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

Saturday, November 12, 2011

week ending Nov 12

Fed Balance Sheet Grows To $2.842T For Week Ended Nov 9 - The U.S. Federal Reserve's balance sheet grew a week after the central bank said it would continue with a strategy to stimulate economic growth by adjusting its massive portfolio of securities.  The Fed's asset holdings in the week ended Nov. 9 stood at $2.842 trillion, up from the $2.825 trillion reported a week earlier, the central bank said in a report released Thursday.  Holdings of U.S. Treasury securities moved up to $1.668 trillion from $1.654 trillion the week before. The central bank's holdings of mortgage-backed securities held steady at $849.26 billion.  Thursday's report showed total borrowing from the Fed's discount lending window was $10.61 billion, down from the $10.84 billion a week earlier. Borrowing by commercial banks fell to $9 million from $62 million.  The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts stayed at about $3.442 trillion last week.  Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts dipped to $2.719 trillion, compared to $2.720 trillion the previous week.  Holdings of agency securities grew to $723.28 billion from $722.02 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- November 10, 2011 

Rosengren: Fed needs to act aggressively on economy (Reuters) - The Federal Reserve should continue to act "aggressively" to try to bring down the stubbornly high U.S. jobless rate and boost lagging economic growth, a top Fed official said on Monday. Eric Rosengren, President of the Boston Federal Reserve Bank, said weak labor conditions would help keep inflation below 2 percent over the next several years. "Given the very weak labor market conditions and the low expected inflation rate, the Federal Reserve should in my view continue to take action to aggressively try to reduce the stubbornly high U.S. unemployment rate," Rosengren said. Rosengren touched on policy issues only briefly in prepared remarks to the New England Board of Higher Education conference on higher education and the workforce. He said that economic growth had been lethargic despite the Fed's policy actions, and that at 9 percent in October, the jobless rate remains "unacceptably high."

Rosengren Says Fed Should Act to Bring Down Unemployment Rate  (Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said the central bank should act to bring down “stubbornly, and unacceptably, high” joblessness that’s been stuck near 9 percent or above since April 2009.  “Given the very weak labor market conditions and the low expected inflation rate, the Federal Reserve should in my view continue to take action to aggressively try to reduce the stubbornly high U.S. unemployment rate,” Rosengren said in the text of remarks given in Boston today. He forecast inflation will be below 2 percent “over the next several years.” The central bank may take new steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public, Fed Chairman Ben S. Bernanke said after the Federal Open Market Committee’s two-day meeting ended Nov. 2. Policy makers last week left unchanged their plans to lengthen the maturity of the Fed’s bond portfolio, known as Operation Twist, and to keep the target federal funds rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook remains “subdued.” “The Federal Reserve should continue to use the tools at its disposal to boost demand in the economy,” Rosengren said, without specifying what steps should be taken.

General Ben's marching orders - CHARLIE EVANS of the Chicago Fed has been pressing his colleagues to give employment more weight in monetary policy, arguing for example that even assigning higher weight to inflation, in a classic Taylor Rule, would permit a more aggressively easy policy now. Does Ben Bernanke agree? Judging from his remarks to troops today in Texas, it looks like he’s even more hawkish on employment than Mr Evans: Supporting job creation is half of our marching orders, so to speak; the other half is controlling inflation," he said, adding that while high unemployment remains a challenge, he at least expects inflation to remain low for the "foreseeable future. So I make the coefficient on employment in Mr Bernanke’s Taylor Rule to be equal to that of inflation. That's interesting; Mr Evans’ argued that even if it was just a quarter of that of inflation, more QE was justified.

At Fed, louder calls for action on economy - Federal Reserve officials who advocate new action to try to strengthen the economy are becoming more vocal in their push, taking their arguments to the public and making them more forcefully within the Fed policy committee. But words haven’t resulted in deeds — and the consensus view among the central bank’s top policymakers is that there would need to be clear evidence of new deterioration in the economy to justify any move to pump out more money.  A flurry of speeches in recent weeks led some people in the financial markets to conclude that the central bank is in a hair-trigger stance, on the verge of some new action, such as buying hundreds of billions of dollars of mortgage-related securities in a bid to bring down mortgage rates. One Fed policymaker took the unusual step of dissenting in favor of more aggressive action at last week’s meeting. But although there are several influential Fed officials who would be inclined to do just that, the more widely held view on the central bank — reflected in its decision last week to stand pat and take no new action 1— is that the potential benefits are still too modest to be worth the risks. In particular, with mortgage rates already exceptionally low, it is not clear that Fed action would spur any more activity in the housing sector even if it lowered rates further. “Things would have to get noticeably worse before a new round of QE,”

Plosser on Communications - Charles Plosser of the Philadelphia Fed gave a noteworthy speech today on how the US central bank might improve its communication policies.Mr Plosser has always been interesting on this subject — he is a long time advocate for a defined Fed inflation objective — but he is especially worth paying attention to now as a member of the Fed subcommittee that is looking at communications.Mr Plosser is the obvious ‘hawk’ on that committee — the other members are vice chair Janet Yellen, governor Sarah Bloom Raskin, and Chicago Fed president Charles Evans — and its clear that there is a lot of common ground on inflation objectives and on providing more information about the forward path of policy. Where Mr Plosser clearly wants to make a stand is against using any change in communication as a back door to tacit acceptance of higher inflation. Here is part of his speech:

Kocherlakota Says Fed Should Make Public Contingency Plan - Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. central bank should develop and make public a contingency plan that would explain how it would react to developments in the economy. Such a contingency plan by the policy-setting Federal Open Market Committee would “provide clear guidance on how it will respond to a variety of relevant scenarios,”  Kocherlakota said a contingency plan would reduce uncertainty about the Fed’s actions among consumers and companies, which he said has reduced incentives to spend and hire. It would also enhance the central bank’s credibility and transparency, he said. His comments extend a discussion among members of the FOMC about how to better explain their forecasts and policies to the public. At a press conference last week, Fed Chairman Ben S. Bernanke said options include clarifying the central bank’s long-term inflation goal, publishing the likely path of interest rates, and tying the Fed’s pledge to hold rates low to specific levels of employment and inflation -- a strategy espoused by Chicago Fed President Charles Evans.

Pursuing Financial Stability at the Federal Reserve - Janet Yellen -speech at the Fourteenth Annual International Banking Conference, Federal Reserve Bank of Chicago

Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash - The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009. $7 billion of that was the net cash transferred to the US Treasury from its note and bond sales less outlays. The Fed still had to meet the other $76 billion. These transactions were revealed in the Fed's weekly H.4.1 report. The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed's System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed's stated target of $2.654 trillion. Prior to this week, it had not strayed from by more than $7 billion since June. The Fed's action was not only a direct contradiction of its stated policy, but it was done without warning or explanation. The Fed took another unusual and virtually unprecedented action to fund these massive withdrawals. It borrowed $43 billion from foreign central banks (FCBs) through Reverse Repurchase Agreements (reverse repos, or RRPs).

The Fed Needs To Get Ahead of the Eurozone Crisis - Brad DeLong says what I have been thinking for some time:Where is my fed announcement that it will not let chaos in Europe cause a double dip here? Exactly.  The Fed needs to be proactive not reactive, otherwise it risks making the same mistakes it made in 2008.  Here is what I said along these same lines earlier this year: Nick Rowe is concerned that the collapse of the Eurozone could lead to another Lehman-type event for the global financial system.  He is also wondering what central banks should be doing in preparation for such an event.  Nick is not the only one concerned.  Others have expressed concerned that financial contagion could arise from credit default swaps on Greek bonds or U.S. money market funds that are indirectly linked to the Greek economy through investments in the core Eurozone countries.  Even Fed Chairman Ben Bernanke expressed concern in his last press conference about the indirect exposure the U.S. economy has to Greek crisis: So what can the Fed do? Here is a suggestion: the Fed could say if total current dollar spending begins to plummet because concerns about the financial system are causing investors to rapidly buy up safe money-like assets then the Fed would begin buying up less-safe and less-liquid assets until the investors' demand for money-like assets is satiated such that they return total current dollar spending to its previous level.

Economist Sees No Immediate Fed Reaction to Europe - Europe’s financial crisis may be quickening, but an economist at one bank doesn’t expect much of a reaction from the Federal Reserve, at least not yet. At issue are the still existing parts of the Fed’s emergency-response tool kit. Much of what Ben Bernanke’s Fed put in place to address the financial crisis has been dismantled due to a lack of need. The main arrows still in the quiver are the Fed’s dollar liquidity facility for major central banks and its long-standing discount window, which provides emergency loans to deposit-taking banks with appropriate collateral. Eric Green of TD Securities argues in a note Wednesday that continuing troubles in Europe have not reached a point where the Fed feels it needs to make these emergency-lending tools more affordable to use, relative to the de facto zero-percent overnight federal funds rate target and market-based borrowing costs. As Green sees it, perception is the main reason why the Fed is likely to leave its emergency tools unchanged. “The Fed will provide as much dollar liquidity to Europe as necessary,” but it will continue to do so on terms more expensive than the market.

Fed's Yellen warns of low interest rate risks - Federal Reserve Vice Chairman Janet Yellen said in Chicago today that European sovereign debt and banking issues are straining global financial markets and “pose significant downside risks to the U.S. economic outlook.” U.S. banking institutions have “manageable levels of direct exposure to the peripheral European countries, but more substantial links to financial institutions in the larger European economies,” she said.  She also raised concerns about U.S. money market funds, emphasizing that international linkages through those funds could “lead to a deterioration of financial conditions in the United States.” Yellen was speaking at the Chicago Federal Reserve International Banking Conference, which is reviewing the financial crisis of the last few years and examining what central bankers throughout the world can do to avoid future systemic risk.  She noted that Fed staff is currently in the process of reviewing banking compensation to determine whether it stimulates risky practices.“We want to insure that compensation isn’t a source of risk,” she said.

Video: Sumner Says Nominal GDP Target Can Save the Recovery -  WSJ - Bentley University economics professor Scott Sumner says the Federal Reserve ought to be far more aggressive in stimulating the U.S. economy and explains how a nominal GDP target would be a better way to run monetary policy.

Supply Shocks and Nominal GDP Targeting - Adam P is a bit irritated with all the attention being given to nominal GDP targeting and has been tossing some "volatility critique" and "optimality critique" grenades our way.  Fortunately, the volatility critique grenade was a dud, though I am still am holding and sizing up the optimality one.  Hopefully, it doesn't blow up.  His latest bombardment on the nominal GDP camp comes in an attempt to critique what I think is one of the biggest benefits of nominal GDP targeting: how it deals with supply shocks.  This latest bombardment, however, is not a dud but ironically ends up blowing apart inflation targeting rather nominal GDP targeting. Here is why.  Inflation is the result or symptom of underlying shocks to aggregate demand (AD) and aggregate supply (AS).  Monetary policy, however, can only meaningfully influence AD so that is where its focus should be.  This cannot happen with strict inflation targeting because it requires the central bank to respond to any change in inflation, regardless of whether it is caused by AD or AS shocks.  In other words, inflation targeting causes the central bank to respond to AS shocks when it should only be responding to AD shocks.  A nominal GDP target acknowledges this distinction and appropriately focuses monetary policy on the cause (AD shock) not the symptom (inflation).  Adam P., therefore, is therefore right to claim that monetary policy cannot "fix" a supply shock, but he has it completely backward when he claims that this does not happen with inflation targeting

Let them eat NGDP -This weekend, at an INET conference, Mike Konczal of Rortybomb made the excellent point that the econ blogosphere is probably adding more new policy ideas to the public discourse right now than academia itself. He identified NGDP targeting as the most important and dramatic example. And boy was he right! NGDP frenzy has reached truly astonishing levels. I have my doubts that the Fed will actually adopt an NGDP target, but there is no denying that the blogosphere and much of the popular press has fallen for this idea like girls at my college fell for Thom Yorke back in 1999 (no I'm not bitter, why do you ask?). These days Scott Sumner says "NGDP" like Herman Cain says "9-9-9." Now, I am all for looser monetary policy, whether it comes in the form of an NGDP target or not. But NGDP has reached the point where, like Radiohead, its cult status is actually starting to annoy me.   Take, for example, this post from Matt Yglesias (an extremely sharp dude) on how NGDP is the "actual thing": [I]t seems natural to many people to take [real GDP and inflation] as “given” and understanding NGDP (= GDP + inflation) as somehow constructed and exotic. But actually NGDP is, relatively speaking, the simple quantity here. It measures total spending in the economy. You count everything, add it all up, and you’ve got your NGDP...

Fed's Plosser: Wrong To Let Inflation Rise To Cut Unemployment--A key Federal Reserve official struck back Tuesday against other central bankers willing to tolerate a higher inflation rate as the result of policies that would bring down the unemployment rate, and said improved economic prospects argue against further stimulus. Federal Reserve Bank of Philadelphia Charles Plosser argued strongly that any move to allow inflation to accelerate, regardless of the motivation, is wrong-headed and could result in a repeat of the 1970s stagflation era of high unemployment and high prices. As he has in the past, the voting member of the interest rate-setting Federal Open Market Committee used remarks given in Philadelphia to argue that the central bank should concentrate on making monetary policy with price stability alone in mind, given that is the economic variable the Fed has the most power to control.  He also countered rising speculation that high unemployment, weak growth and low inflation will drive the Fed to provide further stimulus to the economy via buying Treasurys and mortgages to grow the central bank balance sheet. "It's not clear to me further action is justified at this time," Plosser said

Can the Fed Stimulate Growth or Only Inflation? - Many economists, myself included, believe that a more aggressive Federal Reserve policy is needed to turn the economy around. Additional fiscal stimulus would also help. As the chairman of the Federal Reserve Board, Ben Bernanke put it at a Nov. 2 news conference, “It would be helpful if we could get assistance from some other parts of the government to work with us to create jobs." However, such assistance will not be coming. President Obama’s jobs package has been blocked by Republicans in Congress, and the order of the day is fiscal tightening, with the Joint Select Committee on Deficit Reduction poised to offer recommendations for $1.5 trillion in additional deficit reduction by Nov. 23. With fiscal stimulus off the table, monetary stimulus is all that is available. But the Republican view is that monetary policy is incapable of stimulating real growth – that it will stimulate only inflation. This view is regularly enforced by The Wall Street Journal editorial page, which establishes the ideological line for Republicans on Fed policy.

Supply-side Policies as a Way to Boost Aggregate Demand - Mankiw - This paper from the Philadelphia Fed makes an important point: This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.

Trouble Ahead: Employment, Inflation, And The Fed - Yesterday the Bureau of Labor Statistics told us that unemployment was still stubbornly high. While it has improved year-over-year, a 9.0% unemployment rate is still high and does not signal an economy in recovery. And that has political and policy implications for the U.S.  Also, the Fed's FOMC (Fed Open Market Committee) minutes were released Wednesday and Fed Chairman Ben Bernanke held a press conference as part of the Fed's new openness and desire to clearly communicate policy. They made no policy changes but Bernanke expressed concern about the slow recovery and high unemployment and said "We're prepared to do more and we have the tools to do more." Unemployment, Fed policy, and the coming worldwide economic recession will do more to influence the future of our economy than anything else.

Maybe the problem is Boehner, not Bernanke - The Fed is coming under a lot of criticism from commentators and economists of a Keynesian bent (myself included) for its reluctance to take dramatic action to put the economy on the road to recovery. The economy is stuck in neutral with unemployment at 9 percent; has been pretty much so for a year and a half. The Fed has many tricks it could pull from its sleeve, most promising among them large scale purchases of mortgage backed securities to encourage refinancing under the new HARP rules or announcing a commitment to target nominal GDP or inflation backed up by large scale asset purchases. Ezra Klein says that Obama's decision to reappoint Ben Bernanke may have been a serious mistake; Paul Krugman says he used to think that Bernanke was a dove saddled with more hawkish colleagues on the FOMC, but now he thinks Bernanke just doesn't get it. Tim Duy says the Fed's inaction is "inexplicable." Brad DeLong and Mark Thoma are similarly disappointed. But perhaps the problem is not Ben Bernanke but the political environment in which he is operating.

Why Spotting Bubbles Is Harder Than It Looks - Ever since 1841, when a Scottish journalist named Charles Mackay published the book known today as "Extraordinary Popular Delusions and the Madness of Crowds," the answer has seemed clear. If you watch carefully for signs of euphoria, you can sidestep the damage when markets go mad. But bubble spotting isn't as simple as Mackay made it sound—even, it turns out, for Mackay himself. Investors should always guard against the glib assertions of pundits who claim they can detect bubbles before they burst.  It's also a reminder that expecting policy makers to predict the future by popping "bubbles in the making" is probably a bad idea. Although plenty of people claim to have seen bubbles in hindsight, determining when enthusiasm morphs into euphoria is an inexact science at best. Consider today: With the global financial crisis lingering, but initial stock offerings like Groupon buoyant, is the stock market a bubble? When ATMs dispense gold bars, is gold a bubble? When some of the biggest bond investors say they are willing to buy Treasury bills at negative yields that lock in losses, are government securities a bubble?

The negative unnatural rate of interest - David Andolfatto points out that US five-year real interest rates are now negative. Nick Rowe discusses the possibility that the so-called “natural” real interest rate could be negative, referring us to Frances Woolley’s discussion of the drag demographics might exert on real returns. (I’ll respond to Rowe and Woolley specifically in a little appendix to this post, but I want to start more generally.) When we observe negative real rates, they are often attributed to something abnormal. Perhaps it is “depression economics” which has driven interest rates underground, or, as Andolfatto rather charitably considers, a misguided tax and regulatory regime. I think this aberrationist view is quite wrong. I don’t think you can make sense of the last decade without understanding that the so-called real interest rate has been trying to fall through zero for years. Only tireless innovation by the men and women of Wall Street prevented negative rates long before the traumas of 2008. A deep cause of the financial crisis was a simple expectation: That lenders ought to earn a “decent” real, risk-free yield even while a variety of trends — skyrocketing incomes for the 0.1%, the professionalization of investing, leverage-induced risk aversion, China — were creating Ben Bernanke’s famous savings glut. There is no such thing as a “natural” anything in economics. Economic behavior is human artifact and artifice.

The Return Of Secular Stagnation - Krugman - Steve Randy Waldman has a characteristically interesting post on interest rates. He starts from the observation that real rates are now negative — lenders are actually willing to accept a negative yield on inflation-protected bonds: He then argues that the”natural” real rate of interest — the interest rate that would match savings and investment at full employment — has been negative for quite a while, and that we’re only seeing this now because various bubbles and deregulatory schemes have masked the reality. What he doesn’t say, but immediately strikes anyone who knows some of the history here, is that this amounts to a return of the “secular stagnation” hypothesis that was popular in the early postwar years; the hypothesis was that there was a fundamental excess of desired savings over desired investment, and that this would require government intervention on a sustained basis to achieve full employment.That hypothesis proved wrong at the time, but that doesn’t mean it couldn’t be true now. And I’m somewhat sympathetic to the view that it might indeed be true. Waldman goes on to suggest that high income inequality is what’s driving this — he has a little parable involving bakers and bread that ultimately comes down to the rich being satiated while the poor cannot afford to buy.

What Moves the Interest Rate Term Structure? - SF Fed Economic Letter  - To understand the effects of news on bond markets, it is instructive to look beyond individual maturities and consider the entire term structure of interest rates. For example, unexpected changes in monthly nonfarm payroll employment numbers cause large movements at short and medium maturities, but do not affect long-term interest rates. Inflation news affects the long end of the term structure. Monetary policy actions vary in their effects on interest rates, but cause volatility at all maturities, including distant forward rates.

Perfect Storm; Eight Reasons to be Bullish on the US Dollar - One of my much appreciated contacts is Steen Jakobsen, chief economist for Saxo Bank in Copenhagen, Denmark. Today he passed on an "internal note" that he gave permission to share. For ease in reading, I will not follow with my usual indented blockquote format. Steen Writes ... One of my main themes over the last quarter has been a “relative outperformance” of the US economy relative to consensus. This has materialized and our call was almost entirely driven by Consumer Metric data which over the last three years has outperformed any other relevant predictor. This is now slowing down slightly, but still elevated. Meanwhile Europe start election cycle where Spain goes to the election in less than two weeks, while Sarkozy starts his re-election campaign when he is done playing Napoleon in European politics. The outlook for 2012 is a “Perfect Storm” with increased austerity, higher unemployment, and weaker global growth (read: China). My colleague Peter Garnry was kind enough to quickly program a small excel thing which can track changes to growth by consensus using the ECST function on Bloomberg. This is the result.

Liquidity Traps And Hawaiian Shirts - Krugman - It’s somewhat awesome to realize that many people in the world of finance are just now awakening to the reality that we’re in a liquidity trap. Here’s the FT:Over the past 30 years, US Treasuries have been in an extraordinary bull market with yields on a near-constant downwards path. But as US yields – and those of Germany and the UK – approached 3 per cent, market commentators were unanimous that 2011 would see equities outperform bonds. Yields had to go up. How foolish such predictions look now.“In a Japan-like scenario bonds are fair value,” says David Jacob, chief investment officer of Henderson Global Investors. “I think we are in a liquidity trap to some extent and it’s very difficult to climb out of it.”A liquidity trap refers to the inability of monetary policy to stimulate the economy and many investors are worried that central banks may be able to keep government bond yields low but that will have little direct impact on growth. And I thought it was obvious three years ago that we were in a Japan-type liquidity trap.

"What can exports tell us about the economy?" - There has been considerable debate lately about why the U.S. economy continues to struggle. Some have argued that concerns about future taxes and regulation are preventing American businesses from investing and hiring. Other economists have argued that we have inadequate aggregate demand in the economy and that explains slow GDP and employment growth -- not fear of future government policy. Additional evidence comes from something Menzie posted about last week: the strong performance of U.S. exports. One way to sort out the competing explanations is to see what happens when there is substantial demand for U.S. products. In foreign markets where economies are growing quickly, U.S. exports are rising fast. American businesses do not seem to be held back by fear of taxes or regulation; they are hiring and increasing production for sale where there are customers.  U.S. exports have surged since the end of the recession. Real exports are up 23% in the 9 quarters since the recession ended (a better performance following a recession than any of the last 3 recessions including the strong early 1980s recovery). Nominal exports are up even more as the price exporters can get on world markets has been rising.

Autos, housing, and the business cycle - Here I offer some observations on what's been holding back the recovery. Two of the most important sectors in U.S. business cycle fluctuations are autos and housing. For example, in the 2007:Q4-2009:Q2 recession, real GDP fell on average at a 2.7% annual rate, with autos and housing accounting for about half of this decline all by themselves. Although autos and housing make a very significant contribution to changes in GDP growth rates over the business cycle, they represent only a small part of the level of total GDP. Over 1947-2011, spending on motor vehicles and parts only amounted to 3.5% of total GDP on average, while housing was less than 4.7%. But the fluctuations in spending on new cars and homes are so volatile, these percentages change quite a bit over the cycle, rising well above average during expansions and falling in contractions. For 2011:Q3, motor vehicles and parts represented 2.4% of the level of GDP, while residential fixed investment was only 2.2%.

Economic Perspectives - If you are an investor the good news is that productivity growth improved sharply. Unit labor cost fell in the third quarter and the spread between pricing and labor cost widened nicely. This implies that earnings growth is accelerating and that my earlier fears that earnings expectations were too high is no longer a problem. The bad news is that with strong productivity, hours worked and income growth weakened. In the third quarter, nominal personal income expanded at under a 1% annual rate, a sharp slowing from the roughly 5% growth over the past year. Moreover, average hourly earnings growth continues to slow. Now at 1.56%, it is approaching an all time record low. The recent improvement in consumer spending did not stem from improved real incomes. Rather it was financed by a drawing down of savings. While the headlines are dominated by Europe’s problems and the market is reacting strongly to these headlines, SEER continues to believe that the biggest market-economic threat is the extremely weak income growth. With such weak income growth, it will be difficult for the consumer to sustain the stronger consumption growth of recent months. Yet increased personal consumption expenditures accounted for 1.72 % of the 2.5% growth in third quarter real GDP. This is especially true if the lower social security tax is not renewed for 2012 and/or if oil prices continue to rebound. SEER’s real retail sales model implies that real retail sales growth should be approaching zero.

Predicting GDP With ARIMA Forecasts - Is the U.S. economy headed for a new recession? The risk is clearly elevated these days, in part because the euro crisis rolls on. The sluggish growth rate in the U.S. isn’t helping either. But with ongoing job growth, albeit at a slow rate, it's not yet clear that we've reached a tipping point. Given all the mixed signals, however, forecasting is unusually tough at the moment. It’s never easy, of course, but it’s always necessary just the same. But how to proceed? The possibilities are endless, but one useful way to begin is with so-called autoregressive integrated moving averages (ARIMA). It sounds rather intimidating, but the basic calculation is straightforward and it's easily performed in a spreadsheet, which helps explain why ARIMA models are so popular in econometrics. A more compelling reason for this technique's widespread use: a number of studies report that ARIMA models have a history of making relatively accurate forecasts compared with the more sophisticated competition.

$99 Oil For 11/11/11 - Presented with little comment - except a reminder that: "every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year."

Niall Ferguson: It’s the Stupid Economy - Matt Duss introduces this video: “If you thought Niall Ferguson was an insufferable git in print, just wait.”

ECRI Doubles Down on Recession Call; Points to "Contagion of Forward Leading Indicators" - The Economic Cycle Research Institute is the "world's leading authority on business cycles" whose "state-of-the-art analytical framework is unmatched in its ability to forecast cycle turning points."¹ Furthermore, The Economist magazine has stated that they are perhaps "the only organization to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm." Two months ago, the ECRI made a very definitive and unwavering recession call going even so far to say that "there’s nothing that policy makers can do to head it off." Since then, the markets have rallied strongly on the heels of recent positive economic data, leading many in the mainstream financial press to accept that the U.S. has narrowly averted an impending recession and will begin to see growth. Not so, says Lakshman Achuthan, ECRI's chief economist and spokesman; citing under no uncertain terms that "nothing has changed our view": (Click here if video does not load)

World Faces Subpar Growth for Next 14 Years - The world economy will struggle to grow above its potential over the next five years as advanced economies recover but the gain is offset by a slowdown in emerging markets, according to a global forecast released Tuesday by the Conference Board. Over time, the emergence of larger middle classes in the developing markets will help global businesses that must adjust to declining demand among struggling middle-class consumers in the advanced nations. The Conference Board’s global forecast expects world gross domestic product to grow 3.2% in 2012 and accelerate to 3.5% from 2013 until 2016. Farther out, growth is projected to average 2.7% from 2017-2025. Each period’s projected pace is less than the 3.6% average during the 1996-2005 period, before the severe recession hit. The board’s forecast was prepared to help its business members adapt to a changing world economy. Dow Jones Newswires and The Wall Street Journal were given exclusive access to the forecast. Click for full-size chart.

Another Layer - In his latest Weekly Market Comment, John Hussman who manages the Hussman Funds, adds another layer of data to the "debate" -- actually, the one-sided argument -- about where things are headed next: Our broadest models (both ensembles and probit models) continue to imply a probability of oncoming recession near 100%. It's important to recognize, though, that there is such a uniformity of recession warnings here (in ECRI head Lakshman Achuthan's words, a "contagion") that even an unsophisticated, unweighted average of evidence indicates a very high likelihood of recession. The following chart presents an unweighted average of 20 binary (1/0) recession flags we follow (e.g. credit spreads widening versus 6 months earlier, S&P 500 lower than 6 months earlier, PMI below 54, ECRI weekly leading index below -5, consumer confidence more than 20 points below its 12-month average, etc, etc). The black brackets represent official recessions. The simple fact is that we've never seen a plurality (>50%) of these measures unfavorable except during or immediately prior to U.S. recessions. Maybe this time is different? We hope so, but we certainly wouldn't invest on that hope.

If Europe is in a recession, how about the U.S.? - My best guess is the U.S. stays out of recession even if Europe is currently in a recession. Of course there are significant downside risks, especially if there is a disorderly end to the euro.  If we look at the channels of contagion, it seems the impact from Europe – barring a blow-up – will be fairly small. Of course, with sluggish growth, the U.S. is very susceptible to economic shocks, and it also appears that the U.S. is moving to more austerity in 2012 – and that is an additional concern (If Congress does nothing, taxes will increase on working Americans, and more). What are the channels of contagion from Europe? First, the trade channel – the impact on U.S. exports – is pretty small. Although Europe is a major trading partner, exports only make up a small portion of U.S. GDP. Some of the impact from trade would probably be offset by lower oil prices – and of course lower interest rates as investors seek safety (the European crisis is a key reason the U.S. 10 year bond yield is around 2%). A more significant channel would be tightening of U.S. credit conditions in response to the European crisis.The Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S.

If Rome burns, US will feel the heat --The financial fires raging in Europe threatened to consume Italy Monday, as investors fled the country’s debt, driving up borrowing costs and pressuring Premier Silvio Berlusconi to resign. Unless those fires can be contained, the U.S. and the rest of the world will soon feel the heat. After multiple failed attempts by Berlusconi’s government to reform Italy’s debt-heavy budget and after weekend reports that the government may fall, the financial markets pummeled Italian bonds Monday morning, sending interest rates approaching 7 percent. At those rates, the cost of periodically rolling over Italy’s $2.6 trillion in outstanding debt would quickly swamp its already strained budget. Nearly two years after similar broken reform promises by Greece, the epicenter of the current financial crisis, the widening turmoil poses a much bigger threat. "Italy has much more systemic implications than Greece, its debt is larger than the rest of the periphery put together, it is too big to fail, too big to save,” . To cope with losses expected on Greek debt, European officials are in talks to expand a $320 billion bailout fund to shore up European banks or buy Greek bonds outright. Some analysts have warned that European banks don’t have enough capital to withstand losses on their holdings of Greek debt. A default by Italy, the world’s third largest issuer of government debt behind the U.S. and Japan, would dwarf those losses and swamp even an expanded bailout fund.

The Blooey Factor - Paul Krugman - A thought before tomorrow’s markets open in Europe: might we be seeing Italy go careening off the edge in the next few days? I mean, even more than it has? The FT suggests that we might, writing of a “danger zone”. I’m trying to think about this, so a few observations. First, there is a potential vicious circle in which higher rates raise Italy’s interest burden and push the country into defaulting. This is real; the question is how quickly it can operate given the fairly long maturity of Italian debt. Second, there is the question the FT raises, about whether rising spreads will trigger an increase in required margins.  I think of as Shleifer-Vishny, after their classic paper on the limits of arbitrage (pdf). Their point was that a fall in the price of some asset, even if it should in principle present a buying opportunity if the fundamentals haven’t changed, may actually be self-reinforcing instead if there is a limited class of leveraged investors who buy that asset.  Most Italian debt may be held by stolid domestic players, but at the margin are financial institutions that are quite possibly going to be forced to cut their holdings if Italian interest rates rise, because this will reduce the value of the bonds they already hold. So things could quite possibly go blooey in the very near future.

Who is Screwing Up More: Europe or the US? - In both Europe and the United States, the current public debt woes are attributable to mistakes made by political leaders going back more than a decade.  In both cases the tremendous magnitude of the long-term debt problems has only become evident for all to see recently, by which time it was too late for the straightforward policy solutions that were viable options previously.    It is hard to judge whether it is Europe or the United States that has screwed up worse.     On the one hand, Europe is now much closer to full-fledged crisis: the debt problems in Mediterranean members are virtually insoluble at current interest rates, are probably pushing Europe back into recession, and could well soon result in one or more countries forced to leave the euro.  By contrast, there is no true fiscal crisis here yet;  the world’s investors are still buying large quantities of US bonds at low interest rates. On the other hand, the mistakes by US politicians are more gratuitously self-inflicted than on the other side of the Atlantic.   In 2001, all we had to do was continue the fiscal progress that had been made during the 1990s: preserve the budget surplus and move on to address the longer term problems of social security and Medicare in a deliberate and balanced manner.  Instead we recklessly enacted massive tax cuts and tripled the rate of growth of federal spending, in ways guaranteed to generate serious fiscal troubles in the decade of the 2010s and beyond. 

Treasuries Rise as Italy Deposit Requirement Spurs Refuge Demand - Treasury 10-year note yields fell the most in a week on concern Italy will join Greece in struggling to form a regime strong enough to implement austerity measures following the resignation of Prime Minister Silvio Berlusconi. Italian debt securities slumped, driving five- and 10-year yields to more than 7 percent for the first time since the euro was introduced in 1999, even as the European Central Bank was said to be buying the nation’s debt. U.S. 10-year notes rallied before today’s $24 billion sale of the securities. The $32 billion auction of three-year notes yesterday attracted the highest demand since at least 1993. “It’s another tempest ripping through the peripheral market, and people are now concerned because this is one of the bigger dominos they’ve been trying to keep propped up,”

The money scoreboard - MMTers like to say that money is like points and the government is just a scorekeeper. I have never really liked that analogy because the money unit of account is not just about keeping score it is also a government IOU. Nevertheless, the scorekeeper/point analogy has some utility in terms of our institutional arrangements. So I am going to try to use it here.  The amount of money or credit in the system does not change the productive capacity of a society at one point in time. A country can produce whatever it can produce based on the available physical and human capital. As Andy Xie noted money contracts introduce a distribution problem, but they do not change the inherent productive capacity of a society. So money is the way that we measure that productive capacity and set prices for wages, consumer goods and services and assets. In most monetary systems including in the euro zone, government has been tasked with setting the currency unit of account to make that measurement. If we were to simultaneously increase the price level of wages, consumer goods and services and assets by 1000-fold, all that we have done is change the nominal amounts, not the actual capacity to produce. The ‘points’, as MMTers would call them, are now worth one one thousandth in productive capacity of what they previously were.

The Argument Against the "First Derivative Mistake" Excuse - Unless you're really stupid, or bending over backwards to find excuses for the Obama Administration's Geithnerian malfeasance, you should be less than impressed with Matt Yglesias's attempt to argue that the Administration saw reason to be happy with overall employment (link to Brad DeLong). If you're Matt Yglesias, you should be even less impressed with your (own) argument. Because Matt Yglesias was paying attention in 2010. He was paying much more attention to Barack Obama's speeches than I was, so he would have heard the 27 January 2010 State of the Union, when Barack Obama said: Our efforts to prevent a second depression have added another $1 trillion to our national debt. . But families across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. Starting in 2011, we are prepared to freeze government spending for three years. (Applause.)  And Matt Yglesias, who was paying attention then and has a memory now, would have known that "freezing government spending in 2011" means starting 1 October 2010 (when FY 2011 starts).  And Matt Yglesias—not to mention Brad DeLong—would not be at all surprised when the result of those early 2010 policies came home to roost:

Federal Budget Deficit for Fiscal Year 2011: $1.3 Trillion - CBO Director's Blog - Last month, the Treasury Department reported that the federal government incurred a budget deficit of $1.3 trillion for fiscal year 2011, almost identical to the deficit it incurred in 2010. As a share of the nation’s gross domestic product (GDP), the deficit declined slightly—from 9.0 percent in 2010 to 8.7 percent in 2011—but nonetheless it was the third-highest deficit as a share of GDP since 1945. As discussed in CBO’s latest Monthly Budget Review, the deficit in 2011 would have been about $140 billion less than that in 2010 except for three unusual factors: (1) Certain payments that would have been made on October 1, 2011 (that is, in fiscal year 2012) were made in September 2011 because October 1 fell on a weekend; (2) net outlays for deposit insurance were reduced in fiscal year 2010 and increased in 2011 because banks were required prepay about three years’ worth of deposit insurance premiums in December 2009; and (3) the estimated costs of certain credit transactions made in earlier years were revised downward by a large amount in 2010 and by a much smaller amount in 2011. Excluding those factors, the deficit would have declined because outlays would have been almost unchanged from 2010 to 2011, while receipts rose by $141 billion.

Federal Borrowing Mounts While Household Debt Shrinks - The sharp rise in federal borrowing is overwhelming efforts of consumers to reduce debt, leaving the economy deeper in debt than when the recession began in December 2007, a USA TODAY analysis finds. The substitution of government debt for consumer debt helped end the recession and start a recovery, economists say, but it leaves the nation's long-term economic health in peril.  Households have reduced debt by $549 billion since 2007, mostly by cutting mortgages through defaults and paying down credit cards. During that time, the federal government has added more than $4 trillion in debt, pushing the country's total borrowing to a record $36.5 trillion, excluding the financial industry, according to the Federal Reserve. "Government will eventually need to reduce the deficit," says Susan Lund, research director at McKinsey Global Institute. "But it's a very difficult balancing act to avoid withdrawing stimulus too soon while stopping before you borrow too much."

The Debt Ceiling as a Fiscal Rule - NY Fed - A few months ago, the federal government was once again confronted with the need to raise the statutory limit on the amount of debt issued by the Treasury. As in the past, the protracted stalemate and associated uncertainty led to calls to eliminate the debt ceiling. In this post, I make the counterargument. Likely because of its straightforwardness, the debt ceiling has been an effective “fiscal rule.” The reduction of the federal deficit from the mid-1980s to the mid-1990s was due in large part to a series of budget compromises, all of which were accompanied by the need to raise the debt ceiling.

Swelling Government Balance Sheets - Brad has a nice memo on why expanding the government balance sheet is a good idea during a financial crisis. Because of the financial crisis, the private capital market is not functioning as well. Until risks return to normal, the economy should do less intermediation through and financing of private borrowers. It should do more of something else. What is the something else? Well, a credit-worthy government is a perfectly good borrower and a perfectly good financer of economic activity. Its debt is a perfectly good way of transferring wealth from the present in the future—a way is exposed to none of the added risk generated by the financial crisis. The natural conclusion: if finance was at the appropriate balance between private and public borrowing before the financial crisis, we should have less private and more government financing afterwards—even without all the Keynesian and monetarist reasons for expansionary policy in a downturn. For those who are too afraid of government spending to even contemplate raising it ever for any reason, note that all that is necessary is that the government expand its balance sheet. As I have said before, in the extreme, if you look at the numbers the US government could simply suspend the collection of taxes until further notice. Not only would this have the affect of rapidly expanding the outstanding stock of debt but it would serve as an incredible incentive to bring economic transactions forward in time.

Year-end budget busters: $600 billion on the line -- Debt reduction may be consuming Capitol Hill these days, but lawmakers have a number of pricey budget decisions to make before the year's out. Unless Congress steps in, come January payments to Medicare1 doctors will be slashed by nearly 30%. Workers' payroll tax cut2 will expire. And federal unemployment benefits will end for close to 2 million jobless workers. Should lawmakers decide to prevent all that from happening, as many would like, there's the question of how to pay for it with the current budget. The estimated price tag for all three provisions over 10 years would top $600 billion. In September, President Obama proposed extending and expanding3 a temporary payroll tax break from last December. While employees normally pay 6.2% on the first $106,800 of their wages into Social Security, this year they've only been paying 4.2%. That tax break, however, is set to expire by Jan. 1. Obama proposed extending it for another year and cutting the employee share to just 3.1%. He also proposed cutting the employer's portion -- also 6.2% -- in half on the first $5 million that the company pays in wages. The payroll tax proposals combined would mean $289 billion less in revenue, according to the Congressional Budget Office. The hit would be taken by the general revenue pool, however, not the Social Security trust fund.

On Potential Deals in the Super-Committee - Political scientists Regina Smyth and William Bianco have written a pithy and interesting analysis of the sorts of deals that might emerge from the Super-Committee and, perhaps more importantly, the kinds of side-payments that party leaders might have to make if one of those deals is to win enough support in each chamber. Here is their analysis.  Here is short excerpt: Our analysis shows that many different deals can emerge from bargaining among SC members. But if negotiations center on deals that are enactable in the House or Senate, then only two kinds of deals are plausible. The first is a deal in which the House leadership is able to use its influence to accommodate the preferences of moderate Senate Democrats. This outcome is most likely in the case that House Republican leadership perceives the political cost of the reversion point as just too high with election a year away, and expects that the blame for a failure to cut the deficit will fall squarely on House Republican incumbents. However, this possibility becomes unlikely insofar as schemes to avoid defense cuts emerge. Conversely, if political costs are thought to be small, and bargaining is driven by policy concerns, then the pressure of the reversion mechanisms is likely to force House and Senate Democrats to agree to a deal that gives House Republicans most of what they want.

Supercommittee Deadline: Sooner Than You Think - Time may be even shorter for Congress’s deficit-cutting supercommittee than generally thought. The committee has until Nov. 23 to approve a recommendation for cutting the deficit by $1.2 trillion, or automatic spending cuts would kick in starting in January 2013. A simple majority of the 12 members would suffice to send the proposal to Congress. But the Nov. 23 deadline could be misleading. The Congressional Budget Office must provide an official estimate of how much the plan would cut the deficit before the committee members can vote on it. How long that would take depends on how novel the proposal is. If it consists of ideas that have been long-discussed and the CBO has already evaluated, the agency’s estimate may only take a few days. If it contains newer ideas, it could take longer. There’s yet another catch. The law creating the supercommittee, the Budget Control Act, says committee members must have 48 hours to look at any proposal before voting on it. That means the CBO must evaluate, or “score,” the proposal by Nov. 21—just 12 days from now.

What I Said On Bloomberg TV This Morning About The Not-So-Super Committee - Stan Collender - Please forgive the short commercial you have to watch before the interview begins.

Super Committee May Be The Real Turkey This Thanksgiving - Stan Collender - I predicted two things in the Sept. 6 Fiscal Fitness — the first published after the Budget Control Act was signed into law this past Aug. 2 — that are coming true faster than I, even on my most cynical days, would have dared to forecast. I say this not to be smug but rather with great sadness. First, I predicted that the across-the-board spending cuts “that are supposed to happen in January 2013 if the Joint Committee on Deficit Reduction can’t agree on anything or if what it proposes isn’t enacted have to be considered especially vulnerable to changes.” As the long-expected deadlock in the anything-but-super committee actually comes ever-closer to being realized, serious efforts are under way to prevent the across-the-board spending cuts from being triggered and to make sure the Pentagon isn’t included if they happen. Second, I said “like all the budget deals that have come before it, this one is already on the skids even if it’s not immediately obvious.” A separate analysis I wrote at that same time predicted that this agreement might not last until Christmas.

Why The Super Committee Is Heading For Super Catastrophe - As of Tuesday morning, betting on the Super Committee to succeed would be playing the odds.  A key member of the Senate Democratic leadership team has openly predicted the panel will gridlock and fail, and placed the blame squarely on Republicans. As GOP committee members met privately, Maryland Rep. Chris Van Hollen — a Democrat on the panel — told Bloomberg, “You need to close some of these tax loopholes and you need to generate additional revenue. And so that balance is going to be important. We saw the dueling letters just last week. We had a bipartisan group in the House that said, ‘Look, everything is on the table including revenues - tax revenues.’ And within 24 hours you had 33 [Republican] Senators say, ‘no new net tax revenues.’” Republicans responded with a trial balloon, . “One positive development on taxes taking shape is a deal that could include limiting tax deductions, perhaps by capping write-offs on charities, state and local taxes, and mortgage interest payments as a percentage of each tax filer’s gross income,” he wrote. “In exchange, Democrats would agree to make the Bush income-tax cuts permanent. This would mean preventing top rates from going to 42% from 35% today, and keeping the capital gains and dividend tax rate at 15%, as opposed to plans to raise them to 23.8% or higher after 2013.”

Dems rebuff GOP tax proposal as 'insane' - Republicans say the new revenue would come from limits on itemized tax deductions. The money captured from the tax overhaul would be used to lower the top individual tax rate to 28 percent and toward deficit reduction, aides say. Republicans also want to make the Bush tax cuts permanent. The breakdown, according to aides: $250 billion from limits on itemized tax deductions, such as the mortgage interest deduction on second homes, and about $40 billion in money the government would save by changing the way it calculates who qualifies for government benefits ("chained CPI"). Until now, Republicans have proposed only non-tax related revenue measures such as spectrum sales and increases in FAA fees. As headlines started to trickle out today that Republicans were offering a tax increase proposal to break the supercommittee impasse, Democrats on the committee hit back hard. Kerry told reporters this afternoon he saw a slight change from Republicans but it wasn't nearly enough. "They're anxious to promote a certain concept with all of you. But I'll be very clear that whatever they've put there doesn't get the job done. We've got some distance to travel. We're working very hard to do that. I dont want to go into the details," he said.

Supercommittee Makes Little Progress Amid Sniping - Democrats and Republicans on the congressional supercommittee appeared to make little progress Wednesday toward a deficit-cutting package, instead accusing each other privately of not negotiating in good faith. The two parties each made offers this week that were quickly rejected by the other side. A Democratic plan would raise $1 billion in revenue and cut $1 billion in spending, with much of the revenue coming from changes in the tax code. The GOP plan would cut spending by $700 billion and raise revenue by $500 billion, while cutting taxes dramatically. It would generate some of the revenue by capping deductions that taxpayers can claim on their returns. A Democratic staff analysis says that plan would lower taxes dramatically for the wealthy while raising them for everyone else. Republicans say they’d be willing to retool the plan to address some of these concerns.

Wall Street Doesn't Seem To be Expecting Much From The Not-So-Super Committee - One of the factors that has been leading some to predict that the Joint Select Committee on Deficit Reduction (aka, the super committee) will come up with a deficit reduction plan of its own is the belief that Wall Street will be disappointed if that doesn't happen and that the major averages will suffer immediately and significantly. But while there is some reason to think this could happen (after all, Bank of America Merrill Lynch predicted it several week's ago), the counter argument that Wall Street isn't really expecting much, won't be all that surprised if/when the committee fails, and that the the prediction of a massive negative market reaction is grossly overstated seems to be getting much stronger as the November 23 deadline gets every closer.In a research note released 10 days ago at Moody's Investors Service (sorry, subscription) is one of the major reasons this "it-won't-be-a-big-deal-at-all-if-the-super-committee-fails" attitude is increasing taking hold.  According to the comment, investors won't care if the committee doesn't agree in a deficit reduction plan or if its plan isn't agreed to by Congress because of the $1.2 trillion in additional spending cuts that failure would trigger. 

My Two Cents (But Worth Trillions of Dollars) to the Super Committee - So, hey!–It’s 11/11/11, and we’re down to not much more than 11 days (ok, darn–it’s technically 12) until the Nov. 23 deadline for the “super committee” to come up with proposals that would achieve $1.5 trillion in deficit reduction–or as close to that while hopefully going over as possible.  The confusion on the goal is because the conditions for the triggered automatic cuts and debt limit increases differ depending on whether $1.5 trillion, $1.2 trillion, or less than $1.2 trillion in deficit-reducing policies are actually enacted by December 23.   The graphic above is a Concord Coalition slide from one of our chart talks; it is designed to help explain the goals and triggers of the super committee, although it isn’t as readable as a photo image here as it is as a huge powerpoint chart up on a big screen–sorry.

Supercommittee Failure Could Throttle Holiday Spending - Consumers are starting to feel a bit more confident about the economy, according to the latest Thomson Reuters/University of Michigan consumer sentiment index out today. But a cloud forming over Washington threatens to darken the mood. The congressional “Supercommittee” formed as part of the debt-ceiling deal this summer is working to meet a Nov. 23 deadline for submitting a report on how to trim the deficit. The plan—assuming the bipartisan panel reaches a deal—will include at least $1.2 trillion in deficit reduction, expected to be a combination of revenue generators (read: tax increases) and spending cuts. If a deal doesn’t materialize—or if Congress rejects the committee’s recommended measures–a set of automatic spending cuts will go into effect. With less than two weeks to go, there’s no sign of a deal. Economists warn that a failure to produce a comprehensive deficit-reduction plan would further erode the public’s confidence in Washington lawmakers and consumer sentiment, already at very low levels.

Super Dupes - With the Congressional Super Committee required to produce a bipartisan budget-cutting plan by November 23, the best possible outcome would be for the committee to collapse of its own weight. With no deal, automatic cuts would kick in beginning in 2013. Those budget cuts would be excessive, but that question could—and will—be reopened after the election. And in the meantime, $4 trillion in Bush tax cuts will expire, solving most of the deficit problem. If Democrats win, it’s all up for grabs. If Republicans win, the cuts will be even deeper. The 2012 election will be a referendum on whether we want growth or austerity, and whether we want tax fairness. For now, the six Republicans on the Super Committee, predictably, want all of the budget savings to be on the spending side and are adamantly opposed to any tax increases. On Thursday, 33 Senate Republicans sent a letter to their colleagues on the committee warning them not to support any form of tax increase. What’s bizarre, however, is how bad the Democrats’ proposals are. Erskine Bowles, the investment banker and nominal Democrat on the late Bowles-Simpson Commission, testifying before the committee Tuesday, proposed $600 billion in Medicare and Medicaid cuts, deeper cuts even than those in Speaker John Boehner’s final offer to President Obama just before the bipartisan budget deal collapsed last summer.

The Story of Broke - When filmmaker and activist Annie Leonard set out in 2007 to share what she’d learned about the way we make, use and discard "Stuff," she thought 50,000 hits would be a great audience for her "20-minute cartoon about trash." Today, with over 15 million views and counting, The Story of Stuff is one of the most watched environmental videos of all-time. Earlier this year, Leonard came out with The Story of Citizens United, the best short history of the growth of corporate power I've ever read, heard or seen. Now, Leonard is back with The Story of Broke, a new 8-minute animated movie that directly challenges those who argue that America is penniless and incapable of paying its bills, let alone making investments in a more sustainable and fair economy. Released seemingly in perfect harmony with the growth of the Occupy movement, this film explains why the economic crisis we find ourselves in is the result of choices made and how we, the public, can force different decisions. “It turns out this whole “broke” story hides a much bigger story—a story of some really dumb choices being made for us, but that actually work against us,” said Leonard. “The good news is that these are choices, and we can make different ones.”

Deficit Cuts Should Be Linked to Unemployment - Robert Reich - On planet Washington, where reducing the federal budget deficit continues to be more important than creating jobs, everyone is talking about “triggers” that automatically go into effect if certain other things don’t happen. The biggest trigger on the minds of Washington insiders is $1.2 trillion across-the-board cuts that will automatically occur if Congress’s supercommittee doesn’t come up with at least $1.2 trillion of cuts on its own that Congress agrees to by December 23.  That automatic trigger seems likelier by the day because at this point the odds of an agreement are roughly zero. Here’s the truly insane thing: The triggered cuts start in 2013, a little over a year from now.  Yet no one in their right mind believes unemployment will be lower than 8 percent by then.  The cuts will come on top of the expiration of extended unemployment benefits, the end of a payroll tax cut, and continuing reductions in state and local budgets — all when American consumers (whose spending is 70 percent of the economy) will still be reeling from declining jobs and wages and plunging home prices. In other words, what will really be triggered is a deeper recession and higher unemployment.

Will Americans be Allowed to Vote on Supercommittee Austerity Plan? - Con­gress' "su­per­com­mit­tee" of the 1% is prepar­ing an aus­ter­ity plan for the 99%. Will We, the Peo­ple be al­lowed to vote on this plan, or, like Greece, will the elites just tell us how it is going to be? Our deficits were caused by tax cuts for the rich and huge in­creases in mil­i­tary spend­ing. But in­stead of ad­dress­ing these causes the elite su­per­com­mit­tee is said to be prepar­ing to take money out of the econ­omy by cut­ting the things We, the Peo­ple do for each other. That's right, at the very time when 99% of us need more we will get less so that the 1% can enjoy record-low tax rates -- and it looks like We, the Peo­ple will have no say in it. Last week Greek Prime Min­is­ter George Pa­pan­dreou pro­posed a ref­er­en­dum on the aus­ter­ity plan that Eu­ro­pean gov­ern­ments are prepar­ing for the coun­try. "The mar­kets" -- an­other name for the 1% -- went berserk in re­ac­tion. Pres­sure was ap­plied, and now the Greek peo­ple will not be al­lowed to vote on their aus­ter­ity plan after all, they will just be told. So, will We, the People be allowed to have a say over this austerity plan, or will it be like Greece all over again, told by the 1% how it's gonna be?

The Secret Farm Bill - The Republican-manufactured budget crisis of this past summer — remember? — resulted in a “solution” that’s hijacking what little representative democratic process we have left. Equally sad is that the so-called supercommittee — charged with creating an outline for reducing the deficit by $1.2 trillion over 10 years — may preclude full discussion of the farm bill. It’s the farm bill that largely shapes food and agriculture policy, and — though much of it finances good programs — ultimately supports the cynical, profit-at-any-cost food system that drives obesity, astronomical health care costs, ethanol-driven agriculture and more, creating further deficits while punishing the environment. The farm bill is written every five years. Although the current one doesn’t expire until September, the next one may be all but wrapped up by your first bite of turkey, because the leaders of the House and Senate agriculture committees — a group of four, representing Oklahoma, Michigan, Minnesota and Kansas (do you see a pattern here?) — are working feverishly to draw up a proposal in time to submit it to the supercommittee before the Nov. 23 deadline.

Tax Break for Hiring Jobless Veterans Heads Toward Passage - It looks like one plank of President Barack Obama’s jobs bill might actually pass Congress:  a tax break for companies that hire unemployed veterans.It could be that the parties are feeling pressure to actually produce something. It might be that it’s hard to vote against measures that help veterans. And, it may be that the measure’s cost is so modest that higher taxes aren’t required to pay for it. The bill will also offer a variety of other provisions aimed at helping veterans in the workplace, for a total cost of about $1 billion. A version of the bill has already passed the House, and Senate leadership aides in both parties expect a slightly different version to clear the Senate this week. Tucked into the package will be the Obama tax credits, estimated to cost just $120 million over two years. It all will be paid for by extending a soon-to-expire mortgage fee charged by a housing program run by the Veterans Administration. A vote is planned for Thursday.

An unbridged divide takes its toll - Yet it would be hard to argue that Congress does not deserve it (the disdain rather than the immolation). Its approval rating recently fell to a record low of 9 per cent, which means support has shrunk to “blood relatives and paid staffers”, as a much safer joke goes. It seems that, every few days, America’s first branch of government does something to put off even its hardiest of apologists.  Last week’s Senate decision to kill a modest $60bn bill to upgrade America’s infrastructure before it came to debate may have exceeded even that august chamber’s recent record. The package, which included $10bn in seed money for a public infrastructure bank, was blocked by every Republican and two Democrats. They objected because it would have been funded by a 0.7 per cent surtax on earnings over $1m.  And that was that. At a time when US businesses prefer to hoard rather than invest their cash, and when long-term interest rates are so low the money is virtually free, the political system is unable to accomplish what ought to be a no-brainer. Until now, America has never faced an ideological divide on infrastructure: both parties accepted the need to upgrade roads, dams, bridges, energy and water systems.

Shovel ready - Some infrastructure spending is more stimulative than others.Yoshiyasu Ono of Osaka University had an interesting article in the Journal of Money, Credit and Banking this June on The Keynesian Multiplier Effect Reconsidered. In it he analyzes the special case of government spending on projects that are literally useless, such as paying people to dig a hole in the ground and then fill it back up. Although that's not proposed as an accurate characterization of any actual government programs, the extreme case of literally useless spending helps shed light on some of the issues involved. According to traditional Keynesian models, even for the case of a completely useless government project, if we were to raise private-sector taxes by just the amount needed to pay the salaries of the hole-diggers, GDP would increase, with a balanced-budget multiplier of one. Yet, Professor Ono asks, how could paying the crew a salary to dig a useless hole possibly lead to an improvement in welfare relative to simply handing them a direct transfer and allowing them to spend more time safely and comfortably at home with the family? And, to make things very simple, if the source of funds for paying the workers was in fact a tax levied on those same individuals, how could we possibly conclude that the enterprise has increased total national income?

Turning Our Backs on the Unemployed - Senators, Republicans and two Democrats in particular, have not received anywhere near enough criticism for this: Last week’s Senate decision to kill a modest $60bn bill to upgrade America’s infrastructure before it came to debate may have exceeded even that august chamber’s recent record. The package, which included $10bn in seed money for a public infrastructure bank, was blocked by every Republican and two Democrats. They objected because it would have been funded by a 0.7 per cent surtax on earnings over $1m. And that was that. At a time when US businesses prefer to hoard rather than invest their cash, and when long-term interest rates are so low the money is virtually free, the political system is unable to accomplish what ought to be a no-brainer. Until now, America has never faced an ideological divide on infrastructure: both parties accepted the need to upgrade roads, dams, bridges, energy and water systems.

Infrastructure gamesmanship puts wealthy ahead of jobs, good bridges, and country – Linda Beale -For those who are paying attention to the House and Senate these days, it seems like a frustrating exercise.  Mostly it is one of watching the "do-nothing" Republicans find excuses for never requiring millionaires and billionaires to pay their fair share of taxes while making up excuses for not doing anything of the varied real approaches to stimulating the economy in ways that will create jobs for ordinary Americans. Take the vote on the infrastructure bills.  The Senate leadership asked the Senate to vote for funding $60 billion of much needed infrastructure projects (just a tip of the iceberg of everything that is needed to bring this country's infrastructure into nonembarassment).  The GOP refused, because it was funded by a de minimis tax on millionaires.  There's no end to things that can be said about this further evidence of the craven state of the GOP in the US today.  Political advantage for the wealthy class is to be given primary importance, no matter what happens to the vast majority of Americans and the country we all love.  Jim Maule has it right, in The Tax and Spending Stalemate: Can It Destroy the Nation?, When partisan loyalties mean more than the nation’s well-being, when money means more to wealthy “world citizens” than does the long-term physical security of the nation, and when protection of millionaires who fund campaign treasure chests means more than the lives and safety of the rest of America, the literal physical survival of the nation is imperiled. ...

Bridge our divide by building bridges – Liberals and conservatives agree on little these days, and in the matter of the federal budget, virtually nothing. Recently, however, people from opposite sides of the aisle — the two of us — thought we had found an exception. Our nation's infrastructure is in tatters. The American Society of Civil Engineers7has identified $2.2 trillion8 worth of repairs needed on bridges, roads, dams, schools and water and sewage systems. And that's just overdue maintenance, never mind addition or replacement. Be it stimulus to the good, or deficit to the ill, the case for undertaking these projects immediately is compelling. Postponement is dangerous and expensive. Falling bridges, crumbling roads, bursting dams, moldy schools, contaminated water and leaking sewage are on no one's agenda for cutting government costs or increasing government benefits. And to delay infrastructure expenditure is to inflate it. For example, take a badly worn stretch of Interstate 80 in Nevada. The state's Department of Transportation9 says fixing it today would cost $6 million, but waiting two years would cause the roadbed to be so degraded by traffic and weather that the price would rise fivefold, to $30 million.

The real reasons Americans distrust government - What if distrust of government is running so high partly because Congress is failing to pass job creation policies, including tax increases on the rich, that have broad public support, and has prioritized the deficit for months when Americans want the top priority to be unemployment? If so, it’s hard to see how this supports the conservative storyline. National Journal has now released a fascinating new poll that sheds new light on this possibility: It finds solid support for Democratic ideas on the economy but also high public pessimism that those ideas will be implemented. Solid majorities want Congress to pass new federal spending on infrastructure and schools; deficit reduction through a combination of tax increases on the rich and spending cuts; and new legislation to make mortgage refinancing easier. By contrast, only minorities favor deficit reduction with just cuts to federal programs, including entitlements. But here’s the real rub. Only 27 percent think infrastructure spending will ... actually happen. Only 37 percent think deficit reduction through spending cuts and tax hikes will ... actually happen. Only 39 percent think legislation to make mortage refinancing easier will ... actually happen.

Expansionary Contraction Theory Takes Another Hit - When it comes to cutting our way to prosperity, you can’t get there from here.  Whether it’s here in the US, where stimulus is fading too soon, in the UK, where austerity measures have led to slower growth, or evidence from research by the IMF and others evaluating the early work on this idea: it doesn’t work. Most of this analysis, including an influential early paper by Perroti himself (w/Alesina), has been done through statistical modeling or taking averages over lots of economies over many time periods.  But in an interesting new paper, Perotti takes a case study approach, which makes a lot of sense given the nuances in the historical record.   The statistical work, for example, can mess up on causality grounds, like when an expansion is underway and fiscal tightening occurs—the models can misinterpret that as growth caused by fiscal tightening.

Keynes vs. Hayek: An Economics Debate - Was John Maynard Keynes correct, can government fix the mass unemployment generated by a financial slump? Or is that a dangerous delusion as argued by his arch critic, Friedrich von Hayek? Sir Harold Evans chairs this Oxford-style debate, which focuses on the publication of Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics.

Zombie Wars - Like education and health care — and most charitable activity — spending on ‘defense’ is not subject to market pricing. So, you never know if you’re getting your moneys’ worth. As time goes by, spending on ‘defense’ becomes spending for a variety of purposes that have little to do with ensuring the safety of the nation or its people. One congressional district wants a military base to provide jobs. Another is hoping a local company gets the contract to build a new software system. Still another produces airplanes. One man wants a sinecure. Another wants to boss people around. Still another hopes for a contract without competitive bidding. The Pentagon is the world’s biggest spender. It uses more gasoline. More steel. More food. More of just about everything than any other organization on the planet. The military budget was $685 billion last year. But that was just the beginning of it. Hundreds of billions more were spent to support intervention efforts all over the globe — including foreign aid, trade missions, embassies, spooks, and other meddlers. Altogether, we have seen estimates as high as $1.2 trillion per year as the cost of maintaining the US imperial agenda. It is easy to believe. The total cost of the Iraq war alone is now being estimated at as much as $3 trillion to $6 trillion. The higher number was proposed by Nobel Prize winning professor Joseph Stiglitz at Columbia University. This makes it more expensive than WWII, which adjusted for inflation, cost $3.6 trillion. It also means that the Iraq war will have a price tag about even with the 2008-2011financial bailout, said to cost about $5 trillion. What do you get for that kind of money?

US Weapons 'Full of Fake Chinese Parts' - Thousands of United States' warplanes, ships and missiles contain fake electronic components from China, leaving them open to malfunction, according to a US Senate committee. The US Senate Armed Services Committee said its researchers had uncovered 1,800 cases in which the Pentagon had been sold electronics that may be counterfeit. In total, the committee said it had found more than a million fake parts had made their way into warplanes such as the Boeing C-17 transport jet and the Lockheed Martin C-130J "Super Hercules". It also found fake components in Boeing's CH-46 Sea Knight helicopter and the Theatre High-Altitude Area Defence (THAAD) missile defence system. "A million parts is surely a huge number. But I want to repeat this: we have only looked at a portion of the defence supply chain. So those 1,800 cases are just the tip of the iceberg," said Senator Carl Levin. In around seven in 10 cases, the fake parts originated in China, while investigators traced another 20 per cent of cases to the United Kingdom and Canada, known resale points for Chinese counterfeits.

We're Spending More on Nukes Than We Did During the Cold War?! - On April 5, 2009, President Barack Obama took the stage before 20,000 people in Prague's Hradcany Square to offer an ambitious global vision. "Today, I state clearly and with conviction America's commitment to seek the peace and security of a world without nuclear weapons," he told the open-air audience in the former Eastern Bloc capital. "To put an end to Cold War thinking, we will reduce the role of nuclear weapons in our national security strategy, and urge others to do the same."But shrinking America's nuclear arsenal has turned out to be far easier said than done. Despite the New Strategic Arms Reduction Treaty (START) cuts, federal spending on the atomic stockpile is actually beyond Cold War levels, driven by congressional hawks and powerful nuclear labs eager to "modernize" the arsenal and fund projects that could spark a new arms race.

How the United States Is Like, and Unlike, Greece - The economic situations of the United States and Greece are more alike than one might think. In both countries, the government is insolvent, in the sense that its taxing power, constrained by politics, is insufficient to finance the government’s liabilities, which include not only bonds but also entitlements (such as social security and medicare) and essential public services (such as defense). (See my post, “Is the Federal Government Broke?,” Aug. 29, 2010, regarding our government’s insolvency under standard principles of bankruptcy.) In both countries, government is cutting spending when (from an economic standpoint) it should be increasing it, to take up the slack in private investment and stimulate employment and in turn consumer spending (which drives business spending, which increases the demand for labor). In both countries a major cause of the current economic problems was cheap interest rates that encouraged the governments to finance public services by borrowing rather than taxing—taxing would have generated opposition to the extravagant level of those services. And in both countries another major cause of the current problems was the opacity of key financial data, a result in part of regulatory laxity and in part of the complexity and scale of modern financial instruments and operations. And finally, both countries have dysfunctional governments, made more so by the depression triggered by the financial collapse of September 2008.

