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

Saturday, October 15, 2011

week ending Oct 15

US Fed balance sheet unchanged in latest week - The U.S. Federal Reserve's balance sheet was unchanged in the latest week, Fed data released on Thursday showed. The Fed's balance sheet was $2.843 trillion on Oct. 12, unchanged from last week.The Fed's holdings of Treasuries totaled $1.669 trillion as of Wednesday, down from $1.672 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae , Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $870.9 billion, unchanged from the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was also unchanged at $108.3 billion.  The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $38 million a day in the week from $26 million a day previously.

US Federal Reserve Balance Sheet Remains Nearly Flat In Latest Week -  The U.S. Federal Reserve's balance sheet hardly budged in the latest week, with its holdings of Treasury securities declining slightly. The Fed's asset holdings in the week ended Oct. 12 stood at $2.864 trillion, up only slightly from the $2.863 trillion reported a week earlier, the central bank said in a weekly report Thursday. Holdings of U.S. Treasury securities fell, to $1.669 trillion from $1.672 trillion the week before. Its holdings of mortgage-backed securities and federal agency debt securities were unchanged. Thursday's report showed total borrowing from the Fed's discount lending window was $11.39 billion, down from the $11.40 billion a week earlier. Borrowing by commercial banks climbed to $70 million from $29 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts fell to $3.402 trillion, compared to $3.418 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts declined to $2.679 trillion, compared to $2.697 trillion the previous week. Holdings of agency securities increased to $723.11 billion from $721.76 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 13, 2011

Fed mulled bolder moves in September - Federal Reserve officials mulled a fresh round of bond purchases among other policy tools to ease financial conditions at their last meeting in September, minutes released on Wednesday showed. "Most members agreed that the revisions to the economic outlook warranted some additional monetary policy accommodation to support a stronger recovery," the minutes of the September 20-21 meeting said. The Fed has been trying to strengthen a weak recovery with active measures to lower interest rates but unemployment has remained stuck above 9 percent and the U.S. central bank is under political pressure to back off some of its most aggressive stimulus efforts. Fed officials discussed tools to ease monetary policy that ranged from rebalancing the Fed's portfolio to lengthen its average maturity and put more downward pressure on long-term interest rates -- the step they ultimately took -- to providing explicit guidance about their goals for the labor market. Markets reacted little to the release of the minutes.

Fed Considered Q3 at Meeting - Federal Reserve policymakers considered a third round of bond purchases at their last meeting, and at least two members said the weakening economy might require it. In the end, the Fed stopped short of expanding its portfolio of investments. Instead, it opted to shift $400 billion of its investments to try to lower long-term interest rates. Minutes of the Sept. 20-21 meeting show the two officials, who were not named, were willing to go along with the Fed's policy action because policymakers did not rule out taking further steps. In its statement, the central bank also a bleak economic outlook, saying its sees "significant downside risks," including volatility in overseas markets.Three members of the committee, all regional bank presidents, dissented from the Fed's statement for the second straight meeting. That marked the highest level of dissent at the Fed in nearly 20 years. Chairman Ben Bernanke has acknowledged that the effort would not be a "game-changer." He said the move could lower long-term interest rates by about one-fifth of a percentage point, during testimony before Congress last week.

Fed tempted by ‘QE3’ at latest meeting  - The US Federal Reserve considered a new round of quantitative easing as an option at its September monetary policy meeting, suggesting that “QE3” is still possible if the economy weakens further. “A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” say minutes of the meeting, released on Wednesday. At the September meeting the Fed launched “Operation Twist” – a $400bn programme of selling short-dated and buying longer-dated Treasuries – in an effort to drive down long-term interest rates and support a failing economic recovery. But the minutes suggest there is still an appetite on the rate-setting Federal Open Market Committee for more measures to support growth. While three of the 10 FOMC members voted against Twist, the minutes reveal that two other members thought that the outlook supported stronger action, and voted for Twist only because “it did not rule out additional steps at future meetings”. The minutes also show that the FOMC is debating extensive changes to its communication policies. “Most participants indicated that they favoured taking steps to increase further the transparency of monetary policy,” the minutes say.

Fed Committee Even More Divided, Minutes Show - — The Federal Reserve’s policy-making committee is increasingly divided between advocates for stronger steps to bolster the economy and dissenters who see little benefit and considerable risk in such efforts, according to minutes of the committee’s most recent meeting.  The Federal Open Market Committee voted at the end of a two-day meeting in September to begin an effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.  The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.  The internal divisions were partly the product of a lack of clarity about the health of the economy. In its predictions since the end of the recession, the Fed has repeatedly overestimated the pace of economic growth, and the minutes report that the board does not understand why it has been wrong.

Fed Signals Next Move May Link Stimulus to Economic ‘Mileposts’ - Federal Reserve officials moved closer to setting targets for economic performance such as inflation to decide how long to keep interest rates at a record low, an action analysts said may come as soon as next month.  Most of the central bank’s 17 governors and regional bank presidents “saw advantages” in the approach and judged it would make policy more effective, the Fed said yesterday in minutes of its Sept. 20-21 meeting in Washington. Some officials wanted to keep more bond purchases as an option, the minutes said. Chairman Ben S. Bernanke is trying to find new ways to spur growth and reduce joblessness stuck around 9 percent, while cushioning the economy from risks including the housing slump and Europe’s debt crisis. He may set the new policy benchmarks as early as his planned press conference following a two-day gathering of policy makers on Nov. 2. “That seems like a logical next step” by officials should they decide the economy needs another jolt, said Feroli, a former Fed researcher. “There’s pushback in terms of properly implementing it, but the idea itself didn’t seem to generate a lot of intrinsic opposition” at the meeting last month.

FOMC: We Got a Money Demand Problem - The FOMC minutes for the September, 2011 meeting were released today and the first things that stand out are the clear hawk-dove divide, the smorgasbord of additional ad-hoc monetary stimulus policy options that were discussed, and the increased economic pessimism of the members.  Something else, though, really caught my attention in the minutes.  It was this acknowledgement by the Fed staff:  M2 surged in July and August, as investors and asset managers sought the relative safety and liquidity of bank deposits and other assets that make up the M2 aggregate. Notably, institutional investors, concerned about exposures of money funds to European financial institutions, shifted from prime money funds to bank deposits, and money fund managers accumulated sizable bank deposits in anticipation of potentially large redemptions by investors. In addition, retail investors evidently placed redemptions from equity and bond mutual funds into bank deposits and retail money market funds. It is great to see the Fed acknowledge this problem, but the fact is this problem has been going on for the past three years and the Fed has failed to address it in a forceful and systematic manner.  All the Fed's interventions over the past three years, including Operation Twist from this meeting, have not arrested this problem. 

Man Cannot Live by Fed Alone - Over the past several decades, many people adopted the view that monetary policy, almost alone, could effectively control the economy. Economists, politicians and scholars came to believe that the Federal Reserve was full of neutral technocrats who dutifully fine-tuned the economy. Randall Wray and Micah Hauptman have a piece in The Hill on the problems with our over-reliance on the Federal Reserve.  Due to the fact that fiscal policy is mired in political deadlock (more particularly, expansionary fiscal policy) we may be stuck relying on (inadequate) support from the Fed. Wray recently wrote a policy brief with Scott Fullwiler (“It’s Time to Rein in the Fed”) that is relevant to this issue.  From their one-pager (referring here to QE2):  “…it’s truly remarkable that, three years into the crisis, the Fed still has not learned that monetary policy is about price, not quantity. The Fed is buying $600 billion in long-term Treasuries in the hope of bringing down the long-term rate. Yet, if it really understood monetary operations, the Fed would instead announce that it is standing ready to buy as many Treasuries as necessary in order to lower the long-term rate by a desired amount.”

Bruce Bartlett wants the Fed to target nominal GDP - This is a good video with Bruce Bartlett, an economist and former Reagan/Bush 41 official. He comes out in favor of stimulus, both on the monetary and the fiscal side.  Here’s his basic argument.

  1. The problem with the US economy in the main is not regulation. That is a canard used by corporations who are talking their own book and their boosters to get even less regulatory oversight than we already have.
  2. The problem is a lack of aggregate demand, meaning people are simply not increasing spending as they did before the credit crisis.
  3. You can boost demand by fiscal policy. Bartlett would like to see a large-scale public works program because he believes that the cost of debt is so low and the cost/benefit of these projects would be greater than zero.
  4. He also likes the Scott Sumner/David Beckworth idea of targeting nominal GDP. His view is that the interest rate channel is dead because of the zero lower bound.

Mohamed El-Erian vs. Bruce Bartlett on the Fed - Bruce Bartlett  in a recent CNBC interview made the case that the Fed should be doing more.  He criticized the Fed for "sitting on its hands"  and argued it could spur aggregate demand if it adopted a nominal GDP level target.  Mohammed El-Erian was shocked to hear this claim.  He replied that most people, including himself, believe the Fed cannot do anything constructive at this point and that it probably has gone too far.  He wanted to know why Bartlett would argue otherwise.   (video) I am shocked that El-Erian was shocked.  The man who seems to own a column space at the FT and a studio chair at CNBC is convinced that the Fed now is in incapable of making a meaningful dent in aggregate demand and that most observers agree with him. Apparently, he has not been reading Mike Woodford, Greg Mankiw, Ken Rogoff, Paul Krugman, Charles Evans, Scott Sumner, and others who claim the Fed could be doing more. Even Fed Chairman Bernanke has said the Fed could do more.  For example, here is Bernanke in September: In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. Now the key to the successful aggregate demand management comes from the Fed properly managing expectations.  So far the Fed has not done very well on this front and, as a result, the economy is suffering.

Occupy Wall Street, Monetary Policy and the Federal Reserve - Matt Yglesias echos a reader’s concern about Occupy Wall Street lining up with “End the Fed” rhetoric driven by the Paul camp and wonders what can be recommended to get people interested in monetary policy and the Fed. I’d really like this audience’s reactions, particularly when it comes to blog posts, videos, online materials or other general thoughts.  My friend Andrew Bossie is doing some teach-ins on monetary policy at the Occupy Wall Street New York, and we have been thinking of ways to formalize it for the audience – there’s a huge demand from people who want to learn. One thing I’ve noticed after talking with people on this topic is that it is important to split the Federal Reserve as financial regulator from Financial Reserve as monetary policy.  For some people trying to figure it out, they hear Federal Reserve and they immediately think financial sector bailouts.  They think “monetary policy” is some version of AIG bonuses, the New York Fed hand-waiving bad books, Alan Greenspan ignoring FBI investigations and consumer reporter on fraud in the subprime market, and TARP.  They think regulatory capture, etc.  And they are right to be pissed about all these things in the financial markets.

Did the Fed’s Term Auction Facility Work? - NY Fed - During fall 2007, the spread between the London interbank offered rate (Libor) and the overnight indexed swap (OIS) for loans of one-month maturity or longer rose to unusually high levels (see chart below). It is widely believed that the increase in the Libor–OIS spread reflected the heightened risk perceived by investors at the time, in part due to the increased uncertainty of access to the short-term loan markets. Since Libor affects interest rates on a wide variety of loans and securities (for example, home mortgages and corporate loans), the sudden spike in the spread was disruptive to the debt market and negatively affected the economy. The chart and the accompanying table also show six announcements related to the TAF program. The announcements indicate increases in TAF funding, with the exception of announcement 4 (in green), which indicates a decrease in the availability of TAF funds in February 2008.  We argue that the Fed’s Term Auction Facility (TAF), introduced in December 2007, lowered the cost of borrowing of banks in the market during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the interest rate spreads on interbank loans. In other words, the TAF worked!

Dick Alford: Did the Taylor Rule Cause the Financial Crisis? - Numerous observers have blamed recent and past failures of US economic policy on "short-termism." The Fed's focus on short-term policy responses reflects in part the tendency of politically driven decision makers to push for policies which have positive payoffs before the next election, longer-run consideration notwithstanding. The rules-based approach to monetary policy and the Taylor Rule in particular were promoted and adopted in part because of the expectation that they would produce superior outcomes. This was predicated on the belief that a rules-based approach would insulate the Fed from political pressures and mitigate counter-productive efforts at fine tuning the economy. All of these assumptions are false and, more, transparently political in nature. Today many economists cite the short-term orientation of US policy as an underlying reason for the economic dislocations and financial difficulties around the globe. The seriousness of the recession and heightened political criticism aimed at the Fed suggest that the rules-based approach, or at least the Taylor Rule as applied, has not performed as sold. Indeed, we can even ask whether the Taylor Rule was not the enabling logic of the present crisis.

Richmond Fed's Economic Quarterly Analyzes the Effects of a Higher Inflation Rate Target - Bennett T. McCallum of Carnegie Mellon University and the National Bureau of Economic Research and a visiting scholar at the Richmond Fed discusses whether central banks should set higher inflation targets, such as 4 percent rather than 2 percent. Some economists have argued that because providing monetary stimulus when interest rates are at the zero lower bound is more difficult, central banks should consider increasing their inflation rate targets. McCallum notes that the benefits of providing additional monetary stimulus at the zero lower bound must be weighed against the costs of maintaining higher inflation outside of that scenario. To make that comparison, he explores pertinent research and theory, including Milton Friedman’s “optimal quantity of money” result, New Keynesian literature on resource misallocation caused by price stickiness that affects only some sellers, and the contention that the zero lower bound does not necessarily constitute a limit to monetary stimulus.You can find the full text of this article and others in the latest issue of Economic Quarterly at

The Future of Inflation (Cleveland Fed)  According to consumer price measures like the CPI, inflation has recently jumped up a notch. What those measures don’t tell us is whether the increase will persist. In this Commentary, we look at a measure that does. The measure incorporates data on past inflation rates, surveys of expected inflation, inflation swaps, and a variety of interest rates. It provides estimates of inflation, along with expected inflation and real interest rates. A look at the measure’s estimates suggests that the recent increases in inflation are likely to be temporary.

Manufacturing inflation in a wage deflationary world -  Earlier in the month, I wrote how the currency is the real release valve for a credit based economy using a nonconvertible freely floating currency. It’s not about interest rates. If currency revulsion takes hold from negative real rates and people want to flee a country’s assets, this will be reflected in the currency. This is why the lower and lower yields in the US go against the canard about bond market vigilantes forcing rates higher. Here’s the problem: Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent. -Recession Officially Over, U.S. Incomes Kept Falling, NYTimes How does manufacturing CPI inflation benefit an economy in which incomes are falling? When inflation rises and incomes are stagnant or falling, the economy rolls over. That’s what the British have seen, for example.  I think that’s why people are focusing on nominal GDP and why Bruce Bartlett says the Fed should just start buying stuff.

This time was different, and could have been more different still - COULD this time have been different? That's the question posed by Ezra Klein in a long piece examining the American economy in the aftermath of the Great Recession that began 4 years ago. Conditions remain grim; was that an inevitability? Mr Klein frames his piece around the research of Carmen Reinhart and Kenneth Rogoff. They've spent the past few years busily publishing on the history of debt and financial crises, and among their most notable findings is that in many cases, recessions in the wake of financial crises are deeper, longer, and generally more painful than other downturns. Given this history, one wonders whether much more might have been done to save the American economy from its present difficulties. The fact that he gets all this right, however, makes his treatment of the Federal Reserve's response all the more disappointing. After all, if political systems struggle to fight these kinds of crises, that means it is critical that the independent, technocratic institution charged with facilitating macroeconomic stability do its job well. The Fed has performed well relative to its actions in the 1930s, but that's a pretty low bar to clear. For its shortcomings relative to what ought to have been done, Mr Klein lets the Fed off with little more than a slap of the wrist.

FOMC Minutes: "Considerable uncertainty surrounding the outlook for a gradual pickup in economic growth" - From the Fed: Minutes of the Federal Open Market Committee, September 20-21, 2011. Excerpt:  Participants saw considerable uncertainty surrounding the outlook for a gradual pickup in economic growth. Several commented that, with households and businesses seeking to reduce leverage rather than to borrow and with housing markets in distress, some of the normal mechanisms through which monetary policy actions are transmitted to the real economy appeared to be attenuated. Many participants saw significant downside risks to economic growth. While they did not anticipate a downturn in economic activity, several remarked that, with growth slow, the recovery was more vulnerable to adverse shocks. Risks included the possibility of more pronounced or more protracted deleveraging by households, the chance of a larger-than-expected near-term fiscal tightening, and potential spillovers to the United States if the financial situation in Europe were to worsen appreciably. Participants agreed to consider further how best to use their monetary policy and liquidity tools to deal with such shocks if they were to occur.  

The Lost Decade - Will the US economy go through a "lost decade" like Japan went after the burst of the bubble in the mid 90s? This is a question that gets often asked when comparing the current economic environment in the US to the one in Japan in those years. Lots of similarities: a bubble that burst, the fear (or reality) of deflation, a central bank with limited tools at its disposal, etc  But if you want to be really pessimistic, you can also look backwards to the previous decade, a decade that along some dimensions has also been lost. Here are three variables that show a downward (or flat) trend starting abut 10 years ago. No clear link between the three but interestingly a very similar pattern. The US economy showed weaknesses starting 10 years ago. They were not generalized and some measures of economic activity were doing ok, but it is interesting to see how others were not progressing anymore or even heading in the wrong direction starting around 2000.

Is another U.S. recession a 'done deal'? - Recession probabilities once again are Topic One in the United States. This week the influential Economic Cycle Research Institute (ECRI) took the position that a U.S. recession is inevitable in the near term if it has not started already. Regarding Europe, many observers believe that a Eurozone recession is in the works, but the likelihood that the United States will follow suit is a subject of intense debate. To add a dissenting voice to ECRI's claims about the inevitability of a U.S. recession, I highlight here forecasts from my Qual VAR model (or this link) that are posted monthly on

The Depression - If Only Things Were That Good -UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted “the most technologically progressive decade of the century.”  Economists often distinguish between cyclical trends and secular trends — which is to say, between short-term fluctuations and long-term changes in the basic structure of the economy. It would clearly be nice if we could take some comfort from this bit of history. If anything, though, the lesson of the 1930s may be the opposite one. The most worrisome aspect about our current slump is that it combines obvious short-term problems — from the financial crisis — with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care.

‘About as Bad an Expansion as I’ve Ever Seen’ - Is the U.S. in a depression? In a word, “no,” Harvard University economics professor Martin Feldstein told the Journal’s Kelly Evans in this week’s “Big Interview.” “I’m not quite sure what a depression is,” he said. Still, he expressed concern that there is a “nontrivial chance” the U.S. economy will turn down again, calling the current recovery “about as bad an expansion as I’ve ever seen.” Mr. Feldstein also serves on the business cycle dating committee of the National Bureau of Economic Research, an independent board tasked with declaring the official start and end dates of recessions. He said current Federal Reserve Chairman Ben Bernanke — who has taken heat from both sides of the political aisle lately — has done “a remarkably good job” during his tenure. But Mr. Feldstein added that the Fed “has gone too far recently in pushing for lower interest rates” and he would prefer to see government action instead directed at mortgage principal write-downs, not just refinancing. For more of his views on Europe (“they have locked themselves into a single currency which we’ve now seen doesn’t work”), conflicts of interest in the economics profession, and the Occupy Wall Street movement (“I can’t figure out what that’s all about…I haven’t seen what they’re asking for,” he said), check out the full ten-minute video.

The Top 100 Statistics About The Collapse Of The Economy That Every American Voter Should Know - The U.S. economy is dying and most American voters have no idea why it is happening.  Unfortunately, the mainstream media and most of our politicians are not telling the truth about the collapse of the economy.  This generation was handed the keys to the greatest economic machine that the world has ever seen, and we have completely wrecked it.  Decades of incredibly foolish decisions have left us drowning in an ocean of corruption, greed and bad debt.  Thousands of businesses and millions of jobs have left the country and poverty is exploding from coast to coast.  We are literally becoming a joke to the rest of the world.  It is absolutely imperative that we educate America about what is happening.  Until the American people truly understand the problems that we are facing, they will not be willing to implement the solutions that are necessary. The following are the top 100 statistics about the collapse of the economy that every American voter should know....

Downgrading Triple-B Recovery to Triple-C Crisis - The growing gloom around the world has caused Joachim Fels of Morgan Stanley to move the global economy from triple-B to triple-C. “What we had called a BBB recovery — bumpy, below-par and brittle — morphed into a CCC crisis — one of confidence, competency and credibility — during the summer,” he wrote in a weekend research note. He sees hopeful signs in stepped up measures from the U.S. and European central banks, some solid if not spectacular economic data and indications that EU governments are moving closer toward coordinated action. But he still notes that policy worries abound: Better policy decisions on both sides of the Atlantic are needed to get us out of this fix. In Washington, fiscal gridlock remains the name of the game, and a resolution, if any, will have to wait until at least December 21. In Europe, I remain convinced that what is needed to resolve this situation is an agreement by euro area governments to take a big step towards fiscal integration, coupled with a mandate for the ECB to serve as a lender of last resort. I’m confident that governments will take this route eventually, because the only alternative is euro break-up, which would be even less palatable. But we are not there yet.

No U.S. Recession as Forecasts Improve -  The U.S. has likely dodged a recession for now, even though it’s too early to sound the all- clear for the economy.  A string of stronger-than-projected statistics -- capped by the news on Oct. 7 of a 103,000 rise in payrolls last month -- has prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to raise their growth forecasts for third quarter growth to 2.5 percent from about 2 percent. That’s nearly double the second quarter’s 1.3 percent rate and would be the fastest growth in a year.  "The U.S. economy doesn’t look like it’s double-dipping at all,” said Allen Sinai, president of Decision Economics Inc. in New York. “But it is a crummy recovery.”  That recovery still faces what economist Chris Rupkey in New York calls “a lot of headwinds.” These range from the sovereign-debt crisis in the euro zone -- and increasing likelihood of a recession there -- to political gridlock in the U.S. over the budget.  “We can skirt a recession,” . “But if headlines worsen in Europe and cause a major stock-market rout, it could lead to a loss of confidence here on the part of businesses and consumers and make forecasts for a recession a reality.”

Fed Watch: Too Early to Sound the All Clear? - Last week I wrote: The economy was not in recession in the third quarter, which means the backward looking data flow through this month will not be particularly dire. Consistent with this prediction, the September employment report painted a picture of an economy still wading through knee-deep mud, but not in economic collapse. That said, prior to the report, Barry Ritholtz offered some wisdom regarding individual data points versus trends: What does matter is the overall vector of a given economic sector. Vectors include the rate of acceleration or deceleration, persistency, direction etc. Think overall “trend” and changes thereto. For employment, this means: Are we seeing an increase in the factors that lead to hiring? What is the ratio between hires at big firms vs small firms? Are Wages increasing, staying flat, or decreasing; Temp workers getting hired, total hours worked etc. What are the likely data and modeling errors?  With trends in mind, the data did little to dispel my concern that private sector hiring rolled-over earlier this year, especially when combined with last week's read on employment via the ISM nonmanufacturing report:

Tim Duy: Too Early to Sound the All Clear? - From Professor Duy: Too Early to Sound the All Clear?. An excerpt:  [A]lthough there is optimism the European situation can be resolved in three weeks, they seem to be walking a very fine line between attempting to recapitalize the banking system without undermining sovereign debt ratings while maintaining what effectively amounts to a pegged exchange rate system that is fundamentally inconsistent with the economic needs of more than one nation. In addition, they have an odd situation where every nation needs to issue Euro-denominated debt, but no nation can actually print Euros as a backstop. It's as if each nation issues only foreign-denominated debt, with ultimately no lender of last resort on a national level. Of course, the European Central Bank could fill this role, but will they? My experience is that when a financial landscape is as ugly as we see here, there is no rescue plan. Things tend to get much worse before they get better. That seems to be what financial market are telling us. Goldman did up their Q3 growth forecast, but they remain cautious on the next few quarters. In a note research note titled "Economy Holds Up, But for How Long?", they argued "real income growth has stalled" and "financial conditions have tightened sharply in recent months". They think growth will slow over the next two quarters.

Fed Watch: Widespread Lack of Conviction - Menzie Chinn at Econbrowser looks at the OECD data and concludes the world is close to stall speed. Alcoa is an early victim, as the impact of the European financial crisis becomes evident. Via Reuters: Alcoa CEO Klaus Kleinfeld warned of weak economic conditions through the year, particularly in Europe, "as confidence in the global recovery faded."That sapped aluminum demand from the automotive, industrial products, construction and packaging sectors since the second quarter, with only the aerospace and transport sectors growing. Can the global economy recovery? Will the damage be limited to Europe? With growth teetering on an edge, it would be nice to have one old US recession indicator back in the tool kit - the yield curve. With short-term interest rates at zero, it is impossible for the yield curve to invert, a traditional indication of recession. Bloomberg reports on an effort to overcome this challenge and regain that tool: The unadjusted gap of 79 basis points at the end of last week indicates the chance of recession at about 15 percent... More on the topic can be found at the FT Alphaville blog, including this chart: Alas, still not the defining indicator we could hope for. While 60% is better than even, it is still a call that lacks conviction. As are the other outlooks reported by Bloomberg.

Moody’s Analytics: Risk of New U.S. Downturn 40% - The U.S. economy remains vulnerable to a new downturn, though the probability of a recession in the next six months to a year is unchanged at 40%, according to Moody’s Analytics. Though the economy has continued to grow, it remains under pressure from Europe’s debt crisis, Washington’s budget debate and the weak housing market, according to the sister company to credit-ratings company Moody’s Investors Service. “Policymakers on both sides of the Atlantic must intervene,” said Chief Economist Mark Zandi of Moody’s Analytics. “In our baseline outlook, the U.S. will avoid recession only because we expect policymakers to act in the next few months.” Moody’s said “perhaps our most tenuous assumptions” are that the U.S. payroll tax cut will be extended next year, that Washington will enact long-term deficit reduction and that European regulators can adequately shore up their banking system to withstand at least one sovereign default. Though the European Central Bank has been helping banks with their liquidity problems, Moody’s said its moves don’t address their lack of capital.

A Majority Of Americans Believe Another 2008-Like Financial Crisis Is 'Fairly Likely' To Come - A new Bloomberg-Washington Post poll finds that a majority of Americans believe a 2008-like financial crisis is likely sprout in the next few years.  The poll shows that 52 percent of Americans — and 59 percent of registered Independents — believe the economy is at least "fairly-likely" to worsen. A plurality of voters believe the economy, and their own financial situations, would be the same no matter who wins the next election — reflective of weakening confidence in political leaders.

The 1930s Sure Sound Familiar - It is impossible to read “Since Yesterday” without reflecting, again and again, on the parallels between then and now. The Great Depression, of course, dominates the book — and is far worse than anything we’ve been through. Still, when Allen writes about Ivar Kreuger, the industrialist who built an empire that some considered a Ponzi scheme, you instantly think of Bernie Madoff. The country’s fixation with the Lindbergh kidnapping seems strikingly similar to the country’s fixation with Casey Anthony.  And when Allen describes “Hooverville” — a large encampment of war veterans demanding promised bonus payments — Occupy Wall Street springs to mind. The veterans, who had gathered in a park near the Capitol, were treated well at first, but were eventually routed by the Army in a brutal show of force. In “Since Yesterday,” bankers are vilified; homes are foreclosed on; people desperately search for work — just like today. Businessmen speak of the need for “confidence,” a word that “enters the vocabulary only when confidence is lacking.” Elsewhere Allen writes, “No longer were vital economic decisions made at international conferences of bankers; now they were made only by the political leaders of states.”

Deer in the Headlights, Financially Speaking - BY any measure, the global economy is facing unusually high levels of uncertainty and volatility. But human nature may be impeding our ability to turn the economy around.  Fear and anxiety don’t bring out the best in anyone. Along with making people irritable, uncertainty can create paralysis. Some animals freeze when they are frightened. Acting like a deer in the headlights can be a good strategy if you are trying not to be seen, but it can get you run over.  Congress certainly suffers from this problem. The country has a long list of roads and bridges that are either dangerous or obsolete. We can begin the inevitable process of rebuilding this infrastructure now, when construction costs are low and borrowing costs are essentially zero, or we can wait.  But why wait? Postponing will only make the projects cost more when we finally get around to starting them, and, in the meantime, we risk disaster if one of those bridges fails. Do we think we will no longer need bridges? If Greece defaults, American cars will not suddenly become amphibious.

A recovery, if you can keep it - IT'S a fraught matter saying anything positive about the American economy, given the objective situation. GDP growth seems to be stuck below trend, and recent employment growth has been too slow to bring down the unemployment rate. For much of August and September, shocks threatened to knock the economy from a spluttering stall into an outright nosedive. No one thinks this economy is good. And yet, it's difficult to avoid noticing a hint of positive movement in the data. For the last couple of weeks, a few key datapoints have surprised to the upside, including industrial production, consumer sentiment, and employment growth. Markets have staged a surprising turnaround. American equities are up over 10% since October 4th. Government bond yields are rising from record lows, indicating a bit more appetite for risk and greater expectations for growth.

A Mixed Bag For Recession Risk - A new recession may be coming. Maybe it's already here. Then again, maybe not. Calling major turns in the business cycle in real time is perhaps the most coveted of skills in all of economics. It's also one of the most elusive gifts among self-proclaimed seers. That doesn't stop anyone from trying, including this recent warning that dark days ahead are a virtual certainty. The risk of trouble certainly looks higher to most observers, and it's not just in the U.S. Menzie Chinn of Econbrowser alerts us that the global economy "is close to stall speed." Perhaps, although it's still not obvious that the trend in the U.S. has definitively rolled over. For some perspective, let's review some of the latest indicators.  Small business sentiment turned up slightly in September, ending a six month decline, according to the National Federation of Independent Business. A small bit of good news, mostly because it suggests that the outlook isn't getting any worse.

Your Economic Outlook: Mixed Up - Contradictory data are nothing new in economics, but amid the slump in the United States and Europe, readers may find themselves paying increasing attention to indicators that seem to point every which way. Corporate earnings in the United States grew in 2011 — but that growth has slowed. Household income has fallen farther since the recession officially ended in June 2009 than it did during the recession itself. The American economy gained 103,000 new jobs in September, according to figures released Friday, but unemployment remained high at 9.1 percent.. With this in mind, The Times last week presented an interactive feature, “What’s Your Economic Outlook?” We asked readers to express their views on four topics: their job status, their future spending plans, job prospects for the next generation and the state of the economy next year. Participants were asked to choose from a list of words to summarize their view, and to explain in a few words. More than 5,600 completed submissions, and the results show a broad range of results. Some of the results were unsurprising: people who described themselves as unemployed were mostly more pessimistic than people with jobs. But the distinctions between groups were suggestive: respondents in their 60s seemed a bit more pessimistic about the next generation than did respondents in their 20s.

Economy in Full Swing (Watch Your Head) - Volatility isn't just a Wall Street phenomenon. It's hitting Main Street, too. So far, incoming September economic reports have been surprisingly firm. Auto sales rebounded to their highest level since April. Chain-store sales posted year-on-year growth of 5.5%. The economy added 103,000 jobs, and manufacturing sentiment improved a bit. [Retail sales increased 1.1% in September] If this feels like a 180-degree turn from August, that's because it basically is. It would be one thing if this were a special case, or a broad turning point in the economy. But, in fact, this kind of volatility, these jerky swings in growth, have become the norm. Consider what has happened so far this year: Real gross domestic product shrank in January and February, according to tracking firm Macroeconomic Advisers. Then it surged by more than 1% in March. It contracted again in May and June—only to jump by more than 1% again in July. This isn't typical. Since 1992, monthly GDP has fallen about a third of the time when the economy hasn't been in recession. This year, even assuming a small gain in August, monthly GDP has fallen about half the time.

The Way Forward - The United States remains mired in what is by far its worst economic slump since that of the 1930s.1  More than 25 million working-age Americans remain unemployed or underemployed, the employment-to-population ratio lingers at an historic low of 58.3 percent,2 business investment continues at historically weak levels, and consumption expenditure remains weighed down by massive private sector debt overhang left by the bursting of the housing and credit bubble a bit over three years ago.  Recovery from what already has been dubbed the “Great Recession” has been so weak thus far that real GDP has yet to surpass its previous peak. And yet, already there are signs of renewed recession.  It is not only the U.S. economy that is in peril right now. At this writing, Europe is struggling to prevent the sovereign debt problems of its peripheral Euro-zone economies from spiraling into a full-fledged banking crisis – an ominous development that would present an already weakening economy with yet another demand shock.  Meanwhile, China and other large emerging economies--those best positioned to take up worsening slack in the global economy--are beginning to experience slowdowns of their own as earlier measures to contain domestic inflation and credit-creation kick in, and as weak growth in Europe and the United States dampen demand for their exports. 

"A Boom in 2013?"Put aside the issue of the Fed's level of accommodation for the moment. Instead, will politicians be in a position to stoke growth during the upcoming election year? As it stands, policy will turn increasingly contractionary in the months ahead. Moreover, conventional wisdom is that a weak economy favors Republicans, who can run on the "are you better off than four years ago?" platform. And looking at the latest news of declining median incomes in the post-recession period, combined with an economy that has dramatically underperformed relative to the Administration's expectations when the stimulus was proposed in 2009, that argument has some legs. Politically, it makes sense for the Republicans to thwart Democratic attempts to reduce unemployment, and instead keep the focus on the "failure" of such policies to date. And they would like the Federal Reserve kept in line as well.   So assume fiscal policy is locked up in Washington through 2012, and the Republicans win the White House. What will policy look like in 2013?  I see two possible outcomes. One is to embrace fiscal austerity with both arms. The other is to abandon fiscal austerity, as it was only a useful weapon to win back the White House. Instead, do exactly the opposite and embrace the mantra that "Reagan proved deficits don't matter."

Things could actually get a lot worse - NEIL IRWIN has written a piece in the Washington Post today on the case for optimistic pessimism. Things are now so bad, he writes, that they're unlikely to get much worse. There's a narrative within the piece that seems right to me: essentially, that the fundamentals point toward a steady if slow recovery in the absence of another large shock, like a European collapse. Having said that, this seems like a fundamentally flawed view of the economy: The U.S. economy has been through a lot in the past few months — an unprecedented downgrade of the government’s credit rating, a debt crisis in Europe that threatens to spread across the Atlantic, and a steep decline in financial markets. Yet most economic indicators have pointed to continued, albeit slow, growth. It isn’t the resilience of the U.S. economy. Rather, it’s a sign of how bad things have already become. Many of the key sectors that usually cause economic contraction, including housing and durable goods such as automobiles, are already at such low levels that they don’t have much more room to fall.

Bill Gross Just Made A Huge Bet On Economic Doom, And Nobody Seems To Care - This week, bond god Bill Gross just made a super-long bet on the long end of the yield curve, coming right after a historic rally in fixed income. It was a gigantic shift from his stance earlier this year, when he bet against Treasuries -- a bet that famously worked out badly for him. The interesting thing about this is that his short bet got TONS of attention (including a big story in The Atlantic), whereas his new long bet is only getting a little. The funny thing about this is that in terms of implication for the economy, the new long bet is much more significant. Going super-long on the long end of the curve implies that Gross thinks yields will collapse even more, which would likely happen in a major economic collapse of some sort. Shorting Treasuries, conversely, was a very bullish bet on the economy, as Treasuries fall when the economy is improving (or at least lately that's been the pattern). And so really this new bet should be getting tons of attention for what it says: If it pays off, that will be very ominous. Yet it's hardly getting a peep from most people. The reason is: When people hear "Short Treasuries" they actually hear "Short America" even though that's not what it means, and so they freak out.

Who You Gonna Bet On, October 2011 - Krugman - For readers new to this, back in 2010 Business Week ran a story contrasting my pessimistic views with the bullish outlook of hedgie John Paulson, and making it clear that only a fool would believe the views of some bearded professor. Today in the FT: Paulson’s costly bet on US rebound unravels. It’s also worth noting not just that things have in fact gone badly, but the way they’ve gone badly: not via surging interest rates and inflation, but via weak demand associated with low rates, and with markets now expecting very low inflation looking forward. The point isn’t that I’m infallible, which (as my wife can tell you) is very far from true. It is that Keynesian analysis has worked in this crisis, and those who refused to believe it have lost money as well as credibility.

How to reduce reliance on cash - When the financial crisis hit, the smart money went to cash. Literally, in the case of Mohamed El-Erian: On the Wednesday and Thursday after Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.” It turns out that this was a worldwide phenomenon. Here’s Ravi Menon, the managing director of the Monetary Authority of Singapore, in a speech last week (HT IK): Within the first month of the collapse of Lehman Brothers, there was an exceptionally large withdrawal of high denomination notes by banks in Singapore. Typically, 90 per cent or more of the high-denomination notes withdrawn from banks are re- deposited within the month. During the initial months of the 2008 crisis, only 70 per cent of the $100, $1,000 and $10,000 notes withdrawn were returned.

Fannie and Freddie debt fuels anxiety - Asian and Middle Eastern central banks and sovereign wealth funds are increasingly anxious about the safety of their investments in the debt of Fannie Mae and Freddie Mac , despite the assurances of US government officials. Spooked by US political wrangling, major investors including the National Pension Service of Korea and the Kuwait Investment Authority have sold out of their holdings of the debt of the US Treasury-backed housing agencies since the 2008 global financial crisis. Officials from central banks, including the Bank of Japan, say they will be far more cautious in future. “The GSEs [government sponsored enterprises] are not safe,” said one senior official at an Asian central bank, who added that his institution was reluctant to sell its existing holdings because of fears of spooking the market. Fannie and Freddie – which own or guarantee most US mortgages – were made wards of the Treasury just before the failure of Lehman Brothers in 2008. They have since been dependent on its financial support. Many foreign investors are not reassured by the increasingly explicit US government guarantee, and are wary of the debt that the two housing agencies issue. The political fallout over the US debt ceiling this summer and the consequent Standard & Poor’s downgrade of US sovereign debt intensified fears that politics might derail the US government promise to guarantee the debt.

Foreign Central Banks Selling US Treasuries at Unprecedented Levels - Two weeks ago I began to report that foreign central banks (FCBs) had begun to engage in unprecedented levels of disgorgement of their massive holdings of US Treasury and Agency paper. Prior to this year, the FCBs had typically absorbed the equivalent of 25% of new US Treasury issuance month in and month out. That was effectively a subsidy of US financial markets. It lowered long term interest rates artificially and injected cash into the US markets and banking system.  Then about a year ago the FCBs began to slack off in their buying. In reality, that is what necessitated the Fed's program of Quantitative Easing. The Fed had to step in and fill the demand gap left by the FCBs gradually reducing their rate of purchases. Had the Fed not acted when it did, long term Treasury yields would have started to rise and along with them mortgage rates and other long term rates, something that the US economy and the US Government simply could not afford.  When the negative unintended consequences of the Fed's QE money printing, primarily skyrocketing commodity prices, exploded in Bernanke's face, he was forced to discontinue the program and allow the Treasury market to fend for itself.

Crowding Out Watch, Again - I thought my March post on crowding out would be my last for a while, but the latest data are startling enough so that I wanted to post this graph of ten year real interest rates. Just for all those people who were worrying about big jumps in rates with government borrowing. Figure 1: Ten year constant maturity TIPS yields (blue), and ten year constant maturity yield adjusted by ten year mean expected CPI inflation rate (red squares). NBER defined recession date shaded gray. Source: FREDII, Philadelphia Fed Survey of Professional Forecasters, NBER and author's calculations.  Just in case one wanted to know the exact figures, the TIPS ten year yield in September averaged 0.08% (nominal constant maturity yield at 1.98%). The TIPS ten year constant maturity on 10/6 was 0.18%, the TIPS five year was ....negative 0.57%.

Low Rates As A Sign Of Failure - Krugman - Brad DeLong and Atrios pile on to David Cameron for suggesting that his austerity program, which has rather notably failed to deliver growth, is responsible for Britain’s low borrowing costs. As they say, British rates are low for the same reason US rates are low — not as a reward for fiscal virtue, but because everyone know expects the economy to stay depressed, and policy rates near zero, for years to come. I’d add that if you want to give credit to Cameron’s policies for the recent fall in British rates, you’d have to ask why US rates have fallen even more (no, I don’t know what’s going on with the scales): So no, austerity has not invoked the confidence fairy; those low rates reflect pessimism, not confidence.

Bond Yields Show 60% Odds of U.S. Recession - The bond market indicator that has predicted every U.S. recession since 1970 shows that the economy has about a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Federal Reserve’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research. The unadjusted gap of 79 basis points at the end of last week indicates the chance of recession at about 15 percent. Short-term rates have been higher than longer-term yields, or inverted, before each of the seven recessions since 1970. A contraction would make it harder for U.S. President Barack Obama to reduce unemployment, which has held at or above 9 percent every month except two since May 2009, including a reading of 9.1 percent in September. It may also help bolster Treasuries and keep yields near all-time lows. “The adjusted curve is giving a powerful signal for an upcoming U.S. recession,”

A Couple Graphs... A couple graphs from this week's “Financial Highlights” from the Federal Reserve bank of Atlanta. The graphs are of European Bond Spreads, Federal Reserve Treasury Portfolio and U.S. Treasury Yields respectively:  We can take solace in that the Spanish and Italian spread with the bund has not spiked...

  • Since the September FOMC meeting, the 10-year yield spread between Greek and German bonds has widened by 267 basis points (bps) and is 472 bps higher since September 30. The yield spreads for Portugal and Ireland have both tightened, by 83 bps and 52 bps, respectively. Spanish and Italian spreads are also down, by 52 bps and 31 bps, respectively.

Operation Twist

  • As of September 22, 2011 39 percent of Treasury securities held by the Federal Reserve had maturities of six years or longer. After the maturity extension program concludes in June 2012, 63 percent are expected to have maturities of six years or longer.
  • Increasing demand for longer-term securities through this program is expected to drive down the interest rate on longer-term Treasury Bonds. If the interest rate on longer-term Treasury Bonds falls, the cost of long-term borrowing more generally could also fall, encouraging investment by consumers and businesses.

This Time, It Really Is Different - The title of the white paper is, admittedly, a mouthful: “The Way Forward: Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness.” It was commissioned by the New America Foundation, which hoped that it might “re-center the political debate to better reflect the country’s deep economic problems" Its authors are Daniel Alpert, a managing partner of Westwood Capital2; Robert Hockett, a professor of financial law at Cornell3 and a consultant to the New York Federal Reserve; and Nouriel Roubini.  I don’t know that anything at this point could re-center the political debate, so unyielding are the two parties. But as Congress prepares to take steps, through the deliberations of the already deadlocked supercommittee6, that will likely further wound our ailing economy, “The Way Forward” ought to at least give our politicians pause.  Its analysis of our problems is sobering. Its proposed solutions are far more ambitious than anything being talked about in Washington. And its prognosis, if we continue on the current path, is grim. “Unless we take dramatic steps, it will be Japan all over again7,” says Alpert. “Continuous deflation, no economic growth, in and out of recessions. And high unemployment.” Adds Hockett: “It will be like the economic version of chronic fatigue syndrome. A low-grade fever all the time.”

Inequality and Crisis - Nouriel Roubini argues at Project Syndicate that widening inequality lends itself to both economic and political instability.  In his latest policy brief, “Waiting for the Next Crash,” Randall Wray connects some of these same dots, tying the rise of “financialization” and soaring household debt levels to stagnating median incomes in the US: …as finance metastasized, the “real” economy was withering—with the latter phenomenon feeding into the former. High inequality and stagnant wage growth tends to promote “living beyond one’s means,” as consumers try to keep up with the lifestyles of the rich and famous. Combine this with lax regulation and supervision of banking, and you have a debt-fueled consumption boom. Add a fraud-fueled real estate boom, and you have the fragile financial environment that made the [global financial crisis] possible. Partly inspired by the work of Hyman Minsky, Wray recommends a set of policy changes that are aimed at righting this imbalance between finance and the “real” economy.  These include restructuring (shrinking) and re-regulating (with strict limits on securitization) the financial sector, and an “employer of last resort” policy that would offer a guaranteed job to everyone willing and able to work (federally funded, with decentralized administration). 

Putin Says Fed’s Treasury Purchases Damaging America’s Fiscal Discipline - Russian Prime Minister Vladimir Putin said Federal Reserve purchases of Treasuries are damaging the country’s fiscal discipline and the U.S. is taking advantage of the dollar’s “monopoly” as the main reserve currency. “Maybe our American colleagues know better, but back in the day, this wasn’t how they were advising us to act,” Putin said in an interview with Chinese state media in Beijing today. “America is being parasitic with the dollar’s monopoly position. I didn’t say that it’s a parasite on the world economy.” Putin said the U.S. should work together with Europe and and the so-called BRICS -- Brazil, Russia, India, China and South Africa -- during Group of 20 meetings to find solutions to global imbalances. Russia, which has the world’s third-largest reserves, has reduced its holdings of U.S. government debt by 43 percent from a record high on Oct. 31, 2010, to $100.2 billion as of July 31, Treasury data show. An announcement by Germany and France that they intend to support the euro is a “positive signal” as Europe struggles to resolve its debt crisis, Putin said. Troubles there are primarily political because Greece only represents 2 percent of the European Union’s economy, he said

Uncle Sam Is Not Broke - (video) The bowling alley cannot run out of points, and the US government cannot run out of keystrokes.  Research Associate Stephanie Kelton slaps down the folk wisdom that there is nothing the government can do about unemployment because it’s “broke.”  “We don’t understand our own monetary system.”

McConnell takes chutzpah to new levels - Senate Minority Leader Mitch McConnell (R-Ky.) said this week that White House’s “explicit strategy” is to “make people believe that Congress can’t get anything done.” Seriously, that’s what he said. As McConnell sees it, President Obama doesn’t want Congress to function. Yes, after years of tragic dysfunction and Republican-imposed obstructionism unseen in American history, the conservative GOP leader from Kentucky believes this is all the president’s fault. “[T]hat’s their explicit strategy — to make people believe that Congress can’t get anything done.  “And how do you make sure of it? By proposing legislation you know the other side won’t support — even when there’s an entire menu of bipartisan proposals the President could choose to pursue instead.

Debt committee could raise risk of U.S. downgrade -- As if finding consensus on debt reduction in a hyper-partisan environment isn't hard enough. The other mission of the congressional debt committee is to prove to the world -- and credit ratings agencies -- that Congress isn't completely dysfunctional. "The public is watching very closely1 to see if we can show this country that this democracy can work. I carry that weight on my shoulders as does every member of this committee," Sen. Patty Murray, the bipartisan committee's Democratic co-chair, told CNN last week. That's a lot of pressure for the 12 lawmakers who have until Nov. 23 to demonstrate they can reach across the aisle. If a simple majority fails to approve at least $1.2 trillion in debt reduction -- or Congress votes down the group's proposals in December -- that could put serious downward pressure on the U.S. sovereign credit rating. The three major credit ratings agencies, which declined to comment for this article, basically put Congress on notice after the debt-ceiling nightmare this summer.

Are You Really Surprised Super Committee Is Having Lots Of Trouble? -- This story from one of the best budget reporters around -- Andrew Taylor from the Associated Press -- says that the Joint Select Committee on Deficit Reduction (aka the "Super Committee") is having serious problems coming to any agreement about anything. According to the story, those "...closely tracking the committee are increasingly skeptical, even pessimistic, that the panel will be able to meet its assigned goal of at least $1.2 trillion in deficit savings during the next 10 years." The reason is what I and many others have been saying since the super committee was created: There's never been a reason to think that the years'-long political stalemate over taxes and cuts to Medicare, Medicaid, and Social Security will magically disappear and be any less contentious just because these 12 people are charged with coming up with a plan. Here's what I said about the prospects for the super committee right after it was created in early August.

Congress funnels deficit-cutting ideas to 'supercommittee' - When it set up a "supercommittee" to find $1.5 trillion in deficit reduction, Congress also asked other committees to weigh in with advice about what spending to cut. Today is the deadline for those recommendations. And much of the advice so far is about what not to cut. Rep. Norm Dicks of Washington, the ranking Democrat on the House Appropriations Committee, sent an 11-page letter offering no cuts but warning of "dire consequences" if the supercommittee does nothing — triggering $1.2 trillion in automatic spending cuts.House Armed Services Committee Chairman Buck McKeon, R-Calif., was equally unwilling to discuss further defense cuts. McKeon's advice to the supercommittee Thursday: "They need to do the job by working on the entitlement side, which is the big driver of the problem," he said.  The 12-member panel, officially the Joint Select Committee on Deficit Reduction, has until Nov. 23 to suggest at least $1.5 trillion in budget-balancing measures over 10 years.

Many in Both Parties Want a Window Into the Deficit Reduction Panel’s Work - Republicans and Democrats, liberals and conservatives in and out of Congress say the panel is doing too much of its work in secret.  Moreover, they say, the secrecy could make it more difficult for the 12-member panel to win acceptance for its recommendations from the public and from other members of Congress.  Far from apologizing for their secrecy, members of the committee say it shows they are making progress toward a possible agreement, establishing trust among themselves without public posturing or partisan sniping. And there is a view among some in Congress that such politically charged bargains can be struck only behind closed doors, where members can talk freely, insulated from the special interests that could swoop in to try to kill elements of an agreement.  The panel, which has six remaining weeks to hash out a plan to reduce future deficits by at least $1.2 trillion, operates in an insular world. It has held two public hearings, one on spending and one on taxes, but has not taken testimony from the public. The only witnesses were the director of the Congressional Budget Office and the chief of staff of the Joint Committee on Taxation, both appointed by Congress.

A Dangerous Idea In The Deficit-Reduction Supercommittee by Simon Johnson - Can tax cuts “pay for themselves,” inducing so much additional economic growth that government revenue actually increases, rather than decreases? The evidence clearly says no. Nevertheless, a version of this idea, under the guise of “dynamic scoring,” has apparently surfaced in the supercommittee charged with deficit reduction — the joint Congressional committee with 12 members. Dynamic scoring sounds technical or perhaps even scientific, but here the argument means simply that any pro-growth effect of tax cuts should be stressed when assessing potential policy changes (e.g., reforming the tax code). For anyone seriously concerned with fiscal responsibility, this is a dangerous notion. I would start with a study by Gregory Mankiw, former chairman of George W. Bush’s Council of Economic Advisers – and therefore presumably on the tax-cutting side of American politics – and Matthew Weinzierl that shows the economic growth caused by a tax cut can offset, at best, a portion of the revenues lost by that tax cut. Specifically, Professors. Mankiw and Weinzierl calculated that 32.4 percent of the “static” or direct revenue loss of a capital-gains tax cut and 14.7 percent of the static revenue loss of a labor tax cut could be offset in present-value terms by additional growth, Now 32.4 percent is a lot, but it is far less than 100 percent.

GOP, Dems Differ on How to Save Defense Budget - U.S. Representative Howard P. “Buck” McKeon, the California Republican who leads the U.S. House Armed Services Committee, and Adam Smith of Washington, the panel’s top Democrat, are urging Congress’s supercommittee to avoid further cuts to the Pentagon’s budget. Their Senate counterparts are likely to do the same. Where McKeon and Smith disagree is on how that might be done.In the Senate, Carl Levin of Michigan, chairman of the armed services panel, and John McCain of Arizona, the panel’s top Republican, repeatedly said this month and last that they wouldn’t recommend further cuts beyond the roughly $450 billion in reductions already projected over the next 10 years. McCain today called for no further defense cuts. In a letter to the supercommittee, he supported a proposal made by President Barack Obama to establish an annual enrollment fee for the military’s Tricare for Life health insurance program. “While this fee increase would hit those age 65 and over, a group on mostly fixed incomes who are vulnerable to unanticipated changes in expenses, I believe this fee increase is a reasonable step,” McCain wrote.

Jobs Bill, Likely to Fail, Gets Boost From Obama Aide - President Obama’s jobs bill is likely to meet defeat in a Senate vote today. But David Axelrod, strategist for Mr. Obama’s re-election campaign, is arguing that the public wants it to pass. Mr. Axelrod issued a three-page memo on the eve of the Senate action, arguing that public support for the legislation is mounting. “The more people know about the American Jobs Act, the more they hear the president talking about it, the more they want Congress to pass the plan,” writes Mr. Axelrod, who cites various polls as evidence. “Yet Republican leaders – from Congress to the presidential campaign trail – have been steadfast in their opposition without providing an alternative that would create jobs now.” Mr. Axelrod also says Republicans are offering no alternative plan to create jobs. “So, as Republicans say no to each proposal that President Obama makes to put people back to work . . . they are rapidly losing the faith of the American people on the number one issue people care about: jobs,” he writes. Republicans have argued that they are not alone in opposing the bill—a number of Senate Democrats don’t support it, either.

Geithner: Republicans Raising Risk of Recession - Republican lawmakers are raising the risk of recession if they don’t pass President Barack Obama‘s job-creation plan, Treasury Secretary Timothy Geithner said on Bloomberg television Tuesday evening.“If Congress doesn’t act, it’s because Republicans decided they didn’t want to do anything to help the economy,” Mr. Geithner said.Mr. Geithner acknowledged that Republicans might be able to block the $450 billion legislation, but said their actions would hurt the economy. “If Congress doesn’t act, growth will be weaker, more people will be out of work,” he said. A procedural vote on the bill is still ongoing in the Senate, but at least 41 senators have cast a “no” vote, effectively killing the bill’s chances of proceeding in the Senate.

