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

Saturday, November 5, 2011

week ending Nov 5

US Fed balance sheet shrank in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week as the central bank reduced its holdings of Treasuries, Fed data released on Thursday showed.The Fed's balance sheet stood at $2.805 trillion on Nov. 2, down from $2.829 trillion a week earlier on Oct. 26.The Fed's holdings of Treasuries totaled $1.654 trillion as of Wednesday, Nov. 2, down from $1.678 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $23 million a day during the week, up from $4 million a day previously. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae , Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $849.3 billion, unchanged from the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $107.7 billion, also unchanged on the week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - November 3, 2011 

MF Bankruptcy Causes Biggest Foreign Bank Liquidity Scramble To 'Fed Safety' Ever, Harbinger Of Major Eurobank Stress - When Lehman filed for bankruptcy in that fateful week of September 2008, one thing caught everyone's attention: the epic surge in the Fed Reverse Repos originated by "foreign official and international accounts": essentially cash placed at the Fed by foreign institutions in exchange for collateral, primarily in the form of Treasurys, as well as other securities. This is nothing but an immediate cash parking in a 'safe place', which withdraws overall liquidity from the market, and as has been noted elsewhere, serves as an indirect gauge of banking system funding stress. In the week of September 24, this number soared from $46.6 to $93.7 billion, a $44 billion increase, or the single biggest jump in the history of the series. Well, as the chart below demonstrates, what happened with MF Global caught foreign banks, which as we have noted over the past several weeks have been dumping US Treasury and MBS paper, entirely by surprise as they scrambled to withdraw the last traces of available liquidity from the market, and to place as much of it as possible within the safety (and we use the term loosely) of the Fed. In the just released H.4.1 update, foreign Reverse Repos with the Fed soared from $81.3 billion to $124.5 billion, the most ever, and a weekly surge of $43.2 billion, the second largest ever, second only to the Lehman collapse.

Fed's Balance Sheet Vs. U.S. GDP - Before the Fed's FMOC announcement, the market pundits on TV were guessing about QE3. Should the Fed do it now, latter, or not at all? Seeking Alpha even had a heading "FOMC: No QE3" on its front page, with several articles listed after the announcement. There is still speculation that the Fed will attempt another quantitative easing, spurred on by the problems in Europe and U.S. housing. One member of the FMOC even dissented in favor of a more accommodative policy (see No Surprises In Statement, Yet A Dove Cries). All of this had me thinking about how big has the quantitative easing been, and its effects. From Q1 2008 to Q3 2011, the Fed has tripled (310%) the size of its balance sheet, while real GDP has grown about 65 basis points (.65%) over this same time period. Yes, that is correct; the Fed's balance sheet expanded by $1.8 trillion while real GDP increased by only $86 billion. Nominal GDP increased 6.5% or about $925 billion. This means that over 90% of the growth in nominal GDP has been from inflation, with only 9.3% from "real" GDP growth over the last 2.5 years. The Fed's balance sheet has reached unprecedented heights as a percentage of the U.S. economy. It is just under 20% of real GDP and 17.5% of nominal GDP.

Fed plans changes to communications strategy - There have been calls for major innovations, such as the introduction of a target for the level of nominal GDP, but the Fed has given little indication that it is ready for anything quite so drastic. Much more likely are some further modest steps to improve the communication of the Fed’s thinking on the future path of short rates, with the aim of keeping long rates as low as possible. And there might also be some more purchases of mortgage backed securities. The case for introducing a target path for nominal GDP was well argued by Christina Romer in the New York Times yesterday.  Professor Romer says it is Ben Bernanke’s moment to change the rules of the game by adopting a target for the level of nominal GDP, with the intention of restoring it to the path which it would have followed from 2007 onwards in the absence of a recession. Because this target would focus on the level of money GDP, and not its annual rate of change, it would mean that any shortfall relative to target would have to be restored in future years. That would entail raising the current level of national income by around 10 per cent, a herculean task which would completely change the terms of the debate on the FOMC. It would also radically change the outlook for financial assets.

US Federal Reserve Keeps Policy Settings Unchanged - The US Federal Open Market Committee (FOMC) held the fed funds rate unchanged at 0 to 0.25 percent, and made no other changes to its policy. The Fed said: “To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.” The Fed previously announced the commencement of “operation twist” at its September meeting, after it held monetary policy settings unchanged at its August meeting, where it committed to low rates until 2013.  The US reported inflation of 3.9% in September, compared to 3.8% in August, and 3.6% in both July, June and May, up from 3.2% in April, as high commodity prices caused a broader increase in prices.  Meanwhile the US economy grew 2.5% in Q2, up from 1.3% in Q2, and 0.4% in Q1 this year. 

Fed Statement Following November Meeting - The following is the full text of the Federal Open Market Committee’s statement following the November meeting:

Redacted Version of the November 2011 FOMC Statement

Fed Lowers Its Forecast for Growth, but Takes No Steps — The Federal Reserve1 significantly reduced its forecast of economic growth through 2013, acknowledging that it had once again overestimated the nation’s recovery from the 2008 financial crisis.  Despite the bleak forecast, however, the Fed said that its policy-making committee had decided against taking new measures to stimulate growth at a two-day meeting that concluded Wednesday. The Fed’s chairman, Ben S. Bernanke2, said that the central bank already was pushing hard to spur growth and create jobs.  “We have taken a lot of actions,” Mr. Bernanke said at a news conference after the announcement. He added that Congress, by contrast, was not doing enough to pull the levers of fiscal policy. Lawmakers are gridlocked over a new jobs proposal from the White House, and a special bipartisan committee charged with reducing the deficit is struggling to reach agreement by Thanksgiving.  “I think it would be helpful if we could get assistance from other parts of the government to help create more jobs,” Mr. Bernanke said.

The Fed Has Just Stopped Making Sense - I do not see how the FOMC statement today can be read as a coherent document. Let's go through this line by line. "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."  Got it. Maximum employment. Price stability.  "The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."  So much for maximum employment, at least any time soon. One half of mandate missed.  "The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further."  So they're missing the price stability targets too. Entire mandate missed.  This must mean that they're going to take new measures to correct this, right?  Oh. Nope. What they are going to do is just what they've been doing.

Dear Ben: It's Not 2007 Anymore - Krugman - The Federal Open Market Committee has spoken. It expects very high unemployment for at least the next three years, while it expects inflation to be below target. By any interpretation I can think of, the Fed therefore expects to fail to honor its dual mandate of price stability and full employment. To deal with this shortfall, it proposes doing … nothing. But that’s not what has me upset, since that’s been the way of things all along. What got me was Ben Bernanke’s response to a question about whether the Fed might adopt nominal GDP targeting, or more broadly change its policy framework in some way that might help us escape the Lesser Depression. And his answer was no, because the standard approach has demonstrated “its benefits in terms of macroeconomic stabilization”. Oh, my. Look, here’s a crude calculation – the variance of the unemployment rate over the previous 10 years: You can see the Great Moderation, which might have led the Fed to believe, circa 2007, that it had this stabilization thing under control. But now, after four years and counting of slump?  This is no time to be basing policy on hopes that one of these years we’ll find ourselves back in the Great Moderation.

Shocks Force Fed to Reconsider the Future - Cut the Federal Reserve some slack. Forecasting after a financial crisis and in a period of noneconomic shocks is extremely difficult. In his Wednesday press conference, Fed Chairman Ben Bernanke was asked why the Fed’s central tendency forecasts have gotten more downbeat over the course of 2011. Back in January, the Fed was cautiously optimistic about growth, forecasting real gross domestic product could grow close to or above 4% in 2012 and 2013. Now, the Fed’s forecast sees a U.S. economy barely performing at its potential for at least another year. Real GDP is projected to grow less than 3% in 2012.  Bernanke admitted the Fed underestimated the severity of the fallout from the financial crisis and the continuing housing slump. He also attributed some of the error to “bad luck.” Almost by definition, forecasters cannot forecast shocks, especially those related to weather and politics.

Fed to Savers: No Help Coming -- Federal Reserve Chairman Ben Bernanke had a message for savers who stick to the safest instruments such as U.S. Treasury securities or insured bank accounts: get used to microscopic returns. The Fed chairman didn’t use those words, of course, and he expressed sympathy for the plight of savers who have settled for negligible returns in a sluggish economy featuring an extraordinarily accommodative monetary policy. But his essential message is that the Fed won’t do anything to alter the scenario. Given the Fed’s outlook of subpar economic growth ahead and a pledge to keep the short-term federal funds rate essentially at zero through at least mid-2013 to spur growth and help reduce unemployment, there’s no reason to think interest rates offered to such savers will improve. Indeed, they might get smaller still. Asked at a press conference earlier today about the savers’ dilemma, Bernanke said he was “quite aware” of the impact of super-low rates on savers, on the interest margins for banks and even on pension funds that might have to increase contributions to make up for sustained lower returns.The Fed takes these concerns “very seriously,” Bernanke said.

Bond Dealers See Fed Holding Rate Near 0% at Least Through First Half of 2013 - A Bond Dealers of America survey released Tuesday showed most respondents believe the Federal Reserve will hold its benchmark interest rate near zero at least through the first half of 2013 and largely approved of the central bank’s most recent monetary policy move. More than 80% of respondents to the trade group’s semiannual economic outlook survey believe the central bank will continue to hold the fed-funds rate near zero through the second quarter of 2013, and half forecast the rate won’t increase until 2014.

Someone should really do something - YESTERDAY, the Federal Reserve released a new statement in which the only real change from the previous meeting's statement was that the language concerning the outlook for the economy got a little brighter. Then they released new economic projections: You'll note that the Fed's forecast has—yet again—been revised downward. The central bank now anticipates that the unemployment rate will be around 8% in 2013. That's 6 years after the onset of recession, 4 years after the beginning of the recovery, and that's 2 full percentage points above the Fed's upper-end estimate of the long-term natural rate of unemployment. Given this clear and substantial admission of its own continued failure, the Fed obviously opted to do more, right? No, in fact, you'll be shocked to learn that it did not. Ben Bernanke complained about fiscal policy in yesterday's press conference, but that, in a way, is more damning still. The "independent" institution with the best chance of eliminating the aggregate demand shortfall so painfully obvious in its forecast is pleading with others to do its job for it. I half wish he'd have the decency to argue that unemployment was all structural. At least then we could blame the Fed's failure on ignorance rather than incompetence, or cowardice.

For The First Time Since 2007, Federal Reserve Official Dissents From Central Bank Policy From The Left - The Federal Reserve today released its latest policy statement, announcing that it is taking no new moves to boost the economy’s sluggish growth. However, for the first time since 2007, one of the voting members of the central bank — Chicago Fed President Charles Evans — dissented from the Fed’s decision from the left: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.  Evans has been a consistent voice on the Fed for doing more to stimulate the economy. He laid out his reasoning in a speech last month: 'With unemployment having lingered for so long at rates around 9 percent, it is perhaps natural that some would begin to think that nothing more can be done to improve upon this situation. However, I don’t agree…Any inflation above 2 percent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.”

What is nominal GDP path targeting? - YouTube

Expectations can be frustrated - As the previous post suggests, I support targeting an NGDP path. I think an NGDP path target is superior in nearly every respect to an inflation target, and so would represent a clear improvement over current practice. [1] But, unlike the “market monetarists”, I do not believe that central banks can sustainably track their target, whether NGDP or inflation, given the set of tools currently at their disposal. If those tools are (misguidedly) expanded to permit central banks to lend more freely or purchase a wider range of debt instruments, “success” might prove counterproductive. Although Scott Sumner and Bill Woolsey and Matt Rognlie hate the idea, I think we need to add direct-to-household “helicopter drops” to our menu of instruments. Ultimately, I have a different theory of depressions than the market monetarists do. Self-fulfilling expectations lie at the heart of the market monetarist theory. A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts. They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity. However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty.  And to switch between the two scenarios, all that is required is persuasion.

Negative natural rates of interest and NGDP targets - There is nothing theoretically impossible about a negative natural rate of interest. Even a very negative natural rate of interest.  Suppose, for example, that there are large numbers of ageing baby boomers, and very few young people who will be working when the boomers all retire. The boomers all want to save for their old age, so they will be still able to eat when they have stopped producing goods themselves. And there just aren't enough profitable investment projects to match desired saving even at a zero real rate of interest. The boomers would want to store consumption goods for their old age, if they could.  . The boomers store all the goods that can be stored, and then dig them up 20 years later and swap them for newly-produced bread. But maybe there just aren't enough goods that are cheaply storable and that the young will want for that to work. Could fiscal policy solve the problem, and raise the natural rate of interest back up to zero? Well, yes and no. Yes, the government can borrow all the boomers' excess savings, raising the natural rate back up to zero. But does that really solve the problem? No, not really. Not unless the government has figured out a way to bury loaves of bread in the ground and dig it up so it tastes freshly baked 20 years later.

Dear Ben: It’s Time for Your Volcker Moment - Christina Romer - IN October 1979, inflation was running at more than 10 percent a year, and the Federal Reserve1’s gradual interest rate increases weren’t solving the problem. So Paul Volcker2, the Fed chairman, dramatically changed how monetary policy was conducted. Today, an equally intractable unemployment crisis demands that Ben S. Bernanke3, the current Fed chairman, stage a quiet revolution of his own.  Mr. Bernanke needs to steal a page from the Volcker playbook. To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.  Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.  More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.

A Volcker Moment Indeed (Slightly Wonkish) - Paul Krugman - Christina Romer calls on Ben Bernanke to adopt a nominal GDP target, and suggests that he consider himself in a position comparable to that of Paul Volcker — where Volcker took drastic action to fight inflation, Bernanke should do likewise to fight unemployment. I’m good with that. At the risk of reading the stage instructions, however, let me add that the Volcker parallel may run deeper than most people appreciate. You see, the early Volcker years were the period when the Fed at least claimed to have become monetarist, to be setting targets for monetary aggregates like M1 and M2 rather than interest rates. Yet the monetarist interval served a purpose: it gave the Fed a usefully euphemistic way to talk about its inflation-fighting strategy. As I see it — and as I suspect many people at the Fed see it — the basic point is that to gain traction in a liquidity trap you must either engage in huge quantitative easing, raise the expected rate of inflation, or both. Yet saying this is very hard; people treat expansion of the Fed’s balance sheet as horrible money-printing, and as for the virtues of inflation, well, wear your body armor. But say that we need to reverse the obvious shortfall in nominal GDP, and you’ve found a more acceptable way to justify huge quantitative easing and a de facto higher inflation target. Don’t call it a deception, call it a communications strategy.

The legal scope of Fed purchases - Given the current scope of purchases allowed by the Federal Reserve Act, can the Fed be Chuck Norris?  Section 14 of the Federal Reserve Act sets out the rules governing Fed asset purchases. It currently limits the Fed’s purchases to gold (14.a) and US Federal government issued and guaranteed assets (14.b.1), including those of Federal agencies (14.b.2). Eligible government and agency securities include treasuries, agency debt, and agency-issued MBS. These purchases must be conducted in the open market, or secondary market. The open market stipulation prevents the Fed from purchasing Treasury or agency debt directly from the Federal government or its agencies. Such direct purchases would constitute monetary financing of the government. The Fed is also permitted to purchase bankers acceptances and bills of exchange in the open market (14[para 1]).  These are privately issued assets. But both are legacy instruments. Few American institutions use them much anymore. The Fed is also allowed to purchase state and municipal debt with a term not exceeding six months. (14.b.1) Lastly, it can purchase foreign government issued and guaranteed assets, as well as those of their agencies. (14.b.1)

How can the Fed precommit to a permanent expansion of the money supply ? - A challenge for monetary authorities in a liquidity trap is that it is hard convince people that they won't reverse expansionary policies as soon as the economy leaves the liquidity trap. The other problem is that they can't do much other than affect expectations while the economy is in a liquidity trap. This suggests that they can't do much at all. This argument assumes model consistent expectations (aka rational expectations) but that doesn't mean it is totally wrong. My view has been that the key word is "Much" and that the monetary authority can also bear risk. In particular, I think that the Fed can and should bear mortgage default risk by buying mortgage backed securities. The disadvantage of this approach is that, if house prices and/or GDP tank, then the Fed's balance sheet won't balance. It would not be possible for the Fed to retire as much of its obligations as it might choose, because they are worth more than its assets. This disadvantage is an advantage. It means if things turn out to be worse than expected, then the Fed will not be able to reverse the expansion of the money supply. I think this is exactly what the economy needs. The disadvantage of Fed purchases of risky assets is, in fact, a huge advantage.

NGDP targeting will not provide a Volcker moment - Mr Volcker’s policy did not succeed by changing people’s expectations of inflation. It succeeded by crushing demand. As unemployment moved up the Phillips Curve, inflation plummeted. Only then did inflation expectations stabilize at a lower level. Naming an inflation or money supply target is helpful, but insufficient unless the central bank demonstrates it is willing and able to achieve it.  A nominal target can affect expectations in two ways. First, it influences markets’ expectations of what the Fed will do, thereby amplifying monetary actions. If the Fed promised to hold rates low until NGDP returned to its pre-recession trend, that would no doubt help hold interest rates down. But there are many, potentially superior, ways to achieve the same thing, such as a promise to keep short-term interest rates at zero for a specified period of time, to target bond yields, or to keep rates low until a particular inflation or unemployment rate is achieved. Second, a nominal target should encourage firms and workers to behave in a way that makes the target self-fulfilling. This channel is well established for inflation targeting: if workers and firms believe the Fed will keep inflation at 2%, they will tend to set prices and wages accordingly. Exactly how an NGDP target would be self-fulfillling is unclear to me: I haven’t seen good empirical or theoretical evidence linking NGDP targeting to the behavior of private actors.

NGDP Targeting the Real World is Nominal - Brad Delong relays a benefit of NGDP target that I have tried to layout, though less eloquently: At lunch today Christina Romer reminded me of–or rather drove into my thick head a point that I had missed during the seminar, even though he was standing only six feet in front of me at the time–Ivan Werning’s point that level nominal GDP targeting is a good policy in a liquidity trap not just or not primarily because it promises future inflation but also and (for his parameter values) primarily because it promises a future boom. The hard thing for so many economists to remember – because they have been trained to forget – is that the real world is nominal.I think this is important and so I want to spell it out in careful statements...

The case for an NGDP target - MY COLLEAGUE has written a long post aiming to take the air out of the case for NGDP targeting, which has received a significant amount of public support of late: from Goldman Sachs, Paul Krugman, and Christina Romer among others. It's a useful critique; I'm glad for the opportunity to correct misunderstandings of what the policy is and is not likely to mean for the economy. He launches his argument by questioning that NGDP targeting is a particularly effective way to stablise the economy: If the Fed promised to hold rates low until NGDP returned to its pre-recession trend, that would no doubt help hold interest rates down. But there are many, potentially superior, ways to achieve the same thing, such as a promise to keep short-term interest rates at zero for a specified period of time, to target bond yields, or to keep rates low until a particular inflation or unemployment rate is achieved. This is a sort of upside-down view of what the new policy is designed to achieve. Low rates are not a policy goal; they are a means to an end: growth as stable as the Fed is capable of delivering. One criticism of inflation targeting is that it does this at an unnecessary one-step remove; rather than directly targeting macroeconomic stability, the Fed aims for stable inflation in the hopes that this will deliver stable growth. NGDP targeting cuts out the middleman by having the Fed directly target the broadest possible nominal aggregate.

Nominal GDP Targeting - The subject of Nominal GDP targeting has been ongoing within the economic blogosphere for at least the past couple of years. Bentley University professor Scott Sumner has been championing the idea on his The Money Illusion blog (see his National Affairs article too) and the subject has begun to surface as serious monetary policy with recent reports by Goldman Sachs, the Wall Street Journal and Christina Romer’s Op-Ed this past weekend, among many others. The purpose of this post is not to comment explicitly on central bank policy or the different policy regimes currently used around the world, nor is it to comment directly on NGDP targeting itself; it is designed to examine how the Federal Reserve has forecasted NGDP over time. Hopefully this serves the purpose of understanding what the Fed expects economic performance to be in the future when it sets its policies and to see if the Fed currently is already targeting NGDP, at least implicitly. Click here for the complete set of slides in PDF format.

Work with me here - AS A follow-up to this morning's post on Italy and the European Central Bank, I'd like to make a point about the use of communication by central banks. The Federal Reserve has been engaged in monetary easing for several years now, a process which has involved huge purchases of various kinds of assets. As I've noted before, the Fed's theory of these purchases seems to be primarily mechanical in nature—a certain number of purchases is expected to have such-and-such effect on interest rates, which will in turn influence spending and investment, thereby boosting the economy. Perhaps disappointed in the results and facing criticism, the Fed now appears to be experimenting with greater use of communications as a policy tool, that is, telling the market what the policy is designed to achieve. The thought is that by directly setting expectations it can get more bang for its buck. Its a sensible strategy; when the Fed announces a purchase plan of $600 billion, markets can assume that it's unhappy with the present state of the economy, but they're left with a great deal of uncertainty concerning the path of future policy. If the economy is a smidge better at the end of the programme but still crummy, will the Fed act again? Who knows! The Fed, presumably, but it's not telling, or hasn't been so far.

Bernanke can’t solve our problems - Many thanks to Joe Weisenthal for throwing some much-needed cold water on the NGDP fandom which is currently sweeping the blogosphere. I’m a fan of NGDP myself; I was one of the 37% of econobloggers who voted for it in the Kauffman survey this quarter. But the fact is that switching to NGDP targeting would be a decidedly marginal move: the Fed is, simply, out of credible ammunition right now. And so Ben Bernanke is being rather sensible when he says that if you want to create jobs, then fiscal policy is going to be a lot more effective than monetary policy. If you want a good introduction to NGDP, Christy Romer helpfully provided one in the NYT last week. But at heart, the argument seems to go a bit like this:

  1. The Fed should say that it expects the economy to grow more.
  2. Then everybody else will expect the economy to grow more.
  3. Then the economy will grow more!

Ramesh Ponnuru and David Beckworth actually say this, pretty explicitly, when they talk of how “the mere announcement that the Fed will buy assets until nominal spending hits a target, for example, could raise expectations for nominal-spending growth”. But what’s missing here is the actual mechanism by which the Fed will change expectations about the state of the economy.

NGDP Targeting is the Natural Heir to Monetarism - In a recent post, Daniel Alpert enlists Milton Friedman as an ally against the newly popular (but not new) idea of targeting nominal GDP. On the contrary, I see NGDP targeting as the natural heir to monetarist policy prescriptions of the 1960s and 70s. If we look at the textbook version of monetarism, the point is almost trivial. Textbook monetarism begins from the equation of exchange, MV=PQ, where M is money (M1, back in the day), V is velocity, P is the price level, Q is real GDP, and PQ is NGDP. Next it adds the simplifying assumption that velocity is constant. It follows that targeting a steady rate of money growth is identical to targeting a steady rate of NGDP growth. Of course, Friedman himself propounded a more sophisticated monetarism, one in which the linkage between monetary policy and NGDP was not so tight. He saw two sources of slippage as potential problems for a monetary growth target. Read More>>>

"NGDP targeting" means "print money and buy stuff" - The econ blogosphere is afire with talk of "NGDP targeting." I don't have a huge amount to add to this discussion, but this post by Greg Ip caught my eye: [There is] flawed reasoning behind the newborn infatuation with nominal GDP targeting. Its advocates, which include my colleague, R.A. and Goldman Sachs, now include Christina Romer...  A nominal target can affect expectations in two ways. First, it influences markets’ expectations of what the Fed will do, thereby amplifying monetary actions...But there are many, potentially superior, ways to achieve the same thing, such as a promise to keep short-term interest rates at zero for a specified period of time, to target bond yields, or to keep rates low until a particular inflation or unemployment rate is achieved...Second, a nominal target should encourage firms and workers to behave in a way that makes the target self-fulfilling.  NGDP advocates base their arguments on a flawed premise: that with a different framework the Fed would have been less concerned about inflation and more about output, and would have thus eased more aggressively. Basically (and yes, this is a simplifaction), what the Fed can do to affect the macroeconomy is 1) print money and buy stuff, and 2) convince people that it will print money and buy stuff in the future.

The Fed Gets Schooled Again: Swiss Central Bank Edition - I once argued that all incoming Fed officials should spend six months interning at the Swedish central bank given their relative success in stabilizing nominal GDP.  I was wrong.  What I should have said is that all incoming Fed officials should spend six months interning at the Swiss central bank. Here is from The Street Light: “You may recall that in September the Swiss National Bank (SNB) announced that it was going to intervene as necessary in the currency markets to ensure that the Swiss Franc (CHF) stayed above a minimum exchange rate with the euro of 1.20 CHF/EUR. How has that been working out for them? It turns out that it has been working extremely well...the CHF was almost 10% weaker against the euro in September than in August. Given that, it seems likely that the SNB’s purchases of new euro assets in September after the announcement of the exchange rate floor almost completely stopped.” Exactly. Instead of having a central bank that sets an explicit target and commits to doing whatever is necessary to hit it, we have a central bank that at best has a fuzzy inflation target and operates in a manner that does little to create certainty about the future path of monetary policy.  This is crazy.  Here we have the most powerful central bank in the world stumbling, tripping, and occasionally getting lost as it moves forward because it chooses not to set a clear, explicit path of where it wants to go.  If only we could learn from the Swiss...

The Fed’s MF Global Problem - The Federal Reserve is among those feeling the pinch from the collapse of MF Global Holdings Ltd., which only eight months ago was added to the Fed’s list of 22 primary dealer banks. MF Global’s spectacular downfall seems unlikely to pose a systemic financial risk to either the U.S. economy or the Fed, in sharp contrast to the fallout from Lehman Brothers in 2008. But it’s possible it will make the selection procedure tougher for primary dealers, an elite group of institutions with which the New York Fed conducts monetary policy and which are obligated to participate in U.S. Treasury debt auctions. MF Global’s fortunes quickly went downhill over the past week amid concerns over its exposure to the euro zone’s sovereign debt. In this way, its travails underscore the potential contagion risks to the U.S. financial system via the primary dealer network. Besides MF Global, several primary dealers are owned by big European banks, including France’s BNP Paribas SA and Societe Generale SA, whose shares sold off in September due to concerns about their exposure to debts in Greece and other heavily indebted euro-zone sovereigns.

Vatican Calls for 'Central World Bank' to Be Set Up - The Vatican called on Monday for the establishment of a "global public authority" and a "central world bank" to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises. A major document from the Vatican's Justice and Peace department should be music to the ears of the "Occupy Wall Street" demonstrators and similar movements around the world who have protested against the economic downturn. The 18-page document, "Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority," was at times very specific, calling, for example, for taxation measures on financial transactions. "The economic and financial crisis which the world is going through calls everyone, individuals and peoples, to examine in depth the principles and the cultural and moral values at the basis of social coexistence," it said. It condemned what it called "the idolatry of the market" as well as a "neo-liberal thinking" that it said looked exclusively at technical solutions to economic problems. "In fact, the crisis has revealed behaviors like selfishness, collective greed and hoarding of goods on a great scale," it said, adding that world economics needed an "ethic of solidarity" among rich and poor nations.

Paul Krugman and inflation pessimism - Getting the US economy to a higher equilibrium level of output and employment through monetary policy alone means a real interest rate that is lower than it is now. And since the nominal interest rate can't fall any lower, the only way to lower the real interest rate is to increase actual and expected inflation. So Krugman thinks that an NGDP level-path target could work, but could only works because it increases inflation. "Still, NGDP is arguably mainly a relatively palatable way to state a strategy that’s ultimately about something else." That "something else" is higher inflation and/or an increase in the size of the Fed's balance sheet. But suppose the IS does not slope down. Suppose it slopes up? I'm not arguing anything daft. I'm not saying that an increase in real interest rates would increase investment demand and reduce desired saving. Rather, I'm saying that an increase in output and employment, especially if that increase were expected to continue into the future, might increase the demand for investment more than it increased desired saving at any given real interest rate. And it might even reduce desired saving, if people were less uncertain about the future. And if that happened the equilibrium real interest rate, at which desired investment equals desired saving, would increase, rather than decrease.

Negative real interest rates - In macroeconomic theory, the nominal interest rate plays second-fiddle to the so-called real interest rate. The real rate of interest is ... a relative price. It is the price of output today measured in units of future output... So, if the risk-free annual interest rate on an inflation-indexed U.S. treasury is 2%, then one unit of output today is valued at 1.02 units of output in the future. Economists typically focus on the real interest rate because people presumably care about output and not money (they care about money only to the extent that it may be used to purchase output). ... The higher the real interest rate, the more output is valued today vis-a-vis future output. A high real interest rate reflects the market's strong desire to have you part with your output today (in exchange for a promise of future output). Unlike the nominal interest rate, however, there is nothing that naturally prevents the real interest rate from becoming negative; see Nick Rowe. And indeed, this appears to have happened recently in the U.S. The following diagram plots the real interest rate as measured by the n-year treasury inflation-indexed security (constant maturity) for n = 5, 10, 20; see FRED. The decline in real rates that has taken place, especially since the beginning of 2011, is a troubling sign. ... This premium may be signaling an expected scarcity of future output. If so, then this is a bearish signal.

The Fed Says the Economy Is Getting Better and Worse At the Same Time -The good news is that the Federal Reserve thinks the economy is improving. The bad news is the Fed says GDP and employment won't improve as much as it earlier thought. According to a statement released by the Fed today, Ben Bernanke & Co. said that in the past month the economy has gotten stronger. Consumers have opened their wallets and are spending more money than many thought they would be going into the holiday season. Businesses are continuing to purchase more software and equipment, even after some had predicted that spending would taper off.  Inflation has dropped as the price of oil and to a lesser extant gas at the pump has fallen. In fact, at the same time the Fed said that the economy was improving this year, it ratcheted back its expectations for the economy next year and beyond. Back in June, the Federal Reserve said the economy could grow as much as 2.9% this year. Today the Fed cut that forecast nearly in half, saying GDP could grow as slow as 1.6% on average in 2011. . What was surprising was that the Fed not only lowered its expectations for this year, but for next year and 2013 as well. The Fed predicts GDP could rise as little as 2.5% next year, down from forecast of as much as 3.7% back in June. For 2013, the Fed pulled back its optimistic prediction to a 3.5% rise in GDP, down from 4.2%.

CHART OF THE DAY: Well, We're Finally Back To Where We Were In 2007 - Hard to get too excited about this economic accomplishment, but it's certainly better than the alternative. Thanks to yesterday's solid Q3 GDP report, the U.S. economy is finally back to where it was before it cratered four years ago. (After adjusting for inflation.) And now for the caveat: Yesterday's Q3 GDP report was the first of three. The next two will be revisions. And they might be revised downward. And then there's the bad news: We've regained the lost ground in GDP, but, thanks to corporate downsizing, we're producing that output with about 8 million fewer jobs...

America's Economic "Growth" — A Sad State Of Affairs - The BEA released the preliminary estimate for Gross Domestic Product (GDP) for the 3rd quarter last week. The news was deemed good by the New York Times. Economic growth in the United States picked up in the last quarter in the latest encouraging sign that the recovery, while painfully slow, had not stalled. Consumers spent more, especially on health care and utilities, and businesses invested more, in software and vehicles among other items, spurring the fastest growth in a year. Most commentators focused on the fact that spending increases are outpacing changes in income, causing the savings rate to decline. Although the wealthiest Americans do a disproportionate amount of the spending, that trend is clearly not sustainable. Still, most observers managed to ignore the elephant in the room. You can see the obvious problem in the Times story—the consumption component of GDP rose mostly because of rises in spending on health care and utilities. Rosenberg called this a sad state of affairs. It is sad, this self-deceptive game Americans play. Michael Panzner, who runs the blog Financial Armageddon, caught on to the game in a post called Not Sustainable. First, Panzner cites this graph from Jake's blog EconomicPic

Americans: Awash In Spin - I have come to the conclusion that Big Brother’s subjects in George Orwell’s 1984 are better informed than Americans. Americans have no idea why they have been at war in the Middle East, Asia, and Africa for a decade.  They don’t realize that their liberties have been supplanted by a Gestapo Police State.  Few understand that hard economic times are here to stay. On October 27, 2011, the US government announced some routine economic statistics, and the president of the European Council announced a new approach to the Greek sovereign debt crisis.  The result of these funny numbers and mere words sent the Standard & Poor’s 500 Index to its largest monthly rally since 1974, erasing its 2011 yearly loss. The euro rose, putting the European currency again 40% above its initial parity with the US dollar when the euro was introduced. On National Public Radio, a half-wit analyst declared, emphatically, that the latest US government statistics proved that the recovery was in place and that there was no danger whatsoever of a double-dip recession. And half-brain economists predicted a better tomorrow.

Recovery Measures - This graph is for real GDP through Q3 2011 and shows real GDP is finally back to the pre-recession peak. Gross Domestic Income (not shown) returned to the pre-recession peak in Q2 - GDI for Q3 will be released with the 2nd estimate of GDP. (For a discussion of GDI, see here). At the worst point, real GDP was off 5.1% from the 2007 peak. Real GDI was off 5.7% at the trough. And real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak through September. This measure was off almost 11% at the trough! Real personal income less transfer payments is still 5.3% below the previous peak and has declined over the last three months. This graph is for industrial production through September. Industrial production had been one of the stronger performing sectors because of inventory restocking and some growth in exports. However industrial production is still 6.5% below the pre-recession peak, and it will probably be some time before industrial production returns to pre-recession levels. The final graph is for employment. Payroll employment is still 4.8% below the pre-recession peak. This shows that the recovery in all indicators has been very sluggish compared to recent recessions.

Economists Debate Slowing Release Of US GDP Report - Some of the nation's top economists debated Friday whether the U.S. government should slow its reporting of economic-growth figures to ensure greater accuracy. The advisory committee to the Bureau of Economic Analysis, the arm of Commerce Department that computes several key metrics, discussed whether the agency should scrap its initial gross-domestic-product report issued before all source data are collected. "If there is no signification information in the advance estimate, don't publish it...but we don't want to not publish it just because it will be revised The government's first reading on quarterly GDP comes out less than two months after the previous financial quarter ends. It is closely watched by the media and policymakers, but the number also typically is revised--sometimes significantly. That happened as the financial crisis took hold. The government initially reported the economic contraction in the fourth quarter of 2008 as a 3.8% GDP decline. After several revisions, the number settled at an 8.9% decline. By and large, the committee said the initial reporting was helpful and typically fairly accurate, but said more should be done to stress that the first report is an early estimate and contains much uncertainty.

A Recent Rarity: Forecast upgrades - A couple of forecast upgrades:  Merrill Lynch: "An improvement in domestic demand and inventory rebuilding has led us to revise Q4 GDP growth to 3.0% from 2.3%" Goldman Sachs: "We have revised up our Q4 GDP forecast to 2.0% (quarter-over-quarter annualized) from 1.0% previously. The revision primarily reflects an upgrade to consumer spending, which showed solid momentum at the end of the third quarter." It is important to remember that this is still sluggish growth, and not enough to reduce the unemployment rate. And there are significant downside risks from the European financial crisis and U.S. fiscal tightening in 2012.

Exports in the Recovery - Just a quick observation today, elicited by a question: what has been a consistent source of growth since the recovery began? It's export growth. The question is whether that will continue, as European growth gets marked down (and indeed the rest of the world as well, although not as markedly). (Note that the 2011Q3 figure is an advance one; the contribution of the trade components is estimated on the basis of only two months out of the quarter.)

GDP growth and U.S. exports - This post provides our latest update of the quarterly figures for the real and nominal GDP of U.S. trading partners (1970q1-2016q4), which were presented a few years ago in a Levy Institute working paper and have now been updated to the second quarter of 2011, with predictions up to 2016 based on the latest IMF World Economic Outlook. The database has been requested over the years by other researchers, so we decided to put it up on our web site. It is, and will be, available here: Our index for the annual growth rate in the real GDP of U.S. trading partners, reproduced above, now shows that no boost in U.S. exports from accelerating growth in the rest of the world can be expected. More specifically, according to the IMF the eurozone will not contribute much to global growth, and if fiscal consolidation in Southern European countries will indeed be implemented, we expect a further slowdown in the area. Given that the eurozone accounts for roughly 16 percent of U.S. exports, the impact on the U.S. economy of a European slowdown, through trade, will not be dramatic — certainly not as dramatic as the potential negative impact on financial wealth if the eurozone sovereign debt crisis spirals out of control.

Slow-Paced Recovery Feels Like a Recession - Americans are two years into a recovery that doesn't feel much different to many of them from life during the most bruising recession in seven decades. Scenes of the long haul back from the slump show a nation struggling to rebuild after a battering that crossed ages, regions and occupations. A sobering set of economic statistics is at the heart of tales of Americans moving in with relatives, switching careers and dialing back on spending to cope with straitened circumstances amid the fitful rebound. One benchmark, income of the median household—meaning the one in the very middle of the middle—declined 3.2% to $53518 during the past year.

How Much of the US Economy Is Friction? -   It is a difficult question, as we’ve grown so accustomed to our way of doing things that we tend to assume that the present system is the most efficient one possible. If it is visibly inefficient, that we assume it serves a social need so vital that its maintenance overrides the high costs of maintaining the system.  Much of our faith is based on the belief that because we live in a market economy, the efficiencies intrinsic to a market economy -- such as customers gravitating toward the goods and services that offer the lowest costs and highest benefits -- are being effectively captured by the US economy. But this is mostly wishful thinking, the net result of ceaseless self-promotion by the Status Quo that benefits from the enormous friction that is, in fact, grinding down the US economy. In actuality, market forces influence very little of the US economy, and what they do influence is a series of carefully limited false choices constructed by non-market forces and the immense powers of marketing.

The Pessimism Of Economics Bloggers - "Economics bloggers seem the most pessimistic in their outlook on the U.S. economy so far for 2011," according to the Kauffman Foundation's latest quarterly survey of 200 economics bloggers, including the views of yours truly. According to the report, 96% of the bloggers polled think overall economic conditions are "mixed, facing recession, or in recession." Taking a closer look at the numbers, those in the mixed camp constitute 55% of the respondents, with another 25% saying that the economy is facing a new recession and another 16% predicting the economy is weak and already in a downturn. Suffice to say, economics bloggers are in a dour mood.  Now for the $64,000 question: Is this pessimism a contrarian indicator? Stay tuned for the answer...

Q4 Economics Bloggers Survey (a word cloud time series) - We published the results of the survey at this morning in PDF, and I just emailed the GIF files out to the blogging community.  Here, I'll post the now famous word cloud (which is redder than ever):

Bad Moon Rising - The Economic Cycle Research Institute (ECRI) declared the country was headed back into recession on September 30: “It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar. Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.” The ECRI has called the last three recessions with no instances of false alarms. Last week, the Conference Board announced the Consumer Confidence Index plummeted to two and a half year low of 39.8, last seen in March of 2009. The Dow Jones was trading at 6,500 in March 2009, some 47% below today’s level. It is an interesting dichotomy between how the average American feels about the world and how the Wall Street elite feel about their Ben Bernanke sheltered world. The Consumer Confidence Index was 110 in 2007 and 140 in early 2001. We’ve come a long way baby.

Will the US get hurt by the Eurozone? - Lots of bad news from Europe over the past few days.

  • Most attention is paid to Italy's rising 10-yr benchmark. When nations can't afford to refinance longer bonds, they move down the yield curve. Oh oh, the 2-yr bond yield has blown up too.
  • The Eurozone PMI is horrible. Manufacturing is plummeting in Greece, Italy, and Spain - their GDP will follow. Austerity is making a turnip of their tax base, from which Germany & France can squeeze little blood. Germany's new orders plummeted too, so bad fundamentals all around (except for Ireland, who has markets w/ the US and UK).
  • New EFSF bond issuance that would have refinanced Irish debt was delayed because the value of these bonds has fallen so much - their price is following their French guarantor's bonds.
  • Greece may or may not have a referendum on the Euro. Greek bond payments may not matter much anymore, but leaving the Euro is a scary precedent. Merely the fear by depositors that they could wake up one morning with a new and much weaker currency can spur bank runs throughout peripheral Europe.

There is some good news. The new ECB head cut interest rates, which may foreshadow that he won't be reluctant to apply massive quantitative easing when panic hits. The other good news is that equity markets have mostly rallied through the bad Euro news.

Economists: Europe crisis to cloud U.S. economy in 2012 - Most economists surveyed by USA TODAY say the European debt crisis will remain a threat to the global economy next year and will hurt U.S. economic growth despite last week's deal aimed at averting a meltdown. Still, many of the 43 economists polled Oct. 25-27 see less risk of a new U.S. recession, though they expect only modest growth next year. Sixty-one percent say Europe's financial troubles will continue to weigh on the global economy despite last week's agreement by the continent's leaders to cut in half what Greece owes private lenders, bolster the eurozone's bailout fund and require banks to boost their capital. Bernard Baumohl, chief global economist of the Economic Outlook Group, says the plan is woefully short on details, and there's no guarantee investors will buy government bonds to reduce the borrowing costs of financially troubled nations such as Italy and Spain. Like a majority of those surveyed, Baumohl expects the debt crisis to trigger a recession in Europe that will affect the U.S. economy. He predicts Europe's problems could shave up to a quarter point off economic growth here next year. Although U.S. exports to Europe make up a tiny portion of the overall economy, large U.S. banks hold a significant amount of European debt.

The US Paper Dump Continues: Norway's Sovereign Wealth Fund Sells All Of Its US MBS Exposure - Two days ago we noted that foreigners are selling US paper at a record pace, whether to raise capital in a locked out liquidity environment like French banks, or to make a politicial statement, like China. Today we get the first confirmation to this from Norway's Sovereign Wealth fund, best known for its prediction that it would buy and hold Greek bonds in perpetuity back in September 2010. Just recall: "Norway has taken the view that [Greek bonds] will not [default]. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default." Well, about a year later it is now official that the best the Norway SWF can hope for is a 50% recovery. So what does it do? It proceeds to dump US paper. Mortgage Backed Securities first. Because if it announced that a sovereign wealth fund instead of buying into the biggest ponzi ever, we finally defecting from it, then all bets would be of. Bloomberg reports: "Norway’s $570 billion sovereign wealth fund sold all its holdings in U.S. mortgage-backed securities as part of a shift of its fixed-income portfolio. The fund holds no mortgage bonds issued by Fannie Mae and Freddie Mac, the U.S.-controlled mortgage financiers, and an “insignificant” amount of private home loan-backed bonds“We’ve reduced our holdings of mortgage-backed securities,” he said. “MBS has been taken out of our internal policy benchmark. This means that we don’t have mortgage-backed securities issued by Freddie Mac and Fannie Mae any longer."

"An Examination of U.S. Dollar Declines" - That's the title of a blogpost at the New York Fed. The write: ...we examine the role of market uncertainty and currency risk premia in the pace and size of episodes of dollar weakness since 1991. We find that the most recent bout of U.S. dollar declines largely can be attributed to the recovery in global economic activity from the most recent recession. The unique aspect of the approach is the use of lots of data, and balance sheet variables. Citing a paper entitled Financial Amplification of Foreign Exchange Risk Premia, they describe the approach thus: ...The risk premium measure represents the aggregation of investors’ expected dollar appreciation in excess of one-month forward rates across a multitude of U.S.-dollar-based currency pairs, and we link it to a few determining factors.  The chart below presents the U.S. dollar risk premium estimate since 2001 as well as the component of the premium associated with global economic activity. At times, there is a wedge between the overall risk premium and the global economic activity component, which represents the risk premium component associated with the funding conditions of U.S.-based financial institutions. This latter risk premium component measures the degree to which these institutions are able to expand their asset holdings (including foreign assets) beyond the level implied by their capital and deposit base by borrowing extra funds.

Bill Gross' Latest Monthly Thoughts: "Pennies From Heaven" Or Can You Solve Debt With More Debt?  - Once again, Bill Gross proves he can think outside of the box better than most, with the following paragraph from his latest letter to clients: "the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier: As long as these policies generate growth."..."My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest."

180 Years of the U.S. National Debt Burden per Capita - In 1831, the National Debt Burden per Capita, or rather the ratio of the United States' national debt per capita and GDP, multiplied by 1 billion), dropped below a value of 3 for the first time in its history [1]. In 2011, the U.S.' National Debt Burden per Capita has risen above that level.  Let's look at what happened to the U.S.' National Debt Burden per Capita in between, shall we?  Wars and depressions largely characterize the periods of time where there have been significant run-ups in the level of the U.S. National Debt Burden per Capita, with the debt taken on to support the costs of the U.S. Civil War and World War II being the most significant.  In looking at today's level of the National Debt Burden per Capita, we see that it is perhaps most comparable to the Great Depression.

Discretionary Spending: Funding versus Outlays - CBO Director's Blog - One issue that complicates discussions of discretionary spending—including the question-and-answer portion of my testimony to the deficit-reduction committee—is the difference between “funding” and “outlays.” That difference, which I’ll explain in a moment, may seem rather technical, but it turns out to be very important in understanding the recent pattern of discretionary spending and the outlook for such spending under current law. Discretionary spending is the part of federal spending that lawmakers generally control through annual appropriation acts; the other large category of noninterest federal spending is mandatory spending, which consists primarily of benefit programs for which the Congress sets eligibility rules and benefit formulas rather than appropriating specific amounts each year. For discretionary spending, appropriation acts provide “budget authority” to federal agencies, an allocation of funds that they can use to make financial commitments (“obligations”). To calculate total discretionary “funding,” CBO adds up all of that budget authority, along with some other budgetary resources provided for certain transportation programs (the details of which are described in the testimony but aren’t crucial here). Agencies use that funding to incur obligations, some of which are paid quickly (for example, employees’ salaries) and some of which are paid over several years (for example, payments to contractors for major construction projects). The amount of money paid out by the government is known as “outlays.”

Social Security appears on deficit panel agenda - As a critical deadline for the supercommittee nears, Social Security appears to be on the negotiating table. In private conversations, and now in public, the idea of changing the social program as part of a deficit-reduction deal is gaining some traction — a move that has been politically unthinkable for years.In a speech Monday in Louisville, Ky., House Speaker John Boehner (R-Ohio) appeared to raise the stakes on a grand bargain that would include major entitlement changes. Standing with his Senate counterpart, Minority Leader Mitch McConnell (R-Ky.), at the McConnell Center at the University of Lousiville, Boehner said such action would show markets that Congress can tackle the deficit. “Nothing,” Boehner said, according to prepared remarks, “nothing, would send a more reassuring message to the markets than taking bipartisan steps to fix the structural problems in Medicare, Medicaid and Social Security.” In a brief interview with POLITICO on Monday, Sen. Patty Murray (D-Wash.), the co-chair of the panel, said she was “not going to talk about the details of any package, but I can tell you that everybody on the committee is serious about finding a way forward.”

Why the GOP loves ‘dynamic scoring’ - One of the biggest questions facing the supercommittee is how much revenue lawmakers will put on the table—and where it will come from. Supercommittee Republicans are so far sticking by their party’s hardline pledge not to accept any tax increases, infuriating Democrats. Instead, they’re offering up $640 billion through a small number of sources— including $200 billion “attributed to the impact of future tax reform spurring economic growth,” as Politico reported last week. Sound familiar? It seems that Supercommittee Republicans are depending on a longtime hobby-horse known as “dynamic scoring” in their effort to put revenue on the table. Traditionally, Republicans have pushed this approach to justify tax cuts and supply-side economics: the rationale is that tax cuts will boost the economic growth so much that revenues will actually increase, to the point where the tax cuts could for themselves. It’s the method, for example, that Rick Perry has used to justify his extremely regressive tax plan. But when outside budget analysts actually run the numbers, they don’t always look great:

Supercommittee of the 1% Won’t Even Think of Taxing Wall Street - Dean Baker - If anyone still questioned who owns Washington, the Congressional supercommittee charged with reducing projected deficits by $1.2 trillion seems determined to end any doubts. According to press accounts, both the Republicans and Democrats on the committee support a plan to reduce average Social Security benefits by 3 percent. While whacking our parents and grandparents with a big cut in Social Security benefits apparently draws bipartisan support, the supercommittee will not even score a plan to tax Wall Street financial speculation. No committee member from either party is prepared to make a simple request to the Joint Tax Committee of Congress that would allow a speculation tax to be one of the items considered in the mix. It's hard to know which part of this picture is worse. The plan to cut Social Security benefits at a time when seniors are more dependent than ever on them is incredibly pernicious. The people who would see their benefits cuts under this proposal paid for their benefits contributing to Social Security over their entire working career.

The Supercommittee Countdown: Why Tax Reform Is Gaining Momentum - Whether or not Congress’s deficit supercommittee succeeds in finding $1.2 trillion in savings by Thanksgiving, one likely result is that sometime in the next 18 months, Congress will tackle tax reform. There are already many areas of agreement between Senate Finance Committee Chairman Max Baucus, Democrats’ top tax writer, and Republican Rep. Dave Camp, his counterpart on the powerful House Ways and Means Committee. Over the last year, both men have held a series of hearings on the issue. Tax reform isn’t something that should be done hastily– just look at the Savings & Loan Crisis produced by the rushed tax reform process in 1986 – but with so much already discussed, a comprehensive overhaul is already well on it’s way. So much is apparent in the current supercommittee negotiations. Last week, deficit negotiators from both sides unveiled their offers. Dems proposed a $3 trillion-deficit cutting plan and Republicans proposed a $2.2 trillion version. The biggest difference? Taxes. But this sparring belies the state of near-consensus on tax reform. There’s now enough agreement that if Republicans were to give an inch on revenue, a deal could quickly be achieved.

Progressives on Supercommittee Marginalized Amidst Deficit Theater - For the austerity class in Washington, yesterday was high theater. The Congressional supercommittee on deficit reduction heard hours of testimony from people who served on other deficit commissions about how best to cut the government’s budget. Both Alan Simpson and Erksine Bowles, of the Bowles-Simpson Commission, testified, as did Alice Rivlin and Pete Domenici, who have their own deficit reduction plan.  A morality play about the evils of national debt unfolded: the scene, as set by Domenici, was a fiscal house in disarray—“We have rats, holes in the roof and grass growing window high,” he said. Bowles—a board member at Wall Street megafirm Morgan Stanley—invoked his grandchildren and told the supercommittee not to “fail the country” by not agreeing on a major deficit reduction plan. Rivlin, who helped Representative Paul Ryan craft his Medicare privatization plan, proclaimed that “this committee can change the course of economic history for the better.”

Worry Builds for Deficit-Panel Deal - Lawmakers from both parties are increasingly worried that Congress's deficit-cutting supercommittee will have trouble reaching a significant agreement in time to meet a rapidly approaching deadline. The 12-member committee must come up with a plan to cut the deficit by $1.2 trillion by Nov. 23, or an array of deep spending cuts will take effect in 2013. In reality, the deadline is likely sooner because the Congressional Budget Office says it needs the plan by early this month to provide the official estimate of how much money is being saved. That makes this week crucial. "I am concerned that they might reach only a minimal agreement or no agreement at all," said Sen. Jeff Sessions (R., Ala.), the top Republican on the Senate Budget Committee. "Dams sometimes break, but it doesn't look good." Committee members themselves strike a somewhat more hopeful tone, but all agree this is a do-or-die moment. "With 23 days left to go until our deadline, and with even less time before we need to have a plan ready to be voted on, we are now entering the critical final phase of this process," said Sen. Patty Murray (D., Wash.), the panel's co-chair. Committee members are struggling to close a fundamental gap between Democrats' insistence that tax increases be part of the plan and Republicans' resistance to that idea.

For the Super Committee, Failure Might Be the Best Option - The Joint Select Committee on Deficit Reduction — sometimes called the “super committee” because of the unusual power it was granted in the legislative process — now has just three weeks left before it is to report out a plan to cut at least $1.2 trillion from projected federal budget deficits over the coming decade. If the committee fails to produce such a plan, then nine annual automatic “sequesters” will be triggered, starting in January 2013, to achieve the same targeted level of deficit reduction — $1.2 trillion. The “sequesters” will impose spending cuts in defense and certain non-exempt domestic accounts to hit the deficit reduction target. Producing a deficit-cutting plan that will head off the automatic sequesters will be a tall order for the super committee. The law requires that seven of the committee’s twelve members sign onto any plan before it can be considered “approved” by the committee (and thus eligible for expedited consideration in the House and Senate). But the committee’s membership is split evenly, with six members from each party; thus, no plan can be approved by the committee unless it has achieved some level of bipartisan support

Focus on failure as US budget deadline looms - US lawmakers and budget analysts are starting to contemplate the possible failure of a special congressional committee to reach a deal to cut America’s budget deficits.  With less than three weeks to go before a November 23 deadline to present a plan to save at least $1,200bn for the US government over 10 years, the 12-member panel – equally split between Republicans and Democrats – remains gridlocked. Republican aides say Democrats are not proposing sufficiently audacious cuts to popular government programmes, and Democratic staffers say Republicans are still holding out against any net tax increases. No compromise is in sight.  If a majority of the committee fails to agree on new budget-slashing measures, a “sequester” would be triggered, forcing automatic across-the-board spending cuts worth $1,200bn, beginning in 2013. Some politicians are already bracing themselves for that outcome. According to the August budget deal that set up the so-called “supercommittee”, half of the savings from any sequester would come from the defence budget.

Deficit Panel Is Warned That It Must Not Fail and Is Urged to Compromise - A co-chairman of President Obama’s fiscal commission told members of a powerful Congressional panel on deficit reduction Tuesday that he feared they would fail, and he said the consequences of such failure could be calamitous. Four experts on fiscal policy — two Democrats and two Republicans — told the panel that Congress should reduce the budget deficit by adopting spending cuts and increases in tax revenues. One co-chairman of the president’s fiscal commission, Erskine B. Bowles, said he had great respect for each member of the committee, but added, “I am worried you’re going to fail — fail the country.”  Former Senator Alan K. Simpson, the other co-chairman of the commission, denounced Grover G. Norquist, the conservative antitax advocate, and AARP, the lobby for older Americans, saying both were obstructing efforts to reduce the deficit.

Why the supercommittee should disband - Congress has now achieved the remarkable feat of making itself less popular than Wall Street bankers. And the way it is heading, it hasn’t hit bottom yet — there’s still 9 percent 1of the public that approves of the job the legislators are doing. The entire country is terrified about the economy.  So how is it that after a few weeks of inching toward talk about jobs some members of Congress have turned their attention back to cutting spending and raising taxes — both actions guaranteed to destroy jobs, not to create them? We’re headed toward the deadline of the supercommittee’s Gang of 12 — the despicable offspring of the debt ceiling deal. It must report its plan to reduce the deficit by $1.2 trillion (on top of the $900 billion in spending cuts mandated in the deal) before Thanksgiving. If nothing is passed before Christmas, deep automatic cuts in discretionary spending will begin to kick in — in 20133. Last week, the majority of Democratic representatives on the supercommittee offered up an even larger deal — suggesting $3 trillion in deficit reduction, with a ratio of 6-to-1 spending cuts to tax hikes, according to the most reasonable Congressional Budget Office (CBO) baseline, or nearly 2-to-1 cuts to tax hikes on the CBO’s current policy baseline4. Whatever the measure, the offer was markedly worse on spending 5than either the Simpson-Bowles Deficit Commission’s recommendations or the ideas ladled out by the bipartisan Senate Gang of Six

Castrated servants of Royalty - The right leaning, safety net slashing Simpson-Bowles consensus of two is being revised. Rightwards:“As I have thought about it…under the Affordable Health Care Act we provide subsidies for people who have really chronic illnesses and people who have limited incomes so they can afford health care insurance in the private sector,” Bowles told the panel during an exchange with Sen. John Kerry (D-MA). “And that didn’t exist before the Affordable Health Care Act. That means that people 65, 66, 67 will still be able to get health care insurance. So as I think about it I could support raising the health care age for Medicare since we have other coverage available under the Affordable Health Care Act.”  In private budget negotiations earlier this year with House Speaker John Boehner (R-OH), President Obama entertained the same idea — a slow increase in the Medicare retirement age — provided Boehner find votes for over $1 trillion in new The proposal infuriates progressives, and other defenders of single-payer Medicare, who note that the proposal is regressive — hitting elderly minorities and poor people who have lower life expectancies hardest — and shifts costs on to seniors, states, employers, and other federal programs.

Summers: To end slump, United States must spend - The United States needs additional government spending to create significant economic growth, and in so doing would face little risk of serious inflation, said Lawrence H. Summers ’75, the economist and former Obama administration adviser, in public remarks at MIT on Wednesday. “No thoughtful person can look at the U.S. economy today and believe that the principal constraint on expansion of output and employment is anything other than the lack of demand experienced by firms,” Summers said. That is, not enough consumers in the country have sufficient spending power; government programs employing more people would change that, he asserted at the event, hosted by MIT’s Undergraduate Economics Association. “If the private sector is either unable or unwilling to borrow and spend on a sufficient scale, then there is a substantial role for government in doing that,” added Summers, who also served as Treasury secretary in the Clinton administration. “That’s the right macroeconomics. It’s also common sense.”

Creating Jobs and Boosting the Economy: The Case for Rebuilding our Transportation Infrastructure - Treasury Blog - Today, the Senate begins its consideration of the Rebuild America Jobs Act, which would put hundreds of thousands of construction workers back on the job and modernize America’s crumbling infrastructure.  Our economy is as interconnected as our infrastructure, and well-targeted infrastructure investments create immediate and long-term economic benefits to both local communities and those further away.  As Secretary Geithner said when he visited the UPS Worldport Facility in Louisville, Kentucky recently, “If you do a better job of repairing roads and bridges, highways, airports, railways, it makes companies more competitive. It lowers their costs. It’s like a tax cut.”  Simply put, wise investments in infrastructure save companies and consumers both time and money. In addition to laying the foundation for stronger economic growth, we must also work to address a crucial problem facing our economy today - unemployment. Investments in infrastructure today will put Americans back to work. And with over 1 million construction workers currently unemployed, now is the right time to invest in infrastructure. Eighty percent of jobs created by investing in infrastructure will likely be created in three occupations - construction, manufacturing, and retail trade - which are among the hardest hit from the recession. Treasury Department analysis shows that these sectors pay middle-class wages, so employment in these sectors bolsters middle-class jobs

The Treasury Joins the Build While It's Cheap Chorus - When I first started writing about this in January 2008, I was hoping the Treasury would get on board.  This Treasury Note by Aaron Klein makes the case very well (h/t Mark Thoma): In addition to laying the foundation for stronger economic growth, we must also work to address a crucial problem facing our economy today - unemployment. Investments in infrastructure today will put Americans back to work. And with over 1 million construction workers currently unemployed, now is the right time to invest in infrastructure. Eighty percent of jobs created by investing in infrastructure will likely be created in three occupations - construction, manufacturing, and retail trade - which are among the hardest hit from the recession. Treasury Department analysis shows that these sectors pay middle-class wages, so employment in these sectors bolsters middle-class jobs. Better some than none at all.  Better late than never.

GOP Rep: ‘Few things more important than re-affirming ‘In God We Trust’ - Before voting on the House resolution to reaffirm the phrase “In God We Trust” as the nation’s motto Tuesday evening, Rep. Lamar Smith (R-TX) expressed his view of how necessary this was for the country. “There are few things Congress could do that would be more important than passing this resolution,” Smith said, before the resolution easily passed 396 to 6. It reaffirms ‘In God We Trust’ as the official motto of the United States.” Smith wasn’t the only GOP rep voicing his happiness over the resolution. Rep. Trent Franks told colleagues that without it, “there is no longer any reason for us to gather here in this place.”

President Obama rips Boehner for ignoring jobs legislation… President Obama ripped into House Speaker John Boehner (R-Ohio) on Wednesday, ridiculing the Republican leader for holding a vote to affirm the national motto — but failing to vote on proposed jobs legislation. “If Congress tells you they don’t have time -- they’ve got time to do it,” Obama said at an event at the Georgetown Waterfront. “In the House of Representatives, what have you guys been debating? John, you’ve been debating a commemorative coin for baseball? You had legislation reaffirming that ‘In God We Trust’ is our motto? That’s not putting people back to work.” Obama continued: “I trust in God, but God wants to see us help ourselves by putting people back to work.”  The House passed the nonbinding resolution affirming the national motto on Tuesday. The bill, sponsored by Rep. J. Randy Forbes (R-Va.), was passed by a vote of 396 to 9.

Washington Pre-Occupied - Robert Reich - The biggest question in America these days is how to revive the economy. The biggest question among activists now occupying Wall Street and dozens of other cities is how to strike back against the nation’s almost unprecedented concentration of income, wealth, and political power in the top 1 percent. The two questions are related. With so much income and wealth concentrated at the top, the vast middle class no longer has the purchasing power to buy what the economy is capable of producing. The result is prolonged stagnation and high unemployment as far as the eye can see. Until we reverse the trend toward inequality, the economy can’t be revived. But the biggest question in our nation’s capital right now has nothing to do with any of this. It’s whether Congress’s so-called “Supercommittee” – six Democrats and six Republicans charged with coming up with $1.2 trillion in budget savings — will reach agreement in time for the Congressional Budget Office to score its proposal, which must then be approved by Congress before Christmas recess in order to avoid an automatic $1.5 trillion in budget savings requiring major across-the-board cuts starting in 2013. Diffident Democrats on the Supercommittee have already signaled a willingness to cut Medicare, Social Security, and much else that Americans depend on. The deal is being held up by Regressive Republicans who won’t raise taxes on the rich – not even a tiny bit.

