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

Saturday, October 22, 2011

week ending Oct 22

Federal Reserve Balance Sheet Shrinks In Latest Week - The U.S. Federal Reserve's balance sheet shrunk slightly in the week ended Oct. 19, nearly a month after the central bank unveiled a new plan to try and boost the economy via its huge portfolio of securities. The Fed's asset holdings in the week ended Oct. 19 stood at $2.855 trillion, down only slightly from the $2.864 trillion reported a week earlier, the central bank said in a weekly report Thursday. Holdings of U.S. Treasury securities edged up to $1.670 trillion from $1.669 trillion the week before. However, the central bank's holdings of mortgage- backed securities and federal agency debt securities dropped slightly. Thursday's report showed total borrowing from the Fed's discount lending window was $11.26 billion, down slightly from the $11.39 billion a week earlier. Borrowing by commercial banks plunged to $2 million from $70 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts rose to $3.411 trillion, compared to $3.402 trillion the previous week.Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.689 trillion, compared to $2.679 trillion the previous week. Holdings of agency securities dropped to $722.39 billion from $723.11 billion the prior week.

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

NY Fed: $1.853 Billion Borrowed Via Dollar Swap Facility In Latest Week - The European Central Bank has boosted by a notable level its borrowings of dollars from the Federal Reserve. The New York Fed said Thursday that in the week ended Wednesday, the ECB rolled over a $500 million loan taken the week before, and added to it with a $1.353 billion loan at an 84-day term. The one-week loan had a rate of 1.08% and the 84-day loan came in at 1.09%. The ECB was the only bank to borrow from the facility. The Federal Reserve's dollar liquidity swap operations allow the Bank of Canada, Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to borrow greenbacks to ensure the global financial system does not run short of dollar liquidity. The facility, which was used to the tune of hundreds of billions during the darkest days of the financial crisis, has seen only nominal amounts of borrowing, and frequently none at all, since being relaunched last year.

Tis Not Merry Twistmas - The Fed's security holdings rose in the week ended 10/12/11 by just $0.6 billion, net (versus $22-25 billion per week during QE2). None of the Fed's GSE holdings matured. There was no net change in MBS holdings. The Fed's $10 billion of MBS purchases in the past 2 weeks won't start settling until November. The Fed continued Operation Twist, with purchases of longer dated securities offset by sales of short dated securities. These operations are a wash for the PDs and for the system as a whole, so there's no need to go into detail on the amounts, which in round numbers have totaled roughly $9 billion in purchases and $9 billion in sales per week.  Since the day after the Fed announced the program the 10 year yield has risen roughly 40 basis points. So much for pushing down yields at the long end. Of course, the announcement was well telegraphed for a month in advance, so there was massive front running with yields heading down. Once announced, bond traders sold the news, and have kept selling.

Bernanke's Lessons From the Financial Crisis - The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that the great lesson was the need to juggle two jobs: the traditional work of managing the pace of inflation and the forgotten job of maintaining financial stability. Mr. Bernanke’s speech largely amounted to a defense and explanation of the Fed’s conduct during the crisis. The lessons he described included the propriety of the Fed’s existing approach to monetary policy and the necessity of its various innovations, including lending dollars to other countries. But the Fed chairman acknowledged, as he has before, that the Fed and other central banks had neglected the work of financial supervision. “The crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively,” Mr. Bernanke said at an annual policy conference hosted by the Federal Reserve Bank of Boston.

Bernanke: Fed needs sharper eye on financial bubbles - Federal Reserve Chairman Ben S. Bernanke said Tuesday that he is more open to using the Fed’s interest rate policies to combat financial bubbles, arguing that in the wake of the economic crisis, central bankers must rethink their assumptions. Before the economic upheaval, Bernanke acknowledged, central banks viewed financial stability as a “junior partner” to the task of tweaking interest rates to try to boost growth. But both stability and monetary policy are of vital importance to the U.S. economy, he said. “In the decades prior to the crisis, monetary policy had come to be viewed as the principal function of central banks,” Bernanke said at a conference sponsored by the Federal Reserve Bank of Boston, according to a prepared text. “Their role in preserving financial stability was not ignored, but it was downplayed to some extent. The financial crisis has changed all that. Policies to enhance financial stability and monetary policy are now seen as coequal responsibilities of central banks.”

Bernanke Details Evolution of Fed Policy - Federal Reserve Chairman Ben Bernanke suggested the central bank is considering steps to better signal how it is likely to act.  The Fed has been considering whether to provide more explicit guidance on its plans for interest rates. One idea would be to more explicitly tie changes in its interest-rate policy to forecasts for employment and inflation measures. Mr. Bernanke said "forward guidance and other forms of communication about policy can be valuable" and added he expected "to see increasing use of such tools in the future." He made his remarks Tuesday at a Federal Reserve Bank of Boston conference on the long-run impacts of the recession. The idea would be to reduce public uncertainty about when the Fed might raise short-term interest rates, which are now near zero. Officials weighed making communications changes along these lines at their policy meeting in September, according to meeting minutes released last week. It's a big challenge because officials tend to prefer to avoid boxing themselves in to rigid rules about policy, and also because it is hard to choose which measures to use.

The Great Recession's Impact on Central Bank Practice - Ben Bernanke - Speech at the Federal Reserve Bank of Boston 56th Economic Conference

A hint on Fed communications? - Today’s speech by Fed chairman Ben Bernanke was a hard one to decode. A lot of the material was bland and repetitive stuff about central banks’ responsibility for financial stability; how the recession doesn’t really change the consensus on monetary policy; and how prudential rather than monetary policy is the right way to tackle asset price bubbles. That made his comments about how one consequence of the recession will be a greater role for communication in central bank doctrine stand out all the more. “In most cases, the use of balance sheet policies for macroeconomic stabilisation purposes has reflected the constraints on more-conventional policies as short-term nominal interest rates reach very low levels. In more normal times, when short-term policy rates are not constrained, I expect that balance sheet policies will be rarely used. By contrast, forward guidance and other forms of communication about policy can be valuable even when the zero lower bound is not relevant, and I expect to see increasing use of such tools in the future.” This comes in the context of intense Fed debate about how to improve its communication policies. Mr Bernanke also said that: “The FOMC continues to explore ways to further increase transparency about its forecasts and policy plans.”

Expect Gun-Shy Fed When Next Crisis Strikes - When the next financial crisis arrives, as it inevitably will, expect to find the Federal Reserve gun-shy when called upon to serve as the nation’s lender of last resort. A panel held at the Federal Reserve Bank of Boston Wednesday, which included a former central bank second-in-command, agreed that widespread discontent with the role played by the Fed during the financial crisis, joined with legal changes, will make policymakers reluctant to act when future problems arise. That suggests the next financial crisis, regardless of what generates it, could be harder to deal with.The Fed "can be the lender of last resort" but "there is less room for maneuver, and we won't know until we face the situation" what the central bank will do.

What does the Fed’s language about 2013 mean? A rules-based interpretation - The August 2011 meeting of the Federal Reserve's Federal Open Market Committee produced new language describing the expected path of interest rates over a two-year horizon. That language spurred a variety of interpretations, as some saw it as describing what was already expected and others interpreted it as a significant policy shift. This column examines the expected path of future interest rates and says that the new language was wholly consistent with past Fed practice.

Sizing Up the Feds Maturity Extension Program – NY Fed - The Federal Open Market Committee (FOMC) recently announced its intention to extend the average maturity of its holdings of securities by purchasing $400 billion of Treasury securities with remaining maturities of six years to thirty years and selling an equal amount of Treasury securities with remaining maturities of three years or less. The nominal size of this maturity extension program, at $400 billion, is smaller than the $600 billion of purchases during the second round of large-scale asset purchases (LSAP 2) completed in June 2011. The two programs are more comparable in size, however, once we consider the characteristics of the securities expected to be purchased and sold under the maturity extension program. In this post, we explain what this means and why it matters.

Fed Officials discuss buying more MBS, Bernanke talks with Senators - From the WSJ: Fed Is Poised for More Easing Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly. "I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University. Here is the speech by Dan Tarullo: Unemployment, the Labor Market, and the Economy I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS) to provide more support to mortgage lending and housing markets.  A large-scale MBS purchase program has many of the benefits associated with purchases of longer-duration Treasury securities, such as inducing investors to shift to other assets, including bonds and equities. But it could also have more direct effects on the housing market. By increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates. [T]he effectiveness of an MBS purchase program would be amplified, perhaps significantly, if certain nonmonetary policies were changed.

Fed's Tarullo backs more MBS purchases - Federal Reserve Board Gov. Daniel Tarullo on Thursday backed another large-scale purchase program of agency-backed, mortgage-backed securities to support the economy. In a speech at Columbia University in New York, Tarullo said that the purchases could help the housing market, which is "central to the slow pace of the recovery." The Fed has already purchased $1.25 trillion of agency MBS in 2008 and 2009 as part of its $2.3 trillion of asset purchases, or quantitative easing. Tarullo said that a proposal to allow underwater homeowners to refinance their mortgages would increase the effect of an MBS purchase plan. In an interview with The Wall Street Journal published Thursday, Boston Federal Reserve Bank President Eric Rosengren also said the Fed should consider more MBS. Tarullo added that he disagreed with some Fed officials who believe the central bank has done all it can to help the economy. "If we take account of the unusual nature of the current shortfall in fashioning policy responses, there is much that government policy -- including monetary policy -- can still do," he said.

Bernanke shares concerns on European debt, action on housing - Federal Reserve Chairman Ben S. Bernanke delivered a stern warning Thursday to Senate Democrats regarding the European debt crisis and offered insight into stabilizing the ailing housing market, according to senators and aides who attended the meeting. In a more than hour-long session, Bernanke spelled out “what the problems were, what the potential remedies are” in dealing with Europe’s mounting crisis, according to Sen. Dianne Feinstein (D-Calif.). Because of the traditional sensitivity to the chairman’s remarks and their impact on financial markets, senators declined to discuss the remedies Bernanke suggested. However, Feinstein and Sen. Mark Warner (D-Va.) said they pressed Bernanke for his thoughts on how to help homeowners, given the consensus that failure to move more quickly to stem foreclosures has slowed the economic recovery. Warner said it is now conventional wisdom that actions taken to improve the housing market after the 2008 collapse were not dramatic enough.  “The administration made good-faith efforts; they just haven’t been very successfully,”

Do monetary frictions matter? - In some cases, maybe. But not in understanding the effect of conventional monetary policy, at least to any significant degree. First things first: To be clear about these issues, we need to be specific about the type of “money” and “frictions” we’re discussing. There are, after all, many assets that are sometimes labeled “money”. First, there’s “base money”, the paper currency and electronic reserves issued by the Fed. Then there are all the different kinds of “money” created by banks, both traditional and shadow: transactions accounts, saving accounts, money market funds, repo, and so on.  When all these assets are given the blanket title of “money”, you can’t have any sensible discussion. The properties distinguishing $1000 in cash from $1000 in a money market fund are very different from the properties that, in turn, distinguish $1000 in the money market fund from $1000 in an S&P index fund. So let’s confine our discussion to the narrowest possible definition of money: currency and reserves issued by the Fed.

From QE to Communism -  Zero interest rate policy and quantitative easing is not working to stimulate the real economy. No country has succeeded. The pioneer of quantitative easing, the Bank of Japan, failed (and Japanese yen is uber-strong). The Federal Reserve has failed, and the Bank of England has failed.Before going to quantitative easing, let’s consider whether zero interest rate policy (ZIRP) works. Michael Pettis offered some interesting observations recently in his newsletter. He says that even though theory reckons that lowering interest rates should make people less likely to save, and to consume more, empirical data suggest the otherwise. In fact, people save more when rates are low, not less:In China, for example, deposit rates are seriously negative and have been negative for many years, and yet the household savings rate is nonetheless very high. In fact it seems that, as a rule, countries with repressed interest rates have higher, not lower savings rates. What’s more, I have seen US historical data that suggests that when interest-rate declines have coincided with falling, not rising, stock and real estate markets (as they have recently), the savings rate usually rises rather than declines. In other words households care mainly about their wealth, not about the reward for postponing consumption. So in an environment where the asset side of household’s balance sheet is falling in value (as in recent years in the US), it makes sense for households to save more, regardless of the interest rates. That’s debt deleveraging or balance sheet recession as we know it

Fed should adopt GDP target, Goldman says - The Federal Reserve should target the level of gross domestic product, Goldman Sachs economists said ahead of a wave of speeches from central bank officials.  In a note published Friday night, Goldman Sachs said the best way for the central bank to loosen policy significantly further would be to target a GDP path, and commit to using more asset purchases to achieve that path.  “While a shift to a nominal GDP level target would be a big decision, it would be consistent with the Fed’s dual employment and price mandate,” the economists wrote.  At the moment, the Fed has no formal inflation or unemployment target, though it informally targets inflation at around 2% a year, and pushes for unemployment to be at “natural” levels, which most economists fix at somewhere on the order of 5% to 6%.

Goldman Advises The Fed To Go Nuclear, And Set A Target For Nominal GDP - In his latest US Economics Analyst note, Goldman's Jan Hatzius offers up his suggestion for the next phase of Fed policy. With short-term interest rates near zero and the economy still weak, we believe that the best way for Fed officials to ease policy significantly further would be to target a nominal GDP path such as the one shown in the chart on the right, indicating that they will use additional asset purchases to help bring actual nominal GDP back to trend over time. The case would strengthen further if deflation risks reappeared clearly on the radar screen. More specifically: The specific path in Exhibit 1 is calculated as the level of nominal GDP in 2007 extrapolated forward at a rate of 4½% per year. We can think of this number as the sum of real potential GDP growth of 2½% and inflation as measured by the GDP deflator of about 2%. The specific numbers matter less than the Fed’s willingness to a target path that is anchored at a point like 2007, when the economy was near full employment, and that they indicate that they will pursue this target aggressively. Why this move? Basically, Goldman sees it as a natural extension of the Fed's dual mandate -- price stability and full employment -- but with a greater bent towards full employment. It happens to be a pretty sexy idea among economists. Here's The Economist talking about the benefits of NGDP targeting:

Since When is the Fed Doing its Job Considered Going Nuclear? - Joe Weisenthal is reporting that Goldman Sachs has come out in favor of the Fed adopting a nominal GDP level target that would put it back on its long-run, pre-crisis trend.  This endorsement speaks to the growing interest and recognition of nominal GDP level targeting by the public. Even some Fed officials are speaking in favor of it.  Great news. What is remarkable to me is that many observers in this debate describe the adoption of nominal GDP level targeting as the Fed going nuclear.  For example, Weisenthal's article above is titled "Goldman Advises The Fed To Go Nuclear, And Set A Target For Nominal GDP" and not too long ago David Wessel had an article titled "The Fed's (Gulp) Nuclear Options" where one of the options was nominal GDP targeting.  I did not realize that the Fed doing its job was considered going nuclear.  All along the Fed should have either prevented or corrected the steep fall in nominal spending that took place in late 2008 and early 2009.  The central bank of Sweden was able to do so, but not the Fed.   It should never have come to this point.

MORE NGDP: Goldman Puts Out Another Note On The Hottest New Thing In Economics: This past weekend, Goldman said that the Fed should tilt its mandate way more towards creating jobs, and be willing to target a specific level of Nominal GDP. NGDP targeting has been a buzzy thing in economic circles for awhile, with academics like Scott Sumner arguing that it could be the solution to our economic problems, but Goldman's endorsement of it has taken it to the next level. Everyone's talking about it, including, today Paul Krugman. Well, now Goldman is back for a second go round on this, building on Jan Hatzius previous note. This time its Jari Stehn, offering up a history lesson from Sweden, where in 1930 the government made an effort to targe the price level. Here's the quick and dirty history from Stehn:

Momentum building for NGDP targeting - AS AN avowed enthusiast for the idea of changing central banks' goals to nominal GDP targeting, I would be remiss in not calling attention to a new Goldman Sachs research note produced by Jan Hatzius and Sven Jari Stehn. I'm unable to link, unfortunately, but the authors argue that NGDP targeting is consistent with the Fed's dual mandate and if implemented credibly would improve economic performance. The note includes an analysis of the policy, the outcome of which you can see at right (H/T Matt Yglesias). The authors make an argument I've voiced here at Free exchange: that the announcement of an explicit target is likely to substantially increase the potency of asset purchases (similarly, asset purchases increase the credibility of the target announcement). In their simulation, unemployment falls rapidly when asset purchases are combined with an NGDP target, while inflation remains well under control. Unfortunately, the Fed is unlikely to move quickly to adopt the policy, for a couple of reasons, both related to the central bank's conservatism.

About That Goldman Sachs Endorsement of NGDP Targeting -- Here it is and it is really good.  One might think they were reading a market monetarist policy paper.   Matthew Yglesias provides further comments on the piece as does Ryan Avent.   Here is my initial response to the piece. 

Getting Nominal - Krugman - “Market monetarists” like Scott Sumner and David Beckworth are crowing about the new respectability of nominal GDP targeting. And they have a right to be happy. My beef with market monetarism early on was that its proponents seemed to be saying that the Fed could always hit whatever nominal GDP level it wanted; this seemed to me to vastly underrate the problems caused by a liquidity trap. My view was always that the only way the Fed could be assured of getting traction was via expectations, especially expectations of higher inflation –a view that went all the way back to my early stuff on Japan. And I didn’t think the climate was ripe for that kind of inflation-creating exercise. At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.

What Needs to Happen for the Fed to Successfully Target the Level of Nominal GDP?, - If you are--as we are right now--in a liquidity trap, with extremely interest-elastic money demand, then expansionary monetary policy that involved the Federal Reserve buying financial assets for cash:

  1. will have next to no effect on the short-term safe nominal interest rate--it's already zero.
  2. will decrease the long-term safe nominal interest rate to the extent that your open-market operations today change people's expectations of what your target for the short-term safe nominal interest rate in the future.
  3. will decrease the long-term safe real interest rate to the extent that it decreases the short-term nominal interest rate and changes expectations today of what inflation will be in the future.
  4. will decrease the long-term risky real interest rate to the extent that it decreases the long-term safe real interest rate and to the extent that the assets purchased for cash by the Federal Reserve free up the risk-bearing capacity of private investors and lead to a reduction in risk spreads.
  5. will increase spending to the extent that it decreases the long-term risky real interest rate and to the extent that private spending responds positively to decreases in the long-term risky real interest rate.

Lots of steps here, some of which may well be weak..

Krugman Advocates Nominal GDP Targeting - Krugman now supports nominal GDP targeting, citing market monetarists, Scott Sumner and David Beckworth. His view of the market monetarism, however, was somewhat critical.  My beef with market monetarism early on was that its proponents seemed to be saying that the Fed could always hit whatever nominal GDP level it wanted; this seemed to me to vastly underrate the problems caused by a liquidity trap. My view was always that the only way the Fed could be assured of getting traction was via expectations, especially expectations of higher inflation –a view that went all the way back to my early stuff on Japan. And I didn’t think the climate was ripe for that kind of inflation-creating exercise. Seemed to be saying? Sumner, especially, has been emphasizing the importance of expectations since the day he started his blog, and long before. Further, he probably writes about how it is important to generate expectations of higher inflation more often than he writes about how it is important to generate expectations of higher level of nominal GDP.   While it is true that expectations of higher inflation in the future can raise nominal GDP now, and could also create inflation now, expectations of a higher level of real output in the future can also raise nominal GDP now, and create more real output now.

Nominal GDP Level Targeting Links - Since nominal GDP level targeting seems to be really taking off now, I thought it would be useful to provide some links to past discussions here and elsewhere on the topic. Let me know in the comments section other pieces I should add to the lists.

E(NGDP) level-path targeting for the people of the concrete steppes -"But what concrete steps will the Fed actually take to raise Nominal GDP? Can anyone tell me that?" I must have heard that question a hundred times over the last couple of years. And a dozen more times in the last day, ever since Paul Krugman endorsed the proposal to target NGDP. So this is written for the people of the concrete steppes. First off, you aren't thinking about this right. You want me to tell you a story in which the central bank pulls a lever, and that lever causes another lever to move next, followed by another lever, then another, spelling out a causal chain from beginning to end, where the end is a higher level of NGDP. But economics isn't like that. Because people aren't like that. Sometimes the future causes the present, because people's expectations of the future affect what they do in the present. Sometimes it's not even what will happen in the future that causes the present. It's people's expectations of what would happen in future if they behaved differently today that causes them to behave the way they do today. I switch to snow tires in the Fall because I expect I would have an accident in the Winter if I didn't. It's the threat of an accident that makes me put on snow tires. I don't actually expect to have an accident.

DeLong on Nominal GDP targeting - DeLong commented on Krugman's support of nominal GDP targeting. (He had already advocated the regime change, along with quantitative easing and negative interest rates on reserve balances.)  The thrust of his comment is that money creation and fiscal stimulus should be used together. Either monetary policy alone or fiscal policy alone have doubtful consequences, but by creating money and having the government spend it, there is no doubt it can work. I am much more confident that monetary policy can do it alone.  What are his doubts? What is the market process he describes? If you are--as we are right now--in a liquidity trap, with extremely interest-elastic money demand, then expansionary monetary policy that involved the Federal Reserve buying financial assets for cash: will have next to no effect on the short-term safe nominal interest rate--it's already zero.

What is Nominal GDP targeting ? - I tried to resist asking "what does "Nominal GDP targeting even mean." I managed, but now Krugman is burying the hatchet and I am digging it up. So what is the proposal ? That the Fed have a target for 2012 nominal GDP or first quarter of 2012 nominal GDP ? Even if it isn't measured, the Fed could try to get the November 2011 nominal GDP it wants. As far as I know, advocates of nominal GDP targetting don't even acknowledge this question. I think Krugman understates his case when he claims that the Fed can't target nominal GDP when we are in a liquidity trap. I would define targeting X as making the conditional expected value of X equal to the target. There will be a disturbance, but if the expected value is different from the target no matter what one does, then on can't target X. Do quasi-monetarists really think that the Fed can make the expected value of tomorrow's nominal GDP whatever it wants ?  I think it shows that they just don't think about what monetary policy can and can't do. The Fed can move the Fed funds rate very fast. The Fed can change the money supply quickly at least if it wants to reduce it or we are not in a liquidity trap. Nominal GDP can only jump if prices are flexible. Monetary policy is effective because they are sticky. We have a problem.

Could monetary policy mitigate the real effects of oil shocks? -- Michael Levi (hat tip:Marginal Revolution) and Jeremy Kahn are among those who recently rediscovered some earlier research by Ben Bernanke and others that concluded that the economic downturns that followed historical oil price shocks could have been avoided if the Fed had followed a more expansionary monetary policy at the time. Here I call attention to some subsequent research that took another look at their evidence and reached a different conclusion. Big oil price increases such as occurred in 1973-74, 1979, and 1990 were each followed by economic recessions in the United States. In a study published in Brookings Papers on Economic Activity in 1997, Ben Bernanke and Mark Watson (professors at Princeton University at the time) and Mark Gertler of New York University concluded that these economic downturns could have been avoided if the Fed had not allowed the fed funds rate to rise following the oil shocks. The figure below reproduces one of the important findings from their paper.

Surprise Anti-Austerians - Krugman - It is indeed a mixed-up, muddled-up, shook-up world. Right now, the two most prominent institutions calling for an end to the disastrous turn to short-run austerity are … Goldman Sachs and the International Monetary Fund. Brad has written about the Goldman memo, which calls for a nominal GDP target — that is, a future dollar value of GDP — that would in effect both promise a significantly higher inflation rate over the medium term and require very large quantitative easing. We need to be careful about this: it’s a proposal from the excellent Jan Hatzius, not official GS policy. But still. Meanwhile, the IMF special report for the G20 (pdf) is essentially a declaration that the focus on universal austerity was wrong, wrong, wrong. What’s going on, I believe, is that serious economists — Hatzius at Goldman, and Olivier Blanchard — are rightly frightened by the economic outlook. And those organizations that listen to the right people are trying to get the message out.

Monetary policy as threat strategy. Chuck Norris and central banks. » Central banks run monetary policy not so much by doing things, but by threatening to do things. If their threats are credible, we never observe them carrying out those threats, and we often observe them doing the exact opposite. A credible central bank is a bit like Chuck Norris. Chuck Norris simply looks at the target variable, and it moves to wherever he wants it to go. It looks like magic. But it works because nobody wants Chuck Norris to carry out his implicit threat. So he doesn't need to.  .We teach the monetary policy transmission mechanism like this: the central bank pulls a lever, and that lever pulls other levers, which eventually move the target variable in the direction the central bank wants to move. That's wrong. A credible central bank is exactly like Chuck Norris. It looks at the thing it wants to move, and the thing moves, and all the other levers fall into place where they should be. Causation runs backwards from the target variable. Credible central banks don't actually do anything. They just threaten to do things. But a credible central bank never needs to carry out its threats.

Fisher: Fed is giving Congress an excuse to do nothing - He's an inflation "hawk" who isn't worried about inflation, a former political candidate appalled by politics, a dissident who views himself as part of the team. An idiosyncratic figure, Richard Fisher1 has drawn attention lately as one of three members of the Federal Reserve's policymaking committee who have lined up against Chairman Ben Bernanke's steps to try to stimulate the economy. The three are a minority — Bernanke's side has prevailed with seven votes — but they represent the highest level of dissent at the Fed in nearly two decades. In a wide-ranging interview with The Associated Press, Fisher said his objections aren't with Bernanke, whom he describes as "an unbelievably decent human being."Rather, he argues that further efforts to lower interest rates won't do any good, will hurt people who need interest income and could threaten pension funds. And he says the Fed's actions give Congress an excuse to delay politically painful agreements on taxes and spending.

What is Wrong with This Statement? - According to the AP, Dallas Fed President Richard Fisher believes that the Fed's policies are making it easier for Congress to avoid hard choices:  "The more we offer accommodative monetary policy," said Fisher, president of the Federal Reserve Bank of Dallas, "the less incentive they have to pull their socks up and do what's right for the American people." What is wrong with this statement?  The answer is that Richard Fisher has the causality backward.  The very reason Congress has been running deficits in the first place that need to be addressed is because the Fed failed to first prevent and then afterwards correct the collapse in nominal spending that took place in 2008-2009.  This failure to return nominal spending to its trend path increased the cyclical budget deficit and opened the door for the structural budget deficit brought about by President Obama's fiscal stimulus.   If Fisher really wants to create an economic environment conducive to fiscal consolidation, then the Fed must first restore robust nominal spending. If the Fed were to tighten, as Fisher currently desires, then Congress will be facing an even bigger budget deficit to reign in. There is no way around this reality.

Why Occupy Wall Street Needs to Shift Its Focus on the Federal Reserve - The Government Accountability Office (GAO) just released its findings from their second audit of the Federal Reserve revealing a well-established revolving door and numerous conflicts of interest between the Fed and top banking executives, most of whom sit on its board. As revealed in The Sanders Report, which should probably be mandatory reading for the Occupy Wall Street movement, specific board members directly profited from removing restrictions or giving certain banks access to cheaper Fed loans while simultaneously holding stock in that company. Although such actions would've normally been restricted by the Fed's own internal regulations to prohibit such obvious conflicts of interest, waivers were issued instead to certain individuals allowing them to maintain their financial relationships with companies like the most-beloved Goldman Sachs.What is most troubling, however, aside from the numerous incidents cited in the report, is how completely non-transparent the Fed is when compared to other central banks around the globe. Here’s an astonishing list of examples from The Sanders Report mentioned above:

Awkward History Lessons - Ron Paul, a Republican congressman running for president, indicts the Federal Reserve in today's Wall Street Journal. Surely there's no shortage of mistakes that can and should be leveled at the central bank. Institutions run by mere mortals are nobody's idea of perfection. Yet there's also some progress to report. In contrast to the early 1930s, the Fed's response to the financial crisis was better this time. That's a low standard, but at least we don't have 25% unemployment. Better, but not good enough. But as Paul sees it, the true solution is removing the central bank from the system. All will be well, he suggests, once we let the market take over the delicate task of managing the nation's money supply. The historical precedent for this idea, however, is thin, to say the least. Paul's advice, of course, is a cute way of favoring a gold standard, although he never mentions the metal in this article. It sounds like a reasonable idea on the surface perhaps, but there are some awkward questions that never seem to come up for the gold bugs. But inquiring minds want to know how the anti-Fed crowd would respond to a surge in money demand?

Federal Reserve and Bank of America Initiate a Coup to Dump Billions of Dollars of Losses on the American Taxpayer - Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers. Yves Smith notes: If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble. Professor Black provided a “bottom line” summary in a separate email:

    • 1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch)  to the Bank of America, which is insured by the public
    • 2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees)
    • 3. Any marginally competent regulator would say “No, Hell NO!”
    • 4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A
    • 5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs))
    • 6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.

Karl Denninger writes: So let’s see what we have here. Bank customer initiates a swap position with Bank.  In doing so they intentionally accept the credit risk of the institution they trade with. Later they get antsy about perhaps not getting paid.  Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it. This effectively makes the depositor the “guarantor” of the swap ex-post-facto. That the regulators are allowing this is an outrage.

Bank of America Bosses Find Friend in the Fed - One of the reasons so many Americans are ticked off at the Federal Reserve is a lingering sense that it puts big banks’ interests above those of ordinary taxpayers. The news that the Fed is taking Bank of America Corp. (BAC)’s side in a dispute over where to park some of the company’s holdings only reinforces that impression.  Bank of America, which got hit with a credit- rating downgrade last month by Moody’s Investors Service, has moved an undisclosed amount of derivative financial instruments from its Merrill Lynch unit to its biggest commercial-banking subsidiary. The latter is loaded with insured deposits and has a higher credit rating than Merrill or the parent company.  The Federal Deposit Insurance Corp. is objecting to the transfers. That part is easy to understand: More risk for the retail lender means more risk for FDIC-insured deposits, which ultimately are backstopped by the U.S. government.  The Fed, however, has signaled to the FDIC that it favors the transfers. Shifting the derivatives to the commercial lender may let Bank of America avoid collateral calls and termination fees stemming from the rating downgrade. In short, the Fed’s priorities seem to lie with protecting the bank-holding company from losses at Merrill, even if that means greater risks for the FDIC’s insurance fund.

Should Bankers Serve on Federal Reserve Bank Boards? - A new Government Accountability Office report to Congress that investigates the central bank has some not-so-flattering conclusions. Some regional Fed bank board members are also bankers, which creates a potential conflict-of-interest. Of course, anyone who follows the Fed already knew, so this news isn't all that shocking. Still, the finding raises a question: should such conflicts-of-interest trouble us, and if so, how should they be remedied? Persistent Fed critic Sen. Bernie Sanders (I-VT) seized on the report to cite these conflicts-of-interest. An amendment by Sanders to the Dodd-Frank financial regulation bill actually called for this investigation in the first place. Here are some of the points he makes in a statement he released on Wednesday:

  • The GAO identified 18 former and current members of the Federal Reserve's board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis including General Electric, JP Morgan Chase, and Lehman Brothers.
  • Many of the Federal Reserve's board of directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. These board members oversee the Federal Reserve's operations including salary and personnel decisions.
  • Under current regulations, Fed directors who are employed by the banking industry or own stock in financial institutions can participate in decisions involving how much interest to charge to financial institutions receiving Fed loans; and the approval or disapproval of Federal Reserve credit to healthy banks and banks in "hazardous" condition.

Conflicts Of Interest Abound At The Federal Reserve, Report Finds - When the Federal Reserve was handing out emergency loans during the financial crisis, some of the money didn't have to travel very far. More than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the crisis, according to a new report from the Government Accountability Office. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government. Dean Baker, co-director of the Center for Economic and Policy Research and a HuffPost blogger, said that the report's findings reflected "an institutionalized conflict of interest" within the Federal Reserve. "We don't let Comcast appoint people to the FCC. We don't let Pfizer appoint people to the Food and Drug Administration,"  All in all, the watchdog agency found 18 current or former Federal Reserve board members who had ties to institutions that benefited from the Fed's emergency lending, including directors and executives from General Electric, JPMorgan Chase and Lehman Brothers.

Quelle Surprise! GAO Finds the Fed is a Club of Backscratching, Well Connected, White Bankers - - Yves Smith - The GAO released a report yesterday that provided some anodyne but nevertheless useful confirmation of many of the things most of us knew or strongly suspected about the Fed: it’s a club of largely white male corporate insiders who do a bit too many favors for each other. But the GAO seemed peculiarly to fail to understand some basic shortcomings of its investigation. Bernie Sanders’ office published a useful list of highlights, such as:The GAO identified 18 former and current members of the Federal Reserve’s board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis including General Electric, JP Morgan Chase, and Lehman Brothers. Many of the Federal Reserve’s board of directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. These board members oversee the Federal Reserve’s operations including salary and personnel decisions. Under current regulations, Fed directors who are employed by the banking industry or own stock in financial institutions can participate in decisions involving how much interest to charge to financial institutions receiving Fed loans; and the approval or disapproval of Federal Reserve credit to healthy banks and banks in “hazardous” condition. The Federal Reserve does not publicly disclose its conflict of interest regulations or when it grants waivers to its conflict of interest regulations.

Show the Fed more forbearance - FT - A few years ago, it would have been remarkable for any senior US politician to demand the head of the chairman of the US Federal Reserve. During last week’s Republican debate, almost all of the hopefuls cheerfully called for Ben Bernanke’s. Fed watchers remind us that populist anger against America’s central bank rises and falls with the business cycle. At the height of the late 1990s boom Alan Greenspan was hailed as a magician. During the early 1990s, the future “maestro” was pilloried as a monetary scrooge. That was nothing to the venom Paul Volcker received in the early 1980s when he killed inflation with a drastic round of high interest rates. At one stage the Fed was besieged by a French-style protest of farmers on tractors.  Why should it be tougher for Mr Bernanke? There are three reasons to worry he is in greater danger than his predecessors. The first is of scale and intensity.  Second, Mr Bernanke faces an unfamiliar strain of public anger.  But it is the third difference that is most troubling. However much Mr Volcker was reviled, it was clear what he needed to do. Mr Volcker took charge at a time of double digit inflation. Anyone wanting to slay it agreed on the obvious course of action. The remedy was draconian. But at least it was straightforward. Mr Bernanke faces a much more complex quandary.

A Ticker-Tape Parade? - Mark Thoma - This caught my eye: Simon Johnson ... said that a current member of the Fed told him he was “disappointed there hadn’t been a ticker-tape parade” for policymakers who, in the central banker’s mind, had saved the economy. Suppose the fire department fails to do adequate inspections, and a big fire breaks out because of it. If that same fire department puts it out and saves the day, do we cheer them for cleaning up their own mess? I think not.

Jim Rogers: Bernanke Is Lying to Us - Jim Rogers tells it like it is. In the EPJ Daily Alert, I have been pounding away at the fact that no new QE is required, that the money supply (M2) is exploding. Rogers correctly points to this money growth in the clip below. Also, Larry Kudlow is correct in his view that the European Central Bank is likely to join the Fed in the money printing. If they do, it will be the first time ever that the world could face a massive global inflation. Kudlow is correct that the stock market will skyrocket under these conditions and Rogers is correct that commodities will soar. Prepare yourself for climbing prices like you have never seen before, to differing degrees both Rogers and Kudlow know what is coming.

CHART OF THE DAY: Inflation Is A Thing Of The Past - People who blast the Fed for creating raging inflation or what not don't know what they're talking about. Doug Short put together this fantastic chart of inflation going all the way back to 1872. It couldn't be more obvious: Inflation just isn't that big of a deal either in numerical terms, or from any historical perspective. Policymakers have gotten excellent at keeping things tame, both on the upside and on the downside.

Fed's Evans suggests raising inflation target until unemployment falls below 7% - From Chicago Fed President Charles Evans: The Fed’s Dual Mandate Responsibilities: Maintaining Credibility during a Time of Immense Economic Challenges. In his speech, Evans notes two significant Fed policy errors - one in the 1970s that led to inflation, and one in the 1930s that led to deflation. He argues the current situation is more like the 1930s. Here is an excerpt on a proposed policy, from Charles Evans:  I believe that we can substantially ease the public’s concern that monetary policy will become restrictive in the near to medium term and, hence, reduce the restraint in expanding economic activity. This can be done by clearly spelling out in our policy statements the conditionality of our dual mandate responsibilities. What should such a statement look like? I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. Such policies should enable us to make progress toward our mandated goals. But if this progress is too slow, then we should move forward with increased purchases of longer-term securities. We might even consider a regime in which we reevaluate our progress toward our policy goals and the rate of purchase of such assets at every FOMC meeting.

Expectations and the Economy - Dennis Lockhart - Speech Key Points:
• Atlanta Fed President Dennis Lockhart said that economic data in the first part of the year generally were weaker than forecasters anticipated but that more recent data had exceeded most forecasters' expectations.
• Lockhart interprets recent data and anecdotal reports as signaling a gradually improving economy. Though risks remain, Lockhart does not anticipate a double-dip recession in the absence of a significant negative shock to the economy.
• Lockhart believes that it would go a long way toward "clearing the air" of economic uncertainty if the European debt situation is stabilized and put on a believable resolution path and if the supercommittee delivers a credible fiscal plan accepted by Congress.
• Lockhart cautioned against perceptions that enduring weakness or recession is inevitable.

Great Recession may not yet be even half over, study says  - A new study prepared for a Federal Reserve conference suggests the Great Recession may not even be half over yet.  The paper by David Papell and Ruxandra Prodan of the University of Houston, done for a Federal Reserve Bank of Boston conference today and tomorrow, looks at whether several recessions that are linked to financial crises, like the last slump, lead to a permanent loss in potential gross domestic product, or if it returns in time to its trend. And if it returns, is it a longer period than recoveries that follow recessions not linked to such crises?  The answer may be welcome news on the one hand – it should return to its trend – but on the other hand suggests a full rebound is years away.  They studied The Great Depression in the United States, severe and milder crises in advanced economies, severe crises in emerging markets and post-war slumps in the U.S. and other advanced markets.  "The preponderance of evidence for episodes comparable with the current U.S. slump is that, while potential GDP is eventually restored, the slumps last an average of nine years," they write. "If this historical pattern holds, the Great Recession that started in 2007:4 will not ultimately affect potential GDP, but the Great Slump is not yet half over."

HUSSMAN: The Recession Is Still Coming, And The Europe Mess Has Barely Gotten Started - In his latest note, John Hussman spills some cold water. From my perspective, Wall Street's "relief" about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones. Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession. As Lakshman Achuthan notes on the basis of ECRI's own (and historically reliable) set of indicators, "We've entered a vicious cycle, and it's too late: a recession can't be averted." Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones. The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months. Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness. As a result, there is sometimes a "denial" phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it. We saw exactly that sort of pattern prior to the last recession.

Out of options. Even unprecedented central bank intervention can’t save the global economy now - PDF - IF THERE IS any kind of consensus that has emerged in the past year about the global economy and financial markets, it is that there is too much debt in the system. The last recession unfortunately never did expunge all the imbalances, especially when it comes to the level of overall debt the global economy can truly support. Governments around the world protected their banks, and in so doing issued tremendous amounts of triple-A-rated debt that in many cases is either no longer ranked that pristinely nor being treated that way. In this symbiotic relationship, the banks that were saved by the governments ended up buying a whole lot of the debt of these sovereigns as they issued more and more to save the financial system and the economy. And the end result was that over the past three years, total OECD net government debt relative to GDP soared 30 percentage points to more than 100%. Both the scope and size of this overhang is unprecedented. Now we have a situation where this government debt is being downgraded or losing its value and the banks that own it are in a position where they have to raise expensive capital yet again. The problem this time is not about mezzanine CDOs on bank balance sheets, it is about the deteriorating quality of government paper on bank balance sheets, especially in Europe, although clearly the rapid declines in US bank share prices attest to global contagion pressures. Anyone who thinks this is contained in Europe slept through the last financial crisis after Lehman Brothers failed. At issue now is whether or not the indebted countries can grow their way back to a point where they can properly service these new extraordinary debt levels and begin to chip away at reducing them. To avoid downgrades, governments around the world are tightening their fiscal belts as the global economy starts to sputter – and at a time when central banks either don’t want to use any more gunpowder to kick-start growth or simply don’t have any left.

Macroeconomic Advisers: US GDP Rose 0.4% In August - It's still too early to dismiss the threat of a new recession, but if there's macro trouble ahead it's not obvious in the big picture for August. Macroeconomic Advisers released its latest monthly estimate of U.S. GDP to the public yesterday and reports that the economy expanded 0.4% in August. That's down from July's 0.9% pace, and so the question is whether September's numbers will reflect a further slowing in the broad trend? Answering that question still requires guesswork since all of September's numbers haven't been released yet. (The official government GDP report is calculated quarterly and the first Q3 estimate is scheduled for release on Oct. 27.) What we do know, based on the data so far, is that the economy grew in August, pushing Macroeconomic's estimate of GDP to the highest level since the Great Recession ended in June 2009.

Is the Double Dip Drifting Away?  One of the items that many of the forecasters warning of a double dip held up as evidence was the drop in Philadelphia Fed's manufacturing index in September. It showed a reading of -17.5, which is definitely pretty bad. While the index, like most indexes, does generally move in step with the overall economy, the Philadelphia Fed's coverage is a relatively narrow slice of the country (most eastern Pennsylvania and New Jersey). Since this reading was out of line with most other data, it seemed more likely that the Philadelphia Fed number was an anomaly rather than it was picking up information not seen elsewhere. The October Philadelphia Fed index was released yesterday. The reading was a moderately healthy 8.7. None of this should be seen as celebratory. The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.

Fed Watch: On That Double-Dip - Dean Baker admonishes those concerned about a double-dip:...The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work. Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn't and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured. As I have previously stated, the economy was clearly not in recession in the third quarter, and therefore near-term data would certainly not be consistent with a recession. Indeed, this has been the case. If you expected the bottom to fall out of the economy in the fall, you have been disappointed. Moreover, the primary reason to believe in a reasonably high probability of recession had little to do with the US data to begin with. To be sure, the overall low rates of growth in this "recovery" does imply that downward negative shocks will push us more easily into recession, and this suggests we may face an increase in recession scares in the years ahead. That said, the lead character was and remains the European situation.

Is the growth tide turning? - Atlanta Fed's macroblog - It has been a tough year for forecasters, as the Atlanta Fed's President Dennis Lockhart explained in a speech delivered Tuesday evening: "The basic story of the first half of this year was one of disappointment versus expectations. At the beginning of the year, the consensus forecast had gross domestic product (GDP) growth for 2011 in the range of 3 to 4 percent. Though the Atlanta Fed's forecast was at the lower end of that range, we generally shared the view that the recovery was firmly established…"As the summer progressed, the data surprises were unrelenting and on the negative side of expectations. By the time of the early August FOMC meeting it was clear to my Atlanta Fed colleagues and me that we had to rethink our position. The momentum of the economy looked a lot weaker than was our assessment earlier in the summer."That story is well-captured by a picture of the evolution of Blue Chip consensus forecasts over the course of the year:

September Leading Economic Index - The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.2 percent in September to 116.4 (2004 = 100), following a 0.3 percent increase in August, and a 0.6 percent increase in July. Says Ataman Ozyildirim, economist at The Conference Board: “September data shows moderating growth in both the LEI and the CEI. The weaknesses among the leading indicator components have become slightly more widespread in September. Moreover, the CEI suggests current economic conditions have been slow, with weak gains in all four components over the past six months. The slow pace in the LEI suggests a growing chance that this sluggish economy is going to be here for a while.”

Leading indicators edge up 0.2 percent in September, signaling modest growth in future - A gauge of future economic activity edged up at a slower pace in September, signaling only modest economic growth in coming months. The Conference Board reported Thursday that its index of leading economic indicators rose 0.2 percent in September. It was the fifth consecutive gain but was weaker than increases of 0.3 percent in August and 0.6 percent in July. For September, the Conference Board said that the biggest positive contribution to the index came from the difference in short-term and long-term interest rates. Other positive factors were the growth in the money supply, supplier delivery times, the index of consumer expectations and new orders for consumer goods and materials. The biggest negative factor for the index in September was weakness in applications for building permits followed by new orders for nondefense capital gods, stock prices and weekly claims for unemployment benefits.

Conference Board sees 50 percent chance of recession - The U.S. economy faces a 50 percent chance of recession despite modest gains in a leading index of activity, a private sector research group said on Thursday. The Conference Board's leading index rose 0.2 percent last month, a smaller rise than analysts had forecast in a Reuters poll, following a 0.3 percent gain in August.  Still, the group's economists warned the soft pace of growth in the index was consistent only with an anemic expansion, insufficient to put a dent in the nation's 9.1 percent jobless rate. "This sluggish economy is going to be here for a while,"

Fed's Pianalto: US Seeing 'Painfully Slow' Economic Recovery - A U.S. Federal Reserve official believes economic activity picked up during the third quarter, although she still sees a tepid rate of advancement over the course of next year. "After lackluster output growth in the first half of this year, the third quarter looks like it was somewhat better, with growth that I estimate to be roughly 3%. But overall, the economy is still underperforming relative to past recoveries," Federal Reserve Bank of Cleveland President Sandra Pianalto said Thursday. "We need a growth rate of around 2% just to accommodate the new entrants into the workforce," the official said. "In order for the U.S. economy to make substantial progress on reducing unemployment, economic growth clearly needs to accelerate," Pianalto said. "Unfortunately, I don't expect the pace of growth to pick up very soon; my outlook for real GDP [gross domestic product] growth in 2012 is about 2 1.2%, on par with the past two years," the policy maker said.

Why The Economy Looks Like Expansion, Feels Like Recession… There's a great mismatch between the way people feel about the economy and many of the underlying trends. The sentiment says recession, but much of the underlying data suggest growth. The Thomson Reuters/University of Michigan measure of consumer sentiment, released Friday morning, showed consumer confidence fell and that consumers' expectations for the future are at their lowest level in 30 years. They're not the only ones worried. Lakshman Achuthan of Economic Cycle Research Institute, perhaps the most reliable forecaster on changes in the business cycle, recently told the Daily Ticker he believes a recession is unavoidable. And yet the numbers continue to tell the story of a grinding, continuing recovery that, in some ways, appears to be accelerating. Amid the rising gloom, the data flow in recent weeks has generally been positive. Retail sales, reported this morning, were up strongly in September, up 1.1 percent from August; August's figure was revised upwards. Compared with a year ago, retail sales are up 8 percent. They were led by strong car sales. After putting up a bagel in August, the economy added 103,000 payroll jobs in September, including 137,000 private sector positions. So what's going on? Is all the data fudged? Is it simply backward-looking information telling us a positive story?

America at Stall Speed? - Mohamed El-Erian - Judging from the skittishness of both markets and “consensus expectations,” the United States’ economic prospects are confusing. One day, the country is on the brink of a double-dip recession; the next, it is on the verge of a turbo-charged recovery. This situation is both understandable and increasingly unsettling for America’s well-being and that of the global economy.  As a result, there are now legitimate questions about the underlying functioning of the US economy and, therefore, its evolution in the months and years ahead.  Let us start with some simple aeronautic dynamics to describe the economic risks facing the American economy. For the Dreamliner to take off, ascend, and maintain a steady altitude, it must do more than move forward. It has to move forward fast enough to exceed critical physical thresholds, which are significantly higher than those for most of Boeing’s other (smaller) planes. Failure would mean succumbing to a mid-air stall, with tepid forward motion giving way to a sudden loss of altitude.  America’s economy today risks stall speed. Specifically, the question is not whether it can grow, but whether it can grow fast enough to propel a large economy that, according to the US Federal Reserve, faces “balance-sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook.”

The Data That the Economy is Not So Hot is Getting Harder to Ignore - Yves Smith - The propagandistic exhortation that we all need to need to learn to love or at least accept the crappy economy known as “the new normal” is starting to wear a bit thin. One of the things that has allowed the punditocracy to pretend that “the new normal” really isn’t all that bad are various myths that they get investors and sometimes the broader public to believe in succession or better yet simultaneously:  I don’t want to overdo what I call “mother in law research” which is basing your opinions on observations in your immediate environment, but the flip side is storied investor Peter Lynch was a great fan of precisely that sort of not-very-public intelligence. I’ve had two sightings in the last week that suggest the economy is trending downward more strongly than most experts believe.  My admittedly idiosyncratic datapoints align with other stories today. I’ve been skeptical of the view that consumer credit stress was on the mend, given how high unemployment is and how many firms have announced cutbacks (and that’s before you get to state and local budget, and therefore job, cuts). So I was not surprised by the Financial Times lead story today, “Fear Over US Mortgage Delinquencies.” Not only does it describe an increase in missed mortgage payments, but it also says some banks are seeing deterioration in payments on other types of consumer credit:

Number of the Week: GDP 6.7% Below Potential - 6.7%: The gap between U.S. GDP and its potential. It looks as if, despite everything, gross domestic product picked up in the third quarter, easing fears that the U.S. was on the cusp of another recession. But that doesn’t mean the economy is anywhere near where it needs to be. Economists expect Thursday’s GDP report from the Commerce Department will show the economy grew at a 2.7% annual rate in the third quarter. That would still leave economic output 6.7% below what the Congressional Budget Office estimates its potential is. In other words, in a world where employment and economic activity were as high as they could be without the economy running into inflationary trouble, the U.S. would be producing about $900 billion more in goods and services a year than it is now. Experts quibble about exactly where potential GDP is these days, and that’s especially true in light of all the damage the economy has suffered.  But even so, everyone agrees it is still much, much higher than what we’re getting now.

Time To Manage America’s Decline? -  Gideon Rachman had an eyebrow-raising piece in The Financial Times yesterday that is bound to cause outrage among some segments of American politics, and general discomfort for Americans as a whole. Essentially, he argues, it’s time for Americans to start talking about the consequences of our nation’s decline: Recently I met a retired British diplomat who claimed with some pride that he was the man who had invented the phrase, “the management of decline”, to describe the central task of British foreign policy after 1945. “I got criticised,” he said, “but I think it was an accurate description of our task and I think we did it pretty well.” No modern American diplomat – let alone politician – could ever risk making a similar statement. That is a shame. If America were able openly to acknowledge that its global power is in decline, it would be much easier to have a rational debate about what to do about it. Denial is not a strategy.

When policy makers become complacent - Rebecca Wilder - The prospects for domestic demand in the US are not bright. The labor market barely generates jobs and fiscal policy is a drag. Americans are consuming; but there’s unlikely sufficient nominal income growth to stabilize consumption expenditure growth at current levels. We’ve seen years where consumption growth outpaced income growth; but those periods of consumption were financed through leverage build – with financial conditions tight, the possibility of financing consumption outside the labor market is deteriorating (see the Banking and Finance section of the latest Fed Beige Book, not encouraging).Consumption growth cannot outpace income growth indefinitely. Unless we get a true policy kick (by fiscal policy, admittedly), the cyclical receovery could be a thing of the past. That was nominal growth – in real terms and on a historical basis, the story is just as bad. At 1.8% Y/Y in August is anything but miserable, especially given that its annual pace is 1 ppt below the long run average, 2.8% Y/Y. Long run real income growth is even worse at 2.5 ppt BELOW the long run average, 2.8% Y/Y.

What should have been different this time? The policy response… Ezra Klein wrote an excellent piece on policymaking in the face of the Great Recession and its aftermath. It’s a long piece with plenty to recommend, but I’ll just spend some time lingering over his reliance on the now-famous finding of Carmen Reinhart and Ken Rogoff (and the IMF) that recessions accompanied by financial crises tend to be followed by much slower and less robust recoveries.This finding is true and useful but far too often misinterpreted. There is nothing inherent in the economics of financial crises that makes slow recovery inevitable – they just require that policymakers figure out how to engineer more spending in their wake, same as in response to all other recessions.Rather, the real problem they pose to policymakers is that engineering such spending increases in the wake of financial crises often requires policy responses that seem unorthodox or radical relative to the very narrow range of macroeconomic stabilization tools that enjoy support across the ideological spectrum. To put this more simply – they require policymakers do more than watch the Federal Reserve pull down short-term interest rates.