It's Not About Welfare States - Krugman - Whenever a disaster happens, people rush to claim it as vindication for whatever they believed before. And so it is with the euro. But now that the thing is in trouble, people on the right are spinning this as a demonstration that … strong welfare states can’t work. So, just to say what should be obvious, the countries in trouble are not in any way marked out by having especially generous welfare states. You can use a number of indicators; here’s the OECD measure of “social expenditure”, measuring (separately and together) both public spending and private spending that is channeled and regulated by public policy, like US employer-based health insurance. Sweden, with the largest social expenditure, is doing just fine. So is Denmark. And Germany, which is the up side of the pulling-apart euro, has a bigger welfare state than the GIPS. Not that the facts will convince anyone on the right, but the blame-the-welfare-state meme is nonsense.

Legends of the Fail, by Paul Krugman - Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.  But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking.   First things first: The attempt to create a common European currency was one of those ideas that cut across the usual ideological lines. It was cheered on by American right-wingers, who saw it as the next best thing to a revived gold standard, and by Britain’s left, which saw it as a big step toward a social-democratic Europe. But it was opposed by British conservatives, who also saw it as a step toward a social-democratic Europe. And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.  So now that the euro project is on the rocks, what lessons should we draw?  I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states in general, and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.

Vouchers For Veterans - Krugman - Oh, boy. Mitt Romney wants to privatize the VA. This is awesome on multiple levels. First, you know what voucherization would mean in practice: the vouchers would be inadequate, and become more so over time, so that veterans who don’t make enough money to top them up would fail to receive essential care. Patriotism! Second, the VA is one of the great policy success stories of the past two decades. Back in the early 90s it was a terrible system — but as Philip Longman showed, what followed was a transformation that should be emulated by the rest of our health care system. Integrated care — and effective use of electronic records — delivered rising quality of care even as it reduced costs. Yes, I know, someone will chime in with a VA horror story, because any large health system will make errors. But the VA clearly delivers care as good or better than most civilians receive, at sharply lower cost. So naturally Romney wants to privatize it. So, our serious Republican is committed on ideological grounds to demolishing successful programs and replacing them with conservative fantasies that have failed repeatedly in the past.

The Fatal Flaws of a Balanced Budget Amendment —The idea of a Balanced Budget Amendment (BBA) enjoys broad populist appeal and strong support from the field of Republican presidential candidates. Mitt Romney, Rick Perry, and Herman Cain all support it. But the sentiment for a BBA is by no means unanimous, even among conservatives; many have concluded that it is a bad idea, for several good reasons. Anyone who currently favors a BBA should take a few minutes to consider two things: (1) the four fatal flaws of a BBA, and (2) a superior alternative to the BBA.

The GOP Debate Economic Debacle - Linda Beale - I finally found myself in front of the TV for one of the GOP debates.  It was difficult to watch.  Each candidate attempting to outdo the next in offering up the same worn-out, trickle-down reaganomic ideas of tax cuts, deregulation, privatization and militarization as the only solution for overcoming economic stagnation.  They particularly want to deregulate Big Oil, Big Banks, and let polluters have a hay-day, all in the name of providing businesses "certainty" and "getting the government out of businesses".  They especially want lower taxes on the rich.  And they want to take the entitlement out of the earned benefit programs that ordinary Americans depend upon, calling it "shared sacrifice" from the poor and middle class.  In other words, they are touting austerity economics for everybody except the elite plutocrats. The problem, of course, is that these prescriptions for the economy are the wrong medicine.  They are even more detrimental versions of the policies pursued by Bush that left us with a decade of stagnation and decline for the middle class and unwarranted lopsidedness in the way the rewards of the marketplace are distributed, with everything going to the very top.  The deregulation that the GOP wants ensures that companies need not think about the harm they do to communities in the short term or long term.  The tax cuts that the GOP favors ensure that the rich stay rich and that the country can't afford the programs that ushered in the golden age of the post war years, like almost universal education under the GI Bill, a newly confident elderly population under social Security and Medicare, a decently protected poor population with Medicaid and Unemployment Compensation, an improving environment through the Clean Air, Clean Water and other environmental laws and regulations.

We Are Living in the Conservative Recovery - In talking about the economy, the Republican presidential candidates are quick to blame government spending for our current woes.  “[T]he cut, balance, and grow plan paves the way for the job creation, balanced budgets, and fiscal responsibility that we need to get America working again.” The problem, as Neil Irwin reports for The Washington Post, is that sharp cuts to government have been terrible for the recovery. Thanks to lower revenue, limited federal aid, and budget cutting state legislators, the public sector has cut 455,000 jobs since the beginning of 2010, sending the proportion of government jobs to 16.7 percent, the lowest level in three years. These cuts have been a huge drag on the recovery – to wit, October saw private sector job growth of 104,000, which was offset by the loss of 24,000 public sector jobs, for a net increase of 80,000 jobs. This dynamic has been true of every month since the recovery officially began. Far from unleashing the power of the private sector, cuts to government have prolonged the economic pain, as demand is removed from the economy without an adequate replacement. Despite this, conservatives continue to press for further and greater cuts to government spending – the Pentagon notwithstanding. What conservatives refuse to acknowledge is that we are living through the recovery they say they want, and it’s been disastrous.

The growing acceptance of the ‘sabotage’ question - The New York Times editorial board had a piece today on the importance of unemployment benefits, and made an observation in passing that stood out for me. “Tragically,” the editorial said, “the more entrenched the jobs shortage becomes, the more paralyzed Congress becomes, with Republicans committed to doing nothing in the hopes that the faltering economy will cost President Obama his job in 2012.” The point was made in passing, but it’s nevertheless striking. As far as the editorial board of the nation’s most important newspaper is concerned, it’s simply accepted as fact that congressional Republicans want to hold back the economy, on purpose, to undermine the Obama presidency. Does the American public accept this as easily? Greg Sargent flagged the results of a new Washington Post/ABC News poll, that asked a related question.  This comes less than a week after a poll in Florida found that 49% of voters statewide believe congressional Republicans “are intentionally hindering efforts to boost the economy so that President Barack Obama will not be reelected.” The WaPo/ABC poll is, as best as I can tell, the first national poll to consider the same issue.

The One Percent Turns Class War Into Generational War - Dean Baker - Major news outlets like the Washington Post and National Public Radio constantly bombard us with news pieces on the budget deficit. Invariably these stories focus on the cost of "entitlements," which most of us know as Medicare, Medicaid and Social Security. The story pounded home in these pieces -- often explicitly -- is that these programs, that primarily benefit the elderly, are creating the basis for a generational war between the young and the old.  At the moment, we have the congressional "supercommittee" scheming to produce a deficit-reduction plan that will almost certainly involve large cuts to all three programs. There is a commonly repeated view in Washington policy circles, based on no evidence whatsoever, that there will be a disaster if the supercommittee comes up empty handed. This means that members of the committee are feeling great pressure from the 1 percent to produce a package with big cuts to Medicare, Medicaid and Social Security. It is truly impressive how the Washington elite have managed to make these modest protections for the country's working population (the 99 percent) into the greatest problem facing the country. . One might think that Congress would convene a supercommittee to get people back to work rather than figuring out a way to undermine programs that people need, but it's the 1 percent that pay for elections, not the 25 million workers suffering from their greed and incompetence.

WSJ/NBC Poll: Most Americans Say U.S. Economy Favors ‘Small Portion of the Rich’ - More than three-quarters of Americans say the country’s economic structure is out of balance and “favors a very small proportion of the rich over the rest of the country,” taking up the calls of Occupy Wall Street protesters to reduce the power of major banks and end tax breaks for the affluent and for corporations, a new Wall Street Journal/NBC News poll shows. At the same time, 53% of adults believe – 33% strongly believe – the national debt and the size of government must be cut significantly, regulations on business should be pared back, and taxes should not be raised on anybody. The findings create a split screen of American activism with more than half the country identifying either with Occupy Wall Street or the tea party movement – and a small group siding with both. According to the poll, 60% of those surveyed strongly agreed with the statement, “The current economic structure of the country is out of balance and favors a very small proportion of the rich over the rest of the country. America needs to reduce the power of major banks and corporations and demand greater accountability and transparency. The government should not provide financial aid to corporations and should not provide tax breaks to the rich.” An additional 16% said they mildly agree with that statement.

Flat Tax Doesn’t Solve Inequality Problem - CLOSE watchers of presidential politics weren’t surprised to see many of this year’s Republican hopefuls proposing to replace the nation’s progressive income tax with a flat tax. Such plans reliably surface every four years, and, just as reliably, sink without a trace.  That’s not because the current tax system is far from the abominable tangle of complexity that candidates say it is. Actually, it’s worse. Flat-tax proponents promise to sweep away that mess by imposing a single levy on every dollar earned. That change, many contend, would allow taxpayers to file their returns on postcards. And surveys suggest positive voter responses to several of the most recent proposals. Yet none will be adopted, for at least two reasons. One is that a flat tax would do nothing to make filing tax returns any simpler. But, more important, it would greatly exacerbate longstanding growth in income inequality1.

Exploding, Once Again, the “Non-Payer” Tax Myth - Have you heard the one about how nearly half of Americans don’t pay taxes?  Nonsense, as the recent Congressional Budget Office report on income inequality reminds us. As we have explained, in a typical year around 35-40 percent of households don’t owe any federal income tax. But most of them pay a significant share of their incomes in other taxes — particularly payroll taxes, as the CBO report points out:

  • People in the bottom four-fifths of the income scale pay more in payroll taxes than federal income taxes, on average.  The Tax Policy Center estimates that payroll taxes (including both the employee and employer shares) outweigh federal income taxes for 82 percent of households. 
  • Working-poor and middle-class Americans pay a much larger share of their incomes in payroll taxes than high-income people do (see graph). 
  • When you count all federal taxes (income, payroll, and excise), even people in the bottom fifth of the income scale are net federal taxpayers, on average.  Moreover, these figures don’t consider the significant state and local taxes that virtually all Americans pay — taxes that, like federal payroll and excise taxes, tend to demand more of lower-income people relative to their incomes.

When you count all taxes — federal, state, and local — the bottom fifth of households paid 16 percent of their incomes in taxes in 2009, on average, according to Citizens for Tax Justice.

The Hypocritical Oath? -Wall Street Journal editor Stephen Moore recently called me a hypocrite because I am a rich American who favors higher taxes on the wealthy yet do not voluntarily pay more to the federal government than I legally owe. Mr. Moore wishes he "had a dollar for every time a wealthy liberal has declared he thinks he should pay more taxes," a wish I would be happy to oblige if he gave me a dollar for every time a wealthy conservative has declared he pays too much. So to be clear, I acknowledge that many opponents of higher taxes -- even rich ones -- legitimately believe that low taxes on the wealthy benefit all Americans. But I think that the claim that anybody who favors higher taxes is morally obliged to pay more than they legally owe shows a fundamental misconception about the basis for the social compact we call government. The primary role of government is to provide public goods and services -- things that benefit all citizens but that commercial markets cannot or will not provide. While Ron Paul questions the size of the military, even he acknowledges that some level of defense spending is necessary to keep Americans safe, and most people go further in including things like the transportation system and public education as collective goods which benefit society as a whole.

Bigger Picture on the Recent JCT Analysis of Corporate Rates - The Joint Committee on Taxation (JCT) was recently tasked with finding the lowest possible corporate income tax rate that is revenue neutral, given the elimination of all corporate tax expenditures.  The JCT finds the rate would only come down to 28 percent, from the current 35 percent.  Four things to point out:

  • 1)      As many have noted, this is an incomplete analysis since the JCT was unable to score 90 of the corporate tax expenditures.
  • 2)      However, the JCT did estimate the largest of tax expenditures, and none of the remaining 90 seems likely to be very significant. 
  • 3)      The JCT analysis explicitly ignores the incentives this would create to switch business forms.  There are reasons to think this is a significant effect. 
  • 4)      Lastly, the JCT analysis does not take into account the effect of international capital flows in response to a change in either the corporate rate or tax expenditures.

Nader Argues for a Financial Transactions Tax - Ralph Nader provided an op-ed on the question of a financial transaction tax, "Time for a Tax on Speculation," Wall St. Journal, A17 (Nov. 2, 2011).  He ties the need for the tax as a curb to speculation to the growing concern among ordinary Americans about corporate power and Wall Street excesses. A financial transactions tax would impose a small charge on the value of stock, bond and derivatives transactions--probably somewhere around 0.25% to 0.5% (the latter is the figure pushed by Nader and groups like National Nurses United). Such a tax would raise a considerable amount of money and at the same time serve another important function--curbing speculative and high-frequency trading. [This tax] has the potential to curb risky speculative trading that contributes little real economic value.  The Capital Institute's John Fullerton has stated that a financial speculation tax could have a significant impact on the high-frequency trading and other 'quant' trading strategies that now comprise an astonishing 70% of vastly bloated equity-trading volume. Over the past few decades, trading volume has grown exponentially.  In 1995, the total shares of stock traded on the Nasdaq and the NYSE, not including derivates and other options, was 188 billion.  By the peak of the financial crisis, in 2008, this annual number had skyrocketed to three trillion.

Why does the White House oppose the “Robin Hood” tax? - France and Germany like it. Liberal Democrats and Occupy Wall Street are rallying behind it. But the White House opposes the growing movement in Europe and at home to impose a broad-based tax on financial transactions. Sometimes called the “Robin Hood” or speculators’ tax, the proposal would impose a tax on all financial market transactions — a Congressional bill would put it at 0.03 percent per trade, while a EU proposal hikes it to 0.1 percent per trade. Supporters say the tax is a twofer: It curbs volatility in the financial markets while raising money to cut the deficit. But though the White House professes support for both goals, it believes that the financial transactions tax won’t work in practice and favors, instead, a fee on the biggest banks making the riskiest transactions. “We share the goal of wanting a more stable financial system. We share the goal of wanting a more progressive tax system. The only real questions are — what’s the best way to do that?”

Jack Abramoff: The Lobbyist's Playbook (video) Crooked lobbyist Jack Abramoff explains how he asserted his influence in Congress for years, and how such corruption continues today despite ethics reform. Lesley Stahl reports

Jack Abramoff: ‘The whole system’ is corrupt - Notorious former lobbyist Jack Abramoff is a free man again, after serving three and a half years in prison for corruption and fraud. In an interview aired by CBS on Sunday, he told correspondent Leslie Stahl about the tricks of his former trade. Abramoff, who readily admits to his former corrupt activities, told Stahl, “I was actually thinking of writing a book — The Idiot’s Guide to Buying a Congressman — as a way to put this all down. First, I think most congressmen don’t feel they’re being bought. Most congressmen, I think, can in their own mind justify the system — rationalize it — and, by the way, we wanted as lobbyists for them to feel that way.” “I spent over a million dollars a year on tickets to sporting events and concerts and what not at all the venues,” Abramoff boasted. He insisted, however, that the very best way to buy the favors of a Congressional office is to offer the chief of staff a job. “When we would become friendly with an office,” he explained, “and they were important to us, and the chief of staff was a competent person, I would say or my staff would say to him or her at some point, ‘You know, when you’re done working on the Hill, we’d very much like you to consider coming to work for us.’ Now the moment I said that to them or any of our staff said that to ‘em, that was it. We owned them.”

Tom Ferguson on Congress for Sale - Yves Smith - We’ve featured some articles by our favorite curmudgeon, political scientist Tom Ferguson, on the role of money in elections. More recently, he has been writing about the remarkably brazen system by which committee leadership positions are for sale in the House and Senate. This Real News Network segment reviews how this ugly system works, and discusses its implications. Ferguson also discusses how the system could be reformed.

Matt Stoller: Naked Capitalism – Your Anti-Lobbyist -  Lobbyists take a slice of their budget, put it into ads, and thereby ensure that all information channels into policy-makers are owned by industry-friendly sources. Journalists on the Hill often go back and forth between staff jobs, think tanks, and lobby shops. This has traditionally formed a high wall around policy-making. The problem isn’t that they do this, it’s that there were almost no other structured ways to learn about finance if you were outside the industry. If you needed to learn about credit default swaps, it seemed no one could give you credible information except financial services lobbyists. In 2008, no one could tell you what was going on, except Treasury and the Fed. This monopoly of information allowed for enormous corruption in decision-making, as Congress was steam-rolled into approving TARP despite enormous skepticism among rank-and-file members.  But something odd happened in 2008, during and in the wake of the crisis. Capitol Hill staffers and members of both parties began looking for expertise on how finance actually worked. And they began reading financial blogs.  Over the course of the next few years, the financial blogs became a new alternative system which delivered one of the most valuable commodities that previously had been monopolized by financial lobbyists and institutions like the Fed – credible information. That’s why there was an actual debate during Dodd-Frank over reining in the size of banking institutions, and auditing the Fed. Naked Capitalism is at the heart of this new financial blogosphere. Yves builds her arguments meticulously, with the help of a community that is actually engaged in the system being reformed or challenged. Together, you and Yves challenges the witch doctors of finance, the economists in the Fed, at Treasury, in the housing finance industry. This site has seen the propagation of the chain of title theory on mortgage origination, and there have been multiple hearings on the Hill on the housing finance situation because of the work Yves and you have done. These are literally trillion dollar questions being influenced by this community.

A Sympathetic Account of Geithnerism - You are a centrist New Keynesian Technocrat who is set to become Treasury Secretary during what looks like a replay of the Great Depression and the Japanese Depression. However, Ben Bernanke is the Chairmen of your Central Bank. You are used to an environment where the Chairman exercises his full moral authority and moves the entire Federal Reserve. Ben Bernanke is personally an expert on the Great Depression and was highly critical of the Bank of Japan’s failure to act during its crisis. You also see your Chairman swiftly moving to create  innovative facilities to prevent contagion from spreading in financial markets. What are you likely to conclude?

What Can Economics Offer - Larry Summers is thinks its limited. “In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought,” Summers said, adding: “I think the profession is not entirely innocent.”  Still, Summers said, the complaint that economists should have seen the crisis coming represents “a confusion” on the part of critics. Identifying financial bubbles and knowing when they will burst, he claimed, “is to ask more of the profession than it can reasonably expect to discover.” This is a common viewpoint but I am not sure that I share it. The basic way reasoning here is that if it were possible to see bubbles then one of two things would happen.

  • 1) Private participants will see them and act so as to deflate the bubble in real time.
  • 2) Government agencies – the Fed ect – will see them and act to offset them, preventing a catastrophe.

Mark Ames: Why Finance is Too Important to Leave to Larry Summers - By a quirk of historical bad luck, the American Left has gone two generations without understanding finance, or even caring to understand. It was the hippies who decided half a century ago that finance was beneath them, so they happily ceded the entire field—finance, business, economics, money—otherwise known as “political power”—to the other side. Walking away from the finance struggle was like that hitchhiker handing the gun back to the Manson Family. There’s a great line from Charles Portis’s anti-hippie novel, “Dog of the South” that captures the Boomers’ self-righteous disdain for “figures”: He would always say—boast, the way those people do—that he had no head for figures and couldn’t do things with his hands, slyly suggesting the presence of finer qualities. That part about the hands—that would refer to the hippies’ other great failure, turning their backs on Labor, because Labor didn’t groove with the Hippies’ Culture War. So the Left finds itself, fifty years later, dealing with the consequences of all those years of ruinous neglect of finance and labor—the consequences being powerlessness and political impotence.

Financial Reform: Unfinished Business - Paul Volcker - It should be clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations, market efficiencies, and the techniques of modern finance. That faith was stoked in part by the huge financial rewards that enabled the extremes of borrowing, the economic imbalances, and the pretenses and assurances of the credit-rating agencies to persist so long. A relaxed approach by regulators and legislators reflected the new financial zeitgeist. All the seeming mathematical precision that was brought to investment, all the complicated new products, including the explosion of derivatives, that were intended to diffuse and minimize risk, did not work as had been claimed. Instead, the vaunted efficiency helped justify an explosion of weak credit and an emphasis on trading along with exceedingly large compensation for traders. If those remarks sound critical—and they are meant to inspire caution—let me also emphasize that the breakdown in financial markets and the “Great Recession” since 2007 are also the culmination of years of growing, and ultimately unsustainable, imbalances between and within national economies. These are matters of failures of national economic policy and the absence of a disciplined international monetary system.

Remaining Risks in the Tri-Party Repo Market – NY Fed - The tri-party repo market is one in which large U.S. securities firms and bank securities affiliates (dealers) finance much of their fixed-income securities inventories. A New York Fed white paper and the Financial System Oversight Council annual report have highlighted the risks to financial stability arising from the current infrastructure of this market. The Tri-Party Repo Infrastructure Reform Task Force (Task Force), an industry group sponsored by the New York Fed, has been working on reforms that would address some of these concerns. Unfortunately, a key aspect of the reforms—capped and committed clearing bank credit—has been delayed. In this post, I describe the remaining risks created by this delay.

Gingrich: Repealing Glass-Steagall Was 'A Mistake' - video

Bill Black: The High Price of Ignorance  I have just finished giving three talks, in three days, in three states during which I continued one of my common obsessions – doing research about financial crises. Among of the primary beliefs I’ve had reinforced over these 72 hours are my views about how incredibly harmful financial ignorance is, and how precious are the sources who combine sound information about finance with humanity. My first talk was in central Missouri to the Missouri Association for Social Welfare (MASW). MASW is made up of people who have worked, often for decades, to help those mode in need in our State. They have seen their efforts overwhelmed by the ongoing crisis and they are eager to learn why it occurred and how to prevent or reduce future crises. This is a group that combines policy wonks and boots on the ground caregivers. They are well read, but they do not find that regular media sources provide them with any comprehensive understanding of why we suffer recurrent, intensifying crises. A few of their members, however, read our blog (NewEconomicPerspectives – created and maintained by my UMKC economics colleague Stephanie Kelton) and Naked Capitalism. They learned from these sites about my work and reached out to me to keynote their conference because they have a thirst for learning about finance and the crisis.

Does Nudge require regulators to be "more rational" than consumers? - A couple of times recently I've seen the following common critique of Nudge-style approaches: "But if people are irrational, regulators are irrational too - so how can they make rules to counter citizens' irrationality?" While it's right for regulators to be humble about their degree of knowledge about the world, and to be cautious in creating new regulations, there are several reasons why this particular criticism is wrong. First, we are not comparing like with like. There is no claim that a regulator, when placed in the same situation and making the same decision as a citizen, will come up with a better answer. Instead, we are looking at times when citizens make snap decisions without thinking them through - or, often, make no overt decision at all because they do not notice that there is a decision to be made. In these cases, the regulator's goal is either to say "what would the citizen decide if they did think about it carefully?", or even better, to encourage the citizen to make the effort of thinking it through themselves.

Promises Made, and Remade, by Firms in SEC Fraud Cases -  When Citigroup agreed last month to pay $285 million to settle civil charges that it had defrauded customers during the housing bubble, the Securities and Exchange Commission1 wrested a typical pledge from the company: Citigroup would never violate one of the main antifraud provisions of the nation’s securities laws.  To an outsider, the vow may seem unusual. Citigroup, after all, was merely promising not to do something that the law already forbids. But that is the way the commission usually does business. It also was not the first time the firm was making that promise.  Citigroup’s main brokerage subsidiary, its predecessors or its parent company agreed not to violate the very same antifraud statute in July 2010. And in May 2006. Also as far as back as March 2005 and April 2000.  Citigroup has a lot of company in this regard on Wall Street. According to a New York Times analysis, nearly all of the biggest financial companies — Goldman Sachs, Morgan Stanley, JP Morgan Chase and Bank of America among them — have settled fraud cases by promising that they would never again violate an antifraud law, only to have the S.E.C. conclude they did it again a few years later.

Too Big to Jail - Can we all agree that a $1 billion swindle represents a lot of money, and the fact that Citigroup agreed last week to pay a $285 million fine to settle SEC charges for “misleading investors” demonstrates a damning admission of culpability? So why has Robert Rubin, the onetime treasury secretary who went on to become Citigroup chairman during the time of the corporation’s financial shenanigans, never been held accountable for this and other deep damage done to the U.S. economy on his watch? Rubin’s tenure atop the world of high finance began when he was co-chairman of Goldman Sachs, before he became Bill Clinton’s treasury secretary and pushed through the reversal of the Glass-Steagall Act, an action that legalized the formation of Citigroup and other “too big to fail” banking conglomerates. Rubin’s destructive impact on the economy in enabling these giant corporate banks to run amok was far greater than that of swindler Bernard Madoff, who sits in prison under a 150-year sentence while Rubin sits on the Harvard Board of Overseers, as chairman of the Council on Foreign Relations and as a leader of the Brookings Institution’s Hamilton Project.

Judge Unloads on Deal SEC Struck With Citi - A federal judge sharply questioned the Securities and Exchange Commission about why it didn't force Citigroup Inc. to admit to "what the facts are" before the agency agreed to settle a mortgage-bond case for $285 million. During an hour-long hearing Wednesday, U.S. District Judge Jed S. Rakoff, an outspoken critic of the SEC's approach to securities-fraud settlements, challenged the SEC on why the regulator allowed Citigroup to settle the case using boilerplate language in which it neither admits or denies wrongdoing. "Why does that make any sense in this context?" the judge said. Judge Rakoff didn't issue a decision on the Citi settlement Wednesday, saying he wants to think about the case and issue an opinion later. He also expressed other concerns. He questioned why the SEC only sought $160 million in alleged illicit profits—the regulator claims Citigroup profited from the deal—when investors may have lost more than $700 million in the deal. "They're out something like $600 million, so the net effect of this is, you're only returning a small fraction of what the plaintiff's lost, yes?" the judge asked.

Judge attacks SEC’s Citi settlement - A US judge has attacked Securities and Exchange Commission enforcement policies in a hearing which casts doubt on whether he will approve a settlement between the securities regulator and Citigroup over the sale of mortgage-related products.  Judge Jed Rakoff, an outspoken critic of recent SEC cases, spent a hour-long court hearing on Wednesday honing in on several aspects of the agreement, including the longstanding agency policy of allowing defendants to settle without admitting or denying wrongdoing. The SEC said that policy, practised since 1972, allows the regulator to return money to investors more quickly. Defence lawyers say it provides certainty to shareholders by closing an investigation while affording some protection against suits from private shareholders. In the Citigroup settlement over its sale of a mortgage-related security, the bank agreed to pay $160m in profit and $30m in interest, plus a $95m penalty. Investors in the mortgage security lost $700m.  “The net effect of this is you’re only returning a very small fraction” of the money investors lost, said Judge Rakoff. He suggested the public could not be sure that Citigroup did anything wrong since the bank could deny wrongdoing in private litigation.

Finally, a Judge Stands up to Wall Street - Matt Taibbi - Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug. The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.   This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.  In the deal, Citi made a $160 million profit, while its customers lost $700 million.

CDS demonization watch, ISDA vs Morgenson edition - I’m very much enjoying ISDA’s media.comment blog — corporate blogging done right, with attitude. Its latest broadside is directed against Gretchen Morgenson, who spent the first half of her column this weekend railing against the dangerous nature of MF Global’s “bad derivative bets” and “complex swaps deals”. Now MF Global was a broker-dealer: of course it had a derivatives book and entered into swaps deals once in a while. But Morgenson is talking here about the European sovereign debt deals which ended up sinking the firm — and those deals didn’t have anything to do with derivatives. Here’s ISDA:MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions. We would have thought that, with a little checking, this point would be pretty obvious to one and all. Obviously, ISDA wins this particular argument: it’s right, and the NYT is wrong. But don’t hold your breath waiting for a correction: Morgenson is one of those reporters who sees CDS beneath every rock, and even blamed CDS for Greece’s fiscal problems — twice. Neither of those columns received a correction

Remarks at SIFMA’s 2011 Annual Meeting Mary Shapiro, SEC - Speech on money market reform.

MF Global Customers Say Money Safeguards Failed - Customers of MF Global Holdings Inc. whose money is still trapped at the futures broker almost a week after filing for bankruptcy protection say the safeguards meant to protect them failed as exchanges and regulators work to move client positions.  CME Group Inc. (CME), the world’s largest futures exchange that’s also responsible for auditing its clearing members such as MF Global under its authority as a self-regulating organization, said on Nov. 4 it was in the process of transferring about 15,000 positions. Under a court order in the bankruptcy case, no funds or collateral not backing futures positions can be transferred to another futures broker.  “It shows a terrible weakness in the exchanges, the industry and the regulators,” said Elaine Knuth, an MF Global customer since 2005 who trades agricultural commodities for her own account. Her positions total between $100,000 and $500,000, she said. “The whole system broke down.”

You Won't Believe How MF Global Screwed Their Clients In Their Final Days Before Going Bankrupt - Some incredibly galling behavior on the part of MF Global as exposed by Reuters' Matthew Goldstein: It appears that 10 days ago, with speculation swirling that the Jon Corzine-led firm would soon file for bankruptcy, a good number of customers started to put in requests to pull their money from the New York-based outfit. But instead of simply wiring that money back to their customers, it seems MF Global tried to buy some time for itself by sending that money back via snail mail in the form of an old-fashioned check. This proved to be hugely significant, as the checks have, in many cases, ultimately bounced, now that the company is bankrupt\. 

Nightmare For MF Global Customers: They Really Might Not Get Their Money Back - This is certainly going to  make a lot of people angry.  MF Global commodity customers hoping to retrieve their funds may actually have to share some of their cash with other clients unless the missing $600 million is found, Bloomberg reported.  After MF Global filed for bankruptcy it was revealed the broker-dealer was missing $600 million. At first it was reported the missing funds were in an account at JPMorgan.  However, JPMorgan denied those claims. The latest clue to finding the unaccounted funds emerged yesterday when Reuters reported that federal investigators searching for the missing funds are looking at Chicago-based Harris Bank as a starting point.  So unless the missing funds are recovered, the broker-dealer's customers are probably going to have to take a haircut meaning they will not get 100 cents for every dollar

MF Global's Customer Assets - STOLEN - And Nothing You Hold In This System Is Safe - As suspected, MF Global brazenly took liquid assets like Treasuries and warehouse receipts, but not cash which would have been more quickly missed, from customer accounts to post as illegal collateral for emergency funding with a lender who must have known that they were receiving stolen goods. When things fell apart, the lender simply took the collateral and liquidated it, and kept the money.  And now they are refusing to even acknowledge this transaction, and apparently the management of MF Global is not yet talking. Why? Because it was an insider deal, and they don't want to give back the stolen money. When 'non-consequential' customers were requesting their funds, they were issued checks instead of wire transfers. The checks of course were not honored and bounced. But days later, and just hours before the bankruptcy filing, MF Global was paying BONUSES to its UK traders. Remarkable in light of how much dirty business the NY firms have been outsourcing to London. Follow the hush money.

Some MF Global Customers Want Corzine "Led Away In Cuffs" -  The anger and frustration at the MF Global bankruptcy and the disappearance of $630 million has sent traders to the sidelines without their capital, and triggered outraged hostility by individual traders across the globe.They believe that Corzine took the segregated customer funds at the last minute with the sole purpose of bolstering MF Global until it could be sold. They don’t believe that t he customer funds were used in the original purchase of $6.3 billion short term notes of European nations. If so, the accusation is being made that segregated customer accounts were violated. Truthfully, no one actually knows precisely who did what to whom. Moreover, many of the individual commodity traders had NO IDEA that MF Global could use their segregated accounts in any way, shape or form. They most likely never read the small print in their contracts with MF Global. Did you know that your deposits in Citibank or Chase can be used by the bank to lend to other borrowers. It is not segregated JUST for your personal use. My most well-informed source, who won’t identify himself tells me my original story was “partially correct in the usage of customer funds.” IE MF Global was allowed under Rule 1.29 of the CFTC, to use segregated customers accounts to invest in “high quality, liquid investments.”

A Board Complicit in MF Global’s Bets, and Its Demise - The easy explanation for MF Global’s downfall is that it was killed by Jon S. Corzine’s risky trading bets. Yet MF Global was torpedoed not only by Mr. Corzine but by its board. The board at MF Global is highly sophisticated and experienced. It includes two former senior executives from HSBC, the former chief financial officer of the Aon Corporation and a top member of the private equity firm J. C. Flowers & Company. Under this board’s watch, MF Global invested in European sovereign debt using short-term financing. When ratings agencies and investors became spooked by the European debt exposure, the financing dried up and a classic run on the bank soon ensued. Bankruptcy followed. On paper, these highly qualified directors should have realized that Mr. Corzine and MF Global were taking undue risks. After all, it was short-term financing that brought down Lehman Brothers and Bear Stearns. There is even a board member who appears to specialize in this type of financing and risk management: Robert S. Sloan, a managing partner of a company that focuses on in global collateral management and counterparty risk management This is also not a case of willful blindness. The board appears to have been thoroughly aware of these trades and discussed them.  By the available indications, MF Global directors approved these trades.

In MF Global’s Wake, Regulators to Audit All Futures Firms - Federal regulators have ordered an audit of every American futures trading firm to verify that customer money is protected, a move that comes after roughly $600 million in client funds were discovered to be missing from MF Global, the bankrupt brokerage firm once run by Jon S. Corzine.The Commodity Futures Trading Commission, the federal regulator searching for the missing money at MF Global, will audit many of the nation’s largest futures commission merchants, according to a person briefed on the decision. Exchanges like the CME Group will examine smaller firms to ensure they are keeping customer money separate from company money, a fundamental rule on Wall Street. The futures commission also announced on Thursday that it had formally opened an investigation into MF Global, a largely symbolic move that indicated the seriousness of the case. The agency has already issued subpoenas to MF Global and its auditor, PricewaterhouseCoopers, but the commission had to vote before announcing a full-scale investigation.

MF Global’s Missing Funds May Be ‘Massive’ Ploy: CFTC’s Chilton -  The $593 million shortfall in client money at MF Global Holdings Ltd., the broker that filed for bankruptcy on Oct. 31, appears to result from a “massive hide- and-seek ploy,” Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, said today. The agency took the rare step of publicly announcing its investigation, which began on Oct. 31, saying it was in the public interest to confirm the enforcement action. Jill E. Sommers was named as the senior commissioner during the probe, after Gary Gensler, the agency’s chairman, recused himself. “This isn’t just a lost and found inquiry; it’s a full-on effort to get to the bottom of what appears to be a massive hide-and-seek ploy,” Chilton, a Democrat, said in an e-mail. “It’s a distinct possibility, some would say probability, that somebody has done something with the money, and that it’s not going to be ‘all of a sudden discovered’ with an innocent explanation,” Chilton said. “If that’s the case, it’s patently illegal. I don’t know yet. Our investigation will uncover that, and we’re aggressively pursuing this.”

CME offers $300m to MF Global customers -- CME Group, the biggest US futures exchange operator, scrambled to contain damage from the failure of broker-dealer MF Global by offering $300m to help customers recover their money.MF Global’s bankruptcy filing last week and the discovery of an almost $600m hole in its customer accounts left thousands unable to access cash they use to backstop futures trading positions. The shortfall threatens the integrity of futures markets and has spurred calls for stricter rules.  The bankruptcy trustee wants to quantify the shortfall before releasing more funds to customers. Separately on Friday, the trustee said about 900 of MF Global’s staff in New York and Chicago would be terminated immediately as the company is wound down. CME offered a $250m guarantee – which it called “unprecedented” – to the trustee to speed distributions of frozen MF Global customer funds. The money would come from corporate funds at CME.  CME Trust, established in 1969 to protect customers of a failed clearing member, also pledged its entire $50m fund to exchange customers who lose money in the bankruptcy.  “It’s an indication of how reputationally damaging this is to the CME,”

It’s Official: Wall Street Firms May Legally Steal From Their Customers – Rationalizations to Follow - If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be 'socialized' and haircuts received. This is most likely a distortion of the principle known as 'rehypothecation' in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan.  The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them. In a way it is just making the unbalanced relationship between Wall Street and its customers official. It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.  

The next Global MF-type collapse could be Sachs, Morgan Stanley: Roubini  - Economist Nouriel Roubini is back with his Doomsday predictions. According to tweets by Dr Doom or Roubini, who gained fame for predicting the 2008 financial crisis, large financial institutions  like Goldman Sachs, Morgan Stanley, Barclays and Jefferies and Co could collapse and suffer the same fate as US brokerage firm MF Global. “What happened to MF Global could happen to Jefferies, Barclays, Goldman Sachs & Morgan Stanley”, said Roubini in a tweet on Monday. He added that leverage and maturity mismatch could lead to runs. Roubini, however, argued in another tweet that JPMorgan Chase, Bank of America and Citigroup are “less at risk to a run only because insured deposits of retail bank subsidize the BK presumably the brokerage unit. Huge moral hazard unsolved.” The problem, as pointed out by Roubini earlier, is short-term financing. Everyday big firms borrow billions through short-term loans and then use it to make long-term bets on risky assets that yield  more money. Since most investment banks depend on overnight repos and short-term financing to maintain their long-term asset leverage, the risk of running a business is high.

Wall Street Ignoring Europe - Ryan Avent is puzzled. He says so: I have to say, I'm puzzled. Recent developments in the euro zone seem incredibly negative to me. The probability of a reasonably orderly conclusion of the crisis appears to be falling. Yet equities aren't dropping; indeed, they're up from early September. Has the roadrunner sprinted off the cliff but not yet looked down? Or am I missing something? Avent is trying to wrap his mind around equity market behavior. I wish him the best - I hope he gives me a call if he finds a meaningful answer. All I can say is that we have been here before. Recall 2007: By the middle of 2007 the TED spread was exploding, signaling enormous financial turmoil. Yet equities kept heading upward, fueled by data that was just not that bad coupled with ongoing expectations that a solution was just around the corner. And now we find ourselves in almost the exact same position. Avent is correct, the news out of Europe is abysmal. He is not missing anything. There is no solution, no magic summit at hand. At this point, it is a choice between severe recession and depression. There is no happy ending to this story.

A Big Market, but Not Necessarily Dangerous - AS worries grew about sovereign credit in Europe this fall, the volume of trading in credit-default swaps1 on Italy, Spain and France soared. But there appears to have been little actual purchasing of insurance in all that activity.  More recently, as rates on Italian bonds rose sharply, the volume in credit-default swaps did not grow as rapidly, at least through a week ago. Those figures are released on a delayed basis, and this week’s activity will not be disclosed until Tuesday.  During the middle two weeks of September, more than $20 billion in credit-default swaps on Italy were traded, according to the Depository Trust Clearing Corporation2, which collects the data from dealers around the world. But the net positions outstanding in such swaps declined by $1.5 billion during the period, to $22.1 billion.  Credit-default swaps are essentially insurance contracts, in which an owner of a bond — or anyone else, including someone who simply wants to profit from a default — can buy protection against losses. The large size of the market has raised fears that a default by a European country could cause losses for banks well beyond the actual level of bonds they own because they might have also written credit-default swaps on a larger volume. The derivatives industry argues that the data indicates such fears are overstated.

Fed: Banks Tighten Lending Standards to Banks and Firms with European Exposures - The Federal Reserve released the quarterly October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices today. The survey had a special question on lending to European banks and firms. With regards to banks, the tightening was "considerable", however to European firms the tightening was "moderage": About one-half of the domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries, and about two-thirds of the foreign respondents indicated the same. Among those domestic and foreign respondents, a large share--about two-thirds--reported having tightened standards on loans to European banks over the third quarter. Many domestic banks indicated that the tightening was considerable. About three-fifths of the domestic respondents, mostly large banks, and all foreign respondents indicated that they make loans or extend credit lines to nonfinancial firms that have operations in the United States and significant exposures to European economies. Among those domestic and foreign respondents, a moderate fraction indicated that they had tightened standards on C&I loans to such firms.

Tightening the purse strings - WORDS to chill a heart: The crisis in Europe has begun to spill over into US bank lending, according to the latest survey of loan officers by the US Federal Reserve. Credit conditions have steadily eased since the end of the recession but that process almost ground to a halt in the last three months, with only five domestic banks out of 50 saying that they relaxed their standards for lending to large companies. Two banks had tightened conditions. The retrenchment in bank lending in America is small relative to that in Europe, which will help push the euro zone into recession and place pressure on its banking systems. Here is more interesting reading on ECB purchases of sovereign debt and the approaching threshold for sterilsation operations.  I have to say, I'm puzzled. Recent developments in the euro zone seem incredibly negative to me. The probability of a reasonably orderly conclusion of the crisis appears to be falling. Yet equities aren't dropping; indeed, they're up from early September. Has the roadrunner sprinted off the cliff but not yet looked down? Or am I missing something?

Bailouts: Geithner vs Barofsky - David Leonhardt has managed to get a quite astonishing on-the-record quote from Tim Geithner: “The central paradox of financial crises,” Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, “is that what feels just and fair is the opposite of what’s required for a just and fair outcome.” This is textbook Geithner. For one thing, it’s pure Technocrat. Geithner, here, is the worldly policy wonk, explaining why it’s silly to simply do what feels right. In fact, you should do what feels wrong! The quote is also extremely defensive — as it probably should be, coming from the one member of Obama’s economic team who played a central part in orchestrating the Bush bailouts. And I can’t help but see the influence of Occupy Wall Street here, too. They’re demanding justice; and Geithner is, essentially, dismissing them as unsophisticated rubes. If only they understood what he understands — then they’d see that the bailouts were in their own best interest!  Meanwhile, Zachary Goldfarb gets an equal-and-opposite quote from Neil Barofsky, the former federal watchdog for TARP: “There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,”

Hard evidence: bailed-out banks take more risk - Researchers have asked for some time whether and how bailouts might affect banks’ risk-taking. Would they run wild, aware of the high likelihood of being bailed out again if they ran into trouble? Or would they ease off precisely because they’d now be assured of lower financing costs and long-term survival, and therefore would want to avoid doing anything that might cause regulators to take that valuable banking license away? More daring or more discipline? Ran Duchin and Denis Sosyura of the University of Michigan looked at the U.S.’ Capital Purchase Program. You may recall that this became the centerpiece of TARP once Hank Paulson decided that the money would be better spent directly buying into the banks as opposed to overpaying them for dodgy asset-backed bonds. (Mind you, other parts of TARP were spent overpaying for dodgy asset-backed bonds.) The CPP lasted a little more than a year and invested $205 billion of taxpayer funds into various qualifying institutions. Not every bank that filled out the 2-page application was successful in gaining access. Others were approved but ultimately decided not to take the funds (probably because of the attached restrictions on pay and on paying out dividends.) In the end, 707 financial institutions received the funds.

The Financial System Is Rigged in Favor of the Rich - If the Federal Reserve had thought more about Main Street when it was bailing out the financial system, there might not be an Occupy Wall Street movement throughout the country today. The belief that the economic system is rigged in favor of the rich and powerful is an important factor driving OWS. This belief is based, in part, on the way in which the financial bailoutwas handled by monetary authorities. Policymakers insulated banks from losses using the argument that protecting Wall Street would also prevent large losses on Main Street. But the bailout alone wasn’t enough to prevent big problems on Main Street, and it came to be viewed as largely a giveaway to the wealthy interests controlling financial institutions. It didn’t have to be that way. Instead of bailing out banks directly, we could have given money to homeowners to help them pay their mortgages. The money could have been earmarked for mortgage payments so that it still ended up in the hands of banks, but by allowing the help to pass through households first, the distribution of the benefits from the bailout would be much different: Both households and banks would have realized gains, and this would have been much more politically acceptable.

Boom For Whom - Krugman - Let me start with a puzzle: why did faith in the wonders of financial deregulation persist so long? Well, the answer from the usual suspects has always been that the era of deregulation was also an era of unprecedented economic growth. A while back I noted how Peter Wallison — one of the prime movers behind the Big Lie on the causes of the crisisclaimed that Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations. Similarly, Eugene Fama asserted that It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth. The point is that these are pure fantasies on the part of the right. The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable. So why do these people imagine otherwise? And the answer, once you think about it, is obvious: growth for whom? There’s only one way in which the post-deregulation boom was exceptional, and that’s in terms of the growth in incomes at the top of the scale.

Wall Street’s resurgent prosperity frustrates its claims, and Obama’s - President Obama has called people who work on Wall Street “fat-cat bankers,” and his reelection campaign1 has sought to harness public frustration with Wall Street2. Financial executives retort that the president’s pursuit of financial regulations is punitive and that new rules may be “holding us back3.” But both sides face an inconvenient fact: During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled. The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008, according to government data. Wall Street firms — independent companies and the securities-trading arms of banks4 — are doing even better. They earned more in the first 21/ 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show. (See data in an Excel file here.5)

John Maynard Keynes Knew What Occupy Wall Street Tells Us Today: “Banks and bankers are by nature blind.” - James Galbraith - John Maynard Keynes was a policy man: fully engaged from the Great War and Treaty of Versailles through the Depression and World War II to Bretton Woods. His theories and his policy views developed side by side. Thus Keynes favored deficit spending – “loan-expenditure” -- to fight unemployment, and he denounced the pernicious doctrine of the natural rate of unemployment in 1929, almost forty years before our friend Professor Edmund Phelps is credited with inventing it: “The Conservative belief that there is some law of nature ...that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his brain fuddled with nonsense for years and years...”

How the rich rig the system - A growing number of Americans suspect that the American economic system is rigged in favor of the rich and merely affluent. That growing number of Americans is right. Here are three of the many ways that markets for compensation are rigged to benefit not only the top 1 percent but also the top 10 percent, a group that includes many well-paid professionals:

  • Financial sector compensation. Here’s their business model: “We place highly leveraged bets, sometimes as much as 35 or 40 to 1. In return, the government implicitly agrees to bail out our banks, and if we’re fired, we’ve negotiated sweetheart deals with golden parachutes. If we bet right, then our banks keep the windfall profits and we get big bonuses. If we bet wrong, not to worry — the taxpayers will bail out our banks and the government will pay for the cost of the bailouts by cutting Social Security and Medicare. Suckers!”

  • CEO compensation. In the last generation, American CEOs have been much better paid than their European and Asian counterparts, without having done remarkably better jobs.

  • Professional compensation.  Let’s not forget the professional class, which makes up roughly 10 percent of the population (the approximate number of Americans with graduate or professional degrees). The professions are guilds. They rig labor markets the way that guilds have always done — by preventing anybody who doesn’t belong to the guild from practicing the trade.

Who Rules the Global Economy? - Most economists today don’t ask who rules the global economy, visualizing it as a decentralized competitive market that cannot be ruled. Yet new evidence suggests that global economic clout is highly concentrated among large interlocking transnational companies. Three Swiss experts on complex network analysis have recently examined the architecture of international ownership, analyzing a large database of transnational corporations. They concluded that a large portion of control resides with a relatively small core of financial institutions, with about 147 tightly knit companies controlling about 40 percent of the total wealth in the network. Their analysis draws heavily on network topology, a methodology that biologists use to good effect. An article in the British magazine New Scientist describes the research as evidence of a global financial oligarchy. The technical details of economic network analysis are daunting, but the metaphors evoke a “Star Trek” episode: the network is described as a bow-tie shaped “super entity” of concentrated corporate ownership. One cannot help but worry about threats to the safety of the starship Enterprise.

Protest Planet: How a Neoliberal Shell Game Created an Age of Activism   From Tunis to Tel Aviv, Madrid to Oakland, a new generation of youth activists is challenging the neoliberal state that has dominated the world ever since the Cold War ended.  The massive popular protests that shook the globe this year have much in common, though most of the reporting on them in the mainstream media has obscured the similarities.    Whether in Egypt or the United States, young rebels are reacting to a single stunning worldwide development: the extreme concentration of wealth in a few hands thanks to neoliberal policies of deregulation and union busting.  They have taken to the streets, parks, plazas, and squares to protest against the resulting corruption, the way politicians can be bought and sold, and the impunity of the white-collar criminals who have run riot in societies everywhere.  They are objecting to high rates of unemployment, reduced social services, blighted futures, and above all the substitution of the market for all other values as the matrix of human ethics and life.

Thomas Ferguson: How to Take Back Our Political System From the 1% -The following has been adapted from a version of a speech delivered to Occupy Boston by Thomas Ferguson, the father of the "Investment Theory of Politics." Ferguson outlines bold measures to stop the tsunami of money that threatens our democracy, starting with a Constitutional Amendment.

How I Stopped Worrying and Learned to Love the OWS Protests - Matt Taibbi - I have a confession to make. At first, I misunderstood Occupy Wall Street. The first few times I went down to Zuccotti Park, I came away with mixed feelings. I loved the energy and was amazed by the obvious organic appeal of the movement, the way it was growing on its own. But my initial impression was that it would not be taken very seriously by the Citibanks and Goldman Sachs of the world. You could put 50,000 angry protesters on Wall Street, 100,000 even, and Lloyd Blankfein is probably not going to break a sweat. He knows he's not going to wake up tomorrow and see Cornel West or Richard Trumka running the Federal Reserve. That's what I was thinking during the first few weeks of the protests. But I'm beginning to see another angle. Occupy Wall Street was always about something much bigger than a movement against big banks and modern finance. It's about providing a forum for people to show how tired they are not just of Wall Street, but everything. This is a visceral, impassioned, deep-seated rejection of the entire direction of our society, a refusal to take even one more step forward into the shallow commercial abyss of phoniness, short-term calculation, withered idealism and intellectual bankruptcy that American mass society has become. If there is such a thing as going on strike from one's own culture, this is it. And by being so broad in scope and so elemental in its motivation, it's flown over the heads of many on both the right and the left.

Why #OccupyWallStreet is Corporate America's Final Warning - Over the last several months we have witnessed the rise of the #OccupyWallStreet movement, both across America and around the world, and witnessed its tour of a familiar news cycle. At first, it was dismissed out of hand as a collection of rabble-rousers with no clear or unified intent. It was then re-characterized as a fringe movement with radical demands. It soon became a popular movement, spreading to what is now over a thousand cities in eighty-seven countries around the world. As a consequence, the movement developed sufficient social resonance, on the web and across social media channels, to warrant the attention of traditional news outlets. What is still lacking from this coverage, however, is an accurate articulation of the line in the sand that the #OccupyWallStreet movement represents. Customer and citizen activism, epitomized in the #OccupyWallStreet movement, is tangible evidence of several transformative forces gaining momentum at home and abroad. They all turn on the ability of social media to give regular people a voice, and to scale their message through what is now a wide selection of channels, including Facebook, Twitter, LinkedIn, Google+, YouTube, and beyond.

Banks Collect The Most Government Tax Subsidies -  A new Citizens for Tax Justice report detailing how little corporations pay in federal corporate income tax also noted that financial firms receive the highest percentage of federal tax subsidies, collecting nearly 17 percent of the tax largesse that the government hands out. The largest single recipient of federal tax subsidies over the last three years was mega-bank Wells Fargo.

The 1% are the very best destroyers of wealth the world has ever seen - If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire. The claims that the ultra-rich 1% make for themselves – that they are possessed of unique intelligence or creativity or drive – are examples of the self-attribution fallacy. This means crediting yourself with outcomes for which you weren't responsible. Many of those who are rich today got there because they were able to capture certain jobs. This capture owes less to talent and intelligence than to a combination of the ruthless exploitation of others and accidents of birth, as such jobs are taken disproportionately by people born in certain places and into certain classes. The findings of the psychologist Daniel Kahneman, winner of a Nobel economics prize, are devastating to the beliefs that financial high-fliers entertain about themselves. He studied the results achieved by 25 wealth advisers across eight years. He found that the consistency of their performance was zero. "The results resembled what you would expect from a dice-rolling contest, not a game of skill." Those who received the biggest bonuses had simply got lucky. Such results have been widely replicated. They show that traders and fund managers throughout Wall Street receive their massive remuneration for doing no better than would a chimpanzee flipping a coin.  As for other kinds of business, you tell me. Is your boss possessed of judgment, vision and management skills superior to those of anyone else in the firm, or did he or she get there through bluff, bullshit and bullying?

End Bonuses for Bankers - More than three years since the global financial crisis started, financial institutions are still blowing themselves up. The latest, MF Global, filed for bankruptcy protection last week after its chief executive, Jon S. Corzine, made risky investments in European bonds. So far, lenders and shareholders have been paying the price, not taxpayers. But it is only a matter of time before private risk-taking leads to another giant bailout like the ones the United States was forced to provide in 2008.  The promise of “no more bailouts,” enshrined in last year’s Wall Street reform law1, is just that — a promise. The financiers (and their lawyers) will always stay one step ahead of the regulators. No one really knows what will happen the next time a giant bank goes bust because of its misunderstanding of risk.  Instead, it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.

Taleb: End Bonuses at Too Big to Fail Banks – Yves Smith - The fact that the New York Times is running as its lead op-ed a piece by Nassim Nicholas Taleb arguing against any bank bonuses points to a hardening sentiment among the elites against the banks. (Related proof is a post by Felix Salmon endorsing principal reductions for stressed but salvageable mortgage borrowers).  I lost all sympathy with the executives and producers of major banks in 2009. Here, after having gotten massive, hugely visible rescues, and continuing support in the way of super low interest rates (a massive transfer from savers), they did not do the right thing, which was to lay low for a couple of years, cut pay, and rebuild their balance sheets. Instead, banks fell all over themselves to repay the TARP simply to escape its restrictions on executive pay, and Wall Street bonuses in 2009 and 2010 exceeded the 2007 record. Note that former Goldman co-chairmam John Whitehead had taken the unusual step of excoriating Lloyd Blankfein for Goldman’s “outrageous” 2006 pay and argued the firm could afford to lose those who believed they had better opportunities at hedge funds.  As we’ve argued, banks, particularly in this era of extraordinary support (rock bottom interest rates, regulatory forbearance, underpriced insurance schemes) enjoy far more government support than any other industry, including defense contractors. They can’t properly be considered to be private companies. They are utilities and need to be regulated as such. And if they won’t rein in pay levels on their own, it should include restrictions on pay.

Wall Street Traders Have Profited More Under Obama than in Eight Years Under Bush - As protesters around the country take to the streets to protest the excesses of Wall Street banks that benefited from a federal bailout and quickly returned to profitability, new data from the financial industry has shed light on just how profitable those banks have been since the financial crisis brought the American economy to its knees three years ago. Wall Street banks experienced years of unprecedented growth under President Bush, at least until the crisis of 2008. But in the two-and-a-half years since President Obama took office, the largest Wall Street banks have grown even larger, and profits at banks and trading firms have risen even faster than they did under Bush, the Washington Post’s Zachary Goldfarb reports: The largest banks, including Bank of America, Citigroup and Wells Fargo, earned $34 billion in profit in the first half of the year, nearly matching what they earned in the same period in 2007 and more than in the same period of any other year. Securities firms — the trading arms of big banks and hundreds of other independent firms — have fared even better. They’ve generated at least $83 billion in profit during the past 2 1/2 years, compared with $77 billion during the entire Bush administration, according to data from the Securities Industry and Financial Markets Association.

Guest Post: SHAREOWNERS OF THE WORLD UNITE! - As their visibility and perceived importance of OWS increase, more arm chair generals (me included) are putting forth a lengthening agenda of reforms we hope protestors will demand. One percipient OWS observer hit a big nail on the head when he identified the following economic pressure point progressives should slam: “If I had to give the Occupy Wall Street movement a piece of advice, I would tell them to focus their growing chorus against Wall Street excesses on corporate governance reform. . . . [That] may sound innocuous, or tedious, or overly academic, but if this movement wants to put the fear of God into the corporate chieftains who are looking down from their towers in Manhattan at the masses below, needs to take the time to explain to its foot soldiers exactly how power is wielded in a modern corporation.” That suggestion from Kris Broughton, an independent journalist, blogger and national media commentator who also uses the moniker “brown man thinking.” (See ) And, his African-American heritage may have informed his choice of this agenda item usually overlooked by progressives. But, it was activism by individual and institutional investors (in the form of company annual meeting ballot initiatives and shareholder voting and litigation) that helped end the abomination of legal racial oppression and separation of races in South Africa, and achieve expansion of civil rights at home. Shareholder Activists Help Defeat Apartheid .

For Bank Of America, Debit Fees Extend To Unemployment Benefits - Shawana Busby does not seem like the sort of customer who would be at the center of a major bank's business plan. Out of work for much of the last three years, she depends upon a $264-a-week unemployment check from the state of South Carolina. But the state has contracted with Bank of America to administer its unemployment benefits, and Busby has frequently found herself incurring bank fees to get her money. To withdraw her benefits, Busby, 33, uses a Bank of America prepaid debit card on which the state deposits her funds. She could visit a Bank of America ATM free of charge. But this small community in the state's rural center, her hometown, does not have a Bank of America branch. . She could drive north to Columbia, the state capital, and use a Bank of America ATM there. But that entails a 50 mile drive, cutting into her gas budget. So Busby visits the ATMs in her area and begrudgingly accepts the fees, which reach as high as five dollars per transaction. She estimates that she has paid at least $350 in fees to tap her unemployment benefits. Bank of America and other financial firms -- including U.S. Bank, Wells Fargo and JP Morgan Chase -- have secured contracts to provide access to public benefits in 41 states. These contracts typically allow banks to collect unlimited fees from merchants and consumers. 

Occupy My Wallet: Moving Money Off Wall Street - If you're really ticked off at Wall Street, you've got some options: Grab your sleeping bag and head to the nearest protest site, or do something that actually pinches the big bankers' bottom line.  The second choice may be the smarter one. While Occupy Wall Street protests are colorful and make for good sound bites, what major bankers and money managers really care about are their pocketbooks, and pain in that department is most likely to get them rethinking their ways.  Activists at websites such as recommend that savers switch from banks to credit unions, but there’s another alternative few are talking about. It's buying and holding low-cost index funds, rather than investing in the actively managed mutual funds and other products sold by the big banks and financial services firms. The beauty of such a "revolt" is that it deprives the Street of profits and saves investors money at the same time.  “Indexing fulfills the Adam Smith-ian argument that if you do best for yourself, you will serve society well,” John Bogle, founder of the Vanguard Group says. “The implication of that is if many more people indexed, there’d be much less trading in the market, and that’s good because it's costly.

Big Banks Lose Billions on ‘Bank Transfer Day’ – But This Might Be in Their Favor - Bank Transfer Day, the movement that urged bank customers to close their accounts and instead deposit funds in credit unions on or before November 5, led to at least 650,000 new credit union members and a total of $4.5 billion in new deposits, according to the Credit Union National Association. About 80 percent of credit unions in the U.S. saw an increase in accounts in October, with membership increases of 10,000 or more in 21 of the 50 states and the District of Columbia in the past month. However, despite the loss of capital and customers, there are some analysts who argue that “Bank Transfer Day” was actually in the banks’ favor. How? Motley Fool columnist Morgan Housel explains One of the drivers behind [Bank Transfer Day] is people trying to teach banks a lesson. The irony of that is since the financial crisis, and especially over the last three months as there has been a panic about Europe . . . banks have been inundated with cash deposits.

Open Forum speeches - Last night Andrew, myself and Christian gave the Open Forum at Zucotti Park, representing the Alternative Banking working group. I wanted to share a couple of the speeches we used here. Andrew wrote the first part, and I wrote the second and third parts (the third part was adapted from FogOfWar’s breakdown of the banking system). Because we used the human microphone to speak, it had to be written almost like poetry. For now I’ll only share the ones I wrote, since I haven’t asked Andrew for permission to publish his. The event was videotaped and I’ll post a link to the YouTube when I know it. Hopefully we got a few more people to come to our meeting this afternoon.

Bill Black’s Address To #OccupyLA

Unofficial Problem Bank list declines to 985 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Nov 4, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Very quiet week for changes to the Unofficial Problem Bank List as there were only two removals. After the removals, the list holds 985 institutions with assets of $406.3 billion. A year ago, the list had 894 institutions with assets of $418.5 billion. It appears that the FDIC and OCC will be releasing their new enforcement actions during the last week of the month; thus, most changes to the list during the interim weeks will be from failures or unassisted mergers.

Unofficial Problem Bank list declines to 981 Institutions -  Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Nov 11, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: Another quiet week for the Unofficial Problem Bank List. The list includes 981 institutions with assets of $405.9 billion after two removals.

Fannie Mae loss widens, asks taxpayers for $7.8B - Mortgage giant Fannie Mae is asking the federal government for $7.8 billion in aid to covers its losses in the July-September quarter. The government-controlled company said Tuesday that it lost $7.6 billion in the third quarter. Low mortgage rates reduced profits and declining home prices caused more defaults on loans it had guaranteed. Fannie has received $112.6 billion so far from the Treasury Department, the most expensive bailout of a single company. The government rescued Fannie Mae and sibling company Freddie Mac in September 2008 to cover their losses on soured mortgage loans. Since then, a federal regulator has controlled their financial decisions. Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates that figure could reach up $220 billion to support the companies through 2014 after subtracting dividend payments.

Fannie Mae Taps Treasury For $8 Billion More, Bailout Grows To $112 Billion - Fannie Mae , the biggest source of money for U.S. home loans, on Tuesday said it needed a further $7.8 billion in federal aid to stay afloat as a shaky housing market widened its third-quarter loss to $5.1 billion. The government-controlled firm also attributed the deeper cash drain to losses on derivatives used to hedge its exposure to interest-rate swings and on expenses related to home loans made prior to the 2008 financial collapse. In the year-earlier quarter it had a loss of a $1.3 billion. Fannie Mae has now drawn $112.6 billion in bailout funds from the Treasury Department since being seized by the government in 2008 as mortgage losses mounted, and it has returned $17.2 billion to taxpayers in the form of dividends. "There is certainly a lot of pre-2009 loans that we need to work through and that is certainly driving the credit losses you saw in this quarter and over the last several years,"

Fannie Mae Channels Teddy KGB – Paying Us With Our Own Money - kid dynamite - This is not a new theme, unfortunately.  From Fannie’s earnings report: “The company’s net worth deficit of $7.8 billion as of September 30, 2011 reflects the recognition of its total comprehensive loss of $5.3 billion and its payment to Treasury of $2.5 billion in senior preferred stock dividends during the third quarter of 2011. The Acting Director of the Federal Housing Finance Agency (“FHFA”) will submit a request to Treasury on Fannie Mae’s behalf for $7.8 billion to eliminate the company’s net worth deficit.” That paragraph isn’t very long, and it isn’t very complicated, but just in case it’s not clear: Fannie Mae borrows money from the Treasury in order to pay the Treasury dividends.  Voila! FIXED IT!

What caused the financial crisis? The Big Lie goes viral - Barry Ritholtz - One group has been especially vocal about shaping a new narrative of the credit crisis and economic collapse: those whose bad judgment and failed philosophy helped cause the crisis. Rather than admit the error of their ways — Repent! — these people are engaged in an active campaign to rewrite history. They are not, of course, exonerated in doing so. And beyond that, they damage the process of repairing what was broken. They muddy the waters when it comes to holding guilty parties responsible. They prevent measures from being put into place to prevent another crisis. Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie. A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed.  Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.

Yes, it is Wall Street’s fault - So here’s my question: If the Community Reinvestment Act of 1977 effectively caused the Wall Street meltdown of 2007 by forcing banks to make bad home loans to improvident poor people (and we all know exactly who I mean), how come it took 30 years for the housing bubble to burst? Next question: If fuzzy-thinking Democratic do-gooders enacted such laws in defiance of common sense and sound economics, why didn’t Republican Presidents Reagan, Bush I or Bush II do something? Was Rep. Barney Frank, D-Mass., secretly running the country?  Exactly how did the wealthiest and most powerful individuals in the United States — the investment bankers and corporate execs who host the $1,000-a-plate fundraisers, scoop up the Cabinet appointments and ambassadorships, and party down at White House galas — end up having less power over the U.S. economy than unskilled day laborers in Newark, N.J., or Oakland, Calif.? Maybe some “resident scholar” at the American Enterprise Institute, or another of the comfortable Washington think tanks devoted to keeping Scrooge McDuck’s bullion pool topped-up, can teach us how things got so upside-down.

