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

Saturday, October 29, 2011

week ending Oct 29

US Fed balance sheet shrank in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.829 trillion on October 26, down from $2.835 trillion a week earlier. The Fed's holdings of Treasuries totaled $1.678 trillion as of Wednesday, October 26, down from $1.670 trillion the previous week.The Fed's ownership of mortgage bonds guaranteed by Fannie Mae , Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $849.26 billion, down from $862.07 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $107.7 billion, unchanged from the previous week. Meanwhile, the Fed's overnight direct loans to credit-worthy banks via its discount window averaged $4 million a day during the week from $3 million a day previously.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 27, 2011 

NY Fed: ECB Dollar Borrowing From Fed Stable at $1.853 Billion - The European Central Bank remained the only borrower at the Federal Reserve’s dollar swap borrowing facility, the New York Fed said Thursday. Total borrowings for the week ended on Wednesday total $1.853 billion. That counted an outstanding $1.353 billion loan, and a rolling over of a maturing $500 million loan. The dollar swap facility exists to ensure the global financial system does not run short of dollar liquidity. Central banks eligible to borrow are the Bank of Canada, Bank of England, Bank of Japan, the ECB and the Swiss National Bank.

Fed considers its stimulus options - Federal Reserve officials are considering new strategies to try to lower mortgage rates and help Americans reduce the burden of debt that hangs over the economy. The major question they face: Would the tools they have at their disposal actually work? In the past few months, leaders at the central bank have become increasingly convinced that problems in the system of housing finance are preventing the interest rate policies the Fed controls from having their usual economic impact. For example, even after Fed action that helped lower mortgage rates, surprisingly few people were able to take advantage by refinancing because they owed more than their homes are worth. But with new efforts by federal housing regulators1 underway to make it easier for homeowners and the Fed running out of other tools, the idea of further intervention in the mortgage markets is gaining new attention at the central bank. “Clearly we’ve indicated our interest in supporting the mortgage market,” New York Fed President William C. Dudley said. “Depending on how the world evolves, we potentially could move to do more in that direction.”

QE3 among Fed's remaining bullets, Dudley says (Reuters) - Another round of quantitative easing is a possible option for the central bank as it attempts to boost the slow U.S. economic recovery, one of the most influential Fed officials said on Monday. "I don't think the Fed has run out of bullets," said New York Federal Reserve President William Dudley, listing the large-scale asset purchases, known as quantitative easing, as one of a few moves the Fed could make. "It's possible that we could do another round of quantitative easing, we could do quantitative easing round three," Dudley also listed a commitment to low interest rates for a longer period, and a change in the way the central bank does monetary policy that would commit it to stimulus for a longer period, as other possible bullets in the chamber."There are a number of things we could do to provide greater stimulus but there are costs associated with each of them," he said.

Fed's Dudley Calls for Breaking 'Vicious Cycle' in Housing-- Federal Reserve Bank of New York President William C. Dudley said falling home prices pose “a serious impediment to a stronger economic recovery” and predicted “continued modest growth” for the U.S. “Continued house price declines could lead to even more defaults, foreclosures and distress sales, undermining wealth, confidence and spending,” Dudley said. “Breaking this vicious cycle is one of the most pressing issues facing policy makers.” Fed officials are developing options for further monetary easing even as better-than-forecast economic reports have allayed concerns the U.S. may relapse into a recession. Fed Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”

Fed to wrestle with communication policy -A long and contentious debate on communications is set to occupy most of the Federal Reserve’s time when it meets on Tuesday and Wednesday next week. Big changes to monetary policy are relatively unlikely – not least because waiting will bring greater clarity on congressional tax and spending plans for 2012 – but there is a growing sense of urgency about improving communication. Three different issues are tangled together. The first is whether to clarify the Fed’s goal by agreeing on a clear inflation objective. Second is explaining how the Fed is likely to change policy in the future to reach that goal. Third is whether to use communication to ease policy now with, for example, a pledge to keep rates low until unemployment falls to 7 or 7.5 per cent.A working group is attacking the problem from first principles, with every option – including innovations such as setting a target for growth in nominal gross domestic product over time – up for discussion.But progress is most likely on the second issue of guidance about future policy because changing economic conditions will mean the Fed’s August forecast of exceptionally low rates until mid-2013 goes out of date. Fed officials do not think that forecast has to be updated every meeting, nor necessarily in November, but sooner or later it will have to be changed.

The Fed's Dark Age communications strategy - One sentence in Fed vice-chair Janet Yellen's speech caught my eye: "Indeed, I believe that the Federal Reserve qualifies as one of the most transparent central banks in the world." That is total bullshit. The Fed is one of the least transparent central banks in the world. Ironically, in the excellent paragraph immediately following her bullshit sentence, Janet Yellen tells us precisely why it is a bullshit sentence: " Expectations play a critical role in the decisions of forward-looking households and businesses about how much to spend, work, hire, and invest, and their decisions are more likely to be consistent with the objectives of the central bank if they are based on a solid understanding of the shocks affecting the economy and the likely monetary policy response. When financial market participants understand how a central bank is likely to react to incoming information, asset prices should adjust in ways that anticipate the central bank's expected policy actions, enhancing the monetary policy transmission mechanism and thereby supporting the central bank's attainment of its objectives. Finally, good communication can help anchor the public's long-term inflation expectations, which can, in turn, greatly improve the scope for monetary policy to counteract departures of resource utilization from its sustainable level." The Fed is one of the least transparent central banks in the world because it is totally opaque about the only thing that really matters for monetary policy. What is the Fed's objective? What is the Fed's target? What is it trying to do? Where is it trying to go? How can we possibly know how the Fed will respond to shocks to meet its objective if we don't know what that objective is?

Dalio: "There Are No More Tools In The Tool Kit" - Complete Charlie Rose Transcript With The Head Of The World's Biggest Hedge Fund - When it comes to reading the world's "tea leaves", few are as capable as Ray Dalio, head of the world's biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS' Charlie Rose that "there are no more tools in the tool kit" of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. More importantly, Dalio shares some unique perspectives on what it means to run the world's largest hedge fund, his perspective on social anxiety, and Occupy Wall Street and thus the demonization of wealth and success (in a way that does not imply crony capitalism: see Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, and most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio's conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is "concerned." Full video interview after the jump

The Last Bullet - US policymakers are running out of options to solve our massive unemployment problem and get the economy growing again. The Administration’s jobs bill faces resistance in Congress. The best option that can be implemented without a vote of Congress is to work through the market that started this mess in the first place—housing. The Administration has made a good start by announcing that it plans to make it easier for underwater mortgagors to refinance and repair their balance sheets, but some of the details to be filled in will be important in determining the ultimate effectiveness of the program. In addition, to boost the overall economy and to maximize the benefits of mortgage refinance, the Federal Reserve should announce new large-scale purchases of agency guaranteed mortgage backed securities (MBS) with the goal of keeping the 30-year mortgage rate between 3 and 3.5 percent through the end of 2012. These purchases would have beneficial spillovers into almost all other financial markets.

I Agree with Joe Gagnon - Regular readers will recall that I have been very skeptical of claims that the Fed can cause a large reduction in unemployment by declaring a nominal GDP target and/or buying long term Treasuries. Joe Gagnon is very prominent advocate of unconventional policy, so I was surprised to find that I so strongly agreed with so much of what he wrote in this postThe best option available is a massive program of MBS purchases. The market for agency MBS is one of the largest markets in which the Fed is allowed to operate. The Fed is not allowed to buy equity, real estate, or corporate debt. MBS yields are the most important factor behind mortgage rates. As investors have flocked to the perceived safety and liquidity of Treasuries, the spread between mortgage rates and yields on 10-year Treasury notes has risen considerably. Fed purchases are especially effective at reducing those interest rates whose spreads to Treasuries are wider than normal. Note two things. Gagnon stresses the importance of quality as well as quantity. He thinks it is important for the Fed to buy low quality assets. Also Gagnon is sticking to static supply and demand. He isn't counting on expectations management.

Nominal GDP Targeting Through Unconventional Monetary Policy and Through Fiscal Policy Edition, by Brad DeLong: Duncan Black complains because he thinks I have not been critical enough of nominal GDP targeting via unconventional monetary policy alone: Why Don't They Lend Me $30 Billion On The Security Of My Cats?: If we're going to actually move to more "unconventional" monetary policy, can we please recognize that the reason to do so is largely because conventional monetary policy - acting through the banking system - isn't working? We should understand that it isn't working because it almost destroyed the world a few years ago and is about to do so again because, you know, nothing changed and the overpaid assholes who almost destroyed the world then are still in charge. If we're going to give out dodgy loans, how about giving dodgy loans to people who might do something with the money other than visiting the Great Casino?  Point taken. Touché. I will report to the reeducation camp tomorrow... I have been saying that coordinated fiscal and monetary policy--jen-U-ine helicopter drops or simple government-print-and-buy-useful-stuff--is the superior way to accomplish nominal GDP targeting, and that doing so via monetary policy alone runs risks. But I have not been saying so loudly enough.

The Godfather Speaks - The Godfather of nominal GDP targeting has spoken.  Bennett McCallum, who has authored numerous academic papers on nominal GDP target and is probably the foremost expert on it, weighs in on the growing attention being given to this approach to monetary policy.  An important point that he makes is that a nominal GDP target would be easier to understand by the public than an inflation target:  It seems ironic then that, when academic economists suggested nominal income targeting to Federal Reserve officials in the 1980s, often the main objection put forth was that it would be difficult for the public to understand. But it seems likely that it would be easier for the public to understand nominal GDP growth than a target that includes an unspecified weighted average of an inflation rate and some unreported major adjustment to take account of output and/or unemployment conditions. Indeed, I would argue that “total spending” in the economy is a way of describing nominal GDP that would make that concept at least as easy to understand by average citizens as “core inflation” or even CPI inflation.

The Fed is Talking About a Nominal GDP Target - Robin Harding reports that the Fed trying to improve its communication policy:  A long and contentious debate on communications is set to occupy most of the Federal Reserve’s time when it meets on Tuesday and Wednesday next week... Three different issues are tangled together. The first is whether to clarify the Fed’s goal by agreeing on a clear inflation objective. Second is explaining how the Fed is likely to change policy in the future to reach that goal. Third is whether to use communication to ease policy now with, for example, a pledge to keep rates low until unemployment falls to 7 or 7.5 per cent.A working group is attacking the problem from first principles, with every option – including innovations such as setting a target for growth in nominal gross domestic product over time – up for discussion. I am glad to see them include a nominal GDP target in their discussion, but there is a more important point here. One of the key reasons behind the Fed's inability to restore robust nominal spending is its inability to clearly communicate the future path of monetary policy.  By failing to properly shape expectations about where it wants to guide the nominal economy, the Fed has created much uncertainty.  There is no way programs like QE2 and Operation Twist will have lasting power if there is no explicit and well understood target assigned to them. That is why these talks are important.  As Nick Rowe explains, the Fed is one of the worst communicators among central banks so anything would be an improvement. 

The moral case for NGDP targeting - The last few weeks have seen high-profile endorsements of having the Federal Reserve target a nominal GDP path. (See Paul Krugman, Brad DeLong, Jan Hatzius and colleagues at Goldman Sachs.) This is a huge victory for the “market monetarists”, a group that includes Scott Sumner, Nick Rowe, David Beckworth, Josh Hendrickson, Bill Woolsey, Marcus Nunes, Niklas Blanchard, David Glasner, Kantoos, and Lars Christensen. Sumner in particular deserves congratulations. He has been on a mission from God for several years now, and has worked tirelessly to persuade us all that central banks should target NGDP, and that they have to ability to do so even after interest rates fall to zero. I have reservations about the market monetarists’ project. I’m not certain that the Fed has the tools to meet an NGDP target, or if it does have the tools, that the costs of deploying them to establish its credibility are supportable. Moreover, I don’t think that the market monetarists have sufficiently thought through the consequences of success, in accounting terms, if they restrict themselves to lending to the private sector. But such quibbles are for another time. Here I want to join the market monetarists’ happy dance, and point out several moral benefits of NGDP targeting.

What Is NGDP? -- Desperate times call for desperate measures. This helps explain why nominal gross domestic product — that is, total GDP without inflation stripped out – has wound up at the center of a debate over how, and whether, the Federal Reserve can do more to stimulate the U.S. economy and lower the nation’s current 9.1% unemployment rate. The problem boils down to the Fed’s current dual – or in fact, triple – mandate from Congress. Here is the entire wording of the Fed’s mandate, which falls under Section 2A of the Federal Reserve Act.The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.  It is this last part which is at the heart of today’s policy debate.

Understanding NGDP targeting - NOMINAL GDP targeting is not a new idea. It has an intellectual pedigree that goes back well before the crisis, but even if we just focus on the recent debate over changing Fed policy to targeting growth in the level of nominal output, we're talking about nearly 3 years' worth of public discussion. Scott Sumner started his blog in early 2009, was linked by Tyler Cowen just a few weeks later, and had the economics blogsphere debating intensely by the end of that year. It has taken a while for non-economist elites to notice, but the debate has been bubbling for a while. Neither has the American debate proceeded in isolation. Central banks pay varying amounts of attention to the path of nominal output, and some—among them the Bank of England—put quite a lot of weight on NGDP. But Kevin Drum writes that it's important to get the NGDP debate out in the open. I suppose that's right; I just figured that's what we'd all been doing for the past 30 months.The trigger for Mr Drum's post was a recent Wall Street Journal op-ed which purported to call into question claims made on an NGDP target's behalf. What it mainly demonstrated was that quite a lot of journalists haven't paid attention to the debate over NGDP targeting. I supose that's to be expected. Those who have simply must do a better job explaining the contours of that debate to others.

Carney on NGDP - John Carney says The advocates of NGDP targeting view it primarily as a communications strategy. It’s a way of telling the markets that the Fed will stay very loose for an extended period of time, even if this looseness becomes inflationary.Of course, in conjunction with communicating the goal, the Fed would have to communicate a credible strategy to achieve the goal. How exactly will it pursue the goal of higher nominal growth? Most likely it would have to commit to a very aggressive, open-ended asset purchasing program. No more QE with limited dollar amounts. This would be a throw-open-the-vaults policy. It’s not clear, however, that this will lead to growth. In fact, some of the proponents seem to think that the announcement of an NGDP target would just magically lead to growth. I suspect John is being cute, but the idea is not that magic is at work but expectations. To show people how this works I thinks its best to just forget about Quantitative Easing. Maybe that’s the tool – maybe its not – but it will be easier to think in terms of interest rates.

NGDP target, in practice - Last week Goldman Sachs published a note in favor of the Fed's adopting a formal nominal GDP target, while Fed-watchers caught a whiff of a possible change in policy in the works. The proposal, specifically, is for the Fed to announce a target level for nominal GDP over the next 12 months, and to commit to undertaking asset purchases if it seemed that NGDP would come in too low. Nominal GDP targeting is unlikely to work. I am sympathetic to the arguments given by Duncan Black, Robert Waldmann, and Brad DeLong, but to add something to the debate, my emphasis here will be different. How do proponents defend the idea? First, asset purchases will raise nominal income. Spending on newly produced goods and services is currently too low because people prefer to hoard money rather than to spend it. The Fed's buying up assets with a sufficient amount of new money, they argue, will eventually satisfy this desire to hoard, after which any new money will be spent instead. Second, setting an explicit nominal target will amplify the effect of the asset purchases. Knowing that the Fed will be pulling out all the stops to reach the target level of NGDP, businesses will invest or raise prices today in anticipation of higher demand over the next 12 months, which will itself increase nominal spending toward the target.

A Goldman guide to the monetary policy playground - Goldman Sachs welcomes you to the modern world. The US bank has put out a primer on “‘unconventional’ unconventional policies” to guide us through the maze of recent central bank moves from ‘operation twist’ to UK QE2 and the imposition of a minimum rate for the EUR/CHF exchange rate by the Swiss National Bank. The 8-page report is a synopsis of current monetary policy ideas. We won’t bore you with their views on why the debate over new monetary policy targets has intensified or its explanation of what a liquidity trap is (of course, you already know this), but its views on the main options that are entering the policy debate are well worth a read.

  • 1. Further conditional policy rules
  • 2. Higher inflation targets.
  • 3. Price level targets.
  • 4. Nominal GDP targets.
  • 5. Exchange rate targets.

The uselessness of helicopter drops -I’ve received some skeptical feedback on my last post about how money is just another form of debt, particularly its implications for the effectiveness of a “helicopter drop”. This topic deserves more attention: for reasons I don’t understand, some very smart observers regard the helicopter drop as one of monetary policy’s most potent tools.  What’s wrong with these claims? First, let’s be precise: there are two ways to do a helicopter drop.Option one: the Treasury and Fed coordinate. The Treasury uses bonds to raise money for a tax rebate, while the Fed immediately buys those bonds. This is just a fiscal transfer plus an open-market operation. Is . Adding the Fed to the picture accomplishes nothing.The case for this type of helicopter drop, then, is really no different from the case for traditional fiscal transfers during a recession—the Fed’s participation is irrelevant and unnecessary. In the alternative kind of helicopter drop, the Treasury doesn’t issue any new debt: instead, the Fed somehow directly distributes money to households without obtaining any assets in return. This creates a hole in the Fed’s balance sheet: the Fed will simply recapitalize using the profits it otherwise remits to the Treasury. Over time, Treasury will need to issue slightly more debt (since it’s receiving less money from the Fed), and in effect the transfer will turn out to be debt-financed.

Occupy the Wall Street Journal - What’s happened to the Wall Street Journal?  They seem to be increasingly veering toward the Rick Perry school of monetary analysis.  Here’s an example of an article that’s wrong about almost everything: There are at least three problems with this [NGDP targeting] strategy, however. First, it assumes that the Fed can sensibly determine the “right” trend for nominal GDP. Second, it isn’t clear that it can actually achieve any such target. And third, doing so would run a huge risk of conflicting with the Fed’s congressional mandate to promote “stable prices”—something that can’t unilaterally be rewritten. This is because any boost to nominal GDP may well come more from higher inflation rather than from faster growth in underlying GDP, which Goldman acknowledges. After all, the economy’s real potential growth rate has been slowing for decades.

  • 1.  But doesn’t inflation targeting also assume you can determine the “right” level of inflation?  And also determine the “right” inflation index (there are many, whereas there’s basically one NGDP.)
  • 2.  If they can’t achieve an NGDP target, then ipso facto they can’t achieve an inflation target.
  • 3.  There is no Fed mandate for “stable prices.”  Indeed if the Fed thought that price stability was the mandate they’d be violating the law.  The Fed mandate is stable prices and high employment.  If you targeted stable prices, you’d be implicitly putting a weight of zero on employment.

Can Knut Wicksell Beat Up Chuck Norris? - Nick Rowe argues that NGDP targeting is a way of dealing with coordination failure. Businesses don’t want to hire if nobody’s buying, and households don’t want to buy if nobody’s hiring. So they’re all hoarding money instead. The way to fix it is that you have Chuck Norris threaten to beat up anyone who hoards money. Then businesses start hiring and households start buying (or else they both buy riskier assets, and the people who sold those assets do the hiring and buying, because they also don’t want to be beat up for hoarding the proceeds).  In the simplest version of the argument, beating people up is a metaphor for inflation. But if you don’t believe the Fed can produce more inflation (as many economists believe that the Bank of Japan has tried and failed to produce a positive inflation rate over the past 20 years), you can take beating people up as a metaphor for reducing asset returns. Even if the Fed can’t produce inflation, it can bid down the returns on a lot of assets until people get fed up and start buying riskier assets that can finance new expenditures. Some people don’t even think the Fed can do that, because maybe people have such a strong need for safety that they will only hoard more cash if other safe asset returns go down. I’m not 100% sure myself, but, for the sake of argument, I’m going to assume that the Fed can, if it is aggressive enough in buying safe assets, convince people to buy enough risky assets to get the economy going again.

All Chuck Norris really needs is stamina - This is my fourth and last Chuck Norris post. I'm getting bored with the metaphor too. But there is something many people missed in my last posts. It's important. Andy Harless explains it in his post. I'm going to explain it my way. Suppose Chuck Norris keeps on fighting for an NGDP level path target year after year. Suppose year after year you bet that Chuck will lose his fight. Your losses if Chuck eventually  wins his fight get bigger and bigger every year, while your gains if he loses his fight stay the same. Eventually you will stop betting against Chuck, even if you think there is only a very small chance he will win next year. If everybody else switches their bet before you switch yours, then Chuck wins his fight, and you lose your bet. So you want to switch your bet just before everybody else switches theirs. So do they. So switch your bet now. Eventually the US economy will return to normal. Something will turn up, and the economy will escape the liquidity trap. Utterly boring conventional monetary policy will work again. If Chuck is still fighting, because NGDP is below his target level, he would have no difficulty in getting NGDP up as high as he likes to hit his target. Even a skinny kid could do it.

NGDP Targeting and Sustainable Growth - Kelly Evans of The Wall Street Journal has taken a lot of heat from advocates of nominal GDP targeting over her Monday column on the subject. (To her credit, she has engaged with Scott Sumner on the subject in the comments section of his blog post responding to her column.) While I’m also an advocate of NGDP targeting, and I agree with many of their criticisms, I think there are certain points on which her argument is being too quickly dismissed. In particular, both Scott Sumner and Karl Smith point to the following passage: One worrying aspect of GDP growth prior to 2007 was that it came even as real household incomes stagnated. Assuming that boom-era growth rates were sustainable, and not fueled by a surge in house prices and a credit boom that simply pulled forward demand from the future, is a huge leap in logic.  I think there is some confusion on both sides regarding this point, and to clear it up we need to make a distinction between the demand side and the supply side. Usually when economists talk about “sustainable” growth, they’re referring to the supply side: some growth rates are not sustainable because they deplete the supply of resources too quickly. But here Kelly Evans seems to be referring to demand sustainability rather than supply sustainability.

Monetary Policy In A Storm: David Leonhardt channels the economics blogosphere in a great Sunday Review column on monetary policy: But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists — J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others — than the camp that believes the Fed has done too much. You would never know this, however, from listening to the public debate among Federal Reserve officials. That debate is much narrower…Tragically, the growing media awareness of this school of thought seems to have come far too late to save us from the disasters of the past 18 months and the bleak situation I expect to play out over the next 18. But I do believe that ideas have consequences. At a crucial moment in the winter of 2008-2009 and then for most of the subsequent year there just weren’t enough people outside specialist communities who grasped the importance of these issues. The Federal Reserve simply wasn’t on the radar, President Obama meekly reappointed a conservative Republican to the most important economic policy job in the country, vacancies sat unfilled, hard money cranks dominated the public debate, and poor macro performance started to drag down progressive policy across the board.

Levy Scholars to Advise on Fed Reform - The office of Senator Bernie Sanders has announced the formation of a panel tasked with drafting legislation to reform the Federal Reserve.  Levy Senior Scholars Randall Wray and James Galbraith and Research Associate Stephanie Kelton have been named to the team. Wray’s recent brief on the Federal Reserve, co-authored with Scott Fullwiler (“It’s Time to Rein in the Fed“), looks at our over-reliance on the Fed (something Wray has discussed elsewhere) and the relative lack of transparency and oversight, wading into issues surrounding democratic accountability and the “independence” of the central bank: There is no difference between a Treasury guarantee of a private liability and a Fed guarantee. If the Fed buys an asset (say, a mortgage-backed security) by “crediting a balance sheet,” it is no different from the Treasury buying an asset by “crediting a balance sheet.” The impact on Uncle Sam’s balance sheet is the same in either case: it is the creation, in dollars, of government liabilities, and it leaves the government holding some asset that could carry default risk. [We are not] implying that Uncle Sam would be unable to keep such promises. There is no default risk on federal government debt, and the government can afford to meet any and all commitments it makes. Read the policy brief here (one-pager here).

Bill Black: What I’d Demand Of The Fed - Real News Network  - Bill Black: If I marched with Occupy Wall St. to the New York Fed, this is what I would demand

Today in central banking - THE Bank for International Settlements, often called the central banker's central bank, is a bastion of conservatism and policy orthodoxy. Unsurprisingly, the BIS is not particularly comfortable with the central bank policy interventions that have been adopted as a response to demand-side weakness at the zero lower bound. And unsurprisingly, the BIS (which demanded in June that "growth must slow") is laying out an intellectual framework to help justify inaction. Here is Claudio Borio: There is considerable cross-country evidence that banking crises tend to be preceded by unusually strong credit and asset price booms (see below), that those crises go hand-in-hand with permanent output losses (BCBS (2010)), and that subsequent recoveries tend to be slow and protracted (eg Reinhart and Rogoff (2009), Reinhart and Reinhart (2010)). In all probability this reflects a mixture of an overestimation of potential output and growth during the boom, the corresponding misallocation of resources, notably capital, the headwinds of the subsequent debt and real capital stock overhangs, and disruptions to financial intermediation. Fiscal expansions in the wake of the crises can add to these problems, by piling government debt on top of private debt and sometimes threatening a sovereign crisis.

The Worst Institution In The World  - Paul Krugman - Ryan Avent sends us to the Bank for International Settlements, which has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”. And these are the supposed guardians of the world monetary system.

NY Fed's $40 Billion Iraqi Money Trail - It has been called the largest airborne transfer of currency in the history of the world. But finding out what happened to all the money involved has become one of the biggest financial mysteries of all time. Beginning in the very earliest days of the war in Iraq, the New York Federal Reserve shipped billions of dollars in physical cash to Baghdad to pay for the reopening of the government and restoration of basic services. The money was packed onto pallets inside a heavily guarded New York Federal Reserve compound in East Rutherford, New Jersey, trucked to Andrews Air Force Base outside of Washington, and flown by military aircraft to Baghdad International Airport. By one account, the New York Fed shipped about $40 billion in cash between 2003 and 2008. In just the first two years, the shipments included more than 281 million individual bills weighing a total of 363 tons. But soon after the money arrived in the chaos of war-torn Baghdad, the paper trail documenting who controlled it all began to go cold. Since then, investigators have spent years trying to trace what happened to the enormous amount of money shipped in the frantic days of the occupation of Iraq. Although there have been hundreds of pages of reports, Congressional hearings, and inquiries from Washington to Baghdad, no one in Congress, a special inspector general’s office, the Department of Defense or the Iraqi government itself can say with certainty what exactly happened to all of that money.

Helicopter Geithner’s NY Fed $40 Billion Iraq Money Drop -  Yves Smith  - Reader 1SK sent me a story which I felt I had to call to the attention of Naked Capitalism readers. It strikes me as devious public relations ploy, in which an episode that sounds at best poorly executed and at worst a scandal is reframed by focusing on an account of alleged exceptional individual performance that also provides an unverifiable answer to a key question in an ongoing investigation. The incident in question is the air shipping of a claimed $40 billion in cold hard cash airlifted from the New York Fed to Iraq from 2003 to 2008. This operation took place largely if not entirely on Tim Geithner’s watch, since he was president of the New York Fed from October 2003 to November 2008. So while the US has never had a Helicopter Ben, Iraq had a Helicopter Geithner.  As you will read in due course,  a CNBC report has found a supposedly knowledgable individual who says the amount transported, but we don’t have and are pretty much guaranteed never to get an official tally. The New York Fed has made excuses for its failure to cooperate with the inspector general for Iraq reconstruction.

US Inflation Data: Scant Fuel for Inflation Fears in September CPI Report - Although some observers still think the Fed's easy monetary policy risks a rise in the US inflation rate, there was scant fuel for their fears in the September inflation report from the Bureau of Labor Statistics. The all-items CPI for urban consumers rose at a seasonally adjusted annual rate of 3.7% in September, down almost a point from the August rate of 4.6%.  Food and energy prices are highly volatile and account for much of the month to month variation in the CPI. Their effect can be removed by taking food and energy out of the CPI. The result is called the core inflation rate, which fell to just 0.6% in September (monthly change stated as annual rate), the slowest for the year. Because food and energy prices contributed more than their share to inflation, as they have for most of the year, the core inflation rate was below the all-items rate. Another way to remove volatility from the CPI is the 16% trimmed mean CPI, published by the Federal Reserve Bank of Cleveland. The trimmed mean CPI removes the 8% of prices that increase most and the 8% that increase least in each month, whether they are food, energy, or something else. In September, trimmed mean inflation slowed significantly, although it remained above the core inflation rate.

DAVID FRUM: It's Time We Republicans Finally Admitted That Paul Krugman Might Be Right: Few economists have been more correct about the economic crisis of the last several years than the proudly liberal Paul Krugman. Krugman spotted the "liquidity trap" early on (since the problem with the economy was too much debt, cutting rates and creating easier money would not get us out of it). Krugman shot down the hyperventilation about a coming hyper-inflation, arguing that the global labor glut would prevent easy credit from inflating wages. Krugman quickly pronounced the Obama Administration's stimulus as far too small and said it would not get the job done. Krugman scoffed at the idea that interest rates were about to skyrocket as our creditors decided en masse that we were so fiscally irresponsible that they couldn't possibly lend us any more money. Krugman has been wrong about some things, but he has been right on all those counts.

Great Recession may cost US economy $5,900 billions - It has become commonplace for economists to attempt to “nowcast” the growth rate of real GDP from the dozens of sources of activity data which appear during the quarter. For example, Dave Altig at the Atlanta Fed “nowcasts” that the growth rate may be as high as 3.2 per cent when the official estimate appears next Thursday.  Although much or all of the rebound has probably been due to temporary factors (notably the improvement in Japanese component supply after the earthquake damage in Q2), it will support the Fed’s expectation that growth will recover somewhat from now on. However, we need to view this small improvement in the context of the much less satisfactory picture which emerges from a longer term perspective. The Wall Street Journal points out that the level of US GDP remains 6.7 per cent below the CBO’s estimate of potential GDP, which means that the economy could be producing $900 billion more per annum without risking higher core inflation rates.  The truth is that the US economy seems, at best, to be stuck on a long term path which is very similar to the one which has been followed by previous economies which have suffered deep recessions, along with severely damaged financial sectors. Goldman Sachs recently published the following graph, which tells the story:

The Fed’s data snafus- Reuters is reporting that Fed Governor Elizabeth Duke believes that household debt has declined since the financial crisis of 2008 and that this reduction in household balance sheets will position families to participate in the recovery when conditions tick up. From Reuters: Households’ caution about taking on debt and spending will stand them in good stead when the economic recovery becomes more robust, a top Federal Reserve official said on Saturday.Household debt-to-income ratios skyrocketed during 2001-2007, but households cut debt and spending significantly during the financial crisis that began in 2007, Duke said.Governor Duke is making some large assertions about household behavior. It’s hard to confirm her viewpoint because there has been a lot of confusion surrounding the data sets that the Fed is using to model household balance sheets. The Federal Reserve publishes two major public datasets for household finances: the Survey of Consumer Finance (SCF) and the more recent  “Consumer Credit Panel” (CCP). The SCF is conducted as a survey every three years by interviewing approximately 4,400 households who self report their debt and assets. In contrast the CCP is constructed by compiling a dataset of approximately 38 million credit reports and projecting those findings onto the general population.

Chicago Fed: Economic activity improved in September - This is a composite index from the Chicago Fed: Index shows economic activity improved in September Led by improvements in employment-related indicators, the Chicago Fed National Activity Index increased to –0.22 in September from –0.59 in August.  The index’s three-month moving average, CFNAI-MA3, edged up to –0.21 in September from –0.28 in August, but remained negative for the sixth consecutive month. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. This index suggests the economy was still growing in September, but below trend.

Vital Signs: Fed Balance Sheet Steady - The Federal Reserve’s balance sheet has gotten a smidge smaller. As of last week, the central bank held $2.83 trillion in assets, compared with an early-July peak of $2.86 trillion. But the Fed still holds three times as much as it did before the 2008 financial crisis. The Fed has begun considering a program to buy mortgage-backed securities, which would expand its balance sheet even more.

The ECRI Weekly Leading Index Moves Even Further Into Recession: The Weekly Leading Index (WLI) growth indicator of the Economic Cycle Research Institute (ECRI) has now posted 11 consecutive declines since early August. The interim high of 8.0 was set in the week ending on April 15. The latest reading, data through October 14, is -10.1, down from the previous week's -9.7. On September 30th, the ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st. Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off. ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not "soft landings." Read the report here.. For a close look at this movement of this index in recent months, here's a snapshot of the data since 2000.

A Precarious Optimism For Q3 GDP - Worries about a new recession have been on a roll over the past month, but some forecasters are having second thoughts. "The U.S. economy probably grew in the third quarter at the fastest pace this year, easing anxiety that the recovery was on the verge of stalling, economists said before a report this week." Bloomberg reports. "Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate after advancing 1.3 percent in the previous three months, according to the median forecast of 68 economists surveyed by Bloomberg News before the Commerce Department’s Oct. 27 release. Orders for business equipment rose in September and new-home sales stabilized, other data may show." David Altig and Patrick Higgins at the Atlanta Fed note that recent surprises in the economic news have turned to the positive:We use incoming data on 100-plus economic series to forecast 17 components of GDP for the current quarter. The outcomes of this exercise have been as positive in the third quarter as they were negative for the first two quarters of the year.

Economists Predict Scant Economic Growth in 2011 - A vast majority of businesses predict the U.S. economy will grow only slightly in 2011, a more negative outlook from July when most called for more robust improvement, according to a survey of U.S. companies released Monday. The National Association for Business Economics, in its quarterly industry survey of 70 corporate economists, found companies have curtailed plans to hire amid predictions for continued sluggish growth. Yet there were some bright spots, as the survey found significantly more firms reporting rising sales than declining sales. “Expectations for growth deteriorated quite significantly but the bulk of respondents are not predicting a recession,” The economists surveyed by the NABE expect tepid growth, with 82% predicting the gross domestic product will increase by 2.0% or less this year from 2010, and 3% said the economy would in fact contract. That’s a big swing from July when 76% said GDP would grow by 2.1% or more.

Consumer Confidence Is Signalling A Clear Path Toward Recession: Frugality! That is the key word in today's economic society. Consumers under pressure by rising inflationary costs and lower wages, declining home prices and job worries, political uncertainty and global risks, are more concerned than ever that "something wicked this way comes." Today's release of the consumer confidence survey certainly depicts these concerns and realities with the consumer's assessment of current conditions at its lowest point since December 2010 and one of the lowest readings on record. The first chart shows all three indexes for comparison. While consumer confidence in regards to the economy has eroded drastically over the last several months dropping 6.6 points to 39.8; consumers attitudes about the current economic environment have plunged back toward the 2009 lows, dropping 7 points to 26.3. However, what is most concerning, and a real thorn in the side of the those expecting an economic recovery in the coming months, is the expectations of economic improvement going forward. This index nosedived 6.4 points to 48.7. This is very concerning for one primary reason. The forward expectations index of the economic environment is closely tied to personal consumption expenditures. Since the economy is 70% driven by consumption the expectations of a weaker economy by consumers doesn't bode well for increased consumption

When Confidence Is Lower Than the Economy Itself - Distrust in government is at its highest level in recorded history. Americans are worried that the economy is cratering. Protesters in the Occupy movement are voicing the frustrations of an increasing number of people. There is no question that these sentiments reflect a grim reality: the poverty level is up. Inequality has grown exponentially since the 1970s. The European debt crisis remains unresolved. Unemployment is stuck at 9 percent, and if you count the people who have either given up looking or those who have taken part-time jobs because they can’t find full-time work, close to one in six people is underemployed. Yet by at least one measure, how people feel seems disconnected from how things are. Consumer confidence is back down to lows last seen during the depths of the Great Recession, despite the fact that the economy is still, believe it or not, growing. Although that’s certainly not enough to bring down the unemployment rate significantly or increase middle-class incomes, it does suggest that the economy is not currently on the cusp of a double-dip recession.

Fed Watch: Waiting, Waiting, Waiting" - US markets are closed, with everyone left waiting for the news from Europe and the 3Q11 US GDP report. Expectations appear to be high for both, but I am considerably more certain the latter will deliver on those expectations. Europe is certainly more interesting. Over the last few weeks, market participants looked to have grasped at every little straw that offered hope on the European story, and it remains to be seen whether or not that will continue when rumours turn to news. I remain something of a Euroskeptic at this point. At best, I think the Europeans will be kicking the can down the road for a few months. Some specific concerns:

  • The goalposts are already moving. The Eurozone economy is headed into recession - the combination of fiscal austerity and financial turmoil have already set in motion the inevitable contraction of demand that will soon threaten deficit reduction goals across the continent. And it is only a matter of time before the ratings agencies recognize this as well.
  • The lack of sufficient ECB participation. The German contingent has effectively shut down the ECB. From the Wall Street Journal:Lawmakers also pressed Ms. Merkel to push banks considered systemically relevant to raise core capital to 9%. German lawmakers also called for a clear European commitment to the ECB's independence.
  • Turning to developing nations for help. If it wasn't so sad, it would almost be funny. Reports of BRIC participation as EFSF investors have been circulated for weeks. The latest version that reportedly sparked today's market rally

Advance Estimate: Real Annualized GDP Grew at 2.5% in Q3 --From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the "advance" estimate released by the Bureau of Economic Analysis. The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment. The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q2 at 2.5% annualized was below trend growth (around 3%) - and very weak for a recovery, especially with all the slack in the system.A few key numbers:
• Real personal consumption expenditures increased 2.4 percent in the second quarter, compared with an increase of 0.7 percent in the second.
• Change in private inventories subtracted 1.08 percentage point.
• Investment: "Real nonresidential fixed investment increased 16.3 percent in the third quarter, compared with an increase of 10.3 percent in the second. Nonresidential structures increased 13.3 percent, compared with an increase of 22.6 percent. Equipment and software increased 17.4 percent, compared with an increase of 6.2 percent. Real residential fixed investment increased 2.4 percent, compared with an increase of 4.2 percent.."

US Economy Grew 2.5% In Third Quarter - The economy continues to struggle and recession risk is elevated, but today’s official estimate of third-quarter GDP shows that the economy didn’t surrender to contraction in the last three months. That may change, but for now the recession talk is on the defensive. The economy grew at an annualized real rate of 2.5% in the third quarter, nearly twice as fast as the second quarter’s sluggish 1.3% pace. Today’s initial estimate of Q3 GDP from the Bureau of Economic is only the first stab at the numbers and so there’s revision risk to consider. Based on the number du jour, however, it seems as though the business cycle will live to fight another day for the forces of growth. Digging into the details shows that several critical areas of the economy revived. Notably, personal consumption expenditures rose 2.4% in Q3, considerably better than Q2’s stall speed pace of 0.7%. A recovery in spending in durable goods over the last three months helped. A bigger rise in services spending was a plus too. Meanwhile, the government continues to be a net drag on GDP figures. This is good or bad news, depending on your policy view of fiscal austerity. In any case, nondefense Federal and state/local government columns are pinching GDP these days.

Growth recurring - ADDING to today's could-be-worse news is an advance estimate of third-quarter output growth in America. Despite some very dicey moments during August and September, the American economy grew at a 2.5% annual pace in the third quarter (+/- forthcoming revisions). In normal times, that would be a fairly typical quarter. Given the present output gap, it's an extremely disappointing result. Given what seemed possible a month ago, it's a relief. Strikingly, 2.5% is the best quarterly performance since the third quarter of last year, and it's a significant improvement from 0.4% in the first quarter of this year and 1.3% in the second. Contributing sharply to growth were personal consumption expenditures, which sprang back from a very weak second quarter. Durable goods purchases led the way forward, growing by 4%, following on a quarter in which purchases actually contracted alongside high auto prices associated with the Japanese earthquake, not to mention the chilling effect on car purchases of dear petrol. Investment grew very strongly, particularly on the part of businesses. Nonresidential investment in structures rose at a 13.3% annual pace, and investment in equipment and software jumped upward at a 17.4% pace. Little sign of a chilling impact from uncertainty there. Net exports chipped in a bit, as exports growth outpaced import growth. Then there is the government side of the equation. Federal government spending contributed positively to growth, as an increase in defence spending offset cuts on the non-defence side of the ledger.  ALl told, the government contribution to output was essentially nil.

GDP Grew by 2.5 Percent in the Third Quarter - The BEA released its advance estimate of third quarter GDP this morning. According to the report, GDP grew at an annualized pace of 2.5 percent: The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment. A growth rate of 2.5% is about what would be expected in normal times. Thus, at this rate of growth we will be able to keep up with population growth, but it isn’t enough for the economy to reabsorb the millions of people who have lost jobs in the recession. For that to happen, we need growth rates much higher than this, temporarily, and even at 4 percent it would take years for all of the displaced workers to find jobs. Thus, the danger here is that policymakers will read this report as pointing toward higher growth in future quarters and become complacent. After all, the two quarter trend points upward. But it’s just as likely — perhaps more likely — that we are settling into a period of lackluster growth which will be just enough to keep things from getting worse, but not enough to make thing better. 

U.S. economy grows nearly twice as fast in 3rd quarter …The U.S. economy grew at its fastest clip in a year during late summer as consumers and businesses shrugged off fears of a new recession, according to government data released Thursday that helped drive the stock market to its best day since August. Investors were also cheered by overnight news that European leaders have reached an agreement on how to address their continent’s debt crisis, and the Standard & Poor’s 500-stock index ended the day up 3.4 percent. European markets were up even more sharply, with the German Dax index up 5.3 percent.  The agreement in Europe still has many details to be filled in, and the 2.5 percent pace of U.S. economic expansion in the third quarter isn’t enough to bring unemployment down quickly, even if it is sustained. But on both sides of the Atlantic, the news on Thursday offered a sense of relief: Maybe the world isn’t falling apart after all.

GDP Growth Doubles, Worry Still in Strong Supply - Even more encouraging was where the growth came from - corporate America. There was a huge surge in business spending, up more than 17%. Consumer spending was up as well, but not nearly as much. Of note, though, is that consumer spending rose faster than incomes. That's not a great thing on an individual level. Savings was down. But for the economy in the short-term it's a good sign. Consumers appear to be regaining some measure of optimism. And in a consumer driven economy we need confidence. Still, for a number of economists today's news wasn't enough wipe away their general pessimism about the economy. Paul Ashworth, chief U.S. economist at Capital Economics, said the growth was temporary and would soon fade. Nigal Gault at IHS Global Insight said the most likely outlook for the U.S. is continued weak growth. Josh Bivens of the think tank the Economic Policy Institute said that "the strongest growth in a year was still not strong enough." NBER economist Justin Wolfers said the recovery has been delayed another quarter. What are all these economists so worried about?

Could be worse -- The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.5% during the third quarter of 2011. That's below the average postwar growth rate of 3.2% and well below the 4.3% growth for an average expansion quarter. Even so, it's better than any of the previous 3 quarters, and better than many analysts had been expecting when the quarter began in July. The relatively favorable numbers helped bring the Econbrowser Recession Indicator Index down to 10.3% for 2011:Q2. This is an assessment looking back at the second quarter using today's reported GDP figures, and is based on growth rates rather than levels. Although this has been a disappointing recovery, it has nonetheless been characterized by ongoing growth rather than contraction

Back to Where We Began. Finally. -- The American economy has finally reached the size it was before the recession began four years ago, according to the latest gross domestic product report from the Bureau of Economic Analysis. That may sound like good news, but it’s long overdue, and frankly not good enough. If the economy were functioning normally, it would be significantly greater today than it was before the recession began. Here’s a look at the level of gross domestic product over the last decade: It has taken 15 quarters for the economy to merely recover the ground lost to the recession. That is significantly longer than in every other recession/recovery period since World War II. In the previous 10 recessions, the average number of quarters it took to return to the prerecession peak was 5.2, with a high of 8 quarters after the recession in the 1970s.

The NYT Touts the Fact That GDP Data Show the World Did Not End - There was no reason why people who know economics would have expected a double dip recession, absent a meltdown in the euro zone. Unfortunately, policy debate tends to be dominated by people who don't fall into this category, hence the discussion of a double dip. The unfortunate result of a debate dominated by ignorance is that a terrible 3rd quarter GDP growth number is touted as better than expected. As the NYT tells us in its headline: "U.S. Economy Picks Up Pace, Averting a Stall." At the economy's 3rd quarter growth rate it will take us an infinite number of years to get back to normal levels of unemployment. There was no reason to expect the economy to stall, just like there is no reason to expect heavily armed Martians to take over earth tomorrow. There is no reason that anyone should be happy about the 3rd quarter growth data, it is awful. The fact that some economic "experts" expected worse just speaks to the state of economics.

State/Local Government Continues to Drag -- State and local government continued to be a significant drag on GDP in the third quarter as cities and states continue to cut budgets amid still-weak revenues and the fading effect of the federal stimulus.Consumption by state and local governments — who buy everything from gas for police cars, health insurance for workers and engineering services to build roads — fell 1.3% in the third quarter, a fall that subtracted 0.23 of percentage point from the 2.5% annual pace of growth. That was the fifth quarterly decline in a row and the eighth in nine quarters. But while cities and states have been cutting their budgets for the better part of three years, the composition of those cuts has shifted. The first few years after the recession cities and states were seeing precipitous declines in their tax collections as consumers cut back and businesses shed workers. Governments cut spending accordingly. Today, thanks to the economic recovery and tax increases passed during the recession, state and local revenues are on the upswing (states are up strongly; locals continue to lag). Except now the stimulus money is gone, so governments are now making cuts that, but for the stimulus, they would’ve made in the teeth of the recession.

The Red Flag in Today’s GDP Report - Today’s report on third-quarter GDP offered many encouraging signs, but also one big red flag: consumers are cutting into savings. Real disposable personal income fell 1.7%, the biggest drop since the third quarter of 2009, economist Nigel Gault of IHS of Global Insight notes. Even so, consumer spending jumped 2.4%, a big factor in the overall GDP growth. That means consumers boosted their spending by saving less. The savings rate fell a percentage point to 4.1%, Commerce Department data show. That trend can’t last indefinitely, economists warn. Consumers eventually will tap out their savings or put the brakes on spending. “Consumer spending only accelerated because the saving rate dropped by a full percentage point,” Mr. Gault wrote. “That’s not a solid foundation for growth.” Economists are already wondering whether a plunge in consumer confidence will eventually translate into lower consumer spending. October data from the Conference Board this week showed that Americans’ confidence in the economy is lower than at any point since the depths of the recession.

Q3 2011 Details: Investment in Office, Mall, and Lodging, Residential Components - The BEA released the underlying detail data today for the Q3 Advance GDP report. As expected, the recent pickup in non-residential structure investment has been for power and communication. Here is a look at office, mall and lodging investment: This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and then declined sharply. Investment has increased a little recently (probably mostly tenant improvements as opposed to new office buildings). Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 65% from the peak (note that investment includes remodels, so this will not fall to zero). . Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 80%.  The second graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes).

GDP slightly above pre-recession peak, Investment Contributions - According to the Bureau of Economic Analysis (BEA), real GDP is finally just above the pre-recession peak. The estimate for real GDP in Q3 (2005 dollars) was $13,352.8 billion, 0.2% above the $13,326.0 billion in Q4 2007. Nominal GDP was reported as $15,198.6 billion in Q3 2011. The following graph is constructed as a percent of the previous peak. This shows when GDP has bottomed - and when GDP has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.At the worst point, real GDP was off 5.1% from the 2007 peak. Since the most common definition of a depression is a 10%+ decline in real GDP, the 2007 recession was not a depression. Note: There is no formal definition of a depression. Some people use other definitions such as the duration below the previous peak. By that definition, using both GDP and employment, this seems like the "Lesser depression", but not by the common definition.

Vital Signs: Per Capita GDP Still Lagging - America’s economy has got back to where it was before the recession began. Americans have not. In the third quarter, gross domestic product grew at a 2.5% annual rate, finally putting it above its late 2007 level. But with a growing U.S. population, GDP per capita is still 2.9% below its pre-recession peak. (View previous Vital Signs charts)

The obstacle - FROM Calculated Risk, a very telling chart: As a share of the economy, residential investment during the peak of the housing boom was high, but not remarkably so, and it rose to that high level after a two decade period of a somewhat subdued contribution to output. During the bust, by contrast, investment as a share of the economy has hit striking historical lows, and keep in mind that the denominator hasn't exactly been growing through the roof. There is, at the moment, a remarkable shortfall in residential investment, far greater in magnitude than the excess in building during the boom. And that shortfall is directly related to the disappointing nature of recent GDP and employment growth.  I think there are two key factors generating the failure of the residential investment sector to enjoy a recovery. One is the dismal outlook for demand growth, which has had a particularly relevant impact on household formation (there are lots of people doubling and tripling up at the moment). And another is the failure to get mortgage markets working again: despite rising rents and rock-bottom interest rates, mortgage lending remains at very low levels.

Call it a "Growth Recession" - What are the chances for a double-dip downturn in the U.S.? Mark Zandi and Nouriel Roubini discuss.

The Hill Poll: Most voters say the United States is in decline - More than two-thirds of voters say the United States is declining, and a clear majority think the next generation will be worse off than this one, according to the results of a new poll commissioned by The Hill. A resounding 69 percent of respondents said the country is “in decline,” the survey found, while 57 percent predict today’s kids won’t live better lives than their parents. Additionally, 83 percent of voters indicated they’re either very or somewhat worried about the future of the nation, with 49 percent saying they’re “very worried.” The results suggest that Americans don’t view the country’s current economic and political troubles as temporary, but instead see them continuing for many years. The pessimism is consistent with numerous public opinion polls revealing a sweeping lack of faith in Congress to address the nation’s problems — a souring trend that’s only become more pronounced since the economy slipped into recession three years ago.

The Great Slump is Not Yet Half Over - The United States is well into the fourth year of what Carmen Reinhart and Ken Rogoff call the Second Great Contraction and Bob Hall calls the Great Slump, exceeded only by the Great Depression of the 1930s in its length and severity. While the Great Recession of December 2007-June 2009 ended over two years ago, the recovery has been characterized by very slow growth and persistently high unemployment. When will the Great Slump end?  We recently presented a paper, “The Statistical Behavior of GDP after Financial Crises and Severe Recessions,” at the Federal Reserve Bank of Boston Conference on the “Long-Term Effects of the Great Recession.” We ask two questions. Do severe recessions associated with financial crises cause permanent reductions in potential GDP, or does the economy return to its trend? If the economy eventually returns to its trend, does the return take longer than the return following recessions not associated with financial crises?

Waiting For Lehman - So along with everyone else, I’ve been waiting for Lehman—and fruitlessly trying to guess which will be the Lehman-like event this time around. Will it be the bankruptcy of Dexia? BofA? UniCredit or SocGen or one of the Spanish banks? Will it be a war in the Middle East? Bad producer index numbers from China? A fart by a day-trader in Uzbekistan? When will Lehman arrive!?!? But lately, my thinking has changed: Like the characters in Godot, I think that we’re waiting in vain. The Lehman-like event will never arrive because it won’t be allowed to arrive. So this miserable slog we are going through will continue—indefinitely. (Yeah, I know: Sucks to be us.) My thinking is based on two assumptions: One, that the central banks and government financial authorities and regulators around the globe are absolutely terrified of a repeat of a Lehman-type bankruptcy or trigger event. And two, that those self-same central banksters and government drones will do absolutely anything to prevent another Lehman-like credit event from setting off another cascade of consequences. And when I say “absolutely anything”, I’m not using hyperbole: Fuck principles, fuck the law, fuck legal constraints, fuck even basic long-term economic and fiscal health—or sanity. The clowns running the circus were so freaked out by the effects of the 2008 Lehman bankruptcy and the domino-effect that it triggered, that they will not let it happen again—ever. Come what may.

Felix Zulauf: The Die Is Cast - We were fortunate that Felix was in NYC yesterday briefly for a Barron’s conference (he has been a roundtable member for 20 years). Afterwards, he swung by the office and spent some time discussing the situation in Europe and elsewhere with us. The highlights:

• We are in a spiral caused by mass credit creation, excessive borrowing, reckless spending, and a enormous credit crisis. The end result is inevitable, and most likely unavoidable.
• The Europeans have created their own credit crisis, and it is attributable, in part, to the creation of the EU. The EU is following a path similar to what the US went through n 2008-09.
• There will be yet another bailout in the US and QE3 (or more) — but not until the situation gets much worse; That refers to both the market and the economy.
• There was a window for an Austrian economics solution, but that opportunity has passed. Worse still, imposing Austrian economics on weak countries here and now will only make the situation worse, causing a recession or making any contraction worse.
• Of all the currencies in thew world, the US Dollar is the least ugly. That says less about the Greenback than it does about the Euro and Yen.
• The Eurozone was problematic since its inception. You cannot have a monetary union but not simultaneous fiscal union.

What's in Your Wallet? The Future of Cash - FRBSF Economic Letter - Over the past few decades, the dominant position of cash as a store of value and a means of payment has increasingly been challenged. The growth of electronic payments, especially credit cards and, more recently, debit cards, has radically changed the role of cash in the global economy. Yet, the circulation of the U.S. dollar, the world’s most widely used currency, has continued to grow without interruption. Last year, the value of U.S. currency in circulation reached nearly $1 trillion dollars. That enormous stock of cash consisted of almost 30 billion Federal Reserve notes spread to every corner of the globe. The payment landscape has changed dramatically in recent years as new technologies have been brought to market. Yet, the demand for U.S. currency—cold, hard cash—shows no sign of fading. An empirical analysis indicates that alternative payment technologies have tended to keep cash growth in check, but other factors have more than offset this. Over the next 10 years, cash volume is projected to grow 1.7% per year.

Demand for Cash Shows No Signs of Fading - Cash may no longer be king, but it’s looking like good old paper money has a solid future in front of it, a study from the Federal Reserve Bank of San Francisco argues. The report argues that the proliferation of electronic payment methods isn’t dislodging a continuing strong interest in cash. You may be able to pay for coffee with a credit card these days, but even so, paper money will be sticking around much as it always has for years to come. “Demand for U.S. currency — cold, hard cash — shows no sign of fading,” the analysts wrote. “Alternative payment technologies have tended to keep cash growth in check, but other factors have more than offset this. Over the next 10 years, cash volume is projected to grow 1.7% per year,” they noted. The economists don’t see much of a connection between the still healthy future for cash and activity levels: “We find that economic conditions have very little effect on cash volume.” The paper also doesn’t have much to say about foreign demand for cash, which has been strong in recent years. Importantly, a large share of U.S. currency is held outside of the U.S.

The Real Contagion Risk - At the very core of the global nuclear money reactor are US Treasurys and the dollar. If the dollar's role as the world's reserve currency wanes or even collapses, then the scope and pace of the likely disruptions will be enormous. Of course, we'll be glad to have as much forewarning as possible. Accordingly, it is my belief that if the contagion spreads from Greece to Portugal (or Italy or Spain), and then to the big banks of France and Germany in such a way that they fail, then rather than strengthening the dollar's role (as nearly everyone expects), we should reserve some concern for the idea that the contagion will instead jump the pond and chew its way through the US financial superstructure. While I am expecting an initial strengthening of the dollar in response to a euro decline, I believe this will only be a temporary condition. The predicament is that the fiscal condition of the US is just as bad as anywhere, and we'd do well to ignore the idea, widely promulgated in the popular press, that the US is in relatively better shape than some other countries. 'Relatively' is a funny word. In this case, it's kind of meaningless, as all the contestants in this horse race are likely destined for the glue factory, no matter how well they place.

Eric Janszen: We Are Witnessing The Death of the Dollar - What do you get when the producer of the world's reserve currency takes on too much debt? Nothing less than the end of the US Treasury-based monetary system. In short, it looks at the credit bubble that began in the early 1980's, started accelerating in 1995, and has now reached epic proportions. The amounts are so staggering at this stage that Eric believes it is too politically undesirable to let natural market adjustments clear them away -- the magnitude of the deflationary pain this would create is simply unacceptable for politicians looking to get re-elected. The only other available option is to service these debts via a dramatically devalued currency. Hence the key role the Fed is playing today. The Fed is at the epicenter of this process, intervening heavily to keep the natural corrective market forces at bay. In this, it has a dual strategy. The first is to keep asset prices high (i.e., fight asset deflation), which it is doing by keeping interest rates historically low. The second is to keep wage and commodity costs under control, which it primarily does via devaluing the currency (maintaining a "weak dollar"). And, of course, through its intervention, the Fed is doing all it can to keep the current financial system in place to perpetuate the process for as long as possible. The end result is a fundamental shift in risk from Wall Street to the taxpayer.

The Dollar and the Renminbi as International Currencies - There's been a lot of discussion of the potential rise of the Renminbi as an international currency. In particular, Jeffrey Frankel has recently written a paper on the subject (blogpost), backed in part on research we did in our papers [1] [2] on the dollar. Now, the New York Fed's Linda Goldberg, Mark Choi and Hunter Clark have re-examined some of benefits of being an international currency in a post entitled What If the U.S. Dollar’s Global Role Changed?. Some have suggested that the large benefits extracted by the United States from the dollar’s privileged international status could be undermined should the currency’s role decline. We examine this claim by grouping the potential consequences of a change in the dollar’s relative international status into five “buckets.” These consequences are summarized in the table below and discussed in more detail.

Ricardo Caballero on the search for safe investments - MIT News - MIT economist Ricardo Caballero has posited that a key structural factor was a massive global imbalance between the demand for safe investments, especially bonds, and the supply of safe places to put new capital.  Because this “insatiable demand for safe debt instruments,” as Caballero has called it, was not wholly absorbed by the traditional safe haven of U.S. Treasury notes, it helped spur the growth of the mortgage-backed bond market. But these bonds, backed by subprime loans, turned out to be unsafe despite their AAA ratings, exploding en masse. Financial markets are still feeling the aftereffects.  As a solution to this imbalance, Caballero — an expert on global capital markets, financial panics and risk who is among the 100 most-cited economists worldwide — has proposed the idea of government-issued investment insurance meant to help spur financial activity. Without such policies, he has warned, we could see the “recurrent emergence of bubbles,” as capital chases emerging investment areas.  MIT News recently queried Caballero, MIT’s Ford International Professor of Economics, Macroeconomics and International Finance, about the shortage of safe investments.

Fed Watch: Floating Rate Treasuries -  Reports circulated today that the US Treasury is considering a new type of debt. From Bloomberg: The U.S., seeking to attract investors who might otherwise avoid Treasuries amid a $1.3 trillion budget deficit, is considering the sale of floating- rate notes in what would be its first new security since it began offering inflation-linked debt 14 years ago. I find this idea intriguing. On the surface, with US 10-year debt hovering around 2 percent, there seems to be plenty of demand to dry up whatever Treasury issues. And it looks like a wise move to lock in as much debt as possible at those low rates. That said, at some point in the future (hopefully) rates will rise, and it is easy to see an inflection point where investors, wary that monetary policy may shift abruptly, would be wary to add to their Treasury holdings. Having a floating rate product on hand could be important in such circumstances, preventing any abrupt funding shortfalls and rates spikes by offering investors a form of insurance against rising rates. Daniel Indiviglio at the Atlantic offers up some potential problems with such a product. Tying U.S. debt costs to how interest rates rise and fall could also be dangerous. You can imagine how quickly U.S. debt costs could rise if the government had something like $1 trillion in floating rate debt and interest rates jumped a few percent in a year.