Senate GOP poised to scuttle Obama's jobs plan - President Barack Obama's jobs bill, facing a critical test in the Senate, appears likely to fail because Republicans oppose its spending components and its tax surcharge on millionaires. Obama has been waging a campaign-style effort to rally public support behind the $447 billion measure, which was expected to be the subject of a Senate vote Tuesday. The plan combines payroll tax cuts for workers and businesses with $175 billion in spending on roads, school repairs and other infrastructure, as well as unemployment assistance and help to local governments to avoid layoffs of teachers, firefighters and police officers. The key elements of the jobs package reprise parts of Obama's $800 billion-plus 2009 stimulus measure and a Social Security payroll tax cut enacted last year. Unlike the controversial stimulus bill, the jobs measure would be financed by a 5.6 percent surcharge on income exceeding $1 million, raising more than $450 billion over a decade. In making the case for the bill, the White House cites economists like Mark Zandi of Moody's Analytics, who predicts that the measure would add 2 percentage points of growth to the economy, add 1.9 million payroll jobs and reduce unemployment by a percentage point. But Republicans point to optimistic predictions about the 2009 measure that didn't come to pass.

President’s Jobs Measure Is Turned Back in Key Senate Test — In a major setback for President Obama, the Senate on Tuesday blocked consideration of his $447 billion jobs bill, forcing the White House and Congressional Democrats to scramble to salvage parts of the plan, the centerpiece of Mr. Obama’s push to revive a listless economy.  The legislation, announced with fanfare by the president at a joint session of Congress last month, fell short of the 60 needed to overcome procedural hurdles in the Senate.  The vote in favor of advancing the bill on Tuesday was 50 to 49. Two moderate Democrats facing difficult re-election campaigns, Senators Ben Nelson of Nebraska and Jon Tester of Montana, joined a solid phalanx of Republicans in opposition. In addition, the Senate majority leader, Harry Reid, Democrat of Nevada, switched from yes to no so that he could move to reconsider the vote in the future.

Senate blocks Obama's jobs bill -The Senate failed to advance President Obama's jobs package, as Democratic leaders are expected to begin carving the $447-billion package into individual proposals that may have a better chance at passage. The Senate was still voting late Tuesday, but Democrats did not have enough votes to overcome a filibuster led by Republicans. Most Democrats supported the bill while all Republicans were voting to block it. Senators rejected the legislation on various fronts. Republicans opposed spending more money to hire teachers or give workers tax breaks to spur the economy. Democrats largely rejected taxing the rich to pay for it. A new surtax on millionaires was proposed to pay for the bill. The new 5.6% tax, which would take effect in 2013, would fully cover the cost of the jobs act.  Obama, meeting with members of his jobs council in Pittsburgh, acknowledged the White House would need to take a new approach. "We're going to have to break it up,"

RIP, American Jobs Act - President Obama’s jobs bill, as written, died a predictable death in the Senate last night. Democrats were able to muster fifty-one votes for passage, but that’s well short of the sixty needed to overcome a Republican filibuster. The New York Times called the vote both a “major” and “significant” setback for Obama in this morning’s edition, but in reality this was to be expected from the outset. No amount of press conferences, stump speeches or Congressional addresses would realistically advance the American Jobs Act past Mitch McConnell’s iron grip on his forty-nine-member caucus, which can filibuster the bill into oblivion. And even if it somehow passed the Senate, the Tea Party–dominated House would never touch the bill. So now comes phase two: beating up Republicans for standing in the way of job-creating legislation while using that pressure to hopefully at least get parts of the bill passed.

No Jobs Bill, and No Ideas, Editorial, NY Times: It was all predicted, but the unanimous decision by Senate Republicans on Tuesday to filibuster and thus kill President Obama’s jobs bill was still a breathtaking act of economic vandalism. There are 14 million people out of work, wages are falling, poverty is rising, and a second recession may be blowing in, but not a single Republican would even allow debate on a sound plan to cut middle-class taxes and increase public-works spending. The bill the Republicans shot down is not a panacea, but independent economists say it would have a significant and swift effect on the current stagnation. Macroeconomic Advisers ... said it could raise economic growth by 1.25 percentage points and create 1.3 million jobs in 2012. Moody’s Analytics estimated new growth at 2 percentage points and 1.9 million jobs. . The Republicans offer no actual economic plans, only tired slogans about cutting regulations and spending, and ending health care reform. The party seems content to run out the clock on Mr. Obama’s term while doing very little.

The lump of unfairness fallacy -Ezra Klein is a wonderful writer, but I don’t love his retrospective on the financial crisis. (Kevin Drum and Brad DeLong do.) The account is far too sympathetic. The Obama administration’s response to the crisis was visibly poor in real time. Klein shrugs off the error as though it were inevitable, predestined. It was not. The administration screwed up, and they screwed up in a deeply toxic way. They defined “politically possible” to mean acceptable to powerful incumbents, and then restricted their policy advocacy to the realm of that possible. The administration could have chosen to fight for policies that would have been effective and fair rather than placate groups whose interests were opposed to good policy. They might not have succeeded, but even so, as Mike Koncazal puts it, they would have lost well. We would be better off with good policy options untried but still on the table than where we are now, with policy itself — monetary, fiscal, whatever — discredited as both ineffective and faintly corrupt. There is a lot in Klein’s piece that I could react to, but I want to highlight one point that is particularly misguided:

US currency bill passes Senate vote - A bill that aims to punish Beijing for holding down its currency passed the Senate on Tuesday despite a warning from China that the legislation could plunge the global economy into a 1930s-like depression. The legislation passed the Democrat-led Senate with a comfortable 63-35 majority, with several Republican senators also supporting the bill. The vote could set up a tussle with the House of Representatives, whose Republican leaders have called the bill “dangerous” and so far have refused to schedule a vote on it.. “This bill sends an important message to China,” he said. “China must stop flouting the rules, and ending its currency manipulation is one important step in that process. But in a commentary just hours ahead of the vote, China’s official Xinhua news agency raised the level of its recent rhetoric in opposing the bill, saying the proposed US legislation was reminiscent of the Smoot-Hawley tariff act in 1930 that is widely credited with worsening the Great Depression. “Lawmakers focus mostly on the economic interests of their own electoral districts but fail to consider major political and economic issues from an international perspective.”

The Senate’s Currency Manipulation Bill is Not Only Bad Policy, but Unncecessary - China’s currency manipulation is bad policy. So is the Senate’s latest crackdown on it. The bill passed yesterday is not only bad policy, but unnecessary. Here’s why. First of all, before we get hysterical about Chinese policy, we should recognize that currency manipulation is the global norm, not the exception. By a recent count, only 14 percent of the IMF’s member nations allow their exchange rates to float freely. Some 58 percent manipulate their exchange rates by holding them above or below the level to which the market would move them. The remaining 28 percent pursue an even more rigid policy: They give up their own currencies altogether and put some other country’s money directly into circulation. How would we like it if China put the U.S. dollar into circulation as legal tender, the way Ecuador, Panama, and several others do? The same flag-waving Americans who don’t like a fixed rate for the yuan would probably be proud, but the result would be subject to all the same criticisms, and more, that are made against the current policy of a semi-transparent sliding peg. The long an the short of it? Currency manipulation per se is neither unusual, nor automatically bad, nor a violation of internationally accepted rules of the game.

Chinese Bashing Is All the Rage — But No Antidote - Let’s all blame China. The latest episode of U.S. China-bashing is a Senate measure that would call on the White House to impose unilateral and broad-based tariffs against countries with “misaligned” currencies. The bill could take on more urgency now that the Commerce Department said Thursday that the August U.S.-China trade deficit jumped to a record high of $28.96 billion. Beijing is not pleased. The People’s Bank of China has been guiding the yuan lower versus the U.S. dollar since the U.S. Senate approved the bill. Yes, Beijing manipulates the yuan. U.S. politicians, however, are wrong to think a free-floating yuan will do much to dent the U.S. trade gap or boost economic growth. The Senate bill might even worsen the outlook. The action, which might not pass muster of World Trade Organization rules, “opens the door to similar non-conforming protectionist retaliation by China,” warns Carl Weinberg, chief economist of High Frequency Economics, “The resulting trade war would see both sides of the argument lose exports and jobs. No one wants to [see] that, not in these troubled times.”

Schizophrenia in Congress - THE American public's view of free trade has been heading in one direction only for the past few years. This blog covered a Pew report roughly a year ago which showed that 44% of Americans were against free trade and 35% were in favour. As many as 63% of tea-partiers thought free-trade agreements were bad for America. And yet most economists, even those who point out the harm that import competition can do, are still resoundingly against any protectionist measures. Congress is stuck between these two poles, torn between listening to the experts and listening to their bosses. Events this week only serve to illustrate the resulting schizophrenia. On Tuesday the Senate passed a bill that brings America closer to imposing tariffs on China. On Wednesday it approved long-stalled trade agreements with South Korea, Colombia and Panama. A new paper explains how this ambiguity tends to gets resolved. Politicians in Congress listen to both camps, but the closer they are to an election, the more likely they are to vote "nay" on trade-liberalisation reforms.

Why China 'trade war' bill is tying House Republicans in knots - House Republicans are blocking a vote on a bill to punish China for currency manipulation. Leaders say it could unleash a trade war, but many rank and file want to take China to task. The bill to punish China1 for manipulating its currency – and allegedly stealing American jobs – is setting off a clash within Republican ranks on Capitol Hill2. The bill, which would impose tariffs on Chinese goods, has already passed the Senate with bipartisan support and would likely pass the House if brought to the floor. But so far, House Speaker John Boehner4 refused to do so. With multinational corporations and conservative antitax groups – key Republican constituencies – opposed to the bill, Mr. Boehner has been loath to let it see the light of day, given that it could be vetoed by President Obama5 anyway.  But pressure on Boehner is mounting. Lawmakers representing states hardest hit by the rise of Chinese manufacturing want to go on the record supporting the bill, and GOP presidential hopeful Mitt Romney6 has taken a stand on China currency even more aggressive than the Senate bill.

Congress passes trade deals - -- Congress passed trade deals with Colombia, South Korea and Panama on Wednesday, delivering them to President Obama in time for the South Korean president's Thursday visit to Capitol Hill.  Most House Republicans voted in favor of the deals, while many Democrats opposed them. Several Democrats joined Republicans to pass the bills in the Senate. The deal with South Korea drew the most support in that chamber, passing 83-15, while the Columbia pact had the most opposition, passing by a 66-33 vote. President Obama, who called the deals "a major win for American workers and businesses," plans to sign the pacts.  "I've fought to make sure that these trade agreements with South Korea, Colombia and Panama deliver the best possible deal for our country, and I've insisted that we do more to help American workers who have been affected by global competition," he said in a written statement.

Congress Passes Three Major Trade Deals, Ending Political Standoff - Congress - if you listen to pundits and Washington politicians -- is completely broken. But when multinational corporate interests are at stake, suddenly the institution figures out how to get to work. On Wednesday, both chambers passed three sweeping trade agreements with bipartisan majorities, against the opposition of labor unions worried about job losses that would result.  President Obama and members of Congress from both parties have trumpeted the agreements for their job creation potential, but that assertion was undercut by the deal itself, which included funding for workers whose jobs will be lost as a result of the deals. HuffPost has reported extensively on the deals, which involve Colombia, Panama and South Korea.

Covering Up Protectionism - The NYT went overboard in covering up the protectionism in the trade pacts approved by Congress yesterday. All three deals substantially increase protectionism in the form of patent and copyright protection. The former will likely increase the price of drugs in the countries partnering with the United States. The distortions created by these protections will reduce real wages and lower output. For this reason, it is wrong to call these pacts "free trade" agreements, as the NYT did four times in a short piece. It is also inaccurate to say as the NYT does: "Economists generally predict that free trade agreements, which eliminate tariffs and other policies aimed at protecting domestic manufacturers, benefit all participating nations by creating a larger common market, increasing sales and reducing prices." This does not follow when protectionist barriers raise the price of a substantial group of products. [The Post committed the same sin.]

Obama, Boehner Chat About Jobs Measures - President Barack Obama called House Speaker John Boehner (R., Ohio) on Thursday to congratulate him on one of their rare bipartisan ventures – passage of three free-trade agreements. In the ten-minute conversation, Mr. Boehner made a point of defending his party against Mr. Obama’s charge earlier Thursday that the GOP had no plan for job creation. “I want to make sure you have the facts,’” Mr. Boehner told the president, according to an account of the call by the speaker’s office. Mr. Boehner pointed to a package of measures House Republicans introduced in May, which included the trade pacts and proposals to roll back federal regulations and to cut taxes on businesses. Mr. Boehner was reacting to comments the president had made earlier Thursday. Mr. Obama told reporters during a news conference:  “I asked you guys to show us the Republican jobs plan that independent economists would indicate would actually put people back to work.  I haven’t yet seen it.” Mr. Obama’s own jobs plan was killed in the Senate two days ago.

The Critics Of Modern Macro Are Wrong - Paul Krugman - It’s even worse than they think. John Kay has a rant that I largely agree with. Yet he says this: The debate on austerity versus stimulus, in academic circles, is in large part a debate about the validity of a property called Ricardian equivalence, which is observed in this type of model. If government engages in fiscal stimulus by spending more or by reducing taxes, people will realise that such a policy means higher taxes or lower spending in future. Even if they seem to be better off today, they will be poorer in future, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. Fiscal policy is therefore ineffective as a means of responding to economic dislocation. and proceeds to talk about the unrealism of Ricardian equivalence. But the fact is that even if you believe in Ricardian equivalence, it doesn’t tell you that fiscal policy won’t work. Let me post this yet again: It’s one thing to have an argument about whether consumers are perfectly rational and have perfect access to the capital markets; it’s another to have the big advocates of all that perfection not understand the implications of their own model.

Stocks, Flows, and Fuzzy Math - Krugman - I read David Brooks citing the Tax Foundation this morning, and I thought he must have misread them. They couldn’t possibly have compared one year’s take from higher taxes on the rich with the total stock of debt, could they? They can’t possibly be that stupid, or think that their readers are that stupid, can they? Yes they did. They actually find that their version of the “Buffett rule” would collect $120 billion a year, which is a seriously significant sum. But they try to make it look small by comparing one year’s revenue with the total debt outstanding. This deliberate fraud — because that’s what it has to be — is an example of the reasons knowledgeable people don’t trust the Tax Foundation.

Tim Duy Asks; CG&G Answers - Over at his own blog, Tim Duy provided an interesting post about what we should expect fiscal policy-wise in 2013. Tim said he saw two possibilities -- fiscal austerity or abandon fiscal austerity -- and he that he'd "like to hear the views of the gang at Capital Games and Gains." Since he quoted one of my posts from several weeks ago and mentioned me by name earlier in the piece, I will take up the challenge... Tim is using "fiscal austerity" as a surrogate for spending cuts, and I strongly suspect that, if the GOP wins the White House as he asks us to assume, that at least a symbolic spending cut will be on the agenda.  If the Senate goes and the House stays Republican, the cut may be more than symbolic. But...I also expect that a tax cut will be a priority for the GOP at the same time.  In fact, it's likely to be a higher, and perhaps a much higher, priority than anything they will propose on the spending side.  I also expect that the GOP-proposed tax cut will increase the deficit by more than the GOP-proposed spending cut will reduce it, especially in the first two years. Short-term pain and an increase in federal borrowing to get a long-term gain will be the battle cry.  The fact that the GOP wouldn't let Obama say or so that won't matter a bit.

Milton Friedman’s Magical Thinking, by Dani Rodik - Friedman was one of the twentieth century’s leading economists, a Nobel Prize winner who made notable contributions to monetary policy and consumption theory. But he will be remembered primarily as the visionary who provided the intellectual firepower for free-market enthusiasts during the second half of the century, and as the éminence grise behind the dramatic shift in the economic policies that took place after 1980. At a time when skepticism about markets ran rampant, Friedman explained in clear, accessible language that private enterprise is the foundation of economic prosperity. . He railed against government regulations that encumber entrepreneurship and restrict markets.  Inspired by Friedman’s ideas, Ronald Reagan, Margaret Thatcher, and many other government leaders began to dismantle the government restrictions and regulations that had been built up over the preceding decades. But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed.  .

GOP Representative moves to increase deficit--and aid the investor class - Linda Beale - Peter Roskam (Republican from Illinois and member of the House Ways and Means Committee) introduced legislation--H.R. 3091 (for those with BNA access)-- on Tuesday that would make the ridiculously low Bush tax legislation provisions for capital gains and dividends permanent. A 15% rate on the main source of income that the uberrich enjoy, while the rest of us pay regular ordinary income rates on our wages. How does Roskam justify this further giveaway to the rich, this further example of governmental capture by oligarchy? He claims that this revenue reduction that benefits mostly the very rich will --yes, you guessed it--help generate U.S. investment and create jobs. Making this giveaway rate permanent for everybody will "foster a culture that encourages investment, capital formation, and economic growth", he says. BNA Daily Tax Report, Oct. 5, 2011. Balderdash. Low capital gains rates have nothing to do with encouraging investment or capital formation or job creation. They mostly reward investors in the secondary market on their trades. They let the rich get even richer and make more investments--probably in emerging markets rather than in the US.

Pew Publishes Fiscal Charts-Thoma argues for spreading the wealth - The Pew Foundation has published a set of 10 fiscal charts that provide good illustrations of the nation's current fiscal situation:  10 Essential Fiscal Charts (Oct 11, 2011).  One must keep in mind in reading the text, of course, that Pew, like the Peterson Institute, is overly focused on the budget deficit and debt rather than on jumpstarting the economy. Using CBO, Treasury and Tax Policy Center data, Pew concluded that federal spending as a percentage of total GDP had increased  from 18% of GDP  in 2001 to 24% of GDP in 2011 while revenues as a percent of GDP had decreased from 19% in 2001 down to a mere 15% of GDP in 2011. This stark contrast makes it clear that we need to increase taxes as well as reign in any wasteful or unnecessary spending.  The GOP is on a drive to reduce taxes even further on the rich--e.g., Cain's 9-9-9 plan that shifts most taxes to the middle and lower cases (flat income tax coupled with high consumption tax), while a frequent GOP tax proposal is zero taxation of capital gains and dividends.  Maybe Congress should start listening to the people instead of the moneyed interests that lobby it for special favors.  If it did, it would recognize that the majority of Americans support the idea of higher taxes on the wealthy.   Mark Thoma, in a recent column in the Fiscal Times, makes the case for "spreading the wealth" strongly--Why America Should Spread the Wealth, Fiscal Times (Oct. 11, 2011).

We Are The 99 Percent - Even Rich People - A lot of liberal bloggers are drooling over the We Are the 99 Percent blog that is associated with the Occupy Wall Street movement. I actually find the blog pretty annoying. Partly that’s because because it is so heavy on complaints from people with college (and even postgraduate) degrees, a group that certainly is not bearing the brunt of the economic downturn. But the bigger problem is that the blog is based on a premise that is unhealthy not just for the left but for our political discourse as a whole. The 99th percentile of Americans, by income, starts with households earning incomes of $593,000.  Indeed, “99 percent” is so expansive a designation that it includes most of the bankers working on Wall Street. There is an obsession on the left—fueled by Barack Obama’s incompatible twin efforts to close an enormous budget gap and hold families making less than $250,000 per year harmless from tax increases—with soaking the super-rich. But if you truly believe that the government needs more revenue to provide valuable services, you need to look where the money is, and much of that’s in the top quintile (households making over $111,000) but outside the top 1 percent.

About That 99 Percent ... Who exactly are the people in the top 1 percent of the economy?  Here are some numbers: American households right at the 99th percentile (that is, the cut-off for the top 1 percent) will earn about $506,553 in cash income this year, according to a Tax Policy Center analysis. The income curve is very steep at the high end, meaning that people just a few tenths of a percentile point above that make much, much more. A family at the 99.5th percentile, for example, makes $815,868; its neighbor at the 99.9th percentile makes more than double that, at $2,075,574 a year. The top 1 percent of American earners receive about a fifth of the country’s income. But as we’ve noted before, economic inequality isn’t just about what you make each year. It’s about how much wealth you have already accumulated, too. And inequality is far, far greater when you include wealth. According to an analysis of Federal Reserve data the top 1 percent of Americans by net worth hold about a third of American wealth. The cutoff for the 99th percentile in net worth was $19,167,600 as of 2007.

To Tax the Rich, Stop Arguing About Who’s “Rich” - It’s happening again. As Congress finally begins to take President Obama’s proposal seriously to let taxes return to their 2001 level, but only for households with over $250,000 in income, along with the newer “Buffett Rule” proposal to limit tax breaks for millionaires, even liberal Democrats are starting to get squeamish about whether $250,000 or even a million is really “rich.” Here’s Senator Chuck Schumer on Wednesday: ”In the eyes of many, it is hard to ask more of households making $250,000 or $300,000 a year. In large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that is associated with wealth.” On the other hand, the very things those families think of as the basic necessities of life, like private school and nannies, are in fact things that are “associated with wealth,” as Schumer puts it. These are people who earn almost five times the median income in the U.S. They may not feel rich compared to their college classmates who went to Wall Street instead of law school, but by any real measure they are very wealthy. Arguing about who is “rich,” and therefore should pay more, is a pointless, deadly game. The line will always shift upwards, because at any meaningful level, there’s always someone who doesn’t “feel” rich.

An Analysis of the “Buffett Rule” (congressional research service pdf) The results of this analysis show that the current U.S. tax system violates the Buffett rule in that a large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers. Roughly a quarter of all millionaires (about 94,500 taxpayers) face a tax rate that is lower than the tax rate faced by 10.4 million moderateincome taxpayers (10% of the moderate-income taxpayers). Tax reforms that are consistent with the Buffett rule would likely include raising tax rates on capital gains and dividends. For example, the President has proposed allowing the 2001 and 2003 Bush tax cuts to expire for highincome taxpayers and taxing carried interests of hedge fund managers as ordinary income as tax reforms that observe the Buffett rule. Research suggests that these tax reforms are unlikely to affect many small businesses or to deter saving and investment.

Buffetts, Buffetts Everywhere - Krugman - Greg Sargent points us to a new Congressional Research Service report (pdf) showing that there are a lot of millionaires paying lower taxes than many middle-class Americans. On average, the tax code is progressive — but there are a lot of cases where it isn’t. Oh, and I’m sure that some people will chime in and declare that payroll taxes aren’t really taxes, because they’re dedicated to benefit programs. What I’d point out is that the right wants to have it both ways here. On one side, there are all the complaints about the terrible tax burden on middle class Americans — complaints that rely heavily on including payroll taxes, because that aside, middle class burdens are actually quite light. But as soon as you try to use the tax data to show how lightly many rich Americans are taxed, the payroll tax gets disqualified. Anyway, there are a lot of Buffett-like situations.

Jeffrey Immelt and how the one percent lives - Now that it looks like the Obama jobs plan is circling the porcelain bowl and with it, his “tax the rich” plan, I thought perhaps it was time to take a look at the compensation package for an American that is playing a big role in putting America back to work.  This is even more pertinent after his recent appearance on 60 Minutes, particularly in light of his quote "I want you to root for me." Jeffrey Immelt, age 55, was appointed as CEO of General Electric in September of 2001.  He was appointed by President Obama as the Chairman of Obama's Council on Jobs and Competitiveness where he is otherwise known as Obama's “Jobs Czar”. To put things into perspective, let's look at just how well GE stock has done since Mr. Immelt landed in the corner office: A share that was trading in the $40 range when he took the reins has had a pretty good haircut with shares down to $16 and change, a drop of roughly 60 percent.  GE hit a record high of nearly $60 back in September 2000 in it’s pre-Immelt days and it's been a pretty steady downhill ride from there.  Now let's look at the important stuff.  How much has Mr. Immelt been compensated for this downhill ride?  For my source material, I'm using GE's Notice of 2011 Annual Meeting and Proxy Statement. Note the difference between his total compensation of $21,428,765 and his total realized compensation of a mere $5,845,124? 

Rich People Create Jobs! - And five other myths that must die for our economy to live. - When it comes to the economy, we're stuck in our own version of Groundhog Day—and this one doesn't seem to be coming to an end. America is in a deep and persistent slump, and unemployment is mired at more than 9 percent. Yet when you turn on the TV, all you hear are the same manufactured sound bites delivered in the same apocalyptic tones from the same pack of talking heads—over and over and over. Groundhog Day has turned into the eighth circle of hell. Unfortunately, these zombie talking points aren't just wrong; they're dangerous. If we're ever going to revive the economy, we've got to tackle them head on. Here are six of the worst.

The Seven Biggest Economic Lies - Robert Reich - The President’s Jobs Bill doesn’t have a chance in Congress — and the Occupiers on Wall Street and elsewhere can’t become a national movement for a more equitable society – unless more Americans know the truth about the economy.  Here’s a short (2 minute 30 second) effort to rebut the seven biggest whoppers now being told by those who want to take America backwards. The major points:

  • 1. Tax cuts for the rich trickle down to everyone else. Baloney. Ronald Reagan and George W. Bush both sliced taxes on the rich and what happened?
  • 2. Higher taxes on the rich would hurt the economy and slow job growth. False. From the end of World War II until 1981, the richest Americans faced a top marginal tax rate of 70 percent or above.
  • 3. Shrinking government generates more jobs. Wrong again. It means fewer government workers – everyone from teachers, fire fighters, police officers, and social workers at the state and local levels to safety inspectors and military personnel at the federal. And fewer government contractors, who would employ fewer private-sector workers. According to Moody’s economist Mark Zandi (a campaign advisor to John McCain), the $61 billion in spending cuts proposed by the House GOP will cost the economy 700,000 jobs this year and next.
  • 4. Cutting the budget deficit now is more important than boosting the economy. Untrue. With so many Americans out of work, budget cuts now will shrink the economy. They’ll increase unemployment and reduce tax revenues. That will worsen the ratio of the debt to the total economy.
  • 5. Medicare and Medicaid are the major drivers of budget deficits. Wrong. And since Medicare has far lower administrative costs than private health insurers, we should make Medicare available to everyone.
  • 6. Social Security is a Ponzi scheme. Don’t believe it. Social Security is solvent for the next 26 years. It could be solvent for the next century if we raised the ceiling on income subject to the Social Security payroll tax. That ceiling is now $106,800.
  • 7. It’s unfair that lower-income Americans don’t pay income tax. Wrong. There’s nothing unfair about it. Lower-income Americans pay out a larger share of their paychecks in payroll taxes, sales taxes, user fees, and tolls than everyone else.

When Being Rich Makes Us Poor, People Should Occupy Wall Street - The Very Serious People in Washington are busy trying to find creative ways to cut Social Security and Medicare and take other benefits from middle-class and moderate-income families.  There are two parts of this story that should drive the rest of us crazy. And it is difficult to determine which one is the more infuriating. The first is that we know that many people in this country are fabulously rich. And as Elizabeth Warren beautifully reminded us, none of them did it on their own. But Professor Warren is actually far too generous in her account. While some number of the wealthy may have succeeded by working hard and being smart or creative, many of the very wealthy got their money directly or indirectly through the big hand of the government tilting the playing field in their direction. Their hard work involved rigging the rules to ensure that they ended up on top. Nowhere is this better seen than on Wall Street, which is chock full of multimillionaires and billionaires who got to the top by taking advantage of items like "too big to fail insurance" for their banks, gambling with government insured deposits, ripping off state and local governments on pension management fees and, of course, the trillion dollars in bailouts bucks given at interest rates that were way below market levels.

Protesters Against Wall Street - At this point, protest is the message: income inequality is grinding down that middle class, increasing the ranks of the poor, and threatening to create a permanent underclass of able, willing but jobless people. On one level, the protesters, most of them young, are giving voice to a generation of lost opportunity.  The jobless rate for college graduates under age 25 has averaged 9.6 percent over the past year; for young high school graduates, the average is 21.6 percent. Those figures do not reflect graduates who are working but in low-paying jobs that do not even require diplomas. Such poor prospects in the early years of a career portend a lifetime of diminished prospects and lower earnings — the very definition of downward mobility.  The protests, though, are more than a youth uprising. The protesters’ own problems are only one illustration of the ways in which the economy is not working for most Americans. They are exactly right when they say that the financial sector, with regulators and elected officials in collusion, inflated and profited from a credit bubble that burst, costing millions of Americans their jobs, incomes, savings and home equity. As the bad times have endured, Americans have also lost their belief in redress and recovery.

The Other 99% of Us Can’t Buy Our Way Out of the Impending Global Ponzi Scheme Collapse - We are seeing an accumulation of “wealth” by the super-rich to shame the Gilded Age.  The richest “400 people have more wealth than half of the more than 100 million U.S. households,” Politifact was grudgingly forced to agree that Michael Moore’s statement was correct. I don’t think this is disconnected from the question I raised 2 years ago, “Is the global economy a Ponzi scheme?“  As Tom Friedman reported: “We created a way of raising standards of living that we can’t possibly pass on to our children,” said Joe Romm, a physicist and climate expert who writes the indispensable blog We have been getting rich by depleting all our natural stocks — water, hydrocarbons, forests, rivers, fish and arable land — and not by generating renewable flows. “You can get this burst of wealth that we have created from this rapacious behavior,” added Romm. “But it has to collapse, unless adults stand up and say, ‘This is a Ponzi scheme. We have not generated real wealth, and we are destroying a livable climate …’ Real wealth is something you can pass on in a way that others can enjoy.”

The Job Killers - Among the many ritual ablutions a Republican presidential contender must perform is the signing of Grover Norquist's "Taxpayer Protection Pledge," a document the length and subtlety of a bumper sticker that commits politicians to oppose "any and all efforts to increase taxes." To date, all the GOP hopefuls, save Jon Huntsman, have signed on, as have 238 House members (99 percent of the GOP caucus), 41 senators, and more than 1,200 state legislators (PDF). Norquist, a professional conservative and Washington salonista, drew up the pledge in 1986 at the behest of Ronald Reagan (who had signed a major federal tax increase a few years earlier, but never mind). It was part of the Republicans' nascent "starve the beast" campaign, which postulated that since cutting public services would always be unpopular, the way to shrink the government was to give it little more than hardtack. The movement erupted into full bloom in 2001, when Congress passed the Bush tax cut package; at the time, Norquist crowed: "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

Inside the Cain Tax Plan - With recent polls showing increased support for Herman Cain as the G.O.P. presidential nominee, attention is being drawn to his platform, especially what he calls the 9-9-9 tax plan. News reports describe it as a 9 percent tax rate on business and personal income, combined with a 9 percent national sales tax. First, the 9-9-9 plan is actually an intermediate step in Mr. Cain’s plan to overhaul the tax system and jump-start growth. Phase 1 would reduce individual and business taxes to a maximum of 25 percent, which I assume means reducing the top statutory tax rate to 25 percent from 35 percent. No mention is made on the site of a tax cut for those now in the 10 percent, 15 percent or 25 percent brackets. This means that the only people who would get a tax rate cut are those now in the 28 percent, 33 percent or 35 percent brackets. According to the Joint Committee on Taxation, only 4 percent of taxpayers pay any taxes at those rates. As for corporations, Mr. Cain’s proposal is primarily going to benefit those with revenues of more than $1 million a year, because they account for 98.7 percent of all receipts by C corporations. Other business entities — sole proprietorships, S corporations (which have between 1 and 100 shareholders and pass through net income or losses to shareholders) and partnerships — would not benefit because they are not taxed on the corporate schedule. But they represent 92 percent of all businesses.

Herman Cain’s 9-9-9 Plan: The Return of Trickle-Down Economics - Now that some opinion polls have Herman Cain leading the race for the Republican nomination, it is time to take a closer look at his “9-9-9” economic plan, which is the centerpiece of his campaign. For those of you who are in a hurry, here is the takeaway:

  • It doesn’t raise enough revenue. Without offsetting cuts in spending, it would send the budget deficit skyrocketing.
  • It would be extremely regressive. Poor and middle-income people would pay higher taxes. Rich people would pay a lot less.
  • Its impact on growth is debatable.

Let’s start with Cain’s campaign Web site, which lays out the bare bones of the plan on a single page. If you think this isn’t very much for a proposal that would junk the entire tax code, you are right. Still, here’s what Cain has to say.

What would Warren Buffett pay under 9-9-9? - Many are concerned that Herman Cain's 9-9-9 Plan would shift the tax burden from high income earners to low income earners.  One interesting data point is how much Warren Buffett would pay under 9-9-9.  I assume that Buffett, unlike the average millionaire, has almost no wage income.  Apparently, he pays himself $100,000 per year, which is negligible in comparison to his total income of $62 million.   Let's assume two scenarios:

  • 1)      His income is evenly split three ways, between capital gains, dividends, and interest.
  • 2)      His income is 50 percent capital gains, 25 percent dividends, and 25 percent interest.

Under Scenario 1 with 9-9-9, Buffett would pay $3.77 million from the 9 percent personal income tax on dividends and interest, plus $566 thousand from the 9 percent sales tax.  His total tax would be $4.33 million, compared to $6.93 million in federal tax currently.  That's a tax cut of $2.6 million, or 38 percent. Under Scenario 2 with 9-9-9, Buffett would pay $2.83 million from the 9 percent personal income tax on dividends and interest, plus $566 thousand from the 9 percent sales tax.  His total tax would be $3.39 million, compared to $6.93 million in federal tax currently.  That's a tax cut of $3.5 million, or 51 percent.

Cain Unable -  Krugman - An irate correspondent is furious with me for dismissing Herman Cain’s ideas. Cain’s program, he angrily asserts, has been endorsed by none other than Arthur Laffer, a “much smarter economist than you.” Indeed, Laffer capped his brilliant career two years ago by warning, presciently, that interest rates would soar thanks to the Obama plan. But seriously — or as seriously as anything involving Cain can get — Jared Bernstein has a good summary of the reality of nein, nein, nein. The key point is that each of the nines is a tax that would more or less fully fall on middle-income families, who in addition to paying 9 percent of their income in taxes would find their living costs 9 percent higher and their wages 9 percent lower. That’s a 27 percent tax, way above the average federal taxes now paid by middle-income households. So the Cain plan amounts to a huge tax increase on most Americans, but a huge tax cut on the wealthy.

For a Very Modest US Wealth Tax - The so-called ‘Buffett tax’ on high incomes is fine as far as it goes. But it’s not enough either to reverse the growing wealth stratification in this country, nor to repair the budget deficit. So here’s a suggestion for another small piece of the puzzle: The United States needs a small, graduated, national wealth tax. Properly implemented, a gentle national wealth tax raises some money at minimal distortion to the economy. Experience abroad suggests that so long as the tax is not too large, fears of capital flight are much exaggerated. Yes, what I’m suggesting here is that we follow the lead of socialist trailblazers like Switzerland.  There are a lot of arguments for a small and graduated wealth tax: it raises (some) money, it does so at cost to the people who can best afford it, it provides a (small) counterweight to the increasing wealth inequality we are experiencing, and empirical evidence suggests that it will not materially hurt incentives or the economy.

Repatriation Tax Holiday--WIN America is pushing hard...Linda Beale - I get a press release a day from WIN America, the coalition of almost two dozen multinationals and about two dozen business organizations (like the Chamber of Commerce) that is pushing for another big "repatriation holiday" tax cut for the multinationals. Now they're touting the Hagan-McCain Foreign Earnings Reinvestment Act with lots of quotes from those that are on board .  Most are unsurprising members of the right-leaning arm of the GOP. But there are several on the "quotes" list that are disappointing, at least:

  • Simon Rosenberg, Founder of the New Democrat Network, says "The Foreign Earnings Reinvestment Act is smart public policy...[that will help bring hundreds of billions back home, to be invested in the United States."

Rosenberg claims to espouse "new progressive" ideas.  But folks, there isn't anything progressive about a repatriation holiday--it's just more favors for Big Money.

  • Barbara Boxer says bringing back a trillion dollars "that's sitting overseas" will "create jobs, strengthen the economy, and reduce the deficit."

More on Repatriation--WIN America corporatist lobbying group's strike back on Heritage » In a recent posting, I commented further on the lack of arguments supporting the corporatist lobbying drive for another "repatriation tax holiday" for multinational corporations that have stashed more than a trillion abroad (often through gimmicky transfers of intangible property such as rights to patents developed in the United States).  See  Repatriation Holiday Lobbying--Money Speaks (Oct. 3, 2011).The reasons are manifold.   Most telling is that the very fact of one tax holiday means that corporations will inevitably plan for and conduct business assuming future tax holidays.  It is ikely that planning for this current lobbying effort began on the day Congress passed the 2004 Jobs Act!  What that means is that the tax holiday itself encourages even more of the very offshoring activity it claims to be amerliorating.  Corporations will use gimmicks to move and stash away even more money offshore to avoid even more current taxes, in the hopes that there will be a further tax holiday that will allow almost zero taxation on those repatriated profits.  That certainly happened after 2004.  More of the good citizens then became bad citizens, and the amount of offshore cash has grown much faster since the 2004 repatriation holiday than before.

It's the Jobs, Stupid--support for the unemployed, not repatriation tax holidays for multinationals – Linda Beale - Mark Thoma over at Economist's View has an interesting graph on the topic of "how long will it take the labor market to recover?"  Although September's news was not as bad as expected--110,000 jobs created and thus official unemployment rate of 9.1% holding steady--it is still a far cry from good news.  I'm pleased to report that Detroit is doing better than expected.  While its unemployment rate is still above the national average, it has come down faster from its exceptionally high rate.  And the people that I know best that were hardest hit are now back at work.  One worked for a business that made auto parts, and had been laid off for three years.  He got his old job back three weeks ago and has been estatically working overtime until he is too tired to get up on a Sunday morning!  The other is a construction worker who has suddenly gotten more potential jobs than he can handle.  Great news.  They and their families can now breathe somewhat of a sigh of relief.   They are out there buying groceries and clothing and gas at a higher rate than before, and that puts more dollars in the cash registers of local businesses.  A win all the way around. That's why the most important thing for Congress to focus on right now is jobs.  

GE Head Calls for Lower Corp Taxes; but GE Paid Zero!: The corporate titan President Obama picked to help create millions of new jobs thinks lowering corporate taxes and eliminating all tax loopholes for U.S. companies will put more Americans to work. General Electric Chairman Jeff Immelt sits down with Lesley Stahl to discuss the creation of jobs, the U.S. business climate and his own company, General Electric, in a 60 MINUTES segment to be broadcast Sunday, Oct. 9 (7:00-8:00 PM, ET/PT) on the CBS Television Network. General Electric makes 60 percent of its profit overseas, where the corporate taxes are lower than in the U.S. Immelt thinks the U.S. needs to follow suit. “I think we should have basically the same tax policy that Germany, Japan, the UK – everybody else has, which is a tax rate in the mid-20s and no loopholes. Zero,” he tells Stahl. “The U.S. has the most antiquated tax system. And that means some people are going to pay more taxes, and some people are going to pay less,” Immelt says. But GE paid NO TAXES on $5 billion in profits last year!

Occupy Wall Street’s Misconceptions According to Obama’s Job Czar - In a 60 Minutes interview on Sunday, Obama’s chosen go-to guy on job creation, General Electric’s chairman and CEO Jeffrey Immelt, our Jobs Czar, had this to say about the misconceptions of those protesting Wall Street in over 800 cities across the nation by the tens of thousands, I want you to root for me. Look, every one in Germany roots for Siemens, everyone in Japan roots for Toshiba, everyone in China roots for China South Rail, I want you to say, win GE. I think this notion that it’s the population of the US against big companies is just wrong. Well Jeff, let’s take an unvarnished look at the differences between those companies in Japan and Germany as regards the ratio of pay for a ceo to that of the average worker compared to ceo’s like yourself in American corporations, shall we? In Japan the ratio of pay for a ceo compared to that of the average worker is…… 11 to 1, In Germany that ratio expands to a dizzying……  12 to 1, and in the the old US of A  Jeff ?….. it’s 475 to 1.

Obama Endorses Sarbanes-Oxley Reform To Make Small IPOs Easier - President Barack Obama backed the recommendations of his jobs council to amend the Sarbanes-Oxley regulations to make it easier for small companies to go public.  The jobs council, headed by GE CEO Jeff Immelt and including Sheryl Sandberg and Steve Case, found that the Sarbanes-Oxley was a key factor in reducing the number of IPOs smaller than $50 million from 80 percent of all IPOs in the 1990s to 20 percent in the 2000s..

Financial Speculation Taxes - OMB Watch points us to the idea that:  Financial Taxes Can Raise Revenues, May Help Stabilize Markets  The congressional Super Committee, tasked with forging a $1.2 trillion deficit reduction package by Thanksgiving, is currently deliberating on which revenues — if any — to raise and to include in its plan. With Wall Street at the center of the 2008 economic collapse, the committee should look to a pair of revenue options that would fulfill the dual roles of addressing risks to the economy posed by Wall Street and raising much needed revenue: a financial speculation tax and a financial crisis responsibility fee on large financial institutions.

R&D Credit--no reason to make it permanent - – Linda Beale - Corporate lobbyists are pursuing several moving targets with a GOP dominated House interested in giving them most of what they want (lower rates, repatriation holiday, R&D credit made permanent) and various Democrats like Senate Finance Chair Max Baucus, always a friend to the big corporations, are avidly pursuing making the credit permanent.  Max Baucus  and Orrin Hatch introduced legislation (S. 1577) Sept. 19 to simplify the credit, raise the value of the alternative simplified credit, and make it permanent (183 DTR G-2, 9/21/11) (BNA).  The problem with the R&D credit is that it does not achieve its purpose.  Companies get a deduction for research expenses, but the credit was enacted as a supposed stimulus to more R&D being done in the United States.  However, there's no indication that it really increases R&D.  Companies will do R&D with or without the credit--as they did for our years when US innovations led the world.

On the Leaked Volcker Rule - The American Banker leaked part of a draft of the regulators’ proposed Volcker Rule (pdf) last week, which has caused quite a stir. The first thing to note is that the American Banker did not leak the most important part: the text of the proposed rule. Instead, they leaked the “Supplementary Information” (which I call just the “Supplement”), the core of which is a lengthy, section-by-section analysis of the proposed rule. In addition, the leaked portion does not include the Appendices to the proposed rule, which, from reading the Supplement, appear to be very important — Appendix B, for example, contains a “detailed commentary regarding how the Agencies propose to identify permitted market making-related activities,” which is a core issue. First I’ll give some general thoughts on the proposed Volcker Rule, and then, because I’m such a generous guy, I’ll go ahead and highlight some of the most important pressure points in the proposed rule.

Volcker Rule gets FDIC approval -- The board of the Federal Deposit Insurance Corp. on Tuesday approved a draft version of a rule aimed at cracking down on big banks that make risky bets with their own money or own hedge funds. The FDIC board unanimously passed the draft rule, agreeing it should be published so regulators can collect public comment. At the same time, Federal Reserve published the rule on its website, soliciting comment. Named for its creator, former Federal Reserve chief Paul Volcker, the rule aims to rein in1 how banks use their own accounts to chase profits, what's known as proprietary trading. The Volcker rule was part of the massive Wall Street reforms passed in 20102 and was heralded as one of the sharpest tools available to prevent future financial crisis by chasing speculation and risk out of the banking system. But the draft rule would still allow3 the big banks to own a 3% stake in hedge funds and allow banks to "make markets" and risky bets for their clients, using their money.

Banking Industry Revamp Moves Step Closer to Law - Wall Street is bracing for major changes from a new rule that would overhaul how the banking industry conducts its trading. The Federal Deposit Insurance Corporation1 unanimously approved on Tuesday an initial version of the regulation, known as the Volcker Rule2. Two other regulators followed suit, and the Securities and Exchange Commission3 is scheduled to vote on Wednesday. The rule, intended to limit trading when the bank’s money is at risk, a sweet spot for banks, is seen as a centerpiece of the sprawling financial overhaul of the Dodd-Frank Act of 2010. In anticipation, the nation’s biggest banks, like Goldman Sachs4 and Bank of America5, have already shut down their stand-alone proprietary trading desks. But the proposal on Tuesday included several unfriendly surprises for the banks, including provisions that scrutinize how they generate revenue, award compensation and track their compliance with the Volcker Rule. Such measures, analysts say, could significantly change the way Wall Street does business.

Banks to be forced to bolster liquid assets: FT (Reuters) - Global banking regulators will press ahead with the first worldwide effort to force banks to hold more liquid assets, the chairman of the Basel Committee on Banking Supervision said in an interview with the Financial Times on Monday. Stefan Ingves, who also heads the Swedish central bank, said the Basel group plans to put uniform implementation of the Basel III reforms at the top of its agenda. The measures, which will also force banks to cut back on short-term funding, have come under scrutiny from some of the 27 member countries who say the rule changes could damage the broader economy. The reforms, which were agreed to by the member states, will force banks to hold more top-quality capital against unexpected losses, but there are rising concerns that some countries will not stick to the agreement. "It is going to be all about implementation in as uniform a way as possible. Balkanisation of the rules over the long term is not in anyone's interest," Ingves said.

Fed Oversight of Nonbanks Is Weighed - — Financial companies that are not banks but have more than $50 billion in assets and $20 billion in debt could be regulated by the Federal Reserve and required to meet tougher standards, according to a proposed rule1 issued Tuesday by the nation’s top financial regulatory board.  The Financial Stability Oversight Council voted unanimously to seek public comment on a proposed rule that laid out the standards by which insurance companies, hedge funds, asset managers and the like could fall under stricter regulation. Many companies and trade groups lobbied hard for months in hopes that their companies would not fall under the purview of the law, fearing increased regulation. Treasury Department officials declined to estimate how many nonbank financial companies might meet the proposed standards. There are approximately 30 banks in the United States with more than $50 billion in assets. Several companies are obvious candidates, and a number of them have already submitted comments to the council or had meetings with Treasury Department officials on earlier drafts of the proposed rule.

Too Big to Fail Not Fixed, Despite Dodd-Frank: Simon Johnson - Here we go again. Major shocks potentially threaten the solvency of some of the world’s largest financial institutions. Concerns grow over the ability of European leaders to shore up their banks, which are reeling from a sovereign-debt crisis. In the U.S., the shares of some large banks are trading at less than book value, while creditor confidence crumbles. Private conversations among economists, regulators and fund managers turn naturally to so-called resolution powers — the expanded ability to take over and wind down private financial companies granted to federal regulators by the Dodd-Frank financial reform law. The proponents of these powers, including Tim Geithner and Henry Paulson, the current and former U.S. Treasury secretaries, argue that the absence of such authority in the fall of 2008 contributed to the financial panic. According to this line of thought, if only the Federal Deposit Insurance Corp. had the power to manage the orderly liquidation of big banks and nonbank financial companies, the government could have decided which creditors to protect and on what basis. This would have helped restore confidence, it is argued.

Fitch Installs Its Own Glass-Steagall - Yves Smith - Fitch tries to position itself as the “we try harder” ratings agency, taking more aggressive ratings actions relative to Standard and Poor’s and Moody’s. For instance, it started issuing warnings about and then downgrading CMBS before its two larger competitors pre-crisis. There have been times in the last couple of years when the GFC-chastened ratings agencies appeared to be racing one another back to some position of credibility faster than the world could bear. Well, that race is surely over now, with Fitch announcing after US trading the mother of all downgrade watches on, well, everybody. You simply must read the rationale for the reviews posted below from Zero Hedge. It is, in effect, a private version of Glass-Steagall – the Depression era legislation that separated the trading and commercial banks in terms of public supports. Fitch is downgrading pretty much any “trading” or “universal” bank that is reliant on trading, short term wholesale funding and leverage. To avoid downgrade they will have to “maintain particularly strong levels of retail funding, liquidity and capital”. Well, global regulators have done their best but dithered, really. So here we are. A private sector wake up call. Go Fitch!

Barney Frank and the need for a risk-based bank fee - Linda Beale - At least there still seem to be some who are interested in directing their firepower at those who have caused the recession and job losses and whose activities could well cause further harm.  Barney Frank has written a letter to the so-called 'supercommittee' asking that they include  the risk-based bank fee assessible against 'too big to fail' banks as part of the deficit reduction package.  See Letter.  Given that the very existence of too big to fail banks implies that the government will again have to come to their aid, it seems entirely appropriate to have these banks pay into the Treasury to recognize the guarantee they are being provided.  Further, banks have made good profits since the crisis because of their ability to borrow money extraordinarily cheaply from the Fed, and they have nonetheless continued to demand fairly steep returns for their lending and other activities.  Having them return part of that largesse through a risk-based fee is a reasonable approach that should also help to discourage the excessive speculative risk-taking in which they engaged.

The hysterical (and deceptive) conservative response to Elizabeth Warren - As I noted here the other day, the outpouring of rage in response to Elizabeth Warren’s Senate candidacy has been a real hoot to watch. Some on the right have falsely insisted that in that viral video rebutting the bogus “class warfare” charge, Warren secretly asserted total authority over your property. George Will discerned in Warren’s remarks a “collectivist agenda,” under which the “collectivity” is “entitled to take as much as it pleases” from the individual — even though Warren asserted nothing of the kind. Now we’ve got the most hilarious version of this genre yet: A new video, courtesy of the Massachusetts GOP, that insinuates that Warren favors violent class warfare: The video conflates some earlier comments Warren made about “throwing rocks” with the footage in the viral video, in order to imply that Warren is a class warrior who favors mass redistritution of wealth while harboring quasi-violent hostility towards the wealthy.

Financial Romanticism - Krugman - One line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world. Sorry, but that’s a fantasy. First of all, bank regulation is important even in the absence of bailouts. Don’t trust me, trust Adam Smith.  Smith, having witnessed such a crisis, favored bank regulations, declaring that those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments. Second, there are in fact very good reasons to intervene to support banks during a financial crisis. Bagehot knew it; Diamond and Dybvig showed it theoretically; and it remains true. Letting a financial crisis spread is very dangerous. Finally, even if you persuade yourself that the moral hazard created by financial firefighting outweighs the benefits of avoiding a 1931-style cascading crisis, the fact is that policy makers will intervene. Hank Paulson set out to make Lehman an example; two days later he was staring into the abyss.

If Banks Are Outlawed, Only Outlaws Will Have Banks – Krugman - Yglesias tells us that some Occupy Wall Street protesters have picked up Ron Paulish monetary ideas — although some know better. I thought I’d say a word about one particular idea that sounds plausible to some people but is actually quite wrong: banning fractional reserve banking. So what would happen if you simply tried to eliminate fractional reserve banking? First of all, you would be trying to ban a genuinely productive activity. Dick Fuld banking may have been a bad thing, but Jimmy Stewart banking was very much a useful profession. Second, you would run smack into the problem of defining what constitutes a bank. . Any arrangement that borrows short and lends long, that offers investors claims that are liquid while using their funds to make illiquid investments is a bank in an economic sense — and is potentially subject to bank runs. Indeed, what we had in 2008 was mainly a run on shadow banks, on non-depository institutions. So, are you going to ban fractional reserve strategies by money market funds? Are you going to ban repo? Auction rate securities? Where does it stop?  To be fair, it’s difficult even to regulate shadow banking.  If you try to ban banks from, well, banking, all the banking is going to take place in the areas not subject to the ban, leaving you more vulnerable to crisis than before.

Rabbit-Hole Economics, by Paul Krugman - Reading the transcript of Tuesday’s Republican debate on the economy is, for anyone who has actually been following economic events these past few years, like falling down a rabbit hole. Suddenly, you find yourself in a fantasy world where nothing looks or behaves the way it does in real life. And since economic policy has to deal with the world we live in, not the fantasy world of the G.O.P.’s imagination, the prospect that one of these people may well be our next president is, frankly, terrifying. In the real world, recent events were a devastating refutation of the free-market orthodoxy that has ruled American politics these past three decades. Above all, the long crusade against financial regulation... But down the rabbit hole, none of that happened. We didn’t find ourselves in a crisis because of runaway private lenders like Countrywide Financial. We didn’t find ourselves in a crisis because Wall Street pretended that slicing, dicing and rearranging bad loans could somehow create AAA assets — and private rating agencies played along. No, in the universe of the Republican Party we found ourselves in a crisis because Representative Barney Frank forced helpless bankers to lend money to the undeserving poor.

Is The Levered ETF Tail Wagging The Market Dog? - Douglas Kass of Seabreeze Partners tells Andrew Ross Sorkin that levered ETFs "have turned the market into a casino on steroids. They accentuate the moves in every direction — the upside and the downside.” Sorkin thinks that levered ETFs were the source of Monday's stock market surge in the last 18 minutes of trading. "The Standard & Poor’s 500-stock index jumped more than 10 points with no news to account for the rally," he writes. Levered ETFs are a relatively recent innovation and a fast-growing business. Equity ETFs hold more than $15 billion in assets, according to The largest is ProShares UltraShort S&P 500 (SDS), with $2.7 billion in assets and average daily trading volume in excess of 50 million shares.. Overall, Sorkin estimates the total levered fund category at $1 trillion.