Flaws Jeopardize New Attempt to Help Homeowners - Banking regulators this week launched the government’s latest attempt to help troubled homeowners — the Independent Foreclosure Review — heralding it as a thorough and fair way to compensate homeowners victimized by big banks. But early indications are that this program, like earlier efforts, has fundamental flaws. The most central question — how compensation will be calculated — has not been determined, regulators said, and it’s even unclear what type of compensation borrowers would get: cash or a non-monetary remedy. Many key elements of the program have been kept secret, including the specific bank errors or abuses that would merit compensation. Democratic lawmakers have questioned whether the personnel deciding who deserves compensation are qualified to do so. And the process, which allows no appeals, can require homeowners to put forth their cases in writing, a formidable task that consumer advocates say many borrowers lack the expertise to do.

Streets behind: US property market resistant to attempts to revive it  - It was October 2010 and a suburban Washington auditorium was packed with a hushed crowd of housing experts and financial regulators as a senior adviser at the Federal Reserve Bank of Boston picked apart federal aid programmes meant to stem the rising tide of mortgage defaults and home seizures crippling the US economy. The efforts, concluded Paul Willen, amounted to “three years of failed policies”. Just over a year on, the story remains grim. Homeowners are still struggling as two White House administrations and the Federal Reserve have failed to stop the bleeding in a crucial sector of the world’s largest economy. Nearly five years after America’s housing market showed the first signs of distress, prices are once more falling after false dawns in 2009 and 2010, with forecasters aiming for prices to return to last year’s levels some time in 2014. Construction of homes for families remains depressed. Sales of new homes are at record lows while those of existing homes are a third below their 2005 peak. Delinquencies remain near record highs, and the pipeline of seized or soon-to-be-seized homes waiting to hit the market continues to grow, leaving would-be buyers fearful that the largest investment of their lifetimes will soon be devalued thanks to a flood of distressed homes dragging down prices. All of which leaves US homeowners in the lurch as government policies and record low interest rates fail to arrest the property slump.

US officials consider options on mortgages - US policymakers are considering ways to buy troubled government-guaranteed mortgages from a new refinancing programme in case investors balk, according to people familiar with the matter. The initiative, known as the home affordable refinance programme (Harp), was changed last month so it can refinance mortgages that amount to more than 125 per cent of the value of a home. Such loans are currently not eligible for inclusion in standard mortgage-backed securities. Officials are considering three main options to support the new effort. Their first preference is for Fannie Mae and Freddie Mac, the US-controlled mortgage financiers, to package these mortgages into a new class of mortgage-backed securities for sale to private investors, if the pricing is reasonable. If this fails, Fannie and Freddie could acquire the loans and keep them on their balance sheets. A third idea mooted in Washington is for the Federal Reserve to act as a back-up buyer for these mortgage securities. Such a move is not under active consideration at the central bank. The concern about investor demand for these mortgages highlights a potential problem with the changes to Harp, which the Obama administration hopes will boost the economy by potentially helping millions of struggling homeowners to refinance their underwater mortgages at lower interest rates.

The US's Missing Housing Policy - The United States has no housing policy. And there's none on the horizon either. That's a scary thing, given the centrality of housing to domestic economic woes.   Once upon a time, the US had a housing policy. It was focused on increasing homeownership. It might have been a misguided policy or at least a policy taken too far, but it was a policy and everyone understood that. It meant that programs were designed to work toward that goal. Today, 4 years into a housing crisis, we still have no housing policy. There's no plan to clean up the legacy of the housing bubble and no plan to build the future of housing finance. This sad state reflects a singular failure of political leadership.  It also reflects a deeply fragmented housing finance world in which no one is in a position to call the shots. Let's start with the legacy problems, namely the foreclosure crisis and the collapse of home prices. The Administration has never really figured out where it stands on these issues. It makes nods to the need to fix the housing market as part of economic recovery, yet it has assiduously avoided confronting the foreclosure crisis and housing price collapse as a macroeconomic issue. Instead, it has come up with a stream of poorly integrated, small-bore programs that it has greatly overhyped, even as the programs under-deliver. This is HAMP, HARP, FHAShortRefi, etc.

A Realistic Fix for the Mortgage Crisis - President Obama recently announced that the federal government will take steps to reduce interest rates on mortgages for some existing homeowners. Unfortunately, that won't help millions of U.S. homeowners already in foreclosure and millions more about to join them. The current foreclosure crisis is not due to poor choices by individual homeowners. Most people caught up in it fell prey to a national bubble and bad lending practices. These taxpayers — schoolteachers and medical technicians, salesclerks and mechanics, veterans and parents of soldiers in Iraq and Afghanistan — are often simply people who got in over their heads. They deserve a second chance. Renegotiating mortgages on foreclosed homes at a reasonable interest rate keeps people in their homes and helps neighborhoods. It is not a bailout or charity but a sustainable model that big lenders could employ.

It’s time for principal reductions - It’s been over two years since my last flurry of enthusiasm for the Baker-Samwick own-to-rent proposal, and over four years since the op-ed from Dean Baker and Andrew Samwick first published in August 2007. It’s been so long, in fact, that it seems to have disappeared from the Providence-Journal website; fortunately, Dean Baker has mirrored it here. The idea is very simple, and is based on the idea that there’s a difference between foreclosure and eviction. A bank can foreclose on a house, and seize it and/or sell it to settle the mortgage. But once that has happened, there’s no need to kick the homeowner out of the house. Instead, rent the house back to the homeowner at market rates. This keeps people in their homes, reduces foreclosure sales, stops houses being trashed when they’re foreclosed upon, and even maximizes the income stream from homes in default on their mortgages.

CA AG Harris Attacks FHFA’s DeMarco on Principal Reductions - California Attorney General Kamala Harris has been awfully quiet amid pressure from the Obama Administration to agree to a settlement with the big banks over foreclosure fraud. So it’s interesting that she popped up this week to call for the resignation of Ed DeMarco, the head of the Federal Housing Finance Agency. Some of my colleagues have characterized this as Harris doing the dirty work of the Administration. They don’t like DeMarco, in this telling, because he’s tough on the banks; witness the FHFA lawsuit against 17 financial institutions over misrepresentations on mortgage-backed securities purchased by Fannie Mae and Freddie Mac. I think it’s a bit more complicated. First of all, DeMarco is a bottom-line guy. He views the FHFA mandate very narrowly. He wants to limit taxpayer exposure to Fannie and Freddie, and that’s it. Now that’s a good thing when he sues the banks over representations and warranties, because he’s trying to recoup money on agency MBS. But it’s a bad thing when he refuses to allow the GSEs to give principal reductions to homeowners with Fannie and Freddie-backed loans, which has been the case since March.

Matt Stoller: 50 State Settlement Chatter – $65 Million of Fundraising and the Kamala Harris Network - California Attorney General Kamala Harris is one of the key players involved in the 50 state negotiations. The state was the seat of a good proportion of mortgage fraud nationally, and the California Attorney General’s office is one of the only state AG offices with enough legal resources to impact the national housing framework. Understanding how she thinks about politics matters, because this is how critical decisions are made.  So what do her personal connections and fundraising networks look like?  Well, largely she shares them with President Obama, who endorsed her late in 2010 for the AG office. Her brother-in-law, Tony West, was key fundraiser for Obama in California, having helped raise $65 million for Obama in the state, and he is considered a rising star in the Democratic Party. He now works at the DOJ and has expanded the Civil Rights department to take on some elements of mortgage fraud. The DOJ has an internal directive to make mortgage fraud a top priority, but what mortgage fraud means to the DOJ are mortgage modification scams and penny ante borrowers ripping off fly-by-night lenders. West, while not the direct actor in the DOJ’s settlement talks, is in all likelihood involved in pressure on state AGs to sign on to a settlement. And it’s simply inconceivable he hasn’t dealt with his sister-in-law and political ally on the matter. Harris and West are part of a coherent political network, and much of the strength of that network has to do with reinforcing the traditional bank-friendly policies of the Democratic elite and then using that to create political support.

The Multistate Foreclosure Settlement - The New York Times came out with a strong editorial urging state AGs and the Administration not to rush into the proposed multi-state settlement deal. I think it's worthwhile reviewing what we know about the deal and the arguments for and against it.  Let's start with the facts that we know.  There aren't many that are publicly confirmed; the Administration, the AGs leading the multi-state settlement, and the banks very much want to avoid public comment on the deal--they want to present it as a fait accompli.  As a result, there hasn't been definitive reporting on the contents of the term sheet currently circulating among AGs.  It appears, however, the the deal has the following features. Some 16 banks that do mortgage servicing will:

  1. contribute a total of $5 billion in cash;
  2. contribute total of mortgage assets with a face value of $20 billion, but a market value considerably lower; 
  3. agree to uniform servicing standards.

In exchange, the state and federal authorities signing on would give the banks:

  1. a release of all servicing claims;
  2. a release of all origination claims, including discriminatory lending claims;
  3. a release of all MERS claims against the banks, leaving MERS Inc. as a potential defendant for MERS related issues (MERS Inc. has no financial assets of note.) 

The 46-State Mortgage Fraud Settlement Is Guaranteed To PREVENT A Housing Recovery - There are two fundamental values that are essential to any working capitalist economy: accountability and the rule of law. The reported outlines of the proposed settlement of the robo-mortgage scandal (no official details have been released) by 46 state attorneys general working together shows how far we have diverged from the basic principles of egalitarian capitalism. This proposed settlement has no place in a capitalist economy. First, a successful housing recovery is essential to the ultimate recovery of the economy. So the implications of any settlement that potentially hurts the housing market are extraordinarily significant for the health of the nation. Second, it is based on principles that are unrecognizable in a nation built on capitalism and hence accountability and the rule of law. Bank officials have testified in investigations of the robo-mortgage scandal that they submitted up to 10,000 false affidavits per month. Such testimony is effectively an admission of criminal guilt. These people admitted that, on behalf of their firms, they broke numerous criminal laws, most likely including conspiracy, fraud, and misleading the Court. The banks have attempted to deflect their misdeeds by suggesting that these illegal acts did not harm anyone. The laws were related to process only. The answer to such claims is that they are irrelevant. The banks are acknowledging that they perpetrated victimless crimes on a massive scale. And, each year, I suspect thousands of American citizens go to jail for perpetrating victimless crimes on a far lesser scale.

MERS Update: Multidistrict litigation decision - Judge Teilborg considered motions to dismiss 20 of the MDL cases, and dismissed each of them. Judge Teilborg then dismissed the remaining 52 complaints, but ordered the plaintiffs to take their best collective shot at submitting a "consolidated amended complaint" that avoided the shortcomings identified in the previous 20 complaints. The October 3rd order dismissed the consolidated complaint, and dismissed each of the 72 MDL claims with prejudice. At least some of the cases are apparently still alive in other courts based on claims that were not covered by the MDL decision. The fraud issues were essentially disposed of by earlier rulings, including Cervantes, and did not figure prominently in the October 3 MDL decision. Federal court rules require fraud allegations to be specific. Fraud is a hard claim to prove - to simplify it a little, the plaintiff needs to identify false statements, and explain how the plaintiff was harmed by relying on the statements.The 9th Circuit said: Although the plaintiffs allege that aspects of the MERS system are fraudulent, they cannot establish that they were misinformed about the MERS system, relied on any misinformation in entering into their home loans, or were injured as a result of the misinformation. If anything, the allegations suggest that the plaintiffs were informed of the exact aspects of the MERS system that they now complain about.

Devastating Analysis of MERS -  Yves Smith - We’ve tended to think the securitization industry is in for a world of hurt even before you get to the legal and practical mess created by MERS. A national registry done correctly could have been a very useful, but “correct” was apparently too hard (as in costly) to be seen as attractive to the mortgage industrial complex. And the stripped down version is proving to be a disaster. I’ve read a number of legal analyses of MERS, and this is one of the tidiest I’ve seen of what is so wrong headed about it. I try to avoid long extracts with limited commentary of my own, but I think you’ll see why I’m treating this selection as worthy of your consideration. The full paper, “The MERS Mortgage in Massachusetts” was sent by the author Robert Ludden to 4ClosureFraud, and you can download it there.

Denial in the Mortgage Industrial Complex - Yves Smith - I just came back from the AmeriCatalyst conference in Austin, which was a packed two days focused on the state of the housing and securitization market. The panels were very informative, and it was also good to see some of the people I’ve read or heard about, in particular the leading analyst, Laurie Goodman of Amherst Securities. She gave a talk that where she went through a very persuasive (and conservative) analysis that there are 8.3 to 10.3 million more foreclosures baked give how underwater borrowers are. And she had some striking bits of information. One is if you take out the homes where no one has made a mortgage payment in a year or more, homeownership in the US is 61%. In addition, Judge Annette Rizzo discussed a successful program she had developed in Philadelphia to do remediation. The success rate on modifications that come out of her court is 85% after 18 months.  I had quite a few people come and commend me on my comments. I think the main reason was that the viewpoint presented on this blog, that there are deep seated problems resulting from chain of title issues, and that servicers have engaged in a lot of abuses, was sorely underrepresented. I don’t blame the organizer, Toni Moss, who has an exceptionally well organized and prepped effort; I think this reflects the nature of who has expertise in this industry. The overwhelming majority of knowledgeable people will be insiders, and whether they can admit it to themselves or not, their first loyalty will be to their meal ticket. Put it another way: why would you have to go outside the industry to find someone (and a blogger to boot) to raise issues that come directly out of recent court decisions and the gridlock in foreclosure courts if you could find people with institutional credentials?

Foreclosures jump 7% in October from September— Foreclosure activity rose 7% in October compared with September, a sign that lenders are picking up the pace after foreclosure processing problems caused delays, RealtyTrac said Thursday.  Last month, foreclosure filings were reported on 230,678 U.S. properties, according to RealtyTrac data. Filings include default notices, scheduled auctions and bank repossessions.  Activity is down 31% in October compared with a year ago.  “The October foreclosure numbers continue to show strong signs that foreclosure activity is coming out of the rain delay we’ve been in for the past year as lenders corrected foreclosure paperwork and processing problems,” said James Saccacio, chief executive of RealtyTrac, in a news release.  “However, recent state court rulings and new state laws keep changing the rules of the foreclosure game on the fly, creating more uncertainty in the housing market and threatening to prolong the road to a robust real-estate recovery.”

RealtyTrac: Foreclosure Activity Hits 7-Month High in October - From RealtyTrac: U.S. Foreclosure Activity Hits 7-Month High in October RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for October 2011, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 230,678 U.S. properties in October, a 7 percent increase from the previous month, but still down nearly 31 percent from October 2010. “The October foreclosure numbers continue to show strong signs that foreclosure activity is coming out of the rain delay we’ve been in for the past year as lenders corrected foreclosure paperwork and processing problems,” said James Saccacio, chief executive officer of RealtyTrac. Default notices (NOD, LIS) were filed for the first time on a total of 77,733 U.S. properties in October, a 10 percent increase from September, but still down 23 percent from October 2010. Default notices in states using the judicial process (LIS) reached an 11-month high of 39,282 in October, a 16 percent increase from the previous month, but still down 31 percent from October 2010. Lenders repossessed a total of 67,624 U.S. properties (REO) in October, a 4 percent increase from the previous month, but still a 27 percent decrease from October 2010.

Las Vegas: 100,000 foreclosures and counting - From the Las Vegas Sun: Las Vegas house prices continue to slide, down 9 percent from year ago “In less than four years, more than 100,000 homes in Las Vegas have been lost through foreclosure. That’s 18 percent of our privately owned housing stock: that’s nearly one home in five. And we’re nowhere near finished with foreclosures. In all likelihood, we have another 100,000 yet to go, and at the current rate, that’s another four years,” [housing analyst and SalesTraq President] Larry Murphy said. According to Case-Shiller, house prices have declined almost 60% from the peak in Las Vegas ... no wonder foreclosure are so high. And according to Core Logic, there were 426 thousand first mortgages in Las Vegas at the end of Q2 - and 270 thousand of these were in negative equity (about 63%). Another 100,000 foreclosures might be low.

Nevada Foreclosure Filings Dry Up After ‘Robo-Signing’ Law - Foreclosure filings in Nevada plunged in October during the first month of a new state law stiffening foreclosure-processing requirements. Slightly more than 600 default notices were filed against homeowners through Oct. 25 in the state’s two most-populous counties, Las Vegas’s Clark County and Reno’s Washoe County. That was down from 5,360 in September, or an 88% drop, according to data tracked by, a real-estate website that tracks such filings. Default notices represent the first step in processing foreclosures. Nevada’s state Assembly passed a measure that took effect on Oct. 1 designed to crack down on “robo-signing,” where bank employees signed off on huge numbers of legal filings while falsely claiming to have personally reviewed each case. Banks Among other steps, the Nevada law makes it a felony—and threatens to hold individuals criminally liable—for making false representations concerning real estate title. Individuals are also subject to civil penalties of $5,000 for each violation. Foreclosures have slowed sharply over the past year in many states where banks are required to foreclose on homeowners through courts. But slowdowns haven’t yet been as pronounced in non-judicial states such as Nevada, where foreclosures are conducted by an administrative process.

Foreclosure Law Firm, Vilified for Making Fun of Homeless, Now Attacks Constitutionality of New Rules to Assure It Verifies Court Documents -- Yves Smith - To quote the immortal Forrest Gump, stupid is as stupid does. The biggest New York foreclosure mill, the Steven J. Baum law firm, is a textbook example. The New York Times’ Joe Nocera obtained photos from its 2010 Halloween party from a recently departed employee, who said they were consistent with the firm’s disdain for homeowners at the end of their economic rope who faced eviction. The article produced a hue and cry and led to official follow up. Representative Elijah Cummings, who launched an investigation of servicer abuses earlier this year, had asked the Inspector General of the Federal Housing Finance Agency to investigate allegations foreclosure mills, including Baum. As a result of the Nocera article, Cummings sent a letter to the firm demanding all documents related to possible foreclosure abuses, as well as ” preparing for, carrying out, or communicating about the firm’s 2010 Halloween party.” So you’t think the firm would lay low for a while, right? Wrong. Readers may recall that last October, New York implemented a requirement that all attorneys in residential foreclosures certify that they take “reasonable” measures to verify the accuracy of documents submitted to the court. From a formal standpoint, all this did was reaffirm existing law, but procedurally, it makes it much easier for borrower’s counsel to get attorneys who play fast and loose sanctioned.  Look what has happened to foreclosure activity before the requirement was put in place versus this past October:  Now imagine what this means to a firm like Baum. No foreclosures means no fees which means they might wind up like those homeless people they made fun of last year. So in a pretty desperate gambit, the firm is trying to challenge the rule on Constitutional grounds.

Foreclosure backlogs could take decades to clear out - Foreclosure sales are moving so slowly in half the states that at the current pace, it will take more than eight years on average to clear the 2.1 million homes in foreclosure or with seriously delinquent mortgages, new research shows. That's about twice as long as a year ago in the states where foreclosures go through courts — before the mortgage industry was upended by last fall's disclosures that court papers in many foreclosure cases were improperly prepared. Since then, new checks have slowed the process. The backlogs suggest that the fallout from the nation's worst housing-market collapse is likely to weigh on real estate prices in many markets for years to come, and on some markets for longer than on others. In New York and New Jersey, where courts imposed new rules last fall, it would take lenders more than 50 years at their current pace to clear pipelines of homes that are seriously delinquent or already in the foreclosure process, according to LPS Applied Analytics, which collects data on nearly 40 million mortgage loans.

How a Financial Pro Lost His House - I’m a financial adviser. I get paid to help people make smart financial choices, and I speak and write about personal finance issues for this publication and others. My first book comes out in January, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money”The thing that few people know, though, is that I learned a lot of this from experience. I made a bunch of mistakes, the very same ones that I now go around warning people to avoid.  So this is the story of how I lost my home, the profound ethical questions that arose along the way, and what my wife and I learned from the mistakes that led us to that point. It made me better at what I do, but it wasn’t much fun getting there.

Get your Independent Foreclosure Review! -- OCC and the Federal Reserve announced this week that banks who service mortgages will be sending letters to homeowners this month and next, offering them an opportunity to request review of any 2009 or 2010 foreclosure.  Every homeowner who asks gets a full independent review by a foreclosure auditor.  A homeowner who was in any stage of foreclosure in 2009 or 2010 is eligible for review and possible compensation.  The request for review runs to five pages, and the web site is not exactly user-friendly.  There is also a toll-free number to apply:  888-952-9105. Compensation will be paid (in the amount determined by the independent reviewers discussed on this blog previously) for financial injuries resuting from errors, misrepresentations or deficiencies in the foreclosure process.  Examples include foreclosures during bankruptcy or against an active-duty service member, improper legal or other fees, or foreclosure while a homeowner is in trial or permanent modification plan.  The deadline to request a review is April 30, 2012.  A request for review will not stop foreclosure, and redress payments will not require borrowers to release claims or affect any pending foreclosure litigation or bankruptcy proceeding. 

CoreLogic: House Price Index declined 1.1% in September - From CoreLogic: CoreLogic® September Home Price Index Shows Second Consecutive Month-Over-Month and Year-Over-Year Decline CoreLogic ... today released its September Home Price Index (HPI®) which shows that home prices in the U.S. decreased 1.1 percent on a month-over-month basis, the second consecutive monthly decline. According to the CoreLogic HPI, national home prices, including distressed sales, also declined by 4.1 percent in September 2011 compared to September 2010. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was down 1.1% in September, and is down 4.1% over the last year, and off 31.2% from the peak - and up 3.6% from the March 2011 low. Some of this decrease is seasonal (the CoreLogic index is NSA). Month-to-month prices changes will probably remain negative through February or March 2012 - the normal seasonal pattern. It is likely that there will be new post-bubble lows for this index late this year or early in 2012.

After steadying, home prices begin falling again - After holding up relatively well this summer, it looks like home prices have begun falling again. For a second month in a row, home prices fell 1.1 percent from the month before as fresh foreclosures continued to add inventory to the glut of unsold homes, according to data from CoreLogic, a real estate research firm. Home prices fell 1.1 percent in both  September and August. Record low mortgage interest rates appeared to have put a floor under home values this summer. After falling steadily last winter, the CoreLogic index flattened out this summer. But the latest drop leaves home prices 4.1 percent lower than they were in September 2010. The outlook for home prices remains clouded by the continuing wave of foreclosures that has left the market with many more sellers than buyers. Some banks have slowed the pace of foreclosures to avoid adding more unsold inventory to their books. As lenders slash prices of foreclosed properties, those “distressed” sales force prices of all homes lower. "Home prices are adjusting to correct for the supply-demand imbalance, and we expect declines to continue through the winter,”

Real Estate: Home Prices Under More Pressure -Home prices are highly seasonal, due to the different mix of homes that sell at different times of the year, but the latest reading for September shows home prices are under added pressure now; this is not just due to the high concentration of distressed properties on the market.  Prices fell 1.1% month to month, according to CoreLogic, both in seasonally adjusted and unadjusted terms. This is the second consecutive month of monthly drops, as we head into the slower fall season.  The more concerning aspect of the report is that while home prices including foreclosures and short sales fell 4.1 percent from September of 2010, they still fell 1.1 percent when you exclude distressed sales.  "The acceleration in the rate at which the CoreLogic house price index is falling reflects the slowing in the pace of job creation and wider economic growth earlier this year," says Paul Diggle of Capital Economics. While the unemployment picture has weighed heavily on home prices all year, the new uptick in foreclosure starts will likely have a more drastic effect. Foreclosure start rates on severely delinquent loans have increased to over 10 percent a month in the private-label RMBS (residential mortgage backed securities) sector, according to Fitch, which is now estimating another 10 percent decline in home prices before they fully stabilize.

Shadow Inventory Lurks Behind Recent Price Gains - Home prices rose 4 percent during the third quarter, according to the latest IAS360 House Price Index from Integrated Asset Services. The index also posted a 0.4 percent gain from the beginning of the year and a 0.6 percent gain from the third quarter of last year. “I did a double-take when I saw the numbers,” says Paul Sveen, CEO of Integrated Asset Services. “The markets continue to act as though we’ve seen a bottom and buyers should be encouraged to go out and buy.” “Based on market volume and demographics of homebuyers during the 3rd quarter, there is a clear disconnect between the pricing indexes and real market strength,” Sveen continues. “A large volume of distressed property still overhangs the market and it continues to hold most markets hostage.” However surprising, recent rises have not been enough to bring prices near their 2007 peak. As of the third quarter, national housing prices were 22.7 percent below that peak. Distressed sales reportedly made up one-third of home sales in 2010 and were expected to rise this year. However, foreclosures are on the decline — falling 7 percent from June to July and 39 percent from July 2010 to July 2011.

More than 1 in 4 homeowners 'underwater' as U.S. housing market continues to sink - Nearly 30 percent of American homeowners owe more on their mortgages than their homes are worth, according to a new report from the real estate website Zillow. Defaults and foreclosures are likely to increase as homeowners decide to walk away from their houses, rather than continuing to make mortgage payments on property they can't sell or refinance, analysts said. Forecloses are already twice what they were this time last year and the number of homeowners who haven't made a mortgage payment in at least two months rose for the first time since 2009. 'We're in uncharted waters. More than one in four homes underwater and about 9 percent unemployment is a recipe for more foreclosures,' Zillow chief economist Stan Humphries told The increase in the number of houses underwater - from 21 to 23 percent a year ago - is the result of a backlog in foreclosures, Humphries said

Nearly 29% of mortgaged homes underwater, report finds - A whopping 28.6 percent of homeowners with mortgages owe more on their loans than their homes could sell for, according to quarterly data released Tuesday by Zillow, a real estate website. That's up from 26.8 percent in the second quarter. Home values declined only 0.2 percent from the second quarter but were down 4.4 percent year over year. The rising percentage of homes with "negative equity" or "underwater" status is due largely to how long the foreclosure sale process takes rather than home value fluctuations, said Zillow chief economist Stan Humphries. Prior to the "robo-signing" scandal around foreclosures that came to light in 2010, the negative equity rate hovered in the 21 to 23 percent range, but has been in the 26 to 28 range since due to added delays in foreclosure sales. While the rate of foreclosures is dropping, the time required for foreclosures to sell has lengthened. "We're in uncharted waters," Humphries said in an interview. "More than one in four homes underwater and about 9 percent unemployment is a recipe for more foreclosures." Homes with underwater status are often considered risks for future foreclosure, since owners could have trouble refinancing or selling and may opt for a foreclosure via "strategic default" if they feel they will never regain their lost equity.

Half of US Mortgages Are Effectively Underwater - Negative equity rose to 28.6 percent of single-family homes with mortgages in the third quarter of this year, according to Zillow. That's up from 26.8 percent in the second quarter. In real terms, that's 14.6 million borrowers. While 14.6 million might seem like a lot, it's not the real number when you consider negative equity in housing's recovery. That's because it doesn't factor in "effective" negative equity, which is borrowers who have so little equity in their homes that they cannot afford to move.   On US totals, if you figure average house prices use conforming loan balances, then a repeat buyer has to have roughly 10 percent down to buy in addition to the 6 percent Realtor fee to sell. Thus, the effective negative equity target would be 85%. You also have to factor in secondary financing, which most measures leave out. Based on that, over 50 percent of all mortgaged households in the US are effectively underwater — unable to sell for enough to pay a Realtor and put a down payment on a new purchase without coming out of pocket. Because repeat buyers have always carried the market as the foundation, this is why demand has not come back. It's as if half the potential buyers in America died over a two-year period of time.

Mortgage Payments Show Surprising Rise in Delinquencies The rate at which mortgage holders were late with their payments by 60 days or more rose in the June-to-September period for the first time since the last three months of 2009, according to TransUnion. The credit reporting agency said 5.88% of homeowners missed two or more payments, an early sign of possible foreclosure. That was up from 5.82% in the second quarter. The increase surprised TransUnion researchers, who had expected late payments, or delinquencies, to fall for the quarter. "It's much different than we've been talking about the last few quarters," The problems were widespread. Between the second and third quarters, all but 10 states and the District of Columbia saw delinquency rates increase. "More and more homeowners are likely to struggle," Martin said. "I'm not sure this is a one-quarter blip." That echoes predictions from other sources, like RealtyTrac. "This isn't just about bad loans anymore," said Blomquist. "It's about a bad economy that's pushing people into foreclosure."

Mortgage Delinquencies Haven't Been This Bad Since The End Of 2009: While lawmakers in Washington debated the debt ceiling and consumer confidence dropped, more homeowners were having a harder time making their mortgage payments. The rate at which mortgage holders were late with their payments by 60 days or more rose in the June-to-September period for the first time since the last three months of 2009, according to TransUnion. The credit reporting agency said 5.88% of homeowners missed two or more payments, an early sign of possible foreclosure. That was up from 5.82% in the second quarter. The increase surprised TransUnion researchers, who had expected late payments, or delinquencies, to fall for the quarter. "It's much different than we've been talking about the last few quarters," said Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit. The problems were widespread. Between the second and third quarters, all but 10 states and the District of Columbia saw delinquency rates increase. TransUnion's data is culled from 27 million credit reports, about 10% of U.S. consumers who actively use some form of credit. Martin could not pinpoint one particular reason for the jump. Normally, for instance, housing prices and unemployment have a big influence on delinquency. "Those are both still important, but neither has noticeably deteriorated,"   

Housing: REO and Mortgage Delinquencies - Yesterday Fannie Mae reported their third quarter results. Fannie's REO inventory fell to 122,616 houses from 135,719 at the end of Q2. Fannie's REO inventory has declined for four straight quarters. Below is a graph of Fannie Mae REO acquisitions (completed foreclosure or deed-in-lieu) and dispositions (sales). If we just looked at REO inventory, we might think that the situation is getting better pretty quickly. However there are a large number of properties in the "90 days delinquent" and "in foreclosure" buckets. The second graph shows the delinquent and REO buckets over time. The delinquency data is from LPS, and the REO estimates are based on work by Tom Lawler and my own calculations. The dashed lines are "normal" historical levels for each bucket. The 30 day bucket is only slightly elevated (as of September), and the 60 day buckets is somewhat elevated. But the glaring problems are in the 90 day and in-foreclosure buckets. There are 4.1 million seriously delinquent loans (90 day and in-foreclosure). This is about 3.1 million more properties than normal. Probably when the mortgage settlement is announced, some of these loans will cure as part of the settlement with loan modifications that include principal reduction, but many of these properties will become REOs fairly quickly.

Visible Existing Home Inventory declines 16% year-over-year in early November - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory.  Using the for monthly inventory (54 metro areas), it appears inventory will be back to late 2005 levels this month. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through September (left axis) and the HousingTracker data for the 54 metro areas through October. The HousingTracker data shows a steeper decline in inventory over the last few years (as mentioned above, the NAR will probably revise down their inventory estimates in a few months). The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the November listings - for the 54 metro areas - declined 16.8% from the same week last year. The graph shows monthly inventory change (this is preliminary for November).  This is just "visible inventory" (inventory listed for sales). There is a large percentage of distressed inventory, and various categories of "shadow inventory" too.

Lawler: SF REO Inventories at Fannie, Freddie, PLS, and a “Guess” at FHA - From Tom Lawler: Using data from Barclays Capital for private-label RMBS, the latest reports from Fannie and Freddie, and a “reasonable guess” for FHA (which is having “problems” with its September report), here is a chart showing SF REO inventories for “the F’s” and PLS.Note that the FHA SF REO inventories shown in this chart are from various “Monthly Reports to the FHA Commissioner,” even though the REO data in these reports are not “stock/flow” consistent, and not quite accurate.  CR: This chart does not include REO owned by FDIC insured institutions (we will get an estimate when the Q3 Quarterly Banking Profile is released in a few weeks). Last quarter, Lawler estimated that REO inventory at FDIC insured institutions was about 81,000. That has probably declined slightly in Q3.Also, as Tom Lawler noted before: "This is NOT an estimate of total residential REO, as it excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other lender categories."

Update on NAR revisions - Today NAR chief economist Lawrence Yun provided his annual overly optimistic forecast for next year, but more importantly he provided an update on the coming revisions: NAR presently is benchmarking existing-home sales, and downward revisions are expected for totals in recent years, although there will be little change to previously reported comparisons based on percentage change. There will be will be no change to median prices or month’s supply of inventory. Publication of the improved measurement methodology is expected in the near future. Sales will be revised down for the last few years, and inventory will also be revised down, with no change to months-of-supply. I expect sales for 2011 will be down around 10% to 15% (less for earlier years), and inventory by the same amount.

Mortgage Rates and Refinance Index - From Freddie Mac: 30-Year Fixed-Rate Mortgage Averages 3.99 Percent Freddie Mac today released the results of its Primary Mortgage Market Survey(® (PMMS®), showing average mortgage rates changing little from the previous week amid a mix of economic data reports as the 30-year fixed-rate mortgage averaged 3.99 percent, dropping below 4.00 percent for the second time this year.This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®. The Freddie Mac survey started in 1971. Mortgage rates are currently near the record low for the last 40 years. It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates might not fall that far - 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73%. The second graph compares refinance activity to the ten year yield. The ten year yield is below the level during the 2008 financial crisis - thanks to weak economic growth and the European financial crisis. Even with conforming 30 year mortgage rates slightly under 4%, there still hasn't be a huge pickup in mortgage refinance activity. This is because borrowers who can refinance, already have - and the rest either can't qualify or have negative equity (the new HARP refinance program will help a little).

Student, Auto Loans Push Consumer Credit Higher - U.S. consumer credit grew during September, bouncing back after a big dip the previous month. Consumer credit increased by $7.39 billion to $2.452 trillion, the Federal Reserve said Monday. Economists surveyed by Dow Jones Newswires had forecast a $4.0 billion expansion in consumer credit. The figures are a significant turnaround from August when consumer credit fell $9.68 billion, according to revised figures. The jump was driven by an increase in nonrevolving credit, which includes student loans, perhaps suggesting that more people are returning to school as unemployment remains high. Total nonrevolving credit, which also includes car loans, jumped $8.01 billion in September, rising to $1.662 trillion. The Fed report said revolving credit, which includes credit-card debt, declined slightly, falling by $627 million to $789.62 billion. The consumer-credit report doesn’t include numbers on home mortgages and other real-estate secured loans. But the data are important for the clues to behavior by consumers.

U.S.. Exports, Total Trade Reach Record Highs - The total volume of U.S. international trade activity (exports + imports) reached an all-time record high in September (not adjusted for inflation, BEA report here) of $404 billion, slightly higher than the previous record of $401 billion in July 2011 (see top chart above).  Compared to the recession-related, cyclical low of $277 billion of trade activity in May 2009, there has been a 46% increase in U.S. trade, as the U.S. and world economies have gradually  recovered from the 2008-2009 recession.      The September volume of exports ($180.3 billion) was the highest monthly export volume in history (not adjusted for inflation, see bottom chart), a further sign that a recovery in worldwide economic conditions has increased demand for U.S. products.  There was an overall monthly increase of 1.4% for shipments of U.S. exports in September, including increases in industrial supplies (3.2%), capital goods (0.3%) automobiles (1.7%) and an especially strong gain in consumer goods (5.3%).

Vital Signs: Trade Deficit Narrows -The U.S. trade gap narrowed in September, as exports rose 1.4% and imports increased by a slimmer 0.3%. The trade deficit declined to $43.1 billion from the prior month’s $44.9 billion, its lowest level since December. While Europe’s crisis threatens to stifle exports in the months ahead, the trade figures led some economists to boost economic growth estimates for the third and fourth quarters.

Trade deficit drops to $43.1 billion, lowest in 9 months, as exports climb to record high - The U.S. trade deficit fell in September to the lowest point this year as foreign sales of American-made autos, airplanes and heavy machinery pushed exports to an all-time high. The deficit narrowed 4 percent to $43.1 billion, the third straight decline and the smallest imbalance since last December, the Commerce Department reported Thursday.Exports increased 1.4 percent to a record $180.4 billion, reflecting a big increase in shipments of U.S. made autos and auto parts. Imports were up a smaller 0.4 percent to $223.5 billion as oil imports slowed after huge gains earlier in the year. Through September, the deficit is running at an annual rate of $558.2 billion, up 11.6 percent from the imbalance for all of last year of $500 billion. A higher deficit acts as a drag on economic growth because it means fewer jobs for American workers. However, with the deficit falling for the last three months, that could provide a small boost to growth in the July-September quarter.

Architecture, Not Autos, Should Be Exports’ Future - Boosting foreign demand, particularly in emerging markets, has been a cornerstone of the White House’s job-creation platform. But when setting trade policy, the U.S. should be thinking about consulting as much as commodities, and architecture as much as autos. The U.S. has enjoyed a trade surplus in services since the 1960s. Service exports did not falter as much as merchandise shipments did during the recession, creating a cushion during the downturn. In September, the surplus slipped slightly, to $15.79 billion, from its record high of $16.01 billion in August.. Focusing on services, especially business ones, is a way to bring down the massive trade deficit and provide more jobs in the U.S., Jensen says, and a lower trade deficit would decrease the nation’s need for foreign financing. Jensen, a professor at Georgetown University, had to be creative in parsing the service trade, in part because the government doesn’t collect detailed information. Monthly numbers are available for exports of hard goods such as floor tiles, newsprint and jewelry, but not for legal, consulting or financial services. Using employment and other data, Jensen identified the service industries and professions that can make inroads into global markets.

Decline's Bright Side: BRICs Tourists Do America - If there's any consolation to going down the plumbing system of economic history, it's probably this: Chinese and Brazilian tourists are taking advantage of their strengthening currencies to go on shopping binges in America--where goods are admittedly still among the cheapest in the world. They're also seeing the sights while they're at it: The U.S. is struggling to keep up with surging demand for visas in China and Brazil, as the growing middle class in the world’s two biggest emerging markets flock to American shopping malls and tourist meccas. The U.S. plans to boost by 100 people this year its staff dedicated to processing visas in the two countries after it issued 35 percent more travel permits in China this year and 44 percent more in Brazil, Ed Ramotowski, managing director for U.S. visas, said in a conference call with reporters yesterday. “It’s a function of the robust economy in Brazil,” Donald Jacobson, who oversees visa operations at the U.S. Embassy in Brasilia, said in the same conference call. “Their currency is very strong against the dollar and Brazilians are coming to America to visit Disney World and do lots of shopping.”

AAR: Rail Traffic increases in October - The Association of American Railroads (AAR) reports carload traffic in October increased 1.7 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 3.6 percent compared with October 2010. On a seasonally adjusted basis, carloads in October were up 0.5% from last month, and intermodal in October was up 0.8% from September.  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 about half way back. The second graph is for intermodal traffic (using intermodal or shipping containers): On a non-seasonally adjusted basis, U.S. rail intermodal originations averaged 243,892 trailers and containers per week in October 2011, up 3.6% over October 2010. That’s the highest weekly average for any month since October 2006 and the sixth highest weekly average of any month in history. October is almost always the top month for intermodal traffic because it’s when retailers do the bulk of their stocking up for the holidays.

Ceridian-UCLA: Diesel Fuel index increased 1.1% in October - This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Increased 1.1 Percent in October, Offsetting the 1.0 Percent Decline in September The Ceridian-UCLA Pulse of Commerce Index®(PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation, rose 1.1 percent in October after three consecutive months of negative numbers.  Over the past three months, compared to the prior three months, the PCI declined at an annualized rate of 5.8 percent and the PCI remains lower than it was during most of the first half of 2011.  This graph shows the index since January 2000. This index declined sharply in late summer and this small rebound only offsets some of the recent decline.  Note: This index does appear to track Industrial Production over time (with plenty of noise).

Gas prices might be headed to record highs in 2012, analysts say - If you think gasoline is expensive now, just wait until next year: A combination of growing global demand and rising U.S. fuel exports could send gasoline prices to record highs in 2012, analysts say. Those factors have been pushing pump prices to historically high levels since the beginning of September, and the approaching holiday weekend is expected to present a painful roadside example by breaking the old record for late November — set in 2007 — by 10% or more nationally and in California. Regular gasoline nationally cost an average of $3.097 a gallon during the week leading up to Thanksgiving in 2007, and it cost an average of $3.398 in California. It might have been a relatively trivial annoyance then, as the country hadn't fallen into recession yet. But now, with high unemployment and little economic growth, the U.S. average gasoline price is $3.424 a gallon, the Energy Department said Monday, based on a weekly survey of service stations. Although that represented a decline of 2.8 cents from the previous Monday, the average was still nearly 56 cents higher than at this time last year and shattered the old record for this week of $3.013 a gallon, set in 2007.

US Wholesale Inventories Fall as Sales Rise - Inventories at U.S. wholesalers unexpectedly declined in September for the first time since 2009 as a gain in sales helped distributors keep stockpiles in line with demand.  The 0.1 percent decrease in inventories compared with a 0.5 percent gain forecast in the Bloomberg News survey and followed a revised 0.1 percent August rise that was less than initially estimated, Commerce Department figures showed today in Washington. Sales climbed 0.5 percent in September.  Wholesalers kept enough goods on hand to last 1.15 months at the current sales pace in September, close to the record low reached earlier this year. Stronger demand along with leaner inventories may encourage manufacturers to boost production.  “Inventories were drawn down fairly rapidly in the third quarter,”

Confidence down, but people are still spending - A rift is emerging between Americans’ state of mind and the state of the economy. The economy is getting stronger, with the nation’s gross domestic product growing at its fastest clip so far this year. The number of new people signing up for unemployment benefits has steadily declined, and consumer spending is rising.  But by almost any measure, Americans remain unhappy. Consumer confidence1 has plunged to levels last seen during the financial crisis. A recent Nielsen poll found that nine out of 10 Americans believe the country is still in a recession2. “It’s the hangover from the Great Recession,” “People feel the economy not at the macro level but at the micro level.” This persistent pessimism has perplexed economists. The link between how we feel and what we do is a cornerstone of economic philosophy, what John Maynard Keynes dubbed the “animal spirit” that moves the marketplace. Most of the time, our emotions and our actions move in tandem.

Consumer Sentiment Improves - Consumer sentiment levels moved higher in November. The preliminary Thomson Reuters/University of Michigan consumer sentiment index for November hit 64.2, from 60.9 in October. The index was expected by economists to have hit 62.0. The preliminary current conditions index was 76.6, from 75.1 at the end of last month, while the expectations index was 56.2, from 51.8 in October. All preliminary figures will be revised at the end of the month. The public’s view of future inflation eased a touch, with the expectation for inflation one year out holding steady at 3.2%, while the five-year expectation eased to 2.6%, from 2.7%.

Consumer Sentiment increases in November - The preliminary November Reuters / University of Michigan consumer sentiment index increased to 64.2, up from the October reading of 60.9, and up from 55.7 in August. Consumer sentiment is usually impacted by employment (and the unemployment rate) and gasoline prices.  Gasoline prices have declined about 50 cents per gallon from the highs in early May, but prices are still well above the levels of early this year. And the unemployment rate is also very high at 9.0%. Both negatives for sentiment. In addition, sentiment was probably negatively impacted by the debt ceiling debate in August. Back in August I looked at event driven declines in consumer sentiment. If this decline was "event driven", then we should have seen little impact on consumption (looks correct) and a bounce back fairly quickly, but only to the already low levels of June and July. It looks like we are seeing some bounce back. However sentiment is still very weak, although above the consensus forecast of 61.5.

Vital Signs: Consumer Credit Expands - U.S. consumers stepped up their borrowing in September. Overall consumer credit outstanding rose $7.4 billion from August to $2.452 trillion. Nonrevolving credit, which includes car and student loans, increased $8 billion to $1.662 trillion. Revolving credit, which is mostly credit-card debt, edged down $627 million to $789.6 billion.

US retail sales fall short of expectations - US retail sales rose in October but growth decelerated and fell below market expectations as retailers head into a holiday shopping season of fragile sentiment and fierce competition. In spite of a weak economy, sales increased 3.8 per cent from a year ago to rack up a 26th successive monthly rise, according to Retail Metrics. But they fell below analyst forecasts of 4.4 per cent growth and below the 5 per cent-plus increases of the previous three months. Fifty four per cent of the retailers that report monthly sales fell short of expectations, among them both those that reported overall increases and declines.

Retail: Seasonal Hiring vs. Retail Sales - On Friday I noted that retailers hired seasonal workers at close to the pre-crisis pace in October. Reader Hd asked about the correlation between seasonal hiring and retail sales. Below is a scatter graph of historical October retail hiring vs. the real increase in retail sales. First, here is the NRF forecast for this year: NRF Forecasts Holiday Sales Increase of 2.8 Percent to $465.6 Billion The 2011 holiday season can be summed up in one word: average. On the heels of a holiday season that outperformed most analysts’ expectations, holiday retail sales for 2011 are expected to increase 2.8 percent to $465.6 billion, according to the National Retail Federation. While that growth is far lower than the 5.2 percent increase retailers experienced last year, it is slightly higher than the ten-year average holiday sales increase of 2.6 percent.. Here is a repeat of the graph of retail hiring based on the BLS employment report: The scatter graph is for the years 1993 through 2010 and compares October retail hiring with the real increase (inflation adjusted) for retail sales (Q4 over previous Q4). In general October hiring is a pretty good indicator of seasonal sales. R-square is 0.69 for this small sample. Note: This uses retail sales in Q4, and excludes autos, gasoline and restaurants. This suggests a real gain of around 2.5% in Q4 (plus inflation), well above the NRF forecast of 2.8% nominal (including inflation).

Small Business Optimism Improves a Bit - Small-business owner confidence increased in October but still hovers just above recessionary levels, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index edged up to 90.2 in October, from 88.9 in September. The October level is the highest since 90.8 posted in June. During the last recovery, the index often ran near or above 100. In October, “owner optimism improved a smidge, mostly because the outlook for business conditions and real sales growth became less negative,” said the NFIB report. The subindex of expected business conditions in the next six months rose 6 percentage points, to -16%, and the expected higher real sales subindex increased 2 points, to -4%. The new-jobs subindex weakened, falling 1 point, to 3% in October. Last week, the NFIB said small-business owners reported an average reduction of 0.1 employees per firm last month. That is better than September’s net decrease of 0.3 employees per firm, but still extremely dismal.

Small Business: A Good Worker Is Hard to Find - The U.S. labor pool has nearly 14 million unemployed workers, yet more small businesses complain about the dearth of qualified workers. In a new survey by The Hartford Financial Services Group, 40% of small businesses (defined as companies at least one year old, with fewer than 100 employees and revenues $100,000 or more) say it is “not easy at all” to find good help. Only 14% say hiring good workers is “very” or “extremely” easy. The difficulty in finding qualified workers also shows up in the October report by the National Federation of Independent Business that polls small businesses that typically employ five people and have median gross sales of about $350,000 annually. Almost one third of NFIB respondents say they have seen few or no qualified applicants for their firms’ open positions. That despite an increasing share of business owners raising compensation. But it isn’t only technical expertise in demand. Finding people who get to work on time seems to be difficult. In August, the Federal Reserve Bank of New York asked regional manufacturers about finding good workers. The second biggest challenge — after computer skills — was hiring workers who were punctual and reliable.

Is Overregulation Driving U.S. Companies Offshore? - As my colleague Richard A. Oppel Jr. reported on Thursday, Gov. Rick Perry of Texas is arguing that companies are sending work abroad primarily because of overregulation in the United States, and not because labor is cheaper abroad. “They did not leave to begin with just because they could find cheap labor somewhere,” said Mr. Perry, "I would suggest to you they left because they were overregulated, and the cost of that regulation and the tax structure that we have in place in this country is what drove the masses away.” Is that statement true? Certainly the United States tax code is impenetrably complicated, and companies do have to deal with plenty of regulations. But even so, the United States is far friendlier to business than are emerging markets like India and mainland China, according to international analyses of regulatory climates.  For the last nine years, the World Bank has been grading countries on 10 measures of business regulation: getting electricity, enforcing contracts, protecting investors, dealing with construction permits, trading across borders, registering property, resolving insolvency, paying taxes, getting credit and starting a business. Based on these criteria, these are the top 10 countries where it is easiest to operate a business: That’s right: The United States comes in fourth.

October Jobs Report: Deja Vu All Over Again - This is getting repetitive. The October jobs report, out Friday morning, is very similar to the reports of recent months. Some 80,000 new payroll jobs were created, and the unemployment rate ticked down to 9.0 percent.  For months we've been noticing that, every month, the private sector adds jobs while the public sector cuts them. It's been the case for much of the past year that the U.S. economy is growing not because of government spending, but in spite of government cutbacks. In October, the private sector created 104,000 jobs, with gains led by professional and business services (33,000) and leisure and hospitality (22,000). Manufacturing posted a small 5,000 jobs gain. Meanwhile, governments at all levels cut 24,000 jobs. Since May 2010, government has cut one million jobs while the private sector has added 2.28 million positions. The headline unemployment rate is only one of several data points contained in the report. And while the 9.0 percent rate is pretty dreadful, other metrics bear witness to a high and depressing level of labor market weakness. The unemployment rate for teenagers stands at 24.1 percent. The employment-population ratio checked in at a truly weak 58.4 percent. And the U-6, an alternate measure of unemployment that includes people who have given up people who are marginally attached to the workforce and people who are working part-time but would rather be working full-time, stands at 16.2 percent. That's down from 16.5 percent in September 2011, and down from 17.0 percent in October 2010, but it's still much too high.

October Job Growth Still Slow but Details Hold a Bit of Good News - The Bureau of Labor Statistics reported only 80,000 new payroll jobs in October, still a very slow tempo. However, there was a bit of good news hidden in the revisions for earlier months. The August payroll job figure, originally reported as a shockingly bad zero gain, was revised upward to a more respectable 104,000. September’s job growth, in turn, was revised upward from 103,000 to 158,000. Some observers believe that upward revisions are typical of a job market that is beginning to turn the corner toward growth. Optimists can hope this month’s 80,000 will eventually be revised up, as well. As has been the case all year, the service sector provided essentially all new jobs, 114,000. Goods producers lost 10,000 jobs, with a big loss in construction more than wiping out tiny gains in mining and manufacturing. The government sector continued to shrink at all levels. A total of 24,000 government jobs were lost in the month, with the biggest decline in the noneducational state category. The unemployment rate edged downward slightly to 9.0 percent, a tiny decrease, but welcome after three months when the figure remained stuck at 9.1 percent. Part of the reason for the decrease was a smaller growth of the labor force than in earlier months. Although there was only slight cheer in the headline unemployment rate, the broad unemployment rate, U-6, dropped more substantially, from 16.5 percent to 16.2 percent.

Sluggish Growth and Payroll Employment - If we continue to see sluggish growth with 125,000 payroll jobs added per month (the pace this year), it will take an additional 52 months just to get back to the pre-recession level of payroll employment. If job growth picks up a little - say to 200,000 payroll jobs per month - it will take an additional 33 months to get back to the pre-recession level. The following two graphs show these projections. The dashed red line is 125,000 payroll jobs added per month. The dashed blue line is 200,000 payroll jobs per month.If we follow the red line path, payroll jobs will return to the pre-recession level in February 2016. The dashed blue line returns to the pre-recession level in July 2014. And this doesn't include population growth and new entrants into the workforce (the workforce has continued to grow).  The second graph shows the same data but aligned at peak job losses. This really illustrates both the depth of the 2007 employment recession and the very sluggish recovery.

The World Cares Too Much About A Horribly Inaccurate Jobs Number: The U.S. jobs number, published by the Bureau of Labor Statistics (BLS), is arguably the most highly anticipated and important monthly economic data point in the world. However, the BLS is doing an awful job of reporting it, and it is distorting markets in the near-term. To be fair, it's not easy to compile an accurate non-farm payrolls figure. According to the BLS, there is a total of 131.516 million non-farm payrolls in the U.S. In October, the we added 80k non-farm jobs, which represents just 0.06% month-over-month growth. Economists were expecting 105k jobs, or 0.08% growth. On a percentage basis, as you can see, the surprise was quite small. Nevertheless, the markets and the public will continue to be fixated on that absolute number. But, even that absolute number is prone to significant revisions that often go unnoticed by many. 

Challenger: Holiday Retail Hiring Could Be Lower Than 2010 - Holiday retail hiring is off to a relatively strong start, with 141,500 jobs added in October, but overall hiring for the season may be a bit slower than last year, layoff consultant Challenger, Gray & Christmas Inc. said. The October hiring figure is 1.8% lower than October of last year, but still well above the dismal holiday hiring numbers reported during the recession. The shaky economy, weak consumer confidence and slower retail sales growth may result in lower hiring this holiday season, the company said. In its annual holiday hiring forecast released in September, Challenger predicted that seasonal hiring would be about the same or a little lower than a year ago. “November will give us the best indication of how 2011 stacks up when it comes to holiday hiring. That is usually when we see the highest number of jobs added,” said Chief Executive John A. Challenger. Last week, employment company CareerBuilder said fewer retailers plan to hire additional holiday workers.

BLS: Job Openings increase in September - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in September was 3.4 million, up from 3.1 million in August. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in September was 1.2 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 38 percent since the end of the recession in June 2009. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Notice that hires (dark blue) and total separations (red and blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. In general, the number of job openings (yellow) has been trending up, and are up about 22% year-over-year compared to September 2010.  Quits increased in September, and have been trending up - and quits are now up about 11% year-over-year.

Vital Signs: Four Unemployed for Each Job Opening - Jobs are getting just a bit easier to find. For each U.S. job opening at the end of September, there were 4.2 people looking for work. That was down from a year earlier, when there were 5.4 job seekers for every opening, and the fewest since December 2008. In 2007, there was on average about two job openings for every three unemployed workers.

More Churn in Job Market Is Hopeful Sign - The number of people leaving or receiving jobs picked up in September, the Labor Department reported Tuesday, a sign that that the labor market may be regaining its health. Both hires and separations have been relatively stagnant in the last year, with companies too nervous to hire or let anyone go, and employees too frightened to leave their jobs. Separations in particular had reached record lows. But levels of both rose in September. While a rise in separations, at least, may not sound like welcome news, it means that companies and workers are finally more willing to start making decisions again. Uncertainty about the state of the economy had largely frozen both hiring and firing, and without people leaving their jobs, companies had nobody to replace with new workers. Greater churn in the job market now potentially means more opportunities down the line for the 14 million unemployed workers sitting on the sidelines. The turnover is still not as great as it was before the recession began, however, when the population was also smaller. Particularly promising is that the number of quits — that is, workers who voluntarily left their jobs, as opposed to being fired or laid off — rose in September, reaching its highest total since November 2008. That probably means that workers finally feel more confident that they can find new work if they are unhappy with their current position.

Underutilized Workers Outnumber Job Openings 7 to 1 - The most recent Bureau of Labor Statistics (BLS) data released this month show an increase in the number of job openings available throughout the United States, as reported by Catherine Rampell in the New York Times “Economix” blog. As of the end of September, there were 3.8 unemployed people per job opening, based on raw data. (Rampell reports a slightly higher ratio, based on seasonally adjusted figures.) These ratios use the official definition of unemployment, leading to a rather low count of the number of workers individually affected by the bad labor market. In the figure above, I compare the number of job openings with the number of unemployed people, using separate bars for each gender. In addition, I include bars representing two more groups that are covered by the BLS’s broad “U6 measure of labor underutilization” but not by the official unemployment rate: 1) those working only part-time for economic reasons; and 2) people who are “marginally attached to the workforce.” The latter group includes discouraged workers and many others who would almost certainly be working if the job market were sufficiently robust.* The green bar on the right shows the total number of people in all of these categories of underutilized workers—about 23.9 million, or 7.0 underutilized workers per job opening.

US Jobless Claims Drop To 390k As Euro Crisis Deepens - The drop of 10,000 in new jobless claims last week to a seasonally adjusted 390,000 provides a bit of a shock absorber for sentiment in the wake of the new wave of euro turmoil via Italy. Yes, even last week's numbers may be out of date as the Continent's woes worsen. But for the moment, at least, we know that the labor market was continuing to heal on the margins, as suggested by other metrics, such as the Monster Employment Index or the payrolls report for October. The progress has been slow, but at least there's been some progress. The optimistic view with the number du jour is that the tepid installment of the latest virtuous cycle is spilling over into November. The big mystery is whether the tenuous revival will survive the new bout of euro darkness? Mysteries aside, last week's jobless claims tally is another installment on the new new downward trend of the last two months--and the best yet! Weekly filings for unemployment benefits touched the lowest levels since early April. There's a bit of symbolic significance in retesting the previous lows, and perhaps some economic import as well. April, you may recall, was the month when the previous round of encouraging economic momentum came apart. In terms of initial jobless claims, we've come full circle.

Unemployment Claims Drop; Trade Gap Narrows : NPR - The outlook for American jobs and trade looked a little brighter Thursday, despite growing uncertainty overseas. The number of people who applied for unemployment benefits last week fell by 10,000 to a seasonally adjusted 390,000, the Labor Department said Thursday. That's the fewest since April. The U.S. trade deficit narrowed to $43.1 billion in September, its lowest point of the year, the Commerce Department said. Foreign sales of American-made autos, airplanes and heavy machinery pushed exports to an all-time high. The data suggest layoffs are easing and the economy grew slightly better over the summer than the government had estimated a month ago.

First Time Claims Data A Renoir - Every week the US Department of Labor and Birth/Death Adjustments dutifully reports two sets of numbers on first time and continuing unemployment claims. One set is the actual number of people filing claims as tabulated by the 50 states. The other is a fictionalized number which purports to smooth out the seasonal variances so that the trend can be represented more clearly. One number is real. The other is fake, but is like a work of abstract impressionism. It represents the statistician's impression of reality, and for some people that works. Hey, beauty is in the eye of the beholder. I like photo realism myself. Most of the time the fake seasonal numbers paint a pretty picture more or less representing the trend. The problem is that it makes it impossible to see how the rate of job loss is really doing in real time. For that we need to look at the actual snapshot photo and compare it with past such photos. That way it's possible to quickly determine whether the picture is getting better, worse, or about the same as past periods.

And the actuaries shall eat - In the debate on unemployment, Ryan Avent makes a common move (related post from Matt here, and Fabio here and Adam here), though I think an incorrect one: It is remarkable to me how readily old, successful professionals dismiss the labour-market difficulties of young adults as the product of their poorly-chosen majors and general lack of ambition, and on what flimsy evidence they’re prepared to base these views. There are now 3.3m unemployed workers between the ages of 25 and 34. That’s more than twice the level in 2007. There are over 2m unemployed college graduates of all ages; nearly three times the level of 2007. There are many millions more that are underemployed—unwillingly working less than full-time or unwillingly working in a job outside their field which pays less than jobs in their field. As far as I know, the distribution of college majors didn’t swing dramatically from quantitative fields to art history over the past half decade. The general form of the argument is: “only x changed, therefore x is the cause.”  A supply and demand graph, with the shift of one curve, shows that argument to be false.  The net effect of the shift will depend, for one thing, on the slope of the other curve, plus whether the other curve has been shifting (more slowly) all along.

Can Anyone Really Create Jobs? - The current economic downturn has been called a housing crisis, a financial crisis and a debt crisis, but the simplifying logic of the political season has settled on what is really more a result than a cause. We are now, according to nearly everyone running for office, in a jobs crisis. Every politician currently has a “jobs plan,” very often a list of vague proposals filled with serious-sounding phrases like “budget framework” and “regulatory cap” that are designed, for the most part, to mean both everything and nothing at all.  Even with all the attention on hiring, the government’s ability to create jobs is pretty dispiriting, no matter who is in charge. The most popular types of jobs programs involve state tax breaks or subsidies that seek to seduce a company from one state to another. While this can mean good news for “business-friendly” states like Texas, such policies don’t add to overall employment so much as they just shuffle jobs around. This helps explain Rick Perry’s claim that more than one million jobs were created under his watch in Texas while the rest of the country lost more than two million.  One reason we have so few ideas about job creation is that up until recently, the U.S. economy had been growing so well for so long that few economists spent much time studying it. (They’re trying to make up for it now. See the chart on the next page.)

Will Robots Take Our Jobs? - (video) A debate on the future of the American economy and the role of intelligent computers and robots. Will rapid technological innovations aid American workers, or will it render large numbers of American workers obsolete?

Will Slowing Income Growth Spoil The Party? - Job openings on the last business day of September rose to 3.4 million, the Labor Department reports. That's up from 3.1 million in August. Here's one more statistic for thinking that the U.S. economy continues to grow. Coupled with moderately positive job creation in the private sector for October,, one might reason that the recession risk is falling. The higher "churn" rate in the job market echoes the sentiment, Catherine Rampell explains. But let's not forget that there are still plenty of risks lurking, including the disconnect in consumer spending and income. Tim Duy observes a "nagging" divergence in consumer confidence vs. consumer spending: While confidence is at recession levels, real personal consumption expenditures continue to grow at a reasonable clip. Should confidence numbers be totally dismissed, or do they signal an underlying fragility among households that should not be ignored? Some hints at an answer may be found in the September income and spending report. Notably, real personal disposable income looks to have rolled over Last month I noted the fading in the year-over-year change in personal income in the September data, pointing to this chart:

“When Offshoring Backfires” -- Yves Smith - Readers may know that I have strong feelings about offshoring. There is plenty of evidence that the case for offshoring and outsourcing are considerably overdone. First, direct factory labor is only a small part of the total wholesale cost of manufactured goods, typically 10% to 15%. While offshoring clearly reduces those costs, there are offsets: increased managerial/coordination cost, greater transport and inventory financing costs. I’ve had some executives in different lines of business tell me their company decided to outsource/offshore despite the fact that the business case was not compelling. Second, offshoring increases risk, particularly the risk of getting stuck with inventory you can’t sell.  This VoxEU article does a nice job of looking at the tradeoffs between cost savings and customer responsiveness.  As the global economic downturn grinds on, more companies are acknowledging that labour costs aren’t always the most important factor when deciding where to build their next factory. This column argues that, in times of recession, some companies find that bringing their business home can give them a competitive edge.

War Against Government Workers Is Prolonging the Recession…The US economy gained 104,000 private sector jobs last month, but lost 24,000 public sector jobs, resulting in a net total of 80,000 new jobs—fewer than expected and well below what the country needs to get out of the Great Recession. This is by now a depressingly familiar story. In the past year, 1.6 million private sector jobs have been created. But since the recession began in December 2007, more than 500,000 public sector jobs have been lost. Half of those jobs have disappeared since January 2011, after Republicans (who ran on improving the economy in 2010) took control of the House of Representatives. States have cut 49,000 jobs and localities have cut 210,000 jobs since the beginning of the year. Contrary to what Republicans might tell you, these are “real” jobs lost by real people, who pay taxes, spend money, provide for their families and perform vital public services. When they suffer, the economy suffers too. “This is the worst time to push government workers into the ranks of the unemployed,” notes blogger Mike Konczal of the Roosevelt Institute. “With slack capacity, a high number of unemployed people, and negative real interest rates, we can’t afford a war against government workers.”

Occupy Movement Inspires Unions to Embrace Bold Tactics - Organized labor’s early flirtation with Occupy Wall Street1 is starting to get serious.  Union leaders, who were initially cautious in embracing the Occupy movement, have in recent weeks showered the protesters with help — tents, air mattresses, propane heaters and tons of food. The protesters, for their part, have joined in union marches and picket lines across the nation. About 100 protesters from Occupy Wall Street are expected to join a Teamsters picket line at the Sotheby’s auction house in Manhattan on Wednesday night to back the union in a bitter contract fight.  Labor unions, marveling at how the protesters have fired up the public on traditional labor issues like income inequality2, are also starting to embrace some of the bold tactics and social media skills of the Occupy movement.  Organized labor’s public relations staff is also using Twitter, Tumblr and other social media much more aggressively after seeing how the Occupy protesters have used those services to mobilize support by immediately transmitting photos and videos of marches, tear-gassing and arrests. “You’re seeing a lot more unions wanting to be aggressive in their messaging and their activity. You’ll see more unions on the street, wanting to tap into the energy of Occupy Wall Street.”

