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

Saturday, October 8, 2011

week ending Oct 8

Fed balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week as the central bank swelled its holdings of Treasury debt, Fed data released on Thursday showed. The Fed's balance sheet was $2.843 trillion on October 5, up from $2.834 trillion on September 28. The Fed's holdings of Treasuries totaled $1.672 trillion as of Wednesday, up from $1.665 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 unchanged on the week at $870.9 billion. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was also unchanged from last week at $108.3 billion. The Fed this week bought longer-dated Treasuries and sold shorter-dated debt under its program announced last month and dubbed "Operation Twist."

US Federal Reserve Balance Sheet Expands-- The U.S. Federal Reserve's balance sheet expanded modestly in the latest week, after the central bank said it would roll out a new plan to stimulate the weak economy. The Fed's asset holdings in the week ended Oct. 5 stood at $2.863 trillion, up from the $2.854 trillion reported a week earlier, the central bank said in a weekly report Thursday.Holdings of U.S. Treasury securities rose to $1.672 trillion Wednesday, from $ 1.665 trillion the week before. Its holdings of mortgage-backed securities and federal agency debt securities were unchanged. Thursday's report showed total borrowing from the Fed's discount lending window was $11.40 billion, down from the $11.46 billion a week earlier. Borrowing by commercial banks declined to $29 million from $40 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts fell to $3.418 trillion, compared to $3.422 trillion the previous week.Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts was little changed at $2.697 trillion the previous week. Holdings of agency securities decreased to $721.76 billion from $725.39 billion the prior week.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances  - October 6, 2011  

How does Operation Twist differ from QE? - In a direct sense, almost none at all. Despite the common perception that “Operation Twist” is an ineffectual, conservative move, while further quantitative easing would be a powerful and risky one, the fundamental economic difference between them is quite minor. But maybe perception itself is the problem. In its press release two weeks ago, the Fed pledged to: …purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. Is this different from quantitative easing? QE2 was equivalent to the combination of two open market operations:

  • (1) Buying short-term Treasuries with newly created money.
  • (2) Swapping short-term Treasuries for longer-maturity ones.
The Fed’s new policy is just operation (2), disconnected from (1). Operation Twist is less effective than a potential QE3, therefore, to precisely the extent that operation (1) makes a difference.

Fed's Fisher says "Twist" may hurt US job creation (Reuters) - The Federal Reserve's latest attempt to bolster the U.S. recovery by rejigging the central bank's balance sheet may backfire, hurting the labor market more than it helps, a top Fed official said on Tuesday, Dallas Federal Reserve Bank President Richard Fisher, one of three Fed officials who dissented against the central bank's September 21 decision to replace some of its short-term holdings with longer-term ones to push down borrowing costs, said his fundamental concern was that the program would not work."The monetary accommodation we have thus far implemented has failed to deliver," Fisher said. "There is significant risk that the policies recently undertaken by the FOMC are likely to prove ineffective and might well be working against job creation." Fisher, a self-described inflation hawk, has voiced similar concerns about other recent Fed easing moves, including its promise in August to keep rates low through mid-2013. But it is the "scourge of unemployment" rather than the threat of inflation that underlies his latest opposition to Fed easing. Inflation, now just shy of 3 percent, is likely to decline to the 2 percent level favored by the Fed. Unemployment, on the other hand, is a problem that is largely beyond the Fed's control but is rather the purview of fiscal and regulatory authorities who need to "get their act together," he said.

Operation Twist a Primer for QE3? - Is Operation Twist a failure? The stock market plunged in disappointment when it was announced. Keynesians are tearing their hair out in frustration, as it appears the Fed failed to ramp up the printing press. Free marketers are disgusted by the blatant manipulation of the yield curve. A number of Federal Reserve (Fed) President Bernanke’s colleagues dissented and/or are voicing public opposition. However, as the dust settles, it appears there is a method to the twist: Bernanke may have a plan… To understand where we may be heading, let’s look at where we have come from. Below is a graphical depiction of the Federal Reserve’s holdings of Treasury securities on its balance sheet; the different colors represent the evolving composition of the maturity of assets held by the Fed:  One does not need to be an economist to see that the Fed has already been “twisting” its holdings of Treasury securities. It used to be that over 50% of Treasuries held by the Fed had a maturity of less than a year. That portion has already shrunk dramatically. Operation Twist is going to focus on the purple shading, replacing many of these securities with longer-dated ones. Differently said, Operation Twist really is nothing new, but an extension and expansion of policies in place since 2008.

Economic Outlook and Recent Monetary Policy Actions - Ben Bernanke - prepared testimony

Fed Watch: Too Late for the Unemployed? -  The debate about whether unemployment is cyclical or structural unemployment arose last year. At this point, it looks like Federal Reserve policymakers increasingly favor the structural side of the debate. Federal Reserve Chairman Ben Bernanke, speaking at Jackson Hole, suggested that cyclical unemployment remains the primary economic challenge: Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.  Note that he does not conclude the long-term unemployed are by definition structurally unemployed. Still, he continues to suggest that cyclical unemployment can turn structural: In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.But, as is well known, he throws the ball to the fiscal authorities:

Fed Watch: The Fed Drops the Ball - By mid-summer it was evident the recovery was in jeopardy, that the slowdown in economic activity could not be entirely explained by temporary factors, that unemployment would remain unacceptably high, and that the slow motion train wreck that is the European experiment would be resolved only in the aftermath of financial chaos. The Fed had the opportunity to get ahead of the curve. They chose not to. To be sure, they offered some half-hearted support to the existing policy stance. But this amounts to bring a knife to a gunfight. At this point, we are faced with mounting recession forecasts. The Economic Cycle Research Institute publicly announced their recession call last week, confidently expecting to extend their 3-0 forecasting record. Nouriel Roubini already offered up his recession call. Today, Goldman Sachs placed 40% odds on recession in 2012. And in the Goldman Sachs call lays the obstacle to an aggressive monetary response, as opposed to the simple rearranging of the deck chairs currently underway. There may be widespread belief that the seeds of the recession are planted and beginning to sprout, but the near-term data certainly will not confirm a recession is underway. From the Wall Street Journal:

Fisher Says Fed Has Ammunition If U.S. Turns ‘Horrific’ - Federal Reserve Bank of Dallas President Richard Fisher said the central bank has “plenty of ammunition” left if the economic situation turns “horrific,” while reiterating his view the Fed has provided enough stimulus. “We can expand the money supply to the Nth degree,” he said today in an interview with Bloomberg Radio. Still, the Fed has to be “cautious” with the stimulus it’s already provided, and now “it’s up to the fiscal authorities” to do their job.  Fisher reiterated his view that the central bank’s decision last month to push down longer-term interest rates may prove ineffective. He joined Fed presidents Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis in dissenting for a second straight month, posing the most opposition on the Federal Open Market Committee in almost 19 years.  “There is some minor momentum in the economy,” Fisher said. Business leaders he knows are saying “that they are barely moving forward, but they are not moving backward.”

Bernanke Says Federal Reserve Ready to Boost ‘Close to Faltering’ Growth - Federal Reserve Chairman Ben S. Bernanke said the central bank can take further steps to sustain a recovery that’s “close to faltering” and cautioned lawmakers against making changes in fiscal policy that harm growth. The Fed can give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or buy more securities, Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington, reiterating options he mentioned in July. He signaled that higher inflation this year won’t stop the Fed, saying it hasn’t become “ingrained” in the economy. Bernanke is struggling to find ways to reduce unemployment stuck at 9 percent and avert a second recession in three years after deploying unconventional stimulus tools in August and September. Europe’s sovereign-debt crisis poses risks to growth already weak from housing and joblessness, the Fed chief said. “We need to make sure that the recovery continues and doesn’t drop back and that the unemployment rate continues to fall downward,”

Bernanke Scraps Bold Testimony for Lukewarm Version - A few dissenting scholars thought that it was high time for Bernanke to put his money where his mouth was, so to speak. Among them was Dr. Tcherneva, who had studied Bernanke’s academic proposals for government action during crises and his actual policy moves as Fed Chairman during the Great Recession (2011).**   “I am not at all surprised that Chairman Bernanke is making the case for fiscal policy” Tcherneva said. “I am only astonished that it took him so long. After studying his policy prescriptions for the case of Japan, I am left with the nagging conclusion that Bernanke actually favors fiscal policy over monetary policy. And while the reasons for this position are tucked away in his 2000 paper,***  they were nowhere to be found in his testimony before Congress. This too was very surprising. Considering his scholarship, I was expecting a very different speech today” Tcherneva said. And indeed Tcherneva may have been right. In a breaking development, housekeeping personnel at the Federal Reserve Board building in D.C. have found a crumpled draft of what appears to be the original speech Chairman Bernanke had intended to deliver. In an exclusive, we reprint the original draft below.

Does Ben Bernanke Deserves a Break?: A Few Ill-Formed and Probably Wrong Thoughts About Measuring the Stance of Monetary Policy » To look at the graph above and conclude that the Federal Reserve has striven mightily to boost aggregate demand may be the wrong way to look at it. The way the Fed affect the economy is by swapping assets that people have little inclination to try to trade away for currently-produced goods and services for assets that people have more inclination to try to trade away for currently-produced goods and services--put more assets that people have an inclination to trade away in the hands of the private sector, and you boost planned spending. To assess what the Federal Reserve's net position is, you have to multiply the size of the monetary base by the per-unit inclination to spend. What is the per-unit inclination to spend? We usually say that it is the three-month T-bill rate, in which case the per-unit inclination to spend is now zero. But that is not right, because the assets that the Federal Reserve's bond purchases have taken out of the private sector's portfolio are not all three-month Treasury bills. Suppose (say) that the center of gravity of the Federal Reserve's portfolio is roughly the interest rate of a 5-Year Treasury bond. Then if you calculate the incentive to spend--the foregone interest from holding the monetary base rather than the assets the Federal Reserve has bought--you get a picture of the net monetary impetus from the Federal Reserve that looks like this:

Fed Watch: Don't Let Monetary Policy Off The Hook - Re-reading Federal Reserve Chairman Ben Bernanke’s latest testimony to Congress left me increasingly puzzled by his conclusion:Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans. This is a clear effort to shift the focus away from monetary policy onto the fiscal side of the equation. But I think there is a significant flaw in that position. Fiscal policymakers will be completely unable to address medium- or long-term budget issues as long as there exists a sizable output gap and high levels of unemployment. Persistently low levels of output will necessitate deficit spending, and low interest rates will justify that spending. Assuming the proximate cause of the current US economic environment is indeed a liquidity trap, then a solution to that problem lays solely in the hands of monetary policymakers. Simply put, the Federal Reserve needs to take responsibility for ending the liquidity trap.

Dissecting The Problem (Down To The Bone) - Tim Duy's Fed Watch let's it fly in this post about the hurdles facing the economy courtesy of a central bank that tolerates passive tightening. In summary, Duy asserts: "Don't Let Monetary Policy Off The Hook." He charges that Fed Chairman Bernanke, via testimony earlier this week, is engaged in "a clear effort to shift the focus away from monetary policy onto the fiscal side of the equation," a strategy that Duy argues is seriously flawed.  Duy cuts to the chase, arguing that "the Federal Reserve needs to take responsibility for ending the liquidity trap." But the "stumbling block to real change" is a fear of inflation--a fear that "prevents the Federal Reserve from making an unconditional commitment" to end the liquidity trap. At this point, Duy let's loose: It is virtually impossible to imagine reestablishing the pre-recession nominal GDP trend, and entirely impossible to regain the pre-recession price trend, without accepting a temporary acceleration of inflation along the way.  More succinctly, we will not lift the economy off the zero-bound without accepting higher than 2% inflation. Since the Federal Reserve has made it clear they will not accept inflation greater than 2%, the economy will not clear the zero-bound. And if the economy does not clear the zero-bound, we will be faced with perpetual and unavoidable deficit spending.

Plosser’s Speech - On his blog, Steve Williamson discusses the recent (September 29, 2011) speech by Charles Plosser, President of the Federal Reserve Bank of Philadelphia..  Plosser explains why he disagrees with recent moves by the Fed such as forward guidance about keeping short-term interest rates at current low levels, and operation twist to lengthen the maturity structure of the Fed’s asset holdings.  Williamson likes the speech; I don’t.   The first half of the speech reviews the current economics situation, the slow recovery from the 2008-09 downturn and financial crisis, and the deteriorating economic situation since the beginning of the year, Plosser goes on to defend his dissent from the recent FOMC decisions, arguing that the ineffectiveness of past monetary stimulus in reducing unemployment should serve as a warning to “be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated.”  How is that possible?  Wouldn’t an increase in aggregate demand resulting from an easy money policy tend to increase inflation while reducing unemployment?  Plosser thinks not, because monetary expansion could create “an environment of stagflation, reminiscent of the 1970s [that] will not help businesses, the unemployed, or the consumer.” 

Political Pressure Wouldn’t Halt More Fed Easing - Federal Reserve Chairman Ben S. Bernanke signaled he’ll push forward with further expansion of monetary stimulus if needed, resisting pressure from Republicans concerned that he’s fanning inflation.  Bernanke said yesterday in testimony to Congress’s Joint Economic Committee that the Fed is “prepared to take further action as appropriate” after using unconventional tools to boost growth in August and September. He rejected comments by Senator Jim DeMint of South Carolina and Senator Mike Lee of Utah that record central bank stimulus has spun inflation and the money supply out of control. Some Republicans are trying to remove the half of the Fed’s congressional mandate to achieve “maximum employment,” focusing it only on keeping inflation low. Representative Mick Mulvaney said the Fed chief could legitimately push ahead with more stimulus so long as he keeps price increases in check.  “Doing so, given his dual mandate, is completely defensible despite our objections,”

Flirting with MMT in the Financial Times - Martin Wolf, in the Financial Times last week, “thinks the unthinkable” and inches toward what sounds distinctly like a Modern Money Theory approach:  “Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.” Wolf goes on to argue that such a policy needn’t be inflationary, insisting on the absence of a necessary and immediate linkage between central bank money and the overall money supply:  “…the policy would be inflationary only if it led to chronic excess demand. So long as the central bank retains the right to call a halt, that need be no serious danger.” To learn more about MMT and its policy implications, this short working paper by Randall Wray is a good place to start.  Wray is also putting together an MMT primer over at New Economic Perspectives.

Unconventional Monetary Policy Lessons - SanFran Fed - Researchers have made great strides in improving our understanding of the effects of unconventional monetary policy. Although further study is needed, the evidence from the past few years demonstrates that both forward guidance and large-scale asset purchases are useful policy tools when short-term interest rates are constrained by the zero bound. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the Swiss National Bank Research Conference on September 23, 2011. The full text is available at

Monetary policy and democracy - Should presidents of regional Federal Reserve Banks have a vote on the FOMC, the policy-making committee of the Federal Reserve? Representative Barney Frank (D-MA) thinks they should not: I have long been troubled by the anomaly of having officials-- selected with absolutely no public scrutiny or confirmation-- voting on some of the most important decisions the federal government makes. Therefore, I introduced H.R. 1512, which eliminates the role of the Federal Reserve's regional presidents as voting members of the Federal Open Market Committee. The Federal Reserve (Fed) regional presidents, 5 of whom vote at all times on the Federal Open Market Committee, are neither elected nor appointed by officials who are themselves elected. Instead, they are part of a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the President and confirmed by the Senate.  Would more direct control of U.S. monetary policy by Congress and the President be more consistent with democratic principles than the current system? I can think of several reasons why it might not be.

Deleveraging and monetary policy - Few popular terms irritate me as much as “deleveraging”. Yes, the concept is important. In fact, it’s probably central to understanding why we’re in such a rut. But almost everyone talking about it fails to understand why it matters, and why it’s intimately related to monetary policy. Sure, most people know the basic idea: during the crisis, consumers and businesses experienced an enormous hit to net worth, and now they want to improve their balance sheets. To do so, they spend less—but since lower spending means lower income somewhere else in the economy, in the aggregate balance sheets barely improve at all. The economy is depressed as it gradually returns to the correct level of leverage, and we experience the  ”long, painful” process of deleveraging. (In the words of, well, every blogger and amateur econ pundit in the world.) Great story. Too bad it ignores everything else we know about macroeconomics. After all, why should the desire to spend less and save more hurt the economy? If I want to save, I hand my money over to someone who wants to borrow or invest it.  If consumers want to save more, we’ll see lower consumption but an investment boom—hardly a disaster for the economy.

Balance sheets and reality - Yesterday, I discussed how the central problem with “deleveraging” is that monetary policy fails to accommodate it, not that it’s inherently destructive on its own. One common reaction is the following: “how can monetary policy make a difference when consumers can’t borrow any more?” After all, monetary policy works through interest rates, right? If households are at their borrowing limits, how will anyone’s behavior change? There are several answers. First, to talk about households in general as overleveraged and pinned up against credit constraints is to seriously exaggerate: some are, but many are not. In the aggregate, the assets of American households are still far higher than their liabilities—in fact, as a quick glance at the Federal Reserve Flow of Funds tables will demonstrate, the situation isn’t so much worse than it was pre-crash:

What If the U.S. Dollars Global Role Changed? - NY Fed blog - It isn’t surprising that the dollar is always in the news, given the prominence of the United States in the global economy and how often the dollar is used in transactions around the world (as discussed in a 2010 Current Issues article). But the dollar may not retain this dominance forever. In this post, we consider and catalog the implications for the United States of a potential lessening of the dollar’s primacy in international transactions. The circumstances surrounding such a possibility are important for the effects. As long as U.S. fundamentals remain strong, key consequences could be somewhat higher funding costs and somewhat lower seigniorage revenues (the excess returns to the government of creating money), some reduced U.S. spillovers to the rest of the world, and enhanced sensitivity of the domestic economy to foreign economic conditions.

Currency Revulsion -  If you march down to the government with your paper IOU with $100 printed on it to demand your money, the government will simply hand you another paper IOU with the exact same amount printed on it.  All US government obligations are substantially identical promises to repay a specific amount of the currency unit of account backed by nothing but taxing authority.  So, Treasury bonds don’t ‘fund’ anything. If the Treasury were allowed to run overdrafts at the central bank, the US government could stop issuing bonds altogether and credit bank accounts with keystrokes. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything. But what about currency revulsion, you ask? What if government deficit spends out of control? Well, that’s the confidence trick of fiat currency. If confidence in the currency erodes, tax evasion will rise, citizens will begin surreptitiously using other media of exchange to transact and inflation and currency depreciation will spiral out of control. Notice, however, I mention currency depreciation and inflation instead of national solvency.

Yield Of Dreams (Or Rather Delusions) - Krugman - One principle I like to emphasize is that in times of radical change and stress, analytical economics is more rather than less useful than usual. Why? Because in unusual and stressful situations, experience — the kind of experience business people gather over years in the market –ceases to be a helpful guide, whereas models and deep historical knowledge have at least a hope of getting at what’s really going on. A case in point would be the remarkably slow realization in the financial industry that the yield curve — the spread between short-term and long-term interest rate, often used as a leading indicator of recessions and recoveries — no longer has its usual meaning. FT Alphaville cites new analysis from Merrill Lynch that starts from the following insight:We have often heard that the rates market is not priced for a recession yet because the curve remains historically steep. However, this argument ignores the fact that the Fed is at a zero bound. Because the policy rate cannot go negative, plausible paths of the future rate are either flat (Fed on hold) or rising (Fed hikes). As a result, the curve must be structurally steep relative to historical experience when the Fed had room to cut. . But what amazes me here is that this is presented as a fresh and surprising insight. Um, if you thought at all in terms of economic models, this was obvious right from the beginning.

Higher Inflation Is Not the Answer - Today's NPR Morning Edition presented two sides to the question "Does The Economy Need A Little Inflation?"  By "a little" they mean 5 percent per year for a few years.   The former IMF chief economist and Harvard professor Ken Rogoff argued in the affirmative and was featured in the radio segment, as he has been arguing this view along with his successor at the IMF, Olivier Blanchard, for a while now. I argued for the negative in the segment saying it would do more harm than good to the economy, a point Paul Volcker has been making forcefully. A recent column by George Will puts the issue in the broader context of U.S. economic policy and also comes out on the negative side.

Inflation expectations: a downward march - This graph is courtesy of my colleague, Kevin Kliesen. If you squint your eyes near the end of the sample, you'll see that Operation Twist appeared, on impact, to move short and long inflation expectations in opposite directions. The effect did not last long, however. The march downward continues--for now, at least.

Commodity Prices Redux - Krugman - Remember commodity prices? Not too long ago, the usual suspects were pointing to rising commodity prices as evidence that runaway inflation was just around the corner. Commodity prices were Exhibit A in claims that Bernanke was “debasing the dollar”; Paul Ryan called for monetary policy that would stabilize the price of a basket of commodities (and therefore require deflation in America whenever China experienced a boom, but hey, never mind). So it’s instructive to look at what has happened to commodity prices recently. Actually, here’s the Thomson Reuters index over the past 5 years: Commodity prices have fallen sharply this year. They’re still above their levels at the bottom of the global slump, but that’s hardly surprising. What may be surprising is that they’re just about where they were in 2007, before the big 2007-2008 runup. Over a 4-year period, then, it turns out that the Bernanke Fed has just about stabilized commodity prices — not that this is a good goal, but it is what has happened.

The black hole - Here’s the cover of this week’s Economist: What’s at the center of the black hole?  Is it fear?  Financial contagion?  Fiscal austerity?  Actually those are all effects of the black hole.  (BTW,  I hope I don’t even have to mention “structural problems,” surely no one believes a sudden fear of Obama regulations is causing the current financial market meltdown.) There is only one force in the economic universe powerful enough to cause trillions in asset values to suddenly disappear, for no apparent reason.  To cause nominal incomes to plunge further and further below trend, causing massive job loses.  The center of the black hole sees itself as a force for good, helping to solve the problems it is actually creating.  Others see it as a potential source of help, which is not acting forcefully enough.  Both are wrong.  It’s the center of the black hole.  It’s pulling down the things we see disappear over the event horizon.  But we can’t see it, and hence most of us don’t understand the problem.  It’s the only force capable of determining NGDP growth over time.  It’s the force that several decades ago decreed that henceforth NGDP will grow at about 5%, not 11% or 3%.  It said “let there be 2% inflation.”  And the force saw the 2% inflation, and saw that it was good.  Only one force in the universe could pick a 2% inflation rate out of thin air, and make it happen.  Is it God?  No, it’s much more powerful than that. 

Is That A Recession Lurking In The Distance? - A new recession is inevitable, predicts the Economic Cycle Research Institute. "Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession," the consultancy announced on Friday. "And there’s nothing that policy makers can do to head it off." "The vicious cycle is starting where lower sales, lower production, lower employment and lower income [leads] back to lower sales," ECRI co-founder Lakshman Achuthan told the Daily Ticker. And on Bloomberg TV he explained that another recession is coming because of "contagion in the forward-looking indicators." A new contraction is "inescapable," advised the co-author of Beating the Business Cycle, which outlines ECRI's methodology for analyzing the business cycle. ECRI has a good record in calling turning points in the macro trend and so we should take Achuthan's warning seriously. The stock market indicator is looking bearish again too, offering some confirmation for the recession call. The S&P 500 is down fractionally as of Friday's close vs. a year ago. Every recession in the last 50 years has been accompanied by an annual decline and so the red ink isn't encouraging. Then again, let's not forget that not every annual loss in the stock market leads to a recession.

Bernanke sees weak recovery ‘close to faltering’ - If the political world paid as much attention today to Ben Bernanke’s comments as Chris Christie’s comments, the public discourse would be slightly less discouraging. The Federal Reserve chairman, Ben S. Bernanke, offered a grim assessment of the nation’s economic health Tuesday, telling a Congressional committee that “the recovery is close to faltering.”  Mr. Bernanke said that the Federal Reserve has acted forcefully to support growth and that it stood ready to do more. But he emphasized that the rest of the government also needs to act on problems including the federal debt, unemployment, housing, trade, taxation and regulation. “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Mr. Bernanke said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.” Psst, members of Congress, I think he’s talking to you.

Mortgage Debt Is NOT the Main Factor Holding Back U.S. Growth Back - The NYT had an article about the prospects of persistently slower growth in Europe and the U.S. as a result of the current downturn. It told readers that: "Now, just as the United States economy is held back by households whose mortgages are still underwater and who won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means." Actually, the United States economy is not being held back by a lack of consumer spending. The ratio of spending to income is still considerably higher than the pre-bubble average as reflected by the lower than normal saving rate. The problem is that the bubble had generated excessive consumption demand, which is not being replaced by any other source of demand. The piece also inaccurately asserts that: "in Europe it was mainly governments that piled on the debt, facilitated by banks that lent them money by buying up sovereign bonds." Actually, Ireland and Spain, two of the most troubled countries, ran budget surpluses in the years preceding the downturn. They ran into trouble because they both had large housing bubbles which burst and left their economies in crisis.

Recession Risk Overtaking ’New Normal': Gross - Bill Gross, the manager of the world’s biggest bond fund, said the global economy risks lapsing into recession with the pace of growth falling below the “new normal” level the firm has predicted since 2009. “Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” Gross wrote in a monthly investment outlook posted on Newport Beach, California-based Pacific Investment Management Co.’s website today. “If global policy makers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible. Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor.”

Manufacturing may help fight off new U.S. recession - U.S. factories grew more quickly in September as production and hiring increased, suggesting that manufacturing would help keep the economy from slipping into a new recession. Other data on Monday offered more good news for the troubled U.S. economy, with strong demand for new motor vehicles putting sales on track to surpass August's rate, and construction spending unexpectedly rebounding in August. "That hardly sounds like an economy flat on its back. The economy is still moving forward. But no one should confuse direction with speed," September marked the 26th straight month of expansion in a sector that has shouldered the broader economic recovery, and the factory report implied that an outright contraction in output would probably be avoided. The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring. But new orders fell for third month.

Still Front End of Recession: A good ISM reading doesn’t change the call - The stronger-than-expected ISM manufacturing-index reading for September might normally suggest that the economy, at least for now, has dodged a recession bullet. After zero jobs and zero real consumer spending in August, which put the stalled economy on the front end of recession, the ISM number is the first major September reading. But economist Michael Darda says hold the applause: Inside the ISM, new orders and order backlogs either flat-lined or declined and remain below 50 — the DMZ recession marker on the index. Darda believes weak data in the U.S., plus the ongoing European crisis, plus the China slowdown, plus widened corporate credit spreads and stressful financial conditions, all point to a declining economy and additional stock market drops.

Slow growth continues - Last week the Federal Reserve Bank of Chicago released its National Activity Index, which summarizes the common tendency of a large number of indicators previously reported for August. The 3-month average of this index now stands at -0.28. We've seen this number that bad in 26% of the months since 1967. 59% of the time when the CFNAI was this bad or worse, the economy was already in a recession. But the indicators coming in so far suggest that September was a little better than August. The ISM survey of managers of manufacturing facilities resulted in a value for their PMI index of 51.6 for September, up from 50.6 in August. A value above 50 indicates that more responders reported improvements than reported deteriorations. Still, we should see a majority reporting improvements if the economy were growing, and the average historical value for this index is 52.7. The September PMI is thus consistent with the conclusion that growth picked up a bit from the very disappointing August, but remains below average. The ISM non-manufacturing index for September was reported today to be 53.

Goldman puts U.S. recession probability at 40% in 2012 - The following article makes a few key points that we've been discussing:
• It is very unlikely that the U.S. economy was in a technical recession at the end of Q3. In fact, Goldman revised up their Q3 forecast to 2.5% (Merrill Lynch and others revised up their Q3 forecasts too). The recent data suggests sluggish growth, not recession (examples include the ISM manufacturing survey showing expansion in September, the Chicago PMI increasing, and auto sales back up over 13 million SAAR).
• There are clear downside risks to the U.S. economy mostly from the European financial crisis, the apparent renewed recession in Europe, and from U.S. fiscal tightening. However the potential spillover from Europe is difficult to quantify.
• Since the cyclical sectors in the U.S. remain very depressed, it is difficult for those sectors to fall significantly. Usually these sectors decline prior to a recession in the U.S., and that is not happening now.

Recession Chance 40% in 2012, Jobless Rate to 9.5%: Goldman - Odds that the U.S. economy will enter recession are now close to 50-50 as unemployment heads on a path higher and pressures from Europe intensify, Goldman Sachs economists said. Jan Hatzius, Goldman's chief US economist, pegged recession chances at 40 percent and said the jobless rate is likely to surge to the mid-9 percent range in 2012. While that still jibes with the firm's forecast that a recession — or two consecutive quarters of negative growth — is not the most likely scenario, the warning signs flashed Tuesday underscore concerns about European debt contagion on an already fragile US economy. "Ultimately, it's a judgment call," Hatzius said during a conference call. "We're basically indicating that we think the risk is sizeable and elevated, especially given the already underway deterioration in the labor market, although it's a gradual one. Historically, U.S. business cycles have been quite vulnerable to rising unemployment and deteriorating dynamics in the labor market." On the bright side, the forecast also correlates to others in the recession camp that the downturn is likely to be relatively brief and shallow, even if the ensuing recovery is likely to be slow.

Fourth Quarter Key to Recession Debate - Every quarter is important, but this quarter is crucial for whether the U.S. economy stays in recovery or slips into recession. That’s because two current drags on growth should be resolved by year-end: the euro zone debt crisis and weak U.S. job growth. An controlled debt solution — even with an orderly Greek default — and a pickup in U.S. jobs would push recession talk out of the conversation. But if the euro zone implodes or payrolls contact, the recovery could become a fond memory. So far, as many economists point out, the worst readings on the economy come from sentiment measures rather than hard numbers on economic activity. The pessimism among consumers and businesses alike may be reactions to political uncertainty and the volatility in the stock market, while the nuts-and-bolts data on the U.S. economy look better. In the latest round of data, August construction spending surprisingly rose 1.4% when a 0.4% drop was expected. September factory activity beat forecasts as well. The Institute for Supply Management said the sector’s expansion strengthened for the first time since June.

The St. Louis Fed Financial Stress Index - My colleague Kevin Kliesen (and his coauthor, Doug Smith) have recently introduced a new financial market stress index; see Measuring Financial Market Stress. Here's a link to the Appendix, which describes its construction and the data series used: appendix. A brief description: The St. Louis Fed’s Financial Stress Index is constructed using principal components analysis. Briefly, principal components analysis is a statistical method of extracting factors responsible for the comovement of a group of variables. We assume that financial stress is the primary factor influencing this comovement, and by extracting this factor (the first principal component) we are able to create an index with a useful economic interpretation. We construct the STLFSI using 18 weekly data series beginning December 31, 1993.  Prior to the principal components analysis, each of the data series are de-meaned and then divided by their respective sample standard deviations. The index is available on FRED here. Let me reproduce some of this data here. Here is what the FSI looks like since December 2009.

The Calm Before The Storm? - The Treasury market's inflation forecast has been a reliable barometer of the ebb and flow of crisis and recovery in recent years. In July and August of 2008, just ahead of the implosion of Lehman Brothers that triggered a financial panic, the yield spread between the nominal less inflation-indexed 10-year Treasuries was falling sharply. That was a warning sign of trouble ahead. In early 2009, by contrast, this inflation forecast started trending higher, telling us that the worst had passed. When inflation expectations softened again in the spring of 2010, the shift sent a message that the economy faced new challenges. Later on in the year, it represented a vote of confidence that the Fed's newly announced QE2 monetary stimulus would have some traction in the economy. And earlier this year, when inflation expectations turned down again, starting in April, that was a sign that a new macro storm was lurking. Today, the inflation forecast is under 2%, down from around 2.6% in early April. For the moment, however, the decline in the market's inflation outlook has stabilized. If it holds, that's an encouraging sign that the crowd thinks the economy won't suffer a new recession. That's hardly a forgone conclusion and so it's reasonable to wonder if the stability is the real deal.

Batten Down The Hatches, A Big Storm's Coming - When the Economic Cycle Research Institute's (ECRI) Lakshman Achuthan makes a recession call, you can be sure the economy is in deep trouble. ECRI is so afraid of making a premature call, of crying wolf, that when they finally do make the call, the train has already left the station. Achuthan hit the media circuit last week, saying that a recession in the United States is "inescapable," meaning the economy is already contracting. I last discussed a new recession in The Economy Is Worse Than You Thought (August 31). Most Americans think the so-called "Great" Recession, or the Housing Bubble Recession as Eric Janszen likes to call it, never ended. And rightly so. The National Bureau of Economic Research (NBER) officially calls recessions according to where they think we stand in the business cycle, which tracks expansions and contractions in the economy. The main indicators of recession are real (inflation-adjusted) GDP and GDI (gross domestic income), but there are other indicators as well (falling income, job losses, etc.).

ECRI Explains Its Recession Call - The U.S. recovery wasn’t much to begin with, and now it’s dead. That is the news from the widely respected Economic Cycle Research Institute that said the U.S. has already or is about to tip into recession. The announcement, made public Friday, was met with skepticism by other economists who are more hopeful the U.S. and the world will skirt recession. Lakshman Achuthan, co-founder of ECRI, however says the hope is misplaced. He says the call is based not just on the weekly leading index that is disseminated to the public, but also on dozens of other ECRI leading indexes that are available mainly to ECRI’s clients. Economists downplay the WLI because of its high correlation with movements in the stock markets that have been volatile lately. The WLI, however, is not the only hammer in ECRI’s toolbox, says Achuthan. To capture the macro-view, ECRI also puts together a long leading and short-leading index. The long-leading index, which has no exposure to equities, started falling back in December 2010 and is still falling. In addition, ECRI puts together sector-specific indexes that cover areas including manufacturing, nonfinancial services, housing, credit and exports. These indexes are “overwhelmingly showing recession patterns,” says Achuthan.

A self-induced recession - YOU know, if it weren't for the politicians, the economy would have a fighting chance. The probability of recession spiked in early August as financial markets around the world swooned and American economic momentum abruptly drained away. Since then, the economic data have not, for the most part, gone into freefall. This morning we learned the Institute for Supply Management’s manufacturing purchasing managers index rose to 51.6 in September from 50.6, modestly better than expected; current production is growing but new orders are weakening slightly. Construction spending was also quite a bit better than expected in August, with across the board strength in residential, commercial and government. Third quarter growth rates have been revised up. Indeed, as this chart from Macroeconomic Advisers shows, consensus third quarter growth estimates between late August and last Friday generally edged higher. But last week the Economic Cycle Research Institute (ECRI), a boutique firm that specialises in business-cycle turning points said America is “tipping into a new recession. And there’s nothing that policy makers can do to head it off.” ECRI is not well known to the general public but at times like this I pay them special attention because their indicators are designed to capture turning points and their track record is pretty good.

Recession in Our Minds - Are we in a recession in our minds? Americans certainly seem unhappy about the prospects for the economy. Consumer sentiment remains near its lowest levels since 2009. And those daily indicators of investor confidence — the markets — have painted a very pessimistic picture; the Standard & Poor’s 500-stock index, seen as a broad indicator of the market, is down 8 percent for the year. But economic data based on what people are actually doing tells a slightly different story. There is no measure by which the economy seems robust, but economic indicators published recently — measuring activity in manufacturing and service, vehicle sales and construction spending — were relatively positive, beating analysts’ expectations. By most measures, the economy is growing, while measures of the national mood are at recession levels. So why do people feel the economy is doing so much worse than it is? In part, say some economists, it is because of increased cynicism about the ability of the president and Congress to handle the economy. Indeed, the University of Michigan’s consumer confidence index shows a sharp drop this summer during the debt crisis debate. While it has improved slightly since then, it still remains at its lowest levels since early 2009.

US's Geithner warns Europe crisis a global threat  (Reuters) - Europe needs to step up efforts to control its debt crisis before it pulls the United States and the rest of world into a renewed downturn, Treasury Secretary Timothy Geithner urged on Wednesday. Speaking at the Washington Ideas Forum in the downtown Newseum, Geithner mixed praise and criticism of Europe as he continued an ongoing effort to push its policymakers toward a more forceful approach toward dealing with debt woes. "Europe matters a lot to us. We don't want to see Europe weakened by a protracted crisis. Europe understands that," he said but left no doubt at his impatience with progress so far. "They are moving too slowly," Geithner said. "Europe is a large part of the global economy, and a severe crisis in Europe would be damaging" around the world. He sidestepped a question about how close the U.S. economy might be sliding back into recession, however. Asked whether he agreed with Federal Reserve Chairman Ben Bernanke that U.S. growth was close to faltering, Geithner said that growth is "slower, weaker" in the United States and around the world than hoped at the start of the year.

BBC Does It Again: "In The Absence Of A Credible Plan We Will Have A Global Financial Meltdown In Two To Three Weeks" - IMF Advisor -A week after the BBC exploded Alessio Rastani to the stage, it has just done it all over again. In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

Is the Whole World Going Into a Recession at the Same Time -As the third quarter comes to an end, strategists and investors are beginning to prep their clients and portfolios for the chance that the whole globe slides into a recession at the same time. The worse news is that with uncertainty in Europe, the U.S. and China as high as when the quarter began, they can’t find much to do about it. “A more sinister scenario could also unfold, namely a global synchronous recession where deflation becomes more visible,” said Morgan Stanley’s Adam Parker, the head of U.S. equity strategy, in a note to clients this week. “In recent days, a number of clients have told us they are having great difficulty in getting defensive, even when they want to.” Morgan Stanley’s Parker gives his worst-case scenario described above about a 10 percent chance of occurring, but some investors feel the chances of a global group recession are even greater.

To Cure the Economy, by Joseph E. Stiglitz - As the economic slump that began in 2007 persists, the question on everyone’s minds is obvious: Why? Unless we have a better understanding of the causes of the crisis, we can’t implement an effective recovery strategy. And, so far, we have neither. We were told that this was a financial crisis, so governments on both sides of the Atlantic focused on the banks.  Fixing the financial sector was necessary for economic recovery, but far from sufficient. To understand what needs to be done, we have to understand the economy’s problems before the crisis hit. First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services. Globalization has been one, but only one, of the factors contributing to the second key problem – growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand.  The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves – partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the US Treasury.  Many said, “Never again.” But, while the buildup of reserves – currently around $7.6 trillion in emerging and developing economies – protected them, money going into reserves was money not spent.

Bernanke: Fiscal Policy is of Critical Importance - Ben Bernanke’s testimony before Congress Tuesday emphasized several things. First, he noted that the economy is recovering slower than the Fed expected. In fact, “the recovery is close to faltering.” Second, he emphasized that the Fed has acted aggressively to support growth, and while there is still more the Fed can do. Third, and importantly, he emphasized that although the Fed can do more to help the economy, the Fed cannot do this alone — its powers are limited at this point — and it needs help from fiscal policy authorities. He has made this point before, but in today’s testimony it is more forceful and urgent than in the past: Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain. … I would submit that, in setting tax and spending policies for now and the future, policymakers should consider … key objectives. One crucial objective is to … avoid fiscal actions that could impede the ongoing economic recovery. … To drive the point home,  the end of the speech emphasizes that monetary authorities need help from fiscal policymakers.

A New Direction for American Economic Policy - America remains mired in crisis because the mainstream economic prescriptions peddled by both parties are wrong. The Democrats want to jolt the economy back to prosperity through temporary stimulus. The Republicans want to slash government spending to make room for permanent tax cuts they claim are the key to economic growth. Moderates in the middle call for stimulus today followed by budget cuts in the future.  All three positions misread America's economic plight. Turning dials on stimulus and tax cuts won't solve the real problems. In my new book, The Price of Civilization, I suggest a new direction.  In my opinion, all three positions miss the essential point. The U.S. economic crisis is structural, not cyclical. We are experiencing forces that have been at play for a generation, not a short-term drop of consumer demand that will quickly recover. The long era since the early 1980s has been characterized by low and falling tax collections, not a rising tax burden, but tax cuts have been to no avail. Something much more basic is missing from the diagnosis.  What is missing is the changing global economy.

Currency Sovereignty - Let us begin with some common beliefs that actually are false—that is to say, the following statements do NOT apply to a currency-issuing government.

  1. Governments have a budget constraint (like households and firms) and have to raise funds through taxing or borrowing
  2. Budget deficits are evil, a burden on the economy except under some circumstances
  3. Government deficits drive interest rates up, crowd out the private sector…and necessarily lead to inflation
  4. Government deficits leave debt for future generations: government needs to cut spending or tax more today to diminish this burden
  5. Government deficits take away savings that could be used for investment
  6. We need savings to finance investment and the government’s deficit
  7. Higher government deficits today imply higher taxes tomorrow, to pay interest and principle on the debt that results from deficits

One Point Seven Six - Krugman - The invisible bond vigilantes continue to lure us into their invisible trap. Meanwhile Joe Weisenthal has more about the bizarre response of conservative economists to the failure of interest rates to rise the way they claimed they would: part insistence that somehow the Fed is rigging the market, part denunciations of the markets themselves, because they’re not disciplining government the way they’re supposed to. And as for actually rethinking preconceptions, and considering the possibility that Keynesian economists who told us three years ago that we were in a liquidity trap, and rates would stay low until the economy recovered? Not a chance.

S&P Downgrade of U.S. Debt Approved By 67% in Global Poll - Global investors say that Standard & Poor’s was justified in cutting its rating of U.S. debt on Aug. 5, according to a Bloomberg survey. Sixty-seven percent of those responding backed the decision by McGraw-Hill Cos.’ S&P to downgrade the U.S. credit rating to AA+ from AAA, a Bloomberg Global Poll shows. U.S. investors were less supportive, with 57 percent approving, compared with about three-fourths of respondents in Europe and Asia, last week’s survey of 1,031 Bloomberg subscribers found. S&P’s move contributed to stock losses that left shareholders $1 trillion poorer by Aug. 25. The two other large rating firms, Moody’s Investors Service and Fitch Ratings, retained their top grades of U.S. credit.  The rating cut drew criticism from the administration of President Barack Obama and from investors including billionaire Warren Buffett. John Bellows, acting assistant Treasury secretary for economic policy, said S&P had made a $2 trillion “mistake” in its arithmetic and then changed the rationale for its decision.

Bond Bears Piling Into Treasuries as Yield Forecasts Cut by Most Since ’09 - Eight months ago Bill Gross, manager of the world’s biggest bond fund, said Treasuries “may need to be exorcised” and cleaned them out of his $245 billion Total Return Fund. The company then used derivatives to bet against the debt in March. Now the Pacific Investment Management Co. fund has 16 percent of its assets in U.S. government securities as the debt posted the highest quarterly returns in almost three years. “We’ve rebalanced,” Mohamed A. El-Erian, chief executive officer and co-chief investment officer at  Pimco said in a Sept. 27 radio interview on Bloomberg. “The U.S. benefits the most from a flight to quality.”  With the economy growing slower than forecast, the biggest bond rally in three years has repudiated Standard & Poor’s Aug. 5 downgrade of the U.S. AAA credit rating and driven yields to record lows, prompting bears to play catch up in a bid to match indexes portfolio managers use to measure performance.

The Federal Budget Deficit for 2011—$1.3 Trillion - CBO Director's Blog - The federal government’s fiscal year 2011 has come to a close, and CBO estimates, in its latest Monthly Budget Review that the federal budget deficit for the year was about $1.30 trillion, approximately the same dollar amount as the shortfall recorded in 2010. The 2011 deficit was equal to 8.6 percent of gross domestic product, CBO estimates, down from 8.9 percent in 2010 and 10.0 percent in 2009, but greater than in any other year since 1945. CBO’s deficit estimate is based on data from the Daily Treasury Statements; the Treasury Department will report the actual deficit for fiscal year 2011 later this monthThe estimated deficit is slightly above what CBO projected in its August Budget and Economic Outlook mostly because revenues were a bit lower than expected.Although the 2011 deficit was about the same as the 2010 deficit, that comparison is complicated by several factors, particularly these:

  • About $31 billion in payments that would ordinarily have been made on October 1, 2011, were instead made in September because October 1 fell on a weekend, thus raising outlays for fiscal year 2011.
  • Each year, the Office of Management and Budget records adjustments. Those adjustments reduced outlays by $107 billion in 2010 and by $51 billion in 2011 (mostly for the Troubled Asset Relief Program), thereby boosting outlays in 2011 by $56 billion relative to outlays in 2010.
  • The Federal Deposit Insurance Corporation (FDIC) required banks to prepay deposit insurance premiums (in 2010) that would otherwise have been due in fiscal years 2011 through 2013. The FDIC’s action reduced net outlays in 2010 by $36 billion and increased net outlays in 2011 by $14 billion.

The world wants more US government debt. The US Treasury should supply it. -- This fascinating story came out during the psychodrama of the US debt ceiling: U.S. Treasury debt prices soared on Friday on fears a U.S. default could trigger a shortage of Treasuries and even push the world's largest economy back into recession. On the face of it, this makes no sense. The market's reaction to a higher perceived probability that the US would default on its debt was to demand more US debt? If the markets behaved this way with Greece, there'd be no Eurozone debt crisis. But of course, the US isn't Greece; US debt is special:  The potential that the Treasury might postpone debt sales in the event the debt ceiling is not extended by next Tuesday bolstered Treasuries on concerns fund managers and short-term traders might have to compete for tight supply for their everyday operations. "There's a lot of demand for these issues, just kind of a natural demand that always comes up," . "So with less or truncated supply you have a lot more demand chasing less supply." So long as investors want to shift to liquid assets during episodes of uncertainty and so long as US Treasuries are perceived as being among the most liquid assets, then there's going to be a strong demand for them. And if the only way to acquire US debt is to acquire USD, then we'll also see a pattern of USD appreciating on bad news - even if the bad news is about the US economy.

How Big Is the Long-Term Debt Problem? - Articles about the deficits and the national debt generally talk about unsustainable long-term deficits that will drive the national debt up to a level where scary things happen. Sensible commentators usually acknowledge that our current deficits are a sideshow and the real problems happen in the 2020s and 2030s due to modestly increasing Social Security outlays and rapidly increasing health care spending. I admit that this has generally been my line as well; for example, in a previous post I said that the ten-year deficit problem is entirely a product of extending the Bush tax cuts, but that even if we let them expire things will get worse over the next two decades. But looking at the numbers, it’s not clear that the long-term picture is really that bad. Here I’ll lay out the numbers, and then, as they say on Fox News, you can decide. The summary is the chart above; the details are below.

Bernanke on Going Big in Both Ways - It would seem we have heard this so many times before that we shouldn’t need to hear it again. The U.S. faces two major economic challenges at the same time: (1) an economy still desperately struggling to get out of (or avoid falling back into) recession; and (2) a fiscal outlook on such an unsustainable longer-term path that it threatens our near-term, and not just longer-term, economic health. The two challenges are very different and might suggest very different policy strategies, but it always helps when someone as prominent as the Chair of the Federal Reserve Board makes it crystal clear in his written and oral (and official) remarks. From Bernanke’s testimony before the Joint Economic Committee: I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. .....A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible

Bernanke warns Congress against deep spending cuts - Federal Reserve Chairman Ben Bernanke is reiterating that Congress should not cut spending sharply while the economy is weak. Bernanke tells the Joint Economic Committee that lawmakers face a delicate challenge: They must avoid making deep spending cuts that could impede the recovery. But he says they must also eventually cut spending more deeply than the $1.5 trillion in deficit cuts being sought by a special panel. Bernanke says that the U.S. economy is growing more slowly than the Federal Reserve had expected and that the biggest factor depressing consumer confidence is poor job growth. His warning to Congress not to pursue deep spending cuts in the short run comes at a time of sharp disagreement within the Fed and Congress about how to invigorate the economy.

In Debt Talks, Divide on What Tax Breaks Are Worth Keeping— Plenty of lawmakers are against tax breaks and so-called loopholes. Unless, of course, they personally helped create them.  The Senate Republican leader, Mitch McConnell, for instance, says he is open to ending tax breaks for special interests. But when it comes to a tax break he secured in 2008 for the owners of thoroughbred racehorses, he argues that the measure is essential for the protection of jobs in his home state of Kentucky.  Senator John Kerry, Democrat of Massachusetts, says he too wants to eliminate such breaks, except when it comes to beer. He is one of the main supporters of a proposal that would cut taxes for small beer makers like the Samuel Adams Brewery in Boston.  And Representative Paul D. Ryan, the Wisconsin Republican who leads the House Budget Committee, has privately assured one beer industry group that he would support a second proposed tax break for brewers, even as he has distanced himself publicly from the measure, the beer group’s chief operating officer said in an interview.  The disconnect between the lawmakers’ words and deeds reflects the political hurdles that Congress and the White House face as they look to cut at least $1.2 trillion from the national debt1.

Why The Super Committee Might Fail - The cuts don't take effect until 2013: [I]f the trigger kicks in, the resulting cuts can be undone by the next Congress. And if either party is convinced that it will win in 2012 and control all the branches of government, then it has an incentive to let the Joint Select Committee fail, wait out the clock, and then impose their own preferences after the election.

