week ending Dec 17

Fed Balance Sheet Grows Over Past Week - The U.S. Federal Reserve's balance sheet rose 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. 14 stood at $2.905 trillion, up from the $2.823 trillion reported a week earlier, the central bank said in a report released Thursday. Holdings of U.S. Treasury securities fell to $1.673 trillion from $1.675 trillion the week before, while the central bank's holdings of mortgage-backed securities rose to $858.08 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 $9.59 billion, down from $9.63 billion a week earlier, according to the report. Borrowing by commercial banks rose to $42 million from $12 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts slid to $3.435 trillion from $3.453 trillion in the latest week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts decreased to $2.714 trillion from $2.735 trillion the previous week. Holdings of agency securities climbed to $721.40 billion, from $717.91 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - December 15, 2011 

Fed Reports Borrowing From Foreign Central Banks - The Federal Reserve‘s dollar-liquidity facility for central banks was reported as $52.387 billion in the week ended Wednesday, driven largely by demand from the European Central Bank. The Federal Reserve Bank of New York said Thursday total outstanding borrowing for the week was $54.335 billion, compared with $2.301 billion the week before. In the current week, new borrowing by the ECB was $52.287 billion, in two separate tranches. The Bank of Japan drew $25 million in new loans, and the Swiss National Bank drew $75 million.  The Fed's dollar swap facility exists to ensure the financial system does not run short of dollar liquidity. Thus far the facility has been little used, at least compared to its first run, when borrowings peaked at nearly $600 billion in December 2008. The jump seen in the latest week is the biggest move yet, and it coincides with rising market disruptions tied to events in Europe.

Fed to Consider Publishing a Forecast on Rates - The Federal Reserve’s decision three years ago to reduce short-term interest rates to nearly zero made a splash, both because the Fed had never pushed rates so low and because it said that it planned to keep rates near zero “for some time.” Predicting its own future actions was a new step, an experiment in a time of crisis that the Fed has since repeated several times, most recently in August, when it said that it planned to keep interest rates near zero until at least the summer of 2013. Now the technique looks increasingly likely to become a permanent method for influencing economic growth. When the Fed’s policy-making committee convenes on Tuesday, it will consider the idea of publishing a regular forecast of its future decisions on interest rates. Any such plan would most likely be announced no sooner than its next meeting, in January, when it is already scheduled to publish economic projections. Forecasting policy is part of a broader set of changes that the Fed is considering to improve public understanding of its methods and goals. The Fed’s chairman, Ben S. Bernanke, and other officials say that improved communications could deliver a modest boost to the economy with relatively little risk. None of their other options for additional action are nearly so appealing.

If Fed Decides to Ease Again, Price Could Hit $1 Trillion - If the Fed decides that the US economy needs another round of monetary easing, the price tag likely would be between $700 billion and $1 trillion, according to a new analysis. While the Fed has not said explicitly whether it will enact a third round of quantitative easing — or QE3 in market parlance — speculation has grown that the central bank will step in should the economy stall again in 2012. The Fed next meets Tuesday, when the topic of more easing is likely to come up. Recent indicators such as in housing, unemployment and consumer confidence have shown improvements, though most economists are expecting the gains to be temporary and, more importantly, susceptible to shocks from a European recession. In that event, according to the analysis from Citigroup analyst Inger M. Daniels, the Fed likely would buy $700 billion worth of mortgage-backed securities, and possibly another $300 billion in Treasurys.

Some Economists Speculate Fed Could Trim Discount Rate - With most of Tuesday’s Federal Reserve policy meeting expected to be devoted to central bank communications strategies, some economists are uncertain how policymakers will handle a largely symbolic but potential touchy facet of monetary policy. At issue is the Fed’s chief emergency lending tool, known as the discount window. Some economists say there’s a chance Chairman Ben Bernanke and his central bank colleagues may decide to cut what is now the 0.75% rate attached to this facility. The long-standing facility exists to provide lender-of-last-resort loans to deposit taking financial institutions, as long as they can provide acceptable collateral in return.

A Look Inside the Fed’s Balance Sheet - (interactive as of Dec 7) Ahead of the Federal Reserve‘s policy-setting meeting today, it’s worth taking a look at the latest figures from the Fed’s balance sheet. Assets on the Fed’s balance sheet sit at around $2.8 trillion as of last Wednesday. The level has held pretty stable since June, when the central bank ended it bond-buying program, commonly known as QE2. Amid tensions in Europe, two weeks ago the Fed along with other central banks announced an extension of a program to provide dollars to overseas banks. (See more here) The most recent data from the Fed (as of Dec. 7) show the program, known as central bank liquidity swaps, at a low level of $2.3 billion. But that number is likely to grow substantially this week. The day after the Fed reported its data, the European Central Bank made more than $50 billion in dollar loans and the Bank of Japan lent out nearly $5 billion through the facilities. Though the increase shows that market tensions remain for dollar funding, the use of the swaps still would be substantially below crisis levels when they reached a high of nearly $600 billion. Click for full-sized interactive chart

The Fed Leaves Policy Unchanged - The Federal Reserve's meeting to set the direction of monetary policy ended with no real surprises. As expected the Federal Open Market Committee -- the committee within the Fed that determines monetary policy -- decided to leave interest rates unchanged and offered no new stimulative policies. In addition, the Fed will continue its program of extending the average maturity of its portfolio holdings in an attempt to bring down long-term interest rates. It will also continue to reinvest the proceeds from maturing assets in its portfolio to keep from reducing the size of its balance sheet which would, in effect, begin to reverse previous easing policies. Which way is the Fed leaning for the future? Though there is not much worry about inflation, which leaves room for more aggressive policy, the FOMC sees "some improvement in overall labor market conditions" and that works against any further easing in the future. Thus, unless the incoming data turn significantly negative policy is likely to remain on hold as the Fed waits for signs of the slow recovery it expects to see in coming months. However, even if the data cooperates with the forecast and improves, it will be some time yet before the Fed changes course.I think it is a mistake to take a wait-and-see approach at this point, and so does Chicago Fed president Charles Evans, who dissented from the FOMC's decision.

FOMC Statement:: Economy expanding "moderately", Global growth slowing -- FOMC Statement:  Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate.

Fed Takes No Action, Citing Signs of Moderate Growth — The Federal Reserve¹ said Tuesday that it was closing the books on 2011, maintaining its existing efforts to increase growth but adding no reinforcement amid evidence that the American economy was chugging back toward health.  The central bank will enter next year as it entered this one, in a stance of hopeful exhaustion, optimistic the economy is gaining strength, worried about setbacks and doubtful it can do much more to hasten recovery.  Equity investors, who have been the major beneficiaries of the Fed’s efforts to help growth, immediately responded with disappointment over the absence of any clear hint of new windfalls. Major market indexes recorded quick drops, reversing early gains. The benchmark Standard &Poor’s 500-stock index fell 0.87 percent on the day.  But the Fed left open the possibility that it would take additional steps next year, including an expected effort at improving public understanding of its goals and methods to increase the impact of its policies and disarm its critics.

FOMC statement - The Federal Reserve still would like to do more, but not right now. The Federal Open Market Committee yesterday released the following economic assessment: The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate.  In almost identical language that it used November 2, the Fed is saying that it expects unemployment will remain higher than it wants, inflation will likely be lower than it wants, and that it has significant concerns about where events in Europe might lead. In normal times, that trio would surely signal that policy would become more expansionary. But the Fed opted instead to keep things more or less on hold, again using almost identical language as in its previous statement.

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

Redacted Version of the December 2011 FOMC Statement - November 2011 - December 2011 – Comments 

Fed’s Dudley Doesn’t Expect More Action to Shield U.S. From Europe Crisis - New York Federal Reserve President William Dudley will tell lawmakers Friday that he doesn’t expect the Fed to take further steps to lessen the impact of Europe’s debt crisis on the U.S. economy. In prepared remarks due for delivery at the House of Representatives on Friday, Dudley will say that a program under which the Fed lends emergency U.S. dollars to foreign central banks, including Europe’s, also helps the U.S. economy because of its strong links with the euro-zone economy. “At this time, although I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States, we will continue to monitor the situation closely,” Dudley will tell the House Committee on Oversight and Government Reform.

$29 Trillion Bailout: Response to Critics - L. Randall Wray - OK, anytime one criticizes the Fed or Wall Street there will be some push-back by the professionals who serve their masters. (By contrast, Barry Ritholtz understood the argument, see here.)  My original piece on Friday got picked up by a number of blogs and generated a lot of hostile responses. I expect that. And it looks like many of them deal in obfuscations that would make Chairman Bernanke proud. But let us presume they were not hired by the Fed and Goldman and instead assume good intentions. I will have a longish post over at New Economic Perspectives tomorrow that addresses several issues that were not adequately covered in my post on Friday. But here I will deal with the main topic of a number of the comments—which centered around the proper way to measure the Fed’s intervention: stocks or flows. As I said on Friday, we can choose any of three different measures to ascertain the size of the Fed’s response. First, we can look at peak lending at an instant; more practically, we could choose end-of-day lending by the Fed. We can measure this by looking at the Fed’s balance sheet, adding across the assets associated with the emergency lending facilities (a Fed loan to a bank shows up on the Fed’s balance sheet as an asset; a Fed purchase of an asset from a bank moves that asset to the Fed’s balance sheet.) This is the measure the Fed chooses, and it comes to a peak of $1.2 trillion on a day in December 2008.

More on those secret Federal Reserve loans to banks - The claim that the Federal Reserve extended trillions of dollars in secret loans to banks continues to be spread. Here at Econbrowser we will continue to try to correct some of the misunderstanding that is out there.Consider for example this item from the Levy Institute blog written by University of Missouri Professor L. Randall Wray, which begins: It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get [Bernanke] to finally release much of the information surrounding the Fed's actions. Since that release, there have been several reports that tallied up the Fed's largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion.  This is a common misunderstanding. As the reporters for the Bloomberg story verified to me personally, their $7.77 trillion figure did not come from the records that Bloomberg obtained under the FOIA. Instead, their figure came from this article published by Bloomberg on March 31, 2009. That original $7.77 trillion estimate in turn was based entirely on publicly available sources which were being quite widely discussed at the time.

No One Telling Who Took $586 Billion in Swaps With Fed Condoning Anonymity - For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.

Matt Stoller: How the Federal Reserve Fights - Two weeks ago, Bloomberg released a significant story on the actions of the Federal Reserve as the lender of last resort during the crisis and the extent of that lending. The article, an homage to the late great reporter Mark Pittman, revealed lending and guarantees of roughly $8 trillion, and estimated government-granted profit garnered by the big banks of $13 billion.  More disturbing were inconsistent statements by Bernanke publicly claiming he was lending only to sound institutions when the Fed’s internal assessments of those same banks showed otherwise. This article prompted a remarkable back-and-forth between Bloomberg and the Fed, in which neither side backed down while coming close to calling the other a liar. Bloomberg essentially argued that the Fed gave ill-gotten profits to money center banks through facilities set up to flood the system with liquidity. The Fed responded that it charged “penalty” rates to these banks, that it was fulfilling a well recognized function of central banks by serving as the lender of last resort. I side with Bloomberg, and I’ll explain why.

Central bank secrecy datapoint of the day - I’ve moaned on many occasions about the secrecy of the Federal Reserve, which can and should be much more transparent than it is. But Bloomberg’s latest story on secretive Fed lending is a helpful reminder that while the Fed is opaque by US government standards, it’s positively crystalline by global central-banking standards. The subject of the story is the set of unlimited swap facilities that the Fed set up during the crisis with the world’s big central banks. Any time they wanted to lend out dollars, they could borrow as many dollars as they wanted from the Federal Reserve, putting up their own domestic currency as collateral. At the peak of the crisis in December 2008, the Fed had lent out as much as $586 billion under these facilities, most of it to the European Central Bank. Bloomberg’s problem with this is that once you’ve followed the money to the ECB, the trail goes cold — the ECB won’t say which banks it lent those dollars to. Because while the Fed has revealed the names of the banks that it lent money to under various programs, no other central bank has followed its lead.

Bernanke’s 29 Trillion Dollar Fib Exposed - As I reported here and over at Great Leap Forward, a new study by two UMKC PhD students, Nicola Matthews and James Felkerson, provides the most comprehensive examination yet of the Fed’s bailout of Wall Street. They found that the true total cumulative amount lent and spent on asset purchases was $29 trillion. That is $29,000,000,000,000. Lots of zeros. The number is quite a bit bigger than previous estimates. You can read the first of what will be a series of reports on their study here. I want to be clear that this is a cumulative total—and for reasons I will discuss in this post it is the best measure if we want to understand the monumental Fed effort to restore Wall Street to its pre-crisis 2007 glory. It is certain that no government anywhere, ever, has committed so much to benefit so few. Wall Street owes the Fed a big fat wet kiss. That’s a kiss Chairman Bernanke apparently does not want. Last week he extended the Fed’s veil of secrecy over its bail-out of Wall Street by trying to counter a recent Bloomberg analysis of the extent of the Fed’s largess with a fog of deceit. Apparently the Chairman forgot the lesson we learned from Watergate: the cover-up is always worse than the original indiscretion.

29 Trillion Dollars, One Page - Randall Wray has a new one-pager following up on the release of a report detailing and tallying up the Federal Reserve’s extraordinary efforts to prop up the banking system—a report with the rather eye-catching headline number of $29.6 trillion.  The Levy Institute report, the first in a series, is part of a Ford Foundation-supported project undertaken by James Felkerson and Nicola Matthews under Wray’s direction. In the one-pager, Wray explains the methodology and justification behind the report’s presentation of the raw data that was released (after some persuasion) by the Fed.  As an example, he runs through the numbers for just one facility, the Primary Dealer Credit Facility (PDCF) created in March 2008, and explains the three different measures compiled by the report.  First, they present the peak outstanding commitment (loans and asset purchases) at a point in time ($150 billion); then the peak flow of commitments over a week ($700 billion); and finally, the cumulative total over the life of the facility ($9 trillion).  Again, this is all for one facility (PDCF).Read Wray’s one-pager here.

Bernanke to Brief Republican Lawmakers on Europe Crisis - Federal Reserve Chairman Ben Bernanke will brief U.S. Senate Republicans Wednesday on the impact of Europe’s debt crisis on the U.S. economy amid controversy over a program under which the Fed provides cheap emergency U.S. dollars to banks in Europe. A Senate Republican aide said Bernanke will spend about an hour with GOP senators after their lunch Wednesday to talk about the economic outlook amid the continued troubles in Europe. Two weeks ago, the Fed cut the rate at which it provides U.S. dollars to major central banks, including Europe’s, triggering a rush by banks in the euro zone to secure cheap dollar funding. The move renewed Republican lawmakers’ criticism of the program, which was first launched during the 2008 financial crisis.

Bernanke Tells Senators Fed Won’t Bail Out Europe - Federal Reserve Chairman Ben Bernanke told Senate Republicans Wednesday that U.S. taxpayers won’t bail out Europe, even as he warned that the debt crisis there can really hurt the economy here. “Multiple times” throughout the roughly hour-long discussion Bernanke made clear he doesn’t have the authority or intention to rescue the euro zone, Sen. Bob Corker (R., Tenn.) told reporters after Bernanke’s closed-door briefing. “I think people walked away knowing he has no intentions whatsoever of furthering U.S. involvement in the crisis,” Corker told reporters.

Fire Bernanke? Not So Fast, Mr. Gingrich - The American Spectator, a conservative opinion publication, points out that Newt Gingrich’s promise to fire Federal Reserve chairman Ben Bernanke isn’t as easily executed as the Republican presidential candidate has often made it sound on the stump: "If Gingrich wanted Bernanke gone and Bernanke refused, Gingrich would be faced with two options. The first would be to initiate legal action against Bernanke. The Federal Reserve Act, in section 10.2, stipulates that a governor can only be ‘removed for cause,’ or for some malfeasance. Removing Bernanke for cause, however, would involve proving wrongdoing of some kind, and the process would ultimately be decided by employment lawyers and the legal system, not by Gingrich alone … The other option available to Gingrich would be, simply, to amend the Federal Reserve Act to allow the president to fire the Fed chairman at his discretion … Of course, moving legislation through Congress is vastly more complicated than simply firing an underling.” In recent interviews, Mr. Gingrich has seemed to concede that the second cumbersome course is the one he would have to choose.  But the courts have set a high hurdle...

Debasing The Dollar, Not - Krugman - Hmm. I was looking at the Thomson Reuters/Jefferies commodity price index, which has been trending down since the spring: And I found myself thinking about the hearing last February in which Paul Ryan accused Ben Bernanke of debasing the currency, using rising commodity prices to argue that dangerous inflation lurked just around the corner. So, will Ryan demand more expansionary policies from the Fed given the sharp fall in commodity prices this year? Truly, it is amazing how our political landscape continues to be dominated by people who have been wrong about everything for years.

Smoothed Inflation - Krugman - One thing that becomes obvious when you look at inflation data is that the numbers bounce around a lot, not just from month to month but from year to year. One way to try to get past the noise is to use one or another definition of core inflation, which I think is necessary if you want to catch underlying inflation trends early. But to get a historical picture, it’s good enough just to use longish averages. So here’s three- and four-year average inflation (blue and red respectively), as measured using the headline CPI. (Want to bet that even with me putting this here, I’ll have commenters insisting that the numbers don’t include food and energy?) And remember, ever since the Fed began expanding the monetary base in 2008, the inflationistas have been screaming that hyperinflation was just around the corner.

G.O.P. Monetary Madness, by Paul Krugman - Apparently the desperate search of Republicans for someone they can nominate not named Willard M. Romney continues. New polls suggest that in Iowa, at least, we have already passed peak Gingrich. Next up: Representative Ron Paul. Mr. Paul identifies himself as a believer in “Austrian” economics... Austrians see “fiat money,” money that is just printed without being backed by gold, as the root of all economic evil, which means that they fiercely oppose the kind of monetary expansion Friedman claimed could have prevented the Great Depression — and which was actually carried out by Ben Bernanke this time around. After the fall of 2010, the Fed began another round of purchases, in a less successful attempt to boost economic growth. The combined effect of these actions was that the monetary base more than tripled in size.Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation. One popular Austrian commentator who has advised Mr. Paul, Peter Schiff, even warned (on Glenn Beck’s TV show) of the possibility of Zimbabwe-style hyperinflation in the near future. So here we are, three years later. How’s it going? Inflation has risen an average annual rate of only 1.5 percent.

Key Measures of Inflation mostly slow in November - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis ... The index for all items less food and energy increased 0.2 percent in November following increases of 0.1 percent in each of the prior two months. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.1% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.0% annualized rate) during the month. Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation. You can see the median CPI details for November here. On a year-over-year basis, these measures of inflation have stopped increasing, and are slightly above the Fed's target. On a monthly basis, the rate of increase is mostly below the Fed's target (Core is above, median and trimmed-mean are below). This graph shows the year-over-year change for these three key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 2.5%, and core CPI rose 2.2%. On a monthly basis, the median Consumer Price Index increased 1.1% at an annualized rate, the 16% trimmed-mean Consumer Price Index increased 1.0% annualized, and core CPI increased 2.1% annualized.

Inflation's Split Personality - Inflation hawks have been telling us for some time now that dramatically higher inflation is just around the corner. Eventually they'll be right, but not yet. The numbers are an inconvenient fact for worrying about pricing pressure at this juncture. Despite massive increases in the Fed's balance sheet, consumer inflation remains modest by historical standards. In the chart below, the year-over-year percentage change in the broadly defined M2 money supply (green line) has recently soared. Inflation's pace also increased (blue line is headline CPI, red line is core CPI), but the rise is hardly the hyperinflationary rates that some predicted.  Huh? Haven't we been told that printing money is a sure path to dangerously high inflation? If so, why isn't inflation responding in kind? Some conspiracy theorists charge that the government manipulates the data and so the official inflation numbers vastly understate the true rate. Perhaps, but independent estimates of inflation are also relatively mild. MIT's Billion Prices Project, for instance, generally tracks the government's CPI numbers. As Rex Nutting at MarketWatch reminds,

Latest Price Data Show US on Brink of Deflation as World Economy Slows - The most widely watched U.S. inflation indicator, the seasonally adjusted all-items CPI for urban consumers, fell in November at an annual rate of 0.23 percent. The decrease was small enough that it will hit the headlines as no change, based on the rounded monthly data reported in the press release from the Bureau of Labor Statistics. (All inflation data in this post are month-to-month changes stated as annual rates, based on the three-decimal version of the data released by the Cleveland Fed.) November marked the second consecutive month of negative inflation, following a decrease of 0.96 percent in October. While the headline all-items CPI fell, measures of underlying inflation remained in the very low positive range. The core CPI from the BLS, which covers all items less food and energy, rose at a 2.10 percent annual rate in November, up from 1.69 percent in October. The Cleveland Fed’s 16 percent trimmed mean inflation rate came in an an annual rate of 0.99 percent for November, down a little from 1.36 percent in October. All of these are very low numbers to be seeing at a time when the world economy is slowing. The U.S. economy itself, according to Q3 data, is growing just enough to prevent its large output gap from getting even larger.

Steve Keen: How He Saw “It” Coming, and Others Did Not -The two intersecting lines of supply and demand penetrate economics textbooks like Einstein's mass-energy equivalence penetrates physics textbooks. The theory behind the two lines is inherently flawed, says Steve Keen. It is not possible logically to derive from individuals and their preferences the aggregate demand and supply curves presented in economic textbooks -- unless one is willing to make a host of unrealistic assumptions, such as that all people are alike. That is why the theory is flawed, according to Steve Keen, Professor of Economics at University of Western Sydney in Australia. In part 1 of the INET interview, he talks about the flaws in economic theory, and explains why the second edition of his book, Debunking Economics, carries the subtitle The Naked Emperor Dethroned. In part 2 of the interview, he talks about how in his search for a realistic framework of capitalism he ended up with the work of Hyman Minsky.  Keen was able to put this simple idea into a mathematical model, in a paper he published in 1995. The model helped him to predict the financial crisis. Keen is the recipient of the Revere Award, an award given to the economist who first and most cogently warned the world of the coming financial collapse.

A little better GDP Growth in Q4 - From the WSJ: Economy Poised for Growth Spurt, but Risks Abound Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago. Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery. It does look like GDP growth will be slightly above trend in Q4, but this is still weak growth considering all the slack in the economy. Back in Q4 2009 and early 2010, real GDP increased at around 3.8% annualized for a few quarters, but almost all of that growth was from increases in private inventories (a classic inventory cycle). This quarter most of the increase will be from final demand. However some of this "growth spurt" is just a bounce back from earlier events - auto sales have finally recovered from the impact of the tsunami, and consumer and business spending have bounced back a little from the threat of a U.S. default in August during the debt ceiling debate.  And recently personal spending has been increasing faster than personal incomes, and the saving rate has been declining. That isn't sustainable.

Is the government lying to us about the economy? - Is the government lying to us when it tells us that the economy grew at a 2% annual rate last quarter? Or when it says 120,000 jobs were created last month? Many people in the paranoid wing of the investing and political worlds certainly believe so. If you ask around at Shadow Government Statistics or on investor blogs, they’ll say you can’t trust anything Washington does or says. Republican Party boss Rush Limbaugh, for instance, ranted earlier this month that the report of a decline in the unemployment rate to 8.6% was “nothing more than the government manipulating the real work situation that exists in the country. It’s all calculated to create a false impression of economic recovery and a healthier job market."  Now, if you live in a country, like I do, where the government has lied its way into war after war, where the government deliberately broke every promise it made to the Native Americans, where sharecroppers were left to die of syphilis, and where the government routinely spies on its citizens, you’d be wise to be skeptical about any claim made by the government.

Global Growth Struggles, Fed Stands Still: The news from Japan tonight: Japanese business mood turned pessimistic in the three months to December, the central bank's tankan survey showed, a sign the stubbornly strong yen, Europe's debt crisis and slowing global growth were taking their toll on the export-reliant economy. Earlier this week: India's industrial production slid 5.1 percent in October, helping drive the rupee to a fresh record low against the dollar — more signs of the reversal of fortunes in Asia's third-largest economy. The decline in output from a year earlier was driven by mining and manufacturing, as well as waning consumer demand and lackluster investment, according to government figures released Monday. Another one, via Bloomberg: Brazil’s real fell to a two-week low after data showed Latin America’s largest economy shrank for a third month in October... ..Brazil’s seasonally adjusted economic activity, a proxy for gross domestic product, fell 0.32 percent in October from the previous month, capping its longest contraction since the bankruptcy of Lehman Brothers And a depressing global outlook.. via the Financial Times: 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”.

CFOs Less Optimistic About 2012 Growth - Financial chiefs at U.S. companies are less optimistic about economic growth in 2012 than in previous years, however, the majority don’t expect work force reductions next year, according to a recent chief financial officer outlook survey by Bank Of America Corp. According to the annual latest survey of 600 executives by Bank Of America Merrill Lynch, 38% of respondents said they expect the U.S. economy to grow in 2012, down from 56% a year ago and 66% the prior year. CFOs rated the economy a score of 44 out of 100 — its lowest score in the survey’s 14-year history. A year ago, CFOs gave the economy a score of 47. However, the majority of CFOs didn’t expect their companies to reduce the work force next year. About 48% of executives expected their companies to maintain the current number of employees, while 46% said they expected to hire employees. Bank of America said both responses were similar to last year’s results. Only 7% of respondents predicted layoffs, compared with 6% a year ago.

Fragile and Unbalanced in 2012, by Nouriel Roubini - The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth. Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, "Fasten your seatbelts, it’s going to be a bumpy year!"

The European economy and U.S. exports - U.S. goods exports have enjoyed strong growth since the end of the recession (21 percent from 2009 to 2010, and 17 percent from 2010 to 2011).  Indeed, U.S. exports to Europe have been growing strongly this year, growing at double-digit rates since the end of the recession, and have grown appreciably faster so far this year.  Through the first ten months of 2011, our exports to Europe accounted for 22 percent of our total goods exports and 23 percent of our growth in goods exports.  However, exports to Europe still have not regained their pre-recession high.  Given the manifold headwinds facing Europe, the recent vigor in our exports to Europe may not persist.  How strong are those headwinds?  Well, according to the OECD, the Euro Area is already facing what is expected to be a brief recession (see chart below). Many private-sector analysts are also concerned about the possibility of a European recession during 2011Q4 and 2012 as austerity measures to deal with the sovereign debt crisis have expanded.  A key determinant of how fast our exports to a foreign country rise is the health of that country’s economy as measured by its GDP growth, as we talked about in a previous blog.

Europe Crisis to Shave 1% Off US GDP Growth: Goldman - The European debt crisis is likely to cost already-tenuous U.S. economic growth about 1 percentage point next year, Goldman Sachs economists said. Whether a massive sovereign debt collapse in euro zone economies will spread to America has been a major question in the markets, causing stocks to stage a slump in each session this week and posing questions about how much worse things can get.At the heart of the question for the U.S. has been counterparty risk — or the chance that one side won't be able to live up to an agreement — and how much damage will be wrought in the event of a massive European debt default. Goldman puts the counterparty figure at $1.8 trillion, which is 3.3 percent of the total outstanding debt in the U.S. Should eurozone banks cut their lending to the U.S. by 25 percent — a round estimate — that would cut about 0.4 percentage points from growth. That in turn would cause a retrenchment among domestic banks that probably would see U.S. gross domestic product lose about 1 percentage point total.

Our decade from hell will get worse in 2012 — Fasten your seat belts: 2011 was far worse than expected. Our earlier predictions for America’s Worst Decade just got worse.  As financial historian Niall Ferguson writes in Newsweek: “Double-Dip Depression … We forget that the Great Depression was like a soccer match, there were two halves.” The 1929 crash kicked off the first half. But what “made the depression truly ‘great’ …began with the European banking crisis of 1931.” Sound familiar?  Yes, huge warnings: But America’s deaf. In denial. When we predicted the 2011-2020 “decade from hell” we didn’t see the big macro events dead ahead: Arab Spring virus that’s now Occupy Wall Street, promising to explode into an even more powerful force in 2012 … war on the middle class … widening inequality gap. … Washington gridlock … the Super Rich’s blind resistance to all new taxes.  As Ferguson puts it: “To understand what has been happening in our own borderline depression, you need to know this history. But hardly anyone does.” Get it? America’s already in a “borderline depression,” and virtually nobody gets it. American leaders are dummies about history. Worse, nobody may be able to stop our depression from turning “great.”

Six Tail Scenarios That Deutsche Bank Are Watching For Next Year - Jim Reid and his team from Deutsche have produced another magnificent compendium of information and prognostication in their 2012 Credit Outlook and while their up-in-quality preference (non-financial) may not be earth-shattering strategically, their timing view is of note. Instead of viewing the looming refi-ganza among European sovereigns and financials in H1 2012 as a reason for doom and gloom, they see it as the necessary evil to drive the ECB into the markets in size only for the latter half of the year to disappoint significantly as the reality of the underlying problems rear their ugly head once more. The down-then-up-then-worse-down perspective on markets for next year hardly sounds optimistic but it is the following six scenarios away from European woes that keep them up at night. From the positivity of a US housing rebound or Election year cycle to much more extreme downside risks such as geo-political concerns and non-European sovereign risks, their views on China, QE-evolution and Inflation concerns are noteworthy.

This slump won’t end until 2031 — In retrospect, it wasn’t hard to see that the markets were becoming dangerously unstable. Germany had just adopted a new monetary system, and Europe was being flooded with cheap German money. Greece had just signed up to a monetary union with Italy and France but was struggling to hold it together. Financial markets had been deregulated. New technologies were transforming production and communications, allowing money to move across borders at lightening speed. And a massive new industrial power was flooding the world with cheap manufactured goods, blowing apart old industries. When it all fell apart in an almighty crash, it was only to be expected. h A prophesy for London, New York or Berlin in 2012? Not exactly. It is a description of Vienna in 1873. In that year, in one of the great crashes of all time, the Austrian markets triggered collapses across Europe, swiftly followed by an equally spectacular collapse in New York. It was the start of what economic historians call The Long Depression: a prolonged period of volatility, unemployment and slumps that lasted an epic twenty-three years, only finally coming to an end in 1896.

I wonder if economists will follow suit? - Economic forecasters sometimes use the inability of weather forecasters to get it right as a defense for poor economics forecasts "Hey, we're no worse than the weather forecasters." Well... Two top U.S. hurricane forecasters, revered like rock stars in Deep South hurricane country, are quitting the practice because it doesn’t work. William Gray and Phil Klotzbach say a look back shows their past 20 years of forecasts had no value. The two scientists from Colorado State University will still discuss different probabilities as hurricane seasons approach — a much more cautious approach. But the shift signals how far humans are, even with supercomputers, from truly knowing what our weather will do next.

Maybe this time was at least a little different? - Atlanta Fed's macroblog  Earlier this week, Derek Thomson, a senior editor at The Atlantic, began his article "The Graph That Proves Economic Forecasters Are Almost Always Wrong" with some observations that don't really require a graph: "As the saying goes: 'It's hard to make predictions. Especially about the future.' Thirty years ago, it was obvious to everybody that oil prices would keep going up forever. Twenty years ago, it was obvious that Japan would own the 21st century. Ten years ago, it was obvious that our economic stewards had mastered a kind of thermostatic control over business cycles to prevent great recessions. We were wrong, wrong, and wrong." In a recent speech, Dennis Lockhart—whom most of you recognize as president here at the Atlanta Fed—offered his own thoughts on why forecasts can go so wrong: "… you may wonder why forecasters, the Fed included, don't do a better job. To answer this question, let me suggest three reasons why forecasts may be off. "While it's relatively trivial in my view, the first reason involves missing the timing of economic activity. An example of that was mentioned earlier when I explained that GDP for the third quarter had been revised down while the fourth quarter is expected to compensate. "A second reason that forecasts miss the mark is, in everyday language, stuff happens.

An Interview on Balance Sheet Recessions with Amir Sufi - I think that Amir Sufi (University of Chicago Booth School of Business) and Atif Mian (University of California, Berkeley) are doing the most interesting and important empirical work on what is going on with this Great Recession. So I was excited to see that they just released two new papers on the subject, “What Explains High Unemployment? The Aggregate Demand Channel” and “Household Balance Sheets, Consumption, and the Economic Slump.” Here’s an editorial — “How Household Debt Contributes to Unemployment” — summarizing their research. They have used a lot of innovative methods and data sets in order to pinpoint the problem of the “household balance sheet” and how debt-to-income and leverage are linked to sluggish growth and employment. These papers have been covered in the blogosphere already (here’s Paul Krugman, Calculated Risk and Kevin Drum all discussing it.) I was able to interview Amir Sufi about this research.

A Quick Note on a Wealth and Balance Sheet Debate - I still like using my map for understanding why people disagree on the best course of action on getting the economy going even if they are in agreement that something needs to be done. Take this exchange in Democracy Journal – Arguing About Growth – between Larry Mishel of EPI and William Galston of Brookings Institute.  Galston: I’ve been skeptical about the adequacy of the traditional demand-side stimulus strategy that the Administration has pursued. Mortgages are the epicenter of household debt, and thus of our economic woes as I understand them. Stimulus without debt relief palliates the pain without curing the disease.  And Mishel responds: Galston is correct in noting that the aftermath of a financial crisis must be treated differently from your plain vanilla, high-interest-rate-caused recession, as Rogoff and Reinhart argue. As my EPI colleague Josh Bivens has stressed, this means we need to have full guns blazing to ensure we do not suffer protracted stagnation or just rely on low interest rates. The right measures here include having higher inflation targets for monetary policy and addressing the foreclosure crisis. It also means going beyond the comfort zone of deficit hawks and running large deficits to pump up demand for a number of years while deleveraging proceeds. Failure to do so will dampen the robust job growth needed to help households deleverage. I’m with Mishel and Bivens.  We should be operating on all fronts on this recession.  Getting wages up and unemployment down is a great way to deal with debt overhangs.  Having median wages crash 10% alongside a sustained period of very high unemployment is a good way to make debt loads more unbearable. 

QE and the Budget Deficit - A post up at Barry Ritholtz’s place says the following As we suspected in our last update in September, the flight to quality funding of the U.S. budget deficit would replace the end of QE2 and almost 100 percent indirect financing of the deficit by the Federal Reserve.  Looking at the chart one can only imagine where interest rates would be if the deterioration of Europe hadn’t coincided with the end of QE2. I’ll keep making this point in light form since I will clearly need to make it many, many times. The interest rate on US debt simply is the projected future path of the Federal Funds rate. What the private market thinks is wholly and completely irrelevant.  There are many ways to think about it but the easiest is this: as a bank it is always a better idea to loan money to the government than to loan money to anyone else. This is because the Federal Reserve sets the price of loanable fund by trading T-Bills.If the for some reason the Funds Rate fell below the T-Bill rate you would simply borrow in the Funds market to buy T-Bills. This would raise the Funds rate which the Fed would then lower by buying your T-Bills. The point of QE is in part to push money out of the Treasury market into somewhere else.

Peak Credit - We’ve heard about “peak oil.”  We’ve heard about other resources, and how production will decline over time. But what of credit? It isn’t that hard to create, but it is hard to create well, particularly when debt levels are high, as in this environment. It’s not just the US, debtor-friendly as it has been for most of its existence.  Most of the rest of the world has debt problems. China has indebted municipalities and banks, and debts to many projects from Party members that will not pay off.  The EU is  overly indebted everywhere, not just the PIIGS, and finds its overall borrowing rates rising as lenders wonder what a Euro will be worth if the Eurozone dies. In the US, government debt rises more than corporate and consumer debt falls.  We’ll pay the government debt off later.  Don’t worry.  The simple solution to every problem is to say the it is a liquidity problem, not a solvency problem.  How do does one solve a liquidity problem?  Get a loan.  If the assets are really worth more than the liabilities, there should be some unencumbered assets that you can secure a loan with, and pay off the liquidity squeeze.  But absent that, it’s insolvency, regardless of what notional price one places on the assets.

Jared Bernstein for Democracy Journal: Rethinking Debt - Our national fear and misunderstanding of debt, deficits, and borrowing is understandable, given their role in the etiology of the Great Recession that continues to choke our economy. But such confusion is also terribly destructive. It helped lead us into the recession, and it’s preventing us from recovering from it. Over the last decade, too many households, governments, firms, and banks borrowed recklessly, nudged by financial “innovations,” negligent underwriting, and pure disregard for their ability to meet the liabilities they were taking on. Then, in September 2008, the system snapped.  Millions of people lost, and continue to lose, their homes. Unemployment is rampant, and just under half of the unemployed have been jobless for more than half a year. The debt burdens of sovereign nations, Greece in particular, pose existential threats. And yet policy-makers seem frozen in place, unwilling to take the necessary actions for one basic reason: doing so would mean deficit spending. Indeed, those at the helm in the advanced economies seem intent on shifting into reverse, pursuing austerity measures that, like medieval bleeding, only make the patient sicker.

Occupied Media: Interview With Jared Bernstein

A Real Tax Proposal From The Occupy Movement. Result? No Deficit By 2015. No Debt By 2030. - Commentators who don’t do their homework (and that covers most of them) are saying the Occupy movement hasn’t made any specific proposals.  Well, here’s a comprehensive tax reform proposal, coupled with some ideas on the spending side, that is coming out of the Occupy movement.   If adopted the recommendations would not only balance our budget but move it into surplus.  Social Security would become paygo, and adopting a healthcare model like that used by the Mayo Clinic would chop 28% off medical bills.  Here’s a one page summary.

China trims holdings of US Treasury debt -- China bought less U.S. Treasury debt in October and total foreign holdings dipped for the first time since July. Total foreign holdings of Treasury debt edged down 0.1 percent to $4.66 trillion, the Treasury Department reported Thursday. China, the largest foreign holder, bought 1.2 percent less to bring its total holdings to $1.13 trillion. China had increased its holdings 1 percent in September after a reduction of 3.1 percent in August. The small decline in overall holdings still left them at high levels that suggest foreign demand for U.S. debt remains strong. That strength comes despite a prolonged debate this summer over increasing the nation's borrowing limit. Investors don't appear to be concerned that Standard & Poor's downgraded the credit rating on long-term U.S. debt in August. S&P said it lowered the U.S. credit rating because of political gridlock in Washington that had slowed the debt limit increase and not because the ratings agency thought the U.S. couldn't pay its bills. U.S. government debt is still considered a safe investment and it has been in high demand as worries about the European debt crisis have intensified.

US Treasuries: Surprisingly sturdy - Back in February, traders on the floor of Royal Bank of Scotland in Connecticut gasped in shock at their screens. What had been expected to be a difficult sale of US government debt instead attracted record demand, led by foreign investors. The strength of buyer appetite in that $24bn auction of 10-year Treasury paper produced a result that many would ignore to their great cost. As 2011 draws to a close, one thing is becoming clear: against a backdrop of an escalating crisis in the eurozone and lacklustre American growth, buying boring US government bonds has been the right call for investors in search of a safe haven.  The strong performance of Treasury debt this year, with gains of 30 per cent for owners of long-term bonds alone, has left plenty of smart investors with egg on their faces. While there were a host of perfectly sound reasons to start 2011 with a negative view on the bond market, the relentless decline in Treasury yields and rise in prices has compelled many to reverse course and become buyers

CBO’s Budget Infographic - CBO Director's Blog - The federal government's finances are pretty complicated and not always easy to understand, and most of CBO's reports about the budget outlook are fairly lengthy and detailed. In fact, one of the questions we're most frequently asked is how much the government spends and takes in each year. For those who are not very familiar with the budget, finding the answer is sometimes harder than it should be. CBO's newest infographic—that is, information presented in a graphic form—describes some key elements of the federal budget, including a breakdown of its major components and a visual history of the budget and federal debt over the past 40 years. This graphical budget primer is more accessible than some of our longer reports, and we're hopeful that it will make the federal budget easier to understand.

Way Off Baseline - Krugman - Oh, my. Jonathan Chait — who reads National Review so that the rest of us don’t have to — finds a former Bush budget aide claiming that Obama must be responsible for the deficit, because back in 2008 the CBO projected a surplus. I suspect, however, that Chait is being too charitable in calling this guy ignorant. This almost has to be deliberate deception. I mean, even if you don’t know anything about CBO baselines, I do think that even ex-Bushies are aware of the worst economic slump since the Great Depression, and know that this has some implications for the budget. And I would also imagine that even loyal Bushies understand that a CBO baseline is not a realistic prediction. CBO is required to construct its baseline using existing law, even if everyone knows that the law is likely to change; it also forecasts discretionary spending based on a no-change assumption, which is unrealistic given growing population and a growing economy. To make itself useful, CBO always accompanies its baseline with alternative scenarios intended to be more like what might actually happen; anyone who does budget discussions without using those alternative scenarios is faking it.

Deficit may fall below $1 trillion this year — The federal government is on pace to run a deficit below $1 trillion for the first time in four years, modest progress in the face of intense debate in Washington over spending. The Treasury Department said Monday that the deficit was $137 billion in October. That brings the total for the first two months of the budget year to $236 billion — $55 billion less than the same two months last year. Still, part of the reason for the lower deficit is an accounting quirk. And the government is on pace to end the year $973 billion in the red, according to the Congressional Budget Office (CBO). While that's lower than last year's $1.3 trillion imbalance, it would still be higher than any deficit before fiscal year 2009.The government ran a record deficit of $1.41 trillion in 2009, and a $1.29 trillion imbalance in 2010.The CBO estimate does not include an extension of the Social Security tax cut and emergency unemployment benefits. Congress is likely to extend both before they expire at the end of the year. That could push the deficit back above $1 trillion if those programs aren't offset. The two programs are estimated to cost around $200 billion

Does Anyone Really Think That Reducing The Deficit Isn't Going To Be Painful? - The most striking thing about the continuing federal budget stalemate (calling it a “debate” would be giving it far too much credit) is that few seem to be willing to accept or even state out loud what should be obvious: Eliminating the deficit will impose some pain on most Americans. At least in the short term, reducing the deficit will eliminate or reduce popular services provided by the government and require that many or most people pay more in taxes. Along the way it will decrease economic growth and jobs compared to what they otherwise would be. Unless someone invents a way to increase revenues without anyone paying more or to cut spending without any government services being affected, reducing the deficit absolutely is going to hurt individuals, industries and regions. But the budget fight in Washington won’t get any better anytime soon until this becomes understood and, far more important, accepted.

How America is strangling the state - Sachs - The American economy reached a watershed 30 years ago when Ronald Reagan came into office.  While Europe decided to boost its tax-to-gross domestic product ratio in the 1970s and 1980s to fund an expanded range of education, training, labour market and family support programmes, the US did not.  Reagan insisted that less, not more, government was the key to prosperity and growth, and put emphasis on lowering tax rates on top incomes.  Federal revenues in the fiscal year 2011 amounted to 15 per cent of GDP, less than the 19 per cent of GDP of 1980. Outlays on public services and investments other than health care and pensions have been badly squeezed.  Non-security discretionary programmes, including education, early childhood development, energy, environment, roads, power, ports, dams, training, science, Nasa, technology, the judiciary and much more, have been hard hit. In the late 1970s, 5-6 per cent of national income was directed to these areas.  Reagan slashed that to a mere 2-3 per cent of national income.  Spending has remained at that lower level ever since, apart from a short-lived blip due to the Obama stimulus. America is unilaterally ceding its global leadership in education, science, and infrastructure.  Much of today’s young workforce lacks the education and skills to sustain middle-class living standards, and unemployment rates are high and stuck as a result.  Yet in 2008, as a candidate, Mr Obama said that he too would aim for the same tax-GDP ratio as during the Reagan years!  Mr Obama’s promise of continued low taxation may have helped him to electoral victory, but it also planted the seeds of his policy failures.

Congress Pursues Extenders Accord - The House on Tuesday takes the first shot at what Members hope will become a bipartisan agreement on tax provisions affecting millions of Americans, even as the legislative calendar winds down. Leaving Washington, D.C., last week united behind their proposal, House Republicans will attempt to pass their version of a payroll tax cut extension Tuesday with little help from Democrats. Their “extenders” package includes an extension of long-term unemployment insurance benefits and halts cuts to Medicare reimbursements for doctors. It also includes a provision that would fast-track the Keystone XL pipeline project and would cut off some funding for the health care reform law — non-starters for Democratic leaders. On Monday, Speaker John Boehner defended inclusion of the pipeline proposal, saying, “If the American people want jobs, this is as close to a shovel-ready plan as you’re going to see.” Senate Majority Leader Harry Reid (D-Nev.) has said the GOP’s extenders bill cannot pass his chamber, setting the stage for a battle that could stretch into the weekend and beyond.

Time’s Almost Up for $152 Billion in Expiring Provisions - America is increasingly governed by temporary policies. The 2001/2003/2010 tax cuts get most of the attention, but they are hardly the only ones. There are also a host of other semi-permanent provisions like patching the alternative minimum tax (AMT), avoiding big cuts to what Medicare pays doctors (the “doc fix”), and a plethora of miscellaneous tax cuts that get extended every year or two (the “extenders”).And then there are the policies that really are supposed to be temporary, but likely won’t be retired until the economy strengthens. They include the 2% payroll tax holiday and extended unemployment insurance, both of which Congress is debating this week. Over at the Pew Fiscal Analysis Initiative, Carla Uriona, Evan Potler, and Ernie Tedeschi have put together a nice infographic of all the provisions scheduled to expire at the end of the month. The 2001/2003/2010 tax cuts aren’t included, since they expire at the end of 2012, but there is still plenty of action:

Even More Expiring Provisions - Two follow ups on the nice Pew chart of many federal laws that expire at year-end. First, commenter rjs reminds us that “the whole [darn] [continuing resolution] expires Friday.” In short, almost all discretionary agencies of the federal government run out of money at the end of the week. The one exception? Agriculture, whose 2012 appropriations managed to get enacted as part of the last continuing resolution. (Track the status of appropriations bill here.) Another CR will, I presume, pass later this week. Second, reader JP points us to a new report by the Committee for a Responsible Federal Budget about the expiring provisions. They found a few more (e.g., some additional Medicare ones) and then toted up the costs for one-year extensions and ten-year extensions (except for the payroll tax cut and extended unemployment benefits):

The Long And The Short Of It - Krugman - Olympia Snowe talks nonsense: Fiscal shenanigans such as permanent tax increases to pay for one-year temporary measures are precisely the problem that drove our nation into a $15 trillion debt crisis. Actually, it’s nonsense on multiple levels. A nation that can borrow at negative real interest rates isn’t exactly facing a debt crisis. We do have a $15 trillion debt — but that debt reflects a combination of (1) permanent tax cuts, not paid for at all (2) large temporary spending on wars, not paid for at all, and (3) a severe economic crisis, which has depressed revenue (mainly) and required some emergency spending (which accounts for only a small piece of the debt) And another thing: short-term outlays offset by long-term austerity is precisely what macroeconomics 101 says you should do when faced with a depressed economy. It’s not “shenanigans”, it’s orthodox macro and the height of responsibility. Why did I criticize Bush’s deficit-increasing policies, then call for more deficit-increasing policies from Obama? Part of the answer is the difference in economic conditions. Deficit spending is expansionary when the economy is in a liquidity trap; it does nothing but crowd out other spending when you’re not up against the zero lower bound, and the Fed will just raise rates to offset fiscal expansion.

They Don't Care About Deficits - Krugman - Ezra Klein: There are two very different tax-policy conversations playing out in the Republican Party right now. In Washington, House Republicans are arguing with each other over how small of a temporary tax cut to give the middle class. Out on the primary trail, the Republican presidential candidates are arguing over how huge of a permanent tax cut to give the wealthy.… All of which leaves the Republican Party in an odd place: skeptical of a temporary tax cut for the middle class that carries a price tag in the low hundreds of billions of dollars and is fully paid for but apparently enthused over permanent tax cuts for the rich that cost trillions of dollars and aren’t paid for at all. But it’s not odd at all, once you realize that the GOP is not now, and never has been (at least not since the 1970s) concerned about the deficit. All the fiscal posturing of the last couple of years has been about using the deficit as a club to smash the welfare state, with the secondary goal of frustrating any efforts on the part of the Obama administration to help the struggling economy.

GOP's payroll tax cut bill (with a lot of other stuff) up for vote on Tuesday - Congress has been playing politics as usual over the few policies that are on the table that have a real chance of assisting, to some degree, the plight of ordinary Americans and perhaps even the slow recovery that is still trying to gain steam--extension of the reduction in payroll taxes (from 6.2% to 4.2%) and extension of unemployment compensation. The Republicans have refused to pay for these common sense tax reductions for ordinary Americans with a similarly common sense tax increase on the wealthiest Americans who have continued to capture all the productivity gains in the economy.  Republicans in the House think that these kinds of provisions should be offset by more goodies for the "uberclass"--at least as evidenced by the H.R. 3630, the bill introduced by Dave Camp (R-MI):

• It would restructure unemployment compensation in ways that add hurdles and make it less likely that unemployed Americans will qualify--
• It will interfere with the Environmental Protection Agency's ability to regulate, letting corporations continue to harm the environment at the expense of ordinary Americans.  
• It will expedite the KeystoneXL pipeline by requiring a permit to be issued within 60 days unless within that time the President determines that the pipeline will not serve the national interest (in which case within 15 days the President must provide various committees and members of Congress a report justifying that conclusion from various perspectives). 
• It would provide yet another tax reduction for US corporations
• it makes further changes to medicare such as applying a cap to hospital outpatient therapy services and reversing part of the Health Reform Act passed earlier
• it would continue funding for the "healthy marriage and responsible fatherhood" initiative, see 42 U.S.C. section 603(a)(2)

G.O.P. Bill Would Benefit Doctor-Owned Hospitals— The House Republican bill to hold down payroll taxes and extend unemployment benefits, coming up for a vote on Tuesday, offers a special dispensation to doctors who invest in hospitals.  The bill would repeal and relax several provisions of the 2010 health care law that clamped down on doctor-owned hospitals. The bill would allow such hospitals to open if they were under construction at the end of last year, and it would allow them to expand if they were already in existence. Congressional aides say dozens of hospitals and their physician owners could benefit.  Numerous studies have found that when doctors have a financial stake in a hospital, they tend to order more tests and procedures, raising costs for Medicare and other insurers.

Payroll Tax Extension Passes - The House voted 234 to 193 to pass the GOP-written H.R. 3630, including a payroll extension alongside significant curtailing of EPA regulatory authority, expedited approval of the controversial Keystone XL pipeline project, federal pay freezes, privatization of national flood insurance program, broadband spectrum sales, medicare premium increases for everyone making $80,000 or more, doctor-owned hospital expansions (leading to more unnecessary and expensive testing and procedures), drug-testing and means-testing for receipt of benefits under the unemployment compensation insurance program  (because some 2600 millionaires got about $8,000 apiece in 2010 through the insurance program when they lost their jobs) along with curtailment of the time period for those benefits even in the midst of a still dampened growth economy, and other "ideological candy" (using Senator Reid's term for the Republican agenda encapsulated in the bill). Now it is on to the Senate, where Reid says there will be substantial amendments.  Actually, they should take out everything and start over with a clean bill for extension of unemployment compensation and the payroll tax cut, funded by a millionaire's surtax and an increase in the capital gains tax rate.

House Passes Extension of Cut to Payroll Taxes - Defying a veto threat from President Obama, the House on Tuesday passed a bill extending a cut in Social Security payroll taxes for 160 million Americans for another year. But the Democratic majority in the Senate vowed to reject the measure because of objections to other provisions, including one to speed construction of an oil pipeline from Canada to the Gulf Coast. The 234-to-193 vote set the stage for negotiations between the House and the Senate that were likely to continue into the weekend.  The vote was a victory for Speaker John A. Boehner. House Democrats voted overwhelmingly against the bill, forcing Mr. Boehner to rely on Republicans, including many conservatives who had initially expressed doubts about the economic value of extending the payroll tax cut.

House GOP Passes Payroll Tax Cut Bill Obama Has Threatened To Veto - Despite loud warnings from Senate Democrats and a veto threat from President Obama because of poison pills within the text, House Republicans Tuesday passed legislation to renew a 2 percent payroll tax holiday and extended unemployment benefits of one more year. The bill passed 234 - 193, with 10 Democrats joining with the Republicans and 14 Republicans pitching in with the Dems. In a private conversation Monday, Senate Majority Leader Harry Reid again warned House Speaker John Boehner that his bill remains dead on arrival in the Senate. In particular, Democrats and the White House oppose a number of GOP-backed provisions: a measure forcing the Obama administration to expedite its decision about whether to green light construction the Keystone XL pipeline; out-year spending caps that could further reduce funding to key federal programs; and other restrictions including one that would allow states to drug test unemployment applicants.

Targeting the Unemployed - The House Republican leadership managed to get one thing right in its bill to extend the payroll tax cut and unemployment benefits. The bill does, indeed, extend the payroll tax cut for another year, but, beyond that, there is a lot to dislike. To help pay for the package, for instance, the bill would cut social spending more deeply than is already anticipated under current budget caps without asking wealthy Americans to contribute a penny in new taxes.  It also holds the expiring provisions hostage to irrelevant but noxious proposals to undo existing environmental protections. Worse, it would make unemployment compensation considerably stingier than it is now. At last count, 13.3 million people were officially unemployed and 5.7 million of them had been out of work for more than six months. At no time in the last 60 years has long-term unemployment been so high for so long. But Republican lawmakers would have you believe that the nation cannot afford jobless benefits and that many recipients are not so much needy, as lazy, disinclined to work as long as benefits are available. When was the last time any Republican lawmaker tried to live on $289 a week, the amount of the average benefit?

The 99-Week Ceiling On Jobless Benefits May Fall To 79 Weeks Or Even 59 Weeks: — Is there any downside to extending federal jobless benefits, as Congress is about to do? The benefits are a crucial lifeline to the longtime unemployed. But they also can be a disincentive to looking for work and prolong joblessness, economists say, as lawmakers weigh shortening them. If Congress does nothing, the current law that provides federal benefits to augment state assistance that last for only 26 weeks will expire at the end of this month. As a result, more than a million out-of-work Americans could lose their benefits in January, and a total of five million could lose them by year's end. In states with high or rising unemployment, the ceiling on federal and state benefits combined is now 99 weeks. The Republican-led House has passed a bill that extends the coverage but gradually reduces it by 20 weeks by mid-2012. An improving job market could reduce eligibility for extended benefits by another 20 weeks in some of those states, making the new effective ceiling 59 weeks. At the heart of the controversy is something economists and politicians have long debated. Conservatives argue that prolonging government assistance to the unemployed can discourage active job searching so long as it lasts, keeping jobless rates higher than they would be if aid were ended.

Headed for a Typical “Compromise” - Concerning congressional negotiations over the extension of the payroll tax cut, this Washington Post story seems to offer a prediction as to how this impasse will be broken: To pay for extending the cut, Democrats have pushed for a surtax on those making more than $1 million a year. Although the Senate has twice blocked bills that would fund the reduction with a millionaire tax, [Senate Majority Leader Harry] Reid said again Tuesday that the wealthy should be asked to fund the tax cut for middle-class workers. He also said Democrats would be willing to extend the tax cut without outlining a way to pay for it.And of course, House Republicans are perfectly willing to extend the payroll tax cut as long as the construction of that (”job creating”) oil pipeline can be sped up and avoid the usual environmental impact scrutiny, and as long as long-term unemployment benefits are made less long term (and the recipients subjected to drug testing).  They would only partially pay for the payroll tax cut by cutting the pay and number of government workers.It seems to me we’re headed for the typical “bipartisan compromise” agreement where the Republicans bully the Democrats, the Democrats call the Republicans bullies, and they ultimately all agree to just deficit-finance the whole thing, feeling good that the other side gave up their proposed offsets.

More Re Temporary Spending and the Budget Deficit - Like I said earlier, I don’t want to spend a lot of time on a point that’s completely unwelcomed in the current debate, but instead of all this drama around how we’re going to payfor extending the payroll tax cut and UI, the smart economic move would be to add them to the deficit. How can I be so cavalier, you ask?  Here’s why: Since they’re temporary, the UI and payroll extensions will have almost no impact of the longer term deficit.  Let me show you. Based on this CBO score of the costs of the two measures, this figure plots their impact on the deficit/GDP ratio through 2019.  It starts out as a fraction of a percent and goes to almost zero pretty quickly (it doesn’t get all the way to zero because of servicing the added interest on the debt). Add to this the costs to growth and jobs of failing to renew UI and payroll, and all I’m sayin’ is that fears about their impact on the budget deficit are not at all convincing.  Unless, that is, you’re inpenetrable to facts, in which case, it’s a major, job-killing, deficit disaster!

Extension of Payroll Tax Cut Seen as Potential Peril to Social Security - For all of the partisan brawling over President Obama’s call to extend a temporary payroll tax cut for 160 million Americans, one concern is bipartisan: a significant minority of Democrats and Republicans say that cutting the taxes that finance Social Security¹ benefits will further undermine the program. The Obama administration, many budget experts (but not all) and the chief actuary for the Social Security Administration say the proposal will do no such thing. But some conservative Republicans and liberal Democrats who agree on little else are just as adamant that it will.  Both parties predict the payroll tax cut will be extended beyond its Dec. 31 expiration, though the question of how to pay for it and some other unrelated issues in the year-end legislation continued to hold it up on Wednesday. Still, the disagreement over the tax cut lingers. It is less over money than philosophy, and reflects a debate as old as the 75-year-old program about Social Security’s fundamental structure.  Critics predict one extension will lead to another as politicians balk at raising taxes to their former level, especially if unemployment remains high.  “Imagine that next December the unemployment rate is 8 percent and a year later it’s 7.4 percent,” . “We’ll still be trying to stimulate employment and terminating the payroll tax holiday will be a big hit on most families, one that will hurt job growth.”