Chart of the Day: Republicans and the Filibuster - We haven't had an excuse to talk about Republican abuse of the filibuster lately, so here's a nice chart for you that spells it out. It comes from JS, a regular reader, and instead of just showing the rise in the filibuster over the past 50 years, it color codes each Senate session to represent the party in the minority. As you can see, Democrats have been responsible for only a tiny part of the increase. The big changes came in the early 70s, the late 80s, and then in the late aughts after Republicans lost the Senate in the 2006 elections. When you add up all the red segments, they represent virtually the entire increase in the use of the filibuster over the past half century. This isn't a big surprise or anything, but now you have the color-coded data to show to all your friends and relatives. Republicans are the party of obstruction, and they have been for more than four decades now.

Senate GOP Blocks Obama's $60 Billion Infrastructure Plan – Republicans in the Senate Thursday dealt President Obama the third in a string of defeats on his stimulus-style jobs agenda, blocking a $60 billion measure for building and repairing infrastructure like roads and rail lines. Supporters of the failed measure said it would have created tens of thousands of construction jobs and lifted the still-struggling economy. But Republicans unanimously opposed it for its tax surcharge on the wealthy and spending totals they said were too high. The 51-49 vote fell well short of the 60 votes required under Senate procedures to start work on the bill. Every Republican opposed the president, as did Democrat Ben Nelson of Nebraska and former Democrat Joe Lieberman, I-Conn., who still aligns with the party. Obama's loss was anything but a surprise, but the White House and its Democratic allies continue to press popular ideas from Obama's poll-tested jobs package in what Republicans say is nothing more than a bare-knuckle attempt to gain a political edge by invoking the mantra of jobs but doing little to seek compromise.

More Thoughts On Weaponized Keynesianism - Krugman - Let me follow up a bit on the sudden discovery by Republicans that cuts in government spending cost jobs and drive up the unemployment rate – as long as the spending is on destruction rather than construction. Oh, and thanks to commenters for reminding me of Barney Frank’s coinage, “weaponized Keynesianism.” The first thing to say is that liberals shouldn’t engage in mirror-image thinking, and imagine that spending we dislike somehow lacks the job-creating virtues of spending we like. Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks. As I pointed out not long ago, a perceived threat of alien invasion, by getting us to spend on anti-invasion measures, would quickly restore full employment, even though the spending would be on totally useless object. It’s also worth noting that one of the main sources of evidence that fiscal expansion really does stimulate the economy comes from tracking the effects of changes in defense spending.

Bombs, Bridges and Jobs, by Paul Krugman, Commentary, NY Times: A few years back Representative Barney Frank coined an apt phrase for many of his colleagues: weaponized Keynesians, defined as those who believe “that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation.” Right now the weaponized Keynesians are out in full force. What’s bringing out the military big spenders is the approaching deadline for the so-called supercommittee to agree on a plan for deficit reduction. If no agreement is reached, this failure is supposed to trigger cuts in the defense budget.Faced with this prospect, Republicans — who normally insist that the government can’t create jobs, and who have argued that lower, not higher, federal spending is the key to recovery — have rushed to oppose any cuts in military spending. Why? Because, they say, such cuts would destroy jobs. First things first: Military spending does create jobs when the economy is depressed. ... Some liberals dislike this conclusion, but economics isn’t a morality play... But why would anyone prefer spending on destruction to spending on construction, prefer building weapons to building bridges?

Defense, Jobs,and the Making of Hypocrites - Defense budgets go up and down.  They have ever since the end of the Second World War. We are in a build down today, one that is likely to continue for the next decade, reardless of what the Super Committee does, and regardless of the hard court press coming from the Pentagon, its allies in Congress and, especially, the industry that manufactures weapons for the Department of Defense. In fact, were defense budgets to decline by $465 billion from the current DoD projections, it would be the most moderate and shallow build down we have ever experienced since the end of the Korean War.  The last three build downs saw defense resources fall, on average, 30% in constant dollars over ten years, as the Stimson Center's project on Budgeting for Foreign Affairs and Defense pointed out a month ago.  The currently projected decline (from the DoD projection), would be around 8%, hardly the end of the world.  So there is little reason to fear, little reason to cry "doomsday" as we manage this build down.   The jobs argument, flagrantly advanced by the Aerospace Industries Association (AID) last week, is both flawed and hypocritical. 

Meet the 0.01 Percent: War Profiteers - There’s the top 1% of wealthy Americans (bankers, oil tycoons, hedge fund managers) and there’s the top 0.01% of wealthy Americans: the military contractor CEOs.  If you’ve been following the War Costs campaign, you already know that these corporations are bad bosses, bad job creators and bad stewards of taxpayer dollars. What you may not know is that the huge amount of money these companies’ CEOs make off of war and your tax dollars places them squarely at the top of the gang of corrupt superrich choking our democracy. These CEOs want you to believe the massive war budget is about security — it’s not. The lobbying they’re doing to keep the war budget intact at the expense of the social safety net is purely about their greed. In many areas, including yearly CEO salary and in dollars spent corrupting Congress, these companies are far greater offenders than even the big banks like JP Morgan Chase or Bank of America.

Washington Post Discards All Journalistic Standards In Attack on Social Security - Dean Baker - News outlets generally like to claim a separation between their editorial pages and their news pages. The Washington Post has long ignored this distinction in pursuing its agenda for cutting Social Security, however it took a big step further in tearing down this barrier with a lead front page story that would have been excluded from most opinion pages because of all the inaccuracies it contained. The basic premise of the story, as expressed in the headline ("the debt fallout: how Social Security went 'cash negative' earlier than expected) and the first paragraph ("Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went 'cash negative.'") is that Social Security faces some sort of crisis because it is paying out more in benefits than it collects in taxes. [The "runaway national debt is also a Washington Post invention.] The article makes great efforts to confuse readers about the status of the trust fund. It tells readers: "The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing." This is the same situation the the government faces when Wall Street investment banker Peter Peterson or any other holder of government bonds decides to cash in their bonds when they become due. In such cases it "must raise taxes, cut spending or borrow more heavily from outside investors." The Post's reporters and editors understand this fact.

Social Security Bait And Switch, A Continuing Series - Paul Krugman - Dean Baker is angry at the Washington Post for spreading disinformation about Social Security. He’s right, of course — and it’s shocking that a well-known fallacy is the subject of a “news analysis” that purports to inform readers. You see, the WaPo makes a big deal of the fact that Social Security is currently taking in less in payroll taxes than it’s paying out in benefits. Yet this means nothing, except as a favorite point used to create confusion by those who want to kill the program. I’ve written about this repeatedly in the past, but here it is again: Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

How the rich created the Social Security “crisis” -- Now and then, George W. Bush told the unvarnished truth—most often in jest. Consider the GOP presidential nominee’s Oct. 20, 2000, speech at a high-society $800-a-plate fundraiser at New York’s Waldorf-Astoria. Resplendent in a black tailcoat, waistcoat and white bow tie, Bush greeted the swells with evident satisfaction.“This is an impressive crowd,” he said. “The haves and the have-mores. Some people call you the elites; I call you my base.” Any questions? Eight months later, President Bush delivered sweeping tax cuts to that patrician base. Given current hysteria over what a recent Washington Post article called “the runaway national debt,” it requires an act of historical memory to recall that the Bush administration rationalized reducing taxes on inherited wealth because paying down the debt too soon might roil financial markets. Eleven years later, the Post warns in a ballyhooed article, reading like something out of Joseph Heller’s “Catch-22,” that Social Security—the 75-year-old bedrock of millions of Americans’ retirement hopes—has “passed a treacherous milestone,” gone “cash negative,” and “is sucking money out of the Treasury.”

House Democrats Propose Unemployment Extension - House Democrats introduced a bill Thursday that would extend federal unemployment insurance through 2012 and help states continue to offer assistance as well. Rep. Lloyd Doggett of Texas, the top Democrat on the House Ways and Means Committee‘s subpanel on human resources, submitted legislation Thursday that would extend federal unemployment benefits through the 2012 calendar year and give breaks to states trying to maintain their own assistance programs. The Democratic lawmakers said they were willing to be flexible with the bill in order to get it passed in the Republican-controlled House. Republicans have said they might be willing to support extending the benefits, possibly if they were linked to worker retraining programs, which President Barack Obama has also proposed. “This may be part of a broader package, and the supercommittee should be considering it too,” Doggett said at a press conference Thursday. “We’re trying to get it out there well in advance so this is not a Christmas Eve move.” Last year an extension of unemployment insurance squeaked through in December as Democrats and Republicans agreed to extend up to 99 weeks of federal benefits for long-term unemployed Americans through 2011.

Congress may cut aid to poor as food prices soar‎  - The red-hot debate over cutting the federal budget deficit could literally spill into the nation’s supermarket aisles and onto its kitchen tables. Food costs are now forecast to increase this year by a stunning 3.5 percent to 4.5 percent — nearly double the core inflation rate — while the food stamp program that helps more than 44 million Americans is facing a congressional chopping block. All of this has led policymakers to search for new ways to curb the rising costs, lawmakers to consider changes to the food stamp program and regulators to target speculation in the commodities markets. The annual budget for the Supplemental Nutrition Assurance Program has doubled since 2007 to $70 billion. And some lawmakers see runaway spending when the government is trying to trim more than $1 trillion from its expected debt load. Sen. Jeff Sessions (R-Ala.) unsuccessfully proposed an amendment last month that would have tightened eligibility requirements, arguing the explosive growth of the program over the past decade has most likely led to fraud and misuse.

Overcoming the Great Disconnect - Thoma - Economics has a long history of engagement on important public policy issues, and its early history was driven in large part by the desire to answer important public policy questions. However, ties between academic economists and the public, the press, policymakers, and economists in business and government have declined in recent decades.[1] This has reduced the quality of the public dialogue on important policy issues and this, in turn, has made it easier for groups with a political agenda to use false and misleading claims to influence policy in their favor.[2] In addition, as the ties between academic economists and the practitioners who use the models and techniques they produce have diminished, the questions economists ask have drifted away from the questions of most interest to society. To a large extent, economics has become separated from its real world users and applications. Fortunately, however, the “Great Disconnect”[3] with the non-academic community is being reversed with the development of new information technology. Economics blogs in particular have played a key role in turning things around.

Government Revenues in U.S. Are Low by International Standards - I have already noted that government spending in the United States (as a percent of gross domestic product, or GDP) is below average for a developed country, using data from the Organisation for Economic Co-operation and Development (OECD).  Those data also show that government revenues in the United States are low by international standards. That’s not just because of the economic downturn.  The United States is consistently one of the lowest-taxed countries in the OECD. Here’s what you need to know about the OECD figures:

  • They reflect collections by all levels of government.  In the United States, that means federal, state, and local. 
  • The OECD uses the United Nations’ System of National Accounts (SNA), which measures the government sector differently than we do in our national statistics.  Most importantly, the SNAs count the charges that users pay for many public services, like state-university tuition and public-hospital fees, as government receipts.  As we explained before, such adjustments push up the SNAs’ measure of both spending and receipts by roughly 4 percent of GDP compared with the more familiar measure tallied by the Bureau of Economic Analysis (BEA) in the U.S. National Income and Product Accounts (see figure).
  • Whether using the BEA or OECD measures, government receipts dipped as a percent of GDP during the economic downturn. 

Kirby: Beware: Romney’s flat tax no different than Mormon tithing - The one plan we don’t want is any sort of flat tax proposed by Mitt Romney. He’s a Mormon. Because I’m one, too, I know how a Mormon flat tax works. It’s 10 percent of everything you earn, otherwise known as tithing. In most other churches, tithing is paid according to the wants/needs of those doing the offering. It can range anywhere from $1 to $1 million. Not for Mormons. For us it’s a flat 10 percent right off the top. There are no deductions, brackets, write-offs or loopholes in "flat tithing." Rich, middle class, or poverty-stricken, everybody pays that same percentage. It sounds really fair, but it’s not. Ten percent to a billionaire is less of a tax than 10 percent is to a single mom with six kids.

How my taxes are raised matters - I need to pay higher taxes.  To get to fiscal balance, I need to pay higher taxes.  To fund the things I support, such as national health insurance, more Section 8 housing, and a robust military, I need to pay higher taxes.  But I am not paying them alone--to pay more without others paying more is a gesture, and would not solve anything. The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates.  If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income. If my income is taxed, the impact on my desire to work is ambiguous.  On the one hand, because the cost of leisure would fall, I would have an incentive to work less.  On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more. If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more.  Leisure is no less expensive but my desire to restore my previous income remains as before. 

What Tax Dollars Can’t Buy - OVER the last 30 years, the U.S. economy has generated more large fortunes and more stress for the middle class. While the rich have grown extraordinarily rich, median wages have barely increased, the costs of health care and higher education have jumped, and socioeconomic mobility has lagged behind1 that of other developed nations. Americans have never begrudged the wealthy their success, as long as they had a chance to rise higher than their parents, and perhaps get rich themselves. But our era of diminished expectations is putting that in doubt.  From the drum circles of Zuccotti Park to the hustings of Barack Obama’s re-election push, a suddenly invigorated liberalism thinks that it has the answer to this angst: a renewed demand for higher taxes on America’s richest 1 percent. And if all you care about is reducing measured income inequality, then the Occupy Wall Streeters and their Democratic admirers have it right. Tax millionaires sufficiently and you’ll end up with a more equal society. But true social mobility and broadly shared prosperity are not so easily achieved. Remember that those tax dollars, once collected, would not be disbursed with perfect effectiveness to the most deserving members of the American middle class. Instead, they would be used to buy a little more time for our failing public institutions — postponing a reckoning with unsustainable pension commitments, delaying necessary reforms in our entitlement system and propping up an educational sector whose results don’t match the costs.

Perry’s Tax Plan is a Huge Tax Cut for the Wealthy, But How Big? - Texas Gov. Rick Perry says he wants to cut taxes for everyone and balance the budget. It’s probably impossible to do both. Sadly, Perry’s new fiscal plan may fail at each.  But just how far short he falls depends on what you’re measuring his plan against. The Tax Policy Center has concluded that Perry’s “Cut, Balance, and Grow” fiscal platform will lavish huge tax cuts on the wealthy. It will cut taxes for some of the working poor. And it will also add trillions to the deficit. But how many trillions? And just how will middle-class families fare? It all depends on whether you assume the 2001/2003/2010 tax cuts expire as scheduled at the end of next year or whether you think they are going to continue.     This is a particular problem with Perry’s plan since he wants to give taxpayers a choice between paying under his new rules or under today’s tax code. But does that mean the rules in effect right now or the law that is scheduled to be back on the books starting in 2013 (when Perry would be President). This sounds like a play by Samuel Beckett, only two guys sit on a park bench and argue endlessly about what the tax code will look like in two years. 

Rich Get Biggest Break in Perry Tax Plan, Study Finds - Gov. Rick Perry’s proposal for an opt-in flat tax would primarily benefit the wealthiest Americans, according to a new analysis from the Tax Policy Center, a nonpartisan research organization. Compared with current tax policy, the plan would most likely reduce federal tax revenue by $570 billion, or about 15 percent. The plan, released last week as part of Mr. Perry’s campaign for the Republican presidential nomination, allows taxpayers to calculate their personal income taxes under the existing tax code, which is progressive. But it also allows taxpayers to instead have their income taxed at a flat 20 percent rate. In this alternative system, long-term capital gains, qualified dividends and Social Security benefits would not be taxed, and only a handful of deductions would be allowed. Once a household chooses the new system, it cannot switch back. Because no one would be forced to use the alternate system, Mr. Perry has said, no one would have to pay higher taxes (at least initially; presumably if a family’s income changes a few years after entering the plan, it may no longer be advantageous). Even so, the greatest beneficiaries of the flat-tax option — that is, the households that would be most likely to switch to this system — are far and away the highest earners:

Study: Rick Perry tax plan would cut revenues by $1 trillion, benefit wealthy - Rick Perry’s so-called flat tax plan would drain a titanic sum from the federal treasury and largely benefit wealthy taxpayers over those in the lower brackets.  That’s the upshot of an analysis of the plan by the nonpartisan Tax Policy Center. Perry last week unveiled the plan, which calls for an optional 20% flat tax on personal and corporate income but would also allow taxpayers to remain in the current system. The plan was derided by some conservatives for not going far enough in eliminating the federal tax code completely. The two-track system would also force many taxpayers to calculate their liability under both systems, critics complained, adding complexity to an already labyrinthian endeavor. But to Perry’s campaign that option stands as one of the plan’s greatest assets, because it would allow every taxpayer to pay the lowest tax possible. Perry would also eliminate taxes on investment income, a win-win-win. A corresponding drag on government revenues seemed a likely outcome of such a system. And the findings of the Tax Policy Center, a combined effort of the Brookings Institution and the Urban Institute, suggests that would be the case.

A Close Look at the Perry Tax Plan - In an effort to rejuvenate his flagging campaign for the Republican presidential nomination, Gov. Rick Perry of Texas announced his support for a flat-rate income tax in a Wall Street Journal op-ed article on Oct. 25. Mr. Perry said he would establish a single rate of 20 percent on corporate and individual incomes, with individuals receiving a personal exemption of $12,500. The estate and gift tax would be abolished, and there would be no taxation of dividends and capital gains. All deductions, credits and exclusions would be eliminated except for mortgage interest, state and local taxes and charitable contributions.  Although Mr. Perry praised the simplicity of his plan, it would actually complicate the tax computation for many people, because they would have to calculate their taxes two or even three different ways when the alternative minimum tax was also included. That was because Mr. Perry’s flat tax would be an optional tax system; those who wanted to stay in the current system could do so.This is really just a gimmick to allow Mr. Perry to say with a straight face that everyone would get a tax cut.

Unicorns and Magic Boxes: Bartlett (and Kleinbard) on the Perry Tax Plan - Bruce Bartlett writes about the Perry (optional) flat tax plan in today’s New York Times Economix blog.  There are several fundamental problems with the plan that Bruce outlines:  (1) it’s not very “flat” in a base-broadening sense in that it retains a lot of the special preferences under the current income tax system; (2) it gives people the option of picking the tax system–the new, “flat” one or the old one–that gives them the lowest tax burden, and hence it is by design a revenue-losing proposition; and (3) like the Cain 9-9-9 or 9-0-9 or whatever 9’s you want plan, it would give a huge tax break to the rich who have lots of capital income that would now be exempt from taxation. Problem #2 is what Bruce quotes Ed Kleinbard (former chief of staff of the Joint Committee on Taxation and now a professor at USC) as “a promise to put a unicorn in every pot.”  This is not tax reform to improve the efficiency of the tax system.  This is “tax reform” as an excuse to cut taxes for everyone–except for those who don’t pay income taxes under the current system, that is.  Bruce correctly points out that the vast redistribution of income that already occurs when you flatten the rate structure and switch to a consumption base is only made worse in these plans by their getting rid of refundable tax credits, the only way lower income households get subsidies from the income tax system.

The right's nutty claims about job creation--Gingrich and the estate tax – Linda Beale - The right is busy selling its program for enriching the rich to the working class.  As usual, the sales pitches are full of false and nutty claims pitched to fool hard workers who are uninformed about the facts. Newt Gingrich, for example, pitched the claim that eliminating the estate tax that applies only to the biggest multimillion dollar estates--a large tax cut applicable only to the uberrich silver-spoon kids who do nothing to earn the largesse--will cause all kinds of wondrous economic changes.   See "To create Jobs, abolish the death tax now" (The Newt Gingrich Letter). These claims are based on a  so-called "study" by the American Family Business Foundation (put in quotes, since this is a paid "study" by  a propaganda tank that asks family businesses of the kind that might have to pay the tax whether they would create more jobs if they didn't have to pay the tax, and gets the not at all unsurprising self-serving answer that "oh yes, we'd have more jobs with fewer taxes".)   So the study and Gingrich make pie-in-the-sky claims that

  • the US government would actually take in more tax revenues by getting rid of the millionaires & billionaires' estate tax--even claiming a specific number of $362 billion more in taxes.
  • Gross Domestic Product would increase by 2.26% just by eliminating the tax
  • New revenues from the "economic activity that would result from the elimination of the [estate] tax" would be twice as much as the revenue gained from the current estate tax;
  • the economic growth from eliminating the estate tax would "create thousands of new jobs as families kept more small businesses running through mutliple generations and shifted their efforts from avoiding estate taxes to investing in America"


Should redistributionists feel compelled to give more of their own money away? - What a juvenile argument!  I cited this riposte when I was in high school.  Nonetheless, looking back on it, I think it might be right.  Here is a version from Steve Landsburg, and a while ago Steve Moore wrote it up in the WSJ.  After all, if government action to redistribute income is morally required, in the meantime is not greater private charity morally required too? There are plenty of redistributionist goals which do not require concerted collective action or threshold levels of contribution.  One person’s giving can make a big difference, especially if that person is wealthy.  You don’t have to be Bill Gates.  I’ve seen estimates that a few hundred dollars of giving can save a life (that’s from one of those OUP redistributionist philosophy books, the name of which escapes me at the moment), and while I think that is an exaggeration, surely a few thousand dollars should do the trick, less if you give wisely.  And you can do lots of good short of saving a life.  Citing one argument against a giving obligation — “the unfairness of it all” — does not per se dismantle that obligation.  You still can do a lot of good with the gift.  And is not the obligation strong in the first place, precisely because the misery of the potential recipient is so extreme and attention-worthy?

I Do Not Think That Word Means What You Think It Means, Hypocrisy Edition -I’ve been getting some personal attacks on this front, but it’s a bigger issue than that. Here’s the personal version: suppose that you’re a professor/columnist who advocates higher taxes on high incomes and a stronger social safety net — but you yourself earn enough from various sources that you will pay some of those higher taxes and are unlikely to rely on that stronger safety net. A remarkable number of people look at that combination of personal and political positions and cry “Hypocrisy!” Wait — it’s not just about me and the wingnuts. If you remember the 2004 election, which unfortunately I do, there were quite a few journalists who basically accused John Kerry of being “inauthentic” because he was a rich man advocating policies that would help the poor and the middle class. Apparently you can only be authentic if your politics reflect pure personal self-interest — Mitt Romney is Mr. Natural. So to say what should be obvious but apparently isn’t: supporting policies that are to your personal financial disadvantage isn’t hypocrisy — it’s civic virtue! But, say the wingnuts, you say that rich people are evil. Actually, no — that’s a right-wing fantasy about what liberals believe. I don’t want to punish the rich, I just want them to pay more taxes. You can favor redistribution without indulging in class hatred; it’s only the defenders of privilege who try to claim otherwise.

The Shameless Republican Race to Cut Rich People's Taxes - First there was Herman Cain's 9-9-9 plan, which would replace all of our current taxes with a 9 percent national sales tax, a 9 percent "business tax" and a 9 percent tax on income. Now Rick Perry says that his 20 percent "flat tax" is even better. Meanwhile, Michele Bachmann says Perry stole her idea. But let's be clear: These are massive tax cuts for the rich, not for most of us.  The Cain 9-9-9 plan is breathtaking. The poorest Americans would see their effective tax rate increase from about 5 percent to 18 percent. The typical household would pay $4,000 more than today. But the top 0.1 percent would get an average tax cut of $1.4 million and would pay an effective tax rate of 18 percent--lower than any other income group. That a plan so insane could be proposed by a leading presidential candidate just shows how crazy our political system has become. Although Perry's flat tax preserves the tax code for most families, he offers a special tax cut for the rich. A retired couple making $700,000 would be $75,000 richer under his plan.  Poll after poll says that most Americans want to raise taxes on the rich. In one recent survey, more than two-thirds of respondents -- and even a majority of Republicans! -- favored higher taxes on households making more than $250,000 per year. Why are people who want to be elected president proposing the exact opposite of what the people want?

Boehner Calls Grover Norquist Some Random Person; Norquist Agrees -  Grover who? Mr. Norquist is known for urging politicians to take a pledge not to raise taxes, and he also hosts a weekly gathering of conservative activists. He’s widely considered one of the most influential figures in Washington. But you wouldn’t know it from Mr. Boehner’s response. “It’s not often I’m asked about some random person in America,” Mr. Boehner said. He added that the House is focused on jobs, not “one person’s personality.” Democrats say Mr. Norquist’s pledge, which has been signed by the great majority of House and Senate Republicans, is making it harder to cut the deficit.  Mr. Norquist said he agreed with Mr. Boehner’s view, and that Democrats, including Senate Majority Leader Harry Reid (D., Nev.), were trying to demonize him.

The Occupiers' Responsive Chord - Robert Reich - Although numbers are hard to come by, anecdotal evidence suggests the movement is growing. As importantly, the movement has already changed the public debate in America. Consider, for example, last week’s Congressional Budget Office report on widening disparities of income in America. It was hardly news – it’s already well known that the top 1 percent now gets 20 percent of the nation’s income, up from 9 percent in the late 1970s. But it’s the first time such news made the front page of the nation’s major newspapers. Why? Because for the first time in more than half a century, a broad cross-section of the American public is talking about the concentration of income, wealth, and political power at the top. Score a big one for the Occupiers. Even more startling is the change in public opinion. Not since the 1930s has a majority of Americans called for redistribution of income or wealth. But according to a recent New York Times/CBS News poll, an astounding 66 percent of Americans said the nation’s wealth should be more evenly distributed. A similar majority believes the rich should pay more in taxes.  I remember the days when even raising the subject of inequality made you a “class warrior.”

Total Taxes Paid by U.S. Corporations Exceeds 70 Percent of Profits - The graph below shows 15 years of IRS data on all corporate income tax returns, including taxable income as a measure of total profits.  Profits peaked in 2006 at $1.17 trillion, and then collapsed with the recession to $913 billion in 2008.  In blue are federal income taxes, which also peaked in 2006 at $315 billion and fell to $208 billion in 2008.  That's an effective tax rate of 26 percent, averaged over 15 years (see this report for more).  In red are foreign taxes paid on the foreign income of U.S. corporations, which continued to climb through the recession, amounting to $98 billion in 2008. (This is an underestimate of foreign taxes paid, based on the foreign tax credit, as discussed in detail here.)  Including these taxes on foreign income yields an effective rate of about 33 percent, over 15 years. Finally, in green are all other taxes* paid by corporations that are deducted as business expenses.  This number peaked at $357 billion in 2007 and fell to $331 billion in 2008.  Adding this to corporate taxes, both domestic and foreign, brings the total taxes paid by U.S. corporations to $740 billion in the peak year of 2006, and $637 billion in 2008.  In other words, total taxes paid are about 70 percent of taxable income in 2008, or about 76 percent when averaged over 15 years.

Mission Impossible: Cutting the Corporate Tax Rate to 25 Percent - It has been an article of faith among most congressional Republicans and many Democrats that the corporate tax rate should be cut from today’s top level of 35 percent to 25 percent—or even less. And backers of the idea breezily suggest this could be paid for by scaling back some corporate tax breaks. But a new report released today by the congressional Joint Committee on Taxation concludes it can’t be done. The non-partisan JCT found that even if Congress scrubbed every single corporate preference from the code (a political fantasy if ever there was one) it could not get the corporate rate below 28 percent without adding to the budget deficit, raising taxes on individuals, or cutting spending. The JCT study, which was requested and released by House Ways & Means Committee Democrats, comes just days after the panel’s chairman, Rep. Dave Camp (R-MI), proposed a 25 percent rate as part of a major corporate reform. Camp did not say how he’d pay for his proposed changes.

the right's smoke & mirrors scams about corporate tax "reform" – Linda Beale - One could get a pretty gloomy picture of the state of Social Security, and the need to "reduce entitlements" while at the same time hearing about the (faked) urgency of cutting corporate taxes in order to give our US multinationals an edge in global competition, if you pay much attention to the GOP presidential candidates talk and listen to their echo chambers in the right-dominated GOP factions in the House and Senate and their marketers in the Koch etc. funded propaganda tanks like the misnamed "Americans for Prosperity" (should be "Americans for prosperity for the have-mores").  These same right-wing politicians and funders were gung-ho for two budget-busting manuveurs under George W. Bush--outrageous tax cuts of primary benefit to the rich (such as the gradual reduction of the estate tax to its one-year repeal in 2010 and its rebirth in 2011 at an absurdly low rate with an equally absurdly high exemption amount) and outrageous spending for more and more militarization of the US society (wars of choice in Iraq and Afghanistan, where hundreds of thousands have died but little in the way of lasting peace has been gained, and a gigantic "homeland security" apparatus that has eroded the civil rights of US citizens, including allowing one to be targeted and assassinated on solely the say-so of the executive branch without any of the due process protections supposedly guaranteed by our pre-Bush constitution). 

Biggest Public Firms Paid Little U.S. Tax, Study Says - A comprehensive study released on Thursday found that 280 of the biggest publicly traded American companies faced federal income tax bills equal to 18.5 percent of their profits during the last three years — little more than half the official corporate rate of 35 percent and lower than their competitors in many industrialized countries.  The corporate study, prepared by the left-leaning advocacy group Citizens for Tax Justice, examined the regulatory filings of the companies to compute each year’s current federal taxes. Some of the companies disputed the findings, saying that the study understated their tax payments by omitting deferred taxes that they may pay in future years.  Using information from the companies’ own corporate filings, however, the study concluded that a quarter of the 280 corporations owed less than 10 percent of profits in federal income taxes and 30 companies had no federal tax liability for the entire three-year period.

Thirty Of America's Most Profitable Companies Paid 'Less Than Zero' In Income Taxes In Last 3 Years: Report - Many major corporations have managed to pay taxes at just over half of the corporate income tax rate, according to a new report. Nearly 300 of the nation's most profitable companies paid an average tax rate of 18.5 percent from 2008 to 2010, less than half of the 35 percent corporate tax rate, according to a study by the Citizens for Tax Justice released Thursday. Of the 280 companies, 78 studied paid a tax rate of zero or less during at least one year of the three year period. And thirty companies, the report says, had a negative income tax rate from 2008 to 2010, even though they took home a combined $160 billion in pre-tax profits. The financial services industry netted the largest share -- at 16.8 percent -- of the $222.7 billion in total tax subsidies that the companies received, the study found. Wells Fargo took home the most tax subsidies of them all, raking in nearly $18 billion in tax breaks over the last three years. Officials at some major corporations lashed out at the study's findings following its release. In a statement, GE called the report "inaccurate and and distorted," according to the Washington Post. Verizon spokesman Robert Varettoni, told WaPo that "findings in this and other recent reports have been more politically motivated than truthful."

Obama, the G20, and the 99 Percent - On Thursday, President Obama will meet with leaders of the other G20 countries.  If President Obama is true to his recent words sympathizing with Occupy Wall Street, he will join Sarkozy and Merkel in supporting a Financial Transactions Tax (FTT). More likely, though, he will oppose the proposal in order to protect Wall Street, thereby continuing his pattern of progressive rhetoric that masks conservative policies.   The Financial Transactions Tax is a solid idea that has been resisted by Wall Street for years. Each trade of a financial security like a stock, bond, or derivative would be taxed a tiny proportion of its value. Since the volume of trading is so high, even a tiny tax (say 5 cents per hundred-dollar transaction) would collect tens or hundreds of billions of dollars each year.  There are three goals of the FTT proposal that will be considered at the G20 meeting. The first is to dampen high-speed automated trading and other short-term financial trades that contribute to excessive financial volatility. The second is to raise government revenues, especially in view of the fact that the financial sector is under-taxed in the G20 countries (including the US). The third is to harmonize such a tax across the G20 countries to avoid the obvious problem that a tax in one country but not others would push at least some transactions to other countries.

St Paul’s protests: Archbishop of Canterbury calls for tax on bankers - The Archbishop of Canterbury has thrown his weight behind the St Paul’s Cathedral anti-capitalist protesters as he called for a new tax on banks.  Dr Rowan Williams said that the Church of England had a “proper interest in the ethics of the financial world” and warned that there had been “little visible change in banking practices” following the recession.  He urged David Cameron and George Osborne to drop their opposition to a European-wide tax on financial transactions, which is expected to be formally proposed by France and Germany at the G20 summit of world leaders starting tomorrow.  “The demands of the protesters have been vague. Many people are frustrated beyond measure at what they see as the disastrous effects of global capitalism; but it isn’t easy to say what we should do differently. It is time we tried to be more specific,” Dr Williams said.  The archbishop’s intervention came after the Church and the City of London Corporation agreed to suspend plans to evict protesters who have been camped on the doorstep of St Paul’s for more than two weeks. The issue has caused deep divisions within the Church and led to the resignation of three members of St Paul’s clergy.

Both ‘Occupy’ Marchers And Dem Politicians Rally Behind Taxing Wall Street Trades - At least 1,500 members of the National Nurses Union (NNU) and Occupy D.C. activists marched on the Treasury Department on Thursday morning to call for a "meaningful" tax on Wall Street trading -- one day after Senator Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Oregon) introduced a bill that would levy a small tax on a wide range of financial transactions. The unplanned convergence between Democratic politicians and the protesters, who have generally refrained from making specific demands, offered a hint of how the populist energy from the "Occupy" movement might translate into policy. "Occupy Wall Street made people feel they're part of a very large community," said DeFazio, who has supported similar legislation in the past, in an interview with The National Memo. "As people have been awakened, they're going to look for things to take action on." The White House has not been supportive of previous proposals. President Barack Obama shied away from the policy and instead revived a 2010 idea for a "financial crisis responsibility fee" when he arrived at the G20 summit in Cannes, France, this week; the fee would recoup the remaining losses from the 2008 bailout and help provide a base of support for any future rescues.

U.S., Again, Says It Won’t Join EU on Financial Transactions Tax - The leaders of Germany and France raised the idea of a financial transactions tax in their meetings with President Barack Obama Thursday at the G-20 summit. And both got the same disappointing answer. European Union leaders are using the G-20 forum to push for a tax on trades of stocks, bonds and derivatives to raise money for taxpayers who have bailed out their financial systems. The U.S. is against the proposal, and even some European nations — such as the U.K. and Sweden — say it won’t work unless it’s adopted globally because activity would move to regions that don’t assess the tax. “The president made clear that he shares the objectives that Chancellor Merkel and President Sarkozy have in ensuring that the financial sector contributes an appropriate share to the resolution of crises,” . The Obama administration has backed a different kind of tax, a financial crisis responsibility fee, on the largest financial institutions. How did they resolve the disagreement? “I think there is broad consensus between the Europeans that the president met with this morning and ourselves about the ability of each to pursue this in their own way, whatever way they see to be most effective,” Translation: Go for it, but the U.S. won’t join you.

Wall Street reform law bogged down - President Barack Obama signed the Dodd-Frank financial reform bill into law 15 months ago, saying he was anxious to put new rules of the road in place for Wall Street. But federal agencies have blown about 77 percent of the rule-making deadlines for the massive overhaul, according to a recent progress report by the law firm Davis Polk — meaning key parts of the bill are far from implementation. Some Democratic officials see a Republican plot afoot to run out the clock, in hopes that a GOP-controlled Senate and White House can overturn the reforms. But one top Treasury official said the missed deadlines are less of a concern to the administration than the possibility that a rushed process would result in poor regulations. “We want quality and speed, but we’re not going to sacrifice quality for speed,” Deputy Treasury Secretary Neal Wolin told POLITICO. “We want to make sure that we do these rules in a thorough way.”

The Economist stress tests Dodd-Frank - DURING the financial crisis of 2008, it became abundantly clear that America's banking system was not equipped to handle the failure of a large, systemically-important financial institution; the bankruptcy of Lehman Brothers nearly brought down the global financial system. After the dust settled, Congress set to work devising new banking rules designed to ensure that in the future too-big-to-fail banks could be allowed to fail. The resulting law has come to be known as Dodd-Frank. And one day, perhaps sooner than we'd prefer, the machinery of Dodd-Frank will be put to the test. To demonstrate how that might work, The Economist convened an all-star cast—including Larry Summers as Treasury secretary and Donald Kohn as head of the Federal Reserve—to participate in a simulation of a banking crisis, held at last week's Buttonwood Gathering in New York. A hypothetical large bank is on the brink of failure, and the invited experts are tasked with playing out the crisis' resolution within the constraints of the new regulatory framework. The simulation makes for fascinating, and instructive, watching. It is long, about two hours all told, but I cannot recommend it highly enough. The first clip is below, and remaining clips are below the jump.

The International Agenda for Financial Regulation - FRB: Speech - Governor Daniel K Tarullo

Satyajit Das: Central Counter Party Risk Taming - This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party).  This third part looks at the risk of the CCP itself and how that is managed. The key element of derivative market reform is a central clearinghouse, the central counter party (“CCP”). The CCP is designed to reduce and help manage credit risk in derivative transactions – the risk that each participant takes on the other side to perform their obligations (known as “counterparty risk”). The CCP also simplifies and reduces the complex chains of risk that link market participants in derivative markets. However, the proposal relies on the ability of the CCP itself to manage risk. Risque Matters … The CCP holds the credit risk of cleared derivatives. All participants in the clearing system have exposure to the CCP, specifically its risk management systems.  The basic methodology is that used in exchange traded derivatives. The CCP receives an initial margin or deposit from all parties to a transaction that acts as surety or a security bond against performance. The contract is marked to market daily or more frequently, if market conditions dictate, to establish gains and losses. Parties must post margins to cover the losses on open positions. If a party fails to meet a margin call then the CCP closes out the position, replacing it in the market. The CCP will use the margin it is holding to cover the replacement cost.

Satyajit Das: Central Counter Party Tranquilliser Solutions - This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party). The first part looked at the idea behind the CCP. This second part looked at the design of the CCP. The third part looked at the risk of the CCP itself and how that is managed. The last part looks at the market effects of the effects of the CCP on the market.  Risk conservation means that risk in financial markets never decreases. Risk can be altered and reconstituted in infinite combinations and transferred between participants. In aggregate, the risk remains constant. Alternatively, a risk is converted into a different, sometimes more dangerous exposure. The CCP is a good example of this phenomenon. Margins on cleared contracts will significantly change liquidity and cash flows within the financial system. Derivative traders will need to post initial margin and may experience volatile cash flows as a result of changes in values of positions. As these requirements will have to financed, counterparty risk will morph into liquidity risk.

Corzine Crashes Like It’s 2008 - When Goldman Sachs went public on May 4, 1999, Jon Corzine1, who was then the firm’s chief executive, held a stake that was suddenly valued at $305 million. So, perhaps, it’s uncharitable to complain about the piddling $12 million severance he was poised to gain if he had managed to sell his current firm, MF Global2 Holdings, over the weekend.  But I’m going to complain anyway. The idea that Corzine, who single-handedly destroyed MF Global Holdings3, was in a position to command so much as a penny in severance is horrifying. It suggests two things. The first is the extent to which “heads-I-win-tails-you-lose” remains the operative concept for Wall Street compensation. The second is that one’s politics doesn’t much matter when it comes to lining one’s pockets. Corzine is an avowed liberal who has decried income inequality4 and Wall Street pay5 — but right up until the end, he had his hand out for millions he didn’t deserve.  To read a recounting of Corzine’s tenure at MF Global Holdings is to wonder how he missed the 2008 financial crisis.  Still, you would think that as a former Wall Street titan6, he would have noticed that taking giant bets on shaky, long-term bonds while financing your operations with overnight loans that can be pulled at any second is not exactly a recipe for success.

Were Customer Accounts Pilfered at Jon Corzine’s MF Global? - Yves Smith - I hadn’t paid much attention to the implosion of MF Global, because so many hedge funds went under during the crisis that yet another levered trading firm death seems less than newsworthy unless it is big enough to constitute a possible systemic event. The collapse of MF Global didn’t seem all that unusual, save for the titilating angle that the firm was headed by former Goldman CEO and New Jersey state governor Jon Corzine. But the picture changes considerably with the report that hundreds of millions of customer assets may be “missing”. If this is true, there are pretty much no savory explanations. One possibility is the firm raided customer accounts to try to shore up its principal business. That’s a fraudulent use of customer assets, and one would think anyone associated with it (and that would include the managing partner) would be subject to fines and barred from the securities industry for at least a period of time. I’m not certain what level of abuse is considered to be criminal. Informed readers are encouraged to pipe up.

MF Global Funds Are Accounted For, Held by Brokerage, Lawyer Tells Judge - Bloomberg: MF Global Holdings Ltd. (MF), run by former New Jersey governor and Goldman Sachs Group Inc. (GS) co- chairman Jon Corzine, has accounted for all its customer funds, said Kenneth Ziman, a lawyer for MF Global, citing the company’s management. “To the best knowledge of management, there is no shortfall,” Ziman told U.S. Bankruptcy judge Martin Glenn in Manhattan, who inquired about whether a shortfall in customer accounts would affect the case, citing media reports that hundreds of millions of dollars were missing. Most of MF Global’s U.S. assets are held at its brokerage unit, Ziman said. The brokerage unit is not part of the main bankruptcy case, in which creditors are trying to recover on their claims against the company. The Securities Investor Protection Corp. has appointed a trustee to liquidate the assets in the brokerage. SIPC, which has people in New York looking at MF Global’s assets, said it hasn’t verified whether the assets are accounted for, said Stephen Harbeck, SIPC’s president and chief executive officer.

MF Global’s Collapse Draws FBI Interest -- The fallout from MF Global Holdings Ltd.'s collapse intensified as the Commodity Futures Trading Commission voted to issue subpoenas to the securities firm and the Federal Bureau of Investigation planned to examine whether client funds are missing, according to people familiar with the situation.  The two moves are the result of a discrepancy of hundreds of millions of dollars in the New York company's books that was discovered just before MF Global tumbled into bankruptcy Monday, according to people familiar with the matter.

Failure To Segregate Accounts At MF Global Means Someone Could End Up In Jail - The bankruptcy of MF Global has attracted a lot of attention on the internet, for obvious reasons. It seems that its head, former New Jersey Senator and Governor Jon Corzine, was not a popular man with, well, pretty much anyone. (And having had him speak at my business-school graduation, I can see why.) The unholy glee in his fall has been surprisingly well distributed across the many corners of the internet. But I held off--in part because I was mired in that somewhat excessive post on elites and expectations, and in part, because I wasn't sure exactly what to say. It seemed a shame to kick a man when he was down. But the execution of the bankruptcy seemed to have gone pretty smoothly. Absent worries that this was the start of the second US banking panic, a la 1932, I didn't have much to say. Well, that was yesterday morning. Today, as Jeffries denies that it's the next MF Global, the process starts to look less smooth. And breaking news reveals that the reason that MF Global couldn't sell the company, and had to file for bankruptcy instead, is that a potential buyer allegedly discovered that they'd been intermingling client accounts and company funds: MF Global Holdings Ltd, the futures broker that filed for bankruptcy protection on Monday, did not separate its customers' accounts from the firm's funds as required by law, its main exchange regulator said on Tuesday.

FBI to probe MF Global's use of client money -— MF Global, the securities firm led by former New Jersey governor Jon Corzine, admitted using clients' money as its financial troubles mounted, a U.S. official says. The FBI is expected to investigate whether the firm's actions violated criminal laws, according to two people familiar with the situation. MF Global is the first big Wall Street casualty of the European debt crisis. It filed for bankruptcy protection Monday, after a big bet on European debt threatened to topple it. An MF Global executive told regulators early Monday that the company had diverted client money, according to an official familiar with a separate probe by regulators. It isn't clear where the money ended up or what it might have been used for, the official said. All three people spoke on condition of anonymity because they weren't authorized to discuss the matter publicly.

MF Global Holdings Creditors Led By JPMorgan, Deutsche Bank - The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan. Unsecured creditors rank behind secured lenders in getting repaid in a bankruptcy, and are ahead of preferred and common shareholders. Unsecured Creditors:
JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.
Deutsche Bank AG (DBK), trustee for $1.02 billion in bonds:

Was MF Global brought down by an accounting play? -- Bethany McLean has a theory: that accounting helped to sink MF Global, and that the $6.3 billion long position in European debt was made “for an accounting play”. The key part is that for accounting purposes, MF Global’s filings say the transaction was treated as a sale. That means the assets and liabilities were moved off MF Global’s balance sheet, even though MF Global still bore the risk that the issuer would default; that means the exposure to sovereign debt was not included in MF Global’s calculation of value-at-risk, according to its filings. And that also means MF Global recognized a gain (or loss) on the transaction at the time of the sale. The filings do not say how much of the gain was recognized upfront. But if it were a substantial portion, then these transactions would have frontloaded the firm’s earnings. That, in turn, may have helped cover the fact that MF Global’s core business was struggling. Moving assets and liabilities off your balance sheet to make yourself look less risky? That’s a very Lehman move, redolent of the notorious “repo 105” trades. But I’m not convinced by this story.

As Regulators Pressed, Corzine Pushed Back, and Won - Months before MF Global teetered on the brink, federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse. But they faced opposition from an influential opponent: Jon S. Corzine, the head of the then little-known brokerage firm. As a former United States senator and a former governor of New Jersey, as well as the leader of Goldman Sachs in the 1990s, Mr. Corzine carried significant weight in the worlds of Washington and Wall Street. While other financial firms employed teams of lobbyists to fight the new regulation, MF Global’s chief executive in meetings over the last year personally pressed regulators to halt their plans. The agency proposing the rule, the Commodity Futures Trading Commission, relented. Wall Street, which has been working to curb many financial regulations, won another battle.

Yet with MF Global in bankruptcy and regulators scrambling to find $630 million in missing customer funds, Mr. Corzine’s effort may come back to haunt him.

What Went Down at MF Global? - Okay. I think I have got it. I seem to be smarter, with a better-functioning brain, this morning then I was last night in analyzing what may be the eighth-largest bankruptcy in U.S. history: We need a three-stage model:

  • In stage zero MF Global sets up the financing with its counterparty and buys southern Europe's bonds.
  • In stage one we learn whether the market is tolerant or intolerant of southern Europe risk: if the market is tolerant the bond prices stay high; if the market is intolerant the bond prices collapse.
  • In stage two southern Europe either pays off its bonds or defaults.

We have four possible outcomes: 1--market risk tolerance and bond payoff; 2--risk intolerance and payoff; 3--risk tolerance and default; and 4--risk intolerance and default.

Exclusive: Romney Family Investment Group Partnered With Alleged Perpetrators Of $8 Billion Ponzi Scheme - Mitt Romney, his son Tagg, and Romney’s chief fundraiser, Spencer Zwick, have extensive financial and political ties to three men who allegedly participated in an $8.5 billion Ponzi scheme. A few months after the Ponzi scheme collapsed, a firm financed by Mitt Romney and run by his son and chief fundraiser partnered with the three men and created a new “wealth management business” as a subsidiary.   Tagg Romney told ThinkProgress that his three partners collected about $15,000 from their involvement in the Ponzi scheme. Court documents obtained by ThinkProgress show that the legal proceedings are ongoing and the men made over $1.6 million selling fraudulent CDs to investors.  In 2009, prosecutors announced charges against the Stanford Financial Group, which managed a portfolio of $8.5 billion, for running a “massive, ongoing fraud” against its investors. The Ponzi scheme bust was one of the largest in recent history, second only to Bernie Madoff, who perpetrated a fraud estimated to be around $17 billion. The Stanford Ponzi scheme wiped out the savings of thousands, including many American retirees across the country. In Texas, 1290 people lost their retirement savings because of the Stanford Ponzi scheme; in Louisiana, several hundred reportedly suffered the same fate.

SEC Said to Review Possible MF Insider Trading - The U.S. Securities and Exchange Commission is reviewing trades in MF Global Holdings Ltd. (MF) convertible bonds to determine whether some investors sold the debt based on confidential information before the firm’s demise, according to two people with direct knowledge of the matter.  Investigators are in part focusing on trades that were made ahead of announcements that the firm’s credit rating had been downgraded, the people said, speaking on condition of anonymity because the matter isn’t public.  MF Global, the holding company for the futures broker run by former New Jersey Governor and ex-Goldman Sachs Group Inc. (GS) Co-Chairman Jon Corzine, filed for bankruptcy Oct. 31 after concerns that it may lose money on its holdings of European sovereign debt prompted demands from regulators to boost capital, as well as credit downgrades and margin calls.  Regulators are reviewing whether some investors learned in advance and traded on news that pushed the company closer to bankruptcy, the people said.

AIG records biggest loss since 2009 -- American International Group, the bailed-out US insurer that nearly failed during the 2008 crisis, posted its worst quarterly loss in nearly two years as swooning markets battered the company’s holdings. After markets closed, the company reported a $4.1bn third-quarter loss, worse than analysts’ expectations and a 63 per cent decline from last year’s $2.5bn loss. It was the company’s worst loss since the fourth quarter of 2009, when it recorded an $8.9bn hit. The insurer blamed the larger economy for its ills, pointing to declining equity markets as the reason for its $2.3bn loss on its holdings of AIA, the Asian insurer it partly spun off last year. The deteriorating US housing market also played a role, contributing to a $974m writedown on its mortgage-related holdings at the Federal Reserve Bank of New York. The company’s share price is down more than 57 per cent year to date, compared with a 4 per cent increase in the Dow Jones Industrial Average.

G.A.O. Says New York Fed Failed to Push A.I.G. Concessions…The findings of a federal investigation released Monday raised new questions about the Federal Reserve Bank of New York1’s handling of the 2008 bailout of American International Group2.  The report, by the Government Accountability Office, says that New York Fed officials have offered inconsistent explanations for their decision to pay other financial companies the full amounts they were owed by A.I.G., and that some of the explanations were contradicted by other evidence.  The report also asserts that the decision to pay the full amounts, rather than seeking concessions as the government later did in other cases, disregarded the expectations of senior Fed officials in Washington and the expressed willingness of some of the companies to accept smaller payments.

Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis - Widespread demonstrations in support of Occupy Wall Street have put the financial crisis back into the national spotlight lately. So here’s a quick refresher on what’s happened to some of the main players, whose behavior, whether merely reckless or downright deliberate, helped cause or worsen the meltdown. This list isn’t exhaustive -- feel welcome to add to it.  to the financial crisis by issuing or underwriting loans to people who would have a difficult time paying them back [1], inflating a housing bubble that was bound to pop. Lax regulation [2] allowed banks to stretch their mortgage lending standards and use aggressive tactics to rope borrowers into complex mortgages that were more expensive than they first appeared. Evidence has also surfaced that lenders were filing fraudulent documents to push some of these mortgages through [3], and, in some cases, had been doing so as early as the 1990s. A 2005 Los Angeles Times investigation of Ameriquest [4] – then the nation’s largest subprime lender – found that “they forged documents, hyped customers' creditworthiness and ‘juiced’ mortgages with hidden rates and fees.” This behavior was reportedly typical for the subprime mortgage industry. A similar culture existed at Washington Mutual [5], which went under in 2008 in the biggest bank collapse [6] in U.S. history.

The Globalization of Protest, by Joseph E. Stiglitz - The protest movement that began in Tunisia in January, subsequently spreading to Egypt, and then to Spain, has now become global, with the protests engulfing Wall Street and cities across America. Globalization and modern technology now enables social movements to transcend borders as rapidly as ideas can. And social protest has found fertile ground everywhere: a sense that the “system” has failed, and the conviction that even in a democracy, the electoral process will not set things right – at least not without strong pressure from the street. In May, I went to the site of the Tunisian protests; in July, I talked to Spain’s indignados; from there, I went to meet the young Egyptian revolutionaries in Cairo’s Tahrir Square; and, a few weeks ago, I talked with Occupy Wall Street protesters in New York. There is a common theme, expressed by the OWS movement in a simple phrase: “We are the 99%.” That slogan echoes the title of an article that I recently published, entitled “Of the 1%, for the 1%, and by the 1%,” describing the enormous increase in inequality in the United States: 1% of the population controls more than 40% of the wealth and receives more than 20% of the income. And those in this rarefied stratum often are rewarded so richly not because they have contributed more to society – bonuses and bailouts neatly gutted that justification for inequality – but because they are, to put it bluntly, successful (and sometimes corrupt) rent-seekers.

Interview with John Quiggin - I'm extremely pleased to present the most recent Occupied Media installment, our interview with economist John Quiggin. Professor Quiggin usually does his professoring at the University of Queensland, but is currently a visiting professor at Johns Hopkins Univeristy. He blogs at the widely-read Crooked Timber and also on his own blog, He is the author of Zombie Economics, which was named one of the top thirty business books of 2010 and surely can spawn untold sequels. Professor Quiggin and I discuss the current economic crisis as well as his preferred policies to get us out of this God-awful mess. Among other matters, we discussed criminal prosecutions (which he's against), financial transaction tax (which he's for) and how we can keep this economic system from crashing all the damn time (he doesn't know).

Why one of the World’s Smartest People, Jeffrey Sachs (Columbia Professor), Supports Occupy Wall Street « There is good reason why Jeffrey Sachs and 200+ other Columbia professors support Occupy Wall Street – Many people consider this movement a fad or some misguided waste of time. Well, frankly, those folks couldn’t be further off. There is a reason why the entirety of Wall Street has been barricaded since Occupy Wall Street started on September 17, 2011. Mark that day down as one of the most significant in American and World History. It’s the day the tides started turning, and the sadistic, manipulative power players of the world finally met their match – THE PEOPLE of the world, finally putting the pieces of the puzzle together and standing up against them en masse. The group may have started out as a few thousand, but in just three weeks, they have millions of supporters around the world, in spite of an intentional and equally deceptive media blackout, ordered by the big shots from their ivory towers.

Did You Hear the One About the Bankers? - CITIGROUP is lucky that Muammar el-Qaddafi was killed when he was. The Libyan leader’s death diverted attention from a lethal article involving Citigroup that deserved more attention because it helps to explain why many average Americans have expressed support for the Occupy Wall Street movement. The news was that Citigroup had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.  It doesn’t get any more immoral than this. As the Securities and Exchange Commission civil complaint noted, in 2007, Citigroup exercised “significant influence” over choosing $500 million of the $1 billion worth of assets in the deal, and the global bank deliberately chose collateralized debt obligations, or C.D.O.’s, built from mortgage loans almost sure to fail. According to The Wall Street Journal, the S.E.C. complaint quoted one unnamed C.D.O. trader outside Citigroup as describing the portfolio as resembling something your dog leaves on your neighbor’s lawn. “The deal became largely worthless within months of its creation,” The Journal added. “As a result, about 15 hedge funds, investment managers and other firms that invested in the deal lost hundreds of millions of dollars, while Citigroup made $160 million in fees and trading profits.”

Mike Mayo: Send Citigroup And Bank Of America To 'Minor Leagues' For Breakup: "We Don't Have Capitalism, We Have Entitlement" - Big banks that haven't been performing should be broken up before they become a threat to the entire financial system, banking analyst and author Mike Mayo told CNBC. "Let's go bank by bank, company by company, CEO by CEO, chairman by chairman, let's just go down the list...and start cleaning house," he said.  Looking at specific institutions, Mayo pointed to Citigroup Chairman Dick Parsons and said, "I don't know how he still has a job." "If you haven't performed for a number of years — like a decade — then get out of the major leagues and go back to the minor leagues, and you should be broken up. But I think the shareholders should lead the way," he said. "If you have a company like Citigroup — maybe one or two others out there — that haven't performed over more than a decade, then I say let's break them into more manageable pieces."Parsons in particular drew Mayo's ire for leading the firm's compensation committee while the bank weathered storm after storm during the last decade. Despite the circumstances, top executives suffered no negative effects to their paychecks, Mayo pointed out.

Selling More CDS on Europe Debt Raises Risk for U.S. Banks - Bloomberg: U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults. Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show. The payout risks are higher than what JPMorgan Chase & Co. (JPM), Morgan Stanley and Goldman Sachs Group Inc. (GS), the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced,

Big Banks Betting on the Euro - This Bloomberg article is troubling. It appears too big to fail US banks are betting that Eurozone government and banks are also too big to fail. In the long run, it is probably a good bet. Ultimately, the ECB will probably print enough money to bail everyone out. But in the short run, there could be some very uncertain times.Right until Germany and the ECB capitulate, some US bank investments, shorts, and CDS counterparties may look like the will fail. It is quite possible that some smaller nations and banks will fail (Greece and Portugal would be analogous to Bear Sterns and Lehman). The fear that someone bigger (substitute Spain, Italy, & France for Citi, AIG, & Merrill Lynch) is what forces the ECB act decisively. But in the interim, the large and perfectly hedged positions in US banks don't look all that hedged after all, which would cause panic to jump across the Atlantic.  I'm not against taking bets on the ECB bailout. But it is a trade that has to be made with your own money. Banks borrow their money from depositors and the bond market, and that borrowing is explicitly or implicitly guaranteed by the government. The ECB bet is too dangerous if you are leveraged because there may be times when those who lent to banks get scared and want their money back early. Just ask MF Global.

Make the banks pay - There is $700 billion in negative equity in the U.S. housing market. That means Americans owe $700 billion more than their homes are worth. Any plan for the housing sector or the U.S. economy, that doesn’t take a serious bite out of negative equity isn’t serious. Yet un-serious is what we continue to get from elected officials. This week the Obama Administration announced a new plan to help underwater homeowners refinance their mortgages to lower rates. The plan, really an expansion of an existing program, is the latest in a series of programs designed to deal with the moribund housing market. Each has proven a more dismal disappointment than the next. So too with the latest version of the proposed settlement between the state Attorneys General, led by Iowa’s Tom Miller, and the mortgage servicing industry. Yes, the deal has been sweetened by the addition of some interest rate reductions for underwater homeowners who are current on their payments. But that’s small potatoes. These approaches haven’t worked and won’t work because they fail to acknowledge that negative equity is the critical problem in the U.S. economy. We’re in a “balance sheet recession” caused by people pulling back on their spending because they’re concerned about their households’ net financial position.

Bill Black on the Real News Network on His Three Big, Simple Demands - 11/05/2011 - Yves Smith  - It is interesting to see how the popular desire for Occupy Wall Street to issue demands is leading various pundits and experts to boil down and update their views on what really needs to be done to fix the financial and political systems. (Note we are of the minority view that OWS is being shrewd in not acceding to pressure to reduce its desire for broad-based change to soundbites and an easily-to-digest program. Bill Black give his usual forthright views on this segment on Real News Network. Enjoy!

Bill Black Goes To Occupy Wall Street (video)

Thomas Friedman, Dirty Hippie - The column is already a day old, but a warm welcome is due nonetheless to Thomas Friedman, who has joined the ranks of the shrill: This gets to the core of why all the anti-Wall Street groups around the globe are resonating. I was in Tahrir Square in Cairo, and one of the most striking things to me about that demonstration was how apolitical it was. When I talked to Egyptians, it was clear that what animated their protest, first and foremost, was not a quest for democracy. It was a quest for “justice.”  But, then, what happened to us? Our financial industry has grown so large and rich it has corrupted our real institutions through political donations. As Senator Richard Durbin, an Illinois Democrat, bluntly said in a 2009 radio interview, despite having caused this crisis, these same financial firms “are still the most powerful lobby on Capitol Hill. And they, frankly, own the place.” Our Congress today is a forum for legalized bribery. One consumer group using information from calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street.

Hubris Watch: US Bank CEO Sniffs About Breaking Rules When His Bank Has Huge Trustee Liability - Yves Smith - A writer for the Minneapolis CityPages managed to worm his way into a presentation to the annual meeting of the Minnesota Chamber of Commerce by US Bank’s CEO, Richard Davis. Even though Occupy Minnesota was protesting outside, Davis chose to ignore them. His speech made clear that the business community does not care about long-term self interest, let alone social responsibility. Housing and the foreclosure crisis were absent from the 2012 legislative priorities. But tax reform, which is code for shifting even more of the cost of government on to the small fry? Yeah, that’s a big deal. Davis’ apparent lone comment on the public ire against the banks was dismissive: “‘Everybody’s breaking the rules, blah blah blah,” Davis said at one point, mocking the general sentiment behind the public outrage before admonishing them to “Get over it.”  Davis’ arrogance no doubt seems justified, since only rulebreakers who aren’t in the corporate elite club, like Bernie Madoff, have been brought to justice. And he stole from rich people, which made him a prime target. By contrast, US Bank on Davis’ watch, is a recidivist rulebreaker, but he clearly regards that as a matter of no import.  US Bank is one of the four biggest securitization trustees, along with Bank of New York, Deutsche Bank, and Wells Fargo. That, sports fans, means his bank has massive liability on mortgage backed securitizations. We discussed this issue recently as far as Bank of New York is concerned. The same logic applies to US Bank: What has gotten less attention is the implication of the probable derailment of this deal for the Bank of New York, and its vulnerability to mortgage litigation. If you think, as banking expert Chris Whalen does, that BofA is a goner by virtue of the odds of very large damages in the various mortgage cases that are in progress, Bank of New York is a goner even faster if (and we really mean when) investors start saddling up to target the bank.

Biometric Door Locks and Bulletproof Windows: How Occupy Wall Street Is Scaring the Heck out of the 1% - A giant bunch of red balloons bob outside the glass windows of the tower at 200 West Street—the headquarters of mega-investment bank Goldman Sachs. Tied to each balloon is a letter, printed out from the site OccupyTheBoardroom.org1, being delivered to Goldman in rather spectacular fashion by the activists below, who are holding onto the balloons by a few balls of twine. A small group of people, including a couple of police officers, huddle nearby. It's clear they don't like what's going on, but they can't seem to come up with a legal reason to stop it. The protesters tie more letters to more balloons and send them zipping up the string to join the others at the top, and a blonde woman mutters something like, “They want to occupy the boardroom,” into her her walkie-talkie.  Clearly, someone at Goldman Sachs has heard of the site, and while their message might not be getting through, they're certainly unnerved at the willingness of activists to bring creative protest right to their door. The response of the country's financial elites to the protests in Liberty Plaza and around the country seem not all that different from the police and security guards nervously watching outside the Goldman office. They don't want to overreact and show that the actions are working, but they clearly wish they had a way to shut them down.