Floating Rate Treasuries - Tim Duy is bullish on the idea In short, I think the US Treasury has good reason to consider adding floating rate debt – and should find a ready buyer not only in Wall Street, but just across town. The US government already has floating rate debt. Its called T-Bills. When the your 13-weeks is up you simply issue/buy some more.   Unless I am missing something here the only real advantage to a floating rate long bond is transactions costs. You only have to sell/buy it once rather than 4 times every year. Also, on a related note, there are no savings to be had from the federal government locking in low rates now. Not unless the government knows something about Fed policy the market doesn’t or is deliberately attempting to manipulate Fed policy.  This is because long rates simply are the market’s best guess at the path of short rates plus a slight risk premium and at this point option value because short rates can rise but they cannot fall.  Thus it ought to be the case that borrowing over a longer term increases the government’s borrowing costs.

The Status Quo: Fiscal Contraction - Ryan Avent digs into the latest GDP numbers at Free Exchange and lays out a set of facts that ought to be drilled into the heads of the public and every opinion-maker:  fiscal policy, particularly when you factor in state and local governments, has basically been either null or contractionary for almost two years now. Federal government spending contributed positively to growth, as an increase in defence spending offset cuts on the non-defence side of the ledger. That positive federal contribution, in turn, offset continued contraction at the state and local government level. All told, the government contribution to output was essentially nil. Government consumption has contributed positively to growth in just 2 of the last 8 quarters. Non-defence federal government spending has contributed positively to growth in just 1 of the last 5 quarters. Generally speaking, fiscal policy has not been stimulative in nearly two years and has been clearly contractionary for the past four quarters. That’s a remarkable situation to contemplate given the rock bottom rates on Treasuries. Truly remarkable.  Multiplier Effect recently featured a couple of posts pointing to Levy scholars arguing that aggregate demand management and short-term stimulus are inadequate to the challenges we’re facing. The status quo, for some time now, has not been marked by fiscal stimulus of any kind. 

Greg Mankiw on Fiscal Policy - I think Greg’s analysis is a bit off in his recent NYT column but most notably here.  The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year.  First, the US government never has to pay back money that it borrows. I actually think if I pressed Greg on this he would agree – infinitely lived organizations whether they are companies or government never have to repay their debts. Where the disagreement comes in over servicing debt. A common belief is that all organizations must service their debt. That is, they at least have to be able to make the interest payment. This does put an organization in jeopardy if investors believe that it may not be able to afford the interest payments. This causes the interest rates to spiral ever higher and for the organization to reach illiquidity.  Can this happen to the US government? The simple answer is no.  As long as T-Bills are traded for bank reserves in Open Market Operations this essentially cannot happen. The interest rate on T-Bills will have to be the interest rate equal to the Federal Funds rate.

A Note on Fiscal Policy in a Depressed Economy »   DeLong - Since the mid-eighteenth century, economists have recognized that changes in the pace at which economic agents spend induce changes in the level of prices and in the flow of production.Starting from this perspective, whether expansionary government fiscal policy would expand the nominal flow--and in a sticky-price world the real flow of spending--has an obvious answer: yes, it would. Expansionary monetary policy works by increasing the money stock and reducing interest rates, and so inducing economic agents to increase the pace at which they spend. Expansionary fiscal policy induces one very large economic agent--the government--to increase the pace at which it spends.In this respect, at least the government's spending is as good as anybody else's spending. Thus any economist who holds that expansionary monetary policy has real (or even nominal) effects is thereby committed to presuming that expansionary fiscal policy has similar effects as well. In spite of this, only five years ago the majority of policy-oriented mainstream American economists, if asked whether fiscal policy had a role to play in stabilization policy, would have said that it did not--or that it had at most a very small role.  Monetary policy can carry out the stabilization policy mission, we thought. And monetary policy should do so: it has a comparative advantage, we thought.

A Note on the Return of Depression Economics - DeLong - Over the 1948-1990 period, the U.S. unemployment rate converged 1/3 of the way back to its sample average level each year. Thus the good that expansionary monetary and fiscal policy can do is limited: reduce unemployment by 0.1 percentage point this year through additional expansionary policies, and you reduce the integral of expected excess unemployment relative to trend by a total of 0.3 percentage point-years. And stimulative macroeconomic policies have costs: the policies implemented will not be the policies initially proposed, there will be reduced confidence in long-run price stability, there will be the tax wedge and tax uncertainty burdens of financing a higher national debt, and there will be the opportunity cost of not using the limited attention span and bandwidth of the political system for other policy goals.  Over the 1990-2007 period, the point estimate is that the U.S. unemployment rate converges only 1/15 of the way back to its sample average level each year. Deviations of unemployment from its presumed natural rate are thus to a first approximation permanent.  Because there is no good reason to think that the market system will fix the problem in any reasonable span of time, the benefits to acting now are much greater than they were back before 1990: five times as great.

CHART: ‘Life Without Stimulus’ — The U.S. vs. The U.K. | At, Martin Sullivan rebuts those who claim that the 2009 Recovery Act (i.e. the stimulus) did nothing to boost the economy. “Republicans constantly remind us that the Obama stimulus — the American Recovery and Reinvestment Act of 2009 — did not work. They voted against it. In the United Kingdom the government is led by Conservative Prime Minister David Cameron. His government did not adopt stimulus,” Sullivan noted. “After three and a half years, U.S. GDP is just about returning to the pre-recession peak. That’s awful. But it’s far better than the U.K. where GDP is still five percent ($750 billion in US terms) below its pre-recession peak.”

The Great American False Dilemma: Austerity vs. Stimulus - For this debate to have meaning, we need to consider how economic policies will actually solve the problems currently endured in a mega-region like Los Angeles. Unemployment, food stamp use, and energy costs have leapt ever higher here since the 2008 crisis. Moreover, the seeds of these trends were already showing up before the infamous Autumn of 2008. How would either a new phase of belt-tightening or reflationary policy actually affect southern California? When we witness the clash between the Austerity and Stimulus camps, on the surface there is the appearance that a true debate is taking place between diametrically opposed economists. For example, Austerity folks correctly note that our economy has been badly weighted towards consumption for some decades. They want to clear out the excesses, let the malinvestments fail, and elect an overall path of acute economic pain in order to reset the system. Stimulus advocates find such plans completely unnecessary, if not downright masochistic.  A late 2010 article in the FT by Gavyn Davies illustrates this point. From the viewpoint of sectoral balances, government deficits show up as “savings” on the balance sheet of the private sector. Of course, this is a deduced accounting identity and may not actually tell us much at all about whether the private sector is becoming healthier. I will probe further into this data later on in the essay. But first, the Gavyn Davies chart from the Financial Times: The most important graph of the year:

Another Debt Downgrade On The Way? - Merrill Lynch is telling investors to expect another downgrade of U.S. debt before the end of the year: The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts. The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday. A second downgrade — either from Moody’s or Fitch — would follow Standard & Poor’s downgrade in August on concerns about the government’s budget deficit and rising debt burden. A second loss of the country’s top credit rating would be an additional blow to the sluggish U.S. economy, Merrill said.

DOWNGRADE WATCH: The Super Committee Is (Predictably) Deadlocked Over Taxes - This shouldn't surprise anyone after the events of this summer, but the Super Committee is reportedly deadlocked over whether its plan to cut $1.2 trillion from the federal deficit should include tax cuts. Democrats presented the committee with a plan to cut the deficit by nearly $3 trillion over 10 years, of which 50 percent would come from revenue increases. In exchange, they offered to accept $400 billion in cuts to Medicare, including $200 billion in cuts to benefits. But Republicans are standing by their pledge not to accept any tax increases coming out of the committee — taking the larger deal off the table, and jeopardizing the lawmakers' chances of reaching an agreement at all. The committee must vote on its recommendations before Thanksgiving — and the Congressional Budget Office must "score" the plan before then, which could take weeks. Congressional sources say if a deal is not reached in the committee by next week, they won't likely meet the statutory deadline. Standard and Poor's hinted today that such an outcome could precipitate another downgrade, and the other ratings agencies may not be far behind.

Lobbying Blitz Barrages Budget-Cutting Super Committee - A Thanksgiving deadline to deliver a plan to cut $1.2 trillion from the federal budget looms larger every day for Congress' 12-person "super committee," split evenly between Democrats and Republicans in the House and Senate. Failure to reach consensus will trigger across the board cuts to the Defense Department, Medicare, and plenty more federal agencies and programs. But as the super committee heads into its final month of negotiations, often conducted in secret, they've felt the full force of Washington's special interest machine. According to Politico, the super committee has been lobbied by almost 200 special interest groups and companies seeking to influence the panel's budget-slashing prescriptions. Those interests include everyone from American Indian tribes and the airline industry to powerful health insurance companies such as WellPoint.This lobbying onslaught is, in part, an attempt to pierce the layer of secrecy surrounding the super committee, which often meets behind closed doors and has kept the public mostly in the dark about any potential agreements or breakthroughs. Here's Politico: "During my 42 years in Washington, this is the most closed-mouth committee that I have seen,"

The Incredible Shrinking Supercommittee - A couple of weeks ago, I had a conversation with a prominent--and not normally excessively optimistic--budget expert.  This person offered me two reasons to hope that the Supercommittee in charge of finding budget cuts would choose to go big rather than go home.

  • 1.  They would be extraordinarily foolish to pass up this opportunity; the Supercommittee has a great deal of power to do things that are normally very difficult to accomplish.
  • 2.  There had been no leaks; if the talks really weren't going anywhere, both sides would have been leaking like sieves.

I wanted to believe this very much.  Alas, they're now, well, leaking like sieves.  And they're leaking dueling proposals that seem very, very far apart: House Speaker John Boehner (R-Ohio) on Thursday rejected a proposal by the Democratic members of the congressional supercommittee. A majority of the six Democrats on the 12-member panel privately proposed a package that would cut the deficit by $3 trillion over 10 years, including more than $1 trillion in tax increases.  Boehner made no mention of a counteroffer by Republican members of the panel, which aides said would cut the deficit by $2.2 trillion over a decade and include up to $640 billion in new revenue.

What Happens If/When The Super Committee Fails? - It’s now less than a month before the Joint Committee on Deficit Reduction — the group that more typically is inappropriately referred to as the super committee — is supposed to report its recommended $1.2 trillion to $1.5 trillion deficit reduction plan to the House and Senate. In reality, the time for the committee to act is even shorter than that because it needs to send its plan to the Congressional Budget Office for scoring well before the Nov. 23 deadline. What happens if, as I and many others increasingly suspect, the super committee isn’t able to agree to a deficit reduction plan, if the plan it agrees to is substantially less than what’s required ($400 billion is the number being mentioned most often these days) or if — also as I and many believe — the full House and Senate are unable to pass what’s recommended? Would it really be a political and financial catastrophe, the equivalent of a nuclear bomb, typhoon, tsunami and magnitude-10 earthquake all rolled into one?

US Democrats seek up to $3 trln in budget savings (Reuters) - U.S. Democrats are proposing $2.5 trillion to $3 trillion in measures to reduce the budget deficit, including revenue increases and significant cuts to Medicare, congressional aides told Reuters. The plan was unveiled on Tuesday at a closed-door meeting of a special 12-member congressional panel, the so-called "super committee", that is tasked with finding at least $1.2 trillion in deficit reduction over 10 years. It was the first formal proposal by Democrats on the committee and is aimed at galvanizing talks that are quickly running up against a Nov. 23 deadline. The congressional aides did not say why Democrats were proposing such a big deal, but Democratic congressional leaders have repeatedly called on the committee to go beyond its mandate to fix the country's fiscal mess. According to congressional sources, the plan includes a roughly equal mix of spending cuts and revenue increases; between $200 billion and $300 billion in new economic stimulus spending that would be paid for with lower interest payments from reducing deficits; and around $400 billion in Medicare savings, with half coming in benefit cuts and the other half in cuts to healthcare providers.

Supercommittee Democrats Offer Major Capitulation - Very distressing news broke during this morning’s meeting of the supercommittee: aides told Reuters that Democratic members of the committee have proposed $2.5 to $3 trillion in deficit reduction measures, including $400 billion in cuts to Medicare—a half of which would come from benefits. The Democratic proposal consists of an even split between tax increases and spending cuts, and also $200 to $300 billion in new stimulus spending that would be paid for because interest payments on the debt would be lowered if the plan passed. The $400 billion in Medicare cuts would be split evenly between beneficiaries and providers. It was reportedly a formal proposal advanced by Senator Max Baucus, though Clyburn is said to object to the Medicare cuts. This begs serious questions, once again, about Democrats’ negotiating techniques in the ongoing budget and debt ceiling dramas. The additional stimulus is a terrific idea, and fulfills the calls for the supercommittee to address the jobs crisis as it forms a deficit reduction plan. But this magnitude of Medicare cuts, presumably meant to entice Republicans, is astounding and out of line with previous Democratic proposals. President Obama’s own deficit plan calls for $320 billion in healthcare savings, only seven percent of which—not 50—would affect beneficiaries.

Testimony Before the Joint Select Committee on Deficit Reduction - CBO Director's Blog - This morning, for a second time, I testified before the Joint Select Committee on Deficit Reduction—the body created under the recently enacted Budget Control Act (Public Law 112-25) to propose further deficit reductions. This morning’s testimony focused on discretionary spending in the federal budget, whereas my previous testimony in September centered on the budget and economic outlook and CBO’s analysis of the fiscal policy choices facing the Committee and the Congress. My testimony addressed four basic questions:

  • What does discretionary funding comprise?
  • What have been the trends in discretionary funding?
  • How will discretionary spending evolve over the next decade under current law?
  • How might the path of discretionary funding be altered?

Bipartisan Group of 100 Lawmakers to Urge $4 Trillion Deficit-Cutting Deal - At least 100 House lawmakers plan to urge the deficit-cutting congressional supercommittee to accomplish what the Obama administration and Congress failed to achieve this summer: a large agreement aimed at reducing the federal deficit by $4 trillion over 10 years. In a letter that the bipartisan group plans to send to the supercommittee next week, the lawmakers will argue a large deal is vital to the nation’s future. Economists generally believe that long-term deficit-reduction of about $4 trillion is needed to put the U.S. on sound fiscal footing. Importantly, the letter calls for the 12-member Joint Select Committee on Deficit Reduction to consider “all options,” including both spending and revenue – suggesting that Democrats are open to entitlement reforms while Republicans would back tax increases if they were part a giant deal.“We know that many in Washington and around the country do not believe we in the Congress and those within your committee can successfully meet this challenge,” the lawmakers plan to say, according to a draft copy. “We believe that we can and we must.”

Farm policy and the Super Committee - It is possible -- but not certain -- that the major "Farm Bill 2012" decisions will be made sooner than expected, in November, 2011.  Critics of the process are calling it the "secret Farm Bill" with "no accountability." Everybody involved in farm policy had been expecting the next Farm Bill to pass in 2012 or 2013. However, the strange new Congressional Joint Select Committee on Deficit Reduction -- the "Super Committee" -- may make the important decisions very soon. The Super Committee process is confusing.  Here is my summary of the key points.  As part of the recent fight over raising the debt ceiling, Congress delegated a peculiar and almost unprecedented decision option to the bi-partisan Super Committee. This committee's power comes from its option to make a recommendation before Thanksgiving on $1.5 trillion in deficit reduction over ten years. If the committee succeeds in making a recommendation, Congress has agreed to give the proposal an up-or-down majority vote, with no filibusters. If the Super Committee fails to make a recommendation, there will be ferocious mandatory across-the-board deficit reductions.  Congress has already passed these reductions, with a conditional trigger stating that they kick in when the Super Committee fails to make a proposal.

Panetta’s Pentagon, Without the Blank Check - Defense Secretary Leon E. Panetta took his seat in a hearing room one morning this month ready for battle. The enemy, he warned lawmakers ominously, was “a blind, mindless” one that could “badly damage our capabilities” and “truly devastate our national defense.”  Mr. Panetta meant not Al Qaeda, the Taliban or Iraqi insurgents, but a creation of Congress poised to inflict what he deemed unacceptable budget cuts on a Pentagon that, he admitted, had “a blank check” in the decade after the attacks of Sept. 11, 2001.  “After every major conflict — World War I, World War II, Korea, Vietnam, the fall of the Soviet Union — what happened was that we ultimately hollowed out the force, largely by doing deep, across-the-board cuts that impacted on equipment, impacted on training, impacted on capability,” he said. “Whatever we do in confronting the challenges we face now on the fiscal side, we must not make that mistake.”

US Military Paid $1.1 Trillion to Contractors That Defrauded the Government - The Pentagon has paid $1.1 trillion to hundreds of defense contractors and their parent companies that have defrauded the government over the past ten years, according to a Department of Defense report released Thursday. More than 300 contractors involved in civil and criminal fraud cases that resulted in judgments of $1 million or more during the last decade were paid a total of $573.7 billion by the US military, including $398 billion that was paid to contractors after judgments for fraud. When awards to parent companies are included, the Pentagon awarded $1.1 trillion to the top 37 companies that defrauded the US military since 2000. Raytheon, for example, spent nearly $4 million to settle a civil case with the government in 2002 and $2.5 million to settle a case in 2000. Since the cases were settled, the Pentagon has awarded Raytheon's aircraft and engineering divisions a total of $1.8 billion. Lockheed Martin paid $10.5 million in 2008 to settle charges that the company submitted false invoices on a multibillion dollar contract connected to a space vehicle program. Despite the fraud, the Department of Defense awarded Lockheed $30.2 billion in contracts in 2009.

Defense Industry: Keep Paying Us or the Economy Dies - On Tuesday, the aerospace industry put out a report saying that chopping the defense budget would put over a million Americans out of work. Cuts that could total up to a trillion dollars over 10 years would “devastate the economy and the defense industrial base and undermine the national security of our country,” .But while Blakeley’s group paid for research to draw that dire conclusion, some of her members reported a sunnier economic outlook to their shareholders. In its third-quarter earnings report, also released Tuesday, Lockheed – manufacturers of the F-22 and F-35 jets — told investors to expect that as long as Congress passes President Obama’s next defense budget, ”the Corporation expects 2012 net sales to be flattish as compared to 2011 levels, and that consolidated 2012 segment operating profit margin will remain at approximately 11 percent.” Boom: another $700 million in earnings, on its way. While there’s no doubt that defense cuts will mean job losses, there’s also no doubt that a report prepared for an industry so reliant on defense cash will paint a stark picture of what happens if that cash is threatened. Congressmembers looking to get reelected pay attention, since fighting for defense money as a jobs program is easier than making a case for what a sensible, appropriately funded defense strategy ought to be.

Coalmines And Military Keynesians - Krugman -  Ah, so now we have a new principle of economics: government spending can’t create jobs, but cuts in government spending can destroy jobs — as long as the jobs are in the defense sector It took months of fighting — the threat of a government shutdown, the graver threat of a default on the national debt, and now a new threat of major, automatic cuts to Medicare and defense programs — but Congress’ deficit obsession has finally exposed the rarest of all species: Republican Keynesians. With just a under a month until the deficit Super Committee must recommend policies that cut the 10 year deficit by $1.2 trillion, members of the Republican party — the same party that’s been on the war path for deep spending cuts, and that decries President Obama’s “failed stimulus” — are making uncharacteristic arguments against slashing spending. Trim too much, too quickly, they warn, and people will lose their jobs!  Propose some kind of public investment, say in green energy, and the right screams “Solyndra! Waste! Fraud!” But propose spending the same amount on weapons that we don’t need, and it’s all good. If only we could convince Republicans that solar power or mass transit were complete wastes, but that they would upset some foreign power — the French, that’s it! — a big stimulus program might sail through.

The Military Spending Fairy - Faced with the prospect of cuts to the Defense Department's budget, the defense industry is pushing the story of the military spending fairy on members of Congress. They are telling them that these cuts will lead to the loss of more than 1 million jobs over the next decade. Believers in the military spending fairy say things like "the government can't create jobs," but also think that military spending creates jobs. Under the military spending fairy story, if the government spends $1 billion dollars paying people to do research or to build items related to the civilian economy it is just a drag on the private economy; however if the same spending goes to military related purposes, then it creates jobs. It's not clear exactly how the military fairy blesses projects to make them helpful to the economy rather than harmful. For example, the highways were built in the 50s ostensibly in part for defense purposes. They made it easier to move troops and military equipment around the country in the event of an attack. Government subsidized student loans were also originally dubbed as defense loans since they were ostensibly intended in part to produce more graduates in science and engineering who could help us compete with the Soviet Union in defense related technologies.  Using this same logic, perhaps President Obama could get the military spending fairy to bless some of his stimulus spending so that it will be economically useful. He could again call student loans "defense loans." He could also have the research into clean energy technologies be viewed as providing alternative sources for energy for the military in the event we are cut off from oil imports in a war. (It makes as much sense as the highway story.) Then the military spending fairy can bless the stimulus as creating jobs.

An Insurance Company With An Army - Krugman - I gather, from what I’ve been reading and hearing in various places, that the right-wing line is that it’s all Solyndra — that your tax dollars are going to pay for vast numbers of wasteful projects. Now, even the Solyndra story is a lot more nuanced than that. But this seems like a good time to repeat, once again, the truth about federal spending: Your federal government is basically an insurance company with an army. The vast bulk of its spending goes to the big five: Social Security, Medicare, Medicaid, defense, and interest on the debt. But what about recent deficits? They’re caused mainly by a fall in revenue and a mostly automatic increase in spending on safety-net programs. Oh, and the federal government has been providing aid to state and local governments, largely to limit layoffs of schoolteachers. The amounts spent on anything remotely resembling Solyndra is a rounding error on a rounding error. And if you want smaller government, either you’re talking about cuts in the big five, or you have no idea what you’re talking about.

Jobs Plan Stalled, Obama to Try New Economic Drive - With his jobs plan stymied in Congress by Republican opposition, President Obama on Monday will begin a series of executive-branch actions to confront housing, education and other economic problems over the coming months, heralded by a new mantra: “We can’t wait” for lawmakers to act.  According to an administration official, Mr. Obama will kick off his new offensive in Las Vegas, ground zero of the housing bust, by promoting new rules for federally guaranteed mortgages so that more homeowners, those with little or no equity in their homes, can refinance and avert foreclosure.  And Wednesday in Denver, the official said, Mr. Obama will announce policy changes to ease college graduates’ repayment of federal loans, seeking to alleviate the financial concerns of students considering college at a time when states are raising tuition.

White House Hands GOP Victory In Jobs Bill Shadow Boxing Match - Republicans just won a round of jousting over President Obama’s jobs bill. President Obama supports passage of House GOP legislation that would eliminate a tax compliance rule affecting big government contractors and pay for it by limiting Medicaid eligibility, the White House announced Tuesday. You can read about the legislation — contained in two separate bills — here. Republicans crafted the legislation by pairing two conservative measures the White House proposed as part of their jobs and deficit reduction proposals. That in effect boxed Democrats in, despite its questionable implications for economic growth, and a pay-for that scales back Medicaid, instead of increasing taxes on wealthy Americans.  The administration announced its support in terse statements of official policy, which makes it more likely that Democrats will back it in the Senate. That would give the GOP cover to claim they’re working productively and seeking common ground to pass elements of President Obama’s jobs bill.

House Passes the “Even Obama Supported” Non-Jobs Jobs Act - The House bill eliminating the 3% withholding rule, making it easier for government contractors to cheat on their taxes, a small part of the American Jobs Act and supported by the President, passed today, on a near-unanimous vote of 405-16. The bill was paid for through a separate measure, which changes the calculation of modified adjusted gross income by including Social Security benefits in the calculation, for the purposes of determining eligibility for programs like Medicaid and SCHIP. This fix of a “glitch” that would allow some middle-income early retirees to get nearly free Medicaid coverage (we can’t have that!), passed by a smaller amount, on a vote of 262 to 157. 27 Democrats joined 235 Republicans in supporting the bill. While the withholding requirement passed several years ago, it had yet to go into effect. If it had been allowed to, it would mean “huge accounting burdens on governments and potentially harmful cash-flow disruptions for suppliers, contractors and subcontractors,” said Representative Eric Cantor, Republican of Virginia, the majority leader, on the House floor. “Those are dollars that could otherwise be used to grow a business or hire more workers.”

The GOP's so-called 'jobs plan' isn't - Linda Beale - Greg Sargeant, On GOP Jobs Plan, an Epic Media Fail, Washington Post (Oct. 18, 2011), comments on something that much of the media has let slip, whether intentionally or due to more exciting openings like Cain's 9-9-9 plan for a substantial tax increase on 84% of Americans. Here's the heart of his comment. Obama and the Senate GOP have both introduced jobs plans. In reporting on the Senate plan, many news organizations described it as a “GOP jobs plan.” And that’s fine — Rand Paul said it would create five million of them. But few if any of the same news orgs that amplified the GOP offering of a jobs plan are making any serious effort to determine whether independent experts think there’s anything to it. And independent experts don’t think there’s anything to it — they think the GOP jobs plan would not create any jobs in the near term, and could even hurt the economy. By contrast, they do think the Obama plan would create jobs and lead to growth. (emphasis added) Why aren’t these facts in every single news story about the ongoing jobs debate? Why aren’t they being broadcast far and wide? I discussed the McCain-Paul  GOP so-called "jobs plan" in a post a few days ago, here

Why No Action on Jobs? - Why, you may be wondering, do politicians refuse to take the necessary fiscal steps to dislodge the unemployment rate from its elevated perch of 9.1%?  Why, to the contrary, do they seem if anything intent on austerity measure that will push it in the wrong direction? I can think of three reasons:

  • 1)      They want the President to fail;
  • 2)      They don’t believe fiscal measures will work;
  • 3)      They irrationally fear a higher budget deficit, even temporarily.

Re 1, what can anyone say? Re 2, I’ve got more sympathy for you.  Folks have a hard time accepting counterfactuals—the idea that things would have been worse absent the Recovery Act.  But the evidence is at this point pretty plain to see: here, Re 3, it can’t be emphasized enough that temporary spending measures, even large one, are not what drive the long-term debt problem.   The culprit there would be the Bush tax cuts—it’s the permanent spending, not the temporary stuff that whacks you here.

Sabotage: The Story Behind The Republican Party's "Top Political Priority" - According to the most recent NBC News/Wall Street Journal poll, 63 percent of Americans support the president's bill, which independent economic experts say could create more than two million jobs and prevent another recession. The plan is full of bipartisan ideas, including payroll tax cuts that Republicans have previously supported and infrastructure spending that Republicans admit will create jobs. Senate Democrats have proposed funding it with a surtax on income over $1 million, another policy backed by an overwhelming majority of Americans. CNN's latest poll shows that even Republican voters support the bill's key components. Yet, despite all their bluster about "listening to the American people," GOP leaders seem to be wearing earplugs. House Majority Leader Eric Cantor (R-VA) recently pronounced the president's bill dead in the House, where Republicans are refusing to even bring it up for a vote. Similarly, every single Republican member of the Senate — even the so-called "moderates" like Sens. Olympia Snowe (R-ME) and Susan Collins (R-ME) — voted to block the upper chamber from debating the bill.

The Limits of Pump Priming - Here’s one fairly standard reading of our economic policy challenge:  the economy needs more pump priming, the federal government has more than enough fiscal space to provide it, but for political reasons it won’t be forthcoming.  (If you needed further evidence of that last proposition, take a look at the latest House Republican job creation offering:  repealing a law designed to prevent tax evasion by federal contractors, paid for by kicking some seniors off of Medicaid.  This is the legislative equivalent of planting a giant foam middle finger on the White House lawn.)  So as far as aggregate demand goes, in other words, there’s little reason to think that the federal government will step into the breach (and as things stand, we expect the government to be withdrawing demand from this economy).  But a new one-pager by Pavlina Tcherneva (“Beyond Pump Priming“) suggests that the above reading of the situation is … too optimistic. Even if the AJA, or some other form of aggregate demand injection is passed, there are serious limitations to relying too heavily on an approach that boils down to boosting growth and hoping for the right employment side effects. The alternative is to take dead aim at the employment outcomes we need—to directly target the unemployed.

Repairing infrastructure can help repair economy - If you have spent much time traveling around the United States, you likely have noticed that our infrastructure looks a bit worn and tired and in need of some refreshing. If you spend much time traveling around the world, however, you will notice that our infrastructure is shockingly bad. So bad that it’s not an exaggeration to declare it a national disgrace, a global embarrassment and a massive security risk. Not too long ago, the infrastructure of the United States was the envy of the world.  That was then. In the ensuing decades, we have allowed the transportation grid to get old and out of shape. Our interstate highway system is in disrepair; our bridges are rusting away, with some collapsing now and then. The electrical grid is a patchwork of jury-rigged fixes, vulnerable to blackouts and foreign cyberattacks. The cell system of the United States is a laughingstock versus Asia’s or Europe’s coverage. There are very few things that are done better by government mandate than by the free market, but cell coverage is one of them. Broadband, almost as laughable as our cell coverage, is another.

The Amnesiac Economy - Krugman - Mark Thoma sends us to John Cassidy on the absence of really new ideas in this crisis — largely because we didn’t need new ideas, all we needed for the most part was to remember things that we somehow forgot. This is a theme dear to my heart. The crisis we’re in is not something unprecedented. It’s a close cousin to the Great Depression — milder, but recognizably the same sort of thing. And we understand — or used to understand — how the Depression happened, and what to do in such a situation. Most of what’s required are fairly straightforward translations of existing concepts. For example, we have a pretty good understanding of bank runs; extending that framework to shadow banking requires little more than the understanding that repo and other kinds of short-maturity obligations are, from an economic point of view, more or less equivalent to deposits. I’ve been arguing for a while that much of the economics profession has lost its way, recapitulating old errors because it made a point of unlearning what Keynes taught. But it’s not just economists who willfully threw away hard-won insights.

Very Serious Americans - Krugman - Digby finds Paul Ryan, winner of an award for fiscal responsibility, saying, well, something: RYAN: Let’s review for a moment the path we are on, where we stand right now. It pains me to say this, but it’s become clear that the president has committed us to the current path: higher taxes, more dependency, more bureaucratic control, inaction on the drivers of our debt — just not even dealing with it — and painful austerity, the kind you see in Europe. So unless Obama agrees to sharp spending cuts, we’ll be forced into austerity? What?  Wait, it’s worse: just the other day, Ryan and colleagues were praising European-style austerity; they bought into the “expansionary austerity” thesis just as it was collapsing intellectually.

The Truth Has A Well-Known, Well, You Know - Krugman - Greg Sargent takes us to Paul Ryan’s latest speech, in which Ryan expresses outrage over what President Obama is saying: Just last week, the President told a crowd in North Carolina that Republicans are in favor of, quote, “dirtier air, dirtier water, and less people with health insurance.” Can you think of a pettier way to describe sincere disagreements between the two parties on regulation and health care? Just for the record: why is this petty? Why is it anything but a literal description of GOP proposals to weaken environmental regulation and repeal the Affordable Care Act? I mean, to the extent that the GOP has a coherent case on environmental regulation, it is that the economic payoff from weaker regulation would more than compensate for the dirtier air and water. Is anyone really claiming that less regulation won’t mean more pollution? And Republicans have not proposed anything that would make up for the loss of the measures in the ACA that would lead to more people being insured.  So Ryan is outraged,outraged, that Obama is offering a wholly accurate description of his party’s platform.

Perry’s Cut, Balance and Grow - To no one’s surprise, Rick Perry proposes another variation of the Republican dream of cutting taxes for high income individuals and still balancing the budget somehow. I’ll leave to others to have fun with his tax proposals as we focus on this: We should start moving toward fiscal responsibility by capping federal spending at 18% of our gross domestic product, banning earmarks and future bailouts, and passing a Balanced Budget Amendment to the Constitution. My plan freezes federal civilian hiring and salaries until the budget is balanced. And to fix the regulatory excess of the Obama administration and its predecessors, my plan puts an immediate moratorium on pending federal regulations and provides a full audit of all regulations passed since 2008 to determine their need, impact and effect on job creation. Where exactly is Perry proposing to slash Federal spending again? The Government Accountability Office shows that spending on Social Security and major health care entitlements were about than 10 percent of GDP in 2010 and will grow to 13.5 percent of GDP by 2030 even if we don’t repeal ObamaCare under the best of circumstances. If the Republicans have they way in their zest to gut Obamacare, health care entitlement spending will be even higher.

The Tax Reform Evidence From 1986 - Martin Feldstein - Congress's Joint Select Committee on Deficit Reduction is struggling to find $1.5 trillion in cuts over the next 10 years. This is a unique opportunity to use tax reform to reduce future budget deficits while lowering individual tax rates.The Tax Reform Act of 1986, enacted 25 years ago last Friday, showed how a tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue. The 1986 agreement between President Ronald Reagan and House Speaker Tip O'Neill reduced the top marginal tax rate to 28% from 50%. A conservative Republican and a liberal Democrat could agree to a dramatic reduction in top rates because the legislation also eliminated a wide variety of tax loopholes.A traditional "static" analysis that ignores the response of taxpayers to lower tax rates indicated that those combined tax changes would leave total revenue unchanged at each income level. But the actual experience after 1986 showed an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates.

The Republican Idea of Tax Reform - Back in 1995, flush from taking control of both the House and Senate for the first time since 1954, Republicans made tax reform one of their first priorities. House Speaker Newt Gingrich and Senate Majority Leader Bob Dole asked Jack Kemp, the former congressman and secretary of housing and urban development, to lead a commission that would report back with recommendations for fundamental tax reform. Among the members of the Kemp commission, formally the National Commission on Economic Growth and Tax Reform, was Herman Cain, then the chief executive of Godfather’s Pizza. I still have a copy of the commission report, issued in January 1996, that Mr. Cain and the other commission members signed. In the end, the Kemp commission didn’t come up with a specific tax reform plan. Its report set forth only a set of general principles that didn’t add much to what everyone already knew about the Republican tax philosophy. It didn’t matter very much; it quickly became clear that Congressional Republicans were losing interest in tax reform, which implies revenue-neutrality, in favor of tax cuts. Republicans today prefer to forget that Ronald Reagan signed into law 11 major tax increases, including the Tax Equity and Fiscal Responsibility Act of 1982, the largest peacetime tax increase in American history.

Seeing the Forest: Is A Flat Tax Fair?: We have what's called a "progressive' tax system. This means as you make more you pay more taxes. The first "bracket" of $XX dollars you make is taxed at a low rate. The next $XX dollars are taxed at a higher rate, and so on. Many people think if you "go into a higher bracket" you pay more on all the money you make, but that is not how it works. If a bracket starts at $1 million, and you make $1 million plus $1 you only pay the higher rate on the $1 that is in that bracket. Yes, that means that a 5% increase on taxes over $1 million would mean that person pays a nickel. Yes, all that screaming by Republicans is over a nickel. Screaming is what they do best. Conservatives are always pushing for a "flat tax." It sounds so simple: One easy rate, so we all pay the same, easy to calculate... Get rid of deductions and lower the tax rates. So simple, but it turns out it is a simple trick, a scam to enrich the 1%, like so much else that conservatives are selling. Don't fall for it -- it means taxes will go up for the 99% of us who aren't really, really rich. See if you can guess what happens if you are in the top 1%. Or, just scroll down and see the the chart.

What is a Flat Tax? (Surprise, it is a VAT!) - Rick Perry is reportedly going to announce his tax reform plan, a so-called flat tax. There are, as far as I know, no details about the rate or exemption level of the tax or whether it will allow deductions for things like charitable contributions or mortgage interest.  So I can’t comment on the specific proposal, but I can try to dispel some misconceptions about the flat tax.  The flat tax is a VAT, not so different from the taxes popular around the world. Under one variant of VAT, called a “subtraction-method VAT,” businesses deduct the cost of inputs from gross receipts and pay tax on the difference—the value added. It is basically a sales tax where the tax is collected in stages from each producer on the supply chain rather than all at once from retailers (as in the retail sales taxes that are common in the US). A flat tax adds one more wrinkle:  businesses are allowed a deduction for wages paid, but the employees pay the “flat tax” on their wages directly. If that’s all that happened, the tax burden would be identical to the VAT (assuming the same level of compliance), but the flat tax also allows an exemption for every worker.  Wages are only taxed above that exemption level, typically set at around the poverty level, so that wages up to the poverty threshold are exempt from tax.

How Rick Perry's Tax Plan Would Affect You - Gov. Rick Perry of Texas, who is seeking the Republican presidential nomination, today released some details on his flat tax proposal. The plan would give Americans the option of determining their taxes based on an alternate system that has one tax rate and fewer deductions. We asked the Tax Policy Center, a nonpartisan joint venture of the Urban Institute and the Brookings Institution, to help calculate how Mr. Perry’s proposal might affect different kinds of American families. Roberton Williams, a senior fellow there, kindly crunched some numbers using what’s known about the new proposal. The chart below shows a few different types of families — single, married with children, head of household with children, and retired — and what kind of tax liabilities they would face under current law and under Mr. Perry’s alternative system:

Perry's Tax Slogan Plan - Governor Rick Perry (R-TX) proposed his tax reform plan today and wrote this Wall Street Journal op-ed.  Unfortunately, it's just a slapdash of slogans.  If this plan were enacted as proposed, it would lose a lot of revenue, reward the rich, and complicate filing for most taxpayers. Giving taxpayers the option would also mean that only those who pay less would opt in, guaranteeing significant revenue loss.  Pulling a post card out of your pocket is easy to do, but deciding whether to exercise your option to use that post card or to file under present law would add another layer of complication to April 15, just as we found with the Alternative Minimum Tax and the myriad of IRA filing options A flat tax is a consumption tax in most versions, and Governor Perry would also eliminate tax on qualified dividends and long term capital gains, all of which mostly benefit the rich.  Like many economists, I would prefer not to doubly tax dividends, but a large portion of dividends go to tax exempt accounts and are paid by corporations which didn't pay full tax on them. See my last post for my views on going to a territorial tax system.

Perry's Flat Tax Proposal -- Linda Beale - The Atlantic has a good summary article contrasting Perry's Flat Tax proposal (an alternative choice to the income tax, that is modeled after Steve Forbe's flat tax, which will result in much lower taxes for the wealthy because of the deductions it retains along with the zero taxation of capital income) and Cain's 9-9-9 intermediary proposal as well as Cain's ultimate goal of the so-called "FAIR tax" --a national sales tax at a tax-inclusive rate of 23%--both of which will result in much lower taes for the wealthy because of zero taxation of capital income.  Of course, along the way to his purported "FairTax", Cain will put us through his wacky 9-9-9 plan that includes a VAT (but one that has solely a wage base), an individual Flat Tax (but one whose provisions to benefit the poor are uncertain--some kind of poverty exemption and impoverished district exemption, without much information about how it works or how much it helps), and a FairTax (without any relief from the lumpiness of the tax that causes it to be particularly unfair to the poorest of the poor).  See Derek Thompson, Perry Tax, Flat Tax, Fair Tax, VAT (Tax): What's the Difference?, The Atlantic (Oct. 25, 2011).

Perry's Flat Tax and other "bold reform" ideas in context of the richer 1%  - Linda Beale - The hard right candidates of the GOP are competing to set forth plans that demonstrate their utter and complete loyalty to the right's  "make the rich richer and make businesses less accountable" economic program.  This program involves the tired and failed policies of Reaganomics, just magnified:

  • more tax cuts for the wealthy (zero direct taxation of their primary source of income--making money off money, and --to the extent that the incidence of corporate taxes says that corporate taxation should be attributed to shareholders--reducing those taxes as well);
  • elimination of earned benefits for the rest of us (assuring huge revenue shortfalls to the federal government and no dedicated funding of programs, along with dedicated axing of benefits through the 'deficit/debt' scare tactic);
  • deregulation of everything to do with business or capital (gutting EPA, Dodd-Frank, Sarbanes-Oxley, and every other regulatory agency no matter the impact on the economy or on ordinary Americans, thus encouraging a return to  speculative frenzy that allows socialization of losses/privatization of gains);
  • privatization wherever possible (Perry's plan for privatization of whatever Social Security remains after the afore-mentioned gutting; privatization of schools, firefighters, bridges, highways, etc.); and
  • continued militarization.

The Problem with Perry’s Optional Tax - One of the biggest problems with Texas Governor Rick Perry’s optional flat tax may be the choice it gives taxpayers. Perry says you can either pay his new tax or pay under today’s system, whichever results in a lower bill. That sounds great, but it is a policy disaster. This is the tax code we’re talking about, not some TV game show. Perry says he wants a system that is simple. But his option could well make tax filing far more complicated, especially for middle-income households. He says he wants certainty. But the optional tax will create more confusion. He says he wants people to be able to file on a postcard. But his option may require taxpayers to prepare their returns three times. The option does solve one problem—the regressive nature of any consumption tax. Herman Cain has learned this the hard way as he’s struggled with his 9-9-9 tax. Perry’s semi-consumption tax has a similar problem. And he’s chosen to cure it by telling lower income people that if his plan doesn’t work for them–which it won’t–they can continue to pay under the current system. This will help blow an even bigger hole in the budget. For Perry, a small government guy, that may be a good thing since it would drive even deeper spending cuts. And, if he can avoid describing what cuts he’d make, it might even be good politics..

Charlatans and Cranks - Suzy Khimm poses a question to the Perry campaign: 1) How will the new tax breaks for the wealthy be paid for? Perry campaign: The purpose of this bold tax proposal is to give the economy the jumpstart it needs to get people back to work. ... Gov. Perry is confident that the economic growth that results from this plan will generate the necessary revenue to balance the budget by 2020. So the tax cuts will pay for themselves? Greg Mankiw: I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't. There's no mystery here. The tax cuts for the wealthy will be paid for by cutting benefits for the working class, the poor, and others who are already having a tough time making ends meet.

Pushing Tax Relief For Wealthy Heirs - Linda Beale - The secretive American Family Business Foundation is busy pushing for tax relief for those waiting heirs.  It wants the deficit reduction commission to include repeal of the estate tax as a job creating measure, according to BNA, 202 DTR G-5 (Oct. 19. 2011).  The gist of the message is this:  If only you'll do "dynamic scoring", you'd conclude that eliminating the estate tax (saving wealthy families billions in taxes) will create jobs, because those wealthy people will now invest their extra billions rather than spending it wastefully.  Why, you'd achieve 30% of the $1.2 trillion in deficit reductions that you need just be eliminating that stream of revenue to the federal government. Dynamic scoring is nothing but magical, since you can tweak the numbers until they yield the kinds of figures you want.  According to the AFBF, dynamic scoring can turn a losing proposition (repeal costs the government a 6.54% increase in budget deficits) into a winning proposition (repeal raises revenues that reduce the deficit by 5.17%)!  Trying to sell estate tax repeal and the loss of billions of tax revenues as a revenue raiser, on the grounds that cut taxes will be invested in ways that create new jobs, has got to be a new low in the pro-business, anti-government, anti-safety net, pro-tax-cuts-for-the-wealthy arguments that the radicalized right feels free to make now. 

Seeing the Forest: Tax Holiday Generates Holiday Gifts For Big Multinationals: Have you heard about the "tax holiday" idea? The idea is to let corporations bring overseas profits back to the United States at a very low tax rate. These overseas profits were made in various ways, including schemes to move factories and jobs out of the country in order to avoid paying taxes here. With a "tax holiday" they would ... well ... get to bring that money back and pay even less in taxes, rewarding them for the offshoring and tax dodging. We did this in 2004 and it cost the country a lot of jobs but made the rich even richer. So of course they want to do it again. Of course, we are in a jobs emergency so they claim that giving even more money to those top 1% "job creators" is a good thing because it will "create jobs." If we were in a green cheese emergency they, of course, would call them selves the "green cheese creators" and say that giving them this huge holiday gift would "create green cheese." This is a test of our Congress. Will they continue to do the bidding of the top 1% and reward offshoring and tax dodging, even as more and more people are in the streets demanding they instead start doing the bidding of the 99%.

The Epileptic Economy: Why the Financial System Suffers from a Mental Illness - In March 2008, two researchers from the University of California’s Department of Anatomy and Neurobiology, Robert Morgan and Ivan Soltesz, discovered that when a small number of neurons in the hippocampus become highly connected, they develop into neural ‘hubs’, which begin to circulate and amplify signals to such a degree that they overwhelm the brain’s networks, leading to epileptic seizures. This transforms a healthy brain into an epileptic one, which is more prone to fits. In effect, the hubs become the conduits for seizures in the network. ‘The structure of the epileptic brain differs substantially from that of a healthy one, and our discovery of this hub network offers insight into how epilepsy may develop,’ Morgan explained.The similarities between the epileptic brain and the modern global financial system are disturbing and suggest that the emergence of a few highly connected and powerful banking hubs has made the system more prone to periodic fits and seizures.

Who Needs Financial Stability? - NYTimes editorial - Bankers in this country are not letting up on their campaign to undercut the Dodd-Frank financial reform law, which is supposed to curb risky behavior and lessen the chances of another meltdown. They are also eagerly joining their overseas brethren in a similarly fierce campaign against new international rules that would require banks to gradually increase the amount of capital they must keep in reserve to cushion against future crises.  The rules are being developed by the Basel Committee on Banking Supervision — a group of regulators from 27 countries, including the United States. The Institute for International Finance, a banking lobby group, issued a report claiming that the capital requirements would cut global economic output by 3.2 percent by 2015 and cost 7.5 million jobs. “There is an acute danger that the pursuit of financial stability imposes too great a cost on economic growth and job creation at a fragile time for the world economy,” the report said, with no apparent irony.  The estimates are as dubious as they are self-serving. Basel’s Bank for International Settlements, the organization of central banks that hosts the supervisory committee, issued its own report, which said the rules would shave just 0.04 percentage points a year from economic growth during the eight-year phase-in period.

Volcker Rule, Once Simple, Now Boggles - If banks think it's too complex, “they have no one to blame but themselves,” Paul Volcker said.  When Paul Volcker called for new rules in 2009 to curb risk-taking by banks, and thus avoid making taxpayers liable in the future for the kind of reckless speculation that caused the financial crisis and resulting bailout, he outlined his proposal in a three-page letter to the president.  Last year, when the Dodd-Frank Wall Street Reform and Consumer Protection Act went to Congress, the Volcker Rule1 that it contained took up 10 pages.  Last week, when the proposed regulations for the Volcker Rule finally emerged for public comment, the text had swelled to 298 pages and was accompanied by more than 1,300 questions about 400 topics.  Wall Street firms have spent countless millions of dollars trying to water down the original Volcker proposal and have succeeded in inserting numerous exemptions. Now they’re claiming it’s too complex to understand and too costly to adopt.

Why Paul Volcker Soured on His Own Rule - The Volcker Rule, which was passed as part of the Dodd-Frank financial reform bill and is supposed to ban risky trading by large banks, doesn't have a lot of fan. Bankers have fought it. Republicans, like much of the Dodd-Frank bill, want to repeal it. And even some Democrats don't think it will be all that effective. But among the Volcker Rule haters there is one name that stands out: Paul Volcker, who is the inspiration for the rule. Last week, the former head of the Federal Reserve has this to say in an article in the New York Times about the eponymously named rule: “I don't like it, but there it is,” Mr. Volcker told me in his first public comments on the sprawling proposal. “I'd write a much simpler bill. I'd love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I'd have strong regulators. If the banks didn't comply with the spirit of the bill, they'd go after them.” From the start, Volcker rule was probably trying to do more than it possibly could. As a result, much like Sarbanes-Oxley we will probably be left with a rule that does too little and costs too much.

In Case You Missed It: Paul Volcker Talks Dodd-Frank, Volcker Rule on Charlie Rose - Treasury blog - Monday night, former Fed Chairman Paul Volcker sat down with Charlie Rose to discuss ongoing Administration efforts to prevent a future financial crisis and spark economic growth.  He offered his views on many topics, from the need to keep moving forward to implement Dodd-Frank reforms, to the first proposals of his namesake rule – the Volcker Rule.  The Volcker Rule is a critical component of Dodd-Frank that prohibits banking entities that benefit from government protections—such as FDIC insurance on customer deposits or access to the Federal Reserve discount window—from engaging in proprietary trading and from certain relationships with hedge funds and private equity funds.  President Obama fought hard to make sure this important provision was a part of Wall Street reform legislation, and the banking regulators are hard at work to effectively implement the law. Below are key excerpts from the interview and a link to watch the full video

Robert Reich (Wall Street is Still Out of Control, and Why Obama Should Call for Glass-Steagall and a Breakup of Big Banks): Next week President Obama travels to Wall Street where he’ll demand – in light of the Street’s continuing antics since the bailout, as well as its role in watering-down the Volcker rule – that the Glass-Steagall Act be resurrected and big banks be broken up. I’m kidding. But it would be a smart move — politically and economically. Politically smart because Mitt Romney is almost sure to be the Republican nominee, and Romney is the poster child for the pump-and-dump mentality that’s infected the financial industry and continues to jeopardize the American economy. Romney was CEO of Bain & Company – a private-equity fund that bought up companies, fired employees to save money and boost performance, and then resold the firms at a nice markups. Romney also epitomizes the pump-and-dump culture of America’s super rich. To take one example, he recently purchased a $3 million mansion in La Jolla, California (in addition to his other homes) that he’s razing in order build a brand new one. What better way for Obama to distinguish himself from Romney than to condemn Wall Street’s antics since the bailout, and call for real reform?

The Dodd-Frank Act, systemic risk and capital requirements - The economic theory of regulation is clear. Governments should regulate where there is a market failure. It is a positive outcome from the Dodd-Frank legislation that the Act’s primary focus is on the market failure – namely systemic risk – of the recent financial crisis. The negative externality associated with such risk implies that private markets cannot efficiently solve the problem, thus requiring government intervention. Macroprudential regulation aims to reduce systemic risk by correcting the negative externalities caused by breakdowns in financial intermediation. This column describes the shortcomings of the Dodd-Frank legislation as a piece of macroprudential regulation. It says the Act’s ex post charges for systemic risk don’t internalise the negative externality and its capital requirements may be arbitrary and easily gamed.

Five myths about Dodd-Frank - Christopher Dodd  - After a worldwide financial meltdown — and a $700 billion taxpayer-funded bailout — the need for common-sense financial reforms was clear. But now, even though the Wall Street Reform and Consumer Protection Act of 2010 (known as Dodd-Frank, after Rep. Barney Frank and me, its sponsors) is only beginning to take effect, critics are launching false attacks against the law in an effort to undermine it. Whether they are intentionally misleading or just misguided, they are wrong about the law’s purpose and impact

  • 1. Dodd-Frank is deepening the economic slowdown. Critics who charge that the law is aggravating the recession have forgotten where our economic woes came from in the first place.
  • 2. Dodd-Frank hurts small businesses and community banks.  The law is squarely aimed at better regulating the largest and most complex Wall Street firms — the ones that were most responsible for the crisis and still present the most risk.
  • 3. Dodd-Frank failed to truly reform Wall Street.  The protests about the law emanating from Wall Street tell you all you need to know about this claim.
  • 4. Congress didn’t fix Fannie Mae and Freddie Mac.  There are two issues to address here: the financial problems at Fannie and Freddie, and the future of mortgage finance in America. The problems in our housing market — as well as the debate over the future roles of Fannie and Freddie — remain complex and contentious, but they have hardly been ignored.
  • 5. It’s time to repeal Dodd-Frank.  Imagine legislation that authorizes regulators to prop up failing institutions; makes consumer protection an afterthought once again and allows predatory lenders and other unscrupulous brokers to take advantage of vulnerable Americans; lets Wall Street banks make risky bets backed by taxpayer money; allows hedge funds to trade derivatives in secret; and prevents regulators from getting the information they need to stop another meltdown before it happens.

Keep it to yourselves - On Thursday, the Wall Street Journal reported that the Fed snubbed JPMorgan’s informal inquiry to increase the size of its share buyback as well as MetLife’s formal request to raise its dividend (MetLife’s holding company operates under a banking charter). Two weeks ago, JPMorgan boasted of a “fortress balance sheet”, citing a tier one common equity ratio of 9.9% under Basel I. That number is irrelevant. Those guidelines were even more lax than those of Basel II, with which European banks were compliant right up until losses on mortgage securities wiped their balance sheets clean of equity capital. Under Basel III, which regulators developed in response to the crisis, JPMorgan estimates the same ratio was only 7.7%. For banks whose failure could destabilise the global financial system, the floor on tier one common equity is now set at 9.5%, to be achieved by 2019.  It’s not as if a 9.5% minimum ratio is excessively conservative; The Economist has previously argued that the capital surcharge on the largest banks is inadequate. According to Andrew Haldane, who is responsible for financial stability at the Bank of England, a large and complex institution needs to perform over 200m calculations to come up with its regulatory capital under Basel II. He figures that model risk alone means that the confidence interval around bankers’ estimates of their capital ratios is two to three percentage points wide.

Satyajit Das: Will a Central Counter Party Tame Derivatives Market Risks? - This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party). The first part looks at the idea behind central clearing of OTC Derivatives. The key element of derivative market reform is a central clearinghouse, the central counter party (“CCP”). Under the proposal, standardised derivative transactions must be cleared through the CCP that will guarantee performance.  The CCP is designed to reduce and help manage credit risk in derivative transactions – the risk that each participant takes on the other side to perform their obligations (known as “counterparty risk”). The CCP also simplifies and reduces the complex chains of risk that link market participants in derivative markets. The concept of clearing is not new or novel. It has been an integral part of futures and exchange traded derivative markets. Clearing for over-the-counter (“OTC”) derivatives has been discussed at various times since the mid-1980s.  In traditional exchange traded derivative markets, the contract is standardised, listed and only tradeable on the exchange through member firms. Trading is subject to the rules of the exchange as well as general law. The framework facilitates trading, provides liquidity and transparent price information. Security of contractual performance is ensured by interposing the Clearing House (the equivalent of the CCP) between traders.

Satyajit Das: Central Counter Party Politics -This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party).  This second part looks at the design of the CCP. The key element of derivative market reform is a central clearinghouse, the central counter party (“CCP”). Under the proposal, standardised derivative transactions must be cleared through the CCP that will guarantee performance.  The design of the CCP provides an insight into the complex interests of different groups affected and the lobbying process shaping the regulations. To SEF or Not To SEF… The CCP proposals do not encompass full standardisation or listing of derivative contracts, due to significant resistance from the industry.  Proponents argue that the OTC format is essential to enable users to customise solutions to match underlying financial risks. They also argue that the flexibility of the OTC market is essential to financial innovation. On 10 July 2009, Timothy Geithner, the U.S. Treasury Secretary, testified to the U.S. Congress that: “To force clearing of all derivatives would ban customised products and we don’t believe that’s necessary…. [They] provide an important economic function in helping companies and businesses across the country better hedge against their risk. I think our responsibility is to make sure those benefits come with protections.”

Clearinghouse Over-Confidence - – To reduce the chance that a financial meltdown like that of 2007-2008 will recur, regulators are now seeking to buttress institutions for the longer-run – at least when they can turn their attention from immediate crises like those of Greece’s debt, America’s ceiling on governmental borrowing, and the potential eurozone contagion from sovereign debt to bank debt. Central to their effort has been to bolster clearinghouses for derivatives – instruments that exacerbated the implosion at AIG and others in the last financial crisis. But a clearinghouse is no panacea, and its limits, although easy to miss, are far-reaching. When a company seeks to protect itself from currency fluctuation, it can reduce its exposure to the target currency with a derivative (for example, it promises to pay its trading partner if the euro rises, but gets paid if it falls). Although the company using the derivative reduces its exposure to the risk of a failing euro, the derivative comes packaged with a new risk – counterparty risk. The company risks that if its trading partner fails – as AIG, Bear Stearns, and Lehman did – it won’t be paid if the euro falls. To reduce the risk of runs in derivatives markets, regulators around the world are poised to require that derivatives trades be carried out through clearinghouses or exchanges. The clearinghouses will have many advantages, but not as many as regulators might think.

Wither CDS? - Something I have been wondering about in the context of the supposed "voluntary" writedowns being forced upon holders of Greek debt - what exactly is the point of the credit default swap market for sovereign debt if politicians will act to ensure that any default never triggers a credit event? The FT provides an answer: Now, politicians are seeking to take their revenge: not just with the recent introduction of bans on some trading of credit default swaps but also in their attempts to ensure that any haircut on Greek government bonds does not trigger a credit event. Combined, these two events could spell the end of the credit default swaps market, say bankers. The end of the credit default swap market might not be without consequences: But these aims could backfire. Some bankers believe, rather than lowering borrowing costs, these moves will have the reverse effect and also restrict lending to their banks and companies. In the wake of the CDS ban, some banks are already pushing alternative strategies that risk driving up government bond yields even further. Last week Citigroup, the leading US bank, recommended selling the bonds of France, Italy and Spain because of the trading ban while other banks have warned they could unload peripheral bonds if CDS payouts are ruled out on Greece.

Citi Asks The Trillion-Dollar Question: CAN EUROPE RUIN THE WORLD?: Good note out from Citi's Steven Englander, who asks: Can Europe Ruin The World? Fortunately, he doesn't offer a definitive answer, but he makes one point, which is that even a fairly hard landing growth-wise probably wouldn't cream major trading partners. US exports to Europe are pretty tiny as a percentage of GDP: For China it would be a bit more problematic. Ultimately, we'll say this: If Europe does ruin the world, it won't be through the trade channel. It will be through the financial channel, and the knock-on effects of exposed US institutions.

Bill Black: The Anti-Regulators Are the Job Killers - The new mantra of the Republican Party is the old mantra – regulation is a “job killer.” It is certainly possible to have regulations kill jobs, and when I was a financial regulator I was a leader in cutting away many dumb requirements. We have just experienced the epic ability of the anti-regulators to kill well over ten million jobs. Why then is there not a single word from the new House leadership about investigations to determine how the anti-regulators did their damage? Why is there no plan to investigate the fields in which inadequate regulation most endangers jobs? While we’re at it, why not investigate the areas in which inadequate regulation allows firms to maim and kill. This column addresses only financial regulation. Deregulation, desupervision, and de facto decriminalization (the three “des”) created the criminogenic environment that drove the modern U.S. financial crises. The three “des” were essential to create the epidemics of accounting control fraud that hyper-inflated the bubble that triggered the Great Recession. “Job killing” is a combination of two factors – increased job losses and decreased job creation. I’ll focus solely on private sector jobs – but the recession has also been devastating in terms of the loss of state and local governmental jobs.

Should Some Bankers Be Prosecuted? -In our article in the last issue,1 we showed that, contrary to the claims of some analysts, the federally regulated mortgage agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis. Rather, private financial firms on Wall Street and around the country unambiguously and overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold, particularly the subprime mortgages sold to low-income borrowers with poor credit, was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities to investors throughout the world.Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank. The federal government has been far more active in rescuing bankers than prosecuting them.