To the Streets: Occupy Wall Street moves to Main Streets - The "Occupy Wall Street" movement is moving to Main Streets across the globe. It's about time. But I fear that the movement will be captured by the far left, just as the TEA party movement has been captured by the far right. If Occupy Wall Street will evolve to represent the case of the 99% against the 1% we will have a chance for needed social/institutional change here in the US. I found a little 4-minute video (embedded below) that captures the essence of the problem. My Four Reasons to Occupy Wall Street:

Most “Occupy” Protesters HAVE Jobs … Unemployment Much Lower Than In Tea Party - One of the mindless attacks on Occupy protesters is that they are lazy and should “go get a job”. In fact, most Occupy protesters have jobs. For example, Scott Olsen – the Marine veteran peacefully protesting in Oakland who was shot in the head with a projectile by riot police – had a very good day job, but was so dedicated that he went to the protests after work:Scott Olsen, 24, joined the protests as he worked his day job as a network engineer and left his apartment each night to sleep alongside protesters in San Francisco and Oakland, Calif., Keith Shannon said.Indeed, the Wall Street Journal found: The vast majority of demonstrators are actually employed, and the proportion of protesters unemployed (15%) is within single digits of the national unemployment rate (9.1%). Professor Hector R. Cordero-Guzman and business analyst Harrison Schultz from the Baruch College School of Public Affair puts the unemployment rate of the Occupy protesters at 13.1%.  In other words, approximately 85% employment rate. In contrast, a 2010 New York Times CBS News poll found that only 56% of members of the Tea party were employed (question 105).

October 2011 Jobs: A Surge for Young Adults? - In terms of jobs gained, October 2011 appeared to be the best month for young adults (Age 20-24) since the United States economy peaked before entering into recession in December 2007.  The October 2011 Employment Situation Report indicates that the number of employed individuals between the ages of 20 and 24 increased to 13,357,000, up 285,000 from the previous month.  In fact, that's the third largest month-over-month increase for Age 20-24 individuals ever recorded. Only January 1990's increase of 864,000 over December 1989 and June 1983's increase of 357,000 over May 1983 are higher.  As such, we strongly suspect that gain in the number of employed is somewhat of a statistical outlier, perhaps strongly affected by sampling errors in the surveyed data. We're not certain however, given that almost all of the improvement in the past several months has been concentrated within this age grouping.

College Majors and Unemployment Rates - Choosing the right college major can make a big difference in students’ career prospects, in terms of employment and pay. Some popular majors, such as nursing and finance, do particularly well, with unemployment under 5% and high salaries during the course of their careers. Click here to see a sortable list of college majors, their unemployment rates and salaries.

Generation Jobless: For Those Under 24, a Portrait in Crisis - The U.S. labor market is in a malaise, but young adults are in crisis. Though workers of all ages face economic headwinds, teens and adults under the age of 24, especially those with little or no college education, are faring the worst, economists say. The 16.7% unemployment rate among Americans in that group is more than twice the rate for workers 25 and older. In the downturn of 1982 to 1983, unemployment among young adults topped 16% for 23 straight months. The current slump has been longer and deeper: The unemployment rate has been above 16% for 32 months—and counting. For 29 of those months, the rate has been above 17%, reaching a record 19.5% in April of last year. Paralyzed by a painful economy, some young adults have decided to forgo college degrees, graduate school or even the search for full-time work. Others are working temporary or odd jobs just to get by. Many have moved back in with their parents. Unemployment is particularly acute for young men. In the 16 to 24 age group, 18% of males lacked jobs last month, compared with 15.3% of females. That is partly because the worst-hit sectors, such as construction, employ more men than women. Female-dominated sectors—health care and education, for example—have done better.

Generation Jobless: By the Numbers - For the past week, our Generation Jobless series has looked at the challenges young people are facing in today’s job market. As the recovery limps along and unemployment remains high, we’ve found young adults moving back in with their parents to save on expenses, rejecting Ivy League schools for less expensive state universities, and choosing liberal-arts majors even though science and engineering grads are in greater demand by employers. Below, we pull out some of the numbers that illustrate these and other trends.

Five lowest median earnings by college major, followed by popularity ranking of major, out of 173:

    • School student counseling: $20,000 (#172)
    • Counseling Psychology: $34,000 (#133)
    • Educational Psychology: $35,000 (#156)
    • Visual and Performing Arts: $36,000 (#103)
    • Library Science: $36,000 (#159)

Five highest median earnings by college major, followed by popularity ranking of major, out of 173:

    • Petroleum Engineering: $127,000 (#138)
    • Pharmaceutical Sciences and Administration: $105,000 (#53)
    • Mining and Mineral Engineering: $101,500 (#162)
    • Nuclear Engineering: $96,000 (#149)
    • Naval Architecture and Marine Engineering: $96,000 (#145)

Vital Signs: More 25-34 Year Olds Living With Parents - The tough economy and the housing bust have rejiggered many Americans’ living arrangements. This year, about 14.2% of the 42 million people aged 25 to 34 are living in their parents’ homes. That compares with 10.6% in 2000. Put another way, there are1.5 million people under Mom and Dad’s roof who, in better times, would probably be under their own.

Economy Creating Mostly Low-Paying Jobs - The jobs deficit in the United States, which is made up of jobs lost during and after the recession and not yet recovered plus new jobs needed to keep up with population growth, is currently more than 11 million, according to the National Employment Law Project (NELP). Another, and some say even bigger, problem is that the jobs that have been created so far have been relatively low-paying compared with jobs that were lost during the recession. The bulk of the job losses  during the recession were in mid-wage occupations. Of the net employment losses between the first quarter of 2008 and the first quarter of 2010, 60 percent were in mid-wage occupations, 21.3 percent were in low-wage occupations, and 18.7 percent were in high-wage occupations, according to a recent NELP report, The Good Jobs Deficit. (NELP defines low-wage occupations as those that pay a median hourly wage between $7.51 to $13.52, mid-wage as those that pay between $13.53 and $20.66 per hour, and high-wage as those that pay between $20.67 and $53.32 hourly.) Coming out of the recession, from the first quarter of 2010 through the first quarter of 2011, low-wage occupations, such as retail sales and office clerks, grew by 3.2 percent, while mid-wage occupations grew by only 1.2 percent. At the same time, growth in high-wage occupations declined by 1.2 percent.

Why Americans Won't Do Dirty Jobs - Skinning, gutting, and cutting up catfish is not easy or pleasant work. No one knows this better than Randy Rhodes, president of Harvest Select, which has a processing plant in impoverished Uniontown, Ala. For years, Rhodes has had trouble finding Americans willing to grab a knife and stand 10 or more hours a day in a cold, wet room for minimum wage and skimpy benefits. Most of his employees are Guatemalan. Or they were, until Alabama enacted an immigration law in September that requires police to question people they suspect might be in the U.S. illegally and punish businesses that hire them. The law, known as HB56, is intended to scare off undocumented workers, and in that regard it’s been a success. It’s also driven away legal immigrants who feared being harassed.  His ex-employees joined an exodus of thousands of immigrant field hands, hotel housekeepers, dishwashers, chicken plant employees, and construction workers who have fled Alabama for other states. Like Rhodes, many employers who lost workers followed federal requirements and only found out their workers were illegal when they disappeared. In their wake are thousands of vacant positions and hundreds of angry business owners staring at unpicked tomatoes, uncleaned fish, and unmade beds. “Somebody has to figure this out. The immigrants aren’t coming back to Alabama—they’re gone,” Rhodes says. “I have 158 jobs, and I need to give them to somebody.”

Amazon workers left out in the cold - Paul Grady was working the night shift last November at an warehouse in Breinigsville when a fire alarm sounded, forcing employees to evacuate. It was frigid outside — the temperature dipped into the 20s — and many employees left the building without coats. Some were wearing only T-shirts and shorts or jeans. Grady was among several warehouse workers to require medical attention after being exposed to frigid temperatures during three warehouse evacuations last November and December, highlighting a new occupational hazard claimed by employees who last brought to light punishing heat in the Lehigh Valley facility. Amazon changed its evacuation policies and bought hats, blankets and hand warmers to distribute during fire alarms after workers needed treatment for cold exposure. Working conditions at Amazon's Lehigh Valley shipping hub gained national attention and a public response from the company after a Sept. 18 article in The Morning Call revealed employee complaints about heat in the warehouse complex and rapid production requirements many could not sustain. Amazon hired ambulance crews to park outside the complex on hot summer days in case workers experienced heat-related problems.

Nearly Quarter of Workers Are Depressed - Today’s economic situation is depressing. Literally. As if we needed proof, a recent survey by management consulting firm rogenSi found that nearly a quarter of workers around the world are depressed, a diagnosis the survey reaches based on respondents identifying with five or more of the key adjectives laid out by the World Health Organization. The report found that only 12 % of the global workforce feels optimistic. Only 14% of workers find their leaders inspirational. The survey, which rogenSi calls its “Global Mindset Index,” also found that 92% of workers “responded that their emotions were in someway being controlled by the results they have been achieving at work” as opposed to more positive factors such as their own belief in self. “Today’s environmental stressors have created a negative mindset that has infiltrated our global workforce, causing worker morale to plummet and dangerously hampering productivity,”

Who Gets Unemployment Benefits - It’s commonly assumed that unemployed people not receiving unemployment benefits have been unlucky enough to go without a job for so long that their benefits have run out. But often more important are limited work histories and a low propensity to take benefits that are available. Historically, many unemployed people have not collected unemployment payments because of ineligibility, lack of awareness or simple unwillingness to collect benefits. But some of those patterns changed during the recent recession. The chart below shows the number of unemployment compensation beneficiaries per unemployed person, for people 16 to 24, people 25 and over and all people 16 and over. This ratio can be less than one for all of the reasons mentioned and because some unemployed people may exhaust their benefits sometime during the calendar year. Not surprisingly, more than three-quarters of young unemployed people do not receive unemployment compensation, in large part because they are much less likely to have the employment history that is required for eligibility. Young people are disproportionately represented among the unemployed, and their limited work histories are the primary reason why a large fraction of the unemployed does not receive benefits.

Most of the unemployed no longer receive aid - The jobs crisis has left so many people out of work for so long that most of America’s unemployed are no longer receiving unemployment benefits. Early last year, 75 percent were receiving checks. The figure is now 48 percent — a shift that points to a growing crisis of long-term unemployment. Nearly one-third of America’s 14 million unemployed have had no job for a year or more. Congress is expected to decide by year’s end whether to continue providing emergency unemployment benefits for up to 99 weeks in the hardest-hit states. If the emergency benefits expire, the proportion of the unemployed receiving aid would fall further. The ranks of the poor would also rise. The Census Bureau says unemployment benefits kept 3.2 million people from slipping into poverty last year. It defines poverty as annual income below $22,314 for a family of four. Yet for a growing share of the unemployed, a vote in Congress to extend the benefits to 99 weeks is irrelevant. They’ve had no job for more than 99 weeks. They’re no longer eligible for benefits.

52% of Unemployed No Longer Receive Benefits; Average Duration of Unemployment is 40 Weeks - Yahoo! Finance reports Most of the unemployed no longer receive benefits Early last year, 75 percent were receiving checks. The figure is now 48 percent -- a shift that points to a growing crisis of long-term unemployment. Nearly one-third of America's 14 million unemployed have had no job for a year or more. Congress is expected to decide by year's end whether to continue providing emergency unemployment benefits for up to 99 weeks in the hardest-hit states. If the emergency benefits expire, the proportion of the unemployed receiving aid would fall further. Congress has extended the program nine times. But it might balk at the $45 billion cost. It will be the first time the Republican-led House will vote on the issue. Extending the program will not do any good for those who have already used up 99 weeks. The maximum is still 99 weeks. At the state level, the number of weeks varies.

Census data show wealth of older Americans is 47 times that of young adults, wid - The wealth gap between younger and older Americans has stretched to the widest on record, worsened by a prolonged economic downturn that has wiped out job opportunities for young adults and saddled them with housing and college debt.The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday. While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.The analysis reflects the impact of the economic downturn, which has hit young adults particularly hard. More are pursuing college or advanced degrees, taking on debt as they wait for the job market to recover. Others are struggling to pay mortgage costs on homes now worth less than when they were bought in the housing boom.

Your parents were richer than you are - Your parents were much better off than you are at the same age, according to this report by the Pew Research Center that shows that over the past quarter century households head by older adults have grown far richer faster than their counterparts at the same age. From the Pew Report: In 2009, households headed by adults ages 65 and older possessed 42% more median net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984. During this same period, the wealth of households headed by younger adults moved in the opposite direction. In 2009, households headed by adults younger than 35 had 68% less wealth than households of their same-aged counterparts had in 1984.  As a result of these divergent trends, in 2009 the typical household headed by someone in the older age group had 47 times as much net wealth as the typical household headed by someone in the younger age group–$170,494 versus $3,662 (all figures expressed in 2010 dollars). Back in 1984, this had been a less lopsided ten-to-one ratio. In absolute terms, the oldest households in 1984 had median net wealth $108,936 higher than that of the youngest households. In 2009, the gap had widened to $166,832.

Poll shows most see deepening wealth gap - More than six in 10 Americans see a widening gap between the wealthy and the less well-off in this country, and about as many want the federal government to try to shrink the divide, according to a new Washington Post-ABC News poll1. Democrats and independents largely support government policies to reduce the wealth gap, while most Republicans oppose such action. The issue cuts even more sharply along a new political fault line, with tea party supporters and those backing the fledgling Occupy Wall Street movement on opposite sides of the question.  In official statistics, income disparities between the highest earners and other Americans have reached levels not seen since the Great Depression2, and in the new poll, 61 percent of all adults say the gap is larger than in the past, including 37 percent who say it is “much larger.” About as many, 60 percent, say federal policies should be aimed at lessening the disparities. Those who see a “much larger” wealth gap are particularly apt to say Washington should work to close it; 84 percent in this group say so.

Growth of Inequality in US - The Congressional Budget Office produced an in depth study into inequality in the US. They concluded inequality has widened in the US in the past three decades. In particular, the biggest growth in income has come from the top 1% of the population. See full report at: Trends in US income inequality (CBO) Summary of Report: CBO finds that, between 1979 and 2007, income grew by:

  • 275 percent for the top 1 percent of households,
  • 65 percent for the next 19 percent,
  • Just under 40 percent for the next 60 percent, and
  • 18 percent for the bottom 20 percent.

Is U.S. Upward Economic Mobility Impaired? - When the Pew Economic Mobility Project (EMP) surveyed people about what the American Dream meant, it got widely ranging answers.[1]  Indiana’s governor, Mitch Daniels, recently hit on a common sentiment when he observed that “upward mobility from the bottom is the crux of the American promise.” The economic inefficiency that results when much of the population is stuck at the bottom (and the top) means the tide may lift everyone less than it could.One way to assess the extent of mobility is to ask whether people tend to be better off than their parents were at the same age — whether they experience upward absolute mobility. Research for EMP conducted by my colleagues at the Brookings Institution shows that two-thirds of 40-year-old Americans are in households with larger incomes than their parents had at the same age, even taking into account the fact that the cost of living has risen.[2] That’s pretty impressive, but it actually understates the improvement between generations. Household size declined over these decades, so incomes now are divided up among fewer family members, leaving them better off than bigger households of the past. Another EMP study shows that when incomes are adjusted for household size, four out of five adults today are better off than their parents were at the same age.[3]

The Tyranny of Meritocracy -I don't care about income inequality.  I care about the absolute condition of the poor--whether they are hungry, cold, and sick.  But I do not care about the gap between their incomes, and those of Warren Buffet and Bill Gates.  Nor the ratio of Gates and Buffett's incomes to mine.  But while I do not care about gaps and ratios, I do care about opportunity.  It is fine that CEOs earn many times what their workers do--but it is not fine if some are born to be workers, and others to be CEOs.  And unfortunately, that increasingly seems to be the story in America, as Scott Winship outlines in a fine new piece for National Review: If you're reading this essay, chances are pretty good that your household income puts you in one of the top two fifths, or that you can expect to be there at age 40. How would you feel about your child's having only a 17 percent chance of achieving the equivalent status as an adult? That's how many kids with parents in the bottom fifth around 1970 made it to the top two-fifths by the early 2000s. In fact, if the last generation is any guide, your child growing up in the top two-fifths today will have a 60 percent chance of being in the top two fifths as an adult. That's the impact of picking the right parents -- increasing the chances of ending up middle- to upper-middle class by a factor of three or four.

The young and the broke – 37 percent of young households held zero or a negative net worth in 2009. The median net worth of those 35 and younger is $3,600.It is hard to imagine a future generation of Americans were those moving forward are actually poorer than the current generation.  Yet that is precisely the world we are diving into. It is hard to imagine a future generation of Americans were those moving forward are actually poorer than the current generation.  Yet that is precisely the world we are diving into.  Those that purchased homes in the pre-bubble days and also attended college in less inflated times have a massive head start on the current younger generation that is contending with a bursting housing bubble and a financial system that might as well be a roulette wheel.  One startling figure from a recent Pew Research report shows that 37 percent of young households hold zero or a negative net worth.  This is not a good way to build a healthy financial future.  The wealth gap between previous generations is also becoming increasingly large.  This narrative ties into the overall systemic pilfering of the middle class.The gap between younger and older Americans has never been so large:

Kids' Return Home Takes Toll on Parents - As recent college graduates scramble to find full-time jobs, numerous parents are helping their children pay bills or letting them live at home again. About 59% of parents provide or recently provided financial assistance to children aged 18 to 39 who weren't students, concluded a May survey of nearly 1,100 people by the National Endowment for Financial Education. According to Census data, 5.9 million Americans between 25 and 34 years of age—nearly a quarter of whom have bachelor's degrees—live with their parents, a significant increase from 4.7 million before the recession. But many parents can't afford the extra expense. A full 26% of those polled by the nonprofit group took on more debt to help their offspring, 13% delayed a planned life event such as a home purchase, and 7% postponed retirement. ..Compounding the problem is the fact that certain parents are crowding the younger generation out of the job market because their support of their grown kids means they can't afford to retire.

The economic treadmill is throwing millions out of the middle class and into poverty. In 2010 75 percent of unemployed received unemployment benefits while today it is down to 48 percent. The economy is being pulled apart from the center as if two mighty horses on both sides were set to run in opposite directions of the financially strapped middle class.  This seems to be the current trajectory of our economic progress.  The ranks of the poor continue to grow while the financial sector continues to strive based on government favoritism and a strong form of corporatacracy.  Take this startling fact under consideration that last year 75 percent of the unemployed received some form of unemployment benefits. That figure is set to fall to 48 percent this year.  Part of the main reason has been the long-term structural unemployment in our economy.  The current economy resembles two different worlds and most Americans are still feeling the pangs of the recession that began in 2007.  The main question many are asking is where will this country be heading if the same financial sector that created rampant disorder in the last decade is still at the helm of the ship?  We can look at current trends and the results do not look promising.

The War on the Home Front - The Occupy Wall Street movement has already made the concentration of wealth at the top of this society a central issue in American politics.  Now, it promises to do something similar when it comes to the realities of poverty in this country. By making Wall Street its symbolic target, and branding itself as a movement of the 99%, OWS has redirected public attention to the issue of extreme inequality, which it has recast as, essentially, a moral problem.  Only a short time ago, the “morals” issue in politics meant the propriety of sexual preferences, reproductive behavior, or the personal behavior of presidents.  Economic policy, including tax cuts for the rich, subsidies and government protection for insurance and pharmaceutical companies, and financial deregulation, was shrouded in clouds of propaganda or simply considered too complex for ordinary Americans to grasp. Now, in what seems like no time at all, the fog has lifted and the topic on the table everywhere seems to be the morality of contemporary financial capitalism.  The protestors have accomplished this mainly through the symbolic power of their actions: by naming Wall Street, the heartland of financial capitalism, as the enemy, and by welcoming the homeless and the down-and-out to their occupation sites.  And of course, the slogan “We are the 99%” reiterated the message that almost all of us are suffering from the reckless profiteering of a tiny handful.  (In fact, they aren’t far off: the increase in income of the top 1% over the past three decades about equals the losses of the bottom 80%.)

The War Against the Poor - We’ve been at war for decades now -- not just in Afghanistan or Iraq, but right here at home.  Domestically, it’s been a war against the poor, but if you hadn’t noticed, that’s not surprising. You wouldn’t often have found the casualty figures from this particular conflict in your local newspaper or on the nightly TV news.  Devastating as it’s been, the war against the poor has gone largely unnoticed -- until now. The Occupy Wall Street movement has already made the concentration of wealth at the top of this society a central issue in American politics.  Now, it promises to do something similar when it comes to the realities of poverty in this country. By making Wall Street its symbolic target, and branding itself as a movement of the 99%, OWS has redirected public attention to the issue of extreme inequality, which it has recast as, essentially, a moral problem.  Only a short time ago, the “morals” issue in politics meant the propriety of sexual preferences, reproductive behavior, or the personal behavior of presidents.  Economic policy, including tax cuts for the rich, subsidies and government protection for insurance and pharmaceutical companies, and financial deregulation, was shrouded in clouds of propaganda or simply considered too complex for ordinary Americans to grasp.

No War But the Class War: Is Political Realignment Possible?  - Have you ever suddenly realized that several ideas that have been rolling through your mind are connected? People who regularly write and think about ideas live for such aha moments. In fact, I think Aldous Huxley had such experiences in mind when he cleverly described “[a]n intellectual” as “a person who has discovered something more interesting than sex.” Although I certainly won’t claim to be in that rarefied ether, I did recently have a minor moment of clarity with respect to three ideas about OWS that have been preoccupying me (ha, preoccupying).  The first comes from a recent interview with Larry Mishel of EPI - who is brilliant and charming and very deserving of all of the praise he’s been getting lately (the interview is currently being edited and will be posted soon). Anyway, during the interview, Larry (we’re on a first name basis) said something that I immediately knew was correct, but that I hadn’t heard articulated: He said that he used to think of our system as broken, but it’s not; it’s functioning exactly how it is supposed to function. The 1% haven’t broken our government; they’ve captured it. And having captured it, they’ve designed it to work for their benefit and against the interests of the 99%.

News Flash: Antipoverty Programs Can Reduce Poverty - In 1998, when I was Deputy Assistant Secretary for Tax Analysis at the Treasury Department, I asked my staff expert on the Earned Income Tax Credit (EITC) how many people the EITC had lifted out of poverty. Her answer shocked me: technically, zero. Poverty statistics don’t account for the EITC or any other federal anti-poverty measure. Prior to today, the government could have given every poor household in the country $25,000 and the poverty measure wouldn’t have budged. It’s indeed ironic that a measure originally created in 1963 to track progress in alleviating poverty ignored the effect of those programs on families’ economic well-being. In 1963, it might have sort of made sense since the big anti-poverty programs were yet to be enacted. In 2011, it doesn’t. As poverty expert Rebecca Blank said in her presidential address for the Association of Public Policy and Management in 2008. It is not too strong a statement to say that… the poverty thresholds are nonsensical numbers. They are based on data from 1955 and do not reflect any information related to current expenditures or needs. (Emphasis added.)

A hard road for the poor in need of cars - For more than a century, efforts to help the disadvantaged have focused on education, healthcare, nutrition and housing. Almost nothing has been done to help the working poor afford cars, despite research that indicates it would help alleviate poverty. About 1 in 4 needy U.S. families do not have a car, according to the Annie E. Casey Foundation. That's a serious handicap for the millions of Americans who don't have access to robust mass transit. A nationwide survey of 353 people who bought cars with help from a nonprofit group called Ways to Work found that 72% reported an increase in income. Of those who were on public assistance when they acquired a car, 87% were no longer receiving it a few years later. Other studies have found that low-income people were more involved in community activities and had better access to healthcare after getting cars, while their children participated more frequently in after-school programs. "You're more likely to have a job and less likely to be fired,"

Making The Poverty Numbers Look Better - On Monday the Census Bureau is going release a new Supplemental Poverty Measure designed to make us feel a whole lot better about America's slide into Third World country status. The New York Times is all over this story, as reported in Bleak Portrait of Poverty Is Off the Mark, Experts Say and elaborated on in Calculating Poverty from their Economix blog. When the Census Bureau said in September that the number of poor Americans had soared by 10 million to rates rarely seen in four decades, commentators called the report “shocking” and “bleak.” Most poverty experts would add another description: “flawed”... Concocted on the fly a half-century ago, the official poverty measure ignores ever more of what is happening to the poor person’s wallet — good and bad... On Monday, that may start to change when the Census Bureau releases a long-promised alternate measure meant to do a better job of counting the resources the needy have and the bills they have to pay. By the new poverty measure, the overall poverty rate is only 13.6%, not 15.1%. The change is +1.1% since 2006, not +2.8%. And what about the children? It's all about the children, right? Among children, it showed poverty rates falling to 15 percent, from 22 percent, in the official count

Doug Smith: One Way Journalism Paints Flawed Picture Of Poverty - As a subscriber and well wisher for the critical role that might be fulfilled by The New York Times, I’m always disappointed when Times’ journalists substitute personal agendas for accuracy. This was glaringly on view last week when three reporters butchered the chance to shed light on the Census Bureau’s new “supplemental poverty measure”.  After nearly fifty years of using a terribly flawed poverty measure – one that looks to the single yardstick of food costs as adjusted for inflation — the Census Bureau acknowledged major elements required for a more realistic picture– cash and cash equivalents received by folks through government support programs, and statistical measures for expenses incurred beyond food.  Instead of exploring the implications, strengths and weaknesses of the new measure, however, the Times’ reporters offered readers to a mostly useless piece of one-way, ‘we’re smarter than everybody else’ journalism, beginning with the headline, “Bleak Portrait Of Poverty Is Off The Mark, Experts Say.” So, sports fans, here’s the highlight reel from the Times’ article: When the Census Bureau said in September that the number of poor Americans had soared by 10 million to rates rarely seen in four decades, commentators called the report “shocking” and “bleak.” Most poverty experts would add another description: “flawed.” Slick juxtaposition moment: By contrasting ‘flawed’ with ‘rates rarely seen in four decades’, ‘shocking’ and ‘bleak”, the reporters suggest that poverty is neither shocking nor bleak nor operating at rates ‘rarely seen’. Fact: The official poverty rate in 2010 was 15.2% — a number seen just one single time in the previous forty years. In normal English: ‘rarely seen’. Fact: The new Supplemental Measure of Poverty for 2010 is 16% — that is, even higher than the official rate. One might call this ‘bleak’.

Understanding the New View of Poverty (1): The Erosion of Stereotypes - We all thought we knew who is poor in America. Children, especially in one-parent households. Racial minorities. Families who aren’t able to participate in the great American dream of home ownership. Really? The Census Bureau’s new Supplementary Poverty Measure (SPM) erodes all of these stereotypes. They still contain some truth, but less than it seemed. No matter who you are, you cannot dismiss income insecurity as a problem that doesn’t threaten people just like you. The news does not come without warning. The official 2010 poverty figures, released in September, already showed a record high poverty rate for working-age Americans—some 13.7 percent, up from 12.9 percent in 2009, itself a record. Now the new SPM shows that official figures understate the problem. The new SPM begins from a minimum budget that includes not just food, but food, shelter, clothing, and utilities (FCSU). The FCSU budget is then multiplied by 1.2  to allow for other items and adjust for family size and regional differences in housing costs. The SPM then compares the poverty budget to a measure of resources that adjusts the old cash income concept in three ways. First, it adds the value of in-kind benefits that can be used to meet FCSU needs. Second, it subtracts net taxes. (In doing so, it treats the earned income tax credit as a negative tax.) Third, it subtracts other necessary expenses, the largest of which are work-related child care and out-of-pocket medical expenses.

The bleak face of U.S. poverty -- “Bleak Portrait of Poverty Is Off the Mark, Experts Say,” blared the Friday headline in the New York Times. The traditional strategy for measuring poverty, we were told, did not include the benefits of federal programs like food stamps and tax credits that were helping to keep Americans above the poverty line. A new, “supplemental measure” from the U.S. Census that took such factors into account would reveal that many Americans thought to be living below the poverty line were actually above it — “as much as half of the reported rise in poverty since 2006 disappears,” declared the Times. I discussed the likely political implications of this rejiggering in my last post. But on Monday the census unveiled its report, and a first look at the numbers suggests that the Times’ preview was a bit off-base. According to the census’s new interpretation of the numbers, the total number of people living in poverty America is higher than the traditional approach indicates. We can slice the data in all kinds of different ways to account for the change. There are fewer children living in extreme poverty, for example, while a much higher number of seniors have slipped below the poverty line. But the key point explaining the discrepancy between what the Times predicted and the census has revealed is this: The new supplemental measure does not just take into account the positive effects of tax credits and food stamps, it also calculates the negative effects of paying for childcare, out-of-pocket medical costs, geographic differences and a rising overall standard of living.

Extreme Poverty Is Now At Record Levels – 19 Statistics About The Poor That Will Absolutely Astound You - According to the U.S. Census Bureau, a higher percentage of Americans is living in extreme poverty than they have ever measured before.  In 2010, we were told that the economy was recovering, but the truth is that the number of the "very poor" soared to heights never seen previously.  Back in 1993 and back in 2009, the rate of extreme poverty was just over 6 percent, and that represented the worst numbers on record.  But in 2010, the rate of extreme poverty hit a whopping 6.7 percent.  That means that one out of every 15 Americans is now considered to be "very poor".  For many people, this is all very confusing because their guts are telling them that things are getting worse and yet the mainstream media keeps telling them that everything is just fine.  Tonight, there are more than 20 million Americans that are living in extreme poverty.  This number increases a little bit more every single day.  The following statistics that were mentioned in an article in The Daily Mail should be very sobering for all of us.... About 20.5 million Americans, or 6.7 percent of the U.S. population, make up the poorest poor, defined as those at 50 per cent or less of the official poverty level.Those living in deep poverty represent nearly half of the 46.2 million people scraping by below the poverty line. In 2010, the poorest poor meant an income of $5,570 or less for an individual and $11,157 for a family of four.

The Comfort Of Other People: Inequality Then And Now - It is a truth universally acknowledged that rising inequality and social unrest go hand in hand. Wealth and therefore power in the US are becoming concentrated in fewer and fewer hands, and the deliberate exercise of this power has created one of the highest levels of inequality in the world. The Congressional Budget Office breaks down the facts on inequality. CBO finds that, between 1979 and 2007, income grew by:

275 percent for the top 1 percent of households,
65 percent for the next 19 percent,
Just under 40 percent for the next 60 percent, and
18 percent for the bottom 20 percent.

Two hundred years ago, in 1805, the US had less income inequality.

While the top 1% of American households earn 20% of all the income today, say Lindert and Williamson, in 1774 the top 1% earned less than 4% of total income in New England and under 9% of total income in the 13 colonies as a whole. Even by 1805, roughly a dozen years after stocks began trading on Wall Street, the distribution of income was nowhere near as unequal as it is today, report Lindert and Williamson.

Fast Food is a Middle-Class Luxury - The conventional wisdom is that since obesity rates are so high among the poorest Americans, that fast food is the grease-and-ketchup-soaked engine driving them upwards. But a new study on food consumption from UC Davis medical school got surprising results: It found that middle- and upper-middle income earners are the ones gobbling up the most Big Macs, Whoppers, and that artisanal pork log known as the McRib. [Paul Leigh,] professor of health economics, said the study of the dining habits of about 5,000 Americans found that as a household's income increased, so did visits to chain fast-food restaurants such as McDonald's. The obesity culprit amongst the poor is more likely soda, as well as packaged junk foods found in "supermarkets, convenience stores and mom-and-pop markets in impoverished neighborhoods." But a steady diet of fast food, while advertised as a recession-buster, would actually be financially out of reach for families living at or below the poverty line.

Tough Economy Hurts Food Banks - The tough economy is hitting everyone hard including food banks, which are now relying more on donations. Shelves are looking pretty sparse at Kearney's Mid-Nebraska Food Bank, but it's not just here. There's extreme demand on the whole pantry system with less food available, but an increase in demand. Officials say it's a direct result of difficult economic times. "There's increased pressure on the system for at least a couple years, and resources are drying up," said Mid-Nebraska Food Bank's Rich Weiss. "We rely on donations especially this time of year to help make it through the holiday season and get food out there." The Mid-Nebraska Food Bank serves as a distribution source for food pantries and other agencies in a 26 county area in Nebraska, and is always looking for donations.

Troops Forced To Turn To Food Pantries To Feed Families - For some Americans it may be a hard fact to swallow. Men and women who keep this country safe and free are forced to turn to food pantries to feed their families. And the experts say the need continues to grow. A supply cage at the Army Reserve Center at Jefferson Barracks is vital to many folks in the military. It was almost full of food just days ago but Saturday 59 military families came for help and now many of the shelves are bare. Nancy Amundson is with Operation Homefront, she said, 'The biggest shock is the fact that the men and women who are defending our country defending our freedom that they can`t afford to buy the food they need to feed their families.' Soldiers returning home from the front lines of war encounter the same problems the rest of us do in this rough economy. 'I know soldiers that are having a hard time find work and have bills we all have to come together help each other out.' Last year 1,200 Missouri military families received help at one of the five food pantries that Operaton Homefront operates across the state. When the doors open officials said it doesn`t take long for the groceries to disappear. Nancy Admundson said, 'In a four hour period of time all the food will be cleared out.' She added, 'This is our way of saying thank you and helping them get by day by day.'

Homeless veterans more likely to stay homeless, new survey finds  - Veterans who become homeless tend to stay homeless for longer periods than nonveterans, according to a new national survey by a nonprofit advocacy group. They’re also more likely to suffer from serious health conditions leading to death. The survey of 23,000 homeless people was released Tuesday by the 100,000 Homes Campaign, a nonprofit coalition of local community groups combating homelessness. The survey found that, although veterans make up 9% of the country’s population, they accounted for more than 15% of the homeless people surveyed. “We’ve known that veterans were particularly at risk to become homeless, but now we know that they’re more likely to stay homeless and face life-threatening conditions on the street,” the campaign’s director, Becky Kanis, said in a statement. “The data paint a picture of an extremely at-risk population that is unlikely to get off the streets without targeted help."

Ohio voters look set to dump Republicans’ anti-union law - An aggressive Republican drive to weaken the labor rights of government workers appears to have crested, at least in Ohio, where voters are expected to throw out a far-reaching anti-union law this week. The referendum over collective bargaining for public employees, potentially the most important contest in off-year elections around the nation, is being closely watched for clues about shifting voter trends in a state expected to play its usual outsized role in next year's presidential contest. Barely seven months ago, newly elected Gov. John Kasich joined other Republican governors, including Wisconsin's Scott Walker, in defying angry street demonstrations to push through a measure designed to curb the power of public-employee unions.Tuesday's vote "will reverberate in a major way across the country, because Ohio is still Ohio,"

Ohio election results a blow to Republicans as union curbs are thrown out...Voters in Ohio have overwhelmingly rejected a law curbing union bargaining rights for public employees, dealing a blow to the Republican establishment in a state that could prove pivotal in deciding the outcome of next year's presidential election. The vote buoyed Democrats, who are hoping to rebound from their sweeping losses in 2010, though experts agree the economy is still the biggest issue. "If the economy were to turn around in the next year, that's going to matter a lot more than what happens in ballot issues," said one political analyst, Justin Buchler. Ohio's bill went further than a similar one in Wisconsin by including police officers and firefighters, and was considered by many observers to be a barometer of the national mood on the political conundrum of the day: what is the appropriate size and role of government, and who should pay for it. Its defeat is anticipated to energise the labour movement, which largely supports the Democrats, ahead of Barack Obama's re-election effort. The result indicated that voters in the industrial midwest may be growing disenchanted with the Tea Party-backed Republicans voted into office in 2010, who have advocated deep spending cuts and opposed tax increases.

State jobless fund deficit tops $10 billion - California's Unemployment Insurance Trust Fund, which has been borrowing from Uncle Sam to pay jobless benefits since 2009, is expected to end up $10.1 billion in the hole this year, up from $9.8 billion in 2010, reports the state Employment Development Department. This year's deficit is slightly better than initially projected last year, when state officials thought the deficit would be $13.4 billion. The state was helped this year by $839 million in federal stimulus funds, $791 million of which was used to reduce the trust fund deficit. But even with the number of California unemployed expected to decline from 2.1 million this year to 1.7 million in 2013, state officials project the deficit will balloon to $10.7 billion in 2012 and $10.3 billion in 2013 unless changes are made to the program. That's bad news for employers who will have to ante up an additional $21 per employee in federal unemployment payroll taxes next year ($77 total per worker) to begin paying down the $9.2 billion the state has borrowed from the federal government. And the $9.2 billion doesn't include interest, which continues to pile up. This year the state paid Uncle Sam $303.5 million in interest in September, down from the earlier estimate of $320 million. Because the repayment can't come from the Unemployment Insurance Trust Fund, the state borrowed from the disability insurance trust fund to make the payment.

Alarming state report predicts $294 billion shortfall for transportation over next decade - California faces a staggering $293.8 billion shortfall over the next decade to maintain its crumbling roads, outdated freeways and cash-strapped transit agencies.The California Transportation Commission's first review of state transportation needs since 1999 paints a scenario through 2020 that is beyond bleak and suggests that today's jammed and pothole-riddled roadways may one day seem like the good old days. "Today, California's transportation system is in jeopardy," says the 2011 Statewide Transportation System Needs Assessment. "Investments to preserve transportation systems simply have not kept pace with the demands on them, and this underfunding -- decade after decade -- has led to the decay of one of the state's greatest assets." California needs $536.2 billion through 2020 for transportation needs, but it can expect only $242.4 billion over that time from federal, state and local sources of revenue.

California Supreme Court to hear redevelopment argument - On Thursday, the state court will hear allegations in a lawsuit brought by the League of California Cities and the California Redevelopment Association that seeks to prevent the legislature from diverting funds earmarked for redevelopment to schools and local government. The case has resulted in a temporary halt to lawmakers’ budget plans involving redevelopment funds. The plan was to take $1.7 billion from the agencies for redistribution. If enacted, those budget cuts would virtually eliminate the state’s 400 redevelopment agencies. The organizations contend that the cuts violate Prop. 22, passed in 2010 by voters, which prohibits the state from raiding transportation, redevelopment or local government money. If the justices agree that the legislators’ money grab was unconstitutional, the decision would result in an additional $1.7 billion hole in the state budget. And if the Supreme Court backs the legislature, most redevelopment plans throughout the state would be terminated because of lack of funding.

California Revenue $1.5B (6.5%) Lower Than Expected, Automatic Spending Cut Triggers May Fire; 4 Better Ways to Fix the Problem - The recovery has fizzled out in California with revenues $1.5 billion below overly-optimistic estimatesCalifornia tax collections since the start of the fiscal year have fallen $1.5 billion behind projections, raising concern that the most-populous U.S. state will face automatic spending cuts. Revenue was $810.5 million less than budgeted in October, bringing the total to 6.2 percent below expectations for July 1 through Oct. 31, according to figures released today by Controller John Chiang. Since the start of the fiscal year, the state has spent $1.7 billion more than it budgeted. The $86 billion spending plan Governor Jerry Brown and fellow Democrats adopted in June included a series of cuts to be activated if revenue falls below certain levels. In December, Brown’s finance department will estimate whether the rest of the year’s revenue can meet the original projection. “October’s poor revenues capped a very disappointing first four months of the fiscal year,” Chiang said in a statement. “Unless revenues and expenditures begin to track with projections, the state will face increasing cash pressure in the months ahead.”

Why is the bankruptcy of the Greek government different from the bankruptcy of California? - To see the point, it is instructive to compare what is going on with Greece today with how a truly unified nation, such as the United States, deals with crisis in one of its constituent units, say California.  California shares a common currency with the rest of the U.S., just as Greece (or Ireland or Spain) does with the Eurozone.  But when the state government in California goes bust:

  • Californians automatically get welfare checks and other transfer payments from Washington.
  • Californian borrowers do not get shut out of credit markets and those with healthy balance sheets can borrow from the rest of the nation.   
  • The Federal Reserve stands ready to act as a lender of last resort to any Californian bank.  (Why? Well, because it is one country after all…)
  • California has representatives and senators in Washington, D.C., who can push for remedies for California’s economic troubles through political channels (e.g., fiscal spending, federal assistance, debt relief)
  • Californians can easily move and seek jobs elsewhere in the U.S.

Kentucky budget outlook bleak — State budget experts predict a bleak financial outlook for the next two years that offers little hope of raises for teachers and state workers or funding increases for recently cut state programs. While state revenues are expected to continue inching upward, some moves made by Gov. Steve Beshear and the General Assembly to save money in the current budget crisis can’t be repeated next year. Also, millions of dollars in federal stimulus money that propped up the 2010-12 budget can’t be anticipated in 2012-14. State Sen. Bob Leeper, chairman of the budget committee, reported last month that the state general fund is facing a deficit of at least $337 million in the fiscal year that begins July 1, 2012. “Without question the next budget is going to be tighter than the current one,”

Illinois' Budget: From Worst to 'Worster' - Illinois' state budget, filled with gimmicks, constructed for years on promises for which there were no revenues, and sustained by borrowing of the type that would make even a loan shark blush, is in serious meltdown mode. Less than a year after the state raised taxes by some $7 billion in the face of a fiscal crisis, legislators in Springfield, whose government qualifies as the fiscal bad-boy of states, have done little to address Illinois' long-term spending and borrowing problems. Even while the state's vendors wait up to a year for money they are owed, Gov. Pat Quinn is making sure that favored insiders get paid. The Securities and Exchange Commission is investigating whether Illinois exaggerated in bond offerings the savings it claims it will get from last year's largely cosmetic pension reforms, which did little to fix the worst state pension problem in the country. And now the governor is actually proposing the state borrow even more, up to $5 billion, to clear up some of those back bills, which prompted an editorial from the Chicago Tribune under the simple headline: "No. More. Borrowing."

Bipartisan Group Introduces New Bill to Allow State Taxes on Online Sales - When you buy something online, chances are that you won't be charged a sales tax. That's because the U.S. Supreme Court has consistently held that states' power to force tax collection only extends to individuals and businesses physically present in the state. If a business has no employees or property in a state, the state cannot force that company to be its tax collector (here, for sales tax). After California passed a law and Amazon began gathering signatures to overturn it, a compromise was reached that postponed tax collection while built a physical presence in California. The warring sides began talking and a House bill emerged that would end the physical presence rule and allow states to impose sales taxes on online commerce, so long as the states met some simplification requirements. More work has been done and yesterday a new bill was introduced, S. 1832, the Marketplace Fairness Act. It guts the physical presence rule, but otherwise makes quite a few advances towards ensuring that states reduce the burdens associated with collecting their sales taxes. Its provisions:

Senate bill powers up state online sales taxes (Reuters) - State governments would be able to collect online sales taxes under a bill due to be introduced in the Senate on Wednesday, said sources familiar with the bill. Supporters of the online sales tax collection requirement include Wal-Mart Stores Inc, Target Corp and other "big box" retailers who argue they are at a disadvantage against online-only competitors. A bipartisan group of up to seven senators will introduce the bill, which is broader than similar legislation introduced in the Senate in July. The new bill will differ from a bill in the House of Representatives by affecting more small businesses under a lower exemption threshold, the sources said. State and local governments support the upcoming bill even more than earlier measures. Retailers have been exempted from collecting taxes on sales in states where they do not have a physical presence since a 1992 Supreme Court case -- before the advent of e-commerce. Backers of the new bill say state and local governments will lose $24 billion in uncollected sales taxes in 2012 without the power to tax Web transactions. States have worked for more than a decade to streamline rules and get congressional approval to collect the taxes.

Senate Bill Introduced to Limit State Taxation of Telecommuters in Other States - On Tuesday, Senators Joe Lieberman (I-CT) and Richard Blumental (D-CT) introduced the S. 1811, Telecommuter Tax Fairness Act, which would prevent states from imposing individual income taxes on telecommuting nonresident individuals who are actually physically present in another state. Given that one of the primary justifications of taxation is to pay for the services used and enjoyed by residents of a state, it seems inappropriate to collect taxes from people who never set foot in the jurisdiction.

The Municipal Bond Market Is Imploding - Moody’s Credit Rating Service just announced the ominous trend that credit quality in the municipal bond market is falling at the fastest rate since the collapse of Lehman Brothers in 2008. Data released showed that 5.3 times as many municipal bonds were credit downgraded over the three last months than were upgraded. Moody’s emphasized that: “Downgrades dominated rating revisions across all public finance sectors except for healthcare,” said Assistant Vice President-Analyst Dan Steed, author of the report. “A rapid deterioration in credit metrics led to a higher-than-average 14 multi-notch downgrades.” Often sold to individuals as “conservative investments with tax free income”, munis in states like California, Illinois, New Jersey, and Pennsylvania are increasingly looking like high risk rolls of the dice. This credit implosion comes after a sustained period when muni bonds were performing much better than corporate bonds. During the credit crisis; corporate bonds prices dropped by 30%, while muni bonds suffered very modest losses. The main reason for this stability was bail-out money showered on state and local governments by the Obama Administration. But fed money has dried up and property reassessments are falling for the first time since the 1970s. “We expect downgrades to continue exceeding upgrades in upcoming quarters.” This is polite ratings speak for: “duck and cover”.

Gov: Flint in financial emergency - Flint is a step closer to having an emergency manager after a financial review team recommended Tuesday one be appointed, and Gov. Rick Snyder agreed. The team concluded a financial emergency exists and city officials have no plan to resolve it. Snyder spokeswoman Sara Wurfel said, "The governor concurred with that finding that Flint is facing a fiscal crisis that necessitates this last resort." The report, released late Tuesday, cited repeated instances of expenditures exceeding revenues, cumulative deficits, interfund borrowing, deteriorating pooled cash and other problems. The city frequently borrowed from funds, such as the water and sewer fund, for cash to cover operations. Money from one fund would then be used to pay back borrowed money. Though deficits totaling more than $25 million had accumulated across all of the city's funds between 2007 and 2011, the city time after time failed to follow deficit-elimination plans filed with the state Department of Treasury

Alabama's Jefferson County May Vote on Bankruptcy Filing Today -- The Jefferson County Commission will consider filing the nation's biggest municipal bankruptcy today, according to a resolution approved by a committee. The Alabama county's leaders also may vote to approve a settlement with holders of $3.14 billion in debt or to continue negotiations, according to a resolution approved yesterday that the full commission will consider at 9 a.m. local time. Commissioners voted 4-1 to accept a tentative deal with the creditors on Sept. 16. The agreement included more than $1 billion in concessions from creditors. JPMorgan Chase & Co., which arranged most of the debt, would take the biggest loss. County officials see no hope of a special session of the Alabama Legislature needed to consummate that deal, Commission President David Carrington said in an interview yesterday. There are disagreements among the 25-member delegation and any lawmaker can block a bill. A special session is needed to deliver four conditions of the settlement and to close a $40 million shortfall in county operating funds.

Largest Municipal Bankruptcy Filed - Jefferson County, Ala., which owes more than $3 billion on a failed sewer deal, filed Wednesday for what would be the largest municipal bankruptcy in U.S. history after a tentative rescue plan with creditors unraveled.  The county, home to Alabama's biggest city, Birmingham, filed its Chapter 9 petition in U.S. Bankruptcy Court less than an hour after county commissioners voted 4-1 to do so. The document was signed by Commission President David Carrington.  "After over three years of diligent efforts toward regaining financial stability, the county has exhausted its options, and additional delays in resolving its financial crisis will further harm the county's prospects for recovery and future economic development," the resolution stated.  The petition stated that the county owed $3.136 billion in sewer debt, the result of soured bond financing. The bond dealings were also tainted by corruption, with several former county officials convicted of wrongdoing and sent to prison.

Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy - Jefferson County, Alabama, commissioners voted 4-1 to file the largest U.S. municipal bankruptcy after reaching an impasse over concessions with holders of $3.14 billion of bonds. JPMorgan Chase & Co. (JPM), which arranged most of the debt to fund a sewer renovation, will likely take the biggest loss in the process, which begins with a hearing 10 a.m. local time tomorrow. A provisional agreement with creditors that commissioners approved in September included $1.1 billion in concessions and called for sewer-rate increases of as much as 8.2 percent for the first three years. The county, which encompasses the state’s largest city, Birmingham, couldn’t get signed commitments from creditors, Commission PresidentDavid Carrington said today. In addition, the 25-member legislative delegation for the county was unable to unite behind bills needed to implement the tentative settlement.

Huge bankruptcy filing means pain for Alabama - The decision by Alabama's biggest county to file for the largest municipal bankruptcy in U.S. history comes as a shock and represents a sharp economic setback for the state. It is difficult to gauge the precise impact of the decision by Jefferson County to file for Chapter 9 because bankruptcy will take the state into uncharted territory, according to analysts."Nothing of this magnitude has ever happened before as far as a municipal bankruptcy is concerned," said Melissa Woodley, a finance professor at Birmingham's Samford University and an expert on U.S. municipal debt. That said, the 4-1 decision taken by commissioners in the historic Jefferson County Courthouse could have an impact in the following ways:

  • - It will likely make it more costly for the county to raise funds in the bond market and it could have a contagion effect on neighboring counties, analysts said.
  • - It could rattle the $3.7 trillion U.S. municipal debt market.
  • - It will tarnish the state's reputation for fiscal probity, not least because Alabama's largest city, Birmingham, sits at the center of Jefferson County.
  • - It could jeopardize the county's ability to provide services to its 660,000 residents.
  • - It could also threaten the jobs of county employees.

Jefferson County’s Path From Scandal to U.S. Bankruptcy Filing: Timeline - Jefferson County, Alabama, sought court protection as the biggest municipal bankruptcy in U.S. history to escape the burdens of more than $3 billion in debt.  A 4-1 vote to seek court protection by county commissioners in Birmingham today followed an impasse in a tentative settlement reached in September with creditors led by JPMorgan Chase & Co. (JPM) That deal would have provided $1.1 billion in concessions, contingent on legislative support which hasn’t emerged. A court filing was made within an hour after the vote.  The move is another step toward resolving a saga of more than three years duration that plunged Alabama’s most-populous county and the home of Birmingham into a financial crisis.  The sequence of events that led the county to the bankruptcy court began in 2008 after the cascading blows of Wall Street’s credit crisis produced unforeseen costs on $3.14 billion of bonds that rely on sewer system revenue for payment.  Jefferson was the municipality hardest hit by the 2008 financial unraveling. Adding to the county’s challenges were a sewer project marred by public corruption and political pressure to restrain rising sewer bills. At least 21 people have been convicted or pleaded guilty to corruption-related charges in connection with the sewer construction and financing.

Alabama’s Jefferson County Enters Biggest Muni Bankruptcy as Crisis Victim -Jefferson County, Alabama, declared the largest municipal bankruptcy in U.S. history, capping a more than three-year saga that turned it into one of the biggest casualties of Wall Street’s credit crisis.  The move yesterday by Alabama’s most-populous county, with about 660,000 residents, came after state lawmakers failed to back a September agreement with creditors led by JPMorgan Chase & Co. (JPM) that would have reduced its sewer-system debt of more than $3 billion. Governor Robert Bentley and local leaders worked unsuccessfully for two months to rally support for the deal. . “We could continue and keep kicking this can down the road, but I think the people of Jefferson County have had enough.” The Chapter 9 filing leaves creditors including JPMorgan, the biggest U.S. bank by assets, facing hundreds of millions of dollars in losses and may revive concern that defaults will rise in the $2.9 trillion municipal bond market. The move also leaves residents of the county that’s home to Birmingham, the largest city in the state of 4.8 million people, facing unsustainable sewage fees to repay the debt that led to the debacle.

A Crappy Wall Street Deal Produces Nation's Largest Ever Municipal Bankruptcy - Jefferson County's problems stem in part from a, quite literally, crappy Wall Street deal. In the early 2000s local official realized that they had spent too much updating their sewer system, which had regularly overflowed in heavy rains. The sewer system's alone accounts for $3 billion of Jefferson County's overall debt. There was no way the fees generated by the sewer system could pay the interest on the debt building it had run up. Wall Street, thankfully, had a solution. Jefferson County's financial advisers, lead by JPMorgan Chase, told the county to refinance its sewer debt into something called auction-rate securities - a trick that would allow the county to pay lower short-term interest rates on what was long-term debt. We now know that the deal, instead of being praised, should have been flushed down Jefferson County's costly sewer system. Like many other crafty Wall Street creations, auction rate securities blew up in the financial crisis, and Jefferson County's interest payments shot up, higher than if they had just stuck with their long-term bonds. Worse, along with the refinancing deal, JPMorgan sold Jefferson County a package of interest rate swaps - insurance that was supposed to protect the county from swings in interest rates. Instead, that insurance ended up costing the county over $200 million when the financial crisis struck.

Chicago, Illinois speed camera project could generate $150 million in revenue. - Sixty-one million dollars a year is a lot of money. That is the revenue Chicago's red light camera program program generated in 2010. Based on reports from the Chicago Department of Transportation (CDOT), a proposed speed camera enforcement program being pushed by Mayor Rahm Emanuel (D) would make the city's red light camera program look penny ante in comparison. The Expired Meter obtained the results of three studies conducted by CDOT over the past few years which shed light on how lucrative the speed camera business could be for Chicago. Data from these reports seem to indicate that revenue from speed cameras could generate hundreds of millions of dollars in fines for a desperate, cash-strapped city. Emanuel is pushing legislation through the Illinois General Assembly at breakneck speed, which, if passed, would allow Chicago to utilize its red light cameras to also issue $100 speeding ticket to vehicle owners accused of exceeding the speed limit by more than 5 MPH in designated "safety zones" within an eighth of a mile of schools, parks and colleges.

City fines and fees double, triple for minor and major offenses - Mayor Rahm Emanuel has said his plan to raise taxes, fines and fees by $220 million in 2012 includes higher fines for a laundry list of offenses. Now, the mayor’s 2012 revenue ordinance makes the details public. It’s a doozy.

  • If your car is impounded for carrying drugs, driving drunk, soliciting a prostitute or carrying a firearm registered to someone other than the driver, the penalty will double — to $2,000. But, if the violations occur within 500 feet of a park or school, the fine will triple — to $3,000.
  • If your car is seized for drag racing on Chicago streets, there’s a new, $1,000 fine in addition to the towing and storage fee.
  • For playing a radio too loud, the new fine will be anywhere from $500 to $750.
  • If the vehicle is snatched for driving with a suspended or revoked license or displaying altered temporary registration permits, the fine would double — to $1,000.
  • Tampering with parking meters or pay-and-display boxes — something motorists have done on occasion to vent their anger at the deal that privatized Chicago parking meters — would carry a fine ranging from $500 to $750.
  • †Allowing weeds to grow to a height that exceeds 10 inches — $600-to-$1,200-a-day, up from $500-to-$1,000.
  • †Illegal dumping or allowing trash to accumulate in a way that provides a food supply for rats — $300-to-$600, up from $250-to-$500.
  • †Accumulation of materials or junk on any open lot or other premises not placed on open racks “elevated not less than 18 inches above ground”: $300-to-$600, up from $250-to-$500.

Are teachers are overpaid? I don't think so - A recent study by John Richwine and Andrew Biggs of the Heritage Foundation and the American Enterprise Institute purports to show that teachers are on average overpaid.   I do not find their evidence convincing, and the reasons have less to do with their affilitations than the technical nature of their work.  My problems with their paper are:
(1) They estimate a reduced form, which means it is difficult to interpret the meaning of their coefficients.
(2) Even if we accept their reduced form, there are issues in how the authors specify their explanatory variables.
(3) The authors' specification has a serious selectivity problem and
(4) Most disturbingly, they ignore their most convincing spefication, a specification that supports the idea that teachers get paid 10 percent less in wages than those in other professions.

What Happens When Petulant Parents Won’t Share? School Funding Inequities, That’s What - California’s Santa Monica-Malibu Unified School District set off a parent revolt this past month by taking steps to curtail parents from fundraising solely for their children’s school. If proposed new rules are adopted, future donations for all instructional activities will go through a central education foundation. The motivation? Fairness.  To the outside world, the two Southern California beach communities are fabulously wealthy, fully populated by show-business stars and others of significant means. Then there is reality. Santa Monica, especially, is quite diverse, with significant low-income and Latino populations. Charity, however, begins at home if you are from affluent Malibu, where the anger over the proposed change is most intense. Many say that parents will simply stop donating their time and money if forced to share. One claimed parents were being “disenfranchised” to a local paper. Another told Malibu Patch, “Our families give to the schools and principals and teachers and programs they know and love and trust.”

Globalization, Home Schooling, and Democracy - Even where it comes to something which sounds benevolent like the Convention on the Rights of the Child, under kleptocracy we can guess the way it’ll really be used. Of course there’s some good things about it, such as bans on child trafficking, which are good where enforced. (Although even those are conceived in a way which avoids dealing with the real cause of things like the sex trade. It’s always the same corporate exploitation which drives people into that kind of desperate poverty.) But that’s not the real purpose of a treaty like this. That’s why I chose to write a post focusing on the malign uses to which even the most seemingly benevolent aspects of corporatism and globalization will inevitably be put.  The basic rule for everything is to relocalize. So even if one granted, just for the sake of argument, good intentions on the part of the drafters and signors, an international treaty is in principle the wrong direction.  But we know never to grant these good intentions. In practice all international law is intended to serve the ends of corporate globalization and statism. It will be applied for this purpose, and ignored where it would counteract this purpose.

Facts about education -- Here is one: In 2003, the first year the Babson group and Sloan-C conducted the survey, 57 percent of academic leaders estimated that learning outcomes in online courses were equal or superior to those of face-to-face courses. This year, the figure was 67 percent.  From Peter Orszag, writing about budgetary pressures, here is another: Some admittedly imperfect indicators suggest the quality of public higher education is already fading. For example, in 1987, both UC Berkeley and the University of Michigan were included in U.S. News & World Report’s ranking of the top 10 universities. By this year, there were no public universities in the top 10 — and UC Berkeley, the top-ranked public school, had fallen from fifth to 21st. Put these two facts together, and what is your prediction?

When I Steal A Blog Post, I Leave A Link - I wanted to look at the WSJ job database, suspecting what I might find, but currently lack the bandwidth in a major way. Fortunately, Noah took some (more) time from his thesis ("distraction from productive activity") and did the dirty work. Apparently, being a STEM undergraduate isn't the path to Nirvana: I went through the Wall Street Journal database that Phil cites, and found the following unemployment rates:

  • Genetics: 7.4% unemployed
  • Biochemical Sciences: 7.1% unemployed
  • Neuroscience: 7.2% unemployed
  • Materials Engineering and Materials Science: 7.5% unemployed
  • Computer Engineering: 7.0% unemployed
  • Biomedical Engineering: 5.9% unemployed
  • General Engineering: 5.9% unemployed
  • Engineering Mechanics Physics and Science: 6.5% unemployed
  • Chemistry: 5.1% unemployed
  • Electrical Engineering: 5.0% unemployed
  • Molecular Biology: 5.3% unemployed
  • Mechanical Engineering and Related Technologies: 6.6% unemployed
    Compare these with a 5.0% unemployment rate for all bachelor's degree holders in 2010.
  • Did a Harvard Economics Class Cause the Financial Crisis? - Harvard grads frequently go on to highly influential jobs on Wall Street, at think tanks, and in government. Did the principles they learned in their alma mater's most popular class cause America’s financial crisis and growing wealth gap? That's the view of a group of approximately 70 students who walked out of professor N. Gregory Mankiw's Economics 10 class this week in solidarity with the Occupy protests happening coast-to-coast. The students say the conservative slant of the economic theories taught by the prominent professor are driving policies that create inequality. According to their open letter to Mankiw—who advised President George W. Bush and now Mitt Romney—the free market, laissez faire capitalism he teaches to nearly 700 students every semester deprives students of "an analytic understanding of economics as part of a quality liberal arts education."Mankiw's academic influence also extends well beyond Harvard. His textbook, Principles of Economics, is widely used in introduction to economics classes nationwide.

    Beyond the Limits of Neoliberal Higher Education: Global Youth Resistance and the American/British Divide - “We need a wholesale revision of how a democracy both listens to and treats young people.”[1] The global reach and destructiveness of neoliberal values and disciplinary controls are not only evident in the widespread hardships and human suffering caused by the economic recession of 2008, they are also visible in the ongoing and ruthless assault on the social state, workers, unions, higher education, students, and any vestige of the social at odds with neoliberal values. Under the regime of market fundamentalism, institutions that were meant to limit human suffering and misfortune and protect the public from the excesses of the market have been either weakened or abolished, as are many of those public spheres where private troubles can be understood as social problems and addressed as such.[2] Privatization has run rampant, engulfing institutions as different in their goals and functions as public schools and core public services,  on the one hand, and prisons, on the other. This shift from the social contract to savage forms of corporate sovereignty is part of a broader process of “reducing state support of social goods [and] means that states—the institutions best placed to defend the gains workers and other popular forces have made in previous struggles—are instead abandoning them.”[3] Faced with massive deficits, the U.S. federal government along with many states are refusing to raise taxes either on the rich or on wealthy corporations, while at the same time enacting massive cuts in everything from Medicaid programs, food banks, and worker retirement funds to higher education and health care programs for children. For example, Florida Governor Rick Scott has “proposed slashing corporate income and property taxes, laying off 6,700 state employees, cutting education funding by $4.8 billion, and cutting Medicaid by almost $4 billion. Scott’s ultimate plan is to phase the Sunshine state’s corporate income tax out entirely. He [wants] to gut Florida’s unemployment insurance system, leaving unemployed workers ‘with much less economic protection than unemployed workers in any other state in the country.’”[4] As social problems are privatized and public spaces are commodified, there has been an increased emphasis on individual solutions to socially produced problems, while at the same time market relations and the commanding institutions of capital are divorced from matters of politics, ethics, and responsibility. Free market ideology with its emphasis on the privatization of public wealth, the elimination of social protections, and its deregulation of economic activity now shapes practically every commanding political and economic institution in the United States. In these circumstances, notions of the public good, community, and the obligations of citizenship are replaced by the overburdened demands of individual responsibility and an utterly privatized ideal of freedom.

    Winds of Economic Change Blow Away College Degree: - Many parents in the U.S. are legitimately concerned about the prospects for their college-age children. After all, today’s students face three overlapping challenges: a long-term structural shift as the world’s effective labor supply expands; rising tuition and growing concerns about the quality of public higher education; and the misfortune of graduating into a weak labor market.  The first challenge arises from rapid shifting of the tectonic plates that underlie the world labor market. Over the past 25 years, the effective global labor supply has at least doubled and by some estimates has quadrupled. This has suppressed wage growth in the developed economies and reduced the share of national income accruing to labor. So far, people without a college degree have primarily borne the consequences. As a result, globalization has widened the inequality between workers at the 90th percentile of wages and those at the 50th percentile.  The effects of globalization are already moving up the wage scale, though, and that trend will likely continue. As Alan Blinder trenchantly noted in 2006, “Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly skilled) people and less-educated (or less-skilled) people -- doctors versus call-center operators, for example.” Instead, the crucial distinction is between those tasks that are easily digitized (and thus subject to substantial competition from workers abroad) and those that are not.

    A First Look into Some Distributional Student Loan Data - Robert Cruickshank has a response to my earlier post on how to handle student debt that you should check out.  My plan was bankruptcy reform and mass refinancing, while Cruickshank thinks those trying to deal with current student loans need to deal with the principal itself, as it is far too high (“The best solution is to simply forgive all existing student loan debt”).My initial thoughts stand: the core problems of student loan debt as I read them can be tackled with those two steps.  If the monthly payment is too high, low-interest refinancing will bring it down.  If the lifetime payments are too high, same.  If the balance is too high without any interest, bankruptcy process is in play.  Low-interest refinancing acts as de facto principal reduction.  Also my read is that student debt as a whole isn’t holding back the recovery, and $1 trillion dollars can be spent on better stimulative things now and merit goods later.  That said, lower student loan debt is a good thing.