Investment banking - As protestors occupy Wall Street and financial centres around the world, among the grievances are “socially useless” investment banks. This column argues, however, that investment banking is critical to any effective economy – the idea that policymakers can safeguard retail banking alone is not only tragically mistaken but also horribly dangerous.This column is a Lead Commentary on VoxEU's debate on Why do we need a financial sector?  Join the debate

Shocker: The More You Pay a Rating Agency, the More They Do Your Bidding! - Sit down for this one. Because you’re just not going to believe it. It seems that the more credit rating agencies are paid by corporations and banks to rate their debt, the more favorable ratings they hand out! This goes against everything I know about the untainted, incorruptible hand of the free market, and comes very close to shaking my faith in the credibility of the rating agencies. Credit-rating companies routinely award higher rankings to debt issued by banks and corporations that pay them the most, a conflict of interest that may escape Congressional efforts to change the way they do business. Bonds from countries and cities that pay about half as much as issuers of less creditworthy debt are “rated more harshly,” according to a study by scholars at Indiana University, American University and Rice University in Houston. Sovereigns rated A had no defaults over a 30-year period, compared with 1.8 percent of corporate bonds and 27.2 percent of securities backed by debt such as mortgages and loans assigned that ranking, the study of Moody’s Investors Service data said. I see where the researchers at American U. and Rice will go on to an in-depth study of the effects of mud on clothing. Maybe they’ll find out if it gets the clothes dirty!

crony capitalism and casino capitalism--bad flavors for right or left, per Kristof and Stiglitz - Linda Beale -- The Occupy Wall Street focus on "we are the 99 percent" juxtaposed with the CBO's recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry's so-called "Flat Tax" and Cain's so-called "FairTax", that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society.  Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right.  The right likes to disguise them as 'folksy' 'down-home' populism.  They aren't.  They are wolves disguised in sheep's clothing. In Crony Capitalism Comes Home, Nicholas Kristof notes the "alarmist view" of Occupy Wall Street rampant among the media and the elitist critics of the movement--one that sees the protesters as "half-naked Communists aiming to bring down the American economic system" or "a 'mob' trying to overthow capitalism."  He rightly responds that it is instead a movement that "highlights the need to restore basic capitalist principles like accountability." [I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us. The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.  Something similar is true today of the United States.

Ten Reasons Not To Bank On (Or With) Bank Of America - Charging customers for a debit card is just one reason not to bank at BoA. Recent Occupy Santa Cruz Bank of America incident illustrates how sensitive B of A is to protest.  This "too big to fail" bank may collapse like a house made of junk bonds and become a taxpayer burden. Here are a few other reasons why you shouldn't bank with them. There is no shortage of hatred for the biggest banks. Indeed, the Occupy Wall Street movement is leading a national revolution against these byzantine, powerful Goliaths for the economic devastation they have caused. This makes it difficult to choose the worst of the bunch. That said, a strong case can be made that Bank of America deserves the title of the nation's most despised bank. Here are ten reasons to take your money out of Bank of America - and park it at a credit union or community bank near you. (And yes, that may be near impossible if you have a mortgage with them, as refinancing away from any big bank nowadays is a nightmare.)

Retreat From Debit-Card Fees Continues -- SunTrust Banks1 Inc. and Regions Financial2 Corp. said they will stop charging customers for making purchases with debit cards, marking the latest banking-industry retreat from a monthly fee that drew an outraged response from customers. The announcements follow decisions last week by Wells Fargo3 & Co. and J.P. Morgan Chase4 & Co. to drop customer tests of the new fees. Together, the four banks operate around 15,000 U.S. branches, while controlling more than $2.2 trillion in deposits and $1.6 trillion in loans—more than 20% of the industry total. The about-face by the four big banks represents a rare concession to customer sensitivities over lucrative fees. Hit hard by a soft economy and tightening regulations, banks have been adding fees on services, charging for instance for many checking accounts that used to be free.

In Retreat, Bank of America Cancels Debit Card Fee - Bank of America blinked on Tuesday.  The bank, the nation’s second-largest, said it was abandoning its plan to charge customers a $5 fee to use their debit cards for purchases. Only a month earlier, the bank had announced the new charge, immediately setting off a huge uproar from consumers.  Despite an outpouring of complaints online and at branch offices, the bank had remained steadfast in its plans until last Friday, according to a person briefed on the situation, planning to ease just some of the conditions for avoiding the fee. But over the weekend, after two major competitors — Wells Fargo and the nation’s largest bank, JPMorgan Chase — said they were backing away from their plans to levy similar charges, two high-ranking Bank of America officers recommended to Brian Moynihan, the bank’s chief executive, that the bank simply drop the fee. Then, on Monday morning, when SunTrust, a regional bank in Atlanta, said that it, too, would abandon its $5 charge, Bank of America was left standing alone, the last major bank planning the fee. The announcement came on Tuesday.

Moved your money -- Think Progress points us to …the Credit Union National Association (CUNA) reports that a whopping 650,000 Americans have joined credit unions since Sept. 29 — the date that Bank of America announced it would start charging a $5 monthly debit fee, a move it backed down on this week. To put that in perspective, there were only 600,000 new members for credit unions in all of 2010.

Did Occupiers Just Beat Bank of America? - In four days, Bank of America was all set to face protests against its proposed $5 per month debit card fees -- a so-called "Bank Transfer Day." Today, the bank told the protesters they could find something else to do. We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee. Our customers' voices are most important to us. As a result, we are not currently charging the fee and will not be moving forward with any additional plans to do so. Is this the first popular victory for Occupy Wall Street? The first politician who hinted as much was (get ready for a shock) Sen. Bernie Sanders, who went to the floor of the Senate to congratulate the "American people" for beating the bank. Republicans have been quieter.   Up to now, they'd been citing the debit fee as proof that Democratic regulatory lust was hurting the country.  The existence of the free, said Republicans, proved them right. The end of the fee, say Occupiers and their allies, proves that BoA needlessly fueled a "move your money" concept -- one that dates from 2009 -- to pull cash out of banks and put them in community banks. Here, for example, is video from two weeks ago of a priest announcing the end of his church's BoA relationship.

Bank of America Employees Flood Rivals with Resumes - Bank of America Corp employees are flooding rival companies with resumes as a major cost-cutting program gets under way at the second-largest U.S. bank. Competitors say they are getting an influx of calls, emails and LinkedIn connection requests as the bank embarks on a plan to slash 30,000 jobs over the next few years. The employees are scouting jobs in retail, commercial and investment banking, bankers and recruiters said. In recent months, Bank of America has laid off employees, including senior leaders, in consumer, human resources, capital markets and other areas, people familiar with the situation said. The cuts are part of a round of 3,500 layoffs announced in August and the first wave of Project New BAC, which takes its name from the company's stock symbol. Bank of America said it had 288,739 employees on September 30, up from 288,084 three months earlier, but about 2,000 have been told they will be let go.

Banks Extract Fees On Unemployment Benefits - Across the nation, people receiving a range of state-furnished benefits -- from unemployment insurance and food stamps to cash assistance for poor families -- are facing similar options and reaching the same conclusion. In 41 states major banks and financial firms have secured contracts to provide access to public benefits via prepaid debit cards. And banks are increasingly extracting hefty cuts of these funds through an assortment of small fees. U.S. Bank, JP Morgan Chase, Wells Fargo, Bank of America and other institutions hold contracts to distribute these benefits on prepaid debit cards. When Bank of America announced plans to charge regular banking customers a $5 monthly fee to use their debit card it created a wave of public criticism. But the lesser-known fees attached to prepaid debit cards are already extracting money from the most vulnerable Americans -- those unable to pay their bills and feed their families without public help -- in the midst of stubbornly high unemployment and soaring rates of poverty. "The big banks have actually figured out a way to make unemployed workers a profit center, one that only grows as things get worse,"

Unofficial Problem Bank list increases to 985 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sourcesHere is the unofficial problem bank list for Oct 28, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  The OCC finally released some information on its actions since September 23rd. This week, also, the FDIC released its actions through September. These releases contributed to many changes to the Unofficial Problem Bank List. In all, there were seven removals and 16 additions, which leaves the list with 985 institutions with assets of $406.6 billion. A year-ago, the list had 894 institutions with assets of $410.7 billion. For the month, there were 18 additions and 19 removals with 11 from failure, seven from action termination, and one unassisted merger. It was the fourth consecutive month for the list to have fewer institutions since its month-end peak of 1,001 in June, but the serial monthly decline was only a single institution.

Fannie Mae and Freddie Mac Serious Delinquency Rates mixed in September - Fannie Mae reported that the Single-Family Serious Delinquency rate declined to 4.00% in September. This is down from 4.03% in August, and down from 4.56% in September of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate increased to 3.51% in September, up from 3.49% in August. This is down from 3.80% in September 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent.  Tracking this on a monthly basis this is kind of like watching paint dry, but the serious delinquency rates are generally falling - but only falling slowly. The key is the normal serious delinquency rate is under 1%, and at this pace of decline, the delinquency rate will not be back to "normal" for a number of years.

Freddie Mac reports Q3 loss, asks for $6B in aid -- Government-controlled mortgage giant Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter. Freddie Mac said Thursday that it lost $6 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010. This quarter's $6 billion request from taxpayers is the largest since April 2010. Freddie's losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankrupt mortgage insurers are not paying out as much money when homeowners default. The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. 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 it could cost up to $51 billion more to support the companies through 2014.

Freddie Mac seeks further $6bn from taxpayers -- Freddie Mac, the US-controlled mortgage financier, has requested an additional $6bn from US taxpayers, following a $4.4bn third-quarter loss, the company’s worst three-month performance in more than a year. The home loan group said more homeowners were falling behind on their obligations and it could not count on mortgage insurers to reimburse the company for losses. Freddie set aside $3.6bn in provisions for credit losses, its highest total since the third quarter of last year. The additional $6bn brings its total bailout from the government to $72.2bn, of which $14.9 has been returned in the form of dividends. Fannie Mae, Freddie’s much larger rival, is due to report its earnings in the coming days.Freddie’s deteriorating financial position underscores the poor state of the US housing market. Sales are down, delinquencies are rising and the pipeline of seized homes due to flood the market is growing ever larger. Home prices, which had begun slowly to rise in late 2009 and early 2010, are falling again, sowing anxiety among homeowners and sapping their desire to spend. “The housing sector [is] very important,” Ben Bernanke, US Federal Reserve chairman, said this week. “The problems in that sector are clearly a big reason why our economy is not recovering more quickly.”

Final Tally - Outgoing Freddie CEO Gets $4 Million Bonus To Receive $21 Billion In Bailouts After Massive Q3 Loss - When last week we reported about the scandal of outgoing Freddie Mac CEO Ed Haldeman receiving at least $3.9 million as a reward for his two year tenure at the top of the insolvent and nationalized housing entity, we said: "As the chart below demonstrates, the total "draws" received under Haldeman's tenure amounts to $14.5 billion. This excludes the Q3 number which will be made clear next week. Something tells us with this abrupt departure, the number may be higher to quite higher than expected." As usual: when in doubt, be cynical, and be skeptical, and you will be right. Today, Freddie just reported that its Q3 draw, or required quarterly bailout amount from the Treasury, was $6 billion: the highest since Q1 2010, as a result of a massive loss of $4.4 billion. This means that during his tenure which ended just after the completin of Q3, Freddie has been "rewarded" with $20.5 billion in taxpayer capital merely to keep the zombie entity in operation! And for this, Ed gets $4 milliom. And this is why people in America are very, very pissed.

Kamala Harris, California Attorney General, To Fannie And Freddie Head: ‘Step Aside’ Over Mortgage Crisis - California Attorney General Kamala Harris has called on the head of the agency that houses Fannie Mae and Freddie Mac to "step aside" if he continues to refuse to reduce mortgage loans for underwater homeowners. "It has become clear to me that the only way to keep distressed California homeowners in their homes is through meaningful principal reduction," Harris said in a statement Thursday. The lack of meaningful principal reduction is what drove Harris in late September to exit the multistate settlement talks with major banks that are led by Iowa Attorney General Tom Miller with the support of the Obama administration. The attorneys general of Massachusetts, New York, Kentucky, Minnesota, Delaware and Nevada have also bridled at the settlement efforts, finding the banks' expected $25 billion write-down to be inadequate to protect their states' homeowners from losing their property.  Harris' pressure on Edward DeMarco, who oversees Fannie and Freddie as the acting director of the Federal Housing Finance Agency, serves to further highlight the inadequacies of a deal that does not include Fannie and Freddie, although they own half of the mortgage debt in the country.

Bloomberg: Don’t Blame Banks for Mortgage Crisis - New York City mayor and media mogul Michael Bloomberg says Congress, not the banks, is responsible for our current mess. "they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans..” This was a popular and perfectly plausible argument a year or so ago. I joined many in making it. It was a perfectly understandable mistake for informed laymen to make, since it starts from a true premise: there was indeed pressure on lenders to make loans to disadvantaged people and communities seeking to become homeowners. But, as Paul Krugman notes, it has long since been debunked in the popular debate and therefore “for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his ‘analysis’ from right-wing flacks.”

Michael Bloomberg, Ignoramus - Krugman - Via David Dayen, the favored candidate of those who believe we need a smart centrist to solve our nation’s problems reveals himself to be completely ignorant about the causes of our economic crisis, someone who just swallows right-wing propaganda whole: “I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.“  You can read lots about how wrong this is; Mike Konczal has done it at great length, for example here. The fact is that for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his “analysis” from right-wing flacks. Some centrist hero.

Mayor 1% joins the Limbaugh chorus - Mayor 1% (and Unity 2012 dream boat) is starting to show his true spots: (video) Yeah. Let's not play the blame game. (Well, except we do need to teach the silly serfs --- who took loans from people who were offering them --- a lesson they won't soon forget.) What he said is just an outright lie (a zombie lie, in fact) and he knows it. The key is to ensure that the dizzy bimbos of the press, who worship his alleged "moderation", don't see his endorsement of this toxic rightwing propaganda as if it came down from Mt. Sinai.  I think this is a signal that the 1%ers are getting agitated for real (as opposed to the crocodile tears they shed everyday about being called "fat cats" by their friends in the White House.) Bloomberg has always been one of them, of course, but he's been the designated moderate, put out there to pretend that they give a damn about the peasants. He's joined the Limbaugh crowd with this one.

Bloomberg Refuted - Krugman - Mike Konczal has a post pulling together all the facts showing how totally wrong Bloomberg was in claiming that Fannie/Freddie/the Community Reinvestment Act were responsible for the financial crisis. One point worth emphasizing is that a very large part of the supposed case against the GSEs rests on what has to be a deliberately misleading rhetorical tactic. The raw fact is that Fannie/Freddie accounted for very little subprime lending. So the usual suspects talk about “subprime and other high-risk”, mumbling the latter part, so that it sounds as if they were doing a lot of it. Except, as Konczal documents (based on David Min), the “other high risk” was nothing at all like subprime, and not especially high-risk. The point is that this is cheap, politically motivated stuff, motivated by a deliberate desire to mislead. And if Bloomberg actually believes this stuff, he has very bad judgement, not just about the facts, but about who he should trust.

Bloomberg Revealed - Krugman - I came down pretty hard on Michael Bloomberg recently, but Matt Taibbi comes down harder: Bloomberg’s great triumph as a politician has been the way he’s been able to win over exactly the sort of crowd that was gathering at the HuffPost event that night. He is a billionaire Wall Street creature with an extreme deregulatory bent who has quietly advanced some nastily regressive police policies (most notably the notorious “stop-and-frisk” practice) but has won over upper-middle-class liberals with his stances on choice and gay marriage and other social issues. Bloomberg’s main attraction as a politician has been his ability to stick closely to a holy trinity of basic PR principles: bang heavily on black crime, embrace social issues dear to white progressives, and in the remaining working hours give your pals on Wall Street (who can raise any money you need, if you somehow run out of your own) whatever they want. He understands that as long as you keep muggers and pimps out of the prime shopping areas in the Upper West Side, and make sure to sound the right notes on abortion, stem-cell research, global warming, and the like, you can believably play the role of the wisecracking, good-guy-billionaire Belle of the Ball for the same crowd that twenty years ago would have been feting Ed Koch. Read the whole thing. And you know, he’s right.

Latest Leak on State Attorney General Mortgage Settlement: A Shameless Sellout to the Banks - - Yves Smith - There have been so many rumors about the so-called 50 state attorney general settlement (which now is more like a 43 state settlement) being on the verge of having a deal that we’ve discounted them. We’ve said from the beginning that this was a cash for release deal. Basically, because the Federal regulators and state AGs, by design, had done no meaningful investigations, they didn’t have any threats to bring the banks to heel. So they’d have to offer a bribe, and the bribe has always been a “get out of jail free” card.  Put it more simply: The banks got bailed out, and the rest of us got left out. Yet all levels of government are actively trying to find a way to release from wrong doing for the banks, when everyone knows that they violated a host of laws every step of the way in the mortgage business. We said the only way a deal would get done is if the state AGs capitulated completely. There have been enough leaks about state AGs being uncomfortable with a broad release, plus the banks greatly overplaying their hand, that it looked like no deal would happen. Tom Miller, the Iowa AG who is the lead negotiator for the states, has been saying a deal is imminent since last January, so his credibility is pretty thin. But the Obama administration is moving heaven and earth to get a deal done, since they seem to think the public can be snookered into thinking motion is progress. Nevertheless, the negotiations appear to be grinding forward. And it isn’t the banks that are giving ground. Gretchen Morgenson tells us at the New York Times what an utter joke the settlement has become.

Matt Stoller: Why a Foreclosure Fraud Settlement is a RIDICULOUS Idea - Gretchen Morgenson is ringing alarm bells that a 50 state settlement on the foreclosure fraud issue is on deck, and is spelling out some of the details. There would be some principal write-downs, random cash payouts for those who were foreclosed, and money to buy off nonprofits in the states that work on housing issues (a classic Fannie/Freddie Dem friendly tactic Morgenson and Rosner exposed nicely in their book Reckless Endangerment). The settlement looks vague and stupid, and will probably be executed with the care and competence of HAMP. But let’s put that aside. What makes these discussions so utterly absurd, so ridiculous, and farcical, is that robo-signing, an abuse the banks have admitted to and clam they’ve ceased, is still going on. The AP reported this in July; mortgage servicers in Nevada have stopped foreclosing because of a law explicitly criminalizing robo-signing. Yes, the banks are asking for a release of claims on acts, or perhaps crimes, that are ongoing. And these abuses are extensive: lying to investors about the quality of the mortgages; violating their own contracts by failing to convey mortgages properly to securitization trusts; charging fees that are impermissible under Federal law and the contracts; making a mess of property records and engaging in deceptive consumer practices through the use of MERS; and engaging in document forgeries and fabrications in foreclosures. All these people trying to give the banks “a settlement” are in fact immunizing banks against acts they are committing and will commit going forward. Only in the future, when a voter complains to his or her state AG, that official will have to explain to that voter that his/her rights have been given away.

The Multistate Settlement Lottery: Bupkis - The NY Times had some details today about the multi-state attorney general mortgage servicing settlement in the works. It looks every bit as awful as one might have feared. Here's the criticial take-away:  this is bupkis. It gives meaningless relief to a meaningless number of randomly or adversely selected homeowners.  It doesn't do justice, even by halves.  First, though, there's a detail reported in Gretchen Morgenson's otherwise insightful piece that I have on good source is incorrect.  The piece states that the banks would be doing principal write-downs on loans they own or service.  That's gotta be incorrect.  The banks can do principal write-downs only on loans that they own.  They have no legal authority to pledge write-downs on loans that they service on behalf of investors. There's a critical implication here, then about the scope of the multi-state settlement:  at best 20% of the population of underwater mortgagees will be helped by this settlement, say 2.2 million homeowners.  The other 8.8 million (and probably 10 million by my reckoning) are SOL.  How do you think they're going to feel about their AGs?  About their President?  Too many times have American homeowners been promised help without receiving any.  It's getting old.

A Foreclosure Settlement That Wouldn’t Sting -- AFTER months of back and forth, a deal that is supposed to punish large financial institutions for foreclosure misconduct may be nigh.Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.  This may not qualify as a shock. Accountability has been mostly A.W.O.L. in the aftermath of the 2008 financial crisis. A handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks.  It looks as if they were right to worry. As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.  The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors.

Administration Favors Settling With Banks on Criminal Actions They’re STILL Engaged In - Matt Stoller’s piece on the latest in the foreclosure fraud settlement follies makes one very important point that I missed in my writeup: robo-signing is still happening. What makes these discussions so utterly absurd, so ridiculous, and farcical, is that robo-signing, an abuse the banks have admitted to and clam they’ve ceased, is still going on. The AP reported this in July; mortgage servicers in Nevada have stopped foreclosing because of a law explicitly criminalizing robo-signing. Yes, the banks are asking for a release of claims on acts, or perhaps crimes, that are ongoing. And these abuses are extensive: lying to investors about the quality of the mortgages; violating their own contracts by failing to convey mortgages properly to securitization trusts; charging fees that are impermissible under Federal law and the contracts; making a mess of property records and engaging in deceptive consumer practices through the use of MERS; and engaging in document forgeries and fabrications in foreclosures. All these people trying to give the banks “a settlement” are in fact immunizing banks against acts they are committing and will commit going forward. Only in the future, when a voter complains to his or her state AG, that official will have to explain to that voter that his/her rights have been given away. If the banks weren’t able to robo-sign, they wouldn’t be able to foreclose on anyone, because without fraudulent means they cannot prove ownership.

Is GMAC, Now Ally, Just Dishonest or Criminally Incompetent? - Yves Smith - Here the major bank servicers are about to get a screaming bargain via a hoped-for multi-state-Federal mortgage settlement, and what is number five service Ally doing, but threatening to thumb its nose at the deal as being to hard on them.  Per Housing Wire, Ally CEO Michael Carpenter made some pretty cheeky statements on an investor conference call today:“If we think a settlement is not in the best interest of our shareholders, which is still the U.S. taxpayer, then we will not participate,” Carpenter said in a conference call with investors Wednesday. “The downside is long-term aggravation and legal fees. But if you think we have significant exposure from a financial implication, the answer is no.”… “We deeply regret the sloppy operational practices that led to this. But we have contractual obligations as a servicer to foreclose when we must,” Carpenter said. Notice the logic here. First, the assertion is that the law does not matter, all that matters is whether the servicer’s records say the borrower is current. But as we have discussed repeatedly, there is ample evidence of both error in servicer records and abusive and impermissible practices regarding servicer fees, such as junk fees, force placed insurance, double dipping (charing both the investor and the borrower the same fee), impermissibly (via contract and Federal law) applying borrower payments to fees first rather than principal and interest. The latter practice results in “pyramiding fees”, since charging fees first means a regular payment will be deemed short (or in many cases, will be placed in a suspense account and be treated as late), generating yet more fees.

Bank CEOs Lying When They Say They’ve Stopped Robosiging - - Yves Smith - Readers may recall that we posted on the credibility-straining claim by the former GMAC’s, now Ally’s CEO, that his bank was no longer engaging in robosigining.  Now in fairness, we might have a little clever use of terminology at work. Robosigning narrowly speaking, refers to the use of low paid staffers to execute documents used in court filings by the hundreds per day. This created a huge scandal when it broke because it was a flagrant violation of court procedures. Affidavits, for instance, are used in place of testimony and are required to be based on personal knowledge. A $12 an hour functionary churning out signatures clearly has not even read the paperwork, much the less has any knowledge of the various foreclosures he is pushing through the pipeline. Ally and other major servicers now piously claim that these systematic abuses of legal procedures that date back to the 1677 Statute of Frauds were mere “sloppiness” or “paperwork errors” and they’ve cleaned up their act. Should we believe them? While services like #5 Ally may well have dispensed with factory-style signing procedures. there is evidence on the ground that says that the banks have not made meaningful changes. But there is even evidence that robosigning is still taking place, AFTER the banks were supposedly investigated by 11 Federal regulators (we’ve repeatedly expressed our skepticism about that efforts, and our doubts were confirmed by the GAO) and after the servicers entered into consent decrees which made this sort of thing impermissible. As we wrote in July, two separate investigations, one by Reuters, one by the Associated Press, found that past robosigners were still cranking out signatures. Reuters identified six robosigners at five different servicers.

Occupy Wall Street to March Against Foreclosure Fraud Settlement - Occupy Wall Street has planned a march tomorrow from Zuccotti Park to the US Court House Building at Foley Square, specifically in protest of the looming foreclosure fraud settlement between state and federal regulators and big banks. The goal of the march is to “expose the looming cash-for-immunity deal,” where banks are poised to get a broad release from prosecution in exchange for a pittance sum for troubled borrowers, a loan modification promise on which the banks historically have not followed through. This is from the press release: President Obama is on the brink of cutting a backroom deal that would give bankers broad immunity for illegally throwing tens of thousands of Americans out of their homes. The Administration is pressuring state attorneys general to abandon an ongoing investigation into the massive “robo-signing” fraud, in exchange for a relatively small payoff by the banks.  Numerous investigations by state and federal authorities have demonstrated that banks used illegal procedures to make tens of thousands of foreclosures over the past decade. Rushing to a settlement before the full extent of the fraud is known would be a grave injustice to those who were illegally foreclosed upon and those still struggling to stay in their homes.

A Creditor’s Playland, or: Cato on Housing Crisis Policy  - Earlier this week we talked about a worldview in which all the laws, customs, norms and policy was geared towards only serving the interests of creditors.  A libertarian vision of defending power where “benefitting creditors is the only thing that the rules of debt should consider.” Yesterday Mark Calabria, director of financial regulation studies at the Cato Institute, gave five steps to fixing the housing market on Cato’s blog.  Check this out:

  • 1.   Speed up the foreclosure process.  The massive shadow inventory of homes yet to hit the market, numbering in the millions, is keeping potential buyers on the sidelines.  Why buy now when a future massive increase in supply will likely depress prices more?  It is best to get that supply to the market now.
  • 2.   State Attorneys General need to either put-up or shut-up.  If the state AGs have some real evidence, then why aren’t we in court?  Either the AGs should go to court, where we can all see the facts, or they should drop what only looks like a shakedown….
  • 5.   Exercise recourse when possible.  Many federal loans, like FHA, have a recourse option.  In the case where borrowers can pay, but simply don’t want to (due to price declines or otherwise), they should be held to account. 

Is the Jig up for MERS? - The Mortgage Electronic Registration System (MERS) has been the target in a lot of lawsuits during the mortgage crisis for its shoddy, opaque practices. But because these suits tend to be brought by borrowers in default, the courts have been willing to stretch the law to dismiss plaintiffs' claims. Something new is going on now. The Delaware Attorney General on October 27 sued MERS, a Delaware corporation, for deceptive trade practices for sowing confusion among investors and consumers and running an extra-legal registration system riddled with errors. The Delaware AG, Beau Biden, son of the vice president, is invoking the importance of transparent recording of property interests as a central part of American democracy since the colonial era. Some other AGs and other public officials are pursuing similar legal theories. The argument is that nothing is more important to our democracy than secure property rights recorded in transparent public records, and that the mortgage industry should not be permitted to take this away from us. To read about this new development, visit the Delaware Department of Justice web site, at

To Fix Housing, See the Data - The idea of helping struggling homeowners by writing down some principal on their mortgages — as opposed to reducing the interest or reconfiguring the terms to lower the monthly payments — is much in the air1 right now. Banks loathe the idea of principal reduction; they fear that people who are current on their mortgages will start defaulting just to get their principal reduced. They also don’t want the hit to their balance sheets.  But the states’ attorneys general who sued over the robo-signing scandal2 have made principal reduction the central plank of the settlement they are close to completing. Housing activists love principal reduction because they tend to see it as a just solution to an unjust situation — it’s a way of making the banks pay a real price for their sins during the subprime madness while allowing people to keep their homes. Conservatives, on the other hand, hate principal reduction. They believe that borrowers who made poor decisions by taking out mortgages they could never afford have to take responsibility for those decisions. If that means foreclosure, so be it.  Enter Laurie Goodman. One of the country’s foremost authorities on mortgage-backed securities, she is also one of the most data-driven people I’ve ever met; at breakfast, she was constantly pointing me to one chart or another that backed up her claims. “She’s not into politics,” says my friend, and her client, Daniel Alpert of Westwood Capital. “She is using data to tell us the truth.”

LPS Mortgage Monitor: Over 4 Million Loans 90+ Days Delinquent or in Foreclosure, 72% in Foreclosure Not Made Payment for at Least 1 Year --Inquiring minds are reading the latest LPS Mortgage Monitor, released today.  Foreclosure timelines continue to increase across the board - almost 40 percent of loans in foreclosure have not made a payment in two years, and 72 percent have not made a payment in a year or more. New problem loan rates increased sharply over the last two months, with 1.6 percent of loans that were current six months ago now 60 or more days delinquent or in foreclosure.Take a good look at that chart. There has not been a decrease in the no payment for over 2 years category ever. At the beginning of 2011 it was 28%. It is now 39%. At the beginning of 2010 it was 12%.

LPS: Foreclosure timelines increase, Mortgage delinquency rate declines slightly in September -(see graphs)- From LPS Applied Analytics: LPS' Mortgage Monitor Report Shows Significant Difference in Inventories, Timelines Between Judicial and Non-Judicial States - The September Mortgage Monitor report released by Lender Processing Services, Inc. continues to show significant differences between states that process foreclosures following a judicial vs. non-judicial foreclosure process. ... The time from last payment to foreclosure sale in judicial states is 761 days, which is six months longer than in non-judicial states.Overall, foreclosure starts in September were slightly below the three-year average. Foreclosure timelines continue to increase across the board – almost 40 percent of loans in foreclosure have not made a payment in two years, and 72 percent have not made a payment in a year or more. New problem loan rates increased sharply over the last two months, with 1.6 percent of loans that were current six months ago now 60 or more days delinquent or in foreclosure. According to LPS, 8.09% of mortgages were delinquent in September, down from 8.13% in August, and down from 9.27% in September 2010. LPS reports that 4.18% of mortgages were in the foreclosure process, up from 4.11% in August, and up from 3.84% in September 2010. This gives a total of 12.27% delinquent or in foreclosure. It breaks down as:
• 2.36 million loans less than 90 days delinquent.
• 1.84 million loans 90+ days delinquent.
• 2.17 million loans in foreclosure process.

Foreclosure Timeline Lengthened by 140 Days Over Past Year: LPS - Mortgages backing homes that were foreclosed on in September had been delinquent for an average of 624 days, according to Lender Processing Services (LPS). That’s up from 484 days in September of last year, just before the processing issues surfaced. That 624-day foreclosure timeline is the national average. LPS says timelines in judicial states continue to extend at a greater rate. The time from last payment made to foreclosure sale in judicial states is 761 days, which is six months longer than in non-judicial states. Consequently, the company’s study shows foreclosure sales in judicial foreclosure states remain very low, with only 1.6 percent of their foreclosure inventories moving to sale. The slow pace of liquidation has caused the foreclosure pipeline to balloon, with nearly seven percent of the entire active loan count in judicial states in foreclosure. Ranked by the percentage of loans that are non-current, seven of the top 10 states are judicial foreclosure states: Florida, New Jersey, Illinois, Ohio, Indiana, Louisiana, and Maryland. Non-judicial states making LPS’ top-10 list include Mississippi, Nevada, and Georgia. Looking at the national foreclosure population, LPS says almost 40 percent of loans in foreclosure have not made a payment in two years, and 72 percent have not made a payment in a year or more.

LPS: Foreclosures delinquent an average of 624 days - Foreclosure starts dropped 11.2% in September from the prior month, but loans in foreclosure have been delinquent an average of 624 days, which is the highest level yet and up about two weeks from the level reported in August. Lender Processing Services' mortgage monitor report for September showed foreclosure starts fell about 15% from a year earlier, and the national delinquency rate at Sept. 30 is 8.09%, down from 8.13% the prior month and 9.27% a year earlier.The technology, data and analytics provider said the average delinquency process in judicial states, where backlogs remain extremely high, is about 200 days longer than judicial states: 751 to 565. First-time delinquencies accounted for about 26% of new delinquencies in September, according to LPS. Almost 40% of loans in foreclosure have not made a payment in more than two years and foreclosure starts outnumber sales by more than three to one. Meanwhile, new problem loan rates rose sharply the past two months, with 1.6% of seriously delinquent loans in September current six months ago. LPS also said jumbo prime delinquencies remain nearly 300% higher than the 2008 levels. The company tracks loan-level data of nearly 40 million mortgages and said earlier in October that 4.2 million properties are more than 30-days delinquent but not in foreclosure, while 1.84 million properties area at least 90 days past due but not in foreclosure. The company said 2.17 million homes are in the pre-foreclosure sale inventory.

Damaged Foreclosures Continue to Poison Prices - Nearly half of all foreclosures listed for sale are so seriously damaged they need major repair before they are habitable, a percentage that has remained virtually unchanged over the past two years. Last year, damaged foreclosures accounted for 13.9 percent of all home sales. That rose to 14.9 percent in February and accounted for 13.2 percent of total sales in August, or about 45.8 percent of all REO sales, according to the latest data from the Campbell/Inside Mortgage Finance HousingPulse survey of real estate professionals. Damaged foreclosures have an incredibly toxic effect on home values. Even one or two long-vacant damaged homes can hurt the value every home in a neighborhood. They usually list at a 5 to 7 percent discount below other foreclosures, which sell at 20-30 percent below a comparable home in the same area. These sizeable discounts impact the comparables appraisers use to value other properties for sale or refinancing. They often linger for months in inventory because they appeal to a small segment of the market. Few first-time buyers have the cash available for serious repairs, which can run 20 percent of the purchase price or more. Most damaged foreclosures are purchased by those investors who have the financing and the home improvement skills to spend.

The Looming Occupy Foreclosures Movement - The Occupy Oakland general assembly, a day before a proposed general strike, ruled that they would encourage the occupation of foreclosed and abandoned properties across the city. This is a natural development, but also a useful one. The rush to foreclose has left blighted properties all over the bubble states, serving no productive purpose. The banks have neglected these properties and allowed them to drift into disrepair, sometimes drawing fines from communities like Los Angeles, which passed a blight resolution last year. In fact, some banks are dealing with the problem by demolishing the properties, despite the clear human need for shelter. So if the Occupy movement extends to vacant homes, it creates a living space for people and saves the properties from demolition. What’s more, the dirty secret is that the banks cannot prove ownership on these properties, making it difficult for them to evict the squatters without some chicanery.The Occupy Vacant Properties movement has been slow going, but has expanded. In California, groups like the Home Defenders League are becoming more aggressive on this front, as in San Francisco, where a family will re-enter and re-claim their home, asserting that they were wrongfully evicted.

Home Affordable Refinance Program - Last week the Federal Housing Finance Agency, Fannie Mae and Freddie Mac jointly announced changes to the Home Affordable Refinance Program (HARP) with the goal of making it easier for some households to refinance their mortgages at lower interest rates. Here I offer some thoughts on this proposal. The graph below plots what some of us see as a key factor in the economic problems that the U.S. has been experiencing over the last four years. Household mortgage debt grew 60% faster than income between 2000 and 2007, and we may not see a return to a healthy economy until that ratio returns to more typical historical values. That could come from a combination of (1) foreclosures-- a painful process with significant deadweight loss for all parties--, (2) higher saving rates-- which make it harder to realize short-term growth in total spending-- or (3) strong GDP growth-- which is hard to achieve given (1) and (2). Another way that the debt burden could be reduced is through refinancing.

Freddie Mac, REO and Mortgage Rates - First, on mortgages rate, Freddie Mac reported: 30-Year Fixed-Rate Mortgage Averages 4.00 Percent Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average mortgage rates declining sharply as investors rushed to U.S. Treasury bonds amid concerns over the European debt market. The 30-year fixed at 4.00 percent marks the second lowest reading since it hit a record 3.94 percent in the October 6, 2011 PMMS, the lowest in history. Freddie Mac also released their Q3 financial results today, from the WSJ: Freddie Mac Loss Widens Freddie Mac posted a wider loss in the third quarter of $4.4 billion, marking its worst quarterly loss in more than one year....The loss forced Freddie Mac to seek $6 billion in new aid from the Treasury ... The loss brings Freddie's total cost to taxpayers to $56 billion.  And on REO from the Third Quarter 2011 Financial Results Supplement Here are a few excerpts on REO:
• The pace of REO acquisitions remained slow in 3Q 2011 due to continued delays in the foreclosure process for single-family mortgages. We expect these delays will likely continue into 2012. However, we expect our REO inventory to remain at elevated levels.
• REO dispositions remained high with over 25,000 homes sold, more than 70% of which were sold to owner occupants, or buyers who intend to live in the home.
• Excluding any post-foreclosure period during which a borrower may reclaim a foreclosed property, the average holding period for the company’s REO dispositions was 201 days for the third quarter of 2011 but varies significantly in different states.

U.S. home sales at 22-week low - U.S. homebuying runs at a low not seen since in five months, according to DataQuick. The national homebuying index from DataQuick and its analysts at DQNews attempts to give a weekly snapshot into most-recent trends, using “not modeled” home sales counts and median selling prices. This math — we’ve dubbed it the “DQ98″ — tracks on a weekly basis the freshest homebuying patterns in 98 out of the 100 largest U.S. markets (sorry, Louisville and Wichita!) to compile a national benchmark. The latest reading — as of Oct. 27 — showed pricing down and sales actvity down vs. the previous week. Here’s a peek inside the “DQ98″…

  • Top 98 markets’ median home selling price of $180,000 — that is flat vs. the previous week; down 5.30% vs. a year ago; and down 17.10% vs. the same week three years ago.
  • Pricing momentum — based on average median prices — in the last three weeks was down 0.1% vs. the three previous weeks.
  • Top 98 market’s total home sales of 172,934 — that is down 1.55% vs. the previous week; up 4.50% vs. a year ago; and down 12.30% vs. the same week three years ago.
  • Last time the pace was slower was 22 weeks ago, June 6.
  • Sales pace — average weekly actvity — in the last three weeks was down 3.5% vs. the three previous weeks.
  • Since the start of 2009, when this index’s history starts, these DQ98 markets averaged 182,623 sales in the trailing 30-day periods.

Number of the Week: Vacant Homes and New Households-

4.6%: Percentage of U.S. homes that are vacant and for sale or rent. The housing vacancy rate has eased some but remains a worry. In the third quarter there were 6.1 million empty homes for sale or rent, according to the Census Bureau, or 4.6% of all U.S. homes. To return it to the late-2000 level of 3.5%, about 1.5 million homes would need to be filled. How fast might that happen? Census population projections suggest the U.S. will form about one million more households a year, while builders lately have been putting up about 600,000 new homes annually. Next, consider the 300,000 homes that will be demolished each year, according to Goldman Sachs economists. That suggests it would take about two years to sop up the excess. A better economy could speed things up. One thing the slump did was prompt more kids to move back in with their parents and, in some cases, parents to move in with their kids. There are plenty of people who would jump at the chance to form a new household, if they only had the means.

Lawler to Census on Housing Data: "Splainin" Needed Not Just on Vacancy Rate --In looking at the “disparities” between recent Census 2010 housing data and other Census “housing” reports, many folks have focused the most on differences in the Census 2010 vacancy rates and the Housing Vacancy Survey vacancy rates, and the possible implications of these disparities on measuring the “excess” supply of housing. Indeed, Census officials, reacting to numerous stories on this issue (thank CR for this), agreed that they had “some splainin’” to do, and said that they are “actively investigating” the differences in Census 2010, ACS 2010, and HVS 2010 vacant housing unit estimates, and plan to report the results of this research at the 2012 Federal Committee on Statistical Methodological Research Conference this coming January. In looking at the advance program for that conference, the session devoted to this topic is labeled “Evaluation of Gross Vacancy Rates from the Decennial Census Versus Current Surveys.” Census officials have been “mum,” however, about other “honkingly big” differences between Census 2010 and both the CPS/HVS and the CPS/ASEC, including big differences in household growth by age group, and sizable differences in homeownership rates by age group. There has also been no discussion about the growth in the housing stock as measured by Census 2010 and Census 2000 compared to other Census estimates of total housing production...

Visible Existing Home Inventory continues to decline year-over-year in October - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory.  In a few months, the NAR is expect to release revisions for their existing home sales and inventory numbers for the last few years. The sales revisions will be down (the NAR has pre-announced this), and the inventory is expected to be revised down too.   Using the for monthly inventory (54 metro areas), it appears inventory will be back to late 2005 / early 2006 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 October listings - for the 54 metro areas - declined 16.4% from last year. Inventory was down 16.7% year-over-year in September.  This is just "visible inventory" (inventory listed for sales). There is a large percentage of distressed inventory, and various categories of "shadow inventory" too.

HVS: Q3 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q3 this morning. This report is commonly used by analysts to estimate the excess vacant supply for housing, but it doesn't appear to be useful for that purpose. It might show the trend, but I wouldn't rely on the absolute numbers. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate increased to 66.3%, up from to 65.9% in Q2 2011. I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range. The Census researchers are investigating differences in Census 2010, ACS 2010, and HVS 2010 vacant housing unit estimates, and plan to report the results in 2012. The HVS homeowner vacancy rate declined to 2.4% from 2.5% in Q2. The homeowner vacancy rate has probably peaked and is slowly declining. However - once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers. The rental vacancy rate increased to 9.8% from 9.2% in Q2. I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the overall trend in the rental vacancy rate - and that survey has been showing the trend is down.

Are There Too Many: Homes in America: How High Can Multi-Family Go? - I don’t have a strong enough since of the dynamics and limitations in mulit-family starts to give a really good answer. However, I want to suggest based on the historical data the answer is: pretty darn high. Here is a comparison of mulit-family housing starts to single family. Look at the 70s and to a lesser extent the 80s. Multi-family is a big contribution. Its even more impressive when you consider that a few hundred thousand single families are built by owner or custom contractor, meaning they are not for sale or rent. Looking at the market for-sale and for-rent, multi-family has been almost strong in the past as single family. Given the current shortage of multi-family, the growing shortage of units generally and the burn that Americans and banks still feel from single-family I don’t see a fundamental reason why we couldn’t have a multi-family based boom.. Its to early to “call” that but the fundamentals seem ripe for it.

Home prices heading for triple-dip -- The besieged housing market has even further to fall before home prices really hit rock bottom.According to Fiserv (FISV1), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices. Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv's chief economist.  Should home values meet Fiserv's expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst.

The desert mirage of easy housing profits – Phoenix Arizona home prices on track for four consecutive years of year-over-year home price declines. 55 percent fall from peak and nominal home prices back to 2000 levels. What happens when investors dominate the market?  The foreclosure epidemic in states like Arizona and Nevada is breathtaking and incredibly disheartening.  Prices have cratered much more quickly than the methodical rise up in the last decade.  Home prices in Phoenix now sit precariously where they did in 2000 without adjusting for inflation.  These desert communities largely built on a dream, fast construction, and unsustainable notions of cheap energy are putting strains on local infrastructure.  Now that the housing bubble has popped with a loud bang, you are now seeing a prolonged period with many investors rushing in to buy cheap places.  Yet the market is being flooded with investors lured by cheap prices and many are now competing with one another.  The data is startling because you find a surreal market being fueled by investors seeking long-term investments.  Yet the challenge of course is assuming you have a steady employment base to rent a unit out.

The 20 Cheapest Zip Codes In America - We recently took you on a tour of the zip codes with the most expensive real estate. In the top 12, the price tags on homes currently on the market exceeded $3 million.  And in the most expensive zip code, which belongs to Alpine, New Jersey, the average home on the market was a whopping $4.55 million. Of course, that's only one side of the story. Many neighborhoods, especially in poor urban areas, continue to struggle as jobs disappear and residents move out. Today we're taking a look at the zip codes in the U.S. where home prices are the cheapest, using current median home price data compiled by real estate data firm Altos Research. A staggering number are located in Michigan, within the borders of Detroit, where tons of housing stock sits abandoned. The median home price in the 15 cheapest zip codes is less than $15,000. And in the cheapest zip code in America, you can buy a house for less than the price of a fancy ashtray.

Construction Spending increased slightly in September - Catching up ... this morning from the Census Bureau reported that overall construction spending increased in September:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during September 2011 was estimated at a seasonally adjusted annual rate of $787.2 billion, 0.2 percent (±1.8%)* above the revised August estimate of $786.0 billion. The September figure is 1.3 percent (±1.9%)* below the September 2010 estimate of $797.3 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 66% below the peak in early 2006, and non-residential spending is 34% below the peak in January 2008. Public construction spending is now 12% below the peak in March 2009.  The second graph shows the year-over-year change in construction spending. On a year-over-year basis, both private residential and non-residential construction spending have turned positive, but public spending is now falling on a year-over-year basis as the stimulus spending ends. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

Equifax: Consumer Debt Reached $11.2 Trillion in September - Outstanding consumer debt reached $11.2 trillion in September, on par with pre-recession levels, according to credit bureau Equifax. The figure is below the peak level of $12.4 trillion reached in October 2008 but is still higher than the $11.1 trillion recorded in 2006. The numbers suggest some banks are beginning to expand lending in some loan categories and consumers, who have worked diligently to pay off debt since the recession hit, are more willing to use credit again. “People have deleveraged to an extent,” Koukounas said. “Here people are starting to come back into the market from a lending perspective and you’re starting to see that.” Equifax’s National Credit Trends Report shows lenders are beginning to extend more credit to consumers, offering $436 billion of new credit to borrowers from January through July. That is the highest total for that time frame in three years but down from the $805 billion in new credit originated during that period in 2006. The figure includes auto loans, bank cards, store credit cards, consumer finance loans, home equity lines of credit and student loans.

Meanwhile, Back on This Side of the Pond... The break down in the relationship between consumer confidence and actual spending is something that has been nagging at me for awhile. This picture: 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: So where is the spending power coming from? A plunge in the saving rate: It looks like households are struggling to hold onto the even meager spending gains achieved since the recession ended, and that struggle may be what is reflected in the consumer confidence numbers. Overall, this suggests to me that consumer spending is much more fragile than commonly believed.   Manufacturing activity also looks shaky. To be sure, it is reasonable to expect some momentum from the surge in equipment spending in the third quarter. But it is also reasonable to believe that some of this demand was pulled forward as firms try to get ahead of the expiration of the accelerated depreciation benefit. And even with that surge, note the ISM report surprised on the downside Tuesday morning..

China Manipulates Its Currency To the Advantage of U.S. Consumers and Businesses Buying Its Products - In the best of all possible worlds for the U.S., China would use its labor and capital to manufacture consumer products like clothing, footwear, furniture, electronics and appliances and send $300 billion worth of these products to U.S. consumers for free every year, as a gift, or a form of foreign aid to the American people. In addition, the Chinese would produce and send to America another $100 billion worth of raw materials, parts, industrial supplies, inputs and natural resources at no charge, as a gift to American manufacturers every year.  Can there really be any argument that such an arrangement, where America would receive $400 billion worth of free goods every year from China, would be to the unquestionable economic advantage of the U.S.? (Note: That’s roughly the amount of goods we will purchase from China this year.)

Consumers Remain Pessimistic - U.S. consumers remain pessimistic about the economy, according to a survey released Thursday. The sour mood is reining in holiday shopping plans. The Royal Bank of Canada said its consumer outlook index increased to 39.6 this month from 39.2 in October. The RBC current conditions index fell to 27.7 from 28.5. The expectations index rose to 51.7 from 50.8. “With no positive economic news, stubbornly high unemployment and continued political dysfunction, American consumers can be forgiven for having a hard time finding a silver lining to current economic conditions,” the report said.

Survey: Food prices to eat into holiday spending - More than a third of U.S. consumers expect rising food prices to cause them to cut back on holiday spending, a new survey showed Tuesday. A total of 28.4 percent of the 1,000 people surveyed by Americas Research Group said that rising food costs would cause them to cut back on their Christmas1 shopping "somewhat," while another 7.2 percent said that they would "most definitely" cut back. The question was one in a series posed by Reuters and included in the research group's latest survey. Manufacturers and producers have sharply raised food prices this year to cope with soaring costs for commodities ranging from soybeans and corn to peanuts.  While some of those commodity prices have retreated in recent weeks, the high prices on store shelves are expected to remain. This is not the first time that rising food prices have taken some of the joy out of Christmas, America's Research Group President Britt Beemer said, citing a survey two years ago that showed 31 percent planned to trim spending.

Gasoline Price Update - The graph below shows gasoline prices have been slowly moving down since peaking in early May. Unfortunately, according to Bloomberg, Brent Crude is up to $109.12 per barrel, and WTI is up to $92.83. According to the EIA, WTI is up from $79 per barrel at the end of September, and Brent is up from $105. It appears the gap between WTI and Brent is closing. Note: This graph show oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices. Quick charts: 1 Month | 3 Month | 6 Month | 9 Month | 1 Year | 18 month | 2 Years | 3 Years | 4 Years | 5 Years | 6 Years

Are You Caught In The Energy Trap? - It is the first day of November but the national average gasoline price is $3.437 per gallon according to AAA's National Fuel Gauge. This is the first year I can remember in which gas prices have not fallen below $3/gallon this late in the fall. Last year's price on this date was $2.80/gallon. This event does not bode well for America's economy and most of those trying to eke out a living within it. The New America Foundation's Lisa Margonelli describes the energy trap. In November of 2010, American drivers spent nearly $32 billion on gasoline. Every 25 cent jump in the price of gas siphons $90 million a day away from the recovering American economy. Because we have few choices but to commute to work in private cars, we are trapped by high gas prices. You can do the math. The price of gasoline is now about 63 cents higher than it was last year in November. You can find the actual demand numbers at the Gasoline section of the EIA's This Week In Petroleum. Demand is slightly down due to the higher prices, but not much. The "Energy Trap" is really about the price elasticity of gasoline demand, specifically, the lack thereof. If you gotta drive to get to work, to get food, and so on, you gotta drive, no matter what the price is. Even worse, America gives you few alternatives (trains, buses, whatever) to driving, and public transit systems have been cutting service and raising fares all over the country.

Transportation groups want to increase gas tax - For the first time in two decades, major transportation groups have banded together and made a request that, in other circumstances, would be considered crazy — “Tax us … NOW.” But the answer from Congress and the White House has been a resounding “No!” It’s a fact of Washington: Politicians need cover before voting for most anything controversial, especially a tax increase. But even that is not always enough, much to the chagrin of advocates of a large hike in transportation infrastructure funding supported by a gas tax increase. “That’s been the tragedy here. The frustrating thing is for the first time in decades, we’ve gotten all the key players on the same page in supporting an increase in the user fee,” said Pete Ruane, president and CEO of the American Road & Transportation Builders Association.

What Should We Do With Higher Gas Tax Revenues? - Most of the economics bloggers I know favor higher gasoline taxes. Not immediately, of course, given our economic weakness. But eventually because of environmental and national security concerns. As noted yesterday, Tim Kane of the Kauffman Foundation does a quarterly survey of economics bloggers. This time around, Tim included a question from me about the federal gas tax. Specifically, what would economics bloggers do with the money from a higher gasoline tax? (While allowing for the possibility that some don’t want it to go up.) Here are their responses: (Note: The federal gas tax is 18.4 cents per gallon; state gas taxes average another 30 cents, according to the American Petroleum Institute.) As Tim notes in the full survey, “bloggers seem to love the gas tax.” Almost 85% of respondents supported a higher gasoline tax of which fully half would use the money for infrastructure spending. The remainder would use the money for deficit reduction or to reduce other taxes.

October U.S. Auto Sales Stay Strong - U.S. auto sales jumped 7.5% in October, hitting their second fastest pace of year and defying the sluggish economy, with a revived Chrysler Group LLC leading the way.  Chrysler, a unit of Fiat SpA, said its sales climbed 27% in October, to 114,512 cars and light trucks, with its Jeep brand having its best month in five years. Ford Motor Co. reported its new-vehicle sales rose 6.2% to 167,502 light vehicles, while General Motors Co. experienced slower growth, with sales rising 1.7% to 186,895 vehicles.  Toyota Motor Corp. and Honda Motor Co. reported declines, mainly because of lingering vehicles shortages stemming from the earthquake that hit Japan in March. Toyota's sales fell 7.9% to 134,046 cars and trucks. Honda's fell less than 1% to 98,333 vehicles.

U.S. Light Vehicle Sales at 13.26 million SAAR in October, Highest since Aug 2009 - Based on an estimate from Autodata Corp, light vehicle sales were at a 13.26 million SAAR in October. That is up 9.2% from October 2010, and up 1.7% from the sales rate last month (13.04 million SAAR in Sept 2011). This was slightly above the consensus forecast of 13.2 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for October (red, light vehicle sales of 13.26 million SAAR from Autodata Corp). This was just above the February sales and the highest sales rate since August 2009 ("Cash-for-clunkers") The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June. Note: dashed line is current estimated sales rate. Growth in auto sales should make a positive contribution to Q4 GDP. Sales in Q3 averaged 12.45 million SAAR, and if November and December are at the October rate, sales will be up 6.5% in Q4 over Q3.

Crumbling Bridges’ $140 Billion Tab Leaves Business Paying Price - Benton’s plight is playing out for small businesses across the U.S., where 3,538 bridges were closed in 2010, as customers shop elsewhere rather than take detours. With the average U.S. bridge seven years from the end of its useful life, and one-fourth of 600,000 crossings classified by regulators as “structurally deficient,” more places will be hurt by closings, “Bridge failures throw a monkey wrench into the economic life of communities,” LePatner said. “Things aren’t going to get better, things are going to get much worse.” The Minneapolis-St. Paul regional economy lost as much as $73 million after the collapse in August 2007 of the Interstate 35W bridge, according to a 2008 study by the University of Minnesota. . The Sherman Minton Bridge, which carried about 80,000 vehicles a day across the Ohio River, was closed after cracks as wide as a 12-ounce soda can were found in the structural steel, according to the U.S. Department of Transportation. It will be closed indefinitely, according to a notice the Federal Highway Administration posted Oct. 27 in the Federal Register. 

Dallas Fed Manufacturing Survey shows sluggish expansion - This is the last of the regional Fed surveys for October. The regional surveys provide a hint about the ISM manufacturing index - and the regional surveys were mixed and still weak in October, but improved from August and September. Dallas Fed: Texas factory activity increased in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained positive but edged down from 5.9 to 4.1, suggesting growth slowed slightly.  The shipments index fell from 9.4 to 2.7, suggesting shipment volumes continued to increase but at a slower pace. The capacity utilization index moved back into positive territory after being negative for two months. The new orders index suggested a pickup in demand, moving from 3.6 to 8.3. ... Here is a graph comparing the regional Fed surveys and the ISM manufacturing index: The New York and Philly Fed surveys are averaged together (dashed green, through October), and five Fed surveys are averaged (blue, through October) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through September (right axis).

Vital Signs: Slowing Manufacturing Growth - The pace of manufacturing slowed last month. The Institute for Supply Management’s gauge of factory activity slipped to 50.8, from 51.6 in September, leaving it above the 50 level that indicates growth. The decline was mostly the result of a drop in inventory levels. However, an increase in new orders suggests that manufacturing demand improved.

ISM Manufacturing index indicates slower expansion in October - PMI was at 50.8%% in October, down from 51.6% in September. The employment index was at 53.5%, down from 53.8%, and new orders index was at 52.4%, up from 49.6%.  From the Institute for Supply Management: October 2011 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in October for the 27th consecutive month, and the overall economy grew for the 29th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report...Here is a long term graph of the ISM manufacturing index. This was below expectations of 52.0%, and suggests manufacturing expanded at a slightly slower rate in October than in September. It appears manufacturing employment expanded in October with the employment index at 53.5%. New orders were up, and prices fell sharply.

Vital Signs: Productivity Turns Up - U.S. productivity grew at its fastest rate since the start of 2010 during the last quarter. Productivity, as measured by output per hour, rose at a 3.1% seasonally adjusted annual rate in the third quarter from the second. It had declined in the two previous quarters. The reason for the rebound: The economy picked up even as companies adopted a more cautious stance on hiring.

ISM Non-Manufacturing Index indicates expansion in October - The October ISM Non-manufacturing index was at 52.9%, down slightly from 53.0% in September. The employment index increased in October to 53.3%, up from 48.7% in September. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: October 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in October for the 23rd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was slightly below the consensus forecast of 53.0% and indicates slightly slower expansion in October than in September. The employment index indicated expansion in October following contraction in September.

A Declining Portion of Union Members are Young because ....... a declining share of workers are young - The WSJ ran a piece about unions are having increasing difficulty attracting young members. The article noted that in 1983, 39.6 percent of union members were between the ages of 16 and 34. This figure had fallen to just 24.6 percent in 2010, a drop of 15.0 percentage points. [I should point out that the source of these numbers is my colleague at CEPR, John Schmitt. I apologize for the CEPR promotion.] This might seem to suggest an alarming failure for unions in their ability to craft a message that is relevant to young workers. However, if we look at one additional item we would note that this group of young workers comprised 48.1 percent of total employment in December of 1983. That had fallen to 34.3 percent for September of 2011, a drop of 13.8 percentage points. In other words, the decline in the proportion of young workers in unions reflects almost entirely a drop of the share of young workers in total employment. There has been little change in the relative ability of unions to attract younger and older workers.

The Polarization of Job Opportunities - SF Fed - An in-depth analysis of the state of the U.S. labor market over the past three decades reveals that the U.S. labor market is polarizing into low- and high-skill jobs, with fewer opportunities in the middle. Download pdf

Artificial intelligence: Luddite legacy - The Economist - AN APOCRYPHAL tale is told about Henry Ford II showing Walter Reuther, the veteran leader of the United Automobile Workers, around a newly automated car plant. “Walter, how are you going to get those robots to pay your union dues,” gibed the boss of Ford Motor Company. Without skipping a beat, Reuther replied, “Henry, how are you going to get them to buy your cars?”  Whether the exchange was true or not is irrelevant. The point was that any increase in productivity required a corresponding increase in the number of consumers capable of buying the product.  Some did lose their jobs, of course. But if the Luddite Fallacy (as it has become known in development economics) were true, we would all be out of work by now—as a result of the compounding effects of productivity. While technological progress may cause workers with out-dated skills to become redundant, the past two centuries have shown that the idea that increasing productivity

Cubicle Nation - The occupation employing the greatest share of American workers is paper pushers, according to the Bureau of Labor Statistics. Well, technically the bureau reports that a plurality of workers — 16.9 percent — are employed as “office and administrative support,” but you get the idea. Here’s a chart from a new report on occupational employment: The Labor Department predicts that many of the jobs in this group — for example, mail clerks and proofreaders — will be replaced by automation in the next few years. Occupations in customer service, however, are expected to add about 399,500 by 2018 “as businesses put an increased emphasis on building customer relationships,” according to the bureau’s Occupational Outlook Handbook.

Startup Visa D.O.A., and Startup America Just a Giant Press Release… President Obama seems to understand the role that startups play and the contribution that skilled immigrants make to U.S. economic growth. He has talked a lot about the importance of science and engineering, and expressed fears that, unless we improve our game, China and India will out-innovate us. He even visited Silicon Valley recently to talk to its elite. And he has had his Chief Technology Officer, Aneesh Chopra, make several trips here to the Valley. I commend the President for putting a spotlight on entrepreneurship with his Startup America initiative; but I can’t help wondering whether this is just a giant press release. It needs more substance: a way for foreign-born entrepreneurs to start companies here and a leveling of the playing field for entrepreneurs wanting to solve government problems.

Jobless Claims Drop Below 400k - Initial jobless claims dipped below the 400,000 mark last week, signaling that the odds of a new recession aren't rising and may very well be falling. New claims for unemployment benefits dipped to a seasonally adjusted 397,000 last week. That's the lowest since touching 395,000 for the week through September 24. Yes, we've seen this movie before only to get burned with letting optimism carry us away. But a bit of good news never hurts these days and so we'll take a bit of statistical sunshine wherever (and whenever) we can get it. The key takeaway with today's update is recognizing that recessions don't usually arrive with falling levels of initial claims, which is one of the more reliable leading indicators of the business. Yes, such statements come with all the usual caveats and so no one can fully dismiss the possibility that it's different this time. Leaving that hazard aside, however, leaves plenty of room for thinking that initial claims are again moving toward a healthier trend. It's all the more compelling when we look at claims in context with several other economic trends, such as the persistent strength in retail sales on a year-over-year basis.

Air Force cutting 9,000 jobs now, more later - The Air Force said Wednesday it plans to eliminate 9,000 civilian jobs in a cost-saving move, with more reductions to come later as part of a military-wide effort to adjust to a new era of defense spending cuts. "We clearly understand the turbulence these and future reductions will cause in the workforce," Gen. Norton A. Schwartz, the Air Force chief of staff, said in an announcement that triggered criticism from members of Congress from states affected by the changes. Schwartz said the Air Force would try hard to achieve the job reductions through attrition and other management moves to avoid forced layoffs. After growing rapidly for a decade, the Pentagon budget is headed for substantial reductions. The Obama administration is committed to cuts of between $450 billion and $465 billion over the next 12 years and cuts approximately double that size could be imposed depending on the outcome of congressional budget negotiations.

Senators: Cut 100,000 postal workers A bipartisan group of Senators unveiled legislation Wednesday to save the U.S. Postal Service from what Sen. Joe Lieberman called a “financial death spiral” but keeps six-day-a-week delivery while slashing 100,000 employees. nder the proposal by Sens. Lieberman (I-Conn.), Tom Carper (D-Del.), Susan Collins (R-Maine) and Scott Brown (R-Mass.), the postal service also would reduce the number of post offices and implement a number of other cost-saving options. The legislation would also prohibit the postal service from ending Saturday delivery for at least the next two years.  A move to five-day service, Collins said, should be “truly the last resort, not the first option.” We are not crying wolf here,” Collins said at a press conference. “The postal service literally will not survive unless comprehensive, legislative and administrative reforms are undertaken. Absent to action, the postal service will not be able to meet its payroll a year from now.”A key provision of the proposed legislation would require the Office of Personnel Management to repay nearly the $7 billion due to the postal service for overpayments it made to the federal employee retirement system. This refund would authorize the Postmaster General to initiate a buyout program that would cut about 100,000 workers or more over the next several years.