Former Goldman Sachs Director Gupta Charged by U.S. With Securities Fraud - Rajat Gupta, the former Goldman Sachs Group Inc. director accused of feeding tips to Galleon Group LLC co-founder Raj Rajaratnam, was charged in an indictment that made him the highest-ranking executive arrested in a nationwide crackdown on insider trading. Gupta, who also sat on the board of Procter & Gamble Co. and led McKinsey & Co., was charged with five counts of securities fraud and one count of conspiracy to commit securities fraud in an indictment unsealed yesterday in Manhattan federal court. The indictment alleges that Gupta, 62, of Westport, Connecticut, was a close friend and business associate of Rajaratnam’s who made multimillion dollar investments with him and also passed him inside information after attending board meetings from 2008 through January 2009. The tips generated “illicit profits and loss avoidance” of more than $23 million, the U.S. Securities and Exchange Commission alleged in a lawsuit filed yesterday. “Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel,” said Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case.

Why is the SEC Willing to Get Aggressive and Creative With Big Names Only on Insider Trading Cases? -- Yves Smith - The Wall Street Journal reports that the former head of McKinsey, Rajat Gupta, is facing criminal charges in the Galleon insider trading case. It’s such a rare event for a business figure of the stature of Gutpa to be charged (he was on the boards of Goldman and the Gates Foundation) that it is now the lead story on the New York Times front page. But that is what is wrong with this picture. Given the level of criminality in the top echelons in the US, we should see a lot more in the way of prosecutions. And the Wall Street Journal contends that the case against Gupta would break new ground, since he did not profit in any direct manner from his tips: The expected charges against Mr. Gupta are likely to reveal that the government believes that insider trading doesn’t always involve swapping information for money.  Note the New York Times differs a tad: While there has been no indication yet that Mr. Gupta profited directly from the information he passed to Mr. Rajaratnam, securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them. Regardless of whether the legal argument is a bit aggressive or not, notice that the SEC is moving boldly on these cases when it has sorely neglected other beats. Many people, including your humble blogger, have criticized the SEC for doing close to nothing as far as attacking abuses in mortgage securitizations and CDOs. We’ve also argued that they dropped a promising avenue for getting criminal (stress criminal) prosecutions of Wall Street executives by an apparent misreading of a ruling in their case against Angelo Mozilo.

Why the SEC Won’t Hunt Big Dogs - Back when the Financial Crisis Inquiry Commission1 was doing its work, I would check in periodically with someone who worked there to find out how it was going. "Good news!" my source would joke. "We got the guy who caused it."  That is the way I felt last week when the Securities and Exchange Commission announced that it had, well, agreed to a measly $285 million settlement with Citigroup2 over the bank having misled its own customers in selling an investment it created out of mortgage securities as the housing market was beginning its collapse.  In addition, the S.E.C. accused one person -- a low-level banker. Hooray, we finally got the guy who caused the financial crisis! The Occupy Wall Street protestors can now go home. After years of lengthy investigations into collateralized debt obligations, the mortgage securities at the heart of the financial crisis, the S.E.C. has brought civil actions against only two small-time bankers. But compared with the Justice Department, the S.E.C. is the second coming of Eliot Ness. No major investment banker has been brought up on criminal charges stemming from the financial crisis.

Goldman sued for $1.07 billion over Timberwolf CDO - Goldman Sachs Group Inc (NYSE:GS - News) has been hit with a new $1.07 billion lawsuit for having allegedly sold risky debt that it expected would tumble in value to an Australian hedge fund, causing that fund to become insolvent. The lawsuit by the Basis Yield Alpha Fund alleges fraud, breach of contract and negligence, and seeks to recoup $67 million of losses plus $1 billion of punitive damages. It was filed on Thursday with a New York state court in Manhattan. Basis Yield was managed by Sydney-based Basis Capital Funds Management Ltd. Basis Yield sued three months after a U.S. judge dismissed a similar case, saying the fund could not sue in federal court under U.S. securities laws because its investment in the Timberwolf 2007-1 collateralized debt obligation did not qualify as a "domestic" transaction.

Big Banks Keep Paying a Pittance to Settle Fraud Charges - This week, Cit­i­group an­nounced that it had set­tled with the Se­cu­ri­ties and Ex­change Com­mis­sion over charges that the mega-bank mis­led in­vestors in a de­riv­a­tives deal and then bet against them. Under the terms of the set­tle­ment, Citi agreed to pay $285 mil­lion. Citi is not the first bank to set­tle these sorts of charges with the SEC. Pre­vi­ously, Gold­man Sachs had agreed to a $550 mil­lion set­tle­ment, while JP Mor­gan Chase paid $154 mil­lion. (Gold­man’s set­tle­ment was over the now in­fa­mous “shitty deal.”) Hav­ing to fork over hun­dreds of mil­lions of dol­lars may seem like a lot, but it’s chump change to these banks. Cit­i­group, for in­stance, just an­nounced prof­its of $3.8 bil­lion for the last quar­ter alone, while JP Mor­gan made $4.2 bil­lion. Gold­man Sachs this week an­nounced just the sec­ond los­ing quar­ter since the bank went pub­lic in 1999, but it paid its SEC set­tle­ment in 2010, a year in which the bank made $39.2 bil­lion over­all.

Why Economic Models Are Always Wrong - When it comes to assigning blame for the current economic doldrums, the quants who build the complicated mathematic financial risk models, and the traders who rely on them, deserve their share of the blame. [See “A Formula For Economic Calamity” in the November 2011 issue]. But what if there were a way to come up with simpler models that perfectly reflected reality? And what if we had perfect financial data to plug into them? Incredibly, even under those utterly unrealizable conditions, we'd still get bad predictions from models. The reason is that current methods used to “calibrate” models often render them inaccurate. That's what Jonathan Carter​ stumbled on in his study of geophysical models. Carter wanted to observe what happens to models when they're slightly flawed--that is, when they don't get the physics just right. But doing so required having a perfect model to establish a baseline. So Carter set up a model that described the conditions of a hypothetical oil field, and simply declared the model to perfectly represent what would happen in that field--since the field was hypothetical, he could take the physics to be whatever the model said it was.

More Than 80 Percent of Hedge Funds Underwater - The selloff in most of the global markets in the third quarter heavily impacted a large number of hedge funds. In fact, not only did it put many funds into the red for the year, it pushed a huge number of hedge funds below their high water mark. According to HFR, at the end of the third quarter just 19.3 percent of all hedge funds were above that critical level that determines whether their investors’ accounts are in the black. This is way down from 44.2 percent at the end of the second quarter and less than half the level of each of the three prior quarters.  In fact, the 19.3 percent is the lowest level since the end of the first quarter of 2009, when it bottomed at 18.7 percent, by far the all-time low since HFR began keeping score in 2003.  But even the 19.3 percent figure could be overstating how the average investor in those funds is faring in general. While those invested in these underwater funds for many years before the current slide could still be in the black, many hedge funds with good long-term records traditionally gather the biggest chunk of their assets after their big run-up.

Occupy Wall Street The dukes and earls in America’s Great Tower of Bulls**t are starting to blink a little. -  There may be a good few Maoists, Trotskyists, Anarcho-Syndicalists and even the odd deluded benefit scrounger among them, but it is simply wrong to characterize the Occupy Wall Street protestors who are camping out in 1,500 cities worldwide as wanting to overthrow capitalism, in the same way the sans-culottes toppled France's Ancien Régime in 1789 or that the Tahrir Square protesters toppled Egypt's president Hosni Mubarak. The movement is more nuanced than that. As I tried to explain in yesterday's blog, 'Democracy for sale', what the protesters really want is political and financial reform. They want to replace the corroded crony capitalism that has predominated in the West since the 1980s -- as well as the corrupt political and financial system, rigged in favour of the rich and powerful, that underpins it -- with a saner version of capitalism and a more inclusive democracy. The investment banker who blogs under the pseudonym The Epicurean Dealmaker summed it up well in a tweet on October 17. "@EpicureanDeal I suspect most Americans sympathetic to #OWS want capitalism *back*, not Marxism. Right now we have socialism for corporations."

Forbes 400 has collected plenty of subsidies - - Dirt Diggers Digest has a good post up about how various members of the Forbes 400 have received plenty of government subsidies. Echoing Elizabeth Warren, Phil Mattera writes: Accumulating a great fortune requires, among other things, a legal system oriented to property rights, a tax system biased in favor of investment income, and government spending on infrastructure ranging from interstate highways to the internet. He gives numerous examples of how the 1% have received subsidies on top of these general government provisions. Bill Gates' Microsoft received $32 million in Texas for a data center in Bexar County. Warren Buffett's General Re, an insurance company owned by Berkshire Hathaway, got $28.5 million in various subsidies simply to relocate from one place in Stamford, CT, to another, creating no new jobs. Michael Dell's self-named firm got $242 million (nominal value) from North Carolina for a computer manufacturing facility which closed less than five years later.

Occupy Wall Street is Important - If you have spent the last few years wondering if it is possible for criminal bankers to have pulled off the greatest train-heist in history without repercussions, you are interested in what happens at Occupy Wall Street. For the past 3 years, it has appeared as though the Jamie Dimons of the world, with the aid of the Robert Rubins of the world, were going to exit the crisis with their personal hundreds of millions of dollars intact, regardless of their having made that money by taking on risk on a scale that would threaten the world's economy. That's recklessness. And when you act recklessly and it damages other people, you are liable for damages. And, often, you are also liable for criminal sanction. Of course, recklessness is insufficient to describe what the banks did leading up to the bailouts. Along with their recklessness, they committed fraud. Fraud, deceit perpetrated for profit, is always a criminal offense.

AUDIO: Elizabeth Warren Clarifies Her Occupy Wall Street Comments - Elizabeth Warren isn't backing down from her support for the Occupy Wall Street movement, even as conservatives look to turn the nationwide protests movement into an electoral wedge issue. Speaking to reporters after an event in Framingham, Massachusetts on Tuesday, the Senate candidate downplayed her comments to the Daily Beast, suggesting that she had created the movement—but pointedly embraced their anti-Wall Street message and cast them as kindred spirits against a "rigged" economic system. The controversy began when the Daily Beast's Samuel Jacobs published a profile of the Consumer Financial Protection Bureau architect, in which  Warren was quoted saying of Occupy Wall Street: "I created much of the intellectual foundation for what they do." Conservatives pounced—the National Republican Senatorial Committee released a statement noting that "the Boston Police Department was recently forced to arrest at least 141 of her Occupy acolytes in Boston the other day after they threatened to tie up traffic downtown and refused to abide by their protest permit limits." The Boston Globe moved Warren's comments closer to Al Gore-and-the-Internet territory, headlining its piece, "Warren claims credit for Occupy Wall St. protests."

Financial Stability Board Calls for Effective Consumer Finance Protection - The Financial Stability Board, an international organization operating under the auspices of the G20 countries, this week issued its Report on Consumer Finance Protection.  FSB emphasizes the link between international financial stability and consumer protection, particularly in the mortgage markets. It calls for regulation to assure assessment of borrowers’ ability to pay and to police credit product features that increase risk. The report engages in some comparative analysis and identifies national regulatory architecture that has been particularly effective, such as that of Australia. The report is part of an initiative to stimulate more international discussion of effective means of consumer protection, particularly concerning credit. FSB increasingly sees consumer protection as part of its mission to assess and address vulnerabilities in the international financial system. The report is worthy and sensible. Of course, implementation, primarily by domestic regulation of financial institutions, is a huge challenge.

Say Anything - Krugman - Over the last couple of days, I’ve been getting mail accusing me of consorting with Nazis. My immediate reaction was, what the heck? Then it clicked: the right wing is mounting a full-court press to portray Occupy Wall Street as an anti-Semitic movement, based, as far as I can tell, on one guy with a sign. At the same time, the claque is claiming that OWS is responsible for a crime wave.  My first thought was that OWS must have the right really rattled. And there’s probably something to that. But actually, this is the way the right goes after everyone who stands in their way: accuse them of everything, no matter how implausible or contradictory the accusations are. Progressives are atheistic socialists who want to impose Sharia law. Class warfare is evil; also, John Kerry is too rich. And so on. The key to understanding this, I’d suggest, is that movement conservatism has become a closed, inward-looking universe in which you get points not by sounding reasonable to uncommitted outsiders — although there are a few designated pundits who play that role professionally — but by outdoing your fellow movement members in zeal.

OWS’s Beef: Wall Street Isn’t Winning – It’s Cheating - Matt Taibbi - I was at an event on the Upper East Side last Friday night when I got to talking with a salesman in the media business. The subject turned to Zucotti Park and Occupy Wall Street, and he was chuckling about something he'd heard on the news. "I hear [Occupy Wall Street] has a CFO," he said. "I think that's funny." "Okay, I'll bite," I said. "Why is that funny?" "Well, I heard they're trying to decide what bank to put their money in," he said, munching on hors d'oeuvres. "It's just kind of ironic." Oh, Christ, I thought. He’s saying the protesters are hypocrites because they’re using banks. I sighed. "Listen," I said, "where else are you going to put three hundred thousand dollars? A shopping bag?" "Well," he said, "it's just, they're protests are all about... You know..." "Dude," I said. "These people aren't protesting money. They're not protesting banking. They're protesting corruption on Wall Street." "Whatever," he said, shrugging. These nutty criticisms of the protests are spreading like cancer.

The Vatican meets the Wall Street occupiers - Is Pope Benedict XVI joining the protest movement? Well, yes and no. Yes, the Vatican’s Pontifical Council for Justice and Peace issued a strong and thoughtful critique of the global financial system1 this week that paralleled many of the criticisms of unchecked capitalism that are echoing through Lower Manhattan and cities around the world. The report spoke of “the primacy of being over having,” of “ethics over the economy,” and of “embracing the logic of the global common good.” In a knock against those who oppose government economic regulation, the council emphasized “the primacy of politics — which is responsible for the common good — over the economy and finance.” It commented favorably on a financial transactions tax and supported an international authority to oversee the global economy.

Crony Capitalism Comes Homes - Whenever I write about Occupy Wall Street, some readers ask me if the protesters really are half-naked Communists aiming to bring down the American economic system when they’re not doing drugs or having sex in public. The answer is no. That alarmist view of the movement is a credit to the (prurient) imagination of its critics, and voyeurs of Occupy Wall Street will be disappointed. More important, while alarmists seem to think that the movement is a “mob” trying to overthrow capitalism, one can make a case that, on the contrary, it highlights the need to restore basic capitalist principles like accountability.  I’m as passionate a believer in capitalism as anyone. My cousins lived in Poland, and their experience with Communism taught me that the way to raise living standards is capitalism.  But, in recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us. They’re not evil at all. But when the system allows you more than your fair share, it’s human to grab.

How the Rich Subverted the Legal System and Occupy Wall Street Swept the Land -As intense protests spawned by Occupy Wall Street continue to grow, it is worth asking: Why now? The answer is not obvious. After all, severe income and wealth inequality have long plagued the United States. In fact, it could reasonably be claimed that this form of inequality is part of the design of the American founding—indeed, an integral part of it. Income inequality has worsened over the past several years and is at its highest level since the Great Depression.  This is not, however, a new trend. Income inequality has been growing at rapid rates for three decades.  As journalist Tim Noah described3 the process: “During the late 1980s and the late 1990s, the United States experienced two unprecedentedly long periods of sustained economic growth—the ‘seven fat years’ and the ‘long boom.’ Yet from 1980 to 2005, more than 80% of total increase in Americans' income went to the top 1%. Economic growth was more sluggish in the aughts, but the decade saw productivity increase by about 20%. Yet virtually none of the increase translated into wage growth at middle and lower incomes, an outcome that left many economists scratching their heads.”

Debunking the “Paid Back the TARP” Myth: Banks Should be Paying Over $300 Billion a Year in Systemic Risk Insurance - Yves Smith  This Institute for New Economic Thinking interview with economist Ed Kane discusses how systemic risk should be measured. Kane argues that taxpayer are essentially disadvantaged bank shareholders, getting the downside and none of the bennies, like dividends or capital gains. He argues that banks should be paying taxpayers for the privilege of having them and their counterparties rescued, and that is over $300 billion a year.’ And that isn’t the only freebie banks are getting. For instance, the near zero interest rates are tantamount to a tax on savers (when per above, the banks should be making payments). Some have estimated the cost to savers is over $350 billion a year.

Why Have We Arrested 2,511 Protesters And Zero Bankers? - Since the start of the financial crisis, Americans have wondered why, if laws were broken, none of the occupants of Wall Street or other financial centers have been arrested. Now arrests are starting to happen with growing frequency. To date, an estimated 2,511 people have been arrested on Wall Street and elsewhere for activities related to the crisis. Unfortunately, it's the protesters who account for these arrests. The current tally: 2,511 people arrested for disturbing the peace and related activities; no arrests for any of the financiers who broke the law and plunged millions into untold misery.  "Equal justice under the law" is a cornerstone of the American Republic. In statues, Lady Justice is blindfolded to symbolize that justice is blind to the differences between the powerful and the weak, the rich and the poor. Today, I fear that Justice's blindfold is in tatters, and equal justice under the law has become a myth in the American economic system.

Occupied Media: Interview With Doug Henwood (10/15/11), #OWS -- Occupied Media's next installment in its #OWS interview and teach-in series is with journalist and radio host Doug Henwood. Mr. Henwood is the author of Wall Street (now available for free download), a work consistently mentioned on a short list of must-read books for those wishing to understand the financial crisis and, more recently, the issues central to the OWS movement. Mr. Henwood blogs at and hosts the critically-acclaimed radio show, Left Business Observer. His weekly newsletter is a must-read for anyone interested in OWS, as are his recent blog posts (see here, here, here, here, here, here, here, here, here and here).  For years Mr. Henwood was one of the few voices promoting the very issues OWS has now forced onto the national agenda. I've really appreciated how his ideas about the movement have evolved - one gets the sense that he is sincerely trying to understand OWS on its own terms rather than interpreting it through a fixed ideological lens. In my opinion, he is raising the important and difficult issues facing our movement (many of which were discussed at this recent debate hosted by Jacobin).

Wall Street Protesters Seeking Bank Curbs Focus on City Halls Across U.S. - Advocates for the poor are using the Occupy Wall Street protests in city halls to push municipalities to divest from banks blamed by demonstrators for the global financial crisis and persistent unemployment in its wake.  San Francisco’s Board of Supervisors weighed such a move yesterday during a hearing in which activists, including supporters of the local Occupy SF encampment, urged the adoption of policies that would prompt big banks into modifying mortgages for struggling homeowners.  Communities from California to New York are considering demands to halt doing business with some of the biggest U.S. banks, or at least to focus attention on their local investment activity. The Los Angeles City Council on Oct. 12 accelerated plans to issue report cards on lenders that may lead the nation’s second-most populous city to withdraw funds from those that score poorly on criteria such as home-loan modifications. New York City may make a similar change in bank-selection rules.  “There is a lot of suspicion or frustration with the current financial institutions not doing enough at the local level,” said San Francisco Supervisor John Avalos, who called yesterday’s hearing. “I see that dramatically in my district, where a lot of small businesses are suffering"

Want To Defeat The Banks? Stop Participating In The System! - Most social and political systems today are designed around collectivist methodologies. Their primary tool is centralization of power, and the removal of choice from the public consciousness. We are made to believe that the establishment is necessary for our survival, and that to abandon it would mean certain destruction. We are taught that the individual is subservient and inconsequential in the face of the state. This is simply not so. Like the traveler in “Before The Law”, we have been defeated by our own expectations of how the law (or justice) works. We sit and wait for permission, when we should be charging through the gates and taking what is rightfully ours. The only practical strategy for combating the tyranny of centralized systems has been and always will be decentralization. Individuals must stop relying on the rules of a rigged game to see them through to the truth. This means that while mass protests are certainly a powerful tactic for voicing concerns on an international stage, they accomplish little to nothing in the way of meaningful change in the long run unless they are backed by individual actions to break away from dependency upon a poisoned political and economic framework.

Densely-linked cluster of 147 companies control 40% of world's total wealth - The network of global corporate control (PDF), a study published in PLOS One, analyzes the ownership structures of the world's corporations and finds a tightly-knit cluster of 147 entities control 40 percent of the world's wealth. Not only is this creepy inasmuch as it puts a lot of power into a small number of hands, but it also suggests that the governance of much of the world's wealth is closely correlated, so one disaster could sweep like wildfire across them all:  The work revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.  When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

It’s True, Bankers Really Do Control The World: Study - Here’s a gift to Occupy Wall Street protesters around the world: you now have scholarly proof that banks control the world.  Researchers at the Swiss Federal Institute of Technology Zurich, also known as ETH, have published a paper1 that argues just 147 companies account for a large chunk of the total economicvalue2 of all the transnational companies around the world. No exact dollar figures, but it’s obviously a vast sum.  Among the top 50 corporations, 45 operate within the financial industry. Barclays PLC is the most powerful, according to the ETH study, followed by such well-known names as JPMorgan Chase & Co., UBS3 AG, and Merrill Lynch & Co., Inc.  The United States takes home first prize with 24 companies cracking the researchers’ top 50 list, followed by the U.K. with 8, France with 5, Japan with 4, and Germany, Switzerland and the Netherlands tying with 2 companies each. Canada has one company in the researchers’ top 50: Sun Life Financial, Inc. secures the 35th spot.  The research shows “a large portion of control flows to a small tightly-knit core of financial institutions,” authors Stefania Vitali, James Glattfelder and Stefano Battiston wrote in their study entitled: The network of global corporate control.

Big Banks Blink On Debit-Card Fees - A month after Bank of America got pummeled by consumers and politicians for introducing plans for new debit-card fees, most other big U.S. banks are steering clear of imposing similar charges. Following eight months of consumer testing, J.P. Morgan Chase & Co. has decided that it won't charge customers who use their debit cards to make purchases, according to a person familiar with the bank's plans. The New York bank's Chase retail unit is one of the largest U.S. consumer banks, with 26.5 million checking accounts and 5,300 branches.  J.P. Morgan joins U.S. Bancorp, Citigroup Inc., PNC Financial Services Group Inc., KeyCorp and other large banks that have said in recent days that they won't impose monthly fees on debit cards. None of those banks said they made their decisions because of the outcry over Bank of America's fees. "We looked at all options and quickly decided it didn't fit with our overall strategy,"

Bank of America Rethinking Debit Card Fee - After setting off a firestorm of criticism from consumers, Capitol Hill and the White House, Bank of America1 is rethinking elements of its plan to charge customers $5 a month to use their debit cards.  Although bank officials said their thinking was “evolving” and no firm conclusions had been reached, the bank is likely to broaden the number of customers exempt from the fee. Customers who hold Bank of America credit cards, directly deposit wages into the bank or hold a minimum balance will not be charged under a new plan. Previously, the bank said the minimum balance required to avoid the fee was $20,000, but lowering that minimum is also possible. The hesitation at Bank of America comes as other banks2 are also pulling back, at least for now. Wells Fargo said Friday that it was canceling a test that would have imposed a $3-a-month charge on debit card holders in Georgia, Nevada, New Mexico, Washington and Oregon. JPMorgan Chase, which was testing a $3-a-month charge, has decided it will not impose a stand-alone debit card use fee, a person briefed on the situation said.

Occupy Wall Street in second month: $10 billion in bonuses for Goldman Sachs - As the Occupy Wall Street movement that began in downtown Manhattan’s Zuccotti Park enters its second month, the giant Goldman Sachs investment bank announced October 19 that it had set aside $10.01 billion so far this year for year-end compensation and bonuses. At the same time, the bank reported a third quarter loss of $428 million, only the second time since Goldman went public in 1999 that it has reported a loss. Goldman Sachs’ plans for mammoth year-end payouts only underscore the enormous inequality between the 1 percent represented by the investment bank and the financial industry’s top “earners” and the vast majority of the population.

Goldman Bullies Teeny Credit Union that #OccupyWallStreet Uses - Yves Smith - I suppose there is no point in being part of the 1% unless you can throw your weight around. Greg Palast writes in the Guardian of how Goldman took a wee bit of revenge on Occupy Wall Street via the itty bitty credit union ($30 million in assets) that OWS chose for its bank account, Peoples Bank. Peoples has “a unique Federal charter”. It focuses on low income customers, meaning families with less than $38,000 in income (to get to how far that goes in the rest of the US ex maybe San Francisco, reduce that amount by at least 30%). Goldman had donated $5,000 as a sponsor of a 25th anniversary party for the bank. So far, so good, until someone at Goldman gets wind of the fact that the invitations include its name along with that of other donors, as well as the honoree: Occupy Wall Street. Now to Palast: When a Goldman exec saw its gilded name next to Occupy Wall Street, the financial giant expressed much displeasure. In fact, my sources say, Goldman threatened legal action unless the credit union gave up the $5,000 and reprinted the invite sans the Sachs moniker. Goldman Sachs did not respond to our requests for comment on the affair. So far, it’s a cute story: tiny bank uses Goldman’s money to fete some tent-dwellers who are denouncing Sachs as the Giant Vampire Squid. But there’s a lot more at stake in this battle than a $5,000 donation gone wrong. Underneath, it’s a battle royal for control of tens of billions of dollars in government mandated “community reinvestment” funds. Yves here. Yes, sports fans. When Goldman became a bank during the crisis, it became subject to CRA. Back to Palast:

Why Credit Unions? (#OWS) (part 1) - Moving your money from a megabank to a credit union or community development bank makes for a good sound bite, but is it really an action that can have an impact in the right direction?  I think so (although the matter is not free from doubt), and thought it would be worthwhile to lay out thoughts on the subject as a follow-up to the “What is a Credit Union?” post. I’ll focus this discussion on credit unions, rather than community development banks or smaller locally owned banks as that’s where my knowledge lies. A quick google search indicates the largest credit union in America is Navy FCU with $34Bn in assets. (Internationally, it may be the Dutch Rabobank, although I’ve never gotten a good handle on whether Rabo is still a cooperative or not.) Individual credit unions fail regularly, just like individual banks, but there isn’t one CU that’s in danger of crashing the entire financial system in the same manner as BAC, C, JPM or WF.

#OccupyWallStreet Alternative Banking Working Group Meeting in NYC Sunday @ 3 PM - Yves Smith - The New York City General Assembly website has a section for a recently-formed Alternative Banking group, which has started meeting on Sundays from 3:00 to 5:00 PM. You can read the notes from last week’s session here.  Despite the title, this is NOT about moving your money. An alternative economics committee had already started on that effort and the alternative banking committee agreed to let them run with that ball. Although this group is still in the process of deciding what it is about, it appears to be moving towards making fundamental, wide-ranging critiques and proposals. Anyone is welcome, and the group would particularly benefit from the input of people with capital markets, regulatory, and wholesale banking expertise. The group already has some members with relevant experience (SEC, major hedge fund, investment banking) but more depth would be of great benefit.  Please sign up at the NYCAG webpage to find the meeting location. There is also a dial in number if you are not in NYC and would still like to take part.

Why do we need a financial sector? - This column launches a new Vox Debate titled “Why do we need a financial sector and how much should we pay for it”. The column argues standard measures of the financial sector’s economic contribution overestimate its true value to a modern economy. As such, regulation that makes it more difficult for the sector to perform some activities is not necessarily a bad thing.

Debunking the “Paid Back the TARP” Myth: Banks Should be Paying Over $300 Billion a Year in Systemic Risk Insurance - Yves Smith  This Institute for New Economic Thinking interview with economist Ed Kane discusses how systemic risk should be measured. Kane argues that taxpayer are essentially disadvantaged bank shareholders, getting the downside and none of the bennies, like dividends or capital gains. He argues that banks should be paying taxpayers for the privilege of having them and their counterparties rescued, and that is over $300 billion a year.’ And that isn’t the only freebie banks are getting. For instance, the near zero interest rates are tantamount to a tax on savers (when per above, the banks should be making payments). Some have estimated the cost to savers is over $350 billion a year.

Were non-bank banks actually a good idea all along? - I’ve been wondering that for the last few days.  These entities were capped and banned in the late 1980s but once upon a time Sears Roebuck and American Express offered full banking services and their financial arms grew at a rapid clip.  They took deposits but did not make commercial loans, thereby skirting banking legislation at the time and, I believe, avoiding FDIC premiums. The big debate today is how to get more capitalization for the banks, and we have such absurdities as Basel III, not bad in spirit but somehow wishing that a bunch of essentially insolvent institutions magically had another $700 billion or so.  I say the way to recapitalize banks is to keep them well capitalized to begin with.  Indeed, we just bought a new microwave at Sears the other night.  These institutions have a lot of commercial capital on the line. At the time non-bank banks were banned because many people feared — and I can see why –that the non-bank banks would take big risks, backed ultimately by taxpayer money.   Prescient, no?  Well, sort of.  In reality, it turned out that the non-non-bank banks (i.e., the banks) did that anyway.  With all the financial instruments and risky loans around, it is so much an extra problem that Sears Roebuck might initiate an overly aggressive lawnmower marketing strategy? 

In Cautious Times, Banks Flooded With Cash - Bankers have an odd-sounding problem these days: they are awash in cash. Droves of consumers and businesses unnerved by the lurching markets have been taking their money out of risky investments and socking it away in bank accounts, where it does little to stimulate the economy. Though financial institutions are not yet turning away customers at the door, they are trying to discourage some depositors from parking that cash with them. With fewer attractive lending and investment options for that money, it is harder for the banks to turn it around for a healthy profit. In August, Bank of New York Mellon warned that it would impose a 0.13 percentage point fee on the deposits of certain clients who were moving huge piles of cash in and out of their accounts. Others are finding more subtle ways to stem the flow. Besides paying next to nothing on consumer checking accounts and certificates of deposit, some giants — like JPMorgan Chase, U.S. Bancorp and Wells Fargo — are passing along part of the cost of federal deposit insurance to some of their small-business customers. Even some community banks, vaunted for their little-guy orientation, no longer seem to mind if you take your money somewhere else.

CMBS Underwriting Standards ‘Worrisome’ as Sales Increased, Moody’s Says - Lenders loosened terms on commercial mortgages originated to be packaged into bonds during the third quarter as sales of the securities surged, according to Moody’s Investors Service. “The signs of erosion in underwriting are worrisome,” Moody’s analysts led by Tad Philipp said in an Oct. 21 report. The share of hotels in commercial-mortgage backed securities offerings, one of the riskiest property types, more than doubled to 15.4 percent, compared with 7.4 percent in the prior quarter, according to Moody’s. Additionally, the prevalence of so-called interest-only debt rose to 33.6 percent from 21.1 percent in the second quarter. Interest-only mortgages delay principal payments for a portion of the loan term or until the debt comes due, meaning that borrowers build less equity in the property. Shopping centers and malls, which account for roughly 36.3 percent of deals sold from July through September, had the highest percentage of interest-only loans, with 31.9 percent of the mortgages paying no principal until the maturity date, according to the New York-based rating company. The relationship between property values and the size of the loans against them was comparable to transactions completed in 2004, one of the last years before standards plunged during a property boom.

Mr. Hoenig Goes to Washington - Simon Johnson - Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City, has long been a strong voice for financial sector reform along sensible lines. Within the official sector, he has spoken loudest and clearest on the most important defining issue: “Too big to fail” is simply too big. And last week he took a major step toward a more prominent role, when he was nominated by President Obama to be vice chairman of the Federal Deposit Insurance Corporation. The F.D.I.C. is not as powerful as the Fed, but in our current financial arrangements, it does play a critical role. The Dodd-Frank legislation has its weaknesses, but it gives the F.D.I.C. two important powers. First, with regard to big banks, the F.D.I.C. can help force the creation of credible “living wills” — explaining how the bank can be wound down if necessary. If such wills are not plausible then, in principle, the F.D.I.C. could force simplification or divestiture of some activities. Second, the F.D.I.C. is now in charge of “resolution” for mega-banks, i.e., actually closing them down and apportioning losses in the event of failure.

Unofficial Problem Bank list declines to 976 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 21, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  With four removals and one addition, the Unofficial Problem Bank List finished the week at 976 institutions with assets of $401.9 billion. For comparative purposes, the list had 871 institutions with assets of $402.2 billion last year.

Is Countrywide Still Bankruptcy Remote? Interview with Neil McCarthy - The IRA: Neil, back in August the New York Attorney General, Eric Schneiderman, intervened in New York State court to object to the proposed $8.5 billion settlement of put-back claims over hundreds of residential mortgage backed securities trusts (RMBS) created by the Countrywide unit of Bank of America. The Trustee -- Bank of New York Mellon- had reached a settlement with a self-appointed "Group of 22" large investors that was intended to be binding on all investors. The NY AG objected on grounds that it was unfair to trust investors. He also made serious charges over BK's actions as trustee.  McCarthy: Correct. $8.5 billion sounds like a lot but it's not a lot on potential claims of over $150 billion. It's not just that it's only a nickel on a dollar. What's not gotten sufficient attention is that the settlement agreement proposes to use an elaborate procedure for how to allocate the $8.5 billion among the 530 different RMBS trusts, but then proposes to pay out the settlement to the investors in each trust using the particular PSA waterfall for each trust. If you do it that way, all the money will go to just the very top tranche for each trust. Most investors, even those who bought AAA-rated tranches just below the very top, won't get a dime the way that this has been proposed.

Rakoff queries Citi’s settlement with SEC -- Citigroup’s $285m settlement to resolve Securities and Exchange Commission allegations that it misled investors ran into difficulties on Thursday as the US judge assigned to the case expressed scepticism over the terms of the pact. Judge Jed Rakoff issued an order calling SEC and Citigroup lawyers to court on November 9 to defend terms of the deal. Under the pact, Citigroup agreed to pay the fine and return money to investors in the security without admitting or denying wrongdoing. The SEC accused Citigroup of misleading investors in a $1bn mortgage security by failing to disclose that the bank helped select $500m of securities included in the instrument and bet that it would fail. The SEC also filed allegations against a former Citigroup employee, Brian Stoker, involved in structuring the deal. A lawyer for Mr Stoker said his client was not responsible for any wrongdoing and pledged to vigorously defend the lawsuit. The challenge to the pact is the latest such action by Mr Rakoff. He initially rejected the SEC’s settlement with Bank of America in 2009 as unfair, partly because it would have required shareholders and not any corporate executives to foot the settlement bill. Mr Rakoff eventually approved a $150m settlement after requiring the SEC to explain its charging decisions.  In the Citigroup case, Mr Rakoff told the lawyers to be prepared to discuss why the settlement should include the SEC’s longstanding practice of allowing companies to settle without admitting or denying wrongdoing. By doing so, companies protect themselves against potential private litigation.

How Fannie Mae and Freddie Mac Guarantees Work In Brief - When you get a mortgage, the rights to your loan payments are typically sold to a secondary source. There is a lot of debate over whether the originator of the loan should keep some of the risk, but currently they can make a loan, sell it, and basically be done with it unless they have lied about its contents and are forced to by it back down the road. So the mortgage is sold to the secondary market, likely Fannie Mae or Freddie Mac. In fact, the GSEs and FHA bought or guaranteed 95% of all new mortgages in fiscal year 2011! Mind blowing numbers compared to when 40% market share was seen as high in the early 2000s.  The GSEs then take your loan and put it in a package with other loans they buy and sell rights to the mortgage payments in that package (a mortgage-backed security). The investor is buying rights to part of the principal and/or interest payments, depending on the structure of the deal, on your and many other mortgages.  In addition, the investor pays a small percentage to Fannie or Freddie as a fee in exchange for a guarantee that they will get paid even if the borrowers stop paying their principal and interest. If you, the borrower, are unable to make a mortgage payment and default on your mortgage, Fannie Mae or Freddie Mac will send a payment to the investor anyway so they do not fully loose out on their purchase of a portion of the mortgage package (the MBS).

Investors Raising Cash to Buy Government Foreclosures - If only all the confidence swirling around the stock market today could find its way to potential home buyers across the nation; unfortunately it will take more than a little Greek bounce to right what's wrong in housing. Contracts to buy existing homes fell in September, according to a new report from the National Association of Realtors, and the culprit is confidence. More Americans are staying where they are more than ever before, and even Baby Boomers, once expected to fuel an active adult market, are stagnant.  What's weighing on confidence are still-falling home prices, and what's pushing those home prices down are foreclosures. That's why the Obama Administration is pushing a potential plant to auction off foreclosed properties in bulk to investors, specifically the quarter of a million properties currently on the books of Fannie Mae, Freddie Mac and the FHA. As demand for single family rental properties rises, so too do potential investor returns. "There is a hope that we'll be able to do a pilot in the near future, perhaps by the end of 2011 or early 2012. However, there hasn't been any decision on timing yet," according to an administration source.

MORTGAGE SETTLEMENT HOPES DIMMING? - From a person close to the foreclosure abuse settlement talks: “The chances for a bipartisan settlement of the mortgage crisis at the state Attorney General level probably diminished on Monday following a series of partisan comments by Administration officials and this DNC advertisement [slamming Mitt Romney’s comments suggesting the housing market should be allowed to hit bottom.] ...  The source told Morning Money: “Republican AGs would like to craft a bipartisan deal and have held their noses and stayed involved in the discussions so far even though the recommendations may include some ideas like principal reduction that they dislike. But they aren't going to sign on to a deal that sets them up to be used as advertising fodder against the eventual Republican presidential nominee.”

New York Attorney General Eric Schneiderman Discusses Mortgage Mess on Rachel Maddow - Yves Smith  - Since we’ve been big fans of New York Attorney General Eric Schneiderman’s investigation of mortgage abuses, we thought readers might like to see this interview on the Rachel Maddow.  There is a long preamble with Maddow discussing lame Democratic party ads and then discussing Schneiderman’s actions in the context of the party. That’s a bit odd, because even though Scnheiderman is a Dem, he’s been bucking the party because anyone who was serious about investigating and trying cases would be at odds with big funders like the banks. We’ve mentioned that Schneiderman is in office over the dead body of the state Democratic party. He had been the state senator for the Upper West side, but after pushing tough ethics legislation, he was redistricted into Spanish Harlem. He learned how to do the salsa and speak Spanish and was reelected. He is a thorn in the side of the corporatist governor Andrew Cuomo (Cuomo had backed Eric Dinallo, who lost in the primary). I hope you enjoy this chat.

State of Delaware v. MERSCORP Inc. | Biden: Private National Mortgage Registry Violates Delaware Law – Delaware Attorney General Beau Biden filed suit today against the shadow mortgage registry known as MERS that is at the center of the housing crisis. The complaint, filed in the Delaware Chancery Court, charges that MERSCORP and its subsidiary Mortgage Electronic Registration Systems, Inc. have repeatedly violated the state’s Deceptive Trade Practices Act. “Since at least the 1600s, real property rights have been a cornerstone of our society,” said Attorney General Biden. “MERS has raised serious questions about who owns what in America. A man or woman’s home is not just his or her largest investment, it’s their castle. Rules matter. A homeowner has the obligation to pay the mortgage on time, and lenders must follow the rules if they are seeking to take away someone’s house through foreclosure. The honor system won’t work.” MERS engaged and continues to engage in deceptive trade practices that sow confusion among homeowners, investors, and other stakeholders in the mortgage finance system, seriously damaging the integrity of the land records that are central to Delaware’s real property system, and leading to improper foreclosure practices. These deceptive trade practices fall into three broad categories:

Delaware Attorney General Sues MERS Over Deceptive Practices, Asks for Halt of Foreclosures Relying on MERS - - Yves Smith - The mortgage securitization industry has just had a new major front open on its battle with those who are less than happy with the way it has run roughshod over the law. While there are a significant number of court rulings questioning foreclosures in the name of MERS or other practices commonly associated with the use of MERS (for instance, in Oregon, its violation of recording requirements mandated at the state level), no major regulator or public official (beyond county registers of deeds) has gone after MERS in a serious way (New York’s AG has opened an investigation, but it has not led to any litigation). This has changed with the Delaware attorney general Beau Biden’s filing. The suit takes the interesting angle of pursuing MERS for engaging in deceptive consumer practices. Nevada’s attorney general has also used the deceptive practices argument in suing Countrywide for violation of HAMP procedures. The damages sought are substantial, $10,000 per violation. Since MERS is a tiny company, with under 50 employees and many of its operations outsourced (and no reason for it to maintain a substantial balance sheet), success in court would almost certainly mean bankruptcy for MERS. In theory, a new consortium or private investors could buy the database out of bankruptcy, but how would one structure its operations so as to not run afoul of the law? Yet with so many mortgages recorded in the MERS database (the registry has claimed over 60 million) the banks will need to find a way to keep it going and operate it in an above-board manner.

NY Fed President Dudley: More action needed to stabilize the housing sector - From NY Fed President William Dudley: The National and Regional Economic Outlook Stabilizing the housing sector is particularly important because housing equity is an important part of household wealth. This calls for a comprehensive approach to housing policy, starting with an urgent effort to remove the obstacles that make it difficult for all borrowers to refinance at today's low mortgage rates, but extending beyond this to tackle other problems weighing on housing. Taken together, such efforts could help shift people's expectations about future house prices. If prospective homeowners no longer fear that prices could decline further, they will be more willing to enter the market to take advantage of reduced prices and low financing costs, and existing homeowners will feel more confident about spending. A vicious cycle could be replaced by a virtuous circle, in which stabilization in house prices supports spending, growth and jobs. This suggests a "comprehensive" plan is in the works.  The new refinance plan will be announced today, see the WSJ: Home Lending Revamp Planned

Why the housing burden stalls America’s recovery - Larry Summers -The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending. Most policy failures in the US stem from a failure to appreciate this truism and therefore to take steps that would have been productive pre-crisis but are counterproductive now with the economy severely constrained by lack of confidence and demand.Thus even as the gap between the economy’s production and its capacity increases, fiscal policy turns contractionary, financial regulation focuses on discouraging risk-taking and monetary policy is constrained by concerns about excess liquidity. Most significantly US housing policies especially with regard to Fannie Mae and Freddie Mac, institutions whose purpose is to mitigate cyclicality, have become a case of disastrous procyclical policy.  Construction of new single family homes has plummeted from about 1.7m in the middle of the last decade to about 450,000 at present. With housing starts averaging well over a million during the 1990s, the shortfall in housing construction now dwarfs the excess during the bubble and is the largest single component of the shortfall in gross domestic product.

U.S. readies stronger lifeline for homeowners - Homeowners who owe more than their houses are worth will get new help to refinance in a government plan to be unveiled as early as Monday to support the battered housing sector ... the Federal Housing Finance Agency, intends to loosen the terms of the two-year-old Home Affordable Refinance Program, which helps borrowers who have been making mortgage payments on time but who have not been able to refinance as their home values have dropped. HARP is currently open to borrowers whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac as long as their loans do not exceed 125 percent of their homes' values. The sources said FHFA will lift that threshold ... Another change may include the possibility of easing the fees tied to mortgages refinanced under HARP, according to the sources.

Home Lending Revamp Planned - Federal regulators on Monday plan to unveil a major overhaul of an under-used mortgage-refinance program designed to help millions of Americans whose home values have tumbled. The plan is the latest White House effort to deal with one of the most critical impediments to economic recovery—a stagnant housing market caused in part by a surfeit of homeowners who are unable to refinance.The overhaul will, among other things, let borrowers refinance regardless of how far their homes have fallen in value, eliminating previous limits. The plan will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments. Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1 ... Loans that exceed the current limit of 125% of the property's value won't be able to participate until early next year. The program's expiration date ... will be extended through 2013. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

Regulator throws lifeline to underwater homeowners (Reuters) - Homeowners who owe more than their properties are worth got new help on Monday with the government's expansion of a refinancing program in a step that could help up to 1 million borrowers. The regulator of mortgage finance giants Fannie Mae and Freddie Mac eased the terms of a program that helps so-called underwater borrowers who have made payments on time but have been unable to refinance."These are important steps that will help more homeowners refinance at lower rates, save consumers money and help get folks spending again,"  The overhaul, which would only help a fraction of the country's 11 million underwater borrowers, is the latest government effort to breathe life into the crippled U.S. housing market. Officials have been frustrated that numerous attempts to bolster the sector and help borrowers have had little success. The Federal Housing Finance Agency said it was scrapping a cap that prohibited borrowers whose mortgages exceeded 125 percent of their property's value from refinancing loans backed by Fannie Mae and Freddie Mac under the government's Home Affordable Refinance Program (HARP). It also took steps to coax homeowners into shorter-term loans and encourage more banks to participate in the program.

Obama Foreclosure Plan: President Outlines New Changes in Las Vegas  -- Seeking to circumvent congressional opposition, President Barack Obama is promoting a series of executive branch steps aimed at jumpstarting the economy this week, beginning with new rules to make it easier for homeowners to refinance their mortgages. The White House said changes to the two-year-old Home Affordable Refinance Program will help homeowners with little or no equity in their houses refinance by cutting the cost of doing so and removing caps to give deeply underwater borrowers access to the program. The new rules apply to homeowners with federally guaranteed mortgages who are current on their payments. Obama discussed the initiative during a meeting with homeowners Monday in Las Vegas, a city hard hit by foreclosures and sagging home prices. One in every 118 homes in the state of Nevada received a foreclosure filing in September, according to the foreclosure listing firm RealtyTrac.. In addition to the refinancing program, the White House said Obama will also announce executive action later this week to help students better manage their student loan payments.

Obama Says Plan Will Cut Mortgages Payments for Millions - Speaking in Las Vegas, one of the worst housing markets in the country, President Barack Obama called housing the greatest cause of the financial crisis and said he was acting on his own to help consumers because Congress has not. On Monday, the administration announced a plan to overhaul an underused mortgage refinance program to help owners whose home values have plummeted. It’s the first in a series of executive actions the White House plans in the face of congressional inaction. “There are still millions of Americans who have worked hard and acted responsibly, paying their mortgage payments on time.  But now that their homes are worth less than they owe on their mortgage, they can’t get refinancing,” he said in remarks prepared for delivery. Mr. Obama went on to describe the housing plan announced by officials earlier in the day aimed at helping more home owners refinance their loans at lower interest rates.

A few comments on the HARP Refinance Program changes - Here is the press release from the FHFA: FHFA, Fannie Mae and Freddie Mac Announce HARP Changes to Reach More Borrowers. One of the key elements is the elimination of seller and servicer reps and warrants on these loans. Several readers have asked if that is a "gift" for the originators? It is definitely a plus, but these are seasoned loans (the loans had to be originated before May 2009), so the borrower has been making payments for several years. From the FHFA: Nearly all HARP-eligible borrowers have been paying their mortgages for more than three years, and most of those for four or more years. These are seasoned loans made to borrowers who have demonstrated a capacity and commitment to make good on their mortgage obligation through a period of severe economic stress and house price declines. This will hit some MBS owners since these borrowers will now be able to refinance and the previous loan will be paid off (and these borrowers were paying high interest rates).

  • • Some readers have pointed out this doesn't help with negative equity.
  • • I suspect this will encourage some short term delinquent borrowers to bring their mortgage loans current. From the FHFA: "The borrower must be current on the mortgage at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months."
  • • The FHFA estimates this will help close to 1 million borrowers, but according to a Dow Jones report, analysts at Barclays Capital have estimated that between 1.9 million and 3.1 million homeowners will be eligible.
    • All of the major lenders have agreed to automatically subordinate their second liens behind the new HARP loans.

Obama’s efforts to aid homeowners, boost housing market fall far short of goals - President Obama pledged at the beginning of his term1 to boost the nation’s crippled housing market and help as many as 9 million homeowners avoid losing their homes to foreclosure.  Nearly three years later, it hasn’t worked out. Obama has spent just $2.4 billion of the $50 billion he promised.2 The initiatives he announced have helped 1.7 million people3. Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth.The Obama effort fell short in part because the president and his senior advisers, after a series of internal debates, decided against more dramatic actions to help homeowners, worried that they would pose risks for taxpayers and the economy, according to numerous current and former officials. They consistently unveiled programs that underperformed, did little to reduce mortgage debts owed by ordinary Americans and rejected a get-tough approach with banks.

Obama’s pathetic refinancing initiative - HARP II is being announced with great fanfare today:Across the country, nearly 11 million owe more than their property is worth. Millions of these people have done everything right. They’ve paid all their bills and kept current on their home loans. But right now, they’re stuck with higher payments because their mortgages are underwater. They’re not eligible to refinance because the decline in home prices have made their property worth less than what they owe. And that’s a problem President Obama knows must be addressed… Today, President Obama is taking action. Sounds impressive, eh? It is, until you read the official FHFA press release. At which point you learn that

  • If you’re a homeowner whose mortgage isn’t owned or guaranteed by Frannie, you’re out of luck.
  • If your mortgage was sold to Frannie after May 31, 2009, you’re out of luck.
  • If you want to get out of negative-equity hell by doing a principal reduction, you’re out of luck.
  • If your bank doesn’t feel like participating, for whatever reason, you’re out of luck.

More on HARP and Housing - Many of the reviews of the HARP changes are pretty negative. As an example, Felix Salmon wrote: Obama’s pathetic refinancing initiative. But I think Felix was expecting too much. This program only applies to Fannie and Freddie loans because the U.S. taxpayer already has the credit risk for these loans. Felix seemed to expect more when he wrote: "If you’re a homeowner whose mortgage isn’t owned or guaranteed by Frannie, you’re out of luck." What this program does do is remove many of the stumbling blocks to refinancing Fannie and Freddie loans (eliminate reps and warrants, reduce or eliminate fees, automatic 2nd subordination, minimal qualifying). These were all deal killers for HARP, and hopefully these changes will smooth the refinance road.  As far as non-GSE loans, Jon Prior at HousingWire mentioned some of the comments from the press conference today about the pending mortgage settlement:  As part of the negotiations, the AGs are working to force servicers to refinance current borrowers into lower-rate mortgages.  "The settlement negotiation is also going to be focused on significantly accelerating the reduction of principal,"

On the Administration’s Latest Potemkin Help Struggling Homeowners Plan -- Yves Smith - I’d heard about a week ago that the Administration was readying the Mother of All Homeowner Rescues, to be administered via Fannie and Freddie. Given that Team Obama has never done shock and awe on the financial front, and the Bush Administration engaged in it only on behalf of banks, I was plenty skeptical.  The program revealed on Monday is true to form: greatly underpowered and more likely to benefit banks than homeowners. The simple outline is: the government is extending and modifying its disappointing HAMP program, which allowed borrowers underwater up to 125% loan to value to refinance through Fannie and Freddie at lower rates. HARP was expected to help 3 to 4 million borrowers but only 900,000 participated. The LTV cap is now being eliminated and no appraisal will be required. Only borrowers who have never missed a payment will be eligible. Certain fees will be waived for borrowers to refi into short-term mortgages. Even the Administration conceded this wasn’t much of a program. From The Hill: Edward DeMarco, FHFA’s acting director, was quick to note that the changes won’t expand eligibility to all the nation’s homeowners, but focus instead on enticing participation from those already eligible for HARP. “This is not a mass refinance program,” he said. “It was really designed to enhance the program’s access for those borrowers who have always been the eligible population.”

Obama's Re-Fi Plan: The Perfection of Debt-Serfdom - How better to corral restive underwater debt-serfs than to herd them into accepting a new, "better" set of lifelong servitude shackles? President Obama is taking credit for a new government plan to "save homeowners." That is of course pure propaganda to mask the plan's true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage "underwater" homeowners whose mortgages exceed the value of their homes to re-finance at lower rates. The stated incentive (i.e. the PR pitch) is to lower homeowners' monthly payments via lower interest rates. This is the Federal Reserve's entire game plan in a nutshell: don't write off any debt, as that would reveal the banking sector's insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt. The key purpose of this "plan" is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the "homeowner") into permanent servitude to the banks. If the net worth of your home is a negative number, then what exactly do you own? So how is this any different from a lease?  The difference is the leaseholder can move at the end of the lease with no debt obligations. The underwater "homeowner" debt-serf is trapped by his/her mortgage into what amounts to lifetime servitude to the holders of the mortgage.

New Obama Foreclosure Plan Helps Banks At Taxpayers' Expense: -- The Obama administration is introducing a new program on Monday designed to lower monthly mortgage payments for more troubled homeowners. But a key new condition in the plan would shift the financial liability for refinanced loans from Wall Street banks to the American taxpayer. And by focusing on lower payments, the program does not confront what housing experts view as the core problem in the foreclosure crisis -- borrower debt that exceeds the value of one's home. Faced with the weak response to the Home Affordable Refinance Program, the Obama administration is planning to open up the program to all borrowers who owe more on their mortgage than their homes' worth, commonly dubbed being underwater, and have not missed a mortgage payment. HARP had been limited to borrowers who owed up to 25 percent more than their home is worth. More than 22 percent of all home mortgages -- or 10.9 million homes -- are currently underwater, according to CoreLogic data. Fewer than 900,000 borrowers have elected to go through HARP to date. The revised program also eliminates several fees associated with refinancing that can make the decision to refinance uneconomical for borrowers. But the potential benefit of the eliminated fees could be relatively small: If a few thousand dollars worth of fees made refinancing a bad deal for underwater borrowers, the ultimate benefits that refinancing can pose would remain limited.

Doomed to Fail - Once again, the Obama Administration has announced a plan to shore up housing prices and underwater homeowners—and once again the plan is very likely to fail. This latest effort will try to use Fannie Mae and Freddie Mac, now wards of the government, to help homeowners refinance mortgages at lower interest rates.The premise is that with interest rates at record lows, homeowners can save hundreds of dollars a month in their mortgage payments by refinancing. For example, by refinancing a 5.5 percent mortgage to a 4.5 percent mortgage, a homeowner with a $300,000 loan could save about $250 a month. In theory, as many as 1.6 million people could qualify for this kind of refinancing, putting more money in their pockets.  But the devil is in the details. Fannie and Freddie lost a ton of money in the sub-prime disaster. That’s why the government had to take them over. So the last thing they want to do is finance more risky mortgages. As a result, Obama’s proposed program limits eligibility to those who have been current on their loan payments for at least six months. That excludes a lot of struggling people. The new rules will supposedly allow refinancing for borrowers who owe more than the current value of their homes, but in practice underwriters have discouraged such borrowers by throwing up other obstacles.

Senators press Obama for swifter REO strategy - A group of 33 senators sent President Obama a letter Thursday asking his administration and the Federal Housing Finance Agency to expedite pending plans for selling and renting previously foreclosed homes held by the government. "We urge you to analyze, quickly and diligently, the input you have received so that all REO properties under your control may be best managed to produce the most value for Fannie Mae, Freddie Mac, and FHA," the senators wrote. "As part of this analysis, we ask that you also keep in mind the importance of looking for the most effective ways to stabilize neighborhoods and housing values." In August, the White House sent a request for information from the housing industry, looking for new strategies to help these agencies better manage the supply of more than 90,000 REO homes currently on the market. Along with the plan to boost refinancing for underwater borrowers, the Obama administration is looking for local ways to alleviate this influx of inventory.

Congresswoman Waters Renews Her Call for Mortgage Servicer Accountability - Congresswoman Waters (CA), Ranking Member on the Subcommittee on Capital Markets and Government Sponsored Enterprises, today led 15 of her colleagues in the House of Representatives, renewing her call for U.S. bank regulators to publicly release information regarding the steps that mortgage servicers are taking to prevent illegal foreclosure practices. Recent news reports indicate that the claims process for households harmed by faulty and fraudulent foreclosure processing is likely to begin soon. Despite this fact, regulators have released no information to the public about how eligible households were identified, how these households will be reached by mortgage servicers, and how they will go about having their claims processed. “The only way this claims process will be fair is if the regulators shine a bright light on mortgage servicers, and make them demonstrate to the public how they’re being held accountable. To date, this entire exercise has been conducted in the shadows,” said the Congresswoman. “I fear that without greater transparency, we’re setting homeowners, and foreclosed-upon families, up for more disappointment.”

It’s Time for Debt Forgiveness, American-Style - The rebellious citizens occupying Wall Street shock some people and inspire others with their denunciations of bankers, but everyone seems to know what they are talking about: it is the barbaric and suffocating behavior of the nation’s largest banks (yes, the same ones the government rescued with public money). Right now, these trillion-dollar institutions are methodically harvesting the last possible pound of flesh from millions of homeowners before kicking these failing debtors out of their homes (the story known as the “foreclosure crisis”).  Conservatives preach patience and resignation: nothing to do except wait until the destruction ends. Liberals insist this is a solvable problem, if only government would act forcefully. “There is a cost for doing nothing. You just kick the problem down the road; you don’t solve it. Then home prices deteriorate more and you re-create the death spiral in housing, as lower prices mean more borrowers are underwater.” There is a solution, and it will appeal to the rebellious spirits occupying Wall Street because it combines a sense of social justice with old-fashioned common sense. It is forgiveness—forgive the debtors. Write down the principal they owe on their mortgage to match the current market value of their home, so they will no longer be underwater. It gives homeowners incentive to keep up their payments, because once again they have some equity and the opportunity to accumulate much more.

What the Costumes Reveal - On Friday, the law firm of Steven J. Baum threw a Halloween party. The firm, which is located near Buffalo, is what is commonly referred to as a “foreclosure mill” firm, meaning it represents banks and mortgage servicers as they attempt to foreclose on homeowners and evict them from their homes. Steven J. Baum is, in fact, the largest such firm in New York; it represents virtually all the giant mortgage lenders, including Citigroup, JPMorgan Chase, Bank of America and Wells Fargo. The party is the firm’s big annual bash. Employees wear Halloween costumes to the office, where they party until around noon, and then return to work, still in costume. I can’t tell you how people dressed for this year’s party, but I can tell you about last year’s.  That’s because a former employee of Steven J. Baum recently sent me snapshots of last year’s party. In an e-mail, she said that she wanted me to see them because they showed an appalling lack of compassion toward the homeowners — invariably poor and down on their luck — that the Baum firm had brought foreclosure proceedings against.   I told her I wanted to post the photos on The Times’s Web site so that readers could see them. She agreed, but asked to remain anonymous because she said she fears retaliation.

Analysis: Mortgage probe may open new path for housing relief (Reuters) - A controversial weapon could be deployed soon in the U.S. fight against the housing crisis as states and top banks near a deal in their dispute over mortgage abuses -- cutting the mortgage debt owed by homeowners. Five major banks could be required to commit roughly $15 billion to reduce principal balances for struggling homeowners and modify loans in other ways under a proposed deal to settle allegations linked to the "robo-signing" scandal. That amount would be part of broader sanctions that could total $25 billion, small change for the giants of Wall Street but potentially sowing the seed for a new approach to tackling the housing crisis. Settlement talks continue with the banks, state attorneys general and some federal agencies over foreclosure shortcuts and other abuses. A deal could be struck within a month, according to people familiar with the matter. Much of the exact language has yet to be hashed out but it could provide for the first broad use of principal writedowns, something economists and housing advocates say is a drastic but needed step to help set right the housing market.

How Much Refinancing? - In my October 24 RealTime column, "The Last Bullet," I argued that the combination of serious reform of the Home Affordable Refinance Program (HARP) and an aggressive Federal Reserve program to hold down the mortgage rate would spark a refinancing boom that could save borrowers as much as $60 billion to $80 billion per year.  This contrasts sharply with the estimate [pdf] of the Federal Housing Finance Agency (FHFA) that its announced reforms might help 1 million borrowers to refinance, which would imply annual savings of well under $10 billion per year. I do not know how FHFA reached its estimate.1  I hope it does not imply that the details of FHFA’s proposal—to be released by November 15—will fail to deliver on the promising principles expounded in the initial announcement.  Of special importance is the decision to waive "certain representations and warranties" that participating lenders must make, including on the original loans.  These reps and warranties are widely agreed to be the main stumbling blocks to success for HARP to date, as banks have been reluctant to make them for all but the most creditworthy borrowers.

