week ending Dec 10

Fed Balance Sheet Grows Slightly Over Past Week - The U.S. Federal Reserve's balance sheet rose a little over the last week as the central bank continues with a plan to shake up its portfolio and spur economic growth. The Fed's asset holdings in the week ended Dec. 7 stood at $2.823 trillion, up from the $2.817 trillion reported a week earlier, the central bank said in a report released Thursday. Holdings of U.S. Treasury securities rose to $1.675 trillion from $1.672 trillion the week before, while central bank's holdings of mortgage-backed securities held steady at $827.05 billion. The report Thursday showed holdings of Treasury securities with a remaining maturity exceeding five years rose over the past week. Total borrowing from the Fed's discount lending window was $9.63 billion, down from $9.82 billion a week earlier, according to the report. Borrowing by commercial banks fell to $12 million from $113 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts slid to $3.453 trillion from $3.466 trillion in the latest week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts decreased to $2.735 trillion from $2.748 trillion the previous week. Holdings of agency securities declined to $717.91 billion, from $718.22 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances December 8, 2011

Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines - On November 30, Central Banks Cut Rates on Dollar Swap Lines which made borrowing at the Fed's discount window cheaper for foreign banks than US banks.  As a result, Dollar-Loan Demand Swells In Europe and Japan The European Central Bank said demand for three-month dollar loans surged after it cut the cost of the financing almost in half in a coordinated action last week with five other central banks including the Federal Reserve. The European Central Bank, based in Frankfurt, will lend $50.7 billion to 34 euro area banks on Thursday for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The E.C.B. also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The E.C.B. does not disclose the identity of the banks that borrow. $395 million to $50.7 billion is quite a move. Percentage-wise it is approximately 12,735%. In Japan, demand for loans increased from $1 million to $25 million, a mere 2,400%. The actual demand in Japan is trivial. In Europe, it's not.

NY Fed Says MBS Repurchase Trades Help Settlements - The Federal Reserve Bank of New York on Tuesday said it has been conducting a type of mortgage-bond-repurchase transaction to aid the earlier settlement of its outstanding mortgage-backed securities purchases, which is supporting the larger market. In the "dollar roll" transactions, investors agree to sell the similar type of MBS in the current month and buy back the same trade in a future month at a lower price. The Fed on Monday supported the market by taking the other side of that trade, and traders speculated that the move was to accommodate investors who want to borrow, thus encouraging more MBS trading. "We are conducting dollar roll transactions to facilitate the settlement of our outstanding MBS purchases, consistent with the FOMC's directive in September and the FAQs on our website," . By agreeing to accept delivery earlier than anticipated, the Fed is essentially providing its balance sheet to improve year-end liquidity in the $5 trillion market that is essential to U.S. housing, said Mahesh Swaminathan, a strategist at Credit Suisse. The Fed in past weeks has focused its buying on MBS under a program it announced in September to support conditions in the market that provides the lion's share of credit to U.S. housing. The Fed is reinvesting proceeds from its portfolio of mortgage bonds, having purchased nearly $50 billion since early October.

Fed must act now to boost economy, Evans says - The Federal Reserve must take immediate action to inject new life into a moribund U.S. recovery or risk letting the nation settle into a permanently lower growth path, a top Fed official said on Monday. "There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape," Chicago Fed President Charles Evans said.  "It is imperative to undertake action now." Evans' renewed call for monetary policy easing came even as the U.S. unemployment rate tumbled to a two-and-a-half-year low, and a variety of economic data suggest that U.S. economic growth may rise sharply this quarter, topping a 3 percent annual rate. Known for his dovish views on inflation, Evans was the only Fed policy maker to dissent last month on the central bank's decision to leave monetary policy unchanged. Then, as today, he called for further easing to boost the recovery.

WSJ: New Fed Communication Strategy - From the WSJ: Federal Reserve Prepares to Make Itself Perfectly Clear The Fed has been working on revamping its communication strategy for months. ... Informally, the Fed already has made clear it wants the annual inflation rate to run at 2% or a bit lower over the long-run. A formal statement would codify the commitment. Such a declaration would likely run alongside a description of the Fed's goals for employment, which Congress requires it to mind along with inflation. Most Fed officials believe the unemployment rate could fall to 5% or 6% without triggering higher inflation. To articulate its interest-rate strategy, the Fed would expand its quarterly release of the officials' projections for economic growth, inflation and unemployment. It would add details on the Fed's interest rate expectations underlying its economic projections, along with some description of the policy it expects to employ to reach its goals. I think this would be helpful.

A Fed More Explicit - There has been some chatter about this Informally, the Fed already has made clear it wants the annual inflation rate to run at 2% or a bit lower over the long-run. A formal statement would codify the commitment. Such a declaration would likely run alongside a description of the Fed’s goals for employment, which Congress requires it to mind along with inflation. Most Fed officials believe the unemployment rate could fall to 5% or 6% without triggering higher inflation. To articulate its interest-rate strategy, the Fed would expand its quarterly release of the officials’ projections for economic growth, inflation and unemployment. It would add details on the Fed’s interest rate expectations underlying its economic projections, along with some description of the policy it expects to employ to reach its goals. Since the Fed has been more explicit about its inflation comfort zone it is comforting to here it will be more explicit about its unemployment comfort zone.  However, the primary good of this – I see – is to help solidify political support around the Fed lowering unemployment. Its not the kind of communication vehicle that we would expect to serve as a credible commitment to be irresponsible.

Possible Fed Communication Strategy, by Tim Duy: As is widely known, the Federal Reserve is working on improving its communication strategy to provide better guidance about monetary policy and thus hopefully induce better outcomes. From today's Wall Street Journal: The Fed has taken ad hoc steps in this direction. During the financial crisis, it said rates would stay low for an "extended period." In August, it said they would stay low "at least through mid-2013." Quarterly projections would formalize this guidance and make it more specific. "The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate," Fed vice chairwoman Janet Yellen said in a speech last week. She is chairing the Fed subcommittee designing the communications overhaul. The "mid-2013" formulation is especially problematic. At some point it will need to be updated. With unemployment high and not falling quickly, it is possible the Fed won't raise interest rates until much later. What form might "enhanced" guidance take? It seems unlikely that the Fed would limit itself to point estimates on the future course of interest rates. Reality is much more probabilistic, and I would expect additional Fed guidance to reflect forecast uncertainty via confidence intervals. One such example would be the Monetary Report of the Swedens' central bank. Forecasts for inflation:

A More Dovish Fed? - While the latest figures show the unemployment rate dipping below 9 percent, a lot of this decrease has to do with individuals giving up and leaving the labor force.  As for additional stimulus, Congress is currently negotiating an extension, and possible expansion, of the payroll tax cut.  But Republicans are insisting that it be “paid for,” so it’s not yet clear what effect this would have if passed.  That leaves the Federal Reserve as the only US institution to turn to.  Zero Hedge tries to provide some (small) reason for optimism on this front, suggesting that the composition of the FOMC may become more “dovish” in 2012 when the next group of voting members is rotated in (Fisher, Kocherlakota, Evans, and Prosser out; Pianalto, Lacker, Lockhart, and Williams in).

Should Fed Refocus on Money Supply? - In recent years, the Federal Reserve has considerably narrowed its study of the money supply (referred to by economists, depending on the breadth of the definition, as M1, M2 or M3), relegating it to more or less second-class status in the world of economic indicators. This, it turns out, may have been precisely the wrong thing to do. What the 2008 financial crisis so violently revealed was the tremendous amount of financial activity taking place in the shadows outside the traditional banking system and measured economy. Ever since, researchers have been working to quantify this “shadow banking” activity and properly model its role in credit creation and intermediation to better understand the dynamics of money, inflation, and economic growth. Zoltan Pozsar and Manmohan Singh, two economists currently working at the International Monetary Fund, have been at the forefront of this movement. And a new working paper of theirs sheds considerable light on the size and scope of “shadow banking.” They also help to clarify what is meant by this sinister-sounding term; shadow banking, they argue, is simply reverse maturity transformation.

A Simple Question about NGDP Targeting - It seems that a big part of the econosphere these days talks about NGDP targeting. Translating this into English, a number of economists believe the Fed should be adjusting monetary policy to achieve a given desired rate of nominal GDP in any given year To me there are two very obvious problems with this. The first should be evident to anyone who ever spent time in South America in the 1970s or 1980s, or has so much as heard of, say, Zimbabwe or the Weimar Republic: why should the Fed or anyone else care about nominal growth rates? Nominal figures are useful for Sowellizing, which apparently can be very profitable, but in the end, only inflation adjusted figures tells us whether we're better off or not.  But there is a second problem, and the easiest way to state it is by analogy. Think of the Fed as the quarterback on an American football team. The goal is to do what it takes to win the game. Getting 28 points doesn't help you if the other team walks away with 35. The Fed is left with something that loosely translates as this: "try to get the economy to grow as quickly as possible without setting off too much inflation." It accomplishes that goal to a greater or lesser extent at different times.

Fed May Give Loans to IMF to Help Euro Zone  - Meh, what’s another couple of trillion dollars between friends… Via: Reuters: The Federal Reserve, along with the 17 euro zone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper said. Die Welt cited sources close to the negotiations as saying the euro zone central banks could pay at least 100 billion euros ($134.2 billion) into a special fund that could be used for programs for nations struggling to control their debts. "Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs,” the paper said in an advance copy of an article to appear on Monday.

Secrets of the Bailout, Now Told - A FRESH account emerged last week about the magnitude of financial aid that the Federal Reserve bestowed on big banks during the 2008-09 credit crisis. The report came from Bloomberg News, which had to mount a lengthy legal fight to wrest documents from the Fed that detailed its rescue efforts.  It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.  But that’s the way our world works. Billions are secretly showered on troubled financial institutions to stave off disaster. Individuals get little or no help.  Among all the rescue programs set up by the Fed, $7.77 trillion in commitments were outstanding as of March 2009, Bloomberg said. The nation’s six largest banks borrowed almost half a trillion dollars each from the Fed at peak periods, Bloomberg calculated, using the central bank’s data.  Those six institutions accounted for 63 percent of the average daily borrowings from the Fed by all publicly traded United States banks, money management and investment firms, Bloomberg said.

Discount Window Lending, Secrecy, and Stigma - This story is months old, but received some attention in the last week. In March, the Fed released the details of its lending during the financial crisis, under court order. Whether it took Bloomberg 9 months to process the information, or the timing just seemed right, Bloomberg had a story this week (I think; there is no date on the post) on the details. Further, Eliot Spitzer (how could we forget him?) and Jon Stewart picked up on it. It has of course been well-known for a long time that the Fed lent to financial institutions, particularly large ones, in a massive and unprecedented fashion during the financial crisis. This is the first instance I know of the release of information about the details of the Fed's lending operations - who received the loans, how much, and at what interest rates. Typically we know the total quantities of discount window lending through the Fed's primary and secondary facilities, which appears in the Fed's reported balance sheet numbers, but little else. It would be useful at this point to review the Fed's key lending programs to financial institutions that were active during the crisis. In the chart, I show the Fed's lending through the Term Auction Facility (TAF), the Term Asset-Backed Loans Facility (TALF), primary credit (regular discount window lending), and the specific AIG lending program.

Richard Alford: The Lender of Last Resort, the Fed and the ECB - Bagehot's criteria have become something of a mantra: Lend freely at penalty rates against good collateral to illiquid but solvent banks. Given Bagehot’s purpose and definition, has the crisis of 2008 provided a test of the Fed as an LOLR? If so how well did the Fed perform? What are the ECB’s responsibilities as the LOLR in Europe in 2011? To evaluate the Fed as a LOLR, one must consider how well it fulfilled the four requirements as set out by Bagehot:

1. Lend freely
2. At a penalty rate
3. Against good collateral
4. To illiquid but solvent banks

The Fed lent freely. Discount Window lending has been the vehicle by which the Fed has traditionally fulfilled its responsibilities as the LOLR. Discount Window borrowing did increase. The Discount Window loans to depository institutions peaked at close to $112,000 million in late October 2008. (They were $126million in October of 2007.) The Fed also increased other extensions of collateralized credit by to a variety of financial institutions and markets that were part of the shadow banking system. The Fed did so in order to prevent a run on the shadow banking system, the effects of which would have been similar to a run on the banking system itself. (This expansion of the list of institutions with access to the Fed as a LOLR is not unprecedented. By legal mandate, the Fed is not only the LOLR to the banking system. The Fed has also been the lender of last resort to thrifts.)

Alan Grayson on GAO Report on the Fed -  Yves Smith - Yves here. There has been a lot of press, deservedly so, on the information that Bloomberg managed to pry out of the Fed on its emergency lending programs during the crisis. The Fed again is in crisis mode, again in a controversial and arguably compromised position in extending currency swaps to the ECB to provide dollar liquidity to European banks. They are having difficulty securing funding because US money market funds are no longer keen about parking money with them and US regulators have been discouraging banks from extending credit lines to them. As a consequence, another set of important revelations about Fed conduct, namely, the release of the results of a GAO review of crisis related Fed operations, is not getting the attention it warrants.  But before turing to the Grayson letter, let me offer a thought on the Fed intervention of last week. If anything, even though I’m skeptical that the dollar liquidity shot in the arm is much more than a confidence building move and a very short term expedient, it is even more questionable than the currency swaps extended during the 2007-2008 crisis. Even though in both cases, the US is supposed to act as lender of the last resort, in the global financial crisis, dollar assets were the epicenter. The US has peddled toxic dreck and Eurobanks were big takers. The US had not just a practical but a moral responsibility to do what it could to alleviate the mess it had created. This time, the dollar market stress is the result of the lousy condition of Euro assets on Eurobank balance sheets, namely their expected losses on periphery country debt. If the ECB would step into the breech and play the lender of the last resort in Euros, the need for foreign central bank action would be considerably reduced.

$7.77 trillion in secret Federal Reserve loans to banks? - I have been looking into the claim recently made by any number of internet sites (for example, here's one of the many hundreds, if you insist on a link) that the Federal Reserve made $7.77 trillion in secret loans to banks. The claim is outrageously inaccurate, as I explain below. Let me begin with some accounting basics. Suppose that at the start of January I make a 3-month loan of $100 to person A and a 1-month loan of $100 to person B. At the start of February, person B rolls it over into a new 1-month loan, and does so again at the beginning of March.  So, students, here's your question: how much did I lend to person A, and how much did I lend to person B? The correct answer, of course, is that I lent $100 to person A and I lent $100 to person B. But, if you were trying to sensationalize and misrepresent what actually happened, perhaps you'd say that I lent $300 to person B, by adding the three $100 1-month loans together. So where in particular did people come up with this $7.77 trillion figure? The source appears to be a recent story from Bloomberg news, which includes the following statement: Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system. I contacted the reporters who prepared the Bloomberg story to try to learn some more details. They communicated to me that those who claim that the Fed provided $7.77 trillion in secret loans to banks have misinterpreted their article.

Fed Shoots Back at Media Portrayal of Crisis Lending - Federal Reserve Chairman Ben Bernanke shot back in unusually strong terms at news reports it blamed for making “egregious errors” about the size and impact on Americans of the Fed’s emergency lending during the 2008 financial crisis. In a letter to the Senate banking committee, Bernanke released a staff memo that rebuts the portrayals in recent Bloomberg and other news articles that the Fed was aiming to help big banks’ profits at the expense of taxpayers. (Read the letter) A Bloomberg Markets Magazine article released Nov. 27 said that big banks reaped an estimated $13 billion of income after the Fed committed $7.7 trillion in funds as of March 2009 to rescuing the financial system.  Calling the lending numbers in the media “wildly inaccurate,” the Fed said total credit outstanding under its liquidity programs was never more than the $1.5 trillion peak reached in December 2008. The Fed said that nearly all of the emergency assistance has been fully repaid or is on track to be, something it said wasn’t stressed in news articles. The central bank claimed that the loans benefited American taxpayers by generating an estimated $20 billion in interest income for the U.S. Treasury.

Bernanke calls bombshell loan articles flawed - Federal Reserve Chairman Ben Bernanke on Tuesday pushed back against reports that the Fed had lent banks $7.77 trillion or more during the financial crisis, saying they contained "egregious errors and mistakes." Bloomberg Markets Magazine last month published an article called "Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress." The article was widely referenced by other news organizations, including The New York Times. The Bloomberg article said the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system when all guarantees and lending limits were added up. While Bernanke did not mention Bloomberg or any other news organization by name, he said in a letter to lawmakers that the figure and other estimates of larger total amounts of lending, were "wildly inaccurate." On any given day, Fed credit from its emergency liquidity programs was never more than about $1.5 trillion, he said.

Fed Lashes Out at 'Errors' in Reporting - The Federal Reserve unleashed an unusual attack Tuesday on Bloomberg News, charging in a letter to members of Congress that stories about its bailout programs “have contained a variety of egregious errors and mistakes.” The letter, signed by the Fed chairman, Ben S. Bernanke, showed that the central bank remains deeply concerned that public anger about its actions during the financial crisis will have political consequences, like new limits on its freedom of action. The letter did not name Bloomberg, but the details make clear that the Fed is responding to an article by Bloomberg Markets magazine that was published last week. The article reported that cheap loans from the Fed allowed banks to pocket about $13 billion in profits during a two-year period ending in March 2009. The article also reported that the central bank provided $7.8 trillion in total aid during that period, more than half to the nation’s six largest banks. The Fed said that it disputed both calculations. A Bloomberg News spokesman said: “We have met with the Fed numerous times on this issue and not once has the Fed ever told us our reporting on this issue is inaccurate. We stand by our reporting.” The organization also issued a point-by-point rebuttal.

Bloomberg News Responds to Bernanke Criticism - (Bloomberg) Federal Reserve Chairman Ben S. Bernanke said in a letter to four senior lawmakers today that recent news articles about the central bank’s emergency lending programs contained “egregious errors.”  While Bernanke’s letter and an accompanying four-page staff memo posted on the Fed’s website didn’t mention any news organizations by name, Bloomberg News has published a series of articles this year examining the bailout. The latest, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” appeared Nov. 28.  “Bloomberg stands by its reporting,” said Matthew Winkler, editor-in-chief of Bloomberg News.  Here is a point-by-point response to the Fed staff memo.

Smackdown of the day: Bloomberg vs the Fed - Historically, it was hard for institutions to reply in any effective manner to press reports which they thought were full of egregious errors and mistakes. They The web, of course, has changed all that, and ISDA’s media.comment blog is a great example of a criticized institution taking matters into its own hands. It names and links to the articles it’s criticizing, and I’m pretty sure that it would happily engage in real debate. As a result, ISDA seems — is — more transparent and open than the likes of the New York Times and Bloomberg. The Federal Reserve, on the other hand? Not so much. In a six-page letter today addressed to the Senate Banking Committee, Ben Bernanke lashes out at “a series of articles–one just last week–concerning the Federal Reserve’s emergency lending activities”. He says those articles “have contained a variety of egregious errors and mistakes”. And he encloses “a memo prepared by Board staff that addresses some of the most serious errors and claims in those articles”. Nowhere in those six pages is a single article actually identified. The Fed put the letter up on its website and made sure that various economic journalists, like myself and Binyamin Appelbaum, knew all about it. But the whole thing is an incredibly passive-aggressive way of attacking Bloomberg, which, to reiterate, is never actually named.

Bernanke Escalates Foodfight with Bloomberg: Score Bloomberg 1, Fed 0 - Yves Smith - It’s telling that the Fed was dumb enough to try upping the ante in its ongoing fight with Bloomberg News over the central bank’s refusal to disclose many critical details about its emergency lending programs during the crisis. Any poker player will tell you you don’t raise with a weak hand when the other side is pretty certain to call your bluff.  For those who have been too preoccupied with Europe to keep track of this wee contretemps, Bloomberg last week released a news story that received a great deal of follow through in the media and the blogosphere on the latest information it extracted from the Fed under duress. Bernanke sent a letter that is pissy by the standards of Fed discourse to Tim Johnson, Richard Shelby, Spencer Bachus, and Barney Frank (the big dogs of banking in Congress). Given that Obama had to whip personally to get Bernanke reappointed, and that antipathy towards the central bank is a rare bipartisan cause, writing an aggrieved letter to powerful Congresscritters is not an obvious way to win friends and influence people. And particularly a letter like this one. Get a load of how it begins: First, it tries the sneaky device of complaining about all the bad press it is getting, and alludes in passing to the latest Bloomberg report (“one last week”). So are we dealing with the general or the specific?  But what is even more striking is the tone and substance of the letter: overreaching words like “egregious,” the patently false claims that there is nothing new in the latest (and by implication, earlier) Bloomberg stories, that the disclosure issues are settled. If there was no new information given to Bloomberg, then why did the Fed fight so hard to prevent the release of information?

Separating Fact From Fiction on the Fed's Loans; How Much Was it? Bloomberg Stands By Its Reporting - The Fed and the Wall Street Journal have both taken issue with Bloomberg's article Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress In response to the above article, the Fed went on a publicity campaign, lashing back at Bloomberg and others (but did not mention anyone by explicit name) in this Memo to Congress. Bloomberg pounced on the Fed with a point-by-point rebuttal Bloomberg News Responds to Bernanke Criticism of U.S. Bank-Rescue Coverage which should have ended the debate. Essentially, Bloomberg stands by its numbers and the way it reported them, not necessarily the way others reported them, including my own headline, Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing .. At any rate, Bloomberg's response should have ended the issue right then and there but for some inexplicable reason David Wessel at the Wall Street Journal felt the need to chime in with Separating Fact From Fiction on the Fed's Loans  Wessel essentially did a Fed Suck-Up in his piece, which is of course what one might expect from this line in his article: Full disclosure: My 2009 book, "In Fed We Trust," recounted the Fed's handling of the crisis favorably.

Update on Discount Window Lending - As an update to this post, Ben Bernanke has sent a letter to the Senate Banking Committee defending himself against news reports from last week. Some of the defense deals with various double counting in the reports, which seemed obvious. Here is an interesting part at the end:  Most of the Federal Reserve's lending facilities were priced at a penalty over normal market rates ... The Bloomberg story says: During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008... Of course, those two statements can both be true.

Discount Window Lending, Part III - As a followup to this post and this one, I think we finally have this sorted out. Some people were arguing that the Fed's lending to financial institutions during the financial crisis was subsidizing those financial institutions. But the bulk of lending was through the Term Auction Facility (TAF), and it appears that, if there was any subsidizing, that it had to occur through TAF. But, we have a record of all the loans made through TAF in the excel spreadsheet here. As you can see, the best deal that anyone was getting on a TAF loan was 0.20%, and all those loans occurred on January 2, 2009. Otherwise, the best deal was 0.25%, and no one could make a profit on that, given that the interest rate on reserves was 0.25% at the time, and the fed funds rate was lower than that, as were short T-bill rates. So, was the Fed doing the appropriate thing? As Andolfatto can tell us, there's not a lot in Bagehot to go on. Bagehot tells us that the lender of last resort should "lend freely and at a penalty rate" during a crisis, which if anything seems like a contradiction. If you really want the banks to take the liquidity injection, you should not be penalizing them.

Bailout Total: $29.616 Trillion Dollars - There is a fascinating new study coming out of the Levy Economics Institute of Bard College.  Its titled “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson. The study looks at the lending, guarantees, facilities and spending of the Federal Reserve. The researchers took all of the individual transactions across all facilities created to deal with the crisis, to figure out how much the Fed committed as a response to the crisis. This includes direct lending, asset purchases and all other assistance. (It does not include indirect costs such as rising price of goods due to inflation, weak dollar, etc.) The net total? As of November 10, 2011, it was $29,616.4 billion dollars — (or 29 and a half trillion, if you prefer that nomenclature). Three facilities—CBLS, PDCF, and TAF— are responsible for the lion’s share — 71.1% of all Federal Reserve assistance ($22,826.8 billion). One comment about some of the folks pushing back against this massive total: Yes, there is a big difference between a $100 lent for 3 days, and a $100 lent overnight rolled over 2 more times. And there is an enormous difference when temporary overnight lending lasts for three years.

Fed Is “Ruining an Entire Class of Investors” Says Jim Rogers - No matter what you've heard to the contrary, "there is QE3, the Fed is pumping money into the system," says legendary investor Jim Rogers, disregarding most every Federal Reserve statement over the last six months. In the attached video Rogers explains his lack of trust (read: contempt) for the Federal Reserve and Fed Chairman Ben Bernanke. Rogers has been a critic of the Fed's quantitative easing programs and artificially low interest rates, pointing to the latter as something akin to QE3 in drag. "They're lying to us," he says of the Fed. "One reason the markets are holding up so well is that they are printing money as fast as they can." As asserted on Breakout regularly, the Federal Reserve is operating in an almost complete leadership void due to an unprecedented level of gridlock among the the elected politicians charged with setting fiscal policy. Unless and until the public acts on their many vows to "throw the bums out" of D.C. the Fed will be free, indeed forced, to act alone in regards to doing something to change our economic condition.

Fed’s Evans Willing to Risk Higher Inflation to Boost Growth - If the price of restarting economic growth in the U.S. means the Federal Reserve would have to tolerate higher than desired inflation for a time, that is something policymakers should be willing to pay, an official of the U.S. central bank said Monday. In a speech Monday, Federal Reserve Bank of Chicago President Charles Evans didn’t argue that higher inflation would be ideal or even likely. But as part of an address in which he again laid out arguments for guiding monetary policy by explicit levels in employment and inflation, he said allowing inflation to move above the Fed’s current de facto target of 2% wouldn’t necessarily be a problem.

BPP Data Shows Inflation Trending Downward - The chart above shows monthly inflation rate from the Billion Prices Project @ MIT over the period from the first of the year through October 31.  According to the BPP website, the index is "designed to provide real-time information on major inflation trends, not to forecast official inflation announcements. We are constantly adding new categories of goods, but we do not cover 100% of CPI goods and services. The price of services, in particular, are not easy to find online and therefore are not included in our statistics." Bottom Line: Monthly inflation has been trending downward since February, and at the end of October was below 0.10%.    

Bond Market's Inflation Prediction Falls Below 2% - The chart above shows the bond market's inflation prediction since the beginning of the year, calculated as the weekly difference between the 10-year regular, nominal Treasury yield (data here) and the 10-year Treasury inflation-indexed yield (a measure of the real interest rate, data here), both on a constant maturity basis.  From a yearly high of 2.62% in mid-April, the proxy for bond investors' inflation outlook has been trending downward, and reached a year-to-date low of 1.82% in late September.  After rising above 2% for three weeks for the last week of October and the first two weeks of November, the inflation expectation spread has been below 2% for the last two weeks. Notice that the downward trend in the bond market's inflation prediction over the year has been very similar to the downward pattern in the actual monthly rates of inflation from the BPP @ MIT, see post below (link here) and graph below. 

Inflating Your Way To Prosperity - Paul Krugman - One thing I often see in comments is people attributing to me, or to others, the notion that you can inflate your way to prosperity — which is presented as self-evidently absurd. Well, if you think that it’s self-evidently absurd, you’ve been listening to the wrong people. Nobody thinks that an economy operating somewhere near full employment can inflate its way to higher output. But under depression conditions — which is what we have now — inflation is very much a positive thing. Here’s a quick example from Eichengreen and Sachs showing changes in the gold value of currencies 1929-35 versus changes in industrial production; the devaluation of currencies against gold was closely related to the changes in their overall price level: Yep, countries were able to inflate their way to prosperity. And you get an immediate failing grade if you start ranting about Zimbabwe or Weimar.

Current economic conditions - The U.S. economy experienced disappointingly weak growth in the third quarter. Data coming in during the last week suggest that the fourth quarter is starting out a little better. But it doesn't look to me as much better as some accounts in the financial press might lead you to believe. Auto sales would be a key factor in a normal economic recovery. November light vehicle sales were a little below values for October, but 14% above November 2010. In each of the last 3 years (though not so much in the 4 years before that), sales fell more substantially from October to November, so standard seasonal adjustment procedures report a seasonally adjusted figure for this November that might appear somewhat more encouraging. But note that last month's sales are still 16% below the average values seen for November during 2004-2007.Improvement was also observed in the ISM manufacturing survey, whose index rose from 50.8 for October to 52.7 for November. A value above 50 indicates that the number of facilities reporting improving conditions outnumbered those reporting decline. The ISM measure implies that manufacturing has been growing all year, with the pace of growth picking up in November.

Gauging Holiday Sales’ Impact on GDP Is Tricky - Record-setting Black Friday sales and the jump in online buying suggest retailers are enjoying a very successful holiday season. How those sales translate into real gross domestic product growth can be tricky, warn economists. Associated PressExpectations for a modest increase in holiday shopping have been helped by the recent drop in gasoline prices and an improvement in job growth. Both developments put more money in consumers’ pockets for discretionary spending. They have probably lifted consumer spirits as well. Holiday cheer, however, doesn’t flow easily into GDP calculations. First, while many holiday reports focus on year-over-year sales changes, economic activity is tracked, after seasonal adjustment, on a month-to-month or quarter-to-quarter basis. Second, the Thanksgiving weekend reports gave no indication how many more gifts shoppers still need to buy. Economists at Goldman Sachs have noticed that, even with seasonal adjustments, the chain-store indexes tend to decline in the weeks between Black Friday and Christmas.

ECRI's Weekly Leading Index Rises To 13-Week High - The Economic Cycle Research Institute’s weekly leading index jumped last week to its highest level since September 9, the consultancy reports. Nonetheless, the self-proclaimed “leading authority on business cycles” continues to forecast a recession for the U.S., as ECRI’s co-founder, Lakshman Achuthan, explained yesterday on Bloomberg TV.  If macro trouble awaits, you wouldn't know it by looking at the latest measure of sentiment among Joe Sixpack and friends. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to a six-month high. Optimists will be quick to note that there's more than one study that links consumer sentiment readings with consumption. But Paul Dales of Capital Economics warns not to read too much into the rise. "U.S. consumers appear to be ending the year in a better mood," he says. "Although the recent increase may provide that little bit of support to spending in the malls in the coming weeks, it won't lead to a long and lasting acceleration in consumption growth."

Can We Trust The Moderate Growth Forecasts? - Another day, another economic forecast. The 35 economists polled for the latest Livingston Survey via the Philadelphia Fed project that real GDP for the U.S. will grow at an annualized 2.5% rate for the second half of 2011. That's down from June's 3.2% second-half 2011 forecast. Down, but still not out. Looking ahead to 2012, the Livingston survey forecasters "see the growth rate of economic output slowing to 2.1 percent (annual rate) in the first half of 2012, and they predict that it will then increase to 2.5 percent (annual rate) in the second half of the year." The economists also expect "a slow recovery in the labor market, with the unemployment rate at 9.0 percent in December 2011 and at 8.9 percent in June 2012." Those unemployment predictions are up slightly relative to the June forecast. The case for more optimism, or not, surely depends heavily on how the labor market fares. Yesterday's weekly update on jobless claims provides a boost for optimism, courtesy of the substantial fall last week in new filings for jobless benefits. What's needed now is supporting evidence that this was more than a statistical quirk.

Unrealized Assumptions Could Alter 2012 Forecasts - Economists in the latest Journal forecasting survey expect 2012 gross domestic product growth will accelerate from levels this year, but many are making assumptions about European and U.S. policy that, if not realized, could upend those estimates. The 54 economists see a 2.3% expansion for 2012, compared with an expected rate of 1.7% for 2011. Although an improvement, that isn’t fast enough to tame unemployment. On average, they see that rate still at 8.5% in December 2012, compared with the 8.6% reported in November this year. But underlying the forecasts are assumptions about policy next year. Most respondents — 88% — say Congress and President Barack Obama will come to an agreement on a payroll tax cut before the end of 2011. If policymakers fail to reach a deal and rates increase, it could crimp consumer spending and overall growth. Meanwhile, 56% expect expanded unemployment benefits to be extended for 2012 and nearly half — 48% — predict some form of policy easing by the Federal Reserve. Just 15% of respondents say the government will agree on a significant deficit-reduction plan next year. If Washington manages to come to a deal, it could improve confidence and add to growth next year.

Lost Decades, Illustrated - When I discuss Lost Decades I always stress the fact that the “s” denotes the plural. Figure 1 shows that a decade and a half in, the trajectory of output has been noticeably depressed since 2001Q1..  The downtrend post-2001Q1 is more pronounced in per capita terms (extends only to 2011Q3, since I don’t have population post November 2011, and didn't have the patience to hunt up projections to interpolate to quarterly frequency). In Lost Decades, we make clear that we can avoid two complete lost decades, if we implemented reasonable policies. But we also recognized the obstacles (p.221): ... Financial interests resist regulations that shift the burden of risky behavior back onto them and off of taxpayers. Beneficiaries of government programs fight against attempts to curb their benefits. Taxpayers refuse to pay the taxes needed to pay for the programs they want. Partisan politicians block reasoned discussion, suggesting absurd pseudo-solutions instead of realistic alternatives. ...  And so we see today the blocking of a head for the Consumer Financial Protection Board [1], on top of attempts to repeal Dodd-Frank (no secret why); the wealthiest fighting hard to retain their tax expenditures [2], and others suggesting that cutting taxes and benefits can spur massive supply side responses never before witnessed [3].

Welcome to the living dead economy - A eurozone that somehow stays afloat but can't be reformed, banks awash with cash that don't lend, and incoherent economic policy. We've only found a sticking-plaster solution to our crisis. The longer the economic crisis goes on, the less credible sticking plaster solutions become. Four years in, Europe is heading into a nasty recession, China is flirting with a hard landing, the governor of the Bank of England is warning of a systemic banking crisis and George Osborne has announced spending cuts that will continue for the next six years. The United States is the one part of the world where the news has been better recently, with signs of life returning to the housing market and a welcome fall in unemployment. What's happening in America – where the Federal Reserve has used two rounds of quantitative easing (QE) to boost the money supply and announced its intention to keep interest rates low – has encouraged the belief that recovery will eventually come, provided the policy response is big enough for long enough. The real strength of the US economy will be revealed early next year, when tax breaks supporting consumption and investment are removed and when the world's biggest economy starts to feel the impact of the slowdown on this side of the Atlantic.

Explaining Business Investment - Krugman - One of the charts I prepared for my presentation at the G30 was intended to debunk the notion that we need some kind of special factor aside from the depressed economy to explain low business investment. On the x-axis of the figure below I show the ratio of actual GDP to the CBO estimate of potential GDP. On the vertical axis I show the ratio of nonresidential fixed investment – basically, business investment – to potential GDP. The blue dots show data from 1985 to 2007, during which there was a strong relationship: a depressed economy led to low business investment. The red dots show subsequent data; if anything, business investment has been stronger since the Great Recession began than you might have expected. To pre-answer one possible objection, yes, the relationship is much weaker before 1985. I’d argue that this reflects the changed nature of the business cycle, which I’ve been writing about for years. Pre-1985, recessions were basically generated by the Fed to curb inflation; since the Fed could and would relax the reins as soon as it judged that we had suffered enough, deep recessions tended to be followed by rapid V-shaped recoveries, so it made sense for businesses to keep investing even in the face of a depressed economy.

Taylor Rules - Krugman - Via Mark Thoma, Noah Smith reports on a conference held at Hoover in which right-wing economists reached right-wing conclusions. Surprise! But what’s really remarkable, and what I find a bit shocking even after all we’ve been through, is the way John Taylor misrepresents other peoples’ work. Reading Taylor’s summary, you’d think that Bloom, Baker and Davis had showed that fear of Obama was holding the economy down; if you actually read their paper, while they do conclude that “uncertainty” is an important factor, the biggest sources of uncertainty are Republican brinksmanship over the budget, the situation in Europe, and the legal challenges to health care reform. Not exactly what the GOP ordered.Worse yet, Taylor makes it seem as if Bob Hall showed that fiscal expansion is ineffective. Yet if you have actually been following Hall — which I have, carefully — you’d know that he has been producing extensive evidence that fiscal expansion does, indeed, work; he argues (pdf) that the Obama stimulus made the slump considerably less severe.  You have to wonder why Taylor thinks he can get away with this. Does he think that other economists can’t actually read research papers, and catch the misrepresentation? Or does he think of himself as writing solely for people so politicized that they don’t care if he gets it wrong?

Last Night's Event - Krugman Thanks to a commenter who found the video here. I don’t know if this is official or sanctioned, although it looks like it; I also don’t know why the Times tech people didn’t alert me. But anyway, it seems that those who missed the discussion can watch it via that link.A word about the content: I continue to find Carmen Reinhart’s fatalist view puzzling. She agrees with me that we’re facing a demand-side problem — but insists that this problem can’t be solved quickly, that we need to go through many years of painful deleveraging that leave millions of potentially productive workers idle. I agree that this is probably what will happen, given the political realities. But surely this is a huge failure of policy, not something we should accept as inevitable. It’s truly bizarre, if you ask me, to say that our economy suffers from too little spending, and that nothing can or should be done to increase that spending.

Paul Krugman vs. Carmen Reinhart - Brad DeLong - Video - As I have said it before, I find it easiest to interpret Carmen's argument in Karl Smith's version of the Hicksian combination of the Wicksellian flow-of-funds and the Fisherian velocity-of-money models, the IS-LM model. From Fisher we get the idea that the economy will rapidly head for and then sit for a time at its short-run equilibrium where the level of spending PY and the safe short-term nominal interest rate i are such as to make people want to hold the liquidity--the money--that the economy has for them to hold: LM: PY = MV(i) And from Wicksell we get the idea that the economy will head for and then sit for time at its short-run equilibrium in which real incomes and production Y are such that savers are happy holding all the new bonds and loans that businesses and the government are taking out: IS: S(Y-T) = I + (G-T) Add short-term sticky prices to this (or add some other rule for relating changes in nominal spending to changes in real income and output), and you have a short-run model on which everyone who has thought the issues through ought to agree on as a starting point.

Federal Budget Deficit Close to $240 Billion for the First Two Months of 2012 - CBO Director's Blog - The federal budget deficit was close to $240 billion for the first two months of fiscal year 2012, more than $50 billion below the deficit recorded through November of last year, CBO estimates in its latest Monthly Budget Review. Much of that difference occurred because roughly $30 billion in payments that ordinarily would have been made on October 1, 2011 (that is, in fiscal year 2012), were made instead in September (that is, in fiscal year 2011) because October 1 fell on a weekend. Without those shifts in the timing of payments, the decline in the deficit for the two-month period would have been about $20 billion. Revenues in October and November of this year were $21 billion more than receipts in the same two months last year, CBO estimates. An increase in net receipts from corporate and individual income taxes was partly offset by a decline in receipts from social insurance (payroll) taxes.  Specifically:

Will Obama Specify Sequester Cuts In His 2013 Budget? - Here's the question I've been asked most often over the past week: Will the White House include in it's fiscal 2013 budget -- the one it will send to Congress in February -- the cuts it will make in military and domestic spending under the assumption the sequester will go into effect on January 2, 2013 as it's currently scheduled to do? There's no way to know for sure, but my strong suspicion is that the White House will do no such thing. The president's 2013 budget will include a plan that the White House will say, if it's enacted, will eliminate the need for the sequester. The February budget won't specify what will be cut if the sequester occurs except in the most macro terms. The reason is that going into the election the White House will want to keep the focus on how the the president prefers to reduce the deficit rather than on how he will implement the changes imposed on him by the sequester if he's reelected (Remember: the sequester will happen two months after the election). That prevents those possible cuts from becoming an election issue.

The Numbers Behind's Newt's Plan to Balance the Budget - Newt Gingrich's website provides information on The Gingrich Jobs and Prosperity Plan. It starts with this:  America only works when Americans are working. Newt has a pro-growth strategy similar to the proven policies used when he was Speaker to balance the budget, pay down the debt, and create jobs.  Excellent. That statement should be enough to get an idea of what the program will look like. I want to focus on the first piece: balancing the budget. (You can't pay down the debt unless you run a surplus, so balancing the budget also deals with that issue.) Here's what the surplus / GDP looks like for the years from 1988 to 2004. The gray bar covers the years from 1995 (the Republican Revolution took office, and Newt Gingrich became speaker in 1995) to 1998. As you can see, the deficit did indeed turn into a surplus when Gingrich was in office. However, the chart makes it clear the trend began before Newt took office and continued after Newt left office. In fact, it seems that the deficit started falling in 1993. The surplus, on the other hand, peaked in the year 2000, fell, and the budget returned to a deficit. So what defined the years from 1993-2000? Oh yeah, they were the years Clinton was President. So Newt is basically saying he would support the policies that produced success in the Clinton years.

Budget Process Nonsense From Paul Ryan - This would be funny if it weren't so sad in so many ways: House Budget Committee Chairman Paul Ryan (R-WI) has proposed a series of changes in the congressional budget process. Don't get me wrong; the existing budget process not only is not perfect but is close to a disaster. But after a full year when it has completely and utterly failed to do anything substantive on the budget itself and every end-run around the existing process restrictions hasn't worked, Ryan is now saying in effect that it's the process' fault and everything would be okay if it were changed...even though the standard process wasn't really used. To a certain extent this is one of the traditional congressional budget dodges. As any experienced federal budget watcher will tell you, Congress almost always proposes to do something about the budget process when it can't or won't do something about the budget itself. This is the fiscal equivalent of a member of the House or Senate saying "Stop me before I kill again."

A British Guide to Cutting Public Spending - Policies being carried out by the coalition government headed by Prime Minister David Cameron prefigure what is likely to happen in the United States if a Republican is elected president next fall. As George Osborne, the chancellor of the Exchequer, made clear in his “Autumn Statement” on Nov. 29, the government remains committed to an austerity strategy of major budget cuts. The basic theory, sometimes called “expansionary fiscal contraction,” holds that cutting public spending will reduce the deficit, keep interest rates low and stimulate a boom in private employment. So far, no such boom has taken place, and the spirit of John Maynard Keynes, channeled through an opinion piece in The Guardian by his biographer, Robert Skidelsky, helps explain why. Austerity has contributed to persistently high unemployment and declining real wages. Lower than anticipated rates of economic growth have led to reduced tax receipts. Therefore, the cuts have not reduced the deficit as planned. Mr. Osborne blamed a “debt storm,” or force of nature originating somewhere between Germany and Greece, and reassured his constituents that further cuts in public spending would solve the problem.These cuts are largely focused on cutting pension benefits for workers in the public sector.

House and Senate Negotiators Meet on 2012 Spending Bills - House and Senate negotiators are meeting to begin work on a so-called "omnibus" spending bill that would fund many government agencies through the remainder of the 2012 budget year. The conference aims to resolve differences on the Military Construction and Veterans Affairs spending bill that is on track to become a $900 billion, nine-bill omnibus spending package. The goal is to release a bill by December 12. Congressional rules usually divide government spending into 12 separate appropriations bills, but in recent years Congress hasn't passed them separately, choosing instead to combine them in various ways. Earlier this year lawmakers passed the Commerce/Justice/Science, Transportation/HUD, and Agriculture bills as one "minibus" package. Conferees made opening statements at this meeting but most of the work is now taking place off-camera as House and Senate staffs discuss what they might get their bosses to agree on. The House Conferees include 12 Republicans and 8 Democrats. The Senate is represented by 9 Democrats and 8 Republicans.

IMF Funding Under Attack, But It's Safe For Now. - Friday's Hill article that Senator Tom Coburn (R-OK) was planning an amendment to direct the U.S. to vote against any IMF bailouts became a hot topic of conversation among international investors despite Coburn's admission that his amendment had little chance of enactment. On June 29, 2011, on a 44-55 vote, the Senate rejected Senator Jim DeMint's (R-NC) amendment No. 501 to rescind the U.S.'s $100 billion line of credit to the International Monetary Fund to keep it from being used to bail out European Union countries. In late July, the House Appropriations State Foreign Operations Subcommittee approved same rescission, but it hasn't moved beyond there. It may resurface in the omnibus appropriation to fund the government beyond December 16.  No wonder Mr. Obama ducked calls for additional funding for the IMF at last month's G-20 summit in Cannes, France because that would require congressional approval, which it would be difficult to get. So there's little chance of rescinding that $100 billion IMF line of credit before 2013, but that could change quickly if the Republicans win the White House and majorities in both houses of Congress in the 2012 election.

Unemployment Extension 2012: Millions 'Hanging on by a Thread'  - Nearly seven million Americans, sustained by government unemployment (extension) checks, are "hanging on by a thread," stated a recent National Employment Law Project (NELP) paper. For these people, their unemployment benefits are set to expire in 2012 unless Congress passes an extension. If the extension fails to pass, nearly two million will lose their benefits in January 2012 alone, according to NELP. In January 2012, the organization estimates that 433,100 people will see their regular state benefits end and not be permitted to move into EUC, 709,000 people will finish their current tier of EUC and 647,000 people will see their EB ends. Standard unemployment benefits (up to 26 weeks) --> Emergency Unemployment Compensation (up to 4 tiers, 1st tier up to 20 weeks, 2nd tier up to 14 weeks, 3rd tier up to 13 weeks, 4th tier up to 6 weeks) --> Extended Benefits (up to 20 weeks) Over the remainder of 2012, about four million additional people would lose their benefits. The average unemployment benefits check is only $296 per week. This is only 50 percent of money needed to cover the basic necessities of food, housing and transportation in the U.S., according to the annual Consumer Expenditure Survey.

NELP: Reckless House Proposal Cuts Federal Unemployment Insurance by More Than Half -  A bill introduced Friday by Rep. Dave Camp (R-Mich.) would force new extremes of economic insecurity on unemployed Americans and impose a major setback to the economy recovery, the National Employment Law Project said today. The proposal, H.R. 1209, cuts federal unemployment insurance benefits by 40 weeks in 2012 - more than half the maximum 73 weeks available under the current federal programs, which are scheduled to expire December 31st. The cuts would be particularly egregious in states like California, Florida, Ohio and Michigan, where unemployment levels remain at record highs.  Federal unemployment insurance programs currently provide 34 to 73 weeks of assistance to unemployed workers in every state, depending on the state's unemployment rate, after workers exhaust state unemployment insurance. Representative Camp's proposal would cut Tier II of the federal assistance (14 weeks available to workers in every state) as well as Tier IV (six weeks available to states with high unemployment). The proposal would also allow the last leg of the federal unemployment insurance extension - the 13 to 20 weeks of Extended Benefits in the hardest-hit states - to expire. As a result, states with the highest unemployment, including Representative Camp's home state of Michigan, would face a triple-whammy of cuts to three different pieces of the federal programs.

It’s the Wrong Time to Withdraw Help for the Economy - Treasury Notes - If Congress does not pass measures that support the economy by the end of this year, fiscal policy is expected to be a substantial drag on growth in 2012, as the payroll tax and extension of unemployment insurance benefits put in place last December expire and support from the Recovery Act continues to recede. Private forecasters estimate that these factors will subtract between 1 and 2 percentage points from GDP growth in 2012. The impact on growth in the first quarter could be even greater. At this critical juncture, the U.S. economy should not be subjected to such a strong, self-induced headwind. While there is a nearly complete consensus among economists and budget analysts that deficit reduction sufficient to stabilize our debt would have significant long-run economic benefits, the literature also cautions that fiscal consolidation is contractionary in the short run. Though under certain conditions the withdrawal of fiscal support can be partially offset by economic and policy changes, those conditions do not prevail in the United States today. Interest rates are currently at historic lows, leaving little room for them to go lower, and though exports have grown at a healthy pace recently, they cannot be counted on to grow enough to offset substantial near-term cuts.

House Passes Bill To Grant Congress Veto Power Over White House Rules -- A bill that would give the controlling party of either chamber of Congress veto power over any major new regulation passed the House of Representatives Wednesday. The measure, dubbed the Regulations From the Executive in Need of Scrutiny -- or REINS -- Act, would require Congress to sign off on any new rule estimated to cost more than $100 million. It passed 241 to 184, with a handful of Democrats crossing the aisle. The REINS Act is only the latest of a slew of bills aimed at peeling back regulations, which House Republicans have pushed for in the name of cutting red tape and freeing up businesses. The GOP sees the regulations as overbearing rulemaking by unelected bureaucrats. "Who do the regulators answer to? No one," said Rep. Ted Poe (R-Texas) in debate on the House floor. "When the regulators go to work everyday, like most people go to work, their work assignment's a little different," Poe said. "In my opinion, they sit around a big oak table, sipping their lattes. They have out their iPads and their computers, and they decide, 'Who shall we regulate today?' And they write a regulation and send it out to the masses and make us deal with the cost to that."

PERI: : The U.S. Employment Effects of Military and Domestic Spending Priorities: 2011 Update: Abstract: This study focuses on the employment effects of military spending versus alternative domestic spending priorities, in particular investments in clean energy, health care and education. We first present some simple alternative spending scenarios, namely devoting $1 billion to the military versus the same amount of money spent on clean energy, health care, and education, as well as for tax cuts which produce increased levels of personal consumption. Our conclusion in assessing such relative employment impacts is straightforward: $1 billion spent on each of the domestic spending priorities will create substantially more jobs within the U.S. economy than would the same $1 billion spent on the military. We then examine the pay level of jobs created through these alternative spending priorities and assess the overall welfare impacts of the alternative employment outcomes. We show that investments in clean energy, health care and education create a much larger number of jobs across all pay ranges, including mid-range jobs (paying between $32,000 and $64,000) and high-paying jobs (paying over $64,000). Channeling funds into clean energy, health care and education in an effective way will therefore create significantly greater opportunities for decent employment throughout the U.S. economy than spending the same amount of funds with the military.

Take Two: Senate Democrats Scale Back Payroll Tax Relief Bill - Senate Democrats, hoping to put more pressure on Republicans to support a payroll tax cut, Monday will unveil a new, scaled back bill that drops President Barack Obama‘s plan to cut employers’ share and  reduces proposed new tax on millionaires, a senior Democratic aide said. By dropping the proposal to cut employers’ share, Democrats would reduce the cost of the bill from $265 billion over 10 years to about $180 billion over 10 years, the aide said, but the entire cost would still be offset by spending cuts and tax hikes. Leaders of both parties are looking for a way to act on the payroll tax before the end of this year when, unless Congress acts, the employee payroll tax that funds Social Security will increase by two percentage points, to 6.2%. However, the Senate last week rejected both Democrats and Republicans’ versions, and House Republicans are divided over the issue. Under the new Democratic proposal, the surcharge in income over $1 million would be less than 2% — down from 3.25% in the version of the bill introduced by Democrats last week. It would expire after ten years, instead of the original proposal to make it a permanent change in tax law.

Democrats Say They Will Try Again on Payroll Tax — Senate Democrats said Monday that they would try for the fifth time in two months to raise taxes on top earners to pay for legislation that would reduce Social Security1 payroll taxes, as President Obama2 sought to keep Congressional Republicans on the defensive, asserting that their intransigence could cause a tax increase for tens of millions of American workers. With Republican and Democratic leaders deadlocked over the issue in both chambers, two senators offered a bipartisan compromise that they said could help break the impasse before Congress adjourns for the year. The proposal, devised by Senators Susan Collins, Republican of Maine, and Claire McCaskill, Democrat of Missouri, would extend the current payroll tax cut for employees and reduce the employer’s share of the payroll tax as well. It would also provide additional money for highways, bridges and other job-creating transportation projects. It would offset the cost with a 2 percent surtax on income in excess of $1 million a year, but would carve out protection for many small-business owners who report business income on their personal tax returns.

A win for both Occupy Wall Street and the Tea Party? - Both Democrats and Republicans are pushing new payroll tax proposals after their parties’ initial bills failed in the Senate last week. The most controversial stuff is still in there — for the Democrats, a smaller version of the millionaire surtax, and for the GOP, a plan to cut the federal workforce. President Obama is wading into the fight as well, slamming Republicans today for “fight[ing] tooth and nail to protect high-end tax breaks for the wealthiest Americans. But in fact, there’s an emerging bipartisan consensus that wealthier Americans and government workers should pay for the tax-cut extension. Senate Democrats are proposing a smaller, $180 billion package that would lower the payroll tax cut further to 3.1 percent for employees, while letting the employer tax cut to expire, as Politico reports. In addition to the millionaire’s surtax, Democrats have also embraced GOP Sen. Dean Heller’s plan to means-test benefits like food stamps and unemployment insurance, excluding the wealthy from receiving benefits — an idea that was part of the payroll tax bill that Republicans pushed last week. House Republicans are holding onto that idea, but they also want to increase means-testing in Medicare Part B, which would force wealthy seniors to pay more for doctors’ visits and outpatient health care

Borrow. Borrow. And Borrow Some More - On occasion when I feel like getting upset at someone, I scroll over to the website of the U.S. Treasury Department and check its Daily Real Yield Curve page. This vital economic resource is obscure to the average American, which is understandable, but also apparently unknown to the president of the United States and members of Congress of both parties. It says something, after all, that’s slightly shocking. As of Dec. 2, the inflation-adjusted interest rate financial markets are charging the federal government for a five-year loan is negative. For a seven-year loan? Negative. For a 10-year loan? Zero. In other words, investors are currently willing to lend the U.S. government money, and then in return get back less money (in inflation-adjusted returns) five or seven years later. At 10 years, we’d be repaying exactly what we put in. Consider this as you look at the congressional fight about how to pay for an extension of temporary payroll tax cuts that both parties in principle agree should be extended.

Obama Had It Right the First Time: Bring Back the Making Work Pay Tax Credit - Last December, Congress replaced the two-year-old Making Work Pay tax credit (MWP) with this year’s payroll tax cut. That change cut taxes for higher-income workers, raised taxes for some low-wage workers, and nearly doubled the amount of lost tax revenue. And it most likely provided less bang-for-the-buck economic stimulus than the credit it replaced. Since our anemic economy still needs a boost, why not reverse course and bring back the MWP in a bulked-up form? That step would provide more powerful macro medicine for 2012. MWP provided a credit in 2009 and 2010 of 6.2 percent of earnings up to $400 for singles and twice that for couples. It phased out between $75,000 and $95,000 of income (twice that range for couples). That meant that most of the tax savings went to low- and middle-income workers, the group most likely to spend rather than save the extra cash. In contrast, the 2011 payroll tax cut equals 2 percent of earnings up to a maximum of $2,136 per worker with no income limit. Tax savings for high-income recipients probably went largely into savings accounts and delivered little economic kick. On balance, the payroll tax cut almost certainly had less bang-for-the-buck than MWP but its doubled cost probably resulted in a greater overall boost to the economy.

The Muddled Economics of the Payroll Tax Cut - The current debate over extending the payroll tax cut well demonstrates that policymakers often mean different things when referring to policies that “help” or “expand” the economy. I often hear the words “stimulus” and “growth” used interchangeably, but when economists use them, we typically are making a distinction between different economic goals that apply to different circumstances. “Stimulus” usually refers to short-term policies to increase demand for goods and services in an economy operating at less-than-full capacity — i.e., an economy with high unemployment. In such a recessionary economy, the problem is not a lack of productive resources (capital and labor), but a lack of demand for the goods and services that those resources produce.  In the debate over the payroll tax cut, we are hearing arguments from both sides that muddle the distinctions between short-term, demand-side stimulus and longer-term, supply-side growth. Many Republicans argue that the payroll tax cut is not an effective way to expand the economy, but they are probably measuring it against their favored supply-side yardstick. The Congressional Budget Office (CBO) shows that a payroll tax cut is one of the most effective tax cuts in stimulating demand for goods and services in a recessionary economy — not as effective as direct spending on unemployment benefits but still far more effective than high-end income tax rate reductions.

Republicans tie payroll tax to Keystone pipeline --- House Republicans on Thursday tied an extension of a payroll tax cut and unemployment benefits to swiftly approving the Keystone oil pipeline between the U.S. and Canada. President Barack Obama has said he won't accept linking the pipeline project with an extension of the tax cut, which will expire at the end of this year if Congress doesn't act. House Speaker John Boehner, an Ohio Republican, said "the American people can't wait" for the jobs the pipeline would bring and said the House would vote on the GOP bill next week. The Obama administration has delayed a decision on Keystone until 2013.

How Payroll Tax Cut Affects Social Security's Future - President Obama put Congress on notice Tuesday in a speech in Osawatomie, Kan. He said that unless a temporary payroll tax cut is extended this month, 160 million Americans would see their taxes go up next year by an average of $1,000. But there's concern on both sides of the political aisle that the payroll tax holiday might be undermining the solvency of Social Security.

• Fact No. 1: Last year, for the first time in its 75-year history, Social Security took in less money than it paid out.
• Fact No. 2: This year, the first of the baby boomers reached retirement age and began collecting Social Security benefits.
• Fact No. 3: The payroll tax holiday that Congress approved a year ago reduced Social Security's revenues this year by $105 billion.

Obama showed no sign of being troubled by those facts when he popped into the White House briefing room earlier this week and called on Congress to extend the payroll tax cut for another year.

Republicans: Save Social Security! - Talking and listening to Republican senators today, I heard an old-new message on the problem with extending payroll tax cuts. Why can't we extend the artificially low FICA rates baked in to the 2010 tax deal? Because doing so would mean hurting Social Security. "We cannot run a retirement security program without contributions," Sen. Mark Kirk told reporters after the caucus lunches. "We need to make sure we are running policy for the long term, so that when you're 65, that there's a Social Security trust fund to take care of you. I think members who vote for this legislation are anti-Social Security, and I think we need to defend contributions to Social Security. The White House has redefined this as the payroll tax deduction. It's not the payroll tax deduction -- it's contributions to Social Security. And when the American people hear that we have legislation moving forward to cut contributions to Social Security and drive the trust fund into the red, I think opposition would be fairly overwhelming." The problem here -- and it's not a problem of Kirk's making per se -- is that most conservative thinking on Social Security involves phasing out the system by letting younger workers build accounts instead of paying FICA. That's Newt Gingrich's plan, for example, and it's the basis of other plans from the likes of Jim DeMint.

Fannie, Freddie Put Forth to Cover Payroll Tax Cut - Congress and the Obama administration are turning to an unlikely source to pay for the proposed extension of the payroll-tax cut: mortgage-finance giants Fannie Mae and Freddie Mac. The revenue source proposed by both Senate Democrats and House Republicans would boost fees that Fannie and Freddie collect from lenders. But that is raising hackles in the real-estate industry. Builders, Realtors and lenders say it would amount to a tax that would be passed on to mortgage borrowers. Fannie and Freddie don't issue mortgages, but instead buy them from lenders. They bundle those loans into securities that are sold to investors, and promise to make investors whole if the loans default. To cover any defaults, Fannie and Freddie charge "guarantee" fees to lenders when they buy the loans. Lenders pass the loan-guarantee fees on to borrowers in the form of higher rates. Last year, those fees averaged around one-quarter of one percent of the loan amount. The Senate proposal directs Fannie and Freddie's regulator to raise those fees by at least one-eighth of one percent over the next two years. The House proposal calls for an increase of one-tenth of one percent over the same period.

Paying For The Payroll Tax Cut - Late next week, Congress will extend the present law 2% payroll tax cut for another year. This is a good way to sustain our fragile economic recovery. The additional take home pay each pay period is more likely to be spent than a lump sum would. How it's paid for matters too. Rather than borrowing another $120 billion from China and $35 billion to extend unemployment insurance and $38.9 billion to avoid slashing the Medicare physician reimbursement rate by 27%, several items previously agreed to, but never proposed by the Super Committee, will almost pay for them over the next decade. This afternoon, the Congressional Budget Office scored the House Republican version of the payroll tax cut, H.R.3630. It's $25.2 billion short of balance FY12-FY21. It starts out with a deficit increase of $166.8 billion in FY12, $71.6 billion in FY13, and $9.3 billion FY14, a total of $247.7 billion (assuming it's not extended late next year), before reducing the deficit by $222.5 billion over the rest of the decade. The pay fors in order of size are: Medicare spending cuts, $38.4 billion; increased federal employee retirement contributions, $36.7 billion; increased Fannie Mae and Freddie Mac mortgage insurance rates, $35.7 billion; other health care offsets, such as cuts in the PPACA prevention fund, $33.4 billion; FCC spectrum auction, $16.5 billion; and other, $36.6 billion.

What Government Aid? - Earlier this year I wrote about a paper by Suzanne Mettler that included a survey showing that a large proportion of beneficiaries of government programs insist that they have never been beneficiaries of any “government social programs”—60 percent for the mortgage interest deduction and 44 percent for Social Security retirement benefits, for example. This provides ample evidence that “keep your government hands off my Medicare” is not a fringe opinion. Recently, I read Mettler’s book, and there’s more to the story. One of her arguments is that hiding government programs in the tax code undermines the democratic system because it obscures the role that government plays in society. There were two quantitative examples I thought were particularly revealing. Mettler distinguishes between visible federal programs, such as Pell Grants and Social Security, which are administered by government agencies and therefore are more recognizable as government programs, and submerged programs such as the mortgage interest deduction or 529 accounts. She found that the more visible programs a person uses, “the more likely he or she was to agree that government had helped in times of need.” Benefiting from submerged programs, however, had no impact on people’s perception that the government had helped them—even in the case of things like HOPE or Lifetime Learning tax credits, which help people pay for eduction.