CHAOS IN WASHINGTON: Obama Calls On Congress To Pass Short Term Spending Bill As Negotiations Stall: President Barack Obama's brinkmanship strategy over the payroll tax cut and a bill to fund the government after Friday appears to have fallen apart. An email from White House Communications Director Dan Pfeiffer sent to reporters Wednesday night calls on congress to shelve the $1 trillion funding measure, saying Obama has "significant concerns" about the bill. Instead, Obama urged Congress to proceed with another short-term continuing resolution — without which, much of the federal government will shut down early Saturday morning. Pfeiffer said the current spending bill includes "provisions that would undermine Wall Street reforms, enact extreme social and ideological riders, undercut environmental protections, and threaten the foreign policy prerogatives of the President." Obama had wanted to tie the funding measure to the payroll tax cut bill, asking Senate Majority Leader Harry Reid to hold the spending bill until lawmakers reach a compromise on the vital tax break. Democratic and Republican lawmakers said Tuesday that the "omnibus" spending bill is done and ready for a vote, but the White House maintains there were always issues with the bill, and that there is no final deal until Obama agrees to it.

Congress Takes Up a Partisan Battle, Again, Over Spending - Their poll numbers sinking, their constituents badly bruised by economic hardship and with millions of American workers about to get a sudden and unexpected tax increase, what are members of Congress discussing?Shutting down the government. Again. For the third time in a year, the divided 112th Congress is dancing on the edge of catastrophe, locked in a bitter partisan battle over fiscal measures, with unrelated policy debates clinging to the side. Republicans and Democrats do not agree on how to pay for something that both sides claim to want — extension of a payroll tax holiday for almost every worker — and have until the end of the year to work it out or see the tax go up, something that most economists say would further damage the nation’s fragile economic health by taking money out of consumers’ pockets. Now tied to this measure is a plan to keep the government financed through the rest of the fiscal year, because Senator Harry Reid, Democrat of Nevada and the majority leader, has indicated that he will not permit a vote on the huge spending measure until Republican and Democrats can come together on the payroll tax bill, which would also include an extension of unemployment benefits. If an agreement on the spending bill does not come by midnight Friday, the government will be unable to pay its bills unless Congress passes yet another stop-gap financing bill to buy time, something the White House indicated late Wednesday night that it would prefer

House GOP unveils $1 trillion spending bill despite White House plea for more talks - House Republicans have unveiled a massive $1 trillion-plus yearend spending package despite a plea from the White House for additional talks over a handful of provisions opposed by President Barack Obama. The measure unveiled late Wednesday curbs agency budgets but drops many policy provisions sought by GOP conservatives. But it contains language to roll back Obama administration policies that had loosened restrictions on the rights of Cuban immigrants to send money to relatives in Cuba or travel back to the island to visit them. Earlier this year, the White House promised a veto over the restrictions on travel and gifts, which are supported by many in the GOP-leaning Cuban-American community, a powerful political force in the swing state of Florida. The spending measure had been held up by Senate Democrats seeking leverage in talks on extending payroll tax cuts and unemployment insurance — two pillars of Obama’s jobs agenda. But Democratic leverage to stall the massive spending measure seems limited, since it raises the threat of a government shutdown.

Republicans push $915 billion spending bill (Reuters) - Top Republican and Democratic lawmakers were renegotiating a $915 billion spending bill to keep the government operating beyond the weekend, a congressional aide said on Thursday. The White House and lawmakers in charge of government spending were trying to hash out controversial measures that the Obama administration and Senate Democrats opposed, the Democratic aide said. Those measures include restricted travel to Cuba and energy efficient light bulbs. "They have made significant progress over last night on the remaining items," said the aide, hours after Republicans tried to force Democrats to finalize the legislation by introducing their version of the spending bill in the House of Representatives. Congress has until Friday at midnight to approve of a spending measure before the government is forced into a partial shutdown.

GOP Threaten to Harm the Economy If Obama Won’t Embrace Tar Sands Pipeline - As Congress attempts to finish its 2011 work, the House leadership continues to push hard to speed up the permitting process for the Keystone XL pipeline. Today Speaker of the House John Boehner (R-OH) threatened to add a Keystone provision to a two-month extension of the payroll tax cut, scheduled to expire on December 31. Boehner told reporters:These rumors that are floating around here about a two-month extension, I’ll just say this: If that bill comes over to us, we will make changes to it, and I will guarantee you that the Keystone pipeline will be in there when it goes back to the United States Senate. Ironically the State Department said Monday that such legislation would prevent it from approving the Keystone permit: Should Congress impose an arbitrary deadline for the permit decision, its actions would not only compromise the process, it would prohibit the Department from acting consistently with National Environmental Policy Act requirements by not allowing sufficient time for the development of this information. In the absence of properly completing the process, the Department would be unable to make a determination to issue a permit for this project. Nonetheless, on Wednesday House leadership—and some Democrats—passed a tax extender package that included a sped-up permitting process for the Keystone XL pipeline.

Gov. Shutdown Looms as US Tax Fight Gets Nastier - The U.S. faced the prospect of an imminent government shutdown for the third time this year, as a year-end fight between Republican and Democratic lawmakers in Congress over taxes and spending turned nastier. Democrats, led by President Barack Obama, are refusing to sign off on a bipartisan $1 trillion government funding bill that would keep federal agencies operating beyond Friday. They first want Republicans to agree to a compromise deal to extend a payroll tax cut for 160 million Americans. The Republican-led House of Representatives passed its version of the payroll tax cut bill along a mostly party-line vote Tuesday, but Democratic Senate Majority Leader Harry Reid has vowed to kill it as soon as he can bring it to a vote.  The Republican bill proposes to pay for the $120 billion cost of the payroll tax cut largely by freezing federal pay and shrinking the size of the government work force. Democrats reject it and are instead proposing a surtax on millionaires.Republicans in the Senate blocked a Democratic bid Wednesday to quickly reject the House bill, which also includes a provision to speed up a decision on an oil pipeline that the White House has delayed for further environmental studies.

Quick Word About A Possible Government Shutdown This Weekened -I've been very hesitant to say anything about the possibility of a government shutdown when the current continuing resolution expires this Friday at midnight because...honestly...I've been predicting that one would occur since last year and have been wrong in much the same way that some economists are accused of predicting 10 of the last 2 recessions. It bears mentioning, however, that the most recent dispute over government spending is proving to be far more intractable than most observers and participants had imagined it would be because (1) the recent GOP reticence about being blamed for stalemates on Capital Hill seems to have evaporated and (2) the fight over funding for the rest of fiscal 2012 is now combined with so many other politically tough or tantalizing issues.I would not be at all surprised, therefore, if one of three things happen by the stroke of midnight on Friday, December 16:

1. The current continuing resolution is extended until the following Friday to give everyone another week to work out a deal.
2. The current CR and the payroll tax cut is extended until sometime early next year.
3. There's a government shutdown this weekend.

WAKE UP: The Government Might Really Shut Down This Time It's a scene that's repeated itself at least three times this year — the government is hours from a shutdown, and congressional lawmakers remain far apart on an agreement. But this time, it just might happen. Much of the federal government will shut down early Saturday morning if lawmakers can't pass a nearly $1 trillion spending bill, or a short-term stop gap. The spending bill was thought to be done early this week, with both Speaker of the House John Boehner and Rep. Jim Moran (D-VA) saying there was an agreement. But, President Barack Obama and Senate Majority Leader Harry Reid hadn't signed off on the bill, aides say, and White House Communications Director Dan Pfeiffer said late Wednesday night that the president has "significant concerns" about it. The administration is troubled by a number of policy riders in the bill, which would reinstate some sanctions on Cuba, among other issues. Obama had pushed Reid to stall the "omnibus" spending bill in order to force Boehner's hand on the payroll tax cut, but the strategy appears to be backfiring. Democrats are close to abandoning the millionaires surtax to pay for the tax break, but Republicans haven't shown any willingness to drop a provision expediting a review of the Keystone XL pipeline — which has drawn a veto threat from Obama.

White House Says No Veto Of Defense Bill - — The White House on Wednesday abandoned its threat that President Barack Obama would veto a defense bill over provisions on how to handle suspected terrorists as Congress raced to finish the legislation. Press secretary Jay Carney said last-minute changes that Obama and his national security team sought produced legislation that “does not challenge the president’s ability to collect intelligence, incapacitate dangerous terrorists and protect the American people.” Based on the modifications, “the president’s senior advisers will not recommend a veto,” the White House said. The statement came just moments after the House wrapped up debate on the $662 billion bill that would authorize money for military personnel, weapons systems, the wars in Iraq and Afghanistan and national security programs in the Energy Department in the budget year that began Oct. 1. The House was expected to vote for the measure later Wednesday. The Senate planned to wrap up the bill in the evening and send it to Obama.

Obama administration backs bill authorizing indefinite military detention of US citizens - The bill would allow for the open-ended detention of anyone caught up in the “war on terror,” without trial or charges, including US citizens. This is the first explicit legislation to effectively abolish habeas corpus (the right to challenge unlawful detentions) and the constitutional rights to a fair trial (the Sixth Amendment) and due process (the Fifth Amendment). Another provision requires that such individuals be taken into military custody, with an exception for US citizens. The military seizure of US citizens is left to the discretion of the executive branch. This means the effective abolition of the Posse Comitatus Act, which has restricted use of the military for domestic policing for more than a century. The main concern of the administration was that the requirement for military custody could hamper actions of other agencies engaged in counterterrorism operations, such as the FBI and CIA. The White House has cited the extra-judicial assassination of Osama bin Laden and Anwar al-Awlaki (a US citizen) as evidence that there should be no restraints on the form through which executive power is exercised.

Explaining to a 5-Year Old Why the Indefinite Detention Bill DOES Apply to U.S. Citizens on U.S. Soil  - In response to my essay documenting that the indefinite detention bill does apply to American citizens on U.S. soil, a commentator posted: Can somebody explain to me like I am 5, why [one of the bill's provisions - which discusses U.S. citizens] does not protect citizens? Yes, let me explain it in words that even a 5-year-old can understand … The bill says that the military must indefinitely detain anyone SUSPECTED of helping bad guys. One provision says that the mandatory (“must”) indefinite detention doesn’t apply to U.S. citizens … but the government CAN indefinitely detain any U.S. citizen it feels like without trial, without presenting evidence, without letting the citizen consult with a lawyer, and without even charging the citizen. This would destroy our Constitutional rights to trial, to face our accuser and to consult with an attorney. In other words, it’s like saying “you don’t HAVE to lock up Joey for the rest of his life because he called you a mean name, but you CAN lock him away and throw away the key and then falsely accuse him of being a suspected terrorist if it would make you happy”.

We Have Crossed The Rubicon - Do you suppose cows have any idea what’s coming as they’re marched down the chute? Or do they stare with bovine indifference at the tail and hind quarters in front of them, until they’re suddenly – and very briefly – startled by the man with the nail gun? Perhaps Americans will – likewise too late – ask themselves What Happened in the very near future. Perhaps just after the midnight knock comes and they are taken away into the night. It is not an exaggeration. America is now on the cusp of becoming a state that does exactly such things; things exactly like the things done by 20th century horror shows such as NS Germany or Stalin’s USSR. Literally. Not “this is where it might lead” or “the tendency is similar.” Exactly, literally, the same thing. The only difference is that it awaits being done on a mass scale. But the power to do it openly – brazenly – has been asserted. And is about to be sanctified by law. The National Defense Authorization Act will make it official. It will confer upon the executive branch and the military (increasingly, the same things) the permanent authority to snatch and grab any person, U.S. citizens included, whom it decrees to be a “terrorist” – as defined or not by the executive or the military -  and imprison them, indefinitely, without formal charge, presentation of evidence or judicial proceeding of any kind. These “detainees” will have neither civilian rights in the civil court system, nor – crucially – even the minimal rights to due process and decent treatment conferred upon prisoners of war. (And we are allegedly “at war,” are we not?)

Iraq war ends with a $4 trillion IOU  - Veterans’ health care costs to rise sharply over the next 40 years - The nine-year-old Iraq war came to an official end on Thursday, but paying for it will continue for decades until U.S. taxpayers have shelled out an estimated $4 trillion. Over a 50-year period, that comes to $80 billion annually. Although that only represents about 1% of nation’s gross domestic product, it’s more than half of the national budget deficit. It’s also roughly equal to what the U.S. spends on the Department of Justice, Homeland Security and the Environmental Protection Agency combined each year. Near the start of the war, the U.S. Defense Department estimated it would cost $50 billion to $80 billion. White House economic adviser Lawrence Lindsey was dismissed in 2002 after suggesting the price of invading and occupying Iraq could reach $200 billion. “The direct costs for the war were about $800 billion, but the indirect costs, the costs you can’t easily see, that payoff will outlast you and me,” said Lawrence Korb, a senior fellow at American Progress, a Washington, D.C. think tank, and a former assistant secretary of defense under Ronald Reagan.

AlJazeera: US anti-terrorism bill: Liberty vs security - A new bill is expected to pass in the US Congress, which would formally allow for the indefinite detention of anyone, including American citizens, as long as the government deems them terrorists. It goes to the heart of the question which has plagued US governments for a decade: how to keep Americans safe from a terrorist attack while at the same time holding up the American ideal of liberty for its citizens.  Since 9/11, the US has held "enemy combatants" at the Guantanamo Bay military detention centre, where many are still held without trial. But this proposed bill would expand the list of those who could be detained, from those with a direct connection to 9/11, to anyone suspected of substantially supporting al-Qaeda or any associated forces.Perhaps the most controversial clause in the bill is the one that would formally allow for US citizens to be detained indefinitely. Americans, too, could potentially face military court on terrorism-related charges. Critics say the military should protect Americans rather than roaming their streets. And while the bill says suspects can be held until the 'war on terror' is over, no one says how or when that will happen. By giving the military more power, some complain that the bill could also hamper Federal Bureau of Investigation (FBI) and local law enforcement investigations.

Indefinite Military Detention Of U.S. Citizens Is A Win For Terrorists, Former Admiral Says - A measure that Congress will likely pass this week allowing indefinite detentions of Americans by the U.S. military will mark a significant loss in the war on terrorism, says a retired admiral who ran the Navy legal system. The National Defense Authorization Act, passed by the Senate just over a week ago after a heated debate, includes a provision that requires the military to hold foreign-born terrorism suspects, and also lets the military grab U.S. citizens for indefinite detention.The House and Senate are expected to release the final legislation as soon as late Monday, and in spite of a personal lobbying effort by President Obama, it is expected to include the controversial language. To Ret. Adm. John Hutson, who was Judge Advocate General of the Navy from 1997 to 2000 and is dean emeritus of the University of New Hampshire School of Law, the idea that the United States is chipping away at one of its fundamental principles of civilian law enforcement is a win for terrorists. "The enemy is just laughing over this, because they will have gotten another victory," Hutson told The Huffington Post. "There'll be one more victory. There won't be any bloodshed or immediate bloodshed, there's not a big explosion, except in a metaphorical sense, but it is a victory nonetheless for the enemy. And it's a self-inflicted wound."

Set Your Doomsday Clock to 11:51 pm - The National Defense Authorization Act is not a leap from democracy to tyranny, but it is another major step on a steady and accelerating decade-long march toward a police state. The doomsday clock of our republic just got noticeably closer to midnight, and the fact that almost nobody knows it, simply moves that fatal minute-hand a bit further still.  I’m talking about the complete failure to keep the republic that Benjamin Franklin warned we might not. Practices that were avoided, outsourced, or kept secret when Bill Clinton was president were directly engaged in on such a scale under president George W. Bush that they became common knowledge. Under President Obama they are becoming formal law and acceptable policy. Obama has claimed the power to imprison people without a trial since his earliest months in office. He spoke in front of the Constitution in the National Archives while gutting our founding document in 2009. So why not pick the 220th anniversary of the Bill of Rights to further codify its elimination? President Obama has claimed the power to torture “if needed,” issued an executive order claiming the power of imprisonment without trial, exercised that power on a massive scale at Bagram, and claimed and exercised the power to assassinate U.S. citizens. Obama routinely kills people with unmanned drones.

Politics Over Principle - NYTimes Editorial - The trauma of Sept. 11, 2001, gave rise to a dangerous myth that, to be safe, America had to give up basic rights and restructure its legal system. The United States was now in a perpetual state of war, the argument went, and the criminal approach to fighting terrorism — and the due process that goes along with it — wasn’t tough enough.  President George W. Bush used this insidious formula to claim that his office had the inherent power to detain anyone he chose, for as long as he chose, without a trial; to authorize the torture of prisoners; and to spy on Americans without a warrant. President Obama came into office pledging his dedication to the rule of law and to reversing the Bush-era policies. He has fallen far short.  Mr. Obama refused to entertain any investigation of the abuses of power under his predecessor, and he has been far too willing to adopt Mr. Bush’s extravagant claims of national secrets to prevent any courthouse accountability for those abuses. This week, he is poised to sign into law terrible new measures that will make indefinite detention and military trials a permanent part of American law.  The measures, contained in the annual military budget bill, will strip the F.B.I., federal prosecutors and federal courts of all or most of their power to arrest and prosecute terrorists and hand it off to the military, which has made clear that it doesn’t want the job. The legislation could also give future presidents the authority to throw American citizens into prison for life without charges or a trial.

Three myths about the detention bill - Condemnation of President Obama is intense, and growing, as a result of his announced intent to sign into law the indefinite detention bill embedded in the 2012 National Defense Authorization Act (NDAA). These denunciations come not only from the nation’s leading civil liberties and human rights groups, but also from the pro-Obama New York Times Editorial Page, which today has a scathing Editorial describing Obama’s stance as “a complete political cave-in, one that reinforces the impression of a fumbling presidency” and lamenting that “the bill has so many other objectionable aspects that we can’t go into them all,” as well as from vocal Obama supporters such as Andrew Sullivan, who wrote yesterday that this episode is “another sign that his campaign pledge to be vigilant about civil liberties in the war on terror was a lie.” In damage control mode, White-House-allied groups are now trying to ride to the rescue with attacks on the ACLU and dismissive belittling of the bill’s dangers. For that reason, it is very worthwhile to briefly examine — and debunk — the three principal myths being spread by supporters of this bill, and to do so very simply: by citing the relevant provisions of the bill, as well as the relevant passages of the original 2001 Authorization to Use Military Force (AUMF), so that everyone can judge for themselves what this bill actually includes (this is all above and beyond the evidence I assembled in writing about this bill yesterday)

Congress Blinks on Shutdown -Congressional leaders—fearful of voters' wrath over Washington's bickering and brinkmanship—stepped back Thursday from a possible government shutdown, clearing the way for extending a payroll tax cut that is set to expire at year's end. The shift marked a dizzying change in tone from the contentious atmosphere that prevailed just a day earlier. Republican and Democratic leaders returned to the bargaining table and struck a deal on a $1 trillion spending bill to keep the government operating after Friday.  The spending bill compromise was expected to come to a final vote Friday, in time to avert a shutdown. ... A deal on the payroll tax compromise is expected to follow, although negotiators were still struggling to decide how to offset the cost...

US Congress steps back from shutdown - US Congress leaders reached a deal to avert a government shutdown, appearing ready to strike at least a separate agreement to extend stimulus for the US economy for two months, and ease the political gridlock that has dominated Washington this year.  After a day of intense negotiations on Capitol Hill on Thursday, lawmakers from both parties signed off on a $1tn spending bill that will fund government agencies from Friday night until the end of the fiscal year in September 2012.  The agreement on spending was seen as paving the way for Democratic and Republican leaders to focus on how to extend payroll tax cuts and jobless benefits due to run out at the end of the month. The White House views the $200bn stimulus package as critical to preserving the modest growth in the US economy next year.  Late on Thursday night, however, congressional aides said that although there had been progress in the discussions, some divisions still remained between Republicans and Democrats over how to cover the cost of extending emergency unemployment payments as well as a 2 percentage point reduction in payroll taxes for American workers for the whole year.  Some discussed a possible two-month extension of the measures, worth roughly $40bn, in order to give Congress more time to determine the best way to pay for them and ensure that they did not add to America’s $15tn in debt This could mean that a measure of uncertainty over America’s fiscal policy stance is likely to continue hanging over the US economy into the early part of next year.

Congressional leaders reach spending deal to avoid government shutdown - Congressional negotiators signed off Thursday evening on a $1 trillion spending agreement for 2012 for federal agencies, barely 27 hours before a deadline that could have led to a government shutdown. After dropping minor policy prescriptions that President Obama opposed, members of the House and Senate Appropriations Committees gave final approval to the plan after a four-day standoff related to Obama’s demands to extend the payroll tax holiday for 160 million workers.That negotiation, lawmakers and aides said, also could be headed toward an agreement, with lawmakers considering extending the $120 billion tax break for two months to buy more time to determine how they offset the benefit’s cost so it does not add to the federal deficit. The White House initially had pushed Congress to delay the spending plan until the issue of the payroll tax was resolved, a move that raised the specter of a government shutdown and threatened to increase workers’ withholding tax at the start of the new year. Linking the two measures only complicated the negotiations, however, and Republicans did not give in to Obama’s demands on how to set up the payroll tax provision. With the holiday season upon them, some aides suggested that lawmakers’ exhaustion and eagerness to leave the embattled Capitol for several weeks served as key factors in reaching the deals. Next year’s session will begin in late January.

Government Funding Bill That Will Avert Shutdown Passed by House -  The House on Friday passed a bill that would keep the federal government running through next September, sending the measure over to the Senate hours ahead of a midnight shutdown deadline. The $1 trillion funding agreement, which will fund three-quarters of the federal government, passed on a 296-to-121 vote: 147 Republicans and 149 Democrats voted “yes,” while 86 Republicans and 35 Democrats opposed the measure. The Senate is expected to approve the measure, although the timing of the upper chamber vote remains unclear as leaders continue heated negotiations on a deal to extend the payroll tax cut and other key provisions that expire at the end of the month. Passage of the bill appeared to be a sure thing earlier this week, as congressional leaders of both parties had focused their energies on debating not the funding measure but rather the payroll tax cut and the Keystone pipeline. The House earlier this month passed a proposal that would couple an extension of the payroll tax cut and other provisions with a measure that would force a decision on the pipeline, a move Democrats and the White House have rejected.

Lawmakers Reach Deal On Temporary Payroll-Tax Cut - Senate leaders agreed on compromise legislation Friday night to extend Social Security payroll tax cuts and jobless benefits for two months while requiring President Barack Obama to accept Republican demands for a swift decision on the fate of an oil pipeline that promises thousands of jobs. A vote is expected Saturday on the measure, the last in a highly contentious year of divided government. House passage is also required before the measure can reach Obama's desk.  In a statement, White House communications director Dan Pfeiffer indicated Obama would sign the measure, saying it had met his test of "preventing a tax increase on 160 million hardworking Americans" and avoiding damage to the economy recovery.  The statement made no mention of the pipeline. One senior administration official said the president would almost certainly refuse to grant a permit. The official was not authorized to speak publicly.  Racing to adjourn for the year, lawmakers moved quickly to clear separate spending legislation avoiding a partial government shutdown threatened for midnight.

Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate - Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party.  The GOP got most everything it wanted, and the Dems got just barely more than nothing.  That's the way "negotiating" seems to go in the Congress these days.  The right demands and demands and demands and gets most of it by obfuscating and obstructing.  This time the Dems were worried about not getting a spending bill.  So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they'd said they wouldn't cave on--like the ridiculous provision for expedited approval of the Keystone Pipeline.  All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits--which the GOP knew it could not afford not to pass, no matter what.  And Obama has already flipped on his earlier looks-like-he's-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision.  See, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011).  The GOP continues to call the Keystone pipeline project a "job creator", even though it will create no more than 50 permanent jobs, at a considerable environmental cost.  Schumer calls the Keystone provision a "Pyrrhic victory" for the GOP, because he says Obama will not approve it if pushed.  That's not so clear to me.  Schumer also spins the cave-in as a victory for Dems! saying that the GOP won't have the leverage of the need to pass a spending bill when this issue comes back.  See  Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , Bloomberg.com (Dec. 16, 2011).

Senate Leaders Agree on 2-Month Extension of Payroll Tax Cut - Senate leaders said on Friday night that they had reached a deal that would extend a payroll tax cut for two months — falling far short of the yearlong extension they had been seeking. The agreement would also speed the decision process for the construction of an oil pipeline from Canada to the Gulf Coast, a provision necessary to win over Republicans who opposed the tax break.   A senior administration officials said the deal announced Friday night met the test that President Obama had set out: that Congress would not go home without preventing a tax increase on 160 million Americans.  However, rank-and-file members of the House said on Friday that they were opposed to a short-term extension. Approval in that chamber, even with the provision on the Keystone XL¹ pipeline, is no sure thing.  The agreement, on which a Senate vote is expected Saturday, would also allow jobless workers to continue receiving unemployment insurance benefits as permitted by current law for two months. For the same period, there would be no cut or increase in fees paid to doctors for treating Medicare² patients. The cost of these items will be fully paid for, Congressional aides said.

Senate OKs short-term extension of payroll tax cut - Senators racing for the exits after a year of bitter battles passed legislation Saturday that would extend a Social Security payroll tax cut and jobless benefits for just two months, setting the stage for the next fight until February. While a partial victory for President Barack Obama's year-end jobs agenda, the measure awaiting House approval next week contains a provision demanded by Republicans to pressure the White House into approving construction of a Canada-to-Texas oil pipeline that promises thousands of jobs. Democratic and GOP leaders option for the short-term extension after failing to agree on big enough spending cuts to pay for a full-year renewal of the payroll tax cut. The 2 percentage point tax cut affects 160 million taxpayers. The weekly jobless payments average about $300 for millions of people who have been out of work for six months or more. The measure was approved by an 89-10 vote during a Saturday session. Votes were scheduled later Saturday on a $1 trillion-plus catchall spending measure setting the day-to-day budgets of 10 Cabinet agencies. The House cleared the spending bill Friday. In a statement, White House communications director Dan Pfeiffer indicated Obama would sign the two-month extension measure, saying it had met his test of "preventing a tax increase on 160 million hardworking Americans" and avoiding damage to the economy recovery.

House passes spending bill - While the Senate was wrangling over what of the noxious provisions in HR 3630 they would have to keep in order to get expanded unemployment compensation and a payroll tax cut, the House passed a spending bill 296-121 (with 147 Republicans and 149 Democrats in favor) to carry the government through September 2012.  Steinhauer & Pear, Senate Leaders Agree to a Two Month Extension of the Payroll Tax Cut, New York Times (Dec. 16, 2011). The GOP strategy is to obstruct and demand--one right-wing idea after another is inserted into every bill, just so the Dems will think they have won something when they give the Republicans ten things instead of 100! As wrangling over the tax has continued, Republican leaders have sought to build support for the measure by adding conservative policy provisions, which have replaced earmarks as the legislative sweetener for Republican lawmakers in a Congress where fundamental differences about the role of government in American life deeply divide the parties. That conflict, which mirrors the broader political dynamic across the country, is unlikely to ebb in the second session, as Republicans labor to make life more difficult for President Obama and Democrats struggle to hold the White House and the Senate. The spending bill isn't much better.

CBO’s Estimate of the Cost of the TARP: $34 Billion - CBO Director's Blog - Today CBO released the latest in a series of statutory reports on transactions undertaken as part of the Troubled Asset Relief Program (TARP)—the program established in October 2008, during the financial crisis, to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of “troubled assets.” To further our effort to demystify certain aspects of the federal budget, CBO also prepared an infographic on the TARP. Its aim is to summarize the most pertinent details about the TARP since its inception: the types of assistance, cash disbursements, and net budgetary costs or gains. CBO estimates that the net cost to the federal government of the TARP’s transactions, including the cost of grants for mortgage programs that have not been made yet, will amount to $34 billion. CBO’s analysis reflects transactions completed, outstanding, and anticipated as of November 15, 2011. That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding home foreclosures: CBO estimates a cost of $59 billion for providing those three types of assistance.

Millionaires on Food Stamps and Jobless Pay? G.O.P. Is on It - Under the Republican bill to extend a payroll tax holiday scheduled to be voted on in the House as early as Tuesday, those Americans with gross adjusted income over $1 million would no longer be eligible for food stamps or jobless pay, producing $20 million in savings to help pay for the tax cut for American workers. The idea is also embraced by many Democrats, who had a similar version of the savings in a Senate bill to extend the payroll tax cut, as did a failed Republican Senate bill. Yet as it turns out, millionaires on food stamps are about as rare as petunias in January, even if you count a lottery winner in Michigan who managed to collect the benefit until chagrined officials in the state put an end to it.  But the idea of ending unemployment insurance for very high earners — which would be achieved essentially through taxing benefits up to 100 percent with a phase-in beginning for those with gross adjusted income over $750,000 — demonstrates an increasing desire among members of Congress to find some way to make sure that the wealthiest Americans contribute more to reducing the deficit and paying for middle-class tax relief.

What's In the Social Security Trust Funds, Or: Why Continuing the Payroll Tax Cut Could Eventually End Social Security as We Know It - The ongoing effort to partially convert Social Security from payroll-tax-financing to income-tax-financing – by further cutting the payroll tax as a stimulus measure and replacing the funds with general revenues – may in short order put an end to the longstanding conception of Social Security as a benefit earned by worker contributions. The demise of this conception would also threaten the special political protections Social Security benefits have long enjoyed. Most Americans do not know all of the details of Social Security finances. They do, however, retain a strong sense that Social Security participants somehow paid for their benefits, and that the program’s Trust Funds represent “their money” in a way that the financing for other government programs does not. This sense gives Social Security benefits an extra political protection relative to other programs. It would likely end if we abolished the Social Security payroll tax, did away with its trust fund, and funded the program with general budget revenues. The proposed payroll tax cut extension would take a major step toward ending this longstanding special status. There’s no way to know where exactly the tipping point is, but it will come sooner than most observers now realize. Continuing and expanding this policy would likely soon turn bipartisan perceptions of Social Security into something more like welfare or at least like Medicare Part B: that is, benefits continually open for political renegotiation because they’re known to be subsidized from the general fund -- that beneficiaries themselves did not really pay for them.

Gingrich would give the top 1 percent a $430,000 tax break  - The Tax Policy Center has run the numbers on Newt Gingrich’s tax plan. The verdict? Gingrich’s plan does more for wealthy American households than any plan released by the other 2012 candidates — and increases the deficit by trillions.  Gingrich would give the top 1 percent of U.S. households an average $430,000 tax cut, with their tax rate dropping 22 percentage points under the assumption that the Bush tax cuts expire in 2012. Households with an income of more than $1,000,000 would get a whopping $760,000 tax break on average, heavily weighted by the top 0.1 percent, who’d get a $2.3 million tax reduction. By contrast, the bottom 20 percent would save only an average of $649 under the Gingrich plan — with their tax rate dropping just 1.5 percentage points — and more than half of that group wouldn’t see any benefit at all. And those earning $40,000 to $50,000 would get a tax cut of about $1,900 on average.

Gingrich’s Tax Plan: Give $760,000 to Every Millionaire in America - Gingrich’s plan cut taxes further than Perry, with a flat 15% rate on income and a corporate tax rate of just 12.5%, while retaining most major deductions, from the child tax credit and the Earned Income Tax credit to deductions on charitable giving and mortgage interest. He would also eliminate the capital gains tax and gradually replace the payroll tax with private Social Security accounts. What you don’t see here is any effort to balance major giveaways in the tax code with any increases elsewhere. Nobody had any interest in actually scoring Gingrich’s plan until he surged in the polls. But now, the Tax Policy Center has taken a look. And they found that his plan would give the top 1% a $428,000 annual tax cut, and the top 0.1% a tax cut of $2.3 million. By contrast, wage earners in the lowest quintile would save around $649. The percentage change in after-tax income is relevant here. Low-income Americans would see their after-tax income rise by 2.6%. The top 1% would see it rise by 33.6%, and the top 0.1% would see it rise by 44.2%. The data on average federal tax rate changes are similar. If you want to use millionaires as a baseline, their average tax break would be almost $760,000.

Gingrich tax 'plan' starves government, feeds the wealthy, rests on flawed assumptions - In case you hadn't heard about it, Gingrich would offer taxpayers a choice to pay tax under current policy or at a 15% rate, with zero taxation of capital gains, dividends and interest that accrues mostly to the rich and uberrich, while corporate tax rate would be reduced to a mere 12.5%.  For the rich, the 15% rate on their ordinary income and the 0% rate on their predominant form of income (capital gains and income from capital) would be a windfall.  For corporations, it would practically amount to the elimination of the corporate tax.  It should be no surprise that tax revenues would decline substantially: the Tax Policy Center study of Gingrich's plan estimates by $1.3 trillion over a decade.  While the lower two quintiles would get an average tax cut of about $440, the top 1% (starting at incomes of about $629,000) would get an average $344,000 cut and the top 0.1% (starting at incomes of about 2.868 million) an average $1.9 million cut.  Gingrich's rationale is one that the right-wing American Enterprise Institute strongly supports--the tired old reaganomics rationale that eliminating taxes on capital will create new investments.  See, e.g., Why Romney is Wrong and Gingrich is Right on Capital Gains Taxes, AEI ( Dec. 12, 2011).  This theory is hogwash--lowering the return on investment by the piddling tax (whether 15% or 20%) will not keep folks from investing.  Folks will still make profits and they will still invest those profits, even if they have to pay taxes.  Paying no tax on dividends and capital gains won't make the rich suddenly invest in entreprenuerial activities, my friends.

Who Counts as 'Rich'? Continued - Last week, Catherine Rampell posted a commentary on a new Gallup poll on the question of who is “rich” in America. The median threshold in the poll’s responses was that rich is $150,000 a year of income or a net worth of $1 million. Because I have asserted that the rich need to pay more taxes if we are to get out of our fiscal mess, and even Republicans say that government benefits for the rich should be cut off, the question of who is rich is politically important. The first thing to know is that there is no formal definition of who is rich, middle class or poor. Of course, there is an official definition for the poverty rate, but that figure is just a back of the envelope calculation that has simply been increased by the inflation rate since the 1960s. There are many other ways of calculating the poverty rate that could either raise the poverty threshold or reduce it. Another problem is that one’s social class is a function of both income and wealth. There are many among the elderly who have little income but may have fairly substantial wealth by, for example, owning a home free and clear. At the other end, there are those with high incomes who are, nevertheless, deeply in debt, perhaps even having a negative net worth.

The Politics of the Top 1 Percent - But Gallup analysis may overstate the similarity of the two groups.  A second study released by the Russell Sage Foundation, found that the politics of the very wealthy are strikingly different. What did the survey find?  For one, balance of party identification in this sample is very similar to what Gallup found: 58 percent of this sample identified as or lean Republican.  In several other ways, however, the political behavior of the top 1 percent diverges more strongly from the 99 percent than Gallup’s analysis suggests.

• -The 1 percent cares more about deficits than the economy.  When asked to name the most important problem facing the country, 32 percent of respondents said the deficit and 11 percent said the economy.  By contrast, in an April 2011 CBS News/New York Times poll, 49 percent of Americans said the economy or jobs and only 5 percent said the deficit.
• - The 1 percent wants private-sector solutions, not government solutions.  Among those who considered the deficit the most important problem, 65 percent favored spending cuts and 24 percent favored a combination of spending cuts and revenue increases.  By contrast, a September 2011 New York Times/CBS News poll found that only 21 percent of respondents favored spending cuts exclusively.  The majority (71 percent) favored spending cuts and tax increases.
• -The 1 percent is vastly more politically active. In the Chicago sample, 99 percent reported voting in 2008; in the 2008 American National Election Study, only 78 percent of a nationally representative sample reported voting. 

Lowest Hanging Fruit - There has been much vitriol leveled at inequality and what is believed by some to be unfair compensation. CEOs, Professional Sports Stars, Brokers, Bankers, Brokeback Bankers, Actors, Paris Hilton, Hedge Fund Managers, The Koch Brothers, Trial Lawyers, Plastic Surgeons, LBO/Private-Equity Kings, Trustafarians,  Mark Zuckerberg, Televangelists, all though not exclusively have been the target of critics questioning whether or not they are in fact deserving of the riches heaped upon them, or in perhaps the rarer case, otherwise earned. Some people see such folks (particularly Bankers, Private Equity and Hedge Fund Managers) as unequivocally Evil and, as such, are proverbially low-hanging fruit in their search for scapegoats, sources of Government revenue, or merely general contempt. While sympathetic in-part, I think they are missing the obvious. Indeed, the over-sized day-glo bullseye, and the lowest-hanging fruit for all derision and heated debate regarding inequality should in reality be directed elsewhere - quite simply, at The Dead. No, not Jerry & the Boys who it must be said have been scorned by many 1%ers for decades, but the Deceased; the Un-Living;  the Already-Departed.

When it Comes to Taxes on the Poor, the Supply Siders are Right -- A couple of days ago, I referred to the fact that poor people face some of the highest marginal tax rates in America. IThis is what those high marginal tax rates look like in graph form: this is what they look like in narrative form: "Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more. I told her I didn't know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can't fully reverse her decision to take the higher paying job because she can't get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn't help much either.

Fact Checking the Fact Checkers: Missing the Point on Tax Compliance - Speaker John Boehner and Texas Governor Rick Perry recently claimed that federal income tax compliance costs about $500 billion per year, apparently basing it on a 2005 report of ours in which we project that compliance costs will be $483 billion in 2015. Politifact rightly points out that our projection to 2011 is there as well, and that's $392 billion. Politifact could have also argued that a 6 year projection is getting a little questionable.  The reason we haven't updated this report is because we based it on IRS estimates of the time to fill out each tax form, a methodology the IRS discontinued in 2006.  So we projected based on a fairly well established trend up to that point. Instead, Politifact takes issue with the fact that we assigned a dollar amount to these IRS estimates of time, based on average wages: "Boehner, as did Perry, made a valid point - that a whole lot of money is spent on tax preparation in the United States today. But their numbers are not close to accurate, and a huge part of the dollar cost they mention is not money that anyone actually spends. Rather, it is the value placed on the time people take for preparation. On the Truth-O-Meter, we rate the claim Mostly False."

Hedgies vs Obama - Jim Chanos claims not to understand why hedgies are so critical of Barack Obama: after all, they’ve done pretty well for themselves over the past three years. But maybe this chart, from Thomas Piketty and Emmanuel Saez, might help him out: What we see here is the very strong correlation between tax cuts for the rich (on the x-axis) and increased wealth for the rich (on the y-axis). This correlation comes as no surprise, of course. But Obama doesn’t want tax cuts for the rich: he wants to roll their taxes back to Clinton-era levels. Instead, he wants lower taxes for the middle classes, which won’t help hedge fund managers at all. As Piketty and Saez note, lower top marginal tax rates don’t translate into higher growth — which means that the extra wealth going to the 1% really is a zero-sum game, and being taken out of the pockets of the 99%.

Corporate Tax Holiday Takes Another Hit in Congress -- Driving another spike in the idea of a corporate tax holiday, Sen. Carl Levin (D., Mich.) released a study suggesting much of the money companies claim is trapped overseas already is sitting in U.S. bank accounts  The study is another blow to the already-bleak hopes of major multinationals for a corporate tax holiday that they say would let them bring home as much as $1 trillion in earnings to the U.S. Earlier this week, House Republicans approved an end-of-year tax bill that didn’t include the tax holiday, despite a big push by multinationals.The companies argue that without the tax holiday, much of their foreign earnings will sit offshore indefinitely, and eventually be reinvested overseas, because bringing it home to invest in the U.S. would subject it to the high U.S. corporate tax. They say allowing them to bring the money back with a reduced tax rate – say, around 5% – would give the domestic economy a much-needed lift. But on Wednesday, Mr. Levin cited a study by the Permanent Subcommittee on Investigations, which he chairs, showing that about half the foreign earnings of 27 big U.S. multinationals are already in U.S. bank accounts, or invested in U.S. assets such as Treasury debt, U.S. stocks and bonds and mutual funds.

30 Major U.S. Corporations Paid More to Lobby Congress Than Income Taxes, 2008-2010 - By employing a plethora of tax-dodging techniques, 30 multi-million dollar American corporations expended more money lobbying Congress than they paid in federal income taxes between 2008 and 2010, ultimately spending approximately $400,000 every day -- including weekends -- during that three-year period to lobby lawmakers and influence political elections, according to a new report from the non-partisan Public Campaign. The Public Campaign, a non-partisan research and advocacy organization, reports 30 major U.S. corporations spent more money lobbying Congress than they did on federal income taxes between 2008 and 2010. Despite a growing federal deficit and the widespread economic stability that has swept the U.S since 2008, the companies in question managed to accumulate profits of $164 billion between 2008 and 2010, while receiving combined tax rebates totaling almost $11 billion. Moreover, Public Campaign reports these companies spent about $476 million during the same period to lobby the U.S. Congress, as well as another $22 million on federal campaigns, while in some instances laying off employees and increasing executive compensation.

Should reinsurance using foreign affiliates be deductible to US corporations? - Foreign-owned US insurance companies frequently reinsure through their foreign affiliates and then claim a deduction under section 832(b)(4)(A) for the reinsurance premium paid to the affiliate to reduce the US tax liability of the US company. Rep. Richard Neal (D-Ma) introduced a bill on October 12 that has been referred to the House Ways & Means Committee, where it now languishes unattended by the Republican chair, David Camp of Michigan.  H.R. 3157 amends the Internal Revenue Code to create a new section 849, which disallows the deduction for certain reinsurance premiums and related amounts paid to non-taxed foreign affiliates, defined as members of a controlled group, with 50% rather than the usual 80% used to define a control relationship. The President's FY 2012 Budget included a similar proposal for disallowing some affiliated reinsurance premium amounts.  Earlier iterations of a disallowance bill were introduced in 2000 and 2001.  A bill with somewhat broader disallowance provisions, H.R. 3424, was introduced by Representative Neal in 2010 and did receive a hearing at Ways & Means that year.  The Joint Committee on Taxation issued a report on reinsurance with offshore affiliates prior to the hearings on H.R. 3424 in 2010, titled "Present Law And Analysis Relating To The Tax Treatment Of Reinsurance Transactions Between Affiliated Entities", JCX-35-10 (including a description of HR 3424 and the President's FY 2012 proposal, beginning at page 22).

People are not corporations, and financial journalists are not ordinary people - It is getting really old, the exasperation of entitled financial journalists that ordinary folks are not walking away from their underwater homes as much as they supposedly should. The latest to sound this tired refrain is James Surowiecki in The New Yorker (Living By Default, Dec. 19, 2011), who also makes the clichéd comparison to corporate decisions to shed debt using chapter 11 bankruptcy. He calls on underwater homeowners to do "the smart thing" by walking away. According to Mitt Romney, “Corporations are people.” Whether or not you agree with that proposition, what is empirically true when it comes to debt is that people are not corporations. People don’t view walking away from debts that they can afford as a no brainer if it improves the bottom line. They agonize. They feel bad. They care about their homes and neighborhoods. Walking away is extremely painful, not a simple financial calculation. And, oh by the way, the further down you are in the 99 percent, the more likely that the financial calculation is negative, given impact on credit reputation from defaulting on a mortgage when your income is low. (On the other hand, many people worry about their credit reputations way after they have hit bottom and bankruptcy could actually improve their access to credit.)

Citizens United And The Foolish Attack On Corporate Personhood - The controversy on the left over the Supreme Court’s 2010 decision in Citizens United v. FEC  has never really gone away. It became a cause for controversy between the Executive and Judicial Branches when President Obama openly criticized the decision during his State Of The Union Address in 2010, with most of the Court in attendance. It was a campaign theme for Democrats during the 2010 midterms, although not a very successful ones. The Occupy movement seems to have picked it out as one of the things that they claim is destroying American politics. And, several Democratic Congressmen have introduced proposed Constitutional Amendments that would purport to overrule the Court’s decision, and some would even go further than that. There are several versions of such an Amendment floating around Capitol Hill, btu the most prominent version seems to be the one introduced by a group of Democratic Congressmen and Senator Bernie Sanders,  Eugene Volokh points out the most obvious problem with the proposed Amendment, namely that it would essentially mean that The New York Times has no First Amendment rights:

To Rethink Government, Start Close to Home - For decades, people have complained of long lines and rude service at D.M.V. offices all over the country. There’s a widespread impression that D.M.V. employees consider their customers’ time worthless. One blogger, for example, described a visit to a rural Ohio motor vehicle office where he ignored the “take a number” sign, since he was the only customer in the room. When he approached the counter, the clerk glared at him and sternly ordered him to take a number. He dutifully complied, adding that “as soon as I sat down, she called out, ‘One!’ ” “That’s me!” he responded, and only then did she deign to scrutinize his forms. After countless experiences like these, is it any wonder that many people believe that government is the problem and not the solution, as President Ronald Reagan contended in his first inaugural address? In the years since, increasingly harsh antigovernment rhetoric has dominated American public discourse: All taxation is theft! Starve the beast! Or, in Grover Norquist’s memorable words, we should downsize government enough to “drown it in the bathtub.”

Ben & Jerry’s Gets Behind Occupy Protest - Ice-cream entrepreneurs Ben Cohen and Jerry Greenfield said Monday that U.S. businesses would benefit from supporting the Occupy protesters’ goals. The co-founders of Ben & Jerrys Homemade Inc., now a unit of Unilever PLC, called for ending corporate donations to political campaigns and backed a tax on financial transactions

We need a new Volcker rule for banks -By Sheila Bair - Financial reformers are pointing to the collapse of the $41 billion MF Global brokerage house as evidence of why we need Dodd-Frank's "Volcker Rule" to prohibit FDIC-insured banks and their affiliates from making proprietary bets on the markets. Fortunately, MF Global was not a bank or bank affiliate, and its failure has not cost taxpayers a dime. And I, for one, am very happy to see a major, well-connected market player eat its losses (while being equally dismayed by the apparent regulatory lapses that have let hundreds of millions in customer money go missing). But what if MF Global had been an FDIC bank? Would the Volcker Rule have protected the government purse? Well, it's not clear. MF Global took proprietary positions in European sovereign debt through what Wall Street calls "repo to maturity" transactions. It technically sold the European bonds to other firms, agreeing to repurchase them at a premium when they matured in 2012. MF hoped to make money by pocketing the difference in the rate it paid its trading partners and the higher rate paid on the bonds themselves. As market prices on the bonds fell, MF Global's trading partners demanded more collateral. Given MF's extreme leverage -- about 40 to 1 -- the collateral calls quickly brought it down.

The Dodd-Frank news you don’t hear: It’s moving forward - A lot of coverage of the Dodd-Frank financial reform law focuses on what isn’t happening: How the White House can’t get a head for its Consumer Financial Protection Bureau through Congress in the face of Republican opposition, how the law could become more vulnerable with the retirement of one of its architects, Massachusetts Rep. Barney Frank. Just this morning, as Suzy reports, former FDIC chair Shelia Bair called for part of the law to be scrapped altogether. But, quietly, parts of the law are indeed moving forward, albeit with few headlines and little fanfare. This very morning, a new Dodd-Frank office got underway with work to reform one of the country’s most complex regulatory systems: insurance regulation.

What If Lehman Happened Today? - Gary Gensler is no one’s idea of a biblical David. But Gensler, chairman of the Commodity Futures Trading Commission, is fighting Goliath, and not just one Goliath—he’s challenging several at once. The stakes couldn’t be higher: If he doesn’t win, it’s possible that America could suffer a repeat of the 2008 crash. There’s the Wall Street lobby, which never stops trying to open giant loopholes in the still-evolving Dodd-Frank regulatory overhaul from 2010 that Gensler is trying to implement. There’s the Republican-controlled House, which opposes Dodd-Frank, generally tries to make every loophole bigger, and (along with the Senate) recently sought to gut reform by slashing the CFTC’s budget request by a third.  And now Gensler—a former Goldman Sachs executive whose stand against his erstwhile Wall Street comrades has won praise from progressives—is facing down the biggest Goliath of all. Europe’s raging financial crisis may not leave Gensler the time he needs to get a handle on the vast global market in derivatives, the arcane instruments used to bet on everything from interest rates to currencies to credit default swaps on the Continent. At $708 trillion (yes, trillion), the derivatives trade is already much larger than it was during the 2008 crisis. Just as last time, this opaque market may hold the key to whether the evolving eurozone disaster causes another market meltdown worldwide.

Where Is the Volcker Rule? - Simon Johnson - Three years ago, a financial crisis threatened to bring down the United States economy and to spread economic disaster around the world. How far have we come in preventing any kind of recurrence? And will the much-discussed Volcker Rule – attempting to limit the risks that big banks can take – play a positive role as we move forward? Whatever your broader issues with the Dodd-Frank Act of 2010, one point about legislative intent in this law is clear: The regulators have the authority to cut banks down to size and return them to their historical role of intermediary between savers and borrowers. As for size, the regulators have long ignored the existing guidelines and allowed the biggest banks to get bigger. We need to go in the opposite direction, and that includes cutting down to size the private megabanks, as well as Fannie Mae and Freddie Mac. It also means taking advantage of the resolution authority and all associated provisions that Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation, worked so hard to put into the Dodd-Frank Act.

Volcker Rule, Round One: What’s Wrong with the Repo Exclusion? - Paul Volcker had a simple idea: get the government out of the hedge fund business. From his simple idea was born a simple proposal: ban proprietary trading and investments in hedge funds at government-backstopped banks. Congress agreed, to a point, and passed the “Volcker Rule” as section 619 of the Dodd-Frank Act. The draft of the Volcker Rule, which grew from a three-page proposal to a 300+ page behemoth, was released by the regulatory agencies this October. The draft rule grants a number of exemptions from the proprietary trading restrictions. One of our major concerns is the blanket exemption for repurchase agreements (“repos”). The exemption isn’t mentioned in the statute, and for reasons discussed below it seems to defy the intent of the rule. In our eyes, the presence of such an overbroad exemption is profoundly disappointing. Whose interests are the regulators serving? Repo lending is best described as the financial equivalent of a visit to the pawnshop. An asset  is deposited with a lender in exchange for cash, with an agreement that at some point in the future a slightly larger amount of cash will be repaid and the initial goods returned. The pawnshop provides a way to exchange a valuable-but-illiquid asset (a grandfather’s watch) for a source of short-term liquidity (next month’s rent).

Graham: The CFPB is a ‘Stalinist era’ thing The Raw Story: In the mind of Sen. Lindsey Graham (R-SC), protecting consumers from financial malpractice is something from the Joseph Stalin playbook. Continuing another attack on President Barack Obama over economic policies, Graham appeared on Meet The Press Sunday morning to express his further dislike of the Consumer Financial Protection Bureau (CFPB). “This Consumer Bureau that they want to pass, is under the federal reserve, no appropriation oversight, no board,” he said. “It is something out of the Stalinist era. The reason Republicans don’t want to vote for it is we want a board, not one person making all the regulatory decisions. There is no oversight under this person. We want it under the Congress so we can oversee the overseer.”Unsurprisingly, Graham has his facts incorrect. Under the Dodd-Frank bill, the Financial Stability Oversight Council can overturn the CFPB’s rules by a two-thirds vote. The American Banker points out that no other regulator is under those rules. Graham’s cries of no congressional oversight is also not true. Congress can call any head of the CFPB up to testify at least two times a year and require financial reports from the bureau.

GOP Nullification of Consumer Protection Bureau Law Easily Nullified By a Recess Appointment - Describing the blockade of Richard Cordray to run the Consumer Financial Protection Bureau as a form of nullification sounds accurate to me. Cordray is almost an afterthought to this issue. Republicans disagree with the concept of a federal agency that looks out for consumers. So they plan to stop any effort to staff the agency with a director, which has the added benefit in this case of holding off consumer protection regulation of non-bank financial institutions, unless it is gutted. In other words, Congress passed a law inaugurating a consumer protection agency, and Republicans in the Senate want to re-litigate that. So they’re using the means at their disposal to stop the agency from functioning. . Senate Republicans are protecting payday lenders and other non-bank lending institutions by blocking a director, which is completely outrageous, but Democrats haven’t made that case directly. Moreover, Democrats and the President have an option here. They can simply force a recess appointment.

Obama Should Get Tough On Recess Appointments - In his speech last Tuesday President Obama initiated a new campaign to pressure Senate Republicans to drop their filibuster against Consumer Financial Protection Bureau nominee Richard Cordray and actually vote on his confirmation. But if he was expecting Republicans could be convinced to change course, he was being naïve: No one was surprised when Republicans used a filibuster to defeat a cloture vote on Cordray on December 8, thus killing, for now, his nomination. It’s been clear for a while that the president’s only real choice if he wants to get the new agency fully up and functioning will be to exercise his recess appointment power. Of course, even then, Obama is sure to encounter resistance from Republicans. Clearly, Obama will need to reassert his authority on this issue. Fortunately, he has an excellent precedent in his new role model, Teddy Roosevelt. The Constitution explicitly grants the president “Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.” But people have been fighting about what exactly that means for two hundred years. Indeed, there are multiple fights, because there is more than one type of “Recess of the Senate.”

JP Morgan “Greed Washing”: Sponsors Orwellian TV Advertorial to Tout $2 Million of Charity Spending - Yves Smith - The New York Times (hat tip Mary B) took note of a seamy JP Morgan effort at brand burnishing: In a gambit to promote its charitable work — and maybe polish its image, which has suffered since the financial collapse in 2008 — JPMorgan Chase is financing and sponsoring the “American Giving Awards,” which will be televised by NBC on Saturday night. The two-hour show, with Bob Costas as host, will profile recipients of Chase donations, will be book-ended by Chase commercials and will regularly remind viewers that the whole event is “presented by Chase.”… It’s a “‘greed-washing’ campaign to score P.R. points,” countered Lisa Graves, whose publication “PR Watch” investigates company public relations campaigns. The $2 million in donations that will be featured on Saturday “are a drop in the bucket compared to its ultra-lush benefits for bankers who profited richly from the swaps that undermined our nation’s financial security,” she said… Chase claims this show is to raise the profile of the charities and help them raise more money.  The problem is that any argument that this JP Morgan TV extravaganza has much to do with altruism fails when you do the math. JP Morgan is touting $2 million of spending. If you are serious about giving to charities, one of the very first things you look at is the efficiency of your donation. I’m not current on TV advertising rates (they were $110,000 per 30 second spot in the first quarter, and that is the weakest period of the year for ad spending). JP Morgan bought eight 30 second ads. Even if we assume JP Morgan got better rates than that (Saturday is a low viewership night, and they probably negotiated some sort of volume discount on top of that), the cost of buying airtime was large relative to what went to the charities. And that’s before you get to the expense of producing the program.

Bankers are the dictators of the West - Writing from the very region that produces more clichés per square foot than any other "story" – the Middle East – I should perhaps pause before I say I have never read so much garbage, so much utter drivel, as I have about the world financial crisis. Let's kick off with the "Arab Spring" – in itself a grotesque verbal distortion of the great Arab/Muslim awakening which is shaking the Middle East – and the trashy parallels with the social protests in Western capitals. We've been deluged with reports of how the poor or the disadvantaged in the West have "taken a leaf" out of the "Arab spring" book, how demonstrators in America, Canada, Britain, Spain and Greece have been "inspired" by the huge demonstrations that brought down the regimes in Egypt, Tunisia and – up to a point – Libya. But this is nonsense. The real comparison, needless to say, has been dodged by Western reporters, so keen to extol the anti-dictator rebellions of the Arabs, so anxious to ignore protests against "democratic" Western governments, so desperate to disparage these demonstrations, to suggest that they are merely picking up on the latest fad in the Arab world. The truth is somewhat different. What drove the Arabs in their tens of thousands and then their millions on to the streets of Middle East capitals was a demand for dignity and a refusal to accept that the local family-ruled dictators actually owned their countries.

CME to Customers: Drop Dead -- Yves Smith - We see a variant of the Sumitomo “customer be damned” attitude becoming widespread in financial services. The latest example is CME, which is under the hot lights in the wake of the MF Global debacle. Legislators are trying to get in front of the unhappy mob of wronged customers and call it a parade. And an obvious focus of inquiry is the self regulated derivatives exchange, the CME Group, which also oversaw futures commission merchants like MF Global. Worse, MF Global had gotten a clean bill of health from the CME in its last audit. Needless to say, this isn’t merely a “gee maybe we need to do something about bad practices” issue. As various market participants have fulminated, this strikes at the heart of the integrity of markets. If you can’t be sure a large and supposedly reputable broker won’t pilfer your accounts, it makes no sense to participate in those markets. Not surprisingly, CME trading activity has fallen sharply. Now you would think a buyers’ strike would persuade the CME that it needs to restore credibility. But the 21st century version of that seems to be to engage in lobbying to preserve the status quo rather than do what it takes to win back customers’ trust. The Financial Times tells us the CME is girding up for a fight: “CME has one of the most effective government affairs operations in the nation’s Capitol. I’ve rarely seen them on the losing end of an issue,” says Robert Holifield, a former staff director on the Senate agriculture committee. CME has spent more than $8m on lobbyists since 2008, ranking each year within the top 20 biggest spenders in the securities industry, according to data compiled by the Centre for Responsive Politics, a non-partisan research group.

