like helicopter operations. The helicopter increases the stock of money without first persuading us we want to hold more money. We pick up the money whether we want to hold it or not. We plan to exchange that unwanted money for something we do want to hold. The modern debate over Quantitative Easing is a rehash of the very old debate over the Law of Reflux.

Constraints on Central Banks Leave Markets Adrift - They called it the “Greenspan put,” and it reassured a generation of traders. If economic storms were gathering, the top central banks — most important the Federal Reserve¹, then led by Alan Greenspan² — could and would step in to prevent disaster. Because the traders effectively had a put option, they could safely bet that the markets would survive even the worst crisis.  This year, volatility has soared and share prices have fallen sharply, in part because few think there is a Bernanke put, or, for that matter, a Trichet put. It is far from clear that the authorities could stem a new panic, and even less clear that many would be willing to try.  In other words, the slogan for markets as the International Monetary Fund and World Bank meet this week in Washington could well be, “You’re on your own. Don’t count on anybody to bail you out.”

Actually, the Markets Did Drive Down Their Growth Forecasts Because of the Fed - What explains the big sell off in markets today? As Ezra Klein notes, many observers are attributing it to the FOMC saying it sees "significant downside risk" to the economy.  Felix Salmon, however, objects to this line of reasoning: It’s silly to think that the decline in stock-market prices was a rational reaction to the FOMC statement. If the FOMC is more pessimistic than the market expected, that’s normally a good sign for markets, since it implies that monetary policy will remain looser for longer. The market cares about the Fed because the Fed controls monetary policy. And so Fed forecasts are important because they help drive that policy. No one revised down their growth expectations as a result of the FOMC statement. Actually Felix, the decline in equity markets, the drop in treasury yields, and fall in expected inflation all indicate the public has revised down its growth expectations and the most likely reason is Fed policy.  Over the past three years the FOMC has effectively kept monetary policy too tight by failing to respond to shocks that have kept current dollar spending (i.e. aggregate demand) depressed.  This passive tightening of monetary policy started in mid-2008 and continues to this day.  Based on this experience,  markets understand that when the Fed downgrades its economic forecast it means the Fed is going to allow things to get worse. 

How markets interpreted the Fed’s Operation Twist as a sign of double dip - .I just had a meeting with former US President Bill Clinton. He was explaining to us why inspiring, connecting, and empowering global leaders to forge solutions on problems that are most pressing in developing countries is still relevant during these trying times. I will write this up for a future post. But his comments there reminded me about the negative impact I could have in amplifying crisis by hyping pessimistic outcomes unnecessarily. So I’ll try to keep it real but not alarmist. Tell me how I do at the end.

• The global economy hit stall speed earlier this year as Europe and the US became susceptible to a double dip at the same time.
• Double dip will likely lead to such severe turbulence politically and economically that cohesion could rip apart in a way that creates depression instead of policy support and muddle through.
• Until now, most people realised that fiscal support was lacking in both the US and Europe but they deluded themselves into believing monetary support would ride to the rescue. It will not.
• The Fed statement yesterday, while initially billed as the post-QE3 meeting statement should now be seen as the Fed reload to find its run out of ammo meeting. I should stress as I did yesterday that “it’s not that monetary stimulus is completely ineffective. It’s that you must really jam it on and you would have to target price instead of quantity to get any measurable effect and even then the transmission channel is going to be weak.”
• The Fed is not going to jam it on. “the Fed is already feeling political heat from its previous policy actions, so it will allow the economy to slip before it embarks on the next round of asset purchases. Therefore, if and when the next recession hits, debt deflation will take hold. The calls for stimulus will be deafening. And because the Fed will have resisted more aggressive prior action, the Fed will then be forced to be extremely aggressive in its policy response. That is when expanding the balance sheet will be a go and the Fed won’t just buy Treasuries, but a lot of other assets too.” [Roubini: No QE3 announcement at Jackson Hole but QE3 will happen]

Goldman Surprised by Reaction to "Operation Twist" - I  seriously do not understand how anyone could have thought "Operation Twist Again", could do anything meaningful. What good can another 20 or even 50 basis point lowering on the 10-year rate do? Operation Twist will not spur lending because banks are capital impaired and businesses have no reason to expand. Moreover, the flattening of the yield curve will hurt, not help bank profits. Nonetheless here is something I picked up from ZeroHedge the other day and wanted to comment on. ZeroHedge reports Goldman Is Surprised By The Market's Reaction The yield curve did indeed twist--with the difference between ten-year and two-year Treasury yields flattening 11bp to 166bp. But other asset prices responded in ways atypical for monetary easing: the dollar rallied, equities slumped, and commodity prices fell. On net, our GS Financial Conditions Index actually tightened on the day, certainly not the reaction Fed officials would have been hoping for.

Inflation Expectations Plummet -- Guess What the Stock Market Did - On August 18, I did a post after the S&P 500 fell by 4.6% to 1140.65, observing that inflation expectations as reflected in the breakeven TIPS spread on constant-maturity 10-year Treasuries fell by a whopping 18 basis points from 2.17% to 1.99%.  I also provided a table showing that in 26 instances in which inflation expectations (measured by the 10-year constant maturity TIPS spread) had fallen by 11 basis points or more in a single day since September 2008, 17 had been associated with a decline of more than 1% in the S&P 500.  Today, the TIPS spread fell by 15 basis points from 1.86% to 1.71% while the S&P 500 fell by 3.2%. (For an explanation of the theory behind this relationship and for a description of the econometric evidence supporting it, see my paper here and an earlier post on this blog.)  Inflation expectations are now at their lowest point in over a year just about the time that Chairman Bernanke and other Fed officials began signalling that they were concerned about the dangers of deflation.    Josh Hendrickson provides a good explanation for why the Fed’s feeble moves to flatten the yield curve are irrelevant to the problem now staring us in the face:  price level expectations are not high enough to make capacity-expanding investment worthwhile.

With a Joint Statement, the Leading Economies Try to Reassure World Markets — The world’s major economies released an unexpected joint statement Thursday night reiterating their commitment to the stability of banks and financial markets, seeking to soothe nervous investors on six continents.  “We are committed to supporting growth, implementing credible fiscal consolidation plans, and ensuring strong sustainable growth,” said the communiqué from the Group of 20 nations. “This will require a collective and bold action plan with everyone doing their part.”  The statement, however, did not include commitments to new actions, or any talk of additional support for Europe. It also does not hasten the plan of the member nations to announce any actions at a November meeting of heads of state in Cannes, France.  The possibility of more immediate action also was not discussed at a dinner for member finance ministers and central bank governors Thursday night, according to a senior Treasury Department official who insisted on anonymity because the conversations were private.

Adam Posen Presses Central Banks to Act More Aggressively - GOVERNMENTS are pushing austerity; bankers are hoarding cash; a recession looms in the United States and Europe. But Adam S. Posen has a solution: a shock-and-awe display of coordinated central bank attacks aimed at reviving sluggish economies.  An American economist on the Bank of England’s monetary policy committee, Mr. Posen is no academic scribbler or lonely blogger, but someone inside the central banking establishment.  And, as a leading expert on what is often called Japan’s lost decade, he is particularly worried that the Federal Reserve in the United States and the European Central Bank are making the same monetary policy mistakes that left Japan’s once-robust economy stagnant all through the 1990s and even into the 21st century.  For months now, Mr. Posen — who got his bully pulpit at the Bank of England by answering an ad in The Economist — has been warning that policy makers in Washington and in Europe have been too optimistic about how quickly the global economy would recover from the financial crisis.  The joint action by central banks on Thursday to make it easier for weak European banks to borrow dollars is no doubt a policy nod in Mr. Posen’s direction, but it is still a far cry from the type of unified bond purchasing program, or quantitative easing, that he is advocating.

Richard Alford: The (Re)Education of Ben Bernanke and the FOMC - When you compare Bernanke’s “Deflation: Making Sure It Doesn’t Happen Here” speech of 2002 with his recent Jackson Hole speech, you cannot help but notice changes in his view of the economy and the financial system as well as a significant decline in his confidence in the ability of monetary policy to insure full employment,. The changes between the speeches and the possible explanations for the changes have implication for the course of Fed policy in the near and medium terms as well as the long-run health of the US economy. They suggest that the FOMC sees less upside to further stimulative policy actions and at the same time sees possible downsides where it had not seen them before. This, in turn, suggests that the FOMC will be more tentative in adopting further nonconventional stimulative measures than past behavior would indicate. The 2002 speech reflected a confidence in the underlying health of the US economy and the robustness of the financial system, as well as the effectiveness of both the regulatory system and economic policy: “…I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself….A particularly important protective factor in the current environment is the strength of our financial system...our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape."

Helicopter Ben Needs to Pick Up His Game - Federal Reserve Chairman Ben Bernanke is often characterized as a inflation-monger. There’s just one problem with that criticism. As David Leonhardt demonstrates in the New York Times, when it comes to inflation, Bernanke is a piker

Bernanke Joins King Tolerating Inflation - Inflation flashing red may be less of a green light for higher interest rates as global growth falters. Some Federal Reserve policy makers favor keeping their benchmark rate close to zero until price increases reach a level Vincent Reinhart, a former top official, says could be 3 percent. The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months. Brazil executed a surprise cut Aug. 31 to safeguard its economy even after inflation quickened to a six-year high. Policy makers such as Fed Chairman Ben S. Bernanke and Bank of England Governor Mervyn King may be challenging central-bank orthodoxy to replenish depleted toolkits and support recoveries at risk of sliding back into recession. Tolerating higher inflation may make long-term Treasuries less attractive while supporting stocks and commodity prices. “They’re clearly concerned that monetary policy to date hasn’t really accomplished what they expected it to. So they ask themselves, why? And what could we do about it?”

The Decline & Fall Of Inflation Expectations... Again -The Federal Reserve’s two-day FOMC meeting on monetary policy begins today. Nothing unusual about that. It’s just the latest installment of this regularly scheduled confab. What's different, however, is the growing political pressure aimed at influencing the outcome. “In an unusual move, Republican leaders of the House and Senate are urging Federal Reserve policymakers against taking further steps to lower interest rates,” the AP reports. There’s  David Malpass, president of Encima Global LLC, advises in today’s Wall Street Journal that the Fed should cease and desist in its monetary efforts because "The central bank has already bought nearly $2 trillion in longer-term bonds, a massive intervention in markets, with no constructive results. It's time to move on." Move on? To what? Allowing inflation expectations to continue dropping? The implied inflation forecast based on the yield spread for the 10-year nominal Treasury Note less its inflation-indexed counterpart is under 2% again, and falling. That's not a good sign for an economy facing an elevated risk of recession. The habit of arguing that lower inflation is always and forever preferable isn't justified these days. What's needed is a policy that addresses the problems of the moment, i.e., a policy that stabilizes if not raises inflation.

A Little Inflation Can Be a Dangerous Thing - Paul Volcker - So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.  It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.  The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability. Well, good luck.

When Inflation Was Good - Krugman - Inflation hawks, including Paul Volcker in today’s NYT, often invoke the supposed lessons of history, to the effect that inflation is always harmful and always gets out of control. But that’s a selective reading of history, and it skips the most relevant examples. Early on in this crisis, I began wondering why the US didn’t relapse into the Great Depression after World War II. And there’s a good case that this had something to do with it: The big rise in prices during and after WWII arguably did a lot to eliminate the debt overhang, making it possible for the economy to enter a sustained, non-inflationary boom. And this is the relevant history we should be looking at: this isn’t your father’s slump, it’s your grandfather’s slump. Volcker, I’m sorry to say, is worrying about refighting the 1970s when we’re actually refighting the 1930s. And fighting the wrong war is a good way to lose the one we’re in.

Volker on Inflation - As a strong proponent for a higher inflation target I should address this column by Paul Volker in a full and complete manner. For right now though I want to say that I am making a case that I believe is sustainably different from that the case Volker is arguing against. He says Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. My point is not simply – as seems to be Ken Rogoff’s – that a jolt of inflation inflation would be good for the economy right now – though I believe it would be.  My case is that 2% inflation is a fundamentally bad idea. I argue that 4% inflation is not merely “OK” it is preferable. It is preferable because in even in normal times it produces higher nominal interest rates. Higher nominal interest rates in turn give the Fed more leverage under traditional monetary policy.

Fed Watch: Not the 1970s - Today former Federal Reserve Chairman Paul Volker pulled out the specter of the 1970’s to rail against those suggesting room for a higher inflation target, holding special contempt for the obviously insidious President of the Chicago Federal Reserve Charles Evans: So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt ...It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script. Not so remarkably given that this idea has been making the rounds for some time – Olivier Blanchard suggested a 4% inflation target early last year, and Greg Mankiw wrote this in early 2009: there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations. Of course, Volker’s amazement that someone might suggest a higher inflation target is a consequence of his conviction that the 1970’s was the worst economic decade ever:

There Are Worse Things Than Inflation - Krugman - Like me, Tim Duy comes down hard on Paul Volcker’s inflation-is-history’s-greatest-monster op-ed. I pointed out that the last time we were in an economic trap resembling our current predicament, inflation actually helped get us out. Duy adopts a somewhat different but complementary approach: he asks just how bad the evil inflationary 1970s actually were. And the answer is, not nearly as bad as the noninflationary 00s. For example: As Duy says, we don’t want to romanticize the 70s — but they were nowhere near as terrible as what we’re going through now. And as he also says, Volcker’s condemnation of inflation as a solution is deeply puzzling. Inflation won’t cure problems of low productivity — but nobody said it would, and that’s not our problem. It very much can reduce excessive leverage. And a stronger short-run economy is actually a better environment for fixing whatever structural problems we have than a persistently depressed economy.

Why I am not very worried about inflation just now, by Greg Mankiw - Several people have asked me in recent days if the Fed's aggressive attempts to get the economy going will lead to galloping inflation to go along with our weak economic growth. It is possible that this might occur down the road, of course, but I don't see it happening just now. The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm's costs.  A persistent inflation problem is unlikely to develop until labor costs start rising significantly. Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data. The same thing is not happening now. This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.

The Low-Inflation Trap (Slightly Wonkish) - Krugman - Usually we worry about a deflationary trap, which comes about as follows: suppose that the economy is depressed, that as a result prices begin falling, and interest rates are up against the zero lower bound. Then as deflationary expectations take hold, the real interest rate rises even as the nominal rate stays pinned at zero — and this rising real rate helps keep the economy depressed. Japan has been in this trap for a long time. But here’s what I’ve been thinking: we don’t have to get all the way to actual deflation for something like this to take hold. The key point is that long-term interest rates, which are what matter for spending, are effectively bounded some ways above zero. The reason is option value: the short rate could move up, but it can’t go down, so the yield curve has to be upward-sloping.  And you can make a pretty good case that the US 10-year rate would have a hard time moving much lower than it is now, even if people believe that we’re in full Lesser Depression mode. What this means is that much of any further decline in expected inflation — which has plunged lately — will translate into a rise in real interest rates. And that will be a drag on the economy, leading to further inflation declines.

BOE’s Posen on Central Bankers’ ‘Exaggerated’ Inflation Fears - Adam Posen is an American economist who sits on the Bank of England‘s monetary policy committee where he is an outspoken advocate for the case that developed-country central banks should be doing more — a lot more — to help the struggling global economy. As the minutes of the Sept. 7-8 Bank of England meeting, released Wednesday, reveal, Mr. Posen cast the sole dissenting vote and argued that the central bank should buy at least 50 billion pounds more long-term government bonds in another round of quantitative-easing.In a telephone interview this week with The Wall Street Journal’s David Wessel, Mr. Posen offered his take on why his fellow central bankers in the U.K. and elsewhere are so reluctant to ease aggressively, on why the Bank of England should ease further despite current high inflation rates and on the impact (or lack thereof) of quantitative easing on exchange rates. Here are excerpts of their conversation.

All Banked Up With Nowhere to Go - Krugman -I really, really don’t understand people who deny that we’re in a liquidity trap. As I’ve tried to explain in various ways, the hallmark of such a trap is that at the margin people hold money not for its moneyness but simply as a store of value, and that therefore conventional monetary policy — which involves swapping money for non-money assets like Treasury bills — has no effect, because it’s just replacing one zero-interest asset with another. As confirmation, consider this LA Times report on surging bank deposits; basically, people are holding monetary assets simply as a safe place to park their wealth, and the banks have no desire to put those funds to work. You can also see this in the data. Look at the velocity of M2 — the ratio of nominal GDP to Milton Friedman’s preferred measure of the money supply. Monetarism rested on the assumption that there was a reasonably stable relationship between M2 and GDP; what’s happening now is that deposits are piling up but going nowhere, so velocity (which rose in the 90s thanks to the rise of shadow banking) has plunged:

Commodity money: It's back! (and it sucks) - You may recall hearing that earlier this year, J.P. Morgan began to accept gold as collateral for some types of loans. The story can be found here. Here is an excerpt: J.P. Morgan is effectively saying gold is as rock solid an investment as triple-A rated Treasuries, adding to a movement that places gold at the top tier of asset classes. It also is trying to capitalize on all the gold now owned by hedge funds and private investors that is sitting idle in warehouses.O.K., so gold is not quite "money" (in the sense that it circulates widely as a medium of exchange). That is, if gold was money, one would not need to use it a collateral for a money loan, right? (You could use the gold to buy the stuff you wanted directly.) But the use of gold as collateral in short-term lending arrangements nevertheless has the effect of increasing the liquidity of gold. It is interesting too, to observe that the practice appears to be extending to other commodities, including copper and soybeans. Where is this happening? Apparently, in China; see China's copper collateral -- and covert credit and China and the magic financing (soy) beanstalk.

The End of Sound Money and the Triumph of Crony Capitalism…David Stockman - The triumph of crony capitalism occurred on October 3rd, 2008. The event was the enactment of TARP — the single greatest economic-policy abomination since the 1930s, or perhaps ever. Like most other quantum leaps in statist intervention, the Wall Street bailout was justified as a last-resort exercise in breaking the rules to save the system. In the immortal words of George W. Bush, our most economically befuddled President since FDR, "I've abandoned free market principles in order to save the free market system." Based on the panicked advice of Paulson and Bernanke, of course, the president had the misapprehension that without a bailout "this sucker is going down." Yet 30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found. In fact, the only real difference with Iraq is that in the campaign against Saddam we found no weapons of mass destruction; by contrast, in the campaign to save the economy we actually used them — or at least their economic equivalent.

What the financial markets are telling us about the economy - Ten year U.S. Treasury bonds are currently in such high demand that investors are willing to settle for a yield of only 1.77 percent; that level was even lower, an all-time record low as it happens, on Wednesday. At current stock market levels the Standard & Poor’s 500 is paying dividends of 2.3 percent.  Usually it’s the other way around: The government typically must pay a higher yield on its bonds than the stock market pays out, because investors expect stock prices to rise over time whereas bonds only pay back the amount invested after a decade.  How about inflation?  By looking at the difference in yield between bonds that are indexed for inflation and those that aren’t, you can discern the market's inflation expectations. Just two months ago, financial markets were projecting that inflation would be near the 2 percent or so level that the Federal Reserve aims for. But now, markets are expecting annual inflation over the next five years of 1.3 percent, well below that level. Over the next decade, inflation is expected to be very low as well: Markets expect 1.6 percent annual inflation over the coming decade, down from 2.4 percent at the beginning of August.

Brad DeLong defines “the long run” - Tyler Cowen - Empirical reality has told us that–at least when inflation is very low, as it is at present–the short-run is not less than five years but (shudder) can be as long as fifteen. The full post, which offers more, is here. That is exactly the kind of direct response I have been looking for, though I might get greedy and ask what makes inflation “very low.”  Core inflation has now reached two percent and I can’t quite regard the non-core, which is higher at 3.8 percent, as totally irrelevant.  (Why is it I hear Scott Sumner in my ear, and can you guess which four-letter abbreviation he is screaming out?) In my view, supply-side factors are the main reason why the employment-to-population ratio has been so dismal since 2000, demand-side factors are the main reason why so many bad things have happened since 2007-2009, and supply-side factors and mismatched expectations are the fundamental reason why demand-side factors went south in 2007-2009.

Does rapid TFP growth make recessions end quickly? -Tyler Cowen believes that having rapid TFP growth makes recessions end more quickly: It also seems to me that the long run comes more quickly when TFP is relatively high, which again brings us back, at least partially, to the supply side.  This view is supported by theory.  When the economy has a lot of broad-based technological innovation, at least somewhat evenly distributed, job creation is easier, income effects are more likely to positively cumulate, and monetary and fiscal policy are more likely to gain traction. The post to which he links regards the depression of the 1870s, and says this: 1873-79 was quite turbulent, but afterwards the global economy adjusted to deflation. First, I would like to point out that 1873-1879 is six years. That doesn't sound "quick" to me! Recall that that particular depression is typically called the "Long Depression". This despite the high TFP growth at the time. And six years is twice the amount of time from the 2008 financial crisis until now. If a six-year depression is "quick," why should we conclude, after three years, that our current depression is being prolonged by supply-side factors? That does not make sense to me.

The Fed's Latest Moves May Fall Flat, Experts Say - With the White House and Congress at loggerheads over how best to help the U.S. economy, some have pinned their hopes on the Federal Reserve to help fill the void. Fed Chairman Ben Bernanke says the central bank still has a range of tools it can use to prop up the economy. But Greg McBride of the financial website Bankrate.com is not holding his breath. "The Fed can only do so much," he said. "Their most effective tools are things that they have used up already. At this point, they've got a few options left, but none of them is a surefire way to either jump-start the economy or get people to borrow or get banks to lend. There's still a demand problem. And that is not something that the Fed alone can fix." The stock market seemed unimpressed Wednesday by the Fed's latest efforts. The Dow Jones industrial average fell more than 280 points after the Fed announced an effort to push long-term interest rates even lower.

Reckless Abandon - The Federal Reserve is impotent when it comes to saving the economy, even if it tries with all its might not to show it. It flaunts its fictional capacity and ability to come up with new and creative well-calculated measures to influence everything from A to Z like once upon a time the emperor flaunted his new clothes. And no matter how badly any and all of its previous measures have failed, the vast majority among us still praises the subtly elegant materials and their dream-provoking shine. We don't want reality, we want to believe. Oh, but you say, the Fed did succeed at times: didn't QE1 saved the economy?! No, I say, it did nothing of the kind. One might argue that it saved the day, perhaps, but all it really accomplished was to make the crisis more opaque. And granted, that may well be what it was designed for. So in that light, yes, one can argue that the Fed has been highly successful.  But that is not what we are looking for in a central bank. What we are looking for is for it to, indeed, save the economy, in order that, in the case of the Federal Reserve, ordinary Americans can look forward to decent paychecks, and homes they can keep living in, and bright futures for their kids.

Why Supply Side Economics Won’t Solve Our Problems - There is currently a debate regarding the appropriate policy response to the current economic situation.  The arguments can be broken down along two lines — supply side and Keynesian.  While supply side economics may be appropriate in some situations, they are completely inappropriate for the current problems we face. In general, supply side economics can be described thusly: Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulationIn thinking about the preceding, consider this simple chart of supply and demand:

The real recession never ended - Economists tell us the economic recovery is more than two years old. Corporate profits have zoomed to record highs. Countries such as China and Brazil have roared back. But by just about every other measure, it's as if the 2007 recession never ended. Industrial production, retail sales, employment, home prices, construction activity, inventories and retail sales are all below pre-recession levels. In inflation-adjusted terms, the economy is smaller than it was before the downturn. That's nearly four years of no growth.The truth is, our problems are deeper and go back further. One example: Stocks are coming off their worst 10-year performance since the Great Depression, trading at levels first reached in 1998. In fact, I'd argue that the real recession began a decade or more ago and hasn't ended. The key problem -- stagnant wages -- has only gotten worse. It hasn't mattered who was in the White House or in control of Congress. It's structural, and it's related to globalization and the rise of China.

Hysteresis Begins - Krugman - The slump in the United States and other advanced economies is the result of a failure of demand — period, end of story. All attempts to claim that it is somehow structural, or maybe the result of reduced incentives to produce, have collapsed at first contact with the evidence.But there is a real concern that if the slump goes on long enough, it can turn into a supply-side problem, because investment will be depressed, reducing future capacity, and because workers who have been unemployed for a long time become unemployable. This is the issue of hysteria “hysteresis”. And if you look at manufacturing capacity, in particular, you can already see that starting to happen. You can see that there was a mini-version of the current decline in manufacturing capacity after the 2001 recession: capacity basically stopped growing in the face of a protracted weak economy. But this time around, with manufacturers operating way below capacity with little prospect of needing more capacity any time soon, they’re both scrapping equipment and failing to expand. The result is that when we finally do have a real recovery, we’ll run up against capacity constraints much sooner than we would have if there had been no Lesser Depression.

Krugman and Hystersis - Hystersis is something that concerns me deeply. When we look at the relationship between unemployment and inflation its hard not come to the conclusion that past monetary episodes influence the current relationship between the two. For me the 80s has always been a particarly important period because we have central banks officially adopting a set of policies designed to bring down inflation. Those policies ranged from slam-bam Volkerism to explicit inflation targets.Its hard not to believe that this was money pushing on the economy and not real effects masquerading as nominal ones.  In any case, I wanted to look at the series Krugman uses to produce evidence of hysteresis because it doesn’t look consistent with the data to me. Here is what Krugman offers

The Bleeding Cure, by Paul Krugman - Doctors used to believe that by draining a patient’s blood they could purge the evil “humors” that were thought to cause disease. In reality, of course, all their bloodletting did was make the patient weaker, and more likely to succumb. Fortunately, physicians no longer believe that bleeding the sick will make them healthy. Unfortunately, many of the makers of economic policy still do. And economic bloodletting isn’t just inflicting vast pain; it’s starting to undermine our long-run growth prospects.   For the past year and a half, policy discourse in both Europe and the United States has been dominated by calls for fiscal austerity. By slashing spending and reducing deficits, we were told, nations could restore confidence and drive economic revival.  And the austerity has been real. In Europe, troubled nations like Greece and Ireland have imposed savage cuts, even as stronger nations have imposed milder austerity programs of their own. In the United States, the modest federal stimulus of 2009 has faded out, while state and local governments have slashed their budgets, so that over all we’ve had a de facto move toward austerity not so different from Europe’s.

There is No Monetary and Fiscal Stimulus Because the President Doesn’t Believe in Monetary and Fiscal Stimulus - I am, of course, happy to read this post by Matt Yglesias which confirms my own biases.In a June interview with Fox News, President Obama appeared to argue that the country is suffering from high unemployment because productivity enhancing technologies such at ATMs have reduced the need for work.  It wasn’t clear to me at the time if the president really meant that or if it was just a bad moment in an interview,  . . . Team Obama has, I think, landed on a more sophisticated version of this theory, and that explains some of the reason why Romer & Summers aren’t in the administration anymore and haven’t been replaced by like-minded people. This confirms my biases because it suggests the world is in some ways a lot simpler than people make it out to be. We observe a President not pushing for more stimulus and not appointing doves to the FOMC. What could be the reason? You could come up with all sort of theories involving intrigue and political strategery. However, here is one you might want to try: the President doesn’t want to do stimulus and is not interested in appointing doves to the FOMC.

The most powerful AD denier of all - A couple days ago I suggested that Obama might not be particularly well-informed about economics: It seems increasingly clear that Obama doesn’t have a good understanding of economics.  He approaches issues like a very bright non-economist using his common sense. It now appears that it’s even worse than I thought.  I found this quotation from Ron Suskind over at DeLong’s blog.  Both, in fact, were concerned by something the President had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy.  Summers and Romer were startled. “What was driving unemployment was clearly deficient aggregate demand,” Romer said.  “We wondered where this could be coming from.  We both tried to convince him otherwise.  He wouldn’t budge.” I recall reading similar statements by his former colleagues at the University of Chicago.  They’d make arguments to him, and he just wouldn’t seem to get the point.  He’s obviously very bright, but it’s also clear that he falls into that relatively large group of Americans who have their own very strong views on economics, and couldn’t care less what professional economists think.

The ATM Myth - Brad DeLong cited this passage from Ron Suskind’s latest book on Monday: Both [Christina Romer and Larry Summers], in fact, were concerned by something the president had said in a morning briefing: that he thought that high unemployment was due to productivity gains in the economy. The same meme spread across the economics spectrum: Scott Sumner was horrified. Mike Konczal’s reaction (on Twitter) was restrained (“This is…depressing”) by comparison. In the context of Suskind’s book, we might just assume that Obama was, as usual, being gulled by his handler Rahm and his Svengali, Timmeh Geithner. However, via Karl Smith, we can set to rest any doubt that Barack Obama is just being misled. Matt Yglesias catches a lazy piece of  “thinking” from the President—who has had Austan Goolsbee, Larry Summers, Peter Orszag, Alan Kreuger, Jason Furman, Jason Bernstein, and several others (even dissing Christina Romer, as Obama explicitly did) to correct him: In a June interview with Fox News, President Obama appeared to argue that the country is suffering from high unemployment because productivity enhancing technologies such at ATMs have reduced the need for work. and that explains some of the reason why Romer & Summers aren’t in the administration anymore and haven’t been replaced by like-minded people. [link in original]

Doom! - Paul Krugman - I was recently asked to give a talk on “capitalism and democracy”; that’s bigger-think than I usually do, but I gave it a try. I took as my starting point the famous Fukuyama thesis that liberal democracy — meaning basically a market economy plus democratic institutions — was an end state, a final resting point for state organization. I always had my doubts about that, largely thanks to the 1930s: what we saw there was that a severe economic crisis could put liberal democracy very much at risk. And it was a close-run thing: slightly better strategic decisions by the bad guys could have made totalitarianism, not democracy, the end state. It seemed to me even when Fukuyama first wrote that this could and probably would happen again, that there would be future crises that would put our system — which I agree is a very good system — at risk. But one thing I was sure of was that the next great crisis would be different. We’d learned to much to repeat that performance — right? Wrong. The amazing thing now is not that we’re having a crisis, it’s the fact that we’re having the same crisis, and making the same mistakes.

IMF Predicts Economic Growth Under 2% Per Year Through 2012 - More bad economic news in the latest forecast from the International Monetary Fund: The International Monetary Fund lowered its forecast for U.S. growth this year and in 2012, citing unresolved debt-reduction concerns and waning confidence among consumers and businesses. The world’s largest economy will expand 1.5 percent this year, down from the 2.5 percent projected in June, the Washington-based lender said today in its World Economic Outlook report. Unemployment will average 9 percent or higher through next year, the IMF said. Declining sentiment among Americans and a stagnant labor market threaten household spending, the biggest part of the U.S. economy. “Bold political commitment to put in place a medium-term debt reduction plan is imperative to avoid a sudden collapse of market confidence that could seriously disrupt global stability,” the IMF said in the report. “Downside risks weigh on the outlook given fiscal uncertainty, weakness in the housing market and household finances, renewed financial stress, and subdued consumer and business sentiment.”

I.M.F. Slashes Growth Outlook for U.S. and Europe - The International Monetary Fund1 sharply downgraded its outlook for the United States economy through 2012 because of weak growth and concern that Europe will not be able to solve its debt crisis2, the organization said Tuesday in its economic outlook. The fund said3 it expected the American economy to grow just 1.5 percent this year and 1.8 percent in 2012. Its June forecast was 2.5 percent in 2011 and 2.7 percent next year. The organization also lowered its outlook for the 17 European Union countries that use the euro. It predicted 1.6 percent growth this year and 1.1 percent next year, down from its June projections of 2 percent and 1.7 percent, respectively. The gloomier forecast for Europe was based on worries that Greece would default on its debt and destabilize the region.

The IMF Just Slashed Its Growth Projections For The Entire World - Just out... Lots of growth projection cutting for everyone around the world from the IMF. The global growth outlook has been downgraded from 4.5% to 4%. US growth expectations have been downgraded from 2.5% to 1.5%. The IMF blames Europe, and enourages mroe easing. Readmore from the IMF here.