Bill Gross Suddenly Finding It Hard to Attract New Money - This is stacking up to be one of the worst years for high-profile money manager Bill Gross. His ill-timed bets on Treasury bonds have set his $242.2 billion Total Return Fund, the world’s largest bond fund, up for one of its poorest annual returns in a decade. And that has generated another blow: New money flowing into the fund has dramatically slowed in 2011, a stark contrast to the strong inflows seen in the previous few years. This year through the end of the third quarter, the fund attracted $183.5 million in new contributions, according to data compiled by fund tracker Lipper under the request of Dow Jones Newswires. The fund lured $17.6 billion in new money last year, $57.7 billion in 2009, and $20.4 billion in 2008. “For a fund with over $240 billion in it, an inflow of $180 million is close to zero,” . “Being on the wrong side of the Treasury bond market rally injured performance and reputation. When someone so visible makes a mistake it has large consequences.”

No-name Firm Takes Goldman's Crown; What Gives? - Program trading is a kind of basket trading usually involving a dozen or more stocks, and usually done by computer – high-frequency trading falls under this category. ZH made a big name for itself on the internet a few years ago by asking questions about Goldman's enormous volumes of program trades in 2009, questions that may have led to the scandal involving Sergei Aleynikov, the ex-Goldman trader who was arrested for trying to steal Goldman's computer-trading program and deliver it to a competitor. Readers might recall that at Aleynikov's arraignment that summer, a federal prosecutor asserted that Goldman was claiming that this program, if it fell into the "wrong hands," could be used to manipulate markets, a not-so-subtle admission that these computerized trading programs can be used to game the system by trading on knowledge gleaned fractions of a second ahead of the markets. In any case, Goldman traditionally sits atop the NYSE's weekly reports about program trading volumes. But as ZH notes, they "just lost their crown in that field" to a firm called Latour Trading.  All the other companies on the list are household names – Deutsche, Barclays, Merrill, etc. But just who the fuck is Latour Trading? How does an unknown company with a blank website lead the entire world in computerized stock trades?

FDIC backs ban on banks trading for own profit - The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote Tuesday. The ban on proprietary trading was required under last year's financial overhaul law. For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out. That's what happened during the 2008 financial crisis. The Federal Reserve has also approved the draft of the so-called Volcker Rule, which was named after former Fed Chairman Paul Volcker.The Securities and Exchange Commission and Treasury Department must still vote on it, and then the public has until January 13 to comment. The rule is expected to take effect next year after a final vote by all four regulators.Wall Street banks have complained that the ban on proprietary trading could prevent them from buying and selling investments that their customers might want. It would also put U.S. financial firms at a competitive disadvantage to those in other countries.

Goldman May Drop Bank Status: Hilder - Goldman Sachs and Morgan Stanley may consider dropping their status as bank holding companies to avoid expenses tied to the Volcker rule, said David Hilder, an analyst at Susquehanna Financial Group LLP.  The Volcker rule in its current form would impose costs on lenders and drive capital to non-bank market makers, causing the two New York-based firms to consider whether to stop being banks, Hilder said in a note yesterday, when four regulatory agencies issued a 298-page draft of the rule for public comment.  Goldman Sachs and Morgan Stanley were the biggest U.S. securities firms before they converted to bank holding companies after the September 2008 bankruptcy of Lehman Brothers Holdings Inc. Both became subject to regulation by the Federal Reserve and won access to central bank programs such as the discount window, which are designed to protect deposit-taking banks.  “The regulators have proposed a massive new compliance burden on banks to prove that their market-making activities are just that, and not proprietary trading in disguise,” wrote Hilder

Occupiers on Bank Law: Fix It - If the Occupy Wall Street protests stand for anything they stand for a popular demand to rein in the banks and to bail out the victims of bank excesses.  Those of us who study banking law for a living have an important role as public intellectuals, to grapple with where the banking rules broke down and how to fix them. We still have a great deal of work to do.   Dodd-Frank fell short.  It consisted of a series of half-measures and punts to various agencies.  Break up banks that are too big to fail?  Dodd-Frank instructed the FSOC to think about it but not too much, and so far FSOC has followed its mandate.  Limit executive compensation? Instead we got shareholder say on pay.  Separate utility functions of banks from casino gambling?  In lieu of restoring Glass-Steagall, the watered-down Volcker Rule. Require banks to prevent every preventable foreclosure? Hasn't happened. Make them offer transparent and competitive retail credit and savings products?  Still waiting on a CFPB director appointment before we can work on that item. Banks don’t make anything; they either provide payment and intermediation services, or they engage in various forms of gambling with other people’s money. 

Wall Street and Silicon Valley - Whenever someone criticizes “Wall Street,” someone else tries to defend Wall Street by saying that without it we wouldn’t have Silicon Valley and all of its wonders. Most recently, A.S. at Free Exchange says this:“What would Silicon Valley have been without venture capital and private equity? Apple’s spectacular growth was made possible by the capital it raised in financial markets (it is a public company). As critics of Wall Street go, I probably find this more annoying than most because, well, I worked in Silicon Valley. Most of these comments are obvious, but here goes anyway.

  • Venture capital has been around for centuries; in its current form, it dates back to the 1950s. Venetian bankers were good at it back before the Renaissance.
  • (Private equity? What does private equity have to do with HP, Intel, Apple, Oracle, Sun, etc.?
  • The initial public offering and the secondary public offering (as in “[Apple] is a public company”) have been around for centuries.
  • Credit cards have been around since the 1950s. But that’s just when the current technology (plastic) was introduced; as a type of finance, there are just unsecured personal lending, which has been around for millennia.
  • Ditto for bank loans, except that few if any small business loans are securitized

My Advice to the Occupy Wall Street Protesters - Taibbi - I've been down to "Occupy Wall Street" twice now, and I love it. The protests building at Liberty Square and spreading over Lower Manhattan are a great thing, the logical answer to the Tea Party and a long-overdue middle finger to the financial elite. The protesters picked the right target and, through their refusal to disband after just one day, the right tactic, showing the public at large that the movement against Wall Street has stamina, resolve and growing popular appeal.But... there's a but. And for me this is a deeply personal thing, because this issue of how to combat Wall Street corruption has consumed my life for years now, and it's hard for me not to see where Occupy Wall Street could be better and more dangerous. I'm guessing, for instance, that the banks were secretly thrilled in the early going of the protests, sure they'd won round one of the messaging war. Why? Because after a decade of unparalleled thievery and corruption, with tens of millions entering the ranks of the hungry thanks to artificially inflated commodity prices, and millions more displaced from their homes by corruption in the mortgage markets, the headline from the first week of protests against the financial-services sector was an old cop macing a quartet of college girls.

Chanos, Gross Understand Wall Street Protest Paulson Rejects. - Demonstrators in New York marched to the upscale Upper East Side neighborhood as the Occupy Wall Street movement that started last month in New York’s financial district spread to other U.S. cities.. Hedge-fund manager John Paulson, who became a billionaire by betting against the U.S. housing market and then profited from the recovery of banks, criticized the movement. His townhouse was among those targeted by marchers who left a fake tax-refund check made out for $5 billion on his doorstep, which was barricaded by police. “Paulson & Co. and its employees have paid hundreds of millions in New York City and New York State taxes in recent years and have created over 100 high paying jobs in New York City since its formation,” the $30 billion hedge fund said yesterday in a statement. “Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow.” The protest march, which organizers called a “billionaires walking tour,” targeted other executives including Jamie Dimon, who runs JPMorgan Chase & Co., and billionaire oilman David Koch.

What Occupy Wall Street, the Arab Spring, the Chilean students, and other global protest movements all have in common. - Roubini - Social and political instability has gone global. This year alone, masses of people have poured into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the Occupy Wall Street movement in New York and across the United States. While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. There is high unemployment and underemployment in advanced and emerging economies. There is resentment against corruption, including legalized forms like lobbying. Young people have inadequate skills and education to compete in a globalized world. And income and wealth inequality is sharply rising in advanced and fast-growing emerging-market economies.

Geithner on Wall Street Prosecutions: Just You Wait! - video -Tim Geithner went on CNBC today and said that the Administration is getting right on the whole “prosecuting the people who defrauded the economy” thing.  Asked on CNBC about the Occupy Wall Street movement’s frustrations over the lack of criminal charges related to the financial crisis, Geithner said action is on the way. “You’ve seen very, very dramatic enforcement actions already by the enforcement authorities across the U.S. government, and I’m sure you’re going to see more to come. You should stay tuned for that,” he said.So keep in mind here, Geithner said that the Administration had already undertaken “dramatic enforcement actions,” so any future ones coming would be along that continuum. So look out Raj Rajaratnam, you might get 11 more years! And maybe we’ll see twice as tough consent orders from the OCC! What’s 2 times 0, again?

Constitutional Moments: The People’s Voice - Today we face a crushing burden of foreclosures, dropping incomes, and a financial elite that has bought our government. The elite consensus is powerful enough to prevent change, no matter who is elected. The situation seems, at least in electoral terms, hopeless. Yet, America has been here before, and has shown remarkable resilience in the darkest of times.  So just how do we get the debate we deserve? How do we root out the corruption, greed, and fraud in our system? Clearly, the root of much evil in our system of government comes from the financing of political campaigns by powerful interests. And the Supreme Court has said that money is speech, and thus, protected by the Constitution. So we must pass a Constitutional amendment to speak back to the Supreme Court, and assert the primacy of government by the people. But how do we do this? How does one pass a Constitutional amendment in the American system to ban money from politics? It's not a question with an obvious answer, but history has some clues.  The basic path to serious Constitutional change is almost always the same -- it requires organizational focus by a dedicated small group, a willingness to build alliances across factional and regional lines, a belief in playing hardball, and a strong and sustained outcry by a large group of citizens.

Bailed-out banks issued riskier loans - Banks that received federal bailout money ended up approving riskier loans and shifting capital toward risky investments after getting government help, say University of Michigan researchers. In a new study on risk-taking by banks that received funds from the Troubled Asset Relief Program, finance professors Ran Duchin and Denis Sosyura of Michigan's Ross School of Business found that the overall risk level of TARP banks increased 10 percent. Further, these banks were no more likely to issue loans, overall, than non-TARP banks, in contrast to the declared objective of the federal program to increase lending. The U.S. government established TARP in late 2008—the largest federal investment program in American history—to increase financial stability and stimulate lending to U.S. consumers and businesses. The Capital Purchase Program, the first and largest TARP initiative, invested $205 billion in more than 700 financial institutions in 2008-09."While we do not find a significant effect of TARP on the aggregate amount of originated credit, our results do suggest a considerable impact of TARP on the risk of originated credit," Duchin said.

Bank Profits Depend on Debt-Writedown ‘Abomination’ in Forecast -  Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results. Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote. Investor fears of a Greek default, stalled U.S. economic recovery and tougher industry regulations have rattled markets, snapping banks’ trading streaks and rekindling doubts about their creditworthiness. Prices for Bank of America’s credit derivatives -- used by traders to bet on the likelihood of the firm’s default -- rose by 34 percent during the second quarter, while Morgan Stanley’s doubled and Goldman Sachs Group Inc.’s surged 86 percent. “What’s on investors’ minds are the macroeconomic issues, as reflected by the interbank market in Europe, the very low yields on U.S. Treasuries and recent data on economic growth, jobs and housing,”

Bankers' Salaries Vs. Everyone Else's - Why are the Occupy Wall Streeters so angry at bankers? This chart might give you some idea: Via New York State Comptroller report. That chart is from a new report from the New York State Comptroller’s office on the securities industry in New York City. It shows that the average salary in the industry in 2010 was $361,330 — five and a half times the average salary in the rest of the private sector in the city ($66,120). By contrast, 30 years ago such salaries were only twice as high as in the rest of the private sector. Last year helped contribute to the widening of that gap, too.

Bank Layoffs Exceed 100,000: Where the Cuts Are -  Banks are shedding jobs worldwide as stricter regulations and a tough second quarter for trading income take their toll on investment banking units in particular.  JPMorgan said on Thursday it would cut 1,000 jobs from its investment banking division over the next 18 months.The layoff plan brings staff cuts announced this year or reported to be in the works at U.S. and European banks to just over 100,000 — some to be lost over the course of three- or four-year programs. This year's job cut estimates are also likely to be conservative figures, as not all banks trimming teams have publicly announced layoffs, and the number does not take smaller investment banks, boutiques and brokers into account. The following is a summary of total cuts announced by major banks:

Wall Street Sees ‘No Exit’ From Financial Decline as Bankers Fret Future - Bloomberg: Wall Street executives, facing demonstrators camped for a fourth week in New York’s financial district, say they’re anxious and angry for other reasons. An era of decline and disappointment for bankers may not end for years, according to interviews with more than two dozen executives and investors. Blaming government interference and persecution, they say there isn’t enough global stability, leverage or risk appetite to triumph in the current slump. “I don’t think it’s a time to make money -- this is a time to rig for survival,” said Charles Stevenson, 64, president of hedge fund Navigator Group Inc. and head of the co-op board at 740 Park Ave. The building, home to Blackstone Group LP Chairman Stephen Schwarzman and CIT Group Inc. Chief Executive Officer John Thain, was among those picketed by protesters yesterday. “The future is not going to be like a past we knew,” he said. “There’s no exit from this morass.”

Hard Times On Wall Street - Krugman - Max Abelson reports on the sorrows of the financial elite: Options Group’s Karp said he met last month over tea at the Gramercy Park Hotel in New York with a trader who made $500,000 last year at one of the six largest U.S. banks. The trader, a 27-year-old Ivy League graduate, complained that he has worked harder this year and will be paid less. The headhunter told him to stay put and collect his bonus. “This is very demoralizing to people,” Karp said. “Especially young guys who have gone to college and wanted to come onto the Street, having dreams of becoming millionaires.” Meanwhile, Catherine Rampell reports on Bankers’ Salaries vs. Everyone Else’s, telling us that the average salary in the industry in 2010 was $361,330 — five and a half times the average salary in the rest of the private sector in the city ($66,120). By contrast, 30 years ago such salaries were only twice as high as in the rest of the private sector. It would all be hilariously funny if these people weren’t destroying the world.

Charlie Stross Discovers that The WSJ has been Teaching to the Test - And, therefore, ripping off its (at least European) advertisers: The Guardian has just broken a new story about News International: Wall Street Journal circulation scam claims senior Murdoch executive: Andrew Langhoff resigns as European publishing chief after exposure of secret channels of cash to help boost sales figures. To quote a little bit of the extensive — and hair-raising — article: One of Rupert Murdoch's most senior European executives has resigned following Guardian inquiries about a circulation scam at News Corporation's flagship newspaper, the Wall Street Journal. The Guardian found evidence that the Journal had been channelling money through European companies in order to secretly buy thousands of copies of its own paper at a knock-down rate, misleading readers and advertisers about the Journal's true circulation.  Misleading is British-newspaper-speak for "defrauding." As Charlie explains:  [A]udited circulation figures are the bedrock on which advertising revenue is based — the higher the ABC figures, the more the publisher can charge advertisers per inch of paper. This kind of circulation ramping looks like bare-faced fraud.

Wall Street Journal Stole From Advertisers via Circulation Scam - Yves Smith - If you had any doubts the Murdoch’s NewsCorp was a criminal enterprise, this story by Nick Davies of the Guardian (who has been out in front on NewsCorp reporting) should settle it.  In case you managed to miss it, NewsCorp International has been embroiled in a widening scandal about the hacking of cell phones in its now shuttered tabloid News of the World, which led to the resignation of the head of NewsCorp International, Rebekah Brooks, and has put heir apparent James Murdoch in a perilous position. It has also led to what amounts to serious, and hopefully permanent break in the status Murdoch held in England as a kingmaker.  We now see a calculated scam on the business side designed to defraud advertisers by boosting circulation figures (ad rates are based on circulation, so higher circulation = more revenues). This is fraud, pure and simple. The operation was material, accounting for a full 16% of the Journal’s European sales. And the former Dow Jones CEO Les Hinton was told of the scam, and in predictable fashion, nothing was done and the whistleblower was fired.

News Corp’s ethics cancer grows - The latest shenanigans at News Corp are particularly shocking because they took place at the Wall Street Journal — the flagship publication which was meant to be insulated, at least in part, from Murdoch sleaziness. But this is really bad: the WSJ Europe was telling its advertisers that it had a circulation of 75,000 — but in fact fully 31,000 of those copies were bought for as little as 1 cent apiece by companies which never saw them, and pawned them off onto random students. And when one of those companies decided that even 1 cent per copy was too much to pay, the WSJ decided to simply buy up the papers itself, with its own money. Oh, and the WSJ also demolished the wall between editorial and advertising, promising — and delivering — editorial coverage to the companies it was doing business with. There was a whistleblower, too, who wound up with the sack: The whistleblower, who had worked for Dow Jones for 9 years, was made redundant in January.

Patterns Of Misconduct -  Krugman - Via Charlie Stross, I see that the Murdoch empire has another scandal — this time involving misleading advertisers rather than readers, by inflating circulation numbers. Wow. And yet we should have expected something like this to come to light. My sense, after 11 years of punditizing, is that people are complicated, but gangs of people less so. Individuals are often mixed in their behavior: incorruptible politicians may cheat on their spouses, political scoundrels may have impeccable personal lives. But groups, like a politician’s inner circle or the management team of a media empire, tend to behave similarly on multiple fronts. If they lie and cheat routinely in one domain, they tend to do it in others as well. So the Murdoch people lie routinely about politics and policy; they breach all normal rules of conduct by hacking into peoples’ phones. They really should curb their proclivities when it comes to advertisers — I mean, truth and justice are disposable, but this is business! But they really can’t help themselves, because this is who and what they are.

Reuters vs. Reuters: News agency makes an ass of itself by trying to connect George Soros to Occupy Wall Street - But some Reuters people realize it, and call their company out! “There was no story, and nothing to report.” Reuters then backs down, changing the story line on its report.  Or does it?  It all started with this report from Reuters, suggesting a link between one of the right wing’s major freak-out figures, George Soros (who does fund some liberal causes) and Occupy Wall Street.

Secret Informant Surfaces in BNY Currency Probe - For a decade, Grant Wilson toiled on a small trading desk at Bank of New York Mellon Corp. in Pittsburgh, buying and selling currencies for the bank's biggest clients.  Mr. Wilson also had another job: For the last two of those years he was a secret whistleblower, assisting currency-trading investigations of BNY Mellon, according to people familiar with the matter. His input culminated with the filing last week of separate civil lawsuits by the Justice Department in federal court and New York attorney general in state court alleging that BNY Mellon systematically overcharged investors on billions of dollars of currency trades. The suit is seeking "hundreds of millions of dollars in civil penalties."

Unofficial Problem Bank list declines to 983 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 7, 2011. Changes and comments from surferdude808:  As anticipated, it was a quiet week for changes to the Unofficial Problem Bank List. This week, there were three removals, which leaves the list with 983 institutions and assets of $404.1 billion. A year ago, there were 877 institutions with assets of $417.3 billion.

Why Countrywide bankruptcy likely won’t solve BofA MBS problems - The drumbeat of calls for Bank of America to put what remains of Countrywide into Chapter 11 has grown so loud and relentless that according to a report last month by Bloomberg, BofA is actually considering what's been called the "nuclear option." Resorting to a Countrywide Chapter 11 would be fraught with unknown but surely devastating consequences for a commercial bank, as bankruptcy guru Harvey Miller of Weil, Gotshal & Manges explained in a fascinating Bloomberg video. But more significantly, there's a good chance it wouldn't accomplish the intended goal of roping off BofA's liability for Countrywide's mortgage-backed securities mess. If Bank of America can succeed in limiting its MBS litigation losses to Countrywide's remaining assets, it will have to show that it didn't assume liability for Countrywide's conduct when it acquired the mortgage company in 2008. That's known as successor liability, and it was one of the key questions Bank of New York Mellon considered as it weighed the fairness of BofA's proposed $8.5 billion settlement with Countrywide MBS investors. BNY Mellon's expert, Professor Robert Daines of Stanford Law School, produced a 58-page treatise that concluded it would be very difficult for MBS investors to establish BofA's successor liability.

Robosigning 2.0: Mortgage Foreclosure File Reviewers - Do you have what it takes to be a Mortgage Foreclosure File Reviewer Level 2?  An intrepid researcher forwarded to me a job ad for a mortgage foreclosure reviewer who will be reviewing bank foreclosures per the OCC/Fed servicing fraud consent orders. I have seldom seen a document that says more about the bullshit malarkey that the OCC and Fed are trying to pass off to cover for the banks than this job ad. I think it demolishes even the thin fiction that the OCC/Fed servicing consent orders are anything more than Potemkin villages. Instead, what we have here is nothing less than a federally-blessed Robosigning 2.0. The ad is for a Mortgage Foreclosure File Reviewer Level 2 (whatever Level 2 means).  It states that the:  Key responsibility will be to determine if there was financial harm to the borrower. Now I'm just a simple law professor, but gosh, these sure look like legal questions to me. A determination of whether there is financial harm (as in whether the harm is legally cognizable) is a question of law, not a question of fact--it would go to a judge, not a jury.

More Proof of Federal Coverup of Mortgage Fraud: Robosigner-Equivalents Hired to Review Foreclosure Files in Required Audits - Yves Smith - Georgetown law professor and securitization expert Adam Levitin has come upon a real doozy in terms of how banking regulators aren’t even bothering to mount a serious pretense that their much-touted efforts to rein in mortgage abuses are anything more than a coverup for the banks. And he is suitably irate. If you’ve been following this sorry saga, you may recall that in April of this year, major servicers entered into servicing consent orders with the OCC and Fed. They were clearly all for show. Rather than observer the normal procedure, and have a regulator conduct the exams, the consent orders instead provide for the banks to hire soi-disant independent parties to conduct the reviews. As we and more recently Francine McKenna pointed out, there is pretty much no one with a brand name that is worth renting that doesn’t either have a relationship with the big banks or is keen to develop one. Since the reviews won’t be made public, there is every reason to expect that any problems reported will be strictly cosmetic. As low as our expectations were, the banks have managed to undershoot them on the downside. Levitin reports on an ad via a temp agency (!) for the sort of foot soldiers who will be performing the audits. Note that this means, contra McKenna, that the actual work won’t be done by experienced professional staff of major firms. Remember, the job is to determine whether “a there was financial harm to the borrower.” As Levitin points out, this involves making multiple legal determinations, such as whether the foreclosure was executed in compliance with relevant state and Federal laws (he’s not making that up, you can see it in the job description). So do they want to hire a lawyer? Nah, you only need a year of “mortgage serviceing/foreclosure experience”. An applicant could be a former robosigner or a servicer call center employee. And that’s consistent with the pay, which is a mere $23 an hour. Home cleaners make more than that in the NY metro area.

Bernstein Liebhard LLP Announces Filing of a Class Action against MERS and Its Members -- Bernstein Liebhard LLP, with David P. Joyce, Prosecuting Attorney for Geauga County, Ohio, announced today that a lawsuit has been filed in the Geauga County Court of Common Pleas by Plaintiff Geauga County, on behalf of itself and all other Ohio counties, (the "Class") against MERSCORP, Inc., Mortgage Electronic Registration System, Inc. ("MERS"), and MERS's members (collectively, "Defendants").  In the class action complaint, Plaintiff Geauga County, on behalf of itself and all other Ohio counties, alleges violations of Ohio state law arising from Defendants' failure to record intermediate mortgage assignments in, and pay the attendant county recording fees to, Ohio county recording offices. In failing to record, Defendants systematically broke chains of title throughout Ohio counties' public land records by creating "gaps" due to missing mortgage assignments they failed to record, or by recording patently false and/or misleading mortgage assignments. Defendants' purposeful failure to record has eviscerated the accuracy of Ohio counties' public land records, rendering them unreliable and unverifiable -- damage to public land records that may never be entirely remedied.

Beau Biden on Chris Hayes MSNBC - Biden starts at 11:56 and given his view of the mortgage mess.

Mortgage Servicing – Examination Procedures - Consumer Financial Protection Bureau - After completing the risk assessment and examination scoping, examiners should use these procedures, in conjunction with the compliance management system review procedures, to conduct a mortgage servicing examination. The examination procedures contain a series of modules, grouping similar requirements together. Examination Objectives:

  1. To assess the quality of the regulated entity’s compliance risk management systems, including internal controls and policies and procedures, for preventing violations of federal consumer financial law in its mortgage servicing business.
  2. To identify acts or practices that materially increase the risk of violations of federal consumer financial law in connection with mortgage servicing.
  3. To gather facts that help determine whether a regulated entity engages in acts or practices that are likely to violate federal consumer financial law in connection with mortgage servicing.
  4. To determine, in consultation with Headquarters, whether a violation of a federal consumer financial law has occurred and whether further supervisory or enforcement actions are appropriate.

High Stakes Battle in Credit War - The latest battle in the ongoing war for the future of financial intermediation is currently unfolding in the high balance mortgage space. As of October 1, the Federal government’s agencies – the Federal Housing Administration, Fannie Mae, and Freddie Mac – are unable to guarantee or purchase loans with unpaid principal balances in excess of $625,000. This means that households seeking to borrow more than this amount will be thrown to the mercy of the market. The outcome of this battle will be telling because if the private sector cannot be trusted to set the terms and conditions for collateralized loans made to high income households, it’s not much of a leap to suspect the war will end in the full socialization of credit risk. The reduction in the balance of loans eligible for purchase by Fannie Mae and Freddie Mac affects a small number of housing markets. According to an analysis of the change from Genworth Financial, only 86 of 3,143 U.S. counties (2.7%) had pre-October borrowing limits in excess of $625,000. Those that did were concentrated along the coasts – New York, New Jersey, the San Francisco Bay Area, and Washington, D.C. – and playgrounds for the rich like the ski resort towns of the Colorado, Utah, and Idaho, as well as Honolulu and Key West, Florida.

Sharp rise in foreclosures as banks move in - More U.S. homes are entering the foreclosure process, but they're taking ever longer to get sold or repossessed by lenders.  The number of U.S. homes that received a first-time default notice during the July to September quarter increased 14 percent compared to the second quarter of the year, RealtyTrac Inc. said Thursday. That increase signals banks are moving more aggressively now against borrowers who have fallen behind on their mortgage payments than they have since industrywide foreclosure processing problems emerged last fall. Those problems resulted in a sharp drop in foreclosure activity this year. The surge in default notices means homeowners who haven't kept up their mortgage payments could now end up on the foreclosure path sooner.

Third-Quarter Rise in Foreclosure Filings Is Just the Start: RealtyTrac - Data released by RealtyTrac Thursday shows that foreclosure filings – including default notices, scheduled auctions, and bank repossessions – were reported on 610,337 properties in the third quarter of this year. That translates to one in every 213 U.S. housing units with a foreclosure filing during the three-month period. The third-quarter tally represents an increase of less than 1 percent from the previous quarter – 0.35 percent to be exact – but is down 34 percent from the third quarter of 2010. It’s just a marginal quarterly increase, but it breaks a trend of three consecutive quarterly declines that started late last year. RealtyTrac says it looks as though foreclosure activity is about to do an about-face from the falloff that set in after evidence of robo-signing surfaced. James Saccacio, RealtyTrac’s CEO, describes foreclosure activity since last October as “mired,” brought on by the robo-signing controversy that sparked a flurry of investigations into servicers’ foreclosure procedures and paperwork. “While foreclosure activity in September and the third quarter continued to register well below levels from a year ago, there is evidence that this temporary downward trend is about to change direction, with foreclosure activity slowly beginning to ramp back up.”

RealtyTrac: 3Q Foreclosure Filings Down 34% On Year - Third-quarter foreclosures fell 34% from a year earlier, but edged up slightly from the previous quarter, a sign foreclosure activity may be slowly picking up, according to the latest report from market researcher RealtyTrac.  The number of foreclosure filings in the third quarter edged up less than 1% sequentially, reversing a trend of three consecutive quarters of declines. Default notices, scheduled auctions and bank repossessions were reported on 610,337 U.S. properties in the latest quarter. One in every 213 U.S. housing units had a foreclosure filing during the quarter.  In September, there were 214,855 U.S. properties in varying stages of foreclosure, down 38% from last year and 6% from the previous month. It was the 12th consecutive month of year-over-year declines.  Last year, the validity of a broad swath of foreclosure proceedings came under scrutiny based on claims that banks used so-called robo-signers to rubber stamp documents without thorough vetting. RealtyTrac Chief Executive James Saccacio said there is evidence the temporary downward trend is about to change direction.

After Big Jump in August, Foreclosure Starts Fall Again  After a significant jump in foreclosure starts in August, driven primarily by Bank of America, foreclosure starts returned to levels in line with prior months, far below the numbers reached at the peak. California has seen a drop in activity of 56 percent since its peak, from 58,623 Notice of Default filings in March of 2009 to 25,778 today. Arizona shows a similar swing in Notice of Trustee Sale filings, from 14,722 in March of 2009 to 5,982 filings last month - a decrease of 59.4 percent. Washington shows the greatest decrease of all, with 71.5 percent less Notice of Trustee Sale filings today than at their peak in June of 2009.  Foreclosure sales were mixed this month, with declines in Arizona, California and Nevada, while Oregon and Washington both showed increases. Despite the declines, the percentage purchased by third parties, typically investors, was at or near peak levels. In California, third parties made up a record 27.4 percent of all sales last month. In Arizona, that number was even higher at 38.3 percent, also a record. .

New York Foreclosures Take 3.2 Years - The average time to process a foreclosure in New York State in the third quarter is now 986 days, the longest of any state and a new record for New York. When sales time is added, the time from default to a new owner closes is now 1179 days, or 3.2 years. U.S. properties foreclosed in the third quarter took an average of 336 days to complete the foreclosure process, up from 318 days in the second quarter and the highest number of days going back to the first quarter of 2007. The second longest average foreclosure process was in New Jersey, at 974 days, and the third longest average foreclosure process was in Florida, at 749 days, according to RealtyTrac’s latest Foreclosure Market Report. The average time to sell foreclosures also hit a record high in the third quarter. Properties in the foreclosure process that sold during the third quarter (usually short sales) took an average of 318 days to sell after entering the foreclosure process, up from 245 days in the previous quarter. Bank-owned properties sold in the third quarter took an average of 193 days to sell after being repossessed by the bank, up from 178 days in the second quarter.

“Zombie Mortgages” Mean Delay of Housing and Economic Recovery Well Past 2014 -- Yves Smith - Martin Wolf was one of the hosts of a Financial Times conference last week, and mentioned that he thought whoever would win in 2012 would look like a winner: the recovery will eventually take hold, and he believes, per Carmen Reinhart and Kenneth Rogoff, that the housing market will bottom in 2014 and a recovery will kick in then.  The person sitting next to me leaned over and said, “Japan”. And he is more likely to be right, for two (at least) two reasons. The first is, as the Barclays report indicates, via American Banker, that there is a very large shadow inventory and that is not adequately reflected in most tallies of how many homes will need to clear, ex more radical action to stem foreclosures (I would not hold my breath on that one). Second is that the inability to foreclose and the resulting “zombie” mortgages are not due simply to servicer discretion but due to likely difficulties in foreclosing due to chain of title problems. Why have foreclosures slowed down dramatically in New York, for instance? Because it appears that the requirement that the foreclosing attorney certify the accuracy of documents submitted to the court has thrown a wrench in the process. Our Tom Adams has estimated that it would cost $20,000 to $40,000 more per foreclosure (no typo) to dispense with robosigning and prepare court documents properly in judicial foreclosure states. Think that might not have something to do with why foreclosures have slowed down a lot?

Fannie Mae: Sept. home-price expectations down - Consumer expectations for U.S. home prices worsened significantly in September to register their weakest outlook in more than a year, according to a monthly survey from mortgage market enterprise Fannie Mae. For its September reading, Fannie Mae said respondents now expect home prices to decline 1.1% over the next year, a steeper drop than the 0.5% decrease predicted in the August survey and the biggest decline expected to date. Consumer views on the economy showed modest improvements, however, as 77% of respondents indicated they believe the U.S. economy is on the wrong track, a 1 percentage point decline from August. Regarding personal finances, 19% of respondents saw their personal financial situation deteriorating over the next year, down from 22% of respondents with that view in August. Still, Fannie Mae Chief Economist Doug Duncan said consumers continue to demonstrate highly negative attitudes. "The lack of a sense of urgency to buy homes, given expectations for further declines in home prices and continued low mortgage rates, coupled with general pessimism regarding their own personal finances and the economy, bodes poorly for the recovery of the housing market," Duncan said.

US homeowners yet to feel boost from ‘Twist’ - Almost a month after from the Federal Reserve’s launch of “Operation Twist”, the latest emergency monetary easing aimed at reviving the US economy, and hopes of a big boost for homeowners have yet to materialise. Borrowing costs have fallen. The key 30-year mortgage rate has dropped below 4 per cent for the first time on record, according to Freddie Mac, the state-backed US mortgage group. But that move has lagged behind a much bigger decline in yields on benchmark 10-year Treasury bonds in recent months. Under Operation Twist, the Fed is buying $400bn of long-dated Treasuries, financed by selling an equal amount of debt with three years or less to run. It is also reinvesting early repayments from mortgage securities back into the debt issued by mortgage financiers. If households are to benefit from the Fed’s initiative, mortgage providers must pass on lower borrowing costs. Despite the slide in headline mortgage rates, analysts warn that lower rates may not herald the kind of refinancing boom that marked prior periods of falling market yields. They point to falling home prices, with many homeowners unable to move because they are in negative equity, and tougher lending standards at banks.

How to Stop the Drop in Home Values - HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs. But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don’t want to provide any more help to the banks that made loans that have gone sour. But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.

Martin Feldstein’s mortgage adjustment plan - To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are “underwater” are in this category. If everyone eligible participated, the one-time cost would be under $350 billion. Here’s how such a policy might work: If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half. For the millions of underwater mortgages that are held by Fannie Mae and Freddie Mac, the government would just be paying itself. And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home. This would all be voluntary. Here is more.

It’s All About the Distressed Sales…Coming back from a conference on housing finance, I was reminded of this post from a while back. A critical channel out of the mess we’re in is through low interest rates generating more investment activity.  The Fed’s done its part re lowering rates but especially in housing, the market is still crawling along and the lowest mortgage rates in decades are not driving levels of either refis or sales you’d see in more normal times. A big factor here is home prices, which are down over 30% since the bubble burst.   And they’re unlikely to turn around until we get on the downslope of the mountain in the figure below. Sale prices are a weighted average of distressed sales—foreclosures and short sales—and non-distressed sales.  One slice of good news in this debate is that according to data from CoreLogic, non-distressed sales prices have held up pretty well.  Weak overall home prices are thus a function of the growing weight and falling or flat prices of the distressed side of the market (even if distressed prices rise, if their weight—sales share—grows too quickly, we can still end up with overall falling home prices).

Who pays for the debt overhang? - High levels of debt by governments and households are a constraint on how fast demand can grow today. Even if the economic fundamentals (productivity, labor market) were unaffected by the crisis, an environment where everyone wants to save cannot be conducive to growth. Production needs to be sold and for that you need customers. Even those who are not very sympathetic to economic models where demand drives growth understand the difficulties of growing in an environment of debt overhang (here is Martin Feldstein today on the New York Times). Default, reduction in mortgage payments are all proposals to alleviate the problem but they come at a cost: your debt is someone else's asset. There are, of course, circumstances where debt reduction is not a zero-sum game, where this is the only way to avoid a spiral of less spending, lower income and even higher debt as a percentage of income. This is what is called the paradox of thrift. There are other circumstances where everyone can benefit from debt reductions. As Martin Feldstein argues, reducing the value of a mortgage can be beneficial to both the individual and the bank:

Two mortgage plans - With the enormity of the jobs crisis looming over the 2012 presidential election, it’s worth being reminded every so often that there’s a huge housing crisis in this country as well. And so it’s worth keeping an eye on new ideas there. Martin Feldstein has one, which I don’t much like. He gets one thing right: we need massive principal reductions. But the way he’d like to do them is very flawed. For one thing, he’s very keen on converting non-recourse mortgages to recourse mortgages: “in exchange for reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home”. In this case, however, the homeowner is just being given a take-it-or-leave-it choice; and the principal reduction only reduces the value of the mortgage to 110% of the value of the home, even as house prices continue to decline. The homeowner is still underwater — and, of course, is living in a very tough economy.  Meanwhile, Alan Zibel has a trial balloon from the Obama administration which is reasonably smart but which is unlikely to make much substantive difference. Basically, Frannie should sell off an equity tranche of its mortgages, which is explicitly and credibly not guaranteed by the government.

Existing Home Inventory continues to decline year-over-year in October - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. This graph shows the NAR estimate of existing home inventory through August (left axis) and the HousingTracker data for the 54 metro areas through early October. The HousingTracker data shows a steeper decline in inventory over the last few years (as mentioned above, the NAR will probably revise down their inventory estimates in a few months). The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early October listings - for the 54 metro areas - declined 16.4% from last year. Inventory was down 16.7% year-over-year in September. This is just "visible inventory" (inventory listed for sales). There is a large percentage of distressed inventory, and various categories of "shadow inventory" too. But the decline in listed or "visible" inventory is a key story in 2011 - and listed inventory for October is probably down to the lowest level since October 2005.

Homeownership Decline Outpaces All but Great Depression - The national homeownership rate fell by 1.1 percentage points between 2000 and 2010. The U.S. Census Bureau says it’s the steepest drop since the period from 1930 to 1940, when the rate plummeted by 4.2 percentage points. Housing woes are, without question, taking a bite out of the American Dream. Unprecedented levels of foreclosures have forced more than 3 million homeowners out of their homes over the past four years. And with $7 trillion in home equity wiped out since 2005, many are leery of putting their hard-earned dollars toward an investment that is still depreciating. The Census Bureau said in its report released this week that the U.S. homeownership rate slipped to 65.1 percent in 2010. Even with the sharp decline over the previous 10 years, that rate is the second highest on record since homeownership data collection began in 1890, behind only the year 2000. All but one metropolitan area had more homeowners than renters in 2010. While homeowners were the majority in most of the nation’s metro areas, they were outnumbered by renters in many of the country’s largest cities, including the four most populous cities. Last year, New York renters made up 69.0 percent of households, followed by Los Angeles (61.8%), Chicago (55.1%), and Houston (54.6%).

Banks turn to demolition of foreclosed properties to ease housing-market pressures— The sight of excavators tearing down vacant buildings has become common in this foreclosure-ravaged city, where the housing crisis hit early and hard. But the story behind the recent wave of demolitions is novel — and cities around the country are taking notice. A handful of the nation’s largest banks have begun giving away scores of properties that are abandoned or otherwise at risk of languishing indefinitely and further dragging down already depressed neighborhoods. The banks have even been footing the bill for the demolitions — as much as $7,500 a pop. Four years into the housing crisis, the ongoing expense of upkeep and taxes, along with costly code violations and the price of marketing the properties, has saddled banks with a heavy burden. It often has become cheaper to knock down decaying homes no one wants. The demolitions in some cases have paved the way for community gardens, church additions and parking lots. Even when the result is an empty lot, it can be one less pockmark. While some widespread demolitions could risk hollowing out the urban core of struggling cities such as Cleveland, advocates say that the homes being targeted are already unsalvageable and that the bulldozers are merely “burying the dead.”

Latest Housing Bust Casualty: Babies - Back in 2007, America was experiencing a mini-baby boom. The recession brought that to a quick halt. As early as 2008, the country saw a significant drop in birth rates. Baby booms and busts do tend to follow economic cycles. But what was surprising was how quickly birth rates cratered, dropping even before it was clear we were in a recession. What was going on here? At the time, demographers and sociologists essentially said that people's loins or at least their desire to have babies had done a better job at predicting the recession than economists or forecasters. But a new study from the National Bureau of Economic Research suggests that procreation might not be as good an economic indicator as it was originally thought. The study looked at housing prices and birth rates in 66 metro areas from 1990 to 2005. What Kearney and Dettling found is that birth rates are highly correlated to housing prices, more so than unemployment rates and other measures of the economy. The authors found that generally rising housing prices led to more babies.

Does Occupy Wall Street Need a Better Slogan? - Slogans can be tricky. Occupy Wall Street is learning this. There’s always a balance to be struck between catchy, memorable slogans and meaningful ones. When you start using a slogan to actually talk policy, that’s when this balance becomes really important. For instance, I wrote the other day that a largely lender-driven debt forgiveness program would be a really good idea to get the economy back on firmer ground. Over at Salon, Alex Pareene suggested something similar if a tad more radical. Now pay attention to the slogan of the day and how it operates in Pareene’s jubilee suggestion: Household debt is at 90 percent of GDP. Any stimulus proposal — even “dropping money from helicopters” — would result in a massive transfer of money from indebted Americans to cash-engorged banks, rather than the spending spree that would theoretically put us back to work. [...] So my immodest proposal is simply this: Individuals and households in the bottom 99 percent who owe debt to any large financial institution that received federal government support during and after the 2008 crisis should see their debt forgiven.

Worsening Attitudes - Americans have given their economy a vote of no confidence. Or at least, very little confidence. Gallup’s latest survey shows that Americans are considerably more pessimistic now than they were a year ago. Here’s a chart showing Gallup’s Economic Confidence Index for 2010 and 2011: The index is based on daily interviews with 500 adults across the country, or about 3,500 people each week. Respondents are asked whether the economy is getting better or worse, and whether current economic conditions are “excellent,” “good,” “only fair” or “poor.” For each question, Gallup subtracts the percentage of people answering negatively from the percentage of people answering positively. Then the two results are averaged to come up with a value that Gallup calls the Economic Confidence Index. A negative index value means that Americans are more pessimistic, and a positive value means they are more optimistic. As you can see, the latest index measure was negative 49 (with a margin of error of 2 percentage points), compared to negative 29 a year ago.  The index hit its recession-era monthly low of negative 60 in October 2008, and the highest level it has touched since then was a mere negative 21 (this past January).

Vital Signs: Small-Business Sentiment - Optimism among small business owners has ticked up in the past few weeks. An index of optimism among business owners tracked by the National Federation of Independent Business increased by 0.8 to 88.9 in September from August. That reading, while improved, is solidly in recession territory and puts optimism at roughly the same place it was in September of last year.

Small business confidence inches up - Small business optimism in the US rose for the first time in seven months as the outlook for sales and better business conditions improved slightly, but analysts warned that confidence remains low. The National Federation of Independent Business said on Tuesday that its optimism index rose to 88.9 in September from 88.1 the previous month on a scale of 100. August’s reading had been the lowest level in 13 months. The index surveyed 729 small businesses, which are defined as independent companies employing 500 people or less. The figures offered “more evidence suggesting the meltdown in business confidence is over, at least for now, though by absolute standards this is still a terrible report. If the whole economy were as weak as the small business sector, it would be in a deep recession,” said Ian Shepherdson, chief US economist at High Frequency Economics. The modest 0.8 point increase was “based on a reduction in the pessimism of sales prospects and expected business conditions, both of which remain solidly negative,” said Bill Dunkelberg, NFIB chief economist. “About the only good thing to say about it is that the index didn’t go down.”

NFIB: Small Business Optimism Index increases slightly in September - From the National Federation of Independent Business (NFIB): Small-Business Confidence Sees Modest Gain: The Start of a Trend, or a Blip?. The first graph shows the small business optimism index since 1986. The index increased to 88.9 in September from 88.1 in August. Optimism had declined for six consecutive months and this is just a small increase. The second graph shows the net hiring plans for the next three months. Hiring plans were still low in September, but still positive and the trend is up. According to NFIB: “Over the next three months, 11 percent plan to increase employment (unchanged), and 12 percent plan to reduce their workforce (unchanged), yielding a seasonally adjusted 4 percent of owners planning to create new jobs, also down 1 point from August." Twenty eight percent of small business owners reported that weak sales continued to be their top business problem in September. In good times, owners usually report taxes and regulation as their biggest problems. The optimism index declined sharply in August due to the debt ceiling debate and only rebounded modestly in September.

Consumer Credit Levels Reach Their Lowest Point in over a Year - According to a recent Reuters story, consumers are reluctant to hold debt due to the U.S. Credit rating downgrade and debt problems in Europe. The economy is shaky so people are apparently less willing to carry tons of debt. Consumer credit fell $9.50 billion in August after rising $11.92 billion in July, the report said, which is well below economists’ expectations of a $7.75 billion increase.Revolving credit, which mostly measures credit card use, dropped $2.27 billion in August after falling $3.56 billion in July. Non-revolving credit, which includes mostly auto loans, fell $7.23 billion, the largest decline since August 2008, after rising $15.48 billion in July. "Consumers are extraordinarily sensitive to economic conditions and as things started to look a bit more sour, they stopped using their credit card," said Steve Blitz, a senior economist with ITG Investment Research in New York. While this story paints this as a bad thing for the economy as a whole, it speaks well of consumers’ efforts to protect themselves in this economy.

Consumer Sentiment declines in October - The preliminary October Reuters / University of Michigan consumer sentiment index declined to 57.5 from 59.4 in September. In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. In August, sentiment was probably negatively impacted by the debt ceiling debate. History suggests it usually takes 2 to 4 months to bounce back from an event (If we can call the threat of default an "event"). So sentiment might increase over the next couple of months. And, of course, any bounce back from the debt ceiling debate would be to an already weak reading.  This was very weak, and below the consensus forecast of 60.0.

Consumer Sentiment on Government Policy at All-Time Low - Politicians may have to shoulder some blame for the unexpected drop in early October consumer sentiment. Economists at J.P. Morgan write that the sentiment index regarding government economic policy fell seven points in October to an all-time low of 47, “one point lower than what was reported after the most intense stage of the debt ceiling debate in Washington.” The economists say comments released along with the data suggest consumers less happy with the Fed, “though it is unclear if that means consumers think the Fed should be taking more or less action.”

Business Inventories and Sales Rose in August  - Companies were confident enough in the economy in August to keep stocking their shelves, even as other data stoked recession fears. Businesses added to their stockpiles for a 20th consecutive month and their sales rose for a third straight month, the Commerce Department said Friday. Inventories increased 0.5 percent in August, matching the July gain. Sales climbed 0.3 percent, following a 0.7 percent July increase. A separate report Friday showed consumers stepped up their spending on retail goods in September. The 1.1 percent gain was the largest in seven months, a hopeful sign for the sluggish economy. Businesses appeared to believe they'd see enough future demand. So they shrugged off plunging financial markets, weak growth in the first half of the year and the lowest consumer confidence in two years to continue building their stockpiles.

Retail Sales increased 1.1% in September - On a monthly basis, retail sales were up 1.1% from August to September (seasonally adjusted, after revisions), and sales were up 7.9% from September 2010. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $395.5 billion, an increase of 1.1 percent (±0.5%) from the previous month and 7.9 percent (±0.7%) above September 2010. Total sales for the July through September 2011 period were up 8.0 percent (±0.7%) from the same period a year ago. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 18.9% from the bottom, and now 4.5% above the pre-recession peak.  The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.4% on a YoY basis (7.9% for all retail sales).  The consensus was for retail sales to increase 0.8% in September, and for a 0.4% increase ex-auto.

No Sign Of Recession In September Retail Sales - Any one economic indicator is suspect as a measure of the broad trend, but the updates arrive one at a time and so we must take ‘em as we get ‘em. Taking this morning’s retail sales report at face value suggests that the recession talk of late is premature. Retail purchases rose sharply last month, gaining 1.1% on a seasonally adjusted basis over August. That’s the best month for retail sales since February. Recession where is thy sting? “It’s a strong performance,” . “Retailers are in good position to profit from the holiday season.” It’s true that a big chunk of last month’s surge is due to auto sales. But excluding motor vehicle and parts dealers from the equation still leaves retail sales up by a healthy 0.6% last month. Proclaiming hard-and-fast rules in the dismal science is dangerous, but let's dispense with that caveat for a moment and state what's on everyone's minds this morning: It’s hard to argue there’s a recession under our noses in the face of robust consumption gains.

Trade Deficit unchanged at $45.6 billion in August - The Department of Commerce reports:  [T]otal August exports of $177.6 billion and imports of $223.2 billion resulted in a goods and services deficit of $45.6 billion, virtually unchanged from July, revised. The first graph shows the monthly U.S. exports and imports in dollars through August 2011. Exports and imports were mostly unchanged in August (seasonally adjusted). Exports are well above the pre-recession peak and up 15% compared to August 2010; imports have stalled recently and are up about 11% compared to August 2010. The second graph shows the U.S. trade deficit, with and without petroleum, through August.  The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $102.62 per barrel in August, down slightly from $104.27 per barrel in July. The trade deficit with China increased to a record $29 billion; trade with China remains a significant issue.  Imports have been moving sideways for the last several months - partially due to slightly lower oil prices. However the trade deficit with China continues to increase. Exports are still generally trending up.

Vital Signs: Expanding U.S.-China Trade Gap - The U.S. trade gap with China is wider. A 12-month moving average of the U.S. trade deficit with China increased slightly to $24 billion in August, according to the Commerce Department. Over the month, the U.S.-China trade deficit—calculated by subtracting the value of American exports to China from American imports of Chinese goods—widened even as the overall U.S. trade deficit barely changed.

A Contradiction in the Cargo - Analysts have been raising their predictions for holiday spending ever since the back-to-school shopping season was stronger than most had expected.  But the people who work at the companies that ship and transport retailers’ goods are not nearly as optimistic about holiday sales.  When retailers expect that Americans will be crowding into their stores, their orders pile into the nation’s ports in August and September for delivery to stores by late October. But logistics companies say that is not happening this year. In fact, the five busiest container ports in the United States said that imports in August 2011 were lower than or even with 2010 volumes. In Long Beach, the second-busiest container port by volume, August imports fell by 14.2 percent from August 2010. While the port has not yet released September volumes, a spokesman, Art Wong, said it expected about a 15 percent drop from September 2010. The reports from the remaining container ports in the top five were equally gloomy.

Ceridian-UCLA: Diesel Fuel index declined in September - This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Falls for the Third Month in a Row – Down 1.0 Percent in September The Ceridian-UCLA Pulse of Commerce Index®(PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation, fell 1.0 percent in September on a seasonally and workday adjusted basis, following a 1.4 percent decline in August and a 0.2 percent decline in July. On a year-over-year basis, the PCI was down 0.2 percent in September. This graph shows the index since January 2000. This index has declined for three consecutive months after increasing slightly earlier in the year.

Ceridian-UCLA Pulse of Commerce Index®, Pulse of Commerce Index Falls For the Third Month In a Row. This is alarming news for the third quarter and beyond. In the last three months, the PCI has declined at an annualized rate of 10 percent per year as illustrated in the figure above. This rate of decline has been exceeded only in the deep recession of 2008/09, and equaled only once outside of a recession in March 2000. In other words, since June, trucking activity has been receding at a pace that would be expected to show up in other economic measures soon. Two or three more months like this would confirm an official recession. With the past three negative months, the PCI declined at the annualized rate of 4.3 percent in the third quarter of 2011 compared with the second quarter. Outside of the recessions, we have never experienced such a large quarterly decline in the PCI. Our near-recession situation is made only slightly less concerning by two facts: the declines in the recessions have been much larger than 4.3 percent, and the PCI decline in 2011Q3 is almost as much in 2003Q2. More ominously, the last weeks of September were the weakest, promising more of the same in October.

CHART OF THE DAY: There's Only One Industry That's Added Jobs Since The Start Of The Recession - Obama's jobs council has come out with its report on how to create more jobs in America. There's plenty of talk in there about more investment in education and subsidies for alternative energy. One interesting chart that we'd never seen before: A look at employment creation and destruction by industry since before the recession, in 2007. EVERY category has lost jobs, including government. Construction has obviously gotten killed. The one big stand out winner... mining. We're surprised too.

Intellectual Styles Of The Rich And Clueless - Krugman - Oh, my. Jeff Immelt, who President Obama for some reason appointed to head his job creation panel, insists that what’s good for GE is good for America: I want you to root for me. Look, every one in Germany roots for Siemens, everyone in Japan roots for Toshiba, everyone in China roots for China South Rail, I want you to say, win GE. Wow. First, the macro picture. Here are corporate profits versus employee compensation, both measured as index numbers with the 2001 business cycle peak= 100: We’ve all grown together! Or, actually, not. Also, GE isn’t in any important sense an “American” company. More than half its employees are overseas. I’m sure Immelt would claim that this is just what he needs to do to compete; but in that case, he can’t have it both ways and also demand that we cheer for GE as an American champion. Awesome cluelessness. And this is the head of a job-creation task force in a Democratic administration?

Regulations and Jobs: The Debate Goes On - The idea that regulations eliminate jobs has been a persistent Republican talking point this year. Mitt Romney said, "Of all the Obama regulations we say no. It costs jobs." And he wasn't alone.  Texas governor Rick Perry said that regulations "are strangling the American entrepreneurship out there." House speaker John Boehner has urged the President to cut regulations to boost jobs.However, in a recent article in TIME, Columbia professor Jeffrey Sachs wrote:They [Republicans] claim, without evidence, that taxes and regulations are killing job creation, though many countries with much higher taxes and much stiffer corporate regulations have much higher employment rates than the U.S. So who's right? With the help of TIME reporter Andrea Ford, I put together the chart at the top of the post, which looks at regulation and economic growth around the world. The World Bank annually ranks countries by so-called ease of doing business. They have been doing it since 2003. (The U.S., by the way, ranks very high - 5th.) Last year, for the first time they came up with a metric measuring whether countries were making it easier or harder for businesses to operate within their borders. The chart above maps major economies around the world by their five-year change in ease of doing business and their five-year growth rate.