Norquist Tells GOP That Raising Taxes On The Middle Class Doesn’t Count As A Tax Increase - Anti-tax zealot Grover Norquist, the president of Americans For Tax Reform and author of the radical anti-tax pledge that has played a significant role in hamstringing budget and deficit-reduction negotiations, has said that it is unacceptable for those who have signed his pledge to vote in favor of any tax increase. But now that President Obama and congressional Democrats are backing a tax cut aimed at stimulating economic growth, Norquist has changed his tune.  Norquist met with Republican members today to let them know that opposing the extension of the payroll tax cut — which would provide many families an extra $1,000 a year — would not amount to supporting a tax increase, National Journal’s Billy House reported today: That stands in contrast, however, to Norquist’s position on tax cuts for the wealthy. Norquist has repeatedly warned GOP members about voting in favor of repealing the Bush tax cuts for the rich or tax hikes on millionaires, even verbally sparring with a member of a group of millionaires advocating for higher taxes on themselves last month in Washington, D.C. And yet, when it comes to tax cuts for the middle class meant to drive economic recovery, Norquist clearly takes a different stance.

How a Payroll Tax Cut Boosts the Chances for Tax Reform - When Congress finally extends the payroll tax cut that is due to expire in a few weeks, it may also be taking another step down the road to tax reform—and perhaps even to big Social Security changes as well. Why? Because without fundamental reform, it will be devilishly hard for Congress to ever get rid of an extremely generous tax break for 160 million workers. Brian Beutler over at TPM did some nice reporting on this today, writing that both Senate Majority Leader Harry Reid and senior White House officials believe that extending the payroll tax holiday would help force a rewrite of the tax code by the end of 2012. That’s when Congress would face the triple witching hour of the expiration of the 2001/2003/2010 tax cuts, the automatic spending cuts forced by the last summer’s debt limit deal, and the likely one-year extension of the payroll tax cut. This is largely spin. The chances of Congress rewriting the tax code next year—in the heat of election madness– are vanishingly small. However, top Democrats are not wrong about all of these factors eventually forcing reluctant lawmakers to tackle the tax code.

The Taxpayers’ Burden, by David Cay Johnston: The accompanying graphic shows a fascinating correlation. In the years before New Deal regulation of banks and after the easing of regulations began in 1980, bank failures were quite high. So was income inequality. But from about 1933, when the federal regulation of banks was put in place, to 1980, when Chicago School theories began to shape policy, bank failures were rare. During those years incomes were much more equal, with a prosperous middle class. ... Correlation is not causality, but the fact that income inequality rose as banking regulations were eased makes sense. Freed of restraints, banks got into all sorts of activities that generated fees and saddled clients with high-interest debt. And once banks could collect fees for mortgages without having to worry about repayment — because the mortgages were sold off by Wall Street — the crucial link between reward and responsibility was severed.

Pick Your Poison: VAT or Higher Income Tax Rates - With congressional deficit reduction efforts largely collapsed, the question remains: What are we going to do about the nation’s long-term budget mess? Since any realistic deficit reduction plan will require significant new revenues, is a Value-Added Tax a sensible way for government to raise those extra dollars? In an effort to find out, the Pew Charitable Trusts asked my Tax Policy Center colleagues to set up something of a cage match: In the blue trunks, a broad-based VAT (think 9-9-9 only much less complicated). In the white trunks, the income tax.  And they asked a basic question: What are the pros and cons of using a VAT to cut the deficit compared to an across-the-board hike in income tax rates.  Eric, Jim, and Joe looked at just two options: raising rates in the existing income tax system or adding a prototype VAT to what we’ve got. They found that, even with one form of rebate, this version of a VAT would impose a larger tax burden on low- and moderate-income households than an across-the-board income tax rate increase. And it would significantly increase compliance and administrative costs, especially at the beginning. However, a VAT would result in a smaller increase in marginal tax rates on labor than an income tax rate hike. And it would intrude on fewer economic decisions, especially related to savings and investment.

GOP Supercommittee Member Admits Bush Tax Cuts Didn’t Create Jobs, Can’t Explain Why - Republicans this week filibustered a Democratic plan to extend a soon-to-expire payroll tax cut, objecting to the fact that the extension was paid for by implementing a small surtax on income in excess of $1 million. To justify their objection to taxing the wealthy, Republicans have revived their false claim that taxing the rich amounts to taxing small business owners and job creators.  Bloomberg’s Al Hunt asked Rep. Fred Upton (R-MI) — who represented the GOP on the fiscal supercommittee that failed to craft a deficit reduction package — to explain this viewpoint, considering that more jobs were created under the Clinton administration and its higher taxes on the rich than were created following the Bush tax cuts. Upton admitted that “I don’t know specifically the answer to that question,” nonsensically pointing to Friday’s jobs report instead of trying to argue the premise of Hunt’s question:

Raise Taxes on Rich to Reward True Job Creators - It is a tenet of American economic beliefs, and an article of faith for Republicans that is seldom contested by Democrats: If taxes are raised on the rich, job creation will stop.  Trouble is, sometimes the things that we know to be true are dead wrong. For the larger part of human history, for example, people were sure that the sun circles the Earth and that we are at the center of the universe. It doesn’t, and we aren’t. The conventional wisdom that the rich and businesses are our nation’s “job creators” is every bit as false.  I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.  That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.

Raising Taxes on the Rich: Not Whether, but How - Last week, the Senate rejected proposals by both Democrats and Republicans to pay for an extension of the 2 percent temporary payroll tax cut enacted a year ago. The Democratic plan to finance it with a 3.25 percent surtax on millionaires garnered significantly more votes than the Republican plan to cut the number of federal jobs and freeze the pay of federal workers. This time last year Republicans were insisting that the Bush tax cuts be made permanent without paying for a penny of the cost, even though there is no evidence that they stimulated the economy. Saying that they are now concerned about the impact of the payroll tax cut on the deficit and its lack of stimulative effect makes Republicans sound a lot like Captain Renault in “Casablanca,” when he said he was shocked to discover gambling going on as he was handed his winnings. Republicans like to pretend that cutting spending is economically costless, even stimulative, whereas raising taxes in any way whatsoever is so economically debilitating that it dare not be contemplated. This view is complete nonsense. Careful studies by the Congressional Budget Office and others show that certain spending programs are highly stimulative, whereas tax cuts provide very little bang for the buck.

Who Counts as 'Rich'? - We’ve written plenty of times about how little Americans know about the distribution of income in the United States, and how many rich people don’t realize they’re rich, at least relative to the rest of the country. Now Gallup has surveyed Americans to ask what they believe the cutoff for being “rich” should be. The median response was that a person would need to make at least $150,000 to be considered rich. Here’s a breakdown of the responses: (The national poll was based on telephone interviews, using landlines and cellphones, with about 500 adults and has a margin of sampling error of plus or minus five percentage points.) According to the Tax Policy Center’s calculations on income distribution, a household earning cash income of $150,000 would fall somewhere between the 89th and 90th percentiles. In other words, the typical American believes anyone in about the top tenth of the income distribution counts as “rich.” President Obama and others, on the other hand, have set the cutoff around $250,000 when discussing “raising taxes on the rich.” Households earning cash income of $250,000 are somewhere between the 96th and 97th percentiles.

Difficulties in Defining ‘Rich’: Is It $150,000 a Year? - “Rich” is a term that gets thrown around a lot in discussions about tax policy and income data, but judging from polling data there’s a wide variation in how Americans define the word. Gallup recently released numbers showing $150,000 was the median annual income Americans would have to earn to consider themselves rich. But a closer look at the results reveals how difficult it is to define rich. Some 18% of those respondents who were willing to cite a dollar amount said they would be rich with less than $60,000. While the figure might seem low, it represents a significant step up for many Americans. According to Tax Policy Center data, the bottom 18% of the income distribution makes less than $15,000 a year, so quadrupling your salary could easily be seen as rich. (You can see where you stand in the income distribution with our “What Percent Are You?” calculator) The Gallup data support the notion that the more money you make the higher the threshold considered rich.

Just 6 Walmart heirs have as much wealth as 30% of Americans - Sylvia Allegretto, a labor economist at the University of California Berkeley Center on Wage and Employment Dynamics, dug into the 2007 Survey of Consumer Finances and: [T]hen compared those numbers to the net worth of the six members of the Walton clan as reported on the Forbes 400 list in 2007. They are all children or children-in-law of the founders of Walmart. Their total net worth that year: $69.7 billion.  That’s equal to the wealth of the poorest 30 percent of all Americans, according to Allegretto’s calculations. As if that's not outrageous enough, Allegretto also notes that: [T]he new 2011 Forbes 400 has the inherited worth of these six Waltons at $93 billion. The 2010 SCF data that is slated for release spring of 2012 will almost certainly show a further widening of the wealth gap given that corporate profits, stocks and CEO pay have all recovered while housing values & equity (the lion’s share of wealth for average American’s), wages and family incomes have yet to turn around.  Six people. As much wealth as 30 percent of people. Or, to put it in another way, we're not talking about the top 1 percent. We're talking about the top .00000002 percent.

Billionaires with 1% tax rates -- In case you haven't heard, President Obama wants the wealthiest to pay more in taxes. Noting the rise in income inequality in recent years and the need to reform the U.S. tax system, the president on Tuesday said that some of the wealthiest in America pay far less in federal taxes as a percentage of their income than many lower down the income scale. "A quarter of all millionaires now pay lower tax rates than millions of middle-class households. Some billionaires have a tax rate as low as 1%," Obama said in a speech in Kansas. Here are some of the facts behind the claim: In 2006 roughly 25% of those with adjusted gross incomes over $1 million paid a smaller portion of their income in federal taxes -- income, payroll and corporate -- than 10% of those with AGIs below $100,000, according to a recent study from the Congressional Research Service.

Taxing the 1%: Why the top tax rate could be over 80% - In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from less than 10% in the 1970s to over 20% today (CBO 2011). A similar pattern is true of other English-speaking countries. Contrary to the widely held view, however, globalisation and new technologies are not to blame. Other OECD countries such as those in continental Europe or Japan have seen far less concentration of income among the mega rich (World Top Incomes Database 2011).  The top 1% of US earners now command a far higher share of the country's income than they did 40 years ago. This column looks at 18 OECD countries and disputes the claim that low taxes on the rich raise productivity and economic growth. It says the optimal top tax rate could be over 80% and no one but the mega rich would lose out.

Identification problems in the debate on taxing top earners - Two recent papers on top-earner taxation have made an important contribution to the policy debate on the topic, but it seems to me that we still have some way to go before we have an understanding of the phenomenon that is robust enough to use as a basis for policy. The first paper is the well-known Diamond-Saez Journal of Economic Perspectives article (pdf). My only problem with this class of models is how the labour demand side is modelled: top earners are price takers. This seems implausible.  The price-taker assumption can perhaps be interpreted as an identifying assumption. If demand is less-than-perfectly elastic, the elasticity of taxable income becomes a function of the parameters of both labour supply and labour demand. For the purposes of calculating the revenue-maximising rate, this doesn't really matter: the reduced form is all you need. The even more recent paper by Piketty, Saez and Stantcheva (pdf, VOX version) makes some progress in unpacking the elasticity of taxable income. In their model, lower tax rates increase the incentives for top earners to bargain harder in order to extract larger rents. And since those top incomes are rents, there is no efficiency loss in taxing them, and the incidence of the tax is presumably borne entirely by the top earners.

Infra-marginal garbage - I have no real dog in the fight about taxing incomes over $1,000,000 at a higher rate. In fact, if I could keep my current marginal tax rate, I'd say hack away at those 1% cads.  But, I am incredibly tired of tax increase apologists making the elementary economic mistake of conducting infra-marginal analysis.  You know, by saying things like since the tax surcharge only applies to the income ABOVE $1,000,000, all the income BELOW $1,000,000 is not affected and so incentives for these people won't change much. The argument about tax rates and incentives is a MARGINAL argument.   At the margin, for people already making $1,000,000 changes in the tax rate on incomes higher than $1,000,000 have a full effect on the incentives of these people. The effect on their incentives to undertake further economic activity (expand their business, work more themselves) is NOT mitigated by the fact that the tax rate has not risen on the income they are already making!! If we want to sock it to these "most fortunate Americans", by all means let's do. But let's not think that the fact that it's a marginal tax rate increase means that it will have an attenuated effect on their future economic activity.

U.S. corporate taxes down despite profit rebound - U.S. companies such as AT&T Inc. and Johnson & Johnson are paying less tax than before the recession even as profits have rebounded, buoyed by breaks and expansion in overseas markets, where the tax burden is lower. Cash tax payments by nonfinancial companies in the Standard & Poor's 500 index fell 13.2 percent to $222 billion in 2010 from 2007, according to data compiled by Bloomberg, while net income rose 12.5 percent to $612 billion. Cash taxes are the amount paid in taxes to all jurisdictions in a given year. The pattern has implications for the U.S. government and for companies, said Jim Paulsen, chief investment strategist at Wells Capital Management. With domestic job growth still anemic, Congress may want to keep tax breaks such as accelerated depreciation, while companies may continue growth outside the United States because of strong demand, Paulsen said. "In this recovery, there are so much more foreign profits as a proportion of the total for the large companies," said Paulsen, whose firm manages about $340 billion. "There are just greater business opportunities abroad with the emerging world growing faster."

Groups prepare to bring Occupy protests to Congress - Protesters from the Occupy movement and other groups are planning to converge on Capitol Hill Tuesday to air their grievances in front of members of Congress. Members of a broad range of organizations, including unions and community groups, are expected to travel to Washington to take part in an event dubbed "Take Back the People's House." Many of the participants plan to assemble in the morning before marching toward the Capitol, according to information posted on the website of Progressive Maryland, a nonprofit organization that says it works to improve conditions for working families. After arriving at the Capitol, marchers say they intend to fan out for meetings with representatives and "occupy" Congressional offices until closure. Not all participants have meetings scheduled, so some protests are expected in the area around the Capitol.

Occupy Congress on Jan. 17: 'Largest Occupy protest ever' - In the two weeks since the New York Police Department cleared New York’s Zuccotti Park of its camping protesters, the Occupy Wall Street movement has increasingly turned its attention to Washington. Last week, some 50 marchers arrived at McPherson Square from New York and then marched on the Capitol. Yesterday, Occupy DC targeted congressional Democrats at a campaign fundraiser. Now, protesters say they plan to Occupy Congress on Jan. 17, in the “largest Occupy protest ever!”  The protest is being timed with the start of the 2012 legislative session for Congress. Protesters say they hope to set up 1 million tents in front of the Capitol. “We’re taking the movement straight to their doorstep,” the protest’s Facebook page wrote. Although branded by some as a liberal movement, Occupy has repeatedly stated that it does not ally with any political party, and will take aim at the Democrats as well as Republicans when it Occupies Congress in January.

Michael Lewis: Advice From the 1%: Lever Up, Drop Out - As usual, we have much to celebrate. The rabble has been driven from the public parks. Our adversaries, now defined by the freaks and criminals among them, have demonstrated only that they have no idea what they are doing. They have failed to identify a single achievable goal.  Just weeks ago, in our first memo, we expressed concern that the big Wall Street banks were vulnerable to a mass financial boycott -- more vulnerable even than tobacco companies or apartheid-era South African multinationals. A boycott might raise fears of a bank run; and the fears might create the fact.  Now, we’ll never know: The Lower 99’s notion of an attack on Wall Street is to stand around hollering at the New York Stock Exchange. The stock exchange!  We have won a battle, but this war is far from over.  As our chief quant notes, “No matter how well we do for ourselves, there will always be 99 of them for every one of us.” Disturbingly, his recent polling data reveal that many of us don’t even know who we are: Fully half of all Upper Ones believe themselves to belong to the Lower 99. But we wish to address this issue in a later memo. For now we remain focused on the problem at hand: How to keep their hands off our money.

American plutocracy - Michael Lewis puts his finger on something important: Ordinary Greeks seldom harass their rich, for the simple reason that they have no idea where to find them. To a member of the Greek Lower 99 a Greek Upper One is as good as invisible.He pays no taxes, lives no place and bears no relationship to his fellow citizens. As the public expects nothing of him, he always meets, and sometimes even exceeds, their expectations. As a result, the chief concern of the ordinary Greek about the rich Greek is that he will cease to pay the occasional visit. I can’t help but remember that George Papandreou was born in Saint Paul, Minnesota, grew up with Greek as a second language, and was schooled in Canada, the US, Sweden, and England. He’s part of the Greek social compact entirely by choice; he arrived when he wanted to, and can leave for a comfy sinecure in some English-speaking country any time he wants. Indeed, the elite of most countries in the world is there by choice rather than by any kind of necessity. Chrystia Freeland — herself a Canadian who has lived and travelled widely in Russia and who cemented her reputation by working for the New York bureau of a London newspaper — wrote a great story about the “new global elite” earlier this year which made the point that the very rich are, these days, largely stateless:

Occupied Washington - A few weeks after the Occupy Wall Street protests began, we found ourselves having a random conversation with a couple of San Franciscans at a store counter. What were these kids going on about? they asked. Time was tight, the inquiry a pleasantry, really. Best to keep it simple. "Jobs, the economy, income inequality." Well, one offered, he knew the wife of Wells Fargo CEO John Stumpf, and according to him, the reason companies aren't hiring is because they are worried about the extra cost of Obama's health care reform. Stunned silence. Because what can you really say to that, except…let them eat cake? Stumpf made $17.6 million in 2010—672 times what the average American takes home. And say what you will about Obamacare, but for large companies that already offer health benefits, it imposes pretty much zero costs and might even save money. But why single out Stumpf, who actually sounds fairly cuddly for a bank CEO? (His hobby is baking bread, for Christ's sake.) Let's turn instead to John Paulson, the billionaire hedge fund manager who unctuously admonished Occupy protesters: "Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow." Or how about the homeless-themed Halloween party thrown by an upstate New York foreclosure mill? Or the financier David Moore, who, having been dressed down by a panhandler for proffering only a dollar, took to the Wall Street Journal op-ed pages to bray about Obama's class-warfare rhetoric: "The president's incendiary message has now reached the streets. His complaints that rich people must 'pay their fair share' have now goaded some of our society's most unfortunate."

While Wall Street Gets More Diverse, White Men Still Take Home Much More Money - Though the Wall Street workforce is getting more diverse, white men are still taking home most of the bacon.  White men made up more than 60 percent of Wall Street workers aged 45 and over between 2005 and 2009, but just 46 percent of those 30 and younger, according to a recent City University of New York's Center for Urban Research analysis of Census data. But in almost all categories, the earnings of white males came out on top, with white men aged 31 to 44 earning at least double that of their non-white and female counterparts.  Critics have long bemoaned the lack of diversity on Wall Street. A provision of the Dodd-Frank financial reform act aimed at pushing Wall Street firms to hire more women and minorities, according to Politico -- a measure that drew criticism from Republicans.  Most of the diversity gains on Wall Street came from an uptick in the share of Asian workers, the study found, while the percentage of black Wall Street employees hasn't increased. And though the share of women working on Wall Street gets larger as workers get younger, the overall percentage of women working in financial firms declined between 2000 and 2005-2009.

JPMorgan CEO Jamie Dimon: Stop Bashing the Rich - CNBC -  Jamie Dimon, the CEO of JPMorgan Chase, is railing against bashing the rich.  Dimon was responding to a question at an investor conference about the hostile political environment towards banks.  "Acting like everyone who's been successful is bad and that everyone who is rich is bad — I just don't get it," said Dimon at the conference, which was organized by Goldman Sachs. Dimon said he's worked on Wall Street for much of his life and contributed his fair share.  "Most of us wage earners are paying 39.6 percent in taxes and add in another 12 percent in New York state and city taxes and we're paying 50 percent of our income in taxes," Dimon said in defense of his fellow Wall Street bankers.

Number of the Week: Finance’s Share of Economy Continues to Grow - 8.4%: The financial sector’s share of gross domestic product. Given everything that’s happened, surely the financial sector’s role in the economy is smaller now than it was before the recession hit, right? Wrong. Combined, finance and insurance firms accounted for 8.4% of U.S. gross domestic product last year, according to the Commerce Department, eclipsing the peak it hit in 2006. In 1950, the financial sector accounted for just 2.8% of GDP. The growth in finance over the past 60 years hasn’t, by and large, been a bad thing. While from the outside, what financial workers do — take money from one pot, skim some off the top, and put it into another pot — seems meaningless and, to some people, outright wrong, it does serve a purpose. Deploying capital to the places where it can be best used helps the economy grow. And since the financial sector bears some risk in doing that, it should get a piece of the pie. But that only goes so far. New research by New York University economist Thomas Philippon suggests that the financial sector is enormously outsized.

Kids, stop dreaming of Wall Street - Amid fears of high youth unemployment creating a “lost generation,” there is suddenly a bright spot: Apparently, fewer young people are going to work in the industry that destroyed our economy. That’s the word from the New York Times, which reports that since 2008, “the number of investment bank and brokerage firm employees between the ages 20 and 34 fell by 25 percent,” as banks have laid off young people and slowed college recruiting. For young Wall Streeters, this is a bummer. But for society as a whole, it’s cause for celebration because it may finally allow America to counter the destructive Gordon Gekko-ization of youth culture. Recall that in recent years, up to a third of kids at elite universities have entered finance-related jobs. Such a mass shift in career preferences is, to put it mildly, alarming. A country whose best and brightest begin avoiding occupations that add value to society (doctors, engineers, etc.) in favor of vapid get-rich-quick gigs is a country that has stopped investing in itself and started mortgaging its future. In light of that, Wall Street’s youth layoffs raise a bigger question: Why have so many more kids been pursuing careers in finance?

Cautious capitalism - It has been four and a half years since the crisis began in August 2007. During that period, the financial sector has grudgingly accepted higher capital requirements and lower leverage as the new normal (the collapse of MF Global notwithstanding). It is worth pondering if the continued downturn has also changed attitudes towards investment and finance in the real economy. Past research has shown that exogenous shocks, such as recessions, can modify firm-level behaviour. This view is at odds with traditional theories which posit that firms base their financing decisions on sound economic analysis. But a firm is not a rational actor. It is shaped by its managers whose beliefs are coloured by past and present events. For instance, managers who lived through the Great Depression were scarred by the collapse in capital markets and preferred to rely on internal financing even when it was cheaper to borrow externally. A recent paper concludes that managers who begin their career during a recession have a conservative management style when compared with their non-recession peers.

The Remarkable Political Stupidity of the Street - Robert Reich - The Street’s biggest lobbying groups have just filed a lawsuit against the Commodities Futures Trading Commission, seeking to overturn its new rule limiting speculative trading. For years Wall Street has speculated like mad in futures markets – food, oil, other commodities – causing prices to fluctuate wildly. The Street makes bundles from these gyrations, but they have raised costs for consumers. In other words, a small portion of what you and I pay for food and energy has been going into the pockets of Wall Street. It’s just another hidden redistribution from the middle class and poor to the rich. The new Dodd-Frank law authorizes the Commodity Futures Trading Commission to limit such speculative trading. The commission considered 15,000 comments, largely from the Street. It did numerous economic and policy analyses, carefully weighing the benefits to the public of the new regulation against its costs to the Street. It even agreed to delay enforcement of the new rule for at least a year. But this wasn’t enough for the Street. The new regulation would still put a crimp in Wall Street’s profits. So the Street is going to court. What’s its argument? The commission’s cost-benefit analysis wasn’t adequate.

What is the value added of banks? - This column is a Lead Commentary on VoxEU's debate on Why do we need a financial sector? The financial system is like an organ in the body of the economy. But is it the heart or the appendix? This column, part of the Vox Debate on whether we need a financial sector, argues that we should measure the value banks create through their management of risk, not simply their bearing of risk. Under this measure, banks may well be less valuable to the economy.

Huge Eurobank, rated 'Britain's worst,' now accused of gouging US consumers - The accusations are as outrageous as they are plentiful: Hundreds of “robocalls” -- in one case, 800 to a single person -- to collect auto loan debts; illegal repossession of cars from active duty military deployed overseas; late fees assessed three years after the fact and then compounded into $2,000 or $3,000 bills; harassing calls to friends, neighbors, co-workers -- even children -- on cell phones. And now, a flurry of lawsuits filed around the country, and lawyers fighting over potential clients. The defendant in the lawsuits is Europe’s largest bank, Banco Santander S.A., which is preparing to make a big push into U.S. retail banking. But many Americans already have been introduced to the Spanish financial powerhouse, a first encounter that many liken to a nightmare. Santander’s most visible presence in the U.S. market is the result of a buying spree begun in 2009, when the bank began purchasing billions of dollars in auto loans -- many of them subprime loans for used cars -- from Citibank, HSBC and a host of other banks. But if the cascade of complaints and lawsuits are accurate, Santander Consumer USA has tried to immediately turn those receivables into lucrative assets by assessing massive penalty fees and repossessing cars under dubious circumstances. "They have a good business model if you are a crook,"

Obama renews push for consumer bureau chief — The Obama Administration is renewing its push for the Senate to confirm a director to run the Consumer Financial Protection Bureau.  "The longer we wait to confirm a director, the more we're leaving millions of Americans who aren't doing business with banks vulnerable to the kind of predation and abuse that caused so much damage in this crisis," said Treasury Secretary Tim Geithner at a press conference Thursday.  "Our strategy is to make the case as compelling as we can," said Geithner at the event, which he called to focus attention on the issue. It may be an exercise in futility. Senate Republicans have said they'll maintain a block on the confirmation until Democrats yield to their demands for changes to the structure of the consumer bureau.

Republicans block Obama's consumer nominee - - Senate Republicans on Thursday beat back Democratic President Barack Obama's pick to head the new Consumer Financial Protection Bureau, and each party accused the other of holding consumers hostage to politics. Democrats were able to muster only 53 of the 60 votes needed to advance to an up-or-down vote on the nomination of former Ohio Attorney General Richard Cordray. One Republican, Scott Brown of Massachusetts, sided with the Democrats in the 53-45 vote. Republicans are promising to block Cordray until changes are made to how the new agency operates. Following Thursday's vote Democrats said they have no intention of compromising, even if it means the new bureau will be leaderless until at least after the 2012 elections.

Quelle Surprise! Senate Republicans Block Confirmation of Richard Cordray as Head of CFPB - Yves Smith - Today’s turndown by Senate Republicans of Obama nominee to head the Consumer Financial Protection Bureau, Richard Cordray, was so clearly telegraphed in advance as to make the vote a non-event. The Republicans has said they would not approve anyone, even a Republican, for the position, unless they put into place measures to increase “transparency and accountability.” That is NewSpeak for “gives us control over its budget so we can make it incompetent, weak, and bank-fearing just like the SEC.”  So why are we harping on this set piece? It’s just a reminder of how Elizabeth Warren has allowed herself to be played. The best thing for Warren’s stature would have been for the Administration to play the game out and force the Republicans to nix her. It would have kept the issues of the fallen standing of the middle class and bank bad conduct towards consumers in the press spotlight (in an indirect acknowledgment, Scott Brown, who is opposite Warren in the Mass. Senate race, was the only Republican to vote for Cordray, no doubt not wanting to give her grounds for accusing him of being anti-consumer). Needless to say, given that Obama needs to raise $1 billion for the 2012 presidential campaign and banks are one of the biggest donor groups, all that was every in the offing was the occasional wet noodle lashing of bank bad behavior.

Big Banks Finance Payday Lenders: You Knew that but did you Know some also Make payday loans? - This video is totally worth you 2 minutes. It describes big banks in rather unflattering terms (as parasites, for example) but the main thing I got out of it is that big banks finance payday lenders. Yes, it is true that the same banks that received TARP bailout money are funding payday lenders.  The payday lenders include Advance America, Cash America and ACE Cash Express, which allow customers to borrow against future paychecks, and which charge an average interest rate of 455 percent on top of fees of $15-18 per $100 loaned. These lenders depend on the big banks' financing for their business.  Moreover, Wells Fargo, Fifth Third Bank, and U.S. Bank, all make their own payday loans too.Talk about double dipping!  Just a few more fun facts.... 

Credit Card Confusion: CFPB Developing Simpler Credit Card Form - Imagine a credit card agreement that's short, to the point and easy to understand. If one federal agency gets its way, what you're picturing could become a reality.  The Consumer Financial Protection Bureau launched a campaign aimed at simplifying credit card agreements Wednesday. The agency is asking the public for feedback on a more transparent credit card form that is broken down into three sections -- costs, changes and additional information -- and features information high up on fees, interest rates and other information.  The bureau will also be soliciting feedback through a pilot program that will offer the agreement to customers of the Pentagon Federal Credit Union.  "When a consumer has to read through pages of legal fine print in their credit card agreement to figure out how their card works -- it's easy to get confused," . "With a short, simple, easy-to-understand credit card agreement, consumers can clearly see the terms of the deal and make the decisions that are right for them." The announcement comes after a CFPB report analyzing more than 5,000 credit card complaints found that customers are confused by their credit card terms. The report also found that consumers are still complaining about interest rates, billing disputes and other issues, despite legislation passed in 2010 that aimed to make credit cards more transparent.

Crocodile Tears From the Credit Card Industry - The Wall Street Journal reports on the latest middle finger from the credit card industry: Just two months after one of the most controversial parts of the Dodd-Frank financial-overhaul law was enacted, some merchants and consumers are starting to pay the price. Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10. That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts. The sheer gall on display here is just mind-boggling. If card companies were really interested in a free market, they'd remove the clause in their standard contract that prevents merchants from charging higher prices on credit and debit card Merchants would then be free to pass along swipe fees to their customers or not as they saw fit, and the free market would determine the outcome. But they've resolutely refused to do that, and since Visa and MasterCard are an effective monopoly, merchants have nowhere else to go.

Occupy @Home: The Kitchen Counterstrike Against Bank of America - Last week I conducted my own protest. I could not go marching in the streets, so I came up with a different way to make a point. I called up the customer service line for one of my credit card accounts and posed some questions that illustrate just how hard the banks work to squeeze every dime they can from their customers using these one-sided agreements. I recorded the call and edited the video to include more amusing commentary via text captions, so watch with your eyes, not just your ears. I don’t necessarily recommend you try this at home. I had some unplayed leverage that gave me the extra courage to be this confrontational. You might not have the same circumstances. I’ve included a fuller transcript of the call at the bottom of this page. It has some content that did not make the video.

Citigroup cuts 4,500 jobs amid worsening eurozone sovereign debt crisis - Citigroup Inc is gearing up to minimise capital costs by cutting down about 4,500 jobs in coming quarters and record a $400 million charge in the quarter for severance and other expenses related to the layoffs. Many analysts are seeing it as a bid to reduce costs due to the European sovereign-debt crisis. Speaking at the Goldman Sachs Financial Services Conference in New York, Citibank Chief Executive Vikram Pandit said cuts would be completed over “the next few quarters” and would come from a range of businesses that will likely affect the competitive landscape in the coming years. Citigroup is the third-biggest US bank by assets and the cuts are equal to about 2 percent of Citi’s workforce of 267,000 employees at the end of third quarter 2011. The group is becoming the latest large bank to trim staff, and joins the chorus with other banks worldwide that have cut more than 120,000 jobs due to tight industry regulations taken as economic recovery continues to remain fragile.

Former staff sue Corzine over MF collapse - Jon Corzine and other top MF Global directors have been sued by former employees of the collapsed broker-dealer, accusing the senior management of “misrepresentations and fraudulent conduct”. Jacob Zamansky, lawyer for the class action, alleged that Mr Corzine and the board “breached their fiduciary duty to their employees and destroyed their careers and retirement savings. They need to be held accountable.” The lawsuit, filed in the US District Court for the Southern District of New York, alleges that Mr Corzine, who resigned as chief executive after MF Global filed for bankruptcy on October 31, exaggerated the health of the company in financial statements and so misled employees who purchased stock.

MF Global customer: My entire account is missing (Reuters) - As investigators search for an estimated $1.2 billion missing from MF Global customer accounts, one customer says his entire account has vanished and blames the trustee liquidating the firm. An Illinois-based futures fund on Friday said its more than $50 million account with the broker-dealer unit of MF Global Holdings Ltd (MFGLQ.PK) is missing, and asked a federal bankruptcy judge to order the trustee to find it. Highridge Futures Fund LLP said the trustee James Giddens has refused to help locate its account with MF Global Inc, even after transferring some 38,000 other accounts and giving customers access to some of their collateral. Once run by former New Jersey Governor Jon Corzine, MF Global filed for bankruptcy on October 31 after a bet on European sovereign debt worried markets, causing a liquidity shortfall. The Highridge fund said Giddens, CME Group Inc's (CME.O) Chicago Mercantile Exchange and regulators have told it nothing about the status of its account, which held commodity positions and cash. It also said it had been told twice that the account was being transferred, but the transfer never occurred.

MF Global and the great Wall St re-hypothecation scandal - A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.  MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet. If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.

Corzine: I do not know where the money is — Jon Corzine, the former chief of failed MF Global, apologized to customers of the firm and said in testimony prepared for a House hearing Thursday that he did not know where missing money was located. As much as $1.2 billion in funds may be missing after the eighth-largest bankruptcy in U.S. history, reiterated an attorney representing the trustee overseeing distribution of customer funds for the firm. The trustee first estimated in November that those funds were missing. “I simply do not know where the money is, or why the accounts have not been reconciled,” said Corzine in testimony prepared for a House Agriculture Committee hearing scheduled for Thursday to examine the MF Global collapse. He also said he was “stunned” when told that MF Global couldn’t account for the money. New York-based MF Global filed for bankruptcy protection on Oct. 31 after disclosing sizable exposure to derivatives and other investments related to billions of dollars in European sovereign debt.

On Corzine – MFG in the fog of war - I watched Jon boy. I didn’t hear any smoking guns. That doesn’t mean there weren't any. Keep in mind that Corzine has the best lawyer (for this) that money can buy. Andrew Levander has been advising the former CEO of MFG on every word he says. I was surprised that there was no 5th Amendment stuff. I’m sure that Levander was pushing for that. But Corzine really didn't have much of an option. If the former Senator/ Governor pled the fifth he would have been convicted in the public’s eye. So Jon talked, but he said nothing. You can be absolutely certain that Corzine spent many hours with his lawyers fielding question that might have been asked by the congressional committee. When Corzine seemed to stutter, pause, look up at the ceiling groping for the right words to use, it was just a very well orchestrated and practiced acting job. Jon made one response that I thought was significant. He said several times: "I never intended to break any rules.” This could mean anything, but consider that this canned response was formulated word for word by Levander.  He is trying to establish that whatever he may have said (or signed), he did not understand the consequences. Whether this is true or not, I don't know.

Corzine’s Know-Nothing MF Global Defense - Yves Smith - (video) Jon Corzine’s evasive testimony before the Senate Agriculture Committee was scripted so as to lay foundations for his defense against customer and possibly shareholder suits and reduce the already very low odds of an indictment.  Although I’ll touch on other interesting elements shortly, the key item from his presentation was one that the New York Times’ Dealbook noted: “I never intended to break any rules,” said Mr. Corzine, dressed in a dark suit but without his trademark sweater vest. “I know I had no intention to ever authorize the transfer of segregated moneys. I know what my intentions were.” Mr. Corzine has not been accused of any wrongdoing…. Still, over three hours of testimony, Mr. Corzine danced carefully around questions touching on the scandal of the missing funds, using phrases like “never intended” and “not to my knowledge. To prove fraud, you need to prove intent. So Corzine’s insistence that he didn’t intend for customer accounts to be raided would seem to get him off the hook, unless documents or the testimony from multiple employees establishes otherwise. His justification amounts to blaming any misdeeds on the fog of war: “Yes, I told staffers to be aggressive, but I never meant for them to bayonet old women and babies.”

>MF Global and the Great Re-Hypothecation Scandal - A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.  MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet. If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.

Why The MF Global Collapse May Have "Apocalyptic" Consequences - In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation."

HSBC Sues MF Global Brokerage Over 20 Bars of Gold, Silver on Deposit HSBC Holdings Plc (HSBA) sued the MF Global Inc. brokerage trustee to establish whether he or another person is the rightful owner of gold bars worth about $850,000 and silver bars underlying contracts between the brokerage and a client.  Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and its client Jason Fane of Ithaca, New York, London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said. HSBC asked a judge to decide who the rightful owner is.
“HSBC has received conflicting instructions regarding ownership and disposition of the property,” it said. “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”

Trades Are Linked to Missing MF Global Funds - The trustee liquidating MF Global’s brokerage unit has spotted suspicious trades in customer accounts that appear connected to a $1.2 billion shortfall, the trustee’s lawyer said Friday. The lawyer, James Kobak, said at a hearing in Federal Bankruptcy Court in Manhattan that most of the transactions appeared to have taken place close to the weekend before MF Global filed for bankruptcy. Separately, the bankruptcy judge overseeing the case, Martin Glenn, approved a request by the trustee to pay out up to $2.2 billion to MF Global brokerage customers. The move by the trustee, James W. Giddens, would represent the return of about 72 percent of the fallen firm’s customer accounts. The update by Mr. Giddens’s lawyer, Mr. Kobak, comes amid continuing investigations into the demise of MF Global. In his first public appearance since the bankruptcy filing, Jon S. Corzine, MF Global’s former chief executive, testified at a Congressional hearing on Thursday that he did not know what lay behind the customer fund shortfall.

CFTC Issues A Clear Statement: MF Global Customers Have Priority In This Bankruptcy - Jill Sommers, the CFTC Commissioner who is leading the investigation into the MF Global bankruptcy gave some important testimony to the House today that has been overshadowed by the expected appearance of Jon Corzine.  If you have been following the case, you know that JP Morgan has taken the lead in attempting to file motions to subordinate the customer accounts to their own debts. There are also some confusing arguments being made that because some of the activity was conducted in a subsidiary in London, the UK rules apply to the customer funds. Some of them sound like they are being crafted by the Wall Street attorneys who will be defending and justifying the theft of customer funds. Be careful of some of the 'news' that you get from the corporate media. As Sommers later made clear, and as Janet Tavakoli encapsulates so well,  "Jill Sommers did a great job with her testimony leaving no room for doubt that 1) the cases in which investment in foreign sovereign debt for customers’ own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts) and 2) it is never allowable to transfer money out of the customer accounts to commingle with MF’s investments." Here is Jill Sommers testimony before the House today.

We No Longer Have A Justice System In The U.S. -- It's simply gone. "I simply do not know where the money is, or why the accounts have not been reconciled to date," Corzine's prepared testimony read. "I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules." Sarbanes-Oxley requires him as the CEO of a company to (1) guarantee that effective risk controls and rules are in place and (2) monitor their compliance.  It renders failure to do so -- that is, the old-fashioned "I didn't know" defense that was routinely used after 2000-era failures in the Internet space -- a felony. Now of course Mr. Corzine is entitled to the presumption of innocence and he is entitled to a trial before being pronounced guilty, but the law on this point is clear: Executives, the CEO and CFO in particular, are required under Sarbanes-Oxley to factually know about matters such as this and they are required to attest to that knowledge -- and the presence of appropriate and sufficient risk controls under penalty of felony indictment. It appears that Mr. Corzine has admitted in front of a Congressional Committee that he does not know, and therefore this appears to be a prima-facie admission that he is in direct violation of this law. If this is not dealt with on an expeditious fashion and the law is not enforced you have just seen proof on national television that there is no longer a rule of law in this nation of any substance.

William K. Black: Justice Department is the Dog that has Refused to Bark for a Decade (video) From Goldman Sachs to governor to grilling, Jon Corzine former CEO of the now bankrupt MF Global testifies on Capitol Hill. He claims he is clueless about how and where the possible $1.2 billion dollars of his client's money is that is missing. How has all of this happened three years after the financial crisis when Wall Street was supposed to be reined in? And can we expect anything to change? We speak to William K. Black, a former regulator who during the Savings and Loan crisis oversaw more than 10,000 criminal referrals, 1,000 felony convictions, and where hundreds of bankers went to prison. He says Corzine doesn't have a viable defense of being not involved in the firm's day to day activities with this much money at stake, but that the Justice Department has been the dog that "refuses to bark" when it comes to prosecuting financial executives.

Companies Face $12 Trillion 'Equity Gap' By 2020, McKinsey Says (Bloomberg) -- Global companies' demand for equity capital may outstrip supply by about $12.3 trillion in 2020 as investors avoid stocks, spurring firms to take on more debt and leaving them vulnerable during recessions, McKinsey & Co. said. Investors may cut their equity holdings to 22 percent of total investments by 2020 from 28 percent now, according to a report from the research unit of McKinsey, the international consulting firm. Companies in 18 emerging and developed nations examined by McKinsey will need to raise $37.4 trillion of additional capital to support growth, exceeding the $25.1 trillion of new money invested into stocks, the firm said. The shift away from stocks may be driven by the growing proportion of financial assets in emerging countries, where investors tend to have most of their holdings in bank deposits and government securities, McKinsey said. Companies that can't lure equity investors may add debt instead, leading to more bankruptcies during recessions and bigger swings in economic cycles, according to the report.

Bank-Run Risk in the Shadows - Bank runs aren't a relic of the 20th century. In fact, they risk becoming a hallmark of the 21st—though with a twist.  Indeed, today's panics are more likely to involve major financial institutions and are largely hidden from plain sight until they are severe enough to trigger plunging stock prices, bankruptcies, layoffs and rising unemployment. And the current European crisis is a reminder that some of the vulnerabilities exposed in 2008 still exist.  These panics often originate in the shadows of the banking system, where major financial institutions do business with one another. To say it isn't well understood would be an understatement; the Financial Stability Board, which works on behalf of G-20 countries for financial reform, has formed a task force to clarify what is meant by "shadow banking" in order to monitor and identify potential ways of regulating it.  The FSB's working definition of shadow banking is "credit intermediation involving entities and activities outside the regular banking system." It is akin to a banking system for banks and other financial institutions, where "depositors" exchange cash with borrowers in return for collateral for short periods of time, typically in the form of repurchase agreements. The FSB put the size of shadow-banking activities at roughly $60 trillion as of 2010—a sum that represents 25% to 30% of the total global financial system.

Equities and Basel III’s Liquidity Requirements - Last night, Bloomberg reported that the Basel Committee was considering revising Basel III's new Liquidity Coverage Ratio (LCR) to allow banks to use equities in their liquidity pools. This would be a relatively major change, and one which I consider ill-advised. (For background, I've written about the LCR several times before.) From Bloomberg: "The Basel Committee on Banking Supervision, which coordinates regulations for 27 countries, may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards, said two people with direct knowledge of the plans who requested anonymity because the talks are private." At a Senate Banking hearing today, Fed Governor Dan Tarullo confirmed this report. He also indicated that the Fed would support expanding the list of assets that are eligible for the LCR's liquidity pool. Tarullo, therefore, seems to be willing to allow banks to use certain large-cap equities in their liquidity pools. (Basel III's LCR requires banks to maintain large liquidity pools, which must be made up of "high quality liquid assets," so technically what Tarullo is saying is that certain large-cap equities should be included in the definition of "high quality liquid assets.")

The Price of a Haircut - Gorton’s story is that this was a bank run, not substantially different from the bank runs that have always plagued capitalist economies. In this case, the run took place in the repo market, which is an unregulated (and largely unmonitored)... The repo market serves large institutions (e.g. Fidelity Investments or state governments) with a lot of cash on hand that they want to stash in an interest-bearing account for a day or two. So Fidelity deposits, say, a half-billion dollars at, say, Bear Stearns, just as you might deposit five hundred dollars at your local bank. One difference, though, is that your account at your local bank is insured, whereas Fidelity’s account at Bear Stearns is not — so Fidelity, unlike you, demands collateral for its deposit.  The problem comes in when rumors begin to spread that some bonds might be riskier than they appear, and Fidelity starts to worry that maybe Bear Stearns is picking particularly risky bonds to hand over. Therefore Fidelity demands more than a half-billion in bonds to guarantee its half-billion dollar deposit. Because Bear Stearns has a fixed quantity of bonds on hand, and because all of its depositors are demanding haircuts, Bear Stearns can now accept fewer deposits than before. This means that Bear Stearns has less cash on hand. This makes depositors even more worried about the security of their deposits, which means they demand larger haircuts. The effects snowball until Bear Stearns collapses. ...

U.S. Money Funds Cut French Bank Debt by 68% in November - The eight largest prime U.S. money- market mutual funds cut holdings in French banks by 68 percent in November, shifting investments to Swiss, Swedish, Canadian and Japanese banks. French bank holdings declined by $11.7 billion to $5.56 billion, according to an analysis of fund disclosures by the Bloomberg Risk newsletter. The eight funds have reduced French bank debt by $76.8 billion in the past 12 months. The decline in short-term lending has forced French banks to increase their borrowing from the European Central Bank more than four-fold over the last four months, and adds to woes at lenders seeking to meet tighter capital requirements. European Union banks must raise 114.7 billion euros ($152.8 billion) as part of measures to respond to the region's sovereign-debt crisis, the European Banking Authority said yesterday."

Michael Olenick: Bank of America All In – Calling Moynihan’s Bluff to Bankrupt Countrywide -  Yves Smith - Yves here. As the headline indicates, the steps taken Bank of America that Michael Olenick describes in this article call into question the idea that Bank of America can shield itself by putting Countrywide into bankruptcy. Note that, some litigants, particularly AIG in its petition in opposition of the proposed $8.5 billion settlement of putback liability on 530 Countrywide trusts, made a persuasive case that Bank of America has operated Countrywide in such a way post acquisition so that it is no longer bankruptcy remote from BofA (that is, you can’t BK Countrywide and deny Countrywide creditors access to BofA assets). Nevertheless, as attorney and former monoline executive Tom Adams noted by e-mail, the reason Bank of America might want the servicing at BofA rather than Countrywide if Countrywide is put into bankruptcy is probably to avoid a servicing termination event. If the servicer is bankrupt, the trustee or investors could, in theory, terminate them as servicer. This is really only theory, because almost no one (other than BofA) would want to be servicer for these loans, so it would be hard to see it as a driver of the changes Olenick describes. An interesting related issue is that BofA, like other servicers in this new world of costly and lengthy foreclosures, is at risk of over advancing on mortgages. Servicers advance principal and interest even after a borrower has defaulted and reimburse themselves when the foreclosed property is sold. In theory, they can stop when a loan is clearly irrecoverable.

Let's Make The Clawback Risk Real - One of the forum members pointed out something that was obvious to me when I wrote this morning's Ticker, but might have gone over your head. I want to make absolutely sure it doesn't go over your head because if you're wrong about this you could lose everything in your bank and investment accounts -- every single dime. FDIC / SIPC insured or not. Recently Bank of America transferred a bunch of derivatives into their banking arm. "A bunch" means somewhere around $80 trillion worth. Now pay very careful attention, because part of the bankruptcy "reform" law in 2005 placed derivative claims in front of depositors in a business failure - including a bank failure. What JP Morgan is claiming in the MF Global case is that the derivative trade (which is exactly what a "Repo to Maturity" trade is - it's a derivative) is entitled to preference in the case of MF Global over those who had cash there for safekeeping either as a margin deposit or just as free cash as you would hold free cash in a bank. If a major bank blows up this very same claim, supported in existing Bankruptcy Law with the changes signed by George Bush in 2005, will be used to steal the entirety of your bank account, and if you detect the impending blowup shortly before it happens -- say, 90 days before -- you're still exposed to the risk through clawback!

A Question for Newt Gingrich - Newt Gingrich has surged in recent polls and now has a chance to establish himself as the front-runner in the Republican presidential primaries. But as Mr. Gingrich ascends, he will need to answer a difficult question: What is his policy for Wall Street’s too-big-to-fail banks? This a pertinent issue for all American voters in 2012 – both for the primaries and for the general election. It speaks directly to who wins and who loses in American society and why). No doubt Mr. Gingrich will seek to deflect the issue – as he did on Oct. 11, during a previous debate, when in response to a Wall Street-related question he said, “If you want to put people in jail, you ought to start with Barney Frank and Chris Dodd.” But Mr. Gingrich will find it difficult to avoid the substance of this issue for much longer for a simple reason: Mr. Huntsman has figured out that breaking up megabanks is both sensible economics and good Republican primary politics.

It’s accountability time for banks and Wall Street - There’s a scene in the HBO adaptation of Andrew Ross Sorkin’s book “Too Big to Fail” where Treasury Secretary Henry Paulson’s adviser suggests he call Warren Buffett to ask for help with Lehman Brothers. “As what?” responds Paulson. “Warren’s friend? His former banker? The treasury secretary? No!” In the movie, Paulson understands the difference, that there are bright lines that he should not cross. In real life, it turns out, these were not the kind of distinctions Paulson was particularly concerned about making. Missing from that movie — and other first drafts of recent financial history — was a bombshell recently uncovered by Bloomberg’s Richard Teitelbaum: Paulson gave his hedge fund friends inside information about government plans to seize Fannie Mae and Freddie Mac, seven weeks before it happened. Common stock and some preferred stock would be wiped out in the process, he told them, meaning a bet against the giants was a bet that could make them millions. Those without connections to Paulson didn’t get a tip-off; worse, they got the opposite. On the same day that Paulson met with the hedge funds, he told the New York Times that markets would soon have reason for renewed confidence in both enterprises.

Justice, Deferred - During the early aughts, the financial sector freely gambled with money implicitly or directly guaranteed by taxpayers, selling securities based on worthless subprime mortgages to their customers. We all know how that turned out. And yet those responsible for the worst recession since the Great Depression have for the most part escaped federal prosecution. Given this context, it is easy to understand why United States District Court judge Jed Rakoff angrily rejected a proposed deal between the Securities and Exchange Commission (SEC) and Citigroup over the company's practice of selling toxic mortgage-backed securities to its customers at the same time it bet against them. His decision to reject the settlement—in which Citigroup would have to pay $285 million but not have to admit any wrongdoing—was praised as a win, at least in spirit, for the Occupy Wall Street crowd, and indeed it may have some positive effects, including letting banks know they can't get off that easy. But it is important not to lose sight of the underlying reason executives so often go unpunished: the legal and financial constraints that make the SEC no match for the companies it is regulating.

NYT’s James Stewart Runs PR for Compromised SEC Chief Khuzami Against Judge Rakoff on Proposed $285 Million Citi CDO Settlement - Yves Smith - There is nothing more useful to people in authority than when a writer with an established brand name does their propagandizing for them. Harvard Law graduate and Pulitzer Prize winning author James B. Stewart penned a remarkable little piece in the New York Times over the weekend. Titled “Few Avenues for Justice in the Case Against Citi,” it contends that Judge Jed Rakoff’s ruling against a proposed $285 million SEC settlement with Citigroup over a $1 billion CDO (Class V Funding III) that delivered $700 million in losses to investors and $160 million in profits to Citi is misguided. Stewart argues, based on “some reporting,” that the SEC is unlikely to do better in the trial that Rakoff has forced on the agency by nixing the settlement. We will look at the caliber of Stewart’s “reporting” in due course, since his article reads like dictation from the SEC’s head of enforcement Robert Khuzami (the SEC’s interests are aligned with Citi’s in wanting the settlement to go through). Stewart either did not read or chose to ignore critical information in the underlying complaints, which the Rakoff ruling cites, and he also overlooked relevant cases.

Would You Trust a Randian Banker? - Conservatives give a lot of deference to the opinions of business leaders and other ‘job creators’. The operating assumption is that their criticisms of White House policies are accurate and well informed. What if this assumption is largely off-base? Consider this roundtable hosted on CNBC between Austan Goolsbee, the former Chairman of the Council of Economic Advisers, and several business executives. Pay close attention to the arguments made by John Allison, former CEO of the bank BB&T: In this video, Allison argues that Fannie Mae and Freddie Mac were responsible for the majority of subprime mortgage loans. Goolsbee is aghast because this is not factually accurate at all. Allison is the former CEO of one of the largest banks in America. It is a job demands incredible attention to detail and expertise. What could possible lead him to adopt a stance which is so at odds with what the facts say? It turns out that Allison is actually a major philanthropist who has been making donations to business schools across the country on the condition that they teach Ayn Rand in the classroom. Allison doesn’t only give a lot of money to spread the Rand gospel, he believes it himself so he gives lectures on the topic.

“Flip This House”: Investor Speculation and the Housing Bubble - NY Fed - The recent financial crisis—the worst in eighty years—had its origins in the enormous increase and subsequent collapse in housing prices during the 2000s. While the housing bubble has been the subject of intense public debate and research, no single answer has emerged to explain why prices rose so fast and fell so precipitously. In this post, we present new findings from our recent New York Fed study that uses unique data to suggest that real estate “investors”—borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties—played a previously unrecognized, but very important, role. These investors likely helped push prices up during 2004-06; but when prices turned down in early 2006, they defaulted in large numbers and thereby contributed importantly to the intensity of the housing cycle’s downward leg.

Lawler on "Real Estate Investors, the Leverage Cycle, and the Housing Crisis" - In a relatively recent Federal Reserve Bank of New York “Staff Report” entitled “Real Estate Investors, the Leverage Cycle, and the Housing Crisis,” FRB of NY economists Andrew Haughwout, et al., utilize data from the FRBNY’s Consumer Credit Panel (CCP) data set of US individuals with credit files to attempt to document the role of mortgage-financed purchases of real estate by “investors” in last decade’s housing boom and bust. Here is a summary. Here is the abstract: Folks who read the paper should read it carefully, as a “quick read” can lead to a bit of confusion on what some of the data and charts mean. E.g., there are charts on investor shares of new purchase mortgage borrowing that a “quick” reader might conclude represent estimates of the shares of mortgage-financed purchases FOR investment by non-owners as opposed to estimates of the share of mortgage-financed purchases BY folks who own more than one property with a mortgage (i.e., BY investors), even if the a GIVEN purchase by an “investor” happens to be for his/her primary residence. (By and For mean very different things!) Similarly, there are charts showing the share of first-lien mortgages outstanding owed BY “investors,” which the casual reader might incorrectly conclude represent the share of mortgages outstanding on non-owner-occupied properties owned FOR investment, as opposed to the share of first-lien mortgages owed by folks who happen to own more than one mortgage-financed property.

Shock Me, Shock Me - From a new study by Andrew Haughwout and others, At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half--45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with "just" two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000. Pointer from Mark Thoma, who sees it as an exoneration of government housing policy. Hunh? Loans to speculators were made by Freddie and Fannie. Loans to speculators were eligible to be laundered into AAA securities that were favored by government capital requirements. The sad fact is that the real estate lobby was so good at playing the violins for "home ownership" that they were able to put a smokescreen over a wave of speculative borrowing.

60 Minutes Exposes Specific Instances of Actionable Fraud at Citibank and Countrywide - It is being Actively Ignored - These are not-to-be-missed videos, produced by CBS. Two high-level executive whistle-blowers are interviewed. Both encountered fraud, reported it, and were relieved of their duties. Both are willing to act as witnesses. Our government is refusing to pursue actionable crimes against the people who brought this country to its knees. This redefines lack of accountability. Senior Fraud Investigator for the Financial Crisis Inquiry Commission, Tom Borgers, Found and Reported on Pervasive Fraud. It is being ignored. On the results of Borgers' investigation: Borgers found pervasive fraud, committed across the board - by mortgage originators, underwriters, the banks, etc... On why over 800 bank officials when to jail following the S&L crisis, yet not one has gone to jail following our more recent crisis: Investigators had considerably more "support" following the S&L crisis. In the excellent 60 Minutes episode below, whistle-blower Eileen Foster, former Countrywide Executive VP in charge of Fraud Investigations, is interviewed. Ms. Foster states that she was astounded by the systemic fraud she discovered. Fraud defined entire regions of the company. She was fired shortly before a scheduled meeting with federal regulators - and after she refused to spin her story. Citi subsequently offered to compensate Ms. Foster, in return for silence. She refused.

Why Hasn't the Government Gone After Mortgage Fraud? - One of the most important questions to arise out of Washington over the past three years, and one that Democrats and defenders of the administration often dance around, is why big financial institutions haven’t been punished for their role in the mortgage crisis: for pushing bad loans beforehand and for engaging in shady foreclosure practices afterward. There has not been a single prosecution of a high-ranking executive nor Wall Street firm for playing a part in the meltdown. Much of the analysis about the administration’s response to the global financial crisis focuses on the Dodd-Frank reforms, but that was a process in which the administration didn’t have total control—the legislation was subject to massive lobbying campaigns and horse-trading between members of Congress. But the administration could have acted unilaterally to punish the big financial firms who helped create the crisis and push people out of their homes afterwards—and in large part, it hasn’t.  On 60 Minutes last night, Steve Kroft had an outstanding two-part piece that questioned why the Department of Justice has not pursued cases against big banks for pushing bad mortgages onto people in the run-up to the crisis, and lying to investors about the strength of those loans.

Bottom Line - Mass. official tells of pervasive fraud in mortgages: (video) As we reported last week, Massachusetts' attorney general is suing the top five U.S. banks, charging they foreclosed illegally on homes in the state and used deceptive loan servicing practices, including robo-signing. In the video below, NBC News’ Lisa Myers meets with John O’Brien, register of deeds, in South Essex County, Mass., who says his department found 26,000 fraudulent mortgage documents following an investigation. O’Brien say he is troubled that he can’t “look a constituent in the eye and tell them who owns their mortgage. That’s very sad.” “(The banks) are filing fraudulent documents to take their homes away from them,” O’Brien said.

GMAC, Massachusetts Trade Salvos in Mortgage Fight - GMAC Mortgage, the mortgage lender of Ally Financial Inc., is exiting the vast majority of its lending in Massachusetts a day after the state sued it and other lenders over its allegedly improper foreclosure practices, a decision the state's attorney general called an admission.  The nation's fifth-largest mortgage originator said it "has taken this action because recent developments have led mortgage lending in Massachusetts to no longer be viable."  GMAC's move, ratcheting up the high-stakes mortgage fight, comes after Massachusetts Attorney General Martha Coakley sued the five biggest mortgage servicers Thursday, in the first government lawsuit targeting all five for alleged improper foreclosure practices including so-called robo-signing.  Ms. Coakley, responding in a statement to GMAC's move, said in order to do business in the state GMAC has to follow the law before foreclosing on homeowners. She said she was looking to hold the lenders accountable for actions and enforce the strict foreclosure laws in the state. "With today's action, it appears GMAC has acknowledged it has a problem following those laws and being held accountable for doing so," Ms. Coakley said

Foreclosure battle: A new hope - This week, Massachusetts Attorney General Martha Coakley sued five of the biggest banks in the country – including Bank of America, JPMorgan and Wells Fargo – for alleged foreclosure fraud. As the New York Times noted, the move “diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials to resolve foreclosure improprieties.” And Coakley’s suit comes just as Occupy Wall Street organizers are planning a campaign focusing on the foreclosure crisis that will likely feature eviction defenses, protests at banks and the like. The Occupy Our Homes project is launching on Tuesday. But the foreclosure crisis can be dizzyingly complex, and the issue is still opaque to many Americans who have not been directly affected. For an update on what’s going and to get context on the Coakley suit, I spoke to Alan White, a visiting professor at Tulane law school who has written widely on the foreclosure crisis.

California and Nevada join forces in mortgage probe - An alliance by California and Nevada to jointly investigate misconduct and fraud in the mortgage business further divides efforts by the nation's attorneys general to bring the home-lending industry to account for improper foreclosure practices. The two states, which are at ground zero of the nation's housing bust, will join forces to probe allegations of foreclosure fraud and other wrongdoing in the mortgage markets, including the packaging and selling of mortgage-backed securities by Wall Street players and scams by smaller players offering to help troubled borrowers. The agreement to work together, announced in Los Angeles on Tuesday by California Atty. Gen. Kamala D. Harris and Nevada Atty Gen. Catherine Cortez Masto, comes a week after Massachusetts said it was suing the nation's five largest mortgage servicers over alleged foreclosure illegalities. The moves escalate pressure on the nation's biggest financial institutions already in high-level negotiations with a coalition of state attorneys general over their alleged abuses. "This potential partnership with the Nevada AG may cover a fairly broad array of issues," . "Having the prospect of investigations and litigation could very well raise the stakes for — and put added pressure on — the financial institutions to come up with a settlement."