How a Greek Default Could Tip The US Back Into a Recession -  Despite being more than 5,000 miles from Washington D.C., a default in Athens could trip up the global banking system just enough to tip the U.S. into a recession, investors and economists said. “Due to financial trading relationships and off-balance sheet exposure to European banks, the U.S. banking system will not go unscathed,” said Michelle Meyer, a Bank of America Merrill Lynch economist, in a note to clients Friday. “If the crisis in Europe escalates, it could be the shock that pushes the U.S. economy into recession ." While this is not the base case predicted by Bank of America, the firm does still prepare its clients for this possibility by laying out how the Greece crisis could quickly become a “Lehman event.” After all, a 50 percent haircut on Greek sovereign debt would mean a very manageable $60 billion, or just two percent, of total bank foreign claims for U.S. banks, according to the report. But that’s just director exposure. There are five major ways the U.S. is connected: trading counterparty risk and derivative ownership with heavily-exposed European banks, overall market confidence, central bank funding, money-market funds and trade flows.

The Fatal Flaws in the Eurozone and What They Mean for You - Europe’s fiscal and debt crises have dominated the financial news for months, and with good reason. The fate of the European Union and its common currency, the euro, hang in the balance. As the world’s largest trading bloc, Europe holds sway over the global economy. If it sinks into recession or devolves, it will drag the rest of the world with it. As investors, we are not just observers; we are participants in the global economy, and what transpires in Europe will present risks and opportunities for investors around the world. The issue boils down to this: Is the European Union and the euro salvageable, or is it doomed for structural reasons? The flaws are now painfully apparent, but not necessarily well-understood. The fear gripping Status Quo analysts and leaders is so strong that even discussing the euro’s demise is taboo, as if even acknowledging the possibility might spark a global loss of faith. As a result, few analysts are willing to acknowledge the fatal weaknesses built into the European Union and its single currency, the euro.

August economic indicators signal weak growth --- The economy should exhibit "continued weak growth" through the fall and winter, the Conference Board said Thursday as it reported that its index of leading economic indicators grew 0.3% in August, compared with a 0.1% gain expected by economists polled by MarketWatch. "There is growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession," said Ken Goldstein, a Conference Board economist, in a statement. "While the chance of that happening remains below 50-50, the odds have certainly increased in recent months." The LEI is a weighted gauge of 10 indicators that are designed to signal business cycle peaks and troughs. Among the 10 indicators that make up the LEI, four made positive contributions in August, led by the real money supply. The largest negative contribution came from stock prices. The LEI for July was revised to 0.6% from a prior estimate of 0.5%

ROUBINI: Recession Is At This Point Unavoidable, And It Could Be Worse Than 2008 - Nouriel Roubini is calling it this morning, following a bout of dismal economic data around the world. Europe and the U.S. are "effectively in recession" and there's nothing policy makers can do save them.  @Nouriel tweets:

• Economy already in recession. Whatever the Fed does now is too little too late
• UK in double dip @MarkitEconomics: CBI Trends total orders at -9 in. UK Man PMI highlights real weakness in order books twitpic.com/6onoto
• EZ in recession @MarkitEconomics: Flash Eurozone Composite PMI comes in below consensus for the 4th time in past 5 mths twitpic.com/6oneor
• China slowing @MarkitEconomics: release saw HSBC Flash China Man PMI remain <50 at 49.4 (Aug:49.9). Output index also <50 at 49.2 (Aug:50.2)
• US, Eurozone and UK are effectively in a recession now. And policy makers are running out of policy rabbits to pull out their policy hats
• RGE (www.roubini.com) predicted in July a 60% probability of recession in most advanced economies. By now that probability is much higher.
• Only issue now: will it be a mild G7 recession or a severe recession plus global financial crisis as bad or even worse than the 2008-09 one?

A second Great Depression: Eight drastic policy measures necessary to prevent global economic collapse. -Roubini - The latest economic data suggest that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Bros. in 2008. The risks of an economic and financial crisis even worse than the previous one—now involving not just the private sector, but also near-insolvent governments—are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown? First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the Eurozone's periphery such as Greece or Portugal are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the Eurozone, and Japan. Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates.

Recession's second act would be worse than the first - Fresh evidence of a global economic slowdown has raised fears that governments around the world may be powerless to reverse it. If the world does fall into back into recession, it could be much harder to escape than the contraction that ended in 2009. With banks still recovering from a decade-long credit bubble, governments slashing spending to cope with unsustainable debt, and unemployment at levels not seen in decades, a new recession would be “disastrous,” according to Roger Altman, a senior Treasury official in the Clinton administration. “We could be in for a repeat of the experience of 1937, when America fell back into recession after three years of recovery from the Great Depression,” he wrote in the Financial Times. Altman was referring to the fact the global downturn of the 1930s technically included two U.S. recessions, from 1929 to 1933 and again from 1937 to 1938. U.S. unemployment peaked at over 20 percent in the 1930s, according to historical estimates, and did not decline significantly until factories began gearing up for World War II.

Four Years After the Wake-Up Call - About four years ago exactly, we learned that we were in trouble. We had a housing boom driven by unrealistic expectations of house prices and mortgage costs that had created a housing overhang of overbuilding. Moreover, bankers who ought to have known better and had promised management and shareholders that they were originating-and-distributing securities that rested on a fundamental base of subprime mortgages had held onto such securities instead. The daily gyrations of the usually-placid Federal Funds market starting in late 2007 told us all that banks were really worried that other banks had jumped the shark and turned themselves insolvent. And as it turned out to be long and nasty, recent economic theories of macroeconomics have fallen like tropical rain forests. The--already implausible--claims that downturns had real causes? Fallen. The claim that downturns lasted only as long as workers misperceived their real wage? Fallen. The claim that the labor market cleared in a small number of years? Fallen. Those of us who believed that the long run came soon, that the cause of downturns was transitory price-level misperceptions, or that downturns had real causes need now to be looking for new jobs, or at least new theories.

World Can't Suck Enough - We have nearly reached the end of another grueling week in a world which can't suck enough. Disgusting doesn't quite describe it. Appalling doesn't quite capture it. Why would Christians invent a "hell" to punish the wicked when the true Hell is life right here on Earth? To wit—

• Global financial markets were jittery earlier in the week, but lost it altogether yesterday after Ben Bernanke & Co. announced operation "Twist" (to buy longer term T-bills) while also saying that downside risks to the economic outlook have increased. How fucking stupid do people have to be to not know that downsize risks to the economy have been piling up for some time now?
• European leaders and the ECB continue to dither, setting new world records for wishy-washiness every day. As they take "Extend & Pretend" to levels never imagined before, anxious traders in world markets, who must now constantly ingest prodigious amounts of Prozac to remain upright as the European Debt Crisis enters its 79,735^th day, get more and more hysterical with each passing minute.
• Not one to miss an opportunity for self-promotion, celebrity economist Nouriel Roubini is running around saying we're already in recession and its's too late for the Fed to save us, and perhaps, maybe, there is definitely a possibility, that we're on track for a full-blown contraction even worse than the meltdown of late 2008/early 2009. Good call, Nouriel!
• Republicans have decided to use FEMA—you know, Disaster Relief—as leverage to achieve theiir noble political goals.

What Profit Hath A Man Of All His Labor? - Krugman - Here’s the point: back around 1998 I was among those who looked at the crisis in Asia and realized what it implied — namely, that the problems that caused the Great Depression had not been solved, and that it could happen again. The speculative attacks on smaller nations, the liquidity trap in Japan, were omens for all of us. In 1999 I wrote a book, The Return of Depression Economics, saying all that. When the 2008 crisis struck, it was immediately clear that this was what we had been afraid of. And it was desperately important that policy makers realize that we were in a world where the usual rules no longer applied. But they didn’t. The banks were rescued — but as soon as that happened, the moralizers and deficit worriers, the people who see hyperinflation lurking under every bed, took over. Warnings that we were repeating not just the mistakes of Japan but the mistakes of Hoover and Bruening were waved away as the squeaking of people of no consequence, never mind the fact that some of us had pretty fancy credentials. And now we are exactly where I feared we’d be, repeating all the old mistakes and experiencing all the old consequences. As I said, I’ll get over it. But grant me a moment to look on the past three years, and despair.

Eurovillains - Krugman - It took bad thinking and bad policy by many players to get us into the state we’re in; rarely in the course of human events have so many worked so hard to do so much damage. But if I had to identify the players who really let us down the most, I think I’d point to European institutions that lent totally spurious intellectual credibility to the Pain Caucus. Specifically:

• - The OECD, which a year ago demanded both fiscal austerity and a sharp rise in interest rates, because, well, because. Recently the OECD surveyed Britain, concluded that inflation is likely to decline, unemployment to rise, and that the UK should therefore … continue with fiscal austerity and raise rates. As a correspondent wrote, “What planet are they living on? What planet am I living on?”
• - The ECB, which bought totally into the doctrine of expansionary austerity, despite overwhelming evidence that it was false, and proceeded to raise rates in the face of a deeply depressed economy — possibly the straw that breaks the euro’s back.
• - The BIS, which called for tighter monetary policy just three months ago, to fight a nonexistent inflationary threat. Did I mention that inflation expectations, as measured by the difference between yields on ordinary and index bonds, have been plunging like a stone?

China's chance to be our economic saviour - Can China save the world economy? That is a question that people should be asking as the other potential candidates withdraw from the race. At the moment, the economies of the United States, Europe and Japan are all suffering from weak growth or worse. The debt crisis of eurozone countries threatens another financial crisis that could lead to another plunge in output, not just in Europe but throughout the world. Meanwhile, the actors who could, in principle, take steps to reverse this dismal course of events are largely paralysed. The eurozone countries are struggling with efforts to form the necessary fiscal union to support their currency. Meanwhile, the European Central Bank (ECB) is finding it difficult to break with its cult of 2.0% inflation targeting – even after the economic disaster caused by this single-minded policy focus. It actually raised its overnight rate by 0.5 percentage points in the spring, slowing growth and increasing the cost of borrowing for debt-burdened governments.  The United States does not face the same imminent crisis, but it is likely to see slow growth and rising unemployment as both fiscal and monetary policy are largely checkmated by politics. Furthermore, a eurozone financial freeze-up will almost certainly lead to a double-dip recession in the US, as well.

Closing America’s Growth Deficit - For more than a decade prior to the crisis that began in 2008, the US economy fueled itself (and much of the global economy) with excessive consumption. Savings in the household sector declined and leveled off at about zero, as low interest rates led to over-leveraging, an asset bubble, and an illusory increase in wealth. Moreover, with excess reliance on domestic demand, the structure of the US economy evolved with a bias toward the non-tradable sector (where all of the new jobs were created) and insufficient reliance on foreign demand and hence exports. That led to income and price movements that caused the tradable sector’s scope to shrink, as lower value-added links of global supply chains moved to emerging economies. Asset prices fell, households began a lengthy process of deleveraging, savings rose, and government – faced with falling revenues and rising expenditures on unemployment insurance – could not make up the difference.  But that pattern, too, is clearly unsustainable. The net effect is that domestic demand is dramatically lower, and overall demand (domestic and foreign) is too low. As a result, the US economy has almost stopped growing, particularly as the federal government (together with state and local governments) are now reining in their own budget deficits.

NY Fed's Dudley: Financial Stability and Economic Growth - From NY Fed President William Dudley: Financial Stability and Economic Growth. Dudley makes several interesting comments. I've long argued that the primary causes of the housing bubble were rapid innovation in the mortgage market combined with a lack of regulatory oversight.  Here are a few excerpts:  Turning first to the issue of financial booms and busts, empirical observation makes it clear that financial markets are inherently unstable. Throughout history we have seen numerous sizable booms and damaging busts. The notion that financial markets are dynamically unstable is also supported by controlled experiments conducted by behavioral economists. ...Although it is impossible to attribute the instability of financial markets to any one single driving force, recent experience suggests that in many cases innovation plays an important role. ... innovations that initially create real value generate feedback mechanisms that often fuel the development of excessive expectations—a boom that eventually reverses when the basic belief system that sustained it is contradicted by events.

Interest rates and slumps: competing views - As Paul Krugman notes here, the nominal interest rates on U.S. Treasuries are at historic lows. He seems to take this as vindication for his view that more government "stimulus" was/is needed. (I take "stimulus" here to mean deficit-financed government purchases of goods and services.) Well, let's think about it. First of all, I think that Krugman (along with many others) deserve credit for recognizing that money-bond swaps (Fed policy) are largely irrelevant in very depressed environments. He (again many others too) also deserve credit for understanding the special "safe haven" role that U.S. Treasury debt plays in today's world economy. But does understanding all this necessarily lead to the conclusion that what the economy needs is more (it never seems to be enough) government "stimulus?"  Some of our economic theories suggest that the answer is yes, while some suggest no. What Krugman is suggesting is that the latter group of theories should be discarded because their predictions on nominal interest rates have been completely wrong. Unfortunately for Krugman, there are theories out there that generate predictions broadly consistent with the data but which do not lead to the same policy conclusion. 

A topological mapping of explanations and policy solutions to our weak economy - For the next few posts I need to allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available. I figured it might be a good idea to try and create some sort of topological map of the various clustering of ideas and policies that constitute these arguments as well as the overlap among them. This is a preliminary version of this map: I’d really appreciate your input about what is missing and how to make this better. From those who think that the problem is related to demand and Keynesian ideas, there tends to be three areas of focus: fiscal policy, monetary policy and the debt hangover in the broken housing market. One can think all three are important – I certainly do – but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map. Quotations are ideas, non-quotes are policies and parentheses are people associated with each: This war of ideas is being fought in white papers and articles, and at academic institutions, policy shops and the blogosphere. As a general resources, here are the best one-stop resources online for most of the bulletpoints above:

The Great Debt Scare, by Robert J. Shiller - It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared.' The Thomson-Reuters Surveys of Consumers, has included a remarkable question about the reasonably long-term future, five years hence, and asks about visceral fears concerning that period: “Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?” Those answers plunged into depression territory between July and August, and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s. The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy ... is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years. That said, the economic outlook may hinge on our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story.

Senate Approves $500 Billion Increase in Borrowing Authority…The U.S. Senate, in an unusual procedure, cleared the way Thursday for the U.S. to lift its borrowing authority by $500 billion to $15.19 trillion, enough to keep the support federal government borrowing through late January or early February. The action came under an unusual legislative procedure spelled out under the August agreement to raise the U.S. debt ceiling and avoid a U.S. credit default. In a 52-45 vote, the Senate blocked an attempt by Republicans to slow down the process that will result in the $500 billion debt-ceiling increase. The increase stems from a deal between Congress and the White House, finalized last month, that spells out how the borrowing limit would be increased by $500 billion. Under the process, lawmakers in both the House and Senate must vote on a resolution of disapproval against the increase in the borrowing limit. President Barack Obama would then have to veto the resolution of disapproval, and Congress would then vote to try and override that veto. The complicated procedure, designed by Senate Minority Leader Mitch McConnell (R., Ky.), would allow an increase of the borrowing limit while allowing most Republicans to vote against such an increase.

Obama: Americans must pay fair share to cut deficit (Reuters) - President Barack Obama said on Saturday that Americans need to be ready to "pay their fair share" to narrow the deficit, previewing his proposals to Congress that are expected to include more taxes on the rich. In his weekly radio and video address, the Democrat said his $447 billion jobs plan that features tax breaks for workers and small businesses, plus funds for public works projects and schools, "will not add to the deficit. It will be paid for." "On Monday, I'll lay out my plan for how we'll do that -- how we'll pay for this plan and pay down our debt by following some basic principles: making sure we live within our means and asking everyone to pay their fair share." Obama has repeatedly argued for the wealthiest Americans to face higher taxes with fewer loopholes and exceptions as part of the effort to ensure the U.S. debtload remains in control.

The Biggest Driver of U.S. Government Revenue - What's the biggest single factor that determines how much money the U.S. federal government will collect in any given year?  For our money, it's Median Household Income. The chart below, which shows the relationship between median household income and the total receipts of the U.S. government for each year since 1967, the earliest year for which we have median household income data, shows why we think that:  Here, we found that a simple power law relationship exists between the amount of median household income in the United States and the total amount of money that the federal government collects each year, which is why we've opted to show both the horizontal and vertical axes on a logarithmic scale: a power law relationship becomes a straight line when graphed on such a chart.

Obama to propose $3T in cuts, threaten to veto tax cuts - President Obama on Monday will unveil a $3 trillion deficit-reduction and tax reform plan while promising to veto any package tackling debt that changes entitlement but doesn't raise taxes on the wealthy and corporations. Administration officials said the proposal Obama will announce will pay for Obama's $447 billion jobs plan while cutting $3 trillion in deficit spending over 10 years. The $3 trillion in deficit reduction is made up of money saved from ending the war in Iraq and drawing troops down in Afghanistan, raising taxes for the wealthy and corporations and cutting about $540 billion in Medicare and Medicaid, administration officials said Sunday night. The proposals represent the president's vision for the path he thinks the supercommittee should take; not the elements of compromise Obama sought with House Speaker John Boehner in a "grand bargain" in July. The proposal is also meant to set the president's terms for a debate about the economy and how the nation's finances should be paid for that will extend through his reelection bid next fall.

Obama Deficit Plan to Call for $1.5 Trillion in Taxes - President Barack Obama called for $1.5 trillion in tax increases over the next decade, largely targeting the wealthy, to help trim the deficit, saying U.S. prosperity depends on paying down the federal debt. In combination with cuts in spending, Obama said, his plan would reduce the long-term deficit by $3 trillion beyond the $1 trillion that was agreed to as part of a deal to raise the U.S. debt ceiling. “This is not class warfare, it’s math,” Obama said, “The money’s going to have to come from someplace.” The proposal puts Obama in conflict with Republican congressional leaders such as House Speaker John Boehner, who last week said his party wouldn’t accept tax increases and urged the bipartisan supercommittee to focus on scaling back entitlement programs such as the Medicare health-insurance plan for the elderly. The panel has a Nov. 23 deadline to come up with a plan. Obama coupled his proposal with a call to overhaul the tax code. He said his plan would eliminate “special lower rates for the wealthy” which were “meant to be temporary.” He also would close loopholes in corporate tax law.

Obama to propose $1.5 trillion in new tax revenue - -- Drawing a bright line with congressional Republicans, President Barack Obama is proposing $1.5 trillion in new tax revenue as part of his long-term deficit reduction plan, according to senior administration officials. The president on Monday will announce a proposal that includes repeal of Bush-era tax cuts for the wealthiest taxpayers, nearly $250 billion in reductions in Medicare spending, $330 billion in cuts in other mandatory benefit programs, and savings of $1 trillion from the withdrawal of troops from Iraq and Afghanistan, the officials said. The plan includes no changes in Social Security and does not include an increase in the Medicare eligibility age, which the president had considered this summer.All in all, the president's plan is as much an opening bid as it is a political statement designed to draw contrasts with Republicans, who control the House of Representatives.

Obama Draws New Hard Line on Long-Term Debt Reduction — With a scrappy unveiling of his formula to rein in the nation’s mounting debt, President Obama¹ confirmed Monday that he had entered a new, more combative phase of his presidency, one likely to last until next year’s election as he battles for a second term.  Faced with falling poll numbers for his leadership and an anxious party base, Mr. Obama did not just propose but insisted that any long-term debt-reduction plan must not shave future Medicare² benefits without also raising taxes on the wealthiest taxpayers and corporations. He uncharacteristically backed up that stand with a veto threat, setting up a politically charged choice for anti-tax Republicans — protect the most affluent or compromise to attack deficits. Confident in the answers most voters would make, Mr. Obama plans to hammer on that choice through 2012, reflecting the fact that the White House has all but given up hopes of a “grand bargain” with Republicans to restore fiscal balance for years to come.  “I will not support — I will not support — any plan that puts all the burden for closing our deficit on ordinary Americans. And I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share,”

Obama Tax Plan Would Ask More of Millionaires - — President Obama¹ on Monday will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials.  With a special joint Congressional committee starting work to reach a bipartisan budget deal by late November, the proposal adds a new and populist feature to Mr. Obama’s effort to raise the political pressure on Republicans to agree to higher revenues from the wealthy in return for Democrats’ support of future cuts from Medicare² and Medicaid³.  Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett⁴, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.  or other details, and it is unclear how much revenue his plan would raise.

Taxing the Rich, the Obama Way - Robert Reich - Warren Buffett is a tough negotiator, which is one reason why he’s the second-wealthiest person in America.  So when the President refers to his new initiative to raise taxes on millionaires as the “Buffett rule” we might expect he’d start the bargaining from a tough position. But this is Barack Obama, whose idea of negotiating is to give away half the house before he’s even asked the other side for the bathroom sink. Apparently Obama will propose that people earning more than $1 million a year pay at least the same tax rate as middle-class earners. That’s aiming mighty low. America’s median income is about $50,000. The typical taxpayer at that level pays approximately 20 percent in taxes.  Granted, that’s a higher rate than most of today’s super rich pay because of countless deductions, credits, and loopholes – including, especially, their ability to take their incomes in the form of capital gains, taxed at 15 percent. But a 20 percent rate is still ridiculously low compared to what millionaires and billionaires ought to be paying. Officially, income over $379,150 is supposed to be taxed at 35%.

Obama’s debt-reduction plan: $3 trillion in savings, half from new tax revenue - President Obama will announce a proposal on Monday to tame the nation’s rocketing federal debt¹, calling for $1.5 trillion in new revenue as part of a plan to find more than $3 trillion in budget savings over a decade, senior administration officials said. The proposal draws a sharp contrast with Republicans and amounts more to an opening play in the fall debate over the economy than another attempt to find common ground with the opposing party². Combined with his call this month for $450 billion in new stimulus, the proposal represents a more populist approach to confronting the nation’s economic travails than the compromises he advocated earlier this summer. Obama will propose new taxes on the wealthy, a special new tax for millionaires³, and eliminating or scaling back a variety of loopholes and deductions, officials say. About half of the tax savings would come from the expiration next year of the George W. Bush administration tax cuts for the wealthy.  But the president won’t call for any changes in Social Security⁴, officials say, and is seeking less-aggressive changes to Medicare and Medicaid than previously considered.

Confused? - Some of the headline numbers for President Obama’s deficit reduction proposal that you hear are the following:

• $3 trillion in deficit reduction over ten years—more than the $1.2–1.5 trillion expected from the Joint Select Committee (JSC)
• $4 trillion in deficit reduction, including the discretionary spending caps in the Budget Control Act
• $1.5 trillion in tax increases
• $1 trillion in deficit reduction by capping spending on Iraq and Afghanistan

This didn’t make sense to me for a few reasons, notably that any deal that preserves any of the Bush tax cuts should be scored by the CBO as a tax cut, which increases the deficit. The actual numbers are rather more complicated. You can download the complete proposal here. Table S-3 (p. 57) shows the administration’s view of the world:

When Doing Something Falls Short of Doing Nothing - About a month ago, the Brookings Institution’s Bill Gale made what I thought–and still think–is a brilliant analogy between budget baselines and weight loss goals at an event about the debt limit deal’s “super committee.” I liked it so much that I quoted from the transcript in my very next Tax Notes column (republished on the Concord Coalition site here), and I’d like to re-quote it here (emphasis added): In terms of an example, think about this the following way: Suppose you’ve been eating badly the last, let’s say, 10 years, and you’ve been gaining a lot of weight and you want to lose weight and you want to lose 15 pounds. Well, we won’t go with 1.5 trillion pounds. You want to lose 15 pounds. The question is, compared to what? Now, nobody that’s serious about losing weight builds in a 45-pound weight increase and then says, “I’m going to lose 15 pounds relative to that.” But using one of the baselines, the policy-extended one, as the standard for a deficit reduction goal would be the equivalent of increasing the deficit by $4.5 trillion and then saying, “I’m going to cut it by $1.5 trillion"

A fundamental fiscal deception - I’d like to see if I can add a little more clarity to yesterday’s post about the President’s new budget proposals.  In particular, I want to try to help you zoom out from specifics (like the war funding gimmick) and see what I think is a larger and more fundamental deception in the fiscal argument being made by Team Obama. I think of this as a layered argument.  These layers are nothing more than a mental model I’m using to keep my own thinking straight about this complex topic.  The layers get progressively more egregious. Layer 1 involves legitimate judgment calls about what to count, what not to count, and how to count it.  This includes questions like “Should we count Medicare doc fix spending as part of this proposal,” and “Should we measure tax increases for the rich against current law or current policy?”  These are budget judgment calls in which honest, well-intentioned budget wonks can and will reach different conclusions, and everyone else’s eyes will glaze over.

Who wants to tax a millionaire? - THIS much can be said for the deficit plan that Barack Obama released today: at least it’s a plan. Mr Obama has spent the first two and a half years of his presidency talking grandly about the importance of getting the deficit down without ever laying out a credible plan for doing so, in the process ceding the initiative to Republicans. The 67-page proposal meets the first test of credibility: it sets the right goals. It would reduce the deficit by a cumulative $3.1 trillion over the coming decade, beyond the $912 billion of spending cuts already agreed to in the August 2nd debt-ceiling deal. The annual shortfall would fall from $1.3 trillion this year to $695 billion in fiscal 2021. That would cut it from 8.5% of GDP to 2.9%, instead of only to 6%, which is where the White House says it’s headed under current policies.  Publicly-held debt would stabilise at 74% of GDP, rather than rising to 85% and beyond. It also avoids applying the fiscal brakes immediately when doing so could tip an already feeble economy back into recession, thanks to his previously announced $447 billion in new stimulus.

Sorry, But The Republican Arguments Against A "Millionaire's Tax" Are Just Preposterous The Republicans have had 12 hours to digest the news that President Obama plans to propose a "Millionaire's tax" on annual incomes over $1 million. As expected, they're freaking out. And if they had a good argument as to why such a tax was a terrible idea, we'd be happy to say so. But so far anyway, they don't. Obviously, no one likes higher taxes. And it's no surprise that the potential target of higher taxes will squawk in protest as soon as the idea is proposed. But if the country is to begin to find a way out of its massive debt-and-deficit problem, it's important to separate the self-interested squawking from actual logic. The Republic arguments against Obama's millionaire's tax boil down to the following:

• Raising taxes on millionaires will kill their ambition and discourage them from working
• Raising taxes on millionaires will punish successful people for being successful
• Raising taxes is always a terrible idea--the problem is spending
• Taxes are a form of theft: The government has no right to take our money away
• Raising taxes in a weak economy will further weaken the economy

Obama draws battle line over $1.5T in tax hikes - President Barack Obama's proposal to reduce long-term deficits with $1.5 trillion in new taxes is less an opening bid in a negotiation than it is an opening salvo in a struggle to draw sharp contrasts with congressional Republicans. Mr. Obama's proposal is aimed predominantly at the wealthy and comes just days after House Speaker John Boehner ruled out tax increases to lower deficits. It also comes amid a clamor in his own Democratic Party for Mr. Obama to take a tougher stance against Republicans. And while the plan stands little chance of passing Congress, its populist pitch is one that the White House believes the public can support. The core of the president's plan totals just more than $2 trillion in deficit reduction over 10 years. It combines the new taxes with $580 billion in cuts to mandatory benefit programs, including $248 billion from Medicare. The administration also counts savings of $1 trillion over 10 years from the withdrawal of troops from Iraq and Afghanistan.

How Big is Obama's 28% Limitation on Itemized Deductions? - I wanted to follow up on my last post about Obama's proposal to limit the value of itemized deductions to 28%, even if one pays a higher tax rate. A lot of people have written in to ask "How big a tax increase is this, and how does it compare to the expiration of the Bush tax cuts for high income earners?" The answer: it depends. I've done a relatively simple analysis* looking at a few example high-income taxpayers. I use 2012 tax brackets because that's the latest year that we can know for sure what they'll be, even though these proposals likely wouldn't be in effect until 2013 at the earliest. I look at tax bills under two scenarios: existing (current year) tax policies, and Obama's proposal to let the Bush tax cuts expire for high-income taxpayers (above $200K for single filers and $250K for married filers), combined with his proposal to limit the benefit of itemized deductions to 28%. While I make some simplifying assumptions, these numbers should help to give an idea of the rough magnitude of the proposed policy changes:

Obama Deficit-Reduction Plan Would Allow Federal Debt Collectors To Contact People On Their Cellphones --  President Obama isn't leaving a single couch cushion unturned in his effort to lower the deficit. A new proposal by the White House would allow collectors pursuing a government-backed debt -- which includes most mortgages, unpaid taxes and federal loans -- to contact people via their cellphones, in an effort to secure every last nickel and dime from taxpayers.On page 28 of the president's deficit-reduction plan released Monday, federal agencies would be allowed to call people's cellphones to collect debts -- an attempt to reach the increasing number of Americans who are ditching landlines for mobile phones: Allow agencies to contact delinquent debtors via their cellular phones. The Administration also proposes to amend the Communications Act of 1934 to facilitate collection of debts owed to or guaranteed by the Federal Government, by facilitating contact of delinquent debtors who are most readily reached on their cell phones. This provision is expected to provide substantial increases in collections, particularly as an increasing share of households no longer have landlines and rely instead on cell phones.

No Surprise In Boehner's Response To Obama's Latest Proposal - House Speaker John Boehner (R-OH) issued the following statement in response to the President’s latest debt plan. “Pitting one group of Americans against another is not leadership. The Joint Select Committee is engaged in serious work to tackle a serious problem: the debt crisis that is making it harder to get our economy growing and create more American jobs. Unfortunately, the President has not made a serious contribution to its work today. This administration’s insistence on raising taxes on job creators and its reluctance to take the steps necessary to strengthen our entitlement programs are the reasons the president and I were not able to reach an agreement previously, and it is evident today that these barriers remain.”

Obama's Debt Reduction Plan: Will Political Fights Over Tax Increases for the Wealthy Harm the Economy? - In a speech this morning, President Obama outlined his plans to reduce the national debt by more than $3 trillion through a combination of entitlement cuts, tax increases, and reductions in military spending. The great majority of the deficit reduction, nearly half, comes from proposed tax increases of $1.5 trillion primarily on wealthy Americans and corporations. In particular, $800 billion can be raised by allowing the Bush tax cuts for households making more than $250,000 per year to end as scheduled in 2013. There are additional tax increases from limiting deductions for households making more than $250,000, and from ending tax breaks for oil companies, corporate jet owners, and financial market participants. Finally, there is a proposal for a minimum tax for any household making more than $1 million per year. One of the most controversial parts of his proposal is to allow the Bush tax cuts to expire for wealthy households, and I will focus on this part of the proposal since it could have a large economic impact as well.

Job Creation Overshadowed by Debt Reduction Speech -  For a few days, we were actually talking about a job creation program instead of debt reduction. However, Obama's speech yesterday seems to have turned the conversation back to the debt. In his speech he did talk about how to pay for job creation, but his plans for over $3 trillion in debt reduction (on top of the cuts that were already in place as part of the deficit ceiling negotiations) is the message that stuck in the media. Job creation is no longer at the forefront of the conversation, and unless Obama is willing to lead on this issue, that won't change.

Obama’s Buffett Rule: Keep Your Eye on Capital Gains - On average, high income people do pay significantly higher tax rates than those lower down the economic food chain.  So what’s Obama’s problem? His objection—and Buffett’s—is not with rates paid by the average taxpayer who makes a million dollars or more a year. Rather it is with those in this group (whose income averages about $2.9 million) who make most of their money from investments. To see what’s going on, let’s crank up the microscope even more. Look at the very highest income taxpayers—the 0.1 percent who make an average of almost $7 million annually. Typically, they pay about 29 percent of their income in taxes, nearly twice what middle-income earners pay. But as my colleague Bob Williams described so well in a TaxVox post a few weeks ago, a few of those very high earners make more than two-thirds of their income from capital gains and dividends, which are taxed at just 15 percent. Thanks to those low rates and the astute use of some other tax breaks, they pay very low combined income and payroll tax rates.

Did Obama Just Kill Congress’ Budget-Cutting Super Committee? -- In his feisty speech on Monday, President Obama first decried Republicans' habit of signing pledges, and then made a pledge of his own: "I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share." And with that, the president all but killed Congress' bipartisan deficit reduction Super Committee. Why? Because the 12-person Super Committee, tasked with trimming $1.2 trillion from the federal deficit in the next 10 years, consists of six Republicans and six Democrats, and none of those Republicans is going to sign off on a bill that raises taxes on corporations and the wealthy. Although reforms to Medicare, Medicaid, and Social Security are said to be on the table, new taxes are not. Not a chance. Know this: All six Republicans on the Super Committee signed anti-tax zealot Grover Norquist's pledge to never raise taxes for any reason. There was always a strong chance the Super Committee would fail to reach an agreement. But Obama's veto threat essentially extinguishes even the slightest glimmer of hope that those dozen lawmakers would reach an agreement that could pass both chambers and win Obama's support.