Central Banks Sell Most U.S. Bonds Since 2007 as Funds Buy - (Bloomberg) -- International central banks are selling the most Treasuries since the credit crisis began just as institutional investors load up on U.S. government bonds. The Federal Reserve said its holdings of U.S. government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 billion in the last seven weeks, the most since August 2007. At the same time, bond mutual funds are adding Treasuries, banks have increased their holdings 45 percent in the past five years and the Fed has added $656 billion to its balance sheet this year. Rather than a referendum on the U.S.’s $1.3 trillion budget deficit and rising debt burden, sales by foreign policy makers may have more to do with supporting their currencies after the Brazilian real weakened 11 percent and Taiwan’s dollar lost 4.4 percent against the U.S. dollar since June. With economists forecasting inflation slowing to 2.1 percent in 2012 from 3.1 percent this year and the Fed’s commitment to keeping interest rates near zero, investors say the demand that pushed government bond yields to record lows last month will be sustained. “Demand will come from banks, insurance companies and from pension funds which are still massively underexposed to Treasuries,”

China Reduced Its Holdings of U.S. Treasuries by Most on Record in August - China, the largest-foreign lender to the U.S., reduced its holdings of Treasuries in August by the most in at least a decade as the stripping of America’s AAA credit rating by Standard & Poor’s sent yields to record lows. The world’s second-largest economy cut its position in U.S. government securities by $36.5 billion, or 3.1 percent, to $1.14 trillion, according to Treasury Department data released yesterday in Washington. At the same time, the data showed total foreign ownership increased 2 percent to a record $4.57 trillion as global investors sought a refuge from the financial market turmoil that followed the downgrade. The Treasury data also showed that holdings of Treasuries increased in the U.K. and Caribbean, where other nations often conduct purchases through. The move in China’s figure “is not a question of people disinvesting in the U.S. because there’s a negative macro outlook,” “This is a lot more technical in nature that has to do with dollar strengthening and opportunistic selling, given how low yields went.”

Debt, Deficits, and Modern Monetary Theory - Harvard International Review. An Interview with Bill Mitchell, Research Professor in Economics and the Director of the Centre of Full Employment and Equity at the University of Newcastle, Australia. The following is an edited transcript of the interview, conducted August 15, 2011. Thanks for joining us, Professor Mitchell. I wanted to talk with you today about Modern Monetary Theory (MMT)—the theoretical approach you’ve been integral in developing—and its relevance to current debates over public finances. I know you’ve been quite scathing of mainstream economic discourse. For example, you wrote in your blog recently that “the economics media is dominated with financial issues – too much public debt; debt ceilings; fiscal sustainability; sovereign risk; and all the rest of the non-issues that have taken center-stage.” Could you take a moment to explain why MMT renders these things non-issues?

Money for nothing? - Whenever I write anything about public expenditure and taxation, I’m likely to get someone commenting that Modern Monetary Theory has shown that a government with its own currency does not need taxation to finance public expenditure. I’ve tried a couple of responses to this, but now I think I can explain better why this argument is (a) wrong in terms of (what I understand to be) the central claims of MMT (b) regressive in terms of taxation policy (c) politically pernicious Starting at the beginning, as I read the central argument of MMT on fiscal policy, it is based on the idea of functional finance. The idea is that governments should first decide on the appropriate level of public expenditure, that is on the allocation of resources between public and private consumption and investment. Next, they should consider the requirements of macroeconomic policy to determine appropriate levels of money creation and issue of public debt. Finally, they should set the desired level of taxation as residual, to balance the sum of total income (seignorage+net debt+ tax revenue) and total expenditure.

What If We Paid Off The Debt? The Secret Government Report - Planet Money has obtained a secret government report outlining what once looked like a potential crisis: The possibility that the U.S. government might pay off its entire debt.It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system. You can read the whole thing here. (It's a PDF.) The report is called "Life After Debt". It was written in the year 2000, when the U.S. was running a budget surplus, taking in more than it was spending every year. Economists were projecting that the entire national debt could be paid off by 2012.   If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world. The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds. The U.S. Treasury bond is a pillar of the global economy. Banks buy hundreds of billions of dollars' worth, because they're a safe place to park money.

Making the Most of Our Financial Winter, by Robert Shiller - On a traditional farm, when winter comes and there’s no need for planting, fertilizing or harvesting, it’s time for infrastructure projects. Farmers fix their barns, build fences or dig wells — important tasks that could be done in any season if there weren’t more pressing jobs to do. If the winter is unusually long and cold, planting time is delayed and additional projects are undertaken. It’s all very simple and sensible: the idea is not to let people sit around idle, and to use down time to get important things done. The farm needn’t go into debt to do this. All able-bodied people on the farm are expected to contribute their labor, an imposition we can view as an informal tax. Later, everyone on the farm enjoys the benefits of all that work, by participating in the various benefits — the economic growth — it helps to create. In many respects, the American Jobs Act, proposed by President Obama but blocked in its full form by the Senate last week — would do much the same thing for the nation during the current economic winter. Parts of the plan would provide for projects like school modernization, airport and highway improvements, high-speed rail systems and redevelopment of abandoned and foreclosed-upon properties to stabilize neighborhoods. Those are the modern national equivalents of fixing the barn and building a fence. And these projects would be made possible by taxes.

Robert Shiller Joins the Build While It's Cheap Chorus - Nicely written, "Making the Most of our Financial Winter."  The novel part: In every depression the nation has faced, there have been proposals for the government to do just this: increase spending on public improvements to create jobs for the unemployed. An article in The St. Louis Post-Dispatch, written in 1877, during the 1873-79 depression, argued that the government could create a great many infrastructure jobs. “There are many needed improvements: the construction of the Texas and Pacific Railroad, the widening of the entrances to the Mississippi, the diking of its alluvial blanks, the clearing of obstructions from the beds of the great rivers of the West, the improvement of the harbors and rivers in the East, the completion of the post offices, custom houses, seawalls, breakwaters and other useful works of a national character,” the article said. Shiller goes on to argue for the balanced-budget aspect of infrastructure improvements in the President's American Jobs Act proposal.  I would take that, as well as add a zero to the proposals -- they are an order of magnitude too small -- and borrow to get them done while we are in our financial winter. 

AARP to Super Committee: Screw Our Grandkids Or Else! - I find this AARP ad campaign so offensive.  They threaten policymakers with their 50 million votes if any of them dares to include reforms to Social Security or Medicare as part of longer-term deficit reduction.  AARP’s point?  From their website touting the ad: AARP’s new national television ad tells lawmakers to cut waste and tax loopholes, not Social Security and Medicare. It urges lawmakers not to treat seniors like line items in a budget and lets them know that 50 million seniors are counting on them to protect their benefits. Cuts to Medicare and Social Security benefits could:

  • dramatically increase health care costs for seniors and future retirees.
  • threaten seniors’ access to doctors and hospitals.
  • reduce the benefit checks seniors rely on to pay their bills.

Why do I hate this ad?  For the same reasons in this statement: “Since hollowing out the rest of the budget to pay for expanding entitlements would result in more uninsured, undereducated and unemployed Americans, AARP has taken an approach which can only and honestly be described as generational warfare.  By its actions AARP has put at risk the strong inter-generational support for Social Security and Medicare.”

Super Committee Keeps Negotiations Under Wraps - The congressional super committee tasked with reshaping the social contract between the government and the American people has not had a public meeting since the middle of last month. The next public hearing, meanwhile, is scheduled for October 26th, more than a month after last one was held. On Wednesday, the Gang of Six, which also conducted much of its deliberation behind closed doors, met privately with the super committee members.  As the panel's opacity becomes more conspicuous, centrist advocates have begun to defend the necessity of shielding the public from its decision-making process. "Private meetings are essential to give the committee’s six Republicans and six Democrats the freedom to step away from party orthodoxies, conduct serious negotiations and search for common ground, rather than engage in political posturing," wrote Jordan Tama in a widely read New York Times op-ed Wednesday. The fundamental problem that the committee faces is that it is attempting to pass legislation that is widely opposed by the American people. Large majorities are against cutting Social Security, Medicare, Medicaid or other elements of the social safety net. There is similarly little appetite for significant tax increases on the middle class. The only deficit cutting provisions that are palatable to broad swaths of the American electorate -- cuts to the Pentagon and tax hikes on the wealthy -- are fiercely opposed by key power centers in Washington.

Supercommittee’s lack of progress on debt reduction raises alarms on Hill - With a Thanksgiving deadline fast approaching, a powerful congressional panel devoted to debt reduction1 is running in rhetorical circles, unable to break the impasse over taxes 2that has long blocked aggressive action to tame the national debt. Though the committee’s 12 members have been meeting for nearly two months in closed-door sessions, lawmakers, aides and others involved in the process say they have yet to reach consensus on the most basic elements of a plan to restrain government borrowing. There is no agreement on the scope of their ambitions: Should they aim to meet a savings target of at least $1.2 trillion over the next decade or “go big” with savings of $4 trillion or more? Nor is there agreement on a benchmark against which to measure those savings. And while individual ideas for savings abound, the committee has yet to assemble a comprehensive framework that would demonstrate its ability to produce a plan of any size before the Nov. 23 deadline. Committee members say there is still time to cut a deal and have congressional budget analysts assess it. But the lack of progress is raising alarms on Capitol Hill and beyond as lawmakers and other observers grow increasingly worried that the panel is running out of time.

K Street money flowing into deficit panel - Members of the deficit-reduction supercommittee have raised hundreds of thousands of dollars from special-interest groups, including a significant chunk from healthcare interests that want the panel to fail. Healthcare political action committees gave more to the deficit panel members than political action committees (PACs) representing energy, defense and agriculture interests, which could also be under the knife, according to fundraising reports filed with the Federal Election Commission (FEC). Rep. James Clyburn (S.C.), the third-ranking member of the House Democratic leadership, does not sit on any regular committees with jurisdiction over the health industry, but has raised more than $57,000 from healthcare-related PACs since his appointment to the debt supercommittee. Some of his contributions come from interests that want to minimize cuts to Medicare and Medicaid, such as the American Hospital Association, HealthSouth Corp., DaVita Inc. — which provides kidney dialysis treatment — and HCR Manor Care, which specializes in assisted-living care. Other supercommittee members on both sides of the aisle have won contributions from healthcare interests since being named to the panel. Hospitals, medical-device manufacturers and home-care experts in general would prefer that the supercommittee fail to reach a deal, say lobbyists familiar with the health industry’s strategy toward the panel. An impasse would trigger $1.2 trillion in automatic cuts to defense and non-defense programs, including a 2 percent cut to Medicare, but these healthcare groups believe this would result in smaller cuts than a deal.

Tom Ferguson: Congress is a “Coin Operated Stalemate Machine” - Yves Smith - Readers may recall that we discussed a Financial Times op ed by University of Massachusetts professor of political sciences and favorite Naked Capitalism curmudgeon Tom Ferguson which described a particularly sordid aspect of American politics: an explicit pay to play system in Congress. Congresscritters who want to sit on influential committees, and even more important, exercise leadership roles, are required to kick in specified amounts of money into their party’s coffers. That in turn increases the influence of party leadership, since funds provided by the party machinery itself are significant in election campaigning. And make no doubt about it, they are used as a potent means of rewarding good soldiers and punishing rabble-rousers A new article by Ferguson in the Washington Spectator sheds more light on this corrupt and defective system. Partisanship and deadlocks are a direct result of the increased power of a centralized funding apparatus. It’s easy to raise money for grandstanding on issues that appeal to well-heeled special interests, so dysfunctional behavior is reinforced. Let’s first look at how crassly explicit the pricing is. Ferguson cites the work of Marian Currander on how it works for the Democrats in the House of Representatives:

Pentagon's nightmare -- What's the easiest way to scare the biggest, baddest fighting force on the planet? Budget cuts. Already facing a $350 billion reduction in funding over the next decade, top Pentagon officials are worried that number could rise to $1 trillion. The problem? The debt super committee1 and gridlock on Capitol Hill. A product of the debt ceiling deal, the committee must cut at least $1.5 trillion in debt from the overall federal budget over 10 years. If it fails to do that or it deadlocks, automatic cuts will be triggered at the Pentagon. Dubbed "the trigger," defense cuts were supposed to force lawmakers to compromise on debt reduction, acting as a powerful and politically unthinkable deterrent. But, Washington being Washington3, the committee appears to be making precious little progress. Defense Secretary Leon Panetta is worried. Defense spending: Slaying the sacred cow4 "It will truly devastate our national defense," Panetta told lawmakers last week. "We will have to hollow it out ... I don't say that as scare tactics. I don't say it as a threat. It's a reality."

Has the US Defense Department killed a million Americans since 2001? -- US policy, for better or worse, is focused on  the idea of Value of a Statistical Life. Typically a policy that reduces  risks of death will be approved if the cost per life saved is below $5million, and not otherwise.  (There are similar numbers applied to publicly funded health care services, prescription  drugs and so on, usually per year of life saved).  A striking thing I found out is that anti-terrorism policies of the Department of Homeland Security are subject to  the same benefit-cost requirements as EPA  and Transport. But Homeland Security is only one way  the  US  government spends money with the aim of protecting Americans against attacks from terrorists and other enemies. Defense spending is far bigger and not subject to BCA, even though money spent on defense is money that can’t be spent on reducing terrorism risk through DHS or more reliably on reductions in environmental, health and transport risk.  The ‘peacetime’ defense budget is around $500 billion a  year, and the  various wars of choice have cost around $250 billion a  year for  the last decade (very round  numbers here). Allocated to domestic risk reduction, that  money would save 150 000 American lives a year.

The Austerity Death-Trap - Robert Reich - Can we just put ideology aside for a moment and be clear about the facts? Consumer spending (70 percent of the economy) is flat or dropping because consumers are losing their jobs and wages, and don’t have the dough. And businesses aren’t hiring because they don’t have enough customers. The only way out of this vicious cycle is for the government – the spender of last resort – to boost the economy. The regressives are all calling for the opposite. But even without these hare-brained Republican plans, we’re heading in their direction anyway. Unless Republicans agree to a budget deal before the end of the year (don’t hold your breath), the temporary payroll tax cuts and extended unemployment benefits we have now will end. The result will be the most stringent fiscal tightening of any large economy in the world.Together with ongoing cuts at the state and local government level, the scale of this fiscal contraction would be almost unprecedented. It will come at a time when 25 million are Americans looking for full-time work, median incomes are dropping, home foreclosures rising, and a record 37 percent of American families with young children are in poverty. To call this economic lunacy is to understate the point.

How the Austerity Class Rules Washington - How, in the midst of a massive unemployment crisis—when it’s painfully obvious that not enough jobs are being created and the public overwhelmingly wants policy-makers to focus on creating them—did the deficit emerge as the most pressing issue in the country? And why, when the global evidence clearly indicates that austerity measures will raise unemployment and hinder, not accelerate, growth, do advocates of austerity retain such distinction today? An explanation can be found in the prominence of an influential and aggressive austerity class—an allegedly centrist coalition of politicians, wonks and pundits who are considered indisputably wise custodians of US economic policy. These “very serious people,” as New York Times columnist Paul Krugman wryly dubs them, have achieved what University of California, Berkeley, economist Brad DeLong calls “intellectual hegemony over the course of the debate in Washington, from 2009 until today.” Its members include Wall Street titans like Pete Peterson and Robert Rubin; deficit-hawk groups like the CRFB, the Concord Coalition, the Hamilton Project, the Committee for Economic Development, Third Way and the Bipartisan Policy Center; budget wonks like Peter Orszag, Alice Rivlin, David Walker and Douglas Holtz-Eakin; red state Democrats in Congress like Mark Warner and Kent Conrad, the bipartisan “Gang of Six” and what’s left of the Blue Dog Coalition; influential pundits like Tom Friedman and David Brooks of the New York Times, Niall Ferguson and the Washington Post editorial page; and a parade of blue ribbon commissions, most notably Bowles-Simpson, whose members formed the all-star team of the austerity class.

Obama Calls on Congress to Pass Jobs Bill ‘In Bite-Sized Pieces’ -  With his jobs bill defeated in the Senate and dead-on-arrival in the House, President Barack Obama has scrapped his refrain that Congress should pass the legislation “right away” and instead made a pitch Monday for lawmakers to take it up in parts. The president, who is bringing his tweaked economic message this week to a pair of 2012 battleground states, said lawmakers should start with a $35 billion measure to assist state and local governments. Senate Majority Leader Harry Reid (D., Nev.) is set to hold a news conference Monday afternoon announcing plans to hold a vote on the proposal. “We’re going to give members of Congress another chance to step up to the plate and do the right thing,” Mr. Obama said as he began a three-day bus tour through North Carolina and Virginia. “Maybe they just couldn’t understand the whole thing all at once, so we’re going to break it up into bite-sized pieces so they can take a thoughtful approach to this legislation,” he added, speaking of lawmakers as if they are children in need of some mealtime help.

Democrats Push Teacher-Hiring Bill, Putting Republicans on the Spot - Democrats in Congress Tuesday are touting a $35 billion plan to help teachers and first responders keep their jobs, the first chunk of President Barack Obama’s jobs bill they are trying to push through. Since Senate Republicans last week blocked Mr. Obama’s bill, Democrats have turned to a strategy of breaking it up into pieces and trying to pass them individually. In some cases they may have bipartisan support, and in others Democrats hope to put Republicans on the spot. The teacher-hiring bill is an example of the latter. At a press conference, Democrats spoke of a crisis in America’s schools, which are seeing cuts to arts classes, language classes, sports teams and other programs. They hope the plan strikes a chord with parents dismayed at the hits being taken by their local schools.

Senate Republicans Block Dem Jobs Bill For Teachers, Firefighters - Senate Republicans, joined by three conservative members of the Democratic caucus, blocked a floor debate on a key portion of President Obama's jobs bill, which would have provided states $35 billion to hire or retain teachers and emergency responders. The final tally on the late Thursday vote was 50-50, with Sens. Mark Pryor (D-AR), Joe Lieberman (I-CT), and Ben Nelson (D-NE) voting with the entire Republican caucus to support the filibuster. The GOP continues to oppose all economic stimulus proposals that involve spending money on jobs, and take even greater exception to Obama's jobs bills, which pays for that spending with a small surtax on millionaires. Democrats expected the legislation to fail, but plan to use routine GOP obstruction to strengthen the narrative that the Republican party is unwilling to help improve the economy, or to raise taxes on wealthy people to pay for any of the country's needs.

The Infrastructure Twofer: Jobs Now and Future Growth - Laura D’Andrea Tyson - Two credible reports issued last week present compelling and complementary cases for infrastructure investment and should be required reading by members of Congress before their next vote on President Obama’s American Jobs ActOne report was from President Obama’s Council on Jobs and Competitiveness (on which I serve), a nonpartisan group of business and labor leaders, and the other from the New America Foundation, an influential Washington think tank. According to nonpartisan economic forecasters, the jobs act, which proposes about $90 billion in infrastructure spending as part of a $450 billion package of tax cuts and spending, would create about two million jobs. Echoing the views of many economists, the foundation report asserts: “Long-term investment in public infrastructure is the best way to simultaneously create jobs, crowd in private investment, make the economy more productive and generate a multiplier of growth in other sectors of the economy.”  Both reports provide sobering evidence of the growing deficiencies of infrastructure in the United States, which millions of Americans experience every day in traffic and airport delays, crumbling and structurally unsafe schools and unreliable train and public transit systems.

Adventures In Credibility - Krugman - Menzie Chinn takes us through the “Real American Jobs Act”, which is every bit as ludicrous as one might imagine. What caught my eye, however, is who the GOP is leaning on for economic validation: namely the Heritage Foundation. Yep, the people who released an analysis claiming that the Ryan plan would drive unemployment down to 2.8, that’s right, 2.8 percent; and who then tried to flush that analysis down the memory hole, but weren’t quick enough to forestall others from keeping cached copies. And the GOP is relying on Heritage not once but twice — for the claim that the Affordable Care Act has somehow cost vast numbers of jobs already, even though the thing hasn’t even gone into effect yet, and for the claim that the GOP bill would create 1.6 million jobs. Here’s a suggestion for the GOP: why not rely instead on diviners who examine the entrails of sacrificed rams? It would improve your credibility.

Dirty Jobs - Krugman - It appears that Republican claims that they can create lots of jobs by weakening environmental regulation are keying off a study from the American Petroleum Institute (pdf). There are a lot of things to critique about this study, including the fact that it actually shows a relatively small number of energy jobs, which are then blown up by assuming a large multiplier. Funny how spending can only move money around, not increase total spending, if it comes from the government, and how the multiplier is a nonsense concept when applied to government spending, but totally valid when it involves oil companies … But even if you take it at face value, it’s worth looking at the timing: The big alleged impacts don’t come until late in the decade. In 2012 and 2013, very little. The Obama jobs plan, by contrast, inadequate as it is, could plausibly add 1 million or more jobs next year. Of course, the real number you need to understand this plan is 76.6 percent.

Levels And Changes - Krugman - Jared Bernstein is annoyed at an Investor’s Business Daily piece that totally misinforms readers about how to think about the effects of stimulus and austerity. Indeed, it’s as bad as he says. IBD says federal spending is still rising, so how can you say that stimulus is fading out? This is, of course, dead simple stuff. The economy’s growth — the rate of change in GDP — depends on the rate of change in spending, not its level — and the rate of change has been falling. What’s more, lots of people tried to explain this a long time ago. Here was my take back in 2009. Now, in my experience IBD is a consistent source of misinformation. What’s sad is that people pay money for this, believing that reading the thing will make them smarter, when in fact it actively makes them stupider.

The Limits of Stimulus - Kevin Drum ponders an interesting factoid: rising gas prices have pretty much wiped out the whole cash value of the stimulus to families: Stimulus is hard in an energy-constrained world. I confess that the more I think about this, the more I wonder if conventional fiscal/monetary policy has as much traction as we believe. I'm not an energy fundamentalist by any stretch, but the constraints are real. Ordinary stimulus measures still work, and we should be pursuing them more aggressively, but I can't help but suspect that we're entering an era where they're getting less effective all the time. My macro professor at the University of Chicago argued that the stagflation of the 1970s looks pretty good as an oil-led phenomenon; when supply constraints are real, stepping up the fiscal and monetary policy gives you inflation plus economic doldrums. But how relevant is that to the current recession?  Well, James Hamilton has made a prettly compelling case that oil prices are responsible for more of the current setback than we might think.  And even if you dispute that, I think it's easy to agree that they're making a bad downturn worse.

Balanced Budget Amendment is Nothing More Than Fiscal Prohibition - If you watched any one of the three episodes of “Prohibition,” Ken Burns’ excellent PBS series about the attempt in the early part of the 20th century to ban alcoholic consumption in the United States, it’s impossible not to see the strong parallels between that effort and the movement to add a balanced budget amendment to the U.S. Constitution. The most obvious similarity is that Prohibition was and the BBA is an effort to enact a constitutional amendment. But there’s so much more that the comparison is almost eerie. Although they both had their origins years earlier, both arose at the start of their respective centuries. The first was and the second is a movement that in large part pits the heartland vs. the cities. In addition, actual or pseudo-religious movements organized both and had or have supporters that are often seen as uncompromising zealots.

Debt, Government and Sustainable Growth - There are reasons why we would prefer individuals to pay for their own programs rather than pay for them out of tax money.  However, there is a notion floating around that somehow long term cost expenditures only become real when they are moved on to the government balance sheet.  For example Paul Ryan defended cutting Pell Grants by saying . . . Pell Grants have become unsustainable. It’s all borrowed money…Look, I worked three jobs to pay off my student loans after college. I didn’t get grants, I got loans, and we need to have a system of viable student loans to be able to do this. I point this out not to pick on Ryan but because I think it represents the views of a fair number of people. First, he is saying that cannot – indeed cannot – continue the Pell Grant program because its based on borrowing money the Federal Government doesn’t have. Instead, he suggests student should borrow money to pay for tuition the same way he did.  In both cases, however, money is being borrowed to fund a student’s education and in both cases that money will be repaid by extracting some amount of consumption in the future.

Ron Paul Proposes Elimination Of Education, Energy Departments, Lowering Presidential Salary To $39,336 - Today at 3pm on Las Vegas, perpetually ignored by the media on both the left and right presidential candidate Ron Paul will announce details of his $1 trillion proposal in government spending cuts, which will be the start of a process to balance the Federal budget in three . As Politico reports, "the Texas congressman will lay out a budget blueprint for deep and far-reaching cuts to federal spending, including the elimination of five cabinet-level departments and the drawdown of American troops fighting overseas." Amusingly, and if there is anything that will Paul brownie points with an electorate disgusted by those spreading hypocritical class warfare, "there will even be a symbolic readjustment of the president’s own salary to put it in line with the average American salary." Which will simply make it a given that every president going forward will have at least three laid off Hollywood scriptwriters preoccupied as ghost writers and writing presidential "autobiographies." For the royalties. But we digress. "The federal workforce would be reduced by 10 percent, and the president’s pay would be cut to $39,336 — a level that the Paul document notes is “approximately equal to the median personal income of the American worker.”

Ron Paul’s Economic Plan: Cut 5 Cabinet Agencies, Cut Taxes, Cut President’s Pay - GOP presidential candidate Rep. Ron Paul will unveil his economic plan Monday afternoon, calling for a lower corporate tax rate, cutting spending by $1 trillion during his first year in office and eliminating five cabinet-level agencies, including the Education Department, according to excerpts released to Washington Wire. Mr. Paul’s “Restore America” plan calls for a drastically reduced federal government to help spur American business — a familiar theme for the Texas Republican and many of the GOP White House hopefuls. But unlike some of his Republican rivals who have released economic plans, the libertarian congressman mostly avoids the weeds of tax and trade policy, according to excerpts. But Mr. Paul does get specific when he calls for a 10% reduction in the federal work force, while pledging to limit his presidential salary to $39,336, which his campaign says is “approximately equal to the median personal income of the American worker.”  The Paul  plan would also lower the corporate tax rate to 15% from 35%, though it is silent on personal income tax rates, which Mr. Paul would like to abolish.

When an Excel spreadsheet runs wild- US Presidential candidate Ron Paul released his – Plan to Restore America – yesterday, saying that it will deliver a balanced budget within three years – cutting public spending by $1 trillion in year one, slash “regulations” and “reign in the Federal Reserve and get inflation under control”. The 11 -page document has lots of tables and graphs and says that “America is the greatest nation in human history” (plaudits) but if you search for some theoretical framework or some evidential-basis for the numbers presented you will be very disappointed. You will read that Americans have a “respect for individual liberty, free markets, and limited constitutional government” and that returning (public) spending (mostly) to 2006 (nominal) levels is somehow good. Cutting federal employment by 10 per cent is also good. Cutting all regulations is also good. But that is about as far as the textual rendition goes before you hit the tables and graphs. When I read the document I couldn’t help thinking that someone had run wild with an Excel spreadsheet. The Plan to Restore America is devoid of economics which renders it a useless piece of rhetoric – strong on ideology but weak (tragically so) on analytical clout.

CTJ’s Analysis of Cain’s 9-9-9 Tax Plan - Citizens for Tax Justice (CTJ) has released an analysis of Cain's Tax Plan : Herman Cain's 9-9-9 Plan. Given the sketchy information available about the plan, CTJ makes a number of assumptions regarding exclusions and deductions.  But the analysis provides at least some help in understanding the likely distributional impact of the Cain plan.   If presidential candidate Herman Cain’s proposed “9-9-9 tax plan” was in effect today, then the richest one percent of taxpayers would each pay $210,000 less in annual taxes on average, while the poorest 60 percent of taxpayers would each pay about $2,000 more in annual taxes on average, than they do now. Moreover, under the 9-9-9 plan, the United States government would collect about $340 billion less in revenue in 2011 alone.  Cain's plan replaces (as an intermediary step towards a national sales tax) existing federal taxes (personal income tax, payroll tax, corporate income tax, excise tax, AMT, estate tax, and one assumes, the gift tax) with a 9% personal income tax , a 9% business tax (,and a 9% national sales tax.

Cain’s 9-9-9 Plan Would Cut Taxes for the Rich, Raise Taxes for Almost Everyone Else - Herman Cain’s 9-9-9 tax plan would result in a massive tax cut for nearly all of the highest earning Americans and a steep average tax hike for everyone else, according to a new Tax Policy Center analysis. As Cain knows, when you are in the fast-food pizza business marketing is everything.  That’s what’s so clever about his 9-9-9 tax. It sounds great: small numbers, nice symmetry. What’s not to like? Except this pie is not at all what it appears to be.  A middle income household making between about $64,000 and $110,000 would get hit with an average tax increase of about $4,300, lowering its after-tax income by more than 6 percent and increasing its average federal tax rate (including income, payroll, estate and its share of the corporate income tax) from 18.8 percent to 23.7 percent. By contrast, a taxpayer in the top 0.1% (who makes more than $2.7 million) would enjoy an average tax cut of  nearly$1.4 million, increasing his after-tax income by nearly 27 percent. His average effective tax rate would be cut almost in half to 17.9 percent. In Cain’s world, a typical household making more than $2.7 million would pay a smaller share of its income in federal taxes than one making less than $18,000. This would give Warren Buffet severe heartburn. 

84% would pay more under Cain's 9-9-9 plan - Under Herman Cain's 9-9-9 tax reform plan, 84% of U.S. households would pay more than they do under current tax policies, according to a report released Tuesday by a nonpartisan research group. And the impact would be felt most heavily by the lowest income groups.  Those are some of the estimates from the Tax Policy Center's analysis of Cain's proposal, which has helped make him a leading contender for the Republican 2012 presidential nomination.  Cain's 9-9-9 plan would replace much of the current tax code1 with a flat-rate system: a 9% individual income tax; a 9% corporate income tax and a 9% national sales tax. Estate and gift taxes would be eliminated, as would the payroll tax, and most tax credits, deductions and exemptions. According to the Tax Policy Center, households with incomes below $30,000 would have, on average, between 16% and 20% less in after-tax income than they do today. By contrast, households making more than $200,000 would see their after-tax income grow by between 5% and 22% on average.

9-9-9: The Most Massively Regressive Redistribution of Taxes Ever Seriously Considered, by Jared Bernstein: The Tax Policy Center’s analysis of candidate Herman Cain’s 9-9-9 plan is out and man, it provides us with an embarrassment of riches in terms of which data to feature. So let’s stick with the “embarrassment of riches” theme and look at dollars of federal tax change by income class. The first figure shows that average tax payments go up, on average, for the bottom 80% of households, including the bottom fifth (average income, $10,100) by about $1,700, and for the middle fifth (avg inc: about $50,700) by about $3,200.  The average tax payment for the top fifth (avg inc: $273,000) falls by about $23,500. But aggregating things up that way obscures just how extremely regressive 9-9-9 really is.  If you break out the top 1% (avg inc: $1.8 million) and the tippy-top 0.1% (avg inc: $7.9 million), that’s where you really see the plan go to work.  It reduces the tax burden of the top 1% by $300,000 and that of the top 0.1% by…get ready for it…$1.7 freakin’ million.

Cain's 9-9-9 Plan, Nonpayers, and the Top 1% - The Tax Policy Center has released a distributional analysis of Herman Cain's 9-9-9 tax reform plan showing that millions of low income people may pay more in taxes than they do today. This should shock no one. The tax system is so progressive today, with record numbers off the tax rolls and the "rich" paying a greater share of the burden, that it may be next to impossible to construct a comprehensive tax reform plan that does not "raise taxes on the poor" or "cut taxes for the rich."     But perhaps this is a debate that American needs to have, and maybe the Cain plan can spark an honest discussion of how much each citizen should be required to contribute toward the basic cost of government. The two charts below tell the story.

Perry Proposes (no surprise) a flat tax... Rick Perry, one night after what has been termed an 'invigorated' debate performance, has climbed on the flat-tax bandwagon (presumably meaning a flat-rate consumption tax a la the national retail sales tax idea).  See Tumulty, Rick Perry to Announce Flat Tax as Part of Economic Plan,  See prior posting on ataxingmatter regarding Cain's 9-9-9 plan and generally about the flat tax, here and here and here and here and here and here and here and here and here and here..... Put briefly, having as the sole source of revenue for the federal government's environmental protection, disease control, anti-trust, bank regulation, securities regulation, tax enforcement, consumer protection, military and defense functions a regressive national sales tax that would stifle the consumerism that accounts for about 70% of our economy would likely be quite harmful to the U.S. economy and to the overwhelming majority of Americans who earn less than $100,000 a year.

Parrying Perry with Parry: Flat is the New Stupid - Jared Bernstein writes, Flat Isn't Always SimpleThere’s a theme developing in the tax debate that a flat tax, like Herman Cain’s 9-9-9 or another version that Gov Perry’s now talking about, is simpler than a system of progressively higher, or graduated rates. Not so. Both can be as simple or complicated as you like...Flat is the new stupid. Does it dawn on these conservative tax savants that the principle they are espousing is equality?  That principle can be interpreted variously: equality of sacrifice, equality of outcomes, equality of opportunity. And each of those equalities can be interpreted in several ways: equality of sacrifice may mean a poll tax, where everyone pays the same absolute amount; a proportional percentage tax, such as the flat taxers advocate; or a progressively graduated tax that tries to account for the differential utility of an extra dollar of income to people of different incomes.

A Warm Wind At the Backs of Some, Generated Off the Backs of Others Yesterday, I learned in this Mother Jones article that workers have increased their contribution to government revenue disproportionately since 1980.  In other words, payroll tax (paid by workers) is a larger portion of government revenue than it used to be.  That's a macroeconomic analysis, which still doesn't answer the question of whether rich people are being treated "unfairly" by the current tax system. To to elaborate a little, let's take two people who make exactly the same amount:  $100,000 in taxable income (after the standard deduction - let's not get complicated).  "Worker Taxpayer" earns her money by working (getting compensation by way of a W2) and "Investor Taxpayer" earns her money from dividends in a $4 million stock portfolio she holds (its about 2.5% in yield - about right).  Let's say they are both unmarried.  Investor taxpayer does not work and has no compensation income.  They are otherwise "equal," right? Worker taxpayer will pay $7650 in payroll tax, plus $21,617 in income tax (2011 brackets), for a total tax burden of $29,267. Let's look at investor taxpayer.  You would think they would be taxed at the same rate as worker, right?  Wrong.  Because investor taxpayer receives all of her income from qualified dividends, they get a "special" tax treatment.  Bear with me, we're almost done.  Generally, the maximum tax rate for qualified dividends is 15%, BUT HERE it is actually 0% because investor's other income (remember she doesn't work) is taxed at the 10% or 15% rate. To refresh:  worker making $100K pays about $30K in tax.  Investor making $100K in qualified dividends pays $0 - no - tax.  Huh?  Yup. 

The Bush Tax Cuts and the 99 Percent - I forgot to alert you to my latest Atlantic column, which went up on Monday. To my mind, Occupy Wall Street is a protest movement, and a valuable one, and the often-stated criticism that they should have concrete demands is kind of silly. I have spent a fair amount of time reading the 99 Percent tumblr, however, and I think the kind of policies that would help the people who describe themselves there are pretty obvious. This is Mike Konczal’s summary: “Upon reflection, it is very obvious where the problems are.  There’s no universal health care to handle the randomness of poor health.  There’s no free higher education to allow people to develop their skills outside the logic and relations of indentured servitude. Our bankruptcy code has been rewritten by the top 1% when instead, it needs to be a defense against their need to shove inequality-driven debt at populations. And finally, there’s no basic income guaranteed to each citizen to keep poverty and poor circumstances at bay.” But in my opinion, the preliminary step to getting rich (and reasonably comfortable) people to pay for a better social safety net is to let the Bush tax cuts expire, as I argue in the column. Most importantly, it’s the only inequality-reducing policy I can think of that has any chance of happening in the next year—simply because it only requires doing nothing.

Raise Taxes on the Wealthy: It’s the Fair Thing to Do - 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. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy. There’s little evidence that the Bush tax cuts caused large increases in output growth as promised. In fact, there’s little evidence that they had any effect at all. And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society.  While some argue that those at the top of the income distribution earn every cent they receive, and hence deserve to keep all of it, there is plenty of evidence that the income of financial executives, CEOs of major corporations, etc. exceeds the value of what they contribute to society by a considerable margin.

Taxing the wealthy will not kill jobs -- I study the distribution of wealth and income here at the Levy Institute, so I read the first five hundred words of Robert Samuelson’s Washington Post column on inequality (“The backlash against the rich,” Oct. 9th) with interest and approval. But I knew it couldn’t last. Once Samuelson gets beyond description and attempts explanation and analysis, he is clearly out of his depth. Samuelson turns his gaze to the proposal to raise income taxes on those with incomes above a million dollars, whom he refers to as “job creators”—a Republican Party talking point that Samuelson repeats uncritically. He makes two mistakes in citing a paper, written by my colleague Ed Wolff, in which the distribution of assets for the top 1% of households by wealth (total assets minus total debt) is compared to the distribution for the bottom 80%. First, Samuelson seems to assume that those people who own privately held businesses are small business owners. Second, not all of the people in the top 1% of household wealth are households making more than $1 million a year in income.

The Laffer Curve and the Kimel Curve - People always talk about the Laffer curve, but have you ever seen it estimated? Have you ever wondered why you don't? If you're a quant guy, you know the answer to that. Because if you're a quant guy, at some point curiosity must have gotten the best of you. That means you pulled out some data and you plugged it into whatever piece of software happened to be handy. What happened next depends on what sort of a quant guy you are. If you're the sort that let's the numbers do the talking, you spotted the joke and probably left it at that. If you have a strong ideological leaning in a certain direction, on the other hand, you might have tried to "fix" it. You tried a few times, failed, and kind of just left it there as something to get back to some time, but no hurry because your ideology tells you what the answer should be. Today, by coincidence, I got two e-mails asking me about the Laffer curve. And it occurred to me... maybe someone should let non-quant people into the joke. Because the only people really discussing it are those who are driven by ideology, whereas it should be afforded the Hauser's law treatment.

IRS: Budget cuts would hurt service, raise deficit — Legislation that would trim hundreds of millions of dollars from the Internal Revenue Service budget would force significant cuts in the services it provides taxpayers and cost the government $4 billion annually in lost revenue, the agency warned Congress on Monday. In a letter to lawmakers, IRS Commissioner Douglas Shulman said the budget cuts "would lead to noticeable degradation of both service and enforcement and would have a serious detrimental impact on voluntary compliance for years to come." The House Appropriations Committee has approved a bill that would provide $11.5 billion for the IRS in fiscal 2012, which began Oct. 1. That is $600 million less than it received last year and $1.8 billion less than President Barack Obama requested.The Senate Appropriations Committee version of the bill would provide $11.7 billion. The cuts are part of an effort by lawmakers to curb spending at a time when annual federal budget deficits have reached $1.3 trillion.

The Top 1%: Executives, Doctors and Bankers - The “99-percenters” protesting at Occupy Wall Street should think about occupying the C-suites across America as well, at least if their primary complaint is about income inequality. That is one implication of this fascinating paper on the occupations of the top 1 percent of Americans, which I came across via Mike Konczal. The paper is by Jon Bakija of Williams College, Adam Cole of the Treasury Department and Bradley T. Heim of Indiana University, and is based on tax data from 2005 (so, before the financial crisis). It finds that about a third of Americans in that top percentile were executives, managers and supervisors who work outside of finance. The next biggest share, at 15.7 percent, went to medical professionals, followed by those in financial services with 13.9 percent.

Americans for Greater Inequality - As Rich Oppel and I wrote in an article today, the Republican presidential candidates have been steadily promoting flatter — and therefore more regressive — tax overhaul plans. Flatter taxes have of course always been the holy grail for many in the conservative base, but now such proposals seem to be gathering broader support, too.In a recent article for Scientific American:Support for redistribution, surprisingly enough, has plummeted during the recession. For years, the General Social Survey has asked individuals whether “government should reduce income differences between the rich and the poor.” Agreement with this statement dropped dramatically between 2008 and 2010, the two most recent years of data available. Other surveys have shown similar results. The article notes that declines in support for redistributive government policies have been larger among minorities, and that “Americans who self-identify as having below average income show the same decrease in support for redistribution as wealthier Americans.” These findings are a bit unexpected, given  the spreading Occupy Wall Street movement and frequent complaints about rising inequality.

Our world is now ruled by finance -Occupy Wall Street, which began as rag-tag bunch of protesters sitting in public squares complaining about "corporate greed," has swiftly spread to cities around North America, including Montreal. It seems to be contagious. Suddenly people everywhere are asking, "What is this about?" The best explanation? It's about the financial system driving us all to the brink. Sure. That might makes sense, except it's hard to see with the naked eye. It's even harder to prove. Few would argue unregulated Wall St. greed and excess aren't a problem. But when was the last time you got mugged by banker or came home to find a stockbroker stealing your stuff ? How do we know we're not making Wall St. a convenient scapegoat for our problems? Here's how. It was laid out in the 2010 Oscar-winning documentary Inside Job.

Robert Reich (The Rise of the Regressive Right and the Reawakening of America): Rather than conserve the economy, these regressives want to resurrect the classical economics of the 1920s — the view that economic downturns are best addressed by doing nothing until the “rot” is purged out of the system (as Andrew Mellon so decorously put it). In truth, if they had their way we’d be back in the late nineteenth century — before the federal income tax, antitrust laws, the pure food and drug act, and the Federal Reserve. A time when robber barons — railroad, financial, and oil titans — ran the country. A time of wrenching squalor for the many and mind-numbing wealth for the few. Listen carefully to today’s Republican right and you hear the same Social Darwinism Americans were fed more than a century ago to justify the brazen inequality of the Gilded Age: Survival of the fittest. Don’t help the poor or unemployed or anyone who’s fallen on bad times, they say, because this only encourages laziness. America will be strong only if we reward the rich and punish the needy.Yet the great arc of American history reveals an unmistakable pattern. Whenever privilege and power conspire to pull us backward, the nation eventually rallies and moves forward.  Perhaps this is what’s beginning to happen again across America.

America wakes to the din of inequity - FT editorial - A month ago the disparate band of protesters who set up camp in downtown Manhattan’s Zuccotti Park to decry the excesses of capitalism were seen as little more than idealistic youth, doing what youth tend to do. Today only the foolhardy would dismiss a movement reflecting the anger and frustration of ordinary citizens from all walks of life across the world. So far the protests in the US have been largely peaceful. They may be diffuse and inchoate. But the fundamental call for a fairer distribution of wealth cannot be ignored. What is at stake is the future of the American dream. The bargain has always been that all who work hard should have an opportunity for prosperity. That dream has been shattered by a crisis brought about by financial excess and political cynicism. The consequence has been growing in­equality, rising poverty and sacrifice by those least able to bear it – all of which are failing to deliver economic growth.The frustration of protesters railing against the global financial system, and of the 54 per cent of Americans who polls suggest support their calls, is legitimate. The wonder is why it has taken so long for citizens to come out in popular protest across political boundaries. For the last three years, the country has been paralysed by a political gridlock that has put its future on the line. Politicians in both camps have failed to spot and channel the righteous anger of those who have seen government spend billions on bailing out banks, while bickering over how to create jobs or educate children. One opportunity after another has been squandered – most recently in the failure promptly to pass a proper jobs bill.

Storming the Capitalist Castle - Wall Street is not literally a castle, and the small green space of Zuccotti Park claimed by Occupy Wall Street may soon be emptied. But an upstart movement has spray-painted a new slogan onto the ramparts of the economic establishment. “We Are the 99 Percent” effectively publicizes a message consistent with research on the distribution of income and wealth: the top 1 percent of households in the United States represents an economic aristocracy. Over the last 30 years, it has consolidated and amplified its privileged position, making strategic political investments in policies ranging from financial deregulation to cuts in top marginal tax rates. It took home 21 percent of the nation’s pretax income in 2008, up from 9 percent in 1976. It controlled 36 percent of the nation’s private wealth in 2009. Some economists argue that inequality has no downside — a view critically dissected by Timothy Noah in a terrific essay, “The United States of Inequality.”  The protesters don’t necessarily demonize the top 1 percent or suggest that taxing them at a higher rate will balance the budget. What brings them together is the conviction that this group exercises disproportionate control over our economic and political life.

The Kids Camping on Wall Street Are The Capitalists, Not the People in the Buildings - Many of the protestors in New York City and around the country are jobless college graduates. The majority in all likelihood financed their education through federally subsidized student loans. A central characteristic of today’s generation of student loans is that, unlike most debts, they cannot automatically be discharged in bankruptcy. As a consequence, they are one of the few expenses in our society for which an individual is likely to be accountable throughout his life.  Now, let’s contrast this high accountability with the behavior that occurred in our financial sector. When our largest financial firms created havoc in the U.S. economy through undisputed greed, mismanagement, and extreme risk, some important things happened. First, the government bailed the companies out without demanding any substantial change in behavior, and then the individuals responsible were not held accountable through civil or criminal law. As a result, the people who brought the nation close to the brink of economic collapse and caused untold pain and suffering — which continues to this day — returned after a brief hiatus to record levels of compensation. Individuals who earned tens of millions of dollars continue to earn these extraordinary sums. They have never been called to account for their deeds

Wall Street Loses Its Immunity - Krugman - The modern lords of finance look at the protesters and ask, Don’t they understand what we’ve done for the U.S. economy?  The answer is: yes, many of the protesters do understand what Wall Street and more generally the nation’s economic elite have done for us. And that’s why they’re protesting. For the financialization of America wasn’t dictated by the invisible hand of the market. What caused the financial industry to grow much faster than the rest of the economy starting around 1980 was a series of deliberate policy choices, in particular a process of deregulation that continued right up to the eve of the 2008 crisis. Not coincidentally, the era of an ever-growing financial industry was also an era of ever-growing inequality of income and wealth. Wall Street made a large direct contribution to economic polarization, because soaring incomes in finance accounted for a significant fraction of the rising share of the top 1 percent (and the top 0.1 percent, which accounts for most of the top 1 percent’s gains) in the nation’s income. More broadly, the same political forces that promoted financial deregulation fostered overall inequality in a variety of ways, undermining organized labor, doing away with the “outrage constraint” that used to limit executive paychecks, and more.

Talking to ‘Occupy the Board Room’: New Site Encourages Getting in Touch with the 1%, Legally - Launched on Saturday, is a new site that provides those with a valid email account an opportunity to choose a “pen pal” in the top 1%, to whom they can voice their frustrations about America’s economic issues. Created approximately 3 weeks ago, the site originally intended to release the email addresses of almost 200 bank executives to the public. But according to one of the site’s co-founders, Olivia Leirer, research revealed that if the group released that information, they could be prosecuted if their call to action unwittingly crashed the email servers of the nation’s biggest banks. “It’s part of a new interpretation of the Computer Fraud and Abuse Act,” Ms. Leirer told The Observer by phone today. “And of course, it’s not our intention to cause any harm.” Instead, OTBR has figured out a way around the process by having people write in their letters to a group blog, which then digests and tags the appropriate representative, who will receive the emails. At least ostensibly that is how the program should work: Ms. Leirer told us that the site’s lead developer dropped out a week ago, leading the members of Occupy the Board Room to reach out the, where the Internet working group donated some of their “most creative volunteers” to the cause.

Chris Hedges: A Movement Too Big to Fail - There is no danger that the protesters who have occupied squares, parks and plazas across the nation in defiance of the corporate state will be co-opted by the Democratic Party or groups like MoveOn. The faux liberal reformers, whose abject failure to stand up for the rights of the poor and the working class, have signed on to this movement because they fear becoming irrelevant. Union leaders, who pull down salaries five times that of the rank and file as they bargain away rights and benefits, know the foundations are shaking. So do Democratic politicians from Barack Obama to Nancy Pelosi. So do the array of “liberal” groups and institutions, including the press, that have worked to funnel discontented voters back into the swamp of electoral politics and mocked those who called for profound structural reform.  Tinkering with the corporate state will not work. We will either be plunged into neo-feudalism and environmental catastrophe or we will wrest power from corporate hands. This radical message, one that demands a reversal of the corporate coup, is one the power elite, including the liberal class, is desperately trying to thwart. But the liberal class has no credibility left. It collaborated with corporate lobbyists to neglect the rights of tens of millions of Americans, as well as the innocents in our imperial wars. The best that liberals can do is sheepishly pretend this is what they wanted all along. Groups such as MoveOn and organized labor will find themselves without a constituency unless they at least pay lip service to the protests. The Teamsters’ arrival Friday morning to help defend the park signaled an infusion of this new radicalism into moribund unions rather than a co-opting of the protest movement by the traditional liberal establishment. The union bosses, in short, had no choice.

From OWS to OSCOTUS -  Blaming Congress for the corporate takeover of American democracy is only half the fun; blaming the Supreme Court is almost better. So when Cornel West was arrested Sunday at an impromptu protest on the steps of the U.S. Supreme Court, his message was a simple one that may be starting to resonate: If you don’t like big corporations buying and selling your government, you may want to go talk to the five-justice majority who gave us the Citizens United decision. There is only one small problem with this argument. The corporate takeover of government predates the Citizens United ruling, issued in 2010, by many, many years. Moreover, while the ruling certainly opened up the possibility that future elections will be affected by the flood of corporate money into political campaigns, most empirical studies of the 2010 elections still show that the actual impact of Citizens United was actually quite limited. Many of the worst aspects of our money-saturated campaigns (like the role of 501(c)4’s) were already legal before Citizens United, and the holding in the case didn’t change them. The stuff you want to really worry about with big money and elections, such as the failure to disclose who you’re buying, is unaffected by Citizens United. Things may well get much uglier in future elections. But they’d have been ugly with or without the court’s intercession.

Occupy Wall Street’s Victory: It has shaken up American politics - Occupy Wall Street has already won, perhaps not the victory most of its participants want, but a momentous victory nonetheless. It has already altered our political debate, changed the agenda, shifted the discussion in newspapers, on cable TV, and even around the water cooler. And that is wonderful. Suddenly, the issues of equity, fairness, justice, income distribution, and accountability for the economic cataclysm–issues all but ignored for a generation—are front and center. We have moved beyond the one-dimensional conversation about how much and where to cut the deficit. Questions more central to the social fabric of our nation have returned to the heart of the political debate. By forcing this new discussion, OWS has made most of the other participants in our politics—who either didn’t want to have this conversation or weren’t able to make it happen—look pretty small.

Why Occupy Wall Street Is Bigger Than Left vs. Right - Matt Taibbi - was surprised, amused and annoyed all at once when I found out yesterday that some moron-provocateur linked to notorious right-wing cybergoon Andrew Breitbart had infiltrated a series of private e-mail lists – including one that I have been participating in – and was using them to run an exposé on the supposed behind-the-scenes marionetting of the OWS movement by the liberal media. According to various web reports, what happened was that a private "cyber-security researcher" named Thomas Ryan somehow accessed a series of email threads between various individuals and dumped them all on, Breitbart's site. Gawker is also reporting that Ryan forwarded some of these emails to the FBI and the NYPD. I have no idea whether those email exchanges are the same as the ones I was involved with. But what is clear is that some private email exchanges between myself and a number of other people – mostly financial journalists and activists who know each other from having covered the crisis from the same angle in the last three years, people like Barry Ritholz, Dylan Ratigan, former regulator William Black, Glenn Greenwald and myself – ended up being made public. There is nothing terribly interesting in any of these exchanges. Most all of the things written were things all of us ended up saying publicly in our various media forums. In my case, what I wrote was almost an exact copy of my Rolling Stone article last week, suggesting a list of demands for the movement.

Trying To Unwarp The Debate -  Krugman - I visited Zuccotti Park yesterday. Michael Moore gave a short speech, transmitted by the human microphone. I gather that right-wingers are claiming that OWS is anti-Semitic; someone forgot to tell the excellent Klezmer band. Overall, what struck me was how non-threatening the thing is: a modest-sized, good-natured crowd, mostly young (it was a cold and windy evening) but with plenty of middle-aged people there, not all that scruffy. Hardly the sort of thing that one would expect to shake up the whole national debate. Yet it has — which can only mean one thing: the emperor was naked, and all it took was one honest voice to point it out. As for how the emperor got that naked: read Ari Berman’s article on the austerity class, and its dominance in Washington.