Survey: Small Business Owners report small reduction in employment, hiring plans slightly positive - From the National Federation of Independent Business (NFIB): NFIB Jobs Statement: October Brought Early Snow but Not New Jobs “The cold has set in, and it looks like it might be a long winter for small-business owners. Still hunkering down, small-business owners reported a small, but overall reduction in employment, posting an average reduction of 0.1 employees per firm in October. ... The good news is that October’s jobs numbers are better than September’s (which showed a net decrease of 0.3 employees per firm), but still not good enough to lower the unemployment rate. ... Over the next three months ... a seasonally adjusted net three percent of owners planning to create new jobs. This is down 1 point from September and 2 points below August, the month that has, thus far, posted the strongest reading for 2011. Here is a graph of the net hiring plans for the next three months since 1986. Hiring plans were low in October, but still positive and the trend is up.

ADP: Private Employment increased 110,000 in October - ADP reportsEmployment in the U.S. nonfarm private business sector increased by 110,000 from September to October on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated advance in employment from August to September was revised up to 116,000 from the initially reported 91,000.  Employment in the private, service-providing sector rose 114,000 in October. Although down a bit from an increase of 122,000 in September, this increase marks more than 20 consecutive months of employment gains. Employment in the private, goods-producing sector declined 4,000 in October, while manufacturing employment declined by 8,000. This was slightly above the consensus forecast of an increase of 100,000 private sector jobs in October. The BLS reports on Friday, and the consensus is for an increase of 90,000 payroll jobs in September, on a seasonally adjusted (SA) basis. Government payrolls have been shrinking by about 35,000 on average per month this year. So this suggests around 110,000 private nonfarm payroll jobs added, minus 35,000 government workers - or around 75,000 total jobs added in October. Of course ADP hasn't been very useful in predicting the BLS report.

Vital Signs: Modest Private-Sector Hiring - Hiring by private-sector employers remained modest last month. The ADP National Employment Report showed employers added 110,000 jobs in October, down slightly from the revised 116,000 jobs added in September. All the gains, which are seasonally adjusted, occurred at companies that employ fewer than 500 workers. On Friday, the Labor Department issues its report on October employment.

October Employment Report: 80,000 Jobs, 9.0% Unemployment Rate - From the BLSNonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today. ...The change in total nonfarm payroll employment for August was revised from +57,000 to +104,000, and the change for September was revised from +103,000 to +158,000. The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate declined to 9.0% (red line). The Labor Force Participation Rate was unchanged 64.2% in October (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio increased to 58.4% in October (black line). Note: the household survey showed another strong gain in jobs, and that is why the unemployment rate could decline with few payroll jobs added - and the employment population ratio increase. The second graph shows the job losses from the start of the employment recession, in percentage terms. This was still a weak report, and slightly below consensus. There were decent upwards revisions to the August and September reports.

Employment Situation (6 charts) The employment report showed little evidence that the trends of the past year have changed. Over the past three months private payroll employment grew some 72,000, 191,000 and 104,000 while government employment fell 132,000, 33,000 and 24,000.The one encouraging signs was the third strong month of employment growth reported in the household survey. Over the last three month it has shown gains of 331,000, 398,000 and 277,000. After slowing earlier this year the growth of employment reported by the household survey is reaccelerating. Because the household survey often leads the payroll survey this is a significant trend change to watch. The average weekly hours was unchanged at 33.4 so the index of aggregrate hours worked only increased 0.1% as compared to a 0.5% gain last month and a -0.2% drop in the previous month. But overall the trend of modest gains in hours worked has not changed.Average hourly earnings growth continued to moderate and wage growth is approaching the record low of late 2003. It looks like the slowdown is accelerating, not reversing. With the small change in the workweek the slowing of average hourly earnings means that average weekly earnings growth is also slowing. The third quarter improvement in consumer spending and the economy stemmed from consumers drawing down savings and taking on debt as the savings rate fell significantly.

Economy Creates 80,000 Jobs in October - We need to create 100,000 to 125,000 jobs per month just to keep up with the growth in population. In order to reabsorb the millions of workers who have lost jobs during the recession back into the labor force, we need to create several hundred thousand jobs per month, and even at that rate it would take years for employment to fully recover. Unfortunately, according to the latest employment report from the BLS, the economy only created 80,000 jobs in October: Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent... Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down. The average over the last three months was 114,000. That's enough to keep up with population growth, but no more. Unemployment did fall slightly, from 9.1 percent to 9.0 percent, and the the employment to population ratio also increased by 0.1 pp to 58.4 percent. Those numbers are moving in the right direction, but the rate of change is much slower than needed. Again, at this rate it will be years before we get back to full employment. And the fall in government employment, something under our control, at a time when we need to be creating jobs doesn't help at all.

US Payrolls Rise by 80,000, Unemployment Rate Drops .1% to 9%; Recap and Analysis - Here is an overview of October Jobs Report, today's release.

  • US Payrolls +80,000
  • US Unemployment Rate 9.0%
  • Unemployment rate in narrow range from 9.0 to 9.2 percent since April.
  • Participation Rate steady at 64.2%
  • Actual number of Employed (by Household Survey) rose by 277,000
  • Unemployment fell by 95,000
  • Those not in the labor force increased by 17,000
  • Civilian population rose by 198,000,
  • Civilian Labor Force rose by 181,000
  • Average Weekly Workweek was unchanged 34.3 hours
  • Average Private Hourly Earnings rose 5 Cents to $23.19
  • Government employment decreased by 24,000

Video: Breaking Down the Jobs Report by WSJ Staff - The News Hub panel discusses the October employment picture and how the Federal Reserve might respond.

Sluggish Job Growth Prevails... Again - There's (relatively) good news and (more of the same) bad news in today's employment report. First the good news, such as it is. Private-sector job creation continues to chug along at a mediocre pace. Last month witnessed a net gain of 104,000 for private nonfarm payrolls, the Labor Department reports. That's nothing to get excited about, but it's obviously better than a loss and so it offers yet another bit of statistical evidence for thinking that the economy isn't poised to slip into a new recession. There's also encouraging news in the latest batch of revisions to previous payroll reports. In particular, September's initial estimate of a 137,000 net rise in private payrolls has been substantially revised higher to 191,000. Even August's originally dismal rise has been revised higher to a slightly less dismal gain of 42,000 vs. the earlier 30,000 advance.  Now the bad news: the labor market is still growing at a sluggish pace. The pace is somewhat less sluggish than it appeared, say, yesterday, but nothing much has changed. In fact, October's growth represents a downshift from September's gain. The broader message is that the economy still needs a much higher level of job creation to make a significant dent in the unemployment rate, which explains why the jobless rate slipped by the smallest of margins last month to 9.0% from September's 9.1%. Yup, sluggish growth is still an accurate description of macro conditions. It may be enough to keep us from crashing, but it's not likely to do much more any time soon.

Economy Adds A Mere 80,000 Jobs In October - Even after a GDP report that seemed to show that the economy was moving in the right direction, job growth in October was as anemic as it has been for the past several months: Employers added 80,000 jobs on net, slightly less than what economists had expected. That compares to 158,000 jobs in September, a month when the figure was helped by the return of 45,000 Verizon workers who had been on strike.While job growth is certainly better than job losses, a gain of 80,000 jobs is hardly worth celebrating. That was just about enough to keep up with population growth, so it did not significantly reduce the backlog of 14 million unemployed workers.As a result, the unemployment rate barely budged, dropping to 9 percent from 9.1 percent in September. The rate has not fallen below 9 percent in seven months. In the year before the recession began in December 2007, the jobless rate averaged about half that, at 4.6 percent.

It could be worse - In the month of October, nonfarm payroll employment rose by 80,000 jobs—less than economists expected. The report was less disappointing than might be imagined given that number, however. The initial zero-job figure from August has now been revised up to an increase of 104,000, and September's total has also been revised up, to 158,000. That pace is scarcely enough to keep up with population growth, but it's considerably better than the economy managed in the early summer. Private payroll growth remains the driver of job creation. Private payrolls increased by 104,000 jobs, offsetting a decline of 24,000 jobs from the government sector. Since employment hit bottom in early 2010, the economy has added a total of 2.3m jobs. The private sector has added 2.8m workers while the government has sacked half a million. Private job growth was driven by rising professional and business services employment, education and health services employment, and retail employment, with a little help from durable goods manufacturing. Encouraging signs are tucked throughout the report. According to the household survey, employment rose by 277,000 in October, outstripping growth in the labour force and bringing the unemployment rate down a notch to 9.0%. Broader measures of underemployment also dropped, along with the number of long-term unemployed. The employment-population ratio ticked up slightly, as did hours worked and average earnings.

The Good News About the Weak Job Market - The good news is the economy is regaining its health. The bad news is it's happening slowly. The worse news: That slow pace is here to stay. In October, employers added 80,000 workers to their payrolls. That was slightly worse than the 100,000 rise in jobs that economists had been expecting. So another disappointing jobs report, right? Not quite. Despite the low number the unemployment rate dropped to 9%, from 9.2% the month before. That's not all. It appears job growth in September and August was better than we previously thought. According to the Bureau of Labor Statistics, the economy added about 100,000 more jobs in the past two months than the BLS had previously thought. All told, it means that on average the number of jobs has increased 153,000 per month so far this year. That's up from average employment growth of 98,000 a month in 2010. James Paulsen, chief investment strategist at Wells Capital, says those numbers prove that there is little chance the economy will dip into another recession, which was something many were predicting just a few months ago. "The revisions show that the economy was not as weak as we thought, and that it started to improve earlier than we thought," Paulsen says.

Hope in the jobs numbers - There’s some encouraging news buried in this month’s employment report; you just can’t see it by looking at the headline numbers. Black unemployment is plunging, down to 15.1% in October from 16.7% in August. The number of long-term unemployed fell by 366,000 to 5.9 million, which is a decline of 2.2 percentage points. The broad U-6 unemployment rate fell by 0.3 percentage points, to 16.2%. And note those upward revisions to previous months, too: August’s zero is now +104,000, September was revised up to +158,000, and the twelve-month average is +125,000. Not good enough, but pointing in the right direction. No one’s opening any champagne this morning: the levels here are still atrocious. But at least there’s reason for hope that the economy is still above stall speed; I, for one, am much more sanguine about the prospects for a double-dip recession than I was a couple of months ago. If the jobs situation isn’t getting worse, that means America’s still growing, and that the recession’s still over. And it’s a lot easier to accelerate a recovery than it is to turn around a decline.

U.S. Employment Crawls Forward - October's numbers weren't a disaster, but progress is achingly slow. Mark Zandi discusses the data on CNBC.

On those NFPs - I hate NFP Friday. The numbers are flakey. There are about 130mm workers. This morning we hear that total jobs increased by 80K. The reported number represents a change of 0.06%. This extraordinarily precise estimate is made based on a survey of only 1/8% of households. The error rate on the calculation is easily +/-250,000. And don’t get me started on the Birth/Death calculation. Social Security reports income from payroll taxes. The following looks at the September, October and November numbers for 2008 through 2011 (SSA has Nov. 11’ estimate out). You tell me if there is any evidence of improvement. The three month totals reflect the YoY improvement. But consider the 08 - 11 comparison. My conclusion looking at the NFP #s versus the SS data is that there may be some jobs being created. But they don’t pay very much. On the whole, we still have not caught up to where we were three years ago.

Yes, unemployment is still a crisis - Another month, another dreary jobs report from the Labor Department. The U.S. economy added just 80,000 jobs in October, which isn’t enough to keep up with population growth, let alone get us back to full employment. Indeed, this marks the seventh straight month that the jobless rate hasn’t nudged below 9 percent (it was at 9.1 percent last month). While there are a few bright spots in the report — the numbers for August and September were revised upward by 200,000 jobs — that still leaves vast battalions of unemployed workers sitting out there.And for a reminder of why this is so alarming, the Hamilton Project has released a study looking, once more, at the heavy long-term toll that unemployment is taking on American workers. The numbers are grim: Two years after losing his or her job, the average worker will earn 48 percent less than previously. Even workers who do find new jobs end up making about 17 percent less, and based on history, those lower wages will likely persist for years to come:

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks (3 graphs) This was a weak report, and the headline number was slightly below consensus forecasts. However some of the underlying data was a little more encouraging (with emphasis on "little"). There were only 80,000 jobs added in October. There were 104,000 private sector jobs added, and 24,000 government jobs lost.  The household survey showed an increase of 277,000 jobs in October. This increase in the household survey pushed the unemployment rate down slightly, even as more people participated in the workforce (labor force increased by 181,000). The unemployment rate declined to 9.0%, and the participation rate was unchanged at 64.2%. The employment population ratio also increased to 58.4% from 58.3%. This is the third straight monthly increase in the employment population ratio from the low in July at 58.1%. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  In the previous post, the graph showed the job losses aligned at the start of the employment recession. In terms of lost payroll jobs, the 2007 recession was by far the worst since WWII.  The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) decreased to 8.896 million in October from 9.27 million in September. This just reverses some of the increase last month. These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 16.2% in October from 16.5% in September.  This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 5.876 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.242 million in September.

Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes - According to the BLS employment report, retailers hired seasonal workers at close to the pre-crisis pace in October. Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year. This really shows the collapse in retail hiring in 2008, and the increases in 2009 and 2010.  Retailers hired 141.5 thousand workers (NSA) net in October. This is about the same level as in 2003 through 2006 and the same as in 2010. Note: this is NSA (Not Seasonally Adjusted). This suggests retailers are somewhat optimistic about the holiday season. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Only one category increased in October: The 6 to 14 weeks. This is due to the increase in short term unemployment in August and September. The the long term unemployed declined to 3.8% of the labor force - the number (and percent) of long term unemployed remains very high. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". The BLS diffusion index for total private employment was at 60.7 in October, up from 56.7 in September. It appears job growth is spread across more industries in October.

Long-Term Unemployment Ticks Down - The number of workers unemployed for more than six months ticked down in October, a promising sign that some of the hardest hit may be landing jobs. Nearly 5.9 million Americans had been unemployed for at least 27 weeks in October, down from 6.2 million the prior month, the Labor Department said Friday. Of all those unemployed, 42.4% have been out of work for at least six months. Some 4.1 million had been out of work for a year or more last month. The participation rate was flat in October, an indication that the decline in long-term unemployment likely came from people finding jobs, not necessarily dropping out of the work force. Still, the number of long-term unemployed remains uncomfortably high and it carries a high cost. The longer these Americans are out of work the less likely they are to find another job. That results in a loss of productivity for the economy and rising costs for the government if the chronically unemployed to programs such as Social Security disability.

The High Cost of Long-Term Unemployment - Pew PDF - In the third quarter of 2011, approximately 31.8 percent of the nearly 14 million Americans who were unemployed had been jobless for a year or more.

The Lasting Financial Impact of a Layoff - Losing a job you wanted to keep is never a good thing. But for those who lost their jobs during the Great Recession, the long-term consequences will probably be very significant. According to an economic analysis by the Hamilton Project, a research group in Washington, those laid off from long-term jobs between October 2008 and April 2009 are likely to lose a total of $774 billion in earnings over the next 25 years, even if they get new jobs. The analysis of Census Bureau data looks at how the seven million workers who lost jobs they had held for three years or more at the time of the layoff fared in the two years following the job loss.  Including those who have not yet found work as well as those who did find new jobs, the average earnings of the group were barely half what they were before the workers lost their jobs, falling from $43,700 before to $23,000 two years later. The income numbers do not include unemployment benefits. Focusing just on those who were able to find new jobs, the study found they were earning an average of 17 percent less than they earned in their previous posts.

Jobs Report: Real Wage Alert - Today’s jobs report gives us a look at the wage side of the job market.  It’s not pretty, and it’s an obvious reason why families are facing tight budgets and the economy’s stuck in neutral. As the figure shows, real (inflation-adjusted) weekly earnings are down about 2% over the past year.  There are three ingredients to this result: hourly wages, weekly hours, and inflation. On a year/year basis, nominal hourly wages have been growing, but their pace has significantly slowed as high unemployment has persisted.  There’s just no pressure coming from the demand side of the labor market that would lead employers to bid wages up (this should also be an important indicator against inflation hawkery over at the Fed). Weekly hours started coming back a bit when the job market first started picking up back in early 2010, but they’ve flattened over the last year. Meanwhile, inflation has picked up a lot (again, for any hawks out there, we’re not talking core inflation, which is what the Fed targets—the acceleration has largely come from energy and food prices).*

Canada Loses Most Jobs Since 2009 Recession as Jobless Rate Rises to 7.3% - Canada’s economy lost the most jobs since the 2009 recession during October, led by declines in the manufacturing and construction industries, cementing projections that the recovery is slowing. Employment fell by 54,000 after an increase of 60,900 jobs in September, Statistics Canada said today in Ottawa, in the biggest monthly decline since February 2009. The unemployment rate rose to 7.3 percent from 7.1 percent. Economists surveyed by Bloomberg News had forecast an increase of 15,000 jobs and a 7.1 percent jobless rate in October. “The headline was bad, and the underlying numbers don’t look great either,” said Rudy Narvas, senior economist at Societe Generale in New York, by phone. “It’s not pretty.” The world’s 10th-largest economy shrank in the second quarter, two years after its last recession. Finance Minister Jim Flaherty told lawmakers Nov. 1 the global economic recovery remains fragile, and that too many Canadians remain unemployed. The monthly decline in Canada was led by the loss of 48,400 jobs in the manufacturing sector and 20,100 jobs in construction.

Construction Employment: Down in October, up slightly in 2011 - The graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969. Construction employment declined by 20 thousand jobs in October, and is now down 2.2 million jobs from the peak in April 2006. However construction employment is up 27 thousand this year through the October BLS report.  Unfortunately this graph is a combination of both residential and non-residential construction employment. The BLS only started breaking out residential construction employment fairly recently (residential specialty trade contractors in 2001).  Usually residential investment (and residential construction) lead the economy out of recession, and non-residential construction usually lags the economy. Because this graph is a blend, it masks the usual pickup in residential construction following previous recessions.  Construction employment is mostly moving sideways, but at least it is not a drag on employment and GDP this year - and that helps.

Baby Boom Crisis: Over 55 and Desperate for a Job - Millions of aging Baby Boomers on the cusp of retirement not only lost their jobs in the Great Recession but also saw their savings eviscerated. Remaining in the labor force longer than planned is their only option for replenishing what they lost. Yet workers in their late 50s and 60s face bleak job prospects. During previous downturns, unemployment among people 55 and older was lower than for other age groups, which some economists attributed to older workers’ greater experience as well as union seniority rules. Earlier generations in this demographic group had compelling incentives to retire and not work, thus potentially lowering the unemployment rate. Mandatory retirement at age 65 or earlier was a given in most industries until age discrimination laws were enacted.  And, more important, when workers did approach retirement, they were confident that their defined-benefit pensions and Social Security benefits would suffice. Now, defined-benefit pensions have been replaced by less- secure 401(K)s, which fell prey to the 2008 stock market crash. The shift from defined-benefit pension plans to defined-contribution plans encourages workers to continue working. Under a defined-contribution system, the longer a person works, the more they can save.

Jobless US vets say military experience not valued - Burrell, along with many of what the Department of Labor says are 235,000 unemployed veterans from the Iraq and Afghanistan wars, has run into a vexing problem. Many U.S. companies, and sometimes veterans themselves, do not know how to translate military experience into civilian skills. There is a disconnect between companies demanding a college degree and veterans giving confusing descriptions of their military experience to civilian employers. That disconnect has contributed to veterans having an unemployment rate 2.6 percent higher than the general population, according to September's Bureau of Labor Statistics unemployment report. As U.S. involvement in Iraq and Afghanistan winds down, lawmakers and organizations are starting to address the issue. The Obama administration this week announced steps that include encouraging community health centers to hire 8,000 veterans over the next three years, and improving training opportunities for military medics to become physician assistants.

Federal employees make average 26 percent less than private workers, Labor agency reports - - The federal government reported Friday that on average its employees are underpaid by 26.3 percent when compared with similar non-federal jobs, a “pay gap” that increased by about 2 percentage points over the last year while federal salary rates were frozen. The Bureau of Labor Statistics presented the figures to the Federal Salary Council, an advisory group of federal agency officials, union representatives and outside pay experts. The numbers are calculated for setting pay raises under the locality pay system used for white-collar employees who work under the general schedule pay system. Some of the money provided by Congress for an annual raise is paid across-the-board while the rest is divided according to the pay gaps for 31 city areas plus a catchall “rest of the U.S.” for areas outside those metropolitan zones. Under a 2010 law, however, federal salary schedules were frozen for 2011 and will be frozen again in 2012, although “within-grade” raises that are largely based on longevity still are allowed, as are raises after promotions. “It’s not surprising there’s an increase in the gap because of the pay freeze but it highlights the impact on federal employees that the freeze is having,” 

How Unemployment Benefits Became Twice as Generous - Before the recession, an unemployed person in a state without high unemployment would often exhaust benefits after 13 weeks; that is, the program would stop paying after the 13th weekly benefit, even if the beneficiary was still without work.The federal law in place before the recession included some local labor market “extended benefit” triggers that, based on the statewide unemployment rate, would automatically lengthen the maximum benefit period. These automatic triggers began to extend benefits around the nation in the middle of 2008. About the same time, new “emergency unemployment compensation” legislation extended maximum benefit periods for the entire nation. The American Recovery and Reinvestment Act of February 2009 further extended these “emergency” periods to up to 99 weeks, and legislation later in 2009 and in 2010 permitted the 99-week maximum to continue.  The chart below shows the size of the “emergency” and extended-benefit expansions, by quarter, measured as a fraction of the entire unemployment insurance program.

Gender Gap on Wages Is Slow to Close - First, there was the “mancession” that made the downturn much worse for men. Then, what my colleague Catherine Rampell has called the “he-recovery,” which has put more men than women back to work. What has remained consistent is that women remain on the wrong side of the wage gap. Even with the same college and professional degrees, men earn more than women. And among so-called creative class workers like architects, teachers, artists, engineers, bankers and journalists, men earn much more than women, even though more women hold such jobs. It’s similar at the bottom end of the scale. According to a report issued Thursday by the United States Government Accountability Office, a higher proportion of women finish high school than men, a milestone that is a minimum requirement for any job mobility. Women — especially younger women — are also completing bachelor’s degrees at higher rates than men. Yet they represent a higher proportion of low-wage workers, defined in the report as those who earn hourly wage rates that put them in the bottom 20 percent of the work force.

Politically Correct Employment -- Kenneth Anderson writes, Even more frightening is the young woman who graduated from UC Berkeley, wanting to work in "sustainable conservation." She is now raising chickens at home, dying wool and knitting knick-knacks to sell at craft fairs. Her husband has been studying criminal justice and EMT -- i.e., preparing to work for government in some of California's hitherto most lucrative positions -- but as those work possibilities have dried up, he is hedging with a (sensible) apprenticeship as an electrician. These young people are looking at serious downward mobility, in income as well as status. The prospects of the lower tier New Class semi-professionals are dissolving at an alarming rate.  This popular essay commits the sin of trying to interpret the Occupy Wall Street movement. Please shoot me if between now and the end of the year I finish a serious sentence that begins something like "What the OWS movement represents is..."  Come back to me in 2012, provided that the OWS movement is larger than the number of people who claim to know what it represents. Meanwhile, I vow to render no judgment.

Growing Economies, Stagnant Wages - In the midst of the Occupy protests, the income gains going to the top 1 percent have gotten a lot of attention. Another way to understand the economic frustrations of the Occupiers is to look at how much middle-class living standards have changed, and how much the overall economy has grown. A new report from the Resolution Foundation, a British research organization that focuses on workers with low income, has done just that. The report covers 10 rich countries, and looks at the growth rate of median pay versus economic growth per capita from 2000 to the start of the Great Recession. Here’s the key chart showing that ratio: A higher ratio means that the pace of growth for median pay was close to the pace of growth for output per capita. A low ratio means that median pay grew much more slowly than did the economy as a whole.

Bernanke on Income inequality - From Fed Chairman Ben Bernanke: I certainly understand that many people are dissatisfied with the state of the economy. I'm dissatisfied with the state of the economy. Unemployment is far too high. Inequality, which is not a new phenomenon, it's been going on - increases in inequality have been going on for at least 30 years. But, obviously, that - as that has continued we now have a more unequal society than we've had in the past. So, again, I fully sympathize with the notion that the economy is not performing the way we would like it to be, and in that respect the concerns that people express across the spectrum are -- are understandable. ... I think the best way to address inequality is to create jobs. It gives people opportunities. It gives people a chance to earn income, gain experience and to ultimately earn more. But that's an indirect approach that's really the only way the Fed can address inequality per se. ... I think it would be helpful if we could get assistance from some other parts of the government to work with us to help create more jobs. A weak economy, few jobs, and rising inequality will lead to more social unrest.

Bleak Portrait of Poverty Is Off the Mark, Experts Say - When the Census Bureau1 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. It overlooks hundreds of billions of dollars the needy receive in food stamps and other benefits and the similarly formidable amounts they lose to taxes and medical care. It even fails to note that rents are higher in places like Manhattan than they are in Mississippi.  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. Similar measures, quietly published in the past, suggest among other things that safety-net programs have played a large and mostly overlooked role in restraining hardship: as much as half of the reported rise in poverty since 2006 disappears.

Is Income Inequality A 'Myth'? - Pay no attention to soaring executive compensation, or Wall Street bonuses, or even to the latest CBO report on income distribution: skyrocketing income inequality the past few decades is just a “myth”—at least according to Jim Pethokoukis of the American Enterprise Institute. In a recent post on AEI’s Enterprise blog, Pethokoukis contends that the data liberals typically tout on inequality understates key factors like median income gains, discounts the effects of taxes and benefits, and ignores the differing inflation rates on goods that different income groups purchase. At first glance, Pethokoukis’s case sounds sober and reasonable enough. But according to the experts I interviewed, it suffers from the defect of having a tenuous relationship with reality. On the question of inequality, one of the key observations over the last several decades has been the decoupling of labor productivity from median incomes. In other words, since the late 1970s most workers haven’t shared the gains of their labor like they once did, while incomes for the top 1 percent have raced ahead to unheard of levels. What explains these twin trends remains highly contentious.  But the trends themselves are clear. As Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and the former chief economist to Vice-President Biden, told me, “the highest quality data that we have all show the same thing: significant increases in inequality.”

A Mind Is A Terrible Thing To Lose - Krugman - OK, I see that some people are doubling down on the claim that rising inequality is all about education — when what the CBO report drives home is that this is all wrong, the big increase has come from gains at the very top. I have to admit that I have a sneaking suspicion that this is in part driven by KDS (DS for derangement syndrome): some people will rush to take a position precisely because I have debunked it. But anyway, it’s really, really wrong. Here’s the CBO result: Notice that the 81-99 percentiles have seen only modest gains; it’s really the top 1 percent that drives the story. For comparison, here’s some data on wages of men by education from EPI: Not the perfect comparison, but good enough. Notice the difference in scales. College graduates have made only modest gains, and basically nothing after 2000; even advanced degrees weren’t giving anything like the gains we see for the top 1 percent (and the much bigger gains of the top 0.1 percent).

It's not how rich we are, it's how equal we are. This is a 16 minute * lecture by Richard Wilkinson.  It is posted at TED.  I am posting it here, as I can not believe this information has not received more attention now that the US is awakening from the decades long delusion of prosperity which did not and as shown in the lecture could not lead to greater justice (which implies equality) via the model of economics we have been using.  The model known by many aliases (Chicago School, Friedman, etc) has resulted in the thought that people are drowning in debt and that we have privatized the profits but socialized the losses. These are inaccurate metaphors. They are the results of the language of the delusion we have been living for 3 decades and thus by definition can not capture the truth of our condition. As the science presented in the lecture shows, if our all encompassing concern should be equality, then people are not drowning, they are dehydrating.  The dehydration is the results of privatizing security in life and socializing the risks in life. We are not “drowning” in risk or losses. We of the 99% are lacking in the substance that reduces risk. One can certainly drown from too much water, but the natural risk in life is not having too much water, it is having too little. Thus is the realization of the delusional statement “drowning in debt” and “socialized the losses”.

Why the U.S. is No Longer the Land of Opportunity - One of the nagging questions I have had about the Occupy Wall Street movement is why now. Income inequality is nothing new. So why now? The reason is that the Occupy Wall Street is really not about income inequality, but about opportunity inequality, and it's the later that appears to be hitting all-time highs now. This week's cover story in TIME by Rana Foroohar, titled What Ever Happened to Upward Mobility?, examines the opportunity gap in America and why it has gotten so uneven. A recent study from the Pew Charitable Trust found that Americans born in the a family that was one of the bottom fifth in terms of wealth, only had a 17% chance of making into the top two-fifths as an adult. It now appears, as Foroohar points out, that a number of recent studies have shown that it is now easier to move up the income ladder in Europe than it is in America. So much for the land of the opportunity. What happened? Foroohar says there are a lot of reasons. But Foroohar says the two biggest trends driving income inequality are China and other emerging market countries, and technology - two forces that are in effectively stealing away America's good paying middle class jobs.

Inequality Trends In One Picture -Krugman - Just an addendum on the role of the top 1 percent versus the college-noncollege differential. Here, from the CBO report, are the changes, in percentage points, of the shares of income going to three groups. The top quintile excluding the top 1 percent – which is basically the abode of the well-educated who aren’t among the very lucky few – has only kept pace with the overall growth in incomes. Just about all of the redistribution has taken place from the bottom 80 to the top 1 (and we know that most of that has actually gone to the top 0.1). It’s a tiny minority, not a broad class of well-educated Americans, who have been winning here.

Yes Indeed, Income Inequality Really is Growing - James Pethokoukis is on a mission to show that rising income inequality isn't really a big deal. The big gun in his arsenal is a 2009 paper by Robert Gordon, which says: This paper shows that the rise in American inequality has been exaggerated in at least three senses. First, the conventional measure showing a large gap between growth of median real household income and of productivity greatly overstates the increase compared to a conceptually consistent alternative gap concept, which increases at only one-tenth the rate of the conventional gap between 1979 and 2007....Second, the increase of inequality is not a steady ongoing process; after widening most rapidly between 1981 and 1993, the growth of inequality reversed itself and became negative during 2000-2007. Pethokoukis, responding to a CJR piece by Ryan Chittum, says: "Chittum, nor other liberal economic pundits such as Ezra Klein, Jonathan Chait, Kevin Drum, Ryan Avent, have made an effort to dispute Gordon, hardly a conservative economist. Liberals don’t even like quoting that above bit." Gordon is a good economist, and I haven't made an effort to dispute him because I don't really dispute most of what he says. I just think it's largely irrelevant. Let's take the various claims in his paper one at a time:

Millionaire For A Day - Krugman - I see from comments here and elsewhere that the usual obfuscators are rolling out the old income mobility defense: sure, a few people get a lot of the income, but it’s different people every year, so no harm.  But if you actually read the CBO report, it already deals with that issue: Household income measured over a multiyear period is more equally distributed than income measured over one year, although only modestly so. Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multiyear income measures also show the same pattern of increasing inequality over time as is observed in annual measures. Translation: sure, many people who have incomes greater than $1 million one year fall out of the category the next year — but that’s typically because their income fell from, say, 1.05 million to 0.95 million, not because they went back to being middle class. And the new millionaires are typically people who were making just shy of a million the year before, not Horatio Alger stories. And if you’d been following this subject you would know that this fallacy has been well understood for decades.

Thinking Big on Poverty - “I believe what the Occupy Wall Street movement has done is a patriotic thing by putting wage inequality back on the front and center stage,” said Secretary of Labor Hilda Solis. The occasion was the Half in Ten campaign’s release of its inaugural report that starts the clock ticking on its aggressive goal to cut poverty in half in ten years nationally and in every state.  “You think big, and you challenge America’s leaders to do big things,” . “Cutting the poverty rate in half in ten years is something that I too believe we can do. Providing a ladder out of poverty has been my life’s work.” The new report offers a comprehensive look at a record 46.2 million people living in poverty in the nation today, and lays out the key indicators within four categories that Half in Ten will track to measure progress towards its goal: overall poverty in the United States, more good jobs, strengthening families and communities and family economic security. It ranks states according to each of the indicators, and an interactive website emphasizes the state’s bottom-ranking data to focus attention on the areas that need the most work. The report also includes a call to action which outlines a set of policies that would make a real difference in people’s lives right now.

Calculating Poverty - To preview how the Census Bureau’s new Supplemental Poverty Measure may change the portrait of poverty, The New York Times consulted multiple alternate measures that researchers have quietly published in recent years.They included a 2009 version of the Supplemental Poverty Measure, as well as four of eight alternate measures the Census has published, incorporating recommendations from the National Academy of Sciences. Among children, it showed poverty rates falling to 15 percent, from 22 percent, in the official count. That removes about 5.2 million children from poverty. That drop is broadly consistent with what the Urban Institute researchers found in Massachusetts, Illinois and Georgia — an average decline in child poverty of about 24 percent. It also falls sharply for women ages 25 to 39 — many of them mothers. Many safety net programs, particularly the Earned Income Tax Credit, focus on families with children.  Among elderly, The Times’s examination of the Census data showed poverty rates rising to 13.8 percent, from 9 percent, by the official count. The 2009 Supplemental Poverty Measure and the Urban Institute studies found broadly similar climbs.

Oligarchy, American Style, by Paul Krugman - Inequality is back in the news, largely thanks to Occupy Wall Street, but with an assist from the Congressional Budget Office.Whenever growing income disparities threaten to come into focus, a reliable set of defenders tries to bring back the blur. Think tanks put out reports claiming that inequality isn’t really rising, or that it doesn’t matter. Pundits try to put a more benign face on the phenomenon, claiming that it’s not really the wealthy few versus the rest, it’s the educated versus the less educated.  So what you need to know is that all of these claims are basically attempts to obscure the stark reality: We have a society in which money is increasingly concentrated in the hands of a few people, and in which that concentration of income and wealth threatens to make us a democracy in name only.  The budget office laid out some of that stark reality in a recent report, which documented a sharp decline in the share of total income going to lower- and middle-income Americans. We still like to think of ourselves as a middle-class country. But with the bottom 80 percent of households now receiving less than half of total income, that’s a vision increasingly at odds with reality.

Merchants Of Doubt -  Krugman Jonathan Chait has a terrific takedown of inequality deniers. It’s similar in spirit to my own version, but packaged somewhat differently and I’d say more effectively. The thing to keep in mind is that Pethokoukis doesn’t directly challenge any of these facts, though he wants his audience to think he does. He cites a bunch of figures that pick away at pieces of the general picture — here is a study showing median income may have grown more than you thought, here’s a report showing family structure helped drive inequality, and so on. His favorite sleight of hand involves citing studies that do not focus on the richest 1 percent pulling away. The gap between the top 1 percent and everybody else is the most dramatic change, and it’s also the hardest to capture, since it involves a small subset of the population. (Indeed, the idea that the income of the top 1 percent is an important economic phenomenon is itself new, and older measures of inequality aren’t really designed to capture it.) So Pethokoukis just cites figure after figure that don’t measure the 1 percent against everybody else. He is, in a word, bullshitting.

Not Their Parent's American Dream: The State Of Young America - Young people perceive that something is amiss with the economy they’ve inherited.  According to an extensive survey of young Americans released yesterday by Demos and Young Invincibles, nearly half of 18 to 34 year-olds believe they’ll be worse-off than their parents.  In fact, they already are.   Seizing the opportunity to alter their fates, participants in the Occupy Wall Street demonstrations point to rising inequality, reduced financial regulation, mounting debt obligations, and the lingering recessionary effects of the financial crisis as sources of their current unease, and they struggle toward a vision of a different world.  Some of these factors are just the most recent evidence of the business cycle sinking to its predictable trough, but many have been brewing since before the Millennials were born.   In real terms, only the most educated workers are earning what their parents did a generation ago, and the gap in earnings between those with a college degree and those without has grown. At the same time, tuition and fees at public 4-year institutions more than tripled and the availability of financial aid failed to keep up with the rising costs. Average student loan debts are at an all-time high:

The Inevitable Jubilee - National debt is a cancer. It starts out small and then multiplies. Eventually, it reaches a point where it can’t be ignored, spreading itself through every layer of the economy until it threatens the life of its host.  Many would say that the U.S. is at this point. Having accumulated more debt than any other nation in history, there is little hope that it can ever be paid back without a combination of some very drastic and unrealistic measures. On greater inspection, paying it back is probably never going to happen and may even be mathematically impossible to do so.  This raises the question then—how did we get to this point? Because really, it’s not a pretty picture of what things start to look like once a nation is forced into reducing its debt. Just look at Greece.  For most people, the answer is fairly obvious: society has been borrowing money to live beyond its means. The real question though is why has this been allowed for so long? That is, up until the point where our financial system is on the verge of failure?

Report: Poverty hits record level - The number of Americans below poverty level has hit a new record, making up about 20.5 million people, The Associated Press reports1. Defined as individuals living at 50 percent or less of the official poverty level, 6.7 percent of the U.S. population — or one in 15 people — are considered to be the poorest of the poor. That’s the highest in the 35 years since the Census Bureau has tracked those figures, the wire said. Previous highs were in 2009 and 1993, when the poorest of the poor made up just more than 6 percent of the U.S. population. Neighborhoods in which at least 4 in 10 people are living in poverty have stretched over broader areas and have increased in suburbs twice as fast as in cities, according to the AP. Forty states and the District of Columbia saw a rise in the number of poorest of the poor since 2007, with the nation’s capital suffering the worst at 10.7 percent. Mississippi and New Mexico are in second and third place, while Nevada saw the biggest increase, going up to 7 percent from 4.6 percent.

Poorest poor in US hits new record: 1 in 15 people — The ranks of America's poorest poor have climbed to a record high — 1 in 15 people — spread widely across metropolitan areas as the housing bust pushed many inner-city poor into suburbs and other outlying places and shriveled jobs and income. New census data paint a stark portrait of the nation's haves and have-nots at a time when unemployment remains persistently high. It comes a week before the government releases first-ever economic data that will show more Hispanics, elderly and working-age poor have fallen into poverty. In all, the numbers underscore the breadth and scope by which the downturn has reached further into mainstream America. "There now really is no unaffected group, except maybe the very top income earners,""Recessions are supposed to be temporary, and when it's over, everything returns to where it was before. But the worry now is that the downturn — which will end eventually — will have long-lasting effects on families who lose jobs, become worse off and can't recover."

Extreme Poverty Spikes in U.S., Study Finds - The number of people living in neighborhoods of extreme poverty grew substantially, by one third, over the past decade, according to a new report, erasing most of the gains from the 1990’s when concentrated poverty declined.  More than 10 percent of America’s poor now live in such neighborhoods, up from 9.1 percent in the beginning of the decade, an addition of more than 2 million people, according to the report1 by the Brookings Institution, an independent research group.  Extreme poverty — defined as areas where at least 40 percent of the population lives below the federal poverty line, which in 2010, was $22,300 for a family of four — is still below its 1990 level, when 14 percent of poor people lived in such areas. The report analyzed Census Bureau income data from 2000 to 2009, the most recent year for which there is comprehensive data.  The data captures the first part of the decade most clearly, when growth in concentrated poverty was highest in metropolitan areas in the Midwest. Of the neighborhoods where poverty became most acute, three were Midwestern: Toledo, Youngstown and Detroit.

Another lizard-like Smeeding: making poverty disappear in our plutocratic era - When you are dealing with a fire, the experts involved are firefighters. When you are dealing with scuba diving, the experts are scuba divers. But a funny thing happened to expertise on the way to D.C. The experts on poverty are – upper class. Thus, it is no big shock that under the plutocracy beloved by Obamacrats and Republicans, we are getting a new survey of poverty that, well, tweaks it. And, abracadabra, makes it disappear! Via the New York Times report on poverty spindled and mutilated through the hands of experts, we get things like this: “One explanation can be found in programs the official count ignores: food stamps and tax credits. Combined the two programs delivered $221 billion across the country last year, according to the Center on Budget and Policy Priorities, more than doubling since 2006.  Ms. Melton signed up for $3,600 a year in food stamps and received $1,800 in nutritional supplements from the Women, Infants and Children program. And her small salary qualified her for large tax credits, which arrive in the form of an annual check — in her case for about $4,000. Along with housing aid, those subsidies gave her an annual income of nearly $18,800 — no one’s idea of rich, but by the new count not poor.” Ah, the new count! The new count in inflation in the 90s – by the magic of hedonics! – broke the back of inflation by counting it otherwise. And now the ‘new count” in poverty means that three people living on $18,000 per year are not poor!

A vicious cycle in the used-car business - Another buyer might have balked at the deal she was offered. Lee figured she had no choice. She put $3,000 down and drove off in a 2007 Ford Fusion, agreeing to pay $387 a month for four years. The interest rate: 20.7%, nearly triple the national average for a used-car loan. A year and a half later, Lee fell behind on her payments and filed for bankruptcy. So she was relieved when the dealership called and offered to make her loan more affordable. The sales manager even promised to throw in a free smog check. Lee, 35, drove back to Repossess Auto on a rainy Monday evening, handed the keys to an attendant and sat down with the manager. Moments later, she said, employees parked four cars tightly around the Ford, blocking it in. There would be no new deal. Lee's car was being repossessed. She and her children waited in the rain until a friend could drive them home. Lee, who described that night as “one of the worst experiences of my life,” had stumbled into the bare-knuckle world of Buy Here Pay Here used-car sales.

Investors place big bets on Buy Here Pay Here used-car dealers - Firms like Altamont pride themselves on being the smart money, identifying profitable opportunities ahead of the herd. Lately they and other investors are finding just such a windfall in a little-noticed niche of the used-car business known as Buy Here Pay Here. These dealerships focus on people who need cars to get to work, but can't qualify for conventional loans. They sell aging, high-mileage vehicles at prices well above Kelley Blue Book value and provide their own financing. As lenders of last resort, they can charge interest at three times or more the going rate for regular used-car loans. Many require customers to return to the lot to make their loan payments — that's why they're called Buy Here Pay Here dealerships. If buyers default, as about 1 in 4 do, the dealer repossesses the cars and in many cases sells them again. The dealerships make an average profit of 38% on each sale, according to the National Alliance of Buy Here Pay Here Dealers. That's more than double the profit margin of conventional retail car chains like AutoNation Inc.

We Are The 98% -- I feel little more than contempt for those who have ridiculed the "We Are The 99%" slogan of the occupy protesters. Some of these apologists for the status quo are more despicable than others. Those who have a reservation in Dante's inner circles of Hell tell us that only 13% of the 1% work on Wall Street (in finance). They thus feel entitled to conclude that the protests are misplaced and misinformed. Others who may live out eternity in Dante's upper circles say that the wealthiest Americans lost a lot of income after the meltdown, so the income equality problem is not as bad it was in 2007. Megan McArdle, whose blog Assymetrical Information is hosted on The Atlantic's website, is one of those. I'll quote from Ms. McArdle's The 1% Ain't What It Used To Be. Unsurprisingly, Occupy Wall Street have pushed income inequality to the center of the national conversation.  But it would actually be quite surprising, if true.  The massive, decades-long data set assembled  by Piketty and Saez seems to show that income inequality falls during recessions, and particularly during prolonged crises. Crises destroy capital, and top incomes tend to be more tightly linked to capital than those of average workers.  If you work for a wire factory that goes bankrupt, you may well have a rough year or two before you find another job, and your income may never fully recover. But if you own that factory, it will be years before you have an income even close to what you enjoyed before--and it's very possible that you'll never get there at all.

Uncle Sam's 600 billion dollar gift to the wealthy - Liberals (and here I will be generous and even include the center right krewe at the New Republic) have a weakness for the idea that income distributes wealth downwards. In this takedown of the conservative claim that income inequality hasn’t increased in the past thirty years, Matt O’brien writes:Pethokoukis [the AEI economist} thinks that a more thorough accounting for taxes and benefits like healthcare or pensions yield a different picture of inequality. And that is somewhat true. After-tax inequality is certainly smaller than pre-tax inequality. But it is not as true as it used to be. The CBO recently confirmed that federal taxes and transfers are less redistributive now than they were in 1979. The same is true for benefits.” Into this picture, ladies and gentlemen, let me present two very simple concepts. One is the monopoly premium granted to corporations by that wonderful invention called intellectual property rights. The other is that equally wonderful invention called government guarantees for the financial and big business sector. It has slipped our minds, perhaps, that the Fed spread out loans totaling 16 trillion dollars at one percent and below to our high flying investors, lending a helping hand to hundreds of hedge funds, banks, and businesses. Now, to get that kind of loan normally, the charge, in the 2008-2010 period, would have been probably 4 points higher on those loans, and in many cases the price would have soared to the interest charged on Greek bonds. So, let’s see, handy calculator please: if we are talking four percentage points, 16 trillion, that’s, scribble scribble, about 600 billion dollars. Wow, nice, eh? I’d jack that up a bit, considering the collateral that was offered. So 600 billion to 800 billion was pocketed by the wealthiest in 2 years – hey, really sweet!

Class War Within a Class War - Anne Applebaum points to a growing class divide. She argues that the emphasis on the phenomenally well-off top 1 percent misses the real problem. Rather, the “American upper-middle class . . . is now sociologically and economically very distinct from the lower-middle class, with different politics, different ambitions and different levels of optimism. Thirty years ago, this wasn’t the case. A worker in a Detroit car factory earned about the same as, say, a small-town dentist, and although they might have different taste in films or furniture, their purchasing power wasn’t radically different. Their children would have been able to play together without feeling as if they came from different planets.” One could argue that a dentist actually ought to earn considerably more than an unskilled assembly line worker. But Applebaum argues that we’ve lost a sense of community with this inequality: “Middle America” also once implied the existence of a broad group of people who had similar values and a similar lifestyle. If you had a small suburban home, a car, a child at a state university, an annual holiday on a Michigan lake, you were part of it. But, at some point in the past 20 years, a family living at that level lost the sense that it was doing “well”, and probably struggled even to stay there. Now it seems you need a McMansion, children at private universities, two cars, a ski trip in the winter and a summer vacation in Europe in order to feel as if you are doing minimally “well”.

Oakland’s Port Shuts Down as Protesters March on Waterfront…— Thousands of Occupy Oakland protesters expanded their anti-Wall Street demonstrations on Wednesday, marching through downtown, picketing banks and swarming the port. By early evening, port authorities said maritime operations there were effectively shut down.  "Maritime area operations will resume when it is safe and secure to do so,” port officials said in a statement, asking marchers to “allow your fellow 99% to get home safe to their families.” Despite the disruption of work, the crowd at the port was peaceful.  Protesters had called for a citywide general strike1 on Wednesday, and asked other demonstrators in cities across the country to do the same, after violent clashes2 with the police here last week that included tear gas barrages and injuries involving both police officers and protesters.  While the city was not shut down by the protest, many businesses chose to remain closed Wednesday. Some that stayed open posted signs declaring their support for the marchers.

#OccupyOakland General Strike Closes Port, 5th Biggest in US - - Yves Smith - I had been somewhat concerned at OccupyOakland’s call for a general strike, since failure to have a tangible impact would undermine rather than enhance the notion that the movement has power. A visible failure could easily produce a shift in the tone of ever-fickle press coverage.But this first effort by an Occupation at flexing its muscles seems to have gone well. One indicator: the Financial Times took note of the strike, placing the story on the front page of its Web edition. Key extracts: As many as 5,000 protesters gathered in Oakland, California, for what organisers called the first general strike in the US since demonstrators shut down business and government operations in the same city in 1946. Picketers on Wednesday blocked and pounded on the doors of bank branches and defaced ATMs and brought operations to a halt at the Port of Oakland, the fifth-busiest port in the US, in a demonstration aimed to expand on the broader Occupy Wall Street movement. Note that 5,000 people is not all that many, but closing the port sends a big message.

America’s Exploding Pipe Dream - We are slowly — and painfully — being forced to realize that we are no longer the America of our imaginations. Our greatness was not enshrined. Being a world leader is less about destiny than focused determination, and it is there that we have faltered.  We sold ourselves a pipe dream that everyone could get rich and no one would get hurt — a pipe dream that exploded like a pipe bomb when the already-rich grabbed for all the gold; when they used their fortunes to influence government and gain favors and protection; when everyone else was left to scrounge around their ankles in hopes that a few coins would fall.  We have not taken care of the least among us. We have allowed a revolting level of income inequality to develop.  Poor policies and poor choices have led to exceedingly poor outcomes. Our societal chickens have come home to roost.  This was underscored in a report released on Thursday by the Bertelsmann Stiftung foundation1 of Germany entitled “Social Justice in the OECD — How Do the Member States Compare?” It analyzed some metrics of basic fairness and equality among Organization for Economic Co-operation and Development countries and ranked America among the ones at the bottom.  I could write (and have written) ad nauseam about our woeful state, but it might be more powerful to see it for yourself. So here are some of the sad data2 from the report.

Let Them Eat Cake: 10 Examples Of How The Elite Are Savagely Mocking The Poor - There is absolutely nothing wrong with working hard and making a lot of money, but there is something wrong with being completely arrogant and smug about it. Today, many among the elite are savagely mocking the poor, and that is a huge mistake. You shouldn’t kick people when they are down. There are tens of millions of Americans that are deeply frustrated about losing their homes, losing their jobs or barely being able to survive in this economy. These frustrations have been one of the primary reasons for the rise of the Tea Party movement and the rise of the Occupy Wall Street movement. What these movements have in common is that people in both movements are sick and tired of the status quo and they want something to be done about our broken system. There are huge numbers of families out there right now that have just about reached the end of their ropes. Instead of showing compassion, many of the ultra-wealthy have decided that it is funny to mock the poor and those that are suffering. So how are all of these protesters going to respond to the “let them eat cake” attitude of the Wall Street elite? The protesters are being told that nothing that they can do will change anything and that they should be grateful for what Wall Street and the ultra-wealthy have done for them. They are essentially being told that they should just shut up and go home. So will we see these protest movements become discouraged and die down, or will the patronizing attitudes of so many among the elite just inflame them even further? The following are 10 examples of how the elite are openly mocking the poor in America today….

U.S. Food-Stamp Use Reaches Record 45.8 Million, USDA Says -- The number of Americans receiving food stamps reached a record 45.8 million in August, the government said. The figure was 1.1 percent higher than the previous month and 8.1 percent more than a year earlier, the U.S. Department of Agriculture said today in a report on its website. Assistance rolls are increasing as joblessness remains at 9.1 percent of the workforce. Texas had the most food-stamp recipients in August, at 4.12 million, followed by California with 3.82 million, according to the USDA. Spending was a record $6.13 billion. The number of Americans receiving food stamps under the Supplemental Nutrition Assistance Program has set records every month but one since December 2008.

Some 15% of U.S. Uses Food Stamps -Nearly 15% of the U.S. population relied on food stamps in August, as the number of recipients hit 45.8 million. Food stamp rolls have risen 8.1% in the past year, the Department of Agriculture reported, though the pace of growth has slowed from the depths of the recession. The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), may continue to rise in coming months as families continue to struggle with high unemployment and September’s data will likely include disaster assistance tied to the destruction and flooding caused by Hurricane Irene. Mississippi reported the largest share of its population relying on food stamps, more than 21%. One in five residents in New Mexico, Tennessee, Oregon and Louisiana also were food stamp recipients. Food stamp rolls exploded during the downturn, which began in late 2007. Even after the recession came to its official end in June 2009, families continued to tap into food assistance as unemployment remained high and those lucky enough to find jobs were often met with lower wages. Click image for full-size interactive map of food stamp use by state.

The SNAP (food stamp) explosion -  Every couple years, we update this dynamic interactive graphic showing how Supplemental Nutrition Assistance Program (SNAP) participation changes in response to economic conditions and federal and state policies.  With this Google Gadget, you can track a particular state of interest, or watch all states move together. Of course, the real drama is in the final two years.

Homeless In High School: Meet Jake - When you think of the homelessness, you probably think of it happening in big cities like Milwaukee, Madison, and Racine. Its a growing problem in every Wisconsin city, big and small, especially among families with children. The Department of Education requires each Wisconsin school district to assign one staff member to be a homeless liaison. WXOW called our local liaisons and here's what we found: There are 22 homeless students enrolled in the Sparta School District, 30 in the Viroqua School District, and 70 in the La Crosse School District. But the district with the largest homeless population by far is Tomah, where as of last week, 93 homeless students were enrolled. The high school senior is one close to 100 homeless students enrolled in the district. There are more homeless students than there are kids on the football team. "We have never seen numbers like this." Director of Pupil Services Paul Skofronick blames the economy. "It's hurting all of us without a doubt, but the kids are being affected because they don't know why." The homeless in Tomah are hidden. They don't live on the street; instead they sleep in their cars, at camp ground, or on a friend's couch.

Surprise unemployment tax on business claims $42 million so far - Many Wisconsin businesses were surprised this past summer when they were hit with a special tax to help the state make interest payments on its unemployment insurance debt to the federal government, and some observers, including the author of a new national study, think the assessment could have a significantly negative impact on job creation at a time when job creation is already weak. The surprise arrived in June, when the Wisconsin Department of Workforce Development sent letters to the state's employers telling them they would soon receive a bill to pay their share of an outstanding estimated $48 million interest payment to the Federal Unemployment Trust Fund. According to the department, as of June, the state had an outstanding unemployment fund debt balance of $1.3 billion; the Tax Foundation, a nonpartisan national research group, puts the figure at $1.16 billion now.

Economic Indicator: Tough Economic Times Continue for State and Local Governments - Last week’s gross domestic product (GDP) report confirmed that our economy continues to grow (2.5 percent in the third quarter), although not as quickly as we would like. The fears of a “double dip” recession didn’t come to pass (if anyone in the DC area is interested in a triple dip, head to Ben and Jerry’s from 4 to 7 for their 3-dips-for-3-bucks special.).  One reason why the economy isn’t growing faster is that budget constraints are forcing continued and historically deep contractions in state and local government spending.  Measures within the American Jobs Act can help bridge the gap. These cuts in state and local government spending are evident in the GDP data and also in the employment data (the October payroll data will be released this Friday).  State and local spending and investment decreased 5.3 percent in real terms since spending peaked in the fourth quarter of 2007, by far the deepest 15-quarter decline in spending in the post-WWII era.  Job losses that have followed from these budget cuts total 646,000, or 3.3 percent, since state and local employment peaked in August 2008.

New Jersey, Florida May Face Cuts as Revenue Lags, Moody’s Says New Jersey, California and Florida are among states that may face credit-rating or outlook cuts as tax receipts trail budget projections, raising pressure to trim spending, Moody’s Investors Service said. “Persistent state fiscal pressures, aggravated by additional federal spending reductions or further weak economic or employment performance, may force mid-year budget cuts in 2012,” Ted Hampton, a Moody’s analyst in New York, said in a report. The situation would “possibly increase downward rating pressure for some states,” he said. California revenue missed forecasts by 3.6 percent, or about $705 million, in the first quarter of fiscal 2012, Controller John Chiang said last month. The shortfall increases the chance that automatic spending cuts will be triggered, affecting universities and services to the elderly and disabled. Florida lawmakers were told Oct. 20 that the state faces a $1.2 billion 2013 budget gap, after first-quarter revenue for the current year came in $125 million short of estimates. Revenue rose in Florida compared with the year-earlier first quarter, while it fell in California, the state reports show. Receipts also missed projections by 3.6 percent in New Jersey and 3.5 percent in Pennsylvania, Hampton said, adding that no “immediate rating actions” are anticipated.

Gregoire 'Concerned' About Deep Budget Cuts (audio) Governor Chris Gregoire says she’s “concerned” about the effects of deep spending cuts she’s proposing to close a state budget shortfall of nearly one-and–a-half billion dollars. Among the budget reductions she has put forward are an elimination of the state’s Basic Health Plan, a 15-percent reduction to higher education and a reduction in how long criminal offenders are supervised after release. Gregoire tells KGMI that the current economy has left her administration few options…

Wisconsin Introduces Bill to Create New Upper Income Tax Bracket - Introduced October 28, Wisconsin Assembly Bill 343 would create a new 8.75 percent tax bracket for income earned above $1 million. From the bill: For taxable year 2012 and thereafter, this bill creates a sixth bracket with a taxation rate of 8.75 percent. For single individuals, certain fiduciaries, and heads of households, this bracket applies to taxable income exceeding $1,000,000. For married persons, this bracket applies to taxable income exceeding $1,000,000 for joint filers and $500,000 for separate filers. This bracket is indexed for inflation. 22 Assembly members signed on as sponsors of the bill, and 8 signed on as co-sponsors. The bill, which has been talked about since early October, would also authorize the Wisconsin Technical College System Board to fund grants for technical degrees. The bill states that these grants will "assist in reducing unemployment."

NY Gov: state's deficit next year could top $2 bln (Reuters) - New York state's budget deficit could surpass $2 billion next year because tax revenues have slowed in the past few months, Governor Andrew Cuomo told reporters on Tuesday. "At this point, it appears to be getting worse," he told reporters. At at the close of last year, the deficit was projected at $2.4 billion, he said. Cuomo, asked if he might support the so-called millionaire's tax, which he has previously opposed, said he had heard "the voice" of thousands of people who want this tax increase. "I understand the know my position on the surcharge."

Birmingham wants JEFFCO to pull the trigger on bankruptcy - The Birmingham City Council wants the Jefferson County Commission to declare Chapter 9 bankruptcy. The council unanimously passed a resolution Tuesday urging the county to reject a settlement plan with bond holders, declare bankruptcy, and drop requests for a special session of the legislature to get state help for the county drowning in red ink. The council also wants the commission to fight to get warrants on the sewer debt held by JP Morgan declared invalid. The warrants were the result of the illegal efforts that have sent former commissioners to jail. Right now, Jefferson County owes more than $3-billion in sewer debt. They are also upside down on the General Fund budget asking the state for about $40-million to make ends meet.

City Council hears about homeless cuts - Homeless people seeking overnight help in finding shelter are on their own when it comes to transportation, after Chicago cut the 10 p.m. to 8 a.m. outreach crews that once hit the streets during those hours, a top city official said today. Family and Support Services Commissioner Evelyn Diaz said the cuts were made about two months ago because the state sliced in half a grant used for city homeless programs. Two emergency services supervisors continued to work the midnight shift to take 311 calls related to homeless folks, Diaz said, but the homeless outreach and prevention team was eliminated. So, if a homeless person calls in and asks for a place to stay, he or she can be directed to a shelter, but not taken there. They have to wait until 8 a.m. for a ride, “if they can’t find another alternative,” Diaz said. Because of the decline in state funding, the city also cut 20 percent of its funding for homeless shelters, which had to eliminate 60 beds as a result, Diaz said. There are still about 4,000 beds overall, she said.

Police: 2 men in custody for stealing metal urns - Chicago police have arrested two people they say stole dozens of funeral vases and plaques worth thousands of dollars from several cemeteries and wanted to sell them. Police in Chicago's 4th District said that they have pulled in the Cook County Sheriff's Department, which apparently has an ongoing investigation into this type of robbery. Outrageous as they may seem, graveyard theft is becoming more common as the price of metals, such as brass and copper, go up. Still covered in mud from the gravesites from which they were stolen, 89 brass urns and an inscribed grave marker were recovered. The building where they were being taken from was, according to police, just a storage site. Police say cemeteries sell the urns for between $100-$500 apiece, putting the value of the heist between $9,000-$45,000.

Bold thieves steal copper from KC police tower - Kansas City police are looking for thieves who stole an estimated $12,000 worth of copper wiring and other metal items from a department radio tower. The Kansas City Star reports a police officer checking the tower in the south-central part of the city over the weekend found a chain used to keep the gate shut had been cut. Police say they discovered a large amount of wiring and other items were missing. The Police Department says the theft did not affect radio service or the functioning of the system.

Unable to pay $4 million electric bill, Michigan city turns off and removes many streetlights (AP) -- As the sun dips below the rooftops each evening, parts of this Detroit enclave turn to pitch black, the only illumination coming from a few streetlights at the end of the block or from glowing yellow yard globes. It wasn't always this way. But when the debt-ridden community could no longer afford its monthly electric bill, elected officials not only turned off 1,000 streetlights. They had them ripped out -- bulbs, poles and all. Now nightfall cloaks most neighborhoods in inky darkness. "How can you darken any city?"  She said the decision endangers everyone, especially people who have to walk around at night or catch the bus. Highland Park's decision is one of the nation's most extreme austerity measures, even among the scores of communities that can no longer afford to provide basic services. Other towns have postponed roadwork, cut back on trash collection and closed libraries, for example. But to people left in the dark night after night, removing streetlights seems more drastic. And unlike many other cutbacks that can easily be reversed, this one appears to be permanent.

Mayor Dave Bing: Detroit may need emergency manager - The City of Detroit is sliding closer to insolvency and may soon require the intervention of a state-appointed emergency manager, Mayor Dave Bing told council members behind closed doors, according to sources who were in the meeting. As pension and health care costs continue to skyrocket, Bing said, the city is quickly running out of money. Unions, which took 10% pay cuts last year, have refused to accept deep cuts in health care and pension costs. But a financial manager would have authority to unilaterally cut union contracts.

Colorado Voters Reject Income and Sales Tax Increase - Colorado voters yesterday rejected Proposition 103, which would have raised $2.9 billion between 2012 and 2016 by raising the state income tax from 4.63% to 5% and the state sales tax from 2.9% to 3% for five years. 36.3% voted yes while 63.6% voted no.  As we noted earlier this week: While Colorado's current state sales tax rate seems paltry at 2.9 percent, Tax Foundation analysis finds that once local sales tax rates are accounted for, Colorado has one of the higher sales tax rates in the country. The combined state and average local sales tax rate in Colorado is 7.48 percent, 15th highest in the nation. Colorado's total state and local tax burden per capita for 2009 (the latest data available) was 18th in the nation, at $4,011. More on Colorado here.