CBO: Deficit Would Be One-Third Lower if Economy at Full Potential - The U.S. federal deficit in fiscal year 2012 would be about one-third lower if the economy were operating at its full potential, the Congressional Budget Office said in a letter to a member of the bipartisan deficit-reduction committee, released Tuesday. The official budget score-keeper said the deficit would only be about 4% of gross domestic product, instead of CBO’s 6.2% projection for 2012, if the economy was not under-utilizing capital and labor resources, according to the letter answering a Sept. 27 request from Rep. Chris Van Hollen (D., Md.). If the economy were stronger, incomes would be higher, sending more tax revenue to the government and unemployment would be lower, reducing the cost of some government benefits, CBO said in its letter. These “cyclical factors” contributed about $340 billion to the roughly $973 billion deficit projected for 2012, the nonpartisan agency said.

Reid playing for leverage with jobs bill - Senate Majority Leader Harry Reid (D-Nev.) has made it clear that he will not schedule a vote on President Obama’s jobs package until after the upper chamber moves a China currency bill that the administration does not support. Reid is wielding a significant amount of leverage with the White House on the China legislation, which is unlikely to be signed into law in the 112th Congress. Yet passing the bill through the Senate — which is expected to happen next month — would help Democratic incumbents on the campaign trail, where China-bashing usually resonates. The bill would crack down on what critics contend is China’s policy of manipulating currency to give its companies a trading advantage. The Obama administration is not eager to confront China over its currency policy, but congressional Democrats are eager to tackle it — especially politically vulnerable Democratic incumbents in Midwestern states. They include Sens. Sherrod Brown (Ohio), Debbie Stabenow (Mich.) and Bob Casey Jr. (Pa.), whose states’ economies have suffered because of a steady outflow of manufacturing jobs to China.

Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On - The one and only thing former Fed chairman Alan Greenspan was consistently right about was free trade. In contrast, Fed chairman Ben Bernanke is fanning the fires of protectionism right where he can do the most damage, in front of the Senate Joint Economic Committee. Please consider this short exchange between Senator Robert Casey Jr., Democrat, and Fed chairman Ben Bernanke. Link if video does not play: JEC Hearing (10-4-2011) - Exchange Between Chairman Casey and Fed Chairman Bernanke on China. Casey repeatedly tried to get Bernanke to quantify the magnitude of the effect the undervalued Yuan has on the US economy, jobs, and the trade deficit. Bernanke ducked the question directly but did cite several studies by the IMF and various think tanks that the "Chinese currency is undervalued by a significant amount."

Cantor: Obama’s Job Bill Is Dead in Congress - President Barack Obama’s $447 billion jobs bill was declared dead in Congress Monday, as Majority Leader Eric Cantor (R., Va.) said he did not expect the House to take it up as a package. Mr. Cantor announced the House would consider elements of Mr. Obama’s jobs agenda in the coming month, including trade agreements the White House sent to Congress Monday and a tax break for government contractors. But asked if the president’s jobs bill as a whole is dead, Mr. Cantor replied, “Yes.” “The president continues to say, ‘Pass my bill in its entirety,’” Mr. Cantor said in a press briefing. “As I’ve said from the outset, the all-or-nothing approach is just unacceptable.” Mr. Obama pushed back on Mr. Cantor’s comments, saying Monday in an interview with ABC, “What he needs to do is to tell us what he’s for.” But the move by House Republican leadership, while expected, poses a challenge for Mr. Obama, who has been flying around the country holding up a copy of his jobs bill and insisting that the House and Senate pass it “right away.”

Cantor Says Obama’s Job Bill Is Dead - That the jobs bill is dead is not a surprise, but given the national unemployment crisis we face the lack of will and urgency in Congress to do anything about it ought to add fuel to whatever fire recent protests have ignited. We need to do something to help the unemployed now, not tomorrow -- more should have been done already -- and the action needs to be bold and aggressive. Don't these people have any sense what it's like to look for a job for months and months and not be able to find one while every bit of hard-earned savings and then some withers away (if there's any savings to begin with given the stagnation in wages in recent decades)? Do they understand what the unemployed face in their day to day lives? Where's the compassionate conservatism we heard so much about? Do Republicans really think that trade agreements and tax cuts for government contractors -- while opposing a payroll tax cut -- is going to provide the help that is needed? And what's wrong with the centrist Democrats who are voting against Obama's plan? Whose interests are they protecting? It sure isn't the jobless. Like I said, this isn't unexpected, but (obviously) it still irks me to see it play out in this way.

Obama To Cantor: Dismantle My Jobs Bill At Your Own Risk - The White House Monday continued its war of words with House Republicans over their unwillingness to move his entire jobs package, confidently vowing to let voters decide how to react to Republicans' refusal to pass provisions such as infrastructure spending and retaining teachers.  "Congress can take it up, vote on it...then if there's a desire to take things out, we would accept that although we would not be satisfied by that... [President Obama] would say, 'Where's the rest of it? What about teachers and construction workers...or incentives to hire veterans?" White House spokesman Jay Carney told reporters during a briefing Monday.  One reporter asked whether Obama is pushing passage as a way to help Democrats gain the political upper hand over some vulnerable Republicans on specific popular issues, such as spending on infrastructure projects.  "To avoid anything like that, they could simply pass all of this," Carney responded.

Can’t Congress agree on highways, at least? - To hear Eric Cantor tell it, the president’s jobs bill is dead and rotting in the House — at least in its current form. But that doesn’t mean Obama’s ballyhooed jobs speech last month was totally ineffective. In fact, it already seems to have quietly nudged the dial on at least one key issue, prodding the House GOP to consider a bigger transportation spending bill. Some quick context: Gas-tax revenue, as we know, is shrinking over time: The tax isn’t indexed to inflation, and Americans have cut down on driving during the recession. That means there’s less and less federal money to bankroll new highway and transit projects. (True, Congress could always just raise the gas tax, but, well...) So, earlier this year, House Republicans unveiled a six-year, $230 billion transportation bill that would’ve represented a 30 percent cut in spending from current levels. That’s all we can afford, they said, with current gas-tax levels. Even Transportation Committee Chairman John Mica sounded apologetic about it.

Stuart Zechman: The Beatings Will Continue Until All Not-Yet-Right-Thinking Lefties Support the Infrastructure Bank Scam - via Yves Smith - Well, well, well. It seems as if some of you purists out there have been grumbling again about the President’s latest “jobs legislation,” even though his recent speech to Congress contained some cautiously populist rhetoric designed to get you to clap, vote and give your hard-earned money to his re-election campaign. How predictable of you movement liberals, never giving Our President credit for anything. What exactly do you people want, a Works Progress Administration, or something equally rife with New Deal orthodoxy? Don’t you movement liberals understand that our neoliberal, Third Way program is the least rightist agenda that can ever be achieved in the United States? Haven’t you been listening to Dem-leaning pundits? Are you still insisting that there could actually be a separate, distinct, movement liberal, political-economic philosophy than what is currently held by the “center-left coalition” that runs the Democratic Party and its associated message shops and think tanks? Don’t you get that, if you’re anywhere left of movement conservatives, we’re all there is? What is wrong with you magical-thinkers? Why can’t you accept that political reality dictates that you not exist!

If You Care About the Deficit, You Should Care About Jobs - The prevailing anxieties of elite opinion are focused relentlessly on the deficit and debt, with sporadic bouts of indigestion reserved for the slump in jobs.  This is a complete reversal of what ought to be the case.  But let’s say you really can’t get over the idea that there’s no major short-term economic problem currently being caused by high deficits.  Well then, if you are such a person, you ought to be deeply concerned that the economy is operating below potential.Rep. Chris Van Hollen recently requested an estimate from the CBO (hat tip TPM) regarding what portion of the federal deficit can be attributed to cyclical factors—e.g. the non-recovery in the job market.  The answer:  roughly a third.  There’s nothing new here, but it is an excuse for futile repetition of the following upshot:  attempts to cut the deficit right now are self-defeating, to the extent that they drag down growth and employment.

Reid's Plan for Job Creation - Harry Reid announced on Wednesday (Oct. 5) that the Senate would take up Jobs Act legislation (S. 1549) soon, but that the offsets in the president's proposals would be replaced by a 5% surtax on those making more than a million that would raise about $445 million.  Note that this means that, once again, Congress will punt on the question of taxing fund managers fairly on their compensation, since the carried interest provision would be one of the offsets replaced by this provision.  The carried interest provision should be passed no matter what other offsets are used.  It is an unfair provision that treats fund managers as a specially protected category of worker with preferential rates on their compensation income.  Time to end it, once and for all. Not surprisingly, GOP senator Hatch complained that this small surcharge on millionaires would be a "massive" tax increase on "small businesses".  Id. How many times do we have to remind Congress that most small businesses don't make millions in profits, that those who have millions can pay a 5% tax without undue distress (compared to those with a ten dollar bill being able to support their family with food and shelter), and that 5% of $1 million is not a "massive" tax increase.  50% of $1 million might be, but 5% is simply not.

Dems Float Surtax On Millionaires To Pay For Jobs Bill - Seeking to consolidate party support for President Obama's jobs bill, Senate Democrats are considering a proposal to impose a five percent surtax on millionaires to pay for the legislation, according to two party aides. As currently written, Obama wants the joint Super Committee to increase its deficit reduction target by enough to pay for the whole jobs bill. That way its cost could be offset by spending cuts and revenue measures and other reforms that have bipartisan support. But failing that, Obama's bill would trigger a series of new taxes on wealthy Americans, including oil and gas companies, hedge fund managers and others. This enforcement mechanism caused some strife in the Democratic caucus. Now, driven by party leadership and Sen. Max Baucus (D-MT), whose powerful Finance Committee has jurisdiction over the jobs bill, they're considering a simpler, less parochial, and thus less divisive measure.

Estimated Budgetary Impact of Two Versions of the American Jobs Act - CBO Director's Blog - This afternoon CBO released a cost estimate for S. 1549, the American Jobs Act of 2011, as introduced by Senator Majority Leader Harry Reid on September 13, 2011. That legislation corresponds to the plan put forth by President Obama. We also released a cost estimate for S. 1660, the American Jobs Act of 2011, as introduced by Senator Reid on October 5, 2011. Senator Reid’s alternative bill, S. 1660, includes the same tax cuts and spending increases as S. 1549, but it offsets the budgetary impact of those provisions in a different way, as described below. Those estimates represent joint work by CBO and the staff of the Joint Committee on Taxation (JCT). CBO anticipates that enacting either bill could have a noticeable impact on economic growth and employment in the next few years. Following long-standing Congressional budget procedures, however, the estimates released today do not address the potential budgetary effects of such changes in the economic outlook.

Sen. McConnell: Lets Vote Now on Obama’s Jobs Package - Senate Minority Leader Mitch McConnell called Tuesday for an immediate vote on President Barack Obama‘s $447 billion jobs package in an effort to expose divisions among Democrats. “At least put this jobs bill up for a vote so the entire country knows exactly where every member of Congress stands,” the Kentucky Republican said on the Senate floor as he offered the measure as an amendment to a currency bill that enjoys support in the Senate but isn’t expected to advance in the House. “I think we ought to accommodate the president of the United States on a matter that he has been speaking about frequently over the last few weeks and give him his vote,” he said. A visibly frustrated Senate Majority Leader Harry Reid (D., Nev.) declined to allow a vote on the measure as an amendment to the currency bill now on the Senate floor. He said that he has already planned to hold a vote “this work period” — which ends in two weeks. “To tack this on to the China currency manipulation legislation is nothing more than a political stunt,” Mr. Reid said. He offered to hold a vote on the jobs bill without going through a series of routine procedural hurdles — an offer Mr. McConnell dismissed.

Reid uses ‘nuclear option’ to block GOP amendments - In a move that threatened to calcify an already dysfunctional Senate, Democrats on Thursday voted to change chamber precedent, in effect rewriting the rules to ban a work-around Republicans had used to force votes even when the Democrats in the majority didn’t want to hold them. Things got so heated that all sides agreed they needed a cooling-off period, and they suspended business for the rest of this week, promising to return Tuesday and try to repair what appeared to be lasting damage to the comity and relationships critical to the functioning of the upper chamber. The move was similar to the “nuclear option” Republicans had threatened to use to end filibusters of then-President George W. Bush’s judicial nominations six years ago, which was averted in a bipartisan deal. “We have changed the rules of the Senate,” said an angry Sen. Roger Wicker, Mississippi Republican, as he and fellow Republicans excoriated Democrats for using the backdoor method. The immediate effect was to end a tactic the Republicans had used to force votes on amendments, which returns things to where they stood in the middle of the last decade, before the procedure became common.

Nuclear Option?! What Really Happened On The Senate Floor, And Why It Matters - Did Harry Reid pull the nuclear option in the Senate Thursday night? That all depends what you mean by "nuclear option." Reid did succeed in changing the Senate's rules tonight, but in exceptionally narrow terms. And the only danger for Senate Democrats -- as with setting any new precedent -- is that an opportunistic future GOP majority will seize upon what happened Thursday as an excuse to make much bigger, broader changes to parliamentary procedure, perhaps even nixing the filibuster. All day -- and really all week -- Reid and Senate Minority Leader Mitch McConnell (R-KY) have been involved in a procedural jousting match. McConnell's goal has been to embarrass Democrats -- to force a vote of some kind on the jobs bill President Obama sent to Congress weeks ago, and watch it go down in flames. Reid's goal has been to thwart McConnell, and to call his own vote in the coming days on a modified version of Obama's bill with broader caucus support. That will help Democrats make the case that Republicans alone stand in the way of the American Jobs Act.

Calculating the cost of war - Today marks 10 years since the commencement of the U.S war against Afghanistan. To date, Congress has appropriated approximately $1.3 trillion dollars to prosecute that conflict along with the war in Iraq. This estimate is consistent across varied sources and is readily available from the Congressional Research Service, but tallying appropriated costs understates the true cost of our war efforts. In a nutshell, these figures do not include the debt service to finance the wars, which for the first time in U.S. history have been not been offset by tax increases. They also do not include war expenses hidden in the Pentagon’s base budget, or the costs of providing medical care and disability benefits for the thousands of veterans permanently injured by fighting abroad. A group of academics has added it all up and estimates that the cumulative costs of the wars are up to $4 trillion and rising. Staggering though that number may be, what appalls me is that their estimate, the most comprehensive publicly available, is ultimately an unofficial one. There has been no official accounting or independent audit of Iraq and Afghanistan war costs so that taxpayers know exactly what value they have received for their money.

Poll Shows Majority of Veterans Doubt Iraq and Afghanistan Wars Worth Fighting -- Yves Smith  - Pew Research conducted a large scale survey of veterans (divided into pre and post 9/11) and civilians on their attitudes toward the Iraq and Afghanistan wars. While there have been a number of news reports on the results, they are actually somewhat confusing because the findings in the data aren’t easily boiled down to snappy summaries. For instance, the headline of this post, which is similar to typical MSM headlines, is technically accurate but somewhat obscures the survey results. From Pew: Just half of all post-9/11 veterans say that, given the costs and benefits to the U.S., the war in Afghanistan has been worth fighting. A smaller share (44%) says the war in Iraq has been worth it. Only one-third (34%) say both wars have been worth fighting, and a nearly identical share (33%) say neither has been worth the costs. In other words, the support of both wars is less than robust among those who have seen combat (but many combatants are positive about one of them). And no wonder why. Again from Pew:  44% of post-9/11 veterans say their readjustment to civilian life was difficult.  About half (48%) of all post-9/11 veterans say they have experienced strains in family relations since leaving the military, and 47% say they have had frequent outbursts of anger. One-third (32%) say there have been times where they felt they didn’t care about anything. Nearly four-in-ten (37%) post-9/11 veterans say that, whether or not they were formally diagnosed, they believe they have suffered from post-traumatic stress (PTS). Among veterans who served prior to 9/11, just 16% say the same.

GOP Rep. Walter Jones: Bring troops home instead of cutting school lunch programs - Republican Congressman Walter Jones of North Carolina said Tuesday that all U.S. military forces should be pulled out of Afghanistan now that Osama bin Laden is dead. “Why this Congress continues to complain about budgets and cuts and deficits and debts — and our young men and women are walking the roads of Afghanistan getting their legs blown off and getting killed — we still sit here in Congress and don’t bring it up as an issue,” he said on the House floor. Jones added that Afghan President Hamid Karzai was a “corrupt leader,” and that the U.S. was spending billions of dollars every month in the country, yet Congress was eying cuts to school lunch programs for American children and cuts to benefits for American senior citizens.

Romney Promises to Boost Defense Spending, Deter Iran’s Nuclear Ambitions -  Republican presidential hopeful Mitt Romney today accused President Barack Obama of bowing to global adversaries and promised, if elected, to boost America’s military strength by expanding the Navy and missile defenses.  Romney, 64, presented his national security vision in a speech set against a backdrop of grey-uniformed cadets at The Citadel, a military academy in Charleston, South Carolina. South Carolina has a traditionally pro-military Republican base, and carrying the early primary state is important to winning the party’s nomination.  “America must lead the world, or someone else will,” Romney said, reprising the argument from his 2010 book, “No Apology,” that U.S. military strength and leadership are essential to deterring tyrants and keeping world peace. “In an American century, America has the strongest economy and the strongest military in the world.”  Romney pledged in his first 100 days, if elected, to boost naval shipbuilding, deploy Navy carriers to deter Iran’s suspected military ambitions, increase intelligence cooperation with Israel, review military and aid spending in Afghanistan and invest heavily in missile defense and cybersecurity.

"So, How'd That Trickle-Down Thing Work Out?" - As I mentioned earlier, I’ve been collecting stuff on kids and their economic well-being.  Here are a couple of figures that provide an intersection of a number of points I’ve tried to stress a lot in recent weeks. It’s just a simple plot of real median income for families with kids, 1989-2010, followed by two bars showing the trough to peak of income growth in the two recovery periods. The difference between how middle-income families fared in these two periods is really quite remarkable..., you might want to keep these pictures in your mind when listening to the economic agendas of those who would be President. That is, it’s hard to take seriously those who claim that “supply-side” tax cuts, as in the Bush years—large breaks tilted toward the top that are supposed to trickle down to the middle—will deliver for the middle class, compared to the more progressive tax regime of the Clinton years.  It’s even harder to imagine how “shuddering the EPA” will make the difference.

Obama's Free Trade Sleight of Hand - President Obama has pulled another rabbit out of his hat. Yesterday, as part of his sputtering "jobs plan," Obama submitted to Congress three pending Free Trade Agreements (FTAs) with South Korea, Colombia, and Panama that were originally negotiated by President Bush in 2007. In doing so, Obama is ignoring growing opposition from his Democratic base and voters across the political spectrum to resurrect policies Congress has refused to approve for over four years. And to get his message across, he's using every trick in the book. First is the bait-and-switch, with jobs as the lure. Just like Bush, Clinton, and the Bush before him, Obama cited trumped-up data from corporate lobbyists claiming these deals create jobs. This despite decades of evidence that NAFTA and other such deals have cost hundreds of thousands, if not millions of them. But hey, if these FTAs are in the "jobs plan," they must be about creating jobs, right? Nope. Here comes the switch. Beyond the talking points of these FTAs are a broad swath of new rights to multinational corporations that make the idea of corporate personhood seem quaint. The deals allow corporations to challenge public interest laws in international tribunals,with domestic courts powerless to stop them. Anything from minimum wages and clean water regulations to anti-teen smoking initiatives and recycling rules are vulnerable.

Measures Targeting Tax Fraud Tucked Into Trade Deals - The three trade agreements President Barack Obama sent to Congress this week would do more than just boost commerce, if passed by lawmakers. They’ll put a dent in tax fraud as well.Tucked into the trade deal with South Korea is a proposal that would require federal and state prison agencies to annually provide certain information on their inmates to reduce improper payments sent to prisoners. Another would increase the penalty for paid tax return preparers who don’t make all the necessary checks when applying for a refundable tax credit. By making sure that certain tax refunds aren’t going to people who aren’t eligible, the measures are expected to offset the cost of the trade deals. The trade agreements with Panama, Colombia and South Korea would otherwise formally add to the deficit, since the deals would lower tariffs on imports from the three countries, though lawmakers from both parties have said they expect the deals to result in thousands of new jobs. Tariffs on U.S. exports would also be lowered in the agreements.

Bipartisan Support For China Tariffs Ahead Of Vote : NPR: The debate on trade sanctions against China that has roiled the Senate all week comes to a head in a make-or-break vote Thursday. Earlier this week, 79 senators voted to take up the bill, which could slap punitive tariffs on imports from China, the largest U.S. trading partner. The legislation has strong backing from Democrats and Republicans alike; they say it could boost American jobs by punishing China's efforts to keep its currency undervalued and its exports underpriced. Opponents warn that should the bill become law, it could touch off a devastating trade war. Senate Majority Leader Harry Reid, D-Nev., predicted Wednesday that the measure's passage could help sustain more than 1.5 million American jobs by making U.S. goods more competitive with Chinese goods that would end up costing more. "The bill before the Senate would even the odds for American workers and manufacturers in the global marketplace by stopping unfair currency manipulation by the Chinese government,"

Obama Says China Manipulates Its Currency - Mr. Obama said China is at the very least intervening heavily to keep the yuan’s value low. “China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries,” Mr. Obama said at a wide-ranging,  midday press conference. “Currency manipulation is one example of it, or at least intervening in the currency markets in ways that have led their currency to be valued lower than the market would normally dictate,” he said. But Mr. Obama said he would leave it to the Treasury Department to determine official designations for China’s actions, possibly referring to how China is treated in a periodic currency report released by the agency. Treasury has so far declined to label China a “currency manipulator,” which would have legal trade implications. Mr. Obama acknowledged China has allowed the yuan to appreciate a bit. “We’ve seen some improvement, some slight appreciation over the last year, but it’s not enough,” he said. The yuan has risen against the U.S. dollar, but little against other currencies, and in some cases, it’s actually fallen in value.

The Problem With ‘No New Taxes’ - IN a debate in August, Republican presidential candidates1 were asked whether they would support a budget deal that bundled $10 of spending cuts for every $1 of tax increases. All said no. They rejected any deal that involved raising taxes.  Curiously, though, if this approach actually were to become government policy, it would have a surprising effect: it would surely lead to higher rather than lower taxes.  Consider the example more closely. Cutting $10 in spending for every $1 in tax increases would result in $9 in net tax reduction. That’s because lower spending today means lower taxes tomorrow, and limiting the future path of government spending does limit future taxes, as Milton Friedman, the late Nobel laureate and conservative icon, so clearly explained. Promising never to raise taxes, without reaching a deal on spending, really means a high and rising commitment to future taxes.  The problems with a no-new-taxes stance run deeper. Because it’s unlikely that spending cuts alone can balance the budget, politicians who espouse extreme antitax views often end up denying the scope of our long-run fiscal problems.

How to keep taxes low - Here is my latest NYT column, it is on why I am the true GOP low-tax candidate and how the others are trying to sell you a bill of goods.  I’ll cut to the conclusion at the end: The more cynical interpretation of the Republican candidates’ stance on taxes is that they are signaling loyalty to a cause, or simply marketing themselves to voters, rather than acting in good faith. It could be that candidates are more worried about having to publicly endorse tax increases than they are about the tax increases themselves. If that’s true, it is all the more reason to watch out for our pocketbooks; it means that the candidates are protecting themselves rather than the taxpayers. The final lesson is this: Many professed fiscal conservatives still find it necessary to pander to voter illusions that only a modicum of fiscal adjustment is needed. That’s an indication of how far we are from true fiscal conservatism, but also a sign of how much it is needed.

Senators Want to Add Tax Breaks to Jobs Bill - Arizona Republican Sen. John McCain and Kay Hagan, a Democrat from North Carolina, will seek to attach their proposal for a tax break on U.S. companies’ overseas profits to President Barack Obama’s jobs bill when it comes before the Senate. If Senate leaders don’t agree to include the repatriation-tax holiday in the jobs bill, Mr. McCain and Ms. Hagan will propose it as one of the first amendments, Mr. McCain said. Under the Hagan-McCain bill, U.S. companies would see their income taxed at an effective rate of 8.75% when bringing back profits held overseas, instead of the current top corporate-tax rate of 35%. The lower tax rate would apply to funds that exceed the average amount the company has repatriated over the last five  years. A company could lower that rate in increments to 5.25%, if it showed that it had expanded its payroll in 2012. To get to the lowest rate, companies would have to expand their payrolls by 10%, either by adding new workers or paying them more. Businesses would be able to use the break for a single tax year. The measure also includes a $75,000 penalty for job cuts, with that amount added to the company’s gross income for each full-time position eliminated.

Repatriation Holiday Lobbying--Money Speaks... Linda Beale - We've discussed repatriation before--the tax break being pushed by multinationals who want to bring some of their offshore profits home without paying taxes, as they did in the 2004 "one time only" repatriation break.  The reason they have so much money offshore is that they use gimmicks--such as transfers of intellectual property rights to offshore subsidiaries in low-tax jurisidctions.  These are pseudo transfers (to affiliates) of property they would NEVER really sell out of their companies to independent third parties.  Having the affiliate "own" the right means that the profits associated with the innovation carried out in the US go to the offshore company and aren't subject to US tax until they're officially treated as being transferred back to the parent.  "Selling" the IP to the affiliate is done solely to defer/avoid US taxes on those profits.  So most of those profits should have been treated as US profits all along--and subject to tax. A repatriation holiday would just mean more money in the pockets of the uberrich--the managers and some of the owners.   It won't create jobs--companies already have plenty of cash to invest in this country if they thought they had customers to make money from. But the companies probably have a pretty good chance of getting the break, even though it is a stupid waste that adds to the inequality problem and does nothing for creating jobs.

Heritage: Repatriation Tax Holiday Wouldn’t Create Jobs - Giving U.S. companies a tax break for bringing home profits held overseas likely won’t create more jobs or spur domestic investment, an influential conservative think tank will argue in a report to be released Tuesday. In a break from many Republican lawmakers and a host of major U.S. companies including Google Inc., Apple Inc., Pfizer Inc. and Microsoft Corp., the Heritage Foundation said in a new study that a repatriation tax holiday would not motivate companies to hire new workers. The report from the conservative think tank, often aligned with House Republicans, could slow recent momentum for a repatriation tax holiday, under which U.S. multinationals would bring home profits held abroad at a lower tax rate. Congress previously passed a repatriation tax break in 2004, billed as a one-time remedy, but lawmakers from both parties, eager to bring down the unemployment rate, have suggested repeating the effort.

Tax holiday would kill jobs, not create them - The corporate campaign for a repatriation tax holiday continues, with the claim that it would "create jobs" despite the fact that most of said corporations are hiding their American job numbers to help them hide the number of jobs they're moving overseas.  As if we needed more evidence that a repatriation tax holiday would be a very bad idea, the Institute for Policy Studies has a new report explaining just how bad an idea it would be. Some highlights:

  • U.S. taxpayers provided a huge subsidy to corporations that destroyed jobs. Following a tax holiday on repatriated foreign earnings in 2004, 58 corporations that benefitted from the holiday slashed a total of nearly 600,000 jobs. These 58 giant corporations accounted for nearly 70 percent of the total repatriated funds and collectively saved an estimated $64 billion from what they otherwise would have owed in taxes.[...]
  • One noteworthy example is General Electric, which cut its U.S. workforce by 32,000 between 2004 and 2010. General Electric repatriated $1.2 billion in 2004, but today has more than $94 billion stashed offshore, the highest amount of any U.S. company. If GE were to repatriate the entire sum at the proposed rate of 5.25 percent, it alone would save an estimated $28 billion from the proposed tax holiday.

A tax giveaway to corporations that followed it up by cutting jobs? Let's do that again! Sadly, this isn't just Republican logic—some Democrats, like Chuck Schumer, have indicated support of it despite the evidence it would be bad for the economy.

Stateless income - From the way Washington politicians in both parties tell it, you may well think that multinational companies favor low-tax jurisdictions when investing overseas. They don't. The multinationals prefer investing in high-tax jurisdictions because it so happens that is where they can earn the highest returns. Multinational companies then reduce or eliminate those seemingly high taxes by using simple, widely used devices to take profits in low-tax and no-tax jurisdictions. Such practices create "stateless income," in the words of Edward Kleinbard, whose new scholarship on corporate taxation deserves our attention. As defined by Kleinbard, stateless income means profits earned in a country other than where the firm is headquartered and subject to tax only in a third country which imposes little or no tax. Kleinbard shows why stateless income is the most serious threat to the corporate tax base even as Washington politicians blather on about less important corporate tax issues that their remarks show they do not understand.

Democrats Propose Another Surtax on Millionaires - According to the Wall Street Journal, Democrats are attempting to revive the president's jobs bill by proposing a 5% surtax on all income earned above $1 million--capital gains, dividends, whatever.  I'm not seeing how this revives the bill, since the GOP is probably going to filibuster it anyway.  But it's certainly an interesting proposal.  If we add in the Medicare surtaxes which start in 2013, then for a person earning a million dollars a year (we really need a better word for this than "millionaire", which already has a meaning), the marginal tax rate on long-term investment income for this group jumps to 24% in 2013, from 15% now, while the marginal tax rate on earned income will be (assuming the Bush tax cuts expire like they're supposed to) 48.5%.  This of course does not include any state income taxes, or property taxes.  The tax penalty on earned income seems likely to rise well over 50% for the typical high earner under Democratic plans.  Most left-leaning pundits and wonks do not seem to believe that millionaires pay attention to decreasing returns to effort.  I confess, I'm a bit more skeptical.

It’s a Lie That Working Poor Don’t Pay Taxes - In this age of afflicting the poor and comforting the rich — a favorite pastime of the tea partiers and the new Republican Party they’ve helped shape — there’s a popular myth making the rounds on the Internet that nearly half of working Americans don’t pay taxes, and isn’t that an outrage? But the truth is that every working American pays taxes. Before they even get a chance to cash their paychecks, 6.2 percent has been deducted for Social Security and another 1.45 percent for Medicare. (This year the Social Security payroll tax for everyone has been temporarily lowered to 4.2 percent as part of President Obama’s stimulus program.) In other words, they’re contributing just as big a percentage of their income to the two major federal budget programs as do the CEOs of major corporations. In fact, because people don’t pay Social Security taxes on income over $106,800, the poor actually pay a higher percentage than the wealthy.

Rich people are being ‘demonized’ for flaunting their wealth. Poor dears! - The latest group to claim victim status is the rich. Actually the super-rich, whose wealth ordinarily exempts them from pity. While they are not yet subjected to airport profiling (except for early boarding and club access), they sense that the public is turning subtly against them — otherwise how could President Obama propose raising their taxes? Admirers of the rich, led by pundits and politicians on the right — from Laura Ingraham to Larry Kudlow — have long derided the victimization claims of African Americans, women, gays and the unemployed, but now they’re raising their voices to defend the rich against what they see as an ugly tide of “demonization.” At a time when poverty is soaring, unemployment hovers grimly above 9 percent and growing numbers of Americans suffer from “food insecurity” — the official euphemism for hunger — this concern may seem a tad esoteric. At a time when executive compensation is reaching dizzying new levels and the gap between the rich and everyone else is growing as fast as the federal deficit, it may even seem a little perverse.

How Obama’s tax hikes would really impact the rich, in three easy charts - Ever since Obama redoubled his push to hike taxes on the rich, conservatives have been ridiculing Obama’s invocations of fairness, insisting that the rich are already paying a rising share of the overall tax burden, and accusing him of pushing for mass wealth redistribution in the quest for equality imposed from above. He has been labeled “a staunch believer in the redistributionist state,” a believer in “government-enforced equality,” and even a “socialist.” So let’s look at how Obama’s tax policies would really impact the wealthy if they were enacted — and how those effects would fit into the bigger picture of income disparity in America. I asked the nonpartisan Tax Policy Center to analyze how Obama’s policies would impact the after tax income of people at all levels, and to compare those results to people’s after tax income under previous tax regimes. The Tax Policy Center graciously agreed to my request, and looked at what taxes people would pay in 2013 under various tax regimes, when the Obama proposals would take effect. The Center drew up the answers in graph form (editorial conclusions are mine; the numbers are theirs). Here’s the first result:

Is Obama Tax Hiker in Chief? Not Exactly - Conservatives like to say that President Obama has been responsible for massive tax increases.  It is wonderful rhetoric that plays to the big tax image Democrats have been saddled with for decades—sometimes with good reason. But for most households, this claim is the economic equivalent of the birther movement: It is as credible to call Obama Tax Hiker in Chief, as the Heritage Foundation ’s J.D. Foster does, as to claim he was born in some country other than the United States. To tell a more accurate story, my Tax Policy Center colleagues looked at what would happen to both after-tax incomes and effective tax rates in 2013 if Obama could somehow get his tax agenda enacted (which he can’t, but that’s another story). TPC found that average after-tax incomes would be higher (and effective tax rates lower) in 2013 under an Obama tax code than they would be if Clinton-era rules applied. And average taxes would be about 2 percent higher than if President Bush’s 2001 tax cuts were still in effect. But only because the very highest earners would pay lots more. 

My testimony to Senate Finance Committee on Housing and Tax Reform, by Richard Green: I testified today. I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction.

Nurses’ prescription for healing our economy - If you want to know just how bad things are for those hit hardest by the Great Recession, ask a nurse: They see more young men suffering heart attacks, more anxiety in children, and more ulcers and stomach illnesses in people of all ages. Given this widespread hardship and pain, it makes sense that nurses who are on the frontlines in our communities every day are leading an effort to hold Wall Street accountable for causing these economic troubles while raising hundreds of billions of dollars for vital human needs.  National Nurses United (NNU), the nation’s largest union and professional association of nurses, representing 170,000 RNs, is out in the streets, in congressional offices and just last week in Liberty Park with the Occupy Wall Street protesters pushing a good idea that has been around for decades and whose time has come: a financial-transactions tax . This is a small levy on trades of stocks, derivatives and currencies meant to curb short-term speculation while raising massive revenue for urgent needs.

Should We Tax Financial Transactions? - The idea of a sort of extra-broad Tobin Tax on all financial transactions has been quite popular with the left half of the punditocracy for some time now.  Myself, I don't really see the charms.  Tiny taxes on high-volume transactions raise a lot of money, but they also cost money to record, collect, and audit, which is why few jurisdictions have 0.25% sales taxes.  And I'm not clear on what problem taxing financial transactions is supposed to solve.  It's not as if our woes were caused by legions of high-frequency traders wrecking the markets with their tiny, tiny spreads. The charm seems to be entirely that it might raise some money, and it pisses off bankers.    Of course, we have to raise money somewhere, and how better than by pissing off bankers?  It seems like this might be that most magical of policy possibilities--the tax with no downside. Ah, but is that really so?  Ken Rogoff, who spent quite a lot of time thinking about these issues as chief economist of the IMF, points out that financial transaction taxes aren't actually pain free:

Time for a Tobin tax - I just want to toss up the wholly unoriginal idea of a tax on financial transactions, originally proposed by James Tobin (he focused on international transactions, but the distinction is no longer meaningul). I’ve seen a sign advocating this on one of the videos of the protest, but I think it deserves more attention, for a bunch of reasons

  • * It’s directed squarely at Wall Street
  • * It’s global in its orientation
  • * It doesn’t require complicated structural change, as would a return of Glass-Steagall
  • * There’s an existing global movement supporting it
  • * It’s on the elite policy table right now, with support from the EU
  • * It would potentially raise substantial revenue, while greatly reducing the volume of short-term financial transactions

Class War Games - The term “class warfare,” banished for many years to the far left of our political discourse, has gradually moved toward its center. President Obama, pushing for higher taxes on millionaires, now seems happy to describe himself as a warrior for the middle class. In many games, as well as wars, teams compete for prizes. Competition can include efforts to influence the rules of the game, or to simply snatch the prize and run. Even small changes in our vocabulary can change perceptions. Ironically, Republican efforts to denounce tax increases for millionaires helped bring the term “class warfare” back into vogue; Warren Buffett, one of the country’s most successful capitalists, has wryly warned that his class is winning (even as he supports proposals to change the tax code). Many Americans today aren’t really sure what class they belong to, but they are increasingly interested in figuring this out. The class war game is on.

How Unequal We Are: The Top 5 Facts You Should Know About The Wealthiest One Percent Of Americans - As the ongoing occupation of Wall Street by hundreds of protesters enters its third week — and as protests spread to other cities such as1 Boston2 and Los Angeles3 — demonstrators have endorsed a new slogan: “We are the 99 percent4.” This slogan refers an economic struggle between 99 percent of Americans and the richest one percent of Americans, who are increasingly accumulating5 a greater share of the national wealth to the detriment of the middle class. It may shock you exactly how wealthy this top 1 percent of Americans is. ThinkProgress has assembled five facts about this class of super-rich Americans:

    • 1. The Top 1 Percent Of Americans Owns 40 Percent Of The Nation’s Wealth: How much does the bottom 80 percent own? Only 7 percent:
    • 2. The Top 1 Percent Of Americans Take Home 24 Percent Of National Income: In 1976 they took home just 9 percent9 — meaning their share of the national income pool has nearly tripled in roughly three decades.
    • 3. The Top 1 Percent Of Americans Own Half Of The Country’s Stocks, Bonds, And Mutual Funds: 
    • 4. The Top 1 Percent Of Americans Have Only 5 Percent Of The Nation’s Personal Debt:
    • 5. The Top 1 Percent Are Taking In More Of The Nation’s Income Than At Any Other Time Since The 1920s:

Is Obama anti-business? - Mort Zuckerman repeated a charge in the Financial Times this week that President Barack Obama is “anti-business” and that is why the U.S. recovery remains anemic and corporate America isn't hiring. Here's a bit of what the editor of U.S. News & World Report had to say: The fear is that a double-dip, or worse, is now upon us. Those who might help us escape are now being held back by the anti-business policies of President Barack Obama. Huh? I've heard this claim again and again and again, and have yet to see anyone provide any real evidence to support it. I'd argue that Obama has been a very pro-business president. And I think it is about time U.S. corporate leaders stop blaming the White House for the poor economy and start hiring hard-working Americans. Here's what I mean: Why exactly does Zuckerman believe Obama is “anti-business”? Hard to say, since he doesn't provide meaningful examples to back up his criticism. He talks of a “yawning credibility gap” between the administration and business and then resorts to vague claims that rhetorical attacks on the rich and Obama-created bureaucracy are stifling entrepreneurship:

J.P. Morgan Chase "donates" $4.6 Million to NYPD - #OccupyWallStreet - JPMorgan Chase recently donated an unprecedented $4.6 million to the New York City Police Foundation. The gift was the largest in the history of the foundation and will enable the New York City Police Department to strengthen security in the Big Apple. The money will pay for 1,000 new patrol car laptops, as well as security monitoring software in the NYPD's main data center. New York City Police Commissioner Raymond Kelly sent CEO and Chairman Jamie Dimon a note expressing "profound gratitude" for the company's donation. "These officers put their lives on the line every day to keep us safe," Dimon said. "We're incredibly proud to help them build this program and let them know how much we value their hard work."

Is JP Morgan Getting a Good Return on $4.6 Million “Gift” to NYC Police? (Like Special Protection from OccupyWallStreet?) -- Yves Smith - No matter how you look at this development, it does not smell right. From JP Morgan’s website, hat tip Lisa Epstein: JPMorgan Chase recently donated an unprecedented $4.6 million to the New York City Police Foundation. The gift was the largest in the history of the foundation and will enable the New York City Police Department to strengthen security in the Big Apple. The money will pay for 1,000 new patrol car laptops, as well as security monitoring software in the NYPD’s main data center. Perhaps I remember too much of the scruffy and not exactly safe New York City of the 1980s, where getting your wallet pinched was a pretty regular occurrence. My perception has been that police-related charities have relied overmuch on the never-stated notion that if you didn’t donate, you might not get the speediest response if you needed help. As a mere apartment-dweller, I can’t imagine that anyone could scan incoming 911 calls against a priority list. But the flip side is if I owned a retail store and thought the beat police would keep an extra eye on it if I gave to a police charity, it would seem like an awfully cheap form of insurance. But what, pray tell, is this about? The JPM money is going directly from the foundation to the NYPD proper, not to, say, cops injured in the course of duty or police widows and orphans.

On the Occupy Wall Street ‘Media Blackout’ - Among those part of and concerned with the Occupy Wall Street movement, it’s very common to hear complaints about the lack of mainstream media coverage. There’s even a sign at the occupation’s media center that says, “Welcome to the media blackout.” To a large extent, the blackout is real. The New York Times and other local papers didn’t give the movement headlines until almost a week in, with the exception of a cover story in Metro that first Wednesday. And, while several local TV stations were at Liberty Plaza during the first week, their reports weren’t being picked up by national affiliates. Only recently has this begun to change. Online, there have been accusations of outright censorship. Yahoo has admitted to “not intentional” blocking of emails with links to, blaming their spam filter. (This excuse is not widely believed, but plausible—I’ve seen the site trigger non-Yahoo spam filters as well.) Twitter has similarly blocked #occupywallstreet from being listed as a trending topic. (This may be because it keeps being throttled by Anonymous bots—or, more conspiratorially, because a considerable stake in the company is owned by JPMorgan Chase, which also just donated $4.5 million to the NYPD.)

CHINA: It's Outrageous That The US Media Is Censoring The Wall Street Protests: Well, after decades of the US media tut-tutting China on their airbrushed media and censorship policies, it's "back at ya." An editor at China Daily rails that the US media "blackout" of the Wall Street protests is "shameful:"

Media, Internet and Government Censoring Wall Street Protest? - Washington's Blog - The mainstream media is refusing to cover the Wall Street protests. Google, Yahoo and Twitter are both alleged to be censoring the protests. As an op-ed in China Daily notes, the “US media blackout of protest is shameful”. While China is hardly a bastion for free speech or a free media, the pot is in this case correct in calling the kettle black. Government Censorship? Governments have ordered YouTube to take down protest videos. America has engaged in massive censorship in recent years, and the elites have openly pined to crack down even more … and to emulate China. For example, Senator Joe Lieberman lamented: Right now, China can disconnect parts of its Internet in times of war. We need to be able to do that too. Is the U.S. government censoring coverage of the Wall Street protests? Only time will tell.

Who are the 99 percent? - It’s not the arrests that convinced me that “Occupy Wall Street” was worth covering seriously. Nor was it their press strategy, which largely consisted of tweeting journalists to cover a small protest that couldn’t say what, exactly, it hoped to achieve. It was a Tumblr called, “We Are The 99 Percent,” and all it’s doing is posting grainy pictures of people holding handwritten signs telling their stories, one after the other. “I am 20K in debt and am paying out of pocket for my current tuition while I start paying back loans with two part time jobs.”  These are not rants against the system. They’re not anarchist manifestos. They’re not calls for a revolution. They’re small stories of people who played by the rules, did what they were told, and now have nothing to show for it. Or, worse, they have tens of thousands in debt to show for it. “I am a 28 year old female with debt that had to give up her apartment + pet because I have no money and I owe over $30,000.”  College debt shows up a lot in these stories, actually. It’s more insistently present than housing debt, or even unemployment. That might speak to the fact that the protests tilt towards the young. But it also speaks, I think, to the fact that college debt represents a special sort of betrayal. We told you that the way to get ahead in America was to get educated. You did it. And now you find yourself in the same place, but buried under debt. You were lied to.

The Economics of Occupy Wall Street - It is not easy to say just what Occupy Wall Street wants; there is no concise list of specific demands. But the gist of the quickly snowballing movement is clear. Wall Street has not accepted responsibility for its role in the financial crisis and ensuing recession. It has done more harm than good for average citizens and businesses. On top of all that, average Americans are “getting nothing while the other 1 percent is getting everything. We are the 99 percent.”  One thing is inarguably true: The 99 percent don’t have 99 percent of anything, money-wise, in the United States. But just how bad is the skew toward the top 1 percent? Let’s start with income—the money you make from things like wages, salary, interest payments, and collected rent. According to an analysis (XLS) of Internal Revenue Service data by the economists Thomas Piketty and Emmanuel Saez, the 99 percent account for 79 percent of income in 2008, with the top 1 percent taking the other 21 percent.  Moreover, Piketty and Saez show that in the most recent business cycle, from 2002 until 2007, about two-thirds of all income gains went to the top 1 percent of households. The top 1 percent saw their incomes increase more than 10 percent per year, adjusted for inflation. The 99 percent saw their incomes increase a measly 1.3 percent per year.

Labor Movement Rolls Into Wall Street Occupation - It may be too early to draw parallels between the Occupy Wall Street protests at Zuccotti Park (aka Liberty Plaza) and their antecedents in Tahrir Square and Madison. But the movements suggest a general trajectory of grassroots organizing: a spark of protest led by younger activists, followed by the support of labor organizations, bringing up the rear and then moving to the fore. By Wednesday, the Village Voice reported, the historically militant Transport Workers Union had voted to back, and provide food and services to, the Occupy Wall Street movement. In a video recorded during an evening protest, TWU Local 100 member Christine Williams declared, "The people have finally woke up. And we're here and we're staying and we're not going anywhere." TWU spokesperson Jim Gannon told the Voice: " A motion was brought up to endorse the protests' goals; I don't know why it took us so long to do it." Better late than never, the union says it now plans to amass on the afternoon of October 5 and march to Zuccotti Park.

Unions, Thousands Join Occupy Wall Street’s Fight - Thousands of protesters gathered in Foley Square today as part of Occupy Wall Street’s largest event to date. Unions from the Transport Workers Union, SEIU 1199, and the United Federation of Teachers all joined the protest to voice their discontent at what they call a bailout of Wall Street, while working-class people are left to suffer under a system of austerity. Amin Al-Sahir, a member of the nurses union, said he came to the protest to stand in solidarity with the Liberty Plaza activists. Al-Sahir is having difficulty finding steady work in New York City, but he still tries to protest in between job-hunting. Al-Sahir mentions the negative consequences of the city’s budget cuts, including the closing of the 400-bed St. Vincent Catholic Medical Centers, which sealed its doors back in April. “I wanted to be a nurse to contribute to my community, so I could pay my mortgage, pay my bills, raise my kids, but also help people and help my community,” he explains before addressing the media’s negative depiction of some of the protesters as pot-smoking hippies engaging in an endless drum circle.

A new Lost Decade is leading to revolution - — Memo to the Super Rich, your high-paid lobbyists and your no-compromise political puppets whose sole mission is destroying the presidency: Yes, you are succeeding. You’re also killing the economy. Thanks to your self-destructive ideology, America is now in the second of back-to-back Lost Decades. A new one on the heels of the 2000-2010 Lost Decade where Wall Street lost more than 20% inflation-adjusted. Get it? You guys launched America’s second Lost Decade of 21st century. Yes, two consecutive job-killing Lost Decades. The first created by Wall Street’s obsessive greed. The new one triggered by the widening wealth gap that’s feeding endless partisan political wars powered by Super Rich conservatives hell-bent on re-establishing the same free-market, trickle-down Reaganomics policies that have been sabotaging America for the last generation. Unfortunately, the new one gets worse: Why? The coming Lost Decade is a backdrop for a wave of class warfare destined to trigger a historic revolution in American politics, bigger than the ‘29 Crash and Great Depression. Initially inspired by the Arab Spring, Occupy Wall Street is a virus spreading rapidly as Occupy Everything, a reform movement that will overshadow the GOP/Tea Party as the voice of the people, leading to an Occupy America. Read more about the origins of Occupy Wall Street.

Occupy Wall Street Ends Capitalism's Alibi - This protest pinpoints how dysfunctional our economic system is: we must refashion it for human needs, not corporate aims Occupy Wall Street has already weathered the usual early storms. The kept media ignored the protest, but that failed to end it. The partisans of inequality mocked it, but that failed to end it. The police servants of the status quo over-reacted and that failed to end it – indeed, it fueled the fire. And millions looking on said, "Wow!" And now, ever more people are organizing local, parallel demonstrations – from Boston to San Francisco and many places between. Let me urge the occupiers to ignore the usual carping that besets powerful social movements in their earliest phases. Yes, you could be better organized, your demands more focused, your priorities clearer. All true, but in this moment, mostly irrelevant. Here is the key: if we want a mass and deep-rooted social movement of the left to re-emerge and transform the United States, we must welcome the many different streams, needs, desires, goals, energies and enthusiasms that inspire and sustain social movements. Now is the time to invite, welcome and gather them, in all their profusion and confusion.

What the Wall Street Protesters Want: An Economic Commentary on the “Contract for the American Dream.” - Nearly every news story I read about the occupation of Wall Street begins by saying that the protesters are vague about what they want. Even Paul Krugman, who is supportive of the demonstrations, complains in today’s New York TImes about a lack of specific policy demands. Maybe that is a valid critique of individual protestors, but if you look instead at what some of their sponsoring organizations say the protest is about, you get a different picture—one that is not only more specific but often makes surprisingly good economic sense. The best short summary of protesters’ demands that I have seen is the Contract for the American Dream, or CFAD as I will call it for short. It is a one-page, ten-point program that claims to be the result of a grass roots, bottom-up drafting process. It is hardly an obscure document—it carries hundreds of thousands of individual signatures plus the endorsements of a whole laundry-list of progressive organizations. I suggest clicking on the link right now and reading it. That will save the need for long quotes. Done reading? OK, here is my point-by-point economic commentary.