It’s hard to hate these occupiers - For good, historically specific reasons, everybody hates the banks. Even New Yorkers, whose economy depends on the bankers’ ability to pay for overpriced amenities, hate the banks. In a Quinnipiac University poll this week, New York City voters supported Occupy Wall Street by a 67-percent-to-23-percent margin. Goldman Sachs chief executive Lloyd Blankfein is a profiteer without honor in his own home town. Whence this fall — if not from grace (a state that few of us, and even fewer bankers, attain), then from the occasional decent opinion of humankind? At its root is the simple fact that the Wall Street banks over the past quarter-century have done none of the things that a financial sector should do. They have not helped preserve the thriving economy that America once enjoyed. They have not funded our boldest new companies. (That’s fallen to venture capitalists.) They haven’t provided the financing to maintain our infrastructure, nor ponied up the capital for manufacturing to modernize and grow here (as opposed to in China). Instead, they’ve grown fat on the credit they extended when Americans’ incomes stopped rising. They’ve grown plump on proprietary trading and by selling bad deals to suckers. (Citigroup, like Goldman before it, just agreed to pay hundreds of millions of dollars to settle charges that it defrauded investors.)

A little OWS, a little 99%, a little history - So today I read at the Yahoo Finance that  John Mauldin thinks the OWS would be better off if they occupiedCongress: If they really want to If  they really want to go after the source of the problem, they should go occupy Congress,"  Instead of focusing on Wall Street,Washington and the protests should be focusing on reducing regulation and making it easier for new businesses to start, Mauldin says. To that end, he offers a new slogan I somehow doubt will showup at any Occupy Wall Street protest anytime soon: "Up with Entrepreneurs" As I understand it, OWS is about economic equality. President Roosevelt referred to it as the economic royalty. I just don't see how one can stop, look and listen to OWS and think "go tell congress to further deregulation". John Boy can't be this much of an idiot, can he? My sweetheart gets home from the dentist. $4000 dollars worth of bridge work is down the drain because a tooth of the bridge went bad.  But, she was offered a payment plan. Has a nice dental name at 14.5% interest! This bit of private market solution to paying for health care is brought to you by GE Financial. Yes, the GE of Jeffrey Immelt, Obama's job creating adviser. Hey Obama? Did you read my state of the union?  Obviously not or Jeffrey baby would not be your man.

Poll: Washington to blame more than Wall Street for economy - Most Americans blame Wall Street1 for the nation's economic predicament — but they blame Washington more. And in the democracy that fancies itself the capital of capitalism, more than four in 10 people describe the U.S. economic system as personally unfair to them. A USA TODAY/Gallup Poll taken last weekend, as the Occupy Wall Street2 protest movement completed its first month, found that:

  • •When asked whom they blame more for the poor economy, 64% of Americans name the federal government and 30% say big financial institutions.
  • •Only 54% say the economic system is personally fair to them; 44% say it is not.
  • •78% say Wall Street bears a great deal or a fair amount of blame for the economy; 87% say the same about Washington.

Obama Should Have Bailed Out The Middle Class - It occurred to me tonight after reading all the many blogs about Occupying Wall Street that Obama missed an historic chance to differentiate himself from George Bush. George Bush bailed out Wall Street at a cost of $3-4 trillion, raising the naqtion’s debt by 40% in just 2 years, a record for the rule books if there ever was one. So, the minute Obama took over he should just have promised to bail out the middle class, which might have made for a far more successful  interaction with 310 million people.  Instead of a health plan that was a sell out to 5 giant health insurance companies, Obama should have  put through a program to create jobs by means of a national work program that would have taken millions off the unemployment insurance rolls and put them to concrete pragmatic work that would have been far more beneficial for the nation at large.

Why Wall Street Hates Obama - The explanation is surprisingly simple. - There have been several competing theories for why the finance industry has turned on the White House. One is policy: The administration pushed through the Dodd-Frank financial regulatory reform bill, which tamps down on proprietary trading, leverage, and other tools banks use to increase profits. Another is ideology: Wall Street fingered Obama as a socialist, seeking to redistribute its hard-earned capital gains to the lazy and poor. A third explanation is psychology: Obama clearly doesn’t respect Wall Street. Therefore, Wall Street hates him. All of those may be—and probably are—part of the story. But now there is a new and far more concrete contributor to the antipathy. Perhaps Wall Street hates Obama because Wall Street is doing terribly—and everybody blames the incumbent when the economy turns sour.

On government, regulation, over-regulation and free markets - I want to talk about why people blame government for the state of the economy more than Wall Street and what I think the remedies are.  There was a time when I asked “Why No Outrage?”. In 2008, it seemed to me that Americans were very passive about the credit crisis. After Lehman and AIG, this changed somewhat but even in February of 2009 I said “There is a deep sense of apathy in the United States regarding this massive economic implosion that remains stunning.” Eventually, though we got the Tea Party and Occupy Wall Street movements. Now the outrage is everywhere. On Tuesday I wrote about those movements: Third-party movements like the Tea Party and Occupy Wall Street are about corporatism. Their main appeal has to do with defending democratic values that are violated by bailouts for special interests. I see both movements concentrated on the nexus of government and corporate interests with the Tea Party focused on government's complicity and the Occupy Wall Street movement focused on corporations.  You may not have seen this, but the Gallup people recently did a poll asking people whether government or banks were to blame for the economy. By a two-to-one margin, people blamed government.

Yglesias: Glass-Steagall Is Mostly A Red Herring - Mathew Yglesias argues that "Glass-Steagall is mostly a red herring": Glass-Steagall Is Mostly A Red Herring, by Mathew Yglesias: Something I’ve heard from participants in the 99 Percent Movement is a revival of interest in rescinding the repeal of the 1932 Glass-Steagall Act. But the rule that was repealed in the 1999 Gramm–Leach–Bliley Act were restrictions on the same holding company owning a bank and owning other kinds of financial companies. The thing about this is just that there’s really nothing in particular about co-ownership that you can point to as having been a problem in the financial crisis.  I am sympathetic to this point of view, i.e. that the elimination of Glass-Steagall wasn't an important causative factor in the crash. However, as I said a few days ago: There is a debate over the extent to which removing Glass-Steagall -- the old version of the Volcker rule -- contributed to the crisis. However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it's clear that it has for the reasons outlined above.

G-20 Said to Consider List of 50 Systemically Important Banks - Group of 20 governments are considering naming as many as 50 banks as systemically important to the global economy and in need of extra capital, two officials from G-20 nations said. The list, drawn up by Financial Stability Board Chairman Mario Draghi, will be published in time for a G-20 leaders meeting in Cannes, France, on Nov. 3-4, said the officials, who declined to be identified because the discussions are private. Regulators have said the banks named will be forced to take on more capital. Regulators are at loggerheads with some institutions over the additional capital rules, with lenders arguing the requirements may harm the world’s economic recovery. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bank of America Corp. CEO Brian T. Moynihan are among bankers who have suggested this year that the new rules will constrain lending and hurt growth.

The Bankers’ Capital War - Almost everyone nowadays agrees that banks need more capital. Christine Lagarde chose to make it her first campaign as Managing Director of the International Monetary Fund. And conventional analyses of the financial crisis focus on the weak capital base of many banks, which left them with insufficient reserves to absorb the losses they incurred when asset prices fell sharply in 2007-2008. Taxpayers, notably in the United States and the United Kingdom, were obliged to step in to fill that hole. The same disaster movie is now playing in the eurozone. We can only hope that the bankers are eventually rescued from the burning eurotower by Super-Sarkozy and Wonder-Frau Merkel – and that the Basel Committee of Banking Supervisors ensures that there will be no sequel. The Basel Committee has proposed strengthening considerably both the quantity and the quality of capital in the global banking system. This would mean much larger core equity capital for all banks and a range of additional reserves – a capital conservation buffer, a countercyclical buffer, and a surcharge for systemically vital institutions – to be added by local regulators as they see fit. Unfortunately, the final implementation date for these new obligations has been deferred until 2019 – by which point a few banks might still be left standing.

Huntsman's Warning on 'Too Big to Fail' - Simon Johnson- The idea that big banks damage the broader economy has considerable resonance on the intellectual right.  Tom Hoenig, recently retired president of the Kansas City Fed, has been our clearest official voice on this topic.  And Gene Fama, father of the efficient markets view of finance, said on CNBC last year, that having banks that are too big to fail is “perverting activities and incentives” in financial markets – giving big financial firms, “a license to increase risk; where the taxpayers will bear the downside and firms will bear the upside.” The mainstream political right, however, has been reluctant to take on the issue. This changed on Wednesday, with a very clear statement by Jon Huntsman in the Wall Street Journal on regulatory capture and its consequences.  “More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.”

Just Released: Fed Proposes Simpler Rules for Banks’ Reserve Requirements - NY Fed - Reserve requirements—a critical tool available to Federal Reserve policymakers for the implementation of monetary policy—stipulate the amount of funds that banks and other depository institutions must hold in reserve against specified deposits, essentially checking accounts. On October 18, 2011, the Fed proposed to simplify the rules that govern these requirements, with the aim of reducing cost and burden on depository institutions and on the Federal Reserve. The simplifications will also allow the Fed to modernize the infrastructure that supports reserve administration without compromising the role that reserve requirements play in the conduct of monetary policy.   In this post, I summarize what the Fed proposes, which includes: 1) creating a common two-week maintenance period for all depository institutions, 2) sunsetting the contractual clearing balance program, 3) creating a “band” around reserve requirements to replace carryover, and 4) using “direct compensation” to replace as-of adjustments.

Volcker Rule Divides Regulators - Regulators have faced a barrage of complaints from lawmakers and financial industry lobbyists in their 14-month-long quest to constrain risky trading on Wall Street, an effort known as the Volcker Rule. Now, as regulators begin a push to produce a final draft of the rule, they face hurdles from an unexpected group: themselves. Though several federal agencies agreed last week to propose the initial version of the Volcker Rule, they are divided over some of its crucial details. The Federal Deposit Insurance Corporation, for example, has pushed for tough language that would require bank executives to vouch for their compliance with the Volcker Rule — a measure that the Office of the Comptroller of the Currency has been fiercely resisting, say people close to the regulators. In recent weeks, some regulators even quarreled over which agency would vote first on the rule, according to one of the people close to the regulators. And while four regulators ultimately did vote, a fifth agency, the Commodity Futures Trading Commission, was conspicuous by its silence. Both the rule’s critics and supporters fear that an escalating turf war could sidetrack regulators as they shape a final version of the overhaul by July 2012. While Wall Street opposes the proposal, it worries that the regulatory fracture will generate additional uncertainty over how to comply.

Robert Kuttner: Simplify Banks and Bank Regulation -- Though Volcker was an early supporter of Obama and adviser to the campaign, Treasury Secretary Tim Geithner and economic adviser Larry Summers managed to marginalize Volcker because the old man turned out to be leery of their schemes to prop up the big banks without cleaning them out. Even worse, Volcker was nostalgic about the 1933 Glass-Steagall Act, which had staved off big trouble for more than half a century by requiring that federally insured commercial banks stay out of the inherently speculative investment banking business.  Financial lobbies had finally succeeded in getting Glass-Steagall repealed in 1999, with Summers and Geithner cheering. Now the president, in big political trouble, was sending for Volcker the way one breaks glass in an emergency. But the so-called Volcker Rule, a phrase the White House made up, turned out to be Glass-Steagall lite. Unlike the 1933 statute, Obama's so-called Volcker rule did not separate commercial banks from investment banks -- a nice clear bright line that was easy to police and hard to evade. Rather, the administration's proposed Volcker Rule limited how much "proprietary trading" big consolidated banks could do. Trading, however, is only one of the many kinds of mischief bankers get into when the mix commercial banking and investment banking.

EU bank failures will crash Wall Street — again -  Worst-case scenario’s closing fast: Occupy Wall Street growing. But no political power or allies yet. Feared yes, attacked by GOP proxy tea party. Soon the Occupation will explode into a new American Revolution. When? A string of European bank collapses is dead ahead. And like the Arab Spring, they will trigger an economic disaster for American banks.Yes, coming soon says Martin Weiss in his “7 Major Advance Warnings,” which is “bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.” His new Weiss Ratings warnings are the “most important” in a 40-year career. The stress on Wall Street banks will force them back to Congress for more bailouts. Warning eight: No new bailouts. That will push the economy into a deep recession. Then what? New Glass-Steagall? Not enough. Tax the rich? Not enough. Perp walks? Not enough. Presidential commission? Useless promises. Occupy Wall Street will fail without a fundamental constitutional change. No compromise. Or Wall Street wins, again. We go back to the same free market, deregulated, too-greedy to-fail, conservative Reaganomics policies that have been destroying democracy for a generation.

Derivatives: The $600 Trillion Time Bomb That's Set to Explode - Do you want to know the real reason banks aren't lending and the PIIGS have control of the barnyard in Europe? It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States. In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller. The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS). Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't. Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.

Trading Rebates on Exchanges Should End, ICE’s Sprecher Says -The pricing system used by the majority of U.S. stock exchanges should be banned because it encourages trading aimed only at collecting rebates, according to Jeffrey Sprecher, chief executive officer and chairman of IntercontinentalExchange Inc. (ICE)  Regulators shouldn’t let venues offer maker-taker pricing, in which an exchange charges some firms to trade and gives others rebates, Sprecher said. He said the pricing structure discourages some traders from owning stock.  “Don’t allow us to pay for order flow,” Sprecher said of the exchange industry.  The pricing technique used in equities spurs some traders to “simultaneously buy and sell on two different exchanges” and get paid rebates on both, instead of making money by holding shares, he said.  The number of U.S. stock and options exchanges has risen to 13 and nine, respectively, and one way they try to differentiate themselves is with pricing plans. Maker-taker pricing is mainly used to compensate market makers and other providers of bids and offers, while traders who execute against those orders pay a fee.

Constraints Seen for Market Makers Under Volcker Rule on Trading - Confusion about what constitutes proprietary trading under the Volcker rule may spur banks to reduce market making for customers.  Firms will spend less to service clients, Pirrong, a finance professor specializing in risk management, said in a telephone interview. The proposals may have a chilling effect on some businesses, according to Gira, executive vice president of the oversight organization for the securities industry.  The rule, named for former Federal Reserve Chairman Paul Volcker, was part of last year’s overhaul to rein in risky trading by firms whose customer deposits are federally insured. Concern is growing among banks that it will sometimes prove impossible to distinguish between proprietary transactions and trading done for the benefit of clients. “To the extent the rule constrains the ability of these firms to make profit, which is the whole idea, it will reduce the amount of capital the firms will put into their market- making business,” Pirrong said. “From the regulators’ perspective, that’s probably a feature rather than a bug.”

US adopts limits on speculative commodity trading — Trading in commodities futures will be capped under a federal rule adopted Tuesday that seeks to clamp down on speculative trades, which some have blamed for driving up food and gas prices in the past year. The Commodity Futures Trading Commission voted 3-2 to approve the rule, which doesn't take effect until 2012. It was required under the financial regulatory overhaul. Critics say the cap on futures contracts, which locks in prices, won't curb inflation. Liberals complain that the rule is filled with exemptions that would allow banks and hedge funds to continue speculative trading. Conservatives say too few companies can qualify for exemptions. Under the rule, airlines, agriculture companies and others are exempt from the cap. Those companies buy futures contracts to guard against sharp price swings. There are also exemptions for companies where payments of royalties or service fees are tied to production of a commodity. That could occur with natural gas, for example, CFTC staff said.

Top U.S. Regulator Approves New Limit on Commodity Speculation in 3-2 Vote - The top U.S. derivatives regulators voted 3 to 2 today to curb trading in oil, wheat, gold and other commodities after a boom in raw-materials speculation, record- high prices and years of debate and delay.  The rule has been among the most controversial provisions of the Dodd-Frank financial overhaul, enacted last year, which gave the Commodity Futures Trading Commission the authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The rule will limit the number of contracts a single firm can hold.  “Our duty is to protect both market participants and the American public from fraud, manipulation and other abuses,” Chairman Gary Gensler said at the commission’s meeting in Washington in support of the rule. “Position limits have served since the Commodity Exchange Act passed in 1936 as a tool to curb or prevent excessive speculation that may burden interstate commerce.”  The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. The spot-month limits apply separately to physically settled and cash-settled contracts. Deliverable supply will be determined by the CFTC in conjunction with the exchanges.

CFTC Finalizes Position Limits - The CFTC has finalized rules instituting position limits on futures and swaps contracts. These rules were created under the authority of section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final regulations cover 28 physical commodity futures and swaps and all economically equivalent contracts, and will be implemented in two phases. In this final rule-making, the Commission has established speculative position limits for 28-physical commodity futures contracts, including:

  • Nine “legacy” agricultural contracts (CBOT Corn, CBOT Oats, CBOT Soybeans, CBOT Soybean Meal, CBOT Soybean Oil, CBOT Wheat, ICE Futures U.S. Cotton No. 2, KCBT Hard Winter Wheat, MGEX Hard Red Spring Wheat).
  • Ten “non-legacy” agricultural contracts (CME Class III Milk, CME Feeder Cattle, CME Lean Hog, CME Live Cattle, CBOT Rough Rice, ICE Futures U.S. Cocoa, ICE Futures U.S. Coffee, ICE Futures FCOJ-A, ICE Futures U.S. Sugar No. 11, ICE Futures U.S. No. 16).
  • Four energy contracts (NYMEX Hub Natural Gas, NYMEX Sweet Light Crude, NYMEX NYH Gasoline Blendstock, NYMEX NYH Heating Oil).
  • Five metals contracts (COMEX Copper, COMEX Gold, COMEX Silver, NYMEX Palladium, NYMEX Platinum).

GOP: ‘Deregulate Wall Street!’, by Ezra Klein: In recent days, more than 900 cities have hosted protests under the Occupy Wall Street banner. But the enthusiasm for intervening in Goldman Sachs’s affairs hasn’t trickled up to the GOP presidential campaign. There, the candidates want to leave Wall Street alone. And this isn’t just a passive disinterest in the finance sector’s affairs. They want to deregulate -- actively and aggressively. “I introduced the bill to repeal Dodd-Frank,” bragged Rep. Rep. Michele Bachmann. Herman Cain was not to be outdone. “Repeal Dodd-Frank, and get rid of the capital gains tax,” he countered. Repealing the capital gains tax would make it vastly more profitable to earn a living through investment income rather than wage income. A hedge-fund manager, for instance, might escape income taxation entirely. It would give smart, young college students even more reason than they have now to go into the hedge fund game than, say, medicine. “Dodd-Frank obviously is a disaster,” agreed Rep. Ron Paul. “But Sarbanes-Oxley costs a trillion dollars, too. Let’s repeal that, too!” So three years after the worst financial crisis since the Great Depression, the consensus in the Republican Primary is that we should deregulate Wall Street not just to where it was before the bubble burst, but to somewhere nearer to where it was before Enron crashed.

The Demonization Of Elizabeth Warren - If you read only one article this year to understand the Wall Street/Washington Axis of Evil, it should be Vanity Fair's The Woman Who Knew Too Much. Among those who have spoken up in the last three years about the gross economic inequities that dominate American society, Elizabeth Warren has been the most effective. Unfortunately for us, "effective" doesn't mean much in this context. I am tempted to simply reprint the entire article, but it is very long and I don't have the required permission. It is all right there for you to read. No subscription required. The Consumer Financial Protection Bureau (C.F.P.B.) is Warren's brainchild. Wall Street plutocrats and those Inside the Beltway who carry water for them—mostly, but not exclusively Republicans—hate the C.F.P.B. more than any other aspect of the considerably watered down Dodd-Frank financial "reform" law. (Well, they're not crazy about regulating OTC derivatives either.) It's always best to follow the money.

What Should Happen With Occupy Wall Street? - I don't think it is incumbent on #OWS to have a coherent message.  They are people who feel that their freedoms are being constricted due to the corruptness of others.  They are joining together to push back against that feeling.  They win just by showing up and eschewing violence.  If the NYPD and branch managers at Citibank can't figure that out and stop dehumanizing the protestors, then #OWS will win even more. There are plenty of policy changes that could satisfy the protestors, even if they are not articulating them themselves.  I can only speak for myself. At a gut level, I would like policy makers to:

  1. Stop justifying action to prop up individual institutions based on vague notions of what will happen to the broader economy.
  2. Stop using bailouts in lieu of bankruptcy.
  3. Stop taking any political contributions from the financial sector, period.  What was true of the health sector during health care reform is even more true of the financial sector today.

A Victory for #OccupyWallStreet in the Most Unlikely of Places? - A Financial Times article today showcased recent comments by bank executives and politicians (and even Erick Erickson of!) sympathizing with the sentiments behind the Occupy Wall Street movement. John Stumpf, CEO of Wells Fargo is quoted from the earnings call today, “I understand some of the angst and the anger. This downturn has been too long, unemployment is too high, and people are hurting. We get that.” This comment came during the Q&A portion – more on that later – and doesn’t convey the extent to which the management of Wells Fargo seems deeply concerned and perhaps fearful about how the Occupy movement is turning public sentiment even further against Wall Street and the TBTF banks. But never fear! Nancy Bush of NAB Research LLC and SNL Financial rode to the rescue in the Q&A portion to assure the Wells Fargo management she had their back. She asked them a series of questions that were basically thinly veiled opportunities for her to praise management as “astute securities portfolio managers”, commiserate about what a pain in the neck it must be to have to deal with the CFPB, and encourage them to wage a PR campaign with the other banksters to convey that “the banking industry is not some evil behemoth out to crush the middle class.” With these kinds of probing questions one wonders how the TBTF banks developed the attitude that they can do no wrong.

In Private, Wall St. Bankers Dismiss Protesters as Unsophisticated - Publicly, bankers say they understand the anger at Wall Street — but believe they are misunderstood by the protesters camped on their doorstep.  But when they speak privately, it is often a different story.  “Most people view it as a ragtag group looking for sex, drugs and rock ’n’ roll,” said one top hedge fund manager.  “It’s not a middle-class uprising,” adds another veteran bank executive. “It’s fringe groups. It’s people who have the time to do this.”  Some on Wall Street viewed the protesters with disdain, and a degree of caution, as hundreds marched through the financial district on Friday. Others say they feel their pain, but are befuddled about what they are supposed to do to ease it. A few even feel personally attacked, and say the Occupy Wall Street protesters who have been in Zuccotti Park for weeks are just bitter about their own economic fate and looking for an easy target. If anything, they say, people should show some gratitude.

Which Bank Is the Worst for America? 5 Behemoths That Hold Our Political System Hostage - We've ranked the banks based on how shamelessly they game the political process through lobbying, revolving door politics and campaign donations.

Citi Earnings Bloodbath: $3.8 Billion ($1.23/Share) In Reported "Earnings" Really $0.5 Billion Or $0.16/Share ZeroHedge: Another stunning EPS beat from Citi today which reported $20.8 billion in revenue and $1.23 in earnings on expectations of $19.23 billion in top line and $0.82 in EPS.... Until one actually reads the following two parts from the earnings release: "Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi’s credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011. CVA increased reported third quarter earnings by $0.39 per share"....and... "Loan Loss Reserve Release of $1.4 Billion in Third Quarter, Down from $2.0 Billion in Each of Second Quarter 2011 and Third Quarter 2010." Once again, the bank releases reserves (i.e. a perceived improvement in economic conditions), even as its takes a benefit for major economic deterioration (the equivalent of hypothetically buying bank its debt at lower prices due to risk flaring, or said otherwise, buying CDS on itself). Either way, this is non-recurring gibberish.

The Vampire Squid of Wall Street Is Hemorrhaging - Government Sachs posted its second quarterly loss since it went public in 1999. No doubt that has sent Washington scrambling to try to plug the leak. Lloyd “doing God’s work” Blankfein blamed the “uncertain macroeconomic and market conditions”—conditions created, of course, by Wall Street. And since Wall Street refuses to let Washington do anything to improve those conditions, expect much more hemorrhaging among Wall Street’s finest.The big banks are toast, as I’ve been saying for quite some time. There is no plausible path to real profits with the economy tanking. Only jobs—millions and millions of them, as well as comprehensive debt relief will stop that. As I wrote a couple of weeks ago:  “US and European banks probably are already insolvent. When Greece defaults and the crisis spreads to the periphery that will become more obvious. The smaller US banks are in trouble because of the economic crisis. However, the biggest banks that caused the crisis are still reeling from their mistakes during the run-up to the crisis. They were already insolvent when the GFC hit, and are still insolvent. Policy makers have pursued an “extend and pretend” approach to hide the insolvencies, however, the sorry state of these banks will be exposed when the next crisis begins to spread.

Another Quarter, Another Blatant Window Dressing By The Primary Dealer Banks To Make Their Balance Sheets Seem Strong - When back in 2010, Lehman examiner Anton Valukas exposed the bankrupt bank's Repo 105 practices (which subsequently we learned were also partaken into by most other banks, although the trail ends there and nobody was prosecuted for it, let alone went to jail -after all, everyone was doing it, and everyone knew about it), many were shocked and appalled that such a blatant window dressing practice was allowed to continue quarter after quarter. Which is why we suppose nobody will be surprised to learn that glaringly "in your face" window dressing continues to this very day quarter in and quarter out by the same Primary Dealers who already leech billions in free Fed (i.e., taxpayer) money courtesy of a collusive BWIC/OWIC spread-to-market in the Fed's daily POMOs. The quote-unquote shocking chart below is one we have demonstrated on numerous occasions in the past: it shows total primary dealer assets on a weekly basis as reported publicly by the New York Fed. We have made it clear time and again, that this chart demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios...

Quit the accounting tricks: bankers must show humility  - Bankers’ reaction to the latest flood of earnings statements has probably been one of relief. Although results were mixed – Goldman Sachs’ second-ever quarterly loss as a public company was particularly telling – they were decent enough that bank executives must hope they can get through unscathed by too much criticism. Those who look under the surface, however, and take time to reflect on what they see, may find evidence of just how deep the banking sector’s social and political predicament is. Some big US banks reported year-on-year increases in third-quarter profits. But the results appear a lot poorer when we peer under the hood of the headline numbers. In most cases, banks have booked the unrealised profits from marking to market the value of their own debt to their creditors. In other words, growing market fears about banks’ solvency – which are driving down the price of their bonds and raising their cost of doing business – are turned to advantage in the profit and loss statements. This is to combine the black magic of leverage with the alchemy of mark-to-market accounting. If Eurostat, the European Union’s statistics arm, allowed Greece to use the same trick, Athens would now be flaunting a public sector surplus bigger than Norway’s.

A year later everyone is catching on about Fed policy and net interest margins - Below is a link to a video from today’s talk about earnings at Goldman and Bank of America. Before you watch the video, let me say a few words about Fed policy and net interest margins plus a bit on Goldman and BofA. Last November, in anticipation of QE2, I wrote a post called “How Quantitative Easing and Permanent Zero are Toxic To Bank Net Interest Margins”. The gist of the post was that if the ‘extended period’ for low rates was too long, net interest margins would suffer, especially during a recession. I was looking at Japan and their economic policies and seeing low yields and super-low net interest margins killing bank earnings.

Citigroup to Pay Millions to Close Fraud Complaint - Citigroup1 agreed to pay $285 million to settle charges that it misled investors in a $1 billion derivatives2 deal tied to the United States housing market, then bet against investors as the housing market began to show signs of distress, the Securities and Exchange Commission said Wednesday. The S.E.C. also brought charges against a Citigroup employee who was responsible for structuring the transaction, and brought and settled charges against the asset management unit of Credit Suisse and a Credit Suisse employee who also had responsibility for the derivative security.  The S.E.C. said that the $285 million would be returned to investors in the deal, a collateralized debt obligation3 known as Class V Funding III. The commission said that Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio.  Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.

Did Citi Get a Sweet Deal? Bank Claims SEC Settlement on One CDO Clears It on All Others - In the run-up to the global financial collapse, Citigroup’s bankers worked feverishly to create complex securities. In just one year, 2007, Citi marketed more than $20 billion worth of deals backed by home mortgages to investors around the world, most of which failed spectacularly. Subsequent lawsuits and investigations turned up evidence that the bank knew that some of the products were low quality and, in some instances, had even bet they would fail. The bank says it has settled all of its potential liability to a key regulator – the Securities and Exchange Commission -- with a $285 million payment that covers a single transaction, Class V Funding III. ProPublica first raised questions about the deal [1] in August 2010.  In announcing a case, the SEC said it had identified one low-level employee, Brian Stoker, as responsible for the bank’s misconduct.  It made no mention of the dozens of similar collateralized debt obligations, or CDOs, Citi sold to investors before the crash.  A bank spokesman said the SEC would not be examining any of those deals. “This means that the SEC has completed its CDO investigation(s) of Citi,’’ the spokesman asserted in an e mail.

Is the SEC colluding with banks on CDO prosecutions? - Is the SEC colluding with Wall Street’s biggest banks to let them off lightly with respect to their dodgy CDOs? Jesse Eisinger and Jake Bernstein get an astonishing on-the-record admission today, from a Citigroup flack, that might indeed be the case: The bank says it has settled all of its potential liability to a key regulator – the Securities and Exchange Commission — with a $285 million payment that covers a single transaction, Class V Funding III… [The SEC] made no mention of the dozens of similar collateralized debt obligations, or CDOs, Citi sold to investors before the crash. A bank spokesman said the SEC would not be examining any of those deals. “This means that the SEC has completed its CDO investigation(s) of Citi,’’ the spokesman asserted in an e mail. The SEC, of course, denies this — but it carries the ring of truth. Just look at the SEC’s own list of CDO prosecutions to date: there’s exactly one enforcement action per bank. And the idea is held more broadly, too — look for instance at Peter Henning’s article on the subject today.

Citigroup Deal to Go to Judge Critical of S.E.C. Practices - It is boilerplate language found in nearly every settlement with the Securities and Exchange Commission1: A company settles its case “without admitting or denying” wrongdoing. There it was again in the S.E.C.’s announcement on Wednesday that Citigroup2 had agreed to pay $285 million3 to settle a civil complaint that it had defrauded investors in a mortgage securities deal. The bank did so “without admitting or denying” the government’s accusations. But the S.E.C.’s longstanding policy of using this phrase in its settlements is likely to come under scrutiny by the federal judge who must approve the Citigroup settlement — and it could, legal experts say, cause the deal to come undone.That is because the judge presiding over the S.E.C.’s action against Citigroup is Judge Jed S. Rakoff4 of Federal District Court in Manhattan, a jurist whom many consider the agency’s bête noire. “Given his recent jurisprudence, if anyone’s going to rattle the S.E.C.’s cage on this issue, it’s Judge Rakoff,”

Did Bad Loans Continue at Bank of America After 2008? --Bank of America is out with earnings on Tuesday. It had net income of $6.2 billion, or 56 cents per share, but that is not the part I found most interesting in a quick review of the numbers. Instead it is the progress, or lack of same, in getting past all the bad mortgages it sold into securitizations. In the quarter, the bank set aside only $278 million for representations and warranties claims. It is that number, not the $1.79 billion in charge-offs in the quarter, that affects reported profit. I say “only $278 million” because that is the lowest quarterly figure for additions to that reserve at least since the fourth quarter of 2009, which is the first number I could find in a quick review of prior reports. But the decline was not because new claims have dried up. They amounted to $3.8 billion in the quarter, $99 million more than in the previous quarter. In a commentary, the bank says the new claims come mainly from Fannie Mae and Freddie Mac, the government-sponsored enterprises.O f the new claims in the quarter, $164 million came from mortgages sold in 2009 or later, a figure that is higher than in any of the previous quarters.  It sounds like Fannie and Freddie are saying that bad practices continued.

BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit - Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation. The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision. Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC.

Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors - Yves Smith - If you have any doubt that Bank of America is in trouble, this development should settle it. I’m late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management. The short form via Bloomberg: Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades. That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.  Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

The Next Bailout: BofA Moves Derivatives Into Insured Institution - Bank of America announced a way for them to make it look like they made a $6.2 billion profit in the last quarter. The “profit” came mostly from an accounting trick and the sale of their stake in a Chinese bank, part of their downsizing strategy. But they had lower revenue and income in their credit card, real estate and investment banking businesses, which is pretty much their entire business. If you add up the accounting gains totaling $6.2 billion and the net on the sale of the bank, you’d see that the bank lost $1.4 billion last quarter. The market shrugged off the gimmicks, and at this point BofA is up 10% on the day. But I think that actually has a lot more to do with this: Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation. The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. . The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

BofA puts taxpayers on the hook for Merrill’s derivatives - Bloomberg had a story, a couple of days ago, about BofA moving Merrill Lynch derivatives to its retail-banking subsidiary. The story was quite long and hard to follow. So let me try to cut away the fat. Bank of America is being hit with downgrades. And as we saw with AIG, when a derivatives counterparty gets hit with downgrades, it has to post lots more collateral. In BofA’s case, the numbers are very large indeed: Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing. On the other hand, retail banks are much safer, because they’re protected by the FDIC. If a retail bank is a derivatives counterparty, then it doesn’t need to post nearly as much collateral. The derivatives aren’t themselves insured by the FDIC, but they have extremely senior status, which means that the bank can use its deposit base to pay off derivatives counter parties. And then if there isn’t enough money left to pay depositors, the FDIC will step in and make those depositors whole.

Not with a Bang, but a Whimper: Bank of America’s Death Rattle - Bob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis.  The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA).  The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it.  Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.   I write to add some context, point out additional areas of inappropriate actions, and add a regulatory perspective gained from dealing with analogous efforts by holding companies to foist dangerous affiliate transactions on insured depositories.  I’ll begin by adding some historical context to explain how B of A got into this maze of affiliate conflicts.

Banks Start to Make More Loans - Despite all the bleak economic news, a funny thing has been happening in the financial industry over the last few months: the banks have quietly turned on the lending spigot. Loan growth is still modest. And it remains heavily weighted toward the strongest corporate and consumer borrowers. But after several quarters of having their loan balances plunge or flatten out, several of the nation’s biggest banks are reporting increases. On Monday, Citigroup1 officials said the bank recorded loan growth, compared with a year ago, in almost every one of its businesses during the third quarter, and in almost every corner of the globe. Wells Fargo2 executives said new loan commitments to small businesses were up 8 percent, while lending to bigger companies has been growing for 14 months in a row. Across the industry, analysts expect credit card loan balances will start increasing before the end of the year.

Online Banking Keeps Customers on Hook for Fees - Customers frustrated by banks1’ controversial new fees are finding out what industry insiders have known for years: it is not so easy to disentangle your life from your bank.  The Internet banking services that have been sold to customers as conveniences, like online bill paying,  serve as powerful tethers that keep them from jumping to another institution.  Tedd Speck, a 49-year-old market researcher in Kent, Conn., was furious about Bank of America’s planned $5 monthly fee for debit card use.  But he is staying put after being overwhelmed by the inconvenience of moving dozens of online bill paying arrangements to another bank.  Former bankers and market researchers say that it’s no accident. The steady expansion of online bill paying, they say, has emboldened Bank of America, as well as rivals like Wells Fargo, JPMorgan Chase and SunTrust, to turn to new fees on customer accounts as other sources of revenue dry up. “The technology locks you in and they’re keenly aware of it,” said Robert Smith, who was chief executive of Security Pacific when it was bought by Bank of America in 1992. “It’s very hard for consumers to just ditch that.”

Take your money and run - Hello, you’ve reached Mammoth Bank, where you always get what you pay for. We have a special today. Transfer money between accounts for just $5. Make 2 transfers and there’s no fee for the third. Press 1 to take advantage of this special offer. Otherwise please listen to our menu of services. Press 2 to check your balance. A $1 fee applies. Press 3 to request a copy of your last statement for $19.95. Press 4 if you want to sign up for our bill-paying service. The one-time fee is just $14.95, and you start saving on stamps immediately. Press 5 for our mailing address. There is no fee for this service. At any time, if you’d like to talk to a live customer service representative, press 6. Then press 1 to confirm that you accept the $5 per minute fee. Or you can press 7 to get help from our free automated system. We are experiencing extremely high call volume for free help at this time. Please be advised that your wait time is approximately 16 hours and 4 minutes. There are 789 callers ahead of you.

As Many as 24 People Arrested for Trying to Close Accounts at #Citibank - - Yves Smith - Daily Kos publicized a story captured on Global Revolution, of perhaps as many as 30 people being arrested for attempting to close their Citibank accounts. Kos originally said 30 people were arrested; an update now says 17, again per Global Revolution.  The New York Post reports that 24 people were arrested; its characterization is that a “mob stormed” a branch at Laguardia Place in Manhattan. The basis for the arrests appears to be plenty dubious. Later accounts indicate that people trying to close their accounts were locked in the branch and then arrested for illegal trespass. This video (hat tip Mike Stark) appears to support the protestors’ claims. Notice that the people in the branch are not disruptive, and a woman outside the branch, who had documents to show she was a Citibank customer but apparently had been inside the branch, was grabbed by the police and forced into the branch: This looks troublingly similar to an effort by Bank of America last August to stop account closures by individual who wanted to send a message, in which the police barred access to the branch in St. Louis:

So, how many times have banks had people arrested who tried to close their accounts? You must watch the video. Seems like a lot. Here's MsExPat; Yves has those, and adds another incident in St. Louis*; here's another: Classic quote from the manager: "You cannot be a protester and a customer at the same time." And there you have it, really, don't you? So, what's the grand total, nation-wide? Of course, I don't have to ask why this story isn't being covered..... NOTE * Looking at the video, which is all the evidence I know of, I can't be sure what the count is.

The Public Option in Banking: Another Look at the German Model - Publicly owned banks were instrumental in funding Germany's "economic miracle" after the devastation of World War II. Although the German public banks have been targeted in the last decade for takedown by their private competitors, the model remains a viable alternative to the private profiteering being protested on Wall Street today. One of the demands voiced by protesters in the Occupy Wall Street movement is for a "public option" in banking. What that means was explained by Dr. Michael Hudson, professor of economics at the University of Missouri in Kansas City, in an interview by Paul Jay of the Real News Network on October 6: [T]he demand isn't simply to make a public bank, but is to treat the banks generally as a public utility, just as you treat electric companies as a public utility.... Just as there was pressure for a public option in health care, there should be a public option in banking. There should be a government bank that offers credit card rates without punitive 30% interest rates, without penalties, without raising the rate if you don't pay your electric bill. This is how America got strong in the 19th and early 20th century, by essentially having public infrastructure, just like you'd have roads and bridges....

Recent Trends in Small Business Lending - SF Fed Economic Letter - Although bank small business loan portfolios continue to shrink, there are hints of possible stabilization. Among smaller banks, small business lending that is not backed by commercial real estate looks slightly healthier than small business lending that is secured by commercial property. Meanwhile, small commercial and industrial loans at larger banks are showing clear signs of a turnaround. Evidence from the 2001 recession as well as loan performance data suggest that small commercial and industrial loans at smaller banks may not be far behind.

Community Bank to pay, not charge, $5 a month - Community Bank, which has 17 branches throughout Manatee and four other southwest Florida counties, is joining the outcry against bank debit fees by offering new customers the opposite: a monthly payment. The $5 per month Community Bank is offering anyone who opens a Value Checking account is a direct response to the $3 to $5 monthly debit card fees larger banks are starting to charge, bank officials said.“We needed to do something to help consumers who are under attack from behemoth national banks charging fees that just don’t make sense,” said Katie Pembles, Community Bank president. “People have a choice of where to bank, and at Community Bank, we thought paying people $5 per month rather than charging them $5 per month was a good way to set us apart.” Pembles said Community Bank “doesn’t think we have to charge $5 a month to make an account profitable.”

Moody's: CMBS delinquencies up to 9.36% in September - The delinquency rate of loans in commercial mortgage-backed securities rose in September while total issuance fell as more seasoned loans left CMBS than new deals came into the sector, according to Moody's Investors Service. Analysts said the rate of delinquent loans increased to 9.36% from 9.01% in August. The rate has stayed higher than 9% for all of 2011. The delinquency rates for all five property types rose in September from the prior month and are higher than the year earlier: retail to 7.11% from 7.08% in August; office to 8.16% from 7.36%; industrial 11.39% from 11.2%; hotel 14.81% from 14.56%; and multifamily 15.33% from 15.21%.

Pressures grow on US regional lenders -- Large US regional banks will need to cut expenses by up to 40 per cent to cope with slower economic growth, lower revenues and high regulatory costs, and that will increase pressure to cut staff or merge with rivals, a new study says.The report by Alvarez & Marsal turnround specialists said returns on equity at leading regional US lenders had fallen by about half from pre-crisis levels of about 15 per cent. Luring investors back to the sector would require more than routine cost-cutting, it said. Lenders face multiple challenges to increasing profits. Low interest rates are squeezing their net interest margins. A faltering economic recovery is reducing the demand for loans. Higher capital requirements and restrictions on products are eating into earnings.

Unofficial Problem Bank list declines to 979 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 14, 2011. Changes and comments from surferdude808:  After several changes, the Unofficial Problem Bank List finished the week with 979 institutions and assets of $403.8 billion. A year ago, there were 875 institutions with assets of $401.6 billion on the list. This week, there were five removals and one addition.

Obama Aims for Compromise With Hoenig Pick for FDIC - President Barack Obama‘s nomination of a top Federal Reserve official to a key post at the Federal Deposit Insurance Corp. represents an attempt to reach a compromise with Republicans to fill vacant spots on the agency’s five-member board. Democrats hope to act quickly and move the nomination of Thomas Hoenig, retired chairman of the Federal Reserve Bank of Kansas City, through the Senate Banking Committee and onto the full Senate, a person familiar with the matter said Friday. Hoenig is “highly qualified” and well-known to the banking committee, said Jonathan Graffeo, a spokesman for Sen. Richard Shelby (R., Ala.), the banking panel’s top Republican, adding that Shelby “looks forward to fully vetting his record.” Hoenig, 65, was president of the Kansas City Fed for 20 years before retiring on Oct. 1. The Obama administration nominated him to be vice chairman of the FDIC on Thursday night. The move came after Senate Minority Leader Mitch McConnell (R., Ky.) submitted Hoenig’s name to the White House, people familiar with the matter said.

Big bank mortgage originations drop 24% from year earlier…The big four banks combined to write $175.4 billion in new mortgages during the three months ended Sept. 30. That is 24% lower than what these lenders wrote a year earlier. Wells Fargo remained the lender of choice for many borrowers, originating $89 billion in new mortgages, down 12% from the $101 billion last year. JPMorgan Chase not only surpassed during the quarter Bank of America as the largest bank by assets, but also as the second largest mortgage lender in the country. Chase originated $36.8 billion in new home loans, down 10% from the $40.9 billion in the third quarter of last year. BofA originated $33 billion mortgages in the third quarter, a 54% decline from $71.9 billion a year earlier. Citigroup wrote $17 billion in mortgages during the quarter, down 8.5% from the $18.6 billion. These four firms combined for nearly 60% of the mortgage originations in 2010. Only Ally Financial,  which has yet to report third-quarter earnings, was in the top five last year.

Bank of America Setback: $8.5 Billion Mortgage Settlement Successfully Removed to Federal Court (Updated) - Yves Smith - Bank of America can’t win for losing. Readers may recall the Charlotte bank tried arranging a settlement for a troublingly wide range of liability issues with its securitization trustee, Bank of New York, purportedly on behalf of investors. This deal looked like a victory for BofA, since it covered virtually all of the old Countrywide securitizations.  As we indicated the deal stank to high heaven, in part because Bank of New York itself has liability to investors on these very same trusts and BofA gave Bank of New York an expanded indemnification. That’s called a bribe, folks. And on top of that, Bank of New York is effectively the house RMBS trustee for BofA, so it isn’t surprising that Bank of New York might be a tad responsive to the wishes of a major, ongoing client. The deal is subject to a so-called Article 77 hearing, and a raft of parties objected, not just quite a few investors, but also the FDIC and the attorneys general of New York and Delaware. The hearing was due to take place before a New York judge (this was treated as a state law matter) who has proven to be very bank friendly in the past. One of the investor attorneys, David Grais, petitioned to have the case removed to Federal court. The drill is that the case is automatically removed, but the other side can and pretty much always does move to have the case returned to the original court. It is the judge in the new venue who hears the arguments and decides whether to keep the matter in his court or not.Per Reuters, the Federal judge decided to keep the case. 

Whither BofA MBS deal: Can banks walk if case stays with Pauley? -It's way too early to assume that Manhattan federal judge William Pauley III will end up deciding the fate of Bank of America's proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. But that doesn't mean it's too early to start wondering what will happen to the proposed deal if he does.  First, a caveat: Bank of New York Mellon, the Countrywide securitization trustee that filed the case in New York state Supreme Court , has the right to request appellate review of Pauley's ruling that the case belongs instead in federal court under the Class Action Fairness Act. And when BNY Mellon asks the U.S. Court of Appeals for the Second Circuit to hear the appeal, the bank will surely remind the appellate court of its own language in a previous Countrywide MBS case, in which the Second Circuit decided the suit should go back to state court. In his ruling Wednesday, Pauley cited the "paramount federal interests" at stake in the BofA MBS settlement. But the previous Second Circuit MBS ruling expressly rejected that rationale. "If Congress meant the consideration of a class action's importance to the nation as a whole to trump these limiting provisions [under CAFA], it would have indicated that intent,"

Is Bank of America preparing for a Chapter 11?  - Bank of America has managed to step into the kimchee several times over the past couple of months, an achievement that only warms the hearts of crisis communications professionals.  First came the abortive settlement of $10 billion or so in put-back claims by some large investors.  Then came the decision by Bank America CEO Brian Moynihan to impose a $5 per month fee on ATM transactions, this in response to the Dodd-Frank law which cuts about half of the profits for big banks in the electronic payments market. Consumers reacted in rage to the announcement, which arguably helped to catalyze the Occupy Wall Street movement.  Truth is that the big bank’s cartel control in payments is under assault by more than Congress.   Most recently Bank America drew attention to itself by disclosing that it had moved all of the derivatives footings from its Merrill Lynch subsidiary to the lead bank, Bank of America N.A.  Bloomberg ran the first story, reporting “BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit.” This report led to comments and reports claiming that the Fed, by allowing this move, had somehow impaired the national patrimony and violated Section 23A of the Federal Reserve Act.

California reportedly subpoenas BofA over toxic securities - Investigators with the state attorney general's office have subpoenaed Bank of America Corp. in connection with the sale and marketing of troubled mortgage-backed securities to California investors, according to a person familiar with the probe.The state is trying to determine whether the bank and its Countrywide Financial subsidiary sold investments backed by risky mortgages to institutional and private investors in California under false pretenses, according to the person, who was not authorized to speak publicly and requested confidentiality. The subpoenas, which were served Tuesday, come as talks continue for a broad foreclosure settlement by a coalition of state attorneys general and federal agencies. California walked away from those discussions with major banks more than two weeks ago, saying what the banks were offering was not enough and the state would pursue its own investigations.  California has left the door open to signing on to a bigger settlement, and the BofA subpoenas were seen as a move to exert further pressure on the bank. The person familiar with the matter would not say how much the securities in question cost investors.

Wall Street's New Nightmare: The Next Wave Of Mortgage-Backed Securities Claims - Her $8.5 billion Bank of America settlement over bad mortgage deals was just the beginning. Now, backed by bond giants Pimco and BlackRock, Texas lawyer Kathy Patrick is gearing up for a new legal assault on the financial industry.  The biggest private legal settlement in the history of Wall Street was a few sentences away from death. In early June a ­little-known Texas lawyer named Kathy Patrick was putting the final touches on her carefully crafted $8.5 billion deal with Bank of America over so-called mortgage put-backs, when she got a last-minute demand from the other side. Sitting in her Houston office, Patrick learned that BofA wanted her clients—a clutch of the world’s most important investment firms, including BlackRock and Pimco—to promise they would not go after the bank with separate claims over the same mortgage pools.  No way, she answered. As far as Patrick was concerned, she had made clear such a release was not on the table. Some of her clients had already filed securities claims against Bank of America. “It’s not every day that you write a letter to someone,” the 51-year-old says, “and tell them to take their $8.5 billion and shove it.”

Fannie and Freddie, Still the Socialites - Last week, almost 3,000 people descended on the Hyatt Regency in Chicago for the 98th annual convention of the Mortgage Bankers Association. The price of admission: about $1,000 a head. But for that grand, you got to hear the band Chicago play hits from the ’70s. And David Axelrod and Jeb Bush give speeches. And experts discuss things like demographics, the politics of housing and the future of the mortgage industry, according to a flier for the event. The city of Chicago was no doubt grateful for the conventioneers’ dollars. Besides, Mayor Rahm Emanuel1 knows something about this industry: he used to be a director at the mortgage giant Freddie Mac2.  Nothing wrong with a bit of schmoozing. But it might seem jarring that Freddie, which was rescued by Washington and today exists at the pleasure of taxpayers, paid $80,000 to become a “platinum” sponsor of this shindig. Fannie Mae3, that other ward of the state, paid $60,000 to become a “gold” sponsor.  Keep in mind that taxpayers bailed out Fannie and Freddie to the tune of about $150 billion.

Higher Fannie, Freddie Loan Limits — Back From the Dead? - A push by the real estate industry to restore higher limits on the size of government-backed loans is starting to have some results. But the outcome is far from certain. Around 11:30 p.m. on Thursday night, the Senate voted 60-38 to approve an amendment to a federal spending bill that would raise the maximum size of loans that can be guaranteed by government-controlled mortgage companies Fannie Mae, Freddie Mac and the Federal Housing Administration. Politicians on both sides of the aisle have called for getting rid of Fannie and Freddie, the two mortgage firms whose federal rescue three years ago has cost taxpayers $141 billion to date. The move by Senate lawmakers illustrates just how hard it will be to do that — as long as the housing market limps along. If Congress raises the limits back to their former levels, it’s another indication of how Fannie and Freddie aren’t going anywhere soon. Those limits dropped to $625,500 on Oct. 1 in expensive markets such as New York and San Francisco, down from $729,750. In other parts of the U.S, limits vary by location.

U.S. Mortgage Fixes Won’t ‘Shock and Awe’ Economy, Analysts Say - A U.S. plan to help homeowners refinance mortgages is expected to reach fewer than 1 million borrowers, too few to give a jolt to the struggling economy, according to lawmakers and analysts briefed on the changes. At the root of the furor is a plan from Edward J. DeMarco, acting director of the independent Federal Housing Finance Agency, to repair the Home Affordable Refinance Program, a three-year-old effort that allows borrowers to take new loans for as much as 125 percent of their home value. DeMarco has said his fix will be more of a tune-up than an overhaul, with reduced “frictions” and “enhancements.”  Analysts and lawmakers who have met with FHFA officials estimate that DeMarco’s changes will help 600,000 to 1 million borrowers out of the 11 million in need of assistance.  “To have true shock and awe that would jump-start the economy you need a lot more than 600,000 additional refis,”“Originators are afraid of these loans,”“It’s almost by definition a high-risk loan.” They fear refinancing higher-risk borrowers could trigger scrutiny from the government-sponsored enterprises, which are free to revoke guarantees if a loan sours or flaws are discovered.