Two-Thirds of Colorado Voters Reject Tax Increase for Schools - Colorado voters by a margin of almost 2-to-1 defeated a citizen initiative to increase taxes for public education that would have raised $2.9 billion. Proposition 103, the only statewide tax vote in the U.S. this election season, failed 64-36 percent with 84 percent of the projected vote counted, the Associated Press said today. The rejection continued a nationwide trend against new taxes. In November 2010, Washington voters spurned an income tax on top earners and dropped levies on candy, bottled water and carbonated beverages. The last successful statewide voter initiative to increase taxes was in 2006 in South Dakota. “One of the concerns with Prop 103 was that it was a grassroots movement, done on a low budget with not a lot of advertising,” said Mike Wetzel, a spokesman for the Colorado Education Association, the state’s largest teachers’ union. The organization endorsed the measure. He spoke in an interview before the results of yesterday’s balloting were known. Proposition 103 would have raised the personal and corporate income-tax rate to 5 percent from 4.63 percent and increased the sales and use levy to 3 percent from 2.9 percent. Both increases would have lasted five years, to finance public education.

San Diego board member wants to slash teacher pay -- A school board member on Monday proposed slashing teacher pay 10 percent in California's second-largest district, the latest salvo in a debate over whether wrenching cuts will be required to prevent insolvency. The San Diego Unified School District is preparing for the possibility that state revenue projections due in December fall short, triggering automatic cuts to schools. Superintendent Bill Kowba raised the prospect of insolvency two weeks ago. Hundreds of other school districts would also face deep cuts. Scott Barnett, a taxpayer watchdog advocate who won election to San Diego's five-member school board last year, said he wanted employees to accept a 10 percent pay cut, postpone scheduled pay increases and begin paying health care premiums.

Why should a teacher earn less than a manager? - Klaus Schwab, Founder and Executive Chairman, World Economic Forum (Davos) - Criticism of capitalism has increased in recent months. Protest movements, such as "Occupy Wall Street," are outraged at the excesses of bankers who, according to the protesters, bear the main responsibility for the current economic crisis – but apparently are not being held responsible. A growing number of voices from different parts of society are now showing solidarity with the anti-capitalism activities and reflecting the widespread frustration felt by citizens. Undoubtedly, these anti-capitalist protests have their finger on the pulse of our time. But it is not enough to simply condemn capitalism for its undeniable excesses. We need a deeper analysis of why the capitalist system, in its current form, no longer fits the world around us. The fact that talent has now become the key success factor is often used as justification by companies for paying exorbitant salaries and bonuses. But talent is not the crucial factor only for the manager’s profession, but for any kind of job. Why should an outstanding teacher earn less than a mediocre manager? Why should a surgeon of worldwide renown earn less than the CEO of a global company? Of course, ideally everyone should earn according to their responsibility and performance. But the main professional motivation should be ones vocation - and not simply the desire to make a profit. Separating managers and risk-takers will also reign in those financial transactions where profits benefit individuals but risks are collectivized, meaning the average tax-payer must shoulder the burden when things go wrong. In short, we need to move from excessive capitalism to a market economy in which social responsibility and obligations are not just empty words.

US Schoolchildren Don't Make Grade on Reading, Math Tests -- Only three in 10 U.S. schoolchildren make the grade in reading, the U.S. Education Department said today. Four in 10 passed muster in math. About half of fourth-graders knew that a right triangle and a rectangle each had at least one right angle, according to a federal test, known as the Nation’s Report Card. On the 2011 National Assessment of Educational Progress, which measures fourth- and eighth-grade knowledge, scores rose from 2009 except in reading at the lower level. The score for younger readers was unchanged. President Barack Obama and Congress are seeking to change No Child Left Behind, the nation’s main education law, which requires that all students pass state tests in math and reading by 2014 or risk losing federal money.David P. Driscoll, chairman of the board that oversees the federal test, called the fourth-grade reading results “deeply disappointing” and voiced concern about the modest long-term improvement in literacy. At the same time, two decades of math gains were “impressive and consistent,” he said.

Why OWS has a library and what that means - In the first news stories, the fact that Occupy Wall Street had a library seemed a bit whimsical, sort of like that iconic photo of a dancer perched on the back of the equally iconic statue of a charging bull. How funny! A library for a group that has no leaders and no rules? It seemed to some a contradiction in terms. Aren't libraries all about rules and organization? Well . . . no. Libraries are fundamentally about something quite different. It seems natural to me that a social movement that springs up locally and without any centralized organizing body or criteria for membership would create a library. This is an impulse so ingrained in the idea of books that people are creating tiny lending libraries to put in public places as signals that sharing books is an important act, something that creates community. So the Occupy Wall Street movement quickly acquired a library-not because information is needed. What with Google, Twitter, Facebook, and various streaming video sites, the movement is awash in information. It's more a way to define the community through a culturally meaningful form of sharing, a physical impulse to pass books from one hand to another. It's what you do when you come together: you pool your books so that they can be browsed and shared. Sharing books is communal nourishment, like breaking bread.

College Majors Matter --- We write a lot on Economix about whether college is worth it. In a piece in Investor’s Business Daily, Alex Tabarrok, an economics professor at George Mason University, suggests that Americans are focusing on the wrong question. They shouldn’t be debating whether college in general is “worth it”; they should instead be thinking about whether the specific college degree they’re considering is marketable. A smaller share of students are choosing majors that are in demand, he writes: Over the past 25 years the total number of students in college has increased by about 50 percent. But the number of students graduating with degrees in science, technology, engineering and math (the so-called STEM fields) has been flat… If students aren’t studying science, technology, engineering and math, what are they studying? In 2009 the United States graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985. Dr. Tabarrok notes STEM majors are more likely to find work and also to find high-paying work. Then he emphasizes that the choice of concentration not only matters for a worker’s earnings but for the entire economy.

Why we subsidise arts majors - ALEX TABARROK, a George Mason economist and blogger at Marginal Revolution, notes that though many more young Americans, about 50% more, now go to college than did 25 years ago, the number of students studying science, engineering, technology, or mathematics has not increased. So, Mr Tabarrok asks, "If students aren’t studying science, technology, engineering and math, what are they studying?" They are studying interesting and enjoyable fields, it turns out. Mr Tabarrok reports, with no little dread: In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.    As a consequence, Mr Tabarrok thinks that "the taxpayers who foot the bill for these subsidies" are being ill used. Growth-enhancing disruptive innovation doesn't come from villanelles! I think Mr Tabarrok gets a good deal wrong here. Let me begin my critique with full disclosure: I attended a state university in Iowa on a full-tuition scholarship specifically for art majors.

College has been oversold - Educated people have higher wages and lower unemployment rates than the less educated so why are college students at Occupy Wall Street protests around the country demanding forgiveness for crushing student debt? The sluggish economy is tough on everyone but the students are also learning a hard lesson, going to college is not enough. You also have to study the right subjects. And American students are not studying the fields with the greatest economic potential. Over the past 25 years the total number of students in college has increased by about 50 percent. But the number of students graduating with degrees in science, technology, engineering and math (the so-called STEM fields) has remained more or less constant. Moreover, many of today’s STEM graduates are foreign born and are taking their knowledge and skills back to their native countries. Consider computer technology. In 2009 the U.S. graduated 37,994 students with bachelor’s degrees in computer and information science. This is not bad, but we graduated more students with computer science degrees 25 years ago!  In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

College Is Cheaper Than You Think - The College Board released its annual report on the cost of college last week, and guess what? It’s going up. Again. Cue the headlines: “College Costs Reach New Highs”; “Public College Costs Surge 8.3 Percent”; “College Tuition Is Out of Control.. What has been buried in much of the resulting coverage is that while colleges’ published tuition and fees have indeed increased, these so-called “sticker prices” are not all that informative. For the average full-time student, net tuition – which subtracts grants and tax-based aid – is less than half of the published price at private nonprofit four-year schools and less than a third of the published price at the typical public four-year institution. Moreover, trends in sticker prices and net prices have diverged over the past several years, such that many students are actually paying less now to attend college than they would have five years ago.

Un-preparing the future with the higher education bubble –  For-profits now account for nearly 10 percent of all undergraduate enrollment when in 1997-98 they accounted for 3 percent.  The higher education bubble only continues to spiral out of control because the profits are so good for the massive banking industry that is pushing student loan debt to the trillion dollar level.  At the same time the return on investment in education has been slowly diluted as more for-profit degrees enter the market place and water down what it once meant to have a bachelor’s degree.  If you can get what is the equivalent to a piece of paper and claim you have an education then the marketplace is going to add more scrutiny to those that graduate.  On a bigger scale is the fact that our country is largely run by gambling bankers that are exploiting the population in every facet from housing, education, and even healthcare.  Our financial system is a predatory mess and this can be seen in the form of the higher education bubble.  What is more troubling is the subject areas students are studying in and the amount of debt they are going into for these degrees.

Harvard Students Plan Walk-Out Of Greg Mankiw's Economics Class To Show Solidarity With Occupy Movement - Harvard students are planning to walk out of economist Gregory Mankiw's Econ 10 class on Wednesday to show solidarity with the Occupy Movement, according to an email sent to students. Mankiw, chairman of the Council of Economic Advisers under President George W. Bush and the author of a leading economics textbook, has been less-than-supportive of the Occupy Wall Street protests on his blog — and the email cites his "biased instruction matter" as a reason for the walk-out. So far the Facebook event for the walk-out has just 35 "yes" RSVPs. Read the full email below: Feel upset about EC10 but don’t know how to show your discontent? Want to get involved in the Occupy Movement? Join our STUDENT WALK-OUT of EC10 on Wednesday, November 2nd at 12:15! Gregory Mankiw will be lecturing, and this a great opportunity to show discontent with the style/material/content of the class! We will be heading over to the higher ed march after the walk-out and anyone is welcome. So help show solidarity with the Occupy movement by walking out of EC10 at EXACTLY 12:15. This is later than the general walk-out, but we are making an exception because it is such a symbolic class/instructor. Let’s show Mankiw that his lack of teaching, extremely high textbook cost, and biased instruction matter to the students!

Occupy Greg Mankiw! - It seems that there has been a bit of a kerfuffle at Harvard over Greg Mankiw’s introductory economics course, culminating in a walkout by a number of the students. The Harvard Crimson gravely pronounces that “Protesting a class’s ideology damages free academic discourse.” Even so, the protesters have missed an opportunity. They were not only complaining about the ideological content of Professor Mankiw’s course, but about the high price of his textbook (which he himself has authored, and requires students to buy at $175 a pop). But surely (as I’ve argued here before), the two go together. Greg Mankiw’s book tells us about the evils of monopoly and monopoly pricing. Greg Mankiw exercises a monopoly on required texts for Econ 10. Greg Mankiw’s book tell us about the manifold problems of central planning, in which one hierarchical figure decrees what everyone else should buy. Greg Mankiw – as the hierarchical planner for his course, decides that everyone is obliged to buy his book (and declines to donate the royalties from this captive market to charity).

Steve Keen: Harvard Starts its Own PAECON Against Mankiw - Several correspondents have just told me that some of Greg Mankiw’s students at Harvard are staging a walkout from his first year class. They’ve written an open letter to Mankiw to explain why: I applaud them for this move. Mankiw’s various economics texts are among the most simplistic of the many neoclassical textbooks that parade this flawed paradigm as a flawless jewel of human reasoning. I’m delighted that his students have taken the rebellion against this paradigm to one of its key promulgators. I did likewise forty years ago–against far less well-known advocates of neoclassicism. At the time, I probably knew as much as these students do today of the enormous literature that establishes how fallacious neoclassical theory is, and which of course neoclassical texts like Mankiw’s completely ignore.

Little Help For America's Debt Slaves- The economy sucks and young college grads can't find good paying jobs because they don't exist. Consequently these young debt slaves are having trouble paying off their student loans. We are only 12 months away from yet another meaningless presidential election, so Hopey-Changey has a new slogan We Can't Wait.  He is running against the Do Nothing Republicans in Congress. One of the things we can't wait for is loan repayment relief. Congress passed a bill which stipulated new rules for repaying federally funded student loans. It was going to take effect in 2014, but the President has (through executive order) mandated that it will apply next year. In this misleading National Propaganda Radio story Obama Lends Loan Relief To Current Students, Mark Kantrowitz of and explains the changes. Congress passed a change that would go into effect on July 1, 2014 that would reduce the monthly payment by a third, from 15 percent to 10 percent, and push up the forgiveness from 25 years to 20 years. President Obama is pushing this change forward by two years so that it'll be available to students who borrow loans next year.

How the 99 Percent Really Lost Out – in Far Greater Ways Than the Occupy Protesters Imagine - The biggest "theft" by the 1 percent has been of the primary source of wealth - knowledge - for its own benefit. Knowledge? Yes, of course, and increasingly so. The fact is, most of what we call wealth is now known to be overwhelmingly the product of technical, scientific and other knowledge - and most of this innovation derives from socially inherited knowledge, at that. Which means that, except for trivial amounts, it was simply not created by the 1 percent who enjoy the lion's share of its benefits. Most of it was created, historically, by society - which is to say, minimally, the other 99 percent. Take a simple example: Many of the advances that have propelled our high-tech economy in recent decades grew directly out of research programs financed and, often, collaboratively developed, by the federal government and paid for by the taxpayer. The Internet, to take the most well-known example, began as a government defense project, the Advanced Research Projects Agency Network (ARPANET), in the 1960s. Today's vast software industry rests on a foundation of computer language and operating hardware developed, in large part, with public support. The Bill Gateses of the world might still be working with vacuum tubes and punch cards were it not for critical research and technology programs created or financed by the federal government after World War II.

Illinois lawmakers yet to tackle $85B pension debt -- Illinois lawmakers are hustling to close loopholes in government pension plans to prevent abuses. They've already passed laws changing retirement provisions for future employees. But so far this fall, they've been almost silent on a much bigger challenge: reducing the state retirement systems' massive $85 billion unfunded liability, by far the government's largest unpaid bill. Warning that the problem could soon grow too big for the state to remedy, legislative leaders introduced a proposal last spring to change future pension benefits for current employees but then withdrew it amid intense opposition from unions. Tax watchdog groups say it's the only way to make sure the state can keep its promises to retirees; state workers say it would violate the constitution and spark political and legal battles. Now the question is whether lawmakers are ready to force the matter, or whether they'll delay it again.

 Social Security Isn’t ‘Cash Negative’ – We Are -A Washington Post-Bloomberg special report offers an alarming assessment of Social Security. Liberal economists argue that it’s bunk.Under the headline “The debt fallout: How Social Security went ‘cash negative’ earlier than expected,” Lori Montgomery explains: Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went “cash negative.” For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s. Dean Baker of the Center for Economic and Policy Research is incensed that WaPo would run “a lead front page story that would have been excluded from most opinion pages because of all the inaccuracies it contained.”The basic premise of the story, as expressed in the headline (“the debt fallout: how Social Security went ‘cash negative’ earlier than expected”) and the first paragraph is that Social Security faces some sort of crisis because it is paying out more in benefits than it collects in taxes.

Inflation Adjustments Fall Short for Social Security - Annual cost of living adjustments for Social Security are falling short, reducing the real level of benefits paid out to retired Americans, research from the Federal Reserve Bank of Chicago argues. What’s worse, strategies to close this gap are expensive and politically challenging in a time where the government is looking to trim back massive deficits, the paper argues. The new report looked at a range of annual inflation adjustments for various government benefits programs and determined how effective they are at offsetting rising inflation. The adjustment applied to Social Security is among the most important given the size of that program, amid a widespread view that payments under the program are losing ground to inflation. The found that perception is close to reality when it comes to Social Security. They note there has been high inflation in the things retirees are most likely to spend their money on, and write that “given the gap between inflation experienced by the elderly and the social security [cost of living adjustment], the elderly have experienced a decline in their ability to purchase” the goods and services they want and need.. Somewhat remarkably, there was no COLA adjustment in 2010 and 2011 because the CPI didn’t increase enough to merit one.

Wisconsin won’t see federal Medicaid refund - Wisconsin’s poor-and-elderly might face even more cuts in their Medicaid health programs. That’s after the federal government said it would not give the state $45 million it overpaid Washington due to previous federal mistakes in carrying out disability programs. US Health and Human Services Secretary Kathleen Sebelius said she did not have the legal authority to pay it back. But Wisconsin and other states were counting on that money to help eliminate big shortfalls in their Medicaid budgets. Sebelius says it’s possible that Congress could provide funding to fix the mistakes. Robin Vos, co-chair of the legislature’s finance committee, says officials should ask the state’s congressional delegation to push for that money. Otherwise, the state might have to cut even more Medicaid benefits.

Medicare to slash doctors' pay unless Congress acts - It's become a regular exercise in budget brinksmanship. Medicare is again warning that doctors face draconian pay cuts on Jan. 1 unless Congress acts. Officials said Tuesday it works out to a 27.4% cut. No one expects lawmakers to allow the ax to fall, but 48 million beneficiaries and their doctors are looking on nervously. Temporary reprieves have created a recurring problem that gets harder and harder to fix. A 1990s budget law called for automatic cuts to doctors if Medicare costs kept rising. Congress has issued so many waivers that a permanent fix would now cost more than $300 billion over 10 years. A nonpartisan panel advising lawmakers recommends a 10-year freeze for primary care doctors and cuts followed by a freeze for specialists. Doctors aren't buying that.

The Depreciation of Care at Home - Medicare pays for many expensive medical procedures that don’t significantly prolong life, but does not cover the costs of custodial care for patients with diseases that can’t be medically treated, such as Alzheimer’s or dementia. Medicaid is far more likely to pay for nursing home care for the indigent elderly than to pay for home- and community-based services that would enable them to remain in their own homes. While some states do far better than others in this regard, at least 25 states and the District of Columbia cut spending on such services between 2007 and 2010. Plans to offer families affordable long-term care insurance — whose benefits would include stipends for family members providing care — were recently dropped from President Obama’s health care plan. Paid workers who care for individuals needing assistance in their own homes are not guaranteed a federal minimum wage or overtime protections because they are not covered by the Fair Labor Standards Act. All these policies take for granted family care, and forms of paid work that resemble family care, assuming that they don’t merit public support or regulation. Yet the aging of the population means that the demand for home-care services is growing even as the supply of young people shrinks.

Monday Map: Soda Taxes by State - Today's Monday Map, showing the current state of soda taxation by state, comes from our most recent report, "Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy" by Scott Drenkard.Click on the map to enlarge it.

Sugar doesn’t cause hyperactivity -  Let’s cut to the chase: sugar doesn’t make kids hyper. There have been at least twelve trials of various diets investigating different levels of sugar in children’s diets. That’s more studies than are often done on drugs. None of them detected any differences in behavior between children who had eaten sugar and those who hadn’t. These studies included sugar from candy, chocolate, and natural sources. Some of them were short-term, and some of them were long term. Some of them focused on children with ADHD. Some of them even included only children who were considered “sensitive” to sugar. In all of them, children did not behave differently after eating something full of sugar or something sugar-free…. In my favorite of these studies, children were divided into two groups. All of them were given a sugar-free beverage to drink. But half the parents were told that their child had just had a drink with sugar. Then, all of the parents were told to grade their children’s behavior. Not surprisingly, the parents of children who thought their children had drunk a ton of sugar rated their children as significantly more hyperactive. This myth is entirely in parents’ heads. We see it because we believe it.

Poll: Charge smokers more for health insurance, but not the overweight -  An NPR-Thompson Reuters Health Poll, which asks whether those who smoke and are overweight should be charged more for health insurance, turns up some interesting results: A solid majority — 59 percent — say that smokers should pay more for health insurance than nonsmokers. Nearly three-quarters of people in households with an annual income of $100,000 or more a year say smokers should pay more. Seventy percent of those with at least a college degree support higher rates for smokers.How do the smokers feel? Slightly less than a third of them support higher fees for health insurance.Americans aren’t too keen on higher charges for people who are overweight or obese. Some 69 percent are opposed to that, leaving 31 percent in favor. People with at least a college degree and those living in $100,000-plus households were more likely to support a penalty. But the majority in all groups opposed higher fees for the overweight.

U.S. deaths from painkiller overdose surge to record Kill more than cocaine, heroin combined  - Nearly 15,000 Americans died from an overdose of prescription painkillers in 2008, a record rate that has outstripped fatalities from illegal drugs like cocaine and heroin combined, U.S. health officials said on Tuesday. The Centers for Disease Control and Prevention estimated that as of last year 12 million Americans were using prescription opioid or narcotic pain relievers, such as Vicodin, OxyContin and methadone, for the high they cause instead of their true medical purpose, or without a legitimate prescription. Many get the drugs by eliciting prescriptions from several doctors, also known as "doctor shopping," or through so-called "pill mills," prescription forgery rings and illegal online pharmacies. The amount of painkillers made available at U.S. pharmacies, hospitals and doctors' offices quadrupled from 1999 to 2010, contributing to the overdose death rate that more than tripled over the decade.

Vitals: Half of hospital rooms rife with drug-resistant bug, study finds - Nearly half of hospital rooms of patients infected with drug-resistant strains of Acinetobacter baumannii are contaminated with the bacteria, a small new survey shows. Surfaces such as bedrails, drawer handles and touchpads are particularly prone to harboring the germ. That could pose big problems for hospital staff and future patients if existing cleaning practices don’t get rid of one of the top 10 germs responsible for serious health care-acquired infections, said Dr. Kerri A. Thom, an infectious disease specialist at the University of Maryland School of Medicine in Baltimore. “Fairly frequently we find these important pathogens are inhabiting these high-touch surfaces,” said Thom, noting that previous studies have detected surface contamination with bugs responsible for worrisome MRSA and Clostridium difficile infections. “This does reflect a potential source of transmission of bacteria from one patient to the next.”

The most dangerous school in Los Altos - The first thing to say about this tragic chart is that both Los Altos city and Santa Clara county have extremely low immunization rates. The right level of immunization is 100%, and rates of 90% or 94% are very dangerous indeed. But 23% is positively evil. This is a very dangerous level of immunization–the level where herd immunity gets lost, disease reservoirs are established, and children emerge from their school to infect infants, immunocompromised adults, and people whose vaccinations didn’t take or have waned, with potentially fatal diseases.

Brain DNA 'changes through life'  - Researchers from The Roslin Institute at the University of Edinburgh have found brain cells alter their genetic make-up during a person's lifetime. They have identified genes - known as retrotransposons - responsible for thousands of tiny changes in the DNA of brain tissue. Researchers, whose work is published in the journal Nature, found that the genes were particularly active in areas of the brain linked to cell renewal. By mapping the locations of these genes in the human genome, scientists could identify mutations that impact on brain function and that may cause diseases to develop. The study shows for the first time that brain cells are genetically different to other cells in the body and are also genetically distinct from each other.

FDA approves implanted RFID chip for humans - In the category of unbelievably bad ideas that we all knew were making their way toward reality whether we like it or not comes the news the FDA has just approved VeriChip's implantable RFID chips for use in humans. These are the same chips that we're currently using to identify our pets. VeriChip is touting the chips' medical applications, as a way of potentially saving lives by storing medical data.  Silently and invisibly, the dormant chip stores a code — similar to the identifying UPC code on products sold in retail stores — that releases patient-specific information when a scanner passes over the chip.

Concerns Are Raised About Genetically Engineered Mosquitoes - These mosquitoes are genetically engineered to kill — their own children.  Researchers on Sunday reported initial signs of success from the first release into the environment of mosquitoes engineered to pass a lethal gene to their offspring, killing them before they reach adulthood. The results, and other work elsewhere, could herald an age in which genetically modified insects will be used to help control agricultural pests and insect-borne diseases like dengue fever and malaria.  But the research is arousing concern about possible unintended effects on public health and the environment, because once genetically modified insects are released, they cannot be recalled.  Authorities in the Florida Keys, which in 2009 experienced its first cases of dengue fever in decades, hope to conduct an open-air test of the modified mosquitoes as early as December, pending approval from the Agriculture Department.  “It’s a more ecologically friendly way to control mosquitoes than spraying insecticides,” The Agriculture Department, meanwhile, is looking at using genetic engineering to help control farm pests like the Mediterranean fruit fly, or medfly, and the cotton-munching pink bollworm, according to an environmental impact statement2 it published in 2008.

Rice Is Genetically Modified to Produce Human Blood Protein - You can’t squeeze blood from a turnip, but it might be possible to extract it from rice. Blood protein, at least. Genetically modified brown rice seeds can produce a cost-effective and easily stored supply of human serum albumin, researchers in China report.  HSA is important for treatment of a wide array of maladies, including severe burns, liver cirrhosis and hemorrhagic shock, and it’s a key ingredient in drug and vaccine tests. But its primary source is donated human plasma, so it is in short supply around the world — not least in China, which even saw reports of fake albumin for sale after a price spike four years ago. Hoping to come up with an artificial supply, previous researchers have attempted to draw human blood protein from potatoes, tobacco leaves and genetically engineered mouse milk. But grains would be more efficient, according to researchers led by Yang He and Daichang Yang at Wuhan University in China.

“Deadly Monopolies”: Medical Ethicist Harriet Washington on How Firms are Taking Over Life Itself - video - One of the major themes raised by the Occupy movement is the increasing power of large corporations over more and more aspects of our lives. We spend the hour looking into the issue of the corporate control of life itself. Our guest, Harriet Washington, is a medical ethicist and has just published a book that examines the extent to which what she calls the medical-industrial complex has come to control human life. In the past 30 years, more than 40,000 patents have been granted on genes alone—many more patents are pending. Washington argues that the biotechnology and pharmaceutical companies patenting these genes are more concerned with profit than with the health or medical needs of patients. Her new book is called "Deadly Monopolies: The Shocking Corporate Takeover of Life Itself—And the Consequences for Your Health and Our Medical Future." [includes rush transcript]

Tilburg professor faked data in at least 30 academic publications - Tilburg and Groningen universities are to take legal action against one of their professors after an investigation showed he had faked research data in at least 30 scientific papers.  The fraud is ‘considerable and shocking’, the committee set up to look into Diederik Stapel’s academic publications said in an initial report into the scandal on Monday. Stapel, who was a professor of social and behavioural sciences at Tilburg, was suspended last month after doubts emerged about research that concluded eating meat makes people anti-social and selfish. The investigation shows at least 30 academic papers submitted to respected scientific journals contained data that he had invented and there are doubts about several dozen more, the committee said.

The Era of Small and Many - For 150 years the number of farms in America has inexorably declined. In my state—the most rural in the nation—the number of dairies fell from 11,000 at the end of World War II to 998 this summer. And of course the farms that remained grew ever larger—factory farms, we called them, growing commodity food. Here in Vermont most of the remaining dairies are big, but not big enough to compete with the behemoths in California or Arizona; they operate so close to the margin that they can’t afford to hire local workers and instead import illegal migrants from Mexico.  But last year the USDA reported that the number of farms in America had actually increased for the first time in a century and a half. The most defining American demographic trend—the shift that had taken us from a nation of 50 percent farmers to less than 1 percent—had bottomed out and reversed. Farms are on the increase—small farms, mostly growing food for their neighbors. They’re not yet a threat to the profits of the Cargills and the ADMs, but you can see the emerging structure of a new agriculture composed of CSAs and farmers’ markets, with fewer middlemen. Which is all for the good. Such farming uses less energy and produces better food; it’s easier on the land; it offers rural communities a way out of terminal decline.

How the Supercommittee Could Kill New Farmers Markets - Remember the farm bill, that monstrously complex, twice-a-decade omnibus legislation that shapes US agriculture and hunger policy? You know, the one that Michael Pollan and other sustainable foodies wrote so much about four years ago? Well, it's back, earlier than expected (the last one doesn't expire until 2012). And it has found itself caught in the crosshairs of DC budget hysteria—in a way that will likely reinforce the worst, most agribiz-friendly elements of US ag policy and defund the best parts, including programs that help farmers transition to organic and help communities start new farmers markets. What gives? In a story two weeks ago, Politico's David Rogers laid out what's going on. The House and Senate ag committees have created a joint panel of four who are working furiously to do in a matter of days what usually takes more than a year: craft national food and farm policy for the next half-decade. They want to get it done in time to submit it to the budget-slashing "supercommittee," whose work is scheduled to be done by Nov. 23. The ag panel seeks to cut farm bill spending by $23 billion over the next 10 years, Rogers reported. The panel hasn't submitted its proposal to the supercommittee yet—it's expected to do so early this week—but Rogers wrote that broad outlines have emerged:

Company Aims to Make Better Biofuel Crops - An agricultural company spun out of biotechnology powerhouse Synthetic Genomics will develop higher-yield biofuel crops. It will also develop combinations of microbes designed to supplement chemical fertilizers and pesticides used in corn and wheat production. Called Agradis, the San Diego-based startup was formed with the Mexican investment firm Plenus. The company announced last week that it has raised $20 million in series A funding. Half the company's efforts will go to developing two promising biofuel crops, sweet sorghum and castor plants, says J. Craig Venter, CEO of Synthetic Genomics, who will serve as chairman of Agradis. "We're looking for fuel crops that don't need prime growing conditions," and that won't compete with food crops for land, says Venter. The company will develop higher-yielding varieties of both plants using a combination of traditional plant breeding and genomics approaches, such as genetic engineering and genome sequencing.

How Ready Are We For Bioterrorism? - The specter of a biological attack is difficult for almost anyone to imagine. It makes of the most mundane object, death: a doorknob, a handshake, a breath can become poison. Like a nuclear bomb, the biological weapon threatens such a spectacle of horror — skin boiling with smallpox pustules, eyes blackened with anthrax lesions, the rotting bodies of bubonic plagues — that it can seem the province of fantasy or nightmare or, worse, political manipulation. Yet biological weapons are as old as war itself. The ancient Hittites marched victims of plague into the cities of their enemies; Herodotus described archers’ firing arrows tipped with manure. By the 20th century, nearly every major nation developed, produced and in some cases used a panoply of biological weapons, including anthrax, plague, typhoid and glanders.  A decade after the 9/11 attacks, it is easy to forget the anthrax letters that sprang up just a few weeks later and to dismiss the fear that swept the country as a relic of a fragile moment that already belongs to history. But in the wake of those events, many national-security experts began to reconsider the risk of a biological attack — and reached some unsettling conclusions.   “What took me three weeks in a sophisticated laboratory in a top-tier medical school 20 years ago, with millions of dollars in equipment, can essentially be done by a relatively unsophisticated technician,”

Life in drought: Parched Texas town seeks emergency fix - No one drinks the tap water, which is unbearably briny as the lake dries up. After one of the hottest summers on record, the lake that is the lone water supply and main recreational draw in this tiny West Texas town is more than 99 percent empty. Robert Lee, which is a two-hour drive east of Midland, has received only about six inches of rainfall this year, half the normal amount. It is the worst water stitch the town has been in at least since the lake, E.V. Spence Reservoir, was created in the 1960s by damming a portion of the Colorado River. More water is on the way, but it will only be enough to meet the basic needs of the town of 1,049 and will come at the expense of yet another sizable water rate increase. Residents are looking forward to improved palatability and a more stable supply because Spence -- which is usually 21 times the size of the entire area of Robert Lee, but now not much bigger than a pond -- withers away.

Catastrophic $5.3 Billion Texas Drought Hits Global Cotton, Beef, Peanut Butter and Even Pumpkin Market - In August, agronomists showed that the historic drought in Texas had caused a stunning $5.3 billion in losses in the agricultural sector. Two months later, even with some rain finally coming to the state, Texas farmers are being crippled by a drought that could stretch beyond next summer. As the economic losses pile up, they are having an impact on global commodities like cotton and beef — stretching this crisis well beyond the state of Texas, and showing just how “global” the problem of global warming truly is. Kate Galbraith reported on the “catastrophic drought” for the New York Times: Some of the farthest-reaching effects may be on world cotton markets. Texas produces about 50 percent of U.S. cotton, and the United States in turn grows between 18 and 25 percent of the world’s cotton, This year, however, yields even from irrigated crops have fallen about 60 percent on the high plains where the bulk of Texas’s cotton crop grows, Mr. Hudson said. Farmers have given up on their “dry-land,” or unirrigated, cotton crops. And it’s not just cotton. A terrible peanut crop will soon result in significantly higher costs for peanut-butter products; pumpkin prices have also spiked due to a shortage from Texas; and beef prices are likely to rise due to the crisis:

Meat Prices Continue Their Bull Run - Here's food for thought: Despite being fed a steady diet of conflicting news about the global economy, consumers around the world are still tucking into pricey steaks and juicy pork chops with gusto. U.S. exports of beef and pork are on pace to set records this year, and domestic demand is rebounding with surprising strength, indicating that slower growth world-wide and high unemployment at home haven't choked off appetites for some everyday luxuries. Those consumer cravings have helped keep livestock futures consistently high this year, even as other commodities' prices have swung wildly. They have also pushed up domestic retail prices for many beef and pork products in recent years. The average price for sliced bacon in September was $4.82 a pound, up 34% from two years earlier, while uncooked beef roasts cost $4.52 a pound, up 15% over the same period, according to government figures. Live cattle prices are up 13% this year in Chicago futures trading, making cattle among the few widely traded commodities besides gold to be up by double digits. Lean hogs futures are up 9% this year. Both meat contracts also jumped in 2010, climbing 26% and 22%, respectively

Study: Most U.S. forests not adapting to climate change - More than half of Eastern U.S. tree species are not adapting to climate change as quickly or consistently as predicted, posing risks for their survival, says a new Duke University-led study. Previous climate models had predicted that trees would migrate to higher latitudes and elevations as temperatures warm but such a northward migration is not happening, according to the study that analyzed decades of data from the U.S. Forest Service. The scientists examined 92 tree species at 43,334 forest plots in 31 states. Nearly 59% percent of the species showed signs that their geographic ranges were contracting from both north and south, and only 21% appeared to be shifting northward as predicted, the study finds. About 16% seemed to be advancing southward, and 4% appeared to be expanding in both directions.

Kansas home weatherization funds diverted to bio-fuels industry - Kansas lost more than a thousand jobs and the chance to weatherize thousands of homes, thanks to a state-run loan program that rolled out too slowly.  When it looked as if the state couldn’t meet a federal deadline, more than $20 million meant for weatherization loans went to a company and a nonprofit in the biofuels industry. “This was something that was available that was going to benefit so many Kansans,”  The Kansas Corporation Commission concedes the revolving loan program was too slow in getting traction, but some blame Gov. Sam Brownback for pulling the plug on the program too quickly this summer. “It was unfortunate because (the weatherization program) was a slow start but it was picking up steam,” Kuether said. “The idea was to help constituents lower their (utility) bills … and the rug was pulled out from under them.”

USA Export land model analysis for food energy production and consumption: Part 1 -  As discussed in the previous posts on this topic, the spreadsheets published by FAOSTAT report several food categories: gross Production (P), Imports (I), Stock Variation (SV), Exports (E), and the domestic food supply (DS). See the handbook for further details. The Human Food Supply, refers to the plant and animal food directly available for human consumption, that is, food actually consumed plus that thrown away by humans. Feed for animals and Seed for replanting are self explanatory. Processing refers to the "commodity in question used during the reference period for manufacture of processed commodities for which separate entries are provided in the food balance sheet either in the same or in another food group." Since processing is listed in the food balance tables as, processed, is a positive number, I take this as reflecting gains in food energy due to the food manufacturing process. The handbook defines Other Utilization as food consumed by tourists and for non-food purposes. Alright, with these definitions in mind, let get on with the data reported for the USA. All food energy units are expressed as Peta Joules per year (PJ/yr)

UN IPCC Panel says wild weather worsening - Freakish weather disasters — from the sudden October snowstorm in the Northeast U.S. to the record floods in Thailand — are striking more often. And global warming is likely to spawn more similar weather extremes at a huge cost, says a draft summary of an international climate report obtained by The Associated Press. The final draft of the report from a panel of the world's top climate scientists paints a wild future for a world already weary of weather catastrophes costing billions of dollars. The report says costs will rise and perhaps some locations will become "increasingly marginal as places to live." The report from the Nobel Prize-winning Intergovernmental Panel on Climate Change will be issued in a few weeks, after a meeting in Uganda. It says there is at least a 2-in-3 probability that climate extremes have already worsened because of man-made greenhouse gases. This marks a change in climate science from focusing on subtle changes in daily average temperatures to concentrating on the harder-to-analyze freak events that grab headlines, cause economic damage and kill people. The most recent bizarre weather extreme, the pre-Halloween snowstorm, is typical of the damage climate scientists warn will occur — but it's not typical of the events they tie to global warming.

The Climate, it is a-Changing - Yes, yes, yes, I know you're not supposed to attribute individual weather events to climate change. So noted. And if this weekend's unprecedented October snowstorm that struck the Northeast was the only unusual bout of weather we've had this year, I would shrug it off as an anomaly.  But 2011 has been a doozy of a year overall for unprecedented weather events. Just here in the U.S., off the top of my head, we've had the haboob dust storms in Arizona, the record breaking heat wave and wild fires in Texas, the monster tornadoes in Joplin and Tuscaloosa, the snow melt floods in the Midwest, Hurricane Irene drowning Vermont, and the 1000-year rainstorm we got here in Virginia. And now this. Just how unprecedented was this latest bout of wacky weather? Here is the Weather Channel with the details:

Greenland Glacial Melt Cycle Could Become Self-Amplifying, Making it Difficult to Halt - The Greenland ice sheet can experience extreme melting even when temperatures don’t hit record highs, according to a new analysis by Dr. Marco Tedesco, assistant professor in the Department of Earth and Atmospheric Sciences at The City College of New York.  His findings suggest that glaciers could undergo a self-amplifying cycle of melting and warming that would be difficult to halt. “We are finding that even if you don’t have record-breaking highs, as long as warm temperatures persist you can get record-breaking melting because of positive feedback mechanisms,”  Professor Tedesco and his team collected data for the analysis this past summer during a four-week expedition to the Jakobshavn Isbræ glacier in western Greenland. Their arrival preceded the onset of the melt season. Combining data gathered on the ground with microwave satellite recordings and the output from a model of the ice sheet, he and graduate student Patrick Alexander found a near-record loss of snow and ice this year. The extensive melting continued even without last year’s record highs.

Alaska Dispatch: Much of the world's ice may soon disappear for good, triggering a global climate regime that humans have never experienced as a species [the no-analogue world]. Today's 390 ppm the highest CO2 concentrations seen on Earth in about 15 million years - Much of the world's ice may soon disappear for good, triggering a global climate regime that humans have never experienced as a species. The long-running era of glaciers — meaning the Pleistocene ice age that has periodically covered North America and Alaska with vast sheets during the past 2.5 million years — may be ebbing to its final close, according to a new analysis out of Poland. The inexorable rise in greenhouse gases, and the warming that will come before the end of the century as a result, will likely suspend the “glaciation/interglaciation cycles” that have controlled the planet’s climate for millennia, writes scientistWojciech Budzianowski of Wrocław University of Technology in theInternational Journal of Global Warming. “A new analysis of climate change data and the effects of rising levels of the greenhouse gas carbon dioxides suggests that we are at the end of the period in Earth's history during which icy glaciers form,” according to this story.

Stunning Peatlands Amplifying Feedback: Drying Wetlands and Intensifying Wildfires Boost Carbon Release Ninefold -  The most dangerous amplifying carbon-cycle feedback we face in the near term is, I believe, the thawing northern tundra.  It is poised to turn the Arctic from a carbon sink to source in the 2020s, releasing 100 billion tons of carbon by 2100, according to a 2011 study.  But there are a host of other very serious amplifying feedbacks — or vicious circles — whereby an initial warming leads to changes that cause more emissions, which in turn lead to more warming (see partial list at end).  One of those involves the drying of the peatlands. Most of the world’s wetlands are peat, which are better known as bogs, moors, mires, and swamp forests. Wikipedia notes, “Under the proper conditions, peat is the earliest stage in the formation of coal.” Here’s why peatlands contain so much carbon: Peat is the accumulation of partially decayed vegetation in very wet places and it covers about two percent of global land mass. Peatlands store large amounts of carbon owing to the low rates of carbon breakdown in cold, waterlogged soils.

The Disappearing Island - Tangier Island lies in the middle of the Chesapeake Bay and is 92 miles (148km) southeast of Washington, DC. This small piece of land is barely above sea level and its 500 residents are fighting for its survival. First settled in 1686, the island at times had over 1,200 residents and during the War of 1812 it served as a staging area for British soldiers.  Now fishing restrictions, erosion and rising sea levels have resulted in most of the younger members of this tightly knit community looking for opportunities elsewhere. The BBC's Franz Strasser went to Tangier Island to see how the remaining islanders are coping with a difficult future.

Climate Change and the Developing World - The United Nations Development Program delivered some dire news Wednesday in its annual Human Development Report. By midcentury, it said, the development progress of the poorest countries will be halted or even reversed if bold steps are not taken to forestall the effects of climate change.“The poorest countries’ really remarkable and often overlooked progress in recent decades now faces this calamity down the road,”  “If their progress is stopped because we developed countries didn’t do things that we could have, it adds a huge moral imperative to take action sooner rather than later on climate change.” The study tracks 187 countries and territories in the U.N.’s human development index, which is based on composite measurements of health, education and income, and has tracked global living standards since 1990. From 1970 to 2010, countries in the lowest 25 percent of the rankings improved their scores by a striking 82 percent, twice the global average. If this pace of improvement continues over the next 40 years, the report says, most of these countries would achieve standards equal to or better than those now enjoyed by the top 25 percent.But models of future scenarios cast doubt that this progress will come to pass.

Global Warming: Middle East’s Vital Wet Winters are Disappearing - Winter droughts have become increasingly common in the Mediterranean region, particularly over the past 20 years, and a new study finds that global warming has driven at least half of the change.Drought conditions in this politically explosive region are expected to grow more severe over the course of the century unless countries begin to significantly reduce their emissions of heat-trapping greenhouse gases, particularly carbon dioxide, many researchers say. Those emissions come from burning fossil fuels, as well as from land-use changes.

Megacities - The idea of a megacity derives from “megalopolis”, a pejorative term coined in 1918 by Oswald Spengler, the German historian. He was describing cities that had grown too large and were edging towards decline. Jean Gottmann, a French geographer, used the term more positively in the 1950s to refer to the metropolitan corridor along America’s eastern seaboard. Now, the concept has changed again to mean massive agglomerations, mostly in the developing world.  In truth, more of the world’s population is moving to second-tier cities than to the megacities. But huge conurbations have a symbolic potency. For some, they represent a brave new world in which Chinese, Indians, Brazilians and others in the developing world are clambering from poverty. For others, the megacity is nothing less than a nightmare.  The urban shift of humanity, whose number topped 7bn in October, is inexorable. In 2008, for the first time in human history, more people were living in cities than in the countryside. By this measure, Asia, where only 40 per cent of people are urban, is behind. Much of Asia’s city-building lies ahead.

How 10 Billion Will Live -  Next week, according to United Nations projections, the world will pass 7 billion in population1, and by the end of this century it’s likely to grow by half again to 10 billion2. What will determine their quality of life? From an economist’s view, what matters is the productivity of the 10 billion—will they be educated and have jobs that contribute to economic growth? From a sociologist’s view, what matters is whether the 10 billion are socialized into stable roles in society—can they build families and join communities where they have dignity and focus on building for the future? From a political scientist’s view, what matters is the quality of government in countries where most of the 10 billion will live—will those governments avoid corruption, enforce the rule of law, and protect participation and civil rights? At present, the prospects are not bright. While most of the world’s capital, managerial experience, and engineering expertise is concentrated3 in the high-income and emerging economies of Europe, China, North America, Japan, and the Asian Tigers, none of those countries will be significant contributors to future population growth.

Energy from Waste: A Waste of Time or a Genuine Energy Solution? - How many times have you heard it: if we could tap into the energy embedded in our copious waste streams, we could usher in a new era of energy independence—freeing ourselves of the need to support oppressive regimes who happen to sit atop the bulk of the oil reserves in the world. In fact, these sorts of claims are abundant enough to give the impression that we have a cornucopia of fresh (and sometimes not so fresh) energy solutions to pursue if we got really serious. This is a hasty and dangerous conclusion, so in this case, waste makes haste. I consider this perceived abundance of technological solutions to be one of our worst enemies in developing sensible solutions to the coming fossil fuel energy crunch. If ideas abound, each claiming some ability to free us of foreign oil, then surely we’ve got the situation under control and don’t need to invest substantial time and energy today to solve what looks like a non-problem of tomorrow. But what if the claims are overblown, hyped, or just plain wrong? At best, this is irresponsible behavior. At worst, the resulting sense of complacency could delay substantive action to our ruin.

Make energy policy about energy, not jobs - STRANGE, isn't it, that the unemployment rate in America is so high, given that you can't go ten minutes without someone collaring you to tell you how many jobs they're fixing to create in the energy sector. Barack Obama, slightly on the back foot after having failed to create as many "green jobs" as his campaign predicted last time around, nevertheless touts clean technology as a key component of his proposed American Jobs Act. Rick Perry claims that he will create 1.2m new jobs in the energy sector. Mitt Romney has actually put the figure a bit higher: nearly 1.5m. The left argues that they're actually not ambitious enough; the Center for American Progress, for example, hits Mr Romney for scoffing at the idea of "green jobs": 2.7m of them are "right in front of ya, Mitt." An e-mail drops in my inbox from a solar company, saying that five years ago you could fit the entire industry in a ballroom, and now solar employs 100,000 people in the United States. A billboard for oil and gas glibly promises several million new jobs, if America would just support the industry. People who support the controversial Keystone XL pipeline, which would ferry oil from the tar sands of Canada to the refineries of Texas, point out that building the pipeline would create 20,000 jobs, just like that. At the risk of being obvious: energy policy is not a jobs programme. Here are three reasons why politicians shouldn't try to create jobs through energy policy: it's ambiguous, it's inefficient, and, most importantly, it's undesirable.

Renewable Energy Being Held Back by Fossil Fuel Subsidies - IEA - Recent reports show a massive increase in coal dependency caused by fossil fuel subsidies to be addressed at World Climate Summit. According to the International Energy Agency's (IEA) latest findings, coal and oil subsidies pose the greatest challenge to the renewable energy market. As the world's largest exporter of coal, Australia's carbon emissions have grown nearly 300 percent since 1970, according to the IEA's last annual report on CO2 emissions. Worse, that percentage is regional, excluding the huge amounts of coal shipped overseas to some 20 dependent countries. The IEA blames electricity/heat generations and transportation as the major culprits of nearly two-thirds of carbon dioxide emissions. IEA's World Energy Outlook 2011 report, to be released in early November, the agency recommends a halt on fossil fuel subsidies to reduce emissions and encourage renewable energy development. In a recent interview with EurActiv, IEA chief economist Faith Birol said the current $409 billion equivalent of fossil fuel subsidies are only encouraging a wasteful use of energy.

The Promise and Problems of Pricing Carbon - Friday, October 21st was a significant day for climate change policy worldwide and for the use of market-based approaches to environmental protection, but it went largely unnoticed across the country and around the world, outside, that is, of the State of California.  On that day, the California Air Resources Board voted unanimously to adopt formally the nation’s most comprehensive cap-and-trade system, intended to provide financial incentives to firms to reduce the state’s greenhouse gas (GHG) emissions, notably carbon dioxide (CO2) emissions, to their 1990 level by the year 2020...  Compliance will begin in 2013, eventually covering 85% of the state’s emissions. This policy for the world’s eighth-largest economy is more ambitious than the much heralded (and much derided) Federal policy proposal – H.R. 2454, the Waxman-Markey bill – that was passed by the U.S. House of Representatives in June of 2009, and then died in the U.S. Senate the following year.  With a likely multi-year hiatus on significant climate policy action in Washington now in place, California’s system – which will probably link with similar cap-and-trade systems being developed in Ontario, Quebec, and possibly British Columbia – will itself become the focal point of what may evolve to be the “North American Climate Initiative.” ...

Report: Global carbon dioxide output soaring - The global output of heat-trapping carbon dioxide jumped by the biggest amount on record, the US department of energy has calculated, in a sign of how weak the world's efforts have been at slowing man-made global warming. The new figures for 2010 mean that levels of greenhouse gases are higher than the worst case scenario outlined by climate experts just four years ago. "The more we talk about the need to control emissions, the more they are growing," John Reilly, co-director of MIT's Joint Programme on the Science and Policy of Global Change, said. The world pumped about 564 million more tonnes of carbon into the air in 2010 than it did in 2009, an increase of six per cent.

"Monster" greenhouse gas levels seen - The global output of heat-trapping carbon dioxide jumped by the biggest amount on record, the U.S. Department of Energy calculated, a sign of how feeble the world's efforts are at slowing man-made global warming.  The new figures for 2010 mean that levels of greenhouse gases are higher than the worst case scenario outlined by climate experts just four years ago.  "The more we talk about the need to control emissions, the more they are growing," said John Reilly, co-director of MIT's Joint Program on the Science and Policy of Global Change.  The world pumped about 564 million more tons of carbon into the air in 2010 than it did in 2009. That's an increase of 6 percent. That amount of extra pollution eclipses the individual emissions of all but three countries - China, the United States and India, the world's top producers of greenhouse gases.  It is a "monster" increase that is unheard of, said Gregg Marland, a professor of geology at Appalachian State University, who has helped calculate Department of Energy figures in the past.

Biggest Jump Ever in Global Warming Pollution in 2010, Chinese CO2 Emissions Now Exceed U.S.’s By 50% - The global output of heat-trapping carbon dioxide jumped by the biggest amount on record, the U.S. Department of Energy calculated, a sign of how feeble the world's efforts are at slowing man-made global warming. The new figures for 2010 mean that levels of greenhouse gases are higher than the worst case scenario outlined by climate experts just four years ago."The more we talk about the need to control emissions, the more they are growing," said John Reilly, co-director of MIT's Joint Program on the Science and Policy of Global Change. The world pumped about 564 million more tons (512 million metric tons) of carbon into the air in 2010 than it did in 2009. That's an increase of 6 percent. That amount of extra pollution eclipses the individual emissions of all but three countries — China, the United States and India, the world's top producers of greenhouse gases.

China will phase out energy-draining light bulbs - China will phase out power-draining light bulbs within five years in a move to make the world’s biggest polluting nation more efficient but also certain to impact the global market. China will ban imports and sales of 100-watt-and-higher incandescent bulbs from Oct. 1, 2012, in an attempt to save energy and curb climate change, China’s main planning agency said Friday. Bans will also be imposed on 60-watt-and-higher bulbs from Oct. 1, 2014 and 15-watt-and-higher old-style bulbs from Oct. 1, 2016. The time frame of the last step may be adjusted according to an evaluation in September 2016, the National Development and Reform Commission statement said.

Thai Flooding Leads to Reduction in Work at US Honda Plants - Remember, only trying to mitigate climate change costs jobs. Keep telling yourself that. Parts shortages from three months of catastrophic flooding in Thailand have forced Honda to cut U.S. and Canadian factory production by 50 percent for the second time this year, the automaker said Monday. The cuts, which come just as Honda was recovering from the March 11 earthquake and tsunami in Japan, will run from Wednesday at least through Nov. 10 as Honda tries to find alternate sources for microprocessors that are made in Thailand. The flooding, which began in July and has forced many auto parts plants to close, also affected Toyota Motor Co., which cut overtime for production in North America through the end of this week. As this excerpt indicates, the last time that Honda and other automakers had to reduce or suspend production was because of the supply chain disruption over the spring in Japan, also due to a natural disaster, namely an earthquake and tsunami.

Thai ‘Credibility’ at Stake as Factories Soak -- Hana Microelectronics Pcl is among the thousands of Thai companies with factories swamped by record floods calling on the government to help ensure it never happens again as waters slowly recede north of Bangkok.  “Thailand’s credibility is on the line here,”. “A complete review of how to protect these industrial estates needs to be conducted and it needs government support.”  More than 9 billion cubic meters of water released this month from dams filled to capacity have swept down a river basin the size of Florida, inundating seven industrial parks that helped transform Thailand from an agriculture-based economy to a manufacturing hub since the first one was built four decades ago. The worst floods since 1942 have shuttered 10,000 factories, put 660,000 jobs at risk and caused damage of 140 billion baht ($4.6 billion), government figures show.  Factory owners are concerned the disaster may repeat itself as water defenses fail to keep pace with the development of roads, housing estates and business complexes in Bangkok and its vicinity, which accounts for about half of Thailand’s industrial output. Prime Minister Yingluck Shinawatra must now convince companies such as Honda Motor Co. and Canon Inc. that the flood plain remains a reliable production base.

Factor endowment theories of trade and investment The northern Scandinavian landscape is dotted with fjords, lingonberries and, if you believe some locals, elves. But another sight is increasingly common on the Arctic horizon: data centers. Drawn by the promise of lower electricity costs, a growing number of tech companies are harnessing the region’s abundant cold air to cool their servers, cutting expensive air-conditioning out of the equation. Facebook, the latest tech company to take the polar plunge, announced this week that it will build a data center just south of the Arctic Circle in Lulea, Sweden, where the average low in January is 3 degrees Fahrenheit.

Ammonia leak at San Onofre nuclear plant prompts emergency alert - An ammonia leak prompted officials to declare a Level-Two emergency at the San Onofre nuclear power plant and evacuate some workers, officials said. The leak posed no danger to the public, and no radiation was released during the emergency, said Lauren Bartlett, a spokeswoman for Southern California Edison. Under federal regulations, there are four emergency levels, depending on the severity of the situation. Level Two involves any  "potential substandard degradation in the level of safety of the plant."

“High concentrations” of radiation hit US and Canada — Plume was rich in Cesium-137 and “close to the surface” from Vancouver southward — See also Hawaii, Florida (MAPS)  -SOURCE: Xenon-133 and caesium-137 releases into the atmosphere from the Fukushima Dai-ichi nuclear power plant, Stohl, A., Seibert, P., Wotawa, G., Arnold, D., Burkhart, J. F., Eckhardt, S., Tapia, C., Vargas, A., and Yasunari, T. J., October 20, 2011 Here are some excerpts concerning North America [Emphasis Added]:

  • “Already on 15 March, a first isolated 133Xe cloud reached western North America, followed by the arrival of high concentrations of both 133Xe and 137Cs on 19 March.”
  • “The main part of the radioactive plume entered western North America on 17–18 March. On 18 March at 12:00UTC, the head of the plume had already arrived over the North Atlantic, but the main part was located over the eastern Pacific Ocean and western North America, where it could be detected at monitoring sites. This part of the plume was also rich in 137Cs, as it was still close to the surface south of 50 [Most of US/Canada border is 49°]. At the same time, the plume penetrated the subtropics and arrived at Hawaii on 19 March.”
  • “A map of the simulated surface concentrations of 133Xe for 22 March shows that all of western North America was engulfed by the FD-NPP plume, as well as parts of eastern North America and eastern  Asia.”

Japan radiation expert: Plutonium-238 from inside reactors went far from Fukushima after explosions — ‘Misleading’ media said it would stay close by

Radioactive Xenon Detected at Fukushima Nuclear Plant - Signs of nuclear fission at the crippled Fukushima atomic power plant have been discovered, raising the risk of increased radiation emissions, officials said Wednesday, suggesting one of its reactors might have a new problem. Officials from the Tokyo Electric Power Co., or TEPCO (which operates the plant), acknowledged that they had detected signs of the gas xenon, the potential by-product of a nuclear reaction, the Los Angeles Times reported. Boric acid was injected through a cooling pipe as a precautionary measure because it can counteract nuclear reactions. The Fukushima Daiichi plant was damaged during the massive tsunami triggered by a March 11 earthquake that struck the coastal region several hundred miles northeast of Tokyo. However, TEPCO officials said there was no rise in the reactor's temperature, pressure, or radiation levels.

30 years to decommission Fukushima nuke plant - Decommissioning the stricken reactors at the Fukushima No.1 nuclear power plant is likely to take 30 years or more, the government's Japan Atomic Energy Commission said in a provisional report released on Friday. The commission said that as the situation at the Fukushima plant is more complicated than the process at the United States' Three Mile Island Unit 2 reactor whose core was damaged in a massive accident in 1979. Removing fuel from the US reactor began six and a half years after the reactor melted down and took 10 years in all. The provisional report said that once a state known as "cold shutdown" has been achieved, which according to the plant's operator Tokyo Electric Power Co., will be at the end of this year, it will take in excess of 10 years to complete the process of decommissioning the plant. "We set a goal to start taking out the core debris within a 10- year period and it is estimated that it would take 30 years or more (after the cold shutdown) to finish decommissioning," the report said. However the utility, also known as TEPCO, has been unable to confirm an exact timeline for removing fuel kept inside the spent fuel pools within reactors No.1 to No. 4 at the troubled plant in Fukushima.

24 Hours at Fukushima - A blow-by-blow account of the worst nuclear accident since Chernobyl.

A Depressing Tour Of The Pennsylvania Ghost Town That's Been Burning For 50 Years - Half a century ago, Centralia, Pennsylvania was a bustling coal mining town. It had schools, churches, theaters, and grocery stores. It was home to more than 2,000 people.  Today, the once-thriving industrial community is a smoldering expanse of overgrown streets, cracked pavement, and charred trees. Everywhere, streams of toxic gas spew into the air from hundreds of fissures in the ground.  It's not completely clear how the fire started in May 1962, but most historical accounts hold that burning trash in a landfill near an abandoned strip mine ignited an exposed coal vein. The fire spread throughout a labyrinth of coal mines beneath the town, essentially creating a giant underground inferno. Workers battled the fire for almost two decades, but all attempts to extinguish the massive blaze proved unsuccessful. In 1981, amid growing health concerns over dangerous levels of carbon monoxide, Centralia's plight was launched onto the national radar when a 12-year-old boy fell into a sinkhole. Decades of intense underground heat was causing the pavement to crumble. Now Centralia has been burning for almost 50 years. Experts say there is enough coal to fuel the fire for another 250 years.

Monitoring and enforcement - Safety (and environmental) regulations have no teeth unless the monitoring and enforcement effort is there: After the Upper Big Branch Mine disaster killed 29 miners last year, federal coal-mine regulators launched a new program of safety blitzes, showing up unannounced at mines in Kentucky and other states, seizing telephones so people underground would get no warning, and fanning out in search of hazards. Since April 2010, the federal Mine Safety and Health Administration has conducted 251 so-called “impact inspections” in coal mines, including 73 in Kentucky and seven in Indiana.Those safety sweeps have netted 4,530 citations for violations, including nearly 2,000 in Kentucky and 111 in Indiana. At the same time, MSHA has ordered 427 temporary mine closings to fix problems, including 174 in Kentucky and six in Indiana. via www.courier-journal.comIn your regulatory model, attach a probability of getting caught with a violation variable and taking the derivative. You'll see that safe behavior is proportional to that probability. Consider the graph at the right. The number of deaths in a "safe" year, defined as not 2006 or 2010 (recoding 2005 at 23 and giving 2011 an annual adjustment), is 26. The additional lives lost in an "unsafe" year is about 21.5.

Grist: Learning from history: Why natural gas prices will rise - Here's the standard story about the U.S. power grid: It gets baseload supply from hydro, nuclear, and coal (in that order), using natural gas (and the occasional oil plant) as a swing producer to meet peak demands. Renewables play on the margin, but are neither big nor reliable enough to matter from a grid planning perspective. On average, that story is true. In recent years, however, a steadily larger portion of total U.S. power supply comes from sources that we historically think of as "intermittent" -- namely, natural gas and renewables. Is that the beginning of a new paradigm (the dream of both the renewable and natural gas communities) or an unsustainable deviation from the average (the dream of the coal industry)? To answer that question, we must review a bit of history. The chart below shows the percent of total U.S. power that came from the "baseload triumvirate" of coal, nuclear, and hydro (C-N-H) from 1949-2010, plus the percentages that came from natural gas, oil, and other renewables over the same period.

Not so much: Shale gas shows its limitations - If you live in the United States and bother to turn on your television, it's almost impossible to avoid ads telling you that natural gas from shale is both abundant and environmentally safe to develop. Though the ads will probably not be withdrawn or recut, the emerging facts run counter to the gleeful tone of this television commercial produced by America's Natural Gas Alliance, a consortium of shale gas drillers. (For some more samples from other advertisers, click here, here and here.)  The model assumes that shale deposits are basically uniform, or at least uniform enough that a driller could sink a well virtually anywhere in a shale gas deposit and have an economical well blasting out methane. Independent petroleum geologist Art Berman and his colleague Lynn Pittinger, who studied the actual data, have shown that the manufacturing model is a myth, to wit: "The contraction of extensive geographic play regions into relatively small core areas greatly reduces the commercially recoverable reserves of the plays that we have studied." In short, you can't just drill anywhere. Drillers thought the huge plays highlighted in pink on the map below would yield profitable shale gas everywhere. It turns out that there are sweet spots, and then there are spots that are not sweet at all. And, the sweet spots are turning out to be quite small compared to the size of the deposits.Berman and Pittinger also point out that initial high flow rates give out within a couple of years, putting drillers on a treadmill merely to replace this declining production and implying geometric increases in the number of wells they must drill to grow production consistently. What's more, the two authors question claims of decades-long flows, albeit at very low rates, from individual wells. The history of shale gas wells to date suggests that this is unlikely, at best, and almost certainly uneconomical.