Maybe Adjustable-Rate Mortgages Aren't So Bad? - A Senate Banking Committee meeting on Thursday explored the future of the 30-year fixed-rate mortgage.  While a couple of the panelists provided pretty interesting testimony, the most fascinating came from Paul Willen, Senior Economist and Policy Advisor at the Federal Reserve Bank of Boston.  He exposed a common misconception about the 30-year, fixed-rate mortgage: it was not an invention of the Federal Housing Authority in the 1930s. In fact, 40% of residential lending during the Great Depression was accounted for by long-term, fixed-rate, fully-amortizing loans from building and loan societies. In other words, this home financing option was possible even before the government stepped in to back mortgages after the Great Depression.   He also revealed that adjustable-rate mortgages played little role in creating the foreclosure crisis. For starters, his research shows that 60% of the loans that foreclosed due to delinquency were fixed-rate mortgages. But even more importantly, of those other 40% of loans that were adjustable-rate mortgages, 88% -- the vast, vast majority -- defaulted when payments due were at or below the borrower's initial payment amount. A little math shows that adjustable-rate payment shock was responsible for less than 5% of mortgages that were foreclosed due to delinquency.

Moody's: Commercial Real Estate Prices increased 2.4% in August - From Bloomberg: Moody’s U.S. Commercial Property Index Rose 2.4% in August The Moody’s/REAL Commercial Property Price Index advanced 2.4 percent from July. It’s up 7.2 percent from a year earlier ... Moody’s doesn’t see “significant” price gains in the near term as loan originations based on commercial-mortgage backed securities slow and demand for vacant space continues to “languish,” the company said. ... The share of distressed deals was 21.7 percent, the lowest since January 2010. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are up 7.2% from a year ago, and down about 41% from the peak in 2007. This index is very volatile because there are relatively few transactions - and some of the recent increase was due to fewer distressed sales - and some of the increase was probably seasonal.

Home Prices in 20 U.S. Cities Decline More Than Forecast -- Home prices in 20 U.S. cities dropped more than forecast in August, highlighting one of the obstacles facing the economic recovery in its third year. The S&P/Case-Shiller index of property values in 20 cities fell 3.8 percent from August 2010, the group said today in New York. The median forecast of 30 economists surveyed by Bloomberg News was for a 3.5 percent decline. Recovering the 31 percent plunge in home prices from their 2006 peak will probably be years in the making as foreclosures throw more properties on the market and sales flag. Federal Reserve policy makers like William Dudley are among those that believe bolstering housing is among the “most pressing issues” facing the central bank. “There is still a big imbalance between demand and supply,” “Prices will keep declining into 2012.” Consumer confidence unexpectedly slumped in October to the lowest level since March 2009 as Americans’ outlooks for employment and incomes soured, another report today showed. The Conference Board’s sentiment index decreased to 39.8 from a revised 46.4 reading in September. Economists projected the October gauge would climb to 46, according to the median forecast in a Bloomberg survey.

CHART OF THE DAY: Here's The Good News On House Prices - The August Case-Shiller number was a tad disappointing, as the annual decline of 3.8% was a bit worse than the 3.5% decline that analysts had expected/hoped for. But here's the bottom line. The annual declines are getting less severe (from 4.1% in July to 3.8% in August), and obviously that's the first step towards actual improvement.

Case Shiller: Home Prices increased Seasonally in August - S&P/Case-Shiller released the monthly Home Price Indices for August (actually a 3 month average of June, July and August). The composite indexes were up about 0.2% in August (from July) Not Seasonally Adjusted (NSA), but declined Seasonally Adjusted (SA). From S&P: Annual Rates of Change Continue to Improve According to the S&P/Case-Shiller Home Price Indices Note: Case-Shiller reports NSA, I use the SA data. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 32.2% from the peak, and down 0.2% in August (SA). The Composite 10 is 1.0% above the June 2009 post-bubble bottom (Seasonally adjusted). The Composite 20 index is off 32.0% from the peak, and down 0.1% in August (SA). The Composite 20 is slightly above the March 2011 post-bubble bottom seasonally adjusted. The second graph shows the Year over year change in both indices. The Composite 10 SA is down 3.6% compared to August 2010. The Composite 20 SA is down 3.9% compared to August 2010. This is slightly smaller year-over-year decline than in July. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.  As S&P noted, prices increased in 10 of 20 cities not seasonally adjusted (NSA). However seasonally adjusted, prices only increased in 6 cities.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller home-price data showed sideways movement in August, as prices were boosted from a month earlier thanks to seasonal factors but remained below year-ago levels. The composite 20-city home price index, a key gauge of U.S. home prices, posted a 0.2% increase from July but fell 3.8% from a year earlier. Ten cities posted monthly declines, while the other 10 showed gains. Las Vegas was the only city that posted a new index level low and is 59.5% below its August 2006 peak. Eighteen of the 20 cities posted annual declines in August, with just Detroit and Washington D.C. notching gains. On a seasonally adjusted basis, which aims to take into account the stronger spring-summer selling season, just six cities — Boston, Charlotte, Chicago, Dallas, Minneapolis and Washington, D.C. — posted monthly increases. The overall 20-city index was flat on a seasonally adjusted basis. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

US Home Prices Fell 4% in August From Year Earlier, FHFA Says -- U.S. home prices dropped 4 percent in August from a year earlier as the housing market struggles to stabilize, according to the Federal Housing Finance Agency. The slump was led by a 7.6 percent decrease in the region that includes Colorado and Arizona, the agency said today in a report from Washington. The second-largest decline was 6.8 percent in the area that includes California. Prices are down 19 percent from an April 2007 peak, the FHFA said. Falling home prices are crimping consumer spending and eroding confidence in real estate, making housing among the most “pressing issues” facing the U.S. central bank, Federal Reserve Bank of New York President William Dudley said in a speech yesterday. The federal government, in an effort to stabilize the market, said yesterday it will allow qualified homeowners to refinance mortgages regardless of how much their houses have dropped in value. Measured from July, home prices fell 0.1 percent, according to the FHFA. That was worse than economists’ forecast for an increase of 0.2 percent, the average of 14 estimates in a Bloomberg survey.

New Home Sales increase in September to 313,000 - The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 313 thousand. This was up from a revised 296 thousand in August (revised up from 295 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. The second graph shows New Home Months of Supply. Months of supply decreased to 6.2 in September. The all time record was 12.1 months of supply in January 2009. This is still slightly higher than normal (less than 6 months supply is normal). Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 61,000 units in September. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In September 2011 (red column), 25 thousand new homes were sold (NSA). This ties the record low for September set in 2010. The high for September was 99 thousand in 2005.

September new homes sales up 5.7% - Sales of new single-family homes increased 5.7% in September from the prior month, topping most analysts' estimates.The Commerce Department said the seasonally adjusted rate of 313,000 units last month rose from 296,000 for August, which was revised upward 1,000. September new home sales were 0.9% lower than the rate of 316,000 a year earlier. The seasonally adjusted estimate of new homes for sale at Sept. 30 was 163,000, representing a 6.2-month supply. A healthy housing market usually carries a six-month supply of single-family homes. Analysts surveyed by Econoday expected the rate of new home sales to reach 302,000 in September with a range of estimates between 285,000 and 312,000. The median sales price of new homes sold in September was $204,400 down 2.2% from $209,100 in August. The average sale price fell to $243,900 from $246,000 in August and is at the lowest level since early 2009.

September Pending Home Sales Down, Still Higher Than a Year Ago - Pending home sales declined in September, although activity remains above a year ago, according to the National Association of Realtors®.The Pending Home Sales Index,* a forward-looking indicator based on contract signings, fell 4.6 percent to 84.5 in September from 88.6 in August but is 6.4 percent higher than September 2010 when it stood at 79.4. The data reflects contracts but not closings. Lawrence Yun, NAR chief economist, said the housing market is being excessively constrained. “A combination of weak consumer confidence and continuing tight lending criteria held back home buyers, even though the private sector added nearly 2 million net new jobs in the past 12 months,” he said.The PHSI in the Northeast declined 4.7 percent to 60.6 in September but is 4.0 percent above a year ago. In the Midwest the index dropped 6.2 percent to 71.5 in September but remains 12.3 percent higher than September 2010. Pending home sales in the South fell 5.5 percent in September to an index of 91.6 but are 5.0 percent above a year ago. In the West the index declined 2.1 percent to 105.8 in September but is 5.6 percent higher than September 2010.

Real House Prices and House Price-to-Rent - An update: Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here). Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels. The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2011), and the monthly Case-Shiller Composite 20 SA (through August) and CoreLogic House Price Indexes (through August) in nominal terms (as reported). In nominal terms, the Case-Shiller National index is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to June 2003 levels, and the CoreLogic index is back to July 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). In real terms, the National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to June 2000. This graph shows the price to rent ratio (January 1998 = 1.0).  On a price-to-rent basis, the Composite 20 index is back to August 2000 levels, and the CoreLogic index is back to July 2000.

NMHC Apartment Survey: Market Conditions Tighten Slightly in Recent Survey - From the National Multi Housing Council (NMHC): Development Ramps Up as Demand Swells Finds NMHC Quarterly Survey Increased demand for rental housing has led to a considerable uptick in multifamily construction, finds the National Multi Housing Council’s (NMHC) latest Quarterly Survey of Apartment Market Conditions. The pace of development activity has increased in most markets. Two-thirds (67%) of respondents noted considerable activity, either in the planning stage or actual new construction. In particular, 20% said developers are breaking [ground] on new projects at a rapid clip. The other 47% reported an increase in pre-construction activities—acquiring land, lining up financing, getting building permits—but not much actual construction yet. Even with this increased activity, more than half (54%) think new development remains considerably below demand. This graph shows the quarterly Apartment Tightness Index. The index has indicated tighter market conditions for the last seven quarters and although down from the record 90 earlier this year, this still suggests falling vacancy rates and or rising rents.  This fits with the recent Reis data showing apartment vacancy rates fell in Q3 2011 to 5.6%, down from 6.0% in Q2 2011, and 9.0% at the end of 2009. Based on this index, I expect the declines in vacancy rates to slow.

House Sales: Distressing Gap and New Graph Gallery -  I will keep the most recent graphs in a new graph gallery Here is the New Home sales gallery. It will take me a few weeks to add all the galleries to this new format. The following graph shows existing home sales (left axis) and new home sales (right axis) through September. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Then along came the housing bubble and bust, and the "distressing gap" appeared due mostly to distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties. I expect this gap to close over the next few years once the number of distressed sales starts to decline. Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

ATA Trucking Index increased 1.6% in September - From ATA: ATA Truck Tonnage Index Increased 1.6% in September:The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.6% in September after falling a revised 0.5% in August 2011. August’s decrease was more than the 0.2% drop ATA reported on September 27, 2011. The latest gain put the SA index at 115.8 (2000=100) in September, up from the August level of 114. Compared with September 2010, SA tonnage was up a solid 5.9%. In August, the tonnage index was 4.9% above a year earlier.  Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

DOT: Vehicle Miles Driven decreased 1.7% in August compared to August 2010 -- The Department of Transportation (DOT) reported today:

•Travel on all roads and streets changed by -1.7% (-4.6 billion vehicle miles) for August 2011 as compared with August 2010.
•Travel for the month is estimated to be 263.0 billion vehicle miles.
•Cumulative Travel for 2011 changed by -1.3% (-26.0 billion vehicle miles).

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 45 months - so this is a new record for longest period below the previous peak - and still counting! Talk about moving sideways ... The second graph shows the year-over-year change from the same month in the previous year. The current decline is not as a severe as in 2008, but this is significant.

Strong Auto Sales growth seen in October - It looks like auto sales are fairly strong in October ... From October Auto Sales Forecast: Momentum Is Strong, But it May be a Bubble An estimated 1,033,257 new cars will be sold in October, for a projected Seasonally Adjusted Annual Rate (SAAR) of 13.4 million units, forecasts ... This sales pace would mark the highest monthly SAAR since August 2009, when sales were inflated by the Cash for Clunkers program. analysts attribute October’s sales results to the release of pent-up demand that has been building for more than a year. As a result, the auto industry may be in the midst of a small sales bubble.  Sales in Q3 were up slightly from Q2, although - as part of the Q3 GDP release - the BEA estimated motor vehicles and parts made a small negative contribution to GDP in Q3 (probably due to mix of vehicles). If sales are at this forecast for October - and just hold this level in November and December - vehicle sales will make a strong contribution to Q4 GDP.

Vital Signs: Gasoline Still Pricey - The cost of gasoline is down from its highs of the year, though still pricey. Regular gasoline fetched $3.46 a gallon, on average, in the U.S. on Monday. That is down from an early-May peak of $3.97, but compares with $2.82 a year earlier. Given the drop in crude-oil prices, many economists expect gasoline prices to fall further, leaving consumers more cash to save or spend.

Number of the Week: Cutting Back on Driving - 4.6 Billion:

How many fewer miles traveled by drivers on U.S. roads in August than a year earlier. Americans aren’t hitting the road like they used to. In August, they drove 263 billion miles on U.S. roads (along with tourists, Canadian truckers et al.), down from 267.6 billion in August 2010. The culprit: The steep price of gasoline, which fetched a third more than it did a year ago. But there’s more to the story. When gasoline prices started shooting higher earlier this year, U.S. drivers throttled back much more quickly than they used to in response to price increases. One reason why might be that the 2008 energy price shock is a recent enough memory that it’s easy for people to conserve. They still have the phone numbers of their old carpool buddies handy, and they know where the bus stop is. What’s more, with so many scarred by the recession and scared by the jobless rate, people seem quicker to cut back in response to price increases not just at the gas pump, but of any kind. If rising cotton costs send t-shirt prices higher, they buy fewer t-shirts. If coffee prices go up, they cut back on lattes.

Personal Income increased 0.1% in September, Spending increased 0.6% - The BEA released the Personal Income and Outlays report for September: Personal income increased $17.3 billion, or 0.1 percent in September. Personal consumption expenditures (PCE) increased $68.7 billion, or 0.6 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.5 percent in September, in contrast to a decrease of less than 0.1 percent in August.  The following graph shows real Personal Consumption Expenditures (PCE) through August (2005 dollars). PCE increased 0.6 in August, and real PCE increased 0.5%. Note: The PCE price index, excluding food and energy, decreased 0.2 percent. The personal saving rate was at 3.6% in Setpember. Personal saving -- DPI less personal outlays -- was $419.8 billion in September, compared with $479.1 billion in August. Personal saving as a percentage of disposable personal income was 3.6 percent in September, compared with 4.1 percent in August. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the September Personal Income report. Spending is growing faster than incomes - and the saving rate has been declining. That can't continue for long ...

September's Rebound In Consumer Spending & Income - Personal income and spending jumped in September, offering an encouraging reversal from August's sluggish pace. The revival was particularly strong for consumer spending. The numbers aren't all that surprising in light of yesterday's mildly upbeat GDP report for the third quarter. Surprising or not, today's spending and income numbers reconfirm the statistical case for arguing that there was no sign of a recession in Q3. Deciding what happens in Q4 is guesswork, of course, but there seems to be a bit of momentum in the macro numbers these days and so a bit of optimism is the new new thing again… at least for the weekend. The surge in consumer spending last month vs. August was certainly impressive. Jumping by 0.6% in September (roughly three times higher than August's pace) suggests that a willingness to spend is alive and well in these United States. Nonetheless, there's a potential danger lurking in the sluggish growth in disposable personal income. Indeed, the gap between income and spending has become unusually wide in recent months, implying that a day of reckoning may be coming. Spending after all is financed with income and while it's possible for the two to go their separate ways for a time, eventually any chasm must close, or at least narrow.

US consumer spending rise outpaces income  US consumer spending rose in September, though concerns remained that the expenditure was powered by diminished personal savings. According to US commerce department data released on Friday, consumer purchases increased 0.6 per cent as confidence improved, affirming recent encouraging economic indicators. However, personal income rose only 0.1 per cent – below analysts’ expectations – which suggested that consumers were dipping into savings to bolster spending. “The lack of income growth meant that the boost in spending came from a decline in the savings rate,” said David Semmens, US economist at Standard Chartered.  “This is worrying as it poses questions about the sustainability of the contribution from the consumer going into the fourth quarter without some improvement in income growth.” The savings rate fell 0.5 per cent in the period, reaching a level last seen at the end of 2007.

Americans spent more in Sept., but saved less - Americans spent in September at three times the pace of the previous month, even though their incomes barely budged. They financed their spending binges by saving at the lowest level since the start of the Great Recession. Consumer spending rose 0.6 percent last month, the Commerce Department said Friday. The gain was driven by a big rise in purchases of durable goods, such as autos.Consumers earned only 0.1 percent more after their income fell by the same amount in August. And after adjusting for inflation, their after-tax incomes fell 0.1 percent last month — the third straight monthly decline.As a result, they saved less. The savings rate fell to 3.6 percent, the lowest level since December 2007. Expectations were high after the government said Thursday that consumer spending helped fuel annual growth of 2.5 percent in the July-September quarter, the best quarterly expansion in a year. Consumer spending is closely watched because it accounts for 70 percent of economic activity. It grew at an annual rate of 2.4 percent in the third quarter. That's more than triple the growth in the April-June quarter.

Good News: Americans Saved Less Money Last Month -In September, consumers spent more but made less than expected. As a result, the national savings rate dropped to 3.6%, which is the lowest level it has been since the beginning of the recession. And that has some people nervous. The popular economics blog Calculated Risk blog had this to say: Spending is growing faster than incomes - and the saving rate has been declining. That can't continue for long ...In fact, the savings rate fell nearly continuously from 1985 to 2008. So savings rates can and do fall for long periods of time with no problem - until there is one. Still, coming out of the recent recession it's natural that people would be worry about savings rates. During the 1990s and the 2000s, many Americans spent more than they earned. They piled on debt, which they eventually couldn't pay. That alone with crazy derivatives that magnified the effects of those consumer defaults led to the financial crisis. So does a falling savings rate mean we are headed for trouble again? Probably not. Rather than being a reason to worry, the falling savings rate may be another sign that the economy is improving. Consumer spending makes up 70% of the GDP. So if we want the economy to grow faster to produce jobs, then this is exactly what we want - higher spending and lower savings.

The Spending-Income Shortfall - A boost in consumer spending is largely what fueled the 2.5% growth in GDP in the third quarter. But the spending boost wasn’t accompanied by a similar increase in income, according to new data Friday by the Commerce Department. In September, for example, disposable personal income — the money left over after taxes and other payments to the government — edged up just 0.2% from a year earlier, when adjusted for inflation. Meanwhile, inflation-adjusted consumer spending jumped by 2.2% from September 2010. The report suggests that Americans are dipping into savings, rather than relying on higher wages, in order to boost spending, a trend that economists say is not sustainable in the long term.

Savings Rate Is Dropping, and Experts Are Puzzled - When the recession1 began, Americans began to save more of their money, prompting predictions that their financial habits might be changing permanently.  But the surge has not been sustained. In September, the nation’s savings rate dropped for the third consecutive month, the Commerce Department said Friday. It is now at 3.6 percent of personal disposable income, its lowest level since the month the recession began. The latest decline raises the question of whether consumers are returning to their old spendthrift habits or were temporarily relaxing budget restrictions to make long-awaited purchases.  Real personal after-tax income declined in September, just as it did in July and August. Even so, consumers spent more, for an increase of 0.6 percent in September.  The increase in consumer spending was widely embraced as good news, a sign that consumers might be helping to propel the economy forward. Consumers account for roughly two-thirds of economic activity.

Income Excluding Government Transfers Drops Again - Yes, consumers and businesses are spending more, Thursday’s report on gross domestic product showed. But look deeper, especially at Friday’s data on household income, and the picture is more troubling, and indeed could point to a looming recession. Even though consumer spending makes up most economic activity, Mr. Rosenberg argues the focus should be on income rather than spending in determining the health of the economy. And in that regard, the data don’t look good. The main category to consider is “real personal earnings less government transfers,” Mr. Rosenberg says. Essentially, that’s income minus Social Security, Medicare, unemployment insurance and other government aid. What’s left is the bulk of consumer income Americans are actually earning. The “real personal earnings less government transfers” category is among the host of indicators the National Bureau of Economic Research tracks in determining business cycles. Friday’s Commerce Department report shows that personal income indicator has declined for three consecutive months — at a 2% annual rate. So while consumers boosted spending in the third quarter, they pulled it off by dipping into their savings and spending government dollars, not by earning more money at work. Mr. Rosenberg says stagnant wages, plunging consumer confidence, and low expectations for wage growth are a recipe for a dramatic drop in consumer spending in coming months.

Consumers Had to Save Less to Spend More - The U.S. consumer stepped up to the plate and hit one out of the park in the third quarter. Unless job and income gains pick up, though, the household sector may not get past first base this quarter. Consumer spending powered the 2.5% annualized gain in real gross domestic product last quarter. The monthly numbers show spending ended the quarter on a very strong note in September, despite surveys showing the household sector very downbeat about the economy. Can consumers keep buying in the fourth quarter? Retailers, who depend on holiday shopping to generate profits, are especially keen to see consumers spend. The quirks in GDP math support at least a modest gain. Economists at Nomura Securities point out September real consumer spending stood 1.2% — at an annual rate — higher than the third-quarter average. “This implies that if there is no growth in spending over the October to December, fourth-quarter real consumption would still grow at an annual rate of 1.2%,” they write. There are, however, a few reasons for caution. Incomes gains are trailing spending increases. Personal income edged up just 0.1% in September. After taking price changes and taxes into account, real disposable income has fallen for three consecutive months.

U.S. Stocks Fall as Consumer Confidence Slumps, UPS Declines - UPS, the largest package-delivery company and a proxy for the economy, fell 2.5 percent after international shipping growth began to cool while U.S. expansion stagnated. Stocks extended losses after consumer confidence fell in October to the lowest level since March 2009, when the U.S. economy was in a recession, as Americans' outlooks for employment and incomes soured. The Conference Board's sentiment index decreased to 39.8 from a revised 46.4 reading in September, figures from the New York-based private research group showed today. A separate report showed that home prices in 20 U.S. cities dropped more than forecast in August, highlighting one of the obstacles facing the economic recovery in its third year. A meeting of European Union finance ministers scheduled for tomorrow has been canceled, the U.K. said in an e-mailed statement. Chancellor Angela Merkel and fellow leaders return to Brussels tomorrow for a second summit in four days.

Vital Signs: Consumer Confidence Tumbles - Americans’ outlook became more downbeat this month. In October, an index of consumer confidence fell to 39.8 — the lowest level since March 2009 — from 46.4 in September. It isn’t clear if the drop reflects a worsening economy or if consumers’ bleaker outlook will incline them to spend less. Indeed, the survey the index is based on showed that in October, more people said they planned on buying a major appliance than in September.

Consumer Confidence Hits an All-Time Non-Recession Low - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through October 13th. The 39.8 reading is significantly below the consensus estimate of 46, reported by, and a stunning decline from the September score of 46.4 (an upward revision from 45.2). It is, in fact, the lowest non-recession reading of all time.  Here is an excerpt from the Conference Board report.  "Consumer confidence is now back to levels last seen during the 2008-2009 recession. Consumer expectations, which had improved in September, gave back all of the gain and then some, as concerns about business conditions, the labor market and income prospects increased. Consumers' assessment of present-day conditions did not fare any better. The Present Situation Index posted its sixth consecutive monthly decline, as pessimism about the current economic environment continues to grow."  Consumers' appraisal of present-day conditions deteriorated further in October. Those claiming business conditions are "bad" increased to 43.7 percent from 40.5 percent, while those claiming business conditions are "good" decreased to 11.0 percent from 12.1 percent. Consumers' assessment of the labor market was also less favorable. Those claiming jobs are "plentiful" decreased to 3.4 percent from 5.6, however, those saying jobs are "hard to get" decreased to 47.1 percent from 49.4 percent.

Confidence Falls Most Among High-Income Consumers - U.S. consumers unexpectedly caught a case of the economic willies in October. Their list of woes is growing from jobs to incomes to the stock market. Confidence among high-income consumers has fallen more sharply than among lower earners — a concern for future spending trends. The Conference Board‘s consumer confidence index dropped to 39.8 in October, a level more commonly seen during recessions than recoveries that are more than two years old. Economists had expected the index to rise slightly. The connection between feelings and actions can be tenuous (after all, confidence was low in September, but retail sales popped up). Confidence, however, has been eroding since February. The decline suggests consumers are falling into a protracted bout of pessimism that may trigger a cutback in spending. Job jitters tops the worry list. This month’s survey shows 47.1% think jobs are “hard to get,” and only 3.4% describe jobs as “plentiful.” Looking out six months ahead, 27.4% think there will be fewer jobs, while a smaller 11.3% expect employment to increase.

Confidence Rises in Sign U.S. Will Keep Recovery Intact -- Consumer confidence unexpectedly rose in October from the previous month, indicating the biggest part of the economy will help keep the U.S. recovery intact.  The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 60.9 from 59.4 in September. The gauge was projected to drop to 58, according to the median forecast of 66 economists surveyed by Bloomberg News. The preliminary reading for the month was 57.5.  Stock market gains and easing gasoline costs have brought relief to Americans at a time the jobless rate is hovering above 9 percent and home prices continue to fall. A sustained improvement in moods may encourage consumers to accelerate their spending, which accounts for about 70 percent of the economy.  “Consumers are not throwing caution to the winds, but their mood has lifted slightly from the recession-type readings late this summer,”

Consumer Sentiment increases in October, still very weak - The final October Reuters / University of Michigan consumer sentiment index increased to 60.9, up from the preliminary October reading of 57.5, and up from 59.4 in September. Click on graph for larger image. In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. In August, sentiment was probably negatively impacted by the debt ceiling debate. This was still very weak, but above the consensus forecast of 58.0.

The Inexplicable American Consumer Strikes Again - The recent consumer confidence indices, after a pickup in the spring, have collapsed to levels not seen in years and in some cases in decades. Yet the inexplicable American consumer, the toughest and most indefatigable creature out there that no one has yet been able to beat down, struck again. Consumer spending increased at an annual rate of 2.4% during the third quarter, though the mood, as measured by the confidence indices, has become outright morose. The Bloomberg Consumer Comfort Index dropped to -51.1. By comparison, it averaged -46.2 so far in 2011, -45.7 in 2010, and -47.9 in 2009. The shocker was this number: 95% of the people surveyed had a negative opinion about the economy, the worst reading since April 2009, and just 1% away from the worst reading since the index began in 1985. The Conference Board's Consumer Confidence Index plummeted to 39.8, the lowest level since March 2009, at the trough of the great recession. The Present Situation Index fell to 26.3 from 33.3, its sixth consecutive monthly decline. "Consumer confidence is now back to levels last seen during the 2008-2009 recession ... as pessimism about the current economic environment continues to grow,"

Painful Precursor - It's been said (many times) that correlation is not causation. That said, if the last 30 years are any guide, the recent sharp deterioration in consumer sentiment is the precursor to a dramatic (and widely unexpected) increase in unemployment.

US consumer spending: Hard times | The Economist - AMERICANS are spending less on clothes and eating out and more on household fuel bills and healthcare, according to data from the Bureau of Labour Statistics. Between 2007 and 2010, average annual consumer spending per unit—defined as a family/shared household or single/financially independent person—fell by 3.1% to $48,109. Average prices over this period have risen by 5.2%, so real consumer spending has fallen by almost 8%. The recession and economic slowdown have reduced buying power and consumers are tightening their belts in many ways, though spending on women’s clothes (and belts) fares slightly better than men’s. There are some positive health effects to be gleaned from the data. Real spending on tobacco products fell by 23%, probably because the price of a nicotine fix has risen by 46% between 2007 and 2010. Similarly, people are spending more on fruit and vegetables (up by 9%) and less on sugar and sweets (down by 6.5%). During the good times of 2003-06 consumer spending rose by 8.2%. In that time, Americans boozed more and bought more cushions: spending on alcohol and household furnishings increased by 19% and 13% respectively. Contrast that with 2007-10 when spending on these items fell by over 16%.

Price matters for holiday 2011 season - Forget style, quality and customer service. This holiday season, all that matters is price. A week before Halloween and two full months before Christmas, stores are desperately trying to outdo each other in hopes of drawing in customers worn down by the economy. Wal-Mart, the biggest store in the nation, joined the price wars Monday by announcing that it would give gift cards to shoppers if they buy something there and find it somewhere else cheaper.Staples and Bed Bath & Beyond have already said they will match the lowest prices of and other big Internet retailers. Sears is going a step further, offering to beat a competitor's best price by 10 percent. In better times, retailers could afford to keep prices higher and use promises of higher quality and better service to lure people into stores.Those days are over. In a recent poll of 1,000 shoppers by America's Research Group, 78 percent said they were more driven by sales than they were a year ago. During the financial meltdown in 2008, that figure was only 68 percent.

Moody’s: U.S. Retail to Remain Sluggish in 2012 - Persistent unemployment, stock market volatility and economic gloom are expected to continue weighing on consumer confidence and the U.S. retail industry through 2012, Moody’s Investors Service said. “While consumers face headwinds, retailers remain challenged by increased commodity prices,” said Margaret Taylor, a Moody’s vice president. “These constraints coupled with reluctant consumers means that holiday sales and earnings growth will be tepid compared to last year.” The ratings firm expects drugstores, discounters, dollar stores and auto-parts retailers to show the most stable operating earnings, as supermarkets continue to feel pressure from alternative food retailers. Based on recent earnings misses by industry leaders Sears Holdings Corp., Lowe’s Cos. and Gap Inc., Moody’s lowered its forecast for industry-wide operating income, now expected to rise no more than 1% in 2011. Next year, operating income is expected to rise a still modest 2% to 3%, Moody’s said.

Why We Can't Spend Our Way Back To Normal - Every month, one of the most anxiously anticipated pieces of economic information is the Commerce Department’s spending data. Spending is cheered; frugality causes concern. In the drama that is the U.S. economy, consumers have been cast as the hero, expected to provide the growth that avoids a double-dip recession and rebalances the labor market. It’s an increasingly quixotic hope. In the decade leading up to the collapse, the country went on a consumer binge. This won’t be news to anyone. But what might be surprising is the sheer volume of commodities that were acquired, many of them imported. (That’s one reason that the spend our way out of unemployment approach no longer works.) According to my estimates, the number of new items of clothing bought by the average American rose from 41 to 67 items per year. Furniture purchases rose 150%. Consumer electronics — from coffee makers to laptops to cell phones — rose between 100 and 1000% depending on the item, and it wasn’t just the cool gadgets. We bought 180% more vacuum cleaners. By both weight and volume, material acquisition hit all-time highs.

Guest Post: The Paradox of Thrift — Debunked - Ever since John Maynard Keynes popularized the Paradox of Thrift, economists, central bankers and politicians have labored under the misapprehension that high levels of savings are bad for the economy and inhibit growth. The Paradox of Thrift simply states: Increased savings means there are less buyers for goods produced, so the nation as a whole will tend to produce less.

  • If an individual saves they increase their wealth;
  • But if an entire nation saves, this causes a shortfall in consumption; and
  • The shortfall in consumption will cause national income to fall.

Keynes was correct in his observation that high level of savings caused a shortfall in national income, but we need to remember that he was writing in the 1930s — in the middle of the Great Depression.  Not only will national income fall when savings are used to repay debt, but it falls rapidly. The shortfall between saving and new investment (or spending and income) may be small but, like a puncture in a car tire, the result can be disastrous. At each point in the supply chain the leakage is repeated: A receives an income of $1.00 and use 5 cents to repay debt, only spending $0.95. B will receive $0.95 from A, where previously they received $1.00, and will use 5% to repay debt, only spending $0.9025. C will only receive $0.9025 from B but still uses 5% to repay debt, only spending $0.857. Under normal conditions, however, the paradox of thrift does not apply:

  • If an individual saves they will increase their wealth;
  • If the entire nation saves, there is no effect on national income provided savings are channeled through the financial system into new capital investment.
  • All that then happens is less consumer goods but more capital goods are produced — spending as a whole does not fall.
  • Production, as a result, will also not fall.

A Bit of Confusion on Consumption - I'm not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption. While part of the story sounds very good -- reverse the upward redistribution from wages to profits -- some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer. In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. This doesn't change the fact that it is investment, not consumption, that provide the basis for productivity gains which will make the country wealthier in the future. Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S. owned companies.  The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.

It’s Consumer Spending, Stupid -AS an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth. This is, to put it mildly, a controversial claim. Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth. But history shows that this is wrong.  Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

Richmond Fed business index negative in October - The Richmond Federal Reserve on Tuesday said its manufacturing index was unchanged in October at -6, as shipments and plans for hiring fell. The new orders gauge rose 12 points to finish at -.5, however. Two months ago, the Richmond Fed's index hit its lowest level since June 2009. The Richmond Fed is a diffusion index, calculated by subtracting the percentage of respondents who say activity has dropped from those who say it has increased.

Is Regulatory Uncertainty a Major Impediment to Job Growth? - Treasury Blog - Last week at a Senate hearing Secretary Geithner said, “I'm very sympathetic to the argument you want to be careful to get the rules better and smarter, but I don’t think there's good evidence in support of the proposition that it's regulatory burden or uncertainty that's causing the economy to grow more slowly than any of us would like.”Economists from across the political spectrum have also weighed into this debate and reached the same conclusion. Bruce Bartlett, a senior advisor in both the Reagan and George H.W. Bush administrations, said that “no hard evidence” has been offered for claims that regulation is the “principal factor holding back employment.” And in a recent Wall Street Journal survey of economists, 65 percent of respondents concluded that a lack of demand, not government policy, was the main impediment to increased hiring.  Nonetheless, two commonly repeated misconceptions are that uncertainty created by proposed regulations is holding back business investment and hiring and that the overall burden of existing regulations is so high that firms have reduced their hiring.

Companies Shrug Off Uncertainty, Keep Spending - Damn the uncertainty. Full speed ahead! U.S. businesses are unsure where the economy is headed, but that has not stopped them from going ahead with capital spending projects. The dichotomy echoes consumer behavior, which finds consumers feeling pessimistic but still shopping. The big difference: unlike consumers who have seen little wage growth, the U.S. business sector has piles of money to buy new equipment, modernize plants and retrofit office space. Now they just need to add workers. Shipments of non-defense capital goods excluding aircraft jumped at a healthy 16.7% last quarter. That was the largest gain in five quarters and suggests third-quarter gross domestic product growth was solid (GDP data will be released Thursday). In addition, new orders for capex goods increased last quarter, meaning business investment will keep growing into 2012.

What are businesses worried about? - A new Gallup poll of small-business owners provides evidence about what they’re worried about. Gallup themselves title an article on the survey results “Gov’t Regulations at Top of Small-Business Owners’ Problem List”. They present the following table, which is topped by “complying with government regulations”. One thing that jumped out at me is that complying with government regulations is the most important problem for 22% of respondents, compared to 18% in the most recent  NFIB survey. One explanation for this difference could be simple margin of error: it is, after all, only 4 percentage point. However, Gallup respondents perceive regulation to be an a even bigger problem if you include “new healthcare policy” and/or “poor leadership/government/president”. Another explanation for the difference could be the wording of the question. Gallup asks: “What is the most important problem facing small business owners like you today?” whereas NFIB asks:“What is the single most important problem facing your business today?” The subtle wording difference here could be consequential.

Can Small Businesses Make America Prosperous? - Given that the overwhelming number of American businesses are small, and that, as we’ve all heard, small businesses create most new jobs, this seems reasonable enough. But the truth is that, from the perspective of the economy as a whole, small companies are not the real drivers of growth. One can see this by looking at the track record of the world’s economies. The developed countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain, and Italy—that is, the four countries whose economic woes are wreaking such havoc on financial markets. Meanwhile, the countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark, and the U.S.—some of the strongest economies in the world.  This correlation is not a coincidence. It reflects a simple reality: small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard.

Small Businesses Aren’t Key to the Economic Recovery - Besides, don’t most people work for small businesses, and aren’t such businesses the engine of job growth?  Actually, no. In what may be the most misunderstood fact about the job market, although most companies are small — according to 2008 census data, 61 percent are small businesses with fewer than four workers — more than two-thirds of the American work force is employed by companies with more than 100 workers. You can tweak the definitions, but even if you define “small” as fewer than 500 people (as the federal government does, basically), you still find that half the work force is employed by large businesses. It’s even more stunning when it comes to payrolls: 57 percent of total compensation is paid out by companies of 500 or more employees, with most of that coming from the largest, those with at least 10,000 employees. And new research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all.

Let them die -- KARL SMITH puts this beautifully: The fact that business owners don’t actually have to know anything about business is the fundamental strength of capitalism and it goes incredibly unappreciated. What happens is that people start small businesses. Then by sheer dumb luck someone will be operating a business model that happens to serve the needs of millions of people. This business will kill off the competition and grow to dominate its industry. Then all customers will enjoy the advantages of this business model. However, its crucial to realize that not a single human being anywhere in this process needs to have even the slightest clue about what he or she is doing. He's making an important point about the nature of small business: that economies with too many small businesses probably have a lot of rules that are preventing the market from letting good companies beat out bad ones, and which are constraining growth.   But the beauty of the market is that good ideas should rise to the top, whether or not their creator worked tirelessly to craft the perfect strategy or hit upon a winner through sheer dumb luck.

Philly Fed State Coincident Indexes increase in September - From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for September 2011. In the past month, the indexes increased in 30 states, decreased in 13, and remained unchanged in seven for a one-month diffusion index of 34. Over the past three months, the indexes increased in 30 states, decreased in 16, and remained unchanged in four (Kentucky, Maryland, Mississippi, and New Mexico) for a three-month diffusion index of 28. Note: These are coincident indexes constructed from state employment data..This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In September, 35 states had increasing activity, up from 28 in August. It is important to remember that August was an especially weak month due to the debt ceiling debate, and some rebound in September was expected.  Here is a map of the three month change in the Philly Fed state coincident indicators. Several states have turned red again. This map was all red during the worst of the recession, and all green not long ago - but this is an improvement from August.

Tracking the Recovery Using Gallup Unemployment Data - Gallup collects a rolling survey of unemployment. Unfortunately the series is not very old and there is no seasonal adjustment. One strategy to handle that would be to apply the BLS seasonal adjustment to the Gallup data. However, the methodologies are different enough to make this questionable. Another, way to at least get some handle on what’s happening is to look at the year-over-year change in the unemployment measure. This should give us some sense as to whether things are getting better or worse. What this seems to suggest is that the pace of recovery slowed dramatically in the early part of this year and was stalled through-out the summer. Yet, in the last few months it has picked up again and is running at roughly the rate it was in early 2011.

Jobless Claims: Still Going Nowhere Fast -- Initial jobless claims slipped by a mere 2,000 last week to a seasonally adjusted 402,000. This leading indicator seems to be telling us that the economy can avoid a new recession--maybe--but that's about as far as the good news goes. New filings for unemployment benefits remain stuck at elevated levels, offering a stark reminder that any optimism about the business cycle should be muted. An economy that's growing is all well and good, but it's a precarious growth without a stronger labor market.

Not All the Economic News is Bad - The past decade has been terrible in terms of job growth and median wage growth, and sadly that was true even before it culminated in the worst recession since the 1930s. But not all the news is bad. Although it’s not much discussed, this has actually been the best decade since the 1960s for productivity growth. Last year, labor productivity grew by over 4% and it has averaged over 2.5% in the preceding 10 years. Why does this matter? Simply this: productivity, output per unit input, is by far the most important determinant of our living standards. As Bob Solow showed in his Nobel Prize winning work, the main thing that makes an economy richer is not working harder or even using more capital or other resources. Instead, the main driver is innovations in products, services and business processes that let us create more value without using more inputs. Productivity comes from new technologies and new techniques of production. The most important of these is what economists call general-purpose technologies like the steam engine or electricity. They contribute to productivity directly, but more importantly, they also spur countless complementary innovations that can keep driving productivity growth for decades.

More Jobs Predicted for Machines, Not People - A faltering economy explains much of the job shortage in America, but advancing technology has sharply magnified the effect, more so than is generally understood, according to two researchers at the Massachusetts Institute of Technology. The automation of more and more work once done by humans is the central theme of “Race Against the Machine,”1 an e-book to be published on Monday. “Many workers, in short, are losing the race against the machine,” the authors write. Erik Brynjolfsson, an economist and director of the M.I.T. Center for Digital Business, and Andrew P. McAfee, associate director and principal research scientist at the center, are two of the nation’s leading experts on technology and productivity. The tone of alarm in their book is a departure for the pair, whose previous research has focused mainly on the benefits of advancing technology.

Manufacturers Report Shortage of Skilled Workers - Nearly half of Minnesota manufacturers responding to a survey say they haven't filled positions because they lack qualified job candidates, according to a new study by the Minnesota Department of Employment and Economic Development (DEED). The 2011 Minnesota Skills Gap Survey found that 45 percent of responding manufacturers in the state considered the shortage of skilled workers to be a moderate or serious problem.  The biggest shortages were found in skilled production (58 percent of those responding), followed by jobs for scientists and engineers (40 percent of respondents). Shortages were not as severe for jobs in low-skilled production, management and administration, and customer service. "State manufacturers have openings, but Minnesotans who are looking for work often don't have the right skills to fill them," . "As we observe Minnesota Manufacturers Week, it's a good time to stress the importance of aligning manufacturers' needs with workforce training." The survey, which was conducted last spring, found that manufacturers in southwestern and northwestern Minnesota had the highest worker shortage in the state. Although the current shortage is slightly less than the shortage that existed when a similar survey was conducted in 2007, manufacturers said they expect the problem to become more severe over the next three years.

Working Americans Are Still Taking It Up The Wazoo - It's been a while since we reviewed the economic data. It's not a pretty sight. David Cay Johnston took a long look at the first income data we have for 2010 in First look at US pay data, it’s awful (Reuters). 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 — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles. Doesn't announce their release? Fiddling while Rome burns? Imagine that! Quelle surprise!

Dave Dayen Is Wrong - And not in a good way, when he says: I understand that Republicans are just playing the culture war game here, trying to link Warren and the loony left. I don’t know how that will play in, er, Massachusetts. And the world has moved on from the Hard Hat riots and the 1972 campaign. The hard hats have been brutalized just as much as the rest of us in this economy. No, no, no. The "hard hats" have been brutalized much more than "the rest of us" in this economy. And the economy before that. And, basically, every one since 1986,* Bruce Bartlett's protestations notwithstanding. Note especially that having all those English Literature and Anthropology majors with degrees hasn't hurt.

Ahmadinejad: ‘An ugly thing’ for U.S. to spend more on military than unemployed - In a CNN interview aired Sunday morning, Iranian president Mahmoud Ahmadinejad criticized American military involvement in the Middle East. On Fareed Zakaria GPS, the controversial figurehead for Supreme Leader Ali Khamenei was puzzled by America’s continued focus to plug more defense money overseas while the country’s jobless rate remains high. “The United States is doing a very ugly thing,” he said. “They are spending so much money for these military bases, (but) they cannot spend this money for the American unemployed?”

Painful Separation - Resolution Foundation - 59pp pdf- An international study of the weakening relationship between economic growth and the pay of ordinary workers

Income Inequality Is Hobbling the Middle Class - Income inequality in the U.S. has been rising for the last several decades, and with it concern about the consequences. For example, to what extent does the large flow of income into the hands of financial executives give them the power to influence Congress through campaign donations? How does this have an impact on the willingness of legislators to impose regulations that would stabilize the financial system but inhibit the ability of the financial industry to make the huge profits that fund political campaigns?  If economic mobility increased along with the increase in inequality, then this would at least partially offset the worries associated with the rising concentration of income. To see how, suppose there are two types of jobs in society. One type is desirable and well paying; the other is hard, miserable work with little compensation. Suppose also that one group in society always gets the good jobs while the other gets the bad even though most people within each group are equally qualified to do both types of work. Thus, this is a highly unequal outcome. However if there is mobility – if we prevent one group from keeping the good jobs through political power or other means and instead use a lottery at the beginning of each week to see which of the qualified workers does which job – then the random allocation of jobs over time helps to solve the inequality problem.

What kind of mobility matters? - Mark Thoma had a column yesterday on income inequality and economic mobility. He argues that greater income inequality may be less problematic if there were also greater mobility. If one's chances for moving up and down the economic ladder were no better or worse than anyone else's (including those who are currently at the top), then a longer ladder may not be such a bad thing. Thoma identifies two kinds of mobility: intra-generational and inter-generational. Intra-generational mobility concerns the prospects for mobility that individuals and/or families face during their lifetime. Inter-generational mobility concerns "how easy it is to move between social classes across generations." In other words, relative to the prospects your parents faced, are yours better or worse? I worry (but am not sure) that Thoma is focusing on both the wrong problem and the wrong solution. Near the end of the article Thoma claims, "Increasing mobility can help, but this alone won’t overcome the inequality problem." What, exactly, is "the inequality problem"? Reading his article, I don't see Thoma complaining about income inequality as such.

Trends in the Distribution of Income - CBO Director's Blog - From 1979 to 2007, real (inflation-adjusted) average household income, measured after government transfers and federal taxes, grew by 62 percent. That growth was not equal across the income distribution: Income after government transfers and federal taxes (denoted as after-tax income) for households at the higher end of the income scale rose much more rapidly than income for households in the middle and at the lower end of the income scale. In a study prepared at the request of the Chairman and former Ranking Member of the Senate Committee on Finance, CBO examines the trends in the distribution of household income between 1979 and 2007. (Those endpoints allow comparisons between periods of similar overall economic activity.) CBO finds that between 1979 and 2007:

  • For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent (see figure below).
  • For others in the 20 percent of the population with the highest income, average real after-tax household income grew by 65 percent.
  • For the 60 percent of the population in the middle of the income scale, the growth in average real after-tax household income was just under 40 percent.
  • For the 20 percent of the population with the lowest income, the growth in average real after-tax household income was about 18 percent.

Congressional Budget Office - Trends in the Distribution of Household Income Between 1979 and 2007 - Text-only. The full version of the summary may include tables, charts, and footnotes. After-tax income for the highest-income households grew more than it did for any other group. (After-tax income is income after federal taxes have been deducted and government transfers—which are payments to people through such programs as Social Security and Unemployment Insurance—have been added.) CBO finds that, between 1979 and 2007, income grew by: 275 percent for the top 1 percent of households, 65 percent for the next 19 percent, Just under 40 percent for the next 60 percent, and 18 percent for the bottom 20 percent. The share of income going to higher-income households rose, while the share going to lower-income households fell. The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income. Most of that growth went to the top 1 percent of the population. All other groups saw their shares decline by 2 to 3 percentage points.

Income Growth of Top 1% Over 30 Years Outpaced Rest of U.S. - The wealthiest Americans saw their income nearly triple in the three decades to 2007, substantially more than all other segments of the population, the Congressional Budget Office said Tuesday.The nonpartisan agency said in a report that after-tax income on average grew by 62% during the 30-year period. But that growth wasn’t even. The wealthiest 1% of Americans saw their incomes skyrocket by 275% during that stretch, while after-tax income for the one-fifth of households with the lowest income grew by just 18% from 1979 to 2007. For the richest Americans excluding the top 1%, household income grew by 65% during that period, while for the 60% in the middle of the income scale, the growth in after-tax income was just under 40%, the CBO said. The bulk of this widening gap was because income before taxes and government transfers grew for wealthier earners. The top 1% of the population accounted for 60% of all such income in 2007, up from 50% in 1979.

CBO on Income Inequality, and Interpreting OWS - The CBO released a report on income inequality earlier this week. This means that the "inequality deniers" are having a more difficult time arguing that widening spreads an wages, compensation, or overall income are merely statistical artifacts dreamt up by liberals (see e.g. here). What is of most interest is (i) real after-tax income of the top 1 percentile has risen about 275%, and (ii) the pre-transfers/pre-tax income share of the top 1% has increased most profoundly.  The CBO Director's Blog observes: The rapid growth in average real household market income for the 1 percent of the population with the highest income was a major factor contributing to the growing dispersion of income. Average real household market income for the highest income group tripled over the period, whereas such income increased by about 19 percent for a household at the midpoint of the income distribution. As a result, the share of total market income received by the top 1 percent of the population more than doubled between 1979 and 2007, growing from about 10 percent to more than 20 percent.

Income Inequality Explained by Demographics - Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households, but it’s also instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households? Recently released data from the Census Bureau (available here, here, and here) for American households by income quintiles in 2010 allows for such a comparison: see the chart above (click to enlarge). Bottom Line: American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.

Can Aging Population Explain Income Stagnation? - Since 1970, the number of retired workers receiving Social Security has increased by 159% from 13.35 million to 34.59 million.  During the same period, the number of active employed workers increased by less than half that amount, by 77% from 78.7 million to 139 million.  The fact that retired workers have increased so significantly relative to active workers since 1970 can be explained by advances in medical care that have increased life expectancy by 20 years since 1930.  The top chart shows that the ratio of active workers to retired workers decreased by almost 32% since 1970, from 5.90-to-1 in 1970 to 4.02-to-1 by 2010.  The bottom chart shows the inverse - retired workers as a percent of active workers - which has increased from 17% in 1980 to 24.8% in 2010.     So what? Well, perhaps this demographic trend of an aging U.S. population explains why real median household income has stagnated in recent decades, according to Census Bureau data. Relative to active workers, we now have significantly more retirees, many of whom might have significant assets (a house with no mortgage, stocks and bonds, mutual funds, etc.) that make them very wealthy, but in retirement would be receiving relatively low annual incomes compared to when they were working full-time.

5 ways income inequality happened, and will continue (Reuters) - As if on cue for an Occupy Wall Street commercial, the latest Congressional Budget Office report highlighted the large crevasse between the upper 1 percent of U.S. households and the rest of us. When it comes to income inequality, this is what U.S. politicians should be digesting now. While it's hardly a major revelation that for the top 1 percent of earners real after-tax income rose 275 percent between 1979 and 2007, the top 20 percent made more in after-tax income than the remaining 80 percent. That's quite a difference since the lowest-income group's median income only rose 18 percent. Income inequality couldn't be more of a mainstream issue as some 70 percent of Americans surveyed want wealth shared more equally. The reasons for the growing disparity, which the CBO, without irony, measured by an increasing "Gini coefficient," were buried deep in the report. It's how income was taxed that allowed the ultra-wealthy to keep more of what they earned compared to middle- or lower-class Americans.

Occupy CBO: A Misleading Report on Income Inequality - The Congressional Budget Office has published a report on the 30-year trend of income inequality in the United States, based on the period 1979 to 2007.  They conclude that over this period the distribution of income has grown more unequal, and that part of the reason is that federal taxes have become less redistributive.    First, they overstate their case by not including the most recent data, and conceal what is perhaps a dramatic reversal of the trend.  The trend they speak of peaked in 2007 and has reversed ever since, based on the most recent IRS data.  The first graph below shows that the share of total income attributable to the top 1 percent peaked in 2007 at 22.8 percent, and declined precipitously to 16.9 percent by 2009.  This is because the recession hurt high income earners the most, since their income is derived largely from investments and business income.  The trend towards greater concentrations of wealth occurred mainly in the 1980s and 1990s, and since then the incomes of the top 1 percent have fluctuated up and down with the economy.  In fact, the data indicates that income is now more evenly distributed than it was under most of Clinton's second term.

The Ideological Fantasies of Inequality Deniers -- Rising income inequality, like climate change, is an ideologically inconvenient issue for conservatives. They would prefer not to discuss it altogether. If forced to discuss it, they will generally either deny its existence or simply carry on as if it doesn’t exist. The underlying facts, like the facts of climate change, are stark. Over the last few decades, income growth for most Americans has slowed to a crawl, while income for the very rich has exploded. That’s a reversal of the three decades following World War II, when all income groups got richer, with the poor and middle class rising at a faster rate than the rich. Crucially, the Congressional Budget Office’s new analysis shows that changes in government policy over this period have made inequality worse. (In CBO-speak: “The equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979.”) We’re not having a debate about how to reverse or even stop the growth of inequality. Nobody has a real plan to do that. The Democratic plan is to slightly arrest the growth of inequality by hiking taxes on the rich a few percentage points, so as to minimize the need to cut the social safety net. The Republican plan is to slash taxes for the rich and programs for the poor, thereby massively increasing inequality.

Denial In Depth - Krugman - Columbia Journalism Review has a takedown of a “study” from American Enterprise Institute purporting to show that inequality hasn’t increased, after all. What’s striking is the way AEI doesn’t even resort to the usual practice of concocting misleading numbers; it just flat-out lies about what various other peoples’ research, like Robert Gordon’s work, actually says. Oh, and read the comments for entertainment. CJR, welcome to my world. What I found myself thinking about, however, is the way the inequality debate illustrates some typical features of many debates these days: the way the right has a sort of multi-layer defense in depth, which involves not only denying facts but then, in a pinch, denying the fact that you denied those facts. I’m not sure there are three levels (yet) on inequality, but we definitely have (a) right-wingers denying that inequality is rising and (b) denying that anyone is denying the rise in inequality, but attacking any proposal to limit that rise. You might ask, how is it possible to take such mutually contradictory positions? And the answer is, it’s very easy if confusing the debate is your job.

Occupying Struggle Street  The Occupy Wall Street movement has gained traction globally under the banner of speaking up for the 99% in an era of growing income inequality.  But while the protesters camp out in cities around the globe, low-income earners in the US, and many other developed nations, have been camped out themselves for the past two decades – in Struggle Street.  Families are now occupying the bottom rungs of the income ladder over generations, as observed by declining trends in upward mobility. Inequality in a dynamic capitalist economy is to be expected.  If equality arises as a result of variation in work effort and entrepreneurial endeavour, then its impact on social cohesion is limited, as opportunities are available for lower income individuals and families to climb the ladder of success with a good dose of hard work, entrepreneurship, and luck. However two specific trends have arisen in the past three decades that are undermining this idealist notion of inequality under dynamic capitalism.

  1. Inequality has increased beyond what appears reasonable from individual effort alone, and more importantly,
  2. upward mobility, or the chances that a descendent generation will improve their position on the income distribution, has declined.  Poor people in 2011 are more likely to stay poor, while the rich are likely to stay rich, and indeed, get richer.

NYT: Americas Exploding Pipe Dream - We sold ourselves a pipe dream that everyone could get rich and no one would get hurt — a pipe dream that exploded like a pipe bomb when the already-rich grabbed for all the gold; when they used their fortunes to influence government and gain favors and protection; when everyone else was left to scrounge around their ankles in hopes that a few coins would fall.  We have not taken care of the least among us. We have allowed a revolting level of income inequality to develop. We have watched as millions of our fellow countrymen have fallen into poverty. And we have done a poor job of educating our children and now threaten to leave them a country that is a shell of its former self. We should be ashamed.  Poor policies and poor choices have led to exceedingly poor outcomes. Our societal chickens have come home to roost.  This was underscored in a report released on Thursday by the Bertelsmann Stiftung foundation of Germany entitled “Social Justice in the OECD — How Do the Member States Compare?” It analyzed some metrics of basic fairness and equality among Organization for Economic Co-operation and Development countries and ranked America among the ones at the bottom.  I could write (and have written) ad nauseam about our woeful state, but it might be more powerful to see it for yourself. So here are some of the sad data from the report:

Has America Become an Oligarchy? - The Occupy Wall Street movement is just one example of the sudden outbreak of tension between America's super-rich and the "other 99 percent." Experts now say the US has entered a second Gilded Age, but one in which hedge fund managers have replaced oil barons -- and are killing the American dream.  "We are the 99 percent," is the continuing chant of the protestors, who are now in their seventh week of marching through the streets of Manhattan. And, surprisingly, they have hit upon the crux of America's problems with precisely this sentence. Indeed, they have given shape to a development in the country that has been growing more acute for decades, one that numerous academics and experts have tried to analyze elsewhere in lengthy books and essays. It's a development so profound and revolutionary that it has shaken the world's most powerful nation to its core. Inequality in America is greater than it has been in almost a century. Those fortunate enough to belong to the 1 percent, made up of the super-rich, stand on one side of the divide; the remaining 99 percent on the other. Even for a country that has always accepted opposite extremes as part of its identity, the chasm has simply grown too vast.

Class Warfare: The Middle Class Is Losing - Peggy Noon today picks up a theme, recently invoked by David Brooks, which has become a relentless Republican talking point on the presidential stump: Barack Obama is a divider or, as Newt Gingrich inimitably put it to a crowd in Davenport, Iowa, which I report in my print column this week: “The President is a sincere believer in class warfare radicalism.” This is hilarious, on its face. One thing that we’ve learned about Barack Obama over the past few years is that he is a flagrant, fervent opponent of radicalism of any sort. He has rendered himself a cream puff in his constant pursuit of compromise with the real radicals operating in American politics right now, the Congressional Republicans. His signature initiatives–health care, Wall Street reform, anti-terror policy overseas–either are Republican in origin (health care–I’m looking at you, Newt) or a continuation of policies favored by the Bush Administration (a soft hand toward Wall Street; a strong hand against al Qaeda and its allies). And so it is sort of rich for Republicans to cry “class warfare” when their 30-year no-tax, deregulatory mania has slowly gutted the American middle class.

Veteran shot in the face with police projectile at Occupy Oakland protests - YouTube: Veterans for Peace member Scott Olsen was wounded by a less-lethal round fired by either San Francisco Sheriffs deputies or Palo Alto Police on October 25, 2011 at 14th Street and Broadway in Downtown Oakland

Veteran Scott Olsen Could Be The First Person To Die At A Wall Street Protest - Scott Olsen survived two tours of Iraq, but his life could be over after being critically injured by a police projectile at Occupy Oakland, The Guardian reports. He's 24 years old. As we know, Occupy Oakland got incredibly ugly this week as police tried to remove protesters from their camp in front of City Hall by using tear gas, fire crackers, and rubber bullets. Olsen suffered a head injury on Tuesday night, and is now in critical condition in Oakland's Highland Hospital. Jay Finneburgh, a photographer on the scene, managed to witness and take pictures of the incident. Police policy specifically prohibits the firing of these weapons at a person's head. "This poor guy was right behind me when he was hit in the head with a police projectile. He went down hard and did not get up," Finneburgh wrote. At first, Doctors told Olsen's friends that he was in critical, but stable condition. Now they're being told that his skull has been fractured and his brain is beginning to swell. Neurologists are in the process of determining whether or not he will require surgery.