Too Big to Stop: Why Big Banks Keep Getting Away With Breaking the Law -  Move along, nothing to see here. That's been the Wall Street line on the financial crisis and the calamitous behavior that caused it, and that strategy has been spectacularly successful. Since Spring 2010, financial institutions' predatory practices have fallen off the front pages of newspapers, replaced by manufactured fears of over-regulation and -- thanks to an assist from the European continent -- an Orwellian belief that government debt lies at the root of our economic problems. Occasionally, a news event brings the need for financial reform momentarily into the partial spotlight, like last week when Judge Jed Rakoff rejected a proposed settlement between the SEC and Citigroup over a complex security called a CDO (actually, a CDO-squared) that the bank manufactured and pushed onto investor clients solely so it could bet against it. In April 2010, when the SEC sued Goldman over similar behavior, that was big-time news for weeks. But Citigroup's behavior in "Class V Funding III" was far worse.

Needed: A Cure for a Severe Case of Trialphobia —Does the Securities and Exchange Commission suffer from trialphobia? Ever since Judge Jed S. Rakoff rejected the S.E.C.'s settlement with Citigroup over a malignant mortgage securities deal, the agency has been defending its policy to settle securities fraud cases. But the public wants a "Law & Order" moment, and who can blame them? Of course, there was one criminal trial. Federal prosecutors in Brooklyn brought a case against two Bear Stearns hedge fund managers who blew up the firm's internal fund, eventually leading to the demise of Bear. They were acquitted. But so far, there's been no civil trial in a major case directly related to the biggest economic fiasco of our time: the financial crisis. The S.E.C. contends that it has received more than $1.2 billion in penalties from financial crisis cases, having accused 81 people and entities, 39 of them chief executives and other senior officers. And it doesn't avoid trials altogether. The agency has averaged almost 14 trials a year from 2008 to 2010, compared with about eight from 2001 to 2003. Finally, in cases that haven't yet gone to trial, the S.E.C. has charged some low-level bankers from big Wall Street firms — but no masters of the universe.

Addicted To Risk Naomi Klein TED video via Huffington Post

Bill Black: Dante’s Divine Comedy – Banksters Edition - Sixty Minutes’ December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions. I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. Obama did not explain what Wall Street behavior he found least ethical or what unethical Wall Street actions he believed was not illegal. It would have done the world (and Obama) a great service had he been asked these questions. He would not have given a coherent answer because his thinking on these issues has never been coherent. If he had to explain his position he, and the public, would recognize it was indefensible. I have explained at length in my blogs and articles why:

• Only fraudulent home lenders made liar’s loans
• Liar’s loans were endemically fraudulent
• Lenders and their agents put the lies in liar’s loans
• Appraisal fraud was endemic and led by lenders and their agents
• Liar’s loans could only be sold through fraudulent reps and warranties
• CDOs “backed” by liar’s loans were inherently fraudulent
• CDOs backed by liar’s loans could only be sold through fraudulent reps and warranties
• Liar’s loans hyper-inflated the bubble
• Liar’s loans became roughly one-third of mortgage originations by 2006

Each of these frauds is a conventional fraud that could be prosecuted under existing laws. Hundreds of lenders and over a hundred thousand loan brokers were “accounting control frauds” specializing largely in making fraudulent liar’s loans. My prior work explains control fraud, why accounting is the “weapon on choice” for fraudulent financial firms, and why liar’s loans were superior “ammunition” for committing massive accounting fraud. These accounting control frauds caused greater direct financial losses than any other crime epidemic in history. They also drove the financial crisis that produced the Great Recession and cost millions of Americans their jobs.

Occupied Media: Interview With Professor William K. Black - So, this video took far too long to post due to technical difficulties (and we ultimately ended up posted without video). However, the content is amazing. The interview is with esteemed law professor Bill Black who has been a tireless advocate for reform of the financial system and prosecution of the system fraud that brought our economy to its knees. The title of his book really says it all: The Best Way to Rob a Bank is to Own One.  Professor Black is an Associate Professor of Economics and Law at the University of Missouri, Kansas City, a white-collar criminologist and a former financial regulator. He blogs at New Economic Perspectives and can be followed at @WilliamKBlack on Twitter. Professor Black has been an advocate of the Occupy Wall Street Movement and he has been remarkably generous with his time.

JP Morgan Hit by Ripple Effects of Rakoff Decisions Nixing SEC No Admission Settlements – Yves Smith - The wisdom of Judge Rakoff’s tough and controversial decisions taking issue with the decades-long SEC practice of entering into settlements in which companies admit to no wrongdoing is becoming apparent. This is the essence of Rakoff’s beef, as represented in his latest ruling on this topic: It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations? It is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy. And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.Now we’ll put aside the issue that the SEC could enter into settlements that merely provide for monetary damages (ie, the reason Rakoff reviewed the settlement was that it also included provisions that offered injunctive relief). Alison Frankel at Reuters highlights a new New York appellate court decision where JP Morgan is being hoist on the Rakoff petard. Bear Stearns, which is now owned by JP Morgan, entered into a $250 million settlement in 2006 over allegations that it cheated customers by engaging in impermissible market timing. The agreement contained standard SEC “without admitting wrongdoing or denying” language. The payment broke down into $160 million of disgorgement and $90 million of penalties.

SEC Appeals Judge Rakoff’s Rejection of $285 Million Citigroup Settlement - The U.S. Securities and Exchange Commission appealed a federal judge’s decision to reject its proposed $285 million settlement with Citigroup Inc. (C) The appeal, filed today in the U.S. Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff’s rejection last month of the settlement, which involved claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages. “We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits,” SEC Enforcement Director Robert Khuzami said today in a statement. Rakoff criticized the agency’s practice of resolving cases without requiring the subject of the allegations to admit wrongdoing. In his ruling, Rakoff said the settlement didn’t provide him with “any proven or admitted facts” to inform his judgment.

Anti-Investor Supreme Court Decision and the SEC - In one of its filings prior to U.S. Judge Jed Rakoff’s celebrated November 28th refusal to rubber stamp an SEC-Citicorp deal allowing the bank – a “recidivist offender” -- to escape significant damages and an admission of wrongdoing for what may have been egregious, knowing fraud in Citi’s sale of bad mortgage-related assets to unwitting investors, the SEC incredibly asserted that “the public interest . . . is not part of [the] applicable standard of judicial review [of the proposed Citicorp settlement.]” To that, Manhattan federal Judge Rakoff simply responded: “This is erroneous.” [see Rakoff ruling here ] Just a few years’ ago, the idea that a federal judge would need to remind a federal regulatory agency that the judicial and executive branches work on behalf of the public interest would have seemed ludicrous. Now, it is long over-due. An impending SEC recommendation to Congress (due in January) on whether an anti-US investor Supreme Court decision (Morrison, discussed below) should be overridden will help answer a timely question: has the Commission heard and understood Judge Rakoff’s admonition?

S.E.C. Accuses Fannie and Freddie Ex-Chiefs of Deception -  Regulators have accused the former chief executives of the mortgage giants Fannie Mae and Freddie Mac of misleading investors about their firms’ exposure to risky mortgages, one of the most significant federal actions taken against those at the center of the housing bust. The lawsuits filed Friday against the two chief executives and four other top executives are an aggressive move by the Securities and Exchange Commission, and come after a three-year investigation. The agency has come under fire for not pursuing top Wall Street and mortgage industry executives who contributed to the financial crisis. In cases contending the deceptive marketing of securities tied to mortgages, the S.E.C. has been criticized for citing only midlevel bankers while settling with the Wall Street firms themselves. Recently, the agency drew criticism from a federal judge after allowing Citigroup to settle a fraud case without conceding wrongdoing.

Yves Smith on How Banks Extract from the Economy - Dylan Ratigan (podcast) On this episode of Greedy Bastards Antidote, we’re covering a new term from our upcoming book. This week, we’re focusing on extractionism. Joining us to discuss it is Yves Smith of nakedcapitalism.com. She is author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. This week, I talk with Yves Smith, and she opened my eyes to some radical stuff going on in the capital markets. Big Banks are extracting capital for themselves with such power that investors are actually afraid to go to the courts for redress. Smith said that one prominent securities lawyer told her “he knows investors who he said if Jamie Dimon came into somebody’s house and killed the children of these people, he said they would be afraid to call the police.” That’s how bad the extraction has gotten. And that’s not capitalism. But first, what is extraction, and how is it the opposite of capitalism? How can extractionist systems have all the characteristics of capitalism, while hiding the elimination of productive resources over time? Greedy Bastards like to call themselves capitalists, but what they’re actually doing is the exact opposite: it’s extractionism: taking money from others without creating anything of value; anything that produces economic growth or improves our lives.

CME chief alleges Corzine aware of transfers - Jon Corzine, the former chief executive of MF Global, “was aware” that the broker-dealer made use of customer funds during its desperate fight for survival, a US Senate hearing was told on Tuesday.  Terry Duffy, chief executive of CME Group, the futures exchange operator that supervised MF Global’s handling of customer money, said a CME auditor heard an MF Global employee say during a conference call involving senior MF Global employees that “Mr Corzine was aware of the loans being made from segregated accounts”. A spokesman for Mr Corzine declined to comment. The former MF Global boss and previous New Jersey senator reiterated to the same Senate hearing that he did not intend to authorise the improper use of customer funds to plug a hole in MF Global’s liquidity in the days leading up to the bankruptcy. CME is under scrutiny for its role as a supervisor to MF Global’s customer accounts, from which up to $1.2bn is estimated to have gone missing in the run-up to the company’s bankruptcy on October 31. Mr Duffy said he believed the conference call, which occurred the same morning as the bankruptcy filing, discussed a $175m transfer from MF Global to a European affiliate.

MF Global Explained This video explains causal links between OTC derivatives, the financial crisis of 2008, Alan Greenspan, Robert Rubin, Larry Summers, Jon Corzine and MF Global.

A Romance With Risk That Brought On a Panic - Although Mr. Corzine had been a United States senator, governor of New Jersey, co-head of Goldman Sachs and a confidant of leaders in Washington and Wall Street, he was at heart a trader, willing to gamble for a rich payoff. Dozens of interviews reveal that Mr. Corzine played a much larger, hands-on role in the firm’s high-stakes risk-taking than has previously been known. An examination of company documents and interviews with regulators, former employees and others close to MF Global portray a chief executive convinced that he could quickly turn the money-losing firm into a miniature Goldman Sachs.

Corzine's Lost Money “Rather than invoke the Fifth Amendment to protect himself, Mr. Corzine couched his answers with enough caveats and denials of specific knowledge that it would be nearly impossible to claim that he lied or misled the committee.” It seems we’ve gotten far away from his calls as governor to “Hold me accountable.”

MF Global’s Risk Officer Said to Lack Authority - Congressional investigators are exploring whether regulators and feeble risk controls allowed MF Global to topple. A House committee is expected to disclose on Thursday that MF Global, under Jon S. Corzine¹, stripped critical powers from its top executive in charge of controlling risk, according to a person briefed on the matter. The move left the firm short-handed as it was grappling with the implications of its $6.3 billion position on European sovereign debt, a trade large enough to wipe out the firm if it soured. Earlier this year, MF Global replaced its chief risk officer, Michael Roseman, after he repeatedly clashed with Mr. Corzine over the firm’s purchase of European sovereign debt. The new risk officer, Michael Stockman, took over the position in early 2011 with one major difference: unlike his predecessor, he was not allowed to weigh in on the broader implications the trades might have on the firm, including whether they might undermine investor confidence.

Corzine: MF Staff Said Fund Transfer Legal - Jon S. Corzine, former chairman and chief executive officer of MF Global Holdings Ltd., told lawmakers today that the firm’s back-office staff “explicitly” informed him that fund transfers made before the company filed for bankruptcy were legal.  Corzine, testifying today before U.S. lawmakers for the third time in a week, was responding to allegations made at a U.S. Senate hearing earlier this week when the executive chairman of Chicago-based CME Group Inc. (CME) told lawmakers Corzine had known of a $175 million loan using client money that was made before the Oct. 31 bankruptcy.  Corzine used today’s hearing of an oversight panel of the House Financial Services Committee to rebut the suggestion that he may have authorized improper use of customer money.  Lawmakers and U.S. authorities are investigating what happened to as much as $1.2 billion in customer funds that is missing from MF Global accounts. “I did not instruct anyone to lend customer funds to anyone,”

MF Global and Rehypothecation - Initially I ignored MF Global - it seemed that MF Global had inappropriately used client money and that appeared to be an unusual event. However there is another scarier possibility ... Last week reader jb sent me a Reuters article: MF Global and the great Wall St re-hypothecation scandal By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.  ...Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal.  ...[I]n the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.If MF Global moved their US client assets to their UK subsidiary (added: moved legally with client approval), and then followed the UK rules on rehypothecated assets - the client money is gone and nothing illegal happened. That would be the worst possible outcome.

Revisiting Rehypothecation: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again) -  Yves Smith  -We’ve been loath to comment on a Thomson Reuters article that claimed that rehypothecation of assets in customer accounts was the reason MF Global customer funds went missing. The reason we’ve stayed away from this debate is that the article, despite its length, did not provide any substantiation for its claim. Note that this does NOT mean we are saying that rehypothecation did not play a role, merely that the article was speculative.  The bombshell testimony of CME chief Terry Duffy yesterday, that a CME auditor heard an MF Global employee say that “Mr Corzine was aware of the loans being made from segregated [customer] accounts,” suggests that some of the money went missing via much more straightforward means, namely, taking it and hoping to be able to give it back if the firm survived.  But there is plenty of reason to be worried about rehypothecation. Richard Smith, in a post last January, described not only how rehypothecation played a major role in the last crisis, but also waved a big red flag regarding JP Morgan’s push to promote unrestricted rehypothecation. And it may be completely unrelated to the issue of collateral, but consider this tidbit from the Financial Times yesterday: Separately, in a court filing, James Giddens, the bankruptcy trustee of MF Global, said that “certain” actions of JPMorgan Chase, a lender to the collapsed company, “are likely to be the subject of investigation”. Given that it was JP Morgan withholding cash and collateral that struck the fatal blow to Lehman, one wonders if we’ll find a similar aggressive move as a contributor to the scale of MF Global customer losses.

Exclusive: Regulators know where MF Global funds went (Reuters) - Regulators now have a more complete picture of money transfers in the final days of bankrupt brokerage MF Global, but must sort out which transactions were legitimate before more money can be released to customers, a top official told Reuters on Wednesday. Jill Sommers, who is heading the Commodity Futures Trading Commission's review of MF Global, said regulators "are far enough along the trail" that they know where the money went. "Now it's just finding out which ones of those transactions are legitimate and which ones of them are illegitimate," Sommers said. The CFTC and the trustee liquidating the firm are under intense pressure from lawmakers and customers to provide answers about what happened to hundreds of millions of dollars in customer money that went missing as the firm collapsed. MF Global officials, including former Chief Executive Jon Corzine, have told lawmakers they simply do not know where the money is, and deny authorizing any misuse of customer money. "We certainly don't want to lead anyone to believe we don't know what happened. We do know, and we see where all the transactions went,"

The Big Question: Are Funds At US Financial Firms Safe? - The short answer is 'maybe.' It is more of a buyer beware situation than most had thought, and still think.  It is nice to see someone in the mainstream media addressing this situation intelligently and without making an apology for what is apparently a criminal act and surely an egregious abuse of the public trust. It is an axiom that it is not the initial crime that does the greatest and most widespread damage, although in this case it appears likely that someone in MF Global is due for jail time.  The damage is going to be to the US and British financial systems, Wall Street and the City of London, and in a large part because of the capture of political process by the monied interests.

Dive in deposits at foreign-owned banks in US - Foreign-owned banks operating in the US have suffered their largest six month fall in deposits on record in what some analysts have described as a “flight to safety” from European banks to domestic institutions.  Cash on deposit at foreign-owned banks fell $291bn, or 25 per cent, to $879bn from the end of May to the start of December, the first time deposits in the sector have fallen for six consecutive months since 2002, according to Federal Reserve data.  “We have heard of a lot of US companies that were doing business with non-US banks looking at the news, and saying I want to be somewhere safer,” said Matt Burnell, large-cap US bank analyst at Wells Fargo. “For those companies somewhere safe means domestic banks like PNC, JP Morgan and US Bancorp that are perceived to have higher quality deposit franchises.” While the Federal Reserve only publishes data on foreign-owned banks once a year, in June, quarterly filings by individual subsidiaries of European banks with the Federal Deposit Insurance Corporation show falls in deposits. Deposits at Deutsche Bank’s Americas Trust Company fell by $2.1bn or 6.8 per cent during the third quarter, while deposits at Barclays’ Delaware subsidiary fell by $397m or 5.6 per cent.

End of the ‘anything goes’ era of antitrust? - Maybe you’ve noticed that companies that are already at the top of their industries have become rather brazen about trying to increase their profits and share prices by buying up their nearest competitors. Who can blame them? For years now, the courts and regulators have turned a blind eye as industry after industry consolidates into two or three dominant firms. And for years, fee-driven corporate lawyers and investment bankers have been knocking on boardroom doors peddling the notion that they can win approval for any merger just by divesting a subsidiary or two or establishing some fictitious “Chinese wall” to prevent one division from knowing what the other is doing. (Alas, we’re even importing our metaphors from China!)

Private equity trapped in ‘zombie funds’ - About half of all institutional private equity investors have a stake in a “zombie fund” where unsuccessful managers with no hope of getting a bonus are holding on to the investments as long as possible to live off the management fee, a global survey shows.  The findings are yet another strong sign of difficult times for private equity as many groups struggle to cope with the fallout from the credit-fuelled takeover binge in the run-up to the financial crisis.  The situation is most prevalent in North America, where 57 per cent of the investors said they had capital locked in an underperforming fund, according to the Global Private Equity Barometer, due to be published on Monday by Coller Capital. Private equity funds are typically structured with a 1.5 to 2 per cent management fee and “carried interest” that pays managers a 20 per cent share of the profits.  There is usually an 8 per cent profit threshold that managers have to achieve before they get paid a performance bonus.

Revealed: Huge Increase In Executive Pay For America's Top Bosses- Chief executive pay has roared back after two years of stagnation and decline. America's top bosses enjoyed pay hikes of between 27 and 40% last year, according to the largest survey of US CEO pay. The dramatic bounceback comes as the latest government figures show wages for the majority of Americans are failing to keep up with inflation. America's highest paid executive took home more than $145.2m, and as stock prices recovered across the board, the median value of bosses' profits on stock options rose 70% in 2010, from $950,400 to $1.3m. The news comes against the backdrop of an Occupy Wall Street movement that has focused Washington's attention on the pay packages of America's highest paid. This year's survey shows CEO pay packages have boomed: the top 10 earners took home more than $770m between them in 2010. As stock prices began to recover last year, the increase in CEO pay outstripped the rise in share value. The Russell 3000 measure of US stock prices was up by 16.93% in 2010, but CEO pay went up by 27.19% overall. For S&P 500 CEOs, the largest companies in the sample, total realised compensation – including perks and pensions and stock awards – increased by a median of 36.47%. Total pay at midcap companies, which are slightly smaller than the top firms, rose 40.2%.

“Let Them Eat Pink Slips”: CEO Pay Shot Up in 2010 -  - Yves Smith  - In the old days of Wall Street a partner would take bare bones pay in bad years to keep comp level for everyone else adequate. Similarly, in the 1970s and 1980s, when a company faced headwinds, and in particular, had to cut staff, it would be seen as a sign of poor leadership to a CEO to raise his pay.  Now that a two decades of executive pay increases way in excess of economic fundamentals and stock price increases have firmly established that shareholders be damned, CEOs have become even more aggressive in playing their “heads I win, tails you lose” game with stakeholders. Per the Guardian: Chief executive pay has roared back after two years of stagnation and decline. America’s top bosses enjoyed pay hikes of between 27 and 40% last year, according to the largest survey of US CEO pay. The dramatic bounceback comes as the latest government figures show wages for the majority of Americans are failing to keep up with inflation…. This year’s survey shows CEO pay packages have boomed: the top 10 earners took home more than $770m between them in 2010. As stock prices began to recover last year, the increase in CEO pay outstripped the rise in share value. The Russell 3000 measure of US stock prices was up by 16.93% in 2010, but CEO pay went up by 27.19% overall. For S&P 500 CEOs, the largest companies in the sample, total realised compensation – including perks and pensions and stock awards – increased by a median of 36.47%. Total pay at midcap companies, which are slightly smaller than the top firms, rose 40.2%.

Financial Planner Advises Shorter Life Span - After reviewing his client's income, assets, and personal budget Tuesday, Morgan Stanley financial adviser Henry Dalton determined that Jason Hutchinson, 43, could make the best use of his portfolio by dropping dead at the age of 62. "Taking account of inflation and the rising cost of living versus the projected direction of the economy in the coming decade, I told Mr. Hutchinson that he could significantly reduce his spending by simply living less," Dalton said. "After looking at his investments, I calculated that he really shouldn't live a day over 62—or 59 if he wants a funeral." In order to help his client plan for his financial future, Dalton presented Hutchinson with several of the company's comprehensive suicide packages.

Banks are lending again - An economy without loans is like a salami sandwich without the bread and salami. Now there news from the Federal Reserve that between July to September this year, bank credit lending was up 10 percent -- the highest rate since before the Lehman Brothers collapse in 2008.Willing banks are a crucial part of a healthy economy. Historically low interest rates have encouraged borrowing, but many banks have been gunshy about letting money out the door. The new data today suggests that's changing for commercial and industrial lending. The sticking point is lending to individual consumers increased only by 2.2 percent, while real estate lending dropped. We spoke with Michael Konczal, a fellow with the Roosevelt Institute in New York. He says this increase in lending is a sign that the economy is getting back on track. Still, individual consumers are laying low -- many are paying down debts and fighting their appetite for credit. All this means not as much money for the sort of spending that kick starts the economy. Konczal says there's no mystery here; we're still suffering a hangover after one of the worst recessions in our history. There are some green shoots out there, but we're not out of the woods yet.

Bank Credit Highest Since Before Lehman as US Growth Continues‎ - U.S. bank credit is growing at the fastest pace in three years, giving the Federal Reserve confidence in the economic expansion’s staying power. Financial institutions increased commercial and industrial loans by an average annual pace of almost 10 percent in the third quarter, the highest since the comparable quarter in 2008, compared with a 1.7 percent decline in the past four years, according to Fed data. The latest numbers show loan growth of 15 percent, seasonally adjusted, in October and 6.1 percent in November. The resumption in lending means a projected fourth-quarter pickup in gross domestic product may be sustained next year even amid Europe’s sovereign-debt crisis, said Robert McTeer, former Federal Reserve Bank of Dallas president. He predicts the central bank’s policy group, which has moved to push down long- term interest rates and pledged to keep its benchmark federal funds rate near zero through mid-2013, probably won’t approve new monetary easing at its Dec. 13 meeting. “The bank-credit statistics argue that more stimulus isn’t needed,”

Number of the Week: The Upside of Companies Sitting on Cash - $261.98 billion: How much more companies took in than they spent in the third quarter. Companies continue to sit on lots of cash, frustrating those hoping to see it deployed to spark jobs growth. But on the upside this buffer makes U.S. firms less vulnerable to contagion if the European debt crisis escalates. Nonfinancial companies held more than $2.1 trillion in cash and other liquid assets at the end of September, according to the Federal Reserve‘s latest flow of funds report. That represents some 7.2% of all company assets, down slightly from the second quarter but still near highs last seen in the early 1960s. While businesses are adding to debt, most companies also are taking in more money than they’re spending. The financing gap, corporate cash flow subtracted from capital investment, has been negative since the recession hit and the deficit expanded in the third quarter to $261.98 billion from $188.05 billion in the second. Usually that figure is positive as companies expand operations through borrowing.

Meet the big-bank critics Republicans love. - The Senate is widely expected to confirm Thomas Hoenig, a vocal critic of “too big to fail” banks, to become vice chairman of the Federal Deposit Insurance Corp. Yesterday, the Senate Banking Committee unanimously approved Hoenig’s nomination to the post. Sen. Richard Shelby, the highest-ranking Republican on the committee, had consistently voiced his support for Hoenig, who recently left his position as president of the Kansas City Fed. In fact, it was Senate Minority Leader Mitch McConnell who had originally recommended Hoenig to the White House for the FDIC post in the first place. Hoenig, however, is neither a by-the-book conservative nor a milquetoast bureaucrat. He is a long-standing unabashed critic of big banks that pose a systemic risk to the financial system. As early as 1999, Hoenig warned that increasingly large, complex banks were being protected by implicit government guarantees — and posed a major threat to stability. He now believes that Dodd-Frank doesn’t go far enough in preventing “too big to fail” and future taxpayer-funded bailouts. Over the summer, Hoenig described the very existence of such banks — so-called Systemically Important Financial Institutions (SIFIs) — as an anathema to capitalism itself. In June, he wrote:

Unofficial Problem Bank list declines to 977 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Dec 9, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Perhaps the FDIC is giving its closing teams the balance of the year off as there is only one weekend left before Christmas and New Year's weekend. This week there were three removals to the Unofficial Problem Bank List. After the removals, the list has 977 institutions with assets of $399.5 billion. A year ago, the list held 919 institutions with assets of $411.4 billion.

Federal reserve report: Home flipping drove housing bubble in Nevada, California, other states - The Washington Post: A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Nevada, California, Arizona, Florida and other states. Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an “undocumented” dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it. More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time. “This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family,”

Repeating the "Big Lie" - If you are going to read this, be sure to read this first so you can properly evaluate the credibility of the author -- an author who insists, despite mountains of evidence to the contrary, that ACORN caused the crisis: ...Congressman Frank was one of the leaders of the effort in Congress to meet the demands of activists like ACORN for an easing of underwriting standards in order to make home ownership more accessible to more people. It was perhaps a worthwhile goal, but it caused the financial crisis... That's nuts to put it mildly. See here, or any of the other many, many debunkings of this attempt to push the blame for the housing crisis on programs that tried to help the poor. The hope, of course, is that this will undermine support for social programs intended to help the disadvantaged -- that's the underlying agenda as the post below this one points out. For that reason, it's important not to let the "big lie" go unchallenged as it is repeated again and again by those supporting the right's political agenda.

For the Last Time, Fannie and Freddie Didn't Cause the Housing Crisis -  In his article for The Atlantic, Peter Wallison claims that Rep. Barney Frank played a major role in causing the financial crisis, by pushing for affordable housing goals in 1992 on the mortgage market entities Fannie Mae and Freddie Mac, which enjoyed government backing. This line of attack is consistent with the argument that Wallison has pushed in a multitude of other venues, most notably in his Financial Crisis Inquiry Commission dissent, in which Wallison claims that federal affordable housing policies were the primary cause of the financial crisis. To understand why Wallison's argument has been rejected by many analysts, including by all nine of his fellow commissioners on the FCIC, it is helpful to recall a few facts that he conspicuously omits from his interview with the Atlantic.First, central to Wallison's argument that affordable housing policies (including those advocated by Rep. Frank in 1992) caused the mortgage crisis is his claim that the federal government is responsible for 19.2 million "subprime" mortgages (with Fannie Mae and Freddie Mac being responsible for 12 million of those). But what Wallison fails to tell the Atlantic's readers is that he is using his own made-up definition of "subprime," a definition that no one outside of his think tank, the American Enterprise Institute, uses. By way of comparison, the non-partisan Government Accountability Office has estimated that there were only 4.58 million subprime and other high risk loans outstanding, with very few of these attributable to the federal government. Importantly, as I've argued elsewhere, Wallison's vastly expanded definition of "subprime" does not stand up to serious scrutiny. In fact, the overwhelming majority of the "subprime" loans Wallison attributes to the federal government have defaulted at about the same rate as the national average. This delinquency rate is about one-third the rate of actual subprime mortgages.

Banks Push for Foreclosures Pact - Five large lenders could be forced to make concessions worth roughly $19 billion as bank representatives and government officials push to put the finishing touches on a settlement of most state and federal investigations of alleged foreclosure improprieties. Housing and Urban Development Secretary Shaun Donovan and state officials hope to reach a deal as soon as this week, though any agreement could be delayed by unresolved issues including the naming of a monitor to oversee the agreement. The settlement would end months-long negotiations among federal officials, state attorneys general and the nation's five largest mortgage servicers: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase and Wells Fargo The talks center on the banks' use of "robo-signing," in which employees approved legal documents without proper review, and other questionable foreclosure practices. Representatives of the five banks declined to comment. The value of the settlement could be as large as $25 billion if it includes California, which left the talks in September. Without California, the value of the deal is likely to be roughly $19 billion, people familiar with the talks said. A spokesman for California Attorney General Kamala D. Harris declined to comment.

Iowa AG says mortgage settlement should be done by Christmas - Iowa Attorney General Tom Miller said Thursday a settlement between almost all state attorneys general and the five largest mortgage servicers should be finalized before Christmas, with or without California.The deal, which Miller has been trying to negotiate since March, would release the five servicers – Ally Financial, Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo – from legal claims on past home loan servicing and foreclosures. The deal would not prohibit individuals from suing the banks, or government prosecutors from suing banks over issues related to the packaging of home loans into mortgage-backed securities. In return the banks will agree to pay for what Miller calls “substantial principal reductions” for homeowners who are underwater, and agree to a set of mortgage servicing standards, interest rate reductions, and cash payments to some homeowners who’ve alrady gone through foreclosure.

Ex-Cuomo Aide Said to Be Among 4 Foreclosure-Monitor Candidates - A former aide to New York Governor Andrew Cuomo is among at least four candidates being considered to ensure that banks including JPMorgan Chase & Co. and Bank of America Corp. comply with any settlement of a nationwide foreclosure probe, a person familiar with the matter said. Steven M. Cohen, who was the governor’s secretary, is one potential foreclosure monitor, according to the person, who declined to be identified because the negotiations are secret. That person said North Carolina Commissioner of Banks Joseph A. Smith Jr. is also a candidate, as did a second person who asked not to be identified. Selection of a monitor is one of the final issues to be worked out between the banks and state and federal officials, said the people. Selection of the monitor is a key issue for the regulators because success of the agreement will largely depend on his or her work, one of the people said.

Treasury’s Failure on Bank Accountability, and Nevada’s Success - A few days ago, I tweeted about an interview Felix Salmon did last year with Michael Barr, who at that time still worked at the Treasury Department, on the foreclosure issue. In that interview, Barr touted the inter-agency review being done on the entire mortgage market, and he vowed that “we’re holding the banks accountable to fix it.” Pressed on a timetable, Barr assured Salmon there would be “flow improvement over the course of the next year,” and that “If a year from now nothing has changed, that would be a reasonable criticism.” I noted that it was a year on, and Salmon responded that he would look into it (the Treasury Department does a very good job of not returning my phone calls, so I figured this would be the way to go). Salmon did indeed follow up, and he correctly indicated that nothing of value had changed. The inter-agency review was a pathetic sideshow, the OCC consent decree meaningless, HAMP a thankfully irrelevant joke, and the desired settlement elusive. "What they didn’t point me to — because it doesn’t exist — was any kind of settlement between the attorneys general and the banks. This time last year, it looked almost certain that such a settlement was going to happen; now, with Massachusetts going its own way and California proving unwilling to give in very much, the chances of seeing any settlement at all are diminishing by the day. Realistically, if we don’t see something in the next few weeks, the chances of getting a big settlement will be very small indeed."

Court Cases Revealing Massive Fraud in Mortgage Business - We have a new deadline for the 50, er, 43-state foreclosure fraud settlement. It’s not July Fourth or Labor Day or Halloween, but now Christmas. More holidays have been selected for the target settlement date than have been selected for vignette-laden films directed by Gary Marshall. But this time, Tom Miller means it! The deal, which Miller has been trying to negotiate since March, would release the five servicers – Ally Financial, Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo – from legal claims on past home loan servicing and foreclosures. The deal would not prohibit individuals from suing the banks, or government prosecutors from suing banks over issues related to the packaging of home loans into mortgage-backed securities. In return the banks will agree to pay for what Miller calls “substantial principal reductions” for homeowners who are underwater, and agree to a set of mortgage servicing standards, interest rate reductions".“If what I’ve described is going to happen, this is the only way that it’s going to happen,” Miller said. “The Yes, because only Tom Miller can bring the banks to heel. Look how he’s done so far! There actually is another entity that can force banks into fair dealing and transparency with borrowers, and even mass reductions in principal or loan modifications. That would be the courts. This is the avenue used by Catherine Cortez Masto in Nevada, after a prior deal on loan modifications with Bank of America amounted to nothing. Local news in Las Vegas has a great story on this:

New Nevada law spurs big drop in homes entering foreclosure - For years, the housing news in Nevada has been unrelentingly bleak: Nearly 3 in 5 homeowners, even the state's attorney general, are underwater on their home loans. In Las Vegas, home prices have tumbled further than in any U.S. metropolitan region. So when market researcher RealtyTrac announced a 75% drop in the number of Nevada homes entering foreclosure in October, even as those numbers surged elsewhere in the country, things seemed finally to be looking up in the Silver State. That news, though, did not result from a reversal of fortune in the Nevada housing market. It was spawned by a new Nevada law that plays hardball with companies doing the foreclosing. Assembly Bill 284, which took effect in October, requires those foreclosing on a home to file an affidavit proving they have the right to bring the action — and it increases civil and criminal penalties for using fraudulent documents in a foreclosure.

Conflicted robosigner’ equals no foreclosure: NY state judge - On Monday, a Brooklyn judge dismissed a mortgage-foreclosure case over a major New York firm's failure to vouch for the veracity of its court filings amid questions over whether it used a "conflicted robosigner" to support its case. On July 28, Justice Arthur Schack gave attorneys from Rosicki Rosicki & Associates 60 days to file documents affirming they had taken "reasonable steps" to verify the accuracy of documents filed in support of a bank's motion to foreclose on a Brooklyn property. The affirmations are required in every foreclosure case brought since October 2010, when New York Chief Judge Jonathan Lippman ordered counsel for foreclosing banks to add an extra layer of review to prevent abuses such as deficient notarization and "robosigning" large numbers of documents without first checking their accuracy. Rosicki attorneys sought to push back that deadline in order to get more time to double-check the paperwork. In a supporting statement filed last September, the firm said it would be "unduly harsh and inappropriate to dismiss this action on the basis of a delay in submitting an affirmation to the court." But 137 days after the July 28 order, Schack ruled that the firm's time had finally run out.

California Congressmen Write to President Obama in support of AG Kamala Harris not going along with multi-state settlement - ScribD copy of signed letter

NV AG Casto sues Lender Processing Services for fraud - Attorney General Catherine Cortez Masto announced today a lawsuit against Lender Processing Services, Inc., DOCX, LLC, LPS Default Solutions, Inc. and other subsidiaries of LPS (collectively known “LPS”) for engaging in deceptive practices against Nevada consumers. The lawsuit, filed on December 15, 2011, in the 8th Judicial District of Nevada, follows an extensive investigation into LPS’ default servicing of residential mortgages in Nevada, specifically loans in foreclosure. The lawsuit includes allegations of widespread document execution fraud, deceptive statements made by LPS about efforts to correct document fraud, improper control over foreclosure attorneys and the foreclosure process, misrepresentations about LPS’ fees and services, and evidence of an overall press for speed and volume that prevented the necessary and proper focus on accuracy and integrity in the foreclosure process. “The robo-signing crisis in Nevada has been fueled by two main problems: chaos and speed,” said Attorney General Masto. “We will protect the integrity of the foreclosure process. This lawsuit is the next, logical step in holding the key players in the foreclosure fraud crisis accountable.”

Treat foreclosure as a crime scene - Bubbling under the surface of politics is the foreclosure crisis — where the power of big finance is brushing up against the rule of law. The party leaders seem to have decided it is essentially a giant — but unavoidable — tragedy.But the foreclosure crisis is not only a few million personal tragedies. It is a few million crime scenes. Massachusetts Attorney General Martha Coakley recently filed the first broad civil suit against five major banks and the Mortgage Electronic Registration Systems for foreclosure fraud. Her suit alleges that mortgage servicers routinely backdated and falsified documents to expedite foreclosures. In many cases, they foreclosed on loans they did not even own. Nevada Attorney General Catherine Cortez Masto last month indicted two employees of the foreclosure specialist Lender Processing Services, which works with the big banks, on 606 felony and misdemeanor counts of fraud. Delaware Attorney General Beau Biden is also suing MERS — as I recently wrote in POLITICO — for unfair and deceptive practices. New York Attorney General Eric Schneiderman successfully intervened to stop a whitewash settlement of Countrywide’s ostensible fraud in packaging and selling mortgage-backed securities it knew to be poisoned. These attorneys general have changed the legal environment around the mortgage and foreclosure mess — refocusing the core issue on justice. They are reframing the problem as a crime scene.

Foreclosures fall, but outlook isn't bright -- Foreclosure filings may have fallen in November but the number of homes scheduled for bank auctions grew significantly, indicating that a new wave of foreclosures are set to take place in the New Year. The number of foreclosure filings dropped to 224,394 properties in November, a 3% decline from October and a 14% drop year-over-year, according to RealtyTrac. During the month, one in every 579 housing units received either a default notice or underwent a scheduled auction or bank repossession, the online marketer of foreclosed homes said. The number of completed foreclosures, the last stage of the process when banks repossess the homes of delinquent borrowers, fell to 56,124 homes, a 17% plunge from a month earlier and the fewest since March 2008. Such repossessions are off 45% from their September 2010 peak, when more than 102,000 homes were lost to foreclosure. Foreclosure filings have been artificially depressed for more than a year now as banks slowed the processing of paperwork1 in the wake of the robo-signing scandal.

Occupy Our Homes Chris Hayes, MSNBC (video)

Occupy Goes Home - A cold, persistent rain fell on East New York last Tuesday as a crowd of hundreds snaked its way through the Brooklyn2 neighborhood, filled the street, and filed past blocks scabbed with vacant, boarded buildings. By design, the front of the procession was dominated by local residents and community activists. But the bulk of the crowd was made up of people who had probably never been so far out on the 3 line before: displaced residents of Zuccotti Park3 marching under the banner of Occupy Wall Street4. The marchers made frequent stops outside vacant foreclosed homes and marked them with black-and-yellow-striped tape that read "Occupy." At one stop, a young man named Quincy5 stood on a stoop and told the crowd he was slated for eviction that very day. City Councilmember Charles Barron6, speaking for the crowd, said, "We are not going to let this young man lose his home today." Quincy wept. The final destination of the march was a secret to all but a few until the crowd turned up Vermont Avenue, where balloons and banners outside number 702 heralded a housewarming party.

Negative Equity: How Many Loans are Underwater in Your State? - Home equity has become a thing of the past for millions of homeowners. Nearly 11 million, to be precise. That’s the number of properties nationwide that had negative equity at the end of the second quarter of 2011, according to market research firm CoreLogic. Using CoreLogic’s data, we’ve illustrated the number and percentage of “underwater” properties (a common term for those with mortgage loans that are larger than what the property is currently worth) in the United States. Hover over each state for the details.

American Airlines, Bankruptcy, and the Housing Bubble - American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills.  Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.  It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.

The dangers of De-Occupy Your House - I agree wholeheartedly with Jim Surowiecki’s sentiments this week about strategic default and the way in which it’s entirely rational for homeowners to walk away from their underwater mortgages. But I think he soft-pedals the consequences of what he calls “a De-Occupy Your House movement”: Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. This is all true, as far as it goes. If more people default on their mortgages, total mortgage-lending losses will rise — but a large part of that will simply be the transference of pain from homeowners to lenders. At the same time, however, there would also be a huge rise in foreclosures, evictions, and fire sales — with the result that house prices, which are still falling alarmingly, could see another stomach-churning lurch downwards. That in turn would only serve to increase the number of underwater homes, and would set off another set of of walk-aways and foreclosures, and — well, the vicious spiral is easy to foresee.

New Questions about Banks’ Force-Placed Insurance Deals - The first time Luis Juarez heard of force-placed insurance was when he received a $25,000 bill for it in the mail. A Florida doctor and homeowner, Juarez had been dropped by his previous insurer over a roofing issue. Though that lapse violated his obligation under the mortgage to maintain coverage on the property, he was current on his loan payments and heard nothing from the servicer Wells Fargo & Co. for more than a year. Then on May 10, 2010, Juarez got a note from QBE Specialty Insurance, a partner of Wells. It said that QBE was retroactively charging him $25,000 for a policy that had expired two months earlier, according to court filings. Neither the price tag — nearly quadruple his original policy's rate, according to court papers — nor the expired status of the QBE policy were a mistake.The use of carriers like QBE adds another public wrinkle to the controversy over banks' imposition of homeowners coverage, because the carriers are unregulated in major states such as Florida. Wells Fargo, SunTrust Banks Inc. and others are buying what is called "surplus-line" insurance, which is neither governed by state premium caps nor guaranteed by state funds. That leaves the insurer free to charge whatever rates it pleases — and to share some of the proceeds with banks through payments to their affiliates.

MBA: "Refinance Applications Increase as Rates Drop to 2011 Lows" - From the MBA: The Refinance Index increased 9.3 percent from the previous week to its highest level since November 4, 2011. The seasonally adjusted Purchase Index decreased 8.2 percent from one week earlier....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.12 percent, the lowest rate this year, from 4.18 percent, with points decreasing to 0.45 from 0.48 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. ...The following graph shows the MBA Purchase Index and four week moving average since 1990.  The purchase index decreased last week, but the 4-week average increased slightly. This index has mostly been sideways for the last 2 years - and at about the same level as in 1997. The MBA index was one of the indicators that NAR was overestimating existing home sales for the last several years.

Fixed mortgage rates again at record lows – Low rates offer a great opportunity for those who can afford to buy or refinance. Still, few people are able to take advantage of them. Freddie Mac said Thursday the rate on the 30-year home loan fell from 3.99% the previous week. The average rate of 3.94% is the lowest rate ever, according to data from the National Bureau of Economic Research. The average rate on the 15-year fixed mortgage fell to 3.21% from 3.27%. That's also a new record. Rates have been below 5% for all but two weeks this year. Yet this year could be the worst for home sales in 14 years. Low mortgage rates haven't spurred more home sales. Sales of previously occupied homes are just slightly ahead of last year's dismal sales figures — the worst in 13 years. New-home sales appear headed to their worst year on records dating back half a century. Mortgage applications have risen modestly in recent weeks but are up from extremely low levels, according to the Mortgage Bankers Association.

Realtors to Revise 2007-2011 Sales Data Lower - A real-estate trade group said Monday it plans to lower its estimates of how many homes were sold in the U.S. since 2007, after analysts came up with evidence that the group was overestimating sales. The National Association of Realtors, which publishes the monthly report on sales of previously occupied homes, said it will release revisions to home sales for 2007 through 2010 and for the first 10 months of this year. The data is scheduled to be released on Dec. 21, along with the group’s monthly report on home sales in November. Earlier this year, outside analysts called into question some of the assumptions behind the trade group’s data. For example, CoreLogic Inc., an independent housing data firm, found a far smaller number of home sales by tracking property records through local courthouses. The Realtors group cited several reasons for its decision to revise sales figures downward. The group said it was overcompensating for sales that didn’t happen on the regional and local real estate listing services from which the group gets its data. Other factors leading to the downward revision included geographic population shifts, a decline in the share of “for sale by owner” transactions that were completed without a real estate agent, and some new-home sales also being reported by real estate listing services.

NAR: Downward Revisions for 2007 to 2011 Home Sales and Inventory to be released on Dec 21st - From the WSJ: Realtors to Revise 2007-2011 Sales Data Lower The National Association of Realtors, which publishes the monthly report on sales of previously occupied homes, said it will release revisions to home sales for 2007 through 2010 and for the first 10 months of this year. The data is scheduled to be released on Dec. 21, along with the group’s monthly report on home sales in November. Last year the NAR reported sales of 4.9 million previously occupied homes. I expect 2010 sales to be revised down by 10% to 15%. Using the HousingTracker data, I've estimated 2010 sales will be revised down to around 4.25 million.

Massive Downward Revisions Imminent: National Association of Realtors Miscounted Millions Of Home Sales Over Last Five Years - Just when you thought you could trust the National Association of Realtors, a new shocking report from the NAR itself says that they have miscounted the amount of existing homes that were sold for the last five years.The National Association of Realtors said a benchmarking exercise had revealed that some properties were listed more than once, and in some instances, new home sales were also captured.“All the sales and inventory data that have been reported since January 2007 are being downwardly revised. Sales were weaker than people thought,” . “We’re capturing some new home data that should have been filtered out and we also discovered that some properties were being listed in more than one list.”Source: CNBC…While NAR hasn’t revealed exactly how big the revision to home sales will be, the agency’s chief economist Lawrence Yun said the decrease will be “meaningful.” "For the real estate business, this means the housing market’s downturn was deeper than what was initially thought,” Yun said.

Realtor Revise: Housing Downturn Was Worse Than We Thought - It may not seem possible, but the horrific housing market crash of the past few years has actually been worse than we previously thought. In the past two years alone, more than three million fewer homes may have been sold than was previously reported. On Tuesday, the National Association of Realtors, which releases the most widely watched monthly data on the real estate market, said it has been overstating home sales for as much as five years. The trade organization said it will release revised numbers going back to 2007 next week. The restatements may chop the number of homes sold since the beginning of 2010 by a third. For at least a year, housing economists have suspected that the NAR was overstating home sales. We reported on the growing discrepancy between the NAR’s sales numbers and outside data providers back in February. At the time, a NAR spokesperson said the assumption that the trade group’s data were inflated was “premature at best.” They also pointed out that real estate analytics company CoreLogic, one of the firms raising questions NAR’s sales data, was a competitor. Now NAR appears to be admitting its error. The question what that means for the housing market.

NAR’s Big Miss on Home Sales Underscores Lack of Transparency and Accuracy in Mortgage/Housing Data – Yves Smith - National Association of Realtors (NAR) has announced that their estimates for home sales have been materially incorrect since 2007, and that they plan to restate the number of homes sales downward. Apparently the NAR derives their homes sales information from the Multiple Listing Services, the proprietary “want-ads” real-estate agents use to list houses for sale.  Their error stems from several causes, but one of the biggest is overestimating the number of people who sell their homes without a real-estate agent. During the height of the housing boom many people skipped real estate agents, and their 6% commissions, opting to sell houses on their own.  I can see how some people would have decided to skip an agent back then. When I moved from CA to FL in 2005, I went on a weekend vacation with the family, and came back to nine bids, all well above asking price. NAR took the number of people who came to this same realization, and projected many people were selling homes without real estate agents. They ignored one small factor — the national housing collapse — and the apparently difficult to infer fact that when houses became harder to sell more people hired real estate agents. They also used old Census data to project population trends and they didn’t factor in changes based on consolidation in the MLS market. In other words, they massively blew it.

Headwinds for Housing - It’s no secret that housing and employment are correlated, and the causation is intuitive. If more people have jobs, then more people have incomes that support the purchase of a home. In the other direction, the more houses that are built to meet rising demand, the more jobs will be created in construction and real estate. We can see the correlation in this chart from the St. Louis Federal Reserve displaying one measure of employment for workers age 45-54 and the index of home prices. As employment of those in their peak earning years rose, so did home prices. This is partly a function of basic supply and demand: Rising demand pushes prices higher. As employment fell, demand declined, and so did home prices. The Federal Reserve famously has a dual mandate: to maintain stable inflation and employment. The Fed attempts to pursue these goals with monetary tools such as setting interest rate targets. The Fed’s primary tool for stimulating demand for housing has been to lower mortgage interest rates, by buying the US Treasuries that set the baseline cost of long-term debt and also mortgage securities. Indeed, the Fed’s first quantitative easing (QE) program was to buy about $1 trillion in distressed mortgage debt outright. The Fed’s assumption was that lower rates would stimulate demand for houses. As this chart illustrates, lower rates have stimulated precious little demand.

The Excess Vacant Housing Supply - Over the last few days, there has been some more discussion on the current number of excess vacant housing units in the United States.  There are always a large number of vacant housing units - this includes second homes, housing units for rent, homes sold but not yet occupied, and several other categories. The key is the "excess". Once the excess is absorbed in a local area, then new construction will pickup. Here is the recent discussion, first from an article by Catherine Rampell over the weekend in the NY Times:  Household formation has slowed dramatically since the recession, as cash-strapped families double up and unemployed recent college graduates are unable to leave behind their parents’ couches. To judge just from demographic statistics, more than a million households that should have been formed in the last few years weren’t, according to Mark Zandi of Moody’s Analytics. Dean Baker responded: Mark Zandi and the NYT Hugely Underestimate the Number of Vacant Homes The NYT cited Mark Zandi as saying the number of vacant homes is roughly 1 million, which he puts as equal to the gap in household formation that resulted from the recession. According to the Commerce Department, if the vacancy rate was back at its pre-bubble level, there would be 3 million fewer vacant units. Unfortunately Dr. Baker is using the Census Bureau's Housing Vacancies and Homeownership (CPS/HVS) survey, and there are serious questions about this survey.

The American Community Survey and Total Housing Units - In an earlier post - The Excess Vacant Housing Supply - I mentioned that there are serious question about the Census Bureau's Housing Vacancies and Homeownership (CPS/HVS) survey, and that it is probably not useful for estimating the excess vacant housing supply. There is another more robust annual survey - the American Community Survey (ACS) - that is based on a sample of 3 million housing units every year. Unfortunately this data doesn't jibe with the decennial Census data. The table below shows the ACS estimates of total housing units taken every July 1st. In 2000, the ACS was benchmarked to the 2000 decennial Census (as of April 1st). I've included the total completion data for single family, multi-family, manufactured homes - and calculated the implied number of demolitions using the change in the ACS.

Unwanted Homes, Unwanted Workers - Once upon a time, housing looked like a rare, highly valued asset; now, the market has been flooded with unwanted homes. And as I wrote in an article Sunday, economic forces have helped reallocate those excess houses to more productive (and non-residential) uses, like a park, work of art or marijuana garden. In the course of reporting for this article, I realized that today’s housing problems are not terribly dissimilar from the last time one of pillars of the economy faced sudden devaluation: its labor force, right after World War II. During the war, able-bodied workers were in short supply relative to the output required to keep the country functioning and pumping out tanks and munitions. To lure more women into the labor market, employers raised wages and the government popularized “Rosie the Riveter.” Then the war ended. Millions of soldiers flooded back into an economy that had been restructured to operate almost entirely without them.  But just as governments are bulldozing away excess housing today, after World War II the government removed some of the surplus labor from the market then as well. It did so through two channels — one for women, and one for men.

Fed: Household Debt Service Ratio back to 1994 levels, Mortgage financial obligations remain elevated - The Federal Reserve released the Q3 2011 Household Debt Service and Financial Obligations Ratios yesterday..These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households. The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio...The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases..The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages and consumer debt. The overall Debt Service Ratio has declined back to 1994 levels - thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt is also at 1994 levels.

The Real World Is Nominal - Based on underlying fundamentals I would expect household debt service to hit multi-decade lows by mid-2012 At this point unless there is a major uptick home equity borrowing – unlikely – or a major increase in interest rates it is pretty much baked into the cake.

LA area Port Traffic declines year-over-year in November - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for November. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic is down 0.3% from October, and outbound traffic is down 0.2%. Inbound traffic is "rolling over" and outbound traffic has stopped increasing. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of November, loaded inbound traffic was down 4% compared to November 2010, and loaded outbound traffic was down 2% compared to November 2010. Exports have been increasing, although bouncing around month-to-month. This is only the 2nd month with a year-over-year decline in exports since Sept 2009. Imports have been soft - this is the sixth month in a row with a year-over-year decline in imports.

Vital Signs: Slowing Import-Price Growth - Imports are getting more expensive, but at a slower pace. U.S. import prices increased in November from October with a jump in petroleum overwhelming a decline in nonfuel imports. But the rate of increase has slowed: Import prices were up 9.9% in November from a year ago, which is down from year-over-year increases rising as high as 13.7% over the summer.

US consumer prices unchanged in November - U.S. consumer prices were unchanged in November, mainly because of declining energy costs, the Labor Department said Friday. So-called core prices rose a seasonally adjusted 0.2%, however. The core data strips out volatile food and energy costs. Economists surveyed by MarketWatch had forecast CPI to be unchanged overall, with a 0.1% increase in the core rate. Consumer prices have risen an unadjusted 3.4% over the past 12 months, but that's down from 3.9% in June. Yet the core rate has risen 2.2% over the past 12 months, the largest such increase since 2008. Inflation-adjusted hourly wages, on average, fell 0.1% in November, the government said.

BLS: CPI Unchanged in November - From the BLS: CPI unchanged in November as energy declines offset increases in other categories The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment. The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. ... The index for all items less food and energy increased 0.2 percent in November following increases of 0.1 percent in each of the prior two months.

Energy Prices Have Driven 2011 Inflation - Data for 2011′s penultimate month brings into view the year’s clear villain on the inflation front: an unambiguous and broad surge in energy prices. And yet, for all of the gains in a category of prices consumers face with regularity, overall inflation has remained relatively tame. From the point of view of central bankers, this positive outcome for a dangerous situation comes down to public confidence the Fed will ultimately thwart an inflation wave. Put another way, past Fed success at controlling inflation generates confidence prices in the future will never be allowed to rise by too much. A paper this week from the Federal Reserve Bank of Dallas evaluating the connection between commodity price increases and inflation concludes that “if the Federal Reserve is able to anchor inflation expectations and prevent them from rising following a commodity price shock, it successfully breaks the link between commodity prices and core inflation.” November’s annualized consumer price index readings show energy-related commodities were indeed a conspicuous driver of price pressures. Over the 12-month period, fuel oil surged 25%, while gasoline was up 19.7%. Energy as a whole was up 12.4%, compared with a 4.6% annualized increase in food prices.

Vital Signs: Gas Prices Move Lower -Falling gas prices are leaving many consumers with a little extra cash to spend during the holiday season. A gallon of regular gasoline cost an average of $3.274 as of Monday, according to the U.S. Energy Information Administration. That was down 1.6 cents from a week ago but still 29.4 cents higher than prices were in mid-December last year.

Ceridian-UCLA: Diesel Fuel index increased 0.1% in November - This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Increased 0.1 Percent in November The Ceridian-UCLA Pulse of Commerce Index rose 0.1 percent in November following a 1.1 percent increase in October. On a year-over-year basis, the PCI grew 0.9 percent in November compared to the 1.3 percent year-over-year increase in October. This graph shows the index since January 2000. This index declined sharply in late summer and has only partially rebounded over the last two months. Mostly this has been sideways this year (only up 0.9% from November 2010). Note: This index does appear to track Industrial Production over time (with plenty of noise).

Ceridian Fuel Index Shows Christmas Doesn't Come Early to the Trucking Industry - Reported retail sales are not in alignment with truck fuel usage as reflected in the Ceridian Pulse of Commerce Index for November The Ceridian-UCLA Pulse of Commerce Index rose 0.1 percent in November following a 1.1 percent increase in October. Over the past three months, compared to the prior three months, the PCI declined at an annualized rate of 4.8 percent. On a year-over-year basis, the PCI grew 0.9 percent in November compared to the 1.3 percent year-over-year increase in October. “The continuing weakness in the PCI is out-of-sync with real retail sales. The year-over-year increase in real retail sales through October was 3.6 percent compared with an increase in the PCI of 1.3 percent. The disconnect between real retail sales and the PCI suggests that retailers have learned to better manage their inventory. Therefore, shoppers can anticipate fewer bargains in the month ahead, and relatively little stock left for the after-Christmas sales,” said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and director of the UCLA Anderson Forecast. “Given the weak PCI, the advance estimate of third quarter GDP growth of 2.5 percent was surprising, but the final estimate may be lower,”

Retail Sales increased 0.2% in November - On a monthly basis, retail sales were up 0.2% from October to November (seasonally adjusted, after revisions), and sales were up 6.7% from November 2010. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $399.3 billion, an increase of 0.2 percent (±0.5%)* from the previous month and 6.7 percent (±0.7%) above November 2010. Retail sales excluding autos increased 0.2% in November. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 20.0% from the bottom, and now 5.5% above the pre-recession peak (not inflation adjusted)  The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.  Retail sales ex-gasoline increased by 6.0% on a YoY basis (6.7% for all retail sales).  This was below the consensus forecast for retail sales of a 0.5% increase in November, and a 0.4% increase ex-auto.

Slower But Still Growing Retail Sales In November - The pace of growth in retail sales slowed in November, but the overall trend was still up. We can debate the details of whether a lesser rate of growth is a sign of things to come, but if you’re looking for a smoking gun that screams recession you won’t find it in today’s update on consumer spending. Seasonally adjusted retail sales rose 0.2% last month, the slowest rise since June and well below Bloomberg's consensus forecast of 0.6%. Some corners of retail reported lower sales on a monthly basis, but the generally rising trend is intact. Notably, the cyclically sensitive auto sector had another good run in November with auto sales up by a tidy 0.7%.