EPA to probe gas drilling's toll on drinking water - The Environmental Protection Agency on Thursday released the outlines of its long-awaited probe into whether hydraulic fracturing — the unconventional drilling technique that's led to a boom in domestic natural gas production — is contaminating drinking-water supplies. Investigators will try to determine the impact of large-scale water withdrawals, aboveground spills of drilling fluids, and the fracturing process itself on water quality and quantity in states where tens of thousands of wells have been drilled in recent years. Hydraulic fracturing, or fracking, involves the high-pressure injection of millions of gallons of water, along with sand and chemical additives, deep underground to extract natural gas trapped in shale rock. Energy companies have greatly expanded their use of fracking as they tap previously unreachable shale deposits, including the lucrative Marcellus Shale formation in Pennsylvania and neighboring states. The industry has long contended that fracking is safe, but environmentalists and some residents who live near drilling sites say it has poisoned groundwater. The EPA study, mandated by Congress last year, is the agency's first look at the impact of fracking in shale deposits.

Fracking 'likely cause' of quakes - It is "highly probable" that shale gas test drilling triggered earth tremors in Lancashire, a study has found. But the report, commissioned by energy firm Cuadrilla, also said the quakes were due to an "unusual combination of geology at the well site". It said conditions which caused the minor earthquakes were "unlikely to occur again". Anti-fracking activists who have climbed a rig near Southport in protest said it "did not inspire confidence". Four protesters from campaign group Frack Off have climbed the drilling rig at one of the test drilling sites in Hesketh Bank. The group is against fracking, a controversial extraction method which blasts water into rock to release shale gas, because they fear it is not safe. Safety concerns Cuadrilla suspended its shale gas test drilling in June, over fears of links to the earthquakes.

Shale Shocked: “Highly Probable” Fracking Caused U.K. Earthquakes, and It’s Linked to Oklahoma Temblors -  A previously unreported study out of the Oklahoma Geological Survey has found that hydraulic fracturing may have triggered a swarm of small earthquakes earlier this year in Oklahoma. The quakes, which struck on Jan. 18 in a rural area near Elmore City, peaked at magnitude 2.8 and caused no deaths or property damage. The study, currently being prepared for peer review, follows news today that Cuadrilla Resources, a British shale gas developer, has found that it was “highly probable” its fracturing operations caused minor quakes of magnitude 2.3 and 1.5 in Lancashire, England. The Cuadrilla study could complicate the expansion of hydraulic fracturing for shale gas in risk-averse Europe, where France has already banned the practice. That’s E&E News PM on the twin earth-shaking reports on an emerging concern about fracking, which involves blasting massive amounts of water through rock under high pressure to get the gas out. If this had been happening to some renewable energy technology it would be all but fatal.  Oh, wait, it was:  “Fears of induced minor earthquakes have already complicated development of geothermal energy in regions like Nevada and Switzerland.”  See also LiveScience, “Earthquake Concerns Shake Geothermal Energy Projects.”

"Obama - Not Hillary Clinton - Will Decide Keystone XL Pipeline Fate"  - In a clear sign that President Obama recognizes that Hillary Clinton is too compromised by conflict of interest given the web of crony tar sands lobbyists around her to make the decision on whether to approve the Keystone XL pipeline, Obama announced today that he will make the call personally.  And some of his comments in an interview this afternoon indicate that he has serious reservations about the KeystoneXL and the thought of the U.S. making a long-term commitment to Canada's filthy tar sands oil.  Obama made the announcement about taking personal responsibility for the Keystone XL decision during an interview with Nebraska's KETV NewsWatch 7.  Interviewer Rob McCartney asked, "How do you weigh any potential negative impact with the jobs that it may bring in?" PoliticoPro has the transcript of the President's remarks, excerpted here (and corrected in a few spots):

Obama Asserts He’s The Decider on Keystone XL Pipeline, Cites Risk to Drinking Water, Public Health - Yesterday, White House Press Secretary Jay Carney tried to pass the buck on the Keystone XL tar sands pipeline decision, saying, “This is a decision that will be made by the State Department.” Today, in an interview with Omaha station KETV (video here), Obama (aka The Decider) walked that back entirely: The State Department’s in charge of analyzing this, because there’s a pipeline coming in from Canada.  They’ll be giving me a report over the next several months, and, you know, my general attitude is, what is best for the American people? What’s best for our economy both short term and long term? But also, what’s best for the health of the American people? Because we don’t want for examples aquifers, they’re adversely affected, folks in Nebraska obviously would be directly impacted, and so we want to make sure we’re taking the long view on these issues. We need to encourage domestic oil and natural gas production.  We need to make sure that we have energy security and aren’t just relying on Middle East sources. But there’s a way of doing that and still making sure that the health and safety of the American people and folks in Nebraska are protected, and that’s how I’ll be measuring these recommendations when they come to me.

Obama will make final determination on Keystone XL - Obama has announced that the buck on Keystone XL will stop with him. This image is kind of wishful thinking -- it's nice to imagine that Obama will just slice through all the conflict-of-interest BS that's currently going down with TransCanada and the State Department, but the likelihood is that this will not end well. Still, at least then we'll have a single person to blame. You have to wonder whether the announcement is an attempt to do an end run around congressmembers' assertion that the State Department's evaluation is tainted and untrustworthy. Obama's still basing his decision on State reports; he's just going to be the one who publicly makes the final call. That's not going to satisfy a lot of people who think the State-commissioned environmental analysis, which was carried out by a TransCanada-affiliated firm, is fundamentally flawed. But it's not clear yet how this will shake out. A League of Conservation Voters spokeswoman said she was "encouraged" by the decision. But the American Petroleum Institute said the same thing.

Actual Co-Opting of the 99% Movement, for the Tar Sands Pipeline - I’ve been wary of throwing around charges of co-opting Occupy Wall Street, because I think people are using the term very loosely. If a member of Congress is asked a direct question about OWS, and they answer in response that they support it, how exactly is that co-opting? The same with words of encouragement from some progressive organizations. Is #OccupySupply, the work being done here, an example of co-opting? I don’t really get the claim, it feels like more of a catch-all. However, I can say pretty confidently that the Building Trades Unions are flat-out co-opting OWS with their new initiative to try and get the Keystone XL tar sands pipeline approved. The building trades support the dirty energy pipeline because it means some temporary jobs for them. The public health and environmental issues are not of their concern. So they’ve been in favor of the pipeline for some time. And now, they’re explicitly using the language and imagery of the OWS movement to try and sell it. Their new website is called Jobs for the 99%. See if you notice the biases at work here: Hollywood’s elite 1% should stop flying to DC and speaking out against jobs that help the other 99% of America! Tell the White House to support Keystone XL.

BP Oil Spill Whistleblowers And Experts Continue To Mysteriously Die -  In the last year and a half at least 10 experts, whistleblowers and BP connected individuals have died under mysterious circumstances. This information was widely reported in an April 10th, 2011 video which at the time listed 9 deaths and 3 imprisonments, disappearances, or attempted assassinations. Now, another BP oil spill connected individual has mysteriously died, moving the number of oil spill connected deaths to at least 10.

US Officials Extend Nearly 1,400 Offshore Oil Drilling Leases - U.S. officials have extended oil-drilling leases for the vast majority of companies that say their work in the Gulf of Mexico was disrupted by the Deepwater Horizon oil spill or the temporary drilling ban that followed the spill. The Bureau of Safety and Environmental Enforcement announced Monday that it had approved more than 97% of the lease-extension requests it had received so far--or 1,381 of 1,413 applications. Those that were denied an extension either failed to qualify for an extension or withdrew their applications, the bureau said. The bureau did not identify which companies had received lease extensions and which ones had been denied. President Barack Obama announced in May that his administration would grant one-year extensions to certain companies operating in the deep waters of the Gulf. The goal was to give oil companies additional time to drill on their offshore leases following a moratorium on deepwater activity that lasted from May to October 2010. The typical deepwater lease is 10 years 

Oil rises 18 pct in October -- Oil soared 17.7 percent in October on the expectation that the world's thirst for petroleum would keep growing despite economic struggles in the West. West Texas Intermediate, the benchmark oil in the U.S., jumped from about $79 to $93 per barrel during the month as fears of another U.S. recession subsided while Europe struck a landmark deal to reduce Greece's debt. Demand from emerging markets remains strong. And a strategy calling for traders to buy WTI futures contracts while selling another variety, Brent crude, also boosted the price of WTI. The conditions that fostered the increase remain in place. "Oil demand is higher worldwide," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "Other parts of the world, most notably South America, are consuming a lot of our (petroleum) products." Independent oil analyst Andrew Lipow expects benchmark oil to hit $100 per barrel by the end of the year. But this has been a year of pronounced swings in the price of oil. WTI hit a high of $113.93 at the end of April, after starting 2011 at around $91 per barrel. 

The Untold Story Of How Banks Took Over The Oil Market Real resources are always a true constraint for any economy.  This has become an increasingly important point over the last 10 years as commodity prices have surged.  But the debate over the cause of this surge and the lack of real resources is still very much up in the air.  Some say it is due to an insatiable demand from China.  Some blame the decline of the dollar due to irresponsible government action.  Others say Wall Street is cornering the commodities markets and turning it into another profit making casino. The truth, in all likelihood, lies somewhere in between.  One of the more important themes I’ve discussed over the years here has been the financialization of our economy.  Financialization has seeped into many facets of our economy in order to help the big banks maximize profits. This has led to massive deregulation, increasing reliance on the FIRE industry, a concentration of power in this industry and an economy that is increasingly volatile and dependent on this industry which produces little, but takes much. This financialization has been nowhere more apparent than it has been in the commodities markets.

US Oil Consumption - It's been a while since we've checked in on US oil consumption.  The above graph shows the EIA's data since 2000 - both the weekly and the monthly series.  The monthly series is believed to be more accurate, but the weekly series is more up to date - going through the week before last, versus August for the monthly series. In any cases, both series tell more-or-less the same story: after growing in the recovery following the great recession, US consumption is generally declining in 2011 in the face of a weak economy and fairly high oil prices.

EIA: US Net Gasoline, Distillate Exports Hit Record Highs In August - U.S. net exports of gasoline and distillate fuel (diesel/heating oil) set record highs in August, data released Friday by the Energy Information Administration show.  The EIA data on net exports date back to 66 years to 1945.  A 3.8% drop in gasoline demand to a 12-year August low of 8.907 million barrels a day allowed refiners to ship abroad more fuel than wasn't needed in the domestic market.  Net exports of gasoline averaged 430,000 barrels a day, more than five times the level in August 2010, and 77% more than the level in July 2011.  Mexico was the destination for most of the gasoline exports, which averaged 241,000 barrels a day, up 51,000 barrels a day from the prior month and more than double the year-earlier level.

A Conversation with Chris Martenson - Listen to a recording of our call with Chris

Experts Say Rosy Oil Forecasts Obscure Impending Crisis - Leading energy and economic experts will gather on Capitol Hill this week for a conference to examine how the United States will adapt to an impending oil supply crisis. Most Americans are unaware of this emerging threat in part due to overly optimistic forecasts by the U.S Energy Information Administration (EIA) within the Department of Energy (DOE). ASPO-USA's conference on Peak Oil, Energy & the Economy will examine the prospect that world oil supply is at or near an upper limit and will decline in the near future. Meanwhile, EIA projections indicate that world oil supply will increase by more than 20 million barrels per day by 2035, with prices rising only moderately. "Truth in Energy" is the conference theme, calling for EIA to be more transparent and to address the possibility of severe oil constraints openly and directly. ASPO-USA is also calling for the Department of Energy to lead the development of a National Oil Emergency Response Plan to assess the consequences of oil scarcity and extreme price increases on different parts of the economy.  "America is wholly unprepared for a near-term oil supply crisis, let alone persistent oil shortages,"  "ASPO-USA delivered a letter to Secretary Chu last week urging his response to important questions that we believe DOE and EIA have failed to address

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

TheOilDrum: Tech Talk - The Niobrara, the Tuscaloosa and the Chattanooga Shales - If one looks at the different regions that are suggested as sources to increase oil availability for the United States, I have largely discussed the various options, whether the Bakken Shale, the off-shore resources of Alaska, the Gulf of Mexico, and the gas shale reserves such as the Marcellus. One of the two regions and resources I had not covered was the increase in production that can be anticipated from the Niobrara shales of Colorado, Wyoming, and adjacent states. (The other is the offshore Atlantic). Since this is a new enough development that it may not be well known, I thought to mention some basic information about the Niobrara in this post.  The most likely of still relatively unknown resources (outside the Niobrara) to be developed in the near future may well be the Tuscaloosa and the Chattanooga. The Tuscaloosa has been vertically drilled back in the 1960’s and since but with the potential to have similar attributes to the Eagle Ford, i.e. a liquids-rich resource, and it has a marketable product in those liquids that may make it more attractive. Whether the production will make it possible to profitably cover those costs is yet to be determined. The reservoir varies from 200 to 800 ft thick and lies at depths between 11,000 and 14,000 ft. The reservoir may contain as much as 7 billion barrels of oil.

UAE- World likely to face severe oil crunch by 2015 - There could be a severe global oil crunch by 2015 due to drastic changes in the oil market fundamentals, a World Bank consultant told the 17th Annual Energy Conference of the Emirates Centre for Strategic Studies and Research (ECSSR).  Addressing the ECSSR conference in the UAE capital, Dr Mamdouh Salameh, Consultant on Oil and Energy Affairs for the World Bank, said: "Unfortunately, the current alignment of these fundamentals can only lead to a severe tightening of the oil market. Other major factors impacting on the global oil market are China and the declining influence of OPEC. An analysis of these fundamentals indicates that a severe oil crunch could be in the offing, probably by 2015 or thereabouts, with oil prices projected to exceed the level reached in July 2008." He further added in the face of a looming oil crisis, OPEC will soon reach a crossroads. "It must ramp up supplies very significantly to stem the projected steep rise in the oil price or risk becoming irrelevant," he warned. However, he said, OPEC's previous encounter with high prices in 2008 did not inspire confidence because the organisation was then unable to halt the oil price onslaught due to its members hardly had any spare production capacity. "Today, OPEC still has little spare capacity and therefore can no longer influence the global oil market and the oil price."

Peak Oil - Why We Need To Plan Now - It was by teaching a course on energy in 2004 that I first became aware of the enormous challenges facing our society this century. In preparing for the course, I was initially convinced that I would identify a sensible and obvious path forward involving energy from solar, wind, nuclear, geothermal, tides, waves, ocean currents, etc. Instead, I came out dismayed by the hardships or inadequacies on all fronts. The prospect of a global peak in oil production placed a timescale on the problem that was uncomfortably short. It took several exposures to peak oil for me to grasp the full potential of the phenomenon to transform our civilization, but eventually I was swayed by physical and quantitative arguments that I could not blithely wave off the problem—despite a somewhat unsettling fringe flavor to the story. , Do the Math represents—in computer terms—a “core dump” of years of accumulated thoughts and analysis on energy, growth, and the largely unappreciated challenges we face on both short and long terms. During this queued process—with much more to come—I have made references to peak oil, but have refrained from a head-on treatment. As important as peak oil has been in motivating my quantitative exploration of life beyond fossil fuels, it seems overdue that I share my thoughts.

MASS FAMINE, NO OIL, NO GAS: What Life Might Be Like In The Year 2100 - With global population set to reach seven billion people over the weekend, it may be time to start planning for what the world will look like in the coming years.  Though most of us won't be around to see it, the United Nations has projected that our incredible population growth will level off at around 10 billion people by the year 2100. Already, at less than seven billion, we are experiencing severe poverty, hunger, a shortage of resources, increased urbanization and climate change issues. Will we be doomed by 2100, or can we make it work? Since we've only got one planet (so far), let's hope for the latter.

China Power Shortfall May Hit Up To 40GW - CHINA may face a peak power shortage of up to 40 gigawatts in winter and spring as rising demand outpaces expansion in generation capacity, an industry group said yesterday. Other factors contributing to the shortfall include low coal quality? which could lead to unplanned power plant maintenance, and a lack of coordination between power generators and distributors, according to the China Electricity Council. China's estimated total generation capacity may total about 1,050GW at the end of this year, a rise of about 8.8 percent year on year, but the country may still face a total peak deficit of 30-40GW. Industry officials said rising coal prices, which will erode the profit margins of power generators, could also worsen the shortfall in coming months. The shortfall may affect the main manufacturing hubs of Guangdong and Zhejiang provinces as well as Henan and Hunan provinces in central China, according to local grid operators. China's power demand is forecast to grow 13 percent in the final quarter of this year and 12 percent for the whole year, the CEC said

U.S. Embassy air quality data undercut China's own assessments — Perched atop the U.S. Embassy in Beijing is a device about the size of a microwave oven that spits out hourly rebukes to the Chinese government. It is a machine that monitors fine particulate matter, one of the most dangerous components of air pollution, and instantly posts the results to Twitter and a dedicated iPhone application, where it is frequently picked up by Chinese bloggers. One day this month, the reading was so high compared with the standards set by the U.S. Environmental Protection Agency that it was listed as "beyond index." In other words, it had soared right off the chart. "You couldn't get such a high level in the United States unless you were downwind from a forest fire," .

China PMI Drops to Lowest in Almost 3 Years - A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion. An index of export orders contracted for the second time in three months as Europe’s failure to resolve its debt crisis dims the outlook for shipments to China’s biggest market. South Korea reported today the weakest export growth since 2009 and Taiwan’s government said yesterday that the island’s economy expanded by the least in two years.

China’s Property Stocks Decline as Wen Pledges to ‘Firmly’ Maintain Curbs - China property stocks fell for the first time in six days in Shanghai trading after Premier Wen Jiabao doused speculation the government will ease curbs on the industry.  The government will “firmly” maintain restrictions on real estate and local authorities should continue to strictly implement its policies, Wen said according to a statement following a State Council meeting. China is on “a bigger and faster treadmill” than ever as property sales slow, Jim Chanos, president and founder of $6 billion hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview from Singapore on Oct. 28. Chanos has forecast since at least February 2010 that the property market will slump, saying that China is Dubai times a thousand and on a “treadmill to hell” because of its reliance on real estate. Property transactions in the past two months in so-called tier one, two and three cities his firm tracks are down 40 percent to 60 percent year on year, said Chanos, who predicts “the property slowdown or worse has started.”

China money market rates tumble - China’s money market rates have fallen sharply amid signs that the government is beginning to ease its tight monetary policy around the edges to keep growth on track. Premier Wen Jiabao vowed last week to “fine tune” policies, which many analysts said heralded a shift towards a moderate loosening of the monetary straitjacket imposed on the economy over the past year to control inflation. An indication that the government was delivering on its promise came on Wednesday with a nearly 70 basis point drop in the seven-day repo rate, the steepest decline in three weeks in the country’s most important gauge of interbank liquidity. Moving in tandem, the one-year interest rate swap plumbed a six-month low at 3.37 per cent.  Analysts have been looking for the policy easing to come via two channels: an injection of liquidity through open-market operations and informal guidance to banks to lend more. There are indications that both forms of easing are now under way. Some Rmb107bn ($16.8bn) in central bank bills are maturing this week and the People’s Bank of China has so far announced an issuance of only Rmb11bn, putting it on course for a sizeable net injection of liquidity in the financial system.

Swimming Naked in China - For quite some time, analysts of China have been puzzled by a strange phenomenon: the country’s public and financial institutions are decidedly subpar by any international standard, but its economic growth rate is anything but. This puzzle can only be explained by two conclusions: either China has been fudging its growth data, or Chinese institutions aren’t as bad as outsiders commonly think. There is, however, a third possibility. During the peak of the credit bubble in the United States, bankers on Wall Street had a popular saying: “When the tide is high, nobody knows you are swimming naked.”  What this aphorism means is that apparent economic prosperity can cover up many dubious if not outright shady practices that eventually lead to financial calamities. So if we apply this expensive lesson learned from Wall Street, it’s hard not to suspect that a lot of people have been swimming naked in China in recent years as well. The prudish Communist Party hasn’t acquired Scandinavian-level tolerance and allowed nudist beaches in China (it has not). Instead, based on the recent spate of worrying financial news out of China, it’s obvious that high economic growth has concealed many high-risk and illegal activities and practices that may have bolstered growth, but also sowed the seeds for financial mass destruction.

Chanos Interview: China Slowdown Just Beginning - Mish - Jim Chanos Says China Slowdown has just begun. There is not much new in the video actually. I just happen to think he is correct.

Baby Steps - by Rebecca Wilder - In the FT today, Martin Wolf discusses the symbiotic relationship of global creditors and debtors.  According to the September 2011 IMF World Economic Outlook, China ran the largest current account surplus in 2007, while the US ran the largest current account deficit (in $). Well, if this creditor-debtor relationship is to become more ‘balanced’, then evidence of success should stem from these two giants. Progress has been made. The IMF forecasts China’s 2011 current account surplus will be broadly unchanged since 2007 (in levels $). In contrast, the 2011 US current account deficit is expected to have improved by 35% compared to 2007 levels. It’s baby steps toward a more balanced global capital market place. What’s driving this? Primarily the real exchange rate. The chart below illustrates the real effective exchange rates for China and the US, as measured by a broad set of trading partners and relative inflation. The BIS releases this data. Notably, the Chinese economy experienced real appreciation coincident with US real depreciation. Spanning the years 2005 – current, the Chinese yuan appreciated 25% in real and trade-weighted terms, while that of the US dollar depreciated 14%.

Expect a lot more trade intervention (Pettis) Last week’s Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has hardened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position the likelihood of a good outcome is declining. The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments that characterize each side. For example many of those who believe China is cheating on trade go through complicated exercises to prove the currency is undervalued and should be sharply revalued. The currency may well be undervalued, but a significant rise in the RMB, especially if it is countered domestically by an increase in credit at lower real rates, might actually make the global imbalances worse and, more worryingly, cause China’s debt burden and capital misallocation to rise. This would make China’s eventual adjustment far more difficult. The focus should be on shifting China’s economy towards the more labor-intensive and efficient sectors, and an appreciating RMB might actually make things worse, especially if it encourages hot money inflow. It is much better, I think, for China to raise interest rates than to raise the value of the RMB.

Russia, China want India, Pakistan to become SCO members shortly - Russia & India Report: Russia and China would like to seek India and Pakistan among the members of the Shanghai Cooperation Organisation (SCO), the Foreign Ministry said on Monday, October 31, after a meeting between Deputy Foreign Minister Alexei Borodavkin and his Chinese counterpart Cheng Guoping. “The sides called for accelerated SCO enlargement in keeping with the decisions of the Council of the SCO Heads of State made in Astana in June,” the ministry said, referring to admission of India and Pakistan as members and Afghanistan as an observer, and granting of the status of dialogue partner to Turkey. The diplomats “’coordinated the positions of the sides on further improvement of the Shanghai Cooperation Organisation’s activities in the light of preparations for a meeting of the Council of Heads of Government in St. Petersburg on November 7 and the SCO summit in China in the summer of 2012.”

The Shadow Superpower - Forget China: the $10 trillion global black market is the world's fastest growing economy -- and its future. With only a mobile phone and a promise of money from his uncle, David Obi did something the Nigerian government has been trying to do for decades: He figured out how to bring electricity to the masses in Africa's most populous country.  It wasn't a matter of technology. He contracted with a Chinese firm near Guangzhou to produce small diesel-powered generators under his uncle's brand name, Aakoo, and shipped them home to Nigeria, where power is often scarce. Like almost all the transactions between Nigerian traders and Chinese manufacturers, it was also sub rosa: under the radar, outside of the view or control of government, part of the unheralded alternative economic universe of System D.  System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of "l'economie de la débrouillardise." Or, sweetened for street use, "Systeme D."

Global manufacturing stagnates in October Input prices are falling, but so are new export orders — Global manufacturing conditions were effectively flat as better data from the U.S. and China helped overcome a sharp deterioration in the euro zone, according to data released Wednesday.  Data released by JPMorgan and Markit on Wednesday showed the global PMI for October improved to 50.0 from 49.8 in September. A reading of 50 on the PMI scale shows conditions were unchanged from the previous month, while one below show a deterioration.  “The new orders index was responsible for the increase, although it remains very depressed,” said David Hensley, director of global economics coordination at JPMorgan in a statement accompanying the survey findings.  One piece of good news from the data release is that falling prices of commodities are lowering input costs at factories around the world. But the bad news is that new orders for exports fell at the “quickest pace for almost two-and-a-half years,” JP Morgan and Markit said in the statement.  That could mean tougher conditions for emerging nations, which have been a key driver of the world economy even as most of the developed nations slowed down.  “I think the overall trend has been negative, with the euro zone leading the downward trend in global manufacturing,”

World-Wide Factory Activity, by Country - Global manufacturing was stagnant in October, with a global index produced by J.P. Morgan and Markit stuck at the break-even level of 50, up just slightly from a month earlier. The euro zone was the main laggard, falling into contractionary territory last month, while the U.K. also notched shrinking factory activity. “Underlying the lackluster performance of global manufacturing was a reduced inflow of new business. The level of new work received contracted for the third month running in October, although the rate of decline eased over the month. The reduction was largely centered on the European economies,” J.P. Morgan and Markit said in a release. The U.S. and China remained in expansionary territory and saw new business increase. See a sortable chart of manufacturing activity, by country.

Japan’s Public Debt to Hit Record $13.5t: Reports - Japan’s public debt is expected to swell to a record $13.5 trillion as the government finances reconstruction efforts after the March earthquake and tsunami, reports said on Saturday. Japan’s debt is already the industrialized world’s biggest at around twice its GDP, after years of pump-priming measures by governments trying in vain to arrest a long economic decline. The public debt is expected to reach 1,024 trillion yen ($13.5 trillion) by the end of this fiscal year to March, up 99.75 trillion yen from a year earlier, the Yomiuri daily reported citing, unnamed finance ministry sources. The national debt will inflate as Tokyo plans to issue bonds worth 11.55 trillion yen to finance the reconstruction measures in the disaster-hit northeast, the Yomiuri and NHK public broadcaster said. The government spending for the year to March is also expected to swell to a record 106.40 trillion as the series of extra budgets will exacerbate the nation’s already tricky fiscal condition.

Japan Stages Record FX Intervention - The Japanese government launched a fresh round of foreign exchange intervention Monday, spending an estimated Y7 trillion to cap a rise in the yen that has undermined the economy and dragged down the key export sector. "I have said time and again that we will take decisive steps against speculative movement in the market, but unfortunately we have seen the continuance of one-sided speculative movement that doesn't reflect our country's real economy at all," Finance Minister Jun Azumi said at a press conference some 20 minutes after the yen-selling intervention began mid-morning. Azumi said the intervention was undertaken by Japan alone. He would not comment on amounts, but dealers said the selling through the day likely totalled Y7 trillion, a record amount for one day's intervention. The intervention pushed the dollar as much as 5% higher to Y79.55 from around Y75.65 before the move. The trend was similar against the euro, which initially rose to Y111.24 from Y107.12 and then fell back to Y109.10.

Japan Intervenes on Yen - After keeping the market waiting for more than a week, the Japanese government launched a new foreign-exchange intervention on Monday, Finance Minister Jun Azumi said, moving to cap a continued rise in the yen that is undermining the economy and dragging down the key export sector. It was the first time since Aug. 4 that Japan has stepped into the market to weaken the yen. The intervention came after the dollar fell to a post-World War II record low of ¥75.31 in early Asian trading. Japanese government officials and corporate leaders have repeatedly expressed deep concern about the yen's strength and the damage it could do to the economy by hurting exporters and intensifying deflation. The government recently implemented a series of measures aimed at mitigating the effect of the yen's rise, but large exporters have piled pressure on Tokyo to do more to weaken the currency. Finance Minister Jun Azumi has repeatedly said that Tokyo would take "decisive steps" when necessary against the strong yen. He has blamed speculators for the rise in the yen, which he said did not reflect the fundamentals of the slow-growth Japanese economy.

Yen Slides Most in Three Years After Japan Intervenes; Euro, Krone Weaken - Bloomberg: The yen slumped the most in three years against the dollar as Japan stepped into foreign-exchange markets to weaken the currency for the third time this year after its gains to a postwar record threatened exporters. The euro fell the most in four weeks versus the dollar amid speculation Europe’s leaders will struggle to garner financial support for their revamped crisis-fighting plan. The yen fell against all of the more than 150 currencies tracked by Bloomberg after Japanese Finance Minister Jun Azumi ordered the intervention at 10:25 a.m. Tokyo time because “speculative moves” in the currency failed to reflect the nation’s economic fundamentals. The dollar rose against all its major peers. “It appears that the intervention has been very aggressive,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The measures are only likely to provide temporary relief. In a very uncertain world, demand for safe-haven currencies like the yen will remain high and it is likely to remain strong.”

Japan Faces $510 Billion Losses From Yen Sales, JPMorgan Says -- Japan's government faces almost 40 trillion yen ($512 billion) in losses from intervening in the foreign-exchange markets to stem the yen's advance, according to estimates by JPMorgan Chase & Co. Valuation losses on Japan's foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo. "It's difficult to change the trend of the currency market" with intervention, said Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, at a forum in Tokyo yesterday. "Even if the action can stem the currency's gains temporarily, the yen will eventually appreciate." Japan on Oct. 31 intervened in foreign-exchange markets to weaken the yen for the third time this year after the currency gained to a postwar record. Finance Minister Jun Azumi said he will continue to intervene until he's "satisfied."

A brief post on competitive devaluation - This morning, the Japanese government intervened in a significant way to bring down the value of the yen. It's not the first time Japan has done this in recent months, and neither is it the only country to try and devalue its currency; the Swiss National Bank famously did so after the franc's flight-to-safety status led to significant appreciation and pain for domestic exporters. What are the potential implications of a world in which many large economies are weighing the benefits of competitive devaluation? The first point to make is that Japan is not particularly good at this game. Large, one-off interventions against a backdrop of sustained deflation are unlikely to be effective; markets know the yen will be going back up again in no time. Second, a real intervention would be very good for Japan.  Were the Bank of Japan to make a concerted effort to print yen and sell them for other things—dollars, say—then deflation might finally be vanquished and the economy might stumble into sustained growth for a change. Third, that kind of intervention would have a direct, negative impact on other economies, whose currencies would appreciate relative to the yen. This negative impact could easily be offset, however, if those economies were to respond by printing their currencies and using them to buy yen.  If everyone plays along, the net effect is of a coordinated monetary stimulus. Fourth, however, if other central banks are reluctant to play along, then elected governments may respond to pressure from foreign exporters by adopting trade restrictions. This was the common response among gold bloc countries to devaluations by other economies.

Should India set up a sovereign wealth fund? - New Delhi will soon take a final call on the issue of setting up of a sovereign wealth fund. The idea of setting up an Indian sovereign wealth fund has been going around since 2007 when China established its major sovereign wealth fund, China Investment Corporation (CIC), with an initial capital fund of $200 billion. However, this time the proposal has received strong support from India’s corporate leaders who recently suggested the establishment of a state-owned sovereign wealth fund primarily to secure access to natural resources and pursue strategic investment opportunities overseas.  This column argues that such a move is ill-advised and that India has more worthy investment opportunities at home.

Brazil To Overtake UK As Sixth-Largest Economy - The Latin American giant's GDP for 2011 is expected to hit $2.44 trillion (£1.51 trillion) compared with $2.43 trillion for the UK, the latest monthly forecasts from the Economist Intelligence Unit (EIU) show. This will see Brazil, which last year overtook Italy to become the world's seventh biggest economy, move up one more place to sixth with the UK falling to seventh. Robert Wood, the EIU's chief economist on Brazil, said the country's surge up the table owed much to a growing consumer class and a booming trade relationship with China, based on the Asian giant's need for commodities such as soy and iron ore. "It's partly the story of the lower income classes rising up in Brazil to join the middle-class and partly the sheer size of the population of nearly 200m," said Mr Wood. "This also links in with Brazil's emergence in terms of being dragged up by demand from China. We are in the middle of a commodity super-cycle that will last for some time but at some point the really good times Brazil is enjoying will cool off a bit."

Despite Booming Economy, Brazilians Rally Against Amazonian Dam - No one in the developing world is against hydroelectric projects, which bring the benefits of power and development. Except perhaps the locals. Brazil’s proposed Belo Monte Amazon dam is experiencing an “occupy” moment, with 100s of Xingu River basin indigenous peoples and riverine community members gathering to protest the facility’s construction. The 11,000 megawatt dam Belo Monte Dam is to be built in Altamira, in Para state in the heart of the Brazilian Amazon, and if built, will be the world’s largest hydroelectric project. The protesters have blocked the Trans-Amazon Highway (BR-230) around Sao Antonio village, where it passes through the dam’s construction site. Local indigenous politician Juma Xipaia said, “Belo Monte will only succeed if we do nothing about it. We will not be silent. We will shout out loud and we will do it now. We only demand what our Constitution already ensures us: our rights. Many documents and meetings have already transpired and nothing has changed. The machinery continues to arrive to destroy our region.” Why Belo Monte, which has been planned since 1975? The facility won’t come cheap, as construction costs are estimated at $16 billion and the transmission lines an additional $2.5 billion.

Australia Rethinks Inflation Worries - Bloomberg reports: "Australia’s central bank lowered its benchmark interest rate today for the first time since April 2009 as inflation eases and weaker global growth threatens to slow the nation’s resource-driven economy." The Reserve Bank of Australia cut its benchmark rate by 25 basis points to 4.5%. Recall that Australia was among the first central banks to start raising interest rates after the financial crisis of 2008. The country still has one of the highest rates in the developed world. But at a time when the rich world is struggling with debt and sluggish growth, inflation fears aren't nearly as strong as the hawks predicted. The Reserve Bank of Australia explains: Trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue. Commodity prices, while still at high levels, have generally declined over recent months... After underlying inflation started to pick up in the first half of the year, recent information suggests the subdued demand conditions and the high exchange rate have contained inflation more recently

RBA rate cut sparks bank response - The Reserve Bank of Australia has cut interest rates for the first time in more than two and a half years, bringing relief to households and corporate borrowers. The Australian central bank today lowered its key cash rate by 25 basis points to 4.5 per cent. The move reversed the increased imposed on Melbourne Cup Day last year, the most recent time the RBA has shifted rates. Some economists say the moderate language used in the RBA's accompanying commentary suggest today's move may be a one-off by the central bank for now. "There are no hints in the statement that the RBA is considering further moves at this time," "In large part it seems to be characterised as a shift back to 'neutral' given that the inflation concerns that the RBA had previously seemed to have dissipated." RBA Governor Glenn Stevens noted that recent sharp moves on financial markets were likely to drag on Australia's economy. "The effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," he said in a statement accompanying today's decision.

Europhoria - The markets enjoyed this week’s eurozone announcement, with its expansion of the EFSF, the 50% “haircut” for Greek bondholders, and the recapitalization of European banks. But the Europhoria was not universal, and many remain skeptical. For a well-done glimpse into the inner-workings of the eurozone’s latest plan, watch this Xtranormal cartoon. Zero Hedge’s take: “While it is not the bears doing the explaining in this latest all too realistic summary of the European non-bailout, it is the next best thing.” We agree; we cannot find a better way to communicate the pure confusion.   One obvious problem is the political and financial fallout from the “voluntary” 50% haircuts being agreed to by Greek bondholders. Now that Greek bondholders have been shorn, what will keep Italy, Spain and Portugal from asking for the same deal to help them out of their debt obligations? German Chancellor Merkel is already warning against this. She declared, “In Europe, it must be prevented that others come seeking a haircut.” It is possible that the finance ministers of the eurozone have accomplished nothing more than to prevent fiscal contagion by exchanging it for a pandemic of debt forgiveness, as nation after nation lines up to ask their creditors to similarly accept 50% haircuts or perhaps even more.

The European Debt Crisis and the G-20 Summit Meeting - Simon Johnson - The G-20 heads of government have met twice a year since 2009, and in Cannes this week they meet again. Could this meeting help stabilize the world economy? Can President Obama again play a leading role? The answer to both questions is likely to be no. In 2009, the primary problem was slumping economies in the United States and Western Europe. It was in the perceived individual interest of those economies to engage in some fiscal stimulus – and they were happy to present this as a joint approach. China was also willing to stimulate its economy, as its policy makers feared that slowing global trade would reduce Chinese exports. President Obama’s appeal for fiscal stimulus around the world was pushing on an open door. Now the issue is quite different. We have a sovereign debt crisis within the euro zone, in which countries that have borrowed heavily are facing the prospect of restructuring their debts. The euro zone summit meeting last week established that Greek debt would fall by about half (relative to face value), although this does not clearly put Greece onto a sustainable debt path. Prime Minister Andreas Papandreou announced a plan on Monday for a referendum on the plan, a move with the potential to build political support for the needed reforms, and on Wednesday his cabinet offered its full support. But another outcome — if the government does not fall in the meantime, making the referendum plan moot — could be a Greek exit from the euro and a default on its debts in disorderly fashion, without any kind of international framework or outside financial support.

G-20 Leaders Mull Push for Yuan Flexibility - The Group of 20 is debating whether to include a reference to China’s currency in a joint statement by leaders following their two-day summit in Cannes, France, according to an official from a G-20 nation.  A draft of the communique singled out China as needing to allow more flexibility in its currency to help ease global trade and investment imbalances, the official said on condition of anonymity because discussions on the statement haven’t finished. The official wasn’t convinced the citation will remain in the final version because of opposition from Chinese officials. The statement is scheduled for release tomorrow.  Any ratcheting up of pressure on yuan gains might risk stoking tension as European officials seek to persuade China to invest in an expanded rescue fund aimed at resolving the euro- region’s debt crisis. Chinese Deputy Finance Minister Zhu Guangyao last month welcomed a statement by G-20 finance chiefs that omitted reference to the yuan. 

A Default By Any Other Name - Isn't it wonderful how our Ruling Class can persuade itself that something isn't really what it is, simply by calling it something else. "EU Forges Greek Bond Deal," shouts the headline on Thursday's Wall Street Journal. Aha, one thinks, they've found a solution that doesn't involve Greece going into default. They reached a "deal." But wait a minute. The second line reads: "Private Investors to Take 50% Haircut." What is a 50% haircut if not a default? Let's see here. What is the definition of the word "default"? According to my handy Webster's New World College Dictionary, 4th ed., it is: "1. failure to do something ... when required or expected; specif., (a) failure to pay money due...." I see nothing in this definition implying that acquiescence by a defaultee changes the nature of the act of the defaulter. Let's be frank: at 50 cents on the euro, Greece is defaulting on its bonds, i.e. failing to pay money due.

Europe Tries To Recapitalize Banks Without Injecting Capital (Bloomberg) -- Europe’s largest banks may raise just a tenth of the total capital shortfall estimated by regulators, fueling concern policy makers’ plans to bolster the region’s lenders could fail. European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($148 billion). Of Europe’s 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report. Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends. EU leaders already are pressing banks to restrain payments to employees and shareholders until they meet the capital target.

Europe Shouldn’t Count on a Chinese Bailout - Speculation continues that emerging-market countries will step up to bail out Europe from its sovereign debt crisis. Don’t buy into it, World Bank President Robert Zoellick says. China and other developing economies may be able to support Europe’s plans down the road by providing some money through international institutions such as the International Monetary Fund. But expectations shouldn’t be raised about what they can do, Zoellick said Tuesday. “The picture is pretty clear,” he told reporters. “Europeans are going to have to be the principal agents in solving Europe’s problems.” Some officials from China, Brazil and other emerging-market countries — in a demonstration of their growing international swagger — have stoked speculation that they could provide money for Europe’s bailout fund. But the notion, which has tended to pop up ahead of international meetings over the past two months, hasn’t gained much traction. Zoellick said the latest plan for the euro-zone rescue fund, set last week in Brussels, “needs further clarification to have a sense of what risks people would be taking in terms of investing in it.” But he maintained, as he did amid earlier speculation in September, that China and others wouldn’t be rushing in with money.

Why the latest eurozone bail-out is destined to fail within weeks - Let’s be clear – if global bond markets stop lending to a number of large Western economies, we are in the realms of unpaid state wages and pensions, transport chaos and closures of schools and hospitals – sparking the prospect of serious civil unrest. Forgive my intemperate tone, but these are the dangers we face. And I’m afraid the only rational response to Thursday’s announcement is that the probability of such undesirable outcomes has just been increased. European leaders have reached an “agreement”, we were told, with the private holders of Greek debt, who now accept a 50pc write-down on their stakes. This is predicated on an additional €120bn (£105bn) cash-injection by EU member states and the IMF. By paying bond-holders less, and making other savings, the hope is that Greece can cut its sovereign debt from 150pc of GDP to 120pc in the next few years. The deal is “voluntary”, though, nothing having been decided except the “50pc haircut” headline. In reality, by bargaining hard over coupons and maturities – how much the bonds will pay annually, and for how long – those who so unwisely lent money to Greece (eager to reap high yields, while always expecting a bail-out) will get a much sweeter deal. This is the discussion that will take place, behind closed doors, during the coming months. But that sweeter deal will need to be paid for with yet more sovereign borrowing, by some eurozone government or other, plus further sack-loads of taxpayers’ cash.

Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism - Link if video does not play: Treaty of debt (ESM) - stop it now! There are comments on The Telegraph article A German view of the bailout deal which is where I found the video. Key Details of ESM Accord:

  • Article 8 says "Authorized Capital stock 700 billion Euros"
  • Article 9 says "ESM members irrevocably and unconditionally undertake to pay capital calls on them within 7 days"
  • Article 10 allows the ESM board of governors to "change the authorized capital and amend article 8 accordingly"
  • Article 27 says ESM shall enjoy "immunity from every form of judicial process". Thus the ESM can sue member countries but no one can challenge it. No governments, parliament or any other body or laws apply to the ESM or its organization.
  • Article 30 says "Governors, alternate governors, directors, alternate directors, the managing director and staff shall be immune from legal process with respect to acts performed by them (...) and shall enjoy inviolability in respect of their official papers and documents"

There are no independent reviewers and no existing laws apply. Thus Europe's national budgets will be in the hands of one single, unelected body that is accountable to no one and immune from all legal actions.

Full Text: European Union letter to the G20 on the Euro crisis  - Joint letter by President Van Rompuy and President Barroso to the G20 leaders

The two halves of the eurozone are locked in a broken marriage - Greek premier George Papandreou and his ministers were cruelly depicted in cartoons knuckling to German orders or delivering the Nazi salute.  The yearly march commemorating the struggle against the Axis was blocked in Thessaloniki by protesters shouting "traitor" at Greece's aging president Karolos Papuolias, himself a teenage resistor.  The city band wore black ribbons of protest against the Memorandum, the hated document of EU-IMF submission. They downed instruments in silence as they passed the podium of ministers.  I do not wish to be anti-German, since German citizens have been misled by their own elites and Germany itself is the chief diplomatic and political victim of EMU's unfolding tragedy.  But this is what happens when you insert words such as "Überwachungskapazität vor Ort" (monitoring capacity on the ground) into EU summit conclusions.  Europe’s inspectors will henceforth establish an occupation office in Athens to ensure the "full implementation" of austerity policies, for as long as it takes. Greece has been stripped even of the pretence of sovereignty.

European Doom Loop - Paul Krugman - I think Dean Baker is being a bit too hard here. The Draghi piece was mainly a profile, and I’m willing to cut a bit of slack on the macro analysis. That said, Dean is completely right about the macro doom loop the Europeans have created for themselves, in which the ECB’s refusal to provide either the lender of last resort facility or the monetary expansion the eurozone needs is creating a vicious circle of self-reinforcing austerity. Dick Baldwin got at this very well last week, although he was excessively optimistic about how long the fix would last; it was two days, not six months. And was anyone else struck by Sarkozy’s declaration last week that since French growth was going to be slower than expected, it would be necessary to tighten the budget further? France may still have a AAA rating, but at the margin it’s behaving like a debt crisis country, with fiscal policy reinforcing a downturn rather than fighting it. I’d still like to imagine that next week Mario Draghi, newly installed as ECB president, will suddenly reveal himself as a supporter of quantitative easing and a 4 percent inflation target, not to mention open-ended lending to crisis countries. And all this would be perfectly sensible — much more so than the way the ECB is actually behaving. But it’s not going to happen.

Europe’s Plan To End the Debt Crisis – Putting The “Con” in “Confidence” Part 1 - The most recent summit failed to meet even the lowest expectations. Euro-Zone leaders displayed poor understanding of the problems, confused strategies, political bickering and infighting as well as inability to take decisive steps and stick to a course of actions. This summit follows the 21 July 2011 declaration of a definitive grand plan to solve the problem. Like the ones before it, the 26 October meeting yielded a plan to have a plan to have a plan etc. There’s no reason to believe that this summit will be the last. The actions need to try to stabilise the European debt crisis are well recognised. Countries like Greece need to restructure its debt to reduce the amount owed – an euphemism for default. Banks suffering large losses as a result of these debt write-downs need to be stabilised by injecting new capital and ensuring access to funding to avoid insolvency. A firewall needs to be erected to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from the further spread of the debt crisis. Steps must be taken to return Europe to sustainable growth as soon as possible.Even if all these measures could be implemented as soon as possible, success is not assured. But without them, the chance of a disorderly collapse is increasingly significant.

Forget The Unknown Unknowns: Just The Known Unknowns In The Eurozone Crisis Paint A Dismal Picture - While only the market, and no one else, seems to have a grasp on the unknown unknowns in the Eurozone crisis, and has voted two toes up, despite really having no clue what is coming for Europe, here is a report from Exclusive-Analysis that summarizes the known unknowns, and comes up with a bleak conclusion: "We remain very doubtful that the relative optimism that has followed the EU summit will last. Last time, the 10th of October, following a Berlusconi announcement of austerity in the previous week, it took markets only a few days to distinguish between the detail of what was agreed and the more optimistic principles that were announced." So as everyone scrambles to figure out what is still missing from European bailout plan, perhaps focus on what is already present, because if that is any indication, the Thursday rally is nothing but yet another confirmation of just how broken the market as a discounting mechanism truly is.

No Strong-Arming in Greek Debt Deal, IIF Chief Says - European officials, as part of their latest plan to fight the euro-zone debt crisis, are counting on banks to voluntarily wipe out half the value of their Greek bonds. How easy will that be? The head of the international banks’ trade group suggested Monday that the vast majority of them are already on board. Charles Dallara, managing director of the Washington-based Institute of International Finance, said the group’s task force to secure the latest deal included 40 to 45 firms holding more than 80% of the identified holdings of Greek government bonds. Dallara said he expects “very, very high participation” in the deal. “I feel quite confident that this reflects the will of the bulk of the investors,” he told reporters. “I, of course, cannot say that our views speak for all of them. There are a myriad of smaller holders that we have not been able to contact.”About a third of the 206 billion euros of private-sector debt included in the deal is held by Greek investors – 45 billion euros at Greek banks and 20 billion euros among other Greek investors.

Another Eurozone Country Bites The Dust -Real estate in the Republic of Cyprus has been popular with foreigners who own about 100,000 homes—in a country with 803,000 people. The British alone, whose colony this was until 1960, own more than 60,000 homes. Turns out, real estate is Cyprus' national sport sponsored by dumb money. But now it has become a nightmare that is unraveling the finances not only of expat home owners, but also of developers, banks, and the government. Yet it's hushed up. By comparison, the banks' impending losses on Greek sovereign debt, significant as they are, seem outright manageable. "The most common mistake people make when buying property in Cyprus is to use a lawyer who has been introduced or recommended to them by a property developer," says Nigel Howarth who has helped foreign property buyers in Cyprus for more than 10 years. Foreign buyers are sitting ducks. They're unaware of the local business culture and don't suspect that their lawyers are in cahoots with developers--aided and abetted by the banks.

Portugal seeks to renegotiate bailout program: PM (Xinhua) -- Portuguese Prime Minister Pedro Passos Coelho said Suntoday that Portugal will ask the troika for a renegotiation of the financial assistance program. The announcement was made in Asuncion, Paraguay, at a press conference at the end of the Iberian-American Summit, according to news reaching here. According to the prime minister, the Memorandum of Understanding signed in March with the troika, namely the International Monetary Fund, the European Central Bank and the European Commission is "unrealistic". "The goal is to obtain more flexible solutions," said Coelho. The main difficulty that the Portuguese government faces is financing public companies. The bailout agreement stipulates that those companies should seek their capital needs in the market, but at this moment the situation is adverse for Portuguese state owned companies to raise funds.

Czech PM mulls euro referendum - The ruling euro-sceptic ODS party in the Czech Republic wants to push for a referendum on the country's future eurozone accession, claiming that the rules have changed since 2003 when Czechs said yes to the EU and the euro. We signed up to a monetary union, not a transfer union or a bond union in our accession treaty. This is the major reason why the Czech Prime minister wishes to call the referendum on this matter," said Czech MEP Jan Zahradil, leader of the European Conservatives and Reformists. Last weekend, at an ODS party congress, Prime Minister Petr Necas demanded a referendum on whether the country should join the eurozone. "The conditions under which the Czech citizens decided in a referendum in 2003 on the country's accession to the EU and on its commitment to adopt the single currency, euro, have changed. That is why the ODS will demand that a possible accession to the single currency and the entry into the European stabilisation mechanism be decided on by Czech citizens," the ODS resolution says.

European Bailout Fund Could ‘One Day’ Issue Bonds in Yuan - The euro area’s bailout fund could at some point issue bonds denominated in the Chinese currency, Chief Executive Officer Klaus Regling said in Beijing today. “We are authorized to use any currency we want if it seems efficient so we may one day issue in U.S. dollars or renminbi,” said Regling, head of the European Financial Stability Facility, using another name for the yuan. “It depends whether the Chinese authorities would approve of that. I could imagine that over the years that might happen, maybe not immediately but maybe one day,” he said. European leaders are seeking financial support from China, holder of the world’s largest foreign-exchange reserves, for an enlarged rescue fund aimed at containing the region’s sovereign- debt crisis. Vice Finance Minister Zhu Guangyao said yesterday his government wants more details about the “technicalities” before making any decision on investment. Regling said yesterday that China, which has been a “good” and “loyal” purchaser of EFSF bonds so far, hasn’t set any conditions for buying more of the securities.

Sarkozy Criticized for Seeking China’s Help - French President Nicolas Sarkozy came under fire from opposition leaders for seeking China’s help to resolve the euro area’s debt crisis. “It’s shocking,” Martine Aubry, the general secretary of the Socialist Party, said in the Sunday newspaper, Journal du Dimanche. “The Europeans, by turning to the Chinese, are showing their weakness. How will Europe be able to ask China to stop undervaluing its currency or to accept reciprocal commercial accords?” Sarkozy reached out last week to his Chinese counterpart Hu Jintao to build support for an enlarged rescue fund designed to solve the region’s sovereign-debt crisis. The leaders talked just hours after a euro-region summit on Oct. 27 ended with an agreement to boost the European Financial Stability Facility to about 1 trillion euros ($1.4 trillion), leveraging existing guarantees by as much as five times.

For Europe Bailout Fund, Next Stop Is Japan —The head of Europe's bailout fund, Klaus Regling, takes his tour of potential Asian investors to Japan next, after Beijing proved unwilling to open its checkbook until European leaders could offer more details about their plan to save the euro zone. Japan has shown itself to be a willing buyer of bonds issued by Mr. Regling's European Financial Stability Facility, and Japanese Finance Minister Jun Azumi said last week that the country stands ready to buy more. Mr. Regling said Monday after a meeting with Takehiko Nakao, Japan's top financial diplomat, that Tokyo would continue to buy EFSF bonds.

Sovereign CDS Decision Likely to Reduce Investors’ Appetite for Risk - The oxymoronic decision to force private sector creditors to accept voluntary haircuts on Greek sovereign debt is likely to doom the sovereign credit default swaps (CDS) market. CDS are insurance-like financial contracts that allow investors to buy protection from default risk. The new 50% write down on Greek government debt is tantamount to default, but structured in such a way so as to avoid triggering CDS default payments. This is like watching a house burn down while simultaneously learning that fire is not a risk covered in the homeowner’s insurance policy. Why would anyone rationally decide to throw money away on insurance premiums in the future? The problem for the euro zone is that the potential “buyer’s strike” will extend not only to CDS protection, but also to sovereign bonds themselves. CDS are used to reduce net exposure to credit risk. If an investor has $100 million of gross exposure to Italian sovereign debt, for example, she can cut her net exposure to $50 million by buying $50 million of notional protection in the CDS market. However, if the investor later discovers that the CDS protection does not work, the only way she can reduce her net exposure to $50 million is by selling $50 million of her Italian government debt portfolio.

Gene Frieda: Europe’s Dying Bank Model - Yves here. Frieda makes a very important point in this Project Syndicate column, that of the role of the banking system in the European debt crisis. On one level, it may seem trivial to say that the sovereign debt crisis is the result of financial crisis. But the Eurozone leadership has not drilled into the next layer: how did this come about? The superficial explanation, that they all ate too much US subprime debt and got really sick, is superficial and shifts attention away from the real issues. European banks have huge balance sheets with a lot of low-return investments. I did some consulting work for some European banks over a decade ago (one of the remarkable things about banking is how little things change over time) and they tended to target commodity areas of banking in the US, not simply because that was where they could break in, but also because the returns were tolerable (although they did hope to move up the food chain into more lucrative business). Frieda argues that merely having banks raise capital ratios to the 9% level stipulated in the current version of the Eurozone rescue is inadequate. Absent more aggressive measures, “no amount of capital will restore investors’ faith in eurozone banks.”

George Soros attacks Brussels rescue deal - Veteran investor George Soros has attacked the lack of leadership at the top of the eurozone and said that the new Brussels "deal" to solve the debt crisis will only last between "one day and three months". Mr Soros said that the 50pc "haircut" on private bond holders would only reduce Greek debt by 20pc. He said that was insufficient to stop an economic decline in Greece which would lead to greater social unrest. His words come as the eurozone appeared to be heading for further economic trouble as investors started to express scepticism about the rescue deal announced in the early hours of Thursday morning. This weekend Goldman Sachs said that the eurozone countries were heading for a "mild recession" as confidence waned. "Given the magnitude of the crisis it is again too little too late," Mr Soros said of the Brussels deal at a dinner organised by Pi Capital investor network on Thursday. "It will bring relief partly because the markets were so obsessed by the lack of leadership. The mere fact that something was achieved was a major relief and it will be good for any time from one day to three months.

Sarkozy Warns France of New Economic Reality - Asserting that a global catastrophe had been averted by an 11th-hour deal to save the euro, a drawn and dour French president returned to Paris late Thursday with a sobering message for austerity-weary France1.  “We have entered a new world,” Nicolas Sarkozy2 said in a nationally televised interview3 — his first in more than eight months of turmoil that has seen investors’ confidence in the soundness of France’s financial system shaken by its heavy exposure to Greece. Presenting himself as “protector” of the nation, he warned that France’s new commitments under the rescue plan would require greater economic discipline.  “If we want to defend the French social model,” Mr. Sarkozy said, striking an almost fatherly tone, “we will need to take the necessary measures.”  Six months before a re-election campaign that has yet to formally begin, Mr. Sarkozy — his popularity at an all-time low — painted a pessimistic tableau of slowing economic growth and deeper spending cuts aimed at shoring up France’s credibility with financial markets. He dismissed popular keystones of past Socialist governments, including the 35-hour work week and retirement at age 60, as untenable vestiges of a pre-crisis era that would only complicate France’s efforts to revive economic growth.

German Finance Minister Schäuble Calls for a Eurozone Tobin Tax - Yves Smith - A key German finance leader is talking tough about financial reform. But will his peers follow? Wolfgang Schäuble, in a Financial Times interview, called for a Tobin tax to discourage speculation. Schäuble urged the EU to proceed with the idea even if England balked. That’s a sound move, since in too many markets, transaction costs have gotten to be so low that the ratio of real-economy related activity to mere opportunistic trading has gotten badly out of whack. The classic example is high frequency trading, where speculators add liquidity when it isn’t particularly needed, and withdraw it in a destabilizing manner at the first sign of trouble.  Readers may argue that banks will innovate around such a tax, but they miss crucial chokepoints that regulators have and have not yet used. All major banks that play in the Euro need direct access to payment facilities, and ultimately, payment systems controlled by the ECB. The big payments are almost all related to securities transactions; Perry Mehrling, in an interview, estimated the securities-related volumes as over 50X the real economy activity. A major bank can’t afford to go through correspondents; both the transaction costs and the detrimental impact as far as corporate customers are concerned would be too great. And Mehrling claims (and I haven’t yet found any evidence to the contrary) that banks can’t innovate around the need for direct access to central bank payment facilities. Since any global bank worth its salt has to do business in the euro, the ECB could well impose global rules relating to activity in the euro, including a transaction tax.

European Unemployment Up - European unemployment numbers came out for September, and it's pretty clear that things are getting worse - starting to look like a renewed recession in Europe.  Hardly surprising with all the financial turmoil, I suppose.  The country-level rates look as follows: Spain and Greece are worst, followed by some of the Eastern European countries and Ireland. Also, the early estimate for inflation in October was 3% so that's not particularly low.

Euro-zone Unemployment Ticks Up - Unemployment is on the rise in Europe. The jobless rate in the 17 countries using the euro rose to 10.2% in September from 10.1% in August, matching the 13-year high logged last year and further indicating that the financial crisis is weighing on jobs. Spain had the highest unemployment rate in the euro zone, clocking in at 22.6%. Austria’s, at 3.9%, was the lowest.

German manufacturing shrinks in Oct for 1st time in 2 years - Germany's manufacturing sector contracted in October for the first time in more than two years as new orders fell for a fourth month in a row, data showed on Wednesday in the latest sign Europe's bulwark economy is set for a sharp slowdown. Markit's Purchasing Managers' Index (PMI) fell for a sixth consecutive month in October to hit 49.1 -- just above an initial estimate of 48.9 but below the key 50 line that divides growth from contraction. It was the first time activity had shrunk since September 2009 and it was the lowest PMI reading since July 2009. The sub-index for new orders fell to 45.1, showing the outlook is darkening for the German economy, which recovered from the financial crisis faster-than-expected and outperformed its peers over the past year. The reading for export orders fell even further in a fresh sign that weakness in key markets abroad and uncertainty due to the euro zone debt crisis is hurting German trade. Berlin last month nearly halved its forecast for 2012 growth to 1 percent due to weaker expectations for exports.

Europe’s Economy is Falling Apart - 10/31/2011 - Yves Smith  - Yves here. Note the comment at the end, that Sarkozy’s sales pitch to China on the levered up EFSF did not go so well. If the Chinese don’t relent, this greatly reduces of this scheme working, even in the short term. And further note that the flagging European growth is the result of the austerity hairshirt being imposed on highly indebted economies. Ambrose Evans-Pritchard has a pointed article on the consequences of the beggar-thy-neighbor German stanceAngela Merkel has been warning for quite some time that Europe’s economic woes will take up to a decade to fix and that it is time for Europe to rethink its economic strategy after years of living “beyond its means”. It seems fairly obvious from those statements that the rest of the world is going to have to get use to Europe moving into a slow growth phase while it attempts to adjust away from what it considers to be unsustainable debt. In an attempt support the transition while keeping Europe together the European leaders have put together 3 part package to save Greece, re-capitalise the banks and provide a stability mechanism for countries that run into trouble. The problem is that once you understand the technicalities behind what they have come up with you come to realise that real economic growth is the only thing that actually matters. The latest news out of Europe for many of the 17 member nations is not good at all in that regard. It became obvious that Belgium was in trouble when it was forced to nationalise Dexia, and over the weekend the Belgium central bank reported that economy is now stalling:

Austerity Still Not Expansionary - At Eurointelligence, Rob Parenteau digs into a recently-leaked “Troika” (the IMF, European Central Bank, and European Commission) document that discusses the outlines of a Greek debt restructuring deal.  Among the revelations Parenteau extracts from the document is evidence of a growing willingness to concede that fiscal consolidation is not expansionary.  As Parenteau comments: In 2009 and 2010, citizens across the eurozone were sold large, multi-year tax hikes and government spending cuts on the idea that [expansionary fiscal consolidations] are commonplace and achievable, and besides, balanced fiscal budgets are a sign of prudence and moral purity. In fact, a closer inspection of history suggests fiscal consolidation will tend to be expansionary only under fairly special conditions, namely when accompanied by a) a fall in the exchange rate that improves the contribution of foreign trade to economic growth, and b) a fall in interest rate levels that improves interest rate sensitive spending by households and firms. Notice that neither of these special conditions are automatic, and neither of them have been present in the eurozone of late. Read the whole article, including a link to the leaked document, here.

Okay, Very Soon We're Going To Have To Start Talking About Portugal … Just a warning: We're going to have to start talking about Portugal again, probably rather soon. Remember, this is a country that's already received IMF assistance, and its 2-year debt is trading over 18%. Ambrose Evans-Pritchard recently wrote a story about its "Grecian vortex", citing worrying comments from ECB officials on Portugal. Meanwhile, its leadership, having seen the sweet deal received by Greece, is already chattering about renegotiating its bailout. Bottom line: Pretty soon we'll have to talk about this a lot more.

Merkel calls for legal minimum wage - HALFWAY THROUGH her second term, chancellor Angela Merkel has made a pre-emptive strike to secure a third term by asking her ruling Christian Democratic Union (CDU) to back a statutory minimum wage. After decades of opposing such a move, CDU delegates at a party conference in two weeks’ time will debate plans to introduce a “market-based lower limit for wages” of at least €6.89 an hour. The move appears designed to boost the CDU’s social credentials before the 2013 election. But it risks alienating further CDU conservatives who accuse Dr Merkel of destroying the party’s traditional profile to chase floating voters. A party conference document leaked yesterday reads: “We want a lower limit on wages, decided by the social partners and thus market-based.”