Debt supercommittee weighs ‘dynamic scoring’ concept as part of approach on taxes - Warring Republicans and Democrats on Capitol Hill have little hope of drafting an ambitious plan to tame the national debt by Thanksgiving unless they can agree on an approach to rewriting the tax code, key lawmakers and leadership aides say. But any attempt at a tax overhaul would require policymakers to clear some daunting hurdles, including an old battle over a fundamental question: Do tax cuts pay for themselves by spurring economic growth? The answer could be pivotal to breaking the partisan deadlock over the debt that has bedeviled Washington for months. Republicans have said they cannot support any increase in tax collections except through economic growth. And Democrats have said they cannot support additional cuts in spending except as part of a package that includes new taxes. As a bipartisan supercommittee struggles to slice borrowing by at least $1.2 trillion over the next decade, some Republicans say an agreement to count revenue generated by economic growth — a process known as “dynamic scoring” — could be the magic elixir that greases the skids to a more far-reaching compromise.

Supercommittee May Take Up Muni-Bond Tax - Congress’s deficit-cutting supercommittee may cap or end a tax exemption that helps set state and local debt prices, raising borrowing costs and disrupting the $2.9 trillion municipal-bond market.  Bankers, bondholders and issuers are preparing for an attack on the tax break investors get for interest earned on some municipal securities, already targeted by President Barack Obama in his jobs and deficit-reduction proposals. The exemption, which has never been cut, lowers the cost of loans for schools, highways, hospitals and other public works.  “They’re looking at everything, and the tax exemption is on the table,” . “It’s a factor weighing on investors’ minds.”  Should the 12-member supercommittee whittle down or erase the advantage for high-income investors to own municipal bonds, demand may shrink, pushing up costs for states and local governments. The exemption is projected to save owners of the tax-exempt securities $230 billion from 2012 to 2016, according to the White House’s Office of Management and Budget.

On and Off the Table: Leaving the Door Open to Medicare Cuts - I was pleasantly surprised that President Obama in his deficit speech today didn’t publicly endorse cuts to Social Security benefits or call for any specific major cuts to Medicare benefits. This is a significant improvement compared to the trial balloons we have been seeing for the past months, which indicated raising the Medicare eligibility age could have been part of the Obama plan. President Obama has already privately signaled that in theory he would be willing to support major cuts to Medicare.  And he’s hinted he’d be willing to cut Social Security benefits. They were both earlier put the table for a theoretical deal and this speech didn’t take them off the table. There was no veto threat to protect Medicare and Social Security benefits. In fact,  in his only veto threat Obama made it clear he would accept Medicare benefit cuts if they were accompanied by new tax revenue from the rich by saying, “I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans and biggest corporations to pay their fair share.” That “but” is a very important clause that means there are scenarios in which Obama would sign a bill that significantly cuts Medicare benefits.

The Devilish Detail of Obama’s Speech: Deep Medicare, Medicaid Cuts - President Obama was still compromising with the Tea Party right when he delivered his remarks on Monday. Indeed, he proposed $580 billion in cuts to health and welfare programs, with $248 billion coming from Medicare and $72 billion from Medicaid. That’s bad. Very bad. The president would have us believe that the cuts can be made by addressing “waste, fraud and abuse.” The reality is that cutting a quarter-trillion dollars from Medicare will undermine the quality of care for seniors and the disabled. The Alliance for Quality Nursing Home Care estimates that Obama’s approach would lead to $42 billion in cuts for post-acute care providers “placing patients, our workforce and local facilities at risk.” The proposed cuts to Medicare and Medicaid will put new stress on the economy by making it harder to maintain hiring levels at the skilled nursing facilities that have been some of the real job creators in a period of layoffs and rising unemployment rates.

The Dangers of Cutting Medicare and Medicaid - As I wrote yesterday, the President’s deficit reduction plan includes a non-trivial swath of Medicare and Medicaid cuts, including some cuts for public health and prevention, as well as means testing and higher co-pays for certain services. We’re told that most of the cuts are to providers. In fact, the largest portion of cuts comes from a rebate by drug manufacturers, basically forcing the drug companies to charge lower prices for their sales to Medicare. I don’t think those will have the major effect that Robert Pear lays out here; drug companies can knuckle under or lose access to their most lucrative market. But it’s true that simply saying “don’t worry, these are cuts to providers” is a bit too cute, wrongly assuming that nothing in the health care industry is connected.  "President Obama and some members of Congress assert that, in cutting Medicare and Medicaid, they can whack health care providers while protecting beneficiaries. But experts say it is not so simple. Experience, they say, shows that some cuts in payments to providers hurt beneficiaries, as more doctors refuse to take Medicaid patients or limit the number of new Medicare patients they will accept. Hospitals curtail services. Beneficiaries may have more difficulty getting therapy services after a stroke, traumatic brain injury or hip fracture."

Retiree Benefits for the Military Could Face Cuts - NYT - As Washington looks to squeeze savings from once-sacrosanct entitlements like Social Security and Medicare, another big social welfare system is growing as rapidly, but with far less scrutiny: the health and pension benefits of military retirees.  Military pensions and health care for active and retired troops now cost the government about $100 billion a year, representing an expanding portion of both the Pentagon budget — about $700 billion a year, including war costs — and the national debt, which together finance the programs.  Making even incremental reductions to military benefits is typically a doomed political venture, given the public’s broad support for helping troops, the political potency of veterans groups and the fact that significant savings take years to appear.  But the intense push in Congress this year to reduce the debt and the possibility that the Pentagon might have to begin trimming core programs like weapons procurement, research, training and construction have suddenly made retiree benefits vulnerable, military officials and experts say.

Taibbi: The Debt Ceiling Deal—Democrats take a dive - This is just starting to make the rounds, and it should. It presents the other frame to the "poor Obama is just too weak" story that gives him such a pass among his much-abused base.  That other frame, for what it's worth, is "clever Obama is really good at convincing his base he's actually on their side."  Love it or hate it, intellectual honesty (if not electoral safety) requires both frames be considered. So in service of intellectual honesty, here's Matt Taibbi, telling the Frame 2 story, the "clever Obama" tale. His title is "Debt Ceiling Deal: The Democrats Take a Dive" and it makes the case.  (In case you don't know, a fighter takes a dive when he puts up just enough fight to fool his fans — backers and bettors — then throws the fight to his opponent by falling down to a weak late-round punch. For this deception he is paid extra.) From the article: The general consensus is that for the second time in three years, a gang of financial terrorists has successfully extorted the congress and the White House, threatening to blow up the planet if they didn't get what they wanted. ... Commentators everywhere are killing the president for his seemingly astonishing level of ball-less-ness. ... The popular take is that Obama is a weak leader of a weak party who was pushed around by canny right-wing extremists.

A Good Fight - Robert Reich - So the really big fight — perhaps the defining battle of 2012 — won’t be over Medicare. It won’t even be over Obama’s jobs program. It will be over whether the rich should pay more taxes. The President has vowed to veto any plan to tame the debt that doesn’t increase taxes on the rich. The Republicans have vowed to oppose any tax increases on the rich. It’s a good fight to have. In a Rose Garden ceremony this morning, Obama proposed new taxes on the wealthy — including a special new tax for millionaires, the closing of loopholes and deductions for people making more than $250,000 a year, and an end to the portion of the Bush tax cut going to higher incomes. Republicans accuse the President of instigating “class warfare.” But it’s not warfare to demand the rich pay their fair share of taxes to bring down America’s long-term debt. After all, the richest 1 percent of Americans now takes home more than 20 percent of total income. That’s the highest share going to the top 1 percent in almost 90 years. And they now pay at the lowest tax rates in half a century — half the rate they paid on ordinary income prior to 1981.

The Social Contract, by Paul Krugman - This week President Obama said the obvious: that wealthy Americans, many of whom pay remarkably little in taxes, should bear part of the cost of reducing the long-run budget deficit. And Republicans like Representative Paul Ryan responded with shrieks of “class warfare.” It was, of course, nothing of the sort. On the contrary, it’s people like Mr. Ryan, who want to exempt the very rich from bearing any of the burden of making our finances sustainable, who are waging class war. As background, it helps to know what has been happening to incomes over the past three decades. Detailed estimates from the Congressional Budget Office — which only go up to 2005, but the basic picture surely hasn’t changed — show that between 1979 and 2005 the inflation-adjusted income of families in the middle of the income distribution rose 21 percent. Meanwhile, over the same period, the income of the very rich, the top 100th of 1 percent of the income distribution, rose by 480 percent. No, that isn’t a misprint. In 2005 dollars, the average annual income of that group rose from $4.2 million to $24.3 million.So do the wealthy look to you like the victims of class warfare?

Populist for a Day - Did you catch Obama’s populist twitch? The moment when he tossed aside the stifling cloak of compromise, and like Joshua before the walls of Jericho issued the trumpet call to the disheartened Democratic base that henceforth it will be the battlements guarding the untaxed rich that would tumble under his assault, while the “entitlements” would be zealously guarded. September 17: lead paragraph of the NYT’s story: “President Obama on Monday will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials… It only took 24 hours for President Blinker to re-shuffle the pack. A day later, the New York Times lead, after Boehner has emphasized that meeting the deficit-reduction target should come largely from overhauling benefit programs like Medicare, Medicaid and Social Security: “President Obama will unveil a plan on Monday that uses entitlement cuts, tax increases and war savings to reduce the federal deficit by more than $3 trillion over the next 10 years, administration officials said.”

You Call This Populism? The New Obama Is the Same as the Old Obama. - In his deficit-reduction proposal, unveiled in his Rose Garden speech on Monday, President Obama once again found himself adopting the other party’s frame, embracing budget austerity instead of the fiscal stimulus that the economy needs. He still talks about finding bipartisan consensus and describes his ideas as common-sense solutions that every well-intentioned person should support, even though Republicans have shown they’ll block anything with his name on it. His plan accepts the Republican claim that the problem is spending, not revenues, and proposes to cut spending by two dollars for every dollar it would raise in revenue. By embracing reductions in Medicare spending, he kneecaps Democrats who want to campaign next year by attacking Republicans for proposing Medicare cuts. And his threshold for higher taxes has quadrupled! It used to be families earning more than $250,000 a year would pay more—now it’s just millionaires! If this is Obama’s opening bid, imagine what he’ll negotiate it down to.

The miseducation of the president - President Obama has a feisty new tone this week, offering up a deficit plan with taxes on the rich and no increase in the Medicare eligibility age. And when Republicans (and silly Dems) called his proposals "class warfare," he shot back: "This is not class warfare. It’s math." Maybe Obama read Ron Suskind's controversial book over the weekend, and decided it was time to take control of his presidency and put it on the side of struggling Americans, rather than on the side of super-wealthy Wall Street titans who destroyed the economy, where it's been since Inauguration Day. It's unlikely the president is finding lessons in "Confidence Men: Wall Street, Washington and the Education of a President"; the White House is pushing back, hard, on Suskind's revelations. The coverage has mostly hyped "shocking" anecdotes about an inexperienced president poorly served by scheming aides and Cabinet members who fought among themselves and frequently ignored the president's own wishes. But the question at the heart of Suskind's book is much more interesting: Who is Barack Obama, and what exactly did he want to do with his presidency?

Grim Realities in the Obama Budget Plan - Jeffrey Sachs - Obama may be leaning against the right-wing juggernaut, but he is not changing its direction, only slightly blunting its force. Obama has already given in where it counts by agreeing with the Republicans in August to slash the core of the discretionary civilian budget (non-military spending other than the entitlements programs).  Readers can check this out for themselves by downloading two recent documents from the White House website. I must give advanced warning: they are turgid documents and hard to decipher, even for an expert in budget analysis. Their real meaning is hidden in the fine print, which is why I write about the documents here. "The Mid-Session Review for Fiscal-Year 2012," released on September 1, describes the state of the budget after the August debt deal, and on the eve of the new super-committee. Monday's plan, "Living Within our Means and Investing in Our Future," takes the story forward by making specific recommendations to the super-committee. Taken together they form the President's fiscal blueprint, and most likely his re-election platform. If for some reason you're not worried yet about America's future, start worrying.

Austerity USA - Krugman - Goldman Sachs (no link) has a nice chart showing just how much fiscal policy has been a drag on the economy since the second half of last year, and also shows that the Obama jobs plan, even if enacted in full, would only be enough to put it in neutral: Just worth bearing in mind.

Penny-Wise/Pound-Foolish Budget-Cutting - Press reports say that Congress is about to enact a nominal spending cut of 10 percent in the U.S. Government Accountability Office budget. The mind-boggling stupidity of this action is frankly beyond comprehension. Anyone who knows anything about the budget knows that the GAO is the primary source for detailed analyses of government programs. If Congress really wants to cut the budget without just taking a meat-ax to every program regardless of the consequences it needs the GAO desperately. It is the strongest ally any budget cutter could possibly have. GAO analysts know the ins and outs of government programs better than anyone in Washington. Its database is filled with decades full of reports recommending savings that would have saved trillions of wasted dollars over the years if they had been followed. Instead of slashing GAO's budget, Congress ought to be increasing it.

Obama, Jobs, and the G.O.P. - When people discuss Barack Obama’s current approval rating, which is at its lowest level ever, they may invoke his supposed lack of toughness or his tendency toward moderation, but the only really important factor is the dismal state of the U.S. job market. The American Jobs Act, which Obama is now promoting across the country, is an attempt to change this, by giving the economy a temporary boost with a mixture of tax cuts and government spending amounting to $447 billion. It’s an excellent idea: many independent analysts suggest that it could boost G.D.P. growth over the next year by 1.5 per cent or better, and create as many as one and a half million jobs. And it’s ideologically canny. A hefty chunk of it comes in the form of tax cuts, which Republicans typically love, and much of the rest would go toward more spending on infrastructure, which House Majority Leader Eric Cantor has expressed support for. Even so, it’s unlikely that House Republicans will pass the bill, and there’s a good chance that they’ll stop it even from coming up for a vote.

Academic Research Suggests That the American Jobs Act Will Produce Few Jobs -- Our new report analyzes President Obama's $447 billion proposal to encourage businesses to hire new workers and stimulate spending. Our review of the academic literature suggests that the proposed policies will have little, if any, impact. Indeed, because these temporary tax measures would be offset by some $460 billion in permanent tax increases, the whole package could end up doing much more economic harm than good. The key tax measures in the American Jobs Act include hiring incentives for new workers, a 50% payroll tax cut for workers, and a business investment incentive that allows for 100% expensing of qualifying business deductions. A review of the economic research suggests that "jobs" incentives tend to be ineffective in spurring new hiring. Although the American Jobs Act says that employers will receive a credit for hiring a qualifying worker, it does not state that a layoff cannot accompany the new hire.  Simply put, a firm can fire an employee, hire a new one to do the same job, and collect up to $9,600 for its efforts - which results in a loss to the Treasury with no net reduction in unemployment.

How Obama’s plan for infrastructure bank would work - One of the key aspects of President Obama’s jobs plan is an idea that’s been knocking around Washington for some time: a national infrastructure bank that would leverage private investment to fund new roads, bridges, mass transit and other public-works endeavors. Here’s how it would work. The proposal, modeled after a bipartisan bill in the Senate, would take $10 billion in start-up money and identify transportation, water or energy projects that lack funding. Eligible projects would need to be worth at least $100 million and provide “a clear public benefit.” The bank would then work with private investors to finance the project through cheap long-term loans or loan guarantees, with the government picking up no more than half the tab — ideally, much less — for any given project.

House Republicans Whittle Down $447 Billion American Jobs Act to $11 Billion - The House GOP leadership has written a memo to their caucus picking and choosing what they would be willing to support in the American Jobs Act. The numbers come out to support for 1/44th of the overall price tag, about 2% of the total bill. As you may know, the AJA is comprised of about 57% tax cuts and 43% spending initiatives. So in the main, House Republican leaders tossed out the spending and embraced a few of the tax cuts. They also rejected the tax hikes on corporations and the wealthy to pay for the bill. John Boehner, Eric Cantor, Kevin McCarthy and Jeb Hensarling, who wrote the memo, took advantage of the President’s backtracking of an “all or nothing” approach to the bill, and stressed “areas of common agreement” in the plan. ... So at best, you’re talking about a $447 billion jobs bill whittled down to no more than $11 billion.

The end of the middle class? - With President Barack Obama’s demand that Congress pass his American Jobs Act and his call on the supercommittee to push hard on 10-year deficit reduction, a battle has begun that won’t be resolved until the 2012 election. If then. But the haunting reality is that neither side of the debate comes close to addressing the scope of our nation’s economic challenge. Washington is fighting over who has the better sand castle — while ignoring the tidal wave that is coming our way. The jobs we’ve been shedding by the millions are solid, middle-class positions — the kind that could support a family and send children to college. The hard reality is that the relatively few jobs being created are service-related — disproportionately low-wage and low-skill. The broad middle class — the triumph and strength of America’s democracy — is sinking. Unless we change course dramatically, we will become even more a nation of haves and have-nots. The current debate offers clear contrast.

Understanding The Stimulus Debate: It’s Not 2001 Anymore - Federal policy makers are currently battling multiple problems on the domestic front, prominently including both unsustainable budget deficits and a stubbornly sluggish economy. These simultaneous ills inevitably give rise to divergent opinions on how to prioritize our policy responses. But invoking our 2001 experience to argue for more stimulus, as many have done, fundamentally misreads our current circumstances. Much of our current counter-cyclical deficit-spending arose automatically under pre-existing federal laws. Whenever the economy sags, tax collections automatically diminish while spending in certain categories (for example, Social Security disability claims) rises. These automatic responses increase federal deficits, embodying a built-in counter-cyclical fiscal policy. As it happened this time around, still more deficit spending beyond these automatic responses was implemented by choice: for example, via 2009’s $800-plus billion stimulus package, via the temporary payroll tax cut enacted late last year, and in other legislation. Though the efficacy of these automatic and discretionary fiscal stimulus measures has been widely debated, the empirical fact is that federal deficit-spending has exploded while the economy has remained weak.

When Will Wall Street Call for More Federal Spending? (Robert Reich) The Dow Jones Industrial Average dropped another 3 percent today as Wall Street metabolized the truth most Americans already know: We’re in a recession. The “double dip” has arrived. Most Americans never really emerged from the Great Recession anyway.  We can get out of this recession but not via the Fed’s “quantitative easing” alone. When consumers can’t spend and businesses won’t spend without additional consumers, government must be the spender of last resort. Juicing the economy back to health will require at least $700 billion in additional federal spending this year and next. (This number takes account of state and local government cutbacks as well as well as the current shortfall between current economic activity and the economy’s productive capacity at or near full employment.)But this magnitude of additional spending isn’t feasible in the face of Tea Party Republican intransigence. Not only is this obsession keeping millions of Americans out of work, it’s also starting to bring down the Street. If this keeps up, we’ll have a showdown between establishment Republicans who understand what must be done — and who will support substantially more federal spending in the short term in order to goose the economy — and Tea Party zealots who refuse to face reality.

How Obama’s Jobs Plan Could Trigger Another Debt Limit Fight Before Election Day - If President Obama manages to get his entire jobs plan passed -- a big if, of course -- it will quicken the pace at which the federal government is burning through its new borrowing authority and could set up another debt limit battle with Republicans before Election Day 2012.  There are several variables at play, and another debt limit fight before the election wouldn't be a sure thing. But it's not out of the question, especially if economic growth between now and then is weaker than predicted.  A slower-than-expected economy -- or a double dip recession -- combined with the jobs bill's $447 billion price tag, means the federal government could run out of borrowing authority right about October 2012, according to one worst-case-scenario estimate.  The debt limit law guarantees the administration $2.1 trillion in new borrowing authority, in a handful of increments. It could ultimately provide up to $2.4 trillion -- but only if the new deficit super committee fully meets its $1.5 trillion deficit reduction target, or Congress sends a Balanced Budget Amendment out to the states.

The Jobs Bill: Pretending to Fund Social Security - The President’s latest “jobs” proposal would extend and deepen cuts in the Social Security payroll tax. While as a conservative I generally prefer to see lower taxes, as a Social Security trustee I am deeply concerned that the troubling implications of this proposal have been scarcely discussed. Instead the public debate has focused mostly on the efficacy (or lack thereof) of such temporary tax relief as a stimulus measure. Before this legislation is seriously considered, there needs to be greater understanding that it would take a major step toward transforming Social Security from what it has long been -- an earned benefit, funded by separate worker payroll taxes -- into an income-tax based system more akin to welfare

Poll: Half of All Government is Wasted - Matt Yglesias takes a look at a recent Gallup poll about perceptions of government waste and says, "I infer from the fact that state/local government is seen as less wasteful than the federal government and that older people have a much higher waste-perception than younger people that this is driven by the fact that people don’t understand Social Security and Medicare." I thought I might write a post about why older people perceive so much waste, but I changed my mind when I clicked through and found this summary table of responses. First, on the young-old thing: there's actually surprisingly little difference. 30-somethings think 52 cents of every dollar is wasted while seniors think 56 cents of every dollar is wasted. Meh. In fact, it's pretty surprising how similar everyone's views are. Democrats say 47 cents, Republicans say 52 cents. High school grads say 52 cents, PhDs say 45 cents. Etc. What I'd really like to know about this is what people are thinking when they hear the word "waste." Are they thinking about conventional waste, money that's just flatly going down a rathole and not doing what it's supposed to be doing? Or are they applying the term to spending they just don't like? Is this a matter of pacifists calling the entire Pentagon budget waste and libertarians calling the entire Medicare budget waste?

GOP Battling Windmills When It Should Be Budgeting - The question that everyone should be asking is: Why is the House GOP only proposing a short-term continuing resolution? This should be the moment when either individual appropriations or a full-year CR at the start of the year is not just easy to do but actually gets done. The House, Senate and White House all agreed to the spending level for fiscal 2012 when the president signed the Budget Control Act on Aug. 2, almost two months before the fiscal year starts. The fight to get there was so exceptionally hard-fought (to say the least) and the wounds from those battles are still so painful that only a handful of Members, and even less of the voting public, seem eager to do it all again anytime soon. Under these circumstances, it’s logical to think that the preferred strategy for the House GOP would be a full-year CR rather than a short-term bill. Not only would that avoid another budget-related knock-down fight while the scars  from the last one have not yet healed, but it also wouldn’t preclude any other spending decision from being made on the individual bills if and when they’re considered.

High-stakes disaster aid fight looms in US Congress -  (Reuters) - The U.S. Congress on Tuesday drifted toward another confrontation that could disrupt wide swaths of the government as Democrats sought to double the amount of disaster aid in a must-pass spending bill. Republicans said they were confident the dispute would not threaten funds that are needed to keep the government operating past Sept. 30, but the Senate's top Democrat said he didn't know if that was the case. "We're not going to cave in on this," Senate Democratic Leader Harry Reid said at a news conference. Budget disputes between the Republican-controlled House of Representatives and the Democratic-controlled Senate pushed the government to the brink of a shutdown in April and the edge of default in August. Now the two chambers are headed toward another round of brinkmanship, this time over the emergency aid needed to help local communities recover from one of the most extreme years for weather in U.S. history.

Is Another Shutdown Showdown Looming In Washington? - Less than two months after nearly shutting down the federal government as they argued over the best way to reduce the budget deficit, there's word that Republicans and Democrats on Capitol Hill are again at odds and that another shutdown showdown is possible.Politico reports that:— Senate Majority Leader Harry Reid (D-NV) says he wants to "attach $6.9 billion for the Federal Emergency Management Agency to a stopgap funding bill that must pass in order to keep the federal government running after Sept. 30." — And Reid's announcement has been "blasted" by top House Republicans, "who favor a lower, $3.65 billion level for disaster aid." Republican leaders, says The Washington Post, maintain "that disaster-relief monies included in [the] government funding bill must be offset by additional cuts elsewhere in the budget" and say their plan does that. And according to The Hill, while Senate Minority Leader Mitch McConnell (R-KY) said he thinks a deal can be worked out by this Thursday, Reid said "I'm not that sure" there won't be a shutdown.

How Congress could risk a government shutdown over clean-energy loans - House Republicans are demanding spending cuts for Hurricane Irene relief, proposing a $1.5 billion cut to clean-energy loans in exchange for $3.5 billion emergency disaster relief in its stopgap budget. Democrats aren’t happy about the offset — or any offset at all, in fact. Traditionally, disaster aid has not been offset in the budget, and they worry about setting a new precedent. So last week, Senate Democrats passed a $6.9 billion bill to provide relief without strings attached. All this sets up confrontation between the House GOP and the Senate Dems that could balloon into another government shutdown fight. House Democratic minority whip Steny Hoyer reiterated Democratic opposition to the House GOP’s offset for emergency disaster aid, which targets a Bush-created program that offers loans to auto companies for developing electric cars and other fuel-efficiency innovations. Hoyer defended the program as a job-creator, claiming the GOP’s proposed cut was a “mistake” that would put 30,000 to 50,000 jobs at risk. “

House Rejects Bill Providing Disaster Aid : NPR - In a rebuke to GOP leaders, the House on Wednesday rejected a measure providing $3.7 billion for disaster relief as part of a bill to keep the government running through mid-November. The surprise 230-195 defeat came at the hands of Democrats and Tea Party Republicans. Democrats were opposed because the measure contains $1.5 billion in cuts to a government loan program to help car companies build fuel-efficient vehicles. For their part, many GOP conservatives felt the underlying bill permits spending at too high a rate. The outcome sends House Speaker John Boehner (R-OH) and his leadership team back to the drawing board as they seek to make sure the government doesn't shut down at the end of next week. It also raises the possibility that the government's main disaster relief program could run out of money early next week for victims of Hurricane Irene and other disasters. The Federal Emergency Management Agency has only a few days' worth of aid remaining in its disaster relief fund, lawmakers said Wednesday. The agency has already held up thousands of longer-term rebuilding projects — repairs to sewer systems, parks, roads and bridges, for example — to conserve money to provide emergency relief to victims of recent disasters.

US government shutdown looms again - The US government has been put at risk of a possible October 1 shutdown because of a partisan fight on Capitol Hill over disaster relief for victims of hurricane Irene and Democratic opposition to proposed cuts to subsidies for fuel-efficient cars. At the centre of the debacle lies the ongoing struggle between conservative Republicans and Democrats over how much the government ought to be spending and how programmes are paid for.  In a move that shows the challenge facing Republican leaders in the House of Representatives, who are seeking to appear more conciliatory following this summer’s tough debate over an increase in the debt ceiling, lawmakers voted 230-195 against a bill to keep the US government funded temporarily. Some Republicans objected to the proposal in part because it would set a $1,043bn cap on discretionary spending for the 2011-12 fiscal year, a figure that was agreed during in the final debt ceiling agreement but that they believe is too high.   The defeated proposal included $3.65bn in assistance to areas hit by the recent hurricane and other natural disasters. Mr Cantor, whose own district was affected by hurricane Irene, came under scrutiny after he suggested that any disaster relief funding would have to be offset by cuts to other government programmes.

Government Shutdown Looms: House Rejects Short-Term Budget Bill -- The House on Wednesday failed to pass legislation to keep the government funded past next week, a major defeat for Speaker John Boehner (R-Ohio), who was banking on having the votes for a package that tied emergency disaster aid to spending cuts. The bill went down in a vote of 195 to 230. A whopping 48 Republicans sided with nearly all Democrats in opposing the measure aimed at keeping the government funded past Sept. 30, when current funding runs out, and through Nov. 18.The failed vote was not only an embarrassment for Republican leaders, who ended up nowhere near the 218 votes they needed to pass the bill, but it also eats into the small window of time left to avert a government shutdown. The House and Senate are scheduled to leave town on Friday for a week-long recess; unless that changes, they only have two days left to figure out a way forward. Two factions of Republicans had problems with the bill as they headed into the vote: Conservatives wanted more spending cuts, and some GOP lawmakers affected by natural disasters were unhappy with the bill conditioning $1.5 billion in emergency disaster aid on matching cuts to a fuel-efficiency loan program.

House rejects government funding bill as shutdown looms - The threat of a government shutdown intensified as the House surprised its Republican leadership and rejected a bill to fund the government that required cuts in programs to pay for aid for victims of Hurricane Irene and other disasters. The legislation was narrowly defeated Wednesday after a tense afternoon of vote counting. Conservatives voted against the bill because they thought its spending level was too high, and Democrats rejected it because of the requirement for cuts. The spending bill is needed to keep the government running through Nov. 18; current spending authority stops at the end of September. House Speaker John A. Boehner (R-Ohio) had hoped to avoid another budget battle in the wake of the summer's debt ceiling fight and a near-shutdown of the government in April that caused voters to sour on Republicans and Democrats in Congress. The rebuke gives new currency to Senate Democrats' efforts to fund disaster aid without cuts elsewhere. Congress has just days to resolve the impasse as lawmakers are expected to recess Friday for the Jewish holiday of Rosh Hashana next week.

House passes funding bill but conflict looms - Working past midnight, the Republican House narrowly approved a stopgap spending bill to keep the government operating past Sept. 30 but inviting new conflict with the Democratic Senate over emergency disaster aid and proposed cuts from alternative energy programs. The 219-203 vote, muscled through after an extended roll call, allowed Speaker John Boehner to recover from a stinging loss Wednesday when 48 of his own Republicans deserted him. But even before passage Senate Majority Leader Harry Reid warned he was prepared to block enactment and push the fight into next week when lawmakers had hoped to be on recess. The feeling in there is we’re fed up with this,” said Senate Majority Whip Richard Durbin after a stormy Democratic caucus Thursday evening. And in a statement Reid pointedly said: “The Senate is ready to stay in Washington next week to do the work the American people expect us to do. And I hope the House Republican leadership will do the same.”

House approves spending measure opposed by Senate; shutdown possible - Washington lurched toward another potential government shutdown crisis Friday, as the House approved a Republican-authored short-term funding measure designed to keep government running through Nov. 18 that Democrats in the Senate immediately vowed to reject. In an after-midnight roll call, House Republican leaders persuaded conservatives early Friday morning to support a stop-gap bill nearly identical to one they had rejected just 30 hours earlier.  The bill, which will keep federal agencies funded through Nov, 18, passed over staunch objections from Democrats, who opposed a provision that would pair increased funding for disaster relief with a spending cut to a program that makes loans to car companies to encourage the production of energy-efficient cars.  Without a resolution, the Federal Emergency Management Agency's disaster relief fund will run out of money early next week and the rest of the government would be forced to shut down Oct. 1.

Government shutdown threat looms larger - A government shutdown looms in just a week as the Democratic-led Senate prepares to reject a House-passed funding bill on Friday. In an after-midnight vote, the House approved a bill to fund the government through Nov. 18, after Republican leaders convinced conservatives to vote for the spending measure they’d previously rejected. Democrats said it doesn’t have enough disaster relief aid as the bill passed on a 219-203 vote.

SHUTDOWN SHOWDOWN: No Deal In Sight To Avoid Government Shutdown -- Again  - An already contentious debate over funding the government past September 30 intensified Thursday as Republicans amended their bill to be more amenable to GOP lawmakers and Democrats pledged to oppose it.  In what is at latest government shutdown threat this year, without action by the start of the new fiscal year, all but the most essential government services will cease on October 1 until a new agreement is reached. House Republicans passed a continuing resolution early Friday morning on a mostly partly-line vote, though the bill drew immediate criticism from Senate Democrats over its spending cut offsets for new federal disaster aid. “The bill the House will vote on tonight is not an honest effort at compromise," Senate Majority Leader Harry Reid said, noting that the bill is dead on arrival in the Senate. The House added $100 million in cuts to the federal program that made the loan to the now-bankrupt solar company, Solyndra, in order to win over enough GOP votes to pass over Democratic opposition. An earlier version fo the bill failed to pass on Wednesday, dealing a blow to tha Republican leadership. The measure includes $3.65 billion for the Federal Emergency Management Agency, less than the $6.9 requested by the Obama administration and demanded by Democrats.