Retail enthusiasm? - Barry Ritholz keeps us abreast of retail spending:  Last month, I published a post on the nonsense that is Black Friday sales (No, Black Friday Sales Were Not Up 16% (not even 6%). That evolved into a Washington Post article, Did Black Friday save the season? Beware the retail hype. Today, we learn that many breathless forecasts from NRF to ShopperTrak were so much hot air and empty hype: Sales were flat to up only modestly. Total U.S. retail sales in November gained only 0.2%, following a 0.6% October. Even that month was revised downwards. Retailers themselves may pay the price for their massive discounting: Not only might their quarterly earnings be affected by the margin pressure, but they continually train investors shoppers to hunt for discounts. Retail therapy and sport shopping are being replaced by extreme couponing and sites like Living Social and Groupon.

Retail Inventories Flat Ahead of Holiday Season - Inventories of U.S. retailers were flat during October despite solid sales, a sign that merchants were guarded going into the critical holiday shopping season amid concerns about the overall economy. A Commerce Department report Tuesday showed overall inventories of businesses in the U.S. increased by 0.8% to a seasonally adjusted $1.546 trillion. While retail stockpiling was unchanged, inventories of manufacturers and wholesalers surged. The 0.8% gain was in line with expectations by economists surveyed by Dow Jones Newswires, and followed a flat reading during September. Sales of U.S. businesses in October rose by 0.7% to a seasonally adjusted $1.218 trillion, after climbing 0.6% in September.

As Sales Lag, Stores Shuffle the Calendar - When is the final Saturday before Christmas? Don’t bother consulting a calendar if you’re shopping at Macy’s, Sears or J. C. Penney. They’ve moved it forward a week. A sharp drop in shopping since Thanksgiving3 weekend has prompted worried retailers to slash prices, extend specials, stay open later — and rewrite the calendar. Usually one of the most heavily discounted shopping days of the year, the Saturday before Christmas — it falls on Dec. 24 this year — is too crucial to retailers’ holiday sales to be left in the hands of procrastinating Christmas Eve shoppers. Instead, many of the promotions pegged to “Super Saturday,” as the day is known in the retail industry, are now scheduled for this Saturday — a full eight days before Christmas.

Will Shoppers Save the Economy? - The U.S. consumer is back, but how long can that keep the economy going? One of the growing bright spots in the economy recently has been Americans’ willingness to hit the mall. In the third quarter alone, higher consumer spending accounted for 73% of the rise in the GDP. Holiday shopping looks like it will be much stronger than initially projected. Consumers spent 16% more during the Black Friday weekend than they did a year ago. And it’s not just the holiday season. Consumer expenditures have been up in three of the past four months. Last week, the Federal Reserve said that consumer purchases rose in the third quarter despite the largest decline in household net worth since the beginning of the financial crisis. What’s more, wages, after rising only modestly so far this year, fell last month.

The Great Start-Up Stagnation -- You see a long-term slowdown in start-ups:The numbers are sobering. From the mid-1980s to the mid-2000s, 450,000-550,000 new businesses with at least one employee were created in the US each year. In 2009, the latest year for which records are available, there were just 400,000. More recent numbers suggest that the climate has not improved: the number of incorporated self-employed people, a measure of the health of small businesses, was 5.06m in November, down from 5.37m in November 2009, official figures say. A slowdown would be expected in a downturn, but the start of the decline predates the start of the recession at the end of 2007; the peak year for business starts was 2006. The dwindling birth rate for new businesses matters because young companies are disproportionately responsible for job creation. Indeed, companies less than five years old have generated all of the net jobs in the US economy since the 1970s, according to research published by the Kauffman Foundation.

Small-Business Confidence Ticks Up - Confidence levels among small-business leaders rose in December, albeit from still low levels, a report Tuesday said. The National Federation of Independent Business said that its small-business optimism index rose 1.8 points to a reading of 92.0. The index was lifted by steady or improved conditions in eight of the 10 subcomponents of the index. The NFIB was resistant to putting a positive spin on the numbers, however. “The numbers have been depressing for so long, any little progress looks good,” the report said. “The new reading is still well below the average reading prior to 2008 by 8 huge points and below the comparable level in the recovery that started in 2001 by 14 points,” the NFIB said. The report noted that hiring “brightened” in December, with firms noting an overall increase in payrolls. Few respondents saw access to credit as a problem. Instead, uncertainty about future demand was driving many not to borrow.

Small Businesses Plan to Increase Hiring - Some good news in the job market: Small businesses plan to increase hiring, according to the latest report from the National Federation of Independent Business. The organization — an industry group for small and medium-size businesses — conducts a survey each month on subjects like optimism, credit conditions and jobs. November’s survey showed that the net share of companies that were planning to hire workers was at its highest in 38 months. The share is well below where it has been in previous recoveries, but is an improvement nonetheless. What’s more, the net percentage of companies that say they have already increased their employment in the last three months — that is, the percent saying they increased their staff minus the percent saying they decreased it — was positive for the first time in nearly four years.

Worker-Owners of America, Unite! - THE Occupy Wall Street protests have come and mostly gone, and whether they continue to have an impact or not, they have brought an astounding fact to the public’s attention: a mere 1 percent of Americans own just under half of the country’s financial assets and other investments. America, it would seem, is less equitable than ever, thanks to our no-holds-barred capitalist system.  But at another level, something different has been quietly brewing in recent decades: more and more Americans are involved in co-ops, worker-owned companies and other alternatives to the traditional capitalist model. We may, in fact, be moving toward a hybrid system, something different from both traditional capitalism and socialism, without anyone even noticing.  Some 130 million Americans, for example, now participate in the ownership of co-op businesses and credit unions. More than 13 million Americans have become worker-owners of more than 11,000 employee-owned companies, six million more than belong to private-sector unions.

Survey: CEOs foresee no hiring pickup next 6 months - Two-thirds of chief executives of the largest U.S. companies say they don't plan to increase hiring or will cut staff in the next six months, mainly because of sluggish growth in the United States and financial turmoil in Europe. The Business Roundtable said Wednesday that about one-third of its member CEOs expect to add employees and spend more on large equipment in the next six months. That's little changed from three months ago. More than 40% plan to keep their work forces steady. About a quarter expect to cut jobs. The group forecasts that the economy will expand 2% at an annual rate next year. That's not enough to produce job growth. Instead, existing employees will be expected to handle any increased business. "We're right at the point where the economy is growing, but not enough to offset productivity and create jobs," said the group's chairman, Jim McNerney, CEO of the Boeing Co. "Everybody's doing things more efficiently." New and smaller companies, more than the big multinationals surveyed by the roundtable, tend to drive job creation, particularly in economic recoveries. Businesses with fewer than 500 employees have created about 65% of jobs in the past 20 years.

Industrial Production decreased 0.2% in November, Capacity Utilization decreased - From the Fed: Industrial production and Capacity Utilization Industrial production decreased 0.2 percent in November after having advanced 0.7 percent in October. Factory output moved down 0.4 percent in November; excluding a drop of 3.4 percent in the output of motor vehicles and parts, manufacturing production declined 0.2 percent. Capacity utilization for total industry decreased to 77.8 percent, a rate 2.0 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average.  This graph shows Capacity Utilization. This series is up 10.5 percentage points from the record low set in June 2009. Capacity utilization at 77.8% is still 2.6 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007.  The second graph shows industrial production since 1967. Industrial production decreased in November to 94.8, however October was revised up (this would have been an increase without the upward revisions to previous months).

MISS: November Industrial Production Fell 0.2%: Not good. Industrial Production fell 0.2% in November. Economists were expecting 0.2% increase. Capacity utilization came in a at 77.8%, which was right in line with expectations. Last month, October industrial production climbed 0.7%, beating the expectation fo 0.4%. From the press release: Industrial production decreased 0.2 percent in November after having advanced 0.7 percent in October. Factory output moved down 0.4 percent in November; excluding a drop of 3.4 percent in the output of motor vehicles and parts, manufacturing production declined 0.2 percent. Mining production edged up 0.1 percent, while the output of utilities rose 0.2 percent. At 94.8 percent of its 2007 average, total industrial production for November was 3.7 percent above its year-earlier level. Capacity utilization for total industry decreased to 77.8 percent, a rate 2.0 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average.

Vital Signs: Declining Industrial Output - Industrial production fell in November. Output by U.S. factories, mines and utilities declined 0.2% during the month, and output by manufacturers dropped 0.4%, the Federal Reserve said. The data suggest that U.S. factories are starting to feel the effects of continued sluggish growth at home as well as a slowdown in the brisk pace of expansion in developing world economies.

Empire State and Philly Fed Manufacturing Indexes show improvement in December - From the NY Fed: Empire State Manufacturing Survey The Empire State Manufacturing Survey indicates that manufacturing activity improved in New York State in December. The general business conditions index rose nine points to 9.5, its highest level since May. From the Philly Fed: December 2011 Business Outlook Survey The diffusion index of current activity, the survey’s broadest measure of manufacturing conditions, remained positive for the third consecutive month and increased from 3.6 in November to 10.3. ... The current employment index remained positive at 10.7, only 1 point lower than in November. The average workweek index also remained positive but fell nearly 9 points. Both surveys indicate expansion in December, and at a faster pace than in November. Both indexes were above the consensus forecasts. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through December. The ISM and total Fed surveys are through November.

A Quick Note on Manufacturing - With a sociopathic insouciance that I strongly approve of, Matt Yglesias suggests that the essence of manufacturing (vs services) is putting stuff in boxes and that’s not really something anyone should care about. Kevin Drum disagreesThere really are some good reasons to care about manufacturing jobs. Here are three:

• The manufacturing sector is generally more capital intensive than the service sector. Because of this, a pea canning factory can afford to pay higher wages for unskilled and semi-skilled labor than a restaurant can.
• On a related note, manufacturing facilities are generally more scalable and more amenable to technological improvements. This improves productivity, and improved productivity is key to improved wages. By contrast, the restaurant business doesn’t have a lot of scope for automation or productivity improvements.
• Manufacturing is part of the tradable sector, while service industries generally aren’t (though there are exceptions). A pea canning factory can ship its products overseas and help maintain our balance of payments. A restaurant can’t.

The Real Unemployment Rate - Yesterday in The Financial Times, Ed Luce hits on a point that I made when the most recent unemployment figures were released two weeks ago, namely that the unemployment figures that are shared publicly are vastly understating the real unemployment rate: America is employing a decreasing proportion of its people. At the start of the recession, the employment-to-population rate was 62.7 per cent. The rate is now 58.5 per cent. Last month, unemployment fell from 9 per cent to 8.6 per cent. On the surface, this looked like a welcome leap in job creation. In reality, more than half of the fall was accounted for by a decrease in the numbers “actively seeking” work. The 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs. According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent. Some have moved from claiming unemployment benefits to disability benefits, and have thus permanently dropped out of the labour force.

Hiring, 'Quits' and Layoffs - The recession and lack of recovery have often been characterized as a lack of hiring, rather than an extraordinary number of employer-employee “separations” (a separation is a layoff or what the Bureau of Labor Statistics calls a “quit”). But the aggregate data on hiring, quits and layoffs can be misleading. The chart below from the Bureau of Labor Statistics shows total hires, separations and total employment from December 2000 to December 2009. The shaded area to the right indicates the start of the most recent recession. Both separations and hires fell about 20 percent (the hires dropped sooner). However, this characterization is quite different for young people than for the rest of the work force. Even during business cycle expansions, young people have high rates of job turnover. The number of young people hired during a typical month is disproportionately high, as is the number of young people quitting or getting laid off (I use the term “layoff” to refer to both layoffs and discharges). For this reason, young people could dominate the job turnover statistics, even while they do not dominate the employment statistics.

BLS: Job Openings "essentially unchanged" in October - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in October was 3.3 million, essentially unchanged from 3.4 million in September. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in October was 1.2 million higher than in July 2009 (the most recent trough for the series). The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. . This report is for October, the most recent employment report was for November. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings declined slightly in October, but the number of job openings (yellow) has generally been trending up, and are up about 13% year-over-year compared to October 2010.  Quits declined in October, but have mostly been trending up - and quits are now up about 10% year-over-year. These are voluntary separations and more quits might indicate some improvement in the labor market. (see light blue columns at bottom of graph for trend for "quits").

Weekly Initial Unemployment Claims decline to 366,000 - The DOL reports: In the week ending December 10, the advance figure for seasonally adjusted initial claims was 366,000, a decrease of 19,000 from the previous week's revised figure of 385,000. The 4-week moving average was 387,750, a decrease of 6,500 from the previous week's revised average of 394,250. The following graph shows the 4-week moving average of weekly claims since January 2000. Click on graph for larger image. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 387,750. This is the lowest level for weekly claims - and the lowest level for the 4-week average - since early 2008. And here is a long term graph of weekly claims:

Jobless Claims Drop To The Lowest Level Since May 2008 - Now we’re getting somewhere. Initial claims for new jobless benefits fell last week by a hefty 19,000 to settle at a seasonally adjusted 366,000. That’s the lowest tally since May 2008, which is to say before the Lehman implosion that turned a financial problem into a macro crisis. That's a significant change for this leading indicator and it implies that the U.S. economy is poised to muddle through at a stronger pace in 2012.  Today’s drop in claims, combined with a review of the recent downward trend, is far too substantial to dismiss as statistical noise. Making bold predictions in economics is always a dangerous affair, especially these days. But looking at today’s claims update suggests that the modest growth in the labor market may be poised to rise a notch or two.

A Closer Look At Yesterday's Encouraging Report On Jobless Claims - Is this the real deal? Yesterday's update on new jobless claims, which fell to a 3-1/2 year low last week, suggests that the labor market will continue growing, perhaps at slightly faster rates than we've seen in 2011. “This is unexpectedly great news,” says Ian Shepherdson at High Frequency Economics. But skepticism abounds, and rightly so. There have been several false starts to the recovery since the Great Recession was officially declared at an end in June 2009. There's no way to know for sure if the latest drop in new filings for unemployment benefits signals a true turning point for the better this time, but the possibility can't be dismissed either, at least not yet. Still, economist Brad DeLong has his doubts about the latest fall in claims. "The seasonal adjustment factor makes it shaky news," he writes. Perhaps, but if we strip out the seasonal adjustment and look at the raw claims data on a year-over-year basis the latest numbers are in line with the trend in recent months of a roughly 10% annual decline. In fact, the latest report shows that unadjusted new claims were lower by nearly 12% vs. the year-earlier figure—the biggest drop in two months.

Jobs needed to reach 8% unemployment rate by November 2012 -- On 60 Minutes, President Obama was asked if he thought the unemployment rate could decline to 8% by next November (currently 8.6%). From the 60 Minutes interview:  Kroft: With the unemployment [rate at] 8.6 [percent], you've still got soft consumer demand. You've got no business investment. Do you think that things are gonna get better? Well, do you think that you might have the unemployment rate down to eight percent by the time the election rolls around? Obama: I think it's possible. But, you know, I'm not in the job of prognosticating on the economy. Many forecasters think the unemployment rate will increase next year because of sluggish growth. Right now the FOMC is forecasting the unemployment rate will be in the 8.5% to 8.7% range in Q4 2012, and private forecasters are even more pessimistic. Goldman Sachs is forecasting 9% in Q4 2012, and Merrill Lynch is forecasting 8.8%. But it is possible that we could see 8% by the election. It depends on job creation and the participation rate.

Job Quantity, Job Quality  - In this oped from today’s Financial Times, I made the point that while the nation would definitely benefit from a strategy to preserve and expand our manufacturing base, job growth there is likely to be limited by both globalization and labor-saving productivity growth. So we also need to be mindful of the quality of jobs in the services. The chart below, from the BLS employment projections, shows the top 30 occupations expected to add the most jobs over this period.  A few of the jobs, like computer engineers and physicians, require college or more, but most don’t. If the Bureau’s predictions are anywhere near accurate, and they’ve got a good track record, once the economy finally gets back on track, we will create these types of service jobs in “non-tradable” sectors.  From my oped: But job quality in this sector is bifurcated. We’ll need more security guards and cashiers along with computer whizzes and market analysts.  The high-end folks will be fine. But you must find ways to ensure that low-end service jobs are decent. That means more training – a home health aide with training in gerontology adds more value than one with only a high school diploma.

Can America regain most dynamic labour market mantle? - Last week, Barack Obama went to Osawatomie, Kansas, to kick off a more populist phase in his 2012 re-election bid. “This is a make-or-break moment for the middle class,” “I believe that this country succeeds when everyone gets a fair shot.” Saying everyone should get a “fair shot” always makes political sense – particularly at a time when US income inequality rivals that of Mark Twain’s “Gilded Age”. But it might have been a stretch for Mr Obama to suggest the American middle class is facing a unique “make-or-break” moment. In reality, the labour force has been polarising for most of the past generation in a trend that has sharply accelerated since 2000. America used to be exceptional. Postwar, it maintained lower unemployment than the Europeans and a higher rate of jobs turnover, enabling it to get away with more meagre benefits; “a fair day’s work for a fair day’s pay” was within the grasp of most. That gave America a booming middle class that until recently was the most important engine of global demand. No longer. Today, somewhat remarkably, US joblessness is higher than in much of Europe. And the US consumer is mired in high personal debt. As the jobs crisis deepens, so too does US political polarisation. Allegations of “class warfare” are a staple of Washington debate.  Yet there are few signs that either policymakers or economists are closer to finding answers.

The Book of Jobs - Joseph Stiglitz - It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997. The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Structural adjustment for the middle class - Working people in the US have suffered big economic losses in the past four years.  Losses of jobs in the economy have pushed many working people from high-wage to low-wage jobs, and as we all know, many people have been pushed out of jobs altogether.  The national unemployment rate was 8.6% in November, and very much higher in urban areas and African-American and Latino communities.  Michigan's rate was 10.6% in October 2011 (link).  White non-Hispanic households fell from $55,360 in 2009 to $54,620 (-1.3%), while black households fell from $33,122 to $32,068 (-3.2%) (Table 1).  These differences in household income across race are stunning: black households started out at only 63% the level of white households in 2009, and they fell by more than double the percentage rate of loss from 2009 to 2010. Here is a report from the US Census Bureau,  Income, Poverty, and Health Insurance Coverage in the United States: 2010, that sheds some light on the changes of the past several years.  Here are a few important summary findings:

Job loss ‘is fastest-rising fear’ - Unemployment is the world's fastest-rising worry, a BBC World Service survey covering 11,000 people in 23 countries suggests. The annual poll, called The World Speaks, gave people a list of concerns and asked which they had discussed with friends or family in the past month. Corruption and poverty still ranked the highest, but unemployment was mentioned by 18% - six times the rate citing it in the first survey in 2009. The poll was carried out by Globescan. The growth in concern was found across all countries surveyed, although corruption emerged as the most talked about global concern. Nearly a quarter of those asked had discussed that topic in some form over the past four weeks. Next came extreme poverty. One in five had talked about that subject recently. Issues associated with inflation, such as higher food and energy prices, were on level pegging with unemployment in third place - with both topics mentioned by 18% of those surveyed.

Here’s Another Bad Idea: Reduce Weeks of Unemployment Insurance - In the most recent jobs report, we hit a new, albeit unenviable, world’s record: the average number of weeks of joblessness among the unemployed—40.9 weeks—has never been higher (see figure).* So, what do conservatives do?  They snap into action and propose a holiday gift for the unemployed and their families: a reduction of 40 weeks of unemployment insurance (UI) benefits and, for stocking stuffers, unprecedented, preposterous rules for UI eligibility. It was enough to make NELP yelp: 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 [26 weeks of] 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. Their bill also requires recipients who lack a high-school degree to enroll in a GED program or lose benefits; it would also allow states to make applicants take a drug test.  I suspect that you, like me, agree that people should have at least a high school degree and not take drugs.  But don’t the long-term unemployed have enough problems without this kind of harassment and political grandstanding?

Gingrich: ‘I don’t want to pay people 99 weeks to do nothing’ -Republican presidential candidate Newt Gingrich asserted Monday that workers who lose their jobs were being paid by the government for “99 weeks to do nothing.” Speaking to about 200 employees at Insight Technology, a defense contractor in New Hampshire, the former U.S. House Speaker called for funds workers pay into unemployment insurance to be diverted to training programs. “I am willing to continue unemployment compensation, but I would attach to it a training requirement,” the Georgia Republican explained. “So if you sign up for unemployment compensation, you would also sign up for a business to get trained to learn a new skill. Because by definition, the reason you’re signing up for unemployment compensation is you’re not finding a job at your current skill level.”“Now if you took all the money we spent in the last five years for unemployment compensation, if that had been a worker training fund, you’d have a dramatically better-trained work force. We have thousands of jobs available that people can’t fill. You have people over here that want a job, but they don’t have the skill. You have jobs over here that requires a skill that’s not currently available,” he added. “I don’t want to pay people 99 weeks to do nothing.”

Long-term jobless eye bleak future as benefits end - Parks and Jones are among the nearly 7 million Americans receiving jobless benefits under seven different state and federal programs. Around a quarter of those will fall off the rolls in January if Congress does not renew an extended benefits program that expires at year end. Parks' savings are almost exhausted and his house has lost more than 30 percent of its value, making it hard for him to seek job opportunities outside Pennsylvania. He has tried to market his management skills in manufacturing and the fast-growing field of health care, but has found them already overcrowded. "It's really getting tight," Parks told Reuters. "The ability to provide is really diminishing and it becomes more the ability to survive." Parks is collecting $500 a week in unemployment benefits, a far cry from the $80,000 a year he made in his last job as a project manager in architecture and construction.

UI Cuts by State Under the R’s Plan for Extension - The Dept of Labor just released an analysis of the number of people who would lose unemployment benefits if we were to implement the reductions of up to 40 weeks in the Republicans’ proposed extension.  Summing across the states, about 3.3 million would lose benefits. Review this list with these numbers in mind: according the Bureau of Labor Statistics, there were about 3 million job openings in October, about 7 million people on UI, and about 14 million total unemployed.  That’s more than four unemployed persons per job opening.  And if every single one of those job openings went to people currently on UI, you’d still have around 4 million people on the UI rolls. Until this economy is generating enough jobs to even approximate the needs of job seekers, it is foolish at two levels to cut the UI safety net.  At the micro level, families with jobless members need the money to make ends meet.  At the macro level, the fact that these families spend, as opposed to save, UI benefits gives the economy a needed boost.

Why Oh Why Can't We Have a Better Press Corps? No, High Unemployment Is Not Primarily the Result of "Generous" Unemployment Insurance Benefits » The New York Times continues to print Casey Mulligan, who claims--once again--that the unemployment rate rose to its current levels and remains high because the federal government made unemployment insurance more generous, and that as a result all those lazy lucky duckies decided to take a vacation on the hard-working taxpayer's dime:Casey B. Mulligan: Hiring, 'Quits' and Layoffs: The recession and lack of recovery have often been characterized as a lack of hiring [due to deficient aggregate demand]…. But the aggregate data… can be misleading….[Y]oung people have high rates of job turnover…. [Y]oung people could dominate the job turnover statistics, even while they do not dominate the employment statistics…. Michael Elsby, Bart Hobijn and Aysegul Sahin…. found a very different pattern for people 16-24 than they did for people 25-54. Estimated job separations among employees ages 25-54 were 33 percent greater in 2009 than they were in 2007….Before the recession began, quits were… most common… now the number of quits [has fallen] about equals the number of layoffs… [because] of the unemployment insurance system. A person who quits his or her job is not eligible for unemployment insurance…. Of course, that is not how the people Mulligan cites, Elsby, Hobijn, and Sahin, read the situation:

It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment: Two competing narratives frame the debate about why unemployment remains so high even though the economy has been growing for more than two years. The mainstream “Great Recession” narrative holds that the economy fell into a deep hole in 2008 and has been climbing out of it so slowly because demand has grown so slowly. Jobs continue to be very hard to find, no matter how hard unemployed workers look for them; employers are reluctant to hire until they see stronger signs that their sales will pick up soon. The “Great Vacation” narrative holds that unemployment insurance (UI) benefits — in particular, the added weeks of benefits for the long-term unemployed that Congress has funded in the past few years — have dissuaded millions of unemployed workers from taking a job. If, then, jobless workers would get off their duff (or if we would give them a good swift kick there), unemployment would plummet. That narrative seems to be motivating the latest House UI proposal, which curtails the number of weeks of UI benefits available, would allow states to alter the fundamental social insurance nature of the program, and includes a number of “reforms” that would make it more difficult for workers who lose their jobs through no fault of their own to have access to the program (see our critique).

Study Links Expiring Unemployment Benefits to Disability Applications - Many poor Americans seek Social Security disability payments as a financial life preserver when their unemployment benefits begin expiring, preliminary research by two economists shows. The findings, released by the Obama administration Thursday, are based on interviews with unemployed workers for a study conducted by White House Council of Economic Advisers Director Alan Krueger and Andreas Mueller of Columbia Business School. The findings offer a new window both into the struggles of the poor and the growing financial strain of one of the country’s largest entitlement programs. Their research found that close to 10% of Americans between the ages of 50 and 65 who didn’t have access to at least $5,000 applied for Social Security disability benefits by the time their unemployment benefits were set to expire. The percent of this group seeking the benefits rose precipitously in the weeks leading up to the exhaustion of benefits, as it was below 1% with 50 weeks left in unemployment benefits. Jobless Americans in this age range who had access to at least $5,000 were much less likely to seek SSDI benefits at any point while collecting unemployment benefits.

A Look Back at Extended Unemployment Benefits - Tangled in the current Washington debate over extending the payroll tax is another thorny, but less prominent, policy issue: whether to also renew extended unemployment benefits. States typically allow unemployed workers to receive up to 26 weeks of unemployment benefits. But two temporary, federally funded programs have enabled some job-seekers to receive checks for up to 99 weeks in states with especially high unemployment rates. At the end of this month, those federally paid programs will end unless Congress decides to extend them once again. (The programs have been renewed several times already in the years since they were first created.) The White House estimates that without an extension, an additional five million jobless workers will exhaust their benefits by the end of 2012.Given all this, it’s probably worth looking back at the role that unemployment benefits have played in the economy. Since June 2008, when Congress first created the Emergency Unemployment Compensation program, nearly 18 million Americans have at some point received federally funded extended unemployment benefits.

Crippling the Right to Organize - UNLESS something changes in Washington, American workers will, on New Year’s Day, effectively lose their right to be represented by a union. Two of the five seats on the National Labor Relations Board, which protects collective bargaining, are vacant, and on Dec. 31, the term of Craig Becker, a labor lawyer whom President Obama named to the board last year through a recess appointment, will expire. Without a quorum, the Supreme Court ruled last year, the board cannot decide cases.  What would this mean?  Workers illegally fired for union organizing won’t be reinstated with back pay. Employers will be able to get away with interfering with union elections. Perhaps most important, employers won’t have to recognize unions despite a majority vote by workers. Without the board to enforce labor law, most companies will not voluntarily deal with unions.  If this nightmare comes to pass, it will represent the culmination of three decades of Republican resistance to the board — an unwillingness to recognize the fundamental right of workers to band together, if they wish, to seek better pay and working conditions. But Mr. Obama is also partly to blame; in trying to install partisan stalwarts on the board, as his predecessors did, he is all but guaranteeing that the impasse will continue..

How Goldman Sachs and Other Companies Exploit Port Truck Drivers — Occupy Protesters Plan to Shut Down West Coast Ports in Protest - Astute consumers may know that the rock bottom we see advertised on endless TV and internet commercials are often the result of companies manufacturing their goods overseas, using sweatshop labor where poorly paid workers often toil in dangerous and unhealthy conditions so that we can enjoy the latest electronics, the coolest pair of jeans. But what many people may not know is that these sweatshop conditions don't end when those goods hit American soil. Between the dock where the cargo is unloaded and the shelf from which you pluck your treasure, there are several critical lynchpins. One of them is port truck drivers. These drivers (around 110,000 of them in the United States) are responsible for moving approximately 20 million containers a year from the ports to railway yards and warehouses. Drivers operating large trucks are expected to safely haul loads up to 80,000 pounds. It's a job for professionals, only these professionals are earning poverty wages, sometimes even less than you'd make flipping burgers at a fast food restaurant. Once a middle-class profession, the port trucking (or drayage) industry has now been dubbed "sweatshops on wheels."

BBC News - Occupy protests disrupt ports across US West Coast: The partial shutdown of harbours in California, Oregon and Washington states resulted in a handful of arrests, but no major clashes. From early on Monday, activists picketed gates, beat drums and carried signs with slogans such as "Shut Down Wall St on the Waterfront". The rallies come a month after police dismantled Occupy camps across the US. Demonstrators said they hoped to hit the profits of the corporations that run the harbours. In Oakland, California, about 150 workers were sent home as a result of the demonstrations, effectively closing two terminals.

Why Does the Dallas Fed President Want to Destroy West Coast Port Unions? - The people that really run the world are not elected, but sit on the Federal Open Market Committee of the Federal Reserve (FOMC). This is the crew of Fed insiders — mostly regional reserve bank presidents hired by banks as well as finance-friendly Fed governors appointed by the president — who set monetary policy. They are the ones who decide whether interest rates go up or down and whether to heat or cool the economy. You can actually read the deliberations of their meetings, but only for those that took place five years ago or more. Unlike most federal agencies, their meetings are kept secret for at least five years. Still, it’s interesting what you can find in the records that are public. This is from 2005, when Dallas Fed President Richard Fisher was echoing complaints of American CEOs that we simply didn’t have the port capacity to take as many imports from China as they wanted (emphasis mine): Everyone I’ve talked to continues to try to figure out ways to exploit globalization. Each of them, from the IT [information technology] guys to the big box retailers to the specialty chemical firms to the service firms, wants to have offshore supply. One of the CEOs said, “We have a long way to go in exploiting China.”. If you read the New York Times article two days ago about Shanghai’s new deep water port, you have to realize that those facilities are being built to ship goods out of China, not so much to ship goods into China. The bad news is stateside. We don’t have the capacity to absorb it. Long Beach and the Northwest harbors are constrained. Work rules, according to our interlocutors, are very slow to adjust.  But it is evident that the enemy is us as far as exploiting globalization, and I think that’s a long-term problem that we might want to take note of over time.

Occupy the Left - Near the end of the Occupy the Ports march in Long Beach, Calif., when 400-odd protesters were walking around in circles and coming up with chants in front of a work site, there was a beautiful little moment of cognitive dissonance. A middle-aged woman, who’d been chanting along with the usual stuff—“Whose ports? Our ports!” and “What’s the direction? Insurrection!” —started in on a version of the labor movement’s unofficial anthem.Occupiers would like to think that the “us” is the same from song to song. That’s not really clear. The Occupy the Ports protests temporarily shut down some commerce from San Diego to Oakland to Seattle, shaming facilities owned by SSA Marine, which is owned by Goldman Sachs. “The 1 percent are depriving port truck drivers and other workers of decent pay,” said Occupy Long Beach in a statement, “even while the port of LA/LB is the largest in the U.S. and a huge engine of profits for the 1 percent.” Unionized workers got some unexpected days off. They didn’t get paid for them. “I don't quite understand why they did it,” said Sean Farley, president of the International Longshore and Warehouse Union Local 34 in Oakland. “They want to impact the ‘1 percent,’ which I get. They need to identify the ‘1 percent.’ Who is it? I heard the name of Goldman Sachs got bandied around. OK. Deal with Goldman Sachs. I don't think one day at the port of Oakland or Tacoma or Seattle changes the facts that bother you about that company.”

Open Letter From Port Truck Drivers to Occupy the Ports.... We are the front-line workers who haul container rigs full of imported and exported goods to and from the docks and warehouses every day. We have been elected by committees of our co-workers at the Ports of Los Angeles, Long Beach, Oakland, Seattle, Tacoma, New York and New Jersey to tell our collective story. We have accepted the honor to speak up for our brothers and sisters about our working conditions despite the risk of retaliation we face. One of us is a mother, the rest of us fathers. Between the five of us we have 11children and one more baby on the way. We have a combined 46 years of experience driving cargo from our shores for America’s stores. We are inspired that a non-violent democratic movement that insists on basic economic fairness is capturing the hearts and minds of so many working people. Thank you “99 Percenters” for hearing our call for justice. We are humbled and overwhelmed by recent attention. Normally we are invisible. Today’s demonstrations will impact us. While we cannot officially speak for every worker who shares our occupation, we can use this opportunity to reveal what it’s like to walk a day in our shoes for the 110,000 of us in America whose job it is to be a port truck driver. It may be tempting for media to ask questions about whether we support a shutdown, but there are no easy answers. Instead, we ask you, are you willing to listen and learn why a one-word response is impossible?

The Walmart Heirs Have The Same Net Worth As The Bottom 30 Percent Of Americans - Income inequality in the U.S. is currently the highest its been since the 1920s, with the 400 richest Americans (who are all billionaires) having as much wealth as the bottom 50 percent of Americans combined. And as it turns out, just one wealthy family has managed to amass a fortune equal to that of the combined net worth of the bottom 30 percent of Americans — the Waltons, heirs to the Walmart fortune, as Sylvia Allegretto, a labor economist at the Center on Wage and Employment Dynamics, found: The triennial Survey of Consumer Finances (SCF) is one of the best sources for data on wealth in the U.S. And, of course the Forbes 400 estimates the worth of the wealthiest amongst us—all 400 wouldn’t be captured in the SCF. If we look at both the SCF and the Forbes 400 we can glean some interesting insights. In 2007 (the most recent SCF) the cumulative wealth of the Forbes 400 was $1.54 trillion or roughly the same amount of wealth held by the entire bottom fifty percent of American families. Upon closer inspection, the Forbes list reveals that six Waltons—all children (one daughter-in-law) of Sam or James “Bud” Walton the founders of Wal-Mart—were on the list. The combined worth of the Walton six was $69.7 billion in 2007—which equated to the total wealth of the entire bottom thirty percent!

On fairy tales about inequality - In Jason DeParle’s New York Times article today, it appears that some folks are claiming that the inequality that Occupy Wall Street has called attention to is a thing of the past and of no concern, all because income inequality declined during the recession between 2007 and 2009. Bunk! Wage and salary data show wage inequality rising from 2009 to 2010 (recovering more than a third of lost ground), suggesting that it is too early to shed crocodile tears for the top 1 percent. Regardless of last year’s trend, it remains the case that income inequality in 2009 was still substantially greater than it was in the late 1970s. Moreover, the conclusion that a lion’s share of income gains accrued to the top 1 percent or even the top 0.1 percent, while income growth was modest for the bottom 90 percent (as Josh Bivens and I recently wrote) remains absolutely true.As Josh and I explained, there are three dynamics at play in the shift of income up to the top 1 percent and the top 0.1 percent. First, there’s the shift upwards in the distribution of wage and salaries, which also reflects the “realized option income” provided to CEOs that are counted as wage income. Second, there’s the shift upwards in the distribution of capital income (capital gains, interest, dividends): According to the Congressional Budget Office, the top 1 percent reaped 57 percent of capital income in 2007, up from 38 percent in 1979. Last, there is a shift toward greater capital income and proportionately less labor compensation since 1979.

Percentage Growth in Annual Wages and Salaries [grahic Via: On Fairy Tales about Inequality]

The financial crisis didn’t, and won’t, fix inequality - The incomes of the top 1 percent have fallen in the last two recessions because their incomes were disproportionately affected (through capital gains and stock options, among other things) by the steep decline in the stock market that occurred in the early 2000s and in the recent financial crisis. This decline in the stock market and incomes linked to it are disproportionately claimed by the rich, so this led to a temporary reduction in income inequality. After the early 2000s episode, high incomes and inequality rose quickly during the upturn as the stock market recovered. There is little reason to expect this not to be replicated in coming years after the sharp 2009 fall. People would be well-advised to keep this in mind – too many observers, such as Megan McArdle, have highlighted this drop in top incomes by 2009 and suggested that maybe income inequality has stopped growing, saying “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.” A New York Times article echoed this perspective. EPI countered in a post yesterday with new data showing that wages for top earners have restarted their upward march after hitting a post-recession low in 2009 – meaning that income inequality (or at least inequality of wages) is, not surprisingly, already rising again. The graph below plots average capital gains income for the top 1 percent of income earners along with the S&P 500 index (both indexed to 1989) and shows that this “overreaction” of realized capital gains relative to stock market movements is far from unusual.

Income Inequality Is a Symptom, Not the Disease - On the front page of the business section in today's New York Times, poverty and class reporter Jason DeParle applies the Timesian massage to the news that the recession has put something of a crimp in the incomes of the upper one percent of our fellow Americans and that, because their income has "slipped," on average, from $1.4 million a year in 2007 to $957,000 in 2009, the problem of income inequality in this country is getting better all the time. Actually, DeParle doesn't say that. He gets an economist from the University of Chicago to say that, which is the way you do things when discussing them in the judicious, Timesian way. This, of course, forces the reader to ignore the fact that the University of Chicago is the home office for the Pauperhood Is Good For You school of economic analysis. It is quite possibly the last bastion of American feudalism. I think they drink mead out of the skulls of lesser men. Anyway, and so forth, to wit: "It's very interesting that this has become such a big topic now when the numbers are back to where they were in the 1990s," said Steven Kaplan, an economist at the University of Chicago's business school. "People didn't seem to be complaining about it then."

Marginal Tax Rates and Poverty - Megan McArdle passes along an example of how poor folks respond to the extremely high Marginal Tax Rates that they face...A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000... Because I am a soulless geek I am going to walk right pass the heart break in this story to point out that this woman is describing an income effect not a substitution effect.

After All This Time, Americans Still See the World as a Glass Half-Full -  That, at least, might be the conclusion from a new poll from the Allstate Corporation and National Journal. Although 70 percent of Americans believe the country is generally on the “wrong track,” and more people say their financial situation is in only fair or poor shape than say it is in good or excellent shape, 60 percent said they were still living the American dream. The poll, which has been conducted quarterly since early 2009 by FTI Consulting, defined the American dream as “the opportunity to go as far as your talents and hard work will take you and to live better than your parents.”  The 11th quarterly Heartland Monitor poll also specifically surveyed a larger group of adults aged 50 and older to gauge their views of retirement. The survey found that overall, 73 percent were confident they would have enough money to retire in financial security.

A nation of populists and class warriors - Pew Research has just released the most detailed polling I’ve seen yet on Occupy Wall Street, economic fairness, rising inequality, and the lack of Wall Street accountability. If these numbers don’t put an end to the nonsense about how Dems risk alienating the “middle of the country” by embracing a populist “class warfare” message, nothing will: Roughly three-quarters of the public (77%) say that they think there is too much power in the hands of a few rich people and large corporations in the United States. In a 1941 Gallup poll, six-in-ten (60%) Americans expressed this view. About nine-in-ten (91%) Democrats and eight-in-ten (80%) of independents assert that power is too concentrated among the rich and large corporations, but this view is shared by a much narrower majority (53%) of Republicans. Reflecting a parallel sentiment, 61% of Americans now say the economic system in this country unfairly favors the wealthy and just 36% say the system is generally fair to most Americans. About three-quarters (76%) of Democrats and 61% of independents say the economic system is tilted in favor of the wealthy; a majority (58%) of Republicans say that the system is generally fair to most Americans. The public also views Wall Street negatively, little changed from opinions in March. Currently, just 36% say Wall Street helps the American economy more than it hurts — 51% say it hurts more than helps.

The Making of the American 99% - You might almost think the news was good.  The Europeans, so headlines tell us, have at least a “partial solution” to the Euro-zone crisis; the stock market has sort of rebounded; the unemployment rate “dropped sharply” to 8.6% in November, the lowest it’s been in more than two years (thanks in part to the strangest category around -- the 315,000 people who grew too discouraged last month to look for work and so were no longer considered unemployed but out of the labor force); and talk of a double-dip recession seems on holiday.  So why pay attention to the modest-sized Associated Press story you were likely to find, if at all, deep inside your newspaper (as on page 21 of last Friday's Washington Post)? It was headlined “Household wealth down in 3rd quarter,” with the telling subhead, “Corporate cash continues to grow, Fed report says.” Still, if you wanted to sum up the growing gap between the 1% and the 99%, you couldn’t ask for better.  In fact, household wealth wasn’t just “down” 4%, it was the “biggest loss of wealth” for Americans “in more than two years,” and those corporate cash stockpiles didn’t simply continue to grow, they reached “record levels” at $2.1 trillion.  Since American wealth is deeply linked to homeownership, the fact that “most economists expect home prices to keep falling” wasn’t exactly good news, nor when it came to pensions and retirement was the July-to-September 12% drop in “the average balance in 401(k) plans managed by Fidelity Investments, the largest workplace savings plan provider.”  In sum, the average American household managed to lose $21,000 dollars in those three months, a total loss in household wealth of $2.4 trillion.

Unpaid Bills Land Some Debtors Behind Bars - Although debtors' prisons are illegal across the country, it's becoming increasingly common for people to serve jail time as a result of their debt. Collection agencies are resorting to some unusually harsh tactics to force people to pay their unpaid debt, some of whom aren't aware that lawsuits have been filed against them by creditors. Here's how it happens: A company will often sell off its debt to a collection agency, generally called a creditor. That creditor files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest.

NPR Reports that Debtors Prisons Are Alive and Well - Although debtors' prisons are illegal across the country, you can apparently still end up in jail for an unpaid bill. I first came across this reality reading one of Lea Shepherd’s (Loyola Chicago) law review articles, Creditors Contempt. NPR  tells the story of Illinois debtor Robin Sanders in Illinois, who was stopped by police for a loud muffler but taken directly to jail on an arrest warrant for failure to appear at a hearing on an unpaid medical bill, all in a lawsuit she was unaware of. Similar stories have been reported in Indiana, Tennessee and Washington, and all involve selling debt to a collection agency, that then files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest. According to the story, despite that debtor’s prisons were outlawed early in our country’s history, one-third of all states still allow people who have not paid bills to be jailed.

Reinventing Debtors’ Prisons for the 21st Century - PR just ran a story called “Unpaid Bills Land Some Debtors Behind Bars.” As they report, ”Here’s how it happens: A company will often sell off its debt to a collection agency, generally called a creditor. That creditor files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest.” Marie Diamond has more. This is increasingly common across the country. My colleagues Matt Stoller and Bryce Covert have both written about debtors being jailed for failure to appear in court. Debtors’ prisons are illegal, and some point out that this is really jail for a summons problem, not a payment. But I haven’t had a full vision of the practice until I read this excellent working paper by Lea Shepherd of Loyola Chicago law school, “Creditors Contempt” (h/t creditslips). Beyond laying out the problems with the current system, which gives a disproportionate amount of the coercive powers of the state to creditors, this paper also has implications for another topic I’m interested in — the class bias of the submerged state.

Bankruptcy Filings Drop for 13th Consecutive Month - On a year-over-year basis, the U.S. bankruptcy filing rate dropped for the 13th consecutive month in November. According to statistics from Epiq Systems, Inc., the November daily bankruptcy filing rate was 4,923, a decline of 12.5% from one year ago. November marks the first time that the daily bankruptcy filing rate has dropped below 5,000 since January 2009.  Although the past seven months have seen double-digit year-over-year drops, these drops have consistently stayed between 10-17%. In other words, there is no increase in the rate of decrease. Extrapolating from this trend, we simply would expect to see about 10-17% fewer filings over the coming year than in the past year. Whether this trend continues, however, will depend principally on the ups and downs of the consumer credit market (not unemployment or foreclosure rates as conventional wisdom holds). In the next few weeks, I plan to be do my annual and slighlty more formal analysis of how these variables might interact and come up with a projection for 2012 U.S. bankruptcy filings.

What Latin America Can Teach Us - IN a Bertelsmann Foundation study on social justice released this fall, the United States came in dead last among the rich countries, with only Greece, Chile, Mexico and Turkey faring worse. Whether in poverty prevention, child poverty, income inequality or health ratings, the United States ranked below countries like Spain and South Korea, not to mention Japan, Germany or France.  It was another sign of how badly Americans are hurting their middle class. Wars, famine and violence have devastated middle classes before, in Germany and Japan, Russia and Eastern Europe. But when the smoke cleared and the dust settled, a social structure roughly similar to what existed before would always resurface.  No nation has ever lost an existing middle class, and the United States is not in danger of that yet. But the percentage of national income held by the top 1 percent of Americans went from about 10 percent in 1980 to 24 percent in 2007, and that is a worrisome signal.  So before the United States continues on its current road of dismantling its version of the welfare state, of shredding its social safety net, of expanding the gap between rich and poor, Americans might do well to glance south. The lesson is that even after a large middle class emerges, yawning inequities between rich and poor severely strain any society’s cohesion and harmony.

Welfare Reform Revisited - Fifteen years have passed since changes in welfare administration imposed tighter restrictions on poor families with children that were seeking cash assistance. Many Republicans now advocate similar restrictions and cuts in other forms of assistance to the poor on the grounds that they discourage work. Newt Gingrich asserts that janitorial employment for poor children would improve their work ethic. Yet as the chart above shows, the poverty rate among children now closely follows the unemployment rate, because many parents depend more heavily on paid employment but are unable to find it. As its name suggests, the Temporary Assistance for Needy Families program, or TANF, established in 1996, was devised on the presumption that mothers who were willing to work would not need more than temporary help. It was never intended to function effectively under conditions of high unemployment.  Indeed, caseloads and outlays in the program have increased much less than those in other forms of public assistance, like food stamps, which have less stringent work requirements. A recent Urban Institute report shows that TANF has proved largely unresponsive to the recession. The program no longer provides much of a safety net at all. The Center on Budget and Policy Priorities notes that only 27 percent of families in poverty received any cash assistance from TANF in 2009.

For Families On Welfare, Few Protections From Theft And Fraud - On a fall day in October 2009, Evelyn Carpio's wallet never left her side.  Yet criminals somehow managed to steal $720 from the card Carpio's family uses to obtain cash welfare assistance from California.  This kind of remote financial crime -- a practice known as financial information "skimming" -- is a real problem in the United States, according to federal officials. In 2009 alone, criminals stole $443 million though a combination of skimming, identity theft, and other types of financial crime investigated by federal officials. But for victims like Carpio, whose money was stolen from an electronic benefits transfer card (EBT) rather than a credit or debit card, getting that money back has also proved difficult. In Carpio's case, nearly two years passed before the state returned her stolen welfare benefits. When it comes to stolen credit or debit cards, the rules are straightforward: Federal law requires banks to rapidly return, refund or remove all but $50 of any unauthorized or fraudulent activity on any card reported lost or stolen. No such protections exist for EBT card users, even as government agencies across the country are moving to distribute a growing share of public assistance on EBT and other cards. That lack of security places many of the country's poorest families at serious risk of financial upheaval.

Heating Help Cut for Poor in Northeast - Congress is considering cutting $1 billion out of the Low Income Home Energy Assistance Program, which gave $4.7 billion to 9 million households last year. And several states in the region, where residents depend heavily on heating oil to get them through brutally cold winters, have already cut their aid to poor households who need help paying the heating bills. Some say the results could be beyond uncomfortable—they could be dangerous. Families in New England pay an average of $3,300 to heat their home during the winter, according to the head of the National Energy Assistance Directors’ Association. Compare that to the average income of assistance recipients in the northernmost state of Maine, which is just $16,757. Last year, the average benefit there was $800. This year, it might be as little as $300. The cuts were proposed by President Obama last February. The House and Senate are reviewing funding some $3.4 billion and $3.6 billion respectively. But advocates still say it’s not enough. “They’re playing Russian roulette with people’s lives,” . “We have a lot of terrified people who can’t see how they are going to survive.”

Critical food shortage at Salvation Armys across Bay Area - Hundreds of Bay Area families may not have a holiday meal because of a critical food shortage. A desperate call for help is out today from Salvation Armys across the Bay Area. There are 1,600 families who have signed up for groceries for a holiday meal and toys for Christmas gifts from the Salvation Army serving Alameda County. At this point, Salvation Army has enough for 500 of those families. Not even meeting half of the need. Covert has no idea why donations are so low this year. And he's not one to cry wolf. He did not make this same plea last year.  "Last year was pretty decent we had enough toys and enough food that we were able to produce another 1,500 families last year," said Covert. "We've already tapped out the Alameda County Food Bank, so now we're looking to the public to really help us provide the rest of what we need,"

Child homelessness up 33% in 3 years – One in 45 children in the USA — 1.6 million children — were living on the street, in homeless shelters or motels, or doubled up with other families last year, according to the National Center on Family Homelessness.The numbers represent a 33% increase from 2007, when there were 1.2 million homeless children, according to a report the center is releasing Tuesday. "This is an absurdly high number," says Ellen Bassuk, president of the center. "What we have new in 2010 is the effects of a man-made disaster caused by the economic recession. … We are seeing extreme budget cuts, foreclosures and a lack of affordable housing." The report paints a bleaker picture than one by the Department of Housing and Urban Development, which nonetheless reported a 28% increase in homeless families, from 131,000 in 2007 to 168,000 in 2010.

Report: 1 in 45 American Children Homeless - The picture for America's future just got a little bleaker. A new report indicates one in 45 American children are homeless - bringing the total to 1.6 million, according to calculations by The National Center on Family Homelessness.  The count included children living on the streets, in shelters, hotels and with extended family. The data reflected a 38% increase in homelessness over the past three years. "The Recession has been a man-made disaster for vulnerable children," said Ellen L. Bassuk, MD, President and Founder of The National Center on Family Homelessness and Associate Professor of Psychiatry at Harvard Medical School. The report ranked states according to their resources available to get families back into stable homes.

Census data: Half of U.S. poor or low income - Squeezed by rising living costs, a record number of Americans — nearly 1 in 2 — have fallen into poverty or are scraping by on earnings that classify them as low income.The latest census data depict a middle class that's shrinking as unemployment stays high and the government's safety net frays. The new numbers follow years of stagnating wages for the middle class that have hurt millions of workers and families."Safety net programs such as food stamps and tax credits kept poverty from rising even higher in 2010, but for many low-income families with work-related and medical expenses, they are considered too `rich' to qualify," said Sheldon Danziger, a University of Michigan public policy professor who specializes in poverty. "The reality is that prospects for the poor and the near poor are dismal," he said. "If Congress and the states make further cuts, we can expect the number of poor and low-income families to rise for the next several years."

US hunger, homelessness soar amid cuts in social spending - Buried within the Supplemental Poverty Measure report is perhaps its most shocking finding: the percentage of the population classified as “low-income,” that is, making between 100 and 200 percent of the poverty rate, has nearly doubled. The official statistic puts the portion of families making between 100 and 200 percent of the poverty rate at 18.8 percent of the total population, while the new statistic puts it at 31.8 percent. According to the supplemental Census report, there are 49.1 million people in poverty and an additional 97.3 million who are considered low-income. The two figures combined total 146.4 million out of a population of 300 million. Alongside mass unemployment, falling wages play a critical role in the staggering growth of poverty in the US. Just over the past 12 months, wages have fallen by 1.7 percent in real terms. This is the result of a coordinated and national corporate assault on workers’ wages that was inaugurated with the Obama administration’s insistence that government loans to the auto companies be contingent on a vast expansion of tier-two wages ($14 an hour) for new-hires, and an overall reduction of labor costs to those at non-union foreign transplant auto factories. Together with the collapse in home values, mass unemployment and wage-cutting have thrown even families with working adults into poverty. According to a study by the Working Poor Families Project released this month, the portion of employed families that classify as low-income grew from 27 percent in 2002 to 31.2 percent in 2010.

Our Frayed Social Safety Net, in 8 Infographics - Everyone from the 99 Percenters to the Have-Plenty knows it: ours is a highly unequal society. And a highly unequal society demands a robust social safety net. Do we have one? Not so much. Take a look:

'Third World' conditions in US city as poor cut off from water supply - Wall Street banks stand to lose millions of dollars from the financial collapse of Jefferson County, Alabama. But the real victims of the biggest municipal bankruptcy in American history may be the county's poorest residents - forced to bathe in bottled water and use portable toilets after being cut off from the mains supply. A new sewer system, which has been under construction since 1996, was meant to cost about $300m - but the cost soared to more than $3.1bn due to construction problems, rampant political corruption and a series of debt and derivative deals that went sour. For many years, the soaring sewer rates bill hit the poorest parts of the county hardest, as better-off people in the suburbs installed septic tanks at their properties. Sheila Tyson, a community activist in the deprived West End area of Birmingham, told the BBC how her community has been affected. (video)

The scandal of the Alabama poor cut off from water - Banks stand to lose millions of dollars in debt repayments if the biggest municipal bankruptcy in American history is allowed to proceed. But the real victims of the financial collapse in the US state of Alabama's most populous county are its poorest residents - forced to bathe in bottled water and use portable toilets after being cut off from the mains supply. And there is widespread anger in Jefferson County that singeing sewerage rate hikes could have been avoided but for the greed, corruption and incompetence of local politicians, government officials and Wall Street financiers. Tammy Lucas is the human face of a financial and political scandal that has brought one of the most deprived communities in America's south to the point of what some local people believe is collapse. She says: "If the sewer bill gets higher, my light might get cut off and if I try to catch up the light, my water might get cut off. So we're in between. We can't make it like this." Mrs Lucas's monthly sewerage rate bills - the amount levied by the county to flush away waste and provide water for baths and showers - has quadrupled in the past 15 years. She says it is currently running at $150 (£97) a month, which leaves little left out of her $600 social security cheque for food and electricity.

Beveridge Curves for 36 U.S. Cities (updated) - On October 9, 2010, I posted some regional vacancy-unemployment data for the United States; see: Beveridge Curves for 36 U.S. Cities. My measure of vacancies was the Conference Board's help-wanted index (HWI).  A colleague of  mine (Silvio Contessi) pointed me to a paper by Regis Barnichon (EL 2010) that identifies a major flaw in this data series. Barnichon summarizes the problem here: The traditional measure of vacancy posting is the Conference Board Help-Wanted Index (HWI) that measures the number of help-wanted advertisements in 51 major newspapers. However, since the mid-1990s, this “print” measure of vacancy posting has become increasingly unrepresentative as advertising over the internet has become more prevalent. Instead, economists increasingly rely on the Job Openings and Labor Turnover Survey (JOLTS) measure of job openings. However, this measure is only available since December 2000 and cannot be used to contrast current labor market situations with past experiences.  In this paper, I build a vacancy posting index that captures the behavior of total—“print” and “online”—help-wanted advertising, by combining the print HWI with the online Help-Wanted Index published by the Conference Board since 2005.  Here is how Barnichon's correction looks for the aggregate data.

Monday Map: Annual Income Lost/Gained due to Interstate Migration as a Percentage of State Income - This week's map takes advantage of new migration data recently released by the IRS. It shows, for the year 2009, the net annual income of all migrants to and from each state to other states, as a percentage of that state's aggregate income. (Foreign migration is deliberately excluded.) At the top of the list is Montana, where migrants, in a single year, brought with them a net income totaling more than 1% of the state's entire annual income. At the bottom is Michigan, where migrants leaving the state took with them 0.43% of Michigan's entire annual income. This data partly comes from our interactive State-by-State Migration Calculator, which has just been updated with the most recent 2009-2010 migration data.

Illinois House Caves on Incentives for Sears and Chicago Mercantile Exchange - The pattern is pretty consistent. A state raises their taxes, big companies with mobile capital realize they could save a ton of money by locating elsewhere; they lobby legislatures and make big public statements that they must leave unless they are offered targeted incentives to stay. The company is often a historic state landmark. With a sympathetic public that is concerned about jobs, the incentives are all but guaranteed. In Illinois, which steeply raised its individual and corporate taxes in January, you could not get two more sympathetic companies: Sears and the Chicago Mercantile Exchange are threatening to leave the state unless they get targeted tax incentives. It looks like they will get their way. The Illinois House yesterday passed SB 397, which would give tax credits intended to keep Sears Holdings Corp. and CME in-state.

State Police Could See Hundreds Of Layoffs - Pennsylvania state police are preparing for potential budget cuts, which could mean layoffs for hundreds of state troopers -- something that's never happened before. At a state police cadet class graduation in October, 91 new troopers officially joined the ranks of the state police. With state revenues still falling short of expectations, there is the potential for another difficult budget year ahead. Gov. Tom Corbett asked the agency to prepare an estimate of what a funding cut would look like. It could include cutting 400 to 500 fewer troopers, the closure of some locations and the potential to put future cadet classes on hold. Cumberland County Rep. Glen Grell of the 87th District said, “There's no function more core for state government than to provide police protection for our citizens.”

Cash-strapped Detroit stops paying some vendors in risky move - Running short on cash to fund basic services and payroll, Detroit stopped paying some of its vendors in a move that experts say could increase the likelihood of the state appointing an emergency manager or contractors pushing the city into bankruptcy court. City Council President Pro Tem Gary Brown, the lone Detroit elected official calling for some state intervention, said the city must act more quickly to reduce a runaway deficit that could reach $340 million by June and force draconian reductions. "In order to make payroll, the City of Detroit has been delaying payments to vendors and contractors," Brown told the Free Press on Monday. "We must repair our finances and transform this culture of overspending to one that supports responsible fiscal management and a thriving environment."