California, Nevada Team Up To Prosecute Mortgage Fraud - California and Nevada's attorneys general announced Tuesday in a press conference that they are teaming up to prosecute mortgage fraud in their respective states. The planned cooperation between the attorneys general in two of the states hardest hit by the collapse of the housing market could shift the landscape of the national foreclosure crisis. For one, the new partnership could weaken attempts by other states and the Obama administration to negotiate a single, national foreclosure settlement with the nation's five largest home-loan companies over alleged misdeeds, such as the mass-signing of foreclosure documents and the foreclosure of borrowers who were in the process of seeking mortgage modifications. But the move also serves as a warning to the financial institutions accused of defrauding hundreds of thousands of homeowners. The states plan to work together on a broad range of issues related to mortgage fraud, the sources said. In the past California has been burned by large, multi-state mortgage settlements.  California Attorney General Kamala Harris may be trying to avoid another disappointing mortgage settlement by partnering up with Nevada Attorney General Catherine Cortez Masto.

Knives Come Out Against Martha Coakley, Who Dares Try to Hold Banks Accountable - It was inevitable that some apologist would claim that Martha Coakley actually holding banks accountable for following the law would stunt the nation’s recovery and cause us all to queue up on soup lines. That ignominious honor goes to Liz Peek of the Fiscal Times (a Fox News contributor). I apologize in advance for the fifth-grade writing level of this excerpt. Coakley’s suit torpedoes the negotiations underway between the banking industry, the Obama administration and all fifty states, headed by Iowa Attorney General Tom Miller. Though New York and California had stepped back from the talks, responding to concerns that the banks would be too let off too easily, Miller has steadily pushed the negotiations forward. That was not adequate for Coakley. Known as a grandstander in her prior stint as a district attorney who championed the infamous (and ultimately overturned) Amirault sexual assault case, Coakley could bring chaos to the housing market. With banks potentially liable for vast sums of money, they may well be forced to fight Coakley’s suit, which could take years to resolve. In the process, the housing market will be put on hold. It is hard to conceive of anything more damaging to our fragile economic recovery [...] This, at a time when the housing industry may indeed be finding a bottom.

Former Chase Banker Admits His Bank Pushed Minorities Into Subprime Mortgage Loans - One of the most pernicious practices in which the nation’ biggest banks engaged during the lead up to the financial crisis was pushing minority borrowers into subprime loans, even when many of them qualified for prime loans. This rampant predatory lending helped inflate the housing bubble; a Center for American Progress investigation actually found huge racial disparities in lending at the big banks that wound up getting bailed out, with minority borrowers far more likely to receive high-priced loans.  One former banker for Chase — James Theckston — told the New York Times’ Nick Kristof that not only did his bank push minority borrowers into higher-priced loans, but senior executives then tried to cover up the racial disparity in their banks’ lending:  He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans. These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes.

Three more notaries charged in Nevada robo-signing scandal - The Office of the Nevada Attorney General announced Monday that it filed complaints against three more notaries in the state’s continuing massive robo-signing investigation.."These complaints are the result of notary practices which did not conform with legal requirements of our state," said Chief Deputy Attorney General John Kelleher in a statement. "These requirements were enacted to ensure the integrity of public documents and our action today is another step in our attempt to determine those responsible." According to the Nevada Attorney General criminal complaint, Shaw's and Bloecker's alleged crimes took place in 2005 and were discovered in 2010. Noel's alleged crimes took place in 2008 and were discovered in 2010. The charges stem from the notaries’ involvement in the scheme to file fraudulent documents with the Clark County Recorder’s office. The documents, referred to as Notices of Default, were used to initiate foreclosure on local homeowners. Through an investigation led by the Attorney General’s office, the notaries charged in the case confirmed that their job duties included signing another person’s name on a document and then notarizing that signature as valid.

Landmark foreclosure ruling upheld - The landmark legal case that last year led to a temporary freeze on foreclosures across the nation reached its conclusion Tuesday morning when the Maine Supreme Judicial Court upheld a lower court ruling. By a 5-1 margin, the court declined to explore the issue of contempt and additional sanctions against mortgage servicer GMAC and the Federal National Mortgage Association, known as Fannie Mae. The case centered around an attempt to evict a Denmark woman. Nicolle M. Bradbury bought a home in 2003 for $75,000 but after losing her job several years later became unable to pay the monthly mortgage bill of $474. The loan was modified once before going into default. Foreclosure proceedings reached a snag when attorney Thomas A. Cox, representing Bradbury for free through Pine Tree Legal Assistance, was able to depose a GMAC employee and reveal a high-volume and careless approach to the review and signing of documents necessary to foreclosing on a homeowner's house. The term robo-signing caught on instantly and turned out to be prevalent throughout the industry, leading to temporary foreclosure freezes not only by GMAC but also by larger lenders Bank of America and J.P. Morgan Chase.

Class of Homebuyers Claims BofA Found a New Dirty Trick - Bank of America found a new way to illegally extract money from customers, according to a federal class action: deduct taxes and insurance from mortgage payments, even though the homebuyers make those payments themselves, then call the mortgage in default for the unauthorized deductions, and charge late fees and penalties.“In 2005, plaintiffs obtained a residential mortgage loan. Bank of America subsequently bought the servicing rights to the loan. From the time the loan was issued, plaintiffs complied with their obligations under the loan agreement. They made their monthly payments, maintained the required homeowner’s insurance coverage and timely paid their property taxes. Nonetheless, in December 2009, plaintiffs noticed on their monthly mortgage statement that Bank of America paid their property taxes and homeowner’s insurance without the plaintiffs’ knowledge or consent, and even though plaintiffs also paid them. To fund the impound account, and without informing the plaintiffs, Bank of America took money from plaintiffs’ monthly mortgage payment, not leaving enough to cover plaintiffs’ monthly mortgage payment, throwing plaintiffs into default. Once in default, Bank of America, as the loan servicer, was ale to charge additional fees and penalties. Bank of America also falsely reported to credit agencies that plaintiffs were in default on their mortgage.”

Christmas Present From Fannie Mae And Freddie Mac: No Foreclosures For Now - Fannie Mae, Freddie Mac, and other mortgage providers have a Christmas present for struggling homeowners: They won't get thrown out of their houses homes during the holiday season. Fannie Mae and Freddie Mac will not foreclose on any homeowners between December 19 and January 2, according to statements on their web sites. Private mortgage providers, such as JPMorgan Chase, Wells Fargo, and Bank of America, also said they plan to suspend their evictions during the holidays, according to CNNMoney. "The holidays are meant for families to spend time together," That holiday spirit will only go so far. During the holidays, Fannie Mae and Freddie Mac acknowledged that they will continue the administrative and legal proceedings leading to foreclosure in their statements. Though lenders are touting their holiday hiatus, many banks such as Bank of America have already halted many of their foreclosures before: late last year after it came to light that they had been foreclosing on homes with fraudulent paperwork.

Future of foreclosures in NJ hinges on state Supreme Court decision - In the nearly five months since the state Supreme Court effectively allowed six of the country’s biggest banks to begin filing foreclosures again, attorneys and court officials have been expecting a flood of new filings to hit the courts.  Except it hasn’t happened. Foreclosure filings are down 83 percent as of October this year, compared with the same time period last year, according to court figures, and there are at least 100,000 cases either pending in the system or waiting to be submitted. Attorneys involved in the work in New Jersey point to at least one reason for the significant delay: a court case that has reached the state Supreme Court, with oral arguments on Wednesday. The case, US Bank National Association v. Guillaume, is important because the court is asked to determine who must be named as a point of contact on the document that initiates the foreclosure process, known as the Notice of Intent to Foreclose. The state Fair Foreclosure Act requires identifying the lender and its contact information. But because the original lender has often bundled and sold the loans to investors, the current lender lists the servicer, a third party that collects monthly payments and dispurses it to the mortgage holder. In this situation, the lender’s attorney argued it was unnecessary to name his client on the notice because the servicer had been assigned the mortgage rights.

Two-time Losers Flood Foreclosure Inventory - Nearly half, 45 percent, of October foreclosure starts were redefaults-mortgages which had previously defaulted and were modified unsuccessfully either by the lender or the federal government. About 105,000 redefaults increased total foreclosure starts in October to 232,865, 11.5 percent more than the level of a year ago. These double losers are flooding the foreclosure inventory at a time when foreclosure sales are so slow that starts outnumber sales by a factor of three to one. The national foreclosure inventory hit an all-time high at the end of October of 4.29 percent of all active mortgages. Some 3.9 million loans are delinquent 90 days or more or in foreclosure, according to Lender Processing Services’ November Mortgage Monitor. LPS also reported that processing has slowed to point that the average foreclosure takes 632 days to process and sell. The result is a huge inventory of empty homes that is still growing faster than it can be absorbed by the marketplace despite fewer defaults. The very existing of this glut of foreclosed properties, even if they are not yet listed for sale, depresses local home values and delays the housing recovery. Even as overall defaults have declined by about 30 percent, redefaults have increased this year, from about 32 percent of all defaults in January, increasing the foreclosure inventory with modification failures.

U.S. News - Foreclosed homes, empty lots are next 'Occupy' targets: ‘Occupy’ protesters and housing rights activists are planning to help families resist eviction from foreclosed homes and take control of vacant properties in some 25 U.S. cities on Tuesday, an effort aimed at focusing attention on the ongoing housing crisis and giving the movement a new focus after the dismantling of many of its encampments. The protesters have been crafting proposals – often quietly to prevent police from learning about their intentions beforehand -- to defend families facing eviction or return others home. In Minneapolis, for example, they plan to help a Vietnam War veteran stay in his home, in New York, protesters will try to help a family get back into their house, and in Chicago, two sisters and their seven children will be moved into an abandoned single-family home, activists said. "It’s part of a national day of action that we hope will kick off a wave of defenses and home re-occupations,” Max Berger, 26, told the Occupy Wall Street General Assembly late Thursday while requesting $6,400 in funding to buy tools for the project. "This is not just about one event; this is a huge frontier for us. We can do these kinds of actions all the time, and we should. And it doesn’t have to be just us. We got to do this one right so we can inspire people to do it theirselves.”

Occupy Foreclosures and a Chart of Changing Tactical Innovations in Protest Movements - Tomorrow Occupy begins a new front, with a national day of action that involves occupying foreclosed homes.  Occupy Our Homes has created a list events at their site here. Events are taking place in Brooklyn and Rochester New York; Los Angeles, Oakland, San Francisco, San Diego, San Jose, Petaluma and Contra Costa California; Lake Worth, Florida; Atlanta, Fayetteville, and DeKalb Georgia; Chicago, Illinois; Minneapolis, Minnesota; Denver, Colorado; Detroit and Southgate Michigan; St. Louis, Missouri; Portland, Oregon; and Seattle, Washington.  If you aren’t familiar with what foreclosures are doing to neighborhoods across the country, this would be a good place to start.  We’ll have more coverage on the matter during the rest of the week. It looks like the previously successful tactic – occupying public spaces across the nation – is starting to collapse.  Local cities have cracked down on occupations, and that battle looks to be over.  New fronts are opening up though, from universities to foreclosed homes. This is how it is supposed to go.  Economist and friend of the blog Suresh Naidu sent me the following chart, and it’s a good one.  The evolution of different tactics during the civil rights movement, 1955-1962, charted by frequency of occurrences:

UNC director says data supports Occupy Our Homes dismay - The director of a University of North Carolina center said mortgage finance research supports the frustrations shown by the Occupy Our Homes movement. The movement plans a "national day of action" for Tuesday to "stop and reverse foreclosures," according to the movement's Occupy Our Homes website. The site listed events in at least 20 cities that include people refusing to leave foreclosed homes and disrupting foreclosure actions. Roberto Quercia, director of the university's Center for Community Capital, said he saw a chance to provide background to movement, though he declined to say whether he supports it. In a letter on the center's website, Quercia wrote the foreclosure crisis "has created two Americas: one prosperous and hopeful, the other hopeless and debt-burdened." "We did feel that much of the frustrations and stuff we were hearing was backed by analysis and data that we've done," Quercia said in an interview.

Occupy Wall Street on Your Street - Though Americans are fed up with income inequality and generally disgusted by the bad behavior of big banks, the task Occupy Wall Street has chosen isn’t exactly an easy one. Even though public sentiment on economic issues may align with the movement, organizing against something as abstract as finance capital is a challenge. How do you launch a campaign against something that is everywhere and nowhere? For those who don’t live near Lower Manhattan, it’s not obvious what the proper protest target should be. This is why focusing on the mortgage crisis—which a recent study suggests is only half over—is a brilliant next step. “To occupy a house owned by Bank of America is to occupy Wall Street,” said Ryan Acuff, who has been working with Take Back The Land in Rochester, NY doing these kinds of actions since Sept 2010. “We are literally occupying Wall Street in our own communities.” The reclamation of foreclosed homes and defense of individuals facing unfair eviction helps make arcane economic issues like deregulation and securitization, local and personal. Occupy is certainly not the first group to engage in these sorts of actions, which can even be traced back to the squatters movement of the late ’70s and ’80s. But Occupy has the power to bring public attention to this kind of civil disobedience, which has so far gone mostly under the radar. Indeed, the overwhelming positive response to yesterday’s actions in the mainstream media proves this is the case.

Squatters claim more than $8 million worth of Tarrant County properties - While county officials were asleep at the wheel, Tarrant County became a magnet this year for an odd assortment of squatters claiming other people's houses all over the area.  The cast of characters includes a homeowner who scooped up a dead neighbor's house; a woman who came to Fort Worth from Memphis to lay claim to a $2.7 million mansion; people who cited Bible verses as legal justification for taking properties; and career criminals who grabbed homes to lease to tenants.  All told, county records show that squatters and their associates claimed more than $8 million worth of properties, from Grand Prairie, Mansfield and Arlington to Fort Worth, Haslet and Keller, according to a Star-Telegram examination of county documents. Some of the squatters' elaborate schemes have stumped law enforcement officials. One Tarrant constable has even asked the Texas attorney general's office for help in straightening out the mess.  "It's the craziest thing how anyone could be so brazen to just break into a home and start living in it."

Bank Of America Sends Internal Email Exposing Where The "Occupy" Movement Is Hurting It Most - While the general media may be ignoring the latest peculiar twist on the "Occupy" theme, or in this case the "occupyourhomes.org", Bank of America is taking it quote seriously. As a reminder, "Tuesday, December 6th is the National Day of Action to stop and reverse foreclosures. The Occupy Homes movement is holding actions around the country in support of homeowners and people fighting to have a home. Find an event near you and join in our day of action tomorrow!. There are actions happening in over 20 cities nationwide. Events are taking place in Brooklyn, Buffalo and Rochester New York; Los Angeles, Oakland, San Francisco, San Diego, San Jose, Petaluma, Sacramento, Paradise and Contra Costa California; Lake Worth, Florida; Atlanta, Fayetteville, and DeKalb Georgia; Chicago, Illinois; Bloomington, Indiana; Minneapolis, Minnesota; Cleveland, Ohio; Denver, Colorado; Detroit and Southgate Michigan; St. Louis, Missouri; Portland, Oregon; and Seattle, Washington." And if you have not heard about today's protest on the conventional media that is understandable: as BAC says internally, this event "could impact our industry." Here are the specific warnings to BAC "field services" agents: i) Your safety is our primary concern, so do not engage with the protesters; ii) While in neighborhoods, please take notice of vacant BAC Field Services managed homes and ensure they are secured; iii) Remind all parties of the bank’s media policy and report any media incidents.

LPS: House Price Index Shows 1.2 Percent decline in September - Another house price index ... The LPS HPI is a repeat sales index that uses public disclosure by county recorders or loan origination data for purchase loans (if the sales price isn't disclosed).  From LPS: LPS Home Price Index Shows 1.2 Percent Decline in September U.S. Home Prices; Early Data Suggests Further 1.1 Percent Drop in October Likely “Home prices in September were consistent with the seasonal pattern that has been occurring since 2009,” explained Kyle Lundstedt, managing director for LPS Applied Analytics. “Each year, prices have risen in the spring, but revert in autumn to a downward trend that has not only erased the gains, but has led to an average 3.7 percent annual drop in prices to date. The partial data available for October suggests a further approximate decline of 1.1 percent. Partial data from last month proved to be a good indicator for September's performance: it showed a preliminary 1.1 percent estimated decline, compared to the 1.2 percent as shown by the full month’s data.” Figure 1: "Prices have fallen since autumn 2008 with brief interruptions each spring. Except for February of this year, prices have not been at the current level since January 2003."

CoreLogic: House Price Index declined 1.3% in October - Notes: This CoreLogic Home Price Index report is for October. The Case-Shiller index released last week was for September. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of August, September and October (October weighted the most) and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® October Home Price Index Shows Third Consecutive Month-Over-Month Decline CoreLogic ...today released its October Home Price Index (HPI®) which shows that home prices in the U.S. decreased 1.3 percent on a month-over-month basis, the third consecutive monthly decline. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is off 32.0% from the peak - and up just 2.5% from the March 2011 low. Some of this decrease is seasonal (the CoreLogic index is NSA). Month-to-month prices changes will probably remain negative through February or March 2012 - the normal seasonal pattern. It is likely that there will be new post-bubble lows for this index in early 2012.

Michelle Meyer: Home Prices Will Continue To Plunge, And 2013 Will Be The Worst Year For Foreclosures In History: Michelle Meyer, the well-known housing analyst for BofA/ML, has some bad news: The housing crisis isn't over. In fact, in her 2012 outlook piece, she says it's "far from over" and that prices still have another 7% to decline nationally. The basic problem: There are still tons more foreclosures or "liquidations" yet to come. The most crucial input to our forecast for construction and home prices is our assumption for foreclosures. Our securitized products research team estimates another eight million homes will be liquidated over the next four years, which adds to the six million homes that have already been liquidated since 2007. All told, we expect 14 million foreclosures or a quarter of all homeowners with a mortgage. Not only is the wav of foreclosure not close to over, but 2013 will actually be the worst year yet. Why the acceleration in foreclosures? Basically because there's still an abnormally large backlog. Currently, it takes between 25 and 30 months on average for a non-agency mortgage to transition from 60 days delinquent to liquidation, about double the amount of time it took back in 2008. The extended timelines reflect capacity issues with significantly more than normal mortgages in the pipeline, government mandated modification efforts and the nationwide investigation by the state Attorneys General on the foreclosure process. We assume that the latter is resolved in the near term.

Existing Home Inventory declines 17.5% year-over-year in early December - In the near future, the NAR is expected to release revisions for their existing home sales and inventory numbers for the last few years. The sales and inventory revisions will be down (the NAR has pre-announced this). Using the deptofnumbers.com for monthly inventory (54 metro areas), it appears inventory will be below the December 2005 levels this month. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through October (left axis) and an adjusted inventory using the HousingTracker.net data for the last few years. HousingTracker is reporting that inventory in the 54 metro area is down 17.5% from the same week in 2010. If this adjustment is close, existing home inventory is now below the levels of late 2005 - and that is when inventory started rising sharply. This is just "visible inventory" (inventory listed for sales). There is a large percentage of distressed inventory, and various categories of "shadow inventory" too, but visible inventory has clearly declined in many areas. In a previous post, I used this data to estimate the coming NAR downward revision for sales, see: A few comments on the expected NAR existing home sales revisions. Here is a repeat of the table: Here is what the adjustment to the NAR sales would look like using the HousingTracker data (this is NOT the NAR adjustment):

House Prices and Current Account Deficits - Kash -  A new Economic Letter put out by the Federal Reserve Bank of San Francisco, "Asset Price Booms and Current Account Deficits", by Paul Bergin, addresses a subject that I've been thinking a lot about lately. The question is this: is there a systematic relationship between current account deficits and booms in housing prices, and if so, why? The picture to the right (from Bergin's paper) summarizes why many people think that the answer to the first part of that question is yes. So if we believe that there is indeed a causal relationship between house price appreciation and current account deficits, what's the explanation? Bergin mentions a couple of possibilities:

• 1. Rising house prices make consumers wealthier, so they spend more, which causes an increase in imports.
  2. Rising house prices give consumers more collateral against which to borrow, easing credit constraints and allowing more consumption, which causes an increase in imports.
  3. Rising house prices cause a reallocation of an economy's productive resources away from manufacturing and into construction. The country must therefore source more manufactured goods from elsewhere, leading to an increase in imports.

More House Prices and Current Account Deficits - Kash - Continuing to think about the relationship between house prices and the current account deficit, I put together the following chart showing house price changes in the US (measured by the FHFA's house price index) alongside the US's current account deficit over the past 30 years. Even though I was expecting them to be somewhat correlated, I am still surprised by how incredibly closely the two track each other......And given the relatively close coincidence of the two series, the idea that the causation runs both ways between them seems quite plausible to me.

Q3 Flow of Funds: Household Net Worth declines $2.4 Trillion in Q3 -  The Federal Reserve released the Q3 2011 Flow of Funds report today: Flow of Funds.  The Fed estimated that household net worth declined $2.4 trillion in Q3. Household net worth peaked at $66.8 trillion in Q2 2007, and then net worth fell to $50.4 trillion in Q1 2009 (a loss of $16.4 trillion). Household net worth was at $57.4 trillion in Q3 2011 (up $7.0 trillion from the trough, but down $2.4 trillion in Q3). The Fed estimated that the value of household real estate fell $98 billion to $16.1 trillion in Q3 2011. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011. This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. This ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.  In Q3 2011, household percent equity (of household real estate) was at 38.7% - about the same as in Q2. The third graph shows household real estate assets and mortgage debt as a percent of GDP.  Mortgage debt declined by $54 billion in Q3. Mortgage debt has now declined by $730 billion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

Americans Got Much Poorer Last Quarter - Americans got much poorer last quarter, as their collective household net worth suffered the biggest decline in three years. The total net worth of American households and nonprofit groups fell by $2.4 trillion in the third quarter of this year, according to a new report from the Federal Reserve. That was a decline of 4.1 percent compared with the second quarter. Wealth declined primarily because the financial markets did poorly. Americans saw big drops in the value of their assets like corporate equities (stocks), corporate and foreign bonds, mutual fund shares and pension fund reserves. Household real estate assets also suffered, falling in value by $98.3 billion (0.6 percent) from the previous quarter, in nonseasonally-adjusted terms. Partially offsetting the decline in assets was a smaller decline in household liabilities as families continued to cut back on debt, with the decline in mortgage debt more than offsetting the increase in consumer credit. Don’t break out the Champagne just yet, though. Total debt for the United States — that is, also including corporate and government debt — hit another all-time high because government borrowing is still outpacing the rate at which households shed debt.

US household wealth takes biggest hit since 2008 - Americans' wealth last summer suffered its biggest quarterly loss in more than two years as stocks, pension funds and home values lost value. At the same time, corporations increased their cash stockpiles to record levels. Household net worth fell 4 percent to $57.4 trillion in the July-September quarter, according to a Federal Reserve report released Thursday. It was the sharpest drop since the October-December quarter of 2008 and was the second straight quarterly decline. The value of Americans' stock portfolios fell 5.2 percent last quarter. Home values dropped 0.6 percent. Lower net worth can hurt the economy. When people feel poorer, they spend less. That slows growth. Businesses typically then cut back on hiring and expansion.

U.S. Consumers Take on More Debt - U.S. consumer credit increased in October, an indication that Americans are taking on debt to pay for goods and services while prices rise faster than wages. Consumer credit increased by $7.65 billion to $2.457 trillion, the Federal Reserve said Wednesday. Economists surveyed by Dow Jones Newswires had forecast a $6.5 billion expansion in consumer credit. September’s figure was revised down to a $6.88 billion increase from the originally reported $7.39 billion. October’s rise was driven by an increase in nonrevolving credit, which includes student loans, perhaps suggesting that more people are returning to school as unemployment remains high. Total nonrevolving credit, which also includes car loans, rose $7.28 billion in October to $1.665 trillion. The Fed report said revolving credit, which includes credit-card debt, expanded by a more modest $366.2 million to $792.34 billion. The consumer-credit report doesn’t include numbers on home mortgages and other real-estate secured loans. But the data are important for the clues to behavior by consumers.

Consumer Sentiment Improves to Best Level Since June - Consumers’ view on the economy moved to its best level since June in mid-December. The preliminary Reuters/University of Michigan consumer sentiment index for December stood at 67.7 from 64.1 in November. It was expected by analysts to come in at 66.0, and it will be revised at the end of the month. The preliminary December current conditions index was 77.9, up from 77.6, while the expectations index was 61.1, up from 55.4. Expectations of future prices softened a bit. The one year inflation reading was 3.1%, down from 3.2% in November, while the five-year reading held steady at 2.7%. With the high state of anxiety surrounding the U.S. and European outlook, consumer confidence indexes have been getting considerable attention. However, many economists and policy makers put fairly low weighting on such surveys, and prefer to watch hard data on consumer spending, given its tangible contribution to overall growth.

Retailers report strong sales for November - Retailers reported strong sales gains in November, boosted by a discount-fueled buying binge for the start of the holiday shopping season last weekend. Now, the challenge is to keep shoppers spending throughout the most important selling period of the year. Several retailers including Macy's Inc., Costco Wholesale Corp., Limited Brands Inc. and teen retailer Buckle Inc. reported sales gains Thursday that beat Wall Street estimates. The reports are encouraging news for retailers during the all-important holiday shopping season when they can make up to 40 percent of their revenue. To draw people into stores during the kickoff to the season last weekend, many retailers discounted heavily and opened stores at midnight on Thanksgiving evening. “Retailers pulled out all the stops over Black Friday, which fueled record holiday weekend sales and drove solid November growth,”

November retail sales grow less than in 2010 – November posted 3.2% retail sales growth, vs. a 5.5% gain last year, research firm Retail Metrics reported Thursday. Despite record sales through Black Friday weekend, Retail Metrics President Ken Perkins says the year's biggest shopping weekend was preceded by a dry spell. "Black Friday itself was a success," he says. "The numbers were particularly strong, but the rest of November there was a bit of a lull." However, with retailers such as Walmart and most online sales data not included, Perkins says the data may not be fully representative of how the month truly went. "The numbers might even be stronger if you did have online numbers, given the strength of what we saw for both Black Friday and Cyber Monday online," he says. Cyber Monday saw sales growth of 33%, according to IBM Smarter Commerce. And the overall data released for November represent only 9% of total retailers, Johnson also adds that November accounts for less than half of holiday sales. Still, almost 60% of the 24 retailers included in the data exceeded expectations, with department stores Saks and Nordstrom up 9.3% and 5.6%, respectively.

Black Friday Gun Sales Break Records - Even as Joe Sixpack was maxing out that last credit card on useless gadgets (but not flat screen TVs as Corning was so nice to warn), he was making sure to have enough in store for that one final Plan Z purchase. Guns. As KNDU reports, "Gun dealers flooded the FBI with background check requests from shoppers,  smashing the single day record with a 32% increase from last year." USA Today has more: "Deputy Assistant FBI Director Jerry Pender said the checks, required by federal law, surged to 129,166 during the day, far surpassing the previous high of 97,848 on Black Friday of 2008." And in reality, the number is likely far greater: "The actual number of firearms sold last Friday is likely higher because multiple firearms can be included in a transaction by a single buyer. And the FBI does not track actual gun sales." And while Saudi Arabia is warning that women driving leads to the end of the world, in America women are now the marginal guy buyer: "Some gun industry analysts attributed the unusual surge to a convergence of factors, including an increasing number of first-time buyers seeking firearms for protection and women who are being drawn to sport shooting and hunting. Larry Keane, a spokesman for the National Shooting Sports Foundation, said 25% of the purchases typically involve first-time buyers, many of them women. "

Mystery Company Is Rapidly Acquiring U.S. Gun and Ammo Manufacturers - Reports that a mysterious company has been buying up U.S. gun manufacturers have been popping up on the internet for several months. When we first learned of the possibility that a single company was rapidly acquiring companies like Bushmaster, Remington, and Marlin Firearms we immediately suspected that something was amiss. Apparently, we were not alone, because others were thinking the same thing. One rumor that popped up was that global financier George Soros, historically an anti-gun advocate, was behind the moves, and that he was positioning the gun industry to reduce pro-gun lobbying efforts. This prompted the National Rifle Association to step in to assure American gun owners that this wasn’t a behind the scenes coup.  While Soros may not be involved, the New York Times identified the company making the acquisitions as an obscure organization known as The Freedom Group, which is managed by multi-billion dollar investment firm Cerberus Capital Management:

Paychecks May Be A Bit Fatter Than We Think - One puzzle of the recent gain in consumer spending — including the solid start to holiday shopping — was how were consumers financing the purchases. A popular explanation was that shoppers were drawing down their savings. The drop in the saving rate, to 3.8% in the third quarter from 5.6% a year earlier, supports the idea that consumers are using up their seed corn to put a iPad under the tree. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, has another idea. He argues the saving rate as reported by the Bureau of Economic Analysis understates income and how much households are really socking away. If correct, the idea is important for the outlook. Consumers have lost two sources of financing that kept spending afloat pre-recession: home equity and easy credit. Future gains in consumer spending — a linchpin for overall economic growth — will depend on better income growth coming at a time when households are still rebuilding their finances. More income would also explain why the sentiment surveys have shown consumers are disgusted about economic policy coming out of Washington but continue to spend.

Big-Box Superstores As Bellwether Indicators (podcast) If you really want to understand the U.S. retail industry, there are three stores whose aisles you should browse. Walmart. Obviously. Along with Amazon and Costco. This according to Jeff Weidauer at Vestcom International. It's a marketing company for the retail industry. Weidauer says Costco's 596 stores are a great indicator of where lots of different products are likely to see growth.

Wholesale Inventories Rose 1.6% in October - U.S. wholesale inventories rose in October, an indication that companies expected strong sales heading into the key holiday shopping season. The inventories of U.S. wholesalers increased by 1.6% to a seasonally adjusted $470.18 billion, the Commerce Department said Thursday. September’s revised figure showed inventories were flat. Initially, inventories were seen down 0.1% from the prior month. Economists surveyed by Dow Jones Newswires had forecast a 0.5% increase in overall wholesale inventories for October. Sales of wholesalers, meanwhile, rose 0.9% to $406.00 billion. Wholesalers hold about 30% of all business inventories in the U.S., with manufacturers and retailers making up the rest. With an uncertain economy, companies haven’t been stocking up on goods. Still, Americans have been feeling a bit more confident about the economy. And consumers spent $52.4 billion over the four-day Thanksgiving Day weekend, the highest total ever recorded during the traditional start to the holiday shopping season, according to the National Retail Federation. The average shopper spent a record $398.62, up from $365.34 a year ago, the NRF said. Retailers count on the holiday shopping season for as much as 40% of their annual sales.

Exclusive: Many Americans already done with holiday shopping Reuters: (Reuters) - More than a third of U.S. shoppers are already done with most of their holiday shopping, a survey showed on Monday, signaling that retailers need to offer bigger incentives to win sales in the few weeks before Christmas. The findings underscore the fragility of the U.S. recovery, since consumer spending accounts for about 70 percent of the nation's economy. About 32 percent of people surveyed by America's Research Group said they finished a majority of their Christmas shopping in November. Last month included Black Friday, the day after Thanksgiving when stores pulled out all the stops on discounts to woo shoppers during their biggest season of the year. More than 6 percent completed most of their holiday shopping in the first weekend of December. The questions were asked exclusively for Reuters as part of a larger America's Research Group survey. "There is very little retailers can do unless they really have some incredible sales that force that consumer to reconsider if they want ... to make an extra purchase now,"

AAR: Rail Traffic increased in November - The Association of American Railroads (AAR) reports carload traffic in November increased 2.3 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 3.8 percent compared with November 2010. The Association of American Railroads (AAR) today reported gains in November 2011 rail traffic compared with the same month last year, with U.S. railroads originating 1,476,635 carloads, up 2.3 percent, and 1,162,249 trailers and containers, up 3.8 percent. November 2011 saw the largest year-over-year percentage increase in carload traffic since March 2011. On a seasonally adjusted basis, carloads in November were up 0.9% from last month, and intermodal in Novmeber was up 0.8% from October.This graph shows U.S. average weekly rail carloads (NSA). Rail carload traffic collapsed in November 2008, and now, over 2 years into the recovery, carload traffic is about half way back to the pre-recession levels. The second graph is for intermodal traffic (using intermodal or shipping containers): Graphs reprinted with permission. Intermodal traffic is close to the peak year in 2006. Usually October is the strongest month for intermodal shipping as retailers stock up for the holiday season. That was true again this year, but shipping held up pretty well in November too.

US Petroleum and Gasoline Usage Plunges Last 5 Weeks Compared to Prior Years - Here is a set of charts from reader Tim Wallace on Gasoline and Petroleum usage vs. the same five weeks in prior years. Explanations from Wallace follow each chart. click on any chart for sharper image Petroleum usage history for the past 6 years for this 5 week snapshot - you can see the drop from '06 to '07 was small but I caught that trend in Oct of '07 and got out of the market. My experience suggests that if petroleum does not grow at least 0.8% year on year the economy is headed recessionary. Notice the plunge of '08 into the abyss of '09. We see a good improvement in 2010, not anywhere near the recovery we need as we were in an abyss, but it shows improvement. This year, we see another significant downturn, reflective of a stalled at-bet economy. Gasoline usage history shows a small rise in '07, then a plunge in '08. Usage level for the next two years was flat, followed by a huge plunge now. I did not expect this plunge because gasoline is a lot less volatile in my historical analysis than the overall distillates, some of which are weather related, such as heating oil. It raises the question, why have people stopping driving, because that is what is happening.

How America Started Selling Cars Again - When President Obama’s automobile task force was mulling a menu of seemingly bad options on how to save the car industry in 2008, one of its earliest assumptions was that Chrysler was deader than a Rambler. In Time’s cover story this week, (available to subscribers here) you can find out why Obama’s decision to sell a very used automobile company to Italy’s Fiat has proved to be a good deal for both parties. After some intense negotiations, auto czar Steven Rattner was persuaded by Fiat CEO Sergio Marchionne to hand over the keys to Chrysler, and throw in some $5 billion in loans. The payoff? Chrysler is surging, the government got its money back, with interest, and more than 40,000 jobs have been preserved. Indeed, Chrysler is doing so well this year, with sales up 20%, that it is investing $500 million in its Toledo, Ohio plant to build more Jeeps and add 1,100 jobs. It’s one of the great turnaround stories to come out of the financial meltdown, and certainly an argument that government bailouts aren’t necessarily a losing proposition, given the right circumstances

ISM Non-Manufacturing Index indicates slower expansion in November - The November ISM Non-manufacturing index was at 52.0%, down from 52.9% in October. The employment index decreased in November to 48.9%, down from 53.3% in October. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: November 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in November for the 24th consecutive month, say the nation's purchasing and supply executives. "The NMI registered 52 percent in November, 0.9 percentage point lower than the 52.9 percent registered in October, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. This is the lowest reading since January 2010, when the index registered 50.7 percent. The Non-Manufacturing Business Activity Index increased 2.4 percentage points to 56.2 percent, reflecting growth for the 28th consecutive month. The New Orders Index increased by 0.6 percentage point to 53 percent. The Employment Index decreased 4.4 percentage points to 48.9 percent, indicating contraction in employment after one month of growth. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

Trade Deficit declines in October - The Department of Commerce reports:  [T]otal October exports of $179.2 billion and imports of $222.6 billion resulted in a goods and services deficit of $43.5 billion, down from $44.2 billion in September, revised. October exports were $1.5 billion less than September exports of $180.6 billion. October imports were $2.2 billion less than September imports of $224.8 billion. The trade deficit was at the consensus forecast of $43.5 billion. The first graph shows the monthly U.S. exports and imports in dollars through October 2011.Both exports and imports decreased in October. Imports have been mostly moving sideways for the past six months (seasonally adjusted). Exports are well above the pre-recession peak and up 12% compared to October 2010; imports have stalled recently but are still up about 11% compared to October 2010. The second graph shows the U.S. trade deficit, with and without petroleum, through October. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $98.84 per barrel in October, and import oil prices have been declining slowly from $108.70 per barrel in May. The trade deficit with China was unchanged at $28 billion.

Searching for Clues of European Woes in U.S. Trade Data - Europe’s increasingly difficult economic predicament has yet to have a quantifiable impact on U.S. trade data, but that doesn’t mean economists are any less anxious about what could happen over coming months. It’s a hard problem for analysts to quantify. Amid widespread predictions the European Union is now or will soon be in a broad-based contraction in activity due to the government debt crisis, there are fears the U.S. could be pulled down, too. Growth levels in the U.S. are low enough there’s little margin for error, and while recent data has been more positive, economists and policymakers all agree European developments are the number one risk for the U.S. There are two main ways for the crisis to strike at the U.S.: international trade, and via financial markets turbulence. Thus far, the former factor has yet to head south. A government report Friday said the U.S. trade gap with the rest of the world contracted to a still high $43.47 billion, from $44.17 billion in September. The relative level of improvement was largely due a modest contraction in exports that was outweighed a bigger drop in imports.The U.S. trade exposure to Europe is significant, but not huge, relative to what America books with the likes of neighbors Canada and Mexico, and its massive shortfall with China.

US Employment Data: Stronger November Report Shows Economy Struggling to Resist Global Weakness - The latest employment report from the Bureau of Labor Statistics shows stronger, but still moderate, job growth for November. The unemployment rate fell to 8.6 percent, its lowest since March 2009. On the whole, the report shows a U.S. economy struggling to resist being dragged down by even weaker economies in Europe and Japan, and by a still strong but slowing China. The economy added 120,000 payroll jobs in November. At the same time, figures for the previous four months were revised upward by a total of 114,000. Service jobs, led by retail trade, accounted for all the gains. Producers of goods lost 6,000 jobs and government lost another 20,000, continuing a steady decline. Local governments shed the most jobs last month, The unemployment rate, which dropped to 8.6 percent in November, is the ratio of unemployed persons to the labor force. The labor force, in turn, includes both employed and unemployed persons. The number of unemployed decreased by 594,000 in November, of which 279,000 found jobs and 315,000 withdrew from the labor force.  U-6 fell to to 15.6 percent in November. As with the official unemployment rate, that was the lowest level since March 2009.

The Unemployment Rate Drops, but Economists Aren't Smiling - The U.S. unemployment rate lurched downward in November to 8.6 percent, from 9 percent in October. That’s the lowest level since March 2009, and it emboldened some optimists to predict the U.S. could be back near full employment within a couple of years. Pessimists, on the other hand, say the jobless rate will rise between now and 2013. The consensus view is pretty bearish, too. The median forecast of economists is for scarcely any decrease in the unemployment rate over the next two years. Economists disagree on the job question because they entertain different scenarios for the factors that affect it. Those include the underlying health of the U.S. economy, spillover from Europe’s financial crisis, fiscal policy in Washington, and swings in the labor-force participation rate. James F. Smith, the chief economist of Parsec Financial Management, thinks the jobless rate will average 7.8 percent in 2012 and 6.4 percent in 2013..At the darker end of the range is John E. Silvia, chief economist of Wells Fargo Securities in Charlotte. He predicts a jobless rate of 9.2 percent in 2012 and 9 percent in 2013. Although he favors more fiscal rectitude in Washington, he’s concerned that the short-run effect of deficit reduction will be to suppress demand and thus growth. Worse for workers, Silvia says, companies are getting better at expanding output without hiring.

Invisible Americans: The Overlooked Millions Inside Those Job Numbers - Some politicians are saying that the latest unemployment report is good news, but it's not. It shows us that this country is still in crisis. It shows us that the government needs to act quickly and aggressively to create jobs, and to restore the lost earning power of the average American who has a job. Most of all it shows us that millions of struggling people are still invisible in the Nation's Capitol. This week the Occupy movement is holding a series of "Take Back the Capitol" events in Washington. Let's hope it shines some light on the country's unemployed, under-employed, and under-earning millions. Until now, they've been pretty much invisible in that town. The Invisible Americans are all around you. They're in your state, in your community, maybe in your family. They're right there in the jobs report, for anyone with the eyes - and the willingness - to find them. While some celebrated an unemployment rate of "only" 8.6 percent, half that change was explained by the fact that 315,000 people dropped out of the labor force. Job creation barely kept pace with the entry of new people into the workforce. Those 315,000 people join the 5.7 million people officially classified as long-term unemployed. That number is at historically high levels, representing nearly half (43 percent) of all the jobless people in this country.

Who’s Dropping Out of the Labor Force (4 graphs) Labor force participation has declined the most high school graduates and those with some college. It has actually risen for high school drop outs. Compare that to the dynamics of the unemployment rate for these groups. Relatively speaking unemployment grew the least for high school dropouts and may be declining the fastest, though the series is very volatile. Lasting looking at employment itself. Here you get the exact opposite effect. The number of employed college graduates has grown while the number of employed high school dropout has shrank. My off the cuff interpretation was that the economy was shifting towards more and more employment of educated workers, but the growth rate of this shift slowed down. But that doesn’t seem to be the case What that would suggest are shifts in the labor pool. The United States is becoming more educated faster than the economy would absorb educated workers. Though of course this doesn’t comport with our general sense of the evolution of the economy.

Employed Women, Dropping Out of the Labor Force - In Friday’s jobs report coverage, we noted that the unemployment rate fell partly because 325,000 people dropped out of the labor force — that is, they were not even looking for work. Closer analysis reveals that the entirety of that decline was due to the departure of women — and particularly employed women — from the labor force. In the month of February, the number of men in the labor force (working or actively looking) rose by about 23,000. By contrast, the number of women in the labor force fell by 339,000. (The numbers do not add to a 325,000 net loss because of rounding.) Even more peculiar is what these lost female workers did before they dropped out. Typically when we think of workers dropping out of the labor market these days, we think of workers who have been unemployed for a while and have simply given up looking for a job. But last month, almost all of the net loss of women from the labor force was accounted for by women who had jobs right before they dropped out. Here is a pie chart for the 3,893,000 women who left the labor force in November — the gross number, so not subtracting those who newly entered the job market — sorted by how those women were categorized the month before:

More on Labor Force Dropouts - On Tuesday I wrote about how the entirety of the net decline in the labor force last month could be explained by women dropping out. I also puzzled over why a majority of women who left the labor force happened to have been employed before they opted out, because the stereotypical labor force dropout is usually an unemployed worker who got discouraged and gave up looking for a new job. Since then I’ve dug into the history of labor force dropouts and what workers usually do right before they leave the labor force. As it turns out, November’s breakdown was not terribly unusual; a majority of women who leave the labor force each month are usually coming directly from a job (perhaps because they’re retiring, going on maternity leave or are laid off and not seeking re-employment): Note, however, that the number of women who leave the labor force directly from a job has actually fallen in the last few years, while the number of women leaving the labor force after having been recently unemployed has risen. This supports the discouraged-worker explanation of recent trends. The same is true for men. As with female dropouts, typically most of the men who leave the labor force each month have been leaving directly after holding a job:

Comments on the Employment-Population Ratio - Yesterday someone sent me a column from John Mauldin that had the following graph. The graph shows the BLS Employment-population ratio, 16 years and older, and based on the trend, the author is expecting the employment-population ratio to rise to 65% in 2020. I think this forecast is incorrect - and this gives me a chance to discuss the participation rate and employment-population ratio. The employment-population ratio really increased in the '70s and '80s for two reasons: 1) favorable demographics as the baby boom generation moved into their prime working years, and 2) a rising participation rate for women. But that trend was about to change even if there hadn't been a severe recession. Some definitions:

• Participation Rate = Labor force / Civilian noninstitutional population
• Employment-population ratio = Employed / Civilian noninstitutional population
• Unemployment Rate = Unemployed / Labor Force

If we know the participation rate and the unemployment rate, we can calculate the employment-population ratio as follows: Employment-population ratio = participation rate * (1 - unemployment rate). This means that if the unemployment rate stayed steady, the employment-population ratio would follow the participation rate. This is important because the participation rate is impacted by changes in demographics - and we can forecast some of those changes.

Labor Force Participation Rate by Age Group - As the economy slowly recovers, an important question is: What will happen to the participation rate over the next few years?  On Sunday I pointed out that demographers expected the participation rate to start declining even before the great recession started. The expected gradual decline was due to the aging of the overall population.Note: The participation rate is the percentage of the working age population in the labor force.  One difficultly in projecting the participation rate is that the age group participation rates change over time. The participation rate for the '16 to 19' age group has been declining for some time, and the participation rate has been increasing for older age groups - perhaps because of necessity, perhaps because of fewer "back breaking" jobs. Here is a graph showing the trends by age group since 1990. The participation rate is low for those in the '16 to 19' age group. The rate increases sharply for those in the '20 to 24' age group, and the rate is at its peak from 25 to 49 - and drops off a little for the '50 to 54' age group. After 55 workers start leaving the labor force, and the participation rate falls off with age.

Labor Force Participation Rate: The Kids are Alright - On Sunday I posted Comments on the Employment-Population Ratio with a follow up yesterday: Labor Force Participation Rate by Age Group. Some people have wondered why the participation rate has been declining for the younger age groups.  First below is a repeat of the graph from yesterday showing the trends by age group since 1990. Note: The participation rate is the percentage of the working age population in the labor force.  Some of the recent decline in the participation rate for the '20 to 24' age group is probably related to the recession.  But probably the main reason for the decline in the participation rate for the younger age groups is that more people are pursuing higher education. The decline in age-16-19 and age-20-24 labor force participation is the mirror image of the increase in school enrollment rates for those age groups. The decline in labor force participation for ages 16-24 might be partly due to a short term “bad news” story about discouraged workers, but it is mainly due to a longer term “great news” story about ongoing gains in school enrollment and academic attainment. This graph uses data from the BLS on participation rate, and the National Center for Education Statistics (NCES) on enrollment rates.This graph shows the participation and enrollment rates for the 18 to 19 year old age group. These two lines are a "mirror image".

Gallup Finds Recent Job Boost Due To "Temp And Part-Time" Hiring; Underemployment Greater Than Prior Year - While the BLS unemployment number, fudged strategically to lower the denominator, or the total labor force, may have come well better than expected (as somehow miraculously ever more people find the shadow economy a more hospitable place where to make their money and drop off the BLS roll forever) we once again go to that trusty fallback, the monthly Gallup poll of underemployment. What we find here is rather different from what the BLS, and the administration would like us to believe, namely that "underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, is 18.1% in November, as measured by Gallup without seasonal adjustment. That is up from 17.8% a month ago and 17.2% a year ago." Said simply, "many employers appear to have chosen to hire part-time rather than full-time employees for this holiday season." Naturally, this should come as no surprise: it was first discussed here in May, when we said: "As the attached chart shows, since the start of the depression, America has lost 9.1 million full time jobs, offsetting this by a gain of 2.3 million part time jobs. No need to outsource to Asia any more: America now outsources jobs to temp agencies. And so the transition of America into a part-time worker society, first discussed in December of 2010 continues." (the attached chart can be seen here).

Vital Signs: Demand for Temp Help Cools - Demand for temporary help is cooling. An index of temporary and contract employment, based on a survey of staffing firms, was 1.1% below its year-earlier level for the week ended Nov. 27. Temporary employment often is viewed as a good gauge of the labor market’s overall health, but it can slip when employers sign temporary workers on to permanent positions.

Temporary and Contract Employment in Contraction Every Week vs. Same Week Year Ago Since Mid-August - The Wall Street Journal reports Demand for Temp Help Cools Demand for temporary help is cooling. An index of temporary and contract employment, based on a survey of staffing firms, was 1.1% below its year-earlier level for the week ended Nov. 27.. To put the above chart in better context, here is a chart of ASA Temporary and Contract Employment Index by the American Staffing Association since 2006. Since week 33 (mid-August), demand for temporary and contract help is below where it was for the same week in 2010. Although 2011 is substantially better than 2008 and 2009, it is now lagging 2010 and considerably lagging 2006 and 2007. With the labor force dropping y-o-y by 67,000 vs. an expected increase of 1.5 million (125,000 per month), (see Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force) it is hard to believe this decline is due to employers signing temporary workers on to permanent positions. Instead, consider the possibility employers are slowly dumping temps and contract workers, and permanent employees may be next.

Demographic Shift?, by Tim Duy: Bloomberg appears to attribute the drop in the labor force participation rate to retiring baby-boomers: The drop in U.S. unemployment so far this year may be an early glimpse of what’s to come as the workforce ages... ...At play is a decline in the share of the working-age population, known as the participation rate, meaning that the economy needs to create fewer jobs to bring down unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labor force, another driver is that the baby-boom generation is starting to move into retirement, according to economist Dean Maki. “Demographic forces are the single biggest factor pushing the participation rate down,” said Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former economist at the Federal Reserve. “This is a bit of a slow-moving drama but it’s likely to become more important in coming years.” I think it is important to focus on the "slow-moving drama" part, otherwise the problem with this story is the facts. Labor force participation rates of the 65 and older group:

The Recession Was Sexist (So Is the Recovery) - The Great Recession was hell on everybody, but it was a particularly hellish time for men. The housing collapse and financial crisis tag-teamed to gut industries like construction and manufacturing that had been traditional bastions of male employment for decades. Women reached nearly 50% of the work force. And many have wondered whether the Y chromosome is about to become a permanent economic liability. The Atlantic's own Hanna Rosin captured the question brilliantly in her piece, "The End of Men."  But there's also a less talked about story about gender and the recession. Men may have fallen harder. But during the country's sluggish recovery, they bounced back faster. And in the current rickety job market, women may be facing the tougher road ahead.  A chart from the Institute for Women's Policy Research illustrates the disparity between job gains for men and women since the economy began to turn around. The data is drawn from the Bureau of Labor Statistics' payroll survey.

A Four Year Milestone for U.S. Jobs - Four years ago, the number of employed Americans peaked at 146,584,000 in November 2007, just ahead of the U.S. economy itself peaking in December 2007, which marked the starting point for the nation's most recent economic recession.  Through November 2011, four years later, the number of employed Americans has fallen to 140,480,000. Just over six million fewer Americans are working today than were four years ago.  Overall, the jobs situation in November 2011 brightened for most Americans from October 2011, especially for those Age 25 and older, whose numbers in the U.S. workforce grew by 405,000 during the month.  Young adults however were on the losing side of the employment picture however, as 145,000 fewer individuals between the ages of 20 and 24 were counted as being employed than were in October 2011. That's disappointing because young adults had been seeing the largest gains in the number of employed in each month since July 2011, at least, until now.  Meanwhile, the employment situation of American teens continued to improve very slowly, as only 18,000 additional individuals between the ages of 16 and 19 were counted as having jobs in November 2011.

Jobless Claims Drop To 9-Month Low - The numbers speak loud and clear in today’s weekly update of new jobless claims. New filings for unemployment benefits dropped a hefty 23,000 to a seasonally adjusted 381,000 last week. That’s just what's needed at this juncture to keep hope cyclical optimism alive and humming.  Indeed, this is the biggest weekly drop in new filings since late September. That brings the total of new claims down to the the lowest level since late-February. It could all evaporate next week and beyond, of course, but here and now the numbers look quite compelling. And momentum counts for something. Fortunately, it seems to be in our favor for this series. The four-week moving average is clearly falling right along with the weekly numbers. Inevitably we’ll see some reversal in the weeks ahead. These numbers bounce around more than most. But if the trend can at least hold its ground if not make further improvements through the end of the year and in early 2012, it’s going to get a lot rougher to argue that a new recession is coming. Yes, we’ll need to see some confirmation in other economic reports, but the revival in growth momentum that’s been conspicuous in a number of data series just received a strong vote of support with today’s claims update.

Democrats and G.O.P. Seize on Competing Narratives - The drop in the unemployment rate last month opens up a new front in the presidential campaign, with the White House getting a first big opportunity to define an improving trend in the economy and Republicans emphasizing that conditions still remain unacceptably bad.  Within minutes of the government’s announcement that the jobless rate had declined to 8.6 percent in November from 9 percent a month earlier, Mitt Romney blasted out a statement noting that unemployment had remained above 8 percent throughout the 34 months of President Obamas tenure in office, “the longest such spell since the Great Depression.” Making no mention that the jobless rate is now down 1.5 percentage points from its peak two years ago, Mr. Romney added: “The Obama administration may have come to accept such a high level of joblessness as the new normal. I will never accept it.”  A few hours later, the president cited the growth in jobs without ever mentioning the level of unemployment. “Despite some strong headwinds this year, the American economy has now created, in the private sector, jobs for the past 21 months in a row,” Mr. Obama said

Experts struggle to express direness of infrastructure problem to a wary public - Despite dire warnings that a cancer is eating away the networks that carry people from place to place and goods to market, there is little urgency among the American people or political will in tight times on Capitol Hill to address the issue. Faced with that grim assessment, an elite group of transportation experts that gathered in Washington last week did not pause to ponder the calamity they foresee if the public fails to grasp hold of the need. They had done that a year earlier in a report that was a landmark for depth, scope and bipartisanship. More than 80 transportation experts joined in the conclusion that the federal government needed to spend upward of $60 billion more a year just to maintain the current systems and at least $85 billion more annually on expansion to accommodate a population that has more than doubled since the interstate highway system was begun 60 years ago. Already sobered by the reality that, at the very best, Congress might vote to keep funding at current levels — roughly $54 billion a year — the career transportation experts received another dose of bad news last week.  Americans don’t trust their leaders — notably Congress — to spend transportation tax dollars wisely and are deaf to appeals for additional spending. “The overwhelming sense that this thing has become a scam is very compelling,”

Supply Chains and the Future of Globalization in the Wake of the Tōhoku Earthquake and Tsunami - I was sitting in a briefing recently, where I heard how US GDP would be measurably affected by the floods in Thailand –- specifically through the shutdown of production of key auto parts. [0] That reminded me of the supply-chain-propagated impact of events nine months earlier, following the earthquake and tsunami in Japan. Here’s the trade-related part of the assessment from my colleague Isao Kamata’s article in the La Follette Policy Report, “The Great East Japan Earthquake: A View on Its Implication for Japan’s Economy”: I had wondered whether this event would spur a reversal of the development of supply chains. [1] It’s too early for a quantitative assessment, but clearly managers are thinking hard about this issue, particularly in regard to China. From FM Global Supply Chain Risk Study: China and Natural Disasters – A Case for Business Resilience: Nearly nine in 10 companies surveyed (86 percent) are more reliant on China as part of their supply chain for their key product lines than they are on Japan (43 percent). Figure 1 illustrates the differential response.

Quote of the day - KARL SMITH:[T]his is what a functioning market does when you have spent beyond your means or you’re not as rich as you thought you were.You produce things that get to be consumed by other people. You don’t shutter factories and send your workers home to eat Cheetos and watch the Real Housewives. So why might workers sit at home wasting away their time? It could be that the economy has spent beyond its means (as through having run sustained current account deficits) and must adjust, but the adjustment is impaired (as through fixed exchange rates and wage rigidities). Or it could be that no adjustment is needed, but that the central bank has allowed a drop in expectations to translate into reduced nominal spending. But you certainly don't make good on old obligations by sending millions of productive workers home to do nothing.

There Will Be Inflation, The Real World Is Nominal - Via Suzy Khimm here is a chart on labor’s share of corporate value added. It’s declining and quite frankly when I look out in the world I see pressure for it to decline further. This means that real wages must fall. However, for real wages to fall inflation needs to rise. This is part of the problem that the developed world is facing generally. In addition, this is why folks will be shocked when inflation begins to rise significantly before wages do. The are implicitly assuming this relationship will be stable but it will not be. Inflation will go into supporting ever higher corporate profits. However, that dynamic is a real dynamic. Stopping it by tightening monetary policy will only spread the suffering and cause more unemployment and slower growth.

I signed a letter to the POTUS - More than 100 economists and academics in related fields from across the country today sent a letter to President Obama urging him to “create jobs and support businesses by investing in our public lands infrastructure and establishing new protected areas such as parks, wilderness, and monuments.” The letter, which includes three Nobel laureates, states that federal protected public lands are essential to the West’s economic future, attracting innovative companies and workers, and contributing a vital component of the region’s competitive advantage. Watch a short video of Dr. Ray Rasker discussing the letter to President Obama Letter to the President and Signers. News Release. Summary of Analysis on Economic Impact of Protected Lands

Facing bankruptcy, US Postal Service plans unprecedented cuts to first-class mail next spring -Already mocked by some as "snail mail," first-class U.S. mail will slow even more by next spring under plans by the cash-strapped U.S. Postal Service to eliminate more than 250 processing centers. Nearly 30,000 workers would be laid off, too, as the post office struggles to respond to a shift to online communication and bill payments. The cuts are part of $3 billion in reductions aimed at helping the agency avert bankruptcy next year. They would virtually eliminate the chance for stamped letters to arrive the next day, a change in first-class delivery standards that have been in place since 1971. The plan technically must await an advisory opinion from the independent Postal Regulatory Commission, slated for next March. But that opinion is nonbinding, and only substantial pressure from Congress, the business community or the public might deter far-reaching cuts. Many postal customers could be upset.

Next-Day Mail Faces Postal Service Cuts - The United States Postal Service said on Monday that it would reduce service to cut costs in a move it said could largely eliminate the chance of next-day delivery for stamped letters. Delivery delays will result from the postal service’s decision to shut about half of its 487 mail processing centers across the nation. This would cause the postal service to reduce delivery standards for first-class mail for the first time in 40 years, substantially increasing the distance that mail travails between post offices and processing centers. Current standards call for delivering first-class mail in one to three days within the continental United States. Under the planned cutbacks, those delivery times would increase to two or three days, potentially creating problems for companies like Netflix that rely heavily on next-day delivery.

The Case for Active Labor Market Policies - Government policies toward unemployment fall into two categories: passive and active. Passive policies are those like unemployment benefits or early retirement. They tide over the affected workers until the next job, or until retirement, but accomplish little else. Active policies are those like government support for job training, job search, incentives for private firms to hire, or even direct job creation. The U.S. spends less of either kinds of labor market policy than most developed economies. Here, I'll draw on a recent essay by Jun Nie and Ethan Struby from the Kansas City Fed: "Would Active Labor Market Policies Help Combat High U.S. Unemployment?" Let's set the stage with some basic facts about much developed economies typically spend on active and passive labor market policies. Here's a bar graph from Nie and Struby showing the average levels over the 1998-2008 period for both categories of labor market spending for 21 countries.

The Search for an Era of Labor Peace - When the Boeing Company announced its far-reaching, precedent-setting agreement with the machinists’ union last week, all the talk was about the ushering in of a new era of labor peace between a company and union that were long known for their horrendous labor relations record. That record included five strikes since 1977, among them a 58-day walkout in 2008 that cost Boeing $1.8 billion. Boeing’s four-year contract — its grand bargain with the International Association of Machinists and Aerospace Workers — contained many elements similar to those in the 1948 G.M. contract: annual wage increases of 2 percent, cost-of-living adjustments, a productivity incentive program intended to pay bonuses of 2 percent to 4 percent. In addition, Boeing gave the union something it badly wanted — it pledged to add several thousand jobs in Washington State (rather than another state) as it moves to expand production of its 737 Max passenger jet to 42 aircraft a month from 35 a month.For Boeing, one big, additional benefit of the “grand bargain” is that the newly happy machinists union has promised — assuming the rank and file ratifies the deal — to push the National Labor Relations Board to drop its complaint against Boeing for building a $750 million assembly plant in South Carolina rather than Washington State.

The US is Almost Last in Relative Labor Market Policy Spending - (bar graph) More here.

The trauma of unemployment - This is an interesting post about a new study tracking the attitudes of people who have lost jobs in the Great Recession. You can click the link to get to the original data, but it's distilled nicely here, where the authors have divided the results into several different categories:

• Workers who have MADE IT BACK consider themselves in excellent, good, or fair financial shape and have experienced no change in their standard of living due to the recession.
• People ON THEIR WAY BACK have largely experienced a minor change to their standard of living, but say the change is temporary. They also consider themselves in excellent, good, or fair financial shape.
• Workers who have been DOWNSIZED meet one of three conditions; they have experienced: a minor change that is permanent; a minor change that is temporary, but they are in poor financial shape; or a major change in their standard of living that is temporary and they are in at least fair financial shape.
• Workers classified as DEVASTATED have experienced a major change to their lifestyle due to the recession. They can be either in poor financial shape and think the change is temporary, or in fair financial shape but think this change is permanent.
• Workers that have been TOTALLY WRECKED by this recession have experienced a major change to their lifestyle that is permanent and are in poor financial shape.

Check out the numbers...