    Poll finds more boomers working past retirement    -- A majority of baby boomers say they have taken a financial hit in the past three years and most now doubt that they will be financially secure after they retire, according to a new poll. So much for kicking back at the lake house, long afternoons of golf or pretty much anything this generation had dreamed about in retirement. The Associated poll found a baby boom generation planning to work into retirement years - with 73 percent planning to work past retirement, up from 67 percent this spring. In all, 53 percent of boomers polled said they do not feel confident they'll be able to afford a comfortable retirement. That's up from 44 percent who were concerned about retirement finances in March.

    Pension Trusts Strapped - Retirement trust funds created to cover billions of dollars in medical costs for unionized workers and their families are running short, forcing the funds to cut costs, trim benefits, and ask retirees and companies to pony up more cash. The biggest such fund—a trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependents—is underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month. The funds, known as VEBAs, or voluntary employee beneficiary associations, are being hit by rising medical costs and poor investment performance. Their funding comes in part from company stock, rather than just cash payments, making them vulnerable to the market's volatility. Fearing a shortfall, the UAW is looking for answers in its U.S. government-orchestrated bailout deals with General Motors Corp. and Chrysler. The union, under new labor accords reached last month with GM, Ford Motor Co. and Chrysler, will seek to divert 10% of active workers' profit-sharing checks into the VEBA funds, but the plan still needs to clear legal hurdles and could get blocked by the auto makers.

    Next In Line for Implosion: Pension Plans - I'm afraid it's time for an intervention. I don't enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been "rescued," it's once again tearfully blubbering that this time it's all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is going to make the pain and the addiction all go away. It's time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as "solutions"? The very sources of their pain: illusory "fixes" and more debt. Have you ever seen a global market as dependent on rumors of "magical fixes" for its "resilience" as this one? What's truly remarkable is the psychotic distance between the facts--Europe's debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China's real estate bubble has popped and cannot be reinflated-- and the heady leap of global markets on every trivial rumor of a magic fix.  I seriously suspect the entire global economy is alcoholic--not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best.

    How volatility hits pension plans -- Nanea Kalani of Honolulu Civil Beat has obtained non-public performance numbers for the Hawaii Employees’ Retirement System, and they’re not pretty at all: in the three months to September 30, the fund managed to lose $1.4 billion, or 11.2% of its value. What we’re seeing here is the brutal effect of volatility on portfolio performance. Let’s say you start with $1,000. If your portfolio falls by 5% and then rises by 5% — or, for that matter, if it rises by 5% and then falls by 5% — you end up with $997.50 — just a quarter of a percentage point away from where you started. But if it falls and rises (or rises and falls) by 20%, then you end up with just $960, down 4% on your initial investment.There’s two different lessons to be drawn from the way that Hawaii is investing its money. Firstly, going for active rather than passive investment doesn’t work very well. The policy benchmark — what the fund would have returned if it was passively invested rather than actively managed — has consistently outperformed actual performance.

    No Pension? You May Still Owe $30,000 On One - Pension accounts for state and local government workers are underfunded by $4 trillion, according to one recent analysis. If America's households were to split that tab today, each would have to kick in $34,000.  Don't have that kind of cash on hand? Another option is to chip away at the shortfall over 30 years starting now. That would cost households $1,400 a year beyond what they pay in taxes today. A pension, for those who aren't familiar with one, is like a 401(k) plan in reverse. With a 401(k), or defined contribution plan, a worker knows how much he socks away, but not how much he will have at retirement. That part depends upon investment returns. With a pension, or defined benefit plan, a worker is told how much he will receive in retirement. It's up to the pension to put aside enough today. To do that, pensions guess about future returns. The higher the returns they assume, they less money they must save today. And therein lies the problem.  Most states assume a yearly return of around 8%, says Kil Huh, who manages fiscal research for the Pew Center On the States, a think tank. "In past decades when investment markets boomed they were able to achieve those returns," he says. "Now they're not even coming close."

    New formula would reduce Social Security increases -- Just as 55 million Social Security recipients are about to get their first benefit increase in three years, Congress is looking at reducing future raises by adopting a new measure of inflation that also would increase taxes for most families - the biggest impact falling on those with low incomes. If adopted across the government, the inflation measure would have widespread ramifications. Future increases in veterans' benefits and pensions for federal workers and military personnel would be smaller. And over time, fewer people would qualify for Medicaid, Head Start, food stamps, school lunch programs and home heating assistance than under the current measure. Taxes would go up by $60 billion over the next decade because annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets because their wages rose faster than the new inflation measure. Annual increases in the standard deduction and personal exemptions would become smaller.

    The right's smoke and mirrors scam about Social Security--it ain't broke (unless China is too) - Linda Beale - We've noted in these postings the growing inequality between rich and the rest of us in America, and that is the appropriate backdrop against which to investigate further the right's smoke-and-mirrors scams about tax policy and earned benefits.  Let me remind you with Kevin Drum's Mother Jones article on The Price of Plutocracy: "For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich." (That sentence is illustrated with a great chart, with data drawn from Joseph Hacker of Yale and Paul Pierson of Berkeley, the authors of Winner-Take-All Politics, a book I highly recommend.)The national debate about deficits has been part of a relentless push by the right to reduce as much as possible the New Deal earned benefit programs of Social Security and Medicare. The right twists the facts to suit the arguments it wants to make.  Krugman hones in on this issue, noting Dean Baker's similar anger at the Washington Post's inconsistency in considering Social Security in a recent article by Post writer Lori Montgomery, who seems to be miming for the hard right, anti-New Deal crowd in Washington .  See Krugman, Social Security, Bait and Switch, a Continuing Series,

    Social Security Aint Broke - I want to take advantage of Linda Beale's essay "Social Security: It Ain't Broke Unless China is too" to make some points of my own.  It's not a case of my disagreeing with Linda, but of having something to say that I hope will help people understand the Social Security "question" a little better.  First, I don't agree with Krugman: you CANNOT think of Social Security as "part of the budget." I don't know how the government talks to itself about this, but they sure went to a lot of effort to segregate Social Security funds from the budget with a payroll tax and a Trust Fund. . You don't have a "trust fund" if the money is fungible. We once had a reader at Angry Bear point to a CBO "paper" that said because SS funds come into the Treasury like other taxes, they cannot be regarded as separate from those other taxes.  This is a lie. The government is quite capable of keeping track of where the money comes from and where it is dedicated by law to go. So be warned, there are experts, even in the heart of CBO who are quite willing to lie to you if they think they can get away with it. Second, i don't like the usage "workers pay... to support [past workers, current retirees] who paid into it in the past." While this is technically true, it is misleading. Those current retirees DID pay into SS in the past. They paid for their own benefits.  It is NOT "the young paying for the old." When they figure your benefits, they look at what YOU paid in, not what your son is paying in.

    Why Mitt Romney’s Entitlement-Privatization Plan Is Crazy - David Brooks, the [gratuitous insult deleted], wrote this this morning entitled "Mitt Romney, the Serious One." In it, he explained how Romney’s recent decision to unveil a plan for reforming the entitlement system "demonstrates his awareness of the issues that need to define the 2012 presidential election."Romney grasped the toughest issue – how to reform entitlements to avoid a fiscal catastrophe – and he sketched out a sophisticated way to address it. So we had a giant financial crash in 2008 that necessitated a bailout costing a minimum of nearly $5 trillion and perhaps ultimately costing $10 trillion more, we have foreclosure crisis with more than million people a year losing their homes, and we have a burgeoning European debt disaster that threatens to devastate the global financial system – and the chief issue facing the country, according to Brooks and the Times, is reforming the entitlement system? The column goes on to throw bouquets on Romney’s plan to semi-privatize Medicare and Social Security. Romney’s ideas are not as draconian as Paul Ryan's, but they do pave the way for Wall Street’s ultimate goal – full privatization of Social Security and Medicare. Think about what such reforms might mean. Your typical Medicare/Social Security recipient might already have been ripped off three different ways in this era.

    DC Appeals Court Upholds ACA—With a Republican Taking the Lead - The influential Court of Appeals for the District of Columbia has issued an opinion affirming the Affordable Care Act (ACA) constitutional. In itself, this is not surprising, as several other courts have done so. What is surprising is that the Court's opinion was written by Republican favorite Laurence Silberman. The conservative Reagan appointee notes that the "activity/inactivity" distinction hatched to argue that the individual mandate violates the Constitution has no basis in the Court's precedents, and under those precedents the ACA is clearly constitutional: Today, the only recognized limitations are that (1) Congress may not regulate non-economic behavior based solely on an attenuated link to interstate commerce, and (2) Congress may not regulate intrastate economic behavior if its aggregate impact on interstate commerce is negligible. Those limitations are quite inapposite to the constitutionality of the individual mandate, which certainly is focused on economic behavior–if only decisions whether or not to purchase health care insurance or to seek medical care–that does substantially affect interstate commerce. [...] ...we do not believe these cases endorse the view that an existing activity is some kind of touchstone or a necessary precursor to Commerce Clause regulation.

    Equalizing Payments for Medical Care - For some time now, health policy makers around the world and the analysts who advise them have been exploring reforms of the methods by which the providers of health care are paid or, as the latter prefer to call it, are “reimbursed” – an unfortunate, mind-altering expression on which I have already commented in an earlier post. Several papers in the current issue of Health Affairs are devoted to that topic. They include one by me, another by David Miller that addresses large variations in Medicare payments for surgery and one by Peter Hussey about bundled payments for treatments of an entire episode of illness. My paper focuses on the fact that every private health insurer in this country pays different physicians, hospitals and other providers of health care different prices for identical services. The flip side of this practice is that a given provider charges different payers – insurers or patients – different prices for identical health service. Economists call that practice “price discrimination.” Figure 1 below illustrates this phenomenon from the insurer’s perspective for colonoscopies in New Jersey.

    D.C. Appellate Court upholds constitutionality of Obamacare - A three-judge panel on the D.C. Circuit Court of Appeals — comprised of two judges appointed by Republican presidents and one by a Democrat — upheld the constitutionality of a key section of President Obama’s health care law in a ruling released Tuesday. Senior Judge Laurence Silberman and Judge Harry Edwards ruled to uphold the law — specifically the mandate that requires Americans to purchase health insurance — on the merits. Judge Brett Kavanaugh dissented from their ruling, but he, too, would have ruled against the plaintiffs seeking to overturn the mandate. His opinion argued that federal courts lack jurisdiction to enjoin the mandate, which functions similarly to a tax.  Silberman, a conservative all-star, was first nominated to the D.C. Circuit by Ronald Reagan, and became a senior judge when Kavanaugh — a George W. Bush nominee — was confirmed to the court. Edwards was nominated by Jimmy Carter.  In their opinion, Silberman and Edwards conclude that penalizing individuals for failing to obtain health insurance is within Congress’ powers under the Constitution’s Commerce Clause.

    Our Health Care System, Compared - I was looking at OECD health care data for something else I’ve been working on and wanted to share some of it. It’s well known that the United States spends a lot more per person on health care than comparable countries and that our actual health outcomes are anywhere from average to bad. See, for example, this chart from a 2008 paper by Gerard Anderson and Bianca Frogner. That chart shows how each country’s spending and life expectancy differ from what you would expect based solely on how rich they are (per capita GDP). As you can see, we spend a lot more and live a lot less. (That paper also considers a number of other outcome measures; we do well on some, poorly on others.) Besides where we are today, though, the other thing we should be interested in is where we are going. Our health care system is the product of a number of historical factors that we can’t make go away with a snap of our fingers. So even if we have a bad, expensive health care system, maybe it is getting relatively better and relatively less expensive. Nope.

    Studies Link Auto Pollution to Autism and Stunted Brain Development - We already know that there is a link between long term exposure to tailpipe emissions and higher rates of heart disease, cancer, and respiratory illness. But several studies, compiled in a Wall Street Journal article, have begun to show that high level exposure to car exhaust can also affect brain development. The exact impact is still not entirely certain, but research from separate teams in New York, Boston, Beijing, and Krakow, Poland shows a startling link: Children in areas affected by high levels of emissions, on average, scored more poorly on intelligence tests and were more prone to depression, anxiety and attention problems than children growing up in cleaner air, separate research teams in New York, Boston, Beijing, and Krakow, Poland, found. And older men and women long exposed to higher levels of traffic-related particles and ozone had memory and reasoning problems that effectively added five years to their mental age, other university researchers in Boston reported this year. The emissions may also heighten the risk of Alzheimer’s disease and speed the effects of Parkinson’s disease. Not only are intelligence levels and mental health at risk, but a child’s chance of developing autism goes up markedly if his mother lives in a highly polluted area, according to research from the Journal of Environmental Health Perspectives.

    Fatty Foods Addictive Like Cocaine in Growing Body of Scientific Research -  A growing body of medical research at leading universities and government laboratories suggests that processed foods and sugary drinks  aren’t simply unhealthy. They can hijack the brain in ways that resemble addictions to cocaine, nicotine and other drugs. “The data is so overwhelming the field has to accept it,”  “We are finding tremendous overlap between drugs in the brain and food in the brain.” The idea that food may be addictive was barely on scientists’ radar a decade ago. Now the field is heating up. Lab studies have found sugary drinks and fatty foods can produce addictive behavior in animals. Brain scans of obese people and compulsive eaters, meanwhile, reveal disturbances in brain reward circuits similar to those experienced by drug abusers. Twenty-eight scientific studies and papers on food addiction have been published this year, according to a National Library of Medicine database. As the evidence expands, the science of addiction could become a game changer for the $1 trillion food and beverage industries. If fatty foods and snacks and drinks sweetened with sugar and high fructose corn syrup are proven to be addictive, food companies may face the most drawn-out consumer safety battle since the anti-smoking movement took on the tobacco industry a generation ago.

    FDA: Moldy applesauce repackaged by school lunch supplier - A Washington state fruit processor that supplies the nation’s schools and a baby food maker is under scrutiny by federal health regulators for repackaging applesauce contaminated with several kinds of potentially dangerous, multi-colored molds, has learned. Food and Drug Administration officials this week posted a warning letter to Snokist Growers of Yakima, Wash., saying the company cannot ensure the safety of moldy applesauce and fruit puree that has been reconditioned for human consumption. “Your firm reprocesses moldy applesauce product … using a method that is not effective against all toxic metabolites,” read the FDA letter. “Several foodborne molds may be hazardous to human health.” Products recalled earlier this year by Snokist were blamed for illnesses of nine North Carolina children who became sick after eating applesauce at school.

    Raw Milk, the FDA, and Movement Misdirection -  In the Farm-to-Consumer Legal Defense Fund’s (FTCLDF) raw milk rights lawsuit against the FDA, the FDA has previously said it considers individuals transporting raw milk across state lines for personal use to be engaging in “interstate commerce”, that they were criminals, and that while it had no immediate plans to arrest individuals for this, it reserved the right to do so.  In response to this, the Raw Milk Freedom Rider demonstration engaged in a mass individual transportation of raw milk across the border from Pennsylvania to Maryland. Proving the value of direct action, this and other pressure has forced the FDA to issue a press release affirming that it will not try to enforce its renegade “law” that way. The press release is nevertheless filled with lies and Big Lies. It lies about the evidence for raw milk’s health benefits. It lies about the number of cases of illness attributable to raw milk, a miniscule amount nonetheless. It elides the vastly greater number of illnesses caused by pasteurized milk.

    Excess heavy metals in 10% of China's land: report - About 10 percent of China's farmland contains excessive levels of heavy metals due to contaminated water and poisonous waste seeping into the soil, state media said Monday, citing a government survey. Pollution from heavy metals such as lead, mercury and cancer-causing cadmium is often blamed for poisoning entire villages and crop-growing land in China as factory bosses flout environmental laws and farmers use toxic fertilisers. The report in the Southern Metropolis Daily said the survey organised by the environmental protection ministry found about 10 percent of farmland had "striking problems of heavy metal levels exceeding (official) limits". "Heavy metal pollution incidents have occurred repeatedly in recent years," Wan Bentai, chief engineer at the ministry, was quoted saying. "From January to August alone there were 11 cases -- nine involving lead in the blood." The report did not say what level of heavy metals was considered excessive or how much of the country's agricultural land contained toxins.

    Monsanto is Secretly Poisoning the Population with Roundup - Carrasco is a leading embryologist at the University of Buenos Aires Medical School and the Argentinean national research council. He had heard the horrific stories of peasant farmers working near the vast fields of Roundup Ready soybeans - plants genetically engineered to withstand generous doses of Monsanto's poisonous weed killer. The short-term impact of getting sprayed was obvious: skin rashes, headaches, loss of appetite, and for one 11 year old Paraguayan boy named Silvino Talavera, who biked through a fog of herbicides in 2003, death. But Carrasco also heard about the rise of birth defects, cancer, and other disorders that now plagued the peasants who were sprayed by plane. He decided to conduct a study.  Carrasco injected minute amounts of Roundup into chicken and frog embryos, and sure enough, the offspring exhibited the same type of birth deformities that the peasant communities were seeing in their newborns. A report by the provincial government of Chaco soon followed, confirming that those living near soy and rice fields sprayed with Roundup and other chemicals did in fact have higher rates of birth defects - nearly a fourfold increase between 2000-2009. (Child cancer rates tripled during the same period.)

    Why Is the State Department Using Our Money to Pimp for Monsanto? - People in India are up in arms about eggplant. Not just any eggplant -- the fight, which is also raging in the Philippines, is over Monsanto's Bt eggplant. Even as increasing scientific evidence concludes that biotechnology and its arsenal of genetically modified crops may be doing more harm than good, companies like Monsanto are still pushing them hard and they are getting help from the U.S. The State Department is using taxpayer money to help push the agenda of Monsanto and its friends all across the world. Here's a recent example: Assistant Secretary of State Jose W. Fernandez, addressing an event of high-level government officials from around the world, agribusiness CEOs, leaders from international organizations, and anti-hunger groups said, "Without agricultural biotechnology, our world would look vastly different. One of our challenges is how to grow more crops on the same land. This is where biotechnology plays a role." Many scientists would disagree with these statements, which are more controversial than Fernandez let on. The Union of Concerned Scientists found that biotech crops did not lead1 to reliable yield increases compared to conventional, non-GMO crops and that biotech crops actually required more pesticides2 than conventional crops. These conclusions are reiterated by the scientists who authored the "International Assessment of Agricultural Knowledge, Science, and Technology for Development" (IAASTD) report3, a 2008 study written by 400 scientists from around the world concluding that agroecology was the best way to feed the world.

    Historic Farm Commodity Over-Production and How it Applies to BRIC Nations - The writing to follow addresses today's seldom spoken-of topic of agricultural commodity overproduction, citing history and quoting Jason Henderson. This certainly goes against conventional views which repeat ad nauseam that there will be ever-increasing demand for U.S. agricultural commodities by the BRICS and other nations. Note that back in May, I covered Henderson's warnings on this same subject of the BRIC nations increasing their agricultural production in this post — if you want to learn more — using a report (with graphs) from the Federal Reserve Bank of Kansas City. Henderson is an economist for the FRBKC at its Omaha branch. In reading Jerry Hagstrom’s report on a 3-day conference, Agriculture Investment Summit for the Americas, we were struck by the witty insight of Jason Henderson when he said,“I have never met a farmer who is unwilling to produce himself [or herself] out of prosperity.” In that one sentence, Henderson, executive vice president of the Omaha branch of the Federal Reserve Bank of Kansas City, summed up what agricultural economists have long known. Historically, the production of agricultural crops, sooner or later, outruns demand, resulting in multi-year periods of low prices. The same is true in the shorter-run for livestock, although producers there adjust production much more quickly than crop producers resulting what have historically been hog and cattle cycles.

    Multiplying Agriculture by the Power of Mobile - Lacking modern equipment, access to markets, agricultural supplies and basic infrastructure, many smallholder farmers in developing countries struggle to lift themselves out of poverty.  But the growing penetration and capabilities of the mobile platform offers unique promise to these individuals. As the mobile platform reaches global ubiquity, advanced services are beginning to take hold in developing regions with many smallholder farmers gaining actionable information through their wireless devices. Simple SMS-based services provide access to market prices, weather alerts, and advice on crop management.   But while these simple information services help to educate farmers, combining them with mobile financial services can empower individuals to act (and transact) on this knowledge to further increase production and boost incomes. Services such as mobile-enabled payments, credit, insurance, and savings creates the opportunity for farmers to buy modern farm supplies, build a credit history, ensure their financial security, and save for the future.

    Climate Change and Agricultural Production - In this post there are three graphics worth visiting.  My impression of climate change, currently, is four-fold.
    1) We need to react to CC because there is no stopping it. Not to dismiss our own guilt in fossil fuel burning, but today, coal use is increasing at alarming rates and global developing and urbanizing populations are advancing through the quality of life improvements that electricity provides. In addition to our continuing addiction to fossil fuel use, we might be reaching tipping points of ocean acidification, for example. Acceptance and planning are now key, which in agriculture means seed technology research/advancements, soil protection from flooding, small and micro-irrigation projects, and adaptation of crop (and dietary) choices.
    2) The scale of the impact of climate change might appear more rapidly and more dramatically than many currently expect. James Lovelock predicts that the human population will be reduced by 80% in the year 2100.
    3) Planners need to anticipate for human migrations, especially within countries and continents.
    4) Scientists will attempt some methods of geoengineering.

    Bubble Land - There's been a lot of talk about bubbles in commodity prices, including food commodities like corn, wheat and soybeans.  I've been critical of this, as have a few others who I admire.  Now there's a lot of talk about farmland values and I've been asked a couple times whether I think there's a farmland bubble. My answer:  I don't know.  It's hard to get enough data on farmland prices, the nature of the transactions, and whether we have reckless lending and leverage that would be the telltale signs of excessive speculation.  It's not just that there are so few farm transactions.  It's also that much of the data we do have is made utterly useless due to USDA's antiquated definition of a farm (more on this some other time). Perhaps most importantly, farmland is a durable good that cannot easily be reproduced, and buying and selling it involves huge transactions costs.  These features probably make farmland susceptible to a bubble, far more so than nondurable and easily tradeable commodities like corn.  Possibly even more than houses.  But they also make its value potentially sensitive to fundamental forces, like low interest rats and high commodity prices.  Calling a bubble is tough business; if it were easy, bubbles wouldn't exist.

    Biofuels: Not The Savior We Hoped For - When we enter the decline phase of conventional oil—likely before 2020—we will scramble to fill the gap with alternative liquid fuels. The Hirsch Report of 2005, commissioned by the U.S. Department of Energy, took a hard look at alternatives that could respond to the scale of the problem in time to have an impact. Not one of the approaches deemed to be currently viable in the report departs from fossil fuels. But what about biofuels? To what extent can they solve our problem? We’ll dip our toes into the math and see where a first-cut analysis leaves us. If you add up all the photosynthetic activity on the planet—accounting for virtually all life except for oddball extremophiles—you get a number like 80 TW (80 trillion watts; I see credible estimates ranging from 40–140 TW). About half is from all the plankton in the ocean (and its derivative food chain), and the other half happens on land, capturing every microbe, plant, and dependents. First, note that the human industrial power scale is comparable to the photosynthetic scale. If you react by saying that 13 does not look much like 80, fair enough. But I’m impressed by the similarity in the exponent: both are within a factor of three of 3×1013 W! Of all the places the comparison could have ended up, it’s about the same order-of-magnitude.

    Connecting the Dots for Ethanol, In Pictures - Let's start with some corn factsIn 2005, the U.S. produced 42 percent of the world’s corn. Over 50 percent of the U.S. crop is produced in Iowa, Minnesota, Nebraska or Illinois. Other states in which corn is grown include Kentucky, Ohio, Indiana, Wisconsin, South Dakota, Wisconsin and Missouri. In 2005, over 58 percent of the U.S. corn crop was used for feed. The remaining U.S. crop was split between exports (25 percent) and food, seed or industrial uses such as ethanol production (17 percent). How much of the U.S. corn crop is used for feed today?  If the percentage of the U.S. corn crop used for feed has been shrinking over time, where is the rest of the U.S. corn crop going instead?  How might that change have affected the price of corn? And how might that have affected the cost of meat produced from corn-fed livestock? Now, who is most responsible for that problem?

    There Are Now 7 Billion People In The World And We're Running Out Of Stuff: Earlier this week, the (estimated) total number of people in the world blew past 7 billion. To put that number in context, for the first 70,000-odd years of human history, the total human population was around 1 million. Then, over the course of the next ~10,000 years through 1800, the population gradually grew to 1 billion. And now the population has increased 7X in the past 200 years. Many of the resources used to sustain this population, meanwhile, have not grown. On the contrary, they've shrunk. Because we've used them up. Oil, for example. And metals. And potassium, which is used to make fertilizer, which is used to grow the food we eat. Optimists laugh at the idea that we should be concerned about this — ever-growing population and ever-shrinking resources. Science and innovation will save us, they argue. They always have. ("Always," in this context, of course, means the past few hundred years, which is less than 1% of human history).  

    The Education Solution - The world is assailed by problems that defy easy answers. Economic shocks are destabilizing countries and regions, and inflicting great social and financial hardships on families and their communities. Environmental damage threatens our food supplies, the air we breathe, and the rich biodiversity that sustains the balance of life. Wars and conflict produce millions of new refugees. Moreover, new health risks are emerging, with diabetes, obesity, and other non-communicable diseases now stalking low- and middle-income countries – even as many of those countries are still locked in combat with tuberculosis, HIV/AIDS, malaria, and other infectious diseases. Hundreds of millions of young people around the world are searching for jobs in a very uncertain labor market. The infrastructure we use to produce our energy, transport our goods, and transact our business is under stress. This list of worries is not meant to discourage, but to challenge. As the world’s physical resources grow scarcer, we must increasingly rely on the best and most proven renewable resource available – human ingenuity. Just as they confronted problems in the past, our scientists and entrepreneurs have brought us solutions by way of the Green Revolution, new vaccines, communications technology, and cleaner energy.

    Here Comes the Sun, by Paul Krugman - The sources of energy, the way we move stuff around, are much the same as they were a generation ago.  But that may be about to change. We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power. That’s right, solar power.  If that surprises you, if you still think of solar power as some kind of hippie fantasy, blame our fossilized political system, in which fossil fuel producers have both powerful political allies and a powerful propaganda machine that denigrates alternatives.  Speaking of propaganda: Before I get to solar, let’s talk briefly about hydraulic fracturing, a k a fracking.  Fracking — injecting high-pressure fluid into rocks deep underground, inducing the release of fossil fuels — is an impressive technology. But it’s also a technology that imposes large costs on the public. We know that it produces toxic (and radioactive) wastewater that contaminates drinking water; there is reason to suspect, despite industry denials, that it also contaminates groundwater; and the heavy trucking required for fracking inflicts major damage on roads.  Economics 101 tells us that an industry imposing large costs on third parties should be required to “internalize” those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure.

    Premature Sunrise? - Krugman -  I’ve been getting some pushback from people I respect on today’s column, not so much for what I actually said as for what they fear readers may take away from it. So a bit of clarification. Some of it involves questioning the cost data, but the main point, I think, is that even if solar power’s price per kwh matches coal-fired, it’s not going to take over the market right away, and maybe not ever. The sun doesn’t shine at night, and often doesn’t shine during the day. Intermittency is a big problem, and I probably should have made that clearer. So what we’re actually looking at is still a partial role for solar, as a piece of a multi-source energy system. The point, however, is that it’s now looking like a much larger part than anyone imagined — and if we priced coal-fired power properly, that transformation would be happening now.

    Solar Glut to Worsen After Prices Plunge 93% on Rising Supply: Commodities - The cost of solar cells and microchips has nowhere to go but down because of a supply glut for the commodity they’re made from, a brittle charcoal-colored semiconductor baked in ovens at 600 degrees centigrade.  Polysilicon has plunged 93 percent to $33 a kilogram from $475 three years ago as the top five producers more than doubled output, data compiled by Bloomberg shows. The industry next year will produce 28 percent more of the raw material than will be consumed, up from 20 percent this year, said Robert Schramm- Fuchs and Shai Hill, analysts at Macquarie Group Ltd. “Polysilicon is a grossly, grossly, grossly oversupplied commodity product,” said Paul Leming, director of research at Ticonderoga Securities in New York. “We’re staring at years of stability where polysilicon pricing sits at something approaching cost of production and doesn’t move.”  The shift is squeezing margins for manufacturers led by Hemlock Semiconductor Corp. and Wacker Chemie AG. (WCH) Solar-cell makers that use the material such as JA Solar Holdings Co. and Suntech Power Holdings Co. drove down the cost of photovoltaics, tipping three U.S. manufacturers into bankruptcy this year.

    Krugman: Only Politics Can Delay “an Energy Transformation, Driven by the Rapidly Falling Cost of Solar Power” - Nobel prize winning economist Paul Krugman has another good column in the NY Times today, “Here Comes the Sun.”  He makes three key points.  First, solar is rapidly coming down the cost curve — I’ve  sprinkled a couple of the Climate Progress charts on this throughout this post.  Second, fracking is over-hyped.  Third,  the only thing that can stop the solar revolution in this country is fossil-fuel-driven politics: We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power. That’s right, solar power.If that surprises you, if you still think of solar power as some kind of hippie fantasy, blame our fossilized political system, in which fossil fuel producers have both powerful political allies and a powerful propaganda machine that denigrates alternatives…. And don’t forget the traditional media, who overhype the output of  that propaganda machine. But the cost drops are real and impressive: But Solyndra’s failure was actually caused by technological success: the price of solar panels is dropping fast, and Solyndra couldn’t keep up with the competition. In fact, progress in solar panels has been so dramatic and sustained that, as a blog post at Scientific American put it, “there’s now frequent talk of a ‘Moore’s law’ in solar energy,” with prices adjusted for inflation falling around 7 percent a year.

    Why Solyndra’s Death Could be Good for the Solar Industry - I believe that the loss of industry players Solyndra, Evergreen, and SpectraWatt opens the market for more innovative solar companies to succeed with smarter tactics and mainstream products that fit into existing manufacturing models. Remember when the bubble burst in 2000 and, seemingly overnight, some companies ceased making millions hand-over-fist?  Flash forward to 2011, when nearly everyone is online, Internet technology has become more accessible and fortunes continue to be made. Real innovation always finds its pot of gold. We’ve seen a considerable reduction in solar panel costs, but that is exactly why there is reason to be optimistic. Lower prices open markets that were previously barred economically. I believe most people fail to understand the solar sector. Unlike other established markets the solar industry is still a tiny fraction of the overall energy production worldwide. Solar’s competition is really fossil fuel, or in other words, the established way electricity is being generated. With subsidies long in place for nuclear, coal and gas in the U.S. along with the cheap cost of production for coal and natural gas, solar is essentially competing with that $0.10/kWh average cost of electricity in the United States and globally.

    Unconventional Approaches to Solar Energy Capture - The Earth is deluged with vast amounts of energy from the sun on a constant basis. Humans have utilised solar energy from their earliest days, living on the proceeds of photosynthesis either directly or indirectly. As humans discovered fire, they cleverly enlarged their utilisation of solar energy to keeping warm on cold winter nights. Modern humans have set their sights on powering a large part of their commercial and industrial infrastructure with solar energy, and have become extremely ingenious toward that end. Pictured below are several unconventional approaches to solar energy, which go beyond the simple silicon photovoltaic approach:

    Alaska storm to produce “historic” hurricane-like conditions - A  ferocious, dangerous storm in the north Pacific is on a collision course with the west coast of Alaska. Referred to as the “Bering Sea Superstorm” by the National Weather Service Office in Fairbanks (NWS), damaging winds, severe beach erosion and major coastal flooding are expected. In some locations, heavy snow and blizzard conditions are also forecast. “This will be one of the most severe Bering Sea storms on record,” the NWS wrote today. The storm is predicted to deepen at an incredible rate, with its central pressure crashing from 973 mb this morning to 945-950 mb tonight. “This storm has the potential to produce widespread damage,” the NWS in Fairbanks said. Sustained winds of 80 mph (with gusts to 90 mph in some locations) may impact an area the size of Colorado with offshore waves to more than 40 feet according to the NWS Facebook page. A storm surge of 8 to 10 feet is predicted along the coast. The combination of wind, waves, and high sea levels will create many hazards as described by the NWS in a Special Weather Statement:

    The unending misery in Somalia- heavy rains displace thousands living in shelters - Thousands of Somalis who fled famine, drought and conflict now face the misery of heavy rains and flooding in the region, the UN refugee agency said Friday. “Thousands of displaced Somalis have been affected by heavy rains and flooding in parts of Somalia, Kenya and Ethiopia,” High Commissioner for Refugees spokesman Andrej Mahecic told journalists. In the Somali capital Mogadishu shelters for nearly 2,800 residents of the camp at Sigale have been destroyed, the UNHCR said, while nearly 5,000 people have been flooded out in the vast refugee camp of Dadaab in eastern Kenya. Latrines have also been destroyed, causing a worrying increase in the number of cases of diarrhea and a general worsening of the health of the 450,000 residents of Dadaab. There are currently 1.5 million children in southern Somalia who are in dire need of humanitarian assistance, including some 190,000 who are severely malnourished and at high risk of death within weeks if they do not receive the necessary support. The UNHCR said however that an increase in tensions on the Somalia-Kenya border, where Kenyan forces have mounted an incursion against Shebab rebels, had sharply reduced the flow of refugees making for Dadaab. An estimated 330,000 Somalis have fled their lawless country since January for neighboring states including Kenya, Ethiopia, Yemen and Djibouti. –

    Stop pretending it's not climate change - “All I know is this didn’t happen when we were kids.” That’s how Brian Williams tagged a recent NBC Nightly News report on this year’s extreme weather. Floods, droughts, wildfires and tornadoes dominated the news many nights in 2011. Even this week, weather forecasters are keeping tabs on reports from coastal villages in Alaska, like Kivalina, which is under a coastal flood warning from “one of the most severe storms on record” packing hurricane-force winds while it pushes up the Northwest Alaska coast. Lack of protective Arctic sea ice – which is disappearing because of climate change – is making the surge from storms like this more dangerous. Kivalina’s very existence is threatened due to flooding and erosion fueled by climate change, and the Native Alaskan community struggles to relocate. It’s no wonder the Inuit have a word for the changing weather — “uggianaqtuq” — which roughly translates into “stranger.” As in “the weather has become a stranger.”

    Frozen Microscopic Worlds Come Alive as Earth Warms - As our planet warms, a world locked in permafrost will come alive, and researchers worry the tiny inhabitants of the frozen soil will start churning out greenhouse gases, magnifying global warming. "Nobody has looked at what happens to microbes when the permafrost thaws," said Janet Jansson, a senior staff scientist at Lawrence Berkeley National Laboratory in California. She led a study that recorded what happened when chunks of Alaskan permafrost thawed for the first time in 1,200 years. "We now have a picture, there wasn't really one before," said Jansson, who along with her colleagues sequenced the genetic material of microbes within frozen and thawed permafrost. Along the way, they also discovered a new-to-science microbe and sequenced its entire genetic blueprint or genome.Because there is a lot of carbon tucked away in the permafrost, scientists have feared the melting it could aggravate global warming. Arctic permafrost, for example, is estimated to contain more than 250 times the greenhouse gas emissions from the United States in 2009.

    Greenhouse Gas Index Continues to Climb — NOAA's updated Annual Greenhouse Gas Index (AGGI), which measures the direct climate influence of many greenhouse gases such as carbon dioxide and methane, shows a continued steady upward trend that began with the Industrial Revolution of the 1880s. Started in 2004, the AGGI reached 1.29 in 2010. That means the combined heating effect of long-lived greenhouse gases added to the atmosphere by human activities has increased by 29 percent since 1990, the "index" year used as a baseline for comparison. This is slightly higher than the 2009 AGGI, which was 1.27, when the combined heating effect of those additional greenhouse gases was 27 percent higher than in 1990. "The increasing amounts of long-lived greenhouse gases in our atmosphere indicate that climate change is an issue society will be dealing with for a long time," said Jim Butler, director of the Global Monitoring Division of NOAA's Earth System Research Laboratory in Boulder, Colo. "Climate warming has the potential to affect most aspects of society, including water supplies, agriculture, ecosystems and economies. NOAA will continue to monitor these gases into the future to further understand the impacts on our planet."

    Irreversible Climate Change Looms Within Five Years - Unless there is a "bold change of policy direction," the world will lock itself into an insecure, inefficient and high-carbon energy system, the International Energy Agency warned at the launch of its 2011 World Energy Outlook today in London.The report says there is still time to act, but despite steps in the right direction the door of opportunity is closing. The agency's warning comes at a critical time in international climate change negotiations, as governments prepare for the annual UN climate summit in Durban, South Africa, from November 28. "If we do not have an international agreement whose effect is put in place by 2017, then the door will be closed forever," IEA Chief Economist Fatih Birol warned today. "Growth, prosperity and rising population will inevitably push up energy needs over the coming decades. But we cannot continue to rely on insecure and environmentally unsustainable uses of energy," said IEA Executive Director Maria van der Hoeven.

    Current Global Warming Is Unprecedented Compared to Climate of the Last 20,000 years, Study Finds - A common argument against global warming is that the climate has always varied. Temperatures rise sometimes and this is perfectly natural is the usual line. However, Svante Björck, a climate researcher at Lund University in Sweden, has now shown that global warming, i.e. simultaneous warming events in the northern and southern hemispheres, have not occurred in the past 20,000 years, which is as far back as it is possible to analyse with sufficient precision to compare with modern developments. Svante Björck’s study thus goes 14,000 years further back in time than previous studies have done. “What is happening today is unique from a historical geological perspective,” he says So begins the news release for a recent study, “Current global warming appears anomalous in relation to the climate of the last 20,000 years.”  That study finds clear evidence recent human-caused global warming is unprecedented in the past 20 millennia:

    But Is the Planet Really Burning? - With the United Nation Climate Change Conference scheduled to convene later this month in Durban, South Africa, to consider a second commitment period to follow the Kyoto Protocol, it seemed like a good time to tune in on the global-warming controversy. The Kyoto agreement was signed in 1997, took effect in 2005, and, of the 192 original signatories to it, only the US has declined to ratify it – the result of George W. Bush’s decision in the first few months of his administration. There is no thornier international political issue ahead for the US, at least until the direction of the climatic trend is resolved, one way or the other, by stronger evidence.  In the short term, meaning the next few presidential election cycles, it makes the problems facing the Joint Select Committee on Deficit Reduction look easy. For example, I don’t know a more interesting young writer on environmental economics than Gernot Wagner. He works for the Environmental Defense Fund:  that makes him a good source, but he is lost to journalism.

    Nature is the 99%, too - What if rising sea levels are yet another measure of inequality? What if the degradation of our planet's life-support systems - its atmosphere, oceans and biosphere - goes hand in hand with the accumulation of wealth, power and control by that corrupt and greedy 1 per cent we are hearing about from Zuccotti Park? What if the assault on America's middle class and the assault on the environment are one and the same? It's not hard for me to understand how environmental quality and economic inequality came to be joined at the hip. In all my years as a grassroots organiser dealing with the tragic impact of degraded environments on public health, it was always the same: Someone got rich and someone got sick. In the struggles that I was involved in to curb polluters and safeguard public health, those who wanted curbs, accountability and precautions were always outspent several times over by those who wanted no restrictions on their effluents.

    “FT Adviser” Tricked Into Lending the Good Name of the Financial Times to Carbon Credit Scammers - “Carbon credit company hits out at ‘scammers’”, announces FT Adviser, unfortunately neglecting to consider the possibility that the very company doing the hitting out might itself be a scam. Since this entire FT Adviser piece is, in fact, a transcription of a scammer’s schtick, and I really doubt that the FT wishes to enforce their copyright on that (while sort of hoping they try it), I’ll quote it in full: After IFAs sounded the alert over a potential carbon credit boiler room operated by Carbon Trace Solutions, another carbon credit company has admitted to problems in its sector. Validated Carbon Credits said it wanted to warn IFAs about the misrepresentations surrounding carbon credit investments.The carbon credit company said IFAs needed to ensure credits were visible on a public registry and payment was made direct to the provider or seller of the credits and not to a third party or escrow agent.

    Coal On A Roll - Investment analysts say that fascinating is Buffett-speak for a really, really big deal, and that his visit to Wyoming’s Powder River Basin, which produces almost 40 percent of the nation’s coal, cannot be seen in isolation. Just a year earlier, Buffett had wrapped up the $44 billion purchase of the Burlington Northern Santa Fe Railway, his biggest acquisition ever. Coal accounts for more than a quarter of the company’s revenues, and 90 percent of the coal it hauls is from the Powder River Basin. Ever since the nineteenth century, coal and railroads have thrived on this symbiotic relationship: a recent issue of Trains magazine called coal "railroading’s ultimate commodity and the industry’s best friend from start to now." Buffett’s holdings also include 90 percent of MidAmerican Energy, a utility that operates four coal-fired power plants in Wyoming. Now he was taking a firsthand look at the biggest coal mine in the country. Join up the dots. Most of the coal trains turn to the right here, headed for power plants in the heartland, from Michigan to Texas. But if what Buffett calls his "all-in wager" on railroads and coal pays off, more and more of them will turn to the left, headed for ports in the Pacific Northwest, and from there to Asia. It’s a grotesque idea on the face of it, digging up Wyoming to provide Asia’s booming economies with the dirtiest of all fossil fuels. But will the plan come to fruition? And if it does, how high will it rank in the hierarchy of environmental crimes?

    Toxic Trade - The former power station worker is sick after years of exposure to asbestos that’s used as an insulator in his workplace.  ‘When it would blow, my hair would turn white’. Unwittingly, he brought the danger home. His wife Sevita Devi used to shake asbestos dust from his clothes before washing them and now she’s also stricken with disease. With no money for proper medical care the couple have given up hope for the future. Asbestos illness in India is under-diagnosed and mostly unrecognised as a health problem. But with the proliferation of factories making and using asbestos products and an import trade in asbestos building products booming, India has become a new frontier for what’s sure to be a dramatic, devastating health crisis. Indian asbestos workers have little in the way of safety equipment and if they contract a respiratory illness like asbestosis or a cancer like mesothelioma few are paid compensation.

    Oklahoma shaken up after earthquakes - "There's no statistical inference that seismic activity is increasing. We've just had a lot more quakes in the news because they have occurred where people live," Caruso said. Reneau said she had noticed an increase in earthquakes during the last two years, and wondered whether it might be connected to oil and gas exploration in the area. "There's been a lot of drilling," she said. In August, a research seismologist published a study noting a swarm of earthquakes in January in an area of south-central Oklahoma with active hydraulic fracturing, or fracking, a form of natural gas and oil drilling using pressurized water and other materials. The researcher at the Oklahoma Geological Survey at the University of Oklahoma in Norman noted 50 small earthquakes, ranging in magnitude from 1.0 to 2.8, had occurred within about two miles of Eola Field, a fracking operation in southern Garvin County. "There have been previous cases where seismologists have suggested a link between hydraulic fracturing and earthquakes," the study noted. "But data was limited, so drawing a definitive conclusion was not possible for these cases."

    Oklahoma Hit by Earthquake for a Second Night in a Row - For the second night in a row, an earthquake rattled Central Oklahoma late Saturday night, waking residents, breaking dishes and generally startling people more accustomed to natural disasters from above than from below their feet.  The quake, which the United States Geological Survey said had a preliminary magnitude of 5.6, occurred about 10:53 p.m. and was centered near Sparks, Okla., a town of 137 people about 45 miles east of Oklahoma City.

    Oklahoma's largest quake in decades buckles highway; rattles residents - Central Oklahoma continued to experience dozens of aftershocks Sunday, nearly 24 hours since the state's strongest earthquake since 1952 was felt throughout the region. More than ten aftershocks measuring at east 3.0 magnitude were reported Sunday, in the hours after a 5.6-magnitude earthquake took residents by surprise Saturday night. The temblor rattled homes and structures, causing belongings to scatter in houses and sending strident, booming sounds through the area. The 5.6-magnitude quake struck four miles east of Sparks in Lincoln County at 11:53 p.m. ET Saturday. It hit struck the same area where a 4.7-magnitude quake struck just hours earlier -- at 3:12 a.m. ET Saturday. By 8 a.m. Sunday, geologists had recorded more than 30 aftershocks. The strongest quake previously reported was of magnitude 5.5 on April 9, 1952, according to the Oklahoma Geological Survey.

    Scientists puzzled by recent seismic activity after biggest earthquake in OK history - Two minor injuries were reported from Saturday's quakes by the Oklahoma Department of Emergency Management, which said neither person was hospitalized. And, aside from a buckled highway and the collapse of a tower on the St. Gregory's University administration building in Shawnee, no major damage was reported. But the weekend earthquakes were among the strongest yet in a state that has seen a dramatic, unexplained increase in seismic activity. Oklahoma typically had about 50 earthquakes a year until 2009. Then the number spiked, and 1,047 quakes shook the state last year, prompting researchers to install seismographs in the area. Still, most of the earthquakes have been small.

    Oklahoma earthquakes raise more questions about hydrofracking, injection wells - Another swarm of earthquakes in an unusual part of the country has generated aftershocks of debate about whether the oil and gas drilling process called hydraulic fracturing, or fracking, is to blame. The early returns in Oklahoma, where a 5.6-magnitude earthquake near Sparks damaged buildings and rattled nerves on Saturday, are inconclusive. Much as scientists said there just isn’t enough evidence to link earthquakes this summer in Virginia and Colorado to fracking, officials over the weekend declined to connect the Oklahoma quake to the common drilling practice.The process of fracking involves the high-pressure injection of water, sand and chemicals into oil and gas wells to break up tight rock and sand and free up more hydrocarbons. The fracking fluids are then stored for later use, recycled or disposed of in injection wells.  According to the Associated Press, there are 181 such injection wells in the vicinity of Saturday’s Oklahoma quake and Sunday’s aftershocks. AP also reported Oklahoma typically only experienced about 50 earthquakes a year until 2009 when that number spiked dramatically. Last year there were 1,047 small quakes in the area, prompting the installation of seismographs. The U.S. Geological Survey (USGS) is now seeking more data on the weekend quakes in Oklahoma, a state whose panhandle region borders southeastern Colorado, where earthquakes this summer shook area residents in an area with natural gas drilling.

    Did Fracking Help Cause Oklahoma Earthquakes? - The good people of Oklahoma were rattled on Nov. 5 when the state was hit by its largest earthquake on record, a 5.6-magnitude temblor that struck 44 miles (71 km) east of Oklahoma City. Oklahoma isn't California — this is a state that is usually pretty seismically stable, one with about 50 small quakes a year until 2009. But the number of quakes spiked in 2009, and last year 1,047 tremors shook Oklahoma. All of which begs the question: Has something changed to make the Sooner State unstable? Perhaps something like hydraulic fracturing? Also called fracking, the practice — producing small fractures in the earth miles beneath the surface with explosives in order to tap trapped oil and gas deposits — is common in Oklahoma, a center of the fossil fuel extraction industry. There's some evidence that fracking may induce minor tremors. A report (PDF) written earlier this year by Austin Holland of the Oklahoma State Geological Survey concluded that a swarm of about 50 very small quakes — from magnitudes 1.0 to 2.8 — may have been related to hydraulic fracturing. And just last week, a report financed by the U.K. energy company Cuadrilla Resources found "strong evidence" that two minor quakes and 48 weaker seismic events in Britain resulted from Cuadrilla's fracking practices.

    All Those Oklahoma Earthquakes Over The Weekend Were Probably Caused By Fracking - According to the USGS website, under the undated heading, “Can we cause earthquakes? Is there any way to prevent earthquakes?” the agency notes, “Earthquakes induced by human activity have been documented in a few locations in the United States, Japan, and Canada. The cause was injection of fluids into deep wells for waste disposal and secondary recovery of oil, and the use of reservoirs for water supplies. Most of these earthquakes were minor. The largest and most widely known resulted from fluid injection at the Rocky Mountain Arsenal near Denver, Colorado. In 1967, an earthquake of magnitude 5.5 followed a series of smaller earthquakes. Injection had been discontinued at the site in the previous year once the link between the fluid injection and the earlier series of earthquakes was established.” Note the phrase, “Once the link between the fluid injection and the earlier series of earthquakes was established.” So both the U.S Army and the U.S. Geological Survey over fifty years of research confirm on a federal level that that “fluid injection” introduces subterranean instability and is a contributory factor in inducing increased seismic activity.” How about “causing significant seismic events?”

    U.S. Government Confirms Link Between Earthquakes and Hydraulic Fracturing - On 5 November an earthquake measuring 5.6 rattled Oklahoma and was felt as far away as Illinois. Until two years ago Oklahoma typically had about 50 earthquakes a year, but in 2010, 1,047 quakes shook the state. Why? In Lincoln County, where most of this past weekend's seismic incidents were centered, there are 181 injection wells, according to Matt Skinner, an official from the Oklahoma Corporation Commission, the agency which oversees oil and gas production in the state. The practice of injecting water into deep rock formations causes earthquakes, both the U.S. Army and the U.S. Geological Survey have concluded. The U.S. natural gas industry pumps a mixture of water and assorted chemicals deep underground to shatter sediment layers containing natural gas, a process called hydraulic fracturing, known more informally as “fracking.” While environmental groups have primarily focused on fracking’s capacity to pollute underground water, a more ominous byproduct emerges from U.S. government studies – that forcing fluids under high pressure deep underground produces increased regional seismic activity.

    EPA Finds Fracking Compound in Wyoming Aquifer - As the country awaits results from a nationwide safety study on the natural gas drilling process of fracking, a separate government investigation into contamination in a place where residents have long complained that drilling fouled their water has turned up alarming levels of underground pollution. A pair of environmental monitoring wells drilled deep into an aquifer in Pavillion, Wyo., contain high levels of cancer-causing compounds and at least one chemical commonly used in hydraulic fracturing, according to new water test results released yesterday by the Environmental Protection Agency. The findings are consistent with water samples the EPA has collected from at least 42 homes in the area since 2008, when ProPublica began reporting on foul water and health concerns in Pavillion and the agency started investigating reports of contamination there. Last year -- after warning residents not to drink or cook with the water and to ventilate their homes when they showered -- the EPA drilled the monitoring wells to get a more precise picture of the extent of the contamination. The Pavillion area has been drilled extensively for natural gas over the last two decades and is home to hundreds of gas wells. Residents have alleged for nearly a decade that the drilling -- and hydraulic fracturing in particular -- has caused their water to turn black and smell like gasoline. Some residents say they suffer neurological impairment, loss of smell, and nerve pain they associate with exposure to pollutants.

    Report: Natural Gas Industry Spent Millions to Avoid Fracking Regulations - According to a new report by the nonpartison group Common Cause, the natural gas industry has pumped millions into Congress to avoid regulation of hydraulic fracturing, also known as "fracking."  Fracking is a controversial method of obtaining natural gas involving injecting a mix of sand, chemicals, and water into a well at high pressure. Questions have been raised about the possibility of polluting groundwater near fracking sites, and was documented in a 1987 EPA study. The new report details that $747 million has been spent during a successful 10-year campaign. “Players in this industry have pumped cash into Congress in the same way they pump toxic chemicals into underground rock formations to free trapped gas,” said Common Cause President Bob Edgar. Among the report's key findings:

    Oil Executive: Military-Style 'Psy Ops' Experience Applied - Last week’s oil industry conference at the Hyatt Regency Hotel in Houston was supposed to be an industry confab just like any other — a series of panel discussions, light refreshments and an exchange of ideas. It was a gathering of professionals to discuss “media and stakeholder relations” in the hydraulic fracturing industry — companies using the often-controversial oil and gas extraction technique known as “fracking.” But things took an unexpected twist. CNBC has obtained audiotapes of the event, on which one presenter can be heard recommending that his colleagues download a copy of the Army and Marine Corps counterinsurgency manual. (Click below to hear the audio.) That’s because, he said, the opposition facing the industry is an “insurgency.” Another told attendees that his company has several former military psychological operations, or “psy ops” specialists on staff, applying their skills in Pennsylvania. (Click below to hear.) The comments were recorded by an environmental activist, who passed along audio files to CNBC.

    A Slight Chance of Meltdown - At Indian Point Energy Center, the 49-year-old nuclear-power plant 25 miles north of New York City, they talk a lot about safety—safety with regard to terrorism, to floods, to power outages and meteorological events. Most of the talk revolves around keeping the reactors cooled, and protecting what’s known as the spent-fuel pool. This is important, because it takes a few thousand years for radioactivity to decay to a point where it is no longer hazardous. It often takes a disaster, or the threat of one, anyway, to get people thinking about their power—otherwise they just plug in or charge it overnight, without giving a second thought to where those electrons are born. The last time New Yorkers were focused on Indian Point was in the fear-drenched aftermath of September 11. (You may recall Rudy Giuliani, in some of his first work at Giuliani Partners, vouching for Indian Point’s security) Well, Giuliani’s back—starring in new advertisements, paid for by Entergy, the Louisiana-based company that owns Indian Point, in which he stands before a green screen and accentuates the energy needs of “the greatest city on Earth.” “You have the right to know the facts about this important source of electricity,” he tells us. “All of us have a right to know why Indian Point is right for New York.”

    Washington Post Admits Keystone XL Jobs are a Pipe Dream - In an explosive story posted online in the Washington Post this afternoon, pipeline company TransCanada admitted that it has grossly misrepresented the number of jobs the controversial Keystone XL project would create.The 20,000 jobs involved in pipeline construction? A fabrication supported by misleading mathematics. The 250,000 indirect jobs? A number based on one oil-industry funded study that counted jobs for “dancers, choreographers and speech therapists,” according to the Post. “ The only study not paid for by the pipeline company makes clear that there are no net jobs from this pipeline because it will kill as many as it will create.” Lawmakers, Republican presidential candidates, and the media have repeated TransCanada’s claim that the Keystone XL project would create 20,000 new jobs if approved–13,000 from direct construction and 7,000 from supply manufacturers. The Post shows both numbers to be inaccurate, quoting TransCanada chief executive Russ Girling: “Girling said Friday that the 13,000 figure was ‘one person, one year,’ meaning that if the construction jobs lasted two years, the number of people employed would be only 6,500.”

    Keystone oil sands pipeline construction in doubt - Twenty thousand construction jobs. $5 billion in tax revenue. 700,000 barrels of additional oil a day. All these things are now in doubt as opposition mounts to the expansion of the Keystone pipeline, a 1,700-mile long conduit that would carry crude from Canada's Alberta oil sands region to the U.S. Gulf Coast. Just a few weeks ago analysts thought the jobs and economic benefits would easily outweigh environmental concerns and push the Obama administration to approve the $7 billion project. But now Nebraska is balking at the pipeline's route, and rumblings of discontent are being heard from South Dakota as well. The public pressure is being turned up too.  Protestors, concerned about green house gas emissions associated with Canada's oil sands and doubtful of its promised benefits, have been rallying against the project all summer. On Sunday, thousands joined hands and literally encircled the White House.

    WTI-Brent Spread Costing Canadian Producers Over $1 Billion a Month -- Facing growing political and environmental opposition in the U.S. to the proposed Keystone XL pipeline, Canada’s landlocked options for exporting its oil have never appeared more costly. Not only has deadheaded oil in Cushing Oklahoma, the present terminus of the pipeline, put a crimp on expansion plans in the oil sands, but the ballooning price spread between West Texas Intermediate (WTI) and world oil prices has cost Canadian producers more than $1-billion a month in lost petro-dollars. It’s not U.S. motorists pocketing the difference at the pumps. Midwest refineries have been quick to recognize a gift horse when it is staring them in the face. The only thing bigger than the gap in oil prices between Cushing (where WTI is priced) and the Gulf Coast is the gap in refinery margins.  While refineries in Cushing pay WTI prices for their feedstock, refineries 400 miles south pay about $20 per barrel more for Light Louisiana Sweet, which like all fuels heading into U.S. ports, trades at or near the Brent-based world oil price. Incidentally, those prices have been in triple digit territory since the beginning of the year. That is a great deal for the refineries in Cushing that get a crack spread of around $25, compared to a spread of about $5 for those that have to pay Brent-type world oil prices for their fuel.

    Canadian natural resource minister “cautiously optimistic” Keystone pipeline will be approved - Canada’s natural resources minister said Monday he is “cautiously optimistic” an oil pipeline from western Canada to the U.S. Gulf Coast will win approval from the Obama administration, and affirmed a delay wouldn’t necessarily kill the project. Natural Resource Minister Joe Oliver said in an interview Monday that he would prefer a decision this year but that Canada respects the regulatory process. A U.S. State Department spokeswoman said last week that a decision could take more time. President Barack Obama has said he would receive a recommendation on the project “in the next several months.” The State Department had been expected to make a decision by the end of the year.  The State Department’s inspector general also said Monday it will review the department’s handling of an environmental assessment of the pipeline, possibly delaying a final decision. “I wouldn’t say a delay kills the project but it depends how long the delay is,” . “It’s not helpful. That is very clear. It will cost TransCanada money.”

    US to Delay Decision on Pipeline Until After Election - The Obama administration, under sharp pressure from officials in Nebraska and restive environmental activists, announced Thursday that it would review the route of the disputed Keystone XL1 oil2 pipeline, effectively delaying any decision about its fate until after the 2012 election.  The State Department said in a statement3 that it was ordering a review of alternate routes to avoid the environmentally sensitive Sand Hills region of Nebraska, which would have been put at risk by a rupture of the 1,700-mile pipeline carrying a heavy form of crude extracted from oil sands4 formations in Alberta to refineries in Oklahoma and the Gulf Coast.  The move is the latest in a series of administration decisions pushing back thorny environmental matters beyond next November’s presidential election to try to avoid the heat from opposing interests — business lobbies or environmental and health advocates — and to find a political middle ground.  The proposed project8 by a Canadian pipeline company, TransCanada, similarly put the president in a political vise, squeezed between the demand for a secure source of oil and the thousands of jobs the project will bring, and the loud agitation of environmental advocates who threatened to withhold electoral support next year if he approved it.

    Reports: Obama admin. delays tar sands decision until after election - The Obama administration plans to move a key decision on whether to approve the massive Keystone XL tar sands pipeline until after the 2012 presidential election, according to reports late Thursday that cited administration insiders. While an official announcement was expected sometime this week, administration sources told USA Today and The New York Times that a decision would not be made before the election, and that the pipeline’s route may ultimately be changed. The revelation comes just days after the Office of Inspector General (OIG) announced it would investigate how the State Dept. handled the deal with TransCanada to secure the pipeline’s route. The investigation would likely look at emails released earlier this year by environmental advocacy group Friends of the Earth, which claimed that documents obtained through Freedom of Information Act (FOIA) requests showed improper relationships between TransCanada lobbyists and State Dept. employees. Officials have since denied “complicity” in helping to secure the deal, which the State Dept. claimed would have minimal environmental impact.

    Stunning Triumph for 99%: Obama Sends Keystone XL Back to State for Review, McKibben Calls This “A Very Important Day” - That’s Bill McKibben’s headline at Tar Sands Action (full statement below). In a stunning reversal of a “done deal,” the Obama administration has sent the Keystone XL tar sands pipeline back to review at the State Department: … the Department has determined it is necessary to examine in-depth alternative routes that would avoid the Sand Hills in Nebraska in order to move forward with a National Interest Determination for the Presidential Permit. There will be a “supplemental” environmental impact statement — presumably one that isn’t rigged (see “Bombshell: State Department Outsourced Tar Sands Pipeline Environmental Impact Study to ‘Major’ TransCanada Contractor.”  It “could be completed as early as the first quarter of 2013.” Yes, Obama has punted this until after the election, but don’t undersell what just happened.  Bill McKibben is the man most responsible for leading the charge to kill the pipeline, and as he wrote me, “a done deal has come spectacularly undone.”  He added: The people spoke very loudly, and thankfully the president appears to have heard them. We have had few enough even partial victories on climate change in Washington. That makes this a very important day.

    Keystone Pipeline May Not ‘Survive’ U.S. Delay, Flaherty Says - The U.S. State Department’s decision to delay its review of TransCanada Corp.’s $7-billion Keystone XL pipeline until after next year’s presidential election may doom the project and accelerate Canada’s efforts to ship crude to Asia, Canadian Finance Minister Jim Flaherty said. “The decision to delay it that long is actually quite a crucial decision. I’m not sure this project would survive that kind of delay,” Flaherty said yesterday in an interview at the Asia-Pacific Economic Cooperation summit in Honolulu. “It may mean that we may have to move quickly to ensure that we can export our oil to Asia through British Columbia.” The deferral on Keystone XL is a blow to the government of Prime Minister Stephen Harper, who called U.S. approval of the pipeline a “no brainer.” Canadian officials underestimated the strength of resistance to the project by Nebraska farmers and environmentalists, political and foreign-policy experts said. The State Department said yesterday it will study an alternative route to avoid environmentally sensitive areas in Nebraska. Nebraskan farmers, officials in the state and some members of Congress argue the proposed route across the Sandhills area risks contaminating the Ogallala aquifer that supplies water to 1.5 million people.

    NPR: How To Put A Value On Oil Damaged Life In The Gulf - NPR:A law passed after the Exxon Valdez oil spill requires the government to assess the biological damage from big spills so fines can be fixed and damage paid for. The National Academy of Sciences has a report describing the methods and metrics of determining the "ecosystem services" that have been lost due to the BP oil spill in the Gulf of Mexico. In some ways, ecosystem services valuation is a rose under a different name (here is the ecosystem valuation website). Stephen Polasky is the only economist interviewed along with other "environmental scientists." My guess is that the NAS approach is much more interdisciplinary than the Exxon Valdez study. NPR says the final NRDA recommendations will be released in a year with payout to follow. Here is the podcast:

    BP oil cleanup deal worries residents -- A government plan that ends most of BP's responsibility for cleaning up oil washing onto the Gulf Coast marks a shift toward restoration efforts by the company, but many in the region are worried about who will handle the monitoring of long-term effects from the worst offshore oil spill in U.S. history. Under the agreement approved last week by the Coast Guard, BP P.L.C. won't be required to clean up oil unless officials can prove it came from the blown-out well that caused the 2010 catastrophe - a link that the company concedes will be harder to establish as time passes and the oil degrades. "We are finally at a stage where scientific data and assessment has defined the end point for the shoreline cleanup," said Mike Utsler, head of BP's Gulf Coast Restoration Organization. "That end point can be reopened." BP will shift its focus to restoring areas damaged by the spill. About $1 billion has been set aside for projects that could include planting new vegetation and adding sand to beaches, an official says. About 90 percent of the coast has been deemed clean, according to officials. The plan obtained Tuesday by the Associated Press spells out protocol for when an area still needs to be cleaned and when BP's responsibility for that ends.

    Tech Talk - Drilling off the Atlantic Coast - When the U. S. presidential administration changes, particularly when that change involves a different political party, the results relating to energy policy and ultimately energy availability and price can be - but are not always - significant. In recent posts I have cited Governor Perry’s Energy Plan were he to come to power, and have noted that for some issues, the change in power may not have much effect. This is particularly true where the energy reserve is already being produced, with production levels controlled to a degree by things such as price, rig availability, and the potential promise of a well.  But there are some regions of the country where government policies can have a greater impact on potential production. So the last region I have left to discuss of those included in the Governor’s Plan is the Outer Continental Shelf (OCS) and particularly that off the Atlantic seaboard. This is a theme that ex-Speaker Gingrich, another presidential candidate, has also sounded. His remarks were directed at the benefits of dredging Charleston’s port, thereby supporting the OCS activities and potentially adding 8,800 jobs in S. Carolina. The most likely area to be leased first is that off the coast of Virginia, designated as Lease Sale 220.