Clive, don’t change the subject - Clive Crook blogs on my paper, Regulatory uncertainty: A phony explanation for our jobs problem, and finds it “clever and interesting but not all that persuasive.” He reports that the paper finds “Trends in investment (this recovery, weak as it may be, has been “investment-led” by historical standards), in hiring, and in hours worked all suggested that lack of overall demand is the problem,” and does not dispute any of the conclusions. Crook just thinks I should have written a different paper:“First, the focus on regulatory uncertainty seemed too narrow. What about other kinds of policy-induced uncertainty? Second, its target–the idea that regulatory uncertainty as opposed to weak demand is the cause of slow growth–is a straw man. Who is denying that weak demand is a factor, or even the larger factor of the two?”  Well, I do think there are a ton of important people denying that there is any demand problem whatsoever, or at least one that can be addressed by policy. How else can there be an essentially uniform view among the Republicans that the initial stimulus had zero effect? How else to explain that the program of each candidate for the Republican presidential nomination has an exclusively ‘supply-side’ approach?

Varieties Of Uncertainty - Krugman - Some of the usual suspects have lately been touting a research paper by Baker et al that supposedly shows that policy uncertainty is an important factor in restraining the economy, and claiming that this vindicates the Republican view. Larry Mishel sets the record straight. As Mishel points out, the first thing you need to know is that the index of uncertainty is based on a count of news stories. This means that if the Murdoch empire decides to push the line that there’s a lot of policy uncertainty, the authors’ index measures this as a real rise in uncertainty, not as the propaganda campaign it is. But even setting that aside, what the paper measures as “uncertainty” isn’t at all what the right wants you to think is driving events. Health reform does not visibly move their index; what really sent it sky-high was the debt ceiling dispute. So you could argue that the real policy uncertainty here isn’t fear of that socialist Islamic atheist in the White House; it’s fear of Republican hostage-taking. That, at any rate, comes closer to what seems to be going on in the analysis.

The decline of US labour market dynamism - This simple graph, pulled from a presentation by economist John Haltiwanger, is a tidy illustration of what David Leonhardt means when he writes that the ongoing labour market ossification is a disturbing mix of both secular and cyclical trends. Most discussion of jobs growth naturally focuses on the net numbers, but Haltiwanger’s work emphasises that you get a far better understanding of labour market dynamism by looking at the gross numbers for job destruction and job creation. And as he explains the average trend since the mid-1990s…Job creation has been headed down in a pretty persistent way since 2000. Job creation rose slightly to a quarterly rate of about 9 percent of total employment in the 1990 recession. Still, job destruction rose even more during that recession. During the 1990s, job creation settled at about an 8 percent rate. Job destruction fell sharply during the 1990s, as did the unemployment rate. Since 2000, job creation has never reached the rates of the mid-1990s. Indeed, in the current recovery, job creation remains at the lowest rate as a percent of total employment of the post–World War II period.

How Long Will It Take for the Labor Market to Recover? - To state the obvious, we need to create a lot more jobs per month than we have so far. If we continue at present rates, the unemployment rate will stay constant or increase even further. Even if we duplicate the performance of the economy prior to the recession, it will take four years to reach an unemployment rate of 7%. Thus, to get out of this in a reasonable amount of time we need job creation to accelerate considerably, and it's hard to see that happening without help from Congress. Unfortunately, Congress pretends to "feel your pain," but they don't seem to really understand how hard it is for those who are struggling with unemployment -- that this is a crisis requiring immediate, agressive action -- and it's hard to imagine that Congress will give labor markets the amount of help they need. So no need to hold on to your hats, it looks like we're headed for a very slow ride:

Huge Employment Chart Roundup - Ron Griess of the Chart Store goes mad with this enormous collection of employment related chartage:

Hypothetical Employment and Unemployment Charts from the Atlanta Fed; Mish "What If" Scenarios -Inquiring minds are checking out an interesting "what if" post by Dave Altig, senior vice president and research director at the Atlanta Fed: Two more job market charts  I think those charts are a good starting point for discussion, but there are many other factors to consider. Right now it takes about 125,000 jobs a month to keep up with demographics (birthrate, retirement, and immigration). 125,000 is Bernanke's estimate and I accept it as reasonable. Because of boomer demographics, by 2016 or so it may take far less than that (perhaps 90,000 jobs a month or so) to keep up with demographics. Then if the demographic trends hold, the number may rise through 2020. Unfortunately, it is not as simple as that. One must also factor in the ability of workers to retire when they had planned. Many boomers are very underfunded and thus unable to retire when they thought. Also consider involuntary retirement. Many of those who exhausted all of their unemployment benefits and are approaching retirement age, so desperately need money that they may retire, just to get something from social security. They did not want to retire, but did so out of necessity. Such factors are a significant reason for the plunge in the participation rate.

Vital Signs: More Unemployed Per Job Opening - The ratio of unemployed people to job openings is up. There were 4.6 unemployed people for every job opening in August, up from 4.3 the month earlier, according to the Labor Department. The ratio – a proxy for how hard it is to find work – is down from its recession peaks of just shy of 7, but remains more than twice as high as its pre-recession lows.

BLS: Job Openings "little changed" in August - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in August was 3.1 million, little changed from July. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in August was 944,000 higher than in July 2009 (the most recent trough). The number of job openings is up 26 percent since the end of the recession in June 2009. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  This is a new series and only started in December 2000. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for August, the most recent employment report was for September.Notice that hires (dark blue) and total separations (red and blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. In general job openings (yellow) has been trending up, and are up about 7% year-over-year compared to August 2010. Layoffs and discharges are down about 10% year-over-year.

For Each U.S. Job Opening, 4.6 Unemployed - There were 4.6 unemployed workers for every job opening in the United States in August, according to new data from the Labor Department. That’s a slight tick up from July, because the number of unemployed rose slightly and the number of job openings fell. The bottom line is, even if all job openings were filled overnight, there would still be about 11 million people who were still out of work. Total separations from jobs rose a bit, but primarily because people left their jobs voluntarily (as opposed to being laid off or fired). That could be a good sign for the economy, in that it means workers see opportunities to find other jobs they like better and are opening up more positions in the process. Part of the reason employers have been reluctant to hire is that so few people have been leaving their jobs.

Caught In A Trap - There’s still not a whole heck of a lot going on with jobless claims. That’s good news to a degree since it suggests that the recession risk, while elevated, isn’t rising. But it’s also bad news because it’s a sign too that the labor market isn't likely to break out of its slump with a burst of strong job growth any time soon. This could on for a while and it probably will.  New filings for jobless benefits were virtually unchanged last week, slipping by 1,000 to a seasonally adjusted 404,000. Despite the usual volatility in claims data this year, this series hasn’t changed much since last Christmas.  “The labor market is treading water, maybe slightly better than that,” says Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. “Hanging out around 400,000 claims is indicative of a still very soggy labor market that is not going anywhere fast.”

Wanted: Job Creation - I wish I could find a way to adequately express the frustration I feel over the way Congress has all but turned its back on the unemployed. Even now, the only reason we're hearing anything from Democrats about job creation is because there's an election ahead. The legislation is timed for the politicians -- it needs to maximize reelection chances -- minimizing the struggles of the unemployed is a secondary consideration (if that). If the election were further away it's unlikely we'd be hearing about this much at all. And Republicans are worse, they have no plans at all except to use unemployment as an excuse to further ideological goals (balanced budget amendments, tax cuts for the wealthy, etc.). How can politicians be so indifferent to the struggles that the unemployed face daily? Are they really so disconnected from the lives of ordinary people that they don't understand how devastating this is to those who lost jobs due to the recession, people who can't find a way to get hired again no matter how hard they try? Anyway, I can't seem to find a way to say this with the shrillness it deserves, and I apologize for that, but I just don't understand why the unemployment crisis isn't a national emergency.

Whose Jobs Are at Risk in Free Trade - With Congress expected on Wednesday to take up trade agreements with South Korea, Colombia and Panama as well as a benefits package for workers who lose their jobs to foreign competition, the Joint Economic Committee of Congress has released a report showing that the workers most likely to be hurt by free trade are the same groups that will have the most difficult time getting new jobs. According to the report, “Nowhere to Go: Geographic and Occupational Immobility and Free Trade,” the workers most likely to lose their jobs as a result of increased trade are older workers and those without a college education. The most obviously affected industry has traditionally been manufacturing, where workers tend not to have college degrees and an increasing number are 45 or older.. According to Labor Department data, the unemployment rate among those with just high school diplomas is 9.7 percent, more than double the rate among those with a bachelor’s degree or higher. And while the unemployment rate among those 45 to 54 years old is actually lower than the rate for 25- to 34-year-olds, once they are unemployed, older workers tend to spend much longer searching for work.

Having a Job Ain’t All It’s Cracked Up to Be - The plight of America’s unemployed is terrible. Yet for the 91 percent of those in the U.S. labor force who do have a job, the numbers also tell a dark story. Take-home pay, adjusted for inflation, fell 0.3 percent in August, the third decrease in five months, the Commerce Dept. just reported. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, while the poverty rate jumped to 15.1 percent, a 17-year high. Salary and benefit growth “has been going nowhere,” says Mark Zandi, chief economist at Moody’s Analytics (MCO) in West Chester, Pa. “One of the key reasons the recovery has stalled is that real incomes have fallen.” By contrast, in the 1960s, household debt was low, savings were high, and salaries were heading steadily up. And since the end of the 2007-2009 recession, according to Sentier Research, a firm headed by a former top Census Bureau official, those not in the labor force have fared better on average than those who are. Retirees, for example, get their Social Security payments adjusted for inflation. Few workers today enjoy that benefit.

Make-Work and the G.D.P. - Suppose some evening a group of bored and mischievous teenagers slash tires on a number of cars in the parking lot of a shopping center. Distraught car owners call sundry nearby garages to send someone to fix the damage on the spot or tow the cars in for repairs. That work is speedily done, and the cars are ready for use again. The car owners pay the garage owners sizable repair bills. This fictitious event leads to a number of questions:

1. Did the garages deliver value to the car owners?
2. Was gross domestic product increased or decreased?
3. Were the car owners better off, after paying the repair bill?

My answer to the first question is yes and to the second yes, as well, unless the garages had to give up other jobs with revenue equal to or greater than what they earn coming to the car owners’ rescue. To the third question, my answer is, it depends.Why is this vignette in so serious a blog as Economix? Because it illuminates a phenomenon not always fully appreciated when we talk about value added or G.D.P.

The Myth of the Median Worker - Think of the economy as consisting of lots of escalators. Some are headed up, and some are headed down. If you are a student in computer science at Stanford, your escalator is racing up (and you already may be pretty high). If you do work that can be replaced cheaply by machines or by foreign labor, your escalator is going down. Some of the people have ridden the down escalators close to the bottom, in the sense that they will never again be employed in a job that they consider worthy of their dignity. The same thing happened in the 1930s. Then, there were Bonus Marchers. Today, there are Occupy Wall Streeters. People have some ability to switch escalators, but that ability is limited. To get onto an up escalator, you need to acquire better human capital, physical capital, or organizational capital. I am not sure that has ever happened. Between 1930 and 1950, a lot of the least-educated workers aged out of the labor pool and were replaced by a more modern work force. There is no doubt that people riding a down escalator are sensing a threat to their relative status. However, setting this aside for the moment, I am inclined to give Russ the point that someone lower down in the income distribution has it better today than thirty years ago. 

Recession Officially Over, U.S. Incomes Kept Falling— In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession1 ended than it did during the recession itself, new research has found.  Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau2 officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.  The finding helps explain why Americans’ attitudes toward the economy, the country’s direction and its political leaders have continued to sour even as the economy has been growing. Unhappiness and anger have come to dominate the political scene, including the early stages of the 2012 presidential campaign.  President Obama3 recently called the economic situation “an emergency,” and over the weekend he assailed Congressional Republicans for opposing his jobs bill, which includes tax cuts that would raise take-home pay. Republicans blame Mr. Obama for the slump, saying he has issued a blizzard of regulations and promised future tax increases that have hurt business and consumer confidence.

Behind a Surprising Income Trend - Anyone with detailed knowledge of the annual Census Bureau data on household income may be surprised by the new study  in today’s Times. From the article: Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.  The annual Census data, which is better known than the monthly data that forms the basis of the study, presents a somewhat different picture. It shows that inflation-adjusted median income fell 3.6 percent from 2007 to 2008, more sharply than in any year since. From 2008 to 2010 — a two-year period — income fell 2.9 percent. What explains the difference between the two surveys? For one thing, the monthly data (which goes through June of this year) is more current than the annual data (which ends in 2010) and reflects the economy’s continued weakness.But there is also a second, more surprising reason for the difference: The annual data may be less reliable in some ways than the monthly data.

Chart of the day, median income edition - Why has no one thought to do this before? Every month, the Current Population Survey goes out to a nationally representative sample of more than 50,000 interviewed households and their members. And in one of the questions, those households — or at least the households who didn’t answer the same question the previous month — are asked how much money they made, in total, over the past 12 months. That question has now been asked in 138 successive months, since January 2000. Which means that with a bit of clever analysis, it’s possible to put together an apples-to-apples comparison of what has happened to household income every month. And when you do that, the results are very scary indeed. The red line, here, is median real household income, as gleaned from the CPS, indexed to January 2000=100. It’s now at 89.4, which means that real incomes are more than 10% lower today than they were over a decade ago.

GM CEO Dan Akerson defends lower pay for new workers - CEO Dan Akerson's patriotism led him to seek a position on General Motors' board and has driven his first year at the automaker's helm. During GM's recent negotiations with the UAW, the Republican and former U.S. Navy officer endorsed the union's desire to add American jobs. "We are not a jobs bank. We are not an extension of the federal government. But we are an American company," Akerson said last week in his first on-the-record discussion as CEO with the Detroit Free Press' editorial board. Increasing the number of lower-paid, tier-two workers "is important in relative terms. We've got to feather this in. It can't be a flash cut -- that wouldn't be fair to our employees. But over time, we've got to feather this in and have a comparable cost of labor with transplants in the U.S., or else we're not going to be competitive. "There has to be some trust on both sides of the table. We're not trying to hurt anybody. We're trying to stay strong. So over time, as part of the labor contract, we would buy out some of our more senior employees and some of the skilled trades. We don't need to get there tomorrow. ...

On Making Unions a Productive Social Force -- Yves Smith - It has become fashionable to criticize unions in the US, when many of their shortcomings result from corrupt or at best unimaginative leadership. The fact that we have child labor laws, restrictions on working hours, workplace safety rules, were all the result of hard fought battles by workers. And as an article in Foreign Affairs stresses (hat tip reader Crocodile Chuck), Europe has much less income inequality than the US, which the author George Packer sees as a serious and difficult to remedy contributor to America’s decline. Strong unions have been a significant contributor to Europe’s less skewed distribution. This discussion on Real News Network describes how unions have unduly narrowed their focus and gives some ideas and examples for ways they could be more effective on their own behalf and for the broader community

Wealth Inequality: A Time Series Plot - Dismissing the plots of income inequality in previous posts [0] (related posts [1] [2]), an Econbrowser reader asks:"Do you concur that measures of the wealth distribution have been mostly quiescent since the 1970s and that the distribution of wealth is more even today than it was in the 1940s (the peak for the US modern era)?" Well, I think that this is an interesting question, and so I went a-searching for data. This is what I found, which led to my answer of "no".  I don't see the peak in wealth associated with the top 1% in the 1940's as the reader asserts (looks like around 1930 to me), but I'll leave that aside. As far as I can tell, inequality in 2007 exceeds that over most of the 1940's. The last two red squares are at 2004 and 2007, respectively. Note the big jump going from 2001 to 2004, and the plateau to 2007.

13 Brutal Charts On The Fall Of Household Income During The So-Called Recovery

The Racial Equity dividend - Racial justice organizations around the United States are struggling to find the resources from the corporate and foundation worlds needed to support their continuing work. One part of the problem seems to be that business leaders simply aren't convinced that racial inequalities are a fundamental and debilitating problem in the United States that presents a concrete threat to their own business activities. The issue has fallen off the first page of the priority list. This suggest that we need to revisit some of the costs that the structures of racial inequity are imposing on regions and cities.  The social costs of persistent racial inequity come in many dimensions. But particularly persuasive is the issue of the actual economic costs that these inequities impose on a region. We might put the point this way: racial inequities are an economic drag on a region, blocking the production of wealth and income and slowing down economic growth. Is it possible to estimate the magnitude of these hidden economic costs of continuing racial inequity?

Why America Should Spread the Wealth - Many economists worry that making societies more equal through income redistribution or other means lowers economic growth. This “big tradeoff” between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable. However, while the tradeoff is quite unfavorable as we push to extremes, recent experience suggests there is a wide region where the tradeoff is hard to detect.  For example, the Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. The economy did grow after the Bush tax cuts, but the rate of growth was unremarkable, especially for jobs, and there’s little evidence that they caused large increases in output growth as promised. In fact, there’s little evidence that the Bush tax cuts had any effect at all. The tradeoff simply wasn’t there.

Straight Out of Antiquity - The paper on the Tea Party (summary here) argues that one of the central principles of the Tea Party is a division of the world into workers who deserve what they earn (including Medicare and Social Security, which they like) and undeserving “people who don’t work”—by which many mean the young, or even their own younger relatives. We are the 99 Percent, the tumblr associated with Occupy Wall Street, is, among many other things, a kind of response to that worldview. The introduction takes it on directly: “They say it’s because you’re lazy. They say it’s because you make poor choices. They say it’s because you’re spoiled. If you’d only apply yourself a little more, worked a little harder, planned a little better, things would go well for you. Why do you need more help? Haven’t they helped you enough? They say you have no one to blame but yourself. They say it’s all your fault.” Mike Konczal whipped together a quantitative analysis of the 99 Percent tumblr. The tumblr as a whole is depressing (you need to go look at it to know why), but Konczal’s analysis adds another level of downer. As his numbers indicate (and my reading of a decent chunk of the pages confirms), there aren’t many extravagant ambitions here: no expectations of material consumption, no expectations of self-actualization through work, no 60s-style dreams of peace and community. Instead, as Konczal puts it, “The demands are broadly health care, education and not to feel exploited at the high-level, and the desire to not live month-to-month on bills, food and rent and under less of the burden of debt at the practical level.

Underlying Ideology of the 99 - Rortybomb had this interesting analysis of the “Ideology of the We Are 99% Tumblr.” Konczal ran the HTML text which accompanies many of the images through a program to assemble data on age and keywords. He found two age clusters, around 20 and 27. The 25 most common “words of interest” all involve the necessities of a decent life (except that several like “jobs” and “debt”, the two most common, are endemic to capitalism and other economic hierarchies). One important finding is that none of the key words are characteristically “consumerist”. This plus the overall impression of the images is that, contrary to the fears or scoffing of detractors, the 99ers are not thinking primarily in terms of being gipped consumers who just want to go back to the 1990s. They’re not thinking in terms of a more inclusive neoliberalism whose crimes would continue but merely trickle more of the loot to them, the way previous more fortunate consumers allegedly benefited. So we can take this as a piece of evidence which is promising in light of the previous discussion on this blog of consumerism as a movement.  Instead, they’re thinking in terms of survival amid permanent dispossession. Their first concern is to be free of the oppression of unemployment and debt, which are the only modes of exploitation the decrepit system has left. So although they don’t know it yet, anything they say about jobs and debt is already tantamount to the call to abolish Wall Street and debt as such.

99 Percenters and 53 Percenters Face Off - Welfare. Food stamps. Bankruptcy and minimum wage. Those are a few of the complaints of those in We Are the 99 Percent, a Tumblr blog recording the stories of those who sympathize with the Occupy Wall Street protests.But wait. Those are also the complaints in We Are the 53%, a counterblog that is meant as a conservative retort to the protestors. The site, which mimics the 99 Percenters by having people write out their stories and hold them up to be photographed, says it is by “Those of us who pay for those of you who whine about all of that.” What’s with all the percentages? The 99 Percenters are objecting to the fact that 1 percent of Americans control about a third of the country’s wealth. The 53 Percenters are portraying themselves as the responsible citizens who pay federal income tax, as opposed to the 47 percent of Americans who don’t. The 99 Percenters, who have given a voice to the decentralized protests, tell of accumulated student debt, unaffordable health insurance and a sense of despair. “I followed the rules … now here I am,” wrote a 30-year-old unemployed woman who said she could not afford marriage or children. The 53 Percenters, on the other hand, say things like, “My faith in God has always helped me weather the storms of life, not a government hand out.”

The Instability of Inequality, by Nouriel Roubini– This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States. While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.

The Guys in the 1% Brought This On - At the risk of being pedantic, let me point out that “99% versus 1%” is not a class analysis, not in any respectable sociological sense. Shave off the top 1% and you’re still left with some awfully steep divides of wealth, income and opportunity. The 99% includes the ordinary rich, for example, who may lack private jets but do have swimming pools and second homes. It also includes the immigrant workers who mow their lawns and clean their houses for them. This is not a class. It’s just the default category left after you subtract the billionaires.  Occupy Wall Street has attracted contingents of airplane pilots, electricians and construction workers -– the latter often from the new World Trade Center being built a block away. You’ll also find schoolteachers, professors, therapists, office workers and, of course, the usual crusty punks of indistinct provenance and profession.  Then there are the poorest of the poor – the unemployed, the foreclosed upon, the chronically homeless. In Los Angeles, traditional residents of Skid Row have begun to join the occupation encampment. When about 150 people met to plan their local occupation in a union hall in Fort Wayne earlier this week, they solicited advice from already-homeless people in the crowd, who had first-hand experience of where the police are most heavy-handed and where you’re most likely to find a nutritious dumpster or a public toilet. For the homeless, joining an occupation brings instant upward mobility: free food -- not entirely vegan, I have been relieved to discover -- and, in some cases, Port-a-potties and the rudiments of medical care.

Occupy Wall Street and the Demand for Economic Justice - Around the world, young people -- students, workers, and the unemployed -- are bringing their grievances to the public square. The specific grievances differ across the countries, yet the animating demands are the same: democracy and economic justice. These demands will bring millions around the world together in protest and public education on October 15.  The young people occupying Wall Street and now protesting in several dozen American cities are not a "mob," the ugly deprecation thrown at them by Congressman Eric Cantor. They are channeling sentiments felt very widely throughout the country, indeed the world. Their defining message, "We are the 99 percent," draws attention to the way that the rich at the very top have run away with the prize in recent years, leaving the rest of society to wallow in wage cuts, unemployment, foreclosures, unaffordable tuition and health bills, and for the unluckiest, outright poverty.  It's not just the vast wealth at the top that they are questioning, but how that wealth was earned and how it's being used.

Millions could lose unemployment benefits in 2012 - Millions of unemployed Americans are waiting for Congress to do something other than trade barbs over their job creation plans. If lawmakers don't act soon, the jobless see their unemployment checks start to disappear come January. More than 6 million Americans are set to lose federal unemployment benefits in 2012, with 1.8 million running out in January alone, according to new figures from the National Employment Law Project. President Obama's $447 billion American Jobs Act would extend the deadline to file for federal unemployment benefits for another year. Though the Senate is expected to take up the controversial jobs bill on Tuesday, it's unlikely to get very far. While many Washington observers say the administration's jobs bill is dead in the water, it's possible the unemployment extension could be separated and sent through on its own, or as part of another bill before year's end. The extension is estimated to cost $44 billion, according to the Congressional Budget Office.

Millions To Lose Unemployment Benefits In 2012 - Unemployment benefits for 6 million Americans are at risk now that the U.S. Senate has rejected President Obama's jobs bill.  The Senate voted 50-49 in favor of the bill late Tuesday. But the measure failed to receive the 60 votes needed to advance the $447 billion plan.  This dismissal, while not altogether unexpected, still comes as a grave disappointment to the millions of unemployed Americans who have been waiting for Congress to do something other than trade barbs over their job creation plans. Now, the jobless are expecting to see their unemployment checks start to disappear come January. More than 6 million Americans are set to lose federal unemployment benefits in 2012, with 1.8 million running out in January alone, according to new figures from the National Employment Law Project. President Obama's $447 billion American Jobs Act would have extended the deadline to file for federal unemployment benefits for another year.

Number of the Week: Millions Cut Off Without Unemployment Extension -2,153,700:

The number of jobless people currently receiving unemployment benefits who will lose them by Feb. 11, 2012 if an extension isn’t enacted by Congress by the end of the year. While Republicans and Democrats continue to spar over the best way to inspire job creation, millions of recipients of unemployment benefits may get caught in the cross-fire. In 2010, Congress approved an addition of up to 73 weeks of unemployment benefits backed by the federal government to the traditional 26 offered by the states. The duration of benefits varies from state-to-state, as regions with lower local unemployment rates get less than the full 73 weeks. The extension expires at the end of the year and President Barack Obama‘s jobs plan — shot down in the Senate this week — seeks to keep it going through 2012. The proposal doesn’t extend the maximum beyond 99 weeks, but it would allow those unemployed beyond 26 weeks to continue accessing the current program next year. Without an extension of benefits most people would stop receiving checks after six months. That comes as long-term unemployment is near its record high. The number of Americans out of work for more than six months rose by 208,000 to 6.2 million in September, the Labor Department said last week.  Most of those individuals — nearly 4.4 million — have been out of work for a least a year.

Nearly 1 million in state long-term jobless -  California has 988,000 people who have been unemployed more than six months, with the majority of those out of work a year or longer, according to the state Employment Development Department. That is more than the entire population in the states of Alaska, Delaware, North Dakota, South Dakota, Vermont and Wyoming. That six-month mark is critical because the unemployed typically receive benefits for only 26 weeks. However, because of the depth of this downturn Congress has extended benefits for up to 99 weeks. Even with those extensions, more than 533,000 people in California have become so-called 99ers, people who have exhausted their benefits and no longer are receiving unemployment. It is not known how many of them subsequently found work. In August, the most recent data available, 45.5 percent of California's 2.2 million unemployed had been out of work over six months and 33.2 percent of those had been out over a year.

Fewer Births in a Bad Economy - American birth rates have fallen noticeably in the last few years, a trend that seems to be tied to the poor economy, according to a new analysis from the Pew Research Center. There were a record number of births just as the United States was falling into recession in 2007, when 4,316,233 babies were born. Since then, the number of births has fallen, with provisional data provided by Pew indicating that births totaled about 4,007,000 last year. As you can see from the chart above, the birth rate — that is, the number of births per thousand women ages 15 to 44 — uncannily tracked declining incomes since the recession began. The connection between economic conditions and birth rates also generally held true at the state level. States experiencing the largest economic declines in 2007 and 2008, like Florida, were most likely to experience relatively large fertility declines from 2008 to 2009, the analysis finds. States with relatively minor economic declines on the other hand were likely to experience relatively small decreases in the birth rate. In fact, North Dakota, which had one of the country’s lowest unemployment rates in 2008 (3.1 percent) was the only state to see its birth rate increase from 2008 to 2009 (by 0.7 percent).

The Pro-Hunger Lobby: GOP Frontrunners Fight Aid for Starving Americans -"We don't want to turn the safety net into a hammock that lulls people to lives of complacencies and dependencies, into a permanent condition where they never get on their feet." -Rep. Paul Ryan (R-Wisconsin) "I get home and realize I'm hungry. No need to ask myself what I feel like eating. It will be Farina for breakfast - all week long." - Sheila Steffen, reporter attempting to subsist on food stamps for a week. The Supplemental Nutrition Assistance Program (SNAP), otherwise known as food stamps, is one of the most efficient, effective, penny-pinching programs in today's government-scape. Food stamps have cushioned the recession's blow for the 45 million Americans that depend on them for daily meals. And we're not talking government-subsidized caviar: On average, food stamp recipients can expect an allotment of $30 per week. Plus, it's a dream of a stimulus - every $5 in SNAP benefits generates nearly double that in economic activity. However, as the race to 2012 builds and the crazies get crazier, the top GOP presidential hopefuls have turned on this all-star program with a vengeance.

More Seeking Food Assistance - Oregon saw a jump in people needing food stamps compared to last year. In Medford, it rose close to 25%, while it rose close to 9% in Grants Pass. A spokesman for the Department Health and Human Services says it's a sign that the recession is not over. Southern Oregon already has a high unemployment rate and more folks are losing their jobs or getting their hours cut. ACCESS, a local food bank, says about 3,700 families needed help in the month of August. That's the highest number they've ever seen. "What we've done to get food to people is to start our own food share gardens. We started five in the last two years and that's producing about 50 to 60,000 pounds of food, organic vegetables to help the gap," says ACCESS Nutrition Programs Director Phillip Yates. ACCESS also states that their food gardens gives them control to grow and share food, whereas the federal commodities that are divvied out are limiting.

Central Iowa food pantry asks for help to meet demand - An organization that feeds the needy in central Iowa is putting out an urgent plea for help. The food pantry warehouse of the Des Moines Area Religious Council is being filled and emptied about twice a week. Executive director Sarai Rice says those glowing reports about the improving economy don’t apply. “We’re seeing continuing numbers of people coming on our roles so we’re feeding more and more people.” She says the contributions are not keeping up with the need. “The economy still hasn’t improved for the people we serve,” Rice says. “Wall Street may be doing better but the people who lost their jobs or had their hours cut as a result of the recession, that still isn’t coming back yet.” Every week, D-MARC buys or is given about 20,000 food items which are repackaged and sent to 12 area pantries, feeding about 1,800 people, but donations aren’t meeting demand. Rice says, “They’re not keeping up with the need right now, mostly because people don’t realize that there is such a huge need still out there, that there are so many people that are still struggling.”

Homelessness and hunger on the rise in Toledo area - Today is world Homeless Day, a reminder of the growing local need for food and shelter, in the Toledo area. Homelessness in Lucas County has increased the most of anywhere in the state over the last three years and that trend continued in September "I never thought I'd see myself in this situation, but you never know. You never know what's going to happen," said Ed Sallee, a guest at the Cherry Street Mission. Salee fell on hard times when he lost his job in Sandusky about a month ago.  The Cherry Street Mission is seeing record growth in the number of people in need. In September, 256 people sought shelter which is up nearly 20 percent from 2010. The Cherry Street Mission served an average of more than 800 meals per day - up 25 percent from last year. "To get those double digit increases in September is a first for an organization that's more than six decades old. it's a powerful statement,"

Tent cities grow as homelessness rises in U.S. (Xinhua) -- A dirt road leads to a tent city in the woods near the small New Jersey town of Lakewood. Some 70 people have put up tents and simple huts there. Chickens and rabbits roam freely. It is a desperate place even on a warm fall afternoon, let alone in the rain or snow. The residents, about two-thirds of them men, have lived here for months, some of them for years after first losing their jobs, then their home. Five years ago, only a handful of people were looking for shelter in the woods here. Since the recession started in 2008, the camp has grown into a small community. There are now tent cities like this one in almost every U.S. state. According to the U.S. Department of Housing and Urban Development, about 650,000 people experience homelessness on any given night, 250,000 families have lost their homes, 50,000 youths sleep in the streets.

Montreal food bank sees increasing demand - Every day, the workers at Complexe Le Partage are tasked with adapting to the changing face of poverty in Quebec. Since the beginning of the global economic meltdown in 2008, volunteers and administrators at the South Shore food bank have seen a drastic rise in the amount of working families who need its services while dealing with a steep decline in donations. "We're starting to see homelessness off the island of Montreal, which is a new and difficult challenge for us," said general manager Cathy Lepage. "And with the cost of food on the rise, we've had a 30-per-cent spike in demand for our services. "Mostly it's working families who can't make ends meet. It's definitely not something we're used to seeing, but we are more determined to help these people now than ever." Like most food banks, Complexe Le Partage also offers clothing, emergency financial aid and the potential for employment to the 7,000 people it serves every week.

Arlington food bank sees record demand - When volunteers open the doors at the Arlington Food Assistance Center these fall mornings, people are always waiting. They are young and older, white, black, Hispanic, Asian and all of the other ethnicities found in the increasingly diverse county. Some have children in tow; others grasp only the handles of their reusable grocery bags. Some have familiar faces, but many waiting quietly in line are new clients, and there are more and more of them. During the second week of September, 1,572 families went to the warehouse just off Four Mile Run in Shirlington for eggs, milk, frozen chicken, pastries and produce. That was an all-time record for the 24-year-old food bank — but it lasted only until the last week of September, when 1,602 families (4,050 individuals) were served. As the nation struggles1 with tenacious economic problems, Arlington County has one of the lowest unemployment rates 2in the United States, just below 4 percent. Half of the county’s residents make more than $102,384 annually3, and the per-capita income is $74,035. Many residents are highly educated, and in August, a national magazine called Arlington one of the best spots in the country to be rich and single4.

Suburban Welfare Surge - The welfare rolls are swelling in some of the nation's wealthiest suburbs around New York City, highlighting anemic job growth since the 2008 recession and changing demographics. On Long Island, the number of people receiving welfare surged 67% between July 2007 and July 2011, a far steeper increase than in the rest of New York, according to state records. In the past year, upstate's Rockland and Orange counties experienced double-digit increases, while in Bergen County, N.J., welfare numbers went up 6%. But in New York City, the number of welfare recipients has fallen by 4% since 2007.   "It's another example of how this is not your mother and father's suburbs,"  Long Island in particular has seen a rapid rise in the number of struggling families who have turned to welfare for assistance.  In Nassau County, where the median income of $91,000 is nearly twice the national rate, welfare rolls have climbed to more than 15,000, a 73% percent increase since 2007. The numbers are at levels not seen since the 1990s, state records show, when national welfare reform reduced the rolls dramatically.

How Suburban Sprawl Works Like a Ponzi Scheme - Jobs & Economy - It will not be news to anyone who is reading this that the United States remains in the midst of the deepest economic crisis in my lifetime. Getting out of this mess and becoming more economically resilient will require a basket of solutions, including a serious look at the way we have been growing our cities and towns. Indeed, my friend Charles Marohn and his colleagues at the Minnesota-based nonprofit Strong Towns have made a very compelling case that suburban sprawl is basically a Ponzi scheme, in which municipalities expand infrastructure hoping to attract new taxpayers that can pay off the mounting costs associated with the last infrastructure expansion, over and over. Especially as maintenance costs increase, there is never enough to pay the bill, because we are building in such expensive, inefficient ways. This week, Strong Towns has released a substantial new report analyzing data and arguing that we must change our development approach if we wish to end the current economic crisis. In particular, we must emphasize obtaining a higher rate of financial return from existing infrastructure investments, focusing on traditional neighborhoods where large public investments in infrastructure are currently being underutilized

September Tax Revenues in Oklahoma Jump 14.5% From Increased Hiring and Strong Oil Production -  "Tax collections in Oklahoma grew at a double-digit rate in September for the second straight month compared with receipts for the same period a year ago. Total collections for the state's general revenue fund, the principal funding source for state government, were $526.2 million in September, which was $66.5 million, or 14.5 percent, above collections for the same month in 2010.  For the first quarter of this fiscal year, tax collections registered a 12.1 percent growth. Total collections, led by growth in income tax receipts, exceeded $1.3 billion for the three-month period. That is $143.1 million more than for the first three months of the 2011 fiscal year and 7 percent more than expected.

Florida: Tax collections expected to fall sharply -  State economists are predicting that Florida's tax collections will fall short by $1.3 billion to $1.7 billion over the next two years. Economists began meeting Tuesday to draw up a new forecast on state tax collections amid signs that Florida's economy has been stalling over the last few months. Gov. Rick Scott and legislative leaders will rely on these forecasts to determine whether more cuts will be needed in 2012 to schools, health care and other state programs. Scott is already making it clear he still plans to push for more tax cuts despite the drop in tax collections. He will begin rolling out his legislative agenda over the next few weeks. Scott appeared on a Tallahassee radio station Tuesday morning and said he would like to enact further cuts to the state's corporate income tax as well as look at whether there are fees now paid by businesses that can be scaled back. Scott has pledged to cut taxes and regulations in order to grow the state's economy and create 700,000 jobs over seven years. "We need to look at all our fees, can we get rid of a fee?"

New State Online Sales Tax Bill Introduced in Congress - A new online sales tax bill will be introduced in Congress today, following a press conference at 1:30PM today by the sponsors, Reps. Steve Womack (R-AR) and Jackie Speier (D-CA). This bill (titled the Marketplace Equity Act) is the one that large brick-and-mortar retailers have been working on in recent weeks, although its introduction is sooner than expected. (For background on online sales taxes, and previous bills such as the Main Street Fairness Act, see here.)Although it hasn't been released, this is a recent draft version (PDF) that will probably be close to what is introduced today. Key points of this bill are that it permits states to require out-of-state sellers with no physical presence in the state ("remote sellers") to collect sales tax if: (see list)

Updated: New State Online Sales Tax Bill Introduced in Congress - Yesterday we reported on what might be in a new online sales tax bill being introduced into Congress. The actual version was introduced yesterday and is different from that version. Read the full version (PDF) of the bill; here is a talking points sheet being distributed by supporters. The bill is reportedly called the Marketplace Equity Act but the version I obtained yesterday has that blank. Key points of the bill: (list)

Harrisburg, Pennsylvania, Files for Bankruptcy, Lawyer Says - The city of Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection following a vote by City Council, according to a lawyer for the council. Mark D. Schwartz, a Bryn Mawr, Pennsylvania-based lawyer and former head of municipal bonds for Prudential Financial Inc.’s mid-Atlantic region, said he filed the documents by fax to a federal bankruptcy court last night. The filing couldn’t be confirmed with the U.S. Bankruptcy Court in Harrisburg. The state capital of 49,500 faces a debt burden five times its general-fund budget because of an overhaul and expansion of a trash-to-energy incinerator that doesn’t generate enough revenue. “This was a last resort,” Schwartz said in an interview after the council voted 4-3 to seek bankruptcy protection. “They’re at their wits end.” While bankruptcy would mean the loss of state aid under a law passed in June, it’s preferable to a proposed recovery plan, said Councilwoman Susan Brown-Wilson.

Harrisburg Files for Bankruptcy on Overdue Incinerator Debt - Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection after failing to pay the debt on a trash-to-energy incinerator. The council made its 4-3 decision against the advice of a city attorney who said the panel did not follow proper procedure. It’s the ninth bankruptcy filing this year by a municipal-bond issuer, and the first by a U.S. state capital since 1980 when the municipal bankruptcy laws were overhauled, said James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases. “This was a last resort,” Mark D. Schwartz, the council’s Bryn Mawr-based lawyer, said after he faxed the documents to a federal court yesterday. “They’re at their wits’ end.” Harrisburg is the biggest city to file for bankruptcy since Vallejo, California, filed in 2008

Jefferson County Democratic Lawmakers May Derail Debt Deal - The Democratic half of the Alabama Legislature’s 25-member Jefferson County delegation opposes a settlement with holders of $3.14 billion in debt, throwing the deal in doubt, according to three lawmakers. Democratic state Representatives Patricia Todd, John Rogers and Mary Moore said in phone interviews this week that most of the delegation dislikes the terms of the deal. Their party in particular will oppose bills necessary for its success because they believe it gouges the poor, who would have to pay higher fees. In Alabama, one lawmaker can block legislation pertaining to a county, thanks to a tradition of “local courtesy.” Without a settlement, Jefferson County might file the biggest municipal bankruptcy in U.S. history as early as December. Commissioners avoided a filing Sept. 16 by voting 4-1 for a deal with creditors, who agreed to concessions worth $1.1 billion. JPMorgan Chase & Co. (JPM), which arranged most of the debt, would take the biggest loss. Jefferson County and its creditors set the end of this week as a deadline for an agreement. Officials had said they hoped to have a final draft by Oct. 15. At today’s meeting, however, lawmakers said they wouldn’t support the proposal’s sewer-rate increases. Not one spoke in favor of the deal.

Slumping cities face service cuts, layoffs — and even bankruptcy - The last person to leave Highland Park, Mich., will soon have fewer lights to turn out. Officials with the private electric utility there have started to repossess 1,400 street lights and poles. The city — facing a severe budget crunch — owed the company $4 million, a debt the company canceled in exchange for taking its lights back. At least Highland Park is still solvent. This week city officials in Harrisburg, Pa. — the state’s capital — decided to seek bankruptcy protection, in part because the city is on the hook for millions of dollars used to rebuild a power-generating trash incinerator. Municipal bankruptcy and repossession are extreme cases, but no longer unheard of in America. From Rhode Island to California, hundreds of city governments — after staggering through three years of national economic doldrums — are ending this year facing even more layoffs, unpaid furloughs and service cuts to balance their out-of-whack budgets. “The effects of depressed real estate markets, low levels of consumer confidence and high levels of unemployment will continue to play out in cities through 2011, 2012 and beyond,”

You Know That Your City Has Become A Hellhole When….  All across America there are cities and towns that were once prosperous and beautiful that are being transformed into absolute hellholes. The scars left by the long-term economic decline of the United States are getting deeper and more gruesome. The tax base in many areas of the nation has been absolutely devastated as millions of jobs have left this country. Hundreds of cities are drowning in debt and are desperately trying to survive. Last year, city government revenues in the United States fell by another 2.3 percent. That was the fifth year in a row that we have seen a decline. Meanwhile, costs associated with health care, pensions and virtually everything else continue to explode. So what are cities doing to make ends meet? Well, one big trend that we are now witnessing is that many U.S. cities have been getting rid of huge numbers of employees. If you can believe it, 72 percent of all U.S. cities are laying workers off this year. Social services and essential infrastructure programs are also being savagely cut back in many areas of the country. The cold, hard truth is that most of our cities are flat broke and things are going to get even worse in the years ahead. So how do you know if your own city has become a hellhole? Well, a few potential "red flags" are posted below....

Taxing Nothing: Make Owners of Vacant Property Pay - If nothing happens in Washington, then state and local governments are left to fend for themselves. Unfortunately state and local governments have two serious disadvantages in the job creation effort relative to Washington. They can’t run deficits, since most are required to balance their budgets. And, they can’t just print money like the Federal Reserve Board. As a result, the range of action for state and local policymakers is limited to what they can pay for. With the recession sharply curtailing revenue, that doesn’t leave much money for inventive job-creating agendas. These governments can raise taxes, but there is a limit to how much taxes can be increased without sending business into neighboring states, even if the political will exists. However, there is one tax that state and local governments can raise without fear of losing businesses or people. They can tax vacant properties. This is an especially desirable tax in the current economic situation since the real estate bubble created a glut of both residential and non-residential property in much of the country. Having housing units or commercial properties sit idle does no one any good. People could be living in the housing units and the commercial properties could offer new jobs in stores and offices.

State Revenue Under Plan Means Cuts From New York to California -- New York, California and Florida are among states reporting revenue collections trailing forecasts in the fiscal first quarter, prompting preparations for a fresh round of budget reductions. California’s receipts fell more than 3 percent short of estimates for the three months through September, raising concern that school aid may be cut. In fiscal 2013, New York state may face a $2.4 billion deficit because of smaller Wall Street bonuses and job cuts, Comptroller Thomas DiNapoli said Oct. 11. States are projecting combined budget gaps of $31.9 billion in fiscal 2013, according to the National Conference of State Legislatures in Denver. A 14 percent third-quarter drop in the Standard & Poor’s 500 Index, the worst performance since the end of 2008, and concern that Europe’s debt crisis may spread have dented consumer and business confidence, curbing tax receipts. “It’s going to be quite a while before happy days are here again for many state legislatures,” John J. Pitney Jr., a politics professor at Claremont McKenna College in Claremont, California, said by telephone. “There is such weak job growth and income growth. Everything that should be up is down.” A revenue miss of $1 billion in California would trigger automatic cuts in funding for universities and social services, under the state’s 2012 budget. A $2 billion shortfall would spur cuts to schools.

DHS sends out revised welfare cutoff letters - The Michigan Department of Human Services has reissued notices to 11,162 families slated to lose their cash assistance because they've been on welfare for 48 months or longer. The department issued the notices to comply with a judge's order that stopped DHS from removing the families from the rolls Oct. 1. U.S. District Judge Paul Borman blocked the cutoff of benefits Oct. 4 saying the state hadn't provided adequate notice. Now that the letter has been issued, their benefits will continue for 10 more days to give them time to lodge an appeal. Those who appeal within the 10 days will have their benefits continue until their appeal is decided. Those who miss the 10-day window can still appeal within 90 days, but their benefits will not continue during the appeals process. If recipients lose their appeal they would have to refund benefit payments. The families include roughly 41,000 people, nearly 30,000 of whom are children. Republicans who control the Legislature and governor's office enacted the 48-month limit as a cost cutting measure for the fiscal year that started Oct. 1.

Georgia Considers Replacing Firefighters With Free Prison Laborers - Forcing prison inmates to work as unpaid laborers is not a new practice, but GOP-controlled states are increasing taking the idea to extremes as they face budget shortfalls and refuse to raise taxes. Under Gov. Scott Walker (R-WI) anti-collective bargaining law, at least one Wisconsin county replaced some union workers with prison labor. Inmates are not paid for their work, but may receive time off of their sentences. Now Camden County in Georgia is considering tasking prisoners to take on one of the most dangerous jobs there is: fighting fires. Using prisoners as firefighters is a cost-cutting measure that’s expected to save the county a bundle: A select group of inmates may be exchanging their prison jumpsuits for firefighting gear in Camden County. The inmates-to-firefighters program is one of several money-saving options the Board of County Commissioners is looking into to stop residents’ fire insurance costs from more than doubling. [...] The inmate firefighter program would be the most cost-effective choice, saving the county more than $500,000 a year by some estimates. But that option is already controversial, drawing criticism from the firefighters who would have to work alongside – and supervise – the prisoners.

California Begins Moving Prison Inmates — Facing an unprecedented order1 from the Supreme Court2 to decrease its inmate population by 11,000 over the next three months and by 34,000 over the next two years, California prisons last week began to shift inmates to county jails and probation officers, starting what many believe will be a fundamental and far-reaching change in the nation’s largest corrections system.  Last spring, the Supreme Court ruled3 that overcrowding and poor conditions in state prisons violated inmates’ constitutional rights and, in a first, ordered a state to rapidly decrease its inmate population. Gov. Jerry Brown and the Legislature approved a plan that would place many more offenders in the custody of individual counties.  Under the plan, inmates who have committed nonviolent, nonserious and nonsexual offenses will be released back to the county probation system rather than to state parole officers. Those newly convicted of such crimes will be sent directly to the counties, which will decide if they should go to a local jail or to an alternative community program. And newly accused defendants may wear electronic monitoring bracelets while they await trial.

California Tax Revenue Decline Inches State Toward Trigger Cuts - California took in less revenue than needed to stay within its budget last month, leaving the most- populous U.S. state at risk of triggering automatic cuts to universities and caregivers for the elderly and disabled. The state had $705 million less on Sept. 30 than Governor Jerry Brown and Democrats projected in their budget for the year that began July 1, Controller John Chiang said yesterday. The $86-billion spending plan included a series of reductions to be activated if revenue falls below certain levels. The first tier, if the shortfall is $1 billion, would trim University of California and California State University budgets by $100 million each, increase community-college fees by $10 per unit and cut in-home services for the elderly and disabled who need help. In December, Brown’s finance department will estimate whether the rest of the year’s revenue can meet the original projection. “The potential for revenue shortfalls is precisely why the governor and Legislature included trigger cuts in this year’s state spending plan,” Chiang said

California Nears Automatic Spending Cuts With Revenue $705 Million Short  - California’s revenue for the fiscal year that began three months ago has fallen $705 million below what Governor Jerry Brown and Democrats projected, approaching a level that may trigger automatic university spending cuts and higher community college fees. The $86 billion general-fund spending plan Brown signed in June included a series of cuts activated if higher revenue doesn’t materialize by mid-December. The first, if the shortfall is $1 billion, would trim University of California and California State University budgets each by $100 million and increase community-college fees by $10 million. Under a $2 billion gap, the contraction would mean a seven- day reduction in the school year to save $1.54 billion and an end to $248 million in home-to-school busing subsidies. “The potential for revenue shortfalls is precisely why the Governor and Legislature included trigger cuts in this year’s state spending plan,” Chiang said in a statement. “September’s revenues alone do not guarantee that triggers will be pulled. But as the largest revenue month before December, these numbers do not paint a hopeful picture.”

California Kids Face Days Without Class as Revenue Falls Short - Public schools in California, which already spend less per student than those in 28 states, are bracing for a $1.7 billion cut that may wipe out high-school sports and student busing, and trim the academic calendar by seven days next year. Automatic cuts built into this year’s budget, intended to protect bondholders if revenue falls short of projections, are drawing new attention after California fell $705 million behind estimates in the first quarter. A shortfall of $1 billion will slash hundreds of millions of dollars from universities and care of the elderly and disabled. A deficit of $2 billion will trigger reductions to public schools, creating “a fiscal emergency” that could leave some districts insolvent, a group of superintendents told Governor Jerry Brown in a Sept. 15 letter. “We’re certainly really, really close to the first round of trigger cuts and inching closer to ours,”

"Dream Act" Became Law in California. - In California, illegal immigrants enrolling in college will be eligible for state scholarships and financial aid beginning next July. Over the weekend, Gov. Jerry Brown signed the second portion of the state’s Dream Act into law. The legislation allows illegal immigrants who graduate from high schools in California to apply to the state’s public universities as residents, granting them a reduced tuition rate. (Students must prove themselves to be “on the path to legalization,” meaning that if they are undocumented, they must apply for lawful immigration status or swear to do so.) The law also affords such students the right to both private loans and public aid to help in paying for their education.Also on Saturday, the governor signed a controversial bill on affirmative action in college admissions, legislation that had inspired protests at the University of California, Berkeley, and beyond. Mr. Brown rejected the consideration of affirmative action in admissions, and in that “ducked a costly legal battle,”

7,000 teachers laid off in cuts - Layoffs hit nearly 3 percent of teachers in New York this year, according to a survey released Tuesday by the state Council of School Superintendents. That translates into more than 7,000 teacher layoffs, said Richard C. Iannuzzi, president of the New York State United Teachers union. Another 4,000 unfilled positions were eliminated. More than 4 percent of school administrators also were laid off. The union and the superintendents blame Albany. They cite this year's rare cut in state aid after two years of flat spending and a new law capping local property tax growth that takes effect in the spring. The state has about 222,000 classroom teachers. Besides the teacher layoffs, the superintendents' survey found nearly 2 percent of teacher jobs were lost to attrition or retirement, contributing to two-thirds of districts saying class sizes are larger this year.

Teaching positions reduced in 80 percent of New York districts, survey of superintendents finds - The financial condition of 75 percent of New York's school districts is worse than a year ago, according to a survey of schools superintendents released Tuesday. Seventy-one percent of Mid-Hudson Valley superintendents said their district's financial health has deteriorated since last year, the state Council of School Superintendents found. That compared with 61 percent of Finger Lakes superintendents who said their finances are somewhat or significantly worse and 94 percent for the North Country. Mid-Hudson Valley included Dutchess, Ulster, Orange and Sullivan counties. Eighty percent of the 283 superintendents who responded to the online survey said they cut teaching positions for the current school year. The average reduction in workers was 4.9 percent, including layoffs and attrition, and it rose to 7.5 percent for administrators and 8 percent for support staff. More than 4.3 percent of teaching jobs were cut, 2.7 percent via layoffs and 1.6 percent via attrition, superintendents said. Statewide, districts lost 11,700 teaching positions this school year, roughly 7,700 via layoffs and 4,000 by attrition, according to the New York State United Teachers union.

Does Locking Young Offenders up Longer, Make us Safer? - Real News video

What Smaller Government Looks Like in the US - Last week's employment report in the US contained a familiar story: the private sector continues to add jobs, albeit at a modest pace, while government layoffs continue to undo a portion of those job gains. In the absence of the current mania to reduce the size of government, the US labor market would have gained closer to 2 million jobs instead of the roughly 1.5 million actually created over the past year.  Total federal employment has remained roughly constant (increased defense department jobs have made up for job losses elsewhere in the federal government), and employment by state governments has fallen by a bit. But local government employment has seen by far the largest change over the past two years, with local governments alone accounting for about 90% of all government job losses in the US. And of that, the majority of job losses are education jobs. The US (along with many countries around the world right now) is currently going through a deeply unfortunate and harmful bout of fiscal contraction, right when it should be doing exactly the opposite. And by acheiving that fiscal contraction primarily by laying off teachers, it appears to have decided to do so on the backs of its schoolchildren.