Deadlines, Deadlines, Deadlines - Like students who put off writing term papers until the night before they’re due, legislators often drag out negotiations until the very end. As we saw with the debt-limit debate, the ensuing uncertainty – will the United States really default? – can damage consumer, business, and international confidence. Hard deadlines also give leverage to those legislators who are least concerned about going over the brink. So get ready for the new season. The fall legislative season is full of deadlines that could invite such brinkmanship. Here are five.[The first two won temporary extensions between the time I wrote my column and went it appeared online. FAA funding now runs to January, and highway funding through March.] … Sept. 30 also marks the end of the fiscal year – an especially important deadline. Congress has made woefully little progress in deciding next year’s funding. So we again face the prospect of temporary funding bills being negotiated in the shadow of threatened government shutdowns. The fourth deadline comes on Nov. 23, the day the new “super committee” has to deliver a plan to address government debt and cut the deficit by at least $1.2 trillion over the next decade. If the committee fails to reach agreement or Congress fails to enact it by Dec. 23, however, then automatic budget cuts go into effect for a range of programs, including defense, domestic programs, and Medicare, starting in 2013. A final deadline comes at the end of the year, when several economic initiatives are set to expire, including the 2 percent payroll tax holiday and extended unemployment insurance benefits.

America's too-costly war on terror -Ten years into the war on terror, the U.S. has largely succeeded in its attempts to destabilize Al Qaeda and eliminate its leaders. But the cost has been enormous, and our decisions about how to finance it have profoundly damaged the U.S. economy. Recent congressional investigations have shown that roughly 1 of every 4 dollars spent on wartime contracting was wasted or misspent. To date, the United States has spent more than $2.5 trillion on the wars in Iraq and Afghanistan, the Pentagon spending spree that accompanied it and a battery of new homeland security measures instituted after Sept. 11. How have we paid for this? Entirely through borrowing. Spending on the wars and on added security at home has accounted for more than one-quarter of the total increase in U.S. government debt since 2001. And not only did we fail to pay as we went for the wars, the George W. Bush administration also successfully pushed to cut taxes in 2001 and again in 2003, which added further to the debt. This toxic combination of lower revenues and higher spending has brought the country to its current political stalemate.

Capping War Costs Would Lock in Real Savings - The recent debt-ceiling deal limited the Pentagon’s non-war funding — but not its funding for the wars in Iraq and Afghanistan.  The President has now proposed to cap funding for the wars as well, and he counts $1 trillion in savings over ten years from doing so as part of his $4 trillion in total proposed budget savings.  Some maintain that the $1 trillion in war savings are “phony” or a “gimmick.” We ourselves previously suggested that the savings should be reflected in the budget “baseline” rather than counted as part of the total savings a deficit-reduction plan achieves.  Nevertheless, the President’s proposal itself is sound. Let’s take a closer look. For starters, it’s worth noting that, in his controversial budget plan last spring, House Budget Committee Chairman Paul Ryan claimed as deficit reduction the very same $1 trillion in war savings and cited an estimate by the Congressional Budget Office (CBO) to back him up.  CBO says that the proposed cap on war costs produces savings of this size, relative to its official budget baseline. To be sure, the plan to substantially reduce war expenditures does not represent a new Obama policy.  That’s why some argue that shrinking war costs should be built into the spending “baseline” instead of counted as savings from the baseline.

Politicians dodge the details in US tax debate - Democrats and Republicans have claimed that reforming America’s outdated tax system is at the forefront of their respective agendas on Capitol Hill, but politicians on both side of the aisle are playing a subtle game of chicken that may undermine the chances for change. The White House, which this week presented a deficit reduction and tax reform package that it said would ultimately lower rates on corporate and individual taxpayers, has so far been conspicuously silent on the one detail the business community wants to see: the new target tax rate that the Obama administration would be willing to agree to make the US more competitive. Instead, Barack Obama has centred his message on the need to extract more tax revenue from wealthy Americans and some corporations and make the tax system more “fair”. At the same time, Republican leaders have called for a decrease in US tax rates from 35 to 25 per cent but offered scant details on how the US Treasury might pay for such a change. John Boehner, the Republican speaker, has said that he would support closing some corporate tax loopholes and deductions in exchange for a rate decrease but has not been forthcoming on exactly which individual and corporate tax perks he would be willing to scrap. While there appears to be recognition among both parties that the only politically feasible way tax rates can will be lowered systematically for individuals and corporations is if many special loopholes and deductions are cleared out, neither side has shown willingness to be the first to make concessions.

Taxes and the Wealthy - Krugman - Well, sometimes I really do get tired of trying to reason with these people. Are we really back to the line that the rich are sorely oppressed, because their share of tax payments has risen — never mind how much their share of income has risen? Let’s look at the tax data — the CBO estimates that separate the really rich from the only very rich only go up to 2005, but things probably haven’t changed much since then. And let me present what they say using one technique the Tax Policy Center uses routinely, asking what effect a change in taxes would have on after-tax income, other things equal. Here’s what I get for changes from 1979 to 2005:  Changes in tax rates have strongly favored the very, very rich. Now, they’re only a fairly small part of the huge growth in the after-tax inequality of income. But tax policy has very much leaned into that growing inequality, not against it — and anyone who says otherwise should not be trusted on this issue, or any other.

The Distributional Effect of Tax Cuts - A Brief Note - Krugman  - With taxes on the wealthy on the political radar, we’re going to drowning in a vast wave of double-talk and smothered by vast amounts of fuzzy math. Still, one has to try. So, a couple of notes. One is that you have to beware of the old trick of saying “taxes”, then slipping into “income taxes”. Most Americans pay more payroll than income taxes, but the reverse is true at high incomes. So focusing only on income taxes makes it seem as if the rich pay much more of the burden than they really do. Another, more subtle trick involves comparing percentage changes in taxes as opposed to tax changes as a percentage of income. The starting point is that federal taxes are indeed progressive on average (although there are billionaires who pay a lower rate than their secretaries). And this in turn means that you have to be careful about the question when evaluating a change in taxes.

Billionaires and Secretaries - Krugman - Well, it seems as if a number of people in the media have decided that Obama was fibbing when he said that some millionaires pay lower tax rates than their secretaries — because, as the usual suspects triumphantly declare, on average millionaires pay higher average taxes than middle-income Americans. This is, of course, stupid: the operative word is SOME. And we’re not talking about one or two exceptional guys, either. Look at the IRS data on returns for the 400 highest incomes in America (pdf) — specifically, Table 43. If you look at the numbers since 2004, you’ll see that in a typical year between 30 and 40 percent of those super-high-income players paid an average tax rate of less than 15 percent; most of them paid less than 20 percent. Bear in mind that for the very wealthy the payroll tax — the main burden on working-class Americans — is trivial, because of the cap on Social Security and the fact that it only applies to earned income. And what becomes clear is that the Obama/Buffet claim is absolutely, totally true.

Millionaires, The Middle Class, and Taxes -- Actual Numbers - Paul Krugman - Further to this post about whether the Obama/ Buffett claim is true: the Tax Policy Center has new numbers about the distribution of average tax rates by income class. Consider, in particular, the estimates of the combined income and payroll tax by income class; I’ve deleted a couple of columns to make the thing fit with more or less legible type: Here’s how to read this: 40 percent of taxpayers with incomes between 30K and 40K pay more than 12.9 percent of their income in income and payroll taxes; meanwhile, 25 percent of people with incomes over $1M pay less than 12.6 percent of their income in these taxes. This suggests that there are a lot of very-high-income guys paying a lower tax rate than their secretaries. And that doesn’t even take into account state and local taxes, which are quite regressive. Taken as a whole, the US tax system is probably somewhat progressive — but not as much as you might think, especially at the upper end, and very erratically. There are a lot of rich people basically free-riding on the system.

The AMT: why we should retain it with minor reforms to protect the true middle class – Linda Beale - A commenter on an earlier thread complained about the Alternative Minimum Tax (AMT), saying it should be abolished. He seemed somewhat misinformed, suggesting that the alternative to the AMT is better enforcement.It seems that it might be timely to remind readers about the purpose of the AMT, its advantages as well as its flaws, and the way that reform could reasonably be undertaken to better accomplish its purposes. The following is an edited excerpt of my response to that reader on this issue. The purpose of the AMT is to limit the advantage from aggregating deductions and exclusions and other provisions that are of particular benefit to those with high incomes. For background, readers may want to read my extensive article on the AMT, available on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=726362. Or you can skim through the more accessible (and less dense) series of blogposts on the AMT based on the ideas and information in the article, titled "What Should Congress Do about the AMT?: (list)

What Tax Credits Do – or Don’t Do – for Low-Income Families - Last week, the Census released the official poverty numbers for 2010. The proportion of people in poverty (15.1 percent) reached its second highest point since 1965, and the proportion of people living in deep poverty (half the poverty level) was the highest level since 1975 – 6.7 percent. The poverty line equaled $17,568 for a single parent with two children. The official income counted to determine poverty is money income before taxes and tax credits. It excludes capital gains and non-cash benefits (so Temporary Assistance for Needy Families counts, but food stamps don’t). For some families, tax credits boost income significantly. In 2010, the biggest credits were the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and the Making Work Pay credit (MWP). The first two assist families with children almost exclusively. Individuals without children get only about 3 percent of EITC benefits  and they get nothing from the CTC. In contrast, MWP provided benefits to all workers and their spouses, regardless of whether or not they have children, but it expired at the end of 2010. In 2011, MWP was replaced with a payroll tax cut that is scheduled to expire at the end of 2011, but President Obama has proposed expanding it and extending it. Although tax credits encourage work and subsidize low wages for families with children, they do little for low-income childless families.

Coming Apart: After 9/11 transfixed America, the country’s problems were left to rot - The events of September 11th, as grim as they were, offered the prospect of employment to a generation of working-class Americans who were born too late for good factory jobs. If the Bush Administration’s “global war on terror” had gone the way of the Second World War, mass mobilization in the armed forces, combined with mass production in the factories, would have revitalized a stagnant national economy and produced a postwar boom. This didn’t happen.  Most new defense jobs at home turned out to be in data collection and intelligence, which required college degrees and specialized knowledge, or in the low-paying realm of airport and building security. But the main reason that 9/11 didn’t become a source of jobs, or of ideas for revitalizing the economy, was that the country wasn’t thinking about its own weaknesses. President George W. Bush defined his era in terms of war, and the public largely saw it the same way. September 11th was a tragedy that, in the years that followed, tragically consumed the nation’s attention.

Why David Brooks Misses the Real Source of Moral Decay – Thirty Years of Class Warfare Against the Working Class - What Brooks doesn’t tell you is that the real crisis in contemporary American society is the weakening of the institutions that serve those on the losing end of the American economic ladder. One of the startling observations in the Moynihan Report of the mid-sixties was his finding that as jobs disappeared from rustbelt inner cities so, too, did church attendance. A half century later, Brad Wilcox has found the same thing among the working class more generally. With economic decline that has disproportionately affected traditionalist America, the institutions that produced cohesive communities, including churches, schools, families and civic organizations, are in decay. Modernity with all its faults, however, is not the principal source of the problem. And the risk Brooks does not acknowledge is that attacks on modernity in the name of morality often become attacks on tolerance. Let’s address the real sources of institutional decay and stop conflating the challenges of the last few years with the cultural changes a millennia in the making.

Obama pushes 'Buffett Rule' to tax the wealthy. GOP cries 'class warfare!' -  If you’re aiming to tap the wallets of “millionaires and billionaires,” as President Obama is with his plan to create jobs and reduce the national debt, it’s not a bad idea to have at least one prominent billionaire on your side. And that Obama does with investor and philanthropist Warren Buffett, the “Oracle of Omaha” whose estimated net worth is $47 billion. They’re such good buddies, in fact, that the “Buffett Rule” will be part of the plan to be unveiled at the White House Monday morning.  Details will be left to those in the administration and Congress tasked with rewriting the federal tax code. But the essence, as first reported in the New York Times, is that the wealthy “pay at least the same percentage of their earnings as middle-income taxpayers.” In the abstract, at least, it’s hard to argue with that. And polls show that most Americans – in theory, at least – are on Obama’s side. Earlier this year, an NBC News/Wall Street Journal survey showed that 81 percent of those polled agreed that “placing a surtax on federal income taxes for people earning over one million dollars a year” would be “acceptable” (55 percent said “totally acceptable”). Sixty-eight percent also were OK with “phasing out the Bush tax cuts for families earning $250,000 or more per year.”

Paul Ryan accuses Obama of ‘class warfare’ over millionaires tax - A top House Republican said Sunday that President Barack Obama was engaging “class warfare” with a proposal to tax millionaires at a higher rate. The so-called “Buffet rule” would make sure millionaires pay about the same tax rate as the employees that work for them. It’s named after billionaire Warren Buffet, who has said that he is taxed at a rate of about 17.4 percent, while his secretary is taxed at a rate of about 36 percent. “If you tax something more, Chris, you get less of it,” Rep. Paul Ryan (R-WI) told Fox News’ Chris Wallace. “Class warfare, Chris, may make for really good politics, but it makes for rotten economics. We don’t need a system that seeks to divide people and prey on peoples’ fear, envy and anxiety. We need a system that creates jobs and innovation, and removes these barriers for entrepreneurs to go out a rehire people. I’m afraid these kinds of tax increases don’t work.” “What he forgets to mention is that is a double tax,” Ryan insisted. “Capital gains and dividends are taxes on money that has already been taxed once before based on income… It looks like the president wants to move down the class warfare path. Class warfare will simply divide the country more, attack job creators, divide people and it doesn’t grow the economy.”

Warren Buffett Rule: Class Warfare or Tax Fairness? - In proposing the "Buffett Rule," President Obama is invoking a name synonymous with success to raise taxes for the wealthy in what political analysts are saying will be a tough sell to Congress.  In opposition to the Buffett Rule, Republicans have attacked the president's proposed tax hikes, crying "class warfare."  "Class warfare will simply divide this country more. It will attack job creators, divide people and it doesn't grow the economy," Rep. Paul Ryan said on FOX News Sunday. "Class warfare may make for really good politics, but it makes for rotten economics."  Joseph Stiglitz, Nobel prize winner in economics and professor at Columbia University, said he disagrees. It's not class warfare to ask everyone in the country to pay their fair share. To say the wealthy have taken advantage of their political position and have not paid their share of taxes is not class warfare. It's a statement of fact," Stiglitz told ABC News. "The fact is they are paying lower taxes and most Americans think this is unjust and unfair. Tax loopholes don't just appear out of thin air. They are the result of big political investments that rich people have particularly made to get tax preferences."

Class war! - Economist - BARACK OBAMA'S proposal to raise tax rates on the rich has resulted in the usual ruckus. Republicans have declared class war. Mr Obama has replied: "This is not class warfare—it's math". Not to say it's good math. Whether or not it is, it's certainly not class war. As far as I can see, Democrats have no more interest in fighting one than do Republicans. In a speech in Storm Lake, Iowa, Mr Obama pitched his proposals to more heavily tax high earners as a counterbalance to high levels of economic inequality: Our tax policy has been skewed toward the top 1 percent and away from the middle class, working class in this country. Reversing that would make a significant difference. That’s not trivial. That’s not around the edges. Mr Obama claims to be on the side of the working and middle-classes, but I would submit that this sort of tax policy is in fact trivial. It's electoral public relations. The edges are precisely what this sort of thing is around. Our economy is riddled with a multitude of deeply-embedded structural flaws that allow the well-connected to enrich themselves at the expense of the rest of us, but nobody will do anything about it. There is a class war in this country, a war between the subsidy barons, the regulatory arbitrageurs, the patent monopolists and the rest of us. Mr Obama is a class warrior. The trouble is he's on the wrong side.

Notes on Class Warfare - Krugman - I’ll be saying much more on this. But for now, partly as a note to myself, some notes on the actual class war that has taken place over the past 30 years — namely class warfare for the rich against the middle class.

• 1. Major tax cuts for high-income Americans, much larger as a percentage of income than for the middle class; CBO data here.
• 2. Decline in real minimum wage.
• 3. Union-busting, aided and abetted by federal policy.
• 4. Financial deregulation, which has fed inequality because very high incomes come disproportionately from that sector.

And now shrieks of outrage over the prospect of even a slight reversal of these trends.

Class War Indeed! - It is hardly news that American politicians use political words with little regard for their meaning or that their laxness (and ignorance) exceeds the norm even for our political culture.  Lately, Republicans have been especially culpable; witness the drivel, continuing to this day, identifying Barack Obama’s milquetoast health insurance reforms with, of all things, socialism.  But the latest Republican talking point – that it is “class war” to propose that millionaires and billionaires pay as large a share of their incomes in taxes as those who work for them — marks a new low. Though liberals seem to have forgotten, there is a venerable – and well-corroborated – tradition in social thought that holds history to be a history of class struggles.  But even for those of us who cannot see how human history can be rendered intelligible in any other way, it is only in exceptional moments that class struggles rise to the level of class warfare.

The truth about 'class war' in America - Republicans claim, in Orwellian fashion, that Obama's millionaire tax is 'class war'. The reality is that the super-rich won the war. Republicans and conservatives always fight back against proposals to raise taxes on corporations and rich individuals by making two basic claims. First, such proposals amount to un-American "class warfare", pitting the working class against corporations and the rich. Second, such proposals would take money for the government that would otherwise have been invested in production and thus created jobs. Neither logic nor evidence supports either claim. The charge of class war is particularly obtuse. Consider simply these two facts. First, at the end of the second world war, for every dollar Washington raised in taxes on individuals, it raised $1.50 in taxes on business profits. Today, that ratio is very different: for every dollar Washington gets in taxes on individuals, it takes 25 cents in taxes on business. Second, across those 50 years, the actual shift that occurred was the opposite of the much more modest reversal proposed this week by President Obama; over the same period, the federal income tax rate on the richest individuals fell from 91% to the current 35%.

Why Hiking the Top Income Tax Rate Won't Fix President Obama's Deficits - How much does the top income tax rate affect how much money the government collects each year?  That question is relevant today because of the President's latest idea: the "Buffet Rule", which would impose higher income taxes on people who earn over one million dollars a year.  But would the government actually collect more money? The chart below plots the ratio of total government Revenue Per Household (RPH) to the Median Household Income (MHI) for the U.S. for each year from 1967 through 2010. The chart also plots the maximum income tax rate that the topmost income earners in the United States have had to pay for each year from 1967 through 2010.  What we do see indicates that the maximum tax rate has little to no bearing on how much money the federal government collects per household in any given year. Since 1967, the government's RPH to MHI ratio has risen steadily on average, indicating that the U.S. government is collecting more and more money per household over time, with the changing level of the topmost income tax rate having little to no effect on the rate of that change.

The Biggest Challenge for Today's Tax Reformers - The pressure to reduce the budget deficit and to pay for additional stimulus measures may force Congress to look at the revenue side of the budget. Republicans are adamant about not raising tax rates but appear less dogmatically opposed to restricting tax loopholes. In a speech last week, House Speaker John Boehner said he was open to the idea. Of course, one man’s tax loophole is another man’s essential adjustment to the tax code to ensure fairness and maintain a healthy economy. But clearly there is a limit to how many special tax provisions we can afford when facing deficits that everyone agrees are unsustainable. Economists prefer the term “tax expenditures” to designate exceptions to a normal tax system, be they exclusions, deductions, credits or special rates (such as on dividends). While there is continuing debate among tax theorists over what a normal tax system is, it is also obvious that many tax preferences are hard to justify economically or socially. On Friday, the Tax Policy Center, a private research group, published a study that went through all of the Treasury estimates of tax expenditures since 1985. They were broken down in various ways and aggregated, thus allowing some conclusions to be drawn. The table summarizes the results.

The Effect of Individual Income Tax Rates on the Economy, Part 7: 1988 - 2010 - This post is the seventh in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fourthh looked at 1950 - 1968, and the fifth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, it was also covered again in the sixth post, which looked at the period from 1981 to 1993. This post will look at the period from 1988 to the present. Before I begin, a quick recap...

MotherJones: Chart of the Day: Tax Increases Still Popular - Bruce Bartlett's roundup of 29 polls confirms your suspicions: Americans want higher taxes as part of a deal to reduce the deficit. Here's the chart:

Standard and Poor’s US Downgrade Shock Doctrine; Lather, Rinse, Repeat - The ratings agency Standard and Poor’s is threatening another downgrade of the United States credit rating if the Super Committee doesn’t get results. From Bloomberg:  “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,” [John] Chambers [managing director of S&P] said. “Hopefully things turn around” and fiscal restraint “would enable us to see the ratings stabilize.” [...]  “We have a negative outlook on the rating,” . “An outlook says there is at least a one in three chance of a lowering of the rating over a six to 24 month time frame.” This is the shampoo of shock doctrine; lather, rinse and repeat. Whenever it looks like a deal could be reached that would reduce the deficit, mainly by cutting programs that help regular Americans, Standard and Poor’s issues a downgrade threat, giving members of Congress an excuse for supporting these unpopular cuts. We saw it with the Catfood Commission, during the Obama-Boehner attempt at a grand bargain, and now we are a seeing it with the Super Congress.

U.S. Probes Rating-Cut Trades - Securities regulators have sent subpoenas to hedge funds, specialized trading shops and other firms as they probe possible insider trading before the U.S. government's long-term credit rating was cut last month, people familiar with the matter said. Securities and Exchange Commission officials demanded more information about specific trades made shortly before Standard & Poor's Corp. downgraded the U.S. to double-A-plus from triple-A on Aug. 5, these people said. SEC officials are zeroing in on firms that bet the stock market would tumble. Those trades could have reaped huge profits when the Dow Jones Industrial Average sank 5.5% on Aug. 8.

Fears over exemptions to Volcker rule - The Volcker rule, which bans US banks from trading for their own account, is set to include exemptions that some officials fear will weaken its impact, people familiar with the situation have warned. In the wake of UBS’s $2.3bn loss last week, alleged to have been caused by the actions of a lone trader, proponents of a tough rule to constrain banks’ proprietary trading are concerned that dangerous activity will continue under the guise of customer-related transactions. According to a 174-page draft of the rules seen by the Financial Times, and confirmed by people familiar with discussions between regulatory agencies, so-called “repo” transactions and securities lending, and near-term trading in currency and commodities – but not futures – will be permitted. The draft rules exempt from the prop trading ban “positions arising under certain repurchase and reverse repurchase agreements or securities lending transactions [and] bona fide liquidity management”. They also allow “positions in loans, spot foreign exchange or commodities”.  In line with the statute, which was passed by Congress as part of last year’s Dodd-Frank financial overhaul, securitisations are permitted, including a related “limited amount of interest rate or foreign exchange derivatives”.

UBS Scandal Is a Reminder About Why Dodd-Frank Came to Be… Although the UBS trading scandal happened at the London office of a Swiss financial company, big American banks will feel regulatory heat. When UBS revealed on Thursday that a rogue trader had lost a quantity of money so large that it potentially wiped out profits for the entire quarter, the case cast a glaring spotlight on banks’ risk-taking activities and evoked painful memories of the financial crisis. Such blowups had helped bring the system to the brink, forcing governments to bail out banks and prompting a global economic slowdown. The timing is bad for banks. In the coming weeks, policy makers are expected to propose new regulations intended to limit federally insured banks from making bets with their own money, according to a government official with knowledge of the process. The rules — part of the Dodd-Frank Act, the regulatory overhaul enacted in the wake of the crisis — take aim at a practice called proprietary trading, in which companies speculate for their own gains rather than for their customers’. While the industry has been lobbying aggressively to temper those regulations, the rogue trading case could give proponents of the so-called Volcker Rule, which would prohibit proprietary trading, more ammunition.

Volcker Rule Loses Its Teeth - Banks could be allowed to continue making risky bets with their own capital, according to a draft version of the so-called Volcker rule that dilutes the provision's original ban on "proprietary trading." At issue is how regulators and banks define "hedging," or trades designed to offset risk taken by a bank, usually on behalf of customers.  The law originally defined hedging narrowly as trades tied to specific bets. The new language, contained in a 174-page draft proposal for the rule released to regulators in August and reviewed by The Wall Street Journal, says hedging can cover bank risk on a "portfolio basis" - including "the aggregate risk of one or more trading desks."

UBS Says Trading Losses Were Closer to $2.3 Billion - UBS, the Swiss banking giant, said Sunday that unauthorized trades in index futures during the last three months were at the center of rogue trading that led to a $2.3 billion loss.  In a statement on Sunday², UBS said it failed to notice the trading of index futures on the Standard & Poor’s 500, the DAX in Frankfurt and the EuroStoxx because they were offset by fictitious positions that kept the transactions within the bank’s risk exposure limits. A London court on Friday charged Kweku M. Adoboli, 31, with one count of fraud and two counts of false accounting dating back to as early as October 2008.  “The true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader,” the UBS statement said. “These fictitious trades concealed the fact that the index futures trades violated UBS’s risk limits.”

I strenuously disagree with UBS CEO Oswald Gruebel by Kid Dynamite - There are a lot of people out there who deride Wall Street as a bunch of loose canons gambling with other people’s money. Others think that Wall Street traders are dangerous psychopaths, where any one maniacal gunslinger can take insane risks and blow up the global financial system. As I’ve written numerous times: in all of my experience, this has not been the case. Now, however, we have the CEO of a major investment bank basically confirming those views. UBS CEO Oswald Gruebel was quoted today, in the wake of his firm’s $ 2.3B loss in a “rogue trader” scandal: Speaking for the first time since UBS revealed the loss, Gruebel told the Swiss weekly Der Sonntag that the loss couldn’t have been prevented. “If someone acts with criminal energy, then you can’t do anything. That will always be the case in our business,” the former trader said in the interview published Sunday. Uggh.. Mr. Gruebel – are you sure you want to go that route? Because if what you say is true – that investment banks are helpless to prevent such actions, then the public’s fears about those banks being serious hazards to the global financial system are true.

Bill Black: Why do Banking Regulators bother to Conduct Faux Stress Tests? - One of the many proofs that banking regulators do not believe that financial markets are even remotely efficient is their continued use of faux stress tests to reassure markets. But why do markets need reassurance? If markets do need reassurance that banks can survive stressful conditions, why are they reassured by government-designed stress tests designed to be non-stressful? Stress tests were first mandated for Fannie and Freddie by statute. Fannie and Freddie’s managers referred to them as “nuclear winter” scenarios – impossibly unlikely and stark disasters. In reality, Fannie and Freddie had exceptionally low capital levels. Fannie and Freddie met their capital requirements under a newly toughened version of the statutory stress test weeks before they collapsed and were revealed to be massively insolvent.AIG passed its stress test immediately before it failed. The three big Icelandic banks passed their stress tests shortly before they were revealed to be massively insolvent. Lehman passed its stress tests. The stress tests ignored the actual primary causes of losses and failures – extreme losses on fraudulent liar’s loans and CDOs. For my sins, I read every one of FRBNY President Geithner’s speeches discussing regulation. Geithner is a one-trick pony. His answer, to everything, was stress tests. He claimed that the largest banks had developed advanced, proprietary stress tests that provided ever increasing assurance that they were safe and well-capitalized. The crisis revealed that the models and the safety were illusory.

The Geithner mystery solved - Mr. Suskind suggests that the administration's problems in dealing with the fiscal crisis began with the president's choice of his economic team. He wonders why Mr. Obama turned away from the advisers who had seen him through the campaign (including more progressive thinkers like Mr. Stiglitz, Robert Reich and Austan Goolsbee), and relied instead on two men associated with the deregulatory policies of the past, Mr. Geithner, the Treasury secretary, and Mr. Summers, the chief economic adviser. Both men had served in the Clinton administration (with Treasury Secretary Robert E. Rubin, who would later join Citigroup as a senior adviser and board member); their actions, Mr. Suskind contends, "had contributed to the very financial disaster they were hired to solve." Of course, one might ask the same of Obama's penchant for filling the most important positions in his administration -- including his Vice President, Secretary of State, and Defense Secretary -- with supporters of the Iraq War.  But about Geithner, Suskind unwittingly solved the mystery he raised: Kakutani notes that "one top banker quoted in these pages refers to [Geithner] as 'our man in Washington' for helping avert more systemic changes affecting Wall Street." Geithner wasn't chosen and hasn't remained despite being "associated with the deregulatory policies of the past" and despite being the bankers' "man in Washington."  He is empowered precisely because of those facts, as was pointed out even before Obama's inauguration.

Everyone into the next shadow banking system - Consumer advocates have been worrying for a while now that the rapid rise of reloadable prepaid cards will lead to a two-tier financial system. There will be folks with bank accounts, and then there will be folks with prepaid cards. Prepaid cards, which consumers (or their employers) load with money for debit-card-like spending, may  seem like the perfect solution for the 17 million American adults without a bank account—no carrying around wads of cash, no pesky check-cashing fees—but prepaid cards are hardly little angels. They often come with significant fees, including ones to use ATMs, to put more money on the card, and to close out the account. Plus, they tend not to have handy devices, like account statements, that people with bank accounts rely on. One of the biggest issues is that, unlike bank accounts, prepaid cards don’t necessarily come with FDIC insurance or the protections of the Electronic Funds Transfer Act. To be clear: many prepaid cards do carry “pass-through” FDIC insurance, and some prepaid cards do fall under Reg E, thus carrying consumer protections like limited liability for lost or stolen cards. But the regulation of prepaid cards is patchwork, much of the compliance is voluntary, and consumers are almost certainly not shopping around based on which cards are covered. In many cases, consumers wouldn’t get to pick which card they use anyway, since their employer or government is the one putting money on the thing.

CFPB expects ability-to-repay rule by early next year - Raj Date, special adviser to the Treasury Department and de facto leader of the Consumer Financial Protection Bureau, said the new agency's final rule on identifying qualified mortgages will be released early next year. Date also addressed concerns over mortgage servicing standards, suggesting the CFPB remains focused on improving the default component of the loan life cycle. The qualified mortgage standard is a provision outlined in Dodd-Frank that requires originators to assess a borrower's ability to repay a loan before issuing a home loan. The industry ^[1] spent the past several months brainstorming the standard and discussing what type of safe harbor should be created to give lenders clear expectations.

US accused of unfair antitrust tactic - US authorities are using a little-known immigration provision to secure guilty pleas by foreign businessmen in antitrust cases, a move defence lawyers say unfairly presses non-US executives into co-operating with investigations.  The tactic is likely to be brought to bear in the ongoing US and UK investigation into alleged collusion in the setting of the London and Tokyo interbank markets, which has ensnared US, European and Japanese banks and their employees. No individuals have been charged with any wrongdoing.  The US Department of Justice’s leverage in securing guilty pleas arises from the fact that foreign executives convicted of felonies can be banned from entering the US for more than a decade.  The US’s leverage is a 1996 memorandum of understanding between the DoJ and US immigration officials that US officials say provides immigration certainty for co-operators. The MoU is unique to antitrust cases and lawyers say the MoU is included in nearly ever plea agreement. The net result is that in exchange for co-operation and a guilty plea, the US government will grant exemptions from travel restrictions to foreign executives. The tactic is working. The DoJ has sent 50 foreign businessmen to prison for antitrust offenses since 1999. Only one has gone to trial, defence lawyers say.

No More Patents For Cute Tax Tricks - Did you ever think the clever tax-saving strategy your financial advisor is offering up could be patented?  For the past six years that question has been vigorously debated in the courts, at Congressional hearings and at gatherings of estate planners and other tax wonks. Congress finally put it to rest with a new law that President Obama signed on Sept. 16. Under a provision in the far-reaching patent reform bill, it’s no longer possible to get a patent on a strategy for reducing, avoiding or postponing taxes. (See Section 14 of the law, which downloads here as a pdf.) By the time the bill, known as the America Invents Act, was signed into law, the U.S. Patent and Trademark Office had issued more than 161 tax patents, and another 167 tax patent applications were pending.

High Frequency Trading is an Arms War! - The high frequency trading industry is engaged in an arms war. Algorithmic, low-latency trading now accounts for roughly 70% of the volume in U.S. equity markets. Basically, the robots are in control, and they are fighting for fractions of pennies, but doing it millions of times a day.  The firms that control this lucrative industry range from private, closely held firms such as Chicago's GETCO, to major Wall Street banks like Goldman Sachs (NYSE: GS) and secretive hedge funds such as Renaissance Technologies. While the rewards can be huge, it is an ever evolving game where speed is everything. If firms aren't constantly upgrading their technology, along with their algorithmic strategies, they will soon become someone else's lunch.