Another U-Turn For Merkel - Chancellor Angela Merkel has performed another big U-turn by calling for a minimum wage, which she had opposed until now. She is sharpening her party's social profile in response to the euro crisis -- and, possibly, to secure her power by preparing another 'grand coalition' with the Social Democrats. Angela Merkel has a reputation for playing the long game. But the German chancellor is no stranger to U-turns either, if it serves her political goals. There are some striking examples of Merkel vacating positions that had long been core to the agenda of her conservative Christian Democratic Union (CDU) party. Mandatory military service, that bedrock of CDU policy for decades? Merkel ditched it last year. Nuclear power? She arranged for an early exit just months after extending the lifetimes of reactors. The three-tiered system of secondary schools? A thing of the past. And now it's the turn of social policy. At its party congress in November, the CDU plans to pass a motion that has long been the exclusive domain of the left-wing opposition parties: a minimum wage.

What saves the euro will kill the union - Angela Merkel has been saying it for some time: when the euro fails, Europe fails. The German chancellor is right, but I would add a twist: if the euro succeeds, Europe is also likely to fail. The reason is that the policies needed to solve the eurozone crisis will destroy the European Union as we know it. In particular, they will have profound implications for countries such as the UK, Sweden and Denmark.  The euro was introduced on the back of two lies, which the complacent policy crowd in Brussels rarely bothered to challenge. The first, now well known, is that monetary union could exist without political integration. The second derives from it: that the EU’s euro and non-euro countries could sustainably co-exist. This is the idea of the EU as a “club of clubs”. We all share the single market, but otherwise co-exist in a framework of flexible and variable geometry.The eurozone’s crisis resolution is already unfolding a dynamic that is inconsistent with this. Last week’s decision by eurozone members to leverage the European financial stability facility will push the eurozone on a divergent path from the rest of the EU. The measure is as insufficient as previous “comprehensive plans” to deal with the crisis. But the sceptical reaction of global investors will force further measures. Eurozone members will need the European Central Bank as a lender of last resort. They will move from separate to joint liability of sovereign debt guarantees, possibly leading eventually to a eurozone bond. To solve underlying structural problems, they will need to harmonise their financial sectors, improve product and services markets, and co-ordinate labour market rules, an area now off-limits. They will have to start to co-ordinate tax policies, eventually, perhaps, introducing eurozone-level taxes.

The ECB’s Battle against Central Banking, by Brad DeLong - When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary. It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently? The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” .Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition.

European Central Bank Refusal to Act Like a Central Bank Contributes to Europe’s Woes - Paul de Grauwe has a good summary of the latest problem avoidance strategy masquerading as a “solution” to the European banking crisis (which is not a sovereign debt crisis). Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.The ECB (European Central Bank) has been behaving like the generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.

Whipsaw Traps - John Hussman - With respect to Europe's perceived "solution" to its debt crisis, the 50% write-down of Greek debt is appropriate, but it's not clear that this includes a writedown of Greek obligations to "official" holders such as other European governments and agencies. If not, it's unclear whether the writedown is really deep enough to allow Greece to avoid further debt problems several years out. Likewise, I suspect that investors are celebrating various "headline" figures (such as "1 trillion euros") without much understanding of what they are cheering about. The European Financial Stability Facility (EFSF) is a Luxembourg corporation to which European states have committed 440 billion euros of backing, beyond which the EFSF must issue its own bonds to investors in order to make loans (not grants) to recipient countries or banks. There are two basic options that the EFSF contemplates for "leveraging" its 440 billion euros (which will actually probably be closer to 250 billion for all of Europe after amounts needed for Greece and bank recapitalizations). One is to issue "credit enhancements" or "partial protection certificates" that would be sold along with the new debt of European governments, where the certificates would provide first-loss protection of say, 20% of face value. Alternatively, the EFSF could construct a "special purpose vehicle" or SPV in each given country - basically an investment company formed to buy European debt - where the EFSF would "provide the equity tranche of the vehicle and hence absorb the first proportion of losses incurred by the vehicle."

Italy’s Jobless Rate Hits 10-Month High of 8.3% in September -- Italy’s jobless rate rose to 8.3 percent in September amid a government austerity drive aimed at shielding the euro-region’s second-most indebted country from the sovereign crisis. The rate climbed from a revised 8 percent in August, Rome- based national statistics institute Istat said in a preliminary estimate today. Economists predicted the rate would be unchanged at 7.9 percent, the median of 10 forecasts in a Bloomberg survey of three economists showed. Joblessness among those between ages 15 and 24 rose to 29.3 percent in September, the highest since the series began in 2004, from 28 percent in the previous month. Prime Minister Silvio Berlusconi is struggling to prevent Italy from succumbing to the debt crisis. His government has pushed through more than 100 billion euros ($139 billion) in austerity measures since July, in part to convince the European Central Bank to start buying the nation’s debt on Aug. 8 to stem surging borrowing costs.

Berlusconi Defiant as EU’s Focus Shifts to Italy - Italian Prime Minister Silvio Berlusconi said he alone can deliver the country’s promised deficit cuts as European leaders ramp up demands that his government do its part to combat the region’s debt crisis.  Berlusconi ruled out early elections and said the current legislature in Rome will last until 2013, according to an interview published yesterday in Corriere della Sera. He said the European Central Bank’s support will only be maintained if his administration follows through on the pledged measures. “Only I and my government can achieve this reform program for 18 months, which is why there is no way for me to stand aside,” the Italian leader told the newspaper.  The European Union’s latest package of measures failed to staunch a rise in Italian borrowing costs, with an Oct. 28 bond sale sending yields to a euro-era record and damping the euphoria unleashed after the summit that ended the day before. Luxembourg Prime Minister Jean-Claude Juncker insisted that Italy should deliver “substantial structural reform.”

Italian Bonds Breach 6% Yield -- Italian government bonds buckled Monday, with five-year yields climbing to euro-era highs and the 10-year yield rising above the psychologically important 6% level as the post-European Union summit enthusiasm in risky assets fizzled out. The five-year Italian bond yield rose nine basis points to 5.80%, the highest level since the inception of the common currency. The 10-year yield increased by eight basis points to 6.06%, rising further from Friday when an Italian bond sale received feeble demand. "The lack of detail accompanying the summit's grand plans is sorely limiting the scope for a more permanent shoring up of sentiment,"

Mamma Mia - Krugman - The European rescue plan is falling apart even faster than I expected. One way to think about this is to say that if Italy were perceived as safe, with no real chance of a future default, it would be able to borrow long-term at an interest rate comparable to Germany’s. German rates are currently below 2 percent, but that’s partly because eurozone fears are depressing the outlook; still it’s a good bet that Italy’s rate would be in the 3-4 percent range. But if the debt must be rolled over at >6%, given the size of Italy’s debt, that vastly increases the primary (non-interest) budget surplus Italy needs to stabilize its position. And that difference is quite plausibly the difference between paying its debts and defaulting. So we’re deep into self-fulfilling pessimism territory here. Either the ECB moves in with big purchases, or the euro is crostini.

Italy on the brink - EUROPE'S long-awaited crack at a bold euro-crisis solution calmed markets for all of two days. After digesting the plan, and observing a dismal Italian bond auction, equities are dropping today and the sovereign bond yields around the euro-zone periphery are rising. This development comes as little surprise. The euro zone needed to put together a credible, suitably large backstop for government debt. Instead, leaders cobbled together a plan to provide a guarantee against some losses on government debt and to leverage up the European Financial Stability Facility's paltry €440 billion in capital. But even a leveraged up fund looks small against the scale of maturing debt, and the enterprise is weakened by reliance on the backing of peripheral sovereigns which are themselves under threat. And so attention once again turns to the European Central Bank.   Because central banks can print money, their presence as a buyer of last resort essentially eliminates the risk of panic.  The ECB was deliberately created without fiscal backing and without the right to buy the debt of member governments. It's a pseudo-central bank, leaving the euro zone with the strictures of a single currency area but without the critical shock absorber most economies enjoy.

Ferrari chairman calls on Berlusconi to quit - A prominent Italian businessman called on Prime Minister Silvio Berlusconi to resign on Monday, as Italian bond yields rose nearly to August levels, indicating concern that problems in the euro zone's third largest economy could threaten the whole bloc. Luca Cordero di Montezemolo, chairman of sports car maker Ferrari, said in a letter to the daily La Repubblica that Italy had reached "the point of no return" and urged Berlusconi to make way for a government of national unity. Yields on Italy's 10-year, fixed-rate bonds known as BTPs jumped to 6.1 per cent from 5.9 last week, piling pressure on the government amid new criticism over its handling of the economy. Italian bank leaders said tensions on sovereign bond markets risked hitting the wider economy. Giovanni Bazoli, chairman of Italy's biggest retail bank Intesa San Paolo (ISP.MI), told a conference in Rome the risk of a credit crunch was "inevitable" if tensions on the sovereign debt market continued.

Chicken caesar - MY COLLEAGUE has a very good post on the dangers of a full-fledged Italian crisis. He notes that: [T]he ECB must act forcefully to be any hope of a future. Responsibility for that will fall to Mario Draghi, who tomorrow succeeds Jean-Claude Trichet as head of the bank. There's a clear awkwardness to the hope that an Italian will immediately begin massive purchases of Italian debt upon assuming control. To understand why Mr Draghi may have been a very clever choice by the ECB, we have to step back and look at what game Silvio Berlusconi’s Italy is playing with the ECB and Germany. In this game of chicken, a collapse of Italian bonds is a major problem for both, but neither wants to give in and do what is necessary. For Italy that would not necessarily mean austerity, but aggressive moves to restore competitiveness, pension reforms or setting up legal barriers to future deficits. The ECB and Germany on the other hand could set up the much-debated unlimited liquidity support through the ECB. In this game, what would be a good strategy? Committing yourself to one option in advance, such that the other party knows you probably won’t swerve.

Does Italy Really Deserve To Be A Scary Halloween Story? - Last week after the latest European summit, most of the markets were jumping, with the Russell Index rising over 5% on Thursday, Oct. 28. Then word came that the spread over their German equivalents for Italian ten-year bonds had risen to over 6%, pushing the level in August just before the ECB began buying Italian and Spanish bonds. Now everyone is freaking out that perceived failures by Italy to reform will doom the euro and the EU, with the Daily Mail even fancifully forecasting major European war by 2018. Is all this really justified? Of course, the simple answer is "yes" because the markets say so, and it is clear that Italy is so big that nobody can bail it out if it defaults. But how likely is that really? Yes, its debt-GDP ratio is about 120%, but it has had a greater than 100% such ratio for a majority of years over the last half century, with nobody much bothered as Italians have a high savings rate and most of this debt is internally owned.  More is going on here, and I think there are two parts, a short-term one and a long-term one. The short-term one is simple: Silvio Berlusconi. Both Merkel and Sarkozy have barely been able to restrain their justified contempt for this 75-year old clown. The longer term problem is that growth has slowed, now a ten year phenomenon of barely 1% per year growth.

Swiss Magic and Central Bank Price-Targeting - You may recall that in September the Swiss National Bank (SNB) announced that it was going to intervene as necessary in the currency markets to ensure that the Swiss Franc (CHF) stayed above a minimum exchange rate with the euro of 1.20 CHF/EUR. How has that been working out for them? It turns out that it has been working extremely well. Today the SNB released data on its balance sheet for the end of September. During the month of August the SNB had to spend almost CHF 100 billion to buy foreign currency assets to keep the exchange rate at a reasonable level. But in September -- most of which was after the announcement of the exchange rate minimum -- the SNB's foreign currency assets only grew by about CHF 25 billion. Furthermore, this increase in the CHF value of the SNB's foreign currency assets likely includes substantial capital gains that the SNB reaped on its euro portfolio (which was valued at about €130 bn at the end of September), as the CHF was almost 10% weaker against the euro in September than in August. Given that, it seems likely that the SNB's purchases of new euro assets in September after the announcement of the exchange rate floor almost completely stopped.

Hilarious Video of Eurocrats in Action, Ripping Off Taxpayers and Running Into Walls to Avoid the Cameras - The following must see video shows Eurocrats in action, ripping off taxpayers and inadvertently running into walls to escape the lights of the camera. The video is in German but has English subtitles. A second video follows with French Subtitles. A Member of the European Parliament (MEP) in Brussels earns approx. 14,700 euros per month (~£11,587), according to this RTL Report (in German with English subtitles). How much the MEPs have to work (or don't work) for their €14,700 is the subject of this on-site RTL investigation in Brussels. The video is about MEPs who sign in on attendance lists and then disappear immediately for their weekend. RTL investigating journalists were thrown out of the EU building in Brussels during their work. Some MEPs try to justify themselves, some to invent excuses, again others flee before the camera and dash off to lifts or also in their confusion bump into the wall (German MEP of the Green Party)!

Nowhere to Run, Nowhere to Hide -  Now that Germany and France rolled out the latest provisional miracle rescue of their countries' banks, jubilation reigned in the stock markets and the OECD economy is presumably back to turbo hyper warp speed.   Expect this spirit of euphoria to expire by mid-week. The bankers of the western world and their government helpers have seemingly never heard of unintended consequences, or maybe even consequences, period. The crypto-voluntary bond default of Greece, with 50 percent losses to bond-holders, did not trigger a credit default swap (CDS) "event." Why? Because it is perfectly obvious to all concerned that the CDS market is a grand fraud, so the triggerers are told not to pull any triggers, and it's as simple as that. If CDS were actually allowed to operate as an "insurance" mechanism against dodgy bonds the entire global banking system would go Death Star. Counterparties to these debts could not possibly pay out what the contracts require. So, if CDS are magically "suspended" on Greece's default then they will be suspended for everybody's.  I don't think it matters so much that the CDS market itself is rendered meaningless, because the counterparties hardly put up any real money in the first place, just promises to come up with money at some future date. What matters more is that there really are no hedges on bonds, no real protection if any bonds flop, which means risk has instantly rematerialized in the bond markets and has to be priced back in to bond sales. Unfortunately, that in itself can easily collapse the global financial system, because if investors really require higher interest rates to buy this stuff, the governments issuing the bonds will all choke to death on the interest payments.

Did The European Deal Just Collapse?, by Tim Duy: To be sure, I have been bearish on Europe. From last week: I remain something of a Euroskeptic at this point. At best, I think the Europeans will be kicking the can down the road for a few months. It turns out a "few months" might have been wildly optimistic. It was quickly evident that bond markets didn't show the same enthusiasm equity markets expressed for the supposed deal. That was huge red flag. The second red flag was the Bank of Spain announcing a stagnant 3Q GDP. From the Associated Press: The Bank of Spain suggested that the flat growth calls into question the government's goal of reducing its deficit to 6 percent of GDP in 2011, from 9.2 percent last year......It said domestic demand fell because of lower government spending as a result of deficit-reducing austerity measures taken by regional governments and because of a moribund real estate market. Household and business spending posted small increases. Spain's economic woes stem largely from the collapse of a property bubble.The Bank of Spain said there is still time to meet the deficit reduction target by the year's end but warned that fresh measures may be necessary. Yes, you read that right...the Bank of Spain blamed missing deficit reduction targets on fiscal austerity and then suggests additional fiscal austerity as the solution. And as all nations in the Eurozone increasingly pursue fiscal austerity, we can only expect the nascent European recession to deepen.

Papandreou calls for referendum on EU debt deal - Prime Minister George Papandreou has stated his intention to hold a referendum on last week's agreement in Brussels for Greece's bondholders to accept a 50 percent haircut and the country to receive some 130 billion euros in loans from its eurozone partners. Speaking to PASOK MPs, Papandreou also said that he would ask for a vote of confidence in Parliament. This is likely to take place next week. The referendum could happen later this year. Papandreou said he had faith in Greeks making the right decision. “Let us allow the people to have the last word, let them decide on the country’s fate,” he said. He said handing the vote over to Greeks was «an act of patriotism." The premier insisted that calling snap polls - ahead of elections scheduled for 2013 - would be “simply dodging the issue.” The vote of confidence - likely to be held next week - would come just over four months after a similar vote that Papandreou sought, and won, to bolster his government ahead of a Parliamentary vote on austerity measures. The premier's bombshell came a day after an opinion poll, carried out by To Vima, found that 60 percent of Greeks regard last Thursday's EU debt deal as «negative» or «probably negative."

Europe: Greece to Hold Referendum on Debt Deal in December or January - This was announced earlier today, but this story has the timing. From the NY Times: Greece to Hold Referendum on New Debt Deal Prime Minister George Papandreou announced Monday night that his Socialist government would hold a rare national referendum on a new debt agreement for Greece ... Mr. Papandreou said that the decision on whether to adopt the deal, which includes fresh financial assistance for the country but also imposes unpopular austerity measures, belonged to the Greek people. “Let us allow the people to have the last word, let them decide on the country’s fate,” he said ... Government sources said that the confidence vote was expected by the end of the week, with the referendum much later, in December or even January.So there will be a vote of confidence by the end of this week, and then a general referendum later. The Greek 2 year yield is down to 77.7%. The Greek 1 year yield is down to 158%.  The Portuguese 2 year yield is up to 18.3% and the Irish 2 year yield is up to 8.8%. The Spanish 10 year yield is at 5.54% and the Italian 10 year yield is up to 6.1%. The Belgian 10 year yield is at 4.4% and the French 10 year yield is down to 3.1%.

The shoe drops (cut and run) - Greece’s prime minister unexpectedly announced a referendum to approve a second EU bail-out deal for his austerity-hit country, less than a week after it was agreed with international creditors at a European Union summit. More here, and here, but that’s all you really need to know.  The so-called eurozone deal didn’t last a week, not that there was ever a deal in the first place. p.s. they’re not going to vote yes on the referendum!

Greece’s Surprise Referendum Adds to Chaos - We’re back in the madhouse of uncertainty, at least until January. Until then, the financial markets will go nuts, taking economic sentiment along with them. Just when Greek-watchers didn’t think the situation could get any more convoluted, Greek Prime Minister George Papandreou decided to hold a public referendum on the latest austerity plan. But the vote won’t happen until January. The delay basically puts any credible solution to the sovereign debt crisis on hold–and raises the possibility of a Greek default and possible exit from the euro zone. The uncertainty — including whether the Papandreou government will even hold by week’s end — is driving investors crazy. The Dow Jones Industrial Average plunged about 300 in Wednesday morning trading. Investors are flocking to the safe haven of Treasurys. There is a high probability, if not foregone certainty, that Dexia and MF Global won’t be the only financial firms to fall under the weight of the crisis.

Greek referendum deepens euro zone crisis - The leaders of France and Germany scrambled on Tuesday to limit damage after Prime Minister George Papandreou decided to let Greeks vote on a bailout package -- a move that stunned markets and threw Greece's euro zone membership into question. European politicians complained Athens was trying to wriggle out of the 130 billion-euro rescue deal agreed at a summit only last week, concerned not so much about the fate of Greece as the possibly dire consequences for the entire currency union of the referendum. Ireland, which itself took a bailout, attacked Papandreou's idea."The summit last week was to deal with the uncertainty in the euro zone...and this grenade is thrown in just a few short days later," European affairs minister Lucinda Creighton said. "Legitimately there is going to be a lot of annoyance about it," she told Reuters. The Greek opposition demanded a snap election and financial markets, which had calmed down after euro zone leaders agreed the second Greek bailout, took Papandreou's bombshell badly.

Greek Vote Threatens Bailout - Greek Prime Minister George Papandreou stunned Europe by announcing a referendum on his country's latest bailout—a high-stakes gamble that could undermine the international effort to preserve the euro.  A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.  A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown. The government expects to hold the referendum in January.

"No" in referendum could leave Greece bankrupt: Juncker (Reuters) - Greece could face bankruptcy if the population ends up voting against the European Union's latest financial aid package in a referendum, the chairman of the Eurogroup countries said on Tuesday. Expressing concern at Prime Minister George Papandreou's snap decision to call a referendum on the 130 billion euro ($180 billion) bailout package, Jean-Claude Juncker said it had piled "great nervousness and insecurity" on top of an already highly insecure situation for the euro zone economy. Asked whether Greece could end up bankrupt if Greeks were ultimately to reject the package, Juncker told RTL Radio: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greek people will vote on." "It is something that brings a great nervousness, that adds great insecurity to already great insecurity and therefore we need to see calmly how we will deal with this."

Government in Greece Teeters After Move on Referendum— European markets slid dramatically on Tuesday after Prime Minister George A. Papandreou stunned the continent’s leaders with a surprise announcement late Monday that his government would hold a referendum on a new aid package for Greece. The proposed ballot will put Greek austerity measures — and potentially membership in the euro zone — to a popular vote for the first time, risking Mr. Papandreou’s political future and threatening even greater turmoil both among the countries that share the single currency and further afield. His announcement sent tremors through Europe’s see-sawing markets on Tuesday, with bank stocks taking a particular hammering because of their exposure to Greek debt. President Nicolas Sarkozy of France is expected to speak with German Chancellor Angela Merkel by phone during the day on Tuesday to discuss the referendum, which took both leaders by surprise, Agence-France Presse reported. The French president was said to be “dismayed,” according to Le Monde, citing an unnamed confidant of Mr. Sarkozy.The German Finance Ministry deflected questions in a statement early Tuesday that the call for a referendum “is a domestic political development on which the German government has no official information yet and which therefore it will not comment on.”

2 Greek lawmakers revolt over debt vote  Two Socialist lawmakers revolted Tuesday over their prime minister's shocking decision to hold a referendum on the European debt deal, with one defecting from the governing party and another openly calling for an early election. Lawmaker Milena Apostolaki broke away from the party to declare herself an independent, leaving the Socialists with a razor-thin majority of two seats in the 300-member legislature. Prime Minister George Papandreou's unexpected decision late Monday led to markets plunging Tuesday on fears that Europe's plan to save the euro will unravel. He has not set a specific question, or a date, for the referendum, although ministers said it is expected to be held early next year. He has also called a confidence vote in his government on Friday. This would be the first referendum to be held in Greece since 1974, when Greeks were called on to decide whether they wanted to keep the monarchy after the fall of a seven-year dictatorship. Under a new law passed just last month, a referendum can be called on issues of great national importance. But many have questioned Papandreou's decision to call one on the new debt deal, when he did not ask for a plebescite for Greece's first international bailout last year.

Top brass replaced | Athens News - In a surprise move, on Tuesday evening the defence minister replaced the country’s top brass. An extraordinary meeting of the Government Council of Foreign Affairs and Defence (Kysea), which comprises the prime minister and other key cabinet members, accepted Defence Minister Panos Beglitis' proposal that the following changes be made to army, navy and air force and the general staff:

  • General Ioannis Giagkos, chief of the Greek National Defence General Staff, to be replaced by Lieutenant General Michalis Kostarakos
  • Lieutenant General Fragkos Fragkoulis, chief of the Greek Army General Staff, to be replaced by lieutenant general Konstantinos Zazias
  • Lieutenant General Vasilios Klokozas, chief of the Greek Air Force, to be replaced by air marshal Antonis Tsantirakis
  • Vice-Admiral Dimitrios Elefsiniotis, chief of the Greek Navy General Staff, to be replaced by Rear-Admiral Kosmas Christidis

It is understood that the personnel changes took many members of the government and of the armed forces by surprise. (Athens News)

Greece Replaces Top Brass in Army, Navy, Air Force in Surprise Move; Is Papandreou Preparing for a Military Coup or Afraid of One? -  Greek prime minister George Papandreou pulled a second major surprise move in two days. Yesterday he rattled the markets with a bombshell voter referendum proposal on the EU bailout (see EU Deal Unravels from Many Sides; Italy, France Bond Spreads Hit Record High vs. Germany; Bund Yield Drops Most on Record; All Out Bond Crisis). Today in another surprise move, Greece Replaces Top Brass in Army, Navy, Air Force
I can only think of two reasons for this latest surprise announcement.

  1. Papandreou or the Defense Minister is Preparing for a Military Coup (to stay in power if he does not survive the vote of confidence)
  2. Papandreou or the Defense Minister is Afraid of a Military Coup

Take your pick. It's one or the other but it could be both.

Greece explodes, Italy ticks - I started watching the live BBC feed last night after it became obvious that European markets had reacted very poorly to the call by the Greek PM to allow for a democratic process to occur in his country by asking its citizens to make a decision as to which poison they will imbibe over the next decade. The Greek PM is now running a fine line between his people, the Greek parliament and the rest of Europe which could fall either way. Overnight there were reports that the government was crumbling, then that the referendum was off but neither were true. There will be a confidence vote on Friday for Mr Papandreou, whom at this stage seems to have the numbers, and a spokesperson for the government has re-stated that a referendum is on. Obviously the rest of the European elite are in damage control, but exactly how they will fight against a nation’s right to vote on its own future without coming off looking like the erstwhile Col. Gaddafi will be interesting. I note that there have been some ominous signs of something a little more dangerous occurring with a surprise re-shuffle of the Greek armed forces. The latest update is that this was a “planned” event but given the recent history of Greece this is sure to add tension.

Italy, Europe, and Red Brigade terror – Matters are turning serious. Italy’s labour minister Maurizio Sacconi has just warned that a rushed shake-up of the labour market – as demanded by the EU – risks setting off a fresh cycle of terrorism in the country. Here is the story from Il Sole. “We must stop creating tension over labour reform which could lead to a new wave of attacks. I am not afraid for myself because I have (armed) protection. I am afraid for the people who are not protected and could become a target of political violence that is not extinct in our country,” he said. This is not exaggeration. The Red Brigades-PCC assassinated Massimo D’Antona in 1999 and Professor Marco Biagi in 2002 for spear-heading labour reforms. Opposition leader Pier Luigi Bersani praised Mr Sacconi for speaking out at last. “We are in deep trouble. If we ignite the powder-keg of social discord instead of cohesion we will do dramatic damage to the country.” The EU has woven itself into this drama by presenting Italy with an ultimatum last week, giving the country barely 48 hours to commit to very specific and radical reforms. It is in effect taking sides in an intensely polarized debate within Italy, intruding in the most sensitive matters of how society organizes itself.

Aftershocks - The reality of the worsening European situation came home to roost on Wall Street this week. Last week's "summit to end all summits" offered up only broad brush strokes to begin with, and even those were rapidly erased by plans for a Greek referendum on the deal. A rumor circulated earlier today that the referendum was dead, but that has since been refuted by the Greek government. It appears that either the Greek government collapses or the referendum will occur - and neither outcome is good for market participants looking for certainty in these uncertain times. Let me suggest this as well - that even if Greece comes back on board with the existing agreement, the damage is already done. Three thoughts today:

  • A deepening Eurozone recession is inevitable. Even if full-blown financial crisis is avoided, the cost will be continued austerity programs that will sink the Eurozone economy ever deeper into recession. This will only exacerbate the problems facing European banks as nonperforming loans rise, which will be on top of the credit contraction to follow plans to have banks recapitalizing themselves with private money by next summer.
  • The unintended consequences of the EFSF. The EFSF was already a farce to begin with, underfunded and relying on leverage to cover up a lack of money. The farce continued as European leaders sought handouts from China to fund a project they themselves were not committed to.
  • Will the ECB be Europe's white knight? I think we all agree that lacking a lender of last resort, Europe has something of a credibility problem. As in, no credibility.

NourielRoubini: Full Analysis: Greece Should Default and Abandon the Eurohe following piece of analysis was summarized in an OpEd published Tuesday in the Financial Times.  In order to clarify a number of points made, here is the full analysis.

  • Greece is insolvent, uncompetitive and stuck in an ever-deepening depression, exacerbated by harsh and excessive fiscal consolidation. It is time for the country to default in an orderly manner on its public debt, exit the eurozone (EZ) and return to the drachma to rapidly restore solvency, competitiveness and growth.
  • Exit will require a conversion of euro liabilities into the new currency to limit the balance sheet effects that the depreciation of the new national currency will entail.
  • Greece can exit the monetary union in an orderly and negotiated manner (i.e. limit the collateral damage to its own economy and financial markets that this exit would imply) if orderly mechanisms are used and appropriate official finance is provided. Such official finance to Greece and other EZ members under stress will limit the contagion and the losses for other periphery and core creditor countries, and will ensure that the domestic Greek financial system and economy does not suffer a chaotic implosion.
  • Default and exit will be painful and costly, but the alternative of a decade-long deflation and depression would be much worse, economically, financially and socially.
  • Moreover, there are historical precedents for countries successfully taking the route of an orderly default on unsustainable foreign liabilities and exit from unsustainable currency pegs and/or currency boards.

Calls for Irish bailout referendum -Sinn Fein says Ireland should follow the lead of the Greek Prime Minister and hold a referendum on the deal agreed at an EU summit last week. Eurozone leaders have earmarked a second billion-euro package for Athens as well as allowing 50% of its debts to be written off. If the Greeks go ahead with a referendum on that deal it would be likely to take place next year. Markets in Europe have suffered declines this morning on the back of the news. Sinn Fein Deputy Pádraig Mac Lochlainn has told Highland Radio that the Irish people have the right to have their say on whether we accept the implications for Ireland.

EFSF to Sell 3 Billion Euros of 10-Year Bonds to Help Fund Ireland Bailout - The European Union’s rescue fund is seeking 3 billion euros ($4.2 billion) from its first bond sale since policy makers expanded its powers to stop the euro region’s sovereign debt crisis from spreading. The European Financial Stability Facility’s new securities will help finance Ireland’s bailout, the Luxembourg-based fund said in a statement. The bonds have a so-called long 10-year maturity, meaning they come due between 10 and 11 years, the EFSF said. The EFSF had its AAA rating affirmed by Moody’s Investors Service last week after EU leaders backed leveraging up the 440 billion-euro facility to defend countries such as Italy, which has debt of more than three times the fund. The EFSF is overseen by euro-area states while the European Financial Stabilisation Mechanism is run by the EU’s 27-nation executive arm.

EFSF Delays 3 Billion-Euro Bond Sale on Market Conditions - Europe’s bailout fund is delaying a 3 billion-euro ($4.1 billion) bond sale after Greek Prime Minister George Papandreou’s request for a referendum on the rescue pact for his country roiled markets. The European Financial Stability Facility is putting off the 10-year issue “due to market conditions,” according to Luxembourg-based spokesman Christof Roche. The fund may wait for the outcome of the Nov. 3-4 Group of 20 summit in Cannes, France before selling the bonds, according to a person with knowledge of the matter. “The developments around the G-20 in Cannes will have a big impact on the pricing of any issue,” said Christophe Herpet, a Paris-based fund manager at AXA Investment Managers, which oversees about $735 billion of assets. Credit markets whipsawed after Papandreou surprised European leaders with his referendum plan. A benchmark credit- default swaps index soared the most ever yesterday as investors sought to protect their investments.

Latest China Bailout Rumor Crumbles As EFSF Pulls Bond Due To "Market Conditions", - Once again the desperation level is high as seemingly the core driver of overnight strength was a rumor that China would inject €700 billion in the EFSF, coupled with the even more desperate expectation that in a few short hours Ben will launch the LSAP version of QE: something that is virtually impossibly unless stocks drop to triple digits, and a fact that the market with its constant attempts at Fed frontrunning makes practically impossible. Yet this was good enough to tighten the all critical Italy-Bund spread to 422bps overnight (recall it hit the catastrophic 455 bps yesterday). However some news since then have put a major damper on sentiment, notably another recessionary data point from Europe, where the October Manufacturing PMI printed at 47.1 on expectations of 47.3, and German unemployment posting a rare disappointing miss printing +10K on consensus of -10k. Yet the nail in the coffin for today's European action was that the EFSF, which as we noted already reduced its €5 billion Irish bailout package to €3 billion on subpar market demand, pulled the entire issue citing the trusty old fallback "market conditions" confirming that not only is the latest China bailout rumor a complete fabrication yet again (as explained both here and here).

EFSF Bond Sale Postponed Because of Market Conditions; Fake Haircuts, Fake Help - When was the last time the Fed postponed a US treasury sale due to market condition? I cannot find one although it is possible it happened at some point in a debt ceiling issue. Today Bloomberg reports the EFSF Delays 3 Billion-Euro Bond Sale simply because it does not like market conditions. Europe’s bailout fund is delaying a 3 billion-euro ($4.1 billion) bond sale after Greek Prime Minister George Papandreou’s request for a referendum on the rescue pact for his country roiled markets. The European Financial Stability Facility is putting off the 10-year issue “due to market conditions,” according to Luxembourg-based spokesman Christof Roche. The fund may wait for the outcome of the Nov. 3-4 Group of 20 summit in Cannes, France before selling the bonds, according to a person with knowledge of the matter.

Beijing will not ride to eurozone’s rescue - Yu Yongding - Europe’s courtship of Beijing is moving to a more intense level. Klaus Regling, the chief of the eurozone bail-out fund, is in Beijing discussing possible support. Just a few days ago French President Nicolas Sarkozy conferred with Hu Jintao, his Chinese counterpart, to win Beijing’s support. They should not hold out their hopes too high. The two will have had a courteous hearing: China is willing and able to help. Since the beginning of Europe’s sovereign debt crisis, Beijing has repeatedly expressed its wish to offer “a helping hand” to Europe. Eurozone countries, however, have to understand that they will have to save themselves. Expectations of a “red knight” riding to the rescue are sorely misplaced. To be clear, a strong Europe is always welcomed by Beijing for geopolitical reasons. As China’s most important trade partner, a financially sound and prosperous Europe is firmly in China’s interests. Sitting as it is on $3,200bn in foreign exchange reserves, China can help, but while it is willing to do so this will not be without conditions. As Wen Jiabao, premier, pointed out at the 2011 Dalian World Economic Forum, the European Union has first to put its house in order. When countries and political parties in the eurozone squabble among themselves over how to proceed, how can China support any hastily assembled rescue packages?  China’s faith in the US dollar has been proved misplaced and it cannot afford to make the same mistake again. The recent agreement on expanding the scale of the bail-out fund is perceived as positive, but the idea of “leveraging” the European financial stability facility by partial guarantees is not reassuring. That is a far cry from the original design of EFSF bonds.

Belgium Needs 9.6 Billion Euros of Cuts to Meet 2012 Budget Goal -- Belgium needs to cut spending or raise taxes by 9.6 billion euros to meet its target of a 2.8 percent budget deficit next year assuming economic growth of 0.8 percent, the High Council of Finances said in a report published on the Brussels-based National Bank of Belgium’s website. To meet their respective goals in Belgium’s Stability Pact, the federal government and social security need cuts of almost 8 billion euros, while regional governments face 0.3 billion euros of cuts and local authorities face 1.3 billion euros of cuts, according to the report.

Most European CMBS Could Fail To Repay By End 2012, S&P Says - About 60 percent of loans in European commercial mortgage backed securities that mature by the end of 2012 won’t be repaid, according to Standard & Poor’s. The ratings firm said it added two more loans to its delinquency and special servicing list in September and “we expect this number to rise in October,” according to a statement. Of the 183 loans that are due to mature by the end of 2012, 108 have reported loan-to-value ratios of more than 70 percent, S&P said. Based on that data “we believe that it’s reasonable to conclude that borrowers may struggle to repay nearly two-thirds of the loans that are scheduled to mature between now and end 2012,”

European Union's latest steps won't end Greece crisis - The Greek drama is heightening by the day. Last week, Europe's leaders came up with a $180-billion rescue package for its most troubled member, Greece. Like previous efforts, the plan combines bailout funds with demands for continued austerity in an attempt to isolate Greece and leave the rest of Europe economically intact. This week, in response, a call by Greece's prime minister for a national referendum on the proposal surprised the world. The referendum may accelerate the inevitable fall of the Greek government. And it only emphasizes that a belief in the latest deal as a "Euro success story" — that it solves Greece's problems and prevents a larger Eurozone crisis — is pure fantasy. Whatever the referendum results turn out to be, we are still heading toward the unraveling of an economically united Europe, a union that, despite its many downsides, is in the best interests of the continent's countries — rich and poor — and the global economy. That the European Union finally recognizes the need to push forward on Greece's solvency problem is a positive development, even though the latest fix basically amounts to providing it with some new breathing room.  The price, though, will include a very high unemployment rate. And, most significantly, the underlying problem of an economy without growth has not been addressed.

Eurodämmerung - Krugman - Things are falling apart in Europe; the center is not holding. Papandreou is going to hold a referendum; the vote will be no. Italian 10-years at 6.29 at pixel time; that’s a level at which the cost of rolling over the existing debt will force a default, even though Italy has a primary surplus. And with everyone simultaneously pushing for fiscal austerity, a recession seems almost certain, aggravating all of the continent’s problems. I’ve been charting this trainwreck for a couple of years, and am feeling too weary to trace through it again right now. Let’s just say that the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack. Yet European elites embraced the notion of economics as morality play, imposing across-the-board austerity, tightening money despite low underlying inflation, and have been too concerned with punishing sinners to notice that everything was going to blow apart without an effective lender of last resort.  At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.

Eurodoom - I SUPPOSE it's worth mentioning that Europe is back to crumbling before our very eyes. Late yesterday, the prime minister of Greece announced a plan to hold a referendum on the newly negotiated rescue deal. I'll let Roberto Perli, from the International Strategy and Investment Group, explain the political dynamics: Papandreou’s motives are understandable: So far the opposition has provided no support for the measures that he has been forced to push through, and he and his party have been left alone facing the public anger. The opposition’s tactics are in a sense similar to those used by the Portuguese opposition earlier this year. There the opposition forced the government to fall, took over power, and promptly implemented policies very similar to what the previous government was going to do anyway. Papandreou knows that story, and his decision can be interpreted as a refusal to be the victim of the same game. In the meantime, the news has thrown markets into a near-panic. European equities are plunging; the main Italian index is off over 6%. The euro is dropping like a rock. And sovereign spreads are blowing out. The yield on 2-year Italian debt is now over 5%. Bank shares are tumbling. It's hard to believe that just a few trading days ago markets were ebullient on news of the euro agreement.

Italian Bonds Slide, Premium to Bunds Reaches Record, Amid Greece Concern - Italian bonds led declines among the securities issued by Europe’s most indebted nations after a Greek plan to hold a referendum on its international bailout added to concern the region’s financial turmoil will deepen. Italy and France’s 10-year borrowing costs climbed the highest levels relative to benchmark German debt since before the creation of the euro in 1999. Bund yields fell the most on record, with the securities outperforming all their euro-area peers, as investors sought the safest assets. “The run-up will put the European Central Bank, European Union and International Monetary Fund in a tough position regarding disbursements to Greece,” El-Erian wrote. The EU deal “appears to be unraveling from many sides.” The ECB was said by three people to have bought Italian debt today as it tries to stem financial-market contagion to the euro area’s biggest bond market. Two-year note yields still rose 75 basis points to 5.75 percent, the highest since 1997. The five-year rate rose to more than 6 percent, a premium of more than 5 percentage points compared with similar-maturity German debt.

Italy's Future  - Italy's Prime Minister, Silvio Berlusconi, is apparently going to propose some "shocking measures" in an attempt to get control of the downward spiral that the market for Italian government debt is currently experiencing. Most likely (thanks to the urging of Germany and France) these shocking measures will be composed primarily of sharp cuts in government spending. This will fail to help. The market is not worried about Italian debt dynamics because of excessive government spending. It is not worried about Italian debt dynamics because of an excessive primary (i.e. excluding interest payments) budget deficit in Italy. It is worried about Italian debt dynamics simply and purely because of skyrocketing interest rate expenses that the Italian government is now facing thanks to the eurozone debt crisis. In the table below I present three scenarios for the path of Italy's budget deficits and gross government debt (both as a % of GDP). Scenario 1 is the OECD's most recent forecast for 2012. To extend that baseline a bit, let's say that 2013 would look like 2012 in the absence of other changes. Note that the OECD's forecast is for Italy's debt/GDP ratio to remain roughly constant. Until very recently, there was no particular worry about the Italian debt burden getting out of hand. It is not at all obvious that under the baseline OECD forecast there is any particular urgency for Italy to reduce its budget deficit.

Italy bond yields jump, CDS spreads widen -- Italian government bond yields jumped Tuesday and the cost of insuring Italian and other European sovereign debt against default rose a day after Greek Prime Minister George Papandreou unexpectdly called a referendum on the Greece's latest bailout plan. The yield on 10-year Italian government bonds jumped 20 basis points to 6.18%, according to FactSet Research data. Yields rise as bond prices fall. Meanwhile, the spread on five-year Italian credit default swaps, or CDS, widened 52 basis points to trade at 495 basis points, according to data provider Markit. That means it would cost $495,000 annually to insure $10 million of Italian debt for five years, up from $443,000 on Monday  

European Banks Reduce Jobs as Debt Crisis Ends ‘Years of Plenty' (Bloomberg) -- European banks are accelerating jobs cuts as the region's debt crisis shrinks revenue and regulators force financial firms to bolster capital.  Credit Suisse Group AG, Switzerland's second-biggest bank, said today it will eliminate about 1,500 jobs, adding to the 2,000 staff cuts the Zurich-based lender announced in July. Danske Bank A/S, Denmark's largest lender, will also trim 2,000 posts. Barclays Plc Chief Executive Officer Robert Diamond said yesterday the London-based bank had eliminated 3,500 positions this year and that the trend will continue.  European banks may be forced to eliminate more positions as the sovereign debt crisis erodes earnings and higher capital requirements imposed by regulators force lenders to sell assets and shrink their balance sheets. West European banks have cut more than twice the number of jobs as their U.S. peers, eliminating 86,273 positions this year, compared with 36,951 in North America, according to data compiled Bloomberg Industries.

Fury in Germany after Greek referendum call (Reuters) - Germans expressed fury and frustration on Tuesday at the Greek prime minister's shock decision to call a referendum on a new financial rescue package, political leaders saying it could plunge Greece into bankruptcy and force it out of the euro zone. George Papandreou stunned his own people and his European colleagues with the announcement on Monday evening, only days after European leaders had agreed the outlines of a second bailout for Athens at marathon summit talks in Brussels. The move hammered markets and prompted leaders of the big euro zone countries to hastily arrange a crisis meeting with Papandreou on Wednesday in Cannes, a day before the start of a G20 summit. "Everyone is asking why Papandreou is doing this? Why now? Is he messing with us?" the top-selling tabloid Bild said on its website. Michael Roth, Europe spokesman for the opposition Social Democrats (SPD), told Reuters the referendum call showed courage but said Papandreou was "playing with fire."

Dutch govt wins time on euro bailout deal - The Dutch government won time on Tuesday to get parliament's backing for last week's euro zone rescue plan, promising details on the package and facing demands to have a strong budget commissioner and more IMF involvement in the debt crisis.Despite anger among coalition and opposition parties about Greece's plan for a referendum on the rescue plan, the Dutch parliament agreed to wait for details how the euro zone rescue fund EFSF would work and what powers the commission will get to enforce budget rules before reaching a view. The package negotiated last week does not need the formal approval of euro zone national parliaments. But with the cabinet's main ally outside the ruling coalition, Geert Wilders' anti-immigration Freedom Party, strongly opposed to such bailouts, Prime Minister Mark Rutte relies on help from the opposition. The opposition party Labour, whose support is crucial for securing majority support for the minority government, called Greece's referendum plan a "deal breaker" and "spontaneous self-incineration".

Portugal, hit by recession, seeks adjustments to €78 billion bailout deal — Portugal’s prime minister says he wants to negotiate more flexible terms for the implementation of measures attached to his country’s €78 billion ($107.5 billion) bailout. Portugal needed the financial rescue six months ago as market fears over its heavy debt load drove its interest rates to unaffordable levels.Portugal is stuck in a recession that is forecast to deepen next year as austerity measures that are part of the bailout deal choke the growth it needs to climb out of debt. Prime Minister Pedro Passos Coelho said late Wednesday that Portugal doesn’t need more bailout money. He said, “What we need is more flexible conditions to implement the program, not a new program.”

Greek Yield Rises Over 100%, Italian Bonds Drop on EU Ultimatum -- Greek two-year yields surged above 100 percent for the first time after European leaders suspended aid to the nation until it holds a referendum next month on its bailout that will determine whether it stays in the euro area. The extra yield investors demand to hold 10-year Italian and French debt instead of similar-maturity bunds widened to euro-era records. The European Central Bank’s governing council meets today for the first time under new president Mario Draghi and Group of 20 leaders gather in Cannes, France. BNP Paribas SA said quarterly profit slumped 72 percent because of a writedown on Greek bonds and losses from selling European government securities. Spain and France auctioned debt today. “If it was only about Greece then things would still be controllable, but this is really about the contagion impact on other euro members and in particular Italy,” said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht, Netherlands. “The market doesn’t want to wait any longer. It wants to see quick results.”

Italian borrowing rates keep rising - Italy's borrowing rates soared again on Wednesday as top officials sought agreement on concrete measures to prevent the continent's sovereign debt crisis from engulfing the eurozone's third-largest economy. Yields on 10-year bonds jumped to 6.19 percent on the secondary market, 4.34 percentage points higher than the rate on the German equivalent bond, considered the safest in Europe. The yield is indicative of the rate the Italian government would have to pay if it raised 10-year loans from capital markets. Finance Minister Giulio Tremonti was scheduled to meet later Wednesday with the nation's top finance officials focused on warding off a crisis. Italian news reports said Premier Silvio Berlusconi met earlier at his office with key ministers about Italy's economic strategy following the latest market turbulence caused by Greece's decision to propose a public referendum on its hard-fought European Union debt deal.

Is the Union Unraveling? - In the LA Times today, Dimitri Papadimitriou writes about the very real danger of seeing the end of economic union in Europe; a union Papadimitriou insists is ultimately worth saving. He quickly sketches out what a serious first step toward a solution might look like (rather than this patchwork of half-measures that is sure to be torn apart).  The latest set of deals don’t look like they will provide the “breathing room” they’re intended to create.  What’s needed, Papadimitriou suggests, is for the European Central Bank to step forward with a bond-buying program; something that would perform a function similar to that of the US TARP program. But calming volatility, providing real breathing room, is just the first step.  The next steps in the eurozone triage ultimately need to include serious efforts to tackle the underlying growth problem in Greece: Greece lacks both an industrial base and the widespread availability of technology. It simply can’t be productive enough to compete with neighbors such as Germany, France or the Netherlands. It’s in deep recession and doesn’t have the resources to grow out of it, even with an easing of its still-enormous debt level. Most of the austerity measures and reforms in place — and calls to continue or increase them — won’t work. Raising taxes in a society distinguished by flagrant tax evasion has only boosted the shadow economy

Creditors can huff but they need debtors -- Blessed are the creditors, for they shall inherit the earth. This is not in the Sermon on the Mount. Yet creditors believe it: if everybody were a creditor, we would have no unpaid debts and financial crises. That, creditors believe, is the way to behave. They are mistaken. Since the world cannot trade with Mars, creditors are joined at the hip to the debtors. The former must accumulate claims on the latter. This puts them in a trap of their own making.  Three of the world’s four largest economies – China, Germany and Japan – are creditors: they run current account surpluses, in good and in bad times (see charts). They believe they are entitled to lecture debtors on their follies. China, an ascendant superpower, enjoys berating the US for its imprudence. Japan, a US ally, is more discreet. Germany’s ambitions are closer to home. It wishes to turn its eurozone partners into good Germans, instead.  Yet creditors are vulnerable. Their economies have a capacity to supply goods and services that borrowers desire far larger than their own residents will ever buy. Deficit economies are mirror images: their capacity to supply such goods and services falls short of their demand. These surpluses and deficits are embedded in both kinds of economy. Within creditor countries, the producers of tradeable goods and services are a powerful lobby for the supply of credit to debtors. Private funding will halt once financiers realise how bad their lending has been. Policymakers are then caught between throwing good money after bad or tolerating brutal adjustment, as their markets disappear. In punishing profligate borrowers, they also damage their own citizens. This story lies behind what is happening to the world. It is behind the agenda of the European summit of last week and that of the Group of 20 leading economies this weekend.

Consent Needed for Debt Repayments - Michael Hudson on Real News Network, includes transcript.  JAY: So you have colleagues you’re in touch with in Iceland a lot. What’s going on there now? HUDSON: Well, as many people know, there was a bank failure, and Iceland’s currency plunged and then sort of fell off the pages in the paper. What people don’t realize is that what happened in Iceland has been used as a test case for what’s happening in Greece and what’s happening in Europe, and maybe what happens in the United States. When the three big crooked banks failed, they were sold out to vulture banks, basically, at $0.10 on the dollar. The vulture banks came in and are moving to begin evicting huge amounts of Icelanders from their homes. Ninety percent have their own homes.

Greek referendum is coin-flip on euro exit - The Greek referendum call is, while it lasts, effectively a plebiscite on euro membership. I say "while it lasts" because the opposition is mobilising a parliamentary manoeuvre to bring down the government, which may succeed - returning Europe to its status quo of containable trauma. If Greeks reject the 50% controlled default on the debts they owe to the banking sector, then the arithmetic I revealed on Newsnight on the eve of the Euro summit comes into play - without a 50% haircut, and a further 130bn euro bailout, on top of 110bn, Greek debt spirals out of control and the country goes bust.  At this point, the value of the debt falls to maybe 10% of its face value and Greece has broken all the rules of euro membership. The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro.  Greeks - even those fiercely opposed to Pasok from the left and right - are resigned to the fact that the country faces years of painful restructuring. The real question at issue is a) under whose control and b) in whose interest?

The Greeks — Do They Want To Be Saved? Or Not? - I made a conscious decision some time ago to leave the European Debt Crisis alone. In a life riddled with painful mistakes, maladaptation, and bad luck, this turned out to be one of the wiser decisions I've ever made. That conclusion was born out again yesterday when internal Greek politics upended an EU bail-out plan meant to make the already austere Greeks whole someday in a far off, no doubt imaginary future. Nobody seems to see the humor in this debacle, but I think it's hilarious, this endless joke that keeps on giving. For example, this last agreement included a 50% voluntary haircut for Greek bondholders which gave a whole new meaning to the word "voluntary"—it's your choice, but you have to do it. Apparently, this wouuld not quality as a "credit event" which could cause some forms of derivatives "insurance" (credit default swaps, aka. gambling) to kick in. Here's the Reuters report on the latest of episode of As The World Turns: Greek Prime Minister George Papandreou said on Wednesday he would push ahead with a referendum on an EU bailout deal, defying demands from lawmakers of his own party that he quit for jeopardizing Greek membership of the euro...

Greek's Choice -- and Ours: Democracy or Finance? - Robert Reich - Which do you trust more: democracy or financial markets? Greek Prime Minister George Papandreou decided in favor of democracy yesterday when he announced a national referendum on the draconian budget cuts Europe and the IMF are demanding from Greece in return for bailing it out. (Or, more accurately, the cuts Europe and the IMF are demanding for bailing out big European banks that have lent Greece lots of money and stand to lose big if Greece defaults on those loans – not to mention Wall Street banks that will also suffer because of their intertwined financial connections with European banks.) If Greek voters accept the bailout terms, unemployment will rise even further in Greece, public services will be cut more than they have already, the Greek economy will contract, and the standard of living of most Greeks will deteriorate further. If Greek voters reject the terms and the nation defaults, it will face far higher borrowing costs in the future. This may reduce the standard of living of most Greeks, too. But it doesn’t have to. Without the austerity measures the rest of Europe and the IMF are demanding, the Greek economy has a better chance of growing and more Greeks are likely to find jobs. Shouldn’t Greek citizens make this decision for themselves?

Greece: The Debtor that Roared - Yves Smith - Greek Prime Minister George Papandreou has managed to put the European crisis game of financial fakery into turmoil. Pretty much no informed commentator expected the latest gimmick-larded rescue package to work; there were simply too many points of failure. And even if this program had miraculously come to fruition, a later train wreck was still inevitable, since Germany was persisting in wanting two contradictory outcomes: running trade surpluses in Europe, and not lending more to its trade parters. But no one anticipated that a long suffering debtor would revolt, which is what Papandreou’s announcement of a referendum on the punitive bailout amounts to. He’s publicly coded it in securing Greek support for the deal, but this is actually a clever form of brinksmanship. As Marshall Auerback and Rob Parenteau foresaw, Greece is engaging in a Samson-like gesture of pulling down a much bigger structure to end its misery.  The creditors who pressed on relentlessly with austerity programs in the face of deteriorating results and visible opposition by the Greek public were unduly confident that they could grind down a subject state. Indeed, the New York Times reports that a more and more Greeks, including members of their elites, are contemplating what all orthodox Eurocrats and experts had heretofore considered unthinkable: leaving the Euro and restoring the drachma. That does not mean it will happen; indeed, nearly 70% of the public opposes the idea.  The goal of Papandreou’s move presumably is to renegotiate the terms of the deal imposed on Greece. To get the heretofore dictatorial Troika to take him seriously, he’s effectively threatened the nuclear option of blowing up the rescue package, which means default. And the disruption of a default suddenly changes the calculus of a Euro exit. The incremental short-term damage would not be that much worse, and the longer term benefit of regaining sovereignity, controlling its currency, and as a result, being able to depreciate the drachma would likely more than offset the costs.

Well Played Mr. Papandreou - It was almost funny how quiet he was at the summit. It seems like he sat back, got the best deal he possibly could for Greece and now Greece can decide if it is good enough.  The IIF and their NPV calculations. The ECB and their paid in full demands. The EU and their austerity and controls and demands over which Greek assets can be sold to whom? Debt to GDP of 120% by 2020.  How about debt to GDP of 10% by year end?  How about some nice asset sales to China at premium prices not only to get some immediate funds but to develop a nice long term relationships with deep pockets and a great trade partner.  Not sure where IMF fits in.  All along I have argued it was Greece's choice to default or not and that it was in their best interest to do it. He played it far better than I could have. He holds the cards. He is putting his people and national interest above Europe.  Merkozy must be in a panic.

In Praise of Papandreou's Referendum Decision; Eurocrats Terrified of Democracy; Parade of Cowards - I do not know what motivated Greek Prime minister George Papandreou to call for a voter referendum on the Greek bailouts (and no one else does either) with the exception of Papandreou himself. However, there are some rather interesting possibilities (as well as a simple explanation) The Slog outlines a scenario that Papandreou’s bailout referendum bombshell was inspired by Merkel in order to trigger major losses in French banks, causing France to lose its AAA rating, culminating in a total Merkel victory and German revenge over France. Wow. As convoluted and conspiratorial as that sounds, it makes for highly entertaining reading (and it's also well presented). On the other hand, my readers know I am a firm believer in "Occam's Razor" which suggests the simplest explanation (the one making the fewest assumptions) is likely to be the correct one. Certainly, one should never rule out stupidity when that is one of the possibilities. An even simpler explanation is that Papandreou is simply tired of the beatings, and the meetings, and the riots, and has simply decided to "walk away" from the mess by handing the decision over to the voters. I believe that is the "most likely" explanation even though The Slog presents a very good case that Papandreou Planned this Referendum in Advance with help of his interior minister.

Brilliant Moves by Papandreou; EMU Mentions Eurozone Exit Possibility First Time Ever; Who the Hell is Merkozy to Dictate Terms of a Greek Referendum? - As the days progress, the strategy of George Papandreou has become increasingly clear. He does not like the terms forced on him by Eurozone bureaucrats especially French president Nicolas Sarkozy and German Chancellor Angela Merkel. Not only is he fed up with Eurocrats, he is fed up with Greek protests as well as pressure from political opposition. I talked about this previously in my post In Praise of Papandreou's Referendum Decision; Eurocrats Terrified of Democracy; Parade of Cowards  Who the Hell is "Merkozy" to Dictate Terms of a Greek Referendum? The reaction to Papandreou's referendum proposal was swift and severe, not only in the markets, but also at the emergency meeting Cannes between Merkel, Sarkozy, and Papandreou. Sarkozy and Merkel proclaimed the Referendum was about an exit from the Eurozone.  I ask again, Really? Who the hell is "Merkozy" to dictate terms of a Greek referendum? That said, I appreciate the fact that Merkozy now accept the simple fact that an exit from the Eurozone is possible.

Greece Says Vote on Bailout Is Still On - Greek Prime Minister George Papandreou fought off a barrage of criticism to win the backing of his cabinet on Wednesday to push ahead with a referendum the government said would take place as soon as possible on a European Union debt bailout deal. Some of his party lawmakers called for him to quit for jeopardizing Greek euro membership with his shock decision to call a popular vote, a move that pummelled the euro and global stocks, but the cabinet support at least gives him a stay of execution before a confidence vote in parliament on Friday. "The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro," Papandreou told the seven-hour cabinet meeting, according to a statement released by his office. "No one will be able to doubt Greece's course within the euro." After the apparent show of unity at home, Papandreou will later face the leaders of France and Germany, who summoned him for crisis talks in Cannes, before a G20 summit of major world economies, to push for quick implementation of the bailout deal. Whatever the result of the referendum, Papandreou's gamble guarantees long weeks of uncertainty just when the 17-nation currency area was desperate for a period of calm to implement remedies agreed last week to overcome its sovereign debt crisis.

EU Leaders Threaten Greece With Expulsion From the Eurozone -- Yves Smith - If you had any doubts about the intent of the Eurobailouts, the latest news should settle them. The game plan was to severely limit Greek sovereignity and assert the primacy of creditor rights, even if they came at the expense of democracy. Greece, as we described in a post earlier today, threatened to blow up the bailout by having a referendum. That measure, even if it took place before year end, would create massive uncertainty and wreak havoc with other efforts (for instance, getting China to contribute cash to the levered EFSF, the bailout funding vehicle. As we’ve detailed in earlier posts, it is unworkable in the absence either of ECB backing or substantial outside funding).  The Eurocrats have decided to try to push Greece into line, threatening expulsion from the Euro (note, not the EU) if Greece does not back down. From a practical matter, if the Greeks were to turn down the bailout package, it would lead to a banking crisis, making a Eurozone exit a not that much more traumatic incremental move with considerable upside. And under the Maastrict treaty, Greece cannot unilaterally exit (although as various commentors have pointed out, Nato is not going to send in tanks if the Greeks were to do so).  Greece has already made some concessions, moving up the referendum date to December 4 or 5 when it had been targeted for January. Note that this is before the time when Greece is expected to run out of cash, mid-December, and the officialdom (per the Wall Street Journal) has not disbursed the quarterly aid payment of €8 billion that Greece needs to remain solvent beyond that date.

Greek Referendum will be on staying in the Euro - From the Financial Times Eurozone crisis: live blog German Chancellor Angela Merkel said the Greek referendum would determine whether Greece was to stay in the euro. ...  Greek Prime Minister George Papandreou said: “The Greek people want us to remain in the eurozone. We are part of the eurozone and we are proud to be part of the eurozone.  I do believe there is a wide consensus among the Greek people and that’s why I want the Greek people to speak”  From Reuters: EU, IMF Aid to Greece on Hold Until After Referendum "As soon as the referendum is completed, and all uncertainty removed, I will make a recommendation to the IMF executive board regarding the sixth tranche of our loan to support Greece's economic program," IMF Managing Director Christine Lagarde said  The confidence vote will be this Friday, and the referendum will probably be in early December - since Greece will not receive any more aid until after the referendum. Greece has a large bond payment due on December 11th, so the referendum will probably be before that date - or maybe Papandreou will lose the confidence vote this week.

Greece to Decide Euro Membership in December Vote as EU Cuts Aid Payments - European leaders cut off aid payments to Greece and said a referendum in five weeks will determine whether the debt-strapped nation becomes the first to exit the 17-country euro area. Crisis talks ended in the French resort of Cannes late yesterday with German Chancellor Angela Merkel and French President Nicolas Sarkozy withholding 8 billion euros ($11 billion) of assistance and warning Greece it will surrender all European aid if it votes against a bailout package agreed upon only last week. “The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?,” Merkel told reporters. Sarkozy said Prime Minister George Papandreou’s government won’t get a “single cent” of aid if voters reject the plan.The Greek premier declined to say how the referendum will be worded, saying it “is not the moment” to give the exact language, only that “the question is not just about a program but do we want to be in the eurozone.” More than seven in 10 voters said they favored Greece remaining in the euro, a poll last week of 1,009 people published in To Vima newspaper showed.

Record Unemployment May Derail EU Rescue Efforts: Euro Credit - The highest unemployment rate since the euro's debut in 1999 may hamper efforts by the currency's most indebted nations to reduce deficits, keeping bond yields close to record premiums relative to German securities. The region's jobless rate reached 10.2 percent in September, approaching the highest levels since 1998. Spanish joblessness surged in the third quarter to a 15-year high of 21.5 percent in an economy suffering its worst recession in six decades. About 14.3 percent of Ireland's workforce is idle, compared with 6.9 percent in Germany and 4.5 percent in the Netherlands.. A government report today showed the number of people registering for unemployment benefits climbed by 134,182 to 4.36 million, the largest jump since February 2009. Joblessness amounts to 48 percent among people under 25. "It's like watching a slow-motion train wreck," "Austerity measures are likely to hurt economic growth that these countries need to create jobs and tax receipts in order to get out of their debt problem. Lack of growth will create a vicious circle."

Leaders race to save eurozone deal - George Papandreou, Greece’s prime minister, has won the backing for a referendum on the second bail-out package for his heavily indebted country after a gruelling cabinet meeting. The Greek cabinet met for seven hours before giving the Greek prime minister approval to hold the vote on a yet to be determined date. “The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro,” Mr Papandreou told the meeting, according to a statement released by his office. The prime minister is preparing to fly to Cannes to meet Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, who summoned Mr Papandreou for emergency talks in with Christine Lagarde, managing director of the International Monetary Fund, and the heads of the leading European institutions, following his shock decision to hold a referendum on Monday. The announcement spread panic in financial markets on Tuesday and raised fears that it could result in a disorderly default by Athens. In a joint communiqué, the French and German leaders said they were “determined to ensure the implementation without delay of the decisions adopted at the eurozone summit”, saying they were “more necessary than ever today”.