Call and response with a Nobel laureate - Protests aren’t usually known for their great A/V set-ups, and ‘Occupy Wall Street’ is no exception. So they amplify messages using a cruder technology: repetition. In this video, Nobel-prize winning economist Jospeh Stiglitz and economic historian Jeff Madrick stopped by for a chat. The only problem? No one can hear them. The solution is, for the professors, a little unorthodox, but it looks like they’re having fun:

NHK: Nobel laureate joins Wall Street protest - Economist Joseph Steglitz  has joined the Wall Street protests! - Demonstrators continue to besiege New York's financial district to protest against high unemployment and the government's economic policies. A Nobel laureate has joined the rally. About 1,000 people gathered in a park near Manhattan's financial district on Sunday, despite the arrests of 700 demonstrators on the Brooklyn Bridge the previous day. The protestors, mostly young people, carried placards bearing their slogan "Occupy Wall Street" amid tight police security. Among the protesters was Columbia University Professor Joseph Stiglitz, who received the Nobel Prize in economics in 2001. He criticized the US government for its failure to keep financial markets in check during the global financial crisis of 2008. Stiglitz said the protests were bound to happen and long overdue, with 25 million people without regular jobs. He expressed support for the protests, noting that they may lead to greater movement toward change.

Unsavvy People - Krugman -  Nieman Watchdog has a very good piece by John Hanrahan about press coverage of the Occupy Wall Street demonstrations. Coverage was initially dismissive and minimal — and mea culpa, I wasn’t paying attention myself. But it’s becoming clear that there’s something important happening: finally, after three years in which Very Serious People refused to hold the financial industry accountable, there’s a real grass-roots uprising against the Masters of the Universe. There will, of course, be the usual attempts to dismiss the whole thing based on trivialities. Look at the oddly dressed people acting out! So? Is it better when exquisitely tailored bankers whose gambles brought the world economy to its knees — and who were bailed out by taxpayers — whine that President Obama is saying slightly mean things about them? Or, why don’t they try to work within the system? Well, how’s that been going for those who did indeed try?  Finally, why not defer to people who know what needs to be done? Regular readers know the answer: the VSPs have been consistently, awesomely wrong, both before the financial crisis and after. Nothing in the recent record of policy suggests that the wise men of finance deserve any credence at all.

Anti-Wall Street Protests Spread From New York - Demonstrators from New York City to San Francisco took to the streets to protest what they call a growing wealth disparity between large U.S. corporations and average citizens in the wake of the financial crisis. Picketers marched yesterday as part of the Occupy Wall Street movement that began three weeks ago in Lower Manhattan and has spread across the U.S. The New York crowd was estimated at 10,000, according to Patrick Bruner, a spokesman for the effort. “There’s power in numbers, and we outnumber the people we’re trying to hold accountable,” said Henry Liedtka, a 27- year-old pharmacy worker from New Jersey who said he’s protested since Oct. 2. “We should be bailing out the American public -- not corporations -- by raising the minimum wage, bringing jobs back from overseas and improving labor conditions.”

Why #OccupyWallStreet Doesn’t Support Obama: His “Nothing to See Here” Stance on Bank Looting - Yves Smith  - Despite the efforts of some liberal pundits and organizers (and by extension, the Democratic party hackocracy) to lay claim to OccupyWallStreet, the nascent movement is having none of it. Participants are critical of the President’s bank-coddling ways and Obama gave a remarkably bald-face confirmation of their dim views. As Dave Dayen recounts, Obama was cornered into explaining why his Administration has been soft of bank malfeasance. His defense amounted to “They’re savvy businessmen”: “Banks are in the business of making money, and they find loopholes.” Is breaking IRS rules a “loophole”? How about making repeated false certifications in SEC filings? Or as Dayen points out, fabricating documents? Or making wrongful foreclosures, aka stealing houses?  The Administration’s strategy for maintaining this posture is by being anti-investigation and anti-transparency. As we’ve discussed, the stress tests were a sham. The foreclosure task force didn’t even try to look serious, it was a mere 8 week investigation and of 2800 cases chosen for review (in no scientific manner), only 100 were foreclosures. The US Trustee’s office found a level of servicing errors more than 10 times that asserted by banks and happily parroted by Federal banking regulators. We expect readers could add to this list just as readily as we can.  There are plenty of grounds for legal action. Contrary to the Obama/Geithner position, this is a target rich environment. And some of the violations were persistent and deliberate enough that they might well raise to the level of being criminal. Here is a mere illustrative tally:

Confronting the Malefactors, by Paul Krugman - There’s something happening here. What it is ain’t exactly clear, but we may, at long last, be seeing the rise of a popular movement that, unlike the Tea Party, is angry at the right people. ... Occupy Wall Street is starting to look like an important event that might even eventually be seen as a turning point. What can we say about the protests? First things first: The protesters’ indictment of Wall Street as a destructive force, economically and politically, is completely right. A weary cynicism, a belief that justice will never get served, has taken over much of our political debate. In the process, it has been easy to forget just how outrageous the story of our economic woes really is. So, in case you’ve forgotten, it was a play in three acts. In the first act, bankers took advantage of deregulation to run wild (and pay themselves princely sums), inflating huge bubbles through reckless lending. In the second act, the bubbles burst — but bankers were bailed out by taxpayers, with remarkably few strings attached, even as ordinary workers continued to suffer the consequences of the bankers’ sins. And, in the third act, bankers showed their gratitude by turning on the people who had saved them, throwing their support  behind politicians who promised to keep their taxes low and dismantle the mild regulations erected in the aftermath of the crisis.

Elitist Me? - Krugman - Aarrgghh! Yves Smith totally misreads what I was saying in today’s column, which presumably means that I didn’t write it very well. When I said that it was the job of policy intellectuals to fill in the details for the Occupy Wall Street protestors, I didn’t mean “don’t worry your pretty little heads about it, we’ll work it out”. I meant job literally as in responsibility: people like Joe Stiglitz and me have an obligation to work on this, helping to translate what justifiably angry citizens are saying into more fleshed-out proposals. That doesn’t mean taking the public out of the loop; it means putting whatever expertise you have to work on the public’s behalf. I mean sure, I’m an elitist in the sense that I believe that economics is a technical subject that benefits from study and hard thinking. But that’s very different from being anti-democratic.

On #OccupyWallStreet and the Danger of Elite Capture -- Yves Smith - We’re now in the process of clearing up an interesting blogoshere miscommunication. Paul Krugman made a gracious reply to a remark in Links on a post of his on OccupyWallStreet that I was very keen about (Krugman gets it) and a related New York Times op ed that I liked save one paragraph which rubbed me the wrong way:  A better critique of the protests is the absence of specific policy demands. It would probably be helpful if protesters could agree on at least a few main policy changes they would like to see enacted. But we shouldn’t make too much of the lack of specifics. It’s clear what kinds of things the Occupy Wall Street demonstrators want, and it’s really the job of policy intellectuals and politicians to fill in the details. I took this as “leave this to the elites” and added,” Aargh. What about “The elites in America are corrupt” don’t you understand?” I appreciate the difficulties of working in op-ed space and style limits (Krugman is a master of this format) and Krugman said that my reading wasn’t what he meant to convey or stood forWhen I said that it was the job of policy intellectuals to fill in the details for the Occupy Wall Street protestors, I didn’t mean “don’t worry your pretty little heads about it, we’ll work it out”. I meant job literally as in responsibility: people like Joe Stiglitz and me have an obligation to work on this, helping to translate what justifiably angry citizens are saying into more fleshed-out proposals. That doesn’t mean taking the public out of the loop; it means putting whatever expertise you have to work on the public’s behalf.

One Simple Demand: Abolish Debt. Abolish Wall Street. - In the comment thread for my last post we discussed the possibility of some educational pamphleteering at the occupations. One idea was a few bullet points summing up the facts about debt, along with a recommendation to read David Graeber’s Debt: The First 5000 Years.  So what might those points be? Here’s a few thoughts:

  • *Are you in debt?
  • *Are you forced into debt in order to live like a human being? It hasn’t always been this way.
  • *Humanity has flourished without formalized debt for most of its history.
  • *Formalized debt has always gone hand in hand with scarcity, tyranny, slavery, and war.
  • *Formalized debt is the mode of control of despotic structures like big government and big corporations.
  • *These structures, too, have only recently come into existence, and only along with tyranny, slavery, and war. Humanity has always done better without them.
  • *Cash money is the vehicle of formalized debt.
  • *Wall Street exists only to preside over this unnecessary and destructive debt machine. It serves no legitimate or constructive purpose.
  • *History proves that we can undertake all human endeavors more fairly and efficiently without Wall Street and its debt burdens. Humanity is cooperation.
  • *We must redeem our human economy by building alternatives to cash and debt.
  • *We shall flourish again only with the abolition of Wall Street, the domination of finance, and the tyranny of money debt.

Occupy Wall Street, "Fringe Banking" and Public Options - I happened to walk by Zuccoti Park in Manhattan yesterday, where the Occupy Wall Street protest is centered. I picked up a thoughtful and intelligent, for example a flier about public banking and the Bank of North Dakota (the only state-owned bank in the United States).  Hmmm.  That sounds like a public option for banking. If the financial system is broken, maybe it needs some better competition. It's not such a crazy idea. We actually already do that quite a bit in the mortgage market-FHA, VA, RHS, Ginnie Mae, and historically the FHLBs, HOLC and Fannie Mae (Susan Wachter and I have a forthcoming book chapter on this, to be posted to SSRN soon). We've even done it in straight banking--most people forget that we used to have a U.S. Post Office Bank. We have an FDIC that used to compete with private bank insurance funds. And we have federal (public) currency that used to compete with and has now supplanted private bank notes.  My point here is not to endorse public options or not, but merely to note that historically they were a response to failed private markets and should be part of the policy discussion.

Michael Hudson on #OccupyWallStreet and the Need to Treat Banks as Utilities - On the Real News Network, Michael Hudson discusses some possible ideas for reforming finance to deal with the concerns raised by the OccupyWallStreet movement. I’ve noticed both here and on some news stories I heard in passing on MSNBC on Friday that the OccupyWallStreet movement has already succeeded in expanding the space of what is now being discussed as remedies.

Details Emerge on Draft of Volcker Rule - Federal regulators are planning to vote next week on plans to prohibit banks from making certain lucrative, yet risky trades. As the Federal Deposit Insurance Corporation prepares on Tuesday to vote on the so-called Volcker Rule, some clues have emerged on the details of the proposal. The American Banker on Wednesday published a document on its Web site that appeared to be the latest version of the proposal. The document spelled out the scope of the rule’s ban on proprietary trading and its broad exemptions for more routine business practices that can be mistaken for riskier trades. But the 205-page draft, dated Sept. 30 and labeled confidential, left many details to be developed in coming months. Indeed, the draft posed dozens of questions for the public and the financial industry to address, leaving the window open for significant changes. People close to the rule-making cautioned late on Wednesday that regulators could even make adjustments to the rule over the next week, before the F.D.I.C.’s scheduled vote on Tuesday. And three other federal agencies must also vote on the proposal for it to advance into a public comment period that would end in December.

It’s Too Hard to Know Who Is Too Big to Fail - Two years ago if you had asked whether the commercial lender CIT Group Inc. (CIT) was too big to fail, the answer would have been an emphatic no. The Treasury Department had rejected its latest bailout plea. In November 2009, after 101 years in business, CIT filed for bankruptcy.  Ask that same question about CIT today, though, and the best answer would be: Who knows?  Last month U.S. banking regulators approved new rules that would treat all bank-holding companies with more than $50 billion of assets as systemically important financial institutions, based on average total assets for their previous four quarters. For CIT, which exited bankruptcy in December 2009, that figure was $50.7 billion as of June 30.  No one is sure what exactly this new designation means -- except that, on paper at least, it’s more likely now than it was two years ago that regulators would intervene to stabilize a collapsing CIT. Somehow, in the government’s eyes, CIT is more important to the financial system today than it was when it blew up, even though it has about $20 billion less in assets.

Tighter rules on capital: Bankers versus Basel - Two weeks ago , the simmering battle over how to make the financial system safer turned nasty. On one side: Jamie Dimon, chief executive of JPMorgan Chase, one of the world’s largest banks and one of the few institutions to emerge from the financial crisis relatively unscathed. On the other: the silver-tongued Mark Carney, formerly of Goldman Sachs, now governor of the Bank of Canada. He too was speaking from a position of strength because the banks he supervised survived the turmoil of 2008 in good shape.  According to some of the 30 or so people gathered in a meeting room at the archives, Mr Dimon lambasted Mr Carney – complaining vehemently that the Basel committee’s plan to subject his own and other large institutions to even higher capital requirements than those faced by smaller peers was ill-thought-out and economically and philosophically wrong. He also insisted that some provisions discriminated against US banks. European bankers were left wide-eyed by the outburst but many of them have been launching their own, usually quieter, attacks on Basel III from the other side of the Atlantic. They argue that parts of the liquidity and capital rules unfairly penalise their universal banking model, which combines both insurance and banking in a single group and is found mainly in France and the Benelux countries.

Ghosts Could Be Lurking in Banking Machines - When it comes to banks, what you don't know can definitely hurt. That's a hard-learned crisis lesson and helps explain, in part, why big U.S. banks have taken such a pounding of late. As Europe wobbles, investors in firms like J.P. Morgan Chase, Citigroup, Goldman Sachs, Bank of America and Morgan Stanley, are again trying desperately to figure out their euro-zone risks. A big problem for investors is varied, sparse or confusing disclosure about derivatives exposures—even after the financial crisis showed that the inter-connectedness of firms is often as big a threat as their size. Indeed, in just the U.S., the five big banks account for 96% of $332 trillion in face value, or notional, derivatives held by leading firms. Granted, executives offered some detail on European exposures when reporting second-quarter results, saying they were manageable. But investors were often given net, not gross, exposures, and can't tell how exposed the banks' massive derivatives portfolios may be to big European banks through counterparty risk.  Citigroup CEO Vikram Pandit noted derivatives "remain too opaque." He added, "Lack of transparency inhibits market discipline, obscures risk and leaves nasty surprises buried in the system."

Can Trichet Destroy America? -Obviously the European Central Bank (ECB) has nearly unlimited power to inflict suffering on the people of the Eurozone. And, from the looks of it they it intend to use it. Power unused is useless power, and all that.“Have we delivered price stability? Yes, we have delivered price stability,” he said. “Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds.”  However, lets suppose that the ECB is able to make good on its promise to stabilize the European banking system while simultaneously throwing as many Europeans on to the breadline as possible delivering stable prices over the next 10 years. What does that mean for America?  I’ll be the first to admit that I need to think harder and more carefully about international capital flows but I have to say at this point that it looks like a net positive for the US economy. As sad as that might be, I think its true.Here is my reasoning.

Are the Big Banks Insolvent? -- Let’s look at the reasons to doubt that the big six are solvent.

  • 1.The economy is tanking. Real estate prices are not recovering, indeed, they continue to fall on trend. No jobs are being created. Defaults and delinquencies are not improving.
  • 2.Not only are the financial institutions NOT doing any of the traditional commercial banking business—lending—they aren’t doing much of the investment banking business either
  • 3.Europe is toast. US bank exposure to Euroland is huge. But US banks are doing just fine, thank you? Hello?
  • 4.Commodities are tanking. Equities markets are at best horizontal. Other than making profits by cooking their books, these were areas open to banks to make profits.
  • 5.Hedge funds have not done particularly well over the past couple of years. And yet banks have?
  • 6.And, as mentioned above, they’ve got all these lawsuits—which requires hiring lawyers, paying fees and fines, and employing Burger King kids to falsify documents. The document shredding services alone must be crimping net returns.

Robert Reich (Follow the Money: Behind Europe's Debt Crisis Lurks Another Giant Bailout of Wall Street): Today Ben Bernanke added his voice to those who are worried about Europe’s debt crisis. But why exactly should America be so concerned? Yes, we export to Europe – but those exports aren’t going to dry up. And in any event, they’re tiny compared to the size of the U.S. economy. If you want the real reason, follow the money. A Greek (or Irish or Spanish or Italian or Portugese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008. Financial chaos. Investors are already getting the scent. Stocks slumped to 13-month low on Monday as investors dumped Wall Street bank shares. The Street has lent only about $7 billion to Greece, as of the end of last year, according to the Bank for International Settlements. That’s no big deal. But a default by Greece or any other of Europe’s debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more. That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle. The Street’s total exposure to the euro zone totals about $2.7 trillion. Its exposure to to France and Germany accounts for nearly half the total

Finra Weakened by Appellate Court Ruling - Finra (the successor to the NASD plus the enforcement arm of the NYSE) suffered a major blow in a ruling on what should have been a routine matter: an enforcement action against a penny stock operator, Fiero Brothers. In 2000, the NASD charged Fiero with breaking federal fraud laws. Not only did the then NASD expel Fiero and its owner John Fiero from the organization, but it also fined it $1 million. John Fiero refused to pay, and Finra went to court to collect the money.  The ruling is astonishing and guts one of Finra’s disciplinary tools. From the New York Times: “The principal issue is whether the Financial Industry Regulatory Authority Inc. has the authority to bring court actions to collect disciplinary fines,” Judge Winter wrote. “We hold that it does not and reverse.”… "The decision neuters Finra,” “It has been trying to show that it has teeth and could hold its members more accountable — now, those teeth have been surgically removed.”The New York Times notes that Finra in fact seldom went as far as suing to collect unpaid fines, but also notes that industry incumbent assumed Finra could collect, which presumably would have considerable deterrent value:

How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper - NY Fed - How efficiently do financial markets process news of unexpected events? This question becomes particularly salient now, as multiple events across the globe drive market movements. Do these gyrations reflect responses to fundamental news or to “noise”? In general, it is very difficult to discern how well markets process information, because there is no objective way for observers to separate fundamental news from noise components when markets react to a news report. In this post, however, we examine an unusual episode involving a false news report that provides a unique look into this question. We find that even when noise can be clearly identified, markets may take as long as a week to fully process the “signal,” or relevant information, component of news.

New York Fed to Take Propagandizing to New Level With More Intense Social Media Monitoring -  Yves Smith - We can all look forward to higher quality trolls in comments courtesy of the New York Fed (assuming we don’t have them already) thanks to a more thorough blogosphere/social media monitoring program the Fed is planing to launch (hat tip reader Tom via TPM): New York Fed Social Media Request for Proposal (embedded scribd)  The idea that the Federal Reserve is somehow lacking in share of voice in academic and popular discourse is laughable. I’ve gotten estimates from credible sources that the Fed now funds a full 1/4 of all graduate school research in economics. Bernanke, FOMC Board members, and the various regional Fed presidents have ready access to the media and take frequent advantage of it. Fed staffers regularly publish papers, some of which are appallingly close to propaganda as it is. The real issue is that the Fed plays an increasingly active political role and still tries to hide behind its claim of independence.

Stocks Hammered by EuroCrisis Worries; Bank of America, Citi Down Nearly 10% -  It’s becoming increasingly obvious to Mr. Market that the officialdom in Europe is not on a path to resolving its burgeoning sovereign/bank crisis. It is insisting on imposing austerity on debt burdened countries, which will only shrink their GDPs, making their debt hangovers even worse.  And Germany wants to have its cake and eat it too. It wants to preserve the Eurozone for the express reason of maintaining its trade surpluses, yet not continue to lend to its trade partners. Angela Merkel has stated the reason not to allow Greece to exit the currency union and depreciate its currency is that the Euro would rise on the assumption that other periphery countries would exit, and a strong Euro would hurt German exports. Duh. The Eurozone needs a combination of debt writeoffs, recapitalization of banks, and a program to reduce the magnitude of German surpluses with its EU trade partners. Even if the Eurocrats can figure out a way to create a big enough rescue facility to get through the next year or so, a solution will break down under continuing stresses unless the fundamental pressures are addressed.

SEC Cop to Back Whistleblower’s Claim  -- The U.S. Securities and Exchange Commission's internal watchdog will back a whistleblower's claim that the regulator for years destroyed enforcement records it should have kept, according to people familiar with a report on the findings of a months-long probe. The report by David Kotz, the SEC's inspector general, also criticizes the regulator for misleading another federal agency, the National Archives and Records Administration, the people said. In response to the whistleblower's claims, NARA had confronted the SEC last year about the destroyed records.

IRS Stingy With Whistleblower Payouts, Slow to Follow Up on Tips - The IRS took more than four years to reward a whistleblower through a new program to encourage tipsters and has drawn criticism from the Government Accountability Office for failing to move faster.  A recent GAO study found that the program, which has attracted tips from more than 1,300 whistleblowers, doesn’t collect data that could speed up evaluation of information that started to pour in after Congress authorized the Internal Revenue Service to establish the office in late 2006.  “Five years later, they have to start paying rewards,” Stephen Kohn, executive director of the National Whistleblower Center, a Washington-based non-profit group that advocates for government informants, told Bloomberg Government.  The 2006 law was designed to help the IRS narrow the tax gap, which is the difference between taxes owed and taxes paid. The gross amount of the gap is estimated to be $345 billion.

Consumer watchdog nominee advances; Cordray faces GOP blockade on Senate floor - In a largely symbolic vote along party lines, the Senate banking committee on Thursday approved former Ohio attorney general Richard Cordray1 to lead the new federal consumer watchdog agency even as Republicans reiterated their pledge to block him on the floor. Cordray’s nomination has become a flash point in the larger political battle2 over how the Consumer Financial Protection Bureau should be structured. The agency was the centerpiece of President Obama’s plan to overhaul the nation’s financial system, but it cannot employ many of its powers until a director is named.  Senate Republicans have vowed to block any candidate3 unless the CFPB is revamped. They are seeking to replace the director with a five-member commission and require tighter oversight of the bureau by other agencies. They are also seeking to fund the CFPB through the congressional appropriations process, rather than through the Federal Reserve.

Bully for BofA: New Debit Card Fees! - Bully for you, Bank of America.  Bank of America's starting charging monthly fees for debit card usage to some customers. This is being taken as an "I told you so" by opponents of the Durbin Amendment, who argued that it would only result in higher costs for consumers. Actually, the BoA move is exactly what we might expect:  consumers are having to pay for their rewards. That's how it should be. They might be paying too much, but that's another matter.  So what does Bank of America's move tell us?

  • (1) The Market Works! On broad level, what BoA is doing is exactly what should happen if the market works. Customers who get rewards will have to pay for them. Put differently, customers who use debit will have to internalize the cost of their payment medium.
  • (2) Or the market works more or less. While BoA's announcement is in a primitive form the cost-internalization move that we should all cheer, it's obviously not fine-tuned. For starters, it's not clear that $5/mo has any relationship to BoA's revenue reduction from the Durbin Amendment. Given that Wells is charging $3/mo, the $5/mo figure seems quite dubious.
  • (3) Or just less.  Competition is seriously askew in the consumer banking market. BoA's ability to slap on another $5/mo fee is an indication of the competition problems in the banking market place. $60 in additional deposit account fees is more than a small, but significant increase in price. In a competitive market place, you can't do that without losing market share.

Could the CFPB stop a debit-card charge? - Pace the president, does Bank of America’s $5 debit-card fee really show the need for the Consumer Financial Protection Bureau? Not really: the CFPB does not exist to prevent banks from charging stupid fees as part of a self-defeating protest against the Durbin amendment. If BofA wants to charge $5, or $50, or even $500 to people using its debit cards, then so long as it gives them fair warning, does so transparently, and is happy to see them close their accounts, it should be allowed to do so. The fact that the fee was a mistake can be seen easily by the fact that it caused a huge uproar, while much bigger increases to Citibank’s monthly checking-account fee went largely unremarked-upon. At Citibank, the basic free-checking account now carries a $10 fee, waived if you use direct deposit or have a $1,500 average balance. The era of big-bank free checking is over. But that has nothing to do with Durbin, and everything to do with the regulation of overdraft fees. (And, of course, low interest rates.) If banks need to charge a monthly fee in order to make money on their checking accounts, then so be it. But I do think that the current level of checking-account fees is excessive, and that charging for debit transactions is downright idiotic.

Longest series of web site outages at BoA in thirteen years, says industry observer — Bank of America's consumer online banking service was slow for a fifth day Tuesday, and the bank still wasn't saying what the problem was. The bank said many times starting Friday that it had resolved the problem, but visitors to its home page still saw an error message for much of Tuesday saying the site was "running slowly" and customers might experience delays or have difficulty accessing parts of it. The message encouraged customers to try again at "a non-peak time" or visit an ATM or one of nearly 6,000 branches to get into their accounts.Spokeswoman Tara Burke said the website problems were not the result of hacking. She declined to "break out the root cause" for the problems but said the bank was continuing to assess the situation. She said Tuesday evening that the site was largely operating normally.

Citi Joins Bank of America in Finding New Ways to Bleed Customers -- Yves Smith - As readers know all too well, the very short story of the financial crisis was consumers and banks went on big borrowing party and it all ended really badly, except for the banks. However, banks built their businesses with the expectation that consumers would continue to rack up debt. But consumers aren’t too keen about that any more. Moreover, banks have also gotten a bit of religion and are more careful with extending loans. Since they aren’t making as much money on consumer lending, their natural impulse is to find other ways to fleece obtain more revenue from consumers.  We pointed out that Bank of America is determined to preserve its egregious debit card profits, and is circumventing the intent of recent legislation by charging all but reasonably profitable customers a $5 monthly fee for any debit card use (save at a BofA ATM). We hope customers will leave in droves. We noted that Bank of America no doubt hoped that this move would serve as a bit of price leadership and other banks would follow. Citi apparently decided that the debit card fee was a smidge too obvious and it would try another route. Reader Deloss alos told us, via e-mail, taht Citi has increased its balance requirements for free checking:For what it’s worth, there was a discreet notice on my online Citi page announcing that either I had to raise my minimum balance from $10,000 to $15,000 or I had to start paying $20/month plus various other fees.

Checking Account Wars, Behind the Scenes - This week, Senator Dick Durbin took to the Senate floor and called for a run on Bank of America.  The Illinois Democrat had pushed legislation, which went into effect a week ago, that limits the fees big banks1 collect from merchants, and he now finds himself the fall guy for Bank of America’s new $5 monthly debit card fee2. His response? He ranted and raved3 and suggested that consumers “get the heck out of that bank.”  But even as Bank of America and other institutions are adding fees and other restrictions, a company called PerkStreet4, which you may have read about5 in this column before, is hoping that those Bank of America customers will run to its Web site. PerkStreet gives checking account customers as much as 2 percent back on their purchases when they use its debit cards.  Meanwhile, a company called BancVue6 works with community banks and credit unions to offer checking accounts that can yield more than 3 percent in interest on deposits for people who use their debit cards a lot.  So the big banks make you pay, and the most aggressive of the little institutions want to pay you. What on earth is going on here, and can this possibly continue?

Mad at bank fees? Credit unions get another look - Credit unions are basking in the spotlight again. Whenever a big bank rolls out a controversial fee, customers start fuming about taking their business elsewhere and the attention often falls on credit unions. That happened again last week when Bank of America said it would soon start charging customers a $5 monthly fee to make debit card purchases. This time around, it seems some customers have finally had it. The country's largest credit union, the Navy Federal Credit Union, said new account openings over the weekend were 23 percent higher than normal. "`We're getting a lot of calls and messages on our Facebook page about the debit card fees too," says Tisa Head, who oversees Navy Federal's savings products. The Credit Union National Association and National Association of Federal Credit Unions say other members are reporting an uptick in inquiries and account openings as well. And their respective websites that help users locate credit unions, and, both saw a surge in traffic in the days following Bank of America's announcement. The news may have been the final straw for some because paying to use a debit card was unheard of until this year.

Bank Transfer Day: Remember, Remember the 5th of November - Money-movers, who advocate changing from large corporate banks to credit unions or small local banks, are calling to make November 5 a nationwide Bank Transfer Day. Together we can ensure that these banking institutions will ALWAYS remember the 5th of November!!

  • • Open an account with a Credit Union
    • Transfer your funds to the new account (online or in person) by 11/05
    • Follow your bank’s procedures to close your account
  • To find a credit union near you:

Wire transfers cost $35, can take three to five days to clear, and require an existing account in which the funds will land. A better plan may be to simply go to the bank and close your account in person, ask for cash or a bank check, trot over to a credit union and open an account. 11/5/11 is a Saturday so make sure your bank is open that day! Most credit unions are closed on Saturdays. Don’t forget to change any automatic bill pays, etc to your new account–and don’t forget where you hid the cash or bank check over the weekend!

Will the Big Bad Banks Save Obama? - Interesting article on Politico today suggesting President Obama, with his criticism of Bank of America for charging its customers five dollars a month to use their debit cards, has finally stumbled on a populist wedge issue to gee up his campaign. It might also allow him to harness some of the energy behind Occupy Wall Street. Talking to George Stephanopoulos, of ABC News, Obama said, “My hope is that you’re going to see a bunch of the banks say this is not good business practice.... You can stop it because if you say to the banks: You don’t have some inherent right just to, you know, get a certain amount of profit, if your customers are being mistreated, that you have to treat them fairly and transparently.” As it happens, at about the same time Obama was speaking to Stephanopoulos, I received a letter from Citibank informing me that if I didn’t keep at least $15,000 in my checking and savings accounts, I would be charged $20 a month. The old figure was $6,000, so this is quite a jump. And $20 a month is almost $250 a year. Maybe it’s just me, but that seems a steep price for cashing a few checks a month—I make most of my payments online—and giving me the privilege of earning an annual interest rate of 0.2 per cent on my savings.

President Clears Wall Street Of Crimes - Barack Obama slept through his securities law class at Harvard. That’s the only explanation I can offer for his answer to Jake Tapper’s question at a press conference Thursday. Tapper asked him about the failure of his administration to prosecute a single Wall Street executive. From the transcript. Well, first on the issue of prosecutions on Wall Street, one of the biggest problems about the collapse of Lehmans and the subsequent financial crisis and the whole subprime lending fiasco is that a lot of that stuff wasn’t necessarily illegal, it was just immoral or inappropriate or reckless…. By “a lot of stuff”, the President means everything that happened, from fraudulent sales of real estate mortgage-backed securities, to Repo 105, to filing false affidavits in foreclosure proceedings. He knows this even though there have been no criminal investigations, no FBI inquiries, no Grand Jury subpoenas, and apparently no review of independent investigations. For him, this isn’t about law. He just knows that the immoral and inappropriate and reckless behavior that caused the Great Crash and the Lesser Depression wasn’t a crime. Obama’s blanket pardon isn’t newsworthy. No one in the national media picked it up. Obama’s dismissive response reflects the view of the American Oligarchy, the financial elites who run the country, and the media they own and operate.

America’s Big Banks, America’s Financial Vietnam - Three years ago the most-powerful instutitions in America were the nation’s largest banks and brokerages, Wall Street for short. While millions of people were losing their homes, their jobs and their savings, the nation’s elite extracted a $700 billion line-of-credit from Uncle Sam.Now Wall Street is our financial Vietnam. It’s broken. The old cures and postponements won’t work. Everyone knows it. “High risk mortgage lending and shortcomings in consumer protections for mortgage borrowers were among the most important underlying causes of the housing bubble and the financial crisis that resulted,” according to Sheila Bair, past chairman of the FDIC. “Not only did the proliferation of high-risk subprime and nontraditional mortgage products help to push home prices up during the boom, but excessive reliance on foreclosure as a remedy to default have helped to push home prices down since the peak of the market over four years ago.”No longer are huge financial corporations seen as too big to blame — nor as too big to fail. In fact, some have even embraced the idea of a voluntary bankruptcy.

Banks Repay Tarp With Funds Meant to Spur Small-Business Loans - More than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government's Troubled Asset Relief Program.The Small Business Lending Fund was meant to raise capital at smaller banks, which tend to lend more heavily to small businesses, in the hopes of jump-starting growth and employment. But instead of directly lending to small businesses, many of the banks used the money to rid themselves of higher-cost TARP debt and tougher restrictions.

Unofficial Problem Bank list at 986 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Sept 30, 2011. Changes and comments from surferdude808:  The Unofficial Problem Bank List finished the month unchanged at 986 institutions with assets of $405.4 billion after six additions and six removals this week. A year-ago, there were 872 institutions with assets of $422.4 billion on the unofficial list. For the month, there were 15 additions, five failures, four unassisted mergers, and eight action terminations resulting in a net decline of two institutions. The number of institutions on the list fell for the third consecutive month. After declines the previous two months, however, assets rose during the month by $2.1 billion.

Unofficial Problem Bank List Quarterly Transition Matrix - With the third quarter of 2011 coming to an end this past Friday, it is time to update the Unofficial Problem Bank List transition matrix.  (see table below). Over the past 25 months, about 54 percent or 210 institutions have been removed from the original list with 129 from failure, 62 from action termination, and 19 from unassisted merger. More than 33 percent of the 389 institutions on the original list have failed, which is substantially higher than the 12 percent figure usually cited by the media as the failure rate for institutions on the FDIC Problem Bank List. Since the publication of the original list, another 1,052 institutions have been added. However, only 807 of those 1,052 additions remain on the current list as 245 institutions have been removed in the interim. Of the 245 inter-period removals, 155 were from failure, 55 were from an unassisted merger, 33 from action termination, and two from voluntary liquidation. In total, 1,441 institutions have made an appearance on the Unofficial Problem Bank List and 284 or 19.7 percent have failed. Of the 455 total removals, the primary way of exit from the list is failure at 284 or nearly 63 percent. Only 95 or around 21 percent have been able to rehabilitate themselves to see their respective action terminated. Alternatively, another 74 or 16 percent found merger partners most likely to avoid failure. Total assets that have appeared on the list amount to $777.8 billion and $272.4 billion have been removed due to failure.

Fannie Mae Knew Early of Abuses, Report Says - Fannie Mae, the mortgage finance giant, learned as early as 2003 of extensive foreclosure abuses among the law firms it had hired to remove troubled borrowers from their homes. But the company did little to correct the firms’ practices, according to a report issued Tuesday.  Only after news reports in mid-2010 began to describe the dubious practices, like the routine filing of false pleadings in bankruptcy courts, did Fannie Mae’s overseer start to scrutinize the conduct. The report was critical of that overseer, the Federal Housing Finance Agency, and was prepared by the agency’s inspector general. In one notable lapse, even after the agency reported problems to Fannie Mae in late 2010 about some of the approved law firms, it did not request a response from the company, the report said.

Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability - “Alt-a” is a bright shining lie. “Alt” is short for “alternative,” where the lie is that the loans are “underwritten” through an “alternative” methodology. True, if not underwriting can be considered an “alternative” to underwriting. Relying on a credit score is not underwriting, particularly in the home lending context. The borrower’s credit score does not tell the lender whether the borrower has the capacity to repay a $600,000 home loan. “A” is an even more blatant lie, it claims that the loan is “A” quality, i.e., “prime.” Two bright shining lies were used to support the ludicrous claim that liar’s loans were really high credit quality. One, “alt-a” loans were made to entrepreneurs who could not document their income. Nonsense, there is a standard IRS form (4506t) that such a borrower can sign that allows the lender to check the income that the borrower reported to the IRS.  Two, “alt-a” apologists claimed that borrowers really had the income they “stated” but were unwilling to document that income because they were hiding their income from their former spouse and children and/or the IRS.  As I show below, liar’s loans were so massive that wealthy deadbeat dads and tax evaders could not have been more than a tiny percentage of the recipients of liar’s loans.

Justice Democrats take on big banks - The problem facing the Obama administration and its supporters is — as with the Bush administration — that the public view differs starkly with their version of events. Though the Obama administration has stopped most attempts at constraining the behavior of big banks, the economic damage they have already caused is too big to deny or hide. The banks’ mishandling of trillions of dollars of mortgages has prompted lawsuits across the country over whether banks are legally foreclosing on homeowners. For example, Thigpen, in North Carolina, found thousands of fraudulent documents filed by banks. This level of activity is what economist Bill Black calls a “criminogenic environment.” The Obama administration sought to paper over the problems, first with Attorney General Eric Holder’s policy of making certain crimes “too big to prosecute”; second, by encouraging state attorneys general with jurisdiction over foreclosures to accept a paltry sum and that banks’ promise to behave better. Dissidents in the regulatory community, like Sheila Bair or Elizabeth Warren, were overruled or outwaited. Most attorneys general, with few resources and little expertise in financial crimes, acceded.  But the creaky financial system and the collapsing housing market simply cannot be defeated with bureaucratic intrigue.

NM judge okays MBS class action claims against rating agencies - On Friday, Albuquerque federal court judge James Browning denied therating agencies' motion to dismiss claims that they made false statements in connection with the sale of securities backed by Thornburg-issued mortgages. The order doesn't include any explanation, merely citing Sept. 19 oral arguments. But the key difference between the Thornburg MBS class action and all of its unsuccessful predecessors is that the Thornburg plaintiffs were able to assert New Mexico's since-repealed state securities law. The state blue-sky law holds that it's unlawful for anyone to make an untrue statement or fail to state a material fact in connection with the sale of a security. That's exactly what S&P, Moody's, and Fitch did, according to the class action complaint filed by lead counsel Robbins Geller Rudman & Dowd in December 2010. "The rating agency defendants," the complaint said, "issued investment grade (including Triple-A) ratings on certificates, which ratings were untrue and misleading in that the certificates were not nearly as safe as represented."

Rating Firms' Asset Game - As the housing market buckled in mid-2007, the credit-rating industry's three biggest firms gave top grades to mortgage-linked bonds that soon plummeted in value. There was one significant difference in the firms' analysis, though. Moody's Investors Service and Fitch Ratings modeled their ratings based on what could go wrong with the lowest-quality assets that might wind up in the securities, according to documents and analysts who worked on the deals. Standard & Poor's, however, typically evaluated each asset assembled into the securities rather than relying solely on the so-called worst-case scenario, according to current and former rating analysts.

The uncertain case against mortgage securitization - Atlanta Fed's Real Estate Research - Did mortgage securitization cause the mortgage crisis? One popular story goes like this: banks that originated mortgage loans and then sold them to securitizers didn't care whether the loans would be repaid. After all, since they sold the loans, they weren't on the hook for the defaults. Without any "skin in the game," those banks felt free to make worse and worse loans until...kaboom! The story is an appealing one and, since the beginning of the crisis, it has gained popularity among academics, journalists, and policymakers. It has even influenced financial reform. The only problem? The story might be wrong.  In this post we report on the latest round in an ongoing academic debate over this issue. We recently released two papers, available here and here, in which we argue that the evidence against securitization that many have found most damning has in fact been misinterpreted. Rather than being a settled issue, we believe securitization's role in the crisis remains an open and pressing question.

BofA, JPMorgan Face $13.5 Billion in FHA Claim Costs, FBR Says -- Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. are among mortgage servicers that may face $13.5 billion in costs if the Federal Housing Administration rejects insurance claims on soured loans, according to FBR Capital Markets Corp. Denials from the FHA, which insures loans made by banks and private lenders for home purchases, could be the latest expense from U.S. housing programs, Paul Miller, an FBR analyst, said today in a note to clients. The government said in May that it could pursue other lenders after suing Deutsche Bank AG for more than $1 billion, accusing the firm of lying to the FHA while arranging mortgage insurance. “The servicing of FHA loans comes with highly technical regulatory mandated procedures,” Miller said in the note. “The agency's narrowly proscribed requirements make it more likely for the servicers, not the originators, to be tripped up. If the agency is looking for a way to deny a claim, the servicing process is an easy target.”

Bank of America’s Countrywide May Face Fraud Suit After U.S. Housing Audit - Bank of America Corp. (BAC), the biggest U.S. lender, should face fraud claims after its Countrywide unit submitted faulty borrower data for federally insured mortgages, according to an audit by a U.S. watchdog. Half of 14 loans reviewed had “material underwriting deficiencies” that resulted in more than $720,000 in losses, according to a Sept. 30 report from the Office of the Inspector General for the Department of Housing and Urban Development. A regional inspector general for HUD, Kelly Anderson, recommended that the agency’s lawyers pursue legal remedies against Bank of America. “Countrywide did not properly verify, analyze, or support borrowers’ employment and income, source of funds to close, liabilities and credit information,” Kelly wrote in the audit. “This noncompliance occurred because Countrywide’s underwriters did not exercise due diligence in underwriting the loans.” Bank of America is among lenders facing the most costs if the Federal Housing Administration rejects claims for reimbursement on defective government-guaranteed loans.  “These loans were put together really sloppy. There were problems with the loans and the servicing. They can go after these banks as much as they want. The issue is, how deep do they want to go?”

Raskin Says Some Mortgage Terms Work Against Borrowers, Banks‎ - Federal Reserve Governor Sarah Bloom Raskin said the “shocking and enormous decline” in U.S. home prices has revealed weaknesses in mortgage pooling and servicing contracts that work against the interests of borrowers and lenders.  “Servicers may not be properly motivated to perform loan modifications even when such modifications are in the best interests of borrowers and investors,” Raskin said in the text of her remarks to Maryland State Bar Association in Columbia. “Can this contract be saved? I think the answer is no -- at least not in its current form.”  About 8.4 percent of all mortgages were delinquent at the end of the second quarter, and 4.4 percent were in foreclosure, according to data from the Mortgage Bankers Association.  “An estimated 3 million families are not able to refinance their mortgages at today’s historically low interest rates because they are underwater on their mortgages,” Raskin said. That calculation is based on a Fed Board staff estimate of the number of borrowers with fixed-rate mortgages of 4.75 percent or higher and a loan-to-value ratio of greater than 100 percent.

OCC Servicing Settlement--Will Homeowners Get Screwed (Again)? - The WSJ reports on the latest development in the implementation of the OCC's mortgage servicing fraud consent orders.  It seems that the banks will have OCC approved "independent" foreclosure review consultants (chosen and paid by the banks) review foreclosure files from 2009-2010 and pay homeowners damages if there are any problems found.   This proposal really worries me.  It's hard to imagine that the banks will part with any money unless they receive releases--broad releases--from the homeowners.  The homeowners, however, will not typically have legal representation and will lack the ability adequately value their claims against the banks. $100 for a complete release?  Why not?   There's a real danger that the "independent" consultants will come in with low-ball damage figures when they do in fact find problems (which itself is likely to be rare). Indeed, I would suggest that this sort of practice would be precisely the sort of thing that might fit under the new Dodd-Frank UDAAP rubric, as the banks would be using their superior knowledge to take advantage of consumers who lack the legal expertise to evaluate their options.

Quelle Surprise! Servicer Consent Orders Producing Expected Whitewash -- Yves Smith  - We were far from alone in criticizing the servicer consent orders issued earlier this year. They were yet another whitewash masquerading as regulatory action, orchestrated by the banking industry toady, the OCC. As we wrote: The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort). This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It is critical to understand that servicers are the perps in mortgage abuses. The list of malfeasance is long. This is only partial:

  • Rampant abuses of the HAMP program:
  • Widespread forgeries and document fabrication
  • Wrongful foreclosures
  • Servicer driven foreclosures (as in the foreclosure did not result from borrower failure to pay but from pyramiding and junk fees)
  • Force placed insurance

So there is a great deal of bad behavior that needs to be addressed and corrected, but the Obama Administration seems determined to do everything it can to pretend nothing is amiss.

Yet Another Piss Poor Idea to Stimulate Housing: Tax Breaks for Rental Units Proposed by Peter Orszag, Vice Chairman at Citigroup Global Banking - It is depressing to see an endless parade of foolish and/or self-serving ideas to "fix" the housing market. Here is yet another one, this time from Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. Please consider the self-serving plea of Peter Orszag posing as Boomberg news: U.S. Can Rent Its Way to a Housing Recovery No matter what the government might try to do to break the housing-economy cycle, the deleveraging process will still be painful and take some time. But that’s not an argument against action; just because a headache can still hurt some even if you take aspirin doesn’t mean you should skip the aspirin. One thing the Obama administration could do now -- probably with Republican support -- would be to attack the oversupply of housing stock by allowing a tax write-off for investors who buy empty properties and rent them out.  It should not be difficult to read between the lines. This is nothing more than a plea to help Citigroup unload property. I am sick and tired of tax breaks for anything to promote anything, especially self-serving interests of banks.

Raskin Says Some Mortgage Terms Work Against Borrowers, Banks‎ - Federal Reserve Governor Sarah Bloom Raskin said the “shocking and enormous decline” in U.S. home prices has revealed weaknesses in mortgage pooling and servicing contracts that work against the interests of borrowers and lenders.  “Servicers may not be properly motivated to perform loan modifications even when such modifications are in the best interests of borrowers and investors,” Raskin said in the text of her remarks to Maryland State Bar Association in Columbia. “Can this contract be saved? I think the answer is no -- at least not in its current form.”  About 8.4 percent of all mortgages were delinquent at the end of the second quarter, and 4.4 percent were in foreclosure, according to data from the Mortgage Bankers Association.  “An estimated 3 million families are not able to refinance their mortgages at today’s historically low interest rates because they are underwater on their mortgages,” Raskin said. That calculation is based on a Fed Board staff estimate of the number of borrowers with fixed-rate mortgages of 4.75 percent or higher and a loan-to-value ratio of greater than 100 percent.

Why won’t Frannie do principal reductions? - Negative equity has reached epidemic status across the united states — and especially in the sand states of Arizona and Nevada, where more than half of all homes with mortgages are  underwater. But give the state of Arizona, at least, a lot of credit for biting the bullet and trying to do what needs to be done: If banks would forgive some of a homeowners’ mortgage debt, the state said it would pay half, up to $50,000 of a $100,000 loan reduction. But you know where this story is going to go, don’t you. Since the program was launched in September 2010, it has helped three homeowners. Three. And a big reason is Frannie’s blanket refusal to even think about participating. The two largest mortgage guarantors, Fannie Mae and Freddie Mac, will not participate — in Arizona or elsewhere. No loans are eligible for the state’s program if they were bought and held or securitized by the two companies, which are now under government control and guarantee more than 70 percent of the country’s home loans. Edward J. DeMarco, as acting director of the Federal Housing Finance Agency, oversees Fannie and Freddie.  Fannie and Freddie say reducing the principal is bad for business, and as a result bad for taxpayers.

BNY Mellon sued over currency rates - The city and state of New York and US Department of Justice have filed separate lawsuits against Bank of New York Mellon, alleging the world’s largest custody bank defrauded pension funds, US banks and millions of investors nationwide on currency transactions for 10 years.  Tuesday’s New York action, which seeks to recover more than $2bn in alleged ill-gotten gains, marks the third lawsuit this year filed by a state legal officer against the bank. In August, Florida and Virginia sued the company for allegedly wrongfully overcharging their local pension funds on foreign-exchange trades. The federal lawsuit also represents one of the few actions brought against a Wall Street bank by the Obama administration, which has had to defend itself against accusations that it has taken a soft line against financial fraud.  The suit by Eric Schneiderman, New York attorney-general, raises the stakes for BNY Mellon because of the broad powers he wields under the state’s Martin Act, which allows him to sue companies for fraud on behalf of investors in all 50 US states without having to prove intent. Federal securities regulators lack such broad powers.

BNY Mellon ‘Sledgehammer’ Lawsuits Raise Pressure to Settle -  Bank of New York Mellon Corp., the largest custody bank, faces increased pressure to reach settlements on foreign-exchange cases following new lawsuits brought by New York and federal officials. The New York attorney general and the U.S. Attorney’s Office in Manhattan, each of which filed complaints yesterday, bring deeper resources and more expertise on financial cases. New York Attorney General Eric T. Schneiderman can also wield the state’s powerful Martin Act, he said. “The Martin Act is a fairly significant sledgehammer of a statute” that makes it easier for prosecutors to prove fraud compared with many other states’ laws, said Barbash, a former director of the U.S. Securities and Exchange Commission. The New York suit, brought yesterday in the state’s Supreme Court, accuses BNY Mellon of defrauding public pension funds of $2 billion over 10 years. The U.S. Attorney’s Office filed a separate suit in federal court. Florida and Virginia have also filed claims against the bank and Massachusetts regulators are investigating similar claims.

California Atty. General’s Office Pulls Out of Settlement with Banks - Cal­i­for­nia At­tor­ney Gen­eral Ka­mala Har­ris an­nounced yes­ter­day that her of­fice is pulling out of a pend­ing 50-state set­tle­ment with banks over wrong­ful fore­clo­sures. In a let­ter to As­so­ci­ate U.S. At­tor­ney Gen­eral Thomas Per­relli and Iowa At­tor­ney Gen­eral Tom Miller, Har­ris said the agree­ment would allow “too few…home­own­ers to stay in their homes” and shield banks from fur­ther in­ves­ti­ga­tions. “After much con­sid­er­a­tion, I have con­cluded that this is not the deal Cal­i­for­nia home­own­ers have been look­ing for,” she wrote in the let­ter. Set­tle­ment ne­go­ti­a­tions be­tween the 50 at­tor­neys gen­eral and the na­tion’s five largest banks -- Bank of Amer­ica, JP­Mor­gan Chase and Co., Wells Fargo, Cit­i­group and Ally Fi­nan­cial, com­menced last fall. Be­gin­ning over al­le­ga­tions of robo-sign­ing, or the prac­tice of bank em­ploy­ees no­ta­riz­ing or sign­ing sworn doc­u­ments with­out ver­i­fy­ing or un­der­stand­ing them, they later ex­panded to in­clude other abuses re­lated to mort­gage ser­vic­ing and fore­clo­sure prac­tices.