Police Crackdown Effort at #OccupyOakland Raises Bigger Questions About Movement Evolution - - Yves Smith - Most readers by now no doubt have heard about the aggressive police crackdown at Occupy Oakland on Tuesday, in which police critically wounded Iraq war vet Scott Olsen while using tear gas, rubber bullets, and flash grenades to clear Frank H. Ogawa Plaza. The footage right before the tear gassing began does not show any signs of provocation by the protestors, but other reports say that a small group which most believe were anarchists rather than OWS members, had engaged in aggressive actions earlier.  Like many of the police efforts to rein in Occupations, this one seems to have backfired. The major of Oakland faced a difficult press conference earlier today and as reported by Mother Jones, backed down considerably:It was a peaceful night in Oakland. At a press conference, Mayor Jean Quan promised a “light police presence” for the next few days, to allow an opportunity for “dialogue” with the protesters. But there were still efforts at containment. Tweets indicate that the BART service to San Francisco was closed, blocking efforts of Occupy Oakland to join Occupy San Francisco. There was an effort to organize a march across the bridge, but that seemed to fizzle out.

The Price of Plutocracy - With income inequality on everyone's radar today, the Center on Budget and Policy Priorities tweets this: Quite so. This gives me an excuse to repost one of my favorite tables. It compares how much income various groups make today vs. how much they would be making if everyone's incomes, rich and poor alike, had grown at similar rates since 1979. As you can see, by 2005 the bottom 80% were collectively earning about $743 billion less per year while the top 1% were earning about $673 billion more. It's sort of uncanny how close those numbers are. For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich.One of the points this drives home is just how much the story of growing income inequality really is a story of the top 1%. Inequality has increased within the bottom 99%, but not all that dramatically. It's really the top 1% and the top 0.1% where all the action is. So if the Occupy Wall Street folks are ever looking for an alternate slogan, they might consider "Give us back our $700 billion."

80 Years Later: Same Culprits, Same Rage  - Eighty years ago the last Fourth Turning was also in its infancy. They generally last 15 to 20 years. The catalyst for the last Fourth Turning was the great stock market crash of 1929.   The 1920s “boom” enriched only a fraction of the American people. Earnings for farmers and industrial workers stagnated or fell. Farmers were barely getting by during the roaring 20s. Only the Wall Street crowd was getting rich.  The economic growth of the 1920s did not reach most Americans: 60% of American families earned less than the amount necessary to support their basic needs ($2,500 was considered enough to support a family’s basic needs). The agricultural sector was similarly stagnant: farm prices dropped after World War I when Europe again began to feed itself and new grain exports from South American further depressed prices. The lack of purchasing power of rural people and farmers resulted in declines in consumer purchasing in those areas, as well as increased defaults on debt. Rural, urban, and suburban consumers began to increase their personal debts through mortgages, car loans, and installment plans to buy consumer goods, such as radios.

Top Earners Doubled Share of Nation’s Income, Study Finds - The top 1 percent of earners more than doubled their share of the nation’s income over the last three decades, the Congressional Budget Office1 said Tuesday, in a new report2 likely to figure prominently in the escalating political fight over how to revive the economy, create jobs and lower the federal debt.  In addition, the report said, government policy has become less redistributive since the late 1970s, doing less to reduce the concentration of income.  “The equalizing effect of federal taxes was smaller” in 2007 than in 1979, as “the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes,” the budget office said.  Also, it said, federal benefit payments are doing less to even out the distribution of income, as a growing share of benefits, like Social Security3, goes to older Americans, regardless of their income.  The report, requested several years ago, was issued as lawmakers tussle over how to reduce unemployment, a joint committee of Congress weighs changes4 in the tax code and protesters around the country rail against disparities in income between rich and poor.

The New Gilded Age (chart & graphic) The top 1 percent of American earners controls as much of the nation’s total income as it did on the eve of the Great Depression. Now, however, their money comes from skyrocketing paychecks more than from unearned income, as it did in 1928.

As the Data Show, There’s a Reason the Wall Street Protesters Chose New York - When the federal income tax was first imposed in 1913, the richest 0.1 percent of households reaped 8.6 percent of the nation’s income. In 2007, as the recession1 began, the share going to that sliver of megarich Americans was 12.3 percent.  And an even more exclusive club — the top 0.01 percent of households — is collecting a greater share of total income than ever before recorded.  Those numbers suggest that the Occupy Wall Street2 protesters can make a compelling case when they complain that the economic scales are unfairly tilted toward the wealthy. The megarich hold more of the nation’s wealth and collect more of the overall income today than at any time since right before the Great Depression3.  Certainly, the protesters picked the right city in which to start their campaign. Among the 1 percent of American households with the highest income, a significant portion, 13 percent, live in the New York metropolitan area, with 4.4 percent living in Manhattan, according to an analysis by Andrew A. Beveridge, a sociologist at Queens College. In three Manhattan neighborhoods, the Upper East and Upper West Sides and Greenwich Village, more than 11 percent of the households make enough to qualify for the top 1 percent.

New York Metro Area Has Highest Inequality in Country - It’s probably no wonder that the “Occupy” movement began with Wall Street: the New York metropolitan area has the highest inequality in the country, according to a new report from the Census Bureau. The report, by Daniel H. Weinberg, analyzed income data at various geographical levels and found that the region encompassing New York, northern New Jersey, Long Island and parts of Pennsylvania had the highest income inequality of any large metro area.New York State also has the highest income inequality of all 50 states (although Washington, D.C., was worse). Below is a map showing three measures of income inequality for each state: the Gini index (which ranges from 0.0, when all households have equal shares of income, to 1.0, when one household has all the income and the rest has none); a ratio of household income at the 90th percentile to that at the 10th percentile; and a ratio of household income at the 95th percentile to that at the 20th. In all cases, a higher value means greater inequality.

Outside Cleveland, Snapshots of Poverty’s Surge in the Suburbs - The poor population in America’s suburbs — long a symbol of a stable and prosperous American middle class — rose by more than half after 2000, forcing suburban communities across the country to re-evaluate their identities and how they serve their populations. The increase in the suburbs was 53 percent, compared with 26 percent in cities. The recession2 accelerated the pace: two-thirds of the new suburban poor were added from 2007 to 2010. “The growth has been stunning,” . “For the first time, more than half of the metropolitan poor live in suburban areas.” As a result, suburban municipalities — once concerned with policing, putting out fires and repairing roads — are confronting a new set of issues, namely how to help poor residents without the array of social programs that cities have, and how to get those residents to services without public transportation. Many suburbs are facing these challenges with the tightest budgets in years. “The whole political class is just getting the memo that Ozzie and Harriet don’t live here anymore,” This shift has helped redefine the image of the suburbs. “The suburbs were always a place of opportunity — a better school, a bigger house, a better job,” . “Today, that’s not as true as the popular mythology would have us believe.”

Homeless in America - Homeless people confront the same issues every day: how to scrape together meals, keep warm at night by covering themselves with cardboard or tarp, and relieve themselves without committing a crime. Public restrooms are sparse in American cities -- "as if the need to go to the bathroom does not exist," travel expert Arthur Frommer once observed.  And yet to yield to bladder pressure is to risk arrest. A report entitled “Criminalizing Crisis,” to be released later this month by the National Law Center on Homelessness and Poverty, recounts the following story from Wenatchee, Washington: "Toward the end of 2010, a family of two parents and three children that had been experiencing homelessness for a year and a half applied for a 2-bedroom apartment. The day before a scheduled meeting with the apartment manager during the final stages of acquiring the lease, the father of the family was arrested for public urination. The arrest occurred at an hour when no public restrooms were available for use. Due to the arrest, the father was unable to make the appointment with the apartment manager and the property was rented out to another person. As of March 2011, the family was still homeless and searching for housing."

Recession doubles area's food stamp recipients - Grim statistics show the human side of the recession in Sarasota County, including a doubling in the county households receiving food stamps and a 41 percent spike in Medicaid recipients. "There are so many issues that it's overwhelming to even those of us who deal with it every day," Weaver will appear before the Venice City Council Tuesday to educate elected officials about the Alliance, which formed a decade ago to coordinate social services, and to gain support for the group's efforts at fighting poverty and other social ills. The group's latest numbers show a continuing surge in residents seeking help, especially with food and health care. About 38,000 households now receive food stamps, double the 19,000 in 2007. Because a household can have more than one person, that means that more than 10 percent of the county's residents now receive state help to buy groceries.

Female veterans fall into ranks of homeless - Women make up a growing number of homeless veterans, a group usually associated with combat-hardened men unable to cope with civilian life. Homelessness among female veterans of the Iraq and Afghanistan wars has increased every year for the last six years - from 150 in 2006 to 1,700 this year - according to the Department of Veterans Affairs.  Female veterans contend with the same stresses that can lead to homelessness among male veterans - brain injuries, drug and alcohol abuse, and post-traumatic stress disorder, or PTSD. But many women also contend with sexual trauma, domestic abuse and pregnancy - often while trying to raise children alone. The VA, which has made ending homelessness a priority, says 1 in 5 female veterans report sexual trauma in the military, compared with 1 in 100 men.

New Social Justice Index Places U.S. Near Bottom -- A central concern for those in the Occupy movement -- that the economic system in the U.S. is rigged in favor of the well-off -- has been corroborated by a major new survey of developed nations. When it comes to social justice -- defined here as the ability each individual has to participate in the market society, regardless of their social status -- the United States ranks near the bottom of 31 developed countries, the Thursday report from Bertelsmann Foundation found. It's one thing if you live in a market economy where everyone has the same shot at success. It's quite another if fortune favors the fortunate. And the new survey found that when it comes to "equal opportunities for self-realization," the U.S. ranks 27 out of 31 Organisation for Economic Co-operation and Development member states, well behind not just Northern European countries like Norway and Denmark, but even countries like Hungary, Poland, Italy and France. The only countries whose citizens fare even worse are Greece, Chile, Mexico and Turkey. The new report comes just a day after the Congressional Budget Office validated another key precept of Occupy protesters: The income gap between the rich and poor in the U.S. grew precipitously from 1979 to 2007, the report found, with the top 1 percent of earners seeing their incomes spike by 275 percent.

Heist from San Francisco church raises alarm bells - A 5,300-pound bell that survived the 1906 San Francisco earthquake and is worth an estimated $75,000 was stolen last weekend by recycling thieves probably hoping to scrap it for about $10,000. The theft of this historic bell from St. Mary’s Cathedral is just the latest in a rash of alarming metal thefts across The City. The Police Department recently launched a special investigations unit specifically to combat such thefts. In another heist last weekend, crooks cut several thousand dollars worth of copper from a building owned by Sacred Heart Cathedral Preparatory, San Francisco police Inspector Brian Danker said. Sacred Heart recently acquired the building to house a nonprofit organization, he added. The prior week, a bronze plaque honoring slain Supervisor Harvey Milk was pilfered from Muni’s Castro station. The plaque, worth $10,000, had been bolted to a wall.

Wisconsin owes U.S. $1.18 billion on unemployment borrowing - The state of Wisconsin still owes the federal government a whopping $1.18 billion it borrowed to pay unemployment benefits to the jobless. Despite the fragile state of the economy, the state is working on ways to repay the federal government. It is doing so in a variety of ways: Special assessments against businesses to pay the interest the federal government is charging states. A one-week waiting period for people seeking unemployment benefits. An increase in the taxable wage base the state uses to calculate what companies owe. A requirement that residents filing new claims register first with the Wisconsin Job Service and actively search for work. Proposed legislation that sharply increases the penalty for fraud.

Stockton, California, Warns of Possible Default on 2006 Debt - Stockton, California, which declared a fiscal emergency in May, warned it may default on redevelopment agency debt issued in 2006, citing a shortfall in tax-increment revenue. Debt service will exceed available revenue by about $858,000 in the North Stockton project area, according to an Oct. 12 filing with the U.S. Securities and Exchange Commission. Standard & Poor’s downgraded the underlying rating on series 2006A and 2006B revenue bonds issued by the Stockton Public Financing Authority on behalf of the Stockton Redevelopment Agency to B from BB with a negative outlook in an Oct. 4 report, citing declines in assessed valuation for real estate in the redevelopment area. The redevelopment agency said it expects a 3.17 percent drop in values for fiscal 2012. “The city has experienced persistent negative economic effects of housing market stress and the recent recession in our view, but the declines in some economic indicators appear to be moderating,” the report said.

Debts of states over $4 trillion: Budget group -The total of U.S. state debt, including pension liabilities, could surpasses $4 trillion, with California owing the most and Vermont owing the least, according to an analysis released on Monday. The nonprofit State Budget Solutions combined states' major debt and future liabilities, primarily for pensions and employee healthcare, unemployment insurance loans, outstanding bonds and projected fiscal 2011 budget gaps. It found that in total, states are in debt for $4.2 trillion. The group, which follows state fiscal conditions and advocates for limited spending and taxes, said the deficit calculations that states make "do not offer a full picture of the states' liabilities and can rely on budget gimmicks and accounting games to hide the extent of the deficit." The housing bust, financial crisis and economic recession caused states' tax revenue to plunge, and huge holes have emerged in their budgets over the last few years. Because all states except Vermont must end their fiscal years with balanced budgets, states have scrambled to cut spending, hike taxes, borrow and turn to the federal government for help.

Nurses Condemn Chicago Mayor Emanuel for Arrest Of Nurses, Medical Volunteers at Occupy Chicago - Registered nurses from across the U.S. today condemned Chicago Mayor Rahm Emanuel for his decision to arrest nurse volunteers, as well as peaceful protesters, in a late night crackdown Saturday night at the Occupy Chicago protest. NNU is asking supporters to call Mayor Emanuel’s office at 312-744-5000 and demand they immediately drop all charges against the nurses and other protesters, and stop the harassment and arrests of the nurses and others peacefully exercising their free speech rights. Nurses will also picket the mayor’s office at 10 a.m. Monday morning, at City Hall at the LaSalle entrance.Nurse leaders of National Nurses United who set up a nurses’ station to provide basic first aid to Chicago protesters – as NNU has done peacefully in five other cities across the U.S. – were among the some 130 people arrested by Chicago police. The police also tore down the first aid station, and arrested scores of others who had peacefully assembled to support the station. “Even in wartime, combatants respect the work of nurses and other first responders. Yet Mayor Emanuel and Chicago seem to care as little about that tradition as they do in protecting the constitutional rights of free speech and assembly.”

California bullet train: The high price of speed - Since it opened in 1893, Bakersfield High School has been the pride of this city and its academic cornerstone, the place where the late Chief Justice Earl Warren graduated and students call themselves the Drillers in homage to the region's oil patch. It has withstood earthquakes and depressions, but perhaps it will not survive the California bullet train. The train's proposed routes are taking aim at the campus, potentially putting a bulls-eye on the Industrial Arts Building, where future engineers, ceramic artists, auto mechanics, fabric designers and wood-workers take classes. Even though freight trains already lumber not far from the campus, these elevated trains could rocket by on a viaduct at up to 220 mph every five minutes, eye level with the school library and deafening the stately outdoor commons where students congregate between classes.The California High Speed Rail Authority, the agency trying to build the bullet train, couldn't have found a more politically sensitive target. The school is where House Majority Whip Kevin McCarthy (R-Bakersfield), one of the project's staunchest opponents in Congress, sends his children.

Calif. Corrections Dept. to send out 26K layoff notices -- The California Department of Corrections and Rehabilitation is churning out 26,000 layoff warning notices by the end of the week. It's the result of Gov. Jerry Brown's plan that began sentencing some low-level inmates this month to county jails instead of state prison. The move aims to relieve overcrowding as the courts ordered and save the state money. Due to labor laws and union contracts, warning notices have to be given at least 120 days in advance of an actual layoff. It gives workers an opportunity to transfer or be demoted. While the layoffs affect almost every job category, prison guards are likely to be affected the most since they are half of the agency's 65,000 workforce. It's unclear how many of the 26,000 corrections workers will ultimately lose their jobs since the inmate shift has never been tried before.

Analysis: California school districts to take down reserves (Reuters) - When California lawmakers reached a deal to close a $10 billion budget gap in June, critics warned the agreement relied too heavily on $4 billion in additional tax revenue projected to materialize with a rapidly rebounding economy. Now, with the state's recovery stalling, the new revenue is not coming in -- setting the stage for automatic budget cuts that could threaten the solvency of some state's largest school districts. According to the state controller's office, revenue since the start of fiscal year has fallen $705 million short of projections. That signals big new cuts to school spending. "There is nothing out there that indicates that $4 billion will appear," Gerston said. School districts are in an especially bad spot because teacher payrolls, by far their largest expense, are off limits; the 325,000-member California Teachers Association won a guarantee against teacher layoffs as part of the budget negotiations. That deal was critical in getting a budget passed on-time -- a rarity in California -- but was denounced by school district administrators. "We were appalled,"  "It was the kind of thing that got slipped into legislation, literally, at the last minute."

San Diego Unified School District Discusses Risk of Insolvency - Parents, teachers and students sitting in on a packed meeting of the San Diego Unified School District got a "big picture" look at the financial crisis facing the state's second largest school district. While some parents were there to argue against school closures and against cuts to transportation, the bulk of the meeting involved the future of the district. Financial adviser Ron Bennett painted a grim picture because California's economy is growing at a much slower rate than hoped. After five years of cuts, school leaders say that no amount of layoffs or cutbacks could make up for the projected $118 million gap in state funding this year. Proposition 98 requires that a minimum portion of the state's budget goes to schools but that amount varies from year to year, depending on what the state has to work with.

Schools fear worst budget cuts ahead — Educators are bracing for a tough reality: As difficult as budget cuts have been on schools, more tough times are likely ahead. Even in a best-case scenario that assumes strong economic growth next year, it won't be until 2013 or later when districts see budget levels return to pre-recession levels. Already, an estimated 294,000 jobs in the education sector have been lost since 2008, including those in higher education. The cuts are felt from Keller, Texas, where the district moved to a pay-for-ride transportation system rather than cut busing altogether, to Georgia, where 20 days were shaved off the calendar for pre-kindergarten classes. In California, a survey found that nearly half of all districts last year cut or reduced art, drama and music programs. Nationally, 120 districts — primarily in rural areas — have gone to a four-day school week to save on transportation and utility costs, according to the National Conference of State Legislators. Others are implementing fees to play sports, cutting field trips and ending after-school programs.

A Silicon Valley School That Doesn’t Compute - The chief technology officer of eBay sends his children to a nine-classroom school here. So do employees of Silicon Valley giants like Google, Apple, Yahoo and Hewlett-Packard.  But the school’s chief teaching tools are anything but high-tech: pens and paper, knitting needles and, occasionally, mud. Not a computer to be found. No screens at all. They are not allowed in the classroom, and the school even frowns on their use at home.  Schools nationwide have rushed to supply their classrooms with computers, and many policy makers say it is foolish to do otherwise. But the contrarian point of view can be found at the epicenter of the tech economy, where some parents and educators have a message: computers and schools don’t mix.  This is the Waldorf School of the Peninsula2, one of around 160 Waldorf schools in the country that subscribe to a teaching philosophy focused on physical activity and learning through creative, hands-on tasks. Those who endorse this approach say computers inhibit creative thinking, movement, human interaction and attention spans.

The gain from early intervention - ONE of this week's new NBER working papers is a fascinating look at the impact of early childhood education. The abstract reads: This paper examines the effect of early childhood investments on college enrollment and degree completion. We use the random assignment in the Project STAR experiment to estimate the effect of smaller classes in primary school on college entry, college choice, and degree completion. We improve on existing work in this area with unusually detailed data on college enrollment spells and the previously unexplored outcome of college degree completion. We find that assignment to a small class increases the probability of attending college by 2.7 percentage points, with effects more than twice as large among blacks. Among those with the lowest ex ante probability of attending college, the effect is 11 percentage points. Smaller classes increase the likelihood of earning a college degree by 1.6 percentage points and shift students towards high-earning fields such as STEM (science, technology, engineering and medicine), business and economics. We confirm the standard finding that test score effects fade out by middle school, but show that test score effects at the time of the experiment are an excellent predictor of long-term improvements in postsecondary outcomes.

Study raises questions about virtual schools - As an increasing number of cash-strapped states turn to virtual schools — where computers replace classmates and students learn via the Internet — a new study is raising questions about their quality and oversight. In research to be released Tuesday, scholars at the University of Colorado assert that full-time virtual schools are largely unregulated.  Once used by home-schoolers, child actors and others in need of a flexible way to learn outside a classroom, virtual schools have grown in popularity in the past several years. Cyber-schools generally operate as charters, outside the traditional system but funded with taxpayer dollars.  Nationwide, more than 200,000 students are enrolled in full-time virtual school programs, in which students have no face-to-face contact with teachers. And virtual schools are the fastest growing alternative to traditional public schools, the study found.  Supporters say they allow students to learn at their own pace and provide access to teachers and subjects that may not be available at traditional schools. Critics say they siphon resources and deprive students of socialization.

Higher education costs continue to soar - New figures on the cost of a college education aren't what students and their parents want to hear. But it's probably no surprise: Costs are rising as public universities pass state budget cuts on to customers. The College Board says average in-state tuition and fees at four-year public colleges rose an additional $631 this fall, or 8.3 percent, from a year ago. Nationally, the cost of a full credit load has passed $8,000, an all-time high. With room and board, the average list price for a state school now runs more than $17,000 a year. But a companion report says the actual amount families actually pay is much lower, thanks to a large increase in federal grants and tax credits for students, on top of stimulus dollars that prevented greater state cuts. The average for tuition and fees is about $2,490, or just $170 more than five years ago.

College prices up again as states slash budgets - As President Obama prepared to announce new measures Wednesday to help ease the burden of student loan debt, new figures painted a demoralizing picture of college costs for students and parents: Average in-state tuition and fees at four-year public colleges rose an additional $631 this fall, or 8.3 percent, compared with a year ago. Nationally, the cost of a full credit load has passed $8,000, an all-time high. Throw in room and board, and the average list price for a state school now runs more than $17,000 a year, according to the twin annual reports on college costs and student aid published Wednesday by the College Board. The large increase in federal grants and tax credits for students, on top of stimulus dollars that prevented greater state cuts, helped keep the average tuition-and-fees that families actually pay much lower: about $2,490, or just $170 more than five years ago. But the days of states and families relying on budget relief from Washington appear numbered. And some argue that while Washington's largesse may have helped some students, it did little to hold down prices.

How Much Will Science Research Suffer Due to Federal Funding Budget Cuts? -  Both the National  Science Foundation and the National Institute of Health must be deeply concerned about cuts to their future budgets.  If the NSF and NIH experience a 15% annual cut, what research won't be funded? Universities such as UCLA count on the overhead $ (roughly 50% of the size of the grant) as revenue for the school.  The researchers applying for this $ use it to pay for equipment and to hire research assistants and Post-Docs. If this $ is cut sharply, then unemployment for nerds will rise. While there is certainly private capital out there, these firms are not altruists seeking increases in basic knowledge.  These for profit firms will require the nerds they invest in to give them the intellectual output they generate.  There will be less "open source" knowledge under this model. In today's Harvard Crimson, there is an article that discusses the fact  that the Department of Defense gives Harvard's Physics dept a lot of research $.  If DARPA is pruned back then, this Harvard Dept's revenue will decline. Many universities appear to be betting that Federal grant dollars will keep growing but what if this assumption is wrong?   How will research universities reconfigure themselves if this is the "new reality"?

Why Obama Should Pay Attention To Occupy Wall Street’s Critique Of Higher Education -In early September, officials from the Chilean Embassy in Washington, DC came to my office for advice about a political crisis wracking their country. Angry about the state of university education—including high tuition costs, predatory student loans, ineffective school vouchers, pervasive inequality, and rampant profit-taking—hundreds of thousands of Chileans have taken to the streets regularly since May of this year, participating in demonstrations and national strikes. As riot police used tear gas and water cannons on protesters in the streets of Santiago, approval ratings for President Sebastian Pinera dropped to record lows. Ongoing high-level negotiations between students and government officials have yet to produce resolution. I was happy to talk policy with the visiting Chilean officials, but I warned them that the American experience of higher-education reform wasn’t an especially inspiring example. Indeed, I was struck by the fact that, even though the American higher education financing system is itself on the verge of catastrophe—its integrity crumbling under the weight of three decades of relentless tuition hikes by colleges and universities and fresh cuts in public aid—massive student-led protests hadn’t yet forced the hand of American policy makers.

Obama Plan Would Cut Student-Loan Interest Rates - President Barack Obama will announce a plan to allow people holding two kinds of student loans to reduce their interest rates by consolidating their debts into one government loan, officials inside and outside the administration said Tuesday. Mr. Obama is to announce the move in Denver on Wednesday, part of a White House push to emphasize actions his administration can take to boost the economy without congressional approval. Education Secretary Arne Duncan and White House Domestic Policy Council Director Melody Barnes were scheduled to discuss the proposal later Tuesday.  The change could affect an estimated 5.8 million people who hold two types of student loans—government-backed loans issued by the private sector under the Federal Family Education Loan program and "direct loans" issued by the government, an administration official said. Consolidating the loans would result in lower interest rates and reduced monthly payments, as well as additional loan-forgiveness and repayment options. The president also will announce an acceleration of an income-based repayment program. Existing rules allow graduates to limit their loan payments to 15% of their income, with all debt forgiven after 25 years of payments.

Obama moves to ease student loan burdens - President Obama on Wednesday announced a plan to allow college graduates to cap federal student loan repayments at 10 percent of discretionary income starting in January, two years before the cap was due to take effect under federal law. The accelerated “pay as you earn” program, which Obama will authorize through executive order, could benefit up to 1.6 million borrowers and reduce their payments by as much as a couple hundred dollars a month, administration officials said. All remaining debt on the federal loans would be forgiven after 20 years — five years earlier than under current law. In addition, some borrowers who have more than one federal student loan will be allowed to consolidate their debt, in some cases reducing their interest rates by up to half a percentage point, officials said. Obama formally announced the program at the University of Colorado’s downtown Denver campus.

Obama orders changes to student loan payments - President Obama continued his executive order tour Tuesday by outlining plans to help ease the debt burden of college students. "In a global economy, putting a college education within reach for every American has never been more important, but it's also never been more expensive," Obama said in a statement released Tuesday, a day before he'll deliver a speech on the topic in Denver. "That's why today we're taking steps to help nearly 1.6 million Americans lower their monthly student loan payments," Obama said. The student loan orders are the latest in a campaign Obama aides call "We Can't Wait," stressing executive action as the president's $447 billion jobs bill is held up in Congress. Also this week, Obama has authorized executive orders designed to help veterans find jobs and make it easier for struggling homeowners to refinance mortgages.

President Obama Announces Plan to Boost College Tuition - President Obama today announced a plan that will ensure students are able to commit to higher levels of federally backed student loans. By limiting student obligations to repay, and by passing more of the repayment burden onto taxpayers, colleges and universities will be able to continue to raise tuitions at a rate that outpaces nearly every other cost center in the American economy. The move will come as a great relief to an education establishment increasingly concerned that students might no longer be able to afford skyrocketing tuition rates.The AP reported today that state support for higher education has fallen 23% after accounting for inflation over the last ten years, even as tuitions have risen 5.6% faster than CPI. This gap has been bridged by a whopping 57% increase in federal student loans over the same time period due to the increased cost of tuition and number of student enrollment. The Obama plan limits repayment obligations on those federal loans to just 10% of “discretionary income” which it defines as total income above 150% of the federal poverty level - currently translating to about $16,000 for an individual, or $33,500 for a family of four. The plan also limits the term of obligation to 20 years. These terms represent a substantial easing and acceleration of the terms in Obama’s “Pay as You Earn Plan,” which was just announced last year (see my April 2010 response to that plan).

Student Loans, Social Security and Debts You Carry for Life - Put on your monocle and top hat and pretend you are part of the 1% for a minute. Your first task is to write a set of legal codes about the collection of debt in this country, specifically student debt. And you want to be kind of a jerk about it. What’s the one thing you could do for student debt that you don’t do for any other type of debt, one that would radically shift the relationship between student loan creditors and debtors both practically and symbolically?How about this, from the Debt Collection Improvement Act of 1996: “Notwithstanding any other provision of law… all payments due to an individual under… the Social Security Act… shall be subject to offset under this section.” What this means is that when it comes to collecting on student loans, the government can take funds from your Social Security check. There are rules to the offset: the first $750 a month can’t be touched, and only 15 percent of benefits above that can be taken to pay back student loans. But this is still a radical break in the social contract with no equivalent for private debts.

Can the Fed Prevent the Next Crisis by Eliminating Interest on Student Loan Debt? - Among the demands of the Wall Street protesters is student debt forgiveness - a debt "jubilee." Occupy Philly has a "Student Loan Jubilee Working Group," and other groups are studying the issue. Commentators say debt forgiveness is impossible. Who would foot the bill? But there is one deep pocket that could pull it off - the Federal Reserve. In its first quantitative easing program (QE1), the Fed removed $1.3 trillion in toxic assets from the books of Wall Street banks. For QE4, it could remove $1 trillion in toxic debt from the backs of millions of students. The economy would only be the better for it, as was shown by the GI Bill, which provided virtually free higher education for returning veterans, along with low-interest loans for housing and business. The GI Bill had a sevenfold return. It was one of the best investments Congress ever made. There are arguments against a complete student debt write-off, including that it would reward private universities that are already charging too much and it would unfairly exclude other forms of debt from relief. But the point here is that it could be done and it (or some similar form of consumer "jubilee") would represent a significant stimulus to the economy.

Ron Paul plans to ‘eventually’ end all federal student aid - Republican presidential candidate Ron Paul told NBC’s David Gregory Sunday that he would “eventually” end all federal aid to students. “As you well know, you have a lot of support among young people,” Gregory noted. “They’re borrowing to pay for college at record levels. Would you abolish all federal student aid?” “Eventually,” Paul admitted. “But my program doesn’t do it. There’s a transition in this.”“But that’s your ultimate aim?” Gregory wondered. “Yes,” Paul replied. “Because there’s no authority to do this and just think of all this willingness to want to help every student to get a college education. So, they’re a trillion dollars in debt, we don’t have any jobs for them, the quality of education has gone down. So, it’s a failed program.”

Los Angeles Pension Cuts Anticipated Return to 7.75%, Raising City Deficit - Los Angeles’s biggest public pension fund lowered its anticipated rate of return to 7.75 percent from 8 percent and said it would implement the change in phases to reduce its effect on the city deficit. The Los Angeles City Employees’ Retirement System administers pensions for more than 43,000 current and retired civilian employees. The $10.8 billion fund returned 22.6 percent for the fiscal year that ended June 30. Its investment performance for 10 years was 6.2 percent, according to the fund’s website. A lower assumed rate will require Los Angeles to increase payments to the plan. Implementing it would boost the city’s bill by $22 million, raising the city’s estimated deficit for the fiscal year that begins next July to $272 million, City Administrative Officer Miguel Santana told the fund’s board. “We are already struggling with figuring out how to deal with a $250 million deficit,” Santana told the board. “The $22 million burden only makes this problem harder.”

Gov. Jerry Brown risks backlash from pension proposal -- Gov. Jerry Brown proposed a sweeping overhaul of California pensions that would require public employees to pay more for their retirement and cut benefits for those hired in the future, setting the stage for a fierce battle with fellow Democrats and some of his main political supporters: unions representing government workers. Brown's 12-point plan, announced Thursday, would require that all public workers have at least half the cost of their pensions deducted from their paychecks. Most state employees already make that contribution, but many in cities, counties and school districts across the state pitch in far less. The governor also wants future employees to receive up to a third of their retirement income from a 401(k)-style plan rather than a traditional guaranteed pension. And he urged that the retirement age for most new public workers be raised from 55 to 67. "I try to protect working people whenever I can," said Brown, 73, "but I'm also responsible to the taxpayer and making sure we have a solvent state government."

Investment returns fall short at state pension funds, raising concerns - Kentucky's two public pension funds fell well short of their assumed rates of investment return over the tumultuous last decade, raising more retirement concerns for public workers — and for taxpayers who subsidize their plans. The $14 billion Kentucky Retirement Systems, which covers 324,000 state and local government workers, expected a 7.75 percent rate of return but earned only 5.51 percent over the past 10 years. The $15 billion Kentucky Teachers' Retirement System, which covers 125,000 public school teachers, expected to earn 7.5 percent while getting only 4.8 percent over the past 10 years. "In this climate, with everything so volatile — the stock market, bonds, real estate, really every area of investment — I think we have to admit that it's unrealistic to assume that we're going to get 7.75 percent a year," said state Rep. Jim Wayne, D-Louisville. Wayne and other members of the legislature's Interim Joint Committee on State Government will meet in Frankfort on Wednesday. Lawmakers are expected to ask pension officials if their investment income will be adequate to pay lifetime pensions and health insurance for half a million people.

Economist: S.C. faces big pension fund debt -- A state economic advisor encouraged local conservatives Tuesday night to lobby state lawmakers to address the $27 billion in unfunded debt faced by South Carolina's retirement systems. They're in worse shape than most people think, said Chad Walldorf, chair of the South Carolina Board of Economic Advisors, which forecasts revenues for the state Budget and Control Board. Walldorf was the guest speaker at the monthly meeting of the tea-party infused political group GPS: Conservatives for Action. Right now, the state has $17 billion in debt for employee pensions and another estimated $10 billion for health care benefits for retirees, Walldorf said. But the amount of money coming in for these programs, and the return on that money which the state invests, isn't meeting experts' projections - leaving a massive shortfall.

Don't gamble with the grocery money - But the real trick is to figure out whether you are gambling with the grocery money. I began thinking about all this as I was seated next to a woman retiree on a train ride during a recent trip.  I suggested to her that the retirement savings of the entire middle class of America are at grave risk. I explained that the seeds of that risk were sown back in the early 1980s when a then little-known provision of the tax code labeled 401k--which was designed to encourage supplementary retirement savings--was used to transfer all the risk of pensions from companies to employees. Before the 401k craze (403b for nonprofits) companies with pension plans generally guaranteed a specific benefit, i.e., an amount per month that would be paid to retirees for life based on years of service, pay level and sometimes other factors. It was up to the company to figure out how to make that happen with money set aside usually through both employer and employee contributions. The company often hired outside money managers to invest the money based on the projected needs of retirees. Such plans are usually referred to as defined benefit plans, and they were the norm before the 401k. Now, they are rare. The result has been that every person with a 401k has had to become an amateur investor.

Occupy grandma's house - THE trouble with being a rebel without a cause is that people tend to project their causes on you. That seems to be the case with Occupy Wall Street (and its many local offshoots). The movement has gotten a great deal of attention, despite the absence of a clear objective, gripe or solution. Perhaps that’s what’s so fun about the movement; OWS allows everyone to make it about their favourite villain. For some, that's capitalism; for others, just the parts of capitalism they don’t like. Others get their kicks targeting the protestors. The popular interpretation of OWS is that its an outgrowth of class war: the 99% taking on the 1% who have all the wealth. It's rarely productive for one group of citizens to fight another over resources, because the game is so rarely zero-sum. But if I may be so presumptuous (pretty much everyone else is, so why not me?), I’d suggest that rather than singling out Wall Street fat cats for taking too much of the pie, the protestors look closer to home. Maybe they should look to their parents and grandparents.  Some future economic problems are structural and much of the blame can be placed on older workers.

More states limiting Medicaid hospital stays – A growing number of states are sharply limiting hospital stays under Medicaid to as few as 10 days a year to control rising costs of the health insurance program for the poor and disabled.  Advocates for the needy and hospital executives say the moves will restrict access to care, force hospitals to absorb more costs and lead to higher charges for privately insured patients. States defend the actions as a way to balance budgets hammered by the economic downturn and the end of billions of dollars in federal stimulus funds this summer that had helped prop up Medicaid, financed jointly by states and the federal government. Arizona, which last year stopped covering certain transplants for several months, plans to limit adult Medicaid recipients to 25 days of hospital coverage a year, starting as soon as the end of October.

N.C. Medicaid program struggles to reach $356 million in cuts — North Carolina's Medicaid program is struggling to reach $356 million in cuts required by the state budget written by the Republican-led General Assembly. Officials in Democratic Gov. Beverly Perdue's administration were expected Thursday to tell the Legislature's chief government oversight committee why the program faces a nearly $140 million cash shortfall this year. The state Department of Health and Human Services says in a presentation posted on the committee's web page that regulatory approval delays, slow enrollment for managed care and outstanding federal government repayments are contributing to the shortfall. GOP lawmakers have said state regulators should press the Obama administration to approve more quickly state changes to the Medicaid plan to accelerate savings.

States’ Medicaid Cost-Cutting May Not Control Program Spending (Bloomberg) -- State efforts to cut Medicaid benefits and payments the health program makes to hospitals and doctors may not offset the loss of $100 million in federal aid and added costs of treating patients in a flagging economy. State Medicaid spending will rise 29 percent this year as governors confront an enrollment surge of unemployed people, according to an annual survey of Medicaid officials from the Kaiser Family Foundation in Menlo Park, California. “Unemployment remains high with increasing numbers of poor and uninsured keeping pressure on state budgets and Medicaid programs to meet growing needs,” said Diane Rowland, the foundation’s executive vice president. The loss of $100 billion in U.S. funds authorized by the 2009 economic stimulus law is intensifying the squeeze, forcing states to raid budgets for transportation, corrections and other purposes to pay for Medicaid, said Matt Salo, executive director of the National Association of Medicaid Directors in Washington, in a telephone interview.

State spending on Medicaid rises sharply - The expiration of federal stimulus funding for Medicaid has dealt a blow to states still struggling to recover from the economic downturn, according to figures released Thursday. To compensate for the loss of extra federal Medicaid dollars this June, states have increased their spending on the program by an average of 29 percent in the current fiscal year. Nearly every state also has turned to tough measures to trim Medicaid costs, such as eliminating benefits, reducing payment rates to doctors and hospitals, and increasing the co-payments they charge the poor and disabled served by the program. Even so, more than half of state officials surveyed said there was a 50-50 chance their Medicaid programs, which are financed with a combination of state and federal funds, would face a budget shortfall as enrollment continues to rise. Though widely anticipated, the findings reported in an annual survey of state officials by the nonpartisan Kaiser Family Foundation underscored the stress Medicaid has placed on state budgets. The 2010 health-care overhaul law bars states from tightening their eligibility rules for Medicaid through 2014, when the program will be expanded to cover a larger share of the poor, almost entirely at the federal government’s expense.

What No One Is Telling You About Medicare - This Sunday morning, and for every foreseeable Sunday until at least the 2012 elections, the talking-head news shows will be crowded with members of both parties talking about the need to fix out-of-control "entitlements."  But make no mistake: What they'll really be talking about are your Medicare benefits. Which means they're talking about messing with your retirement.  Medicare, the federal health insurance program for seniors and disabled Americans, represents a giant chunk of your nest egg: A married couple who retired last year can expect to reap $350,000 in lifetime benefits. A couple who are 46 today can expect to get $525,000 worth.  Just one problem: That constantly growing cost is getting harder and harder to pay. By 2030, maintaining Medicare's current level of benefits would push up government spending to 24% of the economy, and even higher as the years roll on. Taxes, however, are set to generate revenue equal to only about 18% of gross domestic product.  It's an unsustainable gap. Something about the way health care is delivered to seniors will have to change. And with the nation in the grip of anxiety over spiking deficits and debt, a lot of Washington is in a radical mood.

Health Care Thoughts: Accountable Care Part II -  Accountable care organizations (ACOs) are the keystone of PPACA  (Obamacare) as far as restraining costs and improving quality.  Early this year there was great excitement about ACOs in the provider community, but the publication of the (first phase) Medicare ACO rules threw cold water on everything.  The rules were at best complicated and convoluted and providers ran for the hills. The administration tried calming the fleeing providers with fast track and modified programs, without much success.  On October 20th the Obama administration published revised Medicare ACO rules. Most of us are still reading and analyzing, but the early response seems more favorable. A more detailed analysis will follow soon.  The administration finally got smarter and announced modifications to antitrust policy so Obama's DOJ would not be wrecking the work of Obama's DHHS. Bad news though, employers and insurers see the possibility of intense ACO activity as anti-competitive.

Tax law could hinder quick Supreme Court decision on healthcare mandate - The nuances of the Supreme Court’s case on the healthcare reform law are beginning to come together, but a thorny procedural issue could still complicate the push for a quick and decisive ruling. By now it seems clear that the Supreme Court will probably take the case filed by 26 state attorneys general and the National Federation of Independent Business. The states, NFIB and the Justice Department have all said that’s the case the court should take, and DOJ has asked the court to hold other suits until it rules in that one. For the most part, the two sides want the same thing: a quick hearing focused on the merits of whether the individual insurance mandate is constitutional. First, the Supreme Court will have to decide whether it’s able to hear the case at all. Part of the administration’s defense of the mandate rests on the idea that the penalty for not buying insurance is a tax, rather than a regulatory fine. But a federal law known as the Anti-Injunction Act prevents courts from blocking taxes before they take effect.

Taking back ‘Obamacare’? - In the political conversation about health-care reform, the term “Obamacare” is almost always used as a pejorative, hurled at the law in long floor speeches and short political ads deriding the Affordable Care Act. Now, health reform’s staunchest supporters want to change that. Today, two Colorado-based groups are launching “Thanks Obamacare!,” a new site and campaign to promote the health reform law. There’s even a video that ticks off 10 benefits of the health reform law with heavy reliance on the word Obamacare:

How the CLASS Act’s Demise Ends the Fiscal Argument for the 2010 Health Care Law - On Friday, October 14, HHS Secretary Kathleen Sebelius announced that she was pulling the plug on the “CLASS Act”, a long-term care insurance program contained in the health care law pushed through Congress in 2010. The program had to be killed because there was no way to operate it in an actuarially sound manner as required under a provision inserted by then-Senator Judd Gregg. Secretary Sebelius stated flatly that “we have not identified a way to make CLASS work,” and so HHS would “suspend work” on implementing it.In the wake of this announcement, two competing narratives have emerged:

  • A) Opponents of the law argue that the CLASS Act’s demise is but one further proof that the bill was originally passed on the basis of suspect numbers; and that claims of its improving the fiscal outlook were always disingenuous.
  • B) Supporters argue that the CLASS Act was a peripheral feature of health care reform, that the law will improve federal finances even without it, and that its suspension was actually an example of the process working as it should

Captured Government’s Increasing Irrelevance Shows Occupy’s Importance - Our cap­tured po­lit­i­cal in­sti­tu­tions make them­selves in­creas­ingly ir­rel­e­vant by not ad­dress­ing the prob­lems of the 99%. Each day we see more ex­am­ples of our gov­ern­ment being "cap­tured" by and serv­ing the in­ter­ests of the top 1% against the rest of us. Even as more and more peo­ple take to the streets in protest, Wash­ing­ton ig­nores We, the Peo­ple, con­tin­u­ing to serve only the top few. Here are just a few ex­am­ples, just from this week, show­ing what our 1%-cap­tured gov­ern­ment is doing even as the 99% of us protest. Lob­by­ists Tell Sen­ate To Keep Un­healthy School Lunches This week the Sen­ate sided with lob­by­ists and voted to block sci­ence-based rec­om­men­da­tions pro­tect­ing our kids’ health. The Dept. of Agri­cul­ture had pro­posed a rule pro­mot­ing healthy food for kids in fed­er­ally-sub­si­dized school lunches, lim­it­ing starches and in­creas­ing healthy veg­eta­bles served to in­creas­ingly obese kids. But as al­ways hap­pens now with our gov­er­ment, lob­by­ists swarmed and the Sen­ate voted to block the sci­ence-based health rules.And they tried to deflect people, saying this is only about "potatoes" to make it sound silly and delegitimize science. Continuing,

Patent on Broccoli will not be revoked - Surprisingly, the European Patent Office (EPO) has just canceled a public hearing on the controversial patent on a broccoli scheduled for 26 October. A broad range of organisations had been preparing a demonstration against patents for plants and animals on that day. The broccoli protected by the patent EP1069819 was derived by conventional breeding methods. The rights to the patents are being held by US company Monsanto. The company Syngenta which had appealed against the patent, has now surprisingly proposed the cancellation of the planned hearing. The EPO is following this request from industry. This means that the patent for the broccoli, which is derived by traditional breeding methods, will now be upheld with only minor modifications.  "The patent office as well as industry shy away from any public spotlight. They wanted to avoid the demonstration, to which even the German minister for agriculture had been invited to speak. There is no other explanation as to why the long scheduled hearing has now so suddenly been canceled. However, public protest will continue, and we will not stop mobilisation for the demonstration", says Ruth Tippe of "No Patents on Life!", which had been involved in the preparation of the demonstration, together with Farmers, Friends of the Earth, Greenpeace, Misereor and others.

Saudis to expand wheat storage to 3.2 MMT - Saudi Arabia plans to expand its wheat storage capacity to 3.2 MMT, enough to cover its annual wheat consumption. There are some projects now to add 710 KMT Work is underway to construct new silos, some of which are at main Saudi ports.

Commodity traders: The trillion dollar club (Reuters)- For the small club of companies who trade the food, fuels and metals that keep the world running, the last decade has been sensational. Driven by the rise of Brazil, China, India and other fast-growing economies, the global commodities boom has turbocharged profits at the world's biggest trading houses. They form an exclusive group, whose loosely regulated members are often based in such tax havens as Switzerland. Together, they are worth over a trillion dollars in annual revenue and control more than half the world's freely traded commodities. The top five piled up $629 billion in revenues last year, just below the global top five financial companies and more than the combined sales of leading players in tech or telecoms. Many amass speculative positions worth billions in raw goods, or hoard commodities in warehouses and super-tankers during periods of tight supply.  U.S. and European regulators are cracking down on big banks and hedge funds that speculate in raw goods, but trading firms remain largely untouched. Many are unlisted or family run, and because they trade physical goods are largely impervious to financial regulators. Outside the commodities business, many of these quiet giants who broker the world's basic goods are little known.

Flawed USGS Study Still Links Southwestern Drying to Increasing Carbon Dioxide Pollution and Climate Change - A new U.S. Geological Survey analysis finds that, as climate scientists have been predicting for decades, the Southwestern U.S. is drying in part because of rising levels of carbon dioxide:The decrease of floods in the southwestern region is consistent with other research findings that this region has been getting drier and experienced less precipitation as a likely result of climate change.  The study, “Has the magnitude of floods across the USA changed with global CO2 levels?” appearing in Hydrological Sciences Journal, however, relies on dubious and “absurd” assumptions, according to a number of climate scientists I spoke with.  Amazingly, the lead author seems to lack an understanding of core issues germane to his analysis, as we’ll see. The finding about SW drying that I’ve focused on isn’t the main spin the USGS and media have given the study.  The USGS focused on what they claim is the lack of a “significant relationship between carbon dioxide (CO2) in the atmosphere and the size of floods over the last 100 years” in the three other regions they rather arbitrarily divide the country into — northeast, southeast, and northwest.

Thai capital fights to hold back floodwaters - Al Jazeera English: Thai military have reinforced vulnerable barriers along Bangkok's Chao Phraya river after a sudden rise in the water level set back efforts to contain the worst floods in decades. Thailand's prime minister has warned people that the country is likely to endure at least one more month of flooding, telling anxious residents in the capital Bangkok to prepare for possible metre-deep water. The overall flood situation would continue for "four to six weeks", Yingluck Shinawatra, the prime minister, said on Saturday. About 113,000 people have been forced to seek refuge in shelters, Yingluck said, adding that while the waters were receding in some areas of the country, the floods heading towards the capital were unstoppable.

The Scientific Finding That Settles the Climate-Change Debate - For the clueless or cynical diehards who deny global warming, it’s getting awfully cold out there. The latest icy blast of reality comes from an eminent scientist whom the climate-change skeptics once lauded as one of their own. Richard Muller, a respected physicist at the University of California, Berkeley, used to dismiss alarmist climate research as being “polluted by political and activist frenzy.” Frustrated at what he considered shoddy science, Muller launched his own comprehensive study to set the record straight. Instead, the record set him straight. “Global warming is real,” Muller wrote last week in The Wall Street Journal. .  “When we began our study, we felt that skeptics had raised legitimate issues, and we didn’t know what we’d find,” Muller wrote. “Our results turned out to be close to those published by prior groups. We think that means that those groups had truly been careful in their work, despite their inability to convince some skeptics of that.” In other words, the deniers’ claims about the alleged sloppiness or fraudulence of climate science are wrong. Muller’s team, the Berkeley Earth Surface Temperature project, rigorously explored the specific objections raised by skeptics — and found them groundless.

Warming could exceed safe levels in this lifetime - Global temperature rise could exceed “safe” levels of two degrees Celsius in some parts of the world in many of our lifetimes if greenhouse gas emissions continue to increase, two research papers published in the journal Nature warned. “Certain levels of climate change are very likely within the lifetimes of many people living now … unless emissions of greenhouse gases are substantially reduced in the coming decades,” Large parts of Eurasia, North Africa and Canada could potentially experience individual five-year average temperatures that exceed the 2 degree Celsius threshold by 2030 — a timescale that is not so distant,” the paper said. Two years ago, industrialized nations set a 2 degree Celsius warming as the maximum limit to avoid dangerous climate changes including more floods, droughts and rising seas, while some experts said a 1.5 degree limit would be safer. It is widely agreed among scientists that global pledges so far for curbing greenhouse gas emissions are not strong enough to prevent “dangerous” climate change.

Durban May Be Last Chance to Stabilise Climate Under Two Degrees - The window to limit global warming to less than two degrees C is closing so fast it can be measured in months, a new scientific analysis revealed Sunday. Without putting the brakes on carbon emissions very soon, large parts of Africa, most of Russia and northern China will be two degrees C warmer in less than 10 years. Canada and Alaska will soon follow, the regional study shows.  "If one is sincerely committed to limit global temperature increase to below two degrees C... (governments) committing to a global peak emission level and peak year makes sense from a science perspective," said Joeri Rogelj of the Institute for Atmospheric and Climate Science in Zurich, who headed the analysis published Sunday in the journal Nature Climate Change. Governments will be meeting in Durban, South Africa starting Nov. 28 to launch the next round of climate treaty negotiations, which so far have failed to ensure their goal of less than a two-degree C increase will be achieved.  Rogelj and a group of leading experts show in this state-of-the-art analysis that to have a 66-percent or better probability of staying below two degrees C this century, global carbon emissions must peak before 2020.

Should the European Union Apply Cap-and-Trade to Flights Over U.S. Airspace? - Beginning January 1, 2012, the European Union will expand its carbon dioxide cap-and-trade program to airlines: The EU program began in 2005 with the capping of carbon dioxide emissions from power plants, refineries, steel mills and other industrial producers. Next year it extends to airlines, which are said to be responsible for about 3 percent of greenhouse gases. Under the program, similar to the cap-and-trade concept that President Barack Obama unsuccessfully tried to move through Congress, each airliner is issued permits to emit a certain amount of carbon dioxide. They can buy extra credits if they emit more than their allowed limit, or sell credits if they emit less. Payments would be made to the EU country to which they most frequently fly. The EU says the costs to airlines will be modest and will have minimal impact on passenger fares. The U.S. aviation industry says the cost between 2012 and 2020 could hit $3.1 billion. Aside from the cost, airlines are also critical of the EU system applying to all flights to and from Europe, with no pro-rating for time over the airspace of the United States, Brazil, Russia, India, China, Japan, and other countries that have not adopted the carbon trading system.

The Republicans’ war on science and reason - Last month, Washington Post columnist Steve Pearlstein wrote that if you wanted to come up with a bumper sticker that defined the Republican Party’s platform it would be this: “Repeal the 20th century. Vote GOP.” With their unrelenting attempts to slash Social Security, end Medicare and Medicaid and destroy the social safety net, Republicans are, indeed, on a quest of reversal. But they have set their sights on an even bolder course than Pearlstein acknowledges in his column: It’s not just the 20th century they have targeted for repeal; it’s the 18th and 19th too. The 18th century was defined, in many ways, by the Enlightenment, a philosophical movement based on the idea that reason, rational discourse and the advancement of knowledge, were the critical pillars of modern life. The leaders of the movement inspired the thinking of Charles Darwin, Thomas Jefferson and Ben Franklin; its tenets can be found in the Declaration of Independence and the U.S. Constitution. But more than 200 years later, those basic tenets — the very notion that facts and evidence matter — are being rejected, wholesale, by the 21st-century Republican Party.

Greenland Ice Sheet “Could Undergo a Self-Amplifying Cycle of Melting and Warming … Difficult to Halt,” Scientists Find - Another day, another amplifying feedback or vicious cycle. The Greenland ice sheet can experience extreme melting even when temperatures don’t hit record highs, according to a new analysis by Dr. Marco Tedesco, assistant professor in the Department of Earth and Atmospheric Sciences at The City College of New York.  His findings suggest that glaciers could undergo a self-amplifying cycle of melting and warming that would be difficult to halt. “We are finding that even if you don’t have record-breaking highs, as long as warm temperatures persist you can get record-breaking melting because of positive feedback mechanisms,” said Professor Tedesco, who directs CCNY’s Cryospheric Processes Laboratory….… melting in 2011 was the third most extensive since 1979, lagging behind only 2010 and 2007. The “mass balance”, or amount of snow gained minus the snow and ice that melted away, ended up tying last year’s record values.

Skeptical Science: Not so permanent permafrost -Permanently frozen ground or permafrost occurs and persists where the mean temperature above ground is 0 °C or less, resulting in soil, rock and their content being frozen and remaining frozen for at least 2 consecutive years. Permafrost is most common in higher latitudes of the northern hemisphere where it occurs over 24% of the landmass. It commonly has a depth of 0.6-150 m, though depths of 1,500 m are known. Soil temperature below 5 m tend to remain stable even though surface temperature may seasonally thaw the active zone where limited plant growth is possible. The content of soil affected by permafrost often includes water, accumulated organic matter (biota) and methane produced from biota decay when temperatures were warmer. The presence of permafrost prevents such decay and methane emission. Water contained in the soil is present in the form of ice which binds composite material together. The presence of ice, often close to the surface, prevents water flow so land affected by permafrost tends to be poorly drained and to be swampy or peatland when the active layer thaws briefly in summer.  Thawing usually occurs from the surface downwards and in the Arctic seldom penetrates more than 1 m.

New study shows no simultaneous warming of northern and southern hemispheres as a result of climate change for 20,000 years - A common argument against global warming is that the climate has always varied. Temperatures rise sometimes and this is perfectly natural is the usual line.  However, Svante Björck, a climate researcher at Lund University in Sweden, has now shown that global warming, i.e., simultaneous warming events in the northern and southern hemispheres, have not occurred in the past 20,000 years, which is as far back as it is possible to analyse with sufficient precision to compare with modern developments. Svante Björck’s study thus goes 14,000 years further back in time than previous studies have done. “What is happening today is unique from a historical geological perspective,” he says.“My study shows that, apart from the larger-scale developments, such as the general change into warm periods and ice ages, climate change has previously only produced similar effects on local or regional level,”

The Real Victims of Climate Change - Climate change is the public policy problem from hell. If you were inventing a problem that would be virtually impossible to solve, you'd give it all the characteristics of climate change: it's largely invisibile, it's slow moving, it's expensive to fix, it requires global coordination, and its effects will be disproportionately borne by poor countries that nobody cares about. That last item might seem like a harsh way of putting things, but it's pretty much the truth. And today, via Brad Plumer, we have a new OECD report that illustrates the problem starkly. It examines which cities will have the most residents vulnerable to coastal flooding due to storm surge and high winds in 2070, and as you can see on the map below, the risk is almost entirely concentrated in developing countries in Asia and Africa. New York and Tokyo have a small bit of exposure, leaving Miami as the sole rich city with a substantial exposure. The total number of vulnerable residents will increase from 40 million today to 150 million in 2070, with the vast bulk of the increase coming in developing countries. The five riskiest cities — by a large margin — are Kolkata, Mumbai, Dhaka, Guangzhou, and Ho Chi Minh City.

Population growth: the baby bomb -The UN will announce the arrival of the 7 billionth human a week today.  Some demographers warn of catastrophic environmental degradation, most acute in the areas where the population grows fastest – the ecologically fragile sub-Saharan Africa – while policies to tackle poverty and disease stall. Others argue that population growth is not necessarily a bad thing: it is only 12 years since the birth of the six billionth person was announced and, for a majority of the world's population, more things have got better than worse. But in an era so shaped by the burden of human activity that scientists are calling it the anthropocene age, the explosive near-trebling of the world's population from just 2.5bn in 1950 demands at least an equal focus on reducing our environmental impact. If it is too soon to panic, there is a clear case for informed debate around a complex subject laden with cultural and ethical considerations.

With 7 Billion People, World Has a Poop Problem - The 7 billionth person on Earth will draw his or her first breath on Oct. 31, at least according to estimates by the United Nations. Assuming all systems are in working order, that baby will also create its first output that same day, in the form — to put it delicately — of a dirty diaper. That dirty diaper is only the tip of an iceberg of human manure produced around the globe every day. It might seem a reasonable question to ask how humanity will deal with this output of feces as the world's population creeps toward 10 billion by 2100. But that question presumes we have the poop problem under control now. Here's the bad news: We don't. Approximately 2.6 billion people around the world lack any sanitation whatsoever. More than 200 million tons of human waste goes untreated every year. In the developing world, 90 percent of sewage is discharged directly into lakes, rivers and oceans. And even in developed countries, cities depend on old, rickety sewage systems that are easily overwhelmed by a heavy rain. All this untreated sewage adds up to a major public health crisis that kills an estimated 1.4 million children each year, according to the World Health Organization. That's one child every 20 seconds, or more than AIDS, malaria and tuberculosis combined.

The Impact of Ecological Limits - The hard part about predicting the future, someone once said, is that it hasn’t happened yet. So it’s a bit curious that so few experts question the received demographic wisdom that the Earth will be home to roughly 9 billion people in 2050 and a stable 10 billion at the century’s end. Demographers seem comfortable projecting that life expectancy will keep rising while birth rates drift steadily downward, until human numbers hold steady with 3 billion more people than are alive today. What’s odd about this demographic forecast is how little it seems to square with environmental ones. There’s little scientific dispute that the world is heading toward a warmer and harsher climate, less dependable water and energy supplies, less intact ecosystems with fewer species, more acidic oceans, and less naturally productive soils. Are we so smart and inventive that not one of these trends will have any impact on the number of human beings the planet sustains? When you put demographic projections side by side with environmental ones, the former actually mock the latter, suggesting that nothing in store for us will be more than an irritant. Human life will be less pleasant, perhaps, but it will never actually be threatened.

Population Bomb: 9 Billion March To WWIII - Sshh. Don’t tell anyone. But “while you are reading these words, four people will have died from starvation. Most of them children.” Seventeen words. Four deaths. That statistic is from a cover of Paul Ehrlich’s 1968 provocative “Population Bomb.”  By the time you finish this column, another five hundred will die. By starvation. Mostly kids. Dead.  But global population will just keep growing, growing, growing. Why? The math is simple: Today there are more than two births for every death worldwide. One death. Two new babies.  Bomb? Tick-tick-ticking? Or economic bubble? Population growth is a basic assumption hard-wired in traditional economic theory. Unquestioned. Yes, population is our core economic problem. Not a military problem. But the bigger this economic bubble grows, the more we all sink into denial, the closer the point of no return where bubble becomes bomb, where war is the only alternative.  Yes, folks, ultimately population growth is an economic nuclear bomb, tick-tick-ticking a silent countdown to global disaster. In denial, we march a self-destructive path to WWIII.