Almost all government layoffs are local... Sometimes I feel like a broken record, but it really can't be emphasized too often: state and local subsidies to business have noticeable negative effects on government finances,which are magnified in times of fiscal crisis like the present. As Kash Mansori points out (h/t Mark Thoma), of the 532,000 government jobs lost from September 2009 to September 2011, fully 470,000 are at the local level. My research suggests that state and local governments give almost $50 billion per year in location incentives to business, and about $70 in total business subsidies. My best guess is that about half of it is at the local level, meaning $25-35 billion per year comes from local governments. It's easy to see that that much money could pay to rehire all those teachers, police, and  other local government workers, and maybe have money left over. At the top end of the estimate, $35 billion could hire half a million workers earning $70,000 a year in salary and benefits, or 700,000 making $50,000 per year.

"Supporting" 400,000 Education Jobs: An Unsupported Claim - The White House has circulated materials asserting that the President’s proposed American Jobs Act (AJA) would “support” nearly 400,000 education jobs. A former colleague of mine has noted that the validity of this claim rests on the definition of the word “support,” prompting a dissection of what exactly the Administration means by this terminology. Similar claims were made earlier in the Administration with respect to jobs “created or saved” by the 2009 stimulus package. The many problems with those claims have been amply discussed elsewhere and will not be reviewed here in detail.  If numerical claims do not reliably measure the effects of government policies, that alone is a reason not to make them. But inappropriate use can also boomerang on the authors of the policies if they create a tangible disconnect between advocacy rhetoric and economic reality. To be claiming a powerful positive effect on millions of jobs at a time when so many Americans were losing theirs inevitably introduces skeptical questions, especially in an environment where many Americans are already inclined to be skeptical. Far better to make more prudent, verifiable claims that resonate with Americans’ actual economic experience.

Why Education Needs an Occupy the Classroom Revolution - Teachers hold our nation’s future right in front of them, as they serve 30—or at the high school level, 150—students per day. We teach academic subjects and implicitly share values and beliefs. Yet, society still devalues our importance in the development of children—paying us with lip service, handshakes, and thank-a-teacher projects, while simultaneously slipping us pink pieces of paper by the thousands. Add in the continued narrowing of our curricula, and we have a dangerous recipe that’s educating children to believe learning is only necessary for commerce. Many teachers are protesting the direction education is heading, but we need a broader Occupy the Classroom movement to help us become the true leaders of our profession. Teachers as a whole don’t occupy—they are preoccupied. In English, that means "busy with other things often at the exclusion of other things." In Spanish, a more apt translation is "worried." Teachers live in a space where they worry about every move they make—fearful that some administrator might come out of the bushes with a rubric that decides they're not proficient.  Thus, teachers must occupy the classroom. This is more than a call for reforming the way schools are funded. Teachers must develop their own expertise and take control of student learning.

Florida's college prepaid tuition soars up to $49,293 - The cost of prepaying for college will soar by as much as $4,000 when the Florida Prepaid College Plans go on sale Monday. The price tag this year for the four-year university plan, traditionally the most popular, is $49,293 for a newborn, or $298 a month. That’s up from from $45,367 last year. It has more than tripled in the past five years because of legislation passed in recent years that allowed universities to make big increases in tuition. “We recognize that families are having difficulty in managing their finances, so we offer four plans, with the lowest (the two-year state college plan) being $50 a month,” Prepaid spokeswoman Susan James said. The current plans cover tuition and most required fees at state colleges and universities.

Gallup: Vast Majority Of College Graduates Are Employed - One of the most prominent themes of the Occupy Wall Street protests has been the phenomenon of college graduates saddled with large student loan debt and no job. While there are no doubt anecdotal cases where this is true, and I’m not going to question the people who’ve posted those stores on the “We Are The 99%” Tumblr Page, a new Gallup survey seems to indicate that it’s not typical of college graduates: While 64% of the U.S workforce is employed full time for an employer, as measured by Gallup from January to September 2011, this percentage ranges from a high of 73% among college graduates to a low of 29% among those aged 65 and older. An additional 7% work full time for themselves and 10% work part time and do not want full-time work, with those 65 and older by far the most likely to fit into these two categories. That gives as a high of 89% of college graduates who are either employed full-time for an employer or themselves, or employed part-time by choice....higher education clearly gives one better job opportunities than those who have not done so, despite the defeatism that one hears from the college graduates that make up the people who post their stories and have become among the more prominent voices of the “Occupy Wall Street” movement.

NYPD infiltration of colleges raises privacy fears - With its whitewashed bell tower, groomed lawns and Georgian-style buildings, Brooklyn College looks like a slice of 18th Century America dropped into modern-day New York City. But for years New York police have feared this bucolic setting might hide a sinister secret: the beginnings of a Muslim terrorist cell. Investigators have been infiltrating Muslim student groups at Brooklyn College and other schools in the city, monitoring their Internet activity and placing undercover agents in their ranks, police documents obtained by The Associated Press show. Legal experts say the operation may have broken a 19-year-old pact with the colleges and violated U.S. privacy laws, jeopardizing millions of dollars in federal research money and student aid. The infiltration was part of a secret NYPD intelligence-gathering effort that put entire Muslim communities under scrutiny. Police photographed restaurants and grocery stores that cater to Muslims and built databases showing where people shopped, got their hair cut and prayed. The AP reported on the secret campaign in a series of stories beginning in August.

Student-Loan Debt Among Top Occupy Wall Street Concerns -- Student-loan debt has continued to grow despite a financial crisis that constrained credit elsewhere, and the increasing burden amid high unemployment is driving at least part of the protests among the Occupy Wall Street movement. Last year, Americans began to owe more on their student loans then their credit cards, with student debt reaching the $1 trillion mark. Many have flocked to higher education during the down economy, only to find themselves still unemployed or underemployed. Zak Cunningham is a 22 year old who graduated from Earlham College in Indiana last spring. He says he “doesn’t know how much student loan debt” he has, since he hasn’t bothered to count. He doesn’t have a job and wants to go to graduate school, but is worried about the cost.  And while organizers say there’s no official “census” of who make up the protester base at Occupy events, the presence of student loan debtors and young, unemployed people, is noticeable. See a chart made by Mike Konczal, who parsed data from the related We Are the 99%.

Exposing the Student Loan Racket (Infographic) -  Student loan debt, now at $830 billion, has surpassed credit card debt—a statement unheard of 20 years ago. Student loans, unlike any other form of debt, CANNOT be forgiven via bankruptcy—these loans MUST be repaid. Is this the next bubble to burst?

Is this what’s feeding the Occupy Wall Street protests? - We’ve seen it mentioned several times over the last week so we thought we’d pose this question to our readers:  Should the real targets of the Occupy Wall Street protests be the fat cats in our institutions of Higher Education?  The fact is that it’s nearly impossible to untangle the causes of the economic mess we’re in. Whether the cause is government (according to the libertarians) or the financial industry (according to the progressives) or an economically ungrounded system of higher education and student loans (according to all of us with a degree, no job and big student debt), there’s a pretty clear message… everyday people are getting tired of getting jerked around.

Enshrining Student Debt Slavery Into Law - Reporter Tim Grant covered student loans in yesterday's Sunday edition of the Pittsburgh Post-Gazette. The time to start paying back student loans is drawing near for recent grads, but some aren't earning enough to pay them. Defaulting on these loans is a very, very bad thing. No, you won't go to debtor's prison, because of the astonishing Progress humankind has made over the centuries. Grant explained the rules— Student loans are unlike other forms of debt such as credit cards, installment loans, auto loans and mortgages. Congress passed a law in 2005 that makes it nearly impossible to discharge federal or private student loan debt in bankruptcy. Borrowers are financially stuck with those payments for life. Defaulting on student loans also leads to harsher penalties than would be imposed for almost all other forms of debt. While defaulted loans normally stay on a person's credit report for seven years, defaulted student loans stay on credit reports for seven years from the date the defaulted loan is paid off — which could mean it never goes away. Also, unlike other debt, unpaid student loans could lead to wage garnishment, seizure of tax returns, seizure of Social Security benefits and loss of eligibility for federal Veterans Affairs or federal housing loan programs.

Kirk report diagnoses Illinois' 'unsustainable' debt -  But about three months ago, Feinberg accepted a request from U.S. Sen. Mark Kirk, R-Ill., to lead a three-member sovereign debt advisory board that looks at Illinois' "unsustainable" debt levels and how they're hurting the state's competitiveness. Kirk will issue a 32-page report prepared by his staff with the advice of the advisory board, making a case for pension reform in Illinois. "If you ask me what I am, I'm a reformer, and I support reformers," Feinberg, also chairman of Chicago-based Maxim Revenue Management Solutions, said in an interview Monday. "What's happened is that Illinois' political leadership has ignored the obvious in recent history and, as a result, has plunged Illinois into this self-perpetuating cycle of debt." Illinois' financial troubles mean that it has to pay more for every dollar it borrows at the state and local level, the report said. It cites a May report from Illinois State Treasurer Dan Rutherford. Rutherford's report said Illinois borrowed $3.7 billion earlier this year to help fund a pension payment, and because of the state's low credit rating, taxpayers are saddled with $1.28 billion of interest. That's 17 percent more than Kentucky, 34 percent more than Michigan, and 41 percent more than Washington have to pay on similar bonds issued this year, Rutherford's report said.

SOCIAL SECURITY: IT’S JUST MATH - Laurence Kotlikoff said this in an interview with NPR: "We've got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000–you're talking about more than $3 trillion a year just to give to a portion of the population. That's an enormous bill overhanging our heads, and Congress isn't focused on it." But you've written that Social Security will be only a small contributor to the future budget gap. Are Kotlikoff's worries unfounded? A look at the 2011 Trustees Report Table IV.B2  shows that, sure enough, in 2025 there will be about 78 million beneficiaries to OASDI.    To find the "$40,000 per person" is not so easy.  Look at Table VI.F7, Cost of OASDI (“Social Security”) in 2025 will be $1213 Billion, not 3 Trillion, for a per person cost of about $15,551 in “constant 2011 dollars” , not  $40,000.  Hmmm, maybe he means “current dollars, that is inflated dollars.  Well, table VI.F8 gives  $1626 Billion for 2025, still not $ 3 Trillion, or $40,000 per person. Perhaps from the (Table VI.F9) “High Cost” estimate for 2025, in current dollars,for Social Security plus Medicare, of $ 2737 Billion. Close enough, if you don’t mind rounding up by 10%. It is not honest to start out by talking about Social Security, then skip to talking about (mumble) “socialsecurityplusmedicare” without bothering to mention that you have done so, or pointing out that Medicare is a very different kind of problem than Social Security. And it is not honest to use a “high cost” estimate which even the Trustees regard as “unlikely,” without even mentioning that that’s what you are doing.  Nor is it honest to talk about inflated dollars without telling people that’s what you are doing.

N.Y. Medicaid Rolls Reach 5 Million - For New York Gov. Andrew Cuomo and state policy makers, it's a milestone that comes with mixed blessings: five million New Yorkers on Medicaid. If New York hasn't already eclipsed the mark this month, it's nearly certain that the Medicaid program will get its five-millionth New Yorker this year, experts said. In August, there were 4,963,000 people enrolled in the government program for the poor and disabled. The figure could top six million by the end of Mr. Cuomo's first term, officials predict.

Madrick, Dean Win Big Defending Social Security and Medicare - (2 hour debate on Vimeo) We’ve all heard it before, repeated ad nauseam by conservative critics of Social Security and Medicare: “Grandma’s benefits imperil junior’s future.” That’s the claim Roosevelt Institute Senior Fellow Jeff Madrick and former DNC chairman Howard Dean sought to debunk at last week’s Intelligence Squared debate. Arguing for the motion were Fox News commentator Margaret Hoover and media mogul Mort Zuckerman. So how did the progressives fare? Before the debate, the audience was split 33/32 in favor of the motion, with 35 percent undecided. By the time Madrick and Dean were finished, they’d swayed 56 percent of the crowd to their side.

Anatomy of a $30 Billion Medicare Crime - Like all great capers, this $30 billion Medicare crime unfolded in plain sight. A drug rep sat in the doctor's office, balancing folders on his knees and flipping through the patient files. He wore a starched shirt, navy slacks and a golf tan from that day he'd convinced the doctor-client to participate in his company's "mini-trial." The deal was this: if the oncologist would inject his patients with high doses of a poorly tested drug, he could pocket $1,500. But the doctor was too busy to select patients for this "study." So, the salesman, Dean McClellan, combed through the confidential patient files himself, searching for a few human guinea pigs to enroll. He found his subjects and, over the ensuing weeks, tracked their reactions to the high doses of the anti-anemia drug Procrit. "Cancer to the brain was worse," the rep wrote in one patient chart. "But anemia was better." Let us count the ways in which this was illegal. First, the payments were bribe sused to seduce doctors to pump Procrit doses to levels not approved by the Food and Drug Administration.  Worse, there was no investigative review board, control group or protocol as there'd be in a bona fide scientific study. If there had been, someone might have noticed that three out of five people were dying in McClellan's jerry-rigged trials.

Not a CLASS Act -- When President Obama’s health care proposal was being debated we were repeatedly told that the “The president’s plan represents an important step toward long-term fiscal sustainability.” Indeed, a key turning point in the bill’s progress was when the CBO scored it as reducing the deficit by $130 billion over 10 years making the bill’s proponents positively giddy, as Peter Suderman put it at the time. Of course, many critics claimed that the cost savings were gimmicks but their objections were overruled. One of the budget savings that the critics claimed was a gimmick was that a new long-term care insurance program, The Community Living Assistance Services and Supports program or CLASS for short, was counted as reducing the deficit. How can a spending program reduce the deficit? Well the enrollees had to pay in for at least five years before collecting benefits so over the first 10 years the program was estimated to reduce the deficit by some $70-80 billion. Indeed, these “savings” from the CLASS act were a big chunk of the 10-yr $130 billion in deficit reduction for the health care bill. The critics of the plan, however, were quite wrong for it wasn’t a gimmick, it was a gimmick-squared, a phantom gimmick, a zombie gimmick:

CLASS Dismissed -- WP: The Obama administration cut a major planned benefit from the 2010 health-care law on Friday, announcing that a program to offer Americans insurance for long-term care was simply unworkable. Last week, I wrote about the CLASS act. As you may recall, this long-term health insurance program was scored as a big 10-year deficit reducer because it combined early taxes with late expenditures. It was obvious that the late expenditures would quick overwhelm the early taxes but the CLASS act added some $80 billion to projected health-care savings which helped to pass the bill. Now the bill is passed, however, reality is setting in and the program has been scrapped. House Republicans are upset: “Make no mistake,” Chairman Fred Upton (R-Mich.) said in announcing the hearing, “the CLASS program was tucked into the health care law to provide $86 billion in false savings, and this budget gimmick is a prime example of why Americans are losing faith in Washington. We plan to hold this hearing to get answers about why this sham was carried on for as long as it was, and what cancellation of the program means for the law’s growing price tag.”

Romney’s Advisers Met With Obama to Help Craft ‘Obamacare’ - Three of Mitt Romney’s advisers went to the White House at least a dozen times in 2009 to consult on the former Massachusetts governor’s health care plan that President Obama used as a model for his initiative -- now a federal law that all the Republican presidential candidates want to repeal. White House spokesman Josh Earnest told reporters Tuesday he was "not in a position to comment on specific meetings." But in a remark that won't help Romney in his pursuit for the 2012 Republican nomination, Earnest repeated that Obama took cues from the Massachusetts legislation. Romney also worked closely with the late Sen. Ted Kennedy on the Massachusetts health care plan and Kennedy was the lead author of the national legislation. Kennedy had said that the Romney plan was a model for the national one.

2012 Projections Anticipate Health Premium Hikes - In concordance with a report published two weeks ago declaring health insurance premiums on the rise, a new pricing survey from Sherlock Company1, of 22 percent of plans across the nation anticipates premium rate increases of 8 percent in 2012. This figure is down two percentage points from the 10 percent increase projected for 2011. After benefit buydowns, premium increases are expected to average 5.5 percent, which also compares favorably with last year’s expectations of 7 percent. According to Sherlock, the area with the highest change in estimated employee contribution trend is the East South Central—consisting of Alabama, Kentucky, Mississippi, Tennessee—with an increase of 19.5 percent. The Pacific area was the lowest at 10.3 percent. On average the contribution is expected to increase by 14.3 percent next year. Sherlock’s Seventeenth Annual Health Plan Pricing Survey reflects projections of health plans of about 30 million commercial members, including 73 plans or 22.1 percent of health plans nationwide.

Why Medical Prescriptions May Be Killing Thousands of Americans Every Year The Centers for Disease Control and Prevention recently reported that physicians' prescribing practices have finally caught up with us in a big way. In 2009, the annual number of deaths (37,485) caused by improper/overprescribing and poor to non-existent monitoring of the use of tranquilizers, painkillers and stimulant drugs by American physicians now exceeds both the number of deaths from motor vehicle accidents (36,284) and firearms (31,228). Deaths from street drugs during 2009 were vastly less than those caused by prescription drugs. Medical doctors are leaving regular drug dealers in the dust. Every 14 minutes one American is killed by prescribed painkillers and psychiatric drugs. The number of "anxious" people or prescription tranquilizers taken by "anxious" people for "anxiety" has jumped 286 percent between 2000 and 2009, and should reach 341 percent by the end of 2011. Really. The prescription of stimulant drugs, amphetamines and methyl-phenidate -- Adderall and Ritalin -- has skyrocketed. The U.S. now consumes 86 percent of these drugs worldwide. The prescribing of painkillers, the leading killer, has also risen dramatically, 328 percent, during this same time period. Vicodin kills the most pain and people, and is the single most prescribed medicine on the face of the earth.

Where Will The Next Pandemic Come From? - "Contagion" is fiction, but just barely. The bug that kills Gwyneth Paltrow's character is made up, but the risk it represents is entirely plausible. The film's screenwriter did some of his research at Global Viral Forecasting.  Since pandemics were first recognized as a serious public-health problem a century ago, the usual approach has been reactive: throw everything you've got at the disease du jour. When there is an influenza threat, drop everything and focus on risks from influenza pandemics. When SARS spreads, focus on unknown respiratory diseases. This approach helps to quell public concern, but it's a hugely inefficient way to deal with future risks, especially at a time when lethal microbes are frequent fliers. It does nothing to deal with the next unknown viral agent, of the sort dramatized in "Contagion."We need a different approach, based on our growing capacity to predict the most serious threats and to keep them from spreading.

Foreign insects, diseases got into US post 9/11 -— Dozens of foreign insects and plant diseases slipped undetected into the United States in the years after 9/11, when authorities were so focused on preventing another attack that they overlooked a pest explosion that threatened the quality of the nation's food supply.  At the time, hundreds of agricultural scientists responsible for stopping invasive species at the border were reassigned to anti-terrorism duties in the newly formed Homeland Security Department — a move that scientists say cost billions of dollars in crop damage and eradication efforts from California vineyards to Florida citrus groves. The consequences come home to consumers in the form of higher grocery prices, substandard produce and the risk of environmental damage from chemicals needed to combat the pests. An Associated Press analysis of inspection records found that border-protection officials were so engrossed in stopping terrorists that they all but ignored the country's exposure to destructive new insects and infections — a quietly growing menace that has been attacking fruits and vegetables and even prized forests ever since.

The Hidden Beauty of Pollination (TED talk)

Drought-dry Texas driving its cattle north - The cowboys herded the youngest, thinnest and weakest animals into a separate pen, some with ribs and hipbones jutting after weeks without a decent meal. The best cattle from Swenson Land & Cattle Co. Inc. will make the trip north. It's a journey born of desperation, a costly cattle drive fueled not by tradition or buyers at Midwest packing houses, but by the desire to survive the lengthening statewide drought. Managers at Swenson and the state's other large ranches have been scrambling to ship cattle to verdant northern land they have leased in an effort to save their trademark brands and to continue taking advantage of the worldwide demand for beef.The number of breeding cows shipped out of state increased 140% in September compared with the same month last year, with 145,000 cattle exported, according to the Texas Animal Health Commission.

Heat Creates Dangers for Farmers at Harvest Time - Farmers usually hope for sunny weather to help speed their harvest, but weeks of unseasonably warm temperatures have dramatically increased the risk of field fires, prompting growers to take extra precautions as they navigate equipment through dry crops. Thousands of acres of farmland already have caught fire recently, including giant blazes this week in central Nebraska and south-central South Dakota. The National Weather Service has issued "red flag warnings" for firefighters and land management agents in Minnesota, Iowa, Nebraska, Kansas, western Missouri, eastern Colorado, North Dakota and South Dakota. The warning indicates a heightened fire danger in those regions.

More Corn is Used For Ethanol in U.S. Than For Food or Feed — The Top Five Reasons We Should Stop This Madness - Today, more corn is grown in America for ethanol than for food or for livestock feed. For every 10 ears of corn grown in the U.S., two are consumed by humans, and the other eight are used for feed and fuel. In the last year, the scales have tipped so that ethanol represents the largest share of corn use — 5 billion bushels of corn went to animal feed and residual demand while “the nation used more than 5.05 billion bushels of corn to fill its gas tanks.” That is sure to rile all those who see corn ethanol as an over-subsidized boondoggle for the climate, a group that includes Climate Progress (see “The Fuel on the Hill” and “Let them eat biofuels!“) Corn ethanol was always touted as a “stepping stone” to advanced fuels. That is still true in theory.  But with the government supporting traditional ethanol for so long, it’s time to refocus our efforts non-food based fuels. Here are the top five reasons why the U.S. should shift incentives away from traditional corn ethanol:

Global Food Prices Expected to Climb, Get More Volatile  - Food prices are stuck near levels not seen since the late 1970s.  And the United Nations expects that trend to worsen well into the future. Those are the findings of a joint report of the UN Food and Agriculture Organization (FAO), the International Fund for Agricultural Development (IFAD) and the World Food Programme (WFP), “The State of Food Insecurity in the World 2011” issued yesterday. The report warns of continued food instability due to fossil energy constraints, climate change, local land pressures, and water availability:There are also compelling arguments suggesting that, in addition to being higher, food commodity prices will also be more volatile in the future. If the frequency of extreme weather events increases, production shocks will be more frequent, which will tend to make prices more volatile. Furthermore, biofuel policies have created new linkages between the price of oil and the price of food commodities. When oil prices increase, demand for biofuels will increase, thus raising food prices, with the opposite happening when oil prices decrease. Because world oil prices have historically been more volatile.

China invests billions to avert water crisis  -China is to invest up to 4 trillion yuan ($600 billion) over the next decade to overcome a huge water shortage that threatens the country's economic growth, a senior official said on Wednesday. The vice minister of water resources said China's unbridled economic growth had left up to 40 percent of its rivers badly polluted and the country faced "huge pressures" on supplies of water. "Industrialisation and urbanisation, including ensuring grain and food security, are exerting higher demands on water supplies... while our water use remains crude and wasteful," Jiao Yong said at a press briefing. Over 46,000 reservoirs in China need to be rebuilt or reinforced to ensure that surrounding farmlands and communities are safe from flooding and have enough water for irrigation, he said. More funding would also be needed to protect the reservoir of the $22.5 billion Three Gorges Dam -- the world's largest -- from geological disasters and pollution, he said. The government has long held up the world's largest hydroelectric project as a symbol of its engineering prowess. But the dam has created a reservoir stretching up to 600 kilometres (370 miles) through a region criss-crossed by geological faultlines and critics fear seismic disturbances such as a huge earthquake could cause a catastrophe.

Afghanistan appeals for aid as drought looms - Afghanistan is appealing for $142m (£92m) to feed 2.6 million people this winter as it faces the worst drought for a decade.  The agriculture minister described the situation as extremely serious, with 14 provinces - about half the country - in the north and east hit by drought. Many farmers have sold their livestock and will now depend on food aid to keep alive during winter.  The World Food Programme has issued an urgent appeal for assistance. Agriculture Minister Mohammed Asif Rahimi said that Afghanistan had not been able to develop the systems necessary to deal with shocks like this on its own.

Economists demand curbs on food speculators - - Leading nations have come under renewed pressure to curb speculation in agricultural commodities - even as data showed fast money exiting the industry faster than during the 2008 crash. More than 450 economists from some 40 countries, and at institutions including Berkeley, Cambridge and Oxford universities, urged this week's meeting of finance ministers from the G20 group of leading industrialised countries to "curb excessive speculation" in agriculture futures. The letter, which blamed speculators for "contributing to increasing volatility and record high food prices", and so "exacerbating global hunger", demand caps on their positions. "Limits could be set at a level that would maintain sufficient liquidity in the markets while preventing an excessive concentration of purely financial actors," the letter said. "Clear limits would provide regulatory certainty, promoting stable and sustainable derivatives markets to the benefit of food producers, consumers and broader economic stability." 

Biofuel fuels food price - A steep rise in biofuel production and a highly concentrated export market coupled with export restrictions have contributed to the rising food prices across the world, badly affecting countries like Bangladesh. Increasing and volatile prices of food left an estimated 80 percent of Bangladeshi households worse off, eroding on average 11 percent of their spending during the food price surge in 2007-08. The poverty rate in the country during that period rose five percent.The Global Hunger Index (GHI) 2011, released yesterday, contains these findings.  The index is an annual hunger rating publication of the International Food Policy Research Institute (IFPRI), a Washington-based food policy think-tank. IFPRI along with two other NGOs prepared the GHI for the sixth time this year with special focus on the issue of food price hike and volatility that played a big role in the global food crises of 2007-08 and 2010-11. "Many poor people already spend large shares of their incomes on food, and surges in food prices leave them unable to pay for the food, healthcare, housing, education, and other goods and services they need," the report said.

Food-Price Declines Won’t Help Feed Hungry as Dollar Strengthens - Lower food prices may be of no help to the world’s hungry people because a stronger dollar might limit purchasing power, according to the United Nations’ Food and Agriculture Organization. The U.S. Dollar Index, a six-currency gauge of the greenback’s strength, climbed the most last month since October 2008 as investors sought a haven from the European debt crisis. A UN food-price index fell in September to 224.98, the lowest level since December, the FAO said in a report yesterday. “If the dollar were to appreciate or strengthen against the importing country’s currency, then some or all, depending on the change, of the benefit of lower prices may be lost to the rising dollar,” Abdolreza Abbassian, a senior economist at the FAO, said yesterday. “The U.S. dollar’s relation to food prices is often overlooked.” A gauge of cereal prices dropped to 245.09, the lowest level since January, FAO data show. A strengthening dollar makes crops from the U.S., the world’s biggest exporter of corn and wheat and third-largest shipper of rice, more costly to overseas buyers using their own currencies.

Thailand Suffers Most Expensive Flood in History, Destroying More Than 10% of Rice Farms in World’s Top Exporter - Meteorologist Dr. Jeff Masters reports on the staggering floods that have hit Thailand: Heavy rains in Thailand during September and October have led to extreme flooding that has killed 283 people and caused that nation’s most expensive natural disaster in history. On Tuesday, Thailand’s finance minister put the damage from the floods at $3.9 billion. This makes the floods of 2011 the most expensive disaster in Thai history, surpassing the $1.3 billion price tag of the November 27, 1993 flood, according to the Centre for Research on the Epidemiology of Disasters (CRED). And this is but the latest example of how extreme weather harms global food security (see “Global Food Prices Expected to Climb, Get More Volatile.”  As BusinessWeek reported, “Floodwaters have swept across 60 of Thailand’s 77 provinces over the past two months … destroying more than 10 percent of the nation’s rice farms.”  Masters notes “Thailand is the world’s largest exporter of rice, so the disaster may put further upward pressure on world food prices, which are already at the highest levels since the late 1970s.”

Rice Farmers in Japan Set Tougher Radiation Limits - Rice farmers near Japan’s crippled Fukushima nuclear plant will impose radiation safety limits that will only clear grains with levels so low as to be virtually undetectable after government-set standards were viewed as too lenient, curbing sales. Farmers now completing the harvest in areas affected by fallout from the nuclear station are struggling to find buyers amid doubts about cesium limits, which are less stringent than in livestock feed. No samples have been found exceeding the official limits. A self-imposed, near-zero limit on radiation in rice may help spur sales from Fukushima, which was the fourth-largest producer in Japan last year, representing about 5 percent of the total harvest. The prefectural office of Zen-Noh, Japan’s biggest farmers group, plans to only ship cesium-free rice to address safety concerns, as does the National Confederation of Farmers Movements, which includes about 30,000 producers nationwide.

Migrant Farm Workers In The PIGS, America, And Elsewhere: Noting A Balance Sheet Correlation - This past week the NYTs article, "Hiring Locally for Farm Work Is No Cure-All" described how a Colorado onion and sweet corn farmer couldn't find enough local help to work in his fields. There are well over 400 reader comments under the article. The NYTs followed up the story with a Room for Debate titled, "What happened to the American work ethic?" It, too, was excellent, so I recommend reading both if you haven't. Few people are willing to do the hard physical labor required to farm under often harsh weather conditions while living in social isolation without many city amenities. This is not just an American problem, as migrant labor issues are present in Europe, the UK, Canada, Australia and elsewhere. In the developing world, young rural countryside residents in large numbers are migrating to cities in China, India, Africa, and other nations to escape farm labor. Today, farming is all about efficiency. Huge farms. Huge hot houses. Big agribusiness. Copious amounts of chemicals. Huge grocery chains. Cheap labor. Robotics. Huge central distribution centers. Cheap transportation. Cheap food. Spoiled consumers. We are in a global competition to produce goods cheaply, including food. Labor costs get squeezed and might even go underground.

Global Food Production And Consumption Trends — An Energy-Based Approach - I have spent last month’s posts laying the ground-work for what I plan to be a series of posts examining food production, consumption and import-export trends. This post kicks-off the series by considering world-wide food production and consumption trends from 1961 to 2007. I am interesting in seeing whether or not there are signs of peaking food production and of countries shifting from being net food exporters to net food importers (or vice versa). It stands to reason that if fossil fuels, and petroleum in particular, are important to the modern food production system, and if the world or various regions are at or near peak fossil fuel or petroleum production, then the world, regions or individual countries, may also be at or near peak food production. I say may, because there does not appear to be a one-to-one relationship between petroleum production and population growth (see Part 10: Peak oil exports, peak oil and implications for population change) at least in part because relatively small amounts of petroleum are needed to maintain the food production system (see The relationship between hunger and petroleum consumption-Part 1 and subsequent posts). As an additional complication, there are other factors besides petroleum that may limit food production (see Export land model analysis of food production and consumption—Background).

Shellfish harvesters plagued by acidic ‘dead muds’ - Rising levels of carbon dioxide in the atmosphere combined with unregulated nitrogen pollution are having a deadly effect on Maine’s shellfish, some researchers say. Scientists are starting to measure the impact of increasingly acidic waters on coastal organisms, and what they’ve found is alarming. Formerly fertile shellfish flats are becoming uninhabitable wastelands of dreck. The phenomenon is another threat to Maine’s shellfish industry, estimated to be worth $60 million annually. "They call them dead muds,” said Mark Green, an oyster grower and marine science professor at St. Joseph’s College in Standish. “The darker muds and sulfur-rich muds don’t have any clams, and those are the flats that have lower pH levels. Places where historically there have been great harvests that supported clammers for decades, you now see water quality changes that are reflected in the mud.” The more acidic the water, the lower the pH.In these places, researchers aren’t finding dead or unhealthy shellfish. They’re finding nothing at all. It is a complete eradication.

High gold price triggers rainforest devastation in Peru - As the price of gold inches upward on international markets, a dead zone is spreading across the southern Peruvian rain forest. Tourists flying to Manu or Tambopata, the crown jewels of the country’s Amazonian parks, get a jarring view of a muddy, cratered moonscape ... and then another ... and another in what the country boasts is its capital of biodiversity. While alluvial gold mining in the Amazon is probably older than the Incas, miners using motorized suction equipment, huge floating dredges and backhoes are plowing through the landscape on an unprecedented scale, leaving treeless scars visible from outer space.

2010 Amazon drought released more carbon than India’s annual emissions -  The 2010 drought that affected much of the Amazon rainforest triggered the release of nearly 500 million tons of carbon (1.8 billion tons of carbon dioxide) into the atmosphere, or more than the total emissions from deforestation in the region over the period, estimates a new study published in the journal Environmental Research Letters.  Christopher Potter from NASA Ames Research Centre and colleagues combined a carbon cycle simulation model with NASA satellite data which reflects the 'greenness' or net primary production of forest to develop their estimate. The researchers only accounted for loss in CO2 uptake by vegetation caused by drought stress, including decomposition of soil and dead wood in regularly flooded forest areas left dry by the drought. Their estimate did not include emissions from fire associated with the drought.  Overall the researchers found emissions from the drought — the worst ever recorded in the Amazon — to be "roughly equivalent to the combined effects of anthropogenic deforestation and forest fires in undisturbed Amazonian forests."

Climate Change and the End of Australia - I have come to Australia to see what a global-warming future holds for this most vulnerable of nations, and Mother Nature has been happy to oblige: Over the course of just a few weeks, the continent has been hit by a record heat wave, a crippling drought, bush fires, floods that swamped an area the size of France and Germany combined, even a plague of locusts. "In many ways, it is a disaster of biblical proportions," Andrew Fraser, the Queensland state treasurer, told reporters. "Australia is the canary in the coal mine,"  "What is happening in Australia now is similar to what we can expect to see in other places in the future." This year's disasters, in fact, are only the latest installment in an ongoing series of climate-related crises. In 2009, wildfires in Australia torched more than a million acres and killed 173 people. The Murray-Darling Basin, which serves as the country's breadbasket, has suffered a dec­ades-long drought, and what water is left is becoming increasingly salty and unusable, raising the question of whether Australia, long a major food exporter, will be able to feed itself in the coming dec­ades. The oceans are getting warmer and more acidic, leading to the all-but-certain death of the Great Barrier Reef within 40 years. Homes along the Gold Coast are being swept away, koala bears face extinction in the wild, and farmers, their crops shriveled by drought, are shooting themselves in despair.

Masters on “Unprecedented” Arctic Ozone Hole: Inaction Risks “Future Nasty Climate Change Surprises Far More Serious” - Dr. Jeff Masters:  An unprecedented ozone hole opened in the Arctic during 2011, researchers reported this week in the journal Nature….  We know that an 11% increase in UV-B light can cause a 24% decrease in winter wheat yield (Zheng et al., 2003), so this year’s Arctic ozone hole may have caused noticeable reductions in Europe’s winter wheat crop…. It is highly probable that we will see future nasty climate change surprises far more serious than the Arctic ozone hole if we continue on our present business-as-usual approach of emitting huge quantities of greenhouse gases. Humans would be wise to act forcefully to cut emissions of greenhouse gases, as the cost of inaction is highly likely to be far greater than the cost of action. Image credit: NASA/JPL-Caltech. JR:   This important finding almost qualifies as an “unknown unknown,” in that this impact was considered unlikely.  And if it harms Europe’s winter wheat crop, it could seriously add to the world’s growing food insecurity (see “Global Food Prices Stuck Near Record High Levels and links therein.   Meteorologist Dr. Jeff Masters has a great post on this, which I reprint below.

Changes in Arctic Sea Ice: Young and thin instead of old and bulky - In the central Arctic the proportion of old, thick sea ice has declined significantly. Instead, the ice cover now largely consists of thin, one-year-old floes. This is one of the results that scientists of the Alfred Wegener Institute for Polar and Marine Research in the Helmholtz Association brought back from the 26th Arctic expedition of the research vessel Polarstern.Dr. Marcel Nicolaus and Dr. Stefan Hendricks employed a measuring instrument called “EM Bird”. This nearly four-metre-long, torpedo-shaped probe is flown over the ice with a helicopter and measures the ice thickness by means of an electromagnetic induction method. In this way the sea ice physicists created an ice thickness profile of the central Arctic over a total distance of more than 2,500 flown kilometres. Their conclusion is: at sites where the sea ice was mainly composed of old, thicker ice floes in the past decades there is now primarily one-year-old ice with an average thickness of 90 centimetres.  “The ice has not recovered. This summer it appears to have melted to exactly the same degree as in 2007. Yes, it is exactly as thin as in the record year,” says Hendricks.

Thinking the unthinkable: Engineering Earth’s climate - A U.S. panel has called for a concerted effort to study proposals to manipulate the climate to slow global warming — a heretical notion among some environmentalists. In an interview with Yale Environment 360, Jane C. S. Long, the group’s chairwoman, explains why we need to know more about the possibilities and perils of geoengineering. Jane C. S. Long, chairwoman of the Bipartisan Policy Center’s 18-member task force on geoengineering, the hydrologist and energy expert realized two fundamental things: that the world has still not come to its senses on global warming, and that science would be remiss if it didn’t consider the possibility that CO2 emissions will continue to soar for decades.  This scenario lies at the heart of a report issued last week by the task force, composed of noted experts in climate science, social science, and foreign policy. It called for a comprehensive study of geoengineering options — including removing CO2 from the atmosphere and reflecting solar energy back into space — in case the Earth’s climate crosses certain tipping points, such as a mass release of methane from the Arctic that would drastically warm the planet.

Perry Officials Censored Climate Change Report - Top environmental officials under Rick Perry have gutted a recent report on sea level rise in Galveston Bay, removing all mentions of climate change. For the past decade, the Texas Commission on Environmental Quality (TCEQ), which is run by Perry political appointees, including famed global warming denier Bryan Shaw, has contracted with the Houston Advanced Research Center to produce regular reports on the state of the Bay. But when HARC submitted its most recent State of the Bay publication to the commission earlier this year, officials decided they couldn't accept a report that said climate change is caused by human activity and is causing the sea level to rise. Top officials at the commission proceeded to edit the paper to censor its references to human-induced climate change or future projections on how much the bay will rise.John Anderson, the oceanographer at Rice University who wrote the chapter, provided Mother Jones with a copy of the edited document, complete with tracked changes from top TCEQ officials. You can see the cuts—which include how much sea level rise has increased over the years, as well as the statement that this rise "is one of the main impacts of global climate change"—here and embedded at the end of this story.

Rice professor accepts Gulf article's fate - - A Rice University oceanographer said he accepts a decision by the state's environmental agency to kill an article he wrote on sea-level rise in Galveston Bay, ending a standoff over the article's references to rising sea levels and human-caused environmental change. . "I refuse to have it published with their deletions." The Texas Commission on Environmental Quality said late Monday it will remove Anderson's article on sea-level rise in Galveston Bay from a collection of 10 articles written for The State of the Bay, a periodical publication of the Galveston Bay Estuary Program. TCEQ, which had contracted with the Houston Advanced Research Center to produce the report, decided to discard the article after Anderson refused to agree to a number of deletions, dealing with climate change, sea-level rise and human-caused changes to the environment. Anderson said the article is based upon a 10-year, peer-reviewed study with other scientists. It was published by the Geological Society of America.

The Murdoch Legacy - Jeffrey Sachs - At age 80, Rupert Murdoch will be long gone in coming decades when the planet is grappling with greatly intensified climate change. The recent spike in world food prices and increasing intensity of famines, heat waves and mega-floods has already increased hunger and death in places like the Horn of Africa, far from Murdoch's cares. Yet climate calamities are likely to spread and intensify as the planet continues to warm and the hydrological cycle is increasingly perturbed. The Murdoch name, carried by James and the grandchildren, will live on in global infamy for having used corporate propaganda to disguise the truth from the public until too late.  I mention this because Murdoch's paper, the Wall Street Journal, again last week performed its usual disservice by publishing an extremely misleading opinion piece on climate change in the banner location of the paper (Robert Bryce, "Five Truths About Climate Change," October 6). That column is not merely an opinion piece among a range of various opinions. It is part of that paper's steady drumbeat of opposition to action on climate change. And the Journal teams up in this with Murdoch's other propaganda outlet, Fox News.  In this particular column, the writer, Robert Bryce, purports to tell us five truths about climate change to reach the conclusion that we shouldn't care about carbon emissions. The column is a study in innuendo, half truths, and misdirection.

Human Shortsightedness And The Maldives - One of the primary reasons people have so much difficulty accepting climate change, the destruction of the Earth's natural ecosystems and other slow-moving disasters is human shortsightedness (myopia). There is nothing surprising about this. Nothing in the 2 million-year evolution of the genus Homo prepared us to think long-term. As the software guys would say, it's not a bug in how our brains are wired, it's a feature! As the Earth warms, many island nations have a limited or drastically altered future. The Maldives in the Indian Ocean southwest of Sri Lanka have become the poster child for islands which will eventually be swamped by rising sea levels.Public Radio International's excellent program The World did a report on the Maldives recently called Uncertain Future for Asian Island Nation (podcast). The Maldives are only about five feet above sea level, so there’s big concern the islands will become inundated as sea levels rise in the coming century.

‘Guns & Patriots’ Editor Creates Fake Solar Scandal About SunPower, Murdoch’s Fox News Misinformers Run With It - When Total, the 14th largest oil and gas company in the world, bought 60% of leading solar manufacturer/developer SunPower back in June, here’s what the company said: We evaluated multiple solar investments for more than two years and concluded that SunPower is the right partner based on its people, world-leading technology and cost roadmap, vertical integration strategy and downstream footprint. But when an editor for Guns & Patriots magazine (yes, you read that correctly) strung together a completely bogus “scandal” about SunPower using disparate pieces of information, the network was all over it — allowing this “bigger than Solyndra” story about a $1.2 billion loan guarantee to take over the prime time airwaves. Here’s the catch: None of this punditry is based on reality. SunPower isn’t even getting the loan guarantee. Although it was offered a conditional commitment originally, it is simply constructing a 250-MW project using its high-efficiency modules — and it has already sold the project to the massive energy company NRG while establishing an agreement to purchase the power.

Solyndra Bankruptcy Could Hobble the U.S. Renewable Energy Sector The controversy surrounding the collapse of solar panel manufacturer Solyndra could make it impossible to extend the US loan guarantee or cash grant programmes for renewable energy and may make supporting other clean energy programmes much more challenging, experts have said. The case of Solyndra, which filed for Chapter 11 bankruptcy protection on 6 September, is being used by some Republican legislators as an excuse to try to eliminate investment in clean energy, according to energy experts. The Fremont, California-based company was backed by a $535 million loan guarantee from the Department of Energy (DOE). “The debate around Solyndra is a Washington, DC-manufactured issue that is being driven by members of Congress who think they can get political gain for attacking an emerging sector of the private economy,” said Joshua Freed, director of the clean energy programme of centrist think-tank Third Way. “It’s hard not to be at the very least frustrated by this because there’s so much at stake.”

Finance for Climate Related Projects Drying Up  - The availability of finance to help developing countries tackle climate change is drying up, imperiling the international climate talks, the head of the World Bank’s sustainable development network has warned. Speaking at Chatham House in London yesterday, Rachel Kyte warned of a “desert” emerging between funds already allocated in ‘fast-start’ climate finance, such as to the Clean Technology Fund, and the beginning of operations of the planned Green Climate Fund. She said that the managers of the Clean Technology Fund, one of two Climate Investment Funds set up via the UN climate talks, and managed by five development banks, have fully “programmed” its $4.5 billion in commitments. That fund has leveraged an additional $37 billion, Kyte said, around one third of which came from the private sector.

A Quest for Hybrid Companies That Profit, but Can Tap Charity - A new type of company intended to put social goals ahead of making profits is taking root around the country, as more states adopt laws to bridge the divide between nonprofits and businesses.  California is the latest state to adopt a statute permitting what is called flexible-purpose corporations, new companies that are part social benefit and part low-profit entities. The companies are now allowed under laws in more than a dozen states and two Indian tribes.  States like New York and Massachusetts are weighing comparable legislation — sometimes also known as low-profit limited liability or benefit corporations — and efforts are afoot to get federal legislation passed that would lower hurdles to the creation of such companies, including a quiet push to get preferential tax treatment for them.

Appalachia Coal Decline: Industry Faces Steep Challenges - Business owners like Howard, politicians and miners in the hilly coalfields of Central Appalachia blame the industry decline on tougher regulation from the Obama administration. They aren't as ready to talk about something a change in administrations cannot fix. The region's thick, easy-to-reach seams of coal are running out, forcing many operators to shift to cheaper and more destructive mining methods that draw heavier environmental regulation. Coal here is getting harder and costlier to dig – and the region, which includes southern West Virginia, Virginia and Tennessee, is headed for a huge collapse in coal production. The U.S. Department of Energy projects that in a little more than three years, the amount of coal mined here will be just half of what it was in 2008. That's a significant loss of a signature Appalachian industry, and the jobs that come with it. "The seams of coal that are left in this area are harder and harder to mine, and they're thinner and thinner and thinner," said Leonard Fleming, a retired Kentucky miner and union leader in Letcher County who worked in the industry for 32 years.

Economics Stunner: “Oil and Coal-Fired Power Plants Have Air Pollution Damages Larger Than Their Value Added.” - Coal does more harm than good.Okay, public health experts have known this for a while — see Life-cycle study [Epstein et al]: Accounting for total harm from coal would add “close to 17.8¢/kWh of electricity generated.” But now we have some of the leading (center-right) economists in the country — Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus — making this case in a top economic journal, the American Economic Review.  Their article, “Environmental Accounting for Pollution in the United States Economy” [aka MMN11], models the impact of emissions of six major pollutants (sulfur dioxide, nitrogen oxides, volatile organic compounds, ammonia, fine particulate matter, and coarse particulate matter) from the country’s 10,000 pollution sources. Nobel Prize-winning economist Paul Krugman summarizes the core conclusions in his post, “Markets Can Be Very, Very Wrong.” Consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation. If consumers did have to pay the full cost, they would use much less electricity from coal — maybe none, but that would depend on the alternatives.

Are transmission lines holding America back? - Here’s a striking data point on renewable energy from this new report by the President’s Council on Jobs and Competitiveness: There are currently 275,000 megawatts worth of proposed wind-power projects in the United States. For context, the capacity of the entire U.S. coal fleet, providing half of the country’s electricity, is 315,000 megawatts. Now, turbines aren’t a perfect substitute, because the wind isn’t always blowing, but that’s a huge amount of wind potential. So what’s holding those projects back? There just aren’t enough wires to connect them all. Transmission is an underrated issue in energy policy. The process for locating and permitting new wires was established way back in 1935, when most power plants were situated close to the people who used the electricity. That process works okay for building a natural-gas turbine near town. It’s not as useful for transporting wind power from large, remote farms out in North Dakota to cities in California. Right now, building big new transmission lines is an enormous hassle. One 90-mile line from West Virginia to Virginia, the council report notes, took American Electric Power 13 years to site. Is that fixable?

California’s Underground Hot Rocks Probed for Energy of 100 Nuclear Plants - For decades, energy companies have tapped steam from deep in the earth to make electricity. Now, at least five American power producers are testing a simple idea that may dramatically expand the industry’s reach: Bring your own water. Instead of producing power only in places where steam flows naturally, these companies are drilling deeper to inject water into superhot, dry rocks and create the vapor needed to generate power. The technology “offers the opportunity of creating additional reserves,” said Mark Walters, a senior geologist at Calpine Corp. (CPN), the biggest U.S. geothermal power producer. “The heat is a resource in areas around existing plants, but right now we really can’t get at” it. The Houston-based company is expected to begin testing this process today.

Companies use fuzzy math in job claims; candidates still buy in - In an ad that has blanketed radio airwaves in the Washington region, a woman’s voice gently intones, “Imagine . . . one million new jobs.” “One million new American jobs,” echoes a man. “One million new opportunities to build a career,” says the woman. And where will these “one million new jobs” come from? By expanding oil and gas drilling and building new pipelines, says the American Petroleum Institute, an industry lobbying group that paid for the ad campaign, which also has featured in newspapers, on television and on Metro platforms. Oil companies aren’t the only ones promising jobs if Washington gives them their way. A wide array of businesses are saying they can help solve the country’s unemployment crisis if only the government would roll back some regulations, approve their big mergers or lower their taxes. 

Coal Ash Regulation Creates Jobs - Does environmental protection destroy jobs? That may be the strongest argument that the pro-pollution lobby has going for it. No one wants to endorse dirty air and water in so many words, but hey, we’re just trying to save jobs at a time when millions are out of work. In one of the latest reincarnations of this idea, the electric utility industry claims that regulating the disposal of coal ash could eliminate up to 316,000 jobs.  A quick reality check: regulating coal ash disposal means using earth-moving equipment, which doesn’t drive itself, constructing new facilities which don’t build themselves, and so on. Close your eyes and try to picture this, and you may see some workers on the premises. Environmental regulation generally creates jobs, including lots of blue-collar jobs in construction and manufacturing. So it’s not surprising that, in my new report on the impacts of coal ash regulation, I found that it would increase employment by 28,000 jobs. . This conclusion doesn’t, by itself, clinch the argument for such regulation. But it does free us of the unfounded fear of massive job loss, allowing us to evaluate the regulation on its merits.

Hydraulic Fracturing Brings Money, and Problems, to Pennsylvania - The gas boom is transforming small towns like this one (population 4,400 and growing) and revitalizing the economy of this once-forgotten stretch of rural northeastern Pennsylvania. The few hotels here have expanded, restaurants are packed and housing rentals have more than doubled. “There’s been a snowball effect due to the gas companies coming in,” Mr. Diaz, 33, said recently at his bustling empire near here. But the boom — brought on by an advanced drilling technique called hydraulic fracturing, known as fracking — has brought problems too. While the gas companies have created numerous high-paying drilling jobs, many residents lack the skills for them. Some people’s drinking water has been contaminated. Narrow country roads are crumbling under the weight of heavy trucks. With housing scarce and expensive, more residents are becoming homeless. Local services and infrastructure are strained. “Very little tax revenue goes to local governments to help them share in the benefits of the economic development,” said Sharon Ward, executive director of the Pennsylvania Budget and Policy Center, an independent policy research organization. And some are asking whether short-term gains have obscured the long-term view of an industry marked by boom-bust cycles.

Occupy Wall Street: No Demand Is Big Enough - Looking out upon the withered American Dream, many of us feel a deep sense of betrayal. Unemployment, financial insecurity, and lifelong enslavement to debt are just the tip of the iceberg. We don't want to merely fix the growth machine and bring profit and product to every corner of the earth. We want to fundamentally change the course of civilization. We protest not only at our exclusion from the American Dream; we protest at its bleakness. If it cannot include everyone on earth, every ecosystem and bioregion, every people and culture in its richness; if the wealth of one must be the debt of another; if it entails sweatshops and underclasses and fracking and all the rest of the ugliness our system has created, then we want none of it.  No one deserves to live in a world built upon the degradation of human beings, forests, waters, and the rest of our living planet. Speaking to our brethren on Wall Street, no one deserves to spend their lives playing with numbers while the world burns. Ultimately, we are protesting not only on behalf of the 99% left behind, but on behalf of the 1% as well. We have no enemies. We want everyone to wake up to the beauty of what we can create.

Approaching 7 billion people - Malthus noted that our ability to increase food supplies went up at best arithmetically, as in 4,5,6, etc. Our ability to procreate can increased geometrically, as in 2,4,8,16, 32, etc. In the mid-20th Century, the Green Revolution arrived in world agriculture, founded on cheap fossil fuels which powered mechanized industrial farms and irrigation. Petroleum-based pesticides and fertilizers also contributed to major gains in cereal crop yields. The end of world hunger seemed in sight. The Wall Street Journal mocked Malthus disciples like England’s Prince Charles and our Al Gore as “Prince Malthus” and “Senator Malthus” for their concerns about population growth, the environment, and resource scarcity. In the Journal’s view, technology and hydrocarbon energy had given us control over nature. Fueled by all that buried sunshine in the form of concentrated oil, gas, and coal, we have come to view the earth as our private garden to be worked as we wish, supplying our continuing need for more. But the earth is its own garden, and we don’t make the rules. Our planet functions under natural laws which relate to physics, chemistry, biology, and mathematics.

Why big-money men ignore world’s biggest problem -— Last year Bill Gates said if he had “one wish to improve humanity’s lot over the next 50 years” he would pick an “energy miracle,” some magical “new technology that produced energy at half the price of coal with no carbon-dioxide emissions,” says CNN editor Fareed Zakaria in the New York Times. And he said “he’d rather have this wish than a new vaccine or medicine or even choose the next several American presidents.” Energy miracle? But that’s not where he’s giving his billions. In fact, since 1994 the Gates Foundation has spent over $26 billion on philanthropic projects, ventures and innovations, lots in vaccines and medicines that extend life, increase mortality rates and encourage population growth. Yes, all good stuff, but ultimately undermining the possibility of discovering a magical energy miracle. Worse, if that energy miracle is discovered anywhere its value could easily be wiped out by the world’s out-of-control population growth, forecast to reach 10 billion by 2050 from 7 billion today, one brief generation. So why is Gates not focusing solely in his energy miracle? Better yet, why is he ignoring what he agrees is the world’s biggest problem? Even undermining the solution?

How Many People Can Earth Hold? Well...“It took until about 1800 or 1825 to put the first billion people on the planet. We added the most recent billion in 12 or 13 years. We anticipate two billion more by 2050.” That’s Joel Cohen, head of the Laboratory of Populations at Rockefeller University in New York. He spoke February 20th at the annual meeting of the American Association for the Advancement of Science in Washington, D.C. So how many people can the Earth hold? “In the last half century, people have estimated human-carrying capacities for the Earth that have ranged from less than one billion to more than a trillion. They can’t all be right. In fact, those numbers are political numbers, not scientific numbers. Because the question how many people can the earth support is an incomplete question, and doesn’t take account of with what technologies, at what average level of well-being, with what distribution of income, with what political and economic institutions.” [The above text is an exact transcript of this podcast.]