Why Blame the Failure of the 50-State Settlement Solely on Tom Miller? - Yesterday, CA Attorney General Kamala Harris announced she was withdrawing from the 50-state foreclosure fraud settlement. California Atty. Gen. Kamala Harris will no longer take part in a national foreclosure probe of some of the nation’s biggest banks, which are accused of pervasive misconduct in dealing with troubled homeowners. Harris removed herself from talks by a coalition of state attorneys general and federal agencies investigating abusive foreclosure practices because the nation’s five largest mortgage servicers were not offering California homeowners relief commensurate to what people in the state had suffered, a person familiar with the matter said. The big banks were also demanding to be granted overly broad immunity from legal claims that could potentially derail further investigations into Wall Street’s role in the mortgage meltdown,  With CA–the largest state and the one with the greatest foreclosure exposure–this effectively kills the settlement. See DDay for more on why Harris made this decision and what it means going forward.

Attorneys General Settlement: The Next Big Bank Bailout? - Matt Taibbi - Amidst all the bad news coming out of Wall Street and the economy, here’s something good: California has backed out of the talks for the long-awaited foreclosure settlement, now making it far from likely that the so-called “Attorneys General” deal will happen anytime soon. California Attorney General Kamala Harris sent a letter to state and federal regulators explaining that she pulled out because the proposed settlement amount for banks guilty of bad securitization practices leading up to the mortgage crisis – said to be in the $20 billion range – was too small. From Business Week: Harris says in a letter to state and federal negotiators that the pending settlement is "inadequate" and gives bank officials too much immunity. I’m convinced that the deal will eventually go through, however, after some further concessions are made. Certainly the absence of both New York (whose Attorney General Eric Schneiderman gamely started this mess by refusing to sign on or abandon his own investigation into corrupt securitization practices) and California will make it difficult for the banks to do any kind of a deal. But there is such an awesome amount of political will to get this deal done in Washington that it almost has to happen before the presidential election season really gets going. If it does get done, expect a great deal of public debate over whether or not the size of the settlement was sufficient. Did the banks pay enough? Should they have paid ten billion more? Twenty? Even I engaged in a little bit of that some weeks ago.

PR Watch: Iowa Attorney General Tom Miller Still Flogging Dead Horse of Mortgage Settlement Negotiation - - Yves Smith - We’ve been perplexed for months with the persistent PR push to pretend that the formerly “50 state” attorney general mortgage settlement negotiations were going anywhere. And bizarrely, in true zombie fashion, the press push continues unabated even as the talks are effectively dead. As we pointed out, the departure of Kamala Harris, the California attorney general, last Friday means the state AG participation is pretty much moot. Enough important states have abandoned the talks that even if all the remainder were to go forward, it wouldn’t buy banks the desired protection from litigations. But these talks were destined to fall apart; the only question was how quickly. Both Dave Dayen at FireDogLake and your humble blogger pointed repeatedly to the disconnect between the story that kept being pumped out every three or four weeks since January that a deal was mere weeks away.  Now of course, this wasn’t and isn’t a state AG effort. The DoJ, HUD, and various Federal banking regulators are also at the table. The participation of the AGs was important to disguise the fact that the Obama Administration wants to say it got a deal as proof that it is taking concrete steps to address the housing crisis. But these negotiations were clearly Son of HAMP: presented as a way to help homeowners, but since anything that might inconvenience the banks was off the table, the program likely did more harm that good.

California Attorney General Harris Now Signaling Willingness to Rejoin Foreclosure Talks - Yves Smith  Dave Dayen saw this one coming. When Kamala Harris said she was not willing to participate in the so called “50 state” attorney general mortgage negotiations, he recognized Harris’ refusal to join the New York attorney general Schneiderman’s group as a bad sign. Note that the state of the talks is persistently misreported in the MSM as being only Schneiderman, when Delaware, Massachusetts, Kentucky, Nevada, and Minnesota are also out of the talks.  It is a safe bet that the Democratic party has been muscling Harris since her defection last week. The Administration is desperate to have the AGs provide legitimacy to their planned “settlement as coverup” strategy. Not that it will be that effective in the end. The threat of the two states where all securitization trusts are domiciled (New York and Delaware) has the potential to undermine the value of any settlement, particularly since New York has the potent weapon of the Martin Act. Merely those two states moving forward (and remember, it is more than those two states) has the potential to be extremely embarrassing to the Administration and the AGs who continue to serve as human shields for the Administration.

Rep. Inslee to Justice Dept: Don’t settle on bank’s mortgage fraud without a full investigation - The negotiations between state attorneys general and the Obama administration to come to a settlement over the robo-signing scandal drag on, a year after the admitted forgeries by bank servicing employees on foreclosure documents became public knowledge, with agreement still not at hand.  Into this mix, and with the backdrop of the growing Occupy Wall Street movement, the issue is now factoring in some campaigns. In Washington state, Congressman Inslee has written to U.S. Attorney General Eric Holder, pressing for a full federal investigation of mortgage fraud before any settlement is made. From the letter: A full investigation is important for two reasons. First, we can’t fix what we can’t see. For years, banks and mortgage companies have been taking advantage of working families and investors. To respond we need to know everything they have done and punish those responsible. It is a sad commentary on our society that protestors standing up for American families in this mess get carted off to jail while individuals and companies have yet to be held accountable. Second, to take the necessary steps to stave off yet another flood of foreclosures we need tens of billions more than what is reportedly being discussed as part of a settlement. Financial institutions got us into this mess, they should play the leading role in helping families get out of it.

Ignoring Massive Industry Fraud, Bank Of America CEO Hypes Benefits Of Faster Foreclosures (video) Speaking at the Atlantic Idea Fest earlier this week, Bank of America CEO Brian Moynihan sat down for a televised interview with CNBC’s Larry Kudlow. Defending the bank’s new $5 per month debit card fee, Moynihan invented something he called the “right to make a profit.”  But another segment of the interview sheds a great deal of light on how Bank of America sees its role in the economy. A year ago, Bank of America was among the many banks caught in a sweeping “robo-signing” scandal, in which documents were allegedly fabricated in places all over the country in order to foreclose on more homes. Although Bank of America has continued using robo-signing tactics today, Moynihan and Kudlow dismissed the potentially massive fraud, and bantered about how faster foreclosures could be great for the country:

    • KUDLOW: Isn’t it fair to say the faster the foreclosure, the better off we’re going to be? And I know there’s pain. But of course, some people lose, other people win. Young families come in, they’re going going to get very low prices. But the point is, the faster we clear our the unsold inventory, the sooner this country might start creating jobs in a real economic growth situation. Is that fair?
    • MOYNIHAN: You can look at the markets and see where the markets have had the inventory cleared, you’re seeing prices stabilize.
    • KUDLOW: So these attorneys general around the country that were blocking you because there were a few bad robo-type-letters or whatever they were, robo-signing letters. They’re keeping the economy on its back because they won’t let the housing market adjust. 

Abused for lack of a lawyer - Scores of low-income New Yorkers have unjustly lost court battles -- and their homes -- because they could not afford lawyers to fight often baseless legal actions, a top aide to Attorney General Eric Schneiderman told a special panel Monday. "The lack of individual representation in foreclosure actions is one reason we have seen systemic abuses of the legal system by lenders and debt collectors," Martin J. Mack, the state's executive deputy attorney general, testified to the Task Force to Expand Access to Civil Legal Services, headed by Chief Judge Jonathan Lippman.  The top judge created the panel to aid the estimated 2.3 million and growing number of low-income New Yorkers who have no legal representation in civil cases ranging from child custody matters to home foreclosures. "We've all heard harrowing tales of abuses, including foreclosure actions brought against homeowners who are actually up to date on their mortgage payments," Mack testified. "For every abusive case uncovered, there are dozens upon dozens of homeowners and, sad to say, former homeowners who have been steamrolled because they did not have adequate representation."

Guest post: Frequently Maligned Class Action Lawsuits Actually Deter Financial Wrongdoing - Though often criticized as frivolous and lacking economic benefit, new research by finance and accounting professors at Rutgers and Emory universities’ business schools finds that class action lawsuits are a strong deterrent to misrepresenting corporate financial results and other wrongdoing.  And, in many instances class actions are a stronger deterrent than SEC enforcement.  “Our research found statistically and economically significant deterrence associated with both SEC enforcement and class action lawsuits,” said Simi Kedia, Ph.D, MBA, associate professor of finance at Rutgers University School of Business in an interview with The Investor Advocate.  “We looked at firms in the same industry as the enforcement target and found that the average peer firm subject to SEC action and/or litigation reduces discretionary accruals (i.e., reporting as sales transactions for which payment has not been received) equivalent to 14 percent to 22 percent of the median return on assets in the aftermath of such enforcement.”  The study, a working paper presented at a couple conferences and now being circulated for comment before publication, measured the effectiveness of the two primary methods of federal securities regulatory and law enforcement:  “public” enforcement by the Securities and Exchange Commission; and, “private” enforcement through securities class action lawsuits.

BofA, Wells Fargo Accused of Charging Veterans Illegal Fees -- Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. were among 13 banks and mortgage lenders accused in a so-called whistleblower lawsuit of charging military veterans illegal fees to refinance home loans. The banks charged fees barred under a U.S. Department of Veterans Affairs program and hid the charges to get government guarantees for the loans, according to the whistleblower complaint brought in 2006 by two mortgage brokers that was unsealed yesterday in federal court in Atlanta. “This is a massive fraud on the American taxpayers and American veterans,” James E. Butler Jr., a lawyer for the plaintiffs, said in an e-mailed statement. “Knowing they weren't allowed to charge the fees, the banks and mortgage companies inflated allowable charges to hide these illegal fees without telling the veterans who were the borrowers or the VA they were doing so.”

Secret Docs Show Foreclosure Watchdog Doesn’t Bark or Bite - Why has the administration’s flagship foreclosure prevention program been so ineffective in helping struggling homeowners get loan modifications and stay in their homes? One reason: The government’s supervision of the program has apparently ranged from nonexistent to weak. Documents obtained by ProPublica — government audit reports of GMAC, the country’s fifth-largest mortgage servicer — provide the first detailed look at the program’s oversight. They show that the company operated with almost no oversight for the program’s first eight months. When auditors did finally conduct a major review more than a year into the program, they found that GMAC had seriously mishandled many loan modifications — miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself said it hasn’t reversed a single foreclosure as a result of a government audit. The documents also reveal that government auditors signed off on GMAC loan-modification denials that appear to violate the program’s own rules, calling into question the rigor and competence of the reviews. Some of the auditors’ mistakes are “appalling,”. “It suggests the government isn’t taking the auditing process seriously.”

LPS: Foreclosure Starts increased in August, Seriously Delinquent Mortgage Loans fall to 2008 levels - From LPS Applied Analytics: LPS' Mortgage Monitor Report Shows Foreclosure Starts Rose Nearly 20 Percent in August, But Down More Than 12 Percent From Same Time Last Year According to LPS, 8.13% of mortgages were delinquent in August, down from 8.34% in July, and down from 9.22% in August 2010.  LPS reports that 4.11% of mortgages were in the foreclosure process, unchanged from July, and up from 3.8% in August 2010. This gives a total of 12.24% delinquent or in foreclosure. It breaks down as:
• 2.38 million loans less than 90 days delinquent.
• 1.87 million loans 90+ days delinquent.
• 2.15 million loans in foreclosure process.
For a total of 6.40 million loans delinquent or in foreclosure in August. This graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquent rate has fallen to 8.13% from the peak in January 2010 of 10.97%. A normal rate is probably in the 4% to 5% range, so there is a long long ways to go. However the in-foreclosure rate at 4.11% is barely below the peak rate of 4.21% in March 2011. There are still a large number of loans in this category (about 2.15 million) - and the average loan in foreclosure has been delinquent for a record 611 days!  This graph provided by LPS Applied Analytics shows the number of loans 90 days delinquent by duration of delinquency. The total number of loans 90+ delinquent is back to 2008 levels, but about 42% of these loans have been delinquent for more than 12 months and are still not in foreclosure. That is close to 800,000 loans. The third graph shows the number of loans in foreclosure by duration of delinquency.

Housing Market Failing to Clear - The market isn’t doing a very good job of cleaning up after the housing bust, more evidence that this is a place where government intervention could help. Banks are taking ever longer to get houses through the foreclosure process, onto the market and into the hands of new owners. As of August, the average mortgage borrower in foreclosure hadn’t made a payment in 611 days, according to data provider LPS Applied Analytics. That's up from 599 in July and more than double the level of three years ago. The banks' slowness has various explanations. For one, problems with documentation have prompted them to hold off on foreclosure actions and even pull some loans back out of foreclosure. Beyond that, selling the homes would require them to fully recognize losses on the attached loans -- something many banks are reluctant to do. The longer the banks delay, the greater their losses are likely to be. As of August, some 38 percent of loans in the foreclosure process -- representing hundreds of thousands of houses -- hadn't been paid in more than two years. All those homes are stuck in a sort of twilight zone, either sitting empty or being exploited by nominal owners who have little incentive to invest in their upkeep. Many may already be worthless.

What is the Foreclosure Rate? - Chicago Fed - When we see reports of the rising foreclosure rate in the media, we get the general sense that the housing market is struggling. While this is generally true, many reports do not accurately characterize the varying struggles from one local housing market to the next.  In particular, it’s important to distinguish between three related housing market measures: the inventory, start, and transition rates. The last is perhaps the least talked about, though it provides important information that affects the foreclosure inventory significantly. Let’s look at Cook County, Illinois, to illustrate the difference between these rates. The inventory rate measures the number of loans in foreclosure at a given time as a percentage of the number of active loans. It is typically referred to as the foreclosure rate. In Cook County, the rate was 7.1% as of June 2011. Behind this rate, however, are two metrics that reflect the two phases of the foreclosure process: (1) start rate and (2) transition rate. The start rate represents mortgages loan going into foreclosure, typically after 90 days of delinquency. Conversely, the transition rate is the rate at which foreclosed mortgages exit foreclosure.

Florida home prices: Banks can predict strategic defaulters… People who can afford to pay their mortgages but choose to stop because their homes are no longer worth what they paid make up a big piece of the foreclosure crisis. Now, those homeowners are the target of a cottage industry among credit reporting companies that have crafted formulas to find them and rat them out to their banks — even before they miss their first payments. At first blush, such a tool may seem like the industry's latest way to persecute borrowers who are making a financial decision to walk away from a house in which they believe they will never gain equity. Fannie Mae and Freddie Mac already scrawled a scarlet "SD" — strategic defaulter — across their credit reports. The companies instituted rules last year that make it harder for people who walked away from their homes to get new loans for seven years. For people who were foreclosed on because of a job loss or other extenuating circumstances, Fannie and Freddie allow new loans in just three years. Credit-scoring company FICO is selling a tool that allows banks to identify soon-to-be strategic defaulters and try to prevent them from turning delinquent on their mortgages.

Annals of government toothlessness, HAMP edition - ProPublica’s Paul Kiel has a fantastic story today about the way in which the government has proved utterly toothless with regard to auditing its mortgage-modification programs, never mind publicizing or enforcing whatever violations it did manage to find. HAMP, it turns out, is a perfect example of what happens when the government mandates change without enforcing it: huge amounts of money get spent, to little or no lasting effect. Neil Barofsky provides the nut quote:“If you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he said. “It’s why the program has been a colossal failure.” Kiel’s story is based on the government audits of just one mortgage servicer — GMAC — since Treasury refuses to release the audits of anybody else. (It only released GMAC’s after GMAC itself, to its credit, consented to the release.) Treasury has paid servicers some $471 million in cash incentives — but taxpayers aren’t allowed to audit where that cash has gone, or whether it has been effective. It’s a fiasco. HAMP was envisioned as a huge, $50 billion program; in the event, it never really took off, and only $1.6 billion has been spent so far, including $116 million paid to Freddie Mac for its ineffective auditing services:

Freddie and Fannie Reject Debt Relief -- Home values have fallen so much in Arizona that almost half the people with mortgages there owe more than their homes are worth. So when federal money became available to help stem the tide of foreclosures, the state flagged that group for help.  If banks would forgive some of a homeowners’ mortgage debt, the state said it would pay half, up to $50,000 of a $100,000 loan reduction. Despite the generous terms, most banks balked.  Only three homeowners have been approved for debt reduction since the program began in September 2010. A major obstacle has been that the two largest mortgage guarantors, Fannie Mae1 and Freddie Mac2, will not participate — in Arizona or elsewhere. No loans are eligible for the state’s program if they were bought and held or securitized by the two companies, which are now under government control and guarantee more than 70 percent of the country’s home loans.

Debt and Taxes - The impetus for this post is a short video in which Amy Goodman interviews David Graeber, one of the organizers of the “Occupy Wall Street” movement.  The interview touches on a number of important issues. Here, I want to explore some of the points raised by Graeber in his discussion of debt and taxes. In particular, Graeber argues that:

  • 1. Debt is a social/political arrangement, open to negotiation and renegotiation. As Graeber emphasizes, this is frequently recognized when it comes to renegotiating debts between the wealthy, between governments, or between governments and the wealthy. Debt obligations suddenly become “sacrosanct” only when it is a case of the poor or middle class owing the rich. Suddenly there is great moral outrage at the thought of “broken promises”. Any thought of renegotiating debt is suddenly beyond the pale.
  • 2. High taxes on the wealthy have accompanied strong employment and economic growth in the past, for instance during the immediate postwar period.
  • 3. The most effective way to reduce public “debt” is through policies that encourage growth in income and employment and therefore tax revenue. This could be achieved through a combination of government deficit expenditure and private-debt forgiveness, the latter freeing up household income for expenditures.

Foreclosures Are Killing Us - AFTER slowing down in the first half of the year, the rate of homes entering foreclosure is rising again. First-time default notices were served on 78,000 homes in August, a 33 percent increase from July.Foreclosure is not just a metaphorical epidemic, but a bona fide public health crisis. When breadwinners become ill, they miss work, lose their jobs, face daunting medical bills — and have trouble making mortgage payments as a result.   A growing body of research shows that foreclosure itself harms the health of families and communities. In our 2008 survey of 250 people undergoing foreclosure in the Philadelphia area, 32 percent reported missing doctor’s appointments and 48 percent said they let prescriptions go unfilled, significantly higher rates than others in their community. A paper released last month by the National Bureau of Economic Research found that people living in high-foreclosure areas in New Jersey, Arizona, California and Florida were significantly more likely than those in less hard-hit neighborhoods to be hospitalized for conditions like diabetes, high blood pressure and heart failure.  More than one-third of homeowners in our study had symptoms of major depression. The N.B.E.R. study found significantly more suicide attempts in high-foreclosure neighborhoods.

Housing crisis is not over - There are many property owners delinquent by over 18 months who have yet to be foreclosed on. The amount of inventory in the MLS is misleading. It looks like a much healthier market than it is. Someday soon, these delinquent properties will hit the market either as a short sale or an REO. In Riverside, about 65% of properties sold are either short sales or REOs. Former owners with a foreclosure or short sale on their record don’t re-enter the market as a buyer because they can get financing. For every 1,000 sales, Riverside needs to find 650 new buyers to replace those that are now non-buyers. For Orange County, it’s closer to 30%, or 300 new buyers. Both areas are seeing all-time record numbers when comparing percentage of distressed sales to normal sales. That ratio prevents price support partially because each sale removes a formerly capable buyer from the market. How bad it gets will depend on how the government decides to handle the “shadow inventory” situation. Up until now, the priority has been to find a new owner-occupant to buy the house. Since mathematically that won’t work, the most successful plan would include selling local investors properties able to be rented by the former owners. If investors aren’t invited to the party, then you could have a second dip in prices.

Bill allows tax-free use of retirement funds for mortgage payments - A bill introduced in Congress would allow struggling homeowners to withdraw funds from their retirement accounts tax free to pay their mortgage. Sen. Johnny Isakson (R-Ga.) and Rep. Tom Graves (R-Ga.) submitted the Home Act Wednesday. Borrowers could pull as much as $50,000 from their retirement account or one-half of the current value of their account, whichever is smaller, and avoid the typical 10% tax penalty. The cap is a lifetime cap, and does not expire on a particular date. Borrowers are eligible to make multiple withdrawals until they reach the cap. The money must be put directly toward the mortgage within 120 days of withdrawal."This bill will help Americans who risk foreclosure use their own resources to make their mortgage payment on time without being penalized by the federal government," Isakson said. "I firmly believe that economic recovery in this country will not occur until the housing market bounces back."

Historic Low: 30-Yr. Mortgage Rates Drop Below 4% - Freddie Mac reported today that mortgage rates dropped to fresh all-time historic lows this week for both 30-year mortgages (3.94%, see chart above) and 15-year mortgages (3.26%).

Freddie Mac: Mortgage Rates below 4% - Another record ... from Freddie Mac: 30-Year Fixed Mortgage Rate Falls Below 4 Percent  Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing the average rate for the conventional 30-year fixed mortgage dropping below 4 percent for the first time in history amid increasing global economic concerns. The 15-year fixed, a popular refinancing option, also fell to the lowest level on record for the sixth consecutive week. 30-year fixed-rate mortgage (FRM) averaged 3.94 percent with an average 0.8 point for the week ending October 6, 2011, down from last week when it averaged 4.01 percent. Last year at this time, the 30-year FRM averaged 4.27 percent.  15-year FRM this week averaged 3.26 percent with an average 0.8 point, down from last week when it averaged 3.28 percent. A year ago at this time, the 15-year FRM averaged 3.72 percent.

Did The NAR Lie About August Pending Home Sales? - Data released today by the Mortgage Bankers Ass. suggest that housing demand is again cratering. In the last week of September mortgage purchase applications were down about 12% versus the same week last year. This is similar to the difference at the end of August, when the drop was about 13%The data conflicts with the NAR’s report that pending home sales (sales contracts) were up 13% percent year to year in August. One of these organizations must have it wrong. Cash sales haven’t increased enough to make up for a 13% drop in mortgage applications. Once again, there’s a suggestion that there’s something wrong with the NAR’s data. The NAR has previously revealed that its pricing data could not be trusted. Apparently neither can its volume data. This conflict between the mortgage applications data and NAR data on sales contract volume only raises more questions about the NAR’s objectivity and competence in reporting data in which the public has a critical interest.

Home ownership sees biggest drop since Great Depression - The percentage of Americans who owned their homes has seen its biggest decline since the Great Depression, according to the U.S. Census Bureau. The rate of home ownership fell to 65.1% in April 2010, 1.1 percentage points lower than it was in 2000. The decline was the biggest drop since the 1930s, when home ownership plunged 4.2%. The most recent decade-over-decade drop, however, only tells half the story. Home ownership during the 2000s "was really high in the middle of the decade, up to almost 70% at one point around 2004," said Ellen Wilson, a survey statistician with the bureau. The crash from that peak was more than 4 percentage points in just about five years -- a far more dramatic decline than the 1.1% drop over the 10-year period. Certain regions have been hit harder than others. The West had the lowest home ownership rate at 60.5%, while the Midwest had the highest rate at 69.2%.The South came in at 66.7% and the Northeast at 62.2%. Thanks to the housing bust there has been a substantial increase in empty homes. The number of vacant housing units jumped an astonishing 43.8% to 15 million (or 11.4% of all housing units) in 2010, up from 10.4 million in 2000

CoreLogic: Home Price Index declined 0.4% in August - Notes: This CoreLogic Home Price Index report is for August. The Case-Shiller index released last week was for July. Case-Shiller is currently the most followed house price index, but CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of June, July and August (August weighted the most) and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® August Home Price Index Shows Month-Over-Month and Year-Over-Year Decline: CoreLogic ... today released its August Home Price Index (HPI) which shows that home prices in the U.S. decreased 0.4 percent on a month-over-month basis, the first monthly decline in four months. According to the CoreLogic HPI, national home prices, including distressed sales, also declined on a year-over-year basis by 4.4 percent in August 2011 compared to August 2010. This follows a decline of 4.8 percent in July 2011 compared to July 2010. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was down 0.4% in August, and is down 4.4% over the last year, and off 30.4% from the peak - and up 4.8% from the March 2011 low.

Prices Grow Grimmer as Fall Begins - Home prices through August are down 4.4 percent on the year according to the most depressing price report issued since the double dip in the first quarter. Not only did CoreLogic’s August Home Price Index record its first month-over-month decline in four months, on a yearly basis prices are now significantly below August 2010, when prices tanked in the wake of the expiration of the federal tax credits. Home prices in the U.S. decreased 0.4 percent on a month-over-month basis, the first monthly decline in four months. Excluding distressed sales, year-over-year prices declined by 0.7 percent in August 2011 compared to August 2010 and by 1.7 percent in July 2011 compared to July 2010. Distressed sales include short sales and real estate owned (REO) transactions. “Although the calendar says August, the end of the summer traditionally marks the beginning of ‘fall’ for the housing market as it begins to prepare for ‘winter.’ So the slight month-over-month decline was predictable, particularly given the renewed concerns over a double-dip recession, high negative equity, and the persistent levels of shadow inventory.

Construction Spending increased in August - Catching up ... this morning from the Census Bureau reported that overall construction spending increased in August:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during August 2011 was estimated at a seasonally adjusted annual rate of $799.1 billion, 1.4 percent (±2.1%)* above the revised July estimate of $788.3 billion. The August figure is 0.9 percent (±1.9%)* above the August 2010 estimate of $791.7 billion. Spending on private construction was at a seasonally adjusted annual rate of $511.0 billion, 0.4 percent (±1.3%)* above the revised July estimate of $508.9 billion. Residential construction was at a seasonally adjusted annual rate of $237.8 billion in August, 0.7 percent (±1.3%)* above the revised July estimate of $236.2 billion.  This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 64.8% below the peak in early 2006, and non-residential spending is 34% below the peak in January 2008. Public construction spending is now 11% below the peak in March 2009. The second graph shows the year-over-year change in construction spending.

We Can’t Ignore Housing Anymore - In the end, we can’t dodge housing. The U.S. recession and financial crisis of the late aughts began with housing and the scourge of subprime mortgages, which were so messily dispensed. It spread to Europe and its banks. For a few years we tried to work around the paralyzed housing sector – the drip, drip of steadily lower home prices, the unresolved status of the wounded Fannie Mae and Freddie Mac — and it seemed to be working.With the help of a super-easy Federal Reserve, fiscal stimulus and much else an admittedly weakish recovery took hold. Now that worries mount about an ever more likely return to recession amid a significant equities markets decline, we are hearing again about housing. There’s the foreclosure mess, the underwater mortgage mess, the tight mortgage lending standards and all the rest. There’s displaced construction workers. There’s consumers unwilling to spend as their perceived real estate wealth evaporates. Just today, two well-known commentators on the U.S. economic scene weighed in on housing, and it wasn’t encouraging.

Reis: Apartment Vacancy Rate falls to 5.6% in Q3 - Reis reported that the apartment vacancy rate (82 markets) fell to 5.6% in Q3 from 6.0% in Q2. The vacancy rate was at 7.1% in Q2 2010 and peaked at 8.0% at the end of 2009. From the WSJ: Landlords Push Up Apartment Rents :The vacancy rate for the third quarter, which wraps up the prime leasing season, fell to 5.6% from 7.1% a year earlier. That is the lowest since 2006. The increased demand follows several years that saw little new apartment development. About 8,200 units came online during the third quarter, one of the lowest quarterly figures since Reis began tracking the data in 1999. Average effective apartment rents, the amount paid after discounting, rose to $1,004 nationwide in the third quarter, up 2.4% from a year earlier.  This graph shows the apartment vacancy rate starting in 2005. Reis is just for large cities, but this decline in vacancy rates is happening just about everywhere. A few key points we've been discussing:
• Apartment vacancy rates are falling fast.
• A record low number of multi-family units will be completed this year (2011). Only 8,200 apartments came on the market in Q3 (in the Reis survey area).
• Multi-family starts are increasing, and that is helping both GDP and employment growth this year. These new starts will not be completed until 2012 or 2013, so vacancy rates will probably continue to decline.

Reis: Office Vacancy Rate declines slightly in Q3 to 17.4% - From the WSJ: Offices Make Slow Recovery - Overall, the amount of occupied space in U.S. office buildings increased by 6.2 million square feet during the quarter, with the vacancy rate falling by 0.1 percentage point to 17.4%, Reis said. ...Average asking rents for office space also have been growing slowly this year and rose by 13 cents to $27.85 a square foot in the third quarter. By comparison, they hit a boom-era high of $29.37 in the third quarter of 2008 and a post-recession low of $27.50 in the third quarter of 2010. This graph shows the office vacancy rate starting in 1991. Reis is reporting the vacancy rate declined to 17.4% in Q3, down from 17.5% in Q2. The vacancy rate was at a cycle high of 17.6% in Q3 2010. It appears the office vacancy rate might have peaked in 2010 - and has only declined slightly since then.

U.S. mall Q3 vacancy rate at 11-year high -report (Reuters) - The average vacancy rate for large U.S. shopping malls reached its highest level in 11 years in the third quarter, as department store closings took effect and retailers scaled back their floor space due to shaky consumer sentiment, according to a report issued on Friday. Preliminary figures by real estate research firm Reis Inc show the average vacancy rate at regional malls rose to 9.4 percent in the third quarter, the highest level since Reis began tracking regional mall vacancy rates in 2000 and up from 9.3 percent in the second quarter. Asking rent rose 0.1 percent from the prior quarter to $38.81 but remained close to 2006 levels. Reis does not provide rent net of perks such as months of free rent, a figure known as effective rent for large regional malls. Unlike the office, apartment or hotel sectors, which have been staging a recovery in various phases, retail real estate continued to struggle in the third quarter. Weak consumer sentiment, which had prompted retail tenants to scale back or close stores over the past two years, remained insufficient for store operators to mount a comeback, Reis said.

House extends national flood insurance program -  The House of Representatives passed a short-term extension of the National Flood Insurance Program, but several real estate groups called for a more long-term solution. The National Association of Realtors "still believes a longer-term extension is needed to ensure access to affordable flood insurance for millions of homeowners," said NAR President Ron Phipps. "NAR strongly supports the NFIP and believes that a five-year extension of the program’s authority to issue flood insurance is essential to a properly functioning real estate market." The NFIP expires Nov. 18. The Senate passed the continuing resolution last week. President Obama is expected to sign it. Both houses are working on a longer-term solution that would extend the legislation five years and include other reforms. The reforms would phase out subsidies for many properties and provide for greater enforcement of the mandatory purchase requirement, according to Independent Insurance Agents and Brokers of America. It also would provide for a transition for properties newly mapped into a flood zone.

Consumer Bankruptcy filings down 10 percent through Q3 - From the American Bankruptcy Institute: Consumer Bankruptcy Filings Down 10 Percent Through Nine Months of 2011. U.S. consumer bankruptcy filings totaled 1,044,722 nationwide during the first nine months of 2011 (Jan. 1-Sept. 30), a 10 percent decrease from the 1,165,172 total consumer filings during the same period a year ago, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). September consumer bankruptcies decreased 17 percent nationwide from September 2010 as the data showed that the overall consumer filing total for September reached 108,517 down from the 130,329 consumer filings recorded in September 2010. “The trend of declining filings has been consistent with consumers continuing to reign in their spending, household debt, and an overall pull back in consumer credit,”  This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from Note: The spike in 2005 was due to the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005".

US incomes fall for first time in nearly 2 years - Americans earned less last month, the first decline in nearly two years. With less income, consumers could cut back on spending and weaken an already-fragile economy. Consumers spent a little more in August despite seeing their incomes drop 0.1 percent, the Commerce Department said Friday. Consumer spending rose just 0.2 percent, after a more robust 0.7 percent gain in July. Most of the increase in spending went to pay higher prices for food and gas. When adjusted for inflation, consumer spending was flat last month. Many tapped their savings to cover the steeper costs. In August, the savings rate fell to its lowest level since December 2009. The data offered "more evidence that households are in quite a bind,"

Personal Income Declines -0.1%, Real Consumer Spending Flatlines for August 2011 -The Personal Income and Outlays report for August covers individual income, consumption and savings. Overall the report shows America flatlining again economically. Personal consumption expenditures, called by the press consumer spending, increased 0.2% and in real dollars, flat lined, zero change from July to August. Real Personal Consumption Expenditures, or PCE, are about 70% of GDP. Real means chained to 2005 dollars, or adjusted for inflation. Below is a graph of real PCE. This report is also bad news for economic growth, or GDP in Q3. Real consumer spending was revised down to 0.4% monthly change for July and June was revised up -0.1%. Graphed blow is the overall real PCE monthly percentage change: The PCE price index increased 0.2% for the month, but minus energy and food increased 0.1%. The energy index increased 0.2% in for August and is up 19.6% for the year. This price index represents inflation, and is different from CPI. The price index is what is used to compute real consumer spending, or spending adjusted for inflation. Personal income decreased -0.1% in August. Below is personal income, not adjusted for inflation, or price changes. (10 charts)

US consumers go AWOL, taking recovery with them - The U.S. economy is limping along with the help of modest business investment in new equipment, some exports to parts of the world that are growing and the last few dollars from the government's 2009 stimulus spending program. For the time being, it looks like American consumers are AWOL. And until they come back, don't expect to see any real recovery in economic growth and the job market. Consumer spending typically accounts for roughly 70 percent of the U.S. economy. Fresh data from the government Friday confirmed that American consumers are tapped out. Consumer spending in dollar terms rose 0.2 percent in August. But those extra dollars went to cover higher prices for food and gasoline; when adjusted for inflation, spending was flat. Wages, meanwhile, slipped 0.1 percent -- the first decline in nearly two years. To make up the difference, American households had to dip into savings: the savings rate in August fell to its lowest level since late 2009.

US consumers rein in credit by most in year - U.S. consumer credit fell sharply in August, taking the biggest drop in more than a year as Americans were cautious about their finances amid a shaky economic outlook.  Consumer credit outstanding decreased by $9.5 billion, to $2.44 trillion, according to the Federal Reserve on Friday. The drop was the biggest since April 2010 and it followed an increase of $11.92 billion in July.Economists surveyed by Dow Jones Newswires had forecast an increase of $7 billion in outstanding credit during August.  The unexpected decline was caused by reductions in revolving and non-revolving credit. The contraction came after a contentious debate over lifting the U.S. debt ceiling and amid the Standard & Poor's unprecedented downgrade of the nation's triple-A bond rating and European debt troubles -- accompanied by wild stock-market swings. Revolving credit, which includes credit-card debt, fell by $2.27 billion, to $790.07 billion. Consumer spending is a big part of the economy, and it has slowed this year sharply. U.S. retail sales were flat in August, as unemployment remains elevated and earnings grow weakly.

U.S. Consumer Credit Decreased $9.5B in August -- Consumer credit in the U.S. unexpectedly dropped in August by the most in over a year.  The $9.5 billion decrease followed an $11.9 billion increase the previous month, the Federal Reserve said today in Washington. Non-revolving credit, which includes student loans and financing for automobile purchases, slumped by the most in three years.  Decreasing credit shows American households are either continuing to pay down debt or lack the confidence to boost spending on non-essential goods. A thawing of credit and a faster pace of purchases may require bigger gains in income and payrolls.  “Consumers were cautious over taking on additional debt at the end of the summer after the volatility in the stock markets and the uncertainty caused by the failure of Congress to work together to bring down these trillion-dollar deficits,”

Economists: Consumers won't save the economy - According to a recent study from the BlackRock Investment Institute, the ratio of household debt to personal income (wages and salaries only) remains at a staggering 154%, which is only 7.5 percentage points lower than in pre-recession peak. "While some progress in consumer debt reduction has been made, the heavy lifting of meaningful deleveraging still lies ahead," says the study. Until consumers repair their balance sheets, they are unlikely to increase spending or take on any new debt even with interest rates close to zero percent.That could continue to hamper the recovery since consumer demand makes up more than 70% of the U.S. economy. The latest data from the Labor Department shows that consumer spending fell 2% last year, following a 2.8% decline in 2009. Persistently high unemployment, stagnant wages, high commodity prices and overall stock market volatility are slowing the deleveraging process.

September retail sales solid ahead of holiday push - U.S. retailers' September sales came in generally well, with promotions helping remove back-to-school merchandise as preparations begin for the holiday season. The 23 retailers tracked by Thomson Reuters reported a 5.1 percent rise in stores open more than a year, or same-store sales. The figure beat expectations for 4.6 percent and compares with 2.7 percent growth last year. Target posted 5.3 percent same-store sales growth when 3.9 percent was expected. Macy's Inc. showed 4.9 percent growth in same-store sales, ahead of expectations for 4.4 percent. J.C. Penney Co. reported same-store sales fell 0.6 percent, when a 0.6 percent gain was expected. The department store now expects flat same-store sales for the quarter, not the 2 percent to 3 percent growth previously forecast, and cut a dime off its earnings per share target.

U.S. Light Vehicle Sales at 13.1 million SAAR in September - Based on an estimate from Autodata Corp, light vehicle sales were at a 13.1 million SAAR in September. That is up 11.2% from September 2010, and up 8.3% from the sales rate last month (12.1 million SAAR in Aug 2011). This was well above the consensus forecast of 12.6 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for September (red, light vehicle sales of 13.1 million SAAR from Autodata Corp). This was close to the sales rate in April and close to the high for the year. The second graph shows light vehicle sales since the BEA started keeping data in 1967.This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June.

ISM Manufacturing index increases in September - PMI was at 51.6% in September, up from 50.6% in August. The employment index was at 53.8%, up from 51.8%, and new orders index was unchanged at 49.6%.  From the Institute for Supply Management: September 2011 Manufacturing ISM Report On Business®  Here is a long term graph of the ISM manufacturing index. This was above expectations of 50.5% and suggests manufacturing expanded at a slightly higher rate in September than in August. It appears manufacturing employment expanded in September with the employment index increasing to 53.8%, up from 51.8% in August.

Manufacturing Activity Perks Up In September - The ISM Manufacturing Index increased in September to 51.6 from 50.6, reflecting a stronger pace of expansion in the manufacturing sector. As an early reading of last month's economic activity, the ISM index offers a bit of optimism at a time of rising fears that a new recession is approaching.  A reading above 50 indicates growth and so the higher number is encouraging if only because it suggests that the odds of another contraction look a bit lower compared with expectations ahead of the report. Every post-war recession has been accompanied by below-50 levels in the ISM. Although every predictor is flawed, today's ISM update offers one more data point on the side of optimism. Let's also note that even with September's rise the ISM index has fallen sharply from the 60-plus readings from earlier this year. It's obvious that the economy has slowed and the decline in the ISM since this year's first quarter confirms the retreat. The question is one of whether the economy will continue to stumble. For what it's worth, the ISM update suggests there's still reason to wonder.

Orders for U.S. Capital Goods Rise by Most in Three Months - Orders for U.S. capital equipment increased in August by the most in three months, a sign business investment and exports held up in the face of mounting concern over the European debt crisis. Bookings for goods like computers and communications gear, excluding military hardware and aircraft, climbed 0.9 percent, the most since May, a Commerce Department report showed today in Washington. Demand for all factory goods declined 0.2 percent. Faster growth in emerging economies helped sustain demand for American-made turbines and equipment even as U.S. households cut back. Federal Reserve Chairman Ben S. Bernanke said today that policy makers stand ready to take further action to propel a recovery that’s shown signs of faltering. “Capital investment continues to grow at a slower pace and exports will continue to do reasonably well, but ultimately activity will be driven by how events unfold in Europe,”

"Industrial Complexes" and the Great Relocation - Paul Krugman created the theory that inspired my Great Relocation idea, so perhaps it's natural for him to invoke it regarding Congress' latest attempt to get tough on China's currency policy. But in any case, I am really glad to see him bring it up:[T]here are real effects on the US if production moves, say, from China to Mexico. To an important extent, global manufacturing is carried out by regional complexes — an Asian complex centered on Japan and China in effect competes with a North American complex in which labor-intensive stuff is done in Mexico or Central America. So there’s an indirect competitive effect.  This is exactly the Great Relocation story. An "industrial complex" is a cluster of suppliers that represent different levels in a value chain. Transport costs, broadly defined - including costs from the necessity for face-to-face contact with customers, the ability to hire people away from one's competitors, and local knowledge spillovers - are minimized when all the firms locate close to one another.  Look around the world, and you will see that industries tend to cluster. Electronics is centered in East Asia. Business services and software are centered in India and on the U.S. West Coast. Heavy industry is in Germany. Not exclusively, obviously, but the clusters are real.

AAR: Rail Traffic increases in September - The Association of American Railroads (AAR) reports carload traffic in September 2011 1.1 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 2.3 percent compared with September 2010. On a seasonally adjusted basis, carloads in were up 1.1% in September 2011 compared with August 2011; intermodal in September 2011 was up 1.0% from August 2011.  This graph shows U.S. average weekly rail carloads (NSA).  Rail carload traffic collapsed in November 2008, and now, over 2 years into the recovery, carload traffic is only about half way back. The second graph is for intermodal traffic (using intermodal or shipping containers): U.S. rail intermodal traffic rose for the 22nd straight month in September 2011.1 U.S. railroads originated 949,606 containers and trailers for the month for an average of 237,402 units per week, up 2.3% from September 2010, up from an average of 235,968 in August 2011, and the highest weekly average for any month since October 2007 (see the chart on the top right of the next page).  Rail traffic improved in September, and really picked up towards the end of the month.

ISM Non-Manufacturing Index indicates expansion in September - The September ISM Non-manufacturing index was at 53.0%, down from 53.3% in August. The employment index decreased in September to 48.7%, down from 51.6% in August. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: September 2011 Non-Manufacturing ISM Report On Business®: The NMI registered 53 percent in September, 0.3 percentage point lower than the 53.3 percent registered in August, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 1.5 percentage points to 57.1 percent, reflecting growth for the 26th consecutive month. The New Orders Index increased by 3.7 percentage points to 56.5 percent. The Employment Index decreased 2.9 percentage points to 48.7 percent, indicating contraction in employment after 12 consecutive months of growth. The Prices Index decreased 2.3 percentage points to 61.9 percent, indicating prices increased at a slower rate in September when compared to August. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

More On China And Jobs - Paul Krugman -- Rob Johnson of INET sends me to an interesting paper by Autor, Dorn and Hanson (pdf) that uses regional data to estimate the impact of China imports on manufacturing employment. The idea is to exploit the major differences among US metro areas in industrial specialization: some areas produce a mix of goods that is in effect in China’s path, while others don’t. The results suggest, as I have been arguing, that it’s wrong to dismiss Chinese exports as not really being in competition with US production. Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects. Like everything in economics, support for free trade should be based on analysis, not slogans. And if you’re in a situation where the analysis says normal rules don’t apply, then they don’t apply.

China labour costs push jobs back to US - Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday. The Boston Consulting Group analysis says the new jobs will be generated by a “re-shoring” of manufacturing activity lost to China over the past decade. “Re-shoring is part of a broad trend that will emerge as ... production gradually swings back to the US,” Hal Sirkin, a senior partner at the consultancy, told the Financial Times. The Boston Consulting Group estimates that the trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade. The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies. “While Chinese labour costs are rising, US competitiveness has been improving,” says Mei Xu, the Chinese-born co-owner of Chesapeake Bay Candle. “We can invest in automation to make our candles in a factory near Baltimore for a similar cost to doing the same job in China.”

Re-Shoring - Krugman -  Ugly new term, but apparently the new thing; it refers to companies moving production back to America from China. The fact that such stories are being heard is support for those (including me) demanding action on the renminbi, because they show that there is indeed a margin at which changes in Chinese dollar costs move production back to the United States, and hence that the undervalued renminbi directly costs US jobs, as well as having the indirect effects I’ve written about recently.

Regulatory uncertainty: A phony explanation for our jobs problem - Policymakers are currently invoking two very different explanations for the jobs crisis. The more persuasive explanation is that the demand for goods and services is depressed because of the collapse of the housing and stock market bubbles—the financial crisis—that has led to both a deleveraging (paying off debts) of households and a cratering of the construction sector.  There is a competing story, widely told by Republican politicians and business trade associations, which claims that business investment and hiring is being held back by uncertainty over future regulations and taxation.  An examination of current economic trends, and especially what employers are doing in terms of hiring and investment, debunks this story about regulatory uncertainty as the cause of our dismal job growth. An examination of what employers and their economists are saying again and again in private surveys (cited later in this paper) makes it clear that what businesses actually identify as their primary set of challenges does not fit this story either. In other words, what the heavily politicized trade associations in Washington are saying does not correspond to the real challenges facing both large and small businesses, even as they themselves perceive them. DOWNLOAD PDF: EPI Briefing Paper No. 330 EPI BLOG: More on why regulatory uncertainty is a phony explanation

Spending measure gives Postal Service 6 more weeks to pay bills - The House approved a short-term spending measure Tuesday that will keep the federal government operating through Nov. 18. While the bill sets spending levels for the next six-and-a-half weeks, it also gives the U.S. Postal Service time to come up with the money necessary to make annual payments required to prefund the future retirements of its workers. Those payments usually total about $5.5 billion, a hefty annual sum that USPS says is primarily responsible for causing its recent financial malaise. Attempts to secure a 90-day extension for the payments failed, and some congressional aides have cautioned that lawmakers might not give the Postal Service another break if they need to pass another short-term measure. So what happens on Nov. 18 if the Postal Service can’t pay? Well, legally, nothing. There are no penalties if USPS doesn’t pay. The hope among postal executives is that Congress can agree on legislation that would revamp the Postal Service’s finances and give it more flexibility to set delivery schedules and close locations, if necessary.

Postal Mail in the Shadow of Email - Postal mail and electronic mail have coexisted for years, sitting next to one another in an uneasy tension. That was so thirty years ago, as it is this year. Two recent posts – one from Robert Cannon, and one from Randall Stross – offered a quick reminder about how that tension has evolved. Robert Cannon to those of us who subscribe to his list serve about telecommunications policy, is as well known for the web page, a goto site for any serious scholar of telecom policy — and that pertains to both its main threads, as well as explanations for the vast arcana and detritus of telecommunications law in the United States. His most recent post celebrates a now long forgotten chapter of the US postal service, when it first tried to offer electronic mail as a service. The tale is amusing for its absurdities. The USPS initiated its own email service known as E-COM ; and briefly considered banning all private email service. We all know how this turned out, of course, but this is still worth a read – not due to the ending, but due to the journey.

Planned layoffs at US firms highest in more than two years, report shows - The number of planned layoffs at U.S. companies leapt to their highest level in more than two years amid large cutbacks in the military and Bank of America, a private report shows. Employers announced plans to shed 115,730 workers from their payrolls in September, according to the latest numbers from consultants Challenger, Gray & Christmas. September’s job cut amount was 126 percent higher than the level announced for August and they were 212 percent higher than one year ago in September 2010, the report said. The September surge brought the number of job cuts announced in the third quarter to 233,258 -- the highest quarterly toll since the third quarter of 2009. Job reductions planned by the military accounted for a significant portion of the September job cuts, signaling what may be ahead as the federal government seeks across-the-board cuts in spending, Challenger said.

Announced Job Cuts in U.S. More Than Triple From Year Ago, Challenger Says - U.S. employers announced the most job cuts in more than two years in September, led by planned reductions at Bank of America Corp. (BAC) and in the military. Announced firings jumped 212 percent, the largest increase since January 2009, to 115,730 last month from 37,151 in September 2010, according to Chicago-based Challenger, Gray & Christmas Inc. Cuts in government employment, led by the Army’s five-year troop reduction plan, and at Bank of America accounted for almost 70 percent of the announcements.  While the bulk of firings are not “directly related” to economic weakness, they “could definitely be a sign of more cuts to come,” . “Bank of America is not the only bank still struggling in the wake of the housing collapse, and the military cutbacks are probably just the tip of the iceberg when it comes to federal spending cuts.”  More reductions will add to the pool of job seekers competing for work as policy makers, including President Barack Obama and Federal Reserve officials, strive to spur the labor market.

Announced U.S. Job Cuts Rise 212% From Year Ago, Challenger Says - U.S. employers announced the most job cuts in more than two years in September, led by planned reductions at Bank of America Corp. (BAC) and in the military. Announced firings jumped 212 percent, the largest increase since January 2009, to 115,730 last month from 37,151 in September 2010, according to Chicago-based Challenger, Gray & Christmas Inc. Cuts in government employment, led by the Army’s five-year troop reduction plan, and at Bank of America accounted for almost 70 percent of the announcements. While the bulk of firings are not “directly related” to economic weakness, they “could definitely be a sign of more cuts to come,” John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. “Bank of America is not the only bank still struggling in the wake of the housing collapse, and the military cutbacks are probably just the tip of the iceberg when it comes to federal spending cuts.”