Paul Ehrlich, a prophet of global population doom who is gloomier than ever - The population of Earth has doubled since Paul Ehrlich first warned the world that there were too many humans. Three and a half billion people later, he is more pessimistic than ever, estimating there is only a 10% chance of avoiding a collapse of global civilisation. "Among the knowledgeable people there is no more conversation about whether the danger is real," Ehrlich told the Guardian. "Civilisations have collapsed before: the question is whether we can avoid the first time [an] entire global civilisation has given us the opportunity of having the whole mess collapse." The idea sounds melodramatic, but Ehrlich insists his vision only builds on famine, drought, poverty and conflict, which are already prevalent around the world, and would unfold over the "next few decades". "What it would look like is getting to the situation where more and more people are living in uncertainty about their future, subject to all kinds of disease," he said. "The really big discontinuity you can't predict is even a small nuclear war between [say] India and Pakistan. "Of course a new emerging disease or toxic problem could alone [also] trigger a collapse. My pessimism is deeply tied to the human failure to do anything about these problems, or even recognise or talk about them."

The Prepper Movement: Why Are Millions Of Preppers Preparing Feverishly For The End Of The World As We Know It? - In America today, there are millions of “preppers” that are working feverishly to get prepared for what they fear is going to happen to America. There is a very good chance that some of your neighbors or co-workers may be preppers. You may even have noticed that some of your relatives and friends have been storing up food and have been trying to convince you that we are on the verge of “the end of the world as we know it”. A lot of preppers like to keep their preparations quiet, but everyone agrees that the prepper movement is growing. Some estimate that there are four million preppers in the United States today. Others claim that there are a lot more than that. In any event, there are certainly a lot of preppers out there. So exactly what are all these preppers so busy preparing for? Well, the truth is that the motivation for prepping is different for each person. Some preppers believe that a complete collapse of the economy is coming. Others saw what happened to so many during Hurricane Katrina are are determined not to let that happen to them. Some preppers just want to become more independent and self-sufficient. There are yet others that are deeply concerned about “end of the world as we know it” scenarios such as terrorists using weapons of mass destruction, killer pandemics, alien invasions, World War III or EMP attacks.

Astronomers discover complex organic matter in the universe - Astronomers report in the journal Nature that organic compounds of unexpected complexity exist throughout the Universe. The results suggest that complex organic compounds are not the sole domain of life but can be made naturally by stars. Prof. Sun Kwok and Dr. Yong Zhang of The University of Hong Kong show that an organic substance commonly found throughout the Universe contains a mixture of aromatic (ring-like) and aliphatic (chain-like) components. The compounds are so complex that their chemical structures resemble those of coal and petroleum. Since coal and oil are remnants of ancient life, this type of organic matter was thought to arise only from living organisms. The team's discovery suggests that complex organic compounds can be synthesized in space even when no life forms are present.

Rapidly Inflating Volcano Creates Growing Mystery - Should anyone ever decide to make a show called "CSI: Geology," a group of scientists studying a mysterious and rapidly inflating South American volcano have got the perfect storyline. Researchers from several universities are essentially working as geological detectives, using a suite of tools to piece together the restive peak's past in order to understand what it is doing now, and better diagnose what may lie ahead. It's a mystery they've yet to solve.   Uturuncu is a nearly 20,000-foot-high (6,000 meters) volcano in southwest Bolivia. Scientists recently discovered the volcano is inflating with astonishing speed. "I call this 'volcano forensics,' because we're using so many different techniques to understand this phenomenon,"  . [See images of the inflating volcano here.] Researchers realized about five years ago that the area below and around Uturuncu is steadily rising — blowing up like a giant balloon under a wide disc of land some 43 miles (70 kilometers) across. Satellite data revealed the region was inflating by 1 to 2 centimeters (less than an inch) per year and had been doing so for at least 20 years, when satellite observations began. "It's one of the fastest uplifting volcanic areas on Earth," 

Energy from hot rocks abounds - Clean, accessible, reliable and renewable energy equivalent to 10 times the installed capacity of coal power plants in the U.S. is available from the hot rocks under our feet, according to the results of a new mapping study. The energy, called geothermal, is generated from heat found deep below the Earth's surface. While there's some geothermal developed in the western U.S., it was previously thought lacking in the eastern portion of the country. Now, researchers at Southern Methodist University, with funding from, have compiled geological data from 35,000 sites across the U.S. and found that there's massive potential all across the country, including significant portions of the eastern two-thirds of the U.S.

Soaring U.S. Wind Power Sector Growing Nervous Over Tax Incentives - The US wind power sector is soaring thanks in large part to a tax policy that makes it attractive to investors, but the uncertainty surrounding those very incentives is casting a cloud over the future, according to the American Wind Energy Association (AWEA). In the quarter to the end of September, a total of 1,204MW of wind capacity was installed across the US, taking new capacity installations for the year to date to 3,360MW – up 74% percent year on year – and the industry total to 43,461 MW, representing some 20% percent of global capacity, AWEA said Tuesday presenting its latest data. With the fourth quarter set to be even bigger than normal, AWEA said total new installations for the year could be between 6,500MW and 7,500MW with developers rushing to get projects under construction as the deadline nears under the crucial Production Tax Credit (PTC) programme.

Offshore Turbines More Powerful than First Nuclear Plant - From a distance, say about three nautical miles, the future looks very simple. You stick a wind turbine up into the air, and it turns. Ralf Klooster can explain this to his five-year-old at home.  The term "energy revolution" sounds light and airy enough, but how do human beings manage to wrest electricity from the sea? Germany's largest offshore wind farm, a power plant surrounded by a hostile environment, produces 12 times as much energy as the world's first nuclear power plant. Germany is the first highly developed, industrialized nation to decide to be dependent on renewable energy in the future. Germany is also the country where nuclear fission was discovered and the internal combustion engine was invented. By 2020 Germany, a country dotted with auto plants, chemical factories and steel mills, is to derive fully one fifth of its power from wind turbines.

Kuwait Sets Biggest Gulf Clean-Energy Goal to Boost Oil Exports -  Sun-drenched Kuwait, a desert nation with no solar-power plants and electricity demand that’s growing about 8 percent a year, has set the most ambitious target for using renewable energy in the Gulf region. OPEC’s fifth-biggest oil producer, whose air conditioners run cheaply off state-subsidized oil-fired power plants, aims to generate 10 percent of its electricity from sustainable sources by 2020, said Eyad Ali al-Falah, assistant undersecretary for technical services at the Ministry of Electricity and Water. Kuwait is trying to free up oil for export and expand its generation capacity to support increased tourism, manufacturing and home building in a $112 billion development program. To meet its clean-energy target, which exceeds the 7 percent goal set by Abu Dhabi in the United Arab Emirates, Kuwait next must gather data on sunshine and wind speeds, al-Falah said.

Electricity Use Continues to Rise - Total energy consumption is falling in developed nations, but not so for the electricity sector as you can see in the above graph.

  • From 2000 to 2009, increases in electricity demand averaged 0.5% per year.
  • Demand growth is projected to continue at about 1% per year through 2035.

Coal is the largest source of electricity generation in the United States. 56% of home electrical use goes towards appliances and lighting, and 22% towards air conditioning: To find out more from the EIA's monthly electricity update go here.

Will Economic Growth Destroy The Planet? (NPR) Economists love economic growth. It's an essential driver of rising living standards. But on today's show, we wrestle with a question we've heard a lot from our listeners: Is economic growth bad for the planet? We talk to one economist, Herman Daly, who argues that economic growth is in fact environmentally unsustainable. And we hear from a second, Robert Mendelsohn who says economic growth and a healthy environment can co-exist — but who argues we should include the effects of pollution in the price of electricity.

Obama set to kill off coal industry? (UPI) -- The proposed merger of two federal agencies managing public land and mining is part of a White House effort to wipe out the U.S. coal industry, a critic said.U.S. Interior Secretary Ken Salazar called for the merger of the Bureau of Land Management and the Office of Surface Mining. U.S. Rep. Doc Hastings, R-Wash., chairman of the House Committee on Natural Resources, said he had "serious" concerns about the decision to "suddenly and dramatically" change management of coal mines and BLM lands by U.S. President Barack Obama's administration. "The Obama administration has not made secret its desire to put an end to America's coal mining industry and this appears to be one more step in that direction," Hastings said.

TVA sees future in small reactors - TVA is eager to help lead the way to a new concept in nuclear plants - small reactors that would be factory-built, hauled to a location and buried underground. Such mini-reactors would make it possible to build nuclear power capacity in less costly increments, said Jack Bailey, Tennessee Valley Authority's vice president of nuclear development. Eventually, small reactors could be placed on the sites of coal-fired power plants that TVA plans to shut down, such as its Johnsonville location about 65 miles west of Nashville.  But the major benefit may be to the nuclear industry's search for new markets. The mini-reactors are touted as a good fit for remote areas that lack a strong, established transmission grid. With the stamp of U.S. approval, nuclear builders could more readily sell the technology to groups that include developing nations.nIt could generally make nuclear power more accessible.

FPL Bills Will Rise To Pay For Nuclear Projects -- Florida Power & Light got the go-ahead Monday to increase the charge on consumers’ household electric bills that will go towards investing in nuclear energy — even if the utility never ends up building any new nuclear power plants. The charge, which will amount to $2.20 every month for a household using the average 1,000 kilowatt hours of electricity a month, was approved unanimously by the Public Service Commission, which regulates state utilities. Under a state law approved by the Legislature in 2006, the company can collect the money for new nuclear plants without having to commit to building the plants. The commission approved the increase, arguing it was required to do so based on the statute.

Fukushima Nuclear Plant Released Far More Radiation than Government Said - The disaster at the Fukushima Daiichi nuclear plant in March released far more radiation than the Japanese government has claimed. So concludes a study1 that combines radioactivity data from across the globe to estimate the scale and fate of emissions from the shattered plant. The study also suggests that, contrary to government claims, pools used to store spent nuclear fuel played a significant part in the release of the long-lived environmental contaminant caesium-137, which could have been prevented by prompt action. The analysis has been posted online for open peer review by the journal Atmospheric Chemistry and Physics. The reconstruction relies on data from dozens of radiation monitoring stations in Japan and around the world. Many are part of a global network to watch for tests of nuclear weapons that is run by the Comprehensive Nuclear-Test-Ban Treaty Organization in Vienna. The scientists added data from independent stations in Canada, Japan and Europe, and then combined those with large European and American caches of global meteorological data.

Fallout forensics hike radiation toll - The disaster at the Fukushima Daiichi nuclear plant in March released far more radiation than the Japanese government has claimed. So concludes a study1 that combines radioactivity data from across the globe to estimate the scale and fate of emissions from the shattered plant.The study also suggests that, contrary to government claims, pools used to store spent nuclear fuel played a significant part in the release of the long-lived environmental contaminant caesium-137, which could have been prevented by prompt action. The analysis has been posted online for open peer review by the journal Atmospheric Chemistry and Physics.  Andreas Stohl, an atmospheric scientist with the Norwegian Institute for Air Research in Kjeller, who led the research, believes that the analysis is the most comprehensive effort yet to understand how much radiation was released from Fukushima Daiichi. "It's a very valuable contribution," says Lars-Erik De Geer, an atmospheric modeller with the Swedish Defense Research Agency in Stockholm, who was not involved with the study.

Fukushima Fallout Was Almost Twice as Bad as Official Estimates, New Study Says - This spring’s nuclear disaster at the Fukushima Daiichi power plant released almost double the amount of radiation the Japanese government has claimed, according to a new analysis. The authors say the boiling pools holding spent fuel rods played a role in the release of some of the contaminants, primarily cesium-137 — and that this could have been mitigated by an earlier response. Researchers at the Norwegian Institute of Air Research examined radiation monitoring stations throughout Japan and the rest of the globe, extrapolating their findings from initial radiation-release estimates. They say the amount of cesium-137, a long-lived isotope that persists in the atmosphere, was about twice as high as the Japanese government’s official estimate. That number (3.5 × 1016 bequerel, for those of you keeping track) is about half the emission from Chernobyl. The researchers also say about 20 percent of the total fallout landed over Japan, but the vast majority fell over the Pacific Ocean. (The effects of this fallout on fisheries and aquatic wildlife are still being determined.)

Up to 20 million tons of debris from Japan’s tsunami moving toward Hawaii - Some 5 to 20 million tons of debris--furniture, fishing boats, refrigerators--sucked into the Pacific Ocean in the wake of Japan's March 11 earthquake and tsunami are moving rapidly across the Pacific. Researchers from the University of Hawaii tracking the wreckage estimate it could approach the U.S. West Coast in the next three years, the UK Daily Mail reports. "We have a rough estimate of 5 to 20 million tons of debris coming from Japan," University of Hawaii researcher Jan Hafner told Hawaii's ABC affiliate KITV. Crew members from the Russian training ship the STS Pallada "spotted the debris 2,000 miles from Japan," last month after passing the Midway islands, the Mail wrote. "They saw some pieces of furniture, some appliances, anything that can float, and they picked up a fishing boat," said Hafner. The boat was 20-feet long, and was painted with the word "Fukushima."  "That's actually our first confirmed report of tsunami debris," Hafner told KITV.

Driller Wins Approval To Halt Water To Pennsylvania Town— Pennsylvania environmental regulators said Wednesday they have given permission to a natural-gas driller to stop delivering replacement water to residents whose drinking water wells were tainted with methane. Residents expressed outrage and threatened to take the matter to court. Cabot Oil & Gas Corp. has been delivering water to homes in the northeast village of Dimock since January of 2009. The Houston-based energy company asked the Department of Environmental Protection for approval to stop the water deliveries by the end of November, saying Dimock's water is safe to drink. DEP granted Cabot's request late Tuesday, notifying the company in a letter released Wednesday morning.  Residents who are suing Cabot in federal court say their water is still tainted with unsafe levels of methane and possibly other contaminants from the drilling process. They say DEP had no right to allow Cabot to stop paying for replacement water.

EIA shale predictions need closer scrutiny, peak oil group says - Federal oil and gas forecasters have not fully considered factors affecting future US supplies in their recent estimates, members of the Association for the Study of Peak Oil & Gas USA (ASPO-USA) warned on Oct. 26. US Energy Information Administration predictions of significantly greater production from US shale resources may be overly optimistic, they said. “We believe that information and analysis provided by DOE and EIA has glossed over alarming trends regarding oil and gas supply, and fostered complacency about their potentially severe consequences,” they said in a letter to US Sec. of Energy Steven Chu. “Without reliable information and a clear understanding of these monumental energy challenges, decisions and actions by the private and public sector are likely to be ill-founded and misguided.” DOE’s optimistic future supply forecasts are dangerously unrealistic,  “If these exuberant predictions are wrong, the consequences could be catastrophic. We need to be conservative in planning for the future,” he said. “We are not running out of oil. But we appear to be running out of oil that we can afford.”

Former Keystone Pipeline Lobbyist Hired by Obama Campaign - President Obama’s reelection campaign has hired a former lobbyist for the controversial Keystone XL oil pipeline as a top adviser. The campaign said that Broderick Johnson, founder and former principal of the communications firm the Collins Johnson Group, would serve as a senior adviser for the campaign. Before founding the firm this spring, he worked for the powerhouse lobbying firm, Bryan Cave LLP, where his clients included Microsoft, Comcast and TransCanada, the company planning to build the $7-billion pipeline to carry crude from Alberta’s oil sands to the Texas Gulf Coast. Johnson’s federal lobbyist filings indicate that TransCanada paid Bryan Cave at least $240,000 late last year and early this year for Johnson to work on supporting the “submission for a presidential permit for Keystone XL Pipeline.” He lobbied members of Congress, the filings show, as well as the administration and the State Department.

BP Plan For Gulf Drilling Approved - The Obama administration on Friday took another step toward allowing BP to return to the Gulf of Mexico, approving the first oil1 drilling plan for the company there since the explosion that sank the Deepwater Horizon rig more than a year ago.  It was another sign that oil exploration in the gulf was coming back to normal, although energy companies continued to complain that the permitting process for drilling new wells remained far slower than before the accident.  The federal government’s approval of the BP plan to drill up to four exploratory wells nearly 200 miles from the Louisiana coast was positive news for BP, which has struggled to recover from the April 2010 accident that left 11 workers dead and spilled millions of barrels of oil into the gulf.  “Our review of BP’s plan included verification of BP’s compliance with the heightened standards that all deepwater activities must meet,” said Tommy P. Beaudreau, the director of the Bureau of Ocean Energy Management, in a statement announcing the decision.

Obama Administration Clears Way for Wave of Industrial Offshore Oil Drilling in Arctic - On Monday, The Center for Biological Diversity and allies appealed the Environmental Protection Agency’s decision to issue Clean Air Act permits allowing Shell to drill for oil in the Arctic. The corporation’s Discoverer drillship plans to sink exploration wells in the Beaufort and Chukchi seas, off Alaska’s north coast, beginning in July 2012. The permits appealed would authorize indefinite drilling operations and cover the Discoverer and a fleet of support vessels, including two icebreakers, an oil-spill response fleet and a supply ship. These large-scale industrial operations emit tons of pollutants into the air and water and pose grave dangers to the pristine Arctic. .“These permits mark the start of full-scale industrial oil exploitation of the extremely sensitive Arctic. Oil drilling in the Arctic Ocean comes with unacceptable risks of spills that could have catastrophic impacts on Arctic wildlife and the communities that rely on the Arctic environment,” said Center attorney Vera Pardee. “We witnessed devastating damage from the Gulf of Mexico oil spill; the turbulent, icy, dark and remote conditions of the Arctic would make cleanup there even harder — next to impossible. Drilling in Arctic waters is an extremely bad idea.”

Why Don’t Gas Prices Fall When Oil Does? - Why don’t gas prices drop when oil prices fall? Because all oil prices aren’t created equal. When most Americans — including economists and newspaper reporters — talk about “oil prices,” they’re referring to West Texas Intermediate, or WTI, the grade of light, sweet crude that’s the basis for contracts traded on the New York Mercantile Exchange. WTI has historically been the dominant global oil price, and has closely tracked other benchmarks, such as Brent (a North Sea crude that’s the basis for the crude contract on the Intercontinental Exchange) and the OPEC reference basket. But in the past year WTI prices have decoupled from those in the rest of the world. WTI now trades for about $91 per barrel, fully $20 a barrel less than Brent. There are a variety of reasons for the split, including limited storage capacity at the Cushing, Okla., oil hub where WTI is traded and surging demand for oil in Asian markets, which are more tightly connected to Brent than WTI. All of this matters to American drivers because U.S. refineries get a lot of their oil from overseas — and therefore often pay prices that are linked to Brent, not WTI. That’s especially true of refineries on the coasts, which is part of why a gallon of regular unleaded costs $3.54 in New England and just $3.36 in the Midwest.

The Peak Oil Crisis: The Energy Trap - Although the price of gasoline so far this year has not reached the rarified levels that we saw three years ago, neither has it plunged as far as in did in the fall of 2008. The price of a barrel of oil on the London futures exchange, which more accurately reflects what refiners must pay for oil, rose above $100 a barrel last January, and has essentially remained there ever since -- averaging about $25 a barrel higher than last year. The Energy Trap is a project of the New America foundation, a non-partisan think tank funded by the Rockefeller Foundation, which recently conducted a survey on just how the American public is holding up under the high cost of energy. The idea of the trap is that an increasing number of Americans are caught between the cost of gasoline and a systemic inability to stop driving their cars. In the last 60 years America has become a "motorized society" in which most of our citizens have become totally dependent on daily travel by car for their existence. Take away our cars and most of us would be hard pressed to reorganize our lives to provide for the essentials of life - earn an income, and provide food, shelter, and education for ourselves and our families.

WTI Crude Returns to Backwardation for the First Time in 3 Years - A prominent feature in the oil market yesterday was that WTI crude oil closed at backwardation for the first time in 3 years. Moreover, the spread between WTI and Brent crude also narrowed to below 20/bbl. This was despite API's report that crude oil inventory climbed more than expected last week. Concerning the financial market as a whole, profit-taking was seen ahead of the EU summit. As we mentioned yesterday, the potentially positive news should have been priced in over the past weeks. WTI crude oil price surged for a third day, rising to as high as 94.65 before settling at 93.17. up +2.08%. The advance in recent days has taken WTI crude to backwardation, signaling a drop in supply or a rise in demand in the near-term. The WTI-Brent gap probably formed a bottom 2 weeks ago and has narrowed since then. While market sentiment has been robust on speculations that European policymakers will formulate a substantial and durable plan to resolve the sovereign debt crisis, Brent crude has underperformed WTI crude. This suggested that investors were not too bullish over European economic outlook.

Is Our Luck Running Out on Oil Supplies? - In an excellent new paper, Jim Hamilton asks whether the “phenomenal increase in global crude oil production over the last century and a half” reflects technological progress or good fortune in finding new reserves. The two aren’t completely distinct, of course. Better technology helps find more resources. But the heart of the question remains: have we been lucky or good? Based on a careful reading of production patterns in the United States and around the world, Jim concludes that we’ve been both and worries that the luck part may be coming to an end: My reading of the historical evidence is as follows. (1) For much of the history of the industry, oil has been priced essentially as if it were an inexhaustible resource. (2) Although technological progress and enhanced recovery techniques can temporarily boost production flows from mature fields, it is not reasonable to view these factors as the primary determinants of annual production rates from a given field. (3) The historical source of increasing global oil production is exploitation of new geographical areas, a process whose promise at the global level is obviously limited.

David Galland interviewing Chris at the 2011 Casey Research Summit in Phoenix, AZ - David Galland interviewing Chris Martenson at the 2011 Casey Research Summit in Phoenix, AZ. Chris had just finished giving his presentation "Unfixable", which received the highest rating of the conference by the attendees.

U.S. To Increase Oil Production and Begin Mining Rare Earth Minerals - In what some in watching economics might consider a private sector resurgence in an economic recovery, the U.S. is increasing oil production and next week will restart mining rare earth minerals after a long absence. The U.S. Energy Information Administration (EIA) is reporting U.S. daily crude oil production was 5.891 million barrels of oil per day for the week of October 14, 2011.  A look at the EIAs chart of weekly U.S. crude production back to January of 1983 shows a slow production fall over two decades.  But since January of 2009 the climb back has been steady rising from under 5 million barrels per day to now closing in on 6 million. Its looking like a new oil boom based in technology.  The production increased from directed and horizontal drilling activity, particularly in the unconventional shale formations.  This is paralleling the natural gas increases also from directed and horizontal drilling.  The fracturing of reservoir rocks is also a major technology.

More rare earth companies in China suspending production as prices slide - Even as China's largest rare earths producer, Baotou, suspended rare earths production for one month in an effort to prop up sliding prices, several others are set to follow suit. A persistent slump in prices and rising uncertainty across the sector has got China's rare-earths industry battling production halts. Average prices for rare earth oxides have fallen more than 20% in the past three months, analysts tracking the sector said. Speculation had sent prices soaring in the first half of the year, but the market has since retreated, they said. "This month, the price of neodymium oxide declined 34% to $157 per kilogram, while europium oxide slid 35% to $2,904 per kilogram. All of this has shaken the industry in China,'' said an analyst with an investment firm. Praseodymium-neodymium oxide has also dropped 11% as compared to the price before China's National Holiday, between October 1 to October 7. In order to check the slide, Ganzhou Rare Earth Mineral Industry, a leading rare earth producer in south China, has also decided to suspend production since October 20, at all its mines and smelting and refining enterprises.

IMF: Mideast oil importers face economic slowdown - The Washington-based fund predicts their growth in 2012 will also be weaker than anticipated, coming in at around 3 percent. “Since the beginning of this year, a deterioration in the international economic outlook and the buildup of domestic social pressures have resulted in an economic slowdown in many of the region’s oil-importing countries,’’ said Masood Ahmed, the director of the IMF’s Middle East and Central Asia department. Among the Mideast’s oil importers are Tunisia and Egypt, whose longtime leaders were overthrown in revolutions earlier this year. The unrest hurt their economies by causing a drop in tourism and other trade. Oil exporting countries — a diverse group that includes wealthy OPEC nations such as the United Arab Emirates and Qatar as well as much poorer states like Yemen — will fare far better thanks to a boom in oil prices and output. The IMF left its growth target of 4.9 percent for those countries unchanged. That is ahead of its outlook of 4 percent for the world economy as a whole.

World power swings back to America - The American phoenix is slowly rising again. Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.  Assumptions that the Great Republic must inevitably spiral into economic and strategic decline - so like the chatter of the late 1980s, when Japan was in vogue - will seem wildly off the mark by then.  Telegraph readers already know about the "shale gas revolution" that has turned America into the world’s number one producer of natural gas, ahead of Russia.  Less known is that the technology of hydraulic fracturing - breaking rocks with jets of water - will also bring a quantum leap in shale oil supply, mostly from the Bakken fields in North Dakota, Eagle Ford in Texas, and other reserves across the Mid-West.  "The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d)," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.

Russia's Lukoil starts drilling in Iraq - Russia's private oil company Lukoil announced that it started drilling operations in the West Qurna-2 oil field near the Iraqi port city of Basra. "We have launched drilling, well borers are already there," company chief Vagit Alekperov was quoted by Russia's state-run news agency RIA Novosti as saying. Lukoil and Norwegian energy company Statoil won the rights to develop West Qurna in 2009 but didn't start work there because of military conflict in Iraq. Revisions of estimated reserves in Iraq led the country's oil minister to say that there at least 143 billion barrels of oil in the country. Reserve estimates for West Qurna-2 are around 13 billion barrels.

China’s property conflict - Yesterday we got a few remarks from China’s Premier Wen Jiabao.  According to Mingpao, Premier Wen said that control of food prices remains an important priority, with the usual problems that have been discussed here and there, including his concern on the supply situation, the costs of logistics (note that moving stuff within China can be more expensive than moving it to New York), and the need to build up reserves.  He also believes that now is a critical time in regulating the property market, as well as construction of affordable housing, giving no hint of any easing.But at the same time, Reuters also reports that Premier Wen suggested that in the face of global economic slowdown, job creation will also be a priority.  Not surprisingly, as the export sector feeling the pain of the global slowdown (as we have seen in the underwhelming rebound of manufacturing PMI in September), and as bosses run from their shadow bank burdens, businesses are being closed, inevitably, and jobs are lost as a result. The problem, of course, is that price stability and property market cooling on one hand and job creation on the other are incompatible goals. As I have said for many times, the task of inflation fighting and maintaining fast economic growth (or so-called soft landing) is a very difficult one, so difficult that I have long assigned a low probably of success.

Can China's economy thrive with a censored Internet? -- There are two Internets in the world today. The first is the one you are probably using right now to read this post, through which you can connect with people around the world, surf for whatever information you want and blog at will. This Internet is a key tool for businesses to enhance productivity, for people to educate themselves about the world and for new ideas to bounce briskly from place to place. Then there is the second version of the Internet. The one here in China. The authoritarian government is fearful of the free Internet and has put in place all sorts of methods of controlling what people can read, say and access on the web. Major international sites, including Twitter, Facebook and YouTube, are completely blocked here. Certain searches are impossible, emails are monitored, many web pages simply won't open, and others open so slowly (like this blog) that only the most patient or determined will endure the wait. How bad it is? Take a read of what my colleague Hannah Beech, TIME's China bureau chief, had to say in a recent magazine essay. Hannah makes the important points that (1) the Chinese government's interference with the Internet actually saps people's interest in using it, and (2) there's not much anyone can do about it:

China's one-child rule turns into a time bomb - China's one-child policy has prevented almost half a billion births but has turned into a demographic time bomb as the population ages, storing up huge economic and social problems for the country. As the world's population hits the seven billion mark, straining the earth's resources, China can claim to have curbed its birth rate to around 1.5 children per woman since the policy was introduced in 1979. Without the birth limits, which no other country applies as rigorously or on such a scale, the world's most populous nation would have hundreds of millions more mouths to feed than the 1.34 billion it has now. But from modern cities to remote villages, its implementation has involved abuses from mass sterilisation to abortions as late as eight months into the pregnancy. Baby girls have also been abandoned and killed. Couples who defy the rule can face fines amounting to several years' salary, have access to social services cut and even go to prison. Their so-called "black children" have no legal status in China.

Shanghai outlaws property discounting - Chinese property developers have been in trouble for the best part of a year. Recently the penny dropped and many began cutting prices. Then guess what? People who already owned properties got cross and, in Shanghai, went to smash the showroom and sales office of a developer offering 30% discounts on flats. But China is, after all, run by a Communist Party with a love of intervention and distorting the market with weird price controls from time to time. And yesterday Mingpao reported that the Shanghai government has banned China Overseas Land (688.HK) from cutting its prices by 30%. The regulator reportedly said that such a discount is “obviously violating the regulation”, and now any projects which are offering more than 20% discount should be re-filed to the regulators before sales. So there you have it, property developers have been squeezed as volume dry up, and just as they finally face the reality to cut prices, the government helps to dry up the volume once more by banning price cutting so that they can’t sell as many as they would have wished. Socialism at its best.

Protests hit China as property prices fall - Hundreds of angry home buyers launched a series of protests in China's commercial hub of Shanghai this week, as owners decried falling prices for their properties, state media said Thursday. In the latest incident, some 200 home owners on Wednesday besieged the sales office for a project of leading developer Greenland Group, demanding refunds. "We require a refund because the loss we are suffering now is too great for us to afford," the Shanghai Daily quoted a protestor as saying. He paid 17,000 yuan ($2,678) per square metre last year and claimed the developer had cut the price by around 30 percent to boost sales. In a another incident, 30 home owners stormed the sales office of a project of Hong Kong-listed China Overseas Land & Investment Ltd. on Wednesday, the Global Times said, repeating a similar protest from over the weekend. Demand for apartments has been falling after authorities, fearing a property bubble, banned the purchase of second homes, increased minimum downpayments and trialled property taxes in some cities -- including Shanghai.

China spoils the party - Something has gone badly wrong with China’s other growth engine, fixed asset investment. And, as we shunt backwards from the bowl, and wildly shake the punch from our hair, spraying the room with scarlet droplets, we can hear the approaching wail of a police siren coming to ruin the evening. The culprit is iron ore, down another 5.7% yesterday to $120.20. 12 months swaps hit a new low of  115.89 down 1.37%. Meanwhile, Shanghai rebar was down a smidgen, 0.23%. Seems to me, we’re in danger of a contango in iron ore, which would be a first. The culprit is not hard to find. From the FT: Chinese metals companies, lynchpins in the global economy, are warning that Beijing’s monetary tightening has gone too far, causing domestic customers to delay orders and raising the risk of payment default. In one of the clearest signs yet of deteriorating sentiment, Baosteel, China’s second-largest steel producer, has told the Financial Times that its customers were pushing back scheduled deliveries “due to declining economic growth and tightening credit”.

CREDIT SUISSE: Premier Wen Jiabao's Latest Statement Is A Game Changer…Yesterday, China Premier Wen Jiabao said he would seek a "well timed and measured pro-active fine tuning" in macro policy.  Credit Suisse economist Dong Tao thinks this is a signal that some form of monetary easing is coming. "This is the first time in a while that a senior government official used the phrase "pro-active" in economic policy speech," said Tao. "This is a game-changer to Wen's thinking as far as macro policy is concerned but not China’s growth prospects." He elaborates:

  • On the monetary front, we take Wen’s remarks as a hint for selective and measured easing. We think the government may be ready to allow more lending to areas desperate for funding, while keeping the overall monetary policy normalization process intact.
  • The second implication, in our view, is that Beijing may be ready to cut the reserve requirement rate in small steps. We would not be surprised to see a cut in the RRR combined with a hike in interest rates, as Beijing attempts to rebalance the weight of its quantitative policy tool (RRR) and price tool (interest rates).
  • On the fiscal front, we think that the government will focus the next stimulus (when it becomes necessary) on consumer subsidies, rather than infrastructure investments as in 2009. Tax reform has been discussed by the Premier.

Just How Powerful Are China’s State-Owned Firms? - China’s super-competitive exporters give the country a capitalist flair and obscure fact that the country’s state-owned companies still play a huge role in the economy. How big? According to a new report for the U.S.-China Economic and Security Review Commission, a congressional review group, state-owned entities of one kind or another, account for about 50% of China’s rapidly expanding gross domestic product. The report figures that the percentage will be reduced over time, but even so, “the state sector will continue to play an important role in China.”  State-owned firms, the report argues, help Beijing pursue a buy-China procurement strategy, which sometimes excludes foreign firms from important development projects or require them to hand over important technology. Those practices are helping China build an aviation industry capable of competing with Boeing and Airbus, the report says. The firms can compete unfairly internationally, according to the report, because they can get below-market interest rates from state owned banks, favorable tax treatments and capital injections if they run into trouble. The China commission, which is widely viewed as taking a hawkish attitude toward China, plays an important role in shaping congressional opinion. The Chinese government often contests its conclusions.

China CBRC Official: China Faces Huge Losses From US Dollar's Long-Term Decline - Report --China faces huge losses from the U.S. dollar's depreciation in the long term as excessive money supply due to massive foreign-exchange reserves leads to inflation, the 21st Century Business Herald reported Monday, citing the China Banking Regulatory Commission's regional head in the eastern Jiangsu Province. China should control growth of its forex reserves as the U.S. will continue to let the dollar depreciate, Yu Xuejun, CBRC's Jiangsu head was cited as saying. Yu also suggested banning interest rates under 1% for any country to prevent the U.S. from printing money without any limit. China's stockpile of foreign currency remains by far the world's largest, worth $3.202 trillion at the end of September. But the country's forex reserves grew by just $4.2 billion in the third quarter, compared to $152.8 billion in the second quarter. In September, the reserves actually fell by $60.82 billion, the first decline since May 2010 and the sharpest monthly decline recorded in data that goes back to 2002.

Paulson: China Should Move Faster on Yuan - China should embrace a faster appreciation of its currency but U.S. policy makers should be wary of taking punitive actions to force the issue, former U.S. Treasury Secretary Henry Paulson said Tuesday. Paulson, speaking during an appearance in Washington, said the U.S. and China could both benefit from Beijing taking on much-needed structural changes to its financial markets. (Read the full speech) “I believe … very strongly that it is in China’s best interest to reform and move to a market-determined currency that reflects economic conditions,” Paulson said. He was critical, however, of ongoing efforts in Congress to pressure China to allow its currency, the yuan, to appreciate at a faster pace. The Senate in recent weeks passed a measure allowing U.S. officials to target Beijing’s currency policy through trade penalties and various international organizations. “I don’t think that an approach that could lead to a trade war … is the right way to go,”

Work underway on China-ASEAN yuan trade settlement agreement: central bank official - (Xinhua) -- China is working on an agreement with the Association of Southeast Asian Nations (ASEAN) to settle trade in yuan, an official with China's central bank said Saturday. "It's currently underway," Jin Qi, assistant to the governor of the People's Bank of China (PBC), told Xinhua when asked to comment on recent reports that China and ASEAN will sign a yuan-denominated trade settlement agreement late this year or next year. She made the brief remark on the sidelines of the third China-ASEAN Summit Forum on Financial Cooperation and Development held in Nanning, capital city of southwest China's Guangxi Zhuang Autonomous Region. China plans to sign a framework agreement with ASEAN to pave the way for banks in China and ASEAN countries to start exchanging yuan for ASEAN currencies, according to a Reuters report released Thursday quoting anonymous sources.

Japanese farmers protest against possible trade pact (Reuters) - Thousands of Japanese farmers marched through central Tokyo on Wednesday to push the government not to join a regional free trade pact that will likely hit the nation's small farmers. Expectation is growing that Prime Minister Yoshihiko Noda, who has said free trade deals are necessary for economic growth, will decide soon to take part in negotiations on the Trans-Pacific Partnership (TPP), a U.S.-led Asia-Pacific trade deal. The TPP would in principle eliminate all tariffs within the zone, including on farm products, which have largely been excluded from Japan's previous free trade deals. Joining the free trade initiative would help Japan's auto and high-tech exporters compete in the global market, but would deal a blow to its well-protected farming sector by opening the door to cheaper overseas farm products. About 4,000 people rallied in Tokyo, holding signs saying "Protect Japan's land and food" and wearing headbands with the words "Absolutely against TPP".

Record-high yen could lead to more intervention: Azumi - The yen's advance Friday to a new postwar record against the dollar apparently put the government on high alert as the finance minister issued yet another verbal warning about potential intervention. "I would like to make a decisive response to any excessively speculative move," Finance Minister Jun Azumi said Saturday, using phrases to warn of possible yen-selling intervention in the foreign-exchange market. The warning was aimed at the nation's "Mrs. Watanabes" and other speculators who make short-term, one-sided bets on currency movements in search of a quick profit. The dollar briefly fell to ¥75.78 Friday in New York, its lowest since the end of the war, after hovering around ¥76 and lower ¥77 for weeks. "This is a disaster," a Finance Ministry official said on condition of anonymity right after the record was broken. An interbank dealer based in Tokyo said the dollar's slide was triggered by speculators taking advantage of investor jitters about the economic turmoil in the United States and Europe. Japan's economy, in contrast, is perceived to be relatively safer than the other two, which strengthens the yen.

Turning Japanese is a Boon - What few seem to appreciate, either inside or outside of Japan, is just how strong the resulting Japanese recovery from 2002-2008 was. It was the longest unbroken recovery of Japan’s postwar history, and, while not as strong as pre-bubble Japanese performance, was in fact stronger than the growth in comparable economies even when fuelled by their own bubbles. How on Earth did Japan manage that with their ageing population and zero population growth? Indeed, Japan outperformed Australia in productivity growth since 2000 and very nearly kept pace with real GDP per capita growth. Australia’s average annual real growth in GDP per capita since 2000 is 1.28%. While I can’t find a direct measure from the Japanese Statistical agency, using the World Bank data collection I can make a comparison of real GDP growth per capita of Australia and Japan using a common methodology. Using these statistics I find that Australia had a mean annual growth in real GDP per person since 2000 of 1.8% while Japan’s was 1.4%.

America's Other 87 Deficits - – The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers. America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth. In the US, there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions. Yet the US found a way to finesse this problem. Exploiting the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.

Decreasing Inequality Under Latin America’s “Social Democratic” and “Populist” Governments: Is the Difference Real? - This paper addresses the claim that the governments of Argentina, Bolivia, Ecuador and Venezuela, Latin America’s so-called “left-populist” governments, have failed to effectively reduce inequality in the 2000s and have only benefitted from high commodity prices and other benign external conditions. In particular, it examines the econometric evidence presented by McLeod and Lustig (2011) that the “social democratic” governments of Brazil, Chile and Uruguay were more successful and finds that their original results are highly sensitive to the use of data from the Socioeconomic Database for Latin America and the Caribbean (SEDLAC). Conducting the same analysis using data on income inequality from the Economic Commission for Latin America and the Caribbean (ECLAC) leads to the exact opposite result: it is the so-called “left-populist” governments who appear to have effectively reduced income inequality over the last decade. Report - PDF

Free Trade, By Itself, Can Lift Labor Standards Abroad - THE passage this month of free trade agreements may be a victory not only for President Obama, but also for workers in Colombia, Panama and South Korea. Although the anticipated economic consequences of these agreements are small, these pacts also offer a mechanism for improving workers’ rights in partner countries.  Some of the delay in completing the agreements was a result of concerns among legislators and activists about labor-related issues in Colombia and Panama. Since the early 1980s, various Congressional acts have required American trade negotiators to include conditions intended to insure fair labor treatment in free trade agreements. While the conditions can vary somewhat, they generally require promises from partner countries to prevent the use of child and forced labor, to require “acceptable” conditions of work, and to allow workers the rights to organize unions and bargain collectively.

Does Redistributing Income Reduce Poverty? - Many on the left are suspicious of the idea that economic growth helps to reduce poverty in developing countries. They argue that growth-oriented policies seek to increase gross national product, not to ameliorate poverty, and that redistribution is the key to poverty reduction. These assertions, however, are not borne out by the evidence. Since the 1950’s, developmental economists have understood that growth in GNP is not synonymous with increased welfare. But, even prior to independence, India’s leaders saw growth as essential for reducing poverty and increasing social welfare. In economic terms, growth was an instrument, not a target – the means by which the true targets, like poverty reduction and the social advancement of the masses, would be achieved. A quarter-century ago, I pointed out the two distinct ways in which economic growth would have this effect. First, growth would pull the poor into gainful employment, thereby helping to lift them out of poverty. Higher incomes would enable them to increase their personal spending on education and health (as seems to have been happening in India during its recent period of accelerated growth). Second, growth increases state revenues, which means that the government can potentially spend more on health and education for the poor.

India: Linked or De-linked from the Global Economy? - IMFdirect - Even as Diwali celebrations begin across India, the outlook for the world economy is fairly uneven and uncertain. More worrisome than the subdued global growth outlook, risks are building up especially in Europe—and these include an extreme scenario with financial disruption.Although India’s economy has generally been less prone to external forces than many others, we still need to contend with the larger than typical risks in the global economy. These risks harken the need for a new wave of reforms. What does the more somber darker global outlook mean for India? And exactly what policies are needed?In our latest Regional Economic Outlook for Asia, we expect India to grow by about 7½ percent in 2011 and 2012, only marginally below its estimated potential. Even within Asia, India does relatively well in this world.  India is less open to international trade than most other economies in the region. In particular, its rural consumption is fairly insulated from the world economy. More importantly, India’s exports are less dependent on advanced economies, so it suffers less from the current anemic outlook in those countries. The chart below shows that India’s exports are more diversified—both geographically and in terms of the products it sells—than its neighbors and competitors.

The Verboten Story of Argentina’s Post-Default Economic Success - Yves Smith - Even notice nothing is ever said in the mainstream media about Argentina’s economy, save that it had a big default? You’d never know the following about Argentina:

  • From 2002 onward, Argentina grown nearly twice as fast as Brazil, and has sported one of the highest growth rates in the world.
  • Its success is not dependent on a commodities boom
  • It has increased social spending from 10.3% of GDP to 14.2% of GDP
  • Inequality has fallen. Poverty and extreme poverty have fallen by roughly 2/3

What is particularly striking is how quickly Argentina’s economy rebounded after its default.  Argentina’s real GDP reached its pre-recession level after three years of growth, in the first quarter of 2005. Looking at twenty-year trend growth, it reached its trend GDP in the first quarter of 2007. By contrast, the US economy contracted 6.8% in the fourth quarter of 2008, and shrank 2.6% in 2009. The US only now has reached its pre-downturn level of GDP, meaning nearly four years later versus Argentina’s three. In addition, Argentina has regained its trend line of growth, while it is not clear whether the US ever will. The Carmen Reinhart and Kenneth Rogoff work on severe financial crises has found that they result in “permanent” falls in the standard of living, but that has not been the case with Argentina.

The NYT Can't Find Anyone to Say Anything Good About Argentina - That is sort of striking since its President Cristina Kirchner seems headed for re-election with a clear majority of the votes. Argentina has also enjoyed the strongest growth over the last decade of any country in Latin America. Nonetheless all 5 of the NYT's sources in an article discussing the election were critical of Kirchner. This quote deserves special mention: " 'This election really seemed to defy the normal rules of politics,' . 'But that is what happens when things are going well in the economy and there is a dearth of alternatives.'" It really should not have been hard to find someone who has positive things to say about President Kirchner. It appears that the NYT is relying on a narrow range of sources who are more in tune with Argentina's creditors than the majority of the Argentine population. The article at one comments negatively about the state of Argentina's economy, noting that growth is expected to slow to 4.6 percent next year. This rate would still be almost a full percentage point faster than the average growth rate in Brazil over the last decade. Brazil is described as a positive contrast to Argentina in the article.

Wall Street protest plans global rally ahead of G20 (Reuters) - An anti-capitalist group which sparked the Occupy Wall Street movement has called for global protests on Saturday to demand G20 leaders impose a "Robin Hood" tax on financial transactions and currency trades. Canada-based Adbusters wants the Occupy Wall Street protest movement against economic inequality to take to the streets to call for a 1 percent tax on such deals ahead of a November 3-4 summit of the Group of 20 leading economies in France. "Let's send them a clear message: We want you to slow down some of that $1.3 trillion easy money that's sloshing around the global casino each day -- enough cash to fund every social program and environmental initiative in the world," the activist group said on its website, Adbusters put out the initial call for Occupy Wall Street and since protesters set up camp in a park in New York City's financial district on September 17, they have inspired solidarity demonstrations and so-called occupations around the world.

Vatican calls for global authority on economy, raps “idolatry of the market” -The Vatican called on Monday for the establishment of a “global public authority” and a “central world bank” to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises. The document from the Vatican’s Justice and Peace department should please the “Occupy Wall Street” demonstrators and similar movements around the world who have protested against the economic downturn. “Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was at times very specific, calling, for example, for taxation measures on financial transactions.  It condemned what it called “the idolatry of the market” as well as a “neo-liberal thinking” that it said looked exclusively at technical solutions to economic problems. “In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale,” it said, adding that world economics needed an “ethic of solidarity” among rich and poor nations.

Some additional reasons why Iceland has done well - I agree with much of Paul Krugman’s recent posts on Iceland, here and here.  But there are neglected factors behind the Icelandic recovery, namely real shocks. Note that Iceland is a small, open economy and fish accounts for 40 percent of Icelandic exports.  It does not hurt that Norwegian cod prices have risen 20 percent over the last year; I cannot find a separate figure for Icelandic cod prices but that is a likely major factor behind the Icelandic resurgence.  Here is a separate, brief report on the boom in the Icelandic fishing sector.  Especially when it concerns small countries, always look first for the real shocks. As an aside, there seems to be a system of fairly flexible wages for the major export: The lay system of remuneration is used extensively in fisheries. Under this system, fishermen are paid a share of the catch value, perhaps after subtracting some costs, rather than a fixed wage. There may, however, also be a fixed wage element, so that fishermen get a share of the catch value in addition to the fixed wage, or a fixed wage as a minimum in case the fishing trip turns out to be unrewarding.

The Global Debt Clock - The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock shows the global figure for all (or almost all) government debts in dollar terms. Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.

Europeans Seek Bold Debt Deal, Despite Differences -  European leaders were struggling on Friday to craft a bolder solution to the region’s financial crisis, despite clear signals from French and German officials that they have sharp differences heading into an important weekend summit meeting in Brussels.  As ever, the focus is on Chancellor Angela Merkel1 of Germany and President Nicolas Sarkozy2 of France, who have made a habit of cobbling together deals to present to their European Union colleagues. But forging an agreement now is harder than before, as Paris and Berlin face core differences3 over how to maximize the euro zone’s financial rescue fund and how far the European Central Bank should intervene in the bond markets, either on its own or through the bailout fund.  Already the two leaders have announced that Sunday’s summit meeting, which had already been delayed to allow more time4 for negotiations, would be followed by another summit meeting as early as Wednesday. That announcement, paradoxically, seemed to buoy stock and bond markets, apparently because the Europeans at least appeared to be focusing intensely on resolving the crisis.

More Grim Euro Thoughts - Krugman - It now appears that as of today European leaders have boldly agreed to … announce something or other later in the week. Meanwhile, a couple of thoughts. First, the grim news from Greece is, as many commentators are pointing out, a big refutation for the doctrine of “expansionary austerity.” And it’s worth pointing out that European leaders, and especially the ECB, went in for that doctrine in a big way. Look at the June 2010 monthly report of the ECB. Basically, the ECB pooh-poohs any notion that austerity would have major negative effects on the economy, suggests that it’s quite likely that the confidence fairy will make everything OK, and specifically says that Determined action on the part of governments to undertake fiscal and structural reforms is necessary to preserve stability and cohesion in the euro area. A sustained commitment to consolidation, possibly including a speeding up of current plans and their delivery, is required from all governments to ensure that the time afforded by the exceptional measures is used to put public finances on a permanently sounder footing. [emphasis added] So the ECB was calling for austerity everywhere. Was any concern expressed about how that would affect Europe-wide growth? Was there any suggestion of expansionary monetary policy to offset such a coordinated fiscal contraction? No and no.

Europe leaders tout progress on debt crisis plan - European leaders said they were making progress Sunday toward a wide-ranging plan to deal with the euro zone’s debt crisis, and vowed to keep working toward a solution ahead of a second summit scheduled for Wednesday.  “Today, we will not undertake any decisions, but will undertake preparatory work,” German Chancellor Angela Merkel told reporters Sunday in a joint news conference with French President Nicolas Sarkozy after a meeting of heads of state from all 27 European Union nations. “A broad agreement is taking shape,” Sarkozy said, emphasizing that leaders aim to reach final agreement on a deal on Wednesday. Merkel said progress was seen toward an agreement on recapitalizing European banks, but talks were set to continue on the difficult issues of devising a plan for Greece and deciding how to leverage the 440 billion euro European Financial Stability Facility to ensure it can provide more firepower in the fight to keep the debt crisis from spreading to Italy and other major euro-zone economies.

EU is reporting "Progress" but None of it is Meaningful -- EU leaders are announcing "progress" but there is little progress to be found. Banks have "volunteered" to 40% haircuts but EU leaders want 50% minimum. Is that progress? Germany won a major arguments with France, the latter wanting unlimited bailout access (printing) by the ECB. Since no one expected France to win that argument, that is not much progress either, except from the point of view we no longer have to listen to asinine proposals from France. Otherwise the bickering still continues as to how best to leverage the EFSF when the best thing to do is not use leverage at all. As soon as leverage is used France will likely lose its AAA rating. Then again France will soon enough lose that AAA rating anyway as it attempts to bailout French banks. Otherwise, here is the misleading headline from Bloomberg: EU Sees Progress on Banks European leaders outlined plans to aid banks and ruled out tapping the European Central Bank’s balance sheet to boost the rescue fund, inching toward a revamped strategy to contain the Greece-fueled debt crisis. Europe’s 13th crisis-management summit in 21 months also excluded a forced restructuring of Greece’s debt, sticking with the policy of enticing bondholders to accept “voluntary” losses to help restore the country’s finances.

Leaked Greek bailout document: Expansionary fiscal consolidation has failed - Below is the leaked Greek bailout document that everyone has been talking about. Yesterday, the Financial Times wrote: 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. -EU looks at 60% haircuts for Greek debt - Here is my understanding of what the Troika analysis demonstrates about the European Sovereign Debt Crisis. We have embedded the document at the bottom of this post.  This leaked Troika "debt sustainability analysis" submitted to the EU Summit yesterday will no doubt be a part of the deliberations in the Greek debt restructuring proposals to be hammered out by Oct. 26th. Point 1. on the first page is a pretty open and blatant admission that expansionary fiscal consolidation (EFC) has proven to be a contradiction in terms, at least in Greece. Moreover, there is a serious policy incompatibility problem, at least over the intermediate term horizon, with efforts at internal devaluation (ID) - that is, attempting nominal domestic private income deflation in order to improve trade prospects when one has a fixed exchange rate constraint.

Meanwhile, Greece - Paul Krugman - At this point Greece almost seems like a sideshow. Yet the scale of its coming default matters, especially with some players still denying that such a default is conceivable. So I would be remiss not to mention the awesomely depressing report of European Commission economists, which is marked “strictly confidential” but has, of course, gone viral. The opening: Since the fourth review, the situation in Greece has taken a turn for the worse, with the economy increasingly adjusting through recession and related wage-price channels, rather than through structural reform driven increases in productivity. That in itself is quite a revelation; did they really believe that structural reform was going to save the day? Even aside from doubts about Greek ability/willingness to carry through on promises, the fact is that nobody knows how much if any payoff microeconomic reforms will yield, and nobody in his right mind builds such payoffs into a fiscal plan.

There's A Hole In The Bucket - Krugman - The torments of the euro would be funny if they weren’t so tragic. At this point the urgent need is for a big Panzerfaust — a bailout fund big enough to head off a self-fulfilling liquidity crisis for Italy. But such a fund would be backed by the credit of the euro area’s remaining AAA governments, basically Germany and France — yet at this point the euro situation has deteriorated sufficiently that taking on another commitment would undermine French credit. There’s a hole in the bucket, and every attempt to fix that hole ends up being stymied because, well, there’s a hole in the bucket. The answer to the whole conundrum is to back the rescue, not with French guarantees, but with the power of the printing press — to put the ECB behind the effort. But the ECB won’t and maybe can’t (under current rules) do that. And meanwhile, austerity programs are leading to severe slumps in Greece and elsewhere. Who could have imagined that? What a tragedy. A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working.

Most Greek bailout money has gone to pay off bondholders - More than half of the money lent to Greece so far by the International Monetary Fund and European nations has gone to repay bondholders, a transfer of billions of dollars from taxpayers around the world to European banks and pension funds that invested in the troubled Mediterranean nation. As the country struggles with a collapsing economy, violent strikes and historic levels of unemployment, a new analysis of an international bailout program shows the degree to which money provided to support Greece has been used to pay off its debts to the private sector. Under an initial bailout program approved by the IMF and the European Union in May 2010, Greece’s government has been kept afloat by international loans that total $91 billion. About $52 billion of that has been used to repay bonds that came due between the start of the program and last month, according to a review of the program done for European leaders gathered in Brussels to address financial problems in the 17-nation euro zone

Banks under pressure in Europe crisis, pushed to raise capital, take Greek losses - On Saturday, the finance ministers of the 27-country European Union decided to force the bloc's biggest banks to substantially increase their capital buffers -- an important move to ensure that they are strong enough to withstand the panic that a steep cut to Greece's debt could trigger on financial markets. A European official said the new capital rules would force banks to raise just over euro100 billion ($140 billion), but finance ministers did not provide details on their decision. The official was speaking on condition of anonymity because it had been agreed to let leaders unveil the deal at their first summit Sunday. The deal on banks was likely to be the only major breakthrough ready to announce on Sunday, leaving many important decisions and negotiations to be completed by Wednesday night.

European Finance Ministers Shaping Greek Rescue and Effort to Aid Banks - European finance ministers said on Saturday that they were near a deal to strengthen capital reserves for their troubled banks — the first part of a package of measures meant to stem the worsening European debt crisis. On the second day of talks here, the ministers also said that holders of Greek bonds would have to take much bigger losses than the 21 percent originally agreed to in July, though one bank official said that despite the ministers’ consensus, no agreement was near on write-offs that could reach as high as 60 percent.  The ministers also reported that France and Germany had made progress on a third issue, how to increase the firepower of a rescue fund for the euro zone. Germany’s chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, along with other European leaders, continued negotiating later Saturday. “I believe that now we have reached a more realistic view of the situation in Greece and that we will provide the necessary means to be able to protect the euro,” Mrs. Merkel said

Greek haircuts and Greek myths — the details - European leaders on Friday received some interesting weekend reading. FT Alphaville has also taken a look at “Greece: Debt Sustainability Analysis”, an assessment prepared by European Commission economists for discussion on Friday among European finance ministers. We’ve put it in the usual place (and extensively quoted excerpts below). The headline: it suggests private bondholders will be pushed to take 50 or 60 per cent haircuts. From the report’s summary:Since the fourth review, the situation in Greece has taken a turn for the worse, with the economy increasingly adjusting through recession and related wage-price channels, rather than through structural reform driven increases in productivity. The authorities have also struggled to meet their policy commitments against these headwinds. For the purpose of the debt sustainability assessment, a revised baseline has been specified, which takes into account the implications of these developments for future growth and for likely policy outcomes. It has been extended through 2030 to fully capture long term growth dynamics, and possible financing implications

Europe's leaders threaten Greek default if banks won't take haircut and accept losses of £120bn - Europe's leaders are threatening to trigger a formal default on Greek debt and risk a “credit event” if banks refuse to accept losses of up to €140bn (£120bn) on their holdings.  Hardline eurozone members, backed by the International Monetary Fund (IMF), delivered the ultimatum this weekend after an official report found that in a worst-case scenario Greece could need a second bail-out of €450bn – twice the current package and more than the entire €440bn in the eurozone’s rescue fund.  Vittorio Grilli, a senior EU official, travelled to Rome yesterday to present the “take it or leave it” deal to the Institute of International Finance, which is leading the negotiations for the banks. “The only voluntary element for the banks now is to take a 50pc haircut or face a credit event, a default,” said an EU diplomat.  The threat marks a dramatic change of stance in Brussels, and follows early warnings that a Greek default would set off a chain reaction that would result in a worse financial crisis than in 2008

Banks must find €108bn in new capital - Europe’s big banks will be forced to find €108bn of fresh capital over the next six to nine months under a deal to strengthen the banking system that is to be unveiled by European Union leaders. After 10 hours of talks in Brussels on Saturday, finance ministers from all 27 EU member states endorsed an estimate of the sector’s capital shortfall that is significantly higher than initial calculations. But strong reservations from southern European countries, who will have to find the lion’s share of the money, have delayed a full announcement until Wednesday, when the necessary state guarantees are set to be agreed. According to two people involved with the talks, the European Banking Authority told finance ministers that its final emergency stress test had identified a total of €108bn ($150bn) to be raised by Europe’s banks. This would allow lenders to meet a 9 per cent threshold for their core tier one capital ratios – a measure of financial strength that goes beyond existing requirements – after marking down to market values their sovereign bond holdings of the eurozone’s peripheral states. The recapitalisation plan will also include measures to co-ordinate national efforts to unblock bank funding through state guarantees for new bank bonds. But Germany successfully opposed the use of joint rescue funds to underwrite new bonds, a step analysts say is essential to improving liquidity for banks, particularly on the southern periphery.

Bank Recapitalizations May Reach €108 Billion - European governments likely will seal an agreement to set aside between €107 billion-€108 billion ($150 billion) to boost the cash reserves of banks weakened by their exposure to sovereign debt, three officials familiar with the discussions said Sunday.  European Union finance ministers discussed the recapitalization plan during a marathon 10-hour session Saturday, with Swedish Finance Minister Anders Borg saying afterward that they had agreed on the foundations.  One EU official said the target was €107 billion, while two others said it would be €108 billion. The idea is to use the money to boost Tier 1 capital ratios—the ratio of a bank's core equity capital to its total risk-weighted assets—up to 9%.  Several EU officials had said there was some resistance to such a high capital ratio, but on Saturday evening Spanish Finance Minister Elena Salgado said 9% was a "reasonable" target.

Deck Chairs, Titanic -  Krugman - OK, yes, European banks do need more capital. But their problems are a symptom of the underlying sovereign debt problem, which can only be resolved, if at all, with ECB lending AND a commitment to reflate. Without that, the losses on sovereign debt will blow right through any amount of newly raised bank capital. So when I read Europe’s big banks will be forced to find €108bn ($150bn) of fresh capital over the next six to nine months under a deal to strengthen the banking system agreed by European Union finance ministers. I think, this is a band-aid — and one that’s going to be applied gradually, over six to nine months! — when the patient is at risk of dying in a few weeks from damage to his internal organs.

