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

Saturday, September 3, 2011

week ending Sept 3

US Fed balance sheet shrinks in latest week - (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week with reduced holdings of agency mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet was $2.838 trillion in the week ended Aug. 31, compared with $2.843 trillion in the week ended Aug. 24. For balance sheet graphic: The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $884.9 billion versus $892.4 billion the previous week. Meanwhile, the Fed's holdings of Treasuries totaled $1.652 trillion, up from $1.648 trillion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $109.8, which was unchanged from a week earlier. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $7 million a day in the week ended Wednesday, up from a $1 million average daily rate in previous week.

FRB: H.4.1  Factors Affecting Reserve Balances  September 1, 2011

Central bank flight to Federal Reserve safety tops Lehman crisis - A key warning signal of global financial stress has shot above the extreme levels seen at the height of the Lehman crisis in 2008.  Central banks and official bodies have parked record sums of dollars at the US Federal Reserve for safe-keeping, indicating a clear loss of trust in commercial banks.  Data from the St Louis Fed shows that reserve funds from "official foreign accounts" have doubled since the start of the year, with a dramatic surge since the end of July when the eurozone debt crisis spread to Italy and Spain.  "This shows a pervasive loss of confidence in the European banking system," . "Central banks are worried about the security of their deposits so they are placing the money with the Fed."  These dollar accounts are just over $100bn (£62bn) and are small beer compared to the vast sums invested in bonds as foreign reserve holdings. Yet they serve as stress indicator, reflecting the operating decisions of the world's top insiders.

A lost chance to jolt ailing America - Perhaps Ben Bernanke has been reading the Financial Times. Last week Professor Michael Woodford of Columbia University and Mohamed El-Erian of Pimco wrote columns for the paper urging the US Federal Reserve chairman, in his keenly awaited speech at the Jackson Hole conference, not to propose a third phase of asset purchases – so-called quantitative easing. Mr Bernanke did as they advised (in that respect). On Friday, at the annual central bankers’ gathering in Wyoming, he said the Fed would keep its options open but he made no case for QE3. This is a pity. I suspect Mr Bernanke agrees. Revised figures show the sluggish US recovery has been even slower than previously believed, and this calls for fresh monetary stimulus. The trouble is, Mr Bernanke would have to convince dissenting members of the Fed’s policymaking committee. In the face of gathering political resistance, he would also have to explain the policy to the country – difficult under the Fed’s present terms of engagement. Why did the FT’s esteemed sceptics oppose further QE? Prof Woodford put two main objections. He believes that, first, done on a modest scale, QE3 would do little to stimulate demand; and, second, it could do more harm than good by letting the Fed “sidestep calls for greater clarity on its future policy targets”. The answer to the first point is easy: undertake further QE on an immodest scale. The answer to the second is easy, too: last week we got neither QE3 nor further clarification of Fed policy.

Changing target - The Economist - OVER a decade ago a frustrated Ben Bernanke called for Japanese central bankers to show some “Rooseveltian resolve” and to act more boldly as total nominal demand in Japan was “growing too slowly for the patient’s health”. He might have been delivering a stern advance warning to himself in his current job as head of America’s Federal Reserve. Judged by its record on inflation, the usual yardstick, the Fed is performing fairly well. But judged by the criterion Mr Bernanke had used for the Japanese economy in the late 1990s, something has gone badly wrong. America’s nominal gross domestic product—GDP before adjusting for inflation—collapsed during the recession and is now nearly 12% below where it would be if its pre-recession trend had continued. The slump in nominal GDP has had pernicious effects. It has raised both public and private debt burdens, since the ability of households, firms and governments to service their debt depends upon their nominal incomes and revenues. The gap between the performance of inflation and that of nominal GDP is so big that some economists, such as Scott Sumner, are calling for central bankers to switch targets. Rather than directing monetary policy to hit inflation targets central bankers should take aim at nominal GDP (or NGDP).

Fed Watch: Brief Hiatus - I did not have the opportunity to backtrack from my last assessment of Fed policy: All in all, this is pretty weak medicine given the condition of the patient. I would have preferred to see an open-ended commitment to asset purchases - buying up anything not nailed to the floor at a rate of $10 or $15 billion a week until achieving the dual mandate is in clear sight. But policymakers, on average tend to think they have relatively weak ammunition to stimulate growth. Their tools are more effective against deflation. And until the former turns into the latter, expect the Fed to do little more than modifications of the basic zero interest rate / hold balance sheet constant policy combination. As was widely noted, Federal Reserve Chairman Ben Bernanke emphasized the Fed’s “wait-and-see” position, offering only an extended September meeting to consider the available options. Nothing specific to hang our hats on, no clear guidance as to the next move – suggesting the next "move" is likely to be more of the same, especially if financial markets stabilize and growth lifts off the first and second quarter floors. I believe we need to see even weaker growth, coupled with a steeper drop in long-term inflation expectations to prompt additional action. The failure of Bernanke to push for more aggressive action is even more puzzling in the wake of this speech. According to the Fed chair, the situation is becoming urgent:

Bernanke didn’t deliver a Fed miracle - Nervous markets spent the week on tenterhooks waiting for Mr. Bernanke to dispense some pearls of wisdom at the annual gathering of central bankers and leading economists in Jackson Hole, Wyo. They were looking for anything that might dispel the clouds of uncertainty that have grown darker than at any time since the financial meltdown of 2008. A world awash in debt and facing the spectre of another recession was hoping against hope that Ben the Interventionist would show up, rummage through his bag of potions and pull out a confidence-restoring elixir. The Wall Street Journal nicely summed up the situation with a mid-week headline: “Market Bets on Fed Miracle.” It was at this very venue last year that Mr. Bernanke revealed Quantitative Easing The Sequel would be coming in time for the fall stock-buying season. But this time, instead of an all-in bet on QE3, we got something of an admission that the Fed has done about all it can and that it’s up to the politicians to get their fiscal house in order.

Bernanke May Seek Consensus On Easing - Federal Reserve Chairman Ben S. Bernanke’s decision to extend next month’s policy meeting to two days stoked speculation the extra time may allow him to forge a stronger consensus on monetary easing. Bernanke, in a speech yesterday at the Fed’s annual forum in Jackson Hole, Wyoming, said adding a second day to the September gathering would “allow a fuller discussion” of the slowing economy and the central bank’s possible response. He said the Fed still has tools to boost growth, without specifying what they were or whether they would be deployed. “The move to a two-day meeting means he’ll work to build consensus” after confronting the most dissent during his tenure last month, “They will end up with QE3, but probably not in September,” she said, referring to a third round of bond purchases, also known as quantitative easing. “They will edge closer to it in the September statement.”Bernanke said the recovery is likely to improve in the second half of this year, and he sought to reassure investors and the public that U.S. growth is safe in the long run.

Bernanke Speech Was Only a Minor Footnote to Enduring Crisis…If Americans expected some sign of dramatic policy initiatives from Federal Reserve Chairman Ben Bernanke, they were disappointed in Friday's speech. If they expected a serious assessment of the costs of the failed "recovery program" to date as the basis to argue for a change in approach, they were disappointed. If Europeans hoped for a strong signal that the US would coordinate policies with them and provide some tangible supports to their struggles with this same economic crisis, they were disappointed. Instead, Bernanke repeated how confident he was in the basic strengths of the US economy while acknowledging that the recovery so far had been less than he had hoped for and that eventual recovery would continue to be "slow." He chided Congress and the president for not using more expansionary fiscal policy and leaving too much of the burden of overcoming crisis on the Federal Reserve. He reiterated promises of very low interest rates for banks to borrow from the Fed for the next two years. This all amounts to more of the same policies we have been seeing. The Fed has evidently decided not to change course, despite those policies' poor performance since the crisis hit in 2007. "Trickle-down" is indeed the right name for this program: shovel help to the financial top of the economic pyramid and hope it trickles some of its loot down to the mass of businesses and individuals. The immense cash hoards now accumulating in US banks and corporations stand as strong testimony -

Dissecting Why the Fed Does What It Does – Leonhardt - IF you were to conduct a survey of the country’s top economists, you would find a fair number who did not believe that the Federal Reserve should be taking more aggressive steps to help the economy. Some would worry that injecting more money into the economy might unnerve global investors or set off uncontrollable inflation. Others would wonder whether, with interest rates already so low, the Fed even had much power to lift economic growth.  But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists — J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others — than the camp that believes the Fed has done too much.  You would never know this, however, from listening to the public debate among Federal Reserve officials. That debate is much narrower.  On one side are people like Ben S. Bernanke, the Fed chairman, who defend both what the Fed has done and what it hasn’t done. On the other side are the so-called inflation hawks, who say the Fed has been far too aggressive.

The Monetary Policy Debates - This article by David Leonhardt in the New York Times is getting a lot of attention.  Leonhardt argues that there is an active debate in the economics profession between inflation hawks, moderates and doves and that only the position of hawks and moderates are represented on the Fed open market committee (FOMC). He guesses that Perry's equating dovishness with treason (now for monetary policy too) might be part of the problem.  I personally have a strong objection to Leonhardt's article. He lumps together people who think that the Fed should not cause higher inflation with people who think that the Fed can't cause higher inflation.  Note that the group that think that the Fed doesn't have much power to lift economic growth are lost somewhere between the first two paragraphs. Leonhardt goes on to present the debate between DeLong et al on one side and FOMC hawks "Richard W. Fisher of Dallas, Narayana R. Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia." with the moderates such as Bernanke in the mushy middle.

Fizzle at Jackson Hole - So no QE3, at least not on the Fed’s own balance sheet, and not yet, but that was no surprise since expectations had been managed down by the time Bernanke gave his speech.   What Bernanke did not say, maybe could not say, is that the major worry confronting central bankers today is Europe, and contagion from whatever happens there.  He didn’t say it, because he remembers all too well being dragged over the coals in Congress for the $600 billion credit line he opened for foreign central banks after Lehman, when the Fed stepped in as international lender of last resort at a time when global dollar funding markets were frozen.   But the worry is there, even if Bernanke can’t talk about it.  We can talk about it here.

The Fed's have-it-both-ways policy - MY VIEW of Ben Bernanke's Jackson Hole speech is similar to my colleague's. I appreciate that he lectured the government on its heedless fiscal policymaking, but I found the tone on monetary policy to be confusing and timid—though not surprisingly so. As I was catching up on my reading after returning to Washington, however, I was struck by the continued divide in interpretation of the Fed's policy moves. Many writers shared the view that the Fed is behaving timidly, and expressed concern that the Fed was unlikely to do much more. Plenty of others, however, continue to argue that the Fed's promise to leave rates low through 2013 is a very good sign, as is the plan to have a two-day September meeting. Help, they argue, is on the way. I just hope that whatever the Fed opts to do in September is spelt out more clearly than its August decision. And while the frustratingly vague nature of the August statement indicates to me that it's unlikely to have the desired effect (assuming that the desired effect is expansionary; one can't really say), it's part of a broader pattern at the Fed of failing to use the expectations channel effectively.

Worse than I thought...Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said. "The recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed. Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. "With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate." And yet the Fed does nothing. Awesome.

Ben Bernanke’s Dream World, by Brad Delong - First of all, Bernanke did not propose any further easing of monetary policy to support the stalled recovery – or, rather, the non-recovery. Second, he assured his listeners that “we expect a moderate recovery to continue and indeed to strengthen.” This is because “[h]ouseholds also have made some progress in repairing their balance sheets – saving more, borrowing less, and reducing their burdens of interest payments and debt.” Moreover, falling commodity prices will also “help increase household purchasing power.” Finally, Bernanke claimed that “the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.” Frankly, I do not understand how Bernanke can say any of these things right now. If he and the rest of the Federal Open Market Committee thought that the projected growth of nominal spending in the US was on an appropriate recovery path two months ago, they cannot believe that today. Two months of bad economic news, coupled with asset markets’ severe revaluations of the future – which also cause slower future growth, as falling asset prices lead firms to scale back investment – mean that a policy that was appropriate just 60 days ago is much too austere today.

Ben Bernanke Doesn’t Get the Message - He declined to offer any new efforts to reduce unemployment, saying only that the Fed “is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.” And mainly he relied on the political branches to solve the country’s problems, calling not only for “good, proactive housing policies” but also for policies that would improve K–12 education for underprivileged households and lower health care costs. I don’t think it makes sense to criticize the political system for being dysfunctional and then rely on the political system to rescue the economy. I understand that traditional monetary policy tools don’t work that well in this environment: short-term rates can’t go any lower, and lowering long-term rates won’t make companies invest if they don’t think there is demand for their stuff. But there’s always, you know, dropping cash out of helicopters.

Bernanke's call for two-day meeting could signal QE3 - Federal Reserve Chairman Ben S. Bernanke's decision to extend next month's policy meeting to two days stoked speculation the extra time may allow him to forge a stronger consensus on monetary easing. Bernanke, in a speech on Friday at the Fed's annual forum in Jackson Hole, Wyoming, said adding a second day to the September gathering would "allow a fuller discussion" of the slowing economy and the central bank's possible response. He said the Fed still has tools to boost growth, without specifying what they were or whether they would be used. "The move to a two-day meeting means he'll work to build consensus" after confronting the most dissent during his tenure last month, "They will end up with QE3, but probably not in September," she said, referring to a third round of bond purchases, also known as quantitative easing. "They will edge closer to it in the September statement."

Is There Stigma to Discount Window Borrowing? - NYFed - The Federal Reserve employs the discount window (DW) to provide funding to fundamentally solvent but illiquid banks. Historically, however, there has been a low level of DW use by banks, even when they are faced with severe liquidity shortages, raising the possibility of a stigma attached to DW borrowing. If DW stigma exists, it is likely to inhibit the Fed’s ability to act as lender of last resort and prod banks to turn to more expensive sources of financing when they can least afford it. In this post, we provide evidence that during the recent financial crisis banks were willing to pay higher interest rates in order to avoid going to the DW, a pattern of behavior consistent with stigma.   With the onset of the recent financial crisis, the Fed enacted several measures to encourage DW borrowing. It reduced the DW penalty rate (the amount by which the DW borrowing rate exceeds the fed funds target rate) from 100 basis points to 50 basis points on August 17, 2007, and extended the term of DW financing from overnight to as long as thirty days. In addition, the Fed encouraged DW borrowing by issuing statements that it would view DW borrowing as a sign of strength for banks. However, DW borrowing remained sparse, and the average weekly DW primary credit outstanding was negligible in 2007 (see chart below). Perceptions of DW stigma resurfaced.

Fed's Evans favors strong policy accommodation  - Chicago Federal Reserve Bank President Charles Evans said on Tuesday he favored strong central bank accommodation for a substantial period of time, as the U.S. economy looks to be moving "sideways." Evans told CNBC television he favored some of the most aggressive policy actions now being considered to boost the economic recovery and said that the U.S. Federal Reserve needed to clarify its policy intentions to get better results. "It's difficult to characterize the labor market as anything other than consistent with being in a recession," said Evans, adding the economy is "really going sideways more than anything else. "I'm in favor of some of the most aggressive policy actions of anyone on the committee," added Evans, a noted policy dove who votes on the Fed's policy-setting Federal Open Market Committee this year. "Strong accommodation needs to be in place for a substantial period of time." U.S. treasuries touched fresh session highs on Tuesday after Evans' comments. Gold futures extended gains as investors worried about U.S. economic growth and prospects of further stimulus measures by the Fed.

Looking for the "on" switch - WRITERS have been busy dissecting Federal Reserve Chairman Ben Bernanke's Jackson Hole speech, but another central banker's comments shed important light on an under-utilised policy area. In " Risk Off", Andrew Haldane, who is responsible for developing the Bank of England’s policy on financial stability, expressed his concern regarding the decline in investors’ risk appetite, and urged policymakers to address it. That decline has sharpened recently, as investors have been selling down risk assets including shares and junk bonds and frantically piling into "safe haven" assets (like Treasuries, gold, and the Swiss franc). Mr Haldane identifies two factors behind the pendulum swing: balance-sheet disrepair and psychological trauma. Over-leveraged balance sheets remain a drag on growth and confidence, whether it be those of banks, households, companies or governments. Financial strength is improving in the first three sectors as they deleverage, but this has been at the expense of a serious deterioration in public finances. The second cause is psychological, rather than fundamental. In the financial markets, perception is reality. Investors are still shell-shocked from the market declines in 2008 and 2009; historical precedent suggests this will hinder their ability to price risk properly, perhaps for the span of a full generation

Bernanke Outlook Revives Risk Appetite - The dollar slid versus the majority of its most-traded peers as Federal Reserve Chairman Ben S. Bernanke said the economy hasn’t deteriorated enough to need immediate stimulus, fueling appetite for higher-risk assets.  Switzerland’s franc had the biggest weekly drop against the euro since July 1 on speculation policy makers will take new steps to curb its strength. The greenback fell for a second week versus the 17-nation currency as Bernanke said yesterday the Fed still has tools to stimulate the economy, spurring bets it may yet take action and damping the currency’s refuge appeal. Data next week may show U.S. employers added fewer jobs this month.  “Bernanke doesn’t want anyone to think that his finger isn’t on the big red button to do more,”. “September could bring the trigger for whatever more is going to be.”

Pavlov Rang The Bell - Last week we wrote in To QE3 or Not to QE3, “The biggest hope for the markets may be another round of quantitative easing. Bernanke acknowledged that while the housing market is bad, and the current rate of unemployment is unacceptably bad, the economy is not in terrible shape and can grow normally again. However, the U.S. government and European governments are going to need to get actively involved. For as Bernanke put it, “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Taking Congress to task for the game of chicken they played with the debt ceiling, Bernanke declared, “The country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”  “[Bernanke] appears to be saying that the Fed has largely played its part and that the politicians need to step up their game.”

FOMC Minutes: Discussed Options for additional monetary accommodation - From the Fed: Minutes of the Federal Open Market Committee, August 9, 2011. Excerpts:  Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee's forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System's portfolio--perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities--could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions.

Takeaways From Fed Minutes - Minutes from the Federal Reserve‘s August policy-setting meeting offered some insight into the discussion surrounding the central bank’s decision to put a date on its commitment to keeping rates low. Participants discussed the uncertainty in the economic outlook and the options available to combat high unemployment amid slowing growth. Here are some key excerpts from the minutes.

  • Economic Outlook:Participants generally saw the degree of uncertainty surrounding the outlook for economic growth as having risen appreciably.
  • Policy Tools: Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted.
  • [QE3]Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates.
  • [Altering Composition of Balance Sheet] Others suggested that increasing the average maturity of the System’s portfolio–perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities–could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve’s balance sheet and the quantity of reserve balances.

A Few Fed Policy Makers Favored ‘More Substantial’ Move  - A few Federal Reserve policy makers this month favored more aggressive action to stimulate the economy and lower unemployment, minutes of their meeting released today showed. Those members, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the Aug. 9 meeting of the Federal Open Market Committee to hold its key interest rate at a record low until mid-2013.  Consumer confidence fell to the lowest point in 28 months in August, a report earlier today showed, raising the risk households will cut back on the spending that accounts for 70 percent of the world's largest economy.  Fed officials discussed a range of tools, including buying more government bonds, to bolster the economy, without coming to an agreement on what they might do next should the economy weaken further. They will more fully debate their options when they gather next month for a two-day meeting that was originally scheduled to last one day.

What is the Fed waiting for? - In yesterday’s column I discussed some of the arguments for and against additional monetary stimulus. On balance, I’m for it–and I wouldn’t bet against it happening in the next month or two. The August 9th FOMC minutes released today confirm what we already knew: since QE2 ended in June, the Fed has learned that the recovery is slower and more fragile than it previously thought, and that inflationary pressures have eased. There you have it: what else does the Fed need to know before it embarks on QE3? The promise that interest rates will stay low for two years–at least, that is how the Fed’s earlier statement was widely reported–is a weak holding action at best, once you realize that this “promise” is actually no such thing. As the original post-FOMC statement said:The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.That is not a promise to keep rates low regardless ,it is a tentative prediction that the recovery will be slow, and if it is then rates will need to stay low.

Minutes, Remarks Tell Tale of Divided Fed - When Federal Reserve Chairman Ben Bernanke announced last Friday he was lengthening September’s monetary policy meeting, he said it was to give officials greater time to discuss their options for aiding what most agree is a pretty weak economy. On Tuesday, the comments of two voting members of the interest rate-setting Federal Open Market Committee, as well as the meeting minutes from the August policy meeting, showed just how widely dispersed policymaker views are. Collectively, the day’s developments highlight how challenging it will be for Bernanke to navigate a path forward. The officials who spoke were Chicago Fed president Charles Evans, in a CNBC interview, and Minneapolis Fed leader Narayana Kocherlakota, a member of the trio who had dissented earlier this month, opposing the Fed’s commitment to keep rates very low for the next two years. The two men are at opposite sides of the debate.

Incoherence at the FOMC - Krugman -  There have already been a number of commentaries on the newly released minutes of the Federal Open Market Committee (the people who decide interest rate policy). The most interesting thing, I think, is the description of the arguments raised by the no votes, the people who opposed even the mild easing implied by the Fed’s sorta-kinda-not-really commitment to keep rates low until mid-2013. Fisher thinks that the problem is “uncertainty” caused by our Muslim socialist president “fiscal and regulatory initiatives”. This happens to be just wrong, as shown by lots of evidence; businesses aren’t expanding because of lack of demand, not because they fear Obamacare. Kocherlakota basically says that the Fed has already done enough, because unemployment is down since the Fed’s last policy change, while inflation is up. But the Fed’s policy was supposed to put unemployment on a steadily declining trend, which hasn’t happened, while inflation was clearly a temporary bulge from commodity prices, now fading out. Plosser thinks things are better than they seem, or something. The point is that all three dissents sound like people who have decided that they’re against easy money, and are looking for reasons to justify that decision.

Optimism in the minutes - THE Federal Reserve released the minutes of its August meeting today, and they make for very interesting reading. Members of the Federal Open Market Committee have developed a much more pessimistic view of the American economy; that much was already clear from the most recent Fed statement. And there is disagreement within the Fed on what ought to be done; that much was also clear. What is interesting about the minutes is that it seems to show that most of the disagreement within the FOMC concerns how to act rather than whether to act. Obviously, there were three dissenters to the last statement. There is little hint of broad sympathy for their position in these minutes, however. Rather, there is a sense that more discussion of the next policy step is needed. Hence the FOMC opted for a mild easing step now and a longer September meeting to hash things out.

QE3 is Imminent According to Fed Minutes - The dollar resumed its slide against all of the major currencies following the release of the August FOMC minutes. The pessimistic tone of the minutes made it clear that policymakers are warming to the idea of more QE. The Fed had actually decided to extend the September meeting from 1 day to 2 days when they last met but Bernanke chose to share that information at Jackson Hole - talk about managing expectations! Considering that a few members sought stronger action and central bank officials openly discussed different ways to stimulate the economy, most Fed officials want more stimulus, but just need more time to weigh the cost and benefits of each policy tool. In particular, options discussed include additional asset purchases, maturity shift and reducing the rate on reserves. At this point, it is not a matter of if, but a matter of when QE3 will be announced. If non-farm payrolls rise by less than 75k on Friday, the Fed cannot afford to wait any longer and will most certainly take additional steps to stimulate the economy in September. In fact, a few Fed officials were ready to press the go button on a more substantial move this month.

Some Fed officials sought more economic stimulus - Some Federal Reserve officials pushed in August for a more aggressive response to the economy's slowdown. They settled for a plan to keep rates near zero for another two years and won agreement to discuss more options at an extended meeting in September. Minutes of the Aug. 9 policy meeting released Tuesday show that Fed officials discussed a range of actions, including another round of Treasury bond purchases. Some Fed officials said a weaker economy called for such a step. Fed officials in the end said they planned to keep rates low until at least mid-2013, assuming the economy remained weak. They also added a second day to their September meeting. That raised speculation that the Fed would announce some further action after that meeting.

Fed’s Bullard sees no need for easing. — Economic conditions are not at the point now where the Federal Reserve should ease monetary policy further, James Bullard, the president of the St. Louis Fed, told MarketWatch in an interview. on Saturday.  Bullard said he was not convinced that the economy would suffer in coming quarters, as many leading economists are predicting.  “I think there are good reasons to be optimistic even though when you look around these days there is a lot of gloom and doom,” Bullard said.  Bullard said the U.S. manufacturing sector might benefit from a restoration of business activity in Japan in the wake of the March earthquake and tsunami.
“The contacts I have in Japan say that [the recovery] is ahead of schedule and that should be helpful,” Bullard said.  Another potential positive is that oil prices are lower, he said.

Fed’s Evans backs more easing - The Federal Reserve should take further easing steps because the economy is “moving sideways” and the labor market is in a recession-like state, said Charles Evans, the president of the Chicago Fed, on Tuesday.  “I think we need to do more,” Evans said in an interview with CNBC.  Evans is the first Fed official who publicly has supported additional easing. Evans is a voting member of the FOMC this year.  Fed Chairman Ben Bernanke said last week that the Federal Open Market Committee would meet for two days next month to decide whether the economy needs more stimulus.  St. Louis Fed president James Bullard told MarketWatch in an interview on Saturday at the Fed’s annual meeting in Jackson Hole, Wyoming, that he would need more definitive signs of weakness and also some deceleration of inflation before he would support more easing.

Fed’s Kocherlakota Suggests Dissent Won’t Be Repeated - One member of the troika who opposed the Federal Reserve‘s recent decision to keep rates at rock bottom levels for two years suggested he won’t be repeating his disagreement at coming central bank gatherings. In a speech, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday “I see no reason to revisit the decisions” made last month, and added “I plan to abide by the August 2011 commitment in thinking about my own future decision.” The reason? With the Fed having made its pledge, “I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future.” ... That said, the official spent a considerable amount of his speech — his comments came from remarks prepared for delivery before the National Association of State Treasurers in Bismarck, N.D. — explaining why he did not think the Fed made the right decision on its forward interest rate commitment. He indicated there was even a case to be made for going the other way on policy and tightening it

Fed official makes plea for more stimulus- A leading Fed policymaker made an aggressive call for more monetary stimulus on Tuesday as it emerged that staff of the US central bank have permanently cut their growth forecasts. In an interview with CNBC, Charles Evans of the Chicago Fed said that he would “favour more accommodation” and became the first policymaker on the rate-setting Federal Open Market Committee to explicitly countenance letting inflation rise above the Fed’s target of 2 per cent in the short-term. “If 1 per cent was not a catastrophe, 3 per cent is not a catastrophe,” said Mr Evans. Ben Bernanke, Fed chairman, has resisted calls for temporarily higher inflation. While Mr Evans is one of the most dovish members of the FOMC, his comments show the division between hawks and doves at the central bank. Minutes of the FOMC’s August meeting – which forecast that interest rates will stay exceptionally low until mid-2013 – showed the Fed’s staff had cut growth forecasts for the rest of 2011 and 2012 “notably”. More importantly, recent revisions to past growth data “led the staff to lower its estimate of potential [gross domestic product] growth, both during recent years and over the forecast period”. Mr Evans argued that the mid-2013 commitment did not go far enough. “I favour being much clearer and [more] specific about the economic markers that it would take in order for us to alter that,” he said.

No excuse for inaction – BoE’s Adam Posen -  It is past time for monetary policy to be doing more to support recovery. The Jackson Hole conference has come and gone, and no shortage of excuses was provided for central banks to hold their fire — even though most economists acknowledged the grim outlook for the advanced economies. ... It is also past time to stop fearing inflationary ghosts. There is no credible threat of sustained higher inflation in the advanced economies that should restrain central bank action. ...The evidence is clear that the Bank of England’s and the Federal Reserve’s asset purchases had a positive significant effect on consumption, on the relative prices of riskier assets, on credit availability, and on liquidity in the financial system. If the improvement was insufficient, because the response to a given injection was less than some hoped, increase the dose.There are no negative side-effects to speak of from greater asset purchases, beyond some politically induced nausea (which central bankers simply have to suffer through).

Market expects Operation Twist in September (Reuters) - Bond investors see Federal Reserve action to boost the flagging U.S. economy as practically a done deal after Friday's dismal jobs report. Government data showing the economy failed to create new jobs last month heightened speculation the Fed will launch a program this month to pump money into the economy by pushing down long-term borrowing rates. The move, known to some in financial markets as Operation Twist, would probably involve the Fed selling shorter-dated Treasuries it holds its balance sheet and buying longer-dated bonds. The Treasury market appeared to price in greater chances of this after the jobs report, with 30-year long bonds surging 3 points in price. "Following today's worse-than-expected jobs report, we now look for the Federal Open Market Committee to announce a lengthening of the average maturity of the Fed's balance sheet at the September 20-21 meeting," Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, wrote in a note to clients. Goldman's call echoed in the Treasury market on Friday, with a flattening of the yield curve as traders increased positions in longer-dated bonds at the expense of shorter maturities.

Monetary policy with excess capacity - Here is some simple evidence of excess capacity and its relevance for unemployment.  I’ll give it more debate another time, and don’t too rapidly infer causal linkage from that graph behind the link, but at the very least it is not a crazy hypothesis.  Now that the gdp numbers have been revised downwards, and we see the U.S. economy has not reattained pre-crash output levels, the hypothesis that excess capacity is driving some of current unemployment is more plausible. In one standard model, excess capacity renders nominal wage flexibility moot.  Workers could lower their reservation wages without it helping much.  Firms don’t want to produce any more, or they could produce more by working their current capital assets more heavily, rather than by hiring another worker. Now let’s say there is a burst of inflation.  It might lower the real reservation wages of the unemployed, but employers still don’t bite, at least not until the excess capacity is worked off.  That can take a long time, especially if aggregate demand is low and the rate of innovation is sluggish.

Long-Term Unemployment Casts Doubt on Fed’s Ability to Help -  A jolt of monetary stimulus from the Federal Reserve may not be able to fix the nation’s unemployment problems. The U.S. is facing an unprecedented long-term unemployment problem that could lead to elevated joblessness for a while. That means the gap between where unemployment stands now, at 9.1%, and full employment may not be as wide as it appears. But it also means more expansive monetary policy won’t be as effective in curing what ails the labor market, Andreas Hornstein, Thomas A. Lubik and Jessie Romero argue in a new paper from the Federal Reserve Bank of Richmond. “After a long period of unemployment, affected workers may become effectively unemployable,” the paper states. “If a large portion of long-term unemployed workers now finds it difficult to transition to employment, this suggests that the natural rate of unemployment may have increased.”Nearly 6.2 million Americans, or 40.4% of all those unemployed, were jobless for more than six months in July. The longer they’re out of work, the more difficult it is for them to reenter the labor market.

A Sharp Expectation Shock is Needed - Via the FT's Alphaville we learn that Goldman Sachs is discussing some "radical" options the Fed could use if economic conditions deteriorate further. One of the options discussed is a nominal GDP level target. It would be a radical change from way the Fed currently operates, but such a shock is exactly what the public now needs.  For the past few years the economic outlook of households and firms has been dismal and consequently they have had been accumulating a large stock of money assets.  If the Fed were to announce a nominal GDP level target it would provide a big expectation shock that would reverse much of this buildup.   One of the ways this shock would play out is through the many more observers who would be wailing about the reckless course of monetary policy, the horrors of debasing the dollar, the end of Western Civilization, and other hard money concerns.  Similar concerns were raised when FDR effectively did the same thing in 1933 with his own QE and price level target program.  These concerns about FDR's program provided a much needed shock to nominal spending and inflation expectations.  As a result, there was robust recovery from 1933 to 1936.   A nominal GDP level target would provide the same kind of shock today if it were properly signaled and followed through by the Fed.

Witan: why printing even more money can save the world (video)The US Federal Reserve and other central banks are likely to take more measures such as massive bond purchases to bolster the global recovery, according to Andrew Bell, chief executive of Witan investment trust. Speaking in a video interview with Citywire, Bell says steps such as a third instalment of quantitative easing – essentially printing money to boost asset prices – by the Fed and other ‘enabling mechanisms’ would be aimed at ensuring liquidity already injected into the US economy had a greater effect. His comments come as global stock markets climbed on Wednesday, amid hopes that Fed policymakers would take this course of action at their next meeting in September. Bell explains how officials could prevent more monetary stimulus from stoking speculation in commodities markets, and why it was probably more necessary now than a year ago.

The bounds of monetary policy on planet earth - The Fed has signaled they may pay interest on reserves at the overnight interest rate indefinitely under a so-called “floor” regime. I wish more economists would update their models for a world in which interest is paid on reserves as a matter of course. Interest on reserves represents a permanent policy shift that had been planned since 2006. It was not an ad hoc crisis response that can be expected to disappear. If interest is paid on reserves at the overnight rate and short-term bond markets are liquid, then short-term bonds and base money are perfect substitutes and a helicopter drop performed by the Tim Geithner dropping bonds from an F-16 would be as effective (or ineffective) as Ben Bernanke dropping dollar bills from his flying lawnmower. But there is one big difference. Timothy Geithner is legally allowed to give away money for nothing. He does it all the time! He writes checks to Social Security recipients, gives money to welfare recipients and oil companies and big pharma. He even writes checks to me when I’ve paid too much in taxes! Ben Bernanke, on the other hand, would go to jail for stuff like that. Sure, he has the printing press. “Operationally”, as the MMT-ers like to put it, he is entirely unconstrained. His checks never bounce. Why can’t he devalue the dollar, or use the threat thereof to upgrade inflation expectations? The economic law of supply an demand has not been repealed, but neither has US law. By law, the Federal Reserve can only engage in financial asset swaps. It shoves money out the door in exchange for some financial asset that colorably has the same value as the money it has dished.

Recommendations for economic policy - As far as monetary policy is concerned, the most fundamental ingredient is what the public expects to happen in the future-- managing those expectations is the basic tool that the Fed could rely on in this situation. Given the way the Fed's opponents have been reacting, I see no way the Fed could effectively approach this other than what I lay out above-- namely, the Fed will have to wait for more convincing evidence of deflation or financial freeze-up before acting. But if you'll let me wave a magic wand to dispense with that complication, the answer is easy-- the Fed should credibly announce a 2.5% inflation target over the next 5 years. As for fiscal policy, I'd give a similar answer. I see a dysfunctional political process and serious long-run debt management issues. I worry that the current actions of both the Fed and any fiscal stimulus could interact negatively with that for simple issues such as the logistics of weekly Treasury auctions and containing fears that are currently bouncing around Europe like a ping-pong ball. Again, if you give me a magic wand to dispense with all this, what I'd call for is a clear political consensus as to when and how the long-run debt problem is going to be controlled, and given that, I would favor a carefully targeted and explicitly temporary fiscal stimulus.

Fed’s Lockhart Comfortable With Current Policy Stance - To jumpstart job growth in the U.S., you need to focus on small businesses. That’s a bit of advice for the White House as President Barack Obama readies his jobs plan to be unveiled after Labor Day. Some ideas include extension of the payroll tax holiday, a new tax credit for businesses that hire, and infrastructure spending focused on public school buildings. The unknown is how much of these initiatives will funnel down to small and medium businesses. Unless smaller firms benefit, the jobs bill won’t created many new jobs. That’s because firms employing less than 500 workers remain the main engines of job growth. Since January 2010, small and medium firms have generated 98% of the nearly 2 million private-sector jobs created, according to data reported Wednesday by payroll processor Automatic Data Processing Inc. But overall, job growth in this upturn has lagged other recoveries. Why hasn’t hiring been stronger? According to recent surveys, small businesses, those unlikely to benefit from exporting to emerging markets, are suffering from a lack of demand. And that’s why Obama’s jobs plan may fall flat.

Deleveraging in Today's U.S. Economy - Dennis Lockhart - FRB Atlanta - While acknowledging that downside risks to the recovery have increased, Lockhart expects a modest cyclical recovery to proceed. In his view, a number of necessary structural adjustments are holding back economic growth in this recovery. One of the major adjustments is deleveraging.   In Lockhart's opinion, it is necessary that the process of deleveraging plays itself out, which may take several more years. While the private sector has made progress in lowering its debt burden over the past two and a half years, government debt has surged. So for the economy as a whole, debt relative to GDP has barely changed over the period.   Lockhart believes that policy must continue to help the economy achieve a healthy enough cyclical recovery, while at the same time recognizing the long-term need for directionally opposite structural adjustment, including deleveraging. The test policymakers must step up to is balancing short- and longer-term needs.  Lockhart is comfortable with the current stance of monetary policy. However, given the recent weak data and considering the rising concern about chronic slow growth or worse, he does not think any policy option can be ruled out at the moment. But in his view it is important that monetary policy not be seen as a panacea.

Calling on the Fed - What I would give to be a fly on in the wall at the Federal Reserve right now, where Ben S. Bernanke is probably doing a double take on Friday’s horrible jobs report. The Fed’s recently released minutes from its August meeting showed huge disagreements over whether more monetary stimulus — and what form of monetary stimulus — was necessary. Many of the members of the Federal Open Market Committee, which sets interest rates, said they wanted to do something to help the economy, like further expanding or rejiggering the Fed’s balance sheet or decreasing the interest rate paid for banks’ excess reserves. And some wanted to do nothing. Publicly Mr. Bernanke, the Fed chairman, has argued that government policy can and should play a significant role in helping the economy grow, but emphasized that Congress should be the ones to lead the way. Congress, however, is trying to tighten fiscal policy, which is the exact opposite of stimulus, and seems fairly entrenched in this view. It will be interesting to see how this dismal jobs report, which didn’t even meet economists’ already very low expectations, affects the committee meeting. The Fed may not have much ammunition left, but perhaps this latest news will convince it to fire what bullets it has.

Lots of Vitriol for Fed Chief, Despite Facts - Attacks on the chairman of the Federal Reserve aren’t new. For years I’ve dismissed them as missives from the lunatic fringe, at least until recently.  On Aug. 16, while speaking in Iowa, Gov. Rick Perry of Texas, a Republican presidential candidate, took the demonization of Mr. Bernanke to a new level. He declared in much-quoted remarks2 — and to appreciative laughter from the crowd — that “we would treat him pretty ugly down in Texas,” and that Mr. Bernanke’s monetary policy was “almost treacherous — or treasonous, in my opinion.”  Despite getting in “trouble” for calling Mr. Bernanke a traitor, as Mr. Perry subsequently put it, Mr. Perry vaulted to the top of polls and is now the unofficial Republican front-runner. Nor are such sentiments confined to Republican presidential candidates looking for quick political gain. Last week, I bumped into an acquaintance I’ve always considered thoughtful and intelligent. He, too, lit into Mr. Bernanke and the Fed with great fervor. No one in government, including the quasi-independent Federal Reserve chairman, should be above criticism. But if Mr. Bernanke is going to be the centerpiece of such a heated debate, it should be conducted on the facts. And in that respect, “The level of ignorance among some of the Republican presidential candidates about monetary policy is stunning,”

The Fed's Mandate (Explanation for Sen. DeMint) - Sen. Jim DeMint is describing the Fed's emergency lending during the financial crisis as a "shadow TARP."  In an opinion column for Politico, he writes: The U.S. government was never meant to be a giant lender for the world’s most powerful banks. Actually, that is exactly what the Fed was originally meant to do.  The preamble to the Federal Reserve Act is: An Act To provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. "Furnish an elastic currency" is another way of saying that the Fed should be a "lender of last resort" - lend money to banks whose funding sources can suddenly disappear in financial crises in order to prevent the system from collapsing.  The Fed was founded because the frequent financial "panics" of the late 19th and early 20th century made clear that the US needed a central bank to perform this function.

Texas Again: Which Rick Does More Harm? - That Rick Perry is a clueless candidate and skilled campaigner is something for Barack Obama's minions to suffer.* That Perry's curiosity goes no further than "Where's My Next Corndog?" cannot be held against him.  So we need to pay attention to who tells him things. And that appears to be people such as Richard Fisher, who recently went to W's "home town" and bragged about the local economy. He starts by making any sane human being worry:  I, along with the 11 other Federal Reserve Bank presidents, operate the business of the Federal Reserve as efficiently as any bank in the private sector.  I'm certain that is true. Then he spreads the Usual Lie:  [W]e make money for the U.S. taxpayer:  You are looking at one of the few public servants that make money from its operations, rather than just spending taxpayer money. English translation: We took money from the Treasury, and our Accounting looks nice because we don't count the overpaying for "assets" or the free money on "excess reserves" as part of our losses. Oh, and by the way, we don't "just spend taxpayer money," like those evil people who run police departments, fire departments, and schools; or make roads, or ensure food and water safety; or do fundamental scientific research, to name a few, do.

Thomas Hoenig and the Ever-Expanding Universe of Excuses for High Interest Rates -  In an interview with Gretchen Morgenson, departing Fed district president Thomas Hoenig offers this bizarre justification for his votes against near-zero interest rates since the 2007 collapse: We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production. Global imbalances made me do it!  Think for a moment, however, and the argument makes no sense at all. Low interest rates encourage borrowing of all kinds, for production as well as consumption.  All the current export-oriented economies—Germany, China, and before them Japan and Korea—achieved their miracles in low interest rate environments.  The thing is, they had cultures, institutions and policies that steered credit toward producers and away from consumers.  In recent decades the US has had none of the above, and a loss of export capacity and competitiveness has been the result, even though the corporate sector is awash with liquidity.

Is this a liquidity trap? - That's not a picture of the Canadian economy. But it is, I think, a good picture of the US economy right now. And maybe Japan, and maybe parts of Europe too.  Let me try to explain it.

  1. The economy is currently at the "we are here" point. The rate of interest (on safe short assets) is currently 0%. (I couldn't draw it exactly at 0% without messing up the picture, but ignore that). Real income is currently less than Y*, which you can think of as "full-employment income", "potential output", "NAIRU output", the "natural level of income", or "that level of income consistent with the economy being on its Long Run Aggregate Supply curve or Long Run Phillips Curve".
  2. But the actual rate of interest (0%) is less than the "natural rate of interest" r*. That's what's different about my picture. In normal pictures of a liquidity trap, the IS curve is drawn sloping down, so the interest rate r* at which the IS curve cuts the "full-employment income" line is less than the actual rate if the economy is at less than full-employment income. The normal picture of a Zero Lower Bound liquidity trap has a negative natural rate. Mine has a positive natural rate.

The I-word - “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man,” said Ronald Reagan in 1978, as nervous citizens imagined the day when they’d have to push a wheelbarrow full of cash to the grocery store in order to buy a loaf of bread. That particular nightmare never came to pass, thanks to drastic measures taken by the Federal Reserve. You might say that Kenneth Rogoff has been one of the guards. As a research economist at the Federal Reserve during the first half of the 1980s, he helped ensure that the word “inflation” would never again flash across American TV screens. His reputation as a conservative-minded inflation hawk followed him from the Fed to the International Monetary Fund to his current position in the economics department at Harvard. But then came the financial crisis of 2008, and the ensuing slump. And as the economy has continued to stagnate, Rogoff, 58, has become the flag-bearer for an unlikely position: that as we struggle to help the economy find its way out of the darkness, inflation could be the answer. It’s time, Rogoff says, to put Reagan’s “hit man” to work for the good guys.

Inflation Hawks Lose Their Shirts -The Financial Times has a fascinating story about how Bill Gross and John Paulson, both the managers of large financial firms (Pimco and Paulson & Co. respectively) expected the United States to enter a period of inflation, planned accordingly, and got their bets completely wrong. Paulson and Gross both made an error in judgement: they assumed that the Federal Reserve’s policy of quantitative easing would engineer inflation. The FT reports on how this has affected their firms’ standing: Mr Paulson’s flagship Advantage Plus fund was down 39 per cent for the year by mid-August, according to investors. Mr Gross, trailing his benchmark, slipped to 501st among his 584 bond manager peers, his status as a bond guru under threat.In Paulson’s case, he not only got this judgement wrong, he got it wrong on the advice and consultation of former Federal Reserve Chairman Alan Greenspan:

Bubble Risk Is A Two-Way Street - Market bubbles are dangerous when they burst, but they're no picnic for investors who make ill-timed bets that the party's over. Just ask Pimco's Bill Gross, manager of the Total Return Fund, the planet's biggest bond fund. In February, he sold all the Treasuries in the fund and compounded the bet with derivatives. He now admits that it was a "mistake," via The Wall Street Journal. It's easy to see why. Treasury prices have soared since February, which means that yields have dropped sharply. The yield on the benchmark 10-year Treasury Note, for instance, settled at 2.28% yesterday, down from as high as 3.75% at one point in February. As short-term rallies in Treasuries go, that's about as potent as it gets. Thanks to ongoing economic challenges this year, the popularity of safe-haven Treasuries has soared… again.

The Debt Non-Explosion - Krugman - A conversation I had earlier today suggested that it might be worth pointing out a fact that isn’t as widely known as it should be: namely, that there has not been an explosion in debt over the past few years. There has been a big rise in federal debt, but this has gone along with a collapse in private borrowing, so that overall debt growth has been lower than it was in the pre-crisis years: Bear this in mind when someone starts ranting about hyperinflation just around the corner thanks to explosive debt growth.

Central Bankers Urge Governments to Keep Global Economic Expansion Intact - Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going. Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund. “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists,

Analysis: Economic leaders fear policy paralysis (Reuters) - The heads of the U.S. Federal Reserve, IMF and OECD stepped up pressure on political leaders on both sides of the Atlantic to shake off their inertia and tackle urgent economic problems. If politicians ignore their pleas -- including a blunt call from International Monetary Fund chief Christine Lagarde to "act now" -- the slowdown in world growth and debt turmoil in Europe could morph into a deeper crisis, top monetary officials and economists warned at an annual retreat here. "I hope they listen," said Bank of Israel Governor Stanley Fischer. Alarm over political deadlock was as obvious a backdrop to the annual meeting of policymakers in the wilds of Wyoming as the thunderstorms that rolled over the nearby Grand Teton peaks and dumped rain on the Jackson Lake Lodge. "The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States," 

Already Weak, US GDP Growth in Q2 2011 is Revised Downward - U.S. GDP growth for the second quarter of 2011 was revised downward to a 1 percent annual rate from the 1.3 percent advance estimate reported last month. The downward revision disappointed many observers. About 2.5 percent growth is generally considered necessary to keep unemployment from rising, when growth of the labor force is taken into account. Although a recovery has been underway for two years, the level of U.S. real GDP has not yet reached its peak level of mid-2007, before the recession. When GDP finally reaches its previous peak, the economy will have been considered to make the transition from the recovery phase of the business cycle to the expansion phase. About three-quarters of the growth of GDP was attributable to investment, mostly business fixed investment. Housing investment remained weak. Consumption grew by about 0.3 percentage points. The government sector contracted, with slight growth of federal government activity more than offset by falling state and local government purchases. Net exports barely edged up, with moderately strong export growth almost fully offset by growth of imports.

Will the "Real" GDP Please Stand Up? - How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index. Now that we have the second update on Q2 GDP, I've updated my charts showing quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The forth chart, a recent addition prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at

Was it housing what did it? - KARL SMITH has been doing some interesting blogging on the nature of the recession and recovery as seen through charts of the composition of economic activity. Do click through and have a look. He makes an interesting point about the contribution of housing to GDP; importantly, its decline began in 2006, over a year before the recession officially began and two years before the recession entered its severest phase. Employment figures tell the same story. Residential construction employment peaked in April of 2006; the economy lost nearly 250,000 construction jobs between then and September of 2008. Total nonfarm employment, however, kept right on growing until January of 2008. Total employment in September of 2008 was 433,000 jobs higher than in April of 2006, despite the bloodbath in residential building. Growth slowed with the collapse of the housing bubble, but it didn't collapse until two years later; beginning in September of 2008, all sectors of the economy faced a sudden, sharp contraction. What does this tell us about the contribution of the housing bust to the recession? Mr Smith muses that it points to the importance of asset prices in the business cycle. This resonates the with Dean Baker view of the downturn, in which massive losses of housing wealth destroyed the economy.

AF447 economics - For Ed everything is always about demographics. For Kevin Drum and others everything is always about energy. Other people have decided that productivity is so high that unemployment is inevitable, or that all consumption is now welfare reducing. Still others that the Chinese are our rightful masters – submit! although poor old Europe runs a trade surplus. And of course these aren’t the only discoveries.  Other people still will tell you that millions of Americans who were gainfully employed up to 2008-2009 are suddenly of literally zero productivity – well, they surely are as long as they’re on the dole, but that’s not what they mean – or just that everyone went mysteriously lazy in a sort of spontaneous mass conversion event. Or that the United States has a serious deficiency of fast trains, which only became apparent all at once in 2008. It has been an era of enormous creativity in the analytical function of economics, which has been more than matched by the united consensus among practitioners in its policy-advising function. Behold the power of Leszek Kolakowski’s Principle of the Infinite Cornucopia. This holds that there is an infinite cornucopia of arguments in favour of whatever course of action or inaction you happen to have decided on for whatever reason

IMF Trims Growth Outlook For U.S, Eurozone: Report - The International Monetary Fund has lowered the growth forecast for the U.S. and Eurozone and urged the Federal Reserve and the European Central Bank to be prepared to ease monetary policy, reports quoted Italy's ANSA news agency as saying on Monday. According to a draft report of the IMF's World Economic Outlook, received by ANSA, the fund lowered its forecast for U.S. gross domestic product this year to 1.6 percent from a 2.5 percent estimated in June. The 2012 outlook was cut to 2 percent from 2.7 percent. The draft report, to be released in September, also forecasts Eurozone economy to grow 1.9 percent this year, slower than the 2 percent expansion predicted in June. The Eurozone growth outlook for 2012 was trimmed to1.4 percent from 1.7 percent.

IMF Cuts US Growth Forecast, Warns of Crisis - The International Monetary Fund cut its forecast for U.S. economic growth Friday and warned Washington and debt-ridden European countries that they are "playing with fire" unless they take immediate steps to reduce their budget deficits. The IMF, in its regular assessment of global economic prospects, said that bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.  The global lender forecast that U.S. gross domestic product would grow an anemic 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent and 2.9 percent growth, respectively.  The outlook elsewhere was mixed. The IMF said it was slightly more optimistic about the euro area's growth prospects this year, but a lack of political leadership in dealing with that crisis and the budget showdown in the United States could create major financial volatility in coming months

What Does Canada’s Shrinking GDP Say About U.S.? - Grim news just arrived from north of the border that is telling us something gloomy about our economic health. New data show Canada’s economy unexpectedly went into reverse gear in the second quarter of the year, declining 0.1%. That’s an annualized drop of 0.4%, down from growth of 3.6% in the first quarter. It matters because Canada is our principal trading partner. Some politicians hoped that international trade would help the U.S. gets its economic mojo back. But when we look inside the Canadian data that’s just where the weakness is. The big driver in Canada’s weakness was a huge drop in exports, down 2.1%. At least part of the drop can be explained by a fall in energy sales due to wildfires; and lack of components caused by the earthquake in Japan. What it also points to is a slowing U.S. economy.

The Yield Curve Can’t Invert With Fed Manipulation -  I have heard otherwise intelligent people say that the economy can’t go into a recession because the slope of the Treasury yield curve is too positive. With the Fed trying to manipulate the yield curve for its own policy purposes, starving savers of income, the yield curve is not a useful measure.  To invert the Treasury yield curve when the Fed is holding short rates at zero, we would have to see the Fed engage in Quantitative Easing to the degree that Treasury Notes and Bonds can be issued at significant negative interest rates. To argue that we can’t have a recession at present because of the Treasury yield curve essentially says that if the Fed holds short rates at zero, we can’t have a recession. I’m sorry, but with an overindebted economy, we can have a structural, not cyclical recession, where the shape of the yield curve doesn’t matter much because of all the debt.  When large portions of the economy have no inclination to borrow, monetary policy, even unorthodox and evil monetary policy has little effect on the real economy, where ordinary people borrow money.

Current economic conditions - The economic data arriving during the last week have been deeply discouraging, though are slightly less grim than some may have been concluding. Let's start with the last week's GDP numbers. The initial "advance" estimate announced July 29 suggested that U.S. real GDP grew in the second quarter at an anemic 1.3% annual rate. As if that wasn't bad enough, the revised figures announced by the BEA last Friday put the growth rate at only 1.0%. However, as noted by Calculated Risk, Economist's View, and Justin Wolfers, there was some consolation in that last Friday's numbers also provided the first read on a separate calculation of GDP that comes from data on income people are earning as opposed to data on goods and services that are being produced. Another disappointment came from the ISM manufacturing survey. Yesterday ISM reported the value of its manufacturing index had slipped down to 50.6 for August, meaning that facilities that reported improving conditions last month just barely outnumbered those whose situation had worsened. That describes a manufacturing sector that is probably still growing, but very weakly. In other words, it's pretty much the same bleak picture as given by the GDP numbers.