Layoff Plans Soar By 126% In September To 115,730, 212% Higher Than Year Ago, Highest Since April 2009 - According to Challenger we just went through a "sea-change" event as "Employers announced plans to shed 115,730 workers from their payrolls in September, making it the worst jobcut month in over two years. Heavy reductions planned by the military accounted for a large portion of September job cuts, signaling what may lie ahead as the federal government seeks across-the-board cuts in spending. September job cuts were 126 percent higher than the 51,114 announced in August, according to the latest Challenger report. They were 212 percent higher than September 2010, when employers announced just 37,151 job cuts. Last month’s total is the highest since April 2009, when 132,590 job cuts were announced." Yet this is good news, considering that the biggest source of cuts was the bloated government and the insolvent Bank of America: "One-third of the layoffs announced this year came from government employers. It is, by far, the largest job-cutting sector, with 159,588 announced job cuts to date. This figure includes 54,182 government-sector cuts in September, 50,000 of which are the result of a five-year troop reduction plan announced by the United States Army.

Survey: Small Business Owners report reduction in employment, hiring plans slightly positive - From the National Federation of Independent Business (NFIB): NFIB Jobs Statement: No News is Bad News; More Jobs Lost - There is no good news to report. Until sales improve, until it becomes cost-effective to hire new workers, we cannot expect small-business owners to take advantage of new hiring tax credits and increase their employee rolls. ... For the fourth month in a row, small-business owners reported an overall reduction in employment, posting an average reduction of 0.3 workers per firm." And looking ahead, 11 percent plan to increase employment (unchanged) over the next three months, while 12 percent plan to reduce their workforce (also unchanged), yielding a seasonally adjusted net 4 percent of owners planning to create new jobs, one point lower than August and far below the double digit readings that are typical during an expansion. Here is a graph of the net hiring plans for the next three months since 1986. Hiring plans were still low in September, but still positive and the trend is up.

Smaller-Sized Firms Plan Less Hiring, Some Price Increases - The U.S. economy’s chief job engines are stalling as weak sales reduce confidence among small and mid-sized business owners, according to a survey released Friday. In a bad sign for inflation, 35% plan to raise prices to protect profit margins. The PNC Financial Services Group Autumn survey of small and mid-sized businesses show owners showed that only 18% were optimistic about their company’s outlook for the next six months, down from 22% in the spring. “Construction companies remain significantly more downbeat than manufacturing and services businesses,” the report said. In regards to sales, 40% of owners now expect sales to increase compared with 48% thinking that in the spring. Another 20% expect sales to decline, versus 13% readings a few months earlier. With owners expecting demand to slow, they are planning to keep a tight rein on payrolls while also raising prices to defend profit margins. According to the survey, only 20% plan to increase hiring, down from 24% planning that in the spring. And 35% expect to mark up their selling prices, with 55% planning to increase prices by more than 2%.

Weekly Initial Unemployment Claims increase to 401,000 - The DOL reports: In the week ending October 1, the advance figure for seasonally adjusted initial claims was 401,000, an increase of 6,000 from the previous week's revised figure of 395,000. The 4-week moving average was 414,000, a decrease of 4,000 from the previous week's revised average of 418,000.  The following graph shows the 4-week moving average of weekly claims since January 2000 (there is a longer term graph in graph gallery). The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined this week to 414,000. This is the lowest level for the 4-week average of weekly claims since August, and this was below the consensus forecast of 410,000. Still elevated, but some improvement.

The U.S. Layoff Picture in October 2011 - When we last looked at seasonally-adjusted initial unemployment insurance claims (aka "new jobless benefit filings") at the end of August 2011, we found that the average rate of new claims was falling at a level of about 800 per week.  Today, using data that the U.S. Department of Labor is just released, we find that the rate of improvement in U.S. layoff activity has slowed down:  For the trend established since 26 March 2011, when the higher cost of doing business associated with high and rising oil and gasoline prices combined with expectations of lower revenue due to a slowing economy prompted U.S. employers to cut their costs elsewhere by laying off higher numbers of employees to keep their businesses afloat, we now find that the average weekly change in the number of new unemployment insurance claims filed each week is falling at a rate of 590 per week.  At the present average rate of improvement, it will take another 2.7 years before the number of weekly new jobless benefit claims reaches the level of 317,600 that is consistent with a "stabilized" U.S. economy.

ADP: Private Employment increased 91,000 in September - ADP reportsAccording to today’s ADP National Employment Report, employment in the nonfarm private business sector rose 91,000 from August to September on a seasonally adjusted basis. Employment in the private, service-providing sector rose 90,000 in September, up slightly from an increase of 83,000 in August. Employment in the private, goods-producing sector rose a scant 1,000 in September, while manufacturing employment declined by 5,000. “Like August, this month’s jobs report continues to show modest job creation,”  “The number of jobs added to the private sector in August and September were virtually identical." Note: ADP is private nonfarm employment only (no government jobs).  This was slightly above the consensus forecast of an increase of 90,000 private sector jobs in September.

ADP Says Private Payrolls Rose 91,000 In September - The ADP Employment Report for September reveals another month of mediocre job growth in this data series, but that’s better than what the crowd’s been expecting. It sets us up for somewhat brighter expectations that Friday’s employment report from the government will confirm a mild revival in the labor market compared with August’s dismal number a la Washington's bean counters. Employment in the U.S. nonfarm private business sector rose 91,000 on a seasonally adjusted basis last month, according to ADP. That’s only slightly higher than the 89,000 gain in August, based on ADP’s accounting. The question is whether the September data will bring the Labor Department’s estimate of job growth back from a near-death experience in the last report.

US added 103,000 jobs last month, calming recession fears; unemployment stays at 9.1 pct - The United States added 103,000 jobs in September, a burst of hiring that followed a sluggish summer for the economy. The figure at least temporarily calms fears of a new recession that have hung over Wall Street and the nation for weeks. The Labor Department also said Friday that the nation added more jobs than first estimated in July and August. The government’s first reading had said the economy added zero jobs in August.The unemployment rate stayed at 9.1 percent. While the report was clearly better than feared, it also showed the economy is not gaining much momentum. “It moves you away from the ledge,” . The unemployment report, one of the most closely watched economic indicators, included some signs that business activity is increasing. The temporary help industry added almost 20,000 jobs, and the length of the average workweek increased slightly. Wages also rose a bit.

September Employment Report: 103,000 Jobs, 9.1% Unemployment Rate - From the BLSNonfarm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. The change in total nonfarm payroll employment for July was revised from +85,000 to +127,000, and the change for August was revised from 0 to +57,000 The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate was unchanged at 9.1% (red line).  The Labor Force Participation Rate increased to 64.2% in September (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio increased to 58.3% in September (black line).Note: the household survey showed a strong gain in jobs, and that is why the unemployment rate could hold steady with few payroll jobs added - and the participation rate increase.  The second graph shows the job losses from the start of the employment recession, in percentage terms.

Employment Situation - (with 7 charts) - The September employment report was among the strongest this cycle. Private payroll employment rose 137,000 and despite the 34,000 drop in government employment total payroll employment rose 103,000. Moreover, the household survey showed a gain of 398,000. Even so, by historic norms employment continues to be weak. But compared to the other jobless recoveries this cycle continues to show growth somewhere between the 1990s and 2000s cycles. Because the household survey tends to lead the payroll numbers the large gains in the household survey was encouraging. Wage growth continues to show weak gains. I have a wage equations that I've used for may years and it is no longer calling for falling wage. But now I expect wage growth to remain weak to offset the period when average hourly earnings were stronger than the wage equation called for. The average work week lengthened and together with the weak wage gains average weekly earnings rose 0.6%, one of the largest gains this cycle. I had been particularly worried about the lack of income growth and saw it as a major threat to economic growth. As of last month real weekly earnings were down some 2.27% over the past years. With weak oil prices real weekly wages should show a nice gain in September.

Payrolls +103,000 Jobs but 444,000 of them were Part-Time - Here is an overview of September Jobs Report, today's release.

  • US Payrolls +103,000
  • 45,000 Striking Workers Return
  • Net effect is +58,000 jobs
  • US Unemployment Rate Flat at 9.1%
  • Participation Rate +.2 to 64.2%
  • Actual number of Employed (by Household Survey) rose by 398,000
  • Unemployment rose by 25,000
  • Those not in the labor force dropped by 224,000
  • Civilian population rose by 200,000
  • Civilian Labor Force rose by 423,000
  • Average Weekly Workweek rose .1 hours to 34.3 hours
  • Average Private Hourly Earnings rose 3 Cents 10 $19.52
  • Government employment decreased by 34,000

Video: Breaking Down the Jobs Numbers - WSJ - In September, the unemployment rate remained unchanged from July and August at 9.1% while 137,000 jobs were added to the private sector. Kelly Evans, Dennis Berman, Evan Newmark, Sudeep Reddy and Phil Izzo break down the numbers on the News Hub.

U.S. Adds 103,000 Jobs; Rate Holds Steady at 9.1% - As an increasing number of economists warn of a possible dip back into recession1, the Labor Department said Friday that American employers added 103,000 jobs in September, staving off the bleakest forecasts for now. The unemployment rate for September was unchanged from August, 9.1 percent. With President Obama continuing to press a balky Congress to pass his jobs bill, the Labor Department’s monthly snapshot highlighted the challenges for an administration faced with an economy that has struggled to deliver significant employment growth since the recovery started more than two years ago. September’s number of new jobs was well more than analysts had expected — one consensus predicted a gain of 55,000 jobs — and the Labor Department also revised the August figure of zero job growth to a gain of 57,000 jobs. Still, the report2 came on the heels of disappointing data about consumer confidence and the housing market. Economists have also grown increasingly concerned about a ballooning European debt crisis3 that could send ripples across the Atlantic.

Private Sector Jobs Rose 137,000 Last Month… Whew! - The labor market pulled back from the brink last month. Private-sector job growth rebounded in September for a net gain of 137,000, a dramatically higher pace over August’s meager 42,000 rise, the Labor Department reports. The case for expecting a recession's near, in other words, has fallen a notch or two. But while September’s job market improved, the growth rate is still weak. The unchanged 9.1% unemployment rate for September drives makes this point loud and clear. The economy, it seems, looks poised to grow just enough to keep a new recession at bay. Expecting much more is probably asking too much, but it’s all we’ve got. The trend is hardly spectacular, but it’s hard to make the case that the economy will contract when private sector employment is rising by well over 100,000 a month.But no one should see today’s number as definitive evidence that the economic recovery will survive. If today’s number had been a substantial move down from August’s thin advance, we’d all be talking about how deep the recession would be. We’re evaluating and reassessing the economy on a daily basis, and that’s not good.

The Employment Report: Still Moving Sideways - Today’s employment report continues to point to a weak labor market. The unemployment rate held steady at 9.1 percent, and only 103,000 jobs were created (a figure that includes 45,000 workers returning from strike): Nonfarm payroll employment edged up by 103,000 in September, and the unemployment  rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. In September, job gains occurred in professional and business services, health care, and construction. Government employment continued to trend down. Even if the 103,000 wasn’t inflated by workers returning from strike, that’s barely enough to keep up with population growth, and it’s far short of what is needed to reabsorb the millions of unemployed. Thus, while this report doesn’t point to a double-dip, it does point to a period of continuing stagnation. There’s nothing in these numbers to indicate that a period of strong growth is just around the corner.

The upside - SOMETIMES it’s the absence of bad news that’s the best news of all. This morning the government reported that nonfarm payrolls in America grew by 103,000 from August to September, and previous months' figures were revised up a total of 99,000. The August goose egg is no more; employment rose by 57,000. Both August and September were distorted by a Verizon Wireless strike, so the two-month average of 80,000 is a better indicator of underlying job growth. Government continues to be the main drag; state and local governments cut 33,000 jobs while private payrolls increased by 137,000. Commentators from both the left and the right grouse that these are tepid numbers, barely enough to keep up with population growth, and point out that the unemployment rate remained at 9.1%, unchanged from August. Yes, but. What matters at turning points is the second derivative, the change in the change. Nonfarm payrolls were less weak than expected, beating the consensus of 60,000. One upside surprise does not an all-clear make, but this is one of several: unemployment insurance claims were lower than expected, and automobile sales and the factory purchasing managers index were higher in September than expected.

Brief Note on the Unemployment Rate - Addendum to Payrolls +103,000 Jobs , 444,000 Part-Time on Household Survey In the household survey (data repeated below for convenience) there was a gain of 398,000 employed. However, the labor force rose by 423,000 explaining the flat unemployment rate.  Of the 398,000 increase in employment, 444,000 were part-time jobs. This can be interpreted two ways. The first way is 46,000 full-time jobs were lost. The second way is 398,000 people who did not have a job, now have one. The correct interpretation depends on the status of those workers over time. My guess now is this is unusual seasonal strength and will not be repeated. Here are the charts once again: In the last year, the civilian population rose by 1,749,000. Yet the labor force dropped by 107,000. Those not in the labor force rose by 1,856,000. Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

US Labor Market Data: Job Growth Moderate, Unemployment Steady in September - The latest data from the Bureau of Labor Statistics show that the U.S. economy added 103,000 payroll jobs in September. That was the best number in five months, but is still well below the rates of job growth earlier in the recovery. The service sector provided nearly all of the new jobs, with health care and temporary work leading the way. Goods producing sectors added just 18,000 jobs and manufacturing jobs actually fell in the month. Government jobs decreased by 34,000, continuing a steady decline. A separate household survey that includes farm jobs and the self-employed showed that the labor force, which includes both employed and unemployed persons, grew by 423,000. Of these, 398,000 found jobs and 25,000 joined the ranks of the unemployed as soon as they started to look for work. The unemployment rate, which is the ratio of unemployed persons to the labor force, remained unchanged at 9.1 percent for the third month in a row. The BLS also calculates a broader measure of unemployment called U-6. The numerator of U-6 includes the officially unemployed, plus persons marginally attached to the labor force who would like to work but are not looking because they think there is no work, plus part-time workers who would prefer full-time work, but can't find it.

The ever-rising `uncertainty’ bar - The economy added 103,000 jobs in September — some 137,000 added jobs in the private sector were offset by more shrinkage in the public sector, which shed 34,000 local government jobs. Matthew Yglesias observes: The conservative story about the Obama economy seems to be that an overweening state is holding the private sector back. But the reality is that the public sector is shrinking. This shrinkage is exactly what conservatives claim to believe will spark growth once they bring the era of Kenyan Anticolonialism to an end. But it’s already happening in a modest way, and has been happening for a year and a half, and it keeps not delivering any private sector magic.  Yglesis asks: What’s the conservative explanation for this? And Steve Benen has more along these lines.  It isn’t just that state governments are shedding jobs. Spending from that “job-killing” stimulus is winding down across the board. Dems agreed to the extension of the Bush tax cuts for the rich, which conservatives claimed would help the economy. Dems agreed to deep cuts in spending, which conservatives claimed would send a signal that would restore business confidence. Dems have prioritized deficit reduction over jobs creation, agreeing to the creation of a deficit supercommittee that will likely cut entitlements. And we’re still where we are.

September Jobs Report: Eh - It is better than zero. That is about the best that can be said about the September jobs report, on the heels of last month's numbers that showed precisely zero jobs added in August. Indeed, the headline number for September of 103,000 jobs added was markedly better, but a deeper dive into the numbers reveal the same disappointing growth we have become inured to during this weak recovery. The overall unemployment rate remained unchanged at 9.1 percent, while the broader U-6 measure that includes discouraged workers and those unable to find full-time work ticked up 0.3 percentage points to 16.5 percent. The better news was that the the jobs numbers for the past two months were revised up by 99,000, and that the private sector managed to add 137,000 jobs this past month. Of course, this latter number is complicated by the fact that 45,000 striking Verizon workers, who were counted as "unemployed" in August, returned to the job rolls in September—meaning, that only 92,000 new private sector jobs were created in the last month. When taken in conjunction with the continued job losses among government workers—34,000 in September—the picture that emerges is of an economy barely able to keep pace with the growth in the population.

Slow Crawl Out of 6.6 Million-Job Hole - Even though the economy has been adding jobs for the past twelve months, the hole left by the recession remains deep. Click for full size graphic.  In order to get back to levels prior to recession the U.S. still needs to add 6.6 million jobs. That’s a steeper climb than prior recessions even taking population growth into account. And the addition of the 6.6 million jobs only accounts for the jobs that were lost, it does nothing to expand the labor market for the nearly 100,000 new entrants who join the ranks of the labor force every month. The above graphic looks at expansions over the past 40 years. Adding to worries about the current jobs shortfall is the pace of recovery in the previous recession. The expansion of the mid-2000s was one of the most lackluster in recent history, if that pattern holds the U.S. economy may not even make it back to prerecession levels before another recession hits.

Two more job market charts - Atlanta Fed's macroblog - Payroll employment growth has averaged about 110,000 jobs a month since February 2010, the jobs low point associated with the crisis and recession. This growth level compares, unfavorably, with the 158,000 jobs added per month during the last jobs recovery period from August 2003 (the low point following the 2001 recession) through November 2007 (the month before the recent recession began). Are these sorts of differences material? If the economy can find its way to creating jobs at the same rate as the last recovery—which nobody remembers as particularly off-the-chart spectacular—we would be back to the prerecession level of overall employment by spring 2015. If, on the other hand, we can only eke out the sub-100k pace we've seen this year, that date moves out to 2017: So we do eventually get there in terms of recovering the jobs lost during the course of the past four years. The same, unfortunately, cannot be said of the unemployment rate. Because the unemployment rate has more moving pieces—like assumptions about labor force participation rates (or how many people jump in and out of looking for jobs)—back-of-the-envelope calculations are a bit more speculative than the simple employment paths in the previous chart. But with a few assumptions, such as the presumptions that the labor force will grow at the same rate as census population projections, the unemployment rates associated with job growth of 158,000, 110,000, and 96,000 per month would look something like this:

US Needs To Generate 261,200 Jobs Per Month To Return To Pre-Depression Employment By End Of Obama Second Term ZeroHedge: Every few months we rerun an analysis of how many jobs the US economy has to generate to return to the unemployment rate as of December 2007 when the Great Financial Crisis started, by the end of Obama's potential second term in November 2016. This calculation takes into account the historical change in Payroll and includes the 90,000/month natural growth to the labor force, and extrapolates into the future. And every time we rerun this calculation, the number of jobs that has to be created to get back to baseline increases: First it was 245,500 in April, then 250,000 in June, then 254,000 in July. As of today, following the just announced "beat" of meager NFP expectations, this number has has just risen to an all time high 261,200. This means that unless that number of jobs is created each month for the next 5 years, America will have a higher unemployment rate in October 2016 than it did in December 2007. How realistic is it that the US economy can create 16.2 million jobs in the next 62 months? We leave that answer up to the US electorate.

Unemployment’s here to stay - There’s no particularly good news in these numbers. For every glimmer of good news, like the upward revisions to previous reports totaling 100,000 new jobs or so, there’s an offsetting piece of bad news, like the broad U6 unemployment rate jumping up to 16.5% from 16.2%. And the number of people unemployed for more than six months is now 6.24 million — up by 208,000. The long-term unemployed — the least employable of the unemployed, and the most intractable problem in terms of getting America back to work — are now 44.6% of the total, up from 42.9% last month, and 41.8% a year ago. It’s always a bit dangerous to try to meld the two surveys which make up the payrolls report, but I’m detecting a trend here: insofar as employers are hiring new people, they’re hiring new entrants into the labor force, rather than people making up the ranks of the unemployed. Maybe it’s recent graduates, maybe it’s former stay-at-home moms who were never claiming unemployment but who are now getting jobs. Maybe it’s immigrants. But the big picture is that employment growth is more or less keeping track with population growth, leaving no new jobs for the 14 million unemployed Americans.

Back to School, With Fewer Teachers - On Thursday I called attention to the question of how many teachers returned to work this fall. The answer seems to be: Not that many.According to the monthly labor report issued today, the number of education employees in state and local governments rose by 1.12 million in September, compared to 1.16 million last September. That is the smallest increase since 2003. It is 12 percent below the peak gain, registered in 2006. (These figures are, of course, before seasonal adjustment.) The number may be revised next month, of course, and since the figures are for the week after Labor Day, there are a few schools that were not back in session yet. There are typically small gains in October as well. But make no mistake: School budgets are hurting. This ought to sound alarm bells in Washington.

The change in payrolls actually decreased from August to September - The payrolls number today was deceiving. Taken at face value, it implies an increase in job creation between August and September, from the (revised) 57k in August to 103k in September. But there was a strike in August., which involved 45k workers. Employees in strike are not counted in the payrolls by the Bureau of Labor Statistics, because they are not paid while they are in strike. I would argue that those employees should be counted in if they are expected to return to the payrolls in the short term. I'm not criticizing the BLS's methodology, but rather trying to capture the underlying trend of employment. If we add those 45k to the change in payrolls in August we get a change of 102k (57k + 45k), and if we subtract those 45k from the change in September, we get a corrected change of 58k (103k - 45k). Job creation, therefore, weakened from August to September. In addition, keep in mind that the threshold for statistical significance of the change in payrolls is 96.4k. So the change in payrolls in August was not different from zero, from a statistical standpoint, and the change in payrolls in September was only barely significant.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - This was a weak report, but better than many expected. A few points:
• The Verizon labor dispute subtracted 45,000 payroll jobs in August and those jobs were added back in September.

• The household survey showed an increase of 398,000 jobs in September. This increase in the household survey kept the unemployment rate from rising, even as more people participated in the workforce (labor force increase by 423,000). The unemployment rate was unchanged at 9.1%, and the participation rate increased to 64.2% from 64.0%. The employment population ratio also increased to 58.3% from 58.2%.
• Employment for July and August were revised up. From the BLS: "The change in total nonfarm payroll employment for July was revised from +85,000 to +127,000, and the change for August was revised from 0 to +57,000." That is an additional 99,000 jobs.
This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  In the previous post, the graph showed the job losses aligned at the start of the employment recession. In terms of lost payroll jobs, the 2007 recession was by far the worst since WWII.  From the BLS reportThe number of persons employed part time for economic reasons rose to 9.3 million in September.The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) increased to 9.27 million in September from 8.826 million in August. This is the high for the year. These workers are included in the alternate measure of labor underutilization (U-6) that increased to 16.5% in September from 16.2% in August.   This graph shows the number of workers unemployed for 27 weeks or more.

Broader Jobless Rate Hits 16.5%, Highest Level of 2011 - The U.S. jobless rate was flat at 9.1% in September, but the government’s broader measure of unemployment rose to 16.5%, the highest rate this year. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. The key to the rise in the broader unemployment rate was due to a 444,000 jump in the number of people employed part time but who would prefer full-time work. That number could reflect a rising number of workers who saw their hours cut back by concerned bosses or new part-time hires who would prefer full-time work. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The 9.1% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks.

Unemployment Among Job Losers - I don’t have any grand conclusion from this yet but I just think its interesting. Here is the unemployment rate considering only people who lost their job as opposed to those who quit or just started looking for work.(chart) Its declining much more sharply.  Does that tell us anything important about the recession?

Austerity Bites - Governments at every level shed 34,000 jobs last month, the Labor Department said Friday. The private sector, meanwhile, added 137,000 positions (about 45,000 of which came from returning Verizon Communications Inc. employees). The cutbacks primarily came from local governments, though the turn toward austerity at every level of government has some liberals worried reduced government spending will depress growth at a time when the economy is already struggling. Conservatives contend that existing and projected federal deficits hinder economic growth and now is the time to start reining them in to reduce uncertainty. “With downward pressure on government payrolls likely to persist (particularly at the state and local level, although soon at the federal level as well), it is important to look at the overall nonfarm payroll results rather than just those for the private sector,”  Local governments, which continue to struggle with depressed tax revenue and declining aid from state governments, trimmed 35,000 jobs in September from a month earlier, mostly in education. In the past year, localities have cut 210,000 jobs. The pain is unlikely to ease soon, city finance managers noted in a recent survey.

City Hall Woes on the Jobs Front - Today’s jobs report shows that the number of jobs in state and local government is down 3.3 percent from the peak reached in August 2008, the month before Lehman Brothers failed. (These numbers are after seasonal adjustment.)That is the largest decline in such jobs registered since the Korean War, exceeding the fall during the early 1980s. The following chart shows the two downturns. What is remarkable about the current decline has been its relentlessness. There is an occasional one-month bounce — there was one in August — but that is probably more a reflection of poor seasonal adjustments than of actual hiring.The early 1980s fall was more rapid, but the number of state and local government jobs hit bottom in July 1982, four months before the official end of the recession, and began to recover. The 2007-9 recession ended two years ago, but you can’t see any evidence of that in this chart.

Duration of Unemployment, Unemployment by Education and Diffusion Indexes - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Two categories increased in August: The 27 weeks and more (the long term unemployed) increased to 6.242 million workers, or just over 4.0% of the labor force, and the less than '5 weeks' category increased slightly - this followed the recent increase in initial weekly unemployment claims. The other two categories decreased. The decrease in the '15 to 26 weeks' group is probably from workers moving into the 27 weeks and more category. The key point is the that number (and percent) of long term unemployed remains very high. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). This says nothing about the quality of job - as an example, a college graduate working at minimum wage would be considered "employed". This is a little more technical. The BLS diffusion index for total private employment was at 55.4 in September, down slightly from 55.6 in August, and for manufacturing, the diffusion index decreased to 46.3 - the 2nd consecutive reading under 50. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Why Isn’t the Unemployment Crisis a National Emergency? - Labor markets are in terrible shape. Fourteen million people are unemployed, long-term unemployment remains near record highs, the ratio of job seekers to job openings is 4.3 to 1, and the employment to population ratio has dropped precipitously. Even if the economy grows at a robust average of 3.5% beginning in 2013, labor markets won’t fully recover until 2017. And if average growth is only 3.0% – well within the range of possibility – it will take until 2020. In short, labor markets are in crisis and the longer the crisis persists, the more permanent and growth-inhibiting the damage becomes. So it was welcome news to see President Obama pivot from deficit reduction to job creation. Unfortunately, it’s unlikely to do much to help with the unemployment problem. There plenty of time to provide help, the dismal prospects for recovery detailed above make that clear. So the time it takes to implement job creation policies – the objection that there are not enough shovel ready projects – is not the issue. And while concerns over the deficit are valid for the long-run, they shouldn’t prevent us from doing more to help the jobless. The long-run debt problem is predominantly a health care cost problem, and whether or not we help the jobless doesn’t much change the magnitude of the long-run problem we face.

Number of the Week: Falling Wages for Young College Grads - 9.6%:

Decline from 2000 to 2010 in inflation-adjusted median earnings of people 25 to 34 years old with a bachelor’s degree and no graduate degree. Few people have gone unscathed by the bad economy, but the way it has damaged the prospects of America’s young college graduates may be one of its most lasting legacies. The high unemployment they are now experiencing will leave many of them a step behind throughout their careers. Research by Yale School of Management economist Lisa Kahn found that workers who graduated from college during the deep recession in the early 1980s were still worse off than workers who graduated in better times in 2006. When young college graduates do land a job, it often won’t pay well. According to the Census Bureau, the median annual earnings of a worker 25 to 34 years old with a bachelor’s degree (but no graduate degree) was $40,875 last year. That compares with $45,200 in 2000, adjusting for inflation. Older college-educated workers also saw their earnings fall, but not by nearly as much.

To boost incomes, Uncle Sam should lend a hand - The Great Recession and its aftermath are at the forefront of Americans' concerns right now. But wages were in trouble long before the economic crisis hit in 2008. After rising steadily for a generation following World War II, the wages paid to ... the lower half of the earnings distribution have barely budged since the 1970s. That isn't because the US economy has failed to grow. It's because growth of wages no longer tracks growth of the economy. Economic growth and wage growth have become decoupled. This is worrisome. Rising income, even more than the opportunity to go from rags to riches, is at the core of the American dream. And people who feel they are better off than before tend to be more generous, altruistic, and participatory. If wage stagnation continues, America risks heightened frustration, alienation, and selfishness. Moreover, given that pay and incomes have been growing rapidly for those at the top, the country has experienced a sharp increase in polarization. At some point this could engender serious societal friction.

When Times Get Tough, the Elderly Work - The elderly are one group whose work hours now exceed what they were before the recession began.  A significant fraction of households and businesses are typically so burdened with the debts they accumulated during the housing surge that they have little incentive to produce and work, because their creditors would get most, if not all, of the fruits of their labor. In contrast to the no-new-loans-and-no-demand theory, old loans do not affect all workers; some are less burdened by debt. The elderly may fall in this category, because they are more likely to have saved money over their lifetimes and to have paid off their mortgages. Although some elderly working for debt-burdened employers may have lost jobs, on average the elderly in these areas should be working more because they have better incentives to do so. The chart below compares 2007-10 changes in work hours for two areas –- the regions where housing prices rose and fell the most, on the left side of the chart, and the rest of the United States on the right. For middle-aged and younger people (blue bars), hours worked fell 12 percent in the large cycle regions and about 9 percent in the rest of the United States.

Explaining the Black-White Wage Gap - As of 2010, black men in America earned 74.5 percent of a typical white man’s wage; black women earned 69.6 percent. A new paper examines some of the factors driving the black-white wage gap. Using data from unemployed workers in New Jersey who sought employment for up to 12 weeks, the authors show that racial discrimination accounts for one-third of the wage difference. They also estimate that blacks have a 7 percent lower reservation wage than their white counterparts at a comparable job that demands a comparable skill level. Fryer and his colleagues control for skill level by measuring the job applicants’ wage at their previous job against the wage they were seeking. Here’s the abstract: The extent to which discrimination can explain racial wage gaps is one of the most divisive subjects in the social sciences. Using a newly available data set, this paper develops a simple empirical test which, under plausible conditions, provides a lower bound on the extent of discrimination in the labor market. Taken at face value, our estimates imply that differential treatment accounts for at least one third of the black-white wage gap. We argue that the patterns in our data are consistent with a search-matching model in which employers statistically discriminate on the basis of race when hiring unemployed workers, but learn about their marginal product over time. However, we cannot rule out other forms of discrimination.

Hecho en América - Between talk-radio blather and election-season bravado, it's easy to have an opinion about immigration, and easier to forget that people—actual people—pick our food. Now and then we might glimpse them out the car window, but few of us realize that what we eat depends on them, and fewer still have any idea what their world is like. Jeanne Marie Laskas spends a season with a group of these nomads—the constant wanderers who put fruit on our table

Alabama Likes its Guest Workers Ignorant and Poor - So much of the immigration "debate" comes down to wishful thinking -- just wish away the incentives Americans have to hire unauthorized immigrants, or the obvious incentive migrants have for taking those jobs, and then everything will be hunky-dory.  But the incentives remain, so we will have people wanting to come here. The legal system for doing so is an epic mess, so we'll have people in the country without having their papers in order. Many of them will eventually become legal, and many will have children who are U.S. citizens. So, in practical terms, this gets down to whether one wants to keep 4 percent or so of the workforce -- and a larger share of the future workforce -- ignorant and poor, or give them a shot at a more prosperous future (which means more tax dollars thrown into the kitty).

Food-stamp use triples as local despair grows - The load on the state's safety net for Palm Beach County's poorest families has tripled since the 2007, with staggering increases every year in the number of individuals using food stamps to feed their families. In Palm Beach County, 161,250 of the county's 1.3 million residents - 12.4 percent - received food stamps in August, close to 22,000 more than last year and triple the amount from August 2007, according to data from the state Department of Children and Families. The number of low-income, elderly and disabled people who received Medicaid through DCF has also steadily increased throughout the last four years, from 90,163 in August 2007 to 152,686 in August 2011. Food stamp use grew faster in Palm Beach County than in Florida as a whole, though the state's numbers more than doubled in four years, from 1.3 million in August 2007 to 3.2 million in August 2011. "Hearing those numbers just makes me depressed, and that's just a signal of what's going on here locally, that so many people have just lost jobs and don't have income,"

Berkeley food programs short on funds as demand rises - At a time when an increasing number of families need help putting a meal on the table, the Berkeley Food Pantry has a severe financial shortfall that threatens to jeopardize its emergency aid program. If a promised check from the Federal Emergency Management Agency (FEMA), which administers the Emergency Food and Shelter National Board Program, doesn’t show up within days, the pantry may not be able to help hungry Berkeley and Albany residents who line up for two bags of groceries later this week. The 42-year-old program, which operates three afternoons a week out of the Berkeley Friends Church on Sacramento Street, has just $190 in its account, said director Bill Shive. In less dire times pantry expenses amounted to $3,000 a month, though it has spent as much as $5,000 a month on both perishables and pantry items to provide sustenance to people in need, said Shive.

U.S. Cost of Hunger Was $167.5 Billion in 2010, Researchers Say -- The cost of hunger in the U.S., the world’s largest economy, was $167.5 billion last year as the recession in 2008 and a slow economic recovery pushed more American households into food insecurity, researchers said. The number of food-insecure and hungry Americans in 2010 rose 30 percent from 2007, Waltham, Massachusetts-based Brandeis University said in an online statement yesterday, citing a study led by university professor Donald Shepard. Hunger’s cost to society includes lost productivity, poor education, additional healthcare costs and charity donations to keep families fed, the researchers said. A 2007 report by Shepard estimated the U.S. hunger bill in 2005 at $90 billion, the university said. “This increase in food insecurity and America’s hunger bill over these three years demonstrates the breadth of suffering associated with this recession,” Shepard said in the statement. “All Americans bear a part of these costs.”

‘Sesame Street’ Special on Hunger Introduces New Muppet Character - The familiar address of Sesame Street is about to get a new visitor, one who could surely benefit from the sunny days and friendly neighbors there. For a prime-time special to raise awareness about hunger faced by American families, Sesame Workshop, the nonprofit organization that produces “Sesame Street,” has created a new Muppet character named Lily, a 7-year-old girl representing one of the 17 million American children that the Department of Agriculture estimates are “food insecure,” meaning their access to food is limited or uncertain.

One Third of Americans One Paycheck Away From Homelessness -  Yves Smith - This stunning factoid was reported in DS News last week and appears not to have gotten the attention it deserves. A mid-September survey ascertained that a full one third of Americans were living paycheck to paycheck, and if they lost their job, they would not be able to make their next rent or mortgage payment. And the article stresses this was not a function of being in or near the poverty line (hat tip reader May S): Despite being more affluent, the poll found that even those with higher annual household incomes indicate they are not guaranteed to make their next housing payment if they lost their source of income. Ten percent of survey respondents earning $100K or more a year say they would immediately miss a payment….Sixty-one percent of those surveyed said if they were handed a pink slip, they would not be able to continue to make their mortgage or rent payment longer than five months. The implications are grim. The odds of an economic recovery any time soon are close to non-existent. Many large companies (like Bank of America) have announced layoffs. Flagging top lines and a likely to be weak Christmas season, if Chinese shipping volumes are any guide, means more cuts are likely go be announced next year. With so many citizens on a knife’s edge financially, a slackening of demand will have a more severe impact than usual. In other words, if we have another economic leg down, it will feed on itself in a more pernicious manner than most experts foresee.

The 99% - I spent quite a lot of time on the "We are the 99%" website last night and this morning.  There's been a considerable amount of carping about it from the conservative side, and to be sure, some of the stories strain plausibility (the percentage of people in the sample who have either taken up prostitution, or claim to have seriously considered doing so, seems rather high, for instance, and as far as I could tell, not a single person on the site had been fired for cause).  Many of the people complaining made all sorts of bad decisions about having children, getting very expensive "fun" degrees, and so forth. These are people who are terrified, and their terror is easy to understand.  Jobs are hard to come by, and while you might well argue that any of these individuals could find a job if they did something different, in aggregate, there are not enough job openings to absorb our legion of unemployed. I  think it's hard to read through this list of woes without feeling both sympathy, and a healthy dose of fear.  Take all the pot shots you want at people who thought that a $100,000 BFA was supposed to guarantee them a great job--beneath the occasionally grating entitlement is the visceral terror of someone in a bad place who doesn't know what to do.  Having found myself in the same place ten years ago, I can't bring myself to sneer.  No matter how inflated your expectations may have been, it is no joke to have your confidence that you can support yourself ripped away, and replaced with the horrifying realization that you don't really understand what the rules are.

Think Again: The Era of the 'One Percent' - Think about it: In 1974 the top 0.1 percent of American families enjoyed 2.7 percent of all income in the country. By 2007 this same tiny slice of the population had increased its holdings to fully 12.3 percent—roughly five times as great a piece of the pie as it had enjoyed just three decades earlier. Half the U.S. population owns barely 2 percent of its wealth, putting the United States near Rwanda and Uganda and below such nations as pre-Arab Spring Tunisia and Egypt when measured by degrees of income inequality. Over one in five American children is living in poverty, and the number is rising. By the end of 2010, corporate profits rose by fully 15 percent of the economic pie—their biggest share of the economy since such statistics became available nearly 70 years earlier—while the share going to workers’ wages dropped to their lowest level in the same period and fell below 50 percent of national income for the first time.

Still Growing -- In "'Scrap Yards Are the New Pawn Shops,'" "Barely Afloat," and "Thieves Expand Their Horizons," I noted the long and growing list of atypical items that thieves -- many of whom are likely acting out of desperation -- have targeted, including transformers, storm drain covers, railroad tracks, air conditioners, meat, cemetary mementos, church collection plates and crosses, newpapers, utility poles, hot air balloons, and embalming fluid. Time's Moneyland blog points us to a few more in "5 Weird Things People Are Stealing While the Economy’s in Bad Shape": Swine swindling! The fact that pork prices have soared to all-time highs must have helped enticed thieves to steal about 1,000 pigs from farms in Minnesota and Iowa. In one of the heists, 594 hogs, worth more than $100,000 disappeared.  In a series of incidents in Atlanta, Chicago, and other cities, teams of thieves have broken into salons and beauty supply stores specifically to steal human hair, which is often imported from Malaysia and India, and is used for trendy weaves, wigs, and extensions.  In one instance, thieves made off with $70K to $90K worth of hair—which explains why they didn’t bother touching the cash register at all.

Copper thieves target Phoenix freeways -- Copper thieves are targeting Valley freeways in a big way.  In the past year, thieves have struck more than 200 times, taking copper out of lights and signs, costing taxpayers about a half-million dollars.  "If there's a bank of lights out along the freeway nowadays, you can really assume that that's the result of a copper theft," said Doug Nintzel of the Arizona Department of Transportation.  He said ADOT has asked the Department of Public Safety to be on the lookout for thieves on patrol.  "The biggest thing, really, is to try to keep access to the wire a minimum, Nintzel said.  He said ADOT is considering going to a smaller gauge wire on its freeway lighting systems to discourage the copper thieves.

Bold thieves steal bridge in North Beaver - As the value of scrap metal — including copper and steel — increases, thieves have been becoming more daring and less respectful of institutions such as churches and schools. But one group of thieves might have set the standard last week by stealing a 50-foot-long bridge. State police said the bridge was stolen between Sept. 27 and Wednesday in North Beaver Township. The theft was discovered shortly after 9 a.m. Wednesday.The bridge, around 20 feet wide, was in a wooded area along a railroad line in the township’s Covert’s Crossing region. The bridge was made out of corrugated steel and valued at approximately $100,000. Police said the thief or thieves used a cutting torch to dismantle the bridge where it sat.

States that have the highest taxes - States facing shrinking revenues approved $23.9 billion in new taxes and fees in 2010. They imposed a further $6.2 billion in taxes in 2011 and proposed $13.8 billion in new taxes for 2012, according to the National Association of State Budget Officers. "Many jurisdictions, many states, many counties, are broke," said Carol Kokinis-Graves, senior writer analyst at Riverwoods (Ill.)-based tax and accounting firm CCH, a Wolters Kluwer business. Along with cutting services, states are getting creative in finding additional revenues. (Think: taxes on yoga classes and lots more "sin" taxes.) The Tax Foundation annually releases state-local tax burdens for the residents of each state. The burdens are effective tax rates calculated by totaling state-local level taxes paid by taxpayers in each state, then dividing by their income. The burdens also reflect the economic incidence of taxes that are commonly shifted to out-of-state taxpayers. Does your state lead the pack in levying taxes on income, property, consumption, inheritance, and whatever else it can dream up? Read on to see which states make you pay the most — and the least.

Monday Map: State and Local Sales Tax Collections - Today's Monday Map shows per capita state and local sales tax collections. Wyoming comes in highest at $2,303 per person; at the other end are Oregon, Montana, Delaware, and New Hampshire, which lack a sales tax at any level.

Florida facing another $2 billion budget shortfall - Senate President Mike Haridopolos said Thursday that the state is facing another multibillion-dollar budget shortfall, and the public can expect another year of deep cuts to government programs and services. Speaking with reporters, he refused to rule out more cuts to public schools — which absorbed a $1.3 billion cut last year, or nearly 8 percent of their per-pupil funding. "I don't think anyone took any glee in the cuts we had to make last year," the Merritt Island Republican said. But, he added, "We can't afford the government we used to have, so we're making adjustments." The culprit is primarily a heavy reliance on real estate to power job growth and the global economic funk that Florida has been unable to escape.

State K-12 Funding Cuts Are Deep and Widespread - Thirty of the 46 states for which data are available are spending less per pupil on K-12 education (after inflation) than they did before the recession, according to a report we’ll issue tomorrow.  In 17 of those states, funding is more than 10 percent below the 2008 level, adjusted for inflation; in 4 of the states, funding is off by more than 20 percent (see graph).

Back to School, With Fewer Teachers - On Thursday I called attention to the question of how many teachers returned to work this fall. The answer seems to be: Not that many.According to the monthly labor report issued today, the number of education employees in state and local governments rose by 1.12 million in September, compared to 1.16 million last September. That is the smallest increase since 2003. It is 12 percent below the peak gain, registered in 2006. (These figures are, of course, before seasonal adjustment.) The number may be revised next month, of course, and since the figures are for the week after Labor Day, there are a few schools that were not back in session yet. There are typically small gains in October as well. But make no mistake: School budgets are hurting. This ought to sound alarm bells in Washington.

From Kindergarten to College Completion - A report released last week has drawn new attention to low degree-completion rates among college entrants, particularly among those who never attend full time. The organization that published the report, Complete College America, seeks to rally policy makers around the goal of substantially increasing completion rates by 2020. But here’s a question: if we want to increase college completions over the longer term, is it more cost-effective to direct resources to college students or to preschoolers and kindergarteners? The influential economist and Nobel laureate James Heckman, among others, has asserted that early educational investments have the highest return, because of the cumulative nature of skill development (“skill begets skill”). By the time a high school student is on the verge of college (or an older worker is considering returning to school), this argument goes, it may be too expensive to try to fix skill deficiencies that trace back decades. Yet the federal government continues to invest far more in higher education than in early childhood programs (see chart). For example, the Pell Grant program received more than $28 billion in 2009, compared with less than $10 billion for Head Start.

Our State (and University) is for Sale - Art Pope bought it. A full 75% of external funding to Republican campaigns in 2010 can be traced to this one man.   I'm still relatively new to this beautiful state of North Carolina, mostly wrapped up in my own research interests and national politics, and still loathsomely ignorant about local politics.  My ignorance is loathsome because unless we all pay a little more attention, politics gets reduced to the least common denominator. Here's the story in the New Yorker. And here's the story on NPR.  You can find the above statistic at around 6 min. 30 sec. into the story. It's not just politics.  It affects our public university.  As the article notes, Pope gave a half million dollars to the economics department here at NCSU and the big speakers are selected first for their ideological leanings.  I've heard a few quiet grumblings about this, but I never fully understood the financial underpinnings. Our fearless leaders in this university should recognize how short-sited it is to pander to such politicized money.  It raises a big red flag to serious scholars of all political stripes: don't come here. This cheapens the university and the degrees we give.

Debt Jubilee? Start With Student Loans. - There is one concrete answer being offered to the anguish of the "99%":  a debt jubilee, where some or all of the outstanding debt is forgiven.  It's in the bible and it helps overburdened debtors, say supporters; shouldn't conservatives and liberals both be ready to jump on board?  The attractions are obvious.  But so are many of the downsides (which is why, as I understand it, orthodox communities that still follow the tradition have mostly come up with elaborate ways to get around it.)  In an op-ed for the New York Times, Martin Hutchinson and Robert Cyran run through some of the issues: To start, writing off debts would not necessarily increase economic growth. Every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank's capital or of an investor's net worth -- subtracting from resources and confidence. And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.

California Teachers Pension Fund Will Seek Boost in Taxpayer Contributions - The California State Teachers’ Retirement System, the second-largest U.S. public pension, said now is the best time to ask lawmakers for an increase in taxpayer contributions toward employee pension benefits. Calstrs, as the $146.6 billion fund is known, wants to include the step in a pension proposal Governor Jerry Brown has said he plans to roll out as early as this month, said Jack Ehnes, the system’s chief executive officer. The increase would be the first in 21 years and may be as much as 14 percent, though that likely would be phased in over years, he said. The pension’s unfunded liability, or what it will owe compared with projected assets, has more than doubled since 2008 to $56 billion, in part because of investment losses. That’s something that state Auditor Elaine Howle has said is a “high- risk issue” since California is on the hook for the difference. “We think we’re at the right moment where it’s time to move on the funding strategy politically,”

US Pension Plan Deficit at End-September Reaches a Post-World War II High, According to Mercer Analysis -  The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $134 billion during September, from a deficit of approximately $378 billion as of August 31, 2011, to $512 billion as of September 30, according to new figures from Mercer(1). This deficit corresponds to an aggregate funded ratio of 72% as of September 30, compared to a funded ratio of 79% at August 31, 2011 and 81% at December 31, 2010. Mercer believes that the end-of-month pension funding levels for the S&P 1500 are at a post-World War II low. The previous low point for funding was August 31, 2010 when the aggregate funded ratio was 71% but the deficit at that point of $507 billion has grown as liabilities have increased. The decline in funded status was driven by a 7.0% drop in equities, and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical US pension plan decreased approximately 30-40 basis points during the month. Mercer's analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 16% decline. "The end of September marks the largest deficit since we have been tracking this information,"

Record $512 billion shortfall for big pensions (Reuters) - September was another cruel month for large U.S. pension plans, as stock losses and lower interest rates caused the shortfall between their assets and liabilities to balloon to the largest gap since the end of World War II. Pension consulting firm Mercer calculated that pension plans of companies in the Standard & Poor's 1500 Index had a $512 billion shortfall at the end of September, a whopping $134 billion increase during the month. Worldwide, stocks fell 9 percent in September as measured by the MSCI World equity index. Most large pension funds have the bulk of their assets invested in equities. At the same time, the funding shortfall has been exacerbated by the Federal Reserve's efforts to bring down long-term interest rates. Pension funds use long-term bond rates to calculate the current value of future payouts they will have to make to retirees. When interest rates fall, the current value of the obligations increases

Has Your Retirement Been Stolen? - If you’re looking for a scary story to read this Halloween, try Retirement Heist. In it Ellen Schultz, a Pulitzer Prize-winning reporter for the Wall Street Journal, describes how executives and accountants legally looted pension plans of billions of dollars. To be sure, the Employee Retirement Income Safety Act of 1974 made clear that pension assets are to be managed solely for the benefit of participants. But Schultz describes how companies still managed to use the money to pay for severance packages and for parachute payments to executives, among other things. Some companies simply sold pension assets for cash. Now pensions are collectively 20% underfunded. Many employees are already aware of how this pension-starving affects them. In the book, Schultz writes about how a Delta pilot who’d been receiving a pension of almost $2,000 a month, which fell to just $95 a month after the company went bankrupt. But others have yet to discover what’s been going on behind the scenes. If you have a pension and have been planning to rely on it in retirement, listen closely to what she has to say:

Social Security For The Young - Intelligence Squared U.S. ( ) is sponsoring an Oxford-style debate Tuesday evening in Manhattan. The program is entitled "Grandma's Benefits Imperil Junior's Future"  The resolution: "Commitments made to seniors decades ago failed to foresee the harsh economic realities of the present. Do entitlements saddle our children with unmanageable debt, asking them to sacrifice their future for the sake of the elderly? Social Security, Medicare, and Medicaid were created to provide a social safety net. But if we cut these programs, are we balancing the budget on the backs of the aged and sick, leaving behind society’s most vulnerable?"Does keeping promises to the elderly mean sacrificing our children's future? The answer is, "NO!  This is nonsense. Social Security has NOTHING to do with balancing the budget. But while you will hear the lies the enemies of Social Security have been telling for 75 years, it is not certain the defenders of Social Security will explain the simple truth.

Nearly Half of Households Receive Some Government Benefit - Families were more dependent on government programs than ever last year. Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data. Those numbers have risen since the middle of the recession when 44.4% lived households receiving benefits in the third quarter of 2008.  The share of people relying on government benefits has reached a historic high, in large part from the deep recession and meager recovery, but also because of the expansion of government programs over the years. (See a timeline on the history of government benefits programs here.) Means-tested programs, designed to help the needy, accounted for the largest share of recipients last year. Some 34.2% of Americans lived in a household that received benefits such as food stamps, subsidized housing, cash welfare or Medicaid (the federal-state health care program for the poor). Another 14.5% lived in homes where someone was on Medicare (the health care program for the elderly). Nearly 16% lived in households receiving Social Security.