Winner-take-all financial incentives - Between 1979 and 2007, inflation-adjusted hourly wages for Americans at the median and below were essentially flat. Household incomes in the lower half increased, but not very much.  At the same time, the earnings and incomes of those at the top exploded (see here, here, here, here). One story sometimes told about the 1980s, 1990s, and pre-crash 2000s links these two developments to offer an optimistic verdict on the evolution of living standards for America’s lower half. The story goes something like this: A winner-take-all economy reduces income growth for low-to-middle Americans. But it nevertheless produces a substantial rise in living standards for them. It does so by increasing financial incentives for inventiveness and hard work, which yields leaps in consumption that aren’t reflected in the price data used to measure changes in the cost of living. To put it more precisely, the story has four parts:

• 1. Returns to success soared in fields such as entertainment, athletics, finance, and high tech, as well as for CEOs. These markets became “winner-take-all,” and the amounts reaped by the winners mushroomed.
• 2. For those with a shot at being the best in their field, this increased the financial incentive to work harder or longer or to be more creative.
• 3. This rise in financial incentives produced a rise in excellence — new products and services and enhanced quality.
• 4. These improvements haven’t been satisfactorily captured in the price index by which we assess changes in the cost of living.

How technology and winner-take-all markets have made income inequality so much worse. -  Effective remedies for growing income disparities require a clear understanding of the forces that have caused them. In their recent book, Winner-Take-All Politics, Jacob Hacker and Paul Pierson have argued that explosive salary growth at the top has been fueled by a more lax regulatory environment purchased with campaign contributions. That’s a spot-on description of what happened in the financial services industry, which is of course the principal target of the OWS movement. But it’s an unsatisfactory account of why inequality has been rising in other occupations. The same pattern of income growth we’ve seen for the population as a whole has been replicated for virtually every subgroup that’s been studied. It holds for dentists, real-estate agents, authors, attorneys, newspaper columnists, musicians, and plastic surgeons. It holds for electrical engineers and English majors. And in none of those instances has it been primarily the result of regulatory favors.

Workers need more income, and more power – The United States is still a very rich country, but the riches aren’t trickling down to where they might do some good.  High unemployment remains our greatest economic challenge. But even people who are working full-time are being squeezed by paychecks that aren’t keeping up with inflation and by debt levels that are still too high. Workers have lost much of the bargaining power that enabled them (and the nation) to prosper in the post-World War II years.  In the 1950s, 1960s and 1970s, labor costs typically accounted for about 65 cents of every dollar spent by businesses. The rest went to capital, covering such things as rent, interest, profits and taxes. Labor’s share has declined over time, and has fallen dramatically since the 2008 Great Recession. Labor now gets just 57 cents on the dollar. Meanwhile, profits have surged to a record share of national income.  If workers got the same share of business income that they did in the period between World War II and 2000, their income would be about $780 billion higher (or about 9% more), according to Michael Feroli, an economist for J.P. Morgan Chase. “That income would have provided a much-needed lift for a sector of the economy reeling from too much debt and too little employment,”

Bruce Judson on the Societal Dangers of Income Inequality, interview by Bryce Covert:  I got the chance to talk with Bruce Judson, who has been writing the “Restoring Capitalism” column and whose comprehensive plan for reversing the rise in economic inequality will be published as an e-book, Making Capitalism Work for the 99%: A Manifesto, this week. We talked about his work before the financial crisis that examined the startling rise of income inequality in the U.S., how it can lead to social unrest and instability, and what course we must take to correct these trends. ...Bryce Covert: You talked about the societal dangers of growing income inequality in your 2009 book It Could Happen Here before it was on the national agenda. What made you pay attention to the trend? Bruce Judson: I started discussing the book with Harper Collins in 2007. At that time, a number of prominent people were also very concerned about it, including Paul Krugman, Robert Reich, Elizabeth Warren, and Roosevelt Institute Chief Economist Joseph Stiglitz. They all said it was dangerous for our democracy. But I kept wondering why. What happens next? So I started my own research.

OWS and Inequality: How “expenditure cascades” are squeezing the American middle class. - Many decry rising inequality because it makes those who’ve fallen behind feel impoverished. But it’s done much more than that. It has also raised the real cost to middle-income families of achieving many basic goals. It’s done that through a process that I’ve elsewhere called “expenditure cascades.” The process begins with the completely unremarkable fact that top earners have been spending at a substantially higher rate than before. They’ve been building bigger mansions, staging more elaborate weddings and coming-of-age parties for their kids, buying more and better of everything. It’s not just the rich who spend more when they get more money. Everyone else does, too. The mansions of the rich may seem over the top to people in the middle, but the same could be said of American middle-class houses as seen by most of the planet’s 7 billion people. The important practical point is that when the rich build bigger, they shift the frame of reference that shapes the demands of the near rich, who travel in the same social circles. Perhaps it’s now the custom in those circles to host your daughter’s wedding reception at home rather than in a hotel or country club. So the near rich feel they too need a house with a ballroom. And when they build bigger, they shift the frame of reference for the group just below them, and so on, all the way down.

Most Important Economic Speech of His Presidency - Robert Reich - The President’s speech today in Osawatomie, Kansas is the most important economic speech of his presidency in terms of connecting the dots, laying out the reasons behind our economic and political crises, and asserting a willingness to take on the powerful and the privileged that have gamed the system to their advantage. Here are the highlights: For most Americans, the basic bargain that made this country great has eroded. Long before the recession hit, hard work stopped paying off for too many people. Fewer and fewer of the folks who contributed to the success of our economy actually benefitted from that success. Those at the very top grew wealthier from their incomes and investments than ever before. But everyone else struggled with costs that were growing and paychecks that weren’t - and too many families found themselves racking up more and more debt just to keep up. He’s absolutely right – and it’s the first time he or any other president has clearly stated the long-term structural problem that’s been widening the gap between the very top and everyone else for thirty years – the breaking of the basic bargain linking pay to productivity gains. For many years, credit cards and home equity loans papered over the harsh realities of this new economy. But in 2008, the house of cards collapsed. Exactly. But the first papering over was when large numbers of women went into paid work, starting the in the late 1970s and 1980s, in order to prop up family incomes that were stagnating or dropping because male wages were under siege – from globalization, technological change, and the decline of unions.

Alan Reynolds Vs. Inequality: When you're a conservative and you find yourself stumbling over the inequality issue, who you gonna call? Alan Reynolds, senior fellow with the Cato Institute! And so Reynolds is once again on the Wall Street Journal editorial page declaring that income inequality is a statistical illusion brought about by technical changes in the tax law that alter what income gets reported to the Internal Revenue Service and what income does not. "[W]hat the Congressional Budget Office presents as increased inequality from 2003 to 2007 was actually evidence that the top 1 percent of earners report more taxable income when tax rates are reduced on dividends, capital gains and businesses filing under the individual tax code." Um, Alan? The CBO report documented increased inequality from 1979 to 2007. As the foregoing demonstrates, Reynolds's technique is to bury you under a mountain of hard-to-follow, often irrelevant, and sometimes entirely erroneous statistical quibbles to the point where you cry "Uncle!" and agree to believe that the existence or nonexistence of inequality is a matter of personal taste, like preferring Cherry Garcia to Chunky Monkey….

Recession and Its Aftermath Create More Mr. Moms - Some 32% of dads that had a wife in the work force watched after the kids on a regular basis, up from 26% in 2002, according to the bureau’s semi-regular report on families’ child-care arrangements. Some stats from the Census:

• –In households with working moms, 30% of preschoolers were regularly cared for by their grandparents, 29% by fathers, and 12% from a sibling or other relative.
• –White fathers are taking on more child care than their black and Hispanic counterparts: Some 30% of preschoolers whose moms are white and employed, 30% were cared for by their fathers and 29% by their grandparents. Preschoolers with employed black and Hispanic mothers, on the other hand, are more likely to be cared for by their grandparents:
• –Of the 21 million mothers who were employed in the spring of 2010, one-third reported they paid for child care for at least one child.
• –Families with an employed mother and children younger than 15 paid an average of $138 per week for child care in 2010, up from $81 in 1985 (in 2010 dollars).
• –Families in poverty spend a greater proportion of their monthly income on child care than families at or above the poverty line (40% compared with 7%).

Categorizing Those Unemployed by the Recession Caused by the Financial Crisis (see graphic) - In August 2009, the John J. Heldrich Center for Workforce Development at Rutgers, The State University of New Jersey began following a nationally representative sample of American workers who lost a job during the height of the Great Recession.  A total of 3,972 individual surveys were completed over the two years. Well over half of the original respondents participated in all four waves of the project, meaning they spent, on average, 50 minutes of their time responding to roughly 200 questionnaire items. This resulting measure combines an assessment of the respondent/family’s current economic status with the magnitude of change in the quality of daily life, with an assessment of whether this change represents a new normal or is a temporary stay in limbo.

Cost of federal unemployment benefits so far: $434 billion - Jobless Americans have collected $434 billion in unemployment benefits over the past four years. Taxpayers have footed $184.7 billion of the tab incurred during the federal government's unparalleled response to the Great Recession, according to Labor Department data. State and federal taxes on employers cover the rest. The cost of continuing this safety net will be the subject of intense debate in Congress in coming weeks as lawmakers decide whether to extend the deadline to file for federal benefits beyond year's end. Keeping this lifeline in place through 2012 would cost $44 billion. Here's how the system works: The jobless collect up to 26 weeks of state benefits before shifting to the federal program. Federal benefits consist of up to 53 weeks of emergency compensation, which is divided into four tiers, and up to another 20 weeks of extended benefits. Those who reach the end of their state benefits or federal tier will not be able to apply for additional benefits unless the deadline to file is extended.

Fixing America's jobless problem - Thousands of long-term unemployed Americans from across the country have converged on Washington this week to dramatize their plight and to urge Congress to extend federal unemployment insurance benefits and the payroll tax cut, and to pass President Obama's jobs bill. According to the U.S. Bureau of Labor Statistics, 13.3 million Americans are unemployed. Nearly half have been jobless for more than six months — a record. If you add workers who are so discouraged that they've given up looking for work, and people who are underemployed (working part time but who want full-time jobs), the number of jobless Americans skyrockets to more than 25 million. After remaining at or over 9% since March 2009, the nation's jobless rate dipped to 8.6% in November. But in California, the rate is 11.7%. For more than 21/2 years, the number of jobless Americans has outstripped the number of available job openings by more than 4 to 1. In such dire circumstances, the least Congress can do is extend unemployment benefits. The Obama administration and House and Senate Democrats are pushing for another yearlong extension of federal benefits before they expire Dec. 31. Without action, nearly 2 million Americans — 305,400 in California — would be cut off from unemployment insurance in January alone; 6 million would be cut off over the course of the next year. 

Food Stamp Use on the Rise - Food-stamp use jumped in the U.S. in September as 11 states tapped into the program for disaster assistance. Food stamp rolls have risen 7.8% in the past year, the Department of Agriculture reported, though the pace of growth has slowed from the depths of the recession. Click on image for full interactive map. The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), rose to 46.3 million, or 15% of the population, in part due to disaster assistance tied to the destruction and flooding caused by Hurricane Irene. Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont and Virginia all received aid for disaster assistance. Use in New Jersey alone soared by nearly 33% in the wake of the storm. But use increased in states that weren’t receiving aid. Minnesota, Hawaii, Iowa, Colorado, Alaska, California, Nevada, Florida, New Mexico and Georgia all saw year-over-year jumps in use by over 10%. Just Illinois, North Dakota and Wyoming posted annual drops in the number of people receiving food stamps.

Over 46 Million Americans On Foodstamps For The First Time Ever - While the capital markets may be cheering that in the past month 120,000 people supposedly found jobs, even if these were largely temporary or part-time just in time for the year end shopping sprees, we wonder how they will react when learning that according to the latest update from the Supplemental Nutrition Assistance Program (SNAP), some 423,000 Americans found their way to minimum way subsistence, courtesy of Food Stamp handouts from Uncle Sam. Since the start of the Second Great Depression, food stamp participation has increased by 18.7 million, and is now at an all time higher 46.3 million. All Bush's fault, or something. At least the chart below appears to be plateauing... Actually, sorry, no isn't.

Chart of the Day: Food Stamp Recession Curve - The latest Food Stamp data (now called SNAP) is out. Here is a chart by reader Tim Wallace showing program usage. I added highlights in yellow to mark recessions based on NBER Business Cycle Expansions. The NBER is the official arbiter of recession start and end dates. Tim writes ... The latest food stamp (SNAP) data is available for September 2011. The reporting lags by two months. We have now surged past 46 million, up to 46,268,257 to be exact. Note that food stamp usage sloped down throughout the Reagan presidency until it started back up in 1989, ahead of the recession that doomed Bush I, then continued for several more years. The pattern is similar for the recession of 2001. Food stamp usage picked up in 2001 prior to the recession, then continued for four years after the recession ended. The current recession ended in mid-2009 but usage spirals higher and higher.

The Food Divide - Under the weight of recession and double-digit unemployment, San Francisco's chronic food divide has grown deeper and wider. From regions of the city like Bayview, Excelsior, and other Southeast neighborhoods, to seniors surviving on marginal fixed incomes, to the city's swelling unemployed and underemployed who rely on food pantries, access to fresh food is a daily geographic and economic battle. Roughly one in five San Franciscans each day has no reliable source of adequate sustenance and must scramble for food from soup kitchens, food pantries, or other "emergency" supplies that have become a structural part of the city's food system, according to the San Francisco Food Bank. Each month, more than 100,000 families rely on the Food Bank to help feed themselves — nearly double the amount from 2006. Economic recession has dramatically increased the number of city residents using food stamps (known as "CalFresh") each month, rising from 29,008 in 2008 to 44,185 in 2010.

Mom denied food stamps shoots kids, kills self - A Texas woman who for months was unable to qualify for food stamps pulled a gun in a state welfare office and held a seven-hour standoff with police that ended with her shooting her two children before killing herself, officials said Tuesday. The 10-year-old boy and 12-year-old girl remained in critical condition Tuesday. Authorities identified the mother as Rachelle Grimmer, 38, and children Ramie and Timothy. When the family entered the office on Monday shortly before it closed, Grimmer asked to speak to a new caseworker, and not the one whom she worked with before, Texas Department of Health and Human Services spokeswoman Stephanie Goodman said. Grimmer was taken to a private room to discuss her case, then she revealed a gun and the standoff began, Goodman said. Police negotiators stayed on the phone with Grimmer throughout the evening, but she kept hanging up, Laredo police investigator Joe Baeza said. She allegedly told negotiators about a litany of complaints against state and federal government agencies. After hanging up the phone around 11:45, police heard three shots, and a riot police team entered the building. Inside, they found Grimmer's body and her two wounded children.

For the Families of Some Debtors, Death Offers No Respite - After Linda Long's husband died of colon cancer last year, the phone calls poured in. The 68-year-old retired office worker says she got as many as 10 calls a day from a debt-collection firm asking for $16,651.52 that her husband, Millard, had racked up on a Bank of America Corp. credit card. Mrs. Long, of Cape Coral, Fla., told the debt collector she had "lost everything." She had sold the couple's motor home to help cover medical bills and funeral costs. All that was left, she said, was $2,000 in life-insurance proceeds. "I can give you that," she said when asked for the money, "anything just to get this off of my head."  When you die, your debts usually die with you. Surviving family members rarely have a legal obligation to pay unless they co-signed a loan, such as a mortgage or credit card. That leaves lenders in the lurch. But debt collectors have found a way to help lenders get their money anyway. Working on behalf of financial giants from Bank of America and Capital One Financial Corp. to Discover Financial Services and Citigroup Inc., collection firms target survivors who might agree to pay at least part of what the dead person owed.

Michigan: More hungry people at local soup kitchens (Video) Food pantries in numerous cities in Michigan are struggling to keep up with demand for food from the jobless and homeless in what was once one of the most prosperous states in the U.S. Flint MI, the hometown of General Motors and once part of what was termed The Arsenal of Democracy during World War 2, is struggling with outmigration, unemployment, and mortgage foreclosures. While the automobile industry once employed approximately 70,000 people in the area, this number has dropped dramatically over the last twenty years and resulted in decay and despair. Catholic Charities is responding to the increased need, but with straitened resources. An annual grant of money from the State of Michigan was not renewed this year, resulting in a significant deficit for the charitable organization just when public need is actually increasing. The North End Soup Kitchen, which is managed by veteran restaurateur John Manse, is serving people hot food in two shifts every day. It relies on volunteers to prepare the meals as well as donations of money and food.

Tennessee family home burns while firefighters watch - A Tennessee couple helplessly watched their home burn to the ground, along with all of their possessions, because they did not pay a $75 annual fee to the local fire department.  Vicky Bell told the NBC affiliate WPSD-TV that she called 911 when her mobile home in Obion County caught fire. Firefighters arrived on the scene but as the fire raged, they simply stood by and did nothing.  Bell and her husband were forced to walk into the burning home in an attempt to retrieve their own belongings. South Fulton Mayor David Crocker defended the fire department, saying that if firefighters responded to non-subscribers, no one would have an incentive to pay the fee. Residents in the city of South Fulton receive the service automatically, but it is not extended to those living in the greater county-wide area. The South Fulton policy produced precisely the same nightmare scenario last year, when homeowner Gene Cranick--who had likewise failed to pay the $75 annual fee for rural Obion County residents--saw his house engulfed by flames as South Fulton firefighter watched close by. That incident sparked a debate among conservative pundits over the limits of fee-for-service approaches to government.

Copper thefts create many traffic, street light outages in Vallejo and elsewhere -  For the past month, city workers have churned out their own street signs, telling the public where to point the finger when city lighting goes awry.  "Signal lights are non functioning due to copper wire theft," a sign at the temporarily blinking red signals at Wilson and Daniels avenues reads. The sign has been there for several months, since copper thieves cut out the wires under the set of lights there.  Assistant Maintenance Superintendent Mike Schreiner said a "national epidemic" of stealing and selling copper wiring for profit has spiked in Vallejo in the past several months, pushing the city workforce to its limits to keep up with repairs. Some 77 city lighting fixtures have had their copper wiring stolen since May, and the city has wracked up about a $220,000 bill to replace stolen copper city-wide since January, Schreiner estimated.For the first time, the Public Works Department will need to approach the Vallejo City Council mid-budget year, seeking to supplement its supply-purchasing account because of all the replacement copper needed, Kleinschmidt said.

Does America Imprison Too Many People? Posner - A society can be thought of as a collection of private and public systems. At present a number of these systems in American society are under stress: the medical system, the educational system, the political system (especially at the legislative level), the finance industry, the fiscal system, transportation infrastructure, the regulation and assimilation of immigrants, and perhaps others. Another troubled American system is that of criminal justice, with particular emphasis on the astrounding growth and level of imprisonment. Some statistics: the incarceration rate had been 118 per 100,000 in 1950, and actually fell in 1972 to 93 per 100,00. By 2000 it had reached 469 and only since the advent of the economic crisis has it begun to decline as states try to reduce expenditures. Between 1950 and 2000 the white imprisonment rate increased by 184 percent and the black imprisonment rate by 355 percent; today 40 percent of prison and jail inmates are black, although blacks are only 13 percent of the overall population. Even though the U.S. crime rate fell by a third in the 1990s (and by two-thirds in many large cities)— the murder rate by more than 40 percent—the inmate population continued growing during this period, an increase that cannot be explained by population growth, since the population grew by much less than a third in the 1990s.

The Occupy movement's message - The most durable message from the Occupy Wall Street encampments across the nation is also the simplest: "We are the 99%." But are the implications of that message fair? Is there a widening gap between rich and poor? Are those doing well just a fraction of the populace? In the nation, and particularly in California, the answer is yes. We are living in an era of widening inequality, with income gains concentrated at the top, and most families in the state are falling behind. New research from the California Budget Project examined data from the Franchise Tax Board and found that income gains during the last two decades were overwhelmingly concentrated among California's wealthy. Between 1987 and 2009, more than one-third of the income gains went to just the top 1% of Californians, and almost three-quarters went to the top 10%. The bottom 90% received just over one-quarter of the growth in incomes.There is a similar divide as to changes in annual income. During the last two decades, the average income for the top one-fifth of Californians jumped by more than 20%, after adjusting for inflation, while incomes declined for Californians in the bottom four-fifths of the income distribution, on average. The report also found:

The Shriveling Middle Class In California - An ominous trend picks up speed: the middle class is shriveling. In 1980, 60% of Californians lived in middle-income families. By 2010, only 47.9% did, according to a study by the Public Policy Institute of California (PPIC), a non-partisan research organization (24-page report PDF, 2-page summary PDF). Main culprits: declining incomes and disappearing jobs. From 2007, when the recession began, through its end in 2009, family incomes across the spectrum dropped over 5%. But then, instead of going into recovery mode, they continued to go south for another 6% through 2010—the end of the timeframe of the study. Given the astronomical cost of living in California, the study defined a middle-income family as one that earned between $44,000 and $155,000 in 2010. But the declines weren’t spread evenly across the income spectrum. Families whose incomes were in the top 10% saw their incomes decline 5%. Those at the bottom 10% of the spectrum, the poorest families in California, saw their incomes plummet by 21%. In a further indictment of income inequality in California—something that is clearer than daylight if you walk or drive around with your eyes open—the upper 10% enjoyed incomes that were higher than those of their counterparts in the rest of the US, while the lowest 10% earned less than their counterparts elsewhere.

L.A. County to bury homeless, poor unclaimed by family members - More than 1,000 bodies unclaimed by family members in Los Angeles County were to be buried in a mass grave Wednesday. The county performs the burial service every year in December. "These are individuals that, for one reason or another, have no one but the county to provide them with a respectful and dignified burial," Supervisor Don Knabe said in a statement. "Some are homeless. Many are poor. Some have no families to grieve for them. Regardless of what their status in life was, each one of their lives mattered," Knabe said. According to the county coroner's office, bodies are kept in storage for two to three years before they are sent to the common grave. This year, 1,639 individuals will be buried.

Vital Signs: North Dakota on Track to Be No. 2 Oil State - At 3.5%, North Dakota has the lowest unemployment rate in the U.S. Oil is one reason: The state produced 464,129 barrels a day in September, up from 113,692 five years earlier. The state looks to be on track to surpass California and Alaska to become the country’s second-largest oil producer behind Texas.

Armed and Ready: New Mexico Residents Defy Government - For example, over near Deming, New Mexico is the Gila National Forest. The U.S. Forest Service wanted to make almost all of it off limits for people -- until the militia of Luna County intervened. They told the feds that they would resist any effort by the Forest Service to restrict access to visitors. The result? Visitors have continued to access all of the Gila National Forest! In the Southeast corner of the state, many landowners have working oil wells on their property. The EPA told the oil operators they would have to stop operating their wells because there was too much risk of harming the environment. At a town hall meeting convened by the EPA, a woman in her 60s rose to address the feds. She pointed out that her land had been in her family for over 200 years, and she was not about to let some official from an unconstitutional bureaucracy tell her what she could or could not do with her land.  The woman ended by warning the feds that her family has many guns and a huge supply of ammunition, and they would use all of it if needed to keep the EPA off of their land. The locals who had packed out the hearing room jumped to their feet with a shout and prolonged applause. That was in August of this year. As of November, oil is still being pumped at full tilt.

Monday Map: Effective Federal Income Tax Rates by Zip Code -  Today's Monday Map shows the average effective federal income tax rate in each zip code of the United States. Data for this map comes from the IRS's income tax zip code data.

State Taxes Rise Across the U.S. - State tax revenues rose last quarter compared with a year earlier, according to preliminary data from the Rockefeller Institute of Government at the State University at Albany. This was the seventh straight quarter of growth, and is happy news for states struggling with budget shortfalls in the wake of the Great Recession. Total state revenues were up 7.3 percent from their level during the same period last year. The biggest gains were in personal income tax revenue, which rose 9.2 percent year over year. The Rockefeller Institute collected tax data from 48 early-reporting states, and found that all but three reported total revenue increases. North Dakota had far and away the fastest growth in percentage terms, with tax revenue there rising 157 percent compared with a year earlier. Alaska had the second-fastest growth, at 124.4 percent. Both benefited significantly from higher oil and mineral prices, which drove up severance tax revenues. At the other end of the spectrum was Delaware, where total tax revenues fell by 13.8 percent year over year. Click the interactive map above to see how each state fared, and choose from the pull-down menu to see which categories of taxes fluctuated most.

California demographic shift: More people leaving than moving in - Recent census figures show the state is losing more Californians like McCluer than it is attracting from other parts of the U.S. And the trend toward out-migration is looking less like a blip than a long-term condition. The proportion of Californians who had moved here from out of state reached a 100-year low of about 20% in 2010, and the decade measured by the most recent census was the first in a century in which the majority of Californians were native-born. The demographics of California today more closely resemble those of 1900 than of 1950: It is a mostly home-grown population, whose future depends on the children of immigrants and their children. Experts point to various causes of the turnaround, most of them rooted in a flagging economy. But exorbitant housing prices — too high for many struggling Californians despite a burst housing bubble — still play a role.

California to Seek Increased Income and Sales Taxes - As we reported last week, California is facing a $3.7 billion shortfall for the current fiscal year, and is projected to face a $12.8 billion deficit in fiscal 2013. There are now reports of two campaigns (one spearheaded by Governor Jerry Brown) for tax hike initiatives that are gearing up to gather signatures for the November 2012 ballot. The Jerry Brown initiative would hike the state-level sales tax from 7.25 percent to 7.75 percent, and create three new income tax brackets for earnings over $250,000. Though official details are hard to come by--the Office of the Governor said in a call that they would release the plan later today--the Sacramento Bee reports that if passed, the new income tax brackets would be as follows (increases in bold):

Income Taxes for Wealthy May Increase in Albany Deal - Gov. Andrew M. Cuomo and legislative leaders, seeking ways to shore up a state budget strained by the weak economy, are ironing out the details of a deal that would raise income taxes on the wealthy and cut them for the middle class.  Top aides to the officeholders planned to meet through the weekend, as New York State lawmakers prepared to return to Albany next week for a special session of the Legislature that the governor appeared likely to call.  Members of the Democratic majority in the State Assembly were notified that they should be ready to return to the capital on Tuesday. Negotiations were still in the preliminary stages on Friday, and rank-and-file lawmakers had not yet been briefed on the discussions. As of Friday, Mr. Cuomo and the legislative leaders had not yet agreed on the specifics of any agreement. But people briefed on their talks, who spoke on the condition of anonymity because the talks were private, said the leaders were discussing the creation of new tax brackets that would allow them to apply higher tax rates to the state’s top earners. The new brackets are likely to be temporary; their duration was still unclear on Friday.

Washington State Democrats Hope Voters Have New Attitude on Taxes -  After cutting $10 billion over the past three years, including trimming higher education spending by half, slicing health care programs and streamlining state agencies, lawmakers and the 6.7 million residents of Washington State have been rewarded for their sacrifices with more bad news: The state has another enormous budget deficit.  “I can’t take it anymore,” said Gov. Christine Gregoire, a Democrat. “I sure hope that’s where the people of the State of Washington are.”  So now, facing a budget gap of nearly $2 billion and more bleak revenue forecasts, Ms. Gregoire and some Democratic leaders say they will seek the same solution they have in the past: To raise taxes. The question is whether, this time, voters will actually let them.

Detroit in a hostile takeover bid? - The idea is extreme, even in a city accustomed to fighting for survival: Should the state of Michigan step in to run Detroit? The governor has taken steps in that direction, proposing an unprecedented move that could give an appointed manager virtually unchecked power to gut union contracts, cut employee health insurance and slash services. But city leaders bristle at the notion. Said the mayor: "This is our city. Detroit needs to be run by Detroiters." If it happens, Detroit would be the largest American city ever taken over by a state. Michigan has seized control of smaller struggling cities, but until now Detroit was always off-limits. That changed this week, when Republican Gov. Rick Snyder's administration said it would begin a review of Detroit's precarious finances. If the governor concludes that the city's economic situation constitutes an emergency, he could dispatch a manager who could push the mayor and city council to the sidelines. Democratic Mayor Dave Bing says Detroit doesn't need the help. He insists the city is reducing a $150 million budget deficit and easing cash-flow problems on its own.

Detroit nears bankruptcy (The Economist) On December 6th Michigan took the first legal steps towards a state takeover of Detroit. If it happens, it will be the largest American city to be taken over by a state. The problem has been building for decades; declining property values and the flight of better-off people to the suburbs have hit revenues, while the cost of servicing a still-sprawling city has not shrunk proportionately. The effects of the recession, particularly severe in Michigan, have provided the trigger for the crisis. Detroit’s mayor, Dave Bing, now says the city will run out of cash in April 2012. Failing to fix the problem, he adds, means losing “the ability to control our own destiny”. This is a reference to legislation known as Public Act 4 (PA4), which allows the state to appoint an emergency manager for failing local governments and school districts. When an emergency manager is appointed, the authority of elected officials is suspended and the manager assumes control of public contracts, city assets, staff, pay and benefits. On December 1st the governor appointed an emergency manager to the city of Flint.

Fed’s Raskin: Data Can Drive Recovery in Urban Neighborhoods - Federal Reserve governor Sarah Bloom Raskin said Wednesday that the recent financial crisis — including a wave of foreclosed homes — hit already struggling urban neighborhoods “extremely hard.” She said the Fed is seeking to aid the recovery by encouraging the analysis of data to inform leaders working on the renovation and stabilization of those communities. “The current economic recovery has been deeply painful,” Raskin said at a Fed conference concerning investment in distressed urban areas. “One ray of hope…is the power of technology.” Unlike in past economic recoveries, municipalities, universities and nonprofit organizations now have an array of data that can be used to guide the rebuilding of struggling urban neighborhoods, she said.

More and more students in local schools are homeless - Social workers with the Boise School District say the increase in homeless students this year is "astronomical." And it's not just Boise schools. All the major school districts in the Treasure Valley are seeing an increase in homeless students, which is creating a new set of challenges for educators. There are 345 children who attend Taft Elementary School in Boise, and 30 of them are homeless.

Newt’s War on Poor Children- Newt Gingrich has reached a new low, and that is hard for him to do. Nearly two weeks after claiming that child labor laws are “truly stupid” and implying that poor children should be put to work as janitors in their schools, he now claims that poor children don’t understand work unless they’re doing something illegal. “Start with the following two facts: Really poor children in really poor neighborhoods have no habits of working and have nobody around them who works. So they literally have no habit of showing up on Monday. They have no habit of staying all day. They have no habit of ‘I do this and you give me cash’ unless it’s illegal.” Gingrich wants to start with the facts? O.K.  First, as I’ve pointed out before, three out of four poor working-aged adults — ages 18 to 64 — work. Half of them have full-time jobs and a quarter work part time.  Furthermore, according to an analysis of census data by Andrew A. Beveridge, a sociologist at Queens College, most poor children live in a household where at least one parent is employed. And even among children who live in extreme poverty — defined here as a household with income less than 50 percent of the poverty level — a third have at least one working parent.

Gingrich: 5-year-olds working is an ‘education in life’ - Republican presidential candidate Newt Gingrich said Thursday that it was good life experience for children as young as five or six to have a job. For more than a week, the candidate has been talking about the virtues of child labor, calling current restrictions “truly stupid.”He explained that a successful young woman had told him that her grandfather had paid her to run errands at the age of five. He also gave the example of a father that paid his 6-year-old son to help him wash the car and clean up the yard. “Now, this is education in life,” Gingrich declared. “This is bringing people into the world of work, the world or prosperity, the world of savings, the world of investment — and we want every young American to have an opportunity to do that.” “So, if you took the cost of the New York City janitors, the most expensive janitors in New York are paid more than the highest paid teachers. The entry level janitor is paid twice as much as an entry level teacher. It’s all because of the union. So, I say let’s keep two janitors who are adults who are professional. They do all the heavy stuff and the dangerous stuff. And let’s take all the other jobs and divide them up into part-time kids.”

Trump, Gingrich To Create Apprentice-Style Program for Poor School Kids - ABC News Donald Trump may not have officially endorsed Newt Gingrich’s presidential bid, but the billionaire businessman gave his hat tip of approval to Gingrich’s plan to put poor schoolchildren to work. Gingrich, who found himself in hot water last month for saying America’s child labor laws are “truly stupid,” called on Trump to create an “Apprentice”-style program for 10 inner-city New York children to teach them “work ethic.” “We’re going to be picking 10, young, wonderful children, and we’re going to make them ‘apprenti,’” Trump said after a high-profile meeting with Gingrich on Monday. “We’re going to have a little fun with it, and I think it’s going to be something that is really going to prove results. But it was Newt’s idea, and I think it’s a great idea.” While it is unclear if the program will run as a reality TV show, like Trump’s NBC show “The Apprentice,” Gingrich said the program is intended to give students “an opportunity to earn money, and get them into a habit of showing up and realizing that hard work gets rewarded.”

School superintendents in San Jose fear state triggers will kick in next year - At a time when most people are eagerly awaiting the holidays, three local school superintendents are worrying about the future. Recent news reports say the state's 2012-13 budget deficit could be as high as $13 billion. The superintendents worry the Legislature will end up cutting more state funds from educators' budgets--a worry that's proved true in a number of recent years. None of the three think midyear cuts will cause problems this school year, but their concerns are growing about further cuts the 2012-13 school year, which could result in fewer school days, fewer teachers and larger class sizes. The biggest problem is the uncertainty over what the cuts will be, say the superintendents from Cambrian, San Jose Unified and Union School districts. "A year ago, we had indications there would be cuts, and we prepared for furlough days," says Vincent Matthews, San Jose Unified's superintendent. "The uncertainty makes it difficult to do the things we need to do for our students. I'd rather know that we're getting cuts so that we could plan."

Montgomery County Scrambles To Pay For Teacher Pensions - In Maryland, council members in Montgomery County are struggling to find answers on how to slow rising teacher pension costs. During the fiscal year of 2003, there was more money than needed to fund teacher pensions in the county. Just eight years later, that number plummeted "To have a pension system be funded from over 100 percent down to 70 percent in not that much time is a huge cause for concern," says council president Valerie Ervin. Council members are looking for ways to reverse that trend, but have yet to find a solution. School employees have already been asked to contribute more to their pensions. "They were asked to contribute 2 percent more this year," says Ervvin. "The employer has contributed their fair share. At this point, there has to be some other answer."

When an adult took standardized tests forced on kids - A longtime friend on the school board of one of the largest school systems in America did something that few public servants are willing to do. He took versions of his state’s high-stakes standardized math and reading tests for 10th graders, and said he’d make his scores public.  By any reasonable measure, my friend is a success. His now-grown kids are well-educated. He has a big house in a good part of town. Paid-for condo in the Caribbean. Influential friends. Lots of frequent flyer miles. Enough time of his own to give serious attention to his school board responsibilities. The margins of his electoral wins and his good relationships with administrators and teachers testify to his openness to dialogue and willingness to listen.  He called me the morning he took the test to say he was sure he hadn’t done well, but had to wait for the results.  “I won’t beat around the bush,” he wrote in an email. “The math section had 60 questions. I knew the answers to none of them, but managed to guess ten out of the 60 correctly. On the reading test, I got 62% . In our system, that’s a “D”, and would get me a mandatory assignment to a double block of reading instruction. He continued, “It seems to me something is seriously wrong. I have a bachelor of science degree, two masters degrees, and 15 credit hours toward a doctorate.

Growing income and gender gaps in college graduation - A new study shows that the gap in rates of college completion between students from high-and low-income families has grown significantly in the last 50 years.  For their analysis, the researchers compared the educational attainment of those born between 1961 and 1964 (who were college age in the early 1980s) to those born between 1979 and 1982 (who were college age in the early 2000s), by family income at the time children were between fifteen and eighteen years old. They found that 54 percent of those who went to college in the early 2000s and who were from families in the top income category graduated from college, fully 18 percentage points more than college-age students in the same income group twenty years earlier. In contrast, college completion rates for those in the lowest income group increased only slightly over the same period, from 5 percent to 9 percent. "We find growing advantages for students from high-income families," . "And we also find that increases in educational inequality are largely driven by women."

Don’t Check Asian -- USA Today: Lanya Olmstead was born in Florida to a mother who immigrated from Taiwan and an American father of Norwegian ancestry. Ethnically, she considers herself half Taiwanese and half Norwegian. But when applying to Harvard, Olmstead checked only one box for her race: white. “I didn’t want to put ‘Asian’ down,” Olmstead says, “because my mom told me there’s discrimination against Asians in the application process.” Her Mom is correct: Asian students have higher average SAT scores than any other group, including whites. A study by Princeton sociologist Thomas Espenshade examined applicants to top colleges from 1997, when the maximum SAT score was 1600 (today it’s 2400). Espenshade found that Asian-Americans needed a 1550 SAT to have an equal chance of getting into an elite college as white students with a 1410 or black students with an 1100.

An Orange and Black Eye for 2 Banks - As DealBook reported last week, several Ivy League schools have seen their on-campus recruiting programs come under fire this fall, because of the influence of the Occupy movement and rising antipathy for the financial sector And this week, student protesters affiliated with the Occupy Princeton movement interrupted not one but two big-bank recruiting sessions at the school, typically among the biggest feeder schools for Wall Street firms. According to the Daily Princetonian, Princeton students targeted a JPMorgan Chase session and a Goldman Sachs session this week. They “filed into the information sessions under the pretense of prospective applicants and interested students, dressed in business attire, providing their names and emails on sign-in sheets, picking up pamphlets and chatting with recruiters who approached them.” At the JPMorgan Chase session, held on Wednesday, students used the Occupy movement’s trademark “mic check” call-and-response style to lambaste the bank. “Your predatory lending practices helped crash our economy, we’ve bailed out your executives’ bonuses, you’ve evicted struggling homeowners while taking their tax money,”  At a Goldman Sachs information session the following night, protesters repeated their grievances, and added a message to their fellow students: (mic check videos)

College Subsidies Fuel Salaries - “Who pays a tax is determined not by the laws of Congress but by the law of supply and demand,” as Tyler and I say in Modern Principles. The same thing is true for a subsidy but in reverse, the inelastic side of the market gets the benefit of the subsidy. Virginia Postrel applies the idea to education and education subsidies. If you offer people a subsidy to pursue some activity requiring an input that’s in more-or-less fixed supply, the price of that input goes up. Much of the value of the subsidy will go not to the intended recipients but to whoever owns the input. The classic example is farm subsidies, which increase the price of farmland. A 1998 article in the American Economic Review explored another example: federal research and development subsidies. The study’s author was Austan Goolsbee, then and now a professor at the University of Chicago but until recently the chairman of the president’s Council of Economic Advisers.….Goolsbee declined a recent request to comment on the subject, but the parallels to higher education are hard to miss.

A College Siren Call – Going to a for-profit college today is like purchasing a home with a subprime loan at the peak of the housing market – The massive student debt bubble expanded from $200 billion to over $960 billion from 2000 to 2011 with a big push from for-profits at a time when incomes contracted.  The college debt problem is boiling over and spilling hot water onto an already weak economy.  This is no longer a petty niche issue when we are quickly reaching $1 trillion in outstanding student loan debt.  What is more problematic is the acceleration in tuition over the last decade.  Most of the combined data is looking back deep into the past when most of the problem has hit in the last decade.  How bad is it?  In 2000 total student debt was roughly $200 billion.  Today it is above $960 billion.  So in a matter of ten years the amount of student debt has gone up over 380% while household income has actually fallen.  The players in the student debt market are largely connected to the big financial institutions and the government is willing to grease these juicy wheels just like it did for the mortgage debt crisis.  The integration between government and the big banks is like a marriage made in graft heaven.

Vital Signs: Student, Car Loans Lead Rise in Borrowing - U.S. consumers increased their borrowing in October. Overall consumer credit outstanding rose $7.6 billion from September to $2.457 trillion. The bulk of the gain came from a $7.3 billion increase in nonrevolving credit, which includes car and student loans, to $1.665 trillion. Revolving credit, which is mostly credit-card debt, edged up $366 million to $792.3 billion.

Learning To Owe - The Cost of Education Is Crushing the Opportunity We Mean It to Provide. The Occupy Wall Street movement has no formal goals but several consistent memes have emerged among the crowd demonstrations in various cities across the country. Most of these have to do with the concentration of wealth and the collusion/corruption between big business and government. However, a more selfish trend also has surfaced among the demonstrators – many want their college student loans forgiven.  A small, informal survey among New York protestors last week by equity research analyst David Maris found ninety-three percent of them advocated student-loan clemency. This idea actually is neither original to OWS nor unique among its members. New York University Professor Andrew Ross recently proposed a radical solution to student loan debts the he calls “A Pledge of Refusal.” The idea requires those who owe to sign a pledge to stop making payments on their student loans once the pledge garners a million signatures. Meanwhile, an online petition supporting student loan forgiveness has collected over a half million signatures.

Many Workers in Public Sector Retiring Sooner —As states and cities struggle to resolve paralyzing budget shortfalls by sending workers on unpaid furloughs, freezing salaries and extracting larger contributions for health benefits and pensions, a growing number of public-sector workers are finding fewer reasons to stay.  The numbers of retirees are way up in Wisconsin, where more applications to retire have been filed this year than ever before. Workers in California’s largest public employee pension system have retired at a steadily increasing rate over the last five fiscal years. In New Jersey, thousands more teachers, police officers, firefighters and other public workers filed retirement papers during the past two years than in the previous two years.  In part, the flood of retirements reflects a broader demographic picture. Baby boomers, wherever they work, have begun reaching the traditional retirement age.  But increasingly workers fear a permanent shift away from the traditional security of government jobs, and they are making plans to get out now, before salaries and retirement benefits retreat further.

Social Security 2011 - Another Bad Year  - Full calendar year 2011 numbers are now available to calculate the results for the Social Security Trust Fund. Here's a look at the key numbers that will be reported to Congress in four months: Payroll Tax Revenue: $669B ($642B - 2010) Benefit payments: $726B ($702B - 2010) Primary Deficit: $57B ($60B - 2010) Other cash components at SSA: Tax on benefits: $23B (2010 - $24b) Payments to R.R. Retirement: $4.6B ($4.4B - 2010) Overhead: $7.0B ($6.5B - 2010) Net 2011 cash drain: $46B ($49B - 2010) Non cash items Interest: $116B ($117.5B - 2010) Paper surplus: $70.0B ($68.5B - 2010) The reported numbers will show a very small improvement ($3B ) in the net cash drain. This may cause some to look at the 2011 results and say, “See! Things are stabilizing and even getting better!” Let me try to blunt any enthusiasm in advance.

Budget shortfall could mean catastrophic Medicaid cuts after all — North Carolina Department of Health and Human Services officials said Monday that state lawmakers have changed their tune about finding funds to fill a projected $139 million Medicaid budget shortfall, forcing them to consider making catastrophic cuts to the program. Unless lawmakers find more money for Medicaid, many adult services, like hospice care and mental health care, could be on the chopping block. The state could also reduce reimbursements to physicians who treat Medicaid patients by up to 20 percent, DHHS officials have said. They say lawmakers publicly pledged to help fill the shortfall in October after it became clear that the agency couldn't make the $356 million in cuts required in the state budget.

Man Bites Dog - Newt Gingrich tells the truth. “the individual mandate was originally developed by the Heritage Foundation and others, as a way to block Hillarycare." Firebaggers argue that the PPACA is conservative, because it is similar to a Heritage Foundation proposal. They neglect to note that the proposal was made in bad faith. The point was to complicate the debate by making it Clintoncare vs Obamacare vs no reform. That way the result was no reform, even though most US adults wanted some reform. This is not speculation. The Heritage/Romney/Obama approach was also the Chaffee proposal. D Chaffee (R-R.I.) proposed something like the PPACA in 1993. Senate minority leader R. Dole cosponsored the bill. In 1994 Dole voted against a bill whcih he had cosponsored proving that his advocacy of an individual mandate was made in bad faith and aiming only at complicating the debate. Similarly when Ted Kennedy was advocating single payer/Medicare for all, Nixon proposed a reform similar to that proposed by the Clintons.

Social Insurance and Individual Freedom - The continuing debate over the Affordable Care Act and the commentary on this blog have convinced me that nothing can ever unite Americans on their vision of an ideal health system. We need different health insurance systems for different Americans. I mean by this not Americans who differ by age or ability to pay but Americans with different notions of a just society. This is where Germany’s approach to a health insurance system can serve as an inspiration. Germany’s population of close to 82 million is served by two distinct health insurance systems:

• 1. The Statutory Health Insurance System, founded in 1883 by Otto von Bismarck and constantly amended over the ensuing century.
• 2. A private commercial health insurance system.

Germany’s statutory health insurance system is the oldest in the world and has served as a model for many other countries in Europe, Latin America and Asia. In Germany the system consists of 154 (as of July 2011) autonomous, private, nonprofit sickness funds among which individuals can choose freely, which means that the funds compete with one another. Unlike Americans, who often are limited to networks of providers, Germans have complete freedom of choice of provider under the statutory system.

MLR bomb...There is a amazing piece in Forbes that Tim Worstall (also at Forbes) notes reporting on scary news that is misleading: I’m very confused by this piece from fellow Forbes contributor Rick Ungar. He tells us that there’s a bomb buried in Obamacare (or more formally, the Patient Protection and Affordable Care Act) and that it’s just gone off. Further, that it will mean the end of private, for profit, health care insurance on any large scale: whatever remains will be just a luxury item for those who like to beat the queues as such insurance is in the UK where we have the NHS. Angry Bear's Bruce Webb noted the MLR in the legislation on July 28, 2009 (and here and here), among the first to offer analysis, but hardly a surprise now. Tim continues:  That would be the provision of the law, called the medical loss ratio, that requires health insurance companies to spend 80% of the consumers’ premium dollars they collect—85% for large group insurers—on actual medical care rather than overhead, marketing expenses and profit. Failure on the part of insurers to meet this requirement will result in the insurers having to send their customers a rebate check representing the amount in which they underspend on actual medical care.

Medical Patents Must Die - Prometheus gave man fire, thankfully he didn’t charge every time man lit a match. Prometheus Labs in contrast wants to charge patients for a rule that says when to increase or decrease a drug in response to a blood test. Quoting Tim Lee:The patent does not cover the drug itself—that patent expired years ago—nor does it cover any specific machine or procedure for measuring the metabolite level. Rather, it covers the idea that particular levels of the chemical “indicate a need” to raise or lower the drug dosage. Even this is not quite right for suppose a physician notes that the patient’s metabolites are within the range where a change in dosage is not necessary; although the physician takes no action she still has used the patent and thus must pay Prometheus Lab a fee or infringe.

We’re #1? - From Healthwatch: Politicians love to claim the U.S. has “the best healthcare system in the world,” though experts argue otherwise. But a new index that purports to measure a nation’s prosperity — not just wealth, but health, personal freedom and other measures — concludes that lawmakers might be on to something. After crunching the World Bank’s world development indicators and survey data from the 2010 Gallup World Poll, the London-based nonprofit Legatum Institute concludes that the U.S. in 10th overall for prosperity — but first for health. I did a two-week series on the quality of the US health care system, so you can imagine I was interested in the results. The “study” was done by the Legatum Institute, a non-partisan institute that nonetheless seems to have the tagline, “Free Markets, Free Minds, Free Peoples”. The methods of the analysis are a bit vague. But here’s what I can figure out: The Health sub-index assesses countries by outcomes that are made possible by a strong health infrastructure, such as rates of immunisation against diseases and public health expenditure. Countries are also assessed on outcomes such as life expectancy, rates of infant mortality and undernourishment. The sub-index also includes measures of satisfaction with personal health and the health effects of environmental factors such as water and air quality, and even environmental beauty.

Obama Says He Backs Decision to Curb Teens Access to Morning-After Pill - President Barack Obama today backed his health secretary’s decision to overrule U.S. drug regulators and deny Teva Pharmaceutical Industries Ltd. (TEVA)’s request to sell its emergency contraceptive pill Plan B over the counter. Secretary of Health and Human Services Kathleen Sebelius ordered Margaret Hamburg, the Food and Drug Administration chief, to reject the application by Petach Tikva, Israel-based Teva, citing potential sales to girls younger than age 17. Hamburg said she was ready yesterday to approve sales of Plan B One-Step without a prescription to women of all ages based on “science-based evidence.” The FDA said it was the first time HHS has overruled an agency approval. “When it comes to 12-year-olds or 13-year-olds, the question is: Can we have confidence that they would potentially use Plan B properly?” Obama said at a press conference, adding that he wasn’t involved in the process. Obama said that, as the father of two young daughters, he supports Sebelius’s decision.

The Private Insurance Market - A bit of background: Long-term care insurance pays for your stay in a nursing home if you become unable to take care of yourself. Depending on the policy, it may also pay for care you receive at home instead of going into a facility. According to the insurer I’m considering, the median annual cost of a semi-private room in a nursing home in my state is $145,000, and the average stay is something like three years. To put that in perspective, in 2009, the median net worth of families where the head of household was of age 65–74 was $205,000 (including real estate assets). Long term care is not covered by Medicare, except for a short period after each acute event. It is covered by Medicaid, but to be eligible for coverage you have to exhaust all of your assets. Despite that onerous requirement, Medicaid currently covers 40 percent of all spending on long-term care. The Affordable Care Act of 2010 included what is known as the CLASS Act, which would have allowed anyone to buy long-term care insurance, with an average benefit of $75 per day, for a monthly premium of $123. The CLASS Act, however, has been suspended because the administration could not certify that it would be deficit-neutral over the long term. So the bottom line is: until you use up all your money, you’re on your own. Still, shouldn’t you be able to buy protection in the private insurance market? The short answer is: not really.

How Doctors Die  - “Years ago, Charlie, a highly respected orthopedist and a mentor of mine, found a lump in his stomach. He had a surgeon explore the area, and the diagnosis was pancreatic cancer. This surgeon was one of the best in the country. He had even invented a new procedure for this exact cancer that could triple a patient’s five-year-survival odds—from 5 percent to 15 percent—albeit with a poor quality of life. Charlie was uninterested. He went home the next day, closed his practice, and never set foot in a hospital again. He focused on spending time with family and feeling as good as possible. Several months later, he died at home. He got no chemotherapy, radiation, or surgical treatment. Medicare didn’t spend much on him. It’s not a frequent topic of discussion, but doctors die, too. And they don’t die like the rest of us. What’s unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of others, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently.”

Ireland: Psychiatrist Calls for Lithium to be Added to Water - A consultant psychiatrist last night called on Government to add lithium salts to the public water supply in a bid to lower the suicide rate and depression among the general population. At a mental health forum on “Depression in Rural Ireland” in Ennistymon, Co Clare, Dr Moosajee Bhamjee said that “there is growing scientific evidence that adding trace amounts of the drug lithium to a water supply can lower rates of suicide and depression”. Lithium is used by doctors as a mood stabiliser in the treatment for depression. Dr Bhamjee said: “A recent article in the British Journal of Psychiatry found the beneficial uses of lithium when it was added to the water supply in parts of Texas.”He said the Government should consider a pilot project for a town in Ireland where lithium salts could be added to the water in very small doses and examine the results.” He said there was already strong precedent for governments intervening in the operation of public water supply for health benefits by adding fluoride.

Man-made flu virus with potential to wipe out many millions is created in research lab --'Anthrax isn't scary at all compared to this' Just five tweaks to H5N1 makes it more contagious 28 Nov 2011 A group of scientists is pushing to publish research about how they created a man-made flu virus that could potentially wipe out civilisation. The deadly virus is a genetically tweaked version of the H5N1 bird flu strain, but is far more infectious and could pass easily between millions of people at a time. There are fears that the modified virus is so dangerous it could be used for bio-warfare, if it falls into the wrong hands [such as USociopaths and pharma-terrorists, who are *dying* to get an avian flu pandemic started].

Clinton: Gene synthesis raises bioweapon threat - New gene assembly technology that offers great benefits for scientific research could also be used by terrorists to create biological weapons, U.S. Secretary of State Hillary Rodham Clinton warned Wednesday. The threat from bioweapons has drawn little attention in recent years, as governments focused more on the risk of nuclear weapons proliferation to countries such as Iran and North Korea. But experts have warned that the increasing ease with which bioweapons can be created might be used by terror groups to develop and spread new diseases that could mimic the effects of the fictional global epidemic portrayed in the Hollywood thriller "Contagion." Many have been calling on the elimination of current viruses and diseases that, if in the wrong hands, could be a powerful weapon. As late as 2010, a congressional mandated panel reported that the U.S. would not be prepared for a bioweapon attack. The Commission on the Prevention of Weapons of Mass Destruction Proliferation said the Obama administration failed in its efforts to prepare for and respond to a biological attack, such as the release of deadly viruses or bacteria.

The Incredible Shrinking Brain -  I stumbled upon a thought-provoking article in the September, 2010 issue of the popular science magazine Discover. Called The Incredible Shrinking Brain, this article gets right to the point. John Hawks is in the middle of explaining his research on human evolution when he drops a bombshell. Running down a list of changes that have occurred in our skeleton and skull since the Stone Age, the University of Wisconsin anthropologist nonchalantly adds, “And it’s also clear the brain has been shrinking.”  “Shrinking?” I ask. “I thought it was getting larger.” The whole ascent-of-man thing. “That was true for 2 million years of our evolution,” Hawks says. “but there has been a reversal.” He rattles off some dismaying numbers: Over the past 20,000 years, the average volume of the human male brain has decreased from 1,500 cubic centimeters to 1,350 cc, losing a chunk the size of a tennis ball. The female brain has shrunk by about the same proportion. “This happened in China, Europe, Africa – everywhere we look.” For me, it doesn't get any better than this. Are you saying we're getting dumber? I don't want to be culture-centric, but it sure does explain a lot of what we observe everyday in the United States. But of course that doesn't apply here, for it appears the brain has been shrinking for the last 20,000 years, not just recently in Washington D.C. or Anytown, U.S.A, but everywhere Homo sapiens ("wise man") lives and breathes.

The 2012 Farm Bill: Another Can Kicked Down the Road - Unless an agreement is reached on the overall budget before then, the failure of the committee triggers automatic spending cuts of $1.2 trillion over 10 years beginning with the 2013 fiscal year. It is expected that agriculture’s share of that will be $15 billion over the 10 years, which is less than the $23 billion in savings that leadership of the House and Senate ag committees offered to the Joint Select Committee on Deficit Reduction. The question is where will the money come from: nutrition programs, major crop programs including crop insurance, conservation, specialty crops? And, what about those three dozen or so programs without baseline funding? At this point everything is up for grabs. And then there are those who think that the partisan paralysis that prevented the supercommittee from coming to agreement might also make it difficult to get a farm bill past both chambers of Congress. In that case both parties might want to kick the can down the road and write farm legislation after the 2013 elections—apparently because both sides think that they will come out the winner next November.

There’s no time to waste - FT - David Giles, a graduate anthropology student at the University of Washington, spends much of his time thinking about food. But not victuals in a grocery store, farm, family kitchen or restaurant. Instead, Giles is obsessed with “dumpster-diving” – or the art of eating food waste from American garbage skips.  The Melbourne-born anthropologist is currently analysing how large volumes of perfectly “edible” food are being thrown away each day in America because it does not meet the cultural or corporate norms of edible, or because shops do not want to display food that is “ugly” (say, bruised) or “old” (near its official sell-by date). Since this food is usually safe to eat, communities in places such as Seattle are now jumping – or “diving” – into those dumpsters to scavenge, thus redefining what can be eaten. “This is about the social life (or life-cycle) of food,” Giles told a recent meeting of the American Anthropological Association (AAA), in which he also described the seemingly arbitrary way that “garbage” is now defined in the west.  Welcome to one of many paradoxes that surround modern food. In some senses, America might appear to be groaning with stuff to eat. Some 34 per cent of adults are classified as obese according to the Center for Disease Control, and portion sizes are infamously large. Indeed, food is so plentiful that an estimated 27 per cent of it is routinely thrown away: hence those dumpsters that fascinate Giles.

Why Calorie Counts Are Wrong: Cooked Food Provides a Lot More Energy -  Especially fascinating were the physiological studies on people who subsist only on raw foods. I was impressed to learn that raw-foodists are thin compared to those eating cooked diets, given that in most cases they are eating domesticated foods with lots of nutrients, are processing them in machines like electric blenders, and of course, living as most do in the developed world, never suffering through seasonal food shortage. Yet despite all these advantages over anyone who might try eating wild foods raw, the average woman on a 100% raw diet did not have a functioning menstrual cycle. About 50% of women entirely stopped menstruating! When a raw-foodist’s reproductive system does not allow her to have a baby even when her diet is composed of processed, high-quality, agricultural foods, the obvious explanation is that she is not getting enough calories.

Global Food Prices 10% off Peak  - The UN Food and Agriculture Organization has reported on the November value for their food price index: The FAO Food Price Index (FFPI) averaged 215 points in November 2011, marginally (1 point) down from October and 10 percent (23 points) below its February 2011 peak. Among the various commodities, a recovery of oils quotations compensated for a decline in sugar, while prices of the other commodity groups were little changed. At its current value, the FFPI is only 1 percent (2 points) above its level in November 2010. At one level - it's good news for those of us that like to eat that food prices are declining (though not such good news for the farmers that grow the food). Still, my take looking at the graph above, is that this looks akin to other indicators such as European new industrial orders or world trade - there are signs of a fairly abrupt drop-off consistent with the beginning of a new recession (compare to the fall in the food price index in 2008).  The incipient stabilization in November contradicts this story a little, however. The timing is easier to see in this picture:

Food prices likely to remain high as corn supply lags - The U.S. government barely changed its estimate for next year's corn surplus, which is expected to stay small and keep high food prices high. The Department of Agriculture estimated Friday that farmers will have 848 million bushels of corn on hand at the end of next summer. That's up less than 1 percent from last month's forecast. Next year's surplus would satisfy demand for fewer than 25 days. A 30-day supply is considered healthy. Higher corn prices have pushed overall food inflation up this year. Corn is an ingredient in everything from animal feed to cereal to soft drinks. The USDA expects food prices to have increased 4.5% in 2011. They estimate prices will rise as much as 3.5% next year. Fears of a corn shortage pushed the price to a record high of $7.99 a bushel in June. Corn prices have eased slightly since then to around $6 per bushel. Corn traded for about $2 a bushel for several years until 2005. Government mandates and subsidies that year helped the ethanol businesses expand. The surplus is at historically low levels because of increased demand from ethanol makers and also from livestock producers.

An interview with David Pimentel | Fill ‘Er Up: On biofuels… Any worthy idea can withstand and even be improved by naysayers; scolds and skeptics play the useful role of pointing out obvious flaws. The biofuels industry has no more persistent, articulate, and scathing critic than David Pimentel, professor emeritus of entomology at Cornell University. In 1979, with the price of oil surging and a politically connected company called Archer Daniels Midland investing heavily in ethanol production, the U.S. Department of Energy invited Pimentel to chair an advisory committee to look at ethanol as a gasoline alternative. The committee's conclusion: ethanol requires more energy to produce than it delivers. That assessment didn't stop the government from enacting a variety of subsidies for ethanol, which has since developed into a multibillion-dollar industry. Nor has Pimentel refrained from issuing a series of scholarly articles claiming to show that, after decades of steady government support, ethanol remains an energy bust.  The U.S. Department of Agriculture now claims that corn ethanol delivers a modestly positive net energy balance [PDF], a conclusion recently endorsed by a study from University of Minnesota researchers. Yet Pimentel's provocations continue. Not only is corn-based ethanol a net energy consumer, he says, but cellulosic ethanol -- simultaneously biofuel's holy grail and sacred cow -- is "worse."

Cargill, the Dr Gloom of commodities markets - Cargill has become the Dr Gloom of the commodities trading sector. The Minnesota-based company was the first big trading house to warn about the economic slowdown; its latest quarterly results reflected a sharp drop year-on-year; and now it is firing 2,000 people due to the “continued weak global economy”. This is no small matter: Cargill is at the centre of global trade, shipping commodities from wheat to beef, and the wide reach of its business network helps it anticipate changes in the economic cycle. Other top commodities trading houses – particularly Glencore and Noble Group – are, however, painting a much rosier outlook, offering a much more positive view both about the global economy and their businesses. It is too early to say whether Cargill’s bearishness is justified. But it is worth noting that Cargill is a privately-owned company – still controlled by the MacMillan and Cargill families, descendants of the founders who set up the group in 1865 – so it does not feel obliged to put as brave a face on in a bad economic environment as its publicly-listed rivals.