Why the U.S. is very close to a recession (if not in one already) A set of economic and financial market conditions indicate that the U.S. economy is either in a recession, or very likely to enter one within months.  As mentioned in the previous post, Hussman’s set of warning signs is currently at a level of 3 (4 being the highest risk, 0 being the lowest). When the index switches from a value of less than 4 to 4, it indicates that we are in a recession or that we will shortly be in one. Given current conditions in the stock market, treasuries market, and corporate debt market, it is extremely likely that the index will reach a level of 4 on September 1, and if not, on September 2.  The consensus forecast for the PMI index is 48.5, which is below 50 and would put the "Hussman index" at 4. The PMI in July was 50.9, and has been falling since February 2011. Regardless, the PMI index will be below 54 almost certainly, in which case employment conditions kick in in the index. One-year growth of payroll has been below the critical value of 1.3% since 2007. For that number to be above 1.3% as of August 2011, the change in payroll from July to August would have to be 431k. Not gonna happen. In fact, consider this: the payrolls number to be released on Sep. 2 takes as reference period “the pay period ending on the 12th day of the month.” The Philly, Empire State, Richmond, and the rest of manufacturing surveys are coherent with my suspicion. In other words, there is a 99.99% chance that the index will reach the scary value of 4 by September 2.

US In Recession Right Here, Right Now – Mish - I am amused by those who think a US recession will come within a year. Even more amusing are those who think a recession will not come at all.   The US is in a recession now. I am not the only one who thinks so.  Last Friday, I received an email from Rick Davis at Consumer Metrics, complete with an Excel spreadsheet that shows that had the GDP deflator been based on the consumer price index (CPI) rather than the BEA's measure of price inflation, the US would already be in the second quarter of contraction.  My friend Tim Wallace noted Davis' explanation would be consistent with Petroleum Distillates Demand Shows "Definite Economic Downturn Starting April/May 2011".  Thus Wallace was not surprised at all.  In the meantime, I received a set of emails from Doug Short. He had already charted what I was about to graph. Let's take a look

Recession Measures - By request, here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments. The following graphs are all constructed as a percent of the peak in each indicator. If the indicator is at a new peak, the value is 100%. These graphs show that most major indicators are still way below the pre-recession peaks. This graph is for real GDP through Q2 2011 and shows real GDP is still 0.5% below the previous pre-recession peak. However Gross Domestic Income (red) is now back to the pre-recession peak. (For a discussion of GDI, see here). At the worst point, real GDP was off 5.1% from the 2007 peak. Real GDI was off 5.7% at the trough. And real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak through July. With the revisions, this measure was off almost 11% at the trough - a significant downward revision! Real personal income less transfer payments is still 4.8% below the previous peak. This graph is for industrial production through July. Industrial production had been one of the stronger performing sectors because of inventory restocking and some growth in exports. However industrial production is still 6.5% below the pre-recession peak, and it will probably be some time before industrial production returns to pre-recession levels. The final graph is for employment. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions.

How The Economy Quietly Entered A Recession On Friday, And Why The GDP Predicts A Sub-Zero Nonfarm Payroll Number - While the key market moving event from last Friday may have been Bernanke's Jackson Hole speech which merely left the door open to future QE episodes, the most important event from an economic standpoint was the first GDP revision Q2, which dropped from preliminary 1.3% to a sub stall speed, in real terms, 1.0%. What is just as important is that as the following chart from Bloomberg demonstrates, the YoY change in real GDP, which is now at 1.5%, is a slam dunk indicator of recession: "Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy." Bernanke agreed that "growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment." And while Bernanke is shifting dangerously into Greenspan territory with the open-ended interpretation of his statement, another thing that is more actionable is the observation that virtually every time real YoY GDP has dropped below 1.5%, this has led to a negative nonfarm payroll number. Granted, the result may not be as shocking as what the Philly Fed implied vis-a-vis this Friday's NFP, but we believe a subzero print in the August labor report will convince the three Fed holdouts that the time for yet another monetary intervention is here

Nouriel Roubini: 60% Probability of Recession - Bloomberg TV’s Margaret Brennan speaks to Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC. Roubini tells Brennan, “we’re going into a recession based on my numbers” and that the Federal Reserve and other authorities no longer have the ability to provide emergency support. Source: Bloomberg TV. Time: 13:59. Transcript excerpt after jump

Recession? No. We're in the Second Great Contraction - Bill McBride, the economic wizard at Calculated Risk, is a master at graphing data series to illustrate troughs and recoveries to new highs. See his August 30th update on recession measures for some excellent examples. With a hat tip to Bill, here are some charts of troughs to peaks that show why so many people believe the U.S. is still mired in a recession. For those of us who do accept the NBER recession call, the charts support the characterization of our current economic condition as, in the words of economist Kenneth Rogoff, The Second Great Contraction — its predecessor being the Great Depression.  The first chart is a look at Real GDP since 1950 with recessions highlighted. As we can see, at present, more than two years after the end of the last recession, real GDP is still 0.5% off the all-time high set in the last quarter of 2007. The recession officially began in December of that year.  My preferred GDP metric is the per-capita variant. I take real GDP and divide it by the mid-month population estimates from the Census Bureau, which has reported this data from 1959 (hence my 1960 starting date). By this measure, Q2 2011 GDP is 3.4% off its peak.

Struggling with a great contraction - Martin Wolf - What has the market turmoil of August been telling us? The answer, I suggest, is three big things: first, the debt-encumbered economies of the high-income countries remain extremely fragile; second, investors have next to no confidence in the ability of policymakers to resolve the difficulties; and, third, in a time of high anxiety, investors prefer what are seen as the least risky assets, namely, the bonds of the most highly rated governments, regardless of their defects, together with gold. Those who fear deflation buy bonds; those who fear inflation buy gold; those who cannot decide buy both. But few investors or corporate managers wish to take on any longer-term investment risks. Welcome, then, to what Carmen Reinhart and Harvard’s Kenneth Rogoff call “the second great contraction” (the Great Depression of the 1930s being the first). Those less apocalyptic might call it the “Japanese disease”. Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become. The point is that, by the second quarter of 2011, none of the six largest high-income economies had surpassed output levels reached before the crisis hit, in 2008 (see chart). The US and Germany are close to their starting points, with France a little way behind. The UK, Italy and Japan are languishing far behind.

Martin Wolf Gets It - Krugman - Just go read his column today, which is very close to my own thinking. And not just on the economics. Martin is usually cautious on matters political, but this time he lets fly: Mr Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed. Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing. Quite. And yes, this was what worried me about Obama from the beginning, way back in 2007-2008, when I got huge grief from progressives for criticizing him.Well, let’s see what the jobs plan looks like — and more important, since the GOP will block everything, how (and if) he makes a political issue of that obstruction.

One Way to Speed the Recovery? Help Households, Not Banks. - As the Great Recession drags on and on, it’s natural to wonder if we will ever get back to normal. Why is the recovery from this recession taking so long? Why was the recovery from other severe recessions, for example the 1982 recession where unemployment reached 10.8 percent, so much faster? Part of the answer is that we are experiencing a “balance sheet recession,” and this type of downturn is much harder to recover from than the other types we have had in recent decades. But poor policy is also to blame. Unfocused stimulus packages don’t get to the root of the problem, and short-term spending cuts are counter-productive. Instead, we need policies that do a better job of targeting the specific problems associated with balance sheet recessions. There are several things policymakers could do to address this, and each would help to improve the economic outlook. The first way to improve policy is to directly target the root of the problem: household balance sheets. When banks were having trouble due to the toxic assets on their books, the Fed took them off their hands at very favorable rates, and then took additional steps to ensure the banks would be able to survive. Unfortunately, however, that help didn’t “trickle down” from banks to households.

It May Be 2008 All Over Again, But There Is One Key Difference - The financial press has been inundated with articles comparing what is happening in global markets now to events in the latter part of 2008. Sure enough, the surge in Treasurys from 100 to 143 in the last two months of 2008 following the Lehman bankruptcy is most comparable to the move in the same security from 122 to 140 in the two months since the beginning of July 2011. What is disturbing is that the bulk of this move has happened after the August 2 debt deal, and after the announcement of QE2.5 or "ZIRP through mid-2013" by the Fed on August 9. Additionally, stocks have also traded in a pattern very reminiscent to what happened during the first round of the Great Financial Crisis, but the lock up in capital market liquidity, especially in Europe, may be the most obvious parallel between the two time periods. That said, there is one key difference between 2008 and 2011. Bill Buckler, in the latest edition of his Privateer, demonstrates what it is...

Negative Real Interest Rates - The “real” (i.e., inflation adjusted) yields on 5 and 7 year Treasury bonds continue to be in negative territory. This is an extraordinary situation that ought to be dominating the public debate. What does it mean? Well it means that right now it’s much cheaper for the government to finance some undertaking by borrowing the money and paying for it out of taxes five or seven years from now than to pay for it with taxes. And yet right now not only does the federal government do lots of things, it collects a fair amount of taxes to pay for those things to be done. This is perverse. In your personal life, paying for all your consumption by wracking up huge amounts of credit card debt rather than working would be a terrible idea. But the reason it’s a terrible idea is that the credit card company charges you a high interest rate. Were the credit card company to instead charge you a negative interest rate, it would be borderline insane to pay your bill in a timely manner. But not only are we paying some of our bills on time even though it would be cheaper to not pay them, our present fiscal policy debate is pathologically focused on the idea that we’re borrowing too much money.

An opportunity we can’t afford to miss - The real yield on Treasury debt has, in recent months, turned negative. Sound impenetrably dull? Sure. But here’s what it means: free money! Let’s start by defining some terms: The “yield” on Treasury debt is how much the government pays to borrow money. The “real yield” is how much it pays to borrow money after accounting for inflation. When the “real yield” turns negative, it means the government isn’t paying to borrow money anymore. Rather, the situation has flipped, and the government is getting paid to keep money safe. It also means that America is facing perhaps the single greatest investment opportunity in decades. Usually, the U.S. government has to pay quite a bit to borrow money. In January 2003, for instance, the interest rate on a seven-year Treasury was about 3.6 percent, which gave investors a yield of more than two percent after accounting for inflation. Right now, the interest rate is 1.52 percent, or minus-0.34 percent after accounting for inflation. Here’s what this means: If we can think of any investments we can make over the next seven years that have a return of zero percent — yes, you read that right — or more, it would be foolish not to borrow this money and make them.

Fatal Distraction - Krugman - Zero job growth, with unemployment still at nosebleed levels. Meanwhile, the interest rate on 10-year US bonds is down to 2.04%, and it’s negative on inflation-protected securities. Aren’t you glad we pivoted from jobs to deficits a year and a half ago? Meanwhile, on the other side of the pond, Is austerity killing Europe’s recovery? After more than a year of aggressive budget cutting by European governments, an economic slowdown on the continent is confronting policymakers from Madrid to Frankfurt with an uncomfortable question: Have they been addressing the wrong problem? Yah think?Too bad there weren’t any prominent economists warning that the obsession with short-term deficits was a terrible mistake, that austerity would undermine hopes of recovery.

Pimco’s Gross rues US debt ‘mistake’ -- Bill Gross, manager of the world’s largest bond fund for Pimco, has admitted that it was a mistake to bet so heavily against the price of US government debt.  Mr Gross emptied his $244bn Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category.  “Do I wish I had more Treasuries? Yeah, that’s pretty obvious,” Mr Gross told the Financial Times last week, adding: “I get that it was my/our mistake in thinking that the US economy can chug along at 2 per cent real growth rates. It doesn’t look like it can.”  When the yield on the 10-year Treasury was 3.5 per cent in January, Mr Gross warned that the risk of rising inflation made government debt a poor investment.  However, this month, as turmoil in equity markets caused investors to rush to the safety of government bonds, the 10-year Treasury yield dipped below 2 per cent, a 61-year low.

Gross Extends Maturities on Bet Fed to Embrace Operation Twist - Pacific Investment Management Co.’s Bill Gross said he favors longer-maturity debt with the Federal Reserve likely to seek to narrow the difference between short- and long-term borrowing rates as employment growth stagnates.  “We’ve advocated hard duration; that basically means something beyond five years,” Gross, manager of the world’s biggest bond fund, said in a radio interview  “The front end of the curve, in the U.S. at least, is inert. You have to move out into longer duration, harder duration.”  A government report today showing job growth was flat in August bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take additional steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE. The central bank will likely extend the maturities of its portfolio by buying five- to 10-year Treasuries while shedding shorter- maturity debt, Gross said, in what has been referred to as “Operation Twist” after a similar program in the 1960s. “I don’t know what form it will take and whether you call it a QE, there’s certainly opposition from the hawks in terms of the Fed,”

High Debt Levels Poised to Stunt Growth - New research suggests the high and rising debt of the U.S., Japan and Europe will stunt economic growth unless countries act quickly to contain it.  A paper presented Friday by three economists at the Bank for International Settlements finds that debt–be it government or corporate–starts to weigh on growth when it rises close to an economy’s annual output, a predicament currently shared by almost all of the world’s largest advanced economies. They show that public debt begins to hurt once it rises from a range of between 80% to 100% of gross domestic product. The threshold is above 90% of GDP for corporate debt and around 85% of GDP for household debt, though the economists warn the latter is only their best guess.  The research provides food for thought at the Kansas City Federal Reserve Bank’s annual summer retreat of top global policy makers in Wyoming’s Grand Teton Mountains. The findings are similar to results from a January 2010 paper by economists Carmen Reinhart and Kenneth Rogoff, even though the data set and analysis are different, reinforcing the point that advanced countries hit by the financial crisis now face a big challenge in managing economies loaded with debt.

Christine Lagarde Calls For Fiscal & Monetary Stimulus, Balanced Debt Reduction & Mortgage Relief - Reading former French Finance Minister Christine Lagarde’s maiden speech as Managing Director of the International Monetary Fund is a valuable reminder that the global policy elite can always benefit from some fresh blood. She very sensibly argues that the problem of the global crisis is an excess of overall debt and not some peculiarity of sovereign borrowing. She correctly argues that “[m]onetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation” and urges policymakers to engage in growth-oriented fiscal policy, trimming unsustainable long-term commitments rather than strangling short-term growth with contraction. Here she is specifically on the US, arguing for action on two fronts:First—the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

Bernanke Blames Politics for Economic Turmoil - The Federal Reserve chairman, Ben S. Bernanke, said Friday that the political battle this summer over the federal government’s borrowing and spending had disrupted financial markets “and probably the economy as well.” In remarks that went well beyond his previous calls for Congress and the White House to address the nation’s long-term fiscal challenges, Mr. Bernanke suggested the process itself was broken. “The country would be well served by a better process for making fiscal decisions,” he said. Mr. Bernanke said he remained optimistic about future growth but he warned that the government had emerged as perhaps the greatest threat to recovery. “The quality of economic policy-making in the United States will heavily influence the nation’s long-term prospects,” Mr. Bernanke said in the much-anticipated speech, delivered at a policy conference held each August here at a resort in Grand Teton National Park.

Obama: Krueger to Be Key Adviser on Growth - President Barack Obama said he’s nominating Alan Krueger, a labor economist who has advocated for a hiring tax credit for businesses and increased infrastructure spending, to lead the White House Council of Economic Advisers.  Obama said Krueger will play a central role in developing policies to spur faster economic growth. The president said he’ll announce a package of proposals next week to boost hiring.  “Our great ongoing challenge as a nation remains how to get this economy growing faster,” Obama said at the White House. “Our challenge is to create a climate where more businesses can post job listings, where folks can find good work that relieves the financial burden they’re feeling, where families can regain a sense of economic security.” The nomination is subject to Senate confirmation. Krueger, 50, would replace Austan Goolsbee, who left the administration earlier this month

Several Pitfalls on the Road to a Budget Agreement for FY2012 - We’ve heard a lot about how a newly-humble GOP will come back and make as little a fuss about the federal budget as humanly possible, quietly agreeing to spending levels for annual appropriations and moving the budget process along. Carl Hulse has another example in the genre: Lawmakers are still likely to clash over just how the money is parceled out to various agencies and the Pentagon. But members of both parties say the bipartisan compromise on overall spending makes it unlikely that an impasse will push Congress back to the brink of closing the government in a repeat of the April showdown that ended just hours before federal money ran out. The current fiscal year ends Sept. 30. I’m just not that sure why it reduces the risk. Of the 12 annual appropriations, only one has passed both houses of Congress – the military construction and veterans bill. That still needs to go through a conference committee. Six others have passed the House, but at lower levels than what’s listed in the debt limit agreement. Three others have passed House committees, and one has passed a House subcommittee. As far as the Senate is concerned, none of the other 11 appropriations bills has moved an inch. This isn’t all that abnormal, but there’s no way whatsoever to pass all these appropriations bills in just under a month.

A Grim Prognosis for Deficit Reduction - The other day, I spent a few hours with some of Washington’s most experienced budget experts. The session was off-the-record, so I can’t tell you who they were but I can tell you what they said. In short, don’t count on much real deficit reduction any time soon, despite this summer’s debt limit deal that, amid much angst, allegedly cut spending by $1.2 trillion over the next decade. To these veterans of the fiscal wars, the odds are awfully long that Congress’ new budget super committee will reach a broad deficit reduction agreement by Thanksgiving—perhaps one-in-three at best. But there is worse news for those who worry about long-term deficits: Although the debt agreement requires an additional $1.5 trillion in automatic spending reductions over 10 years should the Gang of 12 fail, not one of these experts believes those cuts will ever happen.  Congress will find a way to avoid, evade, delay, or otherwise confound these spending limits. In other words, the stick that is supposed to force lawmakers to act is mostly sawdust.

How the “Super Committee” Can Become Our (Fiscal) “Superheroes” - Here’s the full text of my latest column in the Christian Science Monitor, in the blockquote below.  Doing “good” by our economy–with its dual and large challenges–will take superhero-like powers and the courage to use them.  Enter the debt limit deal’s “super committee”–who in being tasked with reducing the deficit by (at least) another $1.5 trillion over ten years might just be forced into recommending policies that aren’t just good at reducing the deficit, but are good for our economy–both near-term and longer-term–as well. The economy continues to face severe dual challenges: (1) a very slow recovery from an unusually bad recession, and (2) an unsustainable longer-term government budget outlook. If our policymakers had their act together and were making successful efforts to combat either one of these, progress with the other would follow. As it is, the lack of substantial policy progress that came out of the debt-limit talks means months – perhaps even years – of the threat of a continued downward spiral.

It’s Not All or Nothing for Deficit-Cutting Committee - The congressional debt-reduction committee’s goal of reducing the deficit by least $1.2 trillion over a decade is often cast as a high-stakes mission, in which the 12 lawmakers will either fail or succeed. But the deal’s fine print shows otherwise: The Joint Select Committee on Deficit Reduction – the so-called supercommittee — could agree on just a portion of the deficit reductions and still avert some automatic spending cuts. The committee won’t face “a binary situation, where you either do it or you don’t do it,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan nonprofit organization focused on fiscal policy issues. Under the compromise reached at the end of this summer’s grueling debt-ceiling debate, the joint committee has to find ways to reduce the deficit by $1.5 trillion over 10 years. Automatic cuts would be made if the supercommittee can’t agree on $1.2 trillion of reductions, or if Congress doesn’t sign off on the supercommittee’s recommendations. But the size of the automatic cuts won’t automatically be $1.2 trillion; they will depend on the size of the package Congress approves. So if Congress approves recommendations paring the deficit by $700 billion, for example, the automatic cuts would total slightly less than $500 billion, since the bill takes into account the lower interest payments on the reduced debt.

Debt super committee vexes even lobbyists (Reuters) - Thousands of Washington lobbyists are scrambling to influence the work of a congressional "super committee" given the job of identifying up to $1.5 trillion in deficit reductions, with many worried about how to gain access to its 12 members. The committee is due to report its findings by Thanksgiving and with such massive potential cuts to the U.S. federal budget being decided by just a handful of lawmakers in such a short timeframe, lobbyists say the mission to protect their clients' interests is unprecedented and potentially impossible. "Anyone who tells their client they have figured out how to influence this process is either lying -- or you should hire them," This special bipartisan committee, made up of six Republican and six Democratic lawmakers, was formed as part of the deal to raise the U.S. debt limit. It will meet independently from Congress, set its own rules and must come up with at least $1.2 trillion -- and potentially $1.5 trillion -- in budget savings for the next decade. If it fails, or if Congress does not endorse its plan, $1.2 trillion in mandatory cuts will be triggered in 2013.

Oh Dear… the Economist Should Be Doing Better Than This: Arguments for Expansionary Fiscal Policy Watch » Poor Richard Koo talks sense. But his adversary in the pages of the Economist is… Allan Meltzer. When the U.S. government can borrow at a real interest rate of -0.65%/year for five years, the case for larger deficits now--for pulling spending forward from the future into the present and pushing taxes back from the present into the future--is unanswerable: of course the government should borrow more on such terms: households value the taxes they will pay in the future if taxes are pushed back as much less painful than the taxes they would otherwise pay today, and a huge number of government spending programs offer at least a zero percent real rate of return via their effect on the productive capacity of the economy. But Allan Meltzer finds a way to oppose pulling spending forward into the present and pushing taxes back in the future. However, the way he finds is by not dealing with any of the arguments for expansionary fiscal policy at all:Allan Meltzer: The Obama stimulus is an example of bad advice leading to bad policy. Much of the pressure for additional stimulus now comes from those who want to repeat their error…. [T]emporary tax cuts have been tried repeatedly. Stacks of research support the theory. It is not enough to point to the number of unemployed and part-time employed to claim that something must be done. Mistaken actions do much more harm than good in part because they destroy confidence.

More from CBO’s Update of the Budget and Economic Outlook: Impact of Fiscal Policy on Economic Growth in the Next Few Years - CBO Director's Blog - Last week CBO released its annual summer update of its budget and economic outlook. Yesterday’s blog posting discussed one aspect of that outlook—the amount of discretionary spending that will occur over the coming decade under current law. Today we’ll summarize the estimated impact of fiscal policy on near-term economic growth (which is discussed on pages 37 to 39 of the report). Under current law, federal fiscal policy—including the effects of both legislative actions and automatic changes in the budget—will provide decreasing support for economic activity this year and significantly restrain economic growth in calendar years 2012 and 2013. One reason for that pattern is that the stimulative impact of the American Recovery and Reinvestment Act (ARRA) is winding down. CBO estimates that relative to what would have happened without that law, ARRA raised real GDP by between 1.5 percent and 4.2 percent in 2010 but will increase GDP by between 0.8 percent and 2.3 percent in 2011 and by between 0.3 percent and 0.8 percent in 2012. ARRA’s boost to employment is also diminishing. CBO estimates that the law raised employment (relative to what it would have been otherwise) by between 1.3 million and 3.3 million people in 2010, but the law’s impact on employment is projected to be progressively smaller in 2011 and 2012.

More from CBO’s Update of the Budget and Economic Outlook: Persistent Effects of the Recent Recession on Potential Output - CBO Director's Blog - Last week CBO released its annual summer update of its budget and economic outlook. Blog postings on Wednesday and Thursday discussed two aspects of that outlook—the amount of discretionary spending that will occur over the coming decade under current law, and the estimated impact of fiscal policy on near-term economic growth. Today we’ll summarize CBO’s estimate of the persistent effects of the recent recession on potential output (the amount of output that corresponds to a high rate of use of labor and capital), which is discussed on pages 54 and 55 of the report.

Two papers on policy uncertainty and learning - This week’s crop had a lot of good papers, so it was difficult to choose a particular one. I chose two related papers, which both in some way address the current fiscal policy uncertainty in the United States.  The first one shows that the policy uncertainty can have a substantial impact, and one could thus consider policy uncertainty as a policy in itself. The most important channel is through expectations on capital income taxes. Reducing uncertainty on other taxes appears less crucial. The second looks at how agents try to learn about their new environment after a fiscal policy change. The learning process itself induces swings and overshooting, which of course would be reduced with better information or more certainty.

Why didn’t the stimulus create more jobs? - There are many studies of the stimulus, but finally there is one which goes behind the numbers to see what really happened.  And it’s not an entirely pretty story.  My colleagues Garett Jones and Daniel Rothschild conducted extensive field research (interviewing 85 organizations receiving stimulus funds, in five regions), asking simple questions such as whether the hired project workers already had had jobs.  There are lots of relevant details in the paper but here is one punchline:…hiring people from unemployment was more the exception than the rule in our interviews.In a related paper by the same authors (read them both), here is more: Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2).

Did the ARRA Hire the Unemployed or Just Shift Jobs Around the Employed? - The Meracatus Center recently published a study by Garrett Jones and Daniel Rothschild titled, “Did Stimulus Dollars Hire the Unemployed?” It uses surveys and seeks to point out flaws in the achievements of the ARRA, or Obama’s stimulus program. Matt Yglesias, Kevin Drum, and Jon Chait have already commented on it, pointing out that the results of the study seem to look like a major win for the stimulus. Specifically, the major debate is over this data point: stimulus-funded projects hired 42.1 percent from the pool of unemployed people. The authors of the paper argue that this is a problem, as it is similar to the rates of hiring from the unemployed that have been observed from the 1990s-2000s. Let’s take a look at their argument (my bold, numbering):

The Austerity Economy - Krugman - Do the dismal economic numbers really reflect the turn to fiscal austerity? I keep hearing people say no, because austerity hasn’t actually happened yet in America. But they’re wrong. The fact is that the fading out of the stimulus, and in particular of aid to state and local governments, is already and noticeably leading to substantial withdrawal of government demand. Look, in particular, at actual government purchases of goods and services — governments at all levels buying stuff — which is what standard macroeconomics says should have the highest multiplier, since unlike transfers and tax cuts it is by definition spent rather than saved. Here’s the picture, showing changes in real spending over the previous year: When the recession officially ended, spending was rising at an annual rate of around $60 billion; now it’s declining at an annual rate of $60 billion. That difference is around 1 percent of GDP, and maybe 1.5 percent once you take the multiplier into account. That makes the turn toward austerity a major factor in our growth slowdown. Still, I guess the beatings will continue until morale improves.

The Price of 9/11, by Joseph E. Stiglitz - The September 11, 2001, terror attacks by Al Qaeda were meant to harm the United States, and they did, but in ways that Osama bin Laden probably never imagined.  The attack on Afghanistan that followed the 9/11 attacks was understandable, but the subsequent invasion of Iraq was entirely unconnected to Al Qaeda – as much as Bush tried to establish a link. That war of choice quickly became very expensive – orders of magnitude beyond the $60 billion claimed at the beginning – as colossal incompetence met dishonest misrepresentation. Indeed, when Linda Bilmes and I calculated America’s war costs three years ago, the conservative tally was $3-5 trillion. Since then, the costs have mounted further. With almost 50% of returning troops eligible to receive some level of disability payment, and more than 600,000 treated so far in veterans’ medical facilities, we now estimate that future disability payments and health-care costs will total $600-900 billion. Even if Bush could be forgiven for taking America, and much of the rest of the world, to war on false pretenses, and for misrepresenting the cost of the venture, there is no excuse for how he chose to finance it. His was the first war in history paid for entirely on credit. As America went into battle, with deficits already soaring from his 2001 tax cut, Bush decided to plunge ahead with yet another round of tax “relief” for the wealthy.

The decade's biggest scam - The Los Angeles Times examines the staggering sums of money expended on patently absurd domestic "homeland security" projects: $75 billion per year for things such as a Zodiac boat with side-scan sonar to respond to a potential attack on a lake in tiny Keith County, Nebraska, and hundreds of "9-ton BearCat armored vehicles, complete with turret" to guard against things like an attack on DreamWorks in Los Angeles.  All of that -- which is independent of the exponentially greater sums spent on foreign wars, occupations, bombings, and the vast array of weaponry and private contractors to support it all -- is in response to this mammoth, existential, the-single-greatest-challenge-of-our-generation threat: "The number of people worldwide who are killed by Muslim-type terrorists, Al Qaeda wannabes, is maybe a few hundred outside of war zones. It's basically the same number of people who die drowning in the bathtub each year," Last year, McClatchy characterized this threat in similar terms: "undoubtedly more American citizens died overseas from traffic accidents or intestinal illnesses than from terrorism."  The March, 2011, Harper's Index expressed the point this way: "Number of American civilians who died worldwide in terrorist attacks last year: 8 -- Minimum number who died after being struck by lightning: 29." 

US defence contractors ‘waste’ $12m a day - Defence contractors have wasted or lost to fraud as much as $60bn over the past 10 years, according to a report by the Commission on Wartime Contracting in Iraq and Afghanistan. The report, released on Wednesday, will exacerbate fears that fiscal discipline at the US Pentagon is lacking at a time when looming budget cuts could lead to greater reliance on outside contractors. It found that at least $31bn had been wasted through poor planning and management – the equivalent of $12m a day since the invasion of Afghanistan. “Despite some progress, the government remains unable to provide effective large-scale contract management and oversight,”. This fact was “troubling”, given that contractors had been considered part of the deployment force for more than 20 years.  “Yet the government was not prepared to go into Afghanistan in 2001, or Iraq in 2003, using large numbers of contractors,” he said. The 240-page report, sent to Congress on Wednesday, found that the US military needed “heavy support” from contractors during military or emergency operations as a result of large-scale reductions in the federal acquisition workforce and in support units within the military during the 1990s. More than 260,000 contractor employees have been used in Iraq and Afghanistan, at times outnumbering the military they support.

Hurricane funds reignite US budget debate - Hurricane Irene has emerged as a new front line in the partisan budget battle in Washington, with Democrats promising to fight a pledge by a top Republican to offset any relief funds with other spending cuts. The issue could raise thorny questions for Republicans in the House and Senate, many of whom could see federal funding for disaster relief cut off in their home districts and states if a looming budget shortfall is not settled before October 1.  Eric Cantor, the Republican majority leader in the House, said this week that any new funds Congress sets aside to deal with the hurricane, which is estimated to have caused billions of dollars in damage to the eastern seaboard of the US, would only be approved if matched by cuts in spending in other parts of the budget. “We will find the money if there is a need for additional money,” Mr Cantor said on Monday. “But those monies are not unlimited.”  Traditionally, Congress has not sought to offset such emergency funds, and Democrats in the Senate lashed out at the remarks. “The American people deserve to know critical assistance won’t be held up by petty squabbles in Washington,”  Mr Cantor might find it difficult to rally unanimous support for his position among Republicans. Fema, the federal disaster relief agency, has announced that it is suspending new projects in states hit by earlier disasters in order to meet the immediate needs of victims of Hurricane Irene. This could have an impact on Americans in Missouri, Alabama, Mississippi and Texas, among others.

Why Republicans Might Demand Hurricane Relief Be Paid For With More Program Cuts - When a massive tornado obliterated the town of Joplin, Missouri earlier this year, House Majority Leader Eric Cantor (R-VA) told reporters that if the disaster ultimately required the government to step in and provide aid, it would have to be offset by cutting spending on other federal programs.  "If there is support for a supplemental, it would be accompanied by support for having pay-fors to that supplemental," he said, using the anodyne language of budget policy.  Three months later, when a modest earthquake struck the town of Mineral, Virginia in his own district, and caused minor, but widespread damage along the eastern seaboard, Cantor upheld the standard. Congress, he said, "will find the monies" to help victims, but that "those monies will be offset with appropriate savings or cost-cutting elsewhere." Now, in the wake of Hurricane Irene -- a much costlier natural disaster -- Cantor may make the same demand, which could touch off a bitter fight on Capitol Hill.

Why Would Eric Cantor Insist on Paygo for Irene Disaster Relief? - Eric Cantor stated his position: "Yes there's a federal role, yes we're going to find the money -- we're just going to need to make sure that there are savings elsewhere to continue to do so,"   Cantor has suggested before that we don’t have the money for additional government spending. And I guess if one were foolish enough to believe we were near full employment, one might worry about the crowding-out of private spending. Cantor, however, undermines both claims with his August 29 memo that claims its agenda is to create new jobs with part of his policy message being tax cuts. On policy grounds – Cantor has no principled reasons for this application of paygo.

Federal Austerity Changes Disaster Relief — As Senator Bernard Sanders toured Vermont by helicopter on Tuesday to assess the damage from what he said could be his state’s worst-ever natural disaster, the idea of cutting other federal programs to aid towns pummeled by Hurricane Irene1 was stoking his outrage.  “To say that the only way you can come up with funding to rebuild devastated communities is to cut back on other desperately needed programs is totally absurd,” said Mr. Sanders, an independent, responding to a call by leading Republicans to balance any financial relief with spending reductions elsewhere. “Historically in this country we have understood that when communities and states experience disasters, we as a nation come together to address those. “That is what being a nation is about,” he said in an interview.  The new push for federal austerity is threatening to change the traditional dynamic when it comes to government relief in the aftermath of a storm, an earthquake or other calamity. It has touched off an intensifying debate over whether the government should just tack needed money onto the deficit or try to find a way to adjust the budget to cover the costs.

Disaster Relief Economics - Krugman - What the government should do, in this case, is set all the marginals equal: the marginal benefit of an additional dollar spent on bombs, dental work, national parks, soup kitchens, etc, should all be equal, and this common marginal benefit should equal the marginal cost of raising an additional dollar of revenue. Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts. But wait: even more important, the government can borrow (or, in principle, lend, if it pays off all its debt). So it should balance its budget in present discounted value terms, not year by year. This means that the tradeoffs should include future spending and taxes as well as this year’s spending and taxes. And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

Eric and Irene, by Paul Krugman - “Have you left no sense of decency?” That’s the question Joseph Welch famously asked Joseph McCarthy, as the red-baiting demagogue tried to ruin yet another innocent citizen. And these days, it’s the question I find myself wanting to ask Eric Cantor, the House majority leader, who has done more than anyone else to make policy blackmail — using innocent Americans as hostages — standard operating procedure for the G.O.P.  The primary issue should be the extraordinary nihilism now on display by Mr. Cantor and his colleagues — their willingness to flout all the usual conventions of fair play and, well, decency in order to get what they want.  Not long ago, a political party seeking to change U.S. policy would try to achieve that goal by building popular support for its ideas, then implementing those ideas through legislation. That, after all, is how our political system was designed to work.  But today’s G.O.P. has decided to bypass all that and go for a quicker route. Never mind getting enough votes to pass legislation; it gets what it wants by threatening to hurt America if its demands aren’t met. That’s what happened with the debt-ceiling fight, and now it’s what’s happening over disaster aid. In effect, Mr. Cantor and his allies are threatening to take hurricane victims hostage, using their suffering as a bargaining chip.

Irene and the Broken Window “Fallacy” - Yes – economists like Krugman and Keynes must be “bad economists” for looking out at the real world and recognizing that we are far from full employment. I would like to give a lot of credit to Irwin Kellner for this:  The bad news is pretty obvious: Countless houses and cars were smashed by fallen trees; there was lots of water damage from the storm itself, as well as from the water that spilled over from nearby rivers and lakes — and even from the ocean. ...For their part, restaurants either forced to close their doors or bereft of their usual complement of customers will not be able to make up these lost receipts. The same goes for other retailers like gasoline stations and department stores.  Cities like New York, which shut down their mass-transit systems and waived tolls on bridges and tunnels, will be unable to recoup these losses as well. Although occurring more than halfway through the third quarter, the effects of this storm could be enough to reduce growth in the gross domestic product by anywhere from a half to a full percentage point. In other words, Irwin starts with all those negative impacts from Irene that we can see. But Irwin goes onto to note the boost to aggregate demand expected to come in the last quarter of this year. Is Irwin being a bad economist for not seeing the crowding-out effects that Bastiat talked about? Of course not! Shall we repeat? We are far from full employment!

Obama To Boehner: New EPA, Transportation Regulations Would Cost Economy More Than $1 Billion A Year: — President Barack Obama says his administration is considering seven new government regulations that would cost the economy more than $1 billion each a year, a tally Republicans will pounce on to argue that Congress needs the power to approve costly government rules. In a letter to House Speaker John Boehner, R-Ohio, Obama lists four proposed Environmental Protection Agency rules and three Transportation Department rules estimated to cost in excess of $1 billion. One of the proposed EPA rules – an update to the health-based standard for smog – is estimated to cost the economy between $19 billion and $90 billion. The letter, dated Tuesday, comes as the Republican-controlled House prepares to consider legislation that would require congressional approval for any new regulations that would impose a significant cost on industries. The four environmental regulations, which target air pollution and coal residue primarily from coal-fired power plants, already have been attacked by House Republicans, who have said they would kill jobs and harm the economy. A federal court ordered the Obama administration to propose two of the four environmental rules. 

Huntsman Proposes New Taxes On Seniors And Veterans To Pay For Tax Cut For The Richest 0.1 Percent - 2012 GOP presidential hopeful Jon Huntsman is releasing an economic plan today that is as bad for the middle-class — and as nutty — as any proposed by his rivals. It would pay for a half-million-dollar tax break for the richest 0.1 percent of Americans with tax increases on the middle-class and new taxes on seniors, veterans, and poor families

How Will We Pay for Obama’s New Jobs Push? Answer: Tax Wall Street - President Obama is right: the United States needs a jobs program1 that spends federal tax dollars to retain jobs, to create jobs and to put tens of millions of Americans back to work. Unfortunately, President Obama does not have a Congress that will work with him to implement a jobs agenda.Rather, he has a Congress that says the United States is broke.2 That’s a lie. The United States is a wealthy country with immense resources. It can fund wars of whim, back bailouts and tax breaks for billionaires. So there is money. The problem is that the money is misallocated. The demand for a jobs programs must be coupled with demands for better budgeting priorities and for new sources of revenue. National Nurses United3, the activist union that has been in the forefront of pushing for a genuinely progressive politics and economics in the United States, is addressing the revenue issue with a bold campaign for a tax on Wall Street financial speculation.

The Case Against a Payroll Tax Cut - In theory, the payroll tax cut has positive economic effects on both the demand side and the supply side. By increasing workers’ cash flow, it should encourage additional spending in the economy – something that the economy desperately needs. It also reduces the tax wedge between what it costs employers to hire a worker and the worker’s after-tax reward. Thus, a cut in the payroll tax should increase economic activity and reduce unemployment. However, there is no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring. There are a number of reasons for this. First, the tax cut only helps those with jobs.  Second, the payroll tax cut helps many workers who have no need for it and will only pocket the tax savings. Third, economic theory and the experience with tax rebates in 2001 and 2008 tell us that people are strongly inclined to save temporary increases in income.  Fourth, even if one assumes that the cost of employment has declined and employers can somehow  capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring.

The New Resentment of the Poor - NYT Editorial - In a decade of frenzied tax-cutting for the rich, the Republican Party just happened to lower tax rates for the poor, as well. Now several of the party’s most prominent presidential candidates and lawmakers want to correct that oversight and raise taxes on the poor and the working class, while protecting the rich, of course.  These Republican leaders, who think nothing of widening tax loopholes for corporations and multimillion-dollar estates, are offended by the idea that people making less than $40,000 might benefit from the progressive tax code. They are infuriated by the earned income tax credit (the pride of Ronald Reagan), which has become the biggest and most effective antipoverty program by giving working families thousands of dollars a year in tax refunds. They scoff at continuing President Obama’s payroll tax cut, which is tilted toward low- and middle-income workers and expires in December.

Some U.S. firms paid more to CEOs than taxes: study (Reuters) - Twenty-five of the 100 highest paid U.S. CEOs earned more last year than their companies paid in federal income tax, a pay study by a Washington think tank said on Wednesday. At a time when lawmakers are facing tough choices in a quest to slash the national debt, the Institute for Policy Studies, a left-leaning group, said it also found many of the companies spent more on lobbying than they did on taxes. The senior Democrat on the House of Representatives oversight committee, Elijah Cummings, called for hearings on executive compensation "to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today." Several companies mentioned in the report took issue with its methodology and said they paid all taxes owed. General Electric spokesman Andrew Williams called the study "inaccurate" and noted it did not include significant income taxes paid in 2010 for previous years, or state taxes paid. "GE pays what it owes," he wrote in an e-mail response to questions. Boeing spokesman Chaz Bickers said the study is "simply wrong".

25 Big Corp CEOs Made More Than Their Companies Paid in Federal Taxes -- Yves Smith - In case you doubted that America needs more progressive taxation, the case in its favor has just been made in a study, “Executive Excess 2011: The Massive CEO Rewards for Tax Dodging,” by the Institute of Policy Studies (hat tip readers aet and Vlad via the International Business Times). The report found that the CEOs of 25 major companies paid themselves more than their companies paid in Federal income taxes. Exhibit 1 on page 31 names and shames them (well, assuming they are capable of shame), and they include John J. Donahoe of eBay, Robert Coury of Mylan Labs, Jeff Immelt of GE, and Robert Kelly of Bank of New York. The New York Times article on the report elicited some not-convincing rebuttals.  Note that this was 1/4 of the 100 companies with the highest reported CEO pay. Perhaps it’s time to restrict the total pay over a threshold level to all C-level execs to a percentage of Federal income tax payments? The summary also notes the increasing disparity between average worker and top executive pay, with the multiple of 263 in 2009 rising to 325 in 2010. The report debunks the idea that the pay reflected superior performance in any arena other than tax avoidance (note that other studies have found that CEO pay is negatively correlated with performance):

NYT: CEOs earn more than firms pay in US taxes - At least 25 top United States companies paid more to their chief executives in 2010 than they did to the federal government in taxes, according to a study released on Wednesday. The companies — which include household names like eBay, Boeing, General Electric ( is a joint venture of Microsoft Corp. and NBC Universal, which is jointly owned by Comcast Corp. and General Electric) and Verizon — averaged $1.9 billion each in profits, according to the study by the Institute for Policy Studies, a liberal-leaning research group. But a variety of shelters, loopholes and tax reduction strategies allowed the companies to average more than $400 million each in tax benefits — which can be taken as a refund or used as write-off against earnings in future years. The chief executives of those companies were paid an average of more than $16 million a year, the study found, a figure substantially higher than the $10.8 million average for all companies in the Standard & Poor’s 500-stock index.

Executive Pay and the Great Tax Dodge - Before the deficit reduction “super-committee” embarks on a $1–2 trillion course of human slashonomics1, it should take a hard look at the Institute for Policy Studies’ (IPS) eighteenth annual executive compensation report2, which details how corporations are rewarding CEOs for aggressive tax avoidance—to the tune of at least $100 billion in lost tax revenues every year. Executive Excess 2011: The Massive CEO Rewards for Tax Dodging reveals that last year twenty-five of the 100 most highly paid CEOs took home salaries greater than the amount their companies paid in 2010 federal income taxes. And it wasn’t because the corporations weren’t making dough—they averaged global profits of $1.9 billion, and only seven reported losses in US pre-tax income. But these twenty-five companies shielded their profits in 556 tax haven subsidiaries in places like the Cayman Islands, Isle of Man, and Singapore, which proved to be a lucrative tax dodging strategy for the CEOs themselves: the twenty-five CEOs averaged $16.7 million in compensation, compared to $10.8 million for their peers in the S&P 500.

Why Investors Pay Less Tax than the Rest of Us - The effective combined tax rate increases from just 0.2 percent of income for people in the lowest quintile (those making less than about $17,000) to 12.1 percent for the middle quintile ($33,500 to $60,000) and 19.5 percent for those in the top quintile (over $103,500). Within that last group, the rate rises from 18.3 percent for the 80th-90th percentiles to 20.2 percent for the 95th-99th percentiles but then dips to 19.6 percent for the top 0.1 percent (and even lower for Buffett, who said he pays just 17 percent). But now look at what happens as people make more of their money from long-term capital gains and qualified dividends. That income faces much lower tax rates—either 0 percent or 15 percent, compared with as much as 35 percent for other income. Plus, unlike wage and salary income, it is also exempt from Social Security and (for a little while longer) Medicare payroll taxes.  The result: the more of your income from gains and dividends, the lower your effective tax rate (ETR). Within the top quintile, for example, people who get less than a tenth of their income from those sources face an ETR of nearly 21 percent, compared with an ETR under 12 percent for those who get more than two-thirds of their income from investments (see graph). The only exception is the lowest-earners, whose effective tax rate is nearly zero, thanks to the earned income credit.

Corporate Tax Rate’s ‘Silly’ Effect on Decisions to Build Factories - Just when you thought it couldn’t get worse it did. No jobs were created in the U.S. economy last month. Zero. Nada. Zilch. That must leave the White House feeling like a bunch of zeros, too. They must be thinking: How is it that U.S. corporations are raking in huge profits and sitting on piles of cash, but still won’t hire? If it seems silly that corporations behave this way, it’s because, in part, the way they decide to invest in new job-bringing factories is silly. But the president could help fix that silliness when he unveils his jobs plan next week. It’s all to do with corporate taxes.When corporate analysts assess whether to build new factories they look at after-tax profits. To do that they make assumptions about corporate tax-rates. There’s the rub, because, get this, they don’t use the actual tax rate the company is paying — close to zero in many cases. No, the analysts use the corporate tax rate of 35%.

GOP Plans Weekly Votes To Repeal "Job-Destroying Regulations," New Tax Cuts: In a memo to Republican lawmakers, House Majority Leader Eric Cantor (R-VA) outlined his caucus' plans for the fall — including almost weekly votes to repeal so-called ""Job-Destroying Regulations." While the "Super Committee" focuses on $1.5 trillion in deficit reduction, Cantor says the House will "continue our focus on the jobs crisis." Beginning in the week of September 12th, the chamber will take up legislation restricting the National Labor Relations Board's ability to restrict where employers create jobs — a response to the ongoing litigation over Boeing's new South Carolina production facility. The House will also seek to delay some of President Barack Obama's new emissions regulations for power plants, boilers, and cement production plans — which Cantor says cost jobs.

Regulations, taxes aren't killing small business, owners say - Politicians and business groups often blame excessive regulation and fear of higher taxes for tepid hiring in the economy. However, little evidence of that emerged when McClatchy canvassed a random sample of small business owners across the nation.  "Government regulations are not 'choking' our business,". "In order to do business in today's environment, government regulations are necessary and we must deal with them. The health and safety of our guests depend on regulations. It is the government regulations that help keep things in order." The U.S. Chamber of Commerce is among the most vocal critics of the Obama administration, blaming excessive regulation and the administration's overhaul of health care laws for creating an environment of uncertainty that's hampering job creation.  When it's asked what specific regulations harm small businesses _which account for about 65 percent of U.S. jobs — the Chamber of Commerce points to health care, banking and national labor. Yet all these issues weigh much more heavily on big corporations than on small business

Alan Krueger Nominated to Head the Council of Economic Advisors - Princeton Economist Alan Krueger has been nominated to head the Council of Economic Advisors, and in my view that’s very good news. Alan Krueger is an excellent economist with administrative experience in Washington, e.g. he recently served in the Treasury under Obama, so he already knows his way around Washington. His most well known research is on the minimum wage and immigration, The work is somewhat controversial in that the results show small negative effects from raising the minimum wage and from increasing immigration. In my view that is a sign of an economist who is willing to let the evidence do the talking, and that is a good trait to have in this job. He has also worked in many other areas, including occupational licensing, the economics of terrorism, and more recently on job search in periods when unemployment is high, including how job search is affected by things such as unemployment insurance. But that is just a small taste of the large amount of research he has done. Finally, it’s important to recognize what the CEA does: … A hallmark of the ethos of the CEA is the pride that its staff members take in providing objective analysis. … Because the CEA has retained its small size over the years, it can be quick and nimble in ways that are difficult for some larger agencies. Moreover, because the CEA is viewed as a neutral agency without ties to any particular constituency, the CEA often has played an important role on interagency committees and working groups…

Appointments And The Evolving Constitutional Crisis - When a politician writes an op-ed, it's usually death. Barney Frank, on the other hand, is unusually interesting for an elected official, and his op-ed today is worth your time: [Richard] Cordray is just the latest capable, dedicated public servant to fall victim to a Republican mugging. He joins Joseph Smith, the banking commissioner of North Carolina who recently drew unanimous bipartisan support from the North Carolina General Assembly for his renomination; Peter Diamond, a Nobel laureate in economics who was nominated to serve on the Federal Reserve System’s Board of Governors; and others as collateral damage of the Senate Republicans’ war on financial regulation in particular and the Obama presidency in general. No one has raised any questions about his intelligence, integrity or dedication. Yet his nomination will not even be fairly considered by the full Senate. I have a slightly less moralistic take on this than Frank does. What we have here is another gap between rules and norms. The rules say that the Senate can block large swaths of executive branch appointees for any reason it chooses. Social norms say the Senate should let the president confirm administrative appointees who share his views, blocking only the most corrupt, incompetent, drunk, or extreme cases.

More S&P Outrage: Subprime Mortgage Deal Gets Higher Rating Than U.S. - Subprime mortgage borrowers, it appears, are more creditworthy than Uncle Sam. Standard & Poor's, the ratings agency that recently downgraded the credit of the United States, is giving a higher rating to a group of subprime mortgage loans - yup, just like the type that lead to the financial crisis - than the bonds issued by the U.S. government. The mortgage trust - 59% of which is set to get a AAA rating from S&P - is mostly made up of loans to borrowers with below average credit scores who have made little or no downpayment on their houses, according to Bloomberg. That's a rating that bonds issued by the U.S. no longer enjoy. Back in early August, S&P lowered the U.S.'s credit rating to AA+. Cue the outrage: “I'm trying to sort out why debt backed by the ability to tax in the United States is rated lower than securities that are backed by no particular ability to have additional revenue,”

Why the triple-A subprime bond is bad news - There was a flurry of predictable coverage on Wednesday when the news broke that a subprime mortgage bond called Springleaf Mortgage Loan Trust 2011-1 was being priced with a triple-A rating from S&P. The WSJ’s Al Yoon has the best detail on how the bond is structured; basically, 5,629 performing subprime loans are being put into a pool, and holders of triple-A bonds get the first 48.85% of the cash flowing from that pool. Because you can be pretty sure that at least 48.85% of the mortgages will be making their payments, the triple-A tranche is considered ultra-safe; Daniel Indiviglio has attempted to defend the deal and its rating on those grounds. But as Bloomberg reports, it’s not as simple as that. There are at least five main arguments for subprime bonds not to have a triple-A rating when the US is only double-A:

Franken Pursues Tighter Oversight of Rating Agencies - The Dodd-Frank Act cracked down on the credit rating agencies, the firms that awarded rosy ratings to bonds backed by junky mortgages, but some lawmakers and consumer advocates contend that the regulatory overhaul falls short. A spate of new Dodd-Frank rules for the rating agencies “doesn’t really respond to the conflict of interest that’s inherent in the system,” Senator Al Franken, Democrat of Minnesota, said Thursday. Critics like Mr. Franken argue that the rating agencies’ business model is innately compromised. Banks and corporations that issue debt pay the rating agencies to assign their bonds a letter grade. In the lead up to the financial crisis, the critics say, the rating agencies sacrificed the integrity of their ratings to increase their bottom lines. At the time, the rating agencies blessed many subprime mortgage bonds with the highly coveted triple-A rating. When the investments soured, it set off a chain reaction that nearly toppled the economy.

Three Questions For The Financial Stability Oversight Council - Simon Johnson - The Dodd-Frank financial legislation of 2010 created a Financial Stability Oversight Council, tasked with taking an integrated view of risks in and around the financial sector in the United States. Known as the FSoc (pronounced EFF-sock), the council comprises all leading regulators and other responsible officials, headed by the Treasury secretary. So far, it has done little — reflecting the predominant official view that in the post-crisis recovery phase, financial risks in the United States are generally receding. But three important and related issues emerged this summer that the FSoc needs to consider quickly: impending bank mergers that could create two more too-big-to-fail banks; whether to force the breakup of Bank of America; and how to rethink capital requirements for large systemically important banks. The first question for the FSoc is therefore: Wouldn’t allowing mergers by Capital One and ING and by PNC and Royal Bank of Canada create financial companies whose potential risk is more likely to be systemic? The second question is closely related: Why not break up Bank of America? The Dodd-Frank legislative process ended up rejecting the idea that existing banks, as of 2010, should be broken up — as long as they continue to operate in a reasonable and sustainable fashion. This raises the third and arguably most important question: Why not increase capital requirements further for systemically important financial institutions?

Should we bring back reserve requirements for banks? - Trying to stimulate more economic activity or bank lending by increasing reserves does not lead to more lending, and only results in fund misallocation, as investors who cannot earn positive income from investing in bonds allocate it to commodities instead (in the belief that inflation is just around the corner).  Now that rates are at the zero bound, monetarists insist that Fed stimulate more activity by quantitative easing, or swapping government bonds held by banks with more reserves. At least when the Fed was controlling the rate of credit, they were able to encourage more lending or they were able to decrease it. Now that it is manipulating reserves, what has that done to increase lending? And if you disagree with Fed control of rates (a position I confess to identify with), why would you advocate Fed control of reserves? Why should the Fed limit all reserves, when their real constraint to lending is their capital?  Taking away restraint on reserves in no way affects the restraint of banks to lend, so bringing it back will not fully constrain it when conditions are right for more lending, and they have adequate capital reserves. In this scenario, all a high reserve requirement will lead to is an increase in interest rates as banks vie to borrow the reserves they need to make the loans they want to give.