Nuclear relic · The scale of operations at the Hanford Site, scene of a multi-billion-dollar cleanup of a half-century of accumulated hazardous waste, cannot fail to impress. Even the vocabulary there evokes the gargantuan, the muscular, the toxic. Hard heels. Chemical baths. Canyons. Ocean liners. Plutonium. It is, its keepers boast, the largest, most complex cleanup site in the world. It is measured in decades, hundreds of square miles and billions of dollars. Much of the cleanup work is done: mothballed reactors, demolished buildings, contaminated soil dug up by the ton and deposited in a sealed landfill. But much is left to accomplish. The site will be active until 2050, according to a spokesman for the U.S. Department of Energy. The pace of operations accelerated with the infusion in 2009 of about $1.9 billion from the American Recovery and Reinvestment Act, the federal spending plan aimed at stimulating the struggling economy.  As the last Recovery Act money was spent this year, Hanford contractors planned 1,985 employee layoffs as a result. In August, the U.S. Department of Energy authorized another 1,100 contractor layoffs because of anticipated cuts to the federal budget. Congress so far has not passed a budget for fiscal year 2012, which began this month.

Citizens’ Testing Finds 20 Hot Spots Around Tokyo -  Takeo Hayashida signed on with a citizens’ group to test for radiation near his son’s baseball field in Tokyo after government officials told him they had no plans to check for fallout from the devastated Fukushima Daiichi nuclear plant.  Then came the test result: the level of radioactive cesium in a patch of dirt just meters from where his 11-year-old son, Koshiro, played baseball was equal to those in some contaminated areas around Chernobyl.  The patch of ground was one of more than 20 spots in and around the nation’s capital that the citizen’s group, and the respected nuclear research center they worked with, found were contaminated with potentially harmful levels of radioactive cesium.  It has been clear since the early days of the nuclear accident, the world’s second worst after Chernobyl, that that the vagaries of wind and rain had scattered worrisome amounts of radioactive materials in unexpected patterns far outside the evacuation zone 12 miles around the stricken plant. But reports that substantial amounts of cesium had accumulated as far away as densely populated Tokyo have raised new concerns about how far the contamination had spread, possibly settling in areas where the government has not even considered looking.

Test Result on Strontium-90 Detection in Yokohama - Here's the image of the test report by Isotope Research Institute in Yokohama City: Isotope Research Institute didn't start testing for radioactive strontium until August 20, according to the Institute's website. Thus the time lag. At the Institute, it costs 65,000 yen (US$847) (pre-tax) to test one sample for strontium-90 (no separate testing for strontium-89), and it takes one week. No volume discount, the webpage says. The ratio of strontium-90 to cesium-137 in this case is about 0.58%. In comparison, the same ratio from the samples taken in Fukushima Prefecture was between slightly less than 0.1% to 8.2%. In other words, the ratio varies too much to discern any pattern. Yokohama City has said it is testing for strontium in the sample taken from the same apartment rooftop but with much higher cesium density (105,600Bq/kg total cesium). But remember there was no official announcement about this high cesium detection because "the apartment building is a private property", according to the city. We'll see if Yokohama will announce anything about strontium-90. The Yokohama Mayor is having her regular Wednesday press conference, but she has refused to let independent journalists including Yasumi Iwakami, who broke the news, attend the press conference.  For my recent posts on strontium-90 in Yokohama City, go here and here.

Nigeria: Rethinking the Atomic Power Project - Despite the 11 March nuclear debacle at Japan’s Fukushima nuclear power complex, Nigeria is determined to press forward with its nuclear power agenda. On 15 September Nigerian President Goodluck Jonathan formally inaugurated Nigeria's Atomic Energy Commission and urged its members to quickly evolve plans and timelines for Nigerian atomic energy. Jonathan said, "We all know the importance of atomic energy. We have plans to generate power from atomic energy and we must pursue it seriously. But we need a very capable commission to facilitate and regulate our development and use of atomic energy for peace applications. "I am very pleased, therefore, to inaugurate your commission today. We expect you to come up with timelines for the delivery of atomic energy to our people and we will give you the resources you need to work. We are very hopeful that with the high caliber and credentials of members of the commission, our expectations will be realized,"  Jonathan’s comments reflect the reality of Nigeria’s current energy crisis. Despite Nigeria having the world's seventh-largest natural gas reserves, the country suffers from chronic electricity outages which force businesses and affluent individuals to rely on generators.

Keystone XL Pipeline Not Worth The Risks - In Washington, D.C., conference rooms, the proposed pipeline running from Alberta, Canada, to Texas refineries on the Gulf of Mexico may look rather attractive. The 1,700-mile Keystone XL pipeline would supply the United States with abundant crude from a friendly neighbor. It would create 20,000 jobs, says owner TransCanada. And it would be reasonably safe for the environment, according to a U.S. State Department study. From the Nebraska Sand Hills over which this pipeline would go, the views are considerably less supportive. This fragile landscape of tiny lakes and giant sand dunes sprouting grass could have come from another world. But the Great Plains have some conflicting needs. Under the Nebraskan dunes and parts of Kansas, Wyoming, Colorado, Texas and New Mexico lies the shallow Ogallala aquifer, an underground sea of water already much depleted. Suppose a pipeline spill poisoned this precious source of water for irrigation and drinking. We hear assurances from the State Department that any mishaps are controllable. But then you have the recent example in Michigan, where a pipeline rupture released 840,000 gallons of tar-sands crude. Some 35 miles of the Kalamazoo River remain closed a year later.

The real price of oil: Keystone XL pipeline corruption investigation (graphic)

A Giant Pipeline Carrying Dirty Oil From Canada to Texas. What Could Go Wrong? - Last year was quite a year for oil and gas disasters. In addition to the BP blowout, there was a leak on BP's TransAlaska pipeline, a million-gallon oil spill in Michigan, and a gas explosion that destroyed 37 homes and killed eight people in California. So it would seem like a lousy time for a Canadian company to propose building a pipeline, the Keystone XL, right through the middle of the continent—especially one that may be unnecessary and that even some oil companies think is overpriced. Below, click on the interactive map's hot spots to read more about the proposed pipeline route

Canadian Oil Sands - A Good Investment? Not in Europe, Apparently - Any American watching cable TV over the past few months can hardly fail to have noticed the seemingly ubiquitous advertisements extolling the virtues of extracting oil from Canadian oil sands, which the commentators assure their audience has a carbon footprint largely comparable with traditional fossil fuels, and which, if developed will provide not only millions of new jobs but billions of dollars for governments as well as energy security by weaning the Western Hemisphere off its addiction to terrorism-tainted Middle East oil. But don’t break out your checkbook just yet. Apparently those pesky Eurocrats in Brussels haven’t gotten the message, as on 4 October the European Commission proposed that oil sands crude be ranked as a dirtier source of fuel compared with oil from conventional wells.

Can the Keystone XL Pipeline Really Break America's Dependence on Middle East Oil? - The United States of America is in trouble… big time.   With a downgraded credit rating, an unemployment rate teetering around 10 percent, and prices at the pump reaching an all time high, what’s a nation to do?  How about build another oil pipeline? The Keystone XL pipeline is a proposed $7 billion project that would link oil sands operations in Alberta, Canada to American refineries in Texas.  The 1,700-mile-long pipe would create 120,000 jobs (20,000 direct and 100,000 indirect) and transport 700,000 barrels of oil per day.   However, while the project certainly looks good on paper economically, there are some other factors to consider.  First off, 700,000 barrels of oil per day may seem like a lot, but Americans are currently using upward of around 20 million barrels per day.  So Keystone XL would be bringing in roughly three to four percent of the oil the country demands.  While that’s nothing to turn your nose up at, it is certainly not enough to sever U.S. dependence on Middle Eastern oil, which is one of the main arguments in favor of the oil sands pipeline.  Not to mention, since oil is traded as a global commodity, it’s not likely the pipeline will actually drive down prices at the pump, because those prices are based on futures speculation these days.  Oil sands oil has been making its way to market for years now, and will continue to do so with or without Keystone XL.

In Throes of Keystone XL Controversy, Obama Admin OKs Alaska Offshore Drilling - With all eyes on the ongoing battle over whether or not the Obama Administration and the State Department will approve the disastrous Keystone XL pipeline, it was easy to lose another huge piece of news in the scuffle pertaining to the Obama White House. On October 3, the Obama Interior Department rubber stamped approval for offshore drilling in the Arctic off the northwest coast of Alaska in the Chibucki Sea. Reported the ​Wall Street Journal: The Obama administration said Monday it was moving forward with oil-drilling leases off the coast of Alaska issued by the Bush administration in 2008, a victory for oil companies in the battle over Arctic Ocean drilling. (Snip) The Interior Department's decision is the latest example of the Obama administration siding with energy companies against environmentalists amid a weak economy. Last month, President Barack Obama withdrew proposed ozone-emission rules that businesses said would have killed jobs. According to an ​Alaska Dispatch​ story, the area that received drilling approval is 2.8 million acres and companies bid $2.6 billion in an auction for drilling rights, with fossil fuel conglomerates Shell and ConocoPhillips leading the way.

Forget About It! The Fix Is In - On August 30, 2011 I wrote about the Keystone XL Pipeline, which will bring tar sands oil from Alberta, Canada to refineries on the Gulf coast. The post's title was Another Pointless Climate Protest. At that time, climate activists were protesting the construction of the pipeline, which would facilitate greater exploitation of the tar sands, leading to greater CO2 emissions over time. Nothing will ever be done about global warming in my view, so all such protests are exercises in futility. A few days ago the New York Times reported that the State Department allowed TransCanada, which will build the pipeline, to handpick a company to carry out the environmental impact study required by law.. The State Department assigned an important environmental impact study of the proposed Keystone XL pipeline to a company with financial ties to the pipeline operator, flouting the intent of a federal law meant to ensure an impartial environmental analysis of major projects.  The article contains lots of additional useless detail which you can look at if you like. What is the bottom line? The Keystone XL pipeline is going to be built regardless any obstacles environmentalists put up to block it. The environmental impact study was rigged, and any additional roadblocks thrown up will be dealt with in a crooked and ruthless way.

Insiders: Obama Will Approve Keystone XL Pipeline This Year - Despite intense lobbying from environmentalists and opposition from many in President Obama’s own party, virtually all National Journal Energy and Environment Insiders say that Obama’s State Department will approve a controversial 1,700-mile pipeline project to bring carbon-heavy tar-sands oil from Alberta, Canada, to refineries on the Gulf Coast of Texas. Environmental groups have been working in Congress and the courts to delay or block a decision, citing environmental concerns and, more recently, questions about the impartiality of some State Department officials. But more than 70 percent of Insiders said they think the State Department will approve the Keystone XL project by year’s end. Another 21 percent said the administration would approve the project eventually, just not by the end of this year. Only 9 percent of those responding think the project will not get final administration approval. Because the project crosses international boundaries, the State Department is tasked with determining whether building the pipeline is in the national interest.

Obama and the Corruption of Big Oil - Bill McKibben - That vet and those women are living reminders that, along with the Wall-Street-focused economic grievances of the new movement, there are other things “too large to fail” in this country which threaten to bring us all down.  If they, too, get swept into this movement, it may truly prove a moment to reckon with.  After all, our wars, including the now decade-old one in Afghanistan and the drone-fed global war on terror (as well as the military-industrial-homeland-security profiteers who accompany them) have proven a quagmire of corruption and failure, as well as a drain on the national treasury. At the same time, big oil’s mad pursuit of every last drop of fossil fuel anywhere in the Americas or on Earth, no matter how dirty or destructive to the environment, threatens -- as our last year of rampaging weather may indicate -- to destabilize the planet itself and further degrade our lives.  In the case of the environment, there is already a kind of “occupy” movement forming, in particular to protest the proposed 1,700-mile Keystone XL pipeline that is to bring the dirtiest “tough oil” from Canadian tar sands to the Gulf of Mexico.  For its construction to begin, however, its “environmental impact” must be assessed by the State Department and then the president must give it the thumbs-up.

‘Unusual mortality event’ continues: 4 dead dolphins wash up on Gulf Coast beaches in 5 days -A dolphin carcass, bloated and violet in the morning sun, was found on Fort Morgan early Saturday, bringing the number lost since the BP oil spill to more than 400.  Three other dolphins have washed up in Alabama in the past week, including a pregnant female on Dauphin Island and a mother and calf pair on Hollingers Island in Mobile Bay.  "We should be seeing one (death) a month at this time of year," . "We’re getting one or more a week. It’s just never slowed down." An examination of the Gulfwide death toll, broken down by month, reveals that dolphins continue to die at rates four to 10 times higher than normal. For instance, 23 dolphins were found dead in August, compared to a monthly average of less than 3 each August between 2002 and 2009.  Federal scientists acknowledge they are no closer to solving the mystery behind the "Unusual Mortality Event" that has been sweeping through the Gulf’s dolphin population since March of 2010, one month before BP’s well was unleashed.

BP Buying-Off Entire University Marine Science Departments - Plain and simple, BP is offering blanket contracts to entire southern university Marine Science Departments to gag them, misuse the science & fight the case in favor of BP. It's happened before. After the Exxon Valdez Oil Spill in Alaska Exxon sent out contracts to buy off west coast university Marine and Environmental Science Departments and anyone with a PhD in Marine Science. At that time (over 30 years ago) the deal from Exxon was $200,000.00 plus per year according to Dr. Riki Ott who herself was made aware of and invited in on this oil company payoff deal. The contract deal doesn't only prevent the scientists from releasing the truth to the public, but it also puts the scientists in the awkward position of having to fight The Natural Resources Damage Assessment Lawsuit that the Government will bring as a result of BP's Macondo Well Blowout Oil Spill.

BP to risk worst ever oil spill in Shetlands drilling - BP is making contingency plans to fight the largest oil spill in history, as it prepares to drill more than 4,000 feet down in the Atlantic in wildlife-rich British waters off the Shetland Islands.  Click HERE to view graphic (207k jpg)  Internal company documents seen by The Independent show that the worst-case scenario for a spill from its North Uist exploratory well, to be sunk next year, would involve a leak of 75,000 barrels a day for 140 days – a total of 10.5 million barrels of oil, comfortably the world's biggest pollution disaster.  This would be more than double the amount of oil spilled from its Deepwater Horizon well in the Gulf of Mexico last year, which had a maximum leak rate of 62,000 barrels a day in an incident lasting 88 days – and triggered a social, economic and environmental catastrophe in the US which brought the giant multinational to the brink of collapse.

Spill ‘worst NZ marine disaster’ - An oil spill from a stranded cargo ship off New Zealand has become the country's worst maritime environmental disaster, the government has said. Officials say 300 tonnes of oil may have leaked from the 775ft (236m) Rena, which ran aground on the Astrolabe Reef off the port of Tauranga on Wednesday. Bad weather which has halted work to pump oil off the ship is set to worsen. Environment Minister Nick Smith said the situation was going to get "significantly worse" in coming days. "This event has come to a stage where it is New Zealand's most significant maritime environmental disaster," he told a news briefing in Tauranga. "It is my view that the tragic events we are seeing unfolding were absolutely inevitable from the point that the Rena ran onto the reef in the early hours of Wednesday morning," he said. "The government is determined to throw everything possible at minimising the environmental harm of what is now clear to be New Zealand's worst environmental disaster in many decades." Mr Smith said the rate at which oil was gushing out of the ship had increased "fivefold" since it ran aground.

Gasoline Cargoes to U.S. to Slide 35% on European Refinery Maintenance -  Gasoline shipments to the U.S. from Europe will decline over the next two weeks as refineries on both sides of the Atlantic Ocean enter a maintenance period to prepare for accelerated winter fuel production. Twenty tankers were booked or due to be chartered for loading in the two-week period, according to the median estimate in a Bloomberg News survey of three shipbrokers, one owner and one trader yesterday. That’s the lowest since the end of August and down 35 percent from 31 tankers last week. Refiners in Europe have cut production to conduct plant maintenance and in response to declining processing profits. Eni SpA (ENI), Hellenic Petroleum SA and Ineos Group AG are among companies to have halted or slowed output. “We have seen many refiners cutting runs because crude-oil prices are too high compared to product prices,”

Greedily sharpening the old pencil -  Rick Perry in the Union Leader: We can create hundreds of thousands of jobs and increase our oil output by 25 percent if we fully develop oil and gas shale formations in the Northeast, mountain West and Southwest. Doing the back of the envelope (and not worrying about whether the 25% increase in oil output is realistic) with these data:

  • daily world oil production = Q = 89,123,026 [barrels]
  • 25% of daily U.S. oil production dQ = 2,422,000
  • oil price = P = $90
  • demand elasticity = ed = -0.1
  • supply elasticity = es = 0.2
  • dp =  ((P*dQ)/Q)/(-ed + es)

The world price of a barrel of oil would fall by about $8 as a result of a 25% increase in U.S. production. If gas prices are about 70% due to the price of oil and gas costs $3.35 per gallon, then the oil price share of gas is about $2.35. Cross-multiplication tells me that the oil price share of the price of a gallon of gas would fall to $2.13 and we'd enjoy and $0.22 drop in the cost per gallon. Filling up a 20 gallon tank you'd save about $4. Doing this every week you'd save about $200/year.

Oil Production of the Top Three IOCs - The above shows the liquids production of the three largest international oil companies (IOCs), as compiled from their annual reports.  You can see that by and large these companies are about the same size they were 15 years ago, in oil production terms (the partial exception is BP which managed to buy into a Russian oil company half way through the last decade).  The big IOCs have not been able to increase production much  in response to the high prices of the last six or seven years. It's important to note of course that since the 1980s most oil is not produced by IOCs but rather by the various national oil companies.  Also it's worth noting that IOC revenues and profits have grown enormously over the last 15 years as oil prices have increased so much - they are basically selling roughly the same sized stream of liquids for far more money.

Peak Supermajor was in 2005? - Yesterday I posted production charts for three of the big IOCs.  Today I add the other three supermajors (Shell, ConocoPhillips, and Total).  The aggregate production for all six is shown above.  Note that this is all liquids - ie it includes natural gas liquids and syncrude from tar sands in addition to regular crude oil. As you can see the supermajors as a group have not grown over the last decade and indeed show something of a peak in 2004-2005 from which they have since declined.  Here are the individual lines (which in some cases go back further): Commenter bmerson asked:  What are the possible explanations for that? I am mainly in favor of explanation 1) -- these are profit making enterprises that are too small relative to global production to set prices themselves, so they have every incentive to maximize production and so this must presumably be the best they can do with the reserves available to them.  Obviously the important caveats are that most of the reserves are under the jurisdiction of national oil companies, and also that there are some areas off-limits for longstanding environmental reasons that could allow some production if those restrictions were lifted.

A Look at the DOD’s Energy Usage in 2010 - The DoD spent $15.2 billion on energy in (Fiscal Year) 2010. Seventy four percent of this (or $11.2 billion) can be attributed to operations while the remaining 24% (or $3.7 billion) to the Department’s permanent installations and 2% (or $0.3 billion) to non-tactical vehicles. When we look at the total energy consumption we have a similar picture. In 2010, DoD consumed 872 trillion Btu of site delivered, purchased energy. Seventy three percent of this was operational energy and the rest was facilities energy. Note that 872 trillion Btu corresponds to site delivered energy. In energy balance terminology it refers to final energy consumption. So, if you want to compare this amount with a country’s energy consumption you better use the estimated source energy, which by the way more or less corresponds to primary energy supply, and which by way is not given in the DoD’s annual energy management report.

Pentagon Unveils Sweeping Energy Strategy - The Pentagon on Tuesday unveiled its first "Operational Energy Strategy," a plan to fundamentally transform the way fuel is used in the theater of war. Clean-energy advocates have heaped praise on the plan, saying it could also drive major energy innovations in the commercial sector. The strategy is a formal step forward in a broad effort by senior Defense officials to cut the military’s dependence on oil and expand its use of alternative energy, as troops lose their lives protecting fuel convoys trucked through Afghanistan and soaring oil prices drive up the Pentagon’s energy bills. The U.S. military is the single largest industrial consumer of oil in the world. In 2010, it spent $13 billion on fuel; in 2008, when oil prices reached a record of $147 a barrel, the military spent nearly $20 billion.      Last year, Congress created a Defense Office of Operational Energy aimed at changing that. With the rollout of the formal strategy, Pentagon planners will for the first time treat energy as a distinct military program or capability, like troops, weapons, or cybercapabilities. One way the strategy is being implemented: for the first time, strategies to acquire and move energy supplies are now being incorporated into war games.

September Oil Production - The two agencies that report earliest, OPEC and the IEA, are out with their estimates of total liquid fuel production in September.  The IEA says it went down a little and OPEC says it went up a bit more than the IEA says down.  So the average is up, but I'm not sure you should rely too heavily on that fact just yet.  We'll see what subsequent months bring with both revisions to this data point and further data points.  In any case, the data since 2008 are above, and since 2002, along with WTI spot prices, are here: The price/production curve continues more or less in the same band: I'm wondering about switching these graphs to be based on Brent rather than WTI prices, given the huge spreads between the two these days, and thinking that Brent is a better indicator of global prices. 

Brent is a Better Reference Price than WTI - During the discussion of Brent vs WTI following my latest monthly global oil supply post, commenters raised a couple of questions: how did Brent or WTI contrast with the prices received by the swing producer (Saudi Arabia), and how did they contrast with US gas prices? The answers are reasonably clear in both cases.  Above, I show the price of Saudi Arabian Light grade from the beginning of 2000 (on the y-axis) versus either Brent or WTI on the x-axis.  Historically, Arab Light has always sold at a slight and only moderately variable discount to Brent/WTI (because Arab Light is more sour).  The black line above represents exactly equal prices.  However, in recent months, the historical relationship with WTI has completely broken down and Arab Light is selling for much more than WTI.  The relationship to Brent is unchanged. Similarly if we look at the average weekly retail price of US gasoline versus WTI (top panel) and Brent (lower panel): One could do a more thorough analysis looking at all oil blends around the globe but the data above is enough to convince me: WTI is now reflecting an anomalous situation in the US midwest and no longer even explains US gas prices well, let alone global trends.

Oil speculation seen adding $600 to your gas bill -  Oil market speculation will cost U.S. households more than ever in 2011, a consumer group predicts, and the drain on household incomes will increase unless government rules to curb it are imposed. "Speculation will add $600 to the average household expenditures on gasoline in 2011," a report released Thursday by the Consumer Federation of America said, "resulting in the highest level of spending ever of almost $2,900. Consumer spending is the main driver of the U.S. economy and in the current weak economic environment, the consequences of rising oil prices are alarming, the CFA said.  Spending on gasoline accounts for less than half of all U.S. oil product consumption, so when higher oil prices get factored into all the other oil-based products households buy, the overall problem becomes much greater, the report says. "When speculators, oil companies and OPEC rob consumers of that much spending power, the inevitable result is a dramatic reduction of economic activity and employment," Speculation has been an integral part of the oil market for some time, but it alone may not be to blame for the recent volatility and price spikes. The report says market deregulation has a lot to do with it.

Did Speculation Drive Oil Prices? Market Fundamentals Suggest Otherwise - Economic Letter, October 2011 - FRB Dallas: Oil market speculation became an especially popular topic when the price of crude tripled over 18 months to a record high $145 per barrel in July 2008. Of particular interest to many is whether speculators drove oil prices beyond what fundamentals would have otherwise justified. We explore this issue over two Economic Letters. In this article, we look at evidence from the physical market for oil and conclude that fundamentals, and not speculation, were behind the dramatic rise and fall in oil prices. In our companion Economic Letter, we examine the futures market.

IEA Slashes Oil Demand Estimates On Fear Of New Global Slowdown The IEA slashed estimates for global oil demand, cutting 50 thousand barrels per day in 2011 and 210 kb/d in 2012. This is based on global GDP growth projections of 3.8% this year and 3.9% next year "with significant downside risk." Previous estimates were 3.9% and 4.2%. Here's the outlook by region: U.S. down; Europe crushed; Asia keeping growth alive.

OPEC cuts oil demand forecast, citing economic woes in US and other developed countries  - OPEC slashed its estimate for oil demand this year and said it expected sales to stagnate next year, in a forecast Tuesday blaming global economic uncertainty for cutting into the world’s appetite for crude.Updating last month’s forecast, the 12-nation Organization of the Petroleum Exporting Countries said that it expected demand to be up by nearly 1 million barrels a day this year over last. That projected increase will be 180,000 barrels a day less than its previous estimate, it said. For next year, OPEC’s monthly forecast said that estimated growth in world oil demand will fall to a daily 1.2 million barrels. That would leave the global appetite for crude at just over 88 million barrels a day for 2012. “Uncertainty in the world economy has dimmed the picture for 2011, particularly in the OECD region,” said the monthly report referring to the major industrialized nations. But it added that domestic policies in China and India — the two developing countries traditionally driving demand — also are expected to contribute to the downward revision in word demand growth.

Peak Oil and the Financial Crisis: Where do Oil Prices Fit In? - The Financial Times and Wall Street Journal have gone into full crisis mode with live blogs continuously reporting unfolding events. Equity markets are falling and London oil prices have been flirting with $100 a barrel for the first time since February. Talk of recessions, depressions, and even collapse of the euro zone is everywhere.  There is growing concern that defaults in Europe would quickly engulf Wall Street financial institutions and that even the great Chinese growth engine could be hurt seriously by declining exports. Our concern here, however, is just where oil supply and oil prices fit into all this gloom and doom. There is growing recognition among researchers that oil prices above $90 a barrel clearly cause significant economic damage in the US and other OECD countries. Additional dollars going into fuel tanks are not spent on other goods and services; hence discretionary consumer spending will contract and will continue to do so until oil prices fall significantly below $90 a barrel. In the winter of 2009, oil prices fell to circa $60 a barrel following the summer's oil price spike to $147 a barrel. This spectacular drop in oil prices did as much or more to quickly bring the country out of recession than the government's stimulus.

What the Nobel Prize tells us about oil - Do you think that it's straightforward to figure out whether high oil prices cause recessions? Many people apparently do. If it was easy to separate cause from effect and thus measure the relationship between stimulus and response, they wouldn't be awarding Nobel Prizes for related progress. Indeed, the difficulty of distinguishing economic cause from effect is a big reason for economists' longstanding interest in oil price shocks, particularly those of the 1970s. Those price hikes were clearly spurred by events outside the economic system -- in 1973 by the Arab oil embargo, and in 1979 by the Iranian revolution (though even on these points there is some dissent [PDF]). Identification should thus be simple: The oil shock is the cause, and any macroeconomic change is a consequence. This provides an unusually clean laboratory in which to study economics. Alas, there is a problem. The oil price shocks of the 1970s prompted big interest rate hikes in consuming countries, as policymakers tried to stem inflation. One now must ask: Were the economic slowdowns that followed the oil price shocks the result of the shocks themselves, or consequences of the monetary policy reaction? The difference matters, because one leads to an energy policy solution, while the other points to better monetary policy as the right response.

Commentary: Weak world GDP growth & “peak oil” - As we previously forecast, the decline in world oil production is likely to occur in the next 1-4 years, a year having passed since we forecast 2-5 years. Some believe that weak worldwide economic conditions will significantly extend the onset of decline. We believe that the delay will be essentially negligible. Because of the myriad of variables, the timing of the onset of the decline of world oil production cannot be predicted with certainty. In the early 2000’s when we began our world oil production studies, we thought that future world oil production might peak sharply, similar to U.S. production, which sharply peaked in 1970. After all, “peak oil” implies a sharp peak. As we continued our studies, it became obvious that a sharp peak scenario was not necessarily the most likely. In particular, the pattern displayed by European oil production — a fluctuating production plateau before decline, became the most likely pattern (Figure 1).

The 65 Year Debt Bubble and a New Financial System - When I write about high oil prices having an adverse impact on the economy, quite a few readers respond by saying, “No, most (or all) of the problem is a debt bubble.” They seem to think that poor underwriting of mortgages a few years ago allowed a debt bubble. Once this bubble is past, or some similar bubble, our problems will be over. I decided to see when the debt bubble really started. The answer surprised me–it appears that we have been building a debt bubble since at least 1945 (Figure 1 – based on Federal Reserve data US Non-Governmental Debt, Divided by Nominal GDP) Furthermore, it appears that this 65-year bubble is beginning to deflate. I believe that this is occurring because high oil prices are putting a cap on economic growth. If I am right, it seems to me that the drop in non-governmental debt shown in Figure 1 can be expected expect to continue, possibly eventually dropping all the way back to the 1965 debt level–that is, about 15% of today’s debt level.

Peak oil from the ivory tower[i] - In the social-empirical world I believe we inhabit, meeting human needs and fueling economic growth is incompatible with the thermodynamic, economic, financial (massive debt, political dominance and corruption) and environmental realities brought to the fore or worsened by peak oil. Nor do I expect corporations, politicians, and governmental and international agencies to hear the clarion call sounded by these earnest academics. These bodies have their underside agendas, as evidenced by their vain attempts to maintain the political/economic/financial status quo peak oil is upending. Bluntly, they evince little or no concern for social responsibility or the public good.[vii]Thus the limits to growth, overshoot, any probing discussion of the interdependence of energy/economy and finance, the potential for institutional collapse, and the need to create a sustainable society –based upon an overhaul of consumer society- go unaddressed in this special issue. For all its erudition and genuine concern of its authors, this special issue demonstrates only a ghost of awareness. It is an anachronistic and jejune health policy analysis of peak oil as a “risk” to be “mitigated” within the framework of logical incrementalism,[viii] whereas I find peak oil an epochal reality.

On The Cusp Of Collapse: Complexity, Energy And The Globalised Economy The systems on which we rely for our financial transactions, food, fuel and livelihoods are so inter-dependent that they are better regarded as facets of a single global system. Maintaining and operating this global system requires a lot of energy and, because the fixed costs of operating it are high, it is only cost-effective if it is run at near full capacity. As a result, if its throughput falls because less energy is available, it does not contract in a gentle, controllable manner. Instead it is subject to catastrophic collapse.  Just as we never consider the ground beneath our feet until we trip, these glimpses into the complex webs of inter-dependencies upon which modern life relies only come when part of that web fails. When the failure is corrected, the drama fades and all returns to normal. However, it is that normal which is most extraordinary of all.

So What Happens if the "Bumpy Plateau" Lasts for Another Decade? -  In his most recent Saturday Oil Report, blogger Dave Cohen of Decline of the Empire wrote the following as part of his analysis: I am not among those who believe peak oil will cause the End of the World sometime soon. I expect global oil remain on a bumpy plateau through 2020, which is as far out as I am willing to look. I also expect American oil production to stay on a bumpy plateau over the same period. A global production plateau will not result in civilization's demise, but it will certainly constrain economic growth if another demand shock occurs. I've been thinking of calling off my prediction that we'll have another oil price shock next year. A global depression seems to be imminent. We'll see. For the record, my own position is that absent a catastrophic geopolitical event such as a nuclear conflagration, Dave Cohen is probably going to be proven correct, with one caveat...the political stability of Saudi Arabia is absolutely crucial to the world being able to maintain oil production at the plateau levels. If at some point an internal revolution overthrows the Saudi monarchy and takes offline the production of the world's most important oil producer--and the only one with a significant amount of apparent reserve capacity--then all bets are off.

Hitting our limits? - For 150 years, commodity prices have trended ever downward. As Mr Pielke notes, a spike in prices in the 1970s prompted the famous Ehrlich-Simon bet, between an ecologist and an economist, over whether resource prices would rise or fall between 1980 and 1990. The economist, Julian Simon, argued that they would fall, as rising prices in the short-term would prompt markets to find new supplies and efficiencies that placed downward pressue on prices over the longer-term. As it turned out, he won the bet. Had it been a 30-year bet, however, he would have lost. Mr Pielke then asks the inevitable question: are the commodity price increases of the past decade likely to trigger a similar market response, such that a decade from now we're once again enjoying a time of plenty? Or is dramatic emerging-market growth combining with dwindling supplies of critical resources to push the world against fundamental limits, the end result of which will be sustained increases in commodity prices? To answer the question, one has to state one's beliefs in the likely path of elasticities of demand with respect to price. To put it another way: over the next decade, how successful will humanity be in substituting away from scarce resources?

The Economics Of The Arab Spring - The Middle East has long been trapped in a vicious development cycle. The region’s excessive dependence on natural resources has prevented the emergence of a strong private sector, which, in turn, has prevented the emergence of a strong constituency for economic diversification. It is clear that the Middle East's political dilemma cannot be properly understood without its economic underpinnings. In this brief article we argue that the current turmoil in the region is fed by two economic undercurrents. First, there is an inherent tension between the region’s demographic and economic structures. As the Middle East undergoes an unprecedented demographic transition, its economic structure remains rigid - unable to generate productive employment opportunities for new entrants to the labour force. Second, and perhaps more importantly, recent happenings in the region call into question the very sustainability of a development model based on a leviathan state and greased by oil and aid windfalls.

China imposes nationwide tax on energy, resources - China is imposing a nationwide tax on production of oil and other resources to raise money for poor areas and possibly ease public anger at the wealth of state energy and mining companies. The measure announced Monday is aimed at generating revenue for poor areas that produce much of China’s oil and other resources but receive little of the wealth. That imbalance has fueled ethnic tensions in Tibet and the northwestern Muslim region of Xinjiang. The tax takes effect Nov. 1 and applies to crude oil, natural gas, rare earths, salt and metals, the Cabinet said on its website. Oil and gas will be taxed at 5 to 10 percent of sales value while other resources will be taxed at different levels. An experimental version of the tax was imposed last year on oil production in Xinjiang and President Hu Jintao said at that time that revenues “should be focused on improving local people’s lives.”

China extends resource tax on oil and gas to entire country: report - China's State Council, or cabinet, has announced the extension of its resource tax on domestic sales of crude oil and natural gas to the entire country and has also increased the number of products subject to the levy, effective November 1, official news agency Xinhua reported Tuesday. The list of taxable resources now includes coal, rare earth, salt and metals, according to revised resource tax regulations released Monday.  The resource tax on oil and gas was introduced at a rate of 5% in northwest China's Xinjiang Uygur Autonomous Region on June 1, 2010, and was extended to 11 other provinces in December last year. The tax is designed to encourage energy conservation and limit environmental damage, Xinhua reported. Under the new regulations, sales of crude and natural gas across the country will be taxed at a rate between 5% and 10% of their sales value.

Merkel Aims to Sign Rare Earths Deal With Mongolia Next Week -  Chancellor Angela Merkel will seek to strike a deal on resources with the Mongolian government during a trip to Ulan Bator next week that secures access to rare-earth elements at fair prices, a German government official said. Mongolia’s potential for rare earths is enormous and Germany is confident of reaching an outline agreement at government level that would allow companies to sign individual contracts ensuring access to the materials, the official told reporters in Berlin today on condition of anonymity because the deal has yet to be struck. The official cited Munich-based Siemens AG, Europe’s largest engineering company, which he said needs rare earths for turbines. German companies may offer infrastructure and clean-energy investments in return. Germany is at the forefront of efforts in Europe, the U.S. and Japan to diversify their sourcing of rare-earth elements used in everything from hybrid vehicles and flat-screen TVs to weapons systems after the Chinese government last year announced cuts in production. China produces more 90 percent of the world’s rare earths.

China's iron ore demand to remain robust - Rio Tinto CEO - Rio Tinto's chief executive said on Tuesday he did not foresee a significant change in China's demand for iron ore despite investor concerns about slowing steel demand in the country and weak developed economies. Index-based spot prices slid to more than six-month troughs on Monday, after dropping about 5 percent in September, spurred by signs of slowing Chinese steel demand and uncertainty about the fate of the global economy. China is the world's biggest buyer of iron ore -- a key steelmaking material. "We continue to see robust business conditions for Rio Tinto products into China, particularly in iron ore. We would not foresee real significant changes in that demand profile in the next few months," CEO Tom Albanese told reporters on the sidelines of the World Knowledge Forum in Seoul.

China realty goes BOGOF - The increasingly tough purchase restrictions in some cities and credit and monetary tightening have crushed the transaction volumes across the country for the best part of the year, even though prices haven’t moved much lower on the whole.  Nonetheless, real estate developers are already feeling the impact of low transaction volume, namely problems with their inventory build up and cash flows as they are unable to sell as many properties as they planned.  Developers have probably counted on September and the Golden Week, but the Golden Week has turned sour. Shanghai, for instance, experienced the worst Gold Week holiday in 6 years.  Only 398 units were sold in the primary market for the entire the 7-day long holiday, which is only 20% of the same period of last year (in other words, sales dropped 80% year-on-year) according to  According to Xinhua, one developer in Jinan tried to sell their flats by offering gifts like iPads and other electronic products, but without much success.  Beijing has been doing somewhat better according, as 866 units were sold in the first 6 days of Golden Week, only 10% fewer than last year, but 62% lower compared to the first week of September.  In Nanjing, one developer even offered a buy one (house) get one (flat) free (BOGOF) according to Xinhua, as that developer has failed to sell those houses since December of last year.

Households Pay a Price for China’s Growth - They own a modest, three-bedroom apartment here in this northeastern industrial city. They paid for their son to study electrical engineering at prestigious Tsinghua University, in Beijing. And even by frugal Asian standards, they are prodigious savers, with $50,000 in a state-run bank.  But like many other Chinese families, the Wangs feel pressed. They do not own a car, and they rarely go shopping or out to eat. That is because the value of their nest egg is shrinking, through no fault of their own. Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

China Inflation Exceeding 6% Limits Wen’s Scope for Easing (Bloomberg) -- China’s inflation exceeded 6 percent for a fourth month, limiting the government’s ability to ease monetary policy as a weakening global recovery threatens growth in the world’s second-largest economy. Consumer prices increased 6.1 percent in September from a year earlier, led by a jump in food costs, the National Bureau of Statistics said today. That matched the median forecast in a Bloomberg News survey of 22 economists and followed a 6.2 percent gain in August. Stocks fell in Shanghai as the report dimmed any prospect China will cut interest rates after data yesterday showed exports grew at the slowest pace in seven months. Asian policy makers face a “delicate balancing act” as inflation remains elevated while an escalation of Europe’s sovereign-debt crisis may severely affect the region, the International Monetary Fund said yesterday. “It is too early to call a victory over inflation,”

What If the China Bubble Bursts? - What's the most important economic question in the world today? One contender would certainly be whether the euro will collapse. Another might be whether the U.S. will plunge into a double-dip recession. But a third, and possibly the most important over the long term, is whether China can find its way out of the biggest housing bubble ever created.  It may seem strange to Westerners, who hear so much about the rise of Asia and growing Chinese competitiveness. But like U.S. Republicans who try to "starve the beast" by cutting government spending, the Chinese Communist Party has been attempting to put a damper on the debt-fueled real estate boom that is at the heart of the nation's economic miracle. This is part of a deliberate attempt that is meant to rejigger the Chinese economy into one that relies more on a domestic service sector and less on manufacturing and exports. If, however, the party's efforts result in a precipitous drop in real estate values, multinational corporations whose revenue and earnings growth are tied to China could be hard hit. And the U.S. could be thrown back into recession.

China's landing: Soft, not hard - China's economy is slowing. This is no surprise for an export-led economy dependent on faltering global demand. But China's looming slowdown is likely to be both manageable and welcome. Fears of a hard landing are overblown. To be sure, the economic data have softened. Purchasing managers' indices are now threatening the "50" threshold, which has long been associated with the break-even point between expansion and contraction. Similar downtrends are evident in a broad array of leading indicators, ranging from consumer expectations, money supply, and the stock market, to steel production, industrial product sales, and newly started construction. Thanks to a massive fiscal stimulus, China veered away from the abyss in early 2009. But it paid a price for this bank-funded investment boom. Local governments' indebtedness soared, and fixed investment surged toward an unprecedented 50 per cent of GDP. Fears surfaced of another banking crisis, the imminent collapse of a monstrous property bubble, and runaway inflation. Add a wrenching European crisis to the equation, and a replay of 2008 no longer seemed far-fetched. While there is a kernel of truth to each of these China-specific concerns, they do not by themselves imply a hard landing. Nonperforming loans will undoubtedly increase in response to the banking sector's exposure to some $1.7 trillion of local-government debt, much of which was incurred during the stimulus of 2008-2009. But the feared deterioration in loan quality is exaggerated.

Has China Just Hit Stall Speed? - - Yves Smith - The Financial Times reports that the Chinese sovereign wealth fund Huijin will buy shares in the four biggest banks in a move to goose the flagging stock market, which is at its lowest point since early 2009. This is the first time the fund has mad this sort of intervention since the onset of the crisis. The stock market is arguably even more important in China than in the US. With yields on bank deposits chronically well below inflation (and the spread between the two rates continues to be much worse than we are now experiencing in the US), investors are almost forced into risky assets. Since there is no domestic bond market to speak of, that means, for the most part, stocks or real estate (we have also heard of the stockpiling of commodities, such as base metals).  But the stock market may well be sending an accurate signal that China’s economic model is under duress. We’ve commented repeatedly that there has never been a large economy that has had 50% of its GDP consist of exports and investment. And before you say, “China is an emerging economy, it can absorb a lot of investment” the evidence is against that. The supposedly sclerotic US took $4 to $5 of debt to generate $1 of GDP growth on the eve of the crisis. As of 2009, it was taking $7 of debt to generate $1 of GDP growth. And China has been raising interest rates to dampen domestic inflation.

China wrestles its slowdown - So, after some concerns and worries, the Chinese government has responded with new measures to try to solve the growing problem of tight financing for small and medium sized businesses. I would describe these measures rather as the” how to stop crazy bosses from running away because they have borrowed from loan sharks” policies. Following a meeting in the State Council, Premier Wen Jiabao announced six new measures to support small business: The more important 4 points of the 6 are:

  1. Increase small businesses’ access to credit from banks, with growth of credit to small businesses not lower than the overall loan growth

  2. Banks should scrap unreasonable fees charge to small businesses to reduce costs of running small businesses

  3. Explore more channels for small businesses to obtain credit

  4. Refine differential regulatory structure for small businesses. Loans of the size below CNY5 million could be excluded in the calculation of of loan-to-deposit ratio, and would allow banks to use the same risk-weighting as retail loans

China's debt pileup raises risk of hard landing (Reuters) - When China announced a nearly $600 billion package to ward off the 2008 global financial crisis, city planners across the country happily embarked on a frenzy of infrastructure projects, some of them of arguable need.  Chengdu, the capital of southwestern Sichuan province, answered the call for stimulus action with a bold plan for a railway hub modeled after Waterloo railway station in London. Except London's Waterloo was not ambitious enough. In a manner typical of many infrastructure projects in China, Chengdu more than doubled the size of its planned transport hub, borrowed 3 billion yuan ($473 million) from a state bank to finance it, then set out on a blistering construction timeline that saw the finishing touches put on the project two years later. But instead of getting the accolades they expected for helping to stimulate the economy, Chengdu Communications and many of China's 10,000 local government financing vehicles (LGFV) have now come under a harsh spotlight for the grim side-effects of the construction binge.

IMF stress tests China/Australia bust - On cue, as a part of its annual report on the Australian economy, the IMF has produced a three part stress test of the Australian fallout in the event of a China bust. So far as I can tell it has gone completely unreported. The first of the scenarios examines the outcome if China is able to do what so far it has been unable to do, rebalance towards internal demand drivers for growth: …we assume that a successful rebalancing of China’s growth toward private consumption comes about by a comprehensive set of policy measures that includes exchange rate appreciation, financial sector reform, structural reforms, and a stronger social safety net. 4 All these measures support private consumption and shift resources from the tradables to the nontradables sector while slowing the build-up of export capacity through private investment. Exchange rate appreciation: The nominal exchange rate appreciates against the U.S. dollar by 20 percent over five years. Because prices in China are sticky, the nominal appreciation translates into a persistent real effective appreciation of about 16 percent over five years.

Romney Talks Tough on China in GOP Debate - Former Massachusetts Governor Mitt Romney said if he were elected president he would immediately launch a combative relationship with Chinese leaders and attack their currency and trade policies, as Republican presidential candidates used an evening debate to jump into an issue that is dividing leaders of their party in Washington. “If you are not willing to stand up to China, you are going to get run over by China,” Mr. Romney said at a New Hampshire debate hosted by Bloomberg and the Washington Post.He accused China of “cheating” and undervaluing its currency, the yuan, which many believe enables the Chinese to boost their exports. Mr. Romney said U.S. leaders have been “played like a fiddle” by Chinese leaders, something he said he would stop as president. “The Chinese are smiling all the way to the bank,” Mr. Romney said. He said he’d use his first day in office to issue an executive order labeling China as a currency manipulator, something the Obama administration and previous administrations haven’t been willing to do.

The Only Way to Get China to Act - I wish there were a class called China 101 that every member of Congress had to attend. This would be the first lesson: if you really want the Chinese to do something, never pressure them about it in public. Loss of face is anathema in the Middle Kingdom. Which is why when the U.S. Senate passed a bill hinting at tariffs on Chinese goods if Beijing doesn't let the value of its currency rise, the People's Bank of China promptly and defiantly responded by pushing the value of the renminbi lower.It's ironic, because Beijing had been doing just the opposite until politicians like Chuck Schumer decided to start posturing and make China's currency a proxy for a highly politicized discussion about globalization and unemployment in America. The idea is that if Chinese money was worth more, American firms wouldn't export so many jobs there (because labor would be more expensive), and the Chinese would be able to buy more U.S. goods and services themselves, thus cutting trade imbalances between the two nations and helping put the global economy back on track.

Fast Enough? China’s Currency Record - As the Senate ponders a measure to punish China for undervaluing its currency, it’s useful to take a look at China’s currency record, compared to other countries. Since July 2005, when China first allowed its currency to rise somewhat, the yuan has gained 30% against the dollar. While that isn’t as much as the yen’s 44% gain during that time, it’s well ahead of the euro’s 10% advance. The British pound, meanwhile, has fallen 12% against the dollar since July 2005. Beijing doesn’t deny that it stage manages the yuan’s rise and says that some day it will let the yuan float — though it never says exactly when. Still, the yuan’s rise doesn’t seem as far out of whack as complaints would have it. But determining exactly how undervalued or overvalued a currency is with precision is very difficult. The International Monetary Fund, using different methodologies, estimates the yuan is still undervalued by somewhere between 3% (hardly at all) and 23% (quite a lot) when measured against global currencies.John Williamson, an economist at the usually free-trade Peterson Institute for International Economics, says that China’s currency is still undervalued by 24% against the dollar. He said the currency should have been rising faster than it did because Chinese productivity rose much faster than U.S. productivity.

Don't forget the Chinese consumer -- The ongoing debate surrounding the yuan’s appreciation focuses on the implicit subsidy of an undervalued yuan to Chinese manufacturing and exports, the resulting impact on jobs in China and America, the perceived influence of Chinese trade on the hollowing out of the American middle class. The effects on Chinese consumer are rarely considered. For the Chinese consumer, a weak yuan increases the cost of imports. This decreases consumption of imports and protects domestic firms from international competition. Michael Pettis, of the Carnegie Endowment for International Peace, argues that the weak yuan is in fact just one of three implicit taxes on consumers in China. Mr Pettis believes there is a growing divergence between productivity growth and wage growth in China. In the time that it has taken for the productivity of the average Chinese worker to triple,  wages have only doubled. As a result, firms are taking an ever larger share of the benefits of rising productivity. Firm often reinvest this return into their businesses, but there are doubts about the value of many such investments given the bubbly nature of some parts of the Chinese economy.

The Kind of Chinese Currency Manipulation the U.S. Likes - In recent days, the Chinese central bank has been intervening in currency markets to drive up the value of the yuan against the dollar while other currencies have been falling against the dollar. This is the kind of currency “manipulation,” that the U.S. Treasury likes — and has taken note of privately. But it’s wary of patting the Chinese on the back. That’s because the only safe political position in Washington on Chinese currency issues is that Beijing isn’t doing enough. With the euro zone seemingly in disarray, the dollar has once again become a safe haven. Since Aug. 31, the dollar has gained 7% against the euro, nearly 9% against the South Korean won and 5% against the Malaysian ringgit. But it continued to depreciate against the yuan at a modest 0.5%. Since China agreed to let its currency float somewhat against the dollar, it has risen at a nearly clockwork pace of 0.5% a month — no matter what the market conditions. That’s because the government minutely sets currency policy, and has reached a consensus that a 6% or so annual appreciation works for China as a way to fight inflation and, eventually, lift the currency to a point where it could float freely and halt the build-up of reserves for which it has no real use.

Inflation and Real Exchange Rates in China - China's exchange rate policy has been in the news quite a bit recently, thanks to the US Senate's action this week to try to punish China for it. Putting aside the legal issues for a moment, it has been noted by various observers (e.g. Matt Yglesias) that the problem of China's undervalued exchange rate is at least partially resolving itself over time.  If you had asked me yesterday how much the yuan (CNY) had appreciated against the dollar since China released the yuan from its long-standing peg of 8.28 CNY/USD back in 2005, I could have told you that the CNY is now about 20% stronger in nominal terms. But then I would have been quick to add that since inflation in China has been considerably higher than in the US, in real terms -- i.e., in terms of actual purchasing power once inflation is accounted for -- the CNY has probably appreciated by more like 30% to 40%. It turns out I would have been pretty badly wrong. It turns out that, at least according to official statistics (and yes, we probably need to take them with a large grain of salt), consumer prices in China have risen only by a total of only 6.7% more than prices in the US since 2005. The inflation differential that had loomed large in my mind is not so great after all.

China should buy US companies with forex reserves - China is falling deeper and deeper into a "dollar trap" after a series of misjudgments in its foreign exchange policy and the policy toward the U.S. economy. For example, the country wrongly believed that the United States had the ability and willingness to maintain a strong dollar, seriously underestimated the value of gold and predicted a gold bubble when gold prices just reached between 500 U.S. dollars and 600 U.S. dollars per ounce. Furthermore, it often fell for the lies of U.S. liberal scholars, financiers and politicians. The value of the U.S.-dollar-denominated assets held by Japan diminished by 40 percent after the country was forced to sign the Plaza Agreement. If China continues to tolerate the debt defaults of the two-faced United States, it is highly likely that the value of its dollar holdings will diminish by more than 60 percent. To ask the United States to protect China's dollar assets is like asking a tiger for its skin. The United States has grown used to making generous promises to service its debt to China. "The United States can pay any debt it has because we can always print money to do that," former Federal Reserve Chairman Alan Greenspan said in a statement. It may sound shameless, but he was telling the truth. It would be foolish and naive of China to rely on the oral guarantee of the United States for the safety of its assets.

Internationalisation Of Chinese Yuan And The Historical Precedents - You would have realised, if you have been reading here for long enough, that one of the reasons for my doubts on China is based on my reading of history.  It is not an entirely scientific argument, but it gives me reasons to doubt the general consensus that the next great power must be China. As I repeatedly said, great powers of the past 300 years seem to have never been intentional.  The British Empire started with buccaneers, essentially pirates; then merchants started a private sector colony in India by the British East India Company.  The United States were not interested in being a great power until it was forced to during the two world wars.  Also, the most obvious candidates for great powers often failed at the end.  Argentina in the early 20th century is one example, Soviet Union and Japan are just some examples. So why have doubts in China?  This is more of a gut feeling more than anything.  The development of China has been too intentional, and the rise of it has been too obvious. 

Is a Rising Yuan Inevitable? - Even though the consensus seems to have ruled out a hard landing in China, and that the consensus seems to believe the yuan is a one way bet upward, it is always good to ask the question of whether something opposite can happen when the consensus is leaning to one extreme. The fact about monetary policy is that you cannot have all of the following three things at the same time:

1. Fixed exchange rate
2. Absence of capital controls
3. Independent monetary policy

China is attempting to do all three, but cannot really accomplish all three things in full. Because of the allegedly undervalued yuan, China has been running a persistent trade surplus. And because of its capital control which favours in-flow and limits out-flow, it also has surpluses in the capital account. As a result, we seem to always have too much money sloshing around in China, and the growth of its money supply makes the effect of quantitative easing in the United States looks insignificant (that also means that China has to intervene in the market by buying foreign currencies and assets, and hence the large foreign exchange reserve). That’s particularly true when the $US weakens. As I have shown previously, even though Chinese Yuan has been creeping higher against the $US dollar, it has not appreciated against many other currencies. There are two questions here. The first is what if the $US strengthens?  The second question is that in the face of a potential hard landing, how will the People’s Bank of China respond though monetary policy?

China trade surplus shrinks as global woes deepen (Reuters) - China's trade surplus narrowed for a second straight month in September to $14.5 billion, with both imports and exports lower than expected, reflecting global economic weakness and domestic cooling that will deepen policy quandaries facing Beijing. The trade data issued on Thursday laid bare trends at the heart of Beijing's debate about how to handle U.S. pressure for a higher yuan while seeking to protect both export-driven jobs and tame inflationary pressures. Moments after the data was released, a deputy chief of China's customs agency staked out one position in that debate, saying a higher yuan is already hurting exports. "The rise in the renminbi exchange rate may limit the room for export growth," Lu Peijun, the deputy head of the Chinese customs administration, said at a news conference about the data. "China is still facing relatively big imported inflationary pressure and trade conditions are also deteriorating," said Lu.