NYC faces "extreme" risk from Europe's debt crisis (Reuters) - New York City's economy faces an "extreme downside risk" from Europe's debt crisis because its banks hold over $1 trillion of assets in the city, where they are active lenders, according to a new report released on Thursday. The city's economy is intertwined with Europe's because non-financial companies have significant ties to European companies while millions of tourists from this region visit the city every year, according to the report by City Comptroller John Liu. "In light of these widespread commercial interactions, adverse effects on the City's economy from Europe's debt crisis appear alarming and lend greater urgency to addressing existing budget issues," Liu said in a statement. This potential problem could bedevil New York City's finances, which already are being pressured by the job-cutting downturn of its prime industry: Wall Street. The Democratic comptroller warned that Mayor Michael Bloomberg might be underestimating some risks. The list includes the difficulty of negotiating labor contracts for teachers and supervisors with no wage increases for the past round of bargaining and the possibility that cash-poor New York state will cut $200 million in aid.

U.S. Municipalities to Borrow $340 Billion Next Year, Mauro Says (Bloomberg) -- States and cities will borrow about $340 billion in 2012 as investors receive about $320 billion in interest and principal from previously issued bonds, said Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets. The issuance projection is almost 20 percent higher than the $285 billion that he said municipalities are set to borrow this year. The money coming back to investors may increase as issuers refinance debt, Mauro said today in the New York offices of Bloomberg News. “That matches pretty nicely with our call of $340 billion in issuance, so the market from a technical perspective is pretty well set up for next year,” said Mauro, whose firm is the investment-banking arm of the Royal Bank of Canada. The $340 billion of issuance will include $240 billion of new bonds and $100 billion of refunding deals, if “the interest-rate environment continues to exist as it is, at a very low level,” Mauro said.

State and Local Budgets in 2011: The Crisis that Didn’t Happen - The year’s top story in state and local government was “hundreds of billions of dollars” in municipal bond defaults.  Oh wait, that didn’t happen.  It was “states coming to Congress as mendicants, seeking relief from the consequences of their choices.”  No, although the Dickensian imagery may fit with the holiday decorations, that didn’t happen either.  To the contrary, governors spent much of the year fretting about federal inaction on the budget and debt limit. What did happen is that state revenues rebounded.  After falling further and faster than in any recession since the Great Depression, taxes started coming back in early 2010.  They continued growing through the third quarter of 2011.  However, tax revenues still haven’t regained peak 2008 levels.  The latest data also suggest growth may be moderating, and some states are reporting monthly collections below projections.  2011 was also the year that local property taxes finally dropped.  The resilience of property tax revenues until now may seem puzzling given 30 plus percent housing price declines.  The explanation is that it typically takes 2 to 3 years for lower prices to show up as lower assessed values and property tax bills.

Texas comptroller declares economic recession over -  The Texas comptroller said Monday that the economic recovery is taking hold, producing higher than expected tax revenues and possibly resulting in a budget surplus in 2013. In a letter to the Legislature, state Comptroller Susan Combs said tax collections were on pace to produce a $1.6 billion budget surplus for the fiscal biennium ending in 2013. That means the state could earn $82.7 billion over the next two years, while the 2012-2013 budget is only $81.1 billion. That represents an 8.2 percent increase in state revenues over the 2010-2011 budget cycle. In the last two budget cycles, lawmakers were forced to slash government spending and tap the Rainy Day Fund to make up for budget deficits. For 2012-2013 they cut $4 billion in funding for public schools and shorted $4.8 billion for Medicaid, the health program for the poor and disabled. The government sector was the only area where employment has gone down, with 35,000 eliminated. Local government employment fell by 1.9 percent and the federal government shedding 8,700 jobs in Texas.

California Budget Cuts: Jerry Brown To Impose Another $1 Billion In Cuts: Gov. Jerry Brown on Tuesday ordered $1 billion in midyear cuts to California's budget that will result in pain for students who rely on school buses to get to class, mothers who depend on child care subsidies to keep working and support programs for the developmentally disabled. Brown, a Democrat, said that the state's revenues will fall about $2.2 billion below the $88.4 billion he and state lawmakers had hoped for when they passed the budget last summer. The announcement was not surprising and could have been worse. The state's legislative analyst had predicted revenues would fall $3.7 billion below forecast. Still, the automatic midyear reductions sparked outcry from advocates and invited lawsuits from school districts. The cuts include up to $100 million each to the University of California, California State University, developmental services and in-home support for seniors and the disabled. Community college fees would increase $10 per unit from $36 to $46, and reductions would be made for child care assistance, library grants and prisons, among other programs.

Finally, Higher Taxes for the 1 Percent - Is Occupy Behind Governors' Moves to Make the Wealthy Pay Their Share? -  This week the New York State Senate and Assembly near-unanimously passed a measure that would increase the top tax rate on the state's wealthiest citizens — at Gov. Andrew Cuomo's request. It was not even two months ago that Cuomo made his infamous statement that his defense of low taxes for the rich was just like the stand his father, former Gov. Mario Cuomo, took against the death penalty in New York State. “The point is, we don’t elect — the governor isn’t a big poll-taking machine.  I respect the people — their opinion matters — but I’m not going to go back and forth with the political winds.” Well, the wind appears to have shifted behind Cuomo — but what changed? Perhaps the momentum created by the Occupy Wall Street movement helped change Cuomo's mind. He has denied it, but Nelini Stamp, a community organizer with the Working Families Party who's been with Occupy Wall Street since the beginning, notes that Cuomo had essentially "written off" any tax increase on the 1 percent. No more, it seems. It's not just New York that is seeing a move to tax the rich — California's Gov. Jerry Brown also has a proposal that will be a ballot initiative in next election that would raise taxes on his state's 1 percent as well, and progressive groups are pushing him to go even further. “We know that the mood of this country and the mood of this state right now is to tax those who can pay more and who have most benefited from the system,”

New York May Face Larger Budget Gaps as Wall Street Slows, DiNapoli Says New York City may face increased budget deficits because of falling Wall Street profits, an “uncertain economic recovery” and the prospect of reduced federal and state aid, state Comptroller Thomas DiNapoli said. The securities industry lost almost $3 billion in the third quarter of 2011, cutting year-to-date profits to $9.6 billion, DiNapoli reported today. He predicted profits will come in “significantly short” of the $20 billion the city forecast for 2011 in its financial plan, saying weakness on Wall Street may lower tax collections by $100 million in the next fiscal year. “With its prospects dimming, the industry has begun to cut costs and reduce employment and employee compensation, actions which will ripple through the New York City economy,” DiNapoli’s office said in a statement. “Cash bonuses paid to securities-industry employees in the city are likely to be substantially smaller than last year.”

Vast Majority of California Voters Like Jerry Brown’s Tax Increase Plan - According to a new survey by the Public Policy Institute of California, most Californians are in favor of Jerry Brown's recent proposal to increase income taxes on high income earners and increase the sales tax from 7.25 to 7.75 percent. From their press release:

• "Sixty-five percent of all adults and 60 percent of likely voters favor the proposal, while 28 percent of adults and 36 percent of likely voters oppose it."
• "Nearly all Californians (93%) say the state's budget situation is a problem. Most residents (62%) say their local government services-those provided by cities, counties, and public schools-have been affected a lot by recent budget cuts."
• "When Californians are asked a follow-up question about how they view his proposal if new revenue were to go directly to schools, 70 percent of all adults and 58 percent of likely voters favor it (27% all adults, 37% likely voters opposed)."
• "With K-12 education making up a large share of the expected 'trigger cuts,' a strong majority (85%) of Californians are concerned (53% very, 32% somewhat) about the potential effects on public schools."

California braces for more budget slashing with possible 'trigger' cuts -- As Gov. Jerry Brown gets ready to pull the trigger on more budget cuts this week, lawmakers and interest groups are bracing to see how devastating the cuts will be. While many in the Capitol are resigned to the worst, some believe the governor will do all he can to avoid cuts to schools -- no matter what the revenue figures show. "He can spin the economic data either way as governor," said Kevin Gordon, a leading education lobbyist. "Ultimately, it's a political decision." On Thursday, Brown will announce the long-awaited results of his finance team's forecast for the last six months of the fiscal year. The team will determine whether the revenues have improved enough to avert the worst of the potential cutbacks: $1.9 billion to K-12 schools.

Calif. schools, social services hit with $1B in new cuts - In a midyear budget correction, California Gov. Jerry Brown has ordered an additional $1 billion in cuts to education, school busing, child care, health programs, public safety and libraries because of the sluggish economic recovery. But K-12 schools escaped drastic reductions foreseen by the state budget analyst -- up to $1.5 billion -- because tax revenues are higher than projected, although they are $2.2 billion below the expected scenario when the budget passed this summer, the Sacramento Bee says. They instead will absorb about $80 million in cuts for classroom instruction and the elimination of $248 million for busing. The University of California system is facing $100 million in cuts, which it plans to offset from reserves, and $100 million was cut from in-home care for elderly and disabled Californians. Tuition hikes are likely at community colleges.

The Unaddressed Link Between Poverty and Education - NO one seriously disputes the fact that students from disadvantaged households perform less well in school, on average, than their peers from more advantaged backgrounds. But rather than confront this fact of life head-on, our policy makers mistakenly continue to reason that, since they cannot change the backgrounds of students, they should focus on things they can control.  No Child Left Behind, President George W. Bush’s signature education law, did this by setting unrealistically high — and ultimately self-defeating — expectations for all schools. President Obama’s policies have concentrated on trying to make schools more “efficient” through means like judging teachers by their students’ test scores or encouraging competition by promoting the creation of charter schools. The proverbial story of the drunk looking for his keys under the lamppost comes to mind.  The Occupy movement has catalyzed rising anxiety over income inequality; we desperately need a similar reminder of the relationship between economic advantage and student performance.

Eight Reasons Public School Teachers Aren't Underpaid - It's one thing to claim that nameless, faceless government bureaucrats are overpaid. It's quite another to argue, as Jason Richwine of the Heritage Foundation and I recently have, that public school teachers are overpaid by more than 50 percent. This is real money, costing state and local governments over $100 billion annually. Our study generated significant, sometimes hysterical, pushback. But our conclusions still stand, and deliver important lessons regarding education financing and reform.  The claim that teachers are underpaid rests on a single isolated fact: that on average, public school teachers receive salaries about 19 percent less than private sector workers with bachelor's or master's degrees. But it's really not that simple. Here are eight reasons why.

Study debunks myths about gender and math performance - — A major study of recent international data on school mathematics performance casts doubt on some common assumptions about gender and math achievement — in particular, the idea that girls and women have less ability due to a difference in biology.  "We tested some recently proposed hypotheses that try to explain a supposed gender gap in math performance and found they were not supported by the data," Instead, the Wisconsin researchers linked differences in math performance to social and cultural factors.  The new study, by Mertz and Jonathan Kane, a professor of mathematical and computer sciences at the University of Wisconsin-Whitewater, was published today (Dec. 12, 2011) in Notices of the American Mathematical Society. The study looked at data from 86 countries, which the authors used to test the "greater male variability hypothesis" . That hypothesis holds that males diverge more from the mean at both ends of the spectrum and, hence, are more represented in the highest-performing sector. But, using the international data, the Wisconsin authors observed that greater male variation in math achievement is not present in some countries, and is mostly due to boys with low scores in some other countries, indicating that it relates much more to culture than to biology.

Teachers Don’t Like Creative Students - One of the most consistent findings in educational studies of creativity has been that teachers dislike personality traits associated with creativity. Research has indicated that teachers prefer traits that seem to run counter to creativity, such as conformity and unquestioning acceptance of authority. The reason for teachers’ preferences is quite clear creative people tend to have traits that some have referred to as obnoxious (Torrance, 1963). Torrance (1963) described creative people as not having the time to be courteous, as refusing to take no for an answer, and as being negativistic and critical of others. Other characteristics, although not deserving the label obnoxious, nonetheless may not be those most highly valued in the classroom. ….Research has suggested that traits associated with creativity may not only be neglected, but actively punished (Myers & Torrance, 1961; Stone, 1980). Stone (1980) found that second graders who scored highest on tests of creativity were also those identified by their peers as engaging in the most misbehavior (e.g., “getting in trouble the most”). Given that research and theory suggest that a supportive environment is important to the fostering of creativity, it is quite possible that teachers are (perhaps unwittingly) extinguishing creative behaviors.

Illinois Prepaid College Program Problems - The State of Illinois is facing another big problem. College Illinois is not taking on any more clients. More than a billion dollars is invested in the prepaid college program but a study finds the program has a 30 percent shortfall. One reason parents are upset is because they've paid in, but now the money's not there. Program participant, Jeanne Corrigan is concerned. "In our minds, it was a guarantee, a contract that was backed by the state of Illinois. We fulfilled our part; every month we paid. Our daughter is fulfilling her part of the bargain; she's working hard in school and preparing herself for college and a career." The Illinois Student Assistance Commission plans to give the governor and lawmakers comprehensive recommendations on fixing the $1.1 billion College Illinois Program. That should happen early next year.  More than 30,000 Illinois families hold contracts in College Illinois, which lets parents lock in tuition costs at public universities years before students go to college.

Report: College Illinois! could need $1.6 billion bailout - Illinois’ financially tanking prepaid college tuition program could require a $1.6 billion bailout from the state to remain solvent during the next 25 years, a new study shows. If state lawmakers do nothing to prop up College Illinois!, the fund could be drained completely by 2022, financial consultant Gabriel Roeder Smith & Company reported in its analysis for the Illinois Student Assistance Commission. The report, made public Monday, says if no new contracts are sold going forward, the shortfall will develop between 2022 and 2036 to pay for past contracts coming due. The contracts are supposed to allow parents to pay in advance and lock in lower tuition rates for their children to attend state schools, including the University of Illinois. Kim Godden said Tuesday she was “outraged” to learn that there might not be any money by the time her daughter, Hannah, needs it. Godden, 38, enrolled her daughter in the program a month after her birth in 2007. She said she did her homework before buying the contract to be sure she wasn’t making a risky investment, but figured her monthly $400 payments were safe.

Occupy the Classroom? - Early last month, a group of students staged a walkout in Harvard’s popular introductory economics course, Economics 10, taught by my colleague Greg Mankiw. Their complaint: the course propagates conservative ideology in the guise of economic science and helps perpetuate social inequality. The students were part of a growing chorus of protest against modern economics as it is taught in the world’s leading academic institutions. Mankiw, for his part, found the protesting students “poorly informed.” Economics does not have an ideology, he retorted. Quoting John Maynard Keynes, he pointed out that economics is a method that helps people to think straight and reach the correct answers, with no foreordained policy conclusions. Indeed, though you may be excused for skepticism if you have not immersed yourself in years of advanced study in economics, coursework in a typical economics doctoral program produces a bewildering variety of policy prescriptions depending on the specific context. Some of the frameworks economists use to analyze the world favor free markets, while others don’t. In fact, much economic research is devoted to understanding how government intervention can improve economic performance. And non-economic motives and socially cooperative behavior are increasingly part of what economists study.

Campus Notebook: Occupy DC Protesters Up the Ante -  Four Occupy DC protesters have expanded their portfolio of complaints to include the constitutional prohibition on federal representation for the District of Columbia. Adrian Parsons, Kelly Mears and Sam Jewler are five days into a hunger strike they say will last until Congress grants the District full Congressional voting rights. A fourth person, Joe Gray, joined them Monday. In that event, the risk of death would seem to be high: The chances of Congress soon passing D.C. voting rights legislation range from extremely low to nonexistent. So the strikers have qualified their intention to refuse food until they get their way. “We are all in communication with our own bodies,” Parsons said.

Virginia's public pension fund short $20 billion - Virginia's retirement system, considered fiscally sound just two years ago, is now $20 billion short of what it owes public employees, a massive liability that threatens the fund's stability as Gov. Bob McDonnell prepares to send his first budget request to the General Assembly. State lawmakers struggling to cover multibillion dollar holes in the state's budget since 2008 reduced what they were paying into the pension fund, shorting it by $1.6 billion this year alone, the Virginia Joint Legislative Audit and Review Commission, a bipartisan government oversight panel, reported Monday. At the same time, the fund's investments soured. That one-two punch means the gap between how much the fund has and what it owes grew from $12 billion in 2009 to $20 billion in 2011, a 69 percent increase over the two years.

New Study: With Giant Pension Debts, California Is Screwed -  Well, my fellow Californians, looks like we’re all pretty much screwed. The evidence: a new study by the Stanford Institute for Economic Policy Research finds that California’s struggles with giant pension obligations for state workers is getting worse. Much worse. The report finds that unless reforms are taken, pension obligations are almost certainly going to crowd out non-mandated spending for things like education and social services. Here are the key findings of the report:

• “Contribution rates, the share of payroll that state government sponsors of pension plans pay each year, are likely to double or perhaps triple, crowding out education and social services spending.
• The study contends the annual cost to the state of delaying pension solutions is more than $1.2 billion over the next year alone, or $3.4 million per day.
• The June funded ratio, which measures assets to liabilities. is only 74% for CalPERS even using a high-rate of return assumption for its investments.
• The report notes that private plans with a funded status below 80% “are required to freeze benefits and face other restrictions.”
• The total unfunded liability for all three systems is close to $300 billion at a 6.2% rate of return; assume a 7.75% return and the shortfall is still $142.6 billion, “or nearly $12,000 per California household.”

A Huge Fight Is Brewing For The Future Of Social Security: Jackie Calmes at the NYT has a good summary regarding the last minute effort to get an extension of the 2% payroll tax reduction for 2012. (There is consideration this morning for a two month extension). There are some subtleties of the debate that are worth noting. Both sides agree that an extension should happen, but within both parties there is surprising opposition. The lovers of Social Security see the handwriting on the wall. They fear that a second year of a payroll tax break may be the last step leading to significant changes in America’s biggest social program. However, that the payroll reduction hurts SS is a common misperception. That's not correct. Every month, the Treasury transfers cash to SS in order to make up for the shortfall. I follow this stuff; if these transfers had not been made, I (and a bunch of others) would have blown the whistle months ago. As a result of these transfers, SS ends up unharmed by the tax break. Other taxpayers foot the bill. But since we have a deficit to begin with, this just adds to the countries red ink. Uncle Sam is digging into one pocket and transferring wealth to SS. This is the socialization of Social Security. What does it mean if SS becomes a ward of the state? Charles Blahous, an ex Bush advisor had this to say: “The payroll-tax cut would take a major step toward transforming Social Security from what it has long been — an earned benefit, funded by separate worker payroll taxes — into an income-tax based system more akin to welfare.”

Doctors Face Massive Cuts In Medicare Fees -- Doctors face a 27% cut in their fees for treating Medicare patients and Congress is up against a January 1st deadline to act against the cuts. "Doctors are challenged to see them because reimbursement levels are already so low for that subset of patients," said Dr. Dean Griffin, President of the LA State Medical Society. He says doctors expenses have gone up drastically over the past ten years but reimbursement levels have not. "It make sense for doctors who are challenged to meet their expenses to see patients with better insurance," Dr. Griffin said. Some Medicare patients, like Michele Poteet, say they're forced to commute for treatment in order to find a doctor that will accept Medicare. "Friends of mine, depending on my medical condition, if my legs are broke, they take me back and forth to Dallas,"

A Medicare Reform Plan That Just Might Work - On a day when Washington partisans couldn’t even figure out (yet again) how to keep the government running, Senator Ron Wyden (D-OR) and House Budget Committee Chairman Paul Ryan (R-WI) did a remarkable thing: They announced a bipartisan plan to fix Medicare, probably the most contentious of policy issues. And amazingly, what they came up with might just work.  Their design—called premium support– isn’t new—it tracks fairly closely to an idea that’s been pushed by health economists for years and one proposed last year by former Clinton budget director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici( R-NM). Ryan-Wyden would work like this:

The Wyden-Ryan Medicare plan moves the ball, but which way? - As noted in today’s Reflex, Senator Ron Wyden and Representative Paul Ryan have jointly proposed a reform of Medicare that involves competition and private plans but differs from Rep. Ryan’s prior concept; it does not phase out traditional Medicare. The two legislators explain their plan in a Wall Street Journal op-ed today and their white paper with more details is available online (pdf). The following are some of the concepts proposed by Sen. Wyden and Rep. Ryan for a reformed Medicare. Their plan also includes reforms for workers of small businesses, which I will not discuss (much) in this post.

1. No changes before 2022.
2. Anyone age 55 and older today would never have to participate in the new plan.
3. Private Medicare plans would compete with each other and with traditional Medicare in an exchange. Private plans must offer the actuarial equivalent of what is available from traditional Medicare.
4. Plan premiums would be community rated. Plans could not reject a beneficiary from enrolling for any reason.
5. The premium support level would be determined by the cost of the second cheapest plan, including traditional Medicare. Payments would be risk adjusted and geographically rated.
6. If a beneficiary chose a costlier plan, (s)he’d pay the difference out of pocket. If (s)he chose a cheaper one, (s)he’d receive the difference in cash.
7. Low-income beneficiaries would receive additional assistance, as they do today.
8. Medicare growth will be capped at a GDP+1% growth rate. Cost growth above the cap will be brought in line by reducing “support for the sector most responsible for cost growth, including providers.”
9. The white paper says that the Parts A and B deductibles of traditional Medicare should be combined and a catastrophic cap should be included.

Competition hasn’t worked in health care, by Ezra Klein:  Republicans and Democrats have the same problem with the Congressional Budget Office: it refuses to score competition between health-care plans as a surefire way to lower the cost of health care.  This annoyed Democrats during the health-care reform debate, as it meant the Affordable Care Act didn’t get any credit for the competition it would foster on its exchanges. It’s annoying Republicans now, as it means their Medicare-reform plans need to impose blunt spending caps if the CBO to certify them as deficit reducing. But the CBO is in the right here: No matter how much sense competition makes in theory, no matter how obvious it is that it will drive down the price of health care, the fact is that it keeps failing when we put it into practice. When I asked Sen. Ron Wyden to give me examples of programs that made him confident that competition could work, he mentioned the Federal Employee Health Benefits Program (FEHBP) and the California Public Employees Retirement System (CalPERS). Rep. Paul Ryan has also pointed towards the FEHBP as a model for his plans. The only problem? Neither system controls costs — a fact that poses difficulties for both conservative efforts to reform Medicare and Democratic efforts to reform health care:

Ron Wyden, Useful Idiot - Krugman - Sen. Ron Wyden did indeed do a bad, bad thing in his joint proposal with Paul Ryan. Ezra Klein explains why; and the devil isn’t in the details. What Wyden did was to give cover to the fundamental fallacy of right-wing attempts to dismantle Medicare: the claim that market competition is the key to reducing health care costs. We have overwhelming evidence on this — and it just isn’t true. Looking both within the United States and across countries, if you ask which systems are best at cost control, the ranking looks like this: Government provision as well as financing (socialized medicine) > single payer > market competition Why doesn’t the market work here? Ken Arrow explained it all half a century ago. Patients by and large don’t have the information to evaluate medical treatments; in any case, they mainly buy insurance rather than medical care directly; and insurers profit not by providing the most cost-effective care, but by trying to insure people who won’t need care. Oh, and if someone starts talking about how the Affordable Care Act relies on private insurers, give me a break; the reason the ACA works the way it does is the raw power of the insurance industry, which forced advocates of universal coverage to settle for an inferior system.

Paying For Health Reform - Krugman -  I’ve noticed an odd thing in comments whenever the subject of Obamacare comes up. Many commenters scoff when I say that the Obama health reform was fully paid for; not only that, but some of them confidently assert that the Congressional Budget Office says that the reform will increase the deficit.  I assume that this is coming from some right-wing source. But you know, the CBO has a web site, and it’s easy to check this; there’s a convenient summary of the estimates here. .And, well, the estimates say that the reform is fully paid for: Oh, and it’s paid for year by year, too — whatever you may have heard about 10 years of taxes paying for 6 years of coverage, or whatever, they’re basically lies.If you have heard from your favorite source of information that the CBO says that Obamacare increases the deficit, you’ve just learned how reliable your source is.

Health Care thoughts: PPACA Employer Mandate Part 1 - So I am trying to put together a template for evaluating the employer health insurance mandate under PPACA....Some preliminary thoughts: 50 employees does not mean 50 employees, there as a Full Time Equivalent (FTE) calculation that is certain to confuse employers because it is different than any other FTE calculation we have ever seen.In the process of avoiding penalties employers need to obtain information about household income and number of persons in the household, but obtaining the information could be difficult and verifying the information could be impossible. Asking for the information before hiring could be illegal (opinions vary so far). Monitoring changes will be very difficult. And how will the government gather and update this information? Smaller employers say 40 to 200 head count (or FTE) without sophisticated HR resources are going to be really confused.

Matters of life & death: Having to think about the unthinkable - "I could show you case after case," said Dr. Neil S. Wenger. "I could bet you million-to-1 odds these patients would not want to be in this situation." He was talking about patients in critical condition who are "attached to machines, being kept alive" in hospitals, many of them suffering. A common reason for that, said Wenger, director of UCLA's Health System Ethics Center, is that fewer than one-third of us make our healthcare wishes known in advance of critical illness or injury. So if we end up comatose after an accident, or with severe memory loss in old age, we're kept alive, regardless of the cost and regardless of what our wishes might be or how grim the prognosis.

Shortages of prescribed drugs..topical thread - The number of newly reported drug shortages (mostly generic) has been growing:

• There were 74 newly reported drug shortages in 2005.
• The number dipped slightly to 70 in 2006, then rose to 129 in 2007, 149 in 2008, 166 in 2009, and 211 in 2010.
• In mid-2011 there were about 246 shortages.

NPR had a special on this about a month ago, but increasing numbers of people in Boston area report inability to easily fill prescriptions is on the rise, and hospitals report shortages that affect their abilities to deliver services, even surgery.

American v. Brazilian Healthcare, a Continuing Series - I spoke to my sister on Skype last night. She's been in Natal, in Northeastern Brazil, for the past few months. Last week, she noticed a couple small warts growing on her leg. So she wandered down to a government run hospital and and had them removed. The hospital was low on supplies, and the doctor asked her to contribute a box of Q-tips (since Q-tips would be needed in the procedure). The total cost of the whole thing: 12 reais, or about $6.60 American, plus a box of Q-tips.  This isn't the first time I've had a post that dealt with my sister and the Brazilian health care system. A few years ago I wrote about the time she had emergency open heart surgery in Brazil, and how it compared very favorably with her experience with (planned) open heart surgery in the US.  Now, on the subject of the US, my wife also has an interesting healthcare story to relate.

The Hidden Epidemic Destroying Your Gut Flora - Story at-a-glance

• Dr. Don Huber, an agricultural scientist and expert in microbial ecology, has issued stern warnings about shockingly devastating effects of genetically engineered food crops after discovering a brand new organism in GE animal feed—an organism that has since been clearly linked to infertility and miscarriage in cattle, horses, pigs, sheep, and poultry
• Glyphosate, the active ingredient in Monsanto’s herbicide Roundup, and this new-to-science microbe are now linked to a new phenomenon referred to as “Sudden Death Syndrome” (SDS)
• Herbicides and pesticides are metal chelators, which means they immobilize specific nutrients, rendering them unavailable to the plant and any animal or human who consumes that plant
• The nutritional efficiency of genetically engineered (GE) plants is profoundly compromised. Micronutrients such as iron, manganese and zinc can be reduced by as much as 80-90 percent in GE plants

Lead From Old U.S. Batteries Sent to Mexico Raises Risks - — The spent batteries Americans turn in for recycling are increasingly being sent to Mexico, where their lead is often extracted by crude methods that are illegal in the United States, exposing plant workers and local residents to dangerous levels of a toxic metal.  The rising flow of batteries is a result of strict new Environmental Protection Agency standards on lead pollution, which make domestic recycling more difficult and expensive, but do not prohibit companies from exporting the work and the danger to countries where standards are low and enforcement is lax.  Batteries are imported through official channels or smuggled in to satisfy a growing demand for lead, once cheap and readily available but now in short global supply. Lead batteries are crucial to cellphone networks, solar power arrays and the exploding Chinese car market, and the demand for lead has increased as much as tenfold in a decade.

Warren Buffett's 57 year old Farmer son, Howard Buffett, to Be the Guardian of Berkshire Hathaway (CBS video) Howard Buffett's cause is that of promoting the poorest farmers around the world in sustainable ways. This is potentially very big news for global agriculture. He opposes the Bill Gates approach to using Buffett money by using hybrid seeds and big-ag methods.

Jack Keller: Understanding Peak Water - "A very, very large amount of our total food production is depending on a diminishing supply of water," remarks Jack Keller, one of our own regulars here in the CM.com community and an accomplished world expert on water management. Similar to oil and other key natural resources that are mined and consumed, water is subject to the same exponential trends. Both surface supply and underground fossil stores of clean water are depleting at alarming rates, and the energy and economic costs of extraction are swiftly increasing. Water is our most precious natural resource (well, perhaps after oxygen). Advances in irrigation in the past century ushered in tremendous prosperity (the "green revolution"), particularly in food production, power generation, and a dramatic increase in the supportable populations for vast regions of land. If the water supply in future years dwindles to less than today's, those societal gains are going to have to retreat to some extent. Jack sees us as "nearing the end of our string" in terms of the efficiencies new technologies can bring to water management. The story that's going to matter more is conservation -- how well we use what we have left.

Global Wheat Stocks are at their Highest Level in Twelve Years - All three categories have increased: global wheat production, global wheat consumption, and global wheat supply or stocks. graph: usda Global wheat production and consumption in 2011/12 are both projected at a record and stocks are forecast at the highest level in 12 years. In just 1 year, the market supply situation has completely reversed from one of extreme tightness to a surplus, particularly in exporting countries. Black Sea countries’ supplies have recovered from last year’s drought and Australia is expecting back-to-back bumper crops. The leap in global consumption is largely a function of abundant global wheat supplies, tight U.S. corn supplies, and the concurrent price inversion between the two grains.

An Update on the Percent of Corn Crop Being Converted into Ethanol and Other Repercussions of the Corn Ethanol Program -  Remember the flooding along the Missouri and Red Rivers, the derecho winds in Iowa and Nebraska which flattened corn fields for miles, the high night time temperatures in Iowa during tasseling time, the hundred-year drought in Texas, rain, rain, and more rain in Ohio, and all of the other headlines suggesting corn yields could end up low this year? Everyone was nervous with corn carryover stocks at dangerously low levels. Despite all of that doom and gloom during the 2011 corn growing season, the USDA summed the season up like this in their December World Agricultural Supply and Demand Estimates (WASDE) report:  "Weather was generally favorable for this year’s crop." If there is one thing that this country knows how to do, through hell and high water, it's grow corn. Since we are near the end of the year, I decided to get out my calculator and look at the amount of corn being burned in our gas tanks, to see if it has changed much from last year. It hasn't.Here are the latest percentages of corn being turned into ethanol domestically and globally, based upon the last WASDE report data:

• U.S. corn crop being turned into ethanol: 40.6%
• Percent of the global corn crop being turned into ethanol here in the U.S.: 14.6%

Soaring Oil and Food Prices Threaten Affordable Food Supply - The connection between food and oil is systemic, and the prices of both food and fuel have risen and fallen more or less in tandem in recent years (figure 1). Modern agriculture uses oil products to fuel farm machinery, to transport other inputs to the farm, and to transport farm output to the ultimate consumer. Oil is often also used as input in agricultural chemicals. Oil price increases therefore put pressure on all these aspects of commercial food systems. The current global food system is highly fuel- and transport-dependent. Fuels will almost certainly become less affordable in the near and medium term, making the current, highly fuel-dependent agricultural production system less secure and food less affordable. It is therefore necessary to promote food self-sufficiency and reduce the need for fuel inputs to the food system at all levels.

2011 Proving to Be a Bad Year for Air Quality in Texas - All told, Dallas-Fort Worth violated ozone standards on more days this year — 32 so far — than anywhere else in Texas, including the greater Houston area. A number of major metropolitan areas, including Dallas-Fort Worth, San Antonio, Austin and even Waco, exceeded federal limits on ozone on more days this year than last. In the greater Houston area, which includes Galveston and Brazoria County, the number of bad-ozone days dropped slightly, to 29, but the pollution was especially severe on certain summer days. On June 6, an air-quality monitor in Galveston measured 112 parts per billion of ozone — the highest reading in Texas since 2008.  Meanwhile, amid shale booms across the state, questions are increasing about the effects of oil and gas drilling on air pollution. Trucks carrying drilling materials emit nitrogen oxides, as does equipment like compressors. Natural gas escaping from pipelines or storage tanks emits volatile organic compounds, or VOCs. Nitrogen oxides and VOCs are known as ozone “precursors” because, aided by sunlight, they can react with each other to form ozone.

2011 Sets U.S. Record for Wet/Dry Extremes, Wettest Year in Philadelphia’s 2-Century Record - This year is now the wettest year in nearly 200 years of record keeping in Philadelphia, Pennsylvania. A large, wet low pressure system soaked the Northeast U.S. on Wednesday and early Thursday, bringing 2.31 inches of rain to the City of Brotherly Love, bringing this year’s precipitation total in Philly to 62.26 inches. This breaks the old yearly precipitation record of 61.20 inches, set in 1867. In a normal year, Philadelphia receives about 40 inches. According to wunderground’s weather historian Christopher C. Burt, this is one of the most difficult U.S. city records to break, since rainfall records in Philadelphia go back to 1820. The only other sites with a longer continuous precipitation record in the U.S. are Charleston, SC (1738 -) and New Bedford, MA (1816 -). Philadelphia is not alone in setting a wettest year in recorded history mark in 2011. Over a dozen major cities in the Ohio Valley and Northeast have set a new wettest year record, or are close to doing so. Thanks to rains associated with this year’s tremendous tornado outbreaks in April in May, plus exceptionally heavy summer thunderstorm rains, combined with rains from Tropical Storm Lee and Hurricane Irene, portions of at least twelve states have seen rains more than twenty inches above average during 2011.

NASA: Climate change may bring big ecosystem changes: By 2100, global climate change will modify plant communities covering almost half of Earth's land surface and will drive the conversion of nearly 40 percent of land-based ecosystems from one major ecological community type - such as forest, grassland or tundra - toward another, according to a new NASA and university computer modeling study. Researchers from NASA's Jet Propulsion Laboratory and the California Institute of Technology in Pasadena, Calif., investigated how Earth's plant life is likely to react over the next three centuries as Earth's climate changes in response to rising levels of human-produced greenhouse gases. Study results are published in the journal Climatic Change. The model projections paint a portrait of increasing ecological change and stress in Earth's biosphere, with many plant and animal species facing increasing competition for survival, as well as significant species turnover, as some species invade areas occupied by other species. Most of Earth's land that is not covered by ice or desert is projected to undergo at least a 30 percent change in plant cover - changes that will require humans and animals to adapt and often relocate.

Thousands of birds crash into Walmart parking lot but wildlife expert’s explanation for the event makes even less sense - Thousands of migratory birds died on impact after apparently mistaking a Wal-Mart parking lot and other areas of southern Utah for bodies of water and plummeting to the ground in what one wildlife expert called the worst downing she’s ever seen. Crews went to work cleaning up the dead birds and rescuing the survivors after the creatures crash-landed in the St. George area Monday night. By Tuesday evening, volunteers had rescued more than 2,000 birds, releasing them into nearby bodies of water. “They’re just everywhere,” said Teresa Griffin, wildlife program manager for the Utah Department of Wildlife Resource’s southern region. “It’s been nonstop. All our employees are driving around picking them up, and we’ve got so many people coming to our office and dropping them off.” Officials say stormy conditions probably confused the flock of grebes, a duck-like aquatic bird likely making its way to Mexico for the winter. The birds tried to land in a Cedar City Wal-Mart parking lot and elsewhere. “The storm clouds over the top of the city lights made it look like a nice, flat body of water. All the conditions were right,” Griffin told The Spectrum newspaper in St. George. “So the birds landed to rest, but ended up slamming into the pavement."

Dim Bulbs: Budget Deal Keeps GOP’s Anti-Consumer, Anti-Business, Pro-Pollution Rider Blocking Lighting Standards - The shutdown-averting budget bill will block federal light bulb efficiency standards, giving a win to House Republicans fighting the so-called ban on incandescent light bulbs. You’ll find that misleading lede filed in the Politico under “GOP wins light bulb fight” with the even more misleading blurb, “The budget bill gives a victory to House Republicans fighting the ban on incandescent bulbs.” Except, of course, there was no “ban on incandescent bulbs.”  As a leading manufacturer explained to Climate Progress in July:“The reality is, consumers will see no difference at all. The only difference they’ll see is lower energy bills because we’re creating more efficient incandescent bulbs.” The only victory is for the right wing media that kept lying about the issue (see “Led by Murdoch Outlets, Conservative Media Misled Light Bulb Consumers 40 Times In 7 Months“). Oh, and there was a victory for the extremist Tea Party wing of the party, which opposes all government standards, even ones that the lightbulb industry itself wants and that would save households an average of $100 annually — which is to say it would save consumers $12 billion a year.

Dirty trade: How important are greenhouse-gas emissions from international transport? -  It is well known that international trade leads to greenhouse-gas emissions but policymakers often focus their attention on the production of goods and not their shipment. This column presents findings based on a unique database that allows researchers to calculate emissions for every dollar of world trade. It suggests that international transport emissions warrant serious attention in current climate-change negotiations.

11th-hour agreement in Durban sees Big Three legally bound to reduce carbon emissions - The world's biggest greenhouse gas emitters, China, the US and India, will be legally bound for the first time to cut their emissions in a new international climate change treaty to be signed by 2015 and to come into force by 2020. The "Big Three" polluters finally agreed to a legal regime of emissions cutting at the close of the UN Climate Conference in Durban, South Africa, at 5am yesterday morning, after most observers had thought deadlock was certain. The conference outcome is a substantial achievement for the European Union, which had proposed the new treaty and wanted, and obtained, a "road map" towards it. Chris Huhne, the Liberal Democrat Energy and Climate Change Secretary, who led the British team at the talks, said pointedly last night: "This is a very good example of how the European Union can act crucially in the British national interest, in a way we could not possibly achieve on our own." The deal was finally clinched in a face-to-face talk between two women negotiators – the EU's Connie Hedegaard, and India's Jayanthi Natarajan. The fact that their soaring emissions – China's and India's growing by more than 9 per cent annually, America's by 4 per cent – will now be brought into a binding reduction framework, gives some hope that the world may hold the expected rise in global temperatures under the danger threshold of 2C above pre-industrial levels.

Landmark Deal Approved At Climate Conference - A U.N. climate conference reached a hard-fought agreement Sunday on a complex and far-reaching program meant to set a new course for the global fight against climate change for the coming decades. The 194-party conference agreed to start negotiations on a new accord that would put all countries under the same legal regime enforcing commitments to control greenhouse gases. It would take effect by 2020 at the latest. The deal also set up the bodies that will collect, govern and distribute tens of billions of dollars a year for poor countries. Other documents in the package lay out rules for monitoring and verifying emissions reductions, protecting forests, transferring clean technologies to developing countries and scores of technical issues. Currently, only industrial countries have legally binding emissions targets under the 1997 Kyoto Protocol. Those commitments expire next year, but they will be extended for another five years under the accord adopted Sunday.

Assessing the Climate Talks — Did Durban Succeed? - The 17^th Conference of the Parties (COP-17) of the United Nations Framework Convention on Climate Change (UNFCCC) adjourned on Sunday, a day and a half after its scheduled close, and in the process once again pulled a rabbit out of the hat by saving the talks from complete collapse (which appeared possible just a few days earlier).  But was this a success? The outcome of COP-17 includes three major elements:  some potentially important elaborations on various components of the Cancun Agreements; a second five-year commitment period for the Kyoto Protocol; and (read this carefully) a non-binding agreement to reach an agreement by 2015 that will bring all countries under the same legal regime by 2020. If by “success” in Durban, one means solving the climate problem, the answer is obviously “not close.” Indeed, if by “success” one meant just putting the world on a path to solve the climate problem, the answer would still have to be “no.”But, I’ve argued previously – including in my pre-Durban essay last month – that such definitions of success are fundamentally inappropriate for judging the international negotiations on the exceptionally challenging, long-term problem of global climate change.

Global Climate Talks In Durban Avert Failure, If Not Global Warming The official theme of the recently concluded United Nations climate conference in Durban, South Africa -- the 17th such meeting since national governments committed to combating climate change in 1992 -- was "Working Together, Saving Tomorrow Today." But while a rough accord was ironed out at the 11th hour in Durban, there remained some disagreement over what it means, and whether the contentious two-week meeting lived up to its ambitious motto. Some environmental groups saw the agreement as being far less ambitious than what is needed to curb rising temperatures and prevent the potentially devastating impacts of a substantially warmer planet. "While governments avoided disaster in Durban, they by no means responded adequately to the mounting threat of climate change," Alden Meyer, the director of strategy and policy at the Union of Concerned Scientists, said in a statement issued from the Durban talks. "The decisions adopted here fall well short of what is needed. It's high time governments stopped catering to the needs of corporate polluters, and started acting to protect people."

Father of climate change: 2C limit is not enough - Talks to limit global temperature rises to 2C will not prevent the possibility of dangerous climate change, warns the scientist who first raised the alarm over global warming. James Hansen, director of Nasa's Goddard Institute for Space Studies in New York, said there was a widespread misconception among international climate negotiators meeting in Durban, South Africa, that the 2C "safe" target would stop extreme changes. He believes carbon dioxide concentrations – now at nearly 389 parts per million (ppm) – should be no higher than 350ppm to stop catastrophic events such as the melting of ice sheets, dramatic sea level rises and methane being released from beneath the permafrost. Dr Hansen, the "father of global warming", first raised the issue at US Senate hearings in 1988. He has advocated drastic curbs on carbon dioxide emissions by limiting fossil fuel burning. The Durban talks are based on the idea that carbon dioxide concentrations should aim to keep global average temperatures to the 2C target. Dr Hansen said that target was still too high to forestall wholesale global changes. "The target of 2C... is a prescription for long-term disaster," he said. "You can't say exactly what long term is but we are beginning to see signs of slow [climate] feedbacks beginning to come into play

The Washington Post Tells Readers that a Climate Deal with no Binding Caps is Catching Up With Reality - That's right, if you thought there was some urgency to do something about climate change the Post is now telling you the opposite. It told readers that the agreement that came out of the Durban talks, which includes no binding commitments: "shows that the byzantine negotiations which have steered global policymaking on climate for two decades are now catching up with reality." The agreement does propose a plan that will eventually impose limits on emissions by fast growing developing countries, most importantly India and China, however these restrictions are not included in this agreement. Also, there is no clear commitment that rich countries would pay poorer countries for the cost of restricting their emissions. This would almost certainly be a part of any reality based agreement since the rich countries are asking poor countries to incur large costs to address a problem created by the rich countries.

Why small delays on climate change can be costly - When it comes to tackling climate change, a few years’ delay can make a huge difference. The International Energy Agency, for instance, has argued that global emissions need to peak by around 2017 if the world wants to keep global warming below 2°C. By contrast, the recently concluded U.N. talks at Durban set a goal of reaching a new climate agreement by 2020. That doesn’t sound like a huge difference — what’s a mere three years between friends? — but it actually makes the task much, much harder. To see why, check out the graph below from David Hone. One way to think about avoiding drastic climate change is that we need to keep the total accumulation of carbon in the atmosphere at below 1 trillion tons in order to have a 50-50 shot at avoiding 2°C. We’re about halfway there right now. Think of it like a bathtub — the longer the faucet runs, and the higher the water level gets, the more quickly you’ll have to turn off the tap to avoid overflow. And with carbon, too much dithering can greatly affect how quickly the world will have to turn off the tap:

Naomi Klein's Inconvenient Climate Conclusions - Naomi Klein, the author of a string of provocative and popular books including “The Shock Doctrine,” recently took on global warming policy and campaigns in “Capitalism vs. the Climate,” a much-discussed cover story for The Nation that has been mentioned by readers here more than once in the last few weeks. The piece begins with Klein’s conclusion, reached after she spent time at a conclave on climate sponsored by the libertarian Heartland Institute, that passionate corporate and conservative foes of curbs on greenhouse gases are right in asserting that a meaningful response to global warming would be a fatal blow to free markets and capitalism. She challenges the environmental left to embrace this reality instead of implying that modest changes in lifestyle and shopping habits and the like can decarbonize human endeavors on a crowding planet. Please dive in. The piece is particularly relevant this week given the continued standoffs and disconnect between stated goals and behavior at the climate treaty talks in Durban, South Africa. Whether you embrace or dispute her conclusions, the article is a worthy and substantive provocation. I disagree with her in pretty profound ways, yet some of her points echo my assertion awhile back that greenhouse-driven climate change is “not the story of our time” but a symptom of much deeper issues. I contacted Klein, who kindly spent quite a bit of time engaging in an e-conversation about her argument. Here’s our chat:

BREAKING: Canada Pulls Out of Kyoto Protocol - Canada is pulling out of the Kyoto Protocol, the cornerstone of international climate negotiations, in the wake of the failed COP17climate talks in Durban. Canadian Environment Minister Peter Kent announced Canada's bail-out of Kyoto as he returned from Durban. The Kyoto Protocol was ratified by Canada in 2002, when the agreement became legally binding. Canada's decision to turn its back on its international obligations confirms yet again that Stephen Harper and his carbon cronies are securing a hellish future for generations to come.  Canada's 'leaders' are brashly choosing pollution-based profiteering over public health and cooking the climate to make a killing in the tar sands.  BBC reports: Peter Kent said the protocol "does not represent a way forward for Canada" and would have forced it to take "radical and irresponsible choices". The move, which is legal and was expected, makes it the first nation to pull out of the global treaty. …"Kyoto, for Canada, is in the past, and as such we are invoking our legal right to withdraw from Kyoto," Mr Kent said in Toronto. CBC has details on Kent's timing, as well as a news poll showing 62% disapproval of the decision (as of 3pm PST) on CBC's Inside Politics Blog:

A Manifesto for Sustainable Capitalism - Al Gore - We are once again facing one of those rare turning points in history when dangerous challenges and limitless opportunities cry out for clear, long-term thinking. The disruptive threats now facing the planet are extraordinary: climate change, water scarcity, poverty, disease, growing income inequality, urbanization, massive economic volatility and more. Businesses cannot be asked to do the job of governments, but companies and investors will ultimately mobilize most of the capital needed to overcome the unprecedented challenges we now face.  Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process. Such sustainable capitalism applies to the entire investment value chain—from entrepreneurial ventures to large public companies, seed-capital providers to institutional investors, employees to CEOs, activists to policy makers. It transcends borders, industries, asset classes and stakeholders.

Beyond Durban: There’s More than One Way to Reduce Global Emissions  - It is clear that focusing on the international climate change negotiations process in the United Nations Framework Convention on Climate Change alone is not enough to put us on a pathway to limiting global temperature increases to 2 degrees Celsius above pre-industrial levels by 2050, which is what scientists say we need to avoid the worst impacts of global warming. That’s why the Center for American Progress proposes a “multiple multilateralism” approach as a complement to the UNFCCC process. This column introduces that approach, which identifies where emissions reductions can be realized in existing multilateral forums outside the UNFCCC. An upcoming CAP analysis expands on the approach and indicates the emissions reductions we could achieve through various paths outside the UNFCCC that can be harmonized with the goal of achieving climate safety. But first, we will show why the UNFCCC’s reductions, even if successful and assisted by increased climate finance, will not get us where we need to be.

2010 Spike in Greenland Ice Loss Lifted Bedrock, Implying “We’ll Experience Pulses of Extra Sea Level Rise” - An unusually hot melting season in 2010 accelerated ice loss in southern Greenland by 100 billion tons – and large portions of the island’s bedrock rose an additional quarter of an inch in response. That’s the finding from a network of nearly 50 GPS stations planted along the Greenland coast to measure the bedrock’s natural response to the ever-diminishing weight of ice above it. Every year as the Greenland Ice Sheet melts, the rocky coast rises, explained Michael Bevis, Ohio Eminent Scholar in Geodynamics and professor in the School of Earth Sciences at Ohio State University.  Some GPS stations around Greenland routinely detect uplift of 15 mm (0.59 inches) or more, year after year. But a temperature spike in 2010 lifted the bedrock a detectably higher amount over a short five-month period – as high as 20 mm (0.79 inches) in some locations. In a presentation Friday at the American Geophysical Union meeting in San Francisco, Bevis described the study’s implications for climate change. “Pulses of extra melting and uplift imply that we’ll experience pulses of extra sea level rise,” he said. “The process is not really a steady process.” Because the solid earth is elastic, Bevis and his team can use the natural flexure of the Greenland bedrock to measure the weight of the ice sheet, just like the compression of a spring in a bathroom scale measures the weight of the person standing on it.

Welcome to the new Arctic - On August 27, 2008, a satellite looking down on the Arctic Ocean observed something possibly unprecedented in human experience. Certainly for the first time in the region’s short recorded history, both the fleetingly navigable routes that skirt this frozen sea – the north-West Passage, and the north-East Passage Russians usually refer to as the northern Sea Route – were ice-free at the same time. For a few weeks that late summer, a ship could circumnavigate the North Pole without being trapped between massive sheets of ice and the bleak shores of northern Siberia or the Canadian archipelago. At first sight, this rare climatic coincidence might seem to be of no more than academic interest.  But crossing the polar ocean is altogether a different matter. Sailors began probing for a safe way through its many dangers hundreds of years ago, almost as soon as they realised the world was round. They were searching for a short cut from the Atlantic to the Pacific – a direct route from Europe to China and the East Indies that would save many thousands of miles by comparison with the long haul round Cape Horn or the Cape of Good Hope and across the notoriously stormy southern ocean.

Shock as retreat of Arctic sea ice releases deadly greenhouse gas - Dramatic and unprecedented plumes of methane – a greenhouse gas 20 times more potent than carbon dioxide – have been seen bubbling to the surface of the Arctic Ocean by scientists undertaking an extensive survey of the region. The scale and volume of the methane release has astonished the head of the Russian research team who has been surveying the seabed of the East Siberian Arctic Shelf off northern Russia for nearly 20 years. Igor Semiletov, of the Far Eastern branch of the Russian Academy of Sciences, said that he has never before witnessed the scale and force of the methane being released from beneath the Arctic seabed. "Earlier we found torch-like structures like this but they were only tens of metres in diameter. This is the first time that we've found continuous, powerful and impressive seeping structures, more than 1,000 metres in diameter. It's amazing," Dr Semiletov said. "I was most impressed by the sheer scale and high density of the plumes. Over a relatively small area we found more than 100, but over a wider area there should be thousands of them." Scientists estimate that there are hundreds of millions of tonnes of methane gas locked away beneath the Arctic permafrost, which extends from the mainland into the seabed of the relatively shallow sea of the East Siberian Arctic Shelf. One of the greatest fears is that with the disappearance of the Arctic sea-ice in summer, and rapidly rising temperatures across the entire region, which are already melting the Siberian permafrost, the trapped methane could be suddenly released into the atmosphere leading to rapid and severe climate change.

Researchers shocked to find thousands of spewing methane fountains in Arctic region -The Russian research vessel Academician Lavrentiev conducted a survey of 10,000 square miles of sea off the coast of eastern Siberia. They made a terrifying discovery – huge plumes of methane bubbles rising to the surface from the seabed. “He found more than 100 fountains, some more than a kilometer across,’ said Dr Igor Semiletov, “These are methane fields on a scale not seen before. The emissions went directly into the atmosphere. This is the first time that we’ve found continuous, powerful and impressive seeping structures, more than 1,000 meters in diameter. It’s amazing. Earlier we found torch or fountain-like structures like this,” Semiletov told the Independent. “Over a relatively small area, we found more than 100, but over a wider area, there should be thousands of them.” Semiletov’s team used seismic and acoustic monitors to detect methane bubbles rising to the surface. Scientists estimate that the methane trapped under the ice shelf could lead to extremely rapid climate change. Current average methane concentrations in the Arctic average about 1.85 parts per million, the highest in 400,000 years. Concentrations above the East Siberian Arctic Shelf are even higher.

Giant plumes of methane bubbling to surface of Arctic Ocean - Russian scientists have discovered hundreds of plumes of methane gas, some 1,000 meters in diameter, bubbling to the surface of the Arctic Ocean. Scientists are concerned that as the Arctic Shelf recedes, the unprecedented levels of gas released could greatly accelerate global climate change.  Igor Semiletov of the Russian Academy of Sciences tells the UK's Independent that the plumes of methane, a gas 20 times as harmful as carbon dioxide, have shocked scientists who have been studying the region for decades. "Earlier we found torch-like structures like this but they were only tens of meters in diameter," he said. "This is the first time that we've found continuous, powerful and impressive seeping structures, more than 1,000 metres in diameter. It's amazing." Semiletov said that while his research team has discovered more than 100 plumes, they estimate there to be "thousands" over the wider area, extending from the Russian mainland to the East Siberian Arctic Shelf. "In a very small area, less than 10,000 square miles, we have counted more than 100 fountains, or torch-like structures, bubbling through the water column and injected directly into the atmosphere from the seabed," Semiletov said. "We carried out checks at about 115 stationary points and discovered methane fields of a fantastic scale — I think on a scale not seen before. Some plumes were a kilometer or more wide and the emissions went directly into the atmosphere — the concentration was a hundred times higher than normal."

Home - Arctic Methane Emergency Group

Arctic Methane Alert - NGU brochure

The brutal logic of climate change - The consensus in American politics today is that there's nothing to be gained from talking about climate change. It's divisive, the electorate has more pressing concerns, and very little can be accomplished anyway. In response to this evolving consensus, lots of folks in the climate hawk coalition (broadly speaking) have counseled a new approach that backgrounds climate change and refocuses the discussion on innovation, energy security, and economic competitiveness. This cannot work. At least it cannot work if we hope to avoid terrible consequences. Why not? It's simple: If there is to be any hope of avoiding civilization-threatening climate disruption, the U.S. and other nations must act immediately and aggressively on an unprecedented scale. That means moving to emergency footing. War footing. "Hitler is on the march and our survival is at stake" footing. That simply won't be possible unless a critical mass of people are on board. It's not the kind of thing you can sneak in incrementally.

All Brazil's cars to use ethanol - Two thirds of all cars in Brazil are fuelled with ethanol, said the chief executive of Petrobras, José Sergio Gabrielli, speaking last week at the World's 20th Petroleum Conference, in Doha, Qatar.  Gabrielli, head of the third-biggest Brazilian oil producer, said the company is increasing its ethanol production and predicts all cars in Brazil will soon be running on ethanol, while also exploring new oil fields.

India Embraces Solar Power, Says Price Will Equal Thermal Power in Five Years - Economic South Asian superpower India has firmly embraced solar power, advancing the target date by five years for selling solar-generated electricity at the same rate as electricity generated by fossil fuel plants, from 2022 to 2017. According to government officials, the reason for moving the date forward is plummeting tariffs in the latest solar development projects, a trend that they believe is likely to continue. Ministry of New and Renewable Energy Joint Secretary Tarun Kapoor said, "The prices will come down further next year and will continue to fall. Earlier, our aim was that solar power will achieve grid-parity by 2022, but looking at the upbeat response from the industry, we have now reduced our target to 2017. Some big names from India have proved that a large investment will soon be possible in solar projects, as huge as 2,000 megawatts. There are other reasons as well. Internationally, the price of solar cells has come down and with  improved technology, the cost of operation as a whole has been reduced, thereby increasing the efficiency."

Buyers of wind power lacking - The developer of the largest wind farm ever proposed in North Carolina says the project has stalled because no utility wants to buy the power the project would produce. Iberdrola Renewables, having put more than three years into a 31-square-mile wind farm near the coast, this week began notifying property owners and public officials in Pasquotank and Perquimans counties that the project is on hold indefinitely. If built, the Desert Wind Energy Project near Elizabeth City would have ranked among the largest wind farms in the country. Iberdrola has developed more than 40 wind farms in this country, but the Spanish company has been unable to find a buyer for the power output of Desert Wind. The $600 million undertaking was to include 150 turbines, enough to supply power to as many as 70,000 homes....The Desert Wind project began in early 2009, with millions of dollars invested since then in wind studies, environmental impact statements and engineering analyses of roads, soils and transmission systems. The N.C. Utilities Commission approved the project in May in a proceeding remarkable for the absence of public protests. Iberdrola has signed real-estate agreements with some 40 property owners who would be paid annual fees of $6,000 or more in exchange for hosting turbines standing 500 feet tall at the upper tip of the blade. But months of talks with neighboring power companies have failed to yield a contract. Iberdrola will not be able to finance the project until it can show institutional lenders a long-term contract with guaranteed cash flow.

Tajikistan: Energy Shortage Accelerates Deforestation  “These hills used to be covered with trees in Soviet times,” says Umedjon Baburforov, gesturing to the bare slopes around his village of Yanchob, near Dushanbe. “Now there are none.”  In the mountains of Tajikistan, summer is the season for collecting wood. Come winter, when many settlements throughout the country receive less than four hours of electricity per day from the state’s power grid, a wood stove becomes the main source of heating for many families. “We have to go further and further each year to find wood. We are planting more trees but they take a long time to grow,” explains Baburforov, 76.