Secret Exemptions Allowed Speculators to Distort Futures Markets: (Real News Video) Michael Greenberger (former Chief of Staff to Brooksley Born): Secret deals with CFTC staff led to futures markets with 80% speculation

Another Reason to Shut the SEC and Restart - Thanks to Darcy Flynn, a longtime attorney at the Securities and Exchange Commission, we now have all the ammunition we need to do what should have been done years ago: terminate the SEC, with extreme prejudice, and in its place construct a new regulatory watchdog for Wall Street free of obvious conflicts of interest.. After raising concerns internally at the SEC last year -- and getting nowhere -- Flynn went public and alleged in a formal whistleblower complaint that for at least 17 years the SEC “followed a policy of systematically destroying documents” related to what are known as Matters Under Investigation, or MUIs, most of which were focused on possibly illicit or illegal behavior at Wall Street firms. MUIs are the first step in investigating a case that may lead to a formal SEC inquiry. Flynn alleged the MUIs were destroyed after the cases were closed when they should have been retained. He catalogued his complaints in a letter to Senator Charles Grassley, an Iowa Republican and the ranking member of the Senate Judiciary Committee. Grassley wrote to Mary Schapiro, the head of the SEC, asking her to respond to him about Flynn’s allegations by tomorrow. She hasn’t yet done so as of yesterday.

Variable Capital Rules in a Risky World - FRBSF Economic Letter - The recent financial crisis showed that a financial institution's equity may be sufficient to absorb losses during normal times, but insufficient during periods of systemic distress. In recognition of this risk, the Basel III agreement last year introduced a new element of macroprudential regulation called countercyclical buffers, variable capital requirements that shift based on credit growth. These buffers raise the classic regulatory dilemma of safety versus economic growth, but may provide protection against financial calamity at an acceptable cost.

Who You Gonna Bet On, Yet Again (Somewhat Wonkish) Krugman - Today’s FT has a piece on famous financial managers having a bad year; among them are John Paulson and Bill Gross. Regular readers may recall that back in 2010 Business Week ran an article contrasting my views with Paulson’s, with the tone of the article clearly conveying the message that we should trust the billionaire, not the silly academic. You might also recall that I was highly critical of Pimco’s assertions that the end of quantitative easing would lead to a spike in interest rates. Now, the point of this post isn’t to gloat — OK, it’s not mainly to gloat. Instead, what I want to point out is that there has been a simple principle to getting things mostly right in the Lesser Depression. The basic IS-LM model, with its possibility of a liquidity trap, has been a very good guide in these troubled times.  Yet people don’t know this model — which is to say, they don’t have any simple framework for thinking about how money, interest rates, and the real economy interact.

If banks should act as utilities, why not treat them as such? - Nobody thinks that utility-operating companies – whether in transport, such as railways, in energy, such as electricity, or telephone or water – are too big to fail. If they lose enough money and go bust, then, if another company cannot be found to take over the franchise, the government steps in to take over the operations. They keep the capital and (most of) the workers to continue running the utility. No one would think that it would make any sense to rip up the railway lines, electricity pylons, or water pipes, to sell them for scrap, and to push the skilled workers into unemployment. Nor is there any worry about utilities being too-big-to-fail. Why is banking different?

Nassim Taleb: The American Economy Will Transfer $5 Trillion To Banker Pay And Bonuses Over The Next 10 Years: For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits. That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting.

Top Banks Confront Leaner Future by Cutting Jobs - Battered by a weak economy, the nation’s biggest banks are cutting jobs, consolidating businesses and scrambling for new sources of income in anticipation of a fundamentally altered financial landscape requiring leaner operations. Bank executives and analysts had expected a temporary drop in profits in the aftermath of the 2008 financial crisis. But a deeper jolt did not materialize as trillions of dollars in federal aid helped prop up the banks and revive the industry.  Now, however, as government lifelines fade and a second recession seems increasingly possible, banks are finding growth constrained. They are bracing for a slowdown in lending and trading, with higher fees for consumers as well as lower investment returns amid tighter regulations. Profits and revenues are slipping to the levels of 2004 and 2005, before the housing bubble. “People heard all these things before, but the reality of seeing the numbers is finally sinking in,” . “It’s hard to imagine big institutions achieving their precrisis profitability levels, and even the community and regional banks are faced with the same problems.”

Pockets of debt illiquidity show rising bank fears (Reuters) - Pockets of the fixed income and money markets are starting to reflect concern that recent volatility will extend past August, and that growing risk aversion may again roil banks and funding markets. One sign of worry is the increasing reluctance of banks to use their balance sheets to facilitate trades, which has hit sectors from corporate bonds to the short-term repurchase market, where there is $1.6 trillion (980.8 billion pound) in triparty loans. For example, banks have reduced activity in the intra-dealer Treasury repurchase agreement market by 63 percent since the end of June, according to Barclays Capital. To some, this spreading risk aversion suggests that an autumn of troubling headlines could again spark a freeze like the 2008 crisis. There is no shortage of potential flash points, from Europe's debt crisis to a weak U.S. economy."I think the markets are going to get very stressed," "All this uncertainty could just lead to a big leg lower in stocks and when that happens bank financial stocks are going to lead the way lower," he said. "It's gonna hurt their balance sheet and that's going to further hurt the liquidity picture."

Unofficial Problem Bank list declines to 987 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Sept 2, 2011. Changes and comments from surferdude808: There were only minor changes to the Unofficial Problem Bank List this week with two removals and one addition resulting in 987 institutions still on the list. Assets dropped by only $48 million so they are unchanged on a rounded basis at $403 billion. For comparison purposes, the list had 845 institutions with assets of $412.0 billion a year ago and 421 institutions with assets of $267.8 billion two years ago.

Bank Of America Buys Time Via Buffett Effect - Warren Buffett said he wanted to pay more taxes. Throwing $5 billion into the Bank of America sinkhole so the U.S. taxpayer doesn’t have to – yet – is one way of doing that. But this is no patriotic, or even altruistic, move. Buffett made his investment in Bank of America on behalf of his conglomerate Berkshire Hathaway on most favored nation terms. Because, as Daniel Gross wrote this morning in his “Contrary Indicators” column, Buffett is a “one man blue chip bailout machine.”BofA’s Buffett bounce was at 13 per cent at pixel time, paring gains from a 20 per cent high earlier on Thursday…too early to tell what this really means for Bank of America. We reckon this won’t put an end to worries over BofA’s balance sheet. Warren’s warrant exercise price — a Fibonacci-esque $7.142857 — is already in the money [and] the staggering size of the exercise deal: 700 million warrants; what must John Paulson be thinking? Sure, BofA is getting a sweeter deal on its dividend payments — 6 per cent per annum compared to 10 per cent in the cases of General Electric and Goldman Sachs — than other all-he-can-eat-Buffett-deals, but if the intention was to put a floor under the share price, isn’t this an awfully low floor?

Bank of America Sells Stake in China Construction Bank - Bank of America announced on Monday that it would offload about half of its China Construction Bank holdings to a group of unidentified investors, in a deal expected to raise $8.3 billion. The deal, which came just days after Warren E. Buffett agreed1 to invest $5 billion into the bank, is the latest asset sale for the beleaguered financial firm. Over the last month, Bank of America has sold its Canadian credit card division and has put its European card operation on the block, as it continues to clear noncore assets from its books. The moves come amid recent fears that Bank of America lacks sufficient capital, concerns that its chief executive, Brian T. Moynihan, has tried to allay. On Monday, Bank of America highlighted the deal’s effect on capital levels. “This sale of approximately half of our shares of C.C.B. stock is expected to generate about $3.5 billion in additional Tier 1 common capital and reduce our risk-weighted assets by $7.3 billion under Basel I,”

Exclusive: Bank of America kept AIG legal threat under wraps (Reuters) - Top Bank of America Corp lawyers knew as early as January that American International Group Inc was prepared to sue the bank for more than $10 billion, seven months before the lawsuit was filed, according to sources familiar with the matter. Bank of America shares fell more than 20 percent on August 8, the day the lawsuit was filed, adding to worries about the stability of the largest U.S. bank. It wasn't until Warren Buffett stepped up with a $5 billion investment that those fears were eased, though hardly eliminated. The bank made no mention of the lawsuit threat in a quarterly regulatory filing with the U.S. Securities and Exchange Commission just four days earlier. Nor did management discuss it on conference calls about quarterly results and other pending legal claims. The SEC's rules for litigation disclosure are murky, and some lawyers said Bank of America may have been justified in not revealing AIG's lawsuit before it was filed. The bank's litigation disclosures are in line with those of many rivals. But other lawyers said banks have an obligation to disclose legal threats that could have major consequences.

Bank of America Gets Buffetted - Last week, our financial Superman, the mild-mannered Midwesterner Warren E. Buffett, swooped in again to save another bank, the financial markets, the American economy and just maybe our precious way of life. Mr. Buffett's purchase of $5 billion worth of Bank of America preferred stock (on his usual generous terms, including long-lasting warrants to buy common stock at an attractive price) immediately stiffened the upper lips of chattering investors and pundits. Bank of America's chairman hailed it as a "vote of confidence" in the bank. It was also celebrated as a signal that the worst was over in the rout recently experienced by the American financial sector. For the moment, that all seems right: Bank of America's stock is up 17 percent from the Aug. 25 announcement, and stocks of the other three major American banks—JPMorgan Chase, Citigroup and Wells Fargo—are also up. But as the news is digested, it could set off the opposite effect. The Buffett investment just might turn out to erode, not increase, confidence. And not only for Bank of America, but for the banking sector as a whole.

BofA’s woes making life difficult for Merrill advisers - Warren E. Buffett's $5 billion vote of confidence in Bank of America Corp. last Thursday notwithstanding, Merrill Lynch advisers have been forced to reassure clients over the past few weeks that their parent company is not headed for insolvency. Bank stocks have been battered during the recent market downturn, and none more so than Bank of America. Until Thursday, when the stock rebounded on the strength of Mr. Buffett's commitment, the bank's shares were down 28% in August and 48% year-to-date. That's a level not seen since early 2009, when the entire U.S. financial system was teetering on the edge. “It's definitely making our job more difficult,” . “Clients are calling and asking if their money is safe at the bank. I tell them Ben Bernanke said we're too big to fail.” The still uncertain size of the bank's mortgage-related liability — largely a result of the disastrous acquisition of Countrywide Financial Corp. — continues to weigh on investor confidence. The bank has announced major cost-cutting moves, including layoffs. The additional worries about commercial-real-estate loans, and exposure to European bank and sovereign debt, have stoked the rumor mill.

FDIC Objects to BofA $8.5B Mortgage-Bond Deal - The Federal Deposit Insurance Corp. filed an objection to Bank of America Corp. (BAC)’s proposed $8.5 billion mortgage-bond settlement with investors, joining investors and states that are challenging the agreement.  The FDIC, the receiver for failed banks, owns securities covered by the settlement and said it doesn’t have enough information to evaluate the accord, according to a filing yesterday in federal court in Manhattan.  Under the agreement, Bank of America would pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. The settlement was negotiated with a group of institutional investors, including BlackRock Inc. (BLK) and Pacific Investment Management Co. LLC, and would apply to investors outside that group.  Bank of New York Mellon Corp. (BK), the trustee for the mortgage-securitization trusts covered by the agreement, has asked a New York state judge to approve the settlement in November. An investor group is trying to move the case to federal court, which Bank of New York opposes.

FDIC Objects To Bank Of America's $8.5 Billion Mortgage Settlement… In June, a director at Bank of America described the company's 2008 acquisition of Countrywide Financial -- the mortgage lender whose holdings included thousands of toxic assets -- as "the worst deal we ever made." On Monday, Bank of America hit the latest in a long series of roadblocks in trying to put that deal behind itself. The Federal Deposit Insurance Corporation, the government agency responsible for taking over failed banks, filed an objection with the State Supreme Court of New York regarding an $8.5 billion settlement BofA agreed to pay earlier this summer as a partial result of its Countrywide portfolio collapsing, Bloomberg Businessweek reports. Bank of America announced in June that it would pay the settlement to a group of investors who claim they lost money when BofA mortgages fell through. But a number of parties have come forward to object to the terms of that settlement, according to Forbes -- including states and investors involved in the claim -- saying they lack sufficient information to tell if the settlement is appropriate, On Monday, the FDIC became the latest party to object -- not in its capacity as a regulator, but rather as one of the investors.

FDIC Objects to $8.5 Billion BofA Settlement (Updated) - Yves Smith - Ooh, this is getting to be fun. Now the FDIC has weighed in too.  Can’t wait to get my hands on the filing. Needless to say, the FDIC objection is further validation of the questions raised by attorneys general Eric Schneiderman and Beau Biden.  No details yet, merely a notice of the existence of the objection at BloombergUpdate. Here is the filing. FDIC Objection to Bank of America Mortgage Settlement.  The general logic is similar to the Biden objection (although he also took a major shot at the Bank of New York role), but this is as skeletal as it gets. This is literally a placeholder, to weigh in prior to the deadline for objections, which is August 30.

More Legal Woes for BofA: Homeowners Opposes $8.5 Billion Settlement; Different Trustee Sues Over Reps and Warranties - 08/30/2011 - Yves Smith - Bank of Americas’s stock beat a bit of a retreat today as its so called $8.5 billion settlement came under increased fire. Frankly, the number of objections filed prior to late afternoon yesterday and today meant it was dead in its current form. At best, it would take a two or three years and a bigger price tag for any deal to be concluded (although we are in the skeptics’ camp, particularly as far as the currently overly broad waiver of liability is concerned). Nevertheless, the latest developments pound more nails into the coffin. Yesterday, as we noted, the FDIC filed a minimalist objection, saying the disclosures were inadequate for it to know whether it would oppose the deal or not. Today, a suit by several homeowners, supported by the National Consumer Law Center, flagged an issue that we highlighted in our initial comments on the deal: that the settlement included provisions to manage foreclosures to strict timetables, designed to speed them up. That was one of the “gimmies” to investors, and homeowner advocates are none too happy. Per the New York Times: On Tuesday, several homeowners filed suit in the Federal District Court in Manhattan seeking to block a proposed $8.5 billion settlement between Bank of America and major mortgage investor..The suit claims that the deal fails to address widespread servicing problems and would actually speed up foreclosures.. “There is a growing realization that this settlement needs more scrutiny,” said

Bank of America puts Countrywide lending unit up for sale - Bank of America Corp plans to jettison another piece of the troubled Countrywide mortgage empire — a lending arm that buys home loans from smaller institutions to then package into mortgage-backed securities on Wall Street. The beleaguered banking giant has shopped the business around and is in serious talks with one potential acquirer, according to spokesman Dan Frahm. If it can't strike a deal, Bank of America would shut down the business, jeopardizing 1,400 jobs. The decision to sell the unit comes as Bank of America has been shedding businesses it considers nonessential. Chief Executive Brian Moynihan is trying to raise capital and focus the company, the nation's largest retail bank, on selling multiple products to its core customers.  With this, Bank of America has decided to get out of correspondent lending, a low-margin business that buys loans made by smaller institutions. Though these loans accounted for more than half of BofA's mortgage volume, the bank now wants to concentrate on those made directly with consumers

Regulators Ask Bank of America About Contingency Plans -  Yves Smith - The Feds appear to be taking the risk that Bank of America might go wobbly seriously, but are they taking it seriously enough? We quoted Tom Adams on the matter of the Buffett investment in the Charlotte bank: This is being spun as good news for BofA but it is really a sign of just how much trouble they are in. This is step one of their rescue. The powers that be felt they could not wait any longer with BofA so damaged, and that a run or crisis was one bad news day away (earlier this week I predicted some rescue action within 2-3 weeks). Step two, some additional lifeline will show up in September. Step three will be a sale of Merrill. Some readers rejected the idea that a Merrill separation would ever be in the cards, given that Bank of America has made a great deal of noise about how it has integrated the securities firm. But the fact is that Merrill, or any of the major capital markets players would be well nigh impossible to resolve without having serious market impact. Harvey Miller, the dean of the American bankruptcy bar, was quoted in Too Big Too Fail as saying that winding down a mere midsized US securities firm was a highly disruptive event. Not that Merrill would have to be wound down, but if the old BofA foundered and Merrill had been knit tightly into the commercial banking operations, it could be extremely difficult to reverse the deal.

Here's The Bomb That Might Blow A Hole In Bank Of America...*: After watching its stock tank 50% this year while denying that it needed capital, Bank of America's management has begun to acknowledge reality. The bank raised $5 billion by selling preferred stock and options to Warren Buffett—diluting common shareholders in the process. And now, as previously promised, it has sold half its stake in China Construction Bank for $8 billion. These moves are good news for the bank's employees and shareholders, as well as for the U.S. taxpayer, which will be on the hook if Bank of America's management flies the company into a mountain. But many analysts believe that Bank of America will need to raise a lot more capital before it gets back on sound footing. These analysts believe that Bank of America is still overstating the value of some of the assets on its balance sheet. When the company is finally forced to recognize the real values of these assets, this theory goes, the bank will once again have to fill a major capital hole.

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages -The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.  The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.  The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.  Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

US-based banks face mortgage lawsuits -  The largest banks operating in the US have been told to expect lawsuits from a federal regulator in the next few days, accusing them of breaching commitments on the quality of mortgage securities sold to Fannie Mae and Freddie Mac, the government-sponsored mortgage guarantors, according to people familiar with the situation. The move, from the Federal Housing Finance Agency, a regulatory agency set up to oversee Fannie and Freddie, would be a dramatic escalation of the mortgage litigation mess that is hampering banks’ attempts to recover from the financial crisis. It would be another blow for Bank of America, the largest US bank by assets, which has seen its share price battered by doubts over its reserves for mortgage-related losses, putbacks and litigation.Bank of America could potentially face the biggest claim, according to data compiled by the news and data company Inside Mortgage Finance, whose research is regularly cited by the US government. Countrywide Financial, the mortgage firm BofA purchased in 2008 at the urging of federal officials, and BofA together probably sold Fannie and Freddie more than $189bn in bonds from 2003 to 2008 backed by mortgages not guaranteed by the now government-controlled home loan giants, according to Inside Mortgage Finance.

U.S. to sue big banks over mortgage securities: report - (Reuters) - The agency that oversees mortgage markets is preparing to file suit against more than a dozen big banks, accusing them of misrepresenting the quality of mortgages they packaged and sold during the housing bubble, The New York Times reported on Thursday. The Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac, is expected to file suit against Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among other banks.. The suits stem from subpoenas the finance agency issued to banks last year. They could be filed as early as Friday, the Times said, but if not filed Friday it said the suits would come on Tuesday. The government will argue the banks, which pooled the mortgages and sold them as securities to investors, failed to perform due diligence required under securities law and missed evidence that borrowers' incomes were falsified or inflated, the Times reported. Fannie Mae and Freddie Mac lost more than $30 billion, due partly to their purchases of mortgage-backed securities, when the housing bubble burst in late 2008. Those losses were covered mostly with taxpayers' money. The agency filed suit against UBS in July, seeking to recover at least $900 million for taxpayers.

Banks Brace For New Wave Of Mortgage Lawsuits, U.S. May Seek Up To $30 Billion - The worst of banks’ mortgage-related legal battles may be yet to come as the Federal Housing Finance Agency readies a massive new wave of lawsuits aimed at a dozen major lenders. The FHFA is looking to recoup $30 billion from banks including Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank over shoddy mortgage securities sold to Fannie Mae and Freddie Mac, the government-sponsored entities that the agency oversees. That’s the scoop from the New York Times whose Nelson Schwartz reports that “the suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.” The suits which Schwartz reports will likely either be filed Friday or Tuesday will be a major blow to banks some of which are already facing similar claims from private institutional investors. The most significant of which is a record $8.5 billion settlement BofA is trying to finalize with 22 investors including PIMCO, BlackRock and the Federal Reserve Bank of New York who say they were sold poor-quality mortgage-backed securities that went bust when the housing market collapsed.

FHFA Files Suit Against 17 Banks - Now here’s a Friday afternoon news dump: the FHFA, as expected, went ahead with their lawsuits against major banks, 17 in all, over mortgage backed securities purchased by Fannie Mae and Freddie Mac. The lawsuits cover $105 billion worth of securities, and FHFA wants returns on some portion of the losses taken on the securities, which they attribute to illegal actions by the banks when they sold the MBS (specifically, misrepresentations about the underlying loans). Earlier reports said that the losses for Fannie and Freddie on private-label MBS came to around $30 billion, so that’s probably around what they will ask for. The LA Times story puts it at $41 billion in losses. Whatever the number, this is more than the 50 state AG settlement is reportedly attempting to extract from the banks for a liability release over ALL issues in foreclosure fraud. And this is just a representations and warrants case. That’s what LAT says too: While the ultimate amount FHFA will seek is still unclear, that person said it could top the $20 billion being discussed by the banks and the state attorneys general.

BofA, JPMorgan Among 17 Banks Sued by U.S. for $196 Billion. - Bank of America Corp. and JPMorgan Chase & Co. (JPM) were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.  The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.  “The loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the enterprises for those securities,” the FHFA said in a statement.  “The claims brought by the FHFA are unfounded,” said Frank Kelly, a spokesman for Frankfurt-based Deutsche Bank. “Fannie Mae and Freddie Mac are the epitome of a sophisticated investor.”

Government Going After Banks for Shoddy Mortgage Securities - The New York Times reports that our government is going to file suit against a bunch of major banks, alleging fraud in the mortgage securitization process.  Apparently, the statute of limitations expires in a few days, so the Federal Housing Finance Agency is expected to slip the suit in just under the wire.  The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers' incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value. Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. The details are rather sketchy, and I am not a securities lawyer, but I expect that this is going to be a fairly difficult case to make.  Fannie and Freddie already have the right to force banks to take back loans with obvious underwriting flaws, or that go bad too quickly, and my understanding is that they've been doing just that. 

FHFA Sues 17 Firms to Recover Losses to Fannie Mae and Freddie Mac - From the FHFA: FHFA Sues 17 Firms to Recover Losses to Fannie Mae and Freddie Mac The Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac (the Enterprises), today filed lawsuits against 17 financial institutions, certain of their officers and various unaffiliated lead underwriters. The suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities (PLS) to the Enterprises. Here are the links to the legal filings for each bank.An excerpt from the filing against BofA:  This action arises out of Defendants’ actionable conduct in connection with the offer and sale of certain residential mortgage-backed securities which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans.

How the FHFA lawsuits could imperil mortgage-settlement talks - So here’s an interesting wrinkle in the mortgage-settlement talks: according to Nelson Schwartz, the Federal Housing Finance Agency is going to file lawsuits against a dozen or so big banks some time before Wednesday, claiming fraud in their mortgage-securitization departments. This smells very much like the mortgage bond scandal that I was writing about last fall; finally, that shoe might be dropping. And more importantly, it would be a major securitization-related lawsuit being filed by one arm of the federal government, just as another arm is trying to put a big settlement together which might (or might not) give the big banks immunity against precisely such suits. According to Schwartz, the timing of the suit has nothing to do with the settlement talks, and everything to do with the statute of limitations. But once the suits have been filed, it’ll be hard to persuade the FHFA to drop them quietly — especially if it doesn’t get a large check as part of the settlement. So count this as one more thing which mitigates against any settlement from happening. The banks won’t agree to anything unless they get immunity from securitization-related suits, and the government won’t give them that immunity, not least because it’s a plaintiff in a lot of those suits itself.

Power Politics – What Eric Schneiderman Reveals About Obama - A lot of people have asked why New York Attorney General Eric Schneiderman is going after the banks as aggressively as he is. It’s almost unbelievable that one lone elected official, who happens to have powerful legal tools at his disposal, is doing something that no one with any serious degree of power has done. So what is the secret? What kind of machinations is he undertaking that no one else has been able to do?  I’ve known Schneiderman for a few years, back when he was a state Senator working to reform the Rockefeller drug laws. And my answer to this question is pretty simple. He wants to. That’s it. Eric Schneiderman is investigating the banks because he thinks it’s the right thing to do. So he’s doing it. This guy has thought about his politics. He wrote an article about how he sees politics in 2008 in the Nation, and in his inaugural speech as NY AG he talked about the need to restore faith in both public and private institutions. Free will still counts for something, apparently. In all the absurdly stupid punditry, the simple application of free will to our elected officials goes missing.

Matt Stoller: Sell America to Communist China Faster, Says New York Fed Official and Schneiderman Foe Kathryn Wylde - Yves Smith - The elite consensus in American politics is held together by a small group of well-paid and well-connected insiders who are marbled throughout the world of corporations, banks, government service, and elite nonprofits. Who are they? And what do they believe?  One way to start is to look at who is being recruited to attack Eric Schneiderman, the liberal New York Attorney General going after the big banks. Normally these people stay behind the scenes, but in this case, we’re getting a nice peak behind the curtain. The best example so far is Kathryn Wylde, the chief of the nonprofit Partnership for New York City, a big bank/corporate-funded lobbying group that advises political officials on how to build a more business-friendly New York. Wylde, importantly, sits on the Board of the New York Federal Reserve as a Class C Director, the group that is supposed to represent “the public”.  Just checking into Kathryn Wylde’s background shows that she’s a standard issue Rubinite who wants to sell out America to bankers and Chinese elites. As head of the Partnership for New York City, she went after unions by attacking education expert Diane Ravitch. Wylde opposes a living wage for New Yorkers, as well as paid sick leave. Not letting employees go home when they are sick is unsanitary, dangerous and authoritarian. These positions are literally pro-poverty.

Memo to Ezra Klein: Doing Something Stupid Isn’t Smart - Yves Smith - The Administration appears to be gearing up to try to Do Something on the housing and general economy front. Readers have no doubt wised up to the fact that Doing Something, Obama Administration version, generally consists (at best) of largely cosmetic measures accompanied by lots of handwaving. The latest sightings include yet another effort to push the 50 state attorney general settlement over the line by the phony deadline of Labor Day and more chatter among by members of the Democratic hackocracy in favor of an expanded Fannie/Freddie refi program as a way to fix the housing market. That idea appears to be moving front burner, since Baghdad Bob Ezra Klein has decided to weigh in.  Adam Levitin did such an effective takedown that it obviated the need for yours truly to say anything. On August 25, Levitin, in “Financing Malarkey,” said: It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today’s low rates, regardless of whether they are delinquent or underwater… I fail to see how such a plan will accomplish much.

IA AG’s Office Whining That They’re Not Getting Credit for Settlement Bank of America Violated - The folks desperately working to give the banks a Get Out of Jail Free card for their servicing abuses are trying hard to deny they’re not doing so. Take this anonymous accusation from someone involved in the settlement talks claiming that opponents of the settlement are using innuendo to smear those participating in it. Another person close to the talks, who like several others spoke on the condition of anonymity to discuss the situation more freely, said many in the group are “just exasperated. . . . This smear campaign of lies and innuendo, it’s uncalled for, it’s unprecedented, and it threatens substantial consumer harm.” Aside from the fact that even if there were such a campaign it would not be unprecedented, since folks have tried to suggest Eric Schneiderman committed an impropriety by paying himself back for a campaign loan he made to his campaign.  What we have here is a person anonymously making vague innuendos about a smear campaign of innuendos. And then there’s the whining from IA Assistant Attorney General Patrick Madigan, who says it’s unfair to say he and Attorney General Tom Miller are in bed with the banks (in spite of Miller’s fundraising outreach to the banks) because of the great work they’ve done holding banks to account in the past.

Foreclosure Fraud Settlement Crumbles As Tom Miller Whines - Tom Miller’s feewings are huwt. He doesn’t like how he’s being portrayed by those who have actually taken a look at how he’s been handling the 50-state “investigation” on foreclosure fraud. And he’s having his top deputy defend him to major media. Those involved in the settlement talks are increasingly frustrated at how their efforts have been perceived. “We’ve been accused of being in bed with the banks. To say that to a group of people who have spent the last seven to 10 years fighting mortgage abuses day in and day out is an insult of the highest order,” “It’s just unreal.” Oh really? The Countrywide settlement? You’re touting the Countrywide settlement? Can I have your fax number, Attorney General Miller? There’s something I want to send you from Attorney General Masto that I’d like you to see.Incidentally, this is par for the course for Miller. He’s been hyping the Countrywide settlement since he signed onto it in October 2008. Pity he hasn’t been checking to see if Bank of America abided by the terms of it in any way whatsoever. Marcy Wheeler shot the fish in the barrel on this one, too.

Ride the Real Estate Roller Coaster - Many of you will already have seen this, but below is a graphical depiction of the Case-Shiller index of home prices from 1890-2006, plotted as a rollercoaster:  See that death drop at the end? The one that never comes? Someone will have to explain why anyone in public policy listens to the morons who insisted that the inevitable would never happen. Back in 2005, I told anyone who would listen that real estate was coming down, but most people around me trusted the financial experts who said it wasn't. And yet the same fools who inflated the bubble and then maintained the bubble didn't exist, still run our economic policy no matter whether Democrats or Republicans get elected.  A year ago, someone uploaded another real estate rollercoaster video, but this time updated to mid-2010:  You'll notice how much farther it still has to come down to reach pre-bubble levels. That decline has happened somewhat in the year since the video was made, but the fact is that housing is still overvalued.  Trying to force this rollercoaster to move higher again in this context is a fool's errand, and bad public policy anyway. And yet that's exactly what the Administration is trying to do by giving the banks indemnification for mortgage underwriting fraud. Crazy.

Iowa Says State AG Accord Won’t Release Banks From Liability - The 50-state attorney general group investigating mortgage foreclosure practices won’t release banks from all civil, or any criminal, liability in a settlement, Iowa Attorney General Tom Miller said.  Miller said criticism of the multistate case was based on the “false notion” that its organizers were prepared to release the banks from all liability, including criminal liability. New York Attorney General Eric Schneiderman has been portrayed as resisting that position, Miller wrote in a letter to New York lawmakers who complained about Schneiderman’s removal from an executive committee working on the agreement.  “The negotiation committee, working on behalf of all 50 states, does not have any intention of constraining the office of the New York attorney general in any way, has not tried to do so and could not do so,” Miller said. “Schneiderman was removed from the executive committee because he has, over the last several months, undermined our efforts to reach an agreement.”

In 50-state foreclosure negotiations, dispute underlines basic questions -- A recent and acrimonious dispute among state officials over a possible legal settlement to address nationwide mortgage abuses is underscoring basic questions about what the effort should accomplish. In settling claims against the largest banks related to “robo-signed” foreclosure documents and other flawed paperwork, should officials seek to rectify all the wrongs of the mortgage crisis? How big a settlement is big enough? What approach will net the best deal for struggling homeowners?  Last fall, Iowa Attorney General Tom Miller and a handful of counterparts from other states began pursuing a settlement aimed specifically at overhauling the mortgage servicing industry, which has been plagued with problems. That endeavor alone has proven complex and time-consuming. But New York Attorney General Eric Schneiderman has been arguing in favor of investigating an even wider range of mortgage-related practices, leading to “comprehensive resolution” that places homeowners and large investors in mortgage securities at the same table. He has suggested that officials involved in the 50-state talks have been too hasty in seeking a settlement and are at risk of releasing banks from future claims that go beyond the issues probed so far. Miller, who has been leading the multi-state effort, last week removed Schneiderman from the coalition’s executive committee, saying he had “actively worked to undermine” the efforts to reach a settlement. Some lawmakers and activists have rallied behind Schneiderman, calling his opposition to the yet-unfinished deal heroic.

Nevada AG: Securitization Fail - The Nevada AG is looking to reopen the 2008 AG settlement with BoA:  the AG alleges rampant and immediate non-compliance with the settlement.  The NYT coverage missed what is arguably the bigger story:  the Nevada AG came out and alleged a securitization fail.  The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no wordsBank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages.  Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.  Amazing how the federal regulators missed all of this.

Nevada Wallops Bank of America With Sweeping Suit; Nationwide Foreclosure Settlement in Peril - The state of Nevada dramatically expanded its lawsuit against Bank of America today, turning the narrow case it filed late last year into a broadside that targets virtually all aspects of the bank's mortgage operations. Bank of America has previously denied wrongdoing. The sweeping new suit [1] could have repercussions far beyond Nevada's borders. It further jeopardizes a possible nationwide settlement with the five largest U.S. banks over their foreclosure practices, especially given concerns voiced by other attorneys general, New York's foremost among them. (You can read the suit here [1].) Most broadly, Nevada's action signals that the banks' problems with home mortgages—the main cause of the financial crisis—continue to burden them and rattle investors. Bank of America, the nation's largest bank and company that services mortgages, has seen its stock plunge [2] about 40 percent since March, in part because of its mortgage liabilities.. Nevada's attorney general charges that Bank of America and the now-defunct mortgage giant Countrywide acquired by the bank in 2008, deceived borrowers and investors at almost every stage of the process.

Nevada Lawsuit Shows Bank of America’s Criminal Incompetence - Yves Smith - It’s pretty remarkable that Mr. Market shrugged off the devastating implications of the amended lawsuit filed by the Nevada attorney general, Catherine Masto against various Bank of America entities. As we’ve stated before, litigation by attorney general is significant not merely due to the damages and remedies sought, but because it paves the way for private lawsuits.  And make no mistake about it, this filing is a doozy. It shows the Federal/state attorney general mortgage settlement effort to be a complete travesty. The claim describes, in considerable detail, how various Bank of America units engaged in misconduct in virtually every aspect of its residential mortgage business.  The case argues on two tracks: it seeks to overturn the legal shield provided by a 2008 consent decree with Countrywide, since, in simple terms, Countrywide and BofA have flagrantly disregarded it. The case argues a separate series of claims, based on the same fact set, in case the consent decree is deemed to be operative. The complaint describes abuses from the very outset of the securitization process: how borrowers were mis-sold mortgages (it describes how entire products were effectively predatory), how investors were misled as to their quality, how they were not conveyed properly to securitization trusts, how borrowers were subject to abusive servicing (as in charged improper and impermissible fees), how promises made under the old consent decree regarding mortgage modifications were violated, and the filing of fraudulent paperwork to execute foreclosures. Nevada vs Bank of America 2nd Amended Complaint

Robo-Signing Redux: Servicers Still Fabricating Foreclosure Documents - Some of the largest mortgage servicers are still fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners. The practice continues nearly a year after the companies were caught cutting corners in the robo-signing scandal and about six months after the industry began negotiating a settlement with state attorneys general investigating loan-servicing abuses. Several dozen documents reviewed by American Banker show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose. Some of documents reviewed by American Banker included signatures by current bank employees claiming to represent lenders that no longer exist. Many banks are missing the original papers from when they securitized the mortgages, in some cases as long ago as 2005 and 2006, according to plaintiffs' lawyers. They and some industry members say the related mortgage assignments, showing transfers from one lender to another, should have been completed and filed with document custodians at the time of transfer.

Robo-signed mortgage docs date back to late 1990s - Counties across the United States are discovering that illegal or questionable mortgage paperwork is far more widespread than thought, tainting the deeds of tens of thousands of homes dating to the late 1990s. The suspect documents could create legal trouble for homeowners for years. Already, mortgage papers are being invalidated by courts, insurers are hesitant to write policies, and judges are blocking banks from foreclosing on homes. The findings by various county registers of deeds have also hindered a settlement between the 50 state attorneys general who are investigating big banks and other mortgage lenders over controversial mortgage practices. The problem of shoddy mortgage paperwork, which comprises several shortcuts known collectively as "robo-signing," led the nation's largest banks, including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., and other lenders to temporarily halt foreclosures nationwide last fall. At the time, "robo-signing" was thought to be contained to the affidavits that banks file when a mortgage is issued and somebody buys a house.

The More You Look, The More Bank Criminality You Find in Mortgage Land - Yves Smith - I hate giving such short shrift to two new mortgage stories today, but the news accountscontain a good deal of the critical information. First is that the Associated Press reports that Guiford County, North Carolina register of deeds Joe O’Brien has found evidence of robosigning in his filed dating back to 1998. This is significant because: Servicers did nothing on a one-off basis. If O’Brien found robosigned documents in his files that far back, it is certain there are other examples in other jurisdictions dating back that far. It indicated the procedural abuses are much longer standing than virtually all commentators had assumed. I had thought it started with the 2002-3 refinancing boom, when servicers failed to staff up to meet big increases in volumes, which led to corners-cuttting in origination and eventually led to abuses in foreclosures. But this records search indicates the bad practices started much earlier and came to be applied over time on a more widespread basis. The second sighting comes from American Banker’s Kate Berry, and provides additional confirmation of other reports that banks continue to engage in backdating of documents after having piously sworn to stop that sort of thing: Several dozen documents reviewed by American Banker show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose. Some of documents reviewed by American Banker included signatures by current bank employees claiming to represent lenders that no longer exist.

Mortgage servicers still lying in court - American Banker’s Kate Berry has a fantastic piece of reporting today, under the headline “Robo-Signing Redux: Servicers Still Fabricating Foreclosure Documents”. Among her discoveries is this document, dated August 3, 2011, wherein Tonya Hopkins signed over a mortgage in her capacity as Assistant Secretary of Sand Canyon Corporation. The problem with this? Sand Canyon hasn’t been in the mortgage business since 2009, and Tonya Hopkins doesn’t work for Sand Canyon: she works for American Home Mortgage Servicing Inc.This, naturally, causes problems. North Carolina consumer bankruptcy lawyer O. Max Gardner III says servicers and trustees often submit promissory notes in court without proper endorsements, which show the chain of title from one lender to another. Then, after the fact, there will be “a magically appearing note with a stamped endorsement,” Gardner said. When plaintiff’s lawyers then try to depose the person whose name is stamped on the endorsement, “we’re being told the person is no longer employed by the servicer or by the party for whom they signed,” Gardner says.

Fed orders Goldman to review foreclosures (Reuters) - The Federal Reserve ordered Goldman Sachs to hire an outside consultant to review mortgage loans serviced by a subsidiary in order to identify and compensate borrowers who were wrongly foreclosed upon, the central bank announced on Thursday. The Fed said it believes a monetary penalty will be needed and plans to announce one at a future date. The subsidiary, Litton Loan Servicing LP, is being sold by Goldman to Ocwen Financial Corp.

FDIC-insured institutions’ Real Estate Owned (REO) decreased in Q2 - Last week I noted that 1-4 family Real Estate Owned (REO) by FDIC insured institutions declined to an estimated 80,600 in Q2. As Tom Lawler noted, the FDIC does not collect data on the number of properties held by FDIC-insured institutions, instead they aggregate the carrying value of 1-4 family residential REO on FDIC-insured institutions’ balance sheets. Here is a graph of the 1-4 family REO carrying value for FDIC insured institutions since Q1 2003.  For Q2 2011, the FDIC reported (See Table V-A) the value was $12.09 billion, down from $13.28 billion in Q1, and down from a high of $14.76 billion in Q3 2010.  The left scale is the dollars reported in the FDIC Quarterly Banking Profile, and the right scale is an estimate of REOs using an average of $150,000 per unit. Using this estimate for the average per REO, that gives 80.6 thousand REO at the end of Q2, down from 88.5 thousand at the end of Q1. This is about 5 times the carrying value in 2003.

Foreclosures: Uncle Sam and His 248000 Homes - The number of homes listed for sale by Fannie Mae, Freddie Mac, and the Federal Housing Administration on Aug. 29, 2011: 89,819  For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae (FNMA), Freddie Mac (FMCC), and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market. Trouble is, they haven’t figured out how to do that. The government admitted as much in August, when Fannie, Freddie, and FHA issued a joint plea to the public for ideas about how to solve the problem. (Give it your best shot: You have until Sept. 15 to submit ideas to “

LPS: Average Loan in Foreclosure Is Delinquent for Record 599 Days - LPS Applied Analytics released their July Mortgage Monitor Report today. From LPS: LPS' Mortgage Monitor Report Shows Average Loan in Foreclosure Is Delinquent for Record 599 Days; First-Time Foreclosure Starts Near Three-Year Lows The July Mortgage Monitor report released by Lender Processing Services, Inc. shows that foreclosure timelines continue their steady upward trend, as a payment has not been made on the average loan in foreclosure in a record 599 days. Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record. According to LPS, 8.34% of mortgages were delinquent in July, up from 8.15% in June, and down from 9.31% in July 2010.  LPS reports that 4.11% of mortgages were in the foreclosure process, down slightly from 4.12% in June, and up from 3.74% in July 2010. This gives a total of 12.45% delinquent or in foreclosure. It breaks down as:
• 2.48 million loans less than 90 days delinquent.
• 1.90 million loans 90+ days delinquent.
• 2.16 million loans in foreclosure process.
This graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquent rate has increased recently (part of the increase is seasonal), but the rate has fallen to 8.34% from the peak in January 2010 of 10.97%. This graph provided by LPS Applied Analytics shows the number of loans entering the foreclosure process each month and the number of foreclosure sales. The third graph shows mortgage origination by the original term.  This graph is interesting because of the surge in shorter duration loans.

First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ - The LPS Mortgage Monitor August 2011 Mortgage Performance Report Shows First-Time Foreclosure Starts Near Three-Year Lows. That's the good news. The Bad News:

  • Average Loan in Foreclosure Is Delinquent for Record 599 Days
  • Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record.
  • As of the end of June, 4.1 million loans were either 90 or more days delinquent or in foreclosure, as delinquencies remain two times and foreclosures eight times pre-crisis levels.
  • On average, at the current rate of foreclosure sales, judicial foreclosure states would require 111 months to work through inventories of loans that are 90 or more days delinquent or in foreclosure as compared to non-judicial states, which would be able to clear the inventories in approximately 32 months.
  • Most of the foreclosure “outflow” is back into delinquency
  • Loans deteriorating over 90 days still outnumber foreclosure starts 2:1
  • Foreclosure starts outnumber sales by a factor of almost 3:1

Foreclosures Now Take 20 Months - The average home entering the foreclosure process today won’t house new owners until the next President has been inaugurated and in office for three months. New data from LPS shows that payments have not been made on the average loan in foreclosure in a record 599 days, or 20 months. Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record. At the same time, first-time foreclosure starts in June were near three-year lows, and first-time delinquencies accounted for only 25 percent of new delinquent inventory, according July Mortgage Monitor report released by Lender Processing Services, Inc. As of the end of June, 4.1 million loans were either 90 or more days delinquent or in foreclosure, as delinquencies remain two times and foreclosures eight times pre-crisis levels. Foreclosure sales remain constricted, with foreclosure starts outnumbering sales by a factor of almost three to one. The slowdown is most pronounced in judicial foreclosure states, which maintain a foreclosure and seriously delinquent pipeline that is more than three times as long as non-judicial states. On average, at the current rate of foreclosure sales, judicial foreclosure states would require 111 months to work through inventories of loans that are 90 or more days delinquent or in foreclosure as compared to non-judicial states, which would be able to clear the inventories in approximately 32 months.

At 65 percent, Nevada leads nation in sale of foreclosed homes - Nevada led the nation during the second quarter with 65 percent of its homes sold as foreclosures, according to a California research firm. The nation’s percentage was 31 percent. Arizona was second with 57 percent and California was third with 51 percent. Third parties purchased 15,685 homes in Nevada during the second quarter, up 24 percent from the first quarter and 31 percent from the second quarter of 2010, RealtyTrac reported. The average foreclosure sales price in Nevada was $121,862, RealtyTrac reported. Foreclosures sold at a 22 percent discount than those not sold in foreclosure, the firm noted. Nevada had the biggest quarterly increase in pre-foreclosure home sales during the second quarter, a 43 percent gain. Most pre-foreclosure sales are short sales in which homeowners owe more on the loan than the home is valued.

Fannie Mae and Freddie Mac Serious Delinquency Rates mostly unchanged in July - Fannie Mae reported that the Single-Family Serious Delinquency rate was unchanged at 4.08% in July. This is down from 4.82% in July of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 Freddie Mac reported that the Single-Family serious delinquency rate increased to 3.51% in July from 3.50% in June. This is down from 3.89% in July 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". Note that the Fannie and Freddie serious delinquency rates are much lower than the overall serious delinquency rate (LPS reported that the overall serious delinquency rate and in-foreclosure was 7.72% in July). Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent. Although the delinquency rate was unchanged in July, the serious delinquency rate has been falling as Fannie and Freddie work through the backlog of delinquent loans.

Tying Health Problems to Rise in Home Foreclosures - The threat of losing your home is stressful enough to make you ill, it stands to reason. Now two economists have measured just how unhealthy the foreclosure crisis has been in some of the hardest-hit areas of the U.S. New research shows a direct correlation between foreclosure rates and the health of residents in Arizona, California, Florida and New Jersey. The economists concluded in a paper published this month by the National Bureau of Economic Research that an increase of 100 foreclosures corresponded to a 7.2% rise in emergency room visits and hospitalizations for hypertension, and an 8.1% increase for diabetes, among people aged 20 to 49.  Each rise of 100 foreclosures was also associated with 12% more visits related to anxiety in the same age category. And the same rise in foreclosures was associated with 39% more visits for suicide attempts among the same group, though this still represents a small number of patients, the researchers say.

Refinancing Mortgages Won’t Fix U.S. Housing - The New York Times reported last week that the Obama administration was considering a proposal to “allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent.” The measure’s supporters tout this as an almost cost-free way to stimulate the economy, boost the housing market and reduce foreclosures. But universal refinancing is far from free, and is poorly designed to stimulate either the economy or the housing market. Certainly, Fannie Mae and Freddie Mac, the huge finance companies now under government control, will have to allow some mortgage modifications in order to reduce their foreclosure losses. That calls for smart, selective policies, not universal refinancing. The most extreme proposal now being floated involves refinancing at current low rates all the mortgages insured by Fannie Mae and Freddie Mac. One of the big appeals is that it seems like free stimulus. As the Times reported, “proponents say the plan carries little risk because the mortgages are already guaranteed by Fannie Mae and Freddie Mac.” But even supporters of the plan emphasize that refinancing would mean that “Fannie Mae and Freddie Mac eat billions by giving up their ability to challenge these reps and warrants” given by mortgage issuers in the first place.

More on Refinancing Plan - Chris Mayer, one of the authors of the refinancing plan, a version of which is currently being considered by the administration, wrote in to the comments on an earlier post, protesting my characterization of his proposal. I have no argument with Chris about there being too many frictions in the refinancing process. I'm not sure that this is the best way to fix them, however, and I'm also puzzled by what problem the proposal aims to solve.  Is the goal to stabilize the housing market or to provide economic stimulus?   If it is aiming to stabilizing the housing market, it is hard to see how a refinancing program, no matter how massive or generous, will accomplish that, as it doesn't address negative equity or unemployment. Too-high interest rates aren't what's driving forecloses.  Yes, there's a large gap between current mortgage rates and the Fed Funds rate, but mortgage rates on existing mortgages are not especially high as things go.  Lowering interest rates makes mortgages more affordable, but we don't have an affordability problem per se.  We have a problem of mortgages being too pricey relative to employment and relative to equity in the homes.  This proposal doesn't fix those problems. 

Allowing underwater borrowers to refinance could help - Yves Smith and Adam Levitin, for whom I have enormous respect, argue that allowing underwater borrowers to refinance their mortgages at lower rates would not help the housing market very much.  I am not so sure. Consider a borrower with a six percent mortgage whose house is worth 80 percent of the mortgage balance.  Let's also say that it is four years into its mortgage--so it has 26 years remaining on its term.  If house prices remain flat, it will be 11 years and 9 months before the mortgage balance drops to the value of the house.   Suppose we were to convert the mortgage to a 4.5 percent mortgage but left the mortgage payment the same.  In the first month, the amount of principal payment would increase by 2.35 fold.  The borrower would be above water in 5 years and 5 months.  Helping borrower see a light at the end of the tunnel could really make a difference. Personally, I would rather see some principal reduction too, but allowing free refinancings on Fannie and Freddie mortgages could materially benefit the housing market.

Rebalancing the Housing Market - Fed Governor Elizabeth Duke - Speech At the Federal Reserve Board Policy Forum: “The Housing Market Going Forward: Lessons Learned from the Recent Crisis”

Fed governor calls for refi program changes - Changes should be made to the Obama administration’s existing housing refinance program to enable the participation of millions more underwater borrowers, Federal Reserve Governor Elizabeth Duke said in a speech on Thursday.  “Given the potential savings to households, the relatively low take-up on this program warrants another look at the frictions that may be impeding these refinancing transactions,” Duke said in remarks prepared for a Fed housing conference.  Duke’s comments come as observers speculate that the Obama administration is considering a major new initiative that would allow for the refinancing of millions of underwater mortgages backed by the U.S. government.  At issue in Duke’s speech is the Obama administration’s Home Affordable Refinance Program, or HARP, which seeks to provide refinancing to borrowers who have low or no equity in their homes as long as that mortgage is backed by government seized housing giants Fannie and Freddie. So far, roughly 800,000 borrowers have refinanced their mortgages through HARP, but Duke said the Fed estimates that 4 million borrowers appear to meet the basic eligibility standards to qualify.

Mortgage Refinancing Proposals: Defining the Objective - A recent New York Times article suggested that the President may launch a new mortgage refinancing initiative as part of next week’s speech to announce a “pivot to jobs.” Current mortgage markets are so dysfunctional that a reaction to the trail balloon seems to depend, in part, on what specific aspect of the dysfunction the proposal is attempting to address. The current situation also provides a reminder of the problems inherent with the 30-year fixed rate mortgage and why it would be no great loss if eventual privatization of the mortgage markets made this instrument less ubiquitous. There are two basic problems a mortgage refinancing program can seek to address:

  1. About one-quarter of all mortgage borrowers are underwater, which means the outstanding principal balance on their home mortgage(s) exceeds the market value of their home. Households in this situation have an incentive to walk away from their property because doing so would increase their wealth.
  2. The economy is struggling. A huge portion of household cash flow is used to meet the monthly mortgage payment. Reducing that mortgage payment through a downward adjustment in the effective rate paid on the mortgage would allow households to increase consumption of other goods and services.

More of the Same in a Mortgage Plan - There’s talk of yet more government help for careworn American mortgage borrowers. But there’s no magic bullet and returns are diminishing.  Refinancing is back on the agenda. The idea is to find ways for underwater homeowners, or those nearly so — and therefore unable to meet the usual criteria to replace their mortgages — to benefit from currently low interest rates. This has been tried already, with miserable results.  Two years ago, the Obama administration set up a program called the Home Affordable Refinancing Plan, or HARP, precisely for this purpose. Yet fewer than one million of the anticipated five million to six million borrowers have benefited from the program. Meanwhile, the president’s Home Affordable Modification Program , known as HAMP, has permanently reduced monthly payments for fewer than one million homeowners, a far cry from the three million to four million initially expected. Both programs remain open.  A big hurdle is the role of private banks. Mortgage servicing operations, which do all the paperwork, are overloaded and in some cases seem to lack even a basic level of competence.

Mortgage Reality Distortion Field -  A year ago I wrote a sad little column about my friend Ralph and his difficulty getting his mortgage adjusted.  Ralph had lost his tech job, there was this federal program to help people in his position lower their mortgage payments, but for some reason it just wasn’t working. His lender kept losing the paperwork, forcing Ralph to reapply three times. Twelve months later Ralph is now working hard at a tech startup that can’t yet afford to pay him, he’s thankful his wife has a good business reselling children’s clothes, but their mortgage still hasn’t been modified, though Ralph keeps trying. Understand here that Ralph isn’t an outlier.  He is not in foreclosure. He’s precisely in the intended sweet spot for this federal loan modification program. Here are the numbers so far, according to Ralph:

  • He has dealt with 11 different bank negotiators
    He has applied for either 8 or 10 modifications (depends who you ask)
    He has made 50 phone calls
    He has sent 35 FedEx shipments
    He has faxed the bank 300 pages
    He scanned 70 pages to PDF and sent by e-mail
    He initiated one Congressional inquiry

The most powerful man in housing policy - It’s a little-known bureaucrat named Edward DeMarco. DeMarco is the acting director of the Federal Housing Finance Agency. Which means that, under the terms of the 2008 Housing and Economic Recovery Act, DeMarco is in charge of supervising mortgage giants Fannie Mae and Freddie Mac. So any attempts the Obama administration might make to use Fannie and Freddie to stabilize the housing market run directly through DeMarco’s office. And in many of the attempts it has made, the Obama administration has not exactly found DeMarco to be a willing partner. At the heart of the tension between DeMarco and the Obama administration is a conflict tucked deep into DeMarco’s job description: The head of the FHFA is stuck between the narrow needs of Fannie and Freddie and the broader needs of the housing market.