New Mortgage Plan Floated - State and federal officials are pushing a plan that could help some "underwater" borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market. The proposal was raised in a meeting last week between government negotiators and giant lenders as part of an effort to settle allegations of questionable foreclosure practices. Discussions are still fluid and any final outcome is uncertain. Talks between government officials and the banks are expected to continue this week.   The plan under consideration would make refinancing available to some borrowers whose houses are worth less than their loans, so long as they are current on mortgage payments. Such borrowers typically aren't able to refinance because they lack equity in their homes. The plan would apply only to mortgages owned by the banks. ... Around 20% of all U.S. mortgages are owned by U.S.-chartered commercial banks

Mortgage refinance doesn’t belong in the settlement talks - The WSJ has the latest mortgage-settlement trial balloon, and it’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.  When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it. As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off. But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment. Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do. Naturally, they’re clinging on to this undeserved income stream for dear life:

Latest Attorney General Bailout Plan: Give Banks “Get Out of Jail Free” Card for a Few Refis - Yves Smith - Attorney General Tom Miller of Iowa, who is leading the whitewash once known as the 50 state attorney mortgage settlement negotiations (7 have defected), reliably, every few weeks, has gotten word to the media that a deal is weeks away. This has been going on so long that it is easy to ignore it, particularly since the absence of key states is going to reduce the importance of any settlement being reached.  We have a combo plate of stories, one in the Wall Street Journal yesterday morning and a further critical tidbit from Reuters this evening that together give an overview of Miller’s latest effort to push a deal over the goal line. The latest idea is as bad as we feared. It gives banks a broad waiver in return for very little. That was always the only deal that might ever get done here, and Miller is now officially trying to arrange a give-away with a few sops to borrowers as a camouflage.  The “what the borrowers might get” trial balloon was leaked to the Journal is pathetic. It is a refi plan for borrowers who are current on their mortgages but underwater. Oh, and you have to be one of the lucky ones whose mortgage was NOT securitized!

Attorney General Beau Biden on Investigating the Mortgage Mess - 10/19/2011 - Yves Smith - The Dylan Ratigan show is on a roll this week. The program today included a segment with one of our heros, Delaware attorney general Beau Biden, who was early to join New York’s Eric Schneiderman in questioning the now less than 50 state attorney general mortgage settlement. He also joined the FDIC, Schneiderman and a large number of investors in objecting to a proposed $8.5 billion mortgage settlement by Bank of America.  Biden makes a clear and concise statement of the major issues:

Occupy the Mortgage Lenders - Simon Johnson - Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents. But leading banks are also accused of illegal behavior – inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities to investors. If these charges are true, the bank executives involved may fear that civil lawsuits would uncover evidence that could be used in criminal prosecutions. In that case, their interest would naturally lie in seeking – as they now are – to keep that evidence from ever seeing the inside of a courtroom. The scale and structure of any out-of-court mortgage settlement should address the damage inflicted by the alleged pattern of behavior. Many Americans now have too much debt. About 10 million mortgages are estimated to be “underwater” (the house is worth less than the loan). And, in key markets around the US, four years into the housing slump, home prices continue to fall.

Massachusetts Supreme Court Blows Whistle on How the Banks Broke the Housing Market - I should have given the Bevilacqua case a bit more attention yesterday rather than sticking it in the Roundup. It represents the nightmare scenario we all expected to come to pass. The highest court in Massachusetts ruled that a homeowner who bought a foreclosure that hadn’t been properly conducted by the foreclosing bank in 2006 didn’t have legal ownership of the property. The decision by the Supreme Judicial Court casts a cloud over the legal ownership of any properties in Massachusetts where banks didn’t properly convey title when foreclosing. The problem has gained attention nationwide because of banks’ use of “robo-signing” and other dubious practices that may have broken chains of title on foreclosures. Think about that. Banks that failed to convey title during foreclosure have clouded the title of any property for the foreseeable future, meaning that whoever buys up the foreclosed property may not be the legal owner. And extrapolating that out, all the homes across the country where the banks failed to convey title properly through securitization have clouded the titles there. That means tens of millions of homes pretty much have no legal ownership chain.

BOMBSHELL - Massachusetts Supreme Court Rules That Most Foreclosure Sales From Previous 5 Years Are VOID - The only thing surprising about this ruling is that it took so long to be made. This is black letter law, folks, the logical extension of the Court's Ibanez decision. Without a promissory note, a foreclosing plaintiff cannot show a legal injury, i.e., does not have standing to sue. Without standing, the action before the court does not qualify as a "case or controversy" under Article III of the constitution. Courts can only make rulings on "cases or controversies;" advisory opinions are a legal nullity. Consequently, a court that purports to enter a "judgment" where it has no subject matter jurisdiction has in fact entered a legal nullity on its docket; that "judgment" is void as a matter of law. As such, any such "judgment" entered where the plaintiff had no standing is open to collateral attack in any subsequent proceeding. What is more, subject matter jurisdiction cannot be waived; were that the case, parties could falsely induce courts to make binding rulings--obviously non-sensical. The procedural posture of this particular case is unusually serpentine, no doubt. In any event, there is nothing controversial--as a legal proposition--about this case. I'm sure the banks, who are now shitting their pants over the implications of this case, see it differently, but they're just wrong.

Nemo Dat Trumps Bona Fide Purchaser - The Massachusetts Supreme Judicial Court just handed down a second major mortgage foreclosure ruling, Bevilacqua v. Rodriguez.  The case was an Ibanez follow-up dealing with the rights of a purchaser at an invalid foreclosure sale. I thought this was a no brainer case and said so in an amicus brief co-authored with some of the Credit Slips crew. As the trial court noted, the foreclosure sale purchaser has to lose otherwise I could actually sell you the Brooklyn Bridge or some other property I don't own. What was cool about this case from an academic perspective was that it pitted two heavyweight, Latin-inscribed principles of commercial law against each other:  the nemo dat quod non habet principle (you can't give what you don't have) and the bona fide purchaser principle (one who takes in good faith for value and without notice of defect will get legal protection against claims). While these are both venerable principles of commercial law, there should have been no question that nemo dat prevails. It is arguably the foundational principle of commercial law:  the most one party can transfer to another are the rights it has. 

Supreme Court Declines to Review MERS Challenge - The United States Supreme Court has denied a writ of certiorari in a case involving MERS, refusing to reconsider a California court ruling, which upheld MERS’ right to initiate foreclosures. The case in question, Gomes v. Countrywide, was originally decided by Judge Steven R. Denton, who ruled that the language in the deed of trust allows MERS to initiate non-judicial foreclosure actions and that the borrower concedes this right to MERS when he or she signs the deed of trust. “Courts in California have ruled consistently that MERS’ legal standing as beneficiary gives MERS the authority under state law to take action on behalf of the owner of the note,” said Janis Smith, MERSCORP’s VP of corporate communications in a statement announcing the Supreme Court’s denial of the case.

Barclays expects foreclosures to sap housing demand - Foreclosures are moving into real-estate owned status quicker and quicker, Barclays Capital said Friday. Currently, the market can handle the rate at which the properties move onto the market. However, if the roll rate of foreclosure to REO continues to increase greatly, the market for these properties may begin to soften. "Although REO supply and demand are currently evenly matched, the glut of foreclosed homes in the pipeline should eventually cause REO supply to far exceed REO demand," said the analysts in a note to clients. Barclays also warned that the existing timeline of defaulting loans will only ramp up in the future. "Severities will remain elevated, even rise, in the near term, but are expected to fall 18-24 months from now," Barclays said. The analysts also noted that foreclosure timelines in judicial and non judicial states are getting closer in length (see chart below).

Romney’s Foreclosure Plan: Faster Foreclosures - Mitt Romney often gives off the distinct impression of not being a human being with blood coursing through his veins. That’s a good rationale for this conversation on the foreclosure crisis with the editorial board of the Las Vegas Journal-Review. Here’s a quickie transcript: ROMNEY: Are there things that you can do to encourage housing. One is, don’t try and stop the foreclosure process. Let it run its course and hit the bottom, allow investors to buy homes, put renters in them, fix the homes up and let it turn around and come back up. The Obama Administration has slow-walked the foreclosure processes that have long existed, and as a result we still have a foreclosure overhang. I like the notion that the Obama Administration is the one slow-walking the foreclosure process. Anyone who’s looked at the issue for 10 seconds knows it’s the banks, effectively, who have slow-walked the process, in part by violating the laws governing the process. Courts have stopped foreclosures not because they are operating on high and responding to some Kenyan version of a Bat-Signal; instead judges with some sense of fairly enforcing the laws stopped them, because banks committed fraud by using false affidavits and fabricated or forged documents. 

Feldstein’s Mortgage Proposal: No Silver Bullet - Martin Feldstein has recently published  a provocative op-ed arguing for a large-scale mortgage write-off program to counteract housing losses. Feldstein is highly influential economist who has served numerous roles in public policy, so his views are worth considering. His latest piece, however, offers a weak defense of an expensive and unfair housing policy.The core of the plan revolves around a government-backed housing debt-waiver: 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. Before commenting on the plan itself, it’s worth looking through the motivations of an enormously expensive (Feldstein estimates the cost at $350 billion) and difficult to implement plan. What are the problems in the housing market that justify such an extraordinary policy proposal?

For Seriously-Troubled Loans: A Call to ARMs - Many folks have for some strange reason argued that safe and effective loan modifications for troubled borrowers should get these borrowers into 30-year fixed-rate mortgages – even though short-term interest rates are close to zero, and expected to stay close to zero “until at least 2013.” One reason, of course, is that the typical ARM offered by US lenders has been one where the margin over the short-term index rate used has been really high – 275 bp for prime borrowers and often 600 bp for “subprime” borrowers. Such margins have been well in excess of the effective margin of fixed-rate mortgages over the full Treasury curve, after adjusting for the option cost of the prepayment option. If, however, an adjustable rate mortgage with a “reasonable” margin were offered to struggling borrowers, it might just be worth the “risk” of having these borrowers take some interest-rate risk in exchange for lowering their risk of losing their home, by having a larger share of their reduced payment going to principal pay down. Many struggling borrowers, of course, are in danger of losing their homes in the short- or intermediate-term, and it’s not clear if putting such borrowers into a long-term fixed-rate mortgage which includes prepayment risk in the rate is the “best” for such borrowers.

How to Clean Up the Housing Mess - Alan Blinder  -  Millions of foreclosures are ruining millions of lives and devastating many communities. We can do better than Social Darwinism. But many of the reasons are strictly economic. The seemingly-endless housing slump is dragging down our economy. By now, massive underbuilding during the slump far exceeds the overbuilding during the boom. So, by rights, a shortage of houses should be pushing up house prices, incentivizing home builders, and boosting growth in gross domestic product. Instead, actual and prospective foreclosures hang over the housing market like a wet blanket. To get millions of refinancings done expeditiously, simplicity is essential. As nationalized companies that dominate the mortgage market, the government-sponsored enterprises, Fannie Mae and Freddie Mac, should be taking the lead, not watching their profits and mortgage-backed security (MBS) prices. If GSE managements won't move, their regulator, the Federal Housing Finance Agency, should push them. If the regulator won't push hard enough, the U.S. Treasury, their major shareholder, should. If Treasury officials won't, President Obama should order them to. If the whole administration is too timid, Congress should change the law.

Mortgage Modification: What One Non-Profit Lender Is Doing to Help Homeowners - Five years after the housing market peaked, the mortgage mess remains a significant drag on the economy. Banks, policymakers and investors have yet to figure out a way to stop the cycle of massive foreclosures and the fire sales that inevitably ensue. While banks, the Obama Administration and the taxpayer-owned mortgage giants Fannie Mae and Freddie Mac dither, one non-profit lender is taking matters into its own hands. Boston Community Capital1, which has been active in the region for 30 years, last year set up the Stabilizing Urban Neighborhoods (SUN) initiative. The plan?  Buy properties back from banks who aren't willing to modify. Then resell them to the owners who were in danger of defaulting or who had already defaulted —- at a much lower price and with a better mortgage. And all while delivering 4.25 percent annual returns to investors. The goal, aside from keeping people in their homes, is to stabilize neighborhoods. Since 1985, BCC has invested more than $650 million in low-income communities, and financed more than 11,100 affordable homes. The organization's CEO, Elyse Cherry, was a partner at the blue-chip law firm Hale and Dorr who specialized in commercial real estate and who knows her way around structured finance.

'Shadow inventory' of homes could topple real-estate recovery - Officially, there are 3.5 million homes for sale nationwide. But there are millions more lurking in the shadows -- hidden neatly away on banks' balance sheets, stalled in foreclosure court proceedings, or simply occupied by nonpaying owners as lenders wait months or years before taking action. The housing market's ballooning shadow inventory -- buoyed by a yearlong foreclosure slowdown -- stands as its most menacing problem, threatening to stifle recovery for several years. And South Florida, with some 200,000 homes either already owned by lenders or headed for foreclosure, has one of the nation's largest collections of unseen inventory. The number of shadow homes dwarfs the 30,000 or so that are listed on the active market. Even as prices have shown signs of stability this year, an impending wave of foreclosures threatens to keep real estate values deflated in South Florida and across the country.

Housing: A comment on Shadow Inventory - Several readers have sent me an article at McClatchy Newspapers: Millions of homes lurk on bank inventories, casting doubts of rebound. This article is decent if you understand the numbers (ignore the headline). Unfortunately some commentary about this article is wrong. There are different definitions for shadow inventory, but this is usually considered inventory that will be coming on the market soon, but is NOT currently listed for sale. Inventory that is listed for sale is "visible inventory". An all encompassing definition of shadow inventory would probably include bank owned property (Real Estate Owned), properties in the foreclosure process, other properties with delinquent mortgages, condos that were converted to apartments (and will be converted back), investor owned rental properties, and homeowners "waiting for a better market", and a few other categories - as long as the properties were not currently listed for sale. A more conservative estimate would just be the number of 90+ day delinquencies, properties in-foreclosure and REOs not currently listed for sale. That is CoreLogic's approach - they compare the addresses of REO and delinquent properties with current listings and at the end of Q2 CoreLogic reportedOf the 1.6 million properties currently in the shadow inventory, 770,000 units are seriously delinquent, 430,000 are in some stage of foreclosure and 390,000 are already in REO.

California Foreclosure Activity Back Up - From DataQuick: California Foreclosure Activity Back Up A total of 71,275 Notices of Default (NoDs) were recorded at county recorders offices during the third quarter. That was up 25.9 percent from 56,633 for the prior three months, and down 14.4 percent from 83,261 in third-quarter 2010, according to San Diego-based DataQuick. Last quarter's 71,275 NoDs, which mark the first step in the formal foreclosure process, jumped back to levels seen earlier this year and late last year. Lenders filed 68,239 NoDs during first-quarter 2011 and 69,799 in fourth-quarter 2010. NoDs peaked in first-quarter 2009 at 135,431. "The way it looks right now, it's reasonable to expect default filings to run at a somewhat higher level than we saw earlier this year," "Obviously, some lenders and loan servicers have begun to plow through their backlogs of delinquent loans more aggressively." California is a non-judicial state, and it still takes an average of 10 months to foreclose after the Notice of Default is filed (the shortest possible period is 3 months and 21 days). This graph shows the annual Notices of Default (NODs) filed in California. The current year was estimated at the total for Q1 through Q3, plus Q4 the same as Q3.

Foreclosures Empty Homes, and Criminals Fill Them Up - The boarded-up homes that changed the face of Jamaica, Queens1, in recent years were bad enough, the flotsam of the record wave of housing foreclosures2 that roared through the streets like nowhere else in New York City.  But those vacant homes are now recalled almost fondly. For nature, as the saying goes, abhors a vacuum, and so do criminals. The police and neighbors say those vacant homes are filling with drug dealers, addicts, prostitutes, gang members, squatters and copper thieves.  “They’re becoming a magnet for criminal activity,” . “They hang out in these abandoned homes that may be foreclosed, or the owners walked away.” He added, “Every day we respond to something to that effect.”  The police do not keep statistics specifically on crime rates involving foreclosed homes. But Inspector Marmara said his officers had seen a rise both in vacant homes and in crimes occurring in those homes — like theft of copper pipes for scrap, which has spiked in the last year.

Some homeowners regain properties after foreclosure - The housing bust has put thousands of South Florida residents on the sidewalk, but when a mortgage is foreclosed there is hope — sometimes even after a lender has repossessed the home. In some cases, foreclosures are set aside, and the homeowners regain their properties because of errors by courts or lenders. In at least one instance, a bank reversed its foreclosure and sold the home back to the former owner at a deep discount, apparently for no other reason than the deal made financial sense for the lender.

Home Short Sales Rise in ‘Dramatic Shift’ That May Boost U.S. House Prices - U.S. home prices may get a boost from an unlikely source: a pickup in sales of properties in default before they reach the stage where they are repossessed by the bank and sold.  There has been a “dramatic shift” in banks’ willingness to sell a property for less than the mortgage balance to avoid foreclosing, said Ron Peltier, chairman and chief executive officer of HomeServices of America Inc., the second-biggest U.S. residential brokerage.  The transactions, known as short sales, typically change hands at a discount of about 20 percent to homes not in financial distress, compared with a 40 percent price cut for bank-owned homes, according to RealtyTrac Inc. Short sales jumped 19 percent in the second quarter from the prior three months while foreclosure sales were flat, the data seller said.  “Banks have become much more supportive of short sales,” said Peltier, “That’s better for the lenders, who have smaller losses on a short sale, and it’s going to be better for homeowners, who won’t have as much psychological distress as a foreclosure.”

Another impediment to short sales? -   A HUD representative made me aware of an issue I hadn't known about before: how mortgage insurance is giving lenders an incentive to foreclose, rather than agree to short sales. Apparently, a number of lenders bought mortgage insurance on particular mortgages from private mortgage insurance companies.  To clarify, the lenders did not require borrowers to purchase the mortgage insurance, but rather bought mortgage insurance (and paid the cost) on their own. Under the terms of the policies, the lenders get a pay-off from the PMI companies is they foreclose on a property, but not if they modify a loan or allow for a short sale.  Consequently, lenders are better off foreclosing than modifying, even if the foreclosure produces lower proceeds than a modification.

Barclays Expects 'Triple-Dip' With Another 7% Drop in Home Prices - The analysts at Barclays Capital say a “triple-dip” in home prices will likely materialize by early next year. The term “triple-dip” emerged in a Clear Capital report a couple of weeks ago, and Barclays says its analysis corroborates the idea. The research firm warns that home prices will likely slip another 6 to 7 percent over the coming winter months. That would put median prices at a new low for this cycle, in fact about 3 percent below the double-dip measurement of last spring. Following the probable “triple-dip” in the first quarter of next year, Barclays says home prices will “rise very gradually.” “While the likelihood of a negative tail scenario in housing has increased, the probability of a 15-20 percent decline from current levels is still low, in our view,” Barclays’ residential credit analysts said in their report. “Long-run home price measures suggest that prices are close to equilibrium,” they added. Barclays notes that delays associated with foreclosures have, for the moment, prevented an overcorrection in home prices by limiting the amount of REO inventory on the market. Still, REO inventory levels have remained elevated, and Barclays says close to 4 million homes are seriously delinquent or in foreclosure and will eventually need to be sold.

Existing Home Sales in September: 4.91 million SAAR, 8.5 months of supply - The NAR reports: Existing-Home Sales Off in September but Higher Than a Year Ago:Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 3.0 percent to a seasonally adjusted annual rate of 4.91 million in September from an upwardly revised 5.06 million in August, but are 11.3 percent above the 4.41 million unit pace in September 2010. Total housing inventory at the end of September declined 2.0 percent to 3.48 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, compared with an 8.4-month supply in August. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.48 million in September from 3.55 million in August.  The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, so it really helps to look at the YoY change.

Slim Pickings Are Latest Headache For Home Sales - There were more than 2.19 million homes listed for sale at the end of September, down 20% from a year earlier, according to a new report from the real-estate website That is the lowest level since the company began its count in 2007. The report is the latest sign of how the U.S. housing market can't seem to catch a break. While falling inventories are typically a sign of health, because reduced competition can boost prices, that isn't the case right now. Instead, real-estate agents say, people are pulling their homes off the market rather than try to sell them at today's discounted prices. At the same time, banks have been more slowly moving to take back properties through foreclosure ever since processing irregularities surfaced last fall, temporarily reducing the supply of foreclosed properties. The shrinking supply isn't driving up prices because demand is soft.  Yet there is still a substantial "shadow" supply of foreclosures and other distressed homes, estimated to be more than one million, that is likely to stream onto the market in the coming years. The pent-up supply is another constraint on any of the price gains that might normally occur when supply falls.

MBA: Mortgage Purchase Application Index at Lowest Level Since 1996 - The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey - The Refinance Index decreased 16.6 percent from the previous week. The seasonally adjusted Purchase Index decreased 8.8 percent from one week earlier and is at the lowest level in the survey since December 1996. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.33 percent from 4.25 percent, with points increasing to 0.48 from 0.47(including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. .... The following graph shows the MBA Purchase Index and four week moving average since 1990. This was a sharp decrease in the purchase index, and the index is now at the lowest level since December 1996. This does not include cash buyers, but this suggests weaker home sales in November and December.

The 4% mortgage - good luck getting one - A 4% mortgage sounds too good to be true -- and for more than 90% of borrowers, it is. The average rate for a 30-year mortgage dropped below 4%1 earlier this month for the first time, hitting 3.94%, Freddie Mac reported. But at the same time, LendingTree (TREE2) reported that the average rate offered to borrowers by its network of lenders was about 4.32%. Only about 9% of LendingTree borrowers got loans below 4%. About a third got loans between 4.5% and 5%. Those rates are still low, but a half point rate difference adds about $700 a year to the payments on a $200,000 mortgage. Mansions for sale - cheap3 There are a couple of reasons why so few borrowers get the best deals. One is that Freddie Mac surveys lenders, and the rates they quote apply to borrowers with flawless credit, ones with high credit scores and who put down 20% or more. The LendingTree numbers reflect actual loans that borrowers got. There's another factor in play, too. The low rates draw in a flood of current homeowners looking to refi. Nearly 80% of all mortgage applications lately have been to refinance existing loans. The rush of applicants can drive up rates.

Abolish the 30-year fixed-rate mortgage! - File under “Republican ideas which are actually rather good”: During a Senate Banking Committee hearing Thursday, the panel’s top Republican, Sen. Richard Shelby, asked a series of questions that critics of the 30-year fixed-rate mortgage have long been focused on. “What unintended consequences have been created by subsidizing the 30-year fixed-rate mortgage? And what has the subsidy of this product already cost the American taxpayer?” Shelby asked. “We need to take a hard look at this product and determine if the preferential pricing resulting from these subsidies truly creates a public good.” … That’s just one reason why the 30-year fixed-rate mortgage is a bad idea, and it’s not even the strongest one. The real reason this product should be abolished is that it simply doesn’t exist in any free-market system. In order to create it, you need to invent Fannie Mae and Freddie Mac — and just about everybody agrees that those two entities, which have cost the government hundreds of billions of dollars of late, and will probably cost even more going forwards, need to be radically downsized. The simple truth is that without Frannie, you can’t have 30-year fixed-rate mortgages. Banks would never offer such creatures, and if they did, the interest rate on them would be so high, relative to adjustable-rate loans, that nobody would ever take them out.

House Price Indexes show price declines in August - The Case-Shiller House Price index for August will be released Tuesday, Oct 25th. Two other indexes were released today: From FNC: Home Prices End Recent Seasonal Rebound with 0.8% Decline in August FNC’s latest Residential Price Index, released Thursday, indicates U.S. home prices declined in August despite strong existing home sales during the month. This decline reverses a modest fourth-month long seasonal uptrend. Based on the latest data on non-distressed home sales (existing and new homes), FNC’s Residential Price Index™ 1 (RPI) indicates that single-family home prices fell in August to a seasonally unadjusted rate of 0.8%. The FNC index tables for three composite indexes and 30 cities are here.  From Radar Logic today Radar Logic Sees Nothing But Weakness in Recent Housing Data The seasonal decline in home prices shifted into high gear in August. The 25-metropolitan-area RPX Composite Price declined 0.8 percent from July to August, the largest decline for this time of year since the crash of 2008. The RPX Composite price declined 4.7 percent relative to August 2010 ...• CoreLogic reported earlier this month for August: Home prices decreased 0.4 percent on a month-over-month basis

Next Generation of Homeowners Are Freaked Out - The younger you are, the more freaked out you are likely to be by the housing market crash. A new paper by Federal Reserve Bank of Boston economists used consumer sentiment data collected in the Michigan Survey of Consumers over the summer to try to find out how the housing market’s terrible state of affairs was affecting the willingness to buy a new home. Age mattered, which suggests a new generation may be coming along that will cast a wary eye at home ownership for a long time to come. The finding also suggests a new headwind to future growth levels, given that it’s hard for the economy to achieve a better rate of growth when the housing sector remains moribund. The Michigan data suggests younger survey respondents “are relatively less confident about home ownership after larger declines, while older respondents are relatively more confident,” the paper said. Importantly, attitudes were affected by personal experience. For both age groups attitude changes were “observed only for those with personal experience of loss (via themselves or someone close) during the crash.”

Senators Draft Bill To Give Visas To Foreigners Buying Pricey Homes - The reeling housing market has come to this: To shore it up, two Senators are preparing to introduce a bipartisan bill Thursday that would give residence visas to foreigners who spend at least $500,000 to buy houses in the U.S. The provision is part of a larger package of immigration measures, co-authored by Sens. Charles Schumer, D-N.Y., and Mike Lee, R-Utah, designed to spur more foreign investment in the U.S. Foreigners have accounted for a growing share of home purchases in South Florida, Southern California, Arizona and other hard-hit markets. Chinese and Canadian buyers, among others, are taking advantage not only of big declines in U.S. home prices and reduced competition from Americans but also of favorable foreign exchange rates. To fuel this demand, the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate-a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.

Bill would encourage foreigners to buy U.S. homes - American consumers and the federal government haven't been able to bail out the sinking U.S. real estate market. Now wealthy Chinese, Canadians and other foreign buyers could get their chance. Two U.S. senators have introduced a bill that would allow foreigners who spend at least $500,000 on residential property to obtain visas allowing them to live in the United States. The plan could be a boon to California, which has become a popular real estate market for foreigners, particularly those from China. Nationwide, residential sales to foreigners and recent immigrants totaled $82 billion in the 12-month period ended March 31, up from $66 billion the previous year, according to the National Assn. of Realtors. California accounted for 12% of those sales, second only to Florida. "Overall, Los Angeles is the perfect place for investors,"

Better to let immigrants buy homes than to demolish them - America has a problem: We’ve got too many houses and not enough people with the money or inclination to buy them. So we need one of two things: either fewer houses, or more people who have the means and the desire to buy a house. Some banks are trying to go the “fewer houses” route. They’re paying to demolish vacant properties. But Sens. Chuck Schumer and Mike Lee have a better idea: There are people with the money and desire to buy a house in America who aren’t currently allowed to live in America. Why not get them over here and let them buy a home? The theory is sound: Offer visas to immigrants willing to buy homes in the U.S. But the policy is not: Immigrants can get only “residence visa,” so they would not be able to work, and they have to purchase at least $500,000 in homes to qualify.  As Matt Yglesias points out, “the Census Bureau says the median value of owner occupied housing in the United States is around $185,000.” The median value of unoccupied housing is likely lower. If we want immigrants purchasing our $500,000 McMansions, there’s no reason we don’t want them purchasing our $250,000 townhouses. And once they’re here, we want them to work.

Buy a House, Get a Visitor Visa? - I have been promoting a “buy a house, get a visa” program for several years, so I was initially pleased to see a new bill on this theme from Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah). …the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out. On closer inspection, however, the bill is very weak. Most importantly, the visa would simply allow the buyer to live in his or her house but would not allow them to work in the United States. Pathetic. I also liked Matt Yglesias‘s spin on this: this is essentially a form of class warfare against less educated Americans. We should be clamoring to increase the supply of foreign-born doctors, lawyers, engineers, and other highly educated occupations as a way of increasing the real wages of America’s factory workers, janitors, waitresses, carpenters, and retail clerks.

Housing Starts increased in September - From the Census Bureau: Permits, Starts and Completions Housing Starts: Privately-owned housing starts in September were at a seasonally adjusted annual rate of 658,000. This is 15.0 percent (±13.7%) above the revised August estimate of 572,000 and is 10.2 percent (±13.3%)* above the September 2010 rate of 597,000. Building Permits: Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 594,000. This is 5.0 percent (±1.3%) below the revised August rate of 625,000, but is 5.7 percent (±2.6%) above the September 2010 estimate of 562,000. Total housing starts were at 658 thousand (SAAR) in September, up 15.0% from the revised August rate of 572 thousand. Most of the increase was for multi-family starts. Single-family starts increased 1.7% to 425 thousand in September. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have been mostly moving sideways for about two years and a half years - with slight ups and downs due to the home buyer tax credit. Multi-family starts are increasing in 2011 - although from a very low level. This was well above expectations of 590 thousand starts in September.

Housing Starts & Inflation Rise In September - This morning’s updates on consumer inflation and housing construction for September offer some additional support for my previous post on thinking that September won't be seen as the start of a new recession. The quick summary: housing starts rose 15% last month, the fastest pace since January; consumer inflation slowed, but only marginally, suggesting that disinflation/deflationary forces related to economic contraction remain minimal. Today’s rise in housing starts is certainly welcome, although one number alone doesn’t change much in the grand scheme of the macro trend. The best you can say with September’s pop in new starts is that it adds a bit more heft against the case that another downturn is upon us. Even so, the number du jour for starts could easily turn out to be noise, as the chart below suggests. Also, the mildly encouraging news on starts was offset by a 5% fall in new building permits for September, implying that the great slump in residential real estate will drag on.

Builders to deliver record low number of housing units in 2011 - On Tuesday, in a discussion of "builder confidence", I mentioned that "the builders delivered a record low number of housing units last year - and will probably break that record again this year." I should have left out the "probably"; the builders will deliver a record low number of housing units this year (see the table at the bottom). I am upping my forecast for multi-family deliveries this year. Usually it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year. I still expect a record low number of multi-family units completed this year, however the builders have clearly accelerated construction on some projects. The following graph shows the lag between multi-family starts and completions using a 12 month rolling total. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010. The rolling 12 month total for starts (blue line) is now above the rolling 12 month for completions (red line). However completions are now moving up too.

NAHB Builder Confidence index increase in October - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased in October to 18 from 14 in September. Any number under 50 indicates that more builders view sales conditions as poor than good.  From the NAHB: Home Builder Confidence Rises Four Points in October. Builder confidence in the market for newly built, single-family homes rose four points to 18 . This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the October release for the HMI and the August data for starts (September housing starts will be released tomorrow). Both confidence and housing starts have been moving sideways at a very depressed level for several years. This is still very low, but this is the highest level since early 2010 - and that boost was due to the housing tax credit.

So happy together - WHILE this year has been a difficult one for many sectors of the American economy, the housing sector—little by little, and bit by bit—has been firming up over the course of 2011. Not, however, in the way Americans are used to experiencing a housing recovery. Consider this week's data points. Yesterday, the National Association of Home Builders announced a surprising jump in homebuilder confidence for the month of October. Today, we learn that housing starts in September were surprisingly strong, but far more so for multifamily than single-family homes: Single-family starts have been essentially flat for the last two years, while multifamily starts have been responsible for a muted but real upward trend in total starts. But strikingly, new mortgage applications for purchases continue to drop, and the most recent release but the figure at its lowest level since 1996. Finally, the latest CPI figures show that rents in America are up 2.1% over the past year and 0.9% in the last three months alone—nearly twice the increase in core inflation. 

Residential Remodeling Index at new high in August - The BuildFax Residential Remodeling Index was at 138.6 in August, up from 130.4 in July. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax: The Residential BuildFax Remodeling Index rose 29% year-over-year--and for the twenty-second straight month--in August to 138.6. Residential remodels in August were significantly up month-over-month over 8 points (6.3%) from the July value of 130.4, and up year-over-year 31.2 points (29%) from the August 2010 value of 107.4. This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year. The remodeling index is up 29% from August 2010. This is the highest year-over-year increase in activity since the index started. Even though new home construction is still moving sideways, it appears that two other components of residential investment will increase in 2011: multi-family construction and home improvement.

Americans Double Up to Make Do - During the Depression, few American homes had an empty bedroom. The housing recession of the past four years has made empty spare rooms a luxury again by freezing families in place for years and limiting their housing choices. The latest numbers from Census’ Current Population Survey found there are more than 3 million more “doubled-up” households, homes occupied by at least one “additional” adult, a person age 18 or older who is not enrolled in school and is not the householder or spouse. In spring 2007, there were 19.7 million doubled-up households, amounting to 17.0 percent of all households. In the spring of 2011, the number of such households jumped to 21.8 million, or 18.3 percent. In total, 61.7 million adults, or 27.7 percent, were doubled-up in 2007, rising to 69.2 million, or 30.0 percent, in 2011. The number of young adults living at home is rising. Some 5.9 million people ages 25 to 34 living in their parents’ household in 2011, up from 4.7 million before the recession. The remaining 14.2 percent of young adults lived in their parents’ households in March 2011, up more than two percentage points over the period.

Gloom Grips Consumers, and It May Be Home Prices - The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing. There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk. That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow. Many say they believe that the bust has permanently changed their financial trajectory. “People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,”

What's Behind the Lack of Confidence - Economists are scrambling to understand why Americans are so pessimistic about the economy. As I describe in an article in Wednesday’s paper, a leading theory blames the funk on the collapse in housing prices, which has erased a vast amount of wealth and convinced many Americans that they will never recover financially. A new paper from the Federal Reserve Bank of Boston makes an important refinement in this theory. The authors report that even in areas like Orlando, where housing prices have fallen most sharply, the loss of confidence is not pervasive. The people who are most glum are the ones who say that they or someone close to them have “lost a lot of money in the real estate market.” Those people, hit hardest by the crisis, have lost faith in the value of home ownership. But the rest of the population has not. They still want to own homes. And there’s another wrinkle. Even among those who lost of a lot of money, the reaction varies. Younger people reported a loss of confidence, but the effect diminished with age. Respondents older than 58 said that they now viewed housing as an even better investment in the aftermath of the crash.

Rate of increase slows for Key Measures of Inflation in September - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in September on a seasonally adjusted basis ... The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March.The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in September. The 16% trimmed-mean Consumer Price Index increased 0.2% (2.5% annualized rate) during the month.Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 2.5%, the CPI rose 3.9%, and the CPI less food and energy rose 2.0%  Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation. You can see the median CPI details for September here. On a year-over-year basis, these measures of inflation are increasing, and are around the Fed's target.  On a monthly basis, the median Consumer Price Index increased 2.3% at an annualized rate, the 16% trimmed-mean Consumer Price Index increased 2.5% annualized in July, and core CPI increased 0.7% annualized.

Chain Weighted Inflation Measure - A chain weighted inflation measure takes into account changes in both price and spending patterns. A chain weighted inflation index measures both changes in the price of goods, but also reflects changes in the quantity of goods bought. •For example, suppose you buy two goods which are close substitutes – bananas (30p) and apples (30p) •At this price you may buy 2*bananas and 2* apples. •Let us assume the price of bananas increased 50% to 45p, but apples stayed the same price 30p. •This would suggest a jump in the inflation rate. 50%/2 + 0%/2 = 25% average inflation rate However, if the price of bananas increased, you might just shift to buying apples. Therefore, the price of goods that you actually buy have not changed. A chain weighted inflation measure would take into account the fact you no longer buy bananas. The prices you actually pay for apples have stayed the same. Therefore, it would give an inflation rate of 0% – very different to the actual CPI rate of 25%.

How Much Food Will a Week’s Earnings Buy? (Fall Edition) - Signs of serious inflation in broad price indices such as the consumer price index (CPI) have been rare over the past few years, confounding many critics of the stimulus bill and the Fed’s efforts to reduce interest rates.  However, as I reported in a blog entry last spring, most food-commodity prices were rising at that time and had reached levels rivaling those last seen in 2008, when unusually severe food shortages caused serious problems in many parts of the world. The figure at the top of this post is an update of that graph based on data released this morning by the Bureau of Labor Statistics (BLS). The brown line shows the government’s estimate of the average real weekly wage for U.S. private sector employees. The series is of course adjusted for overall inflation, so that it represents actual purchasing power, not a number of dollars. (I have used a slightly different wage series than I used last time.)The other lines show the same weekly earnings data series in terms of various categories of wholesale agricultural commodities, rather than a varied “shopping cart” of retail goods and services. Each line represents the value of average weekly earnings in terms of one major “food group,” to slightly misuse terminology from the federal government’s old dietary guidelines.

U.S. wholesale prices surge in September -— U.S. wholesale prices rose sharply in September as the cost of gasoline and vegetables spiked, the government reported Tuesday.  The producer price index rose a seasonally adjusted 0.8% last month to mark the biggest increase since April, the Labor Department said. Economists surveyed by MarketWatch had predicted a 0.4% gain.  Higher wholesale prices were driven by a 2.3% increase in energy costs and a 0.6% rise in food costs.  If those two categories are excluded, so-called core wholesale prices rose a lesser 0.2%. Economists were expecting a 0.1% increase.  The core index is usually viewed by investors and the Federal Reserve as a better gauge of inflationary pressure because it excludes the volatile food and energy categories.  Increases in wholesale costs usually feed into the price of consumer goods and services, but rarely at the same rate. Many companies will swallow extra costs, at least temporarily, to maintain market share or keep in step with rivals in highly competitive markets.

Safety Regulators Don’t Add Costs, They Decide Who Pays Them - The House of Representatives recently approved a bill to create an independent committee to conduct cost-benefit analyses of some highly controversial regulations proposed by the Environmental Protection Agency, ignoring the fact that the agency already does its own analyses. So, for that matter, do all executive agencies, under a directive issued by President Obama last January reaffirming the administration’s commitment to that approach.  We at the Consumer Product Safety Commission and our sister health and safety agencies have faced a barrage of calls from some politicians and business interests to cut back “oppressive” and “job killing” regulations in order to “jump-start” the nation’s stalled economy. What many of our critics really want to do is to stop government from regulating, period. They are invoking cost-benefit analysis as their weapon of choice — and to impose “paralysis by analysis.”  Anyone who insists that regulations necessarily impose new costs on society shouldn’t be taken seriously. The costs are already there, in the form of deaths and injuries — and are often as much of a drag on our economy as any safety rule. So the real issue is who should bear the costs.

LA Port Traffic in September: Exports increase year-over-year, Imports Down - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for August. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is down 0.3% from August, and outbound traffic is up 0.9%.  Inbound traffic is "rolling over" and this might suggest that retailers are cautious about the coming holiday season. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of September, loaded inbound traffic was down 4% compared to September 2010, and loaded outbound traffic was up 12% compared to September 2010.  Exports have been increasing, although bouncing around month-to-month. Exports are up from last year, but are still below the peak in 2008.  Imports have been soft - this is the 4th month in a row with a year-over-year decline in imports.

Industrial Production increased 0.2% in September, Capacity Utilization increased slightly - From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.2 percent in September after having been unchanged in August. Previously, industrial production was reported to have stepped up 0.2 percent in August. This graph shows Capacity Utilization. This series is up 10.1 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.4% is still 3.0 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production increased in September to 94.2. July was revised up, so there was no increase in August. After the fairly rapid increase last year, increases in industrial production and capacity utilization have slowed recently.

Pace of Demand Will Control Factory Outlook - U.S. manufacturers were a bit busier in September, capping off a quarter that is looking stronger than many thought just a few weeks ago. The Federal Reserve said Monday that U.S. factory output increased 0.4% in September, on top of a 0.3% advance in August. The gains, however, don’t signal the “all’s clear” just yet. The outlook for manufacturers will depend on whether demand picks up and stays at a healthy level. Manufacturing’s seesaw nature so far this year partly reflects the Japanese earthquake and tsunami which skewed the auto sector. Vehicle production dropped sharply in the spring then played catch-up in the summer. Even excluding autos, however, manufacturing is doing well. A big reason is the capital-goods sector. Production of business equipment has risen by more than 1% in each of the three months. For the entire third quarter, nonauto business-equipment output grew at a 12.3% annual pace.

Misc: Solid Auto Sales seen in October, Merrill Lynch ups GDP Forecast - From the LA Times: October auto sales expected to rise Auto research company J.D. Power and Associates estimates an annual industry sales pace of 13.1 million vehicles for the month, about the same as September and a big jump from earlier in the year.  Auto sales in Q3 were up about 3% over Q2. Even though this estimate for October is about the same as September, sales in Q4 would be up about 5% over Q3 even if sales were flat all quarter (because July and August were weak). This will give a boost to Q4 GDP. And from Merrill Lynch this morning:  Our tracking model of third quarter GDP has been running well ahead of our former official estimate of 1.8% growth. Today, in our US economic weekly, we officially revise up our Q3 forecast to 2.7%. We expect some of this strong momentum to carry over into the fourth quarter. We bumped up our Q4 estimate to 2.3% from 2.0%. I'm including this because most of the revisions have been down in recent quarters. But it is important to remember this is still sluggish growth.

Running Out of Bandwidth - AT a time of slow economic growth and declining competitiveness, wireless technology remains a shining example of innovation. In the last 10 years, wireless communications companies in the United States have invested hundreds of billions of dollars and unleashed a torrent of new products1. Demand for faster speeds and more applications is growing at a tremendous rate. But without prompt government action, the lifeblood of this innovative sector of the economy is at risk of being choked off. At issue is the allocation of wireless spectrum, the crucial “real estate” upon which wireless networks are built. A number of wireless companies — large and small, urban and rural — as well as companies like TV networks, cable companies and the government hold spectrum licenses, and have enough spectrum to meet today’s consumer demand. But many other companies depend on spectrum, too: mobile device manufacturers, software and application designers and content creators — all of which make products and services that require fast wireless networks that can connect them to consumers.

US Broadband in Maps, Graphs, and some Bars - Digitopoly

Lowes to Close Stores; Gap to Close US Stores, Expand in China; Best Buy to Reduce Square Footage by 10%; Mall Vacancies Record High; Grim Jobs Picture - Financial job carnage has already been announced. Layoffs in the financial sector may affect 80,000 or more. Cash strapped cities and states are shedding workers. Housing is abysmal. To top it off, Retail jobs carnage is just around the corner.

  • Gap will close 189 stores in the US and instead expand in China.
  • Walmart plans smaller stores.
  • Lowes announced today it will close 20 stores affecting 1,950 employees.
  • Best Buy plans to reduce square footage by 10%.
  • Regional and strip mall vacancies are at record highs already.

U.S. Postal Service lifts stamp price by 1 cent (Reuters) - The cash-strapped U.S. Postal Service announced on Tuesday a one-cent increase in the cost of mailing a letter, starting in January. The new prices lift the cost of a first-class stamp to 45 cents starting on January 22, 2012, the first increase in more than two years.The Postal Service is facing a financial crisis because mail volumes have declined as more people use electronic mail or the services of private sector competitors such as FedEx and United Parcel Service.The Postal Service said the cost to mail a postcard will go up three cents to 32 cents, letters to Canada or Mexico will increase five cents to 85 cents, and letters to other international locations will increase seven cents to $1.05.The agency, which is allowed to raise prices in line with the rate of inflation, said it filed the new prices with the Postal Regulatory Commission on Tuesday. The regulator has 45 days to approve the changes. Until the price changes take effect, consumers can still purchase 44-cent Forever stamps, which do not require additional postage after prices go up.

A Misunderstood Fact About the Job Market - I was listening to this Diane Rehm show today when the guy from the small business lobby (NFIB) was asked whether most workers were employed by small firms.  He misleading said they did. This is widely misunderstood, but the fact is that most businesses are small, but most employees work in large firms (the figure below focuses on “establishments” rather than firms—the former is a single physical place of business; firms can incorporate numerous establishments; the main result is insensitive to this difference).The figure shows that most businesses employ few workers.  Just about 50% employ four or fewer workers, and 80% of businesses employ fewer than 100 workers. But as the second bar in each group—number of employees—shows, about half of all employees work in firms of 500 or more workers and two-thirds work in firms of at least 100 workers. Payroll (total compensation) is even more skewed: 57% is paid out by firms of 500 or more workers; only 30% of payroll is paid by firms of less than 100 workers.

A Small Dip In Jobless Claims Keeps Hope (And The Un-Recession) Alive - Today's update on new jobless claims is encouraging because of what didn’t' happen. New filings for unemployment benefits didn't rise last week, which keeps hope alive that a new recession can be avoided for the foreseeable future. But while new claims dropped by 6,000 last week to a seasonally adjusted 403,000, this mild decline isn't all that convincing. The ranks of the newly unemployed continue to swell each week by roughly 400,000, a stark reminder that the labor market is still struggling. As a result, the economy remains vulnerable, even if it's not at the tipping point. If jobless claims surge higher at some point, so will the odds that another recession is upon us. By that standard, today's numbers suggest that the sluggish growth will prevail. But how much confidence do you have that next week (or the week after) will dodge a bullet as well?

Over 50% Probability of New Jobless Claims Over 400,000 Each Week Through End of 2011 - You know, we're really not sure why so many people seem to be surprised that new, seasonally-adjusted, weekly jobless claim filings persist in clocking in at levels above 400,000, or that the adjusted values for the previous weeks tend to be revised upward.  In fact, based upon the trend that has been established since 9 April 2011, that's exactly what we can expect somewhat more than half the time throughout the rest of 2011, provided the current trend continues to remain in effect: We can arrive at that forecast by following the trajectory of the mean trend line, which is shown as the heavy black line on the chart. Based on the existing trend, we can expect the number of new jobless claims filed in future weeks to be above this line 50% of the time, or below it 50% of the time.  And since that slowly downward trending line is currently projected to stay above the 400,000 level through the end of 2011, we can therefore expect that there is over a 50% probability that the number of new, seasonally adjusted initial unemployment claims will be above the 400,000 mark through the end of the year.

Unemployment Claims Data and Economists' Exploding Brain Syndrome - With the mainstream media reporting the seasonally adjusted first time unemployment claims down by 6,000, it's time for a reminder that this number is fake, and may or may not give an accurate representation of the trend. If it does, it's purely a coincidence. Economists and financial journos are in love with the seasonally manipulated number because it gives them a smooth curve over time. Jagged reality is too much for them to handle. But watching the jagged edge of reality gives us an edge in seeing what's really going on over time. When the trend changes, we'll know it a couple of months before those who are watching only the seasonally fictionalized version. The problem with any form of statistical smoothing is that it obscures the actual situation in the present, and it only reflects real trend change well after the fact. It is particularly absurd to do this with the weekly claims data because the government does provide us with the actual counts which it collects from the 50 state bureaus with a lag of just one week. Since it is based on actual tabulations rather than tiny survey samples, the data is somewhat more likely to be reasonably representative of reality than the numbers the government builds from a sample of one tenth of one percent of the population.

Are Employers Requiring People to Work Longer Hours? - Since 2003, the Census Bureau has supplemented its population survey with the American Time Use Survey, dedicated to measuring time use. Participants in that survey are asked to account for all their waking hours in a specific day, listing various activities, including eating, watching television, working, traveling, caring for children and so on. The diary study therefore has no bias toward finding that masses of people work exactly eight hours every day for exactly five days a week. It would be interesting to know if the recent recession looks different when the economy’s work hours are measured from the diaries, rather than from the population surveys as the product of employees and hours per employee. The chart below displays the results. Eight calendar years are sampled, from 2003 to 2010. The blue line is based on the household survey and is an index (normalized to 100 in the year 2007) of the average number of hours worked by adults. It shows about a 2 percent increase in hours worked from 2003 to 2006. Hours worked were about the same in 2007 as in 2006. For each of the three years after 2007, work hours were significantly below the previous year.

Minimum Wage and Unemployment - As I am reading the most recent post in Greg Mankiw's Blog, I find the data he presents intriguing. He is comparing two years (2007 and 2010) to show that workers being paid the minimum wage has increased, measured as a % of all workers, from 2.3% to 6%. In those years the federal minimum wage increased from $5.15 to $7.25 in nominal terms. My quick reaction is that there is an automatic relation between increasing the minimum wage and the % of individuals who are paid that wage. If we assume that firms keep employment constant and simply pay the higher wage, this increase will simply be those who were paid in between the old minimum wage and the new minimum wage. There is the possibility that some workers are fired, in which case the increase would be smaller.My second reaction was about the fact that the period 2007-10 is special. Not only we have seen an increase in the minimum wage but also a deep recession. It is possible that some wages have fallen and old employees have been replaced by new ones who are now paid a lower wage - right at the level of the minimum wage. This would also cause an increase in the number of workers paid the minimum wage. But, of course, there is a potential second effect of a recession going in the opposite direction:

How Much Does It Cost to Employ You? (2011-12 Edition) - Whether you appreciate it or not, your employer pays quite a bit of money, above and beyond the amount you see on your paycheck to keep you on their payroll. Our tool below estimates how much that is, taking into account things like where you live, what benefits you have, how you get paid and of course, how much you actually see on your paycheck!  Just enter the indicated data into the table below, click the "Calculate" button, and we'll run the numbers....

Veterans’ unemployment outpaces civilian rate - Despite the marketing pitch from the armed forces, which promises to prepare soldiers for the working world, recent veterans are more likely to be unemployed than their civilian counterparts. Veterans who left military service in the past decade have an unemployment rate of 11.7 percent, well above the overall jobless rate of 9.1 percent, according to fresh data from the Bureau of Labor Statistics.  The elevated unemployment rate for new veterans has persisted despite repeated efforts to reduce it. The latest to attempt it is the White House. In the jobs package President Obama has been promoting across the country is a tax credit of up to $9,600 for each unemployed veteran a company hires. But employers say such financial incentives for hiring veterans would not address the heart of the problem

The Plight of Teens and Young Adults from 2006 to 2010 - 1,946,000 fewer teens and young adults between the ages of 15 and 24 were counted as having earned income of any kind between 2006 and 2010, falling from 27,360,000 in 2006 to 25,414,000 in 2010. During that time, the population of teens and young adults rose by 710,000, from 41,702,000 to 42,412,000.  The income range of $7,500 to $9,999 saw the biggest increase in the number of teens and young adults for any of the income ranges shown on our chart, growing by 299,000 in those four years.  Meanwhile, the number of teens and young adults with total money incomes of $15,000 or less fell by 759,000, despite that dramatic increase in the number of teens and young adults with annual incomes between $7,500 and $9,999.

First look at US pay data, it’s awful - Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday. The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful. These are important and powerful figures. Maybe the reason the government does not announce their release is the data show how the United States smolders while Washington fiddles. There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009. The median paycheck -- half made more, half less -- fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999. The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

Pay Raises Trail Behind Even Mild Inflation - When even a hawk like Charles Plosser acknowledges inflation isn’t a near-term threat, you know price pressures are a nonissue for the recovery.  The Labor Department said Wednesday the consumer price index increased 0.3% in September. Core prices, which exclude food and energy, were up a milder 0.1%. The Fed tends to watch the core rate, and policymakers are probably happy that core prices are up just 2.0% over the past year. Households, however, have to deal with the jumps in energy and food prices. The annual top-line inflation is running at a faster 3.9%. Over the past year, food prices have risen 4.7%, gasoline costs 33.3% more and the cost of fuels and utilities used at home are up 4.0%. While households can reduce buying some of these staples, they cannot avoid them completely, which leaves less money to spend on other items. More troubling for the consumer outlook, wage gains aren’t keeping pace with price hikes. Real weekly earnings rose in September for the first time since May. But the 0.2% gain reflected workers putting in longer shifts, not from wages increasing. Real hourly wages fell 0.1% in September from August.

New Research Highlights Importance of EITC for Working Families - New research shows that a larger share of families than we might think turn to a key federal work support — the Earned Income Tax Credit (EITC) — but that most of them receive the credit for only a year or two at a time. Taken together with other research, the new study suggests that while the EITC helps some workers who are persistently paid low wages, for most families who use it, the credit provides effective but temporary help during hard times.  The study examined EITC use from 1989 to 2006 and found:

  • Approximately half of all taxpayers with children used the EITC at least once during this 18-year period.
  • A large majority (61 percent) of those using the EITC did so for only one or two years at a time — only 20 percent used it for more than five straight years (see graph).

The EITC goes to working people — the overwhelming majority of them families with children — with incomes up to roughly $49,000.  Earlier unpublished research from Dowd and Horowitz found that EITC users pay much more in federal income taxes over time than they receive in EITC benefits.  Taxpayers who claimed the EITC at least once during the 18-year period from 1989 through 2006 paid several hundred billion dollars in net federal income tax over this period, after subtracting the EITC and any other refunds.