U.S. and China Data Highlight Weakness in Global Economy - The weakness in the global economy was underscored by reports published Thursday about the balance of trade in the United States and China. The United States trade deficit was essentially unchanged in August at $45.6 billion1, its lowest level since April and $100 million narrower than a year earlier. Exports and imports both slipped by $100 million, to $177.6 billion and $233.2 billion, respectively.  The trade deficit was slightly narrower than analysts’ expectations. The level for July was revised downward from $44.8 billion.  A narrower trade deficit could lead to a slightly higher level for the gross domestic product,  “but not exactly for the reasons that we’d like.” Slipping imports are a bad sign for the United States economy, since it shows weakness in consumer demand.  “In an ideal world we would like to see exports and imports growing at relatively strong rates, but with exports growing even faster than imports,”

China: exporting inflation - The economic impact of China’s rise on the rest of the Asia-Pacific region is very visible – in trade, for example, and foreign direct investment. But according to an International Monetary Fund report released Thursday, some of the hidden effects may be just as important. The IMF’s Asia-Pacific Economic Outlook estimates that China exports more inflation to the rest of the region than is often assumed.  For every 1 percentage point increase in Chinese inflation, the increase in Asia-Pacific countries is 0.25-0.5 of a percentage point – not an insignificant number for states already battling inflation. The report argues that the real danger for regional inflation is an up-tick in Chinese output driving commodity prices up. It notes that a 1 percentage point increase in Chinese output can raise global commodity price inflation by about 5 per cent and that the Asian-Pacific region is especially vulnerable to commodity price increases – because food and energy make up a large proportion of average daily spending.  And, as the chart below demonstrates, inflation in the Asian-Pacific region is a significant problem – particularly since as the global economy slows down, many countries are having to run an unpleasant gauntlet between stimulating growth and curbing inflation:

Where is Asian Thrift and the Global Savings Glut? - Sometime in the early 1990s the US began to move its international trade account from approximate balance into burgeoning deficit.From then on the US trade deficit grew year on year so that by 2006 the US consumed nearly US$900 billion more than it produced. Such excess amounted to 7% of US GDP—up from an average of 2% over 1990–1994.For perspective, the US trade deficit in 2006 was nearly as much as the entire annual production of goods and services in the 1.1 billion-peopled economy of India (this was an improvement, though: in 2005, the US deficit was strictly greater than India’s GDP).And a 7% ratio is the same as that Thailand had in June 1997 on the eve of the run on the Thai baht precipitating the Asian currency crisis. Except for the possibility of trade with outer space, the US deficit has to be matched dollar-for-dollar by trade surpluses in the rest of the world.Correspondingly, therefore, the rest of the world has been saving—consuming less than it has been producing—and accumulating dollar claims against the US as a result. In this description, however large the global imbalance, a savings glut—wherever or however it might arise on Earth—has no independent existence.It makes as much sense to say the world’s excess savings caused enthusiastic US consumers to flood into Walmart to buy $12 DVD players, as to say US consumer profligacy made hungry Chinese peasants abstain even more and instead plow their incomes into holdings of US Treasury bills.

Japan August current account surplus falls 64.3% - Japan's current account surplus shrank 64.3 percent year-on-year in August, the sixth straight monthly fall as higher energy import costs overshadowed a small gain in exports, data showed Tuesday. Higher oil prices and utilities' boosting of liquefied natural gas imports to compensate for the shutdown of the majority of Japan's atomic reactors after the March Fukushima crisis helped push Japan's trade balance into a deficit. The surplus in the current account, the broadest measure of Japan's trade with the rest of the world, stood at 407.5 billion yen ($5.3 billion) in August before seasonal adjustment, finance ministry data showed. The result, the sixth consecutive drop in the aftermath of the March 11 earthquake and tsunami, was lower than expectations of a 446.9 billion yen surplus in a survey of economists by Dow Jones Newswires and the Nikkei.

Why All The Smart People Have Gotten Japan's Demographic Time Bomb 100% Backwards: Do a Google search for Japan Demographic Timebomb and you'll see a host of predictions about how screwed Japan is, and how you should short the hell out of Japanese Government Bonds, as the population gets older, and entitlement costs bankrupt the government. Here's famous newsletter writer Dennis Gartman, back in February, talking about the imminent collapse of the yen. Kyle Bass has been making this argument over and over again lately. Generally, so many investors have been bearish on JGB and the yen for so long, that the trade has been described as the widowmaker, since so many folks have lost money it. Okay, let's take a step back for a second. If you didn't already know, both the yen and JGB have seen huge multi-decade rallies. Here's a long-term JGB yield chart.So why has everyone been so off? Well the funny thing is, the primary concern in Japan — the "demographic time bomb" — simply works exactly the opposite of how people think. For one thing, in an aging society, you would expect policies that favor cash and fixed income, rather than policies that favor growth and inflation. Not only has that been the outcome in Japan, it's the direction the U.S. is going, as the Republican party (whose constituents skew older, and who are thus more concerned about cash) have become very anti-Fed and anti-stimulus, whereas the Democratic party is the party of inflation and the weaker dollar. Bottom line: Older people vote for deflation and that means stronger bonds and stronger currencies.

Russia's Worsening Demographic Crisis - Following Vladmir Putin's decision that he will run again for President of the Russian Federation next March, there are questions about continuity or change in economic reform, political reform, weapons control, U.S.-Russian relations, and a host of other issues.  But there will surely be one constant: Putin's concern about arresting the demographic decline of Russia -- especially of Russia's working-age males -- which has significant implications for Russian society, economy, and standing in the world.  This issue received global media attention in 2006, when then-President Putin said in his state of the nation address that "The most urgent problem facing Russia is demographic crisis." In his recent speech to his party, United Russia, in which he and current President Dmitry Medvedev said they would swap positions next year, Prime Minister Putin emphasized again the importance of stopping Russian depopulation, while claiming that there had been progress in the past five years. This issue is the classic "under the water" part of the Russian iceberg, which will shape the nation's direction for years to come.

Iceland: From Crisis to Constitution - - Yves Smith - Yves here. I’m intrigued by the way Iceland’s post crisis experience does not get the coverage it warrants. This is a country whose banking system collapsed and its citizens suffered months of real privation (I dimly recall that it was difficult to import medicine, for instance, because no finance more or less means no trade). Yet after a period of serious dislocation, things somehow got sorted out, and with a cleaned up financial system and a much cheaper currency, the Icelandic economy has rebounded nicely. One aspect of this housecleaning was writing a new constitution. Its preamble calls for a just society, an idea which seems to be at the core of OccupyWallStreet’s demands: “We, the people of Iceland, wish to create a just society with equal opportunities for everyone.” I think readers will find both the process of developing and ratifying this document as well as its major provisions to be eye-opening. The model for the US Constitution was the Corsican constitution of 1755. Could this Icelandic document also have a disproportionate impact?

Why do people think that Canadian job creation rates require a policy response? » Pundits and politicians are calling on the government to "do something" about the state of the Canadian labour market; these calls are presumably based on a perception that job growth is still weak. It's not clear upon which data this assessment is based. The data that would be most informative are no longer being collected, and the best available proxy that I can find suggests that rates of job creation are back to pre-recession levels. Here is a graph - taken from Calculated Risk - that I wish I were able to make for Canada: This tells the story of how US employment fell and why it's struggling to recover. When Statistics Canada releases its monthly Labour Force Survey, it publishes numbers for the stock of people who are employed and unemployed in a given month. This is of course a very important piece of information to have, but our understanding of the state of the labour market would be even better if we had data on the flows into and out of employment. There is no Canadian counterpart to the JOLTS - although it may be possible to tease some of this information from the micro data files.

In Search of a Global 'Safe Place' - World Economic Forum Weblog - This week we have convened in Abu Dhabi for what is often called the world's largest brainstorm, the World Economic Forum's Summit on the Global Agenda meeting.  For the fourth year in a row, nearly 80 councils with 15-20 experts each, comprised the most relevant thought leaders from academia, business, civil society and government, are meeting to discuss topics as far-ranging as "Europe," "Aviation," “Geopolitical Risk,” "Organized Crime," and the "Role of Business." I am part of the Internet Security Council, which is led this year by Rosemary Leith of the World Wide Web Consortium. We are tackling tough and present issues of security, including 1) cyberwarfare, 2) the rising power of governmental lobbying by "big data"--Internet media companies that may want to cement their control over personal data streams, and 3) the future of individuals' control over their data. Our 2011 Council is composed of attending members from the US, Japan, the UAE, China, UK, and Switzerland.

Vital Signs: Falling Global Activity - An index of world economic activity is pointing down. The Organization for Economic Cooperation and Development’s indicator of economic activity in its 34 member nations fell to 100.8 in August from 101.4 in July. Readings above 100 indicate activity above its long-term trend. The index, which is designed to show turning points in economic activity, is a sign that the slowdown in global growth is likely to continue.

The World Close to Stall Speed -- Or at least OECD plus China, on the basis of the OECD's Composite Leading Indicators for August 2011: Figure 1: from OECD.  These series are scaled so that 100 is the long run trend. The euro area and China are at 100, and so those economies are no longer expanding relative to long run trend. The US remains above, but the gradient is negative. The latest readings on monthly GDP are mixed.  These indicators merely confirm the need for additional stimulus. Moves to eliminate regulations, reduce the corporate tax rate, and pass free trade agreements [1] might provide growth at some time in the future, but are unlikely to provide succor to the economy in the short term. (Allowing the payroll tax reductions to lapse is contractionary, and current opponents at some time in the recent past were supporters of this tax reduction.) That leaves measures that have been outlined here.

Japan's Central Bank Sounds Warning on Global Economy - The Japanese central bank sounded the alarm over the risks facing the world economy, even as it left its monetary policy unchanged Friday, underscoring the gravity of a global economic slowdown over which policy makers may have little control.  Also Friday, the Japanese cabinet outlined a supplemental budget of ¥12 trillion, or $155 billion, for the reconstruction of areas affected by the natural and nuclear disasters this year, the third such budget, and approved a plan to raise taxes temporarily to fund the effort.  The latest emergency budget follows about ¥6 trillion already earmarked in two supplemental budgets this year. It includes money to help relocate survivors and create a fund to revitalize the economy of Fukushima Prefecture, which has been hit hard by the nuclear crisis.  The government will raise up to ¥11.2 trillion from temporary taxes to help cover costs of rebuilding, according to the provisional tax plan. Officials have said they would also cut unnecessary government expenditures and sell state-owned assets, possibly including the government’s entire stake in Japan Tobacco.

IMF advisor says we face a Worldwide Banking Meltdown - YouTube

Is the global economy facing a global banking crisis? - The French-Belgian specialty bank Dexia is the first financial institution to fall victim to Europe's debt crisis. In a deal hammered out by the governments of France, Belgium and Luxembourg, Dexia will be dismantled, with the Belgian government nationalizing the local operations of the bank. Taxpayers are also on the hook for $120 billion in credit guarantees. I can't imagine that Dexia will be the only bank in Europe to meet this fate as the euro crisis continues to boil. Banks across the region hold festering compost heaps of rotting sovereign debt, spoiling the strength of their balance sheets. Some have holdings bigger than their capital. Greek banks are so exposed to their faltering government that I can't see how they dodge a bailout. French banks have been under pressure as financing has dried up. And with talk of a do-over for the proposed second bailout of Greece, as that nation's financial position continues to deteriorate, banks across Europe could be facing larger losses on their holdings of Greece's sovereign bonds.

Merkel and Sarkozy hold talks on crisis - Angela Merkel and Nicolas Sarkozy will talk on Sunday in an attempt to reconcile the differences between Germany and France over how to tackle the eurozone financial crisis and fund an expected recapitalisation of European banks. The two leaders’ longer-term plans for a new layer of “economic governance” to co-ordinate the fiscal policies in the 17-member currency union also face resistance from smaller countries, fearful that they may lead to big country domination, and reduce the role of the European Commission. Despite protestations to the contrary, divisions have emerged between the two capitals on how to maximise the use and effectiveness of the eurozone’s emergency rescue fund – the €440bn ($590bn) European financial stability facility – and whether to use it to top up the capital resources of banks holding large amounts of downgraded eurozone government debt. Ms Merkel, the German chancellor, is resisting moves to leverage the funds available to the EFSF, to expand its capacity to buy eurozone sovereign bonds and provide precautionary loans to governments facing liquidity difficulties. France wants to maximise the firepower of the fund, to stem the danger of contagion from the financial crisis in Greece and other peripheral eurozone members.

Merkel, Sarkozy tackle differences over euro crisis - German Chancellor Angela Merkel will thrash out differences with French President Nicolas Sarkozy on Sunday over how to use the euro zone's financial firepower to counter a sovereign debt crisis threatening the global economy. Sarkozy is due to arrive in Berlin late on Sunday afternoon and hold a meeting with Merkel followed by a working dinner. A news conference will take place at 1530 GMT. Talks are continuing over a vital aid tranche for Greece, which could run out of cash as soon as mid-November. European finance ministers are considering making banks take bigger losses on Greek debt -- an issue that could be discussed at the Merkel-Sarkozy meeting. "It is possible that we assumed in July a level of debt reduction that was too low," German Finance Minister Wolfgang Schaeuble was cited as saying by a newspaper on Sunday. Germany and France have so far been split over how to recapitalize Europe's banks, which Ireland estimated on Saturday may need more than 100 billion euros ($135 billion) to withstand the sovereign debt crisis, while the International Monetary Fund (IMF) has said the banks need 200 billion in additional funds.

Merkel, Sarkozy Say Deal is Near to Stabilize Euro Zone - The leaders of Germany and France said they will present a "comprehensive package" of measures against the crisis in euro-zone banking and government bonds by the end of this month but they gave no details, suggesting that Europe's two biggest economies continue to spar over the specifics of any plan. German Chancellor Angela Merkel and French President Nicolas Sarkozy, meeting in Berlin on Sunday, told reporters that the measures will include a plan for recapitalizing euro-zone banks where necessary, as well as proposals for deepening the coordination of national budget policies between the euro zone's 17 members. Despite signs of convergence between Berlin and Paris, the euro zone's most powerful nations have yet to resolve differences over who will pay for banks' capital needs and over how deeply to restructure Greece's teetering debts, according to people familiar the talks. "We are determined to do what is necessary to guarantee the recapitalization of our banks," Ms. Merkel said. "We will make proposals in a comprehensive package that will enable closer cooperation between euro-zone countries," she said, reiterating her view that it would be necessary to make changes to European Union treaties to allow greater European control over nations' budget discipline.

Merkel and Sarkozy set euro deadline - France and Germany have set themselves a deadline of the end of October to reach agreement on a comprehensive package of measures to stabilise the eurozone, including the recapitalisation of European banks if they need it. Angela Merkel, the German chancellor, and France’s President Nicolas Sarkozy spelt out their determination to defend the stability of the euro as they met for a bilateral summit in Berlin, but refused to spell out any further details of their plans. Mr Sarkozy insisted that the two leading governments in the eurozone were pursuing a common course, and were ready to announce a comprehensive package before the summit of the G20 leading global economies in France at the beginning of November. The only concrete statement they made, however, was Ms Merkel’s announcement that “we are determined to do whatever is necessary for the recapitalisation of our banks”.

Germany, France split on bank aid before summit - Under strong U.S. and market pressure Chancellor Angela Merkel and President Nicolas Sarkozy will try to bridge differences on how to use the euro zone's financial firepower to counter a sovereign debt crisis that threatens the global economic recovery. A ratings downgrade on both Italy and Spain by Fitch Ratings on Friday underscored the grim climate. A German source said Paris wanted to be able to tap the euro zone's 440 billion euro rescue fund to recapitalize its own banks, which have the largest exposure to peripheral euro zone debt, while Berlin insisted the fund should be used only as a last resort when no national funds are available. After meeting Dutch premier Mark Rutte, Merkel confirmed the German position was that the European Financial Stability Facility was a backstop to be used "only if that country is unable to cope on its own.

Dexia Board Meets as France, Belgium Tussle Over Troubled Assets - Dexia SA (DEXB)’s board meets today to study options to dismantle the French-Belgian bank that has brought Europe’s sovereign debt crisis to the heart of the region’s financial system. While France and Belgium have rushed to protect their local units, hurdles to an agreement remain as they wrestle over responsibility for assets hit by the crisis that has caused the bank’s short-term funding to evaporate. Dexia’s troubled assets are being folded into a “bad bank” and could amount to as much as 190 billion euros ($254 billion). Dexia’s balance sheet, with total assets of about 518 billion euros at the end of June, is about the size of the entire banking system in Greece and larger than the combined assets of financial institutions bailed out in Ireland in the last 2 1/2 years. The board meeting, scheduled to start at 3 p.m. in Brussels, will be the third in less than a month, after those on Sept. 27 and Oct. 3. Among sticking points for Belgium and France may be which assets to put in the bad bank and what share of the lender’s borrowings each government should guarantee.

Qatar unlikely to be white knight for Europe banks - Hopes may be disappointed for an influx of money from Qatar and other rich Gulf states into battered European banks, since Gulf investors are likely to see many of the banks as too risky and out of line with their investment strategies. As Europe's banking system has weakened over the last several months, financial markets have been abuzz with rumors and media reports about possible investments from the Gulf -- particularly from cash-rich Qatar, which has been on an international acquisitions spree. In June, Spanish bank Santander (SAN.MC) denied a report that it was in talks on Qatar buying a stake in it. Last month, France's BNP Paribas (BNPP.PA) denied a similar report. The latest speculation centers on assets of financial group Dexia (DEXI.BR); the prime ministers of France and Belgium were meeting on Sunday to discuss breaking up the group.. Some European media reports last week said Qatar was part of an international consortium discussing a purchase of Dexia's Luxembourg arm, valued at some 900 million euros ($1.2 billion).

Democracy or the Banks – which do you want? - The propaganda barrage in preparation of the next global assault on our well being is in full swing. IMF advisor Robert Shapiro giving the BBC an interview where he says there will be a global melt down in just two to three weeks unless the politicians address this financial crisis “in a credible way”. Meaning in a way the markets approve of. Which in turn means bailing out the banks with at least a trillion newly printed and/or borrowed Euros. Seen in light of this interview Mr King’s statement that this crisis may be the most dangerous ever is part of the same propaganda campaign. I’m not saying they’re not right about the seriousness of the insolvency of the banks nor even the time scale of their present moment of crisis. What I am saying is that they are using this moment of crisis as they have the previous ones as a way to ram past us measures which we have not agreed to, have not heard discussed in any open way at all – all we get is the bully boy chorus of the self interested bankers  - and for which they have no mandate.

Merkel, Sarkozy Pledge Bank Recapitalization - Angela Merkel and Nicolas Sarkozy turned their crisis-fighting focus to banks in a blueprint this month that will overtake a 12-week old plan that has yet to be put into place.  “We will recapitalize the banks,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office. “We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.”  Facing rising pressure to defuse turmoil that’s raged for 19 months and growing concern Greece is headed to a default, Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.  Searching for what each called a “durable” solution for Greece’s debt load shows they have moved beyond a July 21 plan that Luxembourg’s Jean-Claude Juncker called the “final package, of course.” Their approach may spike a debt swap now being negotiated that would impose a 21 percent write-off and suggests investors take a bigger share of the losses, reflecting the deterioration of the Greek economy.

Germany and France Near Deal to Recapitalize Banks -Acknowledging that Europe’s banks still need billions of euros to cushion against a possible default by Greece, the leaders of Germany and France announced on Sunday that they would have a package of reforms by the time leaders of the Group of 20 nations meet in early November.  “We are determined to do everything necessary to ensure the recapitalization of Europe’s banks,” Chancellor Angela Merkel said in Berlin after meeting with President Nicolas Sarkozy of France.  But beyond promising closer coordination of economic policies for the euro zone, the two leaders declined to provide specifics on how the recapitalization would work, or how much money they would commit. The continued uncertainty could unnerve investors who hoped to see the governments take more decisive action.  The announcement came on the same day that the governments of France, Belgium and Luxembourg agreed to nationalize Dexia, Belgium’s biggest bank, infusing it with billions of euros in taxpayer money after it became the first casualty of the Greek sovereign debt crisis.

"Planning To Plan" - Merkozy Reach Yet Another "Agreement", Adding "It Is Too Early To Enter Into Details"  No, the day is not August 7, 2011 when we had the first joint Merkozy statement attempting to prevent the latest and greatest round of the global financial crisis with nothing but pure rhetoric, in which however the word Dexia was strangely missing. The day is October 9, and yet we get another statement from the two, this time far more desperate. From Reuters: "We are very conscious that France and Germany have a particular responsibility for stabilizing the euro," Sarkozy said at a joint news conference with Chancellor Angela Merkel in Berlin. "We need to deliver a response that is sustainable and comprehensive. We have decided to provide this response by the end of the month because Europe must solve its problems by the G20 summit in Cannes." And the kicker: Merkozy "suggested that their proposals would include a plan for recapitalizing European banks, accelerating economic coordination in the euro zone and dealing with Greece's debt problems." In other words fix absolutely everything. But the punchline remains the same as always: Sarzkoy "added saying it was too early to enter into details." Ah yes, those ever elusive details, which nobody can ever provide, because, THEY SIMPLY DON'T EXIST, at least not in a universe in which 2 + 2 is still 4.

Belgium to Nationalize Part of Dexia - The Belgian government will nationalize the Belgian subsidiary of Dexia SA after reaching a deal with France on the issue, paving the way for the troubled lender to be broken up, people familiar with the matter said Sunday.  The deal negotiated between Belgium and France calls for the Belgian federal government to pay €4 billion ($5.4 billion) for the subsidiary, which includes one of Belgium's largest retail banks, said a person familiar with the matter. The federal government will own all of Dexia Bank Belgium at first, but then shares of the bank are likely to be sold to the Belgian regional governments later, said another person familiar with the discussions.  Dexia's board of directors was meeting in Brussels Sunday to consider the plan.  A key question is how the latest deal will impact Belgium's credit ratings. Moody's Investors Service Friday warned that it may downgrade Belgium's rating, citing in part the burden that new measures to support banks would place on the government's finances.  "The likelihood for the need of additional government measures to support individual banks or the system has increased, as illustrated by the significant challenges now facing the Dexia Group," Moody's said.

France, Belgium agree to nationalize troubled Dexia bank - The governments of France and Belgium agreed to nationalize Belgium’s largest bank on Sunday as the Greek debt crisis took its biggest victim yet, while France and Germany’s leaders promised far-reaching changes to the euro zone’s economic governance in a bid to stabilize Europe’s reeling finances. Dexia, a Franco-Belgian bank that had a debt exposure totaling more than $700 billion at the end of June — more than twice the size of Greece’s annual economic output — had invested heavily in European government bonds whose value is now under question.The nationalization is a sign of the spiraling problems facing European banks and governments, and it may threaten Belgium’s credit rating, making it one of the countries on shaky financial ground alongside Greece, Ireland, Italy, Portugal and Spain.

Dexia bank to get massive bailout - France, Belgium and Luxembourg are to bail out the troubled bank Dexia, following fears it could go bankrupt. The Belgian government will buy the bank's division in Belgium for 4bn euros ($5.4bn; £3.4bn). And Luxembourg's finance minister said a Qatari investment group was ready to buy the bank's Luxembourg unit, the AFP news agency reported. The plan came after German and French leaders agreed Europe's crisis-hit banks needed to be recapitalised. Dexia also secured state guarantees of up to 90bn euros to secure borrowing over the next 10 years. Belgium will provide 60.5% of these guarantees, France 36.5% Luxembourg 3%, the bank said in a statement. Belgian Prime Minister Yves Leterme told a news conference in the early hours of Monday: "We found an agreement on the fair division of the costs related to the management of the 'rest bank'." The Belgian unit is a largely retail operation of 6,000 staff, handling deposits totalling 80bn euros for four million customers.

Europe up a creek with no central bank -  Europe is demonstrating that a sovereign nation without a true central bank is just an uninsured bank, liable to be tipped over by the markets. While the ECB is a central bank in almost all respects, what it isn’t is a lender of last resort for individual euro zone nations, a role that is expressly ruled out by the European Treaty. A lender of last resort is what stops a bank run on a solvent institution from bringing it down due to a lack of liquidity. In the case of a nation, a lender of last resort, usually the central bank, can simply print money to satisfy debts in its own currency. And though we’ve all become terribly cynical about the concept of liquidity crises in the past couple of years, not least because so many people in authority have used it as a place to hide when the real issue was solvency (Greece, Lehman Brothers), the fact is that markets take on their own momentum. This is the terrible logic of markets when they view sovereign borrowers as credit risks; it is almost inevitable that they push, and in pushing weaken the un-backstopped borrower and ultimately bring it down. This is a process which needs a circuit breaker, and Europe has no adequate circuit breaker, unlike Britain or the U.S.

The troika criticizes the lack of determination to implement the cuts Greek - Members of the group of experts to examine the settings of Greece to continue receiving financial assistance have criticized the lack of determination to Athens for the haircuts, today moved the German newspaper Welt am Sonntag. In an article published in full this morning newspaper, said that members of the "troika" consisting of the International Monetary Fund (IMF), European Commission (EC) and European Central Bank (ECB) Hellenic openly criticize the government before completing his last report. The head of the IMF delegation in Greece, the Dane Poul Thomsen Mathias believes that Athens should be implemented much more severe adjustment that has already executed."It is clear that the program will not succeed unless the authorities decide on the path of structural reforms much more strict than we have seen so far," said Thomsen, who said that "Greece is at the crossroads."

IMF Advisor: Could See Eurozone 'Meltdown' in 2 Or 3 Weeks - In an interview on the BBC (via ZeroHedge), IMF advisor Robert Shapiro said some incredibly alarmist things. He tells broadcasters that if eurozone leaders don't address the crisis properly we will see a meltdown as soon as later this month. In his words: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system.We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

Satyajit Das: Economic Dystopia – The “Stick Shaker Moment” - Powered flight requires air to flow smoothly over the wing at a certain speed. Erratic or slow air flow can cause a plane to stall. Most modern aircraft are fitted with a “stick shaker” – a mechanical device that rapidly and noisily vibrates the control yoke or “stick” of an aircraft to warn the pilot of an imminent stall. The global economy too needs air flow -smooth, steady and strong growth. Unfortunately, the global economy’s stick shaker is vibrating violently. The proximate cause of recent volatility is the down grading of the credit rating US (irrelevant) and the continuation of Europe’s debt problems (relevant). The deeper cause is the realisation that future growth will be low and the lack of policy options. In 2008, panicked governments and central banks injected massive amounts of money into the economy, in the form of government spending, tax concessions, ultra low interest rates and “non-conventional” monetary strategies – code for printing money. The actions did stave off the Great Depression 2.0 temporarily, converting it into a deep recession –the US economy shrank by 8.9% in 2008.  Governments gambled on a return to growth, solving all the problems. That bet has failed.

Bigger haircut needed say Schaeuble, El-Erian - Europe perhaps underestimated how much it needed to reduce Greece's debt burden at its July summit, German Finance Minister Wolfgang Schaeuble was cited as saying by Frankfurter Allgemeine Sonntagszeitung. "It is possible that we assumed in July a level of debt reduction that was too low," Schaeuble was cited as saying. Eurozone finance ministers are reviewing the size of the private sector's involvement in a second international bailout package for Greece, the chairman of the Eurogroup ministers Jean-Claude Juncker said earlier this week. The reassessment could undermine Greece's aid program and hasten the threat of a Greek default. "There is a high risk that this crisis further escalates and broadens," Schaeuble said. Greece should ask its bondholders to accept bigger losses than the 21 percent write-down currently foreseen in a deal agreed by EU leaders on July 21, Pimco's co-chief investment officer Mohamed El-Erian told a Greek paper on Saturday.

IMF mission chief says Greece is at crossroads - The gloomy comments suggested it was still unsure whether current talks on a vital aid tranche for Athens would conclude positively, given doubts over its willingness to reform and Greek strikes and riots. "Greece is at a crossroads," Poul Thomsen was cited as saying by Welt am Sonntag. "It is clear the programme will not work if the authorities do not take the path that requires much stricter structural reforms than those that we have seen so far."  The IMF on Friday dismissed a statement by the Greek government that the deal on aid was already completed. "It is going two steps forward, and one backwards," Thomsen said. "The Greek government understands that many of the most difficult changes lie ahead. At the same time, the political and social fatigue is growing."

Greece must give up sovereignty to get more help - Greece is near bankruptcy and must give up part of its sovereignty to obtain the large debt forgiveness it needs to survive, a leading conservative member of German parliament was quoted as saying on Saturday. Michael Fuchs, a deputy parliamentary floor leader for Chancellor Angela Merkel's Christian Democrats (CDU), also told newspaper "Real News" that the debt-laden country might be better off outside the eurozone. "You are very close to bankruptcy," Real News quoted Fuchs as saying in an interview. "We can not agree to a 'haircut' without terms and conditions and therefore, Greece must give up something, like some of its national sovereignty -- at least temporarily," added Fuchs, who is also the chair of the influential CDU small business group in parliament."I am personally not absolutely convinced that this (eurozone membership) is the best long-term solution for Greece to become quickly competitive," he added.

Barroso says Greek default would spread crisis: paper - A Greek default would have unforeseeable consequences and cause the euro zone crisis to spread, European Commission President Jose Manuel Barroso was quoted as saying in mass-selling Bild daily. Talks are continuing over a vital aid tranche for debt-stricken Athens, which could run out of cash as soon as mid-November, dragging the euro zone deeper into a debt crisis already shaking financial markets worldwide. "If we give up on Greece, there is a big danger that the crisis will spread to other countries," Barroso told Bild in an interview to be published on Monday, echoing comments of German Chancellor Angela Merkel. Merkel warned last week the threat of contagion from a euro zone state rescheduling its debt would be huge and only made sense once it had achieved a primary surplus. Barroso noted the euro zone had no experience with the possible bankruptcy of a member state.

Call for property price falls in Europe - Real estate prices in peripheral eurozone countries need to fall to reflect the possibility of a break-up of the currency union, which could leave investors nursing losses of as much as 60 per cent, according to Natixis. Although the French bank believed the widespread break-up of the eurozone was “unlikely”, it said the possibility of a “two euro” system, with a core block centred on Germany and “sharply devalued currencies” in peripheral countries, was being ignored. AEW Europe, Natixis’ property affiliate, told last week’s ExpoReal real estate fair in Munich that Greek property should trade at a risk premium of 375 basis points over similar real estate in core eurozone countries. Similarly Spain should have a premium of 90bps, Italy 50bps and France and Belgium 10bps.“There is something wrong with pricing relative risk in eurozone real estate markets when, say, Milan or Rome offices are being offered at low yields of 5 to 5.5 per cent or core Spanish retail at 5 per cent, in the middle of the sovereign debt crisis,”

ECB offers emergency loans for banks under fire - In a bid to help steady the euro zone, the European Central Bank has pledged to provide banks with access to unlimited one-year emergency loans. The ECB will also spend €40 billion on underwriting euro-zone lenders’ debt securities. ECB president Jean-Claude Trichet called on “banks to do all that is necessary to reinforce balance sheets.” European decision makers also appear closer to implementing a longer-term solution for propping up the banking sector. German Chancellor Angela Merkel said last week that she would support a program to recapitalize lenders that are exposed to risky sovereign debt. This, she said, could be decided on as early as October 17, at an EU summit. “Germany is prepared to move to recapitalize. We need criteria. We are under pressure of time and we need to make a decision quickly,” she said. France, however, is opposed to a program of recapitalization, since some of its banks are heavily exposed to risky Greek sovereign debt. French President Nicolas Sarkozy is worried his country’s AAA sovereign debt rating will come under threat if France is forced to pay huge sums to bail out its banks.

Banks parking more cash with European Central Bank - Banks are parking more money overnight with the European Central Bank in a sign the eurozone debt crisis is unsettling the banking system. Banks deposited euro255.6 billion ($347.1 billion) overnight Friday, the highest this year, the central bank said on Monday. That surpassed the previous year high of euro229 billion from Thursday. The deposits suggest banks would rather stash money with the ECB than lend it to each other. Banks are afraid that other banks could suffer losses on Greek and other government bonds in case of a default - and not pay them back.

Moody’s threatens to downgrade Belgium - Moody’s Investor Service has warned that it may downgrade Belgium's local and foreign currency government bond ratings on increased sovereign debt risk in Europe. The international credit ratings agency has a "Aa1" rating on Belgium. Moody's cited fragile market sentiment for euro-zone sovereigns, challenges to the banking system, and the increased likelihood for government support for such banks as French-Belgian bank Dexia SA as factors for placing the country's rating on review for a possible downgrade.

Eurozone hopes hinge on Slovakia - FT - A hardline libertarian party in one of the newest, smallest and poorest members of Europe’s single currency looks set to throw a spanner in the machinery of expanding the eurozone’s bail-out fund – seen as crucial to restoring market confidence in the bloc. Despite pressure from across the continent, Richard Sulik, leader of Slovakia’s libertarian Freedom and Solidarity (SaS) party, repeated on Sunday that his party would reject the measure. A last-minute meeting of the four-party ruling coalition is set for today in an effort to persuade Mr Sulik to back down and support the extension of the European financial stability facility at a crunch vote on Tuesday.  Mr Sulik made clear that his 21 MPs will reject the EFSF expansion if the other coalition parties do not agree to his proposals. Without those votes, the 77-member governing coalition has no chance of a majority in the 150-seat parliament. Last week SaS offered to support the EFSF, but in return for a Slovakian veto on how its contribution would be spent and an outright refusal to participate in the permanent European stability mechanism, due to replace the EFSF next year.

Slightly Optimistic European Stats - The stats on industrial production in Europe that just came out for August are a little ray of sunshine in what has been generally a gloomy picture on that continent.  The numbers are above and you can see that the last data point is sharply up.  Industrial production is up 5.3% year-on-year in the Eurozone (though not yet back to the pre-recession level).  Furthermore, some of the nation level internals are encouraging too.  Some of the strongest numbers are coming from peripheral countries: In terms of sector, capital goods did best, with consumer durables doing poorly (consistent with the fact that European retail trade has been declining): Obviously there's quite a bit of noise here month-to-month and not too much should be read into one good month. Europe is going to need institutional change to work its way out of its crisis.  However, given that one of the major fears in the Eurozone is that the peripheral economies will be depressed by austerity measures and tight money from the ECB, making their debt burdens yet harder to bear, it's nice to see these strong numbers in Italy, Portugal, and Ireland.

Portugal Central Bank Warns of Fiscal Deficit Slippage and Recession; Greek 1-Year Yield Tops 150% - Via email, Barclays Capital offered thoughts on "Potential Fiscal Slippage" in Portugal.  The Central Bank of Portugal warned the economy might fail to meet budget deficit targets set for this year and next under the EU/IMF programme (5.9% and 4.5% of GDP, respectively), unless it takes "significant additional measures". According to the report, lower-than-previously projected GDP growth and lack of implementation of structural reforms (as opposed to one-off actions) would be responsible for the anticipated fiscal slippage in 2012. The Central Bank expects GDP growth to contract 1.9% this year and 2.2% next FM Cavaco Silva had also warned that Portugal needs "tough and relentless budget discipline" adding that a failure to control public spending and introduce reforms might trigger the request of additional support, the FT reports this morning.In a note published earlier this week, we had flagged the risk of potential fiscal slippage in Portugal. According to our own seasonal adjustment, general government budget deficit data for H1 were off-track, suggesting a tracking budget deficit of 9.8% of GDP for this year (for more please see: Portugal: H1 national accounts fall behind 2011 budget deficit targets).

The Ticking Euro Bomb - What Options Are Left for the Common Currency? - Politicians have maneuvered their countries into an unparalleled situation in the euro crisis. And they already know what most voters don't yet suspect. In the end, only two possibilities will remain to save the beleaguered common currency: an expensive transfer union or a smaller monetary union. Either solution will be extremely costly. By SPIEGEL Staff

Eurozone quick-fix will create political monster - There is an emerging consensus that bank recapitalisation lies at the heart of any solution short of a fiscal union. Few would claim it is sufficient. It would have to be somehow embedded into a system of cross-border financial insurance. Member states would remain sovereign, but the eurozone would make sure that all systemically important banks are properly capitalised, supervised and, if necessary, forced to close or merge. For this to work, all systemically relevant banks would have to come under the eurozone’s umbrella, not just those operating across borders. In such a minimal system, cross-border transfers would still occur, but would be limited to supporting the financial sector. Member states would retain full sovereignty – subject to a common set of fiscal rules. If imbalances arose that destabilised the financial sector, the eurozone would provide effective insurance against cross-border spill-overs. Such a hypothetical set-up reminds me of a debate among central bankers during the credit bubble: should monetary policy prick bubbles, or mop up the debris afterwards? Our minimal solution mops up. The chaos in the eurozone would continue, but at least there would be some insurance at the end. If the eurozone had adopted this approach in October 2008, right after the collapse of Lehman Brothers, it might just have worked. We would still have had the Greek and Portuguese crises, but Ireland, Spain and Italy might have been spared.  I can think of four reasons why it will not work today.

Iceberg spotted, summit convened - IF ANGELA MERKEL and Nicolas Sarkozy had been captaining the Titanic when the iceberg was spotted, they would probably have issued a statement resolving to avoid it. This weekend’s emergency summit saw the leaders of France and Germany pledge to recapitalise European banks, but left the details open (an EU summit on October 23rd will now finalise a "comprehensive strategy"). “By the end of the month, we will have responded to the crisis issue and to the vision issue,” was Mr Sarkozy’s epically vague pledge.To be fair to the two leaders, even a promise to act on the banks is an advance. And the precise mechanics of recapitalisation are not trivial to work out. First, should bank rescues be carried out nationally, or using the European Financial Stability Facility (EFSF), the euro zone’s bail-out fund? Mrs Merkel is keen on letting governments take the strain, but that approach risks stigmatising banks and governments that have to rely on the EFSF and fuelling worries about the creditworthiness of countries that go it alone. The yields on Belgian government debt have risen as the burden of rescuing Dexia, a Franco-Belgian basket-case, has become clearer.

EU leaders delay summit to agree crisis plan   (Reuters) - European Union leaders will delay a summit meeting planned for next Monday by almost a week, buying time to agree a crisis strategy to boost struggling banks and cope with debt-laden Greece. European Council President Herman Van Rompuy announced the postponement until October 23 after German Chancellor Angela Merkel and French President Nicolas Sarkozy promised on Sunday to present measures to stabilize the euro zone by the end of the month. The two premiers gave scant details about their plan, other than to signal that it would include bank recapitalization, something which has divided German and France. Germany, which could easily bankroll its weak lenders, wants countries to stand by their banks. But France, whose banks are heavily exposed to Greek debt and grappling with an interbank lending freeze, fears it could lose its high credit rating by bailing them out. Rather than a politically embarrassing taxpayer bailout, France would prefer to shunt the bill onto a euro zone fund, which will soon be able to lend money to governments to help banks. Germany is insisting this should be only a very last resort.

Watch What Escapes From Under the Ring Fence - “Ring-fence” is the latest buzzword about economic activity. European leaders are trying to ring a fence around a potential Greek default’s impact on the banking system. That was after they tried to ring-fence Greece’s debt problems so that the contagion wouldn’t spread to other periphery nations. U.S. leaders have been trying for years to ring-fence the housing sector to minimize the damage to the economy. No fence is impenetrable, though. Even if euro-zone leaders were able to build a 10-foot fence around Greece, dig a deep moat and stock the waters with piranha, unintended consequences would slip out into the broader economy. Sunday’s pledge by German Chancellor Angela Merkel and French President Nicholas Sarkozy to find a way to recapitalize banks has resulted in investors shedding their risk-averse skin. Not only have equity prices rallied, but the euro has strengthened against the dollar. Of course, the deal lacks details and sentiment could shift tomorrow. But if sustained, a stronger euro brings consequences all its own–not the least of which is the competitiveness of European exporters..

Expect Neither ‘Sustainable’ nor ‘Comprehensive’ From Euro Area Leaders  - Rebecca Wilder - On Sunday, Merkel and Sarkozy promised a “sustainable and comprehensive” solution to the euro debt crisis ahead of the November 3-4 G20 meeting. Along with this rather grand announcement are absolutely no details on their plan. However, Van Rompuy today pushed back the European Summit, which convenes now on October 23, to ‘finalise our comprehensive strategy on the Euro area sovereign debt criris’. Perhaps a real plan is in the works. I think not.  I have 5 necessary conditions that must be satisfied in order to achieve a ‘comprehensive and sustainable’ policy response to the Euro area debt crisis. None of these conditions will be satisfied in full, critical conditions not even partially (namely 3. and 4. below). I can only conclude that any response/strategy negotiated at the October Summit will be neither ‘comprehensive’ nor ‘sustainable’.

  • Element 3. A move toward more fiscal interconnectedness should be more decisively established, including a fiscal ‘lender of last resort’. This function may be performed by ECB, but presumably a fiscal institution should act in this role. Expectation for October 23rd: No response. In fact, this is the part of the ‘comprehensive solution’ that will likely require an acute worsening of economic and financial conditions (interrelated).’
  • Element 4. Switch to 1st gear in the drive for fiscal austerity and competitiveness. True, some countries could benefit greatly from reform, which buffets long-term growth potential. However, fiscal and institutional reform to increase competitiveness takes years to pass through to potential growth, and the timeline needs to be extended.Expectation for October 23rd: No response. This is the most challenging piece of a comprehensive solution.

Troika on Greece: No Growth Till 2013; Some Progress; Next Tranche Set - Here is the statement released Tuesday by the EU-IMF-ECB troika, in which it said it sees a deeper-than- expected recession in Greece but said the next tranche of bailout funding will be delivered in early November.

German push for Greek default risks EMU-wide 'snowball' - Germany is pushing behind the scenes for a "hard" default in Greece with losses of up to 60pc for banks and pension funds, risking a chain-reaction across southern Europe unless credible defences are established first. Officials in Berlin told The Telegraph it is "more likely than not" that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July. The exact level will depend on findings by the EU-IMF "Troika" in Athens. "A lot has happened since July. Greece has fallen back on its commitments, so we have to assume that the 21pc cut is no longer enough," said one source. Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were "probably" too low, saying banks must have "sufficient capital" to cover greater losses if need be. Estimates near 60pc have been circulating in Berlin.

Greece hit by new strikes against austerity - New strikes hit Greece on Tuesday as the government finalised talks with its EU-IMF creditors on additional spending cuts to secure payment of a bankruptcy-saving loan. Civil servants blocked the entrance to several ministries, teachers and municipal staff walked out on their jobs and a key refinery began a protest shutdown ahead of a general strike on October 19. Hospital workers and prison guards will go on strike later this week while Greece's tax collectors and bank workers plan stoppages next week with lawyers also threatening to join the fray. Public sector workers are up in arms over pay cuts and government plans to put at least 30,000 on temporary leave this year, on top of cuts imposed last year to rein in a budget deficit five times over the European Union ceiling. Lawyers, pharmacists, taxi owners and other self-employed professionals are protesting against a parallel deregulation drive to improve the competitiveness of the gridlocked Greek economy, which is in a deep recession. Another strike by garbage collectors that began last week has left the capital Athens strewn with trash heaps.

Greece may Run Out of Gas in 3 Days in Refinery Strikes; Garbage Piles Up in Street of Athens - Refinery strikes in Greece ahead of a general strike on October 19, have caused supplies of fuel to drop to a mere 3 days. Everyone is up in arms over still more austerity measures. Also ahead of the "general strike", trash collection services are on strike and garbage mounts in the streets of Athens. Ekathimerini reports Cars queue up as refineries leave strike open Greece's oil refineries will continue their strike for “as long as necessary,” the president of the union representing refinery workers said late on Monday, as cars began lining up to fill their tanks at gas stations across the country from the early hours of Tuesday. Speaking on Skai Television’s “New Files” program, Nikos Orfanos said that a government draft bill to reduce spending in the sector represents a threat to workers’ terms of employment, adding that the new measures are aimed at transforming Greece into a “colony” under the control of foreigners.

SocGen and BNP Paribas Deny Seeking $14.8 Billion In French Bank Recap: French banks Societe Generale and BNP Paribas are denying a French report that they'll seek a combined $14.8 billion from the French government as part of a bank recapitalization plan, according to Reuters. French newspaper Le Journal du Dimanche reported this morning that BNP Paribas agreed to $9.4 billion in capital injections while SocGen conceded to receiving $5.4 billion. German daily Frankfurter Allgemeine Zeitung also published an article saying that France's five largest banks would receive $13-20 billion in capital injections as long as Deutsche Bank would also accept aid from the government. Spokesmen for both the banks denied the reports, alleging that the banks would meet the 9% tier 1 capital requirement stipulated by the Basel III agreements without government help and well ahead of schedule.

Europe’s banks face 9% capital rule - European authorities plan to set a higher than expected capital threshold for the region’s banks and give them six to nine months to achieve that level or face government recapitalisations under the auspices of the eurozone’s €440bn rescue fund, senior regulators said. The European Banking Authority’s board of supervisors has approved in principle the idea that banks should be made to raise their core tier one capital ratios – the key measure of financial strength – to 9 per cent, well beyond the current expectations of banks and analysts, even after absorbing writedowns on the value of their sovereign debt holdings. Officials cautioned, however, that the 9 per cent threshold – which could see dozens of banks forced to raise a combined €275bn, according to Morgan Stanley estimates – is still being debated in national capitals and in Brussels. Some senior officials at the European Commission, which is due to unveil its own plan for bank recapitalisations , support the higher levels and could announce their backing as early as on Wednesday. However, some members of the EBA board, notably the German contingent, are understood to have dissented, and no firm decision has yet been taken. Analysts had previously expected banks to be told to raise capital levels to 6 or 7 per cent. A final decision may not be taken until EU finance ministers meet ahead of a key October 23 European leaders’ summit.

Moody's: Bailout plan for euro banks is not enough - Attempts to prop up tottering European banks are doomed to fail unless political leaders tackle the region's sovereign debt crisis, ratings agency Moody's warned today. The agency's stark comments immediately poured cold water on German Chancellor Angela Merkel and French President Nickolas Sarkozy's Berlin pledge to unveil comprehensive plans to recapitalise European banks by November. It warned: "Since any recapitalisation initiative will not address the underlying driver of Europe's bank crisis, mounting sovereign debt concerns, it is unlikely to achieve more than a temporary respite from banks' sovereign debt woes and we expect investor sentiment to remain fragile." The gloomy comments came on the day Franco-Belgian lender Dexia, a victim of fearful funding markets over its exposure to Greece, was dramatically nationalised and broken up.

A Brain-Dead "Financial Reporter" at NPR Defines the Problem - Via Doctor Black, who printed the answer but not the question:

PIGNAL: This is actually the second bailout for Dexia. In 2008, it had to be bailed out after exceptionally imprudent investing, including in U.S. subprime mortgages. This time around, it was basically dealing with the legacy of the past, and it was trying to do what it could to get back into safer waters. But with the Eurozone debt crisis in the past year, it basically ran out of time.
SIEGEL: Yeah, that was the past. This is now. And if the 12th most secure bank in Europe just collapsed, does that mean that several more bank collapses are in store? [idiocy emphasized by me]

This is what happens when you try Extend and Pretend while leaving the Management (think Pandit, Moynihan) who screwed up in the first place in charge of the burning building.

Wise Words On Europe -  Krugman - Kash Mansori has a very good piece on the eurozone crisis, making some points I’ve also tried to hit. Basically, he sees the peripheral countries mainly as victims of an overwhelming tide of cheap money from the core, who are now suffering whiplash when that inflow came to a sudden stop: THE IMPLICATION IS that the very creation of the common currency area sowed the seeds for this crisis, not the behavior of the periphery countries. While these countries didn’t necessarily do everything right, they were playing against a stacked deck. But if the easy explanation for this crisis—namely, that it was due to the irresponsible behavior of the periphery countries—is not the right answer, then we need to reevaluate how it has been handled. To start with, if the crisis is the result of inexorable forces beyond the control of the periphery countries, it’s not appropriate to wag fingers or punish those countries through the bitter medicine of insufficient assistance. This crisis should not be turned into a morality story.

Will internal devaluation work? -  I was talking to my friend Rob Parenteau about internal devaluation. He doesn’t think it will work. His argument against it is similar to the one I have been making about the origins of this crisis. Rob puts why internal devaluation is not a plausible strategy differently. Here’s the flow of his argument.

  1. Many nations try internal devaluation at the same time;
  2. Private sectors have debt to income ratios that well exceed public debt to income ratios;
  3. Credit to households to supplement buying power (in excess of wage and salary) is unlikely to be forthcoming given the mess in the banking system and the falling price of (real estate and equity) collateral;
  4. Many nations are pursuing multiyear fiscal consolidation, which is proving far from expansionary to date;
  5. Many countries around the world are already trying to run export led growth strategies, and not only is it impossible for the whole world to run a current account surplus, but there is no market or policy mechanism insuring that the current account surplus nations reinvest their net savings in productive investments in the current account deficit nations that will allow the current account deficit nations to service their external liabilities without defaulting.

Coco for Europe - After a year and half of delay and denial, Greece is about to restructure its debts.  This, by itself, will not be enough to draw a line under the eurozone’s crisis. Greece will also have to downsize its public sector, reform tax administration, and take other steps to modernize its economy. Its European partners will have to build a firewall around Spain and Italy to prevent their debt markets and economies from being destabilized. Banks incurring balance-sheet damage will have to be recapitalized. The flaws in eurozone governance will have to be fixed. The indispensible first step, however, is a deep write-down of Greek debt – to less than half its face value. The burden on the Greek taxpayer will be lightened, which is a prerequisite for reducing wages, pensions, and other costs, and thus is essential to the strategy of “internal devaluation” needed to restore Greek competitiveness. Forcing bondholders to accept a “haircut” on what they will be paid also promises to discourage reckless lending to eurozone sovereigns in the future. Bringing us to the question of why it took policy makers a year and a half to get to this point. 

Berlin, Paris Deny Rift Rumors: EU Postpones Summit on Debt Crisis - SPIEGEL - The European Union summit scheduled for Oct. 17 to address the euro debt crisis has been postponed by a week to Oct. 23, European Council President Herman Van Rompuy announced on Monday, saying it would give the EU time to finalize its strategy. Government leaders of all the 27 EU member states were due to meet on Oct. 17, followed on Oct. 18 by a meeting of the heads of the 17 euro zone countries. The postponement has fuelled speculation of a rift between Germany and France, although the governments of both countries have denied this. On Sunday, German Chancellor Angela Merkel and French President Nicolas Sarkozy had failed to agree on details for a revised euro rescue strategy but had said they would come up with one by the end of this month.

The ECB’s ‘QE Lite’ and New Downgrades of Euro Area Sovereigns and Banks - A few more words regarding the ECB's latest moves in terms of providing new emergency liquidity facilities are in order. These long term funding facilities are not 'QE' in the sense that they are not permanent. However, they are in essence similar to the arrangements that have been put in place on account of the 2008 crisis, and given the evidence from that time, they should definitely bring about a sizable expansion of the ECB's balance sheet and lead to a notable surge in euro-area money supply. The covered bond purchases appear to be a QE type operation, but the amount of € 40 billion will probably be small compared to the liquidity that is going to be pumped into the banking system via the emergency facilities (note that these are not limited in terms of their size).  Theoretically these liquidity additions have a fixed shelf life – they should eventually be taken back. Undoubtedly this is the plan. Once the crisis has passed, so it is reckoned, the securities the ECB temporarily monetizes will be sold back to the banks.  However, so far all these 'temporary' activities have taken on what appears to be an unintended permanence, as crisis follows upon crisis.

Drawing the Line for Italy and Spain - Greg Ip at Free Exchange directs us to a very helpful graph (helpful to those who think about the world in terms of supply and demand curves, anyway) that illustrates how the current situation with eurozone debt can benefit from some non-traditional thinking.  The idea is that the fear currently endemic in eurozone sovereign debt markets means that investors look to the price of bonds for two very different pieces of information. First, as is always the case, the price of bonds tells investors what return they will earn from holding those bonds. So when the price of bonds falls, they look like a better deal and investors can expect to earn a correspondingly higher rate of return, which tends to make the demand for those bonds goes up. That's the normal, downward-sloping demand curve at the top of the graph. But right now investors also extract a second piece of information from the price of those bonds: they see it as a signal about how worried the rest of the bond market is about the probability of default. So once the price gets too low, then even though investors know they will get a good rate of return, they also start to worry that they'll never get repaid, so a lower price can actually cause demand to fall. That's the backward bending part of the demand curve noted in the graph as the "zone of vulnerability".