    Argentina Announces Massive Oil and Natural Gas Reserves - On 7 November the YPF SA, Argentina's biggest oil and gas company, confirmed its biggest oil discovery yet in Argentina in the country’s Vaca Muerta basin in Neuquen province in northern Patagonia, reserves equivalent to 927 million barrels of recoverable oil and natural gas, of which 741 million barrels is oil. Repsol YPF SA based its discovery on output from 15 producing wells in the Loma Lata Norte area, 746 miles southwest of Buenos Aires. YPF SA's majority shareholder is Spain's Repsol YPF SA, which has a 57.4 percent stake in the company. Following the announcement YPF SA’s stock surged 10.7 percent on the Buenos Aires Stock exchange. YPF SA currently produces more than 50 percent of Argentina’s crude oil. If the discovery proves to be verified, then according to U.S. Energy Information Administration data, Argentina will rank as having the world’s third-largest probable reserves of shale oil, behind the U.S. and China. The bad news? The Vaca Muerta basin Neuquen province oil is situated in a shale formation.

    OPEC Says Oil Production Up in Oct (Sort Of) -The OPEC monthly report is out and says that Preliminary figures indicate that global oil supply increased 0.87 mb/d in October to  average 88.35 mb/d. Non-OPEC supply experienced growth of 0.86 mb/d, while OPEC  crude production remained relatively flat. However, it's worth noting that last month they said Preliminary figures show that global oil supply averaged 88.50 mb/d in September, a  gain of 0.76 mb/d from the previous month, supported by estimated increases in non-OPEC supply. So in other words although they now show production increasing from September to October, they revised down September by more than the inter-month gain, thus coming up with a final number that is a little less than last month's number. Still I suppose we'd have to say that global oil production still seems to be on an uptrend. The IEA will report tomorrow, so we can potentially revise our opinions then.

    Global Liquids Production reaching New Heights in October - Still not peak oil (or at least not peak liquid fuels).  With the IEA and OPEC both reporting through October (and the EIA through July) it seems reasonably likely that October has pipped the pre-Libya heights of January. On the longer time frame, this is the biggest bump on the bumpy plateau that's been going on since 2005: My best guess going forward is that the European situation is going to worsen further and cause a global slowdown that will lead to at least 1-2 mbd drop in production (and a corresponding drop in Brent price down somewhere below $80 in order to get oil producers to cut back in line with demand).  Timing is hard to call, but the pace of degradation in Europe does seem to be accelerating.  The impacts on the real economy there have so far been modest but I expect that to change.

    How Much Might Producing More (or Less) Oil Change Its Price? - Environmental Economics' John Whitehead greedily sharpened his old pencil following a statement Texas governor and GOP presidential candidate Rick Perry made in New Hampshire:  We can create hundreds of thousands of jobs and increase our oil output by 25 percent if we fully develop oil and gas shale formations in the Northeast, mountain West and Southwest. Doing the back of the envelope (and not worrying about whether the 25% increase in oil output is realistic) with these data: daily world oil production = Q = 89,123,026 [barrels] 25% of daily U.S. oil production = dQ = 2,422,000 oil price = P = $90 demand elasticity = ed = -0.1 supply elasticity = es = 0.2 dp = ((P*dQ)/Q)/(-ed + es) The world price of a barrel of oil would fall by $8.20 as a result of a 25% increase in U.S. production. If gas prices are about 70% due to the price of oil and gas costs $3.35 per gallon, then the oil price share of gas is about $2.35.  In the interest of saving what's left of the pencil nub that John uses for his back-of-the-envelope math, not to mention sparing the world of yet another disturbing display of greed-driven pencil sharpening, we've built our latest tool to do John's quick math for estimating how much the price of a barrel of oil might change if the supply of oil being produced were suddenly changed!  Just update the data below or substitute your own values as you see fit!

    Time to Worry: World Oil Production Finishes Six Years of No Growth - - We are entering what may be the longest stretch of no growth in world oil production since the early 1980s. But the reasons for that lack of growth differ in ways that ought to make us all uncomfortable. Starting in 1980, production slumped because for the first time in history people needed less oil. After the huge oil price increases in the 1970s, cars suddenly got smaller. People became more careful about combining trips to save gas. A lot of people switched their home heating to natural gas which was considerably cheaper than heating oil. And, in the United States the Congress severely restricted the use of oil for new electric power generating plants. Those using oil began to switch to cheaper natural gas and coal. The whole globe went on an energy efficiency binge.  Fast forward to 2005 when conventional oil supplies stopped growing and then fluctuated between 73 million and 74 million barrels per day on an annual basis through 2010. (Production averaged 73.8 million barrels per day this year from January through July, the last month for which data is available.) The chain of events following the 2005 peak are both different and worrisome. Following the cessation in growth of conventional oil supplies, the world economy continued to grow until the end of 2007 when it slipped into recession. Prices peaked in July 2008 at around $147 a barrel.

    IEA economist: ‘We have to leave oil before it leaves us’ - The International Energy Agency (IEA)’s annual World Energy Outlook, due for publication on 9 November, will contain alarming research that the world is on track for a catastrophic rise in global temperatures unless fossil fuel subsidies are cut, energy efficiency is improved, and more countries introduce some form of carbon pricing. Fatih Birol is the IEA’s chief economist, tasked with overseeing the World Energy Outlook reports, the Energy Business Council, and the organisation’s economic analyses of energy and climate change policy. He spoke to EurActiv’s environment correspondent, Arthur Neslen. To read a shortened version of this interview, click here:

    Oil Could Hit $150 a Barrel in Near Term: IEA  - The price of oil could rise to as much as $150 per barrel in the near term if investment in the oil-producing countries of North Africa and the Middle East is lower than required to meet growth in demand from emerging economies, the International Energy Agency said on Wednesday. "Growth, prosperity and rising population will inevitably push up energy needs over the coming decades. But we cannot continue to rely on insecure and environmentally unsustainable uses of energy," IEA Executive Director Maria van der Hoeven said in said the organization’s 2011 edition of the World Energy Outlook. Under the report’s central scenario, energy demand will increase by one-third between 2010 and 2035, with 90 percent of the growth in non-OECD economies. China will consume nearly 70 percent more energy than the United States by 2035, the report said, even though, by then, per capita demand in China will still be less than half the level in the United States. Although short-term pressures on oil markets are easing with the economic slowdown and the expected return of Libyan supply, the average oil price will remain high approaching $120/barrel in 2035, according to the IEA.

    IEA Confirms The End Of Cheap Oil - International Energy Agency (IEA) realeased its 2011 World Energy Outlook today in London. The report warns that if urgent action is not taken the world is headed for irreversible climate change within five years. The report also confirms the end of cheap oil. In its executive summary, under the sub-heading "Rising transport demand and upstream costs reconfirm the end of cheap oil. We assume that the average IEA crude oil import price remains high, approaching $120/barrel (in year-2010 dollars) in 2035 (over $210/barrel in nominal terms) in the New Policies Scenario although, in practice, price volatility is likely to remain." The report also confirms the arrival of peak oil when it states that by the year 2035 there will be a shortfall of 47 mb/d, about twice the current total oil production of all OPEC countries in the Middle East. The report says that it can be compensated by the production of natural gas liquids (over 18 mb/d in 2035), unconventional sources (10 mb/d), biofuels 4 mb/d. Even if we believe that such much magical numbers are reached from unconventional sources, the numbers still fall short of demand.  You can access the executive summary here.

    How’s it feel to already be living in a post-peak oil apocalypse? Grist The International Energy Agency says peak oil came and went -- in 2006. The only reason we're not already paying $10 a gallon for gas and generally Mad Maxing it up is that there was this thing called a recession. Well, that, and cough cough the tar sands saved our asses cough cough. Unconventional sources of oil have been making up the difference. But the peak of conventional crude oil -- the stuff that comes out of the ground in Saudi Arabia -- has already passed. And unconventional sources of fossil fuels won't save us in the future, argues peak oil observer Mason Inman, so we're still going to have to deal with some kind of major push for energy efficiency or mass energy transition. Here's how an economist at the IEA put it: "We have to leave oil before it leaves us."

    Will the “economic price” limit oil production? - In a widely-circulated article in September 2011, Chris Skrebowski, who runs a peak oil consulting firm and was editor of the Petroleum Review for eleven years until 2008, argued that there are two forms of oil peak. One is, or will be, caused directly by depletion – the oil is no longer in the ground in sufficient quantities for producers to be able to maintain production. The other is the economic oil peak, which he says is the “price at which oil becomes unaffordable to consume and therefore to produce.” He says that oil becomes unaffordable when the “cost of the supply exceeds the price economies can pay without destroying growth at a given point in time.” In other words, the unaffordable limit is passed when extra cost of the oil after a price increase captures all, or more, of the increase in income that the growth process seemed likely to deliver. He cites a study by an international firm of energy consultants, Douglas-Westwood , which shows that in mature economies such as the US, there is a significant economic impact when oil sells at over $90/barrel. In contrast China can probably sustain oil prices in the $100-110 range.

    Number of the Week: What If Rest of World Had as Many Cars as U.S.? - 4.5 billion: Additional cars, trucks and buses on the world’s roads if every place had the same number of vehicles per capita as the U.S. At last count, there were 248 million registered cars, trucks and buses in the U.S., or 809 for every thousand people. Only tiny Monaco boasts more cars per capita. China has 46 vehicles per thousand people, about what the U.S. had in 1917. India, with 14 vehicles per thousand, is where the U.S. was in 1913. As those developing giants put more cars on the road, resources — and the environment — will be strained. There are about a billion vehicles globally; if the rest of the world had as many vehicles per capita as the U.S., that number would be 5.5 billion. An extreme example, of course, since plenty of developed countries get on fine with far fewer cars than the U.S. So let’s say the world had as many vehicles per capita as Germany, one of the least car-intensive of the major industrialized nations, the total would still be 2.7 billion. Mind you, that calculation assumes no population growth — and that the U.S. would take a third of its vehicles out of service to match German usage.

    IEA fears oil spike; OPEC dreads European defaults -- Oil prices could hit economically damaging record highs if unrest in Africa and the Gulf cuts investment in output, the West's energy watchdog warned oil producers, which said the real problem was likely defaults among euro zone members and banks. The International Energy Agency (IEA), which advises major oil-consuming countries on energy policies, said on Wednesday oil prices could spike by a third to above their all-time high of $147 a barrel. The Organisation of the Petroleum Exporting Countries (OPEC) said the main risks were of price falls. Relations between OPEC and the IEA hit lows earlier this year when OPEC failed to agree on an increase in oil output and the IEA released its stockpiles to compensate for the loss of Libyan oil and to help support flagging economic recovery. OPEC has already signalled it sees no need to release any extra oil to the markets when it meets in December but will probably face increased pressure from consumers as the IEA insists that current prices are damaging the economy.

    EXCLUSIVE - Greece turns to Iranian oil as default fears deter trade (Reuters) - Greece is relying on Iran for most of its oil as traders pull the plug on supplies and banks refuse to provide financing for fear that Athens will default on its debt. Traders said Greece has turned to Iran as the supplier of last resort despite rising pressure from Washington and Brussels to stifle trade as part of a campaign against Tehran's nuclear programme. The near paralysis of oil dealings with Greece, which has four refineries, shows how trade in Europe could stall due to a breakdown in trust caused by the euro zone debt crisis, which is threatening to spread to further countries. "Companies like us cannot deal with them. There is too much risk. Maybe independent traders are more geared up for that," said a trader with a major international oil company. "Our finance department just refuses to deal with them. Not that they didn't pay. It is just a precaution," "We couldn't find any bank willing to finance us. No bank wants to finance a deal for them. We missed some good opportunities there," said a third trader.

    European Oil Consumption - The above graph shows OECD Europe oil consumption, monthly, from 1995 through June of this year.  (The data are from the EIA - Eurostat only has annual data through 2009).  There is a clear seasonal signal with consumption apt to peak each year in the late autumn and be in a trough in the spring.  You can also see that consumption peaked in 2006 and has fallen about 10% since then (similar to the fall in US consumption).  There was a small recovery in 2010, but consumption was down further again in the first half of 2011.  It's hard to see how the data could have rebounded in the second half given the ongoing financial crisis in the Eurozone but we'll have to wait a few months to know for sure.

    China's Economy Threatened By Water Shortages - Companies in China that use water efficiently will be better positioned to profit in an economy increasingly at risk from water stress and new water regulations, according to analysis by HSBC. Nine of China’s 31 provinces suffer from extreme water scarcity and 11 are very water inefficient, the bank says in its China’s rising climate risk report. The economies of 14 provinces could be at risk from water stress, because they rely heavily on manufacturing industries, it said. Government has recognised this and has responded with a target in its 12th five-year plan (2011-15) to cut by 30% the water consumption per unit of value-added industrial output, HSBC notes. Officials have also announced plans to invest about RMB400 billion ($63 billion) per year up to 2020 in water projects, raise the efficiency of rural crop irrigation and cap annual water consumption at 670 billion cubic metres in 2020 (compared with close to 600 billion cubic metres used in 2009).

    Autos sales dip in China, plunge in India Rising loan rates in both countries, global woes citedAuto sales in China fell for the first time in five months, and passenger car deliveries tumbled the most in more than a decade in India after authorities in both countries raised borrowing costs to tame inflation.  Deliveries of passenger and commercial vehicles in the world's largest automobile market fell 1.1 percent to 1.52 million in October, led by the 18 percent drop in minivan sales, the China Association of Automobile Manufacturers said. In India, passenger vehicle sales tumbled 24 percent to 138,521, the biggest drop since December 2000, according to the Society of Indian Automobile Manufacturers.  China's central bank has increased interest rates five times since October last year, while the Reserve Bank of India has raised borrowing costs 13 times since March 2010 to cool consumer prices. That's contributed to the auto associations in both countries cutting their annual forecasts twice in 2011 at a time when the International Monetary Fund is warning the global economy may face a "lost decade."

    Expect falls in Chinese inflation - China’s inflation figures for October will be out on Wednesday.  The consensus is looking for a 5.4% yoy rise of the headline CPI, vs. 6.1% in September. China’s consumer prices inflation has been driven pretty much by food prices, and food prices have been stubbornly high for a while, which pushed the CPI inflation high, and indeed, prices for non-food components have been relatively stable for the past few months:  However, as Bloomberg Brief’s Michael McDonough points our, the following chart shows that the China daily food prices index has plunged very sharply on a year-on-year basis.  The index seems to track the CPI food component reasonably well, so the likelihood is that we’ll see a sharp fall in the food component of CPI, and hence a significant fall of the headline CPI: In that scenario, we could see the case for more selective easing of monetary policy either towards the end of this year or early next year as price pressure ease, something many people have been hoping for.

    Vital Signs: Cooling Chinese Inflation - Inflation may be cooling in China. The country’s consumer price index was 5.5% above its year-earlier level last month, compared to a 6.1% annual gain in September. That could open the door for officials to ease lending standards amid worries that slowing demand from Europe and elsewhere will hamper economic growth.

    China Credit Squeeze Prompts Suicides  - Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands. They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors. “If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them. Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He’d borrowed 30 million yuan ($4.7 million) at interest rates as high as 7 percent a month to expand the business. Many of the lenders were elderly neighbors who’d mortgaged their homes. At least 90 bosses in similar situations to Zhong have fled the city since April, and two killed themselves, according to Zhou Dewen, head of a small business association in Wenzhou. One was shoemaker Shen Kuizheng, who jumped to his death from his 22nd-story home on Sept. 21, he said.

    Chinese bubble bursting: A probable non-event - Well, it looks like it could finally be happening. The Chinese housing bubble could well be bursting right before our eyes.  The bubble has long been present for all to see, with news reports popping up earlier this year about ‘ghost cities’ and ‘ghost malls’. Indeed, it’s been so visible and so well observed that even the mainstream media picked up on it. That’s right, folks… you heard me right: the mainstream media picked up on it! God, it must be serious! People have been calling the bursting of this bubble for a while now. But this is the first real indication I’ve seen that this particular house of cards – excuse the pun – is beginning to topple. On Sunday Gordon G. Chang over at Forbes noted: “Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market.  The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing.  In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project.  “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.” So, why did this bubble inflate and what will be the consequences if it deflates?

    Another Reason Not To Expect the Yuan To Rise Faster - While the U.S. figures it scored a victory in the recent Group-of-20 communique when it won a commitment by China for “greater exchange rate flexibility,” don’t assume that Beijing plans to speed up the appreciation of the yuan any time soon. A big reason why is contained in a new paper (pdf) by economists of the Chinese Academy of Social Sciences. After examining data covering 456 Chinese manufacturing sectors, they conclude that a 10% “real exchange rate appreciation” – economist-speak for adjusting the rise in the yuan for inflation and measuring it against a basket of currencies—would lead to a decline in Chinese manufacturing employment of between 4.1% and 5.3%. Wages in those industries would drop by about 4%, they estimate. Why? A stronger yuan makes Chinese exports more expensive in dollar and euro terms. Chinese exporters would try fight for business by cutting workforceS and wages. One big surprise, the economists said, was that state-owned firms, usually seen as protected by the government from harm, would likely make bigger cuts than privately owned ones.

    Gloomy Outlook for China Exporters as Factory Closure Wave Looms - Up to a third of Hong Kong's 50,000 or so factories in China could downsize or shut by the end of the year as exporters get hit by cost rises and darkening global demand for Chinese goods, a major Hong Kong industrial body said on Tuesday. The Federation of Hong Kong Industries, which represents around 3,000 industrialists running factories in China, said it expected orders in the second half of this year and the first half of 2012 to fall between 5-30 percent. The European debt crisis and a fragile U.S. economy have depressed this year's Christmas orders, Stanley Lau, deputy chairman of Hong Kong's leading industrial promotion body, told a news briefing. He said a consolidation was on the cards, with around a third of Hong Kong's 50,000 or so factories in China likely to scale down operations or close by year-end."We feel that this is not an overestimate," said Lau. "Many (factory owners) can't see when the market will have a rebound so they are trying to cut their losses by closing, before all their money is gone," Lau said.

    Hong Kong Exporters May Close 16,000 Factories In China Due To High Costs And Low Demand: The Federation of Hong Kong Industries has said that it expected factory orders in the second half of 2011 and first half of 2012 to fall between 5% - 30%, Reuters reported. Over 16,000 Hong Kong factories in China could downsize or shut by the end of the year if exporters are hit with rising costs and a slowdown in global demand for Chinese goods. Chinese PMI hit a 32-month low in October dropping to 50.4% and hovering just above contractionary levels. Wage inflation has been impacting businesses in China. And key factory sites in southern China could see an 18% - 20% hike in minimum wages on January 1. This comes amid the European debt crisis and sluggish U.S. economic recovery which have lowered this year's Christmas orders.

    China Plans ‘Orderly’ Delivery of New Ships as Glut Hits Rates, Earnings - Rates for carrying both commodities and containers have tumbled over the past year as the launch of new vessels outpaces demand for shipments. China contributed to the glut by offering financial support for orders during the global recession to help secure jobs at its roughly 3,000 domestic shipyards. “We will guide the orderly arrival of new container and dry-bulk ships in the market,” Transport Minister Li Shenglin said today in a speech at a conference in Hainan province. The current slump in the shipping market is worse than in 2008, during the global recession, and it may last for a “relatively long” period, Li said.

    Container ships make record losses on Asia-to-Europe route… Shipping lines are losing a record $141 for each container they haul to Europe from Asia, the world’s second-largest trade route for the boxes, as slowing economies dent demand, ACM/GFI said. Companies are losing money even at a freight rate of $649 a container because of a fuel surcharge of $790 for each box, Mels Boer and Cherry Wang, container-derivatives brokers at ACM/GFI, said in a report e-mailed Oct. 28. Losses were at the highest level last week since a tally of rates began in March 2009, Wang said. “Current rates on the route Asia to Europe are way lower than the lows seen in 2009,” said ACM/GFI, a joint venture between London-based ACM Shipping Plc and GFI Group Inc., located in New York. Shipping companies were losing $41 for each 20-foot box in June that year, according to the report. Weakening economies are cutting demand for goods shipped in containers as fuel prices rise and an expanding fleet depresses freight rates to levels last seen in 2009, Nomura Equity Research analysts including Andrew Lee said in an Oct. 24 report. Neptune Orient Lines Ltd., Asia’s third-biggest container line, reported a third straight quarterly loss Thursday.

    Global Shipping Downturn Worse Than 2008 - Global shipping is in a downturn even worse than during the 2008 financial crisis, China's transportation minister said on Thursday, with the outlook for the industry made increasingly uncertain by the European debt crisis. The shipping industry, a bellwether of economic activity because of its role in world trade, saw freight rates plummet from mid-2008 to the end of that year. "The shipping industry is in a downturn, which is worse than the financial crisis in 2008," transportation minister Li Shenglin told the conference. "This condition may last for a relatively long period of time." The supply glut, made worse by economic woes in the United States and Europe, has pushed rates for dry bulk vessels that transport goods such as iron and coal below 2,000 on the Baltic Exchange , less than a fifth of the 2008 peak. On the flip side, rising fuel and other costs have squeezed operators' margins. Global benchmark Brent crude has averaged more than $100 this year for the first time ever.

    Widdows Predicts 'Significant' Ship Idling in 2012 - Shippers should be angry over behavior that has hit industry finances, former NOL chief says Retired NOL Group President and CEO Ron Widdows, decrying the steep rate-cutting that is crippling the shipping industry’s financial health, said he expects container lines to idle a large swath of capacity next year in response to deep losses. “I do believe there will be a substantial amount of capacity that will be parked,” Widdows told apparel importers in a candid and often grim look at market conditions on Tuesday. Freight rates have fallen too much this fall, he said, for carriers to maintain existing services, and shippers face the prospect of a new round of ship idling reminiscent of the idling that laid up hundreds of vessels during the 2009 economic and trade downturn. “You should be really pissed off by a carrier community that behaves this way,” Widdows told the annual Textile and Apparel Importer Trade and Transportation Conference in New York. “Your service delivery is going to be affected because the only action the carriers can take is to lay up capacity.”

    Rough Seas Ahead for Brazil's Booming Economy - Brazil has fared better than most over the last year or two. True, the country does have a problem with inflation, which has proved stubbornly hard to contain, and a strong currency has caused severe problems for Brazil’s exporters. Yet the country has low unemployment (part of the reason they have strong wage inflation), robust growth, and a trade surplus of $20.3 billion in 2010. All is not quite as solid as it seems though, according to an FT article. Except for the export revenues of one company, that surplus would have been a deficit. Not that Vale’s exports are likely to disappear, but such reliance on one firm’s fortunes and one single commodity underlines that for as far as Brazil has come, it’s still very much a commodity economy.  Growth is slowing as the country’s main export markets continue to struggle. Although Brazil’s largest trading partner is now China, much of that depends on the export of commodities like iron ore that are slowing. China has been cutting back on purchases as iron ore spot prices have plummeted, and while Vale is bullish about future demand, others are suggesting the tightening process in China may have been overdone and anticipate a period of consolidation.

    Argentina’s president irks U.S. pundits - When Argentina’s president, Cristina Fernández de Kirchner, was reelected two weeks ago by the largest margin of any leader since the return of democracy in 1983, even her bitterest opponents had to admit that she’d done something right. Clarín, Buenos Aires’ highest-circulation daily and a strong contender for the title of Kirchner’s enemy No. 1, acknowledged that the president had earned her victory by creating jobs and prosperity. Mauricio Macri, the conservative mayor of Buenos Aires, congratulated Fernández and told reporters, “If things go well for the president, things go well for us.” But on the pages of America’s leading newspapers, the tone was strikingly less conciliatory. Despite her evident success, the New York Times dedicated itself to  cataloging Fernandéz’s failings before concluding, in the voice of one source, that Argentine economic growth will soon slow and “there will be a political reckoning.”  The editorial board of the Washington Post echoed this prediction, warning that Fernández might turn to authoritarian measures to preserve her power and suggesting, “so far the signs are not good.”

    Japan's National Debt to Exceed 1 Quadrillion Yen by Next March - Europe surely isn't the only region struggling with massive debt. Japan's national debt is on track to exceed, one quadrillion yen, or about 13 trillion US dollars, for the first time by the end of the fiscal year in next March. According to Japan's Finance Ministry, the nation's debt for the fiscal year of 2011 is rising faster than expected, increasing by more than ten percent from 2010. Japan has issued additional government bonds to rebuild the nation from the devastating March 11 earthquake and subsequent tsunami. Earlier this year, credit ratings agencies, Moody's and Standard and Poor's, downgraded Japan's sovereign debt ratings, citing weak growth prospects, massive government debts, and political uncertainties.

    Japan Buys 10% Of Europe Bonds As Debt Crisis Deepens - Japan continued to buy bonds from a European bailout fund, the finance ministry said Tuesday, extending what could be crucial aid to Europe as it struggles to fight its ongoing debt crisis. But Tokyo cut its purchases of new bonds issued by the European Financial Stability Facility to 10%--roughly half its previous investments in the fund--with finance ministry officials citing limited euro cash holdings in the country's foreign reserves. Still, European leaders will likely welcome the continued support from Tokyo as other governments and investors appear less willing to buy bonds amid the intensifying debt turmoil. China, which had previously bought EFSF bonds, has so far remained noncommittal about future purchases. The EFSF's latest 10-year bond issuance on Monday attracted tepid demand compared with past offerings, with orders just above the total offer of EUR3 billion. The first issuance of EUR5 billion in five-year bonds in January attracted total orders of EUR44.5 billion. Officials in Tokyo are concerned that any further deterioration in the European crisis could hurt global economic growth, which would in turn cause serious problems for the export-dependent Japanese economy as it gradually recovers from the impact of the March 11 earthquake and tsunami.

    Slowing China won't rescue the eurozone - I was in China for much of last week, watching the eurozone crisis unfolding from a safe distance. There have been many contenders but this was the eurozone’s worst week. One issue I was exploring was whether the country would be the eurozone’s sugar daddy. Even before the question of Chinese assistance through bond purchases was kicked into the long grass by Greece, it was clear hopes were being unrealistically raised. Seen from China, any decision to purchase eurozone assets will be done - as everything is done - in the national interest. If there is a case in terms of diversification of reserves or because the return is attractive, China may act. There is no question of a modern version of Marshall Aid. China may be the world’s second largest economy but its 1.3 billion people remain poor, on average, by Western standards. Not only that, China has her own problems, the other thing I was keen to explore. There is no shortage of pessimism about China, inside and outside the country. Analysts point to a property bubble bursting and an inflation problem disguised by official figures. Some hedge funds have done well betting against China.

    Joseph Stiglitz on Iceland’s Crisis and Recovery - Here is an IMF video on Iceland’s program featuring Joseph Stiglitz, who has derided "free market fundamentalism" at international institutions like the World Bank, where he was once Chief Economist, and the International Monetary Fund.  Of course, the video stresses the positive since it is an IMF video. The blurb on the You Tube page accompanying the video reads: As the first country to experience the full force of the global economic crisis, Iceland is now held up as an example by some of how to overcome deep economic dislocation without undoing the social fabric. Professor Stiglitz discusses lessons learned. I would say that Stiglitz is right that Iceland and the IMF have done well. Remember, people were rioting in the streets to keep the IMF out.

    Key Lesson From Iceland Crisis Is 'Let Banks Fail' - Three years after Iceland's banks collapsed and the country teetered on the brink, its economy is recovering, proof that governments should let failing lenders go bust and protect taxpayers, analysts say. The North Atlantic island saw its three biggest banks go belly-up in the October 2008 as its overstretched financial sector collapsed under the weight of the global crisis sparked by the crash of US investment giant Lehman Brothers. The banks became insolvent within a matter of weeks and Reykjavik was forced to let them fail and seek a $2.25 billion bailout from the International Monetary Fund. After three years of harsh austerity measures, the country's economy is now showing signs of health despite the current global financial and economic crisis that has Greece verging on default and other eurozone states under pressure. "The lesson that could be learned from Iceland's way of handling its crisis is that it is important to shield taxpayers and government finances from bearing the cost of a financial crisis to the extent possible,"

    IMF, G20 fail -- Westpac’s Russell Jones is the best strategic analyst in the country (not blogging at MB!). His skepticism is a welcome draught of realism amidst the wasteland of optimistic fantasy that passes for analysis in Australian finance. Here’s his take on the failure of the G20 and IMF over weekend. I couldn’t agree more.  Strategic Insights_Busted Flush – The World After the G-20 Meeting (scribd)

    IMF Directors Consider Changes to Currency Basket - International Monetary Fund officials meeting last month discussed changes to its Special Drawing Right currency basket, though fund executive board members said they did not want to loosen criteria in order to bring in new currencies. The IMF’s executive board met late last month to discuss the SDR, an international reserve asset created by the fund that acts as a potential claim on the currencies of IMF members instead of acting as a currency itself. At issue was the requirements for inclusion in the basket and whether changes are needed to better reflect the international monetary system. The IMF said in a release that most directors considered current requirements for currencies in the basket “remain appropriate,” though a number of directors expressed interest in potential alternatives. Still, the fund said that directors do not want to weaken the requirements just to broaden the basket.“Directors stressed that the bar for SDR basket inclusion should not be lowered,” the IMF said.The SDR basket is currently made up of four currencies–the dollar, yen, euro and pound–and there has been a push, particularly by the Chinese, to expand the currencies included in the basket. Beijing officials see the inclusion of the yuan in the basket as another step as they try and expand the use and influence of their currency, and promote alternatives to the dollar.

    Trade war looms over Europe's aircraft carbon tax - THE world could be on the brink of a trade war over European Union efforts to impose carbon charges on the emissions of all planes landing or taking off within the EU. The scheme, if implemented, would be the first global financial sanction on greenhouse gas emitters. From 1 January, the EU intends to make international airlines join its Emissions Trading System (ETS). They will have to buy carbon permits for emissions made by flights into and out of European airports. China, Russia, the US, India, Brazil and Japan all oppose the plan, which they say flouts international law, and last week, the US House of Representatives voted to make it illegal for US airlines to comply, though President Barack Obama is unlikely to pass this into law. But the European Court of Justice provisionally ruled last month that the plan is legal. The impasse arose from the failure of the UN International Civil Aviation Organization to control carbon dioxide emissions from aviation, despite its 1997 pledge do to so. A draft of the paper says that a charge of $25 per tonne on aviation emissions of CO2 "might raise air ticket prices by around 2-4 per cent", while reducing CO2 and other emissions on routes covered by the charges by 5 to 10 per cent.

    Manufacturing is special - Dani Rodrik - Poor countries have access to world markets and rich countries’ technologies. In principle, they should catch up. Yet the record belies this expectation. But this column argues labour productivity in manufacturing displays a clear tendency towards convergence, unconditional on the countries’ institutions or policies. The policies that matter for growth are thus those that bear on the reallocation of labour from nonconvergence to convergence activities.

    Germany suffered for its surplus - JOHN MCMANUS recently described the problem facing Germany in the Irish Times: If the US treasury lends to the US government it has reason to believe the government will do its best to pay it back, as both entities pursue a common goal of a peaceful and prosperous US. If the ECB lends to euro area sovereigns or some proxy such as the European Financial Stability Facility, it has no such assurance. The events of the last week in Greece and Italy would only make you more convinced that domestic imperatives will trump the obligation to repay the ECB in some countries, leaving the better-off countries to cover their liabilities. For better-off countries, read German taxpayers. The deployment of the ECB balance sheet without some sort of credible fiscal union and governance infrastructure to make sure such does not happen would be an act of folly. This is why Germany and the ECB may be forced to play a game of chicken with countries like Italy.

    The Gridlock Where Debts Meet Politics - With Greece1 struggling to form a government that can force harsh austerity measures onto a weary public, Europe is in usual form, taking a couple of steps toward solving its fiscal crisis and then a couple of steps backward. Washington, meanwhile, is hoping that the latest deficit-reduction committee in Congress can succeed where others have failed.  This cycle of bureaucracy and gridlock has been repeating itself for months now. It is tempting to blame feckless politicians on both sides of the Atlantic, and that would not be entirely wrong.  But the frailty of politicians is not the full story. The fact is that most of the industrialized world — Europe, the United States, Japan, too — is in a difficult economic bind. There are no simple solutions that would quickly win the approval of citizens if only politicians were willing to try them.  Most voters in these places have yet to come to grips with the notion that they have promised themselves benefits that, at current tax rates, they cannot afford. Their economies have been growing too slowly, for too long2, to pay for the coming bulge of retirees.  “The U.S. and Europe have to make hard choices because of two things: slower growth and aging populations,” . “Europe’s choices are even harder than America’s, because the prospects for growth are more dubious.”

    The eurozone decouples from the world -- The G20 summit last Friday certainly did not measure up to the billing it was given by the UK Chancellor in September, when he said that policymakers had "six weeks to save the world". Nevertheless, equities and other risk assets have risen markedly over the same period. As Goldman Sachs' Jim O'Neill argues this weekend, this is probably due to improvements in economic data in the US, and to the rising prospects of a soft landing in China. A less optimistic way of summarising recent news is to say that Europe has now decoupled from the rest of the world. It is already in recession, which may prove to be a deep one, and the debt crisis is arguably getting worse, not better. There never was much reason to expect the G20 to come to the rescue of the eurozone. Certainly, there are no grounds in terms of equity why such an extraordinarily rich and economically successful region should be "rescued" by poorer nations. Furthermore, the eurozone has a small surplus on the current account of its balance of payments and a manageable public debt position, so it really has no need for outside capital. The problem is one of the distribution of funds within the eurozone, which admittedly has proven very difficult to solve.

    Bundesbank: central bank reserves will not help fund EFSF - The Frankfurter Allgemeine Sonntagszeitung (FAS) reported that Bundesbank reserves -- including foreign currency and gold -- would be used to increase Germany's contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion euros ($20 billion). The European Central Bank (ECB) would own the reserves, according to the paper, citing sources at the G20 meeting held in Cannes this week. The Welt am Sonntag newspaper, citing similar plans, said 15 billion euros would come from special drawing rights (SDR) that the Bundesbank holds. G20 leaders in Cannes discussed the idea that the European System of Central Banks could pawn their total foreign exchange reserves of 50-60 billion euros to a trust of the European crisis fund in the form of special drawing rights from the International Monetary Fund (IMF), the newspapers said. "We know this plan and we reject it," a Bundesbank spokesman said.

    G-20 Demands German Gold To Keep Eurozone Intact; German Central Bank Tells G-20 Where To Stick It - Going back to the annals of brokeback Europe, we learn that gold after all is money, after the G-20 demanded that EFSF (of €1 trillion "stability fund" yet can't raise €3 billion fame) be backstopped by none other than German gold. Per Reuters, "The Frankfurter Allgemeine Sonntagszeitung (FAS) reported that Bundesbank reserves -- including foreign currency and gold -- would be used to increase Germany's contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion euros ($20 billion)." And who would be the recipient of said transfer? Why none other than the most insolvent of global hedge funds, the European Central Bank. Also, in addition to gold, the ECB had set its eyes on that other "fake" currency that DSK had succeded in protecting throughout his tenure, all his other undoings aside, "The Welt am Sonntag newspaper, citing similar plans, said 15 billion euros would come from special drawing rights (SDR) that the Bundesbank holds." Naturally, these discoveries prompted a prompt and furious rebuttal from the very top of German authorities: "Germany's gold and foreign exchange reserves, which the Bundesbank administers, were not at any point up for discussion at the G20 summit in Cannes," government spokesman Steffen Seibert said. The WSJ adds, "A plan to have the International Monetary Fund issue its special currency as a powerful weapon in Europe's efforts to contain the widening euro-zone debt crisis was blocked by German Chancellor Angela Merkel, according to a report in a German newspaper."

    The Denials That Trapped Greece - THE warning was clear: Greece was spiraling out of control. But the alarm, sounded in mid-2009, in a draft report from the International Monetary Fund, never reached the outside world.  Greek officials saw the draft and complained to the I.M.F. So the final report, while critical, played down the risks that Athens might one day default, with disastrous consequences for all of Europe.  What is so remarkable about this episode is that it wasn’t so remarkable at all. The reversal at the I.M.F. was just one small piece of a broad pattern of denial that helped push Greece to the brink and now threatens to pull apart the euro. Politicians, policy makers, bankers — all underestimated dangers that seem clear enough in hindsight. Time and again over the last two years, many of those in charge offered solutions that, rather than fix the problems in Greece, simply let them fester.  Indeed, five months after the I.M.F. made that initial prognosis, Prime Minister George Papandreou of Greece disclosed that, under the previous government, his nation had essentially lied about the size of its deficit. The gap, it turned out, amounted to an unsustainable 12 percent of the country’s annual economic output, not 6 percent, as the government had maintained.

    To Euro or not to Euro? - Greek Economists for - In two interviews with Hurriyet Daily News (Oct. 11), Costas Azariadis advocates a suspension of all interest payments on Greek debt and a return to the drachma as a stopgap measure that will buy Greece time to debate and implement the deep reforms needed for economic prosperity.  Exiting the eurozone will instantly balance the government budget, restore competitiveness to tourism and exports and reverse the income implosion the country is going through. Default will compromise future borrowing, anger the international community and hurt the reputation of the country but costly but continued austerity makes less sense. The real risk from default is that the relief it provides will be wasted in a futile attempt to preserve the status quo and thwart the necessary reforms. The full article of C. Azariadis:

    Papandreou may step down if he wins vote -  GREECE WAS still in the grip of uncertainty last night after tentative contacts between the ruling socialist Pasok party and main opposition New Democracy party on the formation of a unity government appeared to have floundered amid acrimony. After another day of intense political activity in Athens that put it once again at the centre of international attention, Greek prime minister George Papandreou publicly refused to yield to a condition made by the opposition that he step down to allow for the creation of a caretaker government. However, according to a Reuters report late last night, Mr Papandreou had apparently struck a deal with ministers, led by finance minister Evangelos Venizelos, to step down and make way for a coalition government provided they help him win a confidence vote at midnight tonight.

    Greek Leader May Step Down - Greece's major political parties were edging closer to agreeing on a national unity government Sunday that will aim to safeguard a debt-slashing deal amid signs that embattled Prime Minister George Papandreou was ready to step down within the day.  Mr. Papandreou may announce his resignation after a cabinet meeting Sunday, provided there is an agreement for a coalition government, a senior Socialist party official said Sunday.  "Papandreou wants to end the deadlock today. He will inform the cabinet of his decisions. He may step down today," the official said.  Earlier in the day, Antonis Samaras, the head of Greece's main opposition New Democracy party called for Mr. Papandreou's immediate resignation and signaled that he was open to talks with the governing Socialists over forming a coalition government. "The fact that Papandreou isn't stepping down is blocking any possible solution," he said.

    Negotiations over coalition underway - Athens News - The government spokesman announced on Sunday morning, speaking on a current affairs TV programme, that an agreement over a coalition or unity government could be worked out the same day, while adding that the name of a new prime minister could also be announced. Spokesman Ilias Mossialos underlined that negotiations are underway, clarifying that the name of the new premier must be announced by tomorrow. However, he cautioned that current Prime Minister George Papandreou would resign only when the two issues are finalised.  Moreover, he said a council of political party leaders would be convened in the wake of such an agreement, adding that all procedures would be finalised in the coming week in order for a vote of confidence to be taken in Parliament. In response to raging domestic and international media attention, Mossialos said it was “necessary” for both major parties (ruling PASOK and main opposition New Democracy) to participate in such a government, without however, the presence of lesser Parliament-represented parties ruled out.

    Greek opposition leader insists on immediate vote - Greece's conservative opposition leader has insisted on his demand for immediate elections, snubbing a government offer to form a power-sharing coalition and extending a political deadlock in the debt-shackled country. Center-right New Democracy party leader Antonis Samaras made the remarks Saturday shortly after the Socialist government called on him to join a four-month coalition aimed at securing a mammoth new European debt deal. Samaras described Prime Minister George Papandreou as "dangerous for the country" but did not say whether he would attend any negotiations with the government."

    Is Greece About to Derail the Bailout Yet Again? - Yves Smith - After Greek Prime Minister Papandreou’s inspired gambit of a national referendum to approve the latest bailout pact was beaten back by an ugly combination of betrayal by his finance minister and bullying by the IMF, Merkel, and Sarkozy, the sad farce of the Eurorescue seemed to be back on track. The endgame is clearly default for Greece, or in lieu of that, a deeper restructuring down the road. In the meantime, the country is being driven into the dirt as a perverse showcase of the creditor sovereignity. Public services of various sorts are falling apart, young people who cannot find jobs are emigrating, suicides are skyrocketing. And the country now is running a trade primary budget surplus, which means default and abandonment of the euro is a viable option. And as we and other commentators have observed, Greece is only one of the many probable points of failure in the latest rescue scheme. But foreign effort at containing Greek politics may be failing. Even though Papandreou survived a vote of confidence on Friday, by Saturday, his coalition was fracturing. Per the Financial Times: George Papandreou’s chances of putting together a strong coalition government that could persuade international lenders to unblock fresh funding for Greece have faded after the conservative leader bluntly rejected his proposal. Antonis Samaras said on Saturday his New Democracy party would not join a new government that would lack a clear mandate. He repeated his call for immediate elections. Analysts said that without the support of Greece’s largest opposition party, Mr Papandreou would be unable to secure the disbursement of a desperately needed €8bn loan tranche, exposing the country to the risk of a disorderly default by the middle of December.

    Greece agrees on unity government; Prime Minister Papandreou will resign - Greece’s two main political parties reached an agreement Sunday to form a unity government, giving Europe a steadier partner as it works to avert a larger financial crisis on the continent. Prime Minister George Papandreou will resign after the new government is formed, officials said, although the timing, and his successor, remained unclear. The move brings Greece a step closer to stability after a political crisis1 set off last week threatened its future in the euro zone — and with that, the specter that other, larger countries, could soon follow. Spain and Italy have had increasing trouble paying their debts in recent weeks, and world leaders fear that if Greece fails to sign on to a bailout plan2 reached late last month, it would trigger a bank run and market panic. The Greek president’s office announced after a meeting between Papandreou and the head of the main opposition party, Antonis Samaras, that they had agreed to form a coalition government and for Papandreou to step down. Talks will continue Monday, the office said in a statement. “I am not interested in staying on in this new government as prime minister,” Papandreou told a cabinet meeting hours earlier on Sunday, according to a transcript released by his office. “I couldn’t have been clearer. I don’t play games and neither do I gamble the country’s fortunes.”

    Coalition government deal reached - Greek prime minister George Papandreou and opposition leader Antonis Samaras agreed on the form of a coalition government at talks hosted by the president Karolos Papoulias on Sunday.  A presidency statement said they will meet again on Monday to discuss who would lead the coalition government, but that Papandreou would not lead the new administration. The announcement more-or-less repeated the positions alternately promoted by the two main parties' leaderships over the past three days, namely, a new coalition or consensus government will be formed and assigned the eagerly watched task of ratifying and implementing the latest agreements with eurozone partners and creditors. An election will be held after the agreements are shepherded through the Greek Parliament, although no specific date was cited.

    Greece's prime minister to quit in deal to salvage bailout package -  -- Greek Prime Minister George Papandreou will step down as his government's leader, the country's president announced Sunday night -- agreeing to do so on the condition that the controversial 130 billion euro bailout deal is approved. The announcement follows a meeting on Sunday in which Papandreou and Antonis Samaras -- the leader of the New Democracy party, Greece's leading opposition party -- agreed to form a new government. The two will meet again Monday to discuss who will become the nation's next prime minister as well as who will serve in the new government, according to the statement from President Karolos Papoulias. No more details or a timeline of future events were disclosed, beyond that new national elections will be held sometime after the bailout is implemented. Earlier Sunday, Samaras told reporters that once Papandreou resigns everything will "take its course" and "everything else is negotiable." 

    Papandreou Seeks Unity Government -  Prime Minister George Papandreou is seeking to form a government of national unity that will enable Greece to convince international leaders to resume aid before the nation runs out of funds next month. Papandreou met with President Karolos Papoulias today as pressure mounts on the 59-year-old to step aside after he was forced to cancel a referendum that may have led to Greece being ejected from the euro. The premier won a confidence motion early this morning after pledging to disaffected members of his ruling Pasok party that he would not stay on. Papandreou proposed “contributing definitively to creating a government of wider cooperation with the main goal of guiding legislation and anything else related to the historic Oct. 26” agreement with international lenders, the premier told reporters after meeting the president in Athens today. Last month’s accord “is a prerequisite for our remaining in the euro.” 

    Leaders in Greece Agree to Form a New Government - After crisis talks on Sunday night, Prime Minister George Papandreou and his main rival agreed to create a new unity government in Greece that will not be led by Mr. Papandreou, according to a statement released Sunday night by the Greek president, who mediated the talks.  Mr. Papandreou and the opposition leader Antonis Samaras agreed to meet again on Monday to hammer out the details. The name of the new prime minister is not expected until then.  The new government is intended to govern for several months to put in place a debt agreement with the European Union, a step European leaders consider crucial to shoring up the euro. Then it is to hold a general election and dissolve.   Mr. Papandreou has faced mounting pressure to resign, including from within his own party, the Socialists.

    Papandreou steps aside for unity government - Greek premier George Papandreou is to step down as part of a deal to form a unity government. His expected departure broke a deadlock in talks after the EU demanded Greece’s parties join forces to avert bankruptcy. It is not clear who will lead the interim administration – those discussions will continue today – but whatever the make-up of the new government, it will be charged with getting a euro zone bailout approved. Papandreou and the opposition leader Antonis Samaras also agreed that while the new government could be sworn in and a vote of confidence held within a week, February 19 would be the date for fresh elections. Samaras is one of several candidates to lead the interim unity government although Lukas Papademos, a former European Central bank vice president, is now being suggested as another possible leader.

    The End of Papandreou - After days of political wrangling, Greek Prime Minister Giorgios Papandreou has agreed to step down to allow the formation of an interim coalition government including the opposition conservative New Democracy party.  The new cabinet is to be sworn in within a week and its main task will be to implement the terms of the EU's new rescue package agreed on October 26, which will entail further tough austerity measures for Greece.  The country won't hold new elections until February -- a key demand of Papandreou who had insisted that the interim government should remain in office long enough to approve and implement the EU measures. New Democracy had demanded an election within a few weeks because it wanted to profit from its current strong opinion poll numbers. The election is scheduled to be held on February 19. New Democracy leader Antonis Samaras has more to lose than to gain by joining the cross-party coalition. He will have to drop his outright opposition to Papandreou's austerity measures over the last 18 months, a stance which enabled the party to build up a lead of nine percentage points over the ruling PASOK party.  Even though taking on government responsibility now is a risky move for Samaras, domestic and international pressure on him to agree to a national unity coalition had become too great for him to resist.

    Greece 1-Year Debt Yield "Improves" to 235.35% - I have good news to report. The sovereign debt crisis in Greece is improving as shown by the following chart.

    'It's in Greece's Interest to Reintroduce the Drachma' - Economist Hans-Werner Sinn is the president of the Institute for Economic Research (ifo), a leading German think tank in Munich. He spoke to SPIEGEL about the euro crisis, the growing uselessness of a bailout and a possible way back to the drachma for Greece.

    • SPIEGEL: Mr. Sinn, the Greeks have decided not to hold their referendum. They want to keep the euro and allow themselves to be rescued by Europe. Can we all breathe a sigh of relief?
    • Sinn: What politicians refer to as a "rescue" will not actually save Greece. The Greeks won't ever return to health under the euro. The country just isn't competitive. Wages and prices are far too high, and the bailout plan will only freeze this situation in place. So it's in Greece's interest to leave the euro and reintroduce the drachma.
    • SPIEGEL: How would that work?
    • Sinn: It must happen quickly. Greek banks will have to close for one week. All accounts, all balances and all government debt would have to be converted into drachmas. Then the drachma would depreciate.

    Tui prepares Greek hoteliers for possible euro exit - German tour operator Tui has asked hotels in Greece to sign new contracts spelling out how the company will pay its bills if Greece leaves the eurozone and starts using a new currency. A spokesman for the company confirmed it had written to hoteliers after the letter had been reported in German newspaper Bild. In the letter, Tui said it was entitled to pay in whatever currency was in use. But the Greek Tourist Board said that no hotelier would agree to that. Bild quoted the latter as saying: "If the euro should no longer be the currency... Tui is entitled to pay the sum of money in the new currency. The exchange rate shall be made at the exchange rate set by the government." Tui spokesman Robin Zimmermann confirmed the letter had been sent to hoteliers, saying: "As a responsible company, we should protect ourselves for a potential exit of Greece from the eurozone."

    Greece, home of democracy, deprived of a vote - Greek Prime Minister George Papandreou touched off a firestorm last week when he proposed putting the austerity package designed by the "troika" (the IMF, the European Central Bank and the European Union) up for a popular vote. The idea that the Greek people might directly be able to decide their future terrified leaders across Europe and around the world. Financial markets panicked, sending stocks plummeting and bond yields soaring. However, by the end of the week, things were back under control. The leaders of France and Germany apparently laid down the law to Papandreou and he backed off plans for the referendum. While the government is in the process of collapsing in Greece, the world can now rest assured that the Greek people will not have an opportunity to vote on their future. This is unfortunate, since it means that Greece's future will likely be decided by politicians who may not have the interests of the Greek people foremost in their minds. By their own projections, the austerity package designed by the troika promises a decade of austerity, with high unemployment, falling real wages and sharp reductions in public services and pensions. And their projections have consistently proven to be overly optimistic.

    The real Greek tragedy – its rapacious oligarchs - As the new Greek government struggles to convince Europe of its resolve to cut the country’s bloated public sector, it also has to decide whether to face down the real domestic threat to Greece’s stability: the network of oligarch families who control large parts of the Greek business, the financial sector, the media and, indeed, politicians. Since Mr Papandreou became prime minister, his government has been trying to crack down on habitual tax evaders. He made clear in a speech to parliament on Friday how deep his concerns are regarding the more dubious activities of some of Greece’s banks. We can only hope that the BlackRock audit, ordered by the troika, will be suitably forensic in uncovering what has really been going on in the financial system. In the same speech, Mr Papandreou also revealed dramatic information about a pan-Balkan fuel smuggling operation which is allegedly losing Greece an estimated €3bn annually. He spelt out exactly how damaging such criminal activities have been, all but naming those involved. The oligarchs have responded in two ways. First, they have accelerated their habitual practice of exporting cash. In the last year, the London property market alone has reported a surge of Greek money. Second, they have mobilised hysterical media outlets which they own in order to denounce and undermine Mr Papandreou at every opportunity, aware he is the least pliable among Greece’s political elite.

    SNB Is Ready to Act on Franc If Gains Risk Deflation, Hildebrand Tells NZZ - Swiss central bank President Philipp Hildebrand said policy makers remain ready to act in case the franc’s strength increases the risk of deflation and threatens the country’s economy. The Swiss National Bank expects the franc “to depreciate further,” Hildebrand told NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published today. “Should that not be the case, it could lead to deflationary developments and weigh heavily on the economy. We are ready to take further measures in case economic prospects and a deflationary development should require it.” Asked whether the SNB would increase its cap on the franc versus the euro, the president said that the central bank “monitors the data and would take further measures if needed.” The SNB’s past efforts to stem the franc’s advance, including 15 months of currency sales, contributed to the central bank’s record $21 billion loss in 2010, prompting calls by lawmakers for Hildebrand to resign. The SNB more than quadrupled its currency holdings over 15 months beginning in March 2009, before suspending interventions in June last year.

    France to unveil new austerity steps - The French government will on Monday announce its latest efforts to bring its finances under control, with a new package of tax increases expected to be unveiled.  The Wall Street Journal reported Sunday that French President Nicolas Sarkozy met with government ministers over the weekend to work on the measures. The report cited an unnamed person familiar with the matter.  The Journal said French newspaper Le Journal Du Dimanche reported that steps under consideration include raising the value-added tax on restaurant meals, taking away one public holiday a year and possibly raising the tax rate on companies with revenue over €150 million to 36% from 33%.  France has pledged to reduce its deficit from 5.7% of GDP in 2011 to 4.5% next year, added the paper, and plans to reaching the European Union’s 3% limit by 2013.

    Roubini On Internal Devaluation - Krugman - Nouriel Roubini has a very good, very grim new paper on European prospects (no link). I particularly liked this passage: The international experience of “internal devaluations” is mostly one of failure. Argentina tried the deflation route to a real depreciation and, after three years of an ever-deepening recession/depression, it defaulted and exited its currency board peg. The case of Latvia’s “successful” internal devaluation is not a model for the EZ periphery: Output fell by 20% and unemployment surged to 20%; the public debt was—unlike in the EZ periphery—negligible as a percentage of GDP and thus a small amount of official finance—a few billion euros—was enough to backstop the country without the massive balance-sheet effects of deflation; and the willingness of the policy makers to sweat blood and tears to avoid falling into the arms of the “Russian bear” was, for a while, unlimited (as opposed to the EZ periphery’s unwillingness to give up altogether its fiscal independence to Germany); and even after devaluation and default was avoided, the current backlash against such draconian adjustment is now very serious and risks undermining such efforts (while, equivalently, the social and political backlash against recessionary austerity is coming to a boil in the EZ periphery). At this point the de facto strategy of European leaders is to require that they do this via deflation. And that will not work.

    ECB debates ending Italy bond buys - The European Central Bank often discusses the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms, ECB Governing Council Member Yves Mersch said. "If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect," Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied: "If the ECB board reaches the conclusion that the conditions that led it to take a decision no longer exist, it is free to change that decision at any moment. We discuss this all the time." Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

    For Markets in Europe, the Focus of Fear Moves to Italy - European efforts to solve a growing sovereign debt crisis1 have failed to quell market unease on the Continent, and the political uncertainty in Greece points to continued volatility this week. Among fresh warning signs, Italy’s cost of borrowing has jumped to the highest rate since the country adopted the euro2. Others signs include pressures building in the plumbing of Europe’s banking system. While those pressures are not yet at the levels experienced during the 2008 financial crisis, when some markets in the United States froze altogether, they are high enough to cause worry, analysts say. Even as Greece reached an agreement on Sunday to form a coalition government meant to avert the collapse of the latest bailout plan for the euro zone, investors are still demanding greater certainty on how Europe would pay for a rescue package aimed at stopping the Greek financial contagion from spreading to Italy or Spain. “This is a bit of a sideshow,”  “Markets will react favorably to this, but they won’t rally hard on the news. Italy is the bigger issue.”

    EuroCrisis Spotlight Moves From Greece to Italy - Yves Smith - As Adam Levitin remarked today (he and I are both speaking at the Americatalyst conference in Austin), the news has the same feel as of mid 2007 to early 2008, where market stresses are producing larger and larger numbers of casualties. Reader Swedish Lex was early to call that the crisis would turn critical when it engulfed Italy. And that point appears to be nigh. As market oriented readers no doubt noted yesterday, ten year Italian bond yields hit the new high of 6.68%, despite five ECB interventions during the day. A GoogleTranslate of LinkIvestia (hat tip Richard Smith): Italy, rather than miss the resignation of Prime Minister Silvio Berlusconi, should be concerned by the interventions of the European Central Bank (ECB). Today the Eurotower intervened six times in the secondary market, buying Italian government bonds at 3 and 10 years, trying to bring the returns of BTP levels last Friday. The attempt has failed substantially, as shown by the curve of Italian bonds. To make matters worse, the Treasury has thought that the 18 announced that the auction of Bot (Treasury bills) to three months, originally scheduled for November 10, will not take place. Regular auctions instead of bots to 12 months and that of BTP, scheduled for November 16. The stress on the bond market continues. The next venture is not the risk of default, as erroneously been circulating on the net. The danger is that our refinancing becomes unsustainable, causing a leak from the voluntary market.

    Italian Debt Yields Soar to Euro-Era Record; 2-Year Yield Surges 70 Basis Points to 6.17% - Charts courtesy of Bloomberg. That is one amazing move in the 2-year yield in and of itself, but even more so in relation to the move in the 10-year yield. Once again I point out that the Bloomberg charts on the right do not match the quotes on the left. The quotes appear to be accurate. However, the charts reflect the previous day's close.

    Wake up, Silvio! Your country’s falling apart… Berlusconi takes a nap as world leaders try to save his economy - World leaders looked on in horror as Italian Prime Minister Silvio Berlusconi fell asleep while they discussed how to stop Italy becoming the next victim of the eurozone crisis. During G20 summit talks in France, the 75-year-old twice had to be nudged by officials to wake him up. Mr Berlusconi dozed off as leaders including Barack Obama, David Cameron, Angela Merkel and Nicolas Sarkozy urged the Italian leader to do more to save his country from bankruptcy. Frustrated by his dithering, they humiliated Mr Berlusconi by effectively forcing him to allow International Monetary Fund inspectors to check Italy’s books to prevent it going the same way as Greece. A diplomat at the talks said: ‘There is widespread concern that Mr Berlusconi is not in control of events in Italy. He fell asleep twice during the talks. It caused considerable alarm among his officials. They had to wake him up by giving him a nudge. Other leaders sitting around the table couldn’t help but notice.’

    Europe’s rescue fiasco leaves Italy defenceless - The six weeks allotted to save monetary union have expired. The G20 has come and gone, yet no workable firewall is in place as the drama engulfs Italy and threatens to light the fuse on the world’s third largest edifice of debt.  As of late Friday, the yield spread on Italian 10-year bonds over German Bunds was a post-EMU record of 458 basis points. This is dangerously close to the point where cascade-selling begins and matters spiral out of control.  The European Central Bank has so far bought time by holding a series of retreating lines but either it has reached its intervention limits after accumulating nearly €80bn of Italian debt, or it is holding fire to force Silvio Berlusconi to resign – if so, a foolish game.  The ECB’s hands are tied. A German veto and EU treaty constraints stop it intervening with overwhelming force as a genuine lender of last resort. The bank is itself at risk of massive over-extension without an EU treasury and single sovereign entity to back it up.  This lack of a back-stop guarantor is an unforgivable failing in the institutional structure of monetary union. As Berkeley professor Brad DeLong argues in a new paper, such “utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is a radical departure from the central-banking tradition.”

    Berlusconi’s Majority Unravels as Defections Mount Before Key Budget Vote - Prime Minister Silvio Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow, with allies pressuring him to step aside after contagion from the region’s sovereign debt crisis pushed Italy’s borrowing costs to euro-era records. Two Berlusconi allies defected to the opposition last week, and a third quit late yesterday. Six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone.  “I fear we no longer have a majority in parliament,”  Berlusconi said yesterday he was confident he still had a majority. The desertions may deprive him of the needed support in the lower house for tomorrow’s vote on the 2010 budget report. The Chamber of Deputies failed to rubber-stamp the routine measure in an initial ballot last month, prompting Berlusconi to call a confidence ballot, which he won with 316 votes, barely a majority in the 630-seat body. A second defeat on the budget law would likely lead to another confidence vote, with the defections threatening the outcome.

    Italy's Berlusconi faces mounting pressure to go - Pressure rose on Italy's besieged Prime Minister Silvio Berlusconi to quit on Thursday, as rebel deputies from his own centre-right party threatened to oppose the government in a vital parliamentary vote next week. Six former parliamentary loyalists wrote to Berlusconi calling for a new government in a letter published in the daily Corriere della Sera. "Be the backer of a new political phase and a new government," the deputies wrote. One of the deputies, Isabella Bertolini, said the rebels could oppose Berlusconi in a parliamentary vote next Tuesday to sign off the 2010 budget. "We are convinced that a strong political signal will come, otherwise we will see how we will act," she told reporters.The vote could bring more rebels from the ruling PDL party out into the open, she added, if the 75-year-old premier does not change course.

    Silvio Berlusconi refuses IMF bailout and insists he will not resign despite Italian debt crisis - Defiant Italian prime minister Silvio Berlusconi today refused an offer of financial support from the IMF - and insisted he would not resign.The 75-year-old leader insisted he did not think his coalition government would collapse as they struggle to deal with their debt crisis.With its colossal £1.6trillion debt, Italy is now at the eye of the storm and is paying 6.43 per cent to borrow money for ten years. That figure is perilously close to the 7 per cent level where Greece, Ireland and Portugal were forced to seek a bailout. But rejecting IMF help the Italian leader said at the end of the two-day G20 summit in Cannes: 'We don't believe this type of intervention is necessary.' Italy has built up debts 120 per cent bigger than national income. Its fate is crucial to the eurozone, because its economy - the third-largest in the currency union - would be too expensive to bail out like Greece, Portugal and Ireland have been.

    20 Italian Politicians Mull Leaving Berlusconi's Party - A group of 20 Italian politicians who are members of Prime Minister Silvio Berlusconi's party is considering leaving the center-right government coalition, bringing further instability to the embattled premier's government. The governing coalition is expected to face parliament next week in a routine vote on budget matters that will be closely watched for signs that Berlusconi's majority is weakening. But the Corriere della Sera newspaper reported Sunday that he was planning to speak with each of the 20 potential defectors ahead of the vote, in a bid to convince them to remain loyal. Berlusconi survived a number of confidence votes over the past year and a half and reiterated Saturday -- amid protests in Rome against his government's handling of the eurozone crisis that were backed by the main opposition, the Democratic Party1 -- that he had no intention of resigning and that reports of key advisers urging him to step aside were merely "gossip." 

    Berlusconi Rejects Calls to Resign Over Fiscal Crisis  —Italian Prime Minister Silvio Berlusconi on Saturday rebuffed calls to resign as thousands of protesters poured into the streets criticizing his handling of Italy's economy and calling for new leadership to steer the country out of the euro-zone debt crisis. In a defiant statement, Mr. Berlusconi labeled as "gossip" Italian newspaper reports stating he has come under pressure from key advisers to step down. "Responsibility in the face of voters and the country requires us and our government to continue this battle for civility that we are conducting in this difficult moment of the crisis," he said. On Sunday, Italian newspapers reported that a group of 20 Italian politicians, who are members of Mr. Berlusconi's party, are considering leaving the center-right government coalition. Corriere della Sera said Mr. Berlusconi is planning to speak with each of the 20 people and try to convince them not to leave his coalition.  

    Berlusconi’s Majority Unravels as Allies Turning - Prime Minister Silvio Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow, with allies pressuring him to step aside after contagion from the region’s sovereign debt crisis pushed Italy’s borrowing costs to euro-era records. Two Berlusconi allies defected to the opposition last week, and a third quit last night. Six others called for Berlusconi to resign and seek a more broadly backed government in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone. Berlusconi said yesterday he was confident he still had a majority.The desertions may deprive Berlusconi of a majority in the lower house for tomorrow’s vote on the 2010 budget report. The Chamber of Deputies failed to rubber-stamp the routine measure in an initial ballot last month, prompting Berlusconi to call a confidence ballot, which he won with 316 votes, barely a majority in the 630-seat body. A second defeat on the budget law would likely lead to another confidence vote, with the defections threatening the outcome.

    Italy's Berlusconi at Mercy of Party Rebels, Markets - Italian Prime Minister Silvio Berlusconi has one day left to win over waverers and see off a group of party rebels threatening to bring down his government in a backlash over its failure to adopt reforms to defuse a dangerous debt crisis. Estimates vary widely over how many centre-right deputies will jump ship in a crunch vote on public finance in the Chamber of Deputies (parliament) on Tuesday. Berlusconi's message to potential "traitors" is clear: you have nowhere else to go and you will be rewarded if you stay."We have checked in the last few hours and the numbers are certain, we still have a majority," he told party followers on Sunday. "Berlusconi is bluffing in a last desperate attempt to save himself. He no longer has a majority in the Chamber," said Dario Franceschini of the main opposition Democratic party.Newspapers have estimated the number of potential defectors at between 20 and 40, which would be more than enough to topple the government, but in previous narrow escapes Berlusconi has proved his powers of last-minute persuasion.

    Italy: 10 Year bond yields continue to increase - In October 2010, the Irish 10 year yield moved above 6.6%, and by the end of November the yield hit 9% and Ireland asked for help. Now the Italian 10 year yield is at 6.65% and there is a sense of deja vu. From the NY Times: Italy Bonds Push Higher Interest rates on Italian bonds rose to new euro-era records on Monday, close to the level that earlier forced Greece, Ireland and Portugal to seek financial rescues. And from the WSJ: Reasons to Be Fearful as Italian Yields Spike Greek, Irish, and Portuguese 10-year bond yields spent an average of 43 trading days above 5.50% before they climbed above 6.00%, The move to 6.50% took 24 days, while the move to 7.00% was even quicker, taking just 15 days, he said. An Italian treasury bill sale on Thursday will be a good test.  Italy's deficit to GDP is only around 4% - that is much lower than the other countries in trouble. But Italy already has a high debt to GDP ratio (around 118%), and slow (or no) growth ... not a good combination.