The terrible state of our economy – and a partial reason why - An entrepreneur friend posted the following job on Craigslist, listed in its entirety below.  He was hiring for a  basic data entry job, paying $10 per hour.  Within 45 minutes of posting the ad, he received 40 resumes, including multiple resumes from Ivy League graduates and multiple resumes from PhD graduates. That alone should be an interesting data point on the state of our economy:  Ivy League graduates and PhD’s are desperately trolling Craigslist, ready to pounce within minutes on a part-time, $10-per-hour, data entry job. But here is what is even worse:  Of the 40 people who first applied for the job, all were college graduates, but only two candidates were able to complete the basic skill test that he included in the ad.  Only two out of forty people who tried could correctly complete the task that he asked.  Here is the ad, including the test:

99ers Join Occupy Wall Street Movement (VIDEO) - Fed up with a long jobless spell, Kian Frederick raged against economic injustice during a protest in New York City. "We're tired of blaming the victim," Frederick said during a speech before she and three others were arrested for blocking the street.   Her speech and arrest happened last November, nearly a year before the Occupy Wall Street protests became an international sensation. Way before many of the occupiers took up the cause of the 99 percent, there were "99ers" -- the very long-term jobless. Their protests were smaller, and they got less attention. Now several 99ers and the long-term jobless, including Frederick, have joined the Occupy Wall Street cause.  There are more than 2 million Americans who've been out of work for 99 weeks or longer, according to the Census Bureau. Ninety-nine weeks is the current cutoff point for unemployment insurance in 22 states. A 99er can be either a person who's been out of work at least that long or a person who ran out of unemployment insurance, whether it lasted for 99 weeks, 86 weeks or 76 weeks (the duration varies depending on a state's laws and its unemployment rate).

Income Disparity And The 'Price Of Civilization' - The Occupy Wall Street movement has been criticized for lacking focus — but its main slogan seems to be resonating. That slogan, "We are the 99 percent," highlights the issue of income disparity. It's something economist Jeffrey Sachs has been tracking for a long time. The top 1 percent of U.S. households now take about a quarter of all income, according to Sachs. And wages for the average American male peaked in 1973, he says. "It means that for the typical young person right now who is a high school graduate — but on average will not get a bachelor's degree — life is extremely challenging to find a foothold," Sachs tells NPR's Steve Inskeep, "with a stable job, with an opportunity to have a reliable income, health and other benefits and a chance to have the kind of middle-class life that we once took for granted." Sachs says middle-class growth suffered in the 1980s when taxes were reduced and programs like energy research were scaled back — programs that he says would have made the United States more competitive in the face of globalization.

America’s Standard Of Living Has Dropped - I thought this was very interesting and something we should take note of:Think life is not as good as it used to be, at least in terms of your wallet? You’d be right about that. The standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the US government began recording it five decades ago. Bottom line: The average individual now has $1,315 less in disposable income than he or she did three years ago at the onset of the Great Recession – even though the recession ended, technically speaking, in mid-2009. That means less money to spend at the spa or the movies, less for vacations, new carpeting for the house, or dinner at a restaurant. In short, it means a less vibrant economy, with more Americans spending primarily on necessities. The diminished standard of living, moreover, is squeezing the middle class, whose restlessness and discontent are evident in grass-roots movements such as the tea party and “Occupy Wall Street” and who may take out their frustrations on incumbent politicians in next year’s election.

Snapshot: Incomes rising fastest at the top - The ongoing Occupy Wall Street movement launched on Sept. 17 and its “We are the 99 percent” campaign highlights that the top 1 percent has fared very well while the 99 percent have not fared so well over the last few decades. (The conservative rebuttal, “We are the 53 percent,” referring to households with positive federal income tax liability, is insultingly flawed and misleading.) OWS’ mantra is easily supported by data, as EPI President Lawrence Mishel highlighted in this week’s economic snapshot.From 1979 to 2007, the inflation-adjusted pre-tax incomes of the highest-income 1 percent of families (in 2011, the 1 percent are those with incomes exceeding $441,000) increased 224 percent. Think that’s impressive? The incomes of the top 0.1 percent rose 390 percent. So where does that leave the rest of us?For the bottom 90 percent of Americans, incomes grew just 5 percent over the same 28-year period. Whether it’s the bottom 90 percent or the OWS folks’ 99 percent, this much is clear: We have a winner-take-all economy and the substantial rise in economic inequality has prevented the vast majority from improving their living standards in line with what was possible. The nation’s not broke, even if the bottom 99 percent are.

Amazing Charts Show How 90% Of The Country Has Gotten Shafted Over The Past 30 Years... The Economic Policy Institute has put together an amazing interactive chart that shows the growth of incomes in the US over the past 90 years--broken down by who the gains went to. (Thanks to Barry Ritholtz, for alerting us to this and for running some numbers himself.) By adjusting the sliders on the chart, you can break down the period into different eras, which show startlingly different trends. Basically, the charts show that, starting in the early 1980s, a 60-year trend changed, and most of the country's wealth gains started going to the top 10% of the population. In other words, the charts show how 90% of the country has gotten shafted over the past 30 years, and especially over the past 10.

As Kaldor’s Facts Fall, Occupy Wall Street Rises - In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital. This is the first of “Kaldor’s stylized facts,” articulated half a century ago by the Cambridge economist Nicholas Kaldor.  Recent experience betrays this lesson. Over the past two decades -- and especially since about 2000 -- the share of national income that flows into wages and other kinds of worker compensation has been plummeting in various countries.  And this partly explains the kind of anger and frustration that is fueling the Occupy Wall Street movement worldwide.  The numbers involved are substantial: In 1990, about 63 percent of business income in the U.S. took the form of wages and other types of labor compensation, according to data compiled by the Bureau of Labor Statistics. By 2005, that figure had dropped to 61 percent. And by the middle of this year, it had fallen to 58 percent. (Similar declines have occurred in other data sets, but are milder when the analysis includes the government, rather than only the private sector.)

Why a Majority of Americans Are Getting Behind Occupy Wall Street - Much to everyone’s surprise, the Occupy Wall Street (OWS) movement has rapidly gained support and media attention in the short span since its emergence on September 17. Not only has the movement grown on Wall Street itself, but it has spread to dozens of cities around the country, with more joining everyday. There are even groups forming across Europe. So what’s driving it? Broadly speaking, it’s the belief that inequality of wealth and power is out of control and is undermining the welfare and future of the “other 99 percent.” This is a powerful idea and liberals should welcome it, since it happens to be true and accords with much of what liberals have been arguing for decades. And liberals should welcome OWS’ popularization of the idea even more because, on their own, they’ve had shockingly little success making economic inequality a fighting issue.   The American public has largely agreed with this critique, but it has typically failed to make a strong connection between inequality and its own prospects for getting ahead. That connection is strengthening, however, as the economic downturn drags on, while Wall Street, the banks, and the economically powerful continue business as usual. OWS is building on this dawning recognition that inequality is not just bad or morally wrong, but a huge obstacle in the way of the other 99 percent’s future.

Let’s Admit It - Globalization Has Losers - FOR the typical American, the past decade has been economically brutal: the first time since the 1930s, according to some calculations, that inflation-adjusted incomes declined. By 2010, real median household income had fallen to $49,445, compared with $53,164 in 2000. While there are many culprits, from declining unionization to the changing mix of needed skills, globalization has had the greatest impact.  Yes, globalization. The phenomenon that free traders like me adore has created a nation of winners (think of those low-priced imported goods) but also many losers. Nowhere have these pressures been more intense than in the manufacturing sector, which I saw firsthand as head of President Obama’s Auto Task Force.  A typical General Motors worker costs the company about $56 per hour, which includes benefits. In Mexico, a worker costs the company $7 per hour; in China, $4.50 an hour, and in India, $1 per hour. While G.M. doesn’t (yet) achieve United States-level productivity in China and India, its Mexican plants are today at least as efficient as those in the United States. Pressed by high unemployment and eager to keep jobs in this country, the United Auto Workers agreed that companies could cut their costs by hiring some workers at $14 an hour, with lower benefits.

Steve Rattner, Card Carrying Member of Top 1%, Tells Us We Should Lie Back and Enjoy Much Lower Wages Resulting From Globalization - - Yves Smith - A corollary to Upton Sinclair’s famous saying, “It is difficult to get a man to understand something if his salary depends on his not understanding it” is “People promote ideas that help them secure or preserve a privileged position on the totem pole.”  A glaring example of these observations came in an op ed in the Sunday New York Times by Steve Rattner, former Lazard mergers & acquisition partner, later head of the private equity firm, Quadrangle Partners. He is best known as the chief negotiator in the auto bailouts (and he was criticized for not involving any auto industry experts). He paid $10 million to settle a kickbacks investigation and agreed not to work for a public pension fund in any role for five years. I happened to see Rattner on a panel at a Financial Times conference earlier this week and he elaborated on some of the themes in this piece, “Let’s Admit It: Globalization Has Losers,” which reader Brett asked me to debunk line by line. I’ll spare you and focus just on the most critical and bald-facedly dishonest bits.

Wal-Mart Cuts Some Health Care Benefits - After trying to mollify its critics in recent years by offering better health care benefits to its employees, Wal-Mart1 is substantially rolling back coverage for part-time workers and significantly raising premiums for many full-time staff.  Citing rising costs, Wal-Mart, the nation’s largest private employer, told its employees this week that all future part-time employees who work less than 24 hours a week on average will no longer qualify for any of the company’s health insurance2 plans.  In addition, any new employees who average 24 hours to 33 hours a week will no longer be able to include a spouse as part of their health care plan, although children can still be covered.  This is a big shift from just a few years ago when Wal-Mart expanded coverage for employees and their families after facing criticism because so many of its 1.4 million workers could not afford or did not qualify for coverage — rendering many of them eligible for Medicaid3.

U.S. "misery index" rises to highest since 1983 - An unofficial gauge of human misery in the United States rose last month to a 28-year high as Americans struggled with rising inflation and high unemployment. The misery index -- which is simply the sum of the country's inflation and unemployment rates -- rose to 13.0, pushed up by higher price data the government reported on Wednesday. The data underscores the extent that Americans continue to suffer even two years after a deep recession ended, with a weak economic recovery imperiling President Barack Obama's hopes of winning reelection next year. Consumer prices rose 3.9 percent in the 12 months through September, the fastest pace in three years. With gasoline prices high, consumers have less to spend on other things. Moreover, a rise in overall prices saps economic growth, which is typically measured in inflation-adjusted terms.

CHARTS: Here's What The Wall Street Protesters Are So Angry About...The "Occupy Wall Street" protests are gaining momentum, having spread from a small park in New York to marches to other cities across the country.  So far, the protests seem fueled by a collective sense that things in our economy are not fair or right.  But the protesters have not done a good job of focusing their complaints—and thus have been skewered as malcontents who don't know what they stand for or want. So, what are the protesters so upset about, really? Do they have legitimate gripes? To answer the latter question first, yes, they have very legitimate gripes. And if America cannot figure out a way to address these gripes, the country will likely become increasingly "de-stabilized," as sociologists might say. And in that scenario, the current protests will likely be only the beginning. The problem in a nutshell is this: Inequality in this country has hit a level that has been seen only once in the nation's history, and unemployment has reached a level that has been seen only once since the Great Depression. And, at the same time, corporate profits are at a record high. In other words, in the never-ending tug-of-war between "labor" and "capital," there has rarely—if ever—been a time when "capital" was so clearly winning.

Why a Majority of Americans Are Getting Behind Occupy Wall Street - The reason for this is that inequality as an issue has never gotten much beyond moral condemnation and complaints that current levels are unnecessary and unfair. The American public has largely agreed with this critique, but it has typically failed to make a strong connection between inequality and its own prospects for getting ahead. That connection is strengthening, however, as the economic downturn drags on, while Wall Street, the banks, and the economically powerful continue business as usual. OWS is building on this dawning recognition that inequality is not just bad or morally wrong, but a huge obstacle in the way of the other 99 percent’s future. Fighting inequality has gone from option to necessity: There is now no choice but to confront the economically powerful and somehow restructure the system to promote economic mobility.

On family economics, Rick Santorum gets it only partially right - Lost in the hubbub over Herman Cain’s love affair with the number nine during last week’s Republican debate1 were some compelling observations by Rick Santorum about “the breakdown of the American family” and its relationship to poverty. His comments deserved more attention than a wacky tax plan or Newt Gingrich’s proposal to jail two Democratic foes. “You want to look at the poverty rate among families that have . . . a husband and wife working in them?” Santorum asked. “It’s 5 percent today. A family that’s headed by one person? It’s 30 percent today. We need to do something.” Noting that “the word ‘home’ in Greek is the basis of the word ‘economy,’ ” the former Pennsylvania senator argued for “a policy that supports families, that encourages marriage, that has fathers take responsibility for their children.” He added: “You can’t have a wealthy society if the family breaks down.”Santorum is broadly right. According to Columbia University’s National Center for Children in Poverty2, in the 2005-09 period, 5 percent of married family households were poor at some point within a given year, compared with 28.8 percent of single-parent households. For 2010, the figures were 8.4 percent and 39.6 percent, respectively.

More Americans than Chinese can’t put food on the table - The number of Americans who lack access to basic necessities like food and health care is now higher than it was at the peak of the Great Recession, a survey released Thursday found. And in a finding that could worsen fears of U.S. decline, the share of Americans struggling to put food on the table is now three times as large as the share of the Chinese population in the same position.  The United States' Basic Index Score, a Gallup measure of access to necessities, fell to 81.4 in September--even lower than the 81.5 mark it reached in February and March, 2009. The recession officially ended in June of that year, but the halting recovery hasn't given a sustained boost to the number of Americans able to provide for themselves. The government reported last month that a record number of Americans is living in poverty. Between September 2008 and last month, the share of Americans with access to a personal doctor plummeted from 82.5 percent to 78.3 percent. The share with health insurance fell from 85.9 percent to 82.3 percent. And the share saying they had enough money to buy food for themselves and their family dropped from 81.1 percent to 80.1 percent. Gallup's surveys are based on phone and in-person interviews.

Pitying billionaires as America starves -The housing market has bottomed out faster than at any time since the Great Depression. The job market is so weak that one third of the unemployed have now been without work for more than a year, making unemployment “a semi-permanent condition,” according to the Associated Press. A record number of Americans are now living below the poverty line — including one out of every five children. We’ve reached the economic end times, and we’re now seeing the deep fissures of our society laid bare. On one side, throngs of protesters have hit the street demanding justice for the 99 percenters — otherwise known as The Rest of Us. On the other side, the top 1 percent are complaining about “only” clearing $400,000 a year, and about throngs of poor people getting between them and their steak dinners. In a sense, Ann Coulter is right — there’s a French Revolution quality to it all. Not from the poor but from the ultra-wealthy, who see the upheaval and are now screaming their ancient battle cry even louder: “Let them eat cake!” With that preface, we present to you the autumn edition of our ongoing beat coverage of the “Let Them Eat Cake” movement.

The Rich Say the Funniest Things: Laughing Until You Die of Hunger - With 99% of America standing up to them, the super-rich probably don't feel very funny right now. But they have a history of humorous statements, as demonstrated by Mitt Romney's reference to Occupy Wall Street as "class warfare." Yes, Mitt, class warfare has been waged since 1980, as almost all of America's new income has gone to the richest 1%, who have tripled their share, mainly through tax cuts and deregulation. If the average American family had just kept up with U.S. productivity, it would be making almost DOUBLE what it is now. More conservative humor can be found in the statement "Don't tax the rich - they're job creators," which ignores the fact that the total unemployment/underemployment rate has increased from 15% to 30% in just five years while middle-class household wealth has dropped 36%. Then there's the notion of downtrodden rich people.. "$500,000 is not a lot of money, particularly if there is no bonus," said James F. Reda, director of a compensation consulting firm. "In some parts of the country," $250K "is middle class," suggested CNN reporter Kiran Chetry. While the rich are just getting by, the poor, according to some conservatives, are doing quite well. "What are they complaining about?" asked CNN's Carol Costello, citing a Heritage Foundation study that suggested poor Americans were reasonably comfortable. Sen. Orrin Hatch (R-Utah) claimed that "The poor...need to share some of the responsibility." Berkshire Hathaway's Charlie Munger got right to the point: the poor should just "suck it up and cope."

GOP debate crowd cheers idea that jobless are to blame for their plight -  This moment from last night’s debate, in which the audience cheered the idea that the unemployed are solely to blame for not having a job, strikes me as one of the most iconic moments we’ve seen at the debates yet: Anderson Cooper says: “Herman Cain, I’ve got to ask you — two weeks ago, you said, `Don’t blame Wall Street, don’t blame the big banks. If you don’t have a job, and you’re not rich, blame yourself.’ That was two weeks ago. Do you still say that?” At this point applause starts, and after Cain stands by the claim, the applause crescendos and hoots of approval can be heard. Lovely. I get that this applause might be an affirmation of the idea of self reliance as much as anything else, but the fact remains that the crowd is applauding the idea that the unemployed are solely to blame for their plight. The basic suggestion here is that the private sector is entirely unimpeachable and must be shielded from blame at all costs — the only morally correct position is to place all the blame for unemployment on the jobless themselves.

State Unemployment Rates "little changed" in September - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed in September. Twenty-five states recorded unemployment rate decreases, 14 states posted rate increases, and 11 states and the District of Columbia had no rate change, the U.S. Bureau of Labor Statistics reported today. Thirty-eight states registered unemployment rate decreases from a year earlier, 10 states and the District of Columbia had increases, and 2 states experienced no change. The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate.  Two states and D.C. are at 2007 recession highs: Arkansas (8.3%), D.C. (11.1%), and Texas (8.5%).  From the BLS: "Forty-six states recorded unemployment rates that were not appreciably different from those of a year earlier."

September Jobless Rates by State - See the full interactive graphic.The federal government’s latest snapshot of state and regional unemployment is out, and New Mexico appears to be one of the few somewhat-bright spots. The state saw the biggest drop in unemployment in September from a year ago, the U.S. Labor Department reported Friday in its latest breakdown of the 9.1% unemployment rate across the nation. New Mexico’s 6.6% unemployment rate for September is two percentage points lower than it was a year ago. Only three other states — Florida, Oregon and Massachusetts — reported statistically significant decreases over the year, the new data show.

Fraud Robbing Unemployment Programs? - Thirteen states are seeing high levels of fraud in their unemployment compensation programs with more than 14% of their money going to improper payments.  The most egregious situations exist in New Mexico (27% improperly paid) and Louisiana and Indiana (44% each).  Almost half of unemployment payments made to fraudulent claims? According to the U.S. Department of Labor (DOL) that could be the case in the two states with the biggest problems.  Over the past three years the national improper payment rate for the entire country has ranged from 10.16% (year ending 6/30/2009) to 11.95% (preliminary for year ending 6/30/2011).  The total amount of money improperly paid over the three years is approximately $20 billion. Follow up:The DOL implemented a program to track and correct these frauds over a year ago and has reported on status. The following map shows the result of the audits performed from 2008 to 2011:

Auditors: All states receive extra highway money - Every state in the country received more highway money from the federal government than its drivers paid in federal fuel taxes, but the amount the states collected varied widely.  For every dollar Alaskans paid in federal gas taxes, the feds  chipped in another $3.99, more than for any other state. Texas was a different story. For every dollar its drivers paid, the federal government added just three cents. The data, released by the Government Accountability Office, highlights one of the most vexing transportation problems on Capitol Hill: The federal gas tax is not taking in enough money to meet its current commitments. The reason every state received more than it contributed is because, since 2008, Congress has added other money to the highway trust fund three times. The state-by-state breakdown was requested by Congress as it tries, yet again, to fashion a longer-term plan to support surface transportation. Progress is anything but guaranteed, especially considering Congress has relied on stopgap measures since the last major highway bill expired in 2009.

Cash-Strapped Cities File For Bankruptcy - We all know about the debt problems of the federal government. Many states are squeezed, as well. Now more and more cities are in trouble. Harrisburg, the capital of Pennsylvania, petitioned for bankruptcy last week. That filing is being contested in court right now, and it may be weeks before we know how this all shakes out. But Harrisburg is the sixth city to file for protection under Chapter 9 this year, and, depending on how things play out, we may see the largest municipal bankruptcy in U.S. history later this week in Jefferson County, Alabama, which includes the city of Birmingham. And when city budgets suffer, sometimes essential services can fall through the cracks: Bridges and roads don't get repaired, budgets for firefighters and police get slashed, teachers laid off, and in a new development, bondholders can get paid off before pension checks go out.

State and local fiscal fortunes: Follow the money (collected) - Last week, we found ourselves in conversation with some colleagues discussing the issue of state and local fiscal conditions, which by pure coincidence coincided with the announcement that the city of Harrisburg, Pa., filed for bankruptcy. In the course of conversation, our attention was drawn to an interesting fact. Prior to 2000, according to U.S. Census Bureau data through 2008, annual growth of total revenues at the state and local level was closely aligned with direct expenditures at the same level. Since 2000, however, this pattern has decidedly changed. The main reason is the dramatic volatility of total revenue: (enlarge) Revenues at the state and local level come from many sources. Taxes from income, sales, and property, of course, but also from various fees and charges associated from education, utilities, ports and airports, and so on. In addition, revenues come from transfers from the federal government and, importantly, asset income from trust fund portfolios.In fact, the primary source of the increased volatility in state and local government revenues since 2000 is large swings in revenue going into insurance trust funds to finance compulsory or voluntary social insurance programs operated by the public sector.

Higher Taxes on Wealthy Won’t Drive New Yorkers Away - New York’s highest-income residents will see their taxes fall at the end of this year in part because of the governor’s misplaced fear that unless this happens, they’ll flee the state. New York imposed a temporary surcharge on incomes over $200,000 ($300,000 for couples) several years ago to help close large budget shortfalls resulting from the recession and its aftermath.  But that surcharge is set to expire at the end of December, in the middle of the fiscal year, and lawmakers have thus far opted to let it end, even though the state’s budget woes continue.  This was a big part of the reason why the state made deep cuts to public services in the current budget, including a $1.3 billion cut in aid for local school districts. Governor Cuomo, however, has refused to consider any extension, arguing that high-income people and businesses would simply move to other states.  “We have competitors.  You can move from New York to Connecticut, you can move to New Jersey,” he said recently. As we’ve pointed out, this “tax flight” argument is a myth — the evidence doesn’t support Cuomo’s claim that higher taxes will drive the wealthy out of a state.

Texans Face Billions in Water Works Bills as Drought Saps Perry’s Economy - Allan Ritter pushed a bill to make 25 million Texans pay an extra $3.25 a year to help provide water for decades. Then, with a record drought devastating farms and ranches, the state representative’s party leaders waded in. “We couldn’t get the votes,” said the Republican from Nederland who heads the Natural Resources Committee in the House of Representatives. Lawmakers who run the chamber sought to oblige Governor Rick Perry’s pledge not to boost taxes instead. “You couldn’t get the votes in the House to raise revenue for anything last session,” Ritter said. Since 1996, when lawmakers mandated statewide water planning, Texans haven’t agreed on how to pay for needed work. This year, as crops withered and cattle went to early slaughter, pressure rose for action to protect the economy and sustain a surging population. Perry called on citizens to pray for rain six months after the drought began. On Nov. 8, voters will decide on letting the state carry as much as $6 billion in water-related debt. Perry, who appoints most members of boards overseeing state agencies and local water authorities, didn’t include developing resources among his priorities for the past legislative session.

State economists predict $2 billion budget hole for Florida in 2012 — Florida's budget hole for next year was put officially at $2 billion Thursday in a revised forecast from state economists that also projects state budget shortfalls through 2015. With that news, the state analysts reversed the three-year optimistic outlook they had delivered to lawmakers only last month. But that was before the European debt crisis deepened, sending shockwaves through the nation's economy and darkening consumer confidence. The Sunshine State was not immune, the Senate Budget Committee was told. "We essentially hit a wall in terms of our (tax) collections," said Amy Baker, head of the Legislature's Office of Economic and Demographic Research. Baker said she and other analysts who comprise the state's Revenue Estimating Conference downgraded earlier state revenue forecasts by $600 million for the current year and almost $1 billion for next year. When rising program costs are layered in, especially in public schools and Medicaid, lawmakers will face a $2 billion shortfall when they begin crafting the 2012-13 budget in January. That would mean the sixth straight year of state budget cuts.

Deadbeat state: Ill. owes billions in unpaid bills - Drowning in deficits, Illinois has turned to a deliberate policy of not paying billions of dollars in bills for months at a time, creating a cycle of hardship and sacrifice for residents and businesses helping the state carry out some of the most important government tasks. Once intended as a stop-gap, the months-long delay in paying bills has now become a regular part of the state's budget management, forcing businesses and charity groups to borrow money, cut jobs and services and take on personal debt. Getting paid can be such a confusing process that it requires begging the state for money and sometimes has more to do with knowing the right people than being next in line. As of early last month, the state owed on 166,000 unpaid bills worth a breathtaking $5 billion, with nearly half of that amount more than a month overdue and hundreds of bills dating back to 2010, according to an Associated Press analysis of state documents. The true backlog is even higher because some bills have not yet been approved for payment and officially added to the tally. This includes the Illinois health care agency, which says it is sitting on about $1.9 billion in bills from Medicaid providers because there's no money to pay it.

Unpaid bills take toll on business (Illinois) Forty-eight thousand dollars to state government is loose change that falls behind the sofa. To a small business, such as Brandt’s Pharmacy in Marengo, it’s a lot of money. Illinois has owed the family business $48,000 in late payments and Medicaid prescription drug coverage since June 1, manager Brenda Courtney said. And hers is one of many businesses large and small that have suffered through the state’s failure to promptly pay its bills. “Am I more important than anyone else? I’m not going to say that. But it’s a bad situation all around,” Courtney said. The state’s inability to pay its debts for months at a time has put further pressure on businesses already suffering through the nation’s economic problems and a 46 percent state income tax increase slapped on them in January.

Unpaid state bills of more than $100M taking toll on central Illinois - When patients arrive at Heartland Community Health Clinic without any insurance, the scramble to find resources begins. It's a scramble made even tougher by the state of Illinois, which last month owed more than $115,000 to the East Bluff clinic that primarily serves the poor. "We are all hard pressed to try and figure this out," said Farrell Davies, CEO of Heartland, where nearly half the patients are on state-funded Medicaid and a rising number have no insurance. "This is a very tough issue." Heartland is not alone in coping with Illinois' mountainous pile of unpaid bills. As of Sept. 8, more than 5,300 bills totaling $100 million were sitting unpaid to businesses, not-for-profits and governments across 10 central Illinois counties: Peoria, Tazewell, Woodford, Fulton, Knox, Marshall, Mason, McDonough, Putnam and Stark. That's just a portion of the $5.01 billion that was owed across the state and, in some cases, outside of it, according to data from the Illinois Comptroller's Office.

Emanuel Ends Cheap Water Era’s Drain on Chicago Finances as Pipes Burst - Chicago’s proposed rate increase, the centerpiece of Mayor Rahm Emanuel’s push to create jobs while fixing a century-old utility, would end the long tradition of cheap water in the third-largest U.S. city. And it would force Coleman to pay up. “I don’t like it, but there’s nothing I can do about it,” Emanuel is pitching the increase as an economic stimulus bill whose cost would be shared by suburban water users. If approved by the City Council, the program would add 18,000 jobs over 10 years to both the municipal payroll and private companies hired to do the work, said Bill McCaffrey, an Emanuel spokesman.  Coleman joins a line of complainers stretching from coast to coast as utility companies, towns and cities propose or enact steep water-bill increases as pipes and sewer systems crumble. The rate boosts acknowledge concerns that have been ignored for years, partly because they are underground, water experts say. “Cities, especially east of the Mississippi, where the infrastructure is older, are having their comeuppance now,”

Los Angeles, Wooed by Occupy Protest, Faces Higher Debt Cost -- Los Angeles faces tens of millions of dollars in additional borrowing costs after the City Council told anti-Wall Street protesters it intends to cut ties with banks involved in financial wrongdoing, Administrative Officer Miguel Santana said. The city may have to pay $27.8 million in termination fees and replacement costs if it’s prohibited from doing business with banks providing letters of credit for just one infrastructure program, Santana said yesterday in a memo to Mayor Antonio Villaraigosa. Debt service would climb $14.9 million a year if it has to refinance commercial paper into long-term debt at higher rates, Santana said. Council members in the nation’s second-largest city by population passed a resolution Oct. 12 in support of the demonstrations that started as Occupy Wall Street in New York. They promised to accelerate the issuance of “report cards” rating banks on such things as foreclosures and charitable giving. The vote followed three hours of public comment, much of it by participants in Occupy Los Angeles who’ve camped in front of City Hall since Oct. 1.

US cities face fiscal cirsis - Empty storefronts and "For Rent" signs right across the street from City Hall in the New Jersey town of Newark are telling a story about a city in decay. Located just 45 minutes from New York, Newark used to be an industrial hot spot. However, due to the economic downturn the city is now faced with a 57 million US dollar budget deficit. According to the non-profit association National League of Cities, revenues of American cities continue to fall with a projected 2.3 percent decrease by the end of 2011 and even further declines in 2012. Cities are responding by cutting personnel(72  percent), delaying infrastructure projects(60  percent) and increasing service fees (41 percent). One in three cities have been forced to cut health care benefits for employees. The association' s report concludes that  "cities are squarely in the center of the economic downturn." Falling wages, high unemployment, a suppressed real estate market and business closures have caused local tax revenue to fall.

Feds may freeze N.J. heating aid - Congress is proposing to cut a popular program that's expected to help more than 1 million low-income New Jerseyans pay their heating bills this winter. Cuts to the Low Income Home Energy Assistance Program could reduce or eliminate aid to thousands of laid-off workers, retirees living on fixed incomes and struggling families with young children, advocates say. A record 9 million people across the country applied for LIHEAP heating assistance nationwide last year, up from about 4 million a few years back. Applications are expected to set another record in fiscal 2012, which began Oct. 1, because millions of people can’t find work. “This is a need-to-fund program, not just a nice-to-fund program,” said Brandon Avila, spokesman for the Campaign for Home Energy Assistance. “It’s tailored to the poorest of the poor. It’s not one you can get rid of.”

Poverty And School Performance - You sometimes hear education reformers say that teacher quality is the number one statistical correlate of measurable student learning. This is wrong. Parental socioeconomic status, as measured in a variety of different ways, is far and away the biggest correlate of student achievement. Teacher quality is the most important in-school factor, but out-of-school factors still have a bigger correlation.  I find that this is widely misinterpreted by people as knock-down evidence that raising the incomes of poor parents is the best way to improve student learning. Common sense suggests otherwise.  A person who grows up in a household headed by a single mother who didn’t complete high school is going to be at a significant educational disadvantage vis-a-vis a person who grows up in a household with two college educated parents for reasons that are not going to be solved by a transfer of financial resources to the single mother. Similarly, a person whose parents were both raised in Latin America and don’t speak English is going to be at a substantial disadvantage. Literate English-speaking parents do a lot to teach their kids to read and write, parents who don’t speak English and may have limited literacy in their native language aren’t able to do this.

Illinois backlog adds to schools' money problems - Illinois schools are getting less money from the state this year and they'll have to wait a long time to collect it.As the school year got under way, state government was already more than $449 million behind in education payments. Rockford schools, for instance, were waiting on nearly $7 million. Schools in the western Illinois town of Avon were due $47,800. The Chicago backlog dwarfed everything else - $112 million, Schools have cut teachers, dipped into cash reserves, postponed purchases, slashed training and delayed paychecks. Tremont Superintendent Don Beard says it has become the "way of doing business." The slow payments come at the same time state and federal funds are down. In all, schools will see an 8.4% drop.

Big Oil: $135 Million - School Children: 0 -- Led by Valero Energy Corp., one of the nation’s largest petro-dealers, at least 16 huge refiners are trying to poke a lucrative loophole into the state’s tax laws. Since 2007, these refiners have been required by the EPA to help cut the deadly air pollution spewing from America’s vehicles by installing “hydrotreater” equipment that removes toxic sulfur dioxide from the gasoline they sell. They did — but they’re petulantly demanding a retroactive refund on property taxes they’ve paid since then on the hydrotreaters, claiming that any industrial equipment that reduces on-site pollution is tax-exempt. Nice try, but the professional staff of the state environmental agency points out that this reduction in air pollution doesn’t occur on-site, but in people’s cars. Indeed, the air around the refineries is actually more toxic now, because the corporations are simply burning off the sulfur dioxide they remove from the gasoline. However, Valero appealed to the agency’s political appointees, all named by Texas’ corporate-hugging governor, Rick Perry. Sure enough, the politicos are expected to hand out some $135 million in tax refunds to the oil giants. Where will that money come from? Nearly half would be ripped right out of the local school budgets that were already decimated by Perry’s $4-billion cut this spring in state funding for local districts.

Starving America’s Public Schools - Wall Street’s excesses blew up the economy. Now the question is who pays to clean up the mess. And across the country, our children are already paying part of the bill – as their schools are hit with deep budget cuts. A new report – Starving America’s Public Schools: How Budget Cuts and Policy Mandates are Hurting our Nation’s Students – released today by the Campaign for America’s Future and the National Education Association looks at five states to detail what this means to kids in our public elementary and secondary schools. Every study shows the importance of early childhood education. Analysts at the Federal Reserve discovered that investments in childhood development have, in the words of Fed Chair Ben Bernanke, such “high public as well as private returns” that the Fed has championed such investments, noting they save states money by reducing costs of dropouts, special education, and crime prevention. Yet across the country, states are slashing funding for pre-kindergarten and even rolling back all day kindergarten. Now only about one-fourth of 4-year-olds are served by pre-K programs. Ten states have eliminated funding for pre-K altogether, including Arizona. Ohio eliminated funding for all-day kindergarten.

Admitting You're a Tool Doesn't Make You Less of One - Matt (Dalton, Harvard) Yglesias, via Aaron Carroll's note that he should move into another line of work), accidentally gives the Education game away: the Dread Evil Neoliberal School Reformer Barack Obama And His Lackeys At The Center For American Progress. Yep, Matt has been doing great things for education. As, of course, has CAP, in spades. As for Barack "Also Never Attended a Public School, But I Know All About Them" Obama, all that needs to be said was said by Dean Baker on Saturday: Emanuel's predecessor as mayor, Richard Daley, also placed an emphasis on reforming Chicago's schools. From 2001 to 2009 he installed Arne Duncan, currently President Obama's Secretary of Education, as head of the Chicago school system. If Friedman and Emanuel's complaints about the current state of Chicago's schools are accurate, this would imply that Duncan must not have been very successful in his tenure even though he was widely acclaimed as a reformer at the time.

Study: Many college students not learning to think critically - An unprecedented study that followed several thousand undergraduates through four years of college found that large numbers didn't learn the critical thinking, complex reasoning and written communication skills that are widely assumed to be at the core of a college education. Many of the students graduated without knowing how to sift fact from opinion, make a clear written argument or objectively review conflicting reports of a situation or event, according to New York University sociologist Richard Arum, lead author of the study. The students, for example, couldn't determine the cause of an increase in neighborhood crime or how best to respond without being swayed by emotional testimony and political spin.Arum followed 2,322 traditional-age students from the fall of 2005 to the spring of 2009 and examined testing data and student surveys at a broad range of 24 U.S. colleges and universities, from the highly selective to the less selective.  Forty-five percent of students made no significant improvement in their critical thinking, reasoning or writing skills during the first two years of college, according to the study. After four years, 36 percent showed no significant gains in these so-called "higher order" thinking skills.

Students Who Did Not Attend an Educational Institution - A recent report by the Taxpayer Inspector General for Tax Administration (TIGTA) found that the 2.1 million tax filers claimed $3.2 billion in erroneous higher education tax credits for tax year 2009. Specifically, the tax credit studied was the American Opportunity Tax Credit a partially refundable tax credit worth up to $4,000. The credit was created by the American Recovery and Reinvestment Act as the more generous successor to the Hope Credit. The report notes that over the 4-year life of the credit the potential amount of erroneous payments could reach nearly $13 billion. The TIGTA report found that tax filers who received the credit in error fell into four categories, as seen in this table taken from the report.

St. John’s College Puts Emphasis on What Teachers Don’t Know -  Ms. Benson, with a Ph.D. in art history and a master’s degree in comparative literature, stood at the chalkboard drawing parallelograms, constructing angles and otherwise dismembering Euclid’s Proposition 32 the way a biology professor might treat a water frog. Her students cared little about her inexperience. As for her employers, they did not mind, either: they had asked her to teach formal geometry expressly because it was a subject about which she knew very little. It was just another day here at St. John’s College, whose distinctiveness goes far beyond its curriculum of great works: Aeschylus and Aristotle, Bacon and Bach. As much of academia fractures into ever more specific disciplines, this tiny college still expects — in fact, requires — its professors to teach almost every subject, leveraging ignorance as much as expertise. “There’s a little bit of impostor syndrome,” said Ms. Benson, who will teach Lavoisier’s “Elements of Chemistry” next semester. “But here, it’s O.K. that I don’t know something. I can figure it out, and my job is to help the students do the same thing. It’s very collaborative.”  “Every member of the faculty who comes here gets thrown in the deep end. I think the faculty members, if they were cubbyholed into a specialization, they’d think that they know more than they do. That usually is an impediment to learning. Learning is born of ignorance.”

The Fraud At The Heart Of Student Lending Exposed - The One Sentence Everyone Should Read - A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: "Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can’t afford them." Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were "pushing loans to people who can't afford them" which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them.

Outstanding Student Loan Debt Now Exceeds $1 Trillion - The amount of student loans Americans took out last year hit a record $100 billion, which pushed that debt higher than credit card debt, a new report showed. "It's going to create a generation of wage slavery," Nick Pardini, a Villanova University graduate student in finance, told USA Today. Pardini opined that student loans are the next credit bubble, with borrowers, not the lenders, being the losers. The total of outstanding student loans is on pace to surpass $1 trillion this year, according to the Federal Reserve Bank of New York. The College Board also reported that the amount students are borrowing is more than twice that of a decade earlier, after adjusting for inflation. Furthermore, total outstanding student loan debt is now double that of five years ago. Full-time undergraduate students borrowed an average $4,963 in 2010. The burden of this debt lies on the shoulders of the country's young people, who will begin their adult lives deeply in debt, ultimately slowing the overall economy. "Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children,"

Fact and fiction about student loans - USA Today’s Dennis Cauchon has a very odd story today, headlined “Student loans outstanding will exceed $1 trillion this year”: The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Note Cauchon’s link, there — it’s meant to take you to the USA Today page for the New York Fed, although for me I just get a 404. What it doesn’t do is take you to the NY Fed’s own website, or give any indication of what data Cauchon thinks he’s using. Because, not to put too fine a point on it, Cauchon’s facts — including the headline on the piece — are simply not true. Here’s the NY Fed’s data, in Excel form, and here’s a chart I just put together, from the NY Fed data: This chart shows the total stock of credit-card and student-loan debt, up to the second quarter of 2011. The most recent figures show total credit-card debt at $690 billion, and total student-loan debt at $550 billion. It is not true that Americans now owe more on student loans than on credit cards, and total student-loan debt isn’t even close to $1 trillion.

Student loan debts crush an entire generation -- USA Today says that at some point this year, student loan debt will exceed $1 trillion, surpassing even credit card debt. Felix Salmon says the number is closer to $550 billion. Either way total student loan debt is rising as other debts have tailed off. Delinquency has increased, too, since the height of the financial crisis. Some people have noticed that “student loan debt” comes up a lot among the Wall Street Occupiers and the members of the 99 percent movement. Often, older people, who either attended school when tuition was reasonable, or who didn’t attend college at all in an era when a high school diploma was enough of a qualification for a stable, middle-class career, tend to think this is all the entitled whining of spoiled kids. They don’t understand that these kids accepted a home mortgage worth of debt before they ever even had a regular income, based on phony promises, and that the debt is inescapable, regardless of life circumstances or ability to pay. Thanks to the horrific 2005 bankruptcy bill, one of the most nakedly venal modern examples of Congress serving the interests of the rentiers and creditors over the vast majority, debtors cannot discharge student loans through bankruptcy. In other words, this is unprecedentedly awful for an entire generation of young people just entering adulthood.

Older Americans' challenge: No time to recover from recession - The recession and weak recovery have been difficult for all Americans, but a new government report suggests that older people may be particularly vulnerable to the downturn’s worrisome effects on long-term economic security. That’s partly because Americans 55 and older have less time to catch up on retirement savings and recover from housing market losses before they stop working, the Government Accountability Office report found. In addition, although older workers haven’t been as hard-hit by unemployment, government data show that when they do lose a job, they have a much tougher time finding a new one. For many older Americans, the most immediate effect of the economic downturn has been the hit to their nest egg. The report noted that many older Americans simply don’t have time to wait for the stock market to recover and home values to start rising again. That means they may have to delay retirement or resign themselves to living on much less in their golden years. Meanwhile they have to grapple with how to pay for rising health care costs and may have to make difficult choices between covering medical costs and other expenses.

‘Retirement Heist' compiles evidence of plundered pensions - Sometimes the real crime consists of activities considered "legal," despite the damage they cause. That adage has never been more apt than when applied to the termination of pension funds by U.S. employers large, midsize and small. Over and over, loyal, deserving employees with modest incomes have watched their planned retirement savings disappear because of corporate managers and pension industry consultants. Journalist Ellen Schultz has been writing about such shameful behavior for a long time, mostly in The Wall Street Journal. Now she has pulled together the copious, irrefutable evidence between the covers of a book. It is shocking, and demoralizing. But will members of Congress and federal agency regulators stop what Schultz calls "retirement heists"? Probably not, unless voters make it clear the incumbents will lose their jobs unless something changes. Unfortunately, voters are rarely if ever that organized, no matter how much they have been cheated by corporate chieftains.

Census Bureau Reports Public Pension Assets Decline Over $726 Billion for State and Local Public Employee Retirement Systems in 2009 - The nation's state and local public employee retirement systems had $2.5 trillion in total cash and investment holdings in 2009, a $726.1 billion or 22.7 percent decrease from $3.2 trillion in 2008, according to new statistics from the U.S. Census Bureau. This follows a $176.7 billion loss the previous year.   These statistics come from the 2009 State and Local Public Employee Retirement Systems Survey, which provides an annual look at the financial activity and membership information of the nation's state and local public employee retirement systems, including revenues, expenditures, investment holdings and number of retirement systems.      Losses on investments totaled $633.4 billion in 2009; nearly $600 billion more than in 2008 when losses totaled $38.9 billion. Retirement systems have substantial investments in financial markets and consequently earnings are dependent on changes in market performance. 

Anemic Pension Funds Still Hemorrhaging - Here's a problem with traditional corporate pensions that I hadn't really thought about: in bad times, when the fund looks shaky, they may be vulnerable to something akin to a bank run:  That's the kind of uncertainty prompted American Airlines Captain Rod Carlone to leave the work force last month, much sooner than he had expected. Carlone says he did not want to risk missing out on a lump sum payment if the American Airlines Pensions Inc. Pilot Retirement Benefit Program Fixed Income Plan (the pilot pension plan) was underfunded. After almost 24 years at American, he flew his last flight on September 30 from Dallas to Los Angeles. "I can't afford at almost 62 a financial setback I could not recover from," Carlone says.  If people are concerned about the health of the pension, they may be more likely to retire early--or to take the lump sum, rather than the regular payments.  This forces the pension to liquidate assets just when prices are weakest, and further undermines the health of the plan.

Social Security COLA Increase Expected, First Since 2009 - The Social Security Administration is expected to announce tomorrow that it will institute a cost-of-living adjustment (COLA) of at least 3.5 percent next year, the first “raise” for Social Security beneficiaries in two years. That’s welcome news for seniors, and a better raise than most private sector employees are expecting in 2012. After a big COLA spike in 2009 — seniors got a 5.8 percent bump in benefits –  there were no increases in 2010 or 2011. Seniors were angry, and in 2010, the president and Congress sent $250 bonus checks to Social Security recipients to help make up for the lack of an increase. Many people mistakenly think it was Congress that decided to nix the COLA, but in fact it’s determined by a formula based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W index). Even though other prices have climbed since ‘08, lower gas prices kept the index below its 2008 level until recently. There’s some bad news buried in the good news, however. Many retirees won’t see much of a net increase in their payout because of an increase in Medicare Part B premiums, which are deducted from most recipients’ Social Security checks.

2012 Social Security Cost-Of-Living Adjustment approximately 3.6% increase - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.4 percent over the last 12 months to an index level of 223.688 (1982-84=100)." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation: The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted.Since COLA increased, the contribution base will be adjusted using the National Average Wage Index. This is based on a one year lag. Since there was no increase in COLA for the last two years, the contribution base has remained at $106,800 for three years. Since COLA will be positive this year, the adjustment this year will use the 2010 National Average Wage Index compared to the 2007 Wage Index. The National Average Wage Index for 2010 was $41,673.83 and the index for 2007 was $40,405.48. So $41,673.83 divided by $40,405.48 multiplied by $106,800 is approximately $110,000. So the contribution base will increase to around $110,000 in 2012.

The CLASS Long-Term Care Insurance Program -- CBO Director's Blog -- On Friday, the Secretary of Health and Human Services (HHS) announced that the department does not plan to implement the Community Living Assistance Services and Supports (CLASS) long-term care insurance program under current law. A number of people have inquired about whether and how CBO will reflect that statement in its budget projections and cost estimates for legislation. Here are the answers:

  • In its next baseline budget projections (which will be issued in January), CBO will assume that the program will not be implemented (unless there are changes in law or other actions by the Administration that would supersede Friday's announcement).
  • Following longstanding procedures, CBO takes new administrative actions into account when analyzing legislation being considered by the Congress—even if it has not published new baseline projections. Beginning immediately, therefore, legislation to repeal the CLASS provisions in current law would be estimated as having no budgetary impact.

Wal-Mart cuts health coverage for part-timers, raises premiums… Wal-Mart’s 1.4 million workers are about to see much less health coverage -– or pay much more for it -– than they’re used to. The nation’s largest private employer is heavily scaling back its insurance plans for part-time workers while hiking up the premiums for full-time staff, according to the New York Times. Bentonville, Ark., pointed to the ever-rising cost of healthcare, not the health reform law, as the motivation behind its policy changes this week. The company’s health insurance plans will be off-limits to all future part-time employees who work less than 24 hours a week. Workers averaging 24 to 33 hours a week will no longer be able to add a spouse onto the coverage, though children are still eligible. In 2012, full-time employees will see premiums rise as much as 40%, according to The Times. Smokers will have to shell out up to $90 more during each pay period.

Republicans lay groundwork for healthcare repeal - Republican activists, increasingly optimistic they can win the White House and Senate next year, are beginning to lay the groundwork for a multi-pronged campaign in 2013 to roll back President Obama's sweeping healthcare overhaul. The push includes an effort to pressure Republican candidates to commit to using every available tool to fully repeal the law, a tactic pioneered by conservative activist Grover Norquist, who made an anti-tax pledge de rigeur for GOP politicians. Other conservative healthcare experts are developing an alternative to the law, an effort that could protect Republicans from past critiques that their healthcare plans left tens of millions of Americans without medical coverage. None of the leading Republican presidential candidates has offered a healthcare plan. And conservative experts think the GOP needs a strategy to quickly dismantle the current law and replace it before all Americans are guaranteed insurance coverage under the law.

Health Care and the 2012 Election - This isn't exactly big news or anything, but the Los Angeles Times reports today on just how much of a litmus test repeal of Obamacare has become for Republican activists:Republican activists, increasingly optimistic they can win the White House and Senate next year, are beginning to lay the groundwork for a multi-pronged campaign in 2013 to roll back President Obama's sweeping healthcare overhaul. The push includes an effort to pressure Republican candidates to commit to using every available tool to fully repeal the law...I've been trying to think whether anything like this has really happened before. Has repeal of a major new law ever been the subject of such a feeding frenzy during a presidential campaign? There have always been small blocs that were dedicated to repeal of, say, Social Security or Medicare or the ADA, but I can't remember such a position ever being front and center for an entire party as its top concern. A lot of progressives were pretty unhappy that the Patient Protection and Affordable Care Act ended up so watered down before it passed. There was no public option! For that reason and others, enthusiasm among the Democratic base for Obama's reelection is pretty muted right now. But my guess is that it won't stay that way: Once Republicans have an actual candidate nominated, the lefty base will find its outrage again.

Super Committee and GME funding - As a health workforce researcher, I understand implicitly the difficulties that lie ahead and the underlying shortage of physicians that will worsen dramatically by 2025. Current estimates suggest a shortage of over a 130,000 physicians by that time. Many, if not most, do not realize that physician training, at least the post graduate residency phase, is paid for by CMS (Center for Medicare Services).  Currently, as we all know, if the super committee does nothing, there will be an across the board 2% cut to all federal discretionary spending. Some of the other proposals are a little more concerning. In 2010, direct GME expenses totaled 9.5 billion. IME or Indirect Medical Education expenses totaled an additional 6 billion.  IME represents an additional 5.5 % payment to teaching hospitals, as it is understood that they not only teach other health professionals, but that there may be extra costs associated with education. Current proposals are to cut that rate in half (first proposed by Simpson-Bowles) to 2.2%. Among other proposals which include Home Health Co-Pays, SNF (skilled nursing facility) shared payments, raising Medicare eligibility to the age of 67, lies a proposal by the House Ways and Means Committee to cut GME funding by 15 billion over the next ten years, or a 15.7% cut.

Give Me Liberty and Give Me Death? -- Ezra Klein has an interesting article about the Cleveland Clinic's move to cut its own health costs by somewhat curtailing the choices that its employees can make about their lifestyle:  That left enforcement. The clinic tracks its employees' blood pressure, lipids, blood sugar, weight and smoking habits. If any of these are what the clinic calls "abnormal," a doctor must certify that the employee is taking steps to get them under control. Otherwise, no insurance rebate. The idea is to force employees to have regular conversations with their doctors about wellness. If they participate, they can lock in the rates they were paying two years ago. The savings amount to many thousands of dollars. It appears to be working. Not only has the clinic cut its health-care costs, but its employees are also getting healthier in measurable ways. Workers have lost a collective 250,000 pounds since 2005. Their blood pressure is lower than it was three years ago. Smoking has declined from 15.4 percent of employees to 6.8 percent.

86% of Workers Obese or Have Other Health Issue - Just 1 in 7 U.S. workers is of normal weight without a chronic health problem, according to Gallup polling data, and it could be costing the economy more than $153 billion a year in lost productivity from increased sick days. Gallup polled more than 100,000 full-time workers, and found that two-thirds of the work force is either overweight or obese and nearly half are both overweight and have at least one chronic health problem. The numbers on obesity are calculated using self-reported height and weight, which means the numbers could be even higher. Studies have shown that people tend to underestimate their weight and overestimate their height. Workers who were overweight or obese were more likely to miss work than those of normal weight, but chronic health problems were a much bigger factor. Even among those of normal weight, chronic conditions are prevalent, as nearly 60% of those workers report a continuing health issue. Chronic health problems included having ever been diagnosed with a heart attack, high blood pressure, high cholesterol, cancer, diabetes, asthma, or depression; and recurring physical pain in the neck or back or knee or leg in the last 12 months.

Almost All Americans Eat Too Much Salt: CDC - Bloomberg - Almost all U.S. citizens, including children, exceed the dietary guidelines for salt, putting them at risk for hypertension and heart disease, according to a report by the Centers for Disease Control and Prevention. About half of Americans -- those with high blood pressure or other risk factors -- should consume less than 1,500 milligrams of sodium, and 99 percent of these people don’t, according to a report from the Atlanta-based CDC in the Morbidity and Mortality Weekly Report. The other 52 percent should consume less than 2,300 mg, the recommended daily limit, and 88 percent exceeded that.

Looking to Save Money, More Places Decide to Stop Fluoridating the Water - A growing number of communities are choosing to stop adding fluoride to their water systems, even though the federal government and federal health officials maintain their full support for a measure they say provides a 25 percent reduction in tooth decay nationwide. Last week, Pinellas County, on Florida's west coast, voted to stop adding fluoride to its public water supply after starting the program seven years ago. The county joins about 200 jurisdictions from Georgia to Alaska that have chosen to end the practice in the last four years, motivated both by tight budgets and by skepticism about its benefits. Eleven small cities or towns have opted out of fluoridating their water this year, including Fairbanks, Alaska, which acted after much deliberation and a comprehensive evaluation by a panel of scientists, doctors and dentists. The panel concluded that in Fairbanks, which has relatively high concentrations of naturally occurring fluoride, the extra dose no longer provided the help it once did and may, in fact, be harmful.