HousingTracker: Homes For Sale inventory down 14.1% Year-over-year in July - In June, Tom Lawler posted on how the NAR estimates existing home inventory. The NAR does NOT aggregate data from the local boards (see Tom's post for how the NAR estimates inventory). Sometime this fall, the NAR will revise down their estimates of inventory and sales for the last few years. Also the NAR methodology for estimating sales and inventory will likely (hopefully) be changed.  I think the HousingTracker / DeptofNumbers data that Tom mentioned might provide a timely estimate of changes in inventory. Ben at is tracking the aggregate monthly inventory for 54 metro areas. This graph shows the NAR estimate of existing home inventory through July (left axis) and the HousingTracker data for the 54 metro areas through August. The HousingTracker data shows a steeper decline in inventory over the last few years. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the August listings - for the 54 metro areas - declined 14.1% from last year. Of course there is a large percentage of distressed inventory, and various categories of "shadow inventory" too. But the decline in listed inventory is something to watch carefully all year.

Pending Home Sales decreased in July - From the NAR: Pending Home Sales Slip in July but Up Strongly From One Year Ago The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slipped 1.3 percent to 89.7 in July from 90.9 in June but is 14.4 percent above the 78.4 index in July 2010. The data reflects contracts but not closings. The PHSI in the Northeast declined 2.0 percent to 67.5 in July but is 9.7 percent above July 2010. In the Midwest the index slipped 0.8 percent to 79.1 in July but is 18.8 percent above a year ago. Pending home sales in the South fell 4.8 percent to an index of 94.4 but are 9.5 percent higher than July 2010. In the West the index rose 3.6 percent to 110.8 in July and is 20.6 percent above a year ago. The consensus was for a 1% decrease in the index. This suggests existing home sales will stay weak.

MBA: Mortgage Purchase Activity "near 15-year lows" - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey The Refinance Index decreased 12.2 percent from the previous week. The seasonally adjusted Purchase Index increased 0.9 percent from one week earlier. Refinance application volume declined for a second week from recent highs, despite rates staying near a 10-month low, while purchase volume remained near 15-year lows," ... The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.32 percent from 4.39 percent, with points increasing to 1.30 from 0.88 (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 1990The four week average of the purchase index is now at the lowest levels since August 1995!  This doesn't include the large number of cash buyers ... but purchase application activity was especially weak over the last three weeks, and this suggests weak home sales in the coming months.

The States Where Underwater Mortgages Are Sinking Home Values -  To better understand the current state of the American housing market — and better forecast its future — experts look at a number of economic and financial indicators. Different statistics, such as the size of the market of foreclosed homes, home prices and home inventories, touch on some of the reasons people default on their mortgages and banks end up writing off bad loans. But none is a better indicator than the percentage of mortgages that are underwater – where borrowers owe more on their mortgages than their homes are worth – and the major reason people default on mortgages. Indeed, real estate research firm Corelogic recently released data on underwater mortgages, breaking down the information by state and major city. And according to the latest Corelogic data, “10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011.”

House Price Preview - The Case-Shiller House Price index for June will be released tomorrow morning. Here is a roundup of a few other indexes:

  • CoreLogic: Home Price Index increased 0.7% in June  [H]ome prices in the U.S. increased by 0.7 percent in June 2011 compared to May 2011, the third consecutive month-over-month increase.
  • • FNC: June Home Prices Up for Third Straight Month  FNC’s Residential Price Index™ 1 (RPI) indicates that single-family home prices were up in June at a seasonally unadjusted rate of 0.9%. As a gauge of underlying home value, the RPI excludes sales of foreclosed homes, which are often sold with large price discounts due to poor property conditions.
  • • FHFA Expanded House Price Index (quarterly)  The expanded FHFA national series was down 1.1 percent in Q2 (Seasonally adjusted), and down 6.1% from Q2 2010 ...
  • • Zillow: Real Estate Market Reports indicated house prices declined 0.1% in June.
  • • From RadarLogic Housing Markets Continue to Show Weakness - The RPX Composite price, which tracks housing values in 25 major metropolitan markets in the United States, declined 4.7 percent year over year through June

Case Shiller: Home Prices increased in June -- S&P/Case-Shiller released the monthly Home Price Indices for June (actually a 3 month average of April, May and June). This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities), plus the Q2 2011 quarterly national house price index. From S&P: Nationally, Home Prices Went Up in the Second Quarter of 2011 According to the S&P/Case-Shiller Home Price Indices. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 31.9% from the peak, and up slightly in June (SA). The Composite 10 is 1.5% above the June 2009 post-bubble bottom (Seasonally adjusted). The Composite 20 index is off 31.9% from the peak, and down slightly in June (SA). The Composite 20 is slightly above the March 2011 post-bubble bottom seasonally adjusted.  The second graph shows the Year over year change in both indices. The Composite 10 SA is down 3.9% compared to June 2010.  The Composite 20 SA is down 4.6% compared to June 2010.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller home-price data showed sideways movement in June, as prices were boosted from a month earlier thanks to seasonal factors but remained below year-ago levels. The composite 20-city home price index, a key gauge of U.S. home prices, posted a 1.1% increase from May but fell 4.5% from a year earlier. The broader national home price index, which is only released on a quarterly basis, rose 3.6% in the May-June period compared to the first three months of the year. But the national index was still 5.9% below its level in the second quarter of 2010. All of the 20 cities posted annual declines in June, even as none of them notched monthly declines. On a seasonally adjusted basis, which aims to take into account the stronger spring-summer selling season, just eight cities — Boston, Charlotte, Chicago, Detroit, Miami, Minneapolis, Tampa and Washington, D.C. — posted monthly increases. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Housing Prices: Case-Shiller Index Rises, but Rebound Still Far Away - For the third time in three months, housing prices are up. Don't expect that to continue. According to the latest numbers from the Standard & Poor's/Case-Shiller home price index, which was released on Tuesday morning, house prices in 20 large metro areas around the country rose an average of 1.1% in June. Chicago had the biggest monthly increase in home prices, up 3.2% in the last month of the second quarter. Prices even rose in foreclosure plagued Las Vegas, up 0.07%. So is the housing market set to finally rebound? Not yet. Here's why:First of all, let's get what everyone should know about housing out of the way: Prices rise in the spring. It's the time most people buy houses. So the three month run-up in prices from April through June is to be expected even in a weak housing market. The fact that we didn't get that run up a number of times in the past few years is really a sign of just how bad things got, not how good they are now. Most parents like to be in their new homes by September, so their kids can be in place for the new school year. And it takes a few months to close a home purchase. So June could be the last month to benefit from the seasonal uptick. On a seasonally adjusted basis, homes prices actually fell slightly, down 0.1%.

CoreLogic: Home Price Index increased 0.8% in July - This CoreLogic Home Price Index is for July. The Case-Shiller index released yesterday was for June. Case-Shiller is the most followed house price index, but CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of May, June and July (July weighted the most) and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® July Home Price Index Shows Fourth Consecutive Month-Over-Month Increase CoreLogic ... today released its 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. On a year-over-year basis, however, national home prices, including distressed sales, declined by 5.2 percent in July 2011 compared to July 2010. In June 2011, prices declined by 6.0 percent* compared to June 2010. Excluding distressed sales, year-over-year prices declined by 0.6 percent in July 2011 compared to July 2010 and by 1.9* percent in June 2011 compared to June 2010.  This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. As Mark Fleming noted, some of this increase is seasonal (the CoreLogic index is NSA) and the index is still off 5.2% from last July. Month-to-month prices will probably turn negative later this year (the normal seasonal pattern).

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

Home prices are down -- so where are the buyers? (CBS News) There are new numbers out Tuesday on home prices. They rose 3.6 percent in the second quarter of this year compared to the first, though they are still 5.9 percent lower than a year ago. But what's so puzzling is that despite lower prices, homes are not selling. CBS News correspondent Chip Reid examines the cause. In South Bend, Indiana, real estate agent Peggy North can hardly believe it. A two-bedroom bungalows hasn't sold at $51,000, about $10,000 less than it sold for eight years ago "In 21 years, I've never seen this market," she said. Overall home prices in South Bend are down 10 percent from a year ago, and sales are down 17 percent. Nationally, it's the same story: Home prices are down to 2003 levels, but sales are on track to be the lowest in 14 years. It raises the question: With mortgage rates at 50-year lows, and home prices so low, why aren't people buying?

Lawler: Census 2010: Homeownership Rates by Selected Age Groups - While Census has not released “Summary File 1” for the US as a whole, it has released such data for all 50 states plus DC. As such, aggregate US data from these files, including homeownership rates by selected age groups, can be constructed using the mathematical tools called “addition” and “division.” Note the sizable declines in homeownership rates over the last decade in the 25-54 year old age groups! Here is a comparison of the decennial Census homeownership rates (which reflect April 1st) and the Housing Vacancy Survey (which are yearly average estimates). HVS data by age group only go back to 1982. While the decennial Census data show that the homeownership rates for all age groups save for “geezers” in 2010 were down significantly from 1990, the HVS data do not show the same declines. Census officials are unsure of why there are such large discrepancies, but most – though not all -- feel that the decennial Census data are more accurate, and that there is “sumpin’ wrong” with the HVS data (the same is true for the HVS vacancy data), and not just for 2010, but for 2000 as well.

Construction Spending declined in July - Catching up ... this morning from the Census Bureau reported that overall construction spending declined in July: during July 2011 was estimated at a seasonally adjusted annual rate of $789.5 billion, 1.3 percent (±1.9%)* below the revised June estimate of $799.8 billion. Private construction spending decline in July: Spending on private construction was at a seasonally adjusted annual rate of $514.5 billion, 0.9 percent (±1.1%)* below the revised June estimate of $519.0 billion. Residential construction was at a seasonally adjusted annual rate of $248.1 billion in July, 1.4 percent (±1.3%) below the revised June estimate of $251.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $266.4 billion in July, 0.4 percent (±1.1%)* below the revised June estimate of $267.3 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993.. Private residential spending is 63% below the peak in early 2006, and non-residential spending is 36% below the peak in January 2008. Private construction spending is mostly moving sideways, and it is public construction spending that is now declining.

The Housing Bust, Deleveraging, and Zero - If the housing bust was the proximate cause of our Great Recession, why didn't the economy begin contracting until a year and a half after housing prices began to decline -- and well after the economy began shedding construction jobs? Indeed, Ryan Avent observes:[T]he story in which the housing bust gave us the recession, because America suddenly had lots of houses and workers it couldn't use doesn't appear to fit the data. The economy muddled on despite the housing bust for two years, at which point, for some reason, all sectors suddenly decided that the outlook for growth was much worse than they'd previously believed.But what about the story where the housing bust gave us the recession, because households underwater on their mortgages suddenly upped their savings rates, which was enough of a hit to aggregate demand to cause other households to save more out of fear as well? In short: the collapse of housing prices, rather than the collapse in demand from the housing sector, drove the recession. The data certainly seems to conform with this general narrative. Here are owners' housing equity (blue) plotted against home mortgage liabilities (red) and the personal savings rate (green).

The Changing Distribution of Adjusted Gross Income for U.S. Households - In looking at the chart, you can easily see that the cumulative distribution curves for adjusted gross incomes from $1 through $75,000 are within very close proximity to one another for all years shown on the chart. So much so that these curves essentially overlap each other.  And when you look at households with adjusted gross incomes above $200,000, you can see that this portion of each year's cumulative distribution curve runs nearly parallel with all the others. This indicates that there has been very little change in the number of households counted as having incomes above this level.  But the income range that saw the greatest change from year to year for each year from 1996 through 2009 is that for households with adjusted gross incomes between $75,000 and $200,000.  In fact, if not for the growth in the number of households in this income range, the cumulative income distribution curves would be nearly identical from year to year!

What Does 'Economic Growth' Mean for Americans? - Suppose we placed a carefully selected sample of men on a hot stove and another sample of men on dry ice. Could we reasonably conclude that, on average, they were comfortable? As a nation we worship a deity called economic growth. The more sophisticated users of that term presumably mean by it “annual growth in average gross domestic product per capita, expressed in dollars with a constant value relative to real goods and services, and averaged over the entire population of the United States” — in short, real G.D.P. per capita. But what does an average of this sort mean for most people the United States? I am fascinated by a recent paper in the Journal of Economic Literature. The authors, recognized experts on the study of income distributions, have constructed a long-run time series of top income shares for more than 20 countries, starting about 1915 and ending in 2007.

Personal Income increased 0.3% in July, Spending increased 0.8% - The BEA released the Personal Income and Outlays report for July: The following graph shows real Personal Consumption Expenditures (PCE) through July. PCE increased 0.8 in July, and real PCE increased 0.5% as the price index for PCE increased 0.4 percent in July.  Note: The PCE price index, excluding food and energy, increased 0.2 percent, the same increase as in June. The personal saving rate was at 5.0% in July. Personal saving -- DPI less personal outlays -- was $582.8 billion in July, compared with $638.6 billion in June. Personal saving as a percentage of disposable personal income was 5.0 percent in July, compared with 5.5 percent in June. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the June Personal Income report. Real PCE was revised up a little for Q2 too. This was a solid increase in spending and above the consensus of 0.5% - however I expect August to be weaker due to the confidence shattering debt ceiling debate.

Personal Spending Rises Sharply In July - Today's update on spending and income for July offers more support for thinking that the latest downshift in economic activity won't deteriorate into a recession. Personal consumption expenditures (PCE) surged higher in July, rising by 0.8%--the biggest monthly gain in nearly two years and a sharp reversal from June's slight retreat. If consumption is vulnerable, there's no sign of it in the latest numbers. Even after adjusting for inflation, PCE was up a strong 0.5%. Disposable personal income (DPI) didn't fare as well, but still managed a respectable performance by rising 0.3% last month vs. 0.2% in June. Never say never in macroeconomics, but contractions don't begin with these numbers. All the challenges that bedevil the U.S. economy remain, of course, but the data du jour look surprisingly resilient, given the current climate. In fact, one might wonder if the numbers on the spending side look at little too good. Consider how PCE and DPI compare on a rolling 12-month basis, as the chart below shows. Note that spending (red line) has been accelerating in recent months (with June the exception) for year-over-year comparisons. Meanwhile, DPI has remained in a flat/declining trend. The divergence can't last forever, although the implications aren't necessarily dire either. At the very least, the gap suggests that consumption's pace will slow.

Recession leaves many in permanent cutback mode - Hariprashad, 34, says the recession forced him to change his ways. Business slowed because customers didn't have as much money to spend on driving lessons. Faced with the threat of bankruptcy, he cut back on discretionary spending and used the money to pay off his credit cards. "Now, I have a clean slate," he says. After a prolonged bender of spending and borrowing, millions of recession-scarred Americans have followed a similar redemptive path. Since the third quarter of 2008, overall U.S. household debt, which includes credit cards, mortgages, student loans and car loans, has declined by more than $1 trillion, according to the Federal Reserve Bank of New York. While the rate of the decline has slowed somewhat in recent months, total consumer debt is still down 8.6% from the third quarter of 2008. Some of the reduction in debt stems from tighter credit standards, which have made it more difficult for consumers to borrow. Financial institutions have also written off billions in debts deemed uncollectable. But other trends point to a dramatic change in household balance sheets.

August Sales: How Retailers Fared --Many large retailers reported their August sales numbers this week, with most of them coming out the morning of Thursday, Sept. 1. Results were mixed amid the effects of Hurricane Irene, which boosted companies that sold supplies such as Costco and BJ’s but weighed on apparel retailers. Click here for a chart sortable by company name, category, change in total or same-store sales, and total sales. Click here for July’s chart.

U.S. Light Vehicle Sales at 12.12 million SAAR in August - Based on an estimate from Autodata Corp, light vehicle sales were at a 12.12 million SAAR in August. That is up 5.3% from August 2010, and down less than 1% from the sales rate last month (12.2 million SAAR in July 2011). This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for August (red, light vehicle sales of 12.12 million SAAR from Autodata Corp).  Sales declined slightly from the July rate.  The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession, and that the current level of sales are close to the 1990 recession bottom. This also shows the impact of the tsunami and supply chain issues on sales in May and June. Growth in auto sales should make a positive contribution to Q3 GDP as sales bounce back from the May and June lows. However, so far, sales in Q3 have average 12.16 million, only slightly above the Q2 rate - May and June were very weak, but April was above 13 million SAAR.

U.S. lenders making more subprime car loans: report - (Reuters) - Lenders are making more subprime auto loans again, reversing the cautious approach they adopted after the credit crisis, an industry research firm said on Tuesday. The portion of car loans made to subprime borrowers rose to 40.8 percent in the second quarter from 37.2 percent a year earlier, according to Experian Automotive, a unit of credit bureau and research firm Experian Plc. The data shows how keen lenders are to boost their loan books amid a sluggish U.S. economy. Car loans are seen by lenders as relatively safe, because they are collateralized and repossessing cars is easier than foreclosing on homes. Average credit scores for borrowers declined and the average term for their loans extended by one month to 63 months on new cars and 59 months on used cars. "We are continuing to see growth in subprime, both new and used, and loans are becoming looser,"

Pouring the Red Ink Down the Sink - The US consumer’s decade-long spending spree has ended, but there’s still an ocean of red ink left to mop up. And with housing prices falling and unemployment tipping 9 per cent, it will take longer to clear the family balance sheet than many had anticipated. Traditionally, the government has helped to ease the pain of deleveraging by providing fiscal stimulus to boost economic activity and lower the real cost of debt. But Capital Hill is now in the grips of deficit hawks who frown on such Keynesian remedies, so households and consumers will have to fend for themselves and pay-down debts as best as they can or default when repayment is no longer possible . That’s bad news for the economy that depends on consumers for 71 percent of GDP. Without a healthy consumer, the economy will face years of sluggishness and stagnation. U.S. household debt as a share of annual disposable income is currently 115 percent, down from the peak of 135 percent in 2008. But, while consumers are making headway in paring down their debts, there’s still a lot of work to do. Economists believe that the figure will eventually return to its historic range of 75 percent, which means slower growth for years to come unless someone else makes up the difference in spending. But what sector is big enough to make up for the loss in consumer spending? Business? Government?

U.S. Consumer Confidence Falls to Two-Year Low -The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.  “This paints a picture of underlying demand weakening,” “Consumers are seeing their wealth deteriorate. We’ve seen a huge decline continuing in the housing market. They’ve also been hit on the chin by the equity markets.”  The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent in June from a year earlier, after a 4.6 percent drop in the 12 months ended in May that was the biggest since 2009.  Today’s confidence report is in line with other figures. The Thomson Reuters/University of Michigan final index of consumer sentiment dropped this month to the lowest level since November 2008. The Bloomberg Consumer Comfort Index has been hovering at levels previously consistent with recessions

Chart of the Day: Consumer Confidence - Thanks to Andy Lees for the chart. He says: The Conference Board index implies a recession of 1973/74 severity as per the attached chart. Whilst the data clearly disappointed against consensus estimates, it is exactly in-line with the Michigan overlay, the Philly overlay or the ISM forward index overlay and therefore should not be dismissed out of hand. Yesterday's pickup in consumer spending was financed by a drop in the savings ratio. Had that drop been accompanied by improved consumer confidence it could have been interpreted positively, but the fact that the confidence is falling would suggest that the fall in savings is necessary for people to continue to survive. I don’t ascribe that much importance to confidence data as a leading indicator. Moreover, as we saw during the 2000s, low consumer savings can bolster GDP growth for quite a long time. I remember saying something about low savings, low-quality growth and pro-cyclical forces back when this recovery was just beginning. Nevertheless, I agree with the underlying message here, namely that increasingly economic data indicate the US is dangerously close to a significant downturn.  Still, we are pretty close and I believe the removal of policy stimulus will push us over the edge.

This Is The Way The Hopium Ends: Not With A Bang, But With The Biggest Collapse In Future Consumer Expectations... Ever - The charts below demonstrate the 6 month change in the 6 month forward looking Consumer Confidence outlook: in other words, this chart measure just how deceived US consumers have been by hopium consumption 6 months ago compared to reality now. In short: 2011 has been the most disappointing year for Americans in history. Whether it is due to excess hopium consumption or not... well, it is not irrelevant.

Are Consumer Confidence Indices Useful As Leading Indicators? -Consumer confidence fell to its lowest level in more than two years, the Conference Board reports. That's a discouraging sign for the economy. No one's really surprised, given the various ills weighing on the economy, although some analysts doubt that such measures are all that valuable. "Quantifying how consumers think is a fuzzy art under the best of circumstances, but that doesn't stop anyone from trying. There are several confidence measures to consider. A popular alternative to the Conference Board's index is the Thomson Reuters/University of Michigan survey, which has also slumped recently, falling to its lowest level in August since November 2008. Yet another reason for caution. How much stock should we put in such measures for gauging the future? Consumer confidence benchmarks surely deserve routine monitoring, but the standard caveat applies: Any one predictor is subject to failure at times, and so we need a diversified mix of factors to minimize the potential for error. That said, consumer confidence metrics are a valuable addition to the mix.

How to Read Consumer Survey Data - Yesterday it was reported that US consumer confidence has plunged recently:  Consumer confidence plunges as hope dims; Expectations at the lowest level in two years.When news headlines breathlessly announce breaking news about consumer expectations, it's worth taking a step back and remembering what these surveys actually tell us.  Consumers expectations typically are much more reflective of the past than the future. Put another way, they're backward looking. And that makes perfect sense, since if you don't really know how to reliably forecast the future. To see how this works regarding these consumer surveys, I pulled the data on consumer inflation expectations and overall consumer sentiment in the US since 1978, and compared it with actual inflation and consumer spending. The first chart illustrates that consumer inflation expectations (measured by the University of Michigan's monthly survey) match up almost perfectly with actual inflation -- over the previous 12 months. Inflation expectations do not match future inflation nearly so well. (If you can imagine shifting the red line to the left by 12 months, you can see what I mean.)

Weak consumer confidence and real wage growth portends weak consumer spending - Rebecca Wilder - Yesterday the Conference Board released its measure of consumer confidence, which dropped to 44.5 in August. This brings the Conference Board measure of confidence in line with the Reuters/University of Michigan measure of consumer sentiment. Bloomberg summarizes the Conference Board results.  Confidence is important, since consumer spending accounts for the lion's-share of aggregate spending. Consumer confidence measures are highly correlated with the annual growth in real personal consumption expenditures - the correlation coefficients are 75% and 67% for the University of Michigan Sentiment index and the Conference Board's Confidence index, respectively.   Ultimately, though, it's all about jobs and personal incomes.  To date, while July real wages and salaries (deflated using the CPI) fell on the month, the 3-month average continues its ascent. Clearly the sluggish climb in real wages and salaries is not enough to spark a surge in confidence and spending. Neither will consumers draw down saving, as was the case over the last decade amid debt-financed consumption. In fact, saving is more likely to rise as a share of income than fall as the balance sheet repair process furthers.

Consumer fears put economy on the brink - While the Dow Jones industrial average and the unemployment rate get more attention, the shoppers outside a Wal-Mart in Northern Virginia offered a taste of what some economists believe is the more immediate reason that the U.S. economy may be on the verge of another recession. Americans are still spooked. More than two years after the recession’s official end, people are driving their cars a year longer, holding back on jewelry and furniture, and swapping brand names for cheaper store brands at the supermarket. More ominously, the once sturdy optimism of Americans appears to have crumbled, according to one key measure. Breaking from precedent, Americans no longer believe they will make more money next year than this year, according to the University of Michigan’s Surveys of Consumers. These expectations used to rebound after recessions; this time they didn’t.

Aging Baby Boomers May Curb U.S. Expansion -This is not your mother’s recovery. Women and baby boomers entering the American workforce helped to supercharge expansions in 1975 and 1983 by filling an increasing number of jobs and purchasing more goods and services. Now as the share of women with jobs falls and older Americans age into retirement, the shrinking -- or, at best, slowly growing -- workforce will weaken economic activity for the next two decades. The demographic changes may be the biggest and least- appreciated reason why the two-year recovery has slowed, because the rate of growth for labor and capital is “the most important determinant” of economic expansion,  More retirees mean slower household formation, reduced consumer spending and downward pressure on equity prices as retirement cuts people’s purchasing power,  

In U.S., Worries About Job Cutbacks Return to Record Highs  - American workers' concerns about various job-related cutbacks have returned to the record highs seen in 2009, after improving slightly in 2010. In terms of the most significant employment risk measured, 3 in 10 workers currently say they are worried they could soon be laid off, similar to the 31% seen in August 2009 but double the level recorded in August 2008 and for several years prior.  Separately, 30% of workers say they are worried their hours will soon be cut back, and 33% worry their wages will be reduced. An even larger number, 44%, worry their benefits will be reduced, making this the most prevalent job-related concern.  Workers are least likely to be concerned that their company will move jobs overseas; however, at 13%, this is by one percentage point the highest level of concern since Gallup began measuring it in 2003. Most of the five items tested are at or near record highs this year.

Job Insecurity Remains High - For the last couple of years, the problem plaguing the job market was that companies have been in a holding pattern: Companies weren’t laying off workers in high numbers. But if you were already laid off, finding a company willing to expand was impossible. Even so, workers still employed remain anxious about their job security, according to new survey data from Gallup. A USA Today/Gallup Poll conducted in mid-August, based on a survey of 489 adults employed full or part time, found that 30 percent said they were worried about being laid off, similar to the 31 percent who answered this way in August 2009. The survey also found that workers were concerned that their hours, wages and benefits would be cut back. Benefit cuts were the most common worry, with 44 percent of workers surveyed saying they thought benefits might be on the chopping block. Lower-income workers were especially likely to be concerned about their job security:

The CPI, and Some Key Components - A perennial topic of discussion is the deficiencies of the CPI in measuring the things that are important to “real people”. I actually believe that there is a point to some of these critiques. In particular, we know the CPI is “plutocratic” in that the weights associated with the CPI bundle are consistent with the expenditure shares of a household somewhere in the 4th income quintile. [1] [2] However, I think that other critiques -- namely that food, health, and transportation, are missed -- are misguided. Note that while there has been a tremendous run-up in transportation prices (driven by gasoline prices), it has only regained its position relative to the overall CPI recently. That might be surprising to some, but I think that surprise reflects the fact that people pay attention when transportation prices go up, they don’t so much when they go down (or stay constant). On the other hand, the medical care component continues to outpace the overall CPI.

Annual Inflation Hits 4% - There is the CPI... and then there is the MIT's billion price project which, as the name implies, tracks the prices of a billion products in real time. And according to the latter, annual inflation has hit a multi year high of about 4%. Perhaps someone can advise the talented Mr Evans that the 3% inflation he would so love to achieve... has in fact been eclipsed. At least, according to the real world. So take 4% inflation, add $2.5 trillion in "much more" easing, and what you get is only an economic Ph.D.'s guess. Alas, we are unqualified to have an opinion on the matter.

Gas prices near a Labor Day weekend record - Gasoline is nearly the highest it's ever been for this time of year, just ahead of the Labor Day weekend. The run-up in oil prices this year, combined with a rash of refining problems throughout the U.S., has boosted pump prices. The national average on Thursday was $3.629 per gallon. Drivers will pay more for gasoline this Sept. 1 than in any other year except 2008, when pump prices hit an average of $3.686. Retail gasoline prices are rising in the U.S. even though motorists are buying less. Analysts say they have been pushed higher by a steady rise in international gasoline demand. Americans may be using less, but drivers in developing nations are using more. "It's all part of being in a global market," Americans are using so little gasoline that the U.S. has been a net exporter of refined fuels to other countries for the past nine weeks. That's typical for OPEC countries, but it's extremely rare for the U.S. "You have to go back years and years," Kloza said. "I haven't found a time when we've been a net exporter for that many weeks."

Doing More with Less Driving -While Americans will probably end up driving slightly more miles in 2011 than last year, they do appear to be getting more done per mile of driving.  Plotting the total miles driven in each 12-month period ending in June (the most recent period being up through June 2011), we see that total vehicle miles has basically leveled off over the past few years, after approximately ten decades of continuous growth.  Is this the end to the heretofore endless rise in the amount of driving done in the US? Or is this just a temporary pause in the upward trajectory? As much as I'd like to be able to conclude that we've already seen the all-time high for the amount of driving done in the US, that's probably not the case. There are a few important drivers (ahem) of the current pause in the growth in total vehicle miles. The first is the Great Recession. When fewer people are working, and when businesses are selling less output, some cars and trucks that would otherwise be on the road stay home. Second, there's population growth. More people in the US means more driving, of course. But then there's the most interesting force affecting the amount of driving in the US: the secular trend toward doing less of it. A combination of factors has contributed toward a steady increase in what I call "driving efficiency": the number of miles driven for each dollar of economic activity.

Texas Manufacturing Activity "Flat" in August - From the Dallas Fed: Texas Manufacturing Activity Flat. Texas factory activity was largely unchanged in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained positive but fell from 10.8 to 1.1, suggesting growth stalled this month.This is the last of the regional Fed surveys for August. The regional surveys provide a hint about the ISM manufacturing index - and the regional surveys were very weak in August. The New York and Philly Fed surveys are averaged together (dashed green, through August), and five Fed surveys are averaged (blue, through August) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through July (right axis). The early surveys in August were especially weak (Philly Fed and Empire State), although the surveys later in the month were a little better. Both the Kansas City and Texas surveys showed slight expansion in August, although the Richmond survey showed contraction.

Manufacturing Growth Weakens In August - The first major economic report for August offers no comfort for thinking that we'll break free of the economy's sluggish growth phase any time soon. Today's update on the ISM Manufacturing Index reflects an expansion in the sector, but only slightly. The index slipped to 50.6 last month, down from 50.9 in July. A reading above 50 indicates expansion, but with the index declining to its lowest level in more than two years there's nothing dazzling here. Yes, it could have been worse, and a number of analysts thought it would be. The Bloomberg News survey advises that the median forecast from economists anticipated that ISM would drop to 48.5. By that standard, we're doing ok, but that's like saying you expected to drive off a cliff and instead you only had a flat tire. Sure, it's better, but no one's going to celebrate the relative improvement.

ISM Manufacturing index declines slightly to 50.6 - PMI was at 50.6% in August, down from 50.9% in July. The employment index was at 51.8%, down from 53.5%, and new orders increased to 49.6%, up from 49.2%.  From the Institute for Supply Management: August 2011 Manufacturing ISM Report On Business® . "The PMI registered 50.6 percent, a decrease of 0.3 percentage point from July, indicating expansion in the manufacturing sector for the 25th consecutive month, at a slightly slower rate. Here is a long term graph of the ISM manufacturing index. This was above expectations of 48.5% and suggests manufacturing expanded - slowly - in August.  The regional surveys early in August were especially weak, but the surveys towards the end of the month were a little better - suggesting the debt ceiling debate impacted consumer and business confidence early in August.

Manufacturing ISM Dips Slightly, Barely Above Contraction, Saved by Inventory Growth, Much Weaker than it Looks - The August 2011 Manufacturing ISM Report On Business® is barely above contraction, buoyed only by rising inventories.  "The PMI registered 50.6 percent, a decrease of 0.3 percentage point from July, indicating expansion in the manufacturing sector for the 25th consecutive month, at a slightly slower rate. The Production Index registered 48.6 percent, indicating contraction for the first time since May of 2009, when it registered 45 percent. The New Orders and Backlog of Orders Indexes edged up slightly from July, but both indexes are indicating contraction in August at slower rates than in July. The rate of increase in prices slowed for the fourth consecutive month, dropping another 3.5 percentage points in August to 55.5 percent. The overall sentiment is one of concern and caution over the domestic and international economic environment, which is affecting customers' confidence and willingness to place orders, at least in the short term."

Does America Need Manufacturing? -Over the last two years, the federal government has doled out nearly $2.5 billion in stimulus dollars to roughly 30 companies involved in advanced battery technology. Many of these might seem less like viable businesses than scenery for political photo ops — places President Obama can repeatedly visit (as he did early this month) to demonstrate his efforts at job creation. But in fact, the battery start-ups are more legitimate, and also more controversial, than that. They represent “the far edge,” as one White House official put it, of where the president or Congress might go to create jobs.  For decades, the federal government has generally resisted throwing its weight —and its money — behind particular industries. If the market was killing manufacturing jobs, it was pointless to fight it. The government wasn’t in the business of picking winners. Many economic theorists have long held that countries inevitably pursue their natural or unique advantages. Some advantages might arise from fertile farmland or gifts of vast mineral resources; others might be rooted in the high education rates of their citizenry. As the former White House economic adviser Lawrence Summers put it, America’s role is to feed a global economy that’s increasingly based on knowledge and services rather than on making stuff.

How important is it to make things? - AS THE weak recovery continues, various experts continue to linger on the importance of manufacturing to growth in output and employment. America's economy will work again, many argue, when its workers are once again engaged in the critical task of making things. I continue to struggle to understand this focus. Think of the kinds of tasks that make a product possible: the people who identify a market opportunity and come up with a concept, the people who produce a workable product design, the people who design a production method and supply chain, the people who find supplies and labour at prices and qualities consistent with profitable production, the people who manage the logistics of bringing inputs together, the people who actually assemble the inputs, the people who manage the logistics of delivering the goods to markets, the people who actually sell the goods to customers, and the people who track these processes and add up the numbers to make sure things are working as planned. Why is the assembly step obviously the most important to economic activity?

Does America Need Manufacturing? What Does Mr. Arithmetic Tell Us? - The NYT devoted a major Sunday magazine piece to this question. It never raised the most fundamental question, if we buy all our manufactured goods from someone else, how are we going to pay for them?  We have a surplus on services of around $170 billion a year, less than 1.2 percent of GDP. If we lost all our manufacturing, then the deficit on goods would increase by about $1.2 trillion to more than 13 percent of GDP. What services do we think that we will export to make up this gap? We are rapidly losing ground in many areas. For example in software and computer services we are already a big net importer from India.  One of our biggest surplus areas is tourism. This raises the prospect that the anti-manufacturing crowd thinks that we are too sophisticated to work in factories, but not to clean toilets and make beds. There is nothing wrong with latter (I have done it as a summer job), but it's not what most folks would consider upscale employment. The bottom line is that unless we think someone is going to hand us trillions of dollars worth of manufactured goods for nothing indefinitely, then there is zero doubt that America needs manufacturing. It also needs people writing on economic issues who know arithmetic.

The value of eggheads - THIS comment from National Review's Jonah Goldberg has provoked a lot of blogospheric response: The cult of experts has acolytes in all ideological camps, but its most institutionalized following is on the left. The left needs to believe in the authority of experts because without that authority, almost no economic intervention can be justified. Market-based ideologies don’t have that problem because markets expect events in ways experts never can. This is what you might call a faith-based understanding of markets. That is, Mr Goldberg doesn't seem to get what it is that markets actually do. When a company is developing a new product, its employees don't stroll over to the boss' office, grab the market magic wand, and create something that will sell profitably. The company turns to experts. Statisticians pore over market data, highly trained engineers develop the product and the means to produce it, and skilled accountants balance the books. Petrol doesn't find its way to Mr Goldberg's automobile thanks to pixie dust. Exxon employs scores of geologists, engineers, chemists, and managers. Expertise is critical in the function of a large, complex economy. Markets work by aggregating massive amounts of knowledge; it's the markets efficiency in processing expertise that makes it such a useful tool.

Social Innovation Will be More Important Than Technological Innovation - The explosive rise and global impact of technological innovation has persuaded us that technology is the ultimate solution to all our problems. This assumption is rarely questioned; it has become like the air, unseen and unexamined.  All this boils down to a cargo-cult in which a better battery, a better software package and a better diagnostic tool will enable us to avoid any changes in our lifestyle and culture, which is based on three basic principles:  The notion that technological innovation is intrinsically incapable of "fixing" our problems is not just alien to our collective mindset, it is essentially sacreligious. In the current cargo-cult of technology worship, the basic assumption is better engineering can solve every problem.  This includes social engineering, of course--"nudging" the populace to modify their behavior as deemed appropriate by the Central State, and punishing whatever populace veers away from the chosen path.

The Wages of Destroying Labor Bargaining Power: Nearly 30% of Job Losses Due to Management Cutting Pie in Favor of Capital -  Yves here. This short piece by Robert Gordon is important because it seeks to quantify the impact of a phenomenon that economists have noticed a bit late in the game: that the benefits of GDP growth, which used to go mainly to labor (via increased hiring and better wages) now benefit capitalists fare more than ordinary workers. The shift towards increases in GDP favoring corporate profits at the expense of labor became pronounced in the weak Bush expansion (we commented on it in a 2005 article) and Gordon’s effort to try to translate that into the impact on unemployment levels is a useful step forward in the debate. The US is missing millions of jobs. This column argues that the total is 10.4 million. It claims that 3 million of these can be traced to the weakened bargaining position of labour and the growing assertiveness of management in slashing costs to maintain share prices. Moreover, this employment gap is not shrinking because of the ‘double hangover’ effect—an excess housing supply and besieged consumers unwilling to spend.

CHART OF THE DAY: Corporate Efficiency Is Getting Absurd - U.S. corporate profits and efficiency are getting absurd. On Friday we saw record quarterly profits of $1,450 billion, making up a record share of GDP at 10.1%. We're also at record corporate efficiency of $15,278.72 -- up 22.3% from last year -- according to Sageworks Inc. That last one says it all. Rampant job cuts and salary cuts, with new responsibilities for old workers, during the recession turned corporations into profit-making machines. Stimulative policies from the government and the Federal Reserve helped plenty. New technology also helps with efficiency. Unfortunately there are no signs that corporations are turning revenue into jobs.

Corporate Elites Still Doing a Job on American Workers - On this Labor Day weekend, our country is engulfed in deep economic anxiety, and no doubt you share my heartfelt concern for those Americans who're suffering the worst of these uncertain times. I refer, of course, to millionaire corporate chieftains and big bankers. What? You thought maybe I was referring to our 25 million fellow citizens who can't get the jobs they need, or the millions more who're soon to be out of work due to both corporate and governmental cutbacks in the American workforce? No, no, bucko -- according to the corporate establishment (top executives, media barons and political elites), the number one economic problem is not the ongoing elimination of middle class jobs and the subsequent destruction of consumer spending. Rather it's some terrible "uncertainty" that has swept through the executive suites, immobilizing once-proud risk takers, who now wail that Washington's priority must be to relieve their anxiety. Certainty? Aren't these the same corporate honchos who've proclaimed (and imposed) a "new normal" of intentional economic uncertainty on America's workaday majority? Yes, they are. Forget job security and middle-class expectations, they bark at us. Instead, the future for working families will be one of low wages, long periods of unemployment, no health coverage or pensions, a tattered safety net and practically no worker rights -- get used to it.

Give Karl Marx a Chance to Save the World Economy - Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx.  The wily philosopher’s analysis of capitalism had a lot of flaws, but today’s global economy bears some uncanny resemblances to the conditions he foresaw.  Consider, for example, Marx’s prediction of how the inherent conflict between capital and labor would manifest itself. As he wrote in “Das Kapital,” companies’ pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an “industrial reserve army” of the poor and unemployed: “Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery.”  The process he describes is visible throughout the developed world, particularly in the U.S. Companies’ efforts to cut costs and avoid hiring have boosted U.S. corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 percent and real wages are stagnant.

United States Postal Service Hopes for Federal Help as Debt Grows -- The United States Postal Service is in deep debt trouble and is counting on Congress to help out. The USPS, which is not federally funded, has maxed out at its borrowing limit and will likely default on a $5.5 billion prepayment for employee health benefits, The New York Times reports. The public shift of "snail mail" to email and online bill payments has caused mail handling to diminish, running debts to $9 billion this year with a $67 billion budget, according to the Times. The USPS has appealed to Congress in the past to allow for the cutting of Saturday mail delivery. But in spite of not receiving federal funds to support its service, the USPS' requests have been repeatedly rejected. Now the Postal Service plans to make its request to eliminate Saturday delivery once again, and will seek to cut 220,000 over three years while looking into replacing 3,650 of its 32,000 offices with contracted retailers over the same amount of time, the Times reports. Cutting Saturday delivery could save $40 billion over 10 years.

Obama’s New Economic Adviser Warned of ‘Disturbing Problem’ - Back in March, when he still enjoyed remove from the policy fray as an academic at Princeton, Alan Krueger used unusually blunt language to sound the alarm that the American economy was staring at the sort of crisis that seemed unlikely to be fixed absent sustained and aggressive action. At the end of a largely wonky, data-driven piece of analysis written for Bloomberg News, Krueger discounted the incessant focus on the unemployment rate -- which does not count jobless people who have grown so discouraged that they have given up looking for work -- arguing that the real action is found in the so-called employment-to-population ratio, which measures what slice of working age Americans are employed. The ratio then sat at a dismal 58.4 percent, just off the low reached the previous December, meaning that the supposed resumption of economic growth was not putting large numbers of jobless people back to work. Even back when the economy was still technically expanding between 2002 and 2007, Krueger noted, the percentage of working age people then employed never got back to where it had been before the previous recession in 2001, at a peak of 64.7 percent.

White House Expects Persistently High Unemployment - The White House budget office forecast on Thursday that unemployment would remain at 9 percent through the 2012 presidential election year, an outlook that it said calls for the sort of the job-creating tax cuts and spending President Obama1 will propose next week.  The unemployment outlook for the next 16 months reflects a 9.1 percent rate this year, down slightly from the 9.3 percent forecast when President Obama made his annual budget request in February. Next year, the projected jobless rate is 9 percent, up from 8.6 percent in the February forecast.  Unemployment will not return to the 5 percent range until 2017, the budget office said, reflecting the intensity of the hangover from the most severe recession2 since the Great Depression3.  The Office of Management and Budget4, in its annual midyear update of the nation’s fiscal and economic picture, also said federal budget5 deficits would be lower for this year and next.

White House Budget Office Projects 9% Unemployment Rate Through 2012 - There’s another projection out for long-term unemployment, and there’s nothing good about it: President Obama’s mid-session budget review confirms what most private and government projections have recently concluded — that the economy is considerably weaker than earlier forecasts held, and won’t fully recover from the Great Recession for years. Most troubling, both for the country and for Obama politically, is that near-term unemployment is expected to remain significantly higher than expected, averaging 9 percent in fiscal year 2012.Obama’s budget office initially calculated its economic forecast based upon data available through June. Even that data presaged an 8.8 percent average unemployment rate in 2011 and an 8.3 percent average rate next year. But the mid-session review got delayed, and when the Office of Management and Budget revised it to incorporate the data through the end of August, the picture became much gloomier. Unemployment will average 9.1 percent this year, and 9.0 percent next year, OMB concluded, and won’t dip below 7 percent until 2015 at the earliest.

It's the demand, stupid. - At this point, most economists agree that the best way to save the economic recovery is to get moving on jobs. The question is how to do that. After months of dithering, it looks like we may be getting an answer from a down-trodden President Obama. His administration is coming out with a jobs plan next month. And today, the White House announced it's tapping Princeton labor economist Alan Krueger to head the Council of Economic Advisers. So will these moves spur job creation? The fact is, any jobs plan Obama puts forward isn't likely to have much impact. The White House hasn't sketched out specific plans yet, but the scale of the remedies being bandied about – extending unemployment benefits, renewing a payroll tax expiring end-2011, business tax breaks, workforce training programs, infrastructure spending – wouldn't stab at the heart of the problem: weak demand. Without more consumers clamoring to buy more stuff, there's little incentive for businesses to hire. And without that incentive, any efforts to boost hiring temporarily are bound to be just that: temporary. Economic forecaster Macroeconomic Advisers, for instance, estimates that extending jobless benefits, a payroll tax cut, and business tax breaks would boost the country's 2012 GDP by less than 1 percentage point and employment by 600,000 by the end of next year

Jobs Bill Needs to Target Small Businesses - Structural adjustments in the economy may take years before it is restored to health, a central banker said Wednesday, noting that monetary policy shouldn’t be seen as a “panacea,” but he is comfortable with the current accommodative stance. Economic recovery has been uneven and while it was initially boosted by inventory rebuilding, last summer it weakened, slowing “markedly,” said Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta. But there are still pockets of strength in the economy, he said in a speech to the Lafayette Chamber of Commerce in Lafayette, La. “While the risks have increased, I do not expect a recession.”

Can job training help solve the jobs crisis? - There are still more than four unemployed workers vying for every job opening in the country. But within certain industries--including manufacturing, health care, and engineering--employers are actually struggling to fill jobs that are increasingly demanding higher skills.   In the southern US, 51 percent of current job openings are middle-skill, but only 43 percent of the region’s workers are trained to that level, according to a recent study by the National Skills Coalition. “It's a massive problem from the point of view of the recovery,” . “We can't hire and train fast enough and that means we have to turn down business.” Could job training be part of the solution? That’s what President Obama may be betting on. In a major speech next week, he’s expected to propose support for job training as part of his renewed push for job growth, focusing especially on the 6.2 million Americans who’ve been out of work for more than six months, according to the Wall Street Journal.

On jobs, time to be bold - President Obama’s promised jobs plan needs to be unrealistic and unreasonable, at the very least. If he can crank it all the way up to unimaginable, that would be even better. This is a moment for the president to suppress his reflex for preemptive compromise. The unemployment crisis is so deep and self-perpetuating that only a big, surprising, over-the-top jobs initiative could have real impact. Boldness will serve the nation well — and, coincidentally, boost Obama’s reelection prospects. The political calculus is pretty simple. If voters base their decision on the state of the economy on Election Day, Obama is in trouble. Even the most optimistic scenarios predict that unemployment will still be above 8 percent next fall. These rosy projections envision month after month of painfully slow growth, the kind that is barely discernible. Pessimists see another dip into recession.

Obama Backs Bill Barring Discrimination Against Jobless - We’ve written before about job ads and hiring practices that exclude unemployed candidates from applying. Mitchell Hirsch, an associate at the National Employment Law Project, recently alerted me that President Obama had expressed support for outlawing such practices. From an interview with the president on the Tom Joyner Morning Show, a national radio program, which aired on Tuesday: Well, there is no doubt that folks who have been unemployed longer than six months have a tougher time getting back into the job market. But we have seen instances in which employers are explicitly saying we don’t want to take a look at folks who’ve been unemployed. Well, that makes absolutely no sense, and I know there’s legislation that I’m supportive of that says you cannot discriminate against folks because they’ve been unemployed, particularly when you’ve seen so many folks who, through no fault of their own, ended up being laid off because of the difficulty of this recession. Mr. Obama appears to be referring to this bill, introduced by Representative Rosa DeLauro, a Democrat from Connecticut.

President Obama's job creation mirage - Dean Baker - President Obama has discovered how serious the recession is. That's what he told an audience in Chicago last week. To be fair, he was referring to revised data from the commerce department showing that the falloff in GDP was larger than originally reported.But ridicule is appropriate. He and we knew all along how many people were out of work. The employment numbers told us the size of the hole and the desperate need for government action. This sort of ridiculous comment, and President Obama's weak response to the recession over the first two and a half years of his presidency, explains the tidal wave of scepticism facing his widely hyped upcoming speech on jobs after the Labor Day weekend. The list of remedies leaked ahead of time does little to inspire hope.

Obama's Jobs Plan - Robert Reich - Next Thursday President Obama will unveil his jobs plan. He’ll choose either Plan A or Plan B.Plan A would be big enough to restart the economy (now barely growing) and reduce unemployment (which continues to grow). That means spending another trillion dollars over the next two years – rebuilding the nation’s infrastructure, creating a new WPA and Civilian Conservation Corps, and lending money to cash-starved states and cities. Republicans will oppose it, of course. They’ll say the stimulus didn’t work the first time (they’re wrong – it saved 3 million jobs), and we can’t afford it (wrong again – the yield on 10-year Treasury bills is now 2 percent, meaning this is the best time to borrow. That means the President would have to fight for it. Plan B would be a bunch of policy miniatures that would have almost no effect on the economy or employment but would nonetheless be good things to do (extending the Social Security tax cut, extending unemployment benefits, reauthorizing the highway building trust fund, giving employers a tax incentive to hire the long-term unemployed, ratifying trade agreements). Republicans will oppose it, of course. The President would present each of his policy miniatures as a separate piece of legislation hoping to attract enough Republican votes to get something – anything – enacted and declare a victory.

ECRI: “It’s Too Late” for Obama on Jobs -- Economic Cycle Research Institute co-founder Lakshman Achuthan was on Tech Ticker yesterday discussing the outlook for the economy. Business Insider does a good write-up of his commentary, highlighting the fact that the ECRI has yet to signal a double dip. However, I wanted to add a few comments as well. ECRI’s underlying message is this: we are in a decade-long post-credit crisis struggle which will mean high unemployment even if policy makers focused on jobs (which they have not, I would add). I agree with this forecast.  Achuthan explains that this too is the root cause of why he thinks the jobs picture is going to difficult for the US. In essence, Achuthan is saying he expects a series of what I have been calling Shiller Double Dip Recessions. This dovetails with my view of an austerity-induced initial dip followed by the recession-punctuated lost decade thereafter. Achuthan also explains well that in the short-term the jobs picture has already been set by previous policy decisions. He expects the monthly jobs numbers to continue to be weaker than earlier in the year. If we get a double dip recession, “by definition, the unemployment will be spiking” he says.

Feeble President, Feeble Plans - Yesterday, I posted1 an item titled "How Not to Solve the Jobs Problem." The case in point is President Barack Obama's embrace of a state program called Georgia Works, which tries to turn unemployment insurance into a kind of sing-for-your-supper "workfare" program.  Jobless workers in Georgia drawing unemployment compensation are encouraged to go work for private employers -- for free -- in exchange for some kind of training. They get a small onetime stipend of $240 as an inducement. The premise is that working for free will help them get a foot in the door and maybe get hired (if the employer hires). According to Georgia's own statistics, however, only about 15 percent do.  This pitifully inadequate program is very likely to be part of Obama's forthcoming jobs speech.  But let's drill deeper. Why is the administration embracing such a right-wing and futile program?

The Democratic Jobs Debate As Mass Denial - The debate within the Democratic Party over President Obama's incipient economic relief program is being conducted between two sides that totally misunderstand its purpose. On the one side, you have administration centrists who support a sufficiently narrow plan that can pass Congress: Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. These include free trade agreements and improved patent protections for inventors. And on the other side, you have liberals who demand boldness:“Will he commit all his energy to offering bold solutions, or will he continue to work with the tea party?” AFL-CIO President Richard Trumka said, adding: “If he falls into nibbling around the edges, history will judge him and working people will judge him.” Here's what everybody is missing: Nothing of significance can pass Congress.

Did We Drop the Ball on Unemployment? - I’ve spent a chunk of summer vacation visiting old friends here, and I can’t help feeling that national politicians and national journalists alike have dropped the ball on jobs. Some 25 million Americans are unemployed or underemployed — that’s more than 16 percent of the work force — but jobs haven’t been nearly high enough on the national agenda.  When Americans are polled about the issue they care most about, the answer by a two-to-one margin is jobs. The Boston Globe found that during President Obama’s Twitter “town hall” last month, the issue that the public most wanted to ask about was, by far, jobs. Yet during the previous two weeks of White House news briefings, reporters were far more likely to ask about political warfare with Republicans.  (I’m an offender, too: I asked President Obama a question about his negotiations with Republicans. I’m sorry that I missed the chance to push him on the issue that Americans care most about.)

Fears grow that August will show net loss in jobs picture - At a time when the economy should be creating employment at a fairly steady pace, the U.S. actually may have lost jobs in August. That disturbing trend could be made apparent next week when the government releases its monthly nonfarm jobs report. Some prominent economists think the report will show a modest decrease in jobs when the final tally is made for the turbulent month. In an economy that is more than two years from the technical end of the recession, a drop in jobs now would be a disturbing sign. "If the recent rise in concerns about the economic outlook and associated plunge in equity prices led firms to increase firings and cut back on hiring, payroll employment may well have fallen outright in August,"

U.S. Small Business Hiring Slows in August, Wages Dip - Hiring by U.S. small businesses slowed in August and employers reduced hours, an independent survey showed on Sunday, suggesting the recent stock market turmoil may have dampened job creation.  Intuit, a payrolls processing company, said small businesses added 35,000 jobs after increasing employment by 40,000 in July.  The survey is based on responses from about 66,000 employers at businesses with fewer than 20 employees that use the Intuit Online Payroll system and covered the period from July 24 to August 23.  "There was plenty of bad news this month and the Intuit small business employment figures show this,"  "From this month's numbers, we don't see a new recession, but we don't see a robust recovery either."

Announced U.S. Job Cuts Rose 47% in August From Year Ago, Challenger Says - Employers in the U.S. announced more job cuts in August than a year ago, signaling little progress in the labor market more than two years after the recession ended. Planned firings climbed 47 percent from August 2010 to 51,114, according to figures released today by Chicago-based Challenger, Gray & Christmas Inc. The announcements were led by reductions at government agencies and in the financial industry. Job cuts in federal, state and local governments are another restraint on consumer spending that accounts for about 70 percent of the economy. Job growth this month probably fell shy of the gain needed to reduce the unemployment rate, according to a Bloomberg News survey before a Sept. 2 report. “The private sector once again took a backseat to the government sector, which saw job cuts surge to the second- highest monthly total this year,” John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. “More workforce reductions at the federal level are undoubtedly coming down the road. Congress and the White House are under immense pressure to cut federal budgets.”