    Questioning Italy’s solvency means ECB intervention - Last week we witnessed a flight to quality within the euro zone government bond market. The yield on 10-year German government bonds dropped a record 35 points last week. German 10-year bonds now yield 1.82 percent. Meanwhile, the yield on 10-year Italian government bonds continues to rise, last quoted by Bloomberg at 6.37%, a record 455 basis points higher than German government bonds.Clearly, Italy is now the biggest focal point of the European sovereign debt crisis. And, make no bones about, while the immediate concern for Italy is liquidity, at heart the European Sovereign Debt Crisis is a solvency crisis. Let’s take a look at Italy to see why. Italy’s problem is this: Italian government debt is almost 120 percent of GDP, behind only Greece within the euro area. Meanwhile, Italy pays 6.5% for its long-term debt. If interest rates were to remain at current levels for an extended period, Italy would need to run a primary budget surplus (excluding interest payments) of about 5 percent of GDP, merely to keep its debt ratio constant. As a reminder, the plan is to have Greece’s private sector creditors reduce their claims enough to get Greece to this level, which the EU is calling sustainable. My suspicion is that the 120% debt target for Greece is largely a function of not wanting to suggest that Italy’s debt levels are too high.

    You're 'Developed'? Italian vs LDC Bond Yields - Ah Italy, G7 member country and the land of bunga bunga parties (but until when?) With Italian bond yield spreads over German Bunds now in orbit somewhere above Brussels and Strasbourg, I came across an interesting chart from Trading Economics that compares 10-year bond yields of a number of developed and developing nations. From this (abridged) list alone we see that Singapore (kinda obviously), Thailand, China, Malaysia, South Korea, Brazil, Russia, Mexico, Indonesia are able to borrow at cheaper rates for debts due in a decade than Italy--or fellow EMU members Ireland, Portugal or Greece for that matter. Moseying over to the ADB bond site, we too should add the Philippines to this list. Why is this important? After doing so, we find that all five original ASEAN members (Indonesia, Malaysia, the Philippines, Singapore and Thailand) now have lower 10 year borrowing costs than an erstwhile G7 stalwart undergoing difficult times. As it so happens, pop financial writer Michael Lewis has a book just out entitled Boomerang: Travels in the New Third World .  While his characterization of each new third world country's failings may border on the simplistic, he does hint at a wider question that I increasingly find harder and harder to answer: Does it still make sense to divide this world of ours into developed and developing countries or first and second or third world ones?

    Former Wall Street trader prefers Namibia’s bonds to Italy’s -  In the latest episode of Blundering Heights, the long-running European soap opera, Greek Prime Minister George Papandreou was about to lose his job, which he really didn’t want any more. His Finance Minister was recuperating from a severe stomach ache, probably at the thought he might have to replace Mr. Papandreou. The G-20 leaders meeting on the French Riviera couldn’t agree on how to bolster the International Monetary Fund, so it could dispense more cash to the Europeans. Embattled Italian Prime Minister Silvio Berlusconi insisted his debt-laden country didn’t need any help, thanks: Just look at our full restaurants. Meanwhile, the short-lived Greek referendum idea evaporated after the democratically elected leaders of Germany and France explained that you just can’t let people vote on how much misery they should bear. Not surprisingly, already jittery markets did not enjoy the week’s twists, turns and sudden reversals. Stocks slid, the euro took a hit and yields on Italian and Spanish bonds climbed yet again. It was in these difficult market conditions that Namibia chose to launch its first euro bond issue. The $500-million (U.S.) worth of 10-year bonds with an annual coupon of 5.5 per cent were quickly snapped up by institutional investors, particularly in Britain and the U.S. The price in the secondary market rose 3 cents on the first day.

    Italy bond yields soar; euro zone troubles deepen - (Reuters) - Italian government bond yields soared to near 15-year highs, putting the euro zone's third largest economy front and center of the region's debt crisis, despite scrambling efforts by policymakers to stem the growing contagion. Italy, the world's eighth largest economy, overtook Greece as the prime threat to the stability of the 17-country single currency zone, as finance ministers met to try to find ways of building a firewall around the two-year-old crisis. Italian 10-year bond yields rose to their highest since 1997 -- approaching levels regarded as unsustainable -- with political turmoil in Rome threatening to drag a fourth European economy after Greece, Ireland and Portugal into the debt mire. Jean-Claude Juncker, the chairman of Eurogroup finance ministers, said the European Central Bank would take part in monitoring Italy's promised economic reforms along with the European Commission and the International Monetary Fund, effectively putting the country under full surveillance.

    10 Year BTP = 6.66%; Italian Treasury Cancels November 10 Bill Auction Save this one for the archive files: The Italian 10 Year yield is now at precisely 6.66%. Alas, we doubt it will stay here for long: the Italian Treasury just announced it was cancelling its November 10 3 Month BOT auction due to, wait for it, "lack of specific cash requirements." Stick a fork in it.

    Italy! Italy! Italy! - The euro zone periphery was a sideshow. This stuff with Italy is the real deal. With yields at 6.7% and rising, it’s game over for the euro zone. The extend and pretend stuff ain’t gonna work. Here’s the real problem: Italy needs to run a primary budget surplus (excluding interest payments) of about 5 percent of GDP, merely to keep its debt ratio constant at present yields. That’s never going to happen. So the yields for Italian bonds must come down or Italy is insolvent. More than that, a stressed Italy means a stressed euro zone and a deepening recession with all of the attendant ills that means: Ireland would suddenly start missing deficit targets for example. Bank shares would be under stress, triggering more Dexia’s. So even if Italy limps along at 7 percent yields, we will see a nasty double dip recession and bank failures. And we know that yields will rise. Last November, we were discussing Ireland in the same way with its yields at these levels. Soon, the yield went to 9% and Ireland was forced into a bailout – one that Italy is to big to give. So we are definitely facing a real financial Armageddon scenario here. That’s why questioning Italy’s solvency leads inevitably to monetisation. I’m not the only guy who knows what would happen. Policy makers know that Italy owes German banks 116 Billion euros.  They know that Italy is too big to fail and they will respond. But, policy makers are faced with a simple either or here. Small bond purchases won’t do. We see that already because Italy’s yields are well above 6% for 2-year debt. Credible lenders of last resort use price, not quantity signals. For the ECB, it’s not about buying up Italian debt. It’s about credibly defending Italian government bonds as the monopoly supplier of reserves with a specific target price. Central banks are price-targeting monopolists. They can only be effective if they realise this affects everything they do. The role of the lender of last resort is about price, not quantity.

    Italy Nears Tipping Point as Its Bond Yields Climb . - With Italian bond yields surging higher, analysts said Italy is at the brink of being unable to afford to borrow in the public markets. Less than two weeks after European leaders unveiled an agreement that was designed to bolster confidence in the region, the yield on Italy's 10-year debt drew close to the 7% mark, a line in the sand of both practical and psychological importance to the market. Psychologically, 7% has become a beacon due to the fact that Greece, Portugal and Ireland each sought bailouts soon after their debt reached these levels. While analysts said it is too simplistic to say that Italy will be forced to ask for support if its 10-year debt yields 7%, they said the recent selloff is taking the country to the tipping point. "I don't know if 7% is the upper limit, or if it's 6.9% or 7.25%, but I do know [Italy] can't go on for very long having these kinds of bond yields,"

    Bunga Bunga and the Bond Market - It’s clear that the markets don’t want Silvio Berlusconi to continue as Italy’s prime minister. They were cheered yesterday, briefly, when word got around that Berlusconi was stepping down, then subsided into their accustomed grumpiness when he denied it. (We know this by following the interest rates on Italy’s bonds, which are soaring, save during the brief moment when it was thought Berlusconi’s departure was nigh.) But the markets’ moment may be at hand. The leaders of two of Europe’s Mediterranean governments are either hanging by a thread (Berlusconi) or have already gone (Greece’s George Papandreou), unable to reconcile the demands of their people not to have their lives decimated by austerity with the markets’ demands for precisely such austerity. Such a moment marks a triumph of the market over democracy, queasy as I am to identify Berlusconi with democracy. After all, it was Berlusconi who brought the logic of the market, and of marketing, into Italian politics, controlling the media and increasingly elections themselves through his wealth. As the old Time might have put it, No friend of democracy is Mr. Bunga-Bunga. And yet, the market’s negation of elections remains the ultimate triumph of capitalism over democracy, no matter how flawed a democratic outcome may be.

    Italy Yield Surge Sets Berlusconi on Bailout Path - Italy’s record bond yields are sending the nation down the same path taken by Greece, Portugal and Ireland in the days before they were forced to seek rescues. Italy’s 10-year notes traded above 5.5 percent for 40 days before breaching the 6 percent mark on Oct. 28 and reaching as much as 6.68 percent today. The bailed-out nations followed a similar trajectory, consistently averaging above 6 percent for about a month before crossing the 6.5 percent barrier. After that, it took an average of 16 days for yields to pass the unsustainable 7 percent level. “The trend appears worryingly similar,” “Clearly, the longer it lasts, the worse it gets.” With almost 1.6 trillion euros ($2.2 trillion) of bonds outstanding, Italy has more liabilities than Spain, Portugal and Ireland combined, making it vulnerable to increases in borrowing costs. Prime Minister Silvio Berlusconi triggered the latest surge in yields after bowing to domestic demands to water down a 45.5 billion-euro austerity package.

    Berlusconi’s Majority Unravels as Allies Push Him to Resign - Prime Minister Silvio Berlusconi struggled to hold on to power and prove he can implement austerity measures pledged to European Union allies as reports of his imminent resignation sent Italian stocks surging. Berlusconi denied a report by Giuliano Ferrara, his former spokesman and now editor of newspaper Il Foglio, who wrote today that the premier would step down “within hours.” Berlusconi will likely resign next week in return for support in a vote on the austerity and economic-growth measures, Ferrara said in a phone interview after his initial report. Reports of his resignation were “totally unfounded,” Berlusconi said in an interview with newspaper Libero today. He said he would call on a confidence vote next week on the austerity measures and “look into the eyes of those who try to betray me.”

    Berlusconi ally calls on PM to resign as key vote looms - Italian prime minister Silvio Berlusconi suffered a huge humiliation in parliament today in a vote that indicated he no longer had a majority and ratcheted up pressure for him to resign. The vote, on a routine measure to approve the 2010 state budget, passed in the Chamber of Deputies in Romewith 308 votes for and none against. Some 321 deputies abstained, most of them from the centre-left opposition. If all 630 had voted, Mr Berlusconi would need a 316-seat majority to assure he was still in command. Mr Berlusconi scrutinised the vote tally handed him right after the vote, apparently trying to figure out who had abstained. Opposition leader Pier Luigi Bersani immediately called on Mr Berlusconi to resign, saying Italy ran a real risk of losing access to financial markets after yields on government bonds approached the red line of 7 per cent. "I ask you, Mr Prime Minister, with all my strength, to finally take account of the situation ... and resign," Mr Bersani said immediately after the vote.

    Third Berlusconi ally jumps ship - AS ITALY buzzed with speculation over whether Silvio Berlusconi was about to throw in the towel after dominating Italian politics for 17 years, one of his most loyal - and glamorous - supporters piled on the pressure by abandoning him. Gabriella Carlucci, a former showgirl and television presenter, said she was leaving Mr Berlusconi's ruling People of Freedom party (PDL) and jumping ship to the UDC, a centrist Catholic party in opposition - the third loyalist to do so in just a few days. It was a bitter blow for the Prime Minister. Ms Carlucci had been an admirer of Mr Berlusconi since he burst onto the political scene in 1994 with his Forza Italia party. Then, he had promised to shake up Italy's calcified and discredited political scene and put the country back on track. But after nearly two decades, those promises have been woefully unfulfilled, with economic reforms failing to materialise and Italy groaning beneath a €1.9 trillion debt, 120 per cent of its GDP. Mr Berlusconi, who denied resignation rumours in a posting on Facebook, shocked world leaders by falling asleep at last week's G20 summit in Cannes.

    Europe Update - Reports are Italian Prime Minister Silvio Berlusconi will resign after 2012 budget is approved. First Greece

             • The Athens News is reporting Lucas Papademos will be the interim Prime Minister and that elections will be held on Feb 19th. "Lucas Papademos, an economist and former central banker, will be the new prime minister of Greece, a ruling Pasok source has told Reuters."
             • The EU is asking for all parties in Greece to sign a committment letter. However New Democracy leader Antonis Samaras is balking. From the Athens Times: Samaras sees written committments unnecessary

    • The  Greek 2 year yield is up to 105%, and the Greek 1 year yield is down to 221%.  The Italian 10 year yield is at 6.77%.

    Euro contagion - Credit conditions have steadily eased since the end of the recession but that process almost ground to a halt in the last three months, with only five domestic banks out of 50 saying that they relaxed their standards for lending to large companies. Two banks had tightened conditions. There was also a sharper retrenchment by US branches of foreign banks: 23 per cent of such operations tightened their lending terms, raising their interest rate spreads and cutting back on the amount and period for which they are willing to lend. Here is more, from the FT.  There is also a negative dynamic playing out within the European banking system itself: Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses. The European Banking Authority is requiring lenders to boost capital by 106 billion euros after marking their government debt to market values. The trend may undermine European leaders’ efforts to lower borrowing costs for countries such as Greece and Italy, while generating larger writedowns and capital shortfalls. Roubini claims the ECB is doubling its rate of bond purchases, yet as of today the Italian yield was hitting an unsustainable 6.74 percent.  Here is Italian gdp growth since 1960:

    EFSF Bailout Fund Revives 3 Billion-Euro Bond Sale Amid Deepening Crisis - The European Financial Stability Facility revived the 3 billion-euro ($4.1 billion) bond sale it pulled last week even as the region’s sovereign crisis deepened. The bailout fund priced the bonds due February 2022 to yield 104 basis points more than the benchmark swap rate, according data compiled by Bloomberg. That compares to the facility’s existing 3.375 percent bonds due in 2021 that were priced to yield 17 basis points, or 0.17 percentage point, more than swaps when they were sold on June 15, Bloomberg data show. A basis point is 0.01 percentage point. The relatively high spread on the new issue “is a complete level-changer, a completely new world for the EFSF,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “This will be the new reference point” for any future 10-year deal, he said. The EFSF’s existing notes have underperformed European benchmark debt, with the extra yield over governments on its 3.375 percent 2021 bonds widening to 167 basis points, the most since the notes were sold, Bloomberg Bond Trader prices show.

    You Weren't Paying Attention, But Today's EFSF Bond Auction Was A Flop: The European Financial Stability Facility—the euro rescue fund—just auctioned off €3 billion ($4.1 billion) in bonds, and the sale went miserably. It had already postponed the sale last week due to poor market conditions after a Greek referendum proposal, but poor demand and higher-than-expected yields at today's auction are not good signs. According to RTE, demand for bonds only barely exceeded the $4.1 billion required to fund the next tranche of Irish aid promised as part of its bailout plan. Yields hit 3.59%, up from 3.38% in June at the last sale of EFSF bonds (via Bloomberg).

    Eurogroup aims to deploy bigger bailout fund in Dec (Reuters) - Euro zone finance ministers plan to finish technical work on increasing the EFSF bailout fund to around 1 trillion euros by the end of November and deploy it in December to help shield countries like Italy from the sovereign debt crisis. Ministers from the 17 countries sharing the euro, the Eurogroup, added some detail on Monday to two leveraging options for the 440 billion euro fund, but still want to consult markets on some remaining issues. "We intend to finalise the work of the operational details of the two options by the end of November in the form of guidelines that will be approved by the Eurogroup so that implementation can take place in December," Eurogroup President Jean-Claude Juncker told a news conference. Pressure on the euro zone to bolster its bailout fund rose on Monday as Italy's borrowing costs hit 14-year highs close to unsustainable levels on market concern the Italian government was not strong enough to put its public finances in order.

    Analysis: Losing credibility, EU seeks IMF's embrace (Reuters) - Trust in the European Union's ability to tackle the debt crisis is so low that its leaders are now relying on the IMF and European Central Bank to convince financial markets the rapidly deteriorating problems can be fixed. But even when possible solutions involving the ECB and International Monetary Fund have been put on the table, internal EU disputes, often sourced to German intransigence, have scuppered the proposals -- further compounding a crisis that threatens not just the euro but the whole European project. Markets have long questioned the EU's capacity to resolve the crisis, recognizing that structural and political constraints make quick or firm EU decision-making all but impossible. Last week's G20 summit in Cannes did nothing but reinforce that assessment and the fact policymakers are now openly questioning their own abilities underlines just how dire the situation has become. "Europe is running dry on credibility," Swedish Finance Minister Anders Borg, one of the most straight-talking of his colleagues, said as he arrived for another  meeting of finance ministers in Brussels on Tuesday. "There is a credibility problem ... the solutions that are going to be discussed here today, like the Financial Transactions Tax, are a non-starter."

    'Run For Your Lives' - Euro Zone Considers Solution of Last Resort - The ink on the most recent European Union summit agreement was hardly dry before it became clear that it was insufficient. With investors now increasingly wary of Italy, the consensus is growing that the European Central Bank -- and the IMF -- will have to play an even greater role. . German Chancellor Angela Merkel and US President Barack Obama, together with US Treasury Secretary Timothy Geithner and German Finance Minister Wolfgang Schäuble, met in a mundane conference room at the five-star Intercontinental Carlton Hotel. The group had serious issues to discuss. Merkel reported on the results of a meeting held a day earlier -- during which she and French President Nicolas Sarkozy had told Greek Prime Minister Georgios Papandreou exactly what they thought about his (now cancelled) plans to hold a national referendum on the euro bailout package. Obama and Geithner, however, were not impressed. The euro crisis continues to worsen, the pair grumbled. It is time, they said, for Europe to finally take decisive action. The decisions taken at the European Union summit in late October were not enough, they complained.

    Poorest to Pay Most in EU Bailout   - Slovakia shows the strain the debt crisis has imposed on euro member governments. Prime Minister Iveta Radicova’s political career has been upturned by the latest bailout plans. The Slovak leader, whose coalition came to office in mid-2010, lost a confidence vote last month linked to the euro-zone’s rescue fund, forcing lawmakers in Bratislava to change the country’s constitution to allow her to stay on as caretaker PM until elections are held in March. The EU may find it more difficult to answer critics who say the bloc is undermining member states’ sovereignty, especially in smaller countries that carry less weight in EU decisions. The Slovakian parliament approved the proposal to expand the European Financial Stability Facility, but not before a partner in the governing coalition had used the debate to bring down Radicova. German Chancellor Angela Merkel said last month that euro-area members must accept a “clampdown at European level” if they fail to meet their commitments under deficit-reduction plans. However, a further look at who is bearing the brunt of the euro bailout could well bolster the case of eurosceptics, causing more damage to the bloc than the parliamentray tussles seen so far. Slovakia, the second poorest member of the euro zone, for example, is paying or guaranteeing the equivalent of 11.7 percent of its GDP for the EFSF,  Estonia, the poorest country in the euro, is taking on the equivalent of 13.9 percent of GDP. That compares with 8.5 percent of GDP for Germany and 8.2 percent of GDP for France.

    Europe Banks Selling Sovereign Bonds May Worsen Crisis - BNP Paribas SA and Commerzbank AG (CBK) are unloading sovereign bonds at a loss, leading European lenders in a government-debt flight that threatens to exacerbate the region’s crisis. BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22 percent to 13 billion euros this year. Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses. The European Banking Authority is requiring lenders to boost capital by 106 billion euros after marking their government debt to market values. The trend may undermine European leaders’ efforts to lower borrowing costs for countries such as Greece and Italy, while generating larger writedowns and capital shortfalls.

    Germany must do it, not China (Michael Pettis) I have already discussed last month why I think the desperate attempts by Europe to get China and other Asian and BRIC countries to bail out the weak sovereign borrowers is absurd, but the topic has become so important in the past two weeks, at least judging by the number of calls I have received from journalists, that I thought I would reproduce a discussion I recently had in a forum among a number of China specialists. We were discussing an article that recently appeared in the New York Times calling for a Chinese bailout of Europe.  According to the author, Arvind Subramanian, at the Peterson Institute, “Europe is drowning and needs a lifeline.”  That lifeline is effectively a bail-out package from China. Although I agree with Subramanian that China should use current events to play a bigger and more decisive role in global finance, and I certainly agree that as a surplus nation it is very much in China’s interest provide financing to the eurozone, I am not sure it makes sense for China to do anything that actually helps Europe.  In fact I found the article a little bizarre, but not at all out of step with the thinking in Europe.  Simmons argues that one of the problems with a debt crisis is that when debt levels are perceived as being too high, major stakeholders are forced into behaving in ways that reinforce credit deterioration and exacerbate the debt problem.

    China says Europe will overcome debt crisis (Reuters) - China is confident that Europe will be able to overcome its debt crisis, Foreign Minister Yang Jiechi said, adding stability in the eurozone was crucial for the global economic recovery. Yang, however, made no mention about increasing investment in Europe in his statement late on Saturday on President Hu Jintao's trip to the G20 leaders' meeting in southern France. "We believe that Europe has the complete wisdom and ability to solve the debt problem," Yang said in remarks published on the Foreign Ministry's website. "China has always supported Europe's response to the international financial crisis and its economic recovery efforts," he said. The euro zone has been looking to China play a role in supporting its rescue fund by investing some of its $3.2 trillion in foreign exchange reserves -- the world's largest. But there are limits to what Beijing can actually deliver, Cheng Siwei, a former top Chinese lawmaker, said on Saturday, even though China is willing to help Europe, its largest export market, to deal with the debt crisis.

    Wishful Thinking And The Road To Eurogeddon -  Krugman - Gavyn Davies has a very good piece today offering another way to think about the euromess. I say “another way to think” advisedly — his analysis of the basics is, as far as I can tell, identical to mine, but he offers a different angle of approach that may be better than the route the rest of us have been taking. Here’s Davies: It is normal to discuss the sovereign debt problem by focusing on the sustainability of public debt in the peripheral economies. But it can be more informative to view it as a balance of payments problem. Taken together, the four most troubled nations (Italy, Spain, Portugal and Greece) have a combined current account deficit of $183 billion. Most of this deficit is accounted for by the public sector deficits of these countries, since their private sectors are now roughly in financial balance. Offsetting these deficits, Germany has a current account surplus of $182 billion, or about 5 per cent of its GDP.  The euro problem can then be defined a finding a way (1) to finance these imbalances in the short run (2) end the imbalances over the medium run. The internal imbalances of Europe are a recent development, coinciding with and almost surely caused in large part by the creation of the euro itself (GIPS is Greece, Italy, Portugal, Spain):

    The eurozone vendor financing scheme - Here’s an interpretation of the euro zone I have been meaning to discuss. I touched on it in the update to my post on how austerity in Europe works. In a fixed exchange rate environment like the euro area, you don’t have currency fluctuation issues. So persistent current account imbalances as we see within the euro zone are really a form of vendor financing. I am familiar with the perils of vendor financing having witnessed the Telecom bubble of the late 1990s go bust, wiping out the major source of revenue in the European high yield market in which I worked. Here’s an article from right around the bust that gives you a positive spin on how how vendor financing worked in telecoms.

    What Is To Be Done: Eurozone Crisis Edition - My favored approach would be to simply be to cap the 2 year bond yield from any Eurozone Sovereign at 100 basis points over German bonds. The ECB would do this simply by announcing its intention to purchase bonds through its Structural Operation Facility until the rates target rates are hit. Such a commitment is akin to saying the ECB will print all the money necessary to hold rates down. After the announcement rates will collapse immediately rates and end the contagion. At the end of the day here the ECB still holds all the cards. Its only holding down short rates and only conditional upon countries making progress towards primary balance. If a country refuses then the ECB can remove the hold and let that country’s bonds go higher. More over the long bond markets would still send price signals based on how likely it was that the country in question was going to stick to the ECBs demands. The “downside” of this scenario is that it allows for rising inflation expectations. Of course, I don’t see this as a downside because I believe the ECB is far to tight as it is.

    Germany: Greece must reform or quit euro, no third way (Reuters) - Greece must push through economic reforms or leave the euro, Germany's economy minister said an interview published on Monday, adding Germany could not hold a referendum on whether to fund further euro zone bailouts. "The Greeks have a choice: reforms within the euro zone or no reforms and leave. There is no third way," Philipp Roesler, who is head of the junior partner in Chancellor Angela Merkel's center-right coalition, told the mass-circulation daily Bild. Asked if he thought the Greeks were "ungrateful," Roesler replied: "The Greek government must at least understand that at some point our patience will end." The EU has told Greece's bickering politicians to explain by Monday evening how they plan to form a unity government to get the country's bailout program back on track, following Prime Minister George Papandreou's disastrous attempt to put it to a referendum.

    Greek Bank Deposits Plunge By €5.5 Billion In September: Biggest Monthly Drop Ever - We had a feeling that the modest upward blip in Greek August deposits by corporations and households, to the tune of €1.4 billion, was a "transitory" event. It was. According to just released data by the Bank of Greece, the September collapse in gross deposits from €188.7 billion €183.2 billion was the largest ever, and took the total to an amount last seen in June 2007. Indicatively Greek deposits peaked at €237.8 billion in September 2009. Said otherwise, in addition to being massively undercapitalized, banks cash in the form of deposit liabilities has plunged 23% from its all time highs. Look for this number to continue dropping month after month as more and more Greeks move their cash offshore. Additionally, the ECB announced that financing to Greek banks in September was €77.8 billion while Greek reliance on the "temporary" Emergency Liquidity Assistance program hit €26.6 billion according to Bloomberg. With every additional deposit outflow, expect ever more money to be needed to keep the Greek sham of a banking system afloat, and more and more Germans to follow in Jens Weidmann's footsteps and start getting very, very angry.

    History Suggests Greece Will Freeze Bank Deposits, Exit Euro by Christmas; Spain and Portugal to Follow Next Year; What's the Rational Thing to Do? - Michael Pettis at China Financial Markets asks the question "Will Greece unravel by Christmas?" Pettis then makes a historical case for exactly that while stating "I don’t think Europe can postpone Greece’s exit much longer." From Pettis, via Email, with Permission .... President Hu left the G20 meeting in Cannes Saturday without committing China to very much, merely saying: “We believe Europe has the wisdom and ability to solve the debt problem.” At this point, however, regardless of the amount of wisdom floating around Brussels I think it is pretty unrealistic to expect a happy solution. We’re well past that stage. By now, it seems to me, neither wisdom nor cooperation among world leaders is going to get us out of the debt and currency problems we face. Rather than try to prevent a major disruption the policy goal now should be to engineer as quickly as possible the least disorderly and disruptive unraveling of financial markets in the peripheral countries. And while it may help relieve frustration to excoriate European leaders for having made poor decisions, we shouldn’t assume that there really is a set of “right decisions” that will lead us out of this mess. I think there isn’t.

    Greek Government Wrangling Drags Into Third Day (Bloomberg) -- Prime Minister George Papandreou's talks on forming a Greek interim government to avert the economy's collapse dragged into a third day as a near-accord with the opposition stalled on European Union demands for written commitments. The Greek interim government is to be announced today, NET TV reported, without saying how it got the information. Former central banker Lucas Papademos seemed poised to lead the new government as of late yesterday, according to reports from state-run NET TV and To Vima newspaper. To Vima said today, without citing anyone, that Vassilios Skouris, president of the European Court of Justice, may be given the prime ministerial post in place of Papademos. Antonis Samaras, leader of the opposition New Democracy party, reacted angrily to a demand from EU officials that he sign up to budget measures required to receive a second Greek financing package of 130 billion euros ($179 billion) that was decided on Oct. 26. "The bottom line is that the clock is ticking for Greece as it will soon run out of cash without European help," "Greek leaders seem still not to have appreciated the urgency of the situation."

    Deal on new Greek PM falls through - Greece’s political crisis deepened on Wednesday after Antonis Samaras, the conservative opposition leader, stormed out of a meeting with Carolos Papoulias, the president, amid disagreement over the appointment of a coalition premier. Mr Samaras left after a deal to give the premiership to the speaker of parliament fell through at the last moment. Several other possible candidates were mentioned by George Papandreou, the departing Socialist prime minister, after the talks had started, according to a person with knowledge of the discussions. The presidency said another meeting would be held at 10am on Thursday. Mr Papandreou had delivered a statement announcing his socialist government’s resignation to make way for a new coalition government but did not name a successor. Philippos Petsalnikos, speaker of parliament and a former justice minister, was poised to become premier, having emerged as a compromise candidate after fierce infighting inside the PanHellenic Socialist Movement over the candidacy of Lucas Papademos, a former European Central Bank vice-president. But Mr Papandreou reportedly reintroduced Mr Papademos’s candidacy, along with that of Evangelos Venizelos, the finance minister. Mr Samaras, leader of the conservative New Democracy party, later said he would be happy with either of Mr Papandreou’s nominations for the premiership but he did not want to be drawn into Pasok infighting.

    Coalition deal collapses; new meeting Thursday - A meeting of political leaders with the country's president has been postponed until 10am Thursday morning, the president's office has said, in a sign consensus on a new prime minister has yet to be sealed. The meeting was called off after outgoing Prime Minister George Papandreou and opposition New Democracy leader Antonis Samaras began talks with President Karolos Papoulias on a new coalition.  The announcement came a short time after a furious Popular Orthodox Rally (Laos) leader Yiorgos Karazaferis stormed out of the presidential mansion, charging that the Papandreou and Samaras were engaging in "tactical games".Speaking later, Samaras said his party would not block progress on selecting a new prime minister to lead the country, leaving the ball in the court of the ruling Pasok.  "Many would want this but New Democracy will not be part of the problem, we are focused on the constitution," Samaras told reporters. "The decision for a new prime minister is up to those have the majority in parliament."

    Papademos new Greek PM, vows stability with euro -  Senior banker Lucas Papademos was named Thursday to be the new prime minister of an interim Greek unity government that seeks to cement a new European debt deal and stave off national bankruptcy. Papademos, who was named after four tortuous days of power-sharing talks, immediately called for unity and promised to seek cross-party cooperation to keep Greece firmly in the 17-nation eurozone. The 64-year-old former vice president of the European Central Bank was chosen to lead a temporary government backed by both the governing Socialists and opposition conservatives that will operate until early elections, tentatively set for February. He replaces outgoing Prime Minister George Papandreou midway through the Socialist leader's four-year term. "I am not a politician but I have dedicated most of my professional life to exercising financial policy both in Greece and in Europe,"  "The Greek economy continues to face huge problems despite the great efforts than have been made for fiscal reform." He insisted Greece must defend its euro membership.

    Europes debt crisis endangers the ability to be distinctive…Italy and Greece are not Germany. Until recently, Germany did not want them to be. They were lands of the sunny south, of less work-driven, more pleasure-oriented cultures. To Germans, they smelled of sex (see Thomas Mann1) and good food. Consider, as one illustration of Europe’s cultural divide, the argument recently advanced by Italy’s embattled (and perhaps outgoing) prime minister, Silvio Berlusconi, to demonstrate that his nation’s economy is actually in good shape: “Our restaurants are full of people,”2 he said.   And if Italy’s more restaurant-centric economy increasingly lagged behind Germany’s uber-efficient industrial economy in growth, productivity and incomes, that was all right, too: Europe could encompass a two-speed economy. Vive, as the French would say, la difference. Today, however, it’s apparent that the creators of the European Union, and of the monetary union in particular, failed to grasp that their creation would one day turn on them and demand more of a single continental standard for economic performance. It would demand that Italy cease to be Italy, and Greece, Greece. That’s why the turmoil of the past week is bound to persist. The agenda before Europe is to square circles. And those circles include entire peoples who may not want to be squared.

    In Spain, Low Wages Become Increasingly Common - Many in the crowd are what locals call mileuristas — workers on temporary contracts that pay 1 mil (1,000) euros a month, barely $1,400. That's considered below the poverty line for a family in Spain, and just above it for a single adult. The word used to have a negative connotation. But not in this economy, Horcajada says. "When Spain was booming, like five years ago, just really young people, normally uneducated, were mileuristas," he says. "The thing is that right now, a lot of people are becoming mileuristas, and a lot of people would like to become mileuristas, if they could." Ester Sanz would love to join the ranks of mileuristas. She's a certified teacher but can't find a full-time job. "I finished my degree in June last year, and I have a job, but it's only for one hour a day, so it's only 200 euros, but nothing else," she says. On 200 euros a month, less than $300, she has to live with her parents and clip coupons.

    Is it easier on the outside? - PAUL KRUGMAN points us to Nouriel Roubini who argues that the history of internal devaluations—that is, restoring competitiveness through wage declines rather than exchange rate shifts—is mostly a history of failure. Reading this, it is difficult to be optimistic about Greece or Portugal: the way ahead probably paved with unemployment and economic decline. What's more, the political will to go through such a period in order to stay in the euro, retain the high connectedness to Europe and finally regain strength and grow, is of crucial importance. The Baltic states (Estonia, Latvia, Lithuania) probably have more of that than Portugal or Greece, and may have (as Ireland has) a flexible enough economy to get it over with quickly. One should be careful with comparisons of countries, though. Small countries like Ireland or Latvia may not have benefited from a potential external devaluation as much as is commonly assumed. Iceland is a case in point (yes, once again). It made use of external devaluation, but it actually had to impose capital controls to limit the adjustment. What followed in a country that imports almost everything except fish and hot water is a temporary surge in inflation. Its real GDP performance, however, is very similar to that of Ireland or the Baltics.

    Italy's Bond Rollover Problem Dramatically Worsens; Yield Curve Inverts; 3-Year and 5-Year Bonds Yield Exceed 10-Year Yield -  With Italian government bond yields, it's a case of "another day, another record". Here are a few charts. Curve Watchers Anonymous notes that 3-year and 5-year Italian bonds now yield more than 10-year bonds, albeit by a small amount. This is a huge red flag for Italy. Curve Watchers Anonymous also notes the explosion in the 2-year bond spread between Germany and Italy, now at a whopping 5.98 percentage points and rising rapidly, exacerbating Italy's bond rollover financing problem. Steen Jakobsen, chief economist from Saxo Bank pinged me with these comments earlier today:  Italy has 37 billion EUR of maturing debt this year alone, and 347 billion EUR next year. The average funding rate is 4.5% ish, versus the 10-year now trading at 6.77%. Time is running out. However, we as market players tend to underestimate the political process ability to “buy time”.

    Berlusconi Offers to Quit if Euro Reforms Are Passed - Prime Minister Silvio Berlusconi of Italy offered a conditional resignation on Tuesday, agreeing to step down but only after Parliament passes an austerity package — before the country will go to early elections, government sources said on Tuesday evening. Earlier in the day, the prime minister won a budget vote in Parliament but the tally showed he no longer had the support of the majority. While the opposition leader called on him to resign, Mr. Berlusconi wrote his options on a piece of paper captured by a news agency photographer. “Resignation” was one. He also wrote “eight traitors” about the lawmakers who failed to support him. Mr. Berlusconi’s coalition received 308 votes in favor of passing the budget bill, but 321 lawmakers did not vote — a clear sign that “Mr. Berlusconi no longer has a majority,” said Pier Luigi Bersani, the leader of the opposition Democratic Party. He also called on the prime minister to immediately

    Exit From Italian Debt Spurs Fears - The investor exodus from Italian bonds, sparked by the dual political crises in Italy and Greece, raises the most dangerous scenario yet in the euro zone's two-year-old debt crisis. Yields on 10-year Italian bonds rose to 7.12% Wednesday, a high for the euro era, in the latest sign that investors are fast losing faith in the world's third-biggest sovereign-bond market. Yields might have risen far higher in the past week but for heavy bond-buying by the European Central Bank, economists say.The latest surge in Italy's funding costs on Wednesday came after clearing house LCH.Clearnet raised margin calls on Italian bonds across a range of maturities.  Yields might have risen far higher in the past week but for heavy bond-buying by the European Central Bank, economists say. Reversing the capital flight could require both political change in Italy and massive international assistance.

    Five reasons Italy should scare you -- No, one of them is not Silvio Berlusconi's “bunga bunga” parties. Silvio himself isn't among those reasons, either. Clearly, the concerns about Italy run much deeper than who sits in the PM's office. That's why, in my opinion, the growing financial strain on Italy and the political turmoil in Rome are the scariest events yet to emerge from the spiraling euro zone debt crisis. In fact, what's going down in Italy is more important to the world economy than anything else right now. Here's why:

    First, Italy is not too big to fail. What I mean by that is Italy is too big to be bailed out.
    Secondly, to fix that mess, Italy has to uproot some deep economic problems. As I've mentioned before, the reasons behind Italy's descent into the euro zone debt crisis are much different than those that have undermined other countries in Europe.
    Third, we should doubt whether Italy's political system can produce that rapid-fire reform. The types of reform Italy needs will be highly unpopular with voters. They mean higher taxes, fewer government services, more competition and, if we really start gutting the economic system, likely longer working hours.
    Fourth, Italy could spark even wider contagion. That runs the risk of Italy being a launch pad for more contagion, perhaps spreading the crisis to France, Belgium, and so on.
    Fifth, Italy is probably the biggest threat to the global economy right now.

    LCH.Clearnet Raises Initial Margin Call on Italian Debt - The cost of using Italian bonds to raise funds rose on Wednesday after clearing house LCH.Clearnet increased the margin on debt from the euro zone's third largest country at a time when its bonds yields are close to levels deemed unsustainable. Banks use government bonds as collateral to access cash in the repurchase (repo) market, in which a handful of clearing houses play a vital role, assuming lending risks to provide institutions with the cash.  Clearing houses, such as LCH.Clearnet, collect cash in the form of margin on individual trades, which they hold centrally to refund members left out of pocket in the event of a default.  When LCH.Clearnet Ltd took similar action on Portuguese and Irish debt as bond yields soared, it added to selling pressure on the paper. Both countries were later forced to seek bailouts.  With benchmark 10-year Italian government bond yields approaching 7 percent, LCH. Clearnet raised the initial margin call applied to Italian debt by between 3.5 and 5 percentage points across all maturities of BTP and inflation-linked BTP government bonds.

    Margin Call of 4-5 Billion Euros as Clearing House Raises Deposit Requirements on Italian Bonds; Roman Empire Under Pressure - Yields on Italian bonds rose once again on Tuesday as margin requirements on those bonds rose sharply. Bloomberg reports LCH Clearnet Boosts Deposit Required for Trading Italian Government Bonds The so-called deposit factor charged for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, LCH Clearnet SA said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced in an Oct. 7 document. The additional charges will be applied from close- of-day positions today, LCH said.  Steen Jakobsen, chief economist at Saxo Bank, pinged me with these comments. Major investment banks calculate the “margin call” to be around 4-5 billion EUR as of tomorrow. The Italian situation is very complicated – on one hand Berlusconi has promised to step down, on the other there are no alternatives to him in the opposition, there is no real hope for majority for “someone else”. Berlusconi has a long history of comebacks, and being 75 years old he has little to lose. The main issue remains whether Italy truly moves forward with austerity and reforms. One without the other has no value for market and for building a fire-wall around Italy.

    Italian Credit Risk Rises to Record as LCH Lifts Margin Level -- The cost of insuring against default on Italian government debt rose to a record after LCH Clearnet SA increased the extra deposit it demands from clients to trade the country’s securities. Credit-default swaps on Italy jumped 38 basis points to 562 at 12 p.m. in London, surpassing the previous record of 534 set Sept. 22, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 13 basis points to a one-month high of 341. The move by Europe’s largest clearing house triggered a slump in Italian bonds, with the yield on 10-year notes rising to a euro-era record of 7.48 percent. Markets had rallied after Prime Minister Silvio Berlusconi said last night he’d step down as soon as the country’s parliament passed cost-cutting steps pledged to European Union allies. “Berlusconi’s offer to resign has been spectacularly offset by the Clearnet margin increase,”  “It’s heaped more pressure on Italy and there’s obviously a knock-on effect on the rest of the market.”

    Warning: Italian Debt Breaking Down - cmartenson - Okay folks, the alert I sent out is close to being validated this morning. I am watching Italian debt yields spiking in real time. Just a few weeks ago, the world was wringing its hands over Italian debt breaching the 6% mark. By late yesterday there was growing concern that Italian debt had climbed past 6.5%, and there was speculation that it might even -- gasp! -- be headed towards 7%. Well, this morning Italian debt roared right through the 7% mark, and as of 5:37 a.m. (the time of this writing) we are seeing these shocking yields: Italy 10-year 7.37%; 5-year 7.64%; 2-year 8.03%. What can I tell you? Simply that the game is entering a new phase, one that includes the risk of a massive, systemic banking failure as a possible feature.

    Europe reaches its bogus goal - There is one thing you can say about Europe, they never waste a crisis, the side show soap opera spectacular continued last night.  It has been going on for so long now that the market seems to have set itself false goals and then managed to convince itself that they equate to something important when they get there. A resolution of the political issues in Greece and Italy, not that we are there yet, matters very little at this juncture. It has very little to do with the actual problems of the European economy and at this stage equate to little more than a shuffle of chairs on the Titanic: If you are , however, wondering whether these moves will lead to a loss of sovereignty by both the Italian and Greek citizens then you need not go no further than this paragraph from an article from the Wall Street Journal posted today: German Chancellor Angela Merkel thanked Mr. Papandreou and expressed in a phone call her “respect for the decision” by Mr. Papandreou to step down, and said Greece’s new government must be ready to implement reforms decided in Brussels in late October.

    Italian crisis: Silvio Berlusconi vows to resign - Italian Prime Minister Silvio Berlusconi has confirmed he intends to resign after key economic reforms have been approved. His announcement follows a vote in parliament on the budget in which he appeared to lose his majority. Both allies and opponents have been urging Mr Berlusconi to step down as Italy's debt crisis grows. Borrowing rates have shot up in recent days, raising concerns over whether Italy can service its debts. While Italy's deficit is relatively low, investors are concerned that the combination of Italy's low growth rate and 1.9tn euro (£1.63tn; $2.6tn) debt could make it the next country to fall in the eurozone debt crisis. The European commissioner for economic affairs, Olli Rehn, described the country's economic and financial situation as "very worrying". Mr Berlusconi has dominated Italian politics for the last 17 years.

    Italian borrowing costs reach breaking point - Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconi's promise to resign failed to raise optimism about the country's ability to deliver on long-promised economic reforms. Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back, a fear reflected in a jump in the cost of insuring against Italian debt default.German Chancellor Angela Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait.

    Yield Blowout, Bond Market Emphatically Rejects Italy's Solution; No Place to Hide - Italy has a debt rollover needs and the market just shut off efficient funding across the entire yield curve. There is no place to hide while waiting for the long-end of the curve to calm down. Italian government debt yields are above 7% from 2-year bonds all the way to 10-year bonds, with an inversion in 3-year and 5-year yields vs. 10-year yields. Moreover the 2-year yield is very close to inversion as well. Note that the spread between German and Italian 3-year bonds exceeds 7%. This capture is at about 10:45 Central, after the market calmed down a bit. Here is a chart to show the "calming".

    Leave the Ouzo, Take the Cannoli - Financial markets have suddenly decided to ignore Greece and focus all their angst on Italy. What is critical for the global outlook is that euro zone leaders finally stop talking and start doing. The latest trigger that shifted attention from Athens to Rome came when clearinghouse LCH.Clearnet raised its margin requirements to trade Italian bonds. The yield on 10-year Italian bonds soared above 7%.The euro zone leaders have been playing for time since the serious talk of a Greek default began to surface back in early 2010 (never mind that the situation has been festering for years).With the zone’s third largest nation on the line, will action be taken? Small signs suggest yes. German chancellor Angela Merkel said in a speech Wednesday, the 17-nation economic union can no longer delay. “This could be a turning point,” she said, an opportunity for the zone to rethink its goals and policies.

    European Policy Makers Don’t Understand But Markets Do - Rebecca Wilder - So here we are: the Italian yield curve is flat at above 7%; the government institution is in question; and the ECB is using its SMP purchase program as a carrot to drive austerity implementation in and Berlusconi out. Some would argue that the ‘market is irrational’ – Italy faces a liquidity not solvency crisis. That’s the IMF’s line, and I don’t buy it. See Italy’s situation is simple: given the Italian debt profile and initial conditions, the Italian sovereign should be able to stabilize its debt levels - even at 8% interest rate (borrowing costs) – PROVIDED (1) it grows, and (2) the sovereign increases its primary surplus (Italy is 1 of just 2 G7 countries expected to run a primary surplus in 2011, according to the IMF). The problem is, that (1) Italy’s contracting, and (2) a higher primary surplus is more likely than not going to aggravate the recession. Something has to change to break the link – this is where I encourage you to read Nouriel Roubini’s latest. In my view, the market is behaving very rationally. The Troika (ECB+EU+IMF) adapted the standard IMF model to the European sovereign debt crisis as a means to regain market confidence amid a sovereign liquidity crisis. The plan is to enhance fiscal discipline and become more ‘competitive’ (usually that means coincident with currency devaluation).

    As Italy’s Cost of Borrowing Surges, Europe Shudders - A day after Prime Minister Silvio Berlusconi offered his resignation in the face of rising global market skepticism, investors revolted Wednesday, suggesting they do not believe that even a new leadership could fix Italy’s intransigent financial problems and revive its economy.  Italian bond rates crossed a crucial level of 7 percent, prompting questions about whether Italy could soon need an international bailout just as the financially strapped nations of Greece, Ireland and Portugal did before it. The difference this time is that Italy, the third largest economy in the euro zone, is on a different scale than those other, much smaller European nations. That means any bailout would have to be proportionately far larger, and some analysts question whether the European Union or the International Monetary Fund have enough resources to pay for it at all.   “This is a new phase of the crisis,” said Nicolas Veron, a senior fellow at Bruegel, a research organization in Brussels. “This is uncharted territory.”

    Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return" - Euphoria may have returned briefly courtesy of yet another promise for a resignation that will likely not be effectuated for weeks or months, if at all, and already someone has done the math on what the events in the past several days reveal for Italy. That someone is Barcalys, the math is not pretty, and the conclusion is that "Italy is now mathematically beyond point of no return."
    Summary from Barclays Capital inst sales:

    1) At this point, it seems Italy is now mathematically beyond point of no return
    2) While reforms are necessary, in and of itself not be enough to prevent crisis
    3) Reason? Simple math--growth and austerity not enough to offset cost of debt
    4) On our ests, yields above 5.5% is inflection point where game is over
    5) The danger:high rates reinforce stability concerns, leading to higher rates
    6) and deeper conviction of a self sustaining credit event and eventual default
    7) We think decisions at eurozone summit is step forward but EFSF not adequate
    8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
    9) Investors do not have the patience to wait for austerity, growth to work
    10) And rate of change in negatives not enuff to offset slow drip of positives
    11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
    12) At the moment ECB remains unwilling to be lender last resort on scale needed
    13) But frankly will have hand forced by market given massive systemic risk

    Italy Passes Point of No Return - My latest for the New Atlanticist, “Italy Too Big To Fail, Too Big to Save,” explores the fact that overnight, Italy has replaced Greece as the poster child for the Eurozone crisis. I’ve for some time been bemused that journalists and other informed observers are shocked as each new European country follows Greece in crisis. After all, the acronym PIGS has been around since the 1970s and PIIGS, adding Ireland, has been with us for years. It’s not only a useful mnemonic device, it’s a roadmap. Nonetheless, the rapid implosion in Italy has taken almost everyone by surprise. The yields on 10-year Italian bonds has topped 7 percent overnight “the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts.” Barclay’s Capital has proclaimed, “Italy is now mathematically beyond point of no return.” Their analysts Jeff Meli, Jigar Patel, and Justin Luther conclude, “While reforms are necessary, in and of itself will not be enough to prevent crisis,” adding, “Growth and austerity will not be enough to offset cost of debt.” They explain, ” on our estimates, yields above 5.5% is inflection point where game is over, with the danger being that high rates reinforce stability concerns, leading to higher rates, which sees a deeper conviction of a self sustaining credit event and eventual default.”

    Italy’s Woes Spell ‘Nightmare’ for BNP, Agricole - BNP Paribas SA and Credit Agricole SA (ACA), France’s largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk.  As the world’s biggest foreign holders of Italian public and private borrowings -- with $416.4 billion of such debt at the end of June -- French lenders face collateral damage from the political turmoil that sent Italy’s bond yields to euro-era records. Austerity measures to balance Italy’s budget are also threatening growth in an economy that has lagged behind the European average for more than a decade, and may hurt the French banks’ consumer businesses.  “Italy was a dream investment for French banks,” . “Nobody could have imagined a sovereign crisis touching a G-7 economy at that time. But the political deadlock is turning the dream into a nightmare.”

    Spanish Banks May See $83 Billion Losses, BBVA Research Says - Spanish banks may face more than 60 billion euros ($83 billion) of losses they haven’t covered with reserves as the economy risks tipping back into a recession, Banco Bilbao Vizcaya Argentaria SA’s research arm said. Banks should continue setting aside provisions to clean up their books, analysts led by Chief Economist Jorge Sicilia said in a report published today in Madrid. The risks of the European and Spanish economies slowing or returning to recessions have “considerably increased,” Spain’s second-largest bank said. Spanish banks have provisioned 105 billion euros since the collapse of the debt-fueled building boom in 2008 and have 176 billion euros of “troubled” holdings linked to real estate, according to the Bank of Spain. The Socialist government, which faces a general election this month that polls indicate it will lose, has increased capital requirements for banks and on Sept. 30 nationalized three lenders that failed to meet the new rules.

    Italian Exposure By Bank  - Previously we showed what the sovereign gross level exposure to Italy is. Now, it is time to get granular and show the data at a discrete level. Below are the banks most exposed to Italy. Don't forget that courtesy of our wonderful fractional reserve financial system, with everyone's asset being someone else's liability, the question then becomes who has most exposure to these banks, and then most exposure to banks that have exposure to these banks, and so forth.

    • Intesa €60.2 BN
    • UniCredit €49.1 BN,
    • Banca Monte €32.5 BN
    • BNP Paribas €28.0 BN
    • Dexia €15.8 BN
    • Banco Popolare €11.8 BN
    • Commerzbank €11.7 BN
    • Credit Agricole €10.8 BN
    • UBI €10.5 BN
    • HSBC €9.9 BN
    • Barclays €9.4 BN
    • SocGen €8.8 BN
    • Deutsche Bank €7.7 BN

    65% Chance of Banking Crisis by End November: Think Tank - There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks. Having tested a number of assumptions in a scenario modeling exercise, the Exclusive Analysis team warned it is becoming less and less likely that EU leaders will simply “muddle through” and have made some bold calls with clear timelines on when the euro zone will be thrown into a major financial crisis. The most likely outcome according to their analysis is a sudden crisis in which the US, UK and BRICs nations refuse to provide funding via the IMF for the euro zone. In a world where predictions are made with no time lines, the paper makes some bold predictions which can be held to account over the next three weeks. In the worst case scenario, Exclusive Analysis expects the governments of Greece and Portugal to collapse due to a lack of consensus on how to handle the debt crisis leading to social unrest. German opposition to handing more funds to the EFSF rises, leading Germany’s parliament to actually reduce the money available to the bailout fund.

    Banks Create New Rules to Show they are Already "Well Capitalized"; Magic Spreads at Lightning Speed - Regulators have said European banks need to come up with additional capital. The amounts vary from 8 to 413 billion Euros. Anything less than 200 billion Euros (the IMF's proposed number) is preposterous. Given the rout in Italian bonds today and the gloomy outlook for Spain and Portugal, even 400 billion Euros is far too low. One Trillion Euros would not be surprising.  The number that Merkel and Sarkozy hammered out with banks is a lousy 106 billion Euros. However, more stories are out today showing the intent of banks is to raise 0 billion in additional capital (because they don't need to!) For example, Bloomberg reports Financial Alchemy Foils Capital Rules as Banks Redefine Risk Banks in Europe are undercutting regulators' demands that they boost capital by declaring assets they hold less risky today than they were yesterday. Banco Santander SA, Spain's largest lender, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as “risk-weighted asset optimization,” allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

    The Italian Job - Michael Pettis liked my recent piece on vendor financing in the euro zone. The key point he wrote me – and which he reiterated just the other day – is that bad policies in “the surplus as well as in the deficit countries are at the root of the trade and capital inflow imbalances to which this crisis is the response” I agree with his contention that it is pointless to insist on adjustments only in the deficit countries.That said, Michael agreed, however, that the euro crisis is not just a liquidity crisis. The European Sovereign Debt Crisis is a solvency crisis too. Countries like Italy are simply not going to be able to grow their way out of the problem. Everyone is recognizing this now. Until Italy was at the heart of the crisis, we could all delude ourselves that this crisis could be met with crushing levels of austerity in the periphery, even if that forced the economies there into depression. If Spain’s debt woes and Germany’s intransigence lead to double dip, then Italy’s debt woes and Germany’s intransigence lead to a Depression (with a capital ‘D’). So, how the heck do we get out of this morass? My argument has been that with the central bank as a lender of last resort, solvency is meaningless for a government borrowing in a currency its central bank creates. In a nonconvertible floating exchange rate world, the adjustment mechanism is the exchange rate, not the interest rate.

    Want Berlusconi out? Be careful what you wish for - The media was aflutter Monday with the idea that Italian Prime Minister Silvio Berlusconi was on the verge of resigning. The tone of the reporting made it sound like, if such an event were come to pass, all of Europe’s problems would instantaneously disappear. Now I can appreciate the personal dislike for Berlusconi; after all, a man in his 70s and in his position of authority has no business partying with girls a third his age. But in the enthusiasm of seeing a rather egocentric and controversial leader flounder, the consequences of the fall of his government are being sometimes ignored and more often distorted. If Berlusconi resigns, the consensus seems to be that a “technical government” can step in, implement the reforms required by the European Union and reverse the growing credit crunch affecting Italian bonds. This is, in my humble opinion, complete and utter nonsense. After 10 years out of office, the opposition bloc will do its darn best to regain power through snap elections. And if the center-left were to win, their agenda would consist of the only thing they have known since 1945: increasing taxes on the rich and redistributing the money for their own benefit. There is nothing further from the mind-set of Berlusconi’s opponents than the concept of fiscal restraint. Italy soon to adopt reforms promised to EU, president says… Italian President Giorgio Napolitano said Wednesday that his country will adopt a series of austerity measures promised to the European Union, as officials try to allay investor fears and head off a eurozone debt crisis. Silvio Berlusconi, the embattled Italian premier who has offered his resignation, is expected to step down shortly after the measures are approved. Either an interim government will be formed or elections called, the president said, after the Italian parliament passes reforms meant to address the country's long-term fiscal health and its broader affect on global markets. Italian authorities say that if officials opt for elections, they would take place in January and likely result in a new government by February, at the earliest. The prime minister would typically remain in office until a transition takes place, though mounting market fears have raised questions about whether lawmakers might take swifter action.

    Why Italian fiscal austerity won’t work - Not now, at least.  In the short run, what the country needs is more revenue, relative to expenditure.  If you cut the government expenditures, in the short run revenues go down, including tax revenues.  Maybe you substitute in some private sector outputs for public sector outputs and furthermore maybe those private sector outputs bring higher utility to the citizenry.  But they don’t bring higher revenue, not in the short run. The financial crisis, now exacerbated by a revenue shortage, destroys the economy before the potential gains from the expenditure-switching have a chance to kick in.  Furthermore, if the broader economy is dysfunctional, the gains from expenditure-switching to the private sector may not show up even in the medium run.  Growth-enhancing reforms can take many years to pay off, as we see from the histories of New Zealand, Chile, or the ex-communist countries.  Yet even the Italian two-year note shows default risk, yielding twice as much or more as the American 30-year bond. That said, more government spending probably won’t work either, unless you think that spending is extremely effective in targeting unemployed resources, which in Italy I believe it is not.  Neither contractionary nor expansionary fiscal policy will succeed. The only answer, if that is the right word, is a central bank. 

    Has Austerity Brought a Boom in the UK? - Or Generalissimo Francisco Franco redux. In "UK: Economic growth, double-dips and the PMI," (G. Buckley, Deutsche Bank, Nov. 4, 2011, not online): UK GDP grew by 0.5% qoq in Q3, but the position the economy is in is now officially worse than it was in the aftermath of the Great Depression. Add to this the weakening in the composite PMI survey for October (particularly the manufacturing report), also published this week, and escalating risks for a sharper euro area recession, and the stage possibly looks set for a much bleaker picture by the end of this year/start of 2012. With regards the UK PMI, if the composite index remains at its October level of just above 50 during the remainder of the fourth quarter then that would be consistent with only very modest GDP growth of around 0.1% qoq. However, the risks seem tilted to the downside with our forecast for a technical recession in Europe highlighting the possibility that we see the same in the UK. Here is the key graph:

    The Road to Serfdom - The markets are again in free-fall and, once again, a lazy Mediterranean profligate is to blame. This time, it’s an Italian, rather than a Greek. No, not Silvio Berlusconi, but his fellow countryman, Mario Draghi, the new head of the increasingly spineless European Central Bank. At least the Alice in Wonderland quality of the markets has finally dissipated. It was extraordinary to observe the euphoric reaction to the formation of the European Financial Stability Forum a few weeks ago, along with the “voluntary” 50% haircut on Greek debt (which has turned out to be as ‘voluntary’ as a bank teller opening up a vault and surrendering money to someone sticking a gun in his/her face). To anybody with a modicum of understanding of modern money, it was obvious that the CDO like scam created via the EFSF would never end well and that the absence of a substantive role for the European Central Bank would prove to be its undoing. As far as the haircuts went, the façade of voluntarism had to be maintained in order to avoid triggering a series of credit default swaps written on Greek debt, which again highlights the feckless quality of our global regulators being hoisted on their own petard, given their reluctance to eliminate these Frankenstein-like financial innovations in the aftermath of the 2008 disaster.

    Ambrose Evans-Pritchard: The biggest bankruptcy in history cannot be allowed to run its course - AS we watch Italy's 10-year bond yields smash through 7.3pc and threaten to detonate the explosive charge on €1.9 trillion of debt, it is time for the world to reimpose order. You cannot allow the biggest bankruptcy in history to run its course – with calamitous domino implications – before all options have been exhausted. One can only guess what is happening in the great global centres of power, but it would not surprise me if US President Barack Obama and China's Hu Jintao start to intervene very soon, in unison and with massive diplomatic force. One can imagine joint telephone calls to Chancellor Angela Merkel more or less ordering her country to face up to the implications of the monetary union that Germany itself created and ran (badly). Yes, this means mobilizing the full-firepower of the ECB – with a pledge to change EU Treaty law and the bank's mandate – and perhaps some form of quantum leap towards a fiscal and debt union. Germany will of course try to say no. But it will pay a catastrophic diplomatic and political price, and will fail to save its economy anyway if it does so.

    France set for zero growth in last quarter: central bank - "Gross domestic product will be stable in the fourth quarter of 2011," the bank said in its monthly business climate report for October. The central bank said industrial activity had "remained stable" in October and that service providers were reporting slower activity. The sentiment indicator for industry had fallen in October to 96 from 97 while for the service sector it fell to 95 from 96, the central bank said. The central bank had forecast a 0.1-percent increase in French economic activity in the third quarter. Official figures are due on Tuesday. Concern over the French economy and its exposure to the eurozone's ballooning debt crisis saw the government recently slash its 2012 growth forecast from 1.75 percent to 1.0 percent. The government on Monday unveiled a 65 billion euro ($89 billion) programme of budget cuts and tax hikes, including 18.6 billion euros in savings over the next two years, with the goal of eliminating the country's budget deficit by 2016.

    IMF’s Lagarde Warns of Risk of ‘Lost Decade’ - International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth. “In our increasingly interconnected world, no country or region can go it alone,” Lagarde said in a speech to a forum in Beijing today. “There are dark clouds gathering in the global economy.” China and India echoed the call for cooperation in a separate statement. Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said. European leaders are looking to China as a potential source of funds as a sovereign-debt crisis threatens to engulf Italy, the third-biggest economy in the euro area.

    IMF May Need $300 Billion To Shore Up Europe, Kremlin Aide Says - The International Monetary Fund may need some $300 billion to boost its resources for fighting Europe's sovereign debt crisis, a top Kremlin economic aide said Wednesday. "The number being discussed was around $300 billion, which the IMF would need if a negative trend appeared," said Arkady Dvorkovich, the chief economic aide of President Dmitry Medvedev and Russia's sherpa at meetings of the Group of 20 nations, which last took place on Nov 3-4 in France. That meeting garnered verbal support--but no new money--for the euro zone, with countries like Russia and China saying they needed further detail on Europe's bailout vehicle before investing.

    Eurozone ministers fail to create €1 trillion bail-out fund… Eurozone finance ministers have failed to sanction measures to create the bloc's crucial €1 trillion bail-out fund – despite warnings that Europe is dangerously ill-equipped to cope with the financial and economic crisis enveloping Italy.  Despite publishing a more detailed mandate following a summit in Brussels, the Eurogroup delayed agreeing specifics on how to leverage the €440bn European Financial Stability Facility (EFSF), risking further market turmoil ahead of votes on Tuesday that could topple Silvio Berlusconi's government.  The EFSF also pushed ahead with a 10-year bond auction which it had put off from last week because of lack of demand. The fund, which is supposed to be the eurozone's key weapon against the debt crisis, managed to raise €3bn but only after having to pay record returns to entice investors.  Joachim Fels of Morgan Stanley said: "The leveraged EFSF may still turn into a bazooka but so far it looks more like a water pistol."

    Is Europe on the Verge of a Depression, or a Great Inflation? - Simon Johnson - The news from Europe, particularly from within the euro zone, seems all bad. Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events. And the lack of leadership from Germany and France is palpable. In addition, the pessimists argue, because the troubled countries are locked into the euro, no good options are available. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade. This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence default and global financial chaos seem likely. According to the September 2011 edition of the Fiscal Monitor of the International Monetary Fund, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (see Statistical Table 9), on Page 72). The equivalent number for Greece is 57.4 percent, while for Portugal it is 60.5 percent. And if you want to get really negative and think the problems could spread from Italy to France, keep in mind that 62.5 percent of French government debt is held by nonresidents. If Europe has a serious meltdown of sovereign debt values, there is no way that the problems will be confined just to that continent.

    This Is The Way The Euro Ends - Krugman - This is the way the euro ends. Not with a bang but with bunga-bunga. Seriously, with Italian 10-years now well above 7 percent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable: A eurozone built on one-sided deflationary adjustment will fail. That seems certain. If the leaders of the eurozone insist on that policy, they will have to accept the result. Every even halfway plausible route to euro salvation now depends on a radical change in policy by the European Central Bank. Yet as John Quiggin says in today’s Times, the ECB has instead been part of the problem. I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind. I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what’s needed to avoid that failure. Irresistible force, meet immovable object — and watch the explosion.

    Plan B for Europe: Do Not Stare Into the Abyss - Everyone is running out of hope regarding a solution for the economic problems in Europe. A change in government in Greece, the possibility of Berlusconi stepping down are not enough to bring confidence to markets or the public. In the Econ Blogosphere we only see increasing pessimism: Mark Thoma, Barry Eichengreen, Paul Krugman, and many others. Tim Duy makes the point that so far stock markets, in particular, Wall Street is ignoring the risks that are building in Europe. He believes that today Europe is unable to see the abyss ahead of them and Wall Street is ignoring the problem assuming that it will not hit the US. In 2007 we had built a set of imbalances on asset prices, in particular housing prices... While some did not want to see the abyss, those who saw it were looking into a fall in asset prices, financial disruption and a sharp fall in economic activity. ... But here is where the 2011 abyss looks very different from the 2007 one: this time the crisis is much more linked to confidence. In 2007 the adjustment in asset prices was unavoidable. Today, we debate about whether the Italian government or the Spanish government are solvent and the answer is much less clear.