Spain health service chokes as austerity tightens (Reuters) - Medical suppliers haven't been paid for as much as two years, emergency rooms have been shut down and doctors in Catalonia have been told to accept a pay cut or 1,500 medical residents will lose their jobs. Spain's treasured public health care system has become the latest victim of the euro zone debt crisis. "We haven't been paid, but there's nothing we can do about it. We need the contracts, so we're just going to have to wait it out," The company, which says it is owed hundreds of millions of euros by the government of the Castilla-La Mancha region south of Madrid, is one of dozens of providers of everything from surgical swabs to disinfectants struggling to pay workers as Spain's regions delay payments to meet tight deficit targets.

First aid is not a cure - At least, nobody now sees the eurozone crisis as a little local difficulty. It has become the epicentre of an aftershock of the global financial crisis that could prove even more destructive than the initial earthquake. Potentially, it is a triple shock: a financial crisis; a crisis of sovereigns, including Italy, the world’s third largest sovereign debtor; and a crisis of the European project with unknowable political consequences. It is no wonder people are frightened. They ought to be. The most important part of the answer, as I argued last week, is that it must deal with the immediate crisis in ways that also help resolve the longer-term challenges.  The broad consensus of the world’s policymakers and commentators is that the eurozone must now do the following: divide countries in difficulties into the insolvent and the illiquid; restructure the debts of the former and provide unlimited, but temporary, support for the latter; and recapitalise banks, after stress tests that allow for losses on sovereign debt, either from national treasuries or from the European financial stability facility, in accordance with the flexibility given by the decisions taken in July 2011. Achieving this package will stretch the eurozone’s inter-governmental decision-making to (and quite possibly beyond) breaking point. The French government, for example, remains unwilling to accept that its banks need more capital. Above everything, the eurozone does not have a central bank willing to ensure liquidity in the market for sovereign domestic currency debt at all times. This is partly because doing so conflicts with Bundesbank ideology.

The European Troika’s Rescue Plan Will Fail - Yet another rescue plan for the EMU is making its way through central Europe—raising the total funding available to the equivalent of $600 billion. Germany agreed to raise its contribution to the fund by more than $100 billion equivalent. However, Slovakia has vetoed the rescue and all eyes are now turned to a forthcoming October 23 summit. In any event, some rescue package is assured because the center of Europe wants to save its banks—that hold billions of euros of troubled government debt. No one is foolish enough to believe that will be enough. The latest casualty is Dexia Group, a Belgian-French behemoth that specializes in sovereign debt. It had already been bailed out once, and now needs another bail-out. Rest assured that Dexia is just today’s domino—the other big European banks will fail, too. This is not a Greek problem. It is not an Irish problem. It is not a Portuguese problem. It is not a Spanish problem. It is not an Italian problem. It is an EMU problem and Band-Aids will never suffice. The problem with the set-up of the EMU was the separation of nations from their currencies—as I have long argued (Go here for a relatively recent piece.)

Italy fact of the day - Italy’s guarantees make up 18 per cent of the [EFSF] system. That’s Italy as guarantee source, not Italy as recipient!  The bottom line is this: If you double or treble the size of the EFSF without changing its underlying structure,all you do is double or treble the lack of credibility. If you really want to increase the size of the EFSF without destroying it, then you are left with two options: you have to back it through an unlimited guarantee by the ECB, the only organ in the eurozone that is in a position to give such a commitment. Or you have to change the EFSF’s legal status through the adoption of joint and several liability. This means that member states jointly agree everybody’s debt. The two options ultimately mean the same. The liabilities of the system will be shared jointly by all of its participants. If you want to annoy certain people, you could also call the latter a eurobond. The article, by Wolfgang Münchau, is excellent throughout.

Ireland Needs to Cut €4 Billion to Meet Target - Ireland's Fiscal Advisory Council Wednesday said the Irish coalition government will require four billion euros ($5.5 billion) of budget adjustments to meet a key 2012 target demanded by its bailout lenders, adding the country ought to consider even deeper cuts to impress financial markets. The European Union and the International Monetary Fund lenders require the government reduce a budget deficit of about 10% of gross domestic product this year to 8.6% in 2012. To reach that target, government ministers have said it will consider "at a minimum" €3.6 billion in spending cuts and tax rises in its 2012 budget. However, slower-than-expected economic growth will require an additional €400 million in adjustments for 2012 and total cuts of €4 billion, the fiscal council said. The council was set up to provide independent non-binding advice to the government after the country last November needed an EU and IMF bailout when the cost of rescuing its banks got too much to bear 

Slovak Leader Vows to Resign If Bailout Vote Fails — Lawmakers in Slovakia1 were scrambling on Tuesday to avert an embarrassing and potentially costly setback over its participation in a crucial euro rescue fund, after the prime minister tied the fate of her government to the legislation through a confidence vote.  As the ballot approached, a government official, who spoke in return for anonymity because of the delicate nature of the issue, said that the coalition partners so far had not reached a compromise agreement.  The impasse in tiny Slovakia held up final approval of a $590 billion euro stability fund, intended to shore up confidence in the ability of euro members to withstand the financial crisis. The other 16 members of the euro currency zone have already approved their participation in the fund, but it is now held hostage to domestic politics of Slovakia.  Officials in Brussels were counting on a political solution, but weighing the possibility of a messy workaround if Slovakia failed to pass the measure in time. As currently designed the fund requires the approval of all 17 countries that use the euro.

Slovak PM in quit threat over eurozone vote - Slovakia's prime minister on Monday threatened to resign in a last-ditch attempt to persuade a junior coalition partner to back additional powers for the eurozone's €440bn bailout fund. Iveta Radicova said she was willing to tie approval of enhancements to the European financial stability facility to a confidence motion ahead of a crucial vote in the Slovak parliament on Tuesday. Officials told the Slovak news agency that she was also prepared to step down if her coalition failed to approve the EFSF. Talks aimed at breaking the political deadlock in Bratislava over the bailout fund broke down on Monday evening. Parliamentary approval is being blocked by the libertarian Freedom and Solidarity party. Its leader led by Richard Sulik, who has made clear his distaste for a bailout he feels will be costly to Slovakia, the second-poorest member of the eurozone, and end up helping wealthier Greece, a country he says is simply bankrupt and unable to repay any aid. Speaking before Monday's meeting of the four-party coalition, Mr Sulik said that his party had not shifted its long-standing opposition to the EFSF, and that he would not feel responsible if the government fell over the issue. Without his 21 MPs, the coalition does not have enough votes in the 150-seat parliament to vote through the EFSF extension.

Can tiny Slovakia doom the euro? - If the recent Dexia bank collapse showed the fragility of the euro zone's financial system, then the shocking collapse of Slovakia's government on Tuesday shows the fragility of its political system. Slovakia's parliament unexpectedly voted against a decision reached by euro zone leaders in July to expand the powers of its $1 trillion bailout fund, a step seen by investors as crucial for combating the escalating European debt crisis. The coalition administration of Prime Minister Iveta Radicova subsequently fell. Without Slovakia's approval, the entire euro zone plan to enhance its rescue fund – by allowing it to buy sovereign bonds and recapitalize banks – will be stymied, perhaps entirely killed off. The breakdown in Bratislava is a sign of the growing constraints Europe's leaders face in taking steps to combat the euro debt crisis, and the faults built into the structure of euro zone that make it so difficult to take the rapid-fire action necessary to ensure the monetary union's stability. The events in Slovakia could intensify the debt crisis, put greater strain on its beleaguered governments and enfeebled banking system, and create even more market turmoil. It also raises much greater doubts about the ability of euro zone governments to undertake the more comprehensive measures necessary to finally quell the debt crisis and resolve the biggest current threat to the global economy.

Slovakia votes down eurozone bailout expansion plans - Slovakia's parliament has voted against measures to bolster the powers of the eurozone bailout fund, seen as vital in combating the bloc's debt crisis. The governing coalition had linked the vote to a confidence motion and as a result has effectively been toppled. The measure failed to pass by 21 votes, but that result had been anticipated after a junior party in the centre-right coalition said it would abstain. The Freedom and Solidarity (SaS) party said it was opposed to Slovakia's taxpayers being asked to cover the debts of richer countries. Many Slovaks feel their country - the second poorest in the eurozone - should not have to bail out countries like Greece. Government officials said they would try to pass the EFSF expansion package in a second vote with support from the opposition, but no date has been fixed for that vote.

Slovakia fails to agree on eurozone rescue plan - Europe braced itself for the possibility that Slovakia’s lawmakers could reject a measure to expand the powers of a euro bailout fund designed to shore up the defenses against a debt crisis that is threatening the global economy. Slovakia’s Prime Minister Iveta Radicova confirmed Tuesday that a coalition partner had not accepted a compromise offer, meaning that the government will not have enough votes to get it through if the opposition fails to back the package of measures designed to boost Europe’s firefighting capabilities. A “no” vote would further complicate the eurozone’s efforts to deal with a crisis that’s already seen three countries get bailouts and raised fears of a Greek default and massive losses for banks. Radicova said the vote “will be linked to a confidence vote in this government,” a move described as blackmail by Richard Sulik, chairman of the Freedom and Solidarity party and the major opponent of the fund. In the debate, Sulik gave few indications he was about to change his party’s vote, arguing that the expanded fund made “no sense” because it would not have enough money to help big EU economies like Italy and Spain.

Slovakia On Why It Votes "No" To EFSF Expansion: "The Greatest Threat To The Euro Is The Bailout Fund Itself" - Yesterday we reported that tiny Slovakia's refusal to ratify the expansion of the EFSF 2.0 (even though a 4.0 version will be required this week after the "Dexia-event"), may throw the Eurozone into a tailspin as all 17 countries have to agree to agree to kick the can down the road: even one defector kills the entire Swiss Watch plan. Yet an interview conducted between German Spiegel and Slovakia party head Richard Sulik confirms that tiny does not mean irrelevant, and certainly not stupid. In fact, just the opposite: his words are precisely what the heads ot the bigger and far less credible countries should be saying. Alas they are not. Which is precisely why the euro is doomed. From Spiegel: Only two countries, Malta and Slovakia, have yet to ratify the expansion of the euro bailout fund. Its fate may be in the hands of a minor Slovak party headed by Richard Sulik. In an interview, the politician explains why he hopes the fund will fail and what he sees as the only way to save the euro.

Slovakian government cracks under pressure to bailout EU - A rift within Slovakia's government prevented one of the Eurozone’s poorest countries from approving an increase in the EU’s bailout fund on Tuesday. The vote on the bailout was blocked by Richard Sulik, leader of the neo-liberal Freedom and Solidarity Party, and 21 other MPs from his party. Sulik fiercely opposed the increase in the bailout funds, saying it was not fair to pay for Greek debt from Slovakia’s pocket. “The average pension in Slovakia is less than 400 euros,” Sulik declared last week. “The average pension in Greece is 1,400 euros – three, four times higher.” “It's impossible to explain to a Slovak pensioner that he or she has to contribute – in the form of higher VAT, for example – toward Greek pensions,” he said. “Or toward Italian MPs’ salaries, the highest in Europe.” Both Slovakian Prime Minister Iveta Radicova and her main political opponent now say they will work to get the bill approved swiftly. Still, it is not clear when another vote will be held.

Slovakia Rejects Euro Bailout — Europe’s efforts to stem the sovereign debt crisis1 suffered an embarrassing and potentially costly setback on Tuesday night when the Slovak Parliament failed to approve the expansion of the euro rescue fund, a development that appeared likely to bring down the government but not to derail the measure.  In a vote of 55 for, nine against and 60 abstaining, the Slovak governing coalition failed to muster the necessary votes to pass the plan that would have required them to contribute roughly $10 billion in debt guarantees.  But the country’s leading opposition party said it would be willing to discuss support for the fund after the government fell, pointing to eventual approval of the deal. Officials in Brussels were counting on a political solution, but weighing the possibility of some kind of messy workaround if Slovakia2 failed to pass the measure.

Greek Deficit Widens in First 9 Months of Years - Greece's central government deficit continued to grow in the first nine months of the year, despite a series of austerity measures designed to raise revenues, figures from the country's Finance Ministry showed Wednesday. The central government deficit stood at euro19.2 billion ($26.1 billion) for January to September, from euro16.65 billion in the same period last year. The 15.1 percent increase was slightly lower than the government forecast of a rise to euro19.24 billion. The ministry blamed the revenue shortfall on a deeper than anticipated recession, but said shortfalls were likely to be made up over the next three months as recent tax rises, such as a controversial property levy, kick in. The figures issued Wednesday relate to the state budget deficit, which excludes spending in some areas, and is not the criteria used for the EU's assessment of Greece's financial reforms.

Greek tax inspectors announce strike as austerity protests spread - Greek tax inspectors will go on strike next week to protest against planned wage and pension cuts, threatening more disruption to revenue collection efforts that are already falling behind the tough budget targets imposed by international lenders. With much of Greece expected to be shut down by a general strike on Oct. 19, finance ministry officials have called a two-week stoppage from Oct. 17 while tax offices will remain closed on Oct. 17-20 and customs officials will stay away from their desks on Oct. 18-23. The walkouts are not only expected to disrupt tax payments. They might also block statistics releases and even fuel supplies, since petrol deliveries from refiners to tank stations usually require customs clearance. "This law will drastically cut our wages and hurt our pensions," the POE-DOY union, which represents tax officials, said in a statement. Athens has promised tough new civil service wage cuts to convince the European Union and International Monetary Fund that it will meet its budget deficit targets of 8.5 percent of gross domestic product this year and 6.8 percent in the next. But the strike underlines the risks to a tax collection drive demanded by the EU and IMF inspectors as workers who will themselves suffer from the austerity measures resist implementing the new laws. Disgruntled electricity workers have already threatened to boycott a planned property tax, designed to be collected through electricity bills as a means of bypassing the notoriously inefficient tax authority.

Saving The Euro: Part 16-A/4.b (subsection F) - Managing a currency by popular vote every other week (or day) is water torture and almost surely doomed to fail. But with no other choice, the odyssey that is the euro rolls on, which means that the voting, the deal making, the deliberations, the polling--the rise and fall of governments--endures.  The latest installment in this strange drama arrived yesterday, with Slovakia's parliament rejecting an increase for the euro rescue fund. It's as if the Federal Reserve or U.S. Treasury needed to seek approval from California this week, Maryland the next, to conduct operations. Technically, the vote wasn't about monetary policy per se; rather, yesterday's vote was about pouring more money into the the European Financial Stability Facility, last year's brainchild that was designed to finance the bailout of Greece and, in the process, save the euro from itself. The lines between monetary and fiscal policies are anything but sharp in Europe these days and so it's unclear where one ends and the other begins. That, of course, is part of the problem. Managing a currency that relies on the kindness of politicians is an act of torture at best. . It's a strange state of affairs to watch one of the world's leading currencies as it's held hostage by one small nation.

ECB Warns on Bigger Greek Hit to Banks - Speculation has mounted in recent days that European banks may end up taking a bigger hit on their Greek bond holdings than envisioned under a plan set out in July. The European Central Bank still thinks it’s a risky proposition. In its latest monthly, the ECB outlines its beefs. In a nutshell, private-sector involvement (or PSI), despite its temptations, risks contagion, moral hazard, higher budget deficits as a result of bank recapitalizations and damage to the euro’s global reputation. In other words, it is not a painless remedy. “Within a monetary union, financial markets are very closely integrated, and the negative economic impact of PSI is therefore much more extensive,” the ECB said. “The application of PSI to one member country may put at risk the financial stability of the currency area as a whole,” the central bank wrote.

Bailed-out Portugal braces for more spending cuts - Portugal's budget for next year will be the toughest in living memory as the government slashes spending to drive down the country's stubbornly high debt level, Prime Minister Pedro Passos Coelho said Monday. Portugal took a euro78 billion ($106 billion) bailout in May as its huge debt burden threatened national bankruptcy and investors fled. The four-month-old government has already hiked taxes and cut welfare benefits. But despite a raft of measures, including a one-off 50 percent tax on Christmas bonuses due in December, it remains far off its financial targets. The budget deficit was 8.3 percent in the first half of the year -- down from 9.6 percent last year but way off this year's goal of 5.9 percent. Portugal must meet the target to qualify for the bailout funds.

Portugal gov't warns of severe cuts, tax hikes - Portugal's prime minister is warning his country to prepare for deepening hardship next year as it struggles to climb out of debt. Portugal is one of three eurozone countries that have needed financial rescue because of an unsustainable debt load. It took a euro78 billion ($108 billion) bailout in May. But despite a series of tax hikes and pay and welfare cuts, Portugal is coming up short on its debt reduction targets. Prime Minister Pedro Passos Coelho said in a televised address Thursday his government plans more pay cuts and tax increases in 2012. He said, "We are living through a national emergency."

Why Greece, Spain, And Ireland Aren’t To Blame For Europes Woes - Kash Mansori - It’s all Greece’s fault. That’s what a lot of Europeans secretly—or not so secretly—think as they grumble at the prospect of coming up with yet more money to bail the eurozone out of its debt crisis. Clearly the crisis started because debt in the eurozone’s periphery—Greece, Ireland, Portugal, and Spain—became so large that investors grew frightened that entire countries were at risk of default. If those countries hadn’t racked up all that debt by shamelessly living beyond their means, then none of this would have happened. But this narrative misses a crucial element of the true origin of the eurozone debt crisis. In particular, it misses the fact that the very design of Europe’s common currency area not only caused, but was meant to cause the eurozone’s periphery to incur large amounts of international debt. Further, there was little that the governments of those countries could do to stop it. Far from causing the crisis, the peripheral eurozone countries were up against powerful forces outside their control, forces that probably made this crisis inevitable no matter how responsibly they behaved.

A Standby Program for the Eurozone -How will the eurozone crisis play out in the next few weeks? With luck, Italy may soon get a credible government of national unity, Spain will obtain a new government in November with a mandate for change, and Greece will do enough to avoid roiling the markets. But none of this can be relied upon.  So, what needs to be done? First, eurozone banks have to be recapitalized. Second, enough funding must be available to meet Italy’s and Spain’s needs over the next year or so if their market access dries up. And, third, Greece, now the sickest man of Europe, must be treated in a way that does not spread the infection to the other countries on the eurozone’s periphery. All of this requires financing – bank recapitalization alone could require hundreds of billions of euros (though these needs would be mitigated somewhat if the sovereign debt of large eurozone countries looked healthier). In the short run, it is unlikely that Germany (and Northern Europe more generally) will put up more money for the others. Germans are upset at being asked to support countries that do not seem to want to adjust – unlike Germany, which is competitive because it endured years of pain. The unwillingness of the Greek rich to pay taxes, or of Italian parliamentarians to cut their own perks, confirms Germans’ fears.

Age of Greed: What Should Eurpoe Do? - As Sarkozy and Merkel say they will come to agreement, Solvakia temporarily defers. Ethnic bigotry towards Greece is playing a role here. But the center of the European Union - the strong countries - have a profound obligation to the periphery to save it, including Greece, and make them whole in the future. Maintaining the euro zone is a high political goal, in my mind. As a friend who is involved in the Greek negotiations tells me, just consider the belligerent history of Europe before the Common Market. Do we want to return to that?The irresponsibility of failing to come up with an adequate solution early in this crisis is one of the greater political errors of modern history. That Trichet of the ECB is now saying they should act aggressively when only a month ago he said they should not "dramatize" the situation, and even raised interest rates, is the best example of incompetent and fearful leadership. We have our teachers, Bagehot, Kindlberge, Minsky, Keynes. We all learned the lesson. To some degree, even the Bush administration with TARP learned that lesson—if the plan was ultimately flawed.

Time for euro bonds- but with conditions: The Eurozone is now in an existential crisis.1 Weak fiscal discipline, profound differences in labour market, credit, and housing institutions, failures in financial regulation, and a common interest rate have all led to unsustainable internal imbalances. These are visible in divergences in competitiveness, possibly unsustainable government debt-to-GDP ratios as well as in other symptoms such as persistent balance-of-payments deficits. However, the financial fraud committed by Greek politicians and civil servants from pre-entry to 2009 marks Greece out as a special case. It has often been argued that a monetary union will disintegrate without a fiscal union – for which the Eurozone lacks the democratic institutions. A resolution of the Eurozone crisis needs to address this fundamental issue. It needs to create the right incentives through a mixture of sticks and carrots to enable the poorly performing economies to return to economic growth and to avoid a future existential crisis. It needs to discourage moral hazard and arrive at a fair distribution of burden sharing between tax payers in different countries and holders of sovereign and bank bonds. A common currency rules out currency depreciation but the history of successful currency depreciations offers important sign-posts – how to mimic the consequences of such depreciation without actually abandoning the euro.

Mario Draghi: Fears of Italian debt spiral - "We must act fast. The sorts of interest rate rises seen over the last three months, if protracted, could lead to an uncontrollable spiral," said Mario Draghi, who takes over as head of the European Central Bank next month. Mr Draghi said austerity measures must be enacted "immediately" and warned that Italy's €54bn austerity package is "not enough". Yields on 10-year Italian bonds surged above the danger level of 6pc in August on recession fears. Intervention by the ECB saved the day but yields have been creeping back up again as the ECB steps back. Yields rose to 5.71pc yesterday. Germany's Bundesbank is adamantly opposed to further ECB bond purchases. Mr Draghi hinted that ECB help is nearing its political limits, evoking Italy's "atavistic temptation" of waiting for an army to cross the Alps to sort out its problems. "It is not going to happen. All our citizens must be are aware of this. It would be a tragic illusion to think that the help will come from outside," he said.

ECB intervenes as Italian debt pressured (Reuters) - Italian debt came under pressure on Thursday as the country sold its latest round of government bonds, prompting the European Central Bank to resume buying its debt in secondary markets to cap rising yields. Ahead of the auctions, 10-year Italian yields climbed to their highest since the ECB began buying the country's debt in August. Despite receiving solid demand at the debt sale, yields remained under pressure in the cash bond market. Traders said the ECB, which has been largely absent from markets this week, started buying Italian bonds with maturities of around 10 years shortly after the auction, prompting yields to come off their peak. "They (the ECB) started buying BTPs because they were trading so badly," a trader said. "The auctions looked alright but they came on the back of a 15 basis point concession after the market had been hammered all morning."

Trichet Denies Criticism ECB Bond Purchases are Money Printing - European Central Bank President Jean-Claude Trichet rebuffed criticism that the bank is printing money as it buys government bonds from distressed euro region countries. “This criticism is completely inaccurate,” Trichet said in an interview with Germany’s Welt newspaper to be published tomorrow. “We are fiercely independent of governments and pressure groups. We are totally devoted to our primary Treaty mandate of price stability,” he said, according to a transcript provided by the ECB. Trichet reiterated his call to fully implement the decisions taken by European leaders on July 21 to shield the 17- nation currency bloc against further market tensions. The ECB considers it not “appropriate” to grant the European Financial Stability Facility a bank license and governments should “provide appropriate leveraging of the fund,” Trichet said.

ECB balance sheet hits record high on bond buys -- The Eurosystem's balance sheet expanded further in the week ending Oct. 7, the European Central Bank said Tuesday, hitting the highest level on record as the central bank continued to buy government bonds. The balance sheet rose to EUR2.296 trillion by the end of last week, up about EUR7 billion from EUR2.289 trillion the previous Friday. It was about EUR428 billion larger than a year earlier.   The Eurosystem consists of the ECB and the 17 euro-zone national central banks.  Net lending to credit institutions decreased by EUR67.3 billion to EUR163.3 billion last week, caused by a further rise in deposits with the ECB, as banks sought safety amid mounting concerns around the region's sovereign debt crisis and slightly lower demand at the bank's liquidity tenders.  Use of the ECB's main refinancing tender fell EUR9.5 billion Wednesday, as a tender of EUR208.3 billion matured and a new one of EUR198.9 billion was settled. Use of the ECB's longer-term refinancing operations was unchanged from the previous week.

Berlusconi stakes his fate on confidence vote in parliament - Silvio Berlusconi is to stake the fate of his government and his own political future on a confidence vote in parliament on Friday. Standing before a half-empty chamber boycotted by the opposition, he appealed on Thursday for support from the chamber of deputies, the lower house of the Italian parliament, saying: "There are no alternatives." Berlusconi decided to seek a vote of confidence after losing a crucial division on the public accounts earlier this week. The result of the confidence vote is due at around 11.30am GMT on Friday. To survive, the government needs only to secure more votes than the opposition. If it loses, it is constitutionally bound to resign. All but six deputies were missing from the opposition benches when the prime minister got up to speak, the main opposition parties having decided to stay away from the debate in protest at Berlusconi's refusal to step down. Under mounting pressure from the courts, where he is a defendant in three trials, the prime minister leads an increasingly fractious party.

In parliament, and in court, Berlusconi is fighting to survive - Even by the standards of Berlusconi's roller-coaster ride in politics, the billionaire's grip on power is hanging by a thread. The "parliamentary accident" he mentioned in his speech took place earlier this week, when his weakened coalition lost a key parliamentary vote on the budget by one ballot. This defeat led to opposition calls for Berlusconi to resign and presidential encouragement that he put his government's stability to the test. After the vote, amid cheers from the opposition, a clearly furious Berlsuconi shoved past Finance Minister Giulio Tremonti, who showed up just seconds too late to cast what would have been the decisive ballot. Tension between the two was already high; Tremonti has been pushing for unpopular reforms in his bid to shore up Italy's finances, at a time when Berlsuconi's top priority is clinging to his position. Berlusconi is also under personal pressure in Italy's courts, facing four separate trials and allegations ranging from fraud to paying for sex with a minor. Given the constant flow of revelations from his now-infamous "bunga bunga" sex parties, more cases could be in the pipeline. This, coupled with the country's economic woes, has put the prime minister's popularity rating at an all-time low.

Europe's Bailout Fund Overcomes a Hurdle - It appears that the world can take its eyes off Bratislava. Slovakia's largest opposition party, after a bit of parliamentary gamesmanship, cleared the way Wednesday for the country to endorse changes to the €440 billion ($600 billion) euro-zone bailout fund that European political leaders have deemed essential to the bloc's efforts to beat back the sovereign-debt crisis. Slovakia was the last holdout among the 17 nations that use the euro, and the Slovak agreement will end months of discussion about bolstering the fund. It isn't the end of the story: The crisis has swelled in the meantime, and talks are under way about making the fund bigger still.

E.U. Tells Banks to Garner Bigger Reserves -  A comprehensive plan to strengthen banks in the European Union1 was to be unveiled Wednesday, as the bloc sought to give new momentum to its efforts to calm the continuing debt crisis2.  Under the proposals, to be outlined by the Union’s executive, the European Commission3, banks would have to aim for higher capital reserves to protect themselves against losses and restore waning confidence in the sector.  The euro zone is entering a critical countdown, with investors in financial markets expecting an E.U. summit meeting Oct. 23 and a meeting of leaders of the Group of 20 leading economies Nov. 3 to endorse major decisions to help resolve the region’s debt crisis.  José Manuel Barroso, the European Commission’s president, is expected to argue that the extra capital should be raised first from the private sector, then from national governments. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, according to the proposal.

European Banks Face New Scrutiny Over Capital Needs - Confidence in the ability of European politicians to solve the euro-zone debt crisis gave way to a fresh round of uncertainty Thursday, with analysts presenting wildly differing estimates on how much new capital banks might need to withstand sovereign shocks. Analyst Estimates:

  • Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively.
  • Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario.
  • Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector.
  • Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region's major banks, depending on various scenarios.

EU may offer banks time to hit new capital target - European banks could get up to six months to strengthen their capital under plans aimed at halting the region's debt crisis, giving them time to raise funds privately in the hope of averting another damaging credit crunch. EU officials said on Thursday that weak banks may get the extra time to bolster their balance sheets after a rapid health check currently underway. The European Banking Authority, which is assessing banks' capital needs, is likely to mark down the value of banks' holdings of sovereign debt to market value and require lenders to hold a 9 percent core Tier 1 capital ratio, an EU source told Reuters. Deutsche Bank, Germany's flagship lender, would need 9 billion euros in fresh equity to reach that level, two people with direct knowledge of the bank's finances said on Thursday. Deutsche Bank declined to comment, but in separate remarks the bank's chief executive Josef Ackermann said it would do all it could to avoid a forced recapitalization and added it had enough funds of its own to cope with a crisis.

European Bond Spreads and Interbank Lending - Here is a look at European bond spreads and a measure of bank stress (Euribor-to-Eonia) from the Atlanta Fed weekly Financial Highlights released today (graphs as of Oct 12th). The spread for Greece is at a record high. The spread for Portugal has been moving sideways, and the spread for Ireland has been declining. The second graph below is a measure of European bank stress. This has declined a little in recent weeks, but is still elevated. From the Atlanta Fed: European bond spreads have narrowed over the past week for most sovereigns, except for Greece, which has seen its spread reach a record high. • Since the September FOMC meeting, the 10-year yield spread between Greek and German bonds has widened by 267 basis points (bps) and is 472 bps higher since September 30. The yield spreads for Portugal and Ireland have both tightened, by 83 bps and 52 bps, respectively. Spanish and Italian spreads are also down, by 52 bps and 31 bps, respectively. The second graph is the Euribor-to-Eonia spread: "Eonia is the Euro Overnight Index Average swap rate on unsecured interbank lending in the euro area." The euro-based Euribor-to-Eonia spread has narrowed over the past week after rising steadily since late July. Since October 5, the spread has narrowed by 8 basis points (bps) to 14 bps, depending on the tenor, and is still elevated compared to July levels.

Insurance plan to boost rescue fund’s reach - European policymakers are moving towards a plan that would enable the eurozone’s €440bn rescue fund to insure investors against some losses on government bonds, arguing it presents the fewest legal and political hurdles to quickly increasing the fund’s firepower.Officials have focused on the insurance plan after European Union legal staff determined that other proposals – including turning the fund into a bank so it could access unlimited funding from the European Central Bank – were not allowed under EU regulations.  Jean-Claude Trichet, the ECB president, and senior German officials have also objected to plans that would lean on the ECB for financing, arguing it is not the central bank’s role to provide funds to an agency that many envision as a nascent eurozone treasury.  “The [ECB] governing council does not consider it to be appropriate for the ECB to leverage the [fund],” Mr Trichet said last week. Under the insurance plan, the eurozone fund, formally known as the European financial stability facility, would guarantee 20-40 per cent of losses on bonds for struggling eurozone countries, particularly Spain and Italy, instead of buying them outright, as the ECB currently does

Slowdown in the German economy is predicted - Eight leading European economic institutes have forecast a steep slowdown for Germany's economy. The eight think-tanks make a twice-yearly aggregate forecast of German growth. Six months ago they predicted 2% growth for next year, but they have now cut that to 0.8%, blaming the debt crisis in the eurozone. Slow growth in Germany makes it much harder for the rest of Europe to avoid a return to recession. The German economy grew 3.6% last year. "The debt crisis in Europe is threatening to become a banking crisis, which is increasingly weighing on the German economy too," the institutes said in a statement. The forecasts come from six German think-tanks: IWH, Kiel Economics, Ifo, IfW, RWI and ZEW as well as Zurich's KOF and Vienna's IHS. They attribute the deterioration in their forecasts to a "clear rise in uncertainty", which will "dampen domestic demand". They are also concerned that economic problems among Germany's trading partners will hit its exports.

S&P cuts Spain's long-term sovereign credit rating - Standard & Poor's said late Thursday that it has lowered its long-term rating on Spain's sovereign credit to AA- from AA. The firm said that the outlook for Spain is negative. "Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still-high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," S&P said.

S&P cuts Spain’s sovereign debt rating - Standard & Poor’s has downgraded Spain’s sovereign debt rating, citing slowing growth and a weakening financial system. In an announcement late on Thursday, the rating agency knocked Spain’s rating down one notch from double A, where it has been since last April, to double A minus. It also kept the country’s rating on a negative outlook. S&P’s statement said despite “resilience” in Spain’s economy this year, there were “heightened risks to Spain’s growth prospects” due to high unemployment, tighter financial conditions, a high level of debt and a broader eurozone slowdown. It noted “the financial profile of the Spanish banking system” as a concern, echoing previously expressed fears about the system. S&P earlier in the week said Spain’s banks would continue to accumulate problematic assets into 2012 and that “access to market funding [remains] scarce and expensive”. It downgraded several regional banks on Monday. S&P’s move follows a Monday decision by Fitch to downgrade Spanish sovereign credit and the country’s largest banks, including Banco Santander and BBVA. Observers have also noted that Spain was unlikely to meet its budgetary targets for the year, which aim to cut the deficit to GDP ratio from 9.2 per cent last year to 6 per cent this year and 4.4 per cent next year.

Spain Deficit Raises EU Risks - Slowing economic growth, spiraling unemployment and overspending by its powerful regional governments could make Spain the latest ailing euro-zone country to miss its budget target this year. The Socialist government of Prime Minister José Luis Rodríguez Zapatero won praise last year for measures that let it cut a budget deficit equal to around 11% of gross domestic product in 2009 to just over 9% in 2010. These steps, plus politically difficult overhauls of Spain's labor market and pensions system, helped shore up investor confidence, setting the country apart from its fiscally frail peers. But this year, as the European debt crisis deepens and global growth slows, Spain could follow in the footsteps of Greece and Portugal, which have already warned their deficit-cutting efforts have gone off track. On Thursday, Standard & Poor's downgraded Spain by one notch, in the latest blow to its status.  Though the Spanish government insists it will cut its deficit to 6% of GDP as promised, a growing number of independent economists believe it will fail to meet this target, possibly by a wide margin.  Such a failure could raise new doubts about Europe's ability to stem its tide of red ink. Large budget gaps means debt levels could continue to grow, which, coupled with signs spending cuts are crimping growth, could add to the mounting crisis.

European Banks Face Deadline to Raise Capital Levels - Europe’s banks face a deadline of three to six months to strengthen their balance sheets and to compensate for the decline in value of Greek and other south European sovereign debt, European officials said Thursday.  With European leaders under pressure to produce a major package of measures to tackle the debt crisis1 within weeks, banking supervisors are preparing a proposal that will place substantial new demands on European banks.  Europe’s leaders were given a boost Thursday when Slovakia’s Parliament reversed course and ratified a plan to bolster the euro zone’s rescue fund, becoming the 17th and final country to do so.  But, when European leaders meet in Brussels on Oct. 23, they will confront a series of complex decisions, including how much to increase the contribution of private investors to a Greek bailout. One leading banker confirmed Thursday that those discussions were already under way.

Goldman says 50 European banks could fail EBA stress tests - At least 50 out of 91 European banks could fail a revised regulatory stress test and suffer a capital shortfall of 139 billion euros, Goldman Sachs said and downgraded Germany's Commerzbank and Spain's Banesto to "neutral." The shortfall could be as high as 298 billion euros if the European Banking Authority (EBA) sets the core Tier 1 capital ratio at the high-end of 9 percent instead of 7 percent, Goldman said, and cut price targets on banks citing credit losses from exposure to sovereign debt and likely recapitalizations. In July, eight out of 90 European banks failed the EBA's stress test to raise 2.5 billion euros ($3.5 billion) in capital, when the minimum pass level was set at 5 percent. But recapitalization of banks will not have the capacity to address either the bank or the sovereign crisis, unless economic policy is aimed at steadying the value of sovereign debt, Goldman said in a note. "Without the return of its "risk free" assets, the bank sector will remain destabilized in our view," it added. Capitalization of sovereign bond books may encourage a broader private-sector involvement, which is at the heart of the recent escalation of the crisis, but it is a fallacy to believe this to be sufficient to sustain second round effects of a sovereign default, the brokerage said.

IMF needs around $350 billion more capital: G20 source (Reuters) - The International Monetary Fund may need a capital injection of about $350 billion to give it more firepower to fight economic crises, an emerging market G20 source said on Friday. The senior delegation source said that any recapitalization would not be part of a plan the euro zone aims to present later this month to stem its deepening debt crisis. A second source at the G20 finance chiefs' talks in Paris cautioned that there was little chance of an agreement on any capital increase being agreed at their two-day meeting. The IMF is weighing whether it could expand its rescue lending capacity through debt issuance or bilateral borrowing as part of a review of its crisis-fighting resources mandated by the lender's managing director, Christine Lagarde. Should a country the size of Italy or Spain need rescuing, the IMF's funds could be severely strained. But the IMF's dominant shareholders, including the United States, Japan, Germany and China, would likely be wary of a new independent funding source that could dilute their influence.

French Bond Yields Jump Most Since 2008 on Bank Concern - Ten-year French yields climbed 38 basis points this week, the most since the euro was introduced in 1999. The extra yield investors demand to hold 10-year French bonds instead of German bunds also expanded to the most since the euro started. Spain’s 10-year bonds fell for a fifth day after Standard & Poor’s cut the nation’s credit rating. Yields climbed across the euro area after European Central Bank President Jean-Claude Trichet said the ECB will not act as a “lender of last resort.” The eight largest U.S. money-market funds reduced their lending to French banks by 44 percent last month, according to filings compiled by Bloomberg and published in today’s Bloomberg Risk newsletter. Spanish 10-year yields climbed four basis points to 5.24 percent, even after the ECB was said by people with knowledge of the deals to have bought the nation’s securities. S&P cut Spain’s ranking by one level to AA-, with the outlook remaining negative, the company said yesterday. Portugal 10-year yield increased five basis points to 11.64 percent.

The George Soros plan to save the eurozone -- Let’s have the banks and the governments shore up each other: I am afraid that the leaders are contemplating some inappropriate steps. They are talking about recapitalising the banking system, rather than guaranteeing it. A fair enough point, but where will the money come from to do that? In exchange for a guarantee, the major banks would have to agree to abide by the instructions of the ECB. This is a radical step but necessary under the circumstances. Acting at the behest of the member states, the central bank has sufficient powers of persuasion. It could close its discount window to, and the governments could seize, the banks that refuse to co-operate. The ECB would then instruct the banks to maintain their credit lines and loan portfolios while strictly monitoring the risks they take for their own account.  Um…if it all is a liquidity crisis, this might work, public choice problems aside.  Otherwise it is calling for possibly insolvent banks to prop up not only the real economy but the governments too, which in turn will guarantee the banks, which by the way now have to keep on making bad loans.

Why Slovakia Is Still a Big Problem for the Euro Zone - So after creating a giant kerfuffle on Tuesday by voting down much-needed measures to expand the powers of the euro zone's $1 trillion bailout fund, Slovakia's parliament reversed course and voted for those very same reforms a mere two days later. That means the euro zone can now use the European Financial Stability Facility (or EFSF) to buy up sovereign bonds and recapitalize banks – reforms seen as crucial tools to combat the contagion rampaging through Europe. So all is happy in euro land, right? Not really. Yes, the snafu in Slovakia ended positively for the euro. But the way it played out showed what might be the most dangerous flaw in the entire monetary union. That flaw is the way domestic politics can hold necessary euro zone reforms hostage. Because the parliaments of all 17 euro members have to approve any major crisis-fighting decision, such as this expansion of EFSF powers or the second Greek bailout, politicians in every euro zone capital can use euro zone policy to settle domestic political scores, achieve political goals, or pander to local voters.

On the Lack of Democratic Consent of Greeks to Austerity Programs - Yves Smith  (video) Michael Hudson, in the Real News Network segment, stresses that the bailouts (with tons of hairshirt measures) being imposed on Greece do not have the consent of the population. Hudson exaggerates a bit on how the debt was entered into. However, a critical aspect is that, as Floyd Norris pointed out, the overwhelming majority of the borrowings are subject to Greek law. That means Greece could repudiate that with no legal consequence. And collecting on the portion under English law would not be a party.  But a far more serious issue is the Greek banking system would collapse unless there was an immediate (or done over the course of a one week banking holiday) switch back to the drachma. Even then, the planning would need to be done in absolute secrecy, since if the public were to get a clue that this sort of move were in store, you’d see immediate capital flight. This is, to put it mildly, daunting. Martin Wolf has argued in conversation that the ferocity of Greek protests (as opposed to, say, in Ireland) is due to the fact that it is the continuation of an unresolved civil war. Even so, civil disobedience has a way of being contagious, and if the Greeks are perceived to accomplish something, it may change attitudes in formerly complacent but unhappy groups in other countries.

Foreign riot police may now be operating in Greece - Did you know that the EU has its own riot police that can operate in any European country but is answerable directly to none of them?  No I didn’t either.They are called the European Gendarmerie Force (Eurogendfor) . They are based in Italy but funded and staffed by six signatory nations who are France, Italy, Holland, Spain, Portugal and Romania.  However, according to the Treaty which established Eurogendfor they can operate in any EU country and are available to others who invite them to do so. The country which invites them in is refered to as the ‘Host’. The Gendarmerie are specifically set up to deal with riots and civil unrest and as the treaty spells out they are to be…exclusively comprising elements of police forces with military status Here is a picture of the force. How many police forces or even riot police do you know who drill with bayonet?

Investor threat to second Greek bail-out - The lead negotiator for private holders of Greek debt has said that investors are unwilling to accept greater losses on their bonds than the 21 per cent agreed in July, jeopardising eurozone plans to finalise a second Greek bail-out by the end of next week.Charles Dallara, managing director of the Institute of International Finance, criticised European leaders on Friday for failing to allow the July deal to proceed. He said any greater losses imposed on Greek bondholders could prompt investors to sell the sovereign debt of other eurozone countries, destabilising the single currency. “We do not see that a compelling case has been made to reopen the deal,” Mr Dallara told the FT. “A deal is a deal.” Securing a voluntary “haircut” from Greek bondholders has been the centrepiece of the second €109bn ($150bn) Greek bail-out after a German-led group of creditor countries demanded private investors bear more of the rescue burden so eurozone taxpayers would not be saddled with the entire bill, as in previous bail-outs. At the urging of Germany, other European leaders have in recent weeks agreed to reopen the July haircut deal, arguing that changed economic circumstances in Greece – including a plummeting in value of Greek bonds – meant bondholders should take a bigger hit. German officials have pushed for haircuts as big as 50-60 per cent, according to senior European officials.

Chaney says ‘recession has already started’ in Europe and talks EuroTARP - Eric Chaney, former French Treasury official and former Chief European Economist at Morgan Stanley is the present Chief Economist at AXA. He tells Bloomberg television’s Maryam Nemazee that the banking crisis in Europe is also a credit crunch. Non-financial businesses are trying to ensure liquidity. So they have cut production to accumulate the cash they cannot get through credit channels.This, Chaney says, means recession in Europe. I agree. Then, is it the IMF to the Rescue? I doubt it. For his, part Chaney says we should not expect too much from the upcoming G-20 meeting. Forget about the BRICs riding to the rescue and taking credit risk just to help Europe. The bank issue comes first. Chaney gives credence to the idea of a EuroTARP/EuroTALF in which the European Investment Bank (EIB), takes the money from the present bailout facility, the European Financial Stability Facility (EFSF), and capitalises a special purpose vehicle (SPV). This SPV then turns around and issues bonds and uses those funds to buy up the sovereign debt of the European periphery or to recapitalize the banks.I see this as another extend and pretend measure. Even Italy will not be kept on life support by the ECB. There is no appetite for that. Incoming ECB head Mario Draghi’s comments tell you that.

EU says eurozone needs ‘permanent’ austerity - The EU warned Tuesday that the eurozone requires permanent tough austerity measures if it is to cope with public debt set to crash through the 100-percent-of-GDP barrier and keep rising for many years. With an ageing population piling up social security and pension costs, the European Commission says a radical long-term correction is required to put public debt throughout the 17-nation euro currency area on a sustainable path. “The deterioration in the public finances of the euro area since the onset of the economic and financial crisis comes on top of already high starting levels of debt,” the Commission said in its quarterly report on the euro area. This “at a time when the European economies are facing the prospect of the sustainability challenge of an ageing population,” it added.The report used projections for future age-related spending and concluded that “in the absence of additional consolidation measures” the overall picture would show “debt passing the 100-percent-of-GDP mark over the next 15 years and continuing to increase thereafter.

Arithmetic Has A Well-Known Keynesian Bias - Krugman - Martin Wolf is shrill: [W]ithout economic growth, it is almost impossible to deleverage an economy. The prime minister revels in his pre-Keynesian views. When weak demand is the immediate constraint on output, that is simply terrifying. He’s reacting to Cameron’s statement, semi-withdrawn but not really, that what Britain needs is for everyone to pay down debt, said in obvious obliviousness to the fact that if everyone cuts spending at the same time, income must fall. But then, this kind of obliviousness is very widespread, and my experience is that if you try to point out the problem — if you try to explain that my spending is your income and vice versa — you get a belligerent response. Y=E is seen as a political statement, which in a way it is if one side of the political spectrum insists on believing things that can’t be true. The other part of the story is the troubles of the euro area debtors. Never mind that these have nothing to do with stimulus spending, and that Spain and Ireland were actually fiscal role models before the crisis; this too is spun as somehow anti-Keynesian, rather than a reflection of the disastrous effects of imposing a nouveau gold-standard regime. And yes, it is terrifying.

The Euro Is Dead. Long Live The Euro - First off, Greece would likely default, possibly within weeks, if it were not for the efforts being made to postpone the inevitable until next spring. The driving force behind the Greek drama and its potential fallout has primarily been played out in the bond markets. Indeed, it appears the only language policy makers understand is that of the bond market. In this context, it’s quite astonishing how much progress has been made. Italy, for example, passed substantial reforms three times this year. And for those who worry that the politics of austerity measures may topple governments, and thus the reform process itself, fear not: in Spain, for example, early elections in November will likely have the current opposition sweep to power. The main implication in Spain will be that the new government will own the same old problem, but may have a stronger majority to engage in reform. In Germany, where many fear the junior coalition partner will at some point cause the government to collapse, note that the major opposition parties favor Eurobonds and possibly a Marshall Plan for Greece; both such plans would likely appease bond markets.

Euro crisis could ‘destroy’ financial system, George Soros warns  - About 100 leading figures in Europe, including George Soros, are urging governments to take steps to ease the raging debt crisis, warning the troubles in the euro zone could blow up the financial system. "The euro is far from perfect," the group wrote in an open letter in a German newspaper, according to Agence France Presse. "The current crisis has shown that. But as a reaction that, we need to revise the weaknesses in its make-up rather than allow the crisis to undermine, even destroy, the world's financial system." Besides Mr. Soros, the group includes a former German finance minister, former French foreign minister, noted economists and the one-time commissioner of economic and monetary affairs for the EU. The group called for a pan-Europe institution to pump money throughout the monetary union, greater market oversight, and a new economic plan for the EU. 

Cameron Calls For 'Big Bazooka,' Warns 'Time Short' To Prevent Eurozone Disaster - In an extensive interview with the Financial Times, British Prime Minister David Cameron warned that continental Europe has just weeks to avert a global financial disaster. “The situation with the world economy is very precarious,” he said. “The eurozone is probably contributing more to that uncertainty and lack of confidence than anything else.” Cameron expressed frustration with his fellow heads of government who have allowed internal politics to brink the Eurozone to the brink. He specifically called for a 'big bazooka' to stabilize banks and deal with a potential Greek default, mostly by having France and Germany set aside their differences and substantially expand the side of the European Financial Stabilisation Facility. “You either make the eurozone work properly or you confront its potential failure,” he said. Cameron appears to be in lock-step with President Barack Obama and the recommendations of Treasury Secretary Tim Geithner — a coalition that is preparing a last-ditch push to avert a catastrophe. “That’s the menu," he said. "It’s not à la carte – you have to do the whole thing. Time is short, the situation is precarious."

Bank of England Rejects All Offers, Quantitative Easing Fails to Lower Yields in UK - The Bank of England threw a Quantitative Easing Party today, but no one showed up with acceptable bids. Please consider Bank of England Rejects Offers Against 8.75% 2017 Gilt After Yield Move The Bank of England rejected all bids against the 8.75 percent 2017 gilt that it planned to buy today as part of its quantitative-easing program. “The Bank has decided to reject all offers against UKT 8.75 25/08/17 following significant changes in its yield in the run up to the auction,” the central bank said in a statement today. Chart and Table courtesy of Bloomberg Government Bond Rates

Addicted to tax havens: The secret life of the FTSE 100 - ActionAid have produced another fine report, this time about the use of tax havens by multinational corporations listed on the FTSE 100. The statistics are staggering: for example more than half of the financial sector's overseas subsidiaries are in tax havens. More precisely:

  • The FTSE 100 largest groups registered on the London Stock Exchange comprise 34,216 subsidiary companies, joint ventures and associates.
  • 38% (8,492) of their overseas companies are located in tax havens.
  • 98 groups declared tax haven companies, with only two groups, Fresnillo and Hargreaves Landsdown, who did not.
  • The banking sector makes heaviest use of tax havens, with a total of 1,649 tax haven companies between the ‘big four’ banks. They are by far the biggest users of the Cayman Islands, where Barclays alone has 174 companies.
  • The biggest tax haven user overall is the advertising company WPP, which has 611 tax haven companies.
  • The FTSE 100 companies make much more use of tax havens than their American equivalents.
  • There are over 600 FTSE 100 subsidiary companies in Jersey (more than in the whole of China), 400 in the Cayman Islands and 300 in Luxembourg – all tiny tax havens.

Average household faces fuel poverty by 2015 - The average household will be in “fuel poverty” by the next election in 2015 if energy bills, which have almost doubled as a share of median income since 2004, stay on their current path. A steady rise in electricity and gas charges could force the government to reconsider its energy policy, said analysts, particularly an official target to spend £200bn on new infrastructure by 2020, including a big expansion of wind power. Next month, the average annual bill for a dual fuel customer will reach £1,293, or 6 per cent of median household income, compared with 3.3 per cent in 2004. Any household that spends 10 per cent of median income on electricity and gas lives in “fuel poverty”, according to the government’s definition. David Cameron, prime minister, and Ed Miliband, the Labour leader, have both voiced concern about the absolute level of energy bills. But the relative growth of this burden has gone largely unremarked.

Study estimates 3 million British children in poverty by 2013 – The falling standard of living, coupled with the economic slowdown and government reduction of tax breaks and social benefits, will lead to 3 million children in the United Kingdom living in poverty by 2013, the Institute for Fiscal Studies forecast. The study, released on Monday, blames two years of continuous decline of incomes for adding an estimated 600,000 more children into a state of poverty. It is the biggest drop in living standards for middle-income British families since the 1970s after median incomes declined 7 percent, inclusive of inflation.The relative poverty threshold in Britain is based on people having a household income below 60 percent of the median national income, while those with income in 2009-10 below 60 percent of the 2010-11 median are considered in a state of absolute poverty. Based on those criteria, 17 percent of British children were considered in absolute poverty in 2009-10, which is expected to rise further to 21.8 percent. In 2013, there would also be 2.5 million working-age parents and 4 million working-age adults without children in absolute poverty despite the introduction by the coalition government of the Universal Credit scheme, the report said.

Students storm Goldman Sachs building in Milan (Reuters) - A group of students stormed Goldman Sachs's central Milan offices on Friday ahead of worldwide protests against financial inequality planned for the weekend. The Italian demonstrations are the latest bout of anger at banks and financiers as outcry spreads throughout the world following the occupation of Wall Street in New York by protesters over the past month. Students managed to break into the hall of the Goldman Sachs building in the heart of Milan's financial district, a few steps away from La Scala opera house, police said. The protests were quickly dispersed by police and security was restored to the elegant building, though red graffiti was daubed on its walls expressing anger at Italy's Prime Minister Silvio Berlusconi and proclaiming "Give us money." Protesters in Italy's financial capital also hurled eggs at the headquarters of UniCredit, the country's biggest bank.

Wall Street sit-in protest goes global (Reuters) – Protesters worldwide geared up for a cry of rage on Saturday against bankers, financiers and politicians they accuse of ruining global economies and condemning millions to poverty and hardship through greed.Galvanized by the past month's Occupy Wall Street movement, the global protest began on a sunny spring day in New Zealand and is due to ripple round the world to Alaska via Frankfurt, London, Washington and New York. Riot police prepared for any trouble -- cities such as London and Athens have seen violent confrontations this year -- but it was impossible to say how many people would actually turn out despite a rallying call across social media websites. New Zealand and Australia got the ball rolling while most of traditionally reserved Asia was quiet. Several hundred people marched up the main street in Auckland, New Zealand's biggest city, joining a rally in the city square where about 3,000 chanted and banged drums, denouncing corporate greed.

Wall St protests spread to global stage - The protests against the global financial system that have swept across the US in the past month have spread to the international stage, inspiring offshoot occupations in London, Sydney, Frankfurt, Hong Kong, Toronto and other cities.A “global day of protest” is planned for Saturday in at least 868 cities in 78 countries. Organisers say they are broadly in favour of greater democracy in global financial and political systems. “Undemocratic international institutions are our global Mubarak, our global Assad, our global Gaddafi,” said a statement from Egality, an activist group that is helping co-ordinate the global protests. Shimri Zameret, a co-ordinator for Egality, said that events such as the Arab spring, the student-led protest movement in Chile and Spain’s indignados , or outraged, who have been demonstrating against joblessness and austerity measures, were all part of the same global movement demanding greater democracy and fairness.The inspiration for Saturday’s protests is the Occupy Wall Street movement in the US, which began in New York last month with the occupation of Zuccotti Park in downtown Manhattan, but has since spread to cities including Boston, Philadelphia, Chicago, Atlanta and San Francisco.

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