Rare Earth Shortages - A Ticking Timebomb for Renewables? - A global scarcity of rare earth metals over the next five years could be “a ticking timebomb” for renewables and clean-tech, according to consultancy PwC. Hybrid cars, rechargeable batteries and wind turbines are among the sectors which could be affected by a shortage of these metals, which include cobalt, lithium and platinum, says PwC’s report .Minerals and metals scarcity in manufacturing: A ‘ticking timebomb’. Rare earth metals are a key element for producing gearless wind turbines using permanent magnet generators, said Daniel Guttmann, London-based director for renewables and clean-tech at PwC.  Manufacturers favour gearless turbines increasingly as they are more reliable than geared turbines, which are heavier and have more moving parts. "This is a real headache for the industry and may negatively impact the cost-curve of offshore wind,” he said.

Japanese Officials Declare 'Cold Shutdown' Of Crippled Reactors - Nuclear reactors crippled in Japan's March 11 earthquake and tsunami are now in a "cold shutdown," Prime Minister Yoshihiko Noda announced today. If that is correct, it's a milestone on the long road toward recovery from the world's worst nuclear crisis since Chernobyl, The Associated Press writes.  A cold shutdown, AP says, "normally means a nuclear reactor's coolant system is at atmospheric pressure and the its reactor core is at a temperature below 212 degrees Fahrenheit (100 degrees Celsius), making it impossible for a chain reaction to take place." "But many skeptics," The Japan Times reports, "believe the declaration is little more than political grandstanding, given the revised definition of what constitutes cold shutdown, and are concerned about the long-term stability of the critical coolant system. ... Reactors 1, 2 and 3 have been damaged and much of the melted fuel is believed to have penetrated through the pressure vessels and fallen to the bottom of the outer containment vessels. Tepco [which operates the plant] has been unable to take direct measurements of the temperatures at the bottoms of the containment vessels."

Arne Gundersen explains what is known about the Fukushima radiation being transported to the western U.S

Japan's nuclear meltdown shouldn't close U.S. plants – There's never a shortage of things for Americans to worry about — housing foreclosures, the teetering European economy, even bedbugs — so it's no wonder the Japanese nuclear power plant catastrophe that transfixed the world in March has dropped down the list of things to lose sleep over. But new reports suggest that the meltdown at one of the ill-fated Japanese reactors was even worse than originally thought, and large areas around the plant could be uninhabitable for decades. Germany, not known for the types of natural disasters that triggered Japan's crisis, responded to the Fukushima Dai-ichi disaster by shutting down eight of its 17 reactors and moving to phase out the rest by 2022. Should the United States follow suit? In a word, no. For all its drawbacks, nuclear power remains an indispensable part of the U.S. energy mix, reliably providing about 20% of the nation's electricity with little to none of the greenhouse gas emissions generated by competitors such as coal, oil and natural gas. At a time when wind, solar and other renewable forms of energy are still a long way from being able to carry the 24/7 load for a nation increasingly reliant on computers and appliances, nuclear power makes sense — as long as Americans are confident it's as safe as possible, which is where the lessons from Japan come in.

Argentina poised for shale oil and gas boom - Argentina could be nearing a shale oil and gas boom similar to the one that transformed the US energy landscape as former state monopoly YPF eyes another 1bn barrel discovery adjacent to a Patagonian field whose reserves were more than six times bigger than thought. YPF has almost finished drilling a 502 sq km area just north of the discovery zone and believes full results will be equally vast. Two of the three wells are in production and “the yield is exactly the same,” says Tomás García Blanco, YPF’s executive director for upstream. Asked if this heralded another 1bn barrel discovery, Mr García Blanco says: “Yes. But until the third well is drilled … I would like to be cautious. We hope to know by the end of the year or January 2012.” The group, which is 57.43 per cent owned by Spain’s Repsol, announced in November that it had discovered 927m barrels of oil equivalent in a 428 sq km zone of the Vaca Muerta (“Dead Cow”) formation in south-western Argentina – more than six times higher than its initial estimate in May of 150m barrels. The discovery is three-quarters oil and one-quarter gas, it says.

Shale reserves: Gas seen as bridge between old and new forms of power  - The world is set to enter a golden age for gas, according to the International Energy Agency, that will see it start to rival coal as the main fossil fuel. It is easy to see the attractions, not just for the environment but also in energy security terms.  Coal is widely dispersed and cheap – but it is the most polluting fossil fuel in terms of greenhouse gases and other pollutants that affect air quality and can cause acid rain.  Oil, while less polluting, is overwhelmingly concentrated in the politically insecure Middle East and Russia and has seen huge volatility as well as dizzying price rises. Until recently, much the same was true of gas – global reserves were dominated by Russia, Iran and Qatar, and supplies from existing suppliers such as the UK, Norway and Algeria are being used up fast. But the global gas market has been transformed by the advent of technology that has enabled the exploitation of huge shale gas reserves – particularly in the US, which has moved in less than a decade from being one of the world’s biggest importers of gas to being self-sufficient and even preparing to become an exporter.

Study doubts shale gas to be job gusher -The huge discoveries of natural gas and oil just starting to be tapped in eastern Ohio are expected to generate jobs — but only a fraction of the number that the industry forecasts, according to a report led by an Ohio State University professor. The study released yesterday predicts that the boom in drilling will lead to 20,000 new jobs over the next several years, far fewer than the 200,000 that the industry has predicted will come from drilling in shale formations for oil and gas. The 20,000 jobs would be those created both directly and indirectly from drilling. “We need to be setting realistic expectations,” said Mark Partridge, an economics professor specializing in urban and rural development at Ohio State.

Are Privatized Water Utilities in Cahoots With Shale Gas Companies? - On one hand, we have shale gas companies who have been rushing into various regions of the country to extract gas using a dangerous extraction process that involves toxic chemicals potentially contaminating our drinking water. On the other hand, we also have investor-owned water utilities (IOU’s) who are taking a public resource out of the hands of the public and profiting greatly from it. What happens when you put them both together? The results are revealed in the latest Food & Water Watch Report, Why the Water Industry is Promoting Shale Gas Development and they could involve the over-generalization of water quality tests, increased water rates and big profits… for the investors. The report details big concerns about the sketchy relationship between IOU’s and gas companies, including the possibility that IOU’s would protect their investment even if it meant downplaying the risks of contamination caused by their new customers: shale gas companies. Not only that, but water contamination in a community can lead to new customers for the private water utilities when they need to find a new source of drinking water. Look at what’s happening in Pavillion, Wyoming and Dimock, Pennsylvania, and you can see that this could be a tricky relationship to monitor. If your household relies on its own drinking water well and it suddenly becomes contaminated, you might have to deal with switching to an IOU to provide your water. They can benefit from contamination.

Everything You Need To Know About The Shale Gas Revolution - There has been a surge in domestic energy production in 2011, and a large part of it has been attributed to the shale boom. In fact, the U.S. has twice as much natural gas as Saudi Arabia has oil.  Shale gas is touted as a cleaner for of energy, and with its contribution to the economy, those in favor of recovering these resources argue that it would cut American and global dependence on OPEC.  Yet 'fracking,' a crucial part of shale gas extraction, is considered dangerous and many fear its impact on the environment. In the EU, member states are diverging significantly in national policy responses to shale gas regulation. Where does shale come from? How can you cash-in on the shale boom? Why is fracking so controversial? A report from UK think tank The Global Warming Policy Foundation gives us a quick breakdown of everything you need to know about shale gas market.

The questionable economics of shale gas  - Shale gas is being sold to the American public as a miracle, arriving just in time to save us from peak oil. It’s an abundant new fuel supply that will be a “game-changer,” we’re told. We’ll soon be a major exporter of gas to the rest of the world. The economics of fossil fuels have been changed forever, along with our balance of trade. But what if the business isn’t actually profitable? What if it’s really based on accounting trickery and overstated claims? “Fracking” — extracting natural gas by drilling horizontally through dense shale, then fracturing it with high-pressure fluids — has indeed given the U.S. a nice bump in gas production. Production of dry shale gas soared ten-fold from under 0.4 trillion cubic feet (tcf) in 2003, to 4.8 tcf in 2010. Total gas withdrawals, including conventional gas, are up 16 percent since the end of 2005. Shale gas now accounts for about one-quarter of total U.S. dry natural gas production, and about 4 percent of our total primary energy supply. Our shale gas resources, however, while much ballyhooed in the press, are far less certain. We may now have a 100-year supply of gas in America, as suggested by recent reports. . . or we may not.  Currently, we only have an 11-year supply on the books: 273 tcf classified as “proved reserves,” meaning gas that is commercially producible at a 10 percent discount rate.

Halliburton Set To Thrive On Fracking And Expanding Shale Play -  Halliburton will surge on its North American business, particularly fracking as the U.S. shale play continues to evolve, analysts at RBC Capital Markets argue. The large oilfield services provider won’t derive much profit from its international operations, but it will see Iraqi production stabilizing and unconventional gas plays develop across the globe, setting it up to benefit in the future. While exploration and production companies have had a stellar year, with Exxon Mobil and Chevron both showing double-digit percentage gains, oil and gas service providers have substantially underperformed. Halliburton and Schlumberger, the two largest players, are down 18% and 12% for the year, respectively. But Halliburton’s luck could begin to change. With about 75% of its revenues coming from its North American operations, RBC’s equity analysts believes the company is poised to surge on the expansion of shale plays and hydraulic fracturing, or fracking. The company’s North American markets will be the main growth driver in 2012, explain the analysts, as E&P companies continue to bet on fracking. Halliburton’s frac fleet is already about 80% contracted at an average duration of 2 years, and all incremental 2012 capacity “is coming on-line under term contract[s]” which E&P companies are extending to secure supply. “This behavior indicates shortages, not pending surpluses,” wrote the analysts

Iran Discovers World's Largest Offshore Natural-Gas Field in Caspian Sea - Iran says it has discovered a gas field reserve with a potential 1.4 trillion cubic meters of natural gas in the Caspian Sea. The field, located 2,300 feet deep (700 meters), lies within Iran's maritime borders, Oil Minister Rostam Qasemi said on the Ministry of Petroleum's news site.   Iran has 11 trillion cubic meters of proven gas reserves in the Caspian Sea, excluding this latest discovery, the minister said. Iran is the second-largest oil producing member-nation of the Organization of the Petroleum Exporting Countries. Oil exports account 80 per cent of its public revenues. According to the BP Statistical Review of World Energy released in June, Iran has 29.61 trillion cubic meters of proven gas reserves. It ranks third in the world on oil reserves and second on gas reserves.

Like Lazarus, Republicans Attempt to Revive Moribund Keystone XL Pipeline - In the latest example of dysfunctional Congressional gridlock, the Democratic-led Senate is certain to reject a House of Representatives-passed Republican bill, House Resolution 3630, the 369-page ‘‘Middle Class Tax Relief and Job Creation Act of 2011,’’ to extend the payroll tax cut. The sticking (sticky) point? Oil - specifically, dirty Canadian oil derived from Alberta’s oil sands, and the Keystone XL pipeline cutting across Middle America to deliver it to Gulf Coast refineries. On 10 November, four days after 12,000 pipeline protestors encircled the White House, President Obama announced "the decision on the (Keystone XL) pipeline permit would be delayed until at least 2013, pending further environmental review.”The “dirty” secret about the Keystone XL pipeline’s oil sands hydrocarbons, which no amount of K Street PR can spin away, is that the oil has a higher carbon content than that from traditional fossil fuels, anywhere from 8 to 14 percent more, depending on which scientific report you read. Accordingly, the EU has already banned their import, much to Ottawa’s annoyance. Much to the consternation of Transcanada and the pipeline’s Republican boosters in Washington, environmental groups in such stalwart Republican states as Nebraska went up in arms over the Keystone XL proposal, fearing that a leak from the underground pipeline would irrevocably pollute the Ogalla Aquifer, source of much of the Great Plains' agricultural water.

Deconstructing "ethical oil" - When I stumbled across the site EthicalOil.org recently, I thought there was a small chance that it was a parody. And, it turns out that the site reads like a parody in some places even though I am certain that the owners are dead serious. You see, the site is a defense of the Canadian oil sands industry. The argument it makes is that because human rights standards are much better in Canada than in many other oil exporting nations, Canada should be considered a more "moral" source of oil. In fact, the oil from the oil sands is touted as a "fair trade choice." Once I'd read through the site, it was hard to imagine why the oil sands industry would even want it online. If these people were working for me with the express mission of defending the oil sands, I would fire them. Let me explain why.

The Pipeline We Actually Need - LISTENING to the debate over the proposed Keystone XL oil pipeline, you might think that all pipelines are bad. But thousands of miles of pipeline already crisscross the United States. Without them, there would not be gasoline at filling stations, or natural gas in restaurant kitchens. It is 100 percent certain that new pipelines must be built.  The question is: what kind of new pipelines are needed? Oil pipelines that prolong the nation’s addiction to imported petroleum, or natural gas pipelines that carry a cleaner, domestically produced fuel?  The Keystone XL project — which the Obama administration has moved to table until after the 2012 election — would move synthetic petroleum from the Canadian province of Alberta to Gulf Coast refineries for conversion into gasoline. Yet even if all were to go well with the pipeline, which would be built to high safety standards, the United States might be better off without still more imported oil.  At the same time, there is a better kind of pipeline — but it is nowhere close to construction. That pipeline would bring natural gas from Alaska to the lower 48 states. Access to Alaskan natural gas would reduce greenhouse emissions, while providing an alternative to coal in electricity production and to oil in transportation.

America's New Energy Security - Every president since Richard Nixon has called for energy independence. Nevertheless, U.S. reliance on imported oil long seemed to be headed in only one direction—up—and that pointed to inevitably increasing dependence on the huge resources of the Middle East. No longer. U.S. petroleum imports, on a net basis, reached their peak—60%—of domestic consumption in 2005. Since then, they have been going in the other direction. They are now down to 46%. What's happening? Part of the answer is demand. U.S. oil consumption reached what might be called "peak demand" in 2005 and has since declined. The country has become more efficient in its use of petroleum, and that will continue as vehicle fuel economy goes up. The economic slump has also muffled demand. But developments on the supply side are particularly striking. U.S. crude oil output has risen by 18% since 2008. Some of that has come from an increase in deep-water output, although after last year's Deepwater Horizon oil spill the pace of future growth is more uncertain. The big surprise is onshore, where the United States is experiencing an oil boom.

Shell gambles billions in Arctic Alaska oil push - Standing in front of a brightly colored, 3-D image of the geology far below the floor of the Chukchi Sea, Steve Phelps pointed to the "giant opportunity" that has prompted Shell Oil to pour billions of dollars into the Alaska Arctic. "Burger — that's the name you are going to get to know," Phelps recently told reporters gathered here to learn about the huge oil company's plans and promises for Alaska. Phelps is Shell's Alaska exploration manager, a geologist whose job it is to find big oil. The Burger field, part of a Shell naming theme that revolved around junk food, has been eyed by various oil companies for years. But it's more than 70 miles offshore in the Chukchi Sea — between Siberia and the northwest coast of Alaska — and until recently was thought to be too expensive to develop. Now Shell — for the second time — holds the leases. Armed with promising new seismic science, a sort of undersea sonogram of the earth's belly, the Dutch company says Burger is a signature find. It's the spark for ramping up controversial efforts to drill off the northernmost coast of the U.S. in some of the most extreme conditions on Earth.

Why Some Republican are Delusional About Oil and Energy Policy - In a recent video blog about energy politics, I stated that in my opinion each of the major political parties in the U.S. only gets half of the energy picture. Democrats tend to demonize oil usage, with many believing that we can shift to renewables for our energy needs. To be clear, we can — but not in the way they imagine. They simply underestimate the role oil plays in our lives, and therefore overestimate the ease of a transition. As a result, they feel they have little use for oil companies, and so they are perpetually at war with the oil industry. Of course renewables certainly have a role, and must be the long-term answer. But a little realism about the pathway from here to there is in order. On the Republican side, the common view is that we are awash in oil and gas, if only the environmentalists would clear out and let the oil companies drill. This view was recently articulated by current Republican flavor-of-the-month Newt Gingrich during the CNN Republican Presidential Debate

Fat-tail fears catch oil traders between $50 and $150 bets - Investors and traders are buying large numbers of oil contracts that would profit from a price super-spike – and a collapse.  In a rare and deep split of views, investors and traders are pricing in unusually large “fat tail” risks – low-probability events that have an outsize impact on prices – for next year that could boost oil prices to $150 a barrel or push them to $50 a barrel.  “We face a bifurcated market: a crisis in the Middle East could send prices through the roof; the eurozone debt problems could trigger a collapse,” Seth Kleinman, head of energy strategy at Citigroup, said echoing a widely held view in the market.  The fear of abnormally large “fat tail” risks has driven investors to buy insurance through options – contracts that give holders the right to buy or sell crude oil at a predetermined price and date.  “Everyone I speak to on crude oil, if they have a directional bet they do it through out-of-the-money options,” said Fabio Cortes, a commodities fund-of-funds manager at Oakley Capital. “It’s like a lottery ticket.”

IEA urges Opec to maintain supplies - Opec should maintain its current oil production of more than 30m barrels a day in 2012, the western countries’ oil watchdog said ahead of a key meeting of the cartel.  The call from the International Energy Agency comes as Opec ministers gather in Vienna for a meeting on Wednesday to discuss their production, balancing growing fears of an economic slowdown with oil prices still above $100 a barrel. In its closely-watched monthly report for November, published on Tuesday, the Paris-based IEA said that its own views about Opec oil production for 2012 largely converged with the cartel’s own estimates.  “Both reports [Opec and IEA] point towards an average underlying ‘call on Opec crude and stock change’ that lies above 30m b/d for 2012,” it said.  “There seem to be growing analyst expectations that ministers might converge around expected 2012 crude demand as an aggregate production target for the year ahead.”

November Saudi Oil Production -- Izabella Kaminska at the FT's Alphaville notes that the Saudi Oil Minister has been saying that Saudi Arabia produced over 10mbd of oil in November, but that international agencies don't agree: So while Saudi Arabia’s oil minister Al-Naimi reckons as much as 10m barrels per day are being produced, the market ‘feels’ that approximately 9.6-9.75m per day are hitting the market. The most obvious explanation for the discrepancy, says JBC Energy, is additional demand from Asia based on the fact that marginal barrels are currently flowing in from more expensive Atlantic-Basin markets. That or the fact that something in the region of 400,000 barrels of crude per day has been directed straight into a market black hole.(A graph of all the latest available data is above. Note particularly the still sharply climbing rig count.) It's important to note that this kind of thing happens a lot.  For example,  in March there was a discrepancy of several hundred thousand barrels a day between what Mr Al-Naimi had said and what Saudi Arabia itself later reported to JODI.  Then in July there was again a situation where Saudi Arabia apparently said it would produce 10mbd but fell several hundred kbd short.

World Petroleum Congress in Doha, Qatar - ExxonMobil: ‘Technology to beat Peak Oil’ and Total pulls itself into line - Before the World Petroleum Congress in Doha, Qatar the newspaper Gulf Times wrote in an article that, “A highlight is the keynote speech that will be delivered by Total’s President and CEO, Christophe de Margerie on the theme: “Peak oil – ahead of us or behind us?” on December 7”. The fact that Peak Oil is the theme for one of the seven main presentations at the congress shows that Peak Oil is now an important topic of discussion in the international and national oil industries. Earlier, Total had indicated that they believed Peak Oil could occur before 2030 so it was with some suspense that we awaited the message from Total and their managing director de Margarie. However, Peak Oil was already a topic of discussion on December 6 at a round table discussion titled, ”Peak Oil: Reality or Mirage?” The online oil news site Upstreamonline.com headlined its daily news the next day with, “ExxonMobil: ‘Technology to beat Peak Oil’’’. “We don’t need to discover a lot of new resources if we continue to push forward with new technology and make it possible to economically produce resources that we already know about,”. He added, “Many of the assumptions that underlie peak oil theory…are really unfounded, because they do not take into account the role of technology. Technology makes it easier, and therefore more economically viable, to find hydrocarbons.”

ExxonMobil's Energy Outlook - What the Next 30 Years Will Look Like - ExxonMobil’s just-released Outlook for Energy: A View to 2040 takes a look into the future and finds that technology advancements over the next three decades will produce greater supplies of energy, more diverse supplies of energy and new ways to save energy — all of which will be essential to meeting future energy demand. ExxonMobil’s 2012 Outlook for Energy sees efficiency, developing world economic growth and natural gas reshaping global. Demand through 2040 is to be about 30 percent higher in 2040 versus 2010 as population grows and global GDP doubles; demand in developing nations to rise nearly 60 percent; natural gas from shale and other unconventional rock formations will account for 30 percent of global gas production by 2040; demand growth would be more than four times the projected 30 percent without expected gains in efficiency. The Outlook projects that global energy demand in 2040 will be about 30 percent higher than it was in 2010, led by growth in developing regions such as China, India, Africa and other emerging economies. While oil will remain the most widely used fuel, overall energy demand will be reshaped by a continued shift toward less-carbon-intensive energy sources — such as natural gas — as well as steep improvements in energy efficiency in areas like transportation, where the expanded use of hybrid vehicles will help push average new-car fuel economy to nearly 50 miles per gallon by 2040.

The Future of Oil - 2010 to 2035 - Now that we've seen West Texas Intermediate prices flirting with the $100 a barrel mark yet again and OPEC maintaining its production level at 30 million BOPD, I thought that it was time to take a look at the latest World Energy Outlook (2011) from the International Energy Agency (IEA) and see what they predict for the world's energy markets, focussing on oil, for the next 25 years. First, let's look at the 3 year chart for West Texas Intermediate noting the steady rise in price from the lows of late 2008:Now, let's look at the 3 year chart for Brent once again noting the dramatic rise in price from the lows of late 2008: The IEA opens by noting that energy demand is expected to rise by one-third between 2010 and 2035 due to population growth which is estimated at 1.7 billion people and average annual economic growth which is estimated at what appears to be a rather robust 3.5 percent.  While slowing recent economic activity may have an impact on energy consumption over the coming years, over the 25 year period, it makes only a marginal impact on consumption growth.  Here is a graph showing the increase in demand for various forms of energy over the next 25 years (in blue):

IEA: 90mbd of Liquid Fuel in November - Both the IEA and OPEC reported big jumps in total liquid fuel supply in November: the IEA by 0.9mbd to a new high of 90mbd and OPEC by 1.35mbd to a new high for them of 89.15mb.  The graph above shows the short term changes since the beginning of 2008 - the average is up sharply and easily exceeding previous highs. This picture zooms out to the 2002-2011 timeframe and adds prices:Prices continue to drift downward overall as supply increases and uncertainty over Europe clouds the demand picture. Two new pictures this month.  Although I continue to think that total liquid fuel is the best overall indicator available at the moment (imperfect as it is), the EIA provides a helpful breakdown into individual components: "Crude plus condensate" which is hydrocarbons that come out of the ground in a liquid form, "Natural Gas Plant Liquids (NGPLS) which is hydrocarbons larger than methane removed from the natural gas stream, "Other Liquids" which includes biofuels, coal-to-liquids, gas-to-liquids, etc, and "Refinery Processing Gains" - volume gains which occur in the refinery as heavier oils are cracked to lighter fuel products.

IEA warns high oil prices threaten global economy - High oil prices threaten to worsen a global economic slowdown and crude producers should consider boosting output, the chief economist for the International Energy Agency said Wednesday. "The current high oil prices have the potential to strangle the economic recovery in many countries," Fatih Birol said in a speech Wednesday in Singapore. "I hope that high oil prices don't slow down Chinese economic growth and the negative effect that would have on the global recovery." Crude has jumped to $100 a barrel from $75 in October amid signs the U.S. economy will likely avoid a recession. Most economists expect global economic growth to slow next year as Europe's debt crisis threatens to drag the continent into recession.Birol suggested crude producers should boost output amid growing demand in developing countries and falling inventories in wealthy nations.

OPEC Agrees to Higher Oil Target to Accommodate Libya - OPEC decided to increase its production ceiling to 30 million barrels a day, the first change in three years, moving the group’s target nearer to current output as it grapples with rising exports from post-war Libya. The new quota is for all members of the Organization of Petroleum Exporting Countries, including Iraq and Libya, and compares with actual November production from those 12 nations of 30.37 million barrels a day, according to OPEC estimates. The target will be reviewed at its next meeting on June 14 and replaces a previous target for 11 OPEC nations, excluding Iraq, of 24.845 million. “We have an agreement to maintain the market in balance and we’re going to adjust the level of production of each country to open space for Libyan production,” Venezuelan Energy Minister Rafael Ramirez said in Vienna after OPEC’s conference ended today.

Has the world reached economic peak oil? - Oil production in the US is increasing. The country where output peaked in 1970 and then shrank by 40 per cent over four decades, has turned some kind of corner. Between 2008 and 2010, production rebounded by 800,000 barrels per day to 7.5 million barrels per day, and analysts forecast more growth to come. Goldman Sachs predicts that by 2017 production in the US could reach almost 11 mb/d, just shy of its all-time high, restoring the country to its former glory as the world’s biggest producer.  One reason is a sharp increase in production of “shale oil”. In North Dakota,Texas and Oklahoma, companies are using hydraulic fracturing, or “fracking” – a controversial technique that has revolutionised US natural gas production – to extract a range of liquid hydrocarbons from non-porous shale that used to be thought unworkable. Indeed, if the world is suddenly awash with oil, somebody forgot to tell the oil market. Oil remains stubbornly above $100 per barrel of Brent crude, the main international benchmark. Most analysts agree this is because supply is struggling to keep pace with demand, despite weakening western economies. But if all this extra oil is coming on-stream, how come?

Oil Settles Under $95, Pushed Down By OPEC Deal - Oil fell more than $5 on Wednesday after OPEC agreed a high output target without a clear mechanism to reduce production to defend prices, already under pressure from the deepening euro zone debt crisis.  The Organization of the Petroleum Exporting Countries agreed a supply target of 30 million barrels daily, roughly in line with current production. It did not discuss individual national quotas.  The agreement caps output for all 12 OPEC members for the first half of 2012 but will keep supply running near 3-year highs — enough to rebuild lean global inventories.  "We're not going to bypass it, we're going to adhere to it," said OPEC Secretary General Abdullah al-Badri of the new limit.  Higher supply from OPEC, mostly from Saudi Arabia and its Gulf allies, has kept a leash on oil prices as Riyadh seeks to help nurture global growth by keeping fuel costs under control.

Price of Oil to Remain High as OPEC Limits World Production - The results of OPEC’s latest meeting to set oil production quotas were on Thursday last week. Instead of production targets for individual countries, a group production ceiling of 30 million barrels a day was set. This amount is a bit less than OPEC produced in November 2011 (actual 30.367 mbd), according to its reckoning, and less than it would have produced most of 2011, if Libyan production had stayed on line, based on the amounts shown in its November Oil Market Report.All of this comes shortly after Saudi Arabia announced that it has halted plans to increase capacity to 15 million barrels a day by 2020. I wrote about this in a recent post. Saudi Arabia claims to have 12 million barrels a day in capacity now, but there is little evidence that it can actually produce this amount of oil. Saudi Arabia recently boasted that it would increase oil production above 10 million barrels a day, to help offset the drop in Libyan oil production, but amounts reported by the OPEC Oil Market Report and the EIA report of monthly oil production are still under this amount. The highest Saudi oil production reported by the EIA is 9.94 million barrels a day in August 2011.

Iran: Saudis not compensating If Tehran sanctioned --- OPEC agreed to keep crude output at a daily 30 million barrels Wednesday but left it up to its 12 members to voluntarily honor that ceiling without overshooting it. Ahead of Wednesday's talks, Iran had sought lower production for the cartel, which would raise prices. But it apparently bowed to Saudi Arabia, which wanted to maintain levels and which effectively sets OPEC policy as its largest producer.Despite the compromise, Saudi-Iranian tensions overshadowed much of the meeting.  The OPEC statement said the target includes Libya, which is increasing production after its civil war ended. Libyan delegates say the country is pumping about 1 million barrels a day and plans to be up to pre-civil war levels of around 1.6 million barrels a day within six months. The statement from the Organization of the Petroleum Exporting Countries said members had agreed to voluntarily lower production "to ensure market balance and reasonable prices," should future world supply exceed demand. But by leaving it up to members to cut back on output if needed, the organization effectively acknowledged that it had given up efforts to act as a unified regulator of the oil market. The 30-million figure already represents overproduction of 11 percent from targets agreed to three years ago, the last time OPEC set production quotas on individual nations.

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 sources of oil and mineral wealth. Adding to the euphoria are the historic highs 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, these countries’ current leaders 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?

Chinese Food Energy Production And Consumption: An Export Land Model Analysis - Past series (starting here and here) have defined units and the terms used here, and, explained how I derive food energy contents for the various food items reported by the FAO, and how these aggregated data can be used to estimate overall food energy production, consumption and export/import rates for individual countries, regions, or the entire world. This analysis shows that China has long been a net food energy importer, although the trend as accelerated in the past decade. Throughout, where pertinent, I will point out differences compared the USA’s food energy situation, the details of which have been presented previously starting here. Figure 1 shows the time course of the changes in total net food energy production (blue), and the two major subcategories of plant-derived and animal-derived net food energy production, and its population:China’s total annual net production rate (blue circles), has increased from about 2067 PJ/yr in 1961, to about 9754 PJ/yr in 2007. That’s a 4.7 times increase, which is much greater than the 2.4 times increase in the USA food production over the same period. In part, this dramatic percentage increase is because China's food production was so low in 1960s.

Foreign Investment In China Fell For The First Time Since 2009 — The Commerce Ministry says foreign direct investment in China fell for the first time since 2009 in November, as spending from the U.S. plunged. The ministry said Thursday that the $8.8 billion in foreign investment in November was down 9.8 percent from a year earlier. Investment from the U.S. dropped 23 percent to $2.74 billion. Foreign direct investment covers spending on assets such as factories and excludes financial assets.

China's Fiscal Revenue Growth Slows to 10.6% in November - China's fiscal revenue growth has been slowing since September, with the latest figure standing at 10.6% in November as the country's economy starts to cool. Fiscal revenue climbed 10.6% in November to RMB 645.7 billion ($101.4 billion) compared with growth of 16.9% in October, China's Ministry of Finance announced on Sunday. It cited taxation adjustments and falling property and automobile transactions as the reasons behind the slower growth. Fiscal revenue growth was 17.3% in September and 34.3% in August, according to official data. In the first 11 months China's fiscal revenue rose 26.8% year-on-year to RMB 9.73 trillion, while expenditure grew 24.3% to RMB 8.9 trillion, the ministry said. Of the RMB 645.7 billion collected in November, around RMB 558 billion came from taxes, up 2.7% y-o-y.

China’s deserted fake Disneyland - Along the road to one of China’s most famous tourist landmarks – the Great Wall of China – sits what could potentially have been another such tourist destination, but now stands as an example of modern-day China and the problems facing it. Situated on an area of around 100 acres, and 45 minutes drive from the center of Beijing, are the ruins of ‘Wonderland’. Construction stopped more than a decade ago, with developers promoting it as ‘the largest amusement park in Asia’. Funds were withdrawn due to disagreements over property prices with the local government and farmers. So what is left are the skeletal remains of a palace, a castle, and the steel beams of what could have been an indoor playground in the middle of a corn field. All these structures of rusting steel and decaying cement, are another sad example of property development in China involving wasted money, wasted resources and the uprooting of farmers and their families. It is a reflection of the country’s property market which many analysts say the government must keep tightening steps in place. The worry is a massive increase in inflation and a speculative bubble that might burst, considering that property sales contribute to around 10 percent of China’s growth.

'Long-term Pain' For Chinese Property Market - China’s overheated real-estate market has become a source of fascination and dread for investors. With a significant share of the economy tied up in construction, and global commodity prices hanging on Chinese demand, the recent drop in property prices could prove a turning point. China Vanke, the largest developer and a bellwether for the industry, said Monday that sales in November fell down 36%, year-on-year. This marks the company’s fourth consecutive month of double-digit drops in revenues. So how much further might house prices fall, and what would be the impact on developers’ balance sheets? Is it time to push the panic button? In a new report, Credit Suisse predicts an average drop of 20% from a peak in mid-2011 to the end of 2012.  If a 20% fall sounds dire, consider that some Chinese media outlets have begun speculating on the possibility of a much more severe correction to what is widely seen as a bubble. Some reports flout the idea of 40-50% slump, which would have huge implications for China’s political economy.

China's housing bubble is losing air - Home prices and sales plunge after China's government intentionally slams on the brakes. Some recent buyers stage demonstrations, destroy real estate offices and demand refunds of up to 40%. Home prices nationwide declined in November for the third straight month, according to an index of values in 100 major cities compiled by the China Index Academy, an independent real estate firm. Average prices in the Shanghai area are down about 40% from their peak in mid-2009, to about $176,000 for a 1,000-square-foot home. Sales have plummeted. In Beijing, nearly two years' worth of inventory is clogging the market, and more than 1,000 real estate agencies have closed this year. Developers who once pre-sold housing projects within hours are growing desperate. A real estate company in the eastern city of Wenzhou is offering to throw in a new BMW with a home purchase. The swift turnaround has stunned buyers such as Shanghai resident Mark Li, who thought prices had nowhere to go but up. The software engineer closed on a $250,000, three-bedroom apartment in August, only to watch weeks later as the developer slashed prices 25% on identical units to attract buyers in a slowing market.

China Affirms Property Curbs Even With ‘Grim’ Outlook - China’s leaders affirmed they will stick next year with a campaign to bring down property prices even as a “very grim” global outlook threatens growth in the second-largest economy. The nation will target “basically stable” consumer prices and “unswervingly” implement real-estate curbs, according to a statement after an annual economic planning meeting in Beijing. At the same time, officials will seek “steady and relatively fast growth,” Xinhua News Agency said.  “The authorities are cautious about a premature or aggressive easing of policy, while committed to be pre-emptive and flexible to roll out supportive policies if needed,” said Chang Jian, a Hong Kong-based economist at Barclays Capital, who formerly worked for the World Bank. “The policy focus will be shifting from managing inflation to supporting growth.”  In China, the theme for next year is “progress amid stability,” Xinhua said. “Stability means to maintain macro- economic policies basically stable, maintain steady and relatively fast growth, keep overall price levels basically stable and maintain social stability.”

China’s epic hangover begins - China's credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC's dream that is at last coming down to earth with a thud.  It is hard to obtain good data in China, but something is wrong when the country's Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control. The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains.  The question is whether the People's Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.

Signs of a new strike wave in China - Over the past month, a series of strikes has taken place in China. While these disputes are still small and isolated, they signal a profound shift. The entry of the working class internationally into struggle during 2011—starting with uprisings in Tunisia and Egypt, and spreading to Europe and the protest movement in the US state of Wisconsin—is starting to find its reflection in China. Just as millions of workers in Europe and America are confronting austerity and rising unemployment, so the decline in their living standards has been translated into a loss of export orders in China. In turn, sweatshop owners in China, faced with shrinking profit margins, are passing the burden onto workers, provoking the latest industrial unrest. Strikes have rocked export factories in the Pearl River Delta of Guangdong province. Some 7,000 workers at the Yue Cheng shoe plant struck on November 17 to defend jobs against the company’s plan to move inland where labour is cheaper. They were joined by hundreds more workers at Top Form, a major underwear maker, and 1,000 workers at a Taiwanese-owned computer accessories plant. In both cases the protests were against excessive hours and low pay.

Inside Wukan: the Chinese village that fought back - For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.  The last of Wukan’s dozen party officials fled on Monday after thousands of people blocked armed police from retaking the village, standing firm against tear gas and water cannons.  Since then, the police have retreated to a roadblock, some three miles away, in order to prevent food and water from entering, and villagers from leaving. Wukan’s fishing fleet, its main source of income, has also been stopped from leaving harbour.  The plan appears to be to lay siege to Wukan and choke a rebellion which began three months ago when an angry mob, incensed at having the village’s land sold off, rampaged through the streets and overturned cars.  Although China suffers an estimated 180,000 “mass incidents” a year, it is unheard of for the Party to sound a retreat.

China's Wealth Disparity Erupts in Wukan Protests -The Occupy Wall Street protests in the U.S. are a delayed reaction to a bursting property bubble, which led to a jobs crisis and rising anger over financial influence and wealth disparity. What’s happening right now In China — angry protesters seizing a village and forcing Communist officials to retreat — is a dramatic example of what happens when a similar toxic mix plays out in a totalitarian society. The protests in Wukan, a coastal village in Guangdong province, began three months ago over land seizures. They exploded this week after party officials tried to seal off Wukan with riot police, setting up roadblocks, blocking fishing boats, and beating residents. On Wednesday the party was forced to back down, saying it would halt a controversial real estate project and investigate local officials. The images out of Wukan are a startling contrast to the usual way Chinese officials manage to snuff out any sign of public discord. At the heart of the protests is a corrupt system in which local officials seize land, evict poor tenants, and sell it to rich developers to fund government operations.

In rebellious Wukan, China, a rare sight: No authorities - It's the Chinese Communist Party's nightmare in miniature: Locals stage protests against their land being taken away by shady real estate deals, police respond with heavy-handed tactics and suddenly, with years of frustration and allegations of official corruption bottled up, an entire village erupts in open revolt. That's exactly what's happened in Wukan, a fishing and farming community of some 20,000 people on China's eastern coast. The main road leading into town has been blocked by a police checkpoint on one end, and at the other by dozens of villagers manning a tall barricade of tree branches and boards with nails sticking out. A McClatchy reporter was able to slip into Wukan on Thursday night, apparently the first American news organization to do so, with the help of a local who had detailed knowledge of winding routes that skirted police positions in roads outside the village. Village officials and police had fled the town, leaving government offices empty in the shadows of street signs. The result is almost unthinkable in today's China: A swath of land no longer under the direct management of the Communist Party and its functionaries.

Chinese Police With Shotguns Man Checkpoints Near Scene of Land Protests -  Police armed with shotguns restricted movement in and out of the village of Wukan in southern China, the scene of protests this week following the death in police custody of a local butcher. A dozen uniformed officers and three vehicles manned a checkpoint yesterday about 3 kilometers (1.9 miles) from the village, checking identification cards and preventing some people from entering. The restrictions remain after Communist Party officials began a probe of local officials and halted a real-estate development that sparked protests. Wukan, about 150 kilometers east of Hong Kong in Guangdong Province, rose up in protest after the Dec. 11 death of a villager while in police custody. The local government said Xue Jinbo, 42, died of a heart failure. He was “suspected” of leading more than 400 villagers to “vent their anger” over a land dispute, the official Xinhua News Agency said. “Several thousand” people held a memorial for Xue at a temple in the village center yesterday, the Wall Street Journal said, citing unidentified local residents. Xue’s remains are still held by local officials, the newspaper said.

What's Up in China: Hint, It's Not War With the U.S. - There is a lot of big news in and from China right now, and to touch on a few elements before signing off for a while:1) The outright rebellion that has erupted in the southern coastal town of Wukan is a powerful illustration of the economic, political, environmental, and social tensions that have built up inside China during the recent boom decade -- and that, if anything, may intensify as the boom slows down. For one-stop Wukan updates, I direct you again to ChinaGeeks. Also WSJ and BBC, BBC being source of this picture today:For recent arguments about whether a big slowdown is at hand, I direct you to items last month by Bill Bishop and Patrick Chovanec, each in Beijing and each with links to the various analyses pro and con by Arthur Kroeber, Michael Pettis, and others.2) The military showdown that wasn't. Everyone [in politics] heard last week that China's president Hu Jintao had urged the Chinese military to prepare for the inevitable military showdown with the United States. According to a convincing analysis in The Diplomat, everyone was overreacting. The hubbub appears to have turned on a mistranslated phrase in Hu's comments. The words junshi douzheng, or 军事斗争, were taken in many Western accounts as a recommendation that China begin preparing for war. But M. Taylor Fravel of MIT says: [A] literal and more accurate translation of junshi douzheng would be "military struggle"

Slipping traction for Chinese stimulus - Recently, we saw the People’s Bank of China begin easing by cutting reserve requirement ratio ahead of a rather disappointing PMI figure. That 50 basis points cut made CNY400 billion available for banks to lend. It is always worth saying that central banks ease policy when things are getting bad, so for starters, I am not sure why investors hope that China’s (or indeed, everyone else) monetary easing will save them from their money-losing investments. With respect to China’s monetary easing, there are a few points I would like to stress. To start off, China’s trade surplus has been declining. Year-to-date, trade surplus as a percentage of GDP is roughly 2%, way off the high back in 2007. As the external environment remains challenging, we could see trade surplus vanishing in 2012:

China to Impose Anti-Dumping Duties on GM, U.S. Cars - China announced plans to impose anti-dumping duties on some vehicles imported from the U.S. after failing to block a U.S. tariff on Chinese tires. Punitive duties will be as high as 12.9 percent for autos from General Motors Co. (GM) and 8.8 percent for Chrysler Group LLC, China’s commerce ministry said today on its website. The U.S. units of Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI) will face duties of 2 percent and 2.7 percent respectively, it said.  “The move shows that China is always capable of intervening politically in its markets,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “The automobile industry is very dependent on China for growth, and there’s doubts about the pace of future expansion.”  The move to increase import levies comes three months after the World Trade Organization rejected China’s appeal of a ruling backing U.S. duties on tire imports.  The WTO in September rejected China’s appeal of a ruling by WTO judges last December that found tariffs on $1.8 billion of car and light-truck tires from China were legal. President Barack Obama imposed the duties of as much as 35 percent in September 2009 under a so-called safeguard provision designed to protect U.S. producers from a surge in imports.

China set to tax US-made car imports - China will impose retaliatory duties on US car imports in the latest sign of trade friction between the world’s two largest economies.  In a statement, China’s commerce ministry said on Wednesday that it was taking action in response to damage to its car industry from US “dumping and subsidies”. The move will affect several larger vehicles popular in China, including sport utility vehicles made by Germany’s BMW and Mercedes-Benz brands at their US plants. Shares of BMW and Daimler, which owns Mercedes, fell 5 per cent and 3 per cent respectively on Wednesday.  China overtook the US in 2009 as the world’s largest vehicle market, and sales there account for a substantial chunk of profits for BMW and Mercedes, who build the SUVs they sell globally in North America. In addition to the two German premium brands, the ministry is also targeting models manufactured by General Motors, Ford Motor, Chrysler and Honda’s US unit. The individual duties will range from 2 per cent to 21.5 per cent and be imposed for two years on imported cars and SUVs with engines larger than 2.5 litres. The move by China is unlikely to change the landscape in the country’s booming car market. Beijing has long imposed a hefty import duty – currently set at 25 per cent – on all foreign-made cars, regardless of country of origin.  Faced with that punishing tariff, most foreign automakers have already based production facilities in China for the vast majority of their cars sold to the Chinese market.

China punishes America for unfair trade practices - YES, you read that right: China will levy anti-dumping and anti-subsidy duties on certain US vehicle imports, the commerce ministry said Wednesday, a move likely to fuel tensions between the world's two biggest economies. The tariffs will be applied for two years to passenger cars and sports utility vehicles with engine capacities of 2.5 litres or more and will take effect Thursday, the ministry said in a statement. The decision will affect vehicles produced by General Motors, Chrysler Group, BMW Manufacturing, Mercedes-Benz US International, American Honda Motor and Ford Motor.The move is likely to further strain ties between Beijing and Washington, which have recently locked horns over solar panels, chickens and the value of the Chinese currency.China said the investigation into US auto imports found domestic vehicle manufacturers had "suffered substantial damages" due to the dumping and subsidies.The anti-dumping penalties range from 2.0 percent to 21.5 percent while the anti-subsidy tariffs will be set at a maximum 12.9 percent, the ministry said. More here. Chinese media says the move will only apply to 50,000 vehicles, but the symbolic impact may be significant. The tariff would appear to be a shot fired across the bow of an American government that has recently inched closer toward identifying China as a currency manipulator...

US threatens tariff war with China - The White House has threatened China with tit-for-tat tariffs on imported goods after Beijing imposed extra costs on the importation of sport utility vehicles (SUVs) and other large cars from the US. Commerce secretary John Bryson said a series of breaches by the Chinese this year showed they were ignoring trade rules. The dispute began after data revealed the Chinese manufacturing sector continued to contract in December, though not by as much as in the previous month. The HSBC/Markit purchasing managers' index hit 49 after dropping to 47.7 in November. A figure of less than 50 indicates the sector is shrinking. Capital Economics warned that as long as new orders remained weaker than output and inventories were growing "it is hard to be too optimistic". China's tariffs, ranging from 2% to 22%, are unlikely to inflict much pain on American carmakers, which generally manufacture most of their cars for the Chinese market inside the country. But the sabre-rattling by the Beijing administration may undermine efforts by the White House to foster an export-driven recovery.

US Congress fights China on all fronts - On Tuesday last week, the Congressional Executive Commission on China (CECC) held a hearing on Liu Xiaobo. While it was focused specifically on the one-year anniversary of Xiaobo's Nobel Peace Prize, it also sought to answer the larger question of what his treatment suggests about the potential for further reform of China's political process. In the midst of a United States Congress increasingly of the mind that the country's historical policy of engagement with China needs to be re-evaluated, this hearing was an important attempt to address growing suspicions about the idea that engaging China will successfully bring about political liberalization. As Congressman Christopher Smith (Republican - New Jersey) said in his opening statement, Xiaobo is currently "isolated in Dilbert prison thousands of miles away from his wife, whom is under house arrest in Beijing". While some have suggested that Xiaobo's imprisonment should be understood as somehow unique, Smith clearly believes this is not the case. Pointing to the CECC's database, he noted that they are aware of "1,451 cases of known political or religious prisoners currently detained".

China vows pursuit of more balanced trade - China’s president, Hu Jintao, on Sunday pledged an “even more active” opening up of the country’s economy and a renewed commitment to free trade as he sought to respond to concerns over apparent reform fatigue in Beijing and a deteriorating global economy. Addressing an audience of business leaders and senior trade officials in a speech to mark the 10th anniversary of China’s accession to the World Trade Organisation, Mr Hu pledged to pursue more balanced foreign trade relations and to create a fair and transparent business environment.  China, he said, would seek to strengthen the rule of law, reduce government interference in economic activities, and improve the enforcement of intellectual property rights. “[We will] carry out an even more active opening strategy [and] expand into new areas for opening up,” he said.  The Chinese leader’s commitment to more balanced trade was meant to address the main source of disruption in Beijing’s trade relations with the US, which has long pushed China to allow its currency to appreciate at a faster pace against the dollar.  The rise in the renminbi has slowed to a crawl in recent months as a drop-off in demand in mature economies has hit Chinese exports. New trade data released on Saturday showed China’s exports grew 13.8 per cent in November from a year earlier, slowing from a 15.9 per cent increase in October. Imports grew 22.1 per cent year-on-year, less than the 28.7 per cent rise a month earlier, in another sign of weakening in the domestic economy.

"Are Chinese Trade Flows Different?" - The answer is no, and yes. From the paper by that title, coauthored with Yin-Wong Cheung (UCSC, CUHK) and Xingwang Qian (SUNY Buffalo). (This is a revision of the paper discussed here.) For the "no" part: We find that Chinese trade flows respond to economic activity and relative prices -- as represented by a trade weighted exchange rate -- but the relationships are not always precisely or robustly estimated. Chinese exports are generally well-behaved, rising with foreign GDP and decreasing as the Chinese renminbi (RMB) appreciates.......However, the estimated income elasticity is sensitive to the treatment of time trends. Estimates of aggregate imports are more problematic. In many cases, Chinese aggregate imports actually rise in response to a RMB depreciation and decline with Chinese GDP. This is true even after accounting for the fact a substantial share of imports are subsequently incorporated into Chinese exports. We find that some of these counter-intuitive results are mitigated when we disaggregate the trade flows by customs type, commodity type, and the type of firm undertaking the transactions. However, for imports, we only obtain more reasonable estimates of elasticities when we allow for different import intensities for different components of aggregate demand or when we include a relative productivity variable.

China manufacturing cools further - Chinese manufacturing activity extended its decline in December, as production at factories and the volume of new orders generated eased from the previous month, according to the preliminary reading of an HSBC survey, released Thursday. HSBC’s so-called “flash” Purchasing Managers’ Index for the month printed at 49, staying below the threshold of 50 that separates expansion and contraction.  The flash PMI number is based on the responses of 85% to 90% of the total respondents in a survey.

Japan Manufacturing Slides on Europe Crisis - Japan’s largest manufacturers became more pessimistic than economists expected and China reported the first decline in foreign direct investment since 2009 as Europe’s crisis drags down the global economy. The Tankan large manufacturer index of sentiment fell to minus 4 in December, the Bank of Japan (8301) said today in Tokyo, worse than the median estimate for a reading of minus 2 by 24 economists surveyed by Bloomberg News. Investment in China slid 9.8 percent from a year earlier to $8.76 billion, the Ministry of Commerce said. In Japan, manufacturers from Toyota Motor Corp. (7203) to TDK Corp. (6762) are also under threat from a yen that rose to a postwar record against the dollar on Oct. 31 as investors seek a haven from turmoil in Europe. TDK, the world’s biggest maker of magnetic heads for disk drives, is among Japanese companies cutting jobs, while Panasonic Corp. (6752) has picked Malaysia as the site for a solar-cell plant, to hedge against currency risks. At Toyota, poised to lose its crown as the world’s largest automaker, currency gains have forced price increases, threatening to further erode global market share after production disruptions from the temblor and floods in Thailand.

Fitch Ratings Set to Cut Growth Forecasts for Asian Nations - Fitch Ratings is poised to cut growth estimates for Asian nations as Europe’s debt crisis weighs on the outlook for the world economy. Quarterly predictions due to be released by the company “shortly” will see growth downgraded for Asian countries, Andrew Colquhoun, the company’s Hong Kong-based head of Asia-Pacific Sovereigns, said in an interview with Bloomberg Television today. China’s economy, the biggest in Asia, is cooling as demand for exports weakens and the government prolongs a crackdown on property speculation. Growth in overseas shipments in November was the weakest since 2009, excluding seasonal distortions, and the trade surplus shrank from a year earlier, customs data showed on Dec. 10. Colquhoun didn’t give any specific estimates for growth.

Philippines Plans Spending Jump to Counter Europe, Abad Says - The Philippines is preparing a surge in state spending in coming months that will widen its budget deficit in 2012 as the government seeks to shield the economy from the European crisis, Budget Secretary Butch Abad said. The 2011 shortfall will be 150 billion pesos ($3.4 billion) to 180 billion pesos, Abad, 57, said in an interview late yesterday in Manila. The estimate is more than double the 74.3 billion-peso deficit in the ten months through October, and compares with a previous forecast of 260.6 billion pesos. The gap may reach 286 billion pesos next year, or 2.6 percent of gross domestic product, he said, reiterating an earlier estimate. “This time, our problem will be different; how to keep within the ceiling,” Abad said. “Demand from the outside is going to be weak and we will have to depend on consumption or demand from within. This is our participation, making sure we are cranking the government machinery to create that demand.” President Benigno Aquino has won credit-rating upgrades from Fitch Ratings and Moody’s Investors Service this year after taking steps to narrow the budget gap from a record 314 billion pesos in 2010. As Europe’s deepening sovereign-debt crisis threatened to push the world into another recession, the Philippines unveiled a 72 billion-peso fiscal stimulus package in October to bolster growth.

Morgan Stanley: This Is What Will Happen In India Over The Next Two Years - American economist Tyler Cowen said "the current economic deterioration of India is the single most important under-reported story these days". Despite the country's status as an emerging market, India's economy is looking at a slower pace of growth next year as it isn't immune to the global economic slowdown. In fact Morgan Stanley recently cut its 2012 global GDP forecast to 3.5%, down from 3.8%. High inflation, capital flight and a lack of reforms to drive foreign investment are weighing on the economy. Morgan Stanley now expects the Indian economy to post 6.9% growth in 2012, down from earlier expectations of 7.2% growth.

Canadian households getting poorer, taking on more debt -- Canadians keep taking on more debt even as they get poorer, a new Statistics Canada report shows. Average household debt in Canada hit a new record high of almost 153 per cent to disposable income in the third quarter, a sizable jump from 150.7 per cent the previous quarter, the agency reported Tuesday. As well, household net worth declined by 2.1 per cent to $180,100 from $184,700, the sharpest drop in almost three years as the value of pensions and stock investments declined.  The report came a day after Bank of Canada governor Mark Carney again warned about the dangers of household debt poses to the economy going forward.  Canadians are more indebted now than the Americans and British, Carney noted, saying that they need to move to bring debt accumulation in line with income growth, which is modest. Debt rose at about twice the pace of income during the quarter.

Ottawa’s pension liabilities understated by $80-billion: report - The federal government is understating the liability for its employee pension plans by $80-billion because it does not use “real world” investment returns in its calculation, a new report says.A C.D. Howe Institute study has concluded that the federal liability for pension plans now totals $227-billion, which is $80-billion more than the government reports in its Public Accounts. “Ottawa’s calculations do not reflect investment returns available in the real world,” says co-author William Robson, chief executive officer of the C.D. Howe Institute.  The report, which updates a similar analysis released last year, argues that Ottawa uses unrealistic assumptions in its accounting that could not be used by private-sector companies.

Wave of insolvencies looms for shipping industry -Fears are mounting that the eurozone financial crisis could spark a fresh wave of shipping insolvencies, after funding problems at many leading European banks accelerated falls in vessel values, triggered by the worst conditions in some shipping markets in 25 years. Several of the world’s most important shipping financiers have told the Financial Times that liquidity problems are putting banks off financing potential purchases of ships that come up for sale, pushing down the values they achieve. That is prompting banks to worry about the value of similar ships pledged as collateral on their loans. A downward spiral in values is developing as falling values prompt banks to pressurise owners to sell off further ships. The warnings come at the end of a year so grim for some of the most important shipping segments that many involved are already comparing conditions to the prolonged slump in the mid-1980s. One of the world’s leading shipping conglomerates – Korea Lines – and one of the best-known tanker operators – General Maritime – have already collapsed into bankruptcy protection as a ship glut has depressed earnings. 

OECD warns on global funding struggle - Markets and governments face an uphill struggle to fund themselves next year amid extreme uncertainty over the euro zone and the global economy, as new figures reveal that the borrowing of industrialized governments has surged beyond $10-trillion this year and is forecast to grow further in 2012. The Organization for Economic Co-operation and Development, which represents the leading industrialized nations, will warn in its latest borrowing outlook, due to be published this month, that financial stresses are likely to continue with the “animal spirits” of the markets – their unpredictable nature – a threat to the stability of many governments that need to refinance debt. “[On occasion], market events seem to reflect situations whereby animal spirits dominate market dynamics, thereby pushing up sovereign borrowing rates with serious consequences for the sustainability of sovereign debt.” For the foreseeable future it will be a “great challenge” for a wide range of OECD countries to raise large volumes in the private markets, with so-called rollover risk a big problem for the stability of many governments and economies.

The Global Economy Is Fading Fast and There Won’t Be A Rescue This Time -There’s no longer any doubt. It’s not something the  bulls can argue against. The global economy is fading fast — from one end of  the world to the other. And many markets are rolling over sharply. Just in the last several days, we’ve seen …<?php wp_link_pages(); ?>

• * Indian industrial production plunge 5.1 percent in  October. That was more than four  times the 0.7 percent drop that was expected, and the first decline since June  2009. The Indian rupee is plunging as a result, recently hitting the worst  level against the dollar EVER!
• * Brazilian economic growth slow substantially. The country was growing at a greater-than-7 percent  rate last year. In the most recent quarter, it didn’t grow at all! Brazilian  stocks are falling, and so is the currency, the real.
• * Chinese export growth just slumped to 13.8 percent  in November. That was the lowest  in three years, and it followed weak news on manufacturing and auto demand.

You already know Europe is a basket case, so I don’t  need to rehash that. But here in the U.S., the so-called economic  recovery is also starting to peter out again. Retail sales rose just  0.2 percent in November, for instance. That was one-third the rise that was  expected, and the weakest since June!

George Soros: Global Financial System In 'Self-Reinforcing Process Of Disintegration' - Billionaire investor George Soros says that the global financial system is on the brink of collapse. Developed countries are falling into a "deflationary debt trap," in which consumer spending falls, products become more expensive, tax revenues drop, and sovereign debt grows, Soros said last week, according to the Wall Street Journal. As a result, he said, the global financial system is in a "self-reinforcing process of disintegration." "The consequences could be quite disastrous," Soros, who was born in Hungary, said at the tenth anniversary of the International Senior Lawyers Project. Concern is mounting that the eurozone may break up because of market pressure on European sovereign debt, which could plunge Europe into a depression and the world into a recession. Observers are already worried that Europe could suffer a recession and subsequent slow growth for several years even if it averts a eurozone breakup, since products would remain expensive in the euro, making consumers more hesitant to buy them and forcing governments to curtail budgets even more as consumer spending falls.