The Biggest Bubble of All Time – Commodities Market Speculation - Back in fall of 2008 I wrote a piece examining what was then the biggest bubble in human history: http://www.levyinstitute.org/pubs/ppb_96.pdf.  From 2004 to 2008 we experienced the biggest commodities bubble the world had ever seen. If you looked to the top 25 traded commodities, you found prices had doubled over the period. For the top 8, the price inflation was much more spectacular. As I wrote: “According to an analysis by market strategist Frank Veneroso, over the course of the 20th century, there were only 13 instances in which the price of a single commodity rose by 500 percent or more. Now, if we look at the current commodities boom, there are already eight commodities whose price rise had reached 500 percent or more by the end of June: heating oil (1,313 percent), nickel (1,273 percent), crude oil (1,205 percent), lead (870 percent), copper (606 percent), zinc (616 percent), tin (510 percent), and wheat (500 percent).  I was able to conclude beyond any doubt that it was a speculative bubble driven by a “buy and hold” strategy adopted by managers of pension funds.  The pension funds panicked, realizing that their members would hold them responsible for exploding prices of gasoline at the pump. Pension funds withdrew one-third of their funds and oil prices fell from about $150 per barrel to $50.

Undeclared beneficial ownership: Licence to loot - PERSONAL identity is a tightly policed business. Birth certificates are unambiguous. Using forged documents is a crime. Even where sporting an alias is legal it counts as dodgy. Yet corporate citizens are different. They can hide their true identity in a maze of interlocking companies, or even use places such as the British Virgin Islands, where anonymity is legally protected. Those seeking the owners’ real names and addresses there find that the trail goes cold with a nominee—a lawyer or accountant—who shields clients from nosy outsiders. This can benefit the devious, the tax-shy, the corrupt and the outright criminal. Campaigners and, increasingly, criminal-justice agencies want the rules tightened—and not only in faraway islands. The case for this is highlighted in “The Money Laundry”, a new book by Jason Sharman, an Australian academic. As a test, he tried creating companies in various places without using a real (verified) ID. Of the 47 providers of registration services he approached in OECD countries, no fewer than 35 agreed to form shell companies without requiring proper documents. Some also helped to open bank accounts. Classic tax havens were on the whole much more rigorous.

Corporations hoard cash as a precautionary measure - MIT Sloan - Academic studies have shown that over the past few decades, public firms are increasingly holding large amounts of cash. Curiously, much of this build up in cash savings can be attributed to cash saved from seasoned share issues, which are sales of equity by already public companies. I examined the share-issuance cash savings of a large number of U.S. firms over a 38-year period. In the 1970s, $1.00 of issuance resulted in $0.23 of cash savings, yet in more recent years, that same $1.00 of issuance resulted in $0.60 of savings. Over my sample period, the amount of cash saved from share issuance increased at an average rate of 2.5% per year. So what is going on here? My initial reaction was that the firms were issuing shares because their stock was mispriced, thereby taking advantage of naive investors. However, after digging deeper, I found that this was most likely not the case. It turns out that there are good economic reasons for firms to hold onto cash and even to issue shares for the purpose of cash savings.

S&P: Accounting Rule Cld Boost Lrg US Banks' Assets By Ave 68% - An accounting rule that has yet to be adopted has the potential to boost U.S. large banks assets by an average 68%, and liabilities by nearly 72%, Standard & Poor's said Wednesday.  The International Accounting Standards Board (IASB) and its U.S. counterpart, the Financial Accounting Standards Board (FASB), have been struggling to converge their approaches to offsetting financial assets and liabilities.  And if convergence is not achieved, which Standard & Poor's deems "the likely final outcome" in a report titled "Accounting Proposal Struggles To Create Global Convergence In Balance Sheet Offsetting," the differences between global accounting regimes will be "significant."  And in this case, U.S. banks will mostly feel the impact relative to their European counterparts.  The FASB put out an exposure draft in January 2011 on Balance Sheet Offsetting that provides guidance on when companies can offset financial assets and liabilities.  Also in January, the IASB put out an equivalent proposal called "Offsetting Financial Assets and Financial Liabilities."

Fed's Twist puts the squeeze on U.S. banks - Operation Twist put bank stocks into a spiral. The U.S. Federal Reserve's decision to buy $400-billion (U.S.) of longer-dated Treasuries and sell the same amount of short-term debt by June pushed the yield on the benchmark 10-year note to a record low 1.73 per cent. It's likely to stay under 2 per cent for some time. That squeezes financials across the board.  The most obvious victim is a retail bank's net interest margin, essentially the difference between its cost of borrowing and what it charges for loans. Theoretically, the drop in rates means banks should be able to raise debt capital more cheaply to offset some of the drop in income. But lenders and shareholders alike are wary of banks' exposures and earnings potential. The selloff on Thursday sent most of them even further below book value, with the likes of Citi and Bank of America trading well under half their assets less liabilities. So getting a break on their own interest payments is far from assured.  But the Fed's new policy will also have an impact on fixed-income, currency and commodities traders, traditionally one of the biggest money-spinning operations on Wall Street. They're already struggling thanks to a combination of impending new regulations and a welter of fiscal and economic uncertainties that routinely whack up volatility and scare off customers.

Moody's downgrades Bank of America, Wells Fargo, and Citigroup - In yet another blow to the financial sector, Moody's Investors Services announced the downgrade of Citigroup, Wells Fargo, and Bank of America -- three of the United States' top banks. Among the primary reasons: the U.S. government is less likely to step in to save a troubled financial institution. "It is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute," Moody's wrote in its downgrade note of Wells Fargo's stock. Moody's downgraded Bank of America (BAC, Fortune 500)'s long-term debt two notches to Baa1, Wells Fargo (WFC, Fortune 500)'s long-term one notch to A1, and Citigroup (C, Fortune 500)'s short-term debt one notch to Prime-2. Moody's offered a negative outlook for all three. "While we disagree with their conclusions and we believe our ratings should be higher, to minimize any potential impact of this decision on our business, we have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year," said a Bank of America spokesman.

Moody's cuts Bank of America, Wells Fargo and Citi ratings - Moody's Investors Service has lowered some of the debt ratings for Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., saying it is now less likely that the U.S. government would step in and prevent the lenders from failing in a crisis.  The ratings firm said Wednesday that it believes the government is likely to provide some level of support for financial institutions, but is also more likely now than during the 2008 financial crisis to allow a large bank to fail should it become financially troubled.  Moody's downgraded long-term debt ratings for Bank of America and Wells Fargo Bank N.A., and cut BofA's short-term rating and Bank of America N.A.'s long-term deposit rating.  The firm confirmed Citigroup's long-term rating, but downgraded its short-term rating.

Moody’s Bank Downgrades Assailed as ‘Too-Big-to-Fail’ Persists-- Moody’s Investors Service, the ratings firm that downgraded the credit of Bank of America Corp. and Wells Fargo & Co., said future U.S. bailouts of financial firms are less likely. Some analysts and investors disagree. “We have not gotten beyond too-big-to-fail,” . “We had an experiment where we let one go and it didn’t work out so hot. Now they are going to be more likely to let somebody go? I don’t think so.” Lawmakers have since pushed through regulations including the Dodd-Frank Act aimed at cutting the interconnectedness of financial firms and establishing plans to wind down troubled companies to avoid future bailouts. Moody’s cut the long-term credit ratings for Bank of America and Wells Fargo yesterday and said the government is “more likely now than during the financial crisis” to let a large U.S. bank collapse, according to a statement. The ratings firm said the two banks and Citigroup Inc., which had its short- term rating downgraded, benefitted more than others from underlying government support.

Top Bankruptcy Lawyer Harvey Miller on the Possibility of a Countrywide BK - Bloomberg interviewed Harvey Miller, who is regularly described as the dean of the bankruptcy bar in the US. Miller handled the Lehman bankruptcy and is thus well positioned to opine on whether Bank of America might put Countrywide into bankruptcy. You’ll notice that Miller studiously avoids saying anything terribly definitive. But he also makes clear that a BK filing for Countrywide would open up a shitstorm of litigation and has the potential to have serious adverse consequences for Bank of America. Oh, and it otherwise might not work as planned. It’s also interesting just as a matter of curiosity to see one of the prominent figures in the crisis perform. Bloomberg (video)

Bank deposits soar despite rock-bottom interest rates - Americans are pumping money into bank accounts at a blistering pace this year, sending deposits to record levels near $10 trillion ... In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year. The large amount of cash only adds to expenses such as paying for deposit insurance premiums. ... [banks] have slashed interest payments to discourage customers. Wells Fargo & Co. ... halved its payments on one-year certificates of deposits to 0.1%; Citigroup ... dropped its payment to a paltry 0.3%. [Some banks are] stashing it in a safe but unrewarding place: Federal Reserve banks, which are paying them an interest rate of just 0.25% to tend the funds. Such deposits rose to more than $1.6 trillion at the end of August from about $1 trillion a year earlier, according to the Fed.

Money Market Funds Cut European Bank Debt to Lowest Since 2006, Fitch Says - Money-market mutual funds reduced lending to European banks further last month, with the biggest U.S. funds cutting their holdings to the lowest in at least five years, as the region’s sovereign debt crisis worsened.  The 10 biggest U.S. funds eligible to purchase corporate debt, with a combined $676 billion, reduced European bank assets to 42 percent of holdings, the lowest level since at least 2006, Fitch Ratings said today in a report. European funds also are cutting holdings of Spanish and Italian assets and shortening the maturities of the investments they keep, Fitch said in a separate report this week.  The sovereign-debt crisis has raised concern that money- market funds may suffer losses if banks fail to meet obligations as a result of defaults. Money funds’ withdrawal has made it difficult for some European banks to get longer-term funding and forced the European Central Bank to step in.

Visa, MasterCard to Raise Small-Purchase Fees, Analyst Says - Visa Inc. (V) and MasterCard Inc. (MA), the world’s largest consumer-payment networks, will raise debit-card fees charged for small-ticket purchases to the full amount allowed under new rules, according to an analyst.  Visa, the world’s largest network, and No. 2 MasterCard may increase fees from 8 cents on a $2 purchase to 23 cents, Thomas McCrohan, an analyst at Janney Montgomery Scott LLC, wrote in a note. They will eliminate the so-called interchange portion of the fee, charging the highest amount allowed by rules announced in June, McCrohan said yesterday in an interview.  The change “will kill the economics for small-ticket debit purchases and influence a shift back to credit cards,” McCrohan wrote. “It will almost certainly lead to a merchant revolt against the card networks.”

Cap Rates and Commercial Property Prices - FRBSF - Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market. Movements in national cap rates are the predominant drivers of changes in cap rates in local markets. Therefore, the anticipated commercial real estate rebound is likely to be widespread across many metropolitan areas.

AIA: Architecture Billings Index Turns Positive - This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Turns Positive after Four Straight Monthly Declines On the heels of a period of weakness in design activity, the Architecture Billings Index (ABI) took a sudden upturn in August. ... The American Institute of Architects (AIA) reported the August ABI score was 51.4, following a very weak score of 45.1 in July. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.9, up sharply from a reading of 53.7 the previous month.  This graph shows the Architecture Billings Index since 1996.  This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.  According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So the recent contraction suggests further declines in CRE investment in early 2012, but possibly flattening out in 9 to 12 months (just one month's data).

Moody's: Commercial Real Estate Prices increased in July - From Bloomberg: Commercial Real Estate Prices in U.S. Increased 5% in July, Moody’s Says The Moody’s/REAL Commercial Property Price Index advanced 5 percent from June. It’s up 1.2 percent from a year earlier and almost 13 percent from its post-peak low in April, the New York- based company said in a report today.  Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.  CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are up 1.2% from a year ago and down about 42% from the peak in 2007. Some of this increase was probably seasonal - also this index is very volatile because there are relatively few transactions. Also, this report was for July, and the index will probably be weaker in August after the debt ceiling debate and the renewed fears about Europe.

Why we’re in the dark about the mortgage market - We have a severe shortage of information about a $10.5 trillion market. Jesse Eisinger has a great column at ProPublica about just how inscrutable bank data is — if you haven’t read it, you should. A short summary: even the simplest of big bank statements amount to “guesswork,” Eisinger writes.  Read enough of Eisinger or Bloomberg’s Jonathan Weil, you begin to suspect that if analysts, reporters and executives were to be honest, they’d admit there is no reasonable way for even trained investors to make an accurate judgement on the health of a large bank. Here’s Eisinger (and you can almost feel the strain from reading SEC documents): Day after day, [banks] push out news releases that run to dozens of pages. The most recent of which from Wells ran to 51 pages, on top of a 41-page news release. The SEC filing from the quarter was 162 pages. And while bank disclosures are intelligible only for those versed in financial arcana, there’s one indicator of banking system’s health that may be even more inscrutable: mortgage servicing. Bad mortgages and shoddy foreclosures have cost America’s five biggest banks as much as $66 billion. Assuming we’d be able to put aside concerns about the legality of foreclosures — and that’s a big if — you’d be hard pressed to find recent and reliable specifics about how our banks are actually dealing with bad loans.

Bank of New York: A Train Wreck Waiting to Happen? - Yves Smith - Many readers no doubt know that the so-called $8.5 billion Bank of America mortgage settlement, which was between the Charlotte bank and the Bank of New York as trustee for 530 residential mortgage securitizations, had run into some very serious headwinds. The deal had to be approved in a so-called Section 77 hearing; a number of interested parties, including some investors, the attorneys general of New York and Delaware, and the FDIC, raised questions and objections to the deal, as well as to the use of a Section 77 hearing (which sets a very high bar for opposing an agreement). Although this saga has a quite a few more rounds to go, it looks likely that any settlement will be considerably delayed and will wind up costing Bank of America a good bit more than $8.5 billion. What has gotten less attention is the implication of the probable derailment of this deal for the Bank of New York, and its vulnerability to mortgage litigation. If you think, as banking expert Chris Whalen does, that BofA is a goner by virtue of the odds of very large damages in the various mortgage cases that are in progress, Bank of New York is a goner even faster if (and we really mean when) investors start saddling up to target the bank.  The liability of trustees in mortgage securitizations is so obvious and comparatively easy to prove that I am surprised that no one has yet gone after it.

Wells Fargo accused of forging loan documents - A Las Vegas attorney who represents people facing foreclosure has accused Wells Fargo of forging loan documents. In court papers filed this month in Clark County District Court, attorney Dave Crosby alleged bank employees committed forgery and fraud in making a $350,000 loan to a father of four who was unemployed at the time. "They forged signatures, they backdated documents," Crosby said. "We've got them cold." Crosby said the bank has presented two deeds of trust for the same property. One bears the signature of Olivia A. Todd, who on Jan. 27, 2010, was identified as an assistant secretary with MERS, Inc., a mortgage servicer from the Phoenix area and a co-defendant in the lawsuit. But on Feb. 16, 2010, Todd's signature appears on a second deed of trust, where she is identified as the firm's president. Both assignments were notarized as authentic, Crosby said in court papers.  Nevada Attorney General Catherine Cortez Masto is expected to file criminal charges against bank and title company employees, as well as notary publics, over allegations of robo signing.

Banks to meet with state, federal officials over foreclosure deal- State and federal officials on Friday were again to meet with representatives of the nation’s largest banks, trying to finalize a much-anticipated settlement¹ over shoddy foreclosure practices that remains elusive a year after the abuses first garnered national attention.People familiar with the negotiations said the session in Washington would center around how broad a release from future liability banks should receive in exchange for agreeing to overhaul their mortgage servicing practices and paying billions of dollars in penalties. The issue has caused sharp divisions in recent months within a 50-state coalition of state attorneys general and has threatened to undermine the outcome of the talks². New York Attorney General Eric Schneiderman, who has investigated the manner in which banks bundled and sold pools of mortgages — a practice known as securitization — has expressed concern that the pending settlement could release banks from liability for misdeeds that go beyond flawed and fraudulent foreclosure documents and other questionable servicing practices that caused a national uproar last fall. Attorneys general from a handful of other states, including Delaware and Nevada, have expressed similar concerns. In recent days, attorneys general in Minnesota and Kentucky echoed that sentiment³,

Banking Updates: More 50 State Settlement Follies; Moody’s Downgrade of Bank of America -  Yves Smith - I don’t mean to sound as if I am hectoring Shahien Nasiripour, since he has doggedly and successfully broken quite a few banking stories when he was at Huffington Post, which lead the Financial Times to snatch him up. That’s tremendous validation for a young reporter.  However, the conventions of reporting (and it may reflect FT style preferences) are having two unfortunate side effects on his latest article about the so-called 50 state attorney general settlement. The first is that his new piece has the unfortunate effect of making the deal seem more alive than it is.  Shahien got his hands on a memo from the Illinois attorney general which breaks a settlement of $17 billion (not $20 billion as generally rumored) down among the bank miscreants. Perhaps the reduction in total size is the result of some big states dropping out (more on that shortly), From the Financial Times:  Bank of America would pay $7.8bn…JPMorgan would pay $3.8bn, while Wells could pay about $3.5bn, according to people familiar with the document. Citigroup would be asked to pay about $1.4bn and Ally Financial, which is 73.8 per cent owned by the US Treasury, would pay $860m. Now of course, all these numbers, and the fact that the two sides are meeting Friday makes it sound like the deal is moving along, right? Think twice.

Are Private Investigators Being Used to Intimidate New York Attorney General Schneiderman’s Staff?- Yves Smith - The New York Post has a salacious story about Alisha Smith, a lawyer with the New York attorney general’s office, who is a dominatrix in her private life. Frankly, many of the skills honed by being a domme probably come in handy in litigation (such as knowing exactly how much pain and humiliation to administer when).  The problem isn’t with her having a kinky private life per se; it is the allegation by the Post that she may have gotten paid for performing at S&M parties. Smith makes all of $78,825 a year and the policy of the state AG’s office is for staff to obtain prior approval of any activity which will earn them more than $1,000. The Post presented its allegations about Smith, who was hired by Andrew Cuomo and played an important role in a securities fraud case that led to a $5 billion settlement by Bank of America. She has been suspended without pay as the AG conducts an investigation.  After l’affaire Spitzer, readers in comments have repeatedly noted that Schneiderman had better be squeaky clean since he would be targeted by private investigators, as Spitzer clearly was. This Post “story” looks to have been the result of private investigators going after Schneiderman’s staff, with the intent of intimidating them and embarrassing and discrediting him.

Is the GOP/Media Complex Using Silly Sex Smears to Scare Schneiderman, Other AGs from Probing Bank Crimes? - The New York Post, Rupert Murdoch’s chief American tabloid enterprise (yes, I know, the Wall Street Journal is still technically a broadsheet even after he bought it, but still), and purveyor of stinky turds posing as journalism, dropped a particularly, um, fragrant one the other day: A well-respected lawyer in the state Attorney General’s Office spends her days toiling in securities fraud — and her nights moonlighting as a dominatrix, The Post has learned. Alisha Smith, 36, who dresses demurely as a buttoned-down prosecutor, turns up the heat when she becomes perky persecutor “Alisha Spark,” a nom de dom she uses when she performs at S&M events for pay, according to a fetish source. “They pay her to go to the events. She dominates people, restrains them and whips them,” the fetish source said.  I can see at least three reasons for this smear. One is the desire for the Murdoch media empire to draw attention away from itself and its own scandals, scandals that have touched the New York Post itself. Another, considering the target of it is the justice and law enforcement community, is to warn the FBI off of delving into the Murdoch empire’s alleged hacking of the phones of 9/11 victims. But the third, and in my view most important, reason, is to frighten New York State Attorney General Eric Schneiderman off from investigating the seamy soft rotten underbelly of Wall Street and the banking industry.

Kentucky AG Conway Joins Growing Coalition Backing Schneiderman on Foreclosure Fraud - Shahien Nasiripour continues his dogged financial reporting, this time at the Financial Times, on a story that seems superfluous at this point: the 50-state AG investigation of foreclosure fraud.  Perhaps an interesting story could be made out of what Tom Miller plans as a face-saving measure after the broad settlement fails. But the settlement itself is dead.  So there’s no needle to thread. The latest AG to stand with Schneiderman and against the attempts to whitewash the fraud of the big banks is Kentucky AG Jack Conway. Conway, in conjunction with the Progressive Change Campaign Committee, sent an email to supporters aligning himself with Schneiderman. The same Wall Street banks whose irresponsible actions led to our nation’s economic collapse are now pressuring all 50 states to give them legal immunity. The banks want to block any criminal or civil accountability for actions that have yet to be investigated. Attorneys General from Delaware, Minnesota, Nevada and New York have been fighting back. Today, I want to make a clear statement in support of Wall Street accountability and against immunity for banks — and I ask you to join me on this statement:

Kamala Harris a key player in settlement over mortgage crisis - California Atty. Gen. Kamala Harris has emerged as a key player in pursuing a nationwide settlement with major U.S. banks accused of wrongful foreclosures and is facing increased pressure from consumer groups seeking help for homeowners devastated by the mortgage crisis. Harris, who was in closed-door talks with banks Friday, has been negotiating with the five largest mortgage servicers for months as part of a coalition of attorneys general and federal agencies seeking to a hammer out a deal surrounding allegations that banks committed widespread foreclosure errors. Those involved in the talks see Harris' involvement in any settlement as crucial because of California's size and because so many home repossessions are concentrated in the Golden State. The importance placed on California puts Harris in a significant position to hold banks accountable for improper foreclosures. She has been the subject of increased pressure from advocates who say she has not done enough to battle banks' efforts to get off lightly. "The banks want to get away with everything, and she is probably one of the linchpins in saying that is going to happen or isn't going to happen,"

Countrywide protected fraudsters by silencing whistleblowers, say former employees - In the summer of 2007, a team of corporate investigators sifted through mounds of paper pulled from shred bins at Countrywide Financial Corp. mortgage shops in and around Boston.  By intercepting the documents before they were sliced by the shredder, the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.  Eileen Foster, the company’s new fraud investigations chief, had seen a lot of slippery behavior in her two-plus decades in the banking business. But she’d never seen anything like this.  “You’re looking at it and you’re going, Oh my God, how did it get to this point?” Foster recalls. “How do you get people to go to work every day and do these things and think it’s okay?”  More surprises followed. She began to get pushback, she claims, from company officials who were unhappy with the investigation....

The Inspector General of the US Treasury Agrees With Matt Weidner - Earlier this week I took a whole lot of heat from friends and colleagues who thought the quote attributed to me was a bit over the top. The problem with my critics is they just don’t get it. They’re living in a delusional fantasy world. They are naive and misinformed….and the issues are just too far under their pay grade. But just read a quote from an expert high up on the food chain and compare his quote to mine…..dead on the same….right? “You’re not talking about improperly stapling together two documents; you’re talking about systematic fraud in the system,” said Neil Barofsky, the former special inspector general for the U.S. Treasury’s Troubled Asset Relief Program. “What this shows is that before the financial crisis, the banks were essentially lying to the purchasers of the mortgages about the quality.” (Barofsky Article) “What you are seeing is chaos in the entire financial system,” said Matthew Weidner, a St. Petersburg attorney who helped shed light on unethical acts by bankers and lawyers to speed foreclosure processing. “The robo-signing crisis is just a symptom of that. Banks have not yet figured out a way to undo the wrongs they caused by failing to follow their own underwriting guidelines and rules back in the boom

Why mortgage servicing won’t get fixed - Back in November, Treasury’s Michael Barr set a clock ticking, with respect to mortgage-servicing reform.“Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.” Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.” I was skeptical — and in March, when reform guidelines were leaked, I retained my belief that mortgage servicers simply aren’t capable of reforming themselves. Now, we’re only a couple of months away from Barr’s self-imposed deadline, and the chances of anything substantive having happened by year-end have never looked more remote. Instead, we’re just getting more talk from the official sector that things aren’t good enough. Essentially, we’re still in the same place that we were a year ago: the government is wholly cognizant of the problems, but is having enormous difficulty implementing solutions.

New York Appellate Court rejects validity of loan assignments by MERS - The New York Appellate Division, Second Department, has held that a lender does not have standing to commence a foreclosure action when the lender’s assignor was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but never actually held the underlying notes.

Merscorp Sued in Dallas With Bank of America Over Mortgage-Tracking System - Mortgage Electronic Registration Systems Inc., along with Bank of America Corp. (BAC), was sued by Dallas County District Attorney Craig Watkins over claims its mortgage-tracking system violates Texas law. Merscorp Inc.’s MERS, which runs an electronic registry of mortgages, cheated Dallas County out of “tens of millions in uncollected filing fees,” Watkins said in a statement. MERS tracks servicing rights and ownership interests in mortgage loans on its registry, allowing banks to buy and sell loans without recording transfers with counties. Watkins, in a complaint filed yesterday in state court in Dallas, claims MERS was established by banks including Bank of America to avoid paying filing fees, as well as to ease transfers of mortgages. The county asked the court to hold Bank of America liable as a shareholder of MERS and said the bank “knew or should have known” that the system would cause improper filing.  “Texas public policy favors a reliable functioning public recordation system to avoid destructive breaks in title, confusion as to true identity of the holder of a note, fraudulent foreclosures and uncertainty as to title when a home is sold,” Watkins, said in the 48-page complaint. MERS “has all but collapsed this system throughout the U.S,” he said.

Investors Would Lose Out in Refi Stimulus, but…The Capital column this week looked at the obstacles to mortgage refinancing that appear to be hurting the financial health of millions of Americans and are one reason that the Federal Reserve’s efforts to stimulate the economy by lowering long-term interest rates aren’t more effective. The column cited a Congressional Budget Office estimate that refinancing at today’s low mortgage rates could give affected households, on average, $2,600 in the first year and argued that multiplying that by a few million households could add up to big bucks. A number of readers challenged that argument, observing that every $2,600 saved by a homeowner is $2,600 lost to an investor who holds the mortgage. Yes, but…

• 1) If refinancing a mortgage avoids a default and foreclosure, because it gets easier for the homeowner to meet the monthly payment, that prevents a loss — to the lender/investor and to the neighborhood. CBO estimates that 3.8% of all refinancing prevent a default that would have otherwise occurred.
• 2) The homeowner is more likely to spend the money saved than the investor who would otherwise have received the money.
• 3) A well-executed (ok, that’s a big if) refi program would help not only the individual homeowners, but give the overall housing market — and sagging consumer confidence — a lift. It might even make it easier to get mortgages on new home purchases.
• 4) All stimulus involves taking money from someone and giving it to someone else to spend

More on the Coming Wave of Foreclosures - In response to Mortgage Default Notices Surge 33% Nationwide, 55% in California, 200% by Bank of America; Corresponding Jump in Foreclosures Will Follow Patrick Pulatie at LFI Analytics writes ....  This is what was expected, and the timing is just about right. Apr 13, 2011, the OCC ordered the Consent Decree affecting 16 entities, banks, servicers, & MERS. The lenders were given 60 days to present plans how meet the demands of the Decree, and 60 days to actually implement the plans, which would have been Aug 13. The Decree covered the foreclosure process, and specifically addressed MERS and Certifying Officers. The Decree detailed what need to be done to ensure that any MERS signing and foreclosure was lawful in the particular state where the property was located. Combine this with the MERS "order" to foreclose in the lenders name, decisions like Gomes v Countrywide in the CA Appeals Court, and now the 9th Circuit ruling supporting MERS, the lenders can begin to foreclose again with relative ease, as long as they follow the Decree. Likely, much of the rest of the country will experience similar actions, especially since the lid has been lifted in New Jersey

The bigger the loan, the longer to foreclose - When it comes to foreclosing, lenders see some delinquent homeowners as more equal than others. Mortgage debt of more than a half-million dollars seems to get lenders to look the other way for an extra month compared with those who owe far less, according to a North County Times analysis of foreclosure records. "The banks are more aggressive on these people (with less debt)," said Sidney Kutchuk, a Temecula broker who often deals with clients in foreclosure. "They're punishing the little people because they can." Between March 2009 and last month, borrowers in North San Diego and Southwest Riverside counties who owed a median of $510,000 on their property got a month longer to try and work out a short sale or other agreement with banks than those who owed a median of $210,000

Past Due Mortgages = 6,397,000 - New data from Lender Processing Services (LPS) shows the population of mortgages going unpaid in the U.S. contracted during the month of August. LPS offered the media a sneak peak at several key mortgage performance statistics slated for public release later this month. The company’s analysts derive their findings from LPS’ loan-level database of nearly 40 million mortgage loans. They say there were 6,397,000 home loans at least 30 days delinquent or in foreclosure as of the end of August. That’s down from 6,538,000 the month before. LPS puts the delinquency rate of mortgages 30 or more days past due, but not yet in foreclosure at 8.13 percent. The national delinquency rate dropped by 2.5 percent between July and August, and is down 11.8 percent from a year earlier. The industry’s inventory of properties in the midst of foreclosure, on the other hand, rose by both measurements, and now stands at 4.11 percent of all outstanding mortgages. The foreclosure presale inventory rate edged up by 0.1 percent month-over-month and 8.2 percent year-over-year. Of the 6,397,000 past due mortgages at the end of August, LPS says 2,148,000 were winding their way through foreclosure channels.

Allowing underwater borrowers to refinance could improve investors' Sharpe Ratio - Consider borrowers with 6 percent 30-year mortgages that are 20 percent underwater.  Assume that the probability that any one borrower will default in any one month is .2 percent, and that the cost of default to the lender conditional on default is 50 percent.  Assume that at the end of five years, any remaining long balance is paid off).  A security containing such mortgages will have an IRR of 4.83 percent (I am happy to share the spreadsheet for the details. Now let us convert the borrowers into people with 4 percent mortgages with 20 year terms.  The payment from such mortgages will be essentially the same as before, and the mortgage balance will be paid off more quickly.  The good news for investors is that this lowers the probability of default; the bad news is that it reduces the yield before default.  Assuming default probabilities in any one month go down to .1 percent, the IRR for investors goes down to 3.45 percent.  This seems like a bad deal for investors, except that they will have more certainty about their cash flows; the standard deviation of their investment falls.

MBA: Mortgage Purchase Application Index declines, Record Low Mortgage Rates - The MBA reports: Mortgage Applications Increase in Latest MBA Weekly SurveyThe Refinance Index increased 2.2 percent from the previous week. The seasonally adjusted Purchase Index decreased 4.7 percent from one week earlier....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) remained unchanged at 4.29 percent, with points increasing to 0.41 from 0.38 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The following graph shows the MBA Purchase Index and four week moving average since 1990.  August was an especially weak month for this index. This increase was pretty small, and although this doesn't include the large number of cash buyers, this suggests fairly weak home sales in September and October.

Fed Study: Lack of Home equity and underwriting changes limited Refinancing in 2010 - Here is a new study released today of mortgage originations in 2010. From the Federal Reserve: The Mortgage Market in 2010: Highlights from the Data Reported under the Home Mortgage Disclosure Act Back in 2003, about 35.5% of all homeowners refinanced. In 2010 only 10.7% of homeowners refinanced. On page 62, the study provides a table by FICO score, year of origination, and states with steep house price declines compared to all other states ("Steepest declines" consists of the five states with the steepest declines in house prices from 2006 to 2009: Arizona, California, Florida, Michigan, and Nevada; "other" consists of all remaining states.) Only a few borrowers with low FICO scores refinanced in 2010, and the rates for refinancing were lower in the five states than in the other states. This is important - although we may see sub 4% conforming 30 year fixed rate mortgages soon, many borrowers will not be able to refinance.

Mortgage rates expected to slide on new Fed move - The Federal Reserve’s latest economic-stimulus move tells the markets one thing loud and clear: The Fed wants mortgage rates under 4%, and soon. The central bank, in its post-meeting statement Wednesday, committed to shifting its $1.66-trillion Treasury bond portfolio more toward long-term bonds in an effort to bring down longer-term interest rates in general, including on mortgages. Policymakers also threw the mortgage market another bone: The Fed said it would use the proceeds from maturing securities in its $885-billion mortgage-backed-bond portfolio to buy more of the same.  Until now, the Fed has been using those proceeds to buy Treasury bonds. The shift back to mortgage bonds could bring $20 billion or more a month of Fed buying power into that market, said Walter Schmidt, a bond market analyst at FTN Financial in Chicago. The announcement triggered a new rush of buying in mortgage securities. That should translate into lower rates quoted to home buyers and people hoping to refinance.

Sales of U.S. Existing Homes Rise 7.7%, Beat Forecasts - Sales of previously owned U.S. homes rose more than anticipated in August as investors scooped up distressed properties with cash. The 7.7 percent increase left purchases at a five-month high 5.03 million annual rate, the National Association of Realtors said today in Washington. The August pace compares with a peak of 7.08 million in 2005, before the housing boom turned into a subprime-mortgage bust that dragged the economy into an 18-month recession. “Housing’s been down for so long, we should take whatever good news we can get,”. “Interest rates are low and pricing is attractive and people are responding.” While foreclosure-driven price declines and record-low mortgage rates are preventing a renewed slump in sales, companies like Lennar Corp. (LEN) say weaker confidence and limited access to financing are limiting demand. As the Federal Reserve meets today to consider ways to bolster the economy, cheaper borrowing costs are doing little to spur housing, which since 1982 has fueled every recovery except the current one.

Existing Home Sales in August: 5.0 million SAAR, 8.5 months of supply - The NAR reports: August Existing-Home Sales Rise Despite Headwinds, Up Strongly from a Year Ago...This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in August 2011 (5.03 million SAAR) were 7.7% higher than last month, and were 18.6% above the August 2010 rate (depressed in Aug 2010 following expiration of tax credit). The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.58 million in August from 3.69 million in July. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, so it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory. Inventory decreased 13.1% year-over-year in August from August 2010. This is the seventh consecutive month with a YoY decrease in inventory. Months of supply decreased to 8.5 months in August, down from 9.5 months in July. This is much higher than normal. These sales numbers were well above the consensus, but just slightly above Lawler's forecast using the NAR method.

Existing Home Sales: Comments and NSA Graph - The NAR reported that inventory decreased in August from July, and that inventory is off 13.1% from August 2010. Other data sources suggest that the NAR is overstating inventory (inventory will be part of the coming revisions). Also it appears inventory has continued to decline (year-over-year) in September.  This year-over-year decline in inventory is one of the most important stories of the year for the existing home market, and is hardly being mentioned. I suspect many homeowners are "waiting for a better market", but less inventory will put less downward pressure on prices.  The following graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2011.  Sales NSA are above last August - of course sales declined sharply last year following the expiration of the tax credit in June 2010 - but sales are also above August 2008 and 2009 (pre-revision). The level of sales is still elevated due to investor buying. The NAR noted:  All-cash sales accounted for 29 percent of transactions in August, unchanged from July; they were 28 percent in August 2010; investors account for the bulk of cash purchases.

Existing home sales up but price outlook grim - (Reuters) - Existing home sales rose in August to their highest in five months as lower prices and rock-bottom interest rates drew more buyers into a still moribund market. The data did little, however, to change the view that housing, hobbled by a burst bubble which triggered a major recession, will not help the economy much any time soon. Sales climbed more than expected, up 7.7 percent from the previous month to an annual rate of 5.03 million units, the National Association of Realtors said on Wednesday. The median price was 5.1 percent lower than a year earlier. "This housing market is still very distressed," said Michael Hanson, an economist at Bank of America Merrill Lynch in New York. "We have to get a lot of good news for a meaningful turnaround in the housing market," he said. The outlook for housing prices remains grim. A survey by MacroMarkets LLC showed economists expect home prices to rise just 1.1 percent a year through 2015.

Some Notes On That "Strong" Existing Home Sales Number - This morning existing home sales came in stronger than expected. While the volume is good news, it won't necessarily translate into firmer prices. As Nomura notes, there were lots of distressed sales: Distressed sales, representing properties that tend to be sold at about a 20% discount, continued to increase representing 31% of August existing home sales compared with 29% in July. In addition, contract failures - primarily canceled when appraisals come in lower than the negotiated price - rose to 18% in August compared with 16% in July and 9% in the same month of 2010. The growing share of distressed sales continues to affect home prices. The median price of an existing single-family home declined by 1.7% m-o-m in August, and declined by 5.1% on a y-o-y basis, marking the seventh-straight decline in this metric. It is important to note, however, that the price measure is not seasonally adjusted and the y-o-y comparison is tough because it captures the temporary price support caused by the tax credit of 2010.

House Price Indexes show smaller price increases in July - The Case-Shiller House Price index for July will be released Tuesday. Here are a few other indexes:
• FNC: Home Prices Begin to Lose Momentum; Up 0.1% in July  Based on the latest data on non-distressed home sales (existing and new homes), FNC’s Residential Price Index™ (RPI) indicates that single-family home prices were up slightly in July to a seasonally unadjusted rate of 0.1%, following a strong performance in June that saw a 1.1% increase in a single month. The FNC index tables for three composite indexes and 30 cities are here.
• CoreLogic reported earlier this month for July: Home Price Index increased 0.8% in July  - July Home Price Index (HPI) which shows that home prices in the U.S. increased for the fourth consecutive month, inching up 0.8 percent on a month-over-month basis.

• The FHFA reported this morning: FHFA House Price Index Up 0.8 Percent in July
• From RadarLogic today As We Pass the Seasonal Peak in Home Prices, Signs Point to Trouble Ahead - In July, the 25-MSA RPX Composite price remained essentially unchanged on a month-over-month basis, but declined year over year for the 13th month in a row.

Home Forecast Calls for Pain - Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery. Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.  If the economists' forecast is accurate, it means housing faces a lost decade in which home prices recover just a fraction of what was lost.

US Housing Hangover Or 20-Year Japanese Nightmare - In its schizophrenic manner, the media across the country lamented the housing-starts numbers, which were ugly: 571,000 annualized in August, down 5% from July, down 5.8% from August 2010, and down 75% from its peak of 2.3 million in January 2006 (Census Bureau, PDF). But for the housing market to heal, that number should be near zero for years. 19 million vacant units, that's the problem (Census Bureau, PDF). While some people dispute that number, everyone agrees that the inventory of vacant units is huge.  Housing is mostly zero sum: If I rent or buy something and move into that property, I also have to move out of the property I'm in. Hence, no net impact on the inventory of vacant homes. When people die, it increases the inventory of vacant homes. Household creation has the opposite effect. Yet, household creation has declined over the last few years and was even negative for a while, a new phenomenon in the U.S. An optimistic scenario: Say, the industry is building 600,000 homes a year, household creation perks up to 1,000,000 a year, while 400,000 homes become vacant due to death, then things are in balance, and the inventory of maybe 10 - 18 million vacant homes will stay with us until termites eat it up.

Housing Starts decline in August - From the Census Bureau: Permits, Starts and Completions - Total housing starts were at 571 thousand (SAAR) in August, down 5.0% from the revised July rate of 601 thousand (revised from 604).  Single-family starts declined 1.4% to 417 thousand in August.  The second graph shows total and single unit starts since 1968.  This shows the huge collapse following the housing bubble, and that housing starts have been mostly moving sideways for about two years and a half years - with slight ups and downs due to the home buyer tax credit. Multi-family starts are increasing in 2011 - although from a very low level. This was below expectations of 592 thousand starts in August, but permits increased in August suggesting a slight increase for starts in September.

NAHB Builder Confidence index declines slightly in September - The National Association of Home Builders (NAHB) reports the housing market index (HMI) declined in September to 14 from 15 in August. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Virtually Unchanged in September Builder confidence in the market for newly built, single-family homes dipped by a single point to 14 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for September, released today. The index has now held between 13 and 16 for six consecutive months. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the September release for the HMI and the July data for starts (August housing starts will be released tomorrow). Both confidence and housing starts have been moving sideways at a very depressed level for several years.

Residential Remodeling Index at new high in July - The BuildFax Residential Remodeling Index was at 130.4 in July, up from 129.5 in June. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax:  The Residential BuildFax Remodeling Index rose 24% year-over-year--and for the twenty-first straight month--in July to 130.4, the highest number in the index to date. Residential remodels in July were up month-over-month almost a single point (.6%) from the June value of 129.5, and up year-over-year 25.6 points (24.5%) from the July 2010 value of 104.7. This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom.  Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year. The remodeling index is up 24.5% from July 2010.

Housing vs. Household formation - Recently there has been some discussion of housing in the economy that looked at housing starts versus the long term trend of housing starts and concluded that starts have been so far below trend over the last few years that it should offset the excess housing built before the recession. If the excess housing stock has been worked down the stage would be set for a rebound in housing starts and stronger growth in construction employment. I have major problems with that analysis that is based on the assumption that trend demand was the same as trend supply. Several variables enter into determining the demand for housing. A couple include income trends and interest rates. While these are important determinants of the short run cyclical trends in housing the factor that drive the long run secular housing demand is household formation. Moreover, there is a tendency to assume that household formation has a flat or rising trend because of population growth. But actually, the long run trend for household formation has been down. In the 1970s-80s the baby boomers becoming adults and forming their own household inflated household formations. In more recent years the baby bust after the baby boom and the poor economy has held household formation down as young adults have had to continue to live with their parents. Recently household formation has been roughly half what it was in the the 1970-80s.

Multi-family Starts and Completions, Starts and the Unemployment Rate - Since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - it makes sense that there will be a record low, or near record low, number of multi-family completions this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling total. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010. The rolling 12 month total for starts (blue line) is now above the rolling 12 month for completions (red line), and they are heading in opposite directions (although completions ticked up a little in August).  The following graph shows single family housing starts (through August) and the unemployment rate (inverted) through August. Note: there are many other factors impacting unemployment, but housing is a key sector. You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Housing starts have moved sideways for the last two and a half years and this is one of the reasons the unemployment rate has stayed elevated.

Housing Is to the U.S. What Greece Is to the Euro Zone - The beleaguered housing sector is looking like the Greece of the U.S. economy. Just as the euro zone won’t prosper until Greece gets its act together, the U.S. recovery won’t gain traction until the housing sector deals with the excesses of its past.  Just as Greece took on more than its fair share of euro zone debt, home mortgages accounted for an excessive amount of debt creation in the U.S. in the 2000s. Except for some naysayers, most in U.S. were happy to look past housing’s rickety financing foundation and focus on its benefit to growth and homeownership. And advocates for the euro zone were willing to look past Greece’s fudging of the Maastricht criteria on government finances when the euro zone formed. Then the roof caved in, and we are still picking up the pieces.

Immigration Is The Solution - One of my favorite Wall Street economists called me up after the close today (after the market plunged in disappointment over the Fed's $400 billion "twist."), and exclaimed, "We could fix most of our problems by doubling or tripling legal immigration quotas." My response was "Amen."  It would provide an instant boost of demand for housing and other durables, and it would bring in more skilled workers.  Yes, it would bring in more workers at a time of record unemployment, but the skills mismatch in our economy has got to be overcome somehow, and this would do it.  We're a nation of immigrants.  It's only a question of how far back you have to go to find them.  When he asked whether Congress would pass immigration reform in the foreseeable future, I had to admit, the answer is "No."

Household Net Worth Falls 0.3% in Quarter - Americans’ wealth declined this spring for the first time in a year, as stocks and homes fell in value, a Federal Reserve report said Friday. At the same time, corporations increased the size of their cash stockpiles.  The combination could slow an already weak economy because it implies that families have less to spend and businesses are reluctant to expand.  Household net worth dropped 0.3 percent to $58.5 trillion in the April-June quarter from the previous period, according to the Federal Reserve’s Flow of Funds report. The decline followed three straight quarterly increases.  The value of Americans’ stock portfolios fell 0.5 percent in the second quarter. Home values dropped 0.4 percent.  Corporations held a record $2 trillion in cash at the end of June, an increase of 4.5 percent.  Net worth is expected to fall even further in the current quarter because stocks plunged in late July and early August.

Thirty-Somethings Fear Home Values Won’t Help Retirement - Nearly half of all homeowners in their thirties have lost hope that their homes will recover enough value in time to play an important role in paying for their retirement. With 22.5 percent of all homeowners with a mortgage underwater, only 68 percent of homeowners of all ages are still relying on their home’s value is important to their retirement plan, according to a new survey by Country Financial. Only homeowners over 50, many of whom bought their homes before the housing boom, and those under 30 remain most confident that their homes’ values will play a very important or important role in their retirement. Among those older than 50 who are approaching retirement, 71.7 percent see their homes’ value helping to pay for retirement. Some 83 percent of young homeowners between 18 and 29 have hopes that the housing market will recover in time to help them in retirement, more than any other age group. The survey also found that two out of three homeowners (68 percent) claim if they lost their job, they wouldn’t be able to make mortgage payments after nine months. That period is shorter than the current average unemployment length of nearly 10 months, according to the Bureau of Labor Statistics.

Number of the Week: Americans Spend Smaller Share of Income Paying Debt - 11.09%:

Share of after-tax income Americans are paying on their debt. Through much of the 1990s and 2000s, Americans let their spending grow faster than their paychecks, borrowing to fund more and more of their purchases as a result. One consequence: the amount they had to spend each month paying down mortgages, credit cards and other debts ended up outpacing their income gains as well. By the third quarter of 2007, 13.96% of after-tax income was going toward debt payments, according to the Federal Reserve, up from 11.06% at the end of 1994. Then came the recession, and the debt service ratio fell sharply. That’s partly due to a shift toward frugality, but it also is because many people have been walking away from underwater mortgages and other debts. The upshot is that we now have a bigger chunk of our pay to spend on other things. Considering how much our net worth has fallen since 2007, though, we may prefer to save it.

The Total Private Market's Debt Decline Is A Glaring Warning Sign: Total Credit Market Debt/ GDP - Various Debt Measure as % of GDP- S&P price movement during bubble - World Index since the Bubble - As the nation experienced the Great Depression beginning in 1929, Total Credit Market Debt as a percentage of GDP rose substantially before eventually collapsing. The years following the '29 crash were characterized by the most dramatic rise in public debt (and decline in private debt) the nation has ever seen. Beginning in the 1980's total debt began to expand dramatically until the Total Credit Market Debt hit 380% of GDP in early 2009. Subsequently (just like in the Great Depression), the private debt started to decline while the public debt was rising. (See attached chart by Ned Davis Research). The decline in debt/GDP from this level is a signal that we are headed for another period of apprehension about investing, apprehension about borrowing, apprehension about the markets and apprehension about the direction of the country. Extended periods of apprehension, disinvestment and caution lead to deflation and deflation is much worse than inflation or disinflation because the economy, if history is our guide, will enter a severe recession or depression. Prices going down and the consumers waiting to buy is treacherous for the economy.

U.S. Consumer Confidence Falls to Lowest Since June ’09 in Bloomberg Index - Consumer confidence in the U.S. dropped last week to the weakest point since the recession ended in June 2009 as Americans’ views of the economy worsened. The Bloomberg Consumer Comfort Index fell to minus 52.1 in the period to Sept. 18 from minus 49.3 in the prior week. Sentiment among men slumped to an all-time low. A monthly expectations gauge held at minus 34, the worst reading since March 2009. Stock-market volatility linked to Europe’s debt crisis, declining home values and a lack of job creation help explain why the smallest share of Americans since February 2009 say the economy is improving. Federal Reserve officials yesterday employed another round of unconventional monetary policy to help shore up an economy showing “significant downside risks.” “Readings at these levels are consistent with an economy that has best sharply decelerated and at worst slipped into recession,” “A crisis of confidence that corporate and political leadership are not up to addressing the problem in the labor market and broader economy is likely responsible for the new cyclical low.”

40% of consumers slash spending -- Worries about the economy and the stock market caused 40% of consumers to cut their spending over the past two months, according to a study on financial security from Bankrate.com. Americans across all income groups reduced their spending in the last 60 days. Among those earning $75,000 a year or more, 37% cut back. And 43% of households making less than $30,000 spent less."This type of widespread cutback in consumer spending, if sustained for any length of time, is how recessions are born," said Bankrate's senior financial analyst Greg McBride.

Advertising and making consumers - There is a pervasive feature of modern economic life that never entered into the theories of the economists in the first century of the discipline: marketing, advertising, and the shaping of consumer desires. And yet this activity is itself a trillion-dollar industry, and arguably has greater effect on social values and consciousness than religion, politics, or the workplace. Our culture is flooded by marketing messages that surely have a vast cumulative effect on the ways we think about life and the things we value. And this feature of modern social life is radically different from pre-20th century -- village life in France in the 1880s, city life in 17th-century London, or even life in Chicago in 1920. So what factors made advertising a feature of mass society but not the medieval market town? Capitalism is about selling things. Companies need to generate demand for their products. So capitalism needs effective ways of stimulating new desires for products in consumers.

Three Years After Crisis, Little Sign of Economic Relief in U.S. - Three years after bankruptcy of Lehman Brothers jolted the U.S. economy into economic turmoil, job creation has rebounded from post-collapse lows, but economic confidence and consumer spending remain within the ranges seen in 2009. Gallup finds underemployment and unemployment essentially where they were a year ago.  Gallup has been tracking Americans' economic confidence, consumer spending, and employee reports about hiring and firing at their workplaces since 2008, and employment since January 2010, as part of its Gallup Daily tracking program. The findings in this analysis are based on monthly averages, based on approximately 15,000 interviews per month. Americans' confidence in the U.S. economy is now at its lowest point since February 2009 -- near the conclusion of the recession that officially ended in June 2009. Gallup's Economic Confidence Index was -52 in August, above its financial crisis lows, but much lower than the -21 to -35 range measured from June 2009 to June 2011. The index saw sharp declines this year in April after the federal government nearly shut down amid budget negotiations, and in July and August after protracted negotiations that ultimately produced an agreement to increase the nation's debt ceiling.

No Sign of Recession With Rail Shipments Showing Growth Trend -  Total rail volumes excluding grain and coal averaged 381,831 carloads in August, the most since October 2008, according to data from the Association of American Railroads in Washington. These shipments represent the bulk of materials for industrial production, so rising volumes show the economy is still growing. “We’re not seeing declines in rail volumes that are synonymous with a recession,” Hatfield said. “We remain in a slow growth environment.” The correlation between the 12-month average of total rail- car loadings excluding grain and coal and the three-month average of the Federal Reserve’s manufacturing industrial- production index is 0.82, according to Bloomberg News calculations. A correlation of 1 would show they move in lockstep, while a value of zero signals no relationship. Manufacturing output -- which makes up 75 percent of all U.S. factory production -- climbed 0.5 percent in August, the fourth consecutive increase, according to Fed data released this month.

DOT: Vehicle Miles Driven decreased 2.5% in July compared to July 2010 - The Department of Transportation (DOT) reported today: Travel on all roads and streets changed by -2.5% (-6.7 billion vehicle miles) for July 2011 as compared with July 2010. Travel for the month is estimated to be 261.8 billion vehicle miles.Cumulative Travel for 2011 changed by -1.2% (-21.5 billion vehicle miles). The following graph shows the rolling 12 month total vehicle miles driven. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 44 months - so this is a new record for longest period below the previous peak - and still counting!  The second graph shows the year-over-year change from the same month in the previous year. The current decline is not as a severe as in 2008, but this is significant. With the slowdown at the end of July and in August, miles driven will probably decline further in August.

Car sales strengthen in September - The retail sales rate for new vehicles in the U.S. this month looks “much stronger than in August,” according to J.D. Power & Associates, which gathers sales data from about 8,900 dealers. That's about half of all the dealers selling cars nationally. “Coming off a solid Labor Day sale, retail sales exhibited unexpected strength in the second week of September, as the recovering inventory levels have helped to bring buyers back into the market,” said Jeff Schuster, executive director of global forecasting at J.D. Power. The annual sales rate for all vehicles, including the retail segment of the market and what rental car companies, commercial customers and government agencies purchase, will hit 12.9 million this month ...

Decline Watch: America's roads are so bad you need a German car to drive on them - Voiceover: The road is not exactly a place of intelligence. Across the nation, over 100,000 miles of highways and bridges are in disrepair. Add to that, countless distractions every mile, millions of ill-equipped vehicles, half-a-million cubic yards of debris, and the 38 million drivers who couldn't pass the drivers' exam today... even if road signs actually did make sense.   This is why we engineered a car that analyzes real-time information, reads your handwriting, and makes 2,000 decisions every second.   The new Audi A6 is here. The road is now an intelligent place.  

What’s the Story on Business Investment, Ctd - Not much I am going to say in this edition except to point out the incredible dominance of IT equipment in US investment and how much has changed in such a short period of time. Actual chained value data is available back to 1995, which is convenient for my point since it was the last year in which investment in industrial equipment matched investment in information processing equipment. What’s interesting is the extent to which Information Processing is coming to dominate all investment period. For example, here are Non-residential structure – all of them from offices to malls to mine shafts – compared to IT.

Do Regulations Really Kill Jobs Overall? Not So Much - It’s become a mantra on Capitol Hill and a rallying cry for industry groups: Get rid of the job-killing regulations. In recent days, with nearly every one of the GOP presidential [1] candidates [2] repeating [3] that [4] refrain [5], the political echo chamber has grown even louder. Earlier this month, President Obama also asked the Environmental Protection Agency to back off more stringent ozone regulations, citing the "importance of reducing regulatory burdens [6]" during trying economic times. But is the claim that regulation kills jobs true? We asked experts, and most told us that while there is relatively little scholarship on the issue, the evidence so far is that the overall effect on jobs is minimal. Regulations do destroy some jobs, but they also create others. Mostly, they just shift jobs within the economy. “The effects on jobs are negligible. They’re not job-creating or job-destroying on average,”

This is the reality of a real small business - Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I'm not talking personal income. I'm not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I'm not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!  Oh, just in case you think I'm off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!

Postal Service faces grim ‘new reality’ - The current mail system of the United States is "no longer financially sustainable," and the U.S. Postal Service (USPS) is looking for billions of dollars in cuts to its services. The postal service announced Thursday it was considering closing nearly 250 processing facilities, cutting equipment by 50 percent and slowing mail delivery in an extreme cost-cutting effort. It is looking for $3 billion in annual savings. And as the president and Congress search high and low for ways to boost job creation, up to 35,000 people could be laid off as part of that effort. "We are forced to face a new reality today,” said Postmaster General Patrick Donahoe. “With the dramatic decline in mail volume and the resulting excess capacity, maintaining a vast national infrastructure is no longer realistic." Since the advent of email and other electronic communication, the postal service has seen a steady decline in its use. More than 43 billion fewer pieces of mail are sent now than they were five years ago. First-class mail has dropped 25 percent, and the transmission of stamped letters is down 36 percent over that time frame.

Sorting out the Postal Service - Part public agency, part privately funded business, the U.S. Postal Service doesn't fully operate like either one. And therein lies a central problem that threatens mail delivery more than rain, sleet or any other weather condition. No longer subsidized by the federal government, the Postal Service nevertheless is micromanaged by Congress, which regulates its prices and how many days a week it must make deliveries. At the same time, Postal Service managers come running to Congress for relief when their own bad decisions have landed the service in trouble. The Postal Service has been heading toward insolvency for years, largely because people increasingly use computers to communicate and pay bills, and partly because of unsustainable labor agreements. But neither politicians nor postal managers have acted as though there was any rush to address the problem. Now that the service faces a $5.5-billion bill for retiree health benefits, due at the end of this month, it's planning drastic cutbacks and seeking relief on a variety of fronts.

Obama's Postal Service plan would cut Saturday mail -(Reuters) - The Obama administration's plan to rescue the U.S. Postal Service would allow the agency to end Saturday mail delivery and sell non-postal products, according to documents released on Monday. The plan, introduced alongside a deficit-reduction package, also would restructure a massive annual payment to prefund retiree health benefits and refund $6.9 billion the mail carrier says it overpaid into a federal retirement fund. The White House says its plan would save the Postal Service more than $20 billion in the next few years. "The administration recognizes the enormous value of the U.S. Postal Service to the nation's commerce and communications, as well as the urgent need for reform to ensure its future viability," the White House document said.. The agency has said it needs to downsize drastically or it will be unable to deliver mail by the end of next summer. The agency has said it needs to reduce payrolls by about 220,000 by 2015 and is studying thousands of post offices and about 300 processing facilities for possible closure. Analysts have said the move to five-day mail delivery could hurt e-commerce businesses that rely on the Postal Service to carry their products to consumers.

Jobless Claims Fell Last Week, But The Trend Still Looks Troubling - New jobless claims fell last week, but the drop doesn’t look all that convincing. It’s been clear for some time that filings for unemployment benefits have been trending higher, and for a fundamental reason: the economy has slowed. The surge in new claims back in the spring warned of no less, when the consensus outlook for the economy was still relatively bubbly. Once again, claims have proven their value as a forward-looking indicator. Alas, the current forecast in these numbers isn't encouraging. In sum, it’s going to take a lot more than one modest down week to persuade the crowd that this series has returned to a virtuous cycle. With that nasty thought out of the way, we can digest the number du jour in the proper context. Initial claims slipped last week by 9,000 to a seasonally adjusted 432,000. The four-week moving average, however, inched higher for the fifth week in a row. That's bad enough, but it's even worse when you consider that claims are at elevated levels. And without an obvious catalyst for changing the momentum, it's hard to see how we get out of this trap anytime soon.

Merck speeding up layoffs of many US employees - Drugmaker Merck has told employees it can't reach its goal of cutting up to 13,000 jobs by 2015 just by eliminating vacant jobs, so it is speeding up layoffs in the U.S. According to an internal memo, by the end of October Merck will notify employees losing their jobs in sales and other departments. In July, Merck said the cuts were needed because generic competition is coming next year for its top-selling drug, asthma and allergy drug Singulair. Merck also cited slower revenue growth in the U.S. and Europe, and said 35 percent to 40 percent of the job cuts would be in the United States, many at its headquarters. At the time, Merck said the cuts would not start in earnest until next year.

Worry About a New Wave of Layoffs - Job growth halted entirely in the nation last month. And as Europe’s debt crisis acts as a drag on global growth and Washington debates another jobs bill, the possibility of a second recession is increasing in the United States along with the prospects of corresponding layoffs. Mr. Myricks’s tale of pain the second time around, economists fear, could become all too familiar. With headlines like the 30,000 layoffs planned at Bank of America and the United States Postal Service asking Congress to cut 120,000 workers, it is perhaps not surprising that workers’ concerns about job security are near the peak they reached during the last recession, according to a recent Gallup survey4. At least one anecdotal study found that layoff announcements were greater5 in August than a year earlier. The last workers in the door are often the first out the door. That could make the Americans who have already depleted their support networks and unemployment benefits most vulnerable to layoffs.

Obama Thinks that High Unemployment Is Okay – Unwise for Government to Spur Hiring - As I’ve repeatedly documented, Obama is not concerned with reducing unemployment. Indeed, despite his faux populism, Obama’s policies increase unemployment. D.C. is like a separate country, and the politicians are increasing jobs … but only for their wealthy buddies, and not the average American.  Indeed, former Secretary of Labor Robert Reich says that Obama is simply trying to distract us, so we forget how grim the unemployment situation is. And, no, it is not bad advice from his advisers, but Obama himself which has made the calls on ignoring unemployment. Americans are getting hammered, and so it is no surprise that unemployment is America’s number one concern. A new book by Ron Suskind shows that Obama thinks high levels of unemployment show that : A few weeks later the economic team was back to the discussion of stimulus versus deficit reduction. The October jobless figures, out in mid-November, were now clear: unemployment had jumped to 10.2 percent. *** Both [Director of the National Economic Council Larry Summers and chair of the Council of Economic Advisers Christina Romer] were, in fact, were concerned by something the president had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy. Summers and Romer were startled. “What was driving unemployment was clearly deficient aggregate demand,” Romer said, “We wondered where this could have been coming from. We both tried to convince him otherwise. He wouldn’t budge.”

Paul Ryan supports plan to let unemployed work for free - Rep. Paul Ryan (R-WI) isn’t a fan of President Barack Obama’s American Jobs Act, but he does like the idea of allowing people who are receiving unemployment benefits to work for free. The plan is based on a program called Georgia Works which matches job seekers with employers. Under the plan, employers agree to provide up to eight weeks of on-the-job training. Workers, who can only work for 24 hours a week, continue to receive unemployment benefits instead of getting paid. “The Georgia plan sounds pretty interesting,” Ryan told Fox News’ Chris Wallace Sunday. “I think that’s something we are looking at, which is unemployment reform.” Ryan’s remarks echo House Majority Leader Eric Cantor’s (R-VA) support of the idea.

Obama’s Work for Almost Free, Maybe You Get Hired Program - Yves Smith - I feel compelled to point out a case of good New York Times reporting on an Obama initiative I’ve seen criticized in other venues and failed to shred on NC.  The Times piece focuses on a Georgia “tryout” program in which workers still on unemployment get to work for free for prospective employers for a maximum of 24 weeks. The employer is under no obligation to hire anyone. Needless to say, this program is more than a tad skewed in favor of companies. But it costs no money and creates the impression the government is Doing Something. So since no one in DC wants the government to spend more money, particularly on little people, this gimmick is perfect fit with the “let them eat cake” zeitgeist. Key sections of the Times piece: ….economists say there is little evidence that participants find work faster. And a lack of promotion, limited oversight and budget constraints have limited the program, Georgia Works, to a tiny portion of the state’s nearly half a million unemployed workers. Only about 120 people have been hired because of it this year…Since the program began in 2003, only 18 percent of those who completed the training have been hired by the employer that trained them, according to data released this week by the state labor department. More recently, job placement has declined to about 10 percent.

Inside Amazon’s warehouse: Lehigh Valley workers tell of brutal heat, dizzying pace at online retailer - Over the past two months, The Morning Call interviewed 20 current and former warehouse workers who showed pay stubs, tax forms or other proof of employment. They offered a behind-the-scenes glimpse of what it's like to work in the Amazon warehouse, where temperatures soar on hot summer days, production rates are difficult to achieve and the permanent jobs sought by many temporary workers hired by an outside agency are tough to get. Workers said they were forced to endure brutal heat inside the sprawling warehouse and were pushed to work at a pace many could not sustain. Employees were frequently reprimanded regarding their productivity and threatened with termination, workers said. The consequences of not meeting work expectations were regularly on display, as employees lost their jobs and got escorted out of the warehouse. Such sights encouraged some workers to conceal pain and push through injury lest they get fired as well, workers said.

Senate Passes Worker Aid Program - — The Senate handed President Obama a victory on Thursday by passing a program to help workers displaced by foreign competition, paving the way for action on three long-delayed trade deals.  The Senate voted to approve a bill containing a revamped Trade Adjustment Assistance program, which Mr. Obama had demanded as his price for sending free-trade pacts with South Korea, Colombia and Panama to Congress.  “Today’s vote is a major victory for American workers and a key step forward in our efforts to approve the job-creating free-trade agreements,” Max Baucus, Democrat of Montana and head of the finance committee, said in a statement.

Times grow harder for the US working man - According to figures released last week, median wages have continued to fall across the board in the US since 2006, and have never fully recovered from the 2000-01 financial crisis when the dotcom bubble burst.The real median household income peaked at $53,252 in 1999.  For male workers in the US, the long-term trends are even bleaker. “What’s happened to the American man since the early 70s is quite dramatic,” said Michael Greenstone, a senior fellow at the Washington-based Brookings Institution think tank.  In 2009, the median full-time male worker aged 25-64 was earning $48,000 – roughly the same as in 1969 in real terms. Meanwhile, in the same 40-year period, the income of the top 2 per cent of working-age men has jumped75 per cent. In addition, as the labour force has fractured and become more flexible, increasing numbers of men have started working part-time or in short-term contracts. When part-time workers are included, the median wage for the US man has dropped 28 per cent since 1970 in real terms.

Inside the Trillion-Dollar Underground Economy Keeping Many Americans (Barely) Afloat in Desperate Times - The United States continues to suffer from mass unemployment, and people have had to adjust their lifestyles to the new reality—fewer jobs, lower wages, mortgages to pay that are now more than their homes are worth. Millions have dropped out¹ of the job hunt and are trying to find other ways to sustain their families. That's where the underground economy comes in. Also called the shadow or informal economy, it's not just illegal activity like selling drugs or doing sex work. It's all sorts of work that doesn't get regulated by the government or reported to the IRS, and it's a far bigger part of the economy than most of us are aware—in 2009, economics professor Friedrich Schneider² estimated that it was nearly 8 percent of the US's GDP, somewhere around $1 trillion. (That makes the shadow GDP bigger than the entire GDP of Turkey or Austria.) Schneider doesn’t include illegal activities in his count-- he studies legal production of goods and services that are outside of tax and labor laws. And that shadow economy is growing as regular jobs continue to be hard to come by—Schneider estimated 5 percent in '09 alone.

Why wage war against the working poor? - In urban and rural communities across our nation, public policymakers, corporate executives and faith community leaders have not declared a war on poverty, drugs or the root causes of crime, but on the beleaguered poor themselves. In fact, many of these folks have violently attacked and condemned the poor with great ferocity and viciousness. Consider the multitude of recent policy decisions impacting working-class families, the chronically underemployed, senior citizens and at-risk youth. In a desperate effort to balance budgets and appease corporate interests, local, state and national government leaders are aggressively eradicating collective bargaining agreements, slashing living wage salaries and hacking away at pensions and benefits. Critical food, housing assistance and healthcare programs are on the chopping blocks. Michigan legislators have placed a 48-month cap on public assistance to “truly” needy families during one of the worst economic crises since the Great Depression. Observe how politicians and chamber of commerce executives woo corporations who collect billions in tax breaks, incentives and abatements. It’s mindboggling how the public fails to decry this extreme case of “corporate welfare,” but are unmerciful in its demonization of single mothers as “welfare queens.”

For U.S. workers, the lost decade of opportunity - For many Americans, the recession began well before 2007, and it’s far from over. It’s become a lost decade of fading opportunity for workers, longer and more frequent bouts of joblessness and declining family incomes. Obscured by the housing bubble and cheap credit, the well-being of working Americans was already threatened by powerful structural forces when the Great Recession hit. Technology supplanted routine work of all kinds, leaving millions with skills that employers no longer need. Offshoring of work to China and India destroyed millions of labour-intensive factory jobs. Low interest rates artificially pumped up wealth and consumption, but didn’t steer enough investment into the roots of the economy. Now, more than eight million jobs are gone, and the country is looking at the stark prospect of several more years of unusually high unemployment. Roughly half of the 14 million unemployed Americans have now been out of work for more than six months. And for the first time on record, family incomes are actually falling. New figures this week from the U.S. Census Bureau show that the median income for working-age households fell 10 per cent between 2000 and 2010, even as women worked more hours.

Only Advanced-Degree Holders See Wage Gains - Why do polls show Americans are so cranky these days? Well, maybe it has something to do with their paychecks. A lot of them aren’t keeping up with inflation, as modest as (government-measured) inflation has been. In fact, new Census Bureau data show that if you divide the population by education, on average wages have risen only for those with graduate degrees over the past 10 years. (On average, of course, means that some have done better and some have done worse.) Here (thanks to economist Matthew Slaughter of Dartmouth College’s Tuck School of Business) are changes in U.S. workers wages as reported in the latest Census Bureau report, adjusted for inflation using the CPI-U-RS measure recommended by the Bureau of Labor Statistics:

Only the most educated 3% saw wage gains between 2000 and 2010 - Welcome to another edition of Charts that Speak for Themselves. This one shows that we live in a country in which the 97 percent of the population without education beyond a master's degree experienced declining income over the past decade. A master's degree! Enough said? All right, I have one thing to say. Remember this next time you hear about how union members or public employees or middle class taxpayers or pretty much any person who's not already at the top of the income and wealth ladders just needs to sacrifice to set everything straight in our economy.

A low in jobs, mobility, marriage for young adults - Call it the recession's lost generation. In record-setting numbers, young adults struggling to find work are shunning long-distance moves to live with Mom and Dad, delaying marriage and buying fewer homes, often raising kids out of wedlock. They suffer from the highest unemployment since World War II and risk living in poverty more than others -- nearly 1 in 5. New 2010 census data released Thursday show the wrenching impact of a recession that officially ended in mid-2009. It highlights the missed opportunities and dim prospects for a generation of mostly 20-somethings and 30-somethings coming of age in a prolonged slump with high unemployment. "We have a monster jobs problem, and young people are the biggest losers," He noted that for recent college grads now getting by with waitressing, bartending and odd jobs, they will have to compete with new graduates for entry-level career positions when the job market eventually does improve. "Their really high levels of underemployment and unemployment will haunt young people for at least another decade,"

Underpaid women and their men - New data on U.S. incomes, poverty, pensions and philanthropy all show a common economic reality -- women are still getting shortchanged. Do men care? Men's median total income in 2010 was $1.54 for each dollar women received, my analysis of new U.S. Census data shows. The median -- half make more, half less -- was $32,137 a year for men, $20,831 for women (http://r.reuters.com/qav83s). Ignoring investment and other income, at the median men were paid $1.29 to the dollar earned by women in 2010. Men made $47,715 a year, women $36,931, a difference of $207 per week (http://r.reuters.com/sav83s). . At nonprofits with budgets of $50 million or more, only one in six is run by a woman and as a group those women are paid 25 percentage points less than men, according to the 11th annual nonprofit pay study by Guidestar, a project I long ago urged on its founder (http://r.reuters.com/tav83s). All of which raises a question: Why do men, especially married men, put up with this? Why aren't men in the vanguard of demanding equal pay for women?

U.S. Economy: A Lost Decade Into The Great Middle Class Poverty? - In yet another sign that the Great Recession cuts deep and long--the number of Americans living below the official poverty line reached 46.2 million, the highest in 52 years since the Census Bureau started tracking the figures in 1959. The overall poverty rate also climbed to a 17-year high at 15.1%, which means 1 in 6 Americans are living below poverty line largely due to the high unemployment and underemployment rate.  The official poverty line for 2010 is defined as an annual income of $22,314 for a family of four, and $11,139 for an individual.  The Census Bureau's annual report released on Tuesday, Sept. 13 gives a very grim snapshot of American households in 2010.  As the U.S. economy expanded 3% in 2010, and corporations reported good profits,  the gains are not trickling down to workers.  The median household income in 2010 dropped to $49,445, which is virtually unchanged from the level in 1997.  Overall, household income has fallen by 6.4% since the recession began in December 2007.  (Ok, who was the one declared that the recession "officially" ended in June 2009?)

How Do You Say ‘Economic Security’? - IN the face of nothing but bad economic news, Americans often take heart in remembering that we have been here before — during the Great Depression, when conditions were far worse than they are today — and we survived. But there is a crucial difference between then and now: the words that our political leaders use to talk about our problems have changed. Where politicians once drew on a morally resonant language of people, family and shared social concern, they now deploy the cold technical idiom of budgetary accounting.  President Franklin D. Roosevelt stressed that he places “the security of the men, women and children of the nation first.” All Americans, he emphasizes, “want decent homes to live in; they want to locate them where they can engage in productive work; and they want some safeguard against misfortunes which cannot be wholly eliminated in this man-made world of ours.” President Obama acts², establishing a National Commission on Fiscal Responsibility and Reform. The commission’s task is to “improve the fiscal situation,” to “achieve fiscal sustainability over the long run” and to address “the growth of entitlement spending.” The commission recommends, true to its charge, cuts in entitlement spending — that is, the programs established in 1935 and later years to aid the unemployed, aged, disabled and sick.

A new gilded age shines on America – Much of the country is in psychological denial to the damage being created by the current recession.  Some even believe that we are fully in a recovery.  Part of this has to do with the way the safety net is designed but also the lack of coverage presented in the media.  We have over 45,000,000 Americans on food stamps. It is likely someone you know may be on the food assistance program but you wouldn’t know it because they are issued a debit card that looks like any other credit card.  You also have this stubborn notion that any problems that befall a family are completely their fault while big bankers make egregious errors and somehow it is the market that caused their ill fortune.  This twisted logic has become more apparent with the economic disaster data released in the recent Census report.  46,200,000 Americans are now considered to be in poverty, over 15 percent of the population.  It is no coincidence that this figure aligns with the food stamp data.  In essence we have close to 50 million Americans who are one debit card payment away from being in complete financial trauma.  What is happening to our country?

Fighting Poverty Now - Last week the US Census Bureau released new data on poverty in 2010. The damaging impact of the Great Recession and weak labor market is stark: 46.2 million Americans lived below the poverty line—less than $22,314 annually for a family of four—which translates to nearly one in six Americans. This is the highest number on record in fifty-two years of poverty estimates. More than every fifth child in this country is now mired in poverty, and a record 20 million people are living in deep poverty—less than about $11,000 for a family of four—including an astonishing 9.9 percent of children. The media has had to pay attention to these numbers—they are too dramatic to ignore. But with unemployment expected to remain high through 2012, the coverage is filled with an almost fatalistic helplessness when it comes to reversing this crisis.Yet there are many good people and groups which have been fighting to end poverty for decades. They offer concrete, savvy and strategic ideas about “what works”—ideas too often overlooked in a capitol corroded by money, and by media that seem to only discover poverty when the new census numbers roll around. Here are ten ideas that can make a real difference right now in the lives of people who are poor or near poor.

1 million more children living in poverty since 2009 - Between 2009 and 2010, one million more children in America joined the ranks of those living in poverty, bringing the total to an estimated 15.7 million poor children in 2010, an increase of 2.6 million since the recession began in 2007, according to researchers from the Carsey Institute at the University of New Hampshire. Furthermore, the authors estimate that nearly 1 in 4 young children -- those under age 6 -- now live in poverty. "It is important to understand young child poverty specifically, as children who are poor before age 6 have been shown to experience educational deficits, and health problems, with effects that span the life course," the researchers said. Nationally, the number of all children living in poverty increased from 14.7 million in 2009 to 15.7 million in 2010. In 2007, 13.1 million children were living in poverty nationally.  Since 2007, 38 states have seen a significant increase in child poverty. Mississippi has the highest percentage of children living in poverty at 32.5 percent, followed by the District of Columbia (30.4 percent) and New Mexico (30 percent). New Hampshire has the lowest percentage of children living in poverty (10 percent), followed by Connecticut (12.8 percent) and Alaska (12.9 percent).

The poverty crisis is devastating young Americans. Here's what the president can do about it. - Eliot Spitzer - America excels in dramatic crises: When a bank goes bust, when a tornado strikes, there's no country in the world that rises to the occasion better. But we don't do so well with the accretive and perhaps more widely destructive social shifts that creep up on us, which is why the realization that we have a full-fledged poverty crisis is so troubling.  Publication of the Census Bureau's 2010 annual report on income—as dry a data set as there could be—reveal a shocking rise in poverty .  Median family income fell 2.3 percent between 2009 and 2010—to $49,445—but more significantly, is down 7.1 percent from its peak in 1999. The percentage of the population in poverty —15.1 percent—is the highest since 1993, and the total number—46.2 million—is an all-time high. We have given back a generation of economic progress.But it gets much worse. Below this topline data is evidence of a more insidious picture of poverty and joblessness among the young and among African-Americans. Income for households headed by someone under 24 fell an astounding 15.3 percent between 2007 and 2010. The poverty rate among those under 18 is 22 percent. For those 18 to 24 it is 21.9 percent, and for blacks under the age of 18 it is a staggering 39.1 percent.

More lessons from paying people to be less poor - Back in 2007, New York City began paying members of some 2,400 poor families to do things like get dental check-ups, open savings accounts, hold down jobs, show up for school, and carry health insurance. Cash incentives were meant to get people with complicated, resource-constrained lives to invest in themselves and their children in ways that would ultimately break the inter-generational cycle of poverty. The effort, which was inspired by “conditional cash transfer” programs abroad, was the first of its kind in the U.S. Now the program is expanding to Memphis, Tenn., as the mayor there announced yesterday. Conditional cash transfers (CCTs) have a remarkable ability to bring people together—members of both the left and the right hate the idea. Depending on where you stand, CCTs are offensive because 1) policymakers shouldn’t presume to know what people ought to do, or 2) government shouldn’t pay people to do things they should be doing anyway. I find both sides of that debate disingenuous, unless it’s paired with an argument to end preferential tax treatment of things like home ownership, retirement savings, and student loans—middle- and upper-class equivalents, except for the fact that they are hidden in the tax code and thus distort perceptions of government spending.

Behind the poverty numbers: real lives, real pain - At a food pantry in a Chicago suburb, a 38-year-old mother of two breaks into tears. She and her husband have been out of work for nearly two years. Their house and car are gone. So is their foothold in the middle class and, at times, their self-esteem. "It's like there is no way out," says Kris Fallon. She is trapped like so many others, destitute in the midst of America's abundance. Last week, the Census Bureau released new figures showing that nearly one in six Americans lives in poverty - a record 46.2 million people. The poverty rate, pegged at 15.1 percent, is the highest of any major industrialized nation, and many experts believe it could get worse before it abates. The numbers are daunting - but they also can seem abstract and numbing without names and faces. Associated Press reporters around the country went looking for the people behind the numbers. They were not hard to find.

Could Riots Happen Here? - Europeans and those living in the Middle East are witnessing the spectrum of protest firsthand, from sober public demonstrations to violent mass unrest. From Greece to Jerusalem, London to Egypt, the masses have taken to the streets, and only sometimes peacefully. At times, there appears to be an identifiable cause that mobilizes the angry mob, such as government cutbacks (Greece, Israel). Prolonged frustrations over political leadership have also ignited violence (Egypt). But riots can also take off from a single incident, like an allegation of police abuse (London), and then a wider range of motives can keep the flame burning.  Could we see similar outbursts in the United States? Anticipating the conditions that give rise to riots can help us identify hotspots and prepare for the worst. And conditions are not so great at the moment. Joblessness continues to rise, particularly among the youth, who typically makeup the majority in a riot. Overall, crime rates are at historic lows, but cities across the country are cutting basic services, like policing (New York, Camden), physical upkeep (Oakland), and public services (Madison, Milwaukee).

Beware the Wrong Lessons from Poverty and Income Data - The poverty data released by the Census Bureau last week may well be the straw that broke the camel's back -- the camel being those deliberately blind people who can't seem to acknowledge that most Americans are doing poorly. Average Americans should not be the ones who have to shoulder the burden of balancing the budget, even if it needed balancing soon. The poverty rate is now as high as it was during the war on poverty of the 1960s -- about 15 percent. The Census also revealed that median household income went nowhere under George W. Bush and is now down to its lowest level since 1997, essentially before the Clinton boom. Even more deplorable, the young in America have been hit hardest. Economists at Northeastern University have been showing for years how low wages are for those in their twenties, if they can find a job at all. Now they calculate that 37 percent of young families with children live in poverty -- more than one in three. It was one in five when Bush came to office. But the reason I am writing this is not merely that it gives the "New Obama" some fuel. What concerns me is that some in the media are highlighting the fact that the elderly have taken a far smaller hit than the rest. Is this going to be the new argument for reducing Social Security and Medicare benefits?

Obama seeks to suspend unemployment interest again - President Barack Obama once again suggested suspending the interest charged on loans to U.S. states for covering jobless benefits as part of the tax and deficit plan he unveiled on Monday. The move would extend a break the states received from the 2009 federal stimulus plan. In his proposal, Obama called for "relieving states of interest payments on federal borrowing that are typically paid through an automatic surtax on employers" and for "suspending automatic increases in federal (unemployment insurance) taxes on employers in indebted states." "Although states have been hit hard by the economic downturn, many have chronically underfunded their UI programs and relied on borrowing from the federal government to make up the shortfall," Obama wrote in his proposal. "This borrowing often leads states to increase taxes on employers during recessions, when businesses can least afford the added burden."

Philly Fed State Coincident Indexes Decline in August - From the Philly Fed: The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for August 2011. In the past month, the indexes increased in 26 states, decreased in 17, and remained unchanged in seven for a one-month diffusion index of 18. Note: These are coincident indexes constructed from state employment data. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).In August, 30 states had increasing activity, the lowest number since January 2010. Looking back at previous recessions, the current level is close to when the U.S. entered recession - however it is important to remember that August was an especially weak month due to the debt ceiling debate. In February, 47 states showed increasing activity.Here is a map of the three month change in the Philly Fed state coincident indicators. Several states have turned red again. This map was all red during the worst of the recession, and all green not long ago.

State Budget Cutbacks: Not That Big a Drag - One of the reasons you hear regularly thrown out to explain why unemployment has remained persistently high this recession and whatever you would call the period we are going through now (recovery, not quite) is state budgets. The stimulus bill plugged some of those state fiscal holes for a while. But now that that money is gone, state budget cut backs have emerged as one of the economy's headwinds.  Economist and New York Times columnistPaul Krugman yesterday reprinted a chart from Goldman Sachs showing just how much fiscal policy has affected the economy since the credit crisis. According to the chart, government has gone from providing a 2.5% boost to the economy in mid-2009 to being a drag, subtracting about 0.75% from economic growth in the second quarter of this year. And all of that drag came from state budget cuts. (PHOTOS: Postal Offices Threatened by Budget Cuts) Looking at this chart, you would suspect that government cut backs, i.e. Republican austerity measures, in particular state budget cut backs, are the main reasons hiring has flat-lined recently. But a look at some recently employment statistics suggests that at least state budget issues have played less of a role in the job market freeze than many think.

Monday Map: Percentage of Itemizers by State - President Obama reiterated his call for higher taxes on the rich today, claiming that high income earners often pay taxes at relatively low effective rates, due to various deductions and low capital gains rates. Part of his proposed remedy is what he calles the "Buffett Rule" - while the details are scarce, it's been described as a new AMT that requires high income earners to pay a minimum effective rate, thus negating the effects of many deductions and preferential rates. He also has a separate proposal which would limit the ultimate value of itemized deductions to 28% of their amount, even if one is paying a higher marginal rate. Since these proposals primarily affect itemizers, we made a map showing which states have the most:

Combined State and Local Sales Taxes: New Report - Today we released a new report on local sales taxes, which updates a study we published in February.  The new report updates the state and local sales tax rates across the country and ranks each state on its combined state rate and average local rate.  Click here to read the report. Most shoppers have some idea of the sales tax rate imposed by their state, or they can at least find the rate by looking at the receipts they receive with every taxed purchase. However, it's easy to forget about the local rates imposed by many jurisdictions on top of the statewide rate.  Local option sales taxes can add significantly to the amount consumers pay for everyday goods; in some states, they can more than double the average sales tax paid by consumers.The map below (click here to download it on our website) illustrates the combined rate and rank for each state, and a table in the new report displays the state rate, average local rate, combined rate, and rank of the combined rate for each state and the District of Columbia.

Moody's stays negative on states, local governments (Reuters) - Even though the recession officially ended more than two years ago, the still-weak U.S. economy and a pullback in federal support means the outlook for states and local governments remains negative, Moody's Investors Service said on Monday. The two sectors of the $3.7 trillion U.S. municipal bond market were originally branded with negative outlooks by Moody's in 2009 as tax revenue tanked. The rating agency noted that revenue collections have improved, but not enough for states to completely replace federal stimulus funding that ended in June. Another reduction is expected as Congress wrestles with ways to reduce the U.S. deficit. "The determination of both political parties to reduce project federal budget deficits is certain to result in reduced funding for federal programs run by the states,"

States struggle for financing to meet road needs -The phrase "you can't get there from here" is increasingly apt nearly everywhere one turns. America's roads, highways, bridges and transit systems are falling apart. Even those not in disrepair are often so crowded that a horse and buggy might seem faster. Cities and suburbs are outgrowing their infrastructure far faster than local governments can find the money to fix them. While the problem is plain to all, the money and the political will to fix it isn't there. Two congressionally mandated commissions and a slew of experts and committees have said the nation needs to double, even quadruple, what it spends each year to maintain and repair its aging transportation infrastructure and expand to accommodate population growth. So there's the rub. No one likes traffic jams and potholes. No one wants people to die because an unsafe bridge has collapsed. But raising federal gas and diesel taxes or boosting tolls and fees isn't popular, either. Pew Center polls in the last year show that 67 percent of those questioned said their state should not cut money for roads and public transit to balance its budget. But only 38 percent want federal spending increased and only 27 percent favor an increase in the gas tax that often pays for it. At the same time, three-quarters say more spending on roads, bridges and other public works would help create jobs.

$2 billion hole will mean ‘brutal’ decisions for special session - Washington State lawmakers are in for a brutal special session this holiday season as they debate cuts to schools, social services and health care to close another multibillion-dollar budget shortfall. Gov. Chris Gregoire said Thursday she will call them back Nov. 28 -- four days after Thanksgiving -- and push them to approve up to $2 billion in spending cuts before Christmas. Next month, she intends to give legislative budget writers a "road map" of where cuts might be made in spending on public schools, social services and corrections.

State Likely Faces Another Half-Billion Deficit - The governor's budget director says lawmakers will likely have to cut $400 million to $500 million next year as the state continues to try to dig out of the economic downturn. Henry Sobanet told lawmakers Tuesday that they'll face another difficult budget cycle because the state's revenue is not keeping up with increased demand for services like health care, education and public safety. A separate report from legislative economists warned that "chances of a recession are rising" nationally as households and business continue to be unsure about the weak economy. Sobanet's office estimates that Colorado's general fund revenue will grow by about $57.8 million in the current year. That would be a 0.8 percent increase from last year. Colorado lawmakers adopted a budget this spring to close a shortfall that hovered near a half-billion.

Alabama Lawmaker Pledges Death to Jefferson County Debt Bargain - Anyone wondering how steep a climb Jefferson County’s Sept. 16 debt settlement still faces need only talk to one man: state Representative John W. Rogers Jr. of Birmingham. The cost of averting a record municipal bankruptcy would be “inhumane,” Rogers said in a phone interview yesterday, and the 70-year-old Democrat vowed to stop it in the Alabama Legislature however he can. Rogers said he would draw on influence gained over 29 years to persuade colleagues to block the bargain with holders of $3.14 billion of county debt, a legacy of failed financing for sewer renovations. Governor Robert Bentley, a first-term Republican, has promised to deliver laws to make the preliminary deal a reality. A Republican legislative majority may help, as may fears of the statewide impact of a bankruptcy by Alabama’s most populous county. In his path stand Rogers and a tradition of deferring to local lawmakers on local issues. Rogers said the deal’s cost would be passed on in higher rates that would fall disproportionately on poor areas of Birmingham that comprise 70 percent of sewer-system customers.

Food pantries in greater Portland struggle to keep up with demand - She is in remission from cancer now and is hoping to go back to work soon, although she is physically limited in what she can do. So Gardner relies on the Falmouth Food Pantry to supplement her bills by providing a place to get food every other week. "I would rather do a food pantry than food stamps," she said. "Food stamps are a burden on the state. The food pantry is based on donations." But lately, donations have been scarce. "It's a serious, serious problem," Wayside Food Rescue Program coordinator Don Morrison said in Portland. Morrison said that while the 52 pantries his group supplies food to have seen dramatic increases in demand for their services, corporate donations from grocery stores, food processors and other sources have declined. "Pantries are telling me they run out of food and there are still 10 families waiting," Morrison said. In Falmouth, one of the four volunteer food pantry coordinators, Nancy Lightbody, said there is frequently a line of people waiting when she opens the pantry's door.

More Working Folks Showing Up at Food Pantries - A small crowd waited in line Monday morning outside a South Florida food pantry in an effort to put food on their tables during tough economic times. It was a slow day for Food of Life Ministries, which helps 5,000 people every month. The organization started helping six homeless people living in the woods two years ago, but demand exploded amid the economic downturn, said the founder and leader of the ministry, Wayne Oxford. "We try to help everyone that comes here, but it's not just the homeless anymore," Oxford said. "So we've seen change from homeless to everyday working folks coming in here." Food of Life's highly organized operation is run by volunteers who haul boxes of donated food from trucks to the one-room pantry. Canned corn, Jell-O packs and bread are packed in a plastic grocery bag. Although the basic help for the community is food, everything from suits to shoes to furniture and plates are provided to those who come asking for help.

Food Stamps Rap Video Going Viral On YouTube: "My EBT" By @MrEBT - "My EBT" is a newish video by a Rap artist calling himself @MrEBT (H Man).  It's going viral on YouTube, thanks in part to a headline appearing on Drudge Report on Monday.  Mr EBT is one of the 45 million-plus Americans who receive Supplemental Nutrition Assistance Program (Food Stamps) benefits monthly. In the video he wanders through supermarket aisles and a couple of restaurants while he describes, in rhyme, what he buys with his Electronic Benefits Transfer (EBT) card.   It's mostly junk food--fully allowable under federal guidelines, something Mr EBT notes, in rhyme. And his benefits card is actually his sister's, Mr. EBT notes, also in rhyme, so he's committing fraud "to get my swipe on."  @MrEBT has more than 16,500 followers on Twitter, he's on Facebook, and the video has been viewed more than 84,900 times on YouTube. Update, 8:00 PM: The video now has more than 185,600 views.  (Top: A screengrab from the video; inset is Mr EBT's Twitter avatar)

The bigger story behind the food-stamp-hating videos from Mr. EBT and Chapter - The videos exploit every possible racist stereotype for a laugh.  Some journalists are accepting them as straightforward satire, by artists who are themselves African American, but self-directed satire is not the whole story. The conservative media is giving lots of attention.  The Drudge Report on Monday linked to the first video, by Mr. EBT, showing the singer buying junk food with an EBT card belonging to somebody else.  Fox News covers the same story. The second video is far worse.  In it, the singer Latoya "Chapter" Hicks adopts the fanciful character of Keywanda, a foul-mouthed, sexaholic, beer-swigging, chain-smoking Black mother of 10 children.  She sings that "all you gotta do is f---" and 9 months later you get lots of government benefits. Chapter's website, which hosts the video, and "Creative Indie Artists," which produced her song and video, are both projects of Christopher A. Jackson, a White man from California whose other job is as an executive for KROQUE, a military apparel contractor.  The Fact Evangelist found the link to the apparel contractor raised questions about the origin of this music project.

Michigan changing food stamp eligibility rules -— An undetermined number of Michigan's nearly 2 million food assistance recipients will lose the help under new eligibility requirements the state will begin using in October. Michigan has determined food assistance eligibility based only on income for roughly a decade. A new policy will include a review of certain financial assets starting Oct 1. The requirements will affect new applicants right away and existing recipients when their cases come up for review, which typically happens once every six months. Those with assets of more than $5,000 in bank accounts or some types of property would no longer be eligible for food assistance. Other assets that would count against the cap include vehicles with market values of more than $15,000 and second homes, depending on how much is owed on the properties.  The Michigan League for Human Services says the policies will make it harder for those who are out of work or underemployed to qualify for the assistance. The organization says need is increasing as the state's unemployment rate rose to 11.2 percent in August, the third-highest rate in the nation and up from 10.2 percent in April.

Bodies Pile Up in Detroit Morgue as County Plans Outsourcing to Cut Costs - The bodies line up in the morning at Wayne County’s Detroit morgue, each bagged on a cold steel gurney awaiting an autopsy by one of five pathologists, three fewer than the county could afford a year ago. As local governments struggle to fund services -- half of 500 U.S. counties in a February survey reported fewer employees than in 2010 -- Wayne County is turning to academia to deal with the dead. In a contract to be considered today, Wayne, which has faced budget gaps for the past three years, would pay the University of Michigan to do autopsies, saving $1.5 million over three years and transplanting the program to a medical school. It would be the busiest morgue operation to turn over its primary function to a university medical school, Schmidt said. Autopsies would still take place at Wayne County’s 50,000- square-foot morgue on Detroit’s east side, though the pathologists would work for the school. The morgue drew national attention in 2009 and 2010 when it stacked unclaimed bodies -- at one point more than 100 -- in a refrigerator and temporary trailer. The backlog was caused by red tape and relatives who couldn’t afford to bury or cremate loved ones, Schmidt said.

Detroit Public Schools plans to cut 1,500 teachers - Detroit Public Schools expects to shed nearly 40 percent of its teachers in the next four years to help close a $327 million deficit, yet projects a loss of just 6,000 students under a state-approved fiscal blueprint. The district would cut more than 1,500 teachers by fall 2015, according to a deficit-elimination plan obtained by The Detroit News. Most of the reduction — nearly 1,100 teachers — would occur next fall as DPS moves some of its weakest schools into a statewide recovery system, the Education Achievement Authority. Some of the teachers who leave DPS could be employed in the new system, though it's unclear how many schools the district will move into the EAA. And even as it moves teachers and schools off its books, DPS projects its enrollment losses will slow dramatically between now and 2015-16, according to the deficit-elimination plan, which the state signed off on last week.

Homeless students on the rise in Amarillo - Homeless children living in Amarillo are on the rise. Most kids are worried about what they might wear to school or who they'll play with during recess. But now many of them are having to worry about where they are going to sleep at night.According to the Guyon Saunders Resource Center, homeless students in Amarillo ISD have jumped to just over 1700 this year, up from just under 1400 last year. Major Tim Grider with The Salvation Army says he's seeing more families visit his shelter because many single parents have lost their jobs. Grider explains, "This certainly is not surprising to hear that the number of kids identified as homeless in our school systems is up. There have been times we've had 55 kids. Our highest at one time because of our bedding situation is 70." Homeless shelters this month have been near capacity. Grider says just yesterday The Salvation Army on South Tyler Street was completely full.

NYC Dept. of Education May Layoff 800 School Aides - Union members gathered outside M.S. 571 in Prospect Heights on Tuesday to rally against potential school layoffs. Members of Local 372 said they believe Department of Education officials are preparing pink slips and layoff notices for nearly 800 school aides and parent coordinators. They said, based on what they were told, most of the job losses would be felt in Central Brooklyn, Upper Manhattan and the South Bronx -- communities already in need of better social services and suffering from higher unemployment rates. Union members said over the past three years, over 2,200 valuable service members have been laid off from local schools

L.A. schools brace for wave of layoffs - LAUSD officials closed a $408million budget deficit for the 2011-12 school year using employee concessions and layoffs, including the loss of office clerks, library aides, campus aides and other school workers. The final cuts to schools were less drastic than "worst-case scenario" predictions district officials presented in February. After most employee unions agreed to take four furlough days and the state budget appeared to take a turn for the better, many of the more than 7,000 layoffs that had been expected were prevented. Most of the workers who are being cut this week come from two of the district's nine unions, those that failed to reach a furlough deal with management.

Board strips Kansas City schools' accreditation - The Missouri Board of Education voted Tuesday to revoke the accreditation of the Kansas City School District, effective Jan. 1, because it failed to reach state performance standards. It's the second time in 11 years that the district has lost accreditation, an embarrassing blow to a beleaguered district that again is trying to find a superintendent.  Board members blamed poor test scores; the district met only three of the 14 standards in the state's annual performance report, down from four in 2010.  The Jan. 1 deadline allows the school board, lawmakers and educators time to come up with a plan to improve and regain accreditation before it could face state takeover, Missouri Education Commissioner Chris Nicastro told NBC News affiliate KSHB-TV in Kansas City. “While we are disappointed with this decision, we understand the basis upon which it was made,” Interim Superintendent Dr. Stephen Green told ABC News. “Student achievement remains our top priority and we will couple with this, a focus on restoration and recovery of our accreditation status.”

What Makes Teachers Productive? - If you watch the documentary “Waiting for Superman” or read Steven Brill’s “Class Warfare: Inside the Fight to Fix America’s Schools,” you will learn that many advocates of school reform think they know how to increase teacher productivity: Rate teachers according to their students’ performance on standardized tests and fire those who don’t make the grade. But economic theory suggests several reasons why this approach will probably backfire. Scores on standardized tests are not an accurate measure of success in later life, because they don’t capture important aspects of emotional intelligence, such as self-control and ability to collaborate with others. The Nobel laureate James Heckman describes noncognitive traits as a crucial component of human capital. Indeed, research by the economists Eric Hanushek and Steven Rifkin — both advocates of school reform — indicates that neither teachers’ own test scores when they were students nor their educational credentials explain much of the variation in their students’ outcomes. Why judge teachers narrowly on a set of outcomes that are not even predictive of their own success?

Republicans say education department should go - The Republican presidential contenders say vast parts of the Department of Education would be on the chopping block - if not completely shut down. The GOP candidates on Thursday universally panned the education department as they met for a debate. Rep. Michele Bachmann of Minnesota says she would push the repeal of federal education laws and personally go to the department's headquarters, turn out the lights, lock the door. Texas Gov. Rick Perry says the Education Department is too aggressive and criticized former Massachusetts Gov. Mitt Romney for supporting it. Romney says Perry has his facts wrong yet again. Former Speaker Newt Gingrich says he would roll back much of the department's regulation and would introduce grants to help parents pay for the schools of their choice.

UH holding hearing on tuition hike Tuesday - The public will have another chance to voice their concerns about a tuition hike at the University of Hawaii. The school is holding another hearing at its West Oahu campus at 1 p.m. Tuesday. Currently, undergraduates at UH Manoa pay $4,200 per semester. By the fall of 2016, that number could increase to $5,688 per semester, which is more than $1,500 that what students pay now.

Clashes of Money and Values: A Survey of Admissions Directors -  Admissions counselors like to talk about finding the right "fit" for applicants -- a great match between a student's educational and other goals and an institution's programs. But a new survey of the senior admissions officials at colleges nationwide finds that this "fit" is, from many colleges' point of view, increasingly about money. As evidence of that pressure, the survey found that:

For many colleges, a top goal of admissions directors is recruiting more students who can pay more. Among all four-year institutions, the admissions strategy judged most important over the next two or three years -- driven by high figures in the public sector -- was the recruitment of more out-of-state students (who at public institutions pay significantly more).

Among all sectors of higher education, there is a push to recruit more out-of-state students and international students.

Recruiting more "full-pay" students -- those who don't need financial aid -- is seen as a key goal in public higher education, a sector traditionally known for its commitment to access.

New Enrollment Dips a Bit at U.S. Graduate Schools - Enrollment of new students at graduate schools in the United States dropped slightly from 2009 to 2010, despite an 8.4 percent increase in applications. It was the first decline in first-time graduate enrollment since 2003, according to the Council of Graduate Schools, and came after a 5.5 percent increase the previous year.  The decrease in new graduate students was particularly noticeable in business, education and public administration programs, according to Debra W. Stewart, the council¹’s president. And while the number of new Hispanic students grew by almost 5 percent, new enrollment by black students declined by more than 8 percent.  “Both historically and in recent years, there’s been an inverse relationship between the economy and graduate student enrollment,” Dr. Stewart said. “But now, they’re both down, so the question is, why?”

Analysis: Fed's twist moves hurts company pension plans (Reuters) - The Federal Reserve's 'Operation Twist' to bring down bond yields and stimulate the economy is likely to cause pain for the nation's largest pension funds, already struggling with funding shortfalls from the recent stock market decline. Hit both by falling stock prices and falling bond yields, the 100 largest pension plans of public U.S. companies have assets covering only 79 percent of their liabilities as of the end of August, down from 86 percent at the end of 2010, according to consulting firm Milliman Inc. Already approaching its all-time low of 70.1 percent in August, 2010, the funding ratio could fall below 60 percent within two years if equities stagnate and rates decline further, Milliman projected. "I've said rates were at historic lows for three years now and they keep going lower," John Ehrhardt, a principal in the firm's New York office, said. Corporate pensions were well funded back in 2007 before the financial crisis hit, but even though the stock market has recouped most of its losses, falling bond yields have prevented the funds from regaining their solid footing.

Pensions, what pensions? - In case you aren't depressed enough today, I thought I'd share this with you so you can go into the week-end in full despair:  America is in the midst of a retirement crisis. Over the last decade, we've witnessed the wholesale gutting of pension and retiree healthcare in this country. Hundreds of companies have slashed and burned their way through their employees' benefits, leaving former workers either on Social Security or destitute -- and taxpayers with a huge burden that, as the baby boomer generation edges towards retirement, is likely to grow. It's a problem that is already affecting over a million people -- and the most shocking part is, none of this needed to happen. It wasn't the dire economy that led these companies to plunder their own employees' earnings, it was greed. Over the last decade, some of the biggest companies -- including Bank of America, IBM, General Motors, GE and even the NFL -- found loopholes, abused ambiguous regulations and used litigation to turn their employees' hard-earned retirement funds into profits, and in some cases, executive compensation.

The theft of the American pension - America is in the midst of a retirement crisis. Over the last decade, we've witnessed the wholesale gutting of pension and retiree healthcare in this country. Hundreds of companies have slashed and burned their way through their employees' benefits, leaving former workers either on Social Security or destitute -- and taxpayers with a huge burden that, as the baby boomer generation edges towards retirement, is likely to grow. It's a problem that is already affecting over a million people -- and the most shocking part is, none of this needed to happen. As Ellen E. Schultz, an investigative reporter for the Wall Street Journal, reveals in her new book, "Retirement Heist," it wasn't the dire economy that led these companies to plunder their own employees' earnings, it was greed. Over the last decade, some of the biggest companies -- including Bank of America, IBM, General Motors, GE and even the NFL -- found loopholes, abused ambiguous regulations and used litigation to turn their employees' hard-earned retirement funds into profits, and in some cases, executive compensation. Schultz's book offers a relentlessly infuriating look at the mechanisms they used to get away with it.  We spoke to Schultz over the phone about the companies' deliberate deceptions -- and what they mean for the future of the country.

"House rich & cash poor": Why Social Security can't be Raided (Part 1) - There are three prevalent myths about the assets in Social Security Trust Funds, plural because there are two of them OAS-Old/Age Survivors and DI-Disability Insurance. The first myth, which comes mostly from the Right, is that those assets are just 'Phony IOUs'. The second myth comes mostly from the Left and is just a version of 'Phony IOU', that the assets of the Trust Fund were real but were raided starting with Ronald Reagan. I and others have dealt with these two before and I mention them only to dismiss them for now, though happy to discuss the ideas in comments. The third myth, and the topic of this post is the idea that the Trust Fund assets were and are real and are just a big juicy target of Wall Street, that is that they have not been raided YET. Well this like the first two is based on a profound misunderstanding of the nature and operations of the Trust Funds since their inception. But to clear up, or even begin to, requires some tedious plodding through the numbers and concepts, but for those that do I hope you will understand with I used the descriptor and made the claim in the post Title. Oh and did I say there would be numbers? Continued below the fold.

"House rich & cash poor": Why Social Security can't be Raided (Part 2) - The Trustees measure the health of the Trust Funds in terms of Actuarial Balance. A Trust Fund in annual balance ends the year with a TF Ratio of 100 or above. But the Trustees have a longer horizon than just the next year, instead they consider the Trust Funds to be in Short Term Actuarial Balance if they project to have TF Ratios of 100 or more in each of the next 10 years, while they are deemed in Long Term Actuarial Balance is they project to have those levels of TF Ratio in each of the next 10 years. Now the vast majority of Trust Fund assets since inception of the program have been in Special Issues of Treasuries at times with an admixture of regular Treasuries (but at no point I am aware of ever representing more than a fraction of total assets). The restriction to Treasuries is a direct consequence of language in the 1939 Amendments to the Social Security Act of 1935 mandating that all funds credited to the Trust Fund and not needed for short term benefit payments has to be held in "instruments fully guaranteed as to interest and principal by the federal government". Meaning it would take a change in the law to have them in any other asset class, and except for short term payment purposes even in cash.

Social Security -- Are you kidding me?  -- I think I stopped trusting the U.S. government right after learning that for 40 years, instead of treating a small group of poor, uneducated people officials had identified as having syphilis, officials not only withheld the diagnosis from them, but the cure as well, just to see what would happen if the disease went untreated. This was done even if what would happen was eventually death, which is why burial insurance was given to the unsuspecting victims as if the government was doing them a favor.  In fact, the first wave of Gen Xers were out of diapers while the Tuskegee Syphilis Experiment was still going on.  Once you see how hard Uncle Sam sucker punches people he identifies as expendable, you learn to keep your guard up whenever he comes around. It is for this reason that Social Security is nowhere in my retirement plans.

If Frank Bruni Knew Arithmetic He Wouldn’t Write Columns Like This One - Frank Bruni, one of the NYT's new columnists, ran a column today complaining about government corruption in Italy and the impact that an aging population in both Italy and the U.S. will have on reducing the living standards of our kids. This is one of those columns which could have been so easily prevented if the NYT just required a remedial 3rd grade arithmetic course for columnists that intend to write on economic issues. For example, Bruni complains that seniors and older workers want to protect Social Security and Medicare. If he looked at the Congressional Budget Office's projections for Social Security he would see that they show a 1.6 percentage point increase in the payroll tax would leave the program fully solvent throughout its 75-year planning period. By comparison, workers wages are projected to rise by almost 40 percent over the next three decades. This means that the program can be kept fully solvent with a tax increase that is less than 5 percent of projected wage growth over the next three decades. This will impoverish our kids?

Markets and Merchants' Guilds: Which is the Chicken? Which the Egg? - This post was provoked by a moment of frustrated pique, another in a series of 'shakes cane at clouds' moments as this classic New Deal Liberal is driven to craziness by otherwise sensible social liberals who still fetishize markets. And yes I am pointing fingers right at Erza K, Matt Y and Kevin D. But in this case directly at Kevin and his piece today that should raise hackles at the very sight of its title: A Conservative Medicare Plan Liberals Could Love Here is the core proposal: Yuval Levin proposes a revised version of Ryan's plan that's based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:....In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula.... If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money....Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk. Generally speaking, there's no reason this idea should offend liberals. Well as I said over there maybe just one tiny reason. I call it "the whole effing history of market relations" reason. Rant continues below.

Our Hidden Government Benefits - DON’T take at face value the claims that Americans dislike government. Sure, a recent ABC News/Washington Post poll found that 56 percent of Americans said they wanted smaller government and fewer services. Tea Party activists, the most vocal citizens of our time, powerfully amplify those demands. Yet the reality is that the vast majority of Americans have at some point relied on government programs — and valued them — even though they often fail to recognize that government is the source of the assistance.  A 2008 poll of 1,400 Americans by the Cornell Survey Research Institute found that when people were asked whether they had “ever used a government social program,” 57 percent said they had not. Respondents were then asked whether they had availed themselves of any of 21 different federal policies, including Social Security, unemployment insurance, the home-mortgage-interest deduction and student loans. It turned out that 94 percent of those who had denied using programs had benefited from at least one; the average respondent had used four.  Americans often fail to recognize government’s role in society, even if they have experienced it in their own lives. That is because so much of what government does today is largely invisible.

Passing the baton of irony -Back during the whole health care reform fight, Investors Business Daily wrote an editorial in which they tried to claim that if government were more involved in health care, it would (of course) result in rationing. People would be evaluated by bureaucrats, and if found wanting, they would let them die. A government system would have just looked at a man like Stephen Hawking, said he was uncurable, and let him die. Then, the world would have been deprived of his genius. There was just one problem. Stephen Hawking was born in Great Britian, and has lived in, and been cared for by, the NHS his entire life. In his own words: “I wouldn’t be here today if it were not for the NHS,” he told us. “I have received a large amount of high-quality treatment without which I would not have survived.” In case the irony is lost on you, the NHS is a completely socialized health care system. The government doesn’t just pay for it; the government runs the entire show. I was thinking of this when I watched the following part of the debate last night: Herman Cain is trying to say that under the ACA, he would not have been able to survive his colon cancer. Under the ACA, bureaucrats have sat around and debated whether he’d get his care, and that would have resulted in delays that might have killed him.

U.S. Offers Cash to States Rejecting Insurer Premium Increases - The U.S. is offering $600,000 to states that make it harder for health insurers to raise premiums, federal regulators said. Twenty states won U.S. Department of Health and Human Services “performance awards” for policies that let their insurance regulators reject premium increase requests, said Steve Larsen, director of the agency’s Center for Consumer Information and Insurance Oversight. Connecticut, one of the states, denied an increase of about 14 percent proposed by a subsidiary of UnitedHealth Group Inc. (UNH) on Sept. 7, instead approving a boost of about 12 percent. The U.S. wants to encourage more states to award their regulators similar power, Larsen said in a conference call with reporters. “We think that’s the highest level of protection for consumers,” he said. The 2010 health-care law signed by President Barack Obama authorized Larsen’s office to review, without rejecting, premium increases in states where the U.S. deems regulation weak.

Number of Uninsured Climbs to Highest Figure Since Passage of Medicare, Medicaid - Official estimates by the Census Bureau showing an increase of about 1 million in the number of Americans without health insurance in 2010 – to a 35-year high of 49.9 million persons, or 16.3 percent of the population, under the bureau’s revised calculation method – underscore the urgency of going beyond the Obama administration’s federal health law and swiftly implementing a single-payer, improved Medicare-for-all program, spokespersons for Physicians for a National Health Program said today. Employment-based coverage continued to decline. The bureau said 55.3 percent of Americans were covered by employment-based plans in 2010, down from 56.1 percent in 2009. It was the eleventh consecutive year of decline, from 64.2 percent in 2000. In Massachusetts, whose 2006 health reform is widely viewed as the model for the federal health law, 370,000 people remained uninsured in 2010, representing 5.6 percent of the population, a jump from 4.3 percent who were uninsured in 2009

Drug deaths top traffic fatalities in U.S. - Propelled by an increase in prescription narcotic overdoses, drug deaths now outnumber traffic fatalities in the United States, a Times analysis of government data has found. Drugs exceeded motor vehicle accidents as a cause of death in 2009, killing at least 37,485 people nationwide, according to preliminary data from the U.S. Centers for Disease Control and Prevention. While most major causes of preventable death are declining, drugs are an exception. The death toll has doubled in the last decade, now claiming a life every 14 minutes. By contrast, traffic accidents have been dropping for decades because of huge investments in auto safety. Public health experts have used the comparison to draw attention to the nation's growing prescription drug problem, which they characterize as an epidemic. This is the first time that drugs have accounted for more fatalities than traffic accidents since the government started tracking drug-induced deaths in 1979.

Half of All U.S. Latinos Live In The Country’s Most Polluted Cities - A major report released jointly this week by the Natural Resources Defense Council, the National Latino Coalition on Climate Change, the Center for American Progress and the National Wildlife Federation finds that nearly one in two Latinos live in areas where breathing is unhealthy and even deadly. This report comes on the heels of a shocking announcement from President Obama, blocking his own administration from adopting stronger smog standards that would have saved thousands of lives. Citing the need to reduce “regulatory burdens” as the motivation for delaying this critical rule, the administration has effectively put the profits of a few polluting industries ahead of the health and safety of the fastest growing population group in the country. For the approximately 23 million Latinos living in unhealthy and possibly deadly air pollution, time is not a luxury. Latino children are 60 percent more likely to suffer from asthma attacks than white children, and as a group Latinos are more likely to die from this disease than whites.

There are Things Worse Than Pollution And We Have Them - Millions of American are without jobs, underwater on their mortgages and together with Europe and Japan the developed world faces the serious prospect of prolonged stagnation. We can and should do something about this. We should print more money. We should borrow more money. These are not costless solutions and I do not argue that they are. However, the risks they pose are not as great as the tragedy that we are living through. However, a similar argument prevails on the supply side of energy production. There are strong reasons to believe that energy shortages will make these problems worse. In the short run energy acts more like a debt service than a consumption commodity. We can say that households and businesses “must use” a certain amount of energy. What we really mean is that adjustments in the amount of energy they use will through out of wack enormous long term plans in plants, production, infrastructure, home, and transportation equipment. Thus the cost of altering energy usage can be enormous. Now in the long run something has to be done, if for no other reason than fossil fuels are not forever. In the short run there are many who are concerned about pollution, both C02 and the groundwater pollution from new fracking techniques. I do not argue that these aren’t serious concerns. I do not dispute the science of global warming or the clear evidence of burning water, from natural gas contamination. However, there are things worse the pollution and we have them. We should take steps to mitigate the harm but our first duty should be to relieve suffering now where we can and lay the foundation for recovery in the immediate future.

We Incorporate Genetic Information From the Food We Eat, New Study Finds - Research at Nanjing University has found that strands of RNA from vegetables make it into our bloodstream after we eat them, and can regulate the expression of our genes once they're inside us.  MicroRNAs, or miRNAs, are little strands of RNA that selectively bind to matching sequences of messenger RNA, resulting in repression of those genes. Their role has only been understood in the last decade or so, but miRNAs are currently believed to take part in a vast number of processes in both plants and animals.  Chen-Yu Zhang and colleagues found plant miRNA sequences in the tissue of animals that ate those plants. One of them, called MIR168a, is produced by rice and abundantly found in the blood of the Chinese humans studied. In experiments, MIR168a showed the ability to affect gene expression in mouse, inhibiting the liver's ability to filter out LDL, the lipoprotein with the street name of "bad cholesterol."

Gamers solve AIDS puzzle where scientists fail - Online gamers have succeeded where scientists have failed for a decade, successfully deciphering the structure of an AIDS-like retrovirus enzyme. Biochemists called in the gamers after failing to piece together the structure of the protein-cutting enzyme, and challenged them to produce an accurate model of the enzyme using Foldit, an online game that allows players to collaborate and compete in predicting the structure of protein molecules.  They did it in only three weeks - an achievement believed to represent the first time gamers have solved a longstanding scientific problem. Retroviral protease enzymes have a critical role in how the AIDS virus matures and proliferates. However, efforts to find anti-AIDS drugs that can block these enzymes were hampered by not knowing exactly what the retroviral protease molecule looks like. "We wanted to see if human intuition could succeed where automated methods had failed,"

Miami Invaded By Giant, House-Eating Snails - In southwest Miami, a small subdivision is being called "ground zero" of an invasion by a destructive, non-native species. "It's us against the snails," Richard Gaskalla, head of plant industry for Florida's Department of Agriculture and Consumer Services, tells weekends on All Things Considered host Guy Raz. That's the Giant African Land Snail, to be precise. They can grow to be 10 inches long. They leave a slimy trail of excrement wherever they go. They harbor the microscopic rat-lung worm, which can transmit meningitis to humans. And they will literally eat your house. "They'll attach to the side of the house and eat the stucco off the side of the house," Gaskalla says. The snails are also attracted to garbage and pet food that's been left out. Giant African Land Snails are restricted in the US. Gaskalla says people often smuggle them into the country in their pockets, because they make popular novelty pets. "Back in 1965 we had an introduction that was traced back to an elementary-aged child that had put two of them in his pocket in Hawaii and brought them back to Miami,"  A more recent introduction several years ago was traced to small religious sects in Miami, where the snails are believed to harbor healing properties.

Nanoparticles cause brain injury in fish - Scientists at the University of Plymouth have shown, for the first time in an animal, that nanoparticles have a detrimental effect on the brain and other parts of the central nervous system. They subjected rainbow trout to titanium oxide nanoparticles which are widely used as a whitening agent in many products including paints, some personal care products, and with applications being considered for the food industry. They found that the particles caused vacuoles (holes) to form in parts of the brain and for nerve cells in the brain to die. Although some effects of nanoparticles have been shown previously in cell cultures and other in vitro systems this is the first time it has been confirmed in a live vertebrate. "It is worrying that the effects on the fish brain caused by these nanoparticles have some parallels with other substances like mercury poisoning, and one concern is that the materials may bioaccumulate and present a progressive or persistent hazard to wildlife and to humans," says Professor Handy.

EPA Quashes Cattle Barons’ Dreams of “Better Fishing Though Chemistry” - For the last few weeks, the patriotsphere has been awash with rage over the EPA's heavy-handed treatment of one of the Heartland's most cherished and Kochian beef moguls. It all began in late August when cattle baron Mike Callicrate told attendees of the 12th Annual R-CALF USA Convention that the EPA had initiated an enforcement action against his feedlot, declaring: Now that EPA has declared hay a pollutant, every farmer and rancher that stores hay, or that leaves a broken hay bale in the field is potentially violating EPA rules and subject to an EPA enforcement action. How far are we going to let this agency go before we stand up and do something about it? Modern-day minutemen responded immediately by taking up their keyboards to broadcast this travesty. "EPA Declares Hay a ‘Pollutant’ To Intimidate Ranchers," screamed Alex Jones' Infowars. " JUST ANOTHER EXAMPLE OF AN OBAMA AGENCY RUN A MUCK. The EPA must be stripped of all funding..." blogger Jim Campbell declared in the all caps style so preferred by the Bachmannian blessed. And our most beloved of citizens, the courageous Freeper-American community responded by calling the EPA, "ecoterrorists," and demanding that EPA staffers be imprisoned and burned alive.

‘Severe’ drought triggers Stage 3 water restrictions for more than 1 million in North Texas - The North Texas Municipal Water District's board of trustees unanimously voted to implement a Stage 3 drought plan for its 1.6 million customers. "This is an ongoing drought, and it is very severe," NTMWD spokeswoman Denise Hickey said. Under Stage 3 restrictions, customers can only water their lawns once every two weeks. But they can still use drip irrigation and soaker hoses for home foundations and trees. People can only wash cars with a hose with a shutoff nozzle. Pool owners can only replenish water that has evaporated and cannot drain and refill their pools. Fountains must be turned off unless they use recycled water. "We've hit triple-digit breaking weather," Hickey said. "We've had peak record demands this summer. The drought outlook continues to persist through the fall and into next spring."

Texas Drought 2011 Slideshow - Where water should be, but isn’t.

Drought threatens way of life for Texas ranchers – These days, acre after acre is yellowed and inedible from a withering lack of rain. Wide patches are scorched black from where wildfires mauled them, and highway bridges span dry, empty riverbeds. There are few visible sheep or cattle, many having been sent to slaughter rather than being left to starve in the barren fields.As parts of the northeastern United States recover from historic flooding, Texas is suffering the worst one-year drought in its history. The state has received just 7.33 inches of rain this year through August, the lowest amount in four decades, state climatologist John Nielsen-Gammon says. Temperatures, meanwhile, have hit record highs: Texas' June-through-August average of 86.8 degrees was the hottest summer for any state in U.S. history, beating a record set by Oklahoma (85.2) in 1934, according to the National Weather Service. The dearth of rain has wilted fields and led to destructive wildfires across the state. Across Texas, wildfires this year have burned a record 3.7 million acres — an area about the size of Connecticut, according to the Texas Forest Service. Most affected by the drought have been cattle and sheep ranchers, whose grazing fields have been scorched into arid brown parchment and who have sent their herds to slaughter in record numbers.

2011 Ratio of Stocks-to-Use for Total World Grains and Oilseeds Near Record Low - The ratio of global ending stocks to total use can be a reliable indicator of market prices (the lower the ratio, the tighter the market and the higher the price.) Currently, the stocks-to-use ratios for corn and soybeans are near record lows. The stocks-to-use ratios for wheat and rice suggest reasonably comfortable stock levels, but the shortage of milling-quality wheat has put strong upward pressure on wheat prices. Stock-to-use ratios for cotton, total oilseeds, total coarse grains, and sugar are also low. These low ratios suggest strong worldwide competition among crops for acreage in the 2011 planting season.

Midwest Farmers Are on Alert Against Pig Thieves - This month, 150 pigs — each one weighing more than an average grown man — disappeared from a farm building in Lafayette despite deadbolts on its doors. Farther north near Lake Lillian, 594 snorting, squealing hogs disappeared last month, whisked away in the dark.  And in Iowa, with added cover from the vast stretches of tall cornfields, pigs have been snatched, 20 or 30 at a time, from as many as eight facilities in the last few weeks, said the sheriff of Mitchell County, adding that among other challenges, the missing are difficult to single out.  “They all look alike,” said Curt Younker, the sheriff, who said he had only rarely heard of pig thefts in his decades on the job. “Suddenly we’re plagued with them.”  Some livestock economists pointed to the thefts in this hog-rich region as one more sign of the grim economy, a reflection of record-high prices for hogs this year and the ease of stealing pigs from the large barns that are often far from the farmer’s house.  “This is the hot commodity of the moment, like copper a few years ago and gold,”

Global Food Prices Stuck Near Record High Levels  - World food prices remained virtually unchanged between July and August 2011 according to the FAO Food Price Index published today. The Index averaged 231 points last month compared to 232 points in July. It was 26 percent higher than in August 2010 but seven points below its all-time high of 238 points in February 2011. In over two decades of tracking world food prices, the U.N. Food and Agricultural organization index has never stayed so high for so long.  This represents true suffering for hundreds of millions of people who live on the edge, for whom food is a large fraction of their income like, say, North Africa (see Expert consensus grows on contribution of record high food prices to Middle East unrest). And this year’s warming-driven extreme weather is likely to help keep food prices high for a while: Food prices could rise next year because an unseasonably hot summer likely damaged much of this year’s corn crop….The estimated surplus is down from last month’s forecast and well below levels that are considered healthy….

Glimpses of the Next Great Famine - WHAT’S most heartbreaking about starving children isn’t the patches of hair that fall out, the mottled skin and painful sores, the bones poking through taut skin. No, it’s the emptiness in their faces.  These children are conscious and their eyes follow you — but lethargically, devoid of expression, without tears or screams or even frowns. A starving child shuts off emotions, directing every calorie to keep vital organs functioning.  The United Nations warns¹ that the famine in the Horn of Africa could kill 750,000 people in the coming months, and tens of thousands have already died. In a German aid hospital here in Dadaab, Dr. Daniel Muchiri showed four wards full of children suffering from severe malnutrition. Even among the rare children who reach this well-equipped hospital, one dies each day on average — and Malyun Muhammad may soon become one of them.  Malyun, 2 years old and weighing just 14 pounds, was lying listlessly on a bed, her eyes following me but utterly blank.  Dadaab is now the largest refugee camp in the world², with 430,000 inhabitants. It has doubled in size over the last year, and a huge array of aid groups work here.

World population could just keep on expanding, says expert - "Leading demographers, including those at the United Nations and the U.S. Census Bureau, are projecting that world population will peak at 9.5 billion to 10 billion later this century and then gradually decline as poorer countries develop. But what if those projections are too optimistic?" Carl Haub, who was senior demographer at the Population Reference Bureau for three decades, wants you to think the unthinkable. What if the vaunted "demographic transition" that's supposed to be an inevitable part of countries' economic and social development doesn't materialize? This transition has happened in all developed countries, leading birth rates to go to around two children per couple or less -- the point at which a country's population becomes stable or shrinks. If it happens worldwide, world population stabilizes. If it doesn't, well, can the earth really handle more than 10 billion people?

25 Signs That A Horrific Global Water Crisis Is Coming - Every single day, we are getting closer to a horrific global water crisis.  This world was blessed with an awesome amount of fresh water, but because of our foolishness it is rapidly disappearing.  Rivers, lakes and major underground aquifers all over the globe are drying up, and many of the fresh water sources that we still have available are so incredibly polluted that we simply cannot use them anymore.  Without fresh water, we simply cannot function.  Just imagine what would happen if the water got cut off in your house and you were not able to go out and buy any.  Just think about it.  How long would you be able to last?  Well, as sources of fresh water all over the globe dry up, we are seeing drought conditions spread.  We are starting to see massive "dust storms" in areas where we have never seem them before.  Every single year, most of the major deserts around the world are getting bigger and the amount of usable agricultural land in most areas is becoming smaller.  Whether you are aware of this or not, the truth is that we are rapidly approaching a breaking point. If dramatic changes are not made soon, in the years ahead water shortages are going to force large groups of people to move to new areas.  As the global water crisis intensifies, there will be political conflicts and potentially even wars over water.  We like to think of ourselves as being so "advanced", but the reality is that we have not figured out how to live without water.  When the water dries up in an area, most of the people are going to have to leave.

Third Hottest Summer Globally, Second Warmest for U.S. With Stunning Weather Extremes, Texas Drought Worst in Centuries - Steve Scolnik at Capital Climate analyzed the data from NOAA’s National Climatic Data Center and found that in August,”The over 3000 daily heat records swamped the 142 cold records by 22.2 to 1.” I like the statistical aggregation across the country, since it gets us beyond the oft-repeated point that you can’t pin any one record temperature on global warming.  And 22 to 1 is a stunning ratio.  In the last decade, the ratio averarged about 2 to 1 — see “Record high temperatures far outpace record lows across U.S.”  As Scolnik writes, “For meteorological summer (June-August) as a whole, the ratio increased to 11.4 to 1 … and the year to date is now at 3.4 to 1, more than 50% above the average for the previous decade.” The meteorological summer was the third hottest on record in the NASA dataset.  This is particularly impressive because we’ve been in a  La Niña most of the year and were headed back into one –  and that is normally associated with cooler global temperatures.   The “high-water” extremes this summer were record-smashing from Virginia, whose deluge was an “off the charts above a 1000-year rainfall,” to my hometown area around the Catskill Mountains, where Hurricane Irene was “the most devastating weather event ever to hit the region,”

Extremely Hot Summers Will Soon Be the Norm, Scientists Say - Anyone who’s been paying the slightest attention knows that extreme weather and climate have wreaked havoc in Texas and many other states this year. The worst one-year drought in Texas history and its hottest summer on record — which was the hottest summer ever recorded in any U.S. state — have left Texas short on water, coping with billions of dollars in crop damage, and fighting off record wildfires. The total area burned in Texas so far this year would cover the entire state of Connecticut, and officials says agricultural losses are the largest in state history.“Our current estimate is that the drought in Texas has led to $5.2 billion in agricultural losses,” says Mark Waller, professor and agricultural economist with the Texas AgriLife Extension Service. Cash crops have been especially hard hit, like cotton, corn, and wheat, and ranchers are struggling to feed their cattle. And if the drought continues as recent projections show, says Waller, lost winter wheat crops could make the drought even more expensive.

Recent Blackout Highlights Nation's Aging Electricity Grid - Experts say the cascading blackout that put millions of Westerners in the dark last week was no surprise: Major power outages have more than doubled in the last decade. "This is just evidence that we need a smarter, better, more secure system," said Massoud Amin, director of the Technological Leadership Institute at the University of Minnesota, who has analyzed federal data on the reliability of the nation's electric grid. Blackouts disrupt power to at least a third of U.S. homes each year, and studies show the number of outages is rising. The grid's shortcomings have been well-documented, but efforts to modernize it haven't kept up with demand. Many electrical transmission lines are outdated, and parts of the grid date back to the time of Thomas Edison​. The chairman of the Federal Energy Regulatory Commission, which oversees the nation's grid, acknowledged increasing problems with the system. In a July interview with ProPublica, FERC Chairman Jon Wellinghoff said that while the electric grid is reliable, it is degrading. "It's not getting better," he said. "It's getting worse."

Carbon dioxide emissions hit new record - From Long-term trend in global CO2 emissions, published by PBL Netherlands Environmental Assessment Agency and the European Commission's Joint Research Centre: Continuing growth in the developing nations and economic recovery in the industrialised countries drove the record-breaking 5.8% increase in global CO2 emissions to the all-time high of 33.0 billion tonnes, even though these have not returned to pre-recession levels in most industrialised countries. CO2 emissions went up in most of the major economies, led by China, USA, India and EU-27 with increases of 10%, 4%, 9% and 3%, respectively. Whole dreary report, including stats like "Since 2003, CO2 emissions in China have doubled, and in India they have increased by 60%," is here.

We’re Poisoning the Oceans and It Threatens Our Food - Marine chemist Richard Feely, a senior scientist with the National Oceanic and Atmosphere Administration, has been collecting water samples in the North Pacific for over 30 years. He’s observed a decrease in pH at the upper part of the water column, notably the region where carbon dioxide from automobile exhaust, coal-fired power plants, and other human activities has collected. This surface water is now acidic enough to dissolve the shells of some marine animals such as corals, plankton, and mollusks in laboratory experiments. Feely’s findings are just one sign of a troubling global phenomenon called ocean acidification. We spend a lot of time worrying about carbon dioxide in the atmosphere, as a form of pollution and also as a key greenhouse gas that traps solar heat. But we pay less attention to the effects emissions have in the ocean. There is no debate that rapidly increasing seawater acidity is the result of man-made carbon emissions. “The chemistry of the uptake of carbon dioxide and its changing pH of seawater is very, very clear,” explains Feely.

Do all serious economists favor a carbon tax? - Richard Thaler, Justin Wolfers, and Alex all consider that question on Twitter.  I say no.  While I personally favor such a policy, here are my reservations:

1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness.
2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse.
3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers. 
4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon.
5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors.
6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above).
7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated.  No more NIMBY!  But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere.  Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point.
8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax.
9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.

CGI 2011 – Plenary on Climate Change (AGW) -  President Clinton introduces the panelists,... First up is Mexican President Felipe Calderón Hinojosa, about whom President Clinton is enthusiastic.  Calderon is less vibrant, but presents an impressive array of detail on Mexico’s unilateral reduction in carbon usage, noting that 26% of the energy used in the country now is from renewable sources.  Part of this has been accomplished by the simple things: a concerted consumer campaign toward replacing old refrigerators and light bulbs with modern ones. President Calderon notes that much of the problem in developing countries has originated with cutting down the extant trees.  The Cancun meetings resulted in a new international agreement.  Today, we have a new challenge: continuing the Kyoto Protocol.  “Most important agreement and most important instrument”—saying this in front of President Clinton—needs leadership and mobilization of public opinion. President Clinton notes that the countries that have been putting major effort into climate change have outperformed the United States in jobs, growth, and reducing income inequality.

CGI 2011 – Developing Green Technology -  Van Jones of Rebuild the Dream introduces the two presenters by noting that we are in the “post-Whale oil” strategy for liquid