    French, Germans explore idea of smaller euro zone -- German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources say. “France and Germany have had intense consultations on this issue over the last months, at all levels,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions. “We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part,” the official said. French President Nicolas Sarkozy gave some flavour of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future. The discussions among senior policymakers in Paris, Berlin and Brussels raised the possibility of one or more countries leaving the euro zone while the remaining core pushes on towards deeper economic integration, including on tax and fiscal policy.

    The euro breakup thrill ride begins - It’s important not to read too much into today’s mid-afternoon stock-market wobble. But in the wake of the news that Germany and France have been talking for months about creating a “core” euro zone with real fiscal union, markets sure as hell didn’t go up. And one anonymous diplomat gave a succinct explanation of why. This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years,” one EU diplomat told Reuters. “This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it.” I’ll go out on a limb here and guess that the diplomat in question isn’t German. But whoever it is, they have a point. There is no way that the European periphery will go quietly, resigned to their second-tier fate and their third-tier currencies. And without their consent, this idea is going to get very messy, very quickly. Even if it never happens, simply debating it could suffice to cause enough intra-European mistrust and vitriol that the markets simply cease lending to all but the very safest borrowers. And the ECB can’t lend to everybody.

    Europe: rise of the calculating machine - Stand by for the rise of the technocrats. Apparently, the answer to the huge problems of the eurozone is the replacement of elected premiers with economic experts – approved officials dropped from European institutions. In Greece, Lucas Papademos, a former vice-president of the European Central Bank, has been pushed hard for the job; in Italy, Mario Monti, another economist and a former EU Commissioner, is much mentioned. They may lack a democratic mandate but they’re fantastically well regarded in Frankfurt. It remains to be seen if either will clinch the role. But what exactly is the great attraction of technocrats?  If ever modern Europe needed brave, charismatic leaders to carry their nation through turbulent times, it would seem to be now. Instead, it is as if the crew of the Starship Enterprise had concluded that Captain Jean-Luc Picard is no longer the man for the job and that it is time to send for the Borg. Efficient, calculating machines driving through unpopular measures across the eurozone with the battle cry “resistance is futile” are apparently the order of the day. Faced with a deep crisis, once-proud European nations are essentially preparing to hand over power to Ernst & Young.

    It’s a Bird! It’s a Plane! It’s…. Technocratic Government! - The sky is falling! The Euro is collapsing! What can we do? Look, up in the sky: it’s a bird! it’s a plane, it’s….TECHNOCRATIC GOVERNMENT! Destined to save small and large European governments alike, the sudden appearance of technocratic government as a deus ex machnia is probably raising a similar thoughts in most (especially American) people’s head: just what is a technocratic government? Here at The Monkey Cage, that means it is time for another round of Q&A (although this time I’ll do both the Q and the A): Q (me): Ok, so what’s a technocratic government? A (me): Technically (no pun intended), a technocratic government is one in which the ministers (or what we call “Secretaries” in the United States) are not career politicians; in fact, in some cases they may not even be members of political parties at all. They are instead supposed to be “experts” in the fields of their respective ministries. So the classic example is that the Finance Minister (or Treasury Secretary in the US) would be someone with an academic background in economics who had worked for years at the IMF, but has not previously run for elective office or been heavily involved in election campaigns.

    Crat Me No Techno, Continued - Krugman - Henry Farrell links approvingly to an FT column criticizing the latest trend in euro wishful thinking, the installation of “technocrats” supposedly above politics to rule troubled nations: If ever modern Europe needed brave, charismatic leaders to carry their nation through turbulent times, it would seem to be now. Instead, it is as if the crew of the Starship Enterprise had concluded that Captain Jean-Luc Picard is no longer the man for the job and that it is time to send for the Borg. Efficient, calculating machines driving through unpopular measures across the eurozone with the battle cry “resistance is futile” are apparently the order of the day. Faced with a deep crisis, once-proud European nations are essentially preparing to hand over power to Ernst & Young. But actually it’s worse than that. As I’ve tried to point out in the past, the trouble with the alleged technocrats we’re supposed to rely on isn’t just that they’re uninspiring — it is that they have been wrong about everything, again and again. Actually, not just that; on both sides of the Atlantic, but arguably even more so in Europe, the “technocrats” have consistently ignored their own economic models in favor of what amount to political prejudices, calling for fiscal austerity and higher interest rates when their own analyses say that unemployment will be high and inflation subdued.

    Euro Crisis’s Enabler: The Central Bank - THE escalating debt crisis in Europe has claimed the political career of one prime minister, George A. Papandreou of Greece, and threatened that of another, Silvio Berlusconi of Italy. Despite popular resistance, governments are racing to stay ahead of the bond markets by slashing their budgets. The drama of meetings, proposals, counterproposals and popular unrest seems destined to end in tragedy.  But the theatrical atmosphere of these negotiations within the European Union has overshadowed an event that may prove to be far more significant in the long run than the Greek referendum. It has also sustained a narrative about the sovereign debt crisis that is deeply misleading. According to this narrative, the crisis shows the impossibility of managing a common macroeconomic policy in a system where decisions require the agreement of 27 member states, including the 17 that share the common currency, and a vastly diverse Continent with different countries that face different growth and consumption patterns and have different business cycles.  These are real problems. But they are not the reason for the systemic failure of the European financial system. Overwhelmingly, this failure has been caused by the policy choices of one of the few European institutions that has the capacity to act unilaterally and decisively: the European Central Bank.

    Catching a falling knife - MANY observers—my colleague included—are pulling their hair out in frustration over the ECB's reluctance to guarantee Italian and Spanish debt. In theory, the ECB could short circuit the rising yields/insolvency feedback loop by promising to buy Italian and Spanish bonds, thereby giving those countries breathing space to enact their fiscal consolidation plans. The ECB might not even need to spend money; a credible commitment could convince the bond market that resistance is futile, driving down yields on its own. Or so the argument goes. I'm sceptical. The expectations game only works if you can make a credible promise. But the ECB’s limited bond buying has already generated tremendous dissent, and a more aggressive backstop would face even greater internal resistance, political opposition and legal challenges. What would happen if the ECB backed Italian debt but the country showed no sign of realigning its finances? Would investors blink first in a test of wills? I doubt it—investors will expect Germany to put the breaks on a full-fledged debt guarantee at some point. The difference between the ECB and the Bank of England or the Fed isn’t just a matter of official mandates; unlike the ECB, the latter represent a cohesive democratic polity, with sufficient social and political unity necessary to sustain a lender-of-last-resort commitment.

    The crisis in the eurozone - The eurozone crisis is a bank crisis posing as a series of national debt crises and complicated by  reactionary economic ideas, a defective financial architecture and a toxic political environment, especially in Germany, in France, in Italy and in Greece. Like our own, the European banking crisis is the product of over-lending to weak borrowers, including for housing in Spain, commercial real estate in Ireland and the public sector (partly for infrastructure) in Greece.  The European banks leveraged up to buy toxic American mortgages and when those collapsed they started dumping their weak sovereign bonds to buy strong ones, driving up yields and eventually forcing the whole European periphery into crisis. Greece was merely the first domino in the line. In all such crises the banks’ first defense is to plead surprise – “no one could have known!” – and to blame their clients for recklessness and cheating.  This is true but it obscures the fact that the bankers pushed the loans very hard while the fees were fat.  The defense works better in Europe than in the U.S. because national boundaries separate creditors from debtors, binding the political leaders in German and France to their bankers and fostering a narrative of national-racism  (“lazy Greeks,” “feckless Italians”) whose equivalent in post-civil rights America has been largely suppressed.

    Italy's crisis: Endgame for the euro? - You know the old saying: It ain't over until the fat lady sings. Well, in the case of the euro zone debt crisis, that lady is Italy, she's plump enough to cause quite a bit of trouble, and the orchestra looks to be tuning up. We're in the middle of yet another global financial rout, with stocks plunging around the globe, the sort of panic we've witnessed with sickening regularity in recent months. And as usual, Europe sits at ground zero. Italian government bonds got hammered on Wednesday, smashing through the important 7% level to a new euro-era high. Once Italy's fellow PIIGS – Greece, Portugal and Ireland – broke through the 7% level, their borrowing costs escalated, eventually forcing them to seek European Union bailouts. Italy's plight completely alters the situation in Europe, from a potentially manageable crisis to a potentially unmanageable crisis. Let's put in perspective what's happening here. Italy is not some half-baked emerging market or even a small, developed-world basket case like Greece. Italy is Europe's fourth-largest economy; its bond market is the world's third largest. And in a matter of no time, the liquidity in that market is drying up. And what's scary here is that there may not be any way to rescue Italy if this spiral continues.

    Endgame Approaching -  Wall Street is again taking Europe seriously, at least for the moment. Today was unpleasant. The most important news of the day is that Germany and France are planning for a new Europe. From Reuters:Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin. She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected -- a signal that some members may have to quit the euro. "It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive." For the Eurozone to work, there needs to be greater fiscal integration. But Germany and France do not see a place for Greece and likely Italy, possibly Spain and Portugal as well, in such a fiscal union. And, in all honesty, it is hard to find fault with such a conclusion. The clearly dysfunctional behavior of the Italian and Greek governments has made it all but impossible to erect a firewall around the crisis at this point.

    Marc Faber: They Can Postpone the Endgame For Five or Ten Years - Economist, global trend analyst and well know Doctor of Doom, Marc Faber, suggests that with so many monetary, fiscal and political variables at play, the end game of this crisis can be delayed for months or years to come. Faber, who has warned since before the 2008 crisis that entire nations would fail due to high debt levels, that hyperinflation is an inevitable outcome of the Fed’s accounting games, and that war will be the ultimate result, shares his views on CNBC: [Video Interview Below] I don’t know what other people think, but what I think will happen eventually – and there are so many contradictory statements coming out that nobody really knows – but eventually the same will happen as in the United States. The ECB (European Central Bank) will print money one way or the other. And, the debts that essentially should be written down to realistic value will continue to be carried on the books of banks at unrealistic values. So, the end crisis will be postponed until the sovereigns go bankrupt. Before they go bankrupt they’ll print money. They’ll print endless money. As long as we have Ben Bernanke and Janet Yellin at the Fed they’ll print money and so they can postpone the end game endlessly…Endlessly not, but say for another five to ten years.

    Market volatility limits EFSF firepower - This week’s market upheaval in Europe has made it difficult to increase the firepower of the eurozone’s €440bn rescue fund to the €1,000bn that the bloc’s leaders had hoped for, the fund’s chief executive said on Thursday. Investors have fled from bonds issued by highly indebted countries. Luring them back by offering insurance on losses – the centrepiece of a plan agreed in Brussels on October 26 – would now probably use up more of the fund’s resources, Klaus Regling, head of the European financial stability facility, said. His concerns underline Europe’s difficulties in putting in place mechanisms to contain the sovereign debt crisis and, if necessary, help Italy cope with soaring refinancing costs. “The political turmoil that we saw in the last 10 days probably reduces the potential for leverage,” Mr Regling told reporters. “It was always ambitious to have that number, but I’m not ruling it out.” The European Commission sharply downgraded its forecast for eurozone growth next year from 1.8 per cent to 0.5 per cent. The global ramifications of Europe’s economic woes became clearer with the growth in China’s exports to the EU slowing in October and a sell-off in Asian equities markets. The loss-guarantee programme aims to leverage the €250bn ($340bn) remaining in the EFSF to cover more than four to five times the value of bonds than if the fund purchased the bonds outright.

    Original Original Sin - Krugman - Giancarlo Corsetti reminds me that he made the point that the euro did nothing to correct the problem of original sin — borrowing in someone else’s currency — last year. He was completely right. In yesterday’s post I was making a related but even more downbeat point: the euro imposed original sin on countries that were previously innocent, that used to borrow in their own currency. Italy in the 1990s, whatever else its flaws, retained the ability to bail itself out through the printing press; Italy now does not.The sad irony here is that the euro is, in reality, essentially an Italian creation. If you were part of the dialogue in the late 80s and early 90s, it became clear that the euro was best understood as a plot by Italian technocrats to get themselves German central bankers. This was not, it turns out, a good idea.

    Europe’s Darkness at Noon - Eichengreen - It may be hard to imagine that Europe’s crisis could worsen, but it just has. European Union leaders failed at their summit two weeks ago to produce anything of substance. China and Brazil are clearly reluctant to come to the rescue by providing a large injection of foreign cash. And the recent G-20 summit in Cannes produced no agreement on steps that might have helped to resolve the crisis. Now there is the collapse of the Greek government. The trigger may have been outgoing Prime Minister George Papandreou’s ill-advised decision to call for a referendum on the EU’s rescue package (which implies further severe austerity measures); but the fundamental problem is that a brutal recession made the government’s demise all but inevitable. The formation of a new national unity government does not mean that the Greek problem is behind Europe or the world. On the contrary, the new government’s position will be no more tenable than that of its predecessor. Until there is hope, however remote, that Greece can begin to grow again, the problem will not go away.

    Europe’s Next Nightmare - – As if the economic ramifications of a full-blown Greek default were not terrifying enough, the political consequences could be far worse. A chaotic eurozone breakup would cause irreparable damage to the European integration project, the central pillar of Europe’s political stability since World War II. It would destabilize not only the highly-indebted European periphery, but also core countries like France and Germany, which have been the architects of that project. The nightmare scenario would also be a 1930’s-style victory for political extremism. Fascism, Nazism, and communism were children of a backlash against globalization that had been building since the end of the nineteenth century, feeding on the anxieties of groups that felt disenfranchised and threatened by expanding market forces and cosmopolitan elites. Free trade and the gold standard had required downplaying domestic priorities such as social reform, nation-building, and cultural reassertion. Economic crisis and the failure of international cooperation undermined not only globalization, but also the elites that upheld the existing order.

    The Euro Crisis Has Turned Us Into Wile E. Coyote: We’ve Run Off A Cliff, Legs Spinning - We’re busy at work just now, busy in a good way; project plans hatched years ago are coming to fruition, and we should be approaching 2012 with a sort of prepared determination, one that would make all the work worthwhile.  And yet, given the news pumped over the Channel, from whence ineffectual heads of government meeting follows unbelievable euro rescue plan on a near-hourly basis, it’s hard to shake the suspicion that all economic activity – not just what we’re doing in our own office – is pointless.  I shared this nagging worry with a friend: that I feel growing paralysis through an overwhelming sense of contingency, on the fact that my – our – future is dependent on the historical actions of banks over which, apparently, we had no control; on the current plans of – God help us – Nicolas Sarkozy; and on the outcome of a Greek referendum (cancelled at the time of writing – but who knows what the day will bring?).

    “The party is over” - Whether it was a realization that Italian politics are sclerotic regardless who the PM is or LCH Clearnet raising margin requirements for those trading all Italian government bonds, Italian yields are spiking. The moment of truth for Italy is now here with their yields 2 yrs and out firmly above 7%. As the WSJ reported today, a board member of Enel, the major Italian oil company, said it best, “It’s time to tell the truth to Italians. No.1: The party is over.” The party he’s referring to is the current Italian welfare state as the same parties are getting shut down in other countries. The bright side of this is the bond market is forcing change that can no longer be ignored. Italy is a big, wealthy country and it is in their power to liberate their economy and cut spending. In China, Oct CPI rose 5.5% y/o/y, in line with expectations but at the slowest pace in 5 months. PPI rose 5%, below the estimate of 5.8%. Both Retail Sales and IP rose solidly but slightly below the forecasts. In the US, refi’s rose 12.1% in response to a further drop in mortgage rates to 4.22%. Purchases rose for a 3rd week to a 3 month high by 4.8%.

    Is this how the euro ends? - Here’s how it was supposed to go: Greece first. Then, perhaps, Portugal and Ireland. If things got really bad, Spain. If the world -- or, more precisely, the euro -- was coming to an end, Italy. It was not supposed to go Greece and then Italy. No one was prepared for that. The markets weren’t prepared for that.  The problem, put simply, is that Italy is both too big to fail and too big to save. It’s the eighth-largest economy in the world. At $2 trillion, it’s about seven times as large as Greece’s $300 billion economy. France and Germany’s banks alone have $600 billion in exposure to Italian debt. But Barclay’s says Italy is “now mathematically beyond the point of no return.” Silvio Berlusconi might be out, but changing governments does not change arithmetic. And so the question is simple, and stark: If there wasn’t the will to really save Greece, where would the will -- and the money -- come from to save Italy? . Market participants and commentators are increasingly thinking the unthinkable: Perhaps this really is the end of the euro. “If policymakers had understood two decades ago what they know now,” writes Martin Wolf in the Financial Times, “they would never have launched the single currency. Only fear of the consequences of a break-up is now keeping it together. The question is whether that will be enough. I suspect the answer is, no.”

    Incestuous Amplification, European Style - Krugman - Brad DeLong sends us to a piece by Nouriel Roubini from almost six years ago, describing how Giulio Tremonti, Italy’s economy minister, threw a hissy fit when Roubini suggested that Italy might have problems with its euro membership. And no, I’m not being unfair — read Roubini’s piece. It was quite something. What I would say is that this incident exemplified something that was going on all along the march to the eurodebacle. Serious discussion of the risks and possible downsides was simply not allowed. If you were an independent economist expressing even mild concerns about the project, you were labeled as an enemy and shut out of the discussion. In a way, the remarkable thing is that it took until now for disaster to strike.

    Original Sin And The Euro Crisis - One question that keeps coming up is, how can I reconcile my scorn for warnings about bond vigilantes with what is happening to Italy? This seems especially pointed because I have in the past used Italy’s ability to carry debt exceeding its GDP as an illustration that debt concerns were overblown. The answer lies in the concept of original sin. Not the Pope’s kind, but the economics kind — the long-standing notion that developing countries were especially vulnerable to financial crises because they borrowed in foreign currency. (Yes, the linked paper actually raises some distinctions between currency mismatch and original sin; never mind for now). The key point is that by joining the euro, Italy took a bite of the apple — it converted its advanced-country status, as a nation issuing debt in its own currency, into original sin, with debts in someone else’s currency (Europe’s in principle, Germany’s in practice). That is the root of its new vulnerability.

    The Italy Factor Gets Ugly - Is the euro Toast? Maybe not, but if you thought the currency was under pressure before, well, you ain't seen nothin' yet. The immediate issue is that the Italian problem has forced the European Central Bank into a put-up or shut-up moment. Bloomberg explains: Italy is forcing Europe to choose between increased bond buying by the European Central Bank or a possible breakup of the euro. Italian 10-year yields have breached the 7 percent level that locked Greece, Portugal and Ireland out of the capital markets and forced them to seek aid. With debt of 1.9 trillion euros ($2.6 trillion), more than those three countries combined, Italy has to refinance about 200 billion euros of maturing bonds next year and more than 100 billion euros of bills. With so much uncertainty amid higher stakes, it's no wonder that Italy's government bond yields are rising, jumping north of 7%. The cost of financing Italy's debt burden is soaring, and eventually those chickens will come home to roost. By comparison, the 10-year Treasury Note yields around 2%. That's a hell of a spread for one of the planet's largest economies. The next phase of the euro crisis is underway as Italy, Europe's third-largest economy, struggles to pull itself out of a political/fiscal crisis. The euro will almost certainly survive, but it's not going to be the same currency in the future.

    How it could happen; why it would be horrible - THE bond-market run on Italy has increased the chances of an eventual break-up of the euro, even if no one can be sure what the precise odds now are. If Italy is unable to finance itself at reasonable rates, and the resources of the rest of the euro zone cannot (in the case of the EFSF, the bloc's rescue fund) or will not (in the case of the ECB) stretch to a bail-out of such a big, indebted sovereign, then one of the attractions of euro membership (ie, low interest rates) is gone. That weakens the argument for staying in. If default is forced upon Italy, goes the argument, why would it not go the whole hog and create a new domestic currency? That way, at least, Italy could write down its wages, prices and private debts at the same time as its public debts. All such contracts could be redenominated in a new lira, at a one-for-one exchange rate with the euro. The currrency would then "float" (ie, sink) to a discount to the departed euro on foreign-exchange markets. The size of that effective devaluation would measure the magnitude of Italy's default against its euro creditors. And the deeper cause of Italy's economic malaise, its chronic lack of cost competitiveness, would also then be addressed. A cheap new lira might even make Italian industry vibrant again.

    What is holding Italy back? - Italy’s economy has clearly underperformed since it entered the euro – both relative to its peers and relative to the previous decade. Italy’s growth rate averaged just over 1% during the boom years preceding the crisis. During the crisis, its GDP plunged 5%; instead of rebounding, its economy is now growing at only about 1%. At this rate, Italy’s public debt, at 120% of GDP, becomes an existential threat to the entire Eurozone (Eichengreen 2011). Understanding and curing Italy’s growth problems is thus vital for the survival of the euro.  As Italy’s debt crisis enters the danger zone the question arises: Can Italy ever overcome its decade-old growth slump? This column shows that Italy’s growth fundamentals are all in pretty good shape, except one - good governance. Worldwide Governance Indicators show a dramatic worsening during the Berlusconi governments especially when it comes to the rule of law, government effectiveness, and control of corruption. Progress on improving these might in the end be more important for growth than the reforms the EU demands.

    Italy’s Senate Speeds Austerity Vote - Italy’s Senate rushed to pass debt- reduction measures that clear the way for establishing a new government that may be led by former European Union Competition Commissioner Mario Monti in a bid to restore confidence in Europe’s second-biggest debtor.  The Senate is set to vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies may vote the following day, and Prime MinisterSilvio Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned Rai television last night.  President Giorgio Napolitano named Monti yesterday as a Senator for Life, an honorary position that allows him to vote in the upper house of parliament. Alfano, when asked if Monti would lead the government, said Berlusconi had backed his Senate appointment and had first named Monti as an EU commissioner in 1994. Monti may be nominated as soon as Nov. 13, newspaper Il Sole 24 Ore reported. Former Prime Minister Giuliano Amato may also be in the government, Sole said, citing no one

    European Debt Crisis as Berlusconi’s Last Stand - The European debt crisis1 appeared to claim its most prominent victim on Tuesday when Prime Minister Silvio Berlusconi2 of Italy3, cornered by world markets and humiliated by a parliamentary setback, pledged to resign after Italy’s Parliament passes austerity measures demanded by the European Union. In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts. After Mr. Berlusconi’s pledge to resign, stocks rallied in New York on hopes that political change would help pave the way for an easing of the European debt crisis. But Europe’s markets fell Wednesday for the third straight day in early trading. 

    A Shaken Italy Is Poised to Name a New Government - Italy pulled back from the brink on Thursday, as lawmakers seemed poised to usher out Prime Minister Silvio Berlusconi and replace his government with a cabinet of technocrats most likely led by a former European Commissioner, Mario Monti. A day after Italian bond yields hit 7.4 percent, raising fears of an Italian default that could tear apart the euro zone and threaten the global economy, market pressure on Italy eased as it became apparent there was a break in the political impasse over the post-Berlusconi era. The once-unstoppable Mr. Berlusconi had pledged to step down as soon as the Italian Parliament passed austerity measures demanded by the European Union. But until Thursday the timetable was unclear, and it seemed that Mr. Berlusconi was hoping to buy himself more time in power. But now, with the Senate expected to approve the measures on Friday and the Lower House on Saturday, Mr. Berlusconi is expected to step down by Monday.  Asked what had sped up the process, Stefano Micossi, an economist and the director of Assonime, an Italian business research group, put it simply: “The view of the precipice.”

    Italian Senate Approves Budget Bill - The Italian Senate approved a package of growth-boosting measures on Friday that are likely to pave the way for the appointment of an interim government charged with restoring investor confidence in the euro zone's third-largest economy. The measures, which aim to loosen local authorities' control over public-service contracts and liberalize professions, are part of Italy's efforts to recalibrate its strategy for removing Italy from the center of the euro zone's sovereign-debt crisis.  The speed of the cabinet meetings suggests Mr. Berlusconi is collaborating with the national plan, backed by the head of state, to try to install a new emergency government before markets open on Monday.

    It's not about Berlusconi - ASK any pundit why Italy is in crisis and they will mention some combination of Silvio Berlusconi, a towering national debt, and a moribund economy. The explanation resonates since all three have undeniably been enormous negatives for Italy. Today's market action seems to vindicate the reasoning: with the prospect of a new government under Mario Monti and speedy implementation of a new budget, Italian bond yields have plummeted below 7%, and stocks around the world have rallied.But these factors are not the root cause of the crisis and as long as Europeans behave as if they are, a resolution will elude them. Italy has been burdened by Mr Berlusconi, a large national debt and a moribund economy for most of the last decade. As Daniel Gros points out, some of Italy’s key fundamentals—investment, R&D, educational attainment—have actually improved relative to Germany in that time. Yes, its debt remains a problem but, unlike Greece, it did not suddenly spiral out of control and was not, as far as we know, systematically underreported. As recently as 2009 Italy’s debt was 97% of GDP (it’s 100% now) and its deficit was 5% (compared to 4% this year, according to the IMF). Yet that year Italy could borrow at 4%, not much more than Germany, whereas now it must borrow at 6%-7%, triple what Germany pays.

    Finally, Berlusconi’s Departing — But That Won’t Help the Eurocrisis Unless Austerity Plans Exit, Too - What exactly is the eurozone crisis? Is it a financial crisis? An economic crisis? Actually, it’s a growth crisis. And as such, it must have growth solutions. Instead we are being bombarded every day with theatrical new developments (Papandreou’s referendum, Berlusconi’s wavering on reform and elections) that would make us think that it is all the fault of some corrupt and/or lazy politicians. Or the result of Europeans, and their governments, refusing to live within their means. The solution, we are told, is better politicians and belt-tightening. We are told, for example, that Italy’s enormous debt (118% of GDP), has caused the “markets” to doubt the country’s ability to pay it back, causing the interest it pays on its bonds (the way it funds its debt) to rise to an unsustainable level (7% on November 9th). That rate, we hear, brings Italy to the ‘tipping point’ of default, and will cause it to exit the euro. Pundits claim that in order to “save” Italy, almost all the funds in the European Financial Stability Facility (EFSF) would need to be used (1 trillion euros). That figure is so big that it is deemed not only “too big to fail,” but also ‘”too big to bail out.”

    "Sold To You": European Banks Quietly Dumping €300 Billion In Italian Debt - While the market is ripping today on absolutely nothing (earlier we noted the rotation of muppet X with muppet Y - this changes nothing but who cares), BTPs are soaring, and confusion is prevalent, one thing is certain: we now know who is not buying Italian bonds. As IFR reports, "European banks are planning to dump more of the €300bn they own in Italian government debt, as they seek to pre-empt a worsening of the region’s debt crisis and avoid crippling writedowns – a move that could scupper the European Central Bank’s efforts to bring down soaring yields. Still reeling from heavy losses on money they lent to Greece, lenders are keen not to make the same mistake twice.Then, under the pressure of governments and a hope that credit default swaps would protect them against heavy losses, they held on until it was too late to sell." And for our European readers who may be wondering who the dumb money will be as this tsellnami unleashes, we have one word: you. "With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some of Europe’s largest bank say now is the time to accelerate disposals. Many are also reversing long-standing policies of buying into new Italian bond issues, denying Rome an important base of support." And there you have your explanation for today's action - yet another headfake to get the idiot money foaming at the mouths while the insolvent banks quietly dump everything, sending the EURUSD once again higher as EUR repatriation resumes, this time with feeling.

    On the Brussels’ Agreement: Europe’s Reverse Alchemy in full throttle - While Greece is insignificant, the eurozone, lest we forget, is the globe’s largest economy; a block that accounts for China’s single largest slice of exports, for one fifth of America’s exports, for more than $120 billion of Latin America’s exports, not to mention up to half of emerging Africa’s money-spinning trade (from fresh fruit and flowers to minerals). A deep recession in Northern Europe (which will surely result from the euro’s demise) is, thus, bound to unleash deflationary winds that will destabilise an already imbalanced global economy. It is for this reason that all eyes have been, of recent, on the 27th October EU Brussels’ Agreement. For, as we all know, this is the Agreement that was meant to avert the euro-system’s collapse; a collapse that will force Germany to forge a new currency whose immediate appreciation will be the trigger of the recessionary forces mentioned just above. It is the purpose of this article to argue that the world’s prayers have been misplaced. That the anxiety to see Greece and Italy return to the Brussels’ Agreement fold is a sign of the calamity to befall the global economy. For this Agreement, as I shall be arguing below, is most likely to prove the euro-system’s greatest foe, rather than its cure.

    Roubini: Italy Is Doomed And Will Exit EMU Unless ECB, Germany Step In - With the European sovereign debt crisis escalating dramatically, after Italian bond yields hit record highs on Wednesday and France’s bond spread over German bunds continues to widen, the possibility that the EU will fail to find a solution and will be forced to break up is now very real. Nouriel Roubini, the famed NYU economist dubbed Dr. Doom for his ultra-bearish predictions, argues that without the ECB engaging in QE (drop rates down to zero and massively purchase bonds) and a strong stimulus program from Germany, the European Union will not survive.Italian bond markets might have passed the point of no return on Wednesday, when yields on 10-year sovereigns traded around 7.5. According to High Frequency Economics, Italian bond price action erased about €50 billion of wealth on Wednesday. The following day, the Italian Treasury placed €5 billion in 1-year bonds at a rate of 6.087%, helping to materialize a clear yield curve inversion. While it appears possible that Italy may be able to save itself, Roubini doesn’t believe so.

    Why Italy’s Days in the Eurozone May Be Numbered - Roubini - With interest rates on its sovereign debt surging well above seven per cent, there is a rising risk that Italy may soon lose market access. Given that it is too-big-to-fail but also too-big-to-save, this could lead to a forced restructuring of its public debt of €1,900bn. That would partially address its “stock” problem of large and unsustainable debt but it would not resolve its “flow” problem, a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity. To resolve the latter, Italy may, like other periphery countries, need to exit the monetary union and go back to a national currency, thus triggering an effective break-up of the eurozone. Until recently the argument was being made that Italy and Spain, unlike the clearly insolvent Greece, were illiquid but solvent given austerity and reforms. But once a country that is illiquid loses its market credibility, it takes time – usually a year or so – to restore such credibility with appropriate policy actions. Therefore unless there is a lender of last resort that can buy the sovereign debt while credibility is not yet restored, an illiquid but solvent sovereign may turn out insolvent. In this scenario sceptical investors will push the sovereign spreads to a level where it either loses access to the markets or where the debt dynamic becomes unsustainable.

    Down with the Eurozone - Nouriel Roubini - The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access. But the eurozone's problems are much deeper. They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain.  Symmetrical reflation is the best option for restoring growth and competitiveness on the eurozone's periphery while undertaking necessary austerity measures and structural reforms. This implies significant easing of monetary policy by the European Central Bank; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.

    Eurozone Crisis: Here Are the Options, Now Choose - Nouriel Roubini - The announcement of the most recent EZ rescue package (acceptance of a bigger haircut for Greek private creditors, the recapitalization of EZ banks and the use of guarantees and financial leverage in the hope of preventing Italy and Spain losing market access) led to markets rallying for a day as the tail risk of a disorderly situation in the EZ, temporarily, diminished. By the next day, Italian yields and spreads were still close to their high, serving as a reminder—as we argued in “The Last Shot on Goal: Will Eurozone Leaders Succeed in Ending the Crisis?,” co-authored with Megan Greene—that the EZ’s fundamental problems will not be resolved by this trio of policy actions. To put the latest package in context, we need to first assess the fundamental problems facing the EZ and the potential scenarios for the monetary union.

    "I Want You All Fired" Yet Another Fantastic Video from Nigel Farage, Speaking to European Parliament - Farage asks MEPs "What planet are you on?", then proposes they all be fired. It's an awesome video. Please play it as a stark contrast to everyone wanting to keep the Eurozone intact, at any cost.

    Papademos confirmed as new PM - The will-he, won’t-he saga of whether Lucas Papademos would assume the leadership of the transitional government was finally settled shortly after 2.30pm on November 10 when the former ECB vice-president was confirmed as the country’s next prime minister. The formalities of the resignation of outgoing ministers and swearing-in of the new government are expected to be completed on Friday, with a view to the holding of vote of confidence in parliament possibly as early Monday. "The Greek economy is facing huge problems despite the efforts undertaken," Papademos said in his first public remarks. "The choices we will make will be decisive for the Greek people. The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence."

    Greece turns to Iranian oil as default fears deter trade - Traders said Greece has turned to Iran as the supplier of last resort despite rising pressure from Washington and Brussels to stifle trade as part of a campaign against Tehran's nuclear program. The near paralysis of oil dealings with Greece, which has four refineries, shows how trade in Europe could stall due to a breakdown in trust caused by the euro zone debt crisis, which is threatening to spread to further countries. More than two dozen European traders contacted by Reuters at oil majors and trading houses said the lack of bank financing has forced Greece to stop purchasing crude from Russia, Azerbaijan and Kazakhstan in recent months. Greece, with no domestic production, relies on oil imports and in 2010 imported 46 percent of its crude from Russia and 16 percent from Iran. Saudi Arabia and Kazakhstan provided 10 percent each, Libya 9 percent and Iraq 7 percent, according to data from the European Union. "They are really making no secret when you speak to them and say they are surviving on Iranian stuff because others will simply not sell to them in the current environment,"

    EU mulls new sanctions against defiant Iran - The European Union may approve fresh sanctions against Iran within weeks, after a U.N. agency said Tehran had worked to design nuclear bombs, EU diplomats said Thursday. Iran denies trying to build atom bombs and its Supreme Leader Ayatollah Ali Khamenei said any U.S. or Israeli attack on its nuclear sites would be met with "iron fists.Iran already faces a wide range of U.N. sanctions, as well as some imposed unilaterally by the United States and the EU.New EU sanctions would be a significant part of Western efforts to ratchet up pressure on Tehran after the U.N. nuclear watchdog's report this week that laid bare a trove of intelligence suggesting Iran is seeking nuclear weapons. Tehran, which says its nuclear program is for producing electricity and other peaceful purposes, said Wednesday it remains ready for negotiations with world powers on the issue.

    Greenspan: Europe’s Debt Crisis Comes Down to North vs. South - The divergence between northern Europe’s powerhouse economies and the comparatively less competitive southern region is an “odd dilemma” that euro-zone leaders must confront, former Federal Reserve Chairman Alan Greenspan said Thursday. In a wide-ranging discussion at the Council of Foreign Relations, the man who was once considered the most powerful central banker in the world said the introduction of the euro currency never resolved the fundamental north-south divide of the continent’s economies. Greenspan said the “Club Med” ethic that characterizes countries such as Greece and Italy was never abandoned once they adopted a common currency. Meanwhile, countries such as Germany–the euro zone’s largest economy and its economic workhorse–continued to save and made the northern economies more competitive. “Markets are basically saying that a number of these countries are competitively out of sync, and they cannot take on” the challenges of the global economy, Greenspan said, in response to a question about Italy’s exploding sovereign debt yields.

    Slovenian Bond Yield Breaks 7%, First Time Since Euro Entry -- Slovenia’s 10-year government bonds slid for a fourth day, with the yield topping 7 percent for the first time since the nation adopted the euro in 2007, as the debt crisis in Europe roils markets. The yield rose to 7.14 percent at 1:05 p.m. in Ljubljana, according to Bloomberg data. The spread, or the difference investors demand to hold the securities instead of similar- maturity German debt, also advanced to a euro-era record of 545 basis points. A basis point is a hundredth of a percentage point. Slovenia, which holds early elections next month, was cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings on the government’s collapse, the poor economic outlook and a weak banking industry. The former Yugoslav republic is also a victim of its “proximity” to Italy, which is struggling to fend off an investor crisis of confidence. “The worry is that turmoil in Italy will last for some time, pushing Slovenian bond yields even higher,”. “However, even if they breach the 7 percent mark that would not be the same evil as in Italy.”

    France cuts frantically as Italy nears debt spiral - Telegraph: France has unveiled the toughest austerity measures since World War Two despite the looming danger of a double-dip recession, vowing to slash borrowing by €65bn over the next five years in a last-ditch effort to save the country's AAA rating. "We wish to protect the French against the grave problems facing other European countries. Bankruptcy is not an abstract word," said premier Francois Fillon. The belt-tightening plan -- the second package since August, taking total cuts to €112bn -- include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone. "It is like the 1930s: imposing austerity on countries already in recession is the way into a death spiral," Left-wing critics have evoked grim parallels with the "deflation decrees" of Pierre Laval in 1935 when France had to take ever harsher measures to preserve the country's viability on the Gold Standard, a gamble that ultimately set off violent street protests.

    French Bond Risk Rises to Record as Crisis Spreads Beyond Italy (Bloomberg) -- The cost of insuring against default on French government debt rose to a record on concern Europe’s leaders are failing to contain the region’s deficit crisis. Credit-default swaps on France rose eight basis points to 204, according to CMA prices at 12 p.m. in London, surpassing the record closing price of 202 set Sept. 22. The Markit iTraxx SovX Western Europe Index increased for a fifth day, climbing four basis points to a five-week high of 345. The European Union predicted that the French economy will grow more slowly next year than President Nicolas Sarkozy projects and called for “close vigilance” on the nation’s budget deficit. European Central Bank Governing Council member Klaas Knot said the bank, which was said to purchase Italian and Spanish bonds today after a rout of the securities yesterday, can’t do “much more” to stem the debt crisis. “France is starting to become more like a credit than a government bond,” . “As Italy goes, so will the rest of the EU. It totally depends on Italy.”

    Eurozone debt jitters creeping into French bonds - The European debt crisis has gone from bad to worse as Italian government bond yields have soared, threatening the solvency of the Eurozone’s third-largest economy. But things could go from worse to worst if bond yields keep rising in France, the continent’s No. 2 economy after Germany. The French government knows it can’t afford for the bond market to turn on it. Paris announced a new round of spending cuts last week aimed at ensuring that the country holds on to its coveted AAA credit rating. Moody’s Investors Service warned last month that it might put a negative outlook on France’s top-rung rating if Paris made too many commitments to back up its banks or other Eurozone states with tax dollars.But France’s need to protect itself also raises doubts about its ability to extend help to Italy as Rome’s debt nightmare worsens.

    France Plans EU7 Billion in Taxes, Cuts to Save AAA Rating - France unveiled tax increases and spending cuts amounting to 7 billion euros ($9.6 billion) for next year to defend its triple-A rating as growth slows and Europe's debt crisis deepens. The country will increase some levies on large companies, push up the lower end of its range of value-added taxes and curb welfare spending, Prime Minister Francois Fillon said today. "French people must roll up their sleeves," Fillon said at a press conference in Paris. "We have one goal: to protect the French people from the severe difficulties faced by some European countries."

    Meanwhile, Someone Forgot To Invite France To The Party - With Italian bonds giddy at the prospect of changing one worthless political muppet with another, if only for a few hours, and especially with the stern and long overdue assistance of the ECB (we will find out how many bonds Mario Draghi bought this week to preserve the price stabeeleetee next Monday - we expect the SMP cumulative total to pass €200 billion, a number which will delight Germany), it is becoming increasingly clear that France needs to be urgently added to the list of countries eligible for ECB secondary market "sponsorship", because while Italy yields are gapping in, Franch Bund spreads have since blown out back to record levels, following some modest tightening earlier in the morning. And unlike yesterday, this time there are no downgrade rumors to be blamed. At least not yet.

    France extends short-selling ban on bank shares (Reuters) - France extended its short-selling ban on the shares of 10 financial institutions by three months from Friday as the euro zone debt crisis spreads beyond Greece to Italy. "This ban could be lifted before the end of this period if market conditions allow," Finance Minister Francois Baroin said in a statement on Thursday. The move comes after France's AMF stock market regulator said market conditions did not allow for the ban to be lifted, according to the statement. The ban, introduced on August 11, is designed to discourage speculative trading on French financial institutions after banking stocks took a beating in early August.Currently France, Italy, Greece, Spain and Belgium have short-selling curbs in place. Italy's curbs are due to expire on Friday.

    S&P’s Faux Pas on French Rating Roils Markets -- Standard & Poor’s roiled global equity, bond, currency and commodity markets when it sent and then corrected an erroneous message to subscribers suggesting France’s top credit rating had been downgraded.  The benchmark Stoxx Europe 600 Index extended its decline to 1.5 percent to 234.11 and French 10-year bond yields surged as much as 28 basis points to 3.48 percent, the highest level since July, after the mistaken announcement. The euro pared gains and U.S. equities briefly dropped. Commodities erased gains before resuming increases after S&P affirmed France’s AAA rating in a later statement.  A downgrade of France’s credit rating would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

    France seeks inquiry on S&P gaffe - The French government demanded an investigation of the Standard & Poor's ratings agency after the company admitted it erroneously sent an email to some subscribers suggesting that it had lowered France's flawless credit rating. The episode briefly sowed turmoil in markets yesterday about the safety of the nation's sovereign debt. As Europe's debt crisis starts to engulf Italy, France's president, Nicolas Sarkozy, has been striving to ensure that financial contagion will not spread to his country. A priority of his coming presidential re-election campaign is to ensure that France's AAA rating stays intact, a challenge that has grown larger as France's share of the bill for helping to contain the crisis grows larger. After S&P reported the error, France's finance minister, Francois Baroin, quickly demanded an investigation into "the causes and eventual consequences of the error." Within a half-hour, the French stock market watchdog said it would open one. It also notified the European financial market authority, which oversees "the professional obligations of the ratings agencies."

    Oh Crap... AUSTRIA?!? - And now we have to start talking about this. It's the Austria-German 10-year spread The spread is widening further today, even as Italy improves and markets are rising. What's the deal with Austria? Well there have been persistent rumors about a downgrade, but furthermore, Austrian banks are famously exposed to Eastern Europe. And now you see stuff about how Slovenian yields are surging. Too many fires to put out. For a good background story on Austrian banks and exposure to Eastern Europe, see this NYT piece from last year.

    ECB Officials Reject Calls For Further Action To Contain Crisis (RTTNews) - Policymakers at the European Central Bank on Thursday strongly resisted calls for more help from the bank to contain the region's debt crisis, which has intensified recently with the situation in Italy getting worse amid political uncertainty. "We have gone pretty far in what we can do but there is not much more that can be expected from us," ECB Governing Council member Klaas Knot told the Dutch parliament, according to reports. "It is now up to the governments to make sure the doubts about sustainability, about repayment of individual government debt are removed as quickly as possible," reports said quoting Knot, who also heads the Dutch central bank. The ECB's bond purchases are solely to restore transmission of its interest rates on financial markets and "cannot become a chronic situation," another ECB Board member Peter Praet was quoted as saying in comments posted on the website Debating Europe.

    Jim Grant: "The ECB Is Now Implementing The MF Global Trade" - To print or not to print: the choice of whether to open the European Pandora's box, which as we suggested two months ago is an interesting but ultimately moot thought experiment, has suddenly become the only talking point for TV pundits desperate for eyeballs and suckers to buy their books, who are now experts not only on monetary policy but European monetary policy. And while 99% of these empty chatterboxes should be promptly muted, one person whose opinion we value in any regard is that of Jim Grant. Earlier today, with Bloomberg TV's Deirdre Bolton, he discussed not only the expected ECB response to the ever worsening contagion (while the ECB bought Italian bonds in the open market, and potentially primary against its charter, it is prohibited from buying French bonds which is why the OAT-Bund spread closed at record wides), but all the other developments in the insolvent continent. Here are some of the key sounbdbites, and, of course, the full clip. On the three thread by which the world currently hangs:

      • i) by the financial probity of Italy
      • ii) by the determination of Greece to implement austerity measures
      • iii) and by the responsibility of our money spinning central bankers

    Could the ECB become the central fiscal authority? - There is only one way to save the Euro now. The ECB acts as lender of last resort to the 17 Eurozone governments. But nobody would want to act as lender of last resort to a deadbeat, and the ECB wouldn't want to act as lender of last resort to a fiscal deadbeat. With the guarantee of unlimited loans from the ECB, the fiscal deadbeat would have every incentive to keep on borrowing and spending unlimited amounts. The Eurozone lacks a central fiscal authority to match the central monetary authority. And it seems to lack the ability to create a central fiscal authority in the normal way. Nobody seems to have the power to exert that central fiscal authority, and force the 17 governments to do what they are told. But the ECB does have that power. It can say to each of the 17 governments: "We will act as your lender of last resort if and only if you do what we say. If you don't do what we say, we will loudly announce that we will no longer act as your lender of last resort, and the bond markets will make mincemeat of your bonds, and there will be runs on all your banks."In fact, the ECB is the only body that does have that power. I'm not talking about legal power. It's long past that stage of the game. Good central banks ignore all the rules in an emergency. It has to make the 17 governments do what it tells them to do. It has the power to do that. "Do what we say, or your country is toast".

    No ECB "unlimited firepower": German economy minister (Reuters) - The European Central Bank does not have "unlimited firepower" to handle Europe's debt woes, Germany's Vice-Chancellor and Economy Minister Philipp Roesler said on Friday. Speaking at an event in Berlin, Roesler said that if the ECB opened its floodgates fully, they could never be closed again. He rejected suggestions that the bank print money to help heavily indebted euro zone states. This might help in the short term, Roesler said, but "the impetus to create lasting stability and make reforms would disappear." To date, the ECB has distinguished itself from the U.S. Federal Reserve and the Bank of England by refraining from embarking on a policy of 'quantitative easing' -- code for printing more money. Instead, the ECB sterilises -- or neutralises -- its bond buys by conducting weekly liquidity absorbing operations equal to the cumulative size of its debt purchases.

    Is the ECB Powerless to Rescue Europe, or Just Unwilling? - Marshall Auerback, at New Economic Perspectives, digs into the issue of whether the ECB is legally permitted to engage in the sort of “lender of last resort” activities that many think are key to mitigating this crisis: The notion that it cannot act as lender of last resort is disingenuous:  The ECB does have the legal mandate under its “financial stability” mandate which was provided under the Treaty of Maastricht.  True it is fair to say that the whole Treaty of Maastricht is full of ambiguity.  The institutional policy framework within which the euro has been introduced and operates (Article 11 of Protocol on the Statute of the European System of Central Banks (ESCB) and of the European Central Bank) has several key elements.  One notable feature of the operation of the ESCB is the apparent absence of the lender of last resort facility, which is an issue raised by the WSJ today, and which Draghi uses to justify his inaction.  But it’s not as clear-cut as suggested: The Protocols under which the ECB is established enables, but does not require, the ECB to act as a lender of last resort.

    Why the ECB might want to back Spain - Any solution to the euro crisis has to accomplish two goals: prevent a big country like Italy from failing because of illiquidity-turned-insolvency, and maintain the political pressure to reform and adjust so that this big country really is solvent in the future (see also Nick Rowe on this). Any commitment to support a country will be tested by markets and the more debt the ECB owns, the less negotiating power it has over the large country that will in this case be reluctant to continue its reform efforts. Imagine the ECB were to announce publicly that if the Spanish government continued its reform efforts according to an independent IMF supervision, it would back Spanish debt in full from a certain point in time on (for instance a year from now depending on the IMF-approved reform plan) and will not tolerate yields above, say, 4% at that point. This target could be lowered to 3.5% after another year if the Spanish progress continues further, or increased if it doesn’t. What would the consequences be? The Spanish people will realise that the ECB and Europe stand behind them as long as Spain keeps up the reform efforts. The new Spanish government in turn will continue its reform agenda in order to be rewarded by the ECB. Markets, anticipating this, will let yields drop to slightly above 4% immediately without any actual purchases by the ECB.

    Spanish Economy Stalled in Third Quarter as Borrowing Costs Rose to Record - Spain’s economy stalled in the third quarter, undermining the country’s efforts to shield itself from the sovereign debt crisis after Spanish and Italian borrowing costs surged to records. Gross domestic product was unchanged from the previous quarter, when it expanded 0.2 percent, the National Statistics Institute said today in an e-mailed statement in Madrid. From a year earlier, the economy expanded 0.8 percent. The Bank of Spain estimated on Oct. 31 that the economy stalled in the third quarter and grew 0.7 percent on the year. The slowdown threatens Spain’s budget-deficit goals, the European Commission said yesterday, meaning the government that emerges from the Nov. 20 general election may have to accelerate spending cuts to prevent the nation becoming the next victim of the debt crisis. The People’s Party, which polls show will win, has pledged to regain Spain’s AAA rating and tame borrowing costs without raising taxes or cutting pensions.

    Merkel: I do not ‘want to let the people vote’ -The following exchange between Merkel and Handelsblatt is problematic given the repeated refrain in Europe that the euro system and the entire EU is an ‘elite project’ My position on representative democracy at the federal level, on the balance between Bundestag and Bundesrat are known and unchanged. We have plebiscites on the municipal level and within countries. I think that our democratic system, as it is in Germany, gives us great internal stability. Germans really are sceptical of the euro and many miss the days of the Deutsche Mark. I think Merkel is trying to make the case for why the German people have never been given a direct vote on any major euro area decision. No one wants tyranny of the majority. So I agree on the benefits of representative democracy over direct democracy at the federal level. That said, I do think critical changes like voting on a European constitution or giving up the currency should be voted on directly in Germany (or Greece for that matter). Merkel is in awkward position because it has long been clear that German elites have been leading the German people in a direction that many believe is the wrong direction.

    Don’t Count on ECB Riding to Rescue - European economists are increasingly convinced that the only solution to the escalating debt crisis, that now seriously threatens Italy, is massive intervention in Italian and other bond markets by the European Central Bank. “The ECB has to find a way to put all of its understandable reservations to one side and bite the bullet,” analysts at HSBC wrote. “If worst comes to worst, only the ECB can save Italy and itself… we are getting perilously close to meeting the definition of ‘if worst comes to worst,’” Berenberg Bank economist Holger Schmieding wrote. “Once the ECB acts as forcefully as the [Swiss central bank] has acted in Switzerland, a rebound in confidence could put the [euro zone] economy on track for a very nice recovery after the current recession,” he noted. But a slew of remarks from ECB officials in the past 24 hours suggests officials aren’t there yet. They continue to repeat the longstanding mantra that the ECB has done all it can, and that it is up to governments to keep their borrowing costs down.

    Updated Economist interactive graphic on EU Economics just released

    A Round Trip For Euro Yields - Ed Yardeni has a great graph of European sovereign yield history. It's interesting to note that yields have basically rebounded to levels that prevailed before the euro was launched. Of course, some of the rebounding has moved faster and climbed higher in certain countries. The main exception is Germany, the undisputed benchmark for "risk free" yield in euroland. Accordingly, German yields have dropped given in the current debt-deflation climate. Otherwise, it's up, up, and away with current yields. The irrational exuberance over the euro from the pre-launch era has evaporated. What's old is new. The big outlier--Greece--is now at yields that were the norm in the early '90s. If you pulled a Rip Van Winkle over the last 20 years you might wonder what all the excitement's about. Nothing's changed, at least from a yield perspective. Interim details, of course, can alter one's perspective (and hit you over the head).

    IMF chief holds talks in China amid eurozone turmoil - International Monetary Fund chief Christine Lagarde held talks in Beijing Thursday against a backdrop of worsening economic turmoil in Europe that has rattled financial markets around the world. Lagarde, who is on a two-day visit to China, has warned that Asian economies are not immune to the crisis that has engulfed the eurozone, saying the world risked a "downward spiral" if it did not pull together to tackle the crisis. Details of the IMF chief's visit were being kept under wraps, but it is all but certain to focus on the crisis in Europe, whose leaders have already called on China to contribute to a fund set up to support troubled eurozone economies. Last month Klaus Regling, the head of the European Financial Stability Facility, travelled to Beijing to try to persuade China's leaders to help. Europe has been discussing establishing a special purpose investment vehicle to persuade China and other potential contributors, and is exploring the possibility of linking it to the IMF. Lagarde visited Moscow before heading to China, and on Wednesday the Russian government said it was not prepared to invest directly in the EU rescue fund and would prefer to help the eurozone through the IMF.

    EC Forecasts See France Growth Slowing to 0.6% in 2012 - France's economy will grow by only 0.6% in 2012, as Europe's sovereign debt crisis and slow global growth take their toll, the European Commission said Thursday. In its autumn economic forecast, the EC said growth would slow from an expected rate of 1.6% this year. The EC said the slowdown in growth stems from a "deterioration of the external environment, notably in the euro area and the U.S., with negative confidence effects weighing on both domestic and external demand and affecting consumers and companies." French President Nicolas Sarkozy recently lowered France's official growth forecast to 1.0% for 2012 as his government announced the second fiscal tightening package since August in an effort to cut the country's budget deficit and protect its 'AAA' credit rating. The European Commission forecasts, which did not take account of the fiscal adustment package announced earlier this week, see France's deficit declining only marginally, to 5.3% in 2012 and 5.1% in 2013.

    Europe’s Growth Forecast Is Lowered  - Europe’s economic outlook received a fresh dose of gloom Thursday, when the European Commission warned that the Continent’s economies were stalled and faced the risk of a double-dip recession. The commission’s latest growth forecasts intensified concerns that, as some members of the euro currency union take tough austerity measures to appease the debt markets, they are stifling any chance for economic growth that might help pull them out of financial distress. The commission predicted that, as a result of the contraction, the region’s government debt levels would edge up next year. “The recovery in the European Union has now come to a standstill, and there is a risk of a new recession,” Olli Rehn, the European commissioner for economic and monetary affairs, told reporters in Brussels.  “This forecast is in fact the last wake-up call,” Even Germany, the economic engine of Europe, is now expected to record just 0.8 percent growth in 2012 — more than a percentage point lower than the European Commission predicted in its spring forecast. And none of the euro zone’s other three biggest economies — France, Italy and Spain — are projected to achieve 1 percent growth in 2012.

    EU Forecasters Can’t Exclude Possibility of ‘Deep, Prolonged’ Recession - This word cloud, a visual representation for the number of times a word appears in a document, was created with the European Union’s latest economic forecasts.. (See more detail here) But, EU Economics Commissioner Olli Rehn said Thursday: “The European recovery has come to a standstill.” The EU executive slashed its growth forecast Thursday for the 27-nation bloc in the coming year to 0.5%, sharply down from its forecast only six months ago of 1.8%, and said it can’t exclude the possibility of a “deep, prolonged” recession. The unemployment rate is also expected to increase to 10.1% in 2012 from 10% in 2011, the forecast says. The EU’s spring forecast predicted unemployment would fall to 9.7%. Looking into the report, it’s obvious that there’s not a lot of growth going on. Take a look at some of the country chapter titles:

    EU Slashes Growth Forecasts, Warns Of 'Deep, Prolonged Recession': The European Union has warned that the 17-country eurozone could slip back into recession next year as the debt crisis shows alarming signs of spinning out of control. The EU's economic watchdog, the European Commission, said Thursday its central forecast is that the eurozone will grow by only a paltry 0.5 percent in 2012. That's way down on the 1.8 percent prediction it made in the spring. "This forecast is in fact the last wake-up call," the EU's Monetary Affairs Olli Rehn warned. "Growth has stalled in Europe, and there is a risk of a new recession." The sharp cut in the forecast comes as the eurozone's debt crisis has spread alarmingly to Italy, the single currency bloc's third-largest economy. The interest rate on Italy's 10-year bonds has reached the same levels that forced Greece, Portugal and Ireland to request multibillion euro bailouts. Speculation Premier Silvio Berlusconi will be replaced by leading economist and former Commissioner Mario Monti once he officially resigns has helped calm the market mood somewhat Thursday, but interest rates remain much higher than a week ago.

    Italy in Recession; Industrial Production Drops 4.8% M/M, .1% Q/Q; Barclays says GDP Likely Negative - Here is a note I received by email from Barclays Capital regarding Italian GDP and Industrial Production ... Italian IP declined 4.8% m/m in September, weaker than our below-consensus expectation of -4.0% m/m (market: -3.0% m/m), from an increase of 3.9% m/m in August, downwardly revised from 4.3% m/m previously. As we had highlighted when the previous report was released, the sharp increase in August IP would prove temporary and correct in September. Italian industrial output tends to be historically quite volatile in August for technical reasons such as the process of seasonal adjustment undertaken by the ISTAT statistics office (for more on this please read: Italy: IP surged in August but past experiences suggest there is little to get excited about).  Accounting for the revision to the index, Italian IP is reported to have contracted -0.1% q/q in Q3, below our initial expectations, suggesting a small downside risk to our expectation that Italian GDP had declined 0.2% q/q in Q3. As our GDP indicator shows, Italian GDP might have declined as much as 0.3% q/q. On this specific point, the Italian statistics office ISTAT will not release the preliminary GDP growth for Q3, but it plans to release the final Q3 figure on 21 December.

    Eurozone collapse 'will send continent into depression’ - The collapse of the eurozone would cause a crash that would instantly wipe out half of the value of Europe’s economy, plunging the continent into a depression as deep as the 1930s slump, the president of the European Commission has warned.José Manuel Barroso issued his chilling warning as France began diplomatic overtures to create a eurozone vanguard, potentially with fewer than the 17 existing members of the single currency. Mr Barroso said that if the euro area of the 17 member states or the wider 27-country EU broke apart the estimated initial cost would be up to 50 per cent of European gross domestic product. “It would jeopardise the future prosperity of the next generation. That is the threat that hangs over us,” he said. In a speech in Berlin aimed at tackling any support for a smaller elite eurozone comprised of the EU’s strongest economies, Mr Barroso warned that the consequence of a split would be a million lost jobs in Germany. The result of such an economic shock would be emergence of extremism and divisions within Europe, the former Portuguese prime minister told his German audience.

    Morgan Stanley Says Europe's Pandora's Box Has Been Opened - Have a sinking suspicion that the way the Eurozone has handled the past week's Greek threat has set the stage for the collapse of the Eurozone (here's looking at you Italy, over and over) now that Merkozy has made the possibility of a country leaving the Eurozone all too real? You are not alone: Morgan Stanley's Joachim Fels has just sent a note to clients in which he not only commingles three of the catchiest and most abused apocalyptic phrases of our time ("Emperor has no clothes", "Water Pistol not Bazooka" and "Pandora's Box") he also warns, in no uncertain terms, that "by raising the possibility that a country might (be forced to) leave the euro, core European governments may have set in motion a sequence of events which could potentially lead to runs on sovereigns and banks in peripheral countries that make everything we have seen so far in this crisis look benign." And when a major investment bank, itself susceptible to bank runs warns of, well, bank runs, you listen. 

    Wikileaks Exposes German Preparations For "A Eurozone Chapter 11" - The following cable from US ambassador to Germany Philip Murphy ("Ambassador Murphy spent 23 years at Goldman Sachs and held a variety of senior positions, including in Frankfurt, New York and Hong Kong, before becoming a Senior Director of the firm in 2003, a position he held until his retirement in 2006") "CONFIDENTIAL: 10BERLIN181" tells us all we need to know about what has been really happening behind the smooth, calm and collected German facade vis-a-vis not only Greece, but all of Europe, and what the next steps are: "A EUROZONE CHAPTER 11: DB Chief Economist Thomas Mayer told Ambassador Murphy he was pessimistic Greece would take the difficult steps needed to put its house in order. A worst case scenario, says Mayer, could be that Germany pulls out of the Eurozone altogether in 20 years time. In 1990, Germany's Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an "inflationary zone," or 2) the German taxpayer became the Eurozone's "de facto bailout provider." Mayer proposes a "Chapter 11 for Eurozone countries," which would place troubled members under economic supervision until they put their house in order. Unfortunately, there is no serious discussion of this underway, he lamented." This was In February 2010. The discussion has since commenced. 

    Merkel’s CDU May Adopt Euro Exit Clause in Party Platform  - German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area, a senior CDU lawmaker said. If passed by CDU delegates, the proposal would still have to be agreed by all three parties in Merkel’s coalition before becoming government policy. Germany would then need to persuade its European Union partners to agree to changes to the bloc’s guiding treaty to allow a country to leave the euro. The motion proposes allowing a euro member that doesn’t want to or is unable to comply with the common currency rules to leave the euro without losing EU membership, Norbert Barthle, the ranking CDU member of parliament’s budget committee said by phone. It has been approved for debate by CDU delegates meeting Nov. 13-15 in the eastern German city of Leipzig, he said.“This motion will go through; I am sure of it,” Barthle said late yesterday. “It will become part of our party platform for future policy with regard to amending the framework treaties of the euro,” he said. “Any country that wants to leave the euro on its own should not be prevented from doing so.”

    Thinking through the unthinkable - Will the eurozone survive? The leaders of France and Germany have now raised this question, for the case of Greece. If policymakers had understood two decades ago what they know now, they would never have launched the single currency. Only fear of the consequences of a break-up is now keeping it together. The question is whether that will be enough. I suspect the answer is, no. Efforts to bring the crisis under control have failed, so far. True, the eurozone’s leadership has disposed of George Papandreou’s disruptive desire for democratic legitimacy. But financial stress is entrenched in Italy and Spain (see chart). With a real interest rate of about 4.5 per cent and economic growth of 1.5 per cent (its average from 2000 to 2007, inclusive), Italy’s primary fiscal surplus (before interest rates) needs to be close to 4 per cent of gross domestic product, indefinitely. But the debt ratio is too high. So the primary surplus has to be far bigger, the growth rate far higher, or the interest rate lower. Under Silvio Berlusconi, none of the necessary changes is going to happen. Would another leader fix things? I wonder. The fundamental difficulty throughout has been the failure to understand the nature of the crisis. Nouriel Roubini of New York University’s Stern School of Business makes the relevant points in a recent paper.* He distinguishes, as I did in a column on October 4, between the stocks and the flows. The latter matter more. It is essential to restore external competitiveness and economic growth. As Thomas Mayer of Deutsche Bank notes, “below the surface of the euro area’s public debt and banking crisis lies a balance-of-payments crisis caused by a misalignment of internal real exchange rates”. The crisis will be over if and only if weaker countries regain competitiveness. At present, their structural external deficits are too large to be financed voluntarily.

    Goldman: euro could split apart -  The chairman of Goldman Sachs Asset Management has said that the need for a German-led fiscal integration in the eurozone would make it increasingly unattractive for all the countries who joined to stay in the single currency. Jim O’Neill, whose division manages more than $800bn (£500bn) of assets, said that countries as diverse as Portugal, Ireland, Finland and Greece could pull out of the single currency rather than have to operate under a single eurozone treasury. Yesterday, Angela Merkel, the German chancellor, said the market turmoil could last for a decade and there was still “a chunk of work” to do. “The Germans want more fiscal unity and much tougher central observation – with the idea of a finance ministry,” Mr O’Neill said in an interview with The Sunday Telegraph. “That will emerge for those that want to stay in this damn thing, or can stay in. “With that caveat, it is tough to see all countries that joined wanting to live with that –including the one that is so troubled here [Greece]. If you wind the clock back, it was pretty obvious that economically probably only Germany, France and Benelux of the original joiners were the ones that were ideal for a monetary union.

    The Collapse Of Our Corrupt, Predatory, Pathological Financial System Is Necessary And Positive - I was recently challenged by a contributor to write something positive, and so I decided to write about the single most positive outcome of the current financial crisis in Europe: the complete collapse of the corrupt, predatory, pathological global banking sector and its dealers, the central banks. Exploring why this is so reveals the insurmountable internal conflicts in our current financial system, and also illuminates the systemic political propaganda which is deployed daily to prop up a parasitic, corrupting, pathologically destructive financial system. Our first stop is modern finance itself. Modern financial "products" and "instruments" are often highly complex and abstract, but the entire edifice can be distilled down to this: the system is based on the assumption that all risk can be hedged, and the difference between the initial position's yield/gain (i..e. placement of capital at risk for a gain) and the cost of hedging the risk of the wager to zero can be skimmed from the system risk-free. That is the entire system in a nutshell, and we can immediately see the advantages of this system over traditional Capitalism, where risk can be hedged but never to zero, and the return is correlated to the risk taken on. 

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