All the World's a Grave -Here’s what’s going to happen if we all keep putting one foot in front of the other courtesy of Jeremy Leggett, geologist turned environmentalist writing about the near-future in 2006, "The price of houses will collapse. Stock markets will crash. Within a short period, human wealth -- little more than a pile of paper at the best of times, even with the confidence about the future high among traders -- will shrivel. There will be emergency summits, diplomatic initiatives, urgent exploration efforts, but the turmoil will not subside. Thousands of companies will go bankrupt, and millions will be unemployed. Once affluent cities with street cafés will have queues at soup kitchens and armies of beggars. The crime rate will soar. The earth has always been a dangerous place, but now it will become a tinderbox. ... As with the Great Depression, economic hardship will bring out the worst in people. Fascists will rise, feeding on the anger of the newly poor and whipping up support. These new rulers will find the tools of repression -- emergency laws, prison camps, a relaxed attitude toward torture ...  If that’s as bad as it’s going to get, then everybody can breathe a huge sigh of relief. But sadly we’ve got a lot more down to go.

The Anti-Crisis Bazooka & Other Bedtime Stories - The turmoil in the eurozone makes it easy to overlook positive signs in the U.S. economy, such as this week’s drop in Initial Claims for unemployment insurance, or Friday’s report showing consumer confidence climbing for the fourth month in a row. Financial blogger Scott Grannis argued, “No one can say for sure that the U.S. can avoid contagion, but so far the U.S. economy appears to be decoupling from Europe, as Europe slumps but conditions here continue to improve.” Others disagree. Charles Biderman of TrimTabs “dismisses the simple-minded decoupling perspective.” As Zero Hedge reported, Biderman believes, “U.S. growth will be in the doldrums as European de-leveraging drags global growth down with it. It's not all doom-and-gloom though...this collapse won't happen tomorrow, given balance sheet strength, although selling into rallies is the clear picture he is painting.” Not everything is rosy. Monday’s Non-Manufacturing ISM report for November came in at 52.0%, down nearly a point from October, indicating slowing growth. The employment subindex contracted too, dropping to 48.9% from 53.3% in October. And China is facing serious problems. Slack demand in U.S. and European markets is weighing on China’s export-driven economy.

Economic Crisis + Offshore - Many of the roots of the current global economic crisis trace back to offshore financial centres located in tax havens. These include both those located in the smaller, mostly island states like Cayman and Jersey, and the larger tax havens like the City of London, Switzerland, Dublin, Delaware or Luxembourg.   These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in  a number of interlinked ways:

• They offered what has been called a "get out of regulation free" card to businesses that abuse them.
• The offshore system enabled U.S. financial services companies in particular (but also others) to get around domestic regulations and grow fast, achieving political and regulatory "capture" and contributing to the "too big to fail" banking problem. .
• Unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations that may otherwise have staunched the crisis.
• Tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.

Latvia says false rumors behind weekend's bank run - Latvian authorities Monday said the weekend's run on Swedish banks there was started by false rumors aimed at destabilizing the country, and that its police forces were investigating the matter.  Latvians during the weekend withdrew unusual amounts of cash from Swedish banks' cash machines in the country, following rumors that Swedish banks could be in trouble, Communications Director Thomas Backteman at Swedish lender Swedbank AB (SWED-A.SK) said Monday. Latvian Prime Minister Valdis Dombrovskis said that the rumor-spreading was done "in an effort to destabilize the situation Latvia," his spokesman confirmed Monday. 

Euro Crisis Pits Germany and U.S. in Tactical Fight - Even as European leaders put together their latest response to the euro crisis last week, a German-American clash over how best to manage a vast financial crisis and put the world economy back on a sound footing was set in stark relief. Chancellor Angela Merkel of Germany defied skeptics and laid the groundwork for a deeper union that she said rights the mistakes of the euro’s birth and puts integration on a stable path for the long term. In the process, she forced German fiscal discipline on Europe as the prescription for the ills that afflict the region. Yet even as the cogs of the European agreement were being fitted into place, President Obama issued his sharpest warning yet about the German-led solution. He said the focus on long-term political and economic change was well and good, but emphasized that failure to react quickly and strongly enough to market forces threatened the euro’s survival in the coming months.  At the heart of the debate is the question of how far governments must bend to the power of markets. Mr. Obama sees retaining the stability of markets and the confidence of investors as a primary goal of government and a prerequisite for achieving any major changes in public policy. Mrs. Merkel views the financial industry with profound skepticism and argues, in almost moralistic fashion, that real change is impossible unless lenders and borrowers pay a high price for their mistakes.

The Merkelization of Europe - Not so long ago, France was the political driver and Germany the economic motor of the European Union. "Now," remarked former European Commission president Romani Prodi in February, it is Merkel "that decides and Sarkozy that holds a press conference to explain her decisions." This searing image could be embellished with the 24 EU members cowering in the press room -- and Britain now watching through the window.   Now that Britain has sidelined itself from the historic "fiscal compact" concluded in Brussels on Dec. 9, which provides the EU with new powers to enforce stricter discipline in national budgets, the community appears even more fiercely segregated within its own ranks. Pathetically, the Brits walked not because of the starkly deficient democratic procedure or the fact these governance changes wouldn't adequately address the euro quagmire, but rather to protect London's financial services industry from regulations that were part of the deal. 

Germany’s Last-Ditch Compromise, At A Price - “I’m very happy with the result,” Chancellor Angela Merkel told the cameras on Friday morning as she climbed out the limo. She talked about the start of a stability and fiscal union and didn’t want to accept any “lazy compromises.” But the vague agreement that emerged may be illegal under European Union law and may devastate weaker economies. It elevated Germany to a leadership role that other countries perceive as domineering and arrogant. It can’t be put into a treaty. And by isolating the United Kingdom, it cut a deep gash into the EU—inflicting heavy collateral damage on the well-functioning 27-country free-trade area though it was aimed at the teetering 17-member Eurozone. At its most fundamental level, the Eurozone has a nasty flaw: it allows member economies to become addicted to the crack cocaine of deficit spending without giving them a central bank that provides unlimited amounts of money to feed the habit. The Eurozone is the only major economy that has forbidden its central bank by law to print money to buy government debt. Goal: a currency that would retain its value. The Fed’s policy of stirring up inflation and devaluing the dollar is called Inflationspolitik in German, synonymous with government deception and theft. And Germany tried to make sure that the euro wouldn’t by hijacked by it. But deficits spiraled out of control and debt piled up and the crisis arrived. Each summit that was supposed to solve the crisis once and for all by injecting confidence into the markets was followed by loss of confidence, chaos, and … another summit. Yet the problem remains un-fixed: economies addicted to crack cocaine without a central bank to feed the habit.

German Vision Prevails as Leaders Agree on Fiscal Pact - Europe’s worst financial crisis in generations is forging a new European Union, pushing Britain to the sidelines and creating a more integrated, fiscally disciplined core of nations under the auspices of a resurgent Germany. Exactly 20 years to the day after European leaders signed the treaty that led to the creation of the European Union and the euro currency, Chancellor Angela Merkel of Germany persuaded every current member of the union except Britain to endorse a new agreement calling for tighter regional oversight of government spending. The accord, approved at a summit meeting in Brussels early on Friday, would allow the European Court of Justice to strike down a member’s laws if they violate fiscal discipline.  The big loser in Brussels was Britain, which had endorsed the 1991 Maastricht Treaty on European integration but opted out of the new euro common currency to preserve its economic and monetary independence. Prime Minister David Cameron, a Conservative and self-acknowledged “euroskeptic,” was isolated in his refusal to allow the German prescription of “more Europe” — to give teeth to fiscal pledges underpinning the euro.

Europe pushes ahead with fiscal union - Europe secured an historic agreement to draft a new treaty for deeper economic integration in the euro zone on Friday, but Britain, the region's third largest economy, refused to join the other 26 countries in a fiscal union and was left isolated. After 10 hours of talks that ran into the early hours of Friday, Britain found itself without any allies around the table, diplomats said. All the other nine non-euro states said they wanted to take part in the fiscal union process, subject to parliamentary approval. "Once Cameron said for sure he wasn't in, it only took minutes for the other 26 to agree that they would push ahead with an intergovernmental treaty," one senior official involved in the discussions told reporters. One senior EU diplomat called Cameron's negotiating tactics "clumsy." Among other things, he had sought a veto on a proposed financial transaction tax, which may now be voted through by a majority over the objections of London's financial centre. One EU diplomat summed up the outcome as: "Britain seethes, Germany sulks, and France gloats."

Eurozone rescue rests on shaky foundations - I am not going to add much to the thousands of words on David Cameron’s tactics in Brussels. But, if John Major could claim “game, set and match for Britain” (not necessarily accurately) 20 years ago at the Maastricht negotations, this was more: “It’s my ball and I’m taking it home.” It is not obvious the prime minister’s veto will be of benefit to the City of London, whose interests he was keen to protect. A grouping of 10 euro “outs” with Britain as its leader might have been viable. One lonely objector out of 27 is different. It points towards a looser relationship between Britain and the rest of the EU, a free trade relationship, though achieving it will be easier said than done. Establishing the regulatory paraphernalia that goes with the single market is easier than dismantling it. Can Britain stay in the EU? Yes, but as the equivalent of a social member at sports clubs, not allowed to participate in most events.

Summit Does Not Help Euro Ratings: Moody’s - A European Union summit on the region’s debt crisis last week offered few new measures and doesn’t diminish the risk of credit-ranking revisions, Moody’s Investors Service said. “In the absence of any decisive policy initiatives that stabilise credit market conditions effectively, our intention as announced in November is to revisit the level and dispersion of ratings during the first quarter of 2012,” Moody’s said in its Weekly Credit Outlook.

Lessons From Europe - Krugman - Let me return for a minute to Kevin O’Rourke’s recent piece on the European summit. Aside from pointing out just how bad an idea the new super-stability pact is, O’Rourke makes an important observation about what the European experience teaches us about macroeconomics: 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.

Projections of EU GDP - In our latest Strategic Analysis we estimate that a cut in the general government deficit in the United States would have strong adverse effects on unemployment and a relatively smaller impact on the U.S. public debt-to-GDP ratio, since GDP would slow down with a cut in government expenditures and transfers. A similar strategy of deficit reduction seems to be on the agenda for many eurozone countries; notably Italy, where a new government was recently put in charge to implement unpopular tax increases that the Berlusconi government was not willing to adopt. A comparison of our simulation for the U.S. with the European Commission’s for the eurozone may therefore be interesting.

What is a (Eurozone) "structural deficit", again? - I don't have much to say about the latest EU "agreement" that hasn't already been said. To me, it looks just like the old "stability and growth pact" warmed over, and with a bunch of judges having to approve budgets. (Does this mean we are going to leave fiscal policy to the lawyers? Do they teach it in law school?) But there's something other commenters have, I think, missed. The agreement says that countries can't have a structural deficit bigger than 0.5% of GDP. What exactly is a "structural deficit"? What does it mean? How do we measure it? Read my old post, where I answered part of this question two years ago. Then let's continue from there. mFirst off, a "structural" deficit doesn't mean what you probably think it means. And it doesn't mean what politicians and lawyers (same people, usually) probably think it means. It doesn't mean "built in and hard to get rid of and unsustainable". Instead it means "what the deficit would be given the current set of taxing and spending rules if GDP were equal to Yn". (I'm coming back to what "Yn" means later). Second, it is really easy to make the "structural" deficit anything you want it to be, without changing the actual deficit at all, just by fiddling with the laws. See my old post for examples.

What’s possible under the new ECB policy - So to start Tyler is saddened that no one took up his initial post on the issue where he says Draghi says yes to loans to banks, for a three-year period and with weak collateral, and no to loans to sovereigns, in accord with current EU law.  (Admittedly his remarks requirefurther parsing and so this interpretation is subject to revision.)  What does the Modigliani-Miller theorem say? A cash-strapped government will start a bank.  A cash-strapped government will induce a domestic bank to lend more to it.  A cash-strapped government will force a domestic bank to lend more to it.  Remember the era of “financial repression”? To some extent governments will internalize the value of this guarantee to banks.  If you don’t think this guarantee to banks somehow transfers to governments, won’t ECB-guaranteed claims on the bank become the new safe domestic security, knocking out the market for the riskier sovereign stuff and thus mandating some kind of risk equalization to keep the whole show up and running? I wouldn’t think of it the way his second paragraph reads, but this relates to what I’ll talk about below.

Europe Debt-Crisis Deal Not a Cure-All - Most European leaders agreed on a new "comprehensive" set of measures meant to calm the debt crisis. The pact comprises fiscal rules meant to prevent countries from veering into dangerous waters and some advancements in the rescue apparatus meant to help them if they do. What is in the pact, agreed to Friday, what's new, and will it all come to fruition? First, some basics.  Many countries, chief among them Germany, wanted to craft the new pact as a change to the EU's foundational treaties. That would have given the changes a stronger legal force and would have eased the way for the EU authorities—such as the European Commission and the European Court of Justice—to enforce them. The U.K. rejected that approach, and thus the 17 euro countries and up to nine of the 10 EU countries that don't use the euro will form the pact as a separate agreement outside the EU structure.  As it stands now, the EU's treaty provides for countries in breach of the bloc's fiscal ceilings to suffer possible sanctions, including fines. But the rules have been lackadaisically enforced, and no country has ever been fined. The leaders said Friday that "as soon as" a euro country exceeds the deficit limit—3% of gross domestic product—"there will be automatic consequences" unless the member states vote to block them.

Snags, diversions – and the crisis goes on - The European Union last week destroyed the illusion that the eurozone and the UK could happily coexist inside the EU. That may have made it a historic summit. But the decision to set up a fiscal union outside the European treaties will do nothing whatsoever to resolve the eurozone crisis. There are different notions of a fiscal union – some more integrated, some less so, some obsessed with fiscal discipline, others with a joint bond. But whichever your preference, this is not something you would wish to do outside European treaties. The existing treaties form the legal basis for all policy co-ordination of monetary union. It gets very messy when you try to circumvent them.  Leaders should have admitted on Friday that the summit had simply failed, or perhaps have given it a few more days. Negotiations might have produced a compromise. With the fake pretence of another treaty, that is no longer possible.  Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support. Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in.  Last week, Europe’s leaders created a diversion. We will be talking about the UK for a while. The crisis, meanwhile, goes on.

Europe’s Deadly Transition From Social Democracy to Oligarchy - The easiest way to understand Europe’s financial crisis is to look at the solutions being proposed to resolve it. They are a banker’s dream, a grab bag of giveaways that few voters would be likely to approve in a democratic referendum. Bank strategists learned not to risk submitting their plans to democratic vote after Icelanders twice refused in 2010-11 to approve their government’s capitulation to pay Britain and the Netherlands for losses run up by badly regulated Icelandic banks operating abroad. Lacking such a referendum, mass demonstrations were the only way for Greek voters to register their opposition to the €50 billion in privatization sell-offs demanded by the European Central Bank (ECB) in autumn 2011. The problem is that Greece lacks the ready money to redeem its debts and pay the interest charges. The ECB is demanding that it sell off public assets – land, water and sewer systems, ports and other assets in the public domain, and also cut back pensions and other payments to its population. The bottom 99% understandably are angry to be informed that the wealthiest layer of the population  is largely responsible for the budget shortfall by stashing away a reported €45 billion of funds stashed away in Swiss banks alone. The idea of normal wage-earners being obliged to forfeit their pensions to pay for tax evaders – and for the general un-taxing of wealth since the regime of the colonels – makes most people understandably angry. For the ECB, EU and IMF “troika” to say that whatever the wealthy take, steal or evade paying must be made up by the population at large is not a politically neutral position. It comes down hard on the side of wealth that has been unfairly taken

Merkel’s Teutonic summit enshrines Hooverism in EU treaty law - Angela Merkel’s summit has sealed a 1930s outcome for Europe, further entrenching Germany’s misguided and contractionary policies without offering any viable way out of the crisis at hand.  You could call it Hooverism written into EU treaty law, though that traduces Hoover. The harsher truth is that it replicates the "500 deflation decrees" of Pierre Laval, later shot by a Free French firing squad.  It is happening just as Europe’s banks slash their books to meet the EU’s core Tier I capital ratios of 9pc. The Basel-based Financial Stability Board - the collective voice of the world’s monetary authorities - fears the banks could inflict a €2.4 trillion crunch over "coming months", just as Euroland crashes back into recession. It is hard to imagine a more reckless recipe for social disorder than to combine these shocks at once.  Europe’s mishandling of its affairs is now grave enough to alarm the Pentagon, presumably well-briefed by the DIA, NSA, and ECHELON network of electronic eaves-dropping.  "We are extraordinarily concerned by the health and viability of the euro because in some ways we’re exposed literally to contracts but also because of the potential of civil unrest and break-up of the union,’’ said General Martin Dempsey, chair of the US Joint Chiefs of Staff.  Many of those EU leaders who went along with this summit accord - including France’s Nicolas Sarkozy - must know that it is Medieval leech-cure treatment and can only drain the lifeblood from large parts of wasted Euroland.

Europe’s suicide pact - So the European summit came and went. I am still struggling to see a credible transition plan from the Europe I see today to the new one that the “fiscal compact” speaks off.  The imbalances in Europe exist today as they did yesterday and although I keep reading they have achieved a fiscal union-ship, the truth is what has been agreed to is anything but. There is certainly nothing resembling a usable mechanism to support re-balancing of differences in economic competitiveness. It seems that the president of the Bundesbank agrees: Bundesbank President and European Central Bank council member Jens Weidmann said decisions reached at the European summit in Brussels amount to a “fiscal pact, not a fiscal union,”  So, as far as I can tell what was announced on Friday night was nothing more than an agreement to push mass austerity into Europe while attempting to manage the servicing of the existing debts. The issue is, of course, that these two things are mutually exclusive.

Central European Shadows - Krugman - It didn’t get much media attention, but last month’s Transition Report from the European Bank for Reconstruction and Development devoted a chapter to deteriorating belief in democracy and markets in the transition economies of Europe; there’s been a sharp decline in support for democracy, strongly correlated with the depth of economic crisis: Also, an image to make the blood of anyone with a sense of history run cold: the Magyar Garda, the paramilitary arm of the Jobbik party:

Depression and Democracy, by Paul Krugman - It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege. On that last point, I am not being alarmist. Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.  First of all, the crisis of the euro is killing the European dream. The shared currency, which was supposed to bind nations together, has instead created an atmosphere of bitter acrimony. Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have failed as economic policy; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Poland Needs to Spend 30% of Total Budget on IMF Bailouts to EU as Result of Merkozy Summit - Marcin, a reader from Poland writes ...Amazing but Poland's commitments after recent summits are to be 30% of our yearly budget! Where are this money going to come from is a great mystery to me as we are on a brink of reaching the constitutional debt limit of 55% of GDP. Recently Merkel had confirmed Poland as being "very important" to Germany's plans and our Prime Minster and Minister of Finance both talked about Poland's accession in 2015 so this might indicate that both of above reasons might be in play.  However recent polls show that public does not like the idea of common currency (51% said no and only 17% yes) so why both of these gentlemen are so Euro-enthusiastic is far beyond me.  They are among the fools who think that throwing money on the debt issue will solve it once and for all. It looks like we learn nothing from the history as we are going to be f@#$ed again and unlike post WWII, this time by the western Europe. As preposterous as that sounds, please consider this Google Translation: 100 billion zł in Polish for European bankrupts European leaders have agreed to collect 200 billion for the International Monetary Fund to rescue the euro area. For Poland is to fall more than 100 billion zł - says the "Polish daily Gazeta." The amount is one third of all Polish budgetary expenditure or as much on health care or modernization of our military spending by more than a dozen years.

Hell Will Freeze Over Before Finland Signs Treaty; Europe's Blithering Idiots Make UK the Lone Winner - Reader Janne from Finland claims "hell will freeze over" before Finland signs the Merkozy deal as it is structured right now. Janne also claims Finland will "loan" money to the IMF and it will not be in the budget.  From Janne ....My collection and translation of news shows this new treaty is in serious trouble.  Finance minister Jutta Urpilainen (social democrats/SDP) says Finland has only two options after the EU-summit: Either unanimity is required in ESM decisions as agreed before or Finland will drop out of ESM. She does NOT see any other options based on the statement by Finnish Parliaments Constitutional Committee. Prime Minister Jyrki Katainen says that Finnish contribution to strengthening the IMF is 3.8 billion euros and this money will be a loan from the Bank of Finland to IMF so this will NOT be part of the Finnish budget. Timo Soini,leader of the main opposition party The Finns party(PerusSuomalaiset) is very worried about the decisions made in Brussels and thinks particularly bad is the plan to remove unanimity and move to majority decisions regarding ESM. Soini says that majority decisions in ESM are against the Finnish Constitution as confirmed recently by Finnish Parliaments Constitutional Committee. There was a clear mandate from Finnish Parliament that majority decisions in ESM are against Finnish Constitution and this EU-agreement should have never been agreed to.

The future of the euro: when summits solve nothing - Last week's gathering of European leaders was the eighth to take place this year. The comprehensive package that emerged at the end was the fourth since this January. And yet it represents a very small advance. The analysis of the crisis presented in Friday's final statement is the same stuck record as Angela Merkel and Nicolas Sarkozy have been playing for the past two years, ever since Greece first admitted fudging its budget figures. That goes, in essence: this crisis is the fault of a few southern European nations that have been playing fast and loose with their treasuries. The solution offered is largely the same, too: force the miscreant countries to sort out their public finances, and lend them some cash to tide them over. This is economics as a morality tale, and it is continued in the latest accord. There are the boneheaded stipulations that each country must run a balanced budget (as if the public sector should not respond to recessions in the private sector) and the threats of "automatic consequences" for any government that falls foul of the rules. Picture Tony Soprano reincarnated in Frankfurt and you're not a million miles off. Yet that founding economic analysis is of only limited relevance to Greece – and no help at all in dealing with Spain and Ireland, both of whose slumps stem from housing and lending bubbles, rather than profligate governments. The only thing that has changed has been the size of the emergency loans, from the few tens of billions mooted a couple of years ago to a fundraising target now of €1 trillion. European leaders can throw around as many noughts as they like and they will not sound any more convincing.

A disastrous failure at the summit - Whom the gods wish to destroy they first make mad. That was my reaction to the outcome of last week’s meeting of the European Union’s Council. Many focused their attention, understandably, on the decision by David Cameron, UK prime minister, to veto a new treaty. But the UK’s behaviour took attention away from the failure of the eurozone’s leaders to devise a credible remedy for the ills of the currency union. They propose, instead, to tighten the screws on fiscal deviants. It may feel good. But it will not work.Mr Cameron presented his colleagues with a list of demands designed to protect both the City and the ability of the UK government to regulate it, largely unhindered by European regulators. Mr Cameron could have stated, instead, that he would accept a treaty applicable only to members and candidate members of the eurozone. He could have intimated that he would put a treaty that did any more than this to a UK referendum (which would have been surely lost). Instead, he ended up with no additional safeguards for the City and a semi-detached status inside the European Union, of which, he has insisted, he wants the UK to remain a member. .Yet far more important than this piece of British political theatre is what might now happen inside the eurozone. On this I am pessimistic. Germany and France have agreed that there is to be no fiscal, financial or political union. The failure to transcend the defects of the original construction is predictable, but dire.

Chronic Pain for the Euro - The deal on Friday in Brussels to reformulate the rules of the euro zone has probably saved the shared currency for now — but there may be less to it than meets the eye.  At least four major issues still need to be resolved: how much money is needed to protect Italy now from speculative attack; whether banks will stumble because of the crisis; the isolation of Britain, which does not belong to the euro zone; and not least, whether the Brussels cure, prescribed by Germany, fits the disease.  With mounds of European debt due to be refinanced early next year, the crisis is far from over. “More tests will obviously come, and soon,” perhaps as early as the opening of financial markets on Monday, said Joschka Fischer, the former German foreign minister. And there are risks remaining even in getting the Brussels deal ratified, which is likely to take until late summer 2012 at the soonest.

EA Spreads: Why Should the Trend Change?  - Rebecca Wilder - They changed the title; but originally the NY Times reported “Euro Zone Agrees to Reinforce Maastricht Rules“.  That’s exactly what EA policy makers agreed to last week – not much to bring home. The real shift in policy came from the ECB. Ambrose Evans-Pritchard highlights the ECB’s actions as ensuring some sort of bank profitability, while at the same time defining the buyer of EA sovereign bonds. The banks will access funding from the ECB for up to 3 years at a very low and variable rate - currently the policy rate is 1% – and earn a higher return on their holdings of government debt (This morning, Italian 2-yr debt is trading at 6.05% – not bad). The banks will be ‘encouraged’ to buy government debt, thereby ensuring a funding source for the sovereigns. But this is not a business model, neither for the banks nor for the sovereigns. The chart above illustrates the average 10yr spread of the 9 bond markets listed over a like German bund alongside each major announcement date (see table below) through December 9. The trend has been up while volatile. Furthermore, no announcement to date has successfully stemmed the upward bias in bond spreads. EA policy makers consistently avoid the only truly credible answer: fiscal union.

Does “More Europe” Mean More Pro-Cyclical Fiscal Policy? -Geo-Graphics » “It is time for a breakthrough to a new Europe,” German Chancellor Angela Merkel said on November 9th.  “That will mean more Europe, not less.” Merkel wants a stronger fiscal union with strict controls on eurozone national budgets.  Yet to date EU fiscal policy, such as it is, has meant ill-considered pro-cyclical spending programs – as shown in the graphic above.  Greece was and is a large recipient of EU transfers, yet those transfers collapsed by 1.3% of Gross Domestic Product (GDP) after it was forced to cut back on its contributions to EU-subsidized projects in an effort to slash government spending.  This additional fiscal squeeze hurt growth; Greek GDP fell an annual average of 3.5% in 2009 and 2010.

S&P economist says time running out for EU: report -- Standard & Poor's chief European economist, Jean Michel Six, said Monday that time is running out for the European Union to take action to resolve its debt crisis, according to Reuters. Speaking at a business conference in Tel Aviv, Six said measures announced at last week's EU summit marked a big step towards resolving the issue, but he sees "another shock required before everyone in Europe reads from the same page." An example of that would be a major German bank facing market difficulties, which would make everyone realize that even Germany isn't immune from contagion. S&P last week put 15 euro-zone countries on watch for a potential downgrade. Six said the credit firm wanted to send a strong signal that the region is at major risk of recession and a credit crunch next year.

Moody's says EU lacks decisive policy measures - The credit ratings agency reiterated that it will review the ratings of all EU countries in the first three months of 2012. Another agency, Standard & Poor's, is considering downgrading the debt of 15 of the 17 eurozone countries. European shares were lower on Monday morning, with the Dax in Frankfurt falling 2.0% in early trading. Moody's said that last week's EU summit offered "few new measures" to deal with the eurozone's sovereign debt crisis. "The absence of measures to stabilise the credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat," the agency said in a statement. French President Nicolas Sarkozy said that if France lost its AAA credit rating, it would be "one more difficulty, but not insurmountable". "If they withdrew it, we would face the situation with sang-froid and calm,"

Moody's not impressed with EU fix -  Europe's debt crisis remains in critical condition, Moody's Investors Service said Monday. One business day after European leaders agreed to tighter budgeting and creation of a central fiscal authority, Moody's said the crisis in Europe was at a "critical and volatile stage," The New York Times reported. The credit rating of several European Union member states was at risk, Moody's said, warning of possible downgrades. Leaders in the European summit that ended Friday also agreed to funnel $268 billion more to the International Monetary Fund to assist debt-burdened countries and keep the contagion of debt problems from spreading further. "High levels of debt, the rising risk of a recession and tightening credit conditions are still with us after the summit and there was little in the way of real action to deal with any of them," said economic strategist Gary Jenkins at Evolution Securities.

EU Failure on Unanimous Agreement May Consign Top-Rated Bonds to History - Europe’s failure to agree on a comprehensive solution to the sovereign debt crisis threatens to consign AAA rated bonds in the region to history. Top-rated agencies in the 17-nation euro area have at least 847.5 billion euros ($1.1 trillion) of debt outstanding, according to data compiled by Bloomberg, and will be at risk should their sovereigns be downgraded. Moody’s Investors Service said today it will review the ratings of all European Union nations after last week’s summit failed to produce “decisive policy measures,” while Standard & Poor’s announced Dec. 5 it may cut 15 euro members, including AAA rated Germany and France. “Double A is the new triple A,” “De facto, there are no more highly liquid, risk-free assets. It’s a dangerous problem because in a market crash, liquid AAA assets are the dam that contains the total exodus of liquidity.” European leaders’ fifth attempt to draw a line under their debt woes ended in a fiscal accord that will bring tighter deficit rules, though with many details still to be ironed out and the U.K. vetoing an agreement among all 27 EU members. A lack of top-rated sovereigns would make it harder to gauge a risk-free benchmark for securities, reduce participation in euro-region debt markets and threaten ratings of agencies and supranationals such as the European Investment Bank and World Bank.

EU Banks Seen Sparking ‘Vicious Cycle’ - European banks turning to their governments to raise required capital could trigger a downward spiral of declining sovereign-debt prices and further losses for the lenders. The European Banking Authority ordered the region’s banks on Dec. 8 to raise 115 billion euros ($154 billion) by June. Faced with dwindling profits and unable to tap capital markets to sell new shares, firms may be forced to seek government help. About 70 percent of the capital requirement falls on lenders in Spain, Greece, Italy and Portugal, countries struggling to convince the world they can pay their debts. “If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “Then the banks’ losses will rise because they hold the government debt. That’s a vicious cycle. It’s hard to know which one to stabilize first, the sovereign bonds or the banks.” European Union leaders meeting in Brussels last week agreed to move toward a closer fiscal union, with harsher penalties for countries violating budgetary constraints.

EU Banks Sit in a Tangled Web - Dozens of banks across Europe have sold large quantities of insurance to other banks and investors that protects against the risk of ailing countries defaulting on their debts, the latest illustration of the extensive financial entanglements among the continent's banks and governments. New data released last week by European banking regulators suggest the risks of banks suffering losses tied to European government bonds could be higher and more widespread than previously realized. The numbers show European banks have sold a total of €178 billion ($238 billion) worth of insurance policies,  form of financial derivatives known as credit-default swaps, on bonds issued by the financially struggling Greek, Irish, Italian, Portuguese and Spanish governments.

Class War: Low Wages and Beggar Thy Neighbor - Philip Pilkington called my attention to this presentation by Dr. Heiner Flassbeck, a former deputy secretary in the German Ministry of Finance and currently chief economist the UN agency for World Trade and Development in Geneva. Even though I feature videos from time to time, I thought this one was particularly worthy of reader attention.  Don’t be deceived. The talk starts out a bit dry, but Dr. Flassbeck builds up a real head of steam as he gets into his material.

No Draghi Ex Machina - So last week European leaders announced a plan that, on the face of it, was pure nonsense. Faced with a crisis that is mainly about the balance of payments, with fiscal crisis as a secondary consequence, they supposedly committed everyone to severe fiscal austerity, which would guarantee a recession while leaving the real problem unaddressed. But all this was supposed to work, according to many observers — and, briefly, the market — because the pain would provide the cover the ECB needed to step in and buy lots of Italian and Spanish bonds. In effect, the plan is supposed to rely on a Draghi ex machina, which turns contractionary policies expansionary. It’s actually quite remarkable how many sensible people base their analyses on the presumption that the ECB will do what has to be done. But as far as anyone can tell, the monetary cavalry aren’t coming. And the bond market has figured this out. What Anglo-Saxon economists need to understand is that the Germans and the ECB really, really don’t share our worldview; they really do believe that austerity is all you need. And all indications are that they will cling to that belief, even as the euro falls apart — an event they will insist was caused by the fecklessness of the debtors. Given a choice between saving Europe and remaining righteous, they’ll choose the latter.

Luck May Be Key to Saving Euro - European leaders’ effort to save the euro hinges on support from investors, central bankers and credit-rating companies to win the months needed to put a revamped budget rulebook into practice. “Luck is likely to be required,” said Joachim Fels, chief global economist at Morgan Stanley in London. To have a chance of success, a deal reached after all-night talks on Dec. 9 to restore faith in the single currency requires investors to avoid dumping European debt, Standard & Poor’s to hold off on threatened downgrades, foreign countries to chip in rescue cash and the European Central Bank to soothe bond markets. Politicians also have to avert the unforced errors that sank previous initiatives and turned a Greek deficit problem in 2009 into a threat to the international financial system. The result of a Brussels summit that French President Nicolas Sarkozy called the last chance to rescue the euro after a two-year debt crisis ended with leaders setting themselves a March deadline to flesh out new fiscal rules.

The European Instability and Stagnation Pact - The European Stability and Growth Pact that seems to be delivering exactly the opposite of what the name of the title suggests: Instability and lack of growth. European countries agreed to limit their government deficits and government debt (to 3% and 60% respectively) as part of the Maastricht Treaty that led to the creation of the Euro. The limits were not strictly enforced when the membership decision was made. Some countries (Belgium or Italy) were allowed to be members of EMU with debt levels that were double the established limit. The constraints on fiscal policy were made more explicit through the Stability and Growth Pact that took the numerical limits one step further and developed a set of more specific interpretations of the limits as well as a process to deal with deviations from the rule. The Pact was a failure with many countries (including Germany) going above the deficit and debt limits. The rules were then rewritten once and just las weekend, during the European summit, there has been a proposal to rewrite them once again. This is what some have referred to as a proposal to create a fiscal union, which is clearly not the case. The proposal is simply about changing the enforcement rules of the Pact.

Implementation won’t be easy - On Monday I mentioned that the EU summit agreement didn’t all of a sudden alter Italy’s debt level or quicken its economic growth and what today’s newspapers highlight, it also didn’t reduce the amount of European cooks in the fiscal union kitchen. Executing Friday’s framework amongst all these EU countries is the next battle that won’t be easy and will take more time. Germany’s IFO institute lowered its ’12 GDP growth forecast to just .4%, down from its old, previous estimate of 2.3%. Italy sold 5 yr debt at a yield of 18 bps above one sold last month. The euro basis swap is jumping to 147 bps, a two week high.

Budget Accord Key to Stabilizing Euro Zone, Dutch Minister Says - Simply expanding Europe’s financial rescue funds won’t be enough to strengthen the currency union, Minister for European Affairs and International Cooperation Ben Knapen said in an interview Wednesday. “At the end of the day, just having firepower leads to shooting,” he said. “You need more … to make sure we can stabilize in a sustainable manner.” Analysts say Europe will need to amass far more firepower — perhaps trillions of dollars — to fend off investors betting against sovereign debt in the 17-nation currency bloc. Mr. Knapen, who attended last week’s European Union summit, acknowledged the “huge reservations from a political and a financial point of view” in some European nations to boosting that financial firepower. But Europe could still have more than €1 trillion available once various rescue programs are in place — “a substantial figure,” he said. Mr. Knapen said setting nations such as Italy and Spain on a stronger budget track is “pivotal” for the currency union. Providing more money without changes “is basically undermining the system in a way that’s unacceptable,” he said. “It belongs together. It has to go together.”

Italy's $71 Billion Needs Remain Crisis Flashpoint: Euro Credit -- Italy holds the key to the euro's survival, shouldering one-third of the region's first-quarter funding burden as the debt crisis saps demand for its assets and shrinks its investor base. The euro zone's third-largest nation has to repay about 53 billion euros ($71 billion) in the first quarter from the region's total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months. Italy's five-year borrowing costs reached 7.04 percent on Dec. 9, approaching the Nov. 25 euro-era high of 7.85 percent. The nation's credit-default swaps cost 536 basis points, implying a 37 percent chance of default on concern that crisis- fighting agreements forged by European leaders to end the region's debt crisis will prove insufficient. The first three months of 2012 "will be a very painful auction experience, which is detrimental to investor confidence,""Italian yields at about 7 percent represent fantastic value for investors, but demand is low because there's no confidence that the debt crisis can be solved quickly enough."

Italy Can Endure Rise in Borrowing Costs: BIS - Italy will be able to withstand an increase in borrowing costs for at least for a few years as its relatively long debt maturity helps mitigate the effects of record bond yields, the Bank for International Settlements said. The cost of servicing its debt would rise by just 0.95 percent of gross domestic product next year if 10-year yields stayed at the record 7.48 percent reached last month, the BIS said, citing its own calculations. The “worst-case scenario” would have to persist for three years for the additional costs to exceed 2 percent of output, the bank said. “Simple simulations of the debt-service costs of the Italian Treasury in different yield-curve scenarios suggests that Italy should be able to withstand elevated yields for some time, provided it retains access to the market,” the BIS said in its Quarterly Report published yesterday. “Given the relatively high average residual maturity of the Italian public debt, it would take a long time” for these yields to translate into “significant additional debt service costs.” The average maturity of Italian debt is seven years, according to the BIS. That compares with six years in Portugal and Germany and slightly longer than seven years in France.

More Charts of the Day: Italy Works Over 20% More Hours Than Germany and France - The stereotype of lazy southern Europe and the hard working North is just not reflected in the data. We came across this BLS data set over the weekend which was very enlightening and, in part, smashes this widely held generalization. First, a couple caveats. It is macro data — total number of hours worked in an economy divided by the number of people employed –, can subject to measurement errors, doesn’t take into account productivity per worker, and ignores deleterious labor policies that can contribute to unemployment. Nevertheless, the data and charts below show that the average number of hours worked for an employed person in Italy – 1,778 hours in 2010 – is 25 percent higher than that of Germany’s 1,419 hours. The French are not far off. The average number of hours worked by an employed person in France was 339 hours less than in Italy, or Italy’s average hours worked was 23 percent higher than France. Surprising, no? The data also interestingly shows that Ireland’s average number of hours worked increased dramatically from 2009-10, increasing by over 7 percent. The market seems to like it as Ireland’s bonds have been some of the best performing in the world since July with their sovereign spread over 10-year German bunds tightening more than 500 basis points.

DYLAN GRICE: Germany Is Making The Same Mistake That Allowed The Nazis To Come To Power - In his latest note, famously bearish SocGen analyst Dylan Grice goes there. Big time. The subject of the note is Weimar, hyperinflation, and all that money printing that anyone talks about. But it's not what you'd expect. He's not saying Germany printed money, and that caused Weimar hyperinflation and that caused Nazis. He's saying memories of Weimar caused Germany too adhere too much to hard money, and that caused unemployment and that lead to the Nazis. This chart is a real punch in the gut. 

Dollar Funding Costs Rise for a Third Day in Euro Money Markets -- Dollar funding costs rose for a third day in euro money markets as Moody’s Investors Service said it will review ratings for all European Union countries. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 123 basis points below the euro interbank offered rate at 12:57 p.m. in London. The gap has widened from minus 109 since Dec. 8, when policy makers met in Brussels to address the debt crisis. Europe’s leaders agreed last week to a fiscal accord to tighten budget policies and create automatic penalties for countries violating deficit rules. Moody’s said today the summit offered “few new measures,” prompting it to go ahead with a review of all EU sovereign states first announced in November, which will be completed in the first quarter of next year. “Almost certainly, a number, if not all of euro-area AAA sovereigns will see a downgrade in the near future,”

Sovereign, Corporate Bond Risk Rise, Credit-Default Swaps Show - The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 13 basis points to 376.5 at 9 a.m. in London, approaching the record 385 set Nov. 25. An increase signals deterioration in perceptions of credit quality. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 20.5 basis points to 770.5, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed six basis points to 179.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 11 basis points to 307 and the subordinated index rose 17.5 to 547.5.

Credit Default Swaps: Banking on Failure - Micah Hauptman of Public Citizen has drawn from the work of the Levy Institute’s Marshall Auerback and Randall Wray to put together a concise piece that lays out five core critiques of credit default swaps.  Among the basic problems he highlights is a flaw-riddled process for determining when a CDS pays off:… there are no bright lines to determine when a CDS payment is triggered. The system for determining when payments should occur is murky, unregulated, and replete with conflicts of interest. For speculators to cash in on their bets and receive CDS payments, there must be a “credit event.” Failure to pay when due is the most common credit event, however a “credit event” can also occur through bankruptcy, a change in interest rate, a change in principal amount, or postponement of interest or principal payment date. But even within these occurrences, there is considerable legal debate over what constitutes an “event.”Consider the current financial crisis in Greece. The country has experienced distress due to mounting government debt. European officials recently reached a tentative restructuring agreement. Under the agreement, Greece will undergo a strict austerity plan to regain solvency and Greece’s creditors will receive a reduction in their interests. Whether this restructuring agreement constitutes a “credit event” will likely be contested.

Greek budget deficit widens, construction plunges (Reuters) - Greece's budget deficit continued to widen in November and the construction business kept shrinking as an austerity-fuelled recession hit both government revenues and economic activity, data showed on Tuesday. The debt-choked country is struggling to implement the reforms required by its EU and IMF lenders in exchange for loans and to cope with the impact of austerity on its economy, putting its capacity to meet targets once more at risk. The budget gap of the central government widened 5.1 percent year-on-year to 20.52 billion euros ($27.1 billion) in the first 11 months of the year, the finance ministry said, while the debt-choked country had to pay a higher price to sell T-bills. This means that Greece will likely miss its 2011 deficit targets and may need additional austerity measures to catch up with its budget goals in 2012, in what is forecast to be its fifth consecutive year of recession. The economy is seen shrinking by at least 5.5 percent and bleak construction data showed on Tuesday that a deep slump continued in what used to be a key driver of the country's growth when it joined the euro and organised the 2004 Olympics. Building activity by volume contracted 37.8 percent in the first eight months of the year while the number of new building permits dropped by 30.6 percent.

‘Haircut’ dispute risks delaying Greek rescue - Greece’s new €130bn rescue package could be delayed, after talks on a voluntary haircut for private sector bondholders ended without agreement on Tuesday, according to people involved in the discussions. Both the debt negotiations and the implementation of structural measures agreed with the European Union and International Monetary Fund are running more than a month behind schedule, despite efforts by Lucas Papademos, the new Greek premier, to accelerate the reform timetable. Details of a deal agreed in October, in which bondholders would accept a 50 per cent haircut on the face value of their bonds, have to be wrapped up before the €80bn first tranche of new funding can be disbursed, a Greek official said. “We expected to complete on the bonds in December, now it’s looking like February,” said one official.

Greece is slipping on reforms, IMF warns - Greece’s international rescue program continues to slip as the nation’s leaders shirk promised changes, investors flee a beleaguered banking system and concern that Europe will fall into recession adds to the pressure, the International Monetary Fund said Tuesday in its latest report on the country. Even as European leaders cope with a broader set of financial and political problems1 within the region, the IMF report 2highlighted how issues at the epicenter of the crisis are unresolved more than 18 months into a Greek rescue program that by now was supposed to be making some headway. Instead, IMF Greece mission chief Poul Thomsen said that the Greek economy will shrink by about 6 percent this year — more than twice the rate expected when the three-year bailout was approved in May 2010 — and will continue contracting through 2012. When the initial $140 billion bailout was adopted, the IMF predicted that Greece would return to growth in 2012. Thomsen cast the blame squarely on Greek officials’ slowness in carrying out their pledges to reform economic policy and government spending. Those politically painful steps involve selling off state enterprises, firing tens of thousands of politically connected state employees and removing jealously guarded protections that limit competition in dozens of professions.

Shh... Greece Is Edging Closer To Provoking A Credit Event - We've speculated before that Greece would have difficulty finding enough investors willing to voluntarily take a 50% haircut on their bond holdings (a main facet of the second bailout deal). It looks like that prediction is fast becoming a reality. A slew of headlines out this morning amid meetings between the Greek government and private sector bondholders suggest that the likelihood of the swap going through on a "voluntary" basis is slimming. Sources told Dow Jones that 90% participation in the deal—a stipulation the Greek government proposed months ago and appears to be standing by—"looks difficult" to achieve. Without high participation, the haircut deal will be ineffective as it will not adequately reduce Greece's debt burden to a sustainable level. According to Reuters, officials and bankers are still bickering over the size of the coupon and discount rate, both of which will determine how much of a hit bondholders will take in the swap deal. Yet if participation is coercive it will provoke a credit event that would spur payouts of credit default swaps. The International Swaps and Derivatives Association responsible for determining when a credit event has occurred said it must see the specifics of the deal before it decides if the plan will provoke an event. On the other hand, some investors argue that a credit event might actually be the best thing for Europe, despite the uncertainty that comes with CDS payouts.

Greece’s proposed 75% haircut - One of the most important parts of Greece’s restructuring deal — the agreement with its private creditors over what’s going to happen to its bonds — is still very much up in the air. The idea was originally that there would be an agreement by the middle of next week, but no one’s holding their breath, and it now seems as though it won’t be until the end of January at the earliest before any deal is done. The banks, unsurprisingly, aren’t in any rush to do a deal: they only just hired representation. But the official sector, too, Greece itself included, seems more interested in playing hardball than in getting agreement. The banks have agreed, pretty much, that they’re going to be OK with a deal where they get 50 cents on the dollar. But that’s just the beginning, not the end, of the negotiations. Because the 50-cent number applies only to the nominal principal amount on the bonds — the amount that Greece will eventually repay, many years down the line, assuming it doesn’t default again. What’s equally important is the size of the coupon that the new bonds carry. And Greece has reportedly decided that if it’s going to restructure, it’s going to restructure right — by slashing the income associated with the bonds to such a low level that when they start trading, each $1 in old bonds is going to be worth just 25 cents on the open market.

IMF slashes growth forecast for Greece - The International Monetary Fund slashed its growth forecasts for Greece and warned that ever-deepening recession was making it harder for the debt-ridden country to meet the tough deficit reduction targets under its austerity programme. In a report likely to fan financial market concerns about a possible debt default, the regular health check by staff at the Washington-based Fund said the situation in Greece had "taken a turn for the worse". Poul Thomsen, deputy director of the IMF's European department and its mission chief to Greece, said: "We have revised growth down significantly to -6% in 2011 and -3% in 2012. We expected 2011 to be an inflection point when the recession bottomed out, followed by a slow recovery. But the economy is continuing to trend downwards. The hoped for improvement in market sentiment and in the investment climate has not materialised." The IMF, together with the European Union and the European Central Bank has imposed tough conditions on Greece as the price of financial support that has allowed the government in Athens to continue paying its bills. In the fifth report carried out since the start of the crisis 18 months ago, IMF officials suggested that the austerity programme might need to be eased in view of the damage being caused to the economy by the recession.

From Bad to Worse for the IMF - For some time now I have been pointing out poor economic policy implementations within the European economy and how those policies are likely to effect the real economies of European nations. As I re-stated on Monday, my major concern with the current thinking from European economic leaders is their misguided belief that implementing austerity before credit write-downs/offs is a credible policy for a highly indebted, non-export competitive nation with a non-deflatable currency. As I have explained many times before, this policy will fail because the deflationary effects of austerity will mean that the economy no longer has the ability to services its existing debts as it is not receiving compensation for that deflation via its export sector due to the non-responsive currency. So, as I have been saying, all that will happen with the continued implementation of these policies is failing periphery economies which will require constant bailouts. Greece continues to demonstrate this outcome:

Hopes fade for IMF funds boost - Prospects for a rapid increase in International Monetary Fund firepower to cope with the eurozone crisis have receded after the Japanese government and the Bundesbank set tough conditions before making contributions. On Tuesday Jun Azumi, Japanese finance minister, said that the EU needed to present a more convincing plan before Japan put more money into the IMF. “The EU must make further efforts to convince markets,” he said. “Without European countries showing exactly how much would be needed to deal with the crisis, we would not be able to move on to the next step involving the IMF”. Mr Azumi’s comments follow an announcement at last week’s EU summit that European countries would contribute €200bn to the IMF through their central banks, significantly increasing the fund’s current available lending firepower of around €290bn. European officials said they expected non-European countries including the big emerging market nations to contribute an equal amount. Separately, hopes that eurozone leaders might increase the size of their own rescue fund in March were knocked when Angela Merkel, Germany chancellor, reportedly told lawmakers in a closed session she was sticking to her demand for a €500bn ceiling.

Italy Borrowing Costs Rise To New High - Italy had to pay record yield at an auction of its five-year debt on Wednesday, reflecting market concerns that last week's European Union summit failed to produce a lasting solution to the region's sovereign debt crisis. The Italian Treasury placed EUR 3 billion of bonds, meeting the maximum target of the auction. These bonds mature on September 15, 2016 and carries a coupon rate of 4.75 percent. However, the yield on the 5-year debt rose to a euro-era high of 6.47 percent from 6.29 percent in a similar sale on November 14. Demand was 1.42 times the offer, down from 1.47 in the previous auction. On December 12, Italy had successfully placed EUR 7 billion of 12-month treasury bills at lower cost. The yield fell to 5.952 percent from 6.087 percent seen at the previous auction on November 10, which was the highest in 14 years.

Mario and the Confidence Fairy - Krugman - Oh, my. A downbeat FT report includes the following:Mario Monti, whose technocratic government took office after Italy’s debt crisis toppled veteran premier Silvio Berlusconi, is seeking to tackle public debt levels which stand at 120 per cent of gross national product but faces resistance from labour unions and political foes. "We are confident that markets will react positively to the efforts Italy is making, maybe not tomorrow, but the reduction in borrowing costs that we anticipate in the coming months will help spur the economy,” Mr Monti told legislators on Tuesday night. I guess in Europe today “technocratic” is a synonym for “delusional”. Look, more austerity isn’t going to convince the bond markets that Italy is just fine, let alone cut interest rates sufficiently to make contractionary policies expansionary. In fact, austerity — at least if not accompanied by major policy changes in Frankfurt — is probably self-defeating, because it will hurt the Italian economy more than it helps the short-term budget picture. Italy faces an immediate crisis of self-fulfilling panic, and a huge medium-term adjustment problem as it tries to get costs and prices back in line with core Europe. The only plausible way to resolve these problems is via much more liberal policy from the ECB, in the form of bond purchases now and an implicit (but understood) willingness to let inflation run a bit high for an extended period.

Europe Gets Austerity, But With Few Signs Of Growth : NPR: The plan European leaders agreed on last week to save the euro doesn't seem to have reassured the markets. Two ratings agencies said the plan worked out in Brussels, which calls for greater fiscal integration, failed to address the immediate crisis of rising debts and the crushing costs of borrowing. And some economists worry that the EU leaders are wrong to put so much emphasis on austerity without any real plans to stimulate economic growth. For example, Portugal's growth rate last year was anemic, and the economies of Greece and Ireland shrank. But the more urgent problem for these three countries was mounting debt. And when it looked like they might default, the European Union stepped in with some bailout money and provided a reprieve. The three countries swallowed the bitter medicine that was prescribed, and announced cuts in public payrolls and welfare costs — as well as tax hikes.

Bank Spain Says Markets Showed Signs of Euro Disintegration - Bank of Spain Chief Economist Jose Luis Malo de Molina said markets were showing signs of the “disintegration” of the single currency before the European Union summit last week. “The freezing up of the interbank market and the dislocation of sovereign-debt markets constituted signs of disintegration of the single-currency area and serious obstacles to the transmission of common monetary policy,” he said in a speech late yesterday posted on the Bank of Spain’s website. EU leaders with the exception of the U.K. agreed to bolster fiscal cooperation and strengthen deficit rules after all-night talks in Brussels on Dec. 9 amid concern that Italy and Spain may succumb to a debt crisis that’s brought Greece to the brink of bankruptcy. The fiscal accord provides tighter budget rules and an additional 200 billion euros ($260.2 billion) to the euro area’s warchest in an effort to reassure investors that European leaders will deliver the region from its two-year ordeal. The summit produced “undoubtedly important steps” even as “they are still partial and the pace may still seem too slow,”

EU treaty hopes come under strain - FT - Franco-German hopes for a sweeping new treaty to bind the region’s economies more closely came under strain on Tuesday as several European Union leaders warned of difficulties pushing a far-reaching pact through their national parliaments. The pressure was particularly acute in non-eurozone countries, where at least four governments warned that the precise legal text would determine whether they could sign up to the treaty or otherwise join the UK on the sidelines. Officials in several of those countries said their most pressing concern was whether the new rules giving Brussels powers to police national budgets would be binding only to eurozone governments or to all signatories. “Right now, there is not much more than a blank sheet of paper and even the name of the future treaty might still change,” said Petr Necas, the prime minister of the Czech Republic. “I think that it would be politically short-sighted to come out with strong statements that we should sign that piece of paper.” Even inside the 17-member eurozone, cracks emerged, with Irish opposition leaders calling on Enda Kenny, prime minister, to allow a referendum on the new pact – a vote that would almost certainly fail – and pro-EU opposition parties in the Netherlands attacking the minority government of Mark Rutte, prime minister, for his handling of the deal.

It's the balance of payments, stupid - Just in case the point has not been hammered home over the last few years, or even the last few days, here’s a chart showing how quickly and dramatically the external debt imbalances got out of hand in the eurozone: It’s from a speech given in Toronto earlier this week by Canada’s central bank governor Mark Carney, who recently took over from Mario Draghi’s former gig as chair of the Financial Stability Board, titled “Growth in the Age of Deleveraging”. Carney points out that it doesn’t matter whether the debt is initially public or private, because private debts inevitably become public. And of course, Europe is a microcosm (or, whatever a big microcosm is called) for the whole world. As Carney says, “Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation.” Behold, the work of a generation of G7ers:

Portugal May Nationalize Banks in Historic Irony - Portugal's government may have to partly nationalize crisis-hit banks, even as it sells assets as part of the 78 billion-euro ($102.8 billion) bailout agreement. Portuguese lenders' stock-market value has tumbled to historic lows amid Europe's deepening sovereign crisis and requirements for banks to bolster capital and mark to market the prices of euro-region debt holdings. The nation's three biggest banks have lost a combined 6.3 billion euros, or 68 percent, of market value this year, while Portugal's 10-year bond yield almost doubled to 13 percent. "The financial market is on its knees," "People don't want to take on the country risk." The plunge in banking shares has coincided with a decline in Portuguese bonds since the nation requested aid on April 6. The difference in yield that investors demand to hold Portugal's 10-year bonds instead of equivalent-maturity German bunds reached a euro-era record of 11.83 percentage points on Dec. 2 and was at 10.96 today, up from 5.11 on April 6.

S&P puts insurers on negative watch - IRISH PUBLIC Bodies Mutual Insurance, the body that insures State bodies and local authorities, including the HSE, may have its credit rating downgraded by Standard and Poor’s. The ratings agency has put the ratings of 15 European firms, including top insurers Aviva and Alliance, on negative watch due to the euro zone debt crisis. The move was linked to the agency’s warning last week that it may downgrade 15 euro zone countries’ sovereign debt, it said. RSA Insurance Ireland was also named by the ratings agency. Irish Public Bodies insures most local authorities and county councils and is owned by its members. It currently has a triple-B rating with Standard and Poor’s.

Hungary Eyes IMF Deal of as Much as $15 Billion Euros, Citi Says - Hungary may be targeting an International Monetary Fund-led safety net of as much as 15 billion euros ($20 billion), Citigroup Inc. said, citing unnamed government officials. The Cabinet, which will start negotiations this week with the IMF and the European Union, may aim for a backstop of between 10 billion euros and 15 billion euros, Citigroup’s David Lubin and Eszter Gargyan said in a report published on Dec. 9 after meeting officials in Budapest. Hungary last month lost its investment-grade credit rating at Moody’s Investors Service after seeking a backstop. Prime Minister Viktor Orban reversed his policy of shunning international aid after the forint fell to its weakest against the euro and the government struggled to raise planned amounts at debt auctions. “Since the Prime Minister has already spent some of his political capital in embracing the idea of an IMF agreement, it seems that the sensible option now is quickly to gain the benefits that such a deal would bring,”

Austrian Banks Facing Payback as Hungary’s $22 Billion Debt Slaves Revolt - When Hungary’s former central bank governor was buying a house two months before Lehman Brothers Holdings Inc. collapsed and the country sought an emergency bailout, he received an offer he couldn’t refuse. Peter Akos Bod, now an economics professor at Corvinus University in Budapest, was given a choice of mortgages by his bank. The 60 year-old could select a loan in Hungary’s currency, the forint, at 13 percent interest, or one in Swiss francs at less than 6 percent. After crunching the numbers on a spreadsheet, he picked the cheaper franc loan. “It was rational,” he said of his 2008 decision in an interview in the Hungarian capital. “I put it into a model.” Three years later, Bod and about one million compatriots who took mortgages in francs are faced with a debt pile that has swelled to 4.9 trillion forint ($22 billion). The currency’s 40 percent slump against the franc has raised repayment costs, pushing mortgage arrears to a two-decade high and prompting Prime Minister Viktor Orban’s government to brand the loans “debt slavery.”

The Euro Zone's German Crisis - The euro was an audacious venture that put the cart before many horses. The fundamental problem is that the euro zone is not a country. Initially 11, and now 17, sovereign nations signed up for a currency union without first homogenizing their budget policies, their tax systems, their bank regulations or much else. And they did so without creating a central government strong enough to, for example, impose cross-border discipline or finance large cross-country transfers.  What economists antiseptically call "asymmetric shocks" are the Achilles' heel of a currency union—and they are bound to occur now and then. In plain English, if some countries do well (and/or pursue sound policies) while others do poorly (and/or pursue unsound policies), locking them into a single currency will squeeze some countries like an increasingly uncomfortable Procrustean bed. In this case, Procrustes claimed Greece first over the issue of sovereign debt. But it could have been something else and somewhere else. Normally, a weak economy has three ways to fight back. It can loosen monetary policy, it can loosen fiscal policy, or it can let its currency depreciate. (If the currency is floating, the market will do this automatically.) But membership in the euro zone forecloses two of these escape hatches, leaving only fiscal policy. And once a member country stretches its borrowing capacity to the limit—as Greece did—that route is closed, too. Then what happens? One answer is playing out now as a Greek tragedy: You have a depression. And if neither monetary stimulus, fiscal stimulus, nor currency depreciation is possible, when does this depression end? . Real GDP in Greece is already down about 12% and still falling—which is why you've heard so much talk about Greece leaving the euro.