A novel interpretation of the benefit-cost ratio -- Gernot Wagner: Clean Air Act of 1970: Benefits-to-costs ratio: 30 to 1. Clean Air Act Amendments of 1990: Benefits-to-costs ratio: 30 to 1.Average across all Environmental Protection Agency rules passed between 2000 and 2010: Benefits-to-costs ratio: 10 to 1. That should be cause for celebration, shouldn’t it? Not quite. Any benefits-to-costs ratio above one means that benefits exceed costs. That’s good, of course, but the goal isn’t to maximize the ratio. The goal ought to be to come as close as possible to 1:1. Ratios of 10:1 and above point to real inefficiencies: Too many costs are being socialized. EPA isn’t doing nearly enough to protect us from ourselves. I didn't quite get this post at first but I think I do now. If we push environmental protection down the social demand curve then, at some point, diminishing returns and increasing marginal costs will get us to the point where the last efficient policy has B/C = 1 (and B - C = 0). Until then, there are still good environmental policies out there.

Senators protective of potato in face of USDA limits –   The U.S. Department of Agriculture wants to limit how many starchy potatoes American schoolchildren eat each week as part of the federal school lunch program, beginning next year. A bipartisan group of senators from potato states such as Maine, Idaho and Colorado says the USDA proposal is half-baked, and lawmakers will try to block the rule Monday with an amendment to the 2012 agriculture spending bill. "The much-maligned potato is actually a very affordable, nutritious vegetable," says Sen. Susan Collins, R-Maine, leading the pro-potato forces in the Senate. "The issue is really in the preparation." Collins concedes she's biased. Potatoes are Maine's most important cash crop. Potatoes are also relatively inexpensive. The USDA estimates that the new menu will cost schools about 14 cents more per meal — more than the 6 cents in subsidy they'll get from the government. Total cost to the schools and federal taxpayers: $6.8 billion over five years.

Three Approved GMOs Linked to Organ Damage - In what is being described as the first ever and most comprehensive study of the effects of genetically modified foods on mammalian health, researchers have linked organ damage with consumption of Monsanto’s GM maize. Three varieties of Monsanto’s GM corn – Mon 863, insecticide-producing Mon 810, and Roundup® herbicide-absorbing NK 603 – were approved for consumption by US, European and several other national food safety authorities. The data used for this approval, ironically, is the same data that independent researchers studied to make the organ damage link. The data “clearly underlines adverse impacts on kidneys and liver, the dietary detoxifying organs, as well as different levels of damages to heart, adrenal glands, spleen and haematopoietic system,” reported Gilles-Eric Séralini, a molecular biologist at the University of Caen. Although different levels of adverse impact on vital organs were noticed between the three GMOs, the 2009 research shows specific effects associated with consumption of each, differentiated by sex and dose.

Monsanto sprouting a produce-seed lineMonsanto Co., whose genetically modified corn and soybeans have reshaped America's heartland and rallied a nation of fast-food foes, wants to revolutionize the produce aisle. The agribusiness giant already has quietly stepped into the marketplace with produce grown from its seeds. The goal is to use its technology to create produce that tastes better and plants that yield more product, while letting farmers use fewer resources.  Grocery customers in California and elsewhere are chopping its onions that produce fewer tears, stir-frying its broccoli that decreases cholesterol and biting into tiny orange tomatoes that last longer on the shelf.Soon, people will be thumping melons bred to be a single serving and shucking sweet corn genetically modified to enable farmers to spray the fields with the company's weed killer, Roundup.

Historic drought killing trees across Texas, changing landscape for years to come - The effects of the severe drought in Texas are being seen in widespread damage to trees in the state. Pockets of brown, sickly pines now mar the traditionally majestic woods in East Texas. Even drought-resistant cedars are starting to die off in some areas. An average of 8.5 inches of rain has fallen in the state this year, less than half the normal amount. Foresters are watching insects ravage drought-weakened trees and cities are facings millions of dollars in costs for hauling away fallen limbs and debris in parks.Forestry officials say the extent of the long-term impact won’t be known until next spring when it is clear how many trees died and how many became dormant. But dry conditions are expected to continue well into 2012.

Why the World May be Running out of Clean Water - Earlier this month, officials in the South Pacific island nation of Tuvalu had to confront a pretty dire problem: they were running out of water. Due to a severe and lasting drought, water reserves in this country of 11,000 people had dwindled to just a few days’ worth. Climate change plays a role here: as sea levels rose, Tuvalu’s groundwater became increasingly saline and undrinkable, leaving the island dependent on rainwater. But now a La Niña–influenced drought has severely curtailed rainfall, leaving Tuvalu dry as a bone. “This situation is bad,” Pusinelli Laafai, Tuvalu’s permanent secretary of home affairs, told the Associated Press earlier this month. “It’s really bad.” So far Tuvalu has been bailed out by its neighbors Australia and New Zealand, which have donated rehydration packets and desalination equipment. But the archipelago’s water woes are just beginning — and it’s far from the only part of the world facing a big dry. Other island nations like the Maldives and Kiribati will see their groundwater spoil as sea levels rise.

Barrels, Bushels, and Bonds - The prices of hydrocarbons, minerals, and agricultural commodities have been on a veritable roller coaster. While commodity prices are always more variable than those for manufactured goods and services, commodity markets over the last five years have seen extraordinary, almost unprecedented, volatility. Countries that specialize in the export of oil, copper, iron ore, wheat, coffee, or other commodities have been booming, but they are highly vulnerable. Dollar commodity prices could plunge at any time, as a result of a new recession, an increase in real interest rates in the United States, fluctuations in climate, or random sector-specific factors. Countries that have outstanding debt in dollars or other foreign currencies are especially vulnerable. If their export revenues were to plunge relative to their debt-service obligations, the result could be crises reminiscent of Latin America’s in 1982 or the Asian and Russian currency crises of 1997-1998. But some commodity exporters still seek ways to borrow that won’t expose them to excessive risk. Commodity bonds may offer a neat way to circumvent these risks. Exporters of any particular commodity should issue debt that is denominated in terms of the price of that commodity, rather than in dollars or any other currency.

Fat Replaces Oil for F-16s as Biofuels Head to War - Biofuels face their biggest test yet -- whether they can power fighter jets and tanks in battle at prices the world’s best-funded military can afford.  The U.S. Air Force is set to certify all of its 40-plus aircraft models to burn fuels derived from waste oils and plants by 2013, three years ahead of target, Air Force Deputy Assistant Secretary Kevin Geiss said. The Army wants 25 percent of its energy from renewable sources by 2025. The Navy and Marines aim to shift half their energy use from oil, gas and coal by 2020.  “Reliance on fossil fuels is simply too much of a vulnerability for a military organization to have,” U.S. Navy Secretary Raymond Mabus said in an interview. “We’ve been certifying aircraft on biofuels. We’re doing solar and wind, geothermal, hydrothermal, wave, things like that on our bases.”  Yet the U.S., stung by an oil embargo during the 1973 Arab- Israeli war, won’t deploy biofuels beyond testing until prices tumble. The Air Force wants them “cost-competitive” with traditional fuel, for which it pays $8 billion a year. Producers see it the other way around, saying they need big buyers before building refineries to help slash costs, according to Honeywell International Inc. (HON), which developed a process to make biofuels.

Biofuels False Promise: Breakthroughs May be Tougher Than Previously Thought - In the August issue of Scientific American, David Beillo published an article called The False Promise Of Biofuels. I have a paper copy, but not an electronic copy ($ubscription), so I won't be quoting it extensively. Here's the summary, which is good enough for our purposes. Despite extensive research, biofuels are still not commercially competitive. The breakthroughs needed, revealed by recent science, may be tougher to realize than previously thought. Corn ethanol is widely produced because of subsidies, and it diverts massive tracts of farmland needed for food. Converting the cellulose in cornstalks, grasses and trees into biofuels is proving difficult and expensive. Algae that produce oils have not been grown at scale. And more advanced genetics are needed to successfully engineer synthetic micro-organisms that excrete hydrocarbons. Some start-up companies are abandoning biofuels and are instead using the same processes to make higher-margin chemicals for products such as plastics or cosmetics.

Opposition To Congestion Pricing Is Rational - I don't really agree that congestion prices have to be perpetually ratcheted up to be effective, but I do think that urban econ dorks need to acknowledge that opposition to it is likely to be completely understandable. Yes, in theory, since congestion is an unpriced externality, if we price it correctly we can both reduce the amount of excess congestion and make everybody better off. But that's only true if all of the toll money collected is somehow distributed back to the affected people, either directly (such as through reduced taxation elsewhere or cash) or in some form such as increased transportation investment. If you collect the money and light it on fire it doesn't make everybody better off.  The point is, in theory we can have congestion pricing, less congestion, faster travel times, and everybody's happy, but that's only if the tolls are put to good use. Otherwise, it won't actually be a good deal for drivers.

Race to Build America’s First Offshore Windfarms - Plans for large commercial-scale wind farms have been on the table for years, but constantly held up by environmental permitting issues, financing concerns, or local objections based on aesthetics. States like New Jersey, Rhode Island, Delaware, and Massachusetts all have offshore wind projects that have yet to commence. At the American Wind Energy Association's annual conference last week, two major offshore wind developers have announced progress in their attempts to build America's first offshore wind farms. Those two companies, Providence, RI-based Deepwater Wind, and Cape May, NJ-based Fisherman's Energy are taking their projects to the next phase.

Energy Efficiency Doesn’t Work - The word efficiency carries a meaning immersed in all things positive – you never hear that being more efficient could possibly be detrimental. In fact, if you can bear the evangelical fervour, you may have read about achieving ‘Factor Four’ or ‘Factor Five’ gains in energy efficiency, as part of a ‘Natural Capital’ revolution comprising a ‘decoupling’ economic growth from a growth in the consumption of exhaustible resources – also known as ‘sustainability’. Historical experience shows that these claims are untrue. When it comes to natural resource use, and the externalities associated with resource extraction and production, efficiency alone is the enabler of greater consumption. William Stanley Jevons first noted that technological improvement, in terms of greater efficiency and therefore productivity, was the enabler of greater coal consumption in Britain back in 1865 in his book, The Coal Question: an Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of our Coal-mines. His observation was coined Jevons Paradox, even though the argument that technological improvements in resource efficiency (modes of economy) leads to greater resource use was already widely accepted in the labour market:

Billions And Billions - Sometime on October 31st, the world’s population will hit seven billion. Depending on how you look at things, it has taken humanity a long time to reach this landmark, or practically no time at all. Around ten thousand years ago, there were maybe five million people on earth. By the time of the First Dynasty in Egypt, the number was up to about fifteen million, and by the time of the birth of Christ it had climbed to somewhere in the vicinity of two hundred million. Global population finally reached a billion around 1800, just a couple of years after Thomas Malthus published his famous essay warning that human numbers would always be held in check by war, pestilence, or “inevitable famine.”   In 1968, when Paul Ehrlich published “The Population Bomb,” predicting the imminent deaths of hundreds of millions of people from starvation, it stood at around three and a half billion; since then, it has been growing at the rate of a billion people every twelve or thirteen years. According to the United Nations, it reached six billion on October 12, 1999. For large and slow-to-reproduce mammals like humans, such a growth curve is, to put it mildly, unusual. Edward O. Wilson has called “the pattern of human population growth” in the twentieth century “more bacterial than primate.”

Earth is warming, study concludes - The Earth's surface really is getting warmer, a new analysis by a US scientific group set up in the wake of the "Climategate" affair has concluded. The Berkeley Earth Project has used new methods and some new data, but finds the same warming trend seen by groups such as the UK Met Office and Nasa. The project received funds from sources that back organisations lobbying against action on climate change. "Climategate", in 2009, involved claims global warming had been exaggerated. Emails of University of East Anglia (UEA) climate scientists were hacked, posted online and used by critics to allege manipulation of climate change data. Fresh start The Berkeley group says it has also found evidence that changing sea temperatures in the north Atlantic may be a major reason why the Earth's average temperature varies globally from year to year. The group includes physicist Saul Perlmutter, a Nobel Prize winner this year The project was established by University of California physics professor Richard Muller, who was concerned by claims that established teams of climate researchers had not been entirely open with their data.

Global warming study finds no grounds for climate sceptics' concerns - The world is getting warmer, countering the doubts of climate change sceptics about the validity of some of the scientific evidence, according to the most comprehensive independent review of historical temperature records to date. Scientists at the University of California, Berkeley, found several key issues that sceptics claim can skew global warming figures had no meaningful effect. The Berkeley Earth project compiled more than a billion temperature records dating back to the 1800s from 15 sources around the world and found that the average global land temperature has risen by around 1C since the mid-1950s. This figure agrees with the estimate arrived at by major groups that maintain official records on the world's climate, including Nasa's Goddard Institute for Space Studies in New York, the US National Oceanic and Atmospheric Administration (Noaa), and the Met Office's Hadley Centre, with the University of East Anglia, in the UK. "My hope is that this will win over those people who are properly sceptical," Richard Muller, a physicist and head of the project, said.

Breaking News: The Earth Still Goes Around the Sun, and It's Still Warming Up - - Led by a self-proclaimed climate science critic, partly funded by the notorious anti-climate science Koch family (and other less-ideological funders), but joined by some serious highly-regarded scientists such as the 2011 physics Nobel Laureate Saul Perlmutter, statistician Professor Robert Rohde, and Dr. Arthur Rosenfeld, the BEST group announced some time ago that they would, once again review millions of temperature records with new eyes, new analysis, new thinking, and new sophisticated tools. Anthony Watts and his fans were thrilled, certain that the results would support their anti-warming beliefs. Watts even said he would accept the BEST findings, whatever they were. Well, the BEST results are out. And it turns out that the Earth still goes around the Sun, and it is still warming. As the BEST research summary states: “Global warming is real according to a major study released today. Despite issues raised by climate change skeptics, the Berkeley Earth Surface Temperature study finds reliable evidence of a rise in average world land temperature of approximately 1˚C since the mid-1950s… “On the basis of its analysis… the group concluded that earlier studies based on more limited data by teams in the United States and Britain had accurately estimated the extent of land surface warming.”

More People Who Can't Handle The Truth - Krugman - If you follow this blog regularly, you’ll know that whenever I present data — and I do present a lot of data — right-wingers will complain it’s always obviously wrong. But what they really mean is that they won’t accept data that doesn’t tell them what they want to hear. This stuff is a minor version of what goes on, on a far bigger and more important scale, with regard to climate change. No matter how much evidence scientists accumulate, they’re accused of somehow manipulating the data. Now, as Andy Revkin and Joe Romm tell us, one prominent skeptic who actually believed that the data was being manipulated has reported in detail on his efforts to produce clean climate data. And guess what: his data overwhelmingly confirm what climate scientists have been saying. Richard Muller, the skeptic we’re talking about, seems to have had different motivations from many of the professional climate skeptics. He basically appears to have suffered from nothing more than characteristic physicist arrogance, the belief that people in lesser sciences just don’t know what they’re doing. To his credit, he went and tried to do better — and is now being honest in revealing that what he got was pretty much the same as the results of previous research.Of course, you know how the professional skeptics have responded; Joe Romm has the ugly but predictable details.

California Becomes First State to Adopt Cap-and-Trade Program - The California Air Resources Board on Thursday unanimously adopted the nation’s first state-administered cap-and-trade regulations, a landmark set of air pollution controls to address climate change and help the state achieve its ambitious goals to reduce greenhouse gas emissions. The complex market system for the first time puts a price on heat-trapping pollution by allowing California’s dirtiest industries to trade carbon credits. The rules have been years in the making, overcoming legal challenges and an aggressive oil industry-sponsored ballot initiative. The air board met in Sacramento for more than eight hours in a packed hearing room. Board members listened to sometimes scathing comments from union workers fearful of losing their jobs and a parade of industry representatives who likewise characterized the regulations as anti-business. Other speakers called the proposal historic and groundbreaking.

Policy Makers Put Climate Change on Back Burner - For anyone who cares about the dangers of climate change, the events of the last couple of days have been rather disheartening. On Wednesday, a grand meeting of business leaders and ministers from the world’s largest energy consumers in Paris concluded that carbon-intensive coal will continue to be the fastest growing energy source long into the future, so the only hope of restraining the rise in global temperatures to safe levels was to create affordable new technologies to capture and store carbon dioxide. At the same time across the English Channel, the U.K. government was announcing the cancellation of its flagship project to capture carbon dioxide from a coal-fired power station because it was too costly and technically challenging.The world finds itself in the position of someone who keeps smoking under the assumption that cancer will one day be cured, just as medical research labs are shutting down.

Why America lags on climate change - Why doesn’t the United States care about global warming? That’s a common question nowadays. Poll after poll has found that concern about the climate has tumbled. On the policy front, the United States is doing less than even China and India at this point, as a recent report from HSBC details. Over the weekend, Elisabeth Rosenthal tried to explain America’s carbon exceptionalism in a great piece in the New York Times. . But two factors — the Senate and the recession — seem worth highlighting here. First, there’s the question of “Why hasn’t the United States taken large steps to curtail carbon emissions?” One drudging-but-important reason is that large contentious bills are just plain harder to pass here in the United States. Back in 2009, recall, the House passed climate legislation that was as ambitious as anything Europe has done. The bill needed 60 votes in the Senate to clear a filibuster. And 60 votes proved too high a bar. Meanwhile, the second question is: “Institutions aside, why has public concern about global warming dropped in the United States?”  In California, you can see this effect county-by-county: When local unemployment rises, there’s a drop in the number of residents who see global warming as the most important policy issue.

Why the Insurance Industry Won’t Save Us from Climate Change - A myth floats around among those seeking free-market solutions to climate change that insurers will be a positive force. Insurers are worried about the impact of climate on their business model.  Most recently, Fast Company asked whether trillion dollar storms will drive us off the coasts: “just how long until large chunks of America’s coastline become virtually uninsurable, starting with Lower Manhattan? Some would say this is a good thing, a perfect example of markets appropriately pricing risk and (dis-)incentivizing people accordingly.” There’s only one problem: this market-driven solution won’t work. For several years Munich Re, the giant reinsurer, has been advocating for governments to do something about climate change, based on rational self-interest: if governments can prevent it from happening, then insurers won’t have to pay out. Guess that didn’t work out so well – thanks, United States Senate!  The first adaptation strategy will be to raise rates. Here, the free market advocates are giddy. Coastal insurance will become very expensive, so no one will live on the coasts! yay! However, it won’t work. A look at two southern California coastal communities illustrates the free market failure of insurance to deter people from living near the coast.

Climate scientists grapple with uncertainty (though not the kind you think) -  You’ll often hear climate skeptics say “The science isn’t settled.” And, to an extent, this is true — though not in the way they’re implying. There are lots of things climatologists know with a high degree of confidence: that the Earth is warming, that human activity is a major culprit. But, as scientists will readily concede, there are still plenty of aspects of the climate system subject to fervent debate, especially the scale of the risks involved in heating the planet. That’s not necessarily comforting. Uncertainty, after all, can easily mean things might be much worse than we thought. (Reuters) Increasingly, many scientists are puzzling over how best to present what they know and don’t know to a broader audience. It’s not as easy as it sounds. What do you do when there’s a small but real chance that global warming could lead to a catastrophe? How do you talk about that in a way that’s useful to policymakers? “This is something we’ve struggled with a lot over the years,” says Michael Oppenheimer, a professor of geosciences at Princeton University. And as the world’s climatologists get started on the next big assessment of climate science — due in 2013 — figuring out how to talk about what they’re unsure of has taken on renewed urgency.

El Niño: Unaffected by climate change in the 21st century but its impacts may be more severe -While climate change will not modify the extent or frequency of El Niño variability in the next 100 years, the environmental consequences of such events may become more extreme, according to a new collaborative study between scientists at the Cooperative Institute for Research in Environmental Sciences (CIRES) and the National Center for Atmospheric Research (NCAR). Based on the latest state-of-the-art model, it does not appear that the warm water/cold water anomaly in the Pacific—known as El Niño and La Niña—is changing," said study coauthor Baylor Fox-Kemper, a CIRES Fellow and assistant professor at the Department of Atmospheric and Oceanic Sciences at the University of Colorado Boulder. "But due to a warmer and moister atmosphere the impacts of El Niño are changing, even though El Niño itself doesn't change." El Niño events—anomalous warming of the surface water of the eastern and central Pacific Ocean, occurring every four to 12 years—typically coincide with atmospheric changes like reduced trade winds and a displaced jet stream, which can cause unusual weather patterns such as flooding or droughts. These weather patterns can have dire consequences: "Tens of billions of dollars are associated with big El Niño events or La Niña events," Fox-Kemper said.

In the past decade, typhoons in May have increased from 1 per decade to nearly every year - As the Earth becomes warmer, tropical cyclones or typhoons are expected to behave differently. For example, increased water vapour in the air and warmer sea-surface temperatures lead to more intense tropical cyclones. However, most climate models predict that the total number of tropical cyclones, including both weak and intense, will decrease. While much attention has been focused on how strongly and how often tropical cyclones will occur, when they will form is relatively little studied. In our new work, our team from Academia Sinica, Chinese Culture University, and Chinese Academy of Sciences has tried to examine changes in the seasonal variation of intense typhoons (Category 4 and 5) over the western North Pacific, and particularly in the number of intense typhoons in early summer. Most intense typhoons form between July and November, with the maximum occurring in September and October (see figure a in ‘Seasonal cycles’). They are rare in May. Before 2000, intense typhoons seldom occurred in May – only about one per decade was recorded. Since 2000, however, they have appeared more frequently – almost one per year (figures b and c in ‘Seasonal cycles’).

Sea levels will continue to rise for 500 years - Rising sea levels in the coming centuries is perhaps one of the most catastrophic consequences of rising temperatures. Massive economic costs, social consequences and forced migrations could result from global warming. But how frightening of times are we facing? Researchers from the Niels Bohr Institute are part of a team that has calculated the long-term outlook for rising sea levels in relation to the emission of greenhouse gases and pollution of the atmosphere using climate models. The results have been published in the scientific journal Global and Planetary Change. "Based on the current situation we have projected changes in sea level 500 years into the future. We are not looking at what is happening with the climate, but are focusing exclusively on sea levels", explains Aslak Grinsted. He has developed a model in collaboration with researchers from England and China that is based on what happens with the emission of greenhouse gases and aerosols and the pollution of the atmosphere. Their model has been adjusted backwards to the actual measurements and was then used to predict the outlook for rising sea levels.

"IPCC climate models do not capture Arctic sea ice drift acceleration: Consequences in terms of projected sea ice thinning and decline" - IPCC climate models underestimate the decrease of the Arctic sea ice extent. The recent Arctic sea ice decline is also characterized by a rapid thinning and by an increase of sea ice kinematics (velocities and deformation rates), with both processes being coupled through positive feedbacks. In this study we show that IPCC climate models underestimate the observed thinning trend by a factor of almost 4 on average and fail to capture the associated accelerated motion. The coupling between the ice state (thickness and concentration) and ice velocity is unexpectedly weak in most models. In particular, sea ice drifts faster during the months when it is thick and packed than when it is thin, contrary to what is observed; also models with larger long-term thinning trends do not show higher drift acceleration. This weak coupling behavior (1) suggests that the positive feedbacks mentioned above are underestimated and (2) can partly explain the models' underestimation of the recent sea ice area, thickness, and velocity trends. Due partly to this weak coupling, ice export does not play an important role in the simulated negative balance of Arctic sea ice mass between 1950 and 2050. If we assume a positive trend on ice speeds at straits equivalent to the one observed since 1979 within the Arctic basin, first-order estimations give shrinking and thinning trends that become significantly closer to the observations.

The Arctic Sea may be free of ice in ten years - The melting of the Arctic sea ice is progressing much faster and more dramatically than earlier estimated, according to new research by the Norwegian Polar Institute (NPI). This means that the Arctic Sea could be free of ice in the summer in ten years time, rather than the 50 to 100 years estimated earlier.NPI mesurements made by moored sonars show a dramatic reduction in the fraction of ridged sea ice, compared to the 1990s. The vast fields of ridged ice thicker than 5 m, constituting 28 percent of the winter Arctic sea ice cover during the 1990s, is nearly gone. At the end of winter in 2010, ice thicker than 5 m constituted only 6 percent of the total ice mass observed. The combined effect on late winter mean ice thickness is a reduction from 4.3+-0.4 m during the 1990s to a record low value of 2.0 m in late winter 2010.

Warming Revives Old Dream of Sea Route in Russian Arctic - One thing Captain Bozanov did not encounter while towing an industrial barge 2,300 miles across the Arctic Ocean was solid ice blocking his path anywhere along the route. Ten years ago, he said, an ice-free passage, even at the peak of summer, was exceptionally rare. But environmental scientists say there is now no doubt that global warming1 is shrinking the Arctic ice pack, opening new sea lanes and making the few previously navigable routes near shore accessible more months of the year. And whatever the grim environmental repercussions of greenhouse gas, companies in Russia and other countries around the Arctic Ocean are mining that dark cloud’s silver lining by finding new opportunities for commerce and trade. Oil companies might be the most likely beneficiaries, as the receding polar ice cap opens more of the sea floor to exploration. The oil2 giant Exxon Mobil recently signed a sweeping deal3 to drill in the Russian sector of the Arctic Ocean. But shipping, mining and fishing ventures are also looking farther north than ever before.

First-ever Arctic ozone hole: How it formed, what it may mean - Researchers have been saying for some years that Earth’s ozone layer might recover more slowly if indeed Earth is getting warmer. Now we have dramatic evidence of this possibility, announced by researchers in an article in the journal Nature on October 2, 2011. The researchers said that in the northern spring of 2011, massive ozone destruction of 80% occurred 18 to 20 kilometers (about 12 miles) above the Arctic ice sheet, in the part of the atmosphere known as Earth’s stratosphere. That makes 2011 the first year – ever – that an ozone hole has been observed in the Arctic. These scientists said: For the first time, sufficient loss occurred to reasonably be described as an Arctic ozone hole. We humans need Earth’s ozone. The ozone layer protects living things on Earth from harmful ultraviolet radiation. If there were not an ozone layer, skin cancers and crop failure would increase. Without protective ozone, earthly life would be unable to survive. There is already speculation that the 2011 Arctic ozone hole might have caused noticeable reductions in Europe’s winter wheat crop, for example.

    Climate Change Could Trap Hundreds of Millions in Disaster Areas - Hundreds of millions of people may be trapped in inhospitable environments as they attempt to flee from the effects of global warming, worsening the likely death toll from severe changes to the climate, a UK government committee has found. Refugees forced to leave their homes because of floods, droughts, storms, heatwaves and other effects of climate change are likely to be one of the biggest visible effects of the warming that scientists warn will result from the untrammelled use of fossil fuels, according to the UK government’s Foresight group, part of the Office for Science. But many of those people are likely to move from areas affected by global warming into areas even worse afflicted – for instance, by moving into coastal cities in the developing world that are at risk of flood from storms and rising sea levels.. “An even bigger policy challenge will be the millions who are trapped in dangerous conditions and unable to move to safety.”

    Is Nuclear Power Really a Trump Card Against Global Warming? - In recent years there seemed to be a nuclear power renaissance. One reason for this has been the adoption by its promoters of the theme of global warming, and their claim that nuclear power is clean energy because it does not produce carbon emissions.  But is nuclear power in fact the clean-energy solution its promoters claim? Only one third of the heat energy produced in a nuclear reactor is transformed into electricity.  Before the Fukushima accident, that is, at the end of 2010, Japan’s 54 nuclear reactors were producing a total of 49,112,000 kilowatts of electricity.  So every day they were throwing away twice that much, approximately 100,000,000 kilowatts of energy, in the form of heat, into the sea. This means that every day they were pumping into the sea energy equivalent to 100 of the atomic bombs dropped on Hiroshima. The Hiroshima bomb destroyed the city in an instant and ended the lives of some 140,000 people, but when energy 100 times that great is “dropped” into the sea daily, what effect does that have?  That it would not be destructive of the ocean’s ecology is unimaginable. I want to ask, what kind of global warming debate is it that never discusses this fact?  In Japan, the number one global warming agent is the nuclear power plants.

    New TEPCO Photographs Substantiate Significant Damage to Fukushima Unit 3 - Analysis of new Fukushima 3 photographs released last week by TEPCO substantiate Fairewinds’ claim that explosion of Unit 3 began over the spent fuel pool. Fairewinds believes that significant damage has also occurred to the containment system of Fukushima Unit 3, and that the two events (fuel pool explosion and containment breach) did not occur simultaneously. Video also includes brief discussion of tent system being constructed over Fukushima Unit 1.  The first photograph is taken from behind the building, so you are still looking out toward the ocean at a slightly different camera angle. The fuel pool is on the south side which is the right of this picture. Look in the center of the building. The roof has collapsed and there is a large kind of grey structure in there. That is the trolley for the overhead crane in the middle of the building. That crane is used to lift heavy components like the nuclear reactor head, and it is also used to lift shield plugs that go over top of the nuclear reactor before it starts up after every refueling. So the crane has collapsed but it is in the center of the building.

    Gundersen: NRC wants radiation exposure limit 100 times higher than EPA (VIDEO) »

    Party of Pollution, by Paul Krugman - Last month President Obama finally unveiled a serious economic stimulus plan — far short of what I’d like to see, but a step in the right direction. Republicans, predictably, have blocked it.  So what is the G.O.P. jobs plan? The answer, in large part, is to allow more pollution. So what you need to know is that weakening environmental regulations would do little to create jobs and would make us both poorer and sicker.  Now it would be wrong to say that all Republicans see increased pollution as the answer to unemployment. Herman Cain says that the unemployed are responsible for their own plight — a claim that, at Tuesday’s presidential debate, was met with wild applause.  Both Rick Perry and Mitt Romney have, however, put weakened environmental protection at the core of their economic proposals, as have Senate Republicans. Mr. Perry has put out a specific number — 1.2 million jobs — that appears to be based on a study released by the American Petroleum Institute, a trade association, claiming favorable employment effects from removing restrictions on oil and gas extraction. The same study lies behind the claims of Senate Republicans.  But does this oil-industry-backed study actually make a serious case for weaker environmental protection as a job-creation strategy? No.

    Many officials hold leases with shale drillers - During a contentious meeting in South Fayette last week, the township's zoning hearing board delayed a decision about a challenge mounted by gas driller Range Resources after calls for several members of the board to recuse themselves from discussions because they have signed gas leases with the Texas-based driller. "It cannot be more clear to me that it's a conflict of interest,"  "I can't imagine that they're voting in the best interest of the community and that's what they're supposed to do,"  A review undertaken by the Post-Gazette shows that the circumstances in South Fayette are far from unusual. In Washington County, which has seen heavy gas well drilling in recent years, 27 percent of local elected officials have signed drill leases. Of the 349 elected officials representing 66 municipalities countywide, 94 hold leases that were signed during the past four years, county records show. There are 15 municipalities in which the majority of council members and supervisors have leases. Another six municipalities are governed entirely by leaseholders, including mostly rural and sparsely populated areas such as Carroll, Blaine, Donegal, Morris, Green Hills and South Franklin.

    The Rust Belt Comes Back to Life: Shale Gas Revolution Could Bring 200,000 Jobs to Ohio - ABC NEWS -- "More than 300 new jobs have already come to the Steubenville area. And as many as 10,000 more are expected in the next three years. If jobs keep growing at this pace, every adult in Steubenville could be working by April.  No one in Steubenville can remember the last time anyone heard of a job that paid as much as $77,000 a year coming to town, but those jobs are coming. There could be more than 200,000 of them in Ohio in the next few years." Inspired by the jobs booms in energy-rich states like Ohio and North Dakota, let me propose the "Domestic Energy Jobs Act."  Unlike Obama's "American Jobs Act" that would cost the American economy $450 billion from a mix of tax cuts, tax credits, and government spending to create a questionable and uncertain number of new jobs, the "Domestic Energy Jobs Act" would open up more domestic areas to oil and gas drilling and cost nothing. Thousands or even millions of guaranteed new jobs would be created throughout the country, bringing full employment to cities like Steubenville, Ohio.  Increased domestic production of oil and gas wouldn't require a penny of taxpayer subsidies or government spending, and instead would actually generate millions of dollars of government revenue from oil taxes and royalties.

    Rush to Drill for Natural Gas Creates Conflicts With Mortgages - As natural gas1 drilling has spread across the country, energy industry representatives have sat down at kitchen tables in states like Texas, Pennsylvania and New York to offer homeowners leases that give companies the right to drill on their land. And over the past 10 years, as natural gas has become increasingly important to the nation’s energy future, Americans have signed more than a million of these leases.  But bankers and real estate executives, especially in New York, are starting to pay closer attention to the fine print and are raising provocative questions, such as: What happens if they lend money for a piece of land that ends up storing the equivalent of an Olympic-size swimming pool filled with toxic wastewater from drilling?  Fearful of just such a possibility, some banks have become reluctant to grant mortgages on properties leased for gas drilling. At least eight local or national banks do not typically issue mortgages on such properties, lenders2 say.

    Fracked Up: You Don’t Miss Your Water ‘Til Your Well Explodes - Rick Perry recently made the ludicrous statement that there is not “a single incident of unsafe hydraulic fracturing for natural gas.” Tell that to the residents of Dimock, Pennsylvania who are finally settling a case around methane leaks in local water supplies. After finding Cabot Oil & Gas Company responsible for the methane contamination of 18 domestic water wells in northeast Pennsylvania, state regulators now say the company can discontinue providing water to affected residents because it has met the terms of a legal settlement with the Pennsylvania Department of Environmental Protection. Next up is a decision by regulators on Cabot’s request to resume drilling for natural gas in Dimock, PA, where the methane contamination incidents – featured in the movie “Gasland” – have given the town a central role in the ongoing controversy over drilling for shale gas using hydraulic fracturing. Dimock is in the heart of the Marcellus Shale formation that stretches from southwestern New York State to western Virginia. Residents of Dimock began complaining of exploding water wells and discolored, foul-smelling water shortly after Cabot began drilling in August, 2008.

    'Record-breaking' earthquake rattles south Texas - A 4.8 earthquake is certainly attention-getting, if not catastrophic. In southern Texas, it's also record-breaking -- and one happened there early Thursday morning. The epicenter of the quake was near rural Karnes County, 47 miles southwest of San Antonio. The quake struck at 7:24 a.m. local time, and was the largest earthquake on record for the area, surpassing a magnitude-4.3 shock recorded in 1993, according to the U.S. Geological Survey. In an interview with The Times, USGS geophysicist Don Blakeman said that southern Texas has been experiencing small earthquakes since the 1970s, and that 14 quakes between 2.6 and 3.4 magnitudes have been recorded since 1982. But Thursday morning's quake was significantly larger. "It is a bit unusual," he said.

    Safety First, Fracking Second, The Editors, Scientific American: A decade ago layers of shale lying deep underground supplied only 1 percent of America’s natural gas. Today they provide 30 percent. Drillers are rushing to hydraulically fracture, or “frack,” shales in a growing list of U.S. states. ... The benefits come with risks, however, that state and federal governments have yet to grapple with. Public fears are growing about contamination of drinking-water supplies from the chemicals used in fracking and from the methane gas itself. Field tests show that those worries are not unfounded. ... Yet states have let companies proceed without adequate regulations. They must begin to provide more effective oversight, and the federal government should step in, too. Nowhere is the rush to frack, or the uproar, greater than in New York. Fracking is already widespread in Wyoming, Colorado, Texas and Pennsylvania. All these states are flying blind. A long list of technical questions remains unanswered about the ways the practice could contaminate drinking water, the extent to which it already has, and what the industry could do to reduce the risks. To fill this gap, the U.S. Environmental Protection Agency is now conducting comprehensive field research. Preliminary results are due in late 2012. Until then, states should put the brakes on the drillers.

    Environmental Protection Agency Announces Plans to Regulate Water from Fracking - The Environmental Protection Agency said it planned to regulate wastewater discharged by companies producing natural gas from shale formations, including chemically laced water used in a controversial extraction process known as hydraulic fracturing. The EPA’s initiative comes as water-intensive natural gas production has spread around the country, raising concerns about the effects on drinking-water supplies. The practice, also known as fracking, involves shooting water infused with chemicals and sand at high pressure into shale formations to unlock reservoirs of natural gas. The EPA will try to determine what to do with water used during fracking, as well as water that is already underground and flows back up the well. Companies now often release the water from the production process into municipal wastewater systems. Those treatment facilities lack the technology to completely remove the chemicals, salt and minerals in the wastewater before sending it into streams and other surface water, said Ben Grumbles, president of Clean Water America Alliance, an association of municipal water districts and private industry.

    What Is the Keystone XL Pipeline — and Why Is It So Controversial? - By the end of this year, the State Department will decide whether to give a Canadian company permission to construct a 1,700-mile, $7 billion pipeline that would transport crude oil from Canada to refineries in Texas. The project has sparked major environmental concerns, particularly in Nebraska, where the pipeline would pass over an aquifer that provides drinking water and irrigation to much of the Midwest. It has also drawn scrutiny because of the company's political connections and conflicts of interest. A key lobbyist for TransCanada, which would build the pipeline, also worked for Secretary of State Hillary Clinton on her presidential campaign. And the company that conducted the project's environmental impact report had financial ties to TransCanada. The debate over the pipeline is both complicated and fierce, and it crosses party lines, with much sparring over the potential environmental and economic impacts of the project. More than 1,000 arrests were made during protests of the pipeline last summer in Washington, D.C. Here's our breakdown of the controversy, including the benefits and risks of the project, and the concerns about the State Department's role.

    Senators Point Out Firm With Ties To TransCanada Was Chosen To Do XL Pipeline Environmental Impact Study. Conflict Much? - Three key senators today questioned the U.S. State Department about its dealings with a Canadian company seeking U.S. approval to build a crude oil pipeline from Canada to the Gulf of Mexico. TransCanada, the company trying to build the pipeline, reportedly was permitted to screen private firms bidding to perform an environmental impact study. Sens. Bernie Sanders (I-Vt.), Patrick Leahy (D-Vt.) and Ron Wyden (D-Ore.) wrote a letter to Secretary of State Hillary Rodham Clinton raising what they called "serious concerns" about the matter. Their letter questioned why Cardno Entrix was picked to perform the critical study despite its significant financial ties to TransCanada."We find it inappropriate that a contractor with financial ties to TransCanada, which publicly promotes itself by identifying TransCanada as a ‘major client', was selected to conduct what is intended to be an objective government review," the senators said.

    Senators Weigh Keystone Pipeline Strategy - Senators battling the proposed Keystone XL oil sands pipeline are mulling their options as the Obama administration’s decision on the controversial project looms. Critics of the proposed $7 billion, 1,700-mile pipeline say the State Department’s favorable environmental analysis was flawed, and that the review lacked integrity because it was performed by a company with financial ties to pipeline developer TransCanada. They’re pressing for a new analysis, and more broadly say the pipeline — which would bring oil sands from Alberta, Canada, to Gulf Coast refineries — is a bad idea. But with the Obama administration planning to make a final decision around the end of the year, what can they do about it? “I will have more to say about that down the road,” said Sen. Ron Wyden (D-Ore.), who said he’s concerned about the pipeline’s effect on prices and the possibility that the oil it brings could be exported.

    1 vs. 99: Keystone XL seizes private US land for oil to China - The NYTimes reports that TransCanada, a Canadian oil company, promises to confiscate private land from South Dakota to the Gulf of Mexico, and has already filed nearly 60 lawsuits against private US citizens who refuse to allow the Keystone XL pipeline on their property, even though the controversial project has yet to receive federal approval. “Randy Thompson, a cattle buyer in Nebraska, was informed that if he did not grant pipeline access to 80 of the 400 acres left to him by his mother along the Platte River, ‘Keystone will use eminent domain to acquire the easement.’” In an email, Vince Wade comments: “One of my frequent preaching topics is why NAFTA is bad for our economy and our nation and how it is a tool of the robber baron globalists who have destroyed the Middle Class of the industrialized world–which is why we have a global recession/depression. “For those of you who worry about U.S. Sovereignty, let’s think about this: a Canadian company–that is, a foreign company, which is part of NAFTA, is threatening Americans who are refusing to surrender their property to build a pipeline to carry highly toxic tar sands oil from Alberta, Canada to the refineries of Texas.

    Harry Reid Blasts “Unsustainable and “Dirty” Keystone XL Pipeline in Letter to Hillary Clinton - Senate Majority Leader Harry Reid (D-NV) is weighing in on Keystone XL, the controversial 1,700 mile pipeline that would bring carbon-intensive crude across the U.S. from Alberta’s tar sands to refineries in the Gulf Coast. In a letter sent to Secretary of State Hillary Clinton earlier this month, Reid expressed concerns about the environmental impact of the project. The Washington Post reported on the October 5th correspondence: “The proponents of this pipeline would be wiser to invest instead in job-creating clean energy projects, like renewable power, energy efficiency or advanced vehicles and fuels that would employ thousands of people in the United States rather than increasing our dependency on unsustainable supplies of dirty and polluting oil that could easily be exported,” Reid wrote. Reid has been a strong supporter of clean energy and has maintained that support during a time of severe Congressional backlash against government incentives for the sector. But this is the first time he has publicly given his opinions on the Keystone XL Pipeline — a project that has united environmental activists and split the Democratic party.

    EU oil sands ranking a trade threat: Alberta -The government of Alberta, home to the bulk of Canada’s oil sands, has written to EuropeanUnion1 experts voicing “grave concerns” over the bloc’s plans to rank unconventional oil as a highly polluting fuel saying the measure is unfair and a potential threat to trade ties.  “The proposed measure has been deliberately crafted in such a way as to discriminate specifically and uniquely against oil sands derived fuels,” said a copy of the letter seen by Reuters.  “Alberta believes that the Fuel Quality Directive implementing measure as it currently stands would be incompatible with the EU’s internationaltrade2 obligations.”  The oil sands debate coincides with difficult talks between Canada and the EU on a proposed free trade deal. The two sides have yet to agree on a range of issues, including intellectual property and market access for agricultural goods.

    Pipeline profiteering -  Last year a fourth of the nation’s oil pipelines earned excessive profits, at up to seven times the rates allowed these regulated monopolies, according to an explosive analysis prepared by a former general counsel for the U.S. Federal Energy Regulatory Commission. R. Gordon Gooch, the former counsel, alleges in his Oct. 3 study, for instance, that Sunoco’s Mid-Valley Pipeline, which carries crude oil from Texas to Michigan, earned a 55 percent return on assets. That is seven times its authorized profit margin, based on a calculation derived from an accounting report the company filed with FERC. Three other regulated monopoly pipelines earned more than 40 percent on their assets, while another three earned more than 30 percent, an examination of their FERC filings by Reuters shows. To put that level of profitability into context, overall nonfinancial businesses earned a 6.7 percent after-tax profit on their assets last year, the latest Bureau of Economic Affairs report shows. FERC is supposed to balance the interests of customers and owners, making sure customers are charged only “just and reasonable” rates and that owners earn “just and reasonable” profits on top of recovering actual costs.

    Persistent drought threatens Texas oil industry - Crippling drought and booming industry don’t go hand-in-hand — or at least they can’t for long. That’s what Texas industry leaders and policymakers are remembering right now as the state grapples with the question of how to maintain economic growth in the midst of its worst dry spell on record. The bone-dry conditions of the past ten months have destroyed an estimated $5.2 billion worth of crops and livestock in Texas and have helped spread wildfires that have destroyed thousands of homes and millions of acres of land.  The state’s oil industry hasn’t taken an equivalent hit — yet. But oil companies are looking for innovative ways to secure the millions of gallons of water required for oil and natural gas drilling, which grows more difficult as municipalities begin to place limits on local water withdrawals. The problem is worst for companies that practice the drilling method of hydraulic fracturing, or fracking, in which an estimated 3 to 10 million gallons of chemical-laced water a year are blasted deep into each shale-rich oil well to release natural gas.

    IEA Sees Dire Future For Climate, Energy Without New Technology - The world is headed for a "dire future" where high energy prices drag on economic growth and global average temperatures rise by more than 3.5 Celsius unless significant innovations to lower the cost of clean energy and carbon capture technology, said the International Energy Agency Wednesday. Speaking at the conclusion of a two-day meeting with international energy ministers and business leaders in Paris, senior officials from the agency painted a gloomy picture of the world's current trajectory. The meeting concluded that growth in energy demand will be powered largely by coal and the only hope of restraining the rise in global temperatures to safe levels is to hope that the creation of cheaper technologies to capture carbon dioxide "might eventually allow it to be used in a more environmentally benign manner." The meeting, which was attended for the first time by ministers from a large number of emerging economies, was a clear acknowledgement of how economic realities conflict with the goal of reducing carbon dioxide emissions.

    BP allowed back into the bidding for gulf oil drilling rights - The Obama administration has infuriated environmentalists by giving BP the green light to bid for new drilling rights in the Gulf of Mexico. The move – seen as a major step in the company's political rehabilitation as an offshore driller following the Deepwater Horizon accident – was revealed by the head of the US safety regulator after a congressional hearing in Washington. "They don't have a deeply flawed record offshore," said Michael Bromwich, head of the newly formed Bureau of Safety and Environmental Enforcement. "The question is: 'Do you administer the administrative death penalty based on one incident?', and we have concluded that's not appropriate." Drilling rights are sold off on a regular basis but many believed BP would be ruled out as unsuitable after the gulf well blowout that killed 11 workers and polluted the beaches of southern states. The next sale comes up in December, when more than 8m hectares (20m acres) of offshore rights will come up for grabs.

    Oil Spill Disaster on New Zealand Shoreline - Nine days ago, a Liberian-flagged container ship called the Rena ran aground on Astrolabe Reef, 14 miles offshore from Tauranga Harbor on New Zealand's North Island. In addition to the 2,100 containers aboard, the Rena was carrying 1,700 tons of fuel oil and another 200 tons of diesel fuel. A cracked hull and rough seas have dislodged more than 80 containers and spilled some 300 tons of oil already, fouling Tauranga beaches and reportedly killing some 1,000 birds so far. Salvage teams are racing to offload as much remaining oil as possible while cleanup crews are hard at work, coping with New Zealand's worst environmental disaster in decades. [32 photos]

    Tech Talk - The Future Production from Canadian Oil Sand - If one examines the forecast future supply of liquid fuels that the EIA projects in their most recent International Energy Outlook, the agency projects a considerable growth in unconventional supplies of liquid fuels for 2011. EIA projections of future growth in liquid fuel supplies (EIA) For North America, the projections foresee considerable growth both in production within the United States (rising from 8.5 to 12.8 mbdoe) and from Canada (rising from 3.4 mbdoe in 2008 to 6.6 mbdoe in 2035).  In passing, it is worth noting (for folks such as Dr Yergin, perhaps) that the EIA does not see much of a significant role for oil from shales through 2035. But it highlights the criticality of the Athabasca oil sands for the future well-being of the North American fuel supply chain.  There have been a significant number of posts written both by myself and others over the years at Bit Tooth and at The Oil Drum about these reserves that play an increasing part in North American oil supply and that will likely grow to supply other nations as well, particularly China (a topic dating back to the start of The Oil Drum). In this particular post I will therefore discuss briefly an overview about the reservoirs and the technologies used to extract the fuel, in looking at the projected outlook for the future, – given that this has been reviewed and changed a number of times in the past.

    Peak production for U.S. oil-producing regions - I've just finished a new paper on Oil prices, exhaustible resources, and economic growth, which explores details behind the phenomenal increase in global crude oil production over the last century and a half and the implications if that trend should be reversed. Below I reproduce the paper's summary of the history of oil production from individual U.S. regions.

    Monthly Charts with Brent vs WTI - Pursuant to Friday's decision to use Brent prices henceforth, I wanted to take the standard graphs of oil supply that I post each month - at least the ones that incorporate price information - and post versions of them with each price series to better understand the shift that I am making.  Above is the graph of production since 2002 with inflation-adjusted Brent prices on the right hand scale and below is the same thing with WTI prices: As you can see, the main difference is that the price peak associated with the Arab Spring is bigger in Brent terms, and has not fallen as far since.  This reflects the widening WTI-Brent spread over the last 12 months.  Similarly, here is the new Brent-based price production scatter-plot: And here is the old one based on WTI: Again, the big difference is that the 2010-2011 price spike looks more like the 2005-2008 one when viewed in Brent terms. Henceforth, I will be using only the Brent-based ones.

    Gulf states embark on oil refinery drive - Iraq is driving to build new oil refineries to increase capacity by 740,000 barrels per day as its postwar economy swells, part of a multibillion-dollar program under way across the Persian Gulf region. The Organization of Arab Petroleum Exporting Countries reported in June that Arab countries' refining capacity is expected to increase by 5 million bpd to 12.4 million in the next three years. More than half the refineries in the region were built before the 1990s. "So refiners have had to work hard to keep up with higher global emission standards," the Middle East Economic Digest reported."They are also attempting to refine heavier crudes, which will account for an increasingly bigger share of production over time."

    IEA sees mixed outlook for oil -- Though there are concerns about the European economy, oil producers shouldn't scale back production, an International Energy Agency official said from Paris. David Fyfe, the oil industry and markets division head at the IEA, said world oil markets were tight because of slow production from the North Sea and Canada and the loss of production from war-torn Libya. The Organization of the Petroleum Exporting Countries in June left official production quotas in check despite concerns high energy prices could slow economic growth. The IEA called on its members to release oil from strategic reserves to offset the loss of production from Libya.

    Countdown to $100 Oil - No Normal Recession - This is the fourth post in the series following the oil price, markets and general health of the global economy examining the simple theory that OECD recession may result from annual average oil price exceeding $100 / bbl. The annual average price (AAP) of Brent went through $100 on around 16th August 2011 and the AAP stood at $105.3 on 12th October. The AAP high point in the 2008 price spike was $104.8 on 9th October that year. Below the fold are observations and commentary on debt, economic growth, interest rates, commodities prices and government policy. This is not intended to be quantitative analysis but instead is intended to provide a platform for discussion in the comments.

    Peak oil is about price, not supply  - While conventional production may have peaked long ago in the lower 48 U.S. states as predicted by the father of the peak oil movement, geophysicist M. King Hubbert, new sources of supply have been found in Alaska and under the Gulf of Mexico. And now oil sand production from Alberta and oil from the Bakken shale deposits may soon replace conventional oil in the mix of North American fuel.  Our definition of oil has changed so much the U.S. Energy Information Administration doesn’t even refer to oil any more but rather to energy liquids. This includes all kinds of energy sources we would not have previously called oil such as natural gas liquids, liquefied refinery gases, and even corn-based ethanol.  But peak oil as it turns out isn’t about supply but rather demand. It is a concept rooted more in economics than geology. It doesn’t matter if there are billions of barrels of oil waiting to be tapped from oil sands or oil shales if the prices to extract them are beyond our economies’ capacity to pay.  The peak in our oil consumption will be determined by our ability to pay ever rising prices for the fuel, not by the ability of those same prices to drive new sources of supply.

    The peak oil brigade is leading us into bad policymaking on energy - It is almost always a mistake to assume you know where energy bills are going. This is especially true for secretaries of state, and energy policy should never be based upon assuming you know what the future will bring. Unfortunately, it is the new conventional wisdom and an assumption prevalent across much of Europe.Yet Chris Huhne, the British secretary of state for energy and climate change, is pretty sure that oil and gas prices are going ever upwards, that they will be volatile and that a core function of energy policy is to protect British industry and consumers from the consequences. It is a convenient assumption for renewables and nuclear: if the price of fossil fuel is going to get more expensive, then renewables and nuclear will be relatively cheap. Add in energy efficiency, and then it can be predicted that energy bills will fall if these technologies are supported. The last time policymakers were this sure was the last time oil prices peaked – back in 1979. Instead, prices collapsed in the mid 1980s, and didn't return to the 1979 prices for more than a quarter of a century (even with two Gulf wars). As then, we are led to believe that the world's fossil fuel resources are finite and known, and that the peak of production has either been already met or will come soon.  Almost all of this is nonsense – and some of it is dangerous nonsense.