European Debt: The Big Picture - For everyone struggling to get their arms around the debt crisis in Europe, Bill Marsh in today’s New York Times offers literally a compelling picture, with graphic illustration for the key issues. The picture is big, 18×21 inches. Either you need a very large computer screen or a hard copy of the paper. The main debt linkages across borders for which we have data are all here – and the graphic pulls your eye appropriately to the centrality of Italy in whatever happens next.  (On why eurozone policy towards Italy now matters so much – and what are the options – see my recent paper with Peter Boone, “Europe on the Brink”.) But you might think also about what is not in the NYT graphic because we lack reliable information.  For example, what is the exposure of US financial institutions to European debt, directly or indirectly, through derivatives transactions of any kind? The opaqueness of derivative markets means that most investors can only guess at what could happen.  Most of the relevant regulators and supervisors with whom I have talked seem also to be largely in the dark – remember the experience of AIG in 2008.

The Hole in Europe’s Bucket, by Paul Krugman - If it weren’t so tragic, the current European crisis would be funny, in a gallows-humor sort of way.  Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from a sort of bank run on Italy, the euro area’s third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely. It’s a vicious circle, with fears of default threatening to become a self-fulfilling prophecy. To save the euro, this threat must be contained. But how? The answer has to involve creating a fund that can, if necessary, lend Italy (and Spain, which is also under threat) enough money that it doesn’t need to borrow at those high rates. Such a fund probably wouldn’t have to be used, since its mere existence should put an end to the cycle of fear. But the potential for really large-scale lending, certainly more than a trillion euros’ worth, has to be there. And here’s the problem: All the various proposals for creating such a fund ultimately require backing from major European governments, whose promises to investors must be credible for the plan to work. Yet Italy is one of those major governments; it can’t achieve a rescue by lending money to itself. And France, the euro area’s second-biggest economy, has been looking shaky lately, raising fears that creation of a large rescue fund, by in effect adding to French debt, could simply have the effect of adding France to the list of crisis countries.

My European Nightmare – An Infernal Hurricane Gathers? - Every now and then a terrible thought enters my mind. It runs like this: what if the theatre of the Eurocrisis is really and truly a political power-game being cynically played by politicians from the core while the periphery burns? Yes, of course, we can engage in polemic and say that such is the case. But in doing so we are trying to stoke emotion and generally allowing our rhetorical flourish to carry the argument. At least, that is what I thought. I had heard this rhetoric; I had engaged in it to some extent myself; but I had never really believed it. Only once or twice, in my nightmares, I had thought that, maybe, just maybe, it might have some truth. And then the Financial Times published this ‘strictly confidential’ document leaked to them from within the Eurostructure. That is when my nightmare started becoming increasingly real. The document is damning in that it fully recognises what many of us have been saying for months: namely, that the austerity measures in the periphery are not going to produce an outcome favourable to anyone. The document focuses on Greece, but the implications of what it reports regarding the experiment currently taking place there have implications for all the countries currently looking down the barrel of austerity.

The Myth of Greek Profligacy & the Faith Based Economics of the ‘Troika’ - Reading the press, one gets the impression of a bunch of lazy Mediterranean scroungers, enjoying one of the highest standards of living in Europe while making the frugal Germans pick up the tab. This is a nonsensical propaganda. As if Greece is the only country ever to cook its books in the European Union! Rather, the heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. The top 20% of the income distribution in Greece pay virtually no taxes at all, the product of a corrupt bargain reached during the days of the junta between the military and Greece’s wealthiest plutocrats. No wonder there is a fiscal crisis! So it’s not a problem of Greek profligates, or an overly generous welfare state, both of which suggest that the standard IMF style remedies being proposed here are bound to fail, as they are doing right now. In fact, given the non-stop austerity being imposed on Athens (which simply has the effect of deflating the economy further and thereby reducing the ability of the Greeks to hit the fiscal targets imposed on them), the Greeks really are getting close to the point where they may well default and shift the problem back to those imposing the austerity. This surely can’t be much worse than the slow execution they are facing today.

Spain Slipping on Deficit Means Chances of Contagion Increase - Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall. “They will never make it,” . “Our September forecast sees Spain’s deficit at 7 percent” of gross domestic product this year, he said, adding that the prediction was made before the nation’s credit rating was cut this month. Spain’s region of Castilla-La Mancha was cut five levels to junk on Oct. 20 by Moody’s, which also downgraded nine other regions on “growing liquidity pressures” and difficulties “reining in their cost base.” It’ll be “very difficult” for the 17 regions to reach their 2011 deficit goal of 1.3 percent, opposition leader Mariano Rajoy said on Cope radio yesterday. “There is insufficient firepower to meet all the potential liquidity needs,” David Mackie, chief European economist at JPMorgan Chase & Co., said of the proposed EFSF enhancements in an Oct. 18 note to investors.

PORTUGAL: Crisis Pushes Women into Prostitution - The severe financial and economic problems in Portugal are driving many women to desperation and pushing them into prostitution as a last resort to support their families. The decision to sell one's body cannot be taken lightly. But for many mothers the alternative is to condemn their children to hunger, which is why "increasing numbers of women in their thirties, who are victims of the crisis, are resorting to prostitution," Fontinha, who has spent the past 40 years of her life working with prostitutes, said that never before had the situation in the country been so serious. Added to this situation is the fear that is natural in novices to the game, many of whom are divorced, or married and plying their trade behind their husbands' backs.  These inexperienced women are also afraid on a daily basis of falling victim to human trafficking networks, often controlled by the so-called "Eastern mafias", in comparison with which the local pimps seem almost harmless.

An Irish alternative to high inflation - Unemployment is at its highest rate for 15 years and its highest level for 17. Inflation has matched its record high on the consumer prices index and is at its highest for 20 years on the retail prices index. For followers of the misery index (the unemployment rate plus the inflation rate) this means only one thing; we have not been this miserable for 19 years. Some young people have never been. So the Nationwide building society reported on Friday its consumer confidence index fell three points to 45 and is lower than when gross domestic product was falling. It is just above its all-time low in February, after the Vat hike to 20%. The rise in consumer price inflation to 5.2%, and to 5.6% on the retail prices index, came less than a fortnight after the Bank of England had announced a further £75 billion of quantitative easing (QE).

Irish Reality Check - Krugman - There have been a number of articles and blog posts lately claiming that Ireland is over the hump, that it’s all coming right; see for example this recent piece by Henry Kaspar. But I was checking to see if it was still true that Icelandic CDS prices — the cost of insuring against default — were much lower than Ireland’s. And given what we’ve been hearing, the Irish CDS story comes as something of a shock: Prices are down from a spike last summer, but still very high. And for the record: as of posting time, the Irish 5-year CDS was 776, the Icelandic 5-year CDS 280. Part of what’s happening, I think, is that the apparent good news on Ireland isn’t as good once you look at it closely: for example, pharma exports are up, but they contribute very little to GNP (as opposed to GDP) because they generate very little income for the Irish. Anyway, it’s always a mistake to base your views about what’s happening on the conventional buzz. If you believed that, you’d think that Latvia was booming and Argentina a disaster. And the recent Irish boosterism is just more of the same.

New euro 'empire' plot by Brussels - European Union chiefs are drawing up plans for a single “Treasury” to oversee tax and spending across the 17 eurozone nations. The proposal, put forward by Herman Van Rompuy, the European Council president, would be the clearest sign yet of a new “United States of Europe” — with Britain left on the sidelines.  The plan comes as European governments desperately trying to save the euro from collapse last night faced a new bombshell, with sources at the International Monetary Fund saying it would not pay for a second Greek bail-out.  It was also disclosed last night that British businesses are turning their back on Brussels regulations to give temporary workers full employment rights, with supermarket chain Tesco leading the charge.  Meanwhile, David Cameron is attempting to face down a rebellion tomorrow by Tory MPs in a vote over staging a referendum on Britain’s membership of the EU.

Summarizing The Sheer Chaos In Europe: 9 Meetings In 5 Days - For over a year, our premise #1 in interpreting the newsflow out of Europe has been that in the absence of actual practical ideas, and the continent's glaring inability to do simple math, the only option left to bEURaucrats has been to literally baffle people with so much endless bullshit that the general audience would be simply stunned by the possibility of an alternative that the union's leaders were all talk and absolutely no action, let alone analysis. As of today, we now know that that is precisely the case: for over a year Europe has been mouthing off hollow rhetoric in hopes that the market would just leave it alone, and that promises of promises and plans of plans would be sufficient. That plan (pardon the pun) has now failed. And so behind the scenes chaos turns into fully public panic. As the FT's Brussels blog summarizes, the only game left in town for Europe now is to push off D-Day, but not to some indefinite point in the future, like the US, but to tomorrow, and tomorrow and tomorrow, to channel the bard here. And nothing confirms better that it is all over for Europe, than the following summation of the terror and utter cluelessness gripping Europe, than the following sentence from the FT: "Just to recap, by Wednesday night there will have been nine meetings of ministers or national leaders in five days."

Eurozone Summit - Despair And Backbiting In The Corridors Of Power - Just when the eurozone governments thought it could not get worse for Europe's single currency, it did.  Shell-shocked EU finance ministers meeting in Brussels on Saturday were already reeling from the worst Franco-German rift for over 20 years and a fractious failure to resolve the problems that have brought Greece, and the euro, close to the brink.  But then a new bombshell hit as a joint report by the EU and the International Monetary Fund (IMF) warned that, without a default, the Greek debt crisis alone could swallow the eurozone's entire €440 billion bailout fund - leaving nothing to spare to help the affected banks of Italy, Spain or France.  An EU already rocked by divisions between France and Germany over how to increase the "firepower" of the European Financial Stability Facility (EFSF) in order to save the wider eurozone from Greek contagion now faced the prospect of losing it all in one go.

ECB's Trichet wants more euro zone power over states (Reuters) - Outgoing European Central Bank President Jean-Claude Trichet called on Monday for euro zone authorities to have greater powers over the economic policies of the bloc's errant members, setting out a vision for a closer-knit currency area. Speaking as euro zone leaders struggle toward a strategy to fight the bloc's debt crisis, Trichet used his last scheduled public speech as ECB president to call for deeper euro zone economic integration that would impact national sovereignty. In the speech, entitled "Tomorrow and the day after Tomorrow: A Vision for Europe", Trichet said euro zone states should examine all aspects of each others' economic policies. This would go beyond fiscal policy surveillance. "For countries that lose market access, the current approach of providing aid against strong conditionality is justified," he said, referring to the rescue packages the EU and IMF have extended to Greece, Ireland and Portugal."Countries deserve an opportunity to put the situation right themselves and to restore stability. But ... this approach should have clearly defined limits." He presented a proposal for dealing in future with a country that persistently fails to meet its economic program targets. "Under this second stage, euro area authorities like us would gain a much deeper and more authoritative role in the formulation of that country's economic policies," he said.

Jean-Claude Trichet's dire tenure at the ECB - Dean Baker -- Jean-Claude Trichet will be retiring as head of the European Central Bank at the end of October. He will step into retirement having wreaked the sort of destruction on the European economy that hostile powers could only dream about. Tens of millions of people across the eurozone countries are unemployed or underemployed because of his mismanagement of Europe's economy.  Meanwhile, the world teeters on the brink of another financial crisis because of the failure of the ECB, along with the IMF, to effectively address the sovereign debt crisis. Most incredible of all, Trichet probably thinks he has done a good job.This last point really is central because the ECB, like much of the economics profession, continues to be controlled by a bizarre clique that believes that the most important, and possibly only, goal that a central bank should pursue is a 2% inflation target.  However, the low and stable eurozone inflation rate is not going to provide much help to the 21.2% of the Spanish workforce that is unemployed, or the 14.6% of the Irish workforce, nor the millions more elsewhere in the eurozone who have lost their jobs as a result of the collapsed of the housing bubbles – which the ECB let grow unchecked.

Hard line adopted on Greek debt loss  - European negotiators have asked Greek debt holders to accept a 60 per cent cut in the face value of their bonds, a hardline stance that far exceeds losses agreed in a deal between private investors and eurozone authorities three months ago.The stance, delivered to a consortium of international banks at the weekend by Vittorio Grilli, Italian treasury chief and lead eurozone negotiator, is a victory for German-led northern creditor countries who have been pushing for Greek bondholders to accept far more of the burden for a second bail-out. According to officials briefed on the talks, France, the European Central Bank and the International Monetary Fund remain concerned the tough stance could trigger bondholder insurance policies known as credit default swaps, sparking investor panic because of uncertainty over which financial institutions face CDS losses. “The CDS market is not very transparent,” said Jacques Cailloux, European economist at RBS. “You don’t know where the exposures are.”

Greece in a state of shock as Troika reforms take effect - Up close, the most striking feature of the reforms being forced on Greece by its international creditors is their destructiveness and futility. The pay cuts, tax rises, cuts and job losses agreed to by parliament in Athens last week will serve only to send the economy into a steeper tailspin, even if it extracted a much-needed €8bn in bailout money from the EU leaders. "Nothing but a lost war could be worse than this situation," one left-wing ex-minister tells me. "What is worse, no party or political group in Greece is offering real solutions to our crisis." On the right, there are similar lamentations. Asked if there is the possibility of a revolution in response to current disasters, Simos Kedikoglou, an MP from the opposition New Democracy party, says, "I wish there could be a revolution." He argues that a revolution might at least have a sense of purpose and direction but "we are in a state of shock, and the danger, rather, is that we will have a social eruption, because people have lost hope". The mass rallies and 48-hour general strike that paralysed Greece last week were a sign of how far Greeks feel the reforms insisted upon by the Troika – the IMF, European Central Bank and European Commission – are a recipe for a permanent collapse in living standards.

Banks Clash With Lawmakers on Greek Rescue - Banks are pushing back against European leaders on the size of losses they are ready to accept on Greek bonds as officials struggle to rescue the debt-laden country while avoiding a default.  There are limits “to what could be considered as voluntary to the investor base and to broader market participants,” Charles Dallara, managing director of the Institute of International Finance, an industry group that’s participating in the talks on Greek debt, said in an e-mailed statement yesterday. “Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.”  The discussions are part of an attempt to solve the two- year-old sovereign-debt crisis that has pushed Greece toward default and roiled global markets. European Union leaders, who hold a second summit in four days tomorrow, are seeking an agreement on bolstering the region’s rescue fund, recapitalizing banks and providing debt relief to Greece to avoid contagion spreading to Italy and Spain.

European Leaders Consider Fund to Attract Outside Cash to Tame Debt Crisis - European finance ministers are considering setting up a fund to entice outside investors to buy troubled euro-area government bonds, as they struggled over how to tame the Greece-fueled debt crisis, said a person familiar with the matter. The insured investment vehicle was one of two options being weighed, along with using the European Financial Stability Facility to boost the rescue firepower from 440 billion euros ($611 billion) currently, the person said. “The principle that we leverage the EFSF with private money is being subscribed by everyone, but the level of success is uncertain,” Dutch Finance Minister Jan Kees de Jager told reporters on the second day of crisis talks in Brussels. “How much can we raise, that is being looked at.”

EU could source bailout funds from Asia and the Gulf - Finance ministers from the eurozone countries are discussing the idea in order to boost the lending capacity of the EFSF. The EU could tap sovereign wealth funds from Asia and the Gulf in order to boost the financial clout of its main vehicle to bailout eurozone countries suffering debt distress and prevent contagion spreading, it is understood. Finance ministers from the 17 eurozone countries are discussing the option of creating a "special purpose vehicle" for the European Financial Stability Facility (EFSF) in order to boost its current €440bn (£383bn) lending capacity. The idea, according to sources, would be to attract further money from official and private investors, with the sovereign wealth funds of countries such as China, Singapore or Qatar a prime target. Some of these already invest in European banks such as Barclays and UBS.

The Eurobanks’ Latest Scheme to Escape the Pain of Recapitalization: Pull More Financial Firms into the TBTF Complex - Yves Smith -  Readers probably know the European authorities have been stunningly late to wake up to the fact that EU banks are undercapitalized, apparently being the only ones to believe their PR exercise known as a stress test. The banks’ options would seem to be limited. One is to raise more equity, which is kinda difficult now since no one is terribly keen about banks in general, and the ones in most need of more capital are the least attractive. Second is to let existing loans roll off. The authorities don’t like that idea, since less lending will increase downward economic pressures. And since bank CEO pay is correlated with size of institution, the banksters aren’t too keen about that either. Third is to cut pay to help accelerate earning their way out. You can guess how likely that is to happen. Last is to suffer state-assisted recapitalization, which under EU rules, would be a draconian exercise. But never fear, the financiers have an “innovative” way around this problem. And this innovation is a remarkably destructive idea. From the Financial Times: Banks are striking deals with private equity groups, hedge funds and insurance companies in an effort to preserve their precious regulatory capital. A growing number of investors is moving to provide beleaguered lenders with special targeted transactions to help them share their risks – for lucrative fees – through a fast developing class of “regulatory capital relief” funds. The schemes typically involve writing partial guarantees for the assets sitting on banks’ balance sheets through bespoke securitisations, meaning insurance companies or funds absorb the losses on the riskiest portions of banks’ loans.

EU may combine insurance, SPIV to boost euro fund - The euro zone should combine two proposals for increasing the firepower of its rescue fund -- an insurance model and a special purpose investment vehicle (SPIV) -- according to an EU paper for the mid-week summit obtained by Reuters on Monday. The paper said neither option would require politically-difficult changes to the existing European Financial Stability Facility (EFSF), which has been approved by national parliaments after some problematic debates. The euro zone wants to boost the firepower of its 440 billion euro bailout fund without putting more money into it. Under the credit enhancement or insurance model, the EFSF could boost market confidence in new debt issued by a struggling member state by guaranteeing an unspecified proportion of the losses that could be incurred in the event of a default. This would work via the EFSF extending a loan to a member state, which would buy EFSF bonds in return. The bonds would be the collateral for a partial protection certificate to be held in trust for the state. Both the bond and the certificate would be freely tradable, according to the paper.

Europe is now leveraging for a catastrophe - It is time to prepare for the unthinkable: there is now a significant probability the euro will not survive in its current form. This is not because I am predicting the failure by European leaders to agree a deal. In fact, I believe they will. My concern is not about failure to agree, but the consequences of an agreement. A leveraged EFSF is attractive to politicians for the same reason that subprime mortgages once appeared attractive to borrowers. Leverage can have different economic functions, but in these cases it simply disguises a lack of money. The idea is to turn the EFSF into a monoline insurer for sovereign bonds. It is worth recalling that the role of those monolines during the bubble was to insure toxic credit products. They ended up as a crisis amplifier. Leveraging also massively increases the probability of a loss for the triple A-rated member states, who ultimately provide the insurance. If a recipient of the guarantee were to impose a relatively small haircut – say 20 per cent – the EFSF and its guarantors would take the entire hit. Under current arrangements, they would only lose their share of the haircut. The way eurozone leaders have been handling the crisis ultimately vindicates the German constitutional court’s conservatism in its definition of what constitutes a functioning democracy. Policy co-ordination among heads of state is both undemocratic and ineffective. A monetary union may require more than just a eurobond and a small fiscal union. It may require a formal, if partial, transfer of sovereignty to the centre – that includes the rights to levy certain taxes, impose regulation in product, labour and financial markets, and to set fiscal rules for member states.

Nicolas Sarkozy tells David Cameron: shut up over the euro - David Cameron has begun a week of intense political infighting over Europe by becoming embroiled in a furious row with Nicolas Sarkozy over Britain's role in talks to solve the crisis enveloping the euro. The bust-up between Cameron and Sarkozy held up the conclusion of the EU-27 summit for almost two hours, with the French president expressing rage at the constant criticism and lectures from UK ministers. Sarkozy bluntly told Cameron: "You have lost a good opportunity to shut up." He added: "We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings." The prime minister has torn up his travel plans this week to attend an emergency heads of state meeting on Wednesday, and has demanded that all 27 EU countries be given the final say over measures to prevent the eurozone's sovereign debt crisis spreading and Europe sliding into deep recession. On Monday the prime minister is facing both the largest Commons revolt of his premiership and the largest rebellion of eurosceptics suffered by a Conservative prime minister when parliament votes on whether the UK should have a referendum on Europe.

Europe Readies Its Rescue Bazooka -- Yves Smith - It’s one thing to fail to recall relevant events that are genuinely historical, quite another to refuse to learn from recent failed experiments. Remember Hank Paulson’s bazooka? Less than two months later, Treasury and OFHEO put the GSEs into conservatorship.  If the latest rumors prove to be accurate, the latest Eurozone machinations make Paulson look good. The Financial Times reports that the Greek deal is being reworked, with bondholders being “asked” to take 60% haircuts. The critical bit is the word “asked”. Recall this restructuring is supposed to be voluntary to avoid triggering a credit event under credit default swaps. The old deal with a mere 21% haircut, had a takeup below the 90% sought and the 80% deemed the minimum acceptable. With haircuts this deep, how pray tell will the authorities force banks to go along with an allegedly voluntary deal? Any party that was hedged is going to want to see a bona fide default so he can cash in his credit default protection. But Greek banks were big protection writers (why anyone would accept them as counterparties is beyond me), so breaking them (which is what I assume would happen) would necessitate bailouts by the broke Greek state, which would worsen the national insolvency, which is what the deeper haircuts were supposed to avoid. And some parties are concerned about even worse outcomes, since no one knows who the CDS protection writers are. This is what you get when you let banks innovate to their hearts’ content: more cleverly designed minefields, and the taxpayer picks up the damage inflicted on innocents or greedy chumps who wander into them.

Hoping that the Minimum is Enough in Europe -The headline of this New York Times story is somewhat at odds with the substance of what happened this weekend in Brussels regarding the eurozone debt crisis: European Leaders Deal Directly With Debt Dilemma.  There are three reasons that I've gotten a slightly sinking feeling as I've been reading news reports about the progress that was made this weekend.

  • 1. The EFSF. The heart of the matter to be decided is how to increase the resources available within the EFSF to support the sovereign debt markets for Spanish and Italian debt. That has always been the most difficult part of the puzzle to build, and based on reports from this weekend, we still seem to be no closer to knowing what approach they will agree on, or even if they will be able to agree in the first place.
  • 2. Bank recapitalization. Eurozone leaders have decided that EU banks will need a capital injection of €108bn: Banks must find €108bn in new capital. This seems low to me. The IMF has estimated that the EU's banking system will take a hit of closer to €200bn as a result of the debt crisis, and I would have been somewhat relieved if the EU had agreed on a number closer to that.
  • 3. Common purpose. Or more accurately, the lack of it. Everything I've read about the forthright but also acrimonious debate this weekend suggests to me that European leaders continue to be focused primarily on making sure that their own country pays the smallest share of the costs possible. No one has stepped up as an advocate for the common project of the euro. No country has taken on the leadership role of being willing to accept a higher burden of the costs for the common good. And now it is clear that no one is going to.

German Parliament Expected To Hold Full Vote on EFSF -The German parliament is expected to hold a full vote on Wednesday on proposals to leverage the euro-zone rescue fund, contrary to earlier plans to confine the vote to its budget committee, SPIEGEL ONLINE has learned from sources in Chancellor Angela Merkel's conservative Christian Democratic Union (CDU). At issue is the need to boost the impact of the €440 billion rescue fund, or European Financial Stability Facility (EFSF). There is concern that the current size of the (recently expanded) fund isn't sufficient should additional countries, particularly Spain and Italy, be infected with debt contagion. The fund is also designed to indirectly prop up European banks, which could also become expensive if European leaders this week agree to an even greater haircut on Greek debt. Up to 60 percent is currently under consideration. The news raises the stakes even further for Merkel, who struggled to contain a rebellion in her ranks against the initial expansion of the EFSF in a parliamentary vote on Sept. 29, before the leverage plans took shape. Indeed, one of the strategies she pursued in putting down that rebellion was discounting speculation that the fund would be leveraged. It is unclear when the proposed guidelines for the EFSF will become available for lawmakers to review -- it is possible that a new version will arrive from Brussels on Monday evening.

Europe Still Avoiding Only Solutions to Its Crisis - I think the new deadline for a resolution to the European financial crisis is Wednesday, though I’m not sure a single deadline has been hit so far, so best to consider that soft. We know the basic outlines of the plan that many European leaders want to create. It includes a haircut for investors in Greek bonds, possibly as much at 60%; some recapitalization of European banks after they take this hit, but done in a way that doesn’t undermine France’s credit rating; and a leveraging of the EFSF, the European bailout fund, to make the fund big enough to stop any run on Italy and other euro sovereigns and stop any contagion.There’s some argument over the mechanism for the leveraging, but basically the situation is that the sovereign governments don’t want to spend the money – or don’t have the money – to create a backstop at the level that’s needed without risking their own credit.  Similarly, the European Central Bank isn’t equipped or willing to print the money or to perform the function of a central back, lender of last resort, and thus stand behind the debts. So the idea is to conjure it.As Wolfgang Munchau writes, this is insane.

Italy’s growth disaster - Hat tip goes to Matt Yglesias.  At the risk of sounding like a broken record player, we are not sufficiently thinking through what it means for an advanced society to have basically zero net economic growth for a ten to twenty year period.  It’s very possible, and this is (more or less) the same Italy that was praised in the 1980s for its dynamism and which overtook the UK in terms of per capita income, at least for a while.

Italian Interest Rates - Loss of confidence in Italian debt seems to be slowly worsening - the above shows the yield on the ten year bond from Bloomberg.  Note that the graph is not zero-scaled.  The spike in July was caused by a squabble between Prime Minister Burlusconi and Finance Minister Tremonti.  It ended when the ECB intervened, but now interest rates have risen almost to the peak level notwithstanding continued ECB involvement. A reminder on some of the background.  Italy has the third largest government debt market in the world (after the US and Japan).  This is due to its high level of debt/gdp:Note that the Italian government was slowly working the debt down in the late nineties and early 2000s, but then it increased since the 2008 crisis and that has been enough to cause the present loss of confidence.  To me this is an object lesson in why countries shouldn't run at too high a level of public debt - the world is a dangerous place and you never know when some crisis might come along and force your debt over the threshold of what markets will tolerate.  Obviously it's a particular problem when you don't have your own central bank. It's also a problem when the economy is barely growing:

Pressure on Italy in eurozone struggle - Germany and France have turned on Italy to demand further action to boost growth and reduce its huge debt, as leaders of the eurozone struggled to agree on how to boost their rescue fund to stop contagion in the sovereign debt markets before a Wednesday deadline. Angela Merkel, the German chancellor, and Nicolas Sarkozy, French president, held tough talks with Silvio Berlusconi, at the start of the day-long summit in Brussels, insisting that he take more radical measures to restore the trust of investors.Confidence in Italy’s public finances is critical to preventing the spread of the Greek debt crisis across the eurozone, but France and Germany are worried that Mr Berlusconi is not taking tough enough measures.

Very Serious Europeans - Krugman - From today’s FT: In private, Italian officials say EU leaders are allowing their personal disdain of Mr Berlusconi to cloud their judgment over Italy – and, in the case of President Nicolas Sarkozy, who is facing re-election next year, disguising France’s own economic weaknesses. But they also realise that such views no longer cut any ice as markets increasingly lose faith in Italy’s ability to stop the Greek contagion from spreading. The extent of the concern was highlighted last week when Angela Merkel, the German chancellor, telephoned Giorgio Napolitano, Italy’s head of state, who is widely regarded as a pillar of respectability. According to leaks, Ms Merkel wanted to know if Mr Berlusconi was capable of implementing budget cuts and fulfilling economic reform pledges, and whether Italy had an alternative to take his place. Mr Berlusconi, who, according to diplomats, pretended to doze off during the weekend’s summit, has been given until the next meeting of eurozone leaders on Wednesday to come up with a convincing plan.

Berlusconi’s Cabinet Fails to Agree on Measures Before EU Summit - Prime Minister Silvio Berlusconi’s Cabinet failed to agree on steps to spur economic growth after the European Union urged Italy to push through “comprehensive” measures to fight the sovereign-debt crisis. The meeting concluded last night in Rome without taking any decisions amid opposition to a plan to raise the retirement age by the Northern League, Berlusconi’s key ally. In a statement before the talks, the premier defended his commitment to fiscal rigor, saying Italy is meeting its “public-debt obligations.” The European Commission yesterday called on Italy, which has the euro region’s second-biggest debt load after Greece, to enact “swift adoption followed by rigorous implementation” of growth measures. Berlusconi responded by saying his government was preparing to take “important decisions” on structural changes, as EU leaders prepare to meet for a second summit this week in Brussels tomorrow. “We have a primary surplus stronger than our partners, we will reach a balanced budget in 2013,” Berlusconi said in the e-mailed statement. “Nobody has anything to fear about Europe’s third-largest economy,” he said.

Italy Pressured by EU to Boost Economy - European leaders increased pressure on Italian Prime Minister Silvio Berlusconi to specify how he will reach budget-reduction targets as German lawmakers prepared to vote on a revamped euro-area bailout package that officials raced to complete before a summit tomorrow. Italy needs to back up commitments with “specific actions” and come up with “clear timing,” European Commission spokesman Amadeu Altafaj said in Brussels today after a crisis cabinet meeting in Italy late yesterday failed to announce steps to spur growth. The focus on Italy underscored a push by leaders to prevent the Greece-fueled debt crisis from swamping the third-biggest euro economy and piling risks onto France and Germany. Policy makers, pressed by politicians and investors around the world, are struggling to devise a plan that persuades markets they can stamp out the contagion. “The package is likely to represent the turn of a corner in the European debt crisis, but it will not be a ‘one strike, the crisis is over’ sort of thing, simply because there is no such strike available to policymakers,”

Italian Consumer Confidence Drops to Three-Year Low Amid Crisis (Bloomberg) -- Italian consumer confidence unexpectedly fell to the lowest in more than three years in October as austerity measures and Europe’s debt crisis sparked concern that the economy may slip into a recession. The sentiment index dropped to 92.9, the lowest since July 2008, from a revised 94.2 in September, national statistics office Istat said in Rome today. Economists had predicted a reading of 97.6, according to the median of 12 forecasts in a Bloomberg News survey. Prime Minister Silvio Berlusconi’s government has pushed through two packages of deficit cuts since July totaling about 100 billion euros ($139 billion) to stem borrowing costs that have surged to record highs amid investor concern that Italy may succumb to the debt crisis. The measures may weigh on growth and the European Commission urged Italy yesterday to pass measures to spur the economy. Italian retail sales were unchanged in August from the previous month and fell 0.3 percent from a year earlier, Istat said today. The country’s economy expanded 0.3 percent in the second quarter from the three months through March, when it grew 0.1 percent.

Italian government on brink of collapse - Silvio Berlusconi’s centre-right coalition government in Italy appears in danger of collapsing over European Union demands for a demonstration of concrete action on economic reform by Wednesday’s summit of eurozone leaders. The EU ultimatum delivered to Mr Berlusconi in Brussels on Sunday risks breaking his coalition instead of giving it an external impetus to move ahead on measures to cut Italy’s debt and promote economic growth. The ultimatum was delivered as part of efforts to resolve the eurozone sovereign debt crisis, but the Italians’ failure to reach agreement on reform threatens EU leaders’ stated goal of finalising at Wednesday’s summit a comprehensive solution to the crisis.  Talks on Tuesday morning between Mr Berlusconi and his Northern League coalition partners failed to resolve the deadlock – centred on proposed pension reforms – after negotiations into Monday night made little progress. “The government is at risk,” Umberto Bossi, leader of the fiercely eurosceptic and federalist Northern League, told reporters in Rome. “The situation is difficult, very dangerous. This is a dramatic moment,” he was quoted as saying.

Berlusconi’s Fraying Coalition Fueling Calls for Early Vote (Bloomberg) -- The deepening divisions in Prime Minister Silvio Berlusconi’s coalition over how Italy can meet European Union demands for more robust efforts to tame a $2 trillion debt are fueling calls for early elections. Berlusconi reached an agreement late yesterday with Umberto Bossi, leader of the Northern League party and his key coalition ally, over raising the retirement age. To secure Bossi’s support, Berlusconi agreed to resign in January and hold early elections, newspaper la Repubblica reported today. “Either this government is able to take structural reforms or we need another government,” Mario Baldassarri, chairman of the Senate Finance Committee and a former Berlusconi ally, said in an interview in Rome today. “We will see in the next few days or week” whether Berlusconi resigns. Bickering within his Cabinet this week over pensions and other issues prevented the premier from complying with EU requests to deliver a comprehensive plan to boost growth in Italy and tackle the debt at a summit in Brussels. Berlusconi, who has pledged for more than a month to pass a plan for growth, will instead deliver a letter of intent on his plans to the summit today.

Italy’s Small Business Problem - Jared Bernstein cautions against the over-lionization of small businesses in the New York Times. I agree. The best evidence for skepticism continues, I think, to me the fact that if small firms were so fantastic Italy and Greece would be the economic superstars of the western world: The way a healthy economy works is that you start with a bunch of firms and then it turns out that some of those firms are better-managed than others. The well-managed firms expand while the poorly-managed firms go out of businesses. At the end of the day, then, you wind up with the majority of workers working for relatively well-managed firms. Because the firms are well-managed, the workers are more productive and earn the well-known-in-the-literature large firm wage premium. Alternatively, you can have an economy like Italy’s with lots of barriers to competition so that poorly managed firms stay in business with low productivity and low

Greenspan: Why European Union Is Doomed to Fail - The European Union is doomed to fail because the divide between the northern and southern countries is just too great, former Fed Chairman Alan Greenspan told CNBC in a recent interview. "At the outset of the creation of the euro in 1999, it was expected that the southern eurozone economies would behave like those in the north; the Italians would behave like Germans. They didn’t," Greenspan said. "Instead, northern Europe fell into subsidizing southern Europe’s excess consumption, that is, its current account deficits." Greenspan predicts that as the south's fiscal crisis deepens, the flow of goods from the north will stop altogether and southern Europe's standard of living will go down. "The effect of the divergent cultures in the eurozone has been grossly underestimated," he added. "The only way to have several currencies from divergent nations lumped together is if they are culturally close, such as Germany, the Netherlands and Austria. If they aren’t, it simply can’t continue to work." Greenspan feels that, to a very large extent, what’s driving the United States at the moment is Europe.

Europe must do debt deal quickly: U.S. Treasury - Europe must move “quickly and firmly” to implement any agreement to solve the euro-zone crisis, said Charles Collyns, Treasury assistant secretary for international finance, on Tuesday.    European leaders will gather Wednesday for a second summit meeting in four days in an effort to agree on a wide-ranging set of measures designed to contain the crisis. In testimony prepared for a House Financial Services subcommittee on international matters, Collyns said that the European officials have a framework for an agreement which is to be “finalized” on Wednesday. But experts on both sides of the Atlantic are worried that the leaked details of the agreement fall short of solving the crisis. For instance, there have been reports that the plan calls for European banks to raise reserves by 100 billion euros. Analysts said this will not be enough to calm investor fears over the health of the European financial sector.

Europe scrambles to finalize plan to address financial crisis -— Deliberations over a crisis plan for the euro zone continued across the continent Monday, with the Italian government struggling to prove its commitment to reform and a banking group warning of dire consequences if private losses on Greek bonds grow too steep. The euro region’s financial technocrats, meanwhile, worked to flesh out the details of what has become a complex effort to address three issues at once: a new financing plan for Greece that will include deep losses for private investors who have lent money to the country; a regionwide effort for banks to increase their financial strength to absorb Greek and other potential losses; and a scheme to increase the effective size of a regional bailout fund. The process remains something of a high-wire act with the warning that Greece could face economic isolation if European officials insist on the 60 percent losses envisioned for Greek bondholders. European officials say losses of that magnitude are needed to stabilize Greece’s decaying finances, but they want banks and other investors to accept them voluntarily.

Fear And Loathing In The Eurozone - Europe will be the focus of the financial news again next week. German Chancellor Merkel and French President Sarkozy will try to work out a deal to give additional funding and more discretionary power to the EFSF, while simultaneously strengthening “economic integration” and capitalization of European banks, all under the auspices of implementing “economic governance of the euro area.” Achieving their goals would be historic by any measure. A primary issue at the heart of the struggle is whether the theoretically unlimited funding of the European Central Bank (ECB) can be used to ‘backstop’ the EFSF, thereby guaranteeing sufficient capital to recapitalize banks and buy distressed bonds. While Sarkozy is a strong proponent of backstopping the EFSF with ECB funding, going so far as to abandon his wife during childbirth to travel to Frankfurt to make his case to Chancellor Merkel, his efforts were in vain. Merkel, backed by ECB President Jean-Claude Trichet, adamantly refused to consider Sarkozy’s proposal.

Liquidity, Solvency, and Competitiveness - Kantoos considers whether it is obvious that the eurozone debt crisis is, at least with respect to Spain and Italy, merely a liquidity crisis and not an issue of fundamental insolvency: The problem is how to distinguish a multiple-equilibria situation from cases of genuine one-equilibrium insolvency – especially for countries as the future capacity to repay is not based on assets in a narrow sense but on the expectation of future economic growth.  ...For Italy and Spain, there is a reasonable chance that it is in fact a self-fulfilling liquidity problem, but – and that was my main point – it is by no means certain. A backward-looking remark about Italy having a primary surplus is just not enough to make your case and Henry’s analysis is not encouraging. A few points. First, take a look at the following chart that shows the debt/GDP ratios for a number of major European economies. If the markets believed that Spain (the blue line) is fundamentally insolvent -- or even at risk of becoming fundamentally insolvent in the foreseeable future -- then wouldn't such solvency concerns have also hit the debt of Germany, France, and the UK?  And what about Italy? Italy's debt/GDP ratio is indeed high -- over 100%. But that ratio has been over 100 percent for the past 20 years, so that's nothing new.

German officials: Bailout fund will top $1.4 trln - The eurozone bailout fund's firepower is set to be leveraged to more than euro1 trillion ($1.39 trillion), German opposition leaders said Monday following a briefing with Chancellor Angela Merkel. Governments from the 17-nation eurozone hope that the euro440 billion European Financial Stability Fund, or EFSF, will be able to protect countries like Italy and Spain from being engulfed in the debt crisis. To do that, however, it needs to be bigger or see its lending powers magnified. Frank-Walter Steinmeier, parliamentary leader of the opposition Social Democrats, and the Greens' Cem Oezdemir said the chancellor informed them that the EFSF will be leveraged well beyond its current size. That would be achieved through a combination of measures, Steinmeier said. It would insure investors against a percentage of possible losses on eurozone government bonds and also involve the participation of outside organizations such as the International Monetary Fund.

Europe Banks Must Find $900 Billion in 2012, CreditSights Says - Banks in Europe have to refinance 655 billion euros ($911 billion) of senior bonds next year and may need government backing if the debt crisis continues to block access to markets, according to CreditSights Inc. “Unless funding access eases, we might see banks having to use government guarantees again, and it will add to the pressure on them to reduce assets in order to lower refinancing needs,” said Simon Adamson, an analyst at the independent research firm in London. “I would think only a small proportion has been pre- funded, given that the markets have been virtually closed since July.” Western European lenders raised about 80 billion euros of senior unsecured debt this year, according to data compiled by Bloomberg. That’s down from 97 billion euros for the same period in 2010, as investors worry that banks, the biggest holders of sovereign debt, will face losses as the crisis escalates.

Germany Pushing Hard For 60% Writedown On Greek Debt-Sources --Euro-zone countries Tuesday remained divided over the size of the writedown that banks will have to take on their Greek government bonds, underscoring the last-minute snags still facing the next day's euro-zone summit on a package to stem the currency bloc's debt crisis. Germany is "pushing hard" for banks to take a 60% writedown on their holdings of Greek government bonds, but France insists the cut shouldn't be much higher than 40%, a view which is shared by banks. The banks fear that a 60% cut wouldn't be deemed voluntary and could trigger a raft of claims for insurance contracts, known as credit default swaps, to cover bond losses, according to senior euro-zone and International Monetary Fund officials. "The intention for the 60% haircut was conveyed to the banks on Sunday. So Germany seems to be getting its way although there is still room for a compromise at around 50%. It will become final tomorrow [Wednesday] at the euro-zone summit," a euro-zone official with direct knowledge of the matter told Dow Jones Newswires.

Violent Dispute Over Haircut Percentages - The euro countries and the banks have provided the EU crisis summit on Sunday a violent dispute over the amount of the debt waiver, you want to accept the services in Greece. According to FTD information provided bank representatives a loss of 40 percent, while the governments of the monetary union in the evening called for a cut of 60 percent debt. The real difference between the two proposals is even greater, because the banks want to stretch the loss in the long term, while EU negotiators at a meeting with the Banking Association IIF on the edge of the summit demanded an immediate depreciation. The bank claims were "a joke", said a €-group representatives. The dispute between the governments and the banks shows the difficulty, until next Wednesday to find a comprehensive solution for the euro crisis.

EU Official: IMF Sees 60% Greek Debt Writedown Too Small - The International Monetary Fund believes that a writedown of 60% on private sector's holdings of Greek debt won't be sufficient and a larger haircut will be necessary as part of a new Greek debt bailout, a senior European Union official familiar with the negotiations said Wednesday. "The IMF thinks that 60% haircut is not enough--they want more," the official told Dow Jones Newswires. "It should be 65% or more." He didn't rule out a haircut of as much as 70% to 75% in the value of private sector creditor's holdings. The IMF couldn't immediately be reached for comment. European Union leaders are meeting Wednesday to hammer out details on a plan to stem the region's debt crisis, including a sweeping recapitalization of European banks, a bigger bailout fund and a substantial restructuring of Greece's debt. The biggest sticking point still seems to be the size of the private sector contribution to the Greek bailout package, with a bank source saying the Institute of International Finance, which is negotiating on behalf of private creditors, tabled a proposal Tuesday evening. There are also still differences among euro-zone governments on how aggressively to push for a large writedown.

The Dealbreaker: Barclays Sees A 50-60% Haircut As A CDS Trigger - Finally someone dares to go ahead and say what is on everyone's mind, namely that proclaiming a 60% "haircut" as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and "contagion waterfall" ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won't be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal. What it also will impact is treatment of all other banks and pledged collateral valuations which is effectively the only bridge in the chasm between Mark to Unicorn and reality. So here is Barclays with what can be the effective dealbreaker, because if a bank: an entity that owns the credit event determinations committee at ISDA, comes out with a contrarian statement to the conventional "stick your head in the sand" wisdom, then pretty soon everyone else will have to follow sui: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." And here is why Wednesday's summit is now guaranteed to be a flop: "We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view."

Bankers fear political moves will kill off CDS - It has been blamed by politicians for causing the eurozone debt crisis and attacked as the favoured asset of “evil speculators”.  Now, politicians are seeking to take their revenge: not just with the recent introduction of bans on some trading of credit default swaps but also in their attempts to ensure that any haircut on Greek government bonds does not trigger a credit event.  Combined, these two events could spell the end of the credit default swaps market, say bankers. Sovereign CDS – used to protect creditors against defaults – have been bought by hedge funds and other investors as protection against possible default. But concerns over this market are rising following the latest plans to hit holders of Greek debt with punitive haircuts of 60 per cent and the European Union wide ban on naked trading, or the buying or selling the assets without owning underlying bonds. Bankers fear the market could be “killed stone dead”, in the words of one, if politicians put pressure on banks to accept big haircuts without triggering a CDS payout, while a ban on naked trading could hit liquidity. The EU wants to prevent speculation in this market as it believes this could drive up government borrowing costs. Policymakers are also keen to avoid a credit event on Greek CDS, fearing this could put further pressure on those banks having to pay out.  But these aims could backfire. Some bankers believe, rather than lowering borrowing costs, these moves will have the reverse effect and also restrict lending to their banks and companies.

Geithner: Europe Crisis World’s Biggest Challenge - U.S. Treasury Secretary Timothy Geithner said Tuesday that finding a solution to the European debt crisis in the next several days is imperative because that predicament is the “biggest challenge to growth worldwide.” Encouraged with the outlines for action released in recent days, Geithner said he is anxious to see more specifics. “We want to see details, not just the objectives,” the secretary said. Geithner said the U.S. has offered support, but added that the “primary burden falls on the Europeans.” European leaders are expected to unveil a fresh plan this week to address the debt crisis that is gripping Greece and threatens several other countries. That plan would address Greece’s debt, including losses bondholders may take, boosting a fund to assist other nations and recapitalizing euro-zone banks. While direct U.S. exposure to the most troubled European nations is limited, Treasury officials have said U.S. bank exposure to large European lenders is significant.

Thank you Germany - Alone among EU leaders, Chancellor Angela Merkel goes to tonight’s summit in Brussels with an iron-clad mandate. It is a remarkable moment. Never before – to my knowledge – has a national parliament demanded and held a prior vote on an EU summit accord. Had this principle been established a long time ago, we might have avoided much of the relentless Treaty creep and EU aggrandizement advanced by secret deals at the Bâtiment Justus Lipsius. Thank you Germany. Thank you too, judges of the Verfassungsgericht, for giving the Bundestag a veto on EU encroachments on fiscal sovereignty. The court is seemingly the only tribunal willing and able to defend the liberties of European citizens against EU over-reach, and is therefore my supreme court too even as a British citizen.

Eurozone versus US Debt - Eurostat a couple of days ago released 2010 data for government debt and deficits.  Above I contrast the total Eurozone gross debt with that of the US (US data from the IMF) as a fraction of their respective GDPs.  It's interesting to note that the US debt is higher than Eurozone debt, and the US has overall acted in a more stimulative manner in response to the 2008 crisis than has the Eurozone. This makes it clear that the present crisis in Europe is not a function of the overall level of the debt across the entire Eurozone but rather of inadequate institutional arrangements for coping with the way it is distributed. It doesn't sound like the next summit meeting is likely to have a big impact on the problem: New fissures and disagreements emerged on Tuesday on the eve of a European Union summit meeting promoted as the moment for agreement on a comprehensive solution to the two-year-old euro crisis. My view is that since the present level of crisis is not enough to drive eurozone politicians into an adequate solution, the crisis will have to worsen first.  Since it seems unlikely to get better by itself (with growth slowing and Italian interest rates rising) it seems likely that at some point European leaders will be staring into the abyss.  At that point they will most likely finally come up with some adequate set of arrangements...

Greece Pension Plans Insolvent; No Conceivable Way to Make Promises; Can Spain and Portugal be Far Behind? - I am attempting to figure out just how deep in the hole Greek pension plans are.  One of the things we do know is that Greek pension plans are one of the largest holders of Greek bonds.For the sake of argument, let's assume a 60% haircut on the value of those bonds although I believe that haircut will increase over time. The critical question is what percentage the pension plans hold Greek bonds, other sovereign bonds, Greek equities, and other equities. Here is a look at the stock markets of Greece, Germany, and France from the site Trading Economics.  There are more than one Greek pension plan programs, but no matter what they are invested in, all of them have horrendous losses in the last few years. Moreover, the more the plans are invested in the Greek equities markets and Greek bonds vs. other European bonds and other European equities, the worse off those pension plans are. To know just how badly underfunded the plans are, we need to look at individual plans, as well as pension plan assumptions. Greek citizens needs to be told the truth regarding those pension plans, no matter had bad the situation is.

The long shadow of Greece - THE euro crisis began in Athens some two years ago as the full extent of its dire public finances first became apparent. Now it has turned full circle again. Along with the acute difficulties in constructing a much stronger firefighting fund to protect countries like Italy, especially while Silvio Berlusconi still remains in charge, the agony of Greece is the main reason why today’s summit in Brussels looks set to disappoint those expecting that it would deliver a fully worked-out solution. At their last make-or-break meeting—the “emergency summit” of July 21st—these two interlinked problems were also crucial since Greece’s woes had deteriorated and Italy had first come under attack by bond vigilantes. The leaders of the 17 euro-area countries announced measures to deal with both of them. Greece got a second bail-out, amounting to €109 billion ($152 billion) on top of the first one, announced in May 2010 in conjunction with the IMF, which was worth €107 billion (originally it was €110 billion but Slovakia refused to participate and Ireland and Portugal ceased to contribute when they, too, were bailed out).

Tax haven crackdown yields 14 billion euros: OECD - An international drive against offshore tax havens has reaped nearly 14 billion euros from would-be tax evaders, the Organization for Economic Cooperation and Development (OECD) said on Tuesday. Some 100,000 taxpayers in 20 major economies surveyed by the OECD have revealed previously undetected offshore assets in the last two years, allowing tax authorities to collect the equivalent of nearly $19 billion. "As cash-strapped governments look to pay down their deficits, this will make a substantial contribution to fiscal consolidation," OECD Secretary General Angel Gurria said at the opening of a two-day meeting on tax transparency. "Just as important -- most of the additional revenues has been secured from citizens trying to evade taxes," he added. "At a time when many governments are forced to ask their citizens to accept higher taxes and reduced public services, everyone must pay their fair share."

Why Europe's latest debt-crisis agreement could be DOA - The leaders of the euro zone held an important conference on Sunday to try, once again, to resolve its destabilizing debt crisis. And though a final agreement wasn't reached – and probably won't be until Wednesday – we can already read the writing on the wall. The new grand agreement is likely to be Dead On Arrival. Why so? On every major issue Europe's leaders are debating – from the second Greek bailout to recapitalizing the region's enfeebled banks – they are putting their own, narrow political interests over the desperate needs of the monetary union. We've seen this again and again and again (and again), and it has been the fatal flaw in every deal reached in the two-year quest to stamp out the debt crisis. You know the saying: Those that fail to learn from history are doomed to repeat it. The leaders of Europe have to go back to high school.

Analysis: Sarkozy in fight for French AAA, political future (Reuters) - Nicolas Sarkozy is in one of the most critical weeks of his presidency as he battles to mend his differences with Germany over a euro zone crisis that threatens both France's economic wellbeing and his own political future. A spike in French bond spreads over German Bunds mirrors the rising pressure Sarkozy is under as the relentless advance of the euro area's debt crisis throws France's top-tier position in the bloc alongside Germany into question. The premium investors demand to hold French 10-year bonds soared to 120 basis points over Bunds, three times the normal level, since Moody's said last Monday it was scrutinizing the outlook on France's triple-A rating in light of slowing growth and costly euro zone bailout commitments. Penned in between hawk-eyed rating analysts and a disgruntled electorate, Sarkozy is grappling with one hand to ensure a euro zone plan promised for Wednesday does not place the burden of propping up banks on the state, and must use the other to find fresh deficit-cutting measures without burying his chances of winning a second term in a 2012 election.

Compulsory Greek Debt Writedowns to Cost Taxpayers $55 Billion - Taxpayers in the euro region may face losses of as much as 40 billion euros ($55 billion) should banks be forced to take writedowns on Greek bonds. The 47 billion euros of bilateral loans Greece has received from the region’s governments have the same level of seniority as the nation’s bonds, according to Evolution Securities Ltd. in London. That means losses inflicted on bondholders must be imposed on the loans as well as notes bought by the European Central Bank under its 165 billion-euro Securities Market Program if a non-voluntary restructuring takes place. “The bilateral loans have got to be the worst bit of lending in history,” “That’s why they don’t want to see a loss. It’s got to be incredibly embarrassing, one for the Guinness Book of Records for the worst lending decisions ever, to lose almost 40 billion euros of taxpayers’ money in 18 months.”

Lines to Withdraw Deposits Queue Up as Run on the Banks starts in Greece - With talk of 50% or 60% haircuts on Greek bonds, already mistrustful Greek citizens have queued up to pull deposits. Via Google Translate, The Bild reports Greeks Plunder their Accounts in Fear of Debt CutsMonday morning, 7.40 clock in the district of Athens, "Agia Paraskevi". We, the BILD reporters are witnesses, of a queue in front of a branch of the "National Bank of Greece" right after the opening at 8:00. "I come here to immediately pick up my pension € 300. Who knows what else happened today. My money is safe only when it is at home" said Pensioner Evagelos Dimitros age 73. The head of an Athens bank branch told BILD: "More and more Greeks who still have some money come to get it from the bank. In my office there are a total of 5,000 customers, 2,500 of which either have their money transferred abroad or hoard it at home. If this continues, there will soon be no more money."

Spot the Euro effect - I will not dispute the theoretical argument that a flexible exchange rate can be a tool to smooth business cycle fluctuations but I fail to see that the data speaks so much against the Euro experience. I can entertain the argument that some of the constraints of the Euro are not helping Europeans to find a solution, but when I look at the data, it is not easy to see a dramatic effect coming from the fact that the exchange rate is not allowed to move.  What if we simple focus on the contribution of exports to GDP? Why exports? Because we normally think about exports as being affected by foreign conditions (which are similar for all these countries) and the real exchange rate. If we were to look at imports then domestic conditions would matter as well and we would have to control for other factors. If the exchange rate is a significant part of the crisis we should expect countries that are constrained by Euro membership to show a worse exports performance than those that let their currencies depreciate. The first chart below plots growth of exports (volume) for Portugal, Greece, Ireland and Spain (countries that are part of the Euro) as well as Sweden and the UK (countries that decided to stay out of the Euro and saw their currencies depreciate during the crisis). The second one simply aggregates growth rates over time to compare levels of exports where 2005 is equal to 100.

EU Crisis Roadmap: Key Milestones - With European Union leaders heading from one pivotal summit to another, intense negotiations are underway to hammer out details on a plan to stem the euro debt crisis, including a sweeping recapitalization of European banks, a bigger bailout fund and a substantial restructuring of Greece’s debt. EU and euro-zone leaders are meeting again on Wednesday to finalize a deal after laying out the foundations for a bank recapitalization plan and leveraging of the European Financial Stability Facility at meetings Sunday. Pressure is mounting on euro-zone leaders to deliver a convincing plan before G-20 leaders meet Nov. 3-4. The situation is fluid due to the complex nature of negotiations, meaning timetables are still be susceptible to change. EU finance ministers are likely to meet ahead of the summit, while the German Parliament has also scheduled a critical debate for Wednesday to approve any changes to the EFSF’s role. There are now two options for the EFSF on the table, which could be combined. One is an insurance plan that foresees the fund’s setting aside a pool of money that could be used to offset part of any losses suffered by purchasers of the debt of weak countries, such as Italy. The other would be to create a special, separate fund, which would raise money from private investors and others, like sovereign-wealth funds, to buy debt of weak countries. The known worry list is as follows:

HUGE: IMF Is 'Considering' Participating In EU Bailout Fund: The IMF is "considering" a plan to back a special purpose investment vehicle (SPIV) that would leverage the European Financial Stability Facility, according to Reuters. Analysts have been chattering about the size of IMF involvement in the eurozone bailout, but this is the first confirmation that the fund is actively thinking about playing an even bigger role than it is now. That would equate with a substantial contribution from the U.S., by far the largest IMF subscriber, with a quota of 17.72%. This will no doubt be a major topic of discussion at the G20 meetings in early November. Under the plan, an SPIV created by the EFSF that would issue debt. Then the IMF could purchase that debt, providing more funds to the EFSF. One Reuters source even said the fund was willing to set up an administrative account, that would allow IMF shareholders and maybe even sovereign wealth funds to accumulate money to help the eurozone. This "consideration," however, is by no means a confirmation that the IMF will definitely be more involved.

Europe at Odds Over Crisis Package - Prospects for a long-awaited breakthrough deal to stem the worsening euro-zone debt crisis were up in the air on Tuesday, as governments and banks remained at loggerheads over how much pain to inflict on holders of government bonds issued by Greece, the country at the heart of the Continent's financial mess. National governments and banks have been talking for more than a week in an effort to reach an accord on reducing Greece's debt burden, so that the agreement can be included in a planned "comprehensive package" that euro-zone leaders hope to announce at a summit Wednesday in Brussels. Banks on Tuesday were rebuffing pressure from governments for "voluntary" write-downs of 50% to 60% on their Greek bonds, according to people familiar with the matter, although some said there had been movement that suggested a compromise in time for the summit couldn't be ruled out. An EU finance ministers' meeting set for Wednesday ahead of the summit was canceled Tuesday, adding to doubts over the package. Without an agreement on how Greece's debt will be restructured, it will be tough for European leaders to determine the future size of their beefed-up bailout fund, the European Financial Stability Facility.

Fears euro summit could miss final deal  - Eurozone leaders were struggling on Tuesday to reach agreement on a much-anticipated deal to reverse their spiralling debt crisis amid mounting signals a definitive agreement would not be reached at a key summit on Wednesday night. According to officials briefed on deliberations, talks between European government negotiators and representatives of Greek bondholders remained inconclusive, putting at risk one of the three key pillars of a deal: a final resolution on Greece’s second bail-out. A draft of the summit communiqué circulated to national capitals late on Tuesday and described to the FT does not include any wording on a completed deal on Greek bondholder haircuts, and instead refers only to a second bail-out being concluded sometime in the future. No timetable is mentioned. In addition, a separate “draft terms and conditions” paper on a second key pillar in the deal – beefing up the eurozone’s €440bn rescue fund – makes clear that leaders will be unable to attach a figure to how much firepower the leveraged fund will have. “A more precise number on the extent of leverage can only be determined after contacts with potential investors,” the draft states. The draft communiqué suggests final details of the overhauled €440bn fund, formally known as the European financial stability facility, may not be concluded until eurozone finance ministers meet again. Their next scheduled meeting is not until November 7.

The Vicious Cycle At The Heart Of Europe's Crisis: The term "Receding Horizons". as I first defined years ago with regards to energy, is back; this time in crisis-politics. Just as Europe would need to show a more united front than ever, the gloves are coming off. And there's nothing but solid logic behind it all: the deeper the crisis, the more the various needs diverge. President Sarkozy faces a 2012 election campaign with a sovereign credit rating downgrade looming ever bigger. And French banks are in devastatingly deep doodoo. Chancellor Merkel, however, faces entirely different priorities: strong opposition from all sides, including her own party, to ever-growing German funds and credit being used to prop up the sinking parts of Europe. When a crisis is still in its shallow phases, it's easy to make believe that it's best to prioritize common interests, where and when these can be found. As the crisis deepens, ever fewer of the most pressing interests turn out to be common. And it's obvious that it doesn't take all that much to shine a glaring light on rifts and divisions within Europe. Thousands of years of history can't be polished off in a mere few decades. The entire EU project, including the common currency, sounded great in times of plenty. When the plenty was gone, the whole project was found to be no more than a thin layer of glossy veneer that only temporarily hid all the age-old differences from sight.

EU rescue plans hostage to raw politics - Europe's debt crisis has taken a deeply political turn as parliamentary battles rock Italy and Greece and once again cause simmering dissent in Germany, vastly complicating the search for a workable solution. Italy's coalition was scrambling to head off collapse late on Tuesday after deep rifts on austerity measures dictated by Brussels for a Wednesday deadline, when EU leaders reconvene for yet another crisis summit. "I remain pessimistic," said Umberto Bossi, Northern League leader and key ally of premier Silvio Berlusconi, who had warned earlier in the day that the government was in danger of collapse. Mr Bossi said his party had offered a compromise on fresh austerity but could not accept EU demands for a rapid rise in the retirement age to 67. "The people would kill us," he said. The pension reform is the EU's tacit condition for intervention to shore up Italy's bond markets.

Draghi: Must Immediately Enact EU Crisis Facilities - European Union authorities must “immediately” activate facilities to confront the crisis, but each national government has to take “resolute and lasting” action to stabilize its own public finances, text president of the European Central Bank said Wednesday.Without appropriate action by euro area member states, special facilities will be just a “palliative,” Bank of Italy Governor Mario Draghi said in his last speech in Rome.Draghi, who takes the ECB’s helm in November, said that assuring price stability and anchored inflation expectations remained “essential” for the central bank.