Wis. to face $444M in Medicaid funding cuts - Gov. Scott Walker and the Department of Health Services revealed plans late last week to cut an estimated $444 million from Medicaid in order to balance the state’s budget. DHS launched a website last week that outlines the proposed cuts to Medicaid, a health care program for seniors, children and individuals with disabilities. According to the website, cuts need to be made in order to keep the program in balance with the state budget after a decrease in the amount of federal matching funds to the program. Among the changes DHS is proposing are reforms to eligibility, benefits, service delivery and payment, according the website. Walker’s spokesperson Cullen Werwie said in an email to The Badger Herald that Medicaid has been the top priority in Walker’s budget, with more than $1.2 billion of additional state money dedicated to medical assistance programs.

Much of the Secular Decline in Savings is Explained by Medicare and Medicaid - I have said before that I like retail and food service sales as a proxy for consumer demand because this is actual spending that folks are plunking down on a month by month basis. In Personal Consumption Expenditures on the other hand include things like financial services, owners equivalent rent and health care paid by third parties.  These are not things that consumers are actually “buying” or perhaps to put it another way, there is no cash-in-advance constraint on these services. Over the last thirty years or so retail sales as a fraction of disposable personal income were constant. However, the personal savings rate has been in decline. So, what exactly makes the difference. It looks like its all health care and much of it can be explained simply by looking at Medicare and Medicaid. The red line is the personal savings rate. The blue is the personal savings rate calculating by extracting Medicare and Medicaid from Personal Outlays.

Half of Texas doctors may quit Medicare if cuts enacted, survey finds - Half of Texas physicians would consider withdrawing from the Medicare program if Congress allows a forthcoming deep cut in reimbursement payments, Texas Medical Association officials said Thursday. The result of the cut could mean more elderly people would lose access to their doctors and have trouble finding new ones, said Dr. Bruce Malone, association president. Malone shared the results of the association survey of physicians while calling for federal lawmakers to revamp the payment formula for doctors. Without action, physicians will see a 29.6 percent cut in reimbursements starting Jan. 1. In Tarrant County, 48 percent of physicians said they would consider opting out of the program after such a reduction. "That would be a major crisis for doctors," Malone said. "We love our Medicare patients, and the last thing we want to do is have to stop taking care of them because we physically can't do it and survive."

Free market mechanics and healthcare…Now, I hear something all the time in my work in the health policy realm, and that is that the “free market” could lower prices.  I even recently had someone approach me after I mentioned that the PPACA had resulted in an extra million people aged 18-25 having health coverage this year. His statement? “That’s exactly the wrong direction, we need to have less people, far less people with health insurance.” I asked him his reasoning…of course, already knowing what his response would be. He reasoned that it would force people to compare prices, shop around, and would dramatically lower prices through the mythical, magical “free market”….Of course, this ignores some rather real problems with this line of thinking. For starters, healthcare does not behave like normal commodities for a variety of reasons.  To start with, healthcare does not lend itself to price comparisons, and comparison shopping. The high costs are often related to trauma and emergency care/hospitalizations. It is simply not practical to ask which hospital in the area offers the best rates on cardiac catheterizations while you are being rushed to the hospital in the midst of an MI.

Health Care Spending - Most of us are familiar with the widely used data that shows health care spending as a share of GDP. It tells a scary store that dominates the political debates in Washington and that everyone is concerned about. Looked at this way health care spending clearly looks like the monster that ate Tokyo. But the lesson one learns from a ratio chart like this depends on what is happening to both the denominator and the numerator. If you look at the growth in health care spending in isolation the data creates a very different impression. This data shows that in recent years the growth in health care spending has actually been slowing significantly. It shows that maybe the real problem is the weak economy, not rapidly growing health care spending.

The Plot Sickens – The Heart of the ACA Litigation Moves to the Supreme Court - Maybe. Last week’s big political news concerning the PPACA (a.k.a. “Obamacare”) litigation was the administration’s decision to forego the option of asking the full membership of the Atlanta-based Eleventh Circuit Court of Appeals, the appellate for several southeastern states, to hear and reverse the mid-August opinion by two members of a three-judge panel of that court striking down the individual-mandate provision of the ACA as beyond the constitutionally permissible reach of the Commerce Clause, the “enumerated power” in the Constitution under which Congress enacted the statute.   This surprised some political pundits, but because anyone thought a majority of the members of that most conservative of regional federal appellate courts would disagree with the ruling—except possibly the part holding that the mandate provision was “severable” from the remainder of the Act and that therefore the Act remained intact except for the mandate provision.  Instead, they thought that the Obama administration wanted (or, more accurate, should want) to delay a Supreme Court ruling on the constitutionality of the statute, especially the mandate provision, until after the election next fall.  And if the full appellate court agreed to dissolve the panel’s opinion and hear the case—a long shot, in my opinion—this would do the trick. 

Stuck in Bed for 19 Months, at Hospital’s Expense - In a city with a large immigrant population, it is not rare for hospitals to have one or more patients who, for reasons unrelated to their medical condition, do not seem to leave. At Downtown, where a bed costs the hospital more than $2,000 a day, there are currently three long-term patients who no longer need acute care but cannot be discharged because they have nowhere to go. The hospital pays nearly all costs for these patients’ treatment. One man left recently after a stay of more than five years.  They are the forgotten people in the health care system — uninsured, usually undocumented, without resources and stuck in the system’s most expensive course of care. Some are abandoned by or estranged from relatives; some belong in rehabilitation centers, where care is much cheaper, but because of their immigration status they are not enrolled in Medicaid or Medicare, so the places will not take them. For hospitals, some of these patients, like Mr. Fok, come in as medical cases and then quickly become puzzles for detective work.

Shortages Lead Doctors To Ration Critical Drugs - Drug shortages mean a growing number of Americans aren't getting the medications they need. That's causing drug companies and doctors to ration available medications in some cases. "We're now at 213 shortages for this year," says Erin Fox of the University of Utah, who tracks national drug shortages. "That surpasses last year's total of 211. And it doesn't seem like there's an end in sight." The shortages involve a wide range of medications: cancer chemotherapy agents, anesthetics, antibiotics, electrolytes needed for nutrient solutions, and dozens more. One drug currently in short supply is used in critically ill patients to bring down soaring blood pressure. "We know this is a dire public health situation," Assistant Secretary of Health and Human Services Howard Koh told NPR, "and there have been delays in care." According to those who are tracking drug shortages, there have been more than delays. Some patients have died.

Blue Shield of California Won’t Cover Breast Cancer Drug - Blue Shield of California will no longer pay for the use of the drug Avastin1 to treat breast cancer2, a sign that support for the widely debated and expensive treatment may be eroding among health plans.  Blue Shield, with 3.2 million members, is apparently the first large insurance company to end payments since a federal advisory committee unanimously recommended in June that the Food and Drug Administration rescind Avastin’s approval as a treatment for breast cancer, saying the drug did not really help patients3.

U.S. Panel Says No to Prostate Screening for Healthy Men - Healthy men should no longer receive a P.S.A. blood test to screen for prostate cancer because the test does not save lives and often leads to more tests and treatments that needlessly cause pain, impotence and incontinence in many, a key government health panel has decided.  The recommendation, by the United States Preventive Services Task Force, due for official release on Tuesday, is based on the results of five well-controlled clinical trials and could substantially change the care given to men 50 and older. There are 44 million such men in the United States, and 33 million of them have already gotten a P.S.A. test — sometimes without their knowledge.  The test measures a protein — prostate-specific antigen — that is released by prostate cells, and there is little doubt that it helps to identify the presence of cancerous cells in the prostate. But a vast majority of men with cancer of the prostate never suffer ill effects because the cancer is usually slow-growing. Even for men who do have fast-growing cancer, the P.S.A. test may not save them, since there is no proven benefit to earlier treatment of such invasive disease.

Panel’s Advice on Prostate Test Sets Up Battle - A day after a government panel said that healthy men should no longer get screened for prostate cancer1, some doctors’ groups and cancer2 patients’ advocates began a campaign to convince the nation that the advice was misguided.  Their hope is to copy the success of women’s groups that successfully persuaded much of the country two years ago that it was a mistake for the same panel, the United States Preventive Services Task Force3, to recommend against routine mammograms4 for women in their 40s. This time, the task force found that a P.S.A.5 blood test to screen for prostate cancer does not save lives, but results in needless medical procedures that have left tens of thousands of men impotent, incontinent or both. Both sides in the battle have marshaled distinct arguments, and both said their only goal was to protect patients. Caught in the middle are 44 million men in the United States over the age of 50 who must now decide whom to believe.

Oral Sex May Cause More Throat Cancer Than Smoking in Men, Researchers Say -  Researchers examined 271 throat-tumor samples collected over 20 years ending in 2004 and found that the percentage of oral cancer linked to the human papillomavirus, or HPV, surged to 72 percent from about 16 percent, according to a report released yesterday in the Journal of Clinical Oncology. By 2020, the virus-linked throat tumors -- which mostly affected men -- will become more common than HPV-caused cervical cancer, the report found.

More Drugs Mean More Disease as China Fails to Control Use of Antibiotics - In a Beijing pharmacy, near the headquarters of China’s State Food and Drug Administration, a clandestine transaction takes place involving antibiotics.  Twenty-four amoxicillin capsules are sold without a prescription for 23 yuan ($3.60) by a middle-aged pharmacist in a white coat. Now health officials want those dispensing prescription antibiotics without the obligatory doctor’s note to be stripped of their license. The tougher penalties are part of a plan to rein in a market worth more than $11 billion. Reckless use of the life-saving pills is making them lose their potency faster than new ones can be developed, researchers say.  “We are seeing more patients display drug resistance, which is why it is very important now to manage the use of antibiotics,” said Ma Xiaojun, an infectious diseases doctor at Peking Union Medical College Hospital, who serves on a panel advising the Ministry of Health on rational antibiotics use.  A ministry plan to curb consumption of bacteria-fighting drugs may be introduced as early as this month. Drugmakers have lobbied to delay its implementation.

Researchers Turn Cloned Human Embryo into Working Stem Cell Line   - Potentially big stem cell news out of the New York Stem Cell Foundation Laboratory today in Nature, though in our experience it’s always good to temper one’s expectations when it comes to these sorts of things. After all, we’ve thought we cracked the code on embryonic stem cell cloning technology more than once, only to find this kind of biology is much more difficult and complex than originally thought. Nonetheless, researchers have reprogrammed an adult human egg to an embryonic state and used it to create a self-reproducing embryonic stem cell line. And that’s a big deal. But it’s not the holy grail of stem cell research. The cell line they created doesn’t produce true clones containing perfect copies of the donor’s DNA, and therefore are more or less clinically ineffective. But the development does represent a step forward for the field, and answers some important questions plaguing stem cell science.

SierraClub: House of Representatives Creates Jobs--for Undertakers - Well that was a bold move on the jobs front! While President Obama was over in the East Room urging Congress to vote on his American Jobs Act (and openly ridiculing the notion that rolling back environmental regulations would do anything to increase employment), the House was voting to pass H.R. 2681, a bill that would block critical protections against mercury pollution from cement plants. Cement kilns are second only to coal-fired power plants as sources of toxic mercury, producing some 23,000 pounds a year. But today's vote in the House would nullify restrictions on mercury pollution from the cement industry, as well as regulations on dioxins, arsenic, and lead. Together with last week's passage of the TRAIN Act, which similarly repealed protections from mercury et al from power plants, the EPA estimates that the bills will result in

  • 32,500 more premature deaths;
  • 19,500 additional heart attacks; and
  • 208,000 asthma attacks that otherwise would have been avoided.

So there's your alternative jobs bill! After all, 32,500 people don't just bury themselves; it will take lots of embalmers, gravediggers, ministers, and florists to meet the robust new demand.

Thyroid irregularities found in children near nuclear plant - Hormonal and other irregularities were detected in the thyroid glands of 10 out of 130 children evacuated from areas near the damaged nuclear power plant in north-eastern Japan, news reports said Tuesday.  The Japan Chernobyl Foundation and Shinshu University Hospital conducted tests on youngsters aged up to 16 including babies for about a month through the end of August in Nagano, where they were staying temporarily after evacuating from Fukushima, Kyodo News reported.  The results of the tests showed that one child was found to have a lower-than-normal thyroid hormone level and seven had thyroid stimulation hormone levels higher than the norm, it reported.  The other two children were diagnosed with slightly high blood concentrations of a protein called thyroglobulin, possibly caused by damage to their thyroid glands, Kyodo said.

Flood of food imported to U.S., but only 2 percent inspected - The FDA’s Los Angeles district is one of the busiest in the U. S., overseeing the inspection of more than half a million food shipments arriving through 24 ports of entry in the L.A. area. Through the port stream products like Cambodian rice by the ton, tapioca pearls from the Philippines, tea biscuits from China, sugar cane and fish from around the world.  In 2010, about 3,500 shipments here were refused entry because they were contaminated with filth, pesticides, drug residue or traces of salmonella, according to a News21 analysis of the FDA's database of import refusals. Some of the imports contained unsafe color additives or were mislabeled. And some were even poisonous.  “If it comes in here and it’s bad,” said Denise Williams, a supervisor in the FDA’s Division of Import Operations in Southern California, “we’re gonna get ‘em.”  Except when they don’t.

Surprise! More Corn Than Expected - More corn stocks than expected showed up in the latest report out from USDA on Friday, which was a big surprise for many of the market watchers. Despite the fact that corn stocks are reported to be 34% lower than a year ago, it was expected to be much worse, even just a few weeks prior to the Friday Grain Stocks report. Earlier this year, USDA was predicting corn stocks would finish the year at just 675 million bushels, less than a three-week supply. But as of September 1, stocks instead totaled 1.13 billion bushels, with summer disappearance indicated at 2.54 billion bushels, compared with 2.60 billion bushels during the same period last year. The report left even USDA’s Chief Economist Joe Glauber scratching his head. “Obviously our analysts are going to be looking at those numbers, but it poses a puzzle in that regard,” said Glauber. Some think the numbers are just off, while others think it could be that livestock producers.

Are Genetically Modified Foods Safe To Eat? - We know that eating food derived genetically modified crops won't make you keel over and die. How do we know that? According to the USDA, about three-quarters of US corn and upwards of percent of soy are from genetically modified seeds—a rapid ascent since their roll-out in the early '90s. Those two crops suffuse our food system: they provide the sweetener for soft drinks, the cooking oil for French fries, feed for the animals we eat, and countless ingredients used by food processors. By 2003, the Grocery Manufacturers of America was already reckoning that 75 percent of processed food in supermarets contained GMO ingredients. So if eating a bowl of cereal made from GMO corn, or a Pop Tart sweetened with high-fructose GMO corn syrup, posed an immediate threat, or a we'd know it by now. Millions of people do it every day. So for what public-health people call acute effects, GMOs have more or less been proven safe. But what about chronic effects—slow-moving, unspectacular conditions that could take years to detect, much less to diagnose? Here we're on murkier ground. GMOs have been on the market for less than a generation: not a large span of time for gauging long-term effects on a population.

Texas cattle industry withered by drought - “Even the younger ones look so thin their bones are showing,” Auctions across the state are being inundated with similar animals as ranchers are forced to sell amid a drought that has left them with insufficient grass, hay and water.While drought has also affected Oklahoma, New Mexico, Kansas, Georgia and Louisiana, Texas is its biggest victim – with more than $5.2bn in agricultural losses and heavy blows to its cattle industry – the nation’s largest, which provides 16 per cent of the country’s beef cows. Cows selling for 50 cents a pound would have sold for 80 cents two weeks ago. That adds up to a significant loss on a 2,000lb cow. Jesse Carver, executive director of the Livestock Marketing Association of Texas, believes many will never recover from such losses. Texas has 100 weekly auctions but he said the sell-off would leave ranchers without the means to make a living. Even breeding cows and bulls are being auctioned, hitting supply growth. Many older, or weekend, ranchers are getting out of the business. “This is one of those industry-changing events,’’ Mr Carver said. “The fear is that, come spring, it’s going to be a ghost town.’”

Weeds are vital to the existence of farmland species, study finds: — Weeds, which are widely deemed as a nuisance plant, are vital to the existence of many farmland species according to a new University of Hull study published in the journal Biological Conservation. Since many weeds produce flowers and seed, they are an integral part of our ecosystem and together with other crop and non-crop seeds found on farms, they provide food for over 330 species of insects, birds and animals. Scientists examined the distribution of berries and soil-surface seeds collected over an entire year. They built up the first picture of its kind showing which farmland habitats are the most important seed producers and how the seed resources change in different seasons. The team of researchers created complex 'food-webs' which linked all farmland insects, birds and mammals which are known to feed on the seeds recorded on a typical organic farm. They used the food-web to identify the key seed-producing plants favoured by most animals. This enabled them to model the impacts of increasing farm management on seed resources and food-web interactions.  "We understand a lot about farmland birds and mammals, but little about the plants and insects that underpin them. In this study, we discovered not only the importance of weed and non-crop species for many farmland animals but that the vast majority of seed-feeding animals on farms are insects, which are often overlooked by conservationists."

NASA: It Rained So Hard the Oceans Fell - I spend hours a day researching what New York Times columnist Thomas Friedman calls “global weirding”: the destabilization of our weather system fueled by the three million tonnes of fossil fuel pollution we inject into it each hour. So it is a rare day when something shocks me as much as a recent U.S. National Aeronautics and Space Administration (NASA) report on last year’s extreme rainfall. As most locals know from soggy personal experience, our corner of planet Earth since last spring has been a bit wetter and greyer than normal. And next door, our Washington neighbours donned their gum boots and slogged through their fourth wettest year since 1895. Still, we got off lucky.  Very lucky it turns out. According to this jaw-dropping NASA report, worldwide rainfall and snowfall were so extreme, in so many places last year, that sea levels fell dramatically.

More U.S. Soybeans go towards Biodiesel, Less for Food - Domestic use of soybean oil for 2011/12 is forecast to rise to 17.75 billion pounds from 16.6 billion this year. Nearly all of next year’s gain is projected for the production of biodiesel, which has been accelerating quickly over the last few months. USDA forecasts that soybean oil used for methyl esters (biodiesel) will expand to 3.6 billion pounds in 2011/12 from 2.4 billion this season. Likely tempering next year’s increase in domestic soybean oil use will be a higher availability of other edible oils, particularly canola oil. In Canada, a huge canola supply may incite record U.S. quantities for canola oil imports and production (from imported seed). The Environmental Protection Agency does not yet count biodiesel made from canola oil toward meeting the U.S. Renewable Fuels Standard for biodiesel. In the absence of that market, canola oil can supply much of the growth in U.S. edible oils consumption. At nearly 4 billion pounds, more canola oil would be used in the United States than any other vegetable oil aside from soybean oil.

When Will We Admit that our Corn Ethanol Policy is Immoral? - Having just returned from a trip to Eastern Nebraska, I feel as if I participated in a movie set for "The Road" or its equivalent. It's all about ethanol in this region of the country and it's not a pretty sight. Because of our unbridled and unquenchable thirst for liquid fuels, this policy is creating a vast environmental ruin not so different from that of the tar sands areas of Canada. In recent years, this land which was a prairie a short one-hundred-and-fifty years ago has become a region that produces primarily only two industrial agricultural crops, corn and soybeans. Nebraska, of all places, should not be producing large volumes of ethanol, since it does so largely through the use of irrigation using Ogallala aquifer water. Using irrigated corn further lessens the energy return on energy invested of already low EROEI corn ethanol, since irrigation requires large inputs of generated electricity. Yet, it is the nation's second largest ethanol producer, turning out about two billion gallons per year.

Biofuels May Push 120 Million Into Hunger, Qatar’s Shah Says: “The era of low food prices … is over.” - Biofuel policies in countries from Australia to the U.S. may push 120 million people into hunger by 2050 while doing little to halt climate change, said Mahendra Shah, an advisor to Qatar’s food security program. So-called first-generation biofuels produced from commodity crops compete with food for land use and fertilizers, resulting in higher grain prices and increased deforestation, Shah said at the MENA Grains Summit in Istanbul today. World food output will have to rise by at least 70 percent by 2050 to feed a growing world population, according to Shah. The use of crops for biofuels is forecast to raise food prices by 30 percent to 50 percent in that period, Shah said, citing a study by the Organization of the Petroleum Exporting Countries Fund for International Development, or OFID.

Africa's famine: Seeing is believing - - video - As with most natural disasters, numbers swirl around the drought on the Horn of Africa like so many dust particles.  Consider a few of the big ones: in Somalia alone, four million people are still starving nationwide; three million of those live in the South. Of these, 750,000 people risk death in the next four months if they do not get aid immediately.  According to the United Nations agency responsible for monitoring food supplies in Somalia, almost half a million children are suffering from "severe acute malnutrition". About 75 per cent of those are also in the south.  More than 900,000 Somalis are seeking refuge in neighbouring countries - 90 per cent of them in Kenya, Yemen, Ethiopia and Djibouti. The Dadaab refugee camp in Kenya - already the biggest in the world - has 450,000 of them, and will almost certainly reach half a million by the end of the year. In Ethiopia, the camp in Dolo Ado has taken in 83,000 refugees in the last nine months. UN-estimated mortality rates among children under five are alarmingly high, with an average of 15.43 deaths per 10,000 individuals daily, well above the famine threshold of two deaths per 10,000 people per day.

Many U.S. Drinking Water Wells Contaminated with Arsenic, Other Elements - In Nebraska, along the Platte River, it's uranium. In Maine, New Hampshire and Massachusetts, it's arsenic. In California, boron. And in the Texas Panhandle, lithium. Throughout the nation, metals and other elements are tainting private drinking water wells at concentrations that pose a health concern. For one element – manganese – contamination is so widespread that water wells with excessive levels are found in all but just a few states. Arsenic, too, is a national problem, scattered in every region. In the first national effort to monitor wells for two dozen trace elements, geologists have discovered that 13 percent of untreated drinking water contains at least one element at a concentration that exceeds federal health regulations or guidelines. That rate far outpaces other contaminants in well water, including industrial chemicals and pesticides. For public wells, the discovery is less of a concern, since water suppliers regularly test for contaminants and remove them to comply with federal standards. The most troubling finding involves the widespread contamination of private wells, which are unmonitored and unregulated.

Rural California residents: 'Who knows what's in the water?' - People in rural Tulare County talk about everything from the nearby Sierra Nevada to crime to higher university fees in California. But most conversations drift to the drinking water here. It's a crisis in slow motion. Over the past decade, residents have been warned at one time or another not to drink their tap water. Chemical plumes filled with nitrates have been detected above safe levels hundreds of times in the past five years in rural wells. Nitrates come from sewage, rotting plants, manure and fertilizers. The chemical can cause a fatal blood disease in infants. The nitrate plumes, which many blame on surrounding agriculture, seem frightening and unstoppable. Residents wait years for bureaucrats to process their funding applications so they can get healthy drinking water. Bottled water is a necessity of life.

India sues Monsanto for biopiracy - India has sued Monsanto for “bio-piracy” — stealing indigenous plants, and then trying to develop genetically modified versions of them, without giving any compensation back to the local people or nation where the plant originated. Representing one of the most agriculturally bio-diverse nations in the world, India has become a primary target for biotechnology companies like Monsanto and Cargill to steal local plants whose unique traits have been bred over thousands of years by local farmers, genetically modify them, then sell the seeds back as their own patented technology The National Biodiversity Authority of India (NBA) has decided to sue Monsanto, the St. Louis, MO-based biotechnology power-house, and the company’s Indian partners who developed the Bt eggplant. The controversial move by NBA is based on a complaint filed in 2010 by the Bangalore-based Environment Support Group (ESG), which alleges that the developers violated India’s Biological Diversity Act of 2002 by using local eggplant varieties in developing Bt eggplant without prior approval from NBA.

The Ginormous Task of Saving Forests from Climate Change & Us (Video) - There's a lot to discuss in this great New York Times video about the toll human impact has levied on Arizona's forests: There's the fact that human-caused climate change is causing an already dry region to become ever more vulnerable to wildfires. There's the fact that well-intentioned but shortsighted policies intended to prevent forest fires have instead made severe burns more likely. There's logging, but in the scale of things, that barely factors in here. There's the fact that we're losing forests like these around the world, and losing valuable carbon sinks in the process. And then there's the fact that loggers and environmentalists, traditionally nemesi, are working together to address these problems.  Like I said. There's a lot of valuable stuff in here. Watch:

Why the Obama Administration Invested in Solyndra - Two years ago, the solar company Solyndra was a darling of the Obama Administration. The company had received more than five hundred million dollars in loan guarantees from the Department of Energy, and was building a factory to manufacture a revolutionary new successor to the solar panel—one that didn’t require expensive silicon and came in a convenient tube format. It seemed like an ideal show horse for the Administration’s green-jobs strategy. Vice-President Joe Biden spoke by video at the plant’s groundbreaking ceremony, saying that the company was creating “the jobs of the future.” The following May, Obama gave a speech at the factory, and declared, “The true engine of economic growth will always be companies like Solyndra.” Not quite. In fact, Solyndra had a huge problem: the price of silicon panels was plummeting, making its products uncompetitive. The company burned through its pile of cash in a futile attempt to stay afloat; in late August, it declared bankruptcy and fired eleven hundred workers. Solyndra went from show horse to cautionary tale. Allegations of corruption are flying; critics of the Administration are arguing that the whole idea of government support for green companies should be abandoned as a pure boondoggle.

The Solar Industry is Thriving and Solyndra was the Exception Not the Rule - The bankruptcy of solar panel manufacturer Solyndra should not be used as an excuse to pull government support from a thriving US solar sector, according to solar executives. “A lot of people are saying a lot of things about solar,” “Most of it is wrong.” About 30GW of solar capacity is in late-stage development in the US, and Recurrent alone has 2.4GW worth about $8 billion in investment in its pipeline, he said. About 100,000 people work in the US solar sector, according to the Solar Energy Industries Association (SEIA). “The important point is to look beyond the failure of one company,” Harris said. The Solyndra bankruptcy has been interpreted by some as the failure of government to pick winners, as the company was backed by a $535 million loan guarantee from the Department of Energy. Prior to its bankruptcy filing on 6 September, Solyndra employed more than 1,100 full-time and temporary employees. It sold more than 500,000 solar panels since 2008, with cumulative sales of more than $250 million.

Global warming: New study challenges carbon benchmark - The ability of forests, plants and soil to suck carbon dioxide (CO2) from the air has been under-estimated, according to a study on Wednesday that challenges a benchmark for calculating the greenhouse-gas problem. Like the sea, the land is a carbon “sink”, or sponge, helping to absorb heat-trapping CO2 disgorged by the burning of fossil fuels. A conventional estimate is that soil and vegetation take in roughly 120 billion tonnes, or gigatonnes, of carbon each year through the natural process of photosynthesis. The new study, published in the science journal Nature, says the uptake could be 25-45 percent higher, to 150-175 gigatonnes per year. But relatively little of this extra carbon is likely to be stored permanently in the plant, say the researchers. Instead, it is likely to re-enter the atmosphere through plant respiration.

NASA Leads Study of Unprecedented Arctic Ozone Loss - The study, published online Sunday, Oct. 2, in the journal Nature, finds the amount of ozone destroyed in the Arctic in 2011 was comparable to that seen in some years in the Antarctic, where an ozone "hole" has formed each spring since the mid-1980s. The stratospheric ozone layer, extending from about 10 to 20 miles (15 to 35 kilometers) above the surface, protects life on Earth from the sun's harmful ultraviolet rays. The Antarctic ozone hole forms when extremely cold conditions, common in the winter Antarctic stratosphere, trigger reactions that convert atmospheric chlorine from human-produced chemicals into forms that destroy ozone. The same ozone-loss processes occur each winter in the Arctic. However, the generally warmer stratospheric conditions there limit the area affected and the time frame during which the chemical reactions occur, resulting in far less ozone loss in most years in the Arctic than in the Antarctic.

Arctic ozone loss at record level - Ozone loss over the Arctic this year was so severe that for the first time it could be called an "ozone hole" like the Antarctic one, scientists report. About 20km (13 miles) above the ground, 80% of the ozone was lost, they say. The cause was an unusually long spell of cold weather at altitude. In cold conditions, the chlorine chemicals that destroy ozone are at their most active. It is currently impossible to predict if such losses will occur again, the team writes in the journal Nature. Early data on the scale of Arctic ozone destruction were released in April, but the Nature paper is the first that has fully analysed the data. "Winter in the Arctic stratosphere is highly variable - some are warm, some are cold," said Michelle Santee from Nasa's Jet Propulsion Laboratory (JPL). "But over the last few decades, the winters that are cold have been getting colder. "So given that trend and the high variability, we'd anticipate that we'll have other cold ones, and if that happens while chlorine levels are high, we'd anticipate that we'd have severe ozone loss."

Morgan Stanley: US Energy Security Is At Risk If EPA Doesn't Revise Pollution Rule - The Environmental Protection Agency has to delay or soften new coal regulations or it would jeopardizing U.S. power supply, Morgan Stanley says in a note this morning: These rules were tougher than expected and affect Texas which had believed until a few months ago that it would be excluded from this regulation. Our utility team says that on first inspection up to 22% of the ERCOT and PJM coal fleet would be affected from January 1st 2012. With coal representing about 44% of US power generation and typical reserve capacity around 20%, this implies about half of the critical spare capacity that protects the reliability of the grid is under threat. The EPA also faces lawsuits from eight states and pushback from Texas, which was recently added to the proposed rule. Yesterday WSJ's Deborah Solomon said the administration was already talking about revising the new rule. Coal stocks posted big gains yesterday on this report.

Coal Production in the Top Five Producing Nations Grew by 98% from 2000-2010 - One of the reasons I don't beat the drum daily about climate change is that I think it is a behemoth that has a life of its own. I suspect eventually that man will try to mitigate its effects, because I don't think coal burning or human addiction to fossil fuels can be curtailed because of our short sighted selfishness. Shoot me, someone, for saying that but I think I'm a realist. Look at this, below, from the EIA, and weep. China produced almost half the world's coal in 2010, three times more than the United States, the world's second largest producer, and almost as much as the next 10 highest producing countries combined. While coal is found abundantly across the globe (outside of the Middle East), proven recoverable reserves and production are highly concentrated, with the top five producing nations accounting for over 75% of global production.

The Price Tag for Clean Coal -  Dirty coal currently supplies us with 50% of our electricity, and total electricity demand is expected to go up 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the great majority of independent scientists out there believe that the global warming it is causing will lead us to an environmental disaster within decades. Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and new ones would cost $4 billion each. The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. In a budget constrained congress, this is a bi ticket that is unlikely to get picked up.. This is a big problem as China is currently completing one new coal fired plant a week. In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use, but also to sell to us. The bottom line is coal can be cleaned, but at a frightful price.

China Emissions Rising While Carbon Intensity Falls, Report Says - Greenhouse-gas emissions in China are rising faster than forecast even as the level of pollution relative to its economic growth falls, according to a report from climate researchers. An economy that’s expanding faster than projected will push China’s overall emissions about 1 gigaton higher in 2020 than previous calculations predicted, according to a report issued today by Utrecht, Netherlands-based Ecofys, a renewable-energy consultant, and Climate Analytics, a group hosted by the Potsdam Institute for Climate Impact Research in Germany. The world’s largest greenhouse-gas emitter is also keeping a promise to reduce the amount of carbon dioxide needed for increased production, the groups said in the report. “The warming levels that we’re headed toward” might “easily result in massive damage to ecosystems from one end of the planet to the other,” . “As for the human dimensions of risk, we would see, particularly in Africa, very dangerous threats to food production and availability.”

Welcome To The Anthropocene - We've all heard the hype and seen the advertising: switching to clean-burning natural gas will compensate for our flatlining oil flows, replace dirty coal, mitigate global warming, and power our society for decades to come. It sounds like a wonderful dream and that's exactly what it is—a dream. Climate scientist Tom Wigley is the latest researcher to squash our hopes for natural gas. ScienceDaily reported on his results in Switching from Coal to Natural Gas Would Do Little for Global Climate. — Although the burning of natural gas emits far less carbon dioxide than coal, a new study concludes that a greater reliance on natural gas would fail to significantly slow down climate change. While coal use causes warming through emission of heat-trapping carbon dioxide, it also releases comparatively large amounts of sulfates and other particles that, although detrimental to the environment, cool the planet by blocking incoming sunlight.The situation is further complicated by uncertainty over the amount of methane that leaks from natural gas operations. Methane is an especially potent greenhouse gas. Replacing coal with natural gas is thus a mixed blessing because sulfate aerosol pollution from coal actually cools the planet just as CO2 heats it up. On July 22 Physics World reported on such pollution in Aerosols must be considered by climate models.

Serious Flaws in Department of Energy’s Latest Report on Energy Priority Setting - The US Department of Energy (DOE) recently issued a report called Report on the first Quadrennial Technology Review (QTR), which has as its purpose helping the DOE choose among conflicting priorities. The new report sets priories based on a distorted view of the future. One issue is that it is trying to set priorities based on an overly optimistic view of energy supply presented in the EIA’s International Energy Outlook 2011 (IEO 2011). Another issue is that it overlooks the way the US and world economy can be expected to change as a result of lower oil and natural gas supply. A third issue is that its view of climate change mitigations is based on a view of fossil fuel supply that is far greater than is likely to be the case. The DOE needs to re-think its priorities for an entirely different kind of world–a world of energy scarcity. In a world of energy scarcity, citizens are poorer and less able to pay for basic services, much less higher-priced services. Maintaining basic transportation and electrical services for as much of the population as possible needs to be a top priority. Some government agency, presumably the DOE, will need to make certain that rationing systems are set up so that essential industries get the fuel they need and essential workers are able to obtain transportation to work.

Cooling Problem Shuts Nuclear Reactor in Japan -- In a fresh blow to public confidence, a reactor in southern Japan1 went into automatic shutdown on Tuesday because of problems with its cooling system, clouding the outlook for an imminent restart of the country’s idled nuclear plants.  Kyushu Electric, the operator of the reactor at the Genkai nuclear power plant, characterized the incident as minor and said there was no risk of a radiation leak. A problem with the condenser unit that turns steam back into cooling water appeared to have triggered the halt, but the reactor stopped safely and was undergoing checks, the utility said.  “At no point was the plant under any danger, and the reactor has been brought to a stable shutdown,” said Eiji Yamamoto, a spokesperson for Kyushu Electric. “There has been no effect on radiation levels outside the plant.”  Still, the shutdown came as the government was renewing a push to restart reactors that were idled following the nuclear accident at Fukushima in March. Kyushu Electric said that inspection work had been carried out on a valve of the condenser in question on Tuesday, raising the possibility that human error had triggered the shutdown.

Japanese scientist says nuclear meltdown began within hours -   Nuclear fuel at the stricken Fukushima Daiichi power plant began melting just five hours after Japan’s March 11 earthquake, a Japanese nuclear engineer told a panel of U.S. scientists Thursday. About 11 hours later, all of the uranium fuel in the facility’s unit 1 reactor had slumped to the bottom of its inner containment vessel, boring a hole through a thick steel lining, the University of Tokyo’s Naoto Sekimura told a committee of the National Academy of Sciences. Sekimura’s assessment further damages the credibility of the plant’s operator, the Tokyo Electric Power Co. (Tepco). This week, the company admitted for the first time that nuclear fuel in three of the plant’s reactors had melted — a conclusion that independent scientists had reached long ago. And in a rare insight into internal deliberations at the Nuclear Regulatory Commission, which oversees U.S. power plants, Commissioner George Apostolakis said that NRC staff members “thought the cores were melting” early in the Daiichi crisis. This conclusion — and the lack of information from Japanese authorities — drove the commission’s controversial recommendation to evacuate Americans within 50-mile radius of the facility, an area far larger than the 12.5-mile evacuation zone then enforced by the Japanese government.

Report: Exporting Energy Security: Keystone XL Exposed - In pushing for the Obama Administration’s approval of TransCanada’s proposed Keystone XL tar sands pipeline, the North American oil industry and its political patrons argue that the pipeline is necessary for American energy security and its construction will help wean America of dependence on Mideast oil. But a closer look at the new realities of the global oil market and at the companies who will profit from the pipeline reveals a completely different story: Keystone XL will not lessen U.S. dependence on foreign oil, but rather transport Canadian oil to American refineries for export to overseas markets. A new report from Oil Change International lays out the case, based on data and documents from the U.S. Energy Information Administration and the Canadian National Energy Board, corporate disclosures to regulators and investors, and analysis of the rapidly shifting oil market.Download the full report. The facts:

  • Keystone XL is an export pipeline. The Port Arthur, Texas, refiners at the end of its route are focused on expanding exports to Europe, and Latin America.
  • Valero, the key customer for crude oil from Keystone XL, has explicitly detailed an export strategy to its investors. Because Valero’s Port Arthur refinery is in a Foreign Trade Zone, the company can carry out its strategy tax-free.
  • In a shrinking U.S. market, Keystone XL is not needed. Since the project was announced, the oil industry acknowledges that higher fuel economy standards and slow economic growth mean declining U.S. oil demand, even as domestic production is booming. Oil from Keystone XL will therefore displace American crude from new, “unconventional” domestic fields in Texas or North Dakota.

Tar Sands Showdown in the Nebraska Sandhills - A steady stream of corporate flacks and hired lobbyists and paid scientific experts employed by TransCanada, the corporation intent on building the pipeline, have descended on the state in recent months, leaving many ranchers -- who take special pride in an ethic of square dealing -- feeling besieged by outside interests bent on hijacking the hearing process and fast-tracking a pipeline that a majority of Nebraskans now oppose (according to a poll commissioned by environmental groups). They fear that key decisions are being made in backroom deals by people who don’t appreciate or understand the preciousness and fragility of the Nebraska Sandhills or the Ogallala Aquifer that makes life here possible. Even Nebraska Governor Dave Heineman, an agribusiness-friendly Republican best known for cutting taxes and curbing abortion rights, expressed frustration at his conversations with TransCanada execs and officials from the State Department, saying at a press conference on Wednesday that he feared the pipeline was already “a done deal.”

Questions of Conflict in Pipeline Review - The State Department assigned an important environmental impact study of the proposed Keystone XL1 pipeline to a company with financial ties to the pipeline operator, flouting the intent of a federal law meant to ensure an impartial environmental analysis of major projects.  The department allowed TransCanada2, the company seeking permission to build the 1,700-mile pipeline from the oil sands3 of northern Alberta to the Gulf Coast in Texas, to solicit and screen bids for the environmental study. At TransCanada’s recommendation, the department hired Cardno Entrix4, an environmental contractor based in Houston, even though it had previously worked on projects with TransCanada and describes the pipeline company as a “major client” in its marketing materials.  While it is common for federal agencies to farm out environmental impact studies, legal experts said they were surprised the State Department was not more circumspect about the potential for real and perceived conflicts of interest on such a large and controversial project.

Oil sands environmental impact unknown: Canada audit - Key gaps in information mean Canada has been unable to assess the impact of exploiting Alberta’s oil sands, the nation’s environment commissioner said Tuesday. Lack of information due to “insufficient or inadequate environmental monitoring systems” mean the federal environmental and water agencies cannot build a clear picture of how regional ecosystems have been affected by oil sands projects, the Commissioner of the Environment and Sustainable Development said in a report to parliament. And despite repeated warnings by both departments since 1999, “little was done for almost a decade to close many of those key information gaps,” said Commissioner Scott Vaughan. “As a consequence, decisions about oil sands projects have been based on incomplete, poor, or non-existent environmental information that has, in turn, led to poorly informed decisions,” he concluded.

The Biological Effects of BP's Oil Disaster - Last week The New York Times’ Green Blog reported a study led by scientists at Louisiana State University that found damaging biological effects of the 2010 BP oil spill in some species of fish. The study, led by LSU biologist Andrew Whitehead, examined the cellular processes of the Gulf killfish population. The killfish was selected based on its fundamental role in wetland ecology and the fact that its limited travel makes it a good indication of local environmental developments. In other words, the killfish can be a biological record of what's happened to the Gulf. The study revealed the killfish to have altered cellular functions important in regulating estrogen, which could have wide-ranging implications on their reproductive behavior and trends. The article contains an interesting duality in that it not only explains a new scientific finding, but also is a testament to the ongoing damages to the Gulf Coast a year-and-a-half later.

Gulf oil spill revealed old, deep problems - Five coastal states are determined to clean up the damaged Gulf of Mexico ecosystem after last year’s oil spill highlighted how decades of contamination and deterioration had placed a backbone of the U.S. economy at risk of ruin, according to a federal report released Wednesday. The Gulf Coast Ecosystem Restoration Task Force’s preliminary report pinpointed challenges, priorities and strategies for the five states — Florida, Louisiana, Texas, Mississippi and Alabama — working with the backing of several federal agencies to restore and preserve the Gulf Coast. The task force was established by President Barack Obama after BP’s catastrophic oil spill last year. “One of the results of all the meetings is a real sense of urgency,” EPA chief Lisa Jackson told The AP. “Person after person came in and said `we’re losing the Gulf.’ None of it is irreversible, but the longer we wait, the harder it will be.”

Shell Declares Force Majeure After Singapore Refinery Fire - In the wake of a massive inferno at its Singapore Pulau Bukom refinery, which processes 500,000 barrels a day, Shell declared force majeure, allowing it to void some of its contractual obligations to its customers. Shell Companies in Singapore chairman Lee Tzu Yang issued a statement noting, “We confirm that force majeure has been declared on some of our customers. We continue to be in discussions with our customers to address their supply of product needs and to minimize any potential impact to them.” Analysts believe that the severity of the blaze could force Shell to take its Pulau Bukom refinery offline for up to a month. Pervin and Gertz managing consultant Victor Shum remarked, “If it were to be shut down that long, losses would be in excess of $60 million for Shell. Now that the whole plant has been shut down, even if somebody decides to resume operations, it will take days, if not longer, to get back to normal operating rates. The investigation by both Shell and Singapore may delay the resumption of operations.”

How Fast Can He Cook A Chicken? - When crucial pieces of our infrastructure fail, they do so gracelessly, without much warning and in ways that are difficult to anticipate. The job of sifting through the wreckage falls to official investigators, who determine the event’s ‘root causes’ and offer proposals for new safeguards. Their interventions restore our sense of security by placing what happened in a moral framework. The idea that accidents are caused by a few greedy or negligent individuals is more palatable than the alternative, that the guilty parties were doing exactly what was asked of them, blind to any consequences, like an engine that keeps pumping steam after its pipes break.Extracting petroleum from the earth generates very high economic rewards – more than $2 trillion annually. There are also high costs, human and environmental, which resist measurement in purely economic terms. The combination tends to breed executives who seem to come from an alternate moral universe, one with unusually contingent notions of truth and responsibility. ‘It’s so much easier getting a project running in the developing world,’ a British geologist who had been hired to prospect in China told me: ‘If you lose a man, send a few thousand pounds back to his village and it’s done with.’

Crisscrossing the Rubicon of peak oil - In the minds of many of those concerned about an imminent rendezvous with peak oil, the day the world slides past the all-time peak in oil production will be a fateful and irreversible crossing. After it all the calamitous predicted consequences of the ensuing decline will become obvious--financial collapse, unaffordable energy prices, shortages of food and other goods dependent on cheap oil, and mounting unemployment to name a few. And, the cause of these effects will be plain for everyone to see. But even as some of these symptoms begin to manifest themselves, the public remains ignorant that stringency in oil supplies lies at the heart of them (though peak oil is admittedly part of a complex web of problems related to our broader energy and resource use). Why is this so? From the long view the level of oil production on a graph in this decade may well look like a peak. But from closer in, as we experience it day to day, month to month, and year to year, production may seem to be on a long, bumpy plateau. Even though one of the world's major sources of energy information, the International Energy Agency, admits that conventional crude oil probably peaked in 2006, the public and most policymakers remain ignorant of this sign that liquid fuels will have a hard time keeping up with demand.

Amount of Oil Consumed in the World - Today, approximately 31 billion barrels of oil are consumed each year or 85 million barrels of oil per day. Today, the population of the world is approximately 6.9 billion people. Average number of barrels of oil consumed each year per person: 4.5 barrels By 2025-2030 there will be an estimated 8-9 billion people in the world. Amount of oil needed in 2030 with 9 billion people consuming 4.5 barrels of oil per person per year: 41 billion barrels of oil per year or 111 million barrels of oil per day - a 32% increase. The equivalent of adding the total production capability of another Saudi Arabia. Many knowledgeable oil people and oil companies feel that the world will not be able to produce more than 100 million barrels of oil per day or 36.5 billion barrels of oil per year - ever.

Energy Technology Breakthroughs and Peak Oil - Significant technological advances rarely make eye-catching headlines as they come from many small advances involving numerous scientific disciplines. However, every now and again it becomes clear that progress is being made. When President Obama recently proposed raising the mileage for cars to an average of 54.5 miles per gallon, the automobile manufacturers-- much to the surprise of many -- said we can do it. An increase of this size is not a trivial task that can be accomplished overnight as it primarily involves numerous small improvements that together lead to significant change. Improvements in transportation and other energy related technologies are being reported every day. Most of the developments, however, are down in the technological weeds and involve technical concepts nearly incomprehensible to laymen; however, some of the reports do give insights into the directions in which our civilization may be evolving.

Six Inches Thick - The big macro story here, perhaps the most underappreciated of them all, is the decline in net energy from our energy extraction efforts. Energy drives all economic activity. Without energy nothing is possible. It all centered on food energy once upon a time. Food was the limiting factor for the populations of every country, just as it is for every other organism. With more food come greater populations.  Once we discovered other concentrated forms of energy that could be converted into food, and the food energy problem was effectively solved, then humans could turn their attention to other pursuits - even dedicating entire lives to things besides food production such as painting and science. That is, we turned ancient stored sunlight into food and reaped the benefits.  However, as with all too-good-to-be true-forever stories, this one comes with an ending. And signs that the final act has begun are all around us if we care to see them. Most do not, but you are reading this, which means you are willing to face 'what is' rather than ignore reality.

Daniel Yergin and Oil Supply: Should we Really not Worry About Peak Oil - Saturday, September 17, the WSJ ran an essay by Daniel Yergin called, “There Will Be Oil.” In the essay, Yergin argues that the advocates of “peak oil” theory are wrong. He says, “Meeting future demand will require innovation, investment and the development of more challenging resources,” but he doesn’t make this sound like a huge problem. Should we believe this story? It sounds strangely dissonant, compared to what we have been hearing from other sources. In 2007, the National Petroleum Council (NPC) issued a report called, “Facing Hard Truths about Energy.” In fact, Daniel Yergin was one of the authors of the report. The cover letter to this report said, “To meet the accumulating risks, all recommendations of the 2007 report require implementation with increased urgency and commitment. As stated in the 2007 report, there is no single, easy solution to the global challenges ahead. Given the massive scale of the global energy system and the long lead-times necessary to make material changes, all actions must be initiated now and sustained over the long term. We need all economic, environmentally-responsible energy sources to assure adequate, reliable supply.”

The 10 Commandments - Guidelines to Surviving in a Post Peak Oil World - If they are not actually "commandments" they might as well be. The original set of 10 provided a simple set of rules for members of a small community to live in reasonable harmony with one another, and that is essentially the requirement for an oil-dependent society that has necessarily fragmented into smaller communities, once its supply of oil has been severely curtailed. At first sight this does seem like a prognosis of "doom and gloom", as indeed it will be if there is no sensible scale-down of oil-fuelled activities. Indeed, a "wall" of fuel dearth will suddenly appear, and we will drive straight into it; or really be abandoned by the wayside of the petrol-fuelled journey of globalisation. So, here are some suggestions (not rules or commandments, but logical consequences and prospects for the era that will follow down the oil-poor side of Hubbert's peak). Overall, it will be necessary to curb our use of oil in the same amount as its rate of declining supply, which it is thought will be around 2.5%/year. Clearly the depletion-rate will not be precisely linear, but certain courses of action are indicated.