Monsanto PR Firm Reportedly ‘Ended’ by Anonymous - It seems that Monsanto may be having a rough week. Not only was the company hit by a press release declaring them the worst company of 2011, but a group of Anonymous hackers claim to have actually completely disrupted the operations of a PR firm which manages Monsanto’s own PR. The hackers infiltrated the PR firm, known as The Bivings Group, citing “15+years of running marketing campaigns and helping some of the most corrupt corporations on the planet, as well as several governmental agencies, cover up their dirt.” The hackers claimed to have succeeded in bringing down The Bivings Group on December 5th. Going by information released by Anonymous, Bivings Group shut down all of their servers and liquidated their assets after the infiltration, while former employees moved on to start ‘The Brick Factory’, a new PR firm. The hackers actions are obviously driven by the PR firm’s decision to help run marketing campaigns for corrupt corporations like Monsanto.

North Mexico wilts under worst drought in 70 years - - The sun-baked northern states of Mexico are suffering under the worst drought since the government began recording rainfall 70 years ago. Crops of corn, beans and oats are withering in the fields. About 1.7 million cattle have died of starvation and thirst. Hardest hit are five states in Mexico's north, a region that is being parched by the same drought that has dried out the southwest United States. The government is trucking water to 1,500 villages scattered across the nation's northern expanse, and sending food to poor farmers who have lost all their crops. Life isn't likely to get better soon. The next rainy season isn't due until June, and there's no guarantee normal rains will come then. Most years, Guillermo Marin harvests 10 tons of corn and beans from his fields in this harsh corner of Mexico. This year, he got just a single ton of beans. And most of the 82-year-old farmer's fellow growers in this part of Durango state weren't able to harvest anything at all.

The Parching of the West - The good news? While 2010 tied for the warmest year on record, 2011 -- according to the U.N.'s World Meteorological Organization (WMO) -- is likely to come in 10th once November and December temperatures are tallied. In part, this is evidently due to an especially strong La Niña cooling event in the Pacific.  On the other hand, with 2011 in the top ten despite La Niña, 13 of the warmest years since such record-keeping began have occurred in the last 15 years.  Think of that as an uncomfortably hot cluster. And other climate news is no better.  A recent study indicates that Arctic ice is now melting at rates unprecedented in the last 1,450 years (as far back, that is, as reasonably accurate reconstructions of such an environment can be modeled).  As the Arctic warms and temperatures rise in surrounding northern lands -- someday, Finland may have to construct artificial ski trails and ice rinks for its future winter tourists -- a report on yet another study is bringing more lousy news.  Appearing in the prestigious science journal Nature, it indicates that the melting permafrost of the tundra may soon begin releasing global-warming gases into the atmosphere in massive quantities.  We’re talking the equivalent of 300 billion metric tons of carbon over the next nine decades.

The Age of Thirst in the American West - Consider it a taste of the future: the fire, smoke, drought, dust, and heat that have made life unpleasant, if not dangerous, from Louisiana to Los Angeles. New records tell the tale: biggest wildfire ever recorded in Arizona (538,049 acres), biggest fire ever in New Mexico (156,600 acres), all-time worst fire year in Texas history (3,697,000 acres).The fires were a function of drought.  As of summer’s end, 2011 was the driest year in 117 years of record keeping for New Mexico, Texas, and Louisiana, and the second driest for Oklahoma. Those fires also resulted from record heat.  It was the hottest summer ever recorded for New Mexico, Texas, Oklahoma, and Louisiana, as well as the hottest August ever for those states, plus Arizona and Colorado. Virtually every city in the region experienced unprecedented temperatures, with Phoenix, as usual, leading the march toward unlivability. This past summer, the so-called Valley of the Sun set a new record of 33 days when the mercury reached a shoe-melting 110º F or higher. (The previous record of 32 days was set in 2007.) And here’s the bad news in a nutshell: if you live in the Southwest or just about anywhere in the American West, you or your children and grandchildren could soon enough be facing the Age of Thirst, which may also prove to be the greatest water crisis in the history of civilization.

Unusual Drought Triggers Alarm Across Balkans -The waters of the mighty Danube are so low that dozens of cargo ships are stuck, stranded in ghostly fog or wedged into sand banks on what is normally one of eastern Europe's busiest transport routes. A lack of rain has triggered the worst drought in decades for this time of year, dropping river levels to record lows and sounding an alarm in parts of central and eastern Europe. Power supplies are running low in Serbia, drinking water shortages have hit Bosnia, and crop production is in jeopardy in Romania, Bulgaria and Hungary. The Czech Republic is at its driest since records began in 1775. Meteorologists say they are not sure why the region has had far less rain than average since August — but they don't see any more coming quickly. That is bad news for shipping companies that are already reporting big losses. "This is a disaster," said Branko Savic, the manager of a privately owned Danube shipping company in Serbia that he says is operating at only a third of its capacity. "Traffic on the Danube is practically nonexistent. . . We are in dire need of enormous amounts of water, rain, or melting snow in order to better the situation." About 80 big cargo ships are stranded at the Serbia-Hungary border on the Danube, Europe's second largest river, which winds 2,860-kilometer (1,777-mile) from Germany, passing through eight countries before flowing into the Black Sea.

Study: Water wars likely in Middle East - Using water from the Dead Sea means it's drying up, a resource loss that scientists said could destabilize an already tense Middle East political situation. Sediment cores from below the Dead Sea indicate it dried up roughly 125,000 years ago and scientists say human activity might dry it up again. "The Dead Sea is already drying up because humans are using so much water," Steven Goldstein, a geochemist at Columbia University's Lamont-Doherty Earth Observatory in New York, told London newspaper The Independent. "As of now, virtually no fresh water is entering the Dead Sea." Scientists like Goldstein said the more the regional agricultural sector relies on water from the Dead Sea, the greater the chances for a prolonged drought.

The water, energy and food nexus - As I flew back from Bonn last week, on my way back from the Bonn 2011 Nexus Conference (16–18 November), one thing was clear to me. Corporate environmentalism is entrenching itself firmly in the corridors of global governance, and challenging its advance will require new strategies. The "in-your-face" approach of yesterday is being replaced with a softer, albeit more dangerous "corporate responsibility" garb. This softer path also seeks to ensure that civil society stakeholders are seen as party to the decisions. The Bonn Nexus conference is symptomatic of the way that corporate environmentalism is developing. "The water, energy and food security nexus, Solutions for the Green Economy," as it is called, is an initiative of the federal government of Germany to develop specific contributions to the Rio+20 Conference. In its recognition of a "nexus," these conferences could be seen as a step forward. Two years ago, when we published a report on the need for integrated solutions for the water, climate and food crises, the idea of connections between these three sectors was simply not on any official agenda.

Why deforesters could soon have freer rein in the Amazon  - Despite overwhelming support among the Brazilian public for harsh measures against illegal deforesters, Brazil's Congress looks set to loosen deforestation restrictions instead. Why? The Código Forestal or Forest Code now being debated in Congress will determine the future of Brazil’s forests, including the world’s last great rainforest, the Amazon. In order to make good on a 1965 forest code that was rarely if ever enforced, President Dilma Rousseff introduced strong legislation in 2010. Legislators in the Lower House then weakened the bill substantially, and after being approved with minor alterations in the Senate, it is now heading back to the Lower House for congressional sanction. The bill “constitutes one of the worst regressions for environmental legislation in Brazil,” according to Marina Silva, the rebellious Minister of the Environment under President Luiz Inácio Lula da Silva and the third place candidate in the last presidential election. The Forest Code’s policy example illustrates how representational democracy is not translating citizen interests into law, a universal problem that travels far beyond Brazil.

Earth Likely to Become Increasingly Hostile to Agriculture - To get a glimpse of the future, look to East Africa today. The Horn of Africa is in the midst of its worst drought in 60 years: Crop failures have left up to 10 million at risk of famine; social order has broken down in Somalia, with thousands of refugees streaming into Kenya; British Aid alone is feeding 2.4 million people across the region. That's a taste of what's to come, say scientists mapping the impact of a warming planet on agriculture and civilization. "We think we're going to have continued dryness, at least for the next 10 or 15 years, over East Africa," said Chris Funk, a geographer at the U.S. Geological Society and founding member of the Climate Hazard Group at the University of California, Santa Barbara. Funk and other experts at the American Geophysical Union meeting in San Francisco cautioned that East Africa is just one example. Many recent events - discoveries from sediment cores in New York, drought in Australia and the western United States, data from increasingly sophisticated computer models - lead to a conclusion that the weather driving many of the globe's great breadbaskets will become hotter, drier and more unpredictable.

WMO: 2011: world’s 10th warmest year, warmest year with La Niña on record, second-lowest Arctic sea ice extent - Global temperatures in 2011 have not been as warm as the record-setting values seen in 2010 but have likely been warmer than any previous strong La Niña year, based on preliminary data from data sources compiled by the World Meteorological Organisation (WMO). The global combined sea surface and land surface air temperature for 2011 (January–October) is currently estimated at 0.41°C ± 0.111°C (0.74°F ± 0.20°F) above the 1961–1990 annual average of 14.00°C/57.2°F. At present, 2011’s nominal value ranks as the equal 10th highest on record, and the 13 warmest years have all occurred in the 15 years between 1997 and 2011. Model reanalysis data from the European Centre for Medium-Range Weather Forecasts (ECMWF) are also consistent with this ranking. The 10-year average for the period 2002-11, at 0.46°C above the long-term average, equals 2001-10 as the warmest 10-year period on record. Final annual figures for 2011 will be available once November and December data are available in early 2012.  Global climate in 2011 was heavily influenced by the strong La Niña event which developed in the tropical Pacific in the second half of 2010 and continued until May 2011. La Niña conditions have redeveloped in recent weeks but are not expected to approach the intensity seen in late 2010 and early 2011.

NRDC: Extreme Weather Map 2011: Thousands of Weather Records Broken in the US, Costs Climbing – and Climate Change a Factor - Climate change increases the risk of record-breaking extreme weather events that threaten communities across the country. In 2011, there were at least 2,941 monthly weather records broken by extreme events that struck communities in the US. Check out the interactive map below to find out what events hit your area from January to October 2011.

Weather's Dozen: 2011 Breaks U.S. Billion-Dollar Disaster Record… Between fires, twisters, hurricanes, droughts and floods, 2011 has been Mother Nature's most continuously whopping year for the United States. With data recently updating the number of weather disasters passing the billion-dollar mark, the National Oceanic and Atmospheric Administration now counts a record of 12 disasters -- smashing the previous record of nine such calamities in 2008 by a third. In total, the dozen have killed almost 650 people and add up to more than $52 billion in economic damage. "One billion dollars represents the upper tier of the worst natural disasters," Christopher Vaccaro, spokesman for the National Weather Service at NOAA, told us. "In a year there are numerous smaller events that might cause damage in the hundreds of thousands or in the millions, but when you get to a weather disaster that gets into the billions, you're getting into a significant event that had tremendous economic loss and also an impact on human livelihood. That threshold is truly representative of some of the worst of the worst."

Scientists say Himalayan glaciers melting - GLACIERS in the Himalayas have shrunk by as much as a fifth in just 30 years and scientists say climate change is to blame. The findings, published in three reports by the Kathmandu-based International Centre for Integrated Mountain Development, show Nepal's glaciers have shrunk by 21 per cent and Bhutan's by 22 per cent over 30 years. The reports, launched yesterday at the UN climate talks in Durban, South Africa, form the most comprehensive ever assessment of the extent of Himalayan ice melting.

Rate of Global Temperature Increase  - There's a very interesting new paper out from Grant Foster (who blogs at Open Mind) and Stefan Rahmstorf (who occasionally blogs at Real Climate).  What the paper does is take five global temperature series that look like this: And then uses statistical techniques to remove the influence of three sources of natural variation: the El-Nino oscillation, volcanic eruptions, and solar variability.  After that, the adjusted series look like this:Basically there is a clearly linear trend (the global warming signal) with a much smaller amount of noise left over that is a) fairly correlated between the different sources, and b) not very autocorrelated - ie it looks like the annual fluctuations in the weather. I won't say too much about their analysis since it's well covered at Open Mind.  What I was curious about is the extrapolation, since the data seem to cluster so tightly about a linear trend.  I read off the average of the five adjusted series above and then did a simple linear least squares which gave the overall slope as 1.63 ± 0.09 C/century.  This statistical error of about 5% is much much smaller than the uncertainties from climate models.  Of course, the linear nature of the data is purely an empirical observation that could break down in the future (whereas the climate models attempt to capture the underlying physics of the global climate system).

Report: Global Warming May Be Irreversible By 2006 - A new report from the U.N. Intergovernmental Panel on Climate Change warned Monday that global warming is likely to become completely irreversible if no successful effort is made to slow down the trend before 2006. Unless greenhouse-gas emissions are drastically reduced by then, the report concludes, it will be too late to avoid inflicting a grave environmental catastrophe upon future generations. "We have absolutely no time to waste," said Dr. William Tumminelli, lead author of the report, which stresses it is utterly crucial the world cut its carbon footprint in half by the year 2000. "If we wait until 1998 or even 1995 to really start doing something about climate change, our planet's rising temperature will already have set in motion a series of devastating and irreparable long-term consequences. We need to have strict international rules in place well ahead of 2006 or, to be blunt, many of the earth's inhabitants will be doomed."

Carbon Emissions Show Biggest Jump Ever Recorded - Global emissions of carbon dioxide from fossil-fuel burning jumped by the largest amount on record last year, upending the notion that the brief decline during the recession might persist through the recovery. Emissions rose 5.9 percent in 2010, according to an analysis released Sunday by the Global Carbon Project, an international collaboration of scientists tracking the numbers. Scientists with the group said the increase, a half-billion extra tons of carbon pumped into the air, was almost certainly the largest absolute jump in any year since the Industrial Revolution, and the largest percentage increase since 2003. The increase solidified a trend of ever-rising emissions that scientists fear will make it difficult, if not impossible, to forestall severe climate change in coming decades.

Record Jump in Carbon Emissions in 2010, Study Finds - Global emissions of carbon dioxide from fossil-fuel burning jumped by the largest amount on record last year, upending the notion that the brief decline during the recession might persist through the recovery.  Emissions rose 5.9 percent in 2010, according to an analysis released Sunday by the Global Carbon Project, an international collaboration of scientists tracking the numbers. Scientists with the group said the increase, a half-billion extra tons of carbon pumped into the air, was almost certainly the largest absolute jump in any year since the Industrial Revolution, and the largest percentage increase since 2003.  The increase solidified a trend of ever-rising emissions that scientists fear will make it difficult, if not impossible, to forestall severe climate change in coming decades.  The researchers said the high growth rate reflected a bounce-back from the 1.4 percent drop in emissions in 2009, the year the recession had its biggest impact.

Trickle-Down Economics - As the U.N. climate change meetings meander on in Durban, South Africa, with little sign of major breakthrough -- and soon after news that the last year saw the largest rise in carbon emissions in history -- it is a good time to think about how to deal with some of the impacts of a global warming that appear increasingly inevitable. One big impact involves water -- both that there's soon going to be too much of the salty stuff subsuming low lying areas as the ice caps melt, and too little elsewhere. A warmer world will be wetter overall, but current models predict that climate change will make some dry parts of the planet -- Northern Africa, for one -- even drier. Many of the places are already the very regions suffering from the greatest shortages. Even without climate change, global patterns of water usage are unsustainable, but global warming is a big reason to start using the stuff with greater care. The simplest way to encourage that? Make people pay for it.

Marching Off the Cliff - A task of the United Nations Framework Convention on Climate Change, now under way in Durban, South Africa, is to extend earlier policy decisions that were limited in scope and only partially implemented. These decisions trace back to the U.N. Convention of 1992 and the Kyoto Protocol of 1997, which the U.S. refused to join. The Kyoto Protocol’s first commitment period ends in 2012.  As the delegates meet in Durban, a report on newly updated digests of polls by the Council on Foreign Relations and the Program on International Policy Attitudes reveals that “publics around the world and in the United States say their government should give global warming a higher priority and strongly support multilateral action to address it.” Most U.S. citizens agree, though PIPA clarifies that the percentage “has been declining over the last few years, so that American concern is significantly lower than the global average – 70 percent as compared to 84 percent.” “Americans do not perceive that there is a scientific consensus on the need for urgent action on climate change. A large majority think that they will be personally affected by climate change eventually, but only a minority thinks that they are being affected now, contrary to views in most other countries. Americans tend to underestimate the level of concern among other Americans.”

Delusional in Durban - A week ago, the annual climate change diplomatic cycle convened here in Durban. Global interest in COP-17 goings-on can be gauged by the fact that the media contingent is half what it was in Copenhagen and only 12 heads of state—mostly from Africa—are planning to drop by.  When nobody important is paying much attention and nothing significant is likely to be at stake, then, as the Durban draft negotiations documents show, even diplomats can and will say any silly thing that they’d like. Consider some of the proposed cuts in emissions that are being demanded of developed countries. One of the more moderate proposal demands—with proposed phrases in brackets—that “developed countries as a group should reduce their greenhouse gas emissions…[by][at least][40][45][50] per cent from 1990 levels by 2020.” To make it simple, let’s take a look at just how a 50 percent cut in U.S. emissions of carbon dioxide might be achieved.  A 50 percent cut in fossil fuels below 1990 levels would mean cutting annual emissions by roughly 2.8 billion tons in nine years. One way to achieve this would be to shut down completely the 70 percent of America’s electric power generation that is fueled by coal and natural gas, plus removing from the roads nearly half of America’s 250 million vehicle fleet.

Canada May Miss $6.7 Billion Carbon Offset Bill by Exiting Kyoto Protocol - Bloomberg: Canada, the country furthest from meeting its commitment to cut carbon emissions under the Kyoto Protocol, may save as much as $6.7 billion by exiting the global climate change agreement and not paying for offset credits. The country’s greenhouse-gas emissions are almost a third higher than 1990 levels, and it has a 6 percent CO2 reduction target for the end of 2012. If it couldn’t meet its goal, Canada would have to buy carbon credits, under the rules of the legally binding treaty. Canada, which has the world’s third-largest proven oil reserves, would be the first of 191 signatories to the Kyoto Protocol to annul its emission-reduction obligations. While Environment Minister Peter Kent declined to confirm Nov. 28 that Canada is preparing to pull out of Kyoto, which may ease the burden for oil-sands producers and coal-burning utilities, he said the government wouldn’t make further commitments to it. “Canada is the only country in the world saying it won’t honor Kyoto,”

Suppression of climate debate is a disaster for science - Environment Minister Peter Kent has done us all a favour by stating the obvious: Canada has no intention of signing on to a new Kyoto deal. So long as, the world’s biggest emitters want nothing to do with it, we’d be crazy if we did. Mr. Kent also refuses to be guilted out by climate reparations, a loony and unworkable scheme to extort hundreds of billions of dollars from rich countries and send it all to countries such as China. Such candour from Ottawa is a refreshing change from the usual hypocrisy, which began the moment Jean Chrétien committed Canada to the first Kyoto Protocol back in 1998. Yet even though a global climate deal is now a fantasy, the rhetoric remains as overheated as ever. Without a deal, we’re told, the seas will rise, the glaciers will melt, the hurricanes will blow, the forest fires will rage and the four Horsemen of the Apocalypse will do their awful work. Or maybe not. As Roger Pielke Jr., one of the saner voices on the climate scene, points out, the hurricanes have failed to blow since Hurricane Wilma hit the Gulf Coast back in 2005. Despite the dire predictions of the experts, the U.S. has now experienced its longest period free of major hurricanes since 1906.

Kyoto Protocol on Life Support - The United States has become the major stumbling block to progress at the mid point of negotiations over a new international climate regime say civil society and many of the 193 nations attending the United Nations climate change conference here in Durban."The U.S. position leads us to three or four degrees Celsius of warming, which will be devastating for the poor of the world," said Celine Charveriat of Oxfam International. "They are proposing a 10-year time out with no new targets to lower emissions until after 2020," Charveriat said.At COP 15 in Copenhagen the U.S. committed to reducing its emissions 17 percent from 2005 by 2020. This is far short of what is widely agreed as necessary: cuts in fossil fuel emissions 25 to 40 percent below those in 1990 by U.S. and all developed nations.Scientists have repeatedly warned that global emissions must peak by mid-decade and then decline every year thereafter. But U.S. negotiator Jon Pershing said their Copenhagen emission reduction pledge is sufficient until 2020."There is a huge failure of ambition. Nothing here will keep us out of catastrophic climate change," said Jim Leape, Director General of the World Wide Fund for Nature International. The U.S. has already suffered record- breaking losses due to severe weather this year with only 0.8 degrees Celsius of warming, Leape said.

In Durban, Kyoto seems set to meet its end - With just days remaining to salvage the Kyoto climate treaty, a mood of gloom is descending over the negotiations. Even the most optimistic diplomats are finding it hard to imagine how a deal can be reached. Briefings by the major negotiating players on Wednesday were a study in contrasts: frustration and anger among Kyoto’s supporters, compared with calmness and confidence among Kyoto’s opponents, including Canada. Even a weak compromise deal promoted by the European Union – an agreement on a vague “road map” or “mandate” that could eventually lead to a legally binding treaty after 2020 – now seems in serious doubt. Two of the biggest emitters, China and the United States, continue to set conditions on their support for a binding treaty – and neither will make a move without the other. China wants to be considered a developing country, and as such have lower obligations. The United States wants all countries to be treated equally. “What is really frustrating to see is this conference is again hijacked by the ping-pong game between the U.S. and China,” Among the major emitters, only the European Union is prepared to extend its legal obligations under Kyoto. This would keep Kyoto technically alive, but its rules would apply to a tiny fraction of global emissions, leaving it increasingly impotent.

World’s biggest polluters stymie agreement at Durban global warming talks - China, the U.S. and India, the three biggest polluters, maintained their resistance to a time line leading to a legally-binding climate treaty, threatening efforts to keep up the fight on global warming this year. European Union Climate Commissioner Connie Hedegaard said she hasn’t yet won backing for her demand for a “road map” pointing to the next climate treaty because some nations are holding back support. She indicated that China and India remained a bloc. Last night, the U.S. said it won’t agree to begin talks for a legally-binding deal.  “The responsibility lies very, very heavily on the shoulders of those big ones that are not giving in,” Hedegaard said at a news conference in Durban, South Africa. “I’m concerned about the pace. There isn’t much time left. If there is no further movement from what I have seen at four o’clock in the morning, there will be no deal.”  Two weeks of climate talks led by the United Nations are due to end today, and envoys from more than 190 countries remain divided about how to limit fossil-fuel emissions after restrictions in the Kyoto Protocol expire next year.

World climate talks on brink of disaster - Developing states most at risk from global warming rebelled against a proposed deal at U.N. climate talks Friday, forcing host South Africa to draw up new draft documents in a bid to prevent the talks from collapsing. South African Foreign Minister Maite Nkoana-Mashabane suspended the talks in Durban after a coalition of island nations, developing states and the European Union complained the current draft lacked ambition, sources said. "There was a strong appeal from developing countries, saying the commitments in the proposed texts were not enough, both under the Kyoto Protocol and for other countries," said Norway's Climate Change Minister Erik Solheim. Canada's Environment Minister Peter Kent told Reuters there was "serious negotiating to do" if the conference was to wrap up as planned Friday.

World ‘heading for 3.5 C warming’: study - Current pledges for curbing carbon emissions will doom the world to global warming of 3.5 C, massively overshooting the UN target of 2 C, researchers reported at the climate talks here on Tuesday. Output of heat-trapping carbon gases is rising so fast that governments have only four years left to avert a massive extra bill for meeting the two degrees Celsius (3.6 degrees Fahrenheit) target, they said. “The current pledges are heading towards a global emissionspathway that will take warming to 3.5 C goal (6.3 F),” according to an estimate issued by a consortium of German researchers. The world is on a “high-warming, high-cost, high-risk pathway,” they said. The report, compiled by Climate Analytics and Ecofys, which are German firms that specialise in carbon data, was issued on the sidelines of the 194-nation UN talks in Durban. The 12-day conference runs until Friday.

Blue Carbon: The Role of Oceans in Climate Change - Oceans make up 70% of the earth’s surface and hold 90% of natural carbon. So why do they only make up a small portion of the research on the global impact of carbon emissions? The role of “blue carbon” in climate change is getting more interest from the international community. With a growing body of research exploring how an increase in atmospheric carbon is impacting the chemistry and biology of ocean ecosystems — and thus influencing climate change — people are starting to pay more attention. However, it’s still not a well-explored concept outside the scientific community. At the COP climate talks in Durban, for example, there is endless talk about atmospheric carbon and about how to control terrestrial carbon emissions through deforestation programs like REDD+. But there are still very few mentions of oceanic carbon. We can look at Blue Carbon in two ways. The first is the climate change impact of releasing natural carbon from the oceans through the destruction of ecosystems. Most research in this area is focused on near-shore ecosystems like mangroves and sea grasses. The second is the impact of burning fossil fuels on ocean ecosystems by adding geologically-trapped CO2 to the carbon cycle.

Entrepreneur: Capitalism Will Save World from Climate Crisis to Preserve Markets for iPads, Coke - On Sunday, Democracy Now! attended the corporate-sponsored World Climate Summit in Durban that advocates a market approach to solving the climate crisis. One attendee, South African entrepreneur Jason Drew, called for the United Nations to step aside and let businesses and markets fix the problems caused by global warming. When asked why business would be interested in saving the people of the Maldives from catastrophic climate change, Drew responded, "Customers live there. It’s a business world. It’s capitalism. We need people to buy our goods... They all buy iPads, Coca-Cola, all the products we know. If the don’t exist anymore, the market’s gone." [includes rush transcript]

Corporations versus People - In a very short amount of time, in just a few decades, a large percentage of the planet’s inhabitants have woken up to the reality that that we have very little time remaining to literally recreate our lives and our communities, to start living as if we really get it—that our Mother Earth, Gaia, is a finite, floating sphere and offering us her amazing services if only we would live in a way that is truly sustainable for the next thousands of years. The problem is, we have to act quickly and boldly. For example, most climate scientists now agree that we must cut our greenhouse gas emissions by 80% to 90% within 20 years or less if we want to avert global catastrophic climate destabilization. To succeed at making such drastic cuts, according to George Monbiot, one of Europe’s leading writers on climate change, the only way to reach such goals is to end almost all private driving of cars, to end almost all commercial flights, to end all long- distance transport of food and manufactured goods, to shut down all of our coal-fired power plants, to insulate and retrofit all of our existing homes and offices. That’s a tall order in 20 years. 

How can climate change denialism be explained? - For more than a century some scientists have believed that an increase in certain gases in the atmosphere - most importantly carbon dioxide (CO2) - would raise the temperature of the Earth. Since the beginning of the industrial revolution vast amounts of greenhouse gases have been released into the atmosphere. The temperature of the Earth has risen by 0.7 degrees Celsius. Even without any further greenhouse gas emissions, a further increase of 0.5C in global temperature is guaranteed.Despite one international attempt to reduce greenhouse gas emissions - the Kyoto Protocol - these have continued to climb; last year, as we recently learnt, by an alarming amount. Almost all climate scientists and many governments accept that an increase in global temperature of 2C above pre-industrial levels is dangerous. According to the many models of the climate scientists, if human beings do not manage speedily to radically reduce and then eliminate the emission of greenhouse gases the temperature of the Earth will continue to rise by well beyond 2C and even up to 7C by 2100.

Are CO2 emissions a normal or inferior good? - In Econ 101 terms, a normal good is a good for which consumption rises as incomes rise.  An inferior good is a good for which consumption falls as income rises.  With regards to CO2 emissions, the distinction is important because the income effect of policies aimed at CO2 reductions may cause unintended consequences if the income effects counter the direct reduction of the policy.  If CO2 reducing policies result in diminished economic growth, and if CO2 emissions are inferior, then the reduced income due to reduced growth will put pressure on CO2 emissions to rise, potentially countering some of the direct decrease in emissions caused by the policy itself. Global carbon dioxide emissions from industry rose about 3 percent in a weak global economy this year, a study released on Monday showed, adding fresh urgency to efforts to control planet-warming gases at U.N. climate talks in South Africa. The study by the Global Carbon Project, an annual report card on mankind's CO2 pollution, says a slowdown in emissions during the 2008-09 global financial crisis was a mere speed bump, and the gain in 2011 followed a 6 percent surge in 2010.

Geoengineering could save Earth _ or destroy it - Brighten clouds with sea water? Spray aerosols high in the stratosphere? Paint roofs white and plant light-colored crops? How about positioning "sun shades" over the Earth? At a time of deep concern over global warming, a group of scientists, philosophers and legal scholars examined whether human intervention could artificially cool the Earth — and what would happen if it did. A report released late Thursday in London and discussed Friday at the U.N. climate conference in South Africa said that — in theory — reflecting a small amount of sunlight back into space before it strike's the Earth's surface would have an immediate and dramatic effect.  Within a few years, global temperatures would return to levels of 250 years ago, before the industrial revolution began dumping carbon dioxide into the air, trapping heat and causing temperatures to rise. But no one knows what the side effects would be.

Recognizing good science when you see it: climate change seen by depletion scientists - One of the most interesting talks at the recent meeting on Energy organized by the Club of Rome in Basel, was the one given by Ian Dunlop, of ASPO Australia (photo on the right). It was not so much on energy, but on the interconnection of energy with climate change. It was up to date and saying the things that needed to be said. That is, Ian Dunlop didn't shy away from saying that climate change is threatening the very existence of our civilization and that we must do something quick about it. It was an excellent talk, give a look to the slides if you have a moment, here is the link. What I found surprising were the several comments that I heard later on from people attending the meeting. Some of those who didn't have a specific background on climate science seemed to be shocked. They didn't know, it seems, that the climate situation is so bad and that it is so urgent to act - but they now recognized the problem. This experience of mine in Basel parallels very well the one I had in Brussels for the ASPO-9 conference, when climate scientist Jean-Pascal van Ypersele gave a good talk on climate change. Also there, the reaction of some of the people attending the conference was of surprise; they never had a chance, apparently, to hear a comprehensive report on the climate situation.

China Rejects U.S. Ruling on Solar Imports - China rejected a preliminary ruling by a U.S. trade panel that imports of Chinese solar panels are harming the domestic industry, saying the decision shows the country’s “inclination to trade protectionism.”  The U.S. International Trade Commission on Dec. 2 took the first step toward imposing added tariffs on Chinese solar imports, voting unanimously in Washington on a petition by Bonn- based SolarWorld AG (SWV) that called for antidumping and countervailing duties. The commission will now hold a full investigation.  “The ruling was made without sufficient evidence showing U.S. solar panel industry has been harmed,” China’s Ministry of Commerce said in a statement Dec. 3. It was taken “regardless of defense opinions from Chinese firms, as well as opposition from the U.S. domestic industries and other stakeholders, which prominently shows the U.S.’s strong inclination to trade protectionism and for which China is deeply concerned.”  The Chinese government uses cash grants, raw-materials discounts, preferential loans, tax incentives and currency manipulation to boost exports of solar cells, according to SolarWorld’s Oct. 19 complaint to the ITC and the U.S. Commerce Department. SolarWorld, a maker of solar modules, is seeking duties to offset the practices.

What Will Renewable Energy Really Cost? - That is the question customers are asking as their utility rates go up to pay for the cumulative cost of the aspirations of politicians and regulators. But until now the answer to that question was hard to get, at least in California where under state law and utility regulations the costs of utility procurement of renewable energy contracts was kept confidential. Governor Jerry Brown has signed SB 836 sponsored by Los Angeles County Senator Alex Padilla requiring that the California Public Utility Commission produce a report to the Legislature each year starting in February 2012 that tells the politicians and customers what impact on rates the aggregate costs of renewable energy will cause. California started requiring in 2002 that utilities buy 20 percent of total retail sales of electricity in California from eligible renewable energy resources by December 31, 2017. In 2006, the Legislature increased the Renewable Portfolio Standard (RPS) target to cover all retail sellers requiring the same 20 percent of total retail sales of electricity in California from eligible renewable energy resources by December 31, 2010. Then in 2011, the California Legislature approved a bill embedding in law the 33 percent RPS goal by December 31, 2020.  So that is the current law.

Texas Faces Blackouts as Grid Supply Fails to Meet Demand - The electrical grid in America can be roughly split into three separate and individual areas. The Eastern Interconnection supplies everything east of the Rockies; The Western Interconnection supplies everything to the west; and The Texas interconnection, supplies Texas. Partly due to a historical desire to be self-sufficient, and partly due to the “Don’t Mess with Texas!” attitude, the lone star state exists in an energy based isolation, wherein the Electric Reliability Council of Texas (ECROT) generates and supplies all its own electricity. This self sufficiency has in the past benefited them by providing a consistent supply of cheap electricity, but it now looks as though it could be a poisoned chalice. The Electric Reliability Council of Texas (yellow), ISO-NE of New England (teal) and SaskPower (in red) could face early challenges in providing enough generating capacity.  In their 2011 long-term reliability assessment the North American Electric Reliability Corporation (NERC) projected that ECROT’s reserve margin for peak levels will soon be more than 5% below the recommended 15% level. It may not sound like much, but NERC President and CEO Gerry Cauley told reporters in Washington that the Texas grid is an area of “concern” that will need monitoring to ensure reliability in the future.

With changes, the grid can take it - MIT News - Over the next two decades, the U.S. electric grid will face unprecedented technological challenges stemming from the growth of distributed and intermittent new energy sources such as solar and wind power, as well as an expected influx of electric and hybrid vehicles that require frequent recharging. But a new MIT study concludes that — as long as some specific policy changes are made — the grid is most likely up to the challenge. Study co-director Richard Schmalensee, the Howard W. Johnson Professor of Economics and Management at the MIT Sloan School of Management, says the two-year study came about “because a number of us were hearing two sorts of rhetoric” about the U.S. power grid: that it’s on the brink of widespread failure, or that simply installing some new technology could open up wonderful new opportunities.  “The most important broad finding was that both of these are false,”

Wind Energy Breakthrough: Japan Designs New Wind Turbine With Triple the Output of Traditional Models - In light of recent events, Japan has been urged to pay more attention to renewable energy sources. Coincidently, in the same month as one of the world's worst nuclear crises devastated Fukushima, an incredibly innovative wind turbine system revealed itself on Kyushu University's campus for field testing. With a promise to generate two to three times the power of traditional models, the new turbine designs exemplify the potential for a cleaner energy future in Japan and around the world, removed from the dangers of nuclear power plants. While energy from wind turbines currently accounts for less than one percent of total power generated in Japan, the new breakthrough in design provides ample reason to ramp up production. Called the 'Windlens,' Yuji Ohya, a professor of renewable energy dynamics and applied mechanics, and his team at Kyushu University have created a series of turbines that could make the cost of wind power less than coal and nuclear energy.

Bill Gates in discussions to develop nuclear reactor with China - Microsoft Corp. co-founder Bill Gates says he is in discussions with China to jointly develop a new kind of nuclear reactor. During a talk at China's Ministry of Science & Technology Wednesday, the billionaire said: "The idea is to be very low cost, very safe and generate very little waste."Gates backs Washington-based TerraPower, which is developing a nuclear reactor that can run on depleted uranium. He says TerraPower is having "very good discussions" with state-owned China National Nuclear Corporation. Gates says perhaps as much as a billion dollars will be put into research and development over the next five years.

Smog Closes Beijing Airport — Capital International Airport in Beijing was forced to cancel hundreds of flights on Monday because of heavy smog and weather conditions. The cancellations were the latest sign that pollution in China’s largest cities, among the worst in the world, is leading to significant economic losses.  Monday’s air quality index from the United States Embassy’s air monitoring equipment in central Beijing measured more than 300, which is categorized as “hazardous.” On Sunday, the index hit the maximum of 500.  Both days, the air was a soupy brown haze.  The United States Embassy’s index reading is believed to be more accurate than that used by the Chinese government because Chinese officials only base their index on measurements of large particulate. The embassy also measures fine particulates, which are more harmful to human lungs.

Anger Grows Over Beijing’s Air Pollution — The statement posted online along with a photograph of central Beijing muffled in a miasma of brown haze did not mince words: “The end of the world is imminent.”  The ceaseless churning of factories and automobile engines in and around Beijing has led to this: hundreds of flights canceled since Sunday because of smog, stores sold out of face masks, and many Chinese complaining on the Internet that officials are failing to level with them about air quality or make any improvements to the environment.  Chronic pollution in Beijing, temporarily scrubbed clean for the 2008 Summer Olympics, has made people angry for a long time, but the disruptions it causes to daily life are now raising questions about the economic cost, and the government’s ability to ensure the safety of the population.  “As a Chinese citizen, we have been kept in the dark on this issue for too long,” 

Japanese Tests Find Radiation in Infant Food —— Traces of radioactive cesium thought to be from the crippled Fukushima Daiichi nuclear power plant were detected in Japanese baby formula on Tuesday as concerns about food safety continue almost nine months after the accident.  Meiji, the Tokyo company that makes the powdered formula, announced the recall of 400,000 cans of it as a precaution, but said the levels of cesium detected were well below the government’s safety limits. Tests found a combined 30.8 becquerels per kilogram of cesium 134 and cesium 137, the company said, compared with the government limit of 200, the company said. (A becquerel is a frequently used measurement of radiation.)  Babies could still “drink the formula every day without any effect on their health,” Meiji said in a statement.  Infants and young children are thought to be especially vulnerable to radiation exposure, which can increase risks of cancer and other illnesses.

Tepco Reports More Radioactive Water Leaks - As much as 45,000 liters (11,870 gallons) of highly radioactive water leaked from Japan’s crippled Fukushima nuclear station at the weekend and some may have reached the sea, Tokyo Electric Power Co. said. The leakage shows the company known as Tepco is still struggling to control the disaster nine months after an earthquake and tsunami wrecked the plant. The water contained 1.8 millisieverts per hour of gamma radiation and 110 millisieverts of beta radiation, Tepco said in an e-mailed statement yesterday.  “The source of the beta radiation in the water is likely to include strontium 90, which if absorbed in the body through eating tainted seaweed or fish, accumulates in bone and can cause cancer,” said Tetsuo Ito, the head of Kinki University’s Atomic Energy Research Institute.  Since the March 11 disaster, the utility has reported several leaks of radiated water into the sea, though its estimates of their size have been disputed. In October, a French nuclear research institute said the Fukushima plant was responsible for the biggest discharge of radioactive material into the ocean in history.

Colossal Nuclear Cleanup Challenges Japan - Those who fled Futaba are among the nearly 90,000 people evacuated from a 12-mile zone around the Fukushima Daiichi plant and another area to the northwest contaminated when a plume from the plant scattered radioactive cesium and iodine. Now, Japan is drawing up plans for a cleanup that is both monumental and unprecedented, in the hopes that those displaced can go home.  The debate over whether to repopulate the area, if trial cleanups prove effective, has become a proxy for a larger battle over the future of Japan. Supporters see rehabilitating the area as a chance to showcase the country’s formidable determination and superior technical know-how — proof that Japan is still a great power.  For them, the cleanup is a perfect metaphor for Japan’s rebirth.  Critics counter that the effort to clean Fukushima Prefecture could end up as perhaps the biggest of Japan’s white-elephant public works projects — and yet another example of post-disaster Japan reverting to the wasteful ways that have crippled economic growth for two decades.

Tepco May Dump Decontaminated Water Into Sea (Reuters) - The operator of Japan's crippled Fukushima nuclear power plant is considering dumping water it treated for radiation contamination into the ocean as early as March, the firm said on Thursday, prompting protests from fishing groups. Tokyo Electric Power, (Tepco) the utility operating Fukushima's Daiichi plant, hit by a powerful tsunami in March that caused the world's worst nuclear accident in 25 years, said it was running out of space to store some of the water it treated at the plant, due to an inflow of groundwater. "We would like to increase the number of tanks to accommodate the water but it will be difficult to do so indefinitely," Tepco spokesman Junichi Matsumoto told reporters. He said the plant was likely to reach its storage capacity of about 155,000 tons around March. Tepco plans to come up with possible ways to handle radioactive waste and present its proposals to the government's nuclear regulatory body for approval. "The government should not, and must not, approve a plan allowing Tepco to dispose treated water in the ocean,"

Fukushima: Inside The Exclusion Zone - National Geographic sent AP photographer David Guttenfelder into the exclusion zone around the Fukushima Dai-ichi nuclear power station, which was badly damaged in the earthquake and tsunami earlier this year. He captured images of communities that had become ghost towns, with pets and farm animals roaming the streets. Later, in November, Guttenfelder returned to photograph the crippled reactor facility itself as members of the media were allowed inside for the first time since the triple disaster last March. In some places, the reactor buildings appear to be little more than heaps of twisted metal and crumbling concrete. Tens of thousands of area residents remain displaced, with little indication of when, or if, they may ever return to their homes. Collected here are some images from these trips -- the first six are from the December 2011 issue of National Geographic magazine, now on newsstands, and more photos can be seen at the National Geographic website. [20 photos]

Radioactive water leaked at second Japan plant -  A Japanese nuclear plant leaked 1.8 tonnes of radioactive water from its cooling system, the government said, heightening safety worries as an atomic crisis continues at another plant. The leak, discovered Friday, caused no environmental impact as it was contained within an idled reactor at the Genkai nuclear plant in Saga prefecture in the southern Kyushu region, officials said.  Workers are still scrambling to contain a separate ongoing crisis at the Fukushima No. 1 nuclear plant, triggered by the March earthquake and tsunami that hit northeastern Japan.

Ohio nuclear plant with cracked building can open - Federal regulators will allow an Ohio nuclear reactor to reopen after being satisfied that cracks discovered in concrete at the plant don’t pose a safety concern.The Nuclear Regulatory Commission said Friday that the operator of the nuclear plant along Lake Erie has given them reasonable assurance that cracks found on the outside of the reactor containment building don’t pose a safety threat. The Davis-Besse (BEH’-see) plant outside Toledo was shut down in October for installation of the 82-ton reactor head. Soon afterward, crews discovered a 30-foot hairline crack in the outer wall.

Graph of the Day: World Energy Consumption by Fuel Type, 1990-2035 - In the long-term, the Reference case projects increased world consumption of marketed energy from all fuel sources through 2035. Fossil fuels are expected to continue supplying much of the energy used worldwide. Although liquid fuels—mostly petroleum based—remain the largest source of energy, the liquids share of world marketed energy consumption falls from 34 percent in 2008 to 29 percent in 2035, as projected high world oil prices lead many energy users to switch away from liquid fuels when feasible. Renewable energy is the world's fastest growing form of energy, and the renewable share of total energy use increases from 10 percent in 2008 to 14 percent in 2035 in the Reference case.

The Future of Nano-Electric Power Generation - TED video

Is oil the future of energy? - For the first time in its history, the Middle East is hosting the World Petroleum Congress. The 5,000 participants gathered in the Qatari capital, Doha, will be talking about the most pressing issues facing the energy sector today. The last congress was held in Madrid in 2008, and much has changed since then. With the Middle East undergoing a wave of political upheaval, the emir of Qatar was quick to reassure the world's biggest consumers that energy supplies will continue to flow. So, are we stuck with high energy prices? And will there be enough to meet global demand years from now? Inside Story, with presenter Hazem Sika, discusses with guests: Ibrahim Ibrahim, an economic advisor to the emir of Qatar; Jon Clark, an oil and gas analyst for Ernst & Young; and Saadallah al-Fathi, an energy analyst and former head of the energy studies department at the Organization of the Petroleum Exporting Countries (OPEC).

In Praise of Dirty Energy, Ctd - Its not inconsistent to simultaneously believe that the US should have a carbon tax and that it should aggressively pursue the development of fossil fuel resources. The point of the carbon tax is to make sure that folks account for the cost of climate change when choosing to consume fossil fuels. The point of aggressively pursuing the development of fossil fuels is to lower their real cost. Lower real costs are better than higher real costs.  So, the blackboard ideal is to include the cost of carbon in the price of fossil fuels and then support market conditions which lower the cost of fossil fuel extraction as much as possible. The question is what to do in the absence of a carbon tax. One might suggest that, well in that case we should impede development. That, we should stand in the way of pursuing the tar sands or fracking.  If you believe – as Brad Johnson suggests – that the social cost of carbon are so high that if properly priced people few people would consume it then this makes sense.  However, if you think that properly priced carbon is likely to have little impact on its use then even in the absence of a carbon tax you don’t want to stand in the way of fossil fuel development. Indeed, you still want to streamline the costs, just as you would if there was a carbon tax.

Undermining the Executive Branch - The House will soon consider a bill called the Regulations From the Executive in Need of Scrutiny Act, Reins for short. Its proponents — more than 200 co-signers, mostly Republicans — may hope the stupefying title will lull voters into forgetting what the bill would do. That would be a mistake. Reins is a terrible piece of legislation that would undermine a functioning regulatory system that protects people from harm. It would also do a great disservice to Congress itself.  In a nutshell, the bill would stop any major regulation issued by a federal agency and costing more than $100 million from taking effect unless it received approval from both houses of Congress and the president. Many such rules are issued every year involving everything from food safety to efficiency standards for cars. Disapproval from one house would be enough to kill a rule and force the agency to start all over again. A rule would also die if one house failed to act within 70 days.

New Report Shatters the Myth of Energy Scarcity and Highlights America's Vast Energy Resources - Here are some excerpts from a new energy study titled "North American Energy Inventory" from The Institute for Energy Research: North America is blessed with enough energy supplies to promote and sustain economic growth for many generations. The government’s own reports detail this, and Congress was advised of our energy wealth when the Congressional Research Service released a report showing that the United States’ combined recoverable oil, natural gas, and coal endowment is the largest on Earth. Despite this overwhelming evidence of energy abundance, many continue to proclaim that an energy problem or “crisis” exists that justifies increased central planning, increased expenditures of public money, increased energy taxes and increased diktats on American citizens in order to solve “the problem.” For forty years, politicians and special interests have argued successfully that energy production requires more regulations, more taxes, and more restrictions and the result has been less domestically produced energy, less economic growth, and fewer jobs.   The truth that is finally becoming clear is that North America is not only blessed with huge quantities of energy, but also could become the single largest producer in the world, with all of the attendant manufacturing, technological innovation and re-industrialization that would provide generations with good jobs and sustainable futures.

Shale-Gas Drilling to Add 870,000 Jobs by 2015, Report Says - Producing natural gas from shale will support 870,000 U.S. jobs and add $118 billion to economic growth in the next four years, according to a report from IHS Global Insight. Gas from shale, which accounts for 34 percent of U.S. output, also will contribute $57 billion in federal, state and local taxes by 2035, or $933 billion in the next 25 years, according to today’s IHS report, commissioned by America’s Natural Gas Alliance, a Washington-based industry group. Shale gas is extracted using hydraulic fracturing, a process in which millions of gallons of chemically treated water and sand is forced underground, breaking up the rock to free trapped gas. Industry expansion is adding jobs in an otherwise disappointing economy, said John Larson, a vice president at Lexington, Massachusetts-based IHS, a management consulting company for the energy industry. “Shale gas combines a capital-intensive industry with a broad domestic supply chain,” Larson said in an interview. “We think that these jobs through 2015 are net new jobs because of high unemployment.” Environmental groups have said the process, also called fracking, has tainted drinking water in states such as Pennsylvania, where 4,100 wells have been drilled. About 1,900 people, most opposed to fracking, attended a New York City hearing on Nov. 30 to consider state rules for drilling.

Report: Shale gas industry has profound economic impact in United States - The natural gas "shale gale" that began in the Barnett Shale is having "profound economic impacts" on the U.S. economy -- creating jobs, reducing consumer costs for natural gas and electricity and escalating federal, state and local tax revenues, according to a study released Tuesday by IHS Global Insight, an international consulting firm. Shale gas now represents 34 percent of U.S. natural gas production but will account for 43 percent by 2015 and 60 percent by 2035, the Englewood, Colo., firm says. Its study also says: Shale gas development, after contributing $76.9 billion to the nation's economic output in 2010, will add $118.2 billion in 2015 and $231.1 billion in 2035. In 2010, the shale gas industry supported more than 600,000 jobs; that number will likely grow to nearly 870,000 by 2015 and 1.6 million-plus by 2035. Savings from lower natural gas prices, as well as associated lower prices for other consumer purchases, will add an average $926 in disposable income per household annually from 2012 to 2015 and more than $2,000 annually by 2035. The shale gas industry and related jobs pay higher wages -- an average $23.16 per hour -- than those in manufacturing, transportation and education.

A Reality Check on U.S. Oil Imports and the Shale Revolution for Mortimer Zuckerman - Mortimer Zuckerman, the chairman and editor in chief of U.S. News & World Report, announced on November 25, 2011 that America's energy problems are over thanks to the shale gas revolution. He delivered the good news in an op-ed in The Wall Street Journal called "How American Can Escape the Energy Trap".  The article's subtitle is: "Soaring natural gas production has already cut the share of oil consumption met by imports to 47% last year from 60% in 2005."  Unfortunately, this is not really true.  Exhibit 1 shows the data behind oil and petroleum product imports, and it appears that he has done a bit of mixing-and-matching to arrive at the percentages that he cites. It is true that crude oil & petroleum products represented 60% of 2005 U.S. imports compared to consumption. The reduction in imports to 47% in 2010, however, is the percentage of crude oil alone compared to consumption for that year. When we examine comparable categories, it is clear that crude oil imports - relative to total consumption of crude oil and products - were only 2% lower in 2010 than in 2005, and that the big change that he alludes to was mostly in petroleum product imports.

EPA blames fracking for Wyoming pollution - The Environmental Protection Agency has concluded that the pollution of ground water in Wyoming was probably connected to the hydraulic fracturing, or “fracking”, used in gas production, setting off a fresh round of calls for curbs on the controversial technique. The results of the EPA investigation of water sources around the town of Pavillion in central Wyoming were seized on by environmental groups that have argued for either tighter regulation or an outright ban on fracking. However, the EPA stressed that many features of gas production in the area were “specific to Pavillion” and “different from those in many other areas of the country”. Encana, the Canadian company that owns the gas field around Pavillion, said the EPA’s investigations had not been conclusive. “The water is poor there; there’s no question of that,” said Doug Hock, Encana’s US director of community and public relations. “But is that the result of our operations and is there any evidence that our operations caused that? Not at all.” The EPA launched its investigation in September 2008, after complaints from Pavillion residents that the water from their wells tasted and smelled bad after fracking for gas production nearby.The agency took a range of water samples, including some from wells 770ft and 1,000ft deep, which it said showed signs of contamination.

EPA links hydraulic fracturing with groundwater pollution - The Environmental Protection Agency on Thursday linked hydraulic fracturing with groundwater contamination in Wyoming _ a first-of-its-kind conclusion by the federal agency that could trigger new scrutiny of the practice used to extract oil and natural gas nationwide. The EPA announced its findings as part of a three-year probe into possible groundwater contamination in Pavillion, Wyo. In a draft report issued today, the agency said it had discovered synthetic chemicals — including glycols and alcohols — associated with gas production and hydraulic fracturing fluids inside deep water wells in the region.  Although the study is limited to a gas field in Wyoming and is only in a draft form, the EPA’s finding could be a game changer for the oil and gas industry, which has insisted that hydraulic fracturing is safe and should be regulated solely by state officials, rather than the federal government. About a third of the United States’ natural gas production now comes from the hydraulic fracturing process, which involves blasting mixtures of water, sand and chemicals deep underground and at high pressures to break up dense shale rock and unlock trapped hydrocarbons.

What If Fracking Did Pollute Wyoming Water? - There’s been a real cluster-frack of buzz over the release Thursday of a 121-page draft report from the EPA claiming that chemical contaminants found in deep water aquifers in Pavilion, Wyoming were likely put there by hydraulic fracking. . Encana, the driller of most of the wells in Pavilion, naturally claims that more studies need to be done, that some of the chemicals found, such as benzene, toluene, xylenes, glycols and alcohols, may not have even been used in their fracking operations. I haven’t read the EPA’s draft report thoroughly yet, but if the findings are true they are pretty damning. “Alternative explanations were carefully considered to explain individual sets of data,” states the report. “However, when considered together with other lines of evidence, the data indicates likely impact to ground water that can be explained by hydraulic fracturing.” It’s discomforting to read in the EPA report that at one natural gas well there was no cement liner installed until a depth of 671 meters below the surface. Cement seals off the rock through which the well is drilled from intrusion from hydrocarbons or fracking fluids. The report states that fracking operations were done above that depth at nearby wells, opening up the possibility, however unlikely, that frack chemicals could have intruded into the unlined well and gotten into a water layer. Drillers often insist that any methane found in water migrated into the water naturally. The EPA’s report says that’s unlikely in the Wyoming case:

Steve Horn Fracking Ohio's Utica Shale to "Boost Local Economy"? A "Total" Sham - It is a well-known fact that the unconventional gas industry is involved in an inherently toxic business, particularly through hydraulic fracturing ("fracking"), which the EPA just confirmed has contaminated groundwater in Wyoming. The documentary film "Gasland," DeSmogBlog's report "Fracking the Future: How Unconventional Gas Threatens our Water, Health, and Climate," and numerous other investigations, reports, and scientific studies have echoed the myriad problems with unconventional oil and gas around the globe. What is less well-known, but arguably equally as important, is who exactly stands to benefit economically from the destruction of our land, air, and water in the gas industry's rush to profit from the fracking bonanza. A hint: it's not the small "mom and pop," independent gas companies, but multinational oil and gas corporations. Another hint: it's often not even American multinational oil and gas corporations, but rather, foreign-based multinational oil and gas corporations who stand to gain the most.  On December 7, Bloomberg's Businessweek reported that Total S.A., the largest oil and gas producer in France,  is positioning itself to acquire 25 percent of Chesapeake Energy’s stake in Ohio's Utica Shale, valued at $2.14 Billion.

Nat Gas is King, Will be No. 2 Fuel for Elec.by 2025 - From today's WSJ article "Exxon Declares Gas is King": "Natural gas will replace coal as the leading fuel for generating electricity in the U.S. by 2025, when it will also become the world's No. 2 overall fuel source thanks to its abundance and a drive for cleaner-burning energy, according to the latest long-term outlook from Exxon Mobil Corp. Natural gas will overtake coal as the second-largest fuel source overall, ranking behind oil and powering everything from electrical plants to home-heating systems. But Exxon said coal use will continue to grow through 2025 around the world, primarily in developing nations such as China and India and the African continent, because economic growth will be fastest in emerging nations."

Learning Too Late of Perils in Gas Well Leases —Americans have signed millions of leases allowing companies to drill for oil and natural gas on their land in recent years. But some of these landowners — often in rural areas, and eager for quick payouts — are finding out too late what is, and what is not, in the fine print.  Energy company officials say that standard leases include language that protects landowners. But a review of more than 111,000 leases, addenda and related documents by The New York Times suggests otherwise:

• ¶ Fewer than half the leases require companies to compensate landowners for water contamination after drilling begins. And only about half the documents have language that lawyers suggest should be included to require payment for damages to livestock or crops.
• ¶ Most leases grant gas companies broad rights to decide where they can cut down trees, store chemicals, build roads and drill. Companies are also permitted to operate generators and spotlights through the night near homes during drilling.
• ¶ In the leases, drilling companies rarely describe to landowners the potential environmental and other risks that federal laws require them to disclose in filings to investors.
• ¶ Most leases are for three or five years, but at least two-thirds of those reviewed by The Times allow extensions without additional approval from landowners. If landowners have second thoughts about drilling on their land or want to negotiate for more money, they may be out of luck.

Consumers Beware of Gas Well Leases, Especially Around the Holidays - Yesterday’s New York Times reported on the perils of modern gas well leases. It reported that many homeowners in Pennsylvania, Colorado, and West Virginia have seen their water sources contaminated as a result of such drilling and that based upon a review of the New York Times of over 3,000 lease and other documents, fewer than half of the landowners had any recourse under the contracts for the contamination or for the waste pits being left on the land after the fact. There are significant parallels between these gas leases and the Peevhouse contract. Both are one-sided to say the least. Gas leases are peddled in Texas, Maryland, New York State, Ohio and the other states mentioned above by people called landsman, who have their own trade association and who frequently hawk the leases in rural poor areas, especially around the holidays when people need extra cash. The drilling companies often leave dangerous waste on the land and the leases do to require then to clean up. If they do clean up, the costs are frequently deducted from the revenues the landowner receives. The risks of land and water contamination are not pointed out to the landowners. The leases last 3-5 years but can be extended indefinitely by the drilling companies, making it hard for consumers to ever get out of the arrangements. The article says eight states have state laws requiring drilling companies to clean up their messes but the others do not. Another example of consumer beware.

Mexico: Rising Natural Gas Superstate? - A recent CD post highlighted how the "shale gale" of unconventional natural gas is starting to go global, with huge recent discoveries in Argentina and China, leading some to conclude that "peak oil" is losing relevance.  We can now add Mexico as another rising natural gas superstate:  "Mexico's [energy] future seems even brighter. According to U.S. Energy Information Administration Executive Director Maria van der Hoeven, Mexico's significant untapped natural gas reserves, if properly developed, could eventually provide Mexico with energy independence. She recently stated, "Mexico is sitting on very large natural gas fields that could allow it to end gas imports and could give it energy independence.

Fuel-subsidy fight pits Koch vs. Pickens -  T. Boone Pickens is a billionaire, in the 1 percent of the 1 percent of the 1 percent. Why then, is Harry Reid trying to give him more of your money? Last month, Senate Majority Leader Reid, who ceaselessly invokes class-warfare rhetoric to attack Republican opposition to tax increases and overregulation, proposed what could be called the T. Boone Pickens bill.The New Alternative Transportation to Give Americans Solutions Act of 2011, or NATGAS Act, subsidizes cars running on natural gas. Proponents in the House and Senate want to stick the measure into a year-end, must-pass omnibus spending bill or tax-extender package. Pickens is the bill's original author, chief lobbyist and prime beneficiary: He owns 41 percent of Clean Energy Fuels, which has the largest natural-gas truck-fueling station in the world and plans to set up a series of similar fueling stations around the country -- if it can get the subsidies. Pickens' gain would be at the expense of everyone who uses natural gas, which will spike in price thanks to increased demand. Primary among natural-gas users is the fertilizer industry. One of the world's largest fertilizer sellers is Koch Fertilizer, a subsidiary of the politically connected Koch Industries. Koch (owned by pro-free-market businessmen Charles and David Koch, who are in the top 1 percent of even the Forbes 400) has led the resistance to Pickens' bill.

Saudi oil boss says fossil comeback gives renewables time - A petroleum renaissance means the world has more time than previously thought to develop renewables, claims the head of oil giant Saudi Aramco. Khalid Al-Falih, Saudi Aramco’s chief executive, told the 20th World Petroleum Congress that a confluence of factors will position the oil and gas industry for a new era of success. He says the global discourse on energy is being changed by deflating “peak oil” concerns, the “faltering pace” of renewables and other alternatives, economic uncertainty and a shift in environmental policy. “Rather than the supply scarcity which many predicted, we have adequate oil and gas supplies, due in large part to the contributions of unconventional resources," claims Al-Falih. “That also means the world has even more time for the gradual but meaningful development of renewables, and for them to overcome technical, economic, environmental and consumer acceptance obstacles by competing on a level playing field." Al-Falih suggests new economic realities are leaving neither the resources nor the resolve to make massive investments in idealistic but unrealistic energy programmes.

California backs EU plan to label oil sands products as 'dirty fuel' - European plans to slap a “dirty” label on fuels derived from Canada’s huge oil sands reserves have received a boost from California, whose pioneering labelling scheme seeks to put consumers in the driving seat. Canada sees huge export potential for its reserves of oil sand, which are among the world’s largest, and has bitterly opposed EU plans it regards as a threat to future markets. Extracting oil from a mix of sand and clay is energy and water intensive and critics such as Nobel laureate Al Gore argue that using oil sand-derived fuel effectively converts an economic car into a gas-guzzler. “Over its life cycle, fuel made from tar sands emits much more CO2 than either coal or oil. A Toyota Prius running on gasoline made from tar sands has the carbon footprint of a Hummer,” he said in his book “Our Choice.” Canada, together with the oil industry, has lobbied furiously against a draft EU law it says is unfair, not based on science and imposes an unreasonable administrative burden. But California has already introduced a pioneering scheme to allow consumers to choose their fuel based on the lowest carbon emissions over the wells-to-wheels life cycle. 