Jobless Claims Fell Last Week, But So What? -- New jobless claims fell by a seasonally adjusted 12,000 last week to settle at 409,000, but no one’s going to see that as much more than another round of statistical noise. This leading indicator of economic activity has been stuck in a rut for months and it’s going to take more than one sizable downshift to convince the crowd that something’s changed. It doesn't help that there's another one-time event in the mix. Some of the drop is reportedly due to the end of the Verizon strike, which pushed new claims higher in early August. But the same factor in reverse had the opposite effect a few weeks back. Round and round we go. Temporary factors aside, not much has changed with claims. Going nowhere isn’t encouraging for growth, but it could be worse.  There was a disturbing pop higher earlier in the year, but that was an early warning of the current rough patch that’s afflicting the economy. As I noted back in April, when the previous rise in jobless claims was unfolding, “the bigger risk for now is that the economy’s rebound moderates rather than evaporates.”

ADP: Private Employment increased 91,000 in August - ADP reportsEmployment in the U.S. nonfarm private business sector rose 91,000 from July to August on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated advance in employment from June to July was revised down modestly to 109,000, from the initially reported 114,000....Employment in the service-providing sector rose by 80,000 in August, marking 20 consecutive months of employment gains. Employment in the goods-producing sector rose by 11,000 in August, up from a loss of 2,000 jobs last month. Manufacturing employment slipped 4,000 in August. Note: ADP is private nonfarm employment only (no government jobs).  This was slightly below the consensus forecast of an increase of 100,000 private sector jobs in August.

August BLS employment report - The Bureau of Labor Statistic released the monthly employment report for the month of August. Highlights:  Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent. (...) Health care continued to add jobs, and a decline in information employment reflected a strike. Government employment continued to trend down, despite the return of workers from a partial government shutdown in Minnesota.  The change in total nonfarm payroll employment for June was revised from +46,000 to +20,000, and the change for July was revised from +117,000 to +85,000.  Both the civilian labor force participation rate, at 64.0 percent, and the employment-population ratio, at 58.2 percent, were little changed.  The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour over the month to 34.2 hours.  In August, average hourly earnings for all employees on private nonfarm payrolls decreased by 3 cents, or 0.1 percent, to $23.09. This decline followed an 11-cent gain in July. 

Hiring grinds to halt in August, U.S. data show -  — The U.S. economy did not add any jobs in August, a weak performance that casts a cloud over the sputtering recovery, economic data showed Friday. Nonfarm payrolls were unchanged in August, lower than the 53,000 gain expected by economists surveyed by MarketWatch and the weakest performance in nonfarm payroll since a decline in September 2010.  Payroll counts inJune and July were revised lower by a cumulative 58,000. Payrolls rose a revised 20,000 in June and by 85,000 in July. The average workweek for August edged down by six minutes to 34.2 hours. Average hourly earnings on the month fell 0.1% to $23.09. Economists had been expecting a 0.1% gain. Earnings are up 1.9% in the past year.  The grim report could serve as a catalyst for further Federal Reserve easing.

Employment in U.S. Stagnated in August; Jobless Rate at 9.1% - Employment in the U.S. unexpectedly stagnated in August, increasing pressure on Federal Reserve Chairman Ben S. Bernanke and President Barack Obama to spur an economy that’s barely growing two years into the recovery.  Payrolls were unchanged, the weakest reading since September 2010, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey called for a gain of 68,000. The figures included a 48,000 drop in the information industry, mostly reflecting a strike at Verizon Communications Inc. . The jobless rate held at 9.1 percent. “This is further evidence that the economy is very close to stalling if not having stalled,” . Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., called the report “grim and scary”

August Employment Report: 0 Jobs (unchanged), 9.1% Unemployment Rate - From the BLS Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month.  The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate was unchanged at 9.1% (red line). The Labor Force Participation Rate increased to 64.0% in August (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio increased to 58.2% in August (black line). Note: the household survey showed a strong gain in jobs, and that is why the unemployment rate could hold steady with no payroll jobs added - and the participation rate increase. The second graph shows the job losses from the start of the employment recession, in percentage terms.

Zero Jobs Growth, Unemployment Rate Flat at 9.1%; Charts, Graphs, Details - Here is an overview of today's numbers.

  • US Payrolls +0
  • US Unemployment Rate Flat at 9.1%
  • Participation Rate +.1 to 64.0%
  • Actual number of Employed (by Household Survey) rose by 331,000
  • Unemployment rose by 36,000
  • Those not in the labor force dropped by 165,000
  • Civilian population rose by 200,000, Labor Force rose by 366,000
  • Average Weekly Workweek Fell .1 hours to 34.2 hours
  • Average Private Hourly Earnings Fell 3 Cents
  • Government employment decreased by 17,000 - Not Enough

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.  For a change, the labor force actually rose today. This is a welcome sign. However, were it not for people dropping out of the labor force for the past two years, the unemployment rate would be well over 11%

The Employment Report: Employment was Unchanged In August - I had to read today’s employment report twice to make sure I had read it right. No jobs were created last month, and the previous month’s numbers were revised downward: Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month. … Government employment continued to trend down The change in total nonfarm payroll employment for June was revised from +46,000 to +20,000, and the change for July was revised from +117,000 to +85,000. June data were also revised downward to 20,000 jobs. Note that 47,000 of the lost jobs this time were due to the Verizon strike, so net of the strike we have created around 50,000 jobs per month on average over the last three months. Since we need 100,000-125,000 per month just to keep up with population growth, this means we are not even creating enough jobs to keep up with new entrants to the labor force let alone reabsorb the millions who have lost jobs during the recession. Also note that: Both the civilian labor force participation rate, at 64.0 percent, and the employment-population ratio, at 58.2 percent, were little changed.

Hiring grinds to a halt -- So much for getting Labor Day weekend off to a good start.  The economy added no jobs in August, the Labor Department said Friday.  Zero, zilch, nada. Meanwhile, the unemployment rate1 remained at 9.1%. "We expected a weak report, and what we got was even weaker," said Patrick O'Keefe, director of economic research at J.H. Cohn. The report was partially helped by 22,000 state workers in Minnesota returning to work after a temporary government shutdown in July, but was also hurt by 45,000 Verizon workers on strike in August. Adjusting for those events, the economy probably added more like 23,000 jobs in August -- still dismal compared with monthly gains of about 200,000 earlier this year.

Zero. Nothing. Nilch. - The symbolism of today’s payrolls report — ZERO — would be bad enough even if it wasn’t coming out in advance of the Labor Day weekend. There’s a pattern here: no matter how bad Wall Street thinks the employment report is going to be, it always seems to be worse, these days. It’s like GE’s earnings circa Jack Welch, but in reverse. It’s increasingly looking as though the government is utterly incapable of creating jobs, but is actually pretty effective at destroying them. It’s doing so in a direct, literal way — there were 17,000 fewer government employees in August than there were the previous month, and local government has lost more than half a million jobs since September 2008. And it’s also doing so in an indirect way — there can’t be much doubt that a significant part of the jobs weakness is a function of the anger and uncertainty caused by the utter dysfunction of the legislative branch of government. Hiring and firing decisions, of course, happen slowly — and they often happen after the summer. The jobs situation, which is always cyclical, now seems to be in a downturn rather than an upturn, which raises the prospect of a negative payrolls figure in September and further gruesome news over most of the 2012 election year.

The Zero Economy - Robert Reich - The Bureau of Labor Statistics reports today no jobs were created in August. Zero. Nada. Well, not quite. The strike at Verizon reduced the labor force by 45,000. Minnesota government employees returned to work, adding 22,000. So in reality, America added 23,000 jobs. Almost zero.In reality, worse than zero. We need 125,000 a month merely to keep up with population growth. So the hole continues to deepen. Since this Depression began at the end of 2007, America’s potential labor force – working-age people who want jobs – has grown by over 7 million. But since then the number of Americans with jobs has shrunk by more than 300,000.If this doesn’t prompt President Obama to unveil a bold jobs plan next Thursday, I don’t know what will.The problem is on the demand side. Consumers (whose spending is 70 percent of the economy) can’t boost the economy on their own. They’re still too burdened by debt, especially on homes that are worth less than their mortgages. Their jobs are disappearinig, their pay is dropping, their medical bills are soaring. And businesses won’t hire without more sales.So we’re in a vicous cycle.

August Job Growth Numbers: Nothing to Sneeze at, or Just Nothing? - The Bureau of Labor Statistics released some less than stellar job numbers today: Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month. Health care continued to add jobs, and a decline in information employment reflected a strike. Government employment continued to trend down, despite the return of workers from a partial government shutdown in Minnesota. Yikes. The funny part is that the National Bureau of Economic Research concluded that The U.S. hasn't been in a recession since June 2009. This is because a recession is a period in which the economy is actively getting worse, whereas the recent numbers just suggest that the economy isn't actively getting better. (Score one for small victories?) Fairly or not, the media is pouncing all over President Obama for letting this happen. Despite the free-market nature of the U.S. economy, this is partially a reasonable criticism since the Employment Act of 1946 explicitly makes unemployment the federal government's problem.

Job Growth Takes A Dive In August - Today’s employment report is dismal. It may not be fatal, but it’s the most discouraging update for jobs from the Labor Department since the Great Recession was formally declared dead and buried as of June 2009.  Let’s start the grim work of digging through the numbers by focusing first on total nonfarm payrolls, which includes government employment. The net change is exactly zero for August, which means that last month was the worst for jobs creation since the 29,000 loss for September 2010. No wonder that the unemployment rate stayed at an elevate 9.1%.  The main trouble in this widely cited number is that the government continues to shed jobs. The loss was relatively mild in August, with government jobs retreating by only 17,000--down from a 71,000 loss in July. But the decline has been virtually non-stop for more than a year, and last month was no exception.

Sorry, no jobs in August - THIS morning, the Bureau of Labour Statistics released its statistics on August employment growth in America. There was none. The American economy added zero net new jobs in August. We will have a full analysis up later this morning. I'll just point out that since the recession officially ended, the American economy has lost nearly 600,000 government jobs. Any way you slice it, that's a significant drag on recovery.

Treading water - IT'S hard to imagine a more toxic economic brew than what America had to swallow in August: stock prices plunged, Europe’s debt crisis deepened, Congress took America to the brink of default and Standard & Poor’s responded by cutting its credit rating. It should not surprise anyone that employers decided it was a lousy time to hire. Even so, this morning's numbers from the Labour Department were a shock. Non-farm payroll employment was exactly unchanged in August from July, and total employment was revised down by 57,000 over the previous two months. The unemployment rate was unchanged at 9.1%. It’s mildly encouraging that this held steady because both the number of people with jobs and the number of people who want jobs, the labour force, rose, by more than 300,000 (gathered from a household survey that’s separate from the payroll tally). The household survey is far more volatile than the payroll survey, so take this with a grain of salt.*

Jobs Report, Second Look  - OK, deep breath.  The job market was weaker than expected in August, as employers added no new jobs, on net (this ‘net’ business is important—some jobs were created last month, some lost—this month, creation equaled loss, so net is zero). There were some extraneous factors, but they don’t change the dismal result: the now-ended Verizon strike took 45,000 jobs out of the private sector count in August, but going the other way, 22,000 Minnesota state employees previously shut out, went back to work. Since monthly numbers can always jump around, it’s important to average over a few months to get a feel for the trend.  The figure below does that for payroll jobs.You can clearly see the deceleration in job growth.  From Dec 2010-May 2011, we were adding around 150,000 jobs per month, not enough job growth to push down the unemployment rate, but about enough to hold steady.*  But over the past three months, we’re crawling along the bottom with 35K/month.

Jobs Report Post-Strike, Public and Private - There is no doubt that the recent jobs report was weak, but its worth noting that its not that far off what we have been experiencing recently.  Private payrolls increased by 17K but 45K jobs were cut because of the Verizon strike. After accounting for the strike private employment grew by 62K. Very weak but not out of line. Furthermore manufacturing employment declined slightly. In the beginning of the year manufacturing was expanding somewhere in 40K range. A slowdown and now slight contraction is a big part of the current weakness. On the public side of the ledger employment decreased by 17K, but that’s after the resolution of a government strike in Minnesota. So, the net-of-strike decrease is 42K government jobs. The theme that non-goods private employment is slowly growing, while production and government shrinks, continues.

August Jobs Report Reveals Zero Net Jobs Created For The First Time Since 1945 - For the first time in 66 years, the monthly jobs report shows zero net jobs created in the month of August: The US economy created no jobs and the unemployment rate held steadily higher at 9.1 percent in August, fueling concerns that the US is heading for another recession.It was the first time since World War II that the economy had a net zero jobs created for a month. Economists had been expecting the report to show a net of 75,000 jobs created, an unusually low number considering the US is technically more than two years removed from the end of the last crisis.Markets had been closely watching the August report in hopes that the employment picture would begin to show signs of recovery.(…) Private payrolls actually created 17,000 jobs, but was offset by continued shrinkage in government.

Reluctance to Hire Stalls Job Market - The number of jobs in the U.S. was reported as unchanged in August, and while that number will likely eventually be revised to a loss or a gain, the stagnation provides an apt metaphor for a stalled labor market where businesses are reluctant to hire. The 0 number of jobs added is a rare phenomenon. After revisions it has only happened once — in February 1945 — since 1939 when the Labor Department began compiling data. The U.S. jobs market is dynamic, meaning that every month millions of people are hired or leave positions. This month it just happens that in the payroll survey of businesses, the number of hires was equal to the number of job losses. The unchanged payroll figure is a symbol of the stagnant labor picture that is evident elsewhere in the jobs report. Right now the biggest problem isn’t as much employers cutting back as it is a reluctance to hire more workers. Earlier this week, Challenger Gray & Christmas said announced layoffs fell in July, dropping to 51,114 in August, down 23% from July when the number of job cuts hit a 16-month high of 66,414. Meanwhile, the survey of households showed the number of unemployed people rose modestly by 36,000. That compares to an increase of 331,000 in the number of the employed, not quite enough to make up for the 366,000 new entrants to the labor force.

Government Cutbacks Spur More Layoffs - Government cutbacks spurred a fresh round of layoffs in August as the public sector shed workers for the 10th-straight month. Governments cut a total of 17,000 employees last month after slashing 71,000 workers the prior month, the Labor Department said Friday. The Labor Department’s revisions have consistently shown a weaker public sector than its initial estimates. The number of government layoffs has been revised up for each of the past three months. In July, for example, the Labor Department originally reported governments cut a milder 37,000 slots. States and localities are struggling to maintain balanced budgets amid weak tax revenues and waning federal stimulus money. That’s led to a surge of public-sector layoffs. State governments added 5,000 jobs last month, a small rise even though 22,000 workers returned from the government shutdown in Minnesota. Local governments cut 20,000 workers in August. Localities have shed 550,000 jobs since employment peaked in September 2008.

Comparing Recessions and Recoveries: Job Changes - Today’s jobs report is nothing but bad news. The United States economy showed no net gain in jobs in August, the Labor Department reported, after having added an average of 53,000 in each of the three prior months. This was the worst jobs number since last September. Hiring was essentially unchanged in almost every private industry. The biggest gain was in health care, which added 30,000 jobs, but health care has been growing steadily despite what happens to the rest of the economy. Government employment continued to fall. The chart above shows economywide job changes in this last recession and recovery compared with other recent ones, with the black line representing the most recent downturn. Since the downturn began in December 2007, the economy has shed, on balance, about 5 percent of its nonfarm payroll jobs. And that does not even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession. The unemployment rate — measured by a different government survey, and based on how many people are without jobs but are actively looking for work — was unchanged in August, at 9.1 percent.

Duration of Unemployment, Unemployment by Education and Diffusion Indexes - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Two categories declined in August: The 27 weeks and more (the long term unemployed) declined slightly to 6.0 million workers, or just under 4.0% of the labor force, and the '5 to 14 weeks' category edged down slightly. The other two categories increased, especially the '15 to 26 weeks' group that increased to 2.24 million or almost 1.5% of the labor force - the highest level since January.This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining).  The BLS diffusion index for total private employment was at 52.2 in August, down from 57.7 in July, and for manufacturing, the diffusion index decreased sharply to 42.0.  Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Broader Unemployment Rate Rises to 16.2% - The U.S. jobless rate was flat at 9.1% in August, but the government’s broader measure of unemployment rose to 16.2%, matching the highest rate this year. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. The key to the rise in the broader unemployment rate was due to a 430,000 jump in the number of people employed part time but who would prefer full-time work. That number could reflect a rising number of workers who saw their hours cut back by concerned bosses or new part-time hires who would prefer full time work. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The 9.1% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose from 8.4 million to 8.8 million in August. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) increased to 8.826 million in August from 8.396 million in July. These workers are included in the alternate measure of labor underutilization (U-6) that increased to 16.2% in August from 16.1% in July. Unemployed over 26 Weeks This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 6.034 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.185 million in July. This is very high, and long term unemployment is one of the defining features of this employment recession.

Part-time workers: More now fine without full-time jobs - Unemployment remains a huge concern, but the underemployment problem isn't as bad as it used to be. Fewer part-time workers are looking for full-time work -- because they don't mind working part-time after all. Since hitting a peak of 9.5 million last September, the number of part-time workers who tell the Labor Department they are doing so for economic reasons rather than personal reasons has dropped to 8.4 million in July. "It's not massive, but there is a marked drop during a period when we're not seeing an increase in hours," said Heidi Shierholz, labor economist at the Economic Policy Institute. The vast majority of part-timers, defined as those who work less than 35 hours a week, are happy with their status. Those who would prefer full-time work make up only 31% of all part-time workers, according to the Labor Department.

How is Your (Holiday) Economy Doing? -- Yves Smith - I’m a bit surprised that anyone can be surprised by the lousy jobs numbers for August. Consumers are worried and too many economists have been trying to draw trend lines through noise in retail spending data and call it proof that a recovery in under way. Broad measures of unemployment are stuck in the upper teens, big companies are continuing to shed jobs, small businesses on the whole are pessimistic, state budgets are under pressure and federal deficit spending is set to be reined in. With housing in most markets not having bottomed, the overwhelming majority of consumers having taking a wealth hit, businesses not investing and government not taking up the slack, where exactly is growth supposed to come from? The tooth fairy? The government and private sector confidence generation apparatus hasn’t made much headway against the ugly combination of a post financial crisis hangover (known more formally as a balance sheet recession) and poor policy responses. But why has the media been so clueless? Cynics might argue that they are paid to be clueless, and there is more than a bit of truth in that. However, I suspect at least as powerful is that the overwhelming majority of reporters live in New York or Washington DC, two cities relatively unaffected by the downturn.

The Truth Sets You Free, Resistance Is Futile -- Read it and weep. Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The "consensus" said 67,000 jobs would be added. Nobody bothered to ask me or any of my fellow bloggers what we thought. Mish has posted an informative interactive graphic showing what industries have added or lost jobs, and where those jobs are located. The conventional wisdom now states that the economic downturn will be protracted, and Americans should all be patient. Some of the idiots saying this, the very same idiots who spoke of "the recovery" not so long ago, note that we had a financial crisis, and it always takes a long time to recover from one of those. Others concoct lame-brained stories—deficit reduction? more tax cuts for the rich?—explaining why our misery will take years to cure, but a cure will be found. Nevertheless, everybody also has a half-baked, quick-fix "solution" to our problems.

Dismal Jobs Report Puts Policy Makers on the Spot -August brought no increase in the number of jobs in the United States, a signal that the economy has stalled and that inaction by policy makers carries substantial risk.  The government report on hiring, released on Friday, prompted another round in a relentless diminution of economic expectations. The unemployment rate, at 9.1 percent, did not change last month, and the White House said it was expected to stay that high through at least 2012.  The optics of a giant zero in the jobs column — more symbolically powerful, perhaps, than even a small decrease might have been — increase the pressure on President Obama as he prepares to deliver a major address on job creation next week, on Republicans who have a starkly different approach to economic revival and on the Federal Reserve, whose policy makers have been divided over the wisdom of using its limited arsenal of tools to get the economy moving again.  The White House immediately seized on the report to bolster the president’s impending call to action. Republicans countered that the numbers were further proof that the stimulus policies of Mr. Obama, whom they quickly dubbed “President Zero,” were not working.

But just think of all the jobs it is creating - Irene may cost insurers as much as $3 billion to cover U.S. damage, with overall economic losses of $7 billion, according to Kinetic Analysis Corp., which predicts disaster impact. The U.S. suffered $35 billion in losses in nine separate events so far in 2011, according to the National Oceanic and Atmospheric Administration, tying a record for disasters causing more than $1 billion damage in a single year. via - That's one big broken window.

Potholes -   There is a crucial connection between potholes and unemployment. America's crumbling infrastructure is eroding America's competitiveness in the global economy by eroding America's ability to attract and retain global corporations and their high-productivity, high-wage jobs. This was not always so. Over much of the 20th century, America's strong infrastructure investment was a major factor attracting global corporations headquartered in other countries to invest and create jobs here. Rising U.S. standards of living were fueled by a strong infrastructure system that facilitated the growth of companies in America, both global and domestic alike: transportation systems to move people and products, electrical systems to power plants and offices, communications backbones to drive computers and creativity.  Today is very different. America's decaying infrastructure costs the typical American worker hundreds of hours in lost productivity. It also costs companies time and efficiency in moving their products around -- and also out of -- the country. This decay is particularly stark for global companies, whose executives are witness to the dynamism of emerging economies like China and India that present them with ever-widening choices for where to grow jobs and investments around the world.

U.S. Self-Employed Struggle to See Opportunities -More than 1 million self-employed Americans are no longer in business almost four years after the last recession began, as the economy constrains entrepreneurial activity and small-business job creation. The 18-month contraction that started in December 2007 initially resulted in more would-be business owners, as the number of people who work for themselves grew to 16.3 million in July 2008 from 15.7 million at the end of 2007, according to data from the Bureau of Labor Statistics. Since then, the total has fallen about 10 percent to 14.7 million in July, the data show. Employer businesses -- those that provide work for individuals including the founder -- “have been starting in fewer numbers, with fewer workers and growing at a slower pace than in the past,” . “Therefore, these entrepreneurs are generating increasingly fewer new jobs for the U.S. labor market.”

Time, Money and Unemployment - When Benjamin Franklin advised us that “time is money,” he was living a world in which many individuals were self-employed and could at least grow their own food. In our world, it’s hard to convert time into money if you can’t find a paying job. Still, Americans 15 or older (including students and retirees) devote, on average, almost as much time to unpaid work as they do to paid work (about 23 hours a week on household activities, purchasing goods and services, caring for and helping others, and volunteering, compared with about 25 hours a week on paid work and related activities, according to data from the 2010 American Time Use Survey). Time applied to unpaid work can provide a partial substitute for consumer expenditures. Individuals can cut down on restaurant spending by preparing their own meals, care for family members rather paying for day care or elder care, clean the house instead of hiring a maid or fix their own roof instead of hiring a roofer. Shopping may be fun sometimes, but it’s also foraging work in which increased time and effort can save money

Average Income Fell To Its 1997 Level In 2009 - Reuters filed a report in early August which didn't receive nearly the attention it deserved. I quote from U.S. incomes fell sharply in 2009: IRS data—(Reuters) - U.S. incomes plummeted again in 2009, with total income down 15.2 percent in real terms since 2007, new tax data showed on Wednesday. Granted, this was 2009, the worst year of the downturn. What little attention this report received focused on the fact that 1,470 of those making a million dollars or more paid no taxes. That's an outrage, but I see no reason to get all bent out of shape because 0.6% of the 235,413 Americans making that kind of money paid no taxes. That focus reflects politics as usual. It was alarming to me that average income in 2009 was at its lowest level since 1997. And since 1997, the cost of everything has skyrocketed—oil, food, health care, college tuitions, you name it. We're talking about average Americans getting squeezed here. This is of course the average income, so it behooves us to look at the bigger picture (below).Source. Data for 2008. The average income for the 90% was $31,244. Click to enlarge.

New High of 55% of Americans Foresee Labor Unions Weakening… A majority of Americans, 55%, think labor unions will become weaker in the future than they are today. That is up from 46% last year and the highest Gallup has measured since it first asked the question in 1999. These results are based on Gallup's annual Work and Education poll, conducted Aug. 11-14. Americans have always been more likely to expect labor unions to weaken rather than strengthen, but not to as high a degree as they do this year. The new high could be a response to the battles between state governments and public employee labor unions that have occurred in several states this year. As state governments have struggled to balance their budgets, public employees, many of whom are unionized, have been forced to accept cuts in pay or benefits. In Wisconsin, the government passed legislation to limit the scope of what public unions can bargain for. All party groups generally expect unions to become weaker in the future, with Democrats slightly less likely to say this. Since last year, Republicans and independents have become significantly more likely to believe unions will weaken in the future, with a smaller increase in the percentage of Democrats holding this view.

The Slow Disappearance of the American Working Man - As President Barack Obama puts together a new jobs plan to be revealed shortly after Labor Day, he is up against a powerful force, long in the making, that has gone virtually unnoticed in the debate over how to put people back to work: Employers are increasingly giving up on the American man. If that sounds bleak, it's because it is. The portion of men who work and their median wages have been eroding since the early 1970s. For decades the impact of this fact was softened in many families by the increasing number of women who went to work and took up the slack. More recently, the housing bubble helped to mask it by boosting the male-dominated construction trades, which employed millions. When real estate ultimately crashed, so did the prospects for many men. The portion of men holding a job—any job, full- or part-time—fell to 63.5 percent in July—hovering stubbornly near the low point of 63.3 percent it reached in December 2009. These are the lowest numbers in statistics going back to 1948. Among the critical category of prime working-age men between 25 and 54, only 81.2 percent held jobs, a barely noticeable improvement from its low point last year—and still well below the depths of the 1982-83 recession, when employment among prime-age men never dropped below 85 percent. To put those numbers in perspective, consider that in 1969, 95 percent of men in their prime working years had a job.

Mohamed A. El-Erian: Workers' Malaise Foreshadows Wider Social Issues: This weekend's Labor Day celebrations in America mark a difficult time for workers. Having experienced a multi-year decline in their share of national income, they are now suffering the brunt of the current economic malaise; and there is little to suggest that the situation will improve any time soon. As a result, the country's economic hardships risk morphing from pressuring specific segments of the population to undermining more general aspects of social justice. The numbers are striking -- and worrisome. Over the last 30 years, labor's share of the national pie has declined to 44 percent from 52 percent, with profits growing at twice the annual rate for average wages. This morning's monthly employment report adds to the concerns. Unemployment remains very high, whether measured by the most-quoted unemployment rate (9.1 percent), the less partial under- and un-employment rate, (16.2 percent) or, most comprehensively, the proportion of total adults who are not working (42 percent compared to 35 percent 10 years ago). The duration and composition of joblessness is very troubling. The average unemployed American has been without a job for 40 weeks, a record level, and 44 percent of the unemployed have been out of a job for more than 26 weeks.

Black unemployment rate: Highest since 1984 - -- The August jobs report was dismal for plenty of reasons, but perhaps most striking was the picture it painted of racial inequality in the job market. Black unemployment surged to 16.7% in August, its highest level since 1984, while the unemployment rate1 for whites fell slightly to 8%, the Labor Department reported. "This month's numbers continue to bear out that longstanding pattern that minorities have a much more challenging time getting jobs," Black unemployment has been roughly double that of whites since the government started tracking the figures in 1972.  Economists blame a variety of factors. The black workforce is younger than the white workforce, lower numbers of blacks get a college degree and many live in areas of the country that were harder hit by the recession -- all things that could lead to a higher unemployment rate.  But even excluding those factors, blacks still are hit with higher joblessness.

Hope and despair at a job fair - The Faith Dome at Crenshaw Christian Center was the perfect venue for Wednesday's For the People job fair initiative. It's not just that it holds 10,000 people — and almost half of those seats were filled. It's that something more than logic and reason is required to stoke hope in times like these. The hopefuls began lining up along Vermont Avenue hours before the church doors opened for the job fair at 9 a.m. Men in pressed slacks and sports jackets, women with high heels peeking from their purses and flip-flops on their feet for standing.  Almost everyone in line was black; all of them clutching briefcases, clipboards or binders, with resumes they hoped to exchange for business cards from would-be employers. I weaved through a queue that stretched for blocks, asking how they felt and why they had come. One woman seemed to sum it up best: "To fill out applications, leave our resumes and let them know we're hungry."Hungry in a literal way, for some — those who have been out of work so long, they need food banks and donated clothes to get by.

Unemployed, and Wanting to Be Younger -  Just ahead of the monthly jobs report on Friday, the Heldrich Center for Workforce Development has released its latest update on the wave of unemployed workers it has been following for two years now. The most recent report has a number of interesting findings, but particularly striking were the open-ended responses to the question, “What is the one thing you think would help the most in getting you a new job?” Many of the responses were filled with a sense of hopelessness, or at the very least a sense of resignation. Two of the respondents said they needed “a miracle.” Perhaps most worrisome, dozens said that the only thing that could help them was “being younger.” Fears of age discrimination have frequently come up in my conversations with unemployed workers as well, given that older workers have the longest spells of joblessness (though there are other possible explanations for this).

New college grads losing ground on wages - As college students head back to the classroom this semester, a harsh reality confronts them -- the rewards for the time, energy, and money that young people put into college are less than they were a decade ago.  Since 2000, America’s young college graduates have seen wages, adjusted for inflation, deteriorate.  This lack of wage growth may be particularly surprising to those used to reading about the vast unfilled need for college graduates, which if true would lead to increases in their earnings.  The chart below tracks the average inflation-adjusted hourly wage for young college graduates with no advanced degree from 1979 to 2010. After gains in the 1980s and particularly in the 1990s, hourly wages for young college-educated men in 2000 were $22.75, but that dropped by almost a full dollar to $21.77 by 2010.  For young college-educated women, hourly wages fell from $19.38 to $18.43 over the same period.

Youth Unemployment Crisis Has Longterm Implications For Teens, The Economy: As we look forward to this Friday's August unemployment snapshot from the Department of Labor, one part of the picture is already in focus: this was the worst summer on record for teens and young adults looking for work. This July, the typical summertime peak of youth employment, the share of young people with a job was just 48.8 percent, according to fresh data from the Bureau of Labor Statistics. This represents the lowest July rate since the Bureau began collecting such data, in 1948. Perhaps this grim statistic explains in part why the labor force participation rate -- those working or looking for work -- for Americans aged 16 to 24 also fell a percentage point from the previous summer to a record low of 59.5, as more kids simply gave up looking. "There are numbers of unpleasant consequences of this," "Increased poverty, increased reliance on social safety net programs, potential increases in illegal or off the books work, perhaps illegal actives like crime, idleness, lack of skills, atrophy of skills, inability to get a job later when the labor market gets better -- the list goes on and on."

Generation Limbo - Waiting It Out - Meet the members of what might be called Generation Limbo: highly educated 20-somethings, whose careers are stuck in neutral, coping with dead-end jobs and listless prospects.  And so they wait: for the economy to turn, for good jobs to materialize, for their lucky break. Some do so bitterly, frustrated that their well-mapped careers have gone astray. Others do so anxiously, wondering how they are going to pay their rent, their school loans, their living expenses — sometimes resorting to once-unthinkable government handouts.  “We did everything we were supposed to,” said Stephanie Morales, 23, who graduated from Dartmouth College in 2009 with hopes of working in the arts. Instead she ended up waiting tables at a Chart House restaurant, earning $2.17 an hour plus tips, to pay off her student loans. “What was the point of working so hard for 22 years if there was nothing out there?” Some of Ms. Morales’s classmates have found themselves on welfare. “You don’t expect someone who just spent four years in Ivy League schools to be on food stamps,” said Ms. Morales, who estimates that a half-dozen of her friends are on the Supplemental Nutrition Assistance Program. A few are even helping younger graduates figure out how to apply. “We are passing on these traditions on how to work in the adult world as working poor,” Ms. Morales said.

The Get Lost Generation - Ask a headline writer at any paper of record and they’ll tell you that today’s young people are “The Lost Generation.” They tend to use this label as if Hemingway and Fitzgerald hadn’t stumbled their way through half the bars in Paris under the same flag. Of course the absent jobs that could make us “productive” members of society go a long way toward answering the question of direction. Young people are semi-autonomous when it comes to our life choices, but we are subject as a population to economic and environmental conditions; one could say we are lost because we have been lost. Even so, we don’t seem to be going anywhere. The new phase of “emerging adulthood” described in the now infamous New York Times Magazine article on 20-somethings involves a return to the parents’ home, (as in Lauren Westerfield’s “Flexible Lives, Flexible Relationships.”) Nothing could be more found. There is also some irony in calling the most connected generation in the history of mankind “lost.” The phone in my pocket can not only tell me where I am, but where I might want to go next and how to get there. There are ways in which we could not get lost if we tried. Or could we? If the directions through which productive potential is traditionally realized (traditional careers, families, housing, modes of transportation) are not going to be open to many of us, as the situation indicates they will not, then we will need to produce and construct new ones. “Make it new” is an old phrase but, from one generation to another, it’s still good advice.

Grandma Bunks With Jobless Kids as Multigenerational Homes Surge - The U.S. is experiencing a surge in the multigenerational households that were once a common feature of American life, and Hispanic and Asian families are driving the trend, according to U.S. Census Bureau data released this month. The number of such households, defined as those with three or more generations living under one roof, grew to almost 5.1 million in 2010, a 30 percent increase from 3.9 million in 2000, the data show.  They hit 2.9 million in 1950 and didn’t top that again until four decades later, according to the Washington-based Pew Research Center. At the 1980 low, multiple-generation homes represented just 2.9 percent of all U.S. households, down from 7.8 percent in 1900.  Although the term multigenerational invokes images of grandma churning butter on a pioneer farm or turn-of-the-century immigrants crammed into tenements, today’s extended families are more likely to live in suburbs. Among large cities, the one with the highest percentage of multigenerational households, at 16 percent, is Norwalk, California, a collection of largely single- family homes 15 miles (25 kilometers) south of Los Angeles.

Sustained unemployment deeply scars economy, families, says EPI report - The pain caused by persistently high unemployment is not limited to workers who are currently unemployed, a new Economic Policy Institute (EPI) briefing paper finds.  The economic damage extends to the broader workforce and the country in general through lost wages, income and wealth, as well as higher poverty.  The national unemployment rate is currently 9.1%, and it has been at or above 8.8% for the past 28 months.  The underemployment rate has remained between 15.7% and 17.4% since the spring of 2009, and it currently stands at 16.1%.Sustained, high joblessness causes lasting damage to wages, benefits, income, and wealth by EPI President Lawrence Mishel and economist Heidi Shierholz explains that the monthly unemployment and underemployment rates do not capture the full picture of how many U.S. workers experience labor market distress.  Roughly 31% of U.S. workers experienced unemployment or underemployment at some point in 2009.  The unemployment rate also does not capture how severe the problem of long-term unemployment is—the share of unemployed workers who have been out of work for over six months has hovered around 45% for more than a year.  Finally, the unemployment rate as it is experienced by children is higher than the national average.  In 2010, the unemployment rate averaged 9.6%, but 10.6% of children had at least one unemployed parent.

Productivity, Inequality, Poverty  - Obama made waves two days ago when he asked public employees for “shared sacrifice and burden sharing,” on the grounds that they were somehow doing better off than private employees. Daily Kos showed that average compensation for public employees is less than private ones, but that comparison isn’t really the point, or at least the only point. The real howler of Obama’s speech is the implication that there has not been “shared sacrifice and burden sharing” up until now. It’s not just that public workers, even in states with Democratic governors, like New York, have already had to accept yet another round of wage and benefits cuts. The point is that, since the late 1960s, workers in general have been keeping hold of less and less of what they produce. Doug Henwood’s ‘productivity wedge’ shows the growing gap between productivity and compensation: Henwood’s graph shows the gap in terms of overall compensation (wages plus benefits). As the graph below demonstrates, the gap between productivity and compensation is largely in terms of flatlining real wages:

America’s Rampant Inequality Impossible to Deny - The CIA ranks the country 64th, behind Ivory Coast and Uganda—but Fox's banshees still scream 'class warfare' when Warren Buffet wants to tax the rich. For years, America’s super-rich and their allies in Congress and the media have tried to deny that a tiny elite was growing astronomically wealthy at the expense of the vast majority of Americans. But the vast gaping canyon between the richest 1 percent and Corporate America, on the one hand, and the rest of us on the other, has become so large and well-documented that denial no longer works. The ideological combat gets especially intense when it turns to the relatively minimal taxes that corporations and the rich pay. What defense can be offered when billionaire investor Warren Buffet admits that he pays a 15 percent capital-gains rate on most of his income, while everyone else in his office (including the secretary) pays a considerably higher rate? What can the pundits of the Right say when a corporation like General Electric makes $14.2 billion in profits in 2010 and not only pays no federal income taxes, but collects $3.2 billion in tax credits to lower future tax bills?

Demand for Food Stamps Remains High - The number of Americans receiving food stamps dropped in June from declining disaster assistance, but there’s still little sign of waning demand for the food assistance program. Food stamp rolls declined by 0.5% in June to a still-high 45.2 million, the Department of Agriculture said Friday. It was the first decline since October 2008 and likely reflects declining disaster assistance to states like Alabama rather than improvements in household finances. Alabama was hit by tornadoes in late April that sent the number of food assistance recipients soaring in May. Because disaster-assistance declined in June, it lowered the national tally. The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), may continue to rise in coming months as families continue to struggle with high unemployment and other natural disasters. Click on map to see percent of each state’s population on food stamps.

Thieves Steal 175,000 Feet Of Copper Wire From Overhead Lights On I-95 - Rising copper prices and a bad economy are giving thieves reason to rob Interstate-95 of its copper wiring, used in overhead lights. According to CBS Miami, the larceny of over 175,000 feet of copper wire has rendered useless the lighting over a 33-mile stretch of Palm Beach County. The thievery has taken place over the last six months in 18 separate locations. "Obviously, the economy has driven this," . "It does present itself as a kind of crime of convenience." Palm Beach County isn't the only stretch of I-95 where this is a problem. The South Carolina legislature recently enacted the "Copper Theft Bill", which looks to curb copper theft and make it easier to track scrap metal transactions.

Welfare to Work Doesn’t Work Without Work, by Jared Bernstein: There have been a number of posts and articles on the 1996 welfare reform law (TANF—Temporary Assistance for Needy Families), as it turned 15 last week. I argued that it’s a fair weather ship, performing far better amidst strong labor demand, foundering otherwise. My CBPP colleague Donna Pavetti posts some compelling evidence in that regard here too. Rep Dave Camp, the Republican chairman of the House Ways and Means Committee, feels differently. He released a statement including this point: Welfare reform has worked to reduce dependence by promoting work, as intended. But the job is not finished. We ought to build on those successes by taking steps to ensure that government programs support and not undermine that enduring American work ethic. Now, look at this trend in employment rates—share of the group with jobs—for low-income single moms (family income below two times the poverty level) from 1995 to 2009. If Rep Camp had made this statement in 1999, he might have had a case. But since then, the share of low-income single moms with jobs has consistently fallen, and, given a welfare program now conditioned on work, the safety net failed to adequately catch them and their kids.

U.S. Moves Closer to Minority Majority - Cities and their surrounding suburbs are ground zero for the country’s changing racial and ethnic composition, with just a handful of metropolitan areas driving the nation’s demographic destiny, according to this report released today by demographer William Frey of the Brookings Institution. The U.S. has long been on its way toward becoming what demographers call a “majority minority” country — where whites of European ancestry make up less than 50% of the population. Between 2000 and 2010, minorities accounted for 98% of the population growth in large metropolitan areas. This rapid expansion has caused big shifts in racial composition: Between 1990 and 2010, the share of the white population in big metropolitan areas fell to 57% from 71%. But virtually all of that shift has taken place in big metro areas, according Mr. Frey’s report. Growth in Hispanic and Asian populations — which together accounted for 60% of population growth over the decade — was especially concentrated. . (See a map showing the difference between the minority population among babies and seniors.)

San Diegans on food stamps rises by 89% - The number of San Diegans using food stamps to help supplement their income has increased by 89 percent since January 2009, according to the County’s Health and Human Services Agency. For several years the number of people using food stamps, also known as the CalFresh program, in San Diego, in comparison to other cities across the country was extremely low. In January 2009 San Diego’s food stamp program had 122,878 recipients. In July 2011, there were 232,255 food stamp recipients in San Diego almost double the number in less than two years. There is a huge effort by the County and the state to get qualified individuals to sign up for food stamps, according to San Diego County spokesperson Tom Christensen. But is it the economy or is it the County’s push to get people signed up for the program that has numbers skyrocketing? Christensen says it is both.

More Tennesseans Relying On Food Stamps - (video) New numbers reveal one out of six Tennesseans are on food stamps. For many, the extra help they get from the government to put food on the table still isn't enough. The cost of living has increased, and there's record unemployment in the state. Since 2008 an additional 350,000 people are now on food stamps. In Davidson and Rutherford Counties, one out of six people are on food stamps. In Montgomery County, it's one in seven. In Putnam and Maury Counties the situation is even worse, with one out of five people on food stamps.  Like a lot of people, Pechawer goes to the Martha O'Bryan Center food bank to get some extra help at the end of the month.  As the number of people on food stamps rises, so does the number of people needing help from the Martha O'Bryan Center. They have seen a 63 percent increase in the number of people they helped last year.

Federal cuts could cost Tenn. more than 5,000 jobs - Tennessee agencies would have to cut more than 5,000 jobs if Congress reduces the state's federal funds by as much as 30 percent. Deep federal spending cuts are required under the recent debt-ceiling agreement in Congress. A special bipartisan committee in Congress has been tasked with crafting a compromise $1.5 trillion, 10-year debt reduction package. Tennessee Finance Commissioner Mark Emkes earlier this month told state agency heads to submit two sets of plans: one for how they would cut 15 percent of federal aid, and another for reducing those funds by an additional 15 percent. In his letter, Emkes wrote that national credit rating agencies have asked the state to present plans on how it will respond to the cuts in federal funds, which make up about 40 percent of Tennessee's $30.8 billion annual budget. Tennessee agencies' plans were released Tuesday. In the worst case scenario, 5,131 positions would be eliminated. Those with the most proposed cuts are the Department of Human Services with 1,595 positions, and the Department of Intellectual and Developmental Disabilities with 1,152.

Illinois Loses Most Jobs in the Nation - In a trend that continues to worsen, more Illinoisans found themselves unemployed in the month of July. Illinois lost more jobs during the month of July than any other state in the nation, according to the most recent Bureau of Labor Statistics report. After losing 7,200 jobs in June, Illinois lost an additional 24,900 non-farm payroll jobs in July. The report also said Illinois’s unemployment rate climbed to 9.5 percent. This marks the third consecutive month of increases in the unemployment rate. Illinois started to create jobs as the national economy began to recover. But just when Illinois’s economy seemed to be turning around, lawmakers passed record tax increases in January of this year. Since then, Illinois’s employment numbers have done nothing but decline. Data released today by the bureau confirms this downward trajectory. When it comes to putting people back to work, Illinois is going backwards. Since January, Illinois has dropped 89,000 people from its employment rolls.

Employment in Most Cities Makes Gains From 2010 - Unemployment rates in most metropolitan areas in the U.S. fell during July from a year earlier, according to a Labor Department report released Wednesday.The report said jobless rates were lower in 257 of the 372 metropolitan areas measured. Unemployment rates were higher in 94 areas and unchanged in 21 areas.The data also showed 232 metropolitan areas reported year-over-year increases in non-farm payroll employment, while 133 reported decreases and seven had no change.The somewhat upbeat report indicated improvement in the nation’s weak jobs market. High unemployment in the U.S. is restraining consumer spending and overall economic growth. The economy grew little in the first half of 2011, a setback in the recovery from a recession that ended two years ago.

Thousands of public employees laid off in 2010 (Reuters) - Local and state governments axed more than 200,000 jobs in 2010, according to U.S. Census data released on Tuesday that showed the growing threat of public employee layoffs to the economic recovery. According to the Census, local and state governments had 203,321 fewer full-time equivalent employees in 2010 than in 2009 and 27,567 fewer part-time employees. Most local governments cut full-time jobs in 2010, with the biggest decline in Rhode Island, where the workforce shrank 7.7 percent. Those in North Dakota, one of few states to go through the 2007-09 recession unscathed, added jobs in 2010, with its full-time workforce growing 7.5 percent in 2010. It was the second year local governments lost part-time employees, with cities, counties and authorities in California shedding the most, 47,620. The job losses have continued this year. John Lonski, chief economist for Moody's Capital Markets Research told Reuters this month that "we are looking at the worst contraction of state and local government employment since 1981."

Wells Fargo Says 12 States in Economic Contraction - According to a Wells Fargo report, 12 States in Contraction, Alabama in RecessionThe report from the San Francisco-based bank said Alabama was one of 12 states experiencing an economic contraction in July and "likely slipped into a recession."  The report, written by senior economist Mark Vitner and economist Michael A Brown, said more states "are likely to fall into negative territory within the next six months" because of a persistent decline in manufacturing jobs.  Of the 12 states cited in Wells Fargo's report, five were in the South. Joining Alabama were Georgia, South Carolina, North Carolina and Virginia. The other seven states were Michigan, Nevada, Montana, Illinois, Indiana, Vermont, and Alaska.

Monday Map: Annual Income Lost/Gained due to Interstate Migration - Today's map comes a day late - we've been hard at work getting the data ready. We've updated our interactive State Migration Calculator with the latest IRS data, and it now includes migration in 2008-09. I've used the new data to create a map of interstate movement of income over the past decade. Florida is the big winner - migrants bought a net $70 billion dollars in annual income into the state between 1999 and 2009. New York, on the other hand, lost the most income: $45 billion.

Counties ask US deficit panel to spare local spending (Reuters) - Counties from across the United States are pleading with Congressional leaders working to reduce the U.S. deficit to not cut funds for local governments and to consider raising taxes. The National Association of Counties, in a letter to the senator co-chairing the bipartisan committee on reducing the deficit, essentially asked that the committee not reduce the deficit by "shifting costs to counties, imposing unfunded mandates, or by preempting county programs or taxing authority." Unfunded mandates are a cause for concern for states and local governments alike. Already struggling from a collapse in revenues, they are concerned the federal government will charge them with carrying out programs such as healthcare without providing funding. "As various budget scenarios are analyzed, all expenditures should be considered, including defense, foreign aid and federal entitlement reform, along with other domestic spending. Additionally, revenue enhancements should not be left 'off the table,'"

Ford cuts will cost 1,000 officers their jobs, police chief says -Nearly 1,000 officers will lose their jobs if Mayor Rob Ford’s administration goes ahead with a 10-per-cent cut to the Toronto police budget, Chief Bill Blair said Wednesday. Earlier this year, City Hall asked Chief Blair and the civilian board that oversees the force to reduce spending by roughly $83-million. They have instituted a hiring freeze, eliminated 18 management jobs through early retirement and chopped overtime spending by 10 per cent. These cuts, however, are not enough to meet the target. Since salaries and benefits comprise 90 per cent of the force’s budget, layoffs are inevitable if the Ford administration wants to achieve its goal, Chief Blair said in an interview on CITY-TV. “The majority of that $83-million that could be found will have to be found in salaries and the only way to achieve those savings is to have fewer people on the payroll,” he said.

Harrisburg City Council Rejects Fiscal Plan to Rescue Pennsylvania Capital - Harrisburg’s City Council rejected a fiscal-recovery plan proposed by Mayor Linda Thompson, putting state aid at risk and leaving Pennsylvania’s capital in financial limbo.  By a vote of 4-3, the council turned down the mayor’s blueprint, which called for asset sales. The proposal wouldn’t provide a guaranteed fix of the city’s debt problems and, by selling off assets, raised the possibility of higher taxes later, said Councilman Brad Koplinski.  “It is a plan, yes, but it’s an unreliable one,” Koplinski said. “It’s making sure that Wall Street gets paid and Main Street gets the shaft.”  The decision means the city has no procedure to deal with more than $300 million of debt, or five times its general-fund budget. Harrisburg helped finance improvements to a municipal incinerator that hasn’t generated enough revenue to pay its costs. The city of about 49,500, where a third live below the poverty level, may skip a $3.3 million payment next month. The move may hasten a state takeover, Councilwoman Patty Kim said last week.

Pennsylvania Capital Faces Limbo of Missed Payroll, Bond Default, Takeover - Harrisburg’s City Council has left residents of Pennsylvania’s capital wondering what will become of their struggling community, one so broke it may miss payroll, skip bond payments and face a state takeover. The council voted down a fiscal-rescue plan Aug. 31, the second time in as many months it rejected a proposed way out from under costs tied to a municipal incinerator that it can’t afford. Without an influx of cash, Mayor Linda Thompson has said the city won’t be able to issue paychecks and cover $3.3 million due Sept. 15 on its general-obligation bonds. Detective Jason Brinker, the 38-year-old head of the city’s police union, said no one knows what’s coming next. The city may lose state aid if it doesn’t put a fiscal recovery plan in place by Sept. 6. “It makes an already stressful job 100 times more stressful,” “Now they’ve got to worry about, Can I pay the mortgage, can I keep the heat on, can I feed my family.”

North Dakota's Economic "Miracle" - It's Not Oil - In an article in The New York Times on August 19th titled “The North Dakota Miracle,” Catherine Rampell writes: Forget the Texas Miracle. Let’s instead take a look at North Dakota, which has the lowest unemployment rate and the fastest job growth rate in the country. Oil is certainly a factor, but it is not what has put North Dakota over the top. Alaska has roughly the same population as North Dakota and produces nearly twice as much oil, yet unemployment in Alaska is running at 7.7 percent. Montana, South Dakota, and Wyoming have all benefited from a boom in energy prices, with Montana and Wyoming extracting much more gas than North Dakota has. The Bakken oil field stretches across Montana as well as North Dakota, with the greatest Bakken oil production coming from Elm Coulee Oil Field in Montana. Yet Montana’s unemployment rate, like Alaska’s, is 7.7 percent. A number of other mineral-rich states were initially not affected by the economic downturn, but they lost revenues with the later decline in oil prices. North Dakota is the only state to be in continuous budget surplus since the banking crisis of 2008. If its secret isn’t oil, what is so unique about the state? North Dakota has one thing that no other state has: its own state-owned bank.

More people losing property for late tax payments - Thousands of Tampa Bay area residents have lost property after falling behind on their mortgages and even homeowners association dues. But there's a third way people are losing homes and land: delinquent property taxes. In the first nine months of this year, the owners of more than 200 properties in Hillsborough County have lost them in "tax deed sales," where the county clerk's office sells off properties that are at least two years behind on their tax bills. That number has nearly doubled in the past three years. Who's buying them? Often, it's heavy financial hitters, such as a JPMorgan Chase subsidiary and a former Massachusetts hedge-fund manager.

New School Year Brings Steep Cuts in State Funding for Schools - As a new school year begins, elementary and high schools are receiving less state funding than last year in the great majority of states for which the necessary data are available, and are now funded at below pre-recession levels in most of these states. In at least 10 states, the shortfall compared with pre-recession levels exceeds 10 percent. These are the results of an initial analysis of state budget documents in 24 states where the necessary data were available. These 24 states include about two-thirds of the nation's school-age population.The analysis illustrates the continuing effect on state-funded services like education of the 2007-09 recession and slow recovery. The failure of the federal government to extend emergency fiscal aid to states and school districts and the failure of most states to enact needed revenue increases have exacerbated the cuts. Specifically, 21 of the 24 states analyzed are providing less funding per student to local school districts in the new school year than they provided last year, and 17 of the 24 are providing less than they did before the recession, after adjusting for inflation. In 10 of these 24 states, per student funding is down by more than 10 percent from pre-recession levels. The three states with the deepest cuts — South Carolina, Arizona, and California — each have reduced per student funding to K-12 schools by more than 20 percent.

State and Local Job Cuts Continue, Especially in Education - Today’s jobs report shows that in August, cuts by states and local governments — especially school districts — wiped out private-sector job gains. The state and local sector cut 15,000 jobs in August.  That comes on top of a whopping 66,000 jobs lost in July, according to revised figures released today — the worst single month of job loss for states and localities since the recession began in December 2007.  States and localities have eliminated 671,000 jobs since employment peaked in August 2008 (see first graph).Not coincidentally, July was also the first month of the new fiscal year for most states, one in which they are facing the double-whammy of weak revenues (which remain well below pre-recession levels) and the expiration of temporary federal aid.Some 14,000 of the state and local jobs lost in August were in local school districts, bringing to 293,000 the total decline in school-district employment since August 2008 (see second graph).