EU Talks With Banks on Greece Said Deadlocked European Union talks with banks on bondholder losses as part of a second Greek rescue package are deadlocked and have been suspended, an EU official said. The EU is seeking voluntary participation by banks, though a forced solution can’t be ruled out, the official said in Brussels today on condition of anonymity because the talks are private. While policy makers and bankers are converging on a 50 percent writedown for Greece’s lenders, the disagreement centered on the specifics of the transaction. The dispute focused on how much of the risk of newly issued Greek bonds should be insured, the official said. The Institute of International Finance, which lobbies on behalf of 450 financial firms, yesterday proposed investors make a larger writedown than the 40 percent the group offered last week, said two people with knowledge of the talks. The European Union is calling on investors to forfeit as much as 60 percent, a person familiar with the talks said last week. To safeguard banks’ finances, EU leaders will set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt, according to a draft statement prepared for the summit.

Belgian premier: bailout fund needs more than euro1bn The prime minister of Belgium says the eurozone's bailout fund should have a firepower of more than euro1 trillion ($1.4 trillion) to prevent the currency union's debt crisis from spreading. Yves Leterme said Tuesday "I think that effectively, it has to be able to intervene a good deal beyond euro1 trillion." He was heading into a crucial emergency summit of European leaders in Brussels. At the summit, the leaders will seek to set up a complicated scheme to give the euro440 billion bailout fund more leverage, reduce Greece's massive debt and strengthen banks across the continent.

Talks Suspended in Deadlock; German Parliament Approves "Blank Check" on EFSF Leverage; Belgian PM Seeks Firepower Exceeding One Trillion Euros - Today the German Parliament approved the use of leverage without specifying an amount, thereby giving Chancellor Merkel an effective "blank check" on the amount. In a nonbinding (on the ECB) resolution, the parliament seeks to halt ECB sovereign bond purchases. Unfortunately, the issue will be up to the ECB to decide, not Germany. Given Italy has the ECB deck stacked, I would expect the purchases to continue in clear violation of the Maastricht Treaty. Otherwise, the main news is talks are deadlocked with open issues regarding the size of the haircuts, whether or not the haircuts are voluntary, the amount of EFSF leverage, the size and timing of bank recapitalization efforts, and how much of the new Greek bonds will be insured. That's a lot of open issues.

EU lawmaker: ideas to boost crisis fund fall short - A key member of the European Parliament warns that ideas for increasing the firepower of the eurozone's bailout fund may not be enough to calm market fears over the currency union's debt crisis. Guy Verhofstadt said Tuesday that the European Central Bank may have to continue buying the bonds of wobbly nations like Italy even after a summit of European leaders on Wednesday moves to give the euro440 billion European Financial Stability Facility more heft. Verhofstadt, the head of the liberal faction of the Parliament, said he feared "that on Wednesday we increase the firepower, but with means and with instruments that are not convincing for the markets in the medium-term." The ECB has already spent euro170 billion trying to keep down interest rates on shaky government bonds.

Eurozone Crisis: Fist Fight In Italian Parliament As ‘Dysfunctional’ Government Threatens Euro Plans - A fist fight broke out amongst deputies in the Italian parliament during a tense debate on the country’s austerity reforms, ahead of a critical meeting of eurozone leaders. The failure of the Berlusconi government to agree on key reforms to retirement age and other deficit reduction measures after a cabinet revolt by members of the eurosceptic Northern League on Monday spooked markets and further undermined confidence in the country's economy. It was two Northern League lawmakers who were involved in the scuffle in parliament, Reuters reported. The pair fought with members of the opposition FLI party. Northern League supporters chanted "resign, resign", according to reports. Italy’s debt levels are more than 115% of its gross domestic product (GDP), and the market’s lack of confidence in its ability to repay have seen yields on its bond issuance rise to unsustainable levels. The government is due to put forward a plan detailing its economic and structural reforms today, having already missed previous deadlines. Analysts are far from convinced that it will reassure markets.

Is Berlusconi being sacrificed? - Is the Italian Prime Minister being sacrificed on the altar of finding a deal to fix the euro-zone crisis? As the deadline for fixing the euro-zone summit approaches, more and more attention is focusing on Italy. Quite simply, unless Italy can be protected, no agreement will convince the markets. The muscling of Italy has intensified because Europe's leaders have struggled to increase the firepower of their main rescue fund - the EFSF. It is likely that on Wednesday they will announce that the fund has been leveraged up to one trillion euros. Italy's debt stands at 1.8tn euros. It needs to issue some 600bn euros in bonds in the next three years to refinance maturing debt. Ganging up So President Sarkozy and Chancellor Merkel ganged up against the Italian leader Silvio Berlusconi at the weekend. They told him in no uncertain terms that he had to get his public finances in order.

European summits in ivory towers - Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.The ECB has been behaving like the generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.

Impasse on Greek Debt Threatens EU Deal - European Union talks with banks on bondholder losses as part of a second Greek bailout ran aground, dimming the chances for a comprehensive strategy at a summit to stamp out the debt crisis. A statement issued close to midnight in Brussels by the Institute of International Finance, the bank lobby, said there was no agreement “on any element of a deal.” The outlines of a deal to safeguard banks emerged, centering on a June 30, 2012 deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign debt holdings, according to a statement after all 27 EU leaders met. A group of 70 European banks will need to raise 106 billion euros in the next eight months to meet the goal, the European Banking Authority, the banking regulator, said. Greek banks need 30 billion euros; those in Spain need 26.2 billion euros. In France, the need totals 8.8 billion euros and in Italy, it’s 14.8 billion euros. While policy makers and bondholders were converging on a 50 percent writedown of Greek debt, clashes over collateral to underpin the transaction will limit the summit to issuing a mandate for further talks, an EU official said in Brussels on condition of anonymity.

The Euro Area Precedent for Policy Failure - Rebecca Wilder - Last weekend, a leaked Troika report (Troika = ECB + EC + IMF) revealed that European policy makers now comprehend that the Greek policy prescription is not working: The growth and fiscal policy adjustments assumed under the program individually have precedent in other countries’ experience, but experience to date under the program suggests that Greece will not be able to set a new precedent by realizing at the same time and from very weak initial conditions a large internal devaluation, fiscal adjustment, and privatization program. Rob Parenteau and Marshall Auerback sum up the implications of this point (1 A.): On the first page of the document is not only a pretty open and blatant admission that expansionary fiscal consolidation (EFC) has proven to be a contradiction in terms, at least in Greece, but there is also a serious policy incompatibility problem, at least over the intermediate term horizon, with efforts at internal devaluation (ID). I agree with Rob and Marshall – the grand plan does not work. However, I’d like to focus here on the ‘precedent in other countries’ experience’. What precedent? One might point to Canada’s mid-1990s budget initiative that dropped program spending from 16.8% of GDP in 1993-1994 to 12.1% in 1999-2000 as a candidate for precedent. Marshall Auerback and Stephen Gordon refuted this claim as applicable to current conditions. However, we now have economic data available with which to compare the Canadian austerity experience to that of the Euro area.

On political dysfunction in Europe - Today is the big European summit. Expectations are low because European politics have become messy.  Many at the ECB still see monetisation as not at all compatible with its mandate. I don’t care what Silvio Berlusconi says about the need for a lender of last resort. Italy will dangle in the wind until they make structural reforms. Only then – or if spreads shoot to the moon – will we see whether the ECB backstops Italian debt. The talk now is of 50-60% haircuts as we predicted a couple of weeks ago. Back then, there were comically weak denials. Now everyone has admitted the default and hard restructuring in Greece is upon us. German institutions are preparing for the event. Both Deutsche Bank and Münchener Rück have marked down their books for example. What about the French? That is still a question. The anti-growth nature of fiscal consolidation has now been confirmed by the Troika in Greece via a leaked document we posted a few days ago. Clearly, it is this reality which has caused the troika to move to a hard restructuring. Spain has already acknowledged it won’t make its fiscal targets. I don’t expect Ireland or Portugal to do either because Europe is going into a recession due to an anti-growth fiscal policy and the ill effects of the sovereign debt crisis. Ireland looks good now. But recession will create problems.

Europe Agrees on Plan to Inject Capital Into Banks - European leaders struggled Wednesday to reassure the world they were making progress in overcoming the two-year-old euro zone debt crisis, with German lawmakers approving a proposal to strengthen an emergency bailout fund ahead of a summit meeting later in the day promoted as the moment for a comprehensive solution. The vote to expand the bailout fund passed by a strong margin in Germany’s lower house. “The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to the Parliament in Berlin. “It would be irresponsible not to assume the risk.” The administration of President Nicholas Sarkozy of France, who has also sought to project his intention for a decisive outcome at the summit in Brussels, said there was no other choice. “France is totally mobilized and engaged in the success of today’s summit,”Nonetheless, fissures and significant disagreements among the Europeans were still unresolved ahead of the summit, particularly concerning Italy, the euro zone’s third-largest economy, where Prime Minister Silvio Berlusconi won only provisional support for economic reforms demanded by his European partners.

Europe’s grand gamble risks failure without ECB - Europe's "Grand Plan" to save monetary union is, in broad terms, a settled matter, even if the usual theatrics were still dragging on into the small hours of the Belgian night. Whether it proves any more successful than past efforts over the past two years is far from clear. The package is a huge gamble. If it goes wrong, it may accelerate contagion to core Europe, hastening the denouement so feared by EU leaders. The EU's €440bn bail-out fund (EFSF) will be leveraged "several fold" – perhaps to €1 trillion – chiefly by insuring the first 20pc loss of new bonds by Italy, Spain and other debtors. This creates a two-tier market, instantly downgrading old debt to lower status. The plan will "probably" be buttressed by an off-books fund that uses EFSF seed money to rope in the International Monetary Fund, China, Japan and Russia. French President Nicolas Sarkozy said he would call his Chinese counter-part Hu Jintao on Thursday to garner support. Beijing will almost certainly impose terms, renewing its demand for open-door access for Chinese state firms investing in EU industry and for an end to Europe's veto on "full market status" for China under global trade laws.

Euro Summit Statement - Excerpts: The Private Sector Involvement (PSI) has a vital role in establishing the sustainability of the Greek debt. Therefore we welcome the current discussion between Greece and its private investors to find a solution for a deeper PSI. Together with an ambitious reform programme for the Greek economy, the PSI should secure the decline of the Greek debt to GDP ratio with an objective of reaching 120% by 2020. To this end we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready to provide additional programme financing of up to 100 bn euro until 2014, including the required recapitalisation of Greek banks. The new programme should be agreed by the end of 2011 and the exchange of bonds should be implemented at the beginning of 2012. We call on the IMF to continue to contribute to the financing of the new Greek programme.On EFSF: We agree that the capacity of the extended EFSF shall be used with a view to maximizing the available resources in the following framework:
• the objective is to support market access for euro area Member States faced with market pressures and to ensure the proper functioning of the euro area sovereign debt market, while fully preserving the high credit standing of the EFSF. These measures are needed to ensure financial stability and provide sufficient ringfencing to fight contagion;
• this will be done without extending the guarantees underpinning the facility and within the rules of the Treaty and the terms and conditions of the current framework agreement, operating in the context of the agreed instruments, and entailing appropriate conditionality and surveillance.

Full Text: Euro Summit Statement on Greek Hard Restructuring

Good News for Bears: Torture by Rumor Ends - A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:

  • A "voluntary" haircut of 50% on Greek debt
  • Bank recapitalization set at 106 billion euros
  • EFSF will use leverage to get to at least 1 trillion Euros
  • Leverage will be via a combination SIV plus Insurance plan
  • Banks get an additional 21 billion Euros in "official aid"
  • The ECB is going to continue to buy Italian bonds come hell or high water
A group of 70 European banks will need to raise 106 billion euros in the next eight months.Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.
  • Greek banks need 30 billion euros
  • Spanish banks need 26.2 billion euros
  • French banks need 8.8 billion euros
  • Italian banks need 14.8 billion euros
  • Remaining countries 26.6

Here's What Europe Just Agreed To Do About Its Big Crisis - So here's the rundown of what leaders decided (EU leaders were still pretty vague about all the numbers, however, citing estimates for most things):

  • - 50% haircuts on private holdings of Greek bonds through 2020. Evidently this will still be voluntary. It would cut Greece's debt by €100 billion ($139 billion). German Chancellor Angela Merkel said EU leaders aim to see the credit swap take place in January.
  • - Leverage will increase the firepower of the European Financial Stability Facility by 4-5 times, to somewhere in the range of €1 trillion ($1.4 trillion).
  • - China and the IMF could play a huge role in the bailout. Not only has the IMF expressed interest in playing a role, French President Nicolas Sarkozy told reporters that he will call Chinese Premier Hu Jintao around midday tomorrow, presumably to discuss this.
  • - Greece will receive €130 billion ($180 billion) in fresh aid. We're thinking this includes the nearly €110 billion ($150 billion) it was promised back in July.
  • - EU leaders believe Italy's commitment to debt sustainability and encouraging growth, even though Italian PM Silvio Berlusconi didn't propose any new measures to accomplish these goals in a letter he wrote to some members of the summit today.

What Does 'Recapitalizing Banks' Actually Mean? - As part of their agreement, European governments therefore will force their banks to “raise new capital,” presumably from private investors. If the latter do not show up, then whose money would do the “European recapitalization,” and on what terms? Citizens of any country have reasons to smell a rat when the country’s elite speaks to them of “recapitalizing” banks. In this regard, for example, the United States bailout of its troubled banks, and Ireland’s bailout of its banks, are hardly reassuring. The Occupy Wall Street movement appears to be fed in part by this suspicion. Recapitalization is a generic term. It can be done in different ways, some more unseemly than others. My inquiry among a nonrandom sample of educated adults suggests that many people do not actually know exactly what recapitalization means. Can we blame them, given that financial experts speak mainly to one another in opaque jargon, and government shuns transparency in these matters? To see clearly what is involved, it is helpful to start with a simple accounting identity that describes a business company’s financial position, at market values, at any moment in time as “t.” It is At – Lt = Et Here At denotes the total, realistically realizable dollar value of assets to which the firm has legal title; Lt denotes the total dollar value of the company’s liabilities, if it paid off all of that debt at time t; and Et denotes the company’s net worth or “owners’ equity” – all as of the point in time t.

How gross and net CDS notionals really work - According to the DTCC, there is $75bn gross notional outstanding for CDS contracts referencing Greece. However, on a net basis this figure reduces substantially to $3.7bn. What do these different numbers tell you, and how are they constructed? Let’s look at a simple example where there are four banks engaging in seven CDS trades. Here, a positive number means the dealer is a buyer of CDS protection, and negative is a seller. In the above, Bank A buys $12 CDS from Bank C, hence there is $12 of gross notional from that one trade. Looking at all seven trades, the total gross notional is in the system is $132, which you get by just adding up and not double-counting. Provided the trades are fungible with each other, then for any given bank, the buys and sells can be added up to get that bank’s overall net position. And since this is a contained universe, adding up all the net positions of all four banks gives zero. The net position for just the overall buyers (11 + 44) or just the overall sellers (38 + 17) is $55. That $55 net number is the one that should be compared to the $132 gross. If a credit event occurs, triggering payouts on the CDS, then an auction is held to determine the final settlement amount for all outstanding contracts. Whether a credit event has occurred is decided by the Isda determinations committee, who also decide what the deliverables (bonds) are for the auction.

Roger Bootle on the European Crisis Deal: Get Austere or Die Trying - Here's Roger Bootle talking to Bloomberg's Maryam Nemazee about the deal hammered out yesterday to 'save Greece.' He is quite sceptical. The 120% debt to GDP figure that the deal is predicated on reaching is still high and assumes a benign economic environment. Separately, I have seen a number of other threads on the crisis. Most of the commentary has been negative. One would never know this given the incredibly bullish reaction in the markets. Here are the most interesting threads:

  • The Economist says “The euro deal: No big bazooka”. They reckon “Europe’s leaders have agreed on how to prop up the euro. For now”. However, they see this deal as another extend and pretend exercise.
  • In the UK, according to the Guardian, the British government asked for and got a seat at the negotiating table even though French President Sarkozy asked Prime Minister Cameron to butt out. David Cameron urged Merkel to let central bank play greater role in the future of Euro’s emergency activities.
  • The Telegraph’s Ambrose Evans-Pritchard says “Europe's grand gamble risks failure without ECB” taking the line that David Cameron took to Brussels.
  • In Germany, Der Spiegel remarks that countries outside the euro zone are sitting pretty while inside the euro zone a two class society has developed (link in German).
  • In Ireland, David McWilliams wonders why Ireland is seen as a model for the euro zone periphery. He writes: “When you walk up one of Ireland’s deserted main streets, it is difficult to reconcile the talk of Ireland doing well and being the model for other European countries to follow with the reality of living here.

Germany Is Already Printing Money – Deutsche Marks - By now everyone realizes that the euro is in major trouble and will no longer exist in its current form for much longer. However, the common view is that it is Greece and possibly other PIIGS countries who will be forced out if the eurozone is broken up. But few are talking about another possibility- of Germany leaving the EU. One who is talking about this is Dr. Pippa Malmgren, a former economic advisor to George W. Bush and a former advisor to Deutsche Bank (DB). According to Malmgren, Germany has already ordered the printing of Deutsche Marks in anticipation of a possible withdrawal from the EU.Malmgren states, The social contract between Germany’s citizens and its leaders preclude [debt monetization] given their history. Germany has already begun to emphasize the need for a new EU Treaty that would compel fiscal harmonization, penalties for those that break the Maastricht Treaty rules and other undertakings that would harden Europe’s defenses against economic default risks going forward. If this is true, and Malmgren is correct, then the euro will absolutely implode. Germany is widely held to have the strongest balance sheet in the EU (though even the Head of its Central Bank admits that the country’s real Debt to GDP is over 200%).

BNP, SocGen Accelerate Trading-Book Cuts - BNP Paribas SA and Societe Generale SA, France’s largest banks, are accelerating cuts in their 1.1 trillion-euro ($1.5 trillion) trading books to avoid going to shareholders or the government for capital.  The banks, which last month began a program to trim about 300 billion euros in assets by 2013, have focused on cutting dollar-funded businesses such as aircraft lending after Europe’s sovereign debt woes squeezed funding. The lenders’ statements show that their trading operations have not gone unscathed.  Reluctant to lose their top spots in the risky yet lucrative trading and derivatives business, Societe Generale and BNP Paribas hadn’t shrunk the operations as much as rivals such as Deutsche Bank AG and UBS AG. The French banks may have little choice after European Union leaders pushed lenders to boost capital. BNP Paribas and Societe Generale need 5.4 billion euros in new capital, the region’s banking regulator said today.

Euro deal leaves much to do on rescue fund, Greek debt -  (Reuters) - Euro zone leaders struck a last-minute deal to limit the damage from the currency bloc's debt crisis early on Thursday but are still far from finalizing plans to slash Greece's debt burden and strengthen their rescue fund. After a summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens' massive debt load to sustainable levels. Reached after more than eight hours of hard-nosed negotiations between bankers, heads of state and the IMF, the deal also foresees a recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility (EFSF), to give it firepower of 1.0 trillion euros ($1.4 trillion).

EMU summit leaves €1,000 billion to be raised - In typical European fashion, a summit deal which seemed out of reach at midnight last night was triumphantly unveiled at 4am. The deal does not, and was not intended to, have any effect on the core problems facing the eurozone. There is still an urgent need to restore growth to economies which are hamstrung by uncompetitive business sectors, and continuous fiscal tightening. Recession still looms, especially in the southern economies. What the deal is intended to provide is adequate medium term financing for sovereigns and banks which have been facing urgent liquidity problems. On that, it is notable that the summit has not really raised any new money, apart from an increase in the private sector’s write-down of Greek debt by some €80bn. All of the remaining “new” money, including €106bn to recapitalise the banks and over €800bn to be added to the firepower of the EFSF through leverage, has yet to be raised from the private sector, from sovereign lenders outside the eurozone, and conceivably from the ECB. There is no guarantee that this can be done. The eventual out-turn of this summit will depend on whether this missing €1,000bn can actually be raised.

The Euro’s Deceptive Rally - OK, so the euro likes the look of this European deal on banks and Greek debt. And maybe it’s even cheered by the “spirit of solidarity” mentioned in some of the official statements. But make no mistake: this climb in the currency doesn’t mean investors suddenly think the region has now been placed on a sustainable growth path. It is what market insiders call a “relief trade.” In other words: things could have gone an awful lot worse. Phew. As one analyst, put it:“Credit where credit is due, this is a substantial outcome given where these muppets were only a few days ago.”  The give-away sign of this is that other currencies seen as risky bets have rallied alongside the euro. Chief among them, the Australian dollar–the FX market’s premium measure of market stress–has climbed much faster than the euro.

Eurozone Leaders Agree a Few Rescue Details, Like 50% Haircut on Greek Bonds; Plan to Develop a Plan Gooses Markets - Yves Smith - When failure is too painful to contemplate, any halting motion in something resembling the right direction will be hailed as success.  Eurozone leaders had a session well into the night and announced a sketchy deal that dealt with one major stumbling block, which was getting a deep enough “voluntary” haircut on Greek debt. Government officials regarded it as key that any debt restructuring be voluntary, since no one wanted to trigger payouts on credit default swaps written on Greek debt (a default or forced restructuring would be deemed a credit event and allow CDS holders to cash in their insurance policies, and that could trigger a bigger rout). The banks were unwilling to accept the 60% haircut sought by the Eurocrats, but agreed to a 50% reduction. The only other seemingly new developments were a commitment by the ECB to “maintain” its bond buying program and confirmation that the various bailouts would be funded by the gimmick of leveraging the EFSF to a much larger size.The Financial Times said that Merkel and Sarkozy said the amount could not be calculated now, but analysts estimated that it would be bigger than €1 trillion, while Bloomberg reported €1.4 trillion. Banks are also required to increase their capital levels to 9% or face the prospect of unpleasant government-assisted recapitalization.  But the whole thing was remarkably slapdash, with lots to be sorted out. The Financial Times account gives a sense of the considerable number of details that needed to be worked through:

EU Leaders Throw Europe a Plutonium Life Preserver - As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it's plutonium, and will take Europe straight to the bottom. Plutonium is of course one of the most toxic materials on the planet, and the "rescue" cooked up by the EU leadership is the financial equivalent of plutonium. Stripped of propaganda and disinformation, the "rescue" boils down to this: something for nothing. Sound familiar? Isn't "something for nothing" what inflated the bubbles which have popped so violently? The EU "rescue" conjures something for nothing in two ways:

  • 1. The financial alchemist's favorite magic: leverage. Take a couple hundred billion euros in cash, leverage it up with various magic (unlimited power is now at your fingertips!) and voila, you can suddenly backstop 1 trillion euros of banking-sector losses, all with illusory money. Something for nothing.
  • 2. "Guarantees" to cover the first 20% of loan losses. This is being presented as the equivalent of 100% guarantees, because it is inconceivable that losses could exceed 20%. In other words, the credulous buyer of at-risk Euroland bonds is supposed to be reassured enough to load the wagon because 20% of the bond is backstopped.

Europe’s half-baked deal - There are three main parts to the deal. The first is an agreement, in principle, to leverage the European Financial Stability Facility by a factor of about four. Good idea! Except, the EFSF can’t just borrow $750 billion from its friendly prime broker. So where’s the extra money going to come from? There are a few ideas; foremost among them are “risk insurance” (which would be intended to raise the rest of the money from the private sector), and borrowing the money from Uncle Jintao in Beijing. At the moment it’s all rather inchoate. One place the money’s not coming from is the ECB, which found it hard enough just to keep on buying bonds from Spain and Italy. The second main part of the deal is the bank recapitalization, where 70 banks — primarily in Greece and Spain — are going to be given €106 billion in order to bring their core capital up to 9%. This is a move in the right direction, but it’s also pretty marginal: the big French banks, for instance, aren’t going to need any more money at all, and in fact almost no bank you’ve actually heard of is covered by this. It’s mainly a way of forcing bailout funds to be injected straight into the banking sector. Finally, there’s the Greek default, which has now been upgraded from a 21% haircut to a 50% haircut. This is the headline-grabbing announcement, but don’t hold your breath. The deal was negotiated by the IIF, a membership organization which represents banks but can’t commit them to anything. What are the chances that all IIF members are going to tender all their bonds? Exactly zero.

Euro Bailouts: The Good, The Bad, And The Ugly - The European Financial Stability Facility (EFSF) that’s touted to protect one trillion euros is a scheme where even policy makers don’t yet know what exactly it is going to look like. It is not a “bazooka,” as it cannot refinance itself at the European Central Bank (ECB). Indeed, gearing it up appears to be done through the back door, by making it an insurance scheme. Even so, it only has a fraction of the capital paid-in of what its commitments are going to be. As such, it’s a smokescreen, albeit a very powerful one. In a leveraged world, appearances count for a lot. However, it would be far healthier for policy makers to finally realize that de-leveraging is the answer, not to put up ever-greater commitments that –particularly in the case of Greece – may well be called upon.

Euro Bailout Failure - Have so many ever been so enthusiastic over a plan to beg, borrow, and steal $1.5 trillion?

    • Beg - Weaker European banks will have to raise over $100 billion in capital.
    • Borrow - Eurozone will borrow $1.4 trillion to bailout future sovereign and bank defaults.
    • Steal - Private investors lose 50% of their Greek bonds' face value (ok, "steal" is a bit strong).

    Begging, borrowing, and stealing doesn't usually instill confidence. And it shouldn't. Piece by piece, here's why...

    European Savings Rates -Eurostat just released savings rate data for Q2 of 2011.  The graph is above since 2000.  It looks like savings rates have started to increase a little again - this would be consistent with the slowdown in Eurepean retail sales that began late last year, and presumably reflects European households feeling more cautious about the economic situation (but not catastrophically so at this point). The latest agreement seems like it has successfully kicked the can down the road again, while failing to really solve the problem: However, this non-solution is closer what is required than the last non-solution.  No doubt we'll be back watching the same kind of spectacle again in a month or two.  I guess when political and economic realities collide in this way, it may only be through a series of crises that the two can be reconciled.  It's nerve-wracking to have the global financial system constantly at risk of collapse if politicians make a mis-step, but I guess we will have to get used to it.

    Euro Bailout Explained - This video is depressingly close to the truth. I wrote a few more notes on the Euro bailout here.  One other note, recently I seem to be writing a lot of criticism on the EU, ECB and Eurozone in the way they have been mismanaging the economy and this crisis (see: failures of ECB). But, this doesn’t make me a Eurosceptic. You can support the fundamental idea behind a project without supporting the details policy.

    Spiegel: Euro Zone Frees Greece of Half its Debts - Normally, European leaders have nothing against extended bargaining sessions with seemingly no end in sight. But on Wednesday night, they gave themselves a deadline. Belgian Prime Minister Yves Leterme announced prior to the meeting that the 17 heads of state from the euro zone would have to finish up their haggling before the first markets opened in Asia. Otherwise, he seemed to suggest, global stock prices would plummet on Thursday morning. And yet, summit participants ignored one deadline after another. At 2 a.m., the markets opened in Japan, but euro-zone leaders continued to haggle. At 3 a.m., Singapore opened, and the meetings were still going on.  It was only just before 4 a.m. -- the stock exchanges in Shanghai and Hong Kong had already begun trading -- that a visibly exhausted French President Nicolas Sarkozy stepped before the press in Brussels. Euro-zone leaders, he announced, had agreed with private creditors on a 50 percent reduction in Greece's debt burden. The announcement was consistent with the number which had dominated the headlines for days. Euro-zone leaders had reached their primary goal.

    Warren Mosler and Philip Pilkington: A Bad Haircut - Are these haircuts on Greek debt really such a good idea? Or are they really just a stopgap that will make things all the worse in the long-run? Sure, Mr. Market seems to think they’re fantastic. But then, Mr. Market has always been about as easy to please as a rather stupid dog: give him a car to chase and he’ll be happy – until his nose inevitably meets the bumper, of course. After all, these are the same markets that rally every time the Fed or the Bank of England announces more monetary voodoo ala QE. As many of us have been saying time and again, the situation is simply not sustainable until the ECB takes up its proper role and backstops all the wayward debt. Until then, the whole thing will continue to resemble a man trying to lift a bucket by the handle while he stands on it. He might make a lot of noise and attract a lot of attention, but he’s not going to get anywhere. There are any number of reasons that these haircuts will not work.  First up, there is still the implicit assumption that once the haircut is taken the Greek deficit can be brought under control. The recently leaked document from within the Eurostructure was sceptical of this, but even that document was overly optimistic as far as we can see. With the levels of unemployment that Greece continues to suffer – levels that will probably rise in the near future – those deficits are here to stay.

    Voluntary or forced? The important word games of debt default - When is a default not a default? Investors struggled with that question Thursday after European officials outlined plans that would see owners of Greek bonds take a 50 per cent loss on the face value of their holdings. The International Swaps and Derivatives Association, an industry group that oversees the CDS market, says the Greek deal probably won’t trigger default clauses in CDS contracts because the 50 per cent “haircut” is voluntary. That view is starting to roil the $25-trillion market for credit default swaps because it calls into question the fundamental reason for purchasing insurance against losses on bonds. If investors can no longer count on being able to hedge against the possibility of a loss, they may start demanding higher yields as compensation for increased risk. “I would think [such a ruling by the ISDA] would be quite a negative for the market,” . “You could get hit on the debt, but you don’t get the insurance [payout].”

    Farce Is Complete As ISDA Finds 50% "Haircut" Is Not A Credit Event - And, as expected, here is ISDA with the most farcical of decisions. From Reuters: "A new voluntary deal for holders of Greek debt to accept deeper losses is unlikely to trigger a 'credit event' that would cause a payout on default insurance, said a top lawyer at the International Swaps and Derivatives Association. Greek bondholders face losses of 50 percent under a plan to lower the country's debt burden and contain the euro zone's long-running debt crisis. The aim is to complete negotiations on the package by the end of the year. But because participation in the deal is voluntary rather than forced, it would typically not trigger payment on CDS contracts. "As far we can see it's still a voluntary arrangement and therefore we are in the same position as we were with the 21 percent when that was agreed," said David Geen, general counsel at derivatives body ISDA, referring to an original deal proposed in July that involved smaller bondholder losses. "The percentage (of losses), as far as the analysis for CDS purposes goes, doesn't change things. typically a voluntary arrangement won't trigger the CDS." Geen said the final decision on whether a credit event has occurred rested with the ISDA determinations committee, which would consider the issue when requested to do so by a CDS market participant." The fact that the decision is "voluntary" under duress from an entire political system which realizes its ponzi structure is collapsing is seemingly irrelevant. Luckily, the market is not all that stupid and the preliminary reaction is as expected, and to paraphrase Willem Buiter, "Failure to trigger Greek sovereign CDS when economic logic indicates this ought to occur would likely be detrimental to financial stability."

    Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge - The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs. As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out. “It will raise some very serious question marks over the value of CDS contracts,”  “For euro sovereigns in particular, the CDS market is likely to remain wary.” This approach may undermine confidence in credit-default swaps as a hedge and force banks to look at other ways of laying off risk, “If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market,” she said.

    Making a mockery of sovereign CDS - What happens when you get a default that equates to a 50% loss for most investors without triggering default insurance? Massively negative unintended consequences.  Europe has just made a mockery of the sovereign credit default swap (CDS) market by trying to structure a default via voluntary 50% haircuts in order to avoid triggering CDS claims. It makes absolutely no sense to act as if Greece is not defaulting here.  As I wrote earlier today: In Greece, I find it odd that private sector creditors are invited to write down notional debt while the European Central Bank and the Troika are not. Clearly, the voluntary and private sector nature of this structure is necessary to at once avoid triggering credit default swaps, to assuage voter anxiety about taxpayer losses outside of Greece, and to protect the ECB from an explicit loss of capital which would render it technically insolvent. All of these are legitimate aims. But the optics of this are poor and I am not at all convinced participation in the voluntary arrangement will be adequate to cut the debt burden enough to prevent a further ‘haircut’ down the line. Bottom line: It’s a sham. And it will lead to either much higher bond yields or massive litigation or both. Choose your poison. Reggie Middleton was on RT discussing this very issue. He has some very astute commentary. Take a look.

    “Standard” Credit Default Swaps on Greece Are a Sham and It’s Not a Surprise - Janet Tavakoli -  “Customers” that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is “voluntary” and therefore not a credit event for credit default swap payment purposes according to its documents. As previous sovereign problems have illustrated, the only way to buy protection is to rewrite the flawed ISDA “standard” document and agree to new more sensible terms, before concluding the initial trade. One has to first protect oneself from the ISDA cartel “standard” documentation before one can buy sovereign default protection, or any other protection for that matter. This isn’t the first time investors have been burned in the sovereign credit default swap market. Hedge funds Eternity Global Master Fund Ltd. and HBK Master Fund LP thought they purchased protection against an Argentina default and sued when J.P. Morgan refused to pay off on Argentina credit protection contracts they had purchased.  The Republic of Argentina gave bondholders the option to turn in their bonds in exchange for secured loans backed by certain Argentine federal tax revenues. J.P. Morgan claimed this didn't meet the definition of restructuring, at least for the protection it sold to Eternity.

    Greek credit default swap shenanigans - We now know that private holders of Greek bonds will be “invited” to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out. That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point? I call shenanigans. ISDA, the International Swaps and Derivatives Association that wrote the agreement governing most  derivatives trades, states clearly that a Credit Event would be triggered under the type of haircut proposed…but only if this haircut is forced on all bondholders.  There’s no doubt that this haircut is forced. Sure, sure, bondholders are only being “invited”.

    Why the Greek CDS market is OK -  All the talk about sovereign CDS of late — pegged off the fact that the Greek restructuring might not trigger an event of default — is I think missing three big points. First, why ISDA’s rules make sense. Second, why Greece’s CDS spreads are still extremely wide. And third, what sovereign CDS are used for. But before we get to any of that, it’s important to understand the big picture. Greece has a lot of private-sector debt; most of it is held by banks. There is a small amount of sovereign CDS outstanding, which references that Greek debt. To give you an idea of the orders of magnitude here, we’re talking about roughly €200 billion in Greek bonds, and less than €4 billion in net CDS exposure. Even if all of the net CDS exposure was held by bank creditors, it wouldn’t remotely offset the write-down they’re going to have to take on their bonds. In reality, the banks have de minimis net CDS exposure. They might trade the CDS, and have either a long or a short position on their trading books at any given time, but they’re not using the CDS to hedge their bonds.

    The Path Not Taken, by Paul Krugman - Financial markets are cheering the deal that emerged from Brussels early Thursday morning. Indeed, relative to what could have happened — an acrimonious failure to agree on anything — the fact that European leaders agreed on something, however vague the details and however inadequate it may prove, is a positive development. But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.  The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. Now, however, the results are in, and the picture isn’t pretty. Greece has been pushed by its austerity measures into an ever-deepening slump. Britain’s economy has stalled under the impact of austerity.

    Being pessimistic to build optimism - The new European plan to deal with the potential of sovereign default and the increasing doubts about solvency of financial institutions was announced two days ago. Financial markets so far seem to like the plan. The plan did not provide many surprises, it was very much what was expected. Maybe the surprise, to some, is that there was an agreement on the plan. One issue that was debated in the preparation of the plan is how to account for potential losses derived from default on sovereign debt when doing stress tests on banks. But here is a problem: European governments want to send two messages:

    • 1. No default will ever take place in Italy or Spain.
    • 2. Financial institutions are safe, they have enough capital.

    But how do you build a capital buffer for banks that convinces markets? By being pessimistic and consider scenarios where things really go wrong. . The disagreement can be on how pessimistic you want to be but conceptually we all understand how the different scenarios are being built.

    Sarkozy to Seek China Aid as EU Expands Rescue Fund - French President Nicolas Sarkozy said he plans to call Chinese counterpart Hu Jintao today to discuss China contributing to Europe’s efforts to resolve the region’s debt crisis. The European Financial Stability Facility will be worth about $1.4 trillion after European leaders agreed to leverage existing guarantees by as much as five times, Sarkozy said at a briefing in Brussels at 4 a.m. local time. The presidents will speak about noon Brussels time and Chinese support will be welcomed, he said. Jiang Yu, China’s foreign ministry spokeswoman, said Beijing is ready to work with Europe to stabilize markets. Sarkozy’s outreach precedes a Group of 20 summit he will host next week, and coincides with European efforts to bolster the role of the International Monetary Fund in overcoming the euro-region’s woes. Australia’s finance chief said that while it’s “appropriate” to look at the IMF’s resources, Europeans must look to themselves first for bailout money. “China will need time to evaluate this plan very carefully,” . “What worries China is that there is so much disagreement among European policy makers. It doesn’t want to be seen spending money on a plan that even Europeans don’t want to support.”

    EU bailout fund chief visits China…hmmmm -  The head of the eurozone bailout fund visits Beijing on Friday as debt-laden Europe tries to persuade China and other top emerging economies to come to its rescue. Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), will be in the Chinese capital before travelling to Japan at the weekend, European Union delegations in Beijing and Tokyo have said. Regling’s visit comes a day after European nations reached a last-ditch deal to tackle their festering debt crisis, which they hope will boost market confidence in struggling eurozone economies. French President Nicolas Sarkozy announced at a summit in Brussels that eurozone leaders had agreed to leverage the 440-billion-euro EFSF, the continent’s bailout fund, to one trillion euros ($1.4 trillion). The EU has not said who Regling would meet in Beijing or Tokyo, nor given reasons for his visit, but Europe has been toying with the idea of asking China and other emerging economies to help, possibly by investing in the rescue fund. Sarkozy said Thursday that there was no reason to turn down Chinese assistance.

    Eurozone rescue fund tries to tempt China with bonds issued in yuan - Telegraph: The head of the European rescue fund says it could issue bonds in yuan, as he attempted to tempt China into backing Europe’s bailout. “We have so far only issued euro bonds but we are authorised to use any currency we want if it seems efficient,” Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), said. "It also depends on the Chinese authorities, whether they would approve that. I think it is probably more difficult. But I could imagine that over the years it might happen," he added. China has the largest foreign exchange reserves in the world, valued at $3.2 trillion (£2 trillion) Mr Regling also said that investors may be protected against a fifth of any initial losses. “The EFSF will take a certain tranche that will be a junior tranche, which means if something goes wrong, the first loss will be carried by the EFSF. It could be around 20pc,” Mr Regling said in a speech at Tsinghua University.

    China to the rescue? IT WAS only a matter of time before China was heralded as Europe’s escape route from its debt crisis. News that Nicolas Sarkozy, the French president, called Hu Jintao, his opposite number in China, after the crisis summit on October 27th sparked speculation that China might put substantial amounts of money into the debt of troubled euro-zone borrowers. The chatter grew louder when Klaus Regling, the head of the European Financial Stability Facility (EFSF), the euro area’s bail-out fund, visited Beijing a day later. And a poor post-summit Italian bond auction has made the need for a deus ex machina seem even greater. China certainly has lots of money to invest. its foreign-exchange reserves are reckoned at $3.2 trillion. It trades more with the EU than any other partner. It has exposure to the euro already. Then again, we have been here many times before during the euro-zone saga. The pattern to date has always been the same: lots of encouraging rhetoric, perhaps even a little cash, but not enough to meet initial expectations. There is at least something different on offer now. In the past, investment in euro-zone debt has meant taking on as much risk, and sometimes more risk, than the Europeans themselves have been willing to absorb. No one could ever explain why the Chinese would want to do that. Now China will be able to choose to invest in euro-zone debt that is ensured by the EFSF, or to buy senior tranches of the special-purpose vehicles (SPVs) that the EFSF will capitalise. China would explicitly be taking less risk than the Europeans.

    Greek Bank Investors Facing Wipeout -  Owners of Greece’s banks may be wiped out over coming months as the government prepares to take over the lenders after bondholders agreed to 50 percent writedowns on the nation’s debt. Greek Prime Minister George Papandreou said yesterday that the government will likely buy shares in some banks as a result of a planned writedown, without giving details. The 30 billion euros ($42 billion) already set aside for Greek bank aid should cover the lenders’ needs, the European Banking Authority said.  For shareholders in Greece’s publicly traded banks, led by National Bank of Greece SA (ETE) and Alpha Bank SA, there may be little left once the companies end up in government control. The six biggest lenders, which have assets of 380.2 billion euros and a combined market value of about 3.6 billion euros, are unlikely to attract investors willing to bet on a turnaround.

    Fitch: Greek Debt Deal a Default - Fitch Ratings became the first major credit ratings agency to pass judgment on the European Union's anticrisis plans Friday, saying that the proposed Greek debt exchange would constitute a default and that none of the plans remove the risk of further downgrades for other sovereigns. Fitch said that after the default, the country's rating would probably be in the B category or lower. All three major ratings agencies previously said such a plan would push Greece into a default-rating category.

    German court suspends parliament's bailout committee -  (Reuters) - A German court on Friday suspended a parliamentary committee's right to approve urgent actions by the euro zone's bailout fund, potentially delaying decision-making in Europe's top economy on key moves to tackle the bloc's crisis. A spokeswoman for the Constitutional Court said it would investigate whether the planned use of a small closed-door committee of 9 German lawmakers to consider urgent matters relating to the European Financial Stability Facility (EFSF) infringed on lawmakers' rights. The parliamentary leader of Chancellor Angela Merkel's conservative bloc, Peter Altmaier, said the suspension meant parliament's entire lower house would need to decide on urgent matters relating to the EFSF. But he said the court's action -- pending a final ruling on a complaint from two opposition lawmakers alleging the committee's powers breach Germany's basic law -- would not tie the hands of either the Bundestag or the EFSF."The German parliament will ensure that, until the main ruling, Germany's ability and the EFSF's ability to act are secured," he said.

    Economists: EFSF Not Enough to Relieve Italy Fears - Now the next game begins. Even before the ink is dry on a deal to cut Greece’s debt and put up a firewall against financial contagion in Europe, leading economists fear the rescue package may be too little too late to keep Italy out of the crosshairs of financial markets and open the next battle in the struggle to save the euro. (See more reactions to the deal here and here) “If the market perceives Italy to be a big problem, I’m not sure that the EFSF will be able to solve that problem,” European leaders, meeting into the early-morning hours in Brussels, thrashed out a plan to cut Greece’s notional debt by 50% with private creditors accepting a “voluntary” haircut. At the same time, the European Union’s leaders are requiring Europe’s biggest banks to boost their capital to 9% to shield them against the default of a country like Greece. The leaders also agreed to bolster the 440-billion-euro euro-zone bailout fund, the European Financial Stability Facility, to allow it to leverage its assets almost three-fold, making it the first line of defense against spreading contagion. Economists welcomed the strengthening of the bailout fund, but now worry that the package of measures agreed on by EU leaders in Brussels isn’t sufficient to stem financial contagion and warn that euro-bloc members such as Italy could be next in line.

    Grand European Rescue Already Starting to Come Unglued? - - Yves Smith - This site has had plenty of company in expressing doubts about the latest episode in the continuing “save the banks, devil take the hindmost” Eurodrama. The same issues came up over and over: too small size of rescue fund, heavy reliance on smoke and gimmickry to get it even to that size, insufficient relief to the Greek economy (the haircuts will apply to only a portion of the bonds), no assurance that enough banks will go along with the “voluntary” rescue, and way way too many details left to be sorted out. But it is a particularly bad sign to see disagreement within the officialdom about the just-annnounced deal. The Telegraph reports that the Bundesbank, which has considerable influence on the ECB, is trash talking a critical part of the pact: The concerns were led by Germany’s powerful central bank, which expressed fears that a plan to leverage a €440 billion eurozone rescue fund to amass a “fire power” of €1 trillion, or £880 billion, resembled the risky finance methods that triggered the crisis in 2008. EU leaders are expected to sanction the establishment of a so-called special purpose investment vehicle, or SPIV, to be set up in the coming weeks. It is aimed at attracting investment from countries such as China and Brazil. Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

    Here We Go Again - Krugman - European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly makes no sense at all. Spreads stay high, and maybe even start widening again. Another day in the life.

    Italy 10-Year Auction Yields Hit New Euro Lifetime High - Italy paid the most since joining the single currency to sell new 10-year debt on Friday in the first euro zone bond auction after European leaders agreed new steps to tackle the debt crisis. The auction yield on Italy's March 2022 BTP bond rose to 6.06 percent from 5.86 percent a month ago. The Treasury managed to sell 7.94 bln euros of medium and long term paper, versus a target range of between 5.25 billion and 8.5 billion euros. The yield on a three-year BTP maturing in July 2014 rose to 4.93 percent, at its highest since November 2000, compared to 4.68 precent at an end-September sale.

    Worrying Signs - I don't like seeing stories like this just a day after the eurozone's latest and greatest rescue plan was announced: Italian borrowing costs surge in lacklustre auction Italy issued 10-year debt on Friday but paid the highest price since joining the euro as investors demonstrated scepticism over the centre-right government’s economic reform programme in the first bond auction in the region since new steps were agreed to tackle the eurozone debt crisis. ...The yield on Italy’s March 2022 bond rose to 6.06 per cent from 5.86 per cent a month ago.  Meanwhile, the ECB has apparently been forced to buy up more Italian debt on the secondary market since the new eurozone rescue plan was announced. But because of the ECB's obvious reluctance and the backwards way that they've structured their bond-buying program, such purchases probably have very little effect, other than to reinforce market skepticism about Italian debt. I've argued repeatedly that the ECB can and should assume full responsibility for ending this crisis, and that it should be targeting interest rates on the secondary markets for Spanish and Italian debts.

    Italy gives EU a post-party hangover - Italy’s borrowing costs have climbed to euro-era highs just a day after European leaders agreed on a new plan to reverse the region’s spiralling debt crisis, a worrying sign they have failed to regain the confidence of key financial markets. As striking Italian civil servants massed in central Rome to protest against possible forced redundancies, Italy was forced to pay a record 6.06 per cent at an auction of its benchmark 10-year bonds, up from 5.86 per cent a month ago, despite intervention by the European Central Bank on the open market. The move comes as European officials have turned to China and Japan for possible funding of the eurozone’s bail-out fund. In Tokyo, Japan’s prime minister, Yoshihiko Noda, told the Financial Times he would like to see “even greater efforts” in Europe to “ease crisis worries by creating a stronger and more detailed approach”. The world’s third-largest economy remained concerned about possible contagion. “This fire is not on the other side of the river,” Mr Noda said. “Currently, the most important thing is to ensure it does not spread to Asia or the global economy.” Markets increasingly see Italy as the decisive country for how the eurozone debt crisis plays out.

    Spanish jobless rate soars to near 15-year high - Spain's jobless rate soared to a 15-year high of 21.52 percent in the third quarter of 2011, data showed Friday, a stinging blow for the government just three weeks ahead of elections. The towering unemployment rate, up from 20.89 percent in the previous quarter, is the highest since the end of 1996 and the highest among major industrialised nations. Among 16-24 year olds, the rate was a staggering 45.8 percent, barely down from 46.1 percent three months earlier. The overall unemployment queue grew to 4.978 million people at the end of September from 4.834 million at the end of June, National Statistics Institute figures showed. The figures make grim reading for a Socialist government already facing the prospect of a drubbing in November 20 elections at the hands of the conservative opposition Popular Party. High unemployment and a series of painful spending cuts to rein in runaway government budget deficits have provoked widespread resentment and a nationwide "indignant" protest movement.

    Writedown for Greece queried as Ireland shoulders full debt - OPPOSITION PARTIES have questioned why Greece will benefit from a 50 per cent writedown of its debt while Ireland will still have to shoulder the full cost of the State’s debts. In their separate responses to the deal brokered at the summit of euro zone counties in Brussels early yesterday morning, Fianna Fáil and Sinn Féin both focused on the Government’s refusal to seek reductions in the State’s debt burden. Fianna Fáil finance spokesman Michael McGrath welcomed the breakthrough but said Ireland has received few concessions compared to other programme countries. “From an Irish perspective, it is noteworthy that the Government did not seek any reduction whatsoever in the Irish debt burden and has committed itself to paying its debts in full,” he said. “At the same time Greece will benefit from a 50 per cent writedown of its debt. The Government is clearly of the view that Ireland’s total debt burden is entirely sustainable and manageable. This is markedly different from the rhetoric we heard from Fine Gael and Labour before last February’s election.”

    And So They Line Up At The Concessions Trough: "Irish Spy Opportunity" In Greek Debt Blue Light Special - When sharing our kneejerk reaction to yesterday's latest European resolution, we pointed out the obvious: "Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece." Sure enough, 6 hours later Bloomberg is out with the appropriately titled: "Irish Spy Reward Opportunity in Greece’s Debt Hole." Bloomberg notes that Ireland has not even waited for the ink to be dry before sending out feelers on just what the possible "rewards" may be: "Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. There is one very important addition here: "While Ireland won't seek debt discounts" yet. And seek it will: after all, all Ireland needs is for its economy to mysteriously resume its deterioration. And Ireland is just the beginning. Very soon, and by that we mean 24-48 hours, every country in Europe that is undergoing "austerity" (which in Italy's case means increase the retirement age by 2 years over the next 15 years, or 49 days per year), will see its striking (and rioting) fringe elements demand just the same that Greece got, and probably far more. Which then goes right back to the question: yes, French exposure to Greek banks is limited. But what about Irish, Portugues, Spanish and finally Italian exposure?

    If Greek Bank Run is Underway, It Means an Ugly End to EU Crisis - A Greek bank run may be underway and, if so, there’s no need to schedule any more do-nothing summits. The EU financial crisis is resolving itself in a very fast, ugly manner. So far, only the German newspaper Bild is reporting a run, and so far only in German, which means relying on Google to translate. The article opens with a description of long line of people outside of an Athens branch of the National Bank of Greece waiting for it to open for business. It then quotes the manager of an Athens bank branch (again, apologies for the translation): More and more Greeks who still have some money to get it from the bank. In my office there are a total of 5,000 customers, 2,500 of which either have their money transferred abroad or hoard it at home. There are cases where people leave with €300,000 in the bank bag. If it continues, will soon be no more money. Without seeing other reports it is impossible to say how widespread a phenomenon this is. The most worrisome indicator is that government and banking officials are putting out statements to reassure Greece’s citizens that deposits are safe. These folks saying your money is safe is like the captain of the Titanic announcing a delivery of ice. Another terrifying indicator: Greek 1-year bonds are currently trading at about 190 percent and going up today; 2-years are at 80 percent.

    National Day Parades Turn into Protests with Eggs, Yogurts and Black Flags (pcts, videos) -Tension, frustration and anger colour this years’ parades to commemorate Greece’s “NO” (OXI) to the Axis powers on 28th October 1940. In quite some cities across the country, protesters forced state officials to leave the parades, hurling eggs and yogurts, and chanting “Thieves!” In some cities, the parades were officially cancelled but the parading groups kept their schedule of the day. In Athens, some school students turned their back to Education Minister Anna Diamantopoulou, while teachers and parents groups were urging the students to ‘turn their heads away’. Some protesters were carrying black flags and banners “Greece is not for sale!”. Some eggs were hurled. Video: Athens – student raise hands with black handkerchiefs

    Furious Greeks lampoon German ‘overlords’ as Nazis with picture of Merkel dressed as an SS guard - Greeks angry at the fate of the euro are comparing the German government with the Nazis who occupied the country in the Second World War. Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’ She wears a swastika armband bearing the EU stars logo on the outside.The backlash has been provoked by Germany’s role in driving through painful measures to stop Greece’s debt crisis from spiralling out of control.

    Greece Will Eventually Leave Euro, Rogoff Says - European leaders’ agreement to expand a bailout fund to stem the region’s debt crisis only buys time as Greece will likely still leave the euro in the next decade, Harvard University economist Kenneth Rogoff said. “It feels at its root to me like more of the same, where they’ve figured how to buy a couple of months,” Rogoff said as a compensated speaker at the Bloomberg FX11 Summit in New York yesterday. “It’s pretty darn clear the euro does not work, that it’s not a stable equilibrium.”  European leaders bolstered their crisis-fighting toolbox by boosting the heft of their rescue fund to 1 trillion euros ($1.4 trillion) and persuading bondholders to take 50 percent losses on Greek debt. Measures also included a recapitalization of European banks and a potentially bigger role for the International Monetary Fund in strengthening the bailout fund. "I don't think there's any doubt that we'll see more defaults beyond Greece," Rogoff said. "The interesting question is will all the countries in the euro still be in the euro? My answer to that is no."

    The Global Moral Hazard Dawns: Merkel Says "It Must Be Prevented That Others Come Seeking A Haircut" As Ireland Cuts GDP Forecast - Just about 48 hours after it was duly noted as the greatest threat to the Eurozone in the post bailout world, Germany finally grasps the enormity of what global moral hazard truly means. As we said before, the biggest risk facing Europe, and by that we mean undercapitlized French banks (all of them) obviously, is not Greece or what haircut is applied to the meaningless €100 billion in Greek debt when all the exclusions are accounted for. It is what happens when everyone else understands they now have a carte blanche to pull a Greece at will. And while until now we had some glimmer of hope there was a behind the scenes agreement for this glaringly obvious deterioration to not manifest itself, Merkel just opened her mouth and proved our worst fears wrong. As Reuters reports, "Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings. "In Europe it must be prevented that others come seeking a haircut," she said." Too late, Angie, far, far too late. Because, just as expected, here comes Ireland and literally a few hours ago, launched the first warning shot that will imminently lead to what will be demands to pari passu treatment with Greece. Next up: Portugal, Spain, and, of course, Italy, which however won't be faking its own economic slow down.

    How historians will look back on Euroland’s demise -The Body Politick, like the body of a man, begins to die as soon as it is born; it contains the seeds of its own destruction.” The histories of Europe’s numerous extinct states testify to this truth. Early examples come from the five Kingdoms of Burgundy or the Crown of Aragon, a recent one from the Soviet Union, which evaporated in 1991.Yet states continue to vanish; sooner or later, all human institutions fall apart. The German Democratic Republic merged with West Germany. Czechoslovakia broke up when Czechs and Slovaks agreed their velvet divorce. The federation of Yugoslavia was torn asunder between 1991 and 2006. The map of Europe has repeatedly been transformed by state dissolution and EU expansion. Speculation spreads about which state will be the next to fall. Some say Belgium, others Italy. Most recently, the demise of Euroland came into view. It is not a sovereign state, but it is a body politick of sorts and subject to the same vagaries of fortune afflicting everything else. Launched only a dozen years ago, it may join the long list of organisations that have died young. It lacks viable organs of fiscal management and political governance; by general consent, it must reconstruct itself rapidly or break up. “The eurozone is doomed”, its critics argue. Britain’s Foreign Secretary describes it as “a burning building with no exits”. George Soros warns of possible “meltdown”.

    Worst school cuts 'since the '50s' - Schools in Britain will endure the biggest cuts to education seen since the 1950s, tax and spending experts have warned. The Institute for Fiscal Studies (IFS) estimates that schools will face a funding shortfall of 14.4% which will hit school and college building projects the hardest. Researchers at the IFS estimate that the cuts will hit higher education, as funding to universities has been cut by 40%, but some of that shortfall will be recouped with increased tuition fees. However they warn that further education for 16- to 19-year-olds and early years learning, two areas that were invested in heavily under the previous government, will face a dramatic reduction in their funding. "In new figures released today, IFS researchers estimate that total public spending on education in the UK will fall by over 13% in real terms between 2010/11 and 2014/15," the IFS said of their findings. "This represents the largest cut in education spending over any four-year period since at least the 1950s. The cuts will be deepest for capital spending and higher education, followed by 16-19 education and early years provision."

    Directors’ pay rose 50% in past year, says IDS report - Pay for the directors of the UK's top businesses rose 50% over the past year, a pay research company has said. Incomes Data Services (IDS) said this took the average pay for a director of a FTSE 100 company to just short of £2.7m. The rise, covering salary, benefits and bonuses, was higher than that recorded for the main person running the company, the chief executive. Their pay rose by 43% over the year, according to the study. Prime Minister David Cameron, speaking in Australia, said the report was "concerning" and called for big companies to be more transparent when they decide executive pay. Labour leader Ed Miliband said the pay increases were part of a "something for nothing" culture, since the stock market had not risen to match them. A statement from IDS said that that figure suggested that "executive largesse is evenly spread across the board".

    Cameron slams fat cat bosses as it is revealed they have awarded themselves a massive 49 per cent pay hike - David Cameron has slammed Britain's top bosses for awarding themselves a massive 49 per cent pay rise in the last year. Business chiefs at the UK’s top 100 companies can now expect to take home an average £2.7million as households suffer the biggest squeeze on incomes since the 1920s, according to new figures. The massive salaries are 113 times the national average of £24,000 for a worker in the private sector, where salaries have risen just three per cent in the last year. Speaking from the Commonwealth Heads of Government Meeting in Perth, Australia, the Prime Minister said: 'There needs to be responsibility. Boards have got to think when they are making pay awards, is this the responsible thing to do?

    The bosses' pay con-trick - The bosses’ pay con-trick is getting worse. The pay of average FTSE 100 directors rose 49% last year, with the average CEO getting £3.86m. I say this is a con for several reasons.

    • 1. The link between pay and firm performance is asymmetric (pdf). In good times, bosses’ pay rises a lot, but in bad times, it doesn’t fall so far. In fact, the biggest influence on bosses’ pay is not so much company performance as simply the size of the firm.
    • 2. Big bonuses and performance-related pay are not technically necessary to elicit performance. There’s plenty of evidence that bonuses are sometimes ineffective at improving effort, sometimes actually counter-productive, and sometimes inferior to fines .
    • 3. The claim that bosses must be paid a lot because their pay is set in a global market is silly.  CEOs are paid more in the US than UK, and yet few Brits have become CEOs of US firms; one of the very few exceptions was Martin Sullivan who was CEO of, ahem, AIG. 
    • 4. It’s not even clear that the average boss has much effect upon corporate performance:

    The big questions raised by anti-capitalist protests - Why did it take so long? It is over four years since the financial crisis began. Yet only now are anti-capitalist protests emerging, including at St Paul's Cathedral. So is this the beginning of a resurgent leftwing politics? I doubt it. Are the protesters raising some big questions? Yes, they are.For this to be the beginning of a new leftwing politics, two things have to occur: first, a credible new ideology must emerge; second, some social force must march behind it. In the 19th and early 20th centuries, the ideology was socialism and the force was organised labour. Socialism failed as a way of running economies. It did, however, succeed in establishing welfare states. Socialism is a conservative force, dedicated to defending entitlements built up over a century. Meanwhile, organised labour is only strongly entrenched in the public sector. This gives it the same conservative agenda: defending the welfare state. Strikes by UK public sector workers against the fiscal cuts will demonstrate this.If the traditional left offers no answer, can the free market right return to business as usual? No. People who believe in the marriage of democratic politics with market economics need to address what has happened. They need to do so, above all, because there are darker forms of politics waiting in the wings: nationalism, chauvinism and racism. That is what happens when the conventional elites fail and frustration takes over. We do not need to watch this tragedy again.

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