No. The Bundesbank has not reached its limit - A recent Vox column argues that the Bundesbank is selling off assets to lend to peripheral central banks, that this process is about to end, and the result will be a catastrophe. This column argues that such claims are based on a misrepresentation of the Bundesbank’s accounts and a misunderstanding of ECB monetary policy. The Eurozone may be in crisis but for entirely different reasons.

Strains Remain in Interbank Market Despite Cheap Dollars  - Dollar funds remain cheap and plentiful thanks to the recent emergency measures taken by major central banks, but seasonal factors and nagging counterparty concerns mean the cost of getting them from other banks remains high for some European institutions. At one point Wednesday, the widely watched three-month euro-dollar basis swap—a barometer of dollar-funding costs in the interbank market—traded around a midprice of minus-150 basis points, within sight of the three-year low of minus-165.5 basis points touched Nov. 25. The market has retraced more than two-thirds of the early December rally to minus-108 basis points as banks took advantage of the Nov. 30 decision by central banks to slash the cost of dollars. The implied cross-currency basis swap is a function of spot and forward foreign-exchange prices as well as benchmark interbank interest rates in each currency. A rate of zero implies the balance of demand for each currency is equal and that the market is willing to swap currencies at the prevailing interbank rates. "There's still a big premium attached to it. It's quite concerning,"

Euro Arbitrage - In passing I’ve seen what look like suggestions that European banks could simply buy debt from their home countries and park it at the ECB. Thus, arbitraging the difference between the overnight rate and the rate on sovereign debt. In its simple form, however, this will not work because the Sovereign debt is marked-to-market. Thus, if you buy primary bonds at 3% but they then trade in the secondary market at 6%, the value of the bonds as collateral at the ECB will decline to the 6% price, which on top of you have to take a haircut. This dynamic is actually why you can have well subscribed auctions for Italian debt, but at very high yields. Its good stuff to have but only at the price it trades at in the secondary. In order to keep this backend problem from biting the bank basically needs to make a commitment to the government that is big enough that it calms market fears about the ability of the government to roll over debt.  However, if a bank can make such a guarantee then the market yield on primary and second debt will collapse.

Europe's Banks Seek Fresh Lending Cover - As the euro-zone's sovereign debt crisis has pressed banks to lean on short-term options to meet their funding needs, analysts have been assessing the risks for banks seeking to raise longer-term debt. Euro-zone banks need to pay back €1 trillion ($1.32 trillion) of debt maturing next year, according to Moody's Investors Service. New debt to cover those obligations will come with a higher price tag. Rising interest rates and investor uncertainty about the health of the region's lenders have kept banks almost completely out of the longer-term bond markets since the summer, leaving them more reliant on shorter-term funds. While they can still use the cash to profitably lend at longer maturities, "such a funding model is susceptible to break down when the funding markets do not function as expected,"

Sovereign Bond Risk Nears Record as Cracks Emerge in Euro Pact - The cost of insuring against default on European sovereign bonds approached a record on concern cracks are emerging in last week’s agreement to resolve the region’s debt crisis. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed three basis points to 382 at 10 a.m. in London, near the record 385 set Nov. 25. An increase signals deterioration in perceptions of credit quality. German- and French-led plans to amend European Union rules and create closer fiscal union face misgivings from the European Commission and potentially from some the 26 member states that agreed to the changes, the Handelsblatt newspaper said. Italy’s borrowing costs rose at a bond sale today. “The euro leadership thought they could get away with telling markets what markets want to believe,” “Unfortunately, markets want to see tangible things happen.”

Moody's Places Spanish Banks on Review - Moody's Investors Service has placed eight Spanish banks on review for possible downgrade, citing added pressure from economic weakness and risks from its struggling commercial real-estate market. The negative review covered Banco Cooperativo; Banco de Sabadell SA; Bankia SA and its holding company, Banco Financiero y de Ahorro; Bankinter SA, CaixaBank SA and holding company La Caixa; Confederacion Espanola de Cajas de Ahorro, or CECA; Caja Rural de Granada; Ibercaja Banco SA; and Lico Leasing. Moody's also expanded its reviews of seven banks involved with mergers to incorporate the new considerations.

Spanish Banking sector needs €26.17 billion in funds to meet European standards - The European Banking Authority (EBA) has released the final figures required for the recapitalization of European Banks. According to the banking supervisor, Spanish Banks will need €26.17 billion before June 30th 2012. Spain’s financial sector is the second most in need of funds in Europe, behind Greece. The results of the ‘stress tests’ show five Spanish banks will need recapitalization: La Caixa, Banco Santander, BBVA, Bankia and Banco Popular, which represents 22% of the European total. Due to the tightening of the solvency requirements (core capital) from 5% to 9%, banks from the European Union are being forced to strengthen themselves with €114.685 billion, a increase of €8.238 billion compared to the first estimate made by the EBA at the end of October. The affected banks will have to present their recapitalization plans on January 20th 2012 at the latest and will need to raise the funds before June 30th 2012, the deadline established by the EBA. The Spanish Ministry of Economy, has stated that national banks will not need €26.17 billion but instead only €17 billion, as the European supervisor will accept bonds as capital –more than €9 billion in assets turned into shares available for certain financial entities–.

Italian, Spanish yields rise as ratings threat looms (Reuters) - Italian bond yields rose on Tuesday as the risk of sovereign rating downgrades across the euro zone kept markets on edge after steps towards fiscal integration failed to ease the debt crisis in the short term. Longer-dated Spanish bonds also rose as riskier assets suffered due to the risk that rating agency Standard and Poor's could act on its warning over the region's debt ratings. Measures to strengthen budget discipline agreed at a European Union summit last week were not seen as sufficient to ease immediate market worries over sovereign debt -- something only a huge financial backstop provided by the European Central Bank was seen likely to achieve. "Clearly investors have reassessed the EU agreement and the response of the sovereign ratings is at the forefront of investors' minds,"

Italy's "Vote of Confidence" Charade - There is nothing like setting up a straw-man that a mouse and two fleas can blow over.  Nonetheless, that is what Italy's technocrat Prime minister has set out to do, as noted by the BBC article Italy's Monti faces confidence vote over austerity My first thought, based on the headline, before reading the article, was "please, spare me the sap". My tune did not change after reading the article. The only rational explanation to the Italian "vote of confidence" is that Italy is on such shaky grounds that it desperately needs publicity, hoping to artificially boost confidence in Italian bonds. I suggest this is a staged event, known in advance to pass with flying colors. In reality, if there was genuine confidence, there would be no need to hold a "vote of confidence". Thus, these confidence-seeking charades are anything but confidence-building.

Talk of 'nuclear default' sums up Left's anger at EU dictates Tempers are fraying in austerity-racked Portugal. A top socialist politician was taped at a party dinner calling for diplomatic warfare against the EU's northern powers and issuing threats of debt default.  "We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won't pay," said Pedro Nuno Santos, vice-president of the Socialist Party in the parliament. "Debt is our only weapon and we must use it to impose better conditions, because recession itself is what is stopping us complying with the (EU-IMF Troika) accord. We should make the legs of the German bankers tremble," he said.The comments came as Portugal slides deeper into recession, with the economy expected to contract by 3pc next year. Protesters marched through Lisbon on Thursday denouncing plans by the new conservative government to raise the working week to 42 hours. Wages are being cut 16pc for higher paid, and 8pc for lower paid public workers. The parliament passed a fresh austerity budget earlier this month under the terms of its €78bn loan package from the EU and the International Monetary Fund.

Hungarian Rescue Talks Fail - Something is decidedly strange in Europe today: while there has been a favorable shift in bond spreads with the 10 year BTP dropping to 6.4% (although still waiting for LCH to react to its margin cut even as spreads are 100 bps wider) it is the 3M EUR/USD cross currency basis swap that has us confused as it has mysteriously moved violently tighter, from -140 bps to -121 bps overnight, indicating someone may know something in advance of yet another central bank liquidity infusion. As for the catalyst why one may be needed, we go to Hungary where we learn that "rescue" talks with the IMF and EU "on securing some form of backing to reassure investors" have broken down. As a reminder, should Hungary go, Austria and its billions in CHF-denominated mortgages will almost certainly be next, and with it a test of the SNB's EURCHF floor.

Euro-Area Will Fall Back Into Recession as Breakup Risk Remains, E&Y Says -  The euro-area economy is likely to slip back into a recession and its leaders’ new plan to end the debt crisis hasn’t completely eliminated the risk of a breakup of the currency region, according to Ernst & Young LLP. The economy of the 17 nations using the euro will probably shrink in the current and next quarters, the group said in a report published in London today. The economy will barely grow in 2012, with E&Y forecasting expansion of just 0.1 percent. European Union leaders agreed at a Dec. 8-9 summit in Brussels to tighter control of tax and spending by governments that overstep the bloc’s deficit limit of 3 percent of gross domestic product. They also pledged a faster start to a 500 billion-euro ($659 billion) rescue fund. Standard & Poor’s and Moody’s Investors Service are reviewing the agreement and its implications for credit ratings on euro countries. “The latest developments in Greece, Italy and Spain and the European agreement lower the risk of a breakup of the euro zone,” “This risk remains, however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions.”

The political endgame for the euro crisis - The euro has a supranational monetary policy framework, while the fiscal side is still national/intergovernmental. We have a central bank president for the Eurozone, but no finance minister. But how could countries possibly cede sovereignty over some aspects of fiscal policy without democratic legitimacy? We need to fix the political dimension before we can finally solve the financial side of the sovereign and banking crisis. It is not sufficient to elevate the current Commissioner for Economic and Monetary Affairs to Finance Minister status. A full democratic setting – including an elected president of the European Commission – is necessary to complete political union. Political legitimacy for the Commission president is needed for two reasons:

• To enforce budget discipline on participating members, to restrict the impact of fiscal spending on the wider Eurozone.
• To oversee Eurozone banking supervision and resolution, to foster the stability of the Eurozone banking system.

The Euro Zone's Double Failure - The recent euro-zone summit was a double failure. It failed to achieve the increased European political integration that was the primary goal of German Chancellor Angela Merkel and the other European political leaders. And it failed to improve the outlook for euro-zone sovereign bonds because those politicians continued to insist that only a fiscal union and political integration could limit the interest rates on sovereign debt. The post-summit communiqué proclaimed that each euro-zone country will enact a constitutional rule to balance its budget, will take corrective action if its "structural" deficit exceeds 0.5% of its gross domestic product, and will face penalties if its actual deficit exceeds 3% of its GDP. Chancellor Merkel had hoped that these rules would be embodied in a revised version of the current EU treaty and therefore enforceable by the European Commission through the European Court of Justice. Yet Britain's unwillingness to modify the existing treaty without additional safeguards for the British economy means that the new rules would apply only to the 17 euro-zone countries and others that wish to join them, but that they don't constitute an official EU treaty and therefore cannot be enforced by the commission and other EU institutions.

The outer limits - I HAVE struggled a bit to come with something interesting to say about conditions in Europe at the moment. The conclusion of both markets and commentators would seem to be that the outcome of the recent summit has not meaningfully changed the dynamic in the euro zone. It appears that funding conditions for banks and sovereigns continue to worsen. But no one really wants everything to blow up around the holidays, so markets and governments seem to have crawled out of their trenches to sing Silent Night for now, and will resume the bloodshed in the new year. Unless of course the ratings agencies decide to interrupt the party. No one likes a party pooper, ratings agencies. We won't have to wait long for trouble in 2012. Early in the new year, auctions of sovereign debt will crank back up. And as a new report from Moody's Economy.com indicates, much of Europe is moving past the point of no return. Consider this chart:

Europe’s clueless economic solutions —Confronted with looming catastrophe in Greece, Italy and Spain, European leaders convened but accomplished nothing of relevance. They signed a pact that penalizes E.U. nations if their budget deficits exceed 3 percent of their gross domestic product. But the pact fails to address what these nations are supposed to do if interest rates skyrocket when they roll over billions of euros’ worth of bonds in the coming weeks. The European Central Bank has declared it won’t ride to the rescue by issuing euro-bonds that would federalize European public debt — the only plausible solution to Europe’s impending smash-up. But the nuttiness of the E.U. summit extends well beyond its failure to grapple with imminent disaster. In embracing Merkel’s prescription of fiscal austerity, it misdiagnosed Europe’s ailment: Of the European nations hanging by a thread (Greece, Italy, Spain, Portugal and Ireland), only Greece has failed to meet the standards European leaders set for budget deficits and national debt. Between 1999 and 2007, the budget deficits of Italy and Portugal came in, on average, under the 3 percent target, while Spain’s budget was balanced and Ireland ran a surplus. The “solution” enacted last week wouldn’t have changed anything.

The Euro in a Shrinking Zone - The recent European Union summit was a disaster. Both Britain and Germany played the wrong game: British Prime Minister David Cameron isolated Britain from Europe, while German Chancellor Angela Merkel isolated the eurozone from reality. Had Cameron brought an economic-growth agenda to the summit, he would have been fighting for something real, and would not have lacked allies.  The agreement reached in Brussels forecloses any possibility of Keynesian demand management to fight recession. “Structural” budget deficits would be limited to 0.5% of GDP, with (as yet undisclosed) penalties for violators. This is the wrong cure for the eurozone crisis. The Merkel doctrine holds that the crisis is the result of government profligacy, so only a “hard” balanced-budget rule can prevent such crises from recurring. But Merkel’s analysis is utterly wrong. It was not deficit spending by governments that fueled the economic collapse of 2007-2008, but excessive lending by banks. Government’s mounting debts have been a response to the economic downturn, not its cause. What ought to have been hard-wired into the EU’s institutional structure was not permanent fiscal austerity, but tough financial regulation. Of this there is little sign.

European Banks Insure $25 Billion of Government Debt via Swaps - European banks have sold insurance on a net 18.9 billion euros ($25 billion) of government debt in the region, according to figures from the European Banking Authority analyzed in today’s Bloomberg Risk newsletter. Data gathered by the EBA for its stress tests, combined with figures compiled by the Depository Trust & Clearing Corp., show that European Union banks are responsible for 17 percent of the credit-default swaps issued on euro sovereign bonds. German, French and Italian banks have the most at stake, the data show. German banks have underwritten 8.1 billion euros of government securities, the most for any country surveyed by the EBA. The four largest French banks, which were downgraded by Moody’s Investors Service last week, wrote 4.1 billion euros of protection, while Italian banks sold 3 billion euros of swaps designed to compensate the buyer in the event of a government failing to meet its obligations. The entanglement between banks and their governments may hamper plans by regulators to move settlement of credit-default swap trades to clearing houses by the end of 2012. French banks, for example, have insured a net 1.5 billion euros of their own government debt, according to the EBA.

Cash-Strapped Banks Struggle to Trade Trashed Bonds -- Euro nations may have to pay more to borrow $1.1 trillion next year as cash-strapped banks cut back on making markets in government bonds. "Some poor auction results that we saw recently in many countries were probably a reflection of financial constraints among primary dealers, and not just of a decline in demand for government bonds," said Robert Stheeman, the chief executive at the U.K. Debt Management Office, which manages gilt sales on the government's behalf. Banks that act as primary dealers by bidding at sales and offering continuous buy-and-sell prices face higher funding costs and increased capital requirements, prompting them to take less risk. As the debt crisis drags on into its third year, euro region government bonds are no longer perceived as risk-free assets, with 15 countries threatened with rating downgrades and Italian 10-year yields at about 6.5 percent.

Fitch Downgrades 8 Global Banks Including BNP, SocGen, BofA, Deutsche, And Morgan Stanley ZeroHedge: Every day after close it is one endless downgrade parade in which any of the permutations of rating agencies and either European sovereigns or banks get up and start playing musical chairs with each other. Then proceed to sit down for the overnight session. One of these days all the chairs will have been pulled. The banks cut in some capacity, either via long-term IDR or viability rating, are Bank of America, Barclays, BNP, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Societe Generale. Now we know that even creditors do not want to trigger any ratings downgrade covenants because it would offset what is likely a terminal margin call, but at some point someone will need to do through the various bond docs and find out just who (ahem Bank of America) will need to post far far higher collateral as a result of all these relentless downgrades.

ECB Still Not the White Knight, by Tim Duy: The Wall Street Journal has the story on today's speech by ECB President Mario Draghi: The ECB's purchases of government bonds are "neither eternal, nor infinite," Mr. Draghi said in a speech in Berlin, stressing it would take "a lot" more than monetary-policy measures to restore market confidence in the euro zone. Asked whether the ECB should copy the U.K. and U.S. in printing money to buy government bonds, a policy known as quantitative easing, Mr. Draghi said: "I don't see any evidence that quantitative easing leads to stellar economic performance" in those economies. EU treaties forbid monetary financing of government debt, he added. This suggests Draghi believes quantitative easing should only be used if it delivers "stellar" economic performance. This is depressing, not to mention severely misguided. The appropriate metric should not be achieving a "stellar" economy, but what would have occurred in the absence of QE. Hopefully, he will recognize this distinction should (when) the situation deteriorate further. The combination of fiscal consolidation and ECB intransigence promises to keep the European crisis in the headlines for a long, long time.

France is next - I posted back in July that I thought France would be next after Italy in the contagion breakdown because of its macroeconomic metrics. High levels of public and private debt, a long running negative trade balance and current account deficit, stalling industrial production, GDP and employment along with significant banking sector exposure to the periphery all add up to a fairly risky predicament. This is certainly not a country that could take on a strict austerity regime without causing itself some significant short-to-medium term economic damage because it is obvious from the metrics that the private sector has been borrowing from both the external and government sectors for a long period of time. Over the last month or so we have also seen Nicolas Sarkozy join Angela Merkel in building a new European economic treaty based on the premise of near-balanced government budgets. That being the case, France is almost guaranteed to under-perform over the next few years and, given its weak starting position, I would suggest there is significant downside economic risk for the nation.  Even if I am being a little bearish on those risks, this certainly isn’t a country that I believe deserves the highest marks you can get for credit default risk. When stacked up against a country like Finland or Germany it doesn’t really make much sense. The CDS markets appear to agree, with Indonesia, a BB+ rated country, outperforming France on 5yr CDS.

France Braces for Cut in AAA Debt Rating as Noyer Takes a Swipe at Britain - French leaders are girding for the loss of the nation’s top credit grade, with the central bank governor taking a swipe at Britain as he called debt-rating companies “incomprehensible and irrational.” Standard & Poor’s said last week it may lower France by two levels in a euro-area downgrade stemming from the failure of the region’s leaders to arrest a debt crisis that began in Greece in 2009 and now presents the biggest threat to the world economy. “A downgrade doesn’t strike me as justified based on economic fundamentals,” Bank of France Governor Christian Noyer told Le Telegramme, a newspaper based in Brittany. “Or if it is, they should start by downgrading the U.K., which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing.” A cut by S&P or Moody’s Investors Service, which said this week it will review European ratings, may complicate Europe’s efforts to stem the crisis by threatening the rating of the region’s bailout fund.

France in Recession; Italy in Recession; Poles Protest; Credit Agricole Quits Commodity Business; Liquidity Crunch Continues - The latest Merkozy treaty proposal is far more hype than reality. What little has been agreed to will be taken back as treaty cracks appear everywhere. Worse yet, numerous austerity measures are counterproductive. Thus, it should not be surprising that headlines regarding the real European economy (as opposed to Eurocratic wishes) are generally horrific. Here are a few stories that caught my attention. Via Google Translate, La Tribune reports France Enters Recession INSEE forecasts have rarely been so dark. The institute provides, in its memo on the economy in December, a decline in French GDP for the current quarter (- 0.2%) and below (- 0.1%). In other words, the recession. For this scenario is not only French but also European. The euro area show indeed a decline in GDP of 0.3% in fourth quarter 2011 and 0.1% in first quarter 2012 (see chart) and will benefit the end of a carry-over for 2012 does not exist (0.1%). Reuters reports Confindustria slashes 2012 Italian growth forecast The main employers' lobby Confindustria on Thursday slashed its 2012 growth forecast for Italy to -1.6 percent from +0.2 percent, warning that even that estimate was optimistic and based on a gradual easing of the euro zone debt crisis.Italy is already in recession, began shrinking on a quarter-on-quarter basis in the third quarter of this year, and will emerge only in the third quarter of 2013.

French leaders declare a war of words on Britain - French leaders have launched outspoken public attacks on Britain, calling for the UK to lose its AAA credit rating and comparing its economy with that of Greece. Christian Noyer, the governor of the Bank of France, said that Britain faced larger national debts, higher inflation and slower growth than France. François Baroin, the finance minister, said Britain was “marginalised” and faced “a very difficult economic situation” because of Coalition policies. The blunt remarks are the latest sign of Anglo-French tension following David Cameron’s refusal last week to back a new European treaty drawn up in response to the eurozone crisis. George Osborne, the Chancellor, also provoked anger in France recently by suggesting it could be the next eurozone economy to experience a debt crisis. France and Germany want a new treaty to create a “fiscal union” of eurozone members, to control their deficits and reassure the markets. Mr Baroin told the French parliament that the pact had been backed by every country in Europe, “with the singular, now solitary, exception of Great Britain, which history will remember as marginalised”.

Irish Economy Shrinks 1.9% — Has Its Worst Quarter Since Q1 2009 - THE IRISH ECONOMY shrank dramatically in the third quarter of 2011, striking new figures from the Central Statistics Office have shown. Gross Domestic Product – the total value of all goods and services produced – fell by 1.9 per cent in the three months from July to September. Meanwhile, Gross National Product – the value of all services supplied by Irish residents, which is considered by some to be a more accurate barometer of economic performance – fell by 2.2 per cent. The shrinkage in GDP is the worst since the first quarter of 2009, and reverses the trend set in the first two quarters of this year when the economy grew by 1.8 and 1.4 per cent.

Did The ECB Just End The Euro Crisis?: Yields on short-term peripheral sovereign bonds are plunging, despite the fact that EU leaders appeared to make little progress at their highly-anticipated summit last week. Pundits continue to expound on the flaws of the eurozone but markets are telling a different tale. That's because the European Central Bank may have already introduced roundabout measures that will solve some of Europe's big problems—it's making investing in peripheral sovereign debt a huge profit opportunity for banks. Theoretically, financial institutions will be able coin money by borrowing ultra-cheap from the ECB and buying higher yielding sovereign debt. Essentially, it appears the ECB might allow European banks to pledge everything but the kitchen sink in return for funds. First, the new policy allows European banks to hold far fewer assets as collateral in exchange for funding from the ECB—freeing up liquidity to the tune of €103 billion ($134 billion). More importantly, relaxing collateral restrictions could also allow European banks to use even somewhat risky sovereign assets as collateral for bond purchases.

ECB Backdoor Bailout - Simone Foxman speculates that LOTR  might have been one. To things to comment on. OneThe Bank currently accepts collateral rated as low as A-, although debtors must pay a penalty based on asset risk. Were even riskier sovereign bonds allowed to be used as collateral or if the penalty were dropped, this would provide significant incentive for banks to purchase sovereign debt, particularly given currently high yields on bonds. That would hike demand for sovereign debt in countries that have currently seen high borrowing costs, bringing down yields on sovereign bonds, and thus making it easier for PIIGS sovereigns to finance their debt. So, you can already take risky Sovereign debt to the ECB. The problem is that it is marked-to-market, which means the price in the secondary determines how much cash you can get for your bonds. I think all my readers know that bond prices and yields move in opposite directions, but lets think about what that means for collateral. Suppose I am a bank and I an buy Italian bond at 1.5% yield from the Italian government. After all, I can borrow at 1% from the ECB so this is just free yield. Then I take it to the ECB and get my money. Then the bond yields on the secondary market climb to 6%. I then have to add more bonds as collateral to the ECB. How much more. Until the total market value of my bonds equals the amount of cash that I borrowed. Yet, that amount is precisely the amount that takes the yield on my cash borrowing up to 6%. Because, yield is determined by price which in turn determines collateral value.

It is finally being recognized that the eurozone made a major policy breakthrough - Yields on short-term peripheral sovereign bonds are plunging, despite the fact that EU leaders appeared to make little progress at their highly-anticipated summit last week. Pundits continue to expound on the flaws of the eurozone but markets are telling a different tale. That’s because the European Central Bank may have already introduced roundabout measures that will solve some of Europe’s big problems—it’s making investing in peripheral sovereign debt a huge profit opportunity for banks.  Theoretically, financial institutions will be able coin money by borrowing ultra-cheap from the ECB and buying higher yielding sovereign debt. Here is the story, and you will recall my earlier post here.  Karl Smith asks how this fits in with the treatment of collateral, and here is also a more skeptical take on the arbitrage.  My view is not that banks will find the arbitrage opportunity overwhelming (that is unclear), rather my view is that public choice mechanisms will operate so that desperate governments commandeer their banks to make this move, whether the banks ideally would wish to or not.  Make no mistake about it, this is doubling down and raising the stakes.  It’s funding debt through more debt. 

The Eurozone’s policy breakthrough? -Today’s money quote, obviously, is this, from Fitch: a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach. Fitch’s view reflects the clear consensus of Anglo-American commentators. But Anglo-American commentators aren’t always right. Ezra Klein writes that the German policy establishment “remain[s] serenely confident that they will save [the Eurozone].” Note that Klein attributes this to no one in particular. He characterizes it as a view drawn from “members of Angela Merkel’s government, members of the opposition Social Democrats, industrialists, and bankers.” In other words, Klein heard this in private conversations, not market-moving public statements. Jean-Claude Junker’s famous when-it-becomes-serious-you-have-to-lie rule doesn’t apply. These are smart people who know everything we know, and they think they’ve got the situation covered. Tyler Cowen has been emphasizing the possibility that the ECB will quietly fund sovereigns via the banking system. The ECB would lend to banks at very low rates, accepting sovereign debt as collateral. Banks would earn the spread between the yield on sovereign debt (which is currently distressed and very yieldy) and the sliver of interest demanded by the ECB. As a matter of mechanics, this plan could work. It’s the same as direct ECB lending to sovereigns, except ECB gets added security (in theory) by interposing banks as guarantors, and pays a fee for the privilege. The Anglo-American punditosphere is unimpressed. After all, European banks are already in deep trouble because of their sovereign holdings.

Germany’s Hidden Risk - Involuntary lending is what happens when your teenager figures out how to charge stuff to your credit card. The kid promises to pay for the purchases but never gets around to it, so your involuntary loan keeps getting bigger. At some point it dawns on you that you might never get your money back. Something similar is happening in Europe, except the dysfunctional family consists of central bankers, with Germany’s Bundesbank in the role of aggrieved parent. The figures are hard to find, policymakers don’t like to talk about them, and the accounting is far from sexy. Outside of Germany, headlines have been few. But the numbers are huge—so huge that they may be one of the biggest factors in whether the euro zone hangs together or falls apart. The term to remember is Target2. It’s the name for the European Central Bank’s suddenly important interbank payment system, which before the crisis was just a lowly bit of financial plumbing. The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically lent €495 billion to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal—and lately Spain, Italy, and even France. They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.

Bundesbank: euro zone IMF plan raises German risk -- Germany's central bank is worried that the plan to expand the International Monetary Fund's role in fighting the euro zone's debt crisis will endanger Germany's own aid to the region, Financial Times Deutschland reports Friday. Since the IMF must always be repaid first under international rules, the Bundesbank fears the euro zone's rescue fund would only recoup part of its money if a government goes bankrupt, the newspaper reports, citing unidentified sources. Germany, the biggest contributor to the fund, is on the hook for EUR211 billion. "The risk structure of Germany's maximum commitment of EUR211 billion changes if the IMF contributes to large additional rescue programs," the newspaper quoted a source as saying. Bundesbank President Jens Weidmann is also concerned that merely announcing a new IMF program might panic investors and increase pressure for new rescue measures, FTD reports. A spokesman for the Bundesbank had no immediate comment on the report. EU leaders agreed at last week's crisis talks to provide EUR200 billion in bilateral loans to the IMF to support the euro zone. But a week later, few nations have come forward to commit funds, prompting IMF chief Christine Lagarde to appeal for help Thursday.

Not only in Germany: The ECB now wants export-driven growth for whole Europe!  One claimed objective of the single currency area in Europe is (or should I say was?) to create a large single market for producers. But now the ECB is pressing national governments to gear their policies to enhance competitiveness so that they can “count on external demand” and increase their net exports! Mario Draghi, President of the ECB, and a key figure in the team now managing the European crisis, made this statement while responding to an Italian journalist, in the Q&A session of the ECB press conference of 8 December 2011. Earlier, Draghi had described the ECB’s view of the 3-pillar recipe to end the euro crisis as follows:
First, European nations need budget policies geared to stability, growth, and competition (Note: he first said “stability, growth, and jobs”, but he immediately changed it into “stability, growth, and competition. And thus, jobs”).
Second, countries need common fiscal rules (the so-called “fiscal compact” of the euro zone approved this past week). The first two pillars are aimed at ending what Draghi calls a “confidence problem” with euro nations’ debt. So, again, for the ECB, it is all about “fiscal discipline”.
Third, the euro needs a “stabilization mechanism” led by the EFSF, with the ECB acting as its agent (and no involvement of the ECB’s balance sheet). In this respect, Draghi stressed that the ECB does not discuss its mandate: it simply complies with it.

No quick fix for euro crisis in 2012  - It’s Merkel vs. markets as Germany leads long slog — Think 2012 will be the year when investors learn once and for all whether Europe’s leaders can come up with a plan to once and for all address the euro-zone debt crisis? Think again. The volatility and market turmoil that accompanied the 2011 realization that the euro could conceivably come apart is unlikely to be fully dispelled. Instead, top politicians and policy makers appear likely to continue relying on the potential for imminent disaster to push through otherwise politically unpalatable changes, economists said. After all, it was Europe’s most powerful politician, German Chancellor Angela Merkel, who warned Germany’s parliament earlier this month that the crisis would never be solved in one fell swoop. Instead, she likened the process to a marathon, and hinted that the runners had barely cleared the starting line. Indeed, the recent agreement between nearly all EU members to move forward with closer fiscal and economic links is likely to take months or even years to come to fruition, all but ensuring uncertainty and volatility remain a staple of European markets and politics.

ECB Success and Folly - Yet another interesting night in Europe. Spain managed to over sell as it latest auction with €6.03 billion sold versus €3.5 billion targeted which in the current environment is seen as a good result. Medium term paper had lower yields and lower bid/cover ratios, while longer term paper had higher yields but better bid/cover. Given that the markets are on edge and are therefore hyper-senstive about these preceedings this is a good result, with Spain paying 5.545% on 10 year issuance. The big question is whether the latest night’s auction result was spurred on by the new ECB long term repo operations which could be encouraging Spanish banks to purchased their nations sovereign bonds and then front up to the ECB. This would make sense because the spread between the ECB’s refinance rate and euro-sovereign bond yields is very wide which means it is a profitable transaction for the private banks, although I would expect to see this result further towards the short term paper.. This is a good thing for the Spanish government in the short term, but it doesn’t help solve the issue that the private sector will continue to deflate as banks attempt to repair their balance sheets after the fallout of the housing boom: Repossessed houses in Spain are worth 43 percent less on average than the valuations assigned on the mortgages for the properties, according to Fitch Ratings.Price declines range from 20 percent to 58 percent, analysts Juan David Garcia and Carlos Masip in Madrid wrote in a report analyzing 8,235 properties funded by loans from banks including Banco Santander SA (SAN) and Bankia SA. The mortgages are in asset-backed securities with high loan-to-value ratios.

They Have Made A Desert, Ireland Edition - Krugman - And called it a successful example of austerity, of course: Like that other implausible candidate for role model, Latvia, Ireland has been hailed as a success story — and a challenge to Keynesians like me — when there was never anything that looked like real success and nothing that posed any sort of puzzle. (Even in a Keynesian world, internal devaluation will work in the long run if you can stick to it — but in the long run, well, you know the rest.) The sad thing here is that textbook Keynesian macro has been a very good guide all through this crisis — but nobody will believe it.

Chronic Confusion - Krugman - A quick note — I’ve seen several news reports in the past few days asserting that the structural problems of southern Europe have caused “chronic” trade deficits. Like the notion that all of the troubled countries were fiscally irresponsible, this is a morality-play falsehood that keeps being stated as a fact by reporters who apparently don’t check the numbers. Here’s the combined current account balance (trade balance broadly defined, including factor income) of the GIPS countries since 1990: Those “chronic” large deficits are actually a relatively recent development; they emerged only after the false reassurance created by the euro caused huge flows from Germany to the periphery. By all means, let’s talk about structural reform — but don’t make the false claim that structural problems caused what is actually a macroeconomic problem.

Euro Zone Deal Runs Into Second Thoughts - The deal reached at the emergency European summit meeting in Brussels last Friday was supposed to cement a consensus for better fiscal discipline and reassure the financial markets about the European Union’s resolve. By Wednesday, it was clearly not convincing investors. The market bid the value of the euro1 down below $1.30 for the first time since January, and pushed the interest rates the Italian government must pay on new bond issues up again, apparently unconvinced that a little more austerity and a little more bailout money would save the euro. The European Central Bank2 continued to face pressure to step up its purchases of euro zone government bonds. But the head of Germany’s central bank, the Bundesbank, Jens Weidmann, repeated that his country opposed using the European Central Bank too rashly to back up governments that need to reform themselves first. Mr. Weidmann also said the Bundesbank would provide new money as a loan to the International Monetary Fund only if countries outside Europe did so as well.

Fitch Revises France's Outlook to Negative - Fitch Ratings has today affirmed France's Long-term foreign and local currency Issuer Default Ratings (IDRs) as well as its senior debt at 'AAA'. Fitch has also simultaneously affirmed France's Country Ceiling at 'AAA' and the Short-term foreign currency rating at 'F1+'. The rating Outlook on the Long-term rating is revised to Negative from Stable.  The affirmation of France's 'AAA' status is underpinned by its wealthy and diversified economy, effective political, civil and social institutions and its financing flexibility reflecting its status as a large benchmark euro area sovereign issuer. In addition, the French government has adopted several measures to strengthen the creditability of its fiscal consolidation effort. Nonetheless, government debt to GDP is currently projected by Fitch under its baseline scenario to peak in 2014 at around 92%, higher than any other 'AAA'-rated sovereign with the exception of the UK and US and significantly higher than other 'AAA'-rated Euro Area peers.

Spain regional debt up 22 percent to $176 billion - Debt levels for Spain's cash-strapped 17 semiautonomous regions have soared 22 percent over the past year, the country's central bank said Friday. Bank of Spain quarterly figures showed regional debt rose to €135.2 billion ($176.02 billion) in September from €110.72 billion in the same month last year. A near two-year recession after a real estate bubble collapse has left Spain with swollen regional and national deficits, a stalled economy and 21.5 percent unemployment. The bank says Spain's national debt rose nearly 15 percent on the year to €706.34 billion ($919.6 billion) in the third quarter, representing 66 percent of GDP

Home Prices in Spain Drop 14 Consecutive Quarters; Banks Stuck with Major Losses Not Marked to Market; Expect Conditions to Worsen - The Spanish banking system is in far worse shape than most realize because of unrealized losses related to Spain's imploded housing bubble. Various austerity measures and tax hikes to bail out French and German banks will greatly exacerbate this problem. Please consider Spain Banks Face 43% Price Fall on Repossessed Homes Spanish home prices fell for the 14th consecutive quarter as unemployment surged and a drop in mortgage lending crimped demand for property. The average price of houses and apartments dropped 7.4 percent in three months ended Sept. 30 from the same period a year earlier, Repossessed houses in Spain are worth 43 percent less on average than the valuations assigned on the mortgages for the properties, according to Fitch Ratings.  Spain's Unemployment Rate is 22.8% and rising.  Austerity measures in Spain will force down home prices, force up the unemployment rate, and force up losses on Spanish banks.

ECB Liquidity: Back-Door Bazooka Or Suspension Of Democracy, BARCAP Opines- The market's reaction to Draghi's comments over the last week have been visceral in its schizophrenia. While his 'temporary' provisions, three-year LTROs specifically, provide a life-line of liquidity (a la TLGP - and how is that working out for the US banks having to roll now?), they hardly address the real underlying problem of the vicious circle between sovereign debt's now-risky nature and financial balance sheets bloated with zero-risk-weighted re-hypothecated peripheral bonds. The last week has seen a roller-coaster of Senior-Sub debt decompression and compression, liquidation-like drops in commodities, lower correlation across European sovereign debt, and significant dispersion in high- and low-beta equity and credit markets (notably as we have previously discussed, some of which will have been driven by index roll technicals). The issue comes down to whether this is the Bazooka (buy-buy-buy) or not enough (fade-the-rallies) and BARCAP's macro sales and European Banks' research team have, like the rest of the market, been exchanging views on this perspective. While their take on the liquidity explosion is that it doesn't solve the almost unsolvable solvency problem but it the deeper insight that perhaps it is not the actual mechanics of this liquidity bazooka but the perception that democracy itself has been suspended in favor of bank and sovereign survival that interests us more. Furthermore, they do an excellent job on breaking down the mythical carry trade potential of these LTROs and mutual sovereign financing benefits since near-term profit potential would be offset by additional sovereign risk - meaning that funding markets could stay closed for longer.

Banks resist European pressure to buy government debt - Banks are unlikely to come to the aid of debt-ridden eurozone countries, with many planning to ignore political pressure to use cheap money from the European Central Bank to fund purchases of sovereign bonds. With eurozone governments needing to sell almost €80bn of fresh debt in January alone and bond yields rising by the day, the stand-off between policymakers and banks could turn Europe’s slow-burning debt crisis into a full-scale conflagration in the New Year.Burned by Greek losses, and under the scrutiny of shareholders, banks have slashed their exposure to weaker European sovereigns over recent months. Senior bankers say they will cut further, despite pressure to use newly available, longer-term ECB loans to buy government debt as part of an officially-sanctioned carry trade. “When investors are constantly asking what you have on your books and the board is asking you to reduce your exposure, it doesn’t really matter about the economics of the trade,” said the treasurer of one of Europe’s biggest banks. “Am I going to buy Italian bonds? No.”

Fitch: comprehensive euro zone deal "beyond reach" - (Reuters) - The credit rating agency Fitch has told euro zone countries it believes a comprehensive solution to their debt crisis is beyond reach, putting six euro zone economies including Italy on watch for potential downgrades in the near future. It reaffirmed France's top-notch triple-A rating but even here said the outlook was now negative, meaning it could be downgraded within two years. Underscoring the tensions within the bloc over a crisis that has spread relentlessly over the past two years, Italy's prime minister urged European policymakers on Friday to beware of dividing the continent with efforts to fight its debt crisis. In a swipe at Germany, he warned against a "short-term hunger for rigor" in some countries. Germany has led resistance to allowing the European Central Bank to ramp up its buying of government bonds on the open market to a big enough scale to douse the crisis, but Fitch late on Friday added to the pressure for just such a move.

EA Infernal Devaluation Progressing -  Rebecca Wilder - The EU answer to rebalancing portfolio and trade flows within the Euro area (EA) without currency devaluation is recession and deflation. They call this ‘internal devaluation’ – shifting relative prices by reducing domestic demand in the debtor countries, thereby shifting the terms of trade. Marshall Auerback calls it ‘infernal devaluation’. Marshall’s right.Today we got more evidence that infernal devaluation is progressing. EA unit labor costs (ULC) – average cost of labour per hour workers – increased 0.2% in the third quarter, slowing the annual pace from 3.1% to 2.7%. While the slowdown was to be expected, given the deterioration of domestic demand, the elevated level of growth in ULC suggests that wages in Europe are stickier than what is needed to effectively drive the terms of trade via internal devaluation. Better put: downward pressure in European wages moves more like molasses than water; it will take severe recessions in some of the debtor countries to drive relative prices down sufficient enough to feasibly shift the terms of trade. The table below lists the average annual ULC gains/losses relative to the EA overall. Germany’s moving on par with the EA, averaging -0.05% (rounded to 0 in the Table) annual relative ULC growth. Germany should be seeing relative appreciation. Spain and Italy are seeing average annual relative depreciation, -0.6% and -0.3%, respectively, per quarter. This is consistent with what is ‘supposed to happen’ in Italy and Spain to shift relative capital and trade flows. However, Netherlands and Finland are matching pace, big exporters that theoretically should be turning importers. France is seeing relative appreciation, +2.2% average annual relative ULC gains; but they were already running CA deficits. . Greece and Ireland (Greek data is truncated at Q2 2011) successfully devalued. But at what cost? Their unemployment rates that are now multiples of what they were before the crisis.

David Stockman on the Coming European Train Wreck - The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks—deposits, capital and collateral. Looked at another way, the three big French banks have combined footings of about $6 trillion compared to France's GDP of $2.2 trillion. So the Big Three french banks are 3X their dirigisme-ridden GDP. Good luck with that! No wonder Sarkozy is retreating on France's AAA and was trying so hard to get Euro bonds. He already knows he is going to be the French Nixon, and be forced to nationalize the French banks in order to save his re-election. By contrast, the top three U.S. banks which are no paragon of financial virtue—JPM, BAC, and C—have combined footings of $6 trillion or 40% of GDP. The French equivalent of that number would be $45 trillion. Can you say train wreck!

Europe Still Heading For Collapse, by Tim Duy: The half-life of the effectiveness of European summits is growing increasingly shorter. While I have been a long-term Europessimist, market participants are more willing to trade on whatever appears to be positive news, thus markets jump whenever it appears the Europeans are taking action. But eventually the game will wear thin as market participants increasingly realize European "solutions" are never more than half-measures intended to kick the can down the road another few months. And the last summit was no exception. The reality is quickly sinking in that, relative to the dimensions of the challenge, very little was really accomplished two weeks ago. And very little will be accomplished until European leaders come to the realization that they continue to treat the symptoms of the disease, not the cause of the disease. They need to find a mechanism to address Europe's internal imbalances that does not rely exclusively on deflation as a cure. Alan Blinder provided the background in the Wall Street Journal: Europe's common currency actually has two gigantic problems. The debt and banking crisis hogs all the attention because of its immediacy, plus the high drama of all those summit meetings. But the other, slower-acting problem—lopsided competitiveness within the euro zone—is far more intractable.

Australian Banks Given One Week To Prepare For European "Meltdown" -Whereas previously we had heard extensive horror stories about banks being told to prepare for the end of the world in case the European summit (the latest and greatest one from last Friday which was supposed to find a cure for cancer among other things) failed, and even went so far as to read about preparations for trading in the drachma on a when issued basis, once the summit passed (and it was clear that media posturing would do nothing to fix what has already been a failure and it would be best to remove the threats of "reality" from the public's attention) all such "end of the world" speculation promptly disappeared - after all why remind people that things are now worse than ever. Until today. According to the Australian Finance Review (link - subscription required), banks down under "have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis." Aka a European "Meltdown." And since we don't have immediate access to the article, we leave it to Bloomberg First Word to describe for us what the article says:

EFSF considers euro warning clause - A draft prospectus prepared for the latest euro zone bail-out instruments includes explicit warnings to investors that the euro could break apart or even cease to be a “lawful currency” entirely. The European Financial Stability Facility, which is creating the products to insure bonds of troubled countries against default, is debating whether the “risk factors” should be included in the final version. In the latest draft of the prospectus, seen by the Financial Times, a summary of the dangers to investors includes: “[R]isks arising from a Reference Sovereign ceasing to use the euro as its lawful currency . . . or the cessation of the euro as a lawful currency”. Including such a warning in an official document from the euro zone’s own rescue fund would be a surprising move. European leaders have frequently insisted that a euro break-up is unthinkable, although last month France’s Nicolas Sarkozy and Germany’s Angela Merkel accepted for the first time that Greece might leave. “If you put something like this in the prospectus, you must consider what possible signal effect it has,” said one European official.

The Cookie Crumbles - Reality is a harsh mistress. She insists that you pay attention and then, having done so, take care of business. Politics, on the other hand, is more like stage magic. The man in the tuxedo is always trying to divert your attention. The world has run out of money, that is credible money of the type that represents real wealth, and yet is up to its ears in paper representations of putative wealth-like stuff: mortgages, credit default swaps, Gold ETFs, synthetic CDOs, naked shorts, bonds of all sorts. And now, alas, at Christmas time, the world has gotten a margin call and needs to fork over a whole lot of collateral in order to demonstrate that the global system of financial obligations is legit. Only the collateral turns out to be all this dubious paper, really just a bouquet of promises to pay in distant future Tuesdays for trillions of hamburgers today.  Nobody who observed the proceedings in last week's European Union talks came away from that spectacle feeling reassured. Brussels is like a ventriloquist's dummy sitting on Germany's knee. Germany cannot just step up and act like the Boss of Europe. Too many bad memories of an earlier instance, when a gang of maniacs wearing uniforms studded with grinning totenkopf insignia turned the whole region into a charnel house. So, Germany has to pretend to speak through Brussels. The message was: listen up all y'all nations of the Eurozone!  Prepare to live on a whole lot less than you're used to! Do not exceed your borrowing and spending! Or else!    Yes, the lingering question: or else...what?

Felix Zulauf: A Coming Depression Will Lead To The Collapse Of The Euro: Feliz Zulauf was interview by King World News over the weekend and offered some excellent macro insights on the situation in Europe. The Swiss macro money manager, unfortunately, has been right about the Euro’s developments over the last few years and has a very dire outlook. He says the periphery is entering a periphery that will eventually lead to several nations leaving the currency union: “I think the periphery goes into depression. When you look at a country like Greece, it’s now been in recession for three years. GDP is probably down 15% from the top. The stock market is down 90%, which is the equivalent of 1929 to 1932 in the US. This is depression-like. …Then I expect next year one country, probably three, will exit the euro. That will make 2012 very interesting because there are no rules on how to exit the euro. A country exiting the euro means the next day, when they exit, their banking system is bust. That means the banking system has to be immediately nationalized in a new currency. They introduce a new currency, they nationalize the banking system, and then, of course, the government is also bust. Then the government will default. That’s what you have to expect next year. I think Greece will do so and Portugal and Ireland are candidates also.”

Britain Hesitates - European leaders went one better this time. Not content with failing to resolve the debt crisis tearing through the Eurozone and threatening a global recession, they have now managed to create a new source of instability: The rift between Britain and the rest of the European Union, whose consequences may prove to be momentous indeed. It was a long time coming. The tension between the Eurozone “ins” and the 10 non-Eurozone “outs” has been building throughout the debt crisis, which has forced the states belonging to the common currency to take extraordinary – and yet woefully insufficient – measures to keep the euro from spectacularly collapsing. In the Brussels summit which ended yesterday, France and Germany, drivers of the push towards an ever closer union, were unable to persuade British Prime Minister David Cameron to back their plan for greater fiscal integration. The deal-breaker was a demand by Cameron for special treatment for Britain’s lucrative financial services industry.  Cameron refused to budge and, as it turned out, he opened the way for the rest of the EU members (with the possible exception of Sweden, Hungary and the Czech Republic) to agree on an intergovernmental deal outside the framework of the EU which will more closely coordinate fiscal policy.

A deep seated hostility toward European construction? - The British decision to veto the proposed new EU treaty is not surprisingly provoking an avalanche of commentary this weekend. Among journalists, at least, there seems to be a consensus that David Cameron committed some kind of major diplomatic blunder.  Possibly this is so, but given the difficulties presented by having to take this agreement forward outside the formal structure of the EU, it is hard to not reach the conclusion that both Angela Merkel and Nicolas Sarkozy have been guilty if not of a similar blunder, then at least a major error of judgment. On the other hand the issues involved in the proposed new arrangements are highly complex and in some senses ground breaking, so it is indeed surprising that so many (and so diverse) countries were able to reach such rapid agreement on the need for and the broad outlines of a new agreement.  While Angela Merkel was probably worried before the meeting that too few countries would sign up (there was talk of only a hard core of countries proceeding), now she is surely concerned by the fact that so many have. In many ways the biggest weakness of her debt brake proposal is that it has become “too successful” to be fully credible.

The moment, behind closed doors, that David Cameron lost his EU argument last night - CLAIMS and counter-claims are flying as British officials and European diplomats squabble over who, exactly, was being unreasonable last night when David Cameron refused to sign up to a new European Union treaty with strict new curbs on taxation and spending within the euro zone. There are reliable signs of heavy Downing Street briefing over at the Daily Telegraph, where the well-connected Ben Brogan is reporting that it was all the fault of the French, who crammed the text on the summit table so full of impossible demands that the British had no choice but to walk away. He writes: The events of the past 12 hours have exposed a truth that many chose to ignore, namely that in its relentless pursuit of its national interest, France's strategic objective has been to drive the UK to the margins – if not out of the EU – and to destroy the City. The French narrative of the crisis is that it is all an Anglo-Saxon creation, and we must be punished for it. The failings of the euro so obvious to us are not recognised by the French. The British view is that packing the treaty proposals full of changes that Britain could never conceivably accept was a ploy to force us into a veto, and so into the departure lounge. Or here's another way of putting from inside the machine: "The French are out to screw us," one source tells me. "Despite all the jollity, the fact is that Sarko doesn't gives a s*** about us. It's all bull***. They have their view that the Anglo-Saxon model is a disaster and was responsible for the crisis."

Cameron Says His Veto on Europe Treaty Protects Britain - Prime Minister David Cameron on Monday vigorously defended his decision to veto the proposed European Union treaty changes at last week’s summit meeting, telling Parliament that he had acted to protect Britain’s interests and that, contrary to criticism, he had not consigned the country to the sidelines of Europe.  Mr. Cameron, a Conservative, seemed at pains to offer soothing words to those afraid that he had so alienated his European allies that Britain was bound to leave the European Union altogether. “Britain remains a full member of the E.U., and the events of the last week do nothing to change that,” Mr. Cameron said. “Our membership of the E.U. is vital to our national interest. We are a trading nation, and we need the single market for trade, investment and jobs.”  Olli Rehn, the European commissioner for economic and monetary affairs, said Britain could hardly wall off its financial industry, the bustling City of London. “I regret very much that the United Kingdom was not willing to join the new fiscal compact, as much for the sake of Europe and its crisis response as for the sake of British citizens and their perspectives,” Mr. Rehn said.  If this move was intended to prevent bankers and financial corporations in the City from being regulated, that is not going to happen.” . “The U.K.’s excessive deficit and debt will be the subject of surveillance like other member states,” he said, “even if the enforcement mechanism mostly applies to the euro area member states.”

Forget David Cameron’s veto, another eurozone crisis is only weeks away - You wouldn’t believe it to listen to the fulminating indignation directed at the UK from across the Channel, but David Cameron did the eurozone’s political leaders a favour last weekend. By refusing to sign up, he managed to create a convenient Aunt Sally for Europeans to throw stones at, and divert attention from the summit’s failure to come up with anything remotely credible to address either the single currency’s existential crisis or the gathering economic slump. The latest in a long line of self-styled “make or break” summits, it was in truth no more momentous than any of the others.  What was agreed was some minor strengthening of the Maastricht framework for governing monetary union, though some aspects of the original “stability and growth pact” have actually been watered down. The maximum fine that can be imposed for breach of the rules has been reduced from 0.5 per cent of GDP annually to 0.2 per cent.  In most other respects too, the idea that some kind of great leap forward in terms of fiscal and political union has occurred is a nonsense.

Why Britain and the EU Still Need Each Other - David Cameron’s decision to wield his cherished veto in Brussels last week added more high drama to the endless euro saga. Cameron’s refusal to sign up for a new EU treaty to save the euro, which gained the support of every EU member except Britain, was an abrupt departure from Britain’s usual arms-length approach to greater Europe.  But that doesn’t mean the British-European partnership is permanently falling apart. Both sides still need each other’s economies and will continue to muddle through. In the short run, the spat did both sides some political good. The veto won Cameron a much-needed domestic boost with conservative eurosceptics in his party. And France’s Nicolas Sarkozy and Germany’s Angela Merkel reinforced their defacto two-country rule over teetering Europe. On the economic front, not much has changed. Britain still has what it has always wanted: an arms-length customs union that promotes trade and economic ties while leaving out the fiscal constraints, foreign policy tie-ups, and common currency complications. Sarkozy claimed the spat created “two Europes,” but that was already the case.  Britain has always been the only EU country that doesn’t accept the idea of joining the single currency at some point. That’s why every other non-eurozone country went along with the new fiscal pact.

U.K. Coalition Breakup Over EU Would Cause Economic ‘Disaster’ - U.K. Deputy Prime Minister Nick Clegg said a breakup of the coalition government would spell “economic disaster” for Britain while saying he was “bitterly disappointed” by last week’s European Union summit. Prime Minister David Cameron’s refusal to back a 27-nation pact to tighten budget rules may leave the U.K. “isolated and marginalized within the European Union,” Clegg told the British Broadcasting Corp.’s “Marr” program today. Still, he said “it would be even more damaging for us as a country if the coalition government was now to fall apart. It would create economic disaster.”  By refusing the join the planned fiscal accord, Cameron strengthened that wing of his Conservative party who want Britain to leave the EU. He also caused the biggest rift with his coalition partners since both parties campaigned on opposite sides of a May referendum on overhauling Britain’s voting system.A poll by Survation for the Mail on Sunday today showed that almost two-thirds of voters said Cameron was right to back out of the EU accord, while 48 percent said Britain should leave the EU altogether. A poll by ComRes, carried out just before the summit for the Independent on Sunday, showed 52 percent of Britons say the euro crisis is an ideal opportunity for the U.K. to leave the EU.

Inflation falls to 4.8% - Consumer price inflation fell from 5% in October to 4.8% in November, RPI inflation from 5.4% to 5.2%. It is falling, though perhaps not as fast as some might have hoped, and should receive a big downward kick next year, particularly when January's VAT hike drops out of the 12-month comparison. As importantly, some of the most visible price pressures are starting to ease. According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between October and November came from food, petrol, clothing and furniture, household equipment & maintenance."The fall in inflation should happen faster than the rise in unemployment, easing the misery index. The inflation release is here.

Receding Inflation In Britain - Krugman - Back in June, keying off a speech by Adam Posen, I said that British inflation was offering a teachable moment. The headline inflation number was running quite high, but even a bit of analysis showed that this largely reflected temporary shocks, mainly hikes in VAT and commodity prices plus some effects from the depreciation of the pound. Yet there was much hysteria, with many claiming that Britain was on the verge of a 1970s-type inflationary spiral. I concluded, What we can hope for is that the BoE stays the course; and when inflation in the UK drops sharply, as it almost surely will, that will be an object lesson in the folly of always making policy as if it were 1979. Sure enough, British inflation is rapidly receding. The market is now pricing in just 2 percent inflation over the next 5 years. The hard money and austerity types have been wrong, yet again.

UK’s unemployment increases to highest level in 17 years as austerity measures bite - Austerity measures, prolonged economic weakness and a eurozone crisis have taken their toll on Britain’s work force, with figures published Wednesday showing that unemployment has reached a 17-year high. Britain’s government has staked its reputation on a strategy of cutting costs and jobs in the public sector while trying to boost private sector growth. Today’s unemployment data, which show that unemployment is rising and that women and young people are hardest hit, raise doubts over whether that strategy is working, and leave Prime Minister David Cameron open to criticism that he is taking away opportunities for some parts of society. The highest level since 1994, 2.64 million people were unemployed in Britain at the end of October — 128,000 more than in the previous quarter, according to government statistics. Britain’s unemployment rate is now 8.3 percent, up 0.4 percent on the quarter and at its highest level since 1996.

Desperate British students ‘turning to prostitution’  - Desperate British students, faced with rising costs on the back of government austerity measures, are turning to prostitution, gambling and other dangerous pursuits to fund their studies, support workers and student leaders said on Wednesday. The English Collective of Prostitutes (ECP), a welfare body for sex workers, said it estimated the number of people approaching it for help had doubled in the last year as students struggled to make ends meet. “(The government) know the cuts and the austerity programmes and the removing of grants, they know when they remove those resources they know it drives women further into poverty,” Sarah Walker from the ECP told Reuters.“The way that women survive poverty is often through sex work. The government knows that and they don’t seem to care frankly.”

QE might not work, BIS tells Bank of England - The Bank for International Settlements (BIS), the world’s financial supervisor, has warned the Bank of England that printing more money to boost the economy may not succeed. The warning will concern the Chancellor, who is relying on quantitative easing (QE) to deliver the stimulus the economy needs.  It comes as a leading economist has forecast the UK will fall back into “outright recession” next year. Gerard Lyons, Standard Chartered’s chief economist, has predicted the UK will contract by 1.3pc in 2012, far more than the official forecast of a 0.1pc fall in the final three months of the current year.  Mr Lyons said the fall will be caused by “a squeeze on incomes, the tightening of fiscal policy, low confidence and the hit to exports from a recession in Europe. It will be both a tough domestic and external environment”. He suggested the Chancellor will have to borrow more to stimulate growth. “While the low yields the UK now pays help keep debt payments down, this should not be their only benefit,” he said.