Great Recession could reduce school achievement for children of unemployed - Lingering impacts of the Great Recession could include long-term stress, behavioral problems and economic hardship among children of the unemployed, according to researchers at the University of Chicago.  “There is growing evidence that parental job loss has adverse consequences on children’s behavior, academic achievement and later employment outcomes, particularly in economically disadvantaged families,” said Heather Hill, assistant professor in the University of Chicago School of Social Service Administration. The material hardship and stress associated with unemployment appears to reduce the quality of the home environment and adversely affect children, Hill and other UChicago researchers have found. The families that Hill studied were largely low-income. She found that, among young children, a maternal job loss is associated with increasing children’s problem behavior in the classroom by more than 40 percent.

NC Schools Report 530+ Teacher Layoffs - The state education department says North Carolina public schools have laid off hundreds of teachers and other workers again this year in a pattern repeated for the past several recession-wracked years. The state Department of Public Instruction said Wednesday that school districts laid off more than 530 teachers jobs statewide ahead of the school year that started last week. They were among 2,400 education workers axed. North Carolina The agency says its survey of all but two of the state's 115 school districts found that over the past four years they laid off nearly 6,100 people and eliminated 16,678 positions, many of which were vacant. The state schools agency wanted to know how many positions were eliminated, whether or not those jobs were vacant, and how many people actually lost their jobs. The totals don't include Guilford County Schools, one of the state's largest districts with more than 71,000 students, which did not respond to the survey, DPI reported. Duplin County Schools also did not respond to the survey, the agency said.

Back to school blues: 800 workers to get pink slips on first day - Nearly 800 public school workers will be fired this fall because of budget cuts, but they won't know who's getting canned until the first day of school next week. School aides, parent coordinators and other staffers are facing layoffs as schools across the city trim an average of 2.4% from their budgets. For the workers who could be dumped, waiting to find out is torture. "It's terrifying knowing that you could lose your job," said Mabel Blandino, 57, an aide at Public School 130 in the South Bronx. It's barely enough to cover the essentials for herself and her grandson. "If we lost that money, we could lose our apartment," said Blandino. The school aides who are set to lose their jobs earn $11,000 per year on average, said officials from District Council 37, which represents most of the workers. DC 37 director Lillian Roberts said the cuts would hurt workers who are already living on the edge financially. "These workers are going to end up on welfare - and that doesn't help the taxpayers at all,"

Rick Perry Sought State Profits From Teacher Life Insurance Scheme: -- Two weeks before Thanksgiving in 2003, top officials from Texas Governor Rick Perry's office pitched an unusual offer to the state's retired teachers: Let's get into the death business. Perry's budget director, Mike Morrissey, laid out a pitch that was both ambitious and risky, according to notes summarizing the meeting provided to The Huffington Post. According to the notes, which were authenticated by a meeting participant, the Perry administration wanted to help Wall Street investors gamble on how long retired Texas teachers would live. Perry was promising the state big money in exchange for helping Swiss banking giant UBS set up a business of teacher death speculation. All they had to do was convince retirees to let UBS buy life insurance policies on them. When the retirees died, those policies would pay out benefits to Wall Street speculators, and the state, supposedly, would get paid for arranging the bets. The families of the deceased former teachers would get nothing.

Students Start the School Year with Less Money, Higher Tuition - Forty-one thousand students began a new year today at Florida State University. They were greeted with a fifteen percent increase in tuition over last year, and for many, Bright Futures scholarships that are just a little dimmer. Bright Futures Scholarships no longer cover 100 percent of tuition but are a fixed amount. That’s lead a lot of recipients to start looking for work or take out loans. “It’s harder for students,” Julian Arenas, a student from Naples said. “Basically, for the people who have no support from their parents. They have to take out loans, they have to either work and spend less time in school. I think that’s one of the problems.” “It’s really hard for the rest of us to pay for tuition entirely because I only have Bright Futures,” Sara Dejan, from Odessa, FL. “And since it no longer actually covers 100 percent, even though it says it does, it’s just really difficult for myself and my family, to take care of a college education when we don’t quite have the funding anymore. Despite the fee and tuition increases, Florida State, like other state universities, is making due with its fourth straight year of budget cuts.

A Venn Diagram for Rick Perry: Social Security Is Not a Ponzi Scheme - On Saturday, Texas Gov. Rick Perry told a group of voters that Social Security is a "Ponzi scheme" and a "monstrous lie" to younger Americans. It's not the first time the GOP presidential candidate has made such claims. The Texas governor also described Social Security as a Ponzi scheme in his 2010 book, "Fed Up!," and has argued the program is unconstitutional and could be handed over to the states.When politicians make clearly false claims, reporters have an obligation to explain to readers why those claims are false—or at least quote someone who can. I would suggest political scientist Jonathan Bernstein:Very simple: anyone who says that Social Security is a Ponzi scheme either misunderstands Social Security, misunderstands Ponzi schemes, is deliberately lying, or some combination of those... After all, a Ponzi scheme is a deliberate fraud. Saying that Social Security is financed like a Ponzi scheme is factually wrong, but saying that Social Security is a Ponzi scheme or is like a Ponzi scheme is basically a false accusation of fraud against the US government and the politicians who have supported Social Security over the years.

Sen. Sanders' Plan To Actually Fix Social Security »  Currently the program has built up a huge trust fund -- over $2.5 trillion. This is invested in US Treasury Bonds, and is earning interest. But there are projections that this trust fund will be depleted in approx. 2037, and if this happens the program will have to cut payouts by as much as 25%. (Hey. when does the military budget Trust Fund run down?)  One big reason for this shortfall is that the last time the programs was comprehensively adjusted (1983, Greenspan Commission) certain economic growth and income projections were used to decide how much "payroll tax" to take out of people's paychecks. They increased the amount taken out of paychecks, and set up an increasing "cap" on the income that would be taxed. Right now 6.2% (temporarily reduced to 4.2%) is taken out of paychecks, and employers kick in another 6.2%, on income up to a "cap" of $106,800. There is no "payroll tax" on amounts above that "cap." Senator Bernie Sanders is introducing a bill to the Senate to fix this, once and for all. In simple terms, this bill will start taxing income above $250,000 a year to cover this Social Security shortfall. So instead of just "raising the cap" it lets that cap stay, and then takes it off again on income above $250,000. In effect it means there will be a gap between the current top income that is taxed, and $250K.

New Jersey Governor Christie Sued by Unions Over Pension, Health BenefitsNew Jersey public employee unions, seeking to block a law reducing pension and health benefits, sued Governor Chris Christie and other state officials.  More than 20 unions and individuals representing teachers, firefighters, police officers and other public employees claim the law enacted June 28 violates the U.S. and state constitutions by forcing them to pay more for pensions and health insurance. In a complaint in federal court in Trenton, New Jersey, they asked a judge yesterday to block enforcement of the law and order the state to fully fund the pension systems.  The law “illegally takes away benefits that school employees and others have already earned through their service to the people of New Jersey,” Barbara Keshishian, president of the New Jersey Education Association, said in a statement on the union’s website.

Republican Governors Calling for Overhaul of Medicaid to Reduce Spending -  Medicaid, the U.S. health program for the poor, should be overhauled to limit spending and let states design programs without federal interference, Republican governors said. In a report the Republican Governor’s Association issued today, 31 state and territorial leaders made their most detailed group effort to argue for an overhaul of the federal-state health program that the Congressional Budget Office said will insure 56 million people and cost the federal government $275 billion in 2011. Medicaid is among the biggest expenses for many states struggling with lower tax revenue. “The United States literally cannot afford to have the status quo on Medicaid,” said Mississippi Governor Haley Barbour, a Republican who has called for overhauling the program by ending federal oversight. “We should not have to come to Washington on bended knee and kowtow for waivers to do these kinds of things.” A congressional supercommittee is debating the fate of federal entitlement programs, including Medicare, Medicaid and Social Security, in an effort to reduce spending and the U.S. budget deficit. 

Medicaid's Half A Billion Dollar Hole - The department that funds Medicaid needs hundreds of millions of dollars to fill its budget this year and next. The shortfall is no surprise to budget writers. Scott Frederking with the Georgia Department of Community Health says much of the half a billion dollar hole came from using Medicaid money to pay for other programs, including a shortfall in the state employees’ health insurance. "So this was essentially borrowing some dollars out of Medicaid to fill some gaps in the state budget and I believe it was understood that these dollars would be replaced when legislators came back to town to fill the amended budget," says Frederking.

New cuts to health services for the poor take hold in October - New cuts to health services for North Carolina's poor will start in October, with the elimination of eye exams and glasses for adults on Medicaid. Medicaid recipients are receiving notices about reductions, eliminations or other changes to an array of health services in the next few months. The $354 million Medicaid cut in the state budget includes limits and other changes to services, totaling $16.5 million. In addition to getting rid of routine adult eye care and glasses, the state plans to limit payments for deep-cleaning dental treatments for people who have gum disease to once every two years from once a year. Outpatient physical therapy, occupational therapy and speech therapy for adults will be limited to three visits a year. The Medicaid service reductions were included in Gov. Bev Perdue's proposed budget and adopted by the legislature. More health-care limits may come as the state Medicaid office looks for more savings in the program. "They may seem like innocent cuts on the surface, but cumulatively, they are likely to lead to higher health-care costs later and potentially the loss of independence for many residents,"

U.S. Postal Service woes put worker injury fund at risk (Reuters) - A fund that compensates federal employees for work-related injuries will run out of cash in the last quarter of 2012 if the U.S. Postal Service defaults on an upcoming $1.2 billion payment, according to the Labor Department. The mail carrier, which has been losing billions of dollars each year, has more than 560,000 full-time employees and is the largest employer of workers covered by the Federal Employees' Compensation Act. The Postal Service still plans to make the payment, due in October, to the fund, USPS spokesman David Partenheimer told Reuters. But in its third quarter financial statement this month, the agency said that without relief from Congress it could not guarantee it would have enough cash. The Labor Department said in a letter to Congress dated August 1 that without the Postal Service's usual hefty contribution, the fund would be unable to pay any benefits in the last four months of fiscal year 2012. "Over 2 million other federal employees are covered by FECA and ... would be directly affected, along with USPS employees," if the Postal Service fails to make its $1.2 billion payment, the Labor Department wrote to Darrell Issa, chairman of the House of Representatives Committee on Oversight and Government Reform, in a letter viewed by Reuters.

PCIP: 98 Percent Of Federal Funds To Help Uninsured Go Unspent -- Though as many as 25 million uninsured Americans have pre-existing medical conditions like heart disease and diabetes, a year-old program to insure them has only 21,000 enrollees, according to an audit released Friday by congressional investigators. The Government Accountability Office reported that the government has so far spent just 2 percent of the $5 billion allocated by the health care reform law for the program, which launched last summer as the Pre-Existing Condition Insurance Plan. Administration officials initially said as many as 375,000 people would sign up in 2010 alone. The PCIP offers market-rate monthly premiums and caps out-of-pocket costs for any U.S. citizen who has a pre-existing condition and has been without "creditable" health insurance for at least six months. The GAO found that the six-month requirement is the biggest obstacle to higher enrollment in the program. Officials previously worried that the $5 billion allocation would not last until the program is phased out at the end of 2013, but concern has now shifted to persuading more people to sign up.

Why the U.S. Isn’t Ready for Single Payer Yet - Dr. Samuel Metz, an anesthesiologist in Oregon, has a letter in the August 27 New York Times arguing for a single payer system in the U.S. Several responses follow.  I wanted to write about the exchange especially for European friends I spoke with on a recent trip. They were universally puzzled - "how can it be that you in the States don't have health care for all?"  Dr. Metz is obviously correct. No sane society designing a system from scratch would create the cockeyed U.S. non-system. The hodge podge we have is a result of history (making health insurance an employment benefit during World War II) and theology (our faith in free markets even when experience tells us they don't work).  To help explain - to myself and others - why we in the U.S. are so resistant to doing the obvious right thing, here's one of the responses to Metz, with my comments interlaced in bold italics:

Health Care Thoughts: Regulations Gone Wild - As Rusty presents his short 'thoughts' on the administrative end of the national healthcare reform process, I noticed some readers have taken the problems he notes as indicative that the whole process is flawed and destructive. I do believe that is a wrong tack to take and will not serve to learn more of what is happening in the process. The US public has only begun to take note of the growing necessity of deciding not only public spending but the huge costs to the current private system. Changes are happening in that area as well.  The steadily increasing complexity of insurance billing and particular contracts with groups is simply bypassed in macro discussions but has profound effects on delivery of services and costs. We glibly point to general 'benefits' sections of insurance as the 'worth' of plans and that justify the 'premium' schedules....not the real contracts on the other side of service delivery. Many general public discussions ignore the trends in the private sector. The overall costs of the system itself as the 'cost curve' bends downward without much general scrutiny will impact more than the handy medicaid and elderly targets in the political discourse..

The Hazards of Hospitals (graphic) These numbers are horrible. Any thoughts? There's the obvious - stay healthy, exercise, eat well, don't get sick. If these numbers are accurate, why is a hospital stay in the U.S. so much more dangerous than it is in other developed countries? For example, in European hospitals, the risk of acquiring a deadly infection is about 17 times lower than it is in the U.S. Do we abuse antibiotics significantly more than in other countries? What is the contribution of sleep depriving schedules for interns, poor sanitation practices, worse record keeping? - Ilene Created by Medical Billing and Coding Certification

‘Anti-cancer virus’ shows promise - BBC - An engineered virus, injected into the blood, can selectively target cancer cells throughout the body in what researchers have labelled a medical first. The virus attacked only tumours, leaving the healthy tissue alone, in a small trial on 23 patients, according to the journal Nature. Researchers said the findings could one day "truly transform" therapies. Cancer specialists said using viruses showed "real promise". Using viruses to attack cancers is not a new concept, but they have needed to be injected directly into tumours in order to evade the immune system.

Nitrogen pollution harming environment and human health - A scientist has revealed that nitrogen pollution from fertilizers and other sources has become a major environmental problem that threatens human health and welfare in multiple ways. Billions of people owe their lives to nitrogen fertilizers — a pillar of the fabled Green Revolution in agriculture that averted global famine in the 20th century— but according to Alan Townsend it can have detrimental affect on health and environment. "It’s been said that nitrogen pollution is the biggest environmental disaster that nobody has heard of,” said Townsend. Townsend, an authority on how human activity has changed the natural cycling of nitrogen to create a friend—turned—foe dilemma, called for greater public awareness of nitrogen pollution and concerted global action to control it. "Awareness has grown, but nitrogen pollution remains such a little—recognized environmental problem because it lacks the visibility of other kinds of pollution,”

Monsanto Corn Plant Losing Bug Resistance - Widely grown corn plants that Monsanto Co. genetically modified to thwart a voracious bug are falling prey to that very pest in a few Iowa fields, the first time a major Midwest scourge has developed resistance to a genetically modified crop.  The discovery raises concerns that the way some farmers are using biotech crops could spawn superbugs.Iowa State University entomologist Aaron Gassmann's discovery that western corn rootworms in four northeast Iowa fields have evolved to resist the natural pesticide made by Monsanto's corn plant could encourage some farmers to switch to insect-proof seeds sold by competitors of the St. Louis crop biotechnology giant, and to return to spraying harsher synthetic insecticides on their fields. The finding adds fuel to the race among crop biotechnology rivals to locate the next generation of genes that can protect plants from insects.

Monsanto fail: GMO crops are losing their pest control powers - Monsanto crops bred to thwart western corn rootworms, which love eating corn roots, are no longer are doing their job. The rootworms developed a resistance to the natural pesticide the crops produced and are chowing down. The alternatives for farmers: buy other genetically modified seeds (which will totally work forever!); spray nastier insecticides; abandon the economic model of monoculture and GMO crops. Guess which one's going to happen. Maybe which two out of three. Scientists are already working on a new way to make buggies regret they ever thought for a second about eating corn: it's called RNA interference, and it builds genetic code into plants that turns off essential genes of any bugs that eat it. At least, we hope it only applies to bugs.

Beetle Develops Resistance To Monsanto's Genetically Modified Corn: -- Corn beetles have been consuming plants that were genetically modified to be resistant to that very beetle, raising fears that a new superbug could develop or that farmers could be forced to increase the use of pesticides. In a study published late last month, Iowa State University entomologist Aaron Gassmann found that western corn rootworms (WCR) in four Iowa fields have developed resistance to an insect-killing protein derived from Bacillus thuringiensis, also known as Bt, the natural insecticide in Monsanto's genetically modified corn plant. While there's still no evidence that any significant number of the pests have become resistant to the genetically modified seeds sold by agribusiness giant Monsanto, the findings may have farmers looking for alternatives. Laboratory testing confirmed beetles were able to pass on Bt-resistance to their offspring. "These results suggest that improvements in resistance management and a more integrated approach to the use of Bt crops may be necessary," Gassmann wrote in his study.

Attack of the Monsanto Superinsects - Over the past decade and a half, as Monsanto built up its globe-spanning, multi-billion-dollar genetically modified seed empire, it made two major pitches to farmers. The first involved weeds. Leave the weed management to us, Monsanto insisted. We've engineered plants that can survive our very own herbicide. Just pay up for our patented, premium-priced seeds, spray your fields with our Roundup herbicide whenever the fancy strikes, and—voilà!—no more weeds. The second involved crop-eating insects. We've isolated the toxic gene of a commonly used bacterial pesticide called Bt, Monsanto announced, and spliced it directly into crops. Along with corn and soy, you will literally be growing the pesticide that protects them. Plant our seeds, and watch your crops thrive while their pests shrivel and die.  But now the pitches are wearing thin. Dumping a single herbicide onto millions of acres of farmland has, predictably enough, given rise to weeds resistant to that herbicide. Such "superweeds" are now galloping through cotton and corn country, forcing farmers to resort to highly toxic herbicide cocktails and even hand-weeding. More than 11 million acres are infested with Roundup-resistant weeds, up from 2.4 million acres in 2007, reckons Penn State University weed expert David Mortensen.

60, The Average Age of Farmers - Farming has been a disaster for 30 years. The average age of farmers in America is 58 because it’s been such a horrible business. The average age of farmers in Japan is 66. In Australia, it’s 58. I could go on and on. In 10 years, those farmers are going to be 68 if they are still alive. We have huge shortages developing in agriculture and great fortunes are going to be made by the people who address those problems. Don’t Get An MBA, Go And Get A Farming Degree.The information above is a bit frightening in that as more farmers retire, that leaves more and more of our food supply to the big corporations, like Monsanto, where just about every non-organic food product available to consumers has some sort of connection with the food giant. By the way, Monsanto controls 90% of all genetically engineered seeds. In other words, Monsanto controls – and owns patents on – most of the American food supply. When our food consumption choices and our subsequent well-being are left to pure corporate profits and the stock market price, I fear for our health. We are secondary.

Monitoring Ground-Level Ozone from Space— Satellite views of the Midwestern United States show that ozone levels above 50 parts per billion (ppb) along the ground could reduce soybean yields by at least 10 percent, costing more than $1 billion in lost crop production, according to U.S. Department of Agriculture (USDA) scientists. In a 5-year study led by the National Aeronautics and Space Administration, scientists surveyed widespread ozone damage to soybeans in Iowa, Illinois and Indiana, using both ozone surface monitors and satellite instruments. Satellite information is useful for investigating ozone impacts on crop yields because satellite information is available for rural regions, where ground monitoring networks do not exist. Satellite observations, which are also available for farmland in countries without ground networks, could provide important insight into the global extent of ozone reduction of crop yields. Ozone levels in most urban areas of the United States have declined with improvements in emission controls, but they are still high enough to damage soybean, peanut, cotton, rice, tomato and other crops. Ozone levels are expected to rise in countries like India and China as growing populations are able to afford more cars and build more power plants. Another concern is that ozone levels will rise in developing countries, whose people can least withstand losses of staples such as rice and wheat.

Summer Drought Limits the Positive Effects of CO2 and Heat On Plant Growth in Future Climate - Although the rain this summer has been pouring down over Denmark, most scientists agree that global temperature increases will intensify periods with summer drought already in 2075. The large scale project CLIMAITE, led by Risø DTU, has published its first synthesis paper in the journal Global Change Biology, and the conclusion is perhaps a little surprising that the predicted increase in plant growth, due to more CO2 in the atmosphere is noticeably limited when combined with higher temperatures -- and especially summer droughts. In contrast to the increased growth in plants that scientists have often seen in studies with elevated CO2, the first synthesis paper on the comprehensive CLIMAITE project shows that the combination of summer drought and potential plant growth-promoting factors such as higher temperatures and increased CO2 together limit the effect of CO2 increased plant growth significantly. "When you've previously seen a significantly higher plant growth at elevated CO2 concentrations, it is typically because it has been controlled studies, where only the CO2 concentration was changed. We fundamentally had the theory that you have to look at the combination of the different climate variables, since the plants in the future will be exposed to multiple changes simultaneously, "

State Climatologist: “It’s Likely Much of Texas Will Still Be in Severe Drought” Next August, With Worse Water Shortages - Over 80% of the state is now rated under “Exceptional Drought” (darkest red): Texas State Climatologist John Nielsen-Gammon has a number of charts that provide some historical quantification and comparison.  In his Monday post, “Texas Drought: Spot the Outlier,” N-G offers “a plot of Texas average summer (June-August) temperature versus Texas summer precipitation” as far back as records go (1895): Nielsen-Gammon explains, “Can you spot the outlier?  The year 2011 continues the recent trend of being much warmer than the historical precipitation-temperature relationship would indicate, although with no previous points so dry it’s hard to say exactly what history would say about a summer such as this one.  Except that this summer is way beyond the previous envelope of summer temperature and precipitation.“ Human-caused climate change is starting to take us outside the bounds of the recorded weather extremes.  And the Texas State Climatologist warned it is likely to get worse:

As Texas Withers, Gas Industry Guzzles -At Trinity Park, a popular picnic spot near downtown Fort Worth, Texas, a scorching summer has killed stately oaks and turned lawns into brittle moonscapes. On the park's eastern edge, loud diesel generators pump some 4 million gallons of water from the Trinity River, though they're not supplying the park or city residents, who began facing drought-imposed watering restrictions on Monday. Instead, Chesapeake Energy is piping the water across the park to frack a nearby natural gas well. As Texas faces its worst single-year drought ever, many drinking wells have failed, entire towns could go dry, and millions of residential water users face mandatory cutbacks. A study released at a meeting of Texas water districts yesterday predicted that the drought will persist through next summer. But so far, the state's booming and increasingly thirsty natural gas industry faces no limits to how much water it can pump.

Water, Rights and Privileges, and Global Markets - An article about famine in the Horn of Africa by Maude Barlow appeared today. It is worth your consideration. (h/t coberly) My own response is in comments. Following are excerpts:  Most Westerners see the crisis in the Horn of Africa as a combination of a large population, chronic poverty, corruption on the part of African government officials, failed states and no rain, and that none of this will ever change so giving money to this self perpetuating crisis is throwing it away. But I offered another narrative that I believe is closer to the truth.  I believe the water and food crises in the Horn of Africa are the direct result of old-fashioned colonial exploitation: land grabs by foreign hedge and investment funds and wealthy countries setting up large foreign-based agribusinesses that are guzzling the lion's share of the water resources and using them to grow crops and biofuels for export and drive up speculation.

House GOP revs up a repeal, reduce and rein-in agenda for the fall - House Republicans are planning votes for almost every week this fall in an effort to repeal environmental and labor requirements on business that they say have hampered job growth. With everyone from President Obama to his Republican challengers in the 2012 campaign focusing on ways to spur economic growth, House Republicans will roll out plans Monday to fight regulations from the National Labor Relations Board, pollution rules handed down by the Environmental Protection Agency and regulations that affect health plans for small businesses. In addition, the lawmakers plan to urge a 20 percent tax deduction for small businesses.

Republicans Against Science, by Paul Krugman- Jon Huntsman Jr., a former Utah governor and ambassador to China, isn’t a serious contender for the Republican presidential nomination. And that’s too bad, because Mr. Hunstman has been willing to say the unsayable about the G.O.P. — namely, that it is becoming the “anti-science party.” This is an enormously important development. And it should terrify us. To see what Mr. Huntsman means, consider recent statements by the two men who actually are serious contenders for the G.O.P. nomination: Rick Perry and Mitt Romney. Mr. Perry, the governor of Texas, recently made headlines by dismissing evolution as “just a theory,” one that has “got some gaps in it” — an observation that will come as news to the vast majority of biologists. But what really got peoples’ attention was what he said about climate change: “I think there are a substantial number of scientists who have manipulated data so that they will have dollars rolling into their projects. And I think we are seeing almost weekly, or even daily, scientists are coming forward and questioning the original idea that man-made global warming is what is causing the climate to change.” 

Betting the farm against climate change - Global warming is extracting real costs, even in states where the governors are in denial. In his book, "Fed Up!," Texas governor and presidential aspirant Rick Perry derided global warming as a "phony mess," a sentiment he has expanded on in recent campaign appearances. Susana Martinez, the governor of New Mexico, has gone on record as doubting that humans influence climate, and Mary Fallin of Oklahoma dismissed research on climate change as a waste of time. Her solution to the extraordinary drought: Pray for rain (an approach also endorsed by Perry). Although they may dismiss climate change, a changing climate imposes costs on their states and the rest of us as well. In Texas, the unremitting heat has been straining the capacity of the electric grid, killing crops and livestock, and threatening water supplies. As reported in the Wall Street Journal, the grid's governing body, the Electric Reliability Council of Texas, bases its forecasts on the average demand over the previous 10 years. In a world without the threat of global warming, this is an entirely reasonable approach. But what if climate change makes the past an unreliable guide to the future?

Obama Tells EPA To Ditch New Ozone Regulations - Just days after House Majority Leader Eric Cantor announced the House would begin voting to repeal proposed air quality regulations that he said would prevent job growth, President Obama instructed the Environmental Protection Agency to withdraw its proposed ozone regulations.  In a jobs agenda memo to House Republicans, Cantor said the proposed ozone regulations would be "possibly the most harmful of all the currently anticipated Obama administration regulations" and would cost at least $1 trillion over a decade to implement. The EPA estimates that the public health benefits from the regulations could save up to $100 billion per year.  "I have continued to underscore the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover," Obama said in a statement. Obama said the standards are already being revised and would have to be updated again in 2013.  "Ultimately, I did not support asking state and local governments to begin implementing a new standard that will soon be reconsidered," Obama said in the statement.

President Obama Abandons Clean Air: Picks Polluters Over Sick and Dying American Kids - In a sickening (literally) move, President Obama has told the Environmental Protection Agency to abandon their plans to protect kids from toxic air pollution, siding with big polluters like Exxon, Koch Industries, and their sock-puppet the US Chamber of Commerce over the health and safety of America’s youth. The EPA did their job, following scientific advice, hearing from impacted communities, environmental justice, and health organizations. EPA administrator Lisa Jackson worked to set new standards for communities, which would have helped protect kids and keep people working instead of out of work sick or in the ER taking care of their kids and likely spurred investments in scrubbers and pollution control equipment manufactured here in the United States. Instead, the President sided with the US Chamber of Commerce, echoing the very language they used in their letter scrambling to find justifications for why these polluting corporations wanted to put off essential protections for the lives and health of kids and seniors exposed to toxic air pollutants.

Broken Windows, Ozone, and Jobs -  Krugman - Let’s talk about the economics. Because the ozone decision is definitely a mistake on that front. As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment. And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

Energy Secretary Steven Chu: ‘It Saddens Me’ That Political Leaders Don’t Understand Climate Science - With all the leading candidates attacking basic science in varying degrees, it’s not a surprise that our Nobel-Prize-winning Energy Secretary, Steven Chu, believes science education should be one of the nation’s top priorities. In a speech this morning at the National Clean Energy Summit, Chu outlined three major policy needs to “move aggressively” to develop clean energy — with science and energy education being on the top of his wish list. Although climate change did not actually come up in his speech, Chu spoke to Climate Progress afterward and lamented the manufactured political “debate” over climate change, saying that “it saddens me. And I think as a scientist you have to re-double your efforts.” Steering clear of anything political when asked whether the GOP’s anti-science platform scared him, Chu simply used the opportunity to explain the basic physics of climate change, adding “it’s not rocket science.” Watch it:

'Catastrophic' Vermont Floods Kill Three, Governor Blames Climate Change  - Governor Shumlin, speaking on "Democracy Now," a TV and radio news program, pointed to climate change as the cause of the extreme weather the United States, and particularly the colder states, have been experiencing this year.  "I find it extraordinary that so many political leaders won't actually talk about the relationship between climate change, fossil fuels, our continuing irrational exuberance about burning fossil fuels, in light of these storm patterns that we've been experiencing."  Since Shumlin took office seven months ago, there have been two major disasters as a result of storms. "We had storms this spring that flooded our downtowns and put us through many of the same exercises that we're going through right now. We didn't used to get weather patterns like this in Vermont." "We in the colder states are going to see the results of climate change first," he said. "Myself, Premier [Jean] Charest up in Quebec, Governor [Andrew} Cuomo over in New York, we understand that the flooding and the extraordinary weather patterns that we're seeing are a result of our burnings of fossil fuel. We've got to get off fossil fuels as quickly as we know how, to make this planet livable for our children and our grandchildren."

Graph of the Day: Number of Extreme Storms and Floods Per Year in the U.S., 1900-2010 - According to data collected by the International Disaster Database, the frequency of disastrous storms and floods has increased over the past 100 years, particularly in the past three decades.5 Extreme storms reached a peak in the mid-1990s, but floods appear to be occurring at a steadier rate. Given the extreme storms and floods that have occurred recently, 2011 may turn out to be another peak year.

Report warns of society-wide increase in mental illness due to climate change and severe weather - I grew up an hour from Joplin, Missouri. I know people in Joplin and the surrounding small towns. My wife and I still drive through Joplin when traveling home for the holidays. So this year’s epic Joplin tornado hit home for us even more than it did for the millions of Americans who watched the news coverage from afar with horror. Maybe that’s why the news about a newly released report from Australia’s Climate Institute that links the current and future rise of more severe weather to a rise in mental and emotional illness leaves me fairly thunderstruck (no pun intended). Or maybe it’s that plus several additional considerations, including the facts that 1) my family and I relocated from Missouri to Texas in 2008 partly to escape the epic recent surge (over the past decade) in tornado outbreaks and catastrophically severe winter weather 2) my sister just rode out historic Hurricane Irene in Salem, Massachusetts 3) one of my closest friends was displaced from his home in New Orleans by Hurricane Katrina and 4) in our new home state of Texas, my family and I are currently enduring historic, record-shattering heat, drought, and wildfires, with local news reported dominated by talk of associated crop losses, burned homes, and impending electricity blackouts due to overstrained grids. This comes on the heels of a 2010-2011 winter that brought record cold temperatures down here.

How hot did Earth get in the past? - The question seems simple enough: What happens to the Earth's temperature when atmospheric carbon dioxide levels increase? The answer is elusive. However, clues are hidden in the fossil record. A new study by researchers from Syracuse and Yale universities provides a much clearer picture of the Earth's temperature approximately 50 million years ago when CO2 concentrations were higher than today. The results may shed light on what to expect in the future if CO2 levels keep rising. The study, which for the first time compared multiple geochemical and temperature proxies to determine mean annual and seasonal temperatures, is published online in the journal Geology, the premier publication of the Geological Society of America.

Polarstern: Arctic sea ice at the North Pole half as thick as it was in 2001 - Sea ice floating near the top of the world appears to be half as thick as it was 10 years ago, according to reports from a premier German research icebreaker on a 9-week mission to survey the Arctic Ocean from one side to the other The 387-foot Polarstern plowed through floes at the geographic North Pole at exactly 11:42 p.m. ADT on August 21, 2011, and is now steaming south toward Canada, according to this story posted by the Alfred Wegener Institute for Polar and Marine Research. Over the past few weeks, initial measurements of sea ice have averaged about 0.9 meters or about three feet — 1.1 meters thinner than comparable measurements taken in 2001, the last time the Polarstern visited the North Pole and a season when observed floe depth matched the long-term average. But in what could be a disconcerting harbinger for the 2010 melt season — about to reach its low point during the next 3-4 weeks — the ice thickness measured by Polarstern scientists this summer is almost exactly the same as measurements taken in the central Arctic in 2007. That’s the year the polar ice cap shrank to its all-time summer minimum.

Huge chunk of ice breaks off glacier - A block of ice four times the size of Manhattan has split off from a Greenland glacier and melted--an event so dramatic that it's shocked the scientists who study the area.  Alun Hubbard of Aberystwyth University, Wales, said he was rendered "speechless" when he saw the now much smaller Petermann glacier. The break happened in 2010, but this is the first time photos have been available.The scientist said no similar event has happened in Greenland since recorded observations began in 1876. Scientists now worry that another block of ice--about two times the size of Manhattan--is preparing to break off, according to the New York Times.  Ohio State University Professor Alan Box, who also studies the Petermann glacier, told the Times that observers do not know whether the region's rising water and air temperatures contributed to the deterioration of the ice. Researchers they don't have data that goes far back enough in time to document the water temperature beneath the ice. Greenland's ice sheet may be melting at the rate of 400 billion tons per year. According to MSNBC, Greenland has lost "592.6 square miles of ice between 2000 and 2010."

Second giant ice island set to break off Greenland glacier -  In 2009, scientists installed GPS masts on the glacier to track its movement.But when they returned in July this year, they found the ice had been melting so quickly — at an unexpected 16-and-a-half feet in two years — that some of the masts stuck into the glacier were no longer in position. Hubbard, who has been working with Jason Box, of Ohio State University, and others, said in a statement1 issued by the Byrd Polar Research Center that scientists were still trying to work out how fast the glacier was moving and the effect on the ice sheet feeding the glacier. But he said he was taken aback by the difference between 2009 and 2011 when he visited the glacier in late July. "Although I knew what to expect in terms of ice loss from satellite imagery, I was still completely unprepared for the gob-smacking scale of the break-up, which rendered me speechless," he said in the statement."I'm very familiar with the glacier. It's very hard to sort of envisage something so big not being there ... to come back and basically see an ice shelf has disappeared, which is 20 kilometers across (about 12 miles) ... I was speechless and started laughing because I couldn't sort of believe it,"

China-Icelandic markets in everything - I’ve been waiting for a story like this.  If I were a Chinese tycoon, this is exactly what I would buy:A Chinese tycoon plans to buy a vast tract of Icelandic land for a $100m tourism project which critics fear could give Beijing a strategic foothold in the North Atlantic. Opponents have questioned why such a large amount of land – equal to about 0.3 per cent of Iceland’s total area – is needed to build a hotel. They warned that the project could provide cover for China’s geopolitical interests in the Atlantic island nation and Nato member. Mr. Huang is ranked as China’s 161st richest man and he considers himself a poet and an adventurer. While home to just 320,000 people, Iceland occupies a strategically important location between Europe and North America and has been touted as a potential hub for Asian cargo should climate change open Arctic waters to shipping.

Can You Nuke a Hurricane? - Could a "controlled" nuclear explosion disrupt a violent storm like Irene? Seems every time the United States is threatened by a big cyclonic system, somebody suggests2 lighting it up with a Fat Man or Little Boy; this week's Irene-mania has been no exception3. The Huffington Post takes notes of the suggestion4 that "dropping a nuke into the eye of the storm would heat the cool air and disrupt the convection current, thus subsiding the storm." So how about it? Could nukes possibly kill a tropical storm system too?Sorry, but no, says the federal government. The National Oceanic and Atmospheric Administration's Hurricane Research Division has, amazingly, researched the possibility7. A post by the appropriately named meteorologist Christopher Landsea details two major problems with the bomb-a-storm theory: The main difficulty with using explosives to modify hurricanes is the amount of energy8 required. A fully developed hurricane can release heat energy at a rate of 5 to 20x1013 watts and converts less than 10% of the heat into the mechanical energy of the wind. The heat release is equivalent to a 10-megaton nuclear bomb exploding every 20 minutes. According to the 1993 World Almanac, the entire human race used energy at a rate of 1013 watts in 1990, a rate less than 20% of the power of a hurricane

Perfect Storm of Hype: Politicians, the media and the Hurricane Irene apocalypse that never was - The truth is that the dire warning beforehand suited both politicians and journalists. Just as with the minor earthquake that shook the east coast last week causing no loss of life and virtually no damage, Irene became a huge story because it was where the media lived. For politicians, Irene was a chance to either make amends or appear in control. The White House sent out 25 Irene emails to the press on Saturday alone. By lunchtime on Sunday, the sun was peeking through over New York. The TV anchors were expressing their relief at the good news that the east coast had “dodged a bullet” and Irene had not been the apocalypse they had predicted. Perhaps it would be a bit too much to hope that they and certain politicians felt a little sheepish too.

The Ministry of Fear reports on the weather - The Department of Homeland Security only went up to "extreme," but turns the knobs all the way up to "catastrophic"!  This is really disgraceful (and I far prefer the fact-based coverage at Weather Underground). I think that MsExPat, now in Manhattan, has the right of it in comments, which I will now hoist: I've lived on the eastern seaboard, near New York City, all my life, and we've had severe hurricanes before. But never has NY been evacuated by mayoral fiat, nor has the public transportation system ever been shut down completely, as it was fifteen minutes ago (with the storm now downgraded to a Cat 1, and hundreds of miles away, still, from NY). Think about it: people are being forced into evacuation, yet the entire public transport system was shut down at least 8 hours before the storm arrives! Counter-intuitive, or what? I don't think that what's going on has anything to do with my safety. I see it as "Natural Disaster Theater", very akin to "Security Theater." Fear is one of the tools that the powers that be use to distract us from the very real and present threats to our well being--like the unpunished theft of trillions of our dollars. Natural disasters are opportunities to manipulate and ratchet up the fear/control of the masses. And that's what were seeing now. Not a hurricane: a fear opportunity....

Homeland Security chief slams critics of hurricane Irene preparations (VIDEO) Homeland Security Secretary Janet Napolitano said Tuesday that those who criticize preparations for hurricane Irene for being excessive are engaging in “what I like to call the blinding clarity of hindsight.” At a Monitor-hosted breakfast for reporters Tuesday, Secretary Napolitano was asked about grumbling over storm preparations in New York City where Mayor Michael Bloomberg ordered the city subway system shut down and low-lying areas evacuated. In the end, the city was spared from large scale flooding as a result of the storm. “I think New York City did a great job – making those evacuation decisions, clearing the roads for responders, being very careful and knowledgeable about what kind of time it takes to safely evacuate, say a nursing home ... I would grade New York City very highly on this storm," Napolitano said. Mayor Bloomberg was quoted by The Wall Street Journal as saying on Sunday, "We made exactly the right call” regarding the unprecedented evacuation of more than 350,000 people. 

Vermont And Upstate New York Are Getting Absolutely Hammered By Irene Floods...: While the media tut-tuts itself for "overhyping" the hurricane, Vermont and upstate New York are getting hammered by massive floods. It turns out the Irene story wasn't at the beach. It was in the mountains. And it's not over. A few photos below. Click through for full galleries.

Hurricane Irene Pushes August Into Wettest Month On Record For New York City - Hurricane Irene dropped about 8" of rain onto New York City over the weekend, making August the wettest month on record for the city. Weather Underground's Dr Jeff Masters reports that the torrential rains brought the total rainfall for the month to 19.68" Rainfall records began being kept for New York City in 1869, with the previous record of 16.85" occurring in September 1882. This new record wettest month comes after January and February set records for snowfall in the City. Each got more than 36" of snow.  In the broader picture, all of this comes as extreme weather has cost the United States $35 billion this year.

Irene’s 1-in-100 Year Rains Trigger Deadly Flooding“: - Hurricane Irene is gone, but the huge hurricane’s torrential rains have unleashed one of the Northeast’s greatest flood disasters. Videos of rampaging rivers in Vermont, New York State, New Jersey, and surrounding states attest to the extreme nature of the great deluge Hurricane Irene brought. Numerous rivers and creeks throughout the Northeast crested above their highest flood stages on record over the past 24 hours. The previous records were mostly set during some of the great hurricanes of 50 – 60 years ago–Hazel of 1954, Connie and Diane of 1955, and Donna of 1960. Vermont, where 3 – 7 inches of rain fell in just twelve hours, was particularly hard-hit. Otter Creek in Rutland, Vermont crested at 17.21 feet, 3.81′ above its previous record, and more than 9 feet above flood stage. In northern New Jersey and Southeast New York, where soils were already saturated from the region’s wettest August on record even before Irene arrived, record flooding was the norm. According to imagery from, Irene’s rains were a 1-in-100 year event for portions of six states.

Katrina in Vermont - The same creeping nausea that followed the CNN 'all clear' sign in New Orleans six years ago happened again yesterday. Anderson Cooper seemed a little peeved that the lights didn't go out in Manhattan, but then the remnants of Hurricane Irene stomped up the Hudson Valley and stalled a while and commenced to rip apart the Catskills, the eastern Adirondacks, the Mohawk and upper Hudson valleys, and then almost all of Vermont, not to mention New Hampshire and western Massachusetts.  This is nowhere near Katrina's death toll of over 1800 souls, but the damage to scores of towns, businesses, houses, and basic civic armature is going to be very impressive as the news filters in later this week and the disaster is still very much ongoing Monday, even with the sun shining bright. Towns all over Vermont and New Hampshire are still drowning. The Hudson River is still on the rise. The Mohawk River is at a 500-year flood stage and is about to wipe the old city center of Schenectady, New York, off the map. Bridges, dams, and roads are gone over a region at least as big as the Gulf Coast splatter-trail of Katrina.

Hurricane Irene Exposes Creaky American Infrastructure - In the winter of 1992, a nor'easter sent a storm surge over the floodwall guarding the southern tip of Manhattan. Seawater quickly overwhelmed major roadways and New York City's subway system, shutting down the entire subway for nearly 10 days. "If Hurricane Irene had hit an hour differently or 10 percent stronger or moved 10 percent slower, it would have caused a repeat of that event," Jeff Masters, a meteorologist with the leading forecasting service Weather Underground, told The Huffington Post.  Masters and other experts warn that the city may not be as lucky next time. "Both winter storms and hurricanes are predicted to grow in strength with the warming world. The strongest storms will get stronger, and there will be storm surges on top of rising sea levels," Masters said. "What we saw yesterday is a taste of things to come. " And U.S. facilities are not ready for these stronger storms. In its most recent "report card" assessing the nation's infrastructure, the American Society for Civil Engineers was unequivocal: These critical facilities are often woefully underfunded, aging and in some cases nearing failure.

"Economist" vs. Economist Smackdown - From University of Maryland "economist" Peter Morici "Rebuilding after Irene, especially in an economy with high unemployment and underused resources in the construction and building materials industries, will unleash at least $20 billion in new direct private spending-likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.  From what can only be described as a brilliant economic smackdown from George Mason economist Don Boudreaux, in his open letter to Peter Morici: "I hereby offer my services to you, at a modest wage, to destroy your house and your car.  Act now, and I’ll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances. Because, I’m sure, almost all of these things that I’ll destroy for you are more than a few days old (and, hence, are hampered by wear and tear), you’ll be obliged to replace them with newer versions that are “more economically useful and productive.”  You will, by your own logic, be made richer.

Irene Adds to a Bad Year for Insurance Industry - The total damage inflicted by Hurricane Irene may reach $7 billion by the time the storm dissipates in the coming days, making one of the insurance industry’s worst years even tougher, according to an early estimate by the Kinetic Analysis Corporation in Silver Spring, Md. Most of the loss will very likely come from property in New York and New Jersey, according to industry experts. Although Irene had diminished to a tropical storm by the time it reached New York early Sunday, those two states have the most valuable coastal property on the Atlantic Coast. At $7 billion in possible losses, Irene would be among the 10 costliest catastrophes in American history, according to the Insurance Information Institute. The most expensive disaster by far was Hurricane Katrina in 2005, which caused $45 billion worth of damage, not counting costs that were covered by the National Flood Insurance Program. The second, at about $23 billion, was the Sept. 11, 2001, terrorist attacks on the World Trade Center and Pentagon, which the institute counts as a single event.

Hurricane Irene's Wrath: $7 Billion in Damage = It's time to clean up Irene. The hurricane's destructive path through 10 East Coast states left an estimated $7 billion to $13 billion of damage in its wake -- without even accounting for economic losses.  Downed trees and other wind damage could total about $5 billion in personal claims, while flood damage could total about $2 billion in claims, according to a statement released by the Consumer Federation of America. The figure is significantly lower than that of Hurricane Katrina in 2005, the statement noted.  On the high end of estimates, University of Maryland professor Peter Morici said $20 billion of damage and economic losses could be felt throughout the weeks after the storm, and Maryland-based Kinetic Analysis Corporation estimated the damage at $13 billion.

Hurricane Irene damage could reach billions  -- Hurricane Irene left 20 people dead, three million customers without power and potentially billions of dollars in damage from flooding and wind. But the economic damage could have been a lot worse, experts said. "It was much less bite than bark," said Matt Carletti, specialty insurance analyst at JMP Securities. "Rounding up, it's a $10 billion event, not 20 or 30 or 40." Hurricane damage could total $7 billion, according to the Kinetic Analysis Corp., which estimates the impact of natural and man-made disasters on the economy. Less than half of that -- some $3 billion -- will be covered by insurance, the company said.  Eqecat, a catastrophe risk modeling firm, said that South and North Carolina suffered between $200 million and $400 million in insured losses. And the Caribbean -- including the Bahamas, Turks and Caicos and Puerto Rico -- suffered damage ranging from $300 million to $600 million. "Certainly, the storm was, in terms of damage and losses, less than expected,"

Hurricane Cost Seen as Ranking Among Top Ten - Hurricane Irene will most likely prove to be one of the 10 costliest catastrophes in the nation’s history, and analysts said that much of the damage might not be covered by insurance because it was caused not by winds but by flooding, which is excluded from many standard policies. Industry estimates put the cost of the storm at $7 billion to $10 billion, largely because the hurricane pummeled an unusually wide area of the East Coast. Beyond deadly flooding that caused havoc in upstate New York and Vermont, the hurricane flooded cotton and tobacco crops in North Carolina, temporarily halted shellfish harvesting in Chesapeake Bay, sapped power and kept commuters from their jobs in the New York metropolitan area and pushed tourists off Atlantic beaches in the peak of summer. ... While insurers have typically covered about half of the total losses in past storms, they might end up covering less than 40 percent of the costs associated with Hurricane Irene. The governors of New York, New Jersey and Connecticut sought expedited disaster declarations from the federal government on Tuesday, which would pave the way for more federal aid.

As Irene’s Costs Rise, FEMA’s Funds Run Dry: Who Pays for Disaster Relief? (Video) America's national debate over the "proper" role of government has gone from political theory to stark reality in the aftermath of Hurricane Irene. On Monday, the director of FEMA said the Federal Disaster Relief Fund has less than $800 million, meaning the agency can only pay for emergency repairs vs. rebuilding roads, schools and other damaged buildings, CNN reports. That's bad news considering hurricane season is just getting started and we've already suffered a big one. Hurricane Irene wasn't as bad as feared in New York City but proved to be a lot worse than expected in other areas across the eastern seaboard, from North Carolina to Vermont. At last count, at least 38 deaths have been attributed to Irene, millions of Americans remain without power or clean water and the damage estimates now stand at $12 billion, and rising.

On Cutting the Grass and Fracking the People - This Is Getting Ridiculous Dept: At two schools in Carlisle, Penn., sheep are cutting the grass around solar panels to save the district $15,000. At the same time, Gov. Tom Corbett has cut $2 million in education, laid off teachers and cut extracurricular programs while giving tax breaks of $833 million to frackers and other corporate special interests in the nation's only major natural gas-producing state without a drilling tax. Oh yeah, and he gets lots of money from those same companies. To be clear here: Sheep are cool, but the discrepancies mount.

Ohio EPA Proposes Pollution Limits on Fracking - Companies drilling for oil and natural gas in shale formations in Ohio might soon face air pollution limits on new wells. The practice of horizontal drilling and hydraulic fracturing, or “fracking,” in pursuit of gas can require multiple wells on a single site, creating a concentration of equipment that can leak hazardous airborne compounds, The Columbus Dispatch reported. That’s causing concern about the pollutants the drilling operations might release, and the Ohio Environmental Protection Agency has proposed requiring oil and gas drillers to get permits that would set pollution limits. “This is no longer the individual little well you see out in farm fields,” Ohio EPA spokesman Mike Settles said. “This is a sizable operation with pieces of equipment that need to be covered by an air permit.”

The USGS Reconsiders The Marcellus Shale - It is hard for the general public to figure out what just happened to America's "100 years of natural gas" from shale. The United States Geological Survey (USGS) just issued a report estimating that the Marcellus Shale contains undiscovered gas resources of about 84,198 billion cubic feet of gas, which is about 84 trillion cubic feet (TCF) according to the standard unit of measurement. This text is from the USGS summary—{...}  The 84 trillion cubic feet is the USGS mean estimate of how much gas might eventually be recovered from the Marcellus under the assumptions just stated. The USGS had previously (in 2002) said that the Marcellus about contained 2 trillion cubic feet (mean estimate) of undiscovered natural gas. With the advent of horizontal drilling and fracking, the amount of technically recoverable gas has increased considerably. Thus the USGS raised their estimate of gas we might get from the Marcellus. That seems like good news, but the Energy Information Agency (EIA) had previously said in their Annual Energy Outlook 2011 that the United States has 827 trillion cubic feet of recoverable shale gas, and about 400 trillion cubic feet of that gas is in the Marcellus shale. Bloomberg reported on the conflicting assessments in U.S. to Slash Marcellus Shale Gas Estimate 80%.

Natural Gas: The Squeeze at the Bottom of the Resource Triangle - Theoretically, we have a very large amount of resources of many kinds available–oil, natural gas, coal, uranium, gold, fresh water. There is a relatively small amount of high quality, inexpensive-to-extract resources, and we tend to extract those first. From there, we move to lower quality resources that are more expensive to extract. The question comes: How do we reach limits for the extraction of any of the resources? I recently explained what I think is happening with oil, as we are extracting lower and lower quality resources, in my article Oil Limits, Recession, and Bumping Against the Growth Ceiling. High oil prices are squeezing the economy, leading to recession. I think this squeeze may ultimately lead to serious financial problems and reduced oil production. In this post, I want to discuss natural gas, instead of oil. Here we are also moving down the resource triangle, getting to lower quality, more difficult to extract resources as well.

5 things the media isn’t telling you about human activity and earthquakes - Shortly before midnight Mountain Time on August 23, the largest earthquake in Colorado in more than a century, with a magnitude of 5.3, sent tremors as far away as Kansas. Some twelve hours later, a magnitude 5.8 earthquake centered in Northern Virginia sent shock waves as far away as Toronto. The local damage in each event did not appear extensive, though structural effects, on bridges, tunnels, nuclear power plants and more are yet to be determined. Through the afternoon and evening of August 23rd, the national media uncovered the big story of the East Coast quake:  But with no national correspondents already on site, the Colorado quake was left to the locals. But both quakes were profound, rippling with far-reaching lessons about our outdated and unsafe energy practices that we ignore at great peril.  Human activity can cause earthquakes. No less an authority than the U.S. Geological Survey (USGS) asserts this. And they offer as an illustration a series of atypical Colorado quakes in the 1960s, resulting from the Army’s injection of waste fluid produced by its Rocky Mountain Arsenal chemical weapons plant northeast of Denver.

Virginia Nuclear Plant Not Built to Withstand Last Week’s Earthquake - The picture of the overturned lawn chair is funny and all, but because the region doesn’t get a lot of earthquakes, some of the infrastructure was unprepared. And while disaster has hopefully been avoided, this should raise caution, especially with respect to one nuclear plant in Virginia: The earthquake that prompted the shutdown of a Virginia nuclear power plant last week may have been more severe than the plant’s reactors were designed to withstand, federal regulators said. . NRC said Monday that its preliminary analysis indicates that the ground motion caused by the magnitude-5.8 earthquake near the North Anna Power Station in Louisa County, Va., exceeded the maximum level the two reactors at the plant were built to handle. Nuclear plants cannot lose power. In the case of North Anna, offsite power was lost, but backup diesel generators kicked in. However, if the plant started to crumble because it wasn’t built to withstand an earthquake of that magnitude, power could have become an issue. And then a hugely populated area could have been materially affected

Damage at Nuclear Plant in Virginia - This was forwarded to me by a trusted friend from another trusted friend who spoke with someone whose neighbor's daughter works at North Anna, the nuclear plant in Virginia, not far from last week's earthquake. "During the quake the administration building buckled. White steam began pouring our of the stacks. There is chaos at the power station. ____ said that two NY Times reporters are investigating - ____ and _____. He wants to get a Geiger counter and take readings near the plant. He also said that when they were first building the plant some W & M professors told them it was not safe to build it on the fault. I will let you know what else I hear."  REUTERS: Va. quake may have exceeded nuke plant design:  (Reuters) -The historic earthquake that shut down Dominion Resources Inc's North Anna nuclear plant last week may have exceeded what the reactor was designed to withstand, the U.S. nuclear regulator said on Monday. The U.S. Nuclear Regulatory Commission said it has dispatched an additional team of inspectors to the Virginia plant that was rocked by the 5.8 magnitude earthquake last week, after initial reviews from Dominion indicated the ground motion may have went beyond the plant's design. 