    Peak Oil for Economists - A few quick thoughts on Jim Hamilton's new magnum opus.  The paper is essentially a summation of Jim's current thinking on the evidence that peak oil is near enough to care about and that it's likely to be quite economically disruptive.  It is thoroughly researched, superbly argued, and very clearly written, as one would expect from this author.  I hope and expect that it will be quite influential in getting economists to take the whole subject more seriously. In terms of the content, long-time readers of mine will probably find a limited amount they didn't already know and little to disagree with.  Six years ago, when I first began exploring and blogging about peak oil, Jim and I had some spirited debates on his blog as well as at The Oil Drum (see here for a flavor).  However, I like to think that we are both empirical and pragmatic and six years of additional data have been enough to cause our views to increasingly converge. The one thing that I think is sad..  The argument is couched completely without reference to the line of thinkers about peak oil that stretches back over the last fifty years.  Given the enormous walls of incredibility that prevent diffusion of thought between academic disciplines, that is arguably necessary to make a persuasive case to macroeconomists.

    Saudi oil Saudi energy demand to double by 2028: Saudi Aramco has forecast that the kingdom's daily energy demand will reach an equivalent of 8.3 million barrels by 2028, more than double the 3.4 million barrels equivalent in 2009. Currently, of the 8.3 million barrels daily in oil production, more than three million barrels are consumed by the domestic market mainly to fuel national industries. In the meantime, the National Industrial Clusters Development Programme (NICDP) is promoting solar energy, value chain products to support solar power plants, which are envisioned to be established across the kingdom as a component of the country's resolve to harness renewable energy to meet increasing electricity demand. Saudi Arabia's industrial clusters programme in solar energy products is introducing the polysilicon and photovoltaic technologies, said Azzam Shalabi, president of the National Industrial Clusters Development Programme. Article continues below Integration "The programme is currently developing three projects in the silicon route which would bring in 12 KTA of solar grade polysilicon and semiconductor grade polysilicon," Shalabi said during his presentation on the progress of the industrial clusters plan of the kingdom.

    The Club of Rome is back  - Yes, the Club of Rome is back. Actually, it had never gone away, but the demonization campaign that had been unleashed against its 1972 report, "The Limits to Growth," had largely convinced the public that the Club's approach to the world's problems had been based on a "wrong" model. Instead, it turned out that the model was not wrong. The recent turmoil, the economic recession, the worries about "peak oil", and the rapid rise in the price of all mineral commodities have brought back the interest on "The Limits to Growth". That brings the sponsor of the report, the Club of Rome, again under the spotlight.  I am just back from a meeting on energy that the Club of Rome organized in Basel. When I have some time, I'll see to report on it in detail.  Of course, many things have changed from the time of the foundation of the Club, almost half a century ago. It may be that, today, the Club's activity is more focalized on practical solutions to the world's problems, whereas at the beginning it was more in understanding what the future had in store for humankind. But some elements of the Club's approach remain the same: the international vision, the "system approach", the attention to the interdependency of the ecosystem and the industrial system, the focus on the social problems and on the welfare of the poor.

    Debt Panic in China’s Wenzhou May Augur Wider Woes - Wenzhou's private entrepreneurs, scrappy survivors in an economy ruled by state industries, once thrived on a formula of cheap backstreet loans and low-cost manufacturing.  Now, they're at the center of what some have dubbed China's own subprime debt crisis1, a festering mess of borrowings gone sour that has become one of the weakest links in the economy — at a time when strength here is most needed to offset weakness in the U.S. and Europe.  "Do anything, but not manufacturing in China!" exclaimed Yang Guanghua, boss of a Wenzhou electroplating factory. Unable to collect from customers who themselves have no money, Yang said he stopped paying salaries two months ago.  "I can't get raw materials because suppliers are afraid I will run away," Yang said. "It's just impossible to get loans from the bank unless you have connections," he said.

    Protectionism Cannot Bring Prosperity - It is not often I vehemently disagree with Michael Pettis at China Financial Markets regarding trade. This time I do. Interestingly, there are some points of his recent analysis that I strongly agree with. Via Email, interspersed with my comments please consider the following point counterpoint discussion. Pettis: Expect Still More Trade Intervention.  Last week’s Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has widened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position I think the likelihood of a good outcome, while never high, is declining further. The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments that characterize each side. For example many of those who believe China is cheating on trade go through complicated exercises to prove the currency is undervalued and should be sharply revalued, without considering other relevant factors.  The currency may well be undervalued, but it shouldn’t be the only issue taken into account.

    A "Must See" Heart Wrenching Video of Moral Deterioration in China - Here is a "must-see" video that came my way a few days ago. Words cannot possibly describe the video, so please give it a play.

    Credit crunch in China hurts property developers - The co-founder of SOHO China, one of the nation's leading developers, is worried Beijing's efforts to cool the sector are hurting sales and threatening to send some debt-laden property developers to the wall. "In my sixteen years as a developer this is by far the most challenging year I've ever had, in terms of what we could sell," . Since the beginning of this year Beijing, fearing a bubble, has been trying to bring down dizzying prices by hiking interest rates and restricting lending to developers, making it nearly impossible for many to get financing, Zhang said. Industry officials and analysts are worried that the measures are now squeezing sales so much that property developers who have borrowed heavily to fund new projects could be tipped into bankruptcy."A wave of newly completed property is about to hit the market. Developers are likely to find themselves holding large volumes of unsold property."

    China's Inflation Rates: Signs of Market Imperfections - Ryan Avent points out that if one uses a different measure of inflation in China to convert its nominal exchange rate into a real exchange rate, the Chinese yuan (CNY) has actually appreciated quite a bit in real terms in recent years. Using China's GDP deflator instead of the CPI, in fact, the CNY has appreciated in real terms by close to 50% since 2005. Using the CPI the other day I had calculated the real appreciation to be much smaller. The larger figure obtained using the GPD deflator provides a reassuring confirmation of our priors, but it raises a very interesting question: why are the two measures of China's inflation rate so different? As seen in the chart to the right, the GDP deflator has been consistently rising much faster than the CPI in China. Why? While there are many differences in how the two measures of inflation are calculated, the biggest and most relevant distinction in this case is that the CPI only measures the prices of things that consumers buy, while the GDP deflator also measures the prices of things that non-consumers -- i.e. businesses, the government, and the foreign sector -- buy.   And this has three important implications.

    China and the Eurozone - Compare China vs the US to Spain or Ireland vs Germany, with a lag of about 3 years. The China/US game is about 3 years behind the Eurozone game. China has a (roughly) fixed exchange rate with the US, just as Spain and Ireland have an (exactly) fixed exchange rate with Germany. The monetary policy that was roughly right (well, not really right at all, but definitely not too loose) for the US was too loose for China. Before the recession, 3 years ago, the monetary policy that was roughly right for Germany was too loose for Spain and Ireland. So China, Spain, and Ireland had a credit boom and rising asset prices, especially house prices. It all ended badly in Spain and Ireland. It now looks like it might end the same way in China, with a 3 year lag. Fixed exchange rates seem to do this sort of thing. Spain and Ireland used to wish they could revalue their currencies against Germany. They now wish they could devalue their currencies against Germany. China failed to revalue its currency against the US, when it should have done. I wonder if it will soon want to devalue its currency against the US?

    The Best Things in Life are Free -- Matthew Yglesias explains why we should be happy that the Chinese are subsidizing their solar industry:  I do think it's always helpful to try to take a "real resources" viewpoint on these things. What's at issue here, basically, is that China is trying to give us a bunch of free solar panels. It's quite true that insofar as we've been organizing economic activity around the (reasonable) assumption that China won't give us a bunch of free solar panels, that getting the free panels will cause some dislocations. But it seems implausible that the best possible way of dealing with the situation is to refuse to accept the panels. That (poor) China has chosen to boost domestic employment by subsidizing consumption in (rich) America is slightly bizarre, but we may as well try to enjoy it while it lasts.

    China Growth May Top 9% as Global Slump Poses ‘Biggest Risk’  - China’s economy probably grew more than 9 percent in the third quarter, indicating the nation remains an engine of global growth even as Europe grapples with the sovereign debt crisis and the U.S. recovery falters. Gross domestic product increased 9.3 percent from a year earlier, according to the median estimate of 22 economists in a Bloomberg News survey. That would be the ninth straight quarter of expansion above 9 percent and follow a 9.5 percent gain in the previous three months. The data are due in Beijing tomorrow. Weaker gains in exports and lending in September suggest that Premier Wen Jiabao may need to weigh more measures to support growth after the State Council this month announced aid for small businesses. In Paris, attending a Group of 20 finance ministers’ meeting, Brazil’s Finance Minister Guido Mantega said Oct. 15 that signs of a “slight” slowdown in China, the world’s biggest consumer of commodities, will become a concern if the trend continues.

    China’s whacky GDP -Here’s a little follow-up on the Chinese GDP numbers. The growth figure produced by the National Bureau of Statistics (i.e. that 9.1% number) is growth in real terms, not nominal terms, one point that some people get confused every now and then.  The nominal yoy change for Q3 GDP was actually 21.3%.  That would mean that the implied GDP deflator yoy change is about 11.2%. Yet CPI inflation is only 6.1%. That’s right, things don’t add up for Chinese Statistics.  The charts below show Real vs. Nominal growth of the Chinese economy, as well as the GDP deflator vs. CPI inflation.  As you can see, CPI inflation has been consistently below the inflation rate as implied by the implicit GDP deflator (as implied by the gap between nominal growth rate and real growth rate) for the past 10 years or so.  On top of that, the gap between the GDP deflator implied rate of inflation and rate of CPI inflation has been widening of late.

    Can China achieve a soft landing with a thinning export cushion? - CHINA'S economy grew at a 9.1% annual pace in the third quarter of this year. That's down a touch from the 9.5% rate notched in the second quarter, and it's a bit below expectations for 9.3% growth. Markets didn't much care for the news, but 9.1% is a pretty healthy clip given the weakness spreading across most of the world economy. Industrial production grew somewhat faster than expected, a nice surprise given PMI numbers that have shown China's manufacturing sector contracting slightly for much of the quarter. Generally, speaking, the hoped-for soft landing seems to be on track. At FT Alphaville, however, Kate Mackenzie collects comments on the report that provide reason for pessimism. In particular, China's exports have been falling rapidly in recent months, and especially sales to Europe. That may throw a wrench in China's plans to rebalance its economy. Amid strong export demand, it would be easier for China to relax the rules that artificially constrain consumption. Given a broad slowdown in key export markets, however, China may be reluctant to give up any of the edges that its manufacturers enjoy.

    China, an appreciation - WITH a China currency bill making its way through Congress, the debate over whether America ought to get tough with China is firing up yet again. The case for an aggressive American approach continues to look very weak to me. Some writers are taking on the idea that Chinese inflation is having much of an effect on its export competitiveness—that is, contributing to a real adjustment much larger than what's observed in the nominal exchange rate. Kash Mansori makes an argument to that effect in this post, which has gotten a lot of attention. He compares CPI data in America and China and figures that Chinese prices have risen just 6.7% more than American prices since 2005—less of a contribution to adjustment, in other words, than one might have assumed. That estimate seems unrealistically low to me. Looking at IMF figures on consumer prices and GDP deflators, the differential in inflation between 2005 and 2011 has been about 7 percentage points according to the former and 20 percentage points by the latter. The Economist put together an analysis of the real yuan-dollar rate and found that real appreciation has been significantly greater than nominal appreciation.

    I mug pandas - I don't understand why opponents of attempts to "get tough" on China's currency policy are comfortable with simplistic arguments and hand-waving dismissals. I realize that "free trade" is one of the few issues on which economists have allowed them to think they have a consensus over the past half-century. And I also realize that trade wars are scary in a geopolitical sense, regardless of the economics. But that is no reason to ignore the serious scholarly research that supports the idea of getting tough with China, or to assume that Congress' attempts to do so constitute political pandering. One example of this sort of analysis is Michael Cohen's recent piece in Foreign Policy magazine, entitled "Panda Mugging." Here's the economic argument: [A stronger yuan] would likely lead jobs to trickle to other low-wage countries rather than back to the United States -- a phenomenon that is already taking place as labor costs in China are on the rise. There are theoretical reasons to believe that this is an oversimplification, and may just be flat-out wrong. Suppose the dollar appreciates against the yuan but not against the Indonesian rupiah, and that low-wage manufacturing jobs simply migrate from China to Indonesia. Indonesia will be richer, because it has gained jobs!  End result: Good for America, good for Indonesia (and neutral for China).

    "Free trade" and the Tea Party Congress -- An op-ed in the Washington Post points to an idea worth exploring:  For all the talk of populist foment – the Tea Party on the right and the new Occupy Wall Street movement on the left – business interests remain firmly in control. Forced to choose between their voters and their donors, lawmakers don’t hesitate before choosing the latter. There is little doubt about where the Tea Party faithful stands on free trade. A year ago, a Wall Street Journal-NBC News poll found that 61 percent of Tea Party supporters thought free-trade agreements had hurt the country, compared to 53 percent of Americans overall who held that view. Shortly after that, a Pew Research Center poll found that only 24 percent of Tea Party supporters thought free-trade agreements were good for America.

    Trade deficit next year 'possible' - China may see its first annual trade deficit for two decades next year, Wei Jianguo, former vice-minister of commerce, said. September and October are traditionally the peak time for contracts ahead of the festive season in Europe and the United States but demand is sharply down this year, he said. “China’s export-reliant enterprises are facing their toughest time in years. The possibility of a full-year trade deficit cannot be ruled out next year,” Wei, secretary-general of the China Center for International Economic Exchanges, a government think tank, told China Daily. China's last yearly deficit occurred in 1993.

    China warns foreign trade outlook ‘quite grim’ — China’s Commerce Ministry warned Wednesday about the nation’s trade outlook, saying conditions for the remainder of the year and into the first quarter of 2012 look tough, according to reports from the region. “The import and export situation will be quite grim in the fourth quarter of this year and next year, or at least in the first quarter of next year,” Commerce Ministry spokesman Shen Danyang was cited as saying by the state-run Xinhua News Agency. hen also said criticism of China’s trade policy was unfounded and urged countries such as the U.S. not to politicize economic and trade issues. China’s trade surplus fell in September for the second straight month, he noted. Shen said the declining surplus showed “the determination and forceful acts of the Chinese government to promote trade balance.” Shen also said China should keep the yuan’s exchange rate stable for the time being.

    China's Dwindling Trade Surplus Signals Weak World Economy - NTD Television video below

    Flooding near Bangkok has taken about 25 percent of the world’s hard disk manufacturing capacity offline - If you're going to need hard drives this year or early next year, it would be smart to get your sources locked in now. Disk manufacturing sites in Thailand -- notably including the largest Western Digital plant -- were shut down due to floods around Bangkok last week and are expected to remain shut for at least several more days. The end to flooding is not in sight, and Western Digital now says it could take five to eight months to bring its plants back online. Thailand is a major manufacturer of hard drives, and the shutdowns have reduced the industry's output by 25 percent. Western Digital, the largest hard disk manufacturer, makes more than 30 percent of all hard drives in the world. Its plants in Ayutthaya's Bang Pa-In Industrial Estate and Pathum Thani's Navanakorn Industrial Estate together produce about 60 percent the company's disks. Both were shut down last Wednesday. (Western Digital also has a major plant in Malaysia that hasn't been affected by the floods, so some production will likely shift to that plant.) Fourth-ranked hard-disk manufacturer Toshiba makes more than 10 percent of the world's hard disks, and half of its capacity is in Thailand. Toshiba's plant has also been closed due to flooding.

    Singh’s Top Aide Signals Need for Higher Interest Rates in India - A top economic adviser to Indian Prime Minister Manmohan Singh signaled the need for higher interest rates before next week’s monetary policy decision as food inflation climbed to near a six-month high. Bonds fell. “The fact that inflation is triggered by food inflation or supply side constraints doesn’t mean that the monetary policy doesn’t have a role to play,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in New Delhi today. India’s government and central bank have in recent days indicated the need to pursue a tight monetary policy to tame an inflation that has exceeded 9 percent since the start of December. By contrast, emerging markets from Brazil to Russia have cut borrowing costs to counter the risks posed by Europe’s sovereign-debt crisis and a faltering U.S. recovery. “The RBI will be more focused on inflation than swayed by what other countries are doing," “India has a much worse inflation problem than other countries and the RBI will continue to tighten until inflation comes down significantly.”

    The resources curse - Australia’s current terms of trade boom is a media darling.  This widely quoted statistic has provided a degree of comfort to those who proclaim the robustness of Australia’s economy due to close trade connections with Asia, and China in particular. Most readers would not be aware that macroeconomic researchers have built up a solid evidence base demonstrating that terms of trade volatility leads to volatile outcomes for output growth and inflation, a lower average rate of growth, and reduced welfare.  A temporary income boost from a terms of trade effect has been shown numerous times to be a double-edged sword as the disruptive impact on production patterns filters through the wider economy.But what is the terms of trade?  How is it calculated? Can we better understand the economic impact of this oft-quoted figure by dissecting it into constituent parts? And what policy options exist to deal with the volitility?  This post explores these questions in detail and shows that our terms of trade driven income boom is not an excuse for policy makers to do sit on their hands, but is instead an opportune time to implement policies that improve the durability and diversity of the economy.

    Desperate bank staff pushed into hard-sell tactics - BANK tellers are being offered Christmas party bonuses, free meals and other prizes to push more credit cards, loans and insurance policies on to customers.

    The Global Jobs Challenge - Massive structural changes in the global economy present three great employment challenges worldwide, with different countries facing their own variants.The first challenge is to generate enough jobs to accommodate the inflow of new entrants into the labor market. Clearly, a wide range of advanced and developing countries is failing to do so. Youth unemployment is high and rising. Even in fast-growth developing countries, surplus labor is awaiting inclusion in the modern economy, and the pressure is on to sustain job creation. The second challenge is to match skills and capabilities to the supply of jobs – an adjustment that takes time. It is also a moving target. Globalization and major labor-saving technologies have thrown labor markets in many countries into disequilibrium. Skills mismatches abound. Moreover, with continuing rapid growth in developing countries, the global economy’s structure is far from static, and it seems clear that the pace of market adjustment is lagging that of structural change. The third challenge is distributional. As the tradable part of the global economy (goods and services that can be produced in one country and consumed in another) expands, competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. Subsets of the population gain, and others lose, certainly relative to expectations – and often absolutely.

    US "Pours Cold Water" On IMF Expansion Plans, Leaves European Bailout To Europeans - It is probably not too surprising that the negative news of the day, namely that the US has decided against expanding the IMF and thus leaving the European bailout to the Europeans (at least for now), was released quietly long after happy hour started on Friday. Yet that is precisely what happened after Reuters dropped a Friday night bomb that with hours before a communique is issued by the G20 in Paris, contrary to previous rumors and representation "U.S. Treasury Secretary Timothy Geithner and his Canadian and Australian counterparts poured cold water on the idea" of injecting $350 billion into the International Monetary Fund. As a reminder, the IMF expansion myth was one of the latest rumors floated today by none other than the tag team of Geithner and Liesman. It lasted less than24 hours but it served its purpose. The full on media onslaught of never ending lies has never been more acute, more relentless, and more blatant: with every central bank and trade surplussed nation all in, the very nature of the global ponzi is at risk.

    IMF calls for pan-European deposit insurance - The International Monetary Fund called on Saturday for an EU-wide deposit insurance scheme and more coordinated regulation of the continent's banks to prevent contradictory national regulation from exacerbating its debt crisis. A common bank crisis management system, a supra-national resolution regime and common deposit insurance rules would help significantly stabilize the banking system, said Ajai Chopra, the deputy director of the IMF's European Department. The IMF believes a deposit insurance scheme should be introduced in parallel to an increased harmonization of deposit insurance schemes in the member states to ensure sovereign problems don't trigger destabilizing bank runs, he said.

    Which Way for the Euro Zone? - Which way for the euro zone? Mark Zandi joins Nuriel Roubini to look at the painful options facing Europe.

    G20 tells eurozone to tackle debt crisis - Finance ministers of the world’s leading economies left Paris on Saturday urging the eurozone to act “decisively to restore confidence, financial stability and growth” and holding out the prospect of wider international support if European leaders deliver a solution to its sovereign debt crisis.  Despite a continued lack of agreement on key elements, the eurozone committed to finalise the details of “a comprehensive plan” to recapitalise its banks, resolve the Greek debt crisis, add firepower to its funds to minimise contagion in time for a European summit next Sunday.  The Group of 20 finance ministers and central bank governors expressed encouragement that progress was being made but stressed that the crisis could be solved only if there was rapid movement on the details. François Baroin, France’s finance minister, said progress had been made with his German counterpart, Wolfgang Schäuble, on increasing haircuts for banks holding Greek debt, but refused to disclose how much more than the 21 per cent contribution agreed in July.

    G20 calls for speedy eurozone package - France and Germany have less than a week of frantic negotiation ahead to resolve key differences on a “comprehensive plan” to end the eurozone sovereign debt crisis after the world’s leading finance ministers put the ball firmly in their court at the weekend.  The Group of 20 richest nations told the eurozone that by the European summit next Sunday it should: agree on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalisation of Europe’s banks; and install a firewall to protect other countries from Greece’s woes. The eurozone is still some way from agreement in these areas and G20 finance ministers urged policymakers to act. Having risen sharply last week on expectations that Europe was getting a grip on its problems, financial markets are also nervously awaiting the political decisions to be taken this week.  More optimistic than of late, Tim Geithner, US Treasury secretary, said: “They clearly have more work to do on the strategy and the details, but when France and Germany agree on a plan together and decide to act, big things are possible.”  Details of the eurozone package are not expected to emerge before Thursday, when the 17 governments hope to have the full report of the troika – the International Monetary Fund, European Commission and European Central Bank – on the sustainability of Greek debt.

    Europe Faces More Hurdles on Aid Plan - European leaders have primed investors to expect a sweeping euro-zone rescue plan to be unveiled within a week. But several hurdles remain, among them the details of a new Greek bailout, and clearing them could take weeks, not days. The result could be a plan broad in ambition but short on specifics. The plan will have three pillars: a call for higher capital levels for banks, a beefing up of the euro zone's bailout fund, and a new package of aid for foundering Greece. The latter is proving particularly difficult. Olli Rehn, the European Union's economy commissioner, said Saturday that he expects euro-zone leaders on Oct. 23 to "decide on the key principles and parameters" of the second Greek bailout, but that "technical finalization of the program will take place in the course of the subsequent weeks."

    Rehn Says EU Close to Reaching Agreement on Recapitalization -  European Union Economic and Monetary Affairs Commissioner Olli Rehn said member states are set to agree on a “very serious plan” to recapitalize the region’s lenders and help contain its fiscal crisis. “I expect that in the coming days, we’ll have more clarity on this,” Rehn told Bloomberg Television after a meeting of finance ministers and central bank governors from the Group of 20 nations in Paris yesterday. “Member states and banks need to have very clear plans to put recapitalization in place as swiftly as possible.” With a summit looming on Oct. 23, European leaders are groping toward a master plan for dealing with Greece’s oversized debt, insulating the Spanish and Italian markets, and shielding banks from the fallout. German Chancellor Angela Merkel and French President Nicolas Sarkozy put bank recapitalization at the top of the priority list. There’s now a “strong sense of urgency” among leaders, Rehn said. “The EU is acting very hard in order to put together a comprehensive strategy to overcome the sovereign debt crisis and banking-sector fragilities, which are severely intertwined.”

    ECB to end bond-buying when markets stabilize: Trichet - The European Central Bank signaled on Saturday it would not abruptly end its bond-buying program now that the euro zone bailout fund EFSF has powers of secondary market intervention and would wait until financial markets stabilize.  The European Financial Stability Facility now has the power to buy bonds of distressed euro zone sovereigns to underpin their prices -- a job the ECB has so far been doing to prevent Italy and Spain from running into financing difficulties. ECB President Jean-Claude Trichet told a news conference at a G20 finance chiefs' summit that the bank's bond buying was designed to tackle disruption of markets and was implemented to improve the transmission of ECB monetary policy. "It is because we have the absence of financial stability in the euro area that we have to intervene to help restore a better transmission of monetary policy," Trichet said.

    Nigel Farage Calls Juncker a "Political Ostrich" in European Parliament, says Wake up to the misery you're inflicting on millions! - Here are a couple of highly entertaining videos of Nigel Farage attacking the credibility of Jean Claude Juncker in from of parliament. The second video discusses the no vote by Slovakia's parliament that cost the Prime Minister her job.

    Europe’s lost decade as $7 trillion loan crunch looms - Europe’s banks face a $7 trillion lending contraction to bring their balance sheets in line with the US and Japan, threatening to trap the region in a credit crunch and chronic depression for a decade. The risk is "Japanisation" without the benefits of Japan: without a single government, or a trade super-surplus, or 1pc debt costs, or unique social cohesion. Even today, the jobless rate for youth is near 10pc in Japan. It is already 46pc in Spain, 43pc in Greece, 32pc in Ireland, and 27pc in Italy. We will discover over time what yet more debt deleveraging will do to these societies. Stephen Jen from SLJ Macro Partners says the loan to deposit (LTD) ratio of Europe’s lenders is 1.2, much like Japanese banks in the early 1990s at the onset of the country’s Lost Decade (now two decades). How Europe allowed this to happen will no doubt be the subject of many enquiries. Suffice to say that it was an intellectual failure by everybody: lenders, economists, regulators and the European Central Bank. The ECB misread the implications of the global capital surplus in the middle of the last decade (like the Fed) and gunned the M3 money supply at double-digit rates (like the Fed).

    Strange Price Trends in the Eurozone - Eurostat came out with preliminary inflation numbers for September: at 3% year over year, it's not exactly flirting with deflation.  Even the number excluding food and energy is 1.6%: lower, certainly, but not imminently threatening to become negative either.  But what really caught my eye was some of the nation-level stats, which caused me to make the following chart of the overall price level for the PIIGS countries, as well as for three "core" countries: Germany, France, and the Netherlands. So the conventional account of the Eurozone's woes, the ECB has been unhelpful by raising rates too high (in order to prevent inflation in Germany and France), while letting the poor peripheral countries go to the dogs of internal deflation. However, if that picture of what is happening were fully accurate, we would expect to see the PIIGS countries at the bottom of the chart, with inflation below the Eurozone average (the heavy black line), while the core countries would be a bit above the average.  But that's not what we see at all - instead Greece and Spain are at the top of the chart and France, Germany, and the Netherlands, are all below the average.  Only Ireland appears to be behaving in the expected manner.

    Benford’s Law: Are Euro States and US Stocks Fiddling Their Figures? - As we’ve previously seen, Benford’s law – one of the odder practical truths revealed by statistics – is a great tool for identifying fraudulent accounting, a good indicator that’s there’s something afoot in the footnotes. Now, though, we have a couple of new examples of forensic analysis using the technique, and they don’t make comfortable reading if you’re long of equities; or indeed anything other than sub-automatic weapons and a bricked-up cave. So on one hand we have evidence suggesting that US corporations are systematically manipulating their accounts, and on the other that the real depth of the issues in the Eurozone are yet to be revealed. If true, we’re a long way from resolution of this particular, and peculiar bust. To recap: Benford’s law says that in naturally occurring data the leading digit is most often 1 and least often 9, descending in frequency as the numbers rise. This doesn’t work for all data – human height is distributed according to the familiar Bell curve or normal distribution, for instance – but is common in other areas. In particular Benford’s law rules in financial accounting. So, for instance, more companies earn between 100 million and 199 million than between 200 million and 299 million and so on.

    What Europe Has To Accomplish By Next Sunday: From Nomura, a quick summary of this weekend's G20: The G20 told the eurozone that by the European summit next Sunday, 23 October, it should: agree on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalisation of Europe’s banks; and install a firewall to protect other countries from Greece’s woes. Details of the eurozone package are not expected to emerge before Thursday, when the 17 governments hope to have the full report of the troika on the sustainability of Greek debt. There was some positive news in comments by EU Economic and Monetary Affairs Commissioner, Olli Rehn, suggesting that EU member states are close to an agreement on bank recapitalisation plans. S&P downgraded BNP Paribas on Friday after reviewing the ratings of the five largest French banks. The decision was based on the vulnerability of their funding and liquidity profiles given weaker economic growth in Europe. Piece of cake, right? Well, probably not. Even just today, Germany's Wolfgang Schauble is trying to downplay expectations, talking about the lack of Bazooka, etc.

    Germany Shoots Down ‘Dreams’of Swift Euro Crisis Solution - Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.” Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion. They set the Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered. On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss ways to tighten economic and financial policy, he said.

    Deutsche Bank boss in talks over Greek debt - The head of Germany's biggest bank, Deutsche Bank, is conducting talks over a 50-percent write-down of Greek debt in his capacity as chairman of the global banking lobby, a newspaper reported Sunday. Citing both government and banking sources, the mass circulation Bild said that Josef Ackermann was participating in negotiations on a voluntary "haircut" on Greek debt that could be as high as 50 percent. European Union leaders are gathering next Sunday in Brussels and hope to present a comprehensive solution to the eurozone debt crisis that threatens to tip the 17-nation zone -- and the rest of the world -- into recession.
    It is widely expected that leaders will announce that private investors will have to accept a greater loss -- or "haircut -- on their holdings of Greek debt. Speculation has focused on a 50 or even 60 percent write-down. To prevent these heavier losses from prompting a bank crisis, EU leaders are also thought to be looking at ways to recapitalise the main lenders.

    Does the euro need Greece more than Greece needs the Euro? - Gavin Hewitt puts it another way in his most recent column, but that's basically the question he's asking: Eurozone debt crisis: Greece's wild card Europe's leaders will be asked yet again what they are going to do with Greece. ...But there is another factor in all this, a wild card: the Greek people. What happens if a people simply says "no"? What happens if, through many small and not-so-small actions, they sabotage the plan?I think of it like this: Greece and the core eurozone countries (Germany, France, etc.) are in the process of trying to apportion the additional costs of fixing the crisis. Is local austerity ("punishment" is a more accurate term in my opinion) going to be the main mechanism to pay for the solution, or will the crisis mainly be solved through direct assistance from Germany and France? So far the costs of this crisis have been mainly borne by the Greeks through austerity-punishment, but there's a limit to how much of that can be imposed. To better understand who will pay the additional costs of resolving this crisis, it's helpful to think about the incentives each side has to voluntarily shoulder the burden.

    Europe's Last Stand Needs Firepower = Europe is heading for what could be the last stand in its two-year-old sovereign debt crisis. By the time the Group of 20 nations holds its summit in Cannes, France, on Nov. 3-4, the European Union aims to have a rescue plan sound enough to ensure the financial troubles of struggling governments don’t bring down the banking system. If Europe wants to avert a financial and economic disaster worse than that of 2008 and 2009, it had better apply overwhelming firepower. Achieving credibility will require three things Europe’s leaders have so far failed to do. They must discard the illusion that certain euro-area governments, particularly Greece, can afford to pay their debts. They must provide a realistic accounting of how much Europe’s banks will lose when those governments default. And they must offer financial guarantees large enough to convince markets that the defaults and the losses will be final. Anything short of a full and honest reckoning will only make the situation worse.

    Europeans Struggle Toward Debt Solution— European officials said on Saturday they had moved closer to a comprehensive solution for the Continent’s debt crisis1 during a two-day gathering of leaders from the Group of 202 industrial nations, despite a number of unresolved problems that could still widen the scope of the crisis.  With Europe’s economic and financial woes weighing on prospects for global growth, officials said they had agreed to take “all necessary measures needed to stabilize the financial system” and Europe’s crisis, and were working to introduce a proposal at a meeting of European leaders scheduled for Oct. 23 in Brussels.  “To respond to the global crisis, the results of Oct. 23 will be decisive,” France’s finance minister, François Baroin, said at a news conference capping the two-day meeting in Paris of the G-20 finance ministers and central bank governors. “The capacity of the United States and of China to recalibrate its growth motor” will also be key, he said.  The specter of an economic downturn in Europe has started to trouble leaders in other countries, including the United States and Britain, whose officials have pressed the Europeans to strengthen their rescue fund.

    Euro Leaders’ Crisis Campaign Bogs Down - Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases.  European stocks fell for a second day after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy.  While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.

    Smoke Clears, Fog Lifts, Revealing More Smoke and Fog; Sell the "No-News"; Point by Point Synopsis of the Merkel-Sarkozy Plan - A couple of people asked me yesterday to comment on the G-20 meeting. I responded "What did they say?" Here is the answer. The G-20 leaders said nothing and did nothing other than to offer the hope that Merkel and Sarkozy would provide a solution on October 23. The fog of G-20 is gone and all there is to see is a fog of vague promises by German Chancellor Angela Merkel and French President Nicolas Sarkozy that something dramatic will happen later.The G-20 did nothing and said nothing but today Angela Merkel lifted some of the fog from promises made a couple of weeks ago. The picture is now much clearer. Merkel pulled back the fog revealing more fog.Greece will default and it will be a hard default. The Yield on 1-year Greek bonds is hit a new high of 176% today, currently at 172%. Merkel and Sarkozy have no plan for Greece other than to keep Greece in the Euro and that is not up to Merkel and Sarkozy, but rather up to the citizens of Greece. Moreover, the smaller the haircut, the bigger the burden on Greece and the more likely Greece leaves sooner rather than later.

    Europe’s (non) bailout plan predictable in its absurdity - The fourth year into the crisis, and all G20 meetings have evolved into predictable verbal ping-pong: the non-EU nations urging Europe to deal with the crisis and the EU representatives returning boisterous claims that “robust,” “timely,” “resolute,” “decisive” solutions are being planned. More admonitions for action follow even more “resolute” claims of Europe planning to unveil a “definitive” road map to a plan for resolving the crisis. Ad infinitum.  This weekend’s G20 summit of finance ministers failed to provide for anything different. Here are just a few points from the final comments by the participants.  French Finance Minister François Baroin: The Euro crisis “took up a little part of our dinner last night. We presented ... elements of the global and lasting package which heads of state and government will present at the Oct. 23 summit. It responds to the Greek issue, the maximization of the EFSF, on the level of core tier 1 [capital] with a calendar which will be co-ordinated by the heads of government for the recapitalization of the banks. ... We still have a week to finalize it.” The extraordinary vanity and vacuousness of the statement are self-evident.

    Leveraged Poison; Jackasses Never Give Up; More Fog Rolls In - Tim Geithner and all the Euro "big bazooka" clowns want the EU to use leverage on the EFSF to "increase firepower". However, leverage works both ways as I have pointed out on numerous occasions for numerous reasons. Leverage amplifies gains as well as losses nad leverage will cost France its AAA rating. Ambrose Evans-Pritchard says the same thing in A leveraged EFSF is pure poison Big snag. If Europe’s leaders do indeed leverage their €440bn bail-out fund (EFSF) to €2 trillion or €3 trillion through some form of "first loss" insurance on Club Med bonds – as markets now seem to assume – the consequences will be swift and brutal. Professor Ansgar Belke, from Berlin's DIW Institute, said any leveraging of the EFSF would be "poisonous" for France’s AAA rating and would set off an uncontrollable chain of events. It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone", he told Handlesblatt.

    Euro Leaders’ Crash Crisis Campaign Bogs Down on Divisions Over Timetable - Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases. European stocks fell for a second day after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy. While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion. “We’re really in a bind here,” “We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”

    There Is No Bailout Spoon: The Math Behind The Re-Revised EFSF Reveals A "Pea Shooter" Not A "Bazooka" - Italy and Spain together have just under €2.5 trillion worth of general government debt outstanding. Tradable Spanish and Italian sovereign debt alone amounts to €2.1 trillion. Adding Greece, Ireland and Portugal raises general government debt to €3.1 trillion and tradable government debt to €2.6 trillion. Adding Belgium would raise these totals to €3.5 trillion and €2.9 trillion. In the perhaps unlikely case that France would need sovereign debt insurance, targeting the stocks rather than the flows would require taking care of €5.1 trillion of gross sovereign debt or €4.3 trillion of tradable government debt.These numbers are beyond the size of even the most optimistic estimates of the most audacious of rescue umbrellas.

    Strike shuts down Greece before austerity vote - Greek unions began a 48-hour general strike on Wednesday, the biggest protest in years, as parliament prepared to vote on sweeping new austerity measures designed to stave off a default that could trigger a crisis in the wider eurozone. The strike shut government departments, businesses, public services and even providers of everyday staples such as shops and bakeries and will culminate in mass demonstrations outside parliament, the scene of violent clashes in June.  Some 400 dock workers gathered at the entrance of Greece's main port Piraeus in the morning and about 1,000 prison guards met outside the Justice Ministry ahead of bigger rallies scheduled for 0800 GMT.  Air traffic controllers decided to soften their labour action to reduce the impact on passengers and stop work for 12 hours instead of 48.  “Since midnight until Wednesday noon, 150 domestic and international flights – arrivals and departures – have been cancelled, while 16 flights have been rescheduled,”  “So far, everything is quiet at the airport.” The industrial action comes as European Union leaders scramble to set the outlines of a new rescue package in time for a summit on Sunday that hopes to agree measures to protect the region's financial system from a potential Greek debt default.

    Blinded by Faith – Sinking the Eurozone - Wolfgang Munchau has raised a very important point in his current Financial Times article, “Why Europe’s officials lose sight of the big picture.” The eurozone, Wolfgang points out, is more like a large closed economy than a collection of small open economies, and this has implications for fiscal policy outcomes, yet these implications remain largely unrecognized by policy makers within the region. Wolfgang noted:  The many failures of the eurozone’s crisis response policy have a common cause: the eurozone is a large closed economy. Each of its 17 members is small and open. The political leaders who run the eurozone have a small open economy mindset – every one of them, without exception. The economists they employ mostly use small, open economy models. Right at the moment, the failure to adjust to the necessities of a large closed economy is the single largest force behind the crisis. Small open economy thinking has brought us uncoordinated fiscal austerity packages. Jointly, these programmes have had a profoundly negative effect on growth, one that the small open economy crowd was unable or unwilling to see. All forecasts for economic growth and budget deficits have been too optimistic because governments failed to take into account their full impact. Not only Greece and Ireland are missing their targets, but so will Spain and Italy. I expect a full-blown recession in Italy next year, and an overall increase in the deficit. So the net effect of austerity will be an increase in debt.

    European Spillovers - Krugman - Wolfgang Munchau suggests a reason for European misjudgements — he argues that European leaders have failed to take account of the fact that Europe, collectively, is a fairly closed economy, selling primarily to itself: The many failures of the eurozone’s crisis response policy have a common cause: the eurozone is a large closed economy. Each of its 17 members is small and open. The political leaders who run the eurozone have a small open economy mindset – every one of them, without exception. The economists they employ mostly use small, open economy models. It’s an interesting thesis, and I agree that the within-Europe spillovers from fiscal austerity are significant. Early on in the crisis I did some back-of-the-envelope calculations for fiscal expansion and guesstimated that a coordinated expansion had twice the bang per euro of a unilateral expansion by just one euro area economy. By the same logic, austerity would look much more attractive to each individual country if they don’t take the cross-border effects into account. That said, I think Munchau is being too kind here. European leaders and institutions by and large didn’t even get to the point of devising policies that might have worked in a small open economy. Instead, they went in for fantasy economics, believing that the confidence fairy would make fiscal contraction expansionary.

    When No. 1 Financial-Strength Ranking Spells Doom - Less than three months ago the European Banking Authority said Dexia had passed its so- called stress test with ease. The French-Belgian lender’s July 15 news release carried this headline: “2011 EU-wide Stress Test Results: No Need for Dexia to Raise Additional Capital.”  Then last weekend, 86 days after getting its clean bill of health, Dexia took a government bailout to avoid collapsing. Nobody was surprised this happened. Nor should anyone have been. The stress-test exercise was a charade, just as it was a year earlier when Bank of Ireland Plc and Allied Irish Banks Plc passed their tests and collapsed soon after. Once again the rules were rigged so only a handful of unimportant banks would flunk. Everyone who was paying attention understood this.  The European Union’s banking authority went through with the farce anyway, presumably aware that in all likelihood some big bank was bound to get a passing grade and quickly implode, the same as last year, causing embarrassment for everyone involved. All of which leads to the important question: Why?

    France and Germany ready to agree €2tn euro rescue fund - France and Germany have reached agreement to boost the eurozone's rescue fund to €2tn (£1.75tn) as part of a "comprehensive plan" to resolve the sovereign debt crisis, which this weekend's summit should endorse, EU diplomats said. The growing confidence that a deal can be struck at this Sunday's crisis summit came amid signs of market pressure on France following the warning by the ratings agency Moody's that it might review the country's coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone. The leaders of France and Germany hope to agree a deal that will assuage market uncertainties or, worse, volatility, in the run-up to the G20 summit in Cannes early next month. France would now have to pay more than a percentage point – 114 basis points – over the price paid by Germany to borrow for 10 years as the gap between the two country's bond yields widened to their highest level since 1992.

    France Risks AAA on Bulked Up ESFS Bailout Fund - Proposals to beef up Europe’s bailout fund by offering to guarantee portions of the debt owed by the region’s weaker governments threaten to trash France’s top credit rating. France’s rating is under pressure, Moody’s Investors Service said yesterday, and investors now demand to be paid a record 93.2 basis points more to hold its bonds rather than German notes, up from 29 basis points in April. The cost of insuring French bonds using credit-default swaps has soared to 183 basis points, from an average of about 84 in the first half of the year. They are the most expensive to protect among the top-rated nations in Europe and more costly than for nations rated AA- by Standard & Poor’s, including China, Estonia and the Czech Republic.“Looking at the numbers, France is no longer a AAA credit,” said Nicola Marinelli, who oversees $153 million in funds at Glendevon King Asset Management in London. “They’re talking about guaranteeing trillions of euros of bonds but if France isn’t a AAA then even guaranteeing one more euro might not be sustainable.”

    Moody's warns France on possible negative outlook (Reuters) - Moody's warned on Monday it may slap a negative outlook on France's Aaa credit rating in the next three months if the costs for helping to bail out banks and other euro zone members stretch its budget too much. The warning comes as European Union leaders are discussing measures to protect the region's financial system from an expected Greek debt default. Those measures should include injection of capital into banks with exposure to Greek debt. France and Germany are the two strongest economies among the 17 euro zone members, and they are spearheading a plan to be presented at an EU summit on Sunday to help resolve the region's debt crisis. France's progress on crucial fiscal and economic reforms as well as potential adverse developments in financial markets or the economy will also be taken into account under the review, Moody's said. A negative outlook would be a sign that Moody's could downgrade its rating on France in the next couple of years. 

    France to Defend Credit Rating After Moody’s Warning - The roller-coaster saga of Europe’s debt crisis continued Tuesday, as hopes that Germany and France were near agreement on a big infusion of bailout money sent American stocks up in late trading.Officials are working on the broad outlines of a three-pronged agreement to keep the debt crisis from spiraling into Europe’s large countries. They have been giving serious consideration to increasing the size of a new euro zone bailout fund of 440 billion euros to at least 1 trillion to 1.5 trillion euros (about $1.3 trillion to $2.06 trillion), an idea pushed by the United States Treasury secretary, Timothy F. Geithner, who argues that similar action helped stem the financial crisis that started on Wall Street in 2008. Europeans are also discussing recapitalizing many European banks as insurance in case the crisis worsens; as well as forcing banks to take sizable losses on their holdings of Greek debt to help the country get back on its feet. The discussions have taken on greater urgency since Moody’s warned late Monday of a possible downgrade to France’s flawless credit rating. French finance officials worry that any such move would make it hard for Paris to negotiate solutions, according to an official who was not authorized to discuss the situation publicly. 

    French warning to euro summit  - France warned on Tuesday that European unity would be at risk if eurozone leaders failed to take bold action to tackle its sovereign debt crisis at a crucial summit this weekend.  In sharp contrast to signals from Angela Merkel, Germany’s chancellor, playing down the chances of a breakthrough, President Nicolas Sarkozy said that “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days”. Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsiblity for resurgence of conflict and division on our continent.” As Moody’s, the US rating agency, warned that France could see its credit outlook cut as a result of the growing sovereign debt emergency, Mr Sarkozy alluded to his country’s vulnerability were the eurozone to fall apart. “France on its own cannot cope.”  The European Commission also pushed back against Berlin’s warning that a solution to the eurozone crisis might not be reached this weekend, with a spokesman saying non-EU finance ministers at the G20 had made clear last weekend that “we are expected to provide a comprehensive answer as soon as possible”. 

    French credit review threatens euro zone rescues - Doubt cast on France's triple-A credit rating by Moody's raised uncertainty over Europe's hopes of drawing a line under its sovereign debt crisis, five days before a crucial EU summit. The U.S. ratings agency said late on Monday it may slap a negative outlook on France's Aaa rating in the next three months if slower growth and the costs for helping bail out banks and other euro zone members stretch its budget too much. "The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating," Moody's said in its annual report on France. The warning, which sent the risk premium on French government bonds shooting up to a euro lifetime high, came as European Union leaders are preparing measures to protect the region's financial system from a potential Greek debt default. That strategy includes new steps to reduce Greece's debt, strengthening the capital of banks with exposure to troubled euro zone sovereigns and leveraging the euro zone's rescue fund to prevent market contagion to bigger economies.

    Spain’s Rating Cut to A1 by Moody’s - Spain’s credit rating was cut for the third time in 13 months by Moody’s Investors Service as Europe’s debt crisis threatens to engulf the nation. Moody’s yesterday reduced its ranking to its fifth-highest investment grade, cutting it by two levels to A1 from Aa2, with the outlook remaining negative. Standard & Poor’s downgraded Spain on Oct. 14 to its fourth-highest investment grade, and Fitch Ratings cut it to the same level on Oct. 7, the day it also downgraded Italy. “Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro-area crisis,” it said in a statement. The company cited the “continued vulnerability of Spain to market stress” that is driving up the cost of borrowing, as well as weaker growth prospects. Spanish bonds fell. Spanish and Italian bonds are being pummeled as European leaders fail to convince investors they can contain the debt crisis and shore up banks to withstand the risk of a Greek default. German Chancellor Angela Merkel said yesterday that an Oct. 23 European Union summit will mark an “important step,” though not the final one in solving the sovereign debt crisis.  Lucy And The Eurozone Football - Paul Krugman - There has been a rhythm to the euro crisis: again and again, investors start to realize how bad things look, and spreads rise; then policy makers put together some sort of response, which produces a partial (but only partial) return of confidence, until it becomes clear just how inadequate that response was; then return to step one. Here we go again. The latest initiative is a bank recapitalization plan. Even if this plan is better than I suspect it will be, it addresses only part of the problem. A real rescue for the euro would have to involve open-ended financing for fundamentally solvent governments subject to the risk of self-fulfilling panic, plus a much more expansionary monetary policy and, almost surely, a higher inflation target. And since those aren’t on the table, it’s happening again. Italy: And, even more ominously, France is starting to feel the heat: I still find it hard to believe that the euro could really break up. But European leaders still seem so far from even being willing to think about what must be done that you have to wonder.

    Spain Hit by Downgrade, Falling Home Prices - Spain was hit by a double whammy Tuesday when Moody's Investors Service downgraded the country's government-bond rating, citing fading growth prospects, and the government said housing prices fell further in the third quarter, a concern for embattled banks. Moody's action to cut Spain's debt by two notches followed Fitch Ratings' own downgrade of Spanish debt this month, and comes at a time when investors are growing increasingly worried about the health of the euro zone's financial sector.  Spain's housing-price index in the July-to-September period fell 5.5% from a year earlier—the fastest pace of decline since 2009—and was down 1.3% from the second quarter, the public-works ministry said.  Moody's reduced Spanish debt to A1, which is four steps below the highest possible grade for credit quality. The ratings agency maintained a negative outlook on Spanish debt because of the risk the European crisis could escalate, but removed it from review for a possible downgrade.

    EU Source: No EFSF Deal Til Friday, EUR2 Trillion Number 'Simplistic' - European officials are still debating the size of the bailout fund for the euro zone and reports that an agreement has been reached to leverage it to EUR2 trillion are "totally wrong," an official familiar with the negotiations said.  European officials are working toward resolving the euro zone crisis and will be meeting over the weekend. A report in the Guardian newspaper suggested the EUR440 billion European Financial Stability Facility could be levered up to increase its firepower and the euro surged but EU officials have dismissed the report.  "Leveraging the EFSF is still being debated," a person with direct knowledge of the discussions said. "We may have a decision on the size by the summit or just a statement that firepower must be increased. But there no talk about an amount around EUR2 trillion. Such reports of an agreement between France and Germany are totally wrong."  A consensus to leverage the EFSF is in discussion, but the size and scope is in question. There is still a lot of wiggle room in negotiations to be reached before the weekend.

    European Banks Vow $1 Trillion Shrinkage - European banks, assuring investors they can weather the sovereign debt crisis by selling assets and reducing lending, may not be able to raise money fast enough to prevent government-forced recapitalizations.  Banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($1.06 trillion) in the next two years to reduce short-term funding needs and comply with tougher regulatory capital requirements, according to data compiled by Bloomberg. Morgan Stanley predicts that amount could reach 2 trillion euros across Europe as banks curb lending and sell loans and entire businesses. A lack of buyers and the losses lenders face on loan sales are making those targets unrealistic.  “Asset sales are impractical in the current environment,” said Simon Maughan, head of sales and distribution at MF Global UK Ltd. in London. “Every bank is selling, and no bank is buying. It just won’t work. Beyond that, the magnitude of the cuts the banks are talking about is nowhere near the likely required amount of deleveraging. They need to reduce hundreds of billions more to adjust to the new world order. There has to be a recapitalization.”

    Geithner Plan for Europe is last chance to avoid global catastrophe - Europe, the G20, and the global authorities have one last chance to contain the EMU debt crisis with a nuclear solution or abdicate responsibility and watch as the world slides into depression, endangering the benign but fragile order that has taken shape over the last three decades. The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," said US Treasury Secretary Tim Geithner over the weekend. "Sovereign and banking stresses in Europe are the most serious risk now confronting the world economy. Decisions cannot wait until the crisis gets more severe." Euroland's dysfunctional arrangements are no longer a local affair. As the European Central Bank's Jean-Claude Trichet said in Washington, EMU is at the epicentre of a global sovereign debt crisis that risks engulfing all, and is more intractable than 2008 because governments themselves are now crippled. China, India, Brazil and the world's rising powers will not escape lightly this time if leaders let events spiral out of control. European banks have lent $3.4 trillion to emerging markets (BIS data), or three quarters of external loans to these countries.

    Drowning in debt, EU hits moment of truth - Nearly two years in, Europe's leaders bid to draw a line under the debt crisis this week and deliver a "lasting" solution to ring-fence their money and prevent EU disintegration.  The stakes are high, in the run-up to marathon Brussels talks amid global pressure to end in-fighting and avert the "scary" future US President Barack Obama fears otherwise awaits us all.  But Europe remains steadfast. "The results of the October 23 summit will be decisive," insisted French Finance Minister Francois Baroin after chairing weekend talks with G20 counterparts in Paris.  In a nutshell, the European Union must:

    • -- micro-manage how much Greece can default on its massive loans, striking a delicate balance between debt write-downs that reflect actual market values, and perceived bankruptcy;
    • -- plug the consequent hole in banks' balance sheets, a job the International Monetary Fund reckons could cost 200 billion euros, and that ratings agencies suggest could result in a downgrade for France;
    • -- and nail down safeguards against any repeat of the present mess, to begin with by enhancing the eurozone's existing financial "firewall" to convince doubtful investors that Italy and Spain won't fall into the same desperate spiral.