European leaders say oilsands cannot escape climate legislation— European leaders warned Canadian oilsands producers Wednesday that they should not expect any special exemptions from proposed climate legislation in their parliament designed to reduce pollution from transportation fuels. Responding to suggestions from Canadian Natural Resources Minister Joe Oliver that a vote on the proposal was being delayed until January because of internal divisions among member countries, European representatives at an international climate change summit said they were committed to adopting it after a debate. "Oilsands have to be qualified like any other crude," said Jo Leinen, chairman of the European Parliament's environment committee, following a news conference. "The commission is now reflecting on it and proposing an indicator for oilsands from Alberta." The existing European proposal incorporates an evaluation of different types of fuels along with their estimated impact on the atmosphere, with oilsands actually considered to be less polluting than oil shale and coal converted to liquid fuel. 

Pipeline changes to fix WTI /Brent spread are likely to add new problems - When the price of WTI dropped, the prices of quite a few other grades of oil (especially in the Midwest, but perhaps elsewhere) were affected as well. To get an idea of how much the overall impact was, I compared the price refiners pay for oil to that of Brent and WTI (Figure 1). Some of the types of crude that have been hit by lower prices are those from the Alberta. Recently, there have been proposals by Canadian companies to try to fix the problem. Enbridge announced that it is buying a 50% stake in the Seaway pipeline, and will reverse its direction, so that it will carry crude oil southward, from Cushing to the Gulf, instead of northward, as soon as the second quarter of 2012. In addition, TransCanada has announced the it wants to build the segment of the Keystone XL pipeline from Cushing to the Gulf, possibly starting as soon as January 2012. The question now is what impact the proposed pipelines will have. Will they even out the Brent/WTI price disparity, and, at the same time, cause the prices of other crudes, such as Canadian and Bakken crudes, to rise as well? Or will the pipeline adjustments fix only part of the problem, and add new problems at the same time? In my view, the latter seems more likely, for reasons I discuss in this post.

Northern Gateway pipeline decision will be delayed until late 2013: panel - The joint review panel hearing submissions on the controversial Northern Gateway oil pipeline to the B.C. coast will take a year longer than expected to deliver its final report. In a projected schedule released late Tuesday, the three-member panel said it “would anticipate releasing the environmental assessment report in the fall of 2013 and its final decision on the project around the end of 2013.” That’s a year later than expected, confirmed Annie Roy, panel spokeswoman. “The final hearings were scheduled to start in June of 2012, meaning the panel would have probably released its report in the fall of 2012,” she said. “So the schedule now is almost pushed a year.” Calgary-based Enbridge Inc. is pursuing the $5.5-billion, 1,200-kilometre pipeline that would transport up to 525,000 barrels per day of crude from Alberta’s oilsands and oilfields to ocean-going tankers. The line would help alleviate Canada’s reliance on the United States as its only major market for oil.

Obama rules out trading Keystone pipeline for payroll tax cut - Barack Obama has warned Republicans he will not tie an extension of the payroll tax cut to the approval of the Keystone oil pipeline between Canada and the US. "If the payroll tax cut is attached to a whole bunch of extraneous issues, not related to making sure that the American people's taxes don't go up on January 1, then it's not something I'm going to accept," Obama said after a meeting with the Canadian prime minister, Stephen Harper. Obama stopped short of a veto threat, saying he did not believe Congress should let it come to that. The leader of the House of Representatives, Speaker John Boehner, and other senior Republicans have pushed for Obama to approve the pipeline, saying it would create much-needed jobs in the US. They have suggested adding into the payroll tax cut bill a provision speeding up the pipeline's construction. Payroll tax cuts are due to expire at the end of the year. If they are not extended the White House says the average family will pay an extra $1,000 in tax.

Oil’s Growing Thirst for Water - Water has always been a concern for 65-year-old Joe Parker, who manages a 19,000-acre cattle ranch here in South Texas. "Water is scarce in our area," he says, and a scorching yearlong drought has made it even scarcer. What has Mr. Parker especially concerned are the drilling rigs that now dot the flat, brushy landscape. Each oil well in the area, using the technique known as hydraulic fracturing, requires about six million gallons of water to break open rocks far below the surface and release oil and natural gas. Mr. Parker says he worries about whether the underground water can support both ranching and energy exploration.

BP Accuses Halliburton of Destroying Evidence of its Involvement in the Gulf of Mexico Oil Spill - BP claims Halliburton Energy Services Inc. intentionally destroyed evidence that proved the firm shared the blame for last year's massive Gulf of Mexico oil spill. According to BP's federal court filing yesterday, Halliburton hid test results showing samples of the cement used to seal BP's Macondo well after it exploded. The fight is getting ugly as BP and Halliburton sue each other over the fault of the blow-out that resulted in 11 deaths, hundreds of lawsuits from locally damaged businesses and the country's worst offshore oil spill in history. "BP has now learned the reason for Halliburton's intransigence -- Halliburton destroyed the results of physical slurry testing, and it has, at best, lost the computer modelling outputs that showed no channelling. More egregious still, Halliburton intentionally destroyed the evidence related to its non-privileged cement testing, in part because it wanted to eliminate any risk that this evidence would be used against it at trial," the BP papers say.

Big Oil Companies Are Shifting Their Focus Back to the West… Big Oil is redrawing the energy map. Western energy giants are increasingly hunting for supplies in rich, developed countries—a shift that could have profound implications for the industry, global politics and consumers. Driving the change is the boom in unconventionals—the tough kinds of hydrocarbons like shale gas and oil sands that were once considered too difficult and expensive to extract and are now being exploited on an unprecedented scale from Australia to Canada. The U.S. is at the forefront of the unconventionals revolution. By 2020, shale sources will make up about a third of total U.S. oil and gas production, according to PFC Energy, a Washington-based consultancy. By that time, the U.S. will be the top global oil and gas producer, surpassing Russia and Saudi Arabia, PFC predicts. That could have far-reaching ramifications for the politics of oil, potentially shifting power away from the Organization of Petroleum Exporting Countries toward the Western hemisphere. With more crude being produced in North America, there's less likelihood of Middle Eastern politics causing supply shocks that drive up gasoline prices. Consumers could also benefit from lower electricity prices, as power plants switch from coal to cheap and plentiful natural gas.

North Dakota's Bakken Oil Fields Go From Strength To Strength - The "Economic Miracle State" of North Dakota pumped another record amount of oil during the month of October, producing more than 15 million total barrels in a single month for the first time ever, at a daily rate of 488,068 barrels (see chart above, data here). Compared to October of last year, oil production in North Dakota is up 42%, and production has more than doubled over the last two years, from 240,000 barrels per day in October of 2009.  North Dakota's rich Bakken oil fields produced almost 9% of America's domestic crude oil production for the month of October, up from less than 2% of the nation's oil in 2006 (data here).

How low can oil prices really go? - Commentary: OPEC nations need the money — With the global economy teetering, the Organization of Petroleum Exporting Countries is coming under pressure to lower the price of oil before another worldwide recession does it for them.  Every recession since the 1970s has been preceded by a spike in oil prices, and it would appear as though we have just experienced another such jump. After dropping below $40 a barrel in early 2009, the price of West Texas Intermediate crude oil almost tripled in the ensuing two years, topping out at $115 a barrel earlier this year before dropping back to its current level of around $100.  Since help to stave off such a downturn is unlikely to emanate from fiscal policy — because the conversation has shifted from stimulating the economy to reducing budget deficits — there have been calls in some quarters for OPEC to ride to the rescue and lower the price of oil.  There is no doubt that a decline in oil prices would be quite beneficial to the U.S. and other oil-importing nations. According to the Economist magazine, a fall of $50 a barrel would be equal to a tax cut of $350 billion, in terms of the stimulus it would impart to the economy.

BP boss Bob Dudley warns of high oil prices - High oil prices could send the global economy into a fresh recession, the chief executive of oil giant BP has warned, writes Michael Glackin.Oil prices have remained stubbornly high, driven by a combination of supply fears due to Middle East political unrest, and continuing strong demand from fast-growing economies in Asia. At a conference in Qatar, BP boss Bob Dudley said: ‘There is a risk that the world’s largest economy and largest oil consumer, the United States, could be hit by a lack of supplies and a high price of oil with consequences for the rest of the world.’His comments came as European Union politicians looked set to abandon plans to impose sanctions on imports of Iranian oil, fearing the move would do more damage to the eurozone than Iran. Oil accounts for 50 per cent of Iranian budget revenues, but politicians believe even a small rise in prices as a result of an embargo would more than compensate Tehran for any losses.

It’s Time To Start Freaking Out About Oil Prices - There have been so many other temporary emergencies in the world over the past few years that it's easy to overlook a permanent one: Oil prices. Right now, much of the global economy is weak... and oil is still over $100 a barrel! A few years ago, when oil prices first hit this level, the news came as an absolute shock. And soon, when gas hit $4 a gallon, the entire national conversation changed. (It didn't change so much internationally, because, thanks to gas taxes, other countries already charge way more than $4 a gallon for gas, so oil price moves don't have so huge and visible an impact on driving costs). Specifically, $100+ oil caused many Americans to buy different cars and drive less. And it put a choke chain on the economy, throttling growth. And, shortly thereafter, the economy tanked. And then, of course, oil prices followed the economy down, allowing everyone to focus on other more pressing emergencies. But then, with even a crappy economic recovery from the depths of the financial crisis, oil prices soared again. And now they're back to near-emergency levels, even with the global economy sputtering.

Big Oil Sees Energy Bonanza Ahead - In 2008, concern that a rapidly developing world was eating through all its energy supplies helped push prices to record levels, with oil hitting $147 a barrel and natural gas topping $15 per million cubic feet. Now, those concerns have abated, reflected in $100 oil and $3-$4 natural gas. That's partly due to the global recession, but largely thanks to new technology that's unlocked vast new supplies of oil and, especially, natural gas. "The world holds centuries of natural gas supply, enough for generations," said James Mulva, chief executive of ConocoPhillips, at the World Petroleum Congress on Tuesday. "We don't need any new miracles, the miracles have already occurred." Those "miracles" include the relatively new ability to liquefy natural gas so it can be sent around the world on massive ships. Previously, natural gas had to be transported by pipeline, which made it hard to get it from places where it's abundant, such as here in Qatar, to consuming markets in Asia and elsewhere. The miracles also include the ability to tap oil and natural gas from shale rock, which is done using a combination of new horizontal drilling technology and a process called hydraulic fracturing. Known as fracking for short, it involves injecting vast amounts of water, sand and some chemicals deep into the earth to crack the shale rock and allow the gas or oil to flow out.

OPEC: Speculators to blame for high oil prices -(CNNMoney) -- The head of OPEC said Wednesday that speculators are at least partly to blame for high oil prices -- not any lack of supply on world markets. Speaking at a World Petroleum Congress panel, OPEC Secretary General Abdulla Salem El Badri said the world has plenty of crude but that the number of barrels of oil changing hands in the financial markets is 35 times greater than the actual supply. The numbers he cited were 3 billion barrels per day traded on global exchanges, but only 76 million barrels per day in actual supply. "Oil resources are clearly plentiful," said Badri, a Libyan. "Speculation is playing a very important part in inflating these prices." Yet Badri doesn't think the cost of oil -- currently near $100 a barrel in the United States -- is excessively high. "The current price is comfortable for producers and consumers," he said. "It allows producers to make investments, yet doesn't hinder the global economy."

$9 for a gallon a gas in Alaska? What's the cost in your state? - A story last week reported that residents of Nome, Alaska, could be looking at a costly winter: $9-a-gallon gasoline. The news, rightfully, has some of the 3,500 residents in the coastal town freaked out. "It is going to kill us," said Sunny Song, owner of Mr. Cab, which ferries children to school, nurses to their patients' homes and women to hospitals to give birth.  According to the Associated Press report, a winter storm prevented a barge that usually carries fuel from getting to shore. The most likely plan is to fly it in, but it would be costly and could be a logistical nightmare. A gallon of gas was selling for $5.98 a gallon last week. The next barge delivery wouldn't be until next June. In the meantime, flying fuel to the city could increase the cost per gallon by $3 to $4, officials said.

World Watch Real cost of gas at Afghan bases: $400/gal. - Keeping American vehicles rolling in Afghanistan while avoiding the perils of hauling in fuel via ground transportation is costing the military big time.  Frosty relations between the U.S. and Pakistan - which led to Pakistan closing its border to Afghanistan-bound truck traffic- haven't helped, either.  The Pentagon is increasingly relying on parachute drops of fuel and other supplies to bases in remote parts of Afghanistan, and as Nathan Hodge of the Wall Street Journal reports, the military estimates such deliveries are spiking the ultimate price of a gallon of fuel to as much as $400 per gallon.  "We're going to burn a lot of gas to drop a lot of gas," Capt. Zack Albaugh, a California Air National Guard pilot with the 774th Expeditionary Airlift Squadron, told the WSJ. Albaugh would be at the controls of a C-130 cargo plane that drops pallets of food, water, ammunition and fuel by parachute to troops below. Avoiding the dangers facing truck convoys on the ground, the Pentagon has relied more and more on air delivery of supplies. Six years ago, about two million pounds of supplies were air-dropped to troops in Afghanistan. Last year, that amount was about 60 million pounds. Estimates are that this year the total will be about 90 million pounds.

De-constructing the WSJ's front page story, “U.S. nears milestone: net fuel exporter” - On November 30, the front page of the Wall Street Journal carried what seemed to be an story U.S. Nears Milestone: Net Fuel Exporter by Liam Pleven and Russell Gold. It begins: U.S. exports of gasoline, diesel and other oil-based fuels are soaring, putting the nation on track to be a net exporter of petroleum products in 2011 for the first time in 62 years. According to data released by the U.S. Energy Information Administration on Tuesday, the U.S. sent abroad 753.4 million barrels of everything from gasoline to jet fuel in the first nine months of this year, while it imported 689.4 million barrels.  For 2011, it appears that the US is on track to be net exporter of refined petroleum products, on the order of about 0.2 mbpd. Although the WSJ reporters did note, several paragraphs into the story, that the US remains the world’s largest net oil importer, in both terms of crude oil and total petroleum liquids, I suspect that many casual readers will conclude that the US is now a net oil exporter.

Dirty Energy Money: John Boehner: graphic: coal & oil campaign contributions by company: $1,111,180 

The U.S. Economy, Market Are Yo-Yoing On Oil - It's been over three years since I published my strategic long-term comprehensive energy policy in a quest to help Washington solve the nation's biggest (and least talked about) economic problem -- foreign oil imports.  Apparently many in the Obama administration have read the Robert Hefner III's seminal book The Grand Energy Transition and yet we still have no comprehensive energy policy today and no initiative of any kind to reduce foreign oil imports. What I will discuss, and what I believe has been proved by oil prices and economic activity, are three statements that are much more to the point:

• 1. Worldwide oil production will have much difficulty keeping up with worldwide oil demand. Over the past decade, the price of a barrel of oil is up multiples of the decline in he U.S. dollar. This is based on strong demand not only from China, but from India, Southeast Asia, the Middle East, and Russia.
• 2. This is a crisis for the world's leading oil consumer (the U.S.) which imports 60% of the roughly 20 million barrels it uses everyday. The United States sends roughly $1 billion out of the country every day to purchase petroleum. It is by far the largest component of the trade deficit.
• 3. Policy-makers cannot solve this commodity based oil crisis with monetary policy. One can only solve a commodity crisis by producing more of it, or, finding a substitute. Since producing 20 million barrels a day is out of the rhelm of possiblity over the next say 5 years, we should find a substitute. That substitute is (or at least should be) domestic abundant, clean, and cheap natural gas.

Saudi Arabia Crude Production Rises to Highest in Three Decades - Saudi Arabia, the world’s biggest crude exporter, boosted output last month to the most in more than three decades to meet customer demand. “We produced 10 million and 40 barrels in November because that’s what the customers wanted,” Ali al-Naimi said in an interview in Durban, South Africa, where he is attending a climate conference. That’s the highest level since at least 1980, according to data from the U.S. Energy Department. The desert nation pumped 9.4 million barrels a day in October, al- Naimi said on Nov. 20. Saudi Arabia, the largest and most influential member of the Organization of Petroleum Exporting Countries, will meet with other members of the group on Dec. 14 in Vienna to set output targets for early 2012. The kingdom raised supply this year to make up for halted production in Libya and help prevent oil prices from surging.

Saudi Arabia – Headed for A Downfall? - Saudi Arabia recently announced that it had halted a $100 billion oil production expansion plan to raise capacity to 15 million barrels a day by 2020. At this point, the country claims to have capacity of 12 million barrels a day. What does this mean for its future? Let’s take a look behind the figures. The figure shows that Saudi Arabia has not been increasing its production for many years. At the same time, the country’s own oil consumption has been rising rapidly. The combination means that oil exports have already started declining. Saudi Arabia tells us that its crude oil capacity is 12 million barrels a day. In fact, its crude oil production has not exceeded 10 million barrels a day in recent years, according to EIA data. Perhaps it can produce a bit over the 9.9 million barrels a day it produced in August 2011, but this has not yet been proven.

Asia refiners seen cutting Saudi buys, may cut runs (Reuters) - Asian refiners are likely to trim crude purchases from Saudi Arabia in January after the world's top exporter raised premiums on its oil to record levels, and they may be forced to cut runs if other Middle East producers follow suit. Other top exporters such as Iran and the United Arab Emirates typically track the kingdom's moves when they announce their own prices. The overall rise in the cost of crude from the world's top exporting region to Asia would drive down profits that refiners make for processing oil. Saudi Arabia has raised prices of the flagship Arab Light, Arab Medium and Arab Heavy crude by at least $1.60 a barrel from the previous month, an industry source said this week. Refiners, faced last month with a 50 percent drop in profit margins from processing a barrel of oil, were already considering cutting runs. An increase in crude prices only exacerbates the situation, industry sources said. Asian refiners are likely to buy the minimum Saudi crude permitted without breaking contract, industry sources said. That would be about 10 percent less than stipulated volumes. Refiners would look to import cheaper cargoes from elsewhere on the spot physical market.

Escaping the Oil Curse - Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate. Perhaps Iraqis, after a decade of warfare, feel the same way. Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies. Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well. Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new discoveries of oil and mineral wealth. Heightening the euphoria are the historic levels that oil and mineral prices have reached on world markets over the last four years. Many countries have been in this position before, exhilarated by natural-resource bonanzas, only to see the boom end in disappointment and the opportunity squandered, with little payoff in terms of a better quality of life for their people. But, whether in Libya or Ghana, political leaders today have an advantage: most are well aware of history, and want to know how to avoid the infamous natural-resource “curse.” To prescribe a cure, one must first diagnose the illness. Why do oil riches turn out to be a curse as often as they are a blessing?

Goldman Sachs forecast the price of Brent crude oil at $130 a barrel in 2013: Goldman Sachs forecast the price of Brent crude oil at $130 (U.S.) a barrel in 2013, saying crude will continue to rise even in a poor economic growth environment. Making public its 2013 forecast for the first time, the firm also predicted the price of U.S. crude (WTI) CL-FT at $126 a barrel in 2013, saying the WTI-Brent spread was likely to narrow further as the U.S. Seaway pipeline’s capacity rises to 400,000 barrels a day. Goldman analysts maintained their 12-month “overweight” stance on commodities, as well as their 2012 commodity price forecasts citing their economists’ expectation of a global economic slowdown, but not a global recession. It now expects Brent to end 2012 at $127.5 a barrel, average $130 a barrel in 2013 and end that year higher at $135 a barrel. “We continue to view the crude oil market as navigating between the currently tight physical oil markets and the threat that the European debt crisis could trigger a global economic recession in the near future, which would lead to a sharp drop in oil demand,” analysts said in a note.

Oil tougher to extract, official suggests - -- Major oil producers are looking at complex extraction procedures because the era of "easy oil" is coming to an end, the Emirati oil minister said. Mohammed Bin Dhaen al-Hamli, the oil minister for the United Arab Emirates, told delegates at the World Petroleum Congress in Doha that his country was "firmly committed" to maintaining a strong position in the oil and natural gas sector. He said major oil producers were being forced to find new ways to get resources out of the ground, however. "The challenge for producers such as the (United Arab Emirates) is to continue producing oil and gas from existing reservoirs while, at the same time, developing new opportunities," he was quoted by the Platts news service as saying. "It is no secret that the days of easy oil are coming to an end."

Chris Martenson and Alasdair Macleod Talk About Peak Oil And The Economy - Martenson explains that once spending programmes are implemented, it is very hard to cut them back again. We are now at a point in time where outstanding credit can’t be serviced leading to the need for monetisation by central banks and therefore inflation. Additionally, the depletion of resources will not allow “business as usual” when it comes to getting the economy back on track. Martenson foresees rising oil prices absent a sudden slow down in demand due to a recession. He also expects the world to fully recognise the implications of Peak Oil sometime between 2013 and 2014.

What Peak Oil Looks Like - There are times when the unraveling of a civilization stands out in sharp relief, but more often that process makes itself seen only in the sort of scattered facts and figures that take a sharp eye to notice and assemble into a meaningful picture. How often, I wonder, did the prefects of imperial Rome look up from the daily business of mustering legions and collecting tribute to notice the crumbling of the foundations on which their whole society rested?  Nowadays, certainly, that broader vision is hard to find. It’s symptomatic that in the last few weeks I’ve fielded a fair number of emails insisting that the peak oil theory—of course it’s not a theory at all; it’s a hard fact that the extraction of a finite oil supply in the ground will sooner or later reach a peak and begin to decline—has been rendered obsolete by the latest flurry of enthusiastic claims about shale oil and the like. Enthusiastic claims about the latest hot new oil prospect are hardly new, and indeed they’ve been central to cornucopian rhetoric since M. King Hubbert’s time. A decade ago, it was the Caspian Sea oilfields that were being invoked as supposedly conclusive evidence that a peak in global conventional petroleum production wouldn’t arrive in our lifetimes. Compare the grand claims made for the Caspian fields back then, and the trickle of production that actually resulted from those fields, and you get a useful reality check on the equally sweeping claims now being made for the Bakken shale, but that’s not a comparison many people want to make just now.

Iran sanctions: How much might they affect gas prices? - The Senate unanimously passed a bill Thursday that would impose economic sanctions on Iran, over the objection of the White House. One of the administration’s complaints was that the move could increase oil prices. How much could sanctioning Iran cost us at the pump? The nightmare scenario would be an additional $1.25 per gallon. Iran produces just over 5 percent of the world’s crude, which doesn’t seem like a lot. But oil demand is price-insensitive—people and businesses refuse to change their fuel-buying habits until the costs go way up. That means a reduction in supply will have a disproportionate effect on prices. In the past, price increases have been about 10 times greater than their precipitating drops in production. Based on the same historical data, and given that oil is currently hovering at around $100 per barrel, a complete shutdown of Iranian exports could force prices as high as $150. (That’s 5 percent, times the tenfold multiplier, times the current price of $100.) Since a one-dollar change in the cost of a barrel of oil usually translates to a two-and-a-half-cent surge in retail gas prices, cutting Iran off from world oil markets could increase the price of gasoline by a dollar and a quarter.

Who wins, who loses if Iran's oil is cut -- France and Great Britain want an outright embargo on importing oil from Iran though cash-strapped Greece might have serious objections, diplomats say. Iran gets the bulk of its revenue from oil exports. Amid growing concerns about Iran's nuclear ambitions, Western allies are keen to pressure Iran to back from its perceived goal of a nuclear weapon. Diplomats in London and Paris are expected to push for a European ban on oil imports from Iran. Greece, which gets about 25 percent of its oil from Iran, can't afford the potential economic pressure that would come from an embargo, however. European diplomats said that with more than $145 billion in bailout money on the table, however, Athens might be easily convinced to change its mind.  "Over the next few weeks we have to help Greece find alternative sources of supply," a European diplomat told the Financial Times on condition of anonymity. "But we think other sources can be found and the entire sanctions package is likely to be agreed."

Iran - Possible Implications of an Oil Embargo - Does Thursday's announcement that the EU is considering to ban oil imports from Iran epitomise the draining of power from west to east? The big winners here will be China and India, who do not fear rising Iranian influence and who will gladly soak up any additional oil exports they may have to offer. However, ending this small dependency upon Iranian oil imports in Europe (Figure 2) does clear the way for military action without the need to ponder the immediate consequences on oil imports. In a week where the UK embassy in Iran was overrun and the two countries are breaking off diplomatic ties, on the back of heightened concern about Iran's nuclear weapons program and an unexplained explosion at an Iranian missile launching site, the EU has decided to flex its muscles and to ban Iranian oil imports. The big winners here are the other countries importing oil from Iran - Japan, China, India and South Korea. Does the EU really believe that in today's extremely tight oil market that oil sanctions against Iran will worry them in the least?

OPEC chief hopes EU will not impose embargo on Iran oil —  The head of the Organisation of Petroleum Exporting Countries (OPEC) said on Wednesday he hoped the EU would not press sanctions on Iran's "difficult to replace" oil exports. "I really hope there will not be an EU embargo on Iranian oil," OPEC Secretary General Abdullah El-Badri said at the World Petroleum Congress in Doha. "It will be very, very difficult to replace" the exports of this OPEC member, he said. "Europe now is facing some difficulties... so to cut these 865,000 barrels a day immediately, I think it will be a problem," he said, apparently referring to Iran's exports to all of Europe, as the EU imports only around 450,000 bpd from Iran, according to the International Energy Agency. The EU last week piled up pressure on Tehran following an attack on the British embassy, beefing up sanctions over Iran's nuclear programme, while it threatened to hit its oil and finance sectors next. EU foreign ministers meeting in Brussels slapped sanctions on an extra 143 firms and 37 individuals, after the publication last month of a report on Iran's nuclear sector by the International Atomic Energy Agency (IAEA). The ministers threatened in a statement to "extend the scope" of punitive action to strike at Tehran's economic heart.

Russia rejects Iran oil ban -energy min (Reuters) - Banning Iranian oil sales would be a political move and Russia does not believe energy supplies should be used to exert pressure, Russia's energy minister said on Wednesday. European Energy Commissioner Guenther Oettinger said on Tuesday there was consensus among some EU countries to ban imports of Iranian oil and that Europe hoped to bring Russia on board in a global ban. But the world's biggest crude oil producer, which does not import any Iranian crude, is unlikely to back the plan aimed at piling pressure on Iran to drop its disputed nuclear programme. "It is quite obvious that this decision is based on some political motivation ... In these situations we try to be as neutral as possible," Sergei Shmatko told reporters on the sidelines of the World Petroleum Congress. "Do you realise the impact of this decision once it is made?" he said, without elaborating.

Iran says oil would go over $250 if exports banned (Reuters) - Iran warned the West on Sunday any move to block its oil exports would more than double crude prices with devastating consequences on a fragile global economy. "As soon as such an issue is raised seriously the oil price would soar to above $250 a barrel," Foreign Ministry spokesman Ramin Mehmanparast said in a newspaper interview. The comments come as Iran strives to contain international reaction to the storming of the British embassy last week, a move which drew immediate condemnation from around the world and may galvanize support for tougher action against Tehran. Washington and EU countries were already discussing measures to restrict oil exports after the United Nations nuclear watchdog issued a report in November with what it said was evidence that Tehran had worked on designing an atom bomb. Iran says its nuclear program is entirely peaceful. The U.S. Senate voted on Thursday to penalize foreign financial institutions that do business with Iran's central bank

Playing with fire: Obama's risky oil threat to China - When it comes to China policy, is the Obama administration leaping from the frying pan directly into the fire?  In an attempt to turn the page on two disastrous wars in the Greater Middle East, it may have just launched a new Cold War in Asia -- once again, viewing oil as the key to global supremacy. The new policy was signaled by President Obama himself on November 17th in an address to the Australian Parliament in which he laid out an audacious -- and extremely dangerous -- geopolitical vision.  Instead of focusing on the Greater Middle East, as has been the case for the last decade, the United States will now concentrate its power in Asia and the Pacific.  “My guidance is clear,” he declared in Canberra.  “As we plan and budget for the future, we will allocate the resources necessary to maintain our strong military presence in this region.”  While administration officials insist that this new policy is not aimed specifically at China, the implication is clear enough: from now on, the primary focus of American military strategy will not be counterterrorism, but the containment of that economically booming land -- at whatever risk or cost.

The Real China Threat - Ordinary Americans and policymakers in Washington have plenty to worry about these days: unemployment, housing, deficits and debt, not to mention terrorism, wars and myriad foreign crises. But there’s another looming issue that actually trumps those. It’s China’s push — while the U.S. sits on the sidelines — to amass the lion’s share of natural resources such as copper, silver and rare-earth elements, which are essential to renewable energies and are becoming scarcer and more expensive. Prices of these and many other key industrial materials have been in steady uptrends for a decade as supplies have tightened. They’ve remained high even despite the dreadful U.S. economy. Emerging economies, particularly China — which has become a voracious consumer of industrial materials — are behind the stunning growth in demand. One statistic: in 2011, Brent oil, the chief marker for oil, has been above $100 a barrel a record number of days; its average price for the year is likely to be an all-time high. And with China’s growth continuing, there’s no end in sight.

Iron ore demand to stay strong, China still likely to dominate - Short of a complete meltdown in China, which he believes is highly unlikely, Raw Materials Group CEO, Magnus Ericsson, says iron ore demand will continue to grow for at least the next 20 years. Speaking to Mineweb at the Mines and Money London conference, Ericsson says that while growth in the Asian giant is bound to slow, the demand for iron ore will remain. He says, five to 10 years ago, China produced 300 million tonnes of steel every year and they were growing at 10%, a growth rate that implied a certain level of demand for iron ore every year. "Now," he says, "they're double that volume annually in steel production, and even if growth rates then decline to half, that ends up with the same number of iron ore mines having to come on stream every year." At a presentation earlier in the day, Ericsson pointed out that, while much of the focus is on the spending by the country's central committee on large infrastructure, the continuing urbanisation of the Chinese population and increasing wealth means that an equally important area of growth is likely to be "steel-intensive consumption" - items such as kitchen appliances that require fairly significant amounts of steel. China's main rival in the race for iron ore is, of course, India. But, Ericsson says, while India is likely to play an important role, it is unlikely ever to quite match China.

China’s ghost city busts - China’s most famous ghost city, Ordos in inner-Mongolia, has regularly been cited as a prime example of China’s unsustainable construction-led economy. Last year, AlJazeera posted an explosive video showcasing Ordos’ ghost apartments and frenetic pace of construction, which exemplified the “build it and they will come” approach that has underpinned the Chinese economy. Then Business Insider posted a slideshow of China’s empty cities, headlined by Ordos. Now a video from NTD Television shows that Ordos’ home prices are crashing, having fallen by almost one-third. Meanwhile, construction has finally ground to a halt, leaving many construction workers unemployed. With the real estate market accounting for around 10% of China’s GDP growth, and affecting many related industries, the concern is that the property downturn might become widespread, dragging China into a sharp recession

If China’s Property Bubble Bursts - In October, Beijing announced that four city and provincial governments – Shanghai, Shenzhen, Zhejiang and Guangdong – would be allowed to start issuing bonds for the first time in China’s history.  Zhejiang is expected to issue $8 billion yuan in bonds, including half three-year bonds and half five-year bonds. The proceeds are intended to fund infrastructure projects already under construction.   But why now?  What was the impetus for this unusual step?  Quite simply, it’s a financial pacifier – recent central government policies aimed at cooling down real estate have hurt local governments, who rely on land sales and development fees as their most important sources of revenue.  As these revenues fall, local governments will become increasingly desperate to find other means to finance infrastructure projects and social services.

Next How Do We Know that China Is Overinvesting? - For years I have been arguing that the Achilles heel of the Chinese growth model is the unsustainable rise in debt that comes as a necessary consequence of capital misallocation fueled by bank lending.  Capital misallocation, I argued, was the nearly inevitable consequence of high investment growth over many years in a system in which price signals are severely distorted and there is political incentive to maximize economic activity in the near term.  If capital misallocation is funded by debt, the increase in debt is necessarily unsustainable. These should have never been considered surprising revelations since the historical precedents for investment-led growth “miracles”, of which there are many, are pretty clear.  Still, it was only in the past two or three years that the problem of wasted investment was widely acknowledged, although even here not universally.  A number of China bulls that fought most strongly several years ago against the idea that China was misallocating capital on a grand scale are still fighting the good fight.

Deutsche Bank: The Renminbi Will Be The World's Next Major Reserve Currency - Deutsche Bank analyst Alan Cloete argues the renminbi is expected to become a major reserve currency in the next decade, a move that could see the greenback's share of global reserve currencies fall from about 60% now, to 50% by 2020.   Cloete notes that Berkeley economist Barry Eichengreen has said that the renminbi could account for 15% of global currency reserve holdings within ten years. Cloete elaborates: "Demand for RMB is bound to accelerate, given China’s commitment to liberalize its capital and current account by the end of 2015. Hardly a month goes by without the People’s Bank of China further loosening the restrictions on onshore RMB trade settlements for foreign investors and customers. For instance, since August 2011 foreign businesses have been able to settle contracts in RMB in any province in China, a relaxation of the rules that would have been unimaginable even two years ago."

China’s capital flight - Exclusively from Michael Pettis’ newsletter: On Wednesday night, after the Chinese markets closed, the People’s Bank of China announced that it had cut the minimum reserve requirement by 50 basis points to 21% for the large banks, and lower for the smaller banks.  With the announcement coming just hours before announcements by the Fed, the ECB and the central banks of the UK, Switzerland, Japan and Canada, that they would jointly lower interest rates on dollar liquidity swaps to make it cheaper for banks around the world to trade in dollars, it seemed like world’s major central banks were determined to stimulate global credit growth. But the PBoC move is qualitatively different from that of the others.  I think it is important to remember that changes in the minimum reserve requirements in China have more to do with managing the changes in underlying liquidity caused by net inflows and outflows to China than they have to do with changes in credit.  At any rate here is the Xinhua article on the subject: The People’s Bank of China, the country’s central bank, said on Wednesday that it will lower banks’ reserve requirement ratio (RRR) by 50 basis points for the first time in three years in order to replenish liquidity in the country’s banking system as inflation eases.

Russia Faces Capital Flight - Capital flight from Russia, already at $64 billion this year, is likely to intensify in coming months as a weak showing by Prime Minister Vladimir Putin's United Russia party in parliamentary elections heightens political uncertainty, economists said. The net capital outflow, blamed on European banks and wealthy Russians concerned about a government shake-up, is now expected to exceed $85 billion in 2011, acting Finance Minister Anton Siluanov said late Monday.

Japan third-quarter GDP growth lowered - Japan today said its economy grew at a slower pace in the third quarter than initially estimated, with the fragile post-quake recovery weighed by a strong yen and the euro zone debt crisis. The Cabinet Office said the economy expanded by an annualised 5.6% in the July-September quarter - lower than the 6% announced last month - with a government spokesman saying growth was "moderating." However, the figure represents Japan's first economic expansion in three quarters, as the country recovers from the March 11 quake and tsunami disaster with manufacturers ramping up production. The monthly outcome still beat analysts' expectations for a revised 5.2% gain. On an quarter-on-quarter basis, gross domestic product growth was 1.4 % in the three months from July to September, revised down from 1.5%, the figures showed. Authorities have been cautious about the prospects for Japan's economy, saying weakness in key US and European export markets could dash hopes for a sustained recovery.

Bank Of Korea Cuts GDP Outlook On Europe Woes - South Korea's central bank on Friday slashed its growth forecasts for the economy in view of the deceleration in global economic growth following the sovereign debt problems in the euro area. Bank of Korea now expects the gross domestic product to rise 3.7 percent in 2012, slower than its previous forecast of 4.6 percent. The GDP outlook for this year was cut to 3.8 percent from 4.3 percent. In 2013, growth is seen at 4.2 percent. Export growth will slow considerably, owing to the cooling of world trade growth and the base-period effect from the large increase in the preceding year, the bank said in its economic outlook report. The economy may show signs of a mild slowdown from the second half of 2011 to the first half of 2012, due to the deceleration of world economic growth following the sovereign debt problems in the euro area and the increased volatility in the financial and foreign exchange markets, according the central bank.

India facts of the day - The $950bn worth of gold held by Indian households is the equivalent of 50 per cent of the country’s nominal GDP in dollar terms. All those gorgeous necklaces and other extravagances weigh 18,000 tonnes, or 11 per cent of the world’s stock, according to the report. India imports 92 per cent of its gold, making it the third largest of its merchandise imports behind crude oil and capital goods. Gold made up 9.6 per cent of imports so far for the year ending March 2012 – significantly expanding the current account deficit. That is an old criticism of the Indian economy, and here is some recent background on the deregulation of gold holdings. On a different but related front, here is an overview of the ongoing deterioration of the Indian economy, still an underreported news story.  Here are some economic lessons from Indian retail, a sector which is underperforming.

India suspends plans to OK retailers like Walmart - The Indian government, under two weeks of strong pressure from mom-and-pop stores, suspended sweeping plans to open its huge retail sector to foreign companies such as Wal-Mart (WMT), the Associated Press and Press Trust of India report. Update: Reuters quotes an unidentified government source as saying the government will go ahead with plans to allow single-brand foreigner retailers, such as Nike, to own 100% of their outlets. Finance Minister Pranab Mukherjee announced in the House of the People, the lower house of Parliament, that the government decided to put on hold a decision on the plan until all stakeholders were consulted, PTI reports. Sushma Swaraj, leader of the opposition, welcomed the announcement. "Government has bowed to the wishes of the people. To bow before the will of the people is not defeat,"

The Impoverished “Asian Century” - By 2050, Asia will have more than five billion people, while the European Union’s share of the global population will decline from 9% to 5%. Annual economic growth in Asia over the past 30 years has averaged 5%. Its GDP is projected to increase from $30 trillion to about $230 trillion by 2050. The balance of power in the twenty-first century is shifting – in social, economic, and, arguably, political terms – from west to east.  Western anxieties about a looming “Asian century” stem largely from the precedent of twentieth-century geopolitics, in which the West dominated less-developed nations. But this dynamic is outdated, and Asia would suffer as much as the West from any attempt to emulate the British and American empires of the nineteenth and twentieth centuries. As Asian economic growth has increased, consumption in the region has also risen. Multinational companies and Western countries – both of which stand to benefit greatly from Asia’s increasing consumption – have encouraged Asians to aspire to a Western standard of living, with its high energy usage, electronic toys, and meat-heavy diet. Asian governments seem willing partners in this one-dimensional approach to development, and are eager to lead global economic growth. Yet it is neither desirable nor possible for Asians to consume in the way that Westerners do, and Asian governments should face up to this reality.

Southern discomfort -- RUM news out of Brazil this morning; the Brazilian economy failed to expand in the third quarter, according to a new statistical release. Brazil's red hot economy slowed steadily from last year, thanks in part to efforts to rein in domestic inflation. BRIC trouble is the norm rather than the exception these days. Growth in India dropped to 6.9% in the second quarter of 2011: the slowest pace in two years. There, too, efforts to wring out inflation have contributed to a slowdown. In November, both Brazil and China experienced a decline in factory activity, while growth slowed in India and Turkey. Big emerging economies are suffering from the euro crisis in two big ways. First, a rapid slowdown in the euro-zone economy is diminishing demand for emerging-world exports. And second, trouble in Europe's banking system is leading to a significant slowdown in foreign lending and repatriation in capital. This is generating big declines in emerging-world currencies and fueling local inflation pressures. That, in turn, is limiting the ability of emerging-market central banks to respond to worsening economic conditions through dramatic monetary easing.

Africa: Changing the Narrative - iMFdirect - Enduring poverty and conflict are so stark in Africa that it is sometimes difficult to see what else is happening. In April 2011, a study published by the Columbia Journalism Review titled “Hiding the Real Africa” documented how easily Africa makes news headlines in the West when a major famine, pandemic, or violent crisis breaks. But less attention is given to positive trends and underlying successes. In many cases, despite accelerated economic growth over the past 10 years, the rise of a middle class of consumers, and a more dynamic private sector attracting indigenous entrepreneurs, the narrative about Africa has remained focused on the bad news. That has, fortunately, started to change. This week’s cover story in The Economist, on “Rising Africa”, is testament to that. So too is the just-released December 2011 issue of Finance and Development (F&D) magazine on “Changing Africa: Rise of a Middle Class”.The World Bank earlier published a book on African success stories, titled Yes Africa Can. And the Tunis-based African Development Bank marked 50 years after independence from colonialism for many African nations with a study called Africa in 50 Years’ Time: The Road Towards Inclusive Growth.

Gap Between Rich And Poor Widening Across The Developed World, As Bankers And Executives Reap More Income - According to a new report by the Organization for Economic Cooperation and Development, income inequality — which has sparked the Occupy Wall Street movement in the U.S. — is increasing all across the developed world, led by bankers and executives reaping bigger and bigger income gains. In the OECD countries, the richest 10th of the population makes about nine times as much in average income as the poorest 10th , a significant increase from the gap in the 1980s: The gap between rich and poor is widening across most developed economies as skilled workers reap more rewards and top executives and bankers benefit from a global job market, the Organization for Economic Cooperation and Development said. The average income of the richest tenth of the population is now about nine times that of the poorest tenth, the Paris- based OECD said today in a report. The gap has increased about 10 percent since the mid 1980s. Mexico, the U.S., Israel and the U.K. are among the countries with the biggest divide between rich and poor, while Denmark, Norway, Belgium and the Czech Republic are among those with the smallest gap. The earnings multiple is 14-to-1 in the U.S. and Israel, compared with about 10-to-1 in the U.K., Italy and Japan and 6-to-1 in Germany and Denmark.

Has the Global Business Cycle Ended? - So, global PMIs for November have passed. Where do they suggest that the global economy is heading? Let’s begin with the good news, the US of A. The combined ISM Manufacturing and Services Indexes are below:The headline figure for manufacturing lifted modestly and it contracted modestly for services. New orders improved for both but so too did inventories. Less promising is that employment for manufacturing collapsed into contraction and services went close as well. Clearly, US businesses are not confident enough about the current bounce to hire into it. So much for the good news. Let’s cross the Pacific to North Asia where we find China really struggling. We already know about the plunge of the manufacturing PMI from 51 to 47.7 last week. Yesterday we added the Services PMI which recorded a moderate fall from 54.2 to 52.5, still expanding. But the composit PMI that combines the two give you an idea of the current trajectory of the Chinese economy: That’s 48.9, down from 52.6. This China slowdown has hit the rest of Asia hard with manufacturing contracting in Japan, Korea and Taiwan. All three reported flat employment indexes.Swinging to Europe, we know that maufacturing is contracting fast, down from 47.1 in October to 46.4 in November. The employment sub-index reported active job losses as busiensses became more cautious. Last night we added the services PMI and the result was a weak 47.5, slightly up from 46.4 in October.

China and Europe - Many observers mistakenly think that because China is not a parliamentary democracy that is it monolithic. Yet repeatedly we have seen this is not the case. Many officials at the PBOC, for example, seem more sympathetic to a more flexible currency regime, while officials more involved with commerce and trade are more opposed. Most recently, diplomats and political leaders, including Premier Wen, seem more sympathetic to the plight of Europe. Wen suggested in mid-Sept that China might be more prepared to lend the euro zone funds if it were to recognize the PRC as a market economy. This designation would make it more difficult to charge China with dumping. Officials closer to financial issues seem less sanguine. The vice minister of foreign affairs explained over the weekend why China cannot use its massive reserves (over $3 trillion) to aid Europe. The reserves are effectively financed through borrowed funds. The reserves are the asset, but there is a linked liability. The PBOC forces commercial banks to transfer 20% of their domestic deposits to it, which it then uses to buy dollars in the foreign exchange to manage the RMB.

Airlines could lose $8 billion from euro crisis - Airlines worldwide face over $8 billion in losses next year if Europe's politicians fail to get to grips with the region's debt crisis, the industry's leading trade group warned on Wednesday. A collapse of efforts to shore up the euro and prevent a new shock to the global banking system would hit air transport across the globe and cripple the Asian profit machine which has led the industry's recovery since 2009, Geneva-based IATA said. "The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the eurozone sovereign debt crisis," "Such an outcome could lead to losses of over $8 billion, the largest since the 2008 financial crisis," Even in the best-case scenario, Europe's airlines face losses in 2012 and the gap between the industry's haves and have-nots is expected to widen.

Asset Price Booms and Current Account Deficits - SF Fed - Before the global financial crisis of 2007–2009, the United States and several other countries posted large current account deficits. Many of these countries also experienced asset price booms. Evidence suggests the two developments were linked. Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset prices since the crisis can make it easier to reduce current account imbalances.

OECD Suggests Raising Taxes to Combat Inequality - Governments in a number of developed economies should consider introducing or raising taxes on wealth and property as part of a range of measures designed to halt and reverse rising income inequality, the Organization for Economic Cooperation and Development said Monday. In its first report on the subject since 2008, the OECD said the gap between rich and poor in most of its 34 members has continued to widen. The average income of the richest 10% of the population in developed economies is now nine times that of the poorest 10%, having been five times as large in the 1980s. Since the mid-1990s, differences in income have risen rapidly even in countries such as Sweden and Germany that have traditionally had the least inequality. The OECD said that rising inequality was fueling dissatisfaction with social and economic structures in a number of developed economies. “The social compact is starting to unravel in many countries,”  “Young people who see no future for themselves feel increasingly disenfranchised. They have now been joined by protesters who believe that they are bearing the brunt of a crisis for which they have no responsibility, while people on high incomes appear to have been spared.”

The Robin Hood Tax —They call it the Robin Hood tax — a tiny levy on trades in the financial markets that would take money from the banks and give it to the world’s poor.  And like the mythical hero of Sherwood Forest, it is beginning to capture the public’s imagination.  Driven by populist anger at bankers as well as government needs for more revenue, the idea of a tax on trades of stocks, bonds and other financial instruments has attracted an array of influential champions, including the leaders of France and Germany, the billionaire philanthropists Bill Gates and George Soros, former Vice President Al Gore, the consumer activist Ralph Nader, Pope Benedict XVI and the archbishop of Canterbury.  “We all agree that a financial transaction tax would be the right signal to show that we have understood that financial markets have to contribute their share to the recovery of economies,” the chancellor of Germany, Angela Merkel, told her Parliament recently.  So far, the broader debt crisis engulfing the euro zone nations has pushed discussion of the tax into the background. But if European leaders can agree on a plan that calms the financial markets, they would be in a stronger position to enact a levy, analysts said.

Chris Martenson Discusses The Future Of Europe And Of The Global Economy - In the following video Chris Martenson - economic analyst at chrismartenson.com and regular guest contributor to Zero Hedge, and James Turk, Director of the GoldMoney Foundation talk about the problems facing the eurozone as well as the global economy. Chris Martenson points out that the whole world simply has too much debt. This is why he believes that there won’t be a real solution to the euro crisis. The big question will rather be who will take losses on the debt, which can’t possibly be repaid. The lack of political leadership and unwillingness to accept reality is contributing to this crisis. Additionally, the monetary tools central banks have traditionally used to revive economies are starting to show less and less effect. In Martenson’s view, the financial sector has become way too large and interlinked across borders, so that a default by one country could bring down the whole financial systems, because credit default swaps would get triggered and could bring down the writers of those derivatives.

Spain's industrial output fell 4% in October - Spain's statistics agency said Monday that industrial output tumbled in October, the latest sign that the euro zone's fourth-largest economy may be contracting in the current quarter. Spanish industrial output fell 4% on the year in calendar-adjusted terms, the worst monthly reading in well over a year, compared with a revised 1.4% drop in September, the agency said. It had previously reported a 1.8% decrease in September. In non-adjusted terms, industrial output fell 4.2%. Output fell in all industrial sectors in October, with the durable goods sector posting a whopping 14% annual decrease. Energy output fell 7.6% and that of intermediate goods was down 5.8%. These numbers follow a string of bad data indicating that Spain's timid economic recovery after a contraction in 2009-2010 is grinding to a halt, amid poor household and corporate demand. Just last week, Spain's car manufacturers said car sales dropped 6.7% on the year in October, and are now at the lowest level since 1993.

Spanish regions will miss 2011 targets: Moody's - Moody's Investors Service said Monday that Spain's regional governments are likely to exceed 2011 deficit targets by nearly one percentage point, which is credit negative for those regions. The ratings firm said that even though data for the first nine months of the year indicate regions are implementing austerity measures, those efforts won't be enough to keep them from exceeding the deficit target of 1.3% of gross domestic product. The recently elected Spanish government will have to tackle the regions' fiscal problems, as these problems threaten to increase national deficit figures in 2012, the ratings firm said. Deficit targets for 2011 and 2012 are key to rebuilding market confidence, and difficult market conditions have meant stretched liquidity for regions has deteriorated further, leading to the "accumulation of significant commercial debt," said Moody's.

Portugal Is Latest Country To Go "MF Global", Raid Pensions Funds To Delay Fiscal Death - About a year ago, we discussed the very troubling moves by insolvent countries such as Ireland and Hungary to "raid" their pensions funds for various fungible purposes, a move which in virtually every way a was a progenitor to the MF Global capital commingling, if not outright bankruptcy, and was explained as reflecting "a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system." While it was unclear precisely what the use of funds was, back then FN speculated that it pension funds were being tapped to boost sovereign debt bids. Which if true means that Europe's peripheral pensioners have seen about a 20% drop in the NPV of their retirement assets. Today we add Portugal to the list of countries committing an MF Global type crime on a global scale: the Telegraph writes: "Portugal has raided €5.6bn (£4.8bn) of pension fund assets in a controversial scramble to meet its deficit targets." And since the money is once again implicitly and explicitly used to patch broken fiscal models, it is as good as gone.  

David Apgar: Could Germany Be Right about the Euro? - What if there are good reasons for the preternatural calm of German Chancellor Merkel’s inner circle as the English-language media (based, after all, in the investor capitals of London and New York) light their collective hair on fire about the euro’s imminent immolation? Surprisingly, you can make a decent argument that the euro zone is at no risk of breakup – unless someone secretly switches its purpose from facilitating European trade to providing investors an implicit guarantee against losses. The working assumption is that German calm reflects a pious belief in the power of crises to sober up borrowing governments and motivate a little austerity. It was on display Tuesday night at the French Embassy when luminaries as diverse as former ambassador Jean-David Levitte, former UNDP head Kemal Derviş, and former Treasury secretary Larry Summers all quickly agreed on it. Suppose, however, the feasibility of Mediterranean austerity – austerity at a scale big enough to impress the bond markets – is not what Merkel’s team is counting on. Suppose instead the Germans are really counting on the feasibility of a series of orderly partial defaults.

Germany is the ultimate victim of EMU - Enough is enough. Please stop defaming Germany out there in the blogosphere. The Germans are not engaged in a mercantilist conspiracy to subjugate and milk southern Europe. They are not conducting “warfare by other means”, or heaven forbid, trying to establish a Fourth Reich. The German people entered monetary union for honourable motives, believing they were acting as good Europeans. It is excruciating for them to see those Athens banners in Syntagma Square showing Chancellor Angela Merkel wearing the Swastika, or read that sign “Arbeit Macht Frei”.They gave up the D-Mark reluctantly under French and Italian pressure, as the price for acquiescence in Reunification.They entered EMU at an overvalued rate after the Reunification bubble, leaving them in semi-slump for half a decade. They slowly clawed back competitiveness the hard way, by squeezing wages and driving up productivity. It is entirely understandable that they now think Club Med can and should do the same. (They are profoundly wrong, of course, because Germany was able to lower relative wages during a) a global boom, b) against other EMU states that were inflating c) and with benchmark borrowing cost that stayed low even during the dog days. None of these factors apply to Italy or Spain now.)

German Economy Falls Back Into Contraction - German private-sector activity contracted in November for the first time in more than two years, adding to evidence of a downturn in the euro-zone economy and raising the stakes as leaders seek a new deal to contain the debt crisis. Financial data firm Markit Economics said Monday its composite Purchasing Managers' Index for Germany fell to 49.4 from 50.3 in November. That is the first time the index has fallen below 50--indicating a contraction in business activity--since July 2009. In the euro zone as a whole, activity shrank for the third straight month. It edged up to 47.0 from 46.5 but stayed firmly in contraction territory, a bad omen for gross domestic product in the fourth quarter. "The major euro-zone countries are all now contracting and face the risk of recession," "Germany is currently seeing only a very modest downturn, but that looks set to worsen in coming months." He said economic output in the currency bloc is likely to contract by 0.6% in the fourth quarter, after growth of 0.2% in the third quarter. The fall in private-sector output in Germany means the biggest four euro-zone economies all suffered a decline in November. But Germany's fall is particularly relevant because the country is the driving force for the region, and had thus far managed to escape the downturn.

Euro-zone Nov. PMI points to further contraction - Private-sector activity across the 17-nation euro zone continued to shrink in November, but at a slower pace than in the previous month, according to a final composite purchasing managers index reading compiled by Markit. The composite PMI rose to 47.0 from 46.5 in October, but was down from a preliminary reading of 47.2. A reading of less than 50 indicates a contraction in activity. The November data showed the euro zone's four largest nations in contraction, with Germany joining France, Italy and Spain in posting a sub-50 reading. The figures show activity in the euro zone contracted for a third consecutive month, putting the region on course for a 0.6% contraction in the fourth quarter, said Chris Williamson, chief economist at Markit

Decade-Long European Recession Coming Up; Reflections on the Un-Level Playing Field - If French president Nicolas Sarkozy gets his wish to "Level the Playing Field" on sovereign bonds, a decade-long European recession is on its way.  French President Nicolas Sarkozy made it clear in a speech in Toulon last week that he wanted the private sector to be given a more-level playing field when it came to the threat of having to bear losses on their investments. He said Greece, where there have been drawn-out negotiations between the government and the private sector over how much of a hit banks and insurance companies should take under a debt restructuring, should be a unique case. "It must be clear that what has been done for Greece, in a very particular context, will not happen again, that no other state in the euro zone will be put into default," he said. "It must be absolutely clear that in future no saver will lose a cent on the reimbursement of a loan to a euro zone country." What could possibly be more un-level than guaranteeing banks and bondholders will never take losses? When there are more losses, and there will be, the only way to guarantee banks do not take them, is to have someone else take them, namely taxpayers.

No, It's Not The Welfare State – Krugman - Dean Baker takes on a favorite pet peeve of mine — the incessant claim that Europe’s woes are being caused by the burden of the welfare state. This really isn’t hard to check. Take government spending as a percentage of GDP from the IMF Fiscal Monitor (I use 2009 for Ireland because 2010 is distorted by bank bailouts), and October 10-year interest rates from the ECB. Plot them, and here’s what you get: There’s no relationship; some high-spending countries, notably Sweden and Denmark, have very low rates, while as Dean says, Spain was a relatively low spender. Of course, like all the zombie concepts littering our discourse, this one will be impossible to kill.

Is There A Doctor In The House? - Contrary to conventional wisdom, the euro crisis was NOT triggered by runaway spending, Dean Baker reminds. It follows, then, that monetary policy—NOT fiscal policy—is the solution, as Ambrose Evans-Pritchard explains. Instead, the politicians are, of course, pushing for a political solution engineered by Germany. "For the third time in less than twenty years, Germany is trying to force down the throat of Europe a federal 'political union' which, in the eyes of too many European observers, eerily resembles a gentler, kinder Anschluss," writes Tony Corn. You can't always get what you want. The question is whether Europe will get something it needs before it's too late? The jury's still out.

Politicians Scorn Professors - My preceding blogpost, the Hour of the Technocrats, was inspired by the recent accession of Mario Monti and Lucas Papademos, both professional economists, to the prime ministerships of Italy and Greece, respectively.   Today we turn to the U.S., where the political process seldoms view academic credentials benevolently. In the United States, Senator Richard Shelby scorned President Obama’s 2010 nomination of Peter Diamond, an eminent MIT Professor of Economics, and prevented his confirmation as a governor of the Federal Reserve Board.  The Alabama Senator farfetchedly claimed that the nominee was not qualified, and persisted despite the coincidence that Diamond won the Nobel Prize in Economics soon after his nomination (deservedly).   But, then, Shelby was holding up an astounding 70 of President Obama’s nominations, just to try to get two pork projects in his home state funded.   Diamond finally withdrew in June 2011, because Shelby and other anti-technocratic Senators had blocked the confirmation process for 14 months and were clearly going to continue to do so.   Diamond, like Axel Weber in my preceding blogpost, was comfortable foregoing the limelight.

Do Eurozone leaders finally ‘get it’? Almost - We seem to be watching a delicate ballet. All of the sudden, Angela Merkel envisions fiscal discipline and ECB action. A few hours later, Mario Draghi talks about sequencing - first fiscal discipline, then ECB action. For those of us who have been arguing for months that we need both together, this is music to our ears. But for all of us who have seen so often vague statements concealing an inability to understand what financial crises are, it is a bit early to cheer up. This week’s announcements by German Chancellor Angela Merkel and ECB President Mario Draghi that the Eurozone is taking steps towards a closer fiscal union seem to be calming markets and restoring confidence in the decision-making of Eurozone leaders. This column argues, however, that the devil is still in the detail.

Euro Faces Tests From ECB, EU Summit - European policy makers hold the key to the euro's direction this coming week: Whether it rises or falls depends on the outcome of a meeting of leaders to address the debt crisis and a European Central Bank decision on interest rates. This Thursday, policy makers at the ECB will gather for a meeting that is widely expected to lead to a reduction in interest rates by at least 0.25 percentage point, to 1%. On Friday, European Union leaders have scheduled a summit meeting, where euro-zone officials are expected to lay out plans to enforce stricter budget rules across the currency bloc in an effort to keep the Continent's turmoil from worsening.
Market observers say the ECB and the EU summit are intertwined. Investors are eager for the central bank to take a more aggressive role in buying euro-zone government debt, driving down interest rates. But unless euro-zone countries overhaul their fiscal policies, the ECB is reluctant to expand its emergency bond-buying...

Monti cabinet agrees Italy austerity plans - Italy’s new technocratic government has approved tough austerity measures and economic reforms, kick-starting a pivotal week in Europe’s campaign to shore up the single currency. Mario Monti, prime minister, on Sunday night underlined the gravity of the crisis facing his country, but promised that the “multitude of sacrifices” he was implementing in his “Save Italy” decree would also be used to promote economic growth by reducing the cost of labour. Italy’s move, brought forward by a day, marks the first element of a sequence of choreographed steps Europe’s leaders hope will build into a convincing resolution to the sovereign debt crisis at their summit on Friday.   Rome’s planned tax increases, pension changes and spending cuts amount to a savings of €30bn over the next three years, of which about €10bn will be put back into the economy through measures to promote growth, including cuts in the cost of labour and incentives to get more women and young people into the workforce. If extra measures are needed to ensure Italy remains on course to balance its budget by 2013 then the government proposes to increase value added tax in the second half of 2012.

The austerity bandage - THE narrative running through coverage of the euro zone seems to have shifted on the back of recent policy moves. Last week's coordinated liquidity intervention gave a significant boost to equity markets. European Central Bank head Mario Draghi kept the momentum going a day later, by suggesting that should euro-zone leaders reach an agreement on fiscal integration, "other elements might follow", a seeming reference to stepped up ECB bond-buying. Ahead of this week's summit of European heads of state, details have been leaking of potential outlines of such an agreement. Mr Draghi is also expected to take additional steps toward monetary easing at the ECB's meeting this week. And today, we learn that Italy's new prime minister, Mario Monti has introduced a package of budget cuts worth about €20 billion (€30 billion will be saved, of which €10 billion will be returned to the economy through hiring incentives to firms). All told, equities have risen over 10% in Europe over the past week, and bond yields are retreating (though they remain elevated). There is a sense that should leaders deliver the goods this week, in the form of a credible plan for fiscal integration, that the worst of the crisis may have come and gone.

Italy’s Leader Unveils Radical Austerity Measures - Telling Italians that the fate of their country and the euro was at stake, Prime Minister Mario Monti2 unveiled a radical and ambitious package of spending cuts and tax increases on Sunday, including deeply unpopular moves like raising the country’s retirement age. The measures are meant to slash the cost of government, combat tax evasion and step up economic growth, so the country can eliminate its budget deficit by 2013. Mr. Monti took the steps in an emergency decree, which means they will take effect before he presents them to Parliament for formal approval. Delivered ahead of a crucial summit meeting of European leaders this week, the new measures are aimed at showing that Italy— which is seen as both too big to fail and too big to bail out should it default on its immense debts — is committed to getting its finances in order. The hope is that they will take some of the market pressure off Italy, whose borrowing costs have been pushed up in recent weeks to levels that have led other European countries to seek bailouts; once Italy has shown it is committed to austerity, the European Union can move ahead with broader plans to shore up the euro.