Saudi Arabia May Tap Reserves for Spending Plans: Arab Credit - Saudi Arabia, the world’s largest oil exporter, may be forced to tap its reserves to fund spending programs as oil drops below the kingdom’s breakeven budget price. King Abdullah this year announced a $130 billion plan to create jobs and build homes after uprisings toppled leaders in Tunisia, Egypt and Libya. While officials haven’t said whether they’ll sell debt or draw on reserves, as they did two years ago, an oil price below an $85 to $90 breakeven level as estimated by Citigroup Inc. may force them to act. The central bank’s total assets fell 0.3 percent to 1.93 trillion riyals ($515 billion) in August from July, according to data from the Saudi Arabian Monetary Agency. It was the first monthly decline since February, when the assets fell 0.4 percent. The Riyadh-based bank didn’t respond to telephone calls and a fax seeking comment on the reason for the decrease. “The only reasonable explanation is that they have drawn down their assets to help fund government spending as happened earlier during the financial crisis,”

The Saudi Budgetary Constraint on Oil Prices - You might imagine that the last decade has been pretty kind to Saudi government finances and you'd be right.  The graph above comes from a report on the Saudi government budget from Bank Saudi Fransi and shows government revenues and expenditures in billions of Saudi riyals (the riyal is pegged to the US dollar at 3.75 riyals per dollar).  The huge explosion in revenues as a result of the 2005-2008 oil shock is clear.  Two things have happened as a result.  The first is evident above - the government spends vastly more money than it did a decade ago.  The second is that the government has all but eliminated the national debt: A lot of the spending has gone for new infrastructure: capital investment is up almost 10X over the decade:  Clearly the party is not over in Saudi Arabia!  No doubt this has a good deal to do with why the country didn't experience material instability during the Arab Spring.

Russian oil production increases 1.23% in three quarters, exports drop Business RIA Novosti: Russian oil production increased by 1.23% in the first three quarters of this year to 381.446 million metric tons, and exports shrank by 2.13% to 180.429 million tons, the Energy Ministry said. Russia refined 192.498 million metric tons, a 3.94% rise, and distilled 191.129 million metric tons of crude oil, a 3.24% increase. The Energy Ministry said Russia had produced 505.194 million metric tons of oil in 2010, which is a 2.2% increase year on year. The country exported 0.6% less oil, or 246.816 million tons. The Energy Ministry expects annual oil production to increase to 509 million metric tons and to stay at 505-510 million a year until 2020. In late September, the Economic Ministry raised oil production forecast from 509.1 to 505 million metric tons. Oil export forecast for 2011 has also been increased by 1% and is expected to be 244.5 million metric tons.

Vital Signs: Commodities Taking a Hit - Commodity prices have taken it on the chin in recent weeks. With prices for everything from crude oil to corn and copper falling, the Dow Jones-UBS Commodity Index closed on Friday 14.7% below its end-of-August level. That brought it to its lowest level since last October. Beyond fretting about the troubled U.S. and European economies, commodity investors worry that Asian demand is slowing.

Commodities May Rally 20% on Emerging-Markets Growth - Commodity prices may advance 20 percent over the next year as growth in emerging markets offsets the impact of the sovereign-debt crisis in Europe and a slowdown in developed economies, according to Goldman Sachs Group Inc. (GS) The bank reiterated an “overweight” recommendation on commodities over the next 12 months, while remaining “neutral” in the near term, analysts led by Jeffrey Currie wrote in a report today. Oil and copper forecasts for 2012 were reduced. “With recent GDP revisions by our economists falling hardest on Europe but emerging market growth expectations still relatively solid, we continue to believe that demand growth in 2012 will be sufficient to tighten major commodity markets,” Currie wrote. “We now see a flatter upward trajectory for commodity prices.”

Wen Urges Financial Support For Small Businesses - Premier Wen Jiabao has urged stronger financial support for China's small businesses, as the country is currently walking a fine line between fighting inflation and maintaining growth. Small enterprises should be a priority for bank credit support and enjoy more preferential tax policies, Wen said during visits to east China's economic hub of Zhejiang province on Monday and Tuesday. Banks should increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit, the premier said. He also said bank support for small businesses must follow market principles and avoid too much administrative intervention in order to check moral hazards. His remarks came in light of tightening monetary policies that have bitten into China's small businesses. These companies create 80 percent of the country jobs, but have difficulty securing bank loans, as Chinese banks prefer to lend to larger companies.

China’s Land Sales Skyrocket 6,700-fold in 21 Years - video

China's urbanisation – interactive - The growth of China's cities over the next 15 - 20 years will be historically unprecendented. Click through the interactive to see some of the remarkable statistics ...

China’s manufacturers miss their Xmas bounce - China’s official manufacturing purchasing mangers index (PMI) improved for the second month in September 2011.  The headline PMI rose from 50.9 in August to 51.2 in September, just slightly above market expectation of 51.1. New orders index increased slightly from 51.1 to 51.3, and output rose from 52.3 to 52.7.  Finished goods inventory increased from 48.9 to 49.9, indicating relatively robust manufacturing activity. However, there are reasons for ongoing concern. While the manufacturing PMI is still showing very modest pace of expansion, the HSBC’s survey has been in sub-50 territory for 3 months, so manufacturing in China is only expanding in a slow pace, if at all.  When if we compare the September PMI this year with the same month of previous years, the slight seasonal rebound of September of this year is much more muted.  It is also worth pointing out that the current September reading is exactly the same as the September 2008 reading.Furthermore, if you look at the new exports order alone, September is traditionally a strong month probably due to the Christmas orders.  The September reading for this component of the PMI is therefore unimpressive.

Merrill Lynch: China bust upon us - Zarathustra wrote earlier this week: Deutsche Bank is expecting  a 10% correction in home prices because it would be a disaster if prices are allowed to fall by, say, 30%: Those who understand China’s political economy should know that a 15% decline in average property prices in 35 cities within a few months must be accompanied by a range of economic and social consequences. These will include a sharp decline in real estate transactions, a visible deceleration in real estate investments, rising unemployment in the property construction and agency sectors, a further decline in construction material prices, demand destruction due to inventory destocking, and finally a worrying decline in GDP growth and the resulting concern of social stability. So, the real question is, how do you engineer this landing, which requires the wheels on one side of the aircraft to fall off and a gentle touch down on the other side. Well, that question has just been cast into stark relief by the following from a Merrill Lynch note: Credit to Chinese developers is rapidly drying up which will be the trigger for a construction collapse. The rising cost of funding shows the pressure: - The yields on existing Chinese developers’ bonds in Hong Kong has exploded to around 30%. This means that this source of funding is now shut, as developers could not issue bonds at a 30-35% rate.

China’s disappearing bank deposits - In July this year, households and companies withdrew a total of Rmb1,100bn ($172.5bn) from China’s banks, equivalent to 2.5 per cent of GDP. In August, household deposits barely clinged to positive territory at Rmb26bn, despite receiving over Rmb188bn in new loans that month. Corporate deposits grew a bit more, but were still abnormally low. Although the September numbers are not out yet, Chinese press reports suggest that the deposits in the major state banks declined substantially in the first half of the month. Where did all the money go? The emerging consensus is that household deposits went to wealth management products (WMPs) to finance corporations. This makes great sense because households currently face over negative 3 per cent in real interest rates on their deposits, so they have high motivation to reallocate funds to WMPs, which offer higher yields. If that were the case, though, we would see spikes in firm deposits, but we do not. In August, for example, corporate deposits increased by Rmb371bn, but nearly all of that can be accounted for by the Rmb360bn in new corporate loans. Funds provided by WMPs did not seem to play a role in boosting corporate deposits. At the very least, we need to account for the Rmb188bn in new loans received by households in August, which did not show up as household deposits. If they used that money to pay companies, then companies should have seen an even higher increase in new deposits. But we don’t see that.

US Congress presses China on currency - The US Congress is renewing a push to penalise China over its currency, potentially forcing the White House to choose between angering its Democratic base and upsetting its delicately balanced relations with Beijing. The Senate is expected to vote on anti-China trade legislation on Monday, with the bill likely to pass with overwhelming bipartisan support, before being sent to the House of Representatives.  The White House has given mixed signals. Jay Carney, White House press secretary, said on Friday the administration was “reviewing” the bill and shared “concerns” about the currency. The bill would require the commerce department to use estimates of currency undervaluation when calculating so-called countervailing duties, imposed against imports deemed to be state-subsidised. On Sunday, China’s official news agency said the US was resorting to an old habit of deflecting blame on to China. “This has become a common practice – whenever the [US] economy is slow, whenever an election is nearing, voices in the United States pressing for the rise of the renminbi are all over,” Xinhua said in a commentary.

China Currency Head Fake - Just after 5:30 p.m. tomorrow, the Senate will invoke cloture on the China currency bill, S.1619. Passage by late Wednesday is assured. The bill imposes tougher reporting requirements on the Treasury Department and allows countervailing duty suits to be brought for currency manipulation. House passage is very unlikely despite majority support in both parties because Speaker John Boehner (R-OH) won't take it up, even though the House passed a similar bill last year. What's going on here? This is an exercise in blame avoidance, but given Congress' record low popularity, it doesn't seem to be working. Unemployed workers across the country have seen their jobs move to China in part because of China's currency manipulation that keeps the Renminbi undervalued by approximately 30%, although estimates vary widely as explained in this Congressional Research Service report. Congressional leaders understand that retaliating against China, which holds $1.2 trillion of our debt (See this Treasury table.), could have severe repercussions. So the drill tomorrow is to pass the bill so senators can say they voted for it without revealing that it has no chance of enactment. I don't believe voters will be so easily fooled.

Holding China to Account, by Paul Krugman -The dire state of the world economy reflects destructive actions on the part of many players. Still, the fact that so many have behaved badly shouldn’t stop us from holding individual bad actors to account.  And that’s what Senate leaders will be doing this week, as they take up legislation that would threaten sanctions against China and other currency manipulators. Respectable opinion is aghast. But respectable opinion has been consistently wrong lately, and the currency issue is no exception. Ask yourself: Why is it so hard to restore full employment? ... The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports. Yes, some people will shriek about “debasing” the dollar. But sensible policy makers have long known that sometimes a weaker currency means a stronger economy... Switzerland, for example, has intervened massively to keep the franc from getting too strong against the euro. ...

Krugman’s peculiar views on American nationalism and the Chinese yuan - This will be a long post, as Paul Krugman’s recent piece on the yuan raises all sorts of different questions.  Let’s start with his assertion that an overvalued Chinese currency is restricting our ability to reflate our economy: But given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest — and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit. That, above all, means China. But how do we know the yuan is undervalued?  Its current value is not out of line with predictions of the Balassa-Samuelson Theorem, which predicts that countries with higher per capita GDPs will have higher real exchange rates.  Krugman points to the huge Chinese trade surplus.  But is their surplus actually all that large?  After all, China is a very big country.  As I pointed out earlier, the Germanic/Nordic current account surplus is vastly larger, despite the fact that the countries lying between Switzerland and Norway have a combined population only a tenth as large as China’s.  The smaller East Asian countries also have vastly bigger surpluses on a per capita basis.   So why focus on China?

Retaliating Against Currency Manipulation: A Primer... You've probably heard that this week the US Congress has been addressing the issue of how China controls its exchange rate with the US dollar. In particular, many have argued that China's policy of only allowing the yuan (CNY) to appreciate very gradually against the dollar has kept Chinese products unreasonably cheap to American consumers, and American products unreasonably expensive to Chinese consumers. (See for example Paul Krugman's column on Monday.)  So this week the US Senate voted to consider a bill that would impose tariffs on countries that are judged to have misaligned exchange rates. But China has reacted by very explicitly threatening to retaliate against the US. And now Boehner and other Republicans in Washington seem to be ready to stop this bill, so it's unclear to me whether it actually has a realistic chance of becoming law. But this is an issue that is not going away any time soon, so it bears thinking about. In general I tend to focus much more on the economics than the legal aspects of international trade and financial issues, but in this case the legal implications could have some important economic effects that we need to consider.

How to Value a Currency - With the Senate about to take up legislation to penalize China for “manipulating” its currency and keeping it artificially undervalued, we asked Peterson Institute of International Economics economist Arvind Subramanian to explain how calculations of under- and overvaluation are made. Mr. Subramanian is the author of a new book on China’s economic future, “Eclipse: Living in the Shadow of China’s Economic Dominance.” In recent Congressional testimony, he said China’s currency was about 15% undervalued, citing work by two colleagues at PIIE.

China Fires Back At US Senate Which May Have Just Started The Sino-US Currency Wars - A few hours ago, the maniac simians at the Senate finally did it and fired the first round in the great US-China currency war, after they took aim at one of China's core economic policies, voting to move forward with a bill designed to press Beijing to let its currency rise in value in the hope of creating U.S. jobs. As Reuters reports, "Senators voted 79-19 to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies. Monday's strong green light for debate on the bill bolsters prospects it will clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky. If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach." The response has been quick and severe: "China's foreign ministry said it "adamantly opposes" a bill pushed by the U.S. Senate that will allow the United States to impose duties on countries that undervalue their currencies."

Yuan Appreciation: Do Chinese Trade Flows Behave Differently? (I) China is in the news; or more accurately, the Chinese currency, is. From Reuters: A sharp rise in China's yuan currency might cut the U.S. trade deficit by as much as one third and create enough American jobs to put at least a modest dent in the unemployment rate.  Then again, it may also lead to a destabilizing spike in Chinese unemployment and spark a trade war that drags the global economy back into a deep recession.  I don’t know how the politics surrounding the House bill will unfold. I will also defer on the issue of whether the threat of tariffs would induce Chinese acquiescence or spur retaliation (see Kash Mansouri for discussion of these issues.) I’ll focus on the economic (specifically trade flow) effects of a yuan appreciation. To begin with, it’s useful to think about where we’ve been, and where we’re going.

China warns of 'trade war' over currency bill - FT - China has warned of a potential trade war with the US if Washington lawmakers decide to pass a proposed anti-China currency bill. The bill, if passed, would allow Washington to impose duties on Chinese goods imported to the US to punish Beijing for allegedly undervaluing its currency. The bill could be passed later this week after the Senate voted late on Monday to move ahead with a debate on the matter. On Tuesday the Chinese government blasted the currency bill in three statements released simultaneously by the foreign ministry, the central bank and the ministry of commerce. “By using the excuse of a so-called ‘currency imbalance’, that bill escalates the exchange rate issue, takes protectionist measures, gravely violates the rules of the World Trade Organisation and severely upsets China-US economic and trade relations; China expresses firm opposition to it,” said Ma Zhaoxu, foreign ministry spokesman. China’s central bank said the bill would not solve US economic problems such as insufficient savings, a large trade deficit and high unemployment “but it may seriously affect the entire progress of China’s reform of its yuan exchange rate regime and also lead to a trade war, which we would not like to see.”

No Time for a Trade War - Joseph E. Stiglitz - The battle with the United States over China’s exchange rate continues. When the Great Recession began, many worried that protectionism would rear its ugly head. True, G-20 leaders promised that they had learned the lessons of the Great Depression. But 17 of the G-20’s members introduced protectionist measures just months after the first summit in November 2008. The “Buy American” provision in the United States’ stimulus bill got the most attention. Continuing economic weakness in the advanced economies risks a new round of protectionism. Although US politicians focus on the bilateral trade deficit with China – which is persistently large – what matters is the multilateral balance. When demands for China to adjust its exchange rate began during George W. Bush’s administration, its multilateral trade surplus was small. More recently, however, China has been running a large multilateral surplus as well.Saudi Arabia also has a bilateral and multilateral surplus: Americans want its oil, and Saudis want fewer US products. Even in absolute value, Saudi Arabia’s multilateral merchandise surplus of $212 billion in 2008 dwarfs China’s $175 billion surplus; as a percentage of GDP, Saudi Arabia’s current-account surplus, at 11.5% of GDP, is more than twice that of China. Saudi Arabia’s surplus would be far higher were it not for US armaments exports.

Protectionism beckons as leaders push world into Depression -  The world savings rate has surpassed its modern-era high of 24pc. This is the killer in the global system. It is why we are at imminent risk of tipping into a second, deeper leg of intractable depression. The International Monetary Fund (IMF) expects the savings mountain to rise yet further next year as the governments of Europe, Britain, and the US tighten belts, in unison, by up to 2pc of GDP. This is double the intensity of the last big synchronized squeeze in 1980. They will do so before the private sector is ready to grasp the baton, and without stimulus from the trade surplus states (Germany, China, Japan) to offset the contraction in demand. Put another way, there is a chronic lack of consumption in the world. "This probably comes as a surprise to most people, gorged on propaganda about excessive debt and the need for retrenchment," said Charles Dumas from Lombard Street Research. The inevitable outcome of one-sided austerity polices in the Anglo-sphere and Club Med is a self-feeding downward slide for the whole global system, a variant of 1930s debt-deflation. "Excess savers refuse to acknowledge that if world savings are demonstrably too high, healthy recovery depends on the surplus countries saving less," he said.

Currency wars: Lessons from the US experience -The Great Recession has resulted in sharp exchange-rate changes and threats of ‘currency wars’ linger. Some countries – notably Japan and Switzerland – have shown an interest in foreign-exchange intervention. This column argues that sterilised intervention does not afford monetary authorities a means of systematically affecting their exchange rates independent of their domestic policy objectives. Countries that engage in currency wars run a real risk of shooting themselves in the foot.

The Rise of the Renminbi as International Currency: Historical Precedents - All of a sudden, the renminbi is being touted as the next big international currency.   Just in the last year or two, the Chinese currency has begun to internationalize along a number of dimensions.   A RMB bond market has grown rapidly in Hong Kong, and one in RMB bank deposits.   The currency is starting to be used to invoice some of China’s international trade.   Some are now claiming that the renminbi could overtake the dollar for the number one slot in the international currency rankings within a decade. The basis of this prediction is, first, the likelihood that the Chinese economy will surpass the US economy in size and, second, the historical precedent when the dollar overtook the pound sterling as the number one international currency during the period after World War I.    It used to be thought that international currency status was subject to much inertia (e.g., Krugman, 1984).  There was said to have been a long lag between the date when the US economy had passed the UK economy with respect to size (1872, by the criterion of GNP) and the time when the dollar had passed the pound (1946), The “new view,” represented in particular by Eichengreen (2011) and Eichengreen and Flandreau (2010), is that the lag was in fact rather short.

HSBC Lowers Forecasts for Most Asian Economies - HSBC Holdings Plc cut its economic growth estimates for most Asian economies, citing threats to exports and the impact of sliding stocks and currencies.  Europe’s debt crisis and a struggling U.S. expansion signal Asian exports “will almost certainly take a large hit,” HSBC said in a report received today. Domestic demand “will also throttle down” as currencies and capital markets fall, with Asia excluding Japan growing 7.3 percent in 2011 and 2012, lower than earlier projections of 7.5 percent for both years, it said.  HSBC joins Goldman Sachs Group Inc. in dimming its Asian outlook after Europe’s plight and the threat of a recession in the U.S. roiled global markets. While the expansion in Asia will slow, Chinese growth will “hold up” and regional liquidity is “ample,” which should help avert a sharper deceleration, according to HSBC.  “The risks are certainly rising with every week that policy uncertainty persists in the West,”

Goldman Cuts Global GDP Estimate - Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows. The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report. The company lowered its forecast for earnings growth in Asia excluding Japan in a separate report today. Europe’s worsening sovereign debt woes and the threat of a U.S. recession have roiled global stock markets, erasing about $13 trillion from equities since May. The debt crisis has infected the European banking system, making financial institutions wary of lending to each other and pushing overnight deposits with the European Central Bank last week to the highest in more than a year. “The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly,” the economists said. “Over the next few quarters, we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery.”

Fear (of another recession), not uncertainty - What is keeping growth in advanced economies from recovering at a speed similar from previous recessions? There are several explanations and which one you prefer might depend on your political taste (see an example of this debate in the US here). There is one potential explanation that I find is being overemphasized: "it is all about uncertainty". And some make it more explicit and talk about regulatory uncertainty, uncertainty about taxes, about a sovereign default in Europe, etc. No doubt that uncertainty plays a role in explaining macroeconomic fluctuations and I am a big fan of Nick Bloom's work, an economist at Stanford, who has provided strong evidence that uncertain raises around some of the most recent recessionary episodes. But what do we mean when we use the word uncertainty to describe the current environment? I believe we are mixing two things: one is that the future is more difficult to predict (and this truly matches the notion of uncertainty) but the second one is that future scenarios are simply worse than what we thought before. This is not uncertainty, this is just bad news.

Aussie Weakens to One-Year Low as RBA Signals Interest-Rate Cut Possible - The Australian dollar dropped to its lowest in a year against the greenback as a policy statement by the central bank suggested that an easing of inflation pressures will pave the way for possible interest-rate cuts. The so-called Aussie slid for a third day against the yen as traders priced in an 86 percent chance the Reserve Bank of Australia will cut interest rates by half a percentage point to 4.25 percent by November. New Zealand’s dollar held a four-day loss against the U.S. currency, after touching a six-month low, as data showed business confidence fell in the third quarter. “Taking into account all the recent information, the path for inflation may now be more consistent with the 2-3 percent target in 2012 and 2013,” RBA Governor Glenn Stevens said in a statement accompanying the board’s decision to leave rates unchanged at 4.75 percent. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

Higher Borrowing Means Central Bank to Buy Bonds -- India’s central bank may buy bonds for the first time in nine months to cap rising yields as outflows from national savings accounts forced the government to increase debt sales. The Reserve Bank of India will probably acquire 500 billion rupees ($10.2 billion) of notes, according to Nomura Holdings Inc. and Kotak Mahindra Bank Ltd. Benchmark 10-year yields were steady at 8.54 percent, the highest level since 2008, after the Finance Ministry said last week it would borrow 32 percent more than its 1.67 trillion rupee target in the six months to March. Yields have climbed 60 basis points in 2011, the most in Asia after Vietnam, according to data compiled by Bloomberg. Finance Minister Pranab Mukherjee is struggling to trim the budget deficit to a targeted four-year low of 4.6 percent of gross domestic product as India’s economy slows. Further deterioration in the government’s finances may “weigh” on the nation’s BBB- debt rating, already the lowest among the world’s largest emerging economies, according to Fitch Ratings.

Russia’s Putin promotes ‘Eurasian Union’ in rare article…Russian Prime Minister Vladimir Putin called for the unification ofpost-Soviet states into a “Eurasian Union” in an article published Tuesday on the announcement of his planned return to the Kremlin. Putin’s article in the Izvestia daily outlining a grand project to integrate post-Soviet states into closer cooperation comes five months before polls that can put him at the helm of foreign policy decisions for at least six years. The front-page piece, titled “New Eurasian integration project: a future that begins today”, sings praises to Russia’s economic integration with Belarus and Kazakhstan. But, Putin writes, “we set a more ambitious goal to go to the next, higher level of integration — the Eurasian Union,” which would “build on the experience of the European Union and other regional coalitions.” Russia has pursued for several years closer economic cooperation with ex-Soviet partners, forming a customs union with Belarus and Kazakhstan in 2009 and later developing it into what it calls a unified economic zone.

Global manufacturing PMI - In addition to the individual country manufacturing PMI's, on which I commented yesterday, JPMorgan/Markit produce a "global" PMI, which is the a weighted average of the country PMI's. They released this Global PMI for the month of September yesterday as well, showing that world manufacturing activity weakened further. The composite index reached a level of 49.9, down from 50.2 in August. September is the seventh month in a row in which global manufacturing activity has weakened. Granted, the change is minimal, but it is pointing in the wrong direction (or in the right direction, if you are predicting a recession). From August to September, the new orders component weakened from 49.4 to 48.5. The employment and output components improved slightly (51 to 51.3, and 49.8 to 50, respectively), and the input price component saw no change. 

World-Wide Factory Activity, by Country - Global manufacturing stalled across many countries in September, with countries in the euro zone hit hardest. The U.S., China and the U.K. managed improved expansion. The U.S. rate of growth improved last month, moving further above the 50-level that indicates expansion. The Institute for Supply Management’s manufacturing purchasing managers’ index rose to a better-than-expected 51.6, but new orders were in contractionary territory and the level remains somewhat muted. “It should now go without saying that the United States was not in a recession in the third quarter, no matter how poorly consumers and businesses felt,” Meanwhile, the euro zone moved further into contractionary territory. Germany managed to continue expanding, albeit at a slow pace, but France, Spain, Italy and Ireland all had contracting factory sectors. In Asia, both Taiwan and Japan were contracting, while China’s official purchasing managers’ index managed to eke out a small gain. See a sortable chart of manufacturing activity, by country.

Euro-zone manufacturing PMI hits 25-month low  -- The euro-zone manufacturing sector contracted for the second consecutive month in September, according to data from Markit Economics released Monday. The final Markit euro-zone manufacturing purchasing managers' index fell to 48.5 in September from 49.0 in August, though it was slightly above the flash estimate of 48.4. A reading below 50 shows that activity is contracting. Only Germany saw its PMI hold above the 50.0 mark, while Greece saw the steepest rate of contraction of all countries covered followed by Spain and Ireland, Markit Economics said.

Banking crisis set to trigger new credit crunch - Credit default swaps on lenders as far afield as China and Australia, countries that until recently seemed immune to the chaos, have doubled in the last two months to levels not seen since the financial crisis.  In Europe, French and Belgian government officials are due to meet on Monday to discuss the crisis enveloping Dexia as speculation mounts about a possible break-up of the Franco-Belgian lender.  Last week, the cost of insuring Dexia bonds hit an all-time high of 900 basis points, nearly double the level just two months ago, meaning the annual cost to insure €10m (£8.59m) of the bonds is £900,000.  "The money ran out in June and what you are seeing now is the beginning of a new credit crunch, except this time it will be truly global, not Western,"

BIS Sees ‘Severe’ Problems If Sovereign Debt Isn’t Risk-Free (Bloomberg) -- Bank for International Settlements General Manager Jaime Caruana urged European leaders to step up efforts to solve the region’s sovereign-debt crisis to prevent a further deterioration of the banking system. “We need to urgently and forcefully regain fiscal credibility and take the necessary actions to restore the risk- free status of sovereigns,” Caruana said at a conference in Vienna today. “The implications of not having sovereigns as risk-free are very severe, they will materialize in many areas,” including banks’ capital requirements. Concern that European officials will fail to contain the region’s debt crisis as the U.S. recovery falters wiped more than $9 trillion from the value of global stocks last quarter. Europe’s finance ministers are meeting in Luxembourg today to weigh the threat of a Greek default, assess ways to shield banks from the possible fallout and consider a further boost to the region’s rescue fund. They’ll also tackle the question of how to improve economic and fiscal governance. Caruana, a former council member of the European Central Bank, said the “key challenge’ for European authorities is to break the ‘‘feedback loop between weak public finances and fragilities in the financial system.’’

Eurozone Retail Spending Down Again in August - Numbers out today from Eurostat: In August 2011 compared with July 2011, the volume of retail trade fell by 0.3% in the euro area (EA17) and by 0.2% in the EU27. In July retail trade rose by 0.2% and 0.1% respectively.  In August 2011 compared with August 2010, the retail sales index decreased by 1.0% in the euro area and by 0.8% in the EU27. It's not a precipitous slide at this point, but it certainly does seem that the Eurozone consumer is slowly retrenching.  That's not going to help the Eurozone's problems - after all, consumers who are cutting back on eating out and shopping are probably not planning romantic getaways to Greece, Italy, or Spain either

S&P Report Says Europe Faces Rising Risk of ‘Double Dip’ -- Deteriorating business sentiment in European markets and a projected slowdown of growth in the U.S. is weighing on economic prospects for Europe, Standard & Poor’s Ratings Services said today in a report. S&P now forecasts GDP growth in the eurozone to be 1.1 percent in 2012, compared with 1.5 percent in its earlier projection. For the U.K., S&P expects GDP growth rate of 1.7 percent in 2012, slightly below its 1.8 percent projection made in August.

Goolsbee: Euro Crisis "Could Become a Global Conflagration" -Austan Goolsbee was President Barack Obama's most important economic adviser until August. He told SPIEGEL that Europe must recapitalize its banks immediately to avoid the risk of a financial collapse. He says that Europe has been far too hesitant in combating the ongoing debt crisis. (interview transcript)

Roubini Says Europe Needs 2 Trillion-Euro ‘Bazooka’ Soon - Europe must raise the amount of funds it has earmarked to arrest its fiscal crisis and deploy a 2 trillion-euro ($2.7 trillion) “bazooka” before time runs out, said Nouriel Roubini, chairman of Roubini Global Economics LLC. “I’m very concerned of things getting out of control,” Roubini said in an interview at Bloomberg’s Dubai office yesterday. “You need a huge bazooka of at least 2 trillion euros, but you can’t wait three months. You have to do it in the next few weeks.” Three years after the collapse of Lehman Brothers Holdings Inc., financial shares in Europe are under assault and the cost of insuring bank debt is at records as the global recovery falters and the euro-region crisis weighs on the economy. The euro dropped to an eight-month low against the dollar before European finance ministers meeting in Luxembourg today will grapple with how to shield banks from the debt crisis and mull a further boost to the region’s rescue fund.

What Would It Take To Save Europe? - Simon Johnson - Last weekend official Washington was gripped by euphoria, at least briefly, as people attending the IMF annual meetings began to talk about how much money it would take to stabilize the situation in Europe.  At least one eminence grise suggested that 1.5 trillion euros should do the trick, while others were more inclined to err on the side of caution – 4 trillion euros was the highest estimate I heard.This is a lot of money: Germany’s annual Gross Domestic Product (GDP) is only about 2.5 trillion euros, and the combined GDP of the entire eurozone is about 9.5 trillion euros.  The idea is that providing a massive package of financial support would “awe” the markets “into submission” – meaning that people would stop selling their holdings of Italian or Spanish debt and thus stop pushing up interest rates.  Ideally, investors would also give Greece and Portugal some time to find their way to back to growth. But this is the wrong way to think about the problem.  The issue is not money in the form of external financial support – provided by the IMF or other countries to parts of the European Union.  The real questions are: will Italy get complete and unfettered access to the European Central Bank, and when will we know this?

Greek gloom rocks markets, troubles lenders -  (Reuters) - Greece's admission that it will miss its deficit target this year despite harsh new austerity measures sent stock markets reeling on Monday and raised new doubts over a planned second international bailout. The gloomy news from Athens brought the specter of a debt default closer and will weigh on talks among euro zone finance ministers in Luxembourg later on Monday on the next steps to try to resolve the currency area's sovereign debt crisis. European bank shares suffered the heaviest falls on fears that private sector bondholders may be forced to absorb bigger losses than agreed in a July rescue plan for Greece, which was based on more optimistic growth forecasts. The draft budget sent to parliament on Monday showed this year's deficit would be 8.5 percent of gross domestic product, well off the 7.6 percent agreed in Greece's EU/IMF bailout program.

In Greece, Austerity Measures Weaken the Economy, What Did the Post Expect? - They kept spraying water on the wood, but they just couldn't get the fireplace started. The Post wrote the equivalent in an article on the Greek crisis: "The government has raised taxes and cut services and is announcing tougher steps every other week. So far it has been to no avail; the economic outlook keeps getting worse, not better." When the government pulls money out of the economy by laying off workers, cutting government workers' pay, and raising taxes, the expected result is a weakened economy. This is exactly what has happened in Greece. It is difficult to understand what the Post meant in saying "to no avail."

Battered by Economic Crisis, Greeks Turn to Barter Networks - The first time he bought eggs, milk and jam at an outdoor market using not euros but an informal barter currency, Theodoros Mavridis, an unemployed electrician, was thrilled. “I felt liberated, I felt free for the first time,” Mr. Mavridis is a co-founder of a growing network here in Volos that uses a so-called Local Alternative Unit, or TEM in Greek, to exchange goods and services — language classes, baby-sitting, computer support, home-cooked meals — and to receive discounts at some local businesses.  Part alternative currency, part barter system, part open-air market, the Volos network has grown exponentially in the past year, from 50 to 400 members. It is one of several such groups cropping up around the country, as Greeks squeezed by large wage cuts, tax increases and growing fears about whether they will continue to use the euro have looked for creative ways to cope with a radically changing economic landscape.

Why a reworked Greek deal will happen - Intra-Europe capital flight that has taken place over the past couple of months has made the prospective Greek workout (debt rescheduling) plan so ludicrously profitable for speculators and outrageously expensive for euro-area taxpayers, that I believe a justified fear of public anger will force its reworking. At the same time, the prospect of further capital flight if no Greek deal is reached by the end of the year has become so dangerous that a reworked plan will have to be agreed within a short window of time.  The current problems were created by the eurocrats having only a sketchy understanding of how “Brady bond” exchange offers work, and how they have to mesh with market dynamics. The eurocrats could have delegated the work to people with experience at rescheduling sovereign debt, but wanted to keep the control and credit for themselves. Bad call.  For several weeks now, I’ve been hearing hedge fund people talk about how “private sector involvement”, or the proposed exchange offer for Greek state bonds, is a “no brainer”.  The deal is a “no brainer”, the hedgie will say, because the zero coupon bond that is offered as collateral for the deal will more than cover the cost of buying the bond. So you are getting a bond for free. Well, not free for the euro-area taxpayers who are guaranteeing the European Financial Stability Facility that is putting up the cash to buy the zeros.

Toil and Trouble Over the Caldron That Is Greece -  The 17 European Union nations that share the euro don’t have that much time, of course, to convince investors that they have a plan to hold the currency together and prevent a run on the Continent’s banks.  But rapid action comes hard to a union that works in increments, with political agreement required at every step.   In the short term, Greece remains the central problem. Europe’s strategy, to the extent it can be discerned, is to put off restructuring Greece’s debt as long as possible and build up enough backing for a bailout fund so that banks with large exposure to the sovereign debt of Greece and other troubled euro-zone countries, like Portugal, Ireland, Italy and Spain, can survive an all-but-inevitable Greek default. When speaking privately, officials concede that Greece’s debt ... is unsustainable and that lenders will probably have to write some of it off. A “haircut” of 50 percent, followed by a recapitalization of banks if necessary, is the outcome most commonly mentioned.  Germany and France are not prepared to consider doing that yet, though, in part because relieving the pressure on Greece would remove its incentive to overhaul its finances and make its economy more competitive.

Thousands rally against Portugal’s austerity plans - Thousands demonstrated in Portugal Saturday against the government’s austerity measures amid projections that the economic situation is far worse than expected. Government and private sector workers rallied in Lisbon and Porto, following a call by the country’s largest trade union federation to speak out against policies it says have devastated “jobs, workers, pensions and social rights.” “No to price rises” and “No to the destruction of health care”, read banners hoisted by demonstrators marching through central Lisbon. Rally organisers, who said they had charted dozens of buses to transport protestors from around the country, did not immediately provide an estimate of the turnout.

Wolfgang Schaeuble ruled out larger German EFSF contribution - Finance Minister Wolfgang Schaeuble was quoted on Saturday ruling out a higher German contribution to the euro zone's rescue fund beyond the 211 billion euros approved by parliament last week. In an interview with the Super-Illu newspaper published on Saturday, Schaeuble said Germany would not contribute more than that amount to the 440 billion euro European Financial Stability Facility (EFSF). "Germany will take on 211 billion euros in guarantees and that's it, that's really the end of it with the exception of the interest costs on top of it," said Schaeuble, who has faced criticism recently for revising upwards earlier pledges on ceilings for the guarantees.

German Finance Minister: We're Giving $283 Billion To The EFSF And "That's It. Finished.": German Finance Minister Wolfgang Schaeuble ruled out a larger German contribution to the European Financial Stability Facility in an interview published Saturday, according to Sky News. "The European Financial Stability Facility has a ceiling of 440 billion euros, 211 billion of which is down to Germany. And that is it. Finished,'" he told magazine Super-Illu. This is the latest in a string of comments from Schaeuble that have wrecked hopes for an EFSF capable of recapitalizing European banks or taking on larger debts from peripheral Europe. Dow Jones also reports that Schaeuble ruled out leveraging the EFSF in a meeting with the Free Democrats (FDP) on Tuesday. Despite Schaeuble's criticism of expanding the fund, his tune could change after a meeting October 9 between German Chancellor Angela Merkel and French President Nicolas Sarkozy. Reports say the meeting will be focused on speeding the economic integration of Europe, a proposal German voters are likely to reject.

Schauble 'Going Rogue' - Semi-organized versions of my thoughts can be found here and here; John Quiggin and I have another short piece that will likely be coming out soon. But fwiw I was distinctly heartened by the news today that Wolfgang Schäuble and Alain Juppé are both floating the idea of real fiscal integration and accompanying democratic reforms of the EU. This has plausibly been orchestrated. If they are right to think that this could be pulled off, it would finally create an intersecting set in the Paul Krugman Eurovenn. I’m still not optimistic – but I’m now prepared to up the odds to a 35% chance that Europe could actually get out of this alive. I’ve always suspected that Schäuble was playing a complex game – he’s now putting his cards on the table. Unsurprisingly, this is giving rise to howls of indignation from conservative and euroskeptical Germans – this Spiegel piece (in translation) gives some flavor.

Europe’s Austerity Pipe Dreams - Austerity has become very fashionable these days in Europe. Greece has committed itself to one of the most ambitious austerity programs in modern history. Last week, the government in Athens pledged to ax even more jobs, raise more taxes and cut more expenditures. Italy, one of the most notorious debt nations around, wants to balance its budget in two years time. In France, Nicolas Sarkozy forced his ministers to cut short their sacred summer break. Within two years, “la Grande Nation” wants to cut its social security deficit by 40 percent. When it comes to austerity programs, dreams and reality quite often are worlds apart. This message can be gleaned from a recent comprehensive study conducted by IMF economists. In a series of unique case-studies a research team lead by Paulo Mauro, chief of the IMF division “Fiscal Operations”, analysed if and when governments were able to fulfil announced austerity programs.  On average, EU countries missed their targets significantly. EU governments announced 66 austerity programs and pledged cuts cuts of 1.7 percent of GDP on average. However, they were only able to deliver slightly more than half of this.

Eurozone fix a con trick for the desperate - We are now in the stage of the crisis where people get truly desperate. The latest crazy idea, which is being pursued by officials, is to turn the eurozone’s rescue fund into an insurance company, or worse, a collateralised debt obligation, the financial instrument of choice during the credit bubble. This is the equivalent of putting explosives into a can, before kicking it down the road.   To illustrate the danger of the CDOs as a solution to the eurozone crisis, it is important to recall a few facts about what happened during the credit bubble. CDOs lured investors to put money into mortgages. The CDOs themselves had triple-A credit ratings, even though they invested in bad assets. When the bubble burst, governments stepped in and prevented a catastrophe.  So why use such a toxic instrument to construct a product to save the eurozone? The current lending size of the European financial stability facility (EFSF) is €440bn, which is equal to the guarantees given by the 17 eurozone member states. If you want to leverage the CDO without increasing the liabilities of governments, then this €440bn would become the equity tranche of the new CDO. The equity holders in the CDO are supposed to be the ultimate risk-bearers. You can leverage the structure by creating more senior tranches of bonds that would be open to outside investors. The big difference between a eurozone CDO and a subprime CDO is the the nature of the backstop. When the eurozone CDO fails, there are no governments that can bail it out because the governments themselves are already the equity holders of the system. This leaves the European Central Bank as the last man standing.

Satyajit Das: Euro-Zone’s Leveraged Solution to Leverage - If as Albert Einstein observed insanity is “doing the same thing over and over again and expecting different results”, then the latest proposal for resolving the Euro-zone debt crisis requires psychiatric rather than financial assessment. The sketchy plan entails Greece restructuring its debt with writedowns around 50% and recapitalisation of the affected banks. The European Financial Stability Funds (“EFSF”) would increase its size to a proposed Euro 2-3 billion from its current Euro 440 billion. On proposal under consideration entails the EFSF using leverage to increase its size and enhance its ability to intervene effectively. Attributed to US Treasury Secretary Tim Geithner, the proposal is similar to the 2007 Master Liquidity Enhancement Conduit (“MLEC”) super conduit which was ultimately abandoned. The EFSF would apparently bear the first 20% of losses on sovereign bonds and perhaps its investment in banks. This resembles the equity tranche in a CDO (Collateralised Debt Obligations), which assumes the risk of the initial losses on loans or bond portfolios. Assuming the EFSF contributes Euro 400 billion, the total bailout resources would be around Euro 2 trillion. Higher leverage, a lower first loss piece, say 10%, would increase available funds to Euro 4 trillion. The European Central Bank (“ECB”) would supply the “protected” debt component to leverage the EFSF’s contribution, bearing losses only above the first loss piece size. The proposal has a number of problems.

The Wrong Tax for Europe - – Europe is already in pickle, so why not add more vinegar? That seems to be the thinking behind the European Commission’s proposed financial transactions tax (FTT) – the Commission’s latest response to Europe’s festering growth and financing problems. The emotional appeal of a tax on all financial transactions is undeniable. Ordinary Europeans have to pay value-added tax on most of the goods and services that they buy. so why not tax purchases of stocks, bonds, and all kinds of derivatives? Surely, such a tax will hit wealthy individuals and financial firms far more than anyone else, and, besides, it will raise a ton of revenue.  As a bonus, an FTT will curb destabilizing speculation in financial markets. If only it were so simple. Of course, taxation of financial firms’ profits and bonuses should be made more similar to that of other economic activities. Excessive leverage needs to be reined in. A return to pre-2007 levels of macroeconomic and financial stability would support growth. Unfortunately, much as FTTs are the darling of leading liberal economic commentators and Robin Hood NGOs, they are an extremely misguided approach to achieving such worthy ends.

ECB Says Banks’ Overnight Deposits Reach Highest Since July 2010 - The European Central Bank said financial institutions increased overnight deposits to the highest in more than a year.  Banks parked 199.6 billion euros ($266 billion) with the ECB on Sept. 30, up from 161.4 billion euros a day earlier, according to data published by the Frankfurt-based central bank today. That’s the highest since July 2010. Overnight borrowing at the marginal rate of 2.25 percent almost doubled to 1.4 billion euros from 765 million euros, it said.  Banks are borrowing more from the ECB in regular refinancing operations as the region’s debt crisis intensifies, leaving lenders with excess cash that they return to the central bank in overnight deposits rather than pass it on to other institutions. Banks tend to front-load their ECB borrowings to ensure they have enough cash to meet reserve maintenance requirements.

ECB Says Overnight Deposits Surge to Highest Since July 2010 - Lenders increased overnight deposits at the European Central Bank to the highest in more than a year as financial institutions looked for safety in the euro-region’s debt crisis. Banks parked 209 billion euros ($276 billion) at the Frankfurt-based ECB yesterday, up from 199.6 billion euros Sept. 30. That’s the most since July 2010 and compares with a year-to- date average of 54 billion euros. “It’s a reflection that there seems to be limited lending within the money market,” “There is less willingness to lend between banks and more willingness to lend to the ECB so banks at least get something for their money.” European finance ministers are considering revising a July deal for a second Greek bailout, fueling concern bondholders may have to take bigger losses on the nation’s debt. Goldman Sachs Group Inc. cut its global growth forecasts and predicted recessions in Germany and France, while Standard & Poor’s said Europe faces an increased risk of a double-dip recession.

Goldman Cuts GDP Estimates; Sees German, French Recessions -- Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows. The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report. The company lowered its forecast for earnings growth in Asia excluding Japan in a separate report today. Europe's worsening sovereign debt woes and the threat of a U.S. recession have roiled global stock markets, erasing about $13 trillion from equities since May. The debt crisis has infected the European banking system, making financial institutions wary of lending to each other and pushing overnight deposits with the European Central Bank last week to the highest in more than a year. "The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly,"

Germany Debating Rules For Sovereign Default - Germany's Deputy Economics Minister Stefan Kapferer has called for creating guidelines to regulate an orderly insolvency of a euro-zone member, in a letter to Joerg Asmussen, his counterpart at the Finance Ministry. The letter highlights how the debate over resolving the euro-zone debt crisis is increasingly moving towards establishing a proper framework for sovereign default, despite being short on detail about the specific rules that may be needed. In the letter, which Dow Jones Newswires has seen, Kapferer said the point of any insolvency rule is to provide a long-term growth perspective for countries with structural budget deficits. He suggested creating a European Monetary Fund as a successor to the still not approved European Stability Mechanism. The EMF, a controversial concept that has not found many friends in the euro zone, should be an independent body that would oversee any sovereign insolvency, wrote Kapferer. "We need a comprehensive restructuring process for these countries," Kapferer wrote. "Therefore it is necessary to establish an orderly procedure to re-establish a country's competitiveness."

Is the Dexia mess the start of a new financial crisis? - In the clearest indication yet that Europe's sovereign debt crisis is morphing into a wider, financial sector crisis, a big European bank might be looking at a break up. The talk in Europe is that French-Belgian specialty lender Dexia could be dismantled, with healthy units sold off and other assets dumped into a “bad bank.” None of that has been confirmed yet. But the reports come after Moody's on Monday warned it could downgrade the ratings of Dexia's operating units, and the Dexia board asked the bank's CEO to “resolve the structural problems” troubling the bank. Government officials stepped in to calm investors on Tuesday morning, with the French and Belgian finance ministers pledging to guarantee financing raised by Dexia and protect its depositors. So is Dexia the new Lehman, the starting gun for a renewed financial crisis? Let's not get ahead of ourselves. Dexia has long-standing problems – it got bailed out during the 2008 meltdown – so it's not a perfect poster child of the European banking sector. However, the woes that have pushed it into crisis are symbolic of the pressures facing other European banks today. That means it is possible that other Dexias are lurking in the European banking sector.

Dexia Board Said to Meet as Sovereign Debt Crisis Curbs Funding - The board of Dexia SA, Belgium’s biggest lender, is meeting to discuss options including a possible breakup after Europe’s debt crisis reduced its funding, a person with knowledge of the talks said. Dexia, which finances municipalities in France and Belgium, may split off its French business partly under the oversight of state-owned Banque Postale SA, said the person, who declined to be identified because the matter is confidential. The discussions are complex because Dexia is based in Brussels and Paris, and has both governments as shareholders. An announcement may come as soon as tonight, the person said. In September 2008, France and Belgium led the first rescue of Dexia, buying a combined 3 billion euros of stock. The bank’s existing shareholders, which include Caisse des Depots et Consignations and Belgium’s Holding Communal SA, provided an additional 3 billion euros. Less than a month later, Dexia also obtained as much as 150 billion euros of debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. The bank stopped issuing government-backed debt in June 2010. It still had 29 billion euros outstanding at the end of last month.

The Questionable Balance Sheet Of Dexia Bank - It looks like Dexia Bank will be the first large European bank to fall to speculation about losses on its loans to Greece, and as David Dayen notes, this may be a sign of things to come.  Dexia is partly owned by the Belgian Government and partly by the French Government, the result of a 2008 bailout. Private investors own the rest of the shares. The two governments issued a statement saying they “… will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia.” The current plan is that the Belgian government will take on the retail bank, which is largely in Belgium, perhaps with a view to selling it.   The French Government will fold the French bank into La Banque Postale and the Caisse des Depots et Consignations, both of which are owned by the French government. There will be nothing for shareholders, according to one analyst.

Dexia to Set Up 'Bad Bank' With Guarantees From France, Belgium -- Dexia SA, Belgium's biggest bank, plans to pool its troubled assets into a "bad bank" with Belgian and French government guarantees to protect depositors and its municipal-lending business. The Belgian-French lender bailed out by the two governments in 2008 will put its "legacy" division, which held 113 billion euros ($150 billion) of assets at the end of June, into the bad bank, Belgian Prime Minister Yves Leterme told reporters in Brussels yesterday. Finance Minister Didier Reynders said details of the plan will be released after talks with partners. "What we're looking for is not to spend taxpayers' money on a dossier such as this one," Reynders said. "Our wish is to consolidate, reinforce and safeguard the banking activity in Belgium, as our colleagues will do in France." The creation of a separate entity with government guarantees may help shield Dexia's banking units and avoid a repeat of the 2008 taxpayer-funded capital infusion. Belgium and France said yesterday they will take "all necessary measures" to protect clients and will guarantee Dexia's loans. Both governments have stakes in the bank following its 2008 bailout.

LOL Europe – Dexia Tries to Ringfence Their Pile of Crap - kid dynamite - It wasn’t long ago that I last wrote about the Guaranteed Box of Crap solutions that will be floating around in Europe – in fact, it was this morning.  Today’s NY Times Dealbook article on Dexia – the Franco-Belgian bank of the hour – reads like a satire from The Onion: “Dexia, which received a joint bailout of 6.4 billion euros ($8.4 billion) in 2008, had just received a clean bill of health on July 15 after the European Banking Authority’s latest round of stress tests.” Of course, we never really fixed anything back in 2008, and now the can that we kicked has come rolling back down the hill.   Hey European Banking Authority – bang up job on those stress tests a few months ago!  Talk about a guaranteed box of crap… Jeezus. Now, they’ll try the patented “Good bank / bad bank” solution – also known as the “ring-fence all the stuff no one wants” or “shovel the crap into the corner and put a tarp over it” solutions (tarp – see – pun intended).

Greek haircut under review, no new euro zone aid until November - Euro zone finance ministers are reviewing the size of the private sector's involvement in a second international bailout package for Greece, a move that could undermine the aid program and hasten the threat of a Greek default. Ministers also agreed after a meeting in Luxembourg that Greece could wait until mid-November until it receives the next installment from its existing emergency aid program, piling more pressure on Athens to tackle its debt problems. Jean-Claude Juncker, the chairman of the Eurogroup ministers, said they were reassessing the extent of the private sector's role in the planned second package for Greece, a centerpiece of the deal struck on July 21 to rescue Athens. Despite more than six hours of talks, the meeting produced few concrete steps and is likely to provoke more uncertainty among investors, with expectations rising that Greece will end up having to default on its 357 billion euros of debts. The next finance ministers' meeting on Oct 13, when they were expected to sign off on the next, 8 billion euro payment to Greece, has been canceled, and EU and IMF inspectors will have several weeks in which to report back on Athens' budget cuts.