    There is no sunlit future for the euro - Hurrah! The eurozone’s crisis will be solved at the European Union’s summit this Sunday. So participants at last Saturday’s meeting of finance ministers of the group of 20 leading advanced and emerging economies have suggested. Will such hopes be vindicated? No. It is conceivable – if unlikely – that the eurozone will find ways to manage its emergency. It is inconceivable that it will cure the illness, partly because members are in denial about its nature and partly because it is a chronic condition. Understandably, outsiders, terrified of another global financial shock, are putting fierce pressure on the eurozone’s members to deal with its interlinked crises of sovereign and banking illiquidity and insolvency. Ministers called on the eurozone to act “decisively to restore confidence, financial stability and growth”. Fix banks; fix Greece; and fix debt markets of other fragile eurozone sovereigns. These are the elements of the desired package. The main policy approach is also clear: pour buckets of money over everything.  The starting point is to be a credible stress test. But it is uncertain what a credible test would be. If, after the tests, banks were to shrink assets, rather than raise their capital, as they now threaten to do, the treatment could well be worse than the disease.

    David Rosenberg On The Insanity Of Fixing Excess Leverage With More Leverage, And The Relentless Euro Rumormill - We though we were the only ones brought to the verge with the relentless lies out of a completely clueless Europe, which as we learned at last weekend's G20 meeting, has 3 more days to get is act together. Oh wait, they were lying too? Got it. Well, no, David Rosenberg has also had it pretty much up to here. More importantly, Rosenberg also, like us, but also like Citi's and RBS, to throw some more "credible" names, is convinced that this latest deux ex machina is D.O.A. To wit: "How cool is it that we live in a world where complicated financial engineering in a radically overleveraged system forms the cornerstone of the solution to these debt problems...Why are we so skeptical? Well, when you go back to the opening months of 2010, it was all about Greece and the prime goal was to prevent contagion to Portugal and Ireland. We know how that went. Then that fall, the risk was Greece, Ireland and Portugal and this was when the term PIG was coined. At that time, the goal was to protect Spain and Italy. And we know how that went. Then just this past July, the crisis moved beyond just Greece, Ireland and Portugal to include Italy and Spain (and this is where PUGS was coined). At this point it was about preventing contagion to the banks, but nothing has worked. The contagion has merely spread, and this is not the first time a late-day press release or policy announcement was leaked to juice the market. So, we are still living in a world were levering up is somehow deemed to be a solution to a world of excessive credit and all this will do, again, is just kick the can down the road."

    Portugal Sets General Strike For Nov 24 Amid Growing Austerity -Portugal's trade union confederations on Wednesday set a general strike for Nov. 24, exactly a year since the last one and as the country embarks on the toughest austerity period in decades. Although the government has said it is optimistic Portugal won't suffer the same backlash from the population as seen in Greece, signs of discontent are growing. Transport workers are planning to go on a separate strike next month, while military workers are threatening protests over budget cuts.

    The Un-Bazooka - Krugman - There was some excitement yesterday over reports that the European were going to establish a 2 trillion euro rescue fund. Was this the “big bazooka” needed to put an end to the debt crisis? No, for three reasons. First, when you try to figure out how the thing might work, it turns out to have much less lending capacity than early reports suggested. Second, who’s backing this thing? Even France is looking a bit shaky, so it’s unclear how it’s supposed to work if government Treasuries are the guarantors. What you really need is open-ended funding from the European Central Bank, and that’s not yet on the table. Third, even if this turns out to be the big weapon everyone is hoping for, it won’t be a bazooka — it will be a Panzerfaust!

    Greek union warns of austerity “death spiral” - Greece risks sliding into a “death spiral” if the government continues to slash salaries and lay off workers instead of cracking down on tax evasion and raising money from the rich, the head of the biggest public sector union said on Tuesday. Speaking ahead of a 48-hour general strike called to protest tough new austerity measures, due to be approved this week, Costas Tsikrikas, head of the 500,000-strong ADEDY union, accused Prime Minister George Papandreou’s Socialist government of blindly pursuing austerity measures that would plunge Greece deeper into recession. “This will exacerbate recession, unemployment and state revenues will continue to fall, creating a death spiral. It must not continue,” Tsikrikas told Reuters in an interview and urged lawmakers to reject the package when it is voted in parliament on Wednesday and Thursday.

    Violence erupts as 2-day strike shuts down Greece -(AP) — Hundreds of rioting youths smashed and looted stores in central Athens on Wednesday during a big anti-government rally against painful new austerity measures that erupted into violence. Outside parliament, demonstrators hurled chunks of marble and gasoline bombs at riot police, who responded with tear gas and stun grenades. Police said at least 14 officers were hospitalized with injuries. At least three journalists covering the demonstrations sustained minor injuries. The violence spread across the city center, as at least 100,000 people marched through the Greek capital on the first day of a two-day general strike that unions described as the largest protest in years. Police and rioters held running battles through the narrow streets of central Athens, as thick black smoke billowed from burning trash and bus-stops.

    European CDS Ban Sends 1 Year Greek Bond Yield To 188% - Well, it is not just the CDS ban, the fact that Greece is now done is also a modest factor, but since nobody can short Greek default risk unhedged, the only option is to short the bonds. As they did today en masse. Greek 1 Year bonds: the most liquid proxy for default in the absence of 1 Year CDS, closed at 183%, after hitting an all time high of 188%, following yesterday's 173% close. To all those who bought 1 Year Greek bonds when yields hit 100% a month ago because "they just couldn't possibly drop any more, and you would double your money in one year guaranteed", condolences for the 50% loss. We are certain that a new batch of bottom callers will emerge, this time calling for doubling your money in six months.... Then three.. Then one and a half... etc... Until finally Zeno's paradox catches up and you either double your money overnight or you lose it all.

    Forget Greece, EUROPE is Finished - Merkel and Sarkozy claim they’ve got everything under control. They’re lying. Anyone who uses common sense can tell this. The reason… They’ve never considered the true price tag for the leveraged EFSF. I’m not talking about money, I’m talking about funding costs for France and Germany when they lose their AAA rated status as a result of backing up Greece. First off, while France and Germany are the most solvent members of the EU, they’re not exactly models of fiscal austerity. Consider that both countries officially have Debt to GDP ratios of roughly 80% (Germany’s is 78% and France’s is 84%). And that data point doesn’t include off balance sheet risk or unfunded liabilities for either country. Indeed, Germany, which is widely thought to be super solvent, is in fact sitting on a REAL Debt to GDP ratio north of 200% when you consider unfunded liabilities such as pension plans and so on.  Before you label me as crazy, consider that this statistic comes from Axel Weber… the head of Germany’s CENTRAL BANK

    Credit Revulsion in Belgium, France and Austria - Look at these charts that Win Thin has crafted on sovereign bond spreads. Yes, the periphery looks bad. But look at Belgium, Austria and France. That’s the euro zone core. As I reiterated last week when I saw Belgium’s CDS indicating a one in four chance of default: we are going to get another crisis flare. What you need is a trigger for a gap up move in yields that would signal the next flaring of the crisis. The trigger and its timing are unknown, but the crisis they will precipitate is inevitable until the euro zone’s structural deficits are dealt with. As this is a rolling crisis, any gap up will also infect Belgium and France and potentially Austria.  My hope is that Europe moves to address the medium- and long-term issues before the crisis flares. However, I don’t anticipate they will. -Felix Zulauf on the inevitability of further crisis in Europe Belgium is clearly suffering some serious credit revulsion. France and Austria are being carried in tow. That’s where we stand now. The word is that the EFSF will get levered up and banks will be recapped. This may provide some relief but ultimately the euro crisis is more fundamental. Deciding between breakup and deep fiscal integration is the only long-term crisis remedy.

    Living 'La Vita Bella': Italians Leave Fears of Debt Crisis to Others - SPIEGEL - For the financial markets, Italy's debts are a disaster waiting to happen. But after living with the problem for hundreds of years, most Italians would seem to disagree. They insist that no other country knows as much about getting in and out of debt -- and that many of their fiscal strengths go unappreciated. This is where it all began. Starting sometime in the mid-14th century, the leather-bound ledgers the city of Florence used to record its debts were kept hidden in this secret place. Someone in the city government had apparently hit upon the idea of using the citizens' money to fund the next military campaign. After Florence's (supposedly certain) victory, the city would simply repay the debts -- and with interest. The wealthy Florentines, who were required to buy their city's debt securities, had their names recorded in the ledgers at Palazzo Vecchio. But, for them, paying up was still preferable to putting on their own suits of armor to defend the city. Besides, they could also sell these new debt securities to others. The arrangement marked the beginnings of a system of state borrowing and trading in government bonds. Today's $50-trillion (€36-trillion) market in government bonds, which is now forcing governments to their knees, originated in Italy -- first in Venice and, later, in the hills of Tuscany.

    What can Italy do with its wealth? -Italian private debt is quite low and yesterday I mentioned that Italian homeowners don’t have much in the way of mortgages.  David Henderson then asked a good question:“Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.” How is that good news? The government would still have to pay interest on this debt. The Italian government has high debt and productivity is not going up any time soon.  We can expect a mixture of lower government spending and higher taxes, otherwise the country defaults, maybe the country defaults anyway.  Ideally “they” would like to send equity in Italian homes to bondholders in lieu of making the interest payments.  Italy doesn’t do a good job collecting taxes and the economy already has lots of distortions, so pulling wealth out of homes would in principle be a way to go.  A CDO tranche instead of an interest coupon, so to speak.  One can imagine the Italians borrowing more against their homes and sending the money to their government as a tax, or accepting lower transfer payments from the government, and that would implicitly serve as a way of paying off the bonds with fractions of homes.  Of course that probably won’t happen.

    Where Exactly Are Those Lazy Southern Europeans, Anyway? -I've repeatedly argued that I strongly disagree with this placement of blame; the eurozone crisis was fundamentally caused by the massive flow of capital from the north to the south of Europe that was bound to happen once the euro was adopted, and the specific behavior of individual governments in southern Europe had little to do with it. But I realize that this is a relatively abstract economic argument -- albeit one with substantial theoretical and empirical support. Stories of impersonal capital flows somehow don't address the gut feeling that lots of people have that southern Europeans really are less hard-working and responsible than northern Europeans, and that those laid-back southern attitudes must have caused the crisis. I understand that gut feeling. That's part of what people like about southern Europe, after all -- things there do tend to move more slowly than in the north. But sometimes that gets confused with inefficiency and laziness, and turned into a moral judgment. But either way, being the economist that I am, I've been looking for some data to provide more insight into what lies behind this notion that southern Europeans are indeed a bunch of lazy free-loaders. Here's what I've found so far. Note that each table shows four northern eurozone countries and then four southern eurozone countries. Data is from the OECD.

    German 10 Year Bund Auction Fails To Cover Issuance As Contagion Rages At The Core - If that headline is confusing to readers, it simply means, in a polite way, that Germany had a failed Bund auction. The country sold €4.075 billion in 10 Year Bunds after it had attempted to sell €5 billion and got just €4.55 billion in bids. The result made it "technically uncovered" and reflects the fear in the market that Germany will be forced to shoulder the burden of the EFSF expansion. And even with this poor result, the OAT-Bund spread still managed to blow out to another all time record of 115 bps overnight. The contagion at the core is there. Reuters has more on the internals: Germany sold 4.075 billion euros in its final reopening of the September 2021 bond, bringing the outstanding amount to 16 billion euros. A new January 2022 benchmark will be launched in November. The bid/cover ratio at the sale was 1.1, below the 1.5 at the previous sale in September and the 2011 average at 10-year Bund sales of 1.61, according to Reuters data. But with a target amount of 5 billion euros -- the Bundesbank retained 0.925 billion euros -- the 4.55 billion euros of bids drawn did not match the amount on offer.

    Don’t Hold Out for a Lasting German Rebound - Rebecca Wilder - According to The Wilder View Leading Economic Indicator (TWV-LEI), the annual pace of German manufacturing is set to slow quickly, if not contract, by the end of this year. (I constructed my own indicator since the OECD indicators are generally lagged by two months.) In September, five of the seven components that drive the index confirm a sharp deterioration in economic activity (the final two indicators have not been released yet). This downward trend in TWV-LEI for Germany has been in play since August 2010 and is yet to be fully reflected in industrial production (IP); that will change. The chart above illustrates The Wilder View’s leading indicator for Germany (TWV-LEI, Germany). TWV-LEI is a composite of the following variables: PMI manufacturing, Ifo business climate index, manufacturing orders, employment opportunities index, inflation expectations, consumer confidence, and the terms of trade. I’ve found that these indices have the highest correlation with current economic activity, which is measured by industrial production. The r^2 of a simple univariate regression of annual industrial production growth on the 5-month ahead leading indicator (annual growth) reveals an 81% correlation – Implied IP is the fitted dynamics of this univariate regression. Unless leading surveys improve dramatically, I expect the German economy to soften much further in coming months.

    EU bank recap could be only €80bn. Europe’s grand plan to strengthen its banking system is set to fall well short of market expectations, identifying a capital shortfall of less than €100bn that must be made up over the next six to nine months, according to the latest official estimates. The European Union’s estimate of the necessary recapitalisation effort compares with a recent Inernational Monetary Fund report that identified a €200bn hole in banks’ balance sheets stemming from sovereign debt writedowns. It also falls far short of analyst estimates that banks might have a capital deficit of up to €275bn.  People familiar with the outcome of an emergency stress test of Europe’s banks said the European Banking Authority, which ran the exercise, had suggested that about €80bn should be raised. That would allow banks to meet a 9 per cent threshold for their core tier one capital ratios, a measure of financial strength that goes beyond current requirements, after marking down to market values their sovereign bond holdings of the eurozone’s peripheral states. A fierce political debate has started over almost all the main assumptions used in the analysis but people familiar with the discussions expect any changes to reduce, rather than increase, the estimated shortfall. European leaders are due to ratify the plan at the weekend, alongside a broader sweep of initiatives to strengthen the eurozone, including a well trailed project to use the European financial stability facility as a vehicle to guarantee national governments’ sovereign debt issuance.

    Eurozone Leaders Ready €80 Billion Band-Aid for Banking Industry Gunshot Wound - Yves Smith - The broad lines of the trajectory look all too predictable. The officialdom could patch up things for quite a while if the powers that be let the ECB monetize the debt, However,everyone in positions of authority seems to believe in certain-to-fail-much-faster austerity instead. So the permissible short-to-medium term fixes involves lots of complicated programs, multi-party negotiations, and in some cases, political approvals. And to make matters worse, an earlier deal on a Greek funding, which involved bondholders taking a 21% haircut, is now deemed not to be punitive enough to banks. While that is narrowly true, having this deal come unglued could be the detonator that sets off a crisis chain reaction.  And from a wider vantage, none of these remedies address the real issue: Germany wants to keep running big trade surpluses to the rest of Europe, but does not want to keep funding its partners’ current account deficits. It can’t have both wishes but is unwilling to give either one up. The day before yesterday, Eurozone banks “threatened” that they’d have to be nationalized if the haircuts on the aforementioned Greek funding deal were increased from 21% to 50%.  Increasing the haircuts from 21% to 50% on Greek debt would tank banks. Even if we use the total amount of Greek debt outstanding, €350 x .29, we get €102 billion. But that figure is high, since what is relevant is the debt held by banks, not the total. A FT Alphaville story reported the private debt target for participation in the earlier restructuring plan (the goal was 90% participation) was €135 billion. Gross that up and you get €150 billion, and take 29% of that, and you get €44 billion.

    Leveraged EFSF Violates Maastricht Treaty; "Merkozy" Master Plan Comes Unglued - Steen Jakobsen, chief economist of Saxo Bank in Denmark just pinged me with the following email comments "Leveraged EFSF deemed violation of Maastricht. The Master Plan is coming apart!" Steen offers additional background: European officials debating ways to increase the effectiveness of their bailout fund are focusing on using the fund to provide collateral to back up bond issues by troubled countries, according to people familiar with the matter. Lawyers for governments and European institutions have warned that using the bailout fund to provide direct guarantees would violate the European Union's restrictions on bailouts, pouring cold water on the widely circulated notion that the European Financial Stability Facility on its own could simply stand as a guarantor for euro-zone bond issues. Instead, under versions of the plan being discussed ahead of a critical weekend summit, these people said, countries who want to avail themselves of insurance would borrow an additional amount from the EFSF when they need to tap markets for financing. That extra amount would be kept aside to provide some compensation to creditors in the event of a default.

    Spain’s La Mancha Slashed to Junk as Moody’s Cuts 10 Regions -- Spain’s region of Castilla-La Mancha was cut five levels to junk by Moody’s Investors Service, which also downgraded nine other regions, citing their worsening finances that threaten the central government’s ability to tame the euro region’s third-biggest deficit. Moody’s cut Castilla-La Mancha to Ba2 from A3 and put it on review for another downgrade. It also lowered Catalonia, Spain’s largest economy, Andalusia, Valencia, Murcia, Castilla-Leon, Extremadura, Madrid, Galicia and the Basque Country, the company said in a statement late yesterday. The regions face “growing liquidity pressures” and difficulties “reining in their cost base,” Moody’s said. Spain’s weak economic outlook will also limit tax revenue for the regions, said the company, which downgraded Spain’s sovereign rating on Oct. 18. The move is a further setback to regions at a time when Catalonia, with an economy the size of Portugal’s, is selling debt to its citizens after being locked out of capital markets. It may also undermine confidence in the austerity plan that the People’s Party government of Castilla-La Mancha is implementing after winning control of the region in May following three decades of Socialist rule.

    Spain's Growth Is Worse Than Expected Because It Is Reducing Its Deficit -The NYT left this important fact out of a discussion of the state of the debt crisis in Europe. It noted that lower than projected growth is likely to cause Spain to miss its deficit target. The predicted result of cuts in government spending and increases in taxes in the middle of a severe downturn is lower growth. (GDP is equal to consumption, investment, government spending, and net exports. If government spending falls in the middle of a severe downturn, there is no obvious mechanism through which one of the other components would grow to fill the gap.)

    Portugal forecasts economy to contract 2.8% in 2012 - Portugal's economy is next year expected to shrink further than was previously forecast, the government said Monday as it submitted its tough 2012 budget, while unions responded with a strike call. Finance Minister Vitor Gaspar told a press conference that Portugal was "at the heart of the crisis" affecting the eurozone and that the floundering world economy "will lead to a contraction of gross domestic product of 2.8 percent, following 1.9 percent this year," in Portugal. The government had previously envisaged the economy would shrink by 2.3 percent in 2012 and 1.8 percent this year. The Bank of Portugal had put the estimates at 2.2 percent and 1.9 percent, respectively.

    EU Considers Temporary Bans on Sovereign Ratings - The European Union's executive is leaning toward proposing a ban on the issuing of sovereign credit ratings for countries in bailout talks, European internal market commissioner Michel Barnier said Thursday. "I think it's legitimate to have a special treatment when a country is in negotiation or is covered by an international solidarity program with the IMF or a European solidarity [program]," he said.  Mr. Barnier said if the Commission comes to the view that ratings for these countries are inappropriate, "we could ban it or suspend the rating for the necessary time frame...I am studying this matter very seriously."

    Mirabile Dictu! Eurozone to Impose Penalties on Banks That Get Bailouts -- Yves Smith - Is the bank bailout free lunch coming to an end? While I would not hold my breath, given that financiers have proven quite skilled at watering down proposed reforms to thin gruel, a story from the Financial Times indicates that Eurozone leaders are no longer willing to give banks handouts with no strings attached.  It appears the banks are about to be hoist on their own petard of pushing austerian policies. If the populations of Greece and Ireland are expected to suffer the aftermath of a debt binge, why shouldn’t banks who are revealed to be bust or too undercapitalized to be competitive be subject to similar belt-tightening, downsizing and unpleasant changes in how they operate? Per the FT: In draft guidelines, seen by the FT, for the operation of the enhanced European financial stability facility, EU governments say a “planned restructuring/resolution of financial institutions” is “the sine qua non condition” for assistance. The article continues by observing that the banks intend to retaliate by shrinking their balance sheets instead, which is code for cutting lending. They would presumably do that by letting existing loans roll off. This is blackmail, and it would be nice if the media named and shamed the bankers making these threats.

    Rivets Starting to Pop in Greece - The FT reports, Greece should get its next €8bn in international aid, but its economic outlook is deteriorating so rapidly that a second bail-out plan agreed just three months ago is no longer adequate to keep Athens afloat, international lenders have determined. The report by the so-called “troika” of lenders to Greece – the European Commission, International Monetary Fund, and European Central Bank – put the blame for Greece’s deteriorating fiscal outlook on both the broader recession and failures by Greek government to implement reforms. But in the first acknowledgement that mounting unrest within Greece was having an impact on official deliberations, the report – seen by the FT – said the occasionally violent demonstrations in Athens were contributing to economic problems. “There is no doubt that Greece is undergoing a recession that is deeper and longer than expected,” the report said. “The deterioration in the labour market, with employment falling much faster than expected, uncertainties of political and financial nature, and social unrest and industrial action have weighed on supply and on domestic demand.”

    Europe on the breadline: ‘Chaos is a Greek word’ - I live in chaos. Chaos is a Greek word and aptly describes life in this country. I have been a good citizen of this country and have worked hard in the 25 years that I have lived here. I work from 2pm to 10pm daily. I put in 40 teaching hours per week. If you add the lesson planning and marking it's nearly 50 hours per week. I only see my husband for half an hour a day as he teaches in a state school in the morning but because his salary is so low he needs to supplement his income in the evenings. How many of our European colleagues work so many hours? I teach English. Fortunately even during this recession there is a demand for my work. But for how long will people have enough money to pay me to teach their children? When a mother comes telling me that her husband lost his job and her salary has been slashed and she is forced to feed her children potatoes and rice, I cave in and teach her children for free.Two days ago I heard about my daughter's physics teacher, a father of three young children who gave up and emigrated to Germany to work in a restaurant. A physicist is working as a waiter somewhere in Hamburg.

    Doubts Grow on Euro Fund - Doubts grew about the effectiveness of a key proposal for stemming Europe's deepening debt crisis as it emerged that officials have ruled out a plan for the euro-zone's bailout fund to directly guarantee bond issues. Instead, European officials are discussing a scenario in which governments issuing bonds would borrow from the bailout fund to guarantee a portion of the bond issues—a move that would increase debts for already troubled economies. Pressure is rising ahead of a weekend summit of European leaders billed as critical to stemming the region's deepening debt crisis.

    Leaders in Europe Take Time From a Farewell to Negotiate a Bailout Deal - An event to mark the end of Jean-Claude Trichet’s tenure as president of the European Central Bank drew most of the main players in the debt drama to a Frankfurt opera house, and inevitably raised hopes that a deal to shore up European banks and offer Greece a way out of its debt trap was near. Angela Merkel, the chancellor of Germany, tried to play down expectations, saying that it would not be possible “to erase the mistakes of the past in just one stroke.” A European summit meeting Sunday, she said during a speech praising Mr. Trichet, will be just “one point” in “a long journey.” But the cast of characters at the event created the opposite impression. They included Christine Lagarde, president of the International Monetary Fund and Nicolas Sarkozy, the president of France, who bustled in after the speeches in praise of Mr. Trichet were over, trailed by a large entourage and looking grave. Pressure on the leaders came not only from markets and from ratings agencies — one of which downgraded Spain — but also from Mr. Trichet. “The present calls for immediate action,” he said.

    How the euro zone may be ‘accelerating its own demise’  - Has the bar been set too high for this weekend's EU summit? Probably. But what's more important is that markets are being fed rumour and speculation, with vague reports about what to expect. All of which could lead to a fairly big disappointment when markets open Monday after the meeting in Brussels.  Even the chief of the European Commission, Jose Manuel Barroso, seemed to manage expectations today, though he did suggest something meaningful would come out of the meeting.  Notable here is that this has happened time and time again since the debt crisis in the euro zone began about two years ago. There's no question the leaders of the monetary union are working toward something, and some details are likely to emerge Sunday because they know they have to do something, probably along the lines of bank recapitalizations, a bigger haircut for Greek bondholders, and more money for the rescue fund known as the EFSF.  But with 17 governments involved and a history of letdowns, one should take everything with a grain of salt.

    Europe May Require $2 Trillion Fund, Nobel Winner Spence Says -- Europe may need $2 trillion in its rescue fund to fight the debt crisis, more than the 940 billion euros ($1.3 trillion) that governments are said to be seeking, said Michael Spence, the Nobel Prize-winning economist. “The Europeans have to make a real commitment to provide resources to stabilize the situation,” Spence, a professor at New York University and a Nobel laureate in economics, said in an interview with Bloomberg Television in Hong Kong today. He said the most likely outcome is there will be “very difficult, slow growth” in Europe and the U.S. European governments may make the 940 billion euro available by combining the temporary and planned permanent rescue funds, said two people familiar with the discussions. Global stocks have swung between gains and losses on speculation Europe will struggle to resolve the looming threat on global economy. Apart from the fiscal bailout package, policy makers in Europe need “a commitment to recapitalize the banks” and “the European Central Bank’s stamping on contagion” to overcome the crisis, Spence said.

    Euro-Area Debt Reaches Record 85.4% of GDP as Turmoil Deepens - Government debt in the euro area swelled to a record last year, complicating the efforts of nations in the region to stem Europe’s fiscal crisis. All 16 countries that were using the euro last year increased their debt load, boosting the region’s average to 85.4 percent of gross domestic product from 79.8 percent in 2009, the European Union’s statistics office in Luxembourg said today. The reading exceeded an 85.1 percent estimate published in April. Budget deficits and bank-recapitalization costs may push government borrowing “significantly higher” in an environment of low economic growth or a recession, Standard & Poor’s said in a report today. European leaders have pushed out an Oct. 23 deadline for deciding on how to bolster the firepower of the region’s rescue fund after France and Germany said more time was needed for negotiations. Officials are discussing merging the 440 billion-euro ($604 billion) European Financial Stability Facility with the European Stability Mechanism, which had been intended to replace the EFSF in 2013, according to two people familiar with the talks. The EFSF, which is funded by bonds guaranteed by governments, has already spent or committed about 160 billion euros, including loans to Greece due in up to 30 years.

    Euro summit statement: the leaked draft - Here is the leaked draft copy of the Euro Summit Statement - with gaps for crucial issues to be inserted. DRAFT Over the last three years, we have taken unprecedented steps to combat the effects of the world-wide financial crisis, both in the European Union as such and within the euro area. The strategy we have put into place encompasses determined efforts to ensure fiscal consolidation as well as growth, support to countries in difficulty, and a strengthening of euro area governance. At our 21 July meeting we took a set of major decisions. The ratification by all 17 Member States of the euro area of the measures related to the EFSF significantly strengthen our capacity to react to the crisis. The agreement on a strong legislative package within the EU structures on better economic governance represents another major achievement. The euro continues to rest on solid fundamentals. The crisis is, however, far from over, as shown by the volatility of sovereign and corporate debt markets. Further action is needed to restore confidence. That is why today we agree on additional measures reflecting our strong determination to do whatever is required to overcome the present difficulties. (10-Point Proposal follows...)

    France Likely to Lose Top Rating in Stressed Economic Scenario, S&P Says - France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, according to Standard & Poor’s. The sovereign ratings of Spain, Italy, Ireland and Portugal would also be reduced by another one or two levels in either of New York-based S&P’s two stress scenarios, the ratings firm said in a report dated today. These assume low economic growth and a double-dip recession in the first set of circumstances, and add an interest-rate shock to the recession in the second. “Ballooning budget deficits and bank recapitalization costs would likely send government borrowings significantly higher under both scenarios,” S&P analysts led by Chief Credit Officer Blaise Ganguin in Paris wrote in the report. “Credit metrics would deteriorate sharply as a result.” S&P is seeking to take account of the economic slowdown that hit Europe in the second quarter and which has led the ratings company to trim 2012 growth forecasts to an average of between 1 percent and 1.5 percent. France would follow the so- called peripheral euro-region nations that have already been downgraded, with Moody’s Investors Service saying earlier this week that its top rating was under threat.

    CDS Traders Raise French Bets as EU Debates Greece: Euro Credit - -- Credit-default swaps traders are scaling back bets on Europe's most indebted countries to focus on France and Germany as leaders of the region's two biggest economies wrangle over a solution to the debt crisis. The net amount of swaps protecting French debt climbed 41 percent since the start of the year to $24.6 billion, making it the world's most-insured government, according to the Depository Trust & Clearing Corp. Contracts on Germany rose 28 percent to $19.3 billion in the same period, while CDS outstanding on Greece tumbled 42 percent to $3.7 billion. Investors are speculating French President Nicolas Sarkozy and German Chancellor Angela Merkel will have to increase the firepower of the 440 billion-euro ($604 billion) European Financial Stability Facility. Regional officials are in talks about how to do that as finance ministers gather in Brussels today to try to hammer out a rescue for the euro zone where Greece is edging toward default. "The market has moved on to the next game in town,"

    Franco-German deadlock over ECB’s role in rescue fund - Telegraph: French president Nicolas Sarkozy has raised the stakes dramatically in Europe's debt crisis. "If there isn't a solution by Sunday, everything is going to collapse," he told his inner circle before an emergency trip on Wednesday night to see German Chancellor Angela Merkel in Frankfurt. The talks are deadlocked, reflecting a deep rift between Euroland's two great powers. The French fear the EU's €440bn EFSF rescue fund will not be enough to shore up monetary union without mobilising the might of the European Central Bank as lender of last resort. It is a view shared by UBS, Citigroup, RBS and the US Treasury. Mr Sarkozy wants the fund to operate as a bank, able to leverage its rescue power by tapping the ECB's credit window. This is less likely to endanger France's AAA credit rating. Yet the idea is anathema to Germany and Bundesbank purists. Paris has grave doubts about Mrs Merkel's demand for larger "haircuts" – perhaps 50pc – for Greek bondholders. Such a move risks triggering default, crystallising crippling losses for French banks and courting "Lehman-style" contagion.

    Franco-German split over bailout fund threatens crisis plan Reuters: (Reuters) - Deep divisions between France and Germany mean they will make scant progress on strengthening the euro zone bailout fund at a summit on Sunday, in a sign that Europe's leaders are still some way from getting a grip on the bloc's debt crisis. France and Germany said in a joint statement on Thursday that European leaders would discuss a global solution to the crisis on Sunday but no decisions would be adopted before a second meeting to be held by Wednesday at the latest. The major sticking point is over how to scale up the European Financial Stability Facility (EFSF), a 440 billion euro ($600 billion) fund so far used to bail out Portugal and Ireland. France and Germany disagree over the best way to bolster the facility, with Paris fearing its triple-A credit rating could come under threat if the wrong method is chosen. Failure to agree on leveraging the EFSF will further damage confidence in the euro zone's ability to tackle its debt crisis after nearly two years of trying to get on top of a problem that started in Greece and now threatens Italy, Spain and even France.

    Eurogroup chief: delay of decisions 'disastrous' - — The chairman of the eurogroup of finance ministers says the delay to a debt crisis creates a "disastrous" image of the eurozone to the outside world. Jean-Claude Juncker, who is also the prime minister of Luxembourg, added that it's not necessarily just France and Germany that have differences of opinion on how to tackle the crisis. He said decisions had to be taken by all 17 eurozone countries. Juncker made the comments as he arrived for a meeting of eurozone finance ministers in Brussels Friday. The meeting will be followed by talks between EU finance ministers Saturday, a summit of EU leaders on Sunday, and another crisis summit early next week. The second summit was made necessary when France and Germany realized that a deal would not be reached in time for Sunday.

    Europe: Finance Ministers expected to approve aid for Greece, Most Major Decisions Delayed - Via the Financial Times Eurozone crisis: live blog from Peter Spiegel in Brussels: Jean-Claude Juncker, the Luxembourg prime minister who chairs today’s meeting of eurozone finance ministers, has entered the gathering and was characteristically blunt on his way in. He said he believed that the ministers will sign off on the €8bn aid tranche for Greece – “at least I hope it will happen this way” – but warned that because of the decision to hold a second summit, most every other major decision may have to be delayed. There will still be news on Sunday, but the important news will probably be later in the week - or delayed even more.

    Euro Leaders Begin ’Tough’ Six-Day Marathon on Greece, Banks - European leaders braced for a six- day battle over how to save Greece from default, shield banks from the fallout, and build more powerful defenses against the debt crisis rocking the 17-nation euro economy. With President Barack Obama stressing the “urgency” of a fix, divisions between Germany and France festered as finance ministers arrived in Brussels for the start of the anti-crisis marathon. As a first step, they are set to approve releasing the next aid payment for Greece. Europe’s international image is “disastrous,” Luxembourg Prime Minister Jean-Claude Juncker told reporters before the meeting began. “We’re not really giving a great example of a high standing of state governance.” Aid packages of 256 billion euros ($354 billion) for Greece, Ireland and Portugal have failed to stabilize markets or prevent the turmoil spreading as far as France, co-anchor with Germany of the European economy.

    Italian 10-year bond yield tops 6% -- The yield on 10-year Italian government bonds rose 15 basis points to 6.01% on Friday, according to FactSet Research data, breaching the 6% level for the first time since the European Central Bank began buying Italian and Spanish bonds in early August. Yields rise as bond prices fall. Borrowing costs above 6% are seen by many economists as potentially unsustainable for Italy. Italian bonds came under pressure due to continued disagreements between France and Germany over the response to the euro zone's debt crisis. Moreover, the yield premium demanded by investors to hold Italian 10-year bonds over German bunds widened by around 13 basis points to 3.98 percentage points. The spread at one point widened to more than 4 percentage points on Thursday, a level unseen since the mid-1990s, strategists said

    Solvent? Who said solvent? – Kantoos - The German government remains under attack for not „taking leadership“ in the Euro crisis. This rests on the assumption that a known solution is ready to be implemented, but the German government just refuses to accept it. That is wrong. How many times have you witnessed people changing their opinion about the Euro crisis, while being very confident at the time? This is Joe Stiglitz in February 2010:If the rest of Europe stands behind Greece, interest rates will come down and then it is easy for it to service the debt. There is a vicious circle here: if people don’t believe it will service it, interest rates go up and then there is a problem.„A default by Greece is absurd“ is what he says later. Sounds familiar? It is the argument that is used for Italy and Spain these days, countries that are „illiquid but solvent“ as the popular opinion goes. Isn’t illiquidity always a sign of doubts about solvency? Never mind. Paul Krugman, pointing to Paul de Grauwe, is endorsing this argument as well as The Economist, Willem Buiter, and many others.

    Germany's Role in the Eurozone Crisis - I agree with Kantoos that Germany's influence over ECB monetary is problematic.  I, however, question his  his claim that Germany is not the main impediment to resolving the Eurozone crisis.  Germany's  influence over the Eurozone is vast and broad, of which its pull on the ECB is just one manifestation.  Ryan Avent sums this up nicely: Germany, through its sheer size, its political clout, and its influence on the ECB, can make sure the money is there to end the crisis. No other euro-zone economy can. It's my understanding that Germany enjoyed its strength within the euro zone when times were good, surpluses were huge, and it was splashing out cash to the periphery. Now it seems to want to shrug and pretend it never asked for its dominant position. At a minimum, it seems willing to use the crisis and its strength to force as much of the cost of adjustment on others as possible, in a fashion that's clearly dangerous for the global financial system... Germany has a unique ability to bring the crisis to an end, and it is not accepting the responsibility that falls to it given its role, economically and politically, in the euro zone.

    Why not blame Germany? - People are proposing lots of different solutions to the problems because they're trying to hit on the magical combination of policies that will win political support from key players—notably the German government. Prior to the crisis, all euro-zone countries were able to borrow on terms which suggested that markets believed the full faith of the euro zone as a whole to be behind individual members, and some governments borrowed too much. After the crisis, markets weren't so sure about what the full faith of the euro zone meant, and spreads between the bonds of different euro-zone governments diverged. For the past year and a half, some euro-zone economies have struggled to make their way out of trouble within the confines of the union: without the ability to depreciate their currencies or set an independent monetary policy. The austerity adopted to try and balance budgets gutted internal demand, leaving those struggling economies dependent on external demand for growth. But where an independent currency would have fallen to help markets clear, euro-zone members were forced to make their adjustment through declines in nominal wages. Other euro-zone governments have offered enough help to prevent an implosion of the financial system, but not enough to do much about massive unemployment problems in places like Spain and Greece. Without growth, closing budgets through austerity is like trying to climb a falling ladder.

    I May Be Dumb, But I'm Not Stupid - Krugman - Or something like that. The usually very insightful Kantoos seems to have missed what people like me are actually saying about the need for emergency funding in Europe. He writes,It is the argument that is used for Italy and Spain these days, countries that are „illiquid but solvent“ as the popular opinion goes. Isn’t illiquidity always a sign of doubts about solvency? Never mind. Paul Krugman, pointing to Paul de Grauwe, is endorsing this argument as well as The Economist, Willem Buiter, and many others. That’s not the actual argument; I know very well that liquidity problems generally reflect solvency concerns. The point, however, is that Italy and Spain arguably are at risk of suffering from self-fulfilling panics. And you need open-ended credit to avert that fate. Now, Kantoos is right that more expansionary ECB policy, including a higher inflation target, is really what the doctor ordered. But it would take time to get that moving; even if Mario Draghi suddenly rips off his mask and reveals himself as a closet Woodford/Svensson/Krugmanite, it would take a long time to turn monetary policy around sufficiently to restore confidence. And the existential threat to the euro zone won’t wait. So the indicated policy is lend now, inflate later. If you don’t like that, say goodbye to the euro.

    EU Said to Weigh Combined $1.3 Trillion Fund -European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said. Negotiations over pairing the two funds as of mid-2012 accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders. Disclosure of the dual-use option helped reverse declines in U.S. stocks and the euro on speculation it could help break the deadlock among European leaders. Their wrangling led to the scheduling of a summit three days after an Oct. 23 gathering. The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. It is slated to be replaced by the European Stability Mechanism, which will hold 500 billion euros, in mid-2013.

    EU looks at 60% haircuts for Greek debt. - Greece’s economy has deteriorated so severely in the last three months that international lenders would have to find €252bn in bail-out loans through the end of the decade unless Greek bondholders are forced to accept severe cuts in their debt repayments. The dire analysis, contained in a “strictly confidential” report by international lenders and obtained by the Financial Times, is more than double the €109bn in European Union and International Monetary Fund aid agreed just three months ago. Under a more severe test run by economists for the so-called “troika” of lenders – the IMF, European Central Bank and European Commission – Greece’s bail-out needs could balloon to €444bn, the study said. The report also made clear European leaders are considering “haircuts” on Greek bonds far higher than previously known. The study determined that in order to bring a second Greek bail-out back to the €109bn agreed in July, bondholders would have to take a 60 per cent loss on their current holding.  That is significantly more than the 21 per cent haircut agreed in a deal with private investors three months ago. The analysis says that a 50 per cent haircut, increasingly considered the most likely scenario among European policymakers, would put the second Greek bail-out at €114bn, or €5bn more than the July deal.

    Financial Times: Possible 60% haircuts for Greek debt - From the Financial Times: EU looks at 60% haircuts for Greek debt.  The Financial Times reports on a "strictly confidential" report. According to the Financial Times the report notes that the Greek situation has deteriorated significantly since July, and to bring the next bail-out back to the level of the July agreement would probably require "bondholders ... to take a 60 per cent loss on their current holding". That will change the amount need to recapitalize the European banks! The Greek 2 year yield is up to 77.3%. The Greek 1 year yield is at 183%. (corrected typo)  The Portuguese 2 year yield is up to 17.9% and the Irish 2 year yield is up to 8.6%.  The Spanish 10 year yield is at 5.5% and the Italian 10 year yield is at 5.9%. Both have been moving up recently.

    Now Everyone's Talking About A 60% Haircut On Greek Debt: EU leaders are considering a 60% haircut for Greek private sector bondholders in order to make up a €252 billion ($350 billion) shortfall in outside money Greece will need by the end of the decade, according to a confidential report obtained by the FT. Increased private sector involvement in the Greek bailout has looked assured in the last few weeks, with leaders confirming reports that they could be 30-50%. But according to the report, bondholders will need to take losses of 60% on current holdings in order to keep bailout funds at the €109 billion ($151 billion) level agreed upon in July.

    Banks must take 'at least 50-pct' loss for Greek rescue - Europe and the IMF will only proceed with their planned second Greek bailout if banks accept a "haircut" of "at least 50 percent," diplomatic sources said Friday. Banks would need to take a 60-percent "haircut" on Greek debt to keep "official funding" at the level presently planned, the report seen by AFP concludes, with the "worst-case" scenario outlined by auditors envisaging 440 billion euros in future bailout funds. An EU diplomatic source told AFP after their discussions broke up overnight that the conclusions drawn from the talks were that "a minimum of 50 percent Private-Sector Involvement is needed" to go ahead. The source said that approval by the International Monetary Fund, and therefore EU, on plans aimed at containing contagion threatening the rest of the eurozone, and keeping Greece in the currency area long-term, "is only possible if there is clarity on the second programme," — that it crosses that 50-percent threshhold. Another diplomatic source conceded that getting the second bailout back on track would now require movement both from eurozone partners and the banks.

    FT Reports Europe To Sacrifice Its Banks To Bailout Sovereigns - Under €100 Billion In Bank Recap Funding Available - It appears that in order to accommodate more funds for sovereign bailouts under the total max EFSF guarantee cap, as reported on several occasions yesterday by Zero Hedge, only €100 billion will be set aside for bank recapatialization. There is a problem with this number: it is predicated on the European Banking Authority's estimates of capital shortfalls of between €70-90 billion, the is the same EBA which 4 months ago said Dexia was in sterling health when it passed the 2nd Stress Test in pole position. As a reminder, Goldman predicted a €1 trillion capital shortfall, while Credit Suisse said €400 billion. No matter: the EU will come out with a number from its lower colon, just to make the residual maximum sovereign debt "guarantee" notional appear that much bigger. Too bad, however, that in the process it will once again crush Europe's banks which the market will suspect, rightfully so, that they are undercapitalized even post the recap, anywhere between 90% and 75% and will have to accelerate their asset liquidations to fund themselves one more day in lieu of a functioning interbank liquidity market. And so the risk flaring will shift from Europe's sovereign to Europe's banks, and their main proxy in the US - none other than Morgan Stanley which repeatedly refuted it has any exposure to France...

    Euro Leaders Begin Six-Day Marathon to Reach Agreement on Debt-Crisis Plan - European leaders braced for a six- day battle over how to save Greece from default, shield banks from the fallout, and build more powerful defenses against the debt crisis rocking the 17-nation euro economy. With President Barack Obama stressing the “urgency” of a fix, divisions between Germany and France festered as finance ministers arrived in Brussels for the start of the anti-crisis marathon. As a first step, they are set to approve releasing the next aid payment for Greece. Europe’s international image is “disastrous,” Luxembourg Prime Minister Jean-Claude Juncker told reporters before the meeting began. “We’re not really giving a great example of a high standing of state governance.” Aid packages of 256 billion euros ($354 billion) for Greece, Ireland and Portugal have failed to stabilize markets or prevent the turmoil spreading as far as France, co-anchor with Germany of the European economy. Euro finance ministers meet today, followed by ministers from all 27 European Union countries tomorrow. EU and euro-area leaders gather on Oct. 23, to be capped by another euro summit on Oct. 26. Juncker, the chairman of today's meeting, doesn't plan a press conference afterward.

    S&P sees downgrade blitz in EMU recession, threatening crisis strategy - Standard & Poor's (S&P) is to warn that a double-dip recession in Europe would imperil France's AAA rating and set off a string of downgrades across Southern Europe, undermining the EU's debt crisis strategy. The EU-IMF bail-out machinery would require an extra €250bn or more to stabilize eurozone debt markets, forcing Germany and EU's creditor states to vastly increase rescue commitments. The report, due Friday, said a double-dip recession would lead to a downgrade of "one or two notches" for France, Spain, Italy, Ireland and Portugal, both because of tumbling tax revenues and the extra costs of propping up banks. The scenario looks increasingly likely after Germany slashed its growth forecast from 1.8pc to 1pc for 2012. Greece and Portugal are contracting at alarming speeds. Italy and Spain are already in industrial recession. "Confidence surveys have fallen off a cliff over past three months,"

    France, Germany May Lose AAA Rating, Grant Says - Mark Grant, a managing director at Southwest Securities Inc., talks about the outlook for resolution of Europe's sovereign debt crisis and the possibility that France and Germany may lose their AAA ratings. Grant also discusses a Bloomberg report that European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the crisis. He speaks with Lisa Murphy on Bloomberg Television's "Street Smart."

    Eurozone Rescue Going Off the Rails - Yves Smith - Even though the overall mood at this juncture is far more downbeat, there is again a reporting gap between the the Financial Times and the two major US print business outlets, the Wall Street Journal and the New York Times on the expected crisis nexus, the Eurozone. Both US media outlets have a prominent article on the latest Euro exercise in rescue brinksmanship. And they are almost the same story; indeed, at this hour, they perversely use identical photos of Merkel and Sarkozy conferring. They present the formerly aligned core nation leaders as being at odds, then widen the frame to explain the divisive issues. First,, the Germans want a deeper but voluntary haircut of at most 50% of Greek debt; the French do not want to go beyond the 21% reduction structured last July. The steeper writeoff would, of course, lead to a bigger hit to French banks. Second France (effectively) wants the ECB to provide further leverage to the EFSF directly, while Germany and the ECB itself are decidedly opposed (Germany wants individual states to be responsible for their banks, with the ECB acting as a guarantor). The Journal was thinner on details and focused on the hardening political stances, not just between France and Germany, but other states as well. Per the Journal: People familiar with the negotiations said Germany and France remain so far apart on key issues that Ms. Merkel couldn’t get a green light to sign a deal from her increasingly assertive parliamentarians. If you rated these articles as sobering, the far more detailed coverage at the Financial Times has an undertone of despair. And one story emphasizes an issue absent from the times and mentioned only in passing in the Journal: the experiment in Greece in radical austerity is killing the patient. From the Financial Times: Greece’s economy has deteriorated so severely in the last three months that international lenders would have to find €252bn in bail-out loans through the end of the decade unless Greek bondholders are forced to accept severe cuts in their debt repayments. The dire analysis, contained in a “strictly confidential” report by international lenders and obtained by the Financial Times, is more than double the €109bn in European Union and International Monetary Fund aid agreed just three months ago.

    Merkel says ECB's sole mission is monetary stability -Chancellor Angela Merkel said on Saturday that the European Central Bank has just one mission -- to ensure monetary stability.  Merkel said in a speech to her Christian Democrats in Braunschweig on Saturday that treaties prevent the ECB from taking on any other tasks, such as those such as the U.S. Federal Reserve have.  She also said it would not make any sense to ban ratings agencies from analysing countries.  Earlier, government sources said the proposal to use the ECB in strenghtening the EFSF has been definitely taking off the negotiating table ahead of an EU summit in Brussels on Sunday.

    Exorcising The Inflation Ghost – An Attempt To Cure Our European Compatriots of Their Inflation Phobia Through Regression Therapy - There are certain words in our culture upon which so many taut emotions converge that they become nothing less than a breaking point for certain opinions and moral platitudes. ‘Sex’ is obviously one. ‘Inflation’ is another. People instinctively feel that if there is inflation occurring they are being robbed by someone or other – most likely some ominous governmental bureaucracy, like a central bank. They are not wholly wrong, of course. As the value of the currency falls while savings and loans remain nominally the same, the real value of these savings and loans falls – needless to say, the amount that debtors have to pay back in real terms also falls. Most people will then get an image of a grandmother in their mind and bring up the ‘pension’ trope. “Anyone who favours inflationary policies is advocating robbing poor old pensioners,” they will say. You’ve probably heard all of these ‘arguments’ before. Of course you have. But they’re not actually arguments, they’re emotionally charged soundbites. In reality inflation tends to favour the poor over the rich. Oftentimes it can be seen as an explicit rebalancing act as income or trade disparities close. Poorer people – or countries – are usually indebted to richer people – or countries – and inflation is one way that this debt might be evaporated and greater balance brought about.

    Why Not The Worst? - Paul Krugman - When the magnitude of the crisis became apparent, Iceland was the poster child for the irresponsibility that brought it on. Inside Job began with scenes of Iceland; Michael Lewis went there, not to Ireland or Latvia, to tell tales of bankers gone mad; the Ig Nobels gave their economics prize to the bankers of Iceland.Iceland, in short, was supposed to be the worst of the worst, an object lesson in how bad things could be. Yet if you look at how it’s doing now compared with economies generally considered in the same class, you see this:You can play with different numbers and try to make Iceland look worse in comparison, but the bottom line here is that Iceland — while it has suffered terribly — really does not seem to have done as badly as other countries that seemed to have much less awful fundamentals.Part of the story, of course, is that Iceland refused to take responsibility for the debts run up by runaway bankers. But the other part of the story, surely, involves the exchange rate. The others were either on the euro or insisted on remaining pegged to it; Iceland allowed a big depreciation of the krona.

    The FSA takes pre-emptive action on liquidity swaps - Liquidity swaps, while old news for us, provide a remarkable microcosm in which some of the lessons that have been learned over the crisis reside. One can’t help but look at some of the FSA guidelines and have thoughts like, “oh, that one’s for Lehman”. While the FSA guidelines published in July were part of a consultation process, the FT reported on Monday some swaps have already been blocked by the regulator. It would appear that they aren’t kidding about the systemic risk they perceive. The FSA already requires that the parties wishing to engage in such transactions report them based on their “economic substance” — i.e. if it looks like, smells like, and walks like liquidity transformation, assume it is and ‘fess up on the details. Accordingly, in doing so, some banks and insurers have found such efforts blocked.In some ways, the liquidity swaps are a match made in over-the-counter heaven. The banks don’t have enough liquid assets and need them, not least of all to post as collateral to CCPs and to shore up liquidity buffers. The insurers have enough liquid assets and are struggling to obtain high enough yields in a low interest rate environment. So, what’s the problem if they swap assets then? Let’s look at some of the FSA’s concerns.

    UK inflation hits highest rate in 3 years - Britain's inflation rate jumped to a three-year high of 5.2 percent in September, a bigger than expected increase driven by rising costs for electricity and gas, official data showed Tuesday.Bank of England Governor Mervyn King said he believed inflation was at or near its peak after 22 months of overshooting the official target of 2 percent. The consumer price inflation rate announced by the Office for National Statistics was a big jump from the 4.5 percent reported a month earlier and beat the market consensus of 4.9 percent. At a time when average weekly earnings are just 1.8 percent higher than a year ago, household electric costs rose 7.5 percent and gas leaped 13 percent in one month, the agency said. Clothing and footwear prices rose by 4.4 percent.

    Money And Inflation, British Edition - Krugman - Inflation numbers continue to run high in Britain, yet the Bank of England, far from tightening, seems set to do more quantitative easing. Why are they so complacent about the inflation issue? Well, for good reasons. Here’s the key graph, from the Office of National Statistics: Like the US, Britain has no wage-price spiral — wages are going nowhere. But in that case, why is headline inflation around 5 percent? The answer is a set of shocks we know are temporary. When Britain tried fiscal stimulus, it did so by cutting VAT; the expiration of that cut has raised prices on a one-time basis, which is still filtering through the system. Then there are commodity prices, which in Britain as elsewhere have given a one-time boost to inflation. Finally, there was a big depreciation of sterling in 2008, and as I understand it they believe that some of that is still filtering through. So the Bank thinks that inflation will soon recede, and will probably be below 2 by some time next year.

    Rising energy bills causing fuel poverty deaths - Thousands of people die each year from illnesses linked to fuel poverty, according to an independent report.  Professor John Hills has called for a new definition of the problem, which focuses on people with low incomes driven into poverty by high fuel bills. His report found that in 2004, fuel-poor households faced a shortfall of £256 to heat their homes and avoid poverty, but in 2009 it was £402. Recent bill increases may make the problem worse this year, he warned. The government commissioned Prof Hills, director of the Centre for Analysis of Social Exclusion at the London School of Economics, to examine how serious a problem fuel poverty is and how it should be measured. He argues that fuel poverty poses serious public health and environmental issues. His report is the first to measure the shortfall that some households face in heating their homes, which he calls the fuel poverty gap. Further increases in bills since then are likely to have widened this gap, he warned.

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