Telegraph Video: Italian welfare minister in tears over austerity measures - Italian Welfare Minister Elsa Fornero broke down in tears as she announced an end to inflation indexing on all but the lowest pension bands, a move that will mean an effective income cut for many pensioners. Under the austerity plan unveiled on Sunday, Italy will raise the minimum pension age for women and men to 66 by 2018, and will scrap annual inflation adjustments for many pensions.  "We had to... and it cost us a lot psychologically... ask for a..." Fornero said, but was unable to complete the sentence with the word "sacrifice" as she wiped tears from her eyes.  The measures come before one of the most crucial weeks since the creation of the single currency more than a decade ago, with European leaders due to meet on Thursday and Friday in Brussels to try to agree a broader rescue plan for the bloc.  Italy, with a public debt of around 120 percent of gross domestic product, has been at the centre of Europe's debt crisis since yields on its 10-year bonds shot up to around 7 percent, similar to levels seen when countries such as Greece and Ireland were forced to seek a bailout.

Italy Plan Opens Pivotal Week for Euro —Italy's new government unveiled austerity measures that European leaders and markets hope will form the first part of a wider European deal this week and mark a turning point in the battle to save the euro. Italian Prime Minister Mario Monti, in his first test since taking office two weeks ago, outlined a three-year plan made up of €30 billion ($40.2 billion) in tax increases, spending cuts, pension overhauls and growth-boosting measures. The package—equivalent to 1.9% of Italy's €1.6 trillion gross domestic product—will likely be followed by Franco-German proposals on Monday to create a new regime for budget policies in the euro zone, which European leaders could adopt at a summit on Dec. 8-9.

Italy wins the Oscar - As I said last week I am still in search of a credible transition plan that will take the Europe you see today, with its large sovereign debt problems and every growing imbalances, to what Sarkozy and Merkel now appear to be aiming for. I have stated a number of times previously that austerity alone is not a credible plan because forcing it on any non-exporting nation with no private sector savings buffer will be a self-defeating process unless you first write-off or transfer a considerable amount of the debt. Reducing the costs of borrowing is simply prolonging the problem. Sarkozy and Merkel met overnight, but as far as I can tell nothing at all new of any importance has been decided: The leaders of France and Germany agreed a master plan on Monday for imposing budget discipline across the euro zone, saying the EU treaty will need to be changed in the search for a sweeping solution to its debt crisis. President Nicolas Sarkozy and Chancellor Angela Merkel said their proposal included automatic penalties for governments which fail to keep their deficits under control, and an early launch of a permanent bailout fund for euro states in distress. No euro-bonds, no fiscal union, no bank re-capitalisation/nationalisation plan, no ECB  ’bazooka’, so as far as I can tell no credible transition plan.

Europe: More Austerity, Planning for "fiscal union" -- From the Financial Times Rolling blog: Eurozone crisis lists today's events in Europe:

• Italy’s technocrat-prime minister, Mario Monti, has unveiled tough austerity measures and economic reforms
• Nicolas Sarkozy ... and Angela Merkel ... will meet in Paris ... the structure and rules of a new “fiscal union” in Europe
• Herman Van Rompuy, the European Council president ... meets with foreign ministers to outline the scope of the talks leading up to Friday
• The Irish government presents its austerity budget ...

On the Austerity and Rule by Big Finance in Greece - This Real News Network interview nominally is about whether Greece should leave the Euro. But it is really about the struggle between the bondholders, who are crushing Greek democracy and society, versus the population. The interviewee Costas Lapavitsas makes an forceful case why defying the banks is the best route for Greek society, even thought the transition will also be difficult.

“No People, No Problem”: The Baltic Tigers’ False Prophets of Austerity - The Baltic states have discovered a new way to cut unemployment and cut budgets for social services: emigration. If enough people of working age are forced to leave to find work abroad, unemployment and social service budgets will both drop.  This simple mathematics explains what the algebra of austerity-plan advocates are applauding today as the “New Baltic Miracle” for Greece, Spain, and Italy to emulate. The reality, however, is a model predicated on economic shrinkage as a result of wage cuts. In the case of Latvia, this was some 30 percent for Latvian public-sector employees (euphemized as “internal devaluation”). With a set of flat taxes on employment adding up to 59% in Latvia (while property taxes are only 1%), it would seem hard indeed to present this as a success story. But one hears only celebratory praise from the neoliberal lobbyists whose policies have de-industrialized and stripped the Baltic economies of Lithuania and Latvia, leaving them debt-ridden and uncompetitive. It is as if their real estate collapse from bubble-level debt leveraging that left their basic infrastructure in the hands of kleptocrats, is a free market success story.  Twenty years of neoliberal policy after emerging from Soviet rule have left the Baltics a mess.

In Ireland, Austerity Is Praised but Painful — As European leaders scramble to overcome the Continent’s debt crisis, many are pointing to Ireland as a model for how to get out of the troubles.  Having embraced severe belt-tightening to mend its tattered finances, Ireland is showing glimmers of a turnaround. A year after it received a 67.5 billion euro bailout, or about $90 billion at current exchange rates, modest growth has returned and the budget deficit is shrinking.  But the effects of austerity have pummeled Ireland’s fragile economy, leaving scars that are likely to take years to heal. Nearly 40,000 Irish have fled the country this year alone in search of a brighter future elsewhere; the trend is expected to continue.  “This is still an insolvent economy,” . “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”

Irish Pfizer Smiling - The Times has a good article on Ireland, focusing on the dissonance between the praise of outsiders and the grim realities for the Irish themselves. And as the Times notes, all this “successful” austerity has still left the interest rate on Irish debt at a completely unsustainable level. One thing the article doesn’t mention, however, is the trickiness of measuring Irish growth, which is part of the issue. Ireland, you see, is a country with an extraordinary amount of foreign-owned capital; this means that gross national product, the income of Irish residents, is substantially smaller than gross domestic product, the income generated in the country. We normally focus on GDP, because it’s easier to measure accurately, but in Ireland’s case this can be misleading — because the gap between GDP and GNP has been widening. As I understand it, the recent rise in Irish exports is largely a matter of capital-intensive multinationals — especially pharma — ramping up Irish production. This is good for GDP, but generates very little income for Irish residents, so that GNP doesn’t gain much.

It's Your Choice, Europe: Rebel Against the Banks or Accept Debt-Serfdom: It's really this simple, Europe: either rebel against the banks or accept decades of debt-serfdom. All the millions of words published abembargoout the European debt crisis can be distilled down a handful of simple dynamics. Once we understand those, then the choice between resistance and debt-serfdom is revealed as the only choice: the rest of the "options" are illusory. 1. The euro enabled a short-lived but extremely attractive fantasy: the more productive northern EU economies could mint profits in two ways: A) sell their goods and services to their less productive southern neighbors in quantity because these neighbors were now able to borrow vast sums of money at low (i.e. near-"German") rates of interest, and B) loan these consumer nations these vast sums of money with stupendous leverage, i.e. 1 euro in capital supports 26 euros of lending/debt. The less productive nations also had a very attractive fantasy: that their present level of productivity (that is, the output of goods and services created by their economies) could be leveraged up via low-interest debt to support a much higher level of consumption and malinvestment in things like villas and luxury autos.

Europe is headed to a blood in the streets outcome - My takeaway from two days in DC is that Europe is headed to a blood in the streets outcome. While ECB funding remains ongoing even as it’s uncertain, in any case, the underlying theme remains austerity. There is no plan B. Just keep raising taxes and cutting spending even as those actions work to cause deficits to go higher rather than lower. So while the solvency and funding issue is likely to be resolved, the relief rally won’t last long as the funding will continue to be conditional to ongoing austerity and negative growth. And the austerity looks likely to not only continue but also to intensify, even as the euro zone has already slipped into recession.So from what I can see, there’s no chance that the ECB would fund and at the same time mandate the higher deficits needed for a recovery, In which case the only thing that will end the austerity is blood on the streets in sufficient quantity to trigger chaos and a change in governance.

It Looks Like They Might Thread the Needle - I did not approve of such brinkmanship but it is now looking ever more likely that the attempt by European elites to hold the world hostage in order to induce more structural reforms may work. From the NYT:Mr. Monti, who is both prime minister and finance minister, faces the challenge of satisfying the demands of European leaders while making clear to Italians that they must take responsibility for solving the country’s longstanding structural problems. “The huge public debt of Italy isn’t the fault of Europe; it’s the fault of Italians, because in the past we didn’t pay enough attention to the well-being of the young and the future adults of Italy,” Mr. Monti said. Speaking of his proposals, he said, “We have had to share the sacrifices, but we have made great efforts to share them fairly.” Among the new measures announced Sunday are sharp cuts to regional governments that could significantly change Italian politics by crimping the flow of patronage spending.

Lake Wobegon, Europe - Krugman - Ezra Klein reports on his conversations with Germans: The German embrace of austerity raises an obvious question: If Southern Europe is to cut and tax, how will they grow? The German answer, put simply, is, “like we did.” Ten years ago, the Germans are quick to note, unemployment in Germany was 10 percent and structural deficits were large. Germany was called “the sick man of Europe.” They attribute their subsequent success to a series of painful reforms they made to their unemployment insurance system, their health-care sector, and other pieces of their social safety net. Many figure that if they could do it, so too can Southern Europe. In truth, it’s probably not that easy — Southern Europe doesn’t have the industrial strength that Germany does, and no longer even controls its own currency levels — but it makes sense to the man on the street. Actually, it’s much worse than Ezra says. Germany moved from small current account deficits (the current account is a broad version of the trade balance) to massive, and I mean massive, surpluses. So what the Germans are in effect saying is that everyone should run huge trade surpluses. May I humbly suggest that this poses an arithmetic problem?

Merkel Seeks Swift Action on What May Be Long Job to Save the Euro - Chancellor Angela Merkel of Germany, a central player in efforts to rescue Europe’s single currency, on Friday called for urgent steps to amend European treaties that would address the underlying cause of the crisis but she said the long-term effort could take years, comparing it to a marathon.  Mrs. Merkel was speaking to the German Parliament as Europe’s leaders prepare for yet another round of talks on the issue, which has roiled markets across the continent and forced the collapse of governments in Greece, Italy and elsewhere. Mrs. Merkel spoke in sober and serious tones, and her words drew sustained if not overly enthusiastic applause from lawmakers. She advocated quick agreement on changes in treaties that would prevent overspending — an important contributor to the debt crisis threatening the euro’s future. But she also said “resolving the sovereign debt crisis is a process, and this process will take years.”

Merkel Calls for More ‘Concrete’ Union - German Chancellor Angela Merkel called on the euro zone to accept a strict regimen of legally binding budget discipline, ahead of another European summit next week that many hope will be a turning point in the euro crisis.  Ms. Merkel's first challenge, however, is to overcome her differences about the way forward with French President Nicolas Sarkozy at a meeting in Paris on Monday.  Ms. Merkel is—so far—defying pressure from Mr. Sarkozy to stop the capital flight from euro-zone government bond markets by resorting to radical measures, such as giving a green light to the European Central Bank for massive bond-market intervention.

France and Germany look set to fudge it yet again  -- Angela Merkel and Nicolas Sarkozy are as far apart as they ever were. But with five days to go until the next summit, their political standoff is part of the usual pre-summit poker game. The German chancellor and the French president always reach some agreement in the end. My main concern is they will again fudge it. Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline. Mr Sarkozy’s proposal could not be more different. He has said that he is not prepared to cede any sovereignty to the centre. He wants to retain the inter-governmental approach that has so abysmally failed in the past. He opposes any attempts to strengthen the European Commission, or to involve the European Court of Justice in adjudicating on breaches of the rules. While rejecting Ms Merkel’s obsession with austerity, he is not interested in a genuine fiscal union either. He is open to a eurozone bond and to the European Central Bank having the role of lender-of-last resort. I would surmise that this is because France would stand to benefit from both.Mario Draghi, meanwhile, insists politicians deliver their part of the bargain before he does. The ECB’s president has so far resisted pressure on him to provide an unlimited backstop to the system, either by backing the European bail-out fund or through a direct guarantee of long-term bond market prices.

You Gotta Have Friends - Earlier in the week, Bruce Krasting discussed the ECB’s need to engage in “shock and awe” tactics and make central bank friends. On Wednesday, immediately after Bruce published On FX intervention and the ECB/SMP, the Central Banks announced their coordinated plan that launched the stock market higher (although the shock and awe decision may have been made on Monday). Bruce added an introduction, “Yikes!! I posted this and a few minutes later the Fed/other CBs announces a round of coordinated measures to assist the ECB. My point in this article was that the ECB has no friends, and that was the weakest link in their defense of the EU bond market. It seems they now have friends. We shall see how good these "friends" are...” In the article, Bruce had written, “The ECB is in a bad position. The news flow and large supply have put them on the defensive. Defense is no way to run an intervention policy. At best, it’s slow grind to a loss...

Leaders Look to I.M.F., Again, as Euro Crisis Lingers - European leaders are looking outside the Continent for help solving the longstanding crisis over the euro, but while the International Monetary Fund may be able to help, it will not be the magic wand they seek.  The fund may be asked to assist further as leaders of the 17 European Union nations that use the euro meet to prepare for a summit meeting on Thursday and Friday. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France are scheduled to hold talks in Paris on Monday, and, at the request of President Obama, Treasury Secretary Timothy F. Geithner is meeting with European leaders later in the week.  The leaders of the European Union have already turned to the I.M.F. to assist smaller nations like Ireland, Greece and Portugal. In all three, the fund is providing about a third of the necessary loans and its expertise in guiding countries with solvency problems back to recovery. The I.M.F. lacks the resources to create the much-discussed “firewall” to keep interest rates at sustainable levels for troubled euro zone economies; Italy and Spain together have total debts of more than $3.3 trillion. The fund has about $400 billion available to lend worldwide.

ECB Prepares E1 Trillion Rescue Plan - The European Central Bank is preparing a E1 trillion cash infusion scheme for the eurozone ahead of a series of crisis summits this week, according to The Sunday Times. The report, which didn't include information on where The Sunday Times received the information, says that the plan would be executed if Europe's leaders reach agreement on a broader political reform of the currency bloc -- imposing strict budget controls on nations struggling to control their state finances. German chancellor Angela Merkel is reported to be willing to give the Frankfurt-based institution an expanded, albeit conditional, mandate to control the region's sovereign debt crisis.

Post-euro currencies, charted - Along with “redenomination risk” for eurozone financial assets, this is another of those pieces of bank research that’s as interesting for being considered necessary to be written in the first place, as much as for its conclusion. (Yes, we know it’s a dampener to talk about a euro break-up when the German and French governments are promising European unification, sweetness and light on a scale not seen since Charlemagne. But since it really is about either complete fiscal union, or this – it’s worth noting.) Once again it’s Nomura taking the plunge on covering the break-up issue. In his December 4 note, the bank’s FX analyst Jens Nordvig warned that conclusions about the value of a post-euro currencies would have to be extremely provisional:... we want to stress up-front that these estimates are unlikely to be particularly precise. They are intended to give a sense of potential magnitudes involved over a 5-year forward time frame, after which we believe temporary transition effects should be smaller.

The eurozone’s terrible mistake - The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt. Right now, the commitment is still vague... To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing. Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made?

Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then? - On December 8 Merkel and Sarkozy will have reached a 6-point agreement requiring ratification of a new treaty. However, details will not be finalized until March. At that time, if all goes to plan (and it won't), a vote by all 27 EU nations will take place. If that fails various aspects of the treaty might still be ratified by (and apply only to) the 17-member Eurozone nations.However, fiscal rules will still require individual referendums in Ireland and in my opinion Germany. Got that? Eurointelligence writes That „comprehensive agreement“ in full Angela Merkel and Nicolas Sarkozy essentially agreed on the German position. These should be embedded in a New Treaty, and they have asked Herman van Rompuy to put those proposals formally on the agenda for the Dec 8 and 9. Here is a summary of the six most important decisions taken. As so often, the newspapers cover only a short subset.

1. Automatic sanctions. In case of non-compliance with the deficit rule, countries are subject to automatic sanctions, which will require a majority of 85% to overturn.
2. Golden Rule: All EU member states, but in particular the eurozone, should subject themselves to uniform debt limits. The ECJ will adjudicate in case of a dispute, and should have the right to declare national budgets illegal.
3. Private Sector Participation will follow the rules of the IMF. The PSI agreement on Greece remains valid, but is a unique case that should not be repeated;
4. Germany and France want the ESM to start end-2012.
5. The heads of state and government meet once a month as the eurozone’s economic government.
6. There shall be no eurobonds.

Tricky treaty - ANGELA MERKEL and Nicolas Sarkozy have agreed on the framework of a fiscal deal, to be put to other heads of state at this week's summit. Charlemagne provides details here. There are a few key points worth making. First, Germany and France would like the deal to be enshrined through treaty changes, approved by all 27 EU nations if possible, but by euro-zone members only if necessary. This is not a popular course of action but is a high priority for Ms Merkel. Second, fiscal rules are to be adopted by euro countries, which will require governments to keep deficits within tight limits. Importantly, these rules will not be subject to supranational enforcement. Ms Merkel's desire to have the European Court of Justice oversee budgets was not shared by Mr Sarkozy, and as a result national court systems will handle the process of keeping governments in line. Without explicit oversight of national budgets from Brussels, greater risksharing through euro bonds looks unlikely.

Geithner Backs French-German Plan for Tighter EU - A German-French push for closer economic ties in Europe won the backing of U.S. Treasury Secretary Timothy F. Geithner, who urged governments to work with central banks to erect a “stronger firewall” to end the debt crisis.  Geithner, speaking in Berlin yesterday after talks with German Finance Minister Wolfgang Schaeuble, praised the commitment to fiscal programs put in place by new governments in Spain, Italy and Greece, and said he was “very encouraged” by recent efforts to buttress the euro area. He welcomed “progress toward a fiscal compact for the euro zone,” echoing language used last week by European Central Bank President Mario Draghi.  Geithner’s comments backing German Chancellor Angela Merkel and French President Nicolas Sarkozy were more upbeat than his recent remarks urging Europe to move faster. “This of course will take time” and “a very substantial commitment and a sustained commitment of political will,” he told reporters. Financial crises are resolved when governments and central banks create “conditions that make it compelling for investors to take the risk involved in lending to governments and to banks.”

GOLDMAN: There's Still One Huge Area Where Merkel And Sarkozy Disagree: Goldman is already trying to tamp down investor expectations for Friday's big Eurozone summit. As analysts Andrew Benito and Huw Pill, there's still a major area of disagreement between Merkel and Sarkozy on the essence of what Europe is going to look like. Our bottom line is the following: the ‘clean’ solutions that would have seen clear resolution of that impasse appear to have been ruled out following Monday’s German/French meeting. That makes something altogether fuzzier likely to emerge from Friday, and this risks falling short of market expectations. The sequencing that we believe is being followed will be delayed further into the new year. And so ultimately... This brief overview, alongside experience from the October Summit, adds to our sense that what emerges will be another step forward, it will build on past progress but it will also involve some degree of ‘wishful thinking’. The new year will be required to clarify what is meant by ‘fiscal union’. We expect the ECB to move progressively towards more proactive purchases on a larger scale. But any such actions will fall short of attempts to ‘cap spreads’. We do not think the ECB to act more proactively soon, based on the commitments and statements of intent that emerge on Friday. 

NIALL FERGUSON: Forget Weimar, People In Germany Are Missing The Real Historical Parallel: At their crucial meeting ahead of the December 9 EU summit, German chancellor Angela Merkel and French president Nicolas Sarkozy reached a "complete agreement" on a new treaty that includes imposing restrictions on the size of deficits and spending by governments. In an interview with Bloomberg TV, historian Niall Ferguson explains why such a blanket rule is a mistake: "…Now from an economics point of view this is really an extraordinary crude, very blunt instrument because if there were to be a major recession it would be very hard for countries to stick to that, because of the way in which recessions cause deficits to explode, as we've just seen. So i think there's also a kind of historical problem here that the Germans obsess about inflation and regard any increase in the size of the ECB's balance sheet as almost signaling the next hyperinflation. And i think this is a kind of misremembering of German history, because, although they have had horrendous hyperinflation episodes in 1923 and again after WWII, they also had a hyperdeflation in the 1930s. And not enough people in Berlin seem to be worried that that's the historical parallel, the early 1930s. Which is odd when you think of what happened in Germany in the 1930s." 

Greek Pension Fund Requests €3 Bln Loan - Greece's leading social security fund IKA needs three billion euros ($4 billion) in loans to plug a 200-million-euro deficit in 2011 and manage pension payments in the next two years, its director said Monday. "We are studying alternative solutions to ensure pension payments in 2012 and 2013," IKA director Rovertos Spyropoulos told AFP. "We are looking to borrow three billion euros to cover our needs," he said. The pension fund is likely to approach the European Investment Bank for the money, Greek daily Eleftherotypia reported on Monday. But Spyropoulos insisted no final decision had been made on a creditor. "The IKA loan is to be discussed on December 20 in Brussels with the EU task force," Spyropoulos said, referring to a team of experts assigned by the European Commission to advise Athens on crucial structural reforms. 

IMF sends $2.95B in rescue loans to Greece - The International Monetary Fund is sending $2.95 billion to Greece, the latest installment in a joint effort to help the ailing government avoid a default on its debt. The global lending organization's rescue package follows $10.7 billion provided by the 17 eurozone nations last week. Greece's huge budget deficits and shrinking economy have made it impossible for the country to borrow in private markets, which has necessitated a bailout by the IMF and 17-member eurozone. Christine Lagarde, managing director of the fund, called on Greece's new government, formed last month, to "steadfastly implement" its budget reforms. The IMF agreed in May 2010 to contribute $40 billion to the eurozone's $147 billion bailout loan to Greece. The eurozone and IMF are currently negotiating a second package with Greece.

S&P Places 15 Eurozone Countries, Including Germany and France, on Credit Watch Negative - In a move sure to antagonize EU officials the S&P put 15 Eurozone countries on "Credit Watch Negative". The ratings agency placed the ratings of 15 euro zone countries, including top-rated nations Germany and France, on credit watch negative -- a move that signals a possible downgrade in no later than three months. S&P said, however, it expects to conclude its review "as soon as possible" following this week's summit of EU leaders on Friday. The action was "prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole," the ratings agency said in a statement.  There are 17 Eurozone nations and Greece is already rated CC (near-default). Given that Cyprus was downgraded recently, this is an effective downgrade of every country in the Eurozone.

The Eurozone's Moment: Why S&P is Turning Up the Heat -Standard and Poor's decision to threaten eurozone countries with ratings downgrades may seem like bad timing. But if it keeps markets on edge, European leaders might be scared enough to crank out some real solutions, rather than the half-baked measures already on tap. S&P's threat, which leaves Europe facing a 50% chance of a downgrade in the next three months, came on the heels of some rare optimism in the crisis. Germany's Angela Merkel and France's Nicolas Sarkozy had just banged out a deal to give the EU greater control over national budgets ahead of Friday's game-changing EU summit. Markets were welcoming Italy's budget-slashing plan. And yields on Italian and Spanish debt were heading south. But there are plenty of reasons to be skeptical about the days ahead, which is why S&P swooped in. The tentative agreement struck by Germany and France still doesn't resolve the eurozone's long term problems

Italy leads bond yields higher after S&P warning -- European government bonds fell, sending yields higher Tuesday, a day after Standard & Poor's Ratings Services put the credit ratings of 15 euro-zone countries on negative watch. The move encompassed all euro members other than Cyprus, which was already on negative watch, and Greece, whose CC rating already signals a high risk of default. The yield on 10-year Italian government bonds, which had fallen sharply on Monday, rose 20 basis points to 6.05%. Spain saw its 10-year yield rise 4 basis points to 5.17%, while France's 10-year yield rose 6 basis points to 3.19%. Germany saw its 10-year yield rise 2 basis points to 2.23%.

French, German Bonds Fall on S&P Warning-- French and German bonds declined after Standard & Poor's said it may cut the credit ratings of 15 European nations. Stocks pared losses on speculation the European Central Bank will be forced to take more steps to avert a deepening debt crisis. The yield on France's 10-year bond jumped 11 basis points at 8:54 a.m. in London, with the similar maturity German bund yield climbing three basis points. The euro weakened 0.2 percent to $1.3376, while the Swiss franc depreciated against all 16 major currencies tracked by Bloomberg. The Stoxx Europe 600 Index slid 0.2 percent, and S&P 500 Index futures increased 0.1 percent. Nickel and wheat led commodities lower. Germany, France and four other nations may lose their AAA credit ratings depending on the result of a summit of European Union leaders on Dec. 9, S&P said yesterday. ECB President Mario Draghi will probably cut interest rates a quarter point to buoy the economy when policy makers meet Dec. 8, according to economists in a Bloomberg survey. "The rating action may force the ECB to be more aggressive in inking up the presses if they want to avert a crisis," 

Europe Bailout Fund Faces Downgrade If Any AAA-Rated Member Lowered by S&P - The European Financial Stability Facility may lose its top credit rating if any of the bailout fund’s six guarantors face a downgrade from AAA, Standard & Poor’s said. “We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on creditwatch, on one or more of EFSF’s guarantor members,” S&P said in a statement today. At the same time, the ratings company said it “could affirm the AAA ratings on EFSF and its issues if we affirm the rating on all six of EFSF’s guarantor members currently rated AAA.” Germany, France, the Netherlands, Finland, Austria and Luxembourg are the top-rated nations backing the rescue fund. European stocks the euro fell after S&P said late yesterday that it may cut the debt grade of 15 euro nations, including Germany and France. German Finance Minister Wolfgang Schaeuble said today the downgrade warning should spur European leaders to ratchet up efforts to resolve the region’s debt crisis at a summit in Brussels on Dec. 8-9. 

Downgrade threat could prove final blow to euro rescue fund (Reuters) - The threat of a credit downgrade to the euro zone's top economies leaves the bloc's EFSF bailout fund dangerously exposed, piling yet more pressure on the European Central Bank to step in as lender of last resort. The fund has struggled to attract investors even with the backing of six AAA-rated governments, and on Tuesday S&P followed up a warning of possible downgrades for 15 euro economies by saying it is also reviewing the EFSF. Expanding the lending reach of the European Financial Stability Facility (EFSF), agreed at an emergency summit in October, is central to the euro zone's plan to show investors it can stand behind its wayward sovereigns. But much of the fund's ordinal appeal lay in the top creditworthiness of its guarantors, notable the euro's main paymaster Germany and France, the EFSF's second largest contributor. Even so, appetite for the rescue funds own bonds had waned by its fourth auction last month, while its complex plans to attract nations with big foreign reserves, such as China, to invest in leveraging the fund's lending capacity met a cool response. Standard & Poor's warning on Monday that it could cut the credit ratings of 15 countries in the bloc, including France and Germany, by 1 to 2 notches, makes the goal of leveraging the EFSF's funds to up to 1 trillion euros ($1.35 trillion) look even more doubtful.

S&P warning or warning about S&P analysis? -The fact that S&P is now issuing a warning to all Euro countries regarding their sovereign ratings is not a surprise. All these governments are facing difficulty managing their fiscal policy so there is a potential risk in government bonds, a risk that maybe we have been ignoring for too long. And the behavior of S&P is consistent with their earlier practices: Japan or the US are not AAA in their ratings and they seem to like to make announcements around specific events so that people listen to what they have to say. What is more surprising is that their announcement made it to the front page in all newspapers and seemed to be moving markets. I did not learn much from their announcement except that I confirmed my earlier impression that rating agencies have very little to say when it comes to sovereign debt. Their analysis is shallow and in many cases misleading or even wrong (e.g. in their recent calculations regarding the US fiscal outlook). They are also the same agency that was mispricing risk in the years previous to the crisis.

Nomura Cuts Euro Forecast to $1.20 Saying Italy May Default - Nomura International Plc cut its forecast for the euro to $1.20, citing the risk that Italy will default next year if the European Central Bank fails to step up support for the country. Foreign investors will keep selling their euro assets if the ECB doesn’t step in as a lender of last resort, Nomura strategists including Jens Nordvig in New York, wrote in a note to clients dated yesterday. Nomura previously predicted the euro would trade at $1.32 by the middle of next year. “The ECB will be forced to either commit to full-blown quantitative easing to save the euro by ring-fencing Italy; or face an Italian default in 2012,” the analysts wrote. “This scenario would involve a high risk of euro-zone break-up.”

Economists see France losing AAA in 3 months: Reuters poll - France will lose its AAA credit rating early next year regardless of last-ditch efforts by President Nicolas Sarkozy to resolve the euro zone crisis at an EU summit this week, a Reuters poll of economists showed on Wednesday. The snap survey of 13 economists found that 11 of them think France will be downgraded by one of the major ratings agencies within the next three months. The only question, following this week's blanket euro zone credit warning by Standard & Poor's, is whether France will be cut by one notch to AA+ or by two to a straight AA. "If you apply Standard and Poor's methodology based on quantitative factors, France should already have a AA rating, as should the U.S. and Britain," said Jean-Christophe Caffet, economist at investment bank Natixis. He noted, however, that ratings agencies take into account subjective criteria, such as the credibility of the government's budget plans, making it difficult to estimate the final outcome.

Poland Cuts Growth Forecast For 2012 Budget Bill - The Polish government Tuesday approved a revision of the budget bill for 2012, officially cutting its economic growth forecast for next year to 2.5% from 4% in the original draft, Prime Minister Donald Tusk told a press conference. The central government's deficit won't be higher than 35 billion zlotys ($10.5 billion), Tusk said. He also reiterated the government's desire to reduce the country's general government deficit to below 3% of gross domestic product next year. The European Commission expects the country's general government deficit to reach 4% of economic output next year from 7.8% in 2010. At a separate press conference, the leader of the Peasants' Party, Waldemar Pawlak, said the government's growth projection for 2012 is too conservative. Pawlak is the deputy prime minister and holds the economy portfolio.

Hungary banks take FX hit, brace for more pain - Banks in Hungary will incur losses of over 200 billion forints ($900 million) under the government's foreign currency mortgage relief plan and charges to lenders could exceed double that sum in coming years under a proposal by the sector, a top banker said. Hungarian households are struggling with FX mortgage debt totalling about 5 trillion forints, most of it denominated in Swiss francs, a currency which is about a third stronger versus the forint than the average level when most mortgage loans were made. The resulting income erosion has prompted the government to tackle what it has called "debt slavery". Running until the end of this month, the relief plan allows households to repay mortgages at 250 forints per euro and 180 forints per Swiss franc, deep discounts to the 300 per euro and 242 per franc at 1431 GMT in the market

Belgium, At Last, has a Government -—Belgium's new cabinet will be sworn in by King Albert II on Tuesday, the royal palace said, ending a world-record 541 days without a federal government for the heavily indebted euro-zone country. Elio Di Rupo will become the divided nation's first Francophone premier in 32 years, taking office in a Europe dominated by center-right governments in time for a European summit at the end of this week. The palace said Mr. Di Rupo, who led the negotiations that broke the stalemate, presented the king with the names of ministers, who will be sworn in on Tuesday.

Anxious Greeks Emptying Their Bank Accounts - Many Greeks are draining their savings accounts because they are out of work, face rising taxes or are afraid the country will be forced to leave the euro zone. By withdrawing money, they are forcing banks to scale back their lending -- and are inadvertently making the recession even worse. Georgios Provopoulos, the governor of the central bank of Greece, is a man of statistics, and they speak a clear language. "In September and October, savings and time deposits fell by a further 13 to 14 billion euros. In the first 10 days of November the decline continued on a large scale," he recently told the economic affairs committee of the Greek parliament. With disarming honesty, the central banker explained to the lawmakers why the Greek economy isn't managing to recover from a recession that has gone on for three years now: "Our banking system lacks the scope to finance growth."

Ireland Cuts Economic Growth Forecast as Debt Crisis Escalates -- Ireland’s government lowered its economic growth forecast for 2012 for the second time in five weeks as the euro region’s debt crisis escalates. Delivering the second part of the budget in Dublin, Finance Minister Michael Noonan said gross domestic product will rise 1.3 percent, down from 1.6 percent he forecast on Nov. 4. “As a small country with an open economy, the crisis in the eurozone has a profound effect on our economic prospects,” Noonan said in a speech in parliament today. Noonan said today he’ll raise the country’s sales tax, levies on deposit interests and taxes on tobacco, as part of austerity measures aimed at winning a return to international credit markets. Yesterday, Prime Minister Enda Kenny’s government outlined about 2.2 billion euros ($2.9 billion) of spending cuts even as concern mounted that the euro region debt crisis will derail the nation’s economic recovery. “Broad events in Europe could well have a larger impact on Ireland’s economic prospects than the composition of tax increases,”

Fiction In the Washington Post - I don't want to make this a daily feature but Anthony Faiola and Michael Birnbaum made it hard for me to get past The Washington Post (my home page) without an angry blog post. In what is supposed to be a news article, they make a false claim of fact. They do not point to any supporting evidence (nor could they as their claim is plainly false) nor do they quote even a self appointed expert.  Their claim that "Europe’s crisis now is as much political as economic. It stems from a legacy of overspending and overborrowing, but ..." is false. Spain and Ireland were running budget surpluses and had a debt to GDP ratio lower than Germany's. Italy had a primary surplus and declining debt to GDP ratio. Germany happens to be the one and only country allowed to adopt the Euro in spite of not meeting the Maastricht conditions (which shows how stupid those rules were).  Now, I suppose that the claim is vague enough to be not proven false -- they didn't write public "overspending and over borrowing." Indeed the root cause of most of the crisis, here in Europe as well as in the USA, ws a combination of banking deregulation and banker's errors.

EU talks on doubling financial firewall - Eleventh-hour negotiations have begun to create a much bigger financial “bazooka” to present at this week’s European Union summit that could include running two separate rescue funds and winning increased support for the International Monetary Fund.  This three-pronged rescue system would form part of a carefully crafted package EU leaders hope will win over financial markets, just two months after a similar summit failed to convince bond investors Europe could contain its spiralling debt crisis. The rescue system would be introduced alongside proposals to rewrite EU treaties with far tougher budget rules for the eurozone.  According to senior European officials, negotiators are considering allowing the eurozone’s existing €440bn bail-out fund to continue running when a new €500bn facility comes into force in mid-2012, almost doubling the firepower of the bloc’s financial rescue system.  The proposal, being debated by “sherpas” ahead of Thursday’s crucial eurozone summit, could also include speeding up cash payments into the new €500bn fund – known as the European Stability Mechanism (ESM) – to give it more heft and improve its creditworthiness in the eyes of credit rating agencies.  Supporters of the proposals acknowledge they are controversial and the subject of intense debate by officials negotiating new ESM treaty language. Some northern creditor countries, where bail-out backlash has threatened to topple national governments, have shown reluctance.

ECB ready to push boundaries of crisis role (Reuters) - The European Central Bank is likely to cut interest rates on Thursday and offer ultra-long liquidity operations to support banks, while leaving the door open to further measures to fight Europe's debt crisis if governments agree fiscal reforms. A Reuters survey of 73 analysts showed a 60-percent chance the ECB will cut rates by 25 basis points to a record low of 1.0 percent -- a floor it previously reached during the financial crisis in 2009. It cut rates by a similar amount in November. New ECB President Mario Draghi reinforced expectations for a rate cut last week when he said the bank had a responsibility to ensure inflation did not undershoot its target of just below 2 percent, not just to stop it exceeding it. Markets have taken it to heart. Three-month Euribor futures -- one of the main gauges of market expectations -- point to rates being be cut this month and then even further. The case for a cut is supported by the euro zone economy teetering on the brink of recession. With the ECB increasingly concerned about falling consumer prices, further cuts may be in the offing even if the ECB has never cut rates below 1 percent before -- not even after the collapse of Lehman.

Why Germany opposes a powerful euro solution - Despite rising international pressure, Merkel refuses to allow the ECB to act as the lender of last resort.  With the debt conflagration now blazing across Europe’s borders, the world is urging the euro zone’s leaders to staunch it by unleashing the powers of the European Central Bank. Many European leaders are advocating this as well. The problem: Germany is resolutely opposed to this. The stakes could hardly be much higher. Forget about tiny Greece, Portugal and Ireland. Italy, the zone’s third largest economy, owes $2.55 trillion. It will have to refinance a staggering $530 billion next year alone, and investors are currently demanding unsustainable rates, in excess of 7 percent. Meanwhile, France’s interest rates are rising, and ratings agencies are threatening its AAA status. Even Germany — the continent’s economic powerhouse — is having trouble financing itself. Fear is mounting that Europe’s debt crisis could rage out of control, ultimately causing the breakup of the currency union or worse.

How the ECB could be forced to print money - The European Central Bank has been notoriously reluctant to print money during this crisis. But what if it had to? Aaron Tornell and Frank Westermann have a wonky post up at VoxEU about the flows between various national central banks within the Eurozone, which includes this key chart: The line to concentrate on, here, is the solid one in blue. It shows a key part of the Bundesbank’s assets — its loans to other institutions — falling perilously low to zero, even as its loans to other European central banks — the maroon dotted line — continue to rise inexorably. Up until now, the Bundesbank has managed to fund the latter by means of selling off the former: when it’s asked to lend money to PIIGS central banks, it just sells off some other loans and advances the cash to the Irish or Portuguese central bank instead. But it can’t do that any more, because the Bundesbank is down to its last €21 billion in private loans. And when that hits zero, the only things left to sell are the Bundesbank’s gold and reserves. Which, it’s pretty safe to say, the Bundesbank is not going to sell.

First the ECB, then the IMF - The fact of the matter is that European bank funding markets are collapsing onto the ECB balance sheet.  Forget about the €200 billion of outright peripheral bond purchases--small potatoes.   National central bank exposures, through the TARGET clearing system, now exceed €400 billion, and private bank exposures, through discount lending and deposit facilities, are the same order of magnitude.   Apparently everybody, borrowers and lenders, public and private, wants the ECB as their counterparty.  Reluctant though the ECB may be to step into that role, and vocal as the ECB has been about that reluctance, what we are seeing in practice is that it has no choice, literally.   Clearing imbalances within the Eurozone that cannot be resolved in the interbank market show up mechanically as imbalances between national central banks on the books of the ECB (see here for details).  The ECB lends to the central bank of the deficit country and borrows from the central bank of the surplus country, so expanding its own balance sheet on both sides.   (Think Greece on the asset side, and Germany on the liability side.)

Sarkozy, Merkel call for new E.U. treaty to address debt crisis - Under growing pressure from nervous financial markets, the leaders of France and Germany reached a difficult compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments. Their accord, which requires rewriting a major European Union treaty, was designed to eliminate the leading cause of doubt about European financial health and respond to a barrage of questions about whether the continent’s common currency, the euro, can endure. If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world. Underlining the high stakes, Standard & Poor’s announced in New York that 15 nations using the euro are being placed on a credit watch, risking a downgrade in their creditworthiness rating because of failure to rein in the crisis. The rating agency made the decision despite the accord Monday, signaling doubt that the new measures will be implemented fast enough to calm fears about heavy government debt.

Germany insists on new treaty for Europe - Germany on Wednesday insisted that its European partners must undertake the politically fraught process of changing European Union treaties, or at least accepting a binding new eurozone accord, to bring stability to the single currency and restore the confidence of investors. On the eve of a European summit in Brussels to stem the eurozone crisis, a senior German government official dismissed the suggestion by Herman Van Rompuy, European Council president, that tougher fiscal discipline could be enforced without a full-blown treaty overhaul. “A number of actors have not understood the seriousness of the situation,” the German official said, warning that a “bad compromise” of small steps or “little tricks” would not meet the expectations of the public or the financial markets. The tough German line came as Angela Merkel, the German chancellor, and Nicolas Sarkozy, French president, published a joint letter to Mr Van Rompuy, calling for sweeping measures to enforce fiscal discipline, including near-automatic sanctions for countries with excess debt or deficits. “We propose that those new rules and commitments should be enshrined in the European treaties,” they said, urging an immediate decision to go ahead at the eurozone and EU summits on Thursday and Friday.

Sarkozy and Merkel Submit Treaty Change Proposals - French President Nicolas Sarkozy and German Chancellor Angela Merkel on Wednesday set out their plan to press ahead with changes to the European Union treaty, a day before EU leaders convene at a crucial Brussels summit to shore up the euro zone.  Mr. Sarkozy and Ms. Merkel, who made their proposals in a letter to European Council President Herman Van Rompuy, issued an ultimatum to the 27 EU governments, saying they must decide whether they will accept greater central control over their national budgets.

Angela Merkel Nears a Remaking of Euro Zone  - When the ratings agency Standard & Poor’s warned this week that it might lower the credit ratings of 15 euro zone countries, including Germany1, Chancellor Angela Merkel2 seemed unmoved. “What a rating agency does is the responsibility of the rating agency,” she told reporters in Berlin on Tuesday. It was the kind of impervious reaction to market gyrations that many critics said was at the core of the euro crisis. Mrs. Merkel, they say, has rarely acted quickly or boldly enough to halt the downward spiral of the euro. To American officials, Mrs. Merkel, 57, seems at times shockingly aloof about market turmoil. But as European leaders prepare for crucial meetings this week in Brussels, what may have seemed like timid or even bumbling leadership is looking more like a consistent strategy of brinkmanship aimed at remaking the euro zone in Germany’s likeness.

Germany Doubts EU-Wide Deal At Summit -- The German government has all but given up hope of persuading all 27 nations in the European Union to rally behind a French-German proposal for limited treaty changes to safeguard the euro currency and help stem the euro- zone debt crisis, a senior government official said Wednesday. "I am more pessimistic than I was last week on the chances of total agreement, " the official said on condition of anonymity. A more likely scenario, the official said, is that the 17 euro-zone countries, together with "four or five" other EU countries, would separately agree to far- reaching coordination of economic policies, supervision of their budgets through European officials and strict limits on debts and deficits. European leaders gather in Brussels Thursday for a working dinner and then meet on Friday. France and Germany have presented proposals on improving the framework for Europe's monetary union. Europe's two largest members are seeking treaty change within the framework of the all 27 EU nations or, failing that, more limited changes that would allow euro zone countries to more closely coordinate budgets. 

Zilch again from Merkozy - No fiscal union, no Eurobonds, no ECB as lender of last resort – yet. Just the usual blather and a revamped Stability Pact (Fiskalunion). Yawn. Merkel seems to have backed off on demands that budget breaches will be justiciable before the European Court, so the Treaty chatter is mostly Quatsch, bêtises, and eyewash. This Merkel climb-down makes it less likely that she will give in on real rescue measures, so why the market exuberance in Italy? Beats me. Private investors will not have to face further haircuts after Greece (if you believe anything they say on this subject) but that was already the case. Nothing further to add at this stage.

Merkozy Dog-and-Pony Show is Nothing but Fleas; Immense Arrogance, Loose Cannons, No Credibility -Within a couple of days German Chancellor Angela Merkel and French President Nicolas Sarkozy will present their "Grand Plan" to save Europe to a formal hearing on EU debt. Their plan is on the death-bed already, but it does not officially die until formal votes in May as noted in Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then? As with grand plans for the EFSF, still not finalized, the Merkozy plan has morphed into nothing but budget rules that the EMU will not be able to enforce because Sarkozy would not cede fiscal control to the EU. Merkel will not accept Eurobonds, because she can't, by German supreme court ruling. By any reasonable standard, the Merkozy dog-and-pony show is in reality neither dog nor pony but rather all fleas.  Steen Jakobsen, chief economist for Saxo Bank asks Where have your standards gone, Europe? This week is being touted as the make-or-break week for the Euro and its Euro-zone - we did not get a Grand Plan in Cannes as Sarkozy had promised us, so now it seems we will get a Desperate plan instead. The EU will always create 'something' which they believe they can sell as progress, but the problem is one of moral and political standards, or rather the lack thereof. Yes, you can buy time by printing money, you can try to fast-track changes to EU treaties, but you simply cannot run away from the dilution of standards from these desperate actions.

Merkozy Deal Or Squeal? Time For Zero-Coupon Plan To Rescue Euro -The euro rescue deal pitched on Monday by German Chancellor Angela Merkel and French President Nicolas Sarkozy was an agreement to agree on almost nothing of substance — and to hope that investors and the European Central Bank wouldn’t notice. Instead of meeting in the middle, the French and German leaders both gave up everything they wanted to avoid everything they couldn’t stomach. Of chief importance, Sarkozy gave up his call for shared-liability eurobonds or sovereign debt guarantees by the European Central Bank. For her part, Merkel gave up an insistence that the private sector share in losses and that euro zone countries give up some control over national budgets. What they announced — a plan for euro nations to enshrine budget targets in their constitutions — has zero chance of stemming the sovereign debt crisis that has reached such a critical phase. Pressure is likely to ramp up even further after Standard & Poor’s put 15 euro zone nations — including AAA-rated Germany and France — on a negative outlook. That Merkel and Sarkozy, with their backs to the wall, offered such an impotent remedy speaks volumes about the limits of their ability to maneuver and underscores the need for a new, more politically plausible approach. 

Can New Fiscal Rules Save the Euro? Three Details to Watch For - Yesterday  Angela Merkel and Nicolas Sarkozy announced a new set of fiscal rules, their latest idea to save the euro.  The new rules would replace the unworkable Stability and Growth Pact (SGP), which mandates a deficit of no more than 3 percent of GDP and debt of no more than 60 percent of GDP. Yesterday’s announcement was short on specifics, but here are three crucial things to watch for that will determine whether the new rules will have any chance of working.

1. Will deficit rules avoid procyclicality? Sound fiscal rules must keep budgets in balance over the business cycle, but they must also allow deficits during recessions, balanced by surpluses during expansions. Any rule that forces austerity during a downturn is procyclical. It will do more harm than good.
2. Will there be a credible system of rewards and penalties? New rules will be no good if they do not include an appropriate set of rewards and penalties. The current EU rules, which call for procyclical fines against countries that exceed the maximum deficit limit, are completely unworkable. The current rules have never been enforced because everyone knows enforcing them would be counterproductive.
3. Who will monitor compliance? It will be necessary to score each country’s budget proposals in advance of implementation. Doing so will require estimates of economic variables like potential GDP and output gaps that are not directly observable. Crunching the numbers to assess compliance is a job that must be assigned not to courts or politicians, but to competent experts who are as insulated as possible from political influence.

We cannot afford another half-baked solution - Time and time again over the past 18 months, European leaders have pledged to do “whatever it takes” to preserve the single currency. Just as often their subsequent actions, or lack of them, have belied these fine words. The failure to fill in the gap between rhetoric and reality has taken the eurozone, and the world, to a perilous place. Fear about the ability of states to service their debts has become self-reinforcing. Absent a radical shift in market psychology, the very core of the eurozone is at risk. The break-up of the single currency, once dismissed as unthinkable, is now openly spoken of as a possibility. In a currency area where the money supply has been collectivised but fiscal policy and banking systems remain national, sovereign fragility has infected the banks. Across much of the eurozone, banks are both undercapitalised and facing a growing funding shortfall, making them unhealthily dependent on costly funds from the European Central Bank. This vulnerability is forcing them to pull money back from around the globe. Such is the size of the European banking sector that credit rationing on this scale could tip the world back into recession. . We are at a point where politicians must do more than talk about their commitment to the euro. It is time to act.  Repairing monetary union will take years of effort. But the alternative is worse. The economic consequences of a break-up would be staggering both for creditor and debtor nations. Huge uncertainty about the value of any outstanding euro-denominated contracts could paralyse commerce within Europe and beyond. Political relations would be poisoned for years.

IMF Denies Report On $600 Billion Lending Facility -The International Monetary Fund on Wednesday denied a report in Japan's Nikkei newspaper that the Group of 20 nations were planning to assemble a $600 billion IMF lending facility that could be used to bolster euro zone countries. "There has been no such discussion with the IMF," an IMF spokesman said in response to the Nikkei report. Separately, a G20 official also said the report was untrue.

Europe's Deal: So Who Wins? - The grand bargain between Germany, France, and the European Central Bank (ECB) is being hailed as a diplomatic breakthrough that will save the euro and the European Union (EU). The essence of the deal is this: EU nations commit to an enforceable austerity program, which is ad hoc for now but will eventually become a formal part of the EU treaty. It will take the shape of tight limits on budget deficits, with penalties. That, in turn, gives the ECB the fig leaf it needs to heavily support purchases of bonds from countries like Italy, whose debt has come under speculative attack. All of this reassures markets, and the cost of borrowing comes down. In turn, bank holdings of sovereign bonds retain their value. To make this deal possible, Germany has backed off its absolute opposition to supporting weaker economies and using the ECB to tacitly support sovereign debt. And France has agreed to give up some of its cherished fiscal sovereignty to the EU. Isn’t this wonderful? No, it’s terrible. When we look through a different lens, a lens of political economy, we see what’s actually occurring.

Will the ESM guarantee Eurozone bonds? - TBI’s Simone Foxman has got her wonk on and is getting into the weeds of Eurozone bail-in policies — a crucial subject about which there isn’t nearly enough public coverage. Simone says that I’m wrong, and that the EU is in no way intending to guarantee the debts of the PIIGS. And I very much hope that she’s right about that. Part of the problem here is that we’re all just working from whispered and unsourced news reports: it’s not like there’s any clear public language about what Merkozy is proposing. And even if there were, it would of course be subject to change over the course of the current negotiations. Foxman points me to a form of words in an official Eurogroup statement from November 28: Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies. In all cases, in order to protect taxpayers’ money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junior only to the IMF loan. And today there’s a letter from Merkozy which is even more opaque:

Eurobonds are likely to increase the risk of joint defaults in the Eurozone - The debate on Eurobonds has received new stimulus in recent weeks with the EU commission's president calling for the introduction of 'stability bonds'. The adoption of such bonds – or some other form of Eurobonds – remains a possible outcome as Germany effectively remains the only large country strictly opposing the idea. The defining property of most Eurobond proposals is a joint liability for government debt issued by Eurozone countries: rather than each member state standing behind its own debt, the idea is that all member states will be jointly guaranteeing the Eurozone debt.

Sovereign-Debt Test U-Turn Too Late to Save EBA Credibility -- Less than five months after conducting stress tests that found banks needed to raise 2.5 billion euros ($3.4 billion), the European Banking Authority may tell lenders that they need 40 times that amount to defend against losses on sovereign debt. The regulator may release updated figures on how much capital lenders should raise to absorb losses from euro-area bonds as early as this week, three people familiar with the matter said. The London-based watchdog's stress tests in July were criticized for failing to include writedowns on sovereign debt held to maturity. The EBA "has a fundamental problem, which is that they've lost credibility and it's going to be very difficult to claw that back," European leaders are demanding the region's banks increase capital after financial firms agreed to accept losses on Greek government bonds. The EBA estimated in October that the region's financial institutions need 106 billion euros to reach a goal of holding 9 percent of so-called core Tier 1 capital by mid-2012, after marking their sovereign debt to market prices.

EU Banks Seek Dollars From ECB - Europe's cash-strapped banks put aside concerns over the stigma attached to borrowing from the central bank, taking advantage of the European Central Bank's cheaper U.S. dollar tenders Wednesday, in an effort to confront their funding problems across the Atlantic.  The surprisingly high demand for U.S. dollars at the European Central Bank's tenders Wednesday is evidence that the coordinated attempt by leading central banks to alleviate some of the tensions in the global financial system is having the desired effect by providing euro-zone banks with an alternative source of dollar funding.  But it is also symptomatic of the deeper malaise blighting European banks as the region's growing sovereign-debt crisis rumbles on, making it harder or more expensive for them to fund themselves by borrowing from the interbank market due to U.S. worries of a euro-zone breakup, analysts said.  "The [dollar tender] results are slightly ambiguous. It's either good news in that this facility is now being used or it's bad news in the sense that it is needed,"

ECB Says Demand for Dollar Loans Surges After Cost Lowered - The European Central Bank said demand for three-month dollar loans surged after it almost halved the cost of the funds in a concerted action with five other central banks including the U.S. Federal Reserve.  The Frankfurt-based ECB said it will lend $50.7 billion to 34 euro-area banks tomorrow for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The ECB also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The ECB doesn’t disclose the identity of the banks it lends to.
On Nov. 30, six central banks including the Fed, the ECB and the Bank of Japan cut the cost of emergency dollar loans by 50 basis points in a global effort to ease a credit shortage worsened by Europe’s sovereign debt crisis. Yesterday, demand for seven-day dollar loans from the Bank of Japan surged to $25 million from $1 million.

ECB Allots $52.29 Billion in Dollar Operations, Volume Above Expected - Europe’s cash-strapped banks put aside concerns over the stigma attached to borrowing from the central bank, taking advantage of the European Central Bank‘s cheaper U.S. dollar tenders Wednesday, in an effort to confront their funding problems across the Atlantic. The surprisingly high demand for U.S. dollars at the ECB’s tenders Wednesday is evidence that the coordinated attempt by leading central banks to alleviate some of the tensions in the global financial system is having the desired effect by providing euro-zone banks with an alternative source of dollar funding. (Related: What Are Swap Lines?)

Return of the credit crunch: caught in the grip - Banks provide the oil needed to run the economic machine; without that lubrication the machine seizes up. But to carry out that role, the banks themselves need money. And that is where the whole model is breaking down .As fears over the integrity of the eurozone have deepened, European banks have found it expensive, difficult or in some cases impossible to raise funding in the bond markets. So far they have covered barely two-thirds of the amount of outstanding funding that falls due in 2011. For most banks, the bond markets have been closed for months. The few banks that have plenty of money are holding on to it, or depositing it with super-safe institutions such as the US Federal Reserve or the ECB. That means the third key mechanism for bank funding – interbank lending – is also drying up.  The nervousness surrounding many European banks is rooted in fears about losses they face, particularly on their sovereign debt holdings. Bankers recognise the concerns but complain that the effect is being compounded by regulators’ insistence that the banks should meet tough new capital ratios. The European Banking Authority, which oversees bank regulators across the continent, has identified a total €106bn ($143bn) gap at 70 banks that it stress-tested for their exposure to eurozone sovereign debt. Rather than raise fresh capital in turbulent equity markets to bridge that gap, many are opting instead to shrink their balance sheets and comply with the capital ratios that way.

ECB Officials Said to Plan Additional Measures to Stimulate Bank Lending - The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations. Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow. The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union, a stance they reiterated today. “The ECB’s role tomorrow is going to be pretty much about the banks, and after tomorrow the liquidity side should be on a much stronger footing,”

ECB to Consider More Measures to Stimulate Bank Lending - The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations. Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow. The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union, a stance they reiterated today. “The ECB’s role tomorrow is going to be pretty much about the banks, and after tomorrow the liquidity side should be on a much stronger footing,” 

Germany to Help Banks Bolster Their Reserves - Germany plans to revive the government fund it used in 2008 to rescue banks, in order to help some German institutions increase their reserves, the Finance Ministry in Berlin said Wednesday. It is part of a Europe-wide effort to restore faith in the region’s banking system. On Thursday banks will make public their plans to raise capital and meet reserve requirements set by the European Banking Authority and euro area leaders. A German Finance Ministry spokesman, who was not authorized to be quoted by name, said he could not say which banks might receive funds. However, there was speculation that Commerzbank, a lender based in Frankfurt, would need aid as it did during the first phase of the financial crisis. Last month Commerzbank said it would sell assets and temporarily stop issuing new credit through its troubled EuroHypo unit to meet tougher capital reserve requirements. The bank, which reported a loss of 687 million euros, or $920 million, in the third quarter, said at the time it would also look at other options to increase its reserves. 

European banks have €115bn shortfall - FT.com: Germany’s banking system was shown to be far weaker than previously thought in a new round of European stress tests, raising the prospect of further taxpayer bail-outs. The European Banking Authority said late on Thursday that German banks had a capital shortfall, which must be made up by next June, of €13.1bn – nearly triple the result of a previous test in October – pushing up the Europe-wide deficit from €106bn to €115bn. Analysts said Commerzbank, Germany’s second-biggest private sector bank, which emerged with a capital shortfall of €5.3bn from the test, up from €2.9bn six weeks earlier, was now facing the prospect of nationalisation. The German banking association said the EBA had “lost credibility”. “The stress test hasn’t contributed to market stabilisation,” said Michael Kemmer, general manager of the BDB association of German banks, adding that the process had been “arbritary, lengthy and seemingly chaotic”. Commerzbank shares plunged 11 per cent in late trading as rumours of the shortfall spread ahead of the official announcement after markets closed. German banks’ aggregate capital shortfall, which also includes a €3.2bn gap at Deutsche Bank, jumped from €5.2bn to €13.1bn. The reaction compounded the market’s disappointed response to earlier remarks by European Central Bank president Mario Draghi, who played down the prospect of a boost to ECB sovereign bond purchasing. That overshadowed the ECB’s announcement of a host of new non-standard measures aimed at supporting the region’s ailing banks.

Stress Test Results: European Banks Need 115 Billion Euros - SPIEGEL The European Banking Authority has determined that banks in Europe need an additional 115 billion euros to conform with new capital ratio requirements. The sum is higher than an October estimate, largely because of capital deficits found at banks in Germany.European banks are in need of cash, and will have to find some €114.7 billion to top up their capital reserves, according to a stress test carried out by the European Banking Authority. The EBA released the results of its analysis of capital requirements of European financial institutes on Thursday evening. "The EU-wide recapitalisation exercise is an important element in strengthening European banks' position in the current environment characterised by heightened systemic risk arising from the sovereign debt crisis," the EBA said in a statement. The EBA will demand that German banks come up with €13.1 billion to satisfy the new core capital ratio of 9 percent recently agreed to by European leaders. Banks have until mid-2012 to fulfil the requirements. The total needed is higher than the €106 billion estimated in October primarily because of the increased needs of banks in Germany, Austria, Belgium and Italy.

Quelle Surprise! EBA Raises Eurobank Capital Targets, Finds They Need to Raise €115 Billion - - Yves Smith - As we’ve discussed repeatedly, bank stress tests have been a confidence building exercise, an effort to talk bank CDS spreads down and bank stock prices up. That was clearly the intent of the first effort by the US Treasury in 2009 and it succeeded so well as a PR exercise that the Eurozone copied it last year, incredibly finding that obviously undercapitalized Eurobanks needed a mere €3.5 billion euros more in equity. Mere months after the release of the results, lenders were being much more stringent and shunning banks who had been given an official clean bill of health.  This pattern has continued. Earlier this year, the EBA said the Eurobanks needed €80 billion in additional capital. We hooted: The day before yesterday, Eurozone banks “threatened” that they’d have to be nationalized if the haircuts on the aforementioned Greek funding deal were increased from 21% to 50%. Note credible estimates as early last year put the level of writedowns needed on Greek debt at a minimum of 50% (75% was not an uncommon number) and Greece has undershot forecasts repeatedly since then. Yet today, the FT tells us that European officials thinks the level of recapitalization needed is a mere €80 billion. A week after this post ran, the EBA increased the amount banks needed to raise to €106 billion.  In a further embarrassment, the EBA today, a mere six weeks after their October assessment, announced stress test results that found that Eurobanks now need €115 billion in additional capital. It appears to be difficult to pretend that banks have big enough risk buffers when interbank funding has dried up and central banks are going through all sorts of hoops to provide emergency support.

Germany facing prospect of bank bailout - GERMANY was last night facing the prospect of an imminent bank bailout after its institutions were hit with a €13.1bn recapitalisation bill by European regulators -- more than double the demand imposed on them just six weeks ago. The worsening figures came after the European Banking Authority updated its data to reflect banks' positions at the end of September, three months after the previous snapshot was taken. The capital demands largely stem from writedowns applied to the banks' holdings of bonds issued by weak countries like Greece, Italy, Spain and Ireland. Overall, banks across Europe were found to need some €115bn of extra capital to bring them up to the EBA's minimum levels, against the €106bn figure published in late October. Ireland's banks had no capital demand in the October 26 tests or in last night's version, reflecting the cushion created by their €23bn recapitalisation.

Basel Rules Face Change in No-Risk Debt Focus - Regulators may diminish the central role of government bonds in planned banking rules designed to make the financial system safer. The Basel Committee on Banking Supervision, which coordinates regulations for 27 countries, may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards, said two people with direct knowledge of the plans who requested anonymity because the talks are private. The move could reduce demand for European government securities, making it harder for nations on the brink of insolvency to fund themselves. “One of the central pillars of the Basel III framework is the notion of a risk-free asset class,”“That central pillar is disintegrating. Basel is quite clearly going to have to be revised.” Since rules on liquidity and capital known as Basel III were approved in 2010, holders of Greek debt have agreed to a 50 percent writedown, while prices of Italian, Spanish and Portuguese bonds have fallen as yields hit euro-era highs. Regulators now face a balancing act between acknowledging investors’ loss of confidence in sovereign debt, which has contributed to a 30 percent decline in bank shares (BEBANKS) this year, and the need to avoid undermining governments’ credibility.