Greece will be cut adrift if bail-out is refused, says EU - Greece last night faced the threat of bankruptcy within weeks after the EU said it would not provide any more funding to the beleaguered country unless it agreed to support the euro bail-out. The Greek government is expected to be unable to pay wages for state workers and pensions next month without a planned injection of £8billion of EU cash. George Papandreou, the Greek prime minister, met his French and German counterparts ahead of today's G20 summit of world leaders. Mr Papandreou has called a referendum on whether the Greek public supports the bail–out. The decision has plunged the rescue into turmoil. After more than two hours of tense talks in Cannes, Mr Papandreou announced that the referendum would probably be held on Dec 4. He said: "This is a question of whether we want to remain in the eurozone; that's very clear." He added: "I believe this will be a positive outcome. I believe the Greek people want us to stay in the eurozone."

Athens in turmoil as cabinet splits  - The Greek government was in turmoil on Thursday as George Papandreou, prime minister, made a desperate last-ditch attempt to rally rebellious socialist lawmakers behind his proposal to hold a referendum on Greece’s membership of the euro after European leaders issued an ultimatum on the country’s membership of the eurozone. However, Mr Papandreou’s strategy for an in-or-out referendum was undermined by Evangelos Venizelos, his deputy and finance minister. In a written statement after arriving back from the G20 summit in Cannes, Mr Venizelos said: “Greece’s position within the euro area is a historic conquest of the country that cannot be put in doubt. This acquis by the Greek people cannot depend on a referendum”. Mr Venizelos made a plea for a last-minute consensus, adding:”If we want to protect the country we must, under conditions of national unity and political seriousness and consensus, implement without delay the [European summit’s] decision of October 26.” Pressure mounted on Mr Papandreou ahead of an emergency cabinet meeting after three more legislators declared their opposition to the referendum plan, wiping out the ruling Pasok socialist party’s slim parliamentary majority at a stroke.

Greek Premier Faces Revolt - Greece veered toward political chaos as a dispute over a planned referendum on the country's latest bailout threatened to topple the government and derail Europe's delicate effort to keep the crisis from spreading. Greek lawmakers rebelled against the idea of a referendum in the highly indebted country, which was floated only a day earlier by Prime Minister George Papandreou as an attempt to shore up support for his drastic austerity policies, but which also risked wrecking Europe's plan for taming the debt crisis in the euro zone.

Political Test for Austerity in Greek Turmoil - The crisis of the euro zone has finally hit the potholed road of real politics, with the Greeks now openly questioning whether their commitment to Europe and its single currency still matters more to them than control over their own future and economic well-being.  During the two-year financial crisis, the wealthier countries of northern Europe, led by Germany, have insisted that their heavily indebted brethren in the south radically cut spending in return for emergency loans. They have stuck to that prescription even though austerity has undermined growth and increased unemployment in Greece1, Spain, Portugal and now Italy, betting that people in those countries will swallow the harsh medicine because their only alternative is to default and possibly leave the euro zone altogether.  The turmoil in the government of Prime Minister George A. Papandreou2 means that Greece is about to call that bet. Many Greek politicians appear to be calculating, at this late stage, that they have more to lose by sticking to Germany’s terms than by risking a messy default, and even going it alone with their old currency, the drachma, outside the euro zone.  Austerity, in other words, is facing its first really big political test.

The Greeks will vote on something, and other euro news - SINCE Greek Prime Minister George Papandreou declared his intention to hold a referendum in his country on the recently negotiated rescue plan, the situation in Athens has been somewhat volatile. The world was abuzz last night with the news that after summoning Mr Papandreou to Cannes, where G20 leaders are presently meeting, Angela Merkel and Nicolas Sarkozy essentially suggested that the Greeks could vote if they liked, but if they nixed the deal the euro zone would show their country the exit. Given the deep uncertainy over the impacts of a Greek departure from the euro zone, this has widely been interpreted as a high-stakes bluff. It seems unlikely to be necessary, however. Mr Papandreou's government is now at serious risk. High-level ministers are abandoning him over the referendum plan, and he may not survive a confidence vote scheduled for tomorrow. Should the government fall, a snap election will be held, and something will happen. One strongly suspects, based on the almost shocking placidity of markets, that a new government will come in and implement the cuts demanded of the country so that we can all move on to the next phase of the crisis, which is sure to hit any day now, probably about 600 miles to the northwest.

Greek Prime Minister George Papandreou may be forced to step down at any moment -Athens-based newspaper journalist Nick Malkoutzis said: "It is likely this government has hours or days left." Mr Malkoutzis, deputy editor of the English language edition of Kathimerini, played down the importance of Mr Papandreou's decision to call a referendum on the bailout deal - saying he was likely to be forced out before it was held, which would make it null and void.  "The indications yesterday were that the referendum would take place in January, but it now looks as though we won't get that far. One of the reasons is that some people may topple him before then. It looks more likely there will be a snap election rather than a referendum." On 4 November, Mr Papandreou faces a confidence vote in parliament, which he risks losing because of his small majority. But Mr Malkoutzis said he may not even make it till then. "It's quite possible there won't be a confidence vote. If his ministers turn on him that will be pretty much the end. If they waver, more MPs may quit his party." Opinion polls in Greece 1indicate a hung parliament, with the conservative New Democracy party ahead and Mr Papandreou's socialist Pasok2 party way behind. New Democracy's position on the bailout is that it would seek to renegotiate the terms of the package that has been agreed with the EU and IMF.

Greek prime minister scraps referendum on debt plan - Ignoring increasing calls to step down, Greece's prime minister announced Thursday he would seek emergency talks with the opposition conservatives after they agreed to back the latest European bailout for Greece. Prime Minister George Papandreou, speaking at an emergency Cabinet meeting, warned that an early election was too dangerous because it would force Greece into leaving the 17-nation euro currency. Papandreou sparked a continentwide crisis Monday when he announced he would put the latest European deal to cut Greece's massive debts — an accord that took months of negotiations — to a referendum. The idea horrified other EU nations and Greece's creditors, triggering turmoil in financial markets as investors fretted over the prospect of Greece being forced into a disorderly default. Two officials close to Papandreou said Thursday the referendum idea has now been scrapped, after the debt deal won some support from the opposition.

Greece may leave euro, leaders admit - The G20 is planning to increase the crisis-fighting firepower of the International Monetary Fund after the start of its summit was dominated by the first open admission from EU leaders that it might be necessary for Greece to leave the eurozone if the single currency is to survive. George Osborne said there was a "real sense of urgency" on a day that saw an emergency interest rate cut from the European Central Bank, backtracking from Greece over a referendum on its bailout conditions, and a recognition that the IMF may need extra resources to cope with a deteriorating global economy. Amid distinct echoes of the financial market meltdown in the autumn of 2008, European leaders put massive pressure on the embattled government of Greek prime minister George Papandreou, forcing the abandonment of plans to hold a referendum and triggering a political showdown in Athens.

Michael Hudson on the Showdown in Greece -  - Yves Smith -  Papandreou's finance minister, Evengelos Venizelos, went to the G20 in Cannes (going directly after being discharged from the hospital, meaning he almost certainly did not inform and therefore intended to betray Papandreou) and issued a statement arguing that the need to get the next cash dole from the bailout program and maintain “international credibility” trumped all other considerations. Papandreou backed down and canceled the referendum.  Even though everyone who is not part of the problem recognizes that an eventual Greek default (or much deeper debt restructuring) is inevitable, it seems the Greek population must be ground into the dust first to discourage any rebellion against the new order of rule by creditors. The wild card is whether the level of civil disobedience rises to the point where the government has to change course. We’ve already read of serious signs of breakdown: widespread failures to collect trash, frequent power interruption, such reduced schedules for public transportation that it becomes difficult for those who still have jobs to get to work.  Although this segment was taped before the Papandreou volte face, this discussion on Democracy Now with Michael Hudson illuminates some of the underlying dynamics behind this showdown.

Greek prime minister scraps referendum on debt plan - Ignoring increasing calls to step down, Greece's prime minister announced Thursday he would seek emergency talks with the opposition conservatives after they agreed to back the latest European bailout for Greece. Prime Minister George Papandreou, speaking at an emergency Cabinet meeting, warned that an early election was too dangerous because it would force Greece into leaving the 17-nation euro currency. Papandreou sparked a continentwide crisis Monday when he announced he would put the latest European deal to cut Greece's massive debts — an accord that took months of negotiations — to a referendum. The idea horrified other EU nations and Greece's creditors, triggering turmoil in financial markets as investors fretted over the prospect of Greece being forced into a disorderly default. Two officials close to Papandreou said Thursday the referendum idea has now been scrapped, after the debt deal won some support from the opposition.

The Elites Have Been Saved from a Greek Referendum - Earlier this week I speculated that the possible Greek referendum on the EU bailout/austerity deal could have potentially cost Obama the 2012 re-election. I thought this because while I believe Greece telling their creditors to go shove it would have been the best long term solution for Greece, it would likely cause some short term worldwide economic pain and in politics the economic performance right before the election is often decisive. The ripple effect from Europe would be felt here given they are a major trading partner and Obama will be in real trouble if the economy takes a downward dip.  While I was focusing on Obama, because this is an American political blog, the basic potential political impact of the referendum on the incumbent ruling parties/leaders in Europe was the same but much greater. While Europe’s handling of this crisis so far has been objectively terrible for any national leader facing an election soon, like French President Nicolas Sarkozy, continuing to kick the can down the road past the election is better politics than allowing the problem to unfold now. The point of my earlier post was to show how scary this one nation’s referendum was to those in power elsewhere.

Greek crisis: Referendum cancelled amid chaos - Developments seem to have ground to a halt, after another remarkable day. So we're closing this blog down.  Here's a round-up of the key events.

• George Papandreou has abandoned his plan to hold a referendum, amid scenes of open warfare in his own party. Finance minister Evangelos Venizelos forced the move in an early-morning speech, saying Greece's eurozone membership was too important to risk.
• Opposition leaders are resisting Papandreou's efforts to create a caretaker government of national unity. They are calling for his resignation instead.
• Vote of confidence will still take place on Friday night. Papandreou may quit even if he wins
• The European Central Bank surprised the markets - by cutting interest rates to 1.25%
• In Cannes: G20 leaders have pledged to prevent the eurozone breaking up. Read more in Andrew Sparrow's live blog.

Why Not Give Greeks Their Say? - The fundamental nature of European governance is about to change.  Either a large part of the Continent will move much closer to a federal government, with common fiscal policies and a substantial loss of sovereignty for many nations, or it will spin apart, with possibly severe economic and financial consequences.  That has been clear for months, and markets have alternately soared and plunged as it appeared Europe was closer to or farther from reaching the first alternative.  This week, it appeared that the prospect that scared European leaders the most was the specter of democracy. When the Greek prime minister, George A. Papandreou, proposed a referendum on whether Greece1 would go along with the agreement reached at the European summit meeting last week — one that calls for more austerity and that polls say is unpopular with most Greeks — much of Europe reacted with shock and alarm. How dare he do that?  In the end, he could not persuade his own government, and there will be no vote. That should be a cause for sorrow in the rest of Europe, not joy. There is little reason to think that Greek citizens will be more cooperative now that it has been made clear their opinions are irrelevant to the people who run Europe.

Festering anger, Nazi war crimes and the £60bn the Greeks believe the Germans owe them - The SS indulged their bloodlust on men, women and children alike. While homes and shops blazed around them like some hellish inferno, women were violated and those who were pregnant were stabbed in the guts. Small babies were bayoneted in their cribs. The village priest was beheaded. By the time Hitler’s men had left the Greek village of Distomo near the ancient town of Delphi on that bloody day in June 1944, 218 people were dead. The Waffen-SS was pleased with its work: the local partisans who had dared to attack a German unit had been taught a bitter lesson in revenge. The slaughter at Distomo was such an outrage that, in 2003, even a German Federal Court judge described it as ‘one of the most despicable crimes of World War II’. But he refused to grant the families of the victims any compensation for their suffering, and not a single German soldier was ever punished for what he and his comrades had done. The Distomo massacre is just one example of the terrible suffering endured by the people of Greece during World War II and, some would say, of the German government’s reluctance to pay for the crimes committed against the Greeks in their nation’s name. Countless other villages could tell of similar atrocities. Some 60,000 Greek Jews — more than three-quarters of the nation’s Jewish population — were rounded up and sent to their deaths in the gas chambers of Auschwitz and Treblinka. Yet, neither the massacres of villagers nor the ethnic cleansing of the Jews was the deadliest of torments inflicted on Greece. For the worst Nazi war crimes of all were essentially economic.

Greece PM Papandreou faces knife-edge confidence vote: Greece's Prime Minister George Papandreou faces a crucial confidence vote in parliament on Friday with the outcome on a knife-edge. Mr Papandreou shocked EU partners and sent markets into turmoil after calling for a referendum on a hard-fought EU deal to bail out debt-ridden Greece. While the prospect of a referendum has receded, even if the PM wins his future remains unclear amid new calls to quit. The developments have overshadowed a key G20 meeting in Cannes. It continues for a second day on Friday. Motives questioned The figures in the Greek parliament reveal Mr Papandreou's vulnerability. His governing Socialist party (Pasok) holds a tiny majority - 152 out of 300 seats. A handful of his MPs had indicated they would refuse to back him in the confidence vote.

Parties enter coalition talks - Prime Minister George Papandreou has proposed the formation of a coalition government by announcing that the planned referendum will no longer take place and that his party has entered into talks with New Democracy leader Antonis Samaras. In a speech to his cabinet on November 3, Papandreou said he would assign the task of discussions with the main opposition party to two senior party members. Samaras earlier announced that his party would consider joining a transitional government, under the strict provision that its responsibilities be limited to signing the October 27 Brussels agreement and securing the country’s sixth bailout tranche of 8bn euros - and that there are general elections before the end of the year. "I will be glad even if we don't go to a referendum, which was never a purpose in itself," Papandreou said . "I will talk to [opposition leader Antonis] Samaras so that we examine the next steps on the basis of a wider consensus." Papandreou reiterated that Greece's eurozone membership is not in question and told parliament that he is "not tied to his seat" as prime minister.

Greece Gets Ultimatum: Accept Austerity Plan or Forego Extra Bailout Cash - Greece has been given an ultimatum that it will get no more money from the European Union and International Monetary Fund until its people have voted to accept the austerity measures demanded by the bailout package. The latest tranche of bailout aid, worth €8bn (£7bn) and agreed just two weeks ago, is seen as vital for ensuring that Greek public sector workers can continue to be paid. But it will now be delayed until after the country decides in a referendum whether it accepts the new rescue package or even wants to stay in the euro. The threat to send Greece closer to bankruptcy emerged on the margins of the G20 summit in Cannes – due to start on Thursday – and follows a blunt warning from Jean-Claude Juncker, chairman of the eurogroup, that the sixth tranche of the original €110bn bailout was now in jeopardy. Speaking after the bombshell decision of Greek prime minister, George Papandreou, to hold a referendum, Juncker, Luxembourg's veteran prime minister, asked: "Can we under these conditions pay out the sixth tranche, the €8bn, that we decided upon two weeks ago when we don't know whether the Greeks still agree with what was agreed?"

Opposition Leader Rejects Co-Government, Demands Resignation of Papandreou; Basking in the Clouds of Denial - It is exceptionally difficult to keep up with news stories in Europe. Every minute there is a new twist. What's clear is that no one is in charge, of anything. Via Email from Steen Jakobsen at Saxo bank .... Leader of opposition [Antonis Samaras] just finished talking in parliament

  1. He rejects any co-government, short, medium or long-term with the ruling Pazok party
  2. He demands PM resigns at once (which the PM says he will not) and creation of a new short-term emergency government - to calm the Greek people and the rest of Europe. 

An emergency government that will first and foremost secure the 6th payment to Greece, the realization of the latest debt package, Greece' membership in EUR and Eurozone and then once the waters have calmed ( most likely within 3 months) to hold electionsThe Finance Minister takes the stand after Samaras, asking if he is truly ready to do what he says, i.e. accept every single detail of the debt package, which is a must to ensure not only the 6th but also future payments to Greece.

The Grand Plan for Europe became the Waterloo of the Eurozone - The pre-Cannes meeting between Merko-zy and Papandreou did not change the mind of the Greek Prime Minister. The vote of confidence or more precisely the lack of it, is still going ahead and will probably culminate tomorrow, Friday. This morning the Greek Finance Minister is indicating his displeasure with the PM by publicly opposing Papandreou - this is political posturing developing into a contention for the leadership of the political party PASOK. There is a brief rally in the market based on the idea, wrongly in my opinion, that the finance minister can and will take over and win a confidence vote, but the facts remains the same:

  • Greece has been pushed too far and has not complied with the austerity it promised
  • We are beyond any proper solution for this mess and only the 'blame game' remains with Greece potentially leaving the EURO inside of the next three months.

Greek PM ready to go, dump referendum, for euro deal - Intense European pressure forced debt-stricken Greece to seek political consensus on a new bailout plan instead of holding a referendum after EU leaders raised the prospect of a Greek exit from the euro to preserve the single currency. Fast-moving events in Athens overshadowed the first day of a summit of the Group of 20 major economies on the French Riviera on Thursday, with anxious world leaders urging Europe to act to stop contagion from its sovereign debt crisis. Greek Prime Minister George Papandreou bowed to cabinet rebels and agreed to step down and make way for a negotiated coalition government if his Socialists back him in a confidence vote on Friday, government sources told Reuters."He was told that he must leave calmly in order to save his (PASOK) party," one source said on condition of anonymity. "He agreed to step down. It was very civilised, with no acrimony."

Greek PM to stand down - After a tumultous day in Greece, Prime Minister George Papandreou is reported to have struck a deal to stand down, admitting he made a mistake in calling for a referendum on the eurozone rescue package. The government was in turmoil on Thursday over Mr Papandreou's announcement of a referendum, which angered European leaders on Tuesday and sent shockwaves through the markets. The government was on the verge of collapse on Thursday after several ministers said they did not support a referendum on whether to accept a European Union deal to solve the country's debt crisis. Reuters quotes government sources as confirming there is a deal to hand power to a negotiated coalition government if Mr Papandreou's rebellious MPs help him win a confidence vote on Friday. Finance Minister Evangelos Venizelos has warned the country needs the next €8 billion tranche of aid within the next 12 days. But Chancellor Angela Merkel of Germany has reiterated her threat the cash will be not be available unless Greece accepts the terms of the bailout.

Greece to Form New Government - Greece's embattled prime minister survived a no-confidence vote early Saturday but prepared to step down to make way for a multiparty government—easing some of the uncertainty that gripped Europe this week over whether the latest Greek bailout would go ahead. Greek lawmakers sparred late into the night Friday ahead of the vote of confidence in George Papandreou, the 59-year-old scion of one of Greece's storied political families. Mr. Papandreou won, with all 153 of his fellow Socialists voting in his favor and 145 votes against. He was expected to offer his resignation in order to form an interim government that would approve Greece's latest international bailout deal and pave the way to elections—a grave task for a debt-laden, depressed economy whose deterioration has undermined investor confidence in euro-zone finances.  The vote capped a week of turmoil in Greek politics that has disrupted financial markets around the world, and raised fears that Greece was heading for bankruptcy and a chaotic exit from Europe's common currency, the euro. Greek politicians from all parties agreed that Mr. Papandreou's days as the country's leader were nearing an end. The prime minister, in an address to lawmakers before the vote, said he was prepared to form a coalition government, which would in all likelihood require him to step aside.

Worries About Italy: Growth and Politics - By Rebecca Wilder -  Current bond market pricing implies a 6.17% yield on a 10-yr Italian government bond, or 430 basis points (%/100) over a like German government bond. I’d call this distressed levels for Italian debt, especially for an economy that is very likely contracting as we speak. Today Mark Thoma points us to Kash Mansori’s article on “Italy’s future”. In the article, Kash points out that the [market] “is worried about Italian debt dynamics simply and purely because of skyrocketing interest rate expenses that the Italian government is now facing thanks to the eurozone debt crisis.” I disagree and comment that his argument is circular in nature. See, the market is pricing in Italian solvency risk by way of a rising risk premium, which then portends more solvency risk as borrowing costs rise. But the market is not pricing in solvency risk because of the risk premium, rather the risk premium is rising due to (1) terrible growth dynamics in Italy, and (2) heightened political risk in Italy. The PMI’s illustrate the likely recession in Italy – Roubini Global Economics is pointing to negative growth starting in Q3 2011. Those countries that issue debt in a foreign currency (since Italy does not own the euro rather it uses the euro) are subject to market constraints. And with negative growth comes higher government deficits; but the market is not satisfied with the high Italian public debt levels. Therefore, bond investors push for ‘fiscal discipline’ via a rising risk premium.

Approaching the Italian endgame -- Amid EFSF revamps, Greek politics, and ECB rate cuts, remember that in the end, it all comes down to Italy. In particular, 10-year Italian government bond yields remain well over 6 per cent at pixel time. The Italian endgame is getting nearer and a crisis is “increasingly probable, and would do much to expose the inadequacies of the bailout mechanism as a whole”, warns Citigroup’s Matt King (he of the seminal “brokers are broken” thesis from 2008 that we put back together on Wednesday). King worries that the Papandrendum sets a precedent for future political leaders (“who can be against asking the people?”). He thinks China and the IMF will both think twice before funding the EFSF given political risk in Athens. He’s also worried that the new EFSF is too big

Italy Threatened with Troika Surveillance; Merkozy Sends Inspectors to Italy to Verify the Italian Books; Berlusconi Under Intense Pressure to Resign - Angela Merkel and Nicolas Sarkozy were more than a little ticked off when Italian Prime Minister Silvio Berlusconi showed up for the Cannes summit "empty handed". In response. Merkozy proposed a new Troika for Italy and sent inspectors to pour over Italy's books. Courtesy of Google translate, please consider Europe puts Italy under surveillance While outside the world has their eyes on Greece, Italy is to be found in the line of sight of the negotiators inside the palace in Cannes. "The subject is no longer Greece: the real goal is to stabilize Italy," says one side of Brussels. European leaders were particularly incensed to see Silvio Berlusconi land at Cannes without any concrete steps to ensure the fiscal trajectory of his country, providing a return to balanced public accounts in 2013. At the summit of 27 October, the Italian Prime Minister promised to present to the G20 a new package of measures. Greece - which weighs 2% of GDP in the euro area - is a manageable issue. However, an implosion of Italy and its 1.9 trillion of debt would be far more dramatic. To reassure the markets, it is imperative that each country meets its commitments attacked. To this end, several officials in Brussels would have gone to Rome to check the progress of previous reforms.

Subprime moment looms for ‘risk-free’ sovereign debt - When future financial historians look back at the early 21st century, they may wonder why anybody ever thought it was a good idea to repackage subprime securities into triple A bonds. So, too, in relation to assumptions about the “risk-free” status of western sovereign debt. After all, during most of the past few decades, it has been taken as a key axiom of investing that most western sovereign debt was in effect risk-free, and thus expected to trade at relatively undifferentiated tight spreads. Now, of course, that assumption is being exposed as a fallacy. Just look at those Greek haircuts, or the scale of future losses now being implied in the credit derivatives markets for Portugal, Ireland and Italy. As the turmoil in the euro zone spreads, forcing a paradigm shift for investors, the intriguing question now is whether we are on the verge of a paradigm shift in the regulatory and central bank world, too. After all, it is not just investors who have tended to assume that mainstream sovereign bonds are risk-free; this assumption has also acted as a pillar of the entire regulatory structure, and many central bank operations.  In some senses it has been actually reinforced in the past five years because regulators have demanded that banks raise their holdings of liquid, safe assets, following that subprime turmoil. Those “safe” assets have been – you guessed it – mostly government bonds. But as Greek woes mount, there are now some hints that we may be on the edge of a paradigm shift.

Is the Eurobankster “We’ll Shrink Our Balance Sheets” Threat Largely Empty? -  Yves Smith -  Even though the Greek move to blow up the latest Eurorescue plan caught the world’s attention, another pushback is underway, this via the blue chip lobbying group, The International Institute for Finance. The threat, which has surfaced before and is picked up in an article by Bloomberg, is that raising capital levels as mandated under the latest version of the Eurorescue plan, won’t take place by selling equity, retaining earnings (which would almost certainly mean constraining pay levels) or accepting government equity injections (which will come with nasty strings attached). Instead, banks will just shrink to meet the targets by selling risky assets. (Note that the targets, which are being met with howls by the industry, are for them to write down sovereign and reach a core capital level of 9% by June 30, 2012).  This is meant to be a threat. “Shrinking assets” implies less lending. Less lending would put a downward pressure on economic growth. Recessionary or near recession conditions tend to lead voters to throw elected officials out. So this sabre rattling is clearly meant to get the officialdom back in line. How seriously should we take this?

Crats, Maybe, But Not Much Techno - Paul Krugman - Atrios complains, rightly, about the description of the policies being followed in Europe as technocratic. His point is that we’ve conjured up images of very sensible highly educated wonky people doing the right thing, even as they destroy the world. But it’s more than that: these alleged technocrats have in fact systematically ignored both textbook macroeconomics and the lessons of history in favor of fantasies. The European Central Bank has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience. Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised. The point is that I know technocrats, and these people aren’t — they’re faith healers who are making stuff up to suit their prejudices.

Big Global Banks Boost Pressure on ECB - The banking sector’s international lobbying group on Wednesday joined the campaign to boost the European Central Bank‘s role in the euro-zone rescue, calling for the ECB to backstop struggling bond markets while the currency bloc implements its latest debt deal. The comments by the Washington-based Institute of International Finance, which represents more than 450 financial institutions in 70 countries, add another major voice for a heightened ECB role despite concerns from some European officials — particularly in Germany — about the central bank’s bond purchases. As Europe develops details around its new debt deal, “it is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market,” IIF Managing Director Charles Dallara wrote in a letter to officials from the Group of 20 industrial and developing economies meeting in Cannes, France, this week. The ECB’s new president, Mario Draghi, who took his post Tuesday, faces the question of whether to continue or increase ECB purchases of Italian government debt to push yields lower. The ECB has bought an estimated 70 billion euros in Italian debt since August, but that hasn’t been enough to keep the 10-year yield on Italian debt below 6%.

The ECB’s Risky Business - A central bank always has a crucial role to play in a financial crisis. But the European Central Bank’s role within the eurozone nowadays is even more “central” than that of the Federal Reserve or the Bank of England. A key difference between the eurozone and the United States is that lending between two banks located in two different member countries is still perceived as carrying quite different risks than “domestic” lending (between two banks in the same country). This is not the case in the US, because it has an integrated financial system, and support for banks (deposit insurance or outright bailouts) is administered at the federal level. As a result, the fact that California might be closer to bankruptcy than some eurozone countries has no influence at all on the credit rating of banks headquartered there, or on their ability to obtain funds on the interbank market. In Europe, by contrast, the fate of all banks depends upon their home governments.

ECB cuts rates in surprise move (Reuters) - The European Central Bank cut interest rates by a quarter point to 1.25 percent in a surprise move on Thursday and President Mario Draghi said the euro zone could subside into a "mild recession" in the latter part of 2011. The Italian has walked into a maelstrom in his first week at the ECB's helm, with euro zone leaders contemplating a future without Greece and economic policy paralysis in his home country threatening to pitch Rome into the storm. But he offered no commitment to scale up the central bank's bond-buying program to support the likes of Italy and Spain, instead describing the purchase plan as "limited." "What we are observing now is ... slow growth heading toward a mild recession by year-end," Draghi told a news conference at which he used some of his predecessor Jean-Claude Trichet's lines, while mixing in a dash of humor in an assured debut. "A significant downward revision to forecasts and projections for average real GDP growth in 2012 (are) very likely," he added.

ECB: Perhaps Less Burning is Required than We Originally Anticipated - From Bloomberg The European Central Bank unexpectedly cut interest rates at President Mario Draghi’s first meeting in charge after euro-area leaders raised the prospect of Greece exiting the monetary union, sending bond yields soaring in Italy and Spain. Here is the important point. Even in Greece the primary budget deficit is not that large. The issue is rolling over debt. This is something the ECB could facilitate trivially if it wanted to. It has chosen not to. Like so many, the ECB over-estimates the role of moral hazard in politics and policy. But, that is a deeper question and a longer conversation. However, even short of that they could recognize that when much of your currency area is suffer from double-digit unemployment, that a small rise in inflation is not your primary concern. Afraid to lose creditability?  Credibility of what? That you are ready to rule over a pile of bones if necessary?

ECB Cuts Rates: Mario Draghi’s First Opening Statement - The following is the full text of new ECB President Mario Draghi’s opening statement following a rate cut:

Enter The Draghi - Krugman - The ECB cut rates — which everyone knew was going to happen eventually, but people thought they would delay to save face. And Papandreou was bullied convinced to call off the referendum. And the markets cheered. But it’s really hard to see this as any kind of turning point. The situation still looks impossible without dramatic policy changes that are hard to see happening.

“Super Mario” takes charge - MARIO Draghi of Italy has barely begun his new job: he became president of the European Central Bank (ECB) on November 1st. But already he is doing things differently from his French predecessor. Jean-Claude Trichet liked to prepare the ground for interest-rate changes by signalling them before they were actually decided. In his first meeting chairing the ECB’s governing council, Mr Draghi broke with that tradition and the council unanimously decided upon an early cut, reducing the main policy rate from 1.5% to 1.25%. The decision came as a surprise to financial markets partly because it departed from Mr Trichet’s way of doing things, but also because Mr Draghi was expected to shy away from cutting rates in his very first meeting for fear (as an Italian) of being seen as soft on inflation, especially in Germany. But quite rightly Mr Draghi put that on one side and followed the economic logic for lowering rates as soon as possible. The euro area, he said, was heading for “a mild recession” by the end of the year. The slowdown would bear down on price pressures, and inflation, which is currently running at 3%, would subside to below 2% (in line with the ECB’s target) in the course of next year.

One Small Cut In Interest Rates, One Giant Step For Macro Perspective - The newly installed head of the European Central Bank, Mario Draghi, broke with his predecessor and cut the benchmark interest rate to 1.25% from 1.5%. In one fell swoop Jean-Claude Trichet's misguided austerity policy has evaporated. And not a moment too soon, given the signs of rising recession risk for the Continent. But there's more to the story than just another rate cut. Scott Sumner offers some context as he distills the macro lessons by reviewing the "Trichet debacle"... Thank God Trichet is finally gone. Now let’s see what we can learn from recent policy moves by the Bank of Japan and the ECB.  Start with the fact that both are ultra-conservative institutions. Then consider the following moves:

    • 1. The BOJ tightens in 2000 by raising rates, despite no inflation. Soon after the economy turns down and the BOJ is forced into an embarrassing about face, rates are cut back to zero.
    • 2. The BOJ tightens in 2006 by raising rates, despite no inflation. Soon after the economy turns down and the BOJ is forced into an embarrassing about face, rates are cut back to zero.
    • 3. The ECB tightens policy by raising rates in mid-2008, just as a severe debt crisis is leading to a rush for liquidity, and threatening to plunge the world into recession. A few months later the economy turns down and the ECB is forced into an embarrassing about face, rates are cut sharply.
    • 4. The ECB tightens policy by raising rates in mid-2011, just as a severe debt crisis is leading to a rush for liquidity, and threatening to plunge Europe into recession. Today the ECB was forced into another embarrassing about face, and cut rates by 1/4 point.

German Two-Year Notes Climb After ECB Unexpectedly Cuts Key Rate to 1.25% - Italian securities jumped as the ECB’s Governing Council cut the rate to 1.25 percent, a move predicted by just four of 55 economists in a Bloomberg survey. The median estimate forecast no change. Greek two-year yields rose above 100 percent for the first time after European leaders yesterday suspended aid to the nation pending a vote they said would determine whether it stays in the euro area. Significant cuts to growth forecasts are likely, Mario Draghi said in his first press conference as ECB President. “The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half and beyond,” Draghi said at a press conference in Frankfurt. “The economic outlook remains subject to particularly high uncertainty and intensified downside risks.”

Quick Bites, by Tim Duy: A list of items crossing my screen over the last two days, in no particular order: Greece referendum off, at least for today. Greece Prime Minister George Papandreou backtracked on his calls for referendum, much to the relief of market participants. I hesitate to think this story is over. The citizens of Greece might not react calmly to having democracy snatched back out of hand's reach. It is never easy to put the genie back inside the bottle. The ECB cuts rates. Better late than never, I suppose. The surprise rate cut by the ECB is also credited with bolstering markets today. Red flags in the German data. Germany, the juggernaught of the European economy, looks to be under stress. The German Purchasing Managers Index crossed over into contrationary territory last month for the first time in two years, while German unemployment rose for the first time in two years. Italian economy also shifted into low gear. The Italian PMI dropped a whopping 5 points to 43.3, a notch below Spain's 43.9. No wonder Italy's Prime Minister Silvio Berlusconi is having trouble pushing through another austerity package. Rebecca Wilder highlights the importance of growing political risk in Italy:

Not So Super Mario - Krugman - The half-life of eurozone pseudo-solutions has been steadily dropping over the past two years. It used to be that a new plan that would allegedly finance troubled debtors while they austeritied their way to recovery would buy six months of relative calm in the markets. Then that dropped to a month or two, then a week. At this point it seems to be a matter of a few hours. The Draghi rate cut plus the Papandreou backdown caused a brief rally; but as of now the Italy-Germany spread is at record levels again, the rate on the Italian 10-year is well above 6. No surprise, really — it took very little analysis to see that the latest moves were basically irrelevant to the real problems. But what we’re seeing now is that procrastination is no longer an option. The question is whether Europe is capable of doing anything real.

ECB’s Teutonic Mario chills bond rescue hopes - Investors are slowly digesting the bittersweet message from Mario Draghi, the Teutonic Italian now at the helm of the European Central Bank (ECB).  While he surprised and delighted markets with a quarter-point cut in interest rates to 1.25pc, reversing last July's ill-judged rise, he also dashed hopes for mass bond purchases to save Italy and for radical action to stop the crisis spiralling out of control. That matters far more.  "What everybody wanted to know was whether the ECB would step up to the plate and do something grand and we didn't get that at all,"  In a sombre debut, Mr Draghi warned that Euroland's economy is "heading towards mild recession by year-end" with mounting risks as the debt crisis drags on.  He professed his "great admiration" for the hawkish traditions of the Bundesbank, seeking to allay fears in Germany that the ECB might drift away from orthodox monetarism.  To drive home the point, Mr Draghi issued a categoric warning that the ECB would not act as final guarantor of the system, or step in to rescue feckless states. "It would be pointless to think that sovereign bond rates can stably be brought down for a protracted period by outside intervention."

ECB Says Banks’ Overnight Deposits Jumped to 16-Month High - The European Central Bank said financial institutions in the euro area increased their overnight deposits with it to the highest level in more than 16 months. Banks parked 275 billion euros ($380 billion) with the Frankfurt-based ECB yesterday, up from 253 billion euros on the previous day. That’s the most since June 30, 2010. Banks also borrowed 1.3 billion euros at the marginal rate of 2.25 percent, up from 1.2 billion euros a day earlier. Banks are hoarding their excess cash rather than lending it to other institutions as the worsening sovereign debt crisis makes them wary of each other. The ECB yesterday unexpectedly cut its benchmark interest rate by 25 basis points to 1.25 percent to help boost confidence and growth. “Banks just don’t want to lend in the interbank market,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s a lot of uncertainty and a lack of transparency in terms of the rescue effort for Greece. The end of the maintenance period at the ECB would also be a factor in raising the level.”

G20: Europe faces the nightmare of a euro breakup -- Europe's sovereign debt crisis has moved into a critical new phase with the admission for the first time that the referendum planned in Greece could result in the country leaving the monetary union. The four members of the eurozone attending the G20 summit – Germany, France, Italy and Spain – were holding talks in Cannes this morning to discuss what to do next. Unsurprisingly, the mood was grim. Splits were appearing in the Greek cabinet, Italian bond yields were rising after Silvio Berlusconi's cabinet came up with no new proposals for tackling Italy's debts and for the first time European leaders have had to confront their worst nightmare: the euro may break up. Nicolas Sarkozy, Angela Merkel and their fellow leaders have known for the past two years that Greece has had a big problem with the debts accumulated during the first decade of the single currency's life. But up until now they have insisted that monetary union was permanent, with no mechanism in place for a country that wanted to leave. The bombshell dropped by George Papandreou this week has changed all that. With a Gallic shrug, Sarkozy said after his frosty talks with the Greek premier: "It is up to them to decide if they want to stay in the euro with us."

Berlusconi Seeks IMF Monitoring as Defections Threaten Economic Overhaul - Prime Minister Silvio Berlusconi requested international surveillance of his bid to cut the euro- region’s second-biggest debt, as his fraying coalition threatens Italian efforts to erect a wall against Europe’s debt crisis. Berlusconi’s government asked the International Monetary Fund to periodically assess its debt-reduction progress, while rejecting an offer for financial assistance from the Washington- based lender, he told a press conference today at the Group of 20 summit in Cannes, France. “It hasn’t been imposed, it was requested,” Berlusconi said. The IMF will carry out quarterly “certifications” of the euro region’s third-largest economy, he said, adding that the current sell-off of Italian debt is “a temporary trend” even as the nation’s borrowing costs surged to a new euro-era record. Berlusconi is coming under mounting pressure at home and abroad as Italy struggles to avoid succumbing to the sovereign- debt crisis. His efforts suffered a setback yesterday when at least two lawmakers defected to the opposition. As many as eight other members of his coalition have called for a change of government, threatening his majority in Parliament, Corriere della Sera reported today.

What is Happening in Italy - Italy is more fubar than you imagine possible even taking into account the fact that it is more fubar than you imagine possible. That said, I insist the we are solvent. BTPs are a great buy right now.  Please. We need the money. But I am not joking (OK I admit I am not buying BTPs either). I really have to write about this, since it is the topic of the week and I actually live here. So I will write a long long rambling post (with no useful links). The current critical situation Since last summer, Italy has been in play -- the price of BTPs fell sharply, that is, the interest rate spread between BTPs and Bunden (German bonds) shot up to around 400 basis point 4%. As a result, Italy enacted a harsh austerity plan with painful spending cuts. The European Union fiscal nagging body (Ecofin) and, more importantly the European Central Bank (ECB) demanded more. This lead to a series of rapidly proposed and revoked emergency plans. The Berlusconi government has agreed on a further do something plan in which sales of public property (mostly land and real estate) play an important role The financial system has worked out not necessarily to Italy's advantage -- the latest BTP auction implies paying 6% interest on money raised and the Euro denominated BTP/bund spread is at a record high. The Italian Central Bank claims that Italy is solvent so long as it doesn't have to pay more than 8%. Investors are clearly not convinced.

Italy's 'shock therapy' as eurozone manufacturing buckles - Telegraph: Europe is sliding into a full-blown industrial recession with contraction spreading to Germany and a drastic decline under way in Italy, greatly complicating efforts to contain the region’s debt crisis. Markit’s manufacturing index for Euroland dropped well below the break-even reading of 50 in October. The data for Italy plunged five points to 43.3, the biggest drop since the survey began in the 1990s. “Italy is a serious concern. Total and export new orders collapsed,” said Francois Cabau from Barclays Capital. Italy’s economy is almost certainly in a double-dip recession already, exacerbating the country’s fragile debt dynamics. Manufacturing data for the eurozone as a whole showed the fastest decline since mid-2009 in new orders and export orders. Germany has at last tipped over into contraction as markets cool in Asia. Italy’s premier Silvio Berlusconi was closeted with top ministers on Wednesday night, drawing up “shock therapy” measures in time for Thursday’s G20 summit in Cannes. 

ECB’s Stark Says Economy May Not Expand at All in Fourth Quarter of 2011 - European Central Bank Executive Board member Juergen Stark said the euro-area economy may not grow at all in the final three months of the year. “Possibly we will see, and I say this with all caution, a red zero in the fourth quarter,” Stark said in a speech in Frankfurt today. Growth will be “very weak” going into 2012 and “there are consequences for price and wage developments,” he said. Stark also said he assumes the ECB will end its bond purchases “as soon as possible” as they set the wrong incentives. The ECB unexpectedly cut its benchmark interest rate yesterday by a quarter point to 1.25 percent, with President Mario Draghi saying the economy is heading toward a “mild recession.” At the same time he ruled out significantly ramping up bond purchases to reduce government borrowing costs. The ECB’s decision to resume buying government bonds in August prompted Stark’s resignation in September. He will step down at the end of the year.

Economists Forecast Longer, Deeper Euro Zone Recession - European Central Bank President Mario Draghi said Thursday the euro zone is heading for a “mild recession,” the first ECB official to use the R-word. He appeared to have gotten the recession part right. But mild? That might be a bit too optimistic. J.P.Morgan was among the first European banks to forecast a euro zone recession, meaning two-straight quarter of economic contraction, back in September. It was supposed to be a modest one, with GDP falling just 0.8% from its peak. It now looks like things will get even worse. “We now believe that the recession will be deeper and longer lasting, and we are making forecast changes to show a peak to trough move in the level of GDP of just over 1%, with the recession lasting through the third quarter of next year. The risks around this forecast are for a deeper and even longer lasting contraction,” the bank said in its latest research note. The outlook is particularly grim along Europe’s struggling periphery. Ireland will stagnate next year, J.P. Morgan estimates, making it the economic champion of the periphery by default. Greece will contract 6.6%, Portugal by 3.9%, Spain by 1.1% and Italy by 1.5%, according to the bank’s revised estimates.

Pimco El-Erian Video: "Unfortunately it's a Mess" in Europe, Credibility Declines, Merkozy Cannot Even Agree on the "Easy Part" - Here is an interesting interview between Mohamed El-Erian, CEO of PIMCO, and Bloomberg Television's Betty Liu and Michael McKee this morning regarding the situation in Europe and the global economy. El-Erian said that it's "striking" that German Chancellor Angela Merkel can't agree on the "easy part" and that "unfortunately it's a mess" in Europe.

What's Really At Risk in a Greek Default -As Greeks decide the fate of Prime Minister George Papandreou around midnight Athens time tonight, it's good to remind ourselves what our interest in this latest Balkan mess is: credit. Not the numeric version in your monthly credit card statement, nor the alphabetic label Standard and Poor's attaches to corporations and countries, but rather the intangible social force those numbers and letters are trying to approximate, a force that binds communities, economies and countries together. The world has already firewalled the collapse of Greece's credit on the financial level. The end game in Greece is close and clearer now than ever before: either they get it together, politically, and agree as a country to the deal offered by Europe, or they'll be kicked out of the Euro. The consequences will play out whether or not Papandreou wins his vote of no confidence tonight, as Parliament will have to vote to accept the European package if it's going to get the money it needs to service debt that comes due in early December.

Report on Greece: Papandreou to Stand Down, Venizelos to Form Government, Elections in February - UPDATE via Athens News: 00.56am The voting has finished. Unconfirmed results on Twitter: Yes 153, No 143. Papandreou has won. From Reuters: Greek Leaders Strike Deal for a New Government Greek Prime Minister George Papandreou has struck a deal to stand down and let Finance Minister Evangelos Venizelos form a coalition government ... They said Venizelos had won the backing of leaders of some smaller parties to support the coalition, which would also aim to avert an immediate Greek bankruptcy, before calling early elections in a few months. And a comment from Venizelos via the Athens News: Live news blog – November 4  Finance Minister Evangelos Venizelos giving a speech. Says country needs effective government. Has just said that interim government should stay in power until February, then elections.

Whispers of Return to Drachma Grow Louder in Greek Crisis - The political upheaval in Athens has suddenly made the once unspeakable — Greek debt default — a distinct possibility.  So now it’s time to ponder the once unthinkable: that Greece1 might end its 10-year use of the euro2 and return to its former currency, the drachma.  Such a move is still officially anathema in Athens. But a growing body of economists argues that it would be the best course, whatever the near-term financial and economic implications. And now, with a referendum on the European-led bailout facing Greek voters, a vocal minority that has long called for a return to the drachma might find itself with a growing group of listeners.  A return to the drachma is unlikely to offer a quick cure for Greece’s ills. Default on the nation’s $500 billion in public debt would become a certainty, depositors would take their money out of local banks and, with a sharp devaluation of as much as 50 percent, inflation would loom. A return to the international credit markets would take years.

IMF May Create 6-Month Credit Line for Countries Facing Shocks -- The International Monetary Fund may create a six-month credit line for countries facing shocks, officials from Group of 20 governments and IMF said, as the European debt crisis rocks global financial markets. The amount would be capped at five times a nation’s contribution to the Washington-based IMF, known as a quota, making the credit line best suited for smaller countries, the people said. It is likely to be endorsed at a meeting of G-20 leaders this week in Cannes, France, where European nations will seek financial support from other members, said the three officials, who declined to be identified because the plan hasn’t been made public. The instrument would be the latest in a set of IMF tools intended to increase liquidity as Europe’s crisis threatens to spread beyond Greece. It could be used as part of a broader international package to aid larger economies such as Spain, with IMF participation serving to reassure other creditors, said Bessma Momani, a political science professor at the University of Waterloo in Canada. “The worry of most of these creditor countries is, ‘Who’s watching?’  “This is in a sense a demand of creditor countries -- - Russia, China, the Gulf countries -- that before going to the G-20 there is some sort of confidence-building measure that the IMF will not let this go.”

Bank Exodus From Euro Zone Sovereign Debt Quickens - Banks including BNP Paribas and ING are ditching billions of euros of euro zone government bonds, cutting their exposure to the region's trouble spots. More lenders are expected to retreat as the euro zone crisis deepens and leaders raise the possibility of the exit of Greece from the bloc, further damaging prices. "The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds," Charles Dallara, managing director of the Institute of International Finance, warned on Wednesday. BNP , the biggest overseas private holder of Greek government debt, took a 2.6 billion write down on Thursday as the crisis in the currency bloc deepened, mostly as a result of its holding of Greek bonds. The bank had been told by the French government not to sell down its Greek bond holding as the country's troubles grew over the summer, to prevent destabilising the euro zone, a senior banking source has told Reuters, on condition of anonymity. France's biggest bank took a 2.3 billion euro hit on writing its Greek government debt down to 40 percent of its par value. But it also lost 362 million euros selling almost 25 billion euros of sovereign debt, or a quarter of its holdings, reducing its Italian bonds by 8.2 billion euros to 12.6 billion in just four months.

Behind The Scenes European Panic As Interbank Liquidity At Worst Level Ever - Yesterday we reported that in the aftermath of MF Global, and concurrent with Greece nearly allowing democracy for one brief second, European banks had scrambled to put a record amount of cash with the Federal Reserve. Next we get confirmation from the ECB that like in the US, so in Europe, in the absence of any confidence in one another (ignore Liebor, which while up again is and has always been a collusive joke intended to convey bank strength), the only place banks have left to dump money is the ECB. As of this morning, a 16 month high of €275 billion in cash had been parked with Mario Draghi, an amount which is promptly removed from the Keynesian money multiplier myth, and which confirms that there is a behind the scenes liquidity panic unlike anything we have seen since Lehman, and in fact, as the second chart from Sean Corrigan showing ECB fixed and deposit usage as well as Fed reverse repo and overall foreign bank cash parking, the liquidity in the market now from a European point of view, contrary to what broken indicators may show, is the worst it has ever been with nearly $1.6 trillion in liquidity removed from broad circulation and parked with either just the Fed or the ECB. Translated: as goes democracy, so goes confidence.

Agency Names Top Global Banks - The enforcement agency for financial stability of the Group of 20 industrial and developing nations Friday published the long-awaited list of those banks it will force to hold more capital because of their importance to the global financial system.  The list of Globally Systemically Important Financial Institutions is very much as had been expected, with 17 European banks, eight U.S. ones, three Japanese and one Chinese on it.  The banks named Friday by the agency have until the end of next year to lay out in detail how their businesses should be unwound if they collapse. From 2016, they will also have to hold more capital than other banks "in order to reflect the greater cost to the system of their failure." As such, by 2019 at the latest, these banks will have to have a core Tier 1 capital ratio up to 3.5 percentage points higher than banks that aren't systemically relevant.  The agency foresees five "buckets," requiring extra capital of 1%, 1.5%, 2%, 2.5% and 3.5%. The more important the bank, the higher the surcharge it will have to pay. Mario Draghi, the outgoing chairman of Financial Stability Board and the new president of the European Central Bank, said in Cannes Friday that it is still too early to say which "bucket" the individual banks will be put in, but the 3.5% "bucket" will be left empty to start with.

Because Central Banks Just Aren't Enough: G-20 Will Ask IMF To Print Reserve Currency - World leaders may mandate the International Monetary Policy to print more of its special currency to help solve the euro zone crisis, according to several people familiar with the matter. Asking the IMF to print more of its Special Drawing Rights, essentially an IOU that countries can exchange for cash, is one of the ways the Group of 20 industrialized and developing countries is considering supplementing European efforts to stem a debt crisis threatening to spark a global financial meltdown and another recession. G-20 leaders are pressing euro zone leaders to deliver a detailed and credible plan to leverage their own bailout fund, boost bank capital buffers and restructure ailing economies. Political disarray in Greece and the inability of euro-zone officials to so far agree on exactly how they plan to build a firewall to prevent contagion is fueling talks on alternative emergency measures. If Europe is able to agree on a credible strategy that can assure its colleagues in the G-20, then the group would be willing to consider the SDR allocation and other financing options to bolster European action, the officials said.

China to Commit on Currency Flexibility at G-20, Treasury’s Brainard Says - China will make commitments on currency flexibility as part of a Group of 20 action plan that will call upon export-oriented economies to boost domestic consumption, said Lael Brainard, U.S. Treasury undersecretary for international affairs. Brainard said China is “playing a quite constructive role” in conversations that will commit trade “surplus countries” to stepping up domestic consumption. Currency flexibility “will be part of the action plan” announced at the end of the summit, Brainard said at a briefing in Cannes, France. G-20 leaders are meeting in Cannes to discuss Europe’s efforts to deal with its debt crisis and update their plans on rebalancing the global economy. Chinese President Hu Jintao called for reform of the international monetary system to be advanced “in a steady manner,” according to the text of remarks he made to French President Nicolas Sarkozy at the G-20 meeting. Measures should include changes to “expand the use of” the special drawing rights of the International Monetary Fund, “reform the SDR currency basket and build an international reserve currency system with stable value, rule-based issuance and manageable supply,” Hu said, according to the text distributed to reporters in Cannes.

No IMF, EFSF Participation In European Bailout: Merkel Says G20 Fails To Reach Agreement On IMF Resources, Nobody Wants Any Piece Of EFSF - Yesterday we reported that the latest deus ex machina in the endless European bailout was to proceed with IMF monetization and failing that, just a narrower US-funded bailout of Europe. That ain't happening. German Chancellor Merkel says the G20 failed to agree on IMF resources. German Chancellor Merkel says will make sure that the IMF has sufficient resources, but also new instruments. And it gets worse: German Chancellor Merkel says hardly any countries in G20 have said they will participate in the EFSF Which means we are back to the old and now expired fallback deus exes: China and the magical, wonderful and totally unfunded EFSF. No wonder the EURUSD is dropping on the news, as for the BTP-Bunds spread, well, following the Merkel announcement that Italy has to come under IMF monitoring, see below...

G-20 Fails to Agree on Use of IMF Resources as Europe Is Pressured to Act -  World leaders balked at writing new checks to help bail out the euro-area, demanding its own governments first do more to fix the two-year-old debt crisis. Global policy makers demanded more details of a week-old rescue package before they commit fresh cash to the International Monetary Fund, which could then lend to Europe’s bailout facility, German Chancellor Angela Merkel said at the end of a Group of 20 summit in Cannes, France. French President Nicolas Sarkozy said a deal may not come before February. “The worst thing to do would be to try and cook up a number without being clear who was agreeing to what,” British Prime Minister David Cameron told reporters yesterday after the two-day gathering ended. “The job of the IMF is to help countries in distress, not to support currency systems.” The refusal of major economies to stump up money now reflected irritation with Europe’s failure to resolve its crisis and foiled investor hopes that the summit would mark a turning point. The turmoil instead flared again before Greece’s government survived a confidence vote in parliament early today and Italian Prime Minister Silvio Berlusconi accepted IMF monitoring.

Bill Gates aims for 'Robin Hood' tax - Billionaire philanthropist Bill Gates will tell the G-20 Thursday that they could raise $48 billion to fight global poverty by levying a “Robin Hood” tax on the trading of bonds and shares. Gates will talk about the transaction tax - dubbed by some as a “Robin Hood” tax - when he speaks before the G-20 to deliver a report commissioned by French President Nicholas Sarkozy on international development, according to The Guardian1.  “It is very plausible that certain kinds of FTTs [financial transaction taxes] could work. I am lending some credibility to that. This money could be well spent and make a difference. An FTT is more possible now than it was a year ago, but it won’t be at rates that magically raise gigantic sums of money,” Gates told the British newspaper.Estimates are that the Robin Hood tax could bring in $50 billion a year. The Microsoft founder will talk about the financial transaction tax even as it would be a hard sell for the U.K. and the United States. Gates will also mention tobacco taxes and taxes on shipping and aviation fuel as other ways to raise money for global development, says the Guardian.

Britain liable for billions of pounds as eurozone crisis deepens - Britain is poised to provide billions of pounds for a new global economic rescue package, prompted by concerns that the EU plan to save the euro will not be enough to stabilise the world economy.  A deal being negotiated by world leaders at the G20 summit in Cannes could see the International Monetary Fund (IMF) double in size.  David Cameron will face strong opposition from Conservative MPs over the potential use of taxpayers’ money to assist European countries after repeated assurances from the Government that Britain would not provide extra funds to help the eurozone.  Both the Prime Minister and George Osborne, the Chancellor, insisted that the crisis is so grave that intervention is now required.  “When the world is in crisis, it is right that you consider boosting the IMF, the International Monetary Fund, an organisation founded by Britain in which we are a leading player,” Mr Cameron said.

Euro-TARP - I am making the mistake of reacting to the latest twists in the saga of Greece and other European countries. I started by reading this: Britain is poised to provide billions of pounds for a new global economic rescue package, prompted by concerns that the EU plan to save the euro will not be enough to stabilise the world economy. This would be via an expansion in the International Monetary Fund, presumably requiring an even larger contribution from the United States. The Anglo-Saxons to the rescue of Europe?  So, I went to Google News to find out the latest, and got to this:After a tumultuous day in Greek politics, the chances of the referendum being held dwindled to almost nothing on Thursday. Papandreou offered to drop the idea anyway if the conservative opposition backed the bailout in parliament. So it seems that the Greek politicians will circle the wagons against the voters. What could go wrong?

 Good old days when bonuses were paid from profits - It is curious to reflect that in the London market of 25 years ago, last week’s decision by UBS to maintain investment banking bonuses in the face of a thumping loss would have been literally incomprehensible. Back then, bonuses were paid out of profits. So without profits, where might the money come from? The question is not as naive as it sounds. Before the Big Bang of 1986, which transformed investment banking and broking in the UK, business was done through partnerships. That restricted access to capital in ways which today seem hard to grasp. The contrast is nevertheless relevant. Before pursuing that, let us inspect the UBS case more closely. In its third quarter, as a result of the alleged trading scam that cost it SFr1.85bn (£1.33bn), the investment banking division made a pre-tax loss of SFr337m. The figure reported – a profit of SFr1.43bn – was somewhat rosier. But that resulted from a profit of SFr1.77bn on the fall in value of UBS’s own bonds. I have written on this hallucinatory procedure before (April 27, 2009). Suffice it to say that whereas any corporation could in theory adopt it, only the banks have had the brass neck to do so. Then again, only the banks paid bonuses based on imaginary profits of various kinds throughout the bubble years.

Cameron's Fantasy - Krugman - He opens by declaring that "I am confident that we can both resolve the crises at hand and come through them with an economy that is stronger and fundamentally fairer. My argument here at home and at the meeting of the Group of 20 leading economies in Cannes is that we can only do so if we show complete single-mindedness on three fronts …" I don’t know exactly how you show complete single-mindedness on three fronts. Is this some sort of Zen thing? More seriously, here’s his defense of his austerity policies: It is thanks to the credible plan this government has set out that today we have market interest rates of just 2.5 per cent – half what they are in Spain or Italy. Indeed, nobody else has managed to achieve low interest rates despite large debt and deficits. Oh, wait:All signs point to falling rates because of falling, not rising, confidence: nobody expects the countries with their own currencies to default, nor did they ever, but they now expect short-term rates to stay low for a very long time thanks to a weak economy. So this is really sad. Cameron is pointing to a decline in rates that’s happening world-wide, except among countries that have given up their currencies, and claiming that he sees the confidence fairy.

U.K. Corporate Pension Deficit at $476 Billion, Telegraph Says - British companies that provide employees with defined-benefit retirement plans face a pension deficit of 295 billion pounds ($476 billion), the Sunday Telegraph reported, citing research by accounting firm KPMG. The aggregate deficit is the mark-to-market funding valuation of all defined-benefit pension plans in the U.K. as of Sept. 30, the London-based newspaper reported. BT Group Plc’s pension fund liabilities are about 250 percent of its market value, compared with 195 percent for BAE Systems Plc (BA/) and 112 percent for Royal Bank of Scotland Plc, according to the Telegraph.

Eurozone deal won't stop growth taking a hit - As it turned out, eurozone leaders came up with a version of the “grand plan” that has been circulating for some weeks and the markets, initially at least, liked it. Whether intended or not, this was a good example of expectations management. Ahead of the meeting there were fears of no deal at all (though there always is). The result, a beefing up of the European Financial Stability Facility (EFSF) to ¤1 trillion (£880 billion), a ¤106 billion (£93 billion) recapitalisation of European (but not British) banks and voluntary 50% haircuts on Greek debt, did enough to reassure. Plenty of doubts remain, particularly over Greece and Italy, and over the details. The markets were perhaps a little too euphoric. The eurozone has been the biggest threat to the recovery, globally and in Britain. If there was an easy way out, the Next chairman Lord Wolfson would quickly be relieved of his £250,000 prize. Time, however, is a valuable commodity. And the EU has bought it. Has it removed the threat to the rest of us?

Pretty Q3; ugly Q4 -BRITAIN'S GDP rose by 0.5% in the third quarter, a bit better than the (oddly cautious) consensus forecast of 0.3%. An annualised growth rate of 2% might count as a decent performance in this new age of diminished expectations had it not come after a near flat second quarter, when output was held back by the extra bank holiday for the royal wedding and othere "special factors". Some of the third-quarter growth was catch-up for the output lost during the previous three months. The focus is now on the current quarter, which is likely to be ugly. The Bank of England's best guess is that GDP will be flat in Q4. The October purchasing managers' index (PMI) for manufacturing, released at the same time as the GDP figures, suggests even that might prove too optimistic. The headline index slumped from 50.8 to 47.4, below the 50 reading that divides expansion from contraction. November is likely to see another fall in the index, because order books are thinning at an alarming rate. Manufacturers say their nervous customers are delaying orders and running down stocks. The main anxiety is of course the euro zone, where 40% of Britain's exports (and a fair chunk of its bank lending) go. The euro-area PMIs, also published this morning, also made grim reading.  The October slump in the French index was alarming. Manufacturing is shrinking even in Germany. 

UK faces 70 percent chance of recession - The possibility of another recession hitting the UK is ever closer as an influential think tank said on Thursday that the economy faces a near 50 percent chance of a double dip even if Europe's debt crisis is resolved. The National Institute of Economic and Social Research said if euro zone policymakers merely "muddle through," the chance of a recession would rise to 70 percent, the academic think tank predicted. NIESR's central forecast is for gross domestic product to grow by just 0.9 percent this year and 0.8 percent next, with risks to the downside, revised sharply down from forecasts of 1.3 and 2.0 percent respectively it made in August. "There is a weakness in demand from both consumers and investors but the main downside risk is from the euro zone crisis,". The government has embarked on its own tough austerity drive to pay off a deficit running at nearly 10 percent of GDP by 2015, but the slowing economy makes this an increasingly difficult task.

Is there a credit channel? - An important argument at the moment is whether or not the so-called credit channel exists. When central banks carry out quantitative easing, and even more so in the case of a “credit easing” policy like the one George Osborne announced recently, a major reason for it is that they are trying to reduce the price (i.e. the real-terms interest rate) and increase the supply of loans to businesses. This being their effective cost of capital, this should encourage them to invest, and thus to increase aggregate demand. This is the New Keynesian account; the monetarist one is that creating an expectation of future inflation creates a disincentive to hold onto cash. But there is a criticism of the credit channel that works like this: as banks actually create credit, they are only loosely constrained by its supply. Instead, they supply just as much as their customers demand. If the customers are businesses, they are more likely to worry whether their new venture is a good one or not. If it’s a winner, whether it’s a winner with a carrying cost of 4% or 6% isn’t a primary consideration. If it’s a loser, it’s a loser no matter what the interest rate. The bank operates in one of two states – essentially, risk-loving or risk-averse. In the risk-loving state, it expands its balance sheet as fast as its customers demand credit. In the risk-averse state, it digs in and hoards cash.

World faces years of social unrest as economies falter - The international economy is on the brink of a deep new economic crisis that could cost millions of jobs around the globe and trigger mass social unrest, the world's most powerful nations were warned yesterday. As the leaders of the G20 countries prepare for emergency talks on averting a return to worldwide recession, the United Nations' International Labour Organisation (ILO) issued a grim forecast of the social effects of the continuing economic crisis. The UN agency warned that it could take until 2016 for global employment to return to the levels of three years ago – and that anger could erupt on the streets of Europe and other continents as a result. The economic gloom was exacerbated yesterday by Greek Prime Minister George Papandreou's surprise announcement that his country would hold a referendum on the European debt deal that was struck last week. The vote could put the tortuously conceived package in jeopardy. The Greek Finance Minister, Evangelos Venizelos, said the announcement was prompted by popular discontent at the terms of the deal. If anger at the austerity forced on the country translates into a No vote, European leaders who spent months haggling over the terms of the deal could be forced back to the drawing board and the terms of the deal renegotiated.

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