Rescue Aid to Greece Delayed as Pressure Rises for Reforms - Finance ministers from the 17 euro zone countries on Monday stepped up pressure on Greece1 to implement tough austerity measures in exchange for further aid, after the government in Athens acknowledged that it probably would miss its financial targets this year and next.  The most immediate issue facing the ministers, who are meeting in Luxembourg, is the disbursement of an €8 billion, or $10.6 billion, installment of aid, without which Greece could default on its debt within weeks — an outcome with potentially disastrous consequences for the euro2 zone.  The meeting Monday had originally been scheduled to approve the disbursement, part of a €110 billion rescue program for Greece agreed to in May 2010. But continuing doubts about Greece’s ability to push through harsh structural changes have led to tense discussions with officials from the so-called troika of international lenders — the European Commission3, the European Central Bank4 and the International Monetary Fund5.  Representatives of those institutions, now visiting Athens, have yet to make a recommendation to release the money, and no decision is expected this week.

Greece: Finances Can Withstand Delay - Greece's government has enough cash to continue operating until the middle of November, the country's finance minister said Tuesday, after euro-zone finance ministers delayed the disbursement of the next tranche of promised aid for the debt-stricken country.  "Until mid-November there is no problem," Finance Minister Evangelos Venizelos said at a news conference. "We have done a cash-flow forecast and our estimates are secure."

Things About To Turn Violent Again - Greece May Mobilize Police Against Striking Students And Teachers - Even as the three bureaucratic stooges from the Eurogroup mumbled something or another about kicking the Greek can down the road in the just concluded press conference indicating that Finland will indeed get the Greek collateral its desires, only it will be in the form of worthless Greek bonds that can not be touched for 15 or so years, we have a feeling that Greek society may soon take matters into its own hands, and with quite a terminal outcome at that. According to Kathimerini, the Deputy Education Minister Evi Christofilopoulou (henceforth known simply as Lud-E-Chris) has "suggested" that the police be mobilized to break up "hundreds of sit-ins at schools on Monday a few hours after hundreds of pupils protesting cutbacks clashed with riot officers in central Athens." And if people think that our own version of occupational protests is troubling, just wait until a country's protesting student body comprehends that its country has just sicced the police force against it.

Greeks Also Disrupting Foreclosure Auctions - - Yves Smith  - We pointed to a new front of protests against the banks, namely, efforts in California to obstruct foreclosure auctions. In Greece, they are much more frontal. A translation of how they go about it, from The Greek Streets (hat tip reader Deontos, via Richard Brennman): The committees ‘I do not Pay’ stopped house auctions at the courthouse on Sep 21 in Athens. They invaded the courthouse where houses confiscated by banks were to be auctioned, with a banner writing ‘No house to end up at the hands of bankers’ and chanting slogans entered the room where auctions were to take place, they made bank lawyers and other scum who went to buy the confiscated houses to leave the room and the judge chairing the auctions had to cancel them. This video is in Greek, but you can see the group marched into the courtroom and made a nuisance of themselves, drowning out the proceedings:

EU ministers look at bank aid plans - European Union finance ministers are examining ways of co-ordinating recapitalisations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks. Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis. “There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.” “Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.”

Core Europe Sitting Pretty in their PIIGS Drawn Chariot - The refusal to countenance a Greek default is now said to be dragging the euro zone toward even greater crisis. Implicit in this view, of course, is the idea that the current “bailout” proposals are operationally unsustainable and will lead to a broader contagion which will ultimately afflict the pristine credit ratings of core countries such as Germany and France. Well, we see a very different view emerging: The “solution” currently on offer – i.e. the talk surrounding the European Financial Stability Fund (EFSF) now includes suggestions of ECB backing. This makes eminent sense. Let’s be honest: the EFSF is a political fig-leaf. If 440 billion euros proves insufficient, as many now contend, the fund would have to be expanded and the money ultimately has to come from the ECB — the only entity that can create new net financial euro denominated assets — which means that Germany need no longer fret about being asked for ongoing lump sums to fund the EFSF in a way that would ultimately damage its triple AAA credit rating. Despite public protestations to the contrary, it is beginning to look like the elders of the euro zone have begun to embrace the reality that, when push comes to shove, it is the ECB that must write the check, and that it can continue to do so indefinitely.

Euro Science - Outsiders to the world of money who start to take an interest in it soon notice that most of the things that alarm and outrage the wider public are taken by insiders to be perfectly routine and unremarkable. Consider the sums that bankers get paid, or the disruptive impact of hot money zipping around the world at the click of a mouse, tearing up industries and whole economies at will. To moneymen, those are just givens of the way the world works, and have to be accepted, in the absence of a credible plan to go off to found a new system on another planet.  Once in a great while, though, something happens that reverses the loop, and has the moneymen more scared than the rest of us. That happened in late 2007, when the credit crunch began, and it’s happening again now. The cause is the crisis affecting the euro, and the risk that the economic difficulties of the seventeen euro-zone countries will break up the European Union. That prospect once seemed like an alarmist fantasy. Today, it is something that reasonable people see as a possibility—and if it did happen it would cause a financial convulsion that would make the collapse of Lehman Brothers seem like a theme-park ride.

Europe Finds Slope Ahead Is Growing Ever Steeper - Europe has had a rough ride since Greece confessed it falsified its books to join the euro. Now the economic situation is set to worsen, as the sovereign debt crisis started by that revelation in January 2010 threatens to send the euro zone into its second recession1 in three years.  Greece, Ireland, Portugal and Spain are already in downturns or fighting to escape them, as high unemployment and austerity measures bite. But in the last few weeks, Germany and France, the Continent’s powerhouses, have also started to falter, hurt as struggling banks tighten their lending and orders for business from the indebted countries of Europe ebb.  “The sovereign debt crisis is like a fungus on the economy,”  The euro zone economy has already slowed to essentially no growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenues are likely to fall and unemployment is expected to rise, making it even more difficult for Europe to deal with the sovereign debt crisis and protect its shaky banks.

IMF Floats Bond-Buying Proposal in Europe - —New initiatives emerged Wednesday as part of efforts to quell Europe's twin sovereign-debt and banking crises. Germany pushed a proposal to encourage the euro-zone's national authorities to announce backstops in case their banks hit difficulties, and a senior International Monetary Fund official said the IMF could step in to help shore up the bonds of troubled euro-zone governments.  On a visit to Brussels, German Chancellor Angela Merkel said euro-zone governments should quickly agree on a system of backstops for banks that relies mainly on national support measures, but could also draw on the euro zone's bailout fund.

Magical Thinking - This is what policy paralysis looks like. From the FT's ongoing coverage of the eurozone crisis: Another day, another fudge. Or so cynics might think following the latest eurozone finance ministers’ decision on Greece. After meeting until late into the night, ministers from the 17-member common currency area agreed to – yup you guessed it – wait a bit longer before deciding what to do. Sometimes bad policy-making takes the form of enacting bad policies. But sometimes it takes the form of doing nothing.  What do the EU's finance ministers think will be different one month from now? Do they expect that between now and then Greece will find a secret treasure chest that will enable the Greeks to miraculously reduce their budget deficit? Or that investors will just get bored of the whole eurozone debt crisis, go on a nice holiday for the rest of the year, and stop applying pressure to fix anything? I realize that this will probably sound like a truly horrible insult but I can't help but be reminded of the magical thinking that characterized so much of George W. Bush's policy-making, who regularly avoided making difficult policy choices due to the apparent belief that things would just get better on their own.

Spain Drugmakers Plan $7 Billion Unpaid-Bill Securitization - Spain’s pharmaceutical lobby is negotiating with authorities on a plan to sell state-guaranteed securities backed by 5.4 billion euros ($7.1 billion) of unpaid bills, Farmaindustria Director General Humberto Arnes said. The group, which represents companies including the Spanish units of Roche Holding AG and Novartis AG, is in talks with the regional governments that owe the debt and the central government, Arnes said in an interview in Madrid today. The aim is to bundle the unpaid bills into a vehicle that would issue securities guaranteed by the central government and channel the proceeds to the companies, he said. “It would allow the payment of the debt to be deferred by several years and has a government guarantee which allows it to be sold in the market,” Arnes said. “The mechanism allows a delay until Spain is in a financial and economic situation that allows it to face the pharmaceutical bill.”

Spain endures unemployment woes as jobless total hits 4.2 million - Further gloom spread across Spain on Tuesday as it experienced its worst September increase in registered unemployment for at least 15 years to reach 4.2 million people. The sudden pickup in the rhythm at which Spaniards have been signing on at unemployment offices was a further blow to a country that already has Europe's worst jobless rate of 21%. The latest surge was blamed on a number of public sector layoffs as Spain bowed to deficit control demands and regional governments sacked teachers and health workers. Regional governments account for a third of public spending and are responsible for health, education and other services. With Spain's sovereign debt under pressure on the markets, however, they have been ordered to help rein in last year's 9.2% budget deficit. Although many of September's newly unemployed had finished seasonal tourism jobs, at least one in six were regional and municipal workers from health, education or social services, according to employment secretary Mari Luz Rodríguez.

Bank of Portugal Forecasts Deeper Economic Contraction in 2012 - Portugal’s economy will contract more than previously forecast in 2012 as export growth slows and private consumption drops, the central bank said. Gross domestic product will shrink 1.9 percent this year and 2.2 percent in 2012 after expanding 1.4 percent in 2010, the Bank of Portugal said today in its autumn economic bulletin. In July, the central bank had forecast GDP would shrink 2 percent this year and 1.8 percent in 2012. Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($104 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout. The government has already announced a one-time income-tax surcharge to help cover a budget shortfall this year. “The budget deficit objective for 2011 will only be met with significant additional measures,” the central bank said in the report.

IMF Floats Bond-Buying Proposal in Europe —The International Monetary Fund could create a special financing tool to buy bonds in private markets as a way to help stem the euro zone's debt crisis, a senior IMF official said Wednesday.  However, Antonio Borges, head of the IMF's Europe Department, said the idea hadn't yet been vetted by the fund's membership and there have been no formal requests from euro-zone members for additional financing.  Such a plan could aid countries such as Spain and Italy, which face rising costs for financing in capital markets. Mr. Borges said these countries have a problem of market confidence rather than solvency.

ECB Chief's Legacy Under Fire - Jean-Claude Trichet, who leads his final interest-rate meeting as European Central Bank president on Thursday, is fighting to defend his legacy against mounting criticism in Germany, where he has unexpectedly become a controversial figure in his final year in the post. In Germany, the euro's most powerful member, the 68-year-old Frenchman was seen as a safe pair of hands at the helm of Europe's monetary union—until the ECB began buying the bonds of struggling euro-zone governments last year. Buying the bonds of three small countries—Greece, Ireland and Portugal—was controversial enough in Germany, where central bank funding of governments is taboo.

Full Text: Trichet Press Conference Introduction - The following is the full statement by ECB President Jean-Claude Trichet ahead of his final press conference. Read a live blog here.

Merkel tells Europe to prop up its banks - Germany urged Europe Wednesday to recapitalise its banks where necessary to prevent the eurozone debt crisis from spreading as the IMF warned the EU to get its act together and head off recession. As Greek police tear-gassed protesters in the latest strike over ever-deeper austerity measures, Chancellor Angela Merkel said a new round of bank bailouts were “justified, if we have a joint approach.” She was speaking in Brussels during a visit to EU headquarters, after France and Belgium agreed to provide aid to Dexia, the first European bank to be dragged down by the eurozone debt crisis.

EU banks face new ‘Greek’ stress test -- Europe’s top banking regulator has started to re-examine the strength of the region’s banks, modelling a big writedown of all peripheral eurozone sovereign debt. The exercise, conducted by the European Banking Authority, could potentially identify capital shortfalls across the banking system of as much as €200bn ($266bn).  The EBA, which is mid-way through a two-day crisis board meeting designed to assess the potential hit of mass sovereign restructurings, will use market values, to set “haircuts” on banks’ sovereign holdings.  The regulator is also closely involved in talks with European officials and governments over mechanisms that could be used to forcibly recapitalise banks, enabling them to cope with sovereign defaults. The move, a tacit admission that the European Banking Authority’s two previous rounds of bank stress tests were not sufficiently robust, came as Angela Merkel, the German chancellor, said she was prepared to recapitalise her country’s banks if necessary. She suggested she wanted to discuss joint EU-wide bank support efforts at an EU summit in two weeks.

Greece has weeks left before bankruptcy - Greece has enough money to pay pensions, salaries and bondholders through mid-November, the finance minister said Tuesday, as global markets sank on worries that a messy default could bring down European banks and trigger another global recession.  The turmoil endangered French-Belgian bank Dexia, whose shares plunged as much as 40 percent, on worries about its exposure to Greek bonds.Greece had previously said it would start running out of money in mid-October if it didn't get the next euro8 billion ($11 billion) installment of the euro110 billion rescue package it has been relying on since May 2010. Finance Minister Evangelos Venizelos sought to reassure Greeks and investors that the country can hold on a little longer. The government can tap contingency reserves to buy the extra time, a ministry official explained.

Europe’s Ship of Fools -- The ship of fools is an allegory that has long been a fixture in Western literature and art. It depicts a vessel packed with clueless passengers who are so obsessed with themselves that they don’t realize that their ship has no pilot and is either on a cruise to nowhere or sinking. That certainly describes what is happening in Europe. Here’s the latest:

  • (1) Greek workers aren’t on board. Hundreds of thousands of Greeks walked off their jobs for 24 hours yesterday at airports, schools, hospitals, and tourist sites to protest the government’s latest austerity measures, including reducing the number of public workers, raising property taxes, and cutting pensions and wages.
  • (2) Greece is a rowboat compared to the Italian and Spanish ocean liners. However, the ECB has kept these huge European debtors out of the limelight by purchasing Italian and Spanish government bonds since early August.
  • (3) German Chancellor Angela Merkel doesn’t want to steer the ship. Late on Monday, she said in a speech to members of her Christian Democratic Union that she remains opposed to the issuance of euro bonds. Her finance minister has also opposed leveraging the EFSF. They are opposed to schemes that will reduce the AAA credit rating of Germany.

Italy government bonds downgraded by Moody's - Moody's Investors Service Monday downgraded Italy's government bond ratings to "A2" with a negative outlook from "Aa2," the result of high debt, a weak global economy and political uncertainties that delay corrective action. While the change moves the rating down three notches, it is still investment grade. Moody's affirmed the short-term ratings at Prime-1. Moody's said the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks, however, the "A2" rating indicates the risk of default by Italy remains remote. "Nonetheless, Moody's believes that the structural shift in sentiment in the euro area funding market implies increased vulnerability of this country to loss of market access at affordable rates that is incompatible with a 'Aa' rating," the analysts said.

Moody’s Sees More European Downgrades - Moody’s Investors Service followed its three-level downgrade of Italy by warning that euro-area nations rated below the top Aaa level may see their rankings cut amid contagion from the region’s debt crisis. “All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings,” Moody’s said in a statement late yesterday in London. “Consequently, Moody’s expects fewer countries below Aaa to retain high ratings.” It added that “there are no immediate pressures that could cause downgrades for Aaa-rated countries.” The statement came after the company cut Italy’s rating for the first time since 1993 on concern the government will struggle to reduce the region’s second-largest debt amid chronically weak growth. Italy was lowered to A2 from Aa2. Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. “Italy is being punished not because its finances suddenly deteriorated, but because investors have become more sensitive to its long-standing weaknesses,” “Depending on one’s view, Italy is just as safe, or just as risky, as it was before it was dragged into the crisis.”

Moody's Downgrades Ratings of Two Biggest Italian Banks - Ratings agency Moody's has downgraded its credit ratings on Italy's two biggest banks just one day after it slashed Italy's sovereign debt rating. Moody's said Wednesday that the long-term debt ratings of both UniCredit and Intesa Sanpaolo were downgraded two notches from Aa3 to A2 due to lower growth prospects in recent months. On Tuesday, Moody's lowered the ratings on Italy's bonds by three notches to A2, and Italian banks have come under pressure in recent weeks because of their vast holdings in Italian government bonds. Besides its downgrade of the banks, Moody's also cut its ratings on the debt of several state-controlled Italian companies including oil and gas group Eni and utility group Enel. Meanwhile, the European head of the International Monetary Fund on Wednesday urged eurozone governments to pump up to 200 billion euros into the region's banks in order to stave off a credit crunch. Antonio Borges said a broad injection of capital to all major European banks as opposed to a country-by-country solution would help restore investor confidence.

French Min: Euro Strength Takes EUR3 Billion-EUR4 Billion Off 2011 Exports - The euro is too strong and will cost France between EUR3 billion and EUR4 billion in exports this year, the French trade minister said Tuesday. "It is incontestable that the over-valuation of the euro compared to other big currencies harms our exports," Pierre Lellouche told reporters. He said China accounts for most of France's trade gap--EUR26 billion of last year's EUR51.7 billion deficit. The trade gap widened to a record EUR56.2 billion in 2008 as the economy recorded three consecutive quarters of contraction that year. After narrowing in 2009, the deficit is set to reach a new high of EUR73.1 billion this year and EUR73.8 billion in 2012, the government said in the 2012 budget published last week.

The Strange Economies of France and the Netherlands - I’ve said before that a recession is a decline in construction and manufacturing. Or slightly more broadly construction and industrial production, which adds in mines and utilities. The last two are not a big parts of the US economy but it is in other countries.  Via Catherine Rampbell here is a chart on OECD jobs losses that shows 2008-2009 to just be your garden variety severe global economic recession. The red sections represent jobs in industrial production and the green jobs in construction. You can see that across the board job losses were dominated by red, green or a combination of the two.  However, in France and the Netherlands those two sectors were clearly overwhelmed by what in the US we call FIRE and Professional Services. Great Britain saw some pretty heavy losses but at least their you can tell a story about the dominance of the City of London. Is there a similar story to tell in France and the Netherlands?

IMF Vows To Spend Some More Taxpayer Money - Borges confirmed that EU officials are working on a bank-recapitalization plan.  He suggested banks could use 100-200 billion euro.  Where they get the money would be a more interesting question if they had a better clue how much banks would need.  That seems a pretty big range given how long this crisis has been going on, but it is making the market happy as it has bank-recapitalization and co-ordinated effort - what else does the market need? Borges also suggested that the IMF could invest alongside the ECB/EFSF on Italian and Spanish bond purchases.  Well, that is a new source of funds.  I guess the realization that the EFSF money has already been spent 4 times made everyone realize they needed a new plan.  Now the IMF can participate in open market purchases and maybe prod investors into leveraging the EFSF as a bank? No mention on how excited American's will be to fund even bigger IMF outflows.  I assume the current administration is supportive of sending our money to Europe and bumping up against the debt limit ceiling sooner, rather than later, but this could easily become a political hot potato.

IMF warns that countries may need to reverse cuts - Europe's stronger economies should avoid imposing drastic budget cuts at the expense of growth, a report by the International Monetary Fund has said. If things worsen in the UK, Germany or France, they should "consider delaying" cuts, because they can borrow "at historically low" interest rates. The IMF also warned that a recession in Europe in 2012 could not be ruled out. Separately, a Markit PMI study said the eurozone's service sector shrank for the first time in two years last month. The IMF's warning came in its latest 100-page report on the economic outlook for Europe. "Finding a durable solution to the euro area sovereign crisis has become more than overdue," the IMF said in its report."(This) will require some difficult decisions to improve crisis management and a demonstration of unity behind the project of economic and monetary union that will convince markets.

Up to $266-billion needed for Europe’s banks: IMF - Europe needs between €100-billion and €200-billion ($266-billion U.S.) to recapitalize its banks to win back investor confidence and should carry out the plan across the continent, not in a staggered process, the International Monetary Fund’s European Department Director Antonio Borges said on Wednesday. “We are talking about figures of between €100- and €200-billion, which in our view is very, very small compared to the size of the European capital markets and compared to the resources of the new, enhanced EFSF,” Mr. Borges told Reuters during a visit to Brussels, referring to Europe’s bailout fund. Mr. Borges also said the IMF would “definitely participate” in a second bailout package for Greece if the Washington-based lender was happy that the country showed it was willing to solve its debt problems. “If there is a second program for Greece, which is the expectation, I think the IMF will definitely participate on the condition that we remain convinced that Greece is on track and the right policies can be put in place, that debt can become sustainable,” he added.

Europe Girds for Breakout of New Bank Brush Fires - As European officials brace for the potential of a Greek debt default, Chancellor Angela Merkel1 of Germany said Wednesday that she would push for more capital to protect her nation’s banks. And European banking regulators were trying to identify the region’s most vulnerable financial institutions.  Mrs. Merkel’s comments, after meetings with the European Commission here, came amid reports that customers were withdrawing savings from the French-Belgian financial institution Dexia, which is about to receive its second rescue in three years.  The speed of that chain reaction has prompted the European Banking Authority to review the results of the bank stress tests conducted in July — this time to measure the effect of the even lower value of the bonds of Greece and some other governments held by banks in countries using the euro currency.  Dexia passed the July round of stress tests with some ease, indicating deep flaws in that exercise.

EU preparing bank rescues amid Greece doubts (Reuters) - European finance ministers agreed on Tuesday to prepare action to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead. Collapsing confidence in French-Belgian municipal lender Dexia SA , which hours earlier became the first European bank to have to be bailed out due to the euro zone's sovereign debt crisis, looked to have concentrated minds. "Everyone said the big concern is that worrying developments on the financial markets will escalate into a banking crisis," German Finance Minister Wolfgang Schaeuble told a news conference after EU ministers met in Luxembourg. The growing prospect of a default by Greece in the coming months has stoked fears of a major banking crisis in Europe that would aggravate the global economic slowdown. Dexia will effectively be broken up, with the sale of healthier operations while toxic assets, including Greek and other peripheral euro zone government bonds, will be placed in a state-supported "bad bank".

Moody's downgrades Portuguese banks - Moody's Investors Service said Friday that it has downgraded the senior debt and deposit ratings of nine Portuguese Banks by one or two notches and also cut the standalone ratings for six of the banks. The downgrades conclude a review initiated on July 15, following the downgrade of the Republic of Portugal to Ba2 from Baa1. Moody's said the bank downgrades were due to a mixture of higher asset risk due to their holdings of Portuguese government debt, the expected further deterioration of domestic asset quality and the liquidity strains on the banks because of their lack of access to wholesale funding. Among the banks that were downgraded Banco Comercial Portugues was cut to Ba3 from Ba1, Banco Espirito Santo was downgraded to Ba2 from Ba1 and Banco BPI was cut to Ba2 from Baa3

Banks' overnight ECB deposits hit 2011 high -- Overnight deposits with the European Central Bank hit a fresh 2011 peak Thursday for the fifth day in a row, as lending conditions among euro-zone banks remained strained. Banks deposited EUR229.003 billion with the ECB, the central bank said Friday, up from a previous high this year of EUR221.353 billion, reached Wednesday. That is the highest level since July last year, when the figure was distorted by the run-off of a large 12-month refinancing operation. Funding stress in the euro-zone banking sector has intensified since July as the bloc's sovereign debt crisis has worsened. Shares of French-Belgian bank Dexia were suspended Thursday as the French and Belgian governments put together a rescue package for the lender. Analysts say banks prefer to place their money with the safe haven of the ECB, instead of lending it to one another, in fear of their partners' exposure to weak credit in certain euro-zone countries.

Troika in 'Chicken Game' With Greece: Kyle Bass - International regulators known as the "troika" are in a “chicken game” with Greece right now, forcing the struggling nation to prioritize payments, Kyle Bass, managing partner of Hayman Capital, told CNBC Wednesday. The troika includes the International Monetary Fund , the European Central Bank and the European Union. “They are forcing Greece to almost internally default and figure out who they are going to pay, and who they are not going to pay,” said Bass. A year ago, when the regulators elected to start buying Greek bonds, they asked Greece to agree to hire one worker for every five state workers who leave or retire," Bass said. That ratio was later changed to one new worker for every 10 who left. But when the troika arrived in Greece a few weeks ago the regulators realized roughly 18,000 to 20,000 Greeks had retired or left but 24,000 had been hired, Bass said. As a result, the troika left Greece abruptly and the head of an independent Greek budgetary panel quit that day. The panel was set up in 2010 as part of Greece’s efforts to increase transparency and credibility.

The IMF, ECB, and EC are Prepared to Wreck the World Economy to Squeeze a Few Extra Dollars Out of Greece - The NYT piece on the failure of Greece to meet its deficit targets and the response by the IMF, the European Central Bank, and the European Commission should have included a comment from someone pointing out that these institutions are jeopardizing the growth prospects for the world economy in order to try to squeeze some additional money out of Greece for its creditors. The risk of a Greek default is leading to soaring interest rates on the debt of several euro zone countries and creates a real risk of another Lehman-type financial freeze-up. This would virtually guarantee a double-dip recession in both the euro-zone and the United States. This fact should have been included in the article. Given that the current economic crisis is in large part the result of the incompetence of these institutions, the public might not appreciate the fact that they are risking further damage to the world economy in order to squeeze a country that is already suffering enormous economic pain.

Warning: Greece Can Break Glass and Leave the Eurozone - Yves Smith - One of the things that has been intriguing about the handwringing among European policy-makers has been the general refusal to consider the idea that one of the countries being wrung dry by doomed-to-fail austerity programs might just pack up and quit the Eurozone. The assumptions have been three fold. One is a knee-jerk assumption that the costs of exiting are prohibitive (this argument comes from Serious Economists in Europe, but they never compare it to the hard costs of austerity and the less readily measured but no less real cost of loss of sovereignity). Second is that an exit would come via a country being expelled, since the Eurozone treaties prohibit unilateral departure. Third is that it would be too much of an operational mess to revive a defunct currency. A very good piece by Floyd Norris in the New York Times fills this gap by describing that Greece has the motivation and the means to leave. He points out that the treaty arrangements are pretty meaningless: no one is going to send troops in to Greece to force compliance.  He also dismisses the notion that going back to the drachma would be insurmountably difficult. The model is Argentina going off its dollar peg. Set a value of the drachma v. the euro and convert existing debt at that rate.

Europe’s crisis is all about the north-south split - Alan Greenspan - The eurozone is confronted with a crisis of not just labour costs and prices – but culture. The burden is primarily on southern Europe, where sovereign bond credit spreads (relative to the German Bund) range from 370 basis points (Italy) to 1,960 basis points (Greece). The northern eurozone countries have tight spreads against Germany – a narrow 40 to 80 basis points for the Netherlands, Austria, Finland and France. There are thus two distinctly defined eurozone areas: in the north and in the south. The ranking of credit risk spreads by size across the eurozone in 2010 was almost identical to the ranking of the level of unit labour costs (relative to that of Germany), suggesting that the higher labour costs and prices have rendered “euro-south” less competitive and so more subject to credit risk. The more competitively priced net exports of the northern eurozone participants, in effect, more than covered the rising level of net imports of the south. In short, between 1999 and the first quarter of 2011, there has been a continuous net transfer of goods and services shipped from the north to the south. Northern Europe in effect has been subsidising southern European consumption from the onset of the euro on January 1 1999. It is not a recent phenomenon..

Notes On The Eurobubble - Krugman -Alan Greenspan has written another deeply misleading, destructive op-ed. Also, the sun rose in the east. Greenspan is quickly establishing himself as the worst ex-Fed chairman of all time. But since he has introduced a brand-new fallacy into the debate, it’s worth taking on. One of the big problems in coming to any rational response to the euro crisis has been the insistence of key players, especially but not only in Germany, of seeing it as a morality play: spendthrift, irresponsible politicians brought it on through budget deficits. It has been very hard to get across the point that this is a Greek story only, that Spain and Ireland actually had budget surpluses and low debt on the eve of the crisis.What Greenspan does is to introduce a whole new fallacy: he takes the rise in Southern European costs and prices during the runup to the crisis as a sign of moral turpentine turpitude: Gosh, why should wages and prices have risen faster in, say, Spain than in Germany? Well, maybe this had something to do with it:

Businesses urge quantum leap to beat crisis - Business leaders in the three largest eurozone states have appealed to their governments to make a “quantum leap” to tackle the region’s financial crisis, calling for urgent implementation of fiscal reforms, recapitalisation of European banks and the creation of an independent European monetary fund. The largest business federations in Germany, France and Italy issued their plea ahead of a bilateral summit in Berlin on Sunday between Angela Merkel, the German chancellor, and President Nicolas Sarkozy of France, where the two leaders will try to agree measures to halt the financial market turbulence. The organisations warned of the “deep crisis of confidence on international markets”, and called for Europe to make “a sustained contribution to restoring trust,” including a new treaty “as a step forward towards a closer political and economic union”. The joint statement issued by the BDI, the German federation of industry, with Medef, the French employers’ organisation, and Confindustria, Italy’s leading business lobby, underlines the growing alarm in the business community at the threat to the euro from the ongoing financial crisis.

Pointing fingers and pushing levers - EUROPE’S two big central banks took steps to help stuttering economies today. The Bank of England moved faster than expected to introduce an extra round of quantitative easing (QE), worth £75 billion ($115 billion) over the next four months. The European Central Bank (ECB), which some economists had been expecting to lower interest rates, left them unchanged. But it said that it would restart its programme of purchases of covered bonds (debt typically backed by mortgages) worth €40 billion ($53 billion) and also announced longer-term provision of liquidity for banks. The ECB, for its part, meeting unusually in Berlin, disappointed those who had been hoping that it would lower interest rates. Having been the first of the big central banks to start raising interest rates, pushing up its main policy rate from 1% to 1.5% this year, it failed to beat the hasty retreat. Yet it did provide some relief. For one, it decided to purchase more covered bonds starting in November (though the ECB is careful to distinguish this from QE because it neutralises the monetary impact). Secondly, the ECB reintroduced full-year unlimited liquidity for banks, in two operations, one this month and one in December.

Is Euroland really facing a Lehman moment? - THE fear of contagion is widespread in panicky financial markets. As the latest impasse over the Greek bail-out’s latest instalment continues, an even bigger restructuring of its massive public debt is looming. And the worry remains that a swingeing write-down in Greece could precipitate a bigger crisis in the euro area as banks in other countries come under even greater pressure. Such concerns are certainly bubbling at the Global Economic Symposium being held in the city of Kiel in northern Germany. They are not confined to Europeans. Plenty of American and Chinese are alarmed at the latest lurches in the euro area’s debt crisis. They, too, fear that a Greek default could be Europe’s Lehman moment, which would—as in autumn 2008—send financial shock waves around the world and trigger another global recession. At any rate, the comparison of Lehman in September 2008 and the euro crisis in fall 2011 is rather stretched. In 2008 the bad debts were widely distributed across the private sector, whereas the dodgy public debt in the euro area is concentrated among a few sovereign borrowers. Much of the fear in 2008 arose because of uncertainty about valuations and exposures, whereas the sovereign holdings of banks and potential losses on them are well identified.

Partying Like it’s 2008 All Over Again - From the Washington Post: The European Central Bank offered new emergency loans to banks on Thursday to help them through the turmoil of the government debt crisis, but decided to keep interest rates on hold despite fears of an economic slowdown. Remember what happened last time a central bank failed to let rates fall to zero (nay, failed to let rates fall at all!), failed to commit to an explicit level target, and instead made what were widely understood to be temporary injections into the banking sector? Here’s a hint, it happened in October 2008, in the United States. Also, this is nearing sadistic: “Have we delivered price stability? Yes, we have delivered price stability,” he (Trichet) said. “Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds.”

Eurotrashers - Krugman - Kantoos has a righteous rant about the ECB, and the destructiveness of its tight-money obsession. He’s right: if the euro cracks up, the ECB will bear a large share of the blame. The ECB’s actions are in fact destructive on two levels. First, it’s now completely clear that the recent rate hikes completely repeated the mistake of 2008, when the ECB reacted to an obviously temporary spike in commodity prices by raising rates, even as the economy was sliding into recession. It’s truly remarkable that it would do exactly the same thing again. As Kantoos says, both core inflation and market expectations of inflation say that there is no threat to price stability. Beyond that, too-low inflation is catastrophic in the euro context. I tried to explain that a while back: given the evident need for a large decline in the relative prices of Spain and other countries, a low overall euro area inflation rate means destructive deflation in the periphery. By pursuing policies that have the market expecting only a bit more than 1 percent inflation over the next 5 years, the ECB may well have doomed the whole euro project. And now the ECB is refusing to reverse its obvious rate mistake, as a way of saving M. Trichet’s face. Against stupidity …

America’s six key lessons for a ‘euro Tarp’ - “We told you so”. That captures the reaction of many American bankers and policymakers towards Europe these days. Ever since America unveiled its own troubled asset relief programme in 2008, observers in Washington and New York have muttered darkly about Europe’s failure to grasp its banking nettle. More specifically, it has long been suspected that Europe’s banks were shying away from revealing their bad loans; it has also been clear that some banks would need more capital, particularly if they had to write down deteriorating sovereign debt. Thus the obvious solution to some is what might be called euro Tarp – or a eurozone version of the capital injections and stress tests that in effect halted the American banking crisis back in late 2008 and 2009. This may yet occur. This week eurozone leaders signalled that they are – belatedly – moving that way. But before investors get too excited, it is worth taking a hard look at what America did back in 2008 and 2009 that made Tarp “work”. For, to my mind, there are at least six key points – five bad, and one good – which Europe needs to consider.

The 4 Trillion-Euro Fantasy - Boone & Johnson - Some officials and former officials are taking the view that a large fund of financial support for troubled euro-zone nations could be decisive in stabilizing the situation. The headline numbers discussed are 2 trillion to 4 trillion euros — a large amount of money, given that the gross domestic product of Germany is 2.5 trillion euros and that of the entire euro zone around 9 trillion euros. This approach has some practical difficulties. The European Financial Stability Facility as currently devised has only around 240 billion euros available (and this will fall should more countries lose their AAA credit ratings). The International Monetary Fund, the only ready money at the global level, would be more than stretched to go “all in” at 300 billion euros. Never mind, say the optimists — we’ll get some “equity” from the stability fund and then leverage up by borrowing from the European Central Bank. Think through the best-case scenario, in which the big package is put in place and, at least initially, believed to be credible. Proponents of this approach argue that the “market would be awed into submission”; business as usual would prevail, meaning that Italy and other potentially troubled sovereigns could resume borrowing at low interest rates; and the 4 trillion-euro fund would not actually need to be used. This seems implausible.

Slovakia unsettles Europe’s rescue plan -— As European leaders scramble to stop Europe’s debt woes from triggering another global financial crisis, this sleepy little country known more for its medieval castles and fermented sheep’s milk is holding their grand rescue plan hostage. Under the rules governing the 17 nations that share the euro, an expanded rescue fund for Europe’s ailing nations and troubled big banks must be approved by the parliaments of every country in the currency union. A yes vote by the Netherlands on Thursday left small, stubborn Slovakia as the biggest holdout, giving it outsize power to upend the plan largely shaped by the major European nations of Germany and France.  Though rooted in the fiscal woes of nations such as near-bankrupt Greece, Europe’s economic problems have ballooned largely because of indecision and infighting among the nations in the euro zone — a currency union that critics say was simply not built for crisis management.  Sulik’s Freedom and Solidarity Party calls the plan an unfair bailout of profligate Greeks and fat-cat German and French bankers that poor Slovaks can’t afford. It is vowing to block the rescue fund in a vote next week or make its passage incumbent on a rule that could give this nation of 5.4 million veto power over the use of bailout funds — a move that could spark a showdown with its bigger neighbors.

Spain, Italy Credit Ratings Lowered by Fitch as Europe Debt Crisis Worsens - Spain and Italy, the euro region’s fourth- and third-largest economies, were downgraded by Fitch Ratings on concern they will struggle to improve their finances as Europe’s debt crisis intensifies. Spain had its foreign and local currency long-term issuer default ratings cut to AA- from AA+, while Italy had the same set of ratings to A+ from AA-, the company said in statements today. The outlook for both countries is negative. Fitch also maintained Portugal’s rating at BBB-, saying it would complete a review of that ranking in the fourth quarter. The downgrades reflect “the intensification of the euro zone crisis,” which “constitutes a significant financial and economic shock,” Fitch said, citing risks to Spain’s “fiscal- consolidation” efforts. “A credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors.” Fitch’s cut of Italy was its first since October 2006. It follows downgrades of Italy by Moody’s Investors Service on Oct. 4 and Standard & Poor’s on Sept. 19, which both cited concerns that the country’s weak economic growth means it will struggle to reduce Europe’s second-largest debt, at about 120 percent of gross domestic product.

EU Steps Up Crisis Response - European Commissioner for Economic Affairs Olli Rehn on Friday revealed among other things that there are talks to fast-forward plans for a permanent rescue vehicle while he expects a solution on recapitalizing European banks to come within a few days. "I am confident that the euro-zone summit and the European Council will be able to make a decision in mid-October on how a coordinated Europe can help to solve the distrust towards the banks' capitalization," Mr. Rehn told a conference in Helsinki.  His comments were echoed by German Chancellor Angela Merkel, who said Friday that EU leaders will discuss at the Oct. 17-18 summit how to proceed with possible bank recapitalizations.

Europe on the Brink - I haven't been blogging much about Europe because I felt like I was mostly repeating myself.  Europe is not an optimal currency zone. I don't see how the thing can hold together, except that Jesus, it will be hell if it all falls apart.  In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

Europe Seems to Agree on Recapitalizing Banks — but How? - European leaders are finally coming around to the view that banks must be compelled to replenish their capital reserves if the euro area is ever to emerge from the debt crisis. But whether the politicians can make it happen in a convincing manner is another question ... In the first signs of a split, France wants to draw on the European bailout fund, the European Financial Stability Facility, to rebuild bank capital. German leaders think national governments should take the lead. Analysts are skeptical that even the richest countries will be able to agree on guidelines for a broad, coordinated effort, one impressive enough to remove all doubts about solvency in the event of a default by Greece or another sovereign debtor.  In the first signs of a split, France wants to draw on the European bailout fund, the European Financial Stability Facility, to rebuild bank capital. German leaders think national governments should take the lead.  “Only if a country can’t do it on its own should the E.F.S.F. be used,” Chancellor Angela Merkel said on Friday.

Investors turn bears on Germany and France - Investors are taking increasingly bearish bets on Germany and France, suggesting they believe Europe’s crisis could spread to the monetary union’s stronger members. The cost of protecting German government bonds against default surged to a fresh record this week. Credit default swaps reached almost 122 basis points on Tuesday, meaning it would cost the equivalent of $122,000 annually to insure $10m worth of German paper for five years. Buying CDS protection on Germany can equate to betting that it will have to pick up the tab for bailing out Europe’s so-called peripheral nations, analysts say. The question of how much support Germany is willing to provide to weaker eurozone members has been a point of contention between European politicians, with fierce debate over the scale and method of bail-outs taking place. This week’s reports on moves to recapitalise Europe’s ailing banks appear to have added pressure to European government credits. Investors believe banks in weaker eurozone members may receive billions of euros through Europe’s collective bail-out fund, the €440bn European financial stability facility. Banks in stronger countries could be handed extra money by their own governments.

Mechanics of a euro breakdown - There’s been a lot of talk about the possible break-up of the euro, but until now little has been written about the actual mechanics of a euro breakdown (other than it just can’t happen, so let’s not write about it.) But a few banks have recently dared to speak the unthinkable. Here’s HSBC, which this week put out a note entitled “How to solve the euro’s problems” in which it made the following points about the mechanics of a euro exit: There is nothing in the Treaty that can be used to force a country out of the euro or can facilitate it but if a country decides that the degree of austerity and reforms have become impossible to deliver and unilaterally decides to leave, it can’t be prevented. But euro exit would almost definitely mean EU exit and the free movement of labour, capital and trade that it implies as well as access to EU social and cohesion funds. *The assets and liabilities of the banking system would, most likely, be redenominated at a rate of one-to-one with a view to a quick depreciation,*Capital controls would have to be put in place both because of the still large current account deficit and to limit daily cash withdrawals. If a euro exit were in any way anticipated the bank runs would have already happened.

IMF Advisor Robert Shapiro: Prepare for Global Financial Meltdown Within Two to Three Weeks - The fact that money-industry insiders are finding it in their hearts to tell the truth is actually more frightening than heart-warming, but here we go again: the BBC has interviewed IMF Advisor Robert Shapiro about the pending disaster in the European economy. If they can't get it together, he says, we're looking at a global disaster worse than the one in 2008: If they cannot address it in a credible way I believe within perhaps two to three weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world.   He then says the wildcard, at least for the United States, lies in credit default swaps, and how vulnerable British banks are to Ireland's debt problem. Either way, it sounds pretty dire. Watch below, via ZeroHedge:

Italy and the UK - Krugman - FT Alphaville quotes an economist at an Italian bank, Erik Nielsen, wondering why Britain can borrow so much more cheaply than Italy. It’s a useful piece, largely because it illustrates how hard it apparently is to grasp the advantages of having your own currency. The writer dismisses the notion that the ability to depreciate the pound gives Britain extra flexibility: It’s true that Britain has suffered a nasty recession — but it had a housing bubble and was highly dependent on earnings from the financial sector, neither of which were true for Italy. As for the rest, Nielsen is apparently using unit labor costs measured in domestic currency — which misses the whole point, which is that depreciation reduces your costs in other peoples’ currency. Here’s the real effective exchange rates of Britain and Italy on a ULC basis — that’s a weighted average of the exchange rate against trading partners, adjusted for changes in unit labor costs:

Conservative party conference 2011: Cameron says UK should stay in the EU - It was revealed today that MPs are set to vote on a referendum within the next few months, after a petition with more than 100,000 signatures was submitted calling for the public to be given the chance to decide whether Britain should stay in the EU. Speaking at the start of the Conservative Party in Manchester, Mr Cameron said he did not believe the UK should quit the EU.  And he played down the prospect of the Government repatriating powers from Brussels in the near future.  The Government's immediate priority on Europe is to get the crisis in the eurozone sorted out and revive the continent's economy, he said.  The Commons Backbench Business Committee is expected to set a date before Christmas for a one-day debate in the House of Commons on a referendum on EU membership. The vote will not be binding on the Government, but if MPs back a referendum, it will put massive pressure on Mr Cameron to put the issue to the country.

S&P warns UK against wavering on deficit cuts - Britain's prized triple-A sovereign debt rating could come under pressure if the government strays from its path of public deficit cuts in the face of weaker growth, credit agency Standard & Poor's said on Monday. In a release that coincided with a keynote speech by finance minister George Osborne at his Conservative Party's annual conference, S&P said British growth was likely to be slower than the government expected. It reaffirmed its AAA rating and said the outlook was stable, but warned tax revenues could come under pressure as fiscal austerity weighed on the economy, though easy monetary policy should provide some support. "The ratings could come under downward pressure if, against our expectations -- and perhaps in response to weakening growth prospects -- the coalition government's commitment to fiscal consolidation falters," it said in a statement. .

Bigger boom, deeper bust, earlier recovery - The present is grim and the future is terrifying. But at least the distant past looks a bit brighter. That is the message from new estimates of Britain's GDP, released this morning. The statisticians made minor changes to the recent past but substantially rewrote earlier economic history. GDP in the first and second quarters was revised down a notch: the annual change to the second quarter is now a measly 0.6%, revised from 0.7%. But there were more chunky revisions to figures for 2007-10. In short: the economy was stronger going into recession, fell harder, and recovered earlier (and a bit more strongly) than previously thought. The peak-to-trough fall in GDP during recession is now put at 7.1% from an estimate of 6.4% previously. The new figures suggest the economy was already deep in recession before the fall of Lehman Brothers in September 2008: GDP fell by 1.3% in the second quarter of 2008 and by 2% in the third quarter, much larger declines than had previously been estimated.  The economy expanded in 2007 by 3.5%, well above the long-term trend, and higher than the previous estimate of 2.7%. There were also big changes to the figures for 2001-03, when GDP was revised up in each year by around 0.7pp.

IMF Says Bank of England Loosening Is Needed If Outlook Worsens -- The Bank of England should consider easing monetary policy if the outlook for the economy deteriorates further, the International Monetary Fund said. “In the U.K., where the recovery is tepid, and fiscal tightening stronger, the accommodative stance will need to be maintained for some time,” the Washington-based fund said in an e-mailed report today. “The Bank of England should further loosen its monetary stance if the recent weakening of the growth and inflation outlook continues.” The IMF cut its 2011 and 2012 U.K. growth forecasts last month as threats from Europe’s sovereign-debt crisis weigh on the economy. Growth will be “sluggish” this year as “serious headwinds,” including the largest government budget cuts since World War II and a squeeze on household incomes, undermine demand, the fund said today. The deteriorating outlook prompted most Bank of England policy makers to say last month that more stimulus for the economy is “increasingly probable.”

Bank of England launches more QE; pound sinks — The Bank of England decided Thursday to restart its program of asset purchases, highlighting its concern that global economic tensions threaten the U.K. recovery. The bank’s monetary policy committee voted to increase the size of its asset-purchase program, financed by the issuance of central bank reserves, by 75 billion pounds (around $115 billion) to £275 billion. The program will likely take four months to complete and its scale will be kept under review, the committee said. Read the First Take on the Bank of England. While another round of so-called quantitative easing was expected, many economists thought the bank would announce such a move in November. As the committee noted in its statement, however, concerns about the British economic recovery prompted it to act now. “It is clearly an indication of the extent to which the [committee] is worried about the slowdown that it has chosen to act so soon and so decisively.”

Quantitative easing boosted by £75bn by Bank of England - The Bank of England has taken action to kickstart Britain's flatlined economy by pumping another £75bn into the banking system, more than economists had expected. Faced with growing warnings of a double-dip recession and a eurozone crisis, the Bank is setting aside fears about high inflation to increase its programme of quantitative easing (QE). Explaining the move, Bank governor Sir Mervyn King said that the current financial crisis was "the most serious financial crisis at least since the 1930s if not ever." "We're creating money because there's not enough money in the economy," King told Sky News. "We're having to deal with very unusual circumstances but react calmly to this and do the right thing." King denied that the move would damage the UK economy by fuelling inflation, claiming that the rising cost of living would fall back sharply next year. He insisted that it was right to inject more money in the UK economic system by creating another £75bn of electronic money for asset purchases. "There isn't enough money in our economy. This is very unusual but it's happening. It happened in the 1930s and it's happening now," he said.

Angry Savers Target Bank of England - Campaigners warned that savers are being taken for "mugs" as soaring energy and household costs have exacerbated the bleak future they are facing. A combination of high inflation and the Bank of England's base rate being held at a historic 0.5pc low has left savers struggling to find accounts which will give them a real return. The consumer price index (CPI), a broad measure of the cost of living, increased to 4.5pc in August, moving closer to a three-year high. Members of campaign group Save Our Savers will voice their anger outside the Bank tomorrow, at the same time as the next base rate decision is announced. They will be accompanied by "Bertie the pig" who will take a bashing to reflect the pressure campaigners say they are under.

Moody's downgrades 12 U.K. lenders   -- Moody's Investors Service on Friday downgraded the senior debt rating of 12 U.K. financial institutions, including units of Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC as well as the U.K. arm of Banco Santander . The rating agency said the downgrades reflect a decrease in the probability that the U.K. government would provide future support to financial institutions if they need it. Moody's downgraded Lloyds TSB Bank and Santander U.K. PLC by one notch to A1 from Aa3 and also cut RBS PLC and Nationwide Building Society by two notches to A2 from Aa3. Shares in RBS and Lloyds were the worst performers on the main U.K. index, falling 3.5% and 3.4% respectively in early trading. The rating agency also downgraded Co-Operative Bank PLC and seven smaller building societies.

Moody's cuts credit ratings of 12 UK banks - Moody's today downgraded its ratings for a dozen British banks, including state-owned Royal Bank of Scotland and Lloyds TSB, due to the removal of government financial support.  Moody's said it chose to downgrade five large banks and seven small lenders as government action had "significantly reduced the predictability of support over the medium to long-term."  The downgrades did not concern HSBC, Barclays or Standard Chartered banks, the agency said. But it added that it believed Britain's government was in the current climate more likely to allow small lenders to fail if necessary.  Moody's said it had downgraded Royal Bank of Scotland and Nationwide Building Society each by two notches to A2 from Aa3; Lloyds TSB Bank and Santander UK were cut by one grade to A1 from Aa3; the Co-Operative Bank was downgraded one level to A3 from A2. The news comes as the European Union seeks swift recapitalisation of the region's banks to avert the spreading across borders of the euro zone debt crisis. The downgrades could result in banks facing higher rates of interest when looking to borrow money on markets, further hindering their attempts to return to better health.

World facing worst financial crisis in history, Bank of England Governor says - The world is facing the worst financial crisis since at least the 1930s “if not ever”, the Governor of the Bank of England said last night.  Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.  Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.  Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.  “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”  Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”.

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