Would an ECB Rescue Be Inflationary? - This is one of the questions Marshall Auerback tackles in a piece at Counterpunch.  His answer, as you might expect, is “no.”  He also addresses the concern that the ECB risks an impaired balance sheet if it steps up and plays a larger role in buying member-state debt:… if the ECB bought the bonds then, by definition, the “profligates” do not default. In fact, as the monopoly provider of the euro, the ECB could easily set the rate at which it buys the bonds (say, 4% for Italy) and eventually it would replenish its capital via the profits it would receive from buying the distressed debt (not that the ECB requires capital in an operational sense; as usual with the euro zone, this is a political issue). At some point, Professor Paul de Grauwe is right :  convinced that the ECB was serious about resolving the solvency issue, the markets would begin to buy the bonds again and effectively do the ECB’s heavy lifting for them. So the grand irony of the day remains this: while there is nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national [government] solvency risk but not halt the deflationary monetary forces currently in place.

China's Dagong rating agency downgrades France (Reuters) - Chinese rating agency Dagong downgraded France on Thursday, saying that the government would likely miss its deficit-reduction targets due to weaker-than-expected growth and the fallout from the euro zone's debt crisis. Dagong, whose credit assessments are not closely followed outside China, cut its rating on France to A+ from AA- with a negative outlook to reflect the potential risks stemming from sluggish growth, higher debt and the impact of the sovereign debt crisis spreading through other euro zone economies. The Chinese firm has been much more aggressive about cutting France's rating than its western rivals, which all give France their top rating even though France has weaker public finances than the other five AAA-rated countries in the euro zone. Standard and Poor's put France on watch for a possible downgrade earlier this week along with the other AAA-rated euro countries over concerns the bloc was failing to bring the crisis under control.

French bank ratings downgraded again by Moody's - Credit rating agency Moody's has downgraded France's three big banks due to their difficulty borrowing money. The agency cut Credit Agricole and BNP Paribas from Aa2 to Aa3, and Societe Generale from Aa3 to A1. The move follows a previous rating cut by Moody's for Credit Agricole and Societe Generale in September. "Liquidity and funding conditions have deteriorated significantly" for each of the banks, Moody's said, adding that the problem was likely to worsen. "The probability that the bank will face further funding pressures has risen in line with the worsening European debt crisis," the rating agency said of each of the three. It also assigned a negative outlook to all three banks' ratings, warning that it will continue to monitor the European bank debt markets, and would downgrade them again if conditions look set to worsen.

Three French Banks are in a Bad Moody - Moody's, the ratings agency, downgraded the debt of three leading French banks on Friday, further darkening the mood and deepening the crisis in Europe. According to the New York Times, “Moody's cut various ratings for Société Générale, BNP Paribas and Crédit Agricole by one notch, citing the problems each has had recently in raising funds on the open market.” Moody's claim that all three downgrades ere driven by funding constraints and “deteriorating macro fundamentals”, and it noted that the “probability the banks would need to seek public support remained very high.” However, according to the Telegraph, “Moody's said its ratings did take into account the fact that all three French banks were likely to benefit from state support if the crisis deepened.” Still, the Moody's assessment does not make for fun reading, with the agency also repeating the warning that Greece, among other countries, could yet default on their debts and exit the Euro Zone.

Still Fiscalizing - Krugman - I should react to yesterday’s Martin Wolf column, and more generally to the euro situation. Markets have been relatively hopeful this week, basically because they now believe that the ECB will step in with massive bond purchases — as it should. And I hate to think about what might happen if tomorrow’s summit casts doubt on that belief. But as Martin says, breaking the self-fulfilling panic is just step one. What the eurozone needs is a credible macro adjustment plan. And that still seems nowhere in sight, largely because Germany is still determined to see the whole thing as the price of fiscal irresponsibility. This is obviously wrong to anyone who has looked at the facts; but as Martin says (while laying out those facts), The German faith is that fiscal malfeasance is the origin of the crisis. It has good reason to believe this. If it accepted the truth, it would have to admit that it played a large part in the unhappy outcome. The result of this fiscal fixation is that the macro policies now on tap consist of even harsher fiscal austerity in southern Europe, offset by … nothing. That’s a recipe for a sustained slump that will end up defeating all efforts to resolve the crisis. And expected inflation for the eurozone is still far too low, indicating an impossible adjustment process for overvalued nations.

The IMF and the Collateral Crunch - [N.B.:  This post, while intended to stand on its own, should be understood as part of a sustained analysis that we have been carrying on over a series of posts.  Readers who find themselves baffled by this post may want to start with earlier posts in the thread:  specifically here, and here.] Why is the IMF getting involved in the Eurocrisis, and why is its involvement taking the form of lending to individual member states of the Eurozone?  One reason, which is the focus of most commentary, is the IMF's long-honed reputation for "conditionality" as a condition for lending.  The ECB is simply not in a position to insist on conditionality, so if you think conditionality is needed, then you think you need the IMF. But there is a second reason also, which has been neglected in most commentary, and that has to do with solving the collateral crunch currently underway in the Eurozone.  The breakdown of unsecured interbank markets has meant that whatever interbank lending is still taking place involves a transfer of collateral.  But this is only one source of the demand for collateral.

Vítor Constâncio: Challenges to monetary policy - Vítor Constâncio, Vice-President of the ECB, speech at the 26th International Conference on Interest Rates, Frankfurt, 8 December 2011. The following section from the speech is titled "Contagion, the monetary transmission mechanism and non-standard monetary policy". Challenges to monetary policy in 2012: ...Let me now turn to a more detailed discussion of the non-standard measures implemented by the ECB. These measures must be tailored to the specific market segment, and to the specific disruption, which may prevail at a certain point in time. Therefore, there cannot be a single non-standard policy tool: different tools must be activated depending on the particular impediment to the transmission of changes in the standard policy rate to the economy. Two months ago I argued that financial contagion – both between debt markets of different sovereigns and between sovereigns and banks – is one major force at work that impairs the functioning of the monetary policy transmission mechanism. This is still the case today; if anything contagion dynamics have worsened rather than eased.

Evidence for the Monetary View of the Eurozone Crisis - Some observers argue that the current problems in the Eurozone are actually the result of a monetary crisis not a sovereign debt crisis.  They acknowledge there are structural problems with European currency union but point back to the failure of the ECB to stabilize and restore nominal spending to expected levels during the crisis of 2008-2009 as the real culprit behind the Eurozone crisis.  This failure to act by the ECB--a passive tightening of monetary policy--has been devastating because it means nominal incomes are far lower than were expected when borrowers took out loans fixed in nominal terms.  European borrowers, both public and private, are therefore not able to pay back their debt and the result is a fiscal crisis. But it gets worse.  The reduced ability for Europeans to payback debt also means that risk premiums on countries with lots of debt or ones perceived to have debt problems increases, further raising these country's debt burden with higher financing costs.  The fiscal crisis gets bigger, and being easy to observe, gets wrongly credited as the cause of the Eurozone's problems.  Consequently, the Eurozone crisis is prescribed with the fiscal solution of austerity.  The real solution, however, implied by the monetary view of crisis is restoring nominal incomes to their originally expected values. 

ECB launches new support for banks - The European Central Bank on Thursday announced a host of new non-standard measures aimed at supporting the region’s ailing banks.  The central bank’s range of acceptable collateral, or the securities it takes in exchange for providing loans to banks was also widened, with ratings thresholds reduced and loans to small- and medium-sized enterprises made acceptable for the first time. Europe’s banks have been locked out of traditional funding markets in recent months, unwilling and in some cases unable to tap investors for new liquidity. That has left many of them reliant on the central bank, but even with that support there have been concerns that some banks may run out of collateral needed to obtain ECB liquidity.  Speaking at a press conference after the ECB announced a quarter point cut in its main policy rate to 1 per cent, Mario Draghi, president, said the measures announced were “meant to address the funding pressure.” Mr Draghi noted that many banks remain unable to sell their debt into the market and face a large refinancing hump next year as government-guaranteed bank bonds mature. The worry is that banks may shrink their balance sheets and cut lending to the real economy, as one way of dealing with the funding freeze. “We are observing a deleveraging process by the banks,” Mr Draghi said, noting that “there are funding pressures” and “pressures on capital ratios.”

Euro drops after Draghi cools bond-buy hopes — The euro turned lower against the U.S. dollar on Thursday after the European Central Bank’s chief dashed hopes that the central bank would immediately expand its bond purchase program to help distressed European countries. The euro fell to $1.3313 from $1.3416 after the ECB, as expected, cut its key lending rate by a quarter percentage point to 1%. The shared currency has fallen from $1.3405 in North American trade late Wednesday. The dollar, which measures the U.S. unit against a basket of six major currencies, reversed higher to 78.940 from 78.331 before Draghi’s comments and up from 78.476 late Wednesday. When asked why the central bank doesn’t ramp up its bond-buying program, ECB President Mario Draghi said the European Union treaty prohibits “monetary financing.” 

Draghi Statement: ECB Announces New Measures in Addition to Rate Cut - This morning after the European Central Bank cut interest rates, President Mario Draghi announced new measures to alleviate pressure in interbank markets. The following is the full text of his statement.

Euro-zone economy may contract in 2012, ECB says -- European Central Bank President Mario Draghi said on Thursday that the bank's staff expect annual euro-zone real GDP growth in a range between 1.5% and 1.7% in 2011, and between 0.3% and 2.3% in 2013. For 2012, the ECB projections are in a range from a 0.4% drop to 1.0% growth. Compared with the September projections, "there is a narrowing of the range of the real GDP growth projection for 2011 and a significant downward revision of the range for 2012," Draghi said at a news conference. "These revisions mainly reflect the impact on domestic demand of weaker confidence and worsening financing conditions, stemming from the heightened uncertainty related to the sovereign debt crisis, as well as downward revisions of foreign demand."

Economists React: No Silver Bullet From ECB - The ECB said in its monthly policy remarks Thursday that it will make two offers of unlimited 36-month credit to euro-zone banks; will cut its reserve requirement for commercial banks to 1% from 2%; and will widen the pool of assets it accepts as collateral for ECB loans to ensure easier access to funds for banks. It also cut its key rate to 1%, but stopped well short of giving any commitment to increased purchases of government bonds. Below, economists and others react:

Draghi drags his feet - THE European Central Bank will be an enthusiastic lender-of-last-resort to banks but not to governments. That was the main message from the bank’s president, Mario Draghi, after its monthly policy meeting on December 8^th. The ECB voted to lower its benchmark interest rate from 1.25% to 1%, the second quarter-point cut in as many months. It also agreed on radical steps to help commercial banks secure the financing that private investors are increasingly loth to offer. But Mr Draghi scotched the idea that the ECB would step up its purchases of bonds of troubled euro-zone countries if a credible fiscal compact were agreed at the EU summit on December 9th. Anything that smacks of direct monetary financing of governments—including “tricks” such as lending via the IMF—would go against the EU Treaty, said Mr Draghi at the press conference that followed the meeting of the ECB’s policymakers. Soon after his comments, stockmarkets around the world slumped, and the euro fell, as investors judged the ECB was unwilling to help fix the euro-zone’s government bond markets.

Italian borrowing rates jump on ECB comments - Italy's borrowing rates rose Thursday after the ECB's President Mario Draghi said he had no existing plan to step up purchases of the country's bonds, as investors had been hoping. Much of the recent rally in stock markets and the sharp fall in Italy's borrowing rates had been due to expectations that a deal among European leaders to get the 17 euro countries to accept tought budget oversight would be followed by more aggressive action by the ECB. Draghi's comments hit Milan's main stock market hard. It ended down over 4 percent, the sharpest losses in Europe, while the yield on Italy's ten-year bond spiked 0.58 percentage point to 6.47 percent and nearer the 7 percent level that it traded at as recently as last week. Borrowing rates of over 7 percent are considered unsustainable and eventually caused Greece, Ireland and Portugal to seek financial bailouts. Fears that Europe's banking regulator could tell Italian banks to raise more cash than earlier expected also hurt markets. Despite the uncertainty in financial markets, Italy's new austerity plan won wide-ranging support, with both U.S. Treasury Secretary Timothy Geithner and the European Central Bank chief saying it would help the debt-strapped nation move in the right direction.

Market rout as ECB dashes bond hopes - Mario Draghi, the ECB’s president, said the bank had not agreed to any sort of “Grand Bargain” with EU leaders to act as lender of last resort for sovereign states, insisting that it does not have a legal mandate to rescue sovereign states in trouble. “We have a treaty and Article 123 prohibits financing of governments. It embodies the best tradition of the Bundesbank. We shouldn’t try to circumvent the spirit of the treaty,” he added, warning against the use of “legal tricks” to bend the bank’s mandate. The comments caused consternation on trading floors, where expectations for a “shock and awe” action by the ECB have been running ahead of reality. Mr Draghi had earlier hinted that the ECB might be willing to do more if politicians deliver on a “fiscal compact” to anchor budgetary discipline at today’s summit in Brussels. “This is big, he’s basically pulled the rug out from under the market,” said Brian Dolan at forex.com. “There’s a sense of shock right now because he previously suggested that if EU leaders got things together, the ECB would step up bond purchases.” Italy’s 10-year bond yields spiked 47 basis points 6.43pc and Spain’s yields jumped 39 to 5.75pc, bringing the rally in Club Med debt to juddering halt. French spreads over German Bunds jumped 23 points to 122.

Euro lacks a government banker, not lender of last resort - What the euro lacks is a government banker, not a lender of last resort as is widely claimed. The euro already has a lender of last resort in the European Central Bank, which has dutifully performed that function. Lenders of last resort provide liquidity in financial panics, which is exactly what the ECB did in the financial crisis of 2008-09 and has continued doing via its Lombard lending facility. According to Bagehot’s rule, lenders of last resort should lend without limit, to solvent firms, against good collateral – though Bagehot also recommended lending at high rates, whereas today’s practice is (sensibly) to lend at low rates. The euro lacks a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. This explains why the US and UK can borrow at low rates and remain solvent, whereas Spain, which has a roughly similar deficit and debt profile, is under speculative attack. The lack of a government banker reflects the euro’s neoliberal birthmark. Neoliberalism aims to diminish the role of the state and enhance the power of the market, and this goal is reflected in neoliberal monetary theory which guided the euro’s design. The theory argues central banks should control inflation, but there should be complete separation between the central bank and government finances.

Expletive Deleted - Krugman - I thought that tomorrow might be a really bad day, because the markets have been pricing in high expectations for the European summit, and seemed set for a fall. But the ECB has jumped the gun, and started the big letdown early. You really have to wonder what these people are thinking. Do they not understand how close to the brink they are?

What can the ECB do? - It seems that many economists agree that the ECB has to get more involved in dealing with the current crisis in the Euro area. Politicians (at least some of them) disagree. They cite fear of inflation, take moral stance on past recklessness, argue that sinners have to repent and repay, etc. By now, hundreds of articles have been written on the potential damages from the collapse of the euro area, so I am not going to repeat them here. I want to focus on what the ECB can do to stop the self-fulfilling collapse of several European economies. The standard view on ECB is that they have to print money in order to buy bonds of governments in trouble like Greece, Italy, Portugal, etc. But there is another thing that they can do. About 18 months ago, the chief economist of Citigroup, Willem Buiter, wrote an article in which he noted that the ECB can use its future profits to stop the acceleration of these negative dynamics on the bonds market. According to his estimates, the ECB has a “non-inflationary loss absorption capacity of … at least €2.4trn and more likely over €3.4trn.” In other words, the ECB can put credibly on the market a firewall of over €2.4 trillion. Certainly this ought to stop the ever-increasing yields on Spanish and Italian debt from rising further.

Pay for Our Mistakes? Not Us - It is nice to have the power to never have to pay for your errors. The decision to allow Lehman to fail seems to have had at least some ideological component. It isn’t capitalism if you can’t fail. But practicality prevailed thereafter. This year, the decision to force private lenders to take 50 percent haircuts on loans to Greece was promptly followed by plunging prices on Spanish and Italian bonds. It was Angela Merkel, the German chancellor, who led the charge for making the banks pay, for similar reasons to the ones heard when Lehman went down. Now Europe is contemplating huge capital shortfalls for its banks, and Ms. Merkel has backed down. Bloomberg reports: “As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the I.M.F. principles and doctrines,” EU President Herman Van Rompuy told reporters at a briefing. “Or, to put it more bluntly, our first approach to P.S.I., which had a very negative effect on debt markets, is now officially over.” The I.M.F. — the International Monetary Fund — tells me that those policies and doctrines provide for no automatic losses for the private sector, but do not rule them out either. So you could say that there really is no promise to spare the banks. But I suspect the reality is that the recent experience has traumatized Europe enough that it will be a very long time before anyone suggests that banks should suffer for foolish lending to a member of the European Union.

European CEOs Move Cash to Germany  - Grupo Gowex (GOW), a Spanish provider of Wi-Fi wireless services, is moving funds to Germany because it expects Spain to exit the euro. German machinery maker GEA Group AG is setting maximum amounts held at any one bank. "I don't trust Spain will remain in the euro zone," said Jenaro Garcia, founder and chief executive officer of Madrid- based Grupo Gowex, which provides Wi-Fi access in 15 countries. "We moved our cash and deposits to Germany because Spain will come back to the peseta."  The Bundesbank, Germany's central bank, registered capital inflows of 11.3 billion euros ($15 billion) from non-banks in September, according to the breakdown of its current account published Nov. 9. That helped transform a deficit of 47.3 billion euros in Germany's balance of other capital flows in August to a surplus of 700 million euros in September.  "A couple of weeks ago I would never have thought about having conversations on the probability of the euro disappearing, but now there is more speculation on such a scenario,"

Dutch Central Bank Cuts Growth Views, Sees Higher Unemployment - The Dutch central bank Friday cut its forecasts for Dutch economic growth for the next few years and expects the euro zone's fifth largest economy to experience a recession in the second half of 2011. The central bank forecasts Dutch economic growth of 1.4% in 2011, despite a technical recession in the second half. For 2012 and 2013, the growth projection has also been significantly revised downward, to 0.2% and 1.3% respectively. Six months ago, the central bank was much more optimistic and estimated GDP growth of 2.2% for the current year, 1.7% for 2012 and 2.1% in 2013. In 2010, Dutch GDP growth was 1.8%. Decreasing global trade, waning consumer and corporate confidence and a rising trend to save, triggered by lower housing prices, are the main reasons for this development, the bank said.

Central bank lowers German 2012 growth forecast to 0.6 pct; exports slowing in October - Germany’s central bank on Friday lowered the country’s growth forecast for 2012 as the debt crisis weighs on the prospects of Europe’s largest economy. Underlining the difficulties Germany faces, the Federal Statistical Office said in a separate report that exports, which help drive the economy, dropped sharply during October. The Bundesbank said it was lowering the 2012 growth forecast for Germany from 1.8 percent to 0.6 percent due to ongoing economic struggles in the 17-nation eurozone — the main market for the country’s exports. “The crisis in public finances in a number of euro-area countries, the ensuing uncertainty and general economic slowdown are increasingly placing a strain on the economic activity in Germany,” the bank said in a statement. Still, the bank said that the “domestic conditions for an extended, broadly based upswing are still intact” and that it was predicting growth to pick up to 1.8 percent in 2013, assuming that there will be “no further significant escalation of the sovereign debt crisis.

Most European Leaders Agree to Work on Fiscal Treaty —— European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets. But efforts to get unanimity among the 27 members of the European Union, as desired by Germany, failed as Britain and Hungary refused to go along for now.  Importantly, all 17 member of the euro zone agreed to the new treaty, along with six other countries who wish to join the currency union one day. Two countries, the Czech Republic and Sweden, said they would want to talk to their parties and parliaments at home before deciding, said President Nicolas Sarkozy of France, but it seemed unlikely that Sweden would join. Hungary said it wanted to examine the detail, leaving Britain isolated.  Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.  “It is a very good outcome for euro area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,”

What the European summit must accomplish - What problems must be resolved in order for the European outlook to improve? First and foremost, the EU must solve the sovereign debt problems that many countries in Europe face. The plan at this point is to alter the EU to impose debt limits, and, importantly, to add sanctions for failing to meet the debt limits (3 percent of GDP per year and no more than a 60 percent debt to GDP level overall are tentative guidelines). That's not a process that can happen quickly. It will take time to get a new treaty ratified -- if it can be ratified at all -- and the initial reaction of markets was negative. Thus, if that were all there was to the proposal, then the considerable time and uncertainty inherent in writing and approving a new treaty would leave financial markets just as nervous as before. There is a mechanism in place to deal with this called the European Financial Stability Fund. The ESFS is a 440 billion euro fund backed by European countries empowered to make loans to troubled nations. However, doubts that the size of the fund is sufficient and the fact that it is temporary (it ends in June 2013) make it less than a fully satisfactory solution, as evidenced by the fact that the troubles persist. There is also a plan for a similar fund called the European Stability Mecanism to be established in 2013 to replace the EFSF, but the details of how the ESM will be funded are still unclear, and it is too far away to calm financial markets. 

Europe Disappoints. Again. - This week some smart people thought they knew what was going to happen in Europe. European and American officials thought there was a deal that would be worked out to provide the needed funding by printing money. There would be concessions to German demands for fiscal purity, but it would accept the need for drastic action. The central banks would find a way to pump in zillions of euros in liquidity. There would be more government bond purchases by the European Central Bank, but the more important part was to involve the International Monetary Fund. There was talk of a convoluted deal whereby the I.M.F. would get funding from European central banks and then lend money to European countries.  Then Mario Draghi, the head of the E.C.B., threw cold water on I.M.F. involvement at his news conference today. And he said he had not meant to signal more bond purchases by the E.C.B. when he spoke to the European Parliament last week. As he talked, stock and government bond markets went into reverse. The euro lost ground against the dollar. On Wednesday, 10-year Italian bonds traded to yield about 6 percent. A day later the figure is 6.5 percent. Spanish yields went from 5.4 percent to 5.8 percent.

23 EU nations agree to new treaty to save euro -— The 17 countries that use the euro, plus six of their European Union partners, agreed Friday to an ambitious treaty tying their finances together in the hopes of solving Europe's debt crisis. At the same time, opposition led by Britain created a deep rift in the union. In drafting a new treaty, the 23 countries hope to help European nations struggling with giant debts, and in that sense there were early indications of success. Such an agreement is considered necessary before the European Central Bank and other institutions commit more money to lowering the borrowing costs of heavily indebted countries like Italy and Spain. "It's a very good outcome for the euro area, very good," ECB President Mario Draghi said in Brussels. "It is going to be the basis for much more disciplined economic policy for euro-area members. And certainly it is going to be helpful in the present situation." But Draghi has yet to say whether the European Central Bank will take more aggressive action to buy the bonds of heavily indebted countries, and borrowing costs for European governments were slightly higher Friday.

Eurocrisis Solutions For Whom? - Yves Smith - This Real News Network segment was recorded before the supposed “this time we’re really gonna fix it” Eurozone deal was announced today. Nevertheless, it is a useful discussion of the political dynamics that drove the pact.

Euro-Kremlinology - Understanding developments in the European crisis has become rather like Kremlinology, trying to figure out the meaning of subtle changes in wording, and rearrangements of the Politburo on the podium for May Day parades. In particular, Mario Draghi of the ECB goes back and forth, sometimes suggesting that the ECB will do what nearly everyone else can see is minimally necessary to the survival of the euro (namely, print lots of them, and use some to buy EU government debt, as was done by the Fed and the Bank of England). At other times, though, it’s as if Jean-Claude Trichet is doing a ventriloquist act. In one respect, todays EU agreement was anything but subtle. The fact that the Eurozone countries and those aspiring to join them were prepared to go ahead without the UK (and a few others) suggests that they have something serious in mind. But what – the announcement is pretty much a restatement of the Growth and Stability pact, and under present circumstances, the deficit targets can only be seen as aspirational. Applying one of the approaches that used to be standard in Kremlinology (not necessarily a reliable one, then or now) I’m going to assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. In particular, I’m going to assume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis.

Gauging the Strength of a European Firewall - The Obama administration has applauded the euro zone for moving to save its common currency and enforce fiscal discipline among its members. Yet the deal has done little to calm American concerns about an inadequate “firewall” — financing put up by European governments to ensure that all euro zone countries maintain access to the debt markets at sustainable interest rates. Chancellor Angela Merkel of Germany “has made some progress with other European leaders in trying to move towards a fiscal compact where everybody is playing by the same rules and nobody is acting irresponsibly,” President Obama said at a news conference on Thursday. “That’s all for the good, but there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.” A senior administration official echoed those comments on Friday, saying that Europe is making encouraging and significant steps toward a comprehensive plan — but still needs more money and stronger mechanisms to calm markets in the short term.

EU Leaders Drop Demands for Investor Write-Offs in Bailouts - European Union leaders dropped their demand that investors share the cost of bailouts as Germany abandoned a campaign that helped deepen the two-year-old financial crisis. Limiting so-called private-sector involvement to the terms accepted in International Monetary Fund bailouts was part of a package agreed upon in Brussels early today as leaders met to forge tighter economic bonds to stem the crisis. “As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines,” EU President Herman Van Rompuy told reporters at a briefing. “Or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.” That marks a defeat for German Chancellor Angela Merkel who wanted to expose bondholders to losses in debt restructurings as her electorate resented writing the biggest bailout checks. Her push, which began last year, drew criticism from a European Central Bank concerned it would fan contagion and was blamed for some investors for driving up bond yields and forcing Ireland and Portugal to seek aid packages.

The Wrong Fix - Yesterday, both Bob Kuttner, here in the Prospect, and I ,in my Washington Post column, noted that the deal that German Chancellor Angela Merkel and French President Nicolas Sarkozy struck to save the Eurozone will inflict years of austerity on European nations that are already mired in depression. Spain, for instance, has an unemployment rate of about 20 percent and a youth unemployment rate that is approaching a mind-boggling 50 percent. It needs a massive Keynesian jolt to its economy, not budgetary constraints that will condemn it to a decade or quarter-century of penury. Both Bob and I also noted that the Merkel-Sarokzy solution was based on a misdiagnosis of Europe’s woes. Some of Europe’s current basket cases were actually running budget surpluses in the years before the Lehman meltdown. Ireland and Spain weren’t overspending at all—but the banks and investors speculating on their housing markets most certainly were. When their banks went under, their economies collapsed, driving their unemployment rates, and their budget deficits, sky-high. If Ireland and Spain could do it over again, they’d have adopted far tighter bank regulations—something that the Merkel-Sarkozy deal doesn’t call for. As for adhering to fiscal restraints—well, they already did that, and look at them now.

Playing the Ultimatum Game with Merkozy - It's always good to have a Plan B, and probably a Plan C and D as well. You can't cover every possible contingency, but having a set of options lined up in case things don't work out as expected is a basic rule of good risk management, entrepreneurship, negotiation, career planning, and all number of other endeavors. So why is it that the creators and subsequent managers of Europe's grand experiment with a common currency never came up with a contingency plan in case things didn't work out? It wasn't that they didn't know the risks: lots of economists were warning in the 1990s that a currency union with no mechanism for ironing out fiscal and trade imbalances between its members was doomed to fail. Jacques Delors, president of the European Commission from 1985 to 1994, said in an interview last week with The Telegraph that he too warned of the risks and pushed for harmonization of economic policies, but was brushed aside by national political leaders. Partly this was the natural shortsightedness of politicians. When crisis hit, they figured, it would be someone else's problem.  But it's more than that. It wouldn't have been impossible to build some exit procedures into the 1992 Maastricht Treaty that led to the creation of the euro.

Slow Learners - Krugman - The WSJ has an article today pointing out that the euro crisis isn’t really about fiscal irresponsibility: So if public debt is your yardstick, then the Spaniards were paragons of virtue. They borrowed lightly despite the fact that their euro-zone membership gave them an all-you-can-eat buffet of financing at bargain-basement rates. As Europe scrambles to find a solution to a debt crisis that’s threatening the world economy, it’s crucial to understand what actually happened in countries like Spain. Otherwise, policymakers will end up prescribing the wrong medicine, with disastrous results. That’s all true, and I’m glad to see it in the WSJ. But it’s presented as a startling insight, one that runs contrary to what everyone thinks. And that’s amazing and depressing. I mean, this was obvious from the very beginning.

This-Is-It EU Summit Eupdate - A few quick thoughts as the Make-or-Break, Life-or-Death, Now-or-Never EU Summit gets going. Previews from Merkozy earlier this week got no love, and now that Mr. Draghi has shelved the Big Bazooka idea (HT Hank Paulson), I am not entirely sure what can possibly surprise on the upside. Then again, maybe the dithering is good news--if EU policy makers had really thought this was the abyss, surely they would have done something. I would not claim summit reading as a specialty. That is why, instead of laboring through substance, this time I will be looking for glaring signs of fecklessness. So far this week I have seen two: Private Sector Involvement and Rule Obsession. Private Sector Involvement (or PSI) hase been code for forced sovereign bond restructuring since the mid-1990s. In this crisis, Germany has insisted that private bondholders take losses in exchange for official support of their sovereign debtors. Ergo, European announcements for over a year have insisted that any sovereign support package shall be accompanied by PSI. But PSI is anathema to the European Central Bank, which for good and bad reasons has clung to the proposition that real countries pay their debts, which has led us to the ludicrous situation where Greek bondholders are asked to take 50% haircuts voluntarily. But guess what! This week's front page news is that PSI is off the table in future crises. Can bondholders sleep without fear of waking up next to a severed horse's head? Surely no one in their right mind would think so.

A Summit to the Death - As many feared and most expected, the just-concluded European summit left much to be desired. Once again, Europe’s national leaders showed themselves to be in denial about what underlies the eurozone’s economic, banking, and sovereign-debt crises, and thus hopelessly unable to resolve them.One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012. A second, related lesson is that it is difficult to cut nominal wages, and that they are certainly not flexible enough to eliminate unemployment. That is true even in a country as flexible, small, and open as Ireland, where unemployment increased last month to 14.5%, emigration notwithstanding, and where tax revenues in November ran 1.6% below target as a result.

Disaster Can Wait, by Barry Eichengreen - Nowadays there is no shortage of pundits, economic or otherwise, warning of impending disaster. If right, they are hailed as seers; if wrong, chances are that no one will remember. So here’s a forecast: there will be no shortage of predictions that 2012 is shaping up as a disastrous year. My view is different: 2012 will not be a year of crisis, but nor will it bring an end to our current economic troubles. Rather, it will be a year of muddling through. Many people think that 2012 will be the make-or-break year for Europe – either a quantum leap in European integration, with the creation of a fiscal union and the issuance of Eurobonds, or the eurozone’s disintegration, igniting the mother of all financial crises. In fact, neither scenario is plausible. The collapse of the eurozone would, of course, be an economic and financial calamity. But that is precisely why the European Central Bank will overcome its reluctance and intervene in the Italian and Spanish bond markets, and why the Italian and Spanish governments will, in the end, use that breathing space to complete the reforms that the ECB requires as a quid pro quo.

EU Backs $267 Billion for IMF as Draghi Hails Fiscal Pact -- European leaders added 200 billion euros ($267 billion) to their crisis-fighting warchest and tightened anti-deficit rules, seeking to lure the European Central Bank into stepping up its rescue operations. In an accord hailed by ECB President Mario Draghi, the leaders outlined a "fiscal compact" to prevent future debt runups, accelerated the start of a planned 500 billion-euro rescue fund and dropped bondholder loss-sharing provisions. The euro weakened and bonds from Italy and Spain fell amid concern the measures failed to address investors' concerns. "It's a very good outcome for euro-area members and it's going to be the basis for a good fiscal compact and more disciplined economic policy in euro-area countries," Draghi told reporters after all-night negotiations ended in Brussels at about 5:00 a.m. today. European leaders navigated a labyrinth of political, legal and economic constraints during the meeting amid unrelenting pressure from financial markets to craft a new approach to fighting the crisis, which now threatens to engulf Italy and Spain.

Someone Isn't Buying It - While futures are slowly getting reacquainted with gravity, following both the realization that the bailout was a failure, and seeing past the feeble attempt of the ECB to ramp up Spanish and Portuguese bonds (with Dupoint slashing 2012 outlook not helping) there is one indicator that has outright rejected this day's daily Hopium, and has tumbled to levels last seen at the beginning of the month, when the global Fed FX swap line rate cut was announced in a last ditch attempt to prevent Lehman 2.0. It is the all too critical primary FX liquidity mismatch indicator - the 3 month EUR-USD basis swap, which has fallen 9 bps to 126 bps, the biggest intraday drop since November 29, and the lowest since December 2, with the 1 month basis swap following. In other words, politicians can pretend and talk up the prospects of future bond issuance and crisis resolution, but the market has already spoken and once again demands the ECB (or the Fed) or else the prospect of another imminent liquidity lock up is fast approaching just like at the end of November, and with it rumors that a certain French and/or German bank will fail.

Euro summit rocked by row over veto plan - Hours before leaders arrived in Brussels , the Finnish parliament ruled that treaty changes proposed for the European Stability Mechanism (ESM) were “unconstitutional”. The summit was further put at risk with news that after failing stress tests, European banks need to raise €115bn (£98bn) in fresh capital to satisfy regulators. Finland’s grand committee said decisions made by the ESM – the eurozone’s permanent bail-out fund set for launch in 2012 – had to remain unanimous, and not changed to the “qualified majority” that French president Nicolas Sarkozy and German chancellor Angela Merkel have agreed. The Finns are backed by the Netherlands, which fears proposals to withdraw veto powers from the ESM is an erosion of democracy and would make it vulnerable to funding bail-outs without recourse. Meanwhile, the Irish want to block plans for the “convergence and harmonisation” of the eurozone’s “corporate tax base”. The rebellion is a serious threat to German and French plans to sign treaty changes today along the lines laid out in their joint letter on Wednesday. In it, the leaders said they hoped all 27 European Union countries would sign.   Mr Sarkozy said: “If we do not reach a deal, there will be no second chance.”

European unity teeters as leaders fail to agree on measures to resolve debt crisis - European Union leaders agreed on the need for tougher fiscal regulation but not on the details of how and when to achieve it, after the European Central Bank dashed market expectations it would move forcefully to stem the euro area’s debt crisis. Meeting under a pall of political and economic gloom, the assembled presidents and prime ministers also sought desperately Thursday to prevent their divisions over euro-zone regulation from leading to a potentially fatal breakup." "The European Central Bank let it be known that it did not plan to substantially increase its purchase of the sovereign debt of the euro zone’s most distressed countries. Combined with reports that EU leaders were still at odds over whether to create a massive bailout fund for debt-ridden countries, stocks dropped sharply across Europe and in the United States. Loss of faith in the euro, and the deepening recession in Europe, would have worldwide ramifications. “Should the crisis deepen and spread further to the larger European economies, transmission to Canada could become more severe,” Bank of Canada Governor Mark Carney said.

A Mixed Bag From Europe, by Tim Duy: I find it somewhat hard to judge the merits of this week's developments in Europe. Some positives, some negatives. On net, though, I remain a Europessimist. In my opinion, the issues of internal rebalancing remain completely ignored, and this will eventually doom the Euro if not addressed. The European Central Bank moved forward with additional easing specifically intended to alleviate pressures in the banking system. The breakdown in the interbank lending market threatened to create a Lehman-type event sooner than later, and that threat was receded with the ECB's extension of liquidity facilities and cutting in half reserve requirements for commercial banks. The ECB also cut interest rates to 1%, with more cuts expected. That said, the European financial system remains under pressure with continuing deleveraging and eventually more bank recapitalizations efforts needed. The result will be a worsening of the European recession, an event that is only in its infancy. And, as has been widely reported, ECB President Mario Draghi did not offer unlimited support for Eurozone sovereign debt, which was greeted with disappointment yesterday. I think it is premature to expect such a commitment; they will only play that card as a very last measure.

Europe Friday - From the EU: First session of the EU summit: Agreement on immediate action and on new fiscal rule for the eurozone At a press conference Herman Van Rompuy, President of the European Council, and José Manuel Barroso, President of the European Commission, explained the short-term measures. Up to €200 billion will be made available to the IMF, the European Financial Stability Facility (EFSF) leverage "will be rapidly deployed" and the European Stability Mechanism (ESM) should enter into force in July 2012. For the medium and longer term, the 17 eurozone countries will conclude an international agreement. This fiscal compact, to be signed no later than March 2012, will establish a new, stronger fiscal rule, including more automatism in the excessive deficit procedure. The objective remains to incorporate these provisions into the treaties of the Union as soon as possible. The Heads of State or Government of Bulgaria, Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania and Sweden indicated the possibility to take part in this process after consulting their Parliaments where appropriate. Excerpts from the communiqué: "General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP."

Europe Splits Over Fiscal Union, UK Isolated - Europe divided on Friday in a historic rift over building a fiscal union to preserve the euro, with a large majority of countries led by Germany and France agreeing to move ahead with a separate treaty, leaving Britain isolated. Twenty-three of the 27 leaders agreed to pursue tighter integration with stricter budget rules for the single currency area, but Britain said it could not accept proposed amendments to the EU treaty after failing to secure concessions for itself. After 10 hours of talks, all 17 members of the euro zone and six countries that aspire to join resolved to negotiate a new agreement alongside the EU treaty with a tougher deficit and debt regime to insulate the euro zone against the debt crisis. Arriving on Friday for a second day of talks, German Chancellor Angela Merkel told reporters she was very satisfied with the decision taken on Thursday evening, adding it was not a "lousy compromise". "Not Europe, Brits divided and they are outside of decision making. Europe is united," Lithuanian President Dalia Grybauskaite said on arriving for the second day of a crucial crisis summit, the eighth this year. European Central Bank President Mario Draghi called the decision a step forward for the stricter budget rules he has said are necessary if the 17-nation euro zone is to emerge stronger from two years of market turmoil."We came to conclusions that will have to be fleshed out more in the coming days."

New Euro Accord Consists of 23 Countries; UK, Hungary to Exit New Treaty; Expect More Exits; Treaty Signers Need to Collectively Pony Up $268 billion to IMF - Tonight we have news that only 23 of 27 nations will agree to new treaty. Please consider New euro accord to include 23 countries The president of the European Council said Friday that a new intergovernmental treaty meant to save the euro currency will include the 17 eurozone states plus six other European Union countries — but not all 27 EU members. German Chancellor Angela Merkel praised the plan. "I have always said, the 17 states of the eurogroup have to regain credibility," she said. "And I believe with today's decisions this can and will be achieved." Herman Van Rompuy, president of the European Council, said the countries would provide up to euro 200 billion ($268 billion) in extra resources to the International Monetary fund.  French President Nicolas Sarkozy said early Friday he would have preferred a treaty among all the members of the European Union. But that could not be achieved, he said, because the British proposed that they be exempted from certain financial regulations.

Most European Leaders Agree to Work on Fiscal Treaty - European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets. But efforts to get unanimity among the 27 members of the European Union, as desired by Germany, failed as Britain and Hungary refused to go along for now.  Importantly, all 17 member of the euro zone agreed to the new treaty, along with six other countries who wish to join the currency union one day. Two countries, the Czech Republic and Sweden, said they would want to talk to their parties and parliaments at home before deciding, said President Nicolas Sarkozy of France, but it seemed unlikely that Sweden would join. Hungary said it wanted to examine the detail, leaving Britain isolated.  Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.

Orwellian Currency Area - Krugman - Kevin O’Rourke has a very good point: what European leaders are describing as “fiscal union” is very nearly the opposite:With this in mind, the most obvious point about the recent summit is that the “fiscal stability union” that it proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a “fiscal union,” as some have done, constitutes a near-Orwellian abuse of language. Maybe it was always thus, but the relentless wrong-headedness of the Europeans, their insistence on seeing their crisis as something it isn’t, and responding with actions that deepen the real crisis, has been a wonder to behold. In the 1930s policy makers had the excuse of ignorance; there was nobody to explain what was happening. Now, their actions amount to a willful disregard of Econ 101.

Greece’s Papandreou Calls Crisis Response ’Too Little Too Late’ -- Former Prime Minister George Papandreou said the European Union has done “too little too late” to solve the sovereign-debt crisis. “We need a European, even global solution to this issue,” Papandreou said today in Durban, South Africa. “We lost quite a bit of time in Europe finger-pointing. We have done too little too late,” he said. “I do hope what we come up with in Brussels today is encouraging and will keep the markets calm,” Papandreou said. Responding to a question about the European Central Bank’s role in fighting the debt crisis, Papandreou said Europe is using “too few” of the instruments available to fight the debt turmoil. “Europe has lots of tools. We have been using too few of them and too late,” Papandreou said. “What happens is they get spent, psychologically, and the market doesn’t trust we have the will. What we have to show the markets is they can trust the euro.”

Finland threatens to exit ESM if unanimity dropped (Reuters) - Finland's finance minister threatened to pull her country out of the euro zone's future bailout fund if decisions on how it operates are made by majority vote rather than the EU's current rule of unanimity, according to public broadcaster YLE. "We will stick to this demand for unanimity," Finance Minister Jutta Urpilainen was quoted as saying on YLE's website on Friday. Finland is against a proposal, originally raised by France and Germany, to change the EU's rule of unanimous decision-making for the European Stability Mechanism (ESM). It fears such a change would harm smaller countries' interests. A group of legislators, after consulting constitutional guidelines, said on Thursday that Finland could not accept a change to the EU's rule of unanimous decision-making without two-thirds of its own parliamentarians agreeing to the move.

Europe’s disastrous summit - Somehow, in Brussels, EU leaders have contrived to pull defeat out of the jaws of victory on Thursday night, leaving Friday for finger-pointing and recriminations and wondering whether anybody who signed on to this deal has any chance at all of even getting re-elected, let alone being remembered as one of the leaders who saved the euro. Remember how Wolfgang Münchau said that the Euro zone had to get it right at this summit or it would collapse? Well, the Euro zone has most emphatically not got it right. Take any of the list of prescriptions of the minimum necessary right now — from Münchau, from Larry Summers, from Mohamed El-Erian — and the one thing that jumps out at you, especially in light of the most recent news, is that if you look at anybody’s list, there’s an enormous number of items which has zero chance of actually happening. Here’s how the FT put it on Wednesday: It borders on hysterical to say there are but hours to save the euro, but there is a risk that if the crisis is not now tamed the price of a rescue might start to spiral out of politicians’ grasp. The stakes are therefore very high at Friday’s summit. The world cannot afford another half-baked solution. And yet, inevitably, another half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eur ozone: the collapse of the entire edifice is now not a matter of if but rather of when.

Near-term risk to peripheral states remains - Amid all the heated speculation about the European Union summit’s impact on Europe’s economic future and Britain’s role in it, traders are asking a more mundane question: “Has it done enough to get us through to Christmas?” Their answer: probably not.  The eurozone crisis operates at different levels. Beyond the long-term issue of European governments’ solvency, which the summit’s “fiscal compact” aims to address, it also concerns liquidity; whether the funds are available now to keep Europe’s bond and money markets working.  The sovereign crisis is also tightly linked to the European banking crisis, as government bonds make up a large chunk of bank capital. For money markets to calm down, they need confidence that there will be no defaults or partial “haircuts” on the government bonds sitting on banks’ balance sheets.  Only the European Central Bank, which has the power to print money, can provide that confidence. And, as far as the market is concerned, it has not done so.

The only way to save the eurozone is to destroy the EU - So we have two crises now. A still-unresolved eurozone crisis and a crisis of the European Union. Of the two, the latter is potentially the more serious one. The eurozone may, or may not, break up. The EU almost certainly will. The decision by the eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split. I wrote in October that a time will come when the interests of the eurozone will not only collide with those of the non-eurozone, but with the EU itself. We are now at that point. On Thursday night, Angela Merkel and Nicolas Sarkozy clashed with David Cameron in a familiar Britain-versus-the-rest diplomatic standoff. That itself is not new. But a determination to go outside the treaty to overcome the disagreements adds a new dimension to this long-lasting dispute. The fiscal union likely to be agreed in March may not initially be very effective in resolving the crisis. It focuses on all the wrong issues, mostly fiscal discipline, which is not the real reason why the crisis has spread to Spain or Belgium, for example. But the eurozone nevertheless made an important political statement. It will not allow outsiders to stand in the way when it needs to act.

WOLFGANG MÜNCHAU: Europe Now Has Two Crises The FT's Wolfgang Münchau has a reasonable interpretation of what has just happened in Europe: So we have two crises now. A still-unresolved eurozone crisis and a crisis of the European Union. Of the two, the latter is potentially the more serious one. The eurozone may, or may not, break up. The EU almost certainly will. The decision by the eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split. In order for the Eurozone to save itself it needs deep treaty changes. The UK -- which isn't in crisis -- would be insane to sign up for this treaty. This is a big problem.

IMF must play its part in any euro solution - Larry Summers - European leaders will meet on Thursday and Friday for yet another “historic” summit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last meeting convened to deal with the financial crisis.  If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge. Given that Europe is the largest single component of the global economy, the rest of the world has a stake in helping to avoid major financial accidents. It also has a stake in aiding continued growth in Europe and ensuring that the European financial system supports investment around the world – particularly as cross-border European bank lending dwarfs that of banks from any other region.  Now is also a historic juncture for the International Monetary Fund. The focus of the policy response to the crisis must now shift from Brussels and Frankfurt to the IMF’s boardroom.

The only real solution to the European debt crisis is credit writedowns - Very unfortunate timing of today’s ECB meeting as Mario Draghi poured cold water on providing a backstop for the distressed Eurozone countries. It’s kind of like holding a press conference before playing a hand in a high stakes poker game. At stake? The future of the global economy and President Obama’s re-election.Christopher Wood, over at CLSA, had some great nuggets in his latest Greed and Fear piece: The reason why the character of Draghi has become all important is that it is clear that the compromise agreed by Nicolas Sarkozy and Angela Merkel in Paris earlier this week does not establish the groundwork for a credible fiscal union. For this reason a conservative ECB boss would not view it as a reason to pursue debt monetisation. But if the ECB boss is a politician, looking for an excuse to monetise, then the central bank’s reaction to the new agreement will be different….

Need for an Orderly Withdrawal Mechanism from the Euro and the Eurozone - In the face of imminent breakup, eurozone and EU governments will do well for their common good to create an orderly exit mechanism for Greece and any other country in financial distress that may wish to leave the monetary union to regain sovereign authority to preserve independent, unilateral monetary operational space. To keep the eurozone in good economic health, there is a need for a supranational institution with a clear mandate and authority to coordinate a zone-wide fiscal regulatory regime with two hands, one with monetary policy authority and the other with commensurate fiscal policy authority. Yet forcing eurozone member governments to adjust their separate fiscal policies to accommodate monetary rigidity of a common currency is to ask their political leaders to commit domestic electoral suicide. Without the availability of both monetary and fiscal supranational authority, the effect of supranational policy dealing with the sovereign debt crisis caused by a common currency is merely the same as sounds of one hand clapping.

Central Banks Plan for Possible Euro Breakup as Merkel Focuses on Wrong Issues - The denial about the existential nature of the Eurozone crisis seems to be lifting. The press has featured reports of companies and banks doing contingency planning for the possibility of a Euro dissolution or exits by some member states.  In keeping, the Wall Street Journal tonight reports that even central banks are starting to contemplate what had heretofore been unthinkable: The first signs are surfacing that central banks are thinking about how to resuscitate currencies based on bank notes that haven’t been printed since the first euros went into circulation in January 2002…. The central banks’ planning is preliminary,… But the fact central bankers are even studying the possibility, which until this fall was considered unthinkable, underscores how swiftly conditions have deteriorated… J.P. Morgan Chase & Co. put out a report Wednesday that advised investors and companies to hedge against a collapse of the euro zone—though the bank said the likelihood of that happening was just 20%. It said many corporate clients were buying currency derivatives to place bets against the euro.

The absolutely final save for Europe, again - It is the day before Europe is saved forever… again … and everyone seems to be getting nervous. Bond yields on the periphery and Belgium are heading back in the wrong direction, with big moves on Spanish paper. CDS reflects similar trends with Spain and Belgium again the big movers. In the lead up to the October summit it became obvious that there really wasn’t a plan when members of foreign cabinets, the German parliament, the ECB and the German central bank all released press statements contradicting Angela Merkel and each other. In the end Merkel told them all to keep quiet. One wonders why she didn’t learn her lesson and do the same thing this time: Germany rejected comments by French Prime Minister Francois Fillon that Chancellor Angela Merkel agreed to drop demands on investors to accept losses in any sovereign default, saying that International Monetary Fund rules will ensure private-sector involvement. “We only made it clear that the kind of PSI you had with Greece is an extreme case that won’t be repeated,” . So-called collective action clauses “will stay, so the investors will only encounter risks in Europe  that they already know from everywhere else in the world.”

If one EU bail-out fund flops, create two - If you think that running together Europe’s old rescue fund (EFSF) with the new one (ESM) to double firepower to €880bn is a reassuring move – as some analysts apparently do – you should have your head examined. The idea of combining the two is an admission that attempts to leverage the fund to €1 trillion plus have essentially failed. The clever ruse by German finance minister Wolfgang Schauble to circumvent the €211bn limit on guarantees imposed by the Bundestag has run into investor scorn. That Bundestag ceiling remains – and those of us who watched the debate know how emotional it was – so how on earth can Germany’s share be bumped up in this fashion to over €400bn? No wonder a "senior German official" has rubbished the plan today in irate language. A blizzard of silly proposals has hit the wires this week as a legion of ministers, diplomats, commissars, high secretaries, and fellow travellers all lobby and conspire to create "momentum" behind pet themes. In the meantime, nothing workable is actually on the table before the "summit-to-save-the-euro" on Friday. Be careful. Do not be distracted by Byzantine absurdities. And don’t listen to anybody who uses the term fiscal union. There is no such proposal. All we have so far is a Stability Pact with extra lipstick (Fiskalunion).

What Can Save the Euro? - Just when it seemed that things couldn’t get worse, it appears that they have. Even some of the ostensibly “responsible” members of the eurozone are facing higher interest rates. Economists on both sides of the Atlantic are now discussing not just whether the euro will survive, but how to ensure that its demise causes the least turmoil possible. It is increasingly evident that Europe’s political leaders, for all their commitment to the euro’s survival, do not have a good grasp of what is required to make the single currency work. The prevailing view when the euro was established was that all that was required was fiscal discipline – no country’s fiscal deficit or public debt, relative to GDP, should be too large. But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt. So now European leaders say that it is the current-account deficits of the eurozone’s member countries that must be kept in check.  In that case, it seems curious that, as the crisis continues, the safe haven for global investors is the United States, which has had an enormous current-account deficit for years. So, how will the European Union distinguish between “good” current-account deficits – a government creates a favorable business climate, generating inflows of foreign direct investment – and “bad” current-account deficits?

The terrible consequences of a eurozone collapse - Willem Buiter - What happens if the euro collapses? A euro area breakup, even a partial one involving the exit of one or more fiscally and competitively weak countries, would be chaotic. A full or comprehensive break-up, with the euro area splintering into a Greater Deutschmark zone and about 10 national currencies would create pandemonium. It would not be a planned, orderly, gradual unwinding of existing political, economic and legal commitments. Exit, partial or full, would likely be precipitated by disorderly sovereign defaults in the fiscally and competitively weak member states, whose currencies would weaken dramatically and whose banks would fail. If Spain and Italy were to exit, there would be a collapse of systemically important financial institutions throughout the European Union and North America and years of global depression. Consider the exit of a fiscally and competitively weak country, such as Greece – an event to which I assign a probability of about 20-25 per cent. Most contracts, including bank deposits, sovereign debt, pensions and wages would be redenominated in new Drachma and a sharp devaluation, say 65 per cent, of the new currency would follow. As soon as an exit was anticipated, depositors would flee Greek banks and all new lending governed by Greek law would effectively cease. Even before the exit, the sovereign and the banking system would fail because of a lack of funding. Following the exit, contracts and financial instruments written under foreign law would likely remain euro-denominated. Balance sheets would become unbalanced and widespread default, insolvency and bankruptcy would result. Greek output would collapse.

Buiter: no politically feasible route to sustained growth for many years to come - In the aftermath of the emergence of a “reinforced ‘Stability and Growth Pact’”, Citigroup chief economist Willem Buiter is pessimistic about growth outcomes in the major developed economies because the political economy of the sovereign debt crisis will stymie any pro-growth policy solutions. While Buiter sees giving the ECB a green light to monetise euro area government debt as the genesis of the deal, he anticipates years (or decades) of low growth and he warns that ECB policy support will neither be “open-ended” or “unconditional” . Buiter wrote in a note yesterday: There really is no politically feasible route back to sustained economic growth through monetary and/or demand stimulating policies for the EA, the UK, the US and Japan, for many years to come. As regards demand stimulus, expansionary fiscal policy will not be punished by the markets to the point of being self-defeating for all EA member states except for Germany (which will not do it on any significant scale for domestic political reasons). The US also may be technically able to use fiscal expansion to stimulate demand, but even if markets continue to be tolerant, political gridlock makes it impossible. Expansionary monetary policy is at the end of its rope in the US and Japan. The UK could cut the official policy rate by 50 bps and the ECB by 125 bps, and then they too are restricted to quantitative easing (QE), which I consider to be ineffective.

BBC News - Euro crisis: Eurozone deal reached without UK - The 17 members of the Eurozone have agreed to press ahead with a tax and budget pact to tackle a debt crisis. But a German and French attempt to get all 27 EU states to back changes to the EU's treaties was dropped after objections from the UK. Prime Minister David Cameron had insisted on an exemption for the UK from some financial regulations. Instead, at least 23 countries will adopt an accord with strict penalties for those who break rules on deficits.  "We wish them [eurozone states] well because we want everyone to sort out their problems because we all need that [economic] growth," Mr Cameron said. "But at the end of the day I made my judgment that it was not in Britain's interests [to take part]. I effectively wielded the veto." The new tougher rules on spending and budgets will now be backed not by an EU treaty but by a treaty between governments. It will be quicker to set up but it may prove less rigorous, says the BBC's Europe editor Gavin Hewitt in Brussels. But, he says, Europe has taken a big step towards closer integration, with binding rules over tax and spending, and sanctions against countries that overspend.

Cameron Finally Tells Sarkozy Where to Go; New treaty Splits European Union; Extreme Legal Complications Already; Expect Discord to Rapidly Spread - UK prime minister David Cameron was ready to sign on the Merkozy treaty dotted line if he got exceptions to some UK-unfriendly rules. When Sarkozy refused to go along, the two got into a nice verbal feud, and Cameron finally said what he should have said months if not years ago as reported by Yahoo!Finance in New treaty Splits European Union"What was on offer is not in Britain's interest so I didn't agree to it," he told reporters in Brussels. "We're not in the euro and I'm glad we're not in the euro," he said. "We're never going to join the euro and we're never going to give up this kind of sovereignty that these countries are having to give up."  Now, what's so hard about that? Cameron's next move should be to tell the EU to take all of their rules and shove them too.

Eurozone crisis: Britain’s companies prepare for life after the single currency - Britain's biggest companies are thinking the unthinkable and planning for the collapse of the euro. Multinationals such as Diageo, GlaxoSmithKline, Unilever and Vodafone are looking at contingency measures in case the single currency falls apart. Pharmaceuticals giant GSK says: "As part of our standard risk management practice, GSK has undertaken planning to optimise its operations in the event of a country leaving the eurozone. This includes preparations to ensure uninterrupted flow of the funds that are needed to continue the operations of our business." A Vodafone spokesman says the company is looking at each market individually as events unfold. It has already cut tariffs in Spain to take account of the weak economy and constraints on consumer spending. Asked what the company would do if the eurozone broke up, the spokesman says: "We are ready to implement contingency plans if the situation were to change significantly."

U.K. Banks Cut $15.2 Billion in Southern European Sovereign Debt -- Royal Bank of Scotland, Barclays Plc, and HSBC Holdings cut $15.2 billion of investments in Greek, Italian, Irish, Portuguese and Spanish sovereign debt as investors punished companies with large holdings.  RBS reduced 1.22 billion euros ($1.63 billion) of the debt during the nine months through Sept. 30, while HSBC cut 3.06 billion euros, according to data compiled by Bloomberg and based upon statements the lenders released today. Barclays sold down 6.06 billion pounds ($9.47 billion) of debt.  The three lenders and Lloyds Banking Group Plc don’t need to raise capital to absorb losses from euro-area bonds, according to the European Banking Authority. The EBA estimated banks in the region would need 114.7 billion euros to meet capital requirements, following the updated stress tests, the financial regulator said today in a document obtained by Bloomberg News.  The EBA estimated two months ago that the region’s financial institutions needed 106 billion euros to reach the 9 percent core Tier 1 capital goal by mid-2012 after marking their sovereign bonds to match market prices. European leaders are demanding the region’s banks bolster capital to withstand writedowns after they agreed to take losses on Greek bonds.

RBS Slashes Holdings of French Bonds More Than Southern Europe - Royal Bank of Scotland, Britain’s biggest government-owned lender, is cutting holdings of French government debt more quickly than it is for any other sovereign in the euro region, including the southern nations. RBS cut its holdings of French government debt by about 2 billion euros ($2.68 billion) to 17.15 billion euros in the nine months to Sept. 30, according to data compiled by the European Banking Authority and published yesterday. It reduced its holdings of Luxembourg’s sovereign debt by 460 million euros during the same period, the next biggest reduction.  RBS’s move highlights how investor concern about firms’ holdings of regional sovereign debt, which has contributed to a 31 percent decline in the Bloomberg Europe Banks and Financial Services Index (BEBANKS) this year, is spreading from the southern European nations to the core of the euro area. European Union leaders are meeting in Brussels today to hammer out a plan to stop the crisis from worsening.

BOE Starts New Sterling Liquidity Facility as Crisis Escalates -- The Bank of England introduced a new sterling liquidity facility to address potential financial- market strains as Europe’s sovereign debt crisis intensifies. The central bank announced the move “in light of the continuing exceptional stresses in financial markets,” it said in a statement in London today. “This facility is designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.” The measure comes a week after the Bank of England, the Federal Reserve and four other central banks made it cheaper for banks to borrow dollars in emergencies and agreed to create temporary bilateral swap programs to provide funding if needed in each central bank’s currency. The moves indicate officials are taking preemptive measures in case Europe’s debt crisis escalates further and freezes markets.

Banks May Not Refinance $156 Billion of U.K. Property Loans -- U.K. commercial real estate investors may be unable to refinance about half of their 201.3 billion pounds ($315 billion) of outstanding bank loans amid tightened credit, according to a study by De Montfort University. About 85 billion pounds to 114 billion pounds “could not be refinanced on current market terms,” according to a June survey of lenders by the university near Leicester, England. The loans are too high compared with collateral property values. About 24 percent were worth more than the real estate backing them, it said. Europe's sovereign-debt crisis worsened after the survey was conducted. Banks will need to raise 115 billion euros ($153 billion) of additional capital to cover the reduced value of government bonds, the European Banking Authority regulator said in a document obtained yesterday by Bloomberg News. The debt crisis and a possible U.K. recession “had exacerbated the ongoing lack of liquidity and increasing costs of capital in the property lending market,”

Mind the gap: the perils of forecasting output - The Office for Budgetary Responsibility is a welcome innovation within the UK policymaking framework. Too often governments have manipulated the numbers. The OBR should end such finagling. More important, it should end the fear of such finagling. Greater confidence in the probity of official forecasts is a public good. Yet it is crucial to distinguish probity from correctness. The OBR is honest and competent. How could it be otherwise with my former colleague Robert Chote at its head? But it might still be wrong. Economists just do not know very much. In the OBR’s November forecasts it further lowered potential output at the start of 2016 by 3.5 per cent. As a result, my colleague Chris Giles has estimated that the level of potential output forecast for 2017 is 18 per cent below that implied by the 1997-2008 trend. This is a huge fall. Between March and November, the OBR added a cumulative total of 8.8 per cent of gross domestic product to the cyclically adjusted current account deficit between 2011-12 and 2015-16. On these numbers, George Osborne, the chancellor of the exchequer, can no longer achieve his objective of eliminating the cyclically adjusted current deficit by 2014-15. The OBR has been a rod for the chancellor’s back. The OBR has not just changed its expectations of potential output. It has also lowered expectations of actual output. But the reductions in potential output are more important: they represent losses for ever.