Spent nuclear fuel shifted - In another indication of the power of last week's magnitude-5.8 earthquake, officials at North Anna Power Station said yesterday that 25 of 27 vertical steel casks that hold highly radioactive spent fuel shifted on their pads. Richard Zuercher, spokesman for Dominion power's nuclear operations, said none is leaking, all are intact, and there is no danger to the public or plant employees. "The earthquake did move, slightly, some of the dry storage casks on the pad," he said. The steel casks, which weigh up to 115 tons when loaded, shifted between an inch and 4 inches. "We're evaluating whether we need to move them back," Zuercher said. Other newer steel and concrete casks that sit horizontally on pads sustained some minor "cosmetic" damage, Zuercher said. "Everything there is intact and easily fixable." Thirteen of those casks also contain spent fuel.

Earthquake shifted nuclear storage casks up to 4 inches - The magnitude-5.8 earthquake last week in Virginia caused 25 of 27 spent-fuel storage casks at a nearby nuclear power plant to shift 1 to 4 inches, officials said Thursday. "They vibrated," but each of the 16-foot-tall, 115-ton casks remained upright, safe and "fully intact," said Richard Zuercher, spokesman of Dominion Virginia Power, which runs the North Anna Power Station near the quake's epicenter in Mineral, Va. He said the shifting was noticed shortly after the tremor Aug. 23 but wasn't reported to the public, because "it was not considered damage." This is the first time nuclear storage casks have moved as a result of an earthquake in the USA, says David McIntyre, spokesman of the Nuclear Regulatory Commission.  Zuercher said Dominion is not ready to release the final data from ground sensors on whether the quake's shaking exceeded plant design. "It's complicated," he said, adding that the plant is analyzing the results but could disclose them as early as Friday afternoon.

East Coast quake rekindles nuclear plant safety concerns - The earthquake that rattled much of the East Coast last week is sparking angry calls from elected officials seeking an immediate reevaluation of seismic risks at two dozen or so commercial nuclear plants around the country, including two in California. The frustration is directed at members of the federal agency charged with regulating commercial nuclear plants, the Nuclear Regulatory Commission. In particular, Sen. Barbara Boxer said she would press for an explanation from NRC members who recently declined to support immediate action on a list of safety recommendations from an internal agency task force. Boxer said she was also concerned about seismic safety and evacuation plans at the Diablo Canyon and San Onofre nuclear power plants in California. Last week's magnitude 5.8 earthquake was centered about a dozen miles from Dominion Power's aging North Anna nuclear plant. The quake triggered a shutdown of two reactors built more than 30 years ago to withstand a 5.9 to 6.1 quake. The "close call," as some critics label it, led to demands from Boxer and others for new safety measures to protect plants against earthquakes and other natural disasters.

Earthquake threat to nuclear reactors far higher than realized' Forty years ago, when some of these plants were started The risk that an earthquake would cause a severe accident at a U.S. nuclear plant is greater than previously thought, 24 times as high in one case, according to an AP analysis of preliminary government data. The nation's nuclear regulator believes a quarter of America's reactors may need modifications to make them safer. The threat came into sharp focus last week, when shaking from the largest earthquake to hit Virginia in 117 years appeared to exceed what the North Anna nuclear power plant northwest of Richmond was built to sustain. The two North Anna reactors are among 27 in the eastern and central U.S. that a preliminary Nuclear Regulatory Commission review has said may need upgrades. ..That's because those plants are more likely to get hit with an earthquake larger than the one their design was based on. Just how many nuclear power plants are more vulnerable won't be determined until all operators recalculate their own seismic risk based on new assessments by geologists, something the agency plans to request later this year.

A Privately Owned Nuclear Weapons Plant in…Kansas City? -  The proposed plant, a 1.5 million-square-foot, $673 million1 behemoth, would replace an aging, also in KC, where 85 percent2 (PDF) of the components for nation's nuclear arms are produced. The new plant would be run by the same government contractor as the old one—Honeywell—and proponents say the only major change will be more jobs and city infrastructure. But there will be another big difference: The federal government will sublease the property from a private developer, who in turn will lease it from the city for 20 years...after which the developer will own it outright. The developer that could ultimately own its very own nuclear weapons plant, Centerpoint Zimmer (CPZ), didn't even exist until the deal for the Kansas City facility. It's the product of a union between Zimmer Real Estate, a big swinger in local properties and Chicago-based builder Centerpoint, which just happens to own a new 1,000-acre industrial park3 across the street from the planned production facility. In what it called a "competitive bidding process,4" the US General Services Administration awarded CPZ a contract to build the new plant...on a soybean field that the company already owned. The Kansas City Council, enticed by direct payments and a promise of "quality jobs,5"approved  the deal and agreed to exempt CPZ from property taxes on the plant and surrounding land for 25 years. It also agreed to $815 million in bond subsidies6 to build the plant and needed infrastructure.

China to build 50+ nuclear reactors based on unsafe 60’s tech, says Wikileaks - "China is currently in the process of building as many as 50 to 60 new nuclear plants by 2020; the vast majority will be the CPR-1000, a copy of 60's era Westinghouse technology that can be built cheaply and quickly and with the majority of parts sourced from Chinese manufacturers," says this cable from the U.S. embassy in Beijing. And according to that same cable, 100 percent of those reactors lack the passive safety systems available in more-advanced reactors made by GE and Westinghouse. Passive safety assures that if a plant loses power or is hit by some kind of natural disaster, it will shut down on its own without endangering millions of people, Fukushima-style. Why would China do something so foolish, aside from the fact that the older tech is cheaper? With the exception of the bidding process that resulted in a contract for four Westinghouse AP1000 reactors, all reactor purchases to date have been largely the result of internal high level political decisions absent any open process. Even the Westinghouse decision was arguably a political one, which was quickly followed by subsequent non-competitive purchases of the competing French and Russian plants.

Japanese Island’s Activists Resist Nuclear Industry’s Allure - The story of Iwaishima’s battle has become something of a touchstone in Japan, especially among those who feel uneasy in the wake of the disaster at the Fukushima Daiichi nuclear plant for having accepted decades of government assurances that nuclear power was safe. And because the plans to build the plant are closer to approval than any others in Japan, many antinuclear activists see the island’s struggle as their best hope of ending the country’s reliance on nuclear energy. If the plans are scuttled, they believe, the decision is likely to set a precedent that will end the construction of nuclear plants in Japan.

Why the Fukushima disaster is worse than Chernobyl - Slowly, steadily, and often well behind the curve, the government has worsened its prognosis of the disaster. Last Friday, scientists affiliated with the Nuclear and Industrial Safety Agency said the plant had released 15,000 terabecquerels of cancer-causing Cesium, equivalent to about 168 times the 1945 atomic bombing of Hiroshima, the event that ushered in the nuclear age. (Professor Busby says the release is at least 72,000 times worse than Hiroshima).  Caught in a blizzard of often conflicting information, many Japanese instinctively grope for the beacons they know. Mr Ichida and his colleagues say they no longer trust the nuclear industry or the officials who assured them the Fukushima plant was safe. But they have faith in government radiation testing and believe they will soon be allowed back to sea. That's a mistake, say sceptics, who note a consistent pattern of official lying, foot-dragging and concealment. Last week, officials finally admitted something long argued by its critics: that thousands of people with homes near the crippled nuclear plant may not be able to return for a generation or more. "We can't rule out the possibility that there will be some areas where it will be hard for residents to return to their homes for a long time," said Yukio Edano, the government's top government spokesman. "We are very sorry."

The DC Earthquake Is an Alarming Case Against Keystone XL Pipeline - The August 23rd earthquake that rocked D.C. all the way up to Martha's Vineyard where the President is vacationing should be an alarming wake up call to President Obama on how easily a crude oil pipeline can rupture under the sudden magnitude of an earthquake. It's bad enough that this President gave the thumbs up to the Arctic offshore oil drilling. "The Arctic's Beaufort Sea is plagued with high seas, shrieking winds, darkness, sea ice, and minimal visibility. Yet, the Obama administration State Department just approved aggressive offshore drilling in these harsh waters-before doing a full environmental review, and without requiring reliable safety equipment or an approved oil spill response plan." ( The President still has a chance to be on the right side of history by saying NO to Arctic drilling and NO to the Keystone pipeline project which threatens to poison our fragile ecology, agricultural land and fresh water aqueducts. The pipeline is from the oil sands of Alberta and would run from Canada through Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas. In addition, the consumption of this oil would be the same as setting off a "carbon bomb into the atmosphere," as environmentalist and activist Bill McKibben put it, by intensifying global warming beyond the tipping point.

Choking The Oil Sands - Over the next few weeks, as many as 2,000 climate change protesters are expected to descend on Washington in an effort to draw more Americans into the debate over Alberta’s oil sands—one of the most carbon-intensive sources of fossil fuel on the planet. But this time, anti-oil sands groups aren’t focusing on the vast open pit mines near Fort McMurray, but on a major pipeline project that the industry needs to move forward with its expansion plans. Supported by such high-profile environmentalists and left-leaning luminaries as David Suzuki and Naomi Klein, the protesters, who will risk arrest during their White House sit-in, hope to stop President Barack Obama’s administration from approving the proposed 2,673-km Keystone XL pipeline that is being built by TransCanada Corp. and would move crude oil from northern Alberta to refineries in the Gulf of Mexico.  The industry, meanwhile, is critical of the activists’ strategy. Oil sands proponents point out that, pipelines or not, as long as the world has an unquenchable thirst for cheap energy, Alberta’s vast reserves will continue to be extracted from the sandy soil, whether through open pit mines or in situ technologies, and sent to refineries for processing. And it’s not as if moving three million barrels of crude every day on diesel-swilling trucks or trains is much better for the environment.

Nation's Top Climate Scientist, 140 Others Arrested at White House - NASA's Dr. James Hansen, perhaps our nation's preeminent climate scientist, was arrested with over 140 others at the White House today. Scientists, environmentalists, farmers, students, and other concerned citizens were gathered in the nation's capitol to protest the proposed Keystone XL tar sands pipeline that threatens to ruin many pristine habitats and spell certain disaster for the global climate system. Their stirring acts of civil disobedience made for yet another dramatic day in the series of scheduled protests that continue to put pressure on President Barack Obama to cancel the 1,700 pipeline.

What tar sands and the Keystone XL pipeline mean for climate change - Environmentalist Bill McKibben was among 100 people arrested at the weekend for protesting against the Keystone XL tar sands pipeline. But why are climate campaigners so concerned? Bill McKibben is leading what may be the largest green civil disobedience campaign in a generation, against the proposed construction of the 1,600-mile long Keystone XL pipeline.  The pipeline would transport oil from the Alberta tar sands in Canada to American refineries at the Gulf of Mexico, and many are concerned about the associated impacts on the climate.  Digging up new sources of fossil fuels will inevitably increase the amount of CO2 in the atmosphere, and the tar sands result in higher carbon emissions than even conventional oil.  On 15 June 2011, the Energy and Power Subcommittee of the House Energy and Commerce Panel approved a bill to expedite a decision on the pipeline, possibly trying to rush it through before adequate environmental impact assessments are completed. The project must be approved by President Obama in order to proceed, and the aim of the protest is to convince the president to reject the project. 

Record crowd stands firm against a Tar Sands pipeline that’s ‘built to spill’ - Today was the biggest day of peaceful civil disobedience yet at the White House as 140 Americans including the top climate scientist and a large group of religious leaders were arrested to push President Obama to deny the permit for a massive new oil pipeline. NASA’s Dr. James Hansen, the lead climate scientist in the USA shared this statement following his arrest: “If Obama chooses the dirty needle it will confirm that the President was just green-washing all along, like the other well-oiled coal-fired politicians, with no real intention of solving the addiction.” Earlier this summer, Dr. Hansen and twenty other leading scientists sent a letter to the White House urging the President to prevent the construction of the Keystone XL pipeline, writing: “If the pipeline is to be built, you as president have to declare that it is ‘in the national interest.’ As scientists, speaking for ourselves and not for any of our institutions, we can say categorically that it’s not only not in the national interest, it’s also not in the planet’s best interest.”

New infographic explores how Keystone pipelines are ‘built to spill’  - TransCanada says their Keystone pipelines are the safest on the continent. But what about those 12 spills in the past year? Since its operation began in June of 2010, the Keystone 1 pipeline has suffered more spills than any other 1st year pipeline in U.S. history, a track record which does not bode well for the proposed Keystone XL which tracks across one of the largest aquifers in the world – the Ogallala – which supplies drinking water to millions of mid-Westerners and provides 30% of the nation’s groundwater used for irrigation. The Keystone pipeline map shows the spills documented in TransCanada’s publicly released safety records alongside the proposed route for Keystone XL, indicating key risk areas near waterways and major metropolitan areas. Together with  Emma Pullman from DeSmogBlog, I created an infographic showcasing the spills and potential risks. See it below, read more at the Huffington Post or download a high-resolution PDF here.

Another Pointless Climate Protest - Even as I write this, global warming protestors are being arrested in front the White House. You can get the story at They are opposed to the construction of the 1700 mile Keystone Pipeline, which will transport tar sands oil to the refineries of south Texas (video below). The State Department, and President Hopey-Changey himself, must vote up or down on constructing the pipeline by the end of this year. Producing unconventional tar sands oil is very dirty in terms of CO2 emissions and direct environmental damage. Those in favor of the pipeline want that (relatively) cheap, politically safe Canadian oil, especially because Mexico's oil production has a bleak future. Today we'll consider the problem from the DOTE point of view.When push comes to shove, economic concerns will always trump environmental concerns. That's a Rule of Life. For humankind, environmental concerns are a luxury they can afford when the economy is doing well. And in so far as the economy can not be expected to do well in the foreseeable future, environmental concerns are off the table for many years to come, if not forever.

Keystone Pipeline Necessary to Supply US Refineries - The US State Department has issued its final environmental impact and safety assessment on the controversial Keystone XL pipeline, Reuters reported. It says the $7 billion proposed project, which would pump 500,000 barrels a day of tar sands crude from Alberta, Canada to refineries and production hubs in Texas and Oklahoma, would have “no significant impact” on the environment. Proponents of the ambitious 1711-mile pipeline say it would help guarantee US oil supplies from a neighboring ally, reducing our reliance on oil imports from volatile Middle Eastern countries. It would also create thousands of jobs and boost economic development and wealth. However critics argue the pipeline is a potential environmental calamity. They fear oil spills contaminating major aquifers that provide drinking water to millions of people in eight states, irrigation for huge swathes of US agriculture, and habitats to thousands of animals and plants.However, the State Department report, released Friday, says the pipeline would not significantly threaten water in the Great Plains or have serious impacts on climate change,

Al Gore: The Dirtiest Fuel on the Planet - The leaders of the top environmental groups in the country, the Republican Governor of Nebraska, and millions of people around the country -- including hundreds of people who have bravely participated in civil disobedience at the White House -- all agree on one thing: President Obama should block a planned pipeline from the tar sands of Alberta to the Gulf of Mexico. The tar sands are the dirtiest source of fuel on the planet. As I wrote in Our Choice two years ago, gasoline made from the tar sands gives a Toyota Prius the same impact on climate as a Hummer using gasoline made from oil. This pipeline would be an enormous mistake. The answer to our climate, energy and economic challenges does not lie in burning more dirty fossil fuels -- instead, we must continue to press for much more rapid development of renewable energy and energy efficient technologies and cuts in the pollution that causes global warming.

BP’s Gusher May Be Gushing Again. If So, Can’t Be Stopped -  - At the time BP finally capped the Macondo Well in the Gulf of Mexico, there were concerns that the process had damaged the seafloor. That fear is now materializing. BP’s Gulf Gusher may be spewing again—and if so, there is no way to stop it. It will continue until seafloor pressure and oil pressure have been equalized, which may take decades. BP, of course, denies it. However, a United State Coast Guard undersea inspection at the site of the Macondo Well found that it was, indeed, leaking. They say that they have video footage of it. BP says it wasn’t oil—it was silt. BK Lim is a geohazards specialist with over 30 years of experience. His résumé is shown here in PDF format. In January this year, he wrote to Fred Upton, Chair of the House Committee on Energy and Commerce, of his concerns about the Macondo Well, stating: There is no question that the oil seepages, gas columns, fissures and blowout craters in the seafloor around the Macondo wellhead… have been the direct result of indiscriminate drilling, grouting, injection of dispersant and other undisclosed recover activities. As the rogue well had not been successfully cemented and plugged at the base of the well by the relief wells, unknown quantities of hydrocarbons are still leaking out from the reservoir at high pressure and are seeping through multiple fault lines to the seabed. It is not possible to cap this oil leakage.

Is oil leaking in the Gulf from the BP spill site? - Reports of oil surfacing near the site of the Deepwater Horizon explosion are raising questions about its source and whether it is related to last year’s oil spill in the Gulf of Mexico – one of the worst environmental disasters in US history. A patch of oil was documented last week about a quarter-mile northeast of the Macondo wellhead leased by BP. That site was plugged in July 2010 after about 4.9 million barrels (206 million gallons) of oil leaked into the Gulf. On Wednesday, reporters from the Mobile, Ala., Press-Register published photographs and video of their discovery on the news organization’s website, which was in response to surveillance flights conducted the week before by two environmental groups – the Gulf Restoration Network and On Wings of Care. The Press-Register reported witnessing “blobs of oil rise to the surface and bloom into iridescent yellow patches” that later “expanded into rainbow sheens 4 to 5 feet across.”

Scientists: Oil fouling Gulf matches Deepwater Horizon well (photo gallery, video) - Scientific analysis has confirmed that oil bubbling up above BP’s sealed Deepwater Horizon well in recent days is a chemical match for the hundreds of millions of gallons of oil that spewed into the Gulf last summer. The Press-Register collected samples of the oil about a mile from the well site on Tuesday and provided them to Ed Overton and Scott Miles, chemists with Louisiana State University. The pair did much of the chemical work used by federal officials to fingerprint the BP oil, known as MC252. “After examining the data, I think it’s a dead ringer for the MC252 oil, as good a match as I’ve seen,” Overton wrote in an email to the newspaper. “My guess is that it is probably coming from the broken riser pipe or sunken platform. ... However, it should be confirmed, just to make sure there is no leak from the plugged well.” In an emailed statement, BP officials wrote that the company had a vessel stationed at the site all day Thursday but never saw any oil. During BP’s inspection, the wind was blowing up to 10 mph, and waves were up to 2 feet high. Scientists said that even a light chop would likely have obscured the small sheens emerging every few seconds.

Urban Density Around the World - Matt Yglesias says For one thing, it’s just not the case that some amazing technological breakthrough is required for people to have less gasoline-intensive lifestyles: (From the units this looks rather like a natural gas graph but still the rough form of gasoline consumption would be similar so let's go with it for the sake of argument.) It's important to understand the reasons for these differences.  The graph above of gasoline consumption per capita is basically the inverse of this one, which shows urban density around the world: The places with the highest gasoline usage (like the US) are the places with lowest density and conversely places like India and China with very low gasoline usage also have extremely high urban densities.  It's this density that allows these kinds of things to work:

Every Company Is An Energy Company (PDF, Deloitte Center for Energy Solutions) They all serve to underscore our basic premise: Every company is an energy company. This might come as a surprise to many of them. But a decade from now, a company without an “energy and sustainability” department could be as unusual as one without a human resources department. Either that, or it might be out of business.

Oil And Gas Reality Check 2011 (PDF, Deloitte Center for Energy Solutions) A Look at the Top Ten Issues Facing the Oil Sector - The issue of accountability is also cascading through the extended value chain. For instance, the Gulf spill and other recent mishaps are also forcing insurance companies to redefine risk and worst-cast scenarios as well as who is ultimately held responsible - the rig operator, the owner, or those who work on blowout preventers.

Fundamentals, speculation, and oil prices -The diagram above displays the relation between crude oil prices (solid line) and one estimate (dashed line) of the total number of crude oil futures contracts held by funds that are trying to replicate the Goldman Sachs Commodity Index or the separate Dow Jones-AIG index. One of the issues discussed at the conference was some of the problems associated with these estimates of commodity index fund investments. But a separate issue I wanted to raise is that someone following such an investment strategy was buying not just crude oil contracts, but a variety of other commodity futures as well. For example, a fund following either index would have a long position in natural gas futures. The graph below compares the price of crude oil with the price of natural gas. Although these once sold for about the same price per Btu, they now differ by a factor of 4. Why hasn't index fund buying pushed up the price of natural gas along with crude oil? The answer is obvious to all of us. The surge in natural gas production within the United States has put irresistible downward pressure on the price of natural gas, a reality that completely swamps any purported effect that commodity index buying could conceivably have.

That's oil she wrote - I'VE been meaning to draw attention to this analysis from Stuart Staniford (brought to my attention by Kevin Drum). In it, Mr Staniford asks what the world might have looked like had oil demand continued to grow from 2009 on at its 2000-2008 rate of increase: In the counterfactual world, 2009 gross world product would have been 6.4 percent larger than in the actual world. We can estimate the implications for oil supply because we know that the global income elasticity of oil demand is about 2/3. Thus the counterfactual world would have required an additional 4.5 percent more oil than the real world. …2009 oil production was around 85 [million barrels per day] (depending on what source you like) so in the counterfactual world we would have needed it to be around 88-89mbd. Now, in 2008, oil production got up to around 86mbd (on an average basis) but doing so triggered (or required) an oil shock in which prices briefly reached $135/barrel on a monthly basis and almost $150 on a daily basis.  To give an indication of the scale of an additional 2-3mbd , note that the loss of 1.6mbd of oil this year (Libya) triggered something like a $30 increase in the price of oil . James Hamilton provides interesting, related thoughts on oil markets here. Let's boil this down to basics.

The peak oil crisis: a billion vehicles  - Last month Wards Auto published a story pointing out that the world's motor vehicle count was now over 1 billion. As could be expected, registered vehicles in China grew by 27.5 percent to 78 million last year.Don't worry; the U.S. is still well ahead in the who-has-the-most-cars race with 240 million registered vehicles, but I am afraid that the Japanese have fallen into second place. The thought occurred, that if we squeezed a bit, all seven billion of us currently inhabiting the earth with a little organization might be able to climb aboard a car, truck or bus and go for a simultaneous ride - just before the fossil fuel age comes to an end.I was curious as to whether Wards could draw any profound conclusions from this milestone, but other than mentioning that it took 24 years to go from 500 million to a billion vehicles and that the global vehicle fleet grew by 35 million last year, there was little of note. Those 35 million new gas tanks that hit the road last year should give peak oil doubters some insight into why it will become increasingly difficult to keep up with new demand for oil.

The Seneca Effect: Why Decline Is Faster Than Growth - I had in mind the idea that when things start going bad, they tend to go bad fast. We might call this tendency the "Seneca effect" or the "Seneca cliff," from Lucius Anneaus Seneca who wrote that "increases are of sluggish growth, but the way to ruin is rapid." Could it be that the Seneca cliff is what we are facing, right now? If that is the case, then we are in trouble. With oil production peaking or set to peak soon, it is hard to think that we are going to see a gentle downward slope of the economy. Rather, we may see a decline so fast that we can only call it "collapse." The symptoms are all there, but how to prove that it is what is really in store for us? It is not enough to quote a Roman philosopher who lived two thousand years ago. We need to understand what factors might lead us to fall much faster than we have been growing so far. For that, we need to make a model and see how the various elements of the economic system may interact with each other to generate collapse.   This is what the rest of this post will be about. We'll see that a Seneca cliff may indeed be part of our future if we keep acting as we have been acting so far.

Israel, Lebanon and the Fight for Fossil Fuels - The prolonged and increasingly menacing dispute over eastern Mediterranean oil and gas reserves is not going to start a war between Israel and Lebanon. The stakes are far higher than that. Many have somewhat predictably come to the opposite conclusion; that the two long-time enemies, each of whom continually talk a good fight, will eventually come to blows for fossil fuel because the continued potential for war makes it inevitable. Under normal circumstances, that would be difficult to argue with. But these are far from normal circumstances. Israel has, due to U.S. commercial support, gotten a significant jump-start on Lebanon, including setting up a series of exploration blocks scattered throughout a 9,600 square kilometer section of seabed. Lebanon moved in October to submit a unilateral proposal for the boundary of its Exclusive Economic Zone (EEZ), but this was after Israel had been studying the viability of extracting deep-sea riches for a number of years.

Exxon Wins Prized Access to Arctic With Russia DealExxon Mobil1 won a highly coveted prize in the global petroleum industry on Tuesday by striking an agreement to explore for oil2 in a Russian sector of the Arctic Ocean that is opening for drilling even as Alaskan waters remain mostly off limits. The agreement seemed to supersede a similar but now-defunct partnership that Russia3’s state oil company, Rosneft4, reached with BP earlier this year. The deal announced Tuesday replaces BP, the British oil giant, with its American counterpart and introduces some differences in the geopolitical bargain.  Where BP had swapped stock, Exxon agrees to hand over to Rosneft unspecified assets elsewhere in the world, including some that the Texas-based company owns in the deepwater zones of the Gulf of Mexico and onshore in Texas.  It was not immediately clear whether Rosneft would gain operational control of any Texas or Gulf of Mexico sites or merely obtain a portion of the equity in the projects.  Either way, Exxon’s concessions in the agreement further a long-held goal of the Russian petroleum industry to diversify internationally, using access to reserves at home as leverage to win the capital and technological expertise to do so.

The Kingdom of Magical Thinking - Widely assumed to be a fabulously wealthy welfare state, Saudi Arabia is in fact an economic basket case waiting to happen. Although the temptation of overspending has repeatedly undermined oil-rich governments from Caracas to Tehran, Saudi Arabia avoided this trap over the last decade through fiscal discipline that has kept its expenditures below its swelling oil receipts. But in a recent report striking for the candor of its unpalatable conclusions, Saudi investment bank Jadwa laid out the kingdom's inexorable fiscal challenge: how to balance soaring government spending, rapidly rising domestic oil demand, and a world oil market that gives little room for further revenue increases. And that was before the recent economic turmoil knocked $20 per barrel off oil prices.  Saudi Arabia's government spending, flat since the last oil boom in the 1970s, is now rising at 10 percent or more annually. And it will rise faster still: The House of Saud's survival instinct in the wake of the initial Arab revolutions led King Abdullah to announce $130 billion of largesse in February and March. The resulting increases in government employment and salaries can be cut only at the cost of more discontent.

China–Gulf Energy Relations - Energy, especially oil, lies at the heart of China’s relationships with Persian Gulf countries. As China’s oil demand and imports have grown, so have China’s trade and investment ties with the states of the Persian Gulf. However, the nature of China’s energy relationships with major powers in the region varies dramatically. While Chinese officials and oil executives regard Saudi Arabia as a very reliable oil supplier and Iraq as a land of tremendous upstream opportunities, Iran is viewed as a tempting but tough place to do business. The new unilateral international sanctions imposed on Iran by the United States, the European Union, and other countries are likely to reinforce these perceptions.

In Sudan, Oil Major CNPC May Be Over a Barrel - Ten days after officially declaring independence, the fledgling state of South Sudan successfully sold its first batch of oil. The buyer of the estimated 1 million barrels July 19, according to a western media report, was a subsidiary of China's state-owned oil giant CNPC. The deal doubtless helped allay Chinese concerns about access to oil fields that used to belong to Sudan but today lie behind a new border in South Sudan's territory.Since South Sudan's split from rival Sudan, ending decades of civil war, Chinese companies have been trying to negotiate oil contracts with the new country while keeping good relations with their longtime business ally Sudan. Moreover, rules for oil majors' commercial games have changed since the division. CNPC and other Chinese concerns enjoyed little competition for Sudan's oil before the split, as U.S. government human rights-related sanctions barred American oil firms from doing business in the country starting in the late 1990s. Those sanctions don't apply to the new South Sudan.

Coal Shortages Speed Up China’s Clean Power Plans -The Chinese government continues to expand its clean energy production plans, to replace increasingly expensive coal power that is shutting down coal plants and causing power shortages of at least 16 GW. China’s twelth five-year plan unveiled this week plans for 70 GW for wind, and 5 GW of solar by 2015. Unlike Europe, which is using Feed-in Tariffs to incentivize the addition of more green power to the nation’s grid, China is using competitive bidding to drive down the costs of the new renewable energy generation.This might be a mistake: FITs are a safer bet in the long run for newer more untried energy sources, as generators are paid only for actual production.

Changing of the Guard: Migrate to China, Not US - It's time to quit messing with deck chairs and abandon the fast-sinking America. Destination: Davy Jones' Locker. The story here is a straightforward application of differences in economic performance between one country that has next to no GDP growth (the US) and one racking up nearly 10% GDP growth year in and year out (China). This growth differential explains employment prospects, particularly for migrant workers.  It's getting pretty ugly in America, and no sane person would expect marked improvements in the near future. For instance, more recent data points out that the percentage of employed males has hit a postwar low. It's simple, really: if jobs for Americans are now next to non-existent, what more for migrants? As it so happens, the Economist has a new article on global migration prospects after the US-engineered global financial crisis. While the entire article offers interesting points of view on slowing migration to Western countries, the juxtaposition between the migration situation in American and China is particularly instructive:  An even more intriguing development is that America and China have begun to reverse roles. America has always been the greatest immigration magnet of all. But stricter security measures to thwart terrorist attacks and the severity of its recession have changed this.

China’s Low-Wage Export Engine Starts to Sputter - UBS Economist Jonathan Anderson, a sharp analyst of the Chinese economy, believes he’s uncovered a “pretty convincing turning point” in China’s development model. For decades, Beijing has relied on super-low wages to win a bigger slice of global exports and help turn a poor country into the world’s second largest economy. But for the past 24 months, Mr. Anderson says in a new report, China’s share of low-end light manufacturing imports into the U.S. and European Union “has peaked” at around 50% of those markets. In the U.S. market, Vietnam, Bangladesh, Indonesia and Mexico are picking up market share at China’s expense. In the EU, it’s those Asian nations along with Poland, the Czech Republic and Hungary. It’s difficult to come up with a definitive count of “low-end” manufacturing. Mr. Anderson uses trade data labeled “miscellaneous manufacturing items” as a surrogate. That category includes toys, clothing, footwear, furniture and sporting goods, among other items. In the U.S. market, Mr. Anderson says Vietnam, Bangladesh and Indonesia are getting a bigger slice of the clothing and footwear the U.S. imports, while Mexico is picking up market share in furniture.

The Lesson of the Chinese Invasion - Thanks to a spate of mind-blowing headlines, we are learning that the Chinese invasion isn't just a distant possibility -- it's happening right now. First, in February, ABC News reported that almost every Americana-themed trinket sold in the Smithsonian Institute is made in China. Then news hit that San Francisco is importing its new bay bridge from China. Then came the New York Times dispatch about the Big Apple awarding Chinese state-subsidized firms huge taxpayer-funded contracts to "renovate the subway system, refurbish the Alexander Hamilton Bridge over the Harlem River and build a new Metro-North train platform near Yankee Stadium." Astounding as all of that is, it was quickly topped by news last week reminding us that the new Martin Luther King monument in Washington was designed by a Chinese government sculptor and assembled by low-wage Chinese workers. The trend is enough to trouble any American.

Will Asia “buy up” America? - Those of us old enough to remember the 1980s will probably recall how terrified Americans became about Japan “buying up” the U.S. The fears were sparked by Japanese purchases of American real estate, most notably famed Rockefeller Center in New York City, and other assets, such as Sony's acquisition of Hollywood's Columbia Pictures. Of course, the Japanese were not “buying up” America – Japan's purchases were a miniscule fraction of U.S. assets – but nevertheless, the idea of a rising Asian power going on a shopping spree in a supposedly weakened America did not go down well with many in the U.S. Here we are, more than 20 years later, and the economic conditions are just right for another Asian invasion, with investors from countries like Japan and China going on a renewed spending binge in a crisis-hit United States. The starting point can be found in the giant current account surpluses run by several of America's most important trading partners, most notably China and Japan, which cause them to amass tremendous hoards of U.S. dollars. An estimated $2 trillion of China's $3.2 trillion of foreign currency reserves are in greenbacks, for example. All of these dollars have to go somewhere, and they tend to flood into U.S. dollar assets like Treasury bills.

In Japan, A Tenuous Vow To Cut - As Japan1’s fiscally conservative finance minister, Yoshihiko Noda2 long sounded the alarm on the nation’s ballooning government debt. It is more than twice the size of its $5 trillion economy — and rated more risky than that of Italy and Spain.  Now, after Mr. Noda was elected Japan’s prime minister this week in response to the nation’s natural and nuclear disasters, the question is whether he can administer his prescription: raise taxes while reining in spending.  “We will no longer spend wastefully as if we are pouring buckets of water into a sieve,” Mr. Noda declared in a speech on Monday just before Japan’s ruling Democratic Party elevated him to the top job.  But that political resolve could prove hard to sustain — and not simply because of the systemic weaknesses that have resulted in six prime ministers in the last five years.

Fitch says China yuan debt downgrade likely - China faces a "better than even chance" of a another downgrade to its local currency debt rating due to rising defaults and high inflation following a credit binge, Fitch Ratings said Tuesday. Fitch also warned Chinese policymakers would face a dilemma over how to respond to another global downturn, with rising consumer prices and bad debts preventing a repeat of the massive stimulus launched nearly three years ago. In April, Fitch downgraded its outlook on China's local currency rating from "stable" to "negative" on concerns over a huge rise in potentially destabilising debt since the end of 2008. Fitch's rating for China's yuan-denominated debt currently stands at "AA-", four notches below its top classification. "Bank asset quality ... will deteriorate quite meaningfully in the medium term,"

The big questions China still has to answer - Zoellick - The world’s economic leaders need to “rebalance” their thinking as well as their economies. Fiscal and monetary policies have dominated. That makes sense to a degree: decisions on deficits, debt and the eurozone this autumn may well determine whether the global economy slides deeper into danger, or begins the long climb back. But these policies are insufficient for sustained growth: we need action on the structural dynamics to generate jobs, higher productivity, and a sustainable long-term rebalancing. What happens in China is as important as Europe, Japan, or the United States. China’s growth has been a source of strength in the crisis, but its leaders know their growth model is unsustainable. For 30 years, China has enjoyed average annual growth of about 10 per cent. In 1990, its income per capita was 30 percent lower than the average for Sub-Saharan Africa – today, it is three times greater, over $4,000. By 2030, if China reaches a per capita income of $16,000 – a reasonable possibility – the effect on the world economy would be equivalent to adding 15 of today’s South Koreas. It is hard to see how that expansion could be accommodated within an export and investment-led growth model, so China will need to rebalance through boosting domestic demand, lowering savings and increasing consumption.

China Shipping Warns of Persistent Downturn - China Shipping Container Lines lost $95 million in the first half of the year compared with a profit of $264 million a year earlier, as slumping rates and volumes pushed revenue down 12.9 percent. The company, joining a series of other liner operators that have seen last year's profits turn into red ink this year, warned difficult market conditions could last another year or two. “The road to recovery is not smooth,” the ship operator said. The company posted an $83 million operating loss, compared with $208 million in operating profit in the first half of 2010. Revenue fell to $2.2 billion from $2.36 billion. The company said low rates, weak demands and high oil prices hit most of the company’s routes. Container volumes fell 3.3 percent to 3,436,000 20-foot equivalent container units. Trans-Pacific volume fell 9.9 percent to 597,393 TEUs, while Europe-Mediterranean volume fell 11 percent to 533,0089. Asia-Australia-New Zealand volume tumbled 11.5 percent to 623,180 TEUs. Intra-China services rose 5.8 percent to 1.6 million TEUs,while other services rose 15.6 percent to 43,016 TEUs. 

Chinese manufacturing takes a hit from abroad - The just released official manufacturing purchasing mangers index (PMI) for China shows a small rebound in August.  The headline PMI rose from 50.7 in July to 50.9 in August, just slightly below market expectation of 51.1. The new orders index was flat at 51.1, and output rose from 52.1 to 52.3.  Raw materials inventory rose from 47.6 to 48.8, while finished goods inventory fell from 49.2 to 48.9, which are both good signs as they are below 50, indicating there is less pressure of inventory build-up. Input prices, however, rose from 56.3 to 57.2 after falling for the most part of this year, highlighting the fact that inflation is far from under control.  Another point worth noting is that new exports orders fell from 50.4 to 48.3, the first time since the recovery from the financial crisis in 2008.  This highlights the difficult situation in the global macro environment, while at the same time pointing to relatively robust domestic economy.

Asia's factories quieter as exports slip -The Purchasing Managers Indexes showed manufacturing contracted in South Korea and Taiwan as new export orders fell sharply. China's official PMI increased slightly, the first rise since March, but it also reflected the effects of slowing demand in the United States and Europe.  China's overall PMI rose to 50.9 in August from 50.7 in July, according to government data, a touch weaker than economists polled by Reuters had predicted. The new export orders index dropped to 48.3 from July's 50.4.  Beijing pinned the blame for the sharp fall in export orders at least partly on the debt crises in advanced economies. The National Bureau of Statistics said the export sector was "facing challenges."  Taiwan's PMI dropped to 45.2 in August, the lowest reading since January 2009, which was in the middle of the global financial crisis that crushed world trade. A reading below 50 indicates contraction.

Eurozone Manufacturing Activity Plunges To Two-Year Low - A series of dismal PMI readings in Europe this morning. Greece hit a six-month low of 43.3 -- remember, anything under 50 shows contraction. German PMI fell to 50.9, the lowest level since September 2009. France fell to 49.1 from 50.5. Italy fell to 47, worst in two years. Spain contracted severely at 45.3. UK manufacturing hit a 26-month low of 49. The DAX is down 1.4%, leading declines across Europe. Here's a chart from Markit Economics via Roubini, who tweets: "Indeed a double dip in the EZ. Time 4 ECB 2 cut rates"

Germany's Resiliency Buoys Europe - Germany—buoyed by its cadre of family-owned niche companies—appears to be weathering the global slowdown, countering fears that Europe's economic powerhouse faces a sharp downturn that could deepen the region's debt crisis.  A pair of bullish reports, on German employment and manufacturing, were reassuring on Wednesday: Unemployment remained at its lowest level in nearly two decades last month, while July machine orders jumped 9% from a year earlier. The latest data suggest that Europe's largest economy, which is expected to grow 3% this year, remains resilient, even as evidence mounts that the U.S. and much of the rest of the world are cooling.

World-Wide Factory Activity, by Country - Global manufacturing stalled across the globe in August, with more regions falling into contractionary territory and boosting fears about a global downturn. The U.S. managed to avoid contraction, though growth in the factory sector slowed from July and was just above the 50-level that indicates expansion. China’s official measure also showed expansion in August, but was also at a muted level. Meanwhile, the euro zone and U.K. notched contractions in manufacturing. In Asia, Japanese growth slowed while factory activity in South Korea and Taiwan shrunk. In all, 13 of 24 nations that reported manufacturing activity were in contractionary territory last month. Though the U.S. report was better than expected, the Institute of Supply Management, which compiles the data, still noted difficulties facing the factory sector. “The overall sentiment is one of concern and caution over the domestic and international economic environment, which is affecting customers’ confidence and willingness to place orders, at least in the short term,” See a sortable chart of manufacturing activity, by country.

Global manufacturing grinds to a halt - The global manufacturing recovery appeared to have come to a grinding halt in August, according to a raft of activity surveys across the world, released on Wednesday. In many countries, the surveys of purchasing managers produced the lowest readings of manufacturing activity, orders and jobs since mid-2009, when the world economy was crawling out of recession. The weakness came shortly after the crisis over the US debt ceiling threatened a default in the world’s largest economy and continuing turmoil in the eurozone led to a loss of confidence in the sovereign debt of Italy and Spain. Coupled with official figures showing the US and eurozone economies close to stagnation in the second quarter of the year, the surveys of manufacturing activity suggest little improvement in prospect for the second half of 2011, a period officials had hoped would see the global economic recovery resume with some vigour. Purchasing managers’ indices are far from perfect indicators of the health of the manufacturing sector but they are closely watched for their tendency to deliver early warnings of problems ahead.

Global Manufacturing Slowdown May Encourage Central Bank Stimulus Measures - Manufacturing slumped in Europe and Asia, adding to signs of slowing global growth that may keep a lid on inflation and encourage some central banks to step up stimulus measures. Euro-area manufacturing contracted more than initially estimated in August while Chinese manufacturing growth stayed near a 29-month low, purchasing managers’ indexes showed. Similar gauges for Sweden, the U.K., South Korea and Taiwan all indicated contraction. While manufacturing slumped in Europe and Asia, the Institute for Supply Management’s factory index released today unexpectedly showed U.S. expansion in August, dropping to 50.6 from 50.9 the prior month. A reading of 50 is the dividing line between expansion and contraction in manufacturing. “Today’s data raise the specter of another global economic slump,” . “Everyone is looking to the central banks to bail them out. The question is whether central banks really want to go down that route again.”

Rodrik Says Don’t Count on Emerging Markets -— Developing economies aren’t fixing to overtake the U.S. and Europe anytime soon, despite anxieties to the contrary. A paper presented at the Kansas City Fed’s Jackson Hole conference by Harvard University’s Dani Rodrik asserts that challenges faced by economies like China and others means it will be harder for those areas to catch up than many now believe. “Rapid convergence is possible in principle, but unlikely in practice,” Rodrik writes. “Our baseline scenario has to be one in which high growth remains episodic,” and “sustained convergence is likely to remain restricted to a relatively small number of countries,” he said. The academic said much of the rapid rate of growth seen in the developed world is tied in large part to manufacturing. There, productivity rates are key, and he notes that when a nation embarks upon this path, productivity increases are initially fast and steady. “Once an economy gets to produce electric generators, say, or motor vehicles, labor productivity in that industry is placed on an automatic upward trajectory,” and “the trajectory is steeper the lower the starting point,”

BRICs No Cure for Global Economy This Time -  During the U.S. recession from December 2007 to June 2009, the BRIC nations of Brazil, Russia, India and China became the engines of the global economy, with Chinese gross domestic product expanding 7.9 percent even as America was still contracting. While emerging countries produced about 85 percent of global economic growth since then, China, India and Brazil are slowing after they lifted interest rates to curb inflation following at least $870 billion of fiscal stimulus during the financial crisis.  “The policy driven boom of the past couple of years will not be repeated any time soon,”” It’s “difficult to see how emerging nations can ride to the rescue once more,” he said.   With expansions faltering in the U.S., Europe and Japan, slowing demand in Brazil, Russia, India and China means more challenges to global growth. An index of Chinese manufacturing was at 50.9, near a 29-month low, the China Federation of Logistics and Purchasing reported today.  South Africa,. Africa’s biggest economy expanded an annualized 1.3 percent in the second quarter, its slowest pace in almost two years, data reported on Aug. 30 by the statistics office show.

Goldman Takes a Dark View - A top Goldman Sachs Group Inc. strategist has provided the firm's hedge-fund clients with a particularly gloomy economic outlook and suggestions for how these traders can take advantage of the financial crisis in Europe. In a 54-page report sent to hundreds of Goldman's institutional clients dated Aug. 16, Alan Brazil—a Goldman strategist who sits on the firm's trading desk—argued that as much as $1 trillion in capital may be needed to shore up European banks; that small businesses in the U.S., a past driver of job production, are still languishing; and that China's growth may not be sustainable.

Global Recession, Right Here, Right Now: Japan's Capital Spending Plummets; Eurozone PMI, UK PMI, US ISM ex-Inventory, China Exports in Contraction - It's time to stop debating whether or not the US or Europe is headed into recession. The facts show the entire global economy is in recession. Data-Points Supporting Recession:

  • Euro zone’s manufacturing purchasing managers’ index fell to a two-year low of 49.0 in August, down from a preliminary reading of 49.7. (Business Insider)
  • PMI’s contractions in Ireland, France, Italy, Spain and Greece. (Business Insider)
  • Germany’s manufacturing PMI slowed to its lowest level since September 2009, slumping to 50.9, well below an initial estimate of 52.0. (Business Insider)
  • US Manufacturing ISM ex-inventory Growth in contraction (Mish)
  • Japan's PMI fell at three-month low (Financial Times)
  • PMI Readings in Switzerland, Sweden Drop (Financial Times)
  • British manufacturing PMI falls 49, a 26-month low, in contraction (MarketWatch)
  • Germany private consumption fell for first time since Q4 2009, Manufacturing growth slowest in 23 months (Reuters)
  • Japan Capital Spending Plummets 7.8% In Q2, Expectations were 1% Increase (RTT)
  • US Construction Declines 3.5% vs. Same period in 2010 (US Census Bureau)
  • China exports to US contract, PMI barely above contraction (Reuters)
  • Container traffic at Port of Long Beach drops 3.17% smack in face of normal Christmas season ramp-up (Bloomberg)
  • Canada GDP unexpectedly declines led by a 2.1% drop in exports(Bloomberg)
  • Brazil Unexpectedly cuts interest rates .5% to combat recession.62 of 62 Analysts Miss Call on rate cut (Mish)
  • Taiwan's PMI dropped to 45.2 in August, the lowest reading since January 2009 (Reuters)
  • German economy grew just 0.1 percent in the second quarter (Reuters)
  • Switzerland, economy grew at its slowest pace since 2009, as a record strong Swiss franc also bites into exports. (Reuters)
  • Retail Giant in Australia Warns of Massive Price Deflation and Falling Sales, "Hardest Christmas in Retailer Lives" Coming Up (Mish)
  • US Zero Jobs Growth, Unemployment Rate Flat at 9.1%; Charts, Graphs, Details (Mish)

Around the crisis carousel - I'VE been thinking a lot about this Michael Pettis post from the weekend, in which he offers some economic predictions for the remainder of the decade. What's most interesting about his thinking is the way he orients his model of economic activity around balance of payment dynamics. Here's an example: Since most global consumption comes from the US, Europe and Japan, the collapse in their demand will ultimately be very painful for the BRICs and the rest of the developing world. The latter have postponed the impact of contracting consumption by increasing domestic investment, in some cases very sharply, but the purpose of higher current investment is to serve higher future consumption. In many countries, most notably China, the higher investment will itself limit future consumption growth, and so with weak consumption growth in the developed world, and no relief from the developing world, today’s higher investment will actually exacerbate the impact of the current contraction in consumption. Mr Pettis argues that the pivot around which the BRIC economies (and China especially) swing is reliance on advanced-country demand. As that anchor (sorry, mixing metaphors) becomes dislodged, BRIC economies will face difficult internal structural changes.

Brazil Cuts Key Interest Rate to 12% as Recession Risks Outweigh Inflation  - Brazil’s central bank unexpectedly cut interest rates as the risk of recession in Europe and the U.S. shifted policy makers’ focus away from the fastest inflation in six years.  The bank’s board, led by President Alexandre Tombini, voted 5-2 to cut the benchmark rate a half point to 12.0 percent after raising rates at each of the previous five meetings. All 62 analysts surveyed by Bloomberg had forecast rates would be left on hold.  “Re-evaluating the international scenario, the Committee considers there was a substantial deterioration, reflected in generalized reduction of great magnitude in the growth projections for the major economic blocs,” policy makers said in their statement posted on the central bank’s website.

Tax havens in reverse - The world's militaries routinely game the future, dreaming up scenarios and how to respond. Not so tax agencies, which tend to wait until a smart nag, or thief, props the barn door open and only then build better barn doors.The latest evidence of this tax after-the-factism comes from an eye-popping global tax avoidance study by the Organization for Economic Co-operation and Development ( What makes the study by tax authorities in 17 major countries so astonishing is not just the size of the losses, but when they were booked. Country after country showed corporate losses equal to a 10th or more of an entire country's economic output.In Germany, corporations list 576.3 billion euros of tax losses on their books one year, equal to one quarter of German economic output that same year. What matters there is not just the stunning size of these losses, but also that they were booked before the global meltdown. The German data are from 2006. "What you see in the data is that the amount of losses are particularly high in high tax countries," Jeffrey Owens, director of the OECD's Center for Tax Policy and Administration, told me.

Indian millionaires to double by 2015 - Asia will add 1.66 million U.S.-dollar-millionaires by 2015, taking the total number of wealthy to 2.82 million as the world’s fastest-growing major economies of China and India continue to mint millionaires, a report from Julius Baer said on Wednesday. The Swiss wealth manager forecast that the wealth of high net-worth individuals (HNIs), those with $1-million (U.S.) or more in investable assets, would nearly triple to $15.8-trillion in the five years to 2015.  China alone would be home to nearly half of the millionaires in Asia with combined wealth of $8.8-trillion. The world’s most populous nation had 502,000 HNIs with investable assets totalling $2.6-trillion, the report said.  India would more than double the number of HNIs to 403,000 by 2015, while Indonesia would see the highest growth rate in the number of wealthy, up by a quarter to 99,000, the first such report from Julius Baer said.

Food inflation at 10.05 pct on August 20 (Reuters) - India's Food price index rose 10.05 percent, its highest in nearly six months, and the fuel price index climbed 12.55 percent in the year to Aug. 20, government data on Thursday showed. In the previous week, annual food and fuel inflation stood at 9.80 percent and 13.13 percent respectively. The primary articles index was up 12.93 percent, compared with an annual rise of 12.40 percent a week earlier. The Reserve Bank of India (RBI) has raised interest rates 11 times since March 2010 to tame headline inflation, which stood at 9.22 percent in July. The RBI continues to expect inflation to start easing by November-December and was watching for signs of moderation in demand, Deputy Governor Subir Gokarn had said last week.

India’s Food Inflation Quickens to 4-Month High, Sustaining Rate Pressure - India’s food inflation accelerated to a four-month high and exports surged, sustaining pressure on the central bank to raise interest rates even as growth slows. An index measuring wholesale prices of farm products including rice and wheat rose 10.05 percent in the week ended Aug. 20 from a year earlier, the commerce ministry said in an e- mailed statement in New Delhi today. Merchandise shipments jumped 81.8 percent to $29.3 billion in July from a year earlier, a separate report showed, the biggest increase since at least April 1995, according to Bloomberg data. Gains in food prices have kept India’s inflation rate the highest among major economies in Asia, prompting central bank Governor Duvvuri Subbarao to boost borrowing costs at a record pace since mid-March 2010. While easing economic growth in the region has led nations from Malaysia to the Philippines to pause rate increases, the Reserve Bank of India said last week price gains may remain “stubborn.” “Inflation, including food prices, are still way above the central bank’s comfort level,”

Sub-Saharan Africa: Opportunities at the nexus of population ageing and growth - Driven by persisting high fertility,sub-Saharan Africa’s (SSA) total population will grow much faster and age much more slowly (will quadruple but still not be mature by 2100) than those of industrialised or rapidly ageing developing societies. The contrast will be even starker if the projected continuous fertility decline in SSA doesn’t materialize (and there are signs that it might not). Yet, the different demographic constellation and experiences of such societies hold a number of ‘lessons’ for SSA, which, if harnessed, could equip it to better address core challenges of population growth, ageing and development.  Beginning, most basically, with the importance of planning early for future demographic realities, four particular opportunities stand out to me:

A story missing from our media: Iceland's on-going revolution…As one European country after another fails or risks failing, imperiling the Euro, with repercussions for the entire world, the last thing the powers that be want is for Iceland to become an example.  Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated a two million one hundred thousand dollar loan, to which the Nordic countries added another two and a half million.  But the foreign financial community pressured Iceland to impose drastic measures.  Protests and riots continued, eventually forcing the government to resign.  Elections were brought forward to April 2009, resulting in a left-wing coalition which condemned the neoliberal economic system, but immediately gave in to its demands that Iceland pay off a total of three and a half million Euros.  This required each Icelandic citizen to pay 100 Euros a month (or about $130) for fifteen years, at 5.5% interest, to pay off a debt incurred by private parties vis a vis other private parties.  It was the straw that broke the reindeer’s back.What happened next was extraordinary.  The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents.  The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.

Iceland Exits - Krugman - Iceland is no longer under an IMF program; here’s the IMF report (pdf) pronouncing the adjustment program successful. Indeed. Iceland still has high unemployment and is a long way from a full recovery; but it’s no longer in crisis, it has regained access to international capital markets, and has done all that with its society intact. And it has done all that with very heterodox policies — debt repudiation, capital controls, and currency depreciation. It was as close as you can get to the polar opposite of the gold standard. And it has worked.

UBS may start to charge banks for holding Swiss francs - Swiss bank UBS may charge client banks a fee on cash accounts they use to clear transactions, it said on Friday, in a move to discourage them from using the accounts to hoard safe-haven Swiss francs. "Should we see a continuation of the net inflow of francs in cash clearing accounts of our banking customers, we might have to take corrective action … by means of a temporary excess balance fee," it said. After record demand for the franc, UBS said it was monitoring franc cash balances in the current accounts of its franc clearing customers. The news helped the euro climb more than 2% against the franc to a one-month high . "This is a way to make investors pay for the privilege of owning the currency,"

Switzerland’s Government Pledges $1.1 Billion to Counter Franc’s Strength - The Swiss government plans to spend 870 million francs ($1.1 billion) as part of an economic stimulus package to help counter the impact of the franc’s “massive overvaluation.” The measures aim to support tourism and exports and preserve jobs, the government said in an e-mailed statement from Bern today. The ruling coalition had initially said it plans to spend as much as 2 billion francs. The parliament will discuss the package next month. “The package supports the Swiss economy in an extraordinary situation,” Economy Minister Johann Schneider- Ammann said at a briefing. “We’ll probably have to live with the strong franc for a longer period of time.”

Urbanomics: The Age of Debt in graphics - Der Spiegel has an excellent graphics feature on the global debt crisis. The sovereign debt situation among the developed economies is truly staggering. It is now clear that the past two decades of the Great Moderation, was atleast partially, driven by a spectacular build up of debt.

When debt levels turn cancerous - Now we know where the tipping point lies. Debt becomes poisonous once it reaches 80pc to 100pc of GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households. From then on, extra debt chokes growth. Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit. “The debt problems facing advanced economies are even worse than we thought.” The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc. “Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

ECB’s Trichet: Advanced Economies’ Crisis a ‘Formidable Challenge’ - The U.S., Europe and other advanced economies face new formidable challenges in dealing with high debt and low growth, European Central Bank President Jean-Claude Trichet said Saturday. Mr. Trichet said Europe was particularly challenged by its governance problems. Responding to questions by policy makers such as World Bank President Robert Zoellick worried by Europe’s ongoing debt crisis, he cautioned that overhauling the continent’s institutions is a “complex process… we’re observing history in the making.” Fears have recently grown that Europe could be the source of another major global financial shock similar to the Lehman Brothers Holdings default in 2008 that sparked the financial crisis. Many believe the half-measures taken by European policy makers could lead the debt situation in the euro zone to become a full-blow banking crisis. European banks in solid economies like France and Germany are vulnerable because they hold sovereign debt of countries close to default like Greece.

What Not to Do in a Debt Crisis - In July, 2008, on the eve of the biggest financial crisis in memory, the European Central Bank did something both predictable and stupid: it raised interest rates. The move was predictable because the E.C.B.’s president, Jean-Claude Trichet, was an inflation hawk; he worried about rising oil and food prices and saw a rate hike as a way of tamping them down. But the move was also remarkably ill timed. The crisis was already under way, European economic growth had slowed to a crawl, and within a couple of months the global economy had collapsed, inflation had disappeared, and the E.C.B. was forced to slash interest rates, in an attempt to avert economic disaster. That July rate hike was like kicking the economy when it was down. One might have thought that the E.C.B. would learn from the experience. No such luck. This year, Europe has been wrestling with high unemployment, slow growth, and a continuing debt crisis, with the economies of Portugal, Ireland, Italy, Greece, and Spain (the so-called PIIGS) struggling to avoid default. Given the situation, Trichet could have decided to keep interest rates where they were, as both the Federal Reserve and the Bank of England have done. Instead, the E.C.B. raised interest rates in April and, once more, in July. Again, as if on cue, European economic growth stalled and the continent’s debt crisis deepened, which has created problems for markets around the world.

ECB's Trichet: Inflation above 2% in coming months -- European Central Bank President Jean-Claude Trichet told a European Parliament committee on Monday that the institution expects annual inflation in the 17-nation euro zone to remain above 2% "over the months ahead." Trichet said the Governing Council "is determined to ensure that inflation expectations continue to be firmly anchored" in line with the ECB's target of keeping inflation below but close to 2%. Trichet defended the ECB's decision to resume bond purchases through its Securities Market Program and said the actions remain separate from the ECB's monetary policy stance, emphasizing that liquidity provided by the bond purchases is reabsorbed through the bank's market operations.

A Small Country — Finland — Casts Doubt on Aid for Greece - France and Germany may effectively run the European Union1, but Finland has been demonstrating how even a small country can disrupt their grand designs.  By insisting that it receive collateral from Greece in return for aid, Finland is threatening to upend an agreement that euro zone countries, led by France and Germany, made in July to expand the E.U. bailout fund.  Finland would contribute less than 2 percent of the guarantees provided to the fund, known as the European Financial Stability Facility. But the country’s demands, the subject of intense negotiations in recent days, threaten to derail the fragile consensus that is preventing Greece from defaulting on its debt.  Finland is the most vivid example of the way parochial domestic politics can become Continental problems, threatening the unity of the 17 euro zone members as they face their deepest crisis ever. But Germany, the Netherlands and Austria — all wealthy countries with strong economies — also harbor deep opposition to bailing out Greece, Portugal, Ireland or any other country that may become overwhelmed by debt.

Greece 1-Yr Rate 60%; Finland Retains Collateral Demand; Multiple Veto Points; ECB "Litmus Test" Coming Up; Germany Accuses ECB of Treaty Violations - Once again the bond markets have spoken, and once again the message is the same: default. Greek two-year bonds are near 44%, having touched as high as 46%. The interest rate on 1-year Greek government debt is a stunning 59.8%. 44% a year, for two years or whopping 60% for one year, unless of course there is a default. Not only does the bond market say Greece will default, but the implied haircuts are huge given those interest rates. Greece Not Saved Supposedly "Greece was Saved" on that blue circle when yet another bailout (throwing more good money after bad) was approved. The deal unraveled for numerous reasons but demands by Finland for collateral are at or near the top of the list. Austria, Slovakia, and the Netherlands now want collateral as well.

Germany’s Hoyer Tells Finns to ‘Not Rock the Boat’ on Euro - German Deputy Foreign Minister Werner Hoyer warned euro-area countries not to destabilize the currency after Finland demanded collateral in return for agreeing to a second Greek aid package. The euro is “of utmost importance to all of us in Europe, in particular for countries like Finland and Germany,” Hoyer told reporters at a joint news conference in Helsinki today with Finnish Foreign Trade Minister Alexander Stubb. “So let us not rock the boat.” Hoyer was speaking after euro-area countries including Austria criticized the bilateral deal on collateral, unveiled on Aug. 16, struck by Finland with Greece. Hoyer reiterated Germany’s position that any solution must be approved by all euro-area governments. Germany is “approaching the question with care” and will wait to see the outcome of the collateral model that transpires, Hoyer said. “Finland doesn’t have the reputation as a troublemaker, so I’m very optimistic.”

Finland Working To Resolve Collateral Issue - Foreign Minister  - Finland expects a solution to be found for its demand for collateral from Greece before contributing to the bailout fund, the country's European Affairs and Foreign Minister said Monday. "Finland is not out to cause problems, but to find solutions," Alexander Stubb told a joint news conference in Helsinki, after a lunch with German Deputy Foreign Minister Werner Hoyer. Hoyer said Germany is determined to save the euro and that he is confident Helsinki will reach a collateral deal with Athens that is acceptable to all euro-zone countries. Although Hoyer said he was surprised to learn that Finland last week had made an all cash collateral agreement with Greece, pending euro-zone acceptance, he noted it was "only natural to want guarantees for loans."

Greece likely to miss 2011 deficit targets - Greece's finance minister said the chances of the debt-ridden country missing its 2011 budget deficit targets remained high, the Athens News Agency (ANA) reported. The country would not return to growth in 2012 due to a deeper than expected recession, Evangelos Venizelos told lawmakers in parliament. "We intend to implement the measures already agreed and we will be very close to our fiscal target but the current recession creates a whole new situation," the minister said. Greece promised to pass and implement a series of austerity measures in exchange for a 110 billion euro ($159 billion) EU and International Monetary Fund (IMF)-led bailout in May 2010, but is now awaiting an additional bailout worth 109 billion euros. —

Protests urged in Spain over deficit amendment - Spanish unions called Monday for street protests against a proposed constitutional amendment that would force the government to keep its deficit low. Labor leaders said the Socialist government was adopting neo-liberal economic policies and acting hurriedly without proper public debate as its term ends — early elections are scheduled for Nov. 20. They also said the government is yielding to market pressures that have sent Spanish borrowing costs higher and raised fears Spain will be the next eurozone nation to need a bailout. Ramon Gorriz of the Workers Commission union said street protests will take place Wednesday and Thursday around the country with a larger one in Madrid next week."Once again, it is a matter of an offering a sacrifice on the altar of the markets," Gorriz said of the government's proposal, speaking a day after anti-austerity demonstrators marched through Madrid.

Euro bail-out in doubt as 'hysteria' sweeps Germany -- German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga. Mrs Merkel has cancelled a high-profile trip to Russia on September 7, the crucial day when the package goes to the Bundestag and the country's constitutional court rules on the legality of the EU's bail-out machinery. If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union. The seething discontent in Germany over Europe's debt crisis has spread to all the key institutions of the state. "Hysteria is sweeping Germany " said Klaus Regling, the EFSF's director

Facing the Crisis: Time to Get Angry, Europe - SPIEGEL - Unlike earlier nations and empires that celebrated their origins in myths and heroic victories, the EU is a transnational governmental institution that emerged from the agony of defeat and consternation over the Holocaust. But now that war and peace is no longer the overriding issue, what does the European community of fate signify as a new generational experience? It is the existential threat posed by the financial and euro crisis that is making Europeans realize that they do not live in Germany or France, but in Europe. For the first time, Europe's young people are experiencing their own "European fate." Better educated than ever and possessing high expectations, they are confronting a decline in the labor markets triggered by the threat of national bankruptcies and the economic crisis. Today one in five Europeans under 25 is unemployed.

ECB spent $9.6 billion last week on govt bonds - The European Central Bank says it spent euro6.65 billion ($9.64 billion) last week purchasing government bonds in an attempt to keep the continent's debt crisis from pushing Italy and Spain into financial collapse. The purchases announced on the bank's Twitter feed compare to euro14.3 billion last week and euro22 billion the week before. The purchases raise bond prices and drive down the interest yields on those bonds. Rising interest rates pushed Greece, Ireland and Portugal into needing bailout loans. Eurozone officials are trying to keep such troubles from spreading to Italy and Spain, which are considered too large to bail out.

The Eurozone Tea Party and the Lender of Last Resort - The Tea Party is much more powerful in Europe than in the US. Read Ambrose Evans-Pritchard to see an example. It's just they don't call it the "Tea Party" in Europe. It doesn't seem to have a name over there, but that's what it is. The basic philosophy underlying the Tea Party is, at its crudest: "We're not paying for them". Who's "we" and who's "them" differs across two centuries and across the Atlantic Ocean, but it's still recognisably the same philosophy. The Tea Party makes life difficult for the Lender of Last Resort, because the Tea Party wants some sort of guarantee it will get its money back. And that guarantee can never be made cast-iron. If it could, you probably wouldn't need a Lender of Last Resort in the first place.

Only a fiscal union will hold the eurozone together - The eurozone, to me, is still the biggest single threat to global recovery. There are plenty of hurdles to negotiate before the eurozone can be considered to be even moderately secure. The German constitutional court will rule on September 7 on the legality of the Greek and other eurozone bailouts. Finland has put the cat amongst the pigeons on the second Greek bailout by demanding collateral in return for participation, helping push the yield on two-year Greek government debt to more than 40%. When they met a couple of weeks ago Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, went seriously off piste in backing an EU-wide financial transactions tax, which would have the effect of damaging London without helping the eurozone one bit. They also said they favoured more eurozone government, which appears to involve more frequent meetings, Merkel rejecting the idea of issuing eurobonds, as an alternative to the national bonds of individual eurozone members.In Britain, fortunately, we can only be spectators as this drama, some would say tragedy, plays itself out. It is painful to watch, however, both because it was predictable and because it can be solved.

How Long Can the ECB Prop Up Europe’s Sick Banks? -  Four years to the month since the global credit crisis began, the European Central Bank has emerged as the lender of first resort to the Continent’s broken banks. With the bond market shut off to all but the strongest lenders, the ECB’s unlimited loans are keeping the most afflicted banks in Greece, Portugal, Italy, and Spain afloat. “Banks are becoming more nervous about being exposed to other banks as they hoard liquidity and become more suspicious of other banks’ balance sheets,” Guillaume Tiberghien, an analyst at Exane BNP Paribas, wrote in a note to clients on Aug. 19. On that date, banks deposited €105.9 billion ($152 billion) with the ECB overnight, almost three times this year’s average, rather than lend the money to other banks. They are also stockpiling dollars and hoarding cash in safe havens such as Swiss francs. “I’m not sleeping at night,” says Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. “We have moved into a new phase of crisis.”

Christine Lagarde: EU banks must raise more cash - In a remarkably gloomy assessment of the world economy, Ms Lagarde warned that urgent action is required to stave off the threat of global recession and another credit crisis. Sounding a stark warning to stronger European countries such as Britain and Germany, the new IMF chief said: "We could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis." To reduce these risks, she called for "substantial" and mandatory recapitalisation to bolster European banks' balance sheets, which will be "key to cutting the chains of contagion". European banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.

European banks set cash test by IMF chief - European banks face ordeal by fire this week after the International Monetary Fund called for “urgent” action to shore up their defences, if necessary with state money and under legal compulsion. Christine Lagarde, the IMF’s new chief, set off tremors at the Jackson Hole summit over the weekend with warnings that the global financial system is on very thin ice and vulnerable to the slightest shock. “We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now,” she said. “Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation,” she said. Europe’s lenders are already reeling from a share price collapse since the debt crisis spread to Italy and Spain, threatening to overwhelm Europe’s bail-out fund and leave banks exposed to sovereign defaults. 

EU Working on ‘Radical’ Plan for Banks: Report  - Following weeks of heavy losses for banking stocks across Europe, the Sunday Times in the UK reported Sunday that European officials are working on a "radical plan" to prevent a fresh pan-European credit crunch. Without citing sources, the paper said officials from the European Central Bank and European Commission are considering offering central guarantees over certain types of debt issued by banks. The paper goes onto say that the move comes after a number of European banks where shut out of international money markets. The report comes after the head of the International Monetary Fund warned on Saturday that "urgent recapitalization" was needed for Europe’s banking industry. “Developments this summer have indicated we are in a dangerous new phase. The stakes are clear. We risk seeing a fragile recovery derailed, so we should act now,” said Christine Largarde in a speech in Jackson Hole Wyoming on Saturday.

Lagarde leads from the front on Europe - Going into the Jackson Hole conference, everybody was breathlessly awaiting Friday’s speech from Ben Bernanke, which turned out to be incredibly boring. The most important speech of the meeting, by far, came on Saturday, and came from the new head of the IMF, Christine Lagarde. In decidedly undiplomatic prose she came right out and said what needed to be done: Banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns…

IASB criticises Greek debt writedowns - Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, according to the body that sets their accounting rules. In a letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt.  “This is a matter of great concern to us,” Hans Hoogervorst, IASB chairman, said in the letter, which was published on Tuesday after the IASB’s concerns were revealed by the Financial Times. People familiar with the IASB’s thinking said the intervention was unprecedented and reflected its belief that some European companies had not been making enough provisions for Greek sovereign debt losses.

Regulator stokes fears over European bank capital - Days after the managing director of the International Monetary Fund Christine Lagarde claimed European banks needed to raise more capital to tackle the debt crisis, fears have emerged over their accounting of Greek sovereign debt. The International Accounting Standards Board has written to the pan-European regulator, the European Securities and Markets Authority, to criticise banks for taking different approaches to writing down the value of their holdings of Greek sovereign debt. Many banks have marked their holdings to market, effectively wiping some 50% off their value. Others have sought to 'mark to model' and have attributed the bonds a value equivalent to the 20% haircut envisaged under European proposals. Among those writing down less is BNP Paribas, one of the French banks that has faced market attack in recent weeks forcing the French regulator into a ban on short selling of financial stocks. The chairman of the accounting body, Hans Hoogervorst, is reported to have written that he is greatly concerned about the irregularity and dismissed the argument that it is valid to mark the holdings to model.

Europe's Banking System: How Weak Is It? - Over the weekend Christine Lagarde, former Finance Minister of France and now the head of the IMF, said that a significant amount of new capital should be provided to European banks in order to help contain contagion: A Call to Arms The world economy, [Lagarde] said, was entering a “dangerous new phase” driven by a sense that “policymakers do not have the conviction” to take decisions that are needed. The most headline-grabbing prescription was for Europe’s banks. More capital, Ms Lagarde argued, was essential to “cutting the chains of contagion” in the euro crisis. Without it there could easily be “the further spread of economic weakness to core countries, or even a debilitating liquidity crisis”. She called for what would essentially be a European version of America’s policy for its biggest banks in 2008—a mandatory capital increase using public funds if necessary. But this suggestion was rebuffed by many political and financial leaders in Europe: Europe officials defend banking systemsTop European officials defended the health of the continent’s financial system Monday, trying to stem concerns that Europe’s slowing economy and high levels of government debt may cause some of its banks to fail.

IMF and eurozone clash over estimates - International Monetary Fund staff have provoked a fierce dispute with eurozone authorities by circulating estimates showing serious damage to European banks’ balance sheets from their holdings of troubled eurozone sovereign debt. The analysis, which was discussed by the IMF’s executive board in Washington on Wednesday, has been strongly rebutted by the European Central Bank and eurozone governments, which say it is partial and misleading. The IMF’s work, contained in a draft version of its regular Global Financial Stability Report (GFSR), uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bail-outs – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium. Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity – the core measure of their capital base – by about €200bn ($287bn), a drop of 10-12 per cent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks. The ECB and eurozone governments have rejected such estimates.

IMF Estimates Show Damage To European Banks - The International Monetary Fund said that European banks' balance sheets suffered serious damage from their holdings of troubled euro zone sovereign debt, in estimates that attracted rebuttals from euro zone authorities, the Financial Times reported Wednesday. The IMF's draft version of its regular Global Financial Stability Report contained an estimate that showed that marking sovereign bonds to market would reduce European banks' tangible common equity by around EUR200 billion ($287.49 billion), a drop of 10-12%, the newspaper said, citing two officials. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks, the report added.The European Central Bank and euro zone governments have rejected the estimates, calling them partial and misleading, according to the newspaper. The final version of the IMF report will be published in three weeks, just before the Fund's annual meetings, and is subject to revision depending on the debate between fund staff and the board, the newspaper said.

Europe rejects IMF call for more bank capital (Reuters) - European bankers and politicians leapt to defend the region's banks on Thursday, rejecting an International Monetary Fund (IMF) estimate that they need 200 billion euros ($290 billion) in new capital to reflect sovereign debt losses. IMF chief Christine Lagarde's call on Saturday for mandatory capitalisation of European banks to prevent a world recession has reignited a debate over whether they have raised sufficient capital to withstand a severe downturn. The clash highlights diverging views about the underlying safety of the European banking system. The IMF and the International Accounting Standards Board (IASB) have both voiced concerns, while European regulators, politicians and banking associations argue that banks have a sufficient capital cushion to cope with market turbulence and worries over sovereign debt after several rounds of capital raising across the continent. A European source told Reuters on Wednesday that the IMF had estimated European banks could face a capital shortfall of 200 billion euros, a figure rejected by European bankers and policymakers.

Un petit French funding problème - Rumours of funding problems at French banks have been rife this summer. Without even getting into specific financial firms, you can see a potential issues. French banks do have a relatively higher reliance on wholesale funding, and that’s made them easy targets for anyone remotely squeamish about funding. The ratio of deposits to total assets at French banks, for instance, equated to about 31 per cent in 2010, according to UBS figures. That’s compared to 36 per cent for Europe as a whole, 39 per cent for US banks, and a whopping 42 per cent for British ones. What’s more — French banks have also traditionally been heavy users of short-term funding markets in their corporate and investment banking (CIB) businesses. We all know by now that these have been pulling back from Europe. The FT reported in July, for instance, that US money market funds (MMFs) had sharply cut their exposure to European banks, including France.

Sheer Idiocy, European (and American) Style -It's rare to see theft described so directlyProposals made in July by the Basel Committee on Banking Supervision should be redrafted to allow banks to use so-called contingent capital to meet the obligations, the European Banking Federation said in a letter seen by Bloomberg News. They should also be changed so lenders that can’t meet the requirements don’t immediately face restrictions on their ability to pay dividends and bonuses, the EBF said. Stringing up a few EBF bankers is seeming more and more like a calm, rational approach to solving their issues. Especially when even investors are calling out their lies"European banks are in the deepest hole of all. Over the past five years, the European financial sector has shed 900 billion euros in capitalisation and two thirds of its value," said Jacques Chahine, chairman of European investment firm J.Chahine Capital.  The response from the European Banking Authority is less than encouraging:  "The stress test recently conducted by the EBA showed that EU banks have significantly strengthened their capital positions and are able to withstand adverse macroeconomic scenarios, a view not changed by the additional disclosure of sovereign exposures," it said....

Will the IMF Stand Up to Europe? -  Rogoff - As the eurozone crisis continues to deepen, the International Monetary Fund may finally be acknowledging the need to reassess its approach. New Managing Director Christine Lagarde’s recent call for forced recapitalization of Europe’s bankrupt banking system is a good start. European officials’ incensed reaction – the banks are fine, they insist, and need only liquidity support – should serve to buttress the Fund’s determination to be sensible about Europe. Until now, the Fund has sycophantically supported each new European initiative to rescue the over-indebted eurozone periphery, committing more than $100 billion to Greece, Portugal, and Ireland so far. Unfortunately, the IMF is risking not only its members’ money, but, ultimately, its own institutional credibility. Only a year ago, at the IMF’s annual meeting in Washington, DC, senior staff were telling anyone who would listen that the whole European sovereign-debt panic was a tempest in a teapot.  Never mind the obvious flaw in the Fund’s logic, namely that countries such as Greece and Portugal face policy and implementation risks far more akin to emerging markets than to truly advanced economies such as Germany and the United States.

Europe's Banking System: A Slow-Motion Bank Run in Progress? - Last week The Economist described what it called a "slow-motion run in the funding markets" in Europe -- in other words, a gradual but steady run on European banks, as depositors remove their money from European banks and put it in places that are seen to be safer. It's worth taking a look at some data to see how significant this phenomenon is.  First, let's look at the troubled euro-zone perihpery countries. The following chart shows the total level of deposits with monetary financial institutions ("MFIs", which basically means banks and money market accounts) in Greece, Ireland and Portugal. For comparison, the total level of deposits within the entire euro-zone is also presented. (All data is from the ECB and is through the end of July 2011 unless otherwise noted.)  Ireland clearly stands out as having experienced a large net withdrawal of deposits over the past year. Perhaps surprisingly, banks in Greece have seen their deposits fall by only a relatively modest amount (about 10%) since the summer of 2010. And for the euro-zone as a whole, total deposits have been essentially flat.

The Democratic Deficit in Europe and the Periphery - Regardless of if and when Greece defaults, it is now clear that the Eurozone faces an existential crisis. The contradictions in the Euro are a symptom of a much deeper malaise and the inherent fragility of the European political project. As Martin Kettle points out, lifelong Europhiles now openly question whether the European Union itself is on its last legs. At the heart of the European Union’s problems lies a structural ‘democratic deficit’. Europe – at its core, was always a technocratic undertaking aimed at transcending the “clamorous irrationality of political life”, in need of popular support but “wary of popular engagement”. This technocratic focus was not a bug but a feature, a natural byproduct of the emphasis on the “low politics” of agriculture, free trade, regulatory harmonisation etc. that is so amenable to technocratic decision-making. Underlying this approach was a “theory that integration would spread ineluctably, like an inkblot, from one policy domain to another…..The end was political, but the means were economic; and the means gradually eclipsed the end. Integration was supposed to spread, irresistibly and irrevocably, from one economic field to another; there would be no breaks in the process, when popular consent would have to be mobilized.  There was no need to buttress legitimacy of the fact with the legitimacy of shared purposes. That would take care of itself.”

From Green to Red – Is Credit Crunch 2.0 Imminent? - The European debt crisis has taken a turn for the worse. There is a serious risk that even the half-baked bailout plan announced on 21 July 2011 cannot be implemented. The sticking point is a demand for collateral for the second bailout package. Finland demanded and got Euro 500 million in cash as security against their Euro 1,400 million share of the second bailout package. Hearing of the ill-advised side deal between Greece and Finland, Austria, the Netherlands and Slovakia also are now demanding collateral, arguing that their banks were less exposed to Greece than their counterparts in Germany and France entitling them to special treatment. At least, one German parliamentarian has also asked the logical question, why Germany is not receiving similar collateral. Of course, Greece, which does not have two Euros to rub together, doesn’t have this collateral and would need to borrow it. Compounding the problem is Greece’s fall in Gross Domestic Production (“GDP”) was worse than forecast, even before the latest austerity measures become effective. The Greek economy has shrunk by around 15% since the crisis began.

Is the Greek bailout falling apart? - Only a bit more than a month ago, the leaders of the euro zone were happily congratulating themselves on overcoming their differences and cobbling together a second bailout of troubled Greece. The package, which includes 109 billion euros ($157 billion) in fresh loans from an EU/IMF bailout fund, was supposed to rebuild investor confidence in the monetary union and alleviate mounting pressure on debt-heavy Greece. But it has done neither. The euro zone debt crisis intensified after the deal, turning up the heat on giants Spain and Italy. And now, bitter infighting within the zone threatens to derail the entire Greek bailout package. If the deal can't be rescued, the failure would deliver a blow that would sink Europe deeper into financial turmoil.  The continued disputes over the second bailout of Greece highlight just how difficult it will be for the euro zone to resolve the debt crisis and solidify its monetary union. The very structure of the union allows too many parties with too many conflicting interests to have too great an impact on policies that impact the future and stability of the entire euro zone. Until the leaders of Europe find some more efficient method of making and implementing decisions, it is hard to envision the euro zone ever escaping from its life-threatening trials.

Banks Push Greek Bailout Plan - No bank likes to take a loss, especially those in Europe that already suffer from a toxic mix of thin capital, troubled financing and weak loan books.  But in the case of the proposed second bailout for Greece1 — the one that is supposed to make private investors feel the financial pain along with taxpayers — the biggest banks in Europe are on the road now promoting the plan.  It’s not that the banks are suddenly masochists. It’s that this first major bond restructuring in Europe’s long-festering debt crisis2 is shaping up as a much better deal for the banks than for the Greeks it is supposed to be helping.  Holders of the Greek bonds would get much better value than they could in the open market, while Greece would still owe a lot of money. What’s more, Greece would be surrendering a lot of its negotiating clout if, in the future, it needed to go back to the bailout bargaining table.

Germans oppose bailout boost, critical of Merkel: poll  - Two thirds of Germans surveyed in a poll think their parliament should not ratify more money for the euro-zone bailout fund and agree with former chancellor Helmut Kohl that Angela Merkel's government is undermining Germany's influence abroad. Center-right Chancellor Merkel is trying to face down a threatened revolt in her own bloc in parliament over a September 29 vote to ratify more money and powers for the euro rescue fund. She was also publicly criticized by her ex-mentor Kohl, Germany's longest-serving post-war chancellor and architect of German reunification, over policy on Europe, the United States and Libya, saying Berlin had "no view or idea" about where it was going. An opinion poll by Infratest dimap for public broadcaster ARD suggested 68 percent of Germans agree with Kohl's comments published in a magazine last week, while 66 percent think the Merkel government has "lost its grip" on the euro crisis.

Even a joint bond might not save the euro - The universal experience of financial crisis management is that the longer one waits to resolve it, the more expensive the ultimate bill will be. In the eurozone that moment has been reached. Two months ago, it was said the worst things that could happen were that the crisis would extend to Italy and Spain; and the economic recovery would stall.  Now the crisis has extended to Italy and Spain, and growth in the eurozone economy has slowed. The next plot point of the tragedy would be a return to recession. This is not a far-fetched scenario. Christine Lagarde, the International Monetary Fund’s managing director, warned with refreshing candour at the weekend that the risk of a recession was significant, and called for urgent policy action.  The crisis now has such force that it renders the existing resolution mechanisms defunct. The European financial stability facility was set up to handle small countries, such as Greece, Portugal and Ireland; it is useless as a mechanism to protect Italy or Spain. If you raised its lending ceiling to, say €2,000bn, France would stand to lose its triple A rating. That in turn would affect the EFSF’s own lending capacity, which equals the share of the triple A rated countries. If you really wanted to provide a backstop for Italy or Spain, the only long-term solution is what is known in legal jargon as joint and several liability – in other words, a eurobond. There is no way Germany could guarantee Italy or France could guarantee Spain. The problem has become so big that the only credible guarantees are joint.

Europe's Shaky Foundations -  Slowly, word is getting round – even in Germany – that the financial crisis could destroy the European unification project in its entirety, because it demonstrates, quite relentlessly, the weaknesses of the eurozone and its construction. Those weaknesses are less financial or economic than political. The Maastricht Treaty established a monetary union, but the political union that is an indispensable precondition for the common currency’s success remained a mere promise. The euro, and the countries that adopted it, are now paying the price. The eurozone now rests on the shaky basis of a confederation of states that are committed both to a monetary union and to retaining their fiscal sovereignty. At a time of crisis, that cannot work. At the beginning of the crisis, in 2007-2008, the eurozone’s fundamental flaws could have been corrected had Germany been willing to support a joint European crisis response. But German officials preferred to maintain national primacy – and thus a confederational approach to Europe.

Parliamentary Influence over Euro Bailouts 'Naive'  - The German parliament is calling for increased authority in euro-zone bailout packages established by the EFSF backstop fund. But that could ultimately slow things down to a dangerous degree, economists warn. German commentators on Thursday make a plea for democracy.  Germany's parliament feels ignored. Until now, the Bundestag has had very little influence on decisions made by Chancellor Angela Merkel and her government regarding bailout packages for heavily indebted euro-zone states. But with expanded powers having been granted to the euro backstop fund -- known as the European Financial Security Facility or EFSF -- at a European Union summit in July, German parliamentarians also want a greater say.  On Wednesday, Merkel's cabinet agreed on the law necessary to expand the EFSF , a change which must be agreed to by all euro-zone governments. But the question as to how much influence the German Bundestag might ultimately have over EFSF bailouts was left unanswered, pending ongoing negotiations. Given the threat of a conservative revolt , Merkel has proven open to a compromise. Too many parliamentary defections from her Christian Democrats (CDU) and its Bavarian sister party, the Christian Social Union, in the late September vote could topple her government.

The Eurozone is Headed for a Crash - Bank funding costs are rising, liquidity is being choked off, and interbank lending has started to stall. A full-blown crisis can still be averted, but leaders will have to knuckle down and resolve the political issues fast. Otherwise the 17-member monetary union will fracture and the euro will be kaput. Here’s a clip from the Wall Street Journal:  “Commercial banks boosted their reliance on the European Central Bank, borrowing €2.82 billion ($4.07 billion) from an emergency lending facility on Tuesday. Sure, it’s a pittance compared to the trillions floating around in the EU banking system, but the pattern is the same as it was in 2007 when the troubles began at French bank PNB Paribas. Back then, the problems seemed small, too, but things got out of hand quick. Over the next year, trillions in mortgage-backed securities (MBS) were downgraded, forcing bigger and bigger losses on bondholders, many of which were the nation’s largest banks. The bloodletting persisted until September 2008, when Lehman Brothers imploded and the financial system went into cardiac arrest. The Fed rushed to Wall Street’s rescue with $12 trillion in loans and other guarantees in hand just to keep the patient from croaking on the Emergency Room floor. Now it looks like history is repeating itself.

A sceptic’s solution – a breakaway currency - Having been an early supporter of the euro, I now consider my engagement to be the biggest professional mistake I ever made. But I do have a solution to the escalating crisis. I have three reasons for my change of heart. First, politicians broke all promises of the Maastricht treaty. Not only was Greece let into the eurozone for political reasons, also the fundamental rule, “no member to exceed its yearly budget deficit by the equivalent of 3 per cent of gross domestic product”, was broken more than a hundred times.  Second, the “one-size-fits-all” euro has turned out to be a “one-size-fits-none” currency. With access to interest rates at much lower German levels, Greek politicians were able to pile up huge debts. The Bank of Spain watched the build-up of a real-estate bubble without being able to raise interest rates. Deprived of the ability to devalue, countries in the “south” lost their competitiveness. Third, instead of uniting Europe, the euro increases friction. That is why we need a plan “C”: Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation.

Tax us more, say wealthy Europeans - German group latest to volunteer for higher contributions, saying country could raise €100bn in two years with a 5% wealth tax. First it was Warren Buffett announcing that he and his chums had been "coddled long enough by a billionaire-friendly Congress". Then Liliane Bettencourt, France's richest woman, who was at the centre of a tax scandal last year, signed a letter along with 15 other billionaires begging to make a special contribution to the treasury to help drag France out of the financial crisis. Even an Italian got in the action, with the boss of Ferrari saying that as he was rich, it was only "right" that he stump up more cash. Now, as both France and Spain consider introducing a wealth tax, a group of 50 rich Germans have joined the "tax me harder" movement by renewing their open call to Angela Merkel to "stop the gap between rich and poor getting even bigger".

Bank of Italy warns on growth as bond sale falters (Reuters) - Italy's central bank warned on Tuesday government efforts to cut debt were at risk from weak growth as a tepid bond sale threatened to drag the euro zone's third biggest economy back to the center of the debt crisis. Ignazio Visco, deputy director-general of the Italian central bank, said growth was likely to be under one percent in 2011 and even weaker in 2012 and warned that market tensions remained high, despite government austerity measures. Many analysts expect close to zero growth next year, when austerity will bite in a country seen as too big to bail out if issuing bonds to cope with a 1.9 trillion euro debt burden becomes prohibitively expensive. At the same time, the government's 45.5 billion euro ($65.97 billion) austerity package to balance the budget by 2013 has drawn widespread criticism for a lack of detail and a virtual absence of reforms to improve growth potential "The problems of economic growth are perceived as a strong limit to the ability to rebalance the finances of our country,"

Berlusconi Chooses Retirement Delays Instead Of Tax On Wealthy In New Austerity Plan: A new austerity proposal in Italy provoked an outcry today, with popular criticism leveled from all sides. The latest incarnation of Italian Prime Minister Silvio Berlusconi's newest austerity plan favors pension cuts and delays in the retirement age over an increase in taxes on the rich. It also proposes a constitutional amendment that would do away with provincial governments. Instead of a "solidarity tax" levied against citizens who earn more than $130,000 per year, these new cuts would prohibit workers from counting time spent in the military or in college in calculating their retirement ages. This could delay retirement—particularly for professionals—for years. MPs—whose number would also be cut by half in the deal—would still have to pay the tax. Experts cited by WSJ questioned the feasibility of this plan, as well as the likelihood that a stronger stance against tax evasion would make significant strides in reducing Italy's more $2.7 trillion public debt.

BERLUSCONI: "I Don't Give A F***", Italy Makes Me Feel Like Puking - Secret recordings from the new blackmail case have been reported in the Italian press, AFP reports. One startling recording comes from a conversation in July 2011 between the Italian Prime Minister and the online newspaper editor Valter Lavitola. Berlusconi is recorded saying: "I'm so transparent, so clean in everything I do. There's nothing I could be reproached for. I don't do anything that could be seen as a crime. People can say I f*** but that's all they can say." "I couldn't give a f***. In a few months I'm going to go away and mind my own f****** business. I'm leaving this s*** country that makes me feel like puking." The recordings are being reported by Italy's ANSA agency, according to AFP.

Berlusconi vows to leave 'shitty' Italy in conversation recorded by police - In a sign of his frustration at the investigations into his alleged crimes and misdemeanours, Silvio Berlusconi vowed in July to leave Italy, which he described as a "shitty country" that "sickened" him.  The Italian prime minister's astonishing remarks are contained in the transcript of a telephone conversation secretly recorded by police investigating claims he was being blackmailed about his sex life.  At dawn on Thursday, police swooped on a flat near Via Veneto – one of Rome's most expensive streets – to arrest Giampaolo Tarantini, a central figure in a scandal that threatened to bring down Berlusconi two years ago.  Tarantini's wife, Angela Devenuto, was also taken into custody and a search launched for a third person.

Italy Drops Plan to Tax Higher Earners From Austerity Bill  - Prime Minister Silvio Berlusconi’s government has dropped a planned bonus tax on Italians earning more than 90,000 euros ($131,000) a year from a package of austerity measures that aims to balance the budget in 2013.  The levy will be replaced with other measures that aim to target tax evaders, Berlusconi’s office said in an e-mailed statement. The decision came after Berlusconi and Finance Minister Giulio Tremonti met with Northern League leader Umberto Bossi, a coalition ally that opposed some of the key aspects of the austerity plan passed by Berlusconi’s Cabinet on Aug. 12.  As a result of today’s agreement, the plan will also be modified to reduce the cuts in transfers to regional and local governments. The note did not give details of how the government would compensate for the lost deficit reduction from today’s changes.

ECB steps up pressure on Italy as debt worries grow (Reuters) - European Central Bank President Jean-Claude Trichet told Italy's struggling centre-right government to deliver on its promised austerity package, adding to international pressure on weakened premier Silvio Berlusconi. ECB support is vital because the Frankfurt-based central bank has been buying Italian bonds in markets to keep yields low enough for Rome to continue borrowing without needing outright aid from the EU or IMF. Trichet said measures promised on Aug 5, when Berlusconi said he would balance the budget by 2013 and launch major economic reforms, were "extremely important." "It is therefore essential that the objectives announced for the improvement of public finances be fully confirmed and implemented," he said in an interview with Italian business daily Il Sole 24 Ore on Friday. Trichet's comments underline rising concern at Italy's haphazard progress in agreeing measures to bring its strained public finances under control, joining the Bank of Italy, the European Commission and employers' federation Confindustria.

Retail sales in Eurozone fell for the fourth month in a row in August - Retail sales in the Eurozone fell for the fourth month in a row in August, according to Markit’s latest PMI (Purchasing Managers' Index). A stronger rise in German retail sales was not enough to offset weakness in France and Italy, the two next-largest euro economies. The overall rate of decline accelerated slightly to the fastest since October 2010.  The third-largest euro economy, Italy, registered another steep fall in retail sales in August. The monthly rate of contraction was broadly similar to that posted in July, remaining stronger than the long-run series average. Italian retail sales have fallen continuously for the past six months.  Retailers’ inventories of goods for resale rose for the sixth month running, the longest sequence in three years. Moreover, the rate of growth strengthened to a robust pace.  Consequently, the value of goods purchased by Eurozone retailers fell slightly in August. Moreover, the volume of purchases fell more

Spanish consumers AND savers take a forced siesta - Rebecca Wilder - Recently we saw retail sales figures come out of Spain, Germany, France, and Italy. Across Europe, the seasonally-adjusted pattern of real retail sales is diverging.  The chart above illustrates the real seasonally-adjusted and working-day-adjusted (for Europe) level of retail sales across key countries in Europe and the US (for comparison). The raw data is indexed to 2007 for comparison. Euro area retail sales closely track those of Germany, so I'll speak to Germany alone in this post. German and French consumers are hitting the retailers, while Italian and Spanish consumers are cutting back. In this post, I argued that the timing of the second drop in Spanish retail sales (following the recession) eerily coincides with the outset of fiscal austerity in Europe. US retail trade has outperformed that in Italy and Spain since the 2009 trough.  Spanish and US consumers have something in common: household saving rates fell in order to support retail shopping. In contrast to US consumers, though, Spanish consumers were forced to cut back both on retail spending AND savings. In Spain, there's not enough income to increase retail spending and/or saving rates.

The Irish Establishment – Mad as Goats? - In Ireland we used to measure our economic performance based on GDP (GNP actually, but we won’t go into that). Pretty standard fare for any advanced economy, really. Not so anymore. These days we measure our economic performance based on the government’s ability to extract tax revenue out of the general populace to pay for extortionate loans to our EU masters. The Exchequer – that is, the Irish government body responsible for collecting taxes – released its monthly report today. Already there has been boasting in the media that we are ‘on target’ and this weekend I expect to be inundated with more self-deluded bragging from inept government officials and incompetent media commentators. The truth – a scary word in modern-day Ireland – is that this latest news is less to be celebrated than to be feared. That the Exchequer met its targets is hazardous to the Irish economy and will prove self-defeating in the medium-to-long run.

EU-IMF audit suspended as Greece admits budget overshoot - The EU and IMF left a critical audit of Greek finances unfinished on Friday saying more budget work was needed, and the government admitted its deficit target is in trouble. Finance Minister Evangelos Venizelos conceded that Greece would have to revise its public deficit target for this year, a key condition for continued funding from the 110-billion-euro ($158-billion) EU-IMF-ECB bailout loan agreed last year. But he rejected suggestions of a split between Greece and the EU and International Monetary Fund. A statement by auditors from the European Union, European Central Bank and IMF was couched in conciliatory language, but a source close to the mission privately criticised delays in promised reforms in Athens. "The deeper recession automatically leads to a revision of the fiscal target in relation to the deficit." Under the recovery programme, Greece had pledged to reduce its deficit to 7.4 percent this year.

Greek Bonds Plunge on Aid Deal Worries - Greek bonds fell sharply with two-year and five-year yields hitting euro-era highs as investors trained their guns back on the cash-strapped country amid signs of discord over a bailout package.  Bonds issued by other highly indebted euro-zone countries also fell as traders fretted over the Italian government's ability to push through fiscal tightening measures.  The two-year Greek bond yield rose by 2.64 percentage points to 45.92%, widening the yield spread over similarly dated German schatz by 2.47 percentage points...A Greek official had said earlier Friday that a visiting troika of international inspectors has been suspended amid a dispute over the country's ability to meet its deficit targets,  The delegation of European Union, International Monetary Fund and European Central Bank officials is expected to return in about 10 days after the Greek government has prepared the draft outlines of its 2012 budget, the official added.

Sovereign Debt Worries Flare Again in Europe - Concerns about the euro zone’s ability to cohesively respond to its debt crisis1 resurfaced Friday after talks between Greece and its foreign creditors were interrupted and the head of the European Central Bank warned Italy to stick to its austerity program.  European stocks were sagging even before a disappointing U.S. jobs report added to concerns about the global economy, dragged lower by those companies most tied to growth like car makers, banks and insurers.  Yields on 10-year Italian bonds rose almost a tenth of a percentage point to 5.23 percent — well above the 5 percent level that is considered to be the top rate desired by policy makers.  The yield on Spain’s 10-year securities climbed slightly to 5.08 percent, despite passage in the lower house of the Spanish parliament Friday of an amendment that will enshrine stricter budgetary discipline in the constitution.

Greece Bond Yields Go Nuts, Hit Eurozone Record Yields on Greek 2-year government bonds hit 46.84% today, a eurozone record. The surge in yields follows a report that $8 billion in bailout funds could be in jeopardy after Greece missed its reform goals and an announcement by Greek Finance Minister Evangelos Venizelos that talks between the Greek government and officials from the ECB, EU, and IMF will take a 10-day hiatus. The pause in talks -- which will allegedly give Greece time to do a technical study of its economic data -- has been taken as a bad sign in the developing drama over the Greece bailout, regardless of anything Venizelos had to say. 2-year yields shot up shortly after his 5:00 AM ET press conference this morning.

Is austerity killing Europes recovery? - After more than a year of aggressive budget cutting by European governments, an economic slowdown on the continent is confronting policymakers from Madrid to Frankfurt with an uncomfortable question: Have they been addressing the wrong problem? The campaign to reduce government deficits has come in response to a European debt crisis that could endanger the global banking system. And the budget cutting has been coupled with a reluctance by the the European Central Bank to stimulate economic growth like the Federal Reserve has in the United States; the ECB has instead raised interest rates twice this year to contain inflation. Those steps have sucked hundreds of billions of dollars out of a European economy that may be edging towards recession. Such a downturn, by choking off government revenues and increasing the demand for public services, could put struggling countries such as Spain and Italy at risk of missing the very deficit-reduction targets that budget cuts and other austerity measures were meant to achieve.

Trichet says growth in Eurozone could be weaker than expected - Jean-Claude Trichet, the European Central Bank president, said on Monday that growth in the Eurozone could be weaker than expected, signalling that the central bank is unlikely to raise interest rates in the short term. Trichet told a special session of the European Parliament’s Committee on Economic and Monetary Affairs, called to discuss the sovereign debt crisis in Europe, that inflation could remain above the bank’s target level of 2% “over the months ahead” and forecast that growth would continue at a “modest pace.” The ECB president said in his opening address in Brussels, that because the recently re-emerged tensions in financial markets, uncertainty remains particularly high. This mainly relates to ongoing fiscal and economic adjustment in a number of Eurozone countries and most other advanced economies, as well as the overall outlook for the global economy. In particular, he said the United States has been facing both fiscal and structural headwinds amidst weakened economic prospects.

The Non-Scenic Route to the Place We’re Going Anyway - Quarterly GDP data don’t, on the whole, tend to make the person studying them laugh out loud. The most recent set, however, are an exception, despite the fact that the general picture is of unrelieved and spreading economic gloom. Instead of the surge of rebounding growth which historically accompanies successful exit from a recession, we have the UK’s disappointing 0.2 per cent growth, the US’s anaemic 0.3 per cent and the glum eurozone average figure of 0.2 per cent. That number includes the surprising and alarming German 0.1 per cent, the desperately poor French 0 per cent and then, wait for it, the agreeably frisky Belgian 0.7 per cent. Why is that, if you’ve been following the story, laugh-aloud funny? Because Belgium doesn’t have a government. . No government means none of the stuff all the other governments are doing: no cuts and no ‘austerity’ packages. In the absence of anyone with a mandate to slash and burn, Belgian public sector spending is puttering along much as it always was; hence the continuing growth of their economy. It turns out that from the economic point of view, in the current crisis, no government is better than any government – any existing government.

European Economic Confidence Falls Most Since December 2008 -- European confidence in the economic outlook in August plunged the most since December 2008 as a persistent debt crisis roiled markets and clouded growth prospects across the 17-nation euro region. An index of executive and consumer sentiment in the single- currency region fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today. That's the lowest since May 2010. Economists had forecast a decline to 100.2, according to the median of 29 estimates in a Bloomberg News survey. The euro area's economic prospects are deteriorating as national governments cut spending in a bid to narrow deficits and tackle the debt crisis. Economic and Monetary Affairs Commissioner Olli Rehn signaled yesterday that the EU may reduce its 2011 growth forecast from 1.6 percent on concerns that financial turbulence could spill into the broader economy. "The risk of recession in the euro area has clearly increased as demand from Asia is flagging and governments' efforts to cut fiscal deficits are curbing domestic consumption,"

Meanwhile, in Europe -  Krugman - The Spanish and Italian interest rate spreads — the difference between their borrowing costs and Germany’s — are widening again. So we’re drifting back toward the point at which these countries might enter vicious circles of falling confidence and rising debt burdens. My guess is that this reflects both doubts about whether the ECB will backstop these economies in the face of growing opposition, especially in Germany, and the bad economic news for Europe generally, since paying debts will become much harder in the face of a recession. To make austerity in some European countries workable, you really needed stronger European economies not to be practicing austerity; austerity for all was and is a recipe for failure. Truly, this is turning into a global disaster.

Europe's Banking System: The Transatlantic Cash Flow - And now, the flip side of the story presented yesterday, in which ECB data seems to indicate that monetary financial institutions (MFIs) in Europe have been moving their deposits out of European banks. Where is that money going?  It looks like much of it is being placed with US banks instead. The following chart shows the total deposits at domestically chartered commercial banks in the US. (All data is from the Federal Reserve Board, through August 17, 2011.)  Clearly, something is going on -- the recent rise in deposits with US banks has been dramatic, with an above-trend increase in deposits of approximately $500 billion over the past 6 months.  Who is responsible for this sudden inflow of deposits into the US banking system? The answer is non-US banks, as illustrated in the following picture, which shows the cash assets of domestically chartered banks alongside the cash assets of foreign-owned banks in the US.

Economists Call on ECB to Cut Rates - The European Central Bank should reverse this year’s rate increases to prevent the euro-area economy from slipping back into recession, members of the so- called shadow ECB council said. A contraction in European manufacturing and plunging business and consumer confidence suggest the sharp slowdown in economic growth in the second quarter may continue in the third, they said. The ECB shadow council is a group of 15 economists and portfolio managers who watch economic developments and monetary policy in the euro region and issue recommendations each month. The Frankfurt-based ECB has raised its benchmark rate twice in 2011, taking it to 1.5 percent from 1 percent. “My recommendation is for the ECB to lower the policy rate by 50 basis points as insurance to lower the risk of outright recession re-emerging,” said Julian Callow, chief European economist at Barclays Capital in London. “The economic deterioration has become sufficiently rapid and alarming to warrant an immediate unwinding of the ECB’s rate hikes.”

Sovereign Bond Risk Climbs to Record in Europe After Jobs Data -- European sovereign default risk rose to a record after a report showed employment in the U.S. unexpectedly stagnated in August, adding to signs the global economic recovery is weakening. The Markit iTraxx SovX Western Europe Index of credit- default swaps insuring the debt of 15 governments rose 11 basis points to 310 at 4:30 p.m. in London, surpassing an all-time high closing price of 308 on Aug. 26. Swaps tied to Italian debt jumped 15 basis points to 400, topping last month’s record closing price of 391, according to CMA. Payrolls were unchanged last month, the weakest reading since September 2010, after an 85,000 gain in July that was less than initially estimated, Labor Department data showed today in Washington. The median forecast in a Bloomberg News survey called for a rise of 65,000. “Payrolls are always a roll of the dice,” “The economy is still growing, but not at a pace that delivers upside for jobs.”

World Economy Facing ‘Lean’ 7 Years: German FinMin - German Finance Minister Wolfgang Schaeuble said the global economy may see "seven lean years" as a result of needed fiscal consolidation programs, even as top U.S. economists questioned the effectiveness of austerity measures. In a speech at a meeting of Nobel laureates at the University of St. Gallen in Switzerland, Schaeuble said it may take years for austerity measures to bear fruit. "There might well be seven lean years ahead for the world economy," Schaeuble said, pointing to a "trade off between short term-pain and long-term gain". The Finance Minister underlined the need for closer cooperation on economic policy in Europe to secure long-term growth. "But for this to happen, immediate fiscal consolidation and structural reforms in Italy, Spain, Portugal and Greece are of the essence," he said.

Head of Euro-Zone Bailout Fund: 'The Crisis Will Be Over in Two to Three Years' - SPIEGEL ONLINE - Klaus Regling, the German CEO of the euro zone's bailout fund, the European Financial Stability Facility, is confident that the monetary union can overcome the current crisis. He considers the euro zone to be in a better position than the US when it comes to public debt, and accuses his fellow Germans of "hysteria." 

George Osborne and Vince Cable at war over bank reform - Conservative and Liberal Democrat ministers are at loggerheads over plans for sweeping reforms to Britain's banks aimed at avoiding another taxpayers' bailout in a future financial crisis. The Business Secretary Vince Cable is demanding the immediate introduction of proposals to force the banks to ring-fence their high street and riskier investment arms that are due to be published by the Independent Commission on Banking on 12 September. But David Cameron and George Osborne, the Chancellor, are sympathetic to the banks' demand for them to be given several years to build the "Chinese walls" to be proposed by the commission chaired by Sir John Vickers – which could see the reforms delayed until after the next general election.

Manufacturing PMI disappoints, house prices slip - After an upbeat CBI manufacturing survey last week, there were high hopes for the purchasing managers index this week, but it disappointed, slipping from 49.4 in July to 49 in August, consistent with a decline in output in the sector. There was not a lot of good news in the detail. This from Markit: "Business conditions in the UK manufacturing sector deteriorated further in August. Production fell for the first time since May 2009, as new order inflows declined at the most marked pace in almost two-and-a-half years. The trend in new export business was also substantially weaker than one month ago. "At 49.0 in August, from a revised reading of 49.4 in July, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index posted its lowest reading for 26 months." The Nationwide said that house prices fell by 0.6% in August and fell by 0.4% on a year earlier. In nominal terms they are just under 10% below their 2007 peak.

Homelessness could spread to middle class, Crisis study warns - The economic downturn and the government's deep cuts to welfare will drive up homelessness over the next few years, raising the spectre of middle class people living on the streets, a major study warns. The report by the homelessness charity Crisis, seen by the Guardian, says there is a direct link between the downturn and rising homelessness as cuts to services and draconian changes to benefits shred the traditional welfare safety net. In the 120-page study, co-authored by academics at the University of York and Heriot-Watt University, Crisis highlights figures released over the summer that show councils have reported 44,160 people accepted as homeless and placed in social housing, an increase of 10% on the previous year and the first increase in almost a decade. Last year another 189,000 people were also placed in temporary accommodation – such as small hotels and B&Bs – to prevent them from becoming homeless, an increase of 14